The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (16 page)

They were equal partners, but McClendon—passionate, outgoing, and more comfortable with investors, lenders, and the finance side of the business—became the company’s chairman and chief executive officer. Ward, more introspective and thoughtful, enjoyed focusing on operations and working with the men and women in the field; he became Chesapeake’s president and chief operating officer.

Their families didn’t have much spare cash to invest in their deals, nor did McClendon and Ward have great insights into the next great energy plays. They did have a unique way to entice investors, however. In 1980, the U.S. government had introduced a tax credit called the Nonconventional Fuels Tax Credit, or Section 29. The measure, enacted amid concerns about American dependence on imported oil, was aimed at spurring expensive production from shale and other challenging rock, as well as from coalbeds.

McClendon and Ward made sure to target areas qualifying for these tax credits and to emphasize the tax benefits to doctors, lawyers, and other potential investors in Dallas and elsewhere. They managed to raise $1 million, which they used for Chesapeake’s first well, the Newby 1-1 well in Grady County, Oklahoma, drilled on June 27, 1989, as well as for another well nearby.

Shannon Self, McClendon’s lawyer, had a contact with the Belfer family of New York City, prominent philanthropists and donors to the Democratic Party. Soon, McClendon sold the Belfers on becoming investors in Chesapeake’s drilling deals. (The Belfers later sold a group of energy holdings to Enron and watched their investment drop in value by nearly $2 billion when the utility filed for bankruptcy protection in 2001 amid accusations of fraud.)

It helped McClendon and Ward that many veteran wildcatters still were licking their wounds from years of troubles, leaving them unable to spend much cash to compete with Chesapeake. The new company often acquired dominant positions in oil and gas fields and told those holding acreage in the area that they had to come up with their share of money to participate in Chesapeake’s drilling or sell their acreage to Chesapeake. It sparked grumbling among landowners who resented having to fork over scarce cash in an economic downturn to drill with young operators with little track record.

McClendon and Ward were good at finding oil and gas and rarely hit dry holes or those with little production. They were even better at discovering ways to make their drilling profitable. Because fewer companies in the state were searching for energy, the pair received aggressive bids from drilling service companies. They also could play hardball with those hired to drill their wells and provide other services. When Chesapeake hired a company to provide drilling fluid or something else for a site, it asked as many as eight providers for bids, while rivals offered similar jobs to as few as three companies.

McClendon and Ward only paid dirt-cheap prices and made it clear they would pay their bills at a slower pace than others.

“I told you that you wouldn’t get paid for five months,” McClendon told one company that tried to get Chesapeake to pay its bills because it said it couldn’t meet its own expenses. “Sorry, a deal’s a deal.”

McClendon was up-front with most everyone, making sure contract terms were clear, and some service companies appreciated the business. Others took exception to the tactics, though.

“It was a love-hate thing,” says Dan Jordan, who ran a drilling company that Chesapeake used for many of its wells. “They were just brutal to service companies, they beat them down. But Chesapeake was the biggest game in town, they had balls [to drill] when no else did, so they could get away with it.”

Some in the industry, accustomed to a friendlier way of doing business, resented the young men. “In New York, Aubrey would have blended in, but in Oklahoma he stuck out—he was young, brash, and brutally honest,” Jordan says. “People talked trash about both of them, they couldn’t stand them and were envious . . . but Aubrey and Tom were trying innovative, fresh” approaches to drilling wells.

McClendon and Ward kept leasing more acreage, regularly spending more than Chesapeake had. It forced the company to borrow big sums, leaving it in a precarious position. “It was near-death on a daily basis,” Ward says.

All the debt might have made others uncomfortable, but McClendon had outsized aspirations for the company and for himself, friends say. Borrowing heavy amounts of cash to get his hands on land was the only way he was going to meet those goals.

As for Ward, he figured that if Chesapeake failed to make its debt payments, he and Sch’ree would just move back to their hometown region and live a quiet, contented life. This safety net gave Ward courage to borrow more money. He also felt he didn’t have much choice but to rely on copious amounts of borrowed money. “I didn’t have much to start with in life, so without leverage I wouldn’t have anything,” he explains.

The pair saw their run of good luck end in the early 1990s amid weak oil and gas prices. One day, Jordan drove to Chesapeake’s offices to try to get paid. Jordan was operating eight drilling rigs for Chesapeake and was owed one and a half million dollars by the company. He knew McClendon and Ward were slow to pay their bills, but some of them were more than seven months late and Jordan’s own expenses were piling up.

“Tom, I know it’s a hard time for you guys, but I need something right now,” Jordan told Ward.

“I feel your pain,” Ward responded. “But we don’t have enough to buy a cup of coffee. We have a plan, though.”

Ward told Jordan that he and McClendon hoped to take their company public. By selling shares to investors, they might be able to raise enough cash to pay their bills and keep Chesapeake going, Ward said. They had to clean up the company’s balance sheet first, though, or investors wouldn’t be interested in Chesapeake stock. Ward and McClendon asked Jordan, along with others waiting to get paid, to turn their receivables into long-term notes. That way, Chesapeake could make its balance sheet look healthier while pushing off short-term expenses it couldn’t otherwise pay.

In 1992, Chesapeake’s tax accountants at Arthur Andersen wouldn’t give the company an “unqualified” opinion saying its financial statements were sound, apparently due to the company’s heavy debt, which prevented a public offering. Chesapeake had to switch to PricewaterhouseCoopers to get an opinion that enabled the company to pursue an IPO.

The plan to dig out of the mess worked, though, and Chesapeake managed to go public in February 1993. McClendon and Ward placed the six hundred or so wells they had interests in into Chesapeake while retaining the right to purchase a two-and-a-half-percent stake in each new well the company drilled.

“There was no grand ambition, we just needed the money,” Marc Rowland, by then the company’s chief financial officer, says of the sale of shares.

•   •   •

F
rom the start, McClendon and Ward were a bundle of contradictions. McClendon was a friendly presence in the office. He exuded optimism and was well liked by employees, who called him by his first name. Friends from both grade school and college received a quick return phone call when they reached out to him, and McClendon quietly helped a number of them when they hit tough times. Ward was just as generous, writing big checks for various charities while encouraging employees to spend time on volunteer projects. At times during the day, employees found him studying the Bible in his office.

When it came to business, though, McClendon and Ward were less kindhearted. By the time their company went public, the pair faced lawsuits from aggrieved parties, some of whom claimed that they were mistreated or misled in various land deals. Just weeks after Chesapeake went public, one of these cases came back to haunt them. The dispute also marked their first battle with Harold Hamm, another determined and ambitious Oklahoma energy man.

Back in 1988, Ward had approached Hamm with a proposal. He told Hamm that Chesapeake had a deal with an operator named Ralph Plotner Jr. for some attractive acreage in western Oklahoma. At the time, Hamm ran a company that drilled wells for others, in addition to a midsized exploration and production company called Continental Resources. Ward asked if Hamm’s company would be willing to drill the wells for Chesapeake’s project with Plotner.

Hamm was reluctant. It was a difficult period for the industry and he needed to make sure he’d get paid for any drilling. Hamm was wary of working with Plotner, a 300-pound local energy explorer with an outgoing personality, a high school diploma, and a checkered and tragic past.

Nearly a decade earlier, Plotner had been accused of forcible oral sodomy and attempted rape of a female acquaintance. The accusation was based on the woman’s allegations, as well as on paint chips from a door in her home that allegedly were found on Plotner’s wristwatch. Plotner vehemently disputed the charges, arguing that the woman had tried to blackmail him.

During the resulting trial, Robert Webb, an examiner from the respected FBI Crime Laboratory in Washington, D.C., who had scrutinized evidence in the case, flew in to testify. Webb walked into the courthouse wearing black cowboy boots, affecting a western look, perhaps in a bid to win favor in the eyes of jurors.

“He
was
the epitome of what an FBI agent should look like,” Fred Whitehurst, who worked with Webb in the FBI lab, later told
GQ
magazine. “He was good-looking and very fit from being a triathlete.”

Webb seemed an expert, but some had doubts about his testimony. “I considered Bob a friend, but when it came to things like paint . . . he didn’t know what he was talking about,” Whitehurst told the magazine.
⁴

Plotner was convicted on both charges. He maintained his innocence and the rape charge was later reversed on appeal. But the oral sodomy charge stuck, and Plotner served nearly five years in prison. It proved a crushing experience. He was in a jail with a leaky roof and an infestation of cockroaches and rats. Later, he watched an inmate take a baseball bat and beat another inmate to death.

During his incarceration, Plotner’s wife divorced him and he lost most of his possessions, including a 7,500-square-foot mansion. Plotner couldn’t bear to let his five-year-old son, Kyle, see him in a prison, so he barred the boy from visiting, a move that brought him intense pain. Several years after Plotner left prison, Kyle, then seventeen years old, committed suicide after joining the local goth scene. Plotner blamed the tragedy on his own troubles with the law and time in jail.

After leaving prison, Plotner managed to rebuild his career by working on small oil and gas deals. He happened to control acreage in western Oklahoma that Ward and McClendon took an interest in, resulting in the call from Ward asking Hamm’s company to drill wells. Hamm was hesitant, but his drilling company was dealing with slowing business, so he accepted the job and work commenced.

After a well was drilled, but before pipe was placed in it, McClendon and Ward’s enthusiam for the project seemed to wane, according to three people involved in the deal. Soon, Plotner was told that for technical reasons McClendon and Ward no longer had interest in the acreage.

“When we set pipe they elected not to go in with us,” Plotner recalls. “I thought that was strange.”

When Hamm tried to get paid for his company’s drilling from an escrow account, the money wasn’t there, he says. Hamm, who was owed about a half million dollars, turned furious, blaming McClendon and Ward for transferring the money out of the account, though they said they were blameless. McClendon and Ward argue that they weren’t the operators so they weren’t responsible for paying Hamm. McClendon also denies that there was an escrow account.

Hamm fumed nonetheless.

“It was a tough time for the business and that was a lot of money for me,” Hamm recalls. “When you don’t get paid for drilling wells it’s pretty upsetting.”

In the view of Plotner’s attorney, Charles Watts, the Chesapeake executives likely got cold feet about Plotner’s acreage after agreeing to the deal. “They probably had interest in a lot” of land at the time, Watts says, “and they backed out when the acreage dropped in value. . . . They were trying to hedge their bets with this deal.”

Hamm was so upset that he moved to sue McClendon and Ward. Before the trial began, the parties agreed to a settlement requiring Chesapeake to use Hamm’s drilling company for work on a number of future wells, Hamm says. Hamm couldn’t get over how McClendon and Ward had treated him, and he vowed not to do any more work with them.

“After that, we steered clear of them” for many years, Hamm says.

Plotner suffered more serious consequences from the failed deal. He was left with acreage that dropped in value. Eventually, he was forced to seek bankruptcy protection.

Plotner also sued McClendon and Ward, alleging that they had committed fraud by misrepresenting their interest in his land. As the proceedings began, McClendon and Ward’s attorney raised Plotner’s disturbing past, an apparent attempt at discrediting the Oklahoma oilman, Plotner’s attorney says. The judge wouldn’t allow Plotner’s prior convictions to be shared with the jury, however, ruling that they had no relevance to the dispute, the attorney says.

When McClendon took the witness stand, dressed in a sharp suit, his attorney asked if he was upset about Plotner’s charges of alleged fraud.

“Yes, I am,” McClendon responded, according to two people who were in the court. “No one has ever accused me of” acting improperly in a deal.

The response gave Watts—Plotner’s attorney—an immediate opening. He says he grabbed a tall stack of legal papers and began to slowly and deliberately cite details of previous lawsuits McClendon and Ward had faced since starting in the energy business.

“I liked Aubrey and Tom and I still do,” Plotner now says, “but Aubrey was a real pompous smart-ass . . . he tried to out-slick” the jury.

The suit’s outcome was still in doubt when Chesapeake went public. At the time, it didn’t seem likely that Plotner would win any kind of sizable payout. Chesapeake’s prospectus said the company was not party to any legal proceedings that management believed would have a “material adverse effect.” Even if some payout was to be made, it was expected to be the responsibility of McClendon and Ward, not Chesapeake itself.