Chesapeake Energy (Photo credit: Wikipedia)
Chesapeake remains ” AVOID” ( see The AMP Portfolio ( avaialble at Amazon.com )
here is a recent article ( in part ) from The New York Times
Rex W. Tillerson, the chief executive of Exxon Mobil, which spent $41 billion to buy XTO Energy, a giant natural gas company, in 2010, when gas prices were almost double what they are today, minced no words about the industry’s plight during an appearance in New York this summer.
“We are all losing our shirts today,” Mr. Tillerson said. “We’re making no money. It’s all in the red.”
Like the recent credit bubble, the boom and bust in gas were driven in large part by tens of billions of dollars in creative financing engineered by investment banks like Goldman Sachs, Barclays and Jefferies & Company.
After the financial crisis, the natural gas rush was one of the few major profit centers for Wall Street deal makers, who found willing takers among energy companies and foreign financial investors.
Big companies like Chesapeake and lesser-known outfits like Quicksilver Resources andExco Resources were able to supercharge their growth with the global financing, transforming the face of energy in this country. In all, the top 50 oil and gas companies raised and spent an annual average of $126 billion over the last six years on drilling, land acquisition and other capital costs within the United States, double their capital spending as of 2005, according to an analysis by Ernst & Young.
Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.
“We just killed more meat than we could drag back to the cave and eat,” said Maynard Holt, co-president of Tudor Pickering Holt & Company, a Houston investment bank that has handled dozens of shale deals in the last four years. “Now we have a problem.”
A Master Salesman
Aubrey K. McClendon, chief executive of Chesapeake Energy, had a secret, and he was anxious to share it.
He called Ralph Eads III, a fraternity buddy from Duke who had become his go-to banker. Mr. McClendon explained that he had quietly acquired leases on hundreds of thousands of acres somewhere in the southern United States — he would not say exactly where — that could become one of the world’s biggest natural gas fields.
But to develop the wells, he needed billions of dollars.
“I can get the assets,” Mr. McClendon told Mr. Eads, a vice chairman of Jefferies, according to three people who participated in that call, nearly five years ago. “You have to get the money.”
Get it he did. Mr. Eads, a pitch artist who projects the unrestrained enthusiasm of a college football coach, traveled the world, ultimately raising an extraordinary $28 billion for Mr. McClendon’s “secret” venture in the Haynesville Shale, as well as other Chesapeake drilling projects.
Other bankers working in the glass office towers of downtown Houston were equally busy. While the skyscrapers are home to global giants like Chevron and lesser-known companies like Plains Exploration and Production, they also house storefronts for Wall Street deal makers who play a vital, though less visible, role in the nation’s surging energy production.
Mr. Eads, 53, a Texas native, is a prince of this world. His financial innovations helped feed the gas drilling boom, and he has participated in $159 billion worth of oil and gas deals since 2007.
A Sigma Alpha Epsilon fraternity brother of Mr. McClendon, he headed to Wall Street directly after Duke. He first earned a national profile in 2001, while working for the El Paso Corporation, a natural gas pipeline operator. Regulators accused El Paso of creating an artificial gas shortage in California in the previous year, contributing to a power crisis in the state. Although El Paso eventually settled the complaints for $1.7 billion, Mr. Eads said El Paso was guilty of nothing more than coming up with creative financial transactions.
After Mr. McClendon’s urgent request for money, Mr. Eads put in a call to Mr. Flores to see if he might be willing to finance part of Chesapeake’s Haynesville project.
“Aubrey and I have calculated it, and it might be the largest gas field in the world,” Mr. Eads said he told Mr. Flores, noting early results from a single well that showed unprecedented gas flows.
The type of deal he pitched, nicknamed “cash and carry,” was certainly aggressive and innovative. Plains would pay Chesapeake $1.7 billion to gain ownership of about one-third of the drilling rights that Chesapeake had leased in the Haynesville. Plains would also commit to paying out another $1.7 billion to cover half of Chesapeake’s drilling costs, in return for part of the future profits.
“It’s going to be a great investment,” Mr. Flores said on the day the deal was announced in July 2008.
But the deal, like others later struck by Chesapeake, benefited Mr. Eads and Mr. McClendon and their companies far more than the people writing the big checks.
Chesapeake spent an average of $7,100 an acre on the drilling sites it had leased in the Haynesville. Plains paid Chesapeake the equivalent of $30,000 an acre.
Jefferies and the other firms involved in arranging the deal made an estimated $23 million on this transaction.
Much of the money that Mr. Eads raised for American gas drillers came from overseas oil and gas companies, like Total of France and Cnooc, the China National Offshore Oil
Corporation. He told them the American shale revolution was an opportunity they simply could not afford to pass by.
“This is like owning the Empire State Building,” Mr. Eads said, recalling one of his favorite lines. “It’s not going to be repeated. You miss the boat, you miss the boat.”
In China, he was in awe at just how much money was available to invest. One senior executive at a major Chinese oil company that Mr. Eads declined to identify, citing the confidential nature of the negotiations, explained that the country wanted to move as much as $750 billion from United States Treasury bonds into the North American energy business.
Mr. Eads was only happy to oblige, helping to secure $3.4 billion from the Chinese for Chesapeake through two deals.
Not everyone believed the story line of endless profits and opportunity. Mr. Eads said one oil company executive whom he would not identify had rejected his pitch, complaining, “The reason for the glut is you guys.” The executive said he expected natural gas prices to plummet.
In private, Mr. Eads acknowledged that his pitches involved a bit of bluster.
“Typically, we represent sellers, so I want to persuade buyers that gas prices are going to be as high as possible,” Mr. Eads said. “The buyers are big boys — they are giant companies with thousands of gas economists who know way more than I know. Caveat emptor.”
Investment banking revenue at Jefferies reached $1.1 billion in 2011, a record for the firm, up from $750 million in 2007. Energy deals were cited among the biggest drivers of that surge, which came despite major problems at the firm because of its exposure to European sovereign debt.
Mr. Eads would not say how much he had been compensated for this bonanza. But Dealogic, a firm that tracks Wall Street transactions, estimated that Jefferies collected at
least $124 million in fees from Chesapeake since 2007, a large share of its overall revenue on oil and gas deals, which ranged between $390 million and $700 million during the same period, according to two different industry estimates.
Even before the recent round of deals, Mr. Eads was a wealthy man. He lives in a sprawling, 11,000-square-foot lakefront mansion in Houston and has a wine cellar with 6,500 bottles. In 2010, he bought an $8.2 million home in the exclusive West End of Aspen, Colo., whose other homeowners have included Jack Nicholson and Mariah Carey.
Mr. Eads’s success has produced no shortage of jealousy in Houston.
“A lot of people don’t like him because he got ahead of everyone else,” said Chip Johnson, chief executive of Carrizo Oil and Gas, who made two big deals in which Mr. Eads was involved. “He got the reputation for overselling, but I have a hard time believing you can fool the big companies.”
“Without him,” Mr. Johnson added, “the country would not have had the huge gas supply as quickly as we did.”
Others have been more critical.
“He is like the bartender serving drinks for people who can’t handle it,” said Fadel Gheit, a managing director at Oppenheimer & Company, about Mr. Eads. “And the whole gas industry has gotten a rude awakening, a hangover, with gas prices plummeting. The investment bankers were happy to help with a smile and get their cut.”
A Train Without Brakes
“Quit drilling,” T. Boone Pickens, the Texas oilman, barked to his fellow board members at Exco Resources, a small, independent drilling company based in Dallas that, like Chesapeake, had made a big bet in the Haynesville. “Shut her down.”