The Wisdom of Chairman Aubrey | Russell T. Rudy Energy LLC
Aubrey McClendon, previously chairman of Chesapeake, and currently of American Energy Partners (AEP), recently addressed the February meeting of the Houston Association of Petroleum Landmen. While he has his admirers and detractors, no one can deny that he is articulate and charismatic. He began his remarks with the observation that it was nice to be in front of a largely friendly audience and that he much preferred addressing landmen rather than lawyers.
After graduating from Duke University with a History degree, McClendon found himself working in the accounting department of an oil company. He quickly jumped at the opportunity to take a lateral transfer into the Land Department where he felt he was among kindred spirits. While geologists and engineers perform a valuable service, he contends that nothing gets done unless the landman procures the leases. He went on to say that “once a landman, always a landman” and he will always consider himself one. He proudly pointed out that he is still an active member of AAPL (American Association of Petroleum Landmen). McClendon then offered his observations on a number of topics.
Land Acquisition– McClendon believes strongly that you should control the “core of the core” of any oil and gas play to which you are committed. He was unapologetic for having sometimes overpaid for acreage, saying that “land costs are a rounding error in the grand scheme of things”.
Oil Price Collapse-While the recent price collapse is regrettable he does not think that it is irreversible, and we will see partial relief in the intermediate term. He foresees operators recovering much more quickly than the service sector. In fact, he thinks that operators will be eventually more profitable at $65/barrel than they were at $85. He is less optimistic for the service companies which he sees as key partners if we are to experience an oil patch renaissance.
Natural Gas-Although natural gas prices have been a disappointment he sees them as improving. This will happen if for no other reason than the fact that as oil wells are shut in due to low prices, the associated casinghead gas they were producing will be coming off the market. This in turn will exert upward pressure on prices.
Well Completions-McClendon pointed out that when oil prices started their dramatic collapse, many operators postponed completing drilled and cased wells. He anticipates this trend continuing. He pointed out that since only 30% of the cost of a new well is attributable to drilling and casing there is no harm in deferring completion until prices have started recovering.
Industry Consolidation in the Current Low Price Environment-First of all, McClendon does not believe that there is ever true consolidation in the energy industry.
While companies might think they are going to reducing expenses as a result of mergers and acquisitions (M&A), this is hardly ever the case. He does concede that companies can improve their access to capital through M&A.
However, he questions the wisdom of M&A on the basis of merely improving balance sheets. Rather than looking at the financial statements, he evaluates potential acquisitions on the basis of their properties and contends that a strong portfolio of producing leases and prospects will ultimately lead to a strong balance sheet. Conversely, he does not feel that strong balance sheets necessarily lead to a strong portfolio of producing properties and prospects.
Further, he contends that for every combination of companies through M&A, at least one new company is created through an infusion of private equity. He sees the role of private equity increasing in importance in the future.
Geopolitics-He feels that all too often, when we cannot explain price fluctuations, we attribute them to “geopolitical considerations”. However, he does view Russia with trepidation. Russia has been hammered worse than any other country by the recent oil price collapse engineered by Saudi Arabia. He is concerned about how the self-styled “manliest man in the world” will react to being humiliated by a desert kingdom.
American Energy Partners-After leaving Chesapeake, McClendon formed AEP. The concept is for a corporate mother ship to provide infrastructure services such as accounting, IT, etc. to fledgling offspring until they are capable of leaving the nest and striking out on their own as independent entities.
Conclusion-Never having heard McClendon in person, I was eager to hear his views on what is happening in our industry. I was not disappointed! Love him or hate him, you can’t ignore him.
