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CHK’s Aubrey McClendon – Oil & Gas Question And Answer With Forbes

by Kenneth E. DuBose on October 10, 2011

Forbes conducted a great interview with Chesapeake’s Aubrey McClendon last week. A few notable quotes below:

In reference to the recession in 2008 and losing a chunk of his fortune

I (McClendon) believed in our country and its leadership, and never in my wildest dreams did I think that CHK’s stock price could go from $70 to $16 in 100 days.

In regards to his compensation

You may recall that the $75 million award was not in the form of cash and it had a 100% clawback embedded in it. All in all, I think the award was effective in achieving its goals. I also don’t think it’s well known that at that time I agreed to have my cash compensation held flat for five years. Keep in mind that approximately 85% of my direct compensation for the last two years has been in the form of restricted stock. In fact, in 2010 the number of shares that I received went down by about 15% compared to 2009, and yet the value of my overall compensation went up because the stock price went up by more than 15%.

How he views leasing land”

Take the Eagle Ford shale for example.  Under each acre of land we have acquired there, we believe there is roughly 5,000 barrels of recoverable oil equivalent.  When we put our land position together in that play, we spent roughly $1.2 billion to buy about 600,000 acres of land, giving us an average cost basis of about $2,000 per acre, or roughly $0.40 per barrel of oil equivalent. I ask you, could you go to Wall Street and buy an option to develop 3 billion barrels of oil equivalent at a cost of $10-$15 per barrel for a call option cost of only $0.40 a barrel?  Of course not, there’s no way you could do that in the financial markets.  But yet, we do it in the reality of the oil and gas world all the time.  Too many analysts and investors fail to appreciate that leasehold is simply a very cheap call option on the right to develop resources in some of the best plays the world has to offer.

In addition, please remember that we just sold in a very low gas price environment, our interest in the Fayetteville Shale for an approximate $3.5 billion profit.  I think that is a testament to our land acquisition skills, as well as our resource development skills, and obviously a very strong comment about our ability to create billions of dollars in shareholder value every year in addition to the everyday job of drilling wells.


In regards to debt levels:

In addition, you may be familiar with our 25/25 Plan where we told our investors in January 2011 that by the end of 2012 our debt would be 25% less than it was at year-end 2010, or basically at $10 billion in total.  We will certainly achieve that goal, and I also believe that by year-end 2015 our debt levels will remain below $10 billion and the value of our company should be north of $75 billion and people will have stopped long ago about asking about our balance sheet – it will be rock solid.

In response to a comment that he’ll always lease and acquire land:

I see nothing wrong with acquiring acreage in a new play and then selling off say 25% to 33% in that play to another company and thereby reducing our shareholders’ exposure in that play to perhaps a net zero investment and we have the remaining 67-75% for free – how can you go wrong doing that?

McClendon’s view of gas supply

You can’t ask people to use more of your product unless you can prove to them that you can produce more of the product at the same price every day. I think we have successfully done that and have kicked off the beginning of a demand revolution in the US, which will result in an industrial rejuvenation, a cleaner environment by burning less coal, and in an economic revival in the US when we finally figure out that we can’t afford to export $5 trillion of national wealth every 10 years for the importation of foreign oil.

His view of the Fracking debate:

Against that track record of over 1.2 million frac jobs performed by the industry, our critics can only find one or two instances of alleged groundwater pollution, and having examined those few instances ourselves, we don’t agree that that fracking had anything to do with the alleged groundwater contamination.

So, the key thing here is to keep in mind that the chemicals that we use in our frack fluids are highly diluted and that, unlike the ones that you come across everyday in your normal home and work environments, we inject our chemicals 5,000-10,000 feet below the ground.

The benefits of using in house oilfield services:

Our job, on the other hand, is to create value for CHK’s shareholders and to do that at the highest level, we have felt over the past 10 years that it is important to vertically integrate our business to deliver products and services to our wells at a cheaper cost than we could have them delivered by a third party. This gives us not only lower finding costs than we would otherwise have, but also creates a great inflation hedge.  We intend to roll all these entities up into our newly formed service company holding company, Chesapeake Oilfield Services, and our hope is to take the business public at some point in 2012.

Read the entire interview at forbes.com

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