Thursday, January 23, 2014

Heeee's Back! Aubrey McClendon: Activist Investor or Tail of the Dog?

It looks like former Chesapeke Energy CEO Aubrey McClendon has resurfaced in the Haynesville Shale.  His company Larchmont Resources, LLC has filed drilling applications for 12 alternate unit wells in Bossier Parish on units held by production (HBP) by Chesapeake.  Apparently McClendon is chafing that Chesapeake is leaving so much gas in place by not drilling the thousands of potential well sites under indefinite lease.  Larchmont is rarin' to go, saying that it has $10 billion to invest in Haynesville drilling over the next decade (!).  Woo-hoo!!!

What a turn of events!  Haynesville followers know Chesapeake as the company that used a scatter-shot leasing strategy to snap up as much land prospective for the Haynesville Shale as possible and then drill a well on each unit to HPB it before moving on to the next one.  This cash-sucking land grabbing technique was perfected with McClendon as CEO, allowing the company to hold wide swaths of the Haynesville Shale for later production.  Now he wants Chesapeake to reverse course and sink billions into Haynesville drilling?  I'm sure this will get a chilly reception in OKC, especially as the company tries to remake itself as an oil company.

Many Chesapeake lessors in the Haynesville have heard of Larchmont because they got notices of assignment for McClendon's 2.5% interest in all of the applicable Chesapeake leases (which I believe was all of them), which came about from his infamous sweetheart "Founder's Well Participation Program," one of the factors that lead to his ultimate termination from Chesapeake.

Much has been said about McClendon's makeover following his departure from Chesapeake.  One thing is for sure, the guy:  1) has balls big as church bells, 2)  no sense of irony and 3) little if any shame.  As a very small minority working interest owner, he is trying to force the majority owner into an enormous investment that is a strategic 180.  Not going to happen.  Over three months recently, Chesapeake has ramped up from one rig to seven, but I don't expect its rig count to go much higher any time soon.

In rebutting McClendon, Chesapeake's lawyers claim that he is using this filing as a back door way to gain leverage to buy out Chesapeake's interests in the leases (see #1-3 above).  I'm sure the buy-high-sell-low approach will not fly in OKC.  Why should it?  Holding these dry gas Haynesville leases gives the company the "optionality" (not my word) if and when natural gas prices rise.  It's the company's home run scenario, and I don't see why CHK would give it up just to silence McClendon.

Who is Aubrey these days?  An "activist investor" like Carl Icahn?  An energy hedge fund impresario (look at the insane terms of his proposed offering)?  Right now he seems more like the tail trying to wag the dog.  Or  maybe the fly circling the tail.  Maybe the board will try to swat him away by selling off a small portion of its Haynesville holdings to McClendon.  More likely, maybe they will direct some of those new rigs up to Bossier to throw him a bone.  Chesapeake's lawyer says it will submit a drilling plan to the Department of Conservation in a couple of weeks, so we will see.

There is a new lead dog at Chesapeake and I doubt there is much appetite at the company to appease the former CEO.  If the new CEO Doug Lawler does cave in a big way to McClendon, investors likely will boil him alive in a giant cauldron of WTI crude.

But my big question is, why do this in Bossier Parish?  Bossier was not heavily drilled for the Haynesville following the land rush and some of the Haynesville leases held by competitors were given up.  If Larchmont wants to get big gas, it should target areas where Chesapeake is sitting on units with highly productive wells.  Maybe McClendon is angling for a slice of the Chesapeake's Haynesville pie that is at the margins that will not be such a "give" if Chesapeake decides to sell.  That's a plan that might work. Or maybe the "new Aubrey" who is probably more interested in EUR than IP rate knows something we don't.  Sly dog...


Anonymous said...

maybe they have a standard operating agreement with a non-consent clause. then Aubrey gets a free lease for 97.5% of it and infrastructure already built out and proven reserves to boot---pretty slick

Robert P Tyrrell III said...

I agree w/ Anonymous, there is probably a JOA or associated participation agreement w/ CHK as a matter of course which provides that if AM participated or proposes wells within an AMI which CHK has ownership, and they don't elect to participate (ie: pay their share of drilling and completion costs), AM would with the 2.5% FWPP be able to foreclose CHK's interests in those lands so proposed for additional developement according to terms of the FWPP, usually in a JOA 300-400% of the future net revenue which essentially would net CHK out of the acreage, ie; he's smarter than corporate hire Lawler.

Anonymous said...

Oops,forgot -
If you can pull it off, this is the best way to pull off PUD acquisitions. Lots of moving parts but if you can get them to stand still for a momoment......