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Utica Shale Investing

Brian Hicks

Written By Brian Hicks

Posted October 10, 2013

Love him or hate him, Aubrey McClendon’s tenure as CEO of Chesapeake Energy (NYSE: CHK) has been laced with controversy.

Not only was he ousted in April of 2013 by a board member uprising, but he certainly did not shed a positive a light on the company with several financial scandals over the years that led to criminal and civil investigations of Chesapeake.

shaleThe board cleared him of any wrongdoing, but the most damning assessment of his reign over the company was the mismanagement of funds and the overall direction he was taking the company.

At heart, McClendon is a wildcatter, making numerous land-grabs in shale-rich areas around Texas in the early days and continuing to do so in recent years. We must remember that McClendon came from a different generation of oilmen back in 1989 when he co-founded Chesapeake. But the problem was that he grabbed too much too soon. And the strict focus on natural gas was a major factor in Chesapeake’s fiscal mess.

Well, this kind of business methodology did not sit well with board members.

To compensate for the losses in natural gas drilling, board members have turned to shale oil drilling, which has been profitable so far. Chesapeake has been one of the largest shale oil drillers in the Eagle Ford of South Texas.

But McClendon still has an interest in natural gas, and he seems to be turning toward new horizons on the East Coast.

McClendon managed to raise $1.7 billion from various equity firms for a project in the Utica shale of East Ohio.

The name of his new company is American Energy Partners LP, and it has a plan to purchase 110,000 acres for the purpose of gathering natural gas.

The company was founded back in April 2013, and its current focus is on natural gas and oil. But McClendon is an advocate of natural gas at heart, and he believes in the commodity as a clean-burning fuel source.

Ironically, Chesapeake is the largest operator in the Utica, but there is no partnership between the two companies. Instead, American Energy is partnering with MarkWest Energy Partners LP (NYSE: MWE) and Energy & Minerals, one of McClendon’s primary equity investors. Both of these companies will be doing 80 percent of the gathering and processing.

One rig will be set up in the fourth quarter of 2013, and the over the next few years there will be a minimum of 12 rigs.

Natural Gas Bet

McClendon may have been criticized for playing a role in spiraling Chesapeake’s finances out of control, but there is no denying his history of effectively raising funds to get projects off the ground.

And his company is certainly in the right place, since Eastern Ohio is known for a bustling energy economy that is causing housing shortages from all the influx of workers.

The Utica Shale covers Ohio, Pennsylvania, East Ohio, and West Virginia. According to the Ohio Energy Resource Alliance, over 350 wells have been drilled in the region, and over 100 are online.

But there is a risk in banking too heavily on natural gas at a time when prices are below profitable levels. Natural gas prices are hovering around $3.71 – not quite enough to usher in mass drilling.

Prices are inching up, and shale gas is still a vital part of the energy economy. But American Energy must not make the same mistake as other companies by drilling too heavily for natural gas when shale oil has been the most sought after commodity within the shale boom.

Given McClendon’s history of supporting natural gas, it seems as though natural gas will be a primary focus of his campaigns going forward – but only time will tell.

Will McClendon Succeed?

McClendon’s new company is definitely worth keeping an eye on. It’s private right now, so there’s no way for regular investors to get in, but it could bring in partnerships with other companies that are worth your time. Still, I invoke McClendon’s not-so-stellar history of managing Chesapeake as a reason to be cautious.

In terms of the Utica Shale, you’ll want to watch companies more established in the region, like Chevron (NYSE: CVX) or Chesapeake. But you’ll also want to see how Chesapeake does going forward, as new CEO Robert Lawler is doing his best to turn the company around through fiscal discipline and company restructuring.

Over 1,200 people from Chesapeake were laid off, and numerous assets in Texas and Oklahoma were sold off. Lawler is an engineer, a far departure from his wildcatter predecessor, so he may just be able to turn Chesapeake around.

Will McClendon be able to outflank the company he co-founded?

His startup will take a while before it can become more established, but his experience will prove to be an asset against his rival. We’ll just have to see if he can be successful in starting his own energy empire.


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