Saturday, November 30, 2013

Book review: "The Frackers: The Outrageous Inside Story of America's New Billionaire Wildcatters"

I highly recommend "The Frackers: The Outrageous Inside Story of America's New Billionaire Wildcatters" by WSJ writer Gregory Zuckerman (also author of "The Greatest Trade Ever", reviewed by me here).

The book tracks the business lives (and, to a more limited extent, the personal lives) of several successful and less-than-successful pioneers whose companies have revolutionized Amerca's energy industry. Mr. Zuckerman seems to have had excellent direct access to a number of sources from within and outside the industry, including the direct subjects of the book, which makes for a dynamic, lively read. I will go over some of the content after my brief analysis. 

My take-aways from the book:

(1) Capitalism works: the seemingly improbable renaissance of energy production in the US is a product of profit-motivated individuals, strong private property/mineral rights and contract law, access to capital, deep expertise, rapid decision making and many, many failures. 

(2) The guys who "hit it big" started working for themselves at a very early age (most had own companies by 25), worked harder than anyone else (6 am to midnight days not uncommon), took a lot of risks (technology, geology, land leases, borrowing, etc.), and made rapid decisions once the game was "on". They also had supportive wives. The men on the field that made the actual breakthroughs (i.e. in fracking mixes) were not the company owners and did not enjoy the upside of ownership. 

(3) Most were born dirt-poor, started work/help early and throughout life seem to have something to prove to the world. Even McClendon, of Chesapeake, a Kerr (of Kerr-McGee fame), is from the "poor" side of the family. Hamm, of Continental Resources, was one of thirteen kids of Oklahoma sharecroppers and picked cotton. Tom Ward shoveled horse manure as a kid in the stables that his alcoholic father ran. 

(4) Commodity-priced outputs combined with leverage is a dangerous set-up. Several of the companies are on the on the brink of failure every now and then: Chesapeake Energy is on the ropes three-four times. Additionally, due to lease contract specs, many were forced to pump when prices were weak (i.e. 2011/12) so the industry shot itself in the foot by keeping supply up. It almost feels like the average E&P company is uninvestable. 

(5) Contrarian moves in this case worked: the oil "majors" had basically given up on the continental US as an energy source. Nearly everyone- experts, academics, companies- had also written of shale oil and gas as impossible. And nearly everyone had figured that hydraulic fracturing and horizontal drilling are too difficult to master. 

The book tracks the careers of several energy game changers:

George P. Mitchell, founder of Mitchell Energy- Barnett shale and fracking pioneer, sold company to Devon, then went on to another big hit at age 75 with other shale formations. Born in Galveston, TX, son of poor Greek immigrants. Mitchell is considered The Father of Fracking, and passed away recently at age 94. His "dreamer" drive into fracking- despite internal and external pushback- helped unlock the energy "bonanza". His earlier business success has been supplying gas to Chicago via pipeline.

Harold Hamm, founder of Continental Resources- Bakken shale oil pioneer. Born in Oklahoma, one of thirteen kids. First worked at a gas station servicing oil trucks, went on to start an oil services company himself, moved on to E&P, got to the Bakken early as the convergence of fracking and horizontal drilling happened. Hamm's successful oil services business and focus on oil (not gas) had given him a cushion to weather the cataclysmic 2008-2012 period. 

Aubrey McClendon and Tom Ward- cofounders of Chesapeake Energy; Ward would go on to Sandridge Energy. Both are from Oklahoma (McClendon was from a wealthier family, Duke grad; Ward's family was very poor) and both started out as landmen: guys who negotiate land leases with owners on behalf of energy companies. After running into each other, they decided to start Chesapeake (at their high points each would be worth about $3 bn after starting with practically nothing). Considering their backgrounds, it should not be surprise that CHK spearheaded a massive, decade-long shale grab across the country (at one time, the company held leases on an area larger than Connecticut and New Jersey combined). CHK, the company, is constantly on the edge, borrowing directly or through various innovative structures, until very recently. Both McClendon and Ward would get booted out from CHK and SD due to investor pressure. 

Charif Souki, founder of Cheniere Energy- initially trying to be a LNG import pioneer, now trying to be a LNG export pioneer. The most unusual character, son of a well-to-do Lebanese family, Colgate/Columbia Business grad, worked in middle-east private equity, retired to Aspen, started in restaurants (incl. Mezzaluna of OJ Simpson fame), almost ran out of money, and then decided to import LNG. You can imagine the uphill climb of an outsider trying to start one of the most ambitious infrastructure projects in the country; also, almost always on the brink financially. 

There are other characters in the book: Dvorkin, a Barnett shale individual pioneer; some of the drilling engineers and geologists at the various companies, Oryx Energy, the early horizontal drilling adopters, several "firsts" in the Bakken shale and others. 

The book is easy to read (generally chronological), with an excellent level of detail regarding major turning points in the parallel stories. The gossipy and "personal interest story" content is kept to a bare minimum. Additionally, there is very little space wasted on the efforts by washed-out D-list celebrities (like John Lennon's son) to gain visibility by attacking fracking: there is plenty of media attention on the pollution aspects already. The technical concepts are well-explained. Net-net, the book is a must-read for anyone interested in energy, entrepreneurship, investing/capital allocation and capitalism.