Into the Deep: Who is Chesapeake without Aubrey McClendon?

Chesapeake EnergyThe announcement of Chesapeake Energy (CHK) CEO Aubrey McClendon’s impending retirement has stirred quite a bit of discussion over the past several days. Some lament that CHK will never again be the same. Others cheer that CHK will never be the same. One thing is certain, Chesapeake will never be the same.

The Land Machine

Chesapeake’s “land machine” is well-known for entering a new play and causing lease bonuses to skyrocket. Competitors hate the tactic, and that’s probably the reason McClendon employed it. If you can flood an area with land agents and raise lease bonuses to price out your competitors, it makes it significantly easier to pick up acreage — even if it is at a higher cost. Of course, CHK found ways around having to pay for poor acreage. They issued draft payments to mineral owners for 60-90 days, or longer, to verify title and then (allegedly) drilled test wells to determine if the area was profitable. In areas that were determined to be unprofitable, there are allegations Chesapeake instructed land brokers to find reasons to fail title on the affected leases to avoid paying bonus monies.

This technique served two purposes. First, to remove the mineral owner’s ability to negotiate with other operators during the title check period. Second, to have a free “holding period” on acreage and leave competitors with blocks that were less productive. Of course, this allowed Chesapeake to “flip” the acreage later for the best price because they had the best position in the play. The ability to sell for the best price is absolutely necessary if you are paying exorbitant bonus amounts.

Staffing Effects

When Chesapeake entered a play, there was an obvious effect on staffing in the positions related to their entry. At first, land acquisition agents, title researchers, landmen and title attorneys were brought on. As the play developed, this spilled over into service companies, oil and gas attorneys, right of way agents and many other industries. This created a shortage of supply as Chesapeake is known for hiring many more service providers than is necessary (and is well known for refusing to pay those providers on various grounds). As a result of the supply shortage, other companies were (once again) priced out of the market because labor rates increased. It is not uncommon to see daily and hourly rates increase 30-50% when McClendon’s company entered a play. Is it possible that a controlled entry and departure in the future could have the opposite effect?

The New Guard

While it’s not yet known who will take the helm of Chesapeake, it is rumored that the Board of Directors is looking for a seasoned industry executive that can head the company down a more conservative, mature path. Again, depending on who you ask, this will have a decidedly positive or negative impact. The practice of flooding a market with land agents will likely cease, and with it the staffing levels of field land agents by other operators will likely decrease. While this may engender less competition, it will also reduce the bloating hourly and daily rates that occur in competitive plays.

It is unlikely we’ll see a reduction in current headcount used by the company, as they have already reduced their field landman staffing levels by over 80% across the country. But, the truth remains that in the next big play we probably won’t see the dramatic ramp-up that was previously expected. Good for small operators, but is it good for mineral owners?

Going Forward

It remains to be seen what will happen as things change at Chesapeake, and how that will affect our industry as a whole. Lease bonuses will probably decrease and that will be good for small operators. Some would argue it will be bad for mineral owners, others will argue that leasing to more responsive operators will be in best interest of those mineral owners. Staffing levels will probably not spike as drastically in boom areas, and that will decrease demand for those field personnel. On the other hand, it will probably shrink the industry’s presence in certain areas and require those who want to stay to become more efficient, knowledgeable and professional.

Looking at all these variables, one thing is certain; Chesapeake will not be the same, and neither will our industry. For better or worse.

What do you think? What affect will McClendon’s departure from Chesapeake mean for the company and the industry? Please leave a comment below.

Randy Young

Randy Young

Randy is a land consultant with experience in field and in-house land work, land administration, and software consulting with systems used in the land management business. He is an active member of the AAPL, HAPL, and NHAPL and is a regular attendee of industry functions.

Randy’s latest projects have included land data systems integrations, with a focus on Quorum Land System.