Aubrey McClendon Continues to Bet Big on the Utica Shale

The former Chesapeake Energy CEO has raised nearly $9 billion to target American shale plays, with about a third of that money targeting the Utica Shale.

May 29, 2014 at 3:42PM
 Chesapeake Energy Corporation Shale Gas

Source: Chesapeake Energy.

Former Chesapeake Energy (NYSE:CHK) CEO Aubrey McClendon once boasted that the Utica Shale would prove to be "the biggest thing economically to hit Ohio, since maybe the plow." He called it a half-trillion dollar opportunity because "it sounds bigger" than a $500 billion opportunity. Unfortunately for McClendon, the Utica Shale didn't work out exactly how he envisioned it would. Many of his peers pulled back on the play after it turned out to be less oily than expected. 

McClendon, however, never backed down. It's a good thing too because his former employer, Chesapeake Energy, is now certain that he was right and that the Utica Shale is a world-class energy asset. He likewise remains certain that the Utica's best days lie ahead as he's making a multibillion-dollar bet on the play through his new company, American Energy Partners.

McClendon's big bets
So far, McClendon has raised a whopping $8.7 billion to drill U.S. shale plays after recently raising another $4 billion. A third of these funds are earmarked toward the Utica Shale as McClendon also has his sights set on the Marcellus Shale and Permian Basin, where he is forming two new companies to target those plays. 

What's interesting, given McClendon's history, is he actually has a lot of money to pursue his grand plan. What he doesn't have right now is the people nor the deals. In fact, he recently told a Houston energy conference that "I need deals and I need people" and one of the reasons he was presenting was because he was there on a recruiting mission. 

That being said, this is a man who has already completed three Utica Shale deals this year. He spent $924 million to buy the 74,000 Utica Shale acres that Hess (NYSE:HES) sold earlier this year. On top of that, he completed a deal with ExxonMobil's (NYSE:XOM) XTO Energy unit to fund 100% of the near-term drilling costs of 55,000 net acres in a "core area" of the Utica Shale. In return, McClendon's company will receive ownership of 30,000 net acres from ExxonMobil in the Utica Shale. A third deal brought the company's total haul in the Utica Shale up to 130,000 net acres, which doubled its holdings in the region.

Hess Utica

Source: Hess. 

Just getting started
Despite all of this wheeling and dealing, McClendon is hungry for more. This is despite the fact that some of the acreage he is buying didn't hold compelling economics for the seller. Hess, for example, noted that the acreage it sold was primarily dry gas. The company concluded that the potential returns from the investment at both current and projected natural gas prices didn't justify retaining and drilling the acreage. That, however, doesn't mean it won't be economically appealing for McClendon's company to drill.

One thing that his former employer, Chesapeake Energy, is finding is that the dry gas potential of the Utica Shale is proving to be more lucrative than investors realize. The company and many of its peers are drilling impressive wells as seen on the following slide:

Chesapeake Energy Utica Dry Gas

Source: Chesapeake Energy investor presentation (link opens a PDF).

As the slide notes, these wells have the potential to produce more than 10 billion cubic feet of natural gas equivalent during the lifespan of the well. To put that into perspective, the gas produced during the lifetime of one well is enough gas to supply all of the energy needs for 100,000 American homes for one year.

With the right cost structure, these wells can be highly profitable. It's a cost structure that Chesapeake Energy has, which is why it sees so much value in the more than 2,000 future well locations it possesses. It's this same value that McClendon sees in the Utica whether it's in the dry gas portion or the currently more lucrative liquids-rich section of the play.

Investor takeaway
The Utica Shale is starting to become the economic powerhouse that McClendon envisioned. While it won't fuel returns for everyone, which is why Hess is pulling out of the dry gas portion of the play, it is moving the needle for companies like Chesapeake Energy and is likely to do the same for McClendon's new venture. Needless to say, investors shouldn't be writing off the Utica Shale as it still has the potential to fuel returns for the right companies.

Three stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, The Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Matt DiLallo has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers