The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (2 page)

T
he phone call came as a jolt.

It was May 2007 and Harold Hamm was enjoying dinner at the Brown Palace Hotel and Spa, an elegant hotel in downtown Denver. To Hamm’s right were two longtime colleagues from his energy company, Continental Resources. A pair of Merrill Lynch investment bankers sat to Hamm’s left. The group was two-thirds through a grueling ten-day coast-to-coast trip aimed at wooing investors ahead of a crucial initial public offering of shares of Continental.

When rock bands go on road trips, the days are slow and the nights furious; when executives take to the road to sell pieces of their companies, the opposite usually is true. Hamm and the bankers had spent a full day convincing mutual fund honchos that Continental was set to strike it big in North Dakota, a long-overlooked part of the country. Now the group relaxed over dinner and drinks, their jackets off and ties loosened, as they discussed ways to improve their pitch.

As he’d courted the investors, Hamm hadn’t dwelled on the personal challenges he had overcome, such as growing up dirt poor in rural Lexington, Oklahoma, the youngest of thirteen children. He’d also avoided mention of his more recent turbulent love life.

Instead, Hamm shared an upbeat message about his company and a promising 15,000-square-mile formation of rocks called the Bakken that was under parts of North Dakota, Montana, and Canada. Hamm believed he was at the vanguard of a revolution that would deliver new oil and gas supplies to a nation running out of energy.

For all his big talk, though, Continental was producing just seven thousand barrels of oil a day from the Bakken’s dense rock. It was a mere trickle, representing a fraction of 1 percent of what Exxon pumped on a daily basis. The results offered little proof that much more would flow from a region that had frustrated wildcatters for years, making Hamm’s pitch to investors challenging.

Still, the trip appeared to be on track, and the final leg—meetings with investors in Los Angeles—was just days away. The Merrill Lynch bankers told Hamm there seemed to be enough interest in Continental for the company to sell its shares for as much as eighteen dollars each in its prospective offering. With the IPO just a few weeks away, Hamm, a sixty-one-year-old with thinning auburn hair, a full stomach, and a playful grin, was in good spirits as the dinner wound down.

A lot was riding on the offering. Continental already owed $253 million to lenders, and Hamm planned to use some of the IPO’s proceeds to pay down a portion of that debt. He knew his company would have to raise hundreds of millions of additional dollars at some point to tap the vast quantities of oil he was convinced were buried in the Bakken’s layers of rock. Being public was the only way his company could raise enough cash at reasonable rates to find all that oil.

“We had to be public to be a major player in the Bakken,” Hamm recalls. “But at that point we had very little product.”

Outside the hotel, gloom was setting in. The real estate market was on its last legs, financial firms were wobbling, and the global economy soon would experience its worst downturn in eighty years. Technology and management gurus said America had lost its creative spirit and the country’s economic dominance seemed doomed. Many economists predicted a passing of the baton to India, Brazil, and China. Energy producers were coming up dry, leading to hand-wringing on Wall Street and in Washington, D.C., about how the United States would meet its future energy needs.

As Hamm looked around the table, though, he was convinced he was close to realizing his life’s dream, one that would help confer extraordinary blessings on the nation just when it needed them most. Most executives his age were negotiating retirement packages and scouting golf courses. In a sense, though, Hamm’s real life’s work was just beginning. He was convinced a historic gusher was in the offing that would reenergize the entire country.

Just then, one of the Merrill Lynch bankers, Christopher Mize, heard his cell phone ring. Hamm watched as Mize picked it up.

“Wow . . . that’s a surprise . . . okay . . . thanks.”

Hamm sensed something was wrong.

“It’s not good,” Mize told him.

Two competitors in North Dakota had just reported results from their own exploration efforts in the Bakken rock layer. They were big-time disappointments, suggesting that Continental would also come up dry in the area.

“They busted their pick,” one of the bankers told Hamm, using industry lingo for a huge strikeout.

We can pull the plug on the IPO or keep it going and try to make it happen, though it will be more of a challenge, the bankers told Hamm. It’s up to you, Harold. Think it through carefully.

Hamm barely uttered a good night and went straight to his room, shaken by the news.

The next morning, Hamm told his team they’d continue to pursue the IPO, even if it meant lowering the price to try to entice investors. They might not appreciate what Continental was working on, but Hamm was sure they’d catch on.

Behind Hamm’s confidence was an understanding of the dramatic advances a few American companies like his own were achieving in the way they drilled and extracted oil and gas, breakthroughs that Wall Street investors, industry experts, and even the largest oil companies didn’t fully appreciate. For decades, prospectors had fractured, or broken up, rock formations by pummeling them with various liquids, creating pathways for natural gas to flow to the surface. The process was called hydraulic fracturing, or fracking.

But Hamm, along with other adventurous wildcatters around the country, had begun to combine improved fracking techniques with cutting-edge methods of drilling sideways deep in the ground. They were targeting long, wide rock layers thick with oil and gas. These were formations of shale and other rock that geologists once only dreamed of accessing. Hamm was receiving daily updates detailing how his crew was boring ten thousand feet into the ground, turning drill bits to go another two miles horizontally, and locating layers of rock brimming with oil. One of Hamm’s men boasted he now could hit a target miles below the surface that was no larger than a tiepin.

Hamm was determined to use this new technology to tap a modern-day gusher, one that would change the direction of his company and even his country. He just needed to get investors on board.

Several weeks later, Continental sold its shares at a reduced price of fifteen dollars a share. Wall Street is accustomed to IPOs that soar on takeoff. This one barely fluttered. For months, the stock did little, falling below fifteen dollars in early September 2007. One of Hamm’s key staff members sold all his shares—even he worried the company wouldn’t amount to much.

Hamm still believed an abundance of oil lay untapped in overlooked areas of America, and that his company was getting closer to finding it. Few agreed with him, however.

Don’t they get what’s happening?
Hamm thought.

•   •   •

T
here was good reason for deep skepticism about Harold Hamm and his quest to unlock huge amounts of oil in North Dakota. Hamm was a genial dreamer, maybe even past his prime, not unlike his nation.

The oil industry got its start in the United States and the country spent over a century as the world’s energy giant. At one time, American oil-and-gas supplies seemed endless. But during the 1970s, promising fields became more difficult to locate. American oil production peaked in 1970 at 9.6 million barrels a day, and imports began to soar as the country scrambled to get enough crude to meet its growing demand. The 1973 Arab oil embargo served notice that the nation had become reliant on others for its energy needs. Those others usually weren’t our best friends, either. Oil magnates J. R. Ewing on
Dallas
and Blake Carrington on
Dynasty
may have seduced television audiences in the 1970s and 1980s, but real-life drillers were finding it tough to regain their swagger amid a string of dry holes. A global glut of oil during the 1980s and 1990s resulted in weak prices—good news for consumers but bad news for American wildcatters, who found it difficult to keep up with foreign rivals.

Power brokers in energy capitals such as Dallas, Houston, and Tulsa ignored what Hamm was up to in North Dakota. Instead, it was Aubrey McClendon—an Oklahoma upstart employing his own improved fracking and drilling techniques—who was gaining admiration and even envy. In late spring of 2008, McClendon became a multibillionaire, as shares of his new energy power, Chesapeake Energy, soared. He also helped bring a pro basketball team to Oklahoma City, electrifying the state. Later, when McClendon sat courtside at games with his relative,
Sports Illustrated
swimsuit cover model Kate Upton, the jealousy and buzz grew. Hamm owned his own front-row seat close by. Few noticed him, though.

Talk in the energy patch, in Washington, and on Wall Street in early 2008 was of “peak oil,” a popular and vaguely Malthusian notion that the growth of global energy supplies had reached its limit, a dreaded shift sure to lead to rising prices and global economic strains. McClendon’s company was among the few still making huge new discoveries by focusing its drilling on shale, a dense rock long ignored by oil giants.

In March 2008, McClendon hosted a dinner at New York’s swanky ‘21’ Club for a group of Wall Street billionaires and others hoping to understand the new energy world. Investors George Soros and Stanley Druckenmiller were there. So were some of the leading minds of the global energy business. Over dinner, McClendon’s guests agreed that an era of oil and gas scarcity, and rising prices, had begun.

As he watched the conversation unfold from the head of the table, McClendon couldn’t hide a confident smile. His company was extracting growing quantities of natural gas, despite the pessimism around the room. McClendon had plans to pump even more of it, giving him a chance to become a modern-day Getty or Rockefeller.

Far from that New York hot spot, however, a revolution was quietly under way, one that star investors, energy experts, and most oil executives were oblivious to. It had started a decade earlier in Texas when a wildcatter named George Mitchell searched for a way to keep his business alive.

Soon Hamm, McClendon, and other once obscure drillers would unleash a dramatic transformation of the nation and the world. That evening in New York, though, few at the table had any idea what was ahead.

“It never occurred to any of us what was about to happen,” says Druckenmiller.

The meek shall inherit the earth, but not its mineral rights.

—J. Paul Getty

G
eorge Mitchell wasn’t out to change history. He just wanted to keep his company going.

It was the summer of 1998 and Mitchell Energy was sending huge amounts of natural gas each day from its Texas fields to a pipeline serving the city of Chicago. For decades, the arrangement had provided the company with steady profits, helping Mitchell become wealthy.

But his gas reserves were depleting, slowly but surely. Mitchell Energy’s shares were falling, the industry was on its back, and time was running out for both the seventy-nine-year-old executive and his business. A slow, inevitable decline seemed certain, one that Mitchell was desperate to avoid.

He convened a meeting of his top executives in a large conference room at the company’s headquarters outside Houston. They had been searching for new sources of natural gas for nearly two decades, a fruitless quest that left some of the management team frustrated. Mitchell was convinced their best bet was to try to unlock gas deposits from shale, a dense type of rock deep below Mitchell Energy’s acreage in North Texas. They had spent years drilling this rock, however, and it still wasn’t working.

Larger rivals, such as Exxon, Royal Dutch Shell, and Chevron, already had shuttered operations trying to tap oil and gas from similar rock formations around the country. These huge companies headed off to drill in Africa, Asia, Brazil, and offshore locations. Almost any spot outside the United States appeared more promising than Mitchell’s Texas shale.

The United States was running on empty, just like Mitchell Energy. A growing dependence on foreign energy had pressured the country into costly foreign entanglements at least partly aimed at safeguarding sources of oil and gas, such as the invasion of Iraq seven years earlier after that country annexed Kuwait, a Gulf oil power. The United States would have to get used to a deeper reliance on foreign energy and additional military campaigns, it seemed, as Russia and other nations with vast energy resources assumed greater power.

As the 1998 meeting got under way, Mitchell’s heir apparent, Bill Stevens, spoke up forcefully. The company was wasting its time, Stevens said. Even if they somehow
could
get a lot more gas to flow from this challenging rock, production costs likely would be too high to make much of it worthwhile. Drilling in the Texas shale wasn’t worth the expense of leasing new acreage in the area, Stevens argued to Mitchell and the rest of the company’s board of directors.

Mitchell had been getting the same message from his son Todd, an experienced geologist who was on the company’s board. Shale drilling might be huge someday, Todd had said, but the company was spending too much on additional wells. Todd repeated his view over lunch, at family occasions, and in private meetings with his father. The company was piling on a frightening amount of leverage, Todd warned, and George Mitchell’s personal debts were at worrisome levels.

It seemed clear that George Mitchell was jeopardizing his company’s future with his stubborn pursuit of shale drilling.

Mitchell listened patiently to the skepticism at the board meeting. He said little in response, though, ending the meeting abruptly, leaving board members frustrated

Later, Mitchell reached out to his geologists and engineers working on the Texas shale project. He told them he was sure they’d eventually find a way to get substantial amounts of gas from the shale.

“Keep going, it’s got to be there,” he said, trying to boost their spirits.

Privately, Mitchell had his own growing worries. “I thought perhaps they were right and it wouldn’t work,” he recalls.

Mitchell couldn’t share his concerns with any of his top executives, though, let alone discuss them with his team working in the field. This was Mitchell’s last shot. He had to give it a full try.

“I had no choice, really,” Mitchell recalls. “We had to get the gas to flow.”

Running out of gas was a huge problem for George Mitchell and his company. He and his family of immigrants already had overcome a series of imposing obstacles, however. It gave him some hope he might succeed in the final quest of his life.

•   •   •

M
itchell’s father, Savvas Paraskevopoulos, was a goatherd in Nestani, a dusty mountain hamlet in southern Greece. In 1901, at the age of twenty, Paraskevopoulos, the fourth of five children, got a glimpse of his meager inheritance in the rural, impoverished country: a quarter acre of land nowhere near any water source. He quickly decided he’d have to do something else with his life.

Impoverished and illiterate, Paraskevopoulos walked fifty miles to a freighter bound for Ellis Island, agreeing to work on the ship in exchange for free passage, becoming one of thousands of Greeks leaving for America. With no skills to speak of and virtually no English, Paraskevopoulos was grabbed by railroad laborers as he disembarked. Soon he was laying tracks with an Arkansas railroad gang working its way toward Texas. It was backbreaking work that helped lay the nation’s foundation.

One day, the Irish paymaster of the gang, Mike Mitchell, walked up to Paraskevopoulos, looking annoyed. Mitchell said he was having too much trouble writing Paraskevopoulos’s long and ungainly name. He told the immigrant to change it.

“From now on, your name is the same as mine,” the paymaster told Paraskevopoulos.

With that, Savvas Paraskevopoulos became Mike Mitchell. He eventually made his way to Houston, joining a cousin who had a shoeshine parlor near a glamorous hotel in town. Soon the young Greek had saved enough money to start his own shoeshine and pressing shop across from the Buccaneer Hotel in Galveston, a city fifty miles away with a growing population of Greek immigrants.

Flipping through a local Greek-language weekly paper one morning, Mitchell saw an article about an attractive young woman, Katina Eleftheriou, on her way to Tampa, Florida, to live with her sister. Taken with her beauty, Mike Mitchell cut the article out and stuffed it in his jacket pocket. Two years later, after saving enough money to afford a train ride to Tampa, he put on a coat and tie and left to track Eleftheriou down.

Mitchell didn’t know a soul in Tampa, but he got in touch with someone from the Greek community and managed to locate the young woman, who by then was engaged to a local man. With charm and persistence, Mike Mitchell broke up the relationship and brought Eleftheriou, a fellow Peloponnesian, back to Galveston. They wed in 1905 and raised four children, the third of whom was George Phydias, born in 1919 and named for one of the greatest sculptors of classical Greece.

The Mitchell family lived in a rough immigrant neighborhood that locals nicknamed the “League of Nations,” an area where bootlegging and gambling flourished.
¹
Money was tight, so George helped his family make ends meet by hunting for duck and dove and by fishing for speckled trout and redfish, which he sold to Gaido’s, a historic Galveston fish restaurant, for twenty cents a pound.

Katina Mitchell, who never learned English, was a beacon for the local Greek community, hosting new immigrants at the Mitchell home for weeks at a time until her sudden death from a stroke at forty-four, when George was thirteen. Shortly thereafter, Mike suffered a badly shattered leg in an automobile accident. George’s older siblings, Christie and Johnny, were old enough to be on their own, but George and his sister Maria were sent to live with relatives.

George Mitchell didn’t speak English until he began grade school, but he managed to become a top student at well-regarded Ball High School in Galveston. He planned to fulfill his mother’s dream by attending Rice University and becoming a physician. But a math class taught by a dynamic teacher during his senior year, as well as a summer working in Louisiana’s oil fields with his older brother Johnny, helped change his mind.

“Making discoveries by looking at maps seemed exciting,” says Mitchell, even though oil was only selling for about $1.20 a barrel and the industry was going through tough times.

Mitchell studied geology at Texas A&M University and was the school’s top-ranked tennis player, but he often found himself strapped for money and unable to pay tuition. To raise cash, he began reselling candy to fellow students on campus. “You’d put a stand up and put up a sign saying, ‘Drop your money in,’ and you’d have twenty or thirty different candy bars,” he says. “It was kinda fun.”

Well, it was fun until members of the school’s football team began grabbing Mitchell’s candy bars without paying for them, daring him to do something about it. He realized he had to come up with a fresh moneymaking idea, so he began selling gold-embossed stationery to lovesick freshmen, making $300 a month in his last year in school.
²

That year, a professor of petroleum engineering gave Mitchell advice that left an impression. “If you want to go work for Humble Oil, fine, then you can drive around in a pretty good Chevrolet,” the professor said, referring to a major energy producer at the time that later became part of Exxon. “But if you want to drive around in a Cadillac, you’d better go out on your own someday.”

Mitchell earned a degree in petroleum engineering in 1940 and then worked in Louisiana’s Cajun country on an Amoco oil rig. Then World War II broke out. Like many of his friends, Mitchell expected to see combat overseas. He was wary, however, after mourning too many friends who had died abroad. Instead, he enlisted with the U.S. Army Corps of Engineers. Mitchell tried to convince his commanding officer that he was indispensable in the Houston area. He worked hard, played tennis with the colonel, and even dated his daughter, all to ensure that he wasn’t sent overseas. It worked—Mitchell spent almost five years managing hundreds of men and building projects in Houston and elsewhere.

At the time, Mitchell was more focused on the opposite sex and on avoiding combat than on his future in the energy business. Less than two weeks before the attack on Pearl Harbor, on a train ride back to Houston after a Texas A&M football game, he spotted an attractive young woman, Cynthia Woods, and her twin sister, Pamela, on a double date with two students at the school. Cynthia’s date was intoxicated and obnoxious and she was growing miserable.

“The guy was drinking whiskey out of a flask and it made her angry,” Mitchell recalls.

Finally, Cynthia asked her sister’s date to try to get rid of the jerk so she wouldn’t have to deal with him any longer. The date found a poker game in another train car and convinced the rowdy young man to check it out. Mitchell quickly made his move, introducing himself to Cynthia and getting her phone number. Back home, George and Cynthia began dating and later would join Pamela and her date from that evening in a double wedding.

After the war, George consulted on oil and gas drilling projects in Houston, earning a reputation in the area for picking productive wells. It was enough early success to convince him and his brother, Johnny, to try their luck as prospectors, or “wildcatters,” modern-day treasure hunters who risk financial ruin in hopes of discovering oil and gas. They would gamble it all to drill their own wells and George would try for that Cadillac, just as his professor had advised.

The brothers didn’t choose the most creative name for their company—Oil Drilling, Inc.—but the Mitchells, working with a third partner, opened for business in 1946 in downtown Houston’s Esperson Building with high hopes.

An early problem developed: George and his brother couldn’t afford the fees charged by local libraries to borrow well logs, the detailed records of geological formations that are crucial to finding oil and gas. To get out of their bind, George convinced a local firm to let him borrow the logs at the end of the day and return them by 8 a.m. the next morning, before they opened for business.

George, the trained geologist, stayed up past 2 a.m. each night poring over the logs, trying to identify promising oil and gas prospects. After George located acreage that seemed attractive, Johnny, more outgoing and upbeat than his younger brother, would approach a group of oil and gas promoters congregated in the building’s drugstore, a famous downtown gathering spot and breakfast joint, to try to raise enough cash so the Mitchell brothers could begin drilling some wells.

Soon Johnny became friendly with some Jewish businessmen from Houston and Galveston, including grocery-store owners Abe and Bernard Weingarten, who were looking for ways to invest their spare money. The group agreed to pay the Mitchell brothers fifty dollars a month to find drilling prospects for them. The brothers also received an ownership stake of about one thirty-second of each well they drilled for the investor group. After some early successes, other investors also began giving money to the Mitchell boys to search for oil and gas wells.

“We got a reputation for finding oil, so people found us,” Mitchell says. “All the top Jewish families were willing to risk money in oil and gas.”

The brothers accumulated an impressive track record, even as they competed with a rush of independent wildcatters flocking to Texas after World War II. The investor group was making money, but they still could be hard on George and Johnny, threatening to withdraw their support if the Mitchell brothers hit too many dry holes in a row.

Once, when George Mitchell told Will Zinn, a Galveston lawyer, that they’d found salt water, not oil, in a key well, Zinn shot back, “Hey, I’ve got all the salt water I need in Galveston. . . . I don’t need to spend all my money” to get any more of it.
³

“If we did over five dry holes in a row they would leave us,” Mitchell recalls.

To avoid that scenario, Mitchell made sure to always retain one especially promising well in reserve, to drill if he ever hit a losing streak, a move that kept the investors from bailing.

Soon cash was coming their way from all over the country. One backer was Galveston gambling magnate and organized crime boss Sam Maceo. Another was Barbara Hutton, the troubled and famous heiress to the Woolworth retailing fortune who also was the daughter of a founder of the brokerage firm E. F. Hutton. (Hutton made headlines for marrying seven men in her lifetime, including actor Cary Grant. She profited from Mitchell’s drilling successes but nonetheless died almost penniless, having squandered her wealth on alcohol, drugs, and a string of playboys.)