June was a good month for closely-held upstart American Energy Partners LP. The company inked $4.25 billion in three deals for primo acreage in the Utica, Marcellus and Permian Basin. Including an already-established position in the Mississippi Lime, in just a year AEP has built core positions of 560,000 net acres in four high-return unconventional plays.
Since inception last April, American Energy Partners has raised $10 billion in committed equity and debt capital. Ten billion--for a startup. Think about that. My gut says that’s a record amount for any private startup, whether onshore or offshore. AEP’s primary backer is The Energy and Minerals Group in Houston, but others such as First Reserve have confidently anted up as well.
Only one person wields that amount of personal capital and persuasion--Aubrey McClendon. The deposed king of Chesapeake Energy Corp., McClendon reformulated the day after walking away from his 25-year-old creation and started all over. At a Houston Producers Forum event in April, and before the latest acquisitions, he quipped, “Everyone in the oil and gas industry is making more money than they did five years ago, except one—-that’s me. I’m trying to do something about that.”
He didn’t waste any time.
Unlike the land-grab leasing machine built by McClendon’s Chesapeake to capture resource play acreage ahead of all other comers, AEP is leading with asset acquisitions. McClendon reached into his past for a model perfected at Chesapeake, once known as a serial acquirer of build-and-flips in the conventional age. On the outside looking in today, McClendon is bypassing organic lease and drill for derisked acreage with production and upside. And he’s willing to pay to play.
And unlike Chesapeake, AEP is structured into five distinct and separate entities built around a play or strategy, each with its own investor funding. Under McClendon, many thought Chesapeake was sale-proof due to its myriad plays and convoluted financial structures. AEP, though, will be much simpler. McClendon compared the structure to other exploration and production (E&P) companies backed by institutional investors, like EnerVest Ltd., that buy assets within distinct funds. Only in AEP’s case, the sub companies are prepackaged for easy piecemeal divestiture. Leave it to Aubrey to craft a new vehicle.
"We're building companies so a monetization event should be easy for a buyer," he said. That could be an acquisition by a strategic buyer, or by IPO. “The successful IPOs I’ve seen are laser-focused on a basin or play, and that’s what we’re going to do.”
McClendon has no hesitation about taking one or all of the entities public. “I loved being a public company CEO for 19 of my 20 years,” he remarked.
While AEP is on a quest for acquisitions, McClendon’s former employer Chesapeake is paring down its portfolio and tightening efficiencies. This will be the trend for majors and super independents that bulked up during the rise of the unconventional revolution, and that’s good for the little guys, he believes, a category in which he now places himself.
“Many of them are involved in discussions with activist shareholders, as I was. Never do they say, ‘We want you to get bigger, spend more capital, take more risk.’ It’s always, ‘Shrink, shrink, shrink.’ You’ll see net sales come out of that.”
And the amount of capital available today is “absolutely incredible,” he said. “None of the public companies can access that capital. There’s no chance an Apache, Encana or Chesapeake would say, ‘Hey, let’s do a $5 billion stock offering because there’s so much great stuff out there.’ No chance. That leaves open the opportunity for our company.”
In addition to its four play-focused companies, AEP has also established a unit that only buys nonoperated working interests. “I’ve got nonoperated interests in about 12,000 wells,” he said, referring to his continued interest in Chesapeake’s now-controversial Founders Well Participation Program, “so I know every way to be abused as a nonoperator.”
Reminiscing over troubled times, he confessed he thought he would be at the helm of Chesapeake for his entire career, “so it’s a good reminder in life that good things can come out of starting over. I had forgotten how much fun it is to create value and to work with people you’re absolutely aligned with. Maybe I’ll try that every 25 years.”
The E&P landscape is always more exciting with Aubrey leading the charge, and the former King of Shales rides once again. And unlike his banishment from the Chesapeake castle, his exit the next time will likely be on his own terms.
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