The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (8 page)

“You didn’t want to take him to an event with food,” a Sun executive says. “You got to see what he was eating because half of it came out of his mouth. He was just oblivious.”

Investors didn’t seem to care about Hauptfuhrer’s idiosyncrasies. They warmed to Oryx shares, sending the stock climbing as the company’s production grew.

Hauptfuhrer felt just as confident about the company’s prospects. In 1989, Oryx agreed to pay $1.1 billion to British Petroleum to buy a portfolio of international oil and gas properties in the North Sea, just off the British coastline, and in other nations.

Most major oil companies remained focused on foreign drilling areas, and Hauptfuhrer didn’t want to buck the consensus, even though Oryx was making progress in the United States. He pledged to sell some U.S. properties to pay for the British Petroleum deal, sparking some grumbling by production pros focused on this country. To these skeptics, it was as if Hauptfuhrer didn’t fully believe in the success his own men and women were seeing with their advances in horizontal drilling.

“Sure, we had to put on more debt,” he said, “but I thought it was a pretty good deal, there were more unexplored areas offshore than in the U.S.”

When Iraqi dictator Saddam Hussein ordered an invasion of onetime ally Kuwait in the summer of 1990, oil prices climbed and Oryx became a true Wall Street darling. Shares hit fifty-five dollars, doubling in just two years.
Fortune
magazine called Oryx the nation’s “most admired independent producer of oil and gas” and “the leading practitioner of the industry’s hottest technology, horizontal drilling.”

That’s when Hauptfuhrer made his critical mistake. In 1990, he directed Oryx to buy about 20 percent of the company’s shares from the Pew Charitable Trusts, a group of seven charitable trusts representing Philadelphia’s prominent Pew family, descendants of Sun’s cofounder. The trusts had been itching to sell their shares because the BP purchase left Oryx with too little cash to continue growing its dividends, a payout that the trusts relied on. Charitable laws require trusts to distribute a minimum of 5 percent of their assets each year, creating a need for dividend-paying investments.

Oryx borrowed nearly a billion dollars to pay for the Pew’s stock at a price of nearly $50 a share. It was a lot of money, but Oryx was on a roll, so Hauptfuhrer figured the company would pay the debt off eventually. He told colleagues that Oryx shares likely would tumble if the Pews sold their shares on the open market rather than to Oryx itself. Hauptfuhrer also worried that representatives of the Pew trusts, which had control of three of the company’s board seats, likely would veto future spending on attractive projects if they remained stockholders. It was best if they took their cash and left, Hauptfuhrer figured.

Some employees backed the deal, worried that if Oryx didn’t buy the shares they might fall into the hands of a rival, resulting in a merger and severe job cuts. Many had gone through layoffs at other oil companies during the industry’s difficult period and didn’t want to do so again.

But others worried about Oryx’s rising debt levels. The company already had piled on debt to buy the properties from British Petroleum. Now it owed more than $3 billion, equal to nearly Oryx’s entire market value. Credit rating company Moody’s Investors Service cut its rating for Oryx’s debt, citing the company’s decision to borrow more money when its leverage was “already high.”

Some employees grumbled that Hauptfuhrer was trying to help his father-in-law, who some believed was part of the Pew family. In reality, Robert Dunlop, the former Sun chairman, wasn’t one of the Pews. But he was on the board of the Pew trusts and a director of the firm managing the family’s money, raising other potential conflicts of interest in the buyback agreement.

Unbeknownst to most Oryx employees, the buyback resulted from a behind-the-scenes chess match that Hauptfuhrer appeared to have misplayed. The president of the Pew trusts, Dr. Thomas Langfitt, had indeed convinced Hauptfuhrer and Oryx executives that the trusts would sell their shares to a rival, threatening Oryx’s independence, unless the company bought the shares from the trusts, according to a lawsuit later filed against the trusts related to the deal. The genteel Pew Charitable Trusts, known for their support of civic journalism and other like-minded causes, had embraced a tactic that Jack Willoughby in
Institutional Investor
magazine later likened to “greenmail,” the hard-nosed tactic usually employed by corporate raiders.

“They put a gun to our heads,” Hauptfuhrer recalled. “They said, ‘If you don’t buy us, we’ll shop the shares to another company.’ And I thought we were in the beginning of an important period for the company,” so it wasn’t the right time for a merger.

It turned out to be a bluff by the Pew trusts, however.

“Despite the fact that our own advisers told us that there was no third-party buyer out there on the horizon, we were able to induce them to believe that in fact there was,” Peter Brown, chief operating officer of the firm managing the trusts’ money, later asserted in court testimony, as reported by Willoughby. “And so they wanted to get control of the block.”

Brown testified that Oryx developed a “genuine paranoia . . . about word getting into the market” that the trusts were considering selling shares to an outside company.
⁸

“The president of the Pew trusts told our board that they intended to sell their block,” Hauptfuhrer said later. “That may have been a bluff—in which case he lied.”

Had Hauptfuhrer and Oryx rejected the buyout idea and told the Pew trusts to unload their stock on the open market, the selling likely would have weighed on Oryx shares. But the company would have been left in a healthier position to pursue horizontal drilling across the country. Instead, Oryx bought the shares back and found itself in a weakened state.

“Now we had a lot of debt,” Hauptfuhrer acknowledged.

Hauptfuhrer assured investors that the company’s growth, as well as firm oil prices, would enable Oryx to pay down the borrowing. He didn’t think prices would keep soaring, but he also didn’t plan on any kind of plunge.

But oil prices did plunge soon after the United States overran the Iraqi forces, ending fears of a global oil shortage. Prices remained low the rest of the decade, Oryx’s profits dried up, and its shares crumbled. The company soon tottered under all its debt. Hauptfuhrer restructured operations and froze salaries, as production from the Austin Chalk area tapered off.

Searching for a way out, Oryx applied its horizontal drilling technology to other fields in Texas, to a promising layer of shale and other rock in the Bakken in North Dakota, and to one in Colorado called the Niobrara Shale. Oryx also focused on the Barnett, even as George Mitchell began to ramp up his drilling in the area. The Mitchell team watched what Oryx was up to with interest. Their data suggested that Oryx would find oil in its wells in the Barnett, a big reason Hauptfuhrer was so upbeat as he gave his 1993 speech in Dallas.

But Oryx’s exploration efforts proved failures; the company ended up plugging and abandoning its wells in the Barnett. A big reason was that the company never mastered the fracking techniques necessary to extract oil and gas from fields like those in the Barnett and Bakken formations, where the rock wasn’t as permeable as in the Austin Chalk region.

“We drilled almost every shale play, but we were just too early, we didn’t have fracking capabilities,” says Bowdon. “That was the magic ingredient missing for a technological breakthrough.”

And while Oryx was expert at drilling horizontally, the technology wasn’t at the point where it could be done for more than a few thousand feet, limiting its effectiveness.

It didn’t help that Oryx had some bad luck picking drilling spots. “We were very close in the Barnett, we were just too far north,” recalls Jeff Roberts, an Oryx geologist. “It felt like we hit a lot of long flyouts that were caught at the wall [rather than become home runs]. . . . It was very frustrating.”

The horizontal drilling group soon found it harder to obtain funding for new wells. Oryx fired employees and sold assets, especially those related to domestic drilling.

“The price drop changed the economics” of the company’s innovative drilling technique, Hauptfuhrer said.

All his efforts weren’t enough to stem the fall of the stock, which dropped below fifteen dollars in 1994. Other Oryx executives, including one with a name straight out of a James Bond movie, Chief Financial Officer Edward Moneypenny, did little to strengthen the shares. On Wall Street, Hauptfuhrer went from beloved to detested.

“They’re totally pathetic,” Alan Gaines of New York–based brokerage firm Gaines, Berland Inc., told
BusinessWeek
in late 1994. For three years straight, Gaines, who profited by wagering against Oryx shares, gave Hauptfuhrer his “Jack Kevorkian award” for the executive most likely to aid a corporate suicide. “Lots of people thought oil prices would rise, but how many bet the ranch?”
⁹

Internal rifts grew as employees fought for dwindling resources. Production executives demanded a bigger budget from Hauptfuhrer because they were generating crucial cash for Oryx. Exploration veterans countered that they were the ones finding new reservoirs, the key to the company’s survival.

Hauptfuhrer also became a despised figure within Oryx, due to the layoffs and the company’s declining fortunes. Between 1988 and late 1994, Oryx eliminated two thousand jobs, bringing its workforce down to twelve hundred. Awkward interactions with employees cemented the negative view of Hauptfuhrer, raising doubts about his future.

Hauptfuhrer ended up retiring from the company in the fall of 1994 at the age of sixty-three, a year before the end of his contract, a move Wall Street analysts cheered. After he announced that he would be leaving, some employees boycotted a party thrown in his honor.

Some of Hauptfuhrer’s rivals had more sympathy for the executive. “Their timing was bad,” Raymond Plank, chief executive officer of rival Apache Corp., said at the time, “there but for the grace of God go many oilmen.”
¹⁰

Hauptfuhrer’s replacement, Bob Keiser, had earned his reputation working on international drilling projects. A year earlier, Oryx had risked $6 million of scarce cash on risky drilling in the Gulf of Mexico, a hot area at the time for energy companies, though it didn’t stem the company’s slide.
¹¹

In the fall of 1998, shares of Oryx slumped to just over ten dollars, as continued low oil and natural gas prices weighed on the company, a last, fatal blow. In October of that year, Oryx agreed to be purchased by a rival, Kerr-McGee Corp., of Oklahoma City. Before Christmas that year, Keiser convened the company’s six hundred remaining nervous employees to discuss who would be kept on at the new company and who would be let go.

“Well, I know one person who still has a job,” Keiser joked, according to three employees in the audience. “That’s me.” He said employees would have to deal with adjustments to their lives after the sale of Oryx, just like he would.

“I’m moving to Oklahoma City and my wife’s going to have to find a new doctor,” Keiser said, according to the employees. “I want y’all to go back to your offices, your bosses will tell you if you have a new job. By the way, Merry Christmas.” (Keiser says he doesn’t remember making those statements and that he knew he wasn’t going to have a job at the new company. “If I said that, it was to lighten up the group,” he says.)

Oryx employees turned to each other, mouths agape. Some tried to joke about Keiser’s comments; others were too disturbed to say much. Soon, hundreds of employees would be let go. And Keiser
did
lose his job.

The fall of Oryx was an ignominious defeat both for a company that seemed on its way to greatness, and for an executive who seemed on the brink of remarkable achievement. Hauptfuhrer never sold the tens of thousands of Oryx shares he received during his tenure, meaning he suffered along with other shareholders. He did keep his portfolio well diversified, though, sparing him much of the pain.

Hauptfuhrer retreated to his ten-bedroom Pennsylvania-stone estate, built in 1929, outside Philadelphia, where he lived with the former Barbara Dunlop until his passing in August 2013. “It was disappointing,” he said earlier that year, regarding Oryx’s experience. “The price of oil went lower than we thought. We wouldn’t have made the same bet had we known where they were going. That’s hindsight.”

Some of those at Oryx who believed in horizontal drilling, such as Kenneth Bowdon and Jeff Roberts, either were fired from Oryx or quit. Many continued to refine horizontal drilling methods at new companies or on their own, however, and dozens of these geologists and engineers would go on to help lease and drill millions of acres of land around the United States, playing a major role in the transformation of the country.

“Oryx management missed the most disruptive technology in the energy field in a century; they thought greatness would come if they followed the majors, when in reality the majors most often follow the innovators,” Bowdon says. “While it is true Oryx was destroyed, the legacy lives on in dozens of guys that are still innovating and pushing boundaries.”

George Mitchell was sure he could avoid the mistakes of Robert Hauptfuhrer and Oryx, and he was confident he and his men would figure out how to extract gas from the Barnett Shale.

He’d soon have to deal with an imposing and unexpected foe, however.

A
s George Mitchell drove a brand-new mint-green Cadillac to meet a pair of reporters on a summer day in 1993, he was in good spirits.

The trim, balding seventy-four-year-old was set to give journalists from the
Wall Street Journal
a tour of The Woodlands, the planned city Mitchell had meticulously built outside Houston. By that time, the development had grown to thirty-six thousand residents. Just wait, Mitchell confidently told the reporters. The Woodlands soon would be home to a million people, he predicted, justifying the $600 million Mitchell Energy had invested in the project.

Energy prices remained low and the Texas economy was frail, but Mitchell couldn’t have been more upbeat. Mitchell Energy still had its contract to deliver gas to Chicago at above-market prices, sparing the company much of the pain that rivals were facing. That summer, the company’s shares hit twenty-seven dollars, giving George Mitchell a net worth of more than $700 million. His holdings included 60 percent of the shares of Mitchell Energy, along with seventeen hotels, restaurants, and shops in his hometown of Galveston, where he had spent $65 million of his personal money. It was the kind of wealth Mitchell never dreamed of as a youngster hunting and fishing to help his parents pay the bills.

George Mitchell had emerged as an energy tycoon for the new era. A local boy made good, he threw regular parties in his hometown of Galveston, including a Mardi Gras celebration in which he had his face playfully painted in traditional blue-cat whiskers. Mitchell spent another $17 million of his personal money to build a pavilion in The Woodlands in his wife’s honor. He even lured the Houston Symphony as the centerpiece of the new structure. After musicians complained of the heat, Mitchell paid to install air-conditioning for the outdoor stage.

It didn’t seem as if anything could stop Mitchell. When he returned to Galveston one day, however, a local dignitary named Jim Yarbrough approached him with concern.

Mitchell was spending gobs of money on The Woodlands and on Galveston, but neither of his pet projects was especially profitable. More important, most of his wealth was tied up in shares of his energy company. But Mitchell and his colleagues still hadn’t figured out how to get gas out of the Barnett Shale, and there was no reason to think they ever would, raising questions about how long they could keep the company going.

“George, every night I light a candle for you and all your millions,” Yarbrough told Mitchell.
¹

By the fall of the next year, Yarbrough’s concerns appeared well founded. Mitchell Energy shares began to slip, falling by more than one-third to seventeen dollars. Some investors viewed his growing focus on real estate as a sign his energy business was running out of steam. Why else would Mitchell be spending all that time planning some idyllic community? Mitchell’s gas production outside of the Barnett Shale formation had fallen by almost half over the previous decade. No one on Wall Street thought the company would get much gas out of the shale.

Doubts about Mitchell’s drilling in the difficult rock were well justified. The United States is littered with regions that at various times seemed on the verge of becoming great gushers, only to result in dispiriting dry holes. The Barnett appeared just one more spot that ultimately would prove a huge disappointment.

For a long time, parts of Minnesota were viewed as chock-full of oil and gas, for example. The first reported discovery of natural gas in the state likely was in the late nineteenth century when a vein was struck in the tiny city of Freeborn, quite unexpectedly, emitting a loud “rushing and roaring” sound, according to reports at the time. The lucky landowner of the property milled about, likely trying to figure out what to do with the newfound gas. As he mulled his options, the landowner lit a pipe and suddenly “had his whiskers trimmed without the aid of a barber,” according to an account in 1885 in a local newspaper.

News of the close shave sparked a rush of prospectors to the area. Reports of oil and gas elsewhere in Minnesota fed the frenzy. Some wells were financed by reputable local businessmen and drilled by pros. Others resulted from prospectors relying on divining rods—forked-shaped branches or sticks that they claimed could indicate if oil or gas was nearby, sort of a faux metal detector of its day.

A few years later, a well-known “diviner” who had been paid $250 to travel to Minnesota from Ohio “passed over the ground and was taken by jerks and shakings so violently in certain places he could not endure the current,” according to
The Geological and Natural History Survey of Minnesota
. Alas, when drilling commenced there was nothing to be found in the state. “Take the money to Las Vegas—your chances of coming home a winner are a lot better,” said the former director of the Minnesota Geological Survey when interviewed in 1979 by a local paper about new petroleum exploration.

George Mitchell wasn’t the first to roll the dice on unorthodox rock formations, either. Since the early 1900s, for example, interest has waxed and waned in areas of Colorado, Utah, and Wyoming jam-packed with so-called oil shale, an organic-rich rock that’s a distant cousin of shale oil, despite the similar name. Oil shale holds high concentrations of kerogen, a precursor to oil that some liken to teenage crude because it hasn’t experienced the millions of years of pressure needed to become oil.
²

Rock in those U.S. states holds the energy equivalent of the world’s entire proven oil reserves, government reports have said. Plus, it’s close to the surface, making it easy to find. During World War I,
National Geographic
predicted that “no man who owns a motor-car will fail to rejoice” because oil shale surely would provide the “supplies of gasoline which can meet any demand.”
³

But fervor for this rock has petered out time and time again in the United States due to the imposing cost of heating it to get the kerogen out, as well as the environmental damage that usually results from this extraction.

All of those dispiriting experiences around the country helped explain why experts and industry members viewed efforts by George Mitchell and his men in the Barnett as quixotic and a tad amusing. Between 1988 and 1992, the world’s largest oil companies spent over $150 billion on exploration and development outside the United States, about 50 percent more than they were spending domestically. It was a sign of how little of value was left in the country, and how much more attractive foreign locales were.

Good luck with that shale drilling, George, the Goliaths all but said. Let us know if you ever find anything. We’ll be off in Africa minting money.

Mitchell knew all about the gloomy history of various regions of the country, and about how disappointing shale and other unconventional rock had been. But his early tests in the Barnett had been encouraging. And earlier in his career, he and his men had figured out how to fracture rock to coax natural gas from other challenging rock formations. He was determined to do it again, this time with shale in Texas.

Anyway, he didn’t really have another good choice. “We had to make the gas separate from cells and flow to the pipeline, we were desperately trying to find the gas,” he recalls. “Chicago was a good market for me, I wasn’t about to lose it.”

Mitchell’s quest was about more than keeping his company afloat. Just as well-paid ballplayers with guaranteed contracts still throw tantrums after a benching or a bad loss, Mitchell’s self-worth was tied up in his ability to find oil and gas fields. It was that way with most dedicated oil and gas wildcatters. That larger competitors were so dismissive of his efforts only stoked his fires.

Investors and colleagues became concerned that Mitchell was too distracted to make the shale effort succeed, however. He was guiding the Barnett efforts, but he was also involved in the minutiae of The Woodlands. He approved each of the over 150 wells his company drilled in 1993, even as he directed the planting of wildflowers along fifty-five miles of biking and hiking paths in the Woodlands project. He also took the time to select ice cream for the soda fountain of one of his Galveston hotels. (He chose Texas-made Blue Bell Creameries ice cream over Häagen-Dazs.)

“He’s like a shade-tree mechanic who spends too much time on his hot rod and ignores the family station wagon,” Thomas Lewis, a securities analyst, said in July 1993.
⁴

Investors grew weary of the company’s real estate projects, which accounted for less than 20 percent of earnings. Pressure grew on Mitchell to pick one business, stick with it, and finally see some results for all his dreaming.

Later that year, Mitchell’s right-hand man, Don Covey, the head of the company’s exploration and production division, died of a heart ailment on a flight to Europe. Covey had been Mitchell Energy’s other ardent proponent of shale drilling, and his loss was another blow to Mitchell’s efforts in the Barnett.

In 1994, Mitchell began to cede control of his company, handing the job of president and chief operating officer to industry veteran W. D. “Bill” Stevens, who emerged as Mitchell’s heir apparent. George Mitchell remained Mitchell Energy’s chairman and chief executive officer, but a passing of the torch had begun.

With the move, Mitchell, now seventy-five years old, suddenly had a new and unexpected foe in his lonely effort to unlock the mysteries of drilling in shale. His quest was on borrowed time.

•   •   •

W
hen Bill Stevens retired from Exxon Corp. in 1992, it was an abrupt departure. He had spent more than three decades at the oil and gas giant and had reached the position of president of Exxon’s U.S. operations, one of the top jobs at the company. He was popular with the rank and file and in the middle of a long, successful career.

But when the company’s grounded supertanker, the
Exxon Valdez,
began leaking oil in March 1989, Bill Stevens’s career also became ensnared. The oil tanker sent more than 250,000 barrels of crude pouring into icy Alaskan waters, one of the worst environmental disasters in U.S. history.

Within forty-eight hours of the spill, Stevens, who ran the division overseeing Exxon’s crude shipments from Alaska, rushed to the site, trying his best to deal with the aftereffects. Stevens defended Exxon’s response in testimony before Congress, though he acknowledged that the company’s contingency plans for a big spill had been inadequate. Later, he was portrayed in a television movie adaptation of the disaster called
Dead Ahead
.

After the fiasco, Stevens clashed with Exxon management over cost and staff reductions, according to reports at the time, before retiring in February 1992, after thirty-five years at the company.
⁵

Shortly after leaving Exxon, Stevens joined Mitchell Energy’s board of directors, where he quickly gained the trust of George Mitchell and some family members. Stevens asked tough questions about how the company was spending its cash, upgraded Mitchell’s decision-making process, and hammered board members with warnings about tough times ahead. “Do you understand what happens” if the company can’t find new gas deposits and has to sell its remaining production at low market prices? Stevens demanded of the board. George Mitchell and other board members began to realize their situation was direr than they had imagined.

When Stevens was tapped as Mitchell Energy’s president, chief operating officer, and head of exploration and production in 1994, investors assumed Mitchell Energy would refocus on oil and gas drilling and finally move away from real estate. They also expected Stevens, fifty-nine years old, to shift investments abroad, just like most large U.S. energy companies.

There was good reason to anticipate that Stevens would slow the company’s shale-drilling efforts. As a member of Mitchell’s board of directors, he had quietly campaigned for the company to slow its push in the Barnett, telling board members and other executives that trying to get gas out of much of the formation was too costly and unlikely ever to work.

Stevens told board members that much of the Barnett was “moose-pasture land” unfit for exploration. Sometimes he grew visibly frustrated when George Mitchell discussed plans to expand the company’s shale drilling. At board meetings, Stevens didn’t directly challenge the company’s founder. Instead, he addressed his warnings to Todd Mitchell; Stevens seemed to hope the company’s founder was listening when he alerted his son to the serious risks ahead.

Todd already held serious doubts of his own about the potential of the Barnett. Drilling in shale there was just too expensive to be worthwhile unless natural gas prices somehow took off, he had told his father. Stevens’s alarm served to make Todd even more nervous about the company’s fate.

Over time, the younger Mitchell came to see his job at the company as “describing to my father the dimensions of the box we were in,” he says.

One day, after hearing more words of warning from Stevens, Todd Mitchell approached his father to discuss the latest rebuke from the company’s president. “Dad, tell me what part of that is inaccurate?” he asked his father. George Mitchell waved his son off with a smile, unwilling to let his enthusiasm be dampened by a couple of worrywarts.

Most of the time, Stevens and Todd Mitchell kept their unhappiness to themselves. “I was pushing like hell to find gas and they didn’t want to upset me,” George Mitchell explains.

But other employees became aware of Stevens’s growing displeasure with the work on the Barnett Shale. Within Mitchell Energy, the shale effort became viewed as another of George’s pet projects, one unlikely to ever work. Some of those leading the work on the Barnett Shale, including Nicholas Steinsberger, soon would find themselves in difficult spots.

•   •   •

W
hen Nick Steinsberger received a promotion to run the fracking effort in the Barnett in 1995, he was thrilled. A native of Indiana, Steinsberger was fascinated by engineering and geology at an early age. He dedicated a seventh-grade paper to the “THUMS Project,” explaining how five oil giants drilled under Long Beach, California, in the 1960s, and the ways they replaced oil and gas under the islands with water to keep the city from shifting.