Gregory Zuckerman’s “The Frackers”: Book Review, Notes + Analysis

Poor Ash’s Almanack > Book Reviews > Business / Finance

Overall Rating: ★★★★★★★ (6/7) (standout for its category)

Learning Potential / Utility: ★★★★★★ (6/7)

Readability: ★★★★★★★ (7/7)

Challenge Level: 1/5 (None) | ~400 pages ex-notes (432 official)

Blurb/Description: WSJ reporter Gregory Zuckerman provides an extremely engaging yet thorough history of how fracking revolutionized domestic energy production.

Summary: It’s hard for business books to stand out because there are so many of them that teach similar lessons, but The Frackers stands out as special: I liked it even more on a reread in 2018 than I did on my first read in 2014 (particularly because real-world events subsequent to the book’s publication, i.e. the oversupply-driven oil price crash and also Aubrey McClendon’s not-officially-a-suicide, add even more layers to the book’s lessons).

Zuckerman doesn’t have the writing “flair” of Jonathan Waldman in Rust: The Longest War, but the book is extremely engaging, yet does a good job providing thought-provoking history and not oversimplifying things (based on my research on and investments in various oilfield products vendors).

Highlights: The book is chock-full of business lessons and is extremely readable / fast-paced, with few wasted words or pages (a rarity).  Zuckerman generally does a good job of not falling prey to the narrative fallacy and presenting the success of the protagonists as inevitable: Souki succeeds (I guess) in spite of himself, while George Mitchell gets his reward only after decades and hundreds of millions of dollars of work, and Sanford Dvorin has no happy ending at all.

Lowlights: There’s not a lot to dislike here; I think Zuckerman is generally balanced in his approach.  At times he does seem a little enthusiastic, but I don’t view that as problematic.

Mental Model / ART Thinking Points: luck vs. skillpath dependencyproduct vs. packagingincentivesn-order impactsagencystress / humor / gratitude, schemaconfirmation biasoverconfidence,bottlenecksnonlinearity, leverage, local vs. global optimizationmargin of safety

You should buy a copy of The Frackers if: you want an easy, engaging read rich in business lessons.

Reading Tips: no special approach necessary; if you want to go deeper, I’ve provided some more color on specific oilfield topics in the notes and analysis below.

Pairs Well With:

The Success Equation” by Michael Mauboussin (TSE review + notes) – a great exploration of  luck vs.  skill with a memorable “two jar” model and discussion of  path-dependency.  It provides some context on what happened to poor Sanford Dvorin.

The Upstarts” by Brad Stone (TUS review + notes).  Similar to how Zuckerman here presents the almost-Chesapeake (Dvorin), Stone does a good job of looking at the almost-AirBnBs and Ubers.

Zero to One” by Peter Thiel (Z21 review + notes).  I recognize this may sound like an odd pairing, but “the US has a nearly infinite supply of natural gas” would’ve been a phenomenal answer to the Peter Thiel “what’s something true that nobody agrees with you on” question circa-2007 – as Zuckerman makes clear.

 

Reread Value: 3/5 (Medium)

More Detailed Notes + Analysis (SPOILERS BELOW):

IMPORTANT: the below commentary DOES NOT SUBSTITUTE for READING THE BOOK.  Full stop. This commentary is NOT a comprehensive summary of the lessons of the book, or intended to be comprehensive.  It was primarily created for my own personal reference.

Much of the below will be utterly incomprehensible if you have not read the book, or if you do not have the book on hand to reference.  Even if it was comprehensive, you would be depriving yourself of the vast majority of the learning opportunity by only reading the “Cliff Notes.”  Do so at your own peril.

I provide these notes and analysis for five use cases.  First, they may help you decide which books you should put on your shelf, based on a quick review of some of the ideas discussed.  

Second, as I discuss in the memory mental model, time-delayed re-encoding strengthens memory, and notes can also serve as a “cue” to enhance recall.  However, taking notes is a time consuming process that many busy students and professionals opt out of, so hopefully these notes can serve as a starting point to which you can append your own thoughts, marginalia, insights, etc.

Third, perhaps most importantly of all, I contextualize authors’ points with points from other books that either serve to strengthen, or weaken, the arguments made.  I also point out how specific examples tie in to specific mental models, which you are encouraged to read, thereby enriching your understanding and accelerating your learning.  Combining two and three, I recommend that you read these notes while the book’s still fresh in your mind – after a few days, perhaps.

Fourth, they will hopefully serve as a “discovery mechanism” for further related reading.

Fifth and finally, they will hopefully serve as an index for you to return to at a future point in time, to identify sections of the book worth rereading to help you better address current challenges and opportunities in your life – or to reinterpret and reimagine elements of the book in a light you didn’t see previously because you weren’t familiar with all the other models or books discussed in the third use case.

Pages 3 – 4: an effective way to start the book: Zuckerman highlights with interesting statistics regarding how quickly the U.S. has become energy-independent, and how much of a broader impact it’s had on the economy.

Page 7: Zuckerman spent over three hundred hours interviewing more than fifty key players in fracking.

Page 9: beyond the insight into fracking, there’s actually a pretty interesting angle into capital markets for those who haven’t worked in finance.  Here and elsewhere, the roadshow process is discussed.

Page 11: fracking = hydraulic fracturing = creating fractures in rocks to allow oil to flow into the well; a perforating gun with shaped-charge explosives is typically used to blow holes through the casing of the well and into the formation; fluid (containing various chemical mixtures) is then pumped into these holes at high pressure to create fractures in the formation through which oil can flow; these fractures are held open by “proppant,” usually sand or (sometimes) ceramic balls.  [Fun fact: the most entertaining “research” I’ve ever done was blowing up a shaped charge inside a perf-gun manufacturer’s facility.  In case you were wondering, I did have their permission.]

However, while the term “fracking” is commonly used to describe the shale renaissance, equally (perhaps even more) important was the advent of horizontal drilling – i.e., drilling down to an oil or gas-rich layer of shale, then turning the drillbit and drilling horizontally through that often thin layer that contains all the hydrocarbons, which is a much more efficient way of extracting the resource.  Here is a diagram I drew to show you how what people refer to as “fracking” differs from historical oil wells:

Pages 13 – 14: circa 2006 – 2008, the Malthusian “peak oil” concept was conventional wisdom, publicly supported by plenty of people)

Pages 17 – 18: Zuckerman starts the meat of the story with George Mitchell, which was a good choice.  around D/FW, on top of the Barnett Shale where Mitchell was convinced he could find gas nobody else cared about, Mitchell is generally regarded as the father of fracking (or at least that’s the impression I got from hanging around my old PM and his energy buddies.)  We’ll come back to this story later.

Page 22: reminiscent of some other entrepreneur stories, George Mitchell got creative back in 1946: he wanted to start his own company, and he and his brother chose the evocative name “Oil Drilling, Inc.”  Unfortunately, he couldn’t afford to pay to borrow well logs from libraries, so he:

“convinced a local firm to let him borrow the logs at the end of the day and return them […] the next morning”

Page 23: on margin of safety: dry holes were deadly, so Mitchell always held “one especially promising well in reserve, to drill if he ever hit a losing streak.  

Interestingly, one of the major themes of the book – implicitly, not explicitly – is the transition from the risky “wildcatter” gambling (where discovering oil was the hard part) to the much more mechanical, engineering-problem approach of modern horizontal drilling and fracking: you know exactly where the oil is… you just have to get it out of the ground.

Page 24: Zuckerman does a particularly good job of making geological concepts accessible to laypeople without oversimplifying (I say that as someone in between “layperson” and “geologist” – I’ve done enough work on vendors to E&Ps to be at least familiar with much of the terminology, but I wouldn’t be able to make heads or tails of an actual geological report or well data.)

Here, he explains the difference between natural gas and oil: oil is composed of heavier hydrocarbons that stay liquid, whereas natural gas is comprised of light hydrocarbons that don’t.  Also, it’s important to note that hydrocarbons are found in “pore spaces” in rock, so unless there’s a path for them to flow into the well, they won’t come out.

For any chemistry buffs, a more detailed explanation: oil is typically pentane/hexane (C5/C6) and bigger, whereas natural gas is mostly methane (C1), with small amounts of up to pentane/hexane and higher.  To make things even more confusing, “natural gasoline” is neither oil nor gas, but rather the liquid left over when you separate out the butanes (C4) and lighter from natural gas.  One company I follow, Trecora Resources, is in the business of separating out really high-purity pentantes from a feedstock of natural gasoline.

Confused?  It’s okay, just tell people proudly that “butane is a saturated hydrocarbon with four carbons and ten hydrogens, you know” next time you throw a backyard BBQ and you’re lighting your grill.  Then watch as the crowd slowly disperses.  🙂  [If that didn’t scare you off, consider reading Sam Kean’s The Disappearing Spoon.]

Pages 26 – 29: Here and elsewhere, one of the themes is majors more or less ignoring certain portions of the market, leaving room for the little guy.  In the 1950s, the majors didn’t care about natural gas.  Note the dates here (vaguely and directionally): another theme is how long “fracking” was in the making.  It seemed to have exploded onto the scene around the same time as smartphones, but in reality, it was under development for decades.  The first “fracking” was actually done in the 1860s, and both the U.S. and the Soviet Union, per Zuckerman, actually tried sticking nukes (presumably small ones) down wells.  

(This reminds me of a TV special called 10.5 that Wikipedia calls “widely ridiculed” but I enjoyed at the time – I was 10 and they turned California into an island, which I thought was pretty cool, okay?  Essentially, some superfault in California was causing massive earthquakes, and scientists fixed it by shoving nukes into it and blowing them up.  Or something.)

Anyway, more topically.  George Mitchell was having trouble getting natural gas to flow from “tight” (very compressed) rock in Wise County – just northwest of Fort Worth.  He turned to a new technique: fracking: which, as discussed earlier, basically involves beating the rock up so the pore spaces are connected and oil can flow to the well.  The majors, and pretty much everyone else, thought fracking was dumb, but – in a classic “The Innovator’s Dilemma” ( InD review + notes) type moment – Mitchell, says Zuckerman:

didn’t have much to lose, so he gave fracking a try.”

Fun bit of trivia: the term “moonlighting” comes from the fact that certain oil workers worked under the cover of moonlight to illegally use Edward Roberts’ patented explosive method for getting more oil into your well.

Pages 32 – 33: Not terribly related to fracking, but of cultural interest to me or anyone with ties to Texas: The Woodlands, a far northern (and generally quite nice) suburb of Houston, was actually originally master-planned by George Mitchell as some sort of sustainability endeavor.

Pages 34 – 39: the Barnett Shale makes its first appearance (I’ll share a personal anecdote on it later).  It’s a layer of rock that sits below the D/FW area and sprawls out even farther to the west.  People knew that there was oil/gas in shale thanks to well logs, but nobody had really focused on trying to extract it because it was too expensive (keep that in mind; we’ll come back to n-order impacts later).  The reasons it was too expensive?  It was usually really far down, it was a really thin layer, and it’s super compressed.  Mitchell tried anyway, drilling through the 1980s and 1990s… he spent a bunch of money, and more or less it didn’t work for a long time.

Zuckerman discusses the pore spaces I mentioned earlier, as well as “source rock” and the differing processes that led to formation of oil and natural gas.  The geology is interesting (to me, anyway) but the point is that there’s usually a lot of hydrocarbons in shale, but they’re hard to get out because, you know, it’s hard to squeeze stuff out of a stone.  

(Fun fact: the eponymous Ash Lad, named “Boots” in many stories, once tricked a troll by squeezing a piece of cheese and pretending it was a stone.)

Page 39: Zuckerman defines a wildcatter: an independent guy who goes around scrounging up money to drill, baby, drill.  (His definition’s better than mine.)

Pages 40 – 41: Sanford Dvorin is maybe my favorite character in this entire book – not just because he had the audacity to try to drill in Coppell (a suburban hamlet that’s practically in my backyard), but because he’s the counterpoint to the protagonists of the story like Aubrey McClendon, Harold Hamm, and George Mitchell.  (McClendon kinda served as his own counterpoint, but anyway.)

It’s a great example of luck vs. skill path-dependency, and a few other models.  Dvorin more or less didn’t succeed, but I think the interesting comparison/contrast is that, you know, he actually wasn’t wrong.  In some senses, his idea was better than those of some of the guys who ended up millionaires or billionaires.  He was just – whatever you want to call it – unlucky, too early, etc.

Of course, you can view this story in reverse: maybe Dvorin wasn’t unlucky.  Maybe, and this is in some senses likely, he was the norm: and McClendon et al were the lucky ones.

See Michael Mauboussin on the MusicLab experiment, etc; “ The Success Equation” ( TSE review + notes).

Pages 42 – 43: Zuckerman doesn’t go into this, because it’s wildly off-topic, but one interesting phenomenon that a lot of people aren’t aware of is that Texas, generally viewed as the Wild West of deregulation, actually has really strict securities regulations – I know startup hedge fund managers in New York who more or less wing compliance.  You can’t do that in Texas – it’s pretty serious.

And for good reason: limited partnerships were a vehicle used to scam a lot of individuals, I believe in the ‘80s (this was before my time, obviously, so don’t quote me – these are just my secondhand impressions).  Zuckerman notes that:

“North Texas… was a notorious place where oil and gas promoters had spent years fleecing gullible investors.  The region had already gained an unattractive nickname: “promoter’s paradise.”  They flocked to the region because it wasn’t hard for a wildcatter to bus a group of doctors and dentists from nearby Dallas and elicit a round of oohs and ahhs by lighting a flare and demonstrating some early production.”

As a result, regulatory oversight on limited partnerships in Texas became pretty tough, and that ended up applying to man-in-a-garage hedge funds like me, too.   N-order impacts.

Pages 44 – 45: more innovator’s dilemma type stuff – Chevron ended up spending a buttload of money ($30MM annually) that even got separated out into a new unit, to play around with shale drilling.  (Spoiler – it didn’t go anywhere.)

Page 47: again, totally irrelevant but Dallas culture note that I didn’t know – the Adolphus hotel downtown was built by the founder of Anheuser-Busch, who was named Adolphus Busch.

Pages 51 – 52: horizontal drilling started to be a thing in the 1980s… once again on the technology complementarity, improved targeting ability via computer imaging and seismic analysis made it make more sense.  (It’s obviously more expensive than drilling straight down – Zuckerman later, on page 58, references $2MM initially for an early lateral vs. $350K for a vertical – and there’s not a lot of point in drilling holes to nowhere if you don’t know where the oil is.)

Also, the “secrecy” angle here was amusing – this industry is apparently so steeped in social proofthat nobody wants anyone else to know what they’re doing, else there will be a mad land grab.

Pages 53 – 59: I am pretty sure (but not entirely sure) that somebody once gave me a copy of The Prize, a Pulitzer-winning history of oil.  If so, I have no idea where it is, but I should either find it or re-buy it and read it at some point.

The price comes down on lateral wells with time (again, it turns into more of an engineering problem than a finding-oil problem).  Meanwhile, the majors, in the late 1980s/early 1990s, is still mostly focused on overseas, but thinks about the U.S. a little bit more seeing success at some of these smaller guys.

Meanwhile, George Mitchell had a number of false starts.

Pages 61 – 65: On the famously bad E&P capital allocation: Oryx levers up to buy back shares when oil prices are high.

Also in the “too early” bucket, Oryx had the right idea in the 1900s, but the technology wasn’t there yet.  And then oil prices dropped, so nobody cared about expensive horizontal drilling anymore.

Again here, I think Zuckerman does a good job of staying away from the standard business-lit “find a success story” trope – although Sanford Dvorin is still my personal favorite, Oryx was in the right place at the wrong time.

And a little innovator’s dilemma quote at the bottom of the page about how the majors follow the innovators, and not the other way around.

Page 70: nobody took poor George Mitchell seriously…

Page 73: … not even his new president and COO at Mitchell Energy, Bill STevens, who viewed the Barnett Shale as hopeless.

Meanwhile, again not super topical, but Nick Steinsberger, who wrote a seventh-grade paper on how oil drillers replaced extracted hydrocarbons with water to keep the city from shifting, sounds like the kind of friend I wish I’d had circa junior high.

Pages 74 – 75: there’s a good note here – you might miss it – where the seemingly tunnel-visioned Bill Stevens noted that fracking wasn’t an engineering problem – it was an economics problem.  There’s a difference between something being technically and economically feasible.

Pages 77 – 78: on serendipity: in the mid-90s, Mitchell was trying to frack with a gel-like substance (that cost money to create).  A mistake one day led to a much more watery fluid being pumped down the well, and yet it worked out okay.  It turned out that “slick-water” fracs – more or less just water with some sand (proppant) and some polymers – worked just as well, or better, than the gel fracs at a much lower cost.

Page 79: Ahem incentives ahem.  

“the outside specialists had good reason to promote their gels – they could charge about $200,000 more for a frack job with gel than one without it.”  

Recall the Munger quote about not being able to convince someone of something when their job depends on them not understanding it… see “ Poor Charlie’s Almanack” ( PCA review + notes).

Page 81: The Woodlands gets sold for $460MM in 1997.  Meanwhile, Mitchell Energy had spent $250MM over 16 years trying to turn the Barnett Shale into something, and they hadn’t gotten very far.

Page 82: the Chevron skunkworks shale group was so derided that they were referred to as the “noncommercial” group (the official name was the “nonconventional” group)

Pages 82 – 84: some of the engineers at Chevron figured it out… but management didn’t really care.

Pages 88 – 89: this bit reminded me a little bit of Getting to Yes ( GTY review + notes).  Bowker comes over from Chevron, trying to tell the Mitchell guys something you would think they would want to hear – i.e. that the Barnett is even better than they’d dreamed – but they didn’t like that very much.  Zuckerman notes that:

“Engineers […] don’t have much patience for geologists […] they’re even more unlikely to listen when they’ve been working on an area for a while and a newcomer comes in to tell them how badly they’ve been botching it.”

Kind of an agency and  product vs. packaging thing.  For some reason, my mind made a connection to the bit in Getting to Yes ( GTY review + notes) about how the same tenets of ending apartheid were rejected until the local community felt like they’d participated.

On the soft-skills front, Bowker tries a more tactful approach and gets through.

Pages 91 – 93: 1998: slickwater fracks start to work

Page 94: in a theme that will be repeated over and over, George Mitchell (like Aubrey McClendon, later) finds himself in financial trouble because he used his shares as collateral for loans from banks, and then oil prices go down.  You would think somebody, at some point, in this industry, would learn something from that, but noooooo.   Path-dependency.

Harold Hamm appears to have been the exception, shunning leverage and maintaining other sources of cash flow (like his contract drilling business) to fund his own drilling.

Pages 96 – 98: George Mitchell was a believer, not a geologist, apparently.  Also, more secrecy.

Page 103: your heart kinda breaks for Sanford Dvorin, who at one point:

‘had leased five thousand acres in the Barnett at an average of $50/acre.  Less than a decade later, the same acreage would sell for $22,000 an acre, or $110 million.”  

Zuckerman, in calling Dvorin an “archetype,” implies that there are many others like Dvorin.

Page 109: Once Mitchell Energy got it, they got it.  Production skyrocketed from 100mmcf per day to 365mmcf from 1999 to 2001.  Devon Energy ended up paying $3.1 billion for them.

Page 116, 120 – 121: Tom Ward, Aubrey McClendon’s partner at Chesapeake and later the CEO of SandRidge Energy, grew up poor, with a severely alcoholic father.  After working his way through college and having “no fun” (sounds like me!), he became a landman, a uniquely American profession that The Frackers touches on from time to time.

Ward had the nifty idea of leasing land from holdout owners close to producing wells.  He noticed someone else doing the same thing: Aubrey McClendon.

Pages 122 – 123, 125 – 128: Aubrey had a very different background from Ward: he grew up solidly upper middle-class; it seems he was pretty well-off relative to the neighborhood.  However, he was part of the eminent Kerr family, and ( contrast bias) seemed to always have a chip on his shoulder because he wasn’t really wealthy.  McClendon is described as an articulate, charismatic, natural-born leader.

He had long been a geography buff and, working as an accountant for his uncle’s oil and gas company, ended up transitioning into their land department.  During the 1980s crash, given the difficulty of finding work, he decided to hang out by myself for a couple of years and see what I can learn about the business.”  He took the same strategy as Tom Ward and, in 1983, decided to join forces with him rather than competing (although they kept separate office).  They named their company Chesapeake.

Pages 130 – 131: There are a lot of things you can say about Chesapeake; one of them is that they displayed a remarkable consistency over their two decades under McClendon.  Zuckerman dryly notes:

“McClendon and Ward kept leasing more acreage, regularly spending more than Chesapeake had.  It forced the company to borrow big sums, leaving it in a precarious position.  “It was near-death on a daily basis,” Ward says.”

The company subsequently went public via a 1993 IPO (after switching auditors from Arthur Andersen to PwC to get an “unqualified” opinion) because, as CFO Marc Rowland put it: “we needed the money.”

As the story unfolds, Zuckerman does a good job of portraying Chesapeake the way most investors came to see it: as a capital markets machine that more or less happened, mostly by accident, to be in the oil and gas business.  😉

Page 134: McClendon had a bit of an arrogant streak.

Page 139: Zuckerman does a good job of highlighting the relative diversity of the oilfield, from the slow-talkin’ boot-wearin’ Texans to the sharp, highly technical/educated types like Tom Ward and Nick Steinsberger.

Page 140: the corporate espionage was amusing: here, a Chesapeake employee reads computer logs in a trailer through a trailer window in the dark of night

Page 141: I don’t have enough outside knowledge to be able to properly contextualize this, but at least the way that Zuckerman presents it, McClendon and Ward (unlike, say, Nick Steinsberger or Bowker) were not crack geologists.  They sort of just bought everything that looked halfway decent and rode the rising price deck and investor enthusiasm to wealth.  I wouldn’t necessarily classify them as “pure luck, zero skill” in the vein of Evan Spiegel / Snapchat, but much of their success seems to be more a function of right place / right time (whereas plenty of people who seem equally smart, like poor Sanford Dvorin, ended up with fistfuls of nothin’.)

Here, McClendon and Ward more or less whiff on the geology of the Austin Chalk in Louisiana, and $200MM of “proved but undeveloped” reserves get marked to zero.

Page 144: Frequent readers know that I don’t spend a lot of time trying to think about remodel macroeconomic variables like commodity prices.  With the caveat that there may be some selection bias/narrative fallacy at play here, it does seem like McClendon/Ward at Chesapeake (and, later, Mark Papa at EOG) are able to put two and two together on obvious oversupply or undersupply issues.

Outside of the book (which was published in 2013/2014), there’s an interesting epilogue.  Pretty much the same phenomenon that played out in natural gas circa 2008 to 2009 played out in oil 7-8 years later.  The reduction of oil production to merely an engineering problem, and then merely an economic problem, not to mention a number of frackers like EOG starting to focus on oil rather than gas, led to American oil supply tipping the global boat.  

The entire book (and the repeat of the natural gas story in the oil collapse a few years after publication) is a great example of n-order impacts: the importance of not just focusing on the first-level results, but the and then what?  Getting oil out of the ground is no longer based on luck, but is merely a function of economics – and then what?

Anyway, Charif Souki sort of misses the boat, though, trying to build an LNG import terminal that later gets converted into an export terminal.  And in what can only be described as a miracle, despite spending essentially a decade going the entirely wrong direction, shareholders ended up doing okay if they got in at the right time…

Pages 145 – 146: Harold Hamm is often described as talking slowly and coming across – in the words of his own attorney, off – as a “dumb country bumpkin.”  However, there were smarts hidden behind the surface: he exemplifies something my old PM called “playing country dumb.”  Stay quiet, act stupid, and let other people educate you, rather than trying to be the BSD and prove that you’re the smartest guy in the room.  

Hamm, like Ward, grew up poor, in a “glorified shack” with no electricity or running water.  Hamm, unlike many others, apparently didn’t forget that and didn’t overlever himself, sticking to the Charlie Munger principle of not risking what you have and need for what you don’t have and don’t need.

Pages 149 – 151: Hamm was inspired by Jim Hunter, his shop teacher in junior high, who was missing his hair and plenty of teeth thanks to being a PoW in Nazi war camps.  Jim, Hamm notes, “refused to become a negative person and taught me some life lessons that I never forgot.”  

See agency,  stress / humor / gratitude.  It reminds me of an anecdote I like to tell about Charlie, a Vietnam Vet who worked at a local grocery store handing out samples.  Charlie always had a big smile on his face and brightened everyone’s day.  Only years after seeing him did I learn he had been exposed to Agent Orange and was slowly (and likely painfully) dying.  

I don’t think the story needs any commentary, other than I wish I knew where Charlie was now. Anyway, Hamm worked tirelessly, and from a guy at a filling station, worked his way up.  He admired the kindness and generosity of the oilmen and “wanted to be like them.”

Page 153: Hamm would take the dirty jobs nobody else wanted.  He also built a library in his home and borrowed books about geology and geophysics” despite his brutal work schedule.  He seemed to take the Covey win-win approach to business: Zuckerman states he “gained the trust of clients by using quality equipment and not overcharging.”

Page 155: FANTASTIC example of “playing country dumb.”  Something I still need to get better at.  Here’s the question you need to ask yourself: do you want to BE the smartest guy in the room or LOOK LIKE the smartest guy in the room?  Those are two very different goals that require very different behaviors.

Also, Hamm “embraced early technologies, such as computer mapping and directional drilling.”  I find it intriguing/fascinating that throughout this story, it more or less ended up being independents who were turning to new technology to eke more juice out of North American fields left for dead.

Pages 159 – 160: Hamm’s relatively smart financial management is described here; also his tendency to not let people bully him.

Pages 164 – 165: some interesting background on wildcatters… and the prelude to the Bakken

Pages 169 – 170: circa 2000, Hamm makes a big bet on the Bakken.  One of the big lessons here is how long fracking took to develop.  While the popular conception is that it just sort of exploded onto the scene in the mid-to-late 2000s – and, of course, in some ways it did – it was an approach with such a long history of more-or-less failure (from an economics standpoint) that it had been evaluated and dismissed by plenty of the majors.

Kind of a nice example of the fact that not all innovations are new, and the future being here but not evenly distributed, etc.

Page 180: Charif Souki, once a banker and then a restaurant owner and ski instructor, realized he needed to make some money.

Pages 182 – 185: After trying and failing to economically drill for gas, Souki comes to the conclusion that gas prices have to go up.  So if it’s too hard to find here, maybe you can find it somewhere else… hence, the idea of an LNG import terminal.  Also, about the shale reserves, in a sort of  schema / confirmation bias type thing, Souki thought:

“I knew about the shale reserves, but it wasn’t relevant.  Nobody believed they could be produced.”

Page 186b: in the summer of 2000 – again, note the timeline here – Souki starts pushing the gas import idea.

Pages 188 – 190: like Hamm, McClendon and Ward did adopt technology early, but the big part of their story appears to be the land-grab.

Page 192: Zuckerman paints McClendon and Ward as profligates: after deciding to sell some acreage in the Permian (west Texas, Midland, what people visualize when they think Texas oil country), they end up instead spending another $420MM buying more.

Pages 193 – 195: The secret to Chesapeake wasn’t having more insight into the geology of the fields that they were buying: it was having a higher expectation of commodity prices than everyone else, i.e. the “price deck.”

To provide some color… I’m hardly an expert on oil-and-gas valuation (I don’t spend much time on E&Ps – most of my work has been on their vendors, i.e. people who sell products or services to E&Ps).  However, the quick and dirty version is that while various valuation metrics are used, one of the ones often used for producing assets is “PV10,” i.e. the future cash flows discounted back to the present at 10%.  

Obviously, if you think that oil or gas prices are going to be higher than what most people are modeling, then you’re going be willing to bid way more than anyone else’s for the same asset – which is what Chesapeake spent the better part of a decade doing.

Anyway, Zuckerman goes on to discuss the excitement and depression of landmen.  Mostly, they’re perceived as “used car salesmen” but McClendon valued them more than engineers.

Pages 196 – 197: On the bottleneck of technology complementarity: as early as 1991, Mitchell energy had tried horizontal drilling + fracking in the Barnett, to no avail.  However, by the early 2000s. Better drill bits and better imaging technologies, combined with higher natural gas prices that made more expensive horizontal wells economic.

Devon, which if you will recall had bought Mitchell’s Barnett acreage, started combining the two techniques and turned the Barnett from chopped liver into a hot commodity (literally).  Chesapeake, of course, went on a spending spree to buy Barnett acreage.

Page 199: In a smart business move, Chesapeake offered to digitize records for local companies to speed up the process of checking land ownership records.  In exchange, they got first access, while competitors had to wait in line.

Page 200: McClendon was often compared to Bill Clinton in terms of being able to make people feel special.  Like Elon Musk, he was a capital raiser extraordinaire.

Page 202: Astonishingly, circa 2005, Zuckerman notes that “most environmental groups, including the Sierra Club, also applauded the push into shale drilling,” given that natural gas is cleaner than coal and oil.  In the words of Christopher Nolan, you either die a hero, or live long enough to see yourself become the villain…  contrast bias I guess.

Pages 206 – 207: circa 2003, Hamm/Continental start to get into the Bakken in a big way.

Pages 209 – 210: on book knowledge vs. real-world knowledge: Charif Souki and his partner nearly sign a lease to build an LNG import terminal upstream of a bridge that’s too low for LNG tankers to pass under.

Pages 216 – 217: McClendon continues spending like there’s no tomorrow.  How much is enough, asks one analyst on a conference call?  “I can’t get enough,” responds Aubrey.

Zuckerman maybe doesn’t go far enough in quoting McClendon.  I was curious, so I went and pulled up the CC in Sentieo (for anyone who cares, it’s the Q2 2005 CHK conference call on 2005-08-05).  Here’s McClendon in full pitch mode in all its unabridged glory:

Duane Grubert, Fulcrum Global Partners – Analyst [144]

Aubrey, in your materials today, you talk about the 14,000 locations which, of course, is growing over time, which is great, and now you’re articulating a nine-year drilling inventory. It had been seven and obviously it’s been growing in the interim. I’m wondering if you could just comment a little bit about the philosophy of, let’s say two years from now. Would you guys be comfortable to say, oh, no, we have 10 years, or 12, what’s the point where you think about your inventory in the context of when is enough enough, and when do you change your tactics a little bit either farming some of that out or just working it down?

Aubrey McClendon, Chesapeake Energy Corporation – Chairman, CEO [145]

As you know, Duane, we read your reports, and so not an unexpected question from you based on what you’ve been saying. And our view on that is I’d answer that is, how much Chesapeake stock is too much for management to own. Our view is, you know, we’d like to own more, we’d probably like to own it all. And I think about our inventory that way as well.

I can’t get enough of owning Chesapeake stock and I can’t get enough of good drilling locations, because it’s our view that they will likely increase in value going forward, and it’s how we sleep a little easier knowing that we’ve got this enormous backlog.

So I know that what we have done has done two kind of contradictory things. It has set up an upside story that I think is the best in the industry, but it has given us middling returns on capital as a result of these big investments that we’ve made in leasehold and in science, and so that has dragged down our returns.

I might also mention that most of this acreage is HBP, held by production, and so we do have the luxury of being able to not have our drilling program directed by lease explorations, but we can really direct our drilling program to where we’re getting the best return. So, I know it’s a little frustrating for you and maybe some others that we continue to want to pile up the upside, but it is our nature and not likely to get corrected or changed at this late date in our lives.

Duane Grubert, Fulcrum Global Partners – Analyst [146]

Okay. Very good. And as you know I love the upside. See you later. Bye.

Not sure that needs any commentary, but “pile up the upside?”  Geeze, that should go on a “red flags 101” list under the “unbridled arrogance” heading.  Ahem  overconfidence ahem.

Pages 221 – 222: McClendon goes on a spending spree personally: wines, homes, and enough other stuff that he needed to hire a big team to manage it all.  He also donated to schools and political causes (I probably don’t need to specify which side of the political spectrum!)

Pages 224 – 225: McClendon’s automatic response whenever he heard about a rival buying land somewhere: “Why aren’t we in that?”  McClendon starts to wear Ward out; Ward gets concerned about McClendon’s willingness to pay any price (although apparently the debt doesn’t stress Ward out.)

Page 227: Ward keeps stressing because while McClendon sees the land as piles of upside, given that the land is “held by production,” they’re forced to drill it (indeed, they’re later forced to involuntarily drill to keep their leases).  Ward on capital-markets ebullience: “Capital was free […] it was insane.”  McClendon, of course, never saw a deal he didn’t like.

Ward eventually quits.

Pages 229 – 230: Harold Hamm is happy with his purchases in the Bakken; everyone else more or less thinks he’s batshit crazy: the Bakken had been dead money for fifty years or so…

Pages 231 – 233: … but the rock is hard to frack and Continental doesn’t have the resources to keep throwing money at it.  (Recall George Mitchell spending hundreds of millions before he figured out the Barnett.)

Pages 235 – 236: EOG, which is known by a decent number of people as some of the “smart money” in the E&P space, goes by its initials because it was spun out of Enron for not being sexy enough.  Naturally, it’s one of the only bits of Enron that turned out to actually be worth something.

Page 237: Alan Greenspan goes on record talking about the crisis that will be because we’re running out of cheap natural gas, ack.

Page 238: on herd behavior: once Greenspan comes out in support of importing LNG, Charif Souki no longer has to pitch anyone

Page 243: Back to what Ward called the “insane” ability of Chesapeake to raise money: in the spring of 2007, the company (naturally) needed more money to do more deals, so the CFO, Rowland, told McClendon hey, you know, we need some money.  McClendon says okay, go get us a billion bucks.  So Rowland goes and, you know, Credit Suisse and UBS find investors willing to throw another billion dollars at Chesapeake without so much as a conference call explaining the rationale for capital raising.

And here it takes me seemingly years to close tiny SMAs.  😛

Page 248: Tom Ward doesn’t like being retired, and wants back in.

Pages 252 – 254: Harold Hamm apparently did a good job of keeping up with the technology and talking to engineers/geologists.

Back to the technology side, though, apparently an understated but meaningful improvement was the idea of fracking in stages.  In the original approach of attempting to fracture the entire lateral at one time, much of the rock wasn’t getting fractured.  So some people came up with the idea of sealing off portions of the wellbore and focusing on fracking portions of the rock in “stages.”  At the same time, lateral lengths keep getting longer.

Zuckerman doesn’t really go into it in that much depth, but as of 2018, tighter spacing (i.e. more stages per linear foot of well) and longer laterals (i.e. the horizontal portion of the well going for more length – in some cases, up to and exceeding two miles) both continue to be trends in pretty much every major basin, to the best of my knowledge.  For example, one report cited that lateral length has increased from about ~4,000 feet to close to ~8,000 feet in the Permian since 2010, and ~4,500 to ~6,000 in the Eagle Ford.  

Meanwhile, in the Permian, 40 – 50 stage fracs are now common, whereas the standard was 25 – 30 as recently as 2014.

Page 259: circa 2007, the tone starts to shift…

Page 261: Mark Papa at EOG is either a genius or really, really lucky.  Mark, it seems, is the first person (at least in this story) to recognize fully the effect of n-order impacts. The combination of technology driving costs down* and the availability of oil that didn’t need to be lucked upon (we know where it is – we just have to get it!) and, finally, higher prices enabling higher-cost production was leading to an explosion in the potential for production.

Papa makes the contrarian and prescient decision to shift from focusing on gas to oil, anticipating the glut that’s about to come.  Of course, a similar story plays out with oil down the line (post the book’s publication).

*Investors and those familiar with the energy space probably understand this and can skip it, but as a primer for casual readers who aren’t super familiar, it’s worth differentiating between oil existing and oil being economically recoverable.  (The same applies for gas too; I’m just using “oil” for simplicity.)  There are various places you can get oil – for example, from North American shale, from offshore deepwater fields, or from Canadian oil sands – using various techniques.  More important in the near term than the actual amount of resource that we know for a fact is in the ground in those locations is how much it costs to get it out of the ground.

If I remember my research correctly, in the 2014 or 2015 timeframe, around the time that this book was written, in rough numbers – of course, every field is different – the general “breakeven” costs for a new project were around ~$50 for shale, ~$70 for deepwater offshore, and ~$90 – 100+ for oil sands.  I don’t know exactly what they are now (early 2018), but in “core” (i.e. prime) acreage in plays like the Bakken and Permian Basin, I think breakeven costs in shale are now sub-$40 and maybe even around $30.

In other words, all the oil that is/was in fields deep undersea in the Gulf of Mexico and other areas hasn’t gone away – it’s still there – but given that the prevailing price of oil is not substantially above (and potentially at or below) the price of getting that oil out of the ground, there’s obviously little to no incentive for most private companies to invest in attempting to do so.  In terms of The Frackers, an important concept throughout the book is that it wasn’t purely technology, but the combination of technology and rising prices, that enabled the fracking boom: if oil were ubiquitous and we could still just stick a straw in the ground and watch it come shooting out, then fracking wouldn’t be economic.

Not to nerd out too much, but another interesting/useful concept to consider, that Zuckerman doesn’t really address (and in fact sort of may mislead casual readers on, unintentionally) is the different production profile of fracked shale vs. “conventional” wells.  Here is a very rough graphic I made to illustrate the directional difference:

My sketch of decline curves for shale vs. conventional production.

The y-axis represents production (i.e., how much oil is flowing), while the x-axis represents the time since the well was drilled.  Very roughly – again, my graphics are just directional, pun fully intended – the takeaway is that “conventional” production declines at perhaps 5 – 10% per year, so once you’ve drilled, you’ll be producing economics for a long time.  In shale, on the other hand, the decline curve is hyperbolic, and by the end of the second year, production has often declined by 80% from the initial rate.

[For anyone really interested, an actual decline curve for production from the Alaska North Slope is available from the State of Alaska’s ten-year forecast (scroll down to page 32), while this paper has a shale decline curve for the Eagle Ford on page 33.]

What this means from a business standpoint is that the economics of shale drilling work out very differently from the economics of, say, developing a deepwater oilfield or an oil sands project.  First of all, it’s very easy to switch production on and off, since you’re making a lot of small decisions (individual wells) that lead to production that, for the most part, is trivial in three years.  Therefore, shale production is “swing” production that can be ramped up or down based on prevailing commodity prices (which are often, but not always, hedged.)

On the other hand, conventional projects often require a much higher level of absolute upfront investment, but yield a more consistent level of production over a much longer time period, so majors need to take a longer-term view of commodity prices before initiating these projects.  At the same time, once they are online, the production isn’t simply going to vanish overnight – the “cash sustaining costs” of production are often very low, such that even if a project isn’t earning an economic return on the capital that was initially deployed to put it into the ground, it’s still profitable from a short-term cash flow standpoint to continue operating it.  

(A decent analogy might be: you paid too much for a fuel-sipping hybrid before gas got really cheap, and it is now, in retrospect, no longer an economically positive decision to have paid extra for the car.  However, on an ongoing basis, the purchase is a sunk cost and you’re not going to stop driving the car.)

Ultimately, then, a production boom from these sort of long-term sources is much more dangerous from an oversupply perspective than shale production, which tends to respond relatively quickly to commodity prices.  Oil 101 lesson over.

Pages 265 – 271: McClendon apparently, verbatim, figures out that “we could break the gas market,” but isn’t smart enough to translate that risk into taking some money off the table despite advice from those around him: not only does he not do that, but he remains fairly levered on a personal level, which comes to haunt him later.  In fact, he even buys more shares, as did Ward in Sandridge.

Where did Ward get the money?  He borrowed it… and what was the collateral?  Well, we’re about to find out.

Page 273: The U.S. Geological Survey announces that there’s a buncha oil in the Bakken.

Page 275: EOG secretly buys up land in the Bakken.  The level of hush-hush required here is unreal; you’d think these guys were extracting state secrets, not petroleum.

Pages 284 – 285, 288 – 289: Aubrey McClendon borrowed what he thought to be a “conservative” 33% of his stock value in margin debt (a cool $300MM) to finance purchases of more stock (!) in addition to funding his lifestyle.  As long as things keep going up and to the right, it works swimmingly…

… until one day it doesn’t, and the banks more or less liquidate McClendon’s collateral (the fast-falling shares of Chesapeake), further depressing shares and taking a hatchet to his net worth.  

The lower ‘price deck” also bites them in the butt: McClendon sends a firmwide email telling people that lease prices from 90 days ago were now “overpriced by a factor of at least 2x.”  Ouch.

Debt combined with a strategy premised on reflexivity (i.e., a stock whose value depends on its ability to continue to access the capital markets to make accretive deals) usually ends badly.  See: Valeant.  CHK didn’t blow up, but McClendon did, in a way.

Pages 291 – 292: Ward didn’t have the collateral problem of McClendon.  He did, however, face a liquidity crunch, which was painful.  

Page 293: Harold Hamm is smart, smart, smart (as South Park might say.)  He hadn’t levered up personally, and he’d had other sources of wealth (like his trucking and contract drilling businesses, which in the early days helped finance drilling).

Page 297: Souki, naturally, is left for dead.

Pages 299 – 301: some nice anecdotes on corporate governance… particularly the map purchase

Page 303: honestly the most shocking part of this whole story (but maybe it shouldn’t be) is that Aubrey McClendon appeared pathologically incapable of learning.  After looking into the abyss, he went back to his old ways of buying up more acreage.

Page 311: Harold Hamm gets political

Page 312: More relevantly, Harold Hamm(‘s employees) figure out how to properly frack the Bakken.  boom.

Page 315: Souki inverts his business plan: export the gas!  All we need to do is, you know, raise a few more billion.

Page 319: at an Investor Day, EOG goes public with its reserves in the Eagle Ford, and investors literally start pulling out their phones and buying the stock.

Pages 327 – 328: Zuckerman does a good job acknowledging some of the environmental concerns around fracking without giving them unwarranted airtime or sensationalism; I thought the bit about the matches and flaming water was good research.

Pages 340 – 341: on more McClendon dealmaking, and the “held by production” issue – half to two-thirds of CHK’s drilling was “involuntary” per the CFO.

Page 345: cameo appearance by Lou Simpson of Geico fame.  He tells McClendon, quite rationally, to ease up on the debt, and when Aubrey brushes him off, Simpson agitates for Aubrey’s removal

Page 356: the n-order impacts punchline about how McClendon was “right” on fracking but “wrong” on economics.

Pages 358 – 359: some nice tales from Williston.  There are plenty of interesting pieces you can find by googling.

Pages 376 – 379: more on the environment

Pages 388 – 389: and more of a question than an answer: why hasn’t fracking taken off overseas?  I have not yet answered this to my satisfaction.

 

First Read: late 2014

Last Read: early 2018

Number of Times Read: 2

 

Review Date: early 2018

Notes Date: early 2018