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Aubrey McClendon Puts the Independent in 'Independent'

On Nov. 8 -- after election returns showed Democrats will take control of both houses of Congress -- many in the oil and gas industry likely heard the windfall profits tax bogeyman knocking on the door.

But not the CEO of at least one big-time independent producer. In a presentation Wednesday at the 2006 FBR Investor Conference in New York, Chesapeake Energy CEO Aubrey McClendon, a registered Republican, owned up to his Democratic roots: both parents and a great uncle who was a U.S. senator from Oklahoma.

McClendon said the Democratic regime change in Congress will be good for his gas-focused, Oklahoma City-based company and he has no fear that Chesapeake and companies like it will be subject to punitive taxation as long as they reinvest a healthy percentage of profits in domestic exploration and production. McClendon didn't just spout off on this voluntarily, of course; his comments were in response to a question about the future of oil and gas prices under Democratic Congressional rule.

"My own opinion is that it's wildly bullish for natural gas," McClendon gamely said of the Democrats' sweep of Congress. "Aside from the confiscatory attitude that some Democrats will bring, it's a lot better on a net-net basis for us than the attitude the Republicans had, which was to favor coal and greater access to the Rockies and offshore, none of which we would be in favor of since our assets are not located there -- and they're not located there for many reasons."

The bespectacled Duke University graduate could have stopped there. But what's a discussion of politics and energy without mention of the industry's internationally famous bogeyman?

"I think going forward as we add a third element to that discussion, which is the Democrats will be much more focused on global warming issues, and if you're a serious thinker about global warming, you cannot think about a solution to that problem without considering natural gas as your primary solver of that problem," said McClendon. "We need to burn less coal; we need to burn more natural gas around the world. And so my hope is that there will be a day in my life when coal is priced for its detrimental environmental impacts and that natural gas, rather than being seen as a more expensive fuel today on an all-in basis, is seen as a much cheaper fuel than coal.

"I don't think there's anything that Congress can do that affects oil prices at the end of the day. I presume that they could mandate that we all have to go buy new cars. To change out the U.S. auto fleet would cost about $3.2 trillion and that's a pretty hefty tax on the U.S. consumer if we're all required to do that."

So, because of environmental concerns and the propensity for Democrats to restrict drilling access, things are looking up for gas prices. While everyone knows that oil prices drag gas prices with them to varying degrees. McClendon expressed little concern for the price of oil.

"I will say this," he did proffer, "that clearly the hornets' nest that President Bush stirred up in the Middle East will have implications that will probably last decades, most of which I consider bullish for energy prices. If he's successful in establishing democracies in the Mideast, it will simply unleash more demand growth in the Mideast. Remember last year that there was more demand growth out of Opec for oil than there was in China for oil. And if he was wrong and we create a long-lasting mess, certainly supply growth will be difficult to foresee in the Middle East for a while. Net-net I think we win in either scenario."

And that would have been all for McClendon's brave experiment in mixing politics, energy and candor, but a question or two later an FBR conference attendee who could not be heard clearly over the event's webcast expressed his astonishment at McClendon's views.

"I've been accused of being absurd in many parts of my life," the independent producer said in response. "I was born a Democrat. My great-uncle was a U.S. senator from Oklahoma. My parents were registered Democrats. Today I'm registered a Republican. Really I just call it the way I see it. I think that it's very unlikely the Democrats will at the end of the day take money from companies, such as ours, who are going to spend approximately four times our profits this year searching for new reserves of natural gas. If, on the other hand, Exxon[Mobil] chooses to reinvest only 50% of its profits -- of which probably only 10% or 15% get reinvested in the U.S. -- I could imagine that there would be people who say that's an obscene profit compared to other industries. Compared to what you pay for this bottle of water...oil is still remarkably cheap, and the profits in my view are far from obscene.

"I just think at the end of the day that cooler heads will prevail, and if you take all of our money and don't allow us to reinvest it and drill, I think you're going to have less supply and therefore higher natural gas prices. Despite all the rhetoric, I think it's highly unlikely a company like ours gets targeted in something like that [a windfall profits tax]."

And just in case anyone had mistaken him for an Aggie or a Longhorn, McClendon reasserted his Sooner state status while criticizing the ambitious coal-fired power generation buildout plans of Texas energy giant TXU Corp.

"I don't think burning a lot more coal is a great idea," McClendon said. "There are a lot of people against that [TXU plan]. As somebody who's, I guess, on the north side of prevailing south winds I don't want a bunch of coal fumes from Texas coming into Oklahoma. Texas produces plenty of gas, and we ought to be burning Texas-produced clean-burning natural gas to fire electricity plants in Texas, in my view, rather than dirty lignite plants."

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