Flip This Well: How Fracking Company CEOs Get Rich While Losing Billions

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Last year the fracking company Halcรณn Resourcesย announced a new strategy that was sold as the path to profits for the previously troubled shale oil and gas firm. The company had sold its stake in the Bakken oil fields in order to double down on theย Permian shaleย in Texas. At the time, Reuters touted the deal as a โ€œstunning turnaroundโ€ for CEO Floyd Wilson, and the good news immediately drove up the Halcรณn stock price by 35ย percent.

โ€œThe sale of our Williston Basin operated assets transforms Halcรณn into a single-basin company focused on the Delaware Basin where we have more than 41,000 net acres,โ€ Wilson said in a statement. Heย was making his pitch and investorsย responded.

However, the move was part of a familiar formula for those in the shale industry, whichย usesย horizontal drilling and hydraulic fracturing (fracking) to release oil and gas from shale formations:ย Borrow lots of money, drill lots of fossil fuels at a loss, flip the company for aย profit.

As the Reuters article points out, Wilsonโ€™s ultimate goal is to create excitement about theย potential of its Permian basin wells and then flip Halcรณn, just as he’s flipped other shale firms:ย โ€œFocusing on the Permian could help Wilson achieve his long-held dream of selling Halcรณn to the highestย bidder.โ€

Wilson made his name in the industry by doing just that three times before. He sold Hugoton Energy to fracking giant Chesapeakeย Energy for big profits, flipped the company 3TEC to Plains Exploration & Productionย and then sold his company Petrohawk to energy giant BHP. The latter sale was a big, and necessary, win for Wilson.ย As one analyst told Dealbookย at the time, โ€œPetrohawk tapped practically every source of capital that it could.โ€ When you run out of people willing to lend you money, it is time toย flip.

Those deals made Wilson a respected oil man and instilled confidence that he would do the same with Halcรณn.

โ€œWe will be successful,โ€ Wilson told an interviewer in 2013. โ€œIโ€™ve been doing this a long time. Nothing keeps me up atย night.โ€

He speaks with the confidence of a very wealthy man who, despite driving Halcรณn into bankruptcy once already, was well compensatedย for doing. Itโ€™s a simple formula Wilson uses:ย Borrow a lot of money, predict that you have hit on some major oil find, try to produce as much oil as possible even if the costs outweigh the income, drive up your stock price, and try to flip theย company.

Will the Permian finally be the pitch that works for Wilson and Halcรณn?

2013 and the Uticaย Play

Well cuttings from Utica Shale petroleum well near Granville, Ohio
Well cuttings from a petroleum well west of Granville, Ohio.
ย Utica Shale samples are dark brownish-gray to near black. Credit:ย James St. John,ย CC BYย 2.0

It was 2013 when Wilson was claimingย that nothing kept him up at night. Back then, he and Halcรณnย had another sure thing with the Utica shale play, which stretches across parts of Ohio, Pennsylvania, West Virginia, and New York. As Reuters said, he was going to โ€œdo what he does best: spruce up an oil company and sell it off to the highestย bidder.โ€

However, the Utica strategy did not quite pay off. โ€œHalcรณn had disappointing results when the roulette ball landed on the highly touted Utica in 2013,โ€ย investment site SeekingAlpha noted the following year. When even the financial press is making comparisonsย to random games of chance, perhaps investors should just skip Wall Street and head directly to the Vegas rouletteย tables.

Halcรณn struck out in the Utica shale oil fields, but Wilson was not fazed by this failure. Despite promising big results and coming up dry there, he apparently had no problem joking about it inย an exchange with a Goldman Sachs analyst on a 2015ย investor call:

Jason A. Gilbert, Goldman Sachs & Co: โ€œOkay. And then last one, if I might, what are your plans for theย Utica?โ€

Floyd C. Wilson, Chairman & Chief Executive Officer,ย Halcรณn: โ€œWhatโ€™s theย Utica?โ€

By this time, Wilson already had his eyes set on a new plan for success for Halcรณn: the Tuscaloosa Marineย Shale.

2014 in Tuscaloosa: Strikeย Two

Now you probably can guess how Wilsonโ€™s next gamble paid off as youโ€™ve likely not heard much aboutย the oil fields of theย Tuscaloosa Marine Shale (TMS), a narrow band that primarily stretches across central Louisiana. That did not stop Wilson and Halcรณn from making optimistic assurances about the little-known oil play. Unlike the failed efforts in the Utica shale, Wilson sold theย Tuscaloosa as a โ€œworld-classโ€ oilย field.

โ€œWe are off to a solid start in the TMS, and the capital from our partnership with Apollo will help us to accelerate activity,โ€ Wilson said in a 2014 statement.ย โ€œThe TMS is quickly evolving into a world-class oilย play.โ€

The Motley Fool investment site wrote aboutย the 2014 rise inย Halcรณnโ€™s stock priceย thanks toย the potential of the TMS but noted that itย was a โ€œrelatively unknown and unproven shale formation.โ€ The thing about unknown and unproven assets is that it is easy to sell the potential of future profits based off them because the reality isย โ€œunknown.โ€

At the same time Halcรณnโ€™s stock was doing well and Wilson was making promises aboutย the Tuscaloosa, the company wasย burning through vast amounts of borrowed cash. Halcรณnย was $4 billion in debt when the Tuscaloosa dream eventually evaporated, joining theย Utica as anotherย failure.

As Forbes noted in 2015, โ€œEven during good times Halcรณn didn’t live within its cash flow โ€” only making ends meet by continually issuing more stock and sellingย debt.โ€ย ย 

But after playing hardball with investors, Halcรณn was able to reduce its debt in 2015, and the stock once again got a big bump โ€”ย up 35 percent in just a couple of days. Still,ย the headline of a Forbes articleย mentioning the jump in stock price led with the prescient words โ€œNot Dead Yetย โ€ฆโ€

Rewarded for Bankruptcyย ย 

Oil and gas fields form a grid near Midland, Texas, in the Permian shale
Oil and gas fields pock the land around Midland, Texas, in the Permian shale.ย 
Credit: EcoFlight,ย CCย BYย 2.0

The next chapter of the Halcรณn story will erase any wonderย about why Wilson doesnโ€™t lose sleep at night even after repeatedly losing billions of dollars of other peopleโ€™sย money.

Even in the shale industry where losing large amounts of money is the status quo, at some point the practice can catch up with a company. Wilson ran up Halcรณnโ€™s debt while promising world class oil plays based on unproven assets, but when that didnโ€™t pan out,ย eventually the ability to borrow more money dried up, and Halcรณn declaredย bankruptcy.

Investors lost roughly $1.8 billion as a large portion of Halconโ€™s debt was erased in the bankruptcy, providing the proverbial โ€œget out of jail freeโ€ card for the shale firm and especially forย Wilson.

After the bankruptcy, Wilson remained as the heavily incentivized CEO of the new and improved Halcรณn. A Houston Chronicle article couldn’t help pointing out the irony in a headline:ย โ€œEven in bankruptcy, oil bosses are promisedย riches.โ€

โ€œThe people who came out ahead were the ones who drove them toward bankruptcy,โ€ Praveen Kumar, executive director of the Gutierrez Energy Management Institute at the University of Houston, told the Chronicle. โ€œWhat have they learned? Notย much.โ€

What have they learned? That the path to riches in the shale oil business is to gamble as much as possible with other peopleโ€™s money while making sure the executivesย get rich even when the company loseย billions.

Not only did Wilson stay on as CEO of Halcรณn after the bankruptcy โ€” 10 percent of the new company stock was dedicated to Halcรณnโ€™s โ€œmanagement incentiveย plan.โ€

Halcรณnย Reborn

What Wilson learned from the bankruptcyย is likely what heโ€™s known all along. The key to flipping a shale oil company is to make big promises, find some oil and gas, and pump as much of it as possible, all whileย funding the endeavorย withย debt.

Having struck out in the Utica, Tuscaloosa, and Bakken,ย Wilson is now promising that the Permian shale will be Halcรณn’s money-maker.

In perfect form, Halcรณn is once again borrowing money and again losing it chasing oil production. The company’sย first quarter results for 2018 were cited as โ€œdisappointing.โ€ Losing money can be disappointing to investors, as it turnsย out.

But according to the Motley Fool, those disappointing returnsย aren’tย slowing down Wilson and Halcรณn. And why shouldย they?

The CEO is still accumulating plenty of wealth as heย promises results and borrows money โ€” which his company then loses even as he earns more thanย $7 million a year in compensation. After the 2018 first quarter results were announced,ย the Motley Fool wrote theย following:

โ€œHalcรณn Resources has an aggressive plan to increase output at a lightning-fast rate, to offset asset sales in recent years. It’s a big bet on higher oil prices, since the company is significantly outspending cash flow to get up to where it wants to be as fast asย possible.โ€

Anyone want to bet how this endsย up?

Halcรณn is an excellent example of the Ponzi scheme that is the fracked oil story in America. Big promises that leadย to huge loans that leadย to more promises. And while the investors get burned and $280 billion gets squandered, the fracking CEOs walk away very rich along with the deal makers on Wallย Street.

But the reality is that most shale oil fields in America have never been profitable. As the saying in theย industry goes, โ€œYou canโ€™t fix badย rock.โ€

But you can sell it, and Wilson has been selling bad rock in the shale business forย years.

โ€œThe bottom line is a lot of these companies didnโ€™t have very good assets to begin with,โ€ Leo Mariani, an analyst at NatAlliance Securities,ย explainedย to Bloomberg. โ€œYou can go through bankruptcy and wipe away debt and thatโ€™s all well and good, but the assets they ended up with are still not veryย attractive.โ€

But that is something for investors and analysts to worry about. Floyd Wilson does not appearย troubled by such things and is once again borrowing and losing money as fast as he can.ย He explained this strategy to the Wall Street Journal inย 2012.

โ€œWe rush down the stairs and we just hope we don’t fall,โ€ Wilsonย said.ย 

Even when shale oilย CEOs like Wilson doย fall, and wipeย out billions in other peopleโ€™s money, their falls seem to be cushioned with moreย cash.

Follow the DeSmog investigative series:ย Finances of Fracking: Shale Industry Drills More Debt Thanย Profit

Main image: A derivative of โ€œSignal Hill CA active oil field 2011.โ€ Credit:ย HayMarketRebel,ย publicย domain

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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