Meet Mr. Gas (pg. 2)

Haynesville is a huge bet, for both McClendon and his company. Risky? Sure. Chesapeake just sold 20 million new shares to begin to cover the exploration expenses. And Gimme Credit high-yield analyst Carl Blake sees more heavy borrowing in Chesapeake's future. "Unfortunately, it's going to take a lot more capital to monetize those assets," says Blake. If gas keeps trading above $10 per million British thermal units (BTUs) or, as many analysts expect, goes even higher, then McClendon should be covered. If not, well, we'll see. In any case, he's not backing off. That's not how he got here.

"Have you ever heard of Amy Street?" McClendon wants to know. This interview began the wrong way, with McClendon asking all the questions. He knows how old I am, how many kids I have, where I went to college, what my major was. Amy Street, he says, is in Providence. It's the inspiration for AmieStreet.com, a little company he's backing with some of his VC money that "aspires to remake the indy music business." (It was news to me. Then a couple of weeks later the site got a dash of unexpected publicity when the Eliot Spitzer sex scandal broke: AmieStreet.com is where escort Ashley Alexandra Dupré peddles her MP3s "What We Want" and "Move Ya Body.")

But investments in edgy dot-coms don't begin to explain what all McClendon does with his wealth. He owns half a vineyard in Bordeaux, a soda-pop stand and a tree farm on Route 66, stakes in ten restaurants, and 110,000 acres of ranch, timber, and farm land, which makes him one of Oklahoma's biggest landowners. In the past few years he's built a $3 million Olympics-worthy boathouse on the Oklahoma River, given $20 million to Duke, and contributed some $15 million to the University of Oklahoma. He gave $1 million to the Red Cross after Hurricane Katrina and handed out a fistful of $100 bills to the roughnecks he's pictured with in the photograph that opens this story.

And it all comes from natural gas. In the beginning, back in the early 1980s, it was just McClendon and Tom Ward, a couple of self-employed land men in their early 20s (born three days apart) scouring courthouse records and real estate transactions, snapping up leaseholds wherever they could find them, sprinting to stay one step ahead of the majors. McClendon certainly had a cushion. (His wife, Katie, is a Whirlpool heiress.) But Ward says his partner always worked even harder than he did. They had a deal, sealed with a handshake (no lawyers, no paper), to cut each other in fifty-fifty on whatever either of them found. McClendon took the southern and eastern parts of the state; Ward, who came from tiny Seiling, Okla., took the western.

That arrangement lasted six happy years, until it dawned on them that they probably had enough experience by then to dig some of that good rock themselves rather than turn it all over to somebody else. They got a lawyer this time, one of McClendon's high school buddies. Kicked in $50,000. Incorporated as Chesapeake Energy in 1989, with Aubrey as CEO, Tom as COO. (Ward left, amicably, in 2006 and is now CEO of SandRidge Energy.) The name choice was McClendon's. He had an idea that big companies - ambitious companies - should never carry the founders' names, the better to attract big, ambitious talents down the road. But why Chesapeake? Nice sound to it, that's all.

Quickly they were in over their heads. Drilling demands huge upfront investments - in land, equipment, and personnel. They went public to feed the beast. "We had to have investors," says Ward. "We had to have capital." If it wasn't the worst IPO of 1993 - well, that's how they remember it. It went off at $1.33 a share and dipped below $1 (not for the last time), but then it recovered. For three tipsy years during the mid-1990s, Chesapeake was the top-performing stock in America - any sector, any exchange. McClendon says he never believed it. He felt captive to momentum investors, but what can a CEO do in a situation like that? Only one honorable choice: Don't sell your shares to some sucker. So when some wells turned up dry in late '96, prices plunged, and Chesapeake's stock collapsed, McClendon and Ward went down with it. They were back where they started.

For a while it seemed that selling the company was the only way out. Chesapeake and rival Devon Energy, another Oklahoma City company, were at the top of every investment banker's pitch list in those days. Chesapeake did get one nibble, from an Oklahoma utility looking to scoop up gas reserves on the cheap. The offer was for $2.25 a share, a 25-cent premium. Aubrey held out for $3. The offer went away. Nobody was going to save McClendon and Ward, it was becoming clear, except maybe themselves.

We come now to the money moment in the saga of Chesapeake Energy. Right around the turn of the century. Anybody who's paying any attention to Chesapeake is saying these guys are toast. Gas prices are the pits. The stock is nearly worthless. The debt is frankly overwhelming - $1 billion. The thing about it, though, is that the notes aren't due for seven years. So McClendon and Ward have time, and they have a plan: Natural gas is tremendously underpriced, they tell their board, and we're going to do everything we possibly can to position ourselves for the inevitable recovery.

How do they know that? It's 2000 now. McClendon is in San Jose visiting Calpine (CPN, Fortune 500), one of the new breed of merchant electric-power companies to emerge from deregulation. Unlike Chesapeake, Calpine is soaring. It has big plans to build new plants. McClendon is taking it all in. "And I said, 'Let me get it right,'" McClendon recalls. "'If you guys build this many megawatts and your competitors build this many megawatts, and 90% of it comes from natural gas, remind me how natural-gas prices are going to stay low forever.' And their response was, 'They'll stay low because they've always been low. And No. 2, it doesn't matter because our plants are more efficient than our competitors', so even as prices rise we'll still make money.' I went away from that meeting saying, 'We got a chance.'"

Really all he had so far, though, was a customer. Potentially a very good customer, absolutely. Utilities are less price-sensitive than industrial consumers are, and the electricity market was growing. McClendon could see that. Not like a hockey stick. More like 2% a year, up from 1%. But it was meaningful, the steady growth driven by a timely cluster of long-term trends: The explosion of the Internet. The mad proliferation of music players and flat-screen TVs - all that stuff that gets plugged in. And the great unstoppable migration from the Northeast to the South and the Southwest, which matters because, as a rule of thumb, it takes three times as much energy to cool a room as to heat it. So now McClendon needed more reserves.

Everybody always knew there was a lot of gas locked up in shale. The question was how to get at it. McClendon and Ward's genius - the insight that would not just rescue Chesapeake but would make them billionaires - was recognizing that higher prices would enable new technology, thereby opening up vast new plays that had been ignored. Gas at $2 per million BTUs, which is where it was eight years ago, is strictly a conventional-well proposition; nothing else makes economic sense. Gas at $6, $8, and even $10 per million BTUs, which is where Aubrey and Tom correctly saw the market moving, enables so-called horizontal drilling. You can bore two miles straight down into a bed of shale, hang a 90-degree turn, blast the rock at regular intervals with 10,000 pounds per square inch (psi) of hydraulic pressure to create fractures through which gas can flow, and still make money. "Nobody could imagine that from rock that has almost no permeability you could get gas to flow in commercial amounts," says McClendon. "We weren't the first to unlock those secrets, but we were among the first to recognize that if it works it changes everything."

They bet big, "went long natural gas," is how Ward puts it. Piled debt on debt, and okay, maybe they overspent on land. Thing is, says McClendon, there were "tens of millions of acres of opportunity that once you seized them, there wouldn't be another opportunity." They snapped up land in Texas, Oklahoma, West Virginia, and Louisiana. Established a huge presence around the gas-rich Barnett Shale near Fort Worth, drilling at Colonial Country Club, in the parking lot at the Texas Christian University football stadium, underneath runways and terminals at the Dallas-Fort Worth airport.

McClendon and Ward made it a pure play, kept the focus on gas. Nothing overseas. ("We don't take foreign political risk," says McClendon.) Nothing offshore. ("We don't take hurricane risk.") Everything well east of the Rocky Mountains. ("We're not trying to pick fights with environmentalists.") And while the big bet on rising prices drove strategy, they also became experts at hedging out weather-related volatility. "In the past this industry's always been a price taker, Rockefeller aside," says McClendon. "We believe that we are price makers. We need some cooperation from the market, but we don't need much."

McClendon has been writing checks to politicians for nearly two decades, leaning right, heavily, but aiming to cover every base. (Clinton got a check last June; Obama got his in February.) His breakout year was 2004, when in a span of 56 days leading up to the November elections he made contributions totaling $2,125,000 to a clutch of right-wing 527s: Progress for America Voter Fund, Swift Boat Veterans for Truth, Republican State Leadership Committee, Club for Growth, and Americans United to Preserve Marriage.

NEXT: Meet Mr. Gas (pg. 3)

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