From The Wall Street Journal

Two years ago, investors handed veteran oilman Jim Hackett a $1 billion check and sent him to seek riches in shale drilling.

Today, the company he founded with their money, Alta Mesa Resources Inc., has a market value of about $43 million and is teetering on financial ruin—one of the more spectacular failures met chasing the next big thing in the American shale boom. Mr. Hackett bet big on an up-and-coming Oklahoma oil field after early wells there rivaled those of the best fields in Texas, but subsequent output has been disappointing.

Mr. Hackett, formerly the chief executive of Anadarko Petroleum Corp. , left the company in 2013 to seek a theology degree at Harvard Divinity School before being lured back to oil exploration by moneyed investors seeking a big-name executive to head a new venture. (Chevron Corp. said last week it had agreed to buy Anadarko in a deal valued at $33 billion.)

Mr. Hackett used their check in 2018 to merge Alta Mesa Holdings LP, an Oklahoma oil-and-gas producer, and Kingfisher Midstream LLC, a regional pipeline company. The sellers received about $800 million in cash and shares valued at $2.75 billion as part of the complex deal, which valued the combined company at $3.8 billion.

The strategy: Alta Mesa would capitalize on what was then one of the hottest fields in shale, an Oklahoma formation known as the Stack. But Alta Mesa’s wells turned out to be less robust than anticipated, a problem that has since befallen numerous drillers in the Oklahoma region. As a result of the underwhelming production, Kingfisher’s pipelines have wound up being less valuable than expected.

Last December, Alta Mesa said its chief executive and chief operating officer were resigning and that Mr. Hackett, who had been serving as chairman, would step in as CEO. In February, Alta Mesa took a $3.1 billion write-down, laid off a quarter of its staff and disclosed problems with its “internal control over financial reporting.”

On April 8, the company said it was drawing down the remaining $86 million of a $370 million revolving credit line and that it had hired advisers to help it consider “financial alternatives.” Its shares, which were at nearly $9 in early 2018, have traded as low as 22 cents this month. Its market capitalization is now less than $50 million. Some investors have sued the company in federal court, alleging they were misled.

“In this challenging environment, we believe it is important to increase our liquidity to ensure we have adequate financial flexibility,” Mr. Hackett said in a statement last week. Through a spokesman, he and Alta Mesa declined to comment for this article.

Alta Mesa’s fall is a cautionary tale for investors lured by promising wells in emerging shale basins across the U.S. Wall Street rushed to fund shale producers, helping them raise record levels of debt and equity over the last six years. But many have failed to generate returns, and new investment has dwindled. Shale companies raised about $23 billion last year, compared with $56 billion in equity and debt in 2016.

Mr. Hackett’s “blank check” venture, backed by New York investment firm Riverstone Holdings LLC, was a type of investment vehicle that has fared particularly poorly in the shale boom. Special-purpose acquisition companies, or SPACs, start with no assets and sell shares to raise cash that is then used to make acquisitions in a process that is faster than a traditional initial public offering. SPACs became popular with investors, who have turned over cash to other well-known oilmen besides Mr. Hackett, such as Mark Papa, the former CEO of pioneering shale driller EOG Resources Inc.

Most of the investments haven’t panned out. More than 60% of the energy companies acquired by SPACs since 2016 are worth less now than when they began trading publicly, a Wall Street Journal review found.

Ben Dell, managing partner of New York investment firm Kimmeridge Energy, said SPAC management teams have an incentive to spend the money they have raised no matter what, so they can collect fees and pay themselves a salary and stock options at the company they purchase.

“SPACs are the most egregious example in the industry of executive misalignment with investors,” Mr. Dell said.

Mr. Hackett said in an interview in 2017 that he was drawn to the Stack because of the relatively cheap cost of entry, around $2,000 an acre, a fraction of the prices being paid to lease land for drilling in more-established areas such as the Permian Basin of Texas and New Mexico.

He argued for the Alta Mesa combination, estimating in a presentation that the company would increase oil and gas production in 2018 by 85% from the year prior to 38,500 barrels a day and that its average well would produce nearly 250,000 barrels of oil over its life.

Investors approved the transaction in February 2018, and Mr. Hackett was given a $520,000 annual salary and stock options worth about $5 million, according to regulatory filings. In August, then-CEO Harlan Chappelle told investors that production was 30,000 barrels a day. The company also said the pipeline business wouldn’t meet previous earnings estimates because some customers had slowed drilling activity.

In December, Mr. Chappelle and Chief Operating Officer Michael Ellis resigned. Neither responded to requests for comment.

In February, Alta Mesa disclosed it couldn’t file its annual report because it had identified problems with its financial controls. It also said that an average well from 2018 would produce 120,000 barrels of oil over its life.

In a lawsuit in New York federal court, the Plumbers and Pipefitters National Pension Fund, which had invested in the SPAC that led to Alta Mesa, alleged it voted to approve the acquisition based on false statements about its prospects. The group, which manages a pension plan for around 100,000 people, initially invested roughly $1 million, which is now worth about $27,000 based on current share prices. Lawyers for the fund didn’t respond to requests for comment.

Tom Loughrey, president of oil-and-gas consulting firm Friezo Loughrey Oil Well Partners LLC, said Alta Mesa’s optimism was emblematic of the many drillers who based estimates on small samples of early results.

Mr. Loughrey said that a year ago he tried to persuade a client to sell shares in Alta Mesa, predicting that the company’s well productivity would be significantly below levels estimated by management.

The client opted to hang on, Mr. Loughrey said. In the client’s words: “Jim Hackett is there, so we’re good.”

Legal Notice