This will resonate with some/many on this board
http://www.fool.com/investing/general/2014/03/12/another-skeleton-b...
The legal problems of Chesapeake Energy (NYSE: CHK ) continue to grow. Last week, Chesapeake Energy and Encana (NYSE: ECA ) were charged with colluding together to keep oil and gas lease prices low in the state of Michigan. Now, the governor of the state of Pennsylvania is launching an investigation into Chesapeake's Marcellus shale royalty payment practices. This is yet another skeleton in the closet, so to speak, that adds a new layer of risk to Chesapeake Energy investors.
Another black eye
Pennsylvania state law requires oil and gas companies to pay a minimum royalty of 12.5% to owners of land that has been drilled and is producing hydrocarbons. These royalties can be much higher; it just depends on the lease. However, the issue is that companies are also allowed to charge "post-production costs" for the transportation and processing of the gas, and Chesapeake Energy appears to have taken advantage of this more than its peers.
Pennsylvania has had enough
The state of Pennsylvania is beginning to push back on this practice. The state legislature has introduced a bill that would clarify the current law, and reinstate the 12.5% minimum royalty payment. That, of course, would add to Chesapeake's costs. In addition to that, some landowners have sued Chesapeake Energy in a dispute over one kind of deduction the company is taking. Right now, the settlement from that suit is estimated at about $7.5 million; however, that amount could rise as new landowners join the class action lawsuit.
The bigger problem for Chesapeake Energy, and the industry as a whole, is that these issues are eroding the trust and goodwill of that natural gas industry according to Governor Corbett. This will make it more difficult for gas producers to operate in the state, and could cause additional restrictions or fees to be added in the future. Further, the state is less likely to enact any new policies that are viewed as favorable to the industry.
Not only that, but the image hit Chesapeake Energy continues to take will impact its ability to sign new leases in the future. Landowners might decide to sign elsewhere, or not at all, no matter how much Chesapeake Energy is paying. A prime example of this would be if the moratorium on fracking is ever lifted in New York, as Chesapeake Energy might not find a warm welcome given its poor reputation.
Investor takeaway
Chesapeake Energy has a lot of unknown risks lurking, as its questionable past dealings are starting to catch up to the company. That's adding to the company's legacy image problems, which will continue to hold back the value of its stock. While these issues don't necessarily mean the stock is a sell, Chesapeake Energy must correct any mistakes it made in the past and improve its reputation before its stock will show its true worth.
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Replies to This Discussion
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Permalink Reply by jim weyland on
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i just opened up today's wsj.
in a cover story in section b, they plow pretty much the same ground regarding pennsylvanians' (and their state govt's) outrage w/chk's ppc deduction practices that the mf piece addressed. and, now, having read both articles, i suspect the wsj piece was the 'source rock' for the mf one.
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Permalink Reply by RONNY on -
Chesapeake's immoral and corrupt practices will eventually cost them far more than they've gained by cheating their royalty recipients. JMO
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Permalink Reply by Hopeful About Natural Gas on
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I tend to agree with you Ronny - it has really hurt the company's reputation and future dealings with ANYONE, large or small and that hurts all natural gas companies and acceptance of shale gas.
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Permalink Reply by Max on
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How can "Chesapeake" be immoral and corrupt?
There's no such thing, yet. The folks in the know predict that 2029 will be the year that AI will have about the same capacity as the human brain. Six months later, humans will be obsolete.
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Permalink Reply by John L on
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Does anyone know if Louisiana has any bills proposed for this legislative session like the one introduced in Pa?
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Permalink Reply by Skip Peel - Mineral Consultant on -
From a search of House/Senate bills filed using key words, "minerals" and "royalty", and bills to be heard by the Natural Resources Committee. I'd say, no.
Instrument
Author
Current Status
Considered
Pending House Natural Resources
MINERALS/MINERAL BOARD: Relative to the methods of payment for deposits accompanying bids for mineral leases on state lands
Pending House Appropriations
MINERALS/RIGHTS-ROYALTY: Dedicates a certain amount of mineral revenues from oil and gas production in and around Lake Bistineau to weevil production for control of giant salvinia in the lake
Pending House Civil Law and Procedure
MINERALS: Provides for rights of subsequent purchasers property relative to environmental damages
Pending House Natural Resources
MINERALS: Provides relative to plugging and abandoning of disposal wells and injection wells and restoration of such well sites
Pending Senate Natural Resources
MINERALS: Provides relative to oilfield sites and exploration or production sites. (8/1/14)
Pending Senate Natural Resources
MINERALS: Provides relative to certain indemnification agreements concerning environmental damage. (gov sig)
Pending Senate Natural Resources
MINERALS: Provides relative to alternative dispute resolution in suits involving oilfield sites and exploration and production sites. (8/1/14)
Pending Senate Natural Resources
MINERALS: Requires the court to stay proceedings under certain conditions in a lawsuit involving the remediation of oilfield sites and exploration and production sites. (8/1/14)
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john,
i think/feel that if anyone on the board would know the answer, it'd be mr. peel.
jim
p.s. i recently read the pelican state's current royalty practices. they are so antediluvian that they're collecting royalties on gas by volume, not by the gas's caloric value. imo, really, really 19th century stuff. maybe they're still collecting royalties on buggy whips made at angola, as well.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Perhaps we should collaborate on a list of reasons for updating the royalty practices. If we could produce a compelling list of benefits from doing so, I might be able to find a legislator to sponsor it.
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well, my guess is that a reading of several of the producing states rules/statutes/practices would show that la is leaving money on the table.
on the other hand, while the feds only get their 1/8th; offshore, at least, imo, they set the gold standard for getting fully carried. and, they (or their proxy, via the false claims act) can wield the hammer of thor if they decide to get after you.
towards your suggestion, i'll refresh my current, rather poor knowledge of how the lone star state does things.
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Permalink Reply by tc on
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From today's Pittsburgh newspaper. Even though all this bill is really doing is to clarify & strengthen a law that's been on the books since 1979, you can see from the vote (15-10 in favor), its not easy going against the E&P companies and in PA these companies are not as strong as they are in LA.
Energy committee votes to send gas royalty bill to full Pa. House
A bill designed to limit how much oil and natural gas producers can charge people whose land they lease for drilling passed the Environmental Resources and Energy Committee of the Pennsylvania House of Representatives today, 15-10.
Under Pennsylvania law, those who lease their property for oil and gas drilling are guaranteed a minimum 12.5 percent royalty. House Bill 1684 of 2013 alleges that producers have been charging those landowners for costs after the gas has been withdrawn from the ground, such as transportation or compressing, which bring the royalties to less than 12.5 percent.
"We should have stopped it before," Lycoming County Republican Garth Everett said.
He introduced the legislation with 23 co-sponsors Sept. 16. It was tabled March 11 to consider amendments, including whether to have producers make retroactive payments.
Should a landowner negotiate a royalty above 12.5 percent and sign a contract allowing a producer to deduct post-production costs, the bill would make it so the net payment could fall below the contractual royalty rate, but not below 12.5 percent.
The original law setting the 12.5 percent floor dates to 1979.
Beaver County Republican Rep. Jim Christiana said during the hearing, broadcast live online, he thought the bill unconstitutionally altered existing contracts. Rep. Timothy Krieger, a Republican from Westmoreland County, said he feared creating liability for the state in altering lease contracts and "hurting the people we're trying to help."
Both voted against sending the bill to the full House.
Rep. Steven Santarsierso, a Bucks County Democrat, voted in favor. He said Act 13 already disallowed deducting severance-tax fees from royalties.
"No one's talking about gouging the companies," he said.
Mr. Everett said by allowing even one company to make such deductions and push net royalties below 12.5 percent, it was an invitation and even a mandate to other companies to do the same.
"All we're doing is reinforcing the floor that's existed since 1979," he said.
http://powersource.post-gazette.com/powersource/policy-powersource/...
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People are always looking for the gub'ment to do something for them. Minimum royalty laws and similar regulations are clearly an infringement of free trade. Know what you have and how to value it. Don't depend upon the State you're in to do it for you.
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