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.

An investigation by the Wall Street Journal, which reviewed royalty checks from Chesapeake Energy, Anadarko Petroleum(NYSE: APC  ) and Statoil (NYSE: STO  ) , found that the deductions taken by Chesapeake far surpassed those taken by its peers. In one example, Chesapeake Energy deducted 37% of the royalty payment for expenses such as shipping the gas on pipelines, and for processing the gas. Anadarko, on the other hand, just deducted 18% from its share of the royalty payment from that well, while Statoil didn't deduct anything. Because of examples like this, Chesapeake Energy is alleged to be defrauding landowners.

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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1kw6x71km1v37Permalink Reply by 1kw6x71km1v37 on March 21, 2014 at 13:03

Their gonna get their butts burnt to a crisp in a Michigan court  of law. It's different up there, sho' 'nuff.

Permalink Reply by Skip Peel - Mineral Consultant on May 1, 2014 at 5:31

Probe Into Chesapeake and Encana Michigan Gas Leases Ends

By Joe Carroll May 01, 2014

U.S. prosecutors cleared Chesapeake Energy (CHK:US) Corp. and Encana Corp. (ECA), two of the nation’s largest natural gas producers, of trying to cheat the state of Michigan in shale drilling auctions.

The Justice Department’s antitrust division sent a letter dated April 29 to Chesapeake saying that the investigation has closed, according to a copy obtained by Bloomberg News. Encana confirmed in an e-mailed statement that it also had been informed the probe was over. The department didn’t respond to voice mail messages seeking comment.

The wind-down of the federal grand jury inquiry is another step forward for Chesapeake out from under the shadow cast by former chairman and Chief Executive Officer Aubrey McClendon, who was fired last year amid a shareholder revolt and conflict-of-interest scandal. The decision to drop the case may bolster Chesapeake next week in a Michigan courthouse, where the state is pressing ahead with bid-rigging charges against both companies.

“More often than not, federal prosecutors and state attorneys general come to the same conclusion” because they are examining much of the same evidence, said Bruce McDonald, a partner at Jones Day and a former antitrust enforcer in the Justice Department.

As of the close of business yesterday, the May 5 probable cause hearing into the state charges against Chesapeake and Encana was still scheduled to go forward, Sydney Allen, a spokeswoman for Michigan Attorney General Bill Schuette, said in a telephone interview.

During such a hearing, the accused can challenge whether the state attorney general had probable cause to bring the charges. Both companies pleaded not guilty in March.

Transforming Chesapeake

Recruited by activist investors Carl Icahn and O. Mason Hawkins to turn Chesapeake from an undervalued, cash-burning wildcatter to a streamlined, financially-disciplined energy supplier, CEO Doug Lawler has been selling gas fields and curtailing spending on lower-profit projects.

As he approaches his first anniversary at the company, Lawler’s effort to unravel the complex web of financial instruments and joint ventures left behind by McClendon remains a work in progress, said Scott Hanold, an analyst at RBC Capital Markets LLC in Minneapolis.

Lawler, who was a rising star at Anadarko Petroleum Corp. overseeing international and deep-water exploration before he jumped to Chesapeake, also inherited civil lawsuits in several states over gas royalty payments to landowners who allowed the company to drill wells on their property.

Eroded Trust

In February, Pennsylvania Governor Tom Corbett wrote a direct appeal to Lawler to repair relations with landowners who signed contracts with the company to reverse “a significant erosion of the trust and goodwill the natural gas industry has established” in the state.

McClendon, who co-founded Chesapeake in 1989 with 10 employees and $50,000 in cash, has since created a new gas explorer, closely-held American Energy Partners LP. The 54-year-old scion of Oklahoma political royalty once described by Forbes magazine as America’s most reckless billionaire still owns personal stakes in most of Chesapeake’s 45,000 wells.

His grip on an empire that included 16 million acres of drilling leases -- an area equivalent in size to half of New York state -- along with shopping malls, restaurants and office buildings began to slip in early 2012 after a series of news articles detailed his use of stakes in company-operated wells as collateral for hundreds of millions in private loans. In some cases, McClendon secured financing from some of the same firms that did business with the corporation he ran.

Cash Crunch

The conflict-of-interest concerns coincided with a collapse in gas prices that exacerbated McClendon’s wrong-way bet on energy prices that gutted the company’s coffers and threatened to derail drilling plans.

An internal board investigation exonerated McClendon of any wrongdoing, though the company had to sell tens of billions of dollars in assets to cover expenses and avoid violating debt covenants.

Gordon Pennoyer, a Chesapeake spokesman, declined to comment on the Justice Department’s decision.

“We are very pleased with the confirmation by the U.S. Department of Justice antitrust division that it has closed its grand jury investigation into Encana’s oil and gas leasing activities in the Western District of Michigan,” Jay Averill, an Encana spokesman, said in an e-mailed statement.

Chesapeake rose to $28.80 at 6:49 p.m. in after-market trading (CHK:US) in New York yesterday, after peaking at $29.19. The stock has climbed 5.9 percent this year after advancing 63 percent in 2013.

Chesapeake is the second-biggest U.S. gas producer, behind Exxon Mobil Corp., according to the Natural Gas Supply Association, a Washington-based trade group. Encana is No. 8 on the list.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Andrew Hobbs, Iain Wilson

1kw6x71km1v37Permalink Reply by 1kw6x71km1v37 on May 1, 2014 at 8:59

I wonder how prosecutors got past that email wherein one party basically told the other, "Lets' do it to 'em."

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