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 Glenn Pickett on -
My goodness John, when did the Louisiana Legislature and/or Governor EVER show any
concern for the land owners in dealing with oil and gas companies.
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Permalink Reply by John L on
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Skip,
We recently got an explanation of charges from CHK that shows they are deducting an average of 34% for gathering, treating, and compression. That is on top of a sales price that is 5% below market. I would be happy to send this to you in private.
Could the fact that CHK is deducting 35% of royalty owners money as compared to other operators taking 7-10% be a compelling reason to make them consider? Pa. seems to have discovered this and wants to keep other operators from following suit. If one operator charging 35% and makes the highest returns for it's investors, eventually the others may have to do it to stay competative. I also have been told by a financial firm that manages royalty interests for big companies that Louisiana is getting paid even lower than we are. I think an investigation into the price the state receives from different operators would be a good start.
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Permalink Reply by Skip Peel - Mineral Consultant on -
John, I don't think there is any legislator willing to file the kind of bill you are looking for this session. I would hope that a bill along the lines of what jim and I are discussing might serve to identify one or more legislators who would consider doing so in the future. If an issue is not personal then legislators must be lobbied to be informed of the facts and the impacts, the pros and the cons. There must be research and evidence to back up the purpose of a bill. It would have to be a compelling case to garner support beyond the author of the bill considering the political power wielded by the energy industry. If the legislature declines to kill the levee board suit. It may encourage some legislators to look at the possibility of success for this type legislation.
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Permalink Reply by 1kw6x71km1v37 on
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John L,
Being charged for gathering, treating and compression downstream of the wellhead entitles you to royalty based on the downstream selling price of pipeline-grade gas at the actual point of transfer to a non-affiiated or sweetheart deal buyer. That could be the Chicago School System, the Des Moines Police Department, Alcoa,the Dept. of Defense, etc. at full retail price. Chances are the operator charging you is paying you at the well head based on a price he set.
This deception is getting so far along with so many potential complainants in class that it is beginning to look like good case against operators under the U.S. Mail and Wire Fraud statute.
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Permalink Reply by Nixon Dow on
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I have made points on this topic before in the past. I was hoping that a bill would be introduced this session to address some of these issues but to little leeway time was available once these issues were address through the source that I know.
The main reason for the delay is because of the multiple approaches that are perceived to be the solution to this problem. While the simple solution is to revise/write the law to address the problems at hand, the basis of the problem is much more complicated than that. Even if the law is changed, it still does not address the problem of enforcing the law itself. As most of us here know going to court these days with the major oil companies is a 3+ year (while I mostly blame the companies for this approach I also blame the countless lawsuits by mineral and royalty owners that shouldn't be heard in the first place). Regardless of the change in law the solution for the average person is not addressed.
The second approach to fix the problem is to restructure the enforcement/regulation side of the law that are already there. The commissioner of conservation should be the one that handles all these issues but with the current setup his office just can't do it.
One of the proposed solutions is setting up a system/division in the DNR that just handles the regulation of unitized/forced pooled production and natural gas transportation/transactions. All complaints and issues involving these matters would first be heard, decided and enforced by this office. The thought is that having the process handled by specialized and well educated parties instead of the general court should speed up the process. After the administrative decision either party would still have the right to appeal the decision. Before any aspect of this process can move forward it must first be determined to meet all the constitutional/procedural/jurisdictional requirements.
And if deciding on how to process on the issues was not enough there are the same political hurdles you run into when want to tighten the reigns on oil and gas companies (even though in my opinion it is just an enforcement of the law that is already there). From my understanding the only way any of these changes will come is if a solution to the legacy lawsuit is accomplished.
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to everyone,
i have a 'mea culpa' or, in other words, i'm calling 'bs' on myself.
at least twice on this board, i've groused about the sportsman's state's seeming to collect royalties due the state on gas, as a function of volumes, not caloric value. and, i've also questioned whether the state is getting royalties on plant products and flash gas. i made those grousings on the basis of reviewing dnr web pages that "said", to me, that is how they do things.
after a post i made today, inre: this topic, in an abundance of caution, i went and found some other dnr web pages that show blank royalty computation forms and some minimal instructions on how to fill them out.
on the basis of what blank dnr forms i saw today, i'm now convinced that if the state isn't correctly, collecting all gas related royalties, i.e. tailgate gas by btu and price, plant liquids, by volume and price and flash gas by volume and price, well, then, they're collecting a whole bunch of data on those forms that they don't need if they're not requiring operators/producers to pay royalties as/on such.
i still don't understand things enough to comfort my mind as to why one set on pages states gas royalties are due on volumes and why this other set i viewed today strongly suggests otherwise.
i will be looking further into just exactly how the state does things, if for no other reason than for me to know just exactly how wrong my earlier posts might be.
with my deepest, provisional, apologies,
jim weyland
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Permalink Reply by w.r. frank on
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Jim, based on my conversation with certain of the E&P companies, I don't think anybody gets an adjustment for caloric content. I know they measure it at the wellhead, but once at the tailgate of the treatment plant, it is gas from many wells and a blended caloric content.
I had one CEO tell me "we take everything we produced for the month and everything we collected]. Divide collected by produced=price." Sorta simple, but if collected is at Perryville, Cathage or Erath, or all three, what about gas loss and fuel charges. Also, none of this addresses the screwing you get from CHK on sham sales to CEMI, which for "no cost" lessors deducts indirectly what CHK is prohibited from doing directly.
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Permalink Reply by Andrew on
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As for pre-filed bills in for LA's 2014 legislative session, the one I think royalty owners might be most interested in is likely HB 713 proposed by Rep. Greene, which deals with severance tax exemptions for horizontal and ultra-deep wells.
Currently, if an operator wants to get the severance tax exemption, it has to apply for a determination after the well is already completed, and pay the severance taxes in full until DNR and Revenue make the determination. If the exemption is granted, the operator then has to request a refund of what it already paid. HB 713 proposes a system whereby a preliminary determination can be made in advance, so that the operator doesn't have to pay the taxes just to ask for them back months later.
This should be an important issue for royalty owners because they pay severance taxes along with the companies. When the operator is waiting for a determination, it deducts the royalty owner's share of taxes from his royalty checks and sends them to the state. The royalty owner is then very much at the mercy of the operator's accounting department and the Department of Revenue to get their refund once an exemption is granted. Mysteriously, severance tax refunds received by operators have been rumored to occasionally get lost on the way back to the royalty owners. Legend has it that some operators have even forgotten to stop deducting severance taxes from their royalty owners once the exemptions are granted.
At least in theory, avoiding the payment-and-refund circus for exempt wells should simplify the process and save royalty owners and E&P accounting departments alike from a few headaches. Fingers crossed.
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Permalink Reply by jffree1 on
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Chesapeake, Encana plead not guilty to lease-sale antitrust violations
Posted: Friday, March 21, 2014 12:00 am | Updated: 8:15 am, Fri Mar 21, 2014.
Chesapeake Energy Corp. and Encana Corp. are vowing to fight charges that they colluded to keep down prices in a 2010 lease sale in Michigan.
Representatives of the oil and natural gas producers made their initial court appearances Wednesday on criminal antitrust charges filed March 4 by Michigan Attorney General Bill Schuette.
"This action has no merit and we will vigorously contest it," said Gordon Pennoyer, a spokesman for Oklahoma City-based Chesapeake.
The companies entered pleas of not guilty Wednesday in a state court in Cheboygan, Mich.
http://www.tulsaworld.com/business/chesapeake-encana-plead-not-guil...
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The way I read the case as Reuters reported it, things don't look so good for the defendants.
Why is it that emails always get the bad guys in the end?
Stupid is as stupid does.
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imo, as a non-attorney, venue can be a pretty big factor in how suits turn out. imo, had enterprise filed on energy transfer and established venue in houston rather than etp filing on them in dallas, i venture that epd wouldn't be in the situation it's in now. note: i think most all on this board would be interested in how epd's appeal goes.
when i first got involved in some mi gas production and associated state regulatory matters, i was interested/surprised to learn that mi has been a significant oil and gas producing state for around 100 years. in other words, this ain't their first rodeo. i have some good (and, unfortunately, well earned) sense of how things go down, up there; and, imo, venue in lansing isn't a good thing for those two defendants.
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