Replies to This Discussion

Permalink Reply by Randy on October 8, 2009 at 5:51

First of all, I didn't read the whole article, don't have time right this minute. But I wanted to chime in and add my 2 cents.

I think it's quite possible that companies conspired 'within themselves' to lower bonuses. (By this I mean, companies, individually, not in concert.)

Given the competitive nature of leasing, I don't see companies getting together and saying, "Well Aubrey, we aren't going to pay more than x/acre from now on, this is getting ridiculous." and then Aubrey saying "Yeah, your right, I agree, we won't do it either, let's get these damn landowners."

The more likely scenario is they all came up with lower numbers on their own, and those numbers were similar across the board. They all pretty much use the same calculations to determine offers. As the market price came down, other companies jumped on board, et al.

Again, I'm no crystal ball, just my gut.

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on October 8, 2009 at 6:43

Only made it through the first 2 pages. Had to go throw up. Sorry. Venue shopping, legal fishing expeditions, etc. are pretty much standard operating practices for these lawyers. Requesting thousands and thousands of pieces of information via discovery on a case worth $5000 is a bit much, wouldn't one think? Based on what normally happens in Texas courts, this "discovery" request, or better known as fishing for anything and everything I can get so maybe I stumble across something, will get thrown out pretty quick.

Anti Trust: yeah, right. Here's what one legal expert says:

"One prominent Dallas antitrust lawyer who asked not to be named - and whose firm is considering doing legal work for some of the gas company defendants - said the North Texas Lease Litigation suits shouldn't get far.

"You can't get a verdict just by simply showing that the companies all took the same course of action," the attorney said. "You have to show documented price-fixing. You have to show that the competitors agreed not to compete. Thus far, [the plaintiffs] haven't shown any of these facts at all." "

That will go pretty quickly.

Now for this old Long Term Investment red herring:

"Then there is the aspect of long-term investment. "These [gas] companies have always told the people they were leasing from that the Barnett Shale would be lasting many decades," he said. "So you shouldn't be trying to change the market just because the price has gone down for a short time. That is deceptive trade practice, and we will prove that." "

First, anyone with a lick of business sense would realize that drilling for oil and gas, while a long term revenue business, is a SHORT TERM cash driven business. When prices go down, available cash goes down and the companies have much less money to spend. Hasn't anyone looked at headlines where all of the companies have cut their budgets by large percentages since 2008? So, why wouldn't companies reduce their spending when short term prices go down? Ignorant to business policies and business principles, these folks keep reaching poor conclusions.

Sorry E&E, I just don't buy this whole "scheme" thing! The whole thought of these companies cooperating with each other is a joke. Never trust the guy leasing across the road from you!

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on October 8, 2009 at 10:02

Caliente: long time no see!

seismic "cartel"? well, that's one way to put it. JOA's and well participation agreements are generally involved once everyone has their land/position. Many times, these are forced upon the companies via unitization, which is a good thing! But colluding on pricing land leases? That's like saying the coaches in the SEC have formed a SEC coaches association so they must trade secrets about their own team's playbooks, how they plan to execute the game etc. In acquiring leases, these companies are cutthroat and ruthless competitors fighting each other for acreage.

Within the proper context, the land machine quote is actually not that bad. Basically what Aubrey was trying to say is that he was responsible for driving prices up because he was spending money like a drunken sailor! He and his company had the ability to stop spending that much money and make offers that were within their means! That's it.

But I will agree: COULD they do it? maybe. Did they? I don't think so and based on many years of being in the industry find it highly unlikely. Will we ever know? I think I already know! Will everyone be satisfied with the answer? No. I just hope that these cases get tossed early in summary judgement with a warning from the judge to the individuals and the attorneys involved that they will need to substantially improve their justification or else be dismissed each time. I guess the good news is that it will help create jobs for lawyers, legal aides, court reporters, couriers, copy machine repair men, etc. Bad news is its a waste of company funds that could be spent drilling wells.

But I did see one thing I would encourage XTO to fix: where they sent out a check and then had it returned for a minor correction (like the lady who's ex-husband's name was included but the property wasn't his), then I'd recommend they pay that lady. Or the couple whose check was off by a few dollars. Now, if they are a party to a lawsuit, then I'd make that payment contingent on them dropping all legal action. I haven't left the darkside completely!!

• ▶ Reply

Permalink Reply by Randy on October 8, 2009 at 14:53

Do 'talks' happen? Sure. Hell I've gotten plenty of leases signed on the golf course, I'm sure that the execs do it too. The difference? It's so cut-throat that by the time the execs are discussing it, it's already happened.

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on October 9, 2009 at 2:25

I agree Jay. This is not the time to be locking into a deal as a landowner. Unless you have an urgent need for cash (Lou from the casino called in your marker, big bills, etc.), I would wait out things for a while. The gas ain't going no where!

• ▶ Reply

Permalink Reply by Henry on October 9, 2009 at 3:50

Caliente,
You're back! YEA!!!

• ▶ Reply

Permalink Reply by lanadan Ds3 on October 8, 2009 at 22:18

Chesapeake Energy Corporation Q3 2008 Business Update Call Transcript (October 15, 2008) :

(in answering a question about furture acquisition of acreage)

Aubrey McClendon:
" . . . You mentioned acreage . . . WHAT WE'RE DOING RIGHT NOW IS WE'RE DRIVING DOWN THE UNIT COST OF ACREAGE. Without getting too specific, it's my goal that in places like the Haynesville . . . we'll be at acreage values that may be half to a quarter of where they are today. " (read it again, " . . . WE'RE driving down . . . " )

And, (in answering a comment about re-selling some new leaseholds:)

" . . . if you find a field and you know that what you found is going to be sellable at a BIG PROFIT, then you . . . buy a few more leases than you really need if you know that you can sell those at $5 or $10 x. . . . I really believe that every lease we buy today has an embedded resale value of somewhere between 3 and 10 to 1. "

Does anyone really think that CHK (or any other major player for that matter) is going to be content to be a passive participate in all this and "ride shotgun" in the passengers seat, so to speak, and thus be 100% at the mercy of external forces/pressures ?

Admittedly, market forces DO play a huge roll, no doubt, but it's kinda like, "who's on first" -- who is really in the drivers seat?

It doesn't take a rocket-surgeon to figure this one out.

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on October 9, 2009 at 2:16

(read it again, " . . . WE'RE driving down . . . " )

My interpretation of this statement is that "WE're" relates to CHK. They are company of thousands, hence the use of the plural.

And I think it means that as a company (singular), CHK planned to drive down costs by paying less. They were paying $20,000 per acre and they had full control over whether or not they kept offering that price. They decided to quit offering that price and start offering less. Similar things happen in the real estate market all the time. Houses in my neighborhood skyrocketed from $75/sq ft to $125/sq ft in about 4 months. Then people realized they couldn't afford these prices and quit offering so much money. Quickly prices came back down to about $95. Were all of the home buyers colluding to drive down the price? Hardly. Simple economics demanded that they quit offering so much money because they couldn't afford it.

There is nothing sinister about the term "Driving Down Prices".

• ▶ Reply

Permalink Reply by Mac Davis on October 9, 2009 at 1:30

Unfortunately, US law usually allows "unwritten, unspoken" conspiracies. Or "telepathic" conspiracies.

Suppose company A, B, C, and D never discuss prices among themselves.

However, company B, C, and D always watch what price company A offers and set their prices within a hair's breadth of company A's price. If company A lowers its prices, the other companies lower their prices to match and company A ends up making less money. If company B raises its prices, the other companies raise their prices to match and don't undercut company A's prices, so they all end up making more money.

That's been determined to be perfectly legal, as long as none of them ever discuss prices or pricing policies with each other.

It sometimes even gets nastier. Suppose company A isn't as cash rich as the other companies. Suppose company A lowers its prices to try to gain market share and make more money. The other companies drop their prices below company A's prices, and either drive it out of business, or punish company A until it decides to raise its prices to the price the other companies want to sell it at.

Again, as long as the companies never meet and discuss it, it's OK. I forget the term used, but even if they all come to the same anticompetitive pricing policies independently, it's OK.

The "telepathic co-conspirators" have to be really careful to not ever write or say anything that can be construed as communication with their competitors.

As with almost anything in law, that's the theory. I think it's usually the way it works in practice. Actually applying the law and the theory is a complicated and expensive process. Lots of pitfalls.

In the end, the big guys usually figure out how to shaft the peasants.

Sometimes the government will step in and either take legal action or exert pressure. That's why the big companies pay their bribes support well deserving elected representatives.

It's also possible for someone to file a lawsuit. Winning the lawsuit is another thing.

Sometimes, someone will file a class action lawsuit, which usually results in a settlement where there is a settlement where the attorneys get cash, and the "class members" get very small amounts of cash or beads and trinkets, like coupons or discounts.

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on October 9, 2009 at 2:23

Very good points in there. Anyone can file a lawsuit. I could file one because I didn't like the color of my neighbor's car. Thrown out pretty quickly. And yes, these class action lawsuits are money makers for all but the "victims" and the "accused". The lawyers make all the money, companies spend a lot of money protecting themselves from future predators, adding to the cost of goods/services sold, also hire more lawyers to fight with aforementioned predator lawyers, etc. Its a nice merry go round, all eventually ending up in higher prices paid by the U.S. consumer! Are some of these valid suits? Yep. But even these get distorted to where the real victim gets shafted.

The silent pricing example you gave is a good one. I don't know how else our system could work. If company A lowers their price and companies B, C and D don't lower, aren't they just kind of stupid? Or raises their pricing? You always want to pay $1 more than your competitor, be that $25,001/acre or $201/acre. If everyone is paying $25,000, then yes, pay that $25,001. But when people RUN OUT OF MONEY and stop offering $25,000, you'd better quit offering $25,000 unless you just have to have that acre. If not, you pay the prevailing market price which is whatever the price is.

• ▶ Reply

Permalink Reply by Chad E Ellis on October 9, 2009 at 13:36

It seems to me that some people are forgetting the basic rules of capitalism/business. That is, supply and demand. Last year, before the operators were confident in the size of the play, there was an all out free for all for acreage. Limited supply verses overwhelming demand led to high prices. Now, high supply of unleased land verses low demand for new acreage has led to lower prices. No conspiracy, just good business. Going forward, the same business rules will apply. If your land is in an area that is of interest to several operators then you can expect a higher offer. If it is in an outlying area then the competition will be less and you will not get as lucrative an offer. The price of gas also sets the profitability of a prospect. Operators are more willing to gamble with $7 gas as opposed to $4.

• ▶ Reply

Permalink Reply by Mac Davis on October 10, 2009 at 23:36

If you look at the "scientific" and "mathematical" basis of the "free market," the forces involved are extremely powerful and essentially unstoppable. Anyone trying to "cheat" the market will be undercut by a new competitor, bringing the market back into balance.

However, this is only true if certain assumptions are met. A classic list of the required conditions would include some things that aren't true in the case of the O&G business.

Many buyers/Many Sellers - There's a pretty limited number of buyers in the sense that there's a limited number of production companies.

Low-Entry/Exit Barriers - Definitely NOT true. There are lots of financial, technical, business, and regulatory barriers for new players.

Perfect information - Yet another way the free market fails in the O&G business. The buyer usually has access to non-public information about the geology and other characteristics of a particular parcel of land.

Homogeneous Products - Each location has its own characteristics in terms of mineral production.

I'm sure there are other items that could be brought up why the mineral rights business isn't a free market.

All of this doesn't mean that there is necessarily a conspiracy or unfair practices going on. It does mean that you shouldn't just sit back and naively assume the free market will take care of you. There are still free market forces at work, but they aren't as powerful as they are in the pure free market case. In particular, there is an opportunity for collusion, unfair competition, conspiracies, cartels, etc. that we have to watch out for.

• ▶ Reply

• ‹ Previous
• 1
• 2
• 3
• …
• 5
• Next ›
• Page