Chesapeake: From Bad to Worse to Potentially Criminal

Chesapeake: From Bad to Worse to Potentially Criminal by Brian Stoffel, June 25, 2012, The Motley Fool
Imagine this: In May of 2010, the Michigan Department of Natural Resources held land auctions that drew particular interest from natural gas companies hoping to frack the state’s Collingwood shale. The auction of 118,000 acres brought in a whopping $178 million for the state. A full 83% of bids had competitive offers, and Chesapeake and Encana combined to contribute 93% of the sales to the state. Just five months later, Michigan held a similar land auction. This time, more than twice as many acres were up for sale. The result? The state brought in a paltry $9.7 million. Whereas land went for about $1,500 per acre in May, it sold for just $35 per acre in October. It probably didn’t help that natural gas prices had fallen 20% in the interim, but that hardly explains the full extent of a 98% drop in land price. Even before the October auction, a contractor hired by Chesapeake to bid for land noted that both companies had cut their maximum per acre bids by 50%. This led the contractor to question the company if this was just a “coincidence.” Though the contractor never got an official answer to his question, emails reveal that it may not have been a coincidence at all. … Colluding with a competitor to hold prices down for land would be in direct violation of the Sherman Antitrust Act and carry stiff penalties. Companies could be fined up to $100 million — and individuals $1 million — for each offense. Additionally, victims of the rigging can receive up to triple what they missed out on. Though it is common practice to have joint ventures and area-of-mutual interest agreements between competing companies, it does not appear that either one of these mechanisms was in place during the October bidding. Instead, it seems that the companies divvied up counties to lower competition. Emails reveal that the two companies evenly divided bidding in certain counties. In the end, neither company abided by the agreement 100%, but neither company bought land in the same county as the other. … It could take months or years for this to play out in court, but the markets need not wait to factor in such risks. Chesapeake has already been plagued by bad behavior from McClendon, ranging from leveraged bets that exposed him to conflicts of interest to running a secret hedge fund with current SandRidge Energy (NYS: SD) CEO Tom Ward. I wouldn’t be surprised to see McClendon shown the door soon at Chesapeake. For Encana, one of Canada’s largest natural gas companies, it’s more difficult to see how things will play out. [Emphasis added]