chk-lawsuitNews broke on Wednesday, December 9, 2015, of yet another lawsuit has been filed against Chesapeake Energy (CHK).

Pennsylvania Attorney General Kathleen G. Kane’s office (OAG) today announced it has filed a lawsuit against Chesapeake Energy Corp., the country’s second-largest producer of natural gas, and its affiliates amid allegations the companies underpaid landowners’ royalties associated with fracking.

This was followed by yet another lawsuit filed in U.S. Middle District Court by Edward M. and Kathleen Ostroski of the Athens area in Bradford County, Pennsylvania, seeks to become a class action to include more than 2,000 others whose aggregate damages they say exceed $5 million.

These two lawsuits are by no means the only lawsuits which have been filed against CHK.   CHK has a long history of underpaying on royalties.

A jury in West Virginia found CHK liable for $400 million in damages for underpaying royalties to landowners in 2007.

In August 2015, a U.S. District Judge Ed Kinkeade ruled CHK improperly deducted post production costs from royalty checks issued to Fort Worth investor Ed Bass and 20 other landowners stemming from natural gas pumped from about 4,000 acres in the Barnett Shale.

Court documents indicated the landowners could be owed at least $8.6 million, and the jury could add millions more.

The Bass lawsuit stated CHK improperly deducted post production costs, expressly forbidden by the leases, and then used the sale of gas to affiliates to set a below-market price on which the royalties were paid, also a breach of the lease terms.

For more on CHK lawsuits see: Royalty RIP-OFF

The OAG and Ostroski lawsuits had its beginnings back in 2013. Local TV News station WNEP reported the Bradford County Commissioners held a SPECIAL MEETING on Tuesday, May 28, 2013 to “Try To clear up Gas Lease Concerns”.

Bradford County commissioners say they’re trying to stop this “unreasonable and unfair business.”

Commissioner Doug McLinko, (R) Bradford County other commissioners say according to the Guaranteed Minimum Royalty Act, leaseholders should get at least a 12.5 percent profit on their lease to gas drilling companies. But a state Supreme Court decision says the law is vague and that allows gas companies to find loopholes.   SEE: Natural Gas Leasers dismayed “UBELIEVABLE, DID NOT SEE THIS COMING”

Responding to complaints of tiny royalty checks in 2013 the Pennsylvania Senate swiftly held a hearing.

Not only are the royalty checks tiny, in some instances leasers are being charged retroactively for post production costs which has resulted in receiving a BILL in the thousands of dollars instead of a check.

Testifying at a Senate Environmental Resources and Energy committee hearing on June 27, 2013, Bradford County Commissioners Chairman Doug McLinko said, “Our constituents have shown us evidence of extraordinary post-production cost in Bradford County, with deductions of 40 and 50% all the way up to as much as 90%.”  “…we have seen checks come with zero payment.  We have seen retroactive charges being billed to land owners for tens of thousands of dollars where the property owners actually have a bill sent to them and they go without any royalty payments until it is paid in full.” Similar concerns were raised by the Pennsylvania Farm Bureau at the same hearing.

After listening to the testimony, Senator Gene Yaw says he’s not sure why more people aren’t filing lawsuits, and is doubtful there can be any quick legislative fixes.

“We could take action,” he says, “But that’s not going to solve the problems some of the people face now. I think they need to take action themselves. But the encouraging thing is I think there are avenues for them to pursue it. They’re not alone. They just need to be willing to do it for themselves.”

Yaw serves as Chairman of the Environmental Resources and Energy Committee and Vice Chairman of the Urban Affairs and Housing Committee.  He is also a member of the Judiciary, Law and Justice, Agriculture and Rural Affairs, Labor and Industry and Rules and Executive Nominations Committees and the Majority Policy Committee.  Yaw also serves on a number of Boards and Commissions including as Chairman of the Center for Rural Pennsylvania, a member of the Joint Legislative Air and Water Pollution Control and Conservation Committee and a member of the Environmental Quality Board.

Yaw holds gas leases with Anadarko and has been active in the controversy regarding fracking of Loyalsock State Forest. (See: FRACKED: LOYALSOCK STATE FOREST).

In addition to Chesapeake Energy Corp., the other affiliates named as defendants in the lawsuit are Chesapeake Appalachia, LLC; Chesapeake Operating, Inc. and Chesapeake Energy Marketing, Inc. Williams Partners, LP, which owns and operates infrastructure used in the fracking industry, is also named as a defendant.

Why Williams Partners, LP?   Chesapeake Midstream use to be subsidiary of CHK. It was spun-off as an independent company. In 2012, Chesapeake Midstream changed its name to Access Midstream Partners, LP. Earlier this year, Access Midstream and Williams Partners merged.

In a series of deals, it sold off the network of local pipelines it had built in Pennsylvania, Ohio, Louisiana, Texas and the Midwest to a newly formed company that had evolved out of Chesapeake itself, raising $4.76 billion in cash.

In exchange, Chesapeake promised the new company, Access Midstream, that it would send much of the gas it discovered for at least the next decade through those pipes. Chesapeake pledged to pay Access enough in fees to repay the $5 billion plus a 15 percent return on its pipelines.

That much profit was possible only if Access charged Chesapeake significantly more for its services. And that’s exactly what appears to have happened: While the precise details of Access’ pricing remains private, immediately after the transactions Access reported to the SEC that it collected more money to move each unit of gas, while Chesapeake reported that it also paid more to have that gas moved. Access said that gathering fees are its predominant source of income, and that Chesapeake accounts for 84 percent of the company’s business.

Adding fuel to the fire, SEC documents showed, Chesapeake retained a stake in the gathering process. While Chesapeake collected fees from landowners to cover the costs of what it paid Access to move the gas, Access in turn paid Chesapeake for equipment it used to complete that process, circulating at least a portion of the money back to Chesapeake.

The fear in Bradford County is these deductions may get even steeper as energy rivals catch on to CHK’s practices.   With natural gas trading at all time lows, many of these companies are strapped for cash.

In December 2014, CHK completed a sale of assets it held in West Virginia and Pennsylvania to Southwestern Energy Co. for $4.975 billion. The price, originally $5.375 billion, was adjusted for certain items including Southwestern’s waiver of future claims related to title defects and environmental liabilities.

Following the 2013 reports about CHK, Southwestern Energy Co declined to comment when asked if they planned to increase deductions.

A federal antitrust suit was filed in February 2015 against CHK and Access Midstream alleging an unlawful and anti-competitive conspiracy among several Chesapeake companies and Midstream in violation of the Sherman Act, but Anadarko, Statoil and Mitsui also are named defendants.  Michigan filed antitrust lawsuit against CHK in 2014.

The charges against CHK followed a 2011 investigation by Reuters into the company’s land-leasing tactics during a speculative leasing boom in the northern part of the state during 2010, including its use of a shell company to cancel land deals with more than 800 private landowners.

The antitrust charge brought by Michigan’s Attorney General Bill Schuette alleged that Oklahoma City-based Chesapeake colluded with a competitor, Encana Corp, to suppress land prices during an oil-and-gas leasing boom in 2010. Encana agreed to pay $5 million in a civil settlement with the state in May 2014.

CHK created a $25 million compensation fund as part of a settlement.

fatladysingsLAWSUITS TOO LATE?
The fat lady may be warming up to sing the CHK finale.

CHK is in financial trouble. Its stock has dropped from a high of approx. $35 in 2011, and hit a new 52 week low of $4.03 during the first week of December this year.

Market Analysts generally blame this drop on the natural gas glut keeping prices low and by extension the profits with it.

However, CHK was in trouble even when natural gas was much higher.

Action on CHK stock is in SHORTING. Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.

Over the past few weeks the pattern on CHK stock has been to see the stock make wild swings in the morning, followed by slight up/downs until near the market closing time where it usually closes down.

According to Brian Dempster, of Seeking Alpha:

Shorting Chesapeake Is The Smart Move: It’s not the time to panic. The time to panic was January 1, 2015, the point at which a 70% YTD decline was imminent and you were sitting at home, twiddling your thumbs, wondering what you should do with your investment in the company a Chesapeake Energy.

CHK is being circled by sharks and nibbled at by bottom feeders smelling a Chapter 11 bankruptcy possibility.

Chapter 11 affords the debtor in possession a number of mechanisms to restructure its business and is also protected from litigation against the business through the imposition of an automatic stay.

This means the lawsuits are on hold at least until a company successfully emerges from Chapter 11. If a company doesn’t successfully emerge, creditors, including those filing lawsuits are SOL.


© 2015 by Dory Hippauf


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