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Tuesday, March 18, 2014

Forbes: Chesapeake's Plan to Bilk People Out of Royalties Also Means the Company is Stealing From Shareholders

From Forbes:
Chesapeake Energy has long been accused by its oil and gas partners of monkeying around with royalty payments.  It looks as if this long-simmering issue is rising to a boil.
If you haven’t already, be sure to check out Abrahm Lustgarten’s investigationof Chesapeake’s royalty-related chicanery for Pro Publica last week. The WSJ also took a look at the issue. Both stories focus exclusively on Chesapeake’s operations in Pennsylvania, where last year the company paid $7.5 million tosettle a class-action alleging royalty skimming. Lustgarten’s piece in particular sheds new light on how in 2012 cash-crunched Chesapeake ingeniously structured the $5 billion sale of its pipeline business to screw royalty owners. In one instance discovered by Lustgarten, Chesapeake charged a farmer $2.94 per mcf to move his share of gas — more than 30 times the actual cost.
But there’s far more to this than just shortchanged farmers in Pennsylvania and Texas. Indeed, one source well acquainted with oil and gas accounting (but unwilling to be quoted by name on something so sensitive) tells me the royalty scams throw into question the most important elements of Chesapeake’s financial accounting: “Screwing royalty owners means Chesapeake is stealing cash. That cash goes to the overstating of revenues and flows through to inflation of reserves. You inflate the reserves and steal from the mineral owners and the shareholders at the same time.”
Read much more here.  This is a very interesting article that gives an indication of just how damaging the unraveling of this scheme could be to Chesapeake.

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