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Friday, April 11, 2014

Could "Skeletons in the Closet" at Chesapeake Come Back to Hurt Potential Buyers?

From The Motley Fool:
For example, one skeleton in its closet involves possible collusion with Encana (NYSE: ECA  ) to bring down the price of leases in Michigan. Just recently the state of Michigan charged both Chesapeake Energy and Encana with collusion. If found guilty Chesapeake would be forced to pay a fine of up to a million dollars.
However, beyond that Chesapeake Energy could also face federal charges under the Sherman Antitrust Act. Criminal penalties can be up to $100 million or in some cases up to twice the amount lost by the victims of the crime. Needless to say given the billions in leases signed during the land rush, Chesapeake Energy and anyone that acquires the company could face very stiff penalties in the future.
Another skeleton also began to recently emerge from Chesapeake Energy's closet. In this case the state of Pennsylvania is looking into whether Chesapeake is aggressively charging landowners for "post-production costs" so that it doesn't have to pay as much in royalties to the landowners. In one case the Wall Street Journal found that Chesapeake Energy deducted 37% of the royalty payment for expenses relating to shipping the gas on pipelines. However, Anadarko Petroleum, which was a partner in the well only deducted 18% from its share of the royalty payment while another partner didn't deduct any costs. Again, if Chesapeake Energy is found to have been aggressive, it and a future acquirer could face stiff penalties.
Beyond that there is no telling what other secrets could still be hiding. Chesapeake was one of the most aggressive companies pursing the land-grab and subsequent drilling boom. It entered into a number of transactions that included off balance sheet arrangements. An article by Pro Publica, for example, noted that the company had as much as $36 billion worth of these arrangements, including $17 billion in long-term gathering agreements. The company, for example, has a number of volumetric production payments, or VPPs that could come back to bite the company, or again, the company that someday buys Chesapeake.
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