Blog Archives

Chesapeake retreat ends American energy land grab

By Edward McAllister
NEW YORK | Tue Jul 10, 2012 1:21am EDT

(Reuters) – About six years ago, an army of agents hired by energy companies started desperately courting landowners across the United States whose farms and ranches happened to sit atop some of the richest oil and gas deposits in the world. And so began one of the biggest land grabs in recent memory.

Those days are over.

U.S. energy titan Chesapeake Energy is quickly cutting back on an aggressive land-leasing program that in recent years has made it one of America’s largest leaseholders, putting an end to half a decade of frenzied energy wildcatting.

Beset by growing governance and financial problems, and a sharp slump in natural gas prices, the No. 2 U.S. gas driller is reducing by half the ranks of its agents, known in the industry as landmen.

With little evidence that its competitors are taking on the role of leading industry lease-buyer, Chesapeake’s new found frugality is expected to usher in a more sedate period of U.S. land buying, and a sizeable cultural shift for an industry that has been acquiring new acreage at almost any cost.

A surge in drilling into rich shale-gas seams from Pennsylvania to Texas has pushed natural gas prices to 10-year lows, forcing producers, including Chesapeake, to cut output and put the brakes on new wells.

Drilling simply to hold on to leases represents about half of U.S. natural gas output, analysts say, which has helped keep production at record highs despite plummeting prices. Leases held by energy companies tend to last about three years, but will typically remain valid indefinitely if an energy company drills wells and produces fuel on the leased acreage.

It should be fairly easy for drillers to re-hire agents and secure more land when prices recover, according to landmen sources, and production is not expected to be affected immediately. But a lull in leasing could briefly affect production longer term, given that it takes up to six months to secure large tracts of land.

“Chesapeake has always been a bellwether for where the next big play is. It would come, lease large blocks and send a signal to the market,” said Adam Bedard, senior director at Bentek Energy in Colorado. “Without them, the pace of land acquisition might slow.”

In a move to mollify disgruntled shareholders, Chesapeake plans to reduce its use of contracted landmen from 1,300 now to 650 by the end of the year, said Chief Executive Aubrey McClendon, who was stripped of his chairmanship last month after Reuters reported a series of governance missteps.

The reduction, which is expected to help reduce towering debt levels, marks an 80 percent decrease from its peak of 3,400 landmen, McClendon said.

CULL BEGINS

The cull has begun. Over the past month, 225 contracted landmen were cut from Chesapeake jobs, said one Ohio-based landman, who, like most in the close-knit industry, would only speak off the record.

“Chesapeake’s activity level in the Appalachian region is minimal now. It has devastated the (landman) industry,” the source said. “The Chesapeake debacle is one thing, but the rest of the industry shortfall is because a lot of the projects are intertwined with Chesapeake,” he added.

The Oklahoma-based company has become one of the largest leaseholders in the United States, amassing more than 15 million acres of land for drilling or an area about the size of West Virginia.

One mid-sized U.S. brokerage that does lease work for Chesapeake has experienced a 15 percent to 20 percent fall in business over the last 90 days due to a slowdown not just in Chesapeake activity but across the board, a manager for operations at its eastern division told Reuters. About 15 percent of that company’s business comes from Chesapeake, he said.

“We are getting to the point where companies are becoming more cautious – that is what we are seeing,” he said, asking that he not be named.

Other major producers, including Encana Corp, Royal Dutch Shell and Chevron, said they are not planning to materially change their strategy of land acquisition or staffing numbers, suggesting a gap might be left as Chesapeake, long the pioneer in drill leasing, retreats.

“We have not reduced our land staff nor have we made any changes in the way we conduct land operations,” said a spokesman for Encana, one of Chesapeake’s main land-leasing rivals. Encana employs an in-house staff of about 170 workers in its land department. Shell also said it was “not planning any major staffing level changes in our land function for leasing activity.”

THE GLUT

Landmen in the field reckon companies are now well-placed to increase leasing again when they need to, but it could take up to six months between a decision to lease the land and the drilling, potentially creating a lull in activity, sources said.

While a fall in leasing will affect the landmen, it is unlikely to affect gas output for quite some time given the amount of land already leased and the hundreds of wells drilled that have yet to begin producing.

“The huge land grabs in the gas plays are coming to an end,” said one energy hedge fund manager. “Even without more leasing, however, these companies have backlogged a huge inventory of drilling locations.”

The backlog of 3,500 oil and gas wells in the United States is about 1,000 more than usual, according to Randall Collum, a natural gas analyst at Genscape in Houston.

It could take more than a year to exhaust the natural gas portion of that supply as pipelines come online to connect new producing regions, such as in Ohio, to areas of higher demand, he said. Moreover, the reserves accumulated over the last decade are expected to take longer to dwindle away.

That scenario is likely to put a cap on prices in the near term, with or without Chesapeake.

AFTER THE BOOM

When U.S. drillers employed new technologies during the last decade to economically tap oil and gas from shale rock, results showed the potential for a massive revival in waning domestic production.

In 2006 and 2007, companies began rushing to acquire new leases. Geologists pored over maps, in search of the sweetest acreage. Landmen were hired like never before, court houses in energy-rich regions filled with workers quickly securing leases. Rural and depressed areas in Pennsylvania, North Dakota, and Ohio became, by geological coincidence, new target areas for energy companies.

Teams of between 50 and 100 landmen were charged with securing hundreds of thousands of acres in a matter of weeks. Some would knock on landowners’ doors, while others specializing in title work would make the lease legally secure and determine, among other things, who receives royalties on the production.

Chesapeake led the charge, spending billions of dollars a year on speculative leasing, helping to push land prices higher in energy-rich regions. In 2011, it became the lead acreage holder in the Utica formation shale in Ohio with 1.5 million acres, and was the first to publish production figures from new wells there.

After Chesapeake arrived, other majors such as Anadarko and Exxon Mobil quickly followed. Much of the best drilling areas have already been swept up in what is now thought – though not fully proven – to be one of the most promising oil and gas plays in the country.

Now, five years after the boom began, natural gas output is at an all time high. The success has, in many ways, backfired. Prices have dropped so far that companies can barely afford to drill in pure natural gas plays. Chesapeake, the self-proclaimed ‘champion’ of U.S. natural gas, is facing a $10 billion cash-flow shortfall this year, forcing it to rein in spending.

“It will slow down the overall aggressiveness if Chesapeake isn’t out there leading the charge,” said Genscape’s Collum. “But it is all about prices. If prices rise then companies will come back in.”

(Additional reporting by Joshua Schneyer in New York and Anna Driver in Houston; Editing by Leslie Gevirtz)

Chesapeake turns to Jefferies’ Eads in $28 billion deals

Workers join sections of pipe on a Trinidad Drilling rig leased by Chesapeake Energy north of Douglas, Wyo. Photo: Alan Rogers / Copyright 2012 CASPER STAR-TRIBUNE

Posted on May 21, 2012 at 7:01 am
by Bloomberg

When Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon went on an oil and natural gas buying spree, Ralph Eads was the banker who found the money to fund it.

The vice chairman at Jefferies Group Inc. and former fraternity brother of McClendon helped his firm win work advising Oklahoma City-based Chesapeake on more than $28 billion of transactions since 2007. He assisted Chesapeake in asset sales to raise cash the company then plowed back into locking up new prospects across the U.S., what Chesapeake often calls a “land grab.”

McClendon is depending now on his Jefferies confidant at an even more crucial moment. Falling gas prices, combined with the buying binge, is forcing Chesapeake to unload assets to keep the company afloat. Along with Goldman Sachs Group Inc., Jefferies bankers are seeking buyers for oil-rich prospects and lending Chesapeake $4 billion in the meantime.

“Without Wall Street, Chesapeake wouldn’t be able to do what it has done,” said Phil Weiss, an analyst at Argus Research in New York who rates the shares “sell.”

Read more: Fuel Fix » Chesapeake turns to Jefferies’ Eads in $28 billion deals.

Special Report: Chesapeake CEO took $1.1 billion in shrouded personal loans

image

By Anna Driver and Brian Grow
Wed Apr 18, 2012 8:04am EDT

(Reuters) – Aubrey K. McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, Chesapeake Energy Corp., the second-largest natural gas producer in the United States.

McClendon, 52, helped cause Chesapeake shares to plummet amid the financial crisis when he sold hundreds of millions of dollars in stock to raise cash for himself. Later, to settle a lawsuit by shareholders, he agreed to buy back a $12 million map collection that he’d sold to Chesapeake.

His approach to running his company also is renowned: Among other employee perks, on-site Botox treatments are available at its headquarters in Oklahoma City, Oklahoma.

Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake’s CEO and shareholders at odds.

McClendon has borrowed as much as $1.1 billion in the last three years by pledging his stake in the company’s oil and natural gas wells as collateral, documents reviewed by Reuters show.

The loans were made through three companies controlled by McClendon that list Chesapeake’s headquarters as their address. The money is being used to help finance what could be a lucrative perk of his job – the opportunity to buy into the very same well stakes that he is using as collateral for the borrowings.

The size and nature of the loans raise concerns about whether McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake investors, according to more than a dozen academics, analysts and attorneys who reviewed the loan agreements for Reuters.

“If Mr. McClendon has $1 billion in debt through his own companies — companies operating in the same industry as Chesapeake — he has or could have a high degree of risk for conflicts of interest. As in, whose interest will he look out for, his own or Chesapeake’s?” said Joshua Fershee, an associate professor of energy and corporate law at the University of North Dakota.

The revelation of McClendon’s bout of borrowing comes as he is scrambling to help Chesapeake avert a multi-billion-dollar cash shortfall amid a plunge in natural gas prices.

It also exposes a potentially serious gap in how U.S. regulators scrutinize corporate executives, a decade after those rules were tightened in the wake of major accounting scandals.

The loans portend a number of possible problems, the analysts said. McClendon’s biggest lender is simultaneously a major investor in two units of Chesapeake. That connection raises questions about whether Chesapeake’s own financing terms could be influenced by its CEO’s personal borrowing.

Another concern: A clause in the deals requires McClendon “to take all commercially reasonable action” to ensure that other owners and operators of the wells – including Chesapeake – “comply with…covenants and agreements” of the loans. Such clauses are common in energy-finance deals. But it is rare for the CEO of a major energy company to be personally subject to one involving the corporation that he runs. That means McClendon could have an incentive to influence Chesapeake to act in the interest of his lenders, rather than of his shareholders.

“Basically what you have here is a private transaction that could potentially impact a public company, depending on the manner in which the clause is interpreted and applied,” says Thomas O. Gorman, a partner at law firm Dorsey & Whitney in Washington, D.C., and a former special trial counsel at the Securities and Exchange Commission (SEC). “That may create a conflict of interest.”

As a result, the loans should have been fully disclosed to Chesapeake shareholders, the academics, attorneys and analysts said.

NO CONFLICT

Both McClendon and Chesapeake say the loans are purely private transactions that the company has no responsibility to disclose or even to vet. And they disputed the view that the deals could create a conflict of interest.

“I do not believe this is material to Chesapeake,” McClendon said in an email response to questions. “There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way.”

Chesapeake general counsel Henry Hood said in a statement that the clause in the loan agreements questioned by analysts – called “Compliance by Operator” – is “typical boilerplate language” used in oil and gas mortgages. It requires borrowers to exercise their rights with operators of wells, such as Chesapeake, on behalf of the lender.

Neither the existence of McClendon’s loans nor their terms create the possibility of a conflict of interest, Hood said, in part because the company has a first lien on McClendon’s share of company wells. That would mean Chesapeake gets paid before all other creditors in the event that McClendon defaults on his debt.

“Any loans are Mr. McClendon’s personal business and not appropriate for review or monitoring by the company or public comment,” Hood said.

The company has many checks to protect against conflicts, Hood said. Among them: Some of the world’s largest energy companies own a share of Chesapeake wells and “monitor the actions of the Company” via well audits, government filings and participation in development plans, Hood said.

He added that Chesapeake now employs more than 13,000 people and drills more than 2,000 wells per year, “all of which minimizes the ability of any one person” – McClendon included – “to influence actions on any single well.”

Less than four years ago, a personal transaction by McClendon did negatively influence the company.

To buy more Chesapeake stock, McClendon borrowed money from his brokers – what’s called “buying on margin.” In October 2008, just after the financial crisis erupted with the bankruptcy of Lehman Brothers, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls from those brokers. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly.

Chesapeake’s board of directors is aware that McClendon has borrowed against his share of company wells, Hood said, but “the board did not review or approve the transactions.” Nor did the company vet the loan terms for possible conflicts. “If there were any conflicts of interest,” Hood said, “they would have surfaced by now.”

Chesapeake board members contacted declined to comment. Marc Rome, Chesapeake’s vice president for corporate governance, did not respond to requests for comment.

WELL INVESTMENT PLAN

The loans reveal how McClendon is using an unusual corporate incentive as collateral. The perk, known as the Founder Well Participation Plan, grants Chesapeake’s billionaire co-founder a 2.5 percent stake in the profits – and makes him pay 2.5 percent of the costs – of every well drilled during each year he decides to participate.

Today, Chesapeake is the only large publicly traded energy company to grant its CEO the opportunity to take a direct stake in wells it drills. Chesapeake says the well plan is a uniquely powerful incentive because it aligns McClendon’s personal interests with those of the company’s.

The well plan does not allow McClendon to select the wells in which to invest; Chesapeake says the program is an all-or-nothing proposition so that McClendon can’t cherry-pick only the most profitable wells.

“He has to eat his own cooking here,” said company spokesman Michael Kehs.

But because McClendon is using the loans to finance his participation in the well plan, he defrays his risks. Two of McClendon’s lenders, both private equity firms, in turn spread the loan risks to other investors by raising money from state pension funds and other investors to fund them. Those insights emerge from a February 2011 document detailing a meeting between McClendon’s largest personal lender and a prospective investor.

“If he hasn’t had to put up any of his own money, how is that alignment” of McClendon and Chesapeake’s interests, asked Mark Hanson, an analyst with Morningstar in Chicago.

Chesapeake said McClendon’s loans are “well disclosed” to company shareholders. General Counsel Hood cited two references in the company’s 2011 proxy. In them, the firm refers to McClendon’s personal “financing transactions,” including one in a section entitled “Engineering Support” that discusses McClendon’s use of Chesapeake engineers to assess well reserves.

Nowhere in Chesapeake proxy statements or SEC filings does the company disclose the number, amounts, or terms of McClendon’s loans. Veteran analysts of the company said they were never aware of the loans until contacted for this article.

“We believe the disclosures made by the company have been appropriate under the circumstances, particularly since the disclosure of the loans is not required in any event,” Hood said in a statement.

THROUGH THE CRACKS

Legal experts say the size and terms of McClendon’s borrowing are unusual – and highlight a gap in regulatory scrutiny of American corporate executives.

In the past, major Wall Street banks formed separate companies – or special purpose vehicles, just as McClendon has – to allow select employees to borrow from the employer and make investments. The WorldCom accounting scandal was, in part, fueled by more than $1 billion in loans taken out by former chief executive Bernard Ebbers that were secured by his shares of company stock. And energy giant Enron used off-balance-sheet entities to hide debt from investors. New accounting and corporate governance laws and regulations banned such transactions or required their disclosure.

In September 2006, the SEC revised its related-party transaction rules to require companies to disclose when executives pledged corporate stock as collateral for loans. “These circumstances have the potential to influence management’s performance and decisions,” the SEC wrote.

McClendon’s loans – backed not by stock but by stakes in company wells – aren’t covered by the SEC rule. “Because they have decided to compensate him with a business interest, it kind of falls through the cracks,” says Francine McKenna, an accounting expert and author of the accounting-related blog re: The Auditors.

As a result, no SEC regulation precludes McClendon from using his well plan stake as loan collateral. The SEC declined to comment on the McClendon loans.

TEETH WHITENING

Tall and thin, McClendon is a tireless booster for the oil and gas industry – and of his company. At an energy conference in November in Houston, he sported a tie printed with tiny drilling rigs. His daring deals and stirring speeches to investors have attracted some adoring followers.

During one speech last September, McClendon said opponents of a controversial drilling technique called hydraulic fracturing were interested in “turning the clock back to the Dark Ages.”

“What a great vision of the future!” he said sarcastically. “We’re cold, it’s dark, and we’re hungry!”

McClendon’s investor presentations are standing-room-only. But he often bristles when his business model is questioned by analysts, frequently arguing that Wall Street does not understand the company.

That tension has intensified as Chesapeake scrambles to shed more than $10 billion in debt through the rapid-fire sale of assets amid the lowest natural gas prices in a decade. This year, it has done a series of deals to try to close a cash shortage estimated by analysts to be as high as $6 billion.

McClendon continues to treat his employees well. In recent years, he built a 50-acre red-brick campus in Oklahoma City as Chesapeake headquarters. It boasts a 72,000 square-foot state-of-the art gym, visiting doctors who provide lunchtime Botox treatments for employees, and dentists to whiten teeth.

A part owner of the NBA’s Oklahoma City Thunder and supporter of charitable causes in the state capital, McClendon holds considerable sway in Oklahoma. Former U.S. Senator Don Nickles and former Oklahoma Governor Frank Keating, both Republicans, are members of the Chesapeake board.

McClendon’s close relationship with the board hasn’t left him immune to tensions with stockholders.

After Chesapeake’s board agreed to buy McClendon’s map collection in 2008 for $12.1 million, shareholders sued. The lawsuit was settled in November 2011, when McClendon agreed to refund the $12.1 million, plus interest, and hold stock worth 500 percent of his annual salary and bonus. Chesapeake also agreed to hire Rome, the vice president of corporate governance, and an executive compensation consultant to evaluate corporate pay packages.

The well participation plan, which was approved by shareholders in 2005 and cannot be discontinued until 2015, has remained unaffected.

Disgruntled investors continue to launch challenges. On March 13, New York Comptroller John C. Liu and the $113 billion New York Pension Funds called on Chesapeake to let large long-term shareholders put up their own nominees for the board of directors.

UNTANGLED

Key aspects of McClendon’s loans remain hidden from shareholders. Because promissory notes underpinning the loan agreements are private, the interest rate, the exact amount borrowed and other terms of the transactions are not publicly known.

But the loan agreements demonstrate the extent to which McClendon has leveraged his interests: He has pledged as collateral almost every asset associated with his share of Chesapeake wells. Oil, gas and land interests, platforms, wells and pipelines, hedging contracts, geological and business data, and intellectual property are among scores of well-related assets that can be seized should McClendon default.

Chesapeake said it would be “unaffected by any dispute” between McClendon and a lender in the event of a default because of its first lien on oil and gas production, equipment and land leases.

The company also said that McClendon’s share of “related assets” pledged as collateral – such as business data and hedging contracts associated with wells – is completely separate from similar assets owned by Chesapeake. That means Chesapeake would not become entangled should McClendon default, the company said.

Chesapeake “does not have an interest in the (McClendon’s) related assets … and Mr. McClendon does not have an interest in the company’s related assets,” general counsel Hood said in a statement.

In explaining why Chesapeake’s board isn’t obligated to monitor McClendon’s personal loans, Hood cited a September 2003 decision by a Delaware Chancery Court. The ruling in Beam v. Stewart found the board of Martha Stewart Living Omnimedia did not breach its fiduciary duty to shareholders by failing to monitor her personal investments. (Stewart served five months in prison in 2004 following her conviction for obstruction of justice in an unrelated insider-trading case.)

Given the size, scope and complicated terms of the loans, their particulars constitute important stockholder information and therefore should be more fully disclosed, said David F. Larcker, a professor of accounting at Stanford University’s Graduate School of Business.

Some shareholders agree. “While recognizing (McClendon’s) right to privacy, the more information the company releases to shareholders the better – particularly when it’s such a large amount of money and related to the oil and gas business,” said Mike Breard, oil and gas research analyst at Hodges Capital Management in Dallas, which owns Chesapeake shares.

LOAN TRAIL

As with a mortgage on a residential home, state law requires that ownership rights to physical property be recorded with county clerks.

Reuters found McClendon’s loan agreements by following the trail of well and land lease transfers from Chesapeake to three companies that list McClendon as their corporate representative, according to state deed records.

In county courts in Louisiana, Texas, Arkansas, Pennsylvania and Oklahoma, where Chesapeake operates thousands of wells, the company regularly files a form called a conveyance. In keeping with the corporation’s well participation program, the conveyance grants McClendon a 2.5 percent share of each well and of the leased land on which it is drilled.

For years, Chesapeake has distributed 2.5 percent shares in wells and land to three McClendon-controlled companies – Chesapeake Investments LP, Larchmont Resources LLC and Jamestown Resources LLC.

Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years.

But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth.

The $1.1 billion in loans during the past three years breaks down this way:

In June 2009, McClendon agreed to borrow up to $225 million from Union Bank, a California lender, pledging his share of wells as collateral.

In December 2010, he borrowed $375 million from TCW Asset Management, a private equity firm.

And in January 2012, McClendon borrowed $500 million from a unit of EIG Global Energy Partners, a private equity firm formed by former TCW executives.

It is unclear how much, if any, of those loans have been repaid.

Randall Osterberg, a senior vice president at Union Bank who signed the loan agreement, declined to comment. TCW and EIG also declined to respond to questions.

REAL LOSS?

At first blush, what the company tells shareholders suggests the well plan is a money-loser for McClendon.

In its proxy statements, Chesapeake says McClendon lost $116 million in 2009, and $141.9 million in 2010.

It’s unclear whether McClendon has suffered any real losses, however. Asked about the calculations, Hood said McClendon’s net loss is a byproduct of his drilling costs being “front end loaded,” while his revenues accrue over many years.

“If they are showing that kind of negative cash flow, the wells don’t have value,” said Phil Weiss, oil analyst at Argus Research who has a sell rating on the company’s shares. But given that McClendon has borrowed more than $1 billion based on the value of his well stakes, “I really don’t think (the company’s disclosures) tell me much,” Weiss said.

Chesapeake has resisted attempts by regulators to get more information on McClendon’s well-participation plan before. In 2008, the SEC requested more information about McClendon’s benefits from the well plan as part of a review of the company’s 2007 annual report.

From May to October that year, Chesapeake and SEC officials exchanged at least eight letters and held negotiations on the issue. After first refusing to provide more information, Chesapeake ultimately agreed to provide shareholders a chart detailing well plan revenues and costs, a review of the letters shows.

Chesapeake’s Hood said in a statement that the company’s disclosures are “fully compliant with all legal and regulatory requirements.” The chart and other SEC filings contain “all material facts that Chesapeake was required to disclose,” he said.

A spokesman for the SEC declined to comment.

BIG LENDER

McClendon’s biggest personal lender, EIG, has been a big financer for Chesapeake, too.

In November, Chesapeake raised $1.25 billion from a group of investors including EIG through the sale of “perpetual preferred shares” in a newly formed entity, Chesapeake Utica LLC, which controls about 800,000 acres of oil and gas-rich land in Ohio. The sale offers lucrative terms to EIG investors, paying an annual dividend of 7 percent and royalty interests from oil and gas wells, according to analysts.

On April 9, the company announced a nearly identical deal to raise another $1.25 billion from EIG and other investors, in another new subsidiary called CHK Cleveland Tonkawa.

Dividends on preferred shares are controversial because they are paid before regular dividends owed to common shareholders. “Basically it’s a form of more expensive debt,” Morningstar’s Hanson said. “It makes it appear that it’s not debt, but it sits on top of obligations to the common shareholder.”

The fact that McClendon’s largest personal lender received favorable terms on its Chesapeake investments caused some Wall Street analysts to call for more information about McClendon’s loans.

“I think the company should disclose this information. One reason is that the CEO is taking out loans from at least one entity, EIG, which recently provided financing to Chesapeake,” said Joseph Allman, oil and gas industry analyst at JPMorgan in New York, who reviewed the loan agreements. “In the same way that investors want to know the counterparty to significant Chesapeake transactions, they would want to know if one of those firms has significant private dealings with the CEO.”

Chesapeake’s Hood acknowledged there could be “some theoretical possibility of a conflict of interest” with the company and its CEO borrowing from the same lender. But because Chesapeake does not believe there is “an actual conflict of interest,” more disclosure is not required, Hood said.

CLOSING A GAP

McClendon’s personal loans highlight a gap in current SEC rules governing disclosures of related-party transactions, say accounting experts. The SEC requires disclosure of any transaction over $120,000 involving a company and a related party, such as the CEO, directors and certain family members, “with direct or indirect material interest.”

Chesapeake said the SEC’s related-party rule doesn’t apply to McClendon’s loans – only to his participation in the well plan. That’s because Chesapeake believes the loans “do not constitute a material transaction with Chesapeake or even involve Chesapeake,” Hood said.

That disclosure gap may be closing. A proposed new standard, released for public comment by the Public Company Accounting Oversight Board on February 28, would require auditors to identify and evaluate “significant unusual transactions” with executives connected to publicly traded firms. The board defined such transactions as those “outside the normal course of business or that otherwise appear to be unusual due to their timing, size or nature.”

Board chairman James R. Doty described the proposal as a way to scrutinize transactions that have played “a recurring role in financial failures.” The oversight board declined to comment on McClendon’s loans.

For now, said analyst Weiss, Chesapeake and McClendon are pushing the limits. “If Chesapeake were trying to make things muddy and unclear without breaking the law, this would be a good way to do it.”

(Reporting by Anna Driver in Houston and Brian Grow in Atlanta; additional reporting by Joshua Schneyer in New York; editing by Blake Morrison and Michael Williams)

Source

USA: Total Enters Utica Shale JV with Chesapeake

image

Total announced that its subsidiary, Total E&P USA, has signed and completed on December 30, 2011 an agreement to enter into a Joint Venture with Chesapeake Exploration, a subsidiary of Chesapeake Energy Corporation, and affiliates of its partner EnerVest Ltd.

In the agreement, Total acquires a 25% share in Chesapeake’s and EnerVest’s liquids-rich area of the Utica shale play located across 10 counties on the eastern side of the state of Ohio, USA.

Yves-Louis Darricarrère, President, Total Exploration & Production, stated “Total is delighted to be building on our technical successes with Chesapeake in the Barnett Shale Joint Venture and to expand into the liquids-rich Utica Shale play in Ohio. This is consistent with our strategy to develop positions in unconventional plays with large potential and, in this case, with value predominantly linked to oil price. This joint venture will provide us with a material position in a valuable long-term resource base under attractive terms and with a top-class operator. Total is conscious of the environmental aspects linked to developing shale acreage and is confident in Chesapeake’s capacity to manage the Utica shale operations in a responsible manner, respecting the highest industry standards.

The transaction is effective as of November 1, 2011. Total has paid Chesapeake and EnerVest about USD 700 million in cash for acquiring these assets. Total will also be committed to pay additional amounts up to USD 1.63 billion over a maximum period of 7 years in the form of a 60% carry of Chesapeake and EnerVest’s future capital expenditures on drilling and completion of wells within the Joint Venture.

The Joint Venture covers approximately 619,000 net acres, of which 542,000 net acres are brought by Chesapeake and 77,000 net acres are brought by EnerVest. Total will acquire its 25% share from each of Chesapeake and EnerVest on identical terms, giving a total of 155,000 net acres. Chesapeake will operate the Joint Venture acreage.

As a result of the transaction, Total will also acquire a 25% share in any new acreage which will be acquired by Chesapeake in the liquids-rich area of the Utica shale play.

To date 13 wells have been drilled across the acreage with very promising results seen from each well in terms of productivity and liquid content. The Joint Venture plans to ramp up the drilling activities in the coming 3 years with 25 rigs planned to be mobilized by 2014 to fully appraise and develop the acreage. SEC production in Total’s share is expected to reach 100,000 barrels of oil equivalent per day by the end of the decade.

Additionally, Total, Chesapeake and EnerVest have agreed to jointly develop the construction of the necessary midstream facilities to export the production from this acreage.

Source

Chesapeake CEO Opposes US LNG Exports

image

The head of Chesapeake Energy, one of the biggest U.S. natural gas drillers, does not want the country to ship its huge gas reserves overseas, despite agreeing to supply fuel for a proposed export project.

Record U.S. natural gas production has sparked a debate about whether the resource should be used more at home, potentially for wider use in transportation, or shipped abroad to fetch higher prices on the global market.

I want the right to export natural gas, but I am really hopeful that we never do,” said Chesapeake chief executive Aubrey McClendon during a panel discussion on natural gas vehicles in New York on Wednesday.

A string of rival liquefied natural gas (LNG) export projects have been proposed in the United States over the past year as unconventional gas production has left the country with a century’s worth of cheap supply, evaporating import needs and thinning producers’ profit margins.

Together, the proposed export plants could export the equivalent of more than 10 percent of U.S. gas needs by the end of the decade.

Chesapeake has pledged to supply U.S.-produced gas for the most advanced U.S. project at Sabine Pass in Louisiana, run by Cheniere Energy, which could be online by 2015, pending regulatory approval. Last month Cheniere signed an agreement with LNG shipper BG Group to supply U.S. shale gas to the world.

When we first announced the Sabine Pass Liquefaction project, Chesapeake stated publicly that they would provide half a billion cubic feet per day of gas to the Sabine Pass facility,” a Cheniere spokeswoman said.

Still, McClendon hopes that there will be enough demand at home for that not to be necessary.

An LNG export facility wouldn’t be ready for another four years or so,” McClendon said. “I really hope in the next four years that we embrace natural gas for transportation so we don’t need to export it outside the country.”

Despite massive reserves and nascent efforts, the United States is yet to make widespread progress to turn diesel and gasoline engines over to natural gas.

Much depends on legislation in Washington. There is some optimism surrounding the Nat Gas Act, introduced in the Senate on Tuesday, which provides tax incentives to buy natural gas engines, though past efforts of this kind have been slowed and halted by political wrangling.

In the meantime, McClendon is hedging his bets.

If for some reason this country refuses to use this wonderful fuel…I have to put my gas up for sale to somebody,” he said.

(reuters)

Source

Chesapeake: Report Finds No Major Influence from Gas Well Drilling on Drinking Water (USA)

image

The Center for Rural Pennsylvania on Tuesday released the findings of a study it conducted on the impact of Marcellus Shale drilling on drinking water supplies.

The research was sponsored by a grant from the center, which is a legislative agency of the Pennsylvania General Assembly.

The Center for Rural Pennsylvania is a bipartisan, bicameral legislative agency that serves as a resource for rural policy within the Pennsylvania General Assembly, its website indicates.

According to the report, this research studied the water quality in private water wells in rural Pennsylvania before and after the drilling of nearby Marcellus Shale gas wells. It also documented “both the enforcement of existing regulations and the use of voluntary measures by homeowners to protect water supplies.”

In its introduction, the authors said they evaluated water sampled from 233 water wells near Marcellus gas wells in rural regions of Pennsylvania in 2010 and 2011.

Among these were treatment sites (water wells sampled before and after gas well drilling nearby) and control sites (water wells sampled though no well drilling occurred nearby),” the study indicated. “Phase 1 of the research focused on 48 private water wells located within about 2,500 feet of a nearby Marcellus well pad, and Phase 2 focused on an additional 185 private water wells located within about 5,000 feet of a Marcellus well pad.”

During that phase, the researchers collected both pre- and post-drilling water well samples and analyzed them for water quality at various analytical labs. During Phase 2, the researchers or homeowners collected only post-drilling water well samples, which were then analyzed.

The post-drilling analyses were compared with existing records of pre-drilling water quality, which had been previously analyzed at state-accredited labs, from these wells.

According to the study results, approximately 40 percent of the water wells failed at least one Safe Drinking Water Act water quality standard, most frequently for coliform bacteria, turbidity and manganese, before gas well drilling occurred,” the report indicated. “This existing pollution rate and the general characteristics of the water wells, such as depth and construction, in this study were similar to past studies of private water wells in Pennsylvania.”

The study’s pre-drilling results for dissolved methane showed its occurrence in about 20 percent of water wells—although levels were generally far below any advisory levels.

Despite an abundance of water testing, many private water well owners had difficulty identifying pre-existing water quality problems in their water supply,” the report indicted. “The lack of awareness of pre-drilling water quality problems suggests that water well owners would benefit from unbiased and consistent educational programs that explain and answer questions related to complex water test reports.”

In this study, statistical analyses of post-drilling versus pre-drilling water “did not suggest major influences from gas well drilling or hydrofracturing (fracking) on nearby water wells, when considering changes in potential pollutants that are most prominent in drilling waste fluids.”

When comparing dissolved methane concentrations in the 48 water wells that were sampled both before and after drilling, the research found no statistically significant increases in methane levels after drilling—and no significant correlation to distance from drilling.

However, the researchers suggest that more intensive research on the occurrence and sources of methane in water wells is needed,” the report indicated.

The report then cited the Pennsylvania Oil and Gas Act of 1984, which indicates that gas well operators are “presumed responsible” for pollution of water supplies within 1,000 feet of their gas well for six months after drilling is completed if no pre-drilling water samples were collected from the private water supply.

This has resulted in extensive industry-sponsored pre-drilling testing of most water supplies within 1,000 feet of Marcellus drilling operations,” the report states. “However, the research found a rapid drop-off in testing beyond this distance, which is driven by both the lack of presumed responsibility of the industry and also the cost of testing for homeowners.”

The authors of the study said their research suggests that a standardized list of minimum required testing parameters should be required across all pre-drilling surveys to eliminate confusion among between water supply owners and water professionals.

The study indicates that this standardized list should include bromide. The research found that bromide levels in some water wells increased after drilling and/or fracking. These increases may suggest more subtle impacts to groundwater and the need for more research.

Bromide increases appeared to be mostly related to the drilling process,” the study indicated.

Additionally, “a small number of water wells also appeared to be affected by disturbances due to drilling as evidenced by sediment and/or metals increases that were noticeable to the water supply owner and confirmed by water testing results.”

Increased bromide and sediment concentrations in water wells were observed within 3,000 feet of Marcellus gas well sites in this study, suggesting “that a 3,000 foot distance between the location of gas wells and nearby private water wells is a more reasonable distance for both presumed responsibility and certified mail notification related to Marcellus gas well drilling than the 1,000 feet that is currently required.”

On the regulatory side, “the research found that regulations requiring certified mail notification of water supply owners, chain-of-custody water sampling protocols, and the Pennsylvania Department of Environmental Protection’s investigation of water supply complaints were generally followed, with a few exceptions.

The study also concluded that “since voluntary stipulations were not frequently implemented by private water well owners” that more educational and financial resources should be made available to facilitate testing.

The authors were clear: “This research was limited to the study of relatively short-term changes that might occur in water wells near Marcellus gas well sites. Additional monitoring at these sites or other longer-term studies will be needed to provide a more thorough examination of potential water quality problems related to Marcellus gas well drilling.”

Source

%d bloggers like this: