Texas Jury's Anti-Fracking Verdict Could Create Problems For Oil And Gas Producers

Includes: CHK, DVN
by: Daniel Jennings


Lawsuit could set a precedent that could apply all over the United States.

$3 million verdict is the first of its kind in the United States.

Suit could make fracking operations more difficult and expensive.

A Texas jury has handed down a verdict that could cause big problems for natural gas producers, such as Chesapeake Energy (NYSE:CHK). The Dallas jury ordered a company called Aruba Petroleum to pay a couple, who claim fumes from fracking made them sick, $3 million.

The action was labeled the first anti-fracking verdict in the United States, and it could set a precedent for other courts, National Public Radio reported. The case is similar to lawsuits that have been filed against drillers that use fracking in other parts of the United States, Florida State University Law Professor Hannah Wiseman told NPR.

Basically, the jury found that Aruba violated the Parrs' property rights by fracking for natural gas and oil in the Barnett Shale in North Texas. The Parrs had sued several other drillers, but those cases were either dismissed or settled out of court.

Among other things, the jury found that Aruba was responsible for a long list of health problems that afflicted the Parrs, including asthma, nausea, nose bleeds, and depression. The cause of these problems was hydrocarbon emissions from Aruba's drilling operation, the Parrs' attorney Brad Gilde told The Dallas Morning News.

Torrent of Lawsuits Possible

The danger this lawsuit could create for oil and gas producers such as Chesapeake and Devon Energy (NYSE:DVN) is obvious. Personal injury attorneys could start bombarding drillers and energy companies with lawsuits.

Anybody who lives near a fracking operation and gets sick could have grounds for a lawsuit under the criteria set by the jury in the Parr case. Almost any health problem could be blamed on hydrocarbon emissions from a fracking operation.

Oil and gas producers could be saddled with additional legal expenses in attempts to defend themselves from such verdicts. Some producers might decide to stay away from states such as Texas, where it is easy to sue.

Environmental groups and other fracking opponents could also use such lawsuits in an attempt to block future fracking operations. If fracking foes cannot get state governments to ban the process, they would simply turn to the courts. The result would be a torrent of litigation that could start eating into oil producers' profits.

Anti-Fracking Lawsuits Not Necessarily a Threat to the Bottom Line

The legal battle over fracking is far from over. Even though a judge has upheld the verdict, Aruba has the right to appeal it. It is too early to tell how Texas appeals courts would rule in this matter, but Texas courts are historically pro-business and pro-oil.

The Parrs and their attorneys would face an uphill battle on appeal that could take years. A lengthy appeal process could deter personal injury attorneys from filing similar suits in the future.

The natural gas producers also have the money to deploy vast amounts of legal resources to fight such lawsuits. Devon Energy's trailing yearly revenue increased by $3.18 billion between March 2013 and March 2014. Devon's trailing revenue was $12.15 billion in March 2014 compared to $8.97 billion in March 2013.

Chesapeake's trailing revenues showed an even bigger and more dramatic increase of $5.81 billion. Chesapeake reported trailing revenues of $13.32 billion in March 2013 and $19.13 billion in March 2014.

These revenue increases show that it would take a lot of lawsuit settlements to have any negative effect on these producers' finances. The fracking verdicts would probably only be a threat to smaller drillers that lack large resources.

The nation's first anti-fracking verdict will have little or no effect on large-scale natural gas producers. These companies are swimming in cash and more capable of defending themselves.

Disclosure: I am long CHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.