"No-costs" in drilling leases seems to take on a new meaning for Chesapeake (CHK), as a...

"No-costs" in drilling leases seems to take on a new meaning for Chesapeake (CHK), as a Bloomberg report highlights ways the company has begun reinterpreting in its favor thousands of contracts with landowners from Pennsylvania to Texas. CHK points to a federal court ruling that a provision to pay royalties on “market value” of the gas allows it to deduct costs.

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Comments (5)
  • westelk
    , contributor
    Comments (511) | Send Message
    Chesapeake may win most of these battles, but the word will definitely get around as to how they continually screw the landowner. CHK is going to find it harder and harder to get leases in the future--even the fatter than normal signing bonuses will not carry the deals.


    Aubrey and the boys are doing a bang-up job of giving the company (and unfortunately, the industry) a black eye.
    31 Aug 2012, 12:36 PM Reply Like
  • Harry Johnson
    , contributor
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    Court cases on this subject are all over the map. Back when nobody wanted to bother with natural gas, producers had to make concessions to pipelines and gas plants to move their gas. Usual contract for casinghead gas (gas produced with the oil) paid producers whatever the gas plant sold the dry gas for at the plant tailgate plus a share of the liquids extracted by the plant. Easy for producers to get pencil whipped in these arrangements, but to build your own gathering systems and processing plants was the surest way to move underemployed lawyers from off the streets to your doorstep, clutching a royalty owners class action for underpayment. Due to the technical complexity of gas plant operations, at least five years of gainful employment was assured to a host of lawyers, as well as more than a few engineers, by such suits.


    If what Bloomburg says is true, it isn't good news for CHK stockholders. It may look like a good financial decision going in, but CHK will forfeit any profit made on this interpretation to the lawyers on both sides, plus poison the well with mineral owners for decades to come. In other words, a short sighted decision, the offspring of a deficit cash flow and a management that continues to ignore history.
    31 Aug 2012, 01:38 PM Reply Like
    , contributor
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    I'm sure it may come as a shock to Bloomberg and perhaps to CHK that the unidentified federal court ruling is limited to the facts and specific language of the lease under consideration and is governed by state contract law. Not all royalty provisions are based on "market value" language. Many in fact are based on a percentage of the gross proceeds of sale at the point of sale without deduction for so called "post production expenses" which expenses are ordinarily identified in specific detail. CHK has already paid hundreds of millions of dollars in damages in one class action in WV for underpayment of royalties and punitive damages. They won't be eager to take on another round of litigation for underpayment of royalties on Marcellus wells where the production is exponentially greater than previous cases.
    31 Aug 2012, 05:50 PM Reply Like
  • Harry Johnson
    , contributor
    Comments (516) | Send Message
    Then there is always the Fed's interpretation of royalty due on Indian leases and federal lands. We got a big bill one time for under payment for production on one well on Indian lands and we had never been notified of a suit. Turned out that the BIA had complained to the DOI about another operator in another County, so the two agencies decided to haul in everybody with a BIA lease and arbitrate the issue themselves. After these two agencies applied there sense of justice and fair play, they notified the hapless lessees of how much they owed. We had always paid the BIA their share of what we received, but the Fed's ran their calculations based on prices received by producers over a wide geographic area. We allowed as how not being a party to the proceedings sorta violated our constitutional rights. After we got slam dunked by the federal district court and the Tenth Circuit, we started on an appeal to the Supreme Court, but the Fed's suddenly offered to settle for 2% of their claim. Obviously we accepted.


    There are enough pitfalls out there for honest folks, and a whole lot more for those that choose to run close to the line.
    1 Sep 2012, 03:50 PM Reply Like
  • ebob
    , contributor
    Comments (20) | Send Message
    I guess the big crook at the top thought of a new way to shaft everyone. Thanks again AB
    31 Aug 2012, 05:35 PM Reply Like
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