Just Another Reason Chesapeake Is a Poor Corporate Citizen

A good company delivers excellent products and services, and a great company does all that and strives to make the world a better place.

-- William Ford Jr., chairman, Ford Motor Co.

Before getting started, let's make one thing crystal clear: No company is perfect.

In the course of doing business, employees can be mistreated, shareholders can be short-changed, communities can be scarred, and the environment can become depleted. These things occur whether we like it or not. On some level, it's simply part of life. We can't go around inflicting retribution for every wrongdoing. To paraphrase a quote attributed to Gandhi, that would leave everyone blind.

It seems, though, that from time to time, a person, group, community, or company can act with such blatant disregard for anything but its own self-interest that others must stand and take notice.

Though I'm no moral authority -- or, for that matter, claim to know what the "right" solution is -- the most recent news coming out about Chesapeake Energy (NYSE: CHK  ) is of concern. At best, the company is falling far short of William Ford's requirement that a great company "strive to make the world a better place." At worst, it is quickly becoming the textbook example of ugly corporate responsibility.

Obsessive land grab, unfulfilled promises
Over the past 15 years, oil and gas companies have become increasingly aware of vast natural gas deposits underneath the earth's surface here in America. While such deposits could mean a lot for the country's energy independence, the revelation also has given rise to obsessive land grabs, and left in their wake a trail of anger, frustration, and broken promises.

The most recent example comes from an exclusive investigation by Reuters released yesterday. The investigation details how Chesapeake Energy, in an effort to gain leasing and drilling rights to its current 15-million-acre cache, participated in ethically and legally dubious behavior. Reuters summarizes its findings succinctly: "Chesapeake has unilaterally altered or backed out of leases. And in Texas and at least three other states, it has exploited little-known laws to force owners to hand over drilling rights and sometimes forfeit profits."

In some cases, individual families are choosing not to allow Chesapeake to drill for oil because they oppose fracking. In other cases, the company is allegedly bullying landowners into signing lease documents, saying that given certain circumstances the company can "do whatever [it] wants."

In Texas, a little-known law was put in place in 1919 to "prevent excessive drilling of oil wells and to protect the mineral rights of small land owners." Matthew Festa, an associate professor of at South Texas College of Law, says the application of the law today "seems to be a new creative use of the statute in a way that was not intended when it was designed. It's possible that this amounts to the transfer of private property from one private entity to another private entity."

The governing body that grants permission for Chesapeake to drill on others' lands without their permission in Texas is the Railroad Commission. It just so happens that Chesapeake was one of the largest donors to the commission's chairman last year, to the tune of $25,000.

To be fair, Chesapeake isn't the only company exploiting little-known laws to gain access to land that isn't theirs. In Texas alone, EOG Resources (NYSE: EOG  ) and ExxonMobil's (NYSE: XOM  ) XTO Energy division have also applied for hundreds of exceptions to what's called Rule 37.

So, why, you might ask, am I singling out this one company?

Digging a hole so deep...
That's a fair question, and it's one that has plenty of answers.

For starters, the Reuters investigation also detailed how Chesapeake created shell companies or used contractors to set up leasing rights to thousands of acres in several states. Agreements were signed dictating the amount of money landowners would get in return for drilling rights.

When the landowners went to cash their checks, however, they were given Chesapeake-issued bank drafts. When those drafts were turned in, they were often worth less than what was agreed upon.

The situation was dubious enough that one Michigan contractor, who once referred to Chesapeake CEO Aubrey McClendon as "the most successful Landman in the world," was later forced to revise his assessment of the company and the man entirely.

After realizing that he would be forced to reject hundreds of signed leases on Chesapeake's behalf, the contractor wrote to McClendon: "In my entire career, I have never been put in the position that (Chesapeake) has recently handed us. ... [It is] beyond anything I could ever have imagined. I simply wish our deal would never have taken place."

Speaking of Aubrey McClendon...
McClendon's misdeeds have surfaced with alarming regularity.

In chronological, bullet-point fashion, here's what we've seen from the CEO recently:

  • Historically high compensation and perks, including $12 million paid for his collection of maps.
  • In April, it was revealed that McClendon took out enormous loans to take part in a company perk that potentially pitted his financial interests against those of shareholders.
  • Shortly thereafter, Reuters broke a story detailing how McClendon and SandRidge Energy (NYSE: SD  ) CEO Tom Wells had run a secret $200 million hedge fund that placed bets within the energy sector. The hedge fund allegedly occupied vast sums of the executives' time.
  • In June, another Reuters investigation uncovered potentially criminal collusion between Chesapeake and Encana Energy (NYSE: ECA  ) to keep bidding prices down for land in Michigan.

This list could go on, but I think you get the point. This goes beyond being shareholders, or even investors -- as human beings, we know our businesses won't be perfect, but we do expect them to operate with some type of compass that considers long-term consequences over short-term profit. We hope that some groups will at least try to make the world a better place.

Sadly, this year will be remembered by some as the year where Chesapeake showed the world how reckless and repulsive the very worst companies can really be.

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 03, 2012, at 4:12 PM, RWJ329 wrote:

    It is obvious Brian Stoffel has never run a large company. It is easy to throw mud when you are standing on dry land. Thank god we live in the USA where completion is accepted. As long as a company operates within the law, all is fair. Laws establish boundaries for society to exist. As long as CHK operates within the law boundaries, what is legally and factually wrong with that? Opinion is one thing facts are another. Brain is entitled to his "own opinion but not his own facts".

    If CHK broke the law let the law prevale.

  • Report this Comment On October 04, 2012, at 1:50 AM, GETRICHSLOW2 wrote:

    Aubrey? Is that you?

    When it comes to large , powerful companies using force to take advantage of landowners who cannot afford to defend themselves in today's legal environment, and who had faith in that company to do the right thing when the rep was siting at their kitchen table begging for them to sign the papers, just because something is technically legal does not make it right.

  • Report this Comment On October 04, 2012, at 12:08 PM, billmitts wrote:

    These people had faith they were getting the most money they could from thier leases, they demanded large bonus payments and historically large royalty percentages; to get that you take risk and sometimes you lose. The industry as a whole has had to reassess the values of leases with 30-50% carved out royalties, and in some instances royalty owners are having to pay some of the cost; they are not getting all they believed they would, neither are the shareholders. When NG was selling for $7 the economics of drilling was different than it is at $3; and everyone has to accept that the original plan will not work and some changes are going to alter expected results. I find it hard to feel sorry for people that recieved huge lease bonus payments $3,000 to $25,000 per acre because thay may not get the 20% royalty they expected. The risk/reward principal should apply; they got the large amounts because the risk was great and not because they were nieve, trusting and unsophisticated. In most cases they were ruthless, unyielding and organized and had the best legal representation available; the idea that deals were struck at kitchen tables by fast talking conmen is ludicrus and is a throw back to the beginnings of the oil business in the 1900s not the realities of today.

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