A Natural Gas Deal Gone Awry

Every so often I'll read a story in the local paper that makes me chuckle, involving an honest mistake that, when compounded over the years, can turn into one costly little blunder. In this case, the mistake was compounded by a series of mergers, and $4.3 million later, a natural gas giant is still waiting to be paid for its missing gas.

It all started back in 2008, which was a trying time for us all. At that time, LINN Energy (NASDAQ: LINE  ) and the rest of its exploration and production peers were trying to figure out what to do as the economy hit the skids. In an effort to shore up its own balance sheet, the company sold its operations in the Appalachian Basin for $600 million to XTO Energy.

Unfortunately for XTO Energy, there was one small and, unbeknownst to anyone, unresolved matter. You see, LINN had a contract to sell its gas through a unit of Dominion Resources (NYSE: D  ) , which was gathering the gas in its system. However, LINN's gas wasn't up to the system's standards, so it began to look for another gatherer and it approached Equitrans, which is now part of EQT Midstream Partners (NYSE: EQM  ) but formerly was a unit of EQT Corp. (NYSE: EQT  ) -- they talked, but nothing was signed. However, an EQT employee later that year thought that it had and began crediting gas to the wrong company.

What basically happened, and you can read the full story here, is that for seven months the wells, now owned by XTO, were producing gas but XTO wasn't getting paid for the gas. Now, Dominion owes XTO's new owner, ExxonMobil (NYSE: XOM  ) , a grand total of $3.4 million for the gas and just over $900,000 in interest. It can appeal the ruling, but it's probably not a large enough amount to fight over.

It's an interesting story if for no other reason than it shows how highly efficient our natural gas transportation system really is, as it would seem we'd lose more gas than we do. Think about it. Producers like LINN and ExxonMobil are able to produce gas from some of the hardest-to-reach places in the country, and it's transported rather seamlessly throughout our land. Sure, pipes can spring a leak and mistakes can happen, but overall, the midstream industry really gets the job done.

What's even more incredible when you think about it is that the industry can keep track of everything, with all the mergers, acquisitions, and asset spinouts. What started as a problem involving three companies ended up doubling in size just because of all the activity the industry has experienced over the past few years. For as much grief as we give the industry, you have to give it credit for how efficiently it really does operate. It's one of the reasons it's been able to create so much wealth for investors over the decades and why investing in oil and gas production and transportation will probably continue to pay big dividends for years to come.

It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory because of its sheer size -- it's the fourth largest energy company in the U.S. -- not to mention its enormous potential for profits. In The Motley Fool's premium research report on Kinder Morgan, we break down the company's growing opportunity -- as well as the risks to watch out for -- to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.


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  • Report this Comment On May 11, 2013, at 4:20 PM, toomuchgas wrote:

    Is the Dominion you're talking about DOM or D?

  • Report this Comment On May 11, 2013, at 8:24 PM, TMFmd19 wrote:

    The ticker symbol is D. Not sure how I goofed on that one!

    Matt

  • Report this Comment On May 12, 2013, at 5:30 AM, Dadw5boys wrote:

    OR maybe they sold off because people in SW Virgina have not been paid for the natural gas taken from their land in years ! No one would help them until the economy crashed and Republicans left the White House. Suddenly they had lawyers lining up to get those royalities. The Fund those Companys were suspose to pay into monthly was empty and had been for years.

    Millions started showing up in the account from all over.

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