Should You Fear the Skeleton Lurking in Chesapeake Energy’s Closet?

Chesapeake Energy and Encana face criminal antitrust charges in Michigan. Could this have an impact on Chesapeake’s stock price?

Mar 7, 2014 at 9:45AM

Encana Landowner Consultation

Photo credit: Copyright © Encana Corporation. All rights reserved.  

On Wednesday, the state of Michigan charged Chesapeake Energy (NYSE:CHK) and Encana (NYSE:ECA) with colluding to keep oil and gas lease prices artificially low in the state. These charges which have penalties that could include prison terms for individuals and up to a million dollar fine for the companies adds a new layer of risk to an investment thesis in Chesapeake Energy. The question is if this unknown and another still to be uncovered is something to be feared by investors.

History lesson
The case against Chesapeake and Encana dates back to 2010 when the oil and gas leasing boom hit Michigan. Both companies were interested in securing drilling rights to the Collingwood Shale region and according to the state colluded to avoid paying risings prices for leases with landowners. The land rush in the state had pushed lease prices to as high as $3,000 per acre by the middle of 2010, however, soon thereafter lease prices began to plunge.

While both companies deny collusion, the two did hold talks about forming a joint venture in the state that year. While no joint venture agreement was reached, emails surfaced from high-ranking executives at both companies that discussed ways to avoid "bidding each other up" according to an investigation by Reuters. If its true that these two companies did engage in anti-competitive practices it opens up a whole other layer of legal issues.

Encana Louisiana Landowner Consultation

Photo credit: Copyright © Encana Corporation. All rights reserved.  

The skeleton
In addition to the charges brought forth by the state of Michigan, Chesapeake Energy and Encana both could face federal charges under the Sherman Antitrust Act. Penalties for violating it are severe. Criminal penalties of up to $100 million can be levied on a corporation found in violation of this law. However, under federal law the maximum fine can be increased to twice the amount the conspirators' gain from illegal acts or twice the money lost by victims of the crime if either of those amounts are over $100 million. Because of this there is a risk that these companies could be forced to pay out stiff penalties in the future if found guilty. Needless to say, that unknown is a big risk facing investors.

While both companies are hoping for a civil resolution to the matter, it might not be that easy. The other issue is the fact that the U.S. Department of Justice is looking at more than just the leases in Michigan. Chesapeake Energy was engaged in an aggressive land grab that saw it spend billions of dollars to lock up millions of acres across the U.S. As a leader in the land grab the company will be at the forefront of any future action taken by the government on leasing issues. One of the problems is the perception out there that the company as well as its competitors didn't use the most ethical approach when securing its leases.

Chesapeake Energy Corporation Shale Gas

Photo credit: Chesapeake Energy 

The movie Promised Land, for example, tells the fictional story of a drilling company's pursuit of drilling leases in a small town. While that company doesn't collude with a competitor, it does use less than ethical means to sway public opinion so that it's easier for the company to secure the drilling rights. This perception of loose ethics within the oil and gas industry is really what's at the core of the collusion charges against Chesapeake Energy and Encana. The wildcat mentality of landsmen and drilling executives could come back to haunt the industry if its found that these companies went too far when locking up leasing rights. 

Investor takeaway
The charges levied against Chesapeake Energy and Encana are pretty serious and could have a financial impact before all is said and done. In addition to the potential financial consequences there is always the possibility of additional penalties such as being barred from signing new leases for a period of time, for example, could be levied. That said, given that the land rush in America is largely over it's unlikely that any negative outcome such as that will have a significant long-term impact on either company's ability to grow. So, while this legal matter is something investors need to keep an eye on as it adds a big new risk it's not yet a reason to sell.

The energy boom has OPEC on edge

Shale drilling is revolutionizing America's energy future. But, its not your best way to profit from the energy boom. Instead, imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers