Michigan Regulators Accuse Chesapeake Energy of Antitrust Violations
On Wednesday, Michigan Attorney General Bill Schuette announced that his Corporate Oversight Division is filing criminal charges against Chesapeake Energy Corp. (NYSE:CHK) and Encana Oil and Gas USA (NYSE:ECA) “for their alleged 2010 collaboration to avoid bidding wars against each other in Michigan public auctions and private negotiations for oil and gas leases that caused prices to plummet.” Collaboration of this sort violates both federal and state antitrust laws, and if found guilty, those involved could face prison time on top of a financial penalty.
The ordeal dates back to at least 2010 when the shale gas boom in the United States was in full swing. Upstream oil and gas companies like Chesapeake and Encana were aggressively pursuing land rights, which in Michigan meant participating in biannual auctions of state-held oil and gas leases orchestrated by the state’s Department of Natural Resources (DNR.) Normally, companies bid against each other for these leases during these auctions, which allows for normal, competitive market behavior. The leases would go to those who desire it most and have the means to act on those desires.
But with the shale gas boom in full swing, upstream oil and gas companies were willing to pay huge amounts for those leases. Chesapeake in particular, which was under the leadership of founder and former CEO Aubrey McClendon at the time, was notorious for grabbing land rights at any cost. McClendon racked up nearly $14 billion in debt thanks to his aggressive acquisition of land.
Michigan’s state-held oil and gas lease auctions are held in May and October. In the press release announcing the charges against Chesapeake and Encana, Attorney General Schuette cited the May 2010 auction as a possible beginning of the alleged collusion. During that auction, prices for state-held leases climbed as high as $1,510 per acre. By the October auction, prices fell to less than $40 per acre.
The dramatic decline sent up red flags at both regulatory agencies and within the press, and it was actually a 2012 Reuters investigation that revealed that there was a possible conspiracy in the works. Reuters revealed that executives from Chesapeake and Encana had been in discussions following the May 2010 auction. It’s during these discussions that Michigan’s AG alleges that the companies violated antitrust laws by agreeing to split up Michigan counties instead of bidding for them individually.
Chesapeake’s McClendon was one of those businessmen who identified the tremendous value of shale gas early, and he ended up outbidding many competitors for fields because of his willingness to take on debt. As natural gas boomed and while prices remained high, Chesapeake and McClendon both prospered enormously. At one point, he had a net worth of more than $1 billion. However, after the shale gas boom entered second gear and production skyrocketed, prices fell. Alongside them, so did the value of Chesapeake’s assets and equity. The company, which borrowed billions to fuel its aggressive exploration and drilling campaign, soon found itself crushed by debt and forced to sell $12 billion in oil and gas fields to relieve some pressure.
The upset marked the beginning of the end for McClendon as Chesapeake’s chief executive, but the decisions he made while in charge — such as the aggressive pursuit of land — still haunt the company. In emails obtained by Reuters, McClendon was one of the executives discussing the “cooperative approach to state leasing” that now has the company in regulatory cross hairs.
Both companies have denied any wrongdoing and are working toward a settlement with the Michigan AG. Shares of Chesapeake were flat following the news, while Encana stock edged up marginally. The state-level regulatory news is overshadowed by possible action by the U.S. Department of Justice, which is also investigating the issue. A federal-level ruling against Chesapeake would have a much greater impact and potentially bear much greater penalties than a state-level ruling.