Chespeake Energy Seeks to Void Order to Buy Energy Rights
By Margaret Cronin Fisk and Allen Johnson Jr. on July 10, 2012
Chesapeake Energy Corp. (CHK) (CHK), facing suits by hundreds of mineral rights holders over canceled oil and gas lease offers, will ask appeals judges in New Orleans to reverse a $19.7 million judgment to a Texas lease owner. U.S. District Judge John Ward in Marshall, Texas, ruled in 2011 that Chesapeake officials wrongfully canceled an agreement to buy energy rights held by the family-owned Peak Energy Corp., based in Plano, Texas. Chesapeake breached a contract and abandoned the deal as gas prices plummeted, Peak claimed. Lawyers for Chesapeake, claiming the deal was uncompleted and the offer nonbinding, will ask judges today to reverse the lower court and rule a letter of intent wasn’t a valid contract. The company is also asking the court to cancel an order telling Chesapeake to pay the $12,000-an-acre difference between the offer price and the lease value when the bid was withdrawn. It argues that Peak didn’t have rights to nearly two-thirds of the 5,405 acres covered in the agreement. “Peak cannot enforce a sale and assignment between the parties because, as a matter of law, Peak cannot demonstrate that it performed its obligations,” Chesapeake said in court papers. “In tendering only 1,645 acres, Peak failed to perform under the letter of intent.” Winning may be an uphill battle for Chesapeake, said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation and oil-and-gas law. “It’s quite possible that the judge overlooked some sort of contingency,” he said by phone. “But just as the trial judge made short shrift of this, I think the Fifth Circuit will as well. As they like to say in Texas, a deal is a deal.” Falling Prices, Shares Chesapeake, the second-largest U.S. gas producer, has lost almost 35 percent of its market value (CHK) in the past year as the effect of tumbling energy prices was compounded by questions about Chief Executive Officer Aubrey McClendon. The CEO led a costly push to expand the firm’s gas holdings during the past decade. He was replaced as chairman June 21 by Archie Dunham. McClendon has been under fire for using personal stakes in the company’s oil and gas wells to borrow privately more than $800 million last year from some of the company’s biggest financiers. He also has been criticized for a wrong-way bet in natural- gas prices that damaged the Oklahoma City-based company’s cash flow, increased its borrowing costs and spurred its biggest investors to replace more than half the board. The Peak lawsuit is among similar claims filed in federal and state courts in states including Texas, Michigan and Pennsylvania over claims that Chesapeake breached contracts to buy oil and gas leases. Change of Plans Those suing typically claim Chesapeake offered top prices, including sign-up bonuses, then walked away from agreements when gas prices dropped or shale formations proved less profitable to develop than originally projected. Peak officials sued Chesapeake in 2009, alleging that its executives began a “land grab” in eastern Texas and western Louisiana in early 2008, seeking to acquire the rights to large swaths of the Haynesville Shale area. Chesapeake relied on an “army of landmen” to acquire leases, Peak’s attorneys said in court filings. Peak officials contend that McClendon was personally involved in their deal, approving a landman’s offer of $15,000 an acre and pushing to speed negotiations. Upon learning Peak officials wanted the offer in writing, McClendon sent his negotiator an e-mail urging him to complete the deal promptly. “Sooner the better of course!” McClendon said in the July 1, 2008, e-mail, according to court filings. Investor Call McClendon described the push to acquire rights to the Haynesville Shale formation in a July 2008 call with investors, saying he was trying to make Chesapeake “the only game in town for a lot of owners of smaller tracts of land out there.” “We especially understand the value in today’s world of having a huge land machine that can devour big chunks of land across these massive new unconventional plays,” McClendon said, according to a transcript. “In these plays, if you snooze, you lose. And with over 4,000 landmen in the field every day buying new leases, I can assure you that Chesapeake is not snoozing.” Four months later, McClendon and other Chesapeake officials weren’t as eager to complete the deal as gas prices continued to fall, Peak’s lawyers said. “The transaction failed to close because market conditions had changed, Chesapeake ran into cash flow problems and Chesapeake was looking for excuses to back out of its pending deals for Haynesville Shale properties,” the Texas company’s lawyers said in February appeals court filing.