the audit

Reuters’s Chesapeake Energy drumbeat

Internal emails show companies scheming to lower bids on drilling rights
July 5, 2012

Reuters continues to draw a bead on Chesapeake Energy and its CEO Aubrey McClendon, whose scalp it will be claiming shortly, reporting that the company schemed to collude with a competitor to keep from bidding up drilling leases on a big auction by the Michigan government and on private deals.

Back in April, Reuters reported (with a big assist from the Pittsburgh Post-Gazette that McClendon, whose overborrowing had helped tank Chesapeake shares a few years earlier, had taken out $1.6 billion dollars in loans against his stake in the company’s wells. A good chunk of that money came from a company that was negotiating with Chesapeake to buy some of its assets—a serious conflict of interest.

Reuters then reported that McClendon, undisclosed to his investors, was also running a non-Chesapeake hedge fund from the company’s offices that bet on natural gas—another major conflict.

These probes have already had results. Chesapeake stripped McClendon of his chairman title, ended the sweetheart investment program he had leveraged up, and shook up its crony-filled board of directors.

But last week’s report, by Brian Grow, Joshua Schneyer and Janet Roberts, is the biggest yet—one that surely means the end of the road for McClendon. Reuters got hold of internal emails that show a stunning level of proposed coordination between Chesapeake and Canadian competitor Encana Corporation, which were the two biggest bidders for drilling leases in Michigan:

In one email, dated June 16, 2010, McClendon told a Chesapeake deputy that it was time “to smoke a peace pipe” with Encana “if we are bidding each other up.” The Chesapeake vice president responded that he had contacted Encana “to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim.” McClendon replied: “Thanks.”

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Reuters has no difficulty finding experts to quote on how this is a slam-dunk antitrust case, including a former Justice Department lawyer who calls it a “smoking H-bomb.” This is textbook anticompetitive behavior (emphasis mine):

In subsequent months, the emails show, top officials discussed ways to prevent land prices from escalating. The solution they proposed: dividing up Michigan counties and private landowners between them.

Reuters notes that it’s unclear whether the two firms actually finalized any of these deals they discussed. But the casual manner in which the two firms engaged over email is bad enough, and there’s plenty of indirect evidence, as well as near-smoking gun email traffic, that suggest something happened. Here’s Reuters on Chesapeake’s and Encana’s doings with a big state of Michigan land-lease sale:

Bidding at the state’s May 2010 auction had been vigorous and contested. That helped the state raise a record $178 million from the sale of more than 118,000 acres, according to a review of state auction data by Reuters. At that auction, 83 percent of the more than 1,200 winning bids had competitive offers.

Five months later, at the October auction, the bidding and the results proved remarkably different and far less lucrative. It raised just $9.7 million from the leasing of about 274,000 acres – more than twice the acreage sold in May but almost $170 million less in revenue…

In the end, Chesapeake and Encana did not acquire state land in the exact counties outlined in the proposals and in the maps Reuters reviewed. But an analysis of the auction results shows that neither company bought any land in the same county as the other. Earlier, at the May auction, bidders for Chesapeake and Encana had competed fiercely for tracts in several of the same counties.

One note on process here: it’s unclear where or how Reuters got hold of these internal emails. It doesn’t say they’re from a lawsuit and they’re not subject to open-records laws. It would have been nice to have some clarity there, but the lack of details probably come from a sourcing agreement. It seems Reuters has one helluva mole at the company. In any case, since Chesapeake hasn’t disputed them, we can assume the emails are legit.

This piece is already having a big impact. took the Justice Department less than a week to start an investigation into Chesapeake and Encana in Michigan. The state of Michigan has already launched at least two investigations based on Reuters investigation.

The drumbeat is getting deafening in Oklahoma City, and it’s almost entirely due to Reuters’s first-rate investigative journalism.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.