Of late, Chesapeake Energy Corporation (NYSE:CHK) has consistently been in the news for all the wrong reasons. Recently these have ranged from collusion in fixing land prices, holding non-core real estate during a severe cash crunch, altering lease deed terms with land-owners, special payment privileges to a section of employees in the event the company changes hands, and a fine for a January well blowout. Can the company do anything right? Here’s a recap of the recent news.
Financial Management and Asset Allocation
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The Voss Value Fund was up 4.09% net for the second quarter, while the Voss Value Offshore Fund was up 3.93%. The Russell 2000 returned 25.42%, the Russell 2000 Value returned 18.24%, and the S&P 500 gained 20.54%. In July, the funds did much better with a return of 15.25% for the Voss Value Fund Read More
Chesapeake Energy Corporation (NYSE:CHK) holds huge quantities of prime real estate in Oklahoma City, including a 120-acre headquarter campus, retail centres, office buildings and other lands. It was also reported that a restaurant, co-owned by McClendon, operates in one of these retail centres. The extent of the company’s real estate commitments has led to Don Karchmer, a local developer and investor, saying via Bloomberg, “If something were to happen to Chesapeake, the whole north-western market would collapse. The whole community has a fear of what could happen. It would be a huge hurt.”
Surely the region would be affected if Chesapeake were to unload its real estate en masse – but there’s a question here begging to be asked: considering the company’s massive cash crunch, is there any sense in holding non-core assets such as real estate? Definitely a case of mis-allocation of resources.
In another case of questionable financial priorities, a recent report stated that the company has a ‘special payment arrangement’ for a select group of 1,600 mid-level employees. In the event of a change of ownership of Chesapeake, this group would be entitled to cash payments of between $100 million to $140 million – this, even if they continue to remain in their jobs at Chesapeake!
Chesapeake has frequently been criticized for dealing unfairly with landowners in the course of its massive acquisitions of oil and gas bearing land across the country. Numerous lawsuits, by irate landowners, are a testimony to this. Recently, the company was in the news for allegedly forcing landowners to change the lease terms of the land, allowing the company to have to drill fewer than the contracted number of oil wells, yet maintaining its rights over the land.
The company is also being investigated for allegedly conspiring with Canadian energy company, Encana Corporation (ECA), to manipulate land prices in Michigan to record low levels. This was exposed by Reuters, based on its scrutiny of emails, exchanged between the two companies. The operation is being investigated by anti-trust authorities, the Justice Department and state authorities.
In recent news it turns out Chesapeake has also been lax in its safety and operational procedures relating to well operation. The Oklahoma Corporation Commission (OCC) released its findings on a January blowout of the company’s 1H Davis Well in Roger Mills County, Oklahoma, and fined the company $75,000.
The report was fairly damning, fixing Chesapeake with many lapses. Among them was a failure to report earlier problems with the well to the OCC, and to take actions for proper repair and maintenance. The report also said the company violated rules relating to the installation of blow-out preventers and other safety precautions. It seems the blowout would not have occurred had Chesapeake complied with these rules.