Chesapeake Energy Corporation (CHK), What Goes Around Comes Around: Curbing the Court and Regulation

Chesapeake Energy Corporation (NYSE:CHK) has come to an agreement with over 200 landowners with whom the company sustained a legal battle for over 2 years. The issue concerned some 13,000 acres and the right to conduct gas-drilling operations in the southern region of the state of New York. The firm argued that it had the right to extend the leases beyond the five-year expiration date because the state’s moratorium on horizontal drilling and high-volume hydraulic fracturing has prevented it from drilling since 2008. In the first instance, US District Court Judge David Hurd’s ruling favored the landowners and the decision was subsequently appealed by the company.

Image: Chesapeake Energy Corporation (NYSE:CHK)

When the contracts were signed gas prices were much lower than they are today. Chesapeake Energy Corporation (NYSE:CHK) was able to strike a $2-$3 per acre and 12.5% royalties deal with landowners. The contracts allow the firm to begin drilling while keeping operating costs low. The gas boom in 2007 gave landowners enough reasons to renegotiate the deal at higher prices. But, the firm wanted to avoid higher operating costs and used the state’s moratorium to unilaterally extend the contracts beyond the original expiration date. This is how both parties entangled in a legal battle that lasted more than two years.

Just how much oil and gas is in the Utica Shale is unknown. So far, according the Akron Beacon Journal, 12.8 billion cubic feet of natural gas and natural gas liquids were recovered. Also, the Ohio Geological Survey estimates the shale may hold 1.96 billion up to 8.2 billion oil barrels. However, health and environmental concerns led New York’s Governor Andrew Cuomo to close the door to new gas drilling techniques until further evidence is gathered. Hence, even though landowners in New York are free to do business, companies may not be willing to start operations in the state until regulation changes.

Source: USGS

Chesapeake Energy Corporation (NYSE:CHK) looks to curb the unfavorable decision and regulation in New York by expanding operations in Ohio and West Virginia. So far, state authorities have granted the firm twenty permits to begin operations in the Carroll, Harrison, Columbiana, and Guernsey counties in Ohio. Additional permits were obtained by the company to start operations in the Ohio, Wetzel, and Marshall counties in West Virginia.

Disclosure: Jodor Jalit holds no position in any stocks mentioned