Reuters Strikes Hard at Chesapeake & McClendon, But For Some it Raises Questions

Reuters has been at the leading edge of investigating and reporting on Chesapeake Energy CEO Aubrey McClendon's questionable dealings for some time now, and the report a couple of weeks ago that Chesapeake and Encana Corporation engaged in price-fixing in Michigan may be one of the biggest blows landed on the energy giant to date.

But how did Reuters get their information, and should it matter?

From Columbia Journalism Review:

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.”

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.

Read the rest of this article here.

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