As Chesapeake Energy Corp and Encana Corp face antitrust investigations, emails reviewed by Reuters indicate that top executives of the two rivals shared sensitive information that gave Chesapeake the upper hand in deals with Michigan land owners.
The emails show the competitors traded information about whether Encana was halting new land leasing in Michigan in 2010, and the information prompted Chesapeake to dramatically change its leasing strategy in subsequent weeks and helped send Michigan land prices tumbling from record highs.
In the days after learning that Encana was paring back, Chesapeake CEO Aubrey McClendon ordered Chesapeake to renegotiate or delay closing on at least 10 deals that his company was negotiating with major land lease holders in Michigan, documents reviewed by Reuters show.
Antitrust experts said such discussions could add fodder to probes by the Justice Department and Michigan authorities, who are exploring whether the two companies violated state or federal laws by discussing how to suppress land prices in the state.
They said the emails raise collusion concerns, given that two direct competitors appear to have exchanged critical data. "Information exchange" is not explicitly illegal under U.S. antitrust law, unlike bid-rigging and price-fixing. But it has been found by courts to be anti-competitive when the sharing is done privately, doesn't promote efficiency and involves information of value to customers - in this case, Michigan land owners.
"It's highly suspect," said Maurice Stucke, a former antitrust attorney with the Department of Justice. Said Harry First, another former Justice Department antitrust attorney: "Asking your competitor whether they are going to stop leasing in, or exit, the Michigan market is an offer to collude."
Another antitrust expert, however, played down the significance of McClendon's overture. McClendon's approach to Encana simply may have been an effort at gathering market intelligence, which would be "competitively benign," said Daniel Crane, a professor of antitrust law at the University of Michigan.
Chesapeake is America's second-largest natural gas producer. Encana is Canada's largest natural gas company. The two were fierce rivals in early 2010 in Michigan, where the Collingwood shale formation was once considered one of America's most promising oil and gas plays.
The Justice Department launched an investigation earlier this month after a Reuters report showed the competitors talked in emails about dividing up nine Michigan land owners and counties in an effort to prevent "acreage prices from continuing to push up," and establishing "bidding responsibilities" ahead of an October 2010 Michigan state land auction.
By June 2010, the price to lease prime land surpassed $2,000 an acre in parts of Northern Michigan. In the months after Chesapeake and Encana began talking about splitting up Michigan territory, prices fell as much as 90 percent. In the same period, the price of natural gas futures fell some 20 percent.
Price-fixing, bid-rigging and market allocations by competitors are illegal in the United States under the Sherman Antitrust Act, and companies can be fined up to $100 million for each offense.
Encana said it held talks with Chesapeake without reaching an agreement on a joint venture. It has begun an internal inquiry led by the chairman of its board of directors. Chesapeake also acknowledged it held talks with Encana but said the two companies never consummated any agreement and never bid jointly.
The antitrust investigation is the latest blow to Chesapeake's McClendon, one of the industry's most dynamic executives.
Reuters reported in May that McClendon arranged $1.55 billion in financing from a major financier of Chesapeake and others by mortgaging his stakes in company wells. The news agency later disclosed that McClendon operated a private $200 million hedge fund from Chesapeake offices.
In the wake of those reports, Chesapeake's board stripped him of his chairmanship, and the Internal Revenue Service and the U.S. Securities and Exchange Commission opened inquiries.
A half dozen additional emails reviewed by Reuters indicate that avoiding a bidding battle with Encana wasn't McClendon's only goal. The Chesapeake CEO also sought to learn whether - and why - Encana was easing up its effort to acquire land in Michigan. Such information appears to have helped shape how Chesapeake dealt with land owners.
In one case, a July 20, 2010 email shows, McClendon told one of his land leasing agents his rationale for slashing prices offered to Michigan land owners. "Very sorry about this, am sure some conversations will not be pleasant, but with ECA gone, we have the ability to do this and I can assure you we have the need to do it," he wrote. ECA is the stock abbreviation for Encana, based in Calgary.
The conversations about Encana's strategy in Michigan appear to have begun in mid July 2010, when McClendon reached out to Encana's U.S. president, Jeff Wojahn, to ask whether anonymous rumours on an internet chat room were true.
In an email to Wojahn on July 16, McClendon attached comments from the online forum that claimed Encana may be stopping its leasing efforts in the Collingwood shale. McClendon wrote: "Jeff: does this mean no more drilling and no more interest in joining forces down the road?"
Three days later, Wojahn replied to McClendon. "Aubrey, we have decided to discontinue further leasing at this time," Wojahn wrote. "We will reassess our position after the summer."
McClendon responded quickly: "Are you wanting to exit the play entirely? Have 5 minutes to discuss today?"
Wojahn emailed a few hours later: "We are not exiting the play but rather we are stopping further leasing. At this time we are happy with our current position. We will reassess this fall as we evaluate the October state sale."
Whether the two spoke by phone is unclear. But Wojahn's written confirmation prompted orders from McClendon, emails show.
That same day, July 19, McClendon told top deputies and agents in Michigan: "With Encana pulling away we should be able to be very aggressive in extending some extension dates and not risk losing the deals, agree?" By that, he apparently meant Chesapeake would delay lease-signings even further into the future than they already had been pushed. McClendon now had reason to believe that his top competitor for land in Michigan - Encana - wouldn't swoop in to make the deals in the meantime.
Chesapeake declined to comment on the discussions with Encana, but the emails do indicate that McClendon had been contemplating cutting back leasing land in Michigan days before the confirmation from Wojahn.
Land-lease prices in Michigan soon began to fall after the email exchange, according to the review of Chesapeake emails and interviews with land owners. The discussion came amid more specific talks by the rivals about forming what they called a joint venture.
In those talks, the companies discussed how to avoid bidding against each other in public and private land deals. In one email, McClendon directed a subordinate that it was time "to smoke a peace pipe" with Encana "if we are bidding each other up."
(Reporting By Brian Grow and Joshua Schneyer; editing by Blake Morrison and Michael Williams)