Chesapeake Energy reached an out-of-court settlement with Fort Worth investor Ed Bass and 20 other landowners on the eve of a trial over millions of dollars in unpaid royalties from natural gas drilling.
Late last month, U.S. District Judge Ed Kinkeade ruled in the Bass-led group’s favor, saying that the Oklahoma-based energy giant improperly deducted postproduction costs from royalty checks. His judgment did not specify a dollar amount, but court documents indicated that the landowners could be owed at least $8.6 million and there was speculation that a jury could possibly double that amount.
Attorneys for Chesapeake and the Bass-led group were poised to pick a jury Tuesday to determine final damages, but intense negotiations over the Labor Day weekend led to the last-minute settlement. Exactly how much money will change hands will be confidential, an attorney said. A previous effort in August to settle the case had failed.
“We reached a deal this morning,” said Daniel Charest, the attorney representing Bass and the other landowners. “We are pleased with the result.”
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Gordon Pennoyer, a spokesman for Chesapeake in Oklahoma City, said the company was “pleased to have reached a mutually acceptable agreement and look forward to strengthening our relationship with the Bass family.”
The lawsuit against Chesapeake argued that the company improperly deducted postproduction costs, expressly forbidden by the leases, and then used the sale of gas to affiliates to set a below-market price on which the royalties were paid, also a breach of the lease terms.
The Bass case involves leases on about 4,000 acres and 42 producing gas wells. Other plaintiffs include Trinity Valley School, Texas Health Harris Methodist Hospital Southwest and Texas Health Presbyterian Hospital Dallas.
$8.6 millionThe settlement with the landowners likely exceeds this amount.
The properties in question include Bass’ Winscott Ranch on the Tarrant-Johnson county line, the 74-acre Trinity Valley School campus off Bryant Irvin Road, and the 660-acre Rall Ranch unit surrounding the school.
Chesapeake, in this case and others, has denied that it underpaid royalties to the landowners and contends that it has complied with their leases. The company has argued that it rightfully subtracts downstream postproduction costs that do not reduce the value of royalties.
We reached a deal this morning. We are pleased with the result.
Daniel Charest, the attorney representing Bass and the other landowners.
Kinkeade disagreed with Chesapeake’s arguments, calling them “unpersuasive.”
“The court does not agree with defendant’s substantive arguments and finds the record establishes that plaintiffs are attempting to enforce the contract as written,” Kinkeade wrote.
The decision is Chesapeake’s second big loss in Texas courts over how it calculates royalties to landowners in the Barnett Shale. Earlier this year, the Texas Supreme Court ruled that the company owed the Hyder family of Fort Worth at least $1 million for wrongly subtracting costs from its royalty checks from wells in Tarrant and Johnson counties.
Both cases were widely watched by the oil and gas industry and other property owners suing Chesapeake on allegations of cheating them out of millions on royalty checks. Fort Worth attorney Dan McDonald has filed more than 400 lawsuits in the past year against Chesapeake involving Barnett Shale leases.
The Bass and Hyder lawsuits were both over leases negotiated by sophisticated investors. Both parties inserted exact language that would prevent Chesapeake from deducting postproduction costs. The McDonald lawsuits allege a scheme by the company to deduct an unreasonable amount of postproduction costs.
According to the Bass group’s lawsuit, all the mineral-rights owners signed leases, now held by Chesapeake, that gave the company rights to produce gas under their property. The leases have been in place since about 2005, but production began much later.
There really wasn’t much to try except how much they owed.
John McFarland, an Austin oil and gas attorney
Under the lease terms, Chesapeake is not allowed to pass along “any part of the costs or expenses” of producing, gathering, transporting or processing gas, the suit states.
The landowners also contend that Chesapeake underpaid royalties because it based their payments on a weighted average sales price and that the leases call for the use of a referenced price when there is a sale to an affiliate.
Last, the landowners assert that Chesapeake failed to act as a prudent operator when it failed to connect a number of unprocessed wells on the Winscott West and Rall Ranch to an independent third-party system, instead allowing the gas to flow to an affilate that could not process it.
David Drez, the attorney who successfully represented the Hyders before the Supreme Court, said “once again, you have a specifically-tailored agreement.” He also was not surprised that Chesapeake settled, saying that “ninety-nine percent of cases settle.”
John McFarland, an Austin attorney who was familiar with the Bass lawsuit, said Chesapeake could have been “stung” if it had gotten a verdict that said it wasn’t a “prudent operator” in how it processed the gas. Another plaintiff could have used that ruling against them, he said.
“There really wasn’t much to try except how much they owed,” McFarland said.