Encana Corp. (ECA), which is probing allegations it colluded to rig land auctions in Michigan, has been expanding in the state’s burgeoning shale-exploration region after one-time rival Chesapeake Energy Corp. (CHK:US) decided to quit the area.
Encana paid about $185 an acre for the rights to drill oil and natural-gas wells on 2,156 acres (873 hectares) at an auction last month by the Michigan Department of Natural Resources, 88 percent less than the average paid two years ago in the area. The Calgary-based company said on June 25 that it began an internal review of e-mails from 2010 between Encana and Chesapeake executives concerning bidding strategies for Michigan drilling rights.
Chesapeake, which last week replaced more than half its directors and stripped Chief Executive Officer Aubrey McClendon of the chairman’s role amid a probe of his personal financial transactions, didn’t participate in last month’s lease sale, state records showed. Instead, the Oklahoma City-based company is focusing on oilfields in Texas, Ohio and Oklahoma that show more promise, said Tim Rezvan, an New York-based analyst at Sterne, Agee & Leach Inc.
“It was the combination of disappointing well results and falling commodity prices that made the whole play uneconomic from Chesapeake’s standpoint,” James Sullivan, an analyst at Alembic Global Advisors in New York, said in a telephone interview yesterday. “Somebody else may look at it as a place where they can get in at a low enough price to make a return on it.”
Encana, Canada’s largest gas producer, and U.S. competitors such as Chesapeake and Devon Energy Corp. (DVN:US) began amassing drilling rights four years ago in a geologic formation known as the Collingwood Shale that lies beneath more than a dozen counties in northern Michigan.
Chesapeake, which was responsible for major U.S. onshore discoveries such as the Haynesville Shale in Louisiana and the Utica Shale in Ohio, spent $400 million to create a presence in Michigan before deciding to leave.
The Collingwood Shale is part of the Michigan Basin that stretches beneath five states and parts of Canada. The U.S. section of the basin contains an estimated 1.2 billion barrels of crude and 11 trillion cubic feet of gas, according to the U.S. Geological Survey.
The fees that energy explorers have paid to win drilling rights in the Collingwood Shale plunged 97 percent in the past two years amid a combination of high well costs, poorer-than- expected production and tumbling gas prices, Rezvan said. The average per-acre bonus paid at the May 8 Michigan auction was $45, state records showed. That compared to $1,500 an acre at the May 2010 sale, according to Investment Technology Group Inc. (ITG:US) in Calgary.
“The shale in northern Michigan was a concept that just didn’t play out,” Rezvan said in a telephone interview yesterday.
Jay Averill, an Encana spokesman, declined to comment for this story. Jeff Wojahn, president of Encana’s U.S. division, said during a June 21 conference call that the company has had “positive drilling results” in Michigan and plans to drill five to seven new wells there this year.
Chesapeake, the largest U.S. gas producer until Exxon Mobil Corp. (XOM:US) surpassed it with the 2010 acquisition of XTO Energy, has put its 450,000 acres of Michigan leases up for sale as part of a plan to avoid a cash crunch by raising almost $14 billion by the end of 2013 with asset sales.
Chesapeake is accepting bids until July 13 and plans to close the sale by Aug. 31, according to a listing for the properties on the website of energy-asset broker Meagher Energy Advisors. The richest part of Chesapeake’s holdings lie 5,000 feet (1,500 meters) to 10,000 feet underground and contain oil and natural gas liquids such as butane, according to the listing.
The e-mails that prompted Encana’s review included an exchange between McClendon and a company vice president referring to a call with Encana to discuss oil and gas leases being auctioned off in northern Michigan in 2010. Reuters reported the e-mail exchanges on June 25 without saying where it obtained them.
Encana “immediately initiated” an investigation of the allegations, David O’Brien, chairman of the company’s board of directors, said in a June 25 statement. “Encana therefore will not provide any further information at this time,” he said.
The e-mails include discussions between the companies about divvying up Michigan counties for an October 2010 auction of state-held land leases with Encana bidding on some and Chesapeake on others, according to the Reuters report, which paraphrased those e-mails.
Chesapeake denied any collusion with Encana over bidding for Michigan leases.
Chesapeake installed former ConocoPhillips Chairman Archie Dunham to lead the board last week after shareholders Carl Icahn and Southeastern Asset Management Inc. forced McClendon out of the chairman’s role he occupied since co-founding the company in 1989.
The company’s shares have plunged 24 percent this year as the impact of falling gas prices was compounded by revelations that the CEO used personal stakes in company-owned wells to borrow from financiers that did business with Chesapeake. The Internal Revenue Service and U.S. Securities & Exchange Commission are conducting probes.
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