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U.S. prosecutors clear Chesapeake, Encana in Michigan gas probe

Joe Carroll
(c) 2014, Bloomberg News.
CHICAGO — U.S. prosecutors cleared Chesapeake Energy and Encana, two of the nation's largest natural gas producers, of trying to cheat the state of Michigan in shale drilling auctions.

The Justice Department's antitrust division sent a letter dated April 29 to Chesapeake saying that the investigation has closed, according to a copy obtained by Bloomberg News. Encana confirmed in an e-mailed statement that it also had been informed the probe was over. The department didn't respond to voice mail messages seeking comment.

The wind-down of the federal grand jury inquiry is another step forward for Chesapeake out from under the shadow cast by former chairman and Chief Executive Officer Aubrey McClendon, who was fired last year amid a shareholder revolt and conflict- of-interest scandal. The decision to drop the case may bolster Chesapeake next week in a Michigan courthouse, where the state is pressing ahead with bid-rigging charges against both companies.

"More often than not, federal prosecutors and state attorneys general come to the same conclusion" because they are examining much of the same evidence, said Bruce McDonald, a partner at Jones Day and a former antitrust enforcer in the Justice Department.

As of the close of business Wednesday, the May 5 probable cause hearing into the state charges against Chesapeake and Encana was still scheduled to go forward, Sydney Allen, a spokeswoman for Michigan Attorney General Bill Schuette, said in a telephone interview.

During such a hearing, the accused can challenge whether the state attorney general had probable cause to bring the charges. Both companies pleaded not guilty in March.

Recruited by activist investors Carl Icahn and O. Mason Hawkins to turn Chesapeake from an undervalued, cash-burning wildcatter to a streamlined, financially-disciplined energy supplier, CEO Doug Lawler has been selling gas fields and curtailing spending on lower-profit projects.

As he approaches his first anniversary at the company, Lawler's effort to unravel the complex web of financial instruments and joint ventures left behind by McClendon remains a work in progress, said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis.

Lawler, who was a rising star at Anadarko Petroleum Corp. overseeing international and deep-water exploration before he jumped to Chesapeake, also inherited civil lawsuits in several states over gas royalty payments to landowners who allowed the company to drill wells on their property.

In February, Pennsylvania Gov. Tom Corbett wrote a direct appeal to Lawler to repair relations with landowners who signed contracts with the company to reverse "a significant erosion of the trust and goodwill the natural gas industry has established" in the state.

McClendon, who co-founded Chesapeake in 1989 with 10 employees and $50,000 in cash, has since created a new gas explorer, closely-held American Energy Partners LP. The 54-year- old scion of Oklahoma political royalty once described by Forbes magazine as America's most reckless billionaire still owns personal stakes in most of Chesapeake's 45,000 wells.

His grip on an empire that included 16 million acres of drilling leases -- an area equivalent in size to half of New York state -- along with shopping malls, restaurants and office buildings began to slip in early 2012 after a series of news articles detailed his use of stakes in company-operated wells as collateral for hundreds of millions in private loans. In some cases, McClendon secured financing from some of the same firms that did business with the corporation he ran.

The conflict-of-interest concerns coincided with a collapse in gas prices that exacerbated McClendon's wrong-way bet on energy prices that gutted the company's coffers and threatened to derail drilling plans.

An internal board investigation exonerated McClendon of any wrongdoing, though the company had to sell tens of billions of dollars in assets to cover expenses and avoid violating debt covenants.

Gordon Pennoyer, a Chesapeake spokesman, declined to comment on the Justice Department's decision.

"We are very pleased with the confirmation by the U.S. Department of Justice antitrust division that it has closed its grand jury investigation into Encana's oil and gas leasing activities in the Western District of Michigan," Jay Averill, an Encana spokesman, said in an e-mailed statement.

Chesapeake is the second-biggest U.S. gas producer behind Exxon Mobil, according to the Natural Gas Supply Association, a Washington-based trade group. Encana is No. 8 on the list.

— With assistance from Andrew Harris in federal court in Chicago and Jeremy van Loon in Calgary.

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