In the past year, embattled Chesapeake Energy has faced the ire of investors, a boardroom shake-up and revelations of accounting issues that, combined with weak prices for natural gas, have undermined the company’s stock price.
But the troubles of the country’s second-biggest natural gas producer after ExxonMobil have also taken their toll on a less visible side of the company’s operations.
In western New York State, where Chesapeake has been using hydraulic fracturing to unleash new natural gas reserves from the Marcellus shale formation, contractors have had a harder time getting paid as Chesapeake’s financial problems mounted, said Charlie Joyce, who sued the company last year for unpaid bills.
Joyce is the president of Otis Eastern Service, a fourth-generation family-owned pipeline contractor in Wellsville, N.Y., near the Pennsylvania border.
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From the beginning, Joyce said, Chesapeake was a tough negotiator, often playing contractors against each other to get lower prices.
He assumed the company was used to the contractor rates in fields farther south, such as the Haynesville, Barnett and Eagle Ford shale plays in and around Texas. Laying pipelines in New York and Pennsylvania can be costlier because of the colder winters, stricter environmental regulations and lack of highway access, he said.
Otis is one of the most prominent pipeline contractors in the region, and Joyce said he was pleased to win business from Chesapeake because it was the biggest driller in the Marcellus.
What began as a lucrative partnership, however, began to sour in the past year.
At first, Chesapeake paid its bills in about 45 days, then it slipped to 60 days, then 90, then even longer, Joyce told me during a recent business trip to Houston.
Finally, when Otis’ backlog hit about $5 million, “they just stopped paying me all together.” Chesapeake then offered to settle for 50 cents on the dollar, he said.
Contract disputes are about as common in the oil patch as drill pipe, but Joyce described Chesapeake’s actions as going beyond the typical oil field squabbles. He was surprised that such a large company was essentially refusing to pay its bills.
“The players up there aren’t like that,” Joyce said. “They do business just so much differently than anybody else up there. It permeates everything they do.”
In October, Joyce decided somebody needed to take a stand. Otis filed suit against Chesapeake and its Access Midstream partnership, claiming it was owed more than $15 million.
“I decided I wasn’t going to let this happen,” he said. “They need to stop doing this to people. I feel that I’m positioned well enough that I’m a good person to take a swat at them.”
A Chesapeake spokesman referred questions about the dispute to Access. Access’ area manager, Patrick Myers, disputed Joyce’s claims.
“We’re paying these folks, and we continue to pay other folks,” he said. “We’ve had a very long-standing, positive relationship with Otis. It’s very unfortunate that they’ve taken the tactic that they’ve taken.”
In December, Chesapeake and Access agreed to pay about 40 percent of the money Otis claims it’s owed, but that hasn’t softened Joyce’s stance.
He’s outraged that the Oklahoma City-based company is trying to negotiate on what he said are invoices for work Otis completed at an agreed-upon rate.
During the dispute, Otis has struggled to pay its vendors and Joyce said he worries about the impact that Chesapeake’s tactics will have on other, smaller companies in the area.
It may seem like a small, perhaps even insignificant disagreement, but it’s a reminder of the unintended costs of bad management. Many of Chesapeake’s financial woes were self-inflicted, the result of a board that had lax oversight and didn’t keep the company’s gunslinging chief executive, Aubrey McClendon, in check.
A board shake-up and the appointment of Houston’s Archie Dunham as non-executive chairman may fix those shortcomings, but their consequences are still playing out in small towns such as Wellsville, N.Y.
That, more than the money, is what bothers Charlie Joyce.
“They have a big stake in where I live,” he said.