Gas drillers’ debts prompt liens against leased property

An article published recently by Reuters ( uk.reuters.com/article/2012/12/27/chesapeake-mcclendon-idUKL1E8NQ2H720121227 ) reports that a number of contractors have filed liens against property that has been leased to Chesapeake Energy for gas drilling in Bradford County, PA. The liens were filed after the contractors experienced difficulty collecting payments for services rendered from Chesapeake. According to the article, such liens have been filed against properties leased by Chesapeake elsewhere in the country as well.

 Not only could such liens make it difficult for the property owners to sell their properties, but according to Stanley B. Edelstein, a Philadelphia construction law attorney quoted in the article, "Depending on the language in a mortgage, it could be an act of default."

 This new vulnerability is only the latest to be disclosed in what has been a series of revelations about the potential for financial trouble for owners of properties that have been leased for gas drilling. A number of major lenders, including Wells Fargo, the nation’s largest mortgage lender, and Bank of America, have adopted policies banning the granting of mortgages for such properties. Home insurance companies have also voiced concern, and in July it was reported Nationwide Insurance will not cover damage related to fracking.

With regard to the potential for liens, it could be argued that Chesapeake Energy, under the aegis of Aubrey McClendon, seems to have been uniquely badly managed relative to the various companies now drilling the Marcellus Shale, and that therefore the danger to future lessors to other companies is negligible. However, an  examination of documents recently made available by The New York Times (http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4-intro.html) would suggest that Chesapeake is just the weakest of the companies employing a deeply flawed business model in the Marcellus. That model has cash flow problems—just the kind of thing that leads to delayed payments to contractors—baked into the cake, and if it is as prevalent as the documents suggest, those who choose to lease their land for gas drilling are opening up their property to a significant risk of liens.

I’ll have more on the New York Times documents and the flaws they reveal in the structure of the unconventional gas drilling industry in an upcoming post.