Chesapeake Energy Problems Continue To Mount

March 2013, Vol. 240, No. 3

In a story that has sent rumblings throughout the pipeline construction business, Otis Eastern Service has taken on financially troubled Chesapeake Energy for nonpayment of bills. In press interviews, Charlie Joyce, president of the Wellsville, NY-based company, said Cheaapeake, the independent natural gas producer which is the biggest driller in the Marcellus Shale, was slow, then slower in paying its bills.

Otis Eastern began laying pipeline for Chesapeake in August 2008 until last fall. In his lawsuit Joyce said that by summer 2011, Chesapeake began to fall behind paying its bill. By last October, the outstanding balance reached more than $15 million. After months of fruitless demands, Otis sued. It is now in the process of filing liens on Pennsylvania land that was leased by Chesapeake.

Reuters reported that Otis’s attorney, Kenneth Africano, wrote in a Dec. 5 court filing that Chesapeake is engaging in a “slow payment” strategy to conserve cash and try to force contractors to settle for less than they’re owed.

Chesapeake attorneys wrote on Nov. 5 that the company believes Otis Eastern submitted duplicate bills exceeding $3 million and failed to complete some projects. On Dec. 13, an attorney for Chesapeake denied the “slow payment” allegation, terming it “frivolous.”

Chesapeake’s cash shortfall is no secret and some suspect that it is trying to conserve cash by delaying payments to vendors. Chesapeake had just $142 million in cash in September, down from $1 billion in June, according to SEC filings, Reuters reported. Aubrey McClendon, founder and CEO of Chesapeake, has just resigned.

On Dec. 21, Otis Eastern got what it considers partial payment – a $7.9 million check from a former unit of Chesapeake’s oil and gas infrastructure operation. In June and December, Chesapeake announced that it had sold substantial portions of its oil and gas infrastructure, and the sales could have complicated bill payments.

The lawsuit says contracts with Chesapeake and its affiliates were signed before the sales occurred. Chesapeake remains a defendant as Otis intends to continue its litigation until it receives the balance of what it says it is owed.

A spokeswoman for Access Midstream, the company formed in June from Chesapeake’s former infrastructure unit, said it is “committed to paying all legitimate invoices from all our contractors upon timely receipt of appropriate supporting documentation as required in our construction contracts,” Reuters reported.