Energy firm didn’t skim profit from shale, jury finds

A jury has decided in favor of Southwestern Energy Co. and three of its subsidiaries in a federal lawsuit over whether the companies improperly skimmed payments to landowners who signed leases with the company for natural gas drilling in the Fayetteville Shale.

The jury released its verdict Monday in Connie Jean Smith v. SEECO, et. al, after reaching a decision late Friday night.

Jurors had to decide on eight allegations, as well as determine whether to award civil or punitive damages to Smith. Those allegations were: breach of contract; fraud and deceit, acting in concert to deceive; violation of the Deceptive Trade Practices Act; wrongfully and/or willfully withholding royalties; improper sale; unjust enrichment for DeSoto Gathering; unjust enrichment for Southwestern Energy; and civil conspiracy.

The jury sided with the companies on every count.

Southwestern Energy said in a released statement that it was pleased with the verdict.

“We value our relationships with our landowners, and the hard-working jury agreed that we honored the terms of our leases,” the statement read. “We hope this verdict will put this long-standing litigation to rest.”

Attorneys for Smith could not be reached Monday.

The verdict comes as the companies have already proposed a settlement of up to $45 million for a similar class-action case — Eldridge Snow v. SEECO, et. al — seeking to represent about 13,000 leases owned by Arkansas residents in the Fayetteville Shale. About 4,300 people covered by the Snow case are not covered by the Smith case.

The Snow case alleged that profits for the companies were improperly deducted from royalty payments and that the companies reported false and misleading amounts to property owners on their check stubs, among other claims. It has a fairness hearing on the settlement June 28 in Conway County Circuit Court.

The Snow case settlement prompted company lawyers to attempt to delay the Smith trial, but Chief U.S. District Judge Brian Miller denied motions to delay and the 8th U.S. Circuit Court of Appeals did not overturn him.

The federal case decided this weekend, brought by Nashville, Tenn., educator Connie Jean Smith, hinged on what the jury would decide is “reasonable” for SWN Production — formerly known as Southwestern Energy Exploration Co., or SEECO — to deduct from Smith’s promised cut of the company’s proceeds.

Smith’s case was class-action certified to represent about 12,000 Arkansas landowners — who live here or out-of-state — who Smith’s attorneys say were cheated out of $ 98 million during years of royalty payments for the use of their land to produce natural gas. That averages out to more than $8,000 per lease.

Smith owns 30.3 acres off Interstate 40 in Conway County and half of the mineral rights for the property, which she leased to SEECO in 2005. She inherited the land from her father in 1996 and has operated a tree farm of loblolly pines on it.

According to attorney accounts, in 2003, SEECO began signing leases with landowners in north-central Arkansas — the Fayetteville Shale — to extract gas from their property. In the leases, SEECO agreed to pay royalty owners one-eighth of the proceeds from the sale of the gas, while deducting only “reasonable” pre-sale costs from the royalty owners’ share. In 2005, SEECO and parent company Southwestern Energy created DeSoto Gathering to gather and treat gas collected by SEECO in the Fayetteville Shale. Southwestern Energy wrote the paychecks for employees at each company and received the funds from each company, as the other companies did not have bank accounts. SEECO then deducted the cost of buying the gas from DeSoto Gathering, which included a profit for DeSoto, from royalty owners’ monthly paychecks.

Attorneys for Smith argued that DeSoto Gathering’s profits should not have been among the costs deducted from royalty owners’ checks and that the companies were set up to boost profit for Southwestern Energy and SEECO.

“It’s not fair for SEECO to deduct massive profits that will affect its sister company and its parent company,” Smith’s attorney Brad Seidel told the jury.

Attorneys for the companies argued the contracts royalty owners signed were standard, that Smith’s attorneys hadn’t proved any ill will from the companies and that DeSoto Gathering, like any business, is entitled to charge prices that include profits for themselves. Further, they said, DeSoto Gathering charged less than other companies in the Fayetteville Shale for its services, invalidating the claim that the companies were looking for a big profit.

“The only company that can’t have a profit is DeSoto, they say,” Paul Yetter, attorney for the companies, told the jury.

Smith’s case is one of numerous lawsuits filed against Southwestern Energy subsidiaries and other natural-gas companies in Arkansas and elsewhere that allege the shortchanging of royalty payments to landowners.

Smith’s case covers the largest number of people among the lawsuits against Southwestern Energy subsidiaries in the shale.