Southwestern Energy Faces Multiple Suits

Southwestern Energy Co. stock peaked at about $20 a share in late 1993 but hasn’t been near those heady levels since.

Now, the company also faces at least three lawsuits, including a complex $60 million class-action suit and a $70 million claim from a former consultant who was himself previously sued by Southwestern Energy.

Southwestern Energy plans a vigorous defense in the first suit scheduled to come to trial.

That would be the class-action lawsuit scheduled for trial in Sebastian County Circuit Court in Fort Smith. The suit was scheduled to begin Sept. 28, but Southwestern Energy asked the Arkansas Supreme Court — in the fifth pre-trial appeal filed in this case, in itself, a record, according to the company’s attorney — to delay the trial. A ruling from the state’s highest court was expected soon.

The case was filed two years ago against Southwestern Energy; its exploration division, SEECO Inc.; and its natural-gas utility, Arkansas Western Gas Co. The suit alleges fraud, breach of good faith and fair dealing duties, tortious interference with contractual relations, civil conspiracy and unjust enrichment.

The lawsuit seeks damages of more than $60 million for thousands of royalty interest owners who have contracts to sell to SEECO natural gas pumped from wells in Franklin, Crawford, Washington, Logan and Johnson counties. Essentially, the complaint contends SEECO underpaid royalty holders to sweeten its deal with Arkansas Western Gas.

But Southwestern Energy’s lawyer, Thomas A. Mars of Fayetteville, says that’s not so.

“There has never been any financial incentive for the company to cheat its royalty owners. If [the company] didn’t have royalty owners, it couldn’t drill gas wells.”

Lease agreements with property owners are “the heart and soul of every natural gas production company,” he says.

Contentious history

The relationship between the company and at least one of the plaintiffs’ attorneys has been acrimonious as well as litigious.

Marilyn J. Eickenhorst was a Houston lawyer with the firm of Clements, O’Neill, Pierce & Niches, a firm that represented Enron Oil & Gas Co., among the world’s largest companies. As an associate of the firm, Eickenhorst was asked to look into a possible claim against Southwestern and its subsidiaries regarding nonpayment of overriding royalties on oil and gas leases in several Arkansas counties that dated from 1939.

During the course of that investigation, Eickenhorst, as a representative of the law firm and of Enron, signed confidentiality agreements regarding various internal documents supplied by Southwestern Energy. The company supplied the documents in hopes of avoiding prolonged litigation and, at one point, apparently had an agreement with Enron to settle for $2.9 million, according to court records.

Eventually, Southwestern Energy officials became convinced that Eickenhorst was using her access to line up clients for a separate class-action lawsuit. They filed a complaint in U.S. District Court in Fayetteville and named Eickenhorst as the defendant. Although Eickenhorst contended that the confidentiality agreements didn’t apply to her, she also argued that the information she used was available in public documents.

The case file consists of eight volumes, including a 1,356-page transcript of the trial. Ultimately, Judge H. Franklin Waters found that Southwestern Energy failed to prove its claim under the Arkansas Trade Secrets Act but that Eikenhorst did indeed breech the agreements. However, on neither point did the judge find that injunctive relief was warranted.

Eickenhorst filed a claim against Mars personally, accusing him of defamation and other charges. She sought $900,000 in damages but the claim was thrown out of court.

In the meantime, Southwestern has withdrawn its settlement offer to Enron, which has opted out of the pending class-action suit and filed its own claim against the company in Franklin County Circuit Court.

Southwestern’s latest appeal to the Arkansas Supreme Court asks that the circuit court case in Sebastian County be delayed until the company is satisfied all 7,000-plus possible class members — who live throughout the nation and in Brazil, Australia and Canada — have been served notice.

Mars says one interlocutory or pre-trial appeal is unusual. Five is “clearly a record.”

Public Service Commission

As to the class-action suit, Southwestern Energy is contending all those issues were considered by the Arkansas Public Service Commission during a three-year investigation. In 1994, the PSC found that the company overpaid royalty owners to the detriment of ratepayers – customers of Arkansas Western Gas.

The PSC’s determination, Mars says, was that “if anybody benefited from this gas contract, it was these royalty owners and company shareholders. … We put forth a pretty vigorous defense at the PSC. They didn’t buy anything we had to say.”

In the class-action case, he adds, the company will argue that the PSC has already decided the issues in favor of the royalty owners.

“It’s a bizarre situation. For us to lose this case, this jury would have to reject everything that the PSC said and did and everything the [Arkansas] attorney general said and did in that three-year investigation and reach the opposite conclusion,” Mars says.

Counterclaim

While Southwestern’s lawyers prepare for the class-action trial, they’ve asked a federal judge in Oklahoma City to postpone further discovery and other work on another case.

That involves a counterclaim filed by Denny C. Whinery and his business, Skelly Exploration Co. They were among the 17 defendants named in a suit Southwestern Energy Production Co., a company subsidiary, filed late last year.

In the original lawsuit, SEPCO accuses the defendants of racketeering, fraud, breach of contract and fiduciary duty, negligence and intentional interference regarding 3-D seismic mapping – to scope out possible drilling sites — in the Boure Basin in southern Louisiana. Most of the defendants have reached settlements, but Whinery decided to fight back, and he’s seeking damages of $70 million.

His attorney is Stephen Q. Peters, a partner in the law firm of Harris McMahan & Peters of Tulsa.

Peters says Whinery was an experienced geologist who proposed involvement in the Boure project to SEPCO.

“In Louisiana, you’re dealing with very large landowners, and Denny had established a rapport with those landowners in that area through his earlier work,” Peters says.

“The essence is we have a one-page contract that we believe can be interpreted only one way. It gives us a 25 percent interest in the Boure project, which everyone agreed at the time the deal was consummated was worth at least $7.5 million [for that 25 percent interest],” he says.

SEPCO’s lawsuit, however, “severely damaged” Whinery’s reputation in the oil and gas industry, Peters says. “If you’re an oil company and read about these allegations, it would certainly make you very reluctant to do business with someone who is guilty of what SEPCO alleged.”

Whinery, through his lawsuit, contends SEPCO reneged on its agreement with him because some company executives thought his deal was too good.

“I think SEPCO decided that Denny had made too good of a deal, and I think there were some corporate politics. SEPCO decided to basically run them [the defendants] off,” Peters says.

Although Southwestern Energy officials previously indicated they had turned over evidence of wrongdoing to federal law enforcement officials, Peters says he and his investigator have found no evidence that an investigation was ever opened.

Mars says he’ll turn back to that lawsuit once the class-action case is over.

“We’ll gear that back when this is over with.”

He denies, however, Whinery’s claims and says claims of defamation and slander have become “standard big-city tactics.”

Analyst optimistic

The oil and gas industry, as a whole, has declined 40 percent to 50 percent in the past year, but the Fayetteville-based natural gas company was ahead of the pack in that regard with poor performances for several years.

Still, at least one analyst who follows the company believes Southwestern Energy has the potential to do well. Richard Straley, an analyst for Stephens Inc. of Little Rock, has followed Southwestern Energy for a decade, and he currently rates the stock “outperform,” a step above the neutral “hold” rating and one below the outright positive “buy” rating. An outperform rating means that analysts expect the stock price to appreciate between 10 and 20 percent during the next 12 months.

“I feel pretty good about the rating,” Straley says. “Stock prices have gotten down so low, I think it totally reflects the uncertainty with natural gas prices.”

Straley says Southwestern’s battering of recent years is due to its poor exploration results.

“The company recognized that and about one-and-a-half years ago, changed the management of that division.”

He adds, “Harold Korell is now president and chief operating officer. He is, I think, in effect running the company day to day.”

Although Straley says it’s probably too early to say what results the company will see under Korell’s leadership, he also says the company didn’t err in expanding exploration efforts from beyond the Arkoma Basin in Arkansas and eastern Oklahoma and, in fact, needed to do so to grow the company.

“They and a lot of companies [in the oil and gas sector] felt they needed to go beyond their immediate home territory, so to speak, and look for oil and gas in other regions. [Southwestern Energy] did that, but they didn’t have much success.”

Straley doesn’t think it will necessarily take a major strike to improve Southwestern Energy’s performance, but a series of small successes definitely would be beneficial.

“I think that’s what [Korell] is pursuing, not the high-risk, high-reward [approach] but kind of a moderate-risk, moderate-reward [tack].”