Preliminary $45 million settlement reached in Southwestern royalty case in Fayetteville Shale

Southwestern Energy Co. is expected to take another multi-million dollar hit to its bottom line after a Conway County judge announced a preliminary $45 million settlement in a class action lawsuit that alleged the former Arkansas oil and gas company improperly profited from natural gas production during the Fayetteville Shale boom.

According to Conway County Circuit Court filing on Thursday, Judge Terry Sullivan has given preliminary approval to the multi-million dollar settlement in a class action lawsuit filed over seven years ago against SEECO Inc., the Arkansas production company of Southwestern Energy Co.

In the case, Snow v. SEECO Inc., Conway County Eldridge Snow alleged that the Southwestern subsidiary owed him and other similarly-situated royalty owners unpaid natural gas royalties spanning a period of several years. In Thursday’s preliminary arrangement, both parties agreed that the settlement “was fairly and honestly negotiated, at arm’s length, and without collusion,” Judge Sullivan wrote in his 79-page ruling.

“In reaching this proposed compromise, the parties have considered the time, efforts and costs involved in protracted class action litigation, particularly in light of the strengths and weaknesses of their respective cases and the overall complexity of this case, and believe the value of an immediate recovery outweighs the possibility of future recovery, promotes judiciary economy, and serves the interests of justice,” Sullivan concluded.

Southwestern Energy spokeswoman Christina Fowler told Talk Business & Politics she could not comment on pending litigation. However, the Houston-based oil and gas company did file a disclosure notice with federal the Securities and Exchange Commission outlining the terms of the legal pact, yet emphasizing the “agreement contains no admission of wrongdoing, which the company continues to deny.”

Under the terms of the agreement, Southwestern said it will pay $30 million upon final court approval of the settlement. SEECO also agrees, for a period of 20 years, to calculate deductions for gathering costs incurred with an affiliate at no more than the rate charged by the affiliate minus 4.3 cents per thousand cubic feet (mcf) of gas, the SEC filing states.

The deal also released Southwestern and any of its affiliate companies from “claims relating to all past royalty calculations for affected leases, including deductions for gathering, treatment and other costs, such as gathering charges incurred with an affiliate,” the SEC filing states. “The settlement also validates future deductions calculated in accordance with the terms of the settlement.”

Judge Sullivan first certified the Snow case as a class action for SEECO royalty owners in the Fayetteville Shale on May 7, 2010. Late last year, the Arkansas Supreme Court affirmed Judge Sullivan’s certification of the Snow class.

Attorney Dan Smolen of Tulsa, counsel for the royalty owners, credited mediator Frank Hamlin of Little Rock for “skillfully” handling the settlement earlier this week. In an effort to achieve a full and complete settlement, Smolen said, the parties agreed to an expanded settlement class that includes royalty owners outside of Arkansas.

“We believe this to be a fair and reasonable settlement and a true win for the royalty owners,” Smolen said. “The settlement, if approved by the Court, provides the benefit of a substantial recovery for the class while avoiding the costs and risks inherent in adversarial litigation.”

Smolen said notice of the settlement was communicated to the entire class Friday, giving any members 30 days to opt out or object to the agreed upon terms. Sullivan has scheduled a fairness hearing on his motion for June 28 at the Conway County Courthouse in Morrilton, where the agreement is expected to be finalized.

According to other details of the settlement, attorneys’ fees can amount up to 45% of the settlement, which totals about $20.3 million. Snow, as the class representative, will receive an undisclosed sum for his services. Another $1 million or so will be set aside for expert fees and other litigation and settlement costs, all of which have to be approved by the court.

In anticipation of the case making its way to the Arkansas Supreme Court, Gov. Asa Hutchinson two weeks ago appointed Bob Estes of Fayetteville and Scott Richardson of Little Rock to act as special associate justices. High court Justices Karen Baker and Courtney Goodson both disqualified themselves from the royalty settlement case.

SOUTHWESTERN HISTORY WITH ARKANSAS ROYALTY OWNERS PREDATES FAYETTEVILLE SHALE BOOM

For Southwestern, the settlement harkens back to a similar class action case nearly 20 years ago that put the company in severe financial straits when it was headquartered in Fayetteville. On June 22, 2000, the Arkansas Supreme Court affirmed a 1998 decision in Hale v. Seeco Inc., where a Sebastian County Circuit Court awarded Southwestern royalty owners more than $109 million.

At the time, longtime Southwestern CEO Harold Korell said it would take some time for the company to recoup settlement costs and continue development of its exploration and production projects. Four days after the judgment, Southwestern announced the sale of its Fayetteville based utility business, Western Gas Company. The former Western Gas has since been sold multiple times and is now owned by Black Hills Corp, based in Rapid City, S.D.

By February 2001, Southwestern had made the decision to relocate its headquarters to Houston, where its multi-billion dollar operations are still located. Two years after the move, Southwestern invested $11 million to purchase 343,000 undeveloped acres in north central Arkansas that kicked off the infant development of the Fayetteville Shale play.

In 2004, the company had accumulated 575,000 net acres in the Arkansas shale play and began first natural gas production on the Thomas 1-9 well in Conway County. Later that year, the independent oil and gas company invested another $28 million for leases and drilled 21 test wells in the unconventional shale development.

By 2006, the company annual budget for 50 wells drilled on the nearly 900,000 acres in Franklin, Conway, Van Buren, Cleburne and Faulkner counties had spiked over 120% to $400 million. When Korell retired in 2010, Southwestern’s budget in the Fayetteville had jumped to $1.5 billion annually, pushing the company to the top tier of the nation’s independent oil and gas companies.

Shortly afterward, natural gas prices began a sharp downward turn after topping out at well over $10 per thousand cubic feet in the previous years. Since 2014, Southwestern and other Fayetteville Shale operators have slashed exploration and development budgets by hundreds of millions of dollars as natural gas prices have remained below the industry’s break-even spot price of $3 per million British thermal units (MMBtu).

At the beginning of 2016, Southwestern cut its workforce by 600 to less than 1,000 workers in the Fayetteville Shale and shook up its executive ranks. Company CEO Steven Mueller, who took the reins from Korell, abruptly resigned and was replaced by industry veteran Bill Way of Houston.

This year, Southwestern boosted its companywide capital spending to $1.3 billion, but only $120 million is planned for the Arkansas shale play. Still, company officials are hopeful that the emerging Moorefield development in the north-central corner of the Fayetteville Shale will bring the Arkansas play back to life now that the settlement agreement is in hand.

Even members of the settlement class are fully aware of the downturn in natural gas prices in the Arkansas shale play, which closed the week at $3.26 per MMBtu on the New York Mercantile Exchange. According to the court filing, SEECO has agreed to reduce the amount of natural gas gathered deductions taken from future royalty payments at 4.3 cents per mcf, or the remaining $15 million.

“This is a great settlement, especially considering the prolonged period of extremely low natural gas prices,” Smolen said.