The alleged bid-rigging came to light last year following an investigation by Reuters. The news agency said today that Northstar is seeking triple damages from Chesapeake and Encana.

Emails between soon-to-be former Chesapeake CEO Aubrey McClendon and Encana executives made public by Reuters and Northstar are pretty damning. In one exchange, Chesapeake and Encana suggest that only one of the two companies bid in an auction against Northstar with the intent of keeping the lease prices down. Because Chesapeake was the only bidder in that auction, the lease acreage it acquired from Northstar cost it about 25% less than what Northstar claims was the market rate.

Reuters spoke to a former U.S. Justice Department antitrust attorney who said:

There is one world where you do not want to be an antitrust defendant. That is where there are really damning documents suggesting you engaged in restraint of trade. This is the world that Chesapeake and Encana find themselves in right now.

Encana’s CEO retired unexpectedly in January, shortly before McClendon was shown the door at Chesapeake. Both companies say the departures are not related to the antitrust investigations.

Nucor Corp. (NYSE: NUE) is building a new plant in Louisiana that will use natural gas to fire a direct-reduced iron (DRI) plant. The company signed a long term deal with a division of Encana Corp. (NYSE: ECA) to carry out an onshore drilling program that will keep the steelmaker’s natural gas supply available at low cost for more than 20 years.

An Austrian steelmaker has also said that it is considering a new $660 million U.S. plant to take advantage of the abundant and cheap supply of U.S. natural gas. Bloomberg News reports that a DRI plant produces steel for about 20% less than the traditional blast furnace.

Commodity trading firm Cargill Inc. has formed a joint venture with an Australian steelmaker to build a DRI plant in Ohio and India’s Essar Global Ltd. is planning a new plant in Minnesota.

While it is true that the U.S. currently wallows in an over-supply of natural gas, plans to export some of the gas as well as increased domestic demand could drive the price much higher. Even if the price were to double to around $8 per thousand cubic feet, however, making steel with the DRI method will continue to enjoy a cost advantage.

Paul Ausick

Reuters reports exclusively today that it has now uncovered e-mails between top executives of the two companies showing that Encana revealed that it planned to cut back on its leasing efforts in the Collingwood shale play, and the Chesapeake CEO Aubrey McClendon “ordered Chesapeake to renegotiate or delay closing on at least 10 deals that his company was negotiating with major land lease holders.”

If the report is true, then the information exchange between the companies, though not in itself illegal, may be found to be anti-competitive. A former anti-trust lawyer with the DoJ told Reuters:

Asking your competitor whether they are going to stop leasing in, or exit, the Michigan market is an offer to collude.

Here’s an email exchange included in the Reuters story:

In an email to [Encana’s US president Jeff] Wojahn on July 16, McClendon attached comments from [an] online forum that claimed Encana may be stopping its leasing efforts in the Collingwood shale. McClendon wrote: “Jeff: does this mean no more drilling and no more interest in joining forces down the road?”

Three days later, Wojahn replied to McClendon. “Aubrey, we have decided to discontinue further leasing at this time,” Wojahn wrote. “We will reassess our position after the summer.”

McClendon responded quickly: “Are you wanting to exit the play entirely? Have 5 minutes to discuss today?”

Wojahn emailed a few hours later: “We are not exiting the play but rather we are stopping further leasing. At this time we are happy with our current position. We will reassess this fall as we evaluate the October state sale.”

Following this exchange, McClendon allegedly ordered Chesapeake staff to slow down lease signings, knowing that he now had no competition.

Will Chesapeake’s newly constituted board of directors take any action based on this report? Don’t count on it. At most, the board is likely to say the company is cooperating with the DoJ and promises to take appropriate action at the appropriate time. Wonderful.

Paul Ausick

Microsoft (NASDAQ: MSFT) takes a $6.2 billion write-off, primarily due to its buyout of aQuantive. (Reuters)

The U.S. probe begins on whether Chesapeake Energy (NYSE: CHK) and Encana (NYSE: ECA) colluded on land price deals. (Reuters)

Samsung loses a legal effort to lift a ban on sales of its tablets in the U.S. — a win for rival Apple (NASDAQ: AAPL). (Reuters)

Carl Icahn presses his proxy fight for Forest Labs (NYSE: FRX). (Reuters)

For-profit colleges benefit from “a ruling overturning a main component of federal regulations that would have penalized the schools for graduating students with substantial debt.” (WSJ)

Greece will bid for a better bailout deal that would include a rescue of its banks. (WSJ)

The average price of homes in China’s 100 largest cities rises for the first time in nine months. (WSJ)

Car sales in India slow considerably. (WSJ)

General Motors (NYSE: GM) may return to Facebook as an advertiser. (WSJ)

Fiat may export more cars to the United States. (WSJ)

Record heat threatens the U.S. grain harvest. (FT)

Apple fails to get U.S. officials to ban HTC phones. (Bloomberg)

Douglas A. McIntyre

And Exxon is not alone. The other top producers of natural gas — Chesapeake Energy Corp. (NYSE: CHK), BP plc (NYSE: BP), Encana Corp. (NYSE: ECA), ConocoPhillips (NYSE: COP), Devon Energy Corp. (NYSE: DVN), EOG Resources Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), Ultra Petroleum Inc. (NYSE: UPL), and Questar Corp. (NYSE: STR) — are suffering from an identical problem.

The spot price for natural gas fell below $2/thousand cubic feet earlier this year, and has jumped recently to trade at around $2.84/thousand cubic feet today. Only the Marcellus shale play can post a production cost anywhere near that number. Other natural gas plays all boast production costs above $3.50/thousand cubic feet.

Another consideration related to Tillerson’s remarks is whether this could be a roundabout way of telling investors that quarterly earnings are going to be weak. After all, the company is losing money on natural gas and crude prices are falling at the same time. The consensus estimate for Exxon’s EPS in the June quarter is $2.03, down from $2.37 in the same period a year ago and below the consensus estimate of $2.08 from just a month ago.

According to Exxon’s 2011 annual report, US natural gas production costs averaged $3.45/thousand cubic feet at consolidated subsidiaries and $5.08/thousand cubic feet at equity companies. Production costs for a US-produced barrel of oil were $90.65. Today’s WTI spot price at the Cushing, Oklahoma, hub is $79.75/barrel.

Exxon’s US production costs for crude oil are lower than in any of its other regions. The global average in 2011 was $100.79. With Brent crude at around $92/barrel today, that’s not a good sign either.

The numbers don’t look all that good for Exxon to do much more than meet expectations, and that by the skin of its teeth. And meeting expectations is often not good enough for investors.

Exxon’s shares are trading at $82.96 today, up about 0.7% in a 52-week range of $67.03-$87.94. The United States Natural Gas Fund (NYSEMKT: UNG) is up 3% today at $19.75 in a 52-week range of $14.25-$46.40.

Paul Ausick

In a special report this morning, Reuters revealed emails that indicate that Chesapeake’s CEO, Aubrey McClendon, directed one of the company’s vice-presidents to “smoke a peace pipe” with Encana Corp. (NYSE: ECA) in an effort to rein in the bidding on leases for rights to drill on properties in Michigan’s Collingwood shale play. The two companies admit discussing the formation of an “area of mutual interest,” but that no joint venture was formed nor did the two companies submit any joint bids.

That’s fine, but that is the answer to a question that wasn’t asked. The issue is did the two companies collude to restrain lease prices. Such collusion violates the Sherman Antitrust Act and could lead to fines of up to $100 million for each company and up to $1 million for the individuals involved for each offense. A 10-year jail sentence is also possible, but rare.

Reuters cites a former Justice Department attorney, now a law professor at the University of Houston:

Nothing in the documents suggests any benefit to the joint venture other than making the price fall. If it has no other purpose, then it’s just a shell and doesn’t change the liability for illegal conduct.

Another former DoJ attorney concurred:

The famous phrase is a ‘smoking gun.’ That’s a smoking H-bomb. When the talk is explicitly about getting together to avoid bidding each other up, it’s a red flag for collusion, bid-rigging, market allocation.

Added to McClendon’s dubious well-participation benefits and the replacement of more than half Chesapeake’s board of directors, the second-largest US natural gas producer now faces what could be its most serious problem so far.

Shares of Chesapeak are down about -5.5% in pre-market trading this morning, at $17.60 in a 52-week range of $13.32-$35.75. Encana’s shares are down nearly -6% at $18.68 in a 52-week range of $17.02-$32.23.

Paul Ausick

The company’s drilling plan for 2012 called for 40-45 new wells and has now been expanded to 115-120 new wells in 10 plays focused primarily on oil. Encana also said it would drill 350 oil and liquids-rich wells in 2013.

Encana’s expanded drilling program could benefit the services companies like Baker Hughes Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), and Schlumberger Ltd. (NYSE: SLB), but a bigger knock-on effect may hit some of the company’s neighbors in the various plays where Encana will be drilling.

For example, in the Eaglebine shale play in East Texas, the company plans to drill a dozen wells in 2012, of which four are already producing 165-230 barrels/day each of light oil. Gastar Exploration Ltd. (AMEX: GST) holds acreage adjacent to Encana’s property as well as near a well drilled by EOG Resources Inc. (NYSE: EOG) that is rumored to have an initial production of 1,000 barrels/day of oil.

Likewise, in the Tuscaloosa Marine shale of Louisiana and Mississippi, Goodrich Petroleum Corp. (NYSE: GDP) holds a sizeable stake. Chesapeake Energy Corp. (NYSE: CHK) holds properties adjacent to Encana’s holdings in the Utica shale play in Ohio. Encana has plans to drill a total of 12 wells in the Tuscaloosa Marine play, of which 2 are completed and producing 930-1,080 barrels/day of light oil.

Encana’s announced increase will take the company’s 2012 capital spending to $3.5 billion. What worries investors is that the company’s forecast cash flow is also $3.5 billion for 2012 and that Encana’s capex forecast for 2013 has been raised to $4-$5 billion on cash flow of $2.5-$3.5 billion. The company said it will divest assets worth $1-$1.5 billion in 2013.

That’s a pretty big bet and in order for the bet to pay off, natural gas prices will almost certainly have to rise. If the oil and liquids don’t come in as strong as current production indicates, Encana could be in for some pretty tough times.

Shares are down more than -8% at $19.90 in a 52-week range of $17.02-$32.23. Volume is nearly 12 million shares already today, compared with an average of around 7.6 million shares traded.

Paul Ausick

The big move is happening in the exchange-traded product of United States Natural Gas (AMEX: UNG) with a 5.1% gain to $18.03.  If you want to something really wild, the VelocityShares 3x Long Natural Gas ETN (AMEX: UGAZ) is up over 15% at $24.12 due to its triple-leverage.

Devon Energy Corporation (NYSE: DVN) is down 0.8% at $56.91 with a $23 billion market value while Encana Corporation (NYSE: ECA) is up 0.7% at $22.26 with a $16.4 billion market value.

Westport Innovations Inc. (NASDAQ: WPRT) is up 3.8% at $30.09 and volume is light so far today.  T. Boone Pickens, who last week predicted that nat-gas would reach $3.00 again by next summer, is not finding trader love on his Clean Energy Fuels Corp. (NASDAQ: CLNE) as the shares are down 1.6% at $13.78.

Chesapeake Corporation (NYSE: CHK) is also not finding any love today, but it is of course trading around company-specific sentiment right now due to its ongoing pressure against management and CEO Aubrey McClendon.  Chesapeake shares are down 1.4% at $17.84.

Usually we see a move in the producers that coincides with the direction of the commodity.  Monday is so far only showing a mixed bias.

JON C. OGG

The US Energy Information Administration (EIA) last published a list of the top producers ranked by “wet” gas reserves in 2009. Exxon/XTO is the biggest, of course, followed by Chesapeake Energy Corp. (NYSE: CHK), BP plc (NYSE: BP), Encana Corp. (NYSE: ECA), ConocoPhillips (NYSE: COP), Devon Energy Corp. (NYSE: DVN), EOG Resources Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), Ultra Petroleum Inc. (NYSE: UPL), and Questar Corp. (NYSE: STR). Both BP and Chesapeake have been shedding assets since this list was compiled, but they are not likely to have dropped out of the top ten.

Natural gas producers have stopped hoping that prices will rise and have begun reducing production in an effort to boost prices. Those cutbacks appeared to bear fruit yesterday following the EIA’s weekly storage report that showed a smaller than expected inventory build. But inventories remain about 30% above the top of the five-year range.

There are about 2.9 trillion cubic feet of natural gas in storage today, about 71% of maximum capacity of 4.1 trillion cubic feet. The EIA estimates that total gas in storage by November will be just short of that mark. And with marketed production estimated at nearly 68.5 billion cubic feet/day for 2012, keeping the amount of gas in storage within limits means that at least 460 billion cubic feet of production will have to be cut.

The good news for producers is that demand is growing at a slightly faster rate than production now. Production is up 3.4% over 2011, but demand is up by 4.1%, driven by fuel-switching at electricity generating plants.

More good news for gas producers came from last week’s data on drilling rigs. Baker Hughes data showed a gas rig count of just 565 last week, the lowest level in 13 years. While that’s good news, the produced gas associated with drilling for shale oil has increased as producers go after the higher priced liquids. Total production cuts so far are estimated to total about 1 billion cubic feet/day, not nearly enough to reduce supplies significantly.

The market’s reaction to yesterday’s storage report yielded the biggest one-day jump in natural gas prices in more than three years. The spot price is up another 0.5% today, likely anticipating another decrease in rig counts. The United States Natural Gas ETF (AMEX: UNG) is down about -1.8% today after rising about 15% yesterday. That’s probably due to some profit taking.

The short version of this story is that natural gas production needs to fall more rapidly and significantly in order to push the price up to around $3 or more. There really doesn’t appear to be any way for that to happen in the near term on any sort of permanent basis.

Paul Ausick

Chesapeake Energy Corp. (NYSE: CHK) has also discussed natural gas exports as a means to boost natural gas prices, and EOG Resources Inc. (NYSE: EOG), Apache Corp. (NYSE: APA), and Encana Corp. (NYSE: ECA) have already announced a plan to begin shipping liquefied natural gas from Kitimat, British Columbia, in 2016. Cheniere Energy Inc. (AMEX: LNG) has already obtained the required permits to allow it to export liquefied natural gas from its Sabine Pass facility in the Gulf of Mexico.

Natural gas exports would certainly result in higher domesticd prices, but Tillerson emphasized job creation, higher tax revenues, and a better US balance of trade in his remarks. Liquefied natural gas fetches $15-$16/thousand cubic feet in Asia, compared with around $2.50/thousand cubic feet in the US.

Exxon is the largest US producer of natural gas following its 2010 acquisition of XTO Energy.

Paul Ausick