Emails Shed More Light on Possible Chesapeake Energy Collusion with Encana

According to an exclusive

, Chesapeake Energy

and Encana

executives shared "sensitive information that gave Chesapeake the upper hand in deals with Michigan land owners." Reuters, reviewing emails between top executives at the companies wrote that they could "add fodder to probes by the Justice Department and Michigan authorities, who are exploring whether the two companies violated state or federal laws by discussing how to suppress land prices in the state." Encana revealed to Chesapeake that it was halting new land leasing in Michigan, which caused Chesapeake to significantly change its leasing strategy. The new strategy helped trigger falling land prices in the state. Chesapeake is the second-largest natural gas producer in the United States, while Encana is Canada's largest gas producer. According to Reuters, embattled Chesapeake CEO Aubrey McClendon told his staff to renegotiate or delay closing on at least 10 leasing deals after learning that Encana was no longer doing any deals. The implication is that the information from Chesapeake's competitor allowed it to push for much more favorable terms in its own Michigan leasing deals. This exchange of information is not blatantly illegal, but courts have found it to be anti-competitive when the information sharing is done in private and is not publicly known. A former antitrust attorney with the Department of Justice told Reuters, "it's highly suspect." Another former Justice Department attorney said, "Asking your competitor whether they are going to stop leasing in, or exit, the Michigan market is an offer to collude." Another expert that Reuters spoke with said that the emails could be viewed as an effort to gather market intelligence and may be "competitively benign." The report also notes that the Justice Department launched an investigation last month into the companies after another Reuters report showed that the competitors corresponded in emails about dividing up nine Michigan land owners and counties to prevent "acreage prices from continuing to push up," and establishing "bidding responsibilities" ahead of an October 2010 Michigan state land auction. In the months after the talks between Chesapeake and Encana, land prices fell as much as 90 percent in the state. The Justice Department investigation is another blow for Chesapeake and McClendon. Earlier this year, Reuters revealed that the CEO had arranged $1.55 billion in personal loans using his stakes in Chesapeake wells as collateral. In the wake of the scandal, McClendon lost his chairmanship of the company he founded. The IRS and SEC also opened inquiries. In 2012, Chesapeake shares have lost more than 13 percent as a combination of falling natural gas prices and investor anxiety over the company's seemingly lax internal controls have weighed on the stock. Shares have been climbing since bottoming out in mid-May, however, and Chesapeake has added more than 3 percent on Wednesday despite the continued regulatory overhangs in the name. Surging natural gas prices have helped buoy Chesapeake in recent months and investors view the company's assets as some of the best in the energy sector. Encana (ECA) shares, unlike competitor Chesapeake, are up this year. The stock has risen roughly 8 percent in 2012, but are down more than 33 percent over the last 52-weeks, largely on account of plunging natural gas prices during that period. Despite the near-term uptrend in Chesapeake, the stock has a relatively high short interest--with good reason. McClendon's reputation is one of a risk-loving cowboy who is both brilliant and reckless. Investors are clearly concerned over the probes that are taking place into both McClendon's personal dealings and those of his company. Furthermore, all too often, the line has been blurred between the two. Around 14 percent of Chesapeake's float is currently sold short, which is well above its competitors. For example, the short interest in Encana is 6.25 percent. Competitors Cimarex Energy

and Southwestern Energy

have short interests of 4.14 percent and 5.93 percent, respectively. Traders who are concerned about Chesapeake's reputation for playing fast and loose with regulations may be interested in making a hedged bet that the stock has more downside. They could short the stock while going long a group of its competitors.