the rumors of Chesapeake Energy‘s (NYSE: CHK) the disappearance has turned out to be true. The deeply indebted oil and gas producer has officially filed for bankruptcy protection. These procedures will have important consequences for the company’s existing investors and other interested parties, as you plan to restructure your debt and the inherited contractual obligation. This last factor could have long-range impacts, even affecting the sports world.
One of Chesapeake’s biggest contractual obligations is to intermediate companies, which collect, process and transport oil, gas and natural gas liquids (LGN) for the company. Spend more than $ 1 billion per year on these services. While it is an onerous cost to Chesapeake, these companies provide a vital link in the market for their oil and gas production. It appears that a major battle is brewing between the company and these service providers, with their dividend payments potentially suspended in the balance.
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Huge exposure
Several pipeline operators have contracts with Chesapeake, including Kinder morgan (NYSE: KMI), Williams Companies (NYSE: WMB), Energy transfer (NYSE: ET), Crestwood Equity Partners (NYSE: CEQP)and Edison Consolidated (NYSE: ED). With Chesapeake’s goal of restructuring some of its inherited contractual obligations, each faces the risk that the bankruptcy court may lower their rates or reject their contracts. So everyone has a lot at stake as Chesapeake Energy makes its way to bankruptcy.
For example, Williams gets about 6% of his Chesapeake income. This is in part due to the acquisition of that company’s collection and processing business in 2014. Williams has been working hard to reduce her outsized exposure to Chesapeake, which was as high as 18%, by selling company-linked assets and expanding assets. supporting other clients.
One of the buyers of Williams’ Chesapeake-focused assets was Crestwood Equity Partners, which acquired full control over its collection and processing operations in Wyoming’s Powder River Basin, where Chesapeake is the primary customer. In addition to that, Chesapeake sends part of its natural gas production out of the northeast Marcellus shale through the Stagecoach system, which is a joint venture between Crestwood and the utility company Consolidated Edison.
Large-scale pipeline companies like Energy Transfer and Kinder Morgan also have some exposure to Chesapeake in their systems. In the case of Kinder Morgan, it generates about $ 140 million in revenue from its contracts with Chesapeake. Although it is a considerable amount, the company produces around $ 7.5 billion dollars annually. EBITDA, which means that a reduction in the rate would not be a devastating blow. Meanwhile, Energy Transfer counts Chesapeake as a major customer on its ETC Tiger Pipeline.
Planning to fight and protect your cash flows.
Most Chesapeake intermediate service providers have been preparing for the likelihood of the company going bankrupt, so they have a good handle on its associated risk, which many consider low. For example, Crestwood released a press release in response to the Chesapeake submission. He noted that its “collection and processing systems are an integral part of Chesapeake’s operations in the Powder River basin, as a substantial amount of its revenue is derived from the sale of natural gas and natural gas liquids (LGN) produced to starting from an area dedicated to Crestwood, what is the cheapest way to market “. In addition to that, the company noted that it already restructured its contracts with Chesapeake in early 2017 to “competitive market terms in line with other intermediate operators in the basin. “Therefore, he has plenty of ammunition in any fight with the company if he seeks to adjust the terms again.
Meanwhile, a vice president at Williams Companies told Reuters that the company “is confident in our ability to uphold the integrity of our contracts” with Chesapeake because they are vital to maximize the value of its production. Similarly, the Consolidated Edison, Kinder Morgan, Energy Transfer, and other pipelines are crucial bridges between Chesapeake wells and market centers. Furthermore, most of these contracts are at lower or equal market rates because Chesapeake had previously renegotiated many of its interim deals following the 2014 oil market recession. Therefore, the bankruptcy court is less likely to decide in favor of the company if you try to get them. altered or rejected contracts.
An interesting battle to watch
Chesapeake Energy wants to emerge from bankruptcy with more sustainable capital structures and costs. While most of your creditors have already agreed to eliminate more than $ 7 billion in debt, service providers are likely not as lenient. The court could compel these companies to cut wages or even reject their contracts. If that happens, some of these pipeline companies may need to cut their dividends, causing this battle room to fight something that income investors You should watch closely.
