Shale pioneer Chesapeake Energy files for bankruptcy

Chesapeake Energy, a pioneer of the American oil shale revolution, filed for bankruptcy on Sunday, the largest American producer to succumb to a drop in oil prices that is devastating the country’s energy sector.

After skipping interest payments this month, and with the bonds due this year last trading at just 5 cents on the dollar, a Chapter 11 filing was expected sooner rather than later.

But the bankruptcy of a company that spearheaded the advance of the shale more than a decade ago, helping the United States to become the world’s largest producer of oil and gas, however, will send shock waves through a sector that supports its worst drop in decades.

“We are fundamentally restoring Chesapeake’s capital structure and businesses to address our inherited financial weaknesses and capitalize on our substantial operating strengths,” said Doug Lawler, chief executive of Chesapeake.

The company said it had reached an agreement with most of its creditors to eliminate $ 7 billion of debt and had secured $ 925 million of financing from the debtor in possession to continue operating during the bankruptcy.

The Chesapeake administration, which recently shared a $ 25 million “hold bond” that was announced just days before the company warned investors it could seek Chapter 11 protection, is expected to remain in place during the restructuring.

Stock price line chart ($) showing Chesapeake stock value.

The company has filed for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of Texas. As part of the restructuring, lenders have agreed in principle to provide $ 2.5 billion in financing upon your bankruptcy, comprised of a $ 1.75 billion revolving line of credit and a $ 750 million term loan. Lenders will also back a $ 600 million rights offer on your bankruptcy.

Chesapeake’s bankruptcy advisers include the law firm Kirkland & Ellis, Alvarez & Marsal as a restructuring adviser, and investment banks Rothschild & Co and Intrepid Financial Partners.

Analysts said the company’s Chapter 11 filing would likely open the floodgates for others in a shale patch that was already weakening this year even before the worst oil price collapse in decades hit the sector.

At the end of May, 18 U.S. exploration and production companies had filed for bankruptcy this year, according to the Haynes and Boone law firm.

Despite a rebound in the oil market from record lows in April, when the US benchmark briefly traded below zero, US oil is still trading below $ 45 or more than some weaker producers need to stay afloat.

“The sector is not dead, and the United States will benefit in the coming years from the low-cost resource that Chesapeake helped find,” said Andrew Gillick, director of RS Energy Group, a consultancy.

“But the excitement for the shale is officially dead today with the Chesapeake performance.”

Founded in 1989, Chesapeake went public in 1993, but it wasn’t until the 2000s when the company came, as hydraulic fracturing and horizontal drilling unleashed vast new reserves of shale gas trapped from Texas to Pennsylvania.

Under its charismatic founder and then CEO Aubrey McClendon, Chesapeake amassed a huge land position in the US shale basins, pledging to drill thousands of wells.

It became the second largest natural gas producer in the US, and the drilling craze helped fuel a oil shale revolution that, in a decade, would make the US the largest oil producer and producer in the world. world.

Chesapeake’s market value reached more than $ 35 billion in 2008. McClendon used his wealth, was for a time the highest-paid CEO of the US, and the company transformed Oklahoma City, the hometown of Chesapeake. He helped buy an NBA team and launched redevelopments of properties near the company’s next-generation campus.

McClendon died in 2016, a day after his indictment on charges of drilling rights fraud.

On Friday, the company’s market capitalization was only $ 116 million.

The huge debts McClendon accumulated to build his natural gas empire hampered Mr. Lawler’s efforts to transform the company he took over in 2013. Asset sales halved liabilities to $ 12 billion for the first quarter of this year. year, but the company’s total assets by then were worth just $ 8 billion.

Chesapeake was unable to consistently spend within cash flow and, in 2018, a costly effort to produce more oil, rather than gas, with an acquisition in Texas and a drilling campaign in Wyoming, was not timely as prices of crude fell last year and collapsed. spring.

“Chesapeake is like many of the other companies that followed suit: it took on too much debt and never generated free cash flow,” said John Thieroff, senior analyst at Moody’s Investors Service.

Chesapeake produced nearly 500,000 barrels of oil equivalent in the first quarter, from assets in the Marcellus shale, in the Appalachian Basin, as well as in Texas and Wyoming.

But years of weak natural gas prices, in part caused by rising supplies, Chesapeake helped design, and the constant wind against strong interest payments left Chesapeake vulnerable as the pandemic and war Price shredded the energy market this year.

Analysts say more bankruptcies are inevitable, even if oil and gas prices rise further in the coming weeks. The collapse has done too much damage to already weak companies, and more debt is coming due.

“There will undoubtedly be others to file for bankruptcy in the short term, as the sector seeks to get out from under the large amount of debt it took on during the boom,” Thieroff said.