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Chesapeake Energy Corp announced that it had filed for bankruptcy citing growing debt and steeply dropping oil prices due to the rapid spread of the coronavirus pandemic.
On June 28, reports emerged that Chesapeake Energy Corp (NYSE: CHK) became the biggest U.S. oil and gas producer to seek bankruptcy protection in several years. The company buckled due to heavy debts and the effect of the coronavirus health crisis on the energy industry.
This bankruptcy filing marks the end of an era for the Oklahoma City-based shale pioneer. It comes after many months of negotiations with the company’s creditors. According to a Reuters report in March, the company had retained most of its debt advisers.
Aubrey McClendon, an early adopter who was also a high profile advocate of shale drilling co-founded the company. Aubrey died in 2016 in a fatal car crash in Oklahoma as he was facing a federal probe into bid-rigging. Over 20 years, he set up the company starting from a small wildcatter to a large U.S. producer of natural gas.
Chesapeake Bankruptcy Filing
Until it filed for bankruptcy, Chesapeake was the 6th-biggest produce of natural gas by volume. Doug Lawler who is the current CEO inherited the company embroiled in almost $13 billion in debt in 2013. He managed to reduce the debt with asset sales and spending cuts. Nonetheless, this year’s massive oil price rout left the firm without any capability of refinancing the debt.
After the company decided to file for bankruptcy, Lawler said:
“Despite having removed over $20 billion of leverage and financial commitments, we believe this restructuring is necessary for the long-term success and value creation of the business.”
In 2019, Lawler spent $4 billion on a deal that was ill-timed although he aimed at mitigating Chesapeake’s reliance on natural gas. That ill-timed purchase sent the company’s shares lower and in 2020 the Chesapeake’s oil and gas holdings value dropped by a staggering $700 million in Q2 2020. In May, the company highlighted that it might not be able to continue operating.
Chesapeake plans to get rid of almost $7 billion of the debt according to the company’s official statement. Another court filing states that the company has over $10 billion in liabilities and assets, respectively.
Notably, Chesapeake’s outlook plummeted in 2020 as the COVID-19 pandemic and a Saudi-Russia price war cut energy prices steeply. That drop in prices resulted in losses of over $8 billion in Q1 2020. On June 26, its stock was valued at $11.85 which is a drop of 93% since the beginning of the year. The drop left the company with a market value of $116 million.
Chesapeake has now adopted a restructuring support management with the backing of lenders to its main revolving credit facility. Some of the lenders are offering $925 million of debtor-in-possession (DIP) financing to assist in the funding of activities amid the bankruptcy proceedings.
Furthermore, the agreement also has support from various other creditors including holders of 60% of its senior secured second lien notes due 2025 and 27% of senior unsecured notes, and those behind, 87% of its term loan.
The statement does not name Chesapeake’s creditors. But, the Franklin Resources investment firm is among the major creditors. Reuters reported on June 15 that the company’s impending restructuring might turn its control over to creditors including Franklin.
Chesapeake agreed on the principal terms for a $2.5 billion exit financing. Also, some of the lenders and secured noteholders have committed to backstopping a $600 million offering of new shares. That will happen upon exiting the Chapter 11 process, according to the statement.
Chesapeake’s move to the U.S. Bankruptcy Court for the Southern District of Texas for that filing makes it the biggest bankruptcy of any American oil and gas producer since 2015. In that year, Haynes & Boone law firm started publishing data on restructurings.
The company’s advisers are turnaround specialists Alvarez & Marsal, law firm Kirkland & Ellis LLP, together with investment banks Rothschild & Co and Intrepid Partners.