Major shale producer Chesapeake Energy filed for bankruptcy Sunday in an effort to restructure and shed $7 billion of debt.
Pending court approval, the Oklahoma City-based firm said it had secured $925 million in debtor-in-possession financing, or interim funding, to keep operations chugging along during bankruptcy proceedings, including in Wyoming. Chesapeake’s net debt load is approximately $8.62 billion.
“We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths,” Doug Lawler, Chesapeake’s president and CEO, said in a statement. Lawler, a former Anadarko executive, came on to lead the company in 2013.
“By eliminating approximately $7 billion of debt and addressing the legacy contractual obligations that have hindered our performance, we are positioning Chesapeake to capitalize on our diverse operating platform and proven track record of improving capital and operating efficiencies and technical excellence,” he added.
Though the company eliminated a portion of its liabilities in recent years, outstanding legacy debts and contractual obligations have continued to weigh it down.
Chesapeake has been a dominant fixture in Wyoming’s oil and gas landscape for several years since it first set up shop in the state in the early 1990s.
Last year, Chesapeake produced nearly 9 million barrels of oil, ranking third in the state, according to data collected by the Wyoming Oil and Gas Conservation Commission. So far, it has maintained its ranking in 2020. It also secured 96 permits to drill in Wyoming in 2019, the fourth most in the state.
Currently, Chesapeake is the seventh largest producer of natural gas in Wyoming. A vast majority of Chesapeake’s activity has been located in the Powder River Basin. The company started leasing land in the southern reaches of the basin and gradually expanded northward.
Mark Watson, supervisor of the Oil and Gas Conservation Commission, said he was not surprised to hear of the bankruptcy announcement given the company’s high debt load. He’s also not worried about future cleanup liabilities falling on the state.
Chesapeake’s wells are productive and relatively lucrative, he said. Even if the company did pivot to a Chapter 7 bankruptcy case and liquidation, Watson doesn’t anticipate having trouble finding new owners. Watson called the trouble overshadowing the past few months during the pandemic “a nail in the coffin.”
According to Chesapeake, employees will continue to receive pay and benefits. The company told the Star-Tribune it employs approximately 1,900 workers across the country.
Founded in 1989 by the late wildcatter Aubrey McClendon, the company became known as an early trailblazer of hydraulic fracturing, or fracking, a drilling technique used to extract oil and gas in unconventional shale formations.
The company has had a fair share of financial troubles and controversy over the past three decades.
On Friday, the company’s net worth was a meager $115 million, down from its peak of $37 billion in 2008 — a staggering 99 percent decrease.
In its early days, Chesapeake dominated the natural gas market, aggressively scooping up huge swaths of land in Wyoming, Oklahoma, Texas, Ohio, Louisiana and beyond. But the influx of gas supply to the market — due in part to fellow operators also warming to fracking — led to a glut in the commodity. Natural gas prices started to wobble and deflate.
The 2008 economic recession and resulting energy price crash didn’t help. Nor did the 2015 oil and gas bust. In 2016, former CEO McClendon was charged and indicted for distorting oil and gas lease prices, in addition to unlawful collusion. The following day, he died in a car accident, which the coroner later ruled an accident.
The leading energy company has struggled to get back on its feet since then. Its often fallen short on its free cash flow, or the cash it has to reward investors or pay down its debt.
In its latest quarterly filings with the Securities and Exchange Commission, Chesapeake cited the increased volatility in oil and gas prices from the pandemic as reason for concern. “Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020,” the filing stated.
Several analysts said Chesapeake’s strained finances were nothing new.
“This is a long overdue reckoning for a company that had overextended itself almost from the beginning,” said Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis, an energy policy think tank.
Now faced with plunging energy demand and prices precipitated by the COVID-19 pandemic, the once preeminent shale producer has voluntarily filed for bankruptcy.
According to Williams-Derry, Chesapeake’s filing may not be the last bankruptcy the energy world will see in the coming months.
“What I do think you can expect to see is that companies that are not in a good condition — the companies with a lot of debt, or companies that didn’t do what is called hedging, which is basically protecting themselves against price declines — those may be the companies that may be facing a significant risk of bankruptcy over the next six to nine months.”
That’s a poor position to be in at a time when banks and other lenders are adverse to doling out loans to energy companies, he said. The trend could also foreshadow the longer term economic uncertainty the fossil fuel sector may face.
The tough market conditions have forced Wyoming oil and gas producers to shut in wells and lay off workers in droves since March.
“We are in the midst of a difficult time for oil and natural gas and would expect more upheaval in the industry over the near to midterm,” Ryan McConnaughey, of the Petroleum Association of Wyoming, said of the current environment in an emailed statement. “While prices have increased from historic lows in recent weeks, they are still well below the break-even price for Wyoming producers — who contend with higher taxes and production costs here than their counterparts around the country.”
“I am, however, optimistic about the resiliency of our members,” he added.
The case will be heard in the U.S. Bankruptcy Court for the Southern District of Texas.
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