Chesapeake Energy, the high-flying shale company that helped turn the United States into a natural gas powerhouse and in the process pushed coal way down the ladder as a source of electricity generation, has filed for Chapter 11 protection of the U.S. federal bankruptcy code.
The move has long been expected. But in its filing and the announcement that accompanied it, the Oklahoma City-based company said it would continue to operate and laid out a plan on how it plans to exit Chapter 11.
Specifically, Chesapeake said it is undertaking several steps to emerge from bankruptcy as a company that will continue to operate:
– It has commitments of $925 million in debtor-in-possession financing that will allow it to keep paying its bills. (The company was only worth $115 million at the close of business on Friday, June 26. At one point in 2008, according to The Wall Street Journal, it was worth $38 billion.)
– It is in agreement with a “majority” of Chesapeake’s creditors to eliminate about $7 billion in debt.
– It is getting a $600 million injection of new equity to help it exit Chapter 11.
– It will also have $1.75 billion in revolving credit upon exiting bankruptcy as well as a $750 million term loan.
In the announcement of Chapter 11, the company’s president and CEO Doug Lawler said the filing will allow a “resetting (of) Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths.”
Lawler also said, “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. “
Chesapeake was founded in 1989 by Aubrey McLendon, a high-flying CEO who seemed to encapsulate the entire shale business in his personality – do deal after deal, make acquisition after acquisition, and use plenty of borrowed money to make it happen. McLendon was pushed out as CEO in 2013 and ultimately was indicted in 2016 on charges of bid rigging for leases. The day after the indictment, on March 2, McLendon drove into a bridge abutment and died in a fiery wreck. The debate goes on whether it was suicide or an accident.
In some ways, Chesapeake – and the entire shale business – has fallen from its heights because it was so successful. In 2008, when Chesapeake hit its all-time high valuation, the price of natural gas on the New York Mercantile Exchange stood at $7.87/thousand cubic feet (Mcf). On June 26, the last trading day before the Chapter 11 filing, it was down to $1.54/Mcf. And since 2008, U.S. output of natural gas has soared to just under 115 billion cubic feet per day (cf/d) from about 70 billion cf/d.
The impact of that surge from companies like Chesapeake has been enormous. The world’s petrochemical industry has been relocating back to the U.S. to take advantage of cheap feedstocks, with petrochemical plants being built in Pennsylvania and Ohio, an action that was beyond comprehension in 2008. U.S. exports of natural gas, either through pipelines or as liquified natural gas, or LNG, rose to just about 500 billion cubic feet per month earlier this year from about 109 billion cubic feet in 2008. And while coal’s use to generate electricity has dropped about 48.5% since its 2007 peak, the use of natural gas to generate electricity has risen about 67%.
Chesapeake failed to make interest payments on its bonds earlier this month. At the time, S&P Global Ratings cut the company’s credit rating from its already low level ratings in the C/CC/CCC grade (varied according to the particular bond issue) to “D,” which reflects default.
“The company continues discussions with its debtholders, and we believe these will result in a comprehensive debt restructuring or a bankruptcy filing,” S&P Global said at the time. “Given the current macro and industry conditions and the high level of debt at Chesapeake, we believe the default will be a general default and that the company will fail to pay all or substantially all of its obligations as they come due.”
The plans to restructure Chesapeake and the DIP financing that allows it to keep operating does provide a reminder about the shale industry as it goes through multiple (though less publicized) bankruptcies – the rocks remain, and they can continue to be produced if the financing is there. For now, it appears that the financing is there for Chesapeake.
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