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    Major US Shale Producer Chesapeake Files for Chapter 11

Summary

The company is saddled with $9.5bn in debt.

by: Joseph Murphy

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Major US Shale Producer Chesapeake Files for Chapter 11

Oklahoma-based Chesapeake Energy filed for Chapter 11 on June 28, becoming the largest US shale oil and gas producer to seek bankruptcy protection in recent years.

The company has entered into a restructuring support agreement (RSA) supported by lenders to its main revolving credit facility, it said in a statement. Some of these lenders are providing $925mn in debtor-in-possession financing. The RSA is also backed by creditors, including those holding 87% of its term loan, 60% of its senior secured second lien notes due 2025 and around 27% of senior unsecured notes.

Chesapeake also said it had agreed with some lenders on principal terms for $2.5bn in exit financing, including a new $1.75bn revolving credit facility and a new $750mn term loan. Some term loan lenders and secured note holders have also agreed to backstop a $600mn offering of new shares. The offering will take place once Chesapeake exits the Chapter 11 process.

"We are fundamentally resetting Chesapeake's capital structure and business to address our legacy financial weaknesses and capitalise on our substantial operational strengths," Chesapeake CEO Doug Lawler said. "By eliminating approximately $7bn of debt and addressing the legacy contractual obligations that have hindered our performance, we are positioning Chesapeake to capitalise on our diverse operating platform and proven track record of improving capital and operating efficiencies and technical excellence."

"Despite having removed over $20bn of leverage and financial commitments, we believe this restructuring is necessary for the long-term success and value creation of the business," he concluded.

Chesapeake was co-founded in 1989 by Aubrey McClendon, who died four years ago. Under McClendon's leadership,  Chesapeake transformed itself over the past two decades from a minnow to one of the US' leading shale oil and gas extractors. But his fast-and-loose business practices did not endear him to all the shareholders and he was removed as CEO in 2012.

At its peak, the company was the second biggest US gas producer behind ExxonMobil, but it overextended itself, racking up $13bn by the time Lawler took over as CEO in 2013. The company has since made spending cuts and sold assets to improve its leverage, but its net debt still stands $9.5bn. It lost $8.3bn in the first quarter and had just $82mn of cash left at the end of March. 

Chesapeake is currently the country's sixth-largest gas producer.

Commenting in a research note, Wood Mackenzie analyst Alex Beeker said it was "difficult to point to another company that made more of a widespread impact on the US shale sector than Chesapeake."

"For the US shale sector, there has been no bigger disruptor than Chesapeake," he said. "Chesapeake showed the market – and its competitors – how quickly production could grow, how fast projects could develop, and what the updated US model for engaging with stakeholders looked like. Remember they brought international upstream investors back to US onshore."

 Considering only its asset base, the company is attractive, Beeker said.

"But – and it's a big but – it's hard to make any upstream assets look good with nearly $1bn in interest and G&A expenses per year. Add more than $1bn in midstream gathering and transportation contracts per year to that, and it's a no-win situation," he said.

Chesapeake's southern Eagle Ford operations have a breakeven point of $40/b, WoodMac estimates, while its Power River basin and Brazos Valley assets break even at closer to $50/b. Both have growth potential if prices recover, the Edinburgh-based consultancy said.

Chesapeake generated 40% of its revenues from gas and gas liquids last year, and relatively stable gas prices in 2020, and an expected rise next year, gives the company an advantage over some of its peers, WoodMac said.

"This filing has been a long time coming," Beeker said. "It was likely going to happen with or without Covid-19."