Chesapeake Energy, Oklahoma City, has filed for Chapter 11 bankruptcy protection to facilitate a comprehensive balance sheet restructuring, the Oklahoma-based company said June 28.
The company aims to eliminate $7 billion of debt and address legacy contractual obligations while it continues to operate in the ordinary course during the process, it said.
The company entered into a restructuring support agreement with 100% of the lenders under its revolving credit facility, holders of 87% of the obligations under its term loan agreement, 60% of its senior secured second lien notes due 2025, and 27% of its senior unsecured notes.
The company has secured $925 million in debtor-in-possession financing from certain lenders under its revolving credit facility, which will be available upon court approval.
Chesapeake and certain lenders under the revolving credit facility have also agreed to the principal terms of a $2.5 billion exit financing, consisting of a new $1.75 billion revolving credit facility and a new $750 million term loan. Additionally, Chesapeake has the support of its term loan lenders and secured note holders to backstop a $600 million rights offering upon exit.
Chesapeake filed customary motions with the court seeking a variety of “first-day” relief, including authority to pay owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided.
Excess
“Chesapeake was the undisputable master of US shale gas. The massive financial burden of investing first into the shale gas boom, then its failed attempt to grow a similar strong position on oil plays, have brought the giant to its knees. Chesapeake acquired liquids-rich assets in the Anadarko basin, Utica, Niobrara, and Eagle Ford but most of this acreage failed to make profitable transition to a sustainable business model in a low oil price environment. New investors would now have to believe in commodity prices way above the current forward curves to bring the company safely through Chapter 11 proceedings,” said Per Magnus Nysveen, Head of Analysis of Rystad Energy, following the announcement.
“While Chesapeake put a lot of efforts into optimization of its operational strategy in core oil-rich assets (Eagle Ford, Powder River), it remains to be seen if these acreage positions offer commercial new development potential under current strips pricing. According to our analysis of empiric well results from the last 3 years, nearly all asset value of Chesapeake’s portfolio comes from PDP in $40 WTI environment, while new projects fail to generate fully-burdened after-tax returns greater than 10% once all overhead costs are taken into account.”
“The most likely imminent asset sale is all its Haynesville acreage, where we see a $2.5/MMbtu gas price assumption is needed to pay the revolving debt.”
Alex Beeker, principal analyst on Wood Mackenzie’s corporate upstream team 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.” They brought international upstream investors back to US onshore, he said.
Based purely on its asset base, the company is attractive, Beeker said, but “it’s hard to make any upstream assets look good with nearly $1 billion in interest and G&A expenses per year. Add more than $1 billion in midstream gathering and transportation contracts per year to that, and it’s a no-win situation.”
Half-cycle, Chesapeake’s southern Eagle Ford assets breakeven at $40/bbl in WoodMac models. The Powder River basin and the Brazos Valley acreage break even closer to $50/bbl, and both represent oil growth potential should oil prices recover, he said.
Robert Clarke, vice-president, US Lower 48 upstream, Wood Mackenzie, added that about 40% of the company’s revenue came from gas and natural gas liquids last year. “The relative stability of gas prices in 2020 – and even forecast strength in 2021 compared to oil – is one thing that differentiates Chesapeake from some of its peers. The Marcellus holdings offset some of the basin’s best producers and could have real strength."
“This filing has been a long time coming,” Beeker said. “It was likely going to happen with or without COVID-19.
“Chesapeake refinanced debt at an interest rate above 10% in December 2019. The term loan facility included some aggressive covenant provisions, including a quarterly step-down in the net debt-to-EBITDA ratio. The company was forced to make some difficult decisions, notably whether or not to keep drilling unprofitable wells to support EBITDA just to avoid breaching debt covenants," Beeker continued.”
Chesapeake’s historical strength and business model had been exploration and organic leasing in the core of a play. After acreage had been proven viable, Chesapeake would sell it at a premium to a company that would come in to fully develop the acreage. Chesapeake would then take that money and move on to the next play, Wood Mackenzie said.
“This model has netted Chesapeake $50 billion in asset sales since 2000 – a truly staggering figure. However, it came to a screeching halt with the commodity price crash and subsequent freeze in the M&A market,” Beeker said.
The company was built on the idea that “gas prices would be stay over $6/MMcf for the long term, and the company could identify and delineate plays faster than anyone else,” said Clarke.
Talk of bankruptcy 6 years years ago, after the last Henry Hub spike in 2014 didn’t carry much weight because of divestable acreage, Clarke said, and despite a history of being leveraged, “to investors in the earlier days it did not appear dangerously so, particularly if the gas price floor was $6/[MMcf] and debt was funded at sub-4% rates.”
Beeker said the position changed once the deal flow for gas properties froze. Chesapeake was unable to trim its portfolio and carried too much debt after the 2015 crash.
Efforts by new management teams to sell assets and shift to a more oil weighted company, “while valiant, were too little, too late,” he said.
“In November 2019, there were rumors Chesapeake was close to selling its Haynesville assets for $1 billion - it had dropped its last two active rigs in the basin in Sept 2019, a sure sign a company is trying to exit.” Ultimately, the deal didn’t happen, and while the money “would have gone a long way towards extending the company’s runway,” Beeker said, it may not have been enough.
Ultimately, it comes down to excess, Clarke said. Excess in terms of liabilities, costs, and gas in an oversupplied market. But also in exploration upside, acreage, production growth, and partnerships.
“To me, they’re a story of extremes. But a gas downturn this long means that excess risk has to run its course,” he said.