Chesapeake Energy filed for Chapter 11 bankruptcy protection

U.S shale player, Chesapeake Energy Corporation, announced that it had voluntarily filed for Chapter 11 bankruptcy protection in the U.S. to help eliminate US$7 billion of debt after the recent oil price crash and coronavirus pandemic has had a devastating impact on the industry.

In a statement, Chesapeake says it intends to use the proceedings to strengthen its balance sheet and restructure its legacy contractual obligations to achieve a more sustainable capital structure. Chesapeake will implement a Chapter 11 plan of reorganisation to eliminate approximately $7 billion of debt. 

Chesapeake said it will continue to operate during the Chapter 11 process. 

Doug Lawler, Chesapeake's president and chief executive officer, stated, "We are fundamentally resetting Chesapeake's capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths. By eliminating approximately $7 billion 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. With these demonstrated strengths, and the benefit of an appropriately sized capital structure, Chesapeake will be uniquely positioned to emerge from the Chapter 11 process as a stronger and more competitive enterprise."

Head of Shale Research at Rystad Energy Artem Abramov commented: "Chesapeake had a challenging financial situation for many years and some processes were accelerated by the COVID-19 pandemic and the associated oil market downturn. It would be fair to say that the company’s Chapter 11 was anticipated by a large par of market participants and this is not really representative of the rest of the industry. A material portion of the US light oil supply is now controlled by supermajors and large independents with access to the core acreage and strong balance sheets. Most of these companies can gradually adapt even if oil prices of $35-40 WTI stay around for longer. When it comes to Chesapeake, many Chapter 11 resolution scenarios are now possible, but it is quite likely that we will see significant portfolio restructuring in the next few months."

Speaking after Chesapeake Energy filed for Chapter 11 bankruptcy protection today, Alex Beeker, principal analyst on Wood Mackenzie’s corporate upstream team, said: “It’s difficult to point to another company that made more of a widespread impact on the U.S. shale sector than Chesapeake.  This filing has been a long time coming. It was likely going to happen with or without Covid-19."

He added: “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 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.

“New management teams have been in triage mode to sell assets and shift towards a more oil weighted company. Their efforts, while valiant, were too little, too late,” he noted.