Chesapeake Energy voluntarily files for Chapter 11 protection
Chesapeake Energy Corporation announced that the company has voluntarily filed for Chapter 11 protection in the US Bankruptcy Court for the Southern District of Texas to facilitate a comprehensive balance sheet restructuring. Chesapeake 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 operate in the ordinary course during the Chapter 11 process.
Chesapeake entered into a restructuring support agreement (RSA) with 100% of the lenders under its revolving credit facility, holders of approximately 87% of the obligations under its term loan agreement, approximately 60% of its senior secured second lien notes due 2025, and approximately 27% of its senior unsecured notes, pursuant to which Chesapeake will implement a Chapter 11 plan of reorganization to eliminate approximately $7 billion of debt.
As part of the RSA, the company has secured $925 million in debtor-in-possession (DIP) financing from certain lenders under Chesapeake’s revolving credit facility, which will be available upon court approval. The financing package will provide Chesapeake the capital necessary to fund its operations during the court-supervised Chapter 11 reorganization proceedings. The company and certain lenders under Chesapeake’s 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, the company has the support of its term loan lenders and secured note holders to backstop a $600 million rights offering upon exit.
“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 Chief Executive Officer, 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. 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.”
“In addition to securing financing to fund our ongoing operations and facilitate our exit from this process, we are pleased to have the support of our term loan lenders and secured note holders to backstop a $600 million rights offering, demonstrating their confidence in Chesapeake’s operating platform and future,” Mr Lawler added. “We deeply appreciate the hard work and commitment of our employees, who remain focused on safely and efficiently executing our business. We look forward to working productively with our suppliers, business partners and all stakeholders throughout this process.”
“Over the last several years, our dedicated employees have transformed Chesapeake’s business — improving capital efficiency and operational performance, eliminating costs, reducing debt and diversifying our portfolio. Despite having removed over $20 billion of leverage and financial commitments, we believe this restructuring is necessary for the long-term success and value creation of the business,” Mr Lawler said.
“It’s difficult to point to another company that made more of a widespread impact on the US shale sector than Chesapeake,” Alex Beeker, Principal Analyst, Wood Mackenzie, 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.”
“At the first analyst day Chesapeake held, I overheard hedge fund analysts saying: ‘What is this place? The Google of oil and gas?’ And, yes, in a way, it was,” Robert Clarke, Vice President, US Lower 48 upstream, Wood Mackenzie, added. “But – and it’s a big 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 break even at $40/bbl in Wood Mackenzie’s models. The Powder River basin and the Brazos Valley acreage break even closer to $50/bbl, representing oil growth potential should oil prices recover.
Mr Clarke 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.
Chesapeake has filed customary motions with the US Bankruptcy Court for the Southern District of Texas 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.
