By: Jack Money – The Oklahoman – Chesapeake Energy Corp. aims to whittle down a substantial amount of crippling debt through a voluntary Chapter 11 process.
The Oklahoma City energy pioneer on Sunday made official what had been expected for some time, filing for bankruptcy protection in Texas. The company said it negotiated a restructuring agreement with most of its creditors that company officials assert will create a path back to profitability.
If its proposal ultimately is approved, Chesapeake would emerge from the process with a $2.5 billion line of credit, supplied through a $750 million term loan and $1.75 billion of new credit.
As part of the restructuring agreement, its term loan lenders and secured noteholders have pledged to provide it with $600 million beyond that, which the company would obtain by selling them available shares at a discounted rate.
It also is seeking court approval to spend $925 million during the bankruptcy process to keep the business operating normally.
In most bankruptcy reorganizations like Chesapeake’s, common shareholders receive little or nothing.
The filing became the only viable option left for the company earlier this year, despite various steps taken by its leadership team to both reduce its debt and rebalance its production portfolio to include more oil.
In a release the company issued Sunday, CEO Doug Lawler stated the company took itself to court to complete a process he and his team have worked toward the past six years.
“We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths,” Lawler stated.
“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 our proven track record of improving capital, 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.”
Bankruptcy details
At the end of 2019, Chesapeake Energy had $8.9 billion in debt. Including all obligations, it owed $20.5 billion, with payoffs required for nearly $13 billion of the sum between now and the end of 2024.
Particulars will be hashed out through the court process, which officials expect could take months to unwind.
But one thing Sunday’s filing doesn’t propose is the sale of any of Chesapeake’s assets.
Plus, company officials Sunday highlighted creditors’ support to provide it with the additional $600 million to help bankroll the company, going forward.
“We believe this restructuring is necessary for the long-term success and value creation of the business,” Lawler stated. “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 noteholders,” he added, noting that the support demonstrates they are confident about the company’s future.
How it got there
Chesapeake was co-founded in 1989 by the late Aubrey McClendon and Tom Ward, currently CEO of Mach Resources, with just two wells in Garvin County and 10 employees.
During the next quarter-century, its growth in revenues, net income, and employees exploded.
The company went public in 1993 with an initial public offering worth $27.6 million. Revenues more than doubled year-over-year for several years after going public. Chesapeake’s total revenues were about $1.64 billion in 2003, and by 2008 the number reached $11.35 billion.
McClendon left the company in 2013. Between 1997 and the time of McClendon’s departure, Chesapeake made 53 acquisitions involving upstream and midstream companies and other entities.
Some of its largest deals, including Appalachian Basin acreage it acquired in 2005, exchanged hands for as much as $2.2 billion.
The company held 13.2 million acres across every U.S. shale play under development by the end of 2007 and employed more than 1,700.
Three years later, Chesapeake employed 8,200 workers.
Debt explodes
However, Chesapeake’s acquisitions saddled the company with some expensive financial and operational commitments.
Chesapeake owed creditors $1.33 billion in 2001, according to S&P Capital IQ. Its debt climbed to more than $3 billion by 2004 and was nearly $11 billion by 2007.
Over time, mounting debt retirement obligations began to stress the company and forced it to begin looking to rid itself of assets.
Chesapeake’s buying spree, which already had dramatically slowed, came to a halt in 2012 when the company said it was seeking buyers for 1.5 million acres of leasehold in west Texas’ Permian Basin.
McClendon said the sale would help the company build cash. It needed to meet a total debt repayment requirement of about $9 billion that year.
The company also agreed to sell most of its remaining midstream assets for $2.16 billion to its former pipeline subsidiary in a deal partially bankrolled by Tulsa-based Williams. About 1,250 Chesapeake employees transitioned to new employers as part of that asset’s sale.
But even after that sale and others on assets totaling $11 billion that year, Chesapeake still owed creditors more than $13 billion in long-term debt.
Including volumetric production agreements and other preferred debt Chesapeake was carrying, it owed about $21.5 billion.
That, industry watchers observed, was nearly as much as Chevron and ExxonMobil combined.
And the company carried other obligations, including lease financing and operations, asset retirements, purchase agreements, equity investments, and charitable activities.
All told, Chesapeake owed more than $40 billion.
A revamped Chesapeake board of directors enacted various proposals in January 2013 that, among other things, cut the compensation and perks for McClendon and other top executives.
By then, McClendon already had stepped aside as the company’s chairman and several board members also were replaced.
McClendon’s future leading the company became more tenuous after it was revealed he used a personal stake in Chesapeake wells as collateral for up to $1.5 billion in personal loans. The Securities and Exchange Commission launched an investigation, while shareholders filed multiple lawsuits against the company over that issue and others.
By March 2013, the board and McClendon agreed he would retire on April 1.
Doug Lawler, a senior vice president with Anadarko Petroleum, was selected in May 2013 to take McClendon’s place.
Lawler and the board faced three main challenges when he took over as Chesapeake’s top executive the following month.
They needed to streamline Chesapeake’s operations. They needed to balance the company’s production portfolio, moving it from being primarily a natural gas company to one producing more oil. And they needed to tackle its debt issues.
Dealing with debt
Chesapeake finished 2015 with about $9.7 billion in debt, down from $11.8 billion one year earlier.
By mid-2018, Chesapeake reported it had eliminated $12.2 billion in debt it had owed at the end of 2012, plus reduced midstream and marketing commitments by $10.3 billion since 2014.
But despite those steps, it became increasingly difficult for the company to stay in compliance with its debt-related loan covenants.
A general economic slowdown beginning in late 2018 and concerns about Chesapeake’s debt progressively lowered the value of its stock to less than $1.
Its problems were exacerbated by its announcement in November 2019 that the company could default on its debt by March 31, 2021. Company shares took a beating, losing 17% of their value in a single day.
In December 2019, Chesapeake was notified its stock was in danger of being delisted from the New York Stock Exchange after its share value had closed at less than $1 for 30 consecutive days.
But the company kept lenders at bay by securing an additional line of credit of up to $1.5 billion with plans to retire some debt and consolidate other debt.
Officials this year stated the company intended to meet debt maturity obligations using between $300 million and $500 million raised through the sale of non-core assets.
As for its share value problem, Chesapeake temporarily cured that in April when stockholders agreed to a reverse split plan combining 200 shares into one.
But then, earlier this year, an economic war broke out over the global market share for oil between Russia and Saudi Arabia. That was followed shortly thereafter by the outbreak of COVID-19 inside the United States, significantly cutting demand for refined petroleum products here at home.
Oil prices fell dramatically, causing serious challenges for all energy companies, including Chesapeake.
Last month, Chesapeake announced bankruptcy was on the table after posting a net loss of about $8.3 billion — about $853 a share — for the first quarter of 2020.
In June, it skipped making owed interest payments on outstanding notes to investors.
While it renegotiated its lending agreements to avoid defaulting, it couldn’t stave off bankruptcy forever.
Still, Lawler said the company and its employees should be proud they were able to accomplish so much.
He added the company intends to continue to work productively with its suppliers, business partners, and other stakeholders as the bankruptcy case proceeds.
“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,” Lawler said. “We deeply appreciate the hard work and commitment of our employees, who remain focused on safely and efficiently executing our business.”
