Chesapeake Energy Declares Bankruptcy

After trying for years to manage its debts, Chesapeake Energy finally declared bankruptcy on Tuesday.

Although the company is now much smaller than its former self, it was once the country’s second largest producer of natural gas. It was a free-spending company that had assets in almost every major energy-production area in America. It is now possible to redevelop parts of the sprawling, green campus in northwest Oklahoma City.

However, company leaders claim that they have retained key assets following the seven-month bankruptcy process during which Chesapeake restructured its debt to the tune of billions of dollars.

CEO Doug Lawler stated that Chesapeake is ready to demonstrate the value of its portfolio of operational areas, which it has worked hard to maintain and improve over the past eight years.

Lawler stated this week that the opportunity to free the company from its legacy problems is something Lawler was looking forward to. “We have made tremendous progress in operations, capital efficiency and competitiveness over the last several years on matters we could control.

“What we couldn’t control was the amount of debt the company had and the protection provided by strong contracts for midstream operations. Although the bankruptcy process was extremely stressful and painful, it allowed us to collaborate with our creditors to maximize our assets’ value.

“It will be a very different company going forward.”

Operational footprint

Although Chesapeake Energy today is smaller than it was just a few short years ago, it still has most of its assets.

The following information was provided by Chesapeake in a filing it made last week with the Securities and Exchange Commission. The company was operational as of December 31,

  • Approximately 540,000 acres were held in the Appalachian Basin. Its wells produced an average of approximately 1.1 billion cubic feet per day (Bcf/d), in the fourth quarter.
  • Approximately 225,000 acres of the Haynesville Shale Field on the Gulf Coast. Its wells produced approximately 558 million cubic feet per day (Mmcf/d), in the fourth quarter 2020.
  • Approximately 220,000 acres of Eagle Ford Shale field in south Texas. Its wells produce approximately 84,000 barrels per day of crude oil (equivalent).
  • Approximately 420,000 acres were held in the Brazos valley portion of Eagle Ford Shale Field. Its wells produced approximately 41,000 barrels per day of crude oil in the fourth quarter of 2020.
  • Approximately 190,000 acres of Wyoming’s Powder River basin were held. The wells produced approximately 22,000 barrels per day of crude oil (equivalent) in the fourth quarter of 2020. This is the bulk of the Wyoming crude oil and natural gas liquids.

LaRoche Petroleum Consultants Ltd., an independent firm of petroleum engineers, geologists, and geophysicists, also filed the report.

LaRoche said Chesapeake’s 10-year proven reserves included about 125.5 million barrels of oil, approximately 3.1 Trillion cubic feet of natural gasoline and 41.4 MILLION barrels of natural gas liquids.

The company estimated that it could return approximately $4.3 trillion or $2.7 trillion to investors using those reserves.

Officials announced Tuesday that the company’s stock would be moved to Nasdaq Wednesday under the ticker “CHK”. This is the same ticker symbol Chesapeake shares were traded under before bankruptcy. These prebankruptcy shares are now worthless.

Lawler stated that the company would be a company with an average daily production of 400,000 barrels of oil (equivalent), a substantial producer in America. 

He also said that the company has committed to a reinvestment rate of capital between 60% and 70%. This number is very focused and disciplined. It will make the company more competitive for investors as well as shareholders.

Lawler stated that the company intends to generate more free cash flow than $400 million each year and more than $2 billion for investors over the next five years.

Although the company will emerge from bankruptcy with $1.3 billion of debt, it is still significantly less than the $9 billion it had at the beginning. Moreover, this debt is also better than Chesapeake’s before because it is unsecured and has a coupon rate lower than 5.7%.

Lawler stated, “I believe that reflects investors’ confidence in our assets and employees as well as our strategy.”

He stated that he believes the company can reduce its debt to $600 million by the end of this year.

We take great pride in the fundamental reset of our balance sheet. We won’t change our investment strategy. We will return cash to shareholders. We will also look for ways to reduce debt and improve the business. All this while providing a sustainable operation that investors around the world can trust.

Analysts’ Take

Enverus released Tuesday morning a note estimating that the Chesapeake post-bankruptcy Chesapeake was worth $7.7 Billion. It has a net debt of $1.4 Billion and a market capitalization of $6.3 Billion.

Enverus stated that Chesapeake expects to spend approximately 55% of its cash flow (or $700 million annually) to maintain its production profile over the next five years.

It expects Chesapeake will focus its efforts on maintaining its natural gas profile continuously growing and concentrating on its Marcellus Shale field assets.

Its analysts particularly like Chesapeake Marcellus assets. They believe that Marcellus is home to some of the most affordable gas resources anywhere in the world.

They stated that Chesapeake’s Haynesville holdings were crucial to its future. This was partly due to a restructured transport agreement it secured with Williams, which allowed gas from that field to be brought to market.

Lawler emphasized this week that Chesapeake’s top executives have worked hard to protect its most-performing assets over the past eight years.

Lawler stated that despite all our best efforts, the price war between Saudi Arabian and Russian at the beginning of last year and the subsequent demand destruction caused the coronavirus pandemic created a financial situation we couldn’t overcome. “We went through bankruptcy very painfully. 

We worked very hard to improve our business and to drive greater profitability. As a result, each year, we have managed to burn out a quarter of a billion dollars of cash by reducing interest expenses, midstream and lease operating costs, as well as general and administrative expenses.

He stressed that the company is committed to enhancing its commitment to social and environmental governance issues. The company lower coupon rates to eliminate routine Flaring from all its new wells and operations by 2025.

 

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