Oklahoma City-based Chesapeake Energy has filed for bankruptcy. The company announced today that it has filed for Chapter 11 protections in the U.S. Bankruptcy Court for the Southern District Court of Texas “to facilitate a comprehensive balance sheet restructuring.”
A press release announcing the filing said that “Chesapeake will operate in the ordinary course during the Chapter 11 process.: The press release also revealed details of the financial restructuring effort:
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.
CEO Doug Lawler offered comment in the same statement:
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 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. 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.
Chesapeake’s 26-page bankruptcy filing is embedded at the bottom of this article.
‘We do not expect to be in compliance’
Sunday’s bankruptcy announcement doesn’t come as a surprise. Chesapeake has been visibly struggling for months, with major panic bells going off in November 2019 when a third-quarter earnings report noted significant losses and stated that, unless energy prices increased soon, it would be at risk of defaulting on loans — “which raises substantial doubt about our ability to continue as a going concern.”
At the time, oil prices were hovering between $50 and $60 a barrel, but they soon took a plunge owing to the combined effects of a price war between Saudi Arabia and Russia and the economic impact of the COVID-19 virus.
Today’s announcement follows a number of recent efforts to get the company back on its feet, including selling significant assets, executing a reverse stock split in order to avoid being delisted from the New York Stock Exchange for failing to meet the minimum stock price requirement of one dollar, pursuing debt restructuring, and suspending dividend payments.
The company’s SEC filing for the first quarter of 2020, submitted on May 11, said, “Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020.”
The filing also said the company was looking into “strategic alternatives,” including refinancing and Chapter 11 bankruptcy. But it warned, “there can be no assurances that the company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions.”
Like the report in November, the May filing included “going concern” language, which had been absent from the fourth quarter of 2019, submitted in February.
A few days before the quarterly report, the company also made an SEC filing regarding executive compensation.
“The Board and Compensation Committee, with the advice of their independent compensation consultant and legal advisors, determined that the historic compensation structure and performance metrics would not be effective in motivating and incentivizing the company’s workforce,” the filing said.
The filing laid out plans for $25 million to be distributed between 21 senior employees, contingent on their continued employment and meeting certain targets. According to the filing, the company’s top four executives had also agreed to have their target variable compensation reduced.
On June 15, Chesapeake skipped approximately $13.5 million in interest payments on its debt, triggering a 30-day grace period after which it would be considered in default on the loans.
A long fight against high debt
For several years, Chesapeake’s central challenge has been to get ahead of its debt, which at the end of 2019 stood at about $9 billion.
Reducing the debt has been a primary focus of the company’s CEO, Doug Lawler, who took over in 2013 after investors forced out the company’s co-founder Aubrey McClendon, partly over his lavish borrowing.
‘Gigantic impact’: Chesapeake Energy’s complex legacy by Andrea DenHoed
McClendon was a firm believer that natural gas was the fuel of the future and made it Chesapeake’s main pursuit. At its height, Chesapeake was the second-largest producer of natural gas in the United States. But the heavy leveraging began to catch up with the company when gas prices took a dive starting in 2008 and never recovered.
McClendon died in 2016, when his car hit a concrete traffic barrier the day after he had received a federal indictment for fixing land-lease auctions in violation of antitrust laws.
Under McClendon’s leadership, Chesapeake was known for its aggressive approach to leasing and drilling, and it is widely credited with pioneering the shale-drilling boom that has transformed America’s energy sector in the past few decades as hydraulic fracturing has become a common practice and U.S. fuel production has surged as a result.
According to numbers from 2019, Chesapeake has approximately 2,300 employees, of whom roughly 2,000 are based in Oklahoma.