Chesapeake Energy Finally Succumbs With Chapter 11 Filing

One of the longest-running dramas in corporate oil and gas history finally came to a climax on Sunday when management for Chesapeake Energy announced it would seek Chapter 11 protection under the U.S. bankruptcy code. The company has traveled a long and winding road to reach this point.

Rumors about the company’s pending bankruptcy have run rampant over the past year as it teetered on the financial brink. But in reality, Chesapeake’s financial troubles go back much further, to the early years of this century, when founder and former CEO Aubrey McClendon famously made a bet on natural gas continuing to be a scarce resource in high demand whose price would remain strong for decades. Based on that market view, the company then went on a buying spree for the next several years, buying up natural gas assets and companies at very high prices. In one acquisition in which the company I worked for – Burlington Resources – was the second high bidder, Chesapeake’s winning bid was $3 per MMBTU equivalent higher. That’s a lot of excess capital deployment.

None of his assumptions about the future for natural gas turned out to be accurate, of course, but it must be pointed out that McClendon certainly was not alone in making them. For example, I personally played a leadership role in a 2003 National Petroleum Council study which attempted to project natural gas supply, demand and prices through the year 2025. The study was led by ExxonMobil and Anadarko Petroleum (acquired last year by Oxy), and included participants from many other industry companies, the Energy Department, the Department of Interior and environmental NGOs.

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The fundamental conclusions and projections of that study basically supported McClendon’s view of natural gas remaining a scarce resource with pretty high commodity prices as far as the statistical models we used could project. It was in fact the prevailing common wisdom in the industry at that time.

The NPC study projected that imports of Liquefied Natural Gas (LNG) would in fact have to make up an increasingly high percentage of U.S. natural gas supply. That incredibly wrong projection led to the building of a series of LNG import facilities in the U.S. and helped compel ExxonMobil to invest billions in its own fleet of new LNG tankers to help supply America’s coming needs.

While other operators held similar views about the future for U.S. natural gas, Chesapeake was without doubt the most aggressive in terms of pursuing new reserves. In addition to arguably over-paying for acquisitions of other companies or their assets, Chesapeake became infamous for radically driving up lease bonus prices in every new shale play, in the process running up a prodigious level of corporate debt. At one point, Chesapeake’s corporate debt exceeded that held by ExxonMobil, a company many times its size.

As natural gas prices collapsed in the late ‘00s, McClendon next turned to sales of his own company’s assets or portions of working interests in big play areas as a means of continuing to finance and pay down that debt. He sold shares of the company’s working interests in the Barnett, the Eagle Ford, the Marcellus and the Haynesville to various other players, like BP and CNOOC, but every sale also meant less and less cash flow coming into the company itself. Many in the business during that time joked about it being a sort of a pyramid scheme in which the debts would ultimately end up outstripping the company’s income and ability to pay.

 

 

 

 

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4 thoughts on “Chesapeake Energy Finally Succumbs With Chapter 11 Filing

  1. Jimmy MacAfee - June 29, 2020

    There’s a bit of that going around outside of natural gas – corporate debt. TEVA stopped paying dividends in order to pay down its debt. It’s slowly coming around, becoming more productive and paying down debts. Good idea, but a better idea not to become over-leveraged to begin with.

    A lot of companies in the energy sector have (or had) extremely high dividends – unsustainable, unless there’s a war. Wars in the middle east tend to make oil prices rise.

    A lot of CEOs and CFOs who have left their companies in the first quarter did so, presumably to cash out before the fall. (wonder if this applies to Bill Gates, too?) Insider selling. Lockheed Martin, same. Many others. (Some Q followers assumed it was because of sealed indictments and Jeffrey Epstein…?) I almost cashed out of my own small portfolio during the impeachment charade, because I saw a picture of things falling, but decided to wait it out.

    Right now, gasoline prices are going up, but as more people have begun working from home, and not going on vacation, the demand is not there. A lot of people who work from home prefer it to the lines of traffic. It’s an evolution or a revolution, whichever way you want to put it.

    The Chinese have gambled worldwide, and the virus they spread has caused massive distrust, which they’ve responded to with bribes and threats and intimidation. Talk about over-leveraged! They’ll likely collapse. And start a war or two, or WWIII.

    Instead of going to Mars or making interfaces between tech and brain, why doesn’t Elon Musk develop a separator that can deal with high-tech waste and plastics? Impossible to do this? I double-dare him – and Bill Gates and Jeff Bezos – to develop this as a priority, instead of population control and space travel, or at least in addition to this.

    The story Dave tells is of mistaken priorities and bad bets by one company. Chesapeake is not alone. As the Chinese will soon find out..

  2. Gregg - June 29, 2020

    Is there any competency among any leadership anywhere?

    It doesn’t matter where you look, corporate, federal. state, local or international politics, or ‘education’, advertising or media, sports, or Hollywood – a$$holes all!

    It is truly an exception when you see something, anything, run well,

    While many of us seek guidance from above we are in desperate need of courage and logic here in our earthly existence. Sadly, I think we may be beyond the tipping point. This November, and successive Novembers represents our last hope. And even that may not be enough to prevent the chaos and violence that the left seeks everywhere.

    1. brian - June 29, 2020

      Eph. 6:13 Therefore take up the whole armor of God, that you may be able to withstand in the evil day, and having done all, to stand.

      Right there is where we are all at. The ‘stand’ doesn’t mean standing there waiting aimlessly. Its a full on defensive stance that we are required to do, until we are told to advance again. It doesn’t absolve us of our duty to fight, first with prayer, then with our bodies. Those that know Christ KNOW we are in a war, not only for your soul but also for the souls of others and our God given freedoms. When you think about it… if the Creator, Christ, is on your side… you are in the majority regardless of who else is there.

      Lee Iococa pointed out the problem of corporate stupidity in a book some time back. He talked about the Peter Principle in that incompetent people just keep getting promoted until they are useless in their job. Jordan Perterson has a great talk on this as well an ties it in with marxism and how it slowly came to be this way. Jordon thinks there is little that can be done because its endemic to western society now and nobody really knows what to do about it. Isn’t marxism/communism wonderful…

      1. Gregg - June 29, 2020

        Good points. All these high ranking execs and pols and gov admin types (FAUCI) are paid big bucks not to intercourse up, and most are wrong and do (deliberately) intercourse up more often than not, and NONE ever seem to pay any price – therein lies the problem. Until that changes, were not going to really fix anything.

        Yet Trump is the know-nothing incompetent boob.

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