Chesapeake Bankruptcy: What it Means Going Forward

Former natural gas titan, Chesapeake Energy, is caught between a rock and hard place as it restructures amidst a landmark Chapter 11 bankruptcy filing.

Chesapeake officially filed for bankruptcy on the 26th of June, having suffered a tremendous profit margin loss of 328.59% in the latest quarter.

A change in management highlighted a shift in approach of debt management.

Former CEO, Aubrey McClendon, often received complaints from executives about the lack of formal budgeting and employee management within the company.

This comes in great contrast to current CEO, Doug Lawler, who has refinanced over $20 billion of leverage and financial commitments. However, despite leading a path to restructure the debt, Lawler needed to respond appropriately to the pandemic which halted Chesapeake’s value creation process.

We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses,” said Lawler.

“Chesapeake will be uniquely positioned to emerge from the Chapter 11 process as a stronger and more competitive enterprise.” – Doug Lawler, Chesapeake Energy CEO

Chesapeake’s Chapter 11 case likely began with the filing of a petition with the bankruptcy courts of its base of operations in Oklahoma City. Chesapeake’s bankruptcy creates what is called a “bankruptcy estate”; the bankruptcy estate is a collection of Chesapeake’s property that is wholly separate from Chesapeake itself.

A trustee will be designated to manage Chesapeake’s estate, in the current case of Chesapeake and their creditor relations, the trustee will likely negotiate creditor claims and distribute estate proceeds.

To consider appropriate means of restructuring, Chesapeake had to file with the court:

  1. schedules of assets and liabilities;
  2. a schedule of current income and expenditures;
  3. a schedule of executory contracts and unexpired leases; and
  4. a statement of financial affairs

The chapter 11 bankruptcy case of Chesapeake does not jeopardize the personal assets of the stockholders at risk other than the value of their investment in the company’s stock.

This is especially important news to investors, as Chesapeake’s stock is set for delisting from the NYSE which would be a landmark decision.

Chesapeake’s Market capitalization was $116 million as of June 26; the share sale will drastically devalue current shareholders’ stakes in the company.

Previous experiences of scheming by companies like Hertz to sell worthless shares to investors, resulted in some taking their own lives having believed they suffered tremendous losses of personal assets.

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In a statement, Chesapeake revealed the Chapter 11 protection allows for complete restructuring. As part of the trustee’s agreement with creditors, the company has secured $925 million in financing under a revolving credit facility, and has eliminated around $7 billion of debt.

It has also secured a $600 million future commitment of new equity from investors and creditors.

None of which could save the company from a delisting.

“(the ‘Company’) today was notified by the New York Stock Exchange (‘NYSE’) of its determination to commence proceedings to delist the Company’s common stock and to suspend trading of the Company’s common stock due to the Company’s decision to voluntarily file for reorganization under Chapter 11 of the Bankruptcy Code. The Company anticipates that effective June 30, 2020 its common stock will commence trading on the OTC Pink Market under the symbol ‘CHKAQ.’ “PR Newswire.

The US government could have offered additional stimulus in response to Chesapeake’s bankruptcy. However, this would only be offered in the case of Chesapeake’s renewal of positive cash generation in operations.

Without an indication of positive cash flow generation all further government assistance would have been futile. 

Chesapeake was suffering tremendous losses well before the Coronavirus pandemic hit. Bond markets were indicative of this change, and the yields did not account for pressures put upon the oil and gas industry.

The inclusion of the Coronavirus pandemic effects paints an entirely different picture of the bond market today.

Futures markets for oil and natural gas have fluctuated substantially, and many oil companies have suffered from high borrowing costs and low share prices.

Excluding Chesapeake, one-third of the face value of energy bonds in the ICE BofA High Yield Bond index are trading at distressed levels.

This is alarming, as the continuation of distressed sale rates could render many energy shares worthless.

Chesapeake’s bankruptcy filing has been a development for months now.

It’s manifestation showcases the decrease in demand for natural gas, and is an addition to the statistic of 20 natural gas and oil producers that have filed for bankruptcy this year alone.

 

Noah Hill

Equity Research Analyst

Noah Hill is a rising senior at Boston University, majoring in economics and minoring in computer science. Noah is passionate about data science, statistical analysis, and financial markets. As an active participant in the VentureCafe Initiative, Noah has associated himself with emerging leaders in the FinTech community, understanding both the passion and technology that drives the future of investment management/analysis. As a quantitative analyst in his Finance Club, he has collaborated to provide comprehensive investment strategies for a $650k student-run fund. With this background, Noah places an emphasis on statistical modelling and the impact of sentiment when deciding on an action to take with an equity. In his spare time, you can find Noah singing opera or reading up on political philosophy.

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