Shale Gas Giant Eyes Bankruptcy

May 11, 2020

Naive to think that Oil/gas will just go away any time soon, but clearly the corona crisis is hammering the industry, and I believe history will record this as some kind of definitive point of no return for the sector.


Chesapeake Energy Corp (CHK.N) said on Monday it is no longer able to access financing and is considering a bankruptcy court restructuring of its over $9 billion debt if oil prices don’t recover from their sharp fall caused by the COVID-19 pandemic.

Reuters reported last month that the pioneering shale gas producer was in talks to line up bankruptcy financing and was discussing a possible loan to help maintain operations through the court proceedings. 

Debt maturities and interest expenses combined total more than $1 billion, according to company filings. About $250 million of its senior notes are due this year. 

The Oklahoma City-based company re-issued a going concern warning on Monday, its second since November, and said this quarter’s review of the value of its untapped oil and gas reserves is likely to show a decline due to its distressed financial position, reducing its ability to borrow against those assets.

Chesapeake last week said it would prepay $25 million in incentives to top executives. Peers Whiting Petroleum Corp (WLL.N) and Diamond Offshore Drilling Inc DOFSQ.PK also gave out cash awards to senior management just days before filing for Chapter 11 last month. 

A bankruptcy filing would cap a long reversal of fortunes for Chesapeake, a company that helped revolutionize the energy industry through the relentless extraction of untapped oil and natural gas from shale rock formations, an environmentally controversial method that became known as fracking. 

The company was trying to pivot from natural gas to a greater emphasis on oil when a Saudi-Russian energy price war earlier this year upended its plans and the wider crude market. It was dealt another blow by the coronavirus outbreak, which caused energy demand to dwindle by shutting large swaths of the global economy. 

U.S. oil prices have tumbled around 60% so far this year and in April turned negative for the first time in history.

Houston Public Media:

What are some of the things oil companies do to prevent being in the position to go bankrupt?

One way is to have no debt. Unfortunately for all of the companies that are in the industry, except for a very few, they all have some amount of debt for their continuing operations. It’s a common aspect of the industry that an exploration and production company borrows money. I think many, many of the oil companies here in Houston and across the country have been caught with a decrease in the price for the oil that they sell compared to the amount of debt they’re carrying on their books.

The oil and gas industry was still recovering from the 2015 price crash. Does that mean some companies may be in more vulnerable situations?

The challenge for so many companies that were able to survive the downturn in the 2015 to 2017 era is that they didn’t eliminate all of the debt on their books. They kept what many consider to be a manageable amount of debt for purposes of operations. That was all premised on a belief that by 2019, 2020, commodity prices would return to a manageable level.

Some have said companies are in this situation also because of so-called cheap debt. Can you explain what they mean by that?

Where you saw a lot of the interest in the oil and gas industry over the last 10 years was from investors who flooded money into the only gas industry generally on a junior basis — meaning they loaned money to oil and gas companies at generally low interest rates with an expectation that there was such tremendous cash flow in the oil and gas industry that it would be easy for companies to repay those loans on a timely basis. That simply has not happened.

Instead, you’ve had what we’ve seen the last month of oil going negative, which was an anomaly. But still oil is low today, in the $20s, and it’s simply not high enough to repay the billions of dollars of debt that was invested in the industry over the last decade.

6 Responses to “Shale Gas Giant Eyes Bankruptcy”

  1. Sir Charles Says:

    Bankruptcies could skyrocket
    More than 200 North American oil and gas companies already went bankrupt between 2015 and the end of 2019. By that measure, the shale industry was in financial distress even prior to the global pandemic and oil market meltdown.

    => Shale Bankruptcies to Accelerate

  2. Sir Charles Says:

    After burning through hundreds of billions of dollars in cash over the past decade, the industry has consistently disappointed investors while accumulating huge debts. It now finds itself backed into a corner, increasingly shut out of capital markets. Banks were already poised to cut credit lines after writing off as much as $1 billion in shale loans last year, more than they have in 30 years of making them.

    => Shale drillers are staring down the barrel of the worst oil bust yet

  3. Sir Charles Says:

    Evercore ISI analyst James West: “I think that there were a few things that conspired in 2010 to create what people term the oil-shale revolution. And that was low interest rates, high oil prices, wide-open debt markets and wide-open equity markets for energy companies to raise capital and chase oil shale. Since that time, energy companies spent well over $1 trillion in capex [capital expenditures], and have returned somewhere around $700 billion in cash flow to the [energy exploration-and-production companies]. Very little if almost zero of that went to shareholders, for a nice juicy negative 38% cash-on-cash return [cash flow divided by total cash invested]. So we clearly have an economic problem with the model.”

  4. Reblogged this on The Most Revolutionary Act and commented:
    A bankruptcy filing would cap a long reversal of fortunes for Chesapeake, a company that helped revolutionize the energy industry through the relentless extraction of untapped oil and natural gas from shale rock formations, an environmentally controversial method that became known as fracking.

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