Restructuring / Bankruptcy Sale

Chesapeake Commences Chapter 11 Bankruptcy Restructuring

By Deepak Sharma
June 29, 2020
3 minutes read
Gas Flare

Chesapeake Energy Corp. has filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. In a press release issued on Sunday, the company stated that it intends to use the proceedings to strengthen its balance sheet and restructure its legacy contractual obligations to achieve a more sustainable capital structure.

Despite its attempts to sell assets to raise much-needed cash, Chesapeake’s efforts to remain afloat have ultimately been stymied by persistently low natural gas prices in the U.S., which have fallen from a high of around US$14 per thousand cubic feet (/Mcf) in 2016 to US$1.60/Mcf at present.

Chesapeake disclosed that it has now 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 the company will implement a Chapter 11 plan of reorganization to eliminate US$7 billion of existing debt.

As part of the RSA, the company has secured US$925 million in debtor-in-possession financing from certain lenders under its revolving credit facility. The company and certain lenders under the revolving credit facility have also agreed to the principal terms of a US$2.5 billion exit financing, consisting of a new US$1.75 billion revolving credit facility and a new US$750 million term loan.

Additionally, the company stated that it has the support of its term loan lenders and secured note holders to also backstop a US$600 million rights offering upon exit.

The Oklahoma City-based company, originally co-founded by the late Aubrey McClendon and Tom Ward in 1989, was one of the first U.S. companies to aggressively deploy breakthroughs in horizontal drilling and hydraulic fracturing (‘fracking’) technology to produce oil and natural gas previously trapped in tight shale formations. Chesapeake’s success at using fracking to produce hydrocarbons helped drive the emergence of the U.S. as a major global exporter of oil and natural gas.

However, over the past decade, the company over-extended itself by amassing too much debt to fund its growth, whilst several substantial claims of corporate malfeasance against Mr. McClendon, and a series of environmental violations and operational accidents left the company struggling to survive.

“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,” said Doug Lawler, Chesapeake’s President & CEO.

“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,” he added.

Alvarez & Marsal is serving as restructuring advisor, while Rothschild & Co and Intrepid Financial Partners are serving as financial advisors to Chesapeake.

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