Chesapeake Stock Swings Wildly on Unconfirmed Bankruptcy Reports

By Deepak Sharma
June 11, 2020
3 minutes read
Drilling Rig Shale Gas

The shares of Chesapeake Energy Corp. witnessed sharp moves both up and down this week, as unconfirmed news reports suggested that the company was headed for a Chapter 11 bankruptcy filing.

On Monday, the company’s shares soared 182% to close at US$69.92, but then fell dramatically again on Tuesday by around 66% to close at US$23.75. Trading in the company’s shares had been halted on Tuesday morning following a Bloomberg report after markets closed on Monday suggested that the company was on the verge of a Chapter 11 bankruptcy filing. Wednesday trading witnessed a further drop, as the shares dropped another 29% to close at US$16.81.

The company is now the latest addition to a growing list of heavily indebted U.S. oil companies that have sought bankruptcy protection since the collapse in oil prices due to the Covid-19 pandemic, and the subsequent flooding of world oil markets with Saudi Arabian and Russian production.

Chesapeake Energy, 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 last 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.

According to reports, Chesapeake is now in talks with lenders, as current President & CEO Doug Lawler’s 7-year effort to untangle the financial and legal legacies of Mr. McClendon have seemingly failed. Mr. Lawler assumed the helm at the company in 2013 at the behest of activist investor Carl Icahn and Otis “Mason” Hawkins, two of the company’s largest shareholders.

The company had hired financial advisors to explore the bankruptcy option in recent months after reporting a loss of US$8.3 billion during Q1-2020. The company’s 10-Q quarterly filing revealed that it only had US$82 million in cash at the end of March, and it was forced to write down the value of oil and gas assets by approximately US$8.5 billion. With US$9.5 billion in debt at the end of 2019, it is also facing bond payments of US$192 million that are due in August this year.

Despite its attempts to sell assets to raise much needed cash, the company’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$1.78/Mcf at present.

According to Haynes & Boone’s Oil Patch Bankruptcy Monitor, a total of 227 companies have filed for bankruptcy in the last 5 years (ended 31st May, 2020), involving more than US$134 billion in aggregate debt. This year, 19 U.S. oil and gas producers have filed for bankruptcy so far. Industry analysts now estimate that more than 70 additional U.S. oil companies could succumb to bankruptcy in 2020 if WTI prices average US$30 per barrel this year, with the number of bankruptcies potentially burgeoning to as many as 200 companies if WTI remains stuck around US$30 per barrel through 2021.

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