The disruption in global energy markets has claimed its biggest victim so far – Chesapeake Energy Corp filed for Chapter 11 bankruptcy protection on Sunday in the US, ending life as a fallen pioneer of the fracking boom and now bust.
Now it will try and recreate itself by cutting billions of dollars in debt and taking on $US3.1 billion in fresh debt as part of the refinancing deal and hopefully raise more than half a billion dollars in a share issue once the Chapter 11 revamp ends.
It joins other independents in Chapter 11, including Whiting Petroleum which was the first well-known listed oil fracker to collapse several months ago
Despite all the hopes for a successful rebirth, Chesapeake will be in effect a zombie company when it emerges from Chapter 11.
Chesapeake came the largest American oil and gas producer to seek bankruptcy protection in recent years thanks to heavy debt and the impact of the coronavirus outbreak on energy demand especially, and prices.
It started out in 1989 and gradually scooped up millions of acres of firstly gas producing acreage but was slow to switch to fracking for oil as gas became oversupplied and prices collapsed. It moved into oil fracking but ran into the disruption caused by the collapse in oil rices from mid-2014 onwards. It took on more and more debt to finance its expansion into oil, benefitting from low inters rates and rising demand in the US.
COVID-19 ended that by dropping demand, forcing US producers to cut output and costs. Even in a time of record low-interest rates, having billions of dollars in debt proved too much when revenue collapsed as it has done since March.
The Oklahoma City-based shale pioneer, co-founded by late wildcatter Aubrey McClendon, filed in the US Bankruptcy Court for the Southern District of Texas, according to a company statement released on Sunday, US time.
“Chesapeake intends to use the proceedings to strengthen its balance sheet and restructure its legacy contractual obligations to achieve a more sustainable capital structure,” the statement said, adding its will continue operating.
Chesapeake plans to cut $US7 billion of its debt.
The company says it has entered into a restructuring support agreement, which has the full backing of lenders to its main revolving credit facility as well as varying degrees of support from other creditor classes.
The statement said that as part of the agreement, Chesapeake has secured $US925 million of debtor-in-possession (DIP) financing to help support its operations during the bankruptcy proceedings.
Chesapeake also has agreed the principal terms for a $US2.5 billion exit financing, while some of its lenders and secured note holders have agreed to support a $US600 million offering of new shares, to take place upon exiting the Chapter 11 process. Sounds like good money after bad.