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Chesapeake Files For Bankruptcy, Wiping Out $7 Billion In Debt And Any Existing Equity Value

Chesapeake Files For Bankruptcy, Wiping Out $7 Billion In Debt And Any Existing Equity Value

After years of melting, the Chesapeake icecube is finally history: at exactly 350pm on Sunday afternoon, the company that launched the US shale boom, finally gave up and filed for a pre-packaged bankruptcy in the Southern District of Texas. In so doing, the company with roughly $9.5 billion in debt has become one of the biggest victims of a spectacular collapse in energy demand from the virus-induced global recession, and follows the collapse of another high-flyer in the US oil patch, Whiting Petroleum, which filed for Chapter 11 at the start of April after championing what was once the premiere U.S. shale field, the Bakken of North Dakota.

As part of its prepack agreement, Chesapeake announced that it had 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 Chesapeake will implement a Chapter 11 plan of reorganization to eliminate approximately $7 billion of debt.

Of course, since 73% of unsecured bondholders refused to sign off on the deal, expect a very vicious bankruptcy fight over the recoveries, as hedge funds that accumulated positions in the bonds unleash hell in their fight with the secureds (even as the equity committee claims that all classes above it should be unimpaired).

Also, we have some bad news for Jefferies, which won’t be able to repeat its hilarious attempt to fund the company in bankruptcy by selling stock to Robnhood daytraders: as part of the RSA, the Company has secured $925 million in debtor-in-possession financing lenders under Chesapeake’s revolving credit facility.  The DIP will provide Chesapeake the capital necessary to fund its operations during the Court-supervised Chapter 11 reorganization proceedings.

…click on the above link to read the rest of the article…

No Fracking Way: Debt-Laden Shale Producers May Unleash The Next Financial Crisis

After nearly two decades of horizontal drilling, fracking – as it is commonly known, has “turned the energy world upside down,” according to Journalist Bethany McLean, a former Goldman Sachs analyst-turned-journalist.

And according to a new op-ed in the New York Times, McLean has a warning for anyone betting the farm on the shale industry; beware.

In a nutshell, the fracking industry – which “could not have taken off so dramatically were it not for record low interest rates after the 2008 financial crisis,” is setting up for a spectacular fall without rising oil prices and global demand. Fracking companies have largely survived, according to McLean, because “plenty of people on Wall Street are willing to keep feeding them capital and taking their fees.”

From 2001 to 2012, Chesapeake Energy, a pioneering fracking firm, sold $16.4 billion of stock and $15.5 billion of debt, and paid Wall Street more than $1.1 billion in fees, according to Thomson Reuters Deals Intelligence. That’s what was public. In less obvious ways, Chesapeake raised at least another $30 billion by selling assets and doing Enron-esque deals in which the company got what were, in effect, loans repaid with future sales of natural gas.

But Chesapeake bled cash. From 2002 to the end of 2012, Chesapeake never managed to report positive free cash flow, before asset sales. –NYT

Columbia University Center on Global Energy Policy fellow, Amir Azar, calculates that the fracking industry’s net debt in 2015 was $200 billion, a 300% increase from a decade earlier, however interest expense increased at half the rate debt did due to falling interest rates.

Dr. Azar recently called the post-2008 era of super-low interest rates the “real catalyst of the shale revolution.” –NYT

…click on the above link to read the rest of the article…

Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls

Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls

Back on February 10, when looking at Carl Icahn’s darling Chesapeake, whose stock had plunged to effectively record lows on imminent bankruptcy concerns, we said that for anyone brave enough to take the plunge, the “Trade of the Year” would be to go long a specific bond, the $500 million in 3.25s of March 2016 which were maturing in just over a month, and which on February 10 were yielding 300% at a price of 80.5 cents on the dollar.

And then, just two days later, in an unexpected turn, Chesapeake announced that contrary to public opinion, the troubled energy giant “is planning to pay $500 million of debt maturing in March, using a combination of cash on hand and other liquidity that may include its credit line, according to a person with knowledge of the matter.” The issue referenced was precisely the bond that was our “trade of the year.”

To be sure, the bond promptly surged, even as the stock priced tumbled, on what was seen as a very bondholder-friendly action (and thus to the detriment of shareholders) and hit a price of 95 cents while the stock tumbled by 15%, generating a 30% return for anyone who had decided to go along. At that moment we urged anyone in the trade to take their profits and go home, taking a few weeks, or the rest of 2016, off.

A quick update since then shows that those same bonds are currently trading effectively at par (99.25 cents)…

… suggesting that the risk of a near-term Chesapeake bankruptcy may be gone for now.

But is it truly off the table?

Sadly, we think that despite the brief hiccup in optimism, CHK’s troubles are about to get worse, even if this particular bond is ultimately repaid, for one simple reason: in its 10-K filed yesterday, Chesapeake announced that it has just reached its own “AIG moment.”

…click on the above link to read the rest of the article…

Former Chesapeake Energy CEO Aubrey McClendon Bringing Fracking to Argentina

Former Chesapeake Energy CEO Aubrey McClendon Bringing Fracking to Argentina

Aubrey McClendon, the embattled former CEO and co-founder of Chesapeake Energy, has announced his entrance into Argentina to begin hydraulic fracturing (“fracking”) in the country’s Vaca Muerta Shale basin.

Though he retired as Chesapeake Energy’s CEO back in 2013 in the aftermath of a shareholder revolt, McClendon wasted little time in creating a new company called American Energy Partners (AEP). AEP, like Chesapeake, has found itself mired since its onset in legal snafus over its treatment of landowners. With AEPnot getting a red carpet roll-out in the U.S., McClendon has looked southward for other lucrative business adventures.

DeSmog reported in September that McClendon has also teamed up with a private equity company affiliated with former Mexican president Vicente Fox to begin tapping into Mexico’s portion of the Eagle Ford Shale basin. We also reported that he has begun doing business in Australia.

All of those countries have something in common that makes them different from the U.S.:  lax royalty and land deal laws.

As McClendon boasted in an investor call — and as Chesapeake formerly acknowledged on a portion of its websitesince taken down — the company chose the land grab as a key part of its business model.

Mexico, Australia and Argentina are still in the “land grab” phase of development, with zero production scale fracking taking place in any of the three countries.

AEP attempts to preempt “land grab” charges on its website.

“We work hard to earn – and maintain – your trust,” writes AEP. “We practice open, honest communication with our owner partners to strengthen those partnerships forged in mutual trust.”

Banana Republic Land Laws

In Mexico, unlike in the U.S. in which in most states’ landowners own the minerals underneath their land, the government maintains mineral rights. The same goes for Australia.

…click on the above link to read the rest of the article…

“On The Cusp Of A Staggering Default Wave”: Energy Intelligence Issues Apocalyptic Warning For The Energy Sector

“On The Cusp Of A Staggering Default Wave”: Energy Intelligence Issues Apocalyptic Warning For The Energy Sector

The summary:

“The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get?”

The full report by Paul Merolli, a senior editor and correspondent at Energy Intelligence:

Debt Bomb Ticking for US Shale

The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get and when? It increasingly looks like a number of the weakest companies will run out of financial stamina in the first half of next year, and with every dollar of income going to service debt at many heavily leveraged independents, there are waves of others that also face serious trouble if the lower-for-longer oil price scenario extends further.

“I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession,” Timothy Smith, president of consultancy Petro Lucrum, told a Platts energy conference in Houston last week.

…click on the above link to read the rest of the article…

Oil Suddenly Gets Ugly in Mexico

Oil Suddenly Gets Ugly in Mexico

Mexico’s energy revolution could prove to be a bitter pill for the vast rump of the Mexican population, who stand to lose out on billions of dollars of annual state funds provided by the newly privatized but financially crippled oil company Pemex.

But where there are losers, there are inevitably winners. In this case the biggest beneficiaries will be some of the world’s largest oil and gas majors — particularly those in the U.S. — and well-connected local politicians. Chief among them is former Mexican President Vicente Fox Quesada, whose private equity firm Energy and Infrastructure Mexico (EIM) has just signed a joint venture with Aubrey McClendon, former CEO of natural gas giant Chesapeake Energy and current CEO of American Energy Partners (AEP).

A Well-Oiled Revolving Door

The partnership’s main purpose, according to Sin Embargo, is to exploit the vast exploration and development opportunities opened up by Mexico’s newly privatized and liberalized energy sector.

“This is a significant vote of confidence in the Energy Reform program championed by current Mexican President Enrique Pena Nieto, and in the myriad possibilities offered by Mexico’s unconventional resources,” hailed a joint press release. Those resources include Mexico’s side of the Eagle Ford Shale basin.

 

EIM Capital’s own website admits, with seemingly not even a hint of shame, that the company was “founded in anticipation of Mexico’s historic Constitutional (Energy) Reform of 2013,” a reform for which Fox himself helped pave the way during his six-year presidential mandate (2000-2006), as recently confirmed by a 2005 State Department diplomatic cable about Fox’s first visit to Alberta recently leaked by Wikileaks:

“[T]he Mexican Trade Consul in Calgary…[said] there continues to be much interest in investing in Mexico’s energy sector… The Trade Consul said it is ‘painful‘ to let Mexico’s resources sit in the ground.”

 

…click on the above link to read the rest of the article…

Once Burned, Twice Shy? Utica Shale Touted to Investors As Shale Drillers Continue Posting Losses

For the past several weeks, the drilling industry — hammered by bad financial results — has begun promoting its next big thing: the Utica shale, generating the sort of headlines you might have seen five years ago, when the shale drilling rush was gaining speed. “Utica Shale Holds 20 Times More Gas Than Previous Estimates”, read one headline. “Utica Bigger Than Marcellus”, proclaimed another.

The reason for the excitement was a study, published by West Virginia University, that concluded the Utica contains more shale gas than many estimates for the Marcellus shale, a staggering 782 trillion cubic feet.

“This is a landmark study that demonstrates the vast potential of the Utica as a resource to complement – and go beyond – what the Marcellus has already proven to be,” Brian Anderson, director of West Virginia University’s Energy Institute, told the Associated Press.

But those considering investments based on the Utica’s potential may want to pause and consider the shale industry’s long history of circulating impressive predictions, later quietly downgraded, while spending far more than they earn.

The industry has not been generating enough money to cover its capital spending and dividends,” Fidelity Investments energy fund manager John Dowd told Barrons.

Indeed, while it is clear that the shale drilling rush has produced large amounts of oil and gas, (alongside wastewater and other environmental impacts), the financial prosperity promised by its backers has not seemed to materialize.

Burning Through Cash

Companies like Chesapeake Energy, the nation’s second largest producer of natural gas and one of the most aggressive advocates of the shale rush nationwide, have been hammered hard by low oil prices and high costs in 2015.

…click on the above link to read the rest of the article…

 

It’s Happening: Debt Is Tearing up the Fracking Revolution

It’s Happening: Debt Is Tearing up the Fracking Revolution

The shares of Chesapeake Energy, second largest natural-gas driller in the US, crashed nearly 10% today, to $9.29, the lowest price since August 2003, down nearly 70% since oil began to plunge a year ago. The company’s $1.1 billion of 5.75% notes fell to an all-time low of 84.88 cents on the dollar. And its 4.875% notes dropped to 81.25 cents on the dollar, from 86 last week, according to S&P Capital IQ LCD.

All this in the wake of its announcement that it would suspend its dividend for the first time in 14 years. It’s trying to conserve cash, and that dividend costs $240 million a year. It’s dumping assets as fast as it can, including some Oklahoma fields that will save it another $75 million a year in preferred dividends. It’s cutting operating costs and capital expenditures. It’s trying to stay alive.

It has been cash-flow negative in 22 of the past 24 years, according to Bloomberg.

The only thing surprising is that it took so long, that Wall Street kept funding its cash-flow negative operations and dividends for all these years.

Chesapeake used to be mostly a natural gas producer. But the price of natural gas plunged over five years ago and has remained below the cost of production for most wells for much of that time. The only saving grace was that these wells also produced natural-gas liquids and oil, which sold for much higher prices. As its natural-gas business model collapsed, Chesapeake began chasing after oil-rich plays. But a year ago, the price of oil collapsed.

Among natural gas drillers, Chesapeake isn’t in the worst shape. Much smaller Quicksilver Resources filed for Chapter 11 bankruptcy in March. It listed $2.35 billion in debts and $1.21 billion in assets. The difference has been forever drilled into the ground. Stockholders got wiped out. Creditors are fighting over the scraps.

 

…click on the above link to read the rest of the article…

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