Chesapeake, the giant shale producer, files for bankruptcy, the latest victim of the shale bloodbath

Chesapeake Energy, the natural gas and oil behemoth, filed for bankruptcy protections on June 28, the biggest and most (in)famous victim of the worst crash in oil and gas prices in a generation

Scott McKnight - June 29, 2020

Chesapeake is not alone in seeking help amid the coronavirus-induced oil market collapse. Well over 200 North American oil and gas producers, together holding over $130bn in debt, have filed for similar protections since December 2015. But unlike many of those producers, Chesapeake was gigantic producer and among the handful of companies that brought about the ‘shale revolution’ and the resurgence of natural gas production in the United States.

An empire built on debt and high prices

In the early 2000s, under the buccaneering but controversial leadership of Aubrey McClendon, Chesapeake built a territorial empire of oil and gas-rich acreage stretching from Texas in the southwest, Wyoming in the northwest to Louisiana in the southeast and Ohio in the northeast. But the company’s nerve centre—and indeed McClendon’s heart—was always in Oklahoma City, where the company was headquartered (pictured above). This is also where McClendon helped relocate and eventually own the NBA team the Oklahoma City Thunder. (The team has played in the Chesapeake Energy Arena since mid-2011). Gregory Zuckerman’s book, The Frackers, rightfully spends several chapters detailing Chesapeake’s rise and several controversies of McClendon’s tenure. (McClendon died in early 2016 in a violent car crash, the day after his indictment on federal bid-rigging charges).

Aubrey McClendon, the visionary but controversial force behind Chesapeake’s massive expansion from the early 2000s on

Source: Sean Gardner/Reuters

The Chesapeake business model was built on two premises. First, natural gas prices would rise and stay high, making this vast acreage lucrative and the company—and its shareholders—obscenely rich. Second, the money would never run out. On this second point and under McClendon’s corporate vision, Chesapeake accumulated mountains of debt, permanently extending the company to the limit and relying on an endless supply of credit. The June 28 bankruptcy filing comes after Chesapeake reported a loss of $8.3bn in the first quarter of 2020 with just $82m in cash at the end of March.

One (massive) bust among many busts

Chesapeake, like many shale producers, was in trouble before the pandemic ravaged oil markets. The Chesapeake share price has struggled for years. McClendon had been ousted in 2013; since then, the company, still possessing an empire of leases, has sought to drill its way out of debt. The collapse in oil and gas prices from late 2014 on complicated that drilling strategy; the coronavirus-induced price collapse, helped by the five-week long oil price war that Saudi Arabia launched in early March, made that strategy unviable.

Chesapeake shares had plummeted at the turn of 2020, before collapsing altogether by February 2020

Source: https://www.bloomberg.com/news/articles/2020-06-29/chesapeake-s-collapse-is-latest-in-long-line-of-shale-disasters?sref=aK56ygxJ

Chesapeake’s collapse comes after various other big players have filed for bankruptcy. Like Chesapeake, many of these shale producers had been in trouble for a while (though the pandemic has provided convenient corporate cover for some questionable corporate management decisions). The first and most notable of these bankruptcies has been Denver-based Whiting Petroleum. The company produced from the Bakken shale formation in North Dakota. Last year, the company had fired a third of its workforce last year and scaled back production. Another noteworthy bankruptcy was Ultra Petroleum. This is the second go-around of bankruptcy filing for the Englewood, CO-based company, which had filed for chapter 11 protections in 2016, following that price collapse. Lilis Energy is another example of a shale producer that was in trouble well before the pandemic hit. Producing in the oil and gas-rich Permian basin, the company filed on Monday, the day after Chesapeake’s filing. Lilis had warned of a default in January, several weeks before the pandemic truly took a toll on global energy markets.

Expect more blood

The Chesapeake bankruptcy filing is the biggest of dozens of lesser-known companies with many more likely to follow, with major questions about oil prices, compliance among members of the recent OPEC+ agreement, the continued increase in coronavirus cases in many US states and the desire of big finance to continue to prop up shale producers. Chesapeake’s collapse, many weeks coming, shows that no giant is too big to fall in this low-price environment.