Shares in
At these levels, all of Chesapeake's equity could be had for $1.4 billion. Shares traded above $30 in 2014, and north of $60 in 2008, when natural gas prices hit record highs.
Naturally, holders of Chesapeake debt are shooting first and asking questions later. Its nearest-term bond matures March 15; it traded as high as 95 cents on the dollar late last week, but plunged this morning to 73.75 cents. After the announcement the bonds recovered above 80 cents, according to FINRA data. Investors are concerned that Chesapeake will be unwilling or unable to roll the debt (Cusip: 165167CJ4). According to a report this morning from Troubled Company Reporter, some of Chesapeake's longer dated issues are trading below 30 cents.
Chesapeake has been looking for options to improve liquidity. Late last year amended its $4 billion bank revolver, changing it from an unsecured line to secured. It also did a distressed-debt-exchange offer, taking in $3.8 billion in notes in exchange for $2.4 billion in second-lien debt. It recently canceled dividend payments on its preferred stock.
A big problem for Chesapeake and many other exploration and production companies: their oil and gas hedges are rolling off, meaning that the little protection they used to have against low commodity prices is evaporating. As billionaire natural gas trader John Arnold tweeted this morning: "The wave of E&P bankruptcies starts now. CHK alone has nearly $1 billion less in hedging gains in '16 than '15 at today's prices."
I talked to a well-placed banker over the weekend who says restructuring advisors at shops like Lazard and Kirkland & Ellis had been advising his clients to begin drawing down any cash remaining on their bank revolvers in order to maximize liquidity to get them through the next few months. Basically they’re maxxing out their credit cards before the banks can cut them off. That’s exactly what Linn Energy said last week that it had done; with more than $4 billion in credit facilities maxxed. Shares in LINE fell 50% on Friday and are off another 24% today. Linn's debt is trading below 20 cents.
Most oil companies are simply not viable at these commodity prices. According to a Chesapeake presentation from December, even its most economic oil fields require prices in the $40s to break even.
A collapse of Chesapeake would have far reaching impact. For example, Chesapeake has long-term contracts with pipeline giant Williams Partners to carry large quantities of natural gas at prices favorable to Williams. Those contracts were one of the reasons why Energy Transfer Equity has pursued its $33 billion takeover of Williams. A Chesapeake restructuring would likely jeopardize those contracts. That could be a contributing factor to the plunge in Energy Transfer Equity this morning, with units down 33% to $4.72, their lowest level since 2009. Investors in ETE were also digesting the surprise announcement late Friday that CFO Jamie Welch was leaving the company. ETE units have plunged almost 85% in six months and with units yielding 24%, a dividend cut looks inevitable. It’s hard to imagine that Williams shareholders will end up voting in favor of a tie up with Energy Transfer now.
Brace for the wave of Chapter 11 filings. SandRidge Energy, already delisted fromt he NYSE, laid off 440 employees last week. Bonds of Energy XXI are trading below five cents on the dollar. Halcon Resources, responding to rumors of a pending bankruptcy filing, put out a press release this morning saying it had no news to report and “no formal plan or strategy in place” but continued to review all options related to restructing its balance sheet. Halcon shares are down 95% in the past year.
A lot more to come.
Also on Forbes
Obama's Disingenuous, Dead-On-Arrival, $10 Per Barrel Oil 'Fee'
Amid the Oil Bust, This Fracking Tycoon Sees a Land Of Opportunity
