By Mike Spector and David French
(Reuters) - Chesapeake Energy Corp (NYSE:CHK), the oil and gas exploration and production company that was at the forefront of the past decade's U.S. shale boom, is preparing a potential bankruptcy filing as it grapples with an unprecedented rout in energy prices, people familiar with the matter said on Wednesday.
The Oklahoma City-based company, cofounded by late wildcatter and outspoken natural gas proponent Aubrey McClendon, has held discussions with creditors about a possible loan that would aid operations while it navigates bankruptcy proceedings, the sources said. The loan could total roughly $1 billion, though its size remains in flux, one of the sources added.
Such loans, referred to as debtor-in-possession financing, are key to companies seeking Chapter 11 bankruptcy protection because they help them sustain as much of their business as possible during court proceedings.
Chesapeake's discussions about possibly obtaining bankruptcy financing are in early stages, and the company has made no final decisions about how it plans to address its debts, the sources cautioned. It could attempt to persuade creditors to restructure its debt outside of bankruptcy proceedings, said the sources, who asked not to be identified because the matter is confidential.
Chesapeake did not immediately respond to a request for comment.
Chesapeake was trying to pivot from gas to a greater emphasis on oil production when a Saudi-Russian energy price war earlier this year upended its plans and the wider crude market. It was dealt another blow by the coronavirus outbreak, which caused energy demand to dwindle by shutting large swaths of the global economy.
Chesapeake, which employed about 2,300 people as of the end of last year, faces significant payments due this year on portions of its nearly $9 billion debt pile. Maturities and interest expenses combined total more than $1 billion, according to a regulatory filing.
Chesapeake is considering skipping a payment of $192 million due in August, adding urgency to the discussions with creditors, one of the sources said. Chesapeake also faces a $136 million obligation on July 1.
Chesapeake is also discussing the prospect of obtaining an additional equity infusion that would likely follow a bankruptcy filing, according to one of the sources. The company does not currently anticipate help in the form of U.S. government aid provided to companies ailing from the coronavirus crisis, the source added.
The company said in January it had cut debt by $900 million, and in February added it had ample liquidity of about $1.4 billion to address looming debt maturities. Yet much of that cash sits within a revolving credit line, the size of which could soon be more restricted, according to credit ratings firm Moody's (NYSE:MCO) Investor Service. The company recently suspended its dividend on a series of convertible preferred stock.
Earlier this month, Moody's cut Chesapeake's credit rating deep into junk territory, which makes it exceedingly expensive to borrow because of the high risk of defaulting on debt. The ratings move reflected plunging energy prices along with the company's eroding liquidity and "very limited access to capital," Moody's said. Moody's predicted a "high likelihood of a restructuring in the near term."
Chesapeake has operations in five U.S. states, including Pennsylvania, Texas and Louisiana.
The company completed a reverse stock split in April to avoid being delisted from the New York Stock Exchange. Its shares are down more than 80% this year, giving it a market capitalization under $300 million. [nL3N2C11TF]
Chesapeake started reworking its balance sheet before the end of last year and was able to push out some debt maturities. Still, portions of the company's debt are trading at prices that indicate investors all but expect they will never be fully repaid.
Its 11.5% bonds due in 2025, issued in December as part of a broader reworking of its liabilities, are trading around just 8 cents on the dollar, according to Refinitiv data. Another set of bonds due roughly a year later trade even lower, at about 4 cents.
FALL FROM GRACE
A bankruptcy filing, were one to occur, would cap a long reversal of fortunes for a company that became part of the S&P 500 Index less than 20 years after its founding, and helped revolutionize the energy industry.
Chesapeake began with a small investment in 1989 by Oklahoma businessman Tom Ward and McClendon, the latter of whom became the company's longtime chairman and chief executive.
Under McClendon's stewardship, Chesapeake spent $43 billion over 15 years snapping up land parcels across the United States, helping pioneer the relentless extraction of untapped oil and natural gas from shale rock formations, an environmentally controversial method that became known as fracking.
McClendon was an unabashed evangelist for natural gas, arguing it could replace oil and coal. By 2005, Chesapeake was the second-largest U.S. natural gas producer, trailing only the colossal Exxon Mobil Corp (NYSE:XOM).
A subsequent glut in natural gas caused the commodity's price to crash. In March 2016, a federal indictment charged McClendon with conspiring to suppress land prices by rigging bids for leases while leading Chesapeake.
McClendon at the time called the charge "wrong and unprecedented" and vowed to "prove my innocence and clear my name." He died in a single-car crash the following day. A state medical examiner later determined the death to be an accident.