- Chesapeake appears likely to file for bankruptcy soon.
- The $134 million July 1st second-lien interest payment may serve as a deadline for the filing, although Chesapeake could elect to take the 30-day grace period for more time.
- Chesapeake is looking at over $300 million in 2020 cash burn with its $1.45 billion capex budget, despite solid hedges.
- Common shares are unlikely to see a recovery, due to Chesapeake's high leverage and the multiple classes above the common shares in the capital structure.
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I had expected in early February that Chesapeake Energy (NASDAQ:CHK) would more likely restructure in 2021 than in 2020. Its hedges provided a fair amount of protection for 2020, but it had no hedges for 2021 (other than some sold calls that limited commodity pricing upside a bit). Therefore, the most likely outcome was for Chesapeake to make it through 2020 and then file for bankruptcy in 2021 if oil and gas prices hadn't improved enough.
The oil price crash has put Chesapeake on track to either burn a significant amount of cash in 2020 or cut capex and reduce production further though. While it technically could survive into 2021 if its borrowing base doesn't get cut drastically, it is now very likely to soon file for bankruptcy due to any realistic path for survival being quashed now.
Updated 2020 Outlook
If Chesapeake doesn't cut its 2020 capex budget from $1.45 billion, then it would end up with approximately 456,000 BOEPD (25% oil) in average production during 2020.
At current strip prices (near $29.50 WTI oil and $2.15 NYMEX natural gas), Chesapeake is forecast to deliver $2.628 billion in oil and gas revenue. Chesapeake had guided for slightly positive oil differentials before but is now probably looking at realizing slightly less than WTI on the year. Gulf Coast benchmark oil prices are now commanding a narrower than usual premium to WTI.
Chesapeake's hedges add another $1.131 billion in value for 2020, mostly from its oil hedges after the crash in oil prices. Including hedges, Chesapeake is forecast to end up with $3.759 billion in revenue.
|Barrels/Mcf||Per Barrel/Mcf||$ Million|
|Net Marketing And Other||$0|
Chesapeake is projected to end up with $335 million in cash burn for 2020 now. This includes the effect of Chesapeake suspending its preferred dividends. Chesapeake does save a bit on projected interest costs compared to a few months ago due to the impact of the decrease in LIBOR on its $3+ billion in variable rate debt.
|Gathering, Processing and Transportation||$1,090|
|Cash Exploration Expense||$30|
In addition to the cash burn, Chesapeake had $301 million in unsecured notes (as of the end of 2019) maturing in 2020, although it repurchased a minority of those at a modest discount in January 2020.
Timing Of Bankruptcy Filing
The potential for substantial cash burn in 2020 followed by massive cash burn in 2021 at current strip prices has resulted in Chesapeake looking at a bankruptcy filing over the next few months. Chesapeake probably realistically needed WTI oil at $60+ in 2021 to avoid restructuring in 2021. There was still some hope early in 2020 that oil prices could get to that point for 2021 when 2021 strip was in the mid-$50s. Now with 2021 strip in the low-$30s, the odds of WTI oil averaging $60+ in 2021 is minuscule, so it makes sense that Chesapeake may file for bankruptcy soon.
Chesapeake has a $134 million bond interest payment due on July 1 for its second-lien notes. In May and June, it appears to only have $17 million in bond interest payments due. Thus, it is likely to file for bankruptcy before July, or skip the July 1st interest payment and trigger the 30-day grace period if it needed a bit more time for negotiations. Chesapeake also has up to $208 million (less whatever it repurchased in January) in notes maturing on August 15.
As well, Chesapeake is projected to end up with leverage at 5.0x EBITDAX at the end of 2020. This would leave it in violation of the 4.50x leverage covenant on its credit facility. Its $3.0 billion credit facility borrowing base is also scheduled to be redetermined in Q2 2020 and is likely to see a sizable reduction. Chesapeake may draw substantially on its credit facility to provide it with liquidity to see it through a bankruptcy filing.
Common Equity Recovery
If Chesapeake files for bankruptcy soon, I don't expect the common equity to see a recovery beyond potentially warrants. With Whiting Petroleum's bankruptcy, shareholders are scheduled to get 3% of the new equity. Whiting had just its credit facility debt, unsecured notes, and common shares though.
Chesapeake has credit facility debt, term loan debt (also first-lien, but junior to the credit facility in the collateral proceeds waterfall), second-lien notes, unsecured notes, preferred shares, and common shares. Those additional layers make it less likely that the common shares will see any actual recovery.
Chesapeake was likely previously planning on operating at neutral to positive cash flow during 2020 with the benefit of its hedges, and then potentially filing for bankruptcy in 2021 if oil and gas prices hadn't improved enough. The effects of the coronavirus appear to have made a mid-2020 filing inevitable though given that Chesapeake is now having substantial 2020 cash burn and needs oil prices in 2021 to improve close to $30 above strip.
Chesapeake's common stock was a bet on oil prices hitting the $60s by 2021, but with oil prices going the opposite direction, it is unlikely that the common stock will see a recovery. Chesapeake has many layers to its capital structure, reducing the odds that those lower down in the capital structure will receive anything.
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