Aubrey McClendon (56) died in auto crash
COMMENTARY on Chesapeake Energy Corporation
From an Article by Andres Rueda, Seeking Alpha News, February 29, 2016
……. Summary
Chesapeake Energy’s management is engaged in muscular efforts to turn around the company, but the challenges ahead appear too great. The company announced $500 million in net asset sales and will slash capital expenditures 57% to conserve cash.
The recently released 4Q report was grim, as the company continues to bleed rivers of cash. Chesapeake Energy desperately needs the continuing good graces of its bankers, as its liquidity is ultimately dependent on a credit line.
To all appearances, gas and oil fracking giant Chesapeake Energy Corporation is a prime candidate for a bankruptcy restructuring. Its capital structure is wobbly, profoundly unsound. The losses are large and they flow with frustrating consistency each quarter. The cash pile keeps getting thinner. And yet, management appears determined to avoid a bankruptcy filing.
On February 8, 2016, the company’s common shares plunged approximately 40%, triggering a circuit breaker halt, on reports that the company had engaged a restructuring counsel. The company was forced to issue a clarifying press release that, while it had in fact engaged such counsel, it had no current plans to file for bankruptcy.
This in fact seems to be the case. Although a filing would be the easy way out, and bankruptcies are in fact often structured as insider-friendly affairs, the company’s management appears determined to avoid that outcome, even if the company has to cling from its fingernails through 2016 and into the next year. The management has a plan, which has been well-communicated to the market, and management has in fact had some success in its implementation.
Management insists that Chesapeake Energy has the liquidity to repay its near-term obligations, cut costs, sell off assets, dramatically decrease capital expenditures while more or less maintaining production, and thereby avoid a filing as the company rides out the downward cycle in the oil and gas extraction industry.
The common shareholders have taken up the faith. The market price of the common shares remains well above zero, closing at USD$2.70 per share on February 26, 2016. And yet, the challenges that the company faces are almost vertically steep. Absent a perfect execution, cooperation from its bankers and other creditors, and a long and uninterrupted streak of good luck, management may yet have to throw in the towel.
……. Conclusions
The management of Chesapeake Energy is engaged in a muscular effort to turn around the company in the context of a brutal industry environment. Its success in doing so largely depends on patience, considerable risk-taking, and other forms of cooperation from its creditors, and in particular the bank sponsoring its credit line, Wells Fargo.
The recently announced USD$500 million in net asset sales will give the company some breathing room. However, relief is likely to be brief. The company has a gigantic debt load balancing on a thin or nonexistent sliver of equity, and it is unfortunately not generating enough net operating cash to pay the bills. Under current conditions, and despite its hedge book, the company’s oil and gas fields are either uneconomical or marginally economical.
The company will be slashing capital expenditures. Even if production remains more or less the same despite this cut, net operating cash well into 2016 is likely to decrease as a result of relatively low realized prices. And so, the rivers of negative cashflow are likely to continue. Under the current environment, the company cannot turn to its business as a source of much needed cash. It will need to rely on asset sales and its USD$4 billion credit line.
Despite the recently announced divestiture, it remains to be seen whether management will be able to live up to its guidance of USD$500 million to USD$1 billion in additional deals for 2016. The company’s fields are currently uneconomical or marginally economical. If sold, they will be sold cheaply. This will hurt investors in the long run, if oil and gas prices recover. However, the company right now is in survival mode and this is unfortunately unavoidable.
Although the company likely will meet all major bond repayments due in 2016, unless oil and gas prices significantly improve over the year the company is likely to burn prodigious amounts of cash and eat well into its credit line, with seemingly no other realistic source of cash. It will then just be a matter of time before Wells Fargo and other creditors pull the plug on the company and push it into bankruptcy.
It should also be kept in mind that the company faces a borrowing base redetermination in April 2016. If Chesapeake Energy loses the support of Wells Fargo, management’s efforts will hit a brick wall and the company will simply have to file for bankruptcy.
The market however remains cautiously optimistic on Chesapeake Energy. Management appears committed to avoiding bankruptcy, and has not cut a separate deal to the detriment of the company’s much besieged common shareholders. This institutional support is all-important in the present context.
The challenges faced are however in my opinion too large. I do not believe that in the end management will pull its carefully orchestrated ballet. Too many things could go wrong. My target price for the common shares is consistent with their current book value: USD$0.
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Federal grand jury indicts former Chesapeake Energy CEO
From an Article by Robert Mclean, CNN-Money News, March 2, 2016
A federal grand jury has indicted the former CEO of Chesapeake Energy for allegedly conspiring to rig the price of oil and natural gas leases in Oklahoma. The Department of Justice believes that Aubrey McClendon, who served as Chesapeake’s CEO for nearly 25 years, orchestrated a conspiracy between two large oil and gas companies between December 2007 and March 2012.
McClendon said that the charges against him are “wrong and unprecedented.”
“I have been singled out as the only person in the oil and gas industry in over 110 years since the Sherman Act became law to have been accused of this crime in relation to joint bidding on leasehold,” he said in a statement. “Anyone who knows me, my business record and the industry in which I have worked for 35 years knows that I could not be guilty of violating any antitrust laws.”
The indictment alleges that two large energy firms would decide ahead of time who would be the top bidder on leases in northwest Oklahoma. The winner would then allocate an interest in the lease to the other company.
The Justice Department said McClendon “instructed his subordinates to execute the conspiratorial agreement,” which kept prices low and “put company profits ahead of the interests of leaseholders.”
Chesapeake spokesman Gordon Pennoyer said the company “has been actively cooperating for some time” with the Justice Department and “does not expect to face criminal prosecution or fines relating to this matter.”
McClendon left Chesapeake in 2013 after Reuters reported that he had taken out more than $1 billion in loans against his personal stakes in the company’s wells. Chesapeake subsequently revealed that it was the subject of an inquiry from the Securities and Exchange Commission, and announced that the program through which McClendon acquired his stakes would be terminated.
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Energy pioneer McClendon dies in Oklahoma car crash a day after indictment
From an Article by Heidi Brandes, Reuters News Service, March 3, 2016
Aubrey McClendon, a brash risk-taker who led Chesapeake Energy Corp to become one of the world’s biggest natural gas producers, died in a single-car crash on Wednesday, a day after being charged with breaking federal antitrust laws, police said. He was 56.
The U.S. Department of Justice on Tuesday announced that McClendon had been indicted for allegedly colluding to rig bids for oil and gas acreage while he was at Chesapeake, a central player in the U.S. fracking revolution of the past decade. He denied the charges.
Police said they were investigating the cause of the crash, which occurred when McClendon was driving his 2013 Chevy Tahoe on a sparsely populated, two-lane road. The crash occurred about 8 miles (13 km) from American Energy Partners, which McClendon had founded and where he was the chairman and chief executive. He was not wearing a seat belt.
McClendon, who was revered in oil and gas circles as a visionary, resigned from Chesapeake in 2013 after a corporate governance crisis and investor concerns over his heavy spending. After leaving Chesapeake, McClendon went on to start American Energy Partners and, with the help of private equity funds, made billions of dollars in bets on vast tracts of oil and gas land around the United States and Australia.
Tuesday’s indictment followed a nearly four-year federal antitrust probe that began after a 2012 Reuters investigation found that Chesapeake had discussed with a rival how to suppress land lease prices in Michigan during a shale-drilling boom. Although the Michigan case was subsequently closed, investigators uncovered evidence of alleged bid-rigging in Oklahoma. (reut.rs/1TPxUVy)
A native of Oklahoma, McClendon attended Duke University before starting Chesapeake with his friend Tom Ward, who went on to lead SandRidge Energy Inc for a time.
“Aubrey’s tremendous leadership, vision and passion for the energy industry had an impact on the community, the country and the world,” American Energy Partners said in a statement.
McClendon was known for his high tolerance for risk and debt and for his lavish lifestyle, which included the purchase of high-end homes, antique boats and an extensive wine cellar. (reut.rs/1QUfnHp) On his watch, Chesapeake leased a fleet of planes that shuttled executives to oil and gas fields – and the McClendon family to far-off holiday destinations.
Closer to home, McClendon pursued other passions, including the Oklahoma City Thunder, the National Basketball Association franchise in which he had a minority stake. “I think in situations like this the best thing you can do is just pray, pray for the family and pray for the people involved,” Thunder coach Billy Donovan told reporters at a game on Wednesday in Los Angeles.
McClendon was one of the foremost leaders of a U.S. energy boom that lifted output to the highest levels in years, reduced reliance on foreign oil and mobilized new pools of investment capital for wildcat drillers.
“I’ve known Aubrey McClendon for nearly 25 years. He was a major player in leading the stunning energy renaissance in America,” Texas energy investor T. Boone Pickens said in a statement. “He was charismatic and a true American entrepreneur,” he said.
Chesapeake, which had recently sued McClendon’s AEP on accusations of stealing trade secrets, offered condolences. “Chesapeake is deeply saddened by the news that we have heard today and our thoughts and prayers are with the McClendon family,” the company said in a statement. McClendon is survived by his wife, Katie, and their three children, Jack, Callie and Will.
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