Chesapeake’s Demise Marks End of Shale Model That Changed the World


It will go down as wildest of the shale wildcatters, the overreaching pioneer of fracking techniques that minted vast fortunes and, now, have left behind ruin.

At long last, financial reality has caught up with Chesapeake Energy Corp., avatar of the boom and subsequent bust of North American shale.

Chesapeake’s spiral toward oblivion accelerated this week with executives said to be preparing for a potential bankruptcy filing, signaling the imminent end of Chief Executive Officer Doug Lawler’s 7-year campaign to turn around the troubled gas explorer. For a company that’s been skirting disaster for most of the past decade, the Covid-19-driven collapse in world energy prices merely added one more exclamation point to a tale of risk, hubris and debt.

Chesapeake may be shale’s biggest corporate casualty, but it is hardly the first — and won’t be the last. Its self-inflicted wounds have sapped confidence across the entire industry, leaving many smaller operators teetering on the edge of catastrophe.

As the remnants of shale’s turn-of-the-century heyday turn to dust, it’s unclear who — if anyone — will step into the void. Supermajors like Exxon Mobil Corp. and Chevron Corp. already have written off their own gas-heavy assets, and are instead focusing on oil-rich shale fields. But any shift in the global supply-and-demand balance for gas would prompt the most sophisticated giants to reassess the value of acquiring and drilling mothballed gas projects.

Extreme Pressure

Almost three dozen North American explorers, frackers and pipeline operators have fled to bankruptcy courts since the start of this year, buckling under $25.2 billion in cumulative debts, according to law firm Haynes and Boone LLP. Chesapeake’s indebtedness would swell that encumbrance by almost 40%.

And even with crude prices recovering from the unprecedented April collapse into negative territory, energy-sector bankruptcies are expected to grow in coming months because many shale companies are in too far over their heads. “Extreme financial pressure is being felt at all levels of the energy industry,” Haynes and Boone said in a report.

The template for the shale model that’s now unraveling for many companies was established by Chesapeake and its late co-founder Aubrey McClendon.

Experimental Drilling

Chesapeake was the brainchild of McClendon and his pal Tom Ward, who started out with $50,000 in borrowed money in rented offices. The company went public in 1993 and soon was experimenting with sideways drilling and hydraulic fracturing to pummel open shale formations previously regarded as impermeable — and therefore, worthless — by geologists.

At the time, the outlook for domestic gas production was so grim that Alan Greenspan predicted the U.S. would need huge imports of liquefied gas to keep industries and furnaces running. Tens of billions of dollars were invested in massive new gas import terminals that were rendered obsolete before they even opened as Chesapeake and other shale drillers flooded the continent with gas.

By the time Ward struck out on his own to form SandRidge Energy Inc. in 2006, Chesapeake was spending on average $1 billion a year to snap up drilling rights from Texas to Pennsylvania. At the start of 2007, Forbes magazine named Chesapeake the best managed oil and gas company.

Grand Ambition

Under McClendon, Chesapeake raised production more than 10-fold between 2000 and 2013, invested heavily in experimental natural gas-fueled transport, and even toyed with expanding overseas before its geologists concluded that many European shale formations were unsuitable for drilling.

At its peak, Chesapeake pumped more American gas than anyone aside from Exxon and boasted a market valuation of almost $38 billion.

The other side of that coin was that the company only generated positive cash flow in two out of the past 30 years. When gas output from newly tapped shale fields flooded markets and prices tumbled, Chesapeake had to scramble to find new investors or joint-venture partners to provide cash infusions. By 2012, the company’s net debt load was twice the size of Exxon’s, a company that had a market value 27 times larger. Chesapeake warned it was on the verge of running out of cash.

While all of that was still brewing, little-known oil wildcatters like Harold Hamm were quietly adapting the technology McClendon and the other shale-gas innovators employed for use on crude-drenched rocks in North Dakota. Those breakthroughs reversed the terminal decline in U.S. crude production, turned America into an energy powerhouse and shattered OPEC’s decades-long grip on the world’s most important commodity.

Double Magnums

When times were good, Chesapeake spared no expense recruiting young talent to Oklahoma City and a corporate headquarters modeled after an Ivy League university campus. In between stockpiling double magnums of Bordeaux and collecting antique speedboats, McClendon singlehandedly transformed the northwest side of the city from a rundown backwater to a bustling commercial corridor.

But the good times never last forever. McClendon was ousted during an Icahn-led board revolt in 2013, and three years later he was indicted on federal bid-rigging charges. Just hours after vowing to fight the charges at all costs and clear his name, he died when his Chevy Tahoe slammed into a concrete highway abutment at 78 miles an hour along a desolate country road.

“They were absolutely guns blazing with their growth, but it took a lot of money to do that,” said Robert Clarke, research director at Wood Mackenzie Ltd. “Right now we’re looking at the ugly side of all that excess.”

Gordon Pennoyer, a Chesapeake spokesman, declined to comment for this story.

Escape Routes

Although Lawler inherited many of the burdens that sank the company, the fateful 2019 takeover of WildHorse Resource Development Corp. that included the assumption of more than $900 million in debt was his own undertaking. The move — intended to pivot Chesapeake toward oil and away from gas — occurred just in time to expand the company’s exposure to the crude-market collapse.

In the end, Chesapeake ran out of escape routes from its $9.5 billion debt load. Gas prices were too low for too many years, and lenders and private-equity investors had long since shut the door on shale. That left asset sales as the sole avenue for raising cash, but in a market already drowning in a surfeit of gas, Lawler couldn’t find buyers.

What Bloomberg Intelligence Says

Chesapeake is a prime example of an E&P embroiled in past sins, with years of overspending. Its indebted balance sheet inhibits flexibility and a diverse asset base hinders scale efficiencies and capital allocation.

— Vincent G. Piazza and Evan Lee, BI analysts

Read the full report here.

McClendon’s legacy has haunted Chesapeake long after his 2013 ouster and his 2016 death. Lawler, the former Anadarko Petroleum Corp. exploration boss recruited by Carl Icahn and O. Mason Hawkins, has spent his entire tenure trying to right the ship.

Things were so dire in 2016 that the CEO was forced to pledge almost everything the company owned to keep open a credit lifeline. Lawler, who declined to be interviewed for this story, also sought to demonstrate he was he anti-McClendon. His predecessor’s long, drawn-out conference calls with analysts were replaced with curt recitations of bullet points. Austerity reigned at the company’s once-lavsh headquarters, and Lawler eschewed McClendon’s fondness for opulent displays.

“If you see me out at a dinner, here in Oklahoma City and on company expense,” Lawler said at an event in 2014, “and you see me drinking a $500 bottle of wine, I would ask you to hit me over the head with it.”

— With assistance by Allison McNeely

Source: Read Full Article