Chesapeake Energy, the highest-profile casualty of the turmoil that swept through the US shale industry last year, emerged from bankruptcy on Tuesday, vowing that an era of debt-fuelled supply growth was over.
The company’s Chapter 11 filing last June was a milestone of the pandemic-induced oil crash, as a spearhead of the shale revolution collapsed under a mountain of liabilities accrued during years of rampant spending and expansion.
Its re-emergence coincides with a 12-month high in oil prices and signals the start of a new chapter for the shale business, as operators pledge to prioritise shareholder returns, not supply growth.
“It’s a new era,” said Doug Lawler, Chesapeake’s chief executive. “It’s one of responsibility and profitability and discipline.”
Lawler said his company would be a smaller and more focused operator, committed to spending well within cash flow.
“We are no longer shackled to pursuing cash flow to service debt,” he told the Financial Times. “It’s a fundamental reset of the legacy obligations that impacted our performance in the past.”
Chesapeake’s debts as it filed for bankruptcy last year were more than $9bn. The court-approved deal struck with its creditors last month eliminates about $7bn of debt and will permanently reduce $1bn of annual operating costs.
The company has also secured $2.5bn in exit financing, and lenders have agreed to backstop a $600m rights offering.
Chesapeake will end 2021 with just $500m in net debt — less than the annual interest payments it was making in recent years — and generate $2bn worth of free cash flow in the next five years, Lawler said.
The company would in future reinvest 60 to 70 per cent of its cash flow into production, he said, echoing recent promises from other shale executives to keep a cap on supply growth. Chesapeake’s oil output would decline this year and next, while natural gas production would increase only modestly, if at all, Lawler said.
After last year’s crash, US oil and gas executives have united around a mantra of new capital discipline, focusing on margins, not production growth. It marks a big shift for a sector whose spectacular drilling success in recent years made the US the world’s biggest oil and gas producer.
Lawler suggested that the “reset” Chesapeake — for many investors a company once synonymous with the shale patch’s excesses — could now help lead the sector’s reform.
“We feel great responsibility to all stakeholders in an industry that has not performed well with respect to capital efficiency and has not performed well for the investment community,” Lawler told the FT.
Chesapeake lost its New York Stock Exchange listing after its bankruptcy last year, but will begin trading on Nasdaq on Wednesday. The Houston court that approved the company’s reorganisation last month valued the company at about $5bn, although some analysts now say it could be worth almost $8bn.
Chesapeake embodied the excesses of the shale sector as it built up a huge land position and took on colossal debts in the process. The company was for a time one of the US’s biggest natural gas producers.
It was part of a growth-at-all-costs strategy established under Aubrey McClendon, the company’s founder who was once the US’s best-paid chief executive. He died in a car accident in 2016, a day after he was indicted on charges of bid-rigging.
The company’s total liabilities peaked at almost $30bn in 2012 after years of amassing land to drill for natural gas and signing contracts with pipeline companies to take future supplies to market. Analysts say the company moved too late into shale oil.
The restructured Chesapeake will focus more narrowly on natural gas again, reserving new capital only for assets that offer “outstanding returns”, Lawler said. This will include gasfields with low break-even costs in the Marcellus shale in the US north-east, and the Haynesville shale in Texas and Louisiana, analysts say.
Lawler also told the FT his company would end its routine flaring of natural gas, co-operate with President Joe Biden’s crackdown on methane emissions, and achieve net-zero direct greenhouse gas emissions by 2035. Executive payment would be linked to environmental targets, he said.
