29 June 2020 by jbchevrel
Yesterday evening the shale pioneer Chesapeake Energy Corp. (CHK) filed for chapter 11 in the state of Texas. After skipping interest payments this month, CDS in mid 90s for a while and bonds ~5 cents on the dollar, this Chapter 11 filing was not a surprise. We close the CDS unchanged at 95% today. The DC has not given a decision yet, but no surprise to be expected. That event follows CRC whose auction will occur on the 7th July. CHK CEO said “We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalise on our substantial operational strengths”. CHK said it had gained agreement with the majority of its creditors to eliminate $7b of debt and had secured $925m of debtor-in-possession financing to continue operating through the bankruptcy. CHK management, which recently shared a “retention bonus” of $25m that was announced just days before the company warned investors it may seek Chapter 11 protection, is expected to remain in place during the restructuring, according to the FT. Although CHK is one of the biggest and one of the first debt-laden shale players, it is surely not the only one that will face credit event risk. The WSJ reported that more than 200 shale companies may file for bankruptcy over the next 2 years if oil and gas prices stay around current levels. This is despite the recent rebound in crude. We are still clearly below breakeven. It will take a while to the US shale industry to recover. A Bloomberg analysis of forecasts for the shale industry made by IEA, Rystad, IHS Markit, Genscape and Enervus suggested that shale will be back on its feet by 2023, with production back to over 12 million bpd. Factors explaining how long that is include shut-in wells, abandoned drilling plans, tight cash, and, for many, and of course other looming bankruptcies. Deloitte said 30% of shale drillers could go under if oil prices fail to move substantially higher. These 30% are technically insolvent at $35 a barrel crude. Right now, WTI is $39.5 but quite volatile over the past few sessions. Still closer to $35 than to $50, the level at which most shale drillers will be breaking even. Banks are not keen to add credit risk there. According to calculations by Moody’s and JP Morgan, cited by WSJ, banks could reduce asset-backed loan availability for the industry by -30%, which translates into $10Bs. Shale drillers have been consistently failing to turn a profit over the last 15y, burning through $300B in cash and writing down $450B on invested capital, according to the Deloitte study.