Chesapeake Energy Prepares Bankruptcy Filing, Coronavirus Pushed Crude Demand Down

Chesapeake Energy Corporation, one of the pioneers in fracking, has become the latest victim of a massive oil production glut that's sunk oil prices amid the demand-killing COVID-19 pandemic.

Chesapeake, which was once the second largest United States producer of natural gas after Exxon Mobil Corporation, is poised to enter Chapter 11 in a bid to stay afloat and restructure. The bankruptcy will wipe out existing shareholders and will hand over control of the company to holders of its so-called FILO term loan.

The company is now negotiating a restructuring support agreement that will likely see lenders take most of the company's equity in bankruptcy, according to Bloomberg.

Chesapeake recorded $8.5 billion in impairments from January to March as the value of its oil and gas fields, a sand mine and other assets plummeted along with commodity prices. It was already in a precarious position before COVID-19, which destroyed crude oil demand along with the Saudi Arabia-Russia price war.

Analysts concur Chesapeake was undone by its strategy of amassing massive debt to pursue aggressive drilling programs, a legacy left over from the company's late founder, Aubrey McClendon. Many of these digs wound up dry.

The massive mountain of debt amounting to $9 billion left current CEO Doug Lawler little room to maneuver despite seven years of effort. Lawler’s efforts to rescue Chesapeake included tens of thousands of employee layoffs and a failed years-long campaign to transform itself from a gas giant into an oil company.

Chesapeake’s huge success at extracting natural gas from deeply buried rock contributed to a massive gas glut that ultimately dropped prices to unprofitable levels.

Kirkland & Ellis and Rothschild & Co. are advising Chesapeake, according to industry sources. The FILO lenders are organized with Davis Polk & Wardwell and Perella Weinberg Partners LP. Franklin Resources Inc. is organized with Akin, Gump, Strauss, Hauer & Feld LLP.

Chesapeake will join Whiting Petroleum Corporation, a leading shale oil producer that filed for Chapter 11 bankruptcy on March 28. Whiting became the first publicly traded casualty of crashing crude oil prices.

At the time of Whiting's bankruptcy, it was reported Chesapeake, Chaparral Energy Inc and natural gas producer Gulfport Energy Corporation were working with debt restructuring advisers and investment banks to manage their massive debts.