The last decade has been a rocky ride for employees at Chesapeake Energy. Under its former CEO and Chairman, the late Aubrey McClendon, Chesapeake became an early pioneer in a number of shale plays, including the Haynesville, the Marcellus Shale and the Barnett Shale. That was during the first decade of this century, during a time when McClendon was betting the company’s fortunes on natural gas as the energy play of the future, and on the proposition that the price for natural gas would remain at robust levels.
For awhile, that seemed like a strong strategic move, and in McClendon’s defense, many other independent producers during those years also moved in that same direction. But then, starting in mid-2008, as the commodity became overwhelmingly abundant in the U.S., the price for natural gas began a rapid and momentous collapse, falling from a high of $10.79 per mcf in June of that year to below $3.00 in a span of just 15 months. Suddenly, the imbalance between gas and liquids in Chesapeake’s portfolio, much of it acquired in deals that necessitated the assumption of billions of dollars of debt, became a severe liability for the company.
In the face of depressed gas prices, high levels of debt and rising prices for oil and liquids, McClendon then shifted strategies, and began moves designed to re-balance the company’s portfolio to make it more liquids-heavy. Again, in Chesapeake’s and McClendon’s defense, this is a strategy many other producers were adopting during the same years.
Chesapeake quickly became a major player in the western, oily parts of the Eagle Ford Shale, and later in the liquids-rich Utica Shale region as well. The company financed those new investments in large part with sales of partial interests in its assets in the natural gas shale plays, creating a series of joint venture partnerships that, while enabling the payment of debt and new investments, also steadily depleted Chesapeake’s free cash flow from those legacy areas.
By the time of McClendon’s departure from the CEO position in April, 2013, the company was in severe financial straits. A few months later, in October of that year, new CEO Doug Lawler announced what would become the first of several major company layoffs, severing 640 employees who worked at the company’s beautiful Oklahoma City campus, and a total of 800 nationwide. It was a very sad day for me and others who knew so many very bright and first-rate people who were caught up in the company’s financial struggles.
In the interests of full disclosure here, I knew Mr. McClendon personally and had quite a bit of interaction with him during years in which we were both involved in industry-wide policy projects. I always liked him and had a high opinion of him as a person, and none of this review of history is intended in any sort of disparaging way. Hindsight is far easier than having to make crucial decisions in the moment. But as this company struggles for survival, it is important for everyone to recognize and consider the thousands of employees who are also involved in that struggle, and whose jobs could be in jeopardy if it does not succeed.
The company’s financial difficulties were highlighted again recently in the wake of Chesapeake management’s warning to investors in its Q3 2019 SEC filings that “substantial doubt” exists that the company will be able to continue as a going concern. There was a ray of hope on Wednesday, when Morgan Stanley said, “While we expect the company to successfully manage through the potential covenant breach in 2020, it will likely require strategic action and/or waivers,” even as it lowered its price target for Chesapeake from $2.25 to $1.25.
Certainly, a major sale of some of the company’s assets would amount to a “strategic action.” Dallas Cowboys Owner Jerry Jones has made no secret of his desire for the company he controls, Frisco-based Comstock Resources, to become the biggest player in the Haynesville Shale region of northwest Louisiana and northeast Texas. In fact, thanks to Comstock’s June $2.2 billion acquisition of Covey Park, LLC, the company is already well along the way to reaching that goal.
This week brought news, reported by Reuters, that Jones’s company is in the midst of negotiations to buy Chesapeake’s remaining Haynesville assets. Reuters reports that the deal “could be worth more than $1 billion” and that “the companies have settled on a structure for the deal and hope to reach an agreement by the end of the year.” Such a deal would amount to at least a band-aid that would provide cash to allow Chesapeake to pay down a portion of its $9.7 billion in debt, a monumental amount given that the company’s market cap as of mid-day on November 15 was $1.37 billion, as its stock was trading at $.70 per share.
A potential Haynesville deal with Comstock would certainly qualify as a strategic action. On the other hand, it’s reminiscent of the multiple asset/interest sales the company deployed under previous management in order to service debt and keep hope alive. Whether one more sale can buy the company enough time to implement additional strategic actions that would enable a full return to corporate health remains to be seen.