Chesapeake runs out of alternatives, considers bankruptcy, after losing more than $8 billion in the first quarter of 2020
Chesapeake Energy Corp. announced in a filing it made with regulators Monday that bankruptcy is on the table after posting a net loss of about $8.3 billion — about $853 a share — for the first quarter of 2020.
A few days earlier, the Oklahoma City energy company notified regulators and investors its board had cut some bonuses for senior executives, while also creating a quarterly bonus incentives program for its rank and file employees. The company has about 1,900 employees.
The company, hammered by low commodity prices caused by a global price war and depressed demand caused by COVID-19, stated in its filing with the U.S. Securities and Exchange Commission that it had to take a non-cash impairment charge on its assets of about $8.5 billion during the January through March period.
Chesapeake's share price has fallen significantly over the past year.
“If the current depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant and an expected significant reduction in our borrowing base in our scheduled determination, then our liquidity and our ability to comply with our financial covenants during the next 12 months will be adversely affected,” the company said in its regulatory filing.
The company said it expects to violate those financial covenants, which require it to limit its debt to 4-to-1 ratio of debt to consolidated earnings before interest, taxes, depreciation, amortization and exploration, by October.
Beyond using bankruptcy to restructure its debt, other options the company is considering include taking itself private.
“However, there can be no assurances that the company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions.
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“As a result of these uncertainties and the likelihood of a restructuring or reorganization, management has concluded that there is substantial doubt about the company’s ability to continue as a going concern.”
Pay changes adopted
Chesapeake Energy’s May 8 filing with the SEC stated it had cut 2019 target variable compensation by 34% to CEO Doug Lawler and Chief Financial Officer Domenic J. Dell’Osso; by 33% to Frank J. Patterson, its executive vice president for exploration and production; and by 28% for James R. Webb, its general counsel.
Executives also agreed to give up other owed or future bonuses.
The filing stated it estimates variable target compensation payments set for 2019, after revisions, stand at $25 million for both the company's top officers and other company executives (21 people in all). Half of those payments will be paid only if those employees stay on board throughout the entire year, it stated.
The filing stated the quarterly bonus plan for rank and file employees aims to keep them working hard.
It did not detail payment size per employee, or what that total cost would be. However, it indicated the new program is “essential to keep employees engaged and focused on the tasks necessary to achieve the company’s short- and long-term goals.”
The company’s first-quarter 2020 net loss of about $8.3 billion is larger than the revised $7.8 billion value of its assets after the impairment, the company’s filing on Monday showed.
Chesapeake's total revenue for the first quarter of 2020 was about $2.5 billion, while its total operating expense, less the impairment, was about $2.25 billion.
While Chesapeake also noted it continues to battle various ongoing lawsuits filed against it in Texas, Oklahoma, Ohio and Pennsylvania related to gathering calculations, royalty payments, lease negotiations and earthquakes, the filing stated it didn’t expect those cases to impact its future, for now.
The bigger concerns are ongoing market fluctuations caused by reduced global demands for oil and natural gas, and the potential that those condition could cause the company to fail to meet its debt obligations.
At the same time, an email from Lawler to employees reassures them Chesapeake is continuing to operate.
“We are working with advisors to best position the company for the future, including exploring strategic alternatives to address our capital structure,” he wrote. “Our goal in this process is to finally align our capital structure with the quality of our people, assets and operations.
Lawler acknowledged recent media reports attributed the company was considering bankruptcy as an option.
“It is important that you understand that if that were to happen, we would continue to operate our business as usual, and you would continue to be paid and receive benefits,” he wrote.
“Our people are our most important asset, which is why we enhanced our 2020 bonus program to make sure you are appropriately compensated and incentivized during this challenging time. Your hard work, flexibility and continued diligence and focus on safety amid an unprecedented commodity price environment and the COVID-19 pandemic has been exceptional, and I am proud to work alongside you.”