(Bloomberg) — It will go down as wildest of the shale wildcatters, the overreaching pioneer of fracking techniques that minted vast fortunes and, now, have left behind ruin.At long last, financial reality has caught up with Chesapeake Energy Corp., avatar of the boom and subsequent bust of North American shale.Chesapeake’s spiral toward oblivion accelerated this week with executives said to be preparing for a potential bankruptcy filing, signaling the imminent end of Chief Executive Officer Doug Lawler’s 7-year campaign to turn around the troubled gas explorer. For a company that’s been skirting disaster for most of the past decade, the Covid-19-driven collapse in world energy prices merely added one more exclamation point to a tale of risk, hubris and debt.Chesapeake may be shale’s biggest corporate casualty, but it is hardly the first — and won’t be the last. Its self-inflicted wounds have sapped confidence across the entire industry, leaving many smaller operators teetering on the edge of catastrophe.As the remnants of shale’s turn-of-the-century heyday turn to dust, it’s unclear who — if anyone — will step into the void. Supermajors like Exxon Mobil Corp. and Chevron Corp. already have written off their own gas-heavy assets, and are instead focusing on oil-rich shale fields. But any shift in the global supply-and-demand balance for gas would prompt the most sophisticated giants to reassess the value of acquiring and drilling mothballed gas projects.Extreme PressureAlmost three dozen North American explorers, frackers and pipeline operators have fled to bankruptcy courts since the start of this year, buckling under $25.2 billion in cumulative debts, according to law firm Haynes and Boone LLP. Chesapeake’s indebtedness would swell that encumbrance by almost 40%.And even with crude prices recovering from the unprecedented April collapse into negative territory, energy-sector bankruptcies are expected to grow in coming months because many shale companies are in too far over their heads. “Extreme financial pressure is being felt at all levels of the energy industry,” Haynes and Boone said in a report.The template for the shale model that’s now unraveling for many companies was established by Chesapeake and its late co-founder Aubrey McClendon.Experimental DrillingChesapeake was the brainchild of McClendon and his pal Tom Ward, who started out with $50,000 in borrowed money in rented offices. The company went public in 1993 and soon was experimenting with sideways drilling and hydraulic fracturing to pummel open shale formations previously regarded as impermeable — and therefore, worthless — by geologists.At the time, the outlook for domestic gas production was so grim that Alan Greenspan predicted the U.S. would need huge imports of liquefied gas to keep industries and furnaces running. Tens of billions of dollars were invested in massive new gas import terminals that were rendered obsolete before they even opened as Chesapeake and other shale drillers flooded the continent with gas.By the time Ward struck out on his own to form SandRidge Energy Inc. in 2006, Chesapeake was spending on average $1 billion a year to snap up drilling rights from Texas to Pennsylvania. At the start of 2007, Forbes magazine named Chesapeake the best managed oil and gas company.Grand AmbitionUnder McClendon, Chesapeake raised production more than 10-fold between 2000 and 2013, invested heavily in experimental natural gas-fueled transport, and even toyed with expanding overseas before its geologists concluded that many European shale formations were unsuitable for drilling.At its peak, Chesapeake pumped more American gas than anyone aside from Exxon and boasted a market valuation of almost $38 billion.The other side of that coin was that the company only generated positive cash flow in two out of the past 30 years. When gas output from newly tapped shale fields flooded markets and prices tumbled, Chesapeake had to scramble to find new investors or joint-venture partners to provide cash infusions. By 2012, the company’s net debt load was twice the size of Exxon’s, a company that had a market value 27 times larger. Chesapeake warned it was on the verge of running out of cash.While all of that was still brewing, little-known oil wildcatters like Harold Hamm were quietly adapting the technology McClendon and the other shale-gas innovators employed for use on crude-drenched rocks in North Dakota. Those breakthroughs reversed the terminal decline in U.S. crude production, turned America into an energy powerhouse and shattered OPEC’s decades-long grip on the world’s most important commodity.Double MagnumsWhen times were good, Chesapeake spared no expense recruiting young talent to Oklahoma City and a corporate headquarters modeled after an Ivy League university campus. In between stockpiling double magnums of Bordeaux and collecting antique speedboats, McClendon singlehandedly transformed the northwest side of the city from a rundown backwater to a bustling commercial corridor.But the good times never last forever. McClendon was ousted during an Icahn-led board revolt in 2013, and three years later he was indicted on federal bid-rigging charges. Just hours after vowing to fight the charges at all costs and clear his name, he died when his Chevy Tahoe slammed into a concrete highway abutment at 78 miles an hour along a desolate country road.“They were absolutely guns blazing with their growth, but it took a lot of money to do that,” said Robert Clarke, research director at Wood Mackenzie Ltd. “Right now we’re looking at the ugly side of all that excess.”Gordon Pennoyer, a Chesapeake spokesman, declined to comment for this story.Escape RoutesAlthough Lawler inherited many of the burdens that sank the company, the fateful 2019 takeover of WildHorse Resource Development Corp. that included the assumption of more than $900 million in debt was his own undertaking. The move — intended to pivot Chesapeake toward oil and away from gas — occurred just in time to expand the company’s exposure to the crude-market collapse.In the end, Chesapeake ran out of escape routes from its $9.5 billion debt load. Gas prices were too low for too many years, and lenders and private-equity investors had long since shut the door on shale. That left asset sales as the sole avenue for raising cash, but in a market already drowning in a surfeit of gas, Lawler couldn’t find buyers.What Bloomberg Intelligence SaysChesapeake is a prime example of an E&P embroiled in past sins, with years of overspending. Its indebted balance sheet inhibits flexibility and a diverse asset base hinders scale efficiencies and capital allocation.\– Vincent G. Piazza and Evan Lee, BI analystsRead the full report here.McClendon’s legacy has haunted Chesapeake long after his 2013 ouster and his 2016 death. Lawler, the former Anadarko Petroleum Corp. exploration boss recruited by Carl Icahn and O. Mason Hawkins, has spent his entire tenure trying to right the ship.Things were so dire in 2016 that the CEO was forced to pledge almost everything the company owned to keep open a credit lifeline. Lawler, who declined to be interviewed for this story, also sought to demonstrate he was he anti-McClendon. His predecessor’s long, drawn-out conference calls with analysts were replaced with curt recitations of bullet points. Austerity reigned at the company’s once-lavsh headquarters, and Lawler eschewed McClendon’s fondness for opulent displays.“If you see me out at a dinner, here in Oklahoma City and on company expense,” Lawler said at an event in 2014, “and you see me drinking a $500 bottle of wine, I would ask you to hit me over the head with it.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
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The U.S. airlines have said that a modest recovery in demand was helping slow their daily cash burn rates in June, after the COVID-19 pandemic led to hundreds of flight cancellations. American Airlines expects its daily cash burn rate to slow to about $40 million in June, and said it plans to fly 55% of its domestic schedule and nearly 20% of its international schedule in July. “The company has recently experienced improving demand conditions and has passed the peak in cash refund activity,” American Airlines said in a statement.
Since filing for bankruptcy on May 22, Hertz’s shares have risen more than threefold in value. Hertz is now seeking approval from a bankruptcy court to potentially sell 246.78 million unissued shares to Jefferies LLC. “The recent market prices of and the trading volumes in Hertz’s common stock could potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said in a regulatory filing on Thursday.
Diamond Hill Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. The Diamond Hill Small Cap Fund posted a return of -36.17% for the quarter, underperforming its benchmark, the Russell 2000 Index which returned -30.61% in the same quarter. You should check out Diamond Hill Capital's top 5 […]
Last year, China replaced the United States as the No. 1 importer of oil from Venezuela, yet another front in the heated rivalry between Washington and Beijing. The United States had imposed sanctions on Venezuela’s state-owned oil company as part of a bid to topple that country’s socialist president, Nicolas Maduro. U.S. refineries stopped buying Venezuelan crude.
Top news and what to watch in the markets on Friday, June 12, 2020.
Car rental company Hertz Global Holdings (HTZ) is reportedly asking a bankruptcy judge for permission to raise as much as $1 billion from a stock sale, to benefit from its recent share rally.The stock surged 51% in pre-market trading after closing 18% lower at $2.06 on Thursday. Shares more than doubled this month as investors piled up on the stock amid some optimism that Hertz may be able to work its way through bankruptcy proceedings, while travel is poised to rebound following the coronavirus crisis.As part of the plan, Hertz is offering as many as 246.78 million common shares with help from Jefferies LLC, according to a court filing seen by Bloomberg.“The recent market prices and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said, referring to a traditional bankruptcy loan.A share offering would avoid new interest, fees and restrictions on Hertz’s finances and wouldn’t impose any claims from a bankruptcy loan that would outrank existing creditors, the company said.In addition, Hertz said it would warn any potential buyers “the common stock could ultimately be worthless.”Its lawyers requested an emergency ruling “given the volatile state of trading in Hertz’s stock.”Meanwhile, Hertz earlier this week pledged to challenge plans by the New York Stock Exchange (NYSE) to delist its common stock from the exchange. The debt-strapped car rental company appealed the determination and has requested a hearing before the NYSE.The exchange made the decision after Hertz disclosed on May 22 that it has commenced voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code.“At this time, the common stock of the company will continue to be listed and trade on the NYSE pending resolution of such appeal” Hertz said.The company's stock plunged over 70% in value year-to-date. The troubled car rental company has a bearish Moderate Sell consensus from the Street with 2 recent Hold ratings and 4 Sell ratings. (See Hertz stock analysis on TipRanks).The average analyst price target stands at just $2.33, implying 13% upside potential in the shares over the coming year. Deutsche Bank analyst Chris Woronka has a Hold rating on the stock with a $3 price target, saying “it’s difficult to fundamentally analyze the company” due to the bankruptcy proceedings.While the “reopening trade” for stocks set to improve post-lockdown has become popular, Woronka nevertheless finds himself “questioning the true depth of the buying in what increasingly feels like a capitulation-type short squeeze being exacerbated by high frequency trading programs.”Related News: Beleaguered Hertz Sinks 36% In After-Market On Bankruptcy Protection Filing Hertz Down 11% After-Hours As Carl Icahn Sells Stake At $1.8B Loss Global Airlines Are Set To Lose $84.3 Billion In 2020, IATA Says More recent articles from Smarter Analyst: * Lululemon Drops 5% in Extended Trading After Quarterly Results Miss * Twitter Removes Accounts Linked To China, Russia, Turkey Due To Information Manipulation * Regeneron Starts Human Clinical Trials Of Covid-19 Antibody Cocktail * Emergent Bio Signs Covid-19 Vaccine Manufacturing Deal With AstraZeneca