Opinion

What does Chesapeake's bankruptcy mean for US natural gas?

Once America’s champion of natural gas, Chesapeake declares bankruptcy. What are the implications for the market and pipelines?

In this report, our North America gas analysts use Wood Mackenzie Genscape's short-term data on North American gas markets to assess the impact of Chesapeake's bankruptcy on markets and pipelines. Read on to discover Chesapeake’s daily net gas production across key plays, Chesapeake’s gas hedges as of Q1 2020, and Chesapeake’s FERC index of customers gas transport contracts as of 1 April 2020.  

Event:

In late 2019, Chesapeake, a juggernaut of the US shale revolution, issued a warning to investors that it may struggle to remain a going concern over the next 12 months if commodity prices did not improve. On 28 June 2020, Chesapeake announced that it has voluntarily filed for Chapter 11 bankruptcy protection. Chesapeake intends to use the proceedings to strengthen its balance sheet and restructure its legacy contractual obligations to achieve a more sustainable capital structure. Chesapeake will operate in the ordinary course during the Chapter 11 process and has secured $925 million in debtor-in-possession (DIP) financing.

Background:

Chesapeake championed natural gas in the US and aggressively commenced its shale “land grab” and grow at all cost business model, which necessitated extensive borrowing. Early on Henry Hub gas prices spiking up to $13-14/mmbtu during the winter of 2005 and 2008 and access to low-cost capital cooperated with its business model, but in a way it became a victim of its own success. Significant shale gas-driven growth pressured gas markets to today’s 25-year record low. Chesapeake did not “discover” the various plays that led the shale gas revolution in the US but was involved in most of them, from the Barnett to the Utica. Although both plays have since been sold off along with others, Chesapeake still remains the 4th largest independent gas operator with its Q1 2020 net production slightly under 2 bcfd.

Market implications:

Chesapeake’s current major dry gas producing regions include the Northeast Pennsylvania Marcellus and the Haynesville. Its associated gas plays in the Eagle Ford, Powder River Basin, South Texas and Midcontinent also contribute additional volumes of natural gas. Although short-term production levels may be impacted by the bankruptcy filing, DIP financing should allow for existing operations to continue.

Chesapeake plans to operate six to eight drilling rigs for the next two years. It currently has four rigs active in Northeast Pennsylvania Marcellus and two rigs in the Haynesville. Chesapeake will likely have a more capital disciplined growth strategy, which presents a risk to the market as prices recover. ...