Chesapeake Energy says it is filing for Chapter eleven bankruptcy protection. Chesapeake, of course the energy giant based out of Oklahoma City, one of the fracking pioneers. The company, once employing about thirteen thousand people across all its businesses, now down to nineteen hundred, with thirteen hundred working here at Oklahoma.
Chesapeake Energy, the first big US fracking company, has filed bankruptcy. Chesapeake was a pioneer in the US fracking industry, helping to turn the country into an exporterer for the first time in decades. In those early days, Chesapeake was run by its larger than life co founder, Aubrey McLendon. Here he is addressing Harvard students at the height of the shale boom.
Over the last one hundred and fifty years, you've known natural gas is good, but you haven't been sure about its abundance. And in fact, from from my perspective, when I started this company in nineteen eighty nine, I was thirty years old. I didn't know where the future of the industry was going. Certainly didn't know where natural gas was headed. But we founded our company on the idea that if we were to find our way in the world. We had to look at geology and engineering from a
different perspective than what the bigger companies were doing. We had to go look for unconventional reservoirs. The conventional reservoirs were basically locked up by the exxons of the world
and the larger independent companies. And so my partner and I, who we had been partner since I was twenty three, on a private basis, we decided to go found this company with fifty thousand dollars and we had ten employees at the time, and the idea was, let's go look for natural gas in unconventional reservoirs, and at the time that was mainly fractured carbonates. Today that's shale.
He sounds pretty tame there, but mcclinton's rep was that he could sell shale to anyone.
My name is Clark Williams Dairy, and I'm an analyst with AIFA, the Institute for Energy Economics and Financial Analysis. So Aubrey mcclindon was kind of, you know, the quintessential shale booster. He was somebody who whether to force a personality or because he was just a true believer, or he was just an incredibly good salesman. He got people to invest in his company.
Shale wasn't an easy sell or, it turns out a goodbye for anyone. That was true long before coronavirus hit or oil and gas prices tanked. We've been covering COVID related environmental rollbacks and bailout for fossil fuel companies with our COVID Climate Tracker, and one sector that scored a
lot of government gifts is the shale industry. A couple months ago, we talked about tax breaks, loans and credit extended to shale companies as throwing good money after bad And now here we are with Chesapeake, a company that has benefited from COVID related royalty cuts and tax breaks, declaring bankruptcy anyway, in a lot of ways, the story of Chesapeake is the story of American shale gas. We're going to get into that story right after this message
from today's sponsor. I Mimi Westervelt, and this is drilled.
He got people to invest in his company when he was never ever able to produce positive free cash flow. He's never actually able to squeeze money out of the wells. He's very good at producing gas, but not but terrible at producing profits. And that's something that I think has actually been emblematic with the shale stry as a whole, that it's an industry that's been phenomenally successful at producing oil and gas, but has been terrible at producing cash.
That's Clark William's dairy again. He's run all kinds of numbers on Chesapeake, none of them good.
The company essentially burned through about forty one billion dollars of cash, that is to produced negative free cash flows of forty one billion dollars. And what that means is that this is a company that spent forty one billion dollars more on drilling, on getting access to underground gas reserves, and you know, all the things of going to running a shell business. It's spent forty one billion dollars more than it.
Actually generated by selling gas and oil.
It is racked up nine billion dollars worth of debt at the end of twenty twenty, that had about nine billion dollars worth of long term debt that was you know, was supposed to get paid off soon. But the problem for a company like this is how do you pay off your debt when you're unable to produce positive free cash flow.
It's just not possible.
You can't do it. And if you are consistently year after year after year producing negative free cash flow, there's no way for you to pay down your debt. In some cases, there's no way for you to service your debt, that is paid your interest payments. But in the case of Chesapeake, I mean, what has become abundantly clear over the past few years is that this is a company that has no viable prospect for producing free cash flow and as a result, has no viable prospect for actually
paying down its debt. And that's what really forces a bankruptcy.
Right before it went bankrupt, of course, chess Peak gave out more than twenty million dollars to its executives in bonuses. Again, this is a company that benefited from COVID relief. Just a couple of months ago. The company's current CEO, Robert Douglas Lawler, blamed his predecessor for overspending. He claims that that caused the bulk of Chesapeake stet. On top of buying up every lanlease he could get his hands on,
McLendon did have a secret wine cave. He refused to agree to budgets and apparently he had everyone flying around on chartered jets. But we don't really know if that was the entire problem because McLendon isn't around to defend himself.
I want to report that earlier today, at nine to twelve am, the Oklhom City Police Department responded to a fatality accident involving mister Aubrey McLendon.
In twenty thirteen, shortly after he was ousted from Chesapeake and the morning after he was indicted for allegedly rigging oil and gas leases, McLendon drove his car into a wall, speeding along an Oklahoma highway. By that point, Chesapeake had also brought a civil case against its founder, accusing McLendon of stealing trade secrets to go start his next venture,
American Energy Partners. Also around this time came out that Chesapeake had given some twenty million dollars plus to the Sea Club, which had helped it to perpetuate the bridge fuel narrative around natural gas, the idea that to install renewable energy at scale, you need something like natural gas to help with the intermittency of renewables. It helped that natural gas is a much lower carbon fuel and no one wanted to talk about methane emissions at the time.
There were people who don't agree with the policy because they think the Sierra Club's role should just be to oppose anything that has any environmental consequences. They don't think our role should be to say, Okay, here's where we think we should get our energy. We see it, there's the cleanest of the fossil fuels.
That story is still very much with us today. You might remember hearing some of the Democratic primary candidates talking about it in the recent debates. All these scandals surrounding McLendon make him an easy scapegoat for Chesapeake's financial lows. But Greg Rogers, who specializes in climate change and other lay ablity accounting for the energy industry, says Chesapeake's financial situation is pretty typical for the shale industry as a whole.
The franking industry has not produced a return on capital and excessive the cost of capital since its inception.
That makes it a bad pick for an industry to bail out, at least financially. Rogers says, there are other factors at play.
I would imagine that there would be a lot of political pressure and some inclination by US politicians to support the domestic coil and gas industry, and especially when you tie that back into concerns about national security. So I think the proposition that the Saudis and the Russians are going to provide the oil energy needed by the world as we phase out this industry is not very appealing to US politicians. And so again reasons to bail out the industry is can they afford it?
The answer, amid an ongoing pandemic and an economic downturn sure to worsen, is no. Not really. It's hard to think of any other industry that's been bailed out in spite of performing badly, aside from maybe the banks. In two thousand and eight, Clark Williams Darry explains that in a way, that's kind of what's happening here too.
So bankruptcy is not a process where a company just blows up and dissolves. Bankruptcy is a process for telling creditors.
That they're not going to get paid.
It's essentially like a process where the phoenix dies. It's creditors are told that they're not going to get their money back. The shareholders are completely wiped out, but the company rises from the ashes and still has access to its assets and so forth. It just is really reborn with a new capital structure, and all the old investors are sad, but the company itself.
At some level it sort of survives.
It sort of re emerges from bankruptcy as a new company with a cleaner balance sheet.
Even with that restructuring, William Sterry says, the company may or may not make money.
Okay, So I want to ask you about the fact that, you know, chest Peak is one of several shale like deeply indebted shale companies that did receive some funding through the Cares Act, and whether or not, like I don't know. To me, it sort of seems like one of of what I think will be several examples of the government sort of throwing good money after bad to try to save companies that are so deeply problematic financially and like
a one time loan is not going to fix it. So, yeah, I'm curious to hear your take on that.
Yeah, well, that's that's exactly right. I mean, so, like just the concept of a bailout, and when people talk about bailouts, I used to, you know, when I was younger, I did a lot of canoeing, and a bailout is you know, it's literally you've got a that is fine, that is solid, that doesn't have any problems with with the you know, you know, there's there's no there's no crack, there's no leak, and you just need to toss water out of the boat and the boat's able to sort
of you go on sailing on, right. So it's like your bailout is literally like you're the boat is fine, and you're just taking water out of the canoe and to allow the company the boat to sort of to sort of continue to operate. But the problem with the shale industry is that there's a there's a hole in the hull. This is not a boat that just needs a little bailout. It's a boat that is maybe already sunk.
And so when you're bailing out a boat that's already sunk, you're not actually going to you know, create a boat that can still continue to operate. It's it's it's it's founder, it's done right. So so a lot of the talk about sort of the government bailout, well, what really is going on is not so much technically, it doesn't feel to me, like it's a bailout. What it is, it's
a handout to the investors. So it's something that maybe allows the investors to recoup a little bit and this is mostly the creditors to recoup a little bit of the money that.
These companies owe to them.
So like if you give let's say you give a hundred million dollars to a company like Chesapeake, I don't know act how how much it actually got either Chesapeake continues to burn through that money because this business model is fundamentally broken, or else it saves some of that money and that money can get can go back to the hedge funds and other people who swooped in and
bought Chesapeake debt. So it's you know, the structure of some of the bailouts that have been proposed for the oil and gas industry, and some of them have actually happened for oil and gas companies. The structure is really designed to benefit invest not so much to fix the broken shale industry business model. It's just to reward investors who made bad bets.
On shale companies and allow them.
To get a little bit more of their money back in the bankruptcy process.
Really what this is.
It winds up being sort of a passed through from the US Treasury straight to the hedge funds or other investors who own chesameake Dad.
So instead of supporting working Americans or investing in an energy transition because that would be political, the government is bailing out failing companies to get some money into the pockets of hedge fund the guys. Chesapeake will continue operating with seven million dollars of its debt wiped clean by Franklin Resources, a holding company. We'll see how long that lasts.
That's it for this time. Thanks for tuning in. We will have another episode for you this Friday, and then I swear we really are going to take a little bit of a break to produce the next investigative season. Look out for that in July and in the meantime, you can keep tabs with us at drillednews dot com and via our Patreon. If you're not a member yet, please consider signing up. We will be dropping episodes of the next season there early and ad free, as well
as some bonus content over the next couple months. We'll drop a link to that in the show notes. Thanks again for listening, and we'll see you next time.