Shale pioneer Chesapeake could file bankruptcy. FINALLY ! The consolidation begins

[Jan van Eck + 7,558]

8 minutes ago, ronwagn said:

I hope you are wrong, Chesapeake has led the industry where it needed to go. Natural gas is the best energy answer worldwide IMHO. 

It is unlikely that Jabbar is correct.  And the reason in that the Market does not agree with his opinion.  It seems the Chesapeake 2025  8% notes are trading at 56 cents, so the discount brings the return to 22%.  that is great in the note-buying arena, but is also means that the market is not convinced this is the end of the line.  If it was, the 2025 Notes would be down around a penny. 

What is roiling the markets is the statement contained in some 10-K filing about not meeting covenants on certain inventory and working capital loans, which would be defaults and could allow the creditor to accelerate the debts.  I don't see that happening.  I predict the creditors will simply waive the covenants.  Not waiving would be stupid, as it would force that CH 11 bankruptcy filing, and then the creditors definitely will take a hit.  B y waiving, they create a "zombie corporation," one that is in a state of limbo as it is not making any money, and is basically simply churning the cash, cycling revenues to meet current obligations, with nothing being done about the term debt.  But so what?  There is no logical alternative.  If the place goes under nobody is servicing the term debt either, so either way, there in nothing coming on the table.  But, you never know in the oil patch.  Any sudden political event could unleash a torrent of buying of the Ches. product at elevated prices.  Could be war, could be some Trump administrative action, could be anything.  So the creditors are way better off to waive the covenants and roll with it, see if there is some possibility of a restructured long-term debt payout that could be formulated.  And you cannot do that if you go toe to toe with management by declaring default and an acceleration of debt. 

The spectre of bankruptcy filing is a big club that management can wave at creditors, and smart creditors don't go there.  Remember what happened to those Xerox guys and the United Airlines airplanes, a cautionary tale. 

[Jan van Eck + 7,558]

8 hours ago, Jabbar said:

Usually, but if you look closely at Chesapeake there is no chance . My opinion.  

Sorry, jabbar, I would disagree. See my explanatory post further down, I think on page 2.  And the reason is the market is still pricing the 2025 term notes at 56 cents.  Lot of life left in this company.  Not going down the drain just yet. Cheers.

[Jan van Eck + 7,558]

23 hours ago, Jabbar said:

The weak mismanaged over leveraged shale players will fold.

I predict nobody will "fold."  Not a single one.  You may see some merger and acquisition activity, but folding?  Nah. 

[El Nikko + 2,145]

51 minutes ago, Jan van Eck said:

Sorry, jabbar, I would disagree. See my explanatory post further down, I think on page 2.  And the reason is the market is still pricing the 2025 term notes at 56 cents.  Lot of life left in this company.  Not going down the drain just yet. Cheers.

Would you mind explaining what 2025 term notes are please.

Is it a kind of bond or something?

Sorry for my complete ignorance on financial matters, the more I think about it the more I realise I should have been learning about that side of things. I guess it's a different story when you work for National Oil Companies as I did before getting involved in the shale business.

[Gerry Maddoux + 3,627]

2 hours ago, ronwagn said:

Gerry, do you follow the growth of natural gas use worldwide? What do you project for the future use of this clean and cheap resource?  

Yes, and under normal circumstances it would be smooth sailing for global use . . . like Jan said, the predominant fuel. Looking at the price for construction and maintenance of solar and wind, as well as the petrochemical input, I don't see how in the world anything can compete with a clean-burning fuel that has essentially become a by-product of LTO. I look for a pipeline effluent price of $1.50-$2.50 and a destination price of $5-7.50 and man, that's cheap energy. Lots of "smart money" buying natural gas: Jerry Jones just bought the rest of Comstock Resources. Gas from the Bakken is probably the best because of the high ethane content, but the Permian gas is sweet and of great quality. My prediction is that a vast amount of money will be spent on alternative renewable sources in the next decade while natural gas does all the heavy lifting. 

[Jabbar + 465]

2 hours ago, ronwagn said:

I hope you are wrong, Chesapeake has led the industry where it needed to go. Natural gas is the best energy answer worldwide IMHO. 

If they do the resources will just be picked up by other producer.  

Gas is the future. China said to double their NG imports  by 2040.

Edited November 7, 2019 by Jabbar

[ronwagn + 6,290]

11 minutes ago, Jabbar said:

If they do the resources will just be picked up by other producer.  

Has is the future. China said to double their NG by 2040.

They should. They supposedly have a lot to develop, but different than our formations.

[ronwagn + 6,290]

20 minutes ago, Gerry Maddoux said:

Yes, and under normal circumstances it would be smooth sailing for global use . . . like Jan said, the predominant fuel. Looking at the price for construction and maintenance of solar and wind, as well as the petrochemical input, I don't see how in the world anything can compete with a clean-burning fuel that has essentially become a by-product of LTO. I look for a pipeline effluent price of $1.50-$2.50 and a destination price of $5-7.50 and man, that's cheap energy. Lots of "smart money" buying natural gas: Jerry Jones just bought the rest of Comstock Resources. Gas from the Bakken is probably the best because of the high ethane content, but the Permian gas is sweet and of great quality. My prediction is that a vast amount of money will be spent on alternative renewable sources in the next decade while natural gas does all the heavy lifting. 

Thanks for the encouraging opinion. I have been promoting it for eight years. Just an avocation started during the last "energy crisis" fairy tale. My only fear is that the greenie fossil fuel haters will slow the growth. 

[Jabbar + 465]

4 hours ago, Jan van Eck said:

It is unlikely that Jabbar is correct.  And the reason in that the Market does not agree with his opinion.  It seems the Chesapeake 2025  8% notes are trading at 56 cents, so the discount brings the return to 22%.  that is great in the note-buying arena, but is also means that the market is not convinced this is the end of the line.  If it was, the 2025 Notes would be down around a penny. 

What is roiling the markets is the statement contained in some 10-K filing about not meeting covenants on certain inventory and working capital loans, which would be defaults and could allow the creditor to accelerate the debts.  I don't see that happening.  I predict the creditors will simply waive the covenants.  Not waiving would be stupid, as it would force that CH 11 bankruptcy filing, and then the creditors definitely will take a hit.  B y waiving, they create a "zombie corporation," one that is in a state of limbo as it is not making any money, and is basically simply churning the cash, cycling revenues to meet current obligations, with nothing being done about the term debt.  But so what?  There is no logical alternative.  If the place goes under nobody is servicing the term debt either, so either way, there in nothing coming on the table.  But, you never know in the oil patch.  Any sudden political event could unleash a torrent of buying of the Ches. product at elevated prices.  Could be war, could be some Trump administrative action, could be anything.  So the creditors are way better off to waive the covenants and roll with it, see if there is some possibility of a restructured long-term debt payout that could be formulated.  And you cannot do that if you go toe to toe with management by declaring default and an acceleration of debt. 

The spectre of bankruptcy filing is a big club that management can wave at creditors, and smart creditors don't go there.  Remember what happened to those Xerox guys and the United Airlines airplanes, a cautionary tale. 

The creditors could threaten to shut them down, can't drill without credit line , cash.  

Probably force them to sell some assets. 

Highly leveraged shale producers stuck.  Chesapeake has a very high breakeven  as a result of their debt.  

Their 8% notes at 56 cents dosen't mean I'm wrong.  The debt, which has first claim to assets are built into that number.  It also reflects the value of the assets, the reserves. The assets of their reserves have a value. 

They are barely hanging on at $57 WTI. IF WTI goes to $50 or lower and stays there for a while they are toast.

The bank's patience is wearing thin with shale producers. Not your normal American default. Banks and hedgefunds tired of hearing "the price always comes back". They don't buy it anymore.

It's like playing poker with very little cash left.

Edited November 8, 2019 by Jabbar

[Jabbar + 465]

19 minutes ago, ronwagn said:

They should. They supposedly have a lot to develop, but different than our formations.

China will  DoublePurchases.  Their shale gas reserves are not very good.

Deep: 15k to 25k ft deep.

Broken up in small pockets.

Not much water available for tracking.

No infrastructure in western China.

Edited November 7, 2019 by Jabbar

[Jabbar + 465]

19 minutes ago, ronwagn said:

Thanks for the encouraging opinion. I have been promoting it for eight years. Just an avocation started during the last "energy crisis" fairy tale. My only fear is that the greenie fossil fuel haters will slow the growth. 

Ron 

Whatever happened to the company that developed the natural gas powered engines for large trucks.  Did Cummings Engine buy them ?

Edited November 7, 2019 by Jabbar

[Jabbar + 465]

2 hours ago, Jan van Eck said:

I predict nobody will "fold."  Not a single one.  You may see some merger and acquisition activity, but folding?  Nah. 

Not so

During 2015 -2016 price downturn MANY Folded.  It happens.

Many reorganized under Chapter 11 also.

It comes down to (1) the quality of your reserves (2) your debt to assets ratio. (3) depends on type of debt in the mix is Secured Debt, Unsecured debt, Priority claims. 

Banks or Bond holders could also force a sale with their leverage if the terms suit them.

Keep in mind this now is more than simply over ambitious management growth plans or price cycle, the World Energy Industry is in the middle of major change .  Many changing variables. It has an affect.

Edited November 7, 2019 by Jabbar

[El Nikko + 2,145]

1 hour ago, Gerry Maddoux said:

Yes, and under normal circumstances it would be smooth sailing for global use . . . like Jan said, the predominant fuel. Looking at the price for construction and maintenance of solar and wind, as well as the petrochemical input, I don't see how in the world anything can compete with a clean-burning fuel that has essentially become a by-product of LTO. I look for a pipeline effluent price of $1.50-$2.50 and a destination price of $5-7.50 and man, that's cheap energy. Lots of "smart money" buying natural gas: Jerry Jones just bought the rest of Comstock Resources. Gas from the Bakken is probably the best because of the high ethane content, but the Permian gas is sweet and of great quality. My prediction is that a vast amount of money will be spent on alternative renewable sources in the next decade while natural gas does all the heavy lifting. 

At some point there might be more sanctions against Russian gas, for NATO countries to be dependent on it makes little sense and I'm a guy who isn't anti Russia and finds the anti-Russia hysteria to be crazy...they could make a good partner but whatever...they're going to be our boogy man and there's nothing we can do to change it I expect.

Poland is buying US LNG, I'll bet the UK will start importing more and so on and so on. I think this is all part of of the changing geopolitical landscape as the world becomes more multipolar.

Are many wells still being drilled in the Bakken field? We used to drilled loads of wells there but haven't since 2015/2016.

[Jabbar + 465]

1 hour ago, El Nikko said:

At some point there might be more sanctions against Russian gas, for NATO countries to be dependent on it makes little sense and I'm a guy who isn't anti Russia and finds the anti-Russia hysteria to be crazy...they could make a good partner but whatever...they're going to be our boogy man and there's nothing we can do to change it I expect.

Poland is buying US LNG, I'll bet the UK will start importing more and so on and so on. I think this is all part of of the changing geopolitical landscape as the world becomes more multipolar.

Are many wells still being drilled in the Bakken field? We used to drilled loads of wells there but haven't since 2015/2016.

It is difficult for U.S. LNG to compete on price with a Russian pipeline. 

LNG costs = buy gas, convert to LNG, shipping costs, convert back to gas from LNG. 

Germany loves the U.S. competition with Russian gas.

Edited November 8, 2019 by Jabbar

[El Nikko + 2,145]

2 minutes ago, Jabbar said:

It is difficult for U.S. LNG to compete on price with a Russian pipeline. 

LNG costs = buy gas, convert to LNG, shipping costs, convert back to has from LNG. 

Germany loves the competition with Russian gas.

Which is why sanctions or other threats of US troop pullout makes sense.

Why should Germany get away with having 3 tanks and 1 1/2 serviceable fighters and a bunch of trannies in uniform and then deal with an adversary of the US...yes a tad sarcastic but hopefully you get my point.

I think the US will make life really hard for Germany because of that pipeline and I'm not saying I agree or disagree but I can see the sense from both sides...Cold War 2.0

[ronwagn + 6,290]

46 minutes ago, Jabbar said:

Ron 

Whatever happened to the company that developed the natural gas powered engines for large trucks.  Did Cummings Engine buy them ?

There are many truck manufacturers that make them. Existing trucks can also be converted. We are only talking about the fuel system and storage. Many are also bifuel, meaning they can also use diesel. 

My topic https://docs.google.com/document/d/1DjSFf0dyd74Wx-OdtmNaHfGiRCmDgrZmRwyIR9NNv8c/edit

https://www.ngvamerica.org/why-ngv/

[mloe68 + 1]

6 hours ago, Gerry Maddoux said:

Are you sure about that? Aubrey and Tom Ward started CHK in 1988 or '89, mostly in Beckham County, where I grew up.

Speaking of Beckam County. Do you think it will ever be viable to drill those deep wells they have in that area again?

[Jabbar + 465]

12 hours ago, El Nikko said:

Which is why sanctions or other threats of US troop pullout makes sense.

Why should Germany get away with having 3 tanks and 1 1/2 serviceable fighters and a bunch of trannies in uniform and then deal with an adversary of the US...yes a tad sarcastic but hopefully you get my point.

I think the US will make life really hard for Germany because of that pipeline and I'm not saying I agree or disagree but I can see the sense from both sides...Cold War 2.0

Germany expects U.S. to pay billions to protect Europe from Russia, then Germany buys gas and oil from Russia. Those nice Germans.

Russia was clever.  They had major European Companies, mostly Germany, invest in the pipeline as part owners. U.S. Congress never reslized this and tried to get Germany to  drop pipeline. Angela isn't going to drop pipeline project her companies are invested in. 

U.S. ace in the hole is tariff on German cars and car parts. This would be a major blow to Germans. Trump hasn't played this card . .  yet.  Too many irons in the fire for now.

Patience is a virtue.

Edited November 8, 2019 by Jabbar

[Gerry Maddoux + 3,627]

1 hour ago, El Nikko said:

Are many wells still being drilled in the Bakken field?

There are about fifty rigs running. The new wells are very good, for the most part, with none of the parent-child interaction problems they have in the Permian, and the Bakken can't be beat for the first-month IP. I don't know why there's not more drilling up there . . . oilmen are like tarantulas--they migrate all as one batch. 

39 minutes ago, mloe68 said:

Speaking of Beckam County. Do you think it will ever be viable to drill those deep wells they have in that area again?

I think there's a pretty good possibility of it. If you look at an active rig GPS tracker, they're drilling out the Mills Ranch, and all the way from Wheeler to Kelton right over to the Oklahoma line. It's a bit easier in Wheeler. In Beckham County, an ancient upheaval turned massive slabs of red granite on its sides--they say it's the most complex geology in the world. Those slabs act as strange anticlines, completely nonporous traps for oil. The old deep wells that were drilled on our property three or four decades ago haven't really declined all that much, which is remarkable. I imagine the big companies are tracking that slow decline very carefully. With better GPS like they have today, I would imagine some absolute huge wells. That strange area of uplifted granite is called the Hogshooter Formation. It used to be the most exciting area to drill. As people tire of these rapidly declining shale wells and yearn for onshore conventional wells, man, you can't beat those old 25,000 foot verticals into an oil trap for an annuity. So, maybe I'm more enthusiastic than I should be, but if I were younger, that's exactly where I'd be drilling: Beckham, Roger Mills County, all the way up into Ochiltree County Texas.

[Jan van Eck + 7,558]

26 minutes ago, Gerry Maddoux said:

oilmen are like tarantulas--they migrate all as one batch. 

Now that's funny!   

[Jabbar + 465]

11 hours ago, Gerry Maddoux said:

-they say it's the most complex geology in the world. Those slabs act as strange anticlines, completely nonporous traps

Gerry do you have any knowledge of the Chainman Shale in Nevada ? Seems to have like characteristics. Once was believed to be good prospect that faded.

[Jabbar + 465]

18 hours ago, Jan van Eck said:

I predict nobody will "fold."  Not a single one.  You may see some merger and acquisition activity, but folding?  Nah. 

Bond/Note holders are loving the Chesapeake recent purchase of Wildhorse. 

Wildhorse purchase mostly  shares. Had option to take small % in cash if you wanted. If CHK goes under more assets for the senior debt holders

Edited November 8, 2019 by Jabbar

[Jan van Eck + 7,558]

On 11/7/2019 at 5:33 AM, James Regan said:

Jan, this is where my doubts came from, take Seadrill well into Chapter 11 but still trading, looks like a total lifeline, ie while being tangled up in courts the company still trades and possible manages to rescue itself?

James, I have no familiarity with that particular BK situation so I am responding only generally.  If a company ducks under the protective mantle of a Chapter 11 Filing then it receives protection from creditors under Section 362(a), known as the "automatic stay" clause.  What the Stay does is prevent creditors from doing a rush to the court house doors (the regular State courts) in an effort to secure Judgments and then take assets, in preference to other creditors.  So the Stay gives management (and the company owners) breathing space in which to organize themselves and propose compromises with their creditors. If a creditor breaches the automatic stay then they re in very big trouble, and the boom comes down from the Judge. 

I have to assume that "Seadrill" ducked under that protective cover of a Chapter 11, thus allowing it to continue operations with no threat to their assets, and not being litigated into the ground by creditors.  Once in, then the only recourse by creditors is first to file a Proof of Claim, and then to attempt to obtain "relief from stay" via Motion practice to be able to realize on a secured asset onto which they would have a claim.  that is common enough and stay-relief Motions dominate the BK Courts.  If the asset is "non-core," then stay relief may well enter, and that creditor takes his marbles and goes off the playing field.  If the asset is core, then it is unlikely to be granted, and the creditor can pound sand.  He sits until the case gets resolved.  If substantially all of the company's assets are core assets, then it is likely that no creditor gets any relief, and they all can go pound sand for a decade while management figure out how to return to profitability.  A lot depends on the temperament of the Judge, but that is always the case in Court. 

Can management "rescue itself"?  Of course it can.  But only if you have competent management, which is why company owners sometimes bring in these "turn-around specialists" at high pay to come in and take over from incompetent managers that got the company into the mess in the first place.  If the problem that sank the enterprise is some outside force, such as product pricing in the market, then management is effectively helpless and they have to stumble along until that market becomes constrained and they can get better pricing.  Cast in the context of the oil industry, that is a gamble.  Personally I am not optimistic that oil crudes will bring higher pricing in the future, as all points to increased supplies pushing into the market and eager sellers as price-takers out there ready to unload whatever the buyers are prepared to pay.  Oil could conceivably go all the way back to $28/bbl, and that would be interesting. As to Seadrill, remember that each case is unique. I will say that never think the end is here, unless the COurt has converted the case to a Chapter 7 liquidation; then, it is all over. 

Except, of course, that whoever buys the bones of the enterprise just might, with some fresh capital, start it up yet again! 

[Gerry Maddoux + 3,627]

4 hours ago, Jabbar said:

Gerry do you have any knowledge of the Chainman Shale in Nevada ? Seems to have like characteristics. Once was believed to be good prospect that faded.

The Chainman Formation is complex as all get out but very, very different from the Hogshooter Formation of the Granite Wash. When we were still in our "oil-shortfall" hysteria, back in about 2008 or so, those ranges of southeastern Nevada (Chainman, Covenant) and Utah (Paradox) were looked over extensively. A few holes were drilled . . . mostly disappointing. All of those basins are oil-soaked but the lithology is exceptionally variable, all the way from black shale with interbedded sandstone and siltstone to frankly fissile shale. The arrow in the back was the fact that there was kerogen (teenage oil) in one section, mature oil right next to it, and overall there wasn't enough homogeneity to make a field out of it. Cabot drilled a dry hole or two in the Chainman/Covenant and EOG drilled a couple of mediocre wildcats in the Paradox Basin. And that was the end of that. Perhaps because about that same time Apache drilled a couple of wells in Beckham County Oklahoma, fifteen miles apart, down into that Hogshooter Formation--with granite plates turned on their sides, producing stratigraphic traps the likes of which no one had even seen. Each of those widely separated wells produced about 2,000 boe/d--monsters for the time. Since this is technically a Chesapeake "wake" site, it is important to point out that in 2012 Chesapeake drilled the Thurman Horn 406H, a famous well because it gushed 5,400 bopd during its first 8 days, along with 4.6 mmcf/d of gas and enough natural gas liquids to bring its total production, all told, up to 7,350 boe/d (which I think was a record breaker)--an epiphenomenon. It did that for a while and then settled in at 5100 boe/d, over 60% liquids). Ladies and gentlemen, let me remind you that we're talking about 2012, Chesapeake, at a time of good oil prices--now that was a well!!!!!! Everybody wanted to drill out the Hogshooter. Unfortunately, Chesapeake was already in over its head with the Haynesville. Apache drifted over the fence line to the Mills Ranch in Wheeler County (where it's not so difficult to drill between granite slabs and also where they could buy the whole ranch and not have to worry about a thousand small owners). So it ultimately fell to Linn Energy to try their hand (which wasn't all that good), then Linn went bankrupt after buying the Hugoton Field for way too much money in $100 oil prices, and then the Eagleford and Bakken sucked all the oxygen out of the room as it pertained to the "Mighty Hogshooter." That's the reasons for my above statement that "oilmen are like tarantulas, they all move as a band"). Well, in this case they all moved to the Bakken and Eagle Ford and the Hogshooter turned into a series of villages: gathering stations and pipeline standpipes. My naive sense has always been that the thick granite stratigraphic traps with their abrupt and towering facies represents one-of-a-kind lithology, and even though they refer to it as a completed field, there is still a lot of room for infill wells. Especially now with GPS that can guide the drill bit between these underground canyon walls into pools of oil. That Thurman Horn is still a steady hand. i suspect the Hogshooter, extending upward into Roger Mills County Oklahoma and across Cowboy Creek up to the Packsaddle Bridge still represents one of the unsung heroes of the conventional drilling world. An interesting quirk is that south of the Red River, this lithologic melodrama ends. There the upheaval brought the granite all the way to the surface of the earth and massive granite boulders are strewn around in huge heaps, like God rolled his dice. They call that the Granite Breaks and it is one of the most extraordinary natural exhibits of underground havoc ever to be witnessed. Again, north of the Red River, the granite slabs were merely turned on their sides, not rising to the surface, while south of the Red River they were brought up to the surface in massive slabs that broke apart, thereby losing the oil traps that are present just a few miles north. I'm sorry to go off on you about this geology but it is about the most exciting area onshore. While it hasn't been neglected, all of you young guys should take a gander: there's room for thousands of conventional wells----all it would take would be to just bend the bit a fraction on your way to 20,000 feet.   

[PE Scott + 563]

42 minutes ago, Gerry Maddoux said:

all it would take would be to just bend the bit a fraction on your way to 20,000 feet.   

Strange this hasn't been done yet. When I was working in Nevada on geothermal wells, I wasn't a petro engineer and knew very little at the time, but I specifically remember them telling me they would steer the bit around to avoid granite on their way down. Those wells were going 20,000 feet ot more.  I don't know just how much steering there was, or how drastic the direction changes were. I also seem to remember them punching through some granite in areas where they couldn't avoid it.