Chesapeake Energy declared bankruptcy on June 28, 2020.  The Oklahoma company pioneered the practice of fracking and was a leading producer of natural gas for years.  After being co-founded by Aubrey McClendon with just $50,000 in 1989, Chesapeake used fracking to access previously untapped reserves of natural gas and oil.

But the new technology was expensive, and Chesapeake incurred high capital expenditures to explore and develop thousands of properties across the U.S.  This required Chesapeake to borrow heavily, which wasn’t a problem when natural gas prices were high and business was booming.  But the price of natural gas has been declining for years due to a glut of supply, and Chesapeake has had difficulty servicing its debt.

After McClendon was forced out of the company, Robert Lawler took the helm in 2013 and attempted a turnaround.  Lawler eliminated common stock dividends, sold off parts of the business, and paid down debt.  But then just as the company was getting smaller it paid $4 billion (90% of which was Chesapeake stock) to acquire the oil company WildHorse in 2019.  Natural gas prices had continued to decline, and Lawler wanted to pivot toward oil drilling due to its higher profit margins.  Chesapeake said the merger generated $250 million in cost savings in 2019, with future savings expected to be at least $200 million annually.

But then the price of oil fell off a cliff.

Oil prices went negative for the first time ever in April of 2020, pushing Chesapeake to the brink of ruin.  The company found itself with $9 billion in debt in a capital-intensive industry with two products that nobody wanted; Chesapeake lost $8 billion in the first quarter of 2020 alone.

At that point, bankruptcy was just a matter of time.

Chesapeake plans to emerge from bankruptcy, eliminating $7 billion of debt as part of its restructuring.  Folks in the oil industry say it’s a boom-and-bust cycle, and that companies like Chesapeake will one day return to glory.  But I’m not so sure about that.  Chesapeake only turned a profit once in the past 4 years, and the oversupply of natural gas and oil doesn’t appear to be abating anytime soon.  If businesses are hesitant to invest post-COVID-19, this could stifle the demand for oil and make it difficult for Chesapeake to generate enough cash to cover its high fixed costs.

The main problem is that Chesapeake has no control over the price of its products, so all it can do is try to reduce costs.  But cost-cutting is pointless when so few people want your product.

If this article didn’t make you sad enough, you can read Chesapeake’s most recent 10-K here: