WEBVTT - Pioneering Fracking Company Chesapeake Energy Goes Bust 0:00:00.360 --> 0:00:05.600 Chesapeake Energy says it is filing for Chapter eleven bankruptcy protection. Chesapeake, 0:00:05.640 --> 0:00:08.280 of course the energy giant based out of Oklahoma City, 0:00:08.320 --> 0:00:12.639 one of the fracking pioneers. The company, once employing about 0:00:12.640 --> 0:00:16.560 thirteen thousand people across all its businesses, now down to 0:00:16.680 --> 0:00:26.960 nineteen hundred, with thirteen hundred working here at Oklahoma. 0:00:28.200 --> 0:00:33.720 Chesapeake Energy, the first big US fracking company, has filed bankruptcy. 0:00:34.320 --> 0:00:37.519 Chesapeake was a pioneer in the US fracking industry, helping 0:00:37.560 --> 0:00:40.840 to turn the country into an exporterer for the first 0:00:40.880 --> 0:00:44.520 time in decades. In those early days, Chesapeake was run 0:00:44.640 --> 0:00:48.520 by its larger than life co founder, Aubrey McLendon. Here 0:00:48.560 --> 0:00:51.279 he is addressing Harvard students at the height of the 0:00:51.320 --> 0:00:51.960 shale boom. 0:00:52.280 --> 0:00:54.200 Over the last one hundred and fifty years, you've known 0:00:54.280 --> 0:00:57.280 natural gas is good, but you haven't been sure about 0:00:57.320 --> 0:01:01.360 its abundance. And in fact, from from my perspective, when 0:01:01.400 --> 0:01:03.880 I started this company in nineteen eighty nine, I was 0:01:03.920 --> 0:01:07.640 thirty years old. I didn't know where the future of 0:01:07.920 --> 0:01:10.920 the industry was going. Certainly didn't know where natural gas 0:01:11.040 --> 0:01:14.840 was headed. But we founded our company on the idea 0:01:15.319 --> 0:01:17.920 that if we were to find our way in the world. 0:01:18.000 --> 0:01:22.200 We had to look at geology and engineering from a 0:01:22.200 --> 0:01:25.280 different perspective than what the bigger companies were doing. We 0:01:25.360 --> 0:01:30.160 had to go look for unconventional reservoirs. The conventional reservoirs 0:01:30.200 --> 0:01:32.720 were basically locked up by the exxons of the world 0:01:32.760 --> 0:01:37.280 and the larger independent companies. And so my partner and I, 0:01:37.720 --> 0:01:40.039 who we had been partner since I was twenty three, 0:01:40.760 --> 0:01:43.399 on a private basis, we decided to go found this 0:01:43.480 --> 0:01:47.720 company with fifty thousand dollars and we had ten employees 0:01:47.760 --> 0:01:52.040 at the time, and the idea was, let's go look 0:01:52.760 --> 0:01:56.800 for natural gas in unconventional reservoirs, and at the time 0:01:57.040 --> 0:02:04.400 that was mainly fractured carbonates. Today that's shale. 0:02:05.400 --> 0:02:08.480 He sounds pretty tame there, but mcclinton's rep was that 0:02:08.520 --> 0:02:11.359 he could sell shale to anyone. 0:02:11.560 --> 0:02:15.360 My name is Clark Williams Dairy, and I'm an analyst 0:02:15.639 --> 0:02:19.400 with AIFA, the Institute for Energy Economics and Financial Analysis. 0:02:19.520 --> 0:02:23.840 So Aubrey mcclindon was kind of, you know, the quintessential 0:02:24.720 --> 0:02:29.400 shale booster. He was somebody who whether to force a 0:02:29.400 --> 0:02:32.360 personality or because he was just a true believer, or 0:02:32.400 --> 0:02:34.440 he was just an incredibly good salesman. He got people 0:02:34.520 --> 0:02:36.200 to invest in his company. 0:02:36.880 --> 0:02:41.720 Shale wasn't an easy sell or, it turns out a 0:02:41.760 --> 0:02:46.799 goodbye for anyone. That was true long before coronavirus hit 0:02:47.040 --> 0:02:50.480 or oil and gas prices tanked. We've been covering COVID 0:02:50.520 --> 0:02:54.640 related environmental rollbacks and bailout for fossil fuel companies with 0:02:54.720 --> 0:02:58.560 our COVID Climate Tracker, and one sector that scored a 0:02:58.639 --> 0:03:02.119 lot of government gifts is the shale industry. A couple 0:03:02.240 --> 0:03:05.400 months ago, we talked about tax breaks, loans and credit 0:03:05.520 --> 0:03:09.520 extended to shale companies as throwing good money after bad 0:03:09.680 --> 0:03:13.000 And now here we are with Chesapeake, a company that 0:03:13.040 --> 0:03:17.120 has benefited from COVID related royalty cuts and tax breaks, 0:03:17.240 --> 0:03:20.519 declaring bankruptcy anyway, in a lot of ways, the story 0:03:20.520 --> 0:03:24.440 of Chesapeake is the story of American shale gas. We're 0:03:24.480 --> 0:03:27.000 going to get into that story right after this message 0:03:27.120 --> 0:03:31.560 from today's sponsor. I Mimi Westervelt, and this is drilled. 0:03:40.280 --> 0:03:43.600 He got people to invest in his company when he 0:03:43.720 --> 0:03:49.000 was never ever able to produce positive free cash flow. 0:03:49.040 --> 0:03:51.880 He's never actually able to squeeze money out of the wells. 0:03:51.960 --> 0:03:54.320 He's very good at producing gas, but not but terrible 0:03:54.360 --> 0:03:58.200 at producing profits. And that's something that I think has 0:03:58.280 --> 0:04:00.800 actually been emblematic with the shale stry as a whole, 0:04:01.160 --> 0:04:05.640 that it's an industry that's been phenomenally successful at producing 0:04:05.640 --> 0:04:09.280 oil and gas, but has been terrible at producing cash. 0:04:09.400 --> 0:04:12.280 That's Clark William's dairy again. He's run all kinds of 0:04:12.360 --> 0:04:15.000 numbers on Chesapeake, none of them good. 0:04:15.360 --> 0:04:19.720 The company essentially burned through about forty one billion dollars 0:04:19.760 --> 0:04:23.080 of cash, that is to produced negative free cash flows 0:04:23.080 --> 0:04:25.880 of forty one billion dollars. And what that means is 0:04:25.920 --> 0:04:29.360 that this is a company that spent forty one billion 0:04:29.440 --> 0:04:35.360 dollars more on drilling, on getting access to underground gas reserves, 0:04:35.440 --> 0:04:39.480 and you know, all the things of going to running 0:04:39.480 --> 0:04:41.640 a shell business. It's spent forty one billion dollars more 0:04:41.680 --> 0:04:41.960 than it. 0:04:41.920 --> 0:04:43.760 Actually generated by selling gas and oil. 0:04:44.200 --> 0:04:47.480 It is racked up nine billion dollars worth of debt 0:04:48.040 --> 0:04:50.000 at the end of twenty twenty, that had about nine 0:04:50.000 --> 0:04:53.320 billion dollars worth of long term debt that was you know, 0:04:53.680 --> 0:04:58.000 was supposed to get paid off soon. But the problem 0:04:58.080 --> 0:05:00.440 for a company like this is how do you pay 0:05:00.480 --> 0:05:05.600 off your debt when you're unable to produce positive free 0:05:05.600 --> 0:05:06.080 cash flow. 0:05:06.120 --> 0:05:07.160 It's just not possible. 0:05:07.240 --> 0:05:10.000 You can't do it. And if you are consistently year 0:05:10.040 --> 0:05:13.520 after year after year producing negative free cash flow, there's 0:05:13.640 --> 0:05:16.360 no way for you to pay down your debt. In 0:05:16.360 --> 0:05:19.400 some cases, there's no way for you to service your debt, 0:05:19.440 --> 0:05:21.560 that is paid your interest payments. But in the case 0:05:21.600 --> 0:05:25.800 of Chesapeake, I mean, what has become abundantly clear over 0:05:25.800 --> 0:05:28.120 the past few years is that this is a company 0:05:28.120 --> 0:05:32.760 that has no viable prospect for producing free cash flow 0:05:33.120 --> 0:05:35.880 and as a result, has no viable prospect for actually 0:05:35.880 --> 0:05:39.039 paying down its debt. And that's what really forces a bankruptcy. 0:05:39.320 --> 0:05:41.800 Right before it went bankrupt, of course, chess Peak gave 0:05:41.839 --> 0:05:47.200 out more than twenty million dollars to its executives in bonuses. Again, 0:05:47.360 --> 0:05:50.120 this is a company that benefited from COVID relief. Just 0:05:50.160 --> 0:05:53.080 a couple of months ago. The company's current CEO, Robert 0:05:53.080 --> 0:05:58.320 Douglas Lawler, blamed his predecessor for overspending. He claims that 0:05:58.320 --> 0:06:01.359 that caused the bulk of Chesapeake stet. On top of 0:06:01.440 --> 0:06:03.960 buying up every lanlease he could get his hands on, 0:06:04.160 --> 0:06:07.960 McLendon did have a secret wine cave. He refused to 0:06:08.000 --> 0:06:11.280 agree to budgets and apparently he had everyone flying around 0:06:11.320 --> 0:06:14.760 on chartered jets. But we don't really know if that 0:06:14.960 --> 0:06:19.280 was the entire problem because McLendon isn't around to defend himself. 0:06:19.920 --> 0:06:22.200 I want to report that earlier today, at nine to 0:06:22.200 --> 0:06:25.919 twelve am, the Oklhom City Police Department responded to a 0:06:25.960 --> 0:06:28.800 fatality accident involving mister Aubrey McLendon. 0:06:29.040 --> 0:06:32.560 In twenty thirteen, shortly after he was ousted from Chesapeake 0:06:32.720 --> 0:06:35.960 and the morning after he was indicted for allegedly rigging 0:06:36.040 --> 0:06:40.040 oil and gas leases, McLendon drove his car into a wall, 0:06:40.320 --> 0:06:44.160 speeding along an Oklahoma highway. By that point, Chesapeake had 0:06:44.240 --> 0:06:48.359 also brought a civil case against its founder, accusing McLendon 0:06:48.400 --> 0:06:51.640 of stealing trade secrets to go start his next venture, 0:06:51.760 --> 0:06:55.919 American Energy Partners. Also around this time came out that 0:06:56.040 --> 0:06:59.680 Chesapeake had given some twenty million dollars plus to the 0:06:59.720 --> 0:07:04.120 Sea Club, which had helped it to perpetuate the bridge 0:07:04.160 --> 0:07:08.880 fuel narrative around natural gas, the idea that to install 0:07:09.080 --> 0:07:13.120 renewable energy at scale, you need something like natural gas 0:07:13.640 --> 0:07:17.680 to help with the intermittency of renewables. It helped that 0:07:17.840 --> 0:07:21.840 natural gas is a much lower carbon fuel and no 0:07:21.880 --> 0:07:24.720 one wanted to talk about methane emissions at the time. 0:07:25.160 --> 0:07:28.080 There were people who don't agree with the policy because 0:07:28.120 --> 0:07:31.320 they think the Sierra Club's role should just be to 0:07:31.320 --> 0:07:34.800 oppose anything that has any environmental consequences. They don't think 0:07:34.840 --> 0:07:36.880 our role should be to say, Okay, here's where we 0:07:36.920 --> 0:07:39.040 think we should get our energy. We see it, there's 0:07:39.080 --> 0:07:40.679 the cleanest of the fossil fuels. 0:07:41.040 --> 0:07:44.360 That story is still very much with us today. You 0:07:44.440 --> 0:07:48.400 might remember hearing some of the Democratic primary candidates talking 0:07:48.440 --> 0:07:51.880 about it in the recent debates. All these scandals surrounding 0:07:51.920 --> 0:07:55.880 McLendon make him an easy scapegoat for Chesapeake's financial lows. 0:07:55.960 --> 0:07:59.480 But Greg Rogers, who specializes in climate change and other 0:07:59.600 --> 0:08:04.000 lay ablity accounting for the energy industry, says Chesapeake's financial 0:08:04.040 --> 0:08:07.960 situation is pretty typical for the shale industry as a whole. 0:08:08.640 --> 0:08:12.280 The franking industry has not produced a return on capital 0:08:12.360 --> 0:08:14.800 and excessive the cost of capital since its inception. 0:08:15.360 --> 0:08:17.800 That makes it a bad pick for an industry to 0:08:17.880 --> 0:08:21.560 bail out, at least financially. Rogers says, there are other 0:08:21.640 --> 0:08:22.760 factors at play. 0:08:23.000 --> 0:08:26.600 I would imagine that there would be a lot of 0:08:26.880 --> 0:08:34.400 political pressure and some inclination by US politicians to support 0:08:34.720 --> 0:08:37.960 the domestic coil and gas industry, and especially when you 0:08:38.040 --> 0:08:42.280 tie that back into concerns about national security. So I 0:08:43.120 --> 0:08:47.440 think the proposition that the Saudis and the Russians are 0:08:47.440 --> 0:08:50.920 going to provide the oil energy needed by the world 0:08:50.960 --> 0:08:54.480 as we phase out this industry is not very appealing 0:08:54.920 --> 0:08:58.800 to US politicians. And so again reasons to bail out 0:08:58.800 --> 0:09:01.640 the industry is can they afford it? 0:09:02.120 --> 0:09:05.840 The answer, amid an ongoing pandemic and an economic downturn 0:09:05.920 --> 0:09:09.480 sure to worsen, is no. Not really. It's hard to 0:09:09.480 --> 0:09:11.960 think of any other industry that's been bailed out in 0:09:12.000 --> 0:09:15.200 spite of performing badly, aside from maybe the banks. In 0:09:15.200 --> 0:09:17.720 two thousand and eight, Clark Williams Darry explains that in 0:09:17.760 --> 0:09:19.760 a way, that's kind of what's happening here too. 0:09:20.000 --> 0:09:22.600 So bankruptcy is not a process where a company just 0:09:22.640 --> 0:09:27.599 blows up and dissolves. Bankruptcy is a process for telling creditors. 0:09:27.080 --> 0:09:28.600 That they're not going to get paid. 0:09:28.840 --> 0:09:32.679 It's essentially like a process where the phoenix dies. It's 0:09:32.920 --> 0:09:36.040 creditors are told that they're not going to get their 0:09:36.040 --> 0:09:39.600 money back. The shareholders are completely wiped out, but the 0:09:39.679 --> 0:09:43.120 company rises from the ashes and still has access to 0:09:43.280 --> 0:09:47.479 its assets and so forth. It just is really reborn 0:09:47.559 --> 0:09:50.479 with a new capital structure, and all the old investors 0:09:50.520 --> 0:09:54.760 are sad, but the company itself. 0:09:54.400 --> 0:09:55.800 At some level it sort of survives. 0:09:55.800 --> 0:09:58.040 It sort of re emerges from bankruptcy as a new 0:09:58.040 --> 0:09:59.600 company with a cleaner balance sheet. 0:10:00.200 --> 0:10:03.520 Even with that restructuring, William Sterry says, the company may 0:10:03.640 --> 0:10:05.040 or may not make money. 0:10:05.440 --> 0:10:09.080 Okay, So I want to ask you about the fact that, 0:10:09.200 --> 0:10:12.160 you know, chest Peak is one of several shale like 0:10:12.240 --> 0:10:16.440 deeply indebted shale companies that did receive some funding through 0:10:16.480 --> 0:10:21.400 the Cares Act, and whether or not, like I don't know. 0:10:21.480 --> 0:10:24.760 To me, it sort of seems like one of of 0:10:24.920 --> 0:10:28.240 what I think will be several examples of the government 0:10:28.320 --> 0:10:30.840 sort of throwing good money after bad to try to 0:10:30.920 --> 0:10:36.720 save companies that are so deeply problematic financially and like 0:10:37.120 --> 0:10:40.719 a one time loan is not going to fix it. So, yeah, 0:10:40.760 --> 0:10:42.160 I'm curious to hear your take on that. 0:10:43.120 --> 0:10:48.120 Yeah, well, that's that's exactly right. I mean, so, like 0:10:48.360 --> 0:10:50.960 just the concept of a bailout, and when people talk 0:10:51.000 --> 0:10:53.480 about bailouts, I used to, you know, when I was younger, 0:10:53.520 --> 0:10:57.080 I did a lot of canoeing, and a bailout is 0:10:57.679 --> 0:11:01.120 you know, it's literally you've got a that is fine, 0:11:02.120 --> 0:11:04.880 that is solid, that doesn't have any problems with with 0:11:05.120 --> 0:11:08.080 the you know, you know, there's there's no there's no crack, 0:11:08.120 --> 0:11:13.000 there's no leak, and you just need to toss water 0:11:13.040 --> 0:11:14.559 out of the boat and the boat's able to sort 0:11:14.600 --> 0:11:18.040 of you go on sailing on, right. So it's like 0:11:18.440 --> 0:11:23.200 your bailout is literally like you're the boat is fine, 0:11:23.520 --> 0:11:27.079 and you're just taking water out of the canoe and 0:11:27.360 --> 0:11:30.000 to allow the company the boat to sort of to 0:11:30.040 --> 0:11:34.920 sort of continue to operate. But the problem with the 0:11:34.920 --> 0:11:37.920 shale industry is that there's a there's a hole in 0:11:37.960 --> 0:11:40.360 the hull. This is not a boat that just needs 0:11:40.360 --> 0:11:43.080 a little bailout. It's a boat that is maybe already sunk. 0:11:43.679 --> 0:11:46.120 And so when you're bailing out a boat that's already sunk, 0:11:46.120 --> 0:11:48.120 you're not actually going to you know, create a boat 0:11:48.120 --> 0:11:51.600 that can still continue to operate. It's it's it's it's founder, 0:11:51.720 --> 0:11:57.000 it's done right. So so a lot of the talk 0:11:57.040 --> 0:11:59.520 about sort of the government bailout, well, what really is 0:11:59.520 --> 0:12:02.000 going on is not so much technically, it doesn't feel 0:12:02.040 --> 0:12:04.360 to me, like it's a bailout. What it is, it's 0:12:04.360 --> 0:12:08.360 a handout to the investors. So it's something that maybe 0:12:08.400 --> 0:12:12.080 allows the investors to recoup a little bit and this 0:12:12.200 --> 0:12:15.040 is mostly the creditors to recoup a little bit of 0:12:15.080 --> 0:12:15.920 the money that. 0:12:15.840 --> 0:12:17.079 These companies owe to them. 0:12:17.679 --> 0:12:20.760 So like if you give let's say you give a 0:12:21.040 --> 0:12:23.120 hundred million dollars to a company like Chesapeake, I don't 0:12:23.120 --> 0:12:26.880 know act how how much it actually got either Chesapeake 0:12:27.320 --> 0:12:30.520 continues to burn through that money because this business model 0:12:30.559 --> 0:12:34.520 is fundamentally broken, or else it saves some of that 0:12:34.600 --> 0:12:36.800 money and that money can get can go back to 0:12:37.240 --> 0:12:40.920 the hedge funds and other people who swooped in and 0:12:40.960 --> 0:12:48.880 bought Chesapeake debt. So it's you know, the structure of 0:12:49.400 --> 0:12:51.800 some of the bailouts that have been proposed for the 0:12:51.800 --> 0:12:53.920 oil and gas industry, and some of them have actually 0:12:54.120 --> 0:12:58.240 happened for oil and gas companies. The structure is really 0:12:58.280 --> 0:13:03.840 designed to benefit invest not so much to fix the 0:13:03.920 --> 0:13:08.040 broken shale industry business model. It's just to reward investors 0:13:08.040 --> 0:13:09.439 who made bad bets. 0:13:09.120 --> 0:13:11.400 On shale companies and allow them. 0:13:11.240 --> 0:13:13.640 To get a little bit more of their money back 0:13:14.280 --> 0:13:15.439 in the bankruptcy process. 0:13:15.640 --> 0:13:16.560 Really what this is. 0:13:16.600 --> 0:13:19.199 It winds up being sort of a passed through from 0:13:19.600 --> 0:13:24.680 the US Treasury straight to the hedge funds or other 0:13:24.720 --> 0:13:28.040 investors who own chesameake Dad. 0:13:28.800 --> 0:13:32.080 So instead of supporting working Americans or investing in an 0:13:32.200 --> 0:13:36.000 energy transition because that would be political, the government is 0:13:36.040 --> 0:13:38.959 bailing out failing companies to get some money into the 0:13:39.000 --> 0:13:43.960 pockets of hedge fund the guys. Chesapeake will continue operating 0:13:44.200 --> 0:13:46.760 with seven million dollars of its debt wiped clean by 0:13:46.800 --> 0:13:51.560 Franklin Resources, a holding company. We'll see how long that lasts. 0:14:07.120 --> 0:14:09.800 That's it for this time. Thanks for tuning in. We 0:14:09.880 --> 0:14:13.160 will have another episode for you this Friday, and then 0:14:13.240 --> 0:14:15.320 I swear we really are going to take a little 0:14:15.320 --> 0:14:18.480 bit of a break to produce the next investigative season. 0:14:18.640 --> 0:14:22.040 Look out for that in July and in the meantime, 0:14:22.080 --> 0:14:25.200 you can keep tabs with us at drillednews dot com 0:14:25.240 --> 0:14:28.240 and via our Patreon. If you're not a member yet, 0:14:28.280 --> 0:14:31.960 please consider signing up. We will be dropping episodes of 0:14:32.040 --> 0:14:35.200 the next season there early and ad free, as well 0:14:35.240 --> 0:14:39.320 as some bonus content over the next couple months. We'll 0:14:39.360 --> 0:14:41.440 drop a link to that in the show notes. Thanks 0:14:41.440 --> 0:14:43.320 again for listening, and we'll see you next time.