Speaker 1: Chesapeake Energy says it is filing for Chapter eleven bankruptcy protection. Chesapeake,
Speaker 1: of course the energy giant based out of Oklahoma City,
Speaker 1: one of the fracking pioneers. The company, once employing about
Speaker 1: thirteen thousand people across all its businesses, now down to
Speaker 1: nineteen hundred, with thirteen hundred working here at Oklahoma.
Speaker 2: Chesapeake Energy, the first big US fracking company, has filed bankruptcy.
Speaker 2: Chesapeake was a pioneer in the US fracking industry, helping
Speaker 2: to turn the country into an exporterer for the first
Speaker 2: time in decades. In those early days, Chesapeake was run
Speaker 2: by its larger than life co founder, Aubrey McLendon. Here
Speaker 2: he is addressing Harvard students at the height of the
Speaker 2: shale boom.
Speaker 3: Over the last one hundred and fifty years, you've known
Speaker 3: natural gas is good, but you haven't been sure about
Speaker 3: its abundance. And in fact, from from my perspective, when
Speaker 3: I started this company in nineteen eighty nine, I was
Speaker 3: thirty years old. I didn't know where the future of
Speaker 3: the industry was going. Certainly didn't know where natural gas
Speaker 3: was headed. But we founded our company on the idea
Speaker 3: that if we were to find our way in the world.
Speaker 3: We had to look at geology and engineering from a
Speaker 3: different perspective than what the bigger companies were doing. We
Speaker 3: had to go look for unconventional reservoirs. The conventional reservoirs
Speaker 3: were basically locked up by the exxons of the world
Speaker 3: and the larger independent companies. And so my partner and I,
Speaker 3: who we had been partner since I was twenty three,
Speaker 3: on a private basis, we decided to go found this
Speaker 3: company with fifty thousand dollars and we had ten employees
Speaker 3: at the time, and the idea was, let's go look
Speaker 3: for natural gas in unconventional reservoirs, and at the time
Speaker 3: that was mainly fractured carbonates. Today that's shale.
Speaker 2: He sounds pretty tame there, but mcclinton's rep was that
Speaker 2: he could sell shale to anyone.
Speaker 4: My name is Clark Williams Dairy, and I'm an analyst
Speaker 4: with AIFA, the Institute for Energy Economics and Financial Analysis.
Speaker 4: So Aubrey mcclindon was kind of, you know, the quintessential
Speaker 4: shale booster. He was somebody who whether to force a
Speaker 4: personality or because he was just a true believer, or
Speaker 4: he was just an incredibly good salesman. He got people
Speaker 4: to invest in his company.
Speaker 2: Shale wasn't an easy sell or, it turns out a
Speaker 2: goodbye for anyone. That was true long before coronavirus hit
Speaker 2: or oil and gas prices tanked. We've been covering COVID
Speaker 2: related environmental rollbacks and bailout for fossil fuel companies with
Speaker 2: our COVID Climate Tracker, and one sector that scored a
Speaker 2: lot of government gifts is the shale industry. A couple
Speaker 2: months ago, we talked about tax breaks, loans and credit
Speaker 2: extended to shale companies as throwing good money after bad
Speaker 2: And now here we are with Chesapeake, a company that
Speaker 2: has benefited from COVID related royalty cuts and tax breaks,
Speaker 2: declaring bankruptcy anyway, in a lot of ways, the story
Speaker 2: of Chesapeake is the story of American shale gas. We're
Speaker 2: going to get into that story right after this message
Speaker 2: from today's sponsor. I Mimi Westervelt, and this is drilled.
Speaker 4: He got people to invest in his company when he
Speaker 4: was never ever able to produce positive free cash flow.
Speaker 4: He's never actually able to squeeze money out of the wells.
Speaker 4: He's very good at producing gas, but not but terrible
Speaker 4: at producing profits. And that's something that I think has
Speaker 4: actually been emblematic with the shale stry as a whole,
Speaker 4: that it's an industry that's been phenomenally successful at producing
Speaker 4: oil and gas, but has been terrible at producing cash.
Speaker 2: That's Clark William's dairy again. He's run all kinds of
Speaker 2: numbers on Chesapeake, none of them good.
Speaker 4: The company essentially burned through about forty one billion dollars
Speaker 4: of cash, that is to produced negative free cash flows
Speaker 4: of forty one billion dollars. And what that means is
Speaker 4: that this is a company that spent forty one billion
Speaker 4: dollars more on drilling, on getting access to underground gas reserves,
Speaker 4: and you know, all the things of going to running
Speaker 4: a shell business. It's spent forty one billion dollars more
Speaker 4: than it.
Speaker 5: Actually generated by selling gas and oil.
Speaker 4: It is racked up nine billion dollars worth of debt
Speaker 4: at the end of twenty twenty, that had about nine
Speaker 4: billion dollars worth of long term debt that was you know,
Speaker 4: was supposed to get paid off soon. But the problem
Speaker 4: for a company like this is how do you pay
Speaker 4: off your debt when you're unable to produce positive free
Speaker 4: cash flow.
Speaker 5: It's just not possible.
Speaker 4: You can't do it. And if you are consistently year
Speaker 4: after year after year producing negative free cash flow, there's
Speaker 4: no way for you to pay down your debt. In
Speaker 4: some cases, there's no way for you to service your debt,
Speaker 4: that is paid your interest payments. But in the case
Speaker 4: of Chesapeake, I mean, what has become abundantly clear over
Speaker 4: the past few years is that this is a company
Speaker 4: that has no viable prospect for producing free cash flow
Speaker 4: and as a result, has no viable prospect for actually
Speaker 4: paying down its debt. And that's what really forces a bankruptcy.
Speaker 2: Right before it went bankrupt, of course, chess Peak gave
Speaker 2: out more than twenty million dollars to its executives in bonuses. Again,
Speaker 2: this is a company that benefited from COVID relief. Just
Speaker 2: a couple of months ago. The company's current CEO, Robert
Speaker 2: Douglas Lawler, blamed his predecessor for overspending. He claims that
Speaker 2: that caused the bulk of Chesapeake stet. On top of
Speaker 2: buying up every lanlease he could get his hands on,
Speaker 2: McLendon did have a secret wine cave. He refused to
Speaker 2: agree to budgets and apparently he had everyone flying around
Speaker 2: on chartered jets. But we don't really know if that
Speaker 2: was the entire problem because McLendon isn't around to defend himself.
Speaker 4: I want to report that earlier today, at nine to
Speaker 4: twelve am, the Oklhom City Police Department responded to a
Speaker 4: fatality accident involving mister Aubrey McLendon.
Speaker 2: In twenty thirteen, shortly after he was ousted from Chesapeake
Speaker 2: and the morning after he was indicted for allegedly rigging
Speaker 2: oil and gas leases, McLendon drove his car into a wall,
Speaker 2: speeding along an Oklahoma highway. By that point, Chesapeake had
Speaker 2: also brought a civil case against its founder, accusing McLendon
Speaker 2: of stealing trade secrets to go start his next venture,
Speaker 2: American Energy Partners. Also around this time came out that
Speaker 2: Chesapeake had given some twenty million dollars plus to the
Speaker 2: Sea Club, which had helped it to perpetuate the bridge
Speaker 2: fuel narrative around natural gas, the idea that to install
Speaker 2: renewable energy at scale, you need something like natural gas
Speaker 2: to help with the intermittency of renewables. It helped that
Speaker 2: natural gas is a much lower carbon fuel and no
Speaker 2: one wanted to talk about methane emissions at the time.
Speaker 6: There were people who don't agree with the policy because
Speaker 6: they think the Sierra Club's role should just be to
Speaker 6: oppose anything that has any environmental consequences. They don't think
Speaker 6: our role should be to say, Okay, here's where we
Speaker 6: think we should get our energy. We see it, there's
Speaker 6: the cleanest of the fossil fuels.
Speaker 2: That story is still very much with us today. You
Speaker 2: might remember hearing some of the Democratic primary candidates talking
Speaker 2: about it in the recent debates. All these scandals surrounding
Speaker 2: McLendon make him an easy scapegoat for Chesapeake's financial lows.
Speaker 2: But Greg Rogers, who specializes in climate change and other
Speaker 2: lay ablity accounting for the energy industry, says Chesapeake's financial
Speaker 2: situation is pretty typical for the shale industry as a whole.
Speaker 7: The franking industry has not produced a return on capital
Speaker 7: and excessive the cost of capital since its inception.
Speaker 2: That makes it a bad pick for an industry to
Speaker 2: bail out, at least financially. Rogers says, there are other
Speaker 2: factors at play.
Speaker 7: I would imagine that there would be a lot of
Speaker 7: political pressure and some inclination by US politicians to support
Speaker 7: the domestic coil and gas industry, and especially when you
Speaker 7: tie that back into concerns about national security. So I
Speaker 7: think the proposition that the Saudis and the Russians are
Speaker 7: going to provide the oil energy needed by the world
Speaker 7: as we phase out this industry is not very appealing
Speaker 7: to US politicians. And so again reasons to bail out
Speaker 7: the industry is can they afford it?
Speaker 2: The answer, amid an ongoing pandemic and an economic downturn
Speaker 2: sure to worsen, is no. Not really. It's hard to
Speaker 2: think of any other industry that's been bailed out in
Speaker 2: spite of performing badly, aside from maybe the banks. In
Speaker 2: two thousand and eight, Clark Williams Darry explains that in
Speaker 2: a way, that's kind of what's happening here too.
Speaker 4: So bankruptcy is not a process where a company just
Speaker 4: blows up and dissolves. Bankruptcy is a process for telling creditors.
Speaker 5: That they're not going to get paid.
Speaker 4: It's essentially like a process where the phoenix dies. It's
Speaker 4: creditors are told that they're not going to get their
Speaker 4: money back. The shareholders are completely wiped out, but the
Speaker 4: company rises from the ashes and still has access to
Speaker 4: its assets and so forth. It just is really reborn
Speaker 4: with a new capital structure, and all the old investors
Speaker 4: are sad, but the company itself.
Speaker 5: At some level it sort of survives.
Speaker 4: It sort of re emerges from bankruptcy as a new
Speaker 4: company with a cleaner balance sheet.
Speaker 2: Even with that restructuring, William Sterry says, the company may
Speaker 2: or may not make money.
Speaker 8: Okay, So I want to ask you about the fact that,
Speaker 8: you know, chest Peak is one of several shale like
Speaker 8: deeply indebted shale companies that did receive some funding through
Speaker 8: the Cares Act, and whether or not, like I don't know.
Speaker 8: To me, it sort of seems like one of of
Speaker 8: what I think will be several examples of the government
Speaker 8: sort of throwing good money after bad to try to
Speaker 8: save companies that are so deeply problematic financially and like
Speaker 8: a one time loan is not going to fix it. So, yeah,
Speaker 8: I'm curious to hear your take on that.
Speaker 4: Yeah, well, that's that's exactly right. I mean, so, like
Speaker 4: just the concept of a bailout, and when people talk
Speaker 4: about bailouts, I used to, you know, when I was younger,
Speaker 4: I did a lot of canoeing, and a bailout is
Speaker 4: you know, it's literally you've got a that is fine,
Speaker 4: that is solid, that doesn't have any problems with with
Speaker 4: the you know, you know, there's there's no there's no crack,
Speaker 4: there's no leak, and you just need to toss water
Speaker 4: out of the boat and the boat's able to sort
Speaker 4: of you go on sailing on, right. So it's like
Speaker 4: your bailout is literally like you're the boat is fine,
Speaker 4: and you're just taking water out of the canoe and
Speaker 4: to allow the company the boat to sort of to
Speaker 4: sort of continue to operate. But the problem with the
Speaker 4: shale industry is that there's a there's a hole in
Speaker 4: the hull. This is not a boat that just needs
Speaker 4: a little bailout. It's a boat that is maybe already sunk.
Speaker 4: And so when you're bailing out a boat that's already sunk,
Speaker 4: you're not actually going to you know, create a boat
Speaker 4: that can still continue to operate. It's it's it's it's founder,
Speaker 4: it's done right. So so a lot of the talk
Speaker 4: about sort of the government bailout, well, what really is
Speaker 4: going on is not so much technically, it doesn't feel
Speaker 4: to me, like it's a bailout. What it is, it's
Speaker 4: a handout to the investors. So it's something that maybe
Speaker 4: allows the investors to recoup a little bit and this
Speaker 4: is mostly the creditors to recoup a little bit of
Speaker 4: the money that.
Speaker 5: These companies owe to them.
Speaker 4: So like if you give let's say you give a
Speaker 4: hundred million dollars to a company like Chesapeake, I don't
Speaker 4: know act how how much it actually got either Chesapeake
Speaker 4: continues to burn through that money because this business model
Speaker 4: is fundamentally broken, or else it saves some of that
Speaker 4: money and that money can get can go back to
Speaker 4: the hedge funds and other people who swooped in and
Speaker 4: bought Chesapeake debt. So it's you know, the structure of
Speaker 4: some of the bailouts that have been proposed for the
Speaker 4: oil and gas industry, and some of them have actually
Speaker 4: happened for oil and gas companies. The structure is really
Speaker 4: designed to benefit invest not so much to fix the
Speaker 4: broken shale industry business model. It's just to reward investors
Speaker 4: who made bad bets.
Speaker 5: On shale companies and allow them.
Speaker 4: To get a little bit more of their money back
Speaker 4: in the bankruptcy process.
Speaker 5: Really what this is.
Speaker 4: It winds up being sort of a passed through from
Speaker 4: the US Treasury straight to the hedge funds or other
Speaker 4: investors who own chesameake Dad.
Speaker 2: So instead of supporting working Americans or investing in an
Speaker 2: energy transition because that would be political, the government is
Speaker 2: bailing out failing companies to get some money into the
Speaker 2: pockets of hedge fund the guys. Chesapeake will continue operating
Speaker 2: with seven million dollars of its debt wiped clean by
Speaker 2: Franklin Resources, a holding company. We'll see how long that lasts.
Speaker 2: That's it for this time. Thanks for tuning in. We
Speaker 2: will have another episode for you this Friday, and then
Speaker 2: I swear we really are going to take a little
Speaker 2: bit of a break to produce the next investigative season.
Speaker 2: Look out for that in July and in the meantime,
Speaker 2: you can keep tabs with us at drillednews dot com
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Speaker 2: drop a link to that in the show notes. Thanks
Speaker 2: again for listening, and we'll see you next time.