Chesapeake Ch.11

“…there was a difference of opinion between [Arthur] Andersen & the Company as to whether the Company [Chesapeake] would be able to continue to operate as a going concern considering its capitalization & financial resource…” - 1993, from a disclosure in Chesapeake’s 1st 10K (PDF p.20)


EDITOR’S NOTE:

In June of ‘92, as Chesapeake was preparing to go public, their auditor - Arthur Andersen - resigned, stating that they did not believe that Chesapeake “would be able to continue to operate as a going concern”.

In a case of irony (that fits like a glove for 2020), Arthur Andersen is infamously known for Not Issuing that statement, back when they were Enron’s auditor…


***If you enjoy this newsletter, do us a favor - send it to a friend or colleague***


Chesapeake Filing Links:

Notes:

Twitter Accts:


Chesapeake’s Capital Structure - Docket 49 (p.14)

GOING CONCERN.

Even though Chesapeake (finally) filed for Ch.11 on Sunday, Arthur Andersen was - at least at the time - wrong.

Aubrey McClendon took E&P capital raising to new, unexpected heights.

Arthur Andersen did not see that coming.

What John Raymond described as:

“The infinite power of the human mind” - [see EnergyCynic’s header]

… was - in reality - something more like:

“The incredible hustle of Aubrey McClendon

Act I of Shale was a land-grab.

And that kind of hustle proved to be a powerful tactic -

Exhibit 99.2

In business, the strategy of a land-grab is predicated on two outcomes:

  1. Subsequently flipping the acquired “land”; or

  2. Holding said “land”, & it actually having value that yields a profit

The latter is the investment thesis pitched to E&P investors, over the last ~10yrs.

Traditionally, private funds - seeking exposure to “value” - backed E&Ps.

However - flipping (effectively, exposure to an odd form of private mineral price momentum) was the strategy that returned a profit…

Exhibit 99.2 - DIP Loan Model Forecasts

“Nothing destroys value faster than irrational competitors” - Alfred Lin, Sequoia 

If you find yourself going after a land-grab - and the land is worth something - the simple combination of aggressive fundraising & aggressive land acquisition works.

In that case, two tactics can build an empire.

The same two tactics applied to an irrational land-grab can destroy capital faster than the Soviet Ministry of Finance.

At some point before ‘09, the case for Chesapeake’s land-grab probably made sense.

But in Shale’s 2nd Act, the buy-and-hold economics broke.

Even Rolling Stone called them out -

In Mar of ‘12, they wrote a hit piece on Chesapeake, commenting:

“…who profits more from flipping land than drilling for gas”

Chesapeake’s Operations:

“the Debtors held (i) interests in approximately 13,700 gross wells, a substantial majority of which are Debtor-operated, (ii) approximately 5,193,000 gross acres of developed leasehold, undeveloped leasehold, & fee minerals, in the aggregate, and (iii) estimated proved reserves of approximately 988MMDocket 49 (p.12)

And yet, Chesapeake still drilled

From ShaleProfile, message Enno & start a trial

Did the Powder River Basin wells (ever) make a true return?

Why were the wells drilled?

Ask yourself two questions, & you tell us:

  • Did management get paid on the way down?

  • Did management get paid ahead of Ch.11?

Management incentives that reward financial destruction can & do manifest situations where irrational competitors enter an industry & eviscerate the economics for everyone.

  • When Enron’s auditor won’t sign off…

  • When Rolling Stone describes shale economics more accurately than executives…

  • When Chesapeake lists their 1st core value as

…in the face of pages of Material Litigation (Docket 49, pp. 29-32) in practice.

We can go on. And on.

The shamelessness has no end.

There’s an argument to be made that Chesapeake spent years negotiating with creditors & paying down debt in good faith.

But in the face of the rest of the evidence, the story is simple -

Chesapeake’s management spent years paying themselves a fortune, while ship they captained slowly sank -


OTHER NEWS.

Last week, Rachel Adams-Heard published an article on Oil Reserves, mentioning our bit on Ring’s RBL [thanks for the look]. We recommend the read.

After digging into Chesapeake, it’s clear that there are company-level governance issues that go well beyond reserve financing issues…

We’re taking Friday off - catch y’all next week - be safe & enjoy the holiday weekend -