U.S. Fracking Giant Chesapeake Energy's Share Value Crashes

The accelerating decline of the U.S. fracking industry looked likely to claim its highest-profile victim to date as Oklahoma City-based Chesapeake Energy, once the country’s second-largest gas producer, warned last week that a crippling, US$9.7-billion debt might prevent it from continuing as a viable business.

The news came less than a week before colossal fossil ExxonMobil, another company closely associated with fracking activities in the U.S. and elsewhere, reported a 49% decline in its profit for the third quarter of the year, though it still walked away with $3.17 billion, industry newsletter Rigzone reports.

“Chesapeake Energy (CHK) has fallen,”’ the Cable News Network declared Wednesday, in a post republished by the Institute for Energy Economics and Financial Analysis. “The company’s early bets on fracking made it a natural gas powerhouse, and at one point it was the nation’s No. 2 natural gas producer. Aubrey McClendon, Chesapeake’s late founder and CEO, was considered one of the leaders of the shale boom.”

But now, CNN said, the company is “drowning” in debt and “struggling to pay it all back, because America is swimming in excess natural gas, keeping prices very weak.” Chesapeake also made a tough situation worse by following one bad investment decision with another.

“The financial problems have been amplified by a bid to diversify away from natural gas by betting big on oil,” CNN explained. “The company’s October 2018 deal for shale oil driller WildHorse Resource Development, valued at $4 billion, including debt, came when U.S. oil prices were trading at nearly $70 a barrel. Weeks later, crude plunged below $45 a barrel. Oil prices have yet to fully recover.”

By now, Chesapeake’s debt is “nearly four times its market valuation, much of which was a result of increased spending when energy prices were high, and for acquisitions aimed at expanding its oil assets to combat falling natural gas prices,” Reuters reported last week. With average gas prices down 11%, to US$2.38 per thousand cubic feet, between July and September, the company said its ability to pay off its debts will be affected if prices don’t recover.

At this point, “a continuous rise in U.S. gas production—a byproduct of the shale oil boom—has prices for the fuel heading toward a 25-year low, with output outpacing U.S. consumption,” the news agency adds.

In the wake of last week’s financial report, “shares of Chesapeake fell nearly 18% to US$1.28 in New York on Tuesday after the company reported a marginally bigger-than-expected loss and a huge shortfall in production for the third quarter,” Reuters stated. Its third-quarter losses stood at $188 million, compared to $8 million over the same period last year. As of Sunday evening, the company’s stock was down to 90¢ per share.

Now, CNN said, Chesapeake is scaling back its 2020 drilling activities by 30%, cutting production and expenses by 20% in a bid to free up cash flow, and may sell off some of its assets.

Bloomberg reported that “Wall Street isn’t optimistic on Chesapeake’s future,” noting that the financial report had brought its stock to a 20-year low. “Chesapeake’s Haynesville shale asset is the most likely candidate for a sale,” though the news agency had Tudor Pickering Holt & Co. analyst Sammer Panjwani warning clients that “production (and value) is declining by the day as the asset has entered base decline”.The Seeking Alpha investment blog lists several North American pipeline companies at risk as a result of Chesapeake’s collapse, including Houston-based Kinder Morgan and Energy Transfer Partners, the company behind the intensely controversial Dakota Access Pipeline.