All eyes are on Chesapeake.
The price of natural gas in the US has gotten completely destroyed. The process started in July 2008, at over $13 per million Btu and continues through today, at $1.77 per million Btu.
In between, natural gas traded at prices that, for much of the time, didn’t allow drillers to recoup their investments, leading to permanently cash-flow negative operations, and now huge write-offs and losses, defaults, restructurings, and bankruptcies.
You’d think that this sort of financial misery would have caused investors to turn off the spigot, and for production to fall because drillers ran out of money before it got that far.
But no. Over the years, money kept flowing into the industry. In this Fed-designed world of zero interest rate policies, when risks no longer mattered, drillers were able to borrow new money from banks and bondholders and drill that money into the ground, and production soared, and more money poured into the industry based on Wall Street hoopla about this soaring production, and this money too has disappeared.
In the process, the US has become the largest natural gas producer in the world – and the place where the most money ever was destroyed drilling for natural gas.
But now the spigot is being turned off. And much of the industry is heading toward default and bankruptcy. Granted, the largest producer in the US, Exxon, has apparently bigger problems on its global worry list than the misery in US natural gas. Its stock is down only 25% since June 2014, and its credit rating is still AAA. But even if it gets downgraded a couple of notches, Exxon can still borrow new money to fund its operations, dividends, and stock buybacks, and service its existing debt.
But the rest of the industry – along with its investors and banks – is sinking deeper into fiasco.
A number of smaller natural-gas focused drillers have already sought refuge in bankruptcy court. The number 2 driller, Chesapeake, which gets 72% of its production from natural gas and 11% from natural gas liquids, has already written off $15.4 billion over the past three quarters! It’s currently trying to “restructure” its debt. Nearly $12 billion of it is junk bonds. Of them, $9.3 billion are unsecured. It has hired restructuring advisors Evercore Partners.
Unsecured bondholders know what that means: their illusions will disappear. And they’re sweating blood.
Chesapeake is currently engineering a bond swap which will make a big haircut for unsecured bondholders permanent. Its myriad bond issues have plunged in value. For example, the 6.5% notes due 2017 trade at around 55 cents on the dollar, though they’re included in the bond swap, according to S&P Capital IQ LCD, and the notes due 2019, also included in the bond swap, trade at around 30 cents on the dollar. Its stock has fallen 87% since…