The US fracking company Chesapeake Energy yesterday filed for insolvency under CHAPTER 11 of the US Insolvency Code. Business operations will continue for the time being. By filing under Chapter 11, the company intends to negotiate on its own with creditors in order to reduce 7 billion Dollars in debts, the company said. In the first quarter of this year alone, Chesapeake Energy made a loss of 8.3 billion Dollars. Sure, with the high production costs in the fracking segment and the brutally crashed oil price!
During the corona crisis, Chesapeake Energy is the largest fracking company to go bankrupt to date. The company used to be the number two producer of natural gas in the US. But in the meantime the company, like many others, has become a victim of the oil price crash. But one should not write off the industry too soon. Is it possible that debts are being rescheduled, that debts are being exchanged for shares, and that they are waiting for a higher oil price. Fracking fields will be shut down, even until the oil price is significantly higher again. After such a Chapter 11 procedure, the company might come back “restructured” on the market.
Less oil production thanks to a wave of bankruptcies?
But in the short and medium term, one can assume that the numerous bankruptcies of recent weeks will cause oil production in the USA to suffer for the time being. The latest data from the US Energy Information Administration show that last week’s production volume was 11.0 million barrels per day, compared to over 12 million per day in April. One may assume that insolvent frackers, despite continuing their business operations, will not ramp up existing production facilities for the time being and will not develop new sources for the time being? And the wave of bankruptcies of frackers in the USA is certainly an important factor for the oil market.
According to recent reports, 30 percent of the industry is said to be “technically” insolvent at an oil price of 35 Dollars per barrel. 18 companies have already gone bankrupt this year (for example, Whiting Petroleum was one of the big ones on April 1), after 20 companies went bankrupt last year.
This is obviously the major market shakeout in the USA. Companies that, thanks to the corona crisis and the oil price crash, are now unable to find follow-up financing from a bank or new bond investors are not in sight and are going bankrupt. This can now lead to a decline in production in the USA. But also during the last big “oil war” six years ago, the frackers came back and increased the production volume in the USA as never before. But now for the year 2020, this current consolidation of the industry may well ensure that the supply volume adjusts to demand in the short term. And the market may (at first glance) recover somewhat in the short term. This could be good for the oil price.
What is the Chesapeake Energy share doing?
Three weeks ago we already reported on numerous companies that went bankrupt or were on the verge of going bankrupt. The share prices of these companies rose extremely sharply – unbelievable! One of these shares was that of Chesapeake Energy. The chart shows, on a CFD basis, the price of Chesapeake Energy’s stock against the Dow 30 since mid-May. When the market as a whole was only rising for days on end, the scrap shares and Chesapeake Energy’s shares were pulled up in the wake of this. In just three days, the stock rose from under $14 to $77. But the euphoria immediately collapsed again. On Friday evening the stock closed at 11.85 Dollars. In Germany one can currently see prices around 6.30 Euros.