Energy company Chesapeake Energy Corporation (NYSE:CHK) is on the verge of bankruptcy. The company had been struggling for many years due to a mountain of debt, and despite reconstructing its approach, it seems doomed. The demise of the company is probably going to be placed at the door of crashing commodity prices, but the situation is a bit more complex.
It is a culmination of a series of poor decisions from the company. Back in 2014, the company had managed to offload some of its stakes in Uthica Shale and Marcellus to Southwestern Energy for $5 billion in cash.
It seemed like an excellent deal, and at the time, Chesapeake had debts to the tune of $11.5 billion. Instead of using the money to reduce debt, the company spent it on other things. On top of that, the company made the damaging decision of actually repurchasing its own stock worth $1 billion. Since then, the company has only diluted its investors through one acquisition and debt exchanges.
The company also developed new wells in order to close the gap between its cash flow and expenses. Chesapeake did this for many years, but the debt levels barely got reduced.
That happened despite the fact that the company made several asset sales and also divested from Uthica for as much as $2 billion in 2018. Moreover, the new wells did not add anything of note to the company’s revenues, and by Q4 2019, production had dwindled to 477000 barrels of oil equivalent per day. The acquisition of Wildhorse Resource Development for $4 billion in 2019 turned out to be another disastrous move from Chesapeake.
The company also took over Wildhorse’s debt, which amounted to $1.375 billion, and that put further pressure on its debt balance. Currently, the company has debts to the tune of $9 billion, and at the end of Q1 2019, it had only $82 million in the form of cash balance. The oil price crash might be the last nail for the company, but it finds itself in a precarious position now because of its litany of bad decisions.