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The Troubles Continue for Chesapeake as NGP Moves to Distribute Shares

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The troubles continue to pile up for Chesapeake Energy Corp.

PE firm Natural Gas Partners (NGP), who owns a 16% stake in Chesapeake, has begun distributing its Chesapeake shares to its partners. 

Before we jump into this, its important to note a few bits of operational information that makes Chesapeake an important player in the space.

Operational Data - Chesapeake

• Rig Count : 20 gross rigs (as of 3Q 2019) (amoung the top 10 US drillers)

• Well Count (frac / Complete) : 300+ per year, makes them very important to the oilfield frac market.

Why NGP's Movements are a Big Deal

NGP first picked up the stake in the company via Chesapeake's October 2018 acquisition of WildHorse Resource Development. The deal was valued at $3.97 billion and Chesapeake financed the deal primarily though stock (only $275-400 million of the value was paid in cash).

While NGP didn't provide details on the distrubution, this move has caused Chesapeake's stock to plummet to below $1.00 (see chart below).

The value of NGP's stake in Chesapeake is currently ~$208 million - a dramatic 82% reduction in value compared to when NGP initially acquired the shares (which were worth ~$1.18 billion a year ago when the deal WildHorse deal was struck).

Source: Google Finance

Possible Haynesville Asset Sale

According to a report by Reuters, Chesapeake is rumored to be in 'late stage discussions' regarding the sale of its Haynesville Shale asset. The potential buyer has been IDed as Comstock Resources. If a sale is made, the deal could fetch up to $1.0 billion.

Initial Red Flag - 10K Report

Chesapeake initially signaled signs of trouble in its 10K filing relating to its Q3 2019 report, where it stated: "If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern. Failure to comply with this covenant, if not waived, would result in an event of default under our Chesapeake revolving credit facility."

Chesapeake - A Look at Current Affairs

Chesapeake is currently operating 13 net rigs and the company plans to cut that to 10 rigs in 2020.  That cut will be facilitated by 30% reduction in year over year capital spending.   The company has suspended drilling in the Haynesville and MidCon region.  2020 will see:

• Three (3) Rigs in Powder River Basin

• Two - Three (2-3) Rigs in the Legacy Eagle ford Asset

• Two-Three (2-3) Rigs on the Wildhorse Acquired Asset (called Brazos Valley)

• Three (3) Rigs on the Marcellus Asset.