Chesapeake Energy, one of the first companies to take advantage of directional drilling and fracking, filed for Chapter 11 bankruptcy protection in Houston on Sunday, the latest victim of the oil and gas price plunge caused by the COVID-19 pandemic.  The company, based in Oklahoma City, was highly leveraged when the oil and gas market collapsed, and now the company is seeking to eliminate as much as $7b of its nearly $12b in outstanding debts.  The company will continue to operate as it tries to restructure.  On Monday, allegations surfaced of the depth of the financial mess at the company — a lack of budgets, a massive wine collection, and a nine-figure bill for parking garages — according to CNBC.

Why This Matters:  This is one of the most high profile firms to fall apart during the pandemic, but due to the long term economics of oil and gas, it won’t be the last.  The Wall Street Journal cites industry analysts’ prediction that if oil and gas prices remain flat over the next two years, as many as 200 other shale companies could also file for bankruptcy.   But we wonder how Chapter 11 bankruptcy protection can offset the fundamental structural problems of declining oil and gas demand?

Chesapeake’s Excesses Caught Up To Them

CNBC reported that when the current CEO took over Chesapeake in 2013, he found a raft of financial problems including  “$30 billion in spending above cash flow that happened from 2010-12,” as well as “a season ticket package to the NBA’s Oklahoma City Thunder that was the biggest in the league and a lavish campus that was modeled after Duke University, complete with beekeepers, botox treatments and chaplains for employees.”  (OK we are not so offended by the beekeepers!)  But over the last few years, the company’s shareholder returns fell precipitously after a downturn in oil prices five years ago, according to the Wall Street Journal.

Nevertheless, Wall Street propped up the company with loans that have kept Chesapeake and many other companies like it afloat.  Things looked really bad when earlier this year the company reported a first-quarter loss of more than $8 billion — even after years of selling off assets, the company could not work its way back to solvency.  In May, according to The Journal, the company gave “21 high-ranking employees cash-retention payments totaling about $25 million in exchange for waiving equity and bonus awards, a move that commonly precedes bankruptcy.”  And the current CEO has been paid more than $48 million in compensation during his tenure at the company.