After several turbulent years and plenty of controversy, Chesapeake Energy Corp., once the second-largest natural gas developer in the nation, is reinventing itself.
Pennsylvania has a big part in its plans, with about 45% of the company’s estimated 2021 production happening in about four counties in the northeast – predominantly Bradford, Sullivan, Susquehanna and Wyoming – according to the company’s first-quarter earnings report.
In February, the Oklahoma City company exited bankruptcy, having reduced its debt burden by $7.8 billion.
But then in March, it reached a settlement with Pennsylvania Attorney General Josh Shapiro’s office to pay $5.3 million in restitution to Pennsylvania leaseholders. The settlement followed a protracted process that began with the AG’s initial 2015 claim that Chesapeake deceived landowners when securing leases and improperly paid royalties.
A few weeks later, on March 24, Chesapeake settled with the U.S. Environmental Protection Agency and the state Department of Environmental Protection following alleged Clean Water Act violations seven years earlier. In 2014, the company’s Pennsylvania subsidiary, Chesapeake Appalachia LLC, informed the Army Corps of Engineers and the DEP that it had discharged fill material without proper permits at 76 sites. The discharges affected about 26 acres of wetlands and nearly a half-mile of streams, according to the EPA.
The company agreed either to seek “after-the-fact authorization” for the fill where appropriate and mitigate impacted wetlands or waterways, the EPA said in a statement.
With all that in the rearview mirror, it appears the company is charting a course of rebirth. At the end of April, former Chief Executive Officer Doug Lawler abruptly left his position without explanation. Mike Wichterich, the chairman of the company’s board, is serving as interim CEO until board members can find a permanent executive.
Meanwhile, Chesapeake reported net income of nearly $300 million since it emerged from bankruptcy on Feb. 9.
All this is happening while construction of what could be one of the company’s biggest midstream customers in the northeast remains stalled. Still, the natural gas liquefaction plant in Wyalusing Twp., Bradford County, is something the company likely is preparing for.
Chesapeake has leases on 540,000 Pennsylvania acres and nearly 1,000 wells, mostly in Bradford County. With three active rigs in the state, it drilled 16 new wells in the first quarter 2021 alone, according to financial documents.
Chesapeake leveraged what appears to be its entire lease portfolio to secure operational financing, up to $5 billion in revolving loans and lines of credit. The highly complicated financing instrument was filed as a mortgage in Pennsylvania county deeds offices where the company operates.
Harold Moyer, a longtime Chesapeake observer and accountant who works for Northern Tier leaseholders, said the company appears to have lined up financing for capital projects that won’t start paying out until later.
“The infrastructure is still being built,” he said. “It costs a lot of money to do that kind of stuff. When the gates open up, they’ve got to be ready to supply that plant.”
MUFG Union Bank, which provided Chesapeake with debtor-in-possession financing to continue operating during bankruptcy, is acting as administrative agent and collateral agent. Other institutions listed in financial documents are Bank of America, BMO Capital Markets Corp., Wells Fargo Securities, Citibank, JPMorgan Chase Bank and Royal Bank of Canada.
When asked about the financing and the company’s path forward in Pennsylvania’s Marcellus Shale region, spokesman Gordon Pennoyer referred to public financial filings.
One county official said it might be the biggest mortgage he’s ever seen in his office, but that he was unsure of its specific function beyond leveraging leases
Wyoming County Recorder of Deeds Dennis L. Montross must make sure the mortgage instrument is recordable, but he doesn’t necessarily need to understand how it works.
“It’s a pretty big one,” he said, chuckling. “It very well may be the largest we’ve ever gotten.”
The mortgage does not mean the financial institutions just wrote Chesapeake a $5 billion check. At risk of being overly simplistic, in one key element of the document, lenders agree to let Chesapeake borrow, repay and re-borrow money.
Commercial real estate and financing experts who reviewed the arrangement on behalf of the Northeast Pennsylvania Business Journal could not summarize the 193-page document simply.
“Given this debt arose out of the reorganization, I think more interesting material may be the negotiations that enabled this transaction,” said Kevin Riordan, a real estate finance professor and advisory board member at StackSource, a tech company that specializes in commercial real estate finance.
The upshot, however, is that Chesapeake now has the bankruptcy and attorney general’s lawsuit behind it, financing in hand, a new CEO and a major midstream buyer poised right on its doorstep.
New Fortress Energy has spent $144 million so far to secure the Wyalusing Twp. site and level it, financial documents show. Construction, however, has not advanced since last year. New Fortress officials have also said they need about two years to complete it, though they’re also maintaining that a number of obstacles could derail it.
The liquefied gas company wants to superchill natural gas down to a liquid, making it significantly more compact and portable, then ship it by rail to an export terminal in New Jersey, which is also in development. Both projects have drummed up strong opposition for the environmental damage, logistics issues and human safety concerns they could bring.
New Fortress told local officials that the project will move forward, however, they remain in a “pause,” Wyalusing Twp. Supervisor Marvin Meeter said.
Moyer, on the other hand, seems optimistic.
“Once that happens ... Chesapeake will be one of the big players as well as one of the most opportune for profit,” Moyer said.
Natural gas development unequivocally saved farms in the region, he said. Chesapeake gave farmers the freedom to keep their farms while navigating increasingly difficult markets, but “they really stepped on a lot of landowners’ toes by first off getting the leases so cheap, and they weren’t equitable,” he said.
Now he sees a company trying to create a new image for itself, part of it court-ordered – the AG settlement requires tighter and ongoing government scrutiny – and less frivolous spending compared to the boom days when exploration and production companies scrambled to line up first.
“They’ve spent money in places that you wouldn’t believe – you don’t see that waste now,” Moyer said. “They’re a lot more fine-tuned.”