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Chesapeake Energy Confirms it Hired Advisors to Explore Bankruptcy Options

By Matthew DiLallo – May 11, 2020 at 11:50AM

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The deeply indebted oil and gas producer is taking steps toward a potential bankruptcy filing.

Chesapeake Energy (CHKA.Q) continues to knock at the door of bankruptcy. The financially troubled driller filed its quarterly report with the SEC today, which included a new "going concern" warning. The company also pulled its financial guidance and unveiled plans to prepay incentive compensation to management to keep them motivated in case it files for bankruptcy.  

Chesapeake Energy initially warned investors about its financial situation in November. At the time, the company wrote that "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."

A drilling rig near some oil pumps with a nice sunset in the background.

Image source: Getty Images.

The company reiterated those concerns when it filed its quarterly report with the SEC today. It also confirmed a previous report by stating that it "engaged advisors to assist with the evaluation of strategic alternatives." Among the options they're considering is a "restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the Bankruptcy Code."

However, Chesapeake warned that it might not be able to restructure its debt nor improve its financial position. Because of that, "management has concluded that there is substantial doubt about the Company's ability to continue as a going concern."

The company took an additional step to prepare for a potential bankruptcy filing by prepaying $25 million in incentive compensation to 21 top executives so that they stay motivated. This move mirrors a similar one by Whiting Petroleum, which approved $14.6 million in cash bonuses to its executives just days before it filed for bankruptcy.  

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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