In a widely anticipated moveChesapeake Energy (OTC:CHKA.Q) has filed for Chapter 11 bankruptcy to complete a comprehensive balance-sheet restructuring. The energy company hopes to both strengthen its balance sheet and restructure some of its legacy contractual obligations. This process would enable it to reemerge with a more sustainable capital and cost structure. 

Chesapeake Energy has entered into a restructuring support agreement with many of its creditors. As a result, the company intends to implement a reorganization plan that would eliminate roughly $7 billion of its outstanding debt. That would be a sizable reduction for a company that recently had about $9 billion of debt outstanding.

A person in a suit holding papers with Chapter 11 Bankruptcy on them.

Image source: Getty Images.

As part of its agreement with creditors, Chesapeake has secured $925 million in debtor-in-possession financing, which will provide it with the funding needed to operate as it goes through bankruptcy. The company intends to continue to pay its owner royalties, employee wages and benefits, as well as some of its vendors and suppliers. Lenders have also agreed to provide it with $2.5 billion of exit financing as well as potentially backstop a $600 million rights offering to inject new equity into the company upon its eventual exit.

The bankruptcy process will also determine what happens with the company's existing common stock. At this point, it's too early to determine whether the company will cancel its existing common stock and issue new shares solely to its creditors or if current shareholders will receive a stake in the reorganized company. 

When Chesapeake Energy does formalize a court-approved restructuring plan, it will be able to reemerge with a much better capital and cost structure, making it more competitive in the volatile oil and gas market.