Chesapeake Energy Corporation Files for Bankruptcy: Thoughts and Opinions from an Oil & Gas Attorney

By Michael C. Sanders

It has appeared to be inevitable for months, and it finally happened Sunday night: Chesapeake Energy Corporation filed for Chapter 11 Bankruptcy. Chesapeake and 40 affiliated companies filed in the Southern District of Texas—a huge amount of filings for a hugely indebted company. After reviewing the parent company’s petition and the docket of first day motions, here are my thoughts and observations:

It is a surprise to me that they filed in the Southern District of Texas. I expected Chesapeake to make things harder on its oilfield creditors, who are primarily in Texas and surrounding states, by finding an excuse to file in New York or Delaware. Here in the Southern District of Texas, we have two very capable Bankruptcy Judges, Judge David Jones and Judge Marvin Isgur, both with years of experience dealing with complex oil & gas bankruptcies. The case has been assigned to Judge Jones.

Typical of large operator bankruptcies, Chesapeake filed several first day motions intended to keep it functioning as an oil & gas operator during the bankruptcy. With two motions, Chesapeake asked for leave to pay pre-petition and post-petition royalties, revenues to non-operating working interest owners, joint interest billings on properties where it owns a non-operated interest, and the lease operating expenses on properties it operates. Bankruptcy lawyers and the Bankruptcy Courts have generally accepted the concept that royalty owners’ share of the proceeds of production and non-operators’ share of the working interest revenue should be paid. Many, if not most, agree that funds owed to royalty owners and non-operators do not actually belong to the operator. Failure to pay lease operating expenses and joint interest billings will leave a debtor exposed to statutory and contractual liens, and the Bankruptcy Code will not save the debtor from those liens.

Chesapeake has moved to quickly terminate several marketing and processing agreements that it deemed to be uneconomic. In addition, Chesapeake filed an adversary proceeding against the Federal Energy Regulatory Commission (FERC) to enjoin FERC from issuing rulings and orders that conflict with the Bankruptcy Court’s orders.

In the 22 years I have been practicing law, I have, regrettably, seen Chesapeake make lots of enemies by breaching innumerable contracts and acting as if it was governed by its own set of rules. This bankruptcy is an unfortunate example of what happens when poor business practices catch up to an operator. Other than the unlucky people who work for Chesapeake, I do not think there are many tears being shed today over this bankruptcy.

Fortunately for my current clients, few of them have any dealings with Chesapeake. I expect I will be contacted by many parties that have been impacted by the Chesapeake bankruptcy and/or the many other oil & gas bankruptcy filings we have seen and will continue to see this year. If you or your company fall into one of these categories, please contact me to see if our firm can be of assistance to you.

Michael C. Sanders is the founder of Sanders LLP and is board-certified in Oil, Gas, and Mineral Law by the Texas Board of Legal Specialization. He has extensive experience handling a variety of energy disputes and lawsuits. He can be reached at mcs@sandersfirm.law or 713-338-2677.