By Timothy Puko, Alison Sider and Erin Ailworth
Three big U.S. energy companies pulled each other into a
spiraling stock plunge on Monday that illustrates how one
distressed shale producer can threaten its business partners.
Shares of Chesapeake Energy Corp., once one of the biggest
drillers in the U.S., was the first to go when the market opened.
Its stock lost more than 50% of its value in early trading as
investors digested a report that the embattled Oklahoma company was
working with bankruptcy advisers.
The turmoil helped trigger a selloff in shares of pipeline giant
Williams Cos., which gets 20% of its sales from moving Chesapeake's
natural gas from fields to markets. The trouble cascaded to Energy
Transfer Equity LP, an oil-and-gas logistics firm based in Dallas,
that has been trying to merge with Williams.
The rapid declines in all three companies exposed the complexity
and interconnected nature of some energy stocks, helping to spur a
selloff across the sector as investors continue to brace for the
worst. Oil prices fell back below $30 a barrel Monday and an index
of pipeline companies dropped by more than 8%.
Jay Rhame, who co-manages $2.5 billion in energy investments at
Reaves Asset Management--which owns shares in Williams--called
Chesapeake's woes "a warning shot" for many other debt-loaded
energy producers, as well as the companies that process and ship
the oil and gas they pump out of the ground.
Many pipeline operators pushed clients like Chesapeake to sign
fixed-cost contracts. That put producers on the hook to pay a set
price for securing space on pipelines whether they shipped fuel or
not, a scenario that could convince a bankruptcy judge the
contracts have become too costly, Mr. Rhame said.
"Everyone's looking at it right now and saying 'How much are
these contracts worth and who else has exposure?'" he said. "It's
obviously not only Chesapeake."
Williams and Chesapeake are more closely intertwined than most
pipeline companies and producers because Williams bought a network
of pipelines that had been owned by Chesapeake. But many investors'
assumption that pipeline companies are insulated from plunging
energy prices is being called into question, said Michael Grande,
director of U.S. energy infrastructure at Standard & Poor's
Ratings Services. It isn't entirely clear how the contracts that
were supposed to protect pipeline companies will fare if their
customers go bankrupt, he said.
"If counterparties are either defaulting or not paying, that's
going to be a problem," Mr. Grande said. "It doesn't matter how
good your contract is."
Chesapeake is mired in more than $11 billion in debt after years
of freewheeling spending while energy prices were high, and some
analysts have warned that the company could tip toward bankruptcy.
Chesapeake confirmed it is working with longtime counsel Kirkland
& Ellis LLP to strengthen its balance sheet, and said it "has
no plans to pursue bankruptcy." A Chesapeake spokesman declined to
elaborate further.
The announcement helped shares in Chesapeake and Williams claw
back some of their losses. Even so, they closed markedly lower
Monday, with Chesapeake down 28% and Williams 35% lower. Energy
Transfer dropped 42%.
The oil-patch shakeout is shaping up to be a game of chicken
between banks, bondholders and corporate executives. Bondholders
want to get the most out of oil-and-gas assets that are worth far
less today than they were six months ago. Banks want to avoid
taking over failing energy companies and writing down the value of
bad loans. Management teams are aggressively seeking out
restructuring opportunities.
Chesapeake is widely seen by bankers and energy executives as an
asset-rich, debt-challenged company. Producers that fit that
profile and are able to operate at low cost, excluding debt, may
embrace bankruptcy even with a significant amount of cash on hand,
said Scott Roberts, a senior portfolio manager at Invesco Ltd. who
helps manage $3 billion in high-yield bond investments.
In that scenario, management teams are likely to stay in place.
Chief Executive Doug Lawler, who was brought in after Carl Icahn
spearheaded an investor revolt to oust co-founder and CEO Aubrey
McClendon in 2013, wasn't the architect of Chesapeake's financial
troubles.
Monday's plunge in Chesapeake shares was warranted given the
risks that continue to plague the company, said Tim Rezvan, an
analyst at Sterne Agee CRT. There is little chance that Chesapeake
management can fix its balance sheet this year even if gas prices
rise by 50% and stay there, he said.
Not everybody agrees. Bob Brackett, an analyst at Sanford C.
Bernstein & Co., said that if Chesapeake can stave off
bankruptcy for long enough by modifying its pipeline contracts and
continuing to cut costs, then its stock price should eventually
rebound when oil and gas prices recover.
Chesapeake's woes threaten the nearly $33 billion
Williams-Energy Transfer tie-up announced last September.
Chesapeake's distress has been a drag on Williams's credit rating,
which could cause headaches for Energy Transfer if the merger goes
through. Adding to the uncertainty swirling around the deal, Energy
Transfer announced late Friday that its chief financial officer,
Jamie Welch, was leaving the company.
"All things being equal, Energy Transfer is better off without
Williams, " said Ethan Bellamy, an analyst at Robert W. Baird &
Co. He noted that sentiment is deteriorating about other similar
pipeline companies structured as master limited partnerships, or
MLPs. His team downgraded nine MLPs this week, including Plains All
American Pipeline LP, Oneok Partners LP and Tallgrass Energy GP
LP.
Williams shares have dropped 73%--a loss of more than $22
billion in equity--since the day before its merger with Energy
Transfer was announced. The plunge has far outpaced the fall in the
Alerian MLP Index, which has lost 30% of its value over the same
period.
By contrast, if Williams were to terminate the merger agreement
with Energy Transfer, it would have to pay a breakup fee of just
$1.48 billion.
"I do think at this point the companies would be way better off
if they did not merge," said Jay Hatfield, portfolio manager at
InfraCap MLP ETF, which invests in both pipeline companies. "I
can't believe that both stocks wouldn't rocket if the deal was
called off."
Bradley Olson contributed to this article.
Write to Timothy Puko at tim.puko@wsj.com, Alison Sider at
alison.sider@wsj.com and Erin Ailworth at Erin.Ailworth@wsj.com
(END) Dow Jones Newswires
February 08, 2016 19:59 ET (00:59 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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