The question is really this. Is the company trapped by it's circumstances or can Lawler sustain it long enough for prices to recover?
He spun off SSE and a significant amount of debt associated with the drilling operations.
He sold $5.4B of assets right before the NG market started to tank.
He sold some JV assets (Tonkawa) to reduce dividend payouts
He renegotiated a major pipeline deal to reduce CHK's cost of bringing product to market.
He renegotiated CHK's line of credit to include the possibility of issuing $2B in junior debt
He has cut the dividend to preserve cash
He has trimmed the staff to reduce expenses
He hasn't cut back on capex nearly enough to match the market conditions. So he either failed to correctly assess the market situation or he could not stop the spending rapidly enough.
He had an objective to sell about $1B in non-core assets this fall which he has failed to do so far, and recently indicated that if he did pull it off it would be more like $300M.
I think Lawler has done reasonably well, but his failure to cut back spending quickly is surely his biggest mistake and has led to a lot of speculation that CHK's business model is somehow fundamentally flawed. So flawed in fact that a seasoned and respected oil executive who has had many significant accomplishments while leading CHK cannot surmount the bad hand he was dealt by Aubrey McClendon.
So, I think that is the crux of the issue in a nutshell.
I think Lawler will now position to company to last as long as it can. How long this might be depends greatly on circumstances beyond his control. I do think that the Street is not investing any time in understanding what a minimal capex spend approach would mean for CHK.
CHK recently renegotiated their credit line to include the possibility of issuing $2B in junior debt.
So, if CHK finds it necessary to do that then about $11B of unsecured debt becomes junior to the $2B.
If prices continue to remain low for oil and gas (gas is 70% of CHK's reveune but only about 50% of CHK's profit, leaving oil for the other 50% of profit), and
If CHK spends another $3B on capex next year (like they did this year), then
CHK will most certainly need to exercise the availability of the junior debt and thereby increase risk of default on the unsecured debt.
I don't think it is any more complicated than that. Taking on another $2B in debt would not be good for CHK as a company, for the $11B in bonds, or for the common stock. This concept seemed to suddenly crystallize yesterday and now it gives pundits a good reason to write articles and increase their click-through rates about how CHK is heading for BK. Indeed, the whole industry is heading for BK if things don't change.
CHK does not have to spend $3B in capex next year. They do have to spend some. They have contracts that require a minimum volume of business with their drilling partner (SSE), with their pipeline partners, and with their JV partners. I do not have a good number for what their absolute minimum would be. I think they only have to spend about $150M with their drilling partner, and their pipeline contracts are for carrying product to market, so even though they have a minimum payment they would need to spend it anyway to deliver their product.
CHK has not provided a production update for 2016. They were asked about it during the last conference call and they declined to answer (said it was not a topic for that day, but did not say when they would provide the update). They did say they were prepared to significantly reduce their capex spending.
The Street doesn't seem to believe this is possible or likely.