Chesapeake Energy (CHK) has hired Kirkland & Ellis to help it strengthen its balance sheet at a time when one energy industry consultant fears a failure of the natural gas and oil company could be this credit cycle's "Lehman moment."
The Oklahoma City-based company announced the hiring of the law firm on Monday after its stock and bonds went into a tailspin on rumors of the appointment.
"Chesapeake currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders," the statement said.
Dallas Salazar, CEO of Austin, Texas, energy consulting firm Atlas Consulting, said talk about Chesapeake working with Kirkland had surfaced as early as September.
"It's in everybody's best interests to make sure Chesapeake doesn't go under," Salazar said.
Salazar fears if Chesapeake fails, the effect could mirror what happened in September 2008 when Lehman Brothers filed for Chapter 11 bankruptcy protection because of crushing losses on mortgage securities. The federal government's efforts to rescue the venerable financial services firm had fallen through and its bankruptcy sent a ripple effect of panic throughout global financial markets, helping spark the 2008 financial crisis.
In Chesapeake's case, he worries a failure could cause a similar domino effect in the energy sector because investment funds could be forced to sell off the shares they hold of other big names in the industry, putting further pressure on those companies' capital structures.
If Chesapeake does file for bankruptcy, Salazar expects the second-lien bonds would be the fulcrum security and those holding them would end up with the reorganized equity.
He said he knew things were heading downhill when he heard the company's credit default swaps had started to price upfront, meaning buyers were required to post a year's worth of collateral in order to purchase credit protection.
Chesapeake is the second-largest natural gas producer and 12th-largest oil and natural gas liquids producer in the U.S. The Deal previously reported Evercore Group's Daniel M. Aronson, senior managing director of his firm's restructuring and debt advisory group, is advising the company.
Chesapeake's New York Stock Exchange-listed shares recently traded at $2.07, up 1.5%.
The bonds were "smoked on high volume" on Monday, Salazar said. Even bonds maturing a mere five weeks from now have dropped massively, highlighting investor fear.