Chesapeake Energy Corporation – Court Approves $130.45mn Sale of Mid-Con Assets to Tapstone Energy and Tapstone Energy Sponsor Kennedy Lewis Investment Management

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November 13, 2020 – The Court hearing the Chesapeake Energy Corporation cases issued an order approving a pair of asset purchase agreements (each an "APA") in respect of the sale of the Debtors' Mid-Con assets. In total, the sales have generated $130.45mn; $92.5mn from Tapstone Energy, LLC ("Tapstone") which will receive a 70.73% share in the Mid-Con assets and $37.95mn from KL CHK SPV (an affiliate of Kennedy Lewis Investment Management, "Kennedy Lewis") which will receive a 29.27% share of the Mid-Con assets. 

Each of the Tapstone Energy and Kennedy Lewis APAs is attached to the order. Tapstone Energy initially entered into an October 9, 2020 stalking horse APA which stipulated a $85.0mn purchase price and is attached as Exhibit 1 to the order (page 40 of the order). That APA was amended subsequent to the completion of the Debtors' November 10th auction, to reflect the higher $130.45mn purchase price and a deal cut amongst Tastone Energy, Kennedy Lewis and the Debtors which is memorialized in, the Tapstone APA; the November 12th amendment to the Tapstone APA (see page 1110 of the order); and in the Kennedy Lewis APA (Exhibit 2 to the order at page 1297).

In July of 2020 Tapstone fell short in an earlier bid for Chapter 11 assets when its $65.0mn stalking horse bid for Templar Energy was topped by Morgan Stanley Energy Partners-backed Presidio Petroleum, although Tapstone did walk away with a $1.95mn break-fee and $350k for expenses; not a bad return on what was a short investment. 

Tapstone had then itself only just completed a comprehensive, out-of-court restructuring; which saw the exit of Blackstone's GSO Capital Partners (Tapstone touting Blackstone's $700.0mn investment, and 95% equity ownership, in a May 2019 investor presentation) in favor of Kennedy Lewis which supplied a more modest $50.0 million of new capital in return for the right to be called Tapstone's "new capital sponsor."

At Tapstone's emergence from Chapter 11, Steve C. Dixon, Tapstone's CEO, commented, “The outcome of this process establishes Tapstone as an entity ready to consolidate assets in the Mid-Continent. We are eager to turn our focus on acquiring producing properties and evaluating merger candidates.” When Tapstone was jilted at the Templar altar, we noted that "there will certainly be more of these opportunities" and indeed there was. 

Further Background

The Debtors’ bidding procedures motion [Docket No. 1147] states, “The Debtors have a sound business justification for selling the Mid-Con Assets. The Mid-Con Assets are not core to the Debtors’ business operations. Indeed, the Debtors have previously sold substantial assets in the Mid-Con area with the goal of ultimately divesting the entirety of their Mid-Con portfolio.

In the years prior to commencing these chapter 11 cases, the Debtors entered into a series of transactions to maximize operational efficiencies and divest certain non-core assets, including in Oklahoma and Hemphill County, Texas (the ‘Mid-Con’). In 2018, the Debtors sold certain acreage, producing properties and other related property and equipment in the Mid-Con, including all of the Debtors’ Mississippian Lime assets. In September 2019, the Debtors began a marketing process for a final divestiture of Mid-Con assets, however that process was put on hold in May 2020. Following the Petition Date, the Debtors, in consultation with the Consenting Stakeholders, continued to evaluate the potential sale of their remaining oil and gas properties and related infrastructure in the Mid-Con (the ‘Mid-Con Assets’). On August 3, 2020, the Debtors, with the assistance of Intrepid Partners, LLC (‘Intrepid’), relaunched the Mid-Con marketing process….

The Debtors intend to use the proceeds of any Mid-Con Asset sale to fund the Debtors’ working capital needs and distributions under the Debtors’ plan of reorganization.”

About the Debtors

The Debtors are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs: “We own a large and geographically diverse portfolio of onshore U.S. unconventional liquids and natural gas assets, including interests in approximately 13,500 oil and natural gas wells. We have significant positions in the liquids-rich resource plays of the Eagle Ford Shale in South Texas, the stacked pay in the Powder River Basin in Wyoming and the Anadarko Basin in northwestern Oklahoma. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana.

In February 2019, we acquired WildHorse Resource Development Corporation, an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, for approximately 717.4 million shares of our common stock and $381 million in cash, and the assumption of WildHorse’s debt of $1.4 billion as of the acquisition date of February 1, 2019. The acquisition of WildHorse expands our oil growth platform and accelerates our progress toward our strategic and financial goals of enhancing our margins, achieving sustainable free cash flow generation and reducing our net debt to EBITDAX ratio.”

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