Oklahoma City-based Chesapeake Energy Corp. warned Tuesday that it might not be able to withstand depressed commodity prices and continue operating much longer.

“If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected, which raises substantial doubt about our ability to continue as a going concern,” the company said in a regulatory filing detailing the financial realities it faces under its credit agreement.

CFO Domenic Dell’Osso Jr. said the company has the option of seeking a waiver from its bank group at any time, but “at the moment we continue to be focused on the strategic levers that result in permanent debt reduction.”

If Chesapeake does fail to comply with its lending covenant, or it isn’t waived, that would result in default and accelerate outstanding debt owed.

The announcement is reflective of the broader challenges that have confronted the upstream sector in recent years, as many independents took on heavy debt loads to impress public equity markets, which are now demanding capital discipline and better returns. Operators have increasingly searched for ways to cut costs and spend within their means.

For Chesapeake, which at one time had more than 100 rigs operating across the Lower 48, the “going concern” warning comes after years of belt tightening under CEO Doug Lawler. But as the company has whittled its asset base and transformed from a natural gas juggernaut into an oil producer, it remains saddled with debt.  Once valued at nearly $40 billion, the company has a market capitalization of less than $3 billion today. After Chesapeake issued its warning on Tuesday, the stock opened Wednesday trading at $1.29/share. 

The company had about $9.7 billion of outstanding principal debt at the end of the third quarter, versus roughly $8.1 billion at the end of last year. Management said it is pursuing a variety of transactions and cost-cutting measures, including cuts in corporate spending, refinancing transactions, asset divestitures and a significant budget cut next year.

The company is now targeting capital expenditures of up to $1.6 billion for 2020. That’s down from a previous forecast over the summer, when management said spending would be flat with this year’s level of up to $2.5 billion. Next year’s production is expected to decline by 10%, while year/year oil volumes would remain flat under the current plan, which still depends on commodity prices.

As the company has focused on a wetter production mix in recent years, its Brazos Valley properties produced a record 40,000 b/d of oil in October. The Upper Eagle Ford and Austin Chalk assets were taken in the $4 billion acquisition of WildHorse Resource Development last year after Chesapeake exited the Utica Shale.

In addition to the Eagle Ford Shale in South Texas, Chesapeake continues to focus on the Turner sandstone formation in the Powder River Basin to help drive oil volumes, where the company recently placed online its first Niobrara well since 2014. In the first 87 days, the well has produced around 106,500 bbl of oil, reaching a 24-hour peak rate of more than 1,600 b/d.

Management plans to drill and complete four additional Niobrara wells in 2019 and expects that more than 25% of its 2020 capital program will target the Niobrara formation.

The company continues to operate two rigs in the Marcellus Shale of Pennsylvania, while it has released its rigs and completion crews in both the Haynesville Shale and the Midcontinent.

Chesapeake produced 478,000 boe/d in the third quarter, up 3% from the year-ago period when adjusted for asset sales.

Average realized oil prices actually inched upward by 3%  year/year in the quarter to $60.66/bbl. Natural gas prices fell by 11.5% to $2.38/Mcf, while natural gas liquids prices declined by more than 50% to $12.44/bbl.

Chesapeake reported a third quarter net loss of $61 million (minus 6 cents/share), compared with a net loss of $146 million (minus 19 cents) in the year-ago period. Revenue slipped to $2 billion from $2.4 billion over the same time.