CHESAPEAKE GRANITE WASH TRUST 10-Q

ITEM 1A. Risk Factors Factors that could materially affect our business, financial condition, operating results or liquidity and the trading price of the Trust’s common units are discussed in Item 1A - “Risk Factors” in our 2019 Form 10-K, which risk factors could also be affected by the potential effects of the COVID-19 pandemic discussed herein, and in this Quarterly Report. Risks Related to the Units If the financial position of Chesapeake degrades in the future, Chesapeake may not be able to satisfy its obligations to the Trust. Chesapeake is obligated to market, or cause to be marketed, the oil, natural gas and NGL production related to the Underlying Properties and to provide management services to the Trust. Due to the Trust's reliance on Chesapeake to fulfill these obligations, the value of the Royalty Interests and its ultimate cash available for distribution is highly dependent on Chesapeake's performance. Chesapeake's ability to perform its obligations will depend on its future financial condition, economic performance and access to capital, which in turn will depend upon the supply and demand for oil, natural gas and NGL, prevailing economic conditions and financial, business and other factors, many of which are beyond Chesapeake's control. On June 28, 2020, Chesapeake and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the "Chapter 11 Cases") for reorganization (the “Bankruptcy Filing”) under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Non-Filing Entities and the Trust will continue to operate in the ordinary course of business. The Debtors continue to operate the business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Chesapeake’s ability to perform its obligations related to the operation of the underlying properties and its obligations to the Trust will depend on Chesapeake’s future financial condition and economic performance, which in turn will depend upon the supply and demand for oil and natural gas, prevailing economic conditions and financial, business and other factors, many of which are beyond the control of Chesapeake. Chesapeake cannot provide any assurance that its financial condition and economic performance will not deteriorate in the future. A substantial or extended decline in oil or natural gas prices may materially and adversely affect Chesapeake’s future business, financial condition, results of operations, liquidity, ability to emerge from Chapter 11 bankruptcy, ability to finance planned capital expenditures or ability to comply with the financial covenants contained in its debt instruments. If the reduced demand for crude oil in the global market as a result of the economic effects of the outbreak of the COVID-19 pandemic continues, and a continued low level of demand and prices for oil and natural gas or otherwise persists for the near future or longer, or if the outbreak adversely affects employees of Chesapeake and such employees’ ability to conduct Chesapeake’s operations, such factors could have a negative impact on the financial condition and economic performance of Chesapeake. 18 Risk Factors Relating to the Sale of the Underlying Properties of the Trust The sale of the Underlying Properties of the Trust may result in the ownership and management of the Trust by a party that is unfamiliar with the operation of the Trust or the Underlying Properties. On October 13, 2020, Chesapeake filed a notice with the Bankruptcy Court that it had reached an agreement with Tapstone Energy, LLC as the “Stalking Horse” bidder to sell its Mid-Continent asset, which includes the Underlying Properties of the Trust, for $85 million in a 363 transaction under the Bankruptcy Code. A Bankruptcy Court supervised auction was held on November 10, 2020, in which other pre-qualified buyers were able to submit bids for the asset. At the conclusion of the auction, the successful bidder was Tapstone Energy, LLC and KL CHK SPV, LLC for an aggregate purchase price of $130.45 million. Chesapeake will present these auction results to the Bankruptcy Court for its final approval of the sale on November 13, 2020. If the sale of the Underlying Properties of the Trust is approved by the Bankruptcy Court, duties currently performed by Chesapeake with respect to the Trust will be performed by another party. The purchaser of the Underlying Properties may have less experience with the operation of the Trust or the Underlying Properties, or may interpret or perform its responsibilities with respect to the Trust and the Underlying Properties in a different manner than Chesapeake. Risk Factors Relating to the COVID-19 Pandemic The ongoing COVID-19 pandemic and related economic turmoil have affected and could continue to adversely affect proceeds to the Trust and quarterly cash distributions to unitholders. The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first nine months of 2020. The ongoing COVID-19 outbreak has reached more than 200 countries and has continued to be a rapidly evolving economic and public health situation. The pandemic has resulted in widespread adverse impacts on the global economy, and there is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as quarantines, shelter-in-place orders and business and government shutdowns. State and local authorities have also implemented multi-step policies with the goal of re-opening. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases. The Trust's reserves and quarterly cash distributions depend primarily upon the prices realized by Chesapeake from the sales of oil, natural gas and NGL. Chesapeake requires substantial expenditures to replace reserves, sustain production and fund its business plans. Low oil, natural gas and NGL prices negatively affect the amount of cash available for capital expenditures and debt repayment and the ability to borrow money or raise additional capital and, as a result, could have a material adverse effect on Chesapeake’s financial condition, results of operations, cash flows and reserves and the Trust’s reserves and quarterly cash distributions. There is no guarantee that any actions taken by Chesapeake in light of COVID-19 will be effective in preventing future disruptions to its business. Moreover, future operations of Chesapeake could be negatively affected if a significant number of its employees are quarantined as a result of exposure to the virus, which in turn could negatively affect proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders. Chesapeake regularly monitors the credit worthiness of its customers and derivative contract counterparties. Although Chesapeake has not received notices from any of its customers or counterparties regarding non-performance issues or delays resulting from the pandemic, it may have to temporarily shut down or further reduce production, which could result in significant downtime and have significant adverse consequences for its business, financial condition, results of operations and cash flows. Furthermore, the impact of the pandemic, including a resulting reduction in demand for oil and natural gas, coupled with the sharp decline in commodity prices following the announcement of price reductions and production increases in March 2020 by members of OPEC+ has led to significant global economic contraction generally and in our industry in particular. While an agreement to cut production has since been announced by OPEC+ and its allies, the situation, coupled with the impact of COVID-19, has continued to result in a significant downturn in the oil and gas industry. In April 2020, OPEC+ finalized an agreement to cut oil production by 9.7 million barrels per day during May and June 2020. On June 6, 2020, OPEC+ agreed to extend such production cuts until the end of July 2020. In July 2020, OPEC+ reduced the cut in production to 7.7 million barrels per day for August through December 2020. Despite the production cuts, crude oil prices have remain depressed as a result of an increasingly utilized global storage network and the decrease in crude oil demand due to COVID-19. Oil and natural gas prices are expected to continue to be volatile as a result of the near term production increases and the ongoing COVID-19 outbreak and as changes in oil and natural gas inventories, industry demand and national and economic performance 19 are reported, and we cannot predict when prices will improve and stabilize. We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on Chesapeake’s business, financial condition and results of operations or on proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders due to numerous uncertainties. The ultimate impact of COVID-19 will depend on future developments, including, among others, the ultimate geographic spread and severity of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, further actions taken by members of OPEC+, actions taken by governmental authorities, Chesapeake’s customers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. 20 ITEM 6. Exhibits The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K. INDEX OF EXHIBITS Incorporated by Reference Exhibit Number Exhibit Description Form SEC File Number Exhibit Filing Date Filed or Furnished Herewith 3.1 Certificate of Trust of Chesapeake Granite Wash Trust. S-1 333-175395 3.1 7/7/2011 3.2 Amended and Restated Trust Agreement, dated as of November 16, 2011, by and among Chesapeake Energy Corporation, Chesapeake Exploration, L.L.C., The Bank of New York Mellon Trust Company, N.A., as Trustee, and The Corporation Trust Company, as Delaware Trustee. 8-K 001-35343 3.1 11/21/2011 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Trustee’s Vice President. X 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Trustee’s Vice President. X 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 2020 CHESAPEAKE GRANITE WASH TRUST By: THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A, Trustee By: /s/ Sarah Newell Sarah Newell Vice President The registrant, Chesapeake Granite Wash Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available, and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that such function exists pursuant to the terms of the Trust Agreement under which it serves.