Chesapeake Energy (ticker: CHK, exchange: New York Stock Exchange (.N))
News Release -
26-Apr-2004
Chesapeake Energy Corporation Posts Record Results for the 2004 First QuarterPrinter Friendly Version (pdf format)
Company Reports 2004 First Quarter Net Income Available to Common Shareholders
of $104 Million on Revenue of $563 Million and Production of 79 Bcfe
OKLAHOMA CITY, April 26 /PRNewswire-FirstCall/ -- Chesapeake Energy
Corporation (NYSE: CHK) today reported its financial and operating results for
the 2004 first quarter. For the quarter, Chesapeake generated net income
available to common shareholders of $104.4 million ($0.38 per fully diluted
common share), operating cash flow of $327.5 million (defined as cash flow
from operating activities before changes in assets and liabilities) and ebitda
of $348.1 million (defined as income before income taxes, interest expense,
and depreciation, depletion and amortization expense) on revenue of
$563.1 million.
The company's 2004 first quarter net income available to common
shareholders and ebitda include an unrealized after-tax mark-to-market loss of
$14.6 million resulting from the company's oil and natural gas and interest
rate hedging programs and an after-tax $4.4 million loss from the exchange or
repurchase of certain Chesapeake debt securities. These are items typically
excluded from analysts' estimates.
Excluding these items, Chesapeake's net income to common shareholders in
the 2004 first quarter would have been $123.4 million ($0.44 per fully diluted
common share) and ebitda would have been $369.0 million. These items did not
affect the calculation of operating cash flow.
Oil and Natural Gas Production and Proved Reserves Set Records
Production for the 2004 first quarter was 78.9 billion cubic feet of
natural gas equivalent (bcfe), an increase of 22.1 bcfe, or 39%, over the
56.8 bcfe produced in the 2003 first quarter and an increase of 5.6 bcfe, or
7.6%, over the 73.3 bcfe produced in the 2003 fourth quarter. The 22.1 bcfe
increase in this year's first quarter production over the first quarter of
2003's production consisted of 11.1 bcfe from organic drillbit growth and
11.0 bcfe generated from acquisitions. The company's organic growth rate
during the past 12 months was 20%, well above the company's forecasted organic
growth rate of 5% and among the very best organic growth performances reported
by public mid- and large-cap E&P companies for the past 12 months. In
addition, the 50/50 split between the company's growth through the drillbit
and growth through acquisitions reflects the company's balanced growth
strategy.
The 2004 first quarter's 78.9 bcfe of production was comprised of
70.1 billion cubic feet of natural gas (bcf) (89% on a natural gas equivalent
basis) and 1.47 million barrels of oil and natural gas liquids (mmbo) (11% on
a natural gas equivalent basis). Chesapeake's average daily production rate
for the quarter was 867 million cubic feet of natural gas equivalent
production (mmcfe), consisting of 770 mmcf of gas and 16,099 barrels of oil
and natural gas liquids. The 2004 first quarter was Chesapeake's eleventh
consecutive quarter of sequential production growth. During these eleven
quarters, Chesapeake's production has increased 102%, for an average
sequential quarterly growth rate of 6.6% and an average annualized growth rate
of 29%.
Average prices realized during the 2004 first quarter (including realized
gains or losses from oil and gas derivatives, but excluding unrealized gains
or losses on such derivatives) were $27.10 per barrel of oil (bo) and $5.62
per thousand cubic feet of natural gas (mcf), for a realized gas equivalent
price of $5.50 per thousand cubic feet of natural gas equivalent (mcfe).
Chesapeake's average realized pricing differentials to NYMEX during the
quarter were a negative $2.56 per bo and a negative $0.73 per mcf. Realized
gains or losses from hedging activities generated a $5.69 loss per bo and a
$0.48 gain per mcf, for a 2004 first quarter realized hedging gain of
$25.7 million, or $0.33 per mcfe.
The company drilled 118 gross (88 net) operated wells and participated in
another 137 gross wells (21 net) operated by other companies during the 2004
first quarter. Chesapeake invested $129 million in the operated wells and
$47 million in the non-operated wells. The company's drilling success rate
was 92% for operated wells and 99% for non-operated wells.
During the 2004 first quarter, the company replaced its 78.9 bcfe of
production by 473%, or 372.8 bcfe at a drilling and acquisition cost of $1.66
per mcfe. Drillbit replacement was 146% and acquisition replacement was 327%.
At the end of the first quarter, Chesapeake's estimated proved reserves were
3.5 tcfe.
Key Operational and Financial Statistics for the 2004 First Quarter
The table below summarizes Chesapeake's key statistics during the 2004
first quarter and compares them to the 2003 fourth quarter and the 2003 first
quarter:
Three Months Ended:
3/31/04 12/31/03 3/31/03
Average daily production (in
mmcfe) 867 797 631
Gas as % of total production 89 90 89
Natural gas production (in bcf) 70.1 66.3 50.4
Average realized gas price
($/mcf) (A) 5.62 5.15 4.51
Oil production (in mbbls) 1,465 1,165 1,060
Average realized oil price
($/bo) (A) 27.10 23.76 27.27
Natural gas equivalent
production (in bcfe) 78.9 73.3 56.8
Gas equivalent realized price
($/mcfe) (A) 5.50 5.03 4.52
General and administrative
costs ($/mcfe) .10 .10 .09
Production taxes ($/mcfe) .19 (D) .28 .33
Lease operating expenses ($/mcfe) .57 .49 .55
Interest expense ($/mcfe) (A) .48 .51 .62
DD&A of oil and gas properties
($/mcfe) 1.52 1.41 1.35
Operating cash flow ($ in
millions) (B) 327.5 262.4 167.7
Operating cash flow ($/mcfe) 4.15 3.58 2.95
Ebitda ($ in millions) (C) 348.1 257.8 232.0
Ebitda ($/mcfe) 4.41 3.52 4.09
Net income to common shareholders
($ in millions) 104.4 62.4 70.0
(A) includes the effects of realized gains or (losses) from hedging, but
does not include the effects of unrealized gains or (losses) from
hedging
(B) defined as cash flow provided by operating activities before changes
in assets and liabilities
(C) defined as income before income taxes, interest expense, and
depreciation, depletion and amortization expense
(D) includes pre-tax benefit of $6.8 million, or $0.09 per mcfe, from
prior period severance tax credits
Significant Balance Sheet Improvement Achieved during 2004 First Quarter
Since the beginning of 2004, Chesapeake has closed acquisitions totaling
$570 million. In conjunction with these acquisitions, the company raised
$298 million of common equity and $305 million of 4.125% convertible preferred
equity. Chesapeake's debt-to-total capitalization ratio is now 46%, the
lowest in its 11 years as a public company.
Additionally, through a series of debt exchanges completed during recent
months, Chesapeake has extended the average maturity of its long-term debt to
over nine years and has reduced its average fixed interest rate to 7.7%. The
company's secured credit facility is currently rated as investment grade and
the company believes its business strategy and operational performance will
lead to an investment grade credit rating for its unsecured debt in the
future.
Chesapeake Updates 2004 Production Forecasts and Hedging Information
Chesapeake's updated 2004 second quarter and full-year 2004 forecasts are
attached to this release in an Outlook dated April 26, 2004 labeled Schedule
"A". This Outlook has been changed from the Outlook dated March 23, 2004
(attached as Schedule "B" for investors' convenience) to reflect an initial
forecast for the 2004 second quarter and a revised forecast for the full-year
2004.
Chesapeake's average daily production in 2004 is expected to exceed 2003's
production by approximately 175 mmcfe, or 24%, while average daily production
in the 2004 second quarter is expected to exceed 2003's second quarter
production by approximately 167 mmcfe, or 23%. In addition, average daily
production in the 2004 second quarter is expected to exceed 2004's first
quarter production by approximately 40 mmcfe, or 4.6%.
The following table details Chesapeake's hedged oil and natural gas
positions:
Hedged Positions as of April 26, 2004
Oil Natural Gas
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
2004 1Q 87% $28.58 99% $5.97
2004 2Q 100% $30.00 75% $5.00
2004 3Q 96% $30.32 58% $4.94
2004 4Q 95% $30.10 47% $5.13
2004 Total 95% $29.80 69% $5.35
2005 9% $31.56 27% $5.03
2006 --- --- 10% $4.88
2007 --- --- 8% $4.76
Depending on changes in oil and natural gas futures markets and
management's view of underlying oil and natural gas supply and demand trends,
Chesapeake may either increase or decrease its hedged positions at any time in
the future without notice.
Management Summary
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Chesapeake generated record results for its shareholders again this quarter,
following an especially strong 2003 performance. With the filing of our peer
companies' Form 10-K reports for 2003, we have now been able to compare our
company's 2003 performance with our peer group's 2003 performance. We hope
that you will agree that Chesapeake's performance in 2003 was exceptional:
-- #1 in stock price appreciation, up 75%;
-- #1 in proved reserves growth, up 44%;
-- #1 in production growth, up 48%;
-- #1 in % of gas production, up 90%;
-- #1 in shareholders' equity % increase, up 91%;
-- #1 (tied) for lowest amount of goodwill booked, zero;
-- #1 in oil and natural gas revenue per mcfe, $4.79;
-- #1 in lowest G&A per mcfe, $0.09;
-- #1 in ebitda per mcfe, $3.88;
-- #2 (tied) for lowest LOE per mcfe, $0.51;
-- #4 in cash flow per mcfe, $3.37.
-- CHK's peer companies are: Apache, Anadarko, Burlington, Cabot,
Devon, EnCana, EOG, Forest, Kerr-McGee, Noble, Newfield, Pogo,
Pioneer, Vintage, and XTO.
"Although we obviously can not guarantee a repeat of these rankings in
2004 or in future years, we do believe the combination of Chesapeake's focused
product and geographic strategies, value-added risk management strategy,
balanced acquisition and drilling programs, high quality assets and low
operating costs will enable our company to continue delivering one of the
industry's best track records of value creation for years to come."
Conference Call Information
A conference call has been scheduled for Tuesday morning, April 27, 2004
at 9:00 a.m. EDT to discuss this earnings release. The telephone number to
access the conference call is 913.981.5572. For those unable to participate
in the conference call, a replay will be available from 12:00 p.m. EDT,
April 27, 2004 through midnight EDT on Friday, May 14, 2004. The number to
access the conference call replay is 719.457.0820 and the passcode is 149305.
The conference call will also be simulcast live on the Internet and can be
accessed at www.chkenergy.com by selecting "Conference Calls" under the
"Investor Relations" section. The webcast of the conference call will be
available on the website for one year.
This press release and the accompanying Outlooks include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements give our current expectations or forecasts of future events. They
include estimates of oil and gas reserves, expected oil and gas production and
future expenses, projections of future oil and gas prices, planned capital
expenditures for drilling, leasehold acquisitions and seismic data, and
statements concerning anticipated cash flow and liquidity, business strategy
and other plans and objectives for future operations. Disclosures concerning
derivative contracts and their estimated contribution to our future results of
operations are based upon market information as of a specific date. These
market prices are subject to significant volatility. Although we believe the
expectations and forecasts reflected in these and other forward-looking
statements are reasonable, we can give no assurance they will prove to have
been correct. They can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. Factors that could cause actual results to
differ materially from expected results are described under "Risk Factors" in
Item 1 of our 2003 10-K. They include the volatility of oil and gas prices;
adverse effects our substantial indebtedness could have on our operations and
future growth; our ability to compete effectively against strong independent
oil and gas companies and majors; the cost and availability of drilling and
production services; possible financial losses as a result of our commodity
price and interest rate risk management activities; uncertainties inherent in
estimating quantities of oil and gas reserves, including reserves we acquire,
projecting future rates of production and the timing of development
expenditures; exposure to potential liabilities of acquired properties; our
ability to replace reserves; the availability of capital; changes in interest
rates; and drilling and operating risks. We caution you not to place undue
reliance on these forward-looking statements, which speak only as of the date
of this press release, and we undertake no obligation to update this
information.
Chesapeake Energy Corporation is one of the six largest independent U.S.
natural gas producers. Headquartered in Oklahoma City, the company's
operations are focused on exploratory and developmental drilling and producing
property acquisitions in the Mid-Continent, Permian Basin, South Texas and
onshore Texas Gulf Coast regions of the United States. The company's Internet
address is www.chkenergy.com .
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
THREE MONTHS ENDED: March 31, 2004 March 31, 2003
$ $/mcfe $ $/mcfe
REVENUES:
Oil and gas sales 419,793 5.32 286,019 5.04
Oil and gas marketing
sales 143,336 1.82 90,308 1.59
Total Revenues 563,129 7.14 376,327 6.63
OPERATING COSTS:
Production expenses 44,803 0.57 31,457 0.55
Production taxes 14,936 0.19 18,597 0.33
General and
administrative 8,166 0.10 5,379 0.09
Stock based
compensation 1,869 0.02 --- ---
Provision for legal
settlements --- --- 286 0.01
Oil and gas marketing
expenses 139,664 1.77 89,358 1.58
Oil and gas
depreciation,
depletion, and
amortization 119,908 1.52 76,614 1.35
Depreciation and
amortization of
other assets 5,739 0.08 3,684 0.06
Total Operating
Costs 335,085 4.25 225,375 3.97
INCOME FROM OPERATIONS 228,044 2.89 150,952 2.66
OTHER INCOME (EXPENSE):
Interest and other
income 1,343 0.02 763 0.01
Interest expense (46,545) (0.59) (37,004) (0.65)
Loss on repurchases or
exchanges of Chesapeake
debt (6,925) (0.09) --- ---
Total Other Income
(Expense) (52,127) (0.66) (36,241) (0.64)
Income Before Income
Taxes and Cumulative
Effect of Accounting
Change 175,917 2.23 114,711 2.02
Income Tax Expense:
Current --- --- --- ---
Deferred 63,327 0.80 43,591 0.77
Total Income Tax
Expense 63,327 0.80 43,591 0.77
NET INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE,
NET OF TAX 112,590 1.43 71,120 1.25
Cumulative Effect of
Accounting Change,
Net of Income Tax of
$1,464,000 --- --- 2,389 0.04
NET INCOME 112,590 1.43 73,509 1.29
Preferred Stock
Dividends (8,168) (0.11) (3,526) (0.06)
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS 104,422 1.32 69,983 1.23
EARNINGS PER COMMON SHARE:
Basic
Income Before
Cumulative Effect of
Accounting Change $0.44 $0.34
Cumulative Effect of
Accounting Change --- 0.01
Net Income $0.44 $0.35
Assuming dilution
Income Before
Cumulative Effect of
Accounting Change $0.38 $0.31
Cumulative Effect of
Accounting Change --- 0.01
Net Income $0.38 $0.32
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING
(in 000's)
Basic 236,884 197,608
Assuming dilution 299,241 230,672
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's)
(unaudited)
March 31, December 31,
2004 2003
Cash $189,425 $40,581
Other current assets 382,043 301,823
TOTAL CURRENT ASSETS 571,468 342,404
Property and equipment (net) 4,888,923 4,133,117
Other assets 97,071 96,770
TOTAL ASSETS $5,557,462 $4,572,291
Current liabilities $742,572 $513,156
Long term debt 2,012,147 2,057,713
Asset retirement obligation 57,476 48,812
Long term liabilities 46,280 28,774
Deferred tax liability 368,808 191,026
TOTAL LIABILITIES 3,227,283 2,839,481
STOCKHOLDERS' EQUITY 2,330,179 1,732,810
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,557,462 $4,572,291
COMMON SHARES OUTSTANDING 240,788 216,784
CHESAPEAKE ENERGY CORPORATION
SUPPLEMENTAL DATA - OIL & GAS SALES AND INTEREST EXPENSE
Three Months Ended
March 31,
2004 2003
Oil and Gas Sales ($ in thousands):
Oil sales $48,031 $35,140
Oil derivatives - realized gains (losses) (8,330) (6,238)
Oil derivatives - unrealized gains (losses) (6,019) (77)
Total oil sales $33,682 $28,825
Gas sales $360,101 $314,050
Gas derivatives - realized gains (losses) 33,991 (86,620)
Gas derivatives - unrealized gains (losses) (7,981) 29,764
Total gas sales $386,111 $257,194
Total oil and gas sales $419,793 $286,019
Average Sales Price (excluding gains (losses)
on derivatives):
Oil ($ per bbl) $32.79 $33.15
Gas ($ per mcf) $5.14 $6.23
Gas equivalent ($ per mcfe) $5.17 $6.15
Average Sales Price (excluding unrealized
gains (losses) on derivatives):
Oil ($ per bbl) $27.10 $27.27
Gas ($ per mcf) $5.62 $4.51
Gas equivalent ($ per mcfe) $5.50 $4.52
Interest Expense ($ in thousands):
Interest $38,564 $35,704
Derivatives - realized (gains) losses (758) (674)
Derivatives - unrealized (gains) losses 8,739 1,974
Total Interest Expense $46,545 $37,004
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED CASH FLOW DATA
(in 000's)
(unaudited)
THREE MONTHS ENDED: March 31, March 31,
2004 2003
Cash provided by operating activities $335,733 $99,052
Cash (used in) investing activities $(735,434) $(1,002,289)
Cash provided by financing activities $548,545 $693,604
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF CERTAIN FINANCIAL MEASURES
(in 000's)
(unaudited)
March 31, March 31,
THREE MONTHS ENDED: 2004 2003
CASH PROVIDED BY OPERATING ACTIVITIES $335,733 $99,052
Adjustments:
Changes in assets and liabilities (8,216) 68,661
OPERATING CASH FLOW* $327,517 $167,713
* Operating cash flow represents net cash provided by operating
activities before changes in assets and liabilities. Operating cash
flow is presented because management believes it is a useful adjunct to
net cash provided by operating activities under accounting principles
generally accepted in the United States (GAAP). Operating cash flow is
widely accepted as a financial indicator of an oil and gas company's
ability to generate cash which is used to internally fund exploration
and development activities and to service debt. This measure is widely
used by investors and rating agencies in the valuation, comparison,
rating and investment recommendations of companies within the oil and
gas exploration and production industry. Operating cash flow is not a
measure of financial performance under GAAP and should not be
considered as an alternative to cash flows from operating, investing,
or financing activities as an indicator of cash flows, or as a measure
of liquidity.
March 31, March 31,
THREE MONTHS ENDED: 2004 2003
Net income before cumulative effect of
accounting change $112,590 $71,120
Deferred income tax expense 63,327 43,591
Interest expense 46,545 37,004
Depreciation and amortization of other assets 5,739 3,684
Oil and gas depreciation, depletion and
amortization 119,908 76,614
EBITDA** $348,109 $232,013
**Ebitda represents net income (loss) before cumulative effect of
accounting change, income tax expense (benefit), interest expense, and
depreciation, depletion and amortization expense. Ebitda is presented
as a supplemental financial measurement in the evaluation of our
business. We believe that it provides additional information regarding
our ability to meet our future debt service, capital expenditures and
working capital requirements. This measure is widely used by investors
and rating agencies in the valuation, comparison, rating and investment
recommendations of companies. Ebitda is also a financial measurement
that, with certain negotiated adjustments, is reported to our banks
under our bank credit facilities and is used in our financial covenants
under our bank credit facilities and our indentures governing our
senior notes. Ebitda is not a measure of financial performance under
GAAP. Accordingly, it should not be considered as a substitute for net
income, income from operations, or cash flow provided by operating
activities prepared in accordance with GAAP. Ebitda is reconciled to
cash provided by operating activities as follows:
March 31, March 31,
THREE MONTHS ENDED: 2004 2003
CASH PROVIDED BY OPERATING ACTIVITIES $335,733 $99,052
Changes in assets and liabilities (8,216) 68,661
Interest expense, realized 37,806 35,030
Unrealized gains (losses) on oil and gas
derivatives (14,000) 29,687
Other non-cash items (3,214) (417)
EBITDA $348,109 $232,013
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF ADJUSTED EARNINGS & ADJUSTED EBITDA
($ In 000'S, except per share amounts)
Three Months Ended
March 31, 2004
Net income to common shareholders $104,422
Adjustments, net of tax:
Unrealized (gains) losses from hedging 14,553
Loss on repurchases or exchanges of debt 4,432
Adjusted earnings* $123,407
Adjusted earnings per share assuming dilution $0.44
EBITDA $348,109
Adjustments, before tax:
Unrealized (gains) losses from oil and gas hedging 14,000
Loss on repurchases or exchanges of debt 6,925
Adjusted EBITDA* $369,034
*Adjusted earnings and adjusted EBITDA, both non-GAAP financial measures,
exclude certain items that management believes affect the comparability
of operating results. The Company discloses these non-GAAP financial
measures as a useful adjunct to GAAP earnings and EBITDA because:
a. Management uses adjusted earnings and adjusted EBITDA to evaluate
the Company's operational trends and performance relative to other
oil and gas producing companies.
b. Adjusted earnings and adjusted EBITDA are more comparable to
earnings and EBITDA estimates provided by securities analysts.
c. Items excluded generally are one-time items, or items whose timing
or amount cannot be reasonably estimated. Accordingly, any guidance
provided by the Company generally excludes information regarding
these types of items.
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF APRIL 26, 2004
Quarter Ending June 30, 2004; Year Ending December 31, 2004.
We have adopted a policy of periodically providing investors with guidance
on certain factors that affect our future financial performance. As of
April 26, 2004, we are using the following key assumptions in our projections
for the second quarter of 2004 and the full-year 2004.
The primary changes from our March 23, 2004 guidance are explained as
follows:
1) We have replaced our 2004 first quarter forecast with our initial
forecast for the 2004 second quarter.
2) We have updated the projected effects from changes in our hedging
positions.
3) We have included estimates of non-cash expense associated with the
issuance of restricted stock under stock-based compensation plans.
4) We have included our expectations for future NYMEX oil and gas
prices to illustrate hedging effects only. They are not a forecast
of our expectations for 2004 oil and natural gas prices.
Quarter Ending Year Ending
June 30, 2004 December 31, 2004
Estimated Production:
Oil - Mbo 1,540 6,185
Gas - Bcf 73 - 74 293 - 299
Gas Equivalent - Bcfe 82 - 83 330 - 336
Daily gas equivalent midpoint - in Mmcfe 907 910
NYMEX Prices (for calculation of realized
hedging effects only):
Oil - $/Bo $28.67 $29.45
Gas - $/Mcf $4.96 $5.04
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.75 -$2.72
Gas - $/Mcf -$0.70 -$0.71
Estimated Realized Hedging Effects (based
on expected NYMEX prices above):
Oil - $/Bo $1.34 $0.57
Gas - $/Mcf $0.13 $0.28
Operating Costs per Mcfe of Projected
Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7% of O&G
revenues) $0.28 - 0.30 $0.28 - 0.32
General and administrative $0.10 - 0.11 $0.10 - 0.11
Stock based compensation (non-cash) $0.02 - 0.03 $0.02 - 0.03
DD&A - oil and gas $1.52 - 1.56 $1.52 - 1.60
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (A) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 36% 36%
Equivalent Shares Outstanding:
Basic 241 mm 247 mm
Diluted 304 mm 305 mm
Capital Expenditures:
Drilling, leasehold and seismic $200 - $225 mm $850 - $900 mm
(A) Does not include gains or losses on interest rate derivatives
(SFAS 133).
Commodity Hedging Activities
Periodically the company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include:
(i) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due to
or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside exposure
of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
Commodity markets are volatile, and as a result, Chesapeake's hedging
activity is dynamic. As market conditions warrant, the company may elect to
settle a hedging transaction prior to its scheduled maturity date and, as a
result, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in
order to mitigate a portion of its exposure to adverse market changes in oil
and natural gas prices. Accordingly, associated gains or loses from the
derivative transactions are reflected as adjustments to oil and gas sales.
All realized gains and losses from oil and natural gas derivatives are
included in oil and gas sales in the month of related production. Pursuant to
SFAS 133, certain derivatives do not qualify for designation as cash flow
hedges. Changes in the fair value of these non-qualifying derivatives that
occur prior to their maturity (i.e. because of temporary fluctuations in
value) are reported currently in the consolidated statement of operations as
unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any
change in fair value resulting from ineffectiveness is recognized currently in
oil and natural gas sales.
The company currently has in place the following natural gas swaps:
% Hedged
Open Swap
Avg. NYMEX Positions
Avg. NYMEX Price as a % of
Strike Including Estimated
Open Price Open Assuming Gas Total
Swaps Of Open Gain from & Locked Production Gas
in Bcf's Swaps Locked Swaps Positions in Bcf's of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 70.1 99%
2nd Qtr 55.0 $5.00 $0.00 $5.00 73.5 75%
3rd Qtr 43.7 $4.94 $0.00 $4.94 75.0 58%
4th Qtr 35.4 $5.13 $0.00 $5.13 76.0 47%
Total
2004 203.6 $5.34 $0.01 $5.35 294.6 69%
Total
2005 81.2 $5.03 $0.00 $5.03 305.0 27%
Total
2006 32.9 $4.88 $0.00 $4.88 315.0 10%
Total
2007 25.6 $4.76 $0.00 $4.76 325.0 8%
TOTALS
2004-2007 343.3 $5.18 $0.01 $5.19 1,239.6 28%
The company has also entered into the following natural gas basis
protection swaps:
Assuming Gas
Annual Production
Volume in Bcf's NYMEX less: in Bcf's of: % Hedged
2004 157.4 0.173 294.6 53%
2005 109.5 0.156 305.0 36%
2006 47.5 0.155 315.0 15%
2007 63.9 0.166 325.0 20%
2008 64.0 0.166 335.0 19%
2009 37.0 0.160 345.0 11%
Totals 479.3 $0.164* 1,919.6 25%
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
Open Swap
Positions as
Assuming Oil % of Total
Open Swaps Avg. NYMEX Production Estimated
in Mmbo's Strike Price in Mmbo's of: Production
Q1 - 2004* 1,270 $28.58 1,465 87%
Q2 - 2004* 1,540 $30.00 1,540 100%
Q3 - 2004* 1,519 $30.32 1,590 96%
Q4 - 2004* 1,518 $30.10 1,590 95%
Total 2004* 5,847 $29.80 6,185 95%
Total 2005* 548 $31.56 6,360 9%
*Swaps with a knockout price of $21.00, with the exception of 2,000 bopd
in 2004 with a knockout price of $24.00, with an additional 1,000 bopd
in Q2 2004 at $24.00, 1,000 bopd in Q3 and Q4 2004 with a knockout price
of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of $22.00,
3,000 bopd in 2/04 at a knockout price of $22.00 and 1,500 bopd from
4/04 through 12/05 at a knockout price of $26.00.
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF MARCH 23, 2004
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF APRIL 26, 2004
Quarter Ending March 31, 2004; Year Ending December 31, 2004.
We have adopted a policy of periodically providing investors with guidance
on certain factors that affect our future financial performance. As of
March 23, 2004, we are using the following key assumptions in our projections
for the first quarter of 2004 and the full-year 2004.
The primary changes from our February 23, 2004 guidance are explained as
follows:
1) We have increased our full-year 2004 production forecast to reflect
the four acquisitions announced today and better than expected recent
drilling results.
2) We have updated the projected effects from changes in our hedging
positions.
3) We have included our expectations for future NYMEX oil and gas prices
to illustrate hedging effects only. They are not a forecast of our
expectations for 2004 oil and natural gas prices.
4) The equivalent shares outstanding numbers did not change as a result
of today's announced preferred stock offering because the conversion
structure of the preferred stock is not expected to cause an
immediate increase in fully diluted shares.
Quarter Ending Year Ending
March 31, 2004 December 31, 2004
Estimated Production:
Oil - Mbo 1,450 6,100
Gas - Bcf 69 - 70 293 - 299
Gas Equivalent - Bcfe 78 - 79 330 - 336
Daily gas equivalent midpoint - in Mmcfe 863 910
NYMEX Prices (for calculation of
realized hedging effects only):
Oil - $/Bo $33.58 $28.06
Gas - $/Mcf $5.69 $4.99
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.69 -$2.55
Gas - $/Mcf -$0.66 -$0.61
Estimated Realized Hedging Effects (based
on expected NYMEX prices above):
Oil - $/Bo -$4.56 +$0.86
Gas - $/Mcf +$0.43 +$0.27
Operating Costs per Mcfe of Projected
Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7% of
O&G revenues) $0.32 - 0.34 $0.28 - 0.32
General and administrative (A) $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.48 - 1.52 $1.50 - 1.55
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (B) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 247,000 m
Diluted 302,000 m 304,000 m
Capital Expenditures:
Drilling, leasehold and seismic $175 - $200 mm $750 - $800 mm
(A) Does not include non-cash expense associated with the issuance of
restricted stock.
(B) Does not include gains or losses on interest rate derivatives
(SFAS 133).
Commodity Hedging Activities
Periodically the company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include:
(i) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due to
or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside exposure
of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
Commodity markets are volatile, and as a result, Chesapeake's hedging
activity is dynamic. As market conditions warrant, the company may elect to
settle a hedging transaction prior to its scheduled maturity date and, as a
result, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in
order to mitigate a portion of its exposure to adverse market changes in oil
and natural gas prices. Accordingly, associated gains or loses from the
derivative transactions are reflected as adjustments to oil and gas sales.
All realized gains and losses from oil and natural gas derivatives are
included in oil and gas sales in the month of related production. Pursuant to
SFAS 133, certain derivatives do not qualify for designation as cash flow
hedges. Changes in the fair value of these non-qualifying derivatives that
occur prior to their maturity (i.e. because of temporary fluctuations in
value) are reported currently in the consolidated statement of operations as
unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any
change in fair value resulting from ineffectiveness is recognized currently in
oil and natural gas sales.
The company currently has in place the following natural gas swaps:
% Hedged
Open Swap
Avg. NYMEX Positions
Avg. NYMEX Price as a % of
Strike Including Estimated
Open Price Open Assuming Gas Total
Swaps Of Open Gain from & Locked Production Gas
in Bcf's Swaps Locked Swaps Positions in Bcf's of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 69.5 98%
2nd Qtr 53.2 $4.97 $0.00 $4.97 74.0 72%
3rd Qtr 40.9 $4.87 $0.00 $4.87 75.0 54%
4th Qtr 32.7 $5.05 $0.00 $5.05 76.0 43%
Total
2004 196.3 $5.31 $0.01 $5.32 294.5 66%
Total
2005 81.2 $5.03 $0.00 $5.03 305.0 27%
Total
2006 32.9 $4.88 $0.00 $4.88 315.0 10%
Total
2007 25.6 $4.76 $0.00 $4.76 325.0 8%
TOTALS
2004-2007 336.0 $5.15 $0.01 $5.16 1,239.5 27%
The company has also entered into the following natural gas basis
protection swaps:
Assuming
Annual Gas Production
Volume in Bcf's NYMEX less: in Bcf's of: % Hedged
2004 157.4 0.173 290.5 54%
2005 109.5 0.156 305.0 36%
2006 47.5 0.155 315.0 15%
2007 63.9 0.166 325.0 20%
2008 64.0 0.166 335.0 19%
2009 37.0 0.160 345.0 11%
Totals 479.3 $0.164* 1,915.5 25%
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
Open Swap
Positions
Assuming Oil as % of Total
Open Swaps Avg. NYMEX Production Estimated
in Mmbo's Strike Price in Mmbo's of: Production
Q1 - 2004* 1,270 $28.58 1,390 91%
Q2 - 2004* 1,419 $29.63 1,575 90%
Q3 - 2004* 1,182 $29.47 1,590 74%
Q4 - 2004* 1,058 $29.15 1,590 67%
Total 2004* 4,929 $29.22 6,145 80%
Total 2005* 548 $31.56 6,360 9%
*Swaps with a knockout price of $21.00, with the exception of 2,000 bopd
in 2004 with a knockout price of $24.00, with an additional 1,000 bopd
in Q2 2004 at $24.00, 1,000 bopd in Q3 and Q4 2004 with a knockout price
of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of $22.00,
3,000 bopd in 2/04 at a knockout price of $22.00 and 1,500 bopd from
4/04 through 12/05 at a knockout price of $26.00.
SOURCE Chesapeake Energy Corporation
CONTACT: Marc Rowland, Executive Vice President and Chief Financial
Officer, +1-405-879-9232, or Tom Price, Jr., Senior Vice President-Investor
Relations, +1-405-879-9257, both of Chesapeake Energy Corporation
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Chesapeake Energy
