Business context and reporting period
The supplied filing is Chesapeake Energy Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed February 22, 2018. Although the request metadata names EXPAND ENERGY Corp, the filing itself identifies Chesapeake Energy Corporation; the summary below reflects the filing. Chesapeake is a U.S. onshore oil and gas exploration and production company, with operations across six principal areas. In Q4 2017, it reorganized marketing, gathering and compression as an ancillary activity and reported one operating segment: exploration and production.
Financial and operating results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $9.496 billion | $7.872 billion |
| Income (loss) from operations | $1.139 billion | $(4.411) billion |
| Net income (loss) available to common stockholders | $813 million; $0.90 per diluted share | $(4.915) billion; $(6.43) per diluted share |
| Cash provided by (used in) operating activities | $745 million | $(204) million |
| Oil-equivalent production | 200 million boe; 548,000 boe/day including divested assets | 233 million boe; 635,000 boe/day |
| Average realized price, excluding derivative effects | $22.88/boe | $16.63/boe |
| Production and gathering/transportation costs | $2.81/boe and $7.36/boe | $3.05/boe and $7.98/boe |
| Principal debt at year-end | $9.981 billion | $9.989 billion |
| Cash at year-end / net working capital | $5 million / deficit of $831 million | $882 million / deficit of $1.506 billion |
Reported 2017 operating income included a $233 million gain on debt repurchases/exchanges and benefited from $411 million of net oil, gas and NGL derivative gains. There was no oil and gas ceiling-test impairment in 2017, compared with $2.564 billion in 2016. The 2017 statement of operations also recorded $421 million of fixed-asset impairments and other charges. The filing reports no gross-profit margin measure; operating income was approximately 12.0% of revenue.
Q4 2017 revenue was $2.519 billion, operating income was $405 million, net income attributable to Chesapeake was $333 million, and net income available to common stockholders was $309 million ($0.34 per basic share).
Material changes versus the prior comparable period
- Revenue rose 21% year over year. Oil, gas and NGL sales increased 18%, chiefly because the average realized price per boe rose 38%; lower sales volumes partly offset the price benefit.
- Operating cash flow improved by $949 million, from cash use of $204 million to cash generation of $745 million. Management cited higher commodity prices and lower certain operating costs, partly offset by lower production volumes and specified legal and contract-termination payments.
- Reported earnings turned positive, aided by the absence of the prior-year oil and gas impairment and by debt-repurchase gains. These items make the earnings comparison less indicative of recurring operating performance.
- Total production fell 14%, largely reflecting asset sales; production adjusted for assets sold increased 3%. Fourth-quarter oil production averaged 100,000 barrels per day, up 11% from Q4 2016.
- Production and gathering, processing and transportation expenses declined by a combined $532 million. Per-boe production and transportation costs also decreased, while net G&A increased 9% to $262 million.
- Proved reserves rose 12% to 1.912 billion boe, net of divestitures. Proved undeveloped reserves increased to 796 million boe from 519 million boe, with revisions and development-plan changes affecting estimates.
- Principal debt was nearly unchanged year over year. The company generated $1.249 billion of net divestiture proceeds and used $2.592 billion of cash to repurchase $2.389 billion principal of debt.
Outlook, commentary, risks and unusual items
- For 2018, management forecast capital expenditures of $2.0–$2.4 billion, approximately 12% below 2017 spending, and expected modest production growth adjusted for asset sales. Its stated priorities were to reduce debt by $2–$3 billion, increase operating cash flow and improve margins and operating efficiency.
- As of February 22, 2018, approximately 74% of forecast 2018 oil production and 68% of forecast gas production were hedged. Management said it expected to continue hedging a portion of production; hedges also limit some benefit from rising prices.
- Management expected available cash flows and revolving-credit capacity to fund planned spending, debt service and other obligations for the next 12 months, but cautioned that this assurance did not extend beyond that period. Year-end revolver availability was approximately $2.888 billion, against a $3.8 billion borrowing base; redetermination was scheduled for Q2 2018.
- The company reported approximately $10.0 billion of principal debt, a $831 million working-capital deficit, and $5 million of cash at year-end. It warned that commodity-price declines, refinancing constraints, covenant compliance, collateral requirements and the June 2018 borrowing-base review could pressure liquidity. Debt maturities included $1.161 billion in 2019 and $2.048 billion in 2021.
- Contractual cash obligations totaled $23.198 billion, including $9.981 billion of debt principal, $3.774 billion of scheduled debt interest and $9.190 billion of operating commitments, principally gathering, processing and transportation agreements.
- Subsequent to year-end, Chesapeake agreed to sell Mid-Continent properties, including Mississippian Lime assets, for expected proceeds of approximately $500 million, and sold FTS International shares for approximately $74 million net. It also reduced its workforce by approximately 13%.
- Material risks include volatile commodity prices, high leverage and interest costs, reserve-estimation and development uncertainty, gathering and transportation commitments, environmental and hydraulic-fracturing regulation, water disposal and seismicity, and litigation. The filing describes numerous royalty-payment, antitrust and earthquake-related cases. A tentative settlement of substantially all Pennsylvania civil royalty cases was approximately $30 million; other potential losses were not clearly quantifiable. Environmental matters could also result in sanctions or remediation costs.
- Other notable items: Chesapeake paid $441 million in 2017 following the final adverse ruling concerning early redemption of its 6.775% notes due 2019; the 2017 tax provision was $2 million and included effects of the Tax Cuts and Jobs Act; and the company did not expect common-stock dividends in the foreseeable future. Management and PwC reported effective internal controls at year-end, and the previously identified reserve-valuation control weakness was reported remediated.
Important facts for investors to verify
- Confirm current liquidity, borrowing-base availability, covenant headroom and refinancing plans against subsequent filings and the Q2 2018 redetermination.
- Assess whether forecast 2018 production growth and $2.0–$2.4 billion capital spending can be achieved while reducing debt by the stated $2–$3 billion.
- Review debt maturities, interest expense, secured-credit terms and collateral demands, including the disclosed potential for additional counterparty collateral.
- Examine the sustainability of operating cash flow and earnings apart from derivative fair-value changes, debt gains and other unusual charges.
- Evaluate reserve revisions, PUD development spending and the assumptions behind the $7.49 billion PV-10, which is not a market-value estimate.
- Track royalty, antitrust, environmental and earthquake litigation, and the status and closing terms of announced asset sales.