Chesapeake Energy Corporation — Form 10-Q Summary
Entity note: The supplied filing identifies Chesapeake Energy Corporation as the registrant; it does not identify Expand Energy Corp. This summary reflects the filing’s stated registrant. Reporting period ended September 30, 2017; amounts are in U.S. dollars unless noted.
Business context and reporting period
Chesapeake is a U.S. oil and gas exploration and production company with marketing, gathering and compression operations. It reported results for the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Management’s stated priorities were developing core resource plays, reducing debt, improving margins and capital returns, and maintaining financial flexibility.
Financial performance and position
- Third-quarter revenue: $1.943 billion, down from $2.276 billion in Q3 2016. Oil, natural gas and NGL revenue was $979 million; marketing, gathering and compression revenue was $964 million.
- Third-quarter earnings: Operating income was $94 million, versus an operating loss of $1.234 billion in Q3 2016. Net loss was $17 million, or $0.05 per diluted share; net loss available to common stockholders was $41 million. Q3 2016 included substantial impairments.
- Nine-month earnings: Revenue was $6.977 billion, versus $5.851 billion in 2016. Net income was $619 million, and net income available to common stockholders was $506 million, or $0.56 per diluted share; the comparable 2016 period had a $4.058 billion net loss.
- Cash flow and investment: Nine-month operating cash flow was $273 million, compared with $50 million. Investing cash outflow was $602 million; drilling and completion cash costs were $1.597 billion. Cash declined from $882 million at year-end 2016 to $5 million at September 30, 2017.
- Margins and production: Q3 average production was 542 mboe per day, down 15% year over year; adjusted for asset sales, management said production was approximately unchanged versus the prior-year quarter. Q3 realized prices excluding derivatives rose across oil, gas and NGL. Marketing, gathering and compression recorded a $14 million loss, an improvement from a $162 million loss in Q3 2016.
- Debt and liquidity: Debt principal was $9.775 billion ($9.899 billion carrying value, net). Current liabilities exceeded current assets by $1.040 billion. The $3.8 billion revolving-credit borrowing base had $645 million drawn and $97 million used for letters of credit, leaving $3.043 billion available. The company reported covenant compliance at quarter-end.
- Equity: Total equity was a deficit of $704 million at September 30, 2017, compared with a $1.203 billion deficit at December 31, 2016.
Material changes versus the prior comparable period
- Nine-month production fell 19% to 532 mboe per day, mainly due to asset sales; nine-month oil and gas prices improved, lifting oil, gas and NGL revenue excluding derivatives by $531 million.
- Q3 oil, gas and NGL sales revenue including derivatives declined $198 million year over year. Derivatives reduced Q3 revenue by $70 million, compared with a $129 million increase in Q3 2016.
- Interest expense rose to $114 million in Q3 from $73 million and to $302 million for nine months from $197 million, primarily due to term-loan interest and lower capitalized interest.
- No oil and gas property ceiling-test impairment was recorded in 2017 through September, compared with $2.564 billion in the first nine months of 2016. Fixed-asset and other impairment charges were $426 million in the 2017 nine-month period, including costs associated with ending or assigning transportation commitments.
- The company sold Haynesville acreage and producing properties for approximately $915 million and reported about $1.3 billion of asset divestitures through November 1. It issued $750 million of 8% notes in the nine-month period and retired $1.609 billion principal amount of debt for $1.751 billion.
Outlook, risks, contingencies and unusual items
- Management projected 2017 capital expenditures of $2.3–$2.5 billion, inclusive of capitalized interest, compared with $1.7 billion in 2016. It anticipated higher Q4 production and said it expected to balance 2018 capital expenditures and operating cash flow.
- Management expected available cash, forecast operating cash flow and revolving-credit availability to fund planned spending, debt service and other obligations for the next 12 months, but cautioned that liquidity measures might not be sufficient. It cited commodity-price volatility, capital-market access, collateral demands and covenant compliance as material risks.
- As of October 31, the company reported downside hedges on approximately 62% of remaining 2017 oil production and 83% of remaining 2017 gas production, as well as significant 2018 oil and gas hedges. Derivative gains and losses materially affected reported revenue.
- Subsequent to quarter-end, Chesapeake issued $850 million aggregate principal of 8% notes due 2025 and 2027, reporting approximately $842 million net proceeds. It used proceeds for debt tenders and repurchased approximately $237 million principal of its term loan. Lenders reaffirmed the $3.8 billion borrowing base on October 30.
- Gathering, processing and transportation commitments totaled $9.587 billion undiscounted through 2035, excluding certain offsets and other adjustments described in the filing. Potential additional collateral requests were approximately $487 million; cash or letters of credit posted reduce revolver availability.
- Pending royalty and antitrust cases and environmental matters remain. The filing says potential losses in certain royalty cases are reasonably possible but cannot currently be estimated. The DOJ closed its investigation of royalty-payment practices with no action; other agency inquiries continued.
- Disclosure controls were concluded to be ineffective at September 30 because of a previously identified material weakness involving basis-price-differential calculations. Management reported remediation efforts underway.
- The filing states that prior-period comparative figures were revised for errors in 2016 impairment and DD&A calculations; management said those errors were not material to previously issued interim statements.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for Chesapeake Energy Corporation, not Expand Energy Corp.
- Assess liquidity and refinancing needs against only $5 million cash at quarter-end, the working-capital deficit, collateral exposure and large contractual commitments.
- Review the debt maturity schedule, post-quarter debt issuance and repurchases, borrowing-base terms, and continued covenant compliance.
- Distinguish operating performance from commodity-price and derivative effects, asset-sale impacts, and debt-repurchase gains.
- Track the material-weakness remediation and the status and potential financial exposure of royalty, antitrust and environmental proceedings.