Chesapeake Energy Corporation — Q1 2013 Form 10-Q
Issuer note: The supplied filing is for Chesapeake Energy Corporation, not Expand Energy Corp. The unaudited reporting period ended March 31, 2013; comparisons are with the three months ended March 31, 2012.
Business context
Chesapeake reported exploration and production, marketing/gathering/compression, and oilfield services operations. Its strategy was shifting toward liquids production, developing core assets, improving capital efficiency, and selling noncore assets to fund investment and reduce debt.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $3.424 billion | $2.419 billion |
| Operating income | $217 million | $6 million |
| Net income (loss) | $102 million | $(3) million |
| Net income (loss) attributable to Chesapeake | $58 million | $(28) million |
| Net income (loss) available to common stockholders | $15 million; $0.02/share | $(71) million; $(0.11)/share |
| Cash provided by operating activities | $924 million | $274 million |
| Cash and cash equivalents, period end | $33 million | $438 million |
| Total debt, net | $13.449 billion | $12.620 billion at December 31, 2012 |
- Operating margin was approximately 6.3%, versus approximately 0.2% a year earlier. The filing does not provide a single headline net margin; reported net income included $44 million attributable to noncontrolling interests and $43 million of preferred dividends.
- Production was 358.1 bcfe, up 8% year over year; average daily production was 3.979 bcfe. Oil production rose 56%, NGL production 14%, and natural gas production 2%. Liquids were 24% of production on a gas-equivalent basis.
- Sales prices excluding unrealized derivative gains or losses averaged $4.46/mcfe versus $4.02/mcfe. Natural gas averaged $2.10/mcf, oil $95.23/barrel, and NGL $28.25/barrel. The period included $146 million of unrealized derivative losses in natural gas, oil and NGL sales.
- Cash used in investing was $1.745 billion and cash provided by financing was $567 million. Drilling and completion spending was $1.579 billion; total natural gas and oil expenditures, including other related items, were $1.859 billion.
- At March 31, current assets were $2.884 billion and current liabilities $5.785 billion, a $2.901 billion working-capital deficit. Management reported $3.262 billion of cash availability, including available revolving-facility capacity.
Changes versus prior comparable period
- Revenue increased 42%; operating income improved from $6 million to $217 million, and common-stockholder results improved from a $71 million loss to $15 million of income.
- Operating cash flow rose to $924 million from $274 million, which management attributed primarily to higher realized overall commodity prices, increased sales volumes, and lower unit operating costs.
- Production growth and a higher liquids mix lifted sales, while natural gas and NGL prices individually declined on the stated price measures. Natural gas equivalent production rose from 332.8 bcfe to 358.1 bcfe.
- Operating expenses included $133 million of employee retirement and termination benefits, compared with none in Q1 2012. DD&A rose to $726 million from $590 million; fixed-asset sale gains were $49 million versus $2 million.
- Debt, net of unrestricted cash, increased approximately $1.083 billion during Q1, to $13.416 billion. Unrestricted cash fell to $33 million from $287 million at year-end.
Outlook, risks and unusual items
- Management projected 2013 capital expenditures would remain above operating cash flow, but at a significantly smaller gap than in 2012. The 2013 capital expenditure budget was approximately 50% below 2012 spending; management estimated a $3.5 billion funding gap and planned $4–$7 billion of asset-sale proceeds.
- Management expected liquids production to increase approximately 27% in 2013 versus 2012. It reported downside price protection on approximately 78% of remaining 2013 estimated gas production at an average $3.72/mcf and 88% of estimated oil production at $95.43/barrel.
- Management expected covenant compliance and adequate liquidity through Q1 2014, based on its budget, commodity-price assumptions, hedges, forecast production, borrowing capacity, and asset sales. It cautioned that not all planned sales had binding agreements and that delayed, canceled, or lower-proceeds transactions could impair funding and debt-reduction plans.
- The $4.0 billion corporate revolver had $832 million outstanding and $31 million of letters of credit at quarter-end. The company was in compliance with covenants; its reported debt-to-EBITDA ratio was approximately 3.62x against an amended 4.75x limit for March 31, 2013. The covenant limit tightens to 4.00x after 2013.
- After quarter-end, Chesapeake issued $2.3 billion of notes and used proceeds for tenders and planned debt repayment, including redemption of $1.3 billion of 2019 notes. A court ruled for Chesapeake in a dispute over that redemption notice; payment was scheduled for May 13, 2013. Subsequent asset transactions included a $1.02 billion planned Mississippi Lime joint venture and announced midstream sales, subject to closing conditions.
- CEO Aubrey McClendon left on April 1, 2013; Steven Dixon became Acting CEO. Q1 included $64 million of estimated McClendon separation benefits and $56 million for a voluntary separation program, among other termination costs.
- Risks included continued natural-gas price exposure, potential impairments, high capital needs and leverage, covenant/cross-default provisions, execution and proceeds risk on asset sales, and litigation/regulatory matters. The filing described an ongoing SEC investigation and other inquiries; it stated that certain litigation losses could exceed accrued estimates. The company expected monetary sanctions exceeding $100,000 in EPA matters but did not expect a material consolidated financial effect.
Investor verification priorities
- Confirm that the intended filing is Chesapeake Energy’s 2013 Q1 10-Q, given the Expand Energy company label in the request.
- Track actual 2013 capital spending, operating cash flow, asset-sale closings and proceeds against management’s $3.5 billion funding-gap estimate and $4–$7 billion sale plan.
- Verify refinancing, tender and redemption completion, resulting debt balances, interest costs, and covenant headroom after the subsequent note transactions.
- Assess commodity prices, hedge coverage and settlements, including the large reported derivative liability and its effect on realized cash flows and reported earnings.
- Monitor production mix and growth, particularly whether projected liquids growth and production economics are achieved.
- Review developments in the SEC and other regulatory inquiries, litigation, and the financial or governance consequences of the leadership transition.