Filing Summary: Chesapeake Energy Corporation, Q1 2012
Registrant note: The filing identifies Chesapeake Energy Corporation as the registrant, not Expand Energy Corp. It covers the three months ended March 31, 2012, compared with the first quarter of 2011. Dollar amounts below are in millions unless noted.
Business context and financial performance
Chesapeake was a large U.S. natural gas and oil producer, with marketing, gathering and compression, and oilfield services businesses. It reported shifting investment toward liquids-rich plays as low natural gas prices pressured returns from dry-gas production.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $2,419 | $1,612 |
| Operating income (loss) | $6 | ($284) |
| Net income (loss) | ($3) | ($162) |
| Net loss attributable to Chesapeake | ($28) | ($162) |
| Net loss available to common stockholders | ($71); ($0.11) per share | ($205); ($0.32) per share |
| Cash provided by operating activities | $274 | $718 |
| Cash and cash equivalents, quarter-end | $438 | $849 |
Revenue rose about 50%, while operating results improved substantially from the prior-year loss. Natural gas and oil revenue increased to $1,068 from $494, notwithstanding much lower realized gas prices, as production grew and derivative losses were smaller. Natural gas production was 270.8 bcf; liquids production was 10.3 million barrels. Total production rose 18% to 3.658 bcfe per day. Liquids represented 61% of unhedged natural gas and oil revenue, versus 34% in the prior-year quarter.
Balance sheet, debt, liquidity and cash flow
- Total assets were $45,589 at March 31, 2012, up from $41,835 at year-end 2011. Current assets were $3,924 and current liabilities were $6,664, a working-capital deficit of approximately $2,740.
- Long-term debt, net, was $13,082, up from $10,626 at year-end. Management reported net long-term debt, net of unrestricted cash, of approximately $12.6 billion, an increase of about $2.4 billion during the quarter.
- Chesapeake reported approximately $2.4 billion of cash availability at quarter-end, compared with $3.1 billion at year-end. The corporate revolver had $2,462 outstanding against $4,000 capacity; availability on midstream and oilfield-services facilities was constrained by covenants.
- Operating cash flow of $274 was more than offset by $3,650 of investing outflows. Financing provided $3,463, including $1,044 of proceeds from sales of noncontrolling interests and $1,263 net proceeds from senior notes. Cash increased by $87 during the quarter.
- Natural gas and oil derivative instruments had a reported net fair-value liability of approximately $1,743. Derivative results materially affected reported revenue and include noncash mark-to-market changes.
Changes, outlook and material matters
- Commodity exposure: Realized natural gas price, excluding unrealized derivative effects, fell to $2.35 per mcf from $5.31. Management said forecast natural gas production was not protected against downward price adjustments by derivatives; oil hedges also carried basis risk.
- Capital program: Management forecast 2012 drilling and completion spending, net of drilling carries, of $7.5–$8.0 billion, plus $1.6 billion of net undeveloped-leasehold spending. It projected 2013 drilling and completion spending of $6.5–$7.0 billion and leasehold spending of about $500 million. Other projected capital expenditures were $2.5–$3.5 billion in 2012 and $2.0–$2.5 billion in 2013.
- Production and drilling plans: Management projected liquids production averaging approximately 115,000 barrels per day in 2012, exceeding 150,000 in 2013 and reaching 250,000 by 2015. It planned to reduce operated rigs from 154 as of May 1 to approximately 125 in Q3 2012, and dry-gas rigs to an average of 12 in the second half of 2012. The company curtailed natural gas production amid low prices.
- Debt-reduction target depends on monetizations: The 25/25 Plan targeted net long-term debt of no more than $9.5 billion by year-end 2012 and 25% production growth over 2010–2012. Management estimated 2012 closed or planned monetizations could generate $11.5–$14 billion, but disclosed there were no binding agreements for the planned transactions and no assurance they would close or produce expected proceeds. Failure to raise funds could require spending reductions or additional financing.
- Transactions and commitments: The quarter included a $745 million VPP, a $1.25 billion Cleveland-Tonkawa investment by third parties in exchange for preferred interests and royalty rights, and a $1.3 billion senior-note issuance used to repay revolver debt. An April 2012 sale of Texoma Woodford acreage generated approximately $572 million. Undiscounted gathering, processing and transportation commitments totaled $13.606 billion; additional disclosed commitments included rig leases of about $423 million, compressor leases of about $466 million, and drilling contracts of about $351 million.
- Governance, litigation and environmental matters: The filing disclosed shareholder and derivative litigation concerning the CEO’s Founder Well Participation Program (FWPP), an SEC informal inquiry and document-preservation request, and an internal board review. The board announced early termination of the FWPP effective June 30, 2014, without compensation, and plans for an independent non-executive chair. Chesapeake said the SEC inquiry was not an indication that a violation occurred. The company also described EPA/DOJ Clean Water Act investigations in West Virginia, for which it expected monetary sanctions but did not expect a material financial effect; it could not estimate potential loss in a separate certified class action concerning a 2008 stock offering.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is Chesapeake Energy Corporation’s 2012 Q1 10-Q, not a filing by Expand Energy Corp.
- Track realized commodity prices, derivative settlements and mark-to-market effects, including the extent of production actually protected by hedges.
- Assess whether planned asset sales and other monetizations closed on expected terms and whether proceeds funded capital spending and the $9.5 billion year-end net-debt target.
- Review debt growth, revolver availability, covenant headroom and substantial off-balance-sheet and contractual commitments.
- Follow FWPP-related litigation and SEC developments, the board’s governance changes, and environmental proceedings and potential sanctions.