Chesapeake Energy Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. The filing identifies the registrant as Chesapeake Energy Corporation, not Expand Energy Corp.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total revenues and other | $3.370 billion | $935 million |
| Natural gas, oil and NGL sales | $1.453 billion | $1.914 billion |
| Net income (loss) | $1.389 billion | $(764) million |
| Diluted earnings (loss) per share | $9.60 | $(6.32) |
| Cash provided by operating activities | $889 million | $853 million |
| Capital expenditures | $497 million | $344 million |
| Cash from operations less capital expenditures | $392 million | $509 million |
| Adjusted gross margin, non-GAAP | $989 million; $2.70/Mcfe | $1.499 billion; $4.48/Mcfe |
| Cash and cash equivalents | $130 million | $130 million at Dec. 31, 2022 |
| Long-term debt, net | $2.040 billion | $3.093 billion at Dec. 31, 2022 |
Q1 2023 total revenues included $930 million of derivative gains and $335 million of gains on asset sales; the prior-year quarter included $2.125 billion of derivative losses. These items materially affect the year-over-year comparison. Operating cash flow less capital expenditures is a simple calculation, not the company’s adjusted free cash flow measure.
Production averaged 4.069 billion cubic feet equivalent per day, up from 3.719 billion. Average realized price, including realized derivatives, was $3.45/Mcfe versus $3.96/Mcfe. Net property and equipment was $10.523 billion, and stockholders’ equity was $10.283 billion at March 31.
Material changes versus the prior comparable period
- Natural gas, oil and NGL sales fell $461 million, chiefly due to lower commodity prices, which reduced sales by an estimated $512 million. Higher Marcellus volumes partly offset the decline; the Marcellus Acquisition had closed in March 2022.
- Adjusted gross margin declined $510 million, reflecting lower sales and changes in portfolio mix.
- The $1.389 billion net profit contrasts with the prior-year loss, primarily reflecting the swing in derivative results and the $335 million gain on the WildFire Eagle Ford divestiture.
- Debt declined by about $1.053 billion from year-end. The company reported no outstanding New Credit Facility borrowings at quarter-end, after making $1.050 billion of net repayments during the quarter.
- Cash from operations rose $36 million year over year, while capital expenditures increased $153 million. Divestiture proceeds were $931 million, compared with $403 million in Q1 2022.
Liquidity, capital allocation and outlook
- Management reported $2.1 billion of available liquidity at March 31: $130 million cash and $2.0 billion of unused New Credit Facility commitments. The facility has a $3.5 billion borrowing base and $2.0 billion of commitments; its borrowing base was reaffirmed in April 2023.
- The WildFire sale of a portion of Eagle Ford closed March 20, 2023, for approximately $1.425 billion, subject to adjustments. A separate sale to INEOS for approximately $1.4 billion closed April 28, 2023; the company reported proceeds of approximately $1.055 billion. Assets for that transaction were classified as held for sale at quarter-end.
- For 2023, management expected to bring online approximately 145–165 gross wells using 10–12 rigs and planned capital expenditures of $1.765–$1.835 billion, with about 85% directed to natural gas assets. Plans may change with business and market conditions.
- Management said cash from operations, divestiture proceeds, cash on hand and borrowing capacity should be sufficient for liquidity needs over the next 12 months and foreseeable future.
- Q1 dividends paid totaled $175 million. A May 2 declaration set a $1.18-per-share quarterly dividend for June 6, comprising $0.55 base and $0.63 variable; future dividends remain at the Board’s discretion. The company repurchased 792,543 shares for about $60 million during the quarter.
- Hedges covered approximately 55%–65% of projected natural gas volumes for the remainder of 2023. The company noted that hedging can reduce downside exposure but also limit cash flows when prices rise.
Risks, commitments and other notable items
- Management cited commodity-price volatility, inflation in services and labor, possible economic downturn, supply-chain constraints, interest rates, operational and reserve-estimation risks, litigation, environmental regulation, and the ability to meet debt covenants and fund distributions.
- Undiscounted gathering, processing and transportation commitments were approximately $4.16 billion through 2036. Chesapeake also had approximately $290 million remaining in its commitment to the Momentum Sustainable Ventures pipeline and carbon-capture project through 2024.
- The New Credit Facility includes current-ratio, net-leverage and PV-9 coverage covenants. Management reported no outstanding facility borrowings at quarter-end; the filing describes covenant requirements but does not provide actual covenant ratios.
- Litigation and regulatory matters are ongoing; management did not believe pending or threatened matters were likely to have a material adverse effect, while acknowledging ultimate losses could exceed accruals.
- The Haynesville gathering pipeline project is expected to enter service in Q4 2024; the carbon-sequestration component remains subject to regulatory approvals. Company-stated environmental objectives include net-zero Scope 1 and 2 emissions by 2035.
Key facts for investors to verify
- Separate recurring operating performance from the large derivative gains and divestiture gain included in Q1 earnings.
- Confirm final proceeds and post-closing adjustments for the WildFire and INEOS Eagle Ford transactions, including the timing and collection of deferred consideration.
- Track realized commodity prices, hedge coverage and hedge-related cash settlements as market prices change.
- Compare actual 2023 capital spending and well activity with management’s stated ranges, and assess funding needs against operating cash flow and liquidity.
- Review debt covenant compliance, the next borrowing-base redetermination and cash commitments for midstream contracts and the Momentum investment.
- Assess the sustainability of variable dividends and share repurchases, which are discretionary and subject to liquidity, covenants and market conditions.