Chesapeake Energy Corporation — Q1 2016 Form 10-Q
The filing is by Chesapeake Energy Corporation and covers the three months ended March 31, 2016, compared with the same period in 2015. Chesapeake reported that its strategy was to maximize liquidity, improve margins and reduce spending amid depressed oil, natural gas and NGL prices.
Key financial and operating metrics
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $1.953 billion | $3.218 billion |
| Net loss | $921 million | $3.720 billion |
| Net loss available to common stockholders | $964 million; $1.44 per diluted share | $3.782 billion; $5.72 per diluted share |
| Operating cash flow | $(421) million | $423 million |
| Capital spending, including capitalized interest | Approximately $365 million | Approximately $1.486 billion |
| Cash and cash equivalents | $16 million | $825 million at Dec. 31, 2015 |
| Net working capital | Deficit of approximately $1.341 billion | Deficit of approximately $1.205 billion at Dec. 31, 2015 |
| Debt principal | $9.425 billion; $367 million drawn on revolving facility | — |
- Oil, natural gas and NGL production revenue before derivative effects was $812 million, down from $1.382 billion. Average realized prices before derivatives fell year over year: oil to $29.34 per barrel from $44.33, natural gas to $1.75 per mcf from $2.92, and NGL to $11.44 per barrel from $18.40.
- Production was 61 mmboe, approximately 672 mboe per day, down 2% year over year. Natural gas volumes rose 4%; oil fell 21% and NGL fell 7%.
- The company recorded an $853 million noncash oil and gas property impairment, versus $4.976 billion in Q1 2015. It reported a $952 million operating loss.
- Marketing, gathering and compression generated an $18 million net margin before depreciation, compared with a $25 million loss. The 2016 result included a $20 million unrealized supply-contract derivative gain.
- Oil and gas derivative gains increased reported revenue by $181 million in Q1 2016. Cash receipts on derivative settlements, net, were $267 million.
Material changes and financing
- Revenue fell 39% year over year, primarily because of lower commodity prices and lower prices in marketing operations; production volumes were relatively stable overall.
- Operating cash flow moved from $423 million provided to $421 million used, which management attributed mainly to lower realized prices and working-capital cash use.
- Chesapeake spent $472 million to reduce $558 million of debt principal, including open-market repurchases and debt exchanges. The transactions generated an approximately $100 million gain; exchanges also increased common shares outstanding.
- In April 2016, lenders reaffirmed the $4.0 billion borrowing base and postponed the next scheduled redetermination to June 15, 2017. The amendment suspended certain financial covenants through September 30, 2017, revised the interest-coverage test, required liens on substantially all assets and imposed a minimum-liquidity covenant.
- Preferred-stock dividends were suspended beginning in Q1; $43 million of quarterly preferred dividends were recorded in the loss available to common stockholders, and $43 million was in arrears at March 31. No common dividend was declared.
- The company reported approximately $1.625 billion of debt maturing or potentially put to it in 2017, including $902 million of notes subject to a May 2017 put right.
Outlook, risks and unusual items
- Management forecast 2016 capital expenditures, including capitalized interest, of $1.3–$1.8 billion, versus $3.6 billion spent in 2015. The plan was to fund spending with operating cash flow, cash, revolver availability and asset-sale proceeds.
- Management expected to meet planned spending, debt service and other obligations for the next 12 months, but warned that continued depressed prices, unsuccessful asset sales or limited access to financing could impair its ability to fund spending and debt service in 2017 and beyond.
- Management expected another material property write-down in Q2 2016. It estimated Q2 proved-reserve revisions of approximately negative 16% and a roughly $1.2 billion reduction in the present value of proved-reserve future net revenues from price declines and related reserve changes.
- As of May 3, Chesapeake had received collateral requests of approximately $281 million and posted or otherwise complied with requests for approximately $247 million. It could face additional requests of approximately $696 million, which could reduce liquidity or revolver availability. Credit ratings had been downgraded to Caa3 by Moody’s and CC by S&P.
- Chesapeake said it could be required to pay up to $440 million in 2016 in the 2019 Notes redemption litigation; the amount was accrued, and a $461 million supersedeas bond was supported by a revolver letter of credit.
- Asset transactions included approximately $140 million of Q1 divestiture proceeds and about $100 million of subsequent proceeds. The filing also describes executed divestiture agreements with expected gross proceeds of approximately $920 million, potential repurchase of four VPPs for approximately $245 million, and a May 2016 agreement to sell about 42,000 net STACK acres for approximately $470 million. These amounts may relate to overlapping transactions; the filing does not clearly reconcile them in the supplied text.
- Other exposures include royalty and antitrust claims, government investigations, shareholder and noteholder litigation, and environmental and induced-seismicity proceedings. Management said some royalty-case losses were reasonably possible but could not be estimated; final liabilities could exceed accruals.
- Undiscounted gathering, processing and transportation commitments totaled $14.064 billion. The company also disclosed minimum future drilling-service payments of $218 million and pressure-pumping payments of $161 million.
Most important facts for investors to verify
- Actual cash generation, cash balance, revolver availability and compliance with the amended minimum-liquidity and interest-coverage covenants.
- Completion, timing and net cash proceeds of announced asset sales, including whether stated proceeds overlap with VPP repurchases.
- 2017 debt maturities and put rights, refinancing prospects, and any additional collateral demands or credit-rating actions.
- Q2 impairment and reserve revisions, and the effects of commodity prices and hedges on realized cash flows.
- Potential cash requirements and outcomes from the 2019 Notes judgment, royalty disputes, investigations and other litigation.