Chesapeake Energy Corporation — Q1 2015 Form 10-Q
Filing identity: The supplied filing is for Chesapeake Energy Corporation, not Expand Energy Corp. It covers the unaudited quarter ended March 31, 2015, with comparisons to the quarter ended March 31, 2014. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and reporting period
Chesapeake explored for and produced oil, natural gas and natural gas liquids (NGL), and operated marketing, gathering and compression businesses. Its oilfield-services business had been spun off in June 2014. Management described a strategy centered on financial discipline, lower spending and costs, and improving returns from its existing resource base.
Financial and operating highlights
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $2.760 billion | $5.046 billion |
| Operating income (loss) | $(5.040) billion | $733 million |
| Net income (loss) | $(3.720) billion | $466 million |
| Net income (loss) attributable to Chesapeake | $(3.739) billion | $425 million |
| Loss per diluted common share | $(5.72) | 2014 diluted EPS: $0.54 |
| Cash provided by operating activities | $423 million | $1.291 billion |
| Cash and cash equivalents at period-end | $2.907 billion | $4.108 billion at Dec. 31, 2014 |
| Net debt carrying value | $11.508 billion | $11.535 billion at Dec. 31, 2014 |
- The $4.976 billion oil and gas property impairment drove the operating loss. Management attributed the impairment to the full-cost ceiling test and said future commodity prices could prompt further write-downs.
- Oil, natural gas and NGL sales, including derivative effects, were $1.085 billion, down from $1.766 billion. Before derivatives, sales were $924 million versus $2.148 billion, principally reflecting lower realized commodity prices.
- Production was 61.8 million barrels of oil equivalent (mmboe), versus 60.8 mmboe. Average realized prices excluding derivatives fell to $14.96 per boe from $35.35; oil was $41.16 per barrel, gas $1.61 per mcf and NGL $6.99 per barrel.
- Derivative gains increased oil, gas and NGL revenue by a net $161 million in Q1 2015, compared with a net $382 million decrease in Q1 2014. The period-end net derivative fair-value asset was $500 million for oil and gas commodity contracts.
- Investing cash outflow was $1.472 billion, including $1.306 billion of drilling and completion costs. Financing cash outflow was $152 million. Cash declined by $1.201 billion during the quarter.
- Working capital was approximately $32 million, versus $1.605 billion at year-end 2014. Management reported cash availability of $6.892 billion, defined as unrestricted cash plus revolving-credit capacity.
- The $4.0 billion unsecured revolving facility had no borrowings and $15 million of letters of credit outstanding. Chesapeake reported compliance with its financial covenants; net debt to capitalization was about 0.35:1 and leverage was about 2.01:1.
Material changes versus the prior comparable period
- Revenue declined by about 45%, while the company moved from $466 million of net income to a $3.720 billion net loss, primarily because of the impairment and steeply lower commodity prices.
- Operating cash flow fell to $423 million from $1.291 billion. Capital spending exceeded operating cash flow, contributing to the lower cash balance and liquidity measures.
- Production rose modestly to 61.8 mmboe from 60.8 mmboe, but commodity prices excluding derivatives fell sharply. Oil production increased, natural gas was broadly flat, and NGL production decreased.
- Marketing, gathering and compression generated a $25 million net loss before depreciation, compared with a $35 million net margin. Q1 2015 had no oilfield-services revenue or expense following the spin-off; Q1 2014 included $265 million of oilfield-services revenue.
- Total assets fell to $34.373 billion from $40.751 billion at Dec. 31, 2014, and equity fell to $14.373 billion from $18.205 billion, reflecting the impairment and quarterly loss.
Outlook, risks, contingencies and unusual items
- Spending and activity: Management projected 2015 capital expenditures of $3.5–$4.0 billion, including capitalized interest, and an average of 25–35 operated rigs, compared with 64 rigs in 2014. It expected drilling and completion spending in the remaining 2015 quarters to be significantly below Q1.
- Impairments and taxes: Management expected another material oil and gas property write-down in Q2 2015 based on subsequent commodity-price data, with further impairments possible if trailing 12-month prices declined. It also projected a year-end net deferred tax asset and said it was more likely than not that some such tax assets would not be realized.
- Liquidity and hedging: Management believed liquidity would be sufficient to fund operations and commitments and anticipated keeping the revolver undrawn through Dec. 31, 2015. It reported downside price protection on about 43% of projected remaining 2015 oil production and 40% of projected remaining 2015 gas production. These expectations depend on prices, production and spending assumptions.
- Debt maturity and put exposure: Current maturities included $500 million of 3.25% notes due in 2016 and $396 million of 2.75% contingent convertible notes subject to a holder put on Nov. 15, 2015. Holders could require repurchase at principal value. The filing reported total debt of approximately $11.7 billion for market-risk disclosure purposes.
- 2019 notes litigation: Chesapeake accrued $100 million related to the disputed 2013 redemption. It estimated a possible loss range of $100–$380 million, plus prejudgment interest; the court had not ruled as of May 5, 2015.
- Other legal matters: A negotiated Oklahoma royalty settlement required $119 million and awaited court consideration; that amount had been accrued in Q4 2014. A Michigan settlement provided for a contribution of up to $25 million, with misdemeanor pleas subject to dismissal if settlement terms were met. Other royalty, antitrust, derivative and environmental matters remained pending, with some potential losses not estimable.
- Commitments: Undiscounted gathering, processing and transportation commitments totaled $14.531 billion through 2099. The company also disclosed approximately $398 million of minimum future drilling-service payments and $367 million of minimum future pressure-pumping payments.
- Other unusual item: The filing recorded a $25 million legal-contingency charge in Q1 related to the Michigan matter. It also disclosed that lower planned drilling activity could trigger further contract-termination charges and fees for unused gathering or transportation capacity.
Most important facts for investors to verify
- Confirm the issuer and filing identity: this is Chesapeake Energy Corporation’s 2015 Q1 10-Q, not an Expand Energy filing.
- Review the commodity-price assumptions underlying the expected Q2 impairment and any subsequent ceiling-test write-downs.
- Assess the company’s ability to fund planned capital spending, contractual commitments and dividends from operating cash flow and available liquidity.
- Verify refinancing or repurchase plans for the 2015 contingent-note put and 2016 note maturity, and monitor revolver covenant headroom and credit ratings.
- Track the outcome and cash impact of the 2019-note dispute, Oklahoma royalty settlement approval, Michigan settlement and other royalty or regulatory proceedings.
- Evaluate the effect of hedges, including three-way collar exposure, on realized prices and cash flows if market prices change.