EXPAND ENERGY Corp quarterly report, Q2 FY2013

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Business context and reporting period

Chesapeake Energy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, compared with the same periods in 2012. The filing describes an oil and gas producer focused on growing liquids production, improving capital discipline and selling noncore assets. The request identifies Expand Energy Corp, but the filing is for Chesapeake Energy Corporation; verify the intended issuer.

Financial and operating performance

  • Second-quarter revenue: $4.675 billion, up 38% year over year. Natural gas, oil and NGL revenue was $2.406 billion; marketing, gathering and compression revenue was $2.057 billion.
  • Second-quarter earnings: Operating income was $1.167 billion, versus $738 million. Net income was $625 million, versus $1.037 billion; income attributable to Chesapeake was $580 million. Net income available to common stockholders was $457 million, or $0.70 basic and $0.66 diluted per share, versus $929 million, or $1.45 basic and $1.29 diluted.
  • Six-month results: Revenue was $8.098 billion versus $5.807 billion; net income was $728 million versus $1.033 billion. Diluted EPS was $0.72 versus $1.25.
  • Production and pricing: Second-quarter production was 369.4 bcfe, up 7% year over year; oil production rose 44%. The average realized price excluding unrealized derivative gains was $4.96 per mcfe, versus $3.77. Liquids were 25% of production, up from 21% in the prior quarter.
  • Cash flow and investment: Six-month operating cash flow was $2.205 billion, versus $1.029 billion. Investing activities used $1.575 billion. Drilling and completion costs were $3.159 billion on the cash-flow statement; MD&A reports $3.131 billion net of partner drilling carries.
  • Liquidity and debt: June 30 cash was $677 million and total debt, net of discounts, was $13.057 billion. Management reported net debt of $12.380 billion and cash availability of $4.747 billion. Working capital was negative $2.028 billion. The $4.0 billion corporate revolver had no borrowings outstanding; $399 million was drawn on the $500 million oilfield services facility.

Material changes versus the prior comparable period

  • Second-quarter operating income improved, while net income and common EPS fell. The 2012 quarter included a $1.030 billion gain on investment sales; 2013 included $70 million of losses on debt purchases and substantial termination costs in the first half.
  • Six-month natural gas, oil and NGL revenue rose to $3.858 billion from $3.185 billion, reflecting higher realized prices and increased volumes. Production expenses per mcfe declined to $0.82 from $1.01; G&A per mcfe declined to $0.30 from $0.43.
  • Six-month cash flow from operations more than doubled, while drilling and completion cash expenditures declined year over year. The company completed a $1.110 billion Mississippi Lime joint venture with Sinopec and reported approximately $2.4 billion of asset-sale and joint-venture proceeds received during the first half.
  • Debt was refinanced and restructured: Chesapeake issued $2.3 billion of senior notes, tendered for certain notes, and redeemed $1.3 billion of 2019 notes. Total debt increased from $12.620 billion at year-end 2012 to $13.057 billion at June 30.

Outlook, commentary, risks and unusual items

  • Management projected 2013 drilling and completion costs of $5.7–$6.0 billion and full-year unproved-property acquisitions of $300–$350 million, net of joint-venture reimbursements. The 2013 capital expenditure budget was approximately 45% below 2012.
  • Management estimated a 2013 funding gap of approximately $3.5 billion, said asset-sale proceeds of approximately $3.6 billion through August 1 had fully funded it, and expected capital spending to exceed operating cash flow in the second half. It projected covenant compliance and adequate liquidity over the next 12 months; these expectations depend partly on asset-sale proceeds and operating assumptions.
  • As of June 30, downside protection covered approximately 79% of remaining 2013 estimated natural gas production at an average $3.70 per mcf and 94% of remaining 2013 estimated oil production at $95.64 per barrel. Derivatives reduce, but do not eliminate, commodity-price exposure; the reported fair-value liability for natural gas and oil derivatives was $425 million.
  • Material unusual items included $140 million of six-month employee termination benefits, including $64 million related to former CEO Aubrey McClendon, and $258 million of fixed-asset and other impairments, largely involving buildings and land. Fixed-asset sale gains were $158 million for the six months.
  • Key risks include commodity-price volatility, asset impairment, high capital needs and indebtedness, dependence on asset sales, covenant compliance, production and reserve uncertainty, and environmental, regulatory and litigation matters. The SEC investigation and DOJ/state inquiries were continuing. Chesapeake also disclosed an appeal concerning the redemption of its 2019 notes and unresolved proceedings for which potential losses could not be estimated; it expected certain environmental penalties exceeding $100,000, which management did not believe would be material.
  • Robert Lawler became CEO in June 2013 following McClendon’s departure. Disclosure controls were judged effective as of June 30, 2013, with no material change in internal control reported.

Important facts for investors to verify

  1. Confirm the intended issuer: the supplied filing is Chesapeake Energy Corporation, not Expand Energy Corp.
  2. Check how much of earnings and cash flow reflects commodity derivatives, including unrealized gains, and distinguish those effects from realized operating performance.
  3. Assess whether asset sales and joint ventures can continue to cover the projected funding gap, and account for the production, cash flow and collateral sold with producing assets.
  4. Review debt maturities, interest costs, revolving-facility covenants and the reported $12.380 billion of net debt; note the filing’s stated covenant ratio of approximately 3.00 to 1.00.
  5. Track production mix, realized prices, capital spending and impairment exposure, as well as the outcome of material litigation, regulatory investigations and post-closing sale contingencies.