SEC filing summary
Entity and period: The supplied filing is Chesapeake Energy Corporation’s Form 10-K for the fiscal year ended December 31, 2012, filed March 1, 2013. It is not identified in the filing as Expand Energy Corp.; verify the issuer before associating these results with that company. The filing reports full-year results, with separate quarterly data for 2012.
Business context and financial performance
Chesapeake was a large U.S. onshore natural gas and liquids producer, with interests in about 45,400 producing wells and average 2012 production of 3.886 bcfe per day. Management described a strategic shift from natural gas toward liquids and a focus on core assets.
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $12.316 billion | $11.635 billion |
| Natural gas, oil and NGL sales, including derivative effects | $6.278 billion | $6.024 billion |
| Operating income (loss) | $(1.694) billion | $2.921 billion |
| Net income (loss) | $(594) million | $1.757 billion |
| Net income (loss) attributable to Chesapeake | $(769) million | $1.742 billion |
| Loss per diluted common share | $(1.46) | Income of $2.32 |
| Cash provided by operating activities | $2.837 billion | $5.903 billion |
| Cash used in investing activities | $4.984 billion | $5.812 billion |
| Cash provided by financing activities | $2.083 billion | $158 million |
The 2012 operating loss included a $3.315 billion non-cash impairment of natural gas and oil properties. Other significant items included a $1.092 billion gain on sales of investments and a $200 million loss on debt repurchases. The auditor reported that the financial statements were fairly presented in accordance with U.S. GAAP and that internal control over financial reporting was effective as of year-end.
Operating trends, reserves and liquidity
- Production rose 19% to 1.422 tcfe. Natural gas production increased 12%, oil 84% and NGL 19%. Liquids were about 20% of production on a gas-equivalent basis but 59% of revenue including realized hedging.
- Natural gas sales price excluding unrealized derivative effects fell to $2.07 per mcf from $4.77; oil rose to $91.74 per barrel from $86.25; NGL fell to $29.37 per barrel from $38.12.
- Estimated proved reserves declined 17% to 15.690 tcfe from 18.789 tcfe. The filing attributes much of the decrease to lower gas prices and reports 5.414 tcfe of price-related downward revisions. Year-end SEC reserve pricing included $2.76 per mcf for gas.
- Capital expenditures were approximately $14.1 billion. The company said 2012 spending exceeded operating cash flow and was funded in part by asset sales and borrowing.
- Year-end debt was $12.620 billion, including current maturities; unrestricted cash was $287 million. Net debt was reported as $12.333 billion, and working capital was negative $3.318 billion. Cash availability, defined by the company as cash plus revolver capacity, was $4.338 billion.
- The $4.0 billion corporate revolver had no borrowings at year-end; the $500 million oilfield-services revolver had $418 million outstanding. A $464 million senior-note maturity was due in July 2013.
Material changes, outlook and risks
- Portfolio sales and debt plan: Chesapeake reported approximately $11.6 billion of 2012 asset-sale proceeds, including sales of Permian properties and most of its midstream business. It planned additional 2013 asset sales for $4–$7 billion and stated these proceeds were expected to support capital spending and debt reduction. Some planned sales were not under binding agreements.
- 2013 spending and funding: The 2013 capital budget was expected to be about 50% below 2012 spending. Management still forecast a funding gap of approximately $4 billion before planned asset-sale proceeds, and expected to use operating cash flow, revolver capacity and sales to fund the plan. Management projected covenant compliance and adequate liquidity through 2013, subject to its assumptions and execution of sales.
- Hedges: The company reported downside protection on about 50% of forecast 2013 gas production at an average $3.62 per mcf and 85% of oil production at an average $95.45 per barrel; it said about 72% of forecast 2013 commodity revenue was hedged. Hedge positions can limit upside, create collateral needs and expose the company to counterparty risk.
- Debt covenant pressure: Chesapeake amended its corporate revolver covenant after it said it would not have met the September 2012 leverage test without relief. The amended maximum debt-to-EBITDA ratio stepped down through 2013; the company reported a 3.91-to-1 ratio at December 31, 2012 and compliance at that date.
- Management and investigations: CEO Aubrey McClendon agreed to retire by April 1, 2013 or upon appointment of a successor. The SEC investigation into disclosure, accounting and financial-reporting matters was ongoing, with subpoenas issued; the company also disclosed shareholder and ERISA litigation and other governmental inquiries. The Board reported that its review found no intentional misconduct by McClendon or management in the matters it examined. The ultimate outcomes of pending proceedings were uncertain.
- Other exposures: Risks include commodity-price volatility, further reserve reductions or property impairments, dependence on asset-sale proceeds, high capital needs, gathering and pipeline constraints, hydraulic-fracturing and environmental regulation, and potentially material legal or regulatory costs. The filing also disclosed West Virginia Clean Water Act matters, including a $600,000 criminal fine paid by a subsidiary and expected additional monetary sanctions.
Most important facts for investors to verify
- Confirm the issuer identity: the filing is Chesapeake Energy Corporation, not Expand Energy Corp.
- Track whether announced 2013 asset sales closed on schedule and at expected proceeds, and whether proceeds reduced debt as planned.
- Review subsequent liquidity, cash flow, capital spending and compliance with the amended credit-facility covenants, including repayment of the 2013 notes.
- Assess reserve and impairment sensitivity to gas prices, reserve revisions, production results and development costs; SEC reserve values are estimates, not market value.
- Follow the CEO succession, SEC and other investigations, shareholder claims, and environmental proceedings for developments, costs or changes in exposure.
- Reconcile reported results with derivative gains and losses, the large non-cash impairment, asset-sale gains, and the company’s substantial contractual commitments.