SEC Filing Summary: Chesapeake Energy Corporation Form 10-Q
Entity note: The supplied filing is for Chesapeake Energy Corporation, not Expand Energy Corp. It covers the quarter and nine months ended September 30, 2009; comparative 2008 figures are adjusted for a retrospective accounting change where noted. Dollar amounts are in U.S. dollars.
Business context and reporting period
Chesapeake was a U.S. natural gas and oil producer, with operations spanning exploration and production, midstream services, and drilling and trucking operations. It reported production of 2.483 bcfe per day in Q3, up 7% from the prior-year quarter. Natural gas accounted for about 92% of production.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $1.811 billion | $7.491 billion | $5.480 billion | $8.648 billion |
| Operating income (loss) | $397 million | $5.478 billion | ($8.232 billion) | $2.842 billion |
| Net income (loss) | $192 million | $3.322 billion | ($5.306 billion) | $1.600 billion |
| Net income (loss) per diluted share | $0.30 | $5.62 | ($8.78) | $2.76 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $3.131 billion | $4.387 billion |
- Q3 natural gas and oil sales were $1.187 billion, including $687 million of realized derivative gains and $285 million of net unrealized derivative losses. Q3 2008 revenue included a large unrealized hedge mark-to-market gain; reported quarter-to-quarter revenue is therefore not a straightforward measure of underlying production economics.
- For the nine-month period, the $5.306 billion net loss primarily reflected $9.721 billion of impairment charges before tax, including approximately $6.0 billion after tax for natural gas and oil properties. The company also recorded $162 million of investment impairments.
- Nine-month cash from operations fell $1.256 billion year over year, which management attributed primarily to lower natural gas prices. Investing activities used $3.654 billion, down from $8.283 billion in 2008; financing activities used $706 million.
- At September 30, cash was $520 million, total current assets $2.508 billion and current liabilities $2.514 billion. Long-term debt, net, was $12.073 billion; cash-adjusted debt was approximately $11.553 billion. Debt, net of cash, was 47% of total capitalization, versus 40% at year-end 2008.
- Management reported $2.9 billion of available borrowing capacity at November 4, 2009. The general corporate revolver had $1.618 billion drawn against $3.5 billion capacity; the company’s covenant-defined debt-to-EBITDA ratio was 3.48x against a 3.75x limit.
- Common dividends were $0.075 per share for Q3 and $0.225 per share for the first nine months.
Material changes versus comparable periods
- Q3 production rose 7% year over year, while nine-month production increased about 6% to 664.6 bcfe. Realized prices excluding unrealized derivative gains and losses fell sharply: Q3 gas averaged $6.04/mcf versus $8.02, and oil averaged $66.42/bbl versus $75.74.
- Natural gas and oil derivative gains supported reported sales: nine-month realized gains were $1.802 billion, compared with $454 million of realized losses in the prior-year period. Derivative fair value declined from $1.305 billion at year-end 2008 to $384 million at September 30, 2009.
- The company reduced long-term debt from $13.175 billion at year-end 2008 to $12.073 billion. Cash declined from $1.749 billion to $520 million. Equity fell substantially, mainly due to the impairment-driven loss.
- Chesapeake formed a 50/50 midstream joint venture with Global Infrastructure Partners, received $588 million, and retained consolidated reporting control. It also accelerated approximately $1.1 billion of remaining Haynesville drilling-carry payments from PXP, in exchange for an approximately 10% reduction in those obligations.
Outlook, commentary, risks and unusual items
- Management budgeted capital expenditures, net of drilling carries, of $3.525–$3.900 billion for 2009 and $4.625–$5.000 billion for 2010. It said expected operating cash flow, cash resources, asset monetizations and other liquidity sources should fund the plans, while warning that weaker prices or economic conditions could require further spending cuts.
- Management said 75% of expected remaining 2009 production and 22% of expected 2010 production were hedged at average prices of $7.29/mcfe and $9.39/mcfe, respectively. It cited approximately $2.1 billion of remaining joint venture drilling carries as a source of cost support.
- The company recorded no Q3 full-cost oil and gas write-down: although its September 30 ceiling-test calculation indicated an approximately $1.2 billion after-tax impairment, higher commodity prices before filing eliminated the impairment under the applicable rules. A $6.0 billion after-tax write-down had been recorded for the first quarter.
- Other Q3 charges included an $82 million impairment of gathering systems contributed to the midstream joint venture, $4 million of related debt issuance-cost impairment, and a $38 million loss on sale of two gathering systems. Nine-month restructuring costs were $34 million; substantially all were expected to be paid by year-end.
- Significant off-balance-sheet or future commitments included minimum future payments of approximately $539 million for rig leases, $355 million for compressor leases, $862 million for a 40-year real estate surface-asset lease, and $2.282 billion of pipeline transportation demand charges. These are distinct commitments and should not be treated as current balance-sheet debt.
- Risks included commodity-price volatility and further ceiling-test impairments, substantial indebtedness and covenant headroom, hedging and counterparty exposure, reserve replacement and production execution, transportation constraints, and pending litigation. Securities and derivative shareholder actions were at preliminary stages; management said potential liabilities could not then be estimated.
- Subsequent to quarter-end, holders exchanged $125 million of 2.25% convertible notes for 3.5 million common shares; the company expected to record an approximately $21 million debt-exchange loss.
Most important facts for investors to verify
- Whether cash flow, remaining revolver availability and covenant ratios provide adequate liquidity under lower commodity prices; the reported covenant debt-to-EBITDA ratio was close to its stated maximum.
- How much reported earnings and cash generation depend on derivative settlements, hedge prices, collateral requirements and counterparty performance.
- The impact of the 2009 impairment, reserve revisions and the new reserve-reporting rules on proved reserves and future ceiling-test exposure.
- Whether planned capital spending, asset sales, production growth and joint venture drilling carries are achieved as projected.
- The full economic burden and terms of lease, pipeline, drilling and other commitments, as well as the outcomes of pending litigation.