EXPAND ENERGY Corp quarterly report, Q3 FY2015

SEC Filing Summary

Entity clarification: The supplied filing is Chesapeake Energy Corporation’s Form 10-Q, not an Expand Energy Corp filing. It covers the quarter and nine months ended September 30, 2015; amounts below are in U.S. dollars unless noted.

Business context and reporting period

Chesapeake reported results as a U.S. oil and natural gas producer with marketing, gathering and compression operations. Average production was approximately 667 thousand barrels of oil equivalent (mboe) per day in Q3 2015. The filing is unaudited and compares Q3 and the first nine months of 2015 with the corresponding 2014 periods.

Financial performance and condition

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Total revenue	$2.893 billion	$5.703 billion	$8.686 billion	$15.901 billion
Net income (loss)	$(4.639) billion	$692 million	$(12.450) billion	$1.387 billion
Net income (loss) available to common stockholders	$(4.695) billion	$169 million	$(12.628) billion	$687 million
Diluted earnings (loss) per share	$(7.08)	$0.26	$(19.07)	$1.04
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$1.055 billion	$3.805 billion

Q3 oil, natural gas and NGL revenue was $880 million, including derivative effects; reported marketing, gathering and compression revenue was $2.013 billion. Revenue declines principally reflected lower commodity prices.
Q3 operating loss was $5.453 billion, including a $5.416 billion oil and gas property impairment. The nine-month impairment totaled $15.407 billion. The impairment is a noncash accounting charge.
Average Q3 realized prices excluding derivatives were $41.25 per barrel of oil, $0.87 per mcf of natural gas and negative $1.38 per barrel of NGL. Including realized derivatives, the oil-equivalent price was $15.45 per boe versus $25.74 a year earlier.
Q3 production was 61.3 million boe, down from 66.8 million; nine-month production was 187.0 million boe, versus 190.7 million. Adjusted for asset sales, management said production increased year over year.
Cash and cash equivalents were $1.759 billion at September 30, 2015, down from $4.108 billion at year-end 2014. Working capital was negative $978 million, compared with positive $1.605 billion at year-end.
Cash used in investing activities was $2.905 billion and cash used in financing was $499 million over the first nine months. Capital spending for oil and gas, including capitalized interest, was approximately $3.1 billion.
Total debt, net, was $11.567 billion; $893 million was classified as current. Total assets were $21.286 billion and total equity was $4.546 billion.

Material changes versus the prior comparable period

Nine-month revenue fell about 45%, while the company moved from $1.387 billion of net income to a $12.450 billion net loss. Management attributed the loss primarily to impairment charges and revenue declines to sharply lower realized commodity prices.
Nine-month operating cash flow fell to $1.055 billion from $3.805 billion. Management cited lower realized prices, partly offset by derivative gains and lower operating costs.
Property and equipment, net, declined to $16.959 billion from $32.515 billion at December 31, 2014, largely reflecting impairments. Stockholders’ equity declined to $4.282 billion from $16.903 billion, with accumulated deficit of $11.017 billion.
In August, Chesapeake’s CHK C-T subsidiary sold its oil and gas properties and used proceeds and cash on hand to repurchase and cancel its preferred shares. This eliminated associated future preferred dividends, drilling commitments and ORRI obligations; Chesapeake also sold adjacent noncore properties for approximately $90 million.
The board eliminated quarterly common-stock cash dividends effective in Q3. Preferred-stock dividends continued.
Chesapeake reduced its workforce by approximately 15% in September and recorded about $55 million in termination charges, payable in Q4.

Outlook, management commentary, risks and contingencies

Management projected 2015 capital expenditures of $3.4–$3.9 billion, inclusive of capitalized interest, and planned to average 28 operating rigs for 2015, exiting the year with 14. The filing says the budget anticipated adequate cash to fund operations and contractual commitments, with the revolving facility expected to remain undrawn through year-end.
Management expected another material oil and gas property write-down in Q4. Based on then-current price assumptions, it estimated a roughly $2.9 billion reduction in the present value of proved-reserve future net revenue and anticipated further price-related reserve revisions. These are management estimates, not reported Q4 results.
At September 30, cash availability, defined by the company as unrestricted cash plus revolver capacity, was approximately $5.748 billion. The amended $4.0 billion revolving credit facility had no borrowings and $12 million of letters of credit outstanding. The amendment required liens on certain properties while secured, suspended the total leverage ratio covenant during that period, and established other leverage and interest-coverage tests. Chesapeake reported compliance with its financial covenants at quarter-end.
The first put date for $396 million principal amount of 2.75% contingent convertible notes due 2035 was November 15, 2015. Holders could require repurchase at par; the amount ultimately put was not known in this filing. The notes were included among current maturities.
In litigation over the 2013 redemption of its 2019 notes, a July 2015 judgment awarded the trustee $380 million plus $59 million of prejudgment interest. Chesapeake accrued $339 million in the first nine months, in addition to a prior $100 million accrual, and appealed while staying execution with a bond.
The company paid $114 million to settle Oklahoma royalty-owner litigation in Q3. It continued to face royalty claims, including Texas cases, and antitrust and royalty-practice investigations; management said some potential losses could not be estimated.
Undiscounted gathering, processing and transportation commitments totaled $14.348 billion. The filing also reported minimum future payments of approximately $321 million under drilling-service commitments and $265 million under pressure-pumping commitments.
Chesapeake anticipated $160–$180 million of Q4 2015 shortfall fees under Barnett and Haynesville gathering agreements. New Haynesville and dry-gas Utica agreements were expected to lower gathering rates beginning in 2016, subject to the stated acreage and volume commitments.
Other risks include commodity-price volatility, future impairments, reserve replacement and production uncertainty, debt and liquidity demands, derivative counterparty exposure, operational and environmental risks, and litigation. The filing states disclosure controls were effective at September 30, 2015.

Most important facts for an investor to verify

Confirm the issuer: this is Chesapeake Energy Corporation’s filing, despite the request metadata naming Expand Energy Corp.
Track cash, working capital, operating cash flow and the ability to fund capital spending and contractual obligations at subsequent reporting dates.
Check the outcome and cash impact of the November 2015 put right on the 2035 notes, and any refinancing or liquidity actions.
Review the final Q4 impairment, reserve revisions and commodity-price assumptions against management’s estimates in this filing.
Monitor the 2019-note redemption appeal and royalty, antitrust and environmental proceedings, including any changes to accrued or reasonably possible losses.
Assess whether production, cost reductions, gathering-agreement savings and hedge settlements support management’s liquidity and operating outlook.