Chesapeake Energy Corporation — 2013 Form 10-K
Filing identity and period: The supplied filing is Chesapeake Energy Corporation’s Form 10-K for the fiscal year ended December 31, 2013, filed February 26, 2014. This does not match the request metadata identifying EXPAND ENERGY Corp or “2013 Q4”; the filing reports full-year results and unaudited quarterly data.
Business context and reporting period
Chesapeake was a major U.S. onshore natural gas and oil producer, with interests in approximately 46,800 wells. Average 2013 production was about 670 thousand barrels of oil equivalent (boe) per day. The company focused on financial discipline, divestitures and more profitable growth from its resource base, and reorganized into Northern and Southern operating divisions. CEO Robert Lawler took office in June 2013.
Financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $17.506 billion | $12.316 billion |
| Net income (loss) | $894 million | $(594) million |
| Net income (loss) available to common stockholders | $474 million | $(940) million |
| Diluted earnings (loss) per share | $0.73 | $(1.46) |
| Cash from operating activities | $4.614 billion | $2.837 billion |
| Cash used in investing activities | $2.967 billion | $4.984 billion |
| Cash from (used in) financing activities | $(1.097) billion | $2.083 billion |
| Cash and cash equivalents at year-end | $837 million | $287 million |
| Long-term debt, net | $12.886 billion | $12.157 billion |
| Total equity | $18.140 billion | $17.896 billion |
Natural gas, oil and NGL sales were $7.052 billion, up from $6.278 billion. Production rose 3% to 244 million boe; oil production increased 32%, NGL production 19%, while natural gas production declined 3%. Sales price excluding derivative gains and losses averaged $28.33/boe versus $22.61/boe. Reported total revenue also includes substantial marketing, gathering and compression revenue recorded gross: that segment generated $9.559 billion of revenue but only $98 million of net margin before depreciation, compared with $119 million in 2012. Oilfield services net margin was $159 million, up from $142 million.
Production expense declined to $4.74/boe from $5.50/boe; G&A expense declined to $1.86/boe from $2.26/boe. DD&A was $10.59/boe, broadly unchanged year over year. Interest expense rose to $227 million from $77 million. The company reported a $546 million fixed-asset and other impairment charge and $248 million of restructuring and termination costs. No natural gas and oil property ceiling-test impairment was recorded in 2013; 2012 included a $3.315 billion charge.
Fourth quarter: Revenue was $4.541 billion; net loss attributable to Chesapeake was $116 million and loss available to common stockholders was $159 million, or $(0.24) per share. The quarter included $203 million of fixed-asset impairments and $123 million of losses on extinguishment of other financing.
Material changes versus the prior comparable period
- Chesapeake returned to annual profitability after 2012’s loss, supported by higher realized commodity prices, increased liquids production and lower unit production and G&A costs.
- Operating cash flow increased by $1.777 billion. The company attributed the improvement mainly to higher realized prices, increased oil and NGL sales volumes and lower unit costs.
- Capital spending fell materially: drilling and completion costs were $5.490 billion versus $8.707 billion; additions to other property and equipment were $972 million versus $2.651 billion. Net cash from investing activities benefited from asset-sale proceeds.
- Proved reserves increased 2% to 2.678 billion boe. Proved undeveloped reserves fell to 869 million boe from 1.124 billion boe, including 355 million boe of downward PUD revisions; proved developed reserves rose to 68% of total reserves from 57%.
- Debt, net of unrestricted cash, declined by approximately $284 million according to management, although reported long-term debt increased year over year. Divestitures and a strategic joint venture generated substantial funding for capital spending and balance-sheet objectives.
Outlook, commentary, risks and contingencies
- Management projected 2014 capital expenditures of $5.2–$5.6 billion, about 20% below 2013 spending, and expected capital expenditures to approximate operating cash flow. The company said its 2014 capital budget was not dependent on asset sales.
- Management expected approximately $1 billion of proceeds in 2014 from identified asset sales, post-closing adjustments and other transactions, excluding any potential oilfield-services transaction. On February 24, 2014, Chesapeake announced it was exploring a sale or spin-off of its oilfield-services business.
- At year-end, cash availability was approximately $4.909 billion, including cash and revolving-facility availability. The $4.0 billion corporate revolving facility was undrawn; the separate $500 million oilfield-services facility had $405 million outstanding. Working capital was negative by approximately $1.859 billion.
- Management projected covenant compliance under its 2014 plan. The corporate facility’s indebtedness-to-EBITDA covenant was 4.00:1.00; the reported year-end ratio was approximately 2.70:1.00. Failure to meet covenants could trigger acceleration and cross-defaults.
- Commodity exposure remained material: about 73% of proved reserves were natural gas. The company had price protection on approximately 68% of forecast 2014 gas production at an average $4.15/mcf and 58% of forecast oil production at an average $93.92/barrel. Derivatives can limit upside, require collateral and expose the company to counterparty risk.
- Key risks include commodity-price volatility, substantial leverage and capital needs, reserve-estimation uncertainty, development execution, gathering and transportation constraints and significant contractual commitments. Undiscounted gathering, processing and transportation commitments totaled $17.190 billion, including $2.002 billion due in 2014; the company also disclosed $36.188 billion of total contractual cash obligations under its summary table.
- The company disclosed continuing SEC and other governmental investigations, shareholder and derivative litigation, and royalty disputes. It entered a West Virginia environmental consent decree requiring an approximately $3 million penalty, restoration and monitoring; a related 2012 Clean Water Act guilty plea resulted in a $600,000 penalty. Management stated it could not predict outcomes of certain proceedings.
- The workforce reduction affected approximately 900 employees, with broader organizational changes reducing headcount by approximately 1,000. Management anticipated future savings but warned of further potential impairment, lease-termination, debt-extinguishment and unused-capacity charges.
The independent auditor gave an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and procedures were effective at December 31, 2013.
Important facts for investors to verify
- Confirm the filing entity and period: this document is Chesapeake Energy Corporation’s 2013 annual 10-K, not an EXPAND ENERGY Corp filing or a quarterly 10-Q.
- Assess debt maturities, interest costs, covenant headroom and the distinction between reported debt and management’s net-debt measure.
- Review the assumptions and engineering basis for proved reserves and the significant reduction in PUDs, including required development spending and timing.
- Examine the sustainability of operating cash flow and the 2014 capital-spending plan, including gathering and transportation charges and asset-sale assumptions.
- Track the results of the oilfield-services strategic review, outstanding litigation and investigations, and environmental restoration obligations.
- Distinguish gross marketing revenue from net margin, and separate recurring operating performance from impairments, restructuring costs, derivative marks and asset-sale gains.