Chesapeake Energy Corporation — Q3 2020 Form 10-Q
Filing identity: The filing is for Chesapeake Energy Corporation, not Expand Energy Corp. It covers the quarter and nine months ended September 30, 2020; amounts below are in U.S. dollars unless noted.
Business context and reporting period
Chesapeake is an independent U.S. oil and gas exploration and production company. It filed for Chapter 11 on June 28, 2020 and was operating as a debtor-in-possession at quarter-end. Its common stock had been delisted from the NYSE and traded on OTC Pink as CHKAQ.
Financial performance and liquidity
- Q3 revenue and results: Total revenues were $959 million, down 53% from $2.059 billion a year earlier. The company reported an operating loss of $111 million and a net loss of $745 million, versus a $61 million net loss in Q3 2019. Q3 results included $611 million of net reorganization expense.
- Nine-month results: Total revenues were $3.991 billion, down 39% from $6.591 billion. Net loss was $9.334 billion, compared with net income of $16 million in 2019; this included $8.522 billion of impairments, principally the $8.446 billion impairment of proved oil and gas properties.
- Production and prices: Q3 production averaged 445 thousand barrels of oil equivalent per day, down from 478 thousand. Average oil, natural gas and NGL sales were $16.40 per boe, versus $22.79. Management attributed lower sales primarily to weaker prices and reduced volumes from curtailments, natural declines and shut-in wells.
- Cash flow: Nine-month operating cash flow was $1.155 billion, compared with $1.182 billion in 2019. Investing cash outflow was $958 million, including $946 million of drilling and completion costs; financing provided $103 million. Cash at September 30 was $306 million, up from $6 million at year-end 2019.
- Debt and liquidity: Total debt carrying amount was $9.095 billion. The balance sheet classified $1.929 billion as current maturities and $7.166 billion as liabilities subject to compromise in Chapter 11. Net working capital deficit was $2.033 billion. The company had no DIP borrowings outstanding at quarter-end and reported up to $925 million of new-money DIP capacity.
- Costs and margins: Q3 marketing margin was negative $2 million, versus negative $12 million a year earlier. The filing does not provide a clear consolidated profit-margin measure; Q3 operating loss was $111 million.
Material changes versus the prior comparable period
- Q3 oil, gas and NGL sales fell 33% to $672 million; nine-month sales declined 41% to $2.006 billion. Lower realized prices were the primary driver, with lower sales volumes also contributing.
- Nine-month capital spending on drilling and completion fell to $946 million from $1.640 billion. The company reduced its 2020 capital expenditure forecast to $1.0–$1.2 billion from 2019 spending of $2.2 billion.
- DD&A declined to $170 million in Q3 from $573 million, largely reflecting the lower asset carrying value after first-quarter impairments.
- The company repurchased $160 million principal amount of senior notes for $95 million and recognized a $65 million gain. It also suspended preferred dividends beginning with the second quarter of 2020.
Outlook, restructuring, risks and unusual items
- Restructuring: A restructuring support agreement and proposed plan contemplated new equity for certain creditor classes and cancellation of existing common and preferred equity without a distribution. The plan remained subject to Bankruptcy Court approval. The proposed exit facilities were conditional, including minimum liquidity of $500 million, leverage no greater than 2.25:1 and asset coverage of at least 1.50:1.
- Going concern: Management stated that substantial doubt existed about the company’s ability to continue as a going concern. Continued operations depended on DIP covenant compliance, plan approval and implementation, and obtaining exit financing.
- Operating actions: Workforce reductions affected approximately 13% of employees in April and a further 12% in September; expected annualized savings were approximately $70 million. Wells were shut in and turn-ins delayed during the downturn. Management said it expected remaining 2020 capital expenditures to focus primarily on natural gas assets.
- Market risks: Management expected continued oil and gas price volatility and warned that depressed demand and prices, including COVID-19 impacts, could materially adversely affect business, cash flows and liquidity. Commodity hedges were subject to Chapter 11-related minimum hedging requirements.
- Other notable items: Contract terminations generated an $80 million expense and removed approximately $169 million of future gathering and transportation commitments. A proposed Mid-Continent asset sale had a $85 million stalking-horse bid and remained subject to an auction and court approval. Litigation included royalty claims, a $215 million arbitration demand and lawsuits related to a fatal well-control incident; outcomes and potential losses were uncertain.
- Equity risk: The filing warned that trading in existing shares was highly speculative and that the restructuring plan contemplated cancellation of current equity with no recovery.
Important facts for investors to verify
- Whether the plan of reorganization was confirmed and became effective, and the final treatment of each creditor and equity class.
- Whether exit financing conditions were satisfied and whether liquidity remained adequate through emergence from Chapter 11.
- The final allowed claims and liabilities subject to compromise; the company said claims reconciliation could materially change reported amounts.
- Completion and final proceeds of the proposed Mid-Continent asset sale, and any subsequent changes to capital spending or production outlook.
- Current status and potential financial exposure from material litigation, contract claims and other contingencies.