Business context and reporting period
This is Chesapeake Energy Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing identifies Chesapeake Energy—not “EXPAND ENERGY Corp”—as the registrant; investors should verify the company and filing match the intended security. Chesapeake is a U.S. oil and gas exploration and production company with marketing, gathering and compression operations.
Financial and operating performance
Unless otherwise noted, amounts are in U.S. dollars. In Q3 2016, revenue was $2.276 billion, down 33% from $3.376 billion a year earlier. Operating loss was $1.174 billion and net loss attributable to Chesapeake was $1.155 billion, or $1.54 per diluted share, versus a $4.652 billion attributable net loss, or $7.08 per share, in Q3 2015. The improvement in reported loss largely reflects substantially lower impairment charges; Q3 2016 still included significant impairments.
For the first nine months of 2016, revenue was $5.851 billion, down 42% year over year. Operating loss was $3.883 billion and net loss attributable to Chesapeake was $3.826 billion, or $5.47 per diluted share, compared with a $12.500 billion attributable net loss, or $19.07 per share, in the prior-year period. Oil, natural gas and NGL revenue was $2.610 billion for the period, down from $4.122 billion; lower prices and lower oil volumes were key factors.
- Q3 production averaged approximately 638,000 boe per day, down 4% year over year; adjusted for asset sales, management said production increased 2% versus the prior quarter.
- Q3 realized oil-equivalent price excluding derivatives was $17.86/boe, versus $18.52/boe a year earlier. Nine-month average was $15.27/boe, versus $20.21/boe.
- Q3 oil and gas property impairment was $433 million; fixed-asset and other impairments were $751 million. Nine-month charges were $2.331 billion and $795 million, respectively.
- Operating cash flow for the first nine months was $50 million, down from $1.055 billion. Investing cash outflow was $579 million and financing cash outflow was $292 million. Cash declined to $4 million from $825 million at year-end 2015.
- At September 30, total debt principal was $8.717 billion; debt carrying value, net, was $9.678 billion. Current maturities were $656 million. Stockholders’ equity was in deficit by $1.191 billion, and working capital was negative $2.539 billion.
- The $4.0 billion revolving facility had $240 million drawn and $709 million used for letters of credit, leaving reported borrowing capacity of $3.051 billion at quarter-end. The company reported covenant compliance at September 30.
- Preferred dividends were suspended; $127 million was recorded as preferred dividends for the nine-month period and approximately $127 million was in arrears at September 30. No common dividend was declared in 2016.
Changes, outlook and management commentary
Management emphasized liquidity, cost control, asset sales and debt reduction amid depressed commodity prices. It forecast 2016 capital expenditures of $1.65–$1.75 billion and 2017 capital expenditures of $1.82–$2.62 billion, both including capitalized interest. Management said operating cash flow, cash and revolver availability were expected to fund planned spending, debt service and other obligations for the next 12 months, while cautioning that liquidity measures might not be sufficient. The company also cited improved operating efficiency and said those gains and its liquidity position could support a modest capital-program increase in 2017.
- During the period, Chesapeake raised a $1.5 billion secured term loan and used proceeds, along with other measures, to retire or exchange debt. It also amended its revolving facility, reaffirming a $4.0 billion borrowing base while providing temporary covenant relief and requiring liens on a majority of assets and minimum liquidity of $500 million. Subsequent asset sales reduced the borrowing base to $3.8 billion as of October 31.
- In October, it issued $1.25 billion of 5.5% convertible notes due 2026 and exchanged common shares for preferred stock with approximately $1.2 billion liquidation value, reducing annual preferred dividend obligations by $67 million. It also repurchased about $105 million principal of near-term debt.
- The October 31 Barnett Shale sale generated approximately $218 million net proceeds, but Chesapeake paid $334 million to terminate a gathering agreement and could owe up to another $70 million for title and environmental matters. Management estimated the exit eliminated about $1.9 billion of future midstream and downstream commitments and could increase operating income by $200–$300 million annually from the remainder of 2016 through 2019.
- Commodity-price exposure remains substantial. At November 1, management reported swaps covering approximately 67% of remaining 2016 oil production and swaps/collars covering 79% of remaining 2016 natural gas production; 2017 coverage was approximately 52% for oil and 63% for natural gas.
Risks, contingencies and unusual items
- Commodity-price declines could reduce cash flow, reserve value, capital capacity and debt-service ability. The company also cited capital-market access, covenant compliance, collateral demands and counterparty credit risk as liquidity risks.
- The Second Circuit affirmed the $439 million judgment plus prejudgment interest in the 2019 notes redemption case. The company intended to seek further review; up to $440 million could be payable within 12 months, and the matter was accrued. A $461 million supersedeas bond uses revolver capacity.
- Chesapeake faces royalty, antitrust, securities, debt-exchange and other litigation, as well as DOJ, SEC and state inquiries. Potential losses in certain royalty matters were described as reasonably possible but not estimable. The filing also describes environmental proceedings, including claims related to wastewater disposal and earthquakes.
- Undiscounted gathering, processing and transportation commitments totaled $13.028 billion through 2099; these commitments are not recorded as balance-sheet liabilities. Additional drilling and pressure-pumping minimum commitments were approximately $144 million and $79 million.
- Unusual noncash and transaction effects included large full-cost ceiling-test impairments, asset-sale-related charges, a $255 million nine-month gain on debt purchases or exchanges, and a $280 million Q3 unrealized loss from reversal of gains on a long-term gas supply contract sold for $146 million cash proceeds.
Important facts for investors to verify
- Confirm the filing belongs to Chesapeake Energy Corporation, given the request metadata’s different company name.
- Review near-term maturities, revolver availability after borrowing-base reductions, covenant and minimum-liquidity requirements, and the effect of collateral postings.
- Assess whether operating cash flow and planned asset-sale proceeds can support capital spending, debt service and other commitments under lower commodity-price scenarios.
- Track the outcome and potential cash impact of the 2019 notes judgment and other litigation, investigations and environmental proceedings.
- Reconcile reported earnings and operating cash flow with impairments, derivative mark-to-market movements, asset dispositions and debt transactions.