Business context and reporting period
This is Chesapeake Energy Corporation’s Form 10-K for the fiscal year ended December 31, 2015, filed February 25, 2016; it is not a quarterly filing. The company was a U.S. onshore oil and gas producer, with marketing, gathering and compression operations. The filing identifies Chesapeake Energy Corporation, not Expand Energy Corp.
Chesapeake reported average 2015 production of 679 mboe per day and held interests in approximately 43,700 wells. Its principal plays included the Eagle Ford, Utica, Anadarko Basin, Haynesville/Bossier, Marcellus, Barnett and Niobrara.
Key financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $12.764 billion | $23.125 billion |
| Net income (loss) | $(14.635) billion | $2.056 billion |
| Loss available to common stockholders | $(14.856) billion | $1.273 billion |
| Diluted earnings (loss) per share | $(22.43) | $1.87 |
| Cash provided by operating activities | $1.234 billion | $4.634 billion |
| Capital expenditures, including capitalized interest | $3.614 billion | $6.667 billion |
| Cash and cash equivalents, year-end | $825 million | $4.108 billion |
| Debt principal, year-end | $9.706 billion | $11.756 billion |
| Total assets / total equity, year-end | $17.357 billion / $2.397 billion | $40.751 billion / $18.205 billion |
For the fourth quarter of 2015, revenue was $2.649 billion and net loss available to common stockholders was $2.228 billion, or $3.36 per diluted share.
The $18.238 billion noncash impairment of oil and gas properties was the principal driver of the annual loss. Operating expenses were $31.683 billion, including the impairment; loss from operations was $18.919 billion. Operating cash flow less reported capital expenditures was approximately negative $2.380 billion.
Production totaled 248 mmboe, down 4% from 2014. Excluding derivative effects, average realized prices fell to $45.77 per barrel of oil from $89.41, $2.31 per mcf of natural gas from $4.14, and $14.06 per barrel of NGL from $30.95. Average realized oil-equivalent price fell to $19.23 per boe from $36.21. Realized oil and gas derivatives added $624 million to 2015 revenue; derivative gains and losses can also create substantial period-to-period volatility.
Material changes versus the prior comparable period
- Revenue declined 45%, while operating cash flow fell 73%, reflecting sharply lower commodity prices and lower production volumes.
- Proved reserves decreased 39%, to 1.504 billion boe from 2.469 billion boe. The filing attributes the largest downward revisions to lower prices; proved undeveloped reserves fell to 242 mmboe from 605 mmboe.
- Capital investment fell 46%. The company averaged 28 operated rigs in 2015, down from 64 in 2014. Production declined 4% overall, but management reported an 8% increase in daily production after adjusting for asset sales.
- Chesapeake recorded no common dividend after the first quarter of 2015 and announced suspension of preferred dividends in January 2016.
- In December 2015, it exchanged approximately $3.9 billion of existing debt principal for approximately $2.4 billion of 8% secured second-lien notes due 2022. It also amended its $4.0 billion revolving facility and reduced its workforce by approximately 15%.
- Beginning in the fourth quarter, transportation and gathering costs were reclassified from deductions to oil and gas sales into operating expenses. The change increased reported revenue and expenses but did not affect net income, equity or cash flows.
Outlook, liquidity, risks and unusual items
Management’s 2016 strategy emphasized liquidity, margins and lower, value-focused spending. The company forecast 2016 capital expenditures of $1.3–$1.8 billion, including capitalized interest, and expected 2016 revenue and results of operations to be below 2015 levels. As of February 23, 2016, swaps covered 56% of forecast 2016 oil production at an average $47.79 per barrel and 58% of forecast natural gas production at $2.84 per mcf; these protections are subject to contract terms and counterparty risk.
At year-end, cash was $825 million and net working capital was negative $1.205 billion. The $4.0 billion revolving facility was undrawn apart from $16 million of letters of credit, but the company expected to draw on it in 2016. Debt maturities or put rights included $381 million in 2016, $1.892 billion in 2017 and $878 million in 2018. Management said it expected to meet 2016 needs, but did not expect operating cash flow alone to cover 2017 and 2018 maturities. It cited refinancing, debt exchanges, asset sales and spending reductions as possible liquidity measures. Moody’s and S&P had downgraded senior unsecured ratings to Caa3 and CC, respectively.
The filing reported a $4.727 billion year-end PV-10 for proved reserves, based on SEC pricing of $50.28 per barrel of oil and $2.58 per mcf of gas; it cautions that this is not market value. Management expected an additional material first-quarter 2016 impairment and estimated a roughly $1.2 billion reduction in reserve PV from then-current price assumptions.
Significant contingencies included litigation over the 2013 redemption of 2019 notes, with a $439 million accrued judgment including interest and an appeal pending; royalty underpayment claims and government investigations; and environmental and earthquake-related proceedings. The company also disclosed potential additional counterparty collateral requests of approximately $698 million, apart from collateral already requested or posted. Reserve estimates, commodity prices, asset-sale execution, credit-facility borrowing-base determinations and compliance with debt covenants were material uncertainties.
Important facts for investors to verify
- Whether 2016 asset divestitures, debt transactions and planned liquidity measures were completed on the expected terms and generated the anticipated cash.
- Current cash, revolver availability, borrowing base, collateral requirements and covenant headroom, especially as debt maturities and put dates approach.
- Actual 2016 operating cash flow, capital spending, production and realized prices compared with management’s outlook and hedge assumptions.
- Subsequent reserve revisions and impairment charges, and the sensitivity of proved reserves and reserve values to commodity prices.
- Developments in the 2019-notes appeal, royalty litigation and investigations, and the potential costs of environmental or disposal-well matters.
- That reported revenue comparisons account for the transportation-cost reclassification and the gross presentation of marketing activity.