Business context and reporting period
The supplied filing is Chesapeake Energy Corporation’s Form 10-Q for the quarter and nine months ended September 30, 2011—not a filing by Expand Energy Corp. The summary below reflects the filing’s named registrant. Chesapeake operates in exploration and production, marketing/gathering/compression, and oilfield services.
Financial and operating highlights
- Third quarter: Revenue was $3.977 billion, up 54% from $2.581 billion. Net income was $922 million versus $558 million; diluted EPS was $1.23 versus $0.75. Operating income was $1.483 billion, a 37.3% operating margin, compared with $817 million and 31.7%.
- Nine months: Revenue was $8.908 billion versus $7.391 billion. Net income was $1.269 billion versus $1.550 billion; diluted EPS was $1.69 versus $2.24. Operating income was $2.185 billion versus $2.476 billion, equivalent to a 24.5% operating margin versus 33.5%.
- Production and realized prices: Third-quarter production rose 9% year over year to 3.329 bcfe per day; liquids production rose 91%. Nine-month production rose 13% to 863.3 bcfe, including 21.9 million barrels of oil and liquids. Nine-month average sales price excluding unrealized derivative gains or losses was $5.94/mcfe versus $6.17.
- Derivatives and earnings quality: Third-quarter natural gas and oil sales included $344 million of realized derivative gains and $636 million of unrealized gains. For the nine months, they included $1.240 billion of realized gains but a net $444 million of unrealized losses; management reported a $271 million after-tax unrealized hedging mark-to-market loss for the period. Chesapeake said it closed all natural-gas swap positions during the period, locking in approximately $1.3 billion of gains.
- Cash flow and investment: Nine-month operating cash flow was $3.724 billion, down from $3.971 billion. Investing activities used $3.715 billion, including $5.177 billion of drilling and completion costs and $1.416 billion of additions to other property and equipment; divestiture proceeds were $6.357 billion. Cash was $111 million at September 30, versus $102 million at year-end 2010.
- Debt and liquidity: Long-term debt was $11.789 billion, down from $12.640 billion at year-end. Current assets were $3.470 billion and current liabilities $6.195 billion. The $4.0 billion corporate revolver had $3.236 billion drawn and $60 million of letters of credit outstanding. The midstream facility’s effective capacity was limited to $440 million, with $327 million drawn. Chesapeake reported compliance with credit-facility covenants.
Material changes and significant transactions
- Chesapeake sold its Fayetteville Shale assets for approximately $4.65 billion in cash in March 2011, including about 487,000 net acres and midstream assets. It used part of the proceeds to repurchase debt; the sale was recorded as a reduction of capitalized costs, without a gain or loss.
- In May, the company paid $2.058 billion to tender for $1.904 billion principal amount of senior and contingent convertible notes, recording approximately $174 million of related losses. It also issued $1.0 billion of 6.125% notes due 2021 and used the net proceeds to repay revolver borrowings.
- Chesapeake acquired Bronco Drilling for approximately $339 million and entered a $853 million volumetric production payment transaction. Its six joint ventures had generated $6.5 billion of cash proceeds and commitments for $7.7 billion of drilling-cost carries.
- Oilfield services operations were reorganized and released from guarantees supporting certain Chesapeake debt and hedging obligations. In October, the subsidiary issued $650 million of 6.625% notes due 2019; a new $500 million revolving facility was established in November, with availability then limited to $60 million.
Outlook, risks, contingencies and unusual items
- Management’s 2011–2012 plan targeted a 25% reduction in long-term debt while growing production 25%; the production-growth expectation was later increased to approximately 30% for the two-year period through December 31, 2012. Debt reduction depended substantially on asset monetizations and lower leasehold spending.
- Management budgeted net drilling and completion capital expenditures of $6.0–$6.5 billion for 2011 and $6.2–$6.8 billion for 2012. It projected liquids at 50% of drilling and completion spending in 2011 and 75% in 2012, with liquids production targets of approximately 150,000 barrels/day in 2012, 200,000 in 2013 and 250,000 by 2015.
- After quarter-end, Chesapeake received $471 million from Total for accelerated payment of remaining drilling carries, at an approximately 9% reduction to the total obligation. It also completed a $500 million Utica preferred-share financing. A proposed Utica joint venture was expected to provide approximately $640 million cash and a $1.5 billion drilling carry, but remained subject to definitive agreements and closing conditions.
- Major risks include commodity-price volatility, substantial debt and capital requirements, dependence on asset sales and joint-venture proceeds, reserve and production uncertainty, hedging exposure, and gathering/transportation commitments. Undiscounted gathering, processing and transportation commitments totaled $11.688 billion; rig leases, compressor leases and drilling contracts also entail significant future payments.
- Pending matters included a securities class action for which the company could not estimate potential loss, and environmental enforcement matters in West Virginia and Pennsylvania. The company anticipated monetary sanctions in certain environmental matters but said it did not expect a material adverse financial effect. A proposed settlement of certain derivative and inspection-demand cases was subject to court approval.
Important facts for investors to verify
- Confirm the registrant identity: the supplied 10-Q names Chesapeake Energy Corporation, while the request names Expand Energy Corp.
- Assess how much reported earnings and revenue depended on derivative gains, including the difference between realized cash gains and unrealized mark-to-market changes.
- Review revolver availability, borrowing-base and covenant terms, debt maturities, and the impact of the oilfield-services guarantee release and subsidiary financing.
- Track execution and proceeds from planned asset monetizations and the proposed Utica transactions, which were not all completed as of the reporting date.
- Evaluate the sustainability of production and liquids-growth targets against capital spending, commodity prices, and the company’s substantial contractual commitments and unresolved legal and environmental matters.