SEC Filing Summary
Issuer discrepancy: The supplied filing is Chesapeake Energy Corporation’s Form 10-Q, not an Expand Energy Corp filing. It covers the quarter and nine months ended September 30, 2010; the financial statements are unaudited and amounts are generally in millions of dollars unless stated otherwise.
Business context and reporting period
Chesapeake was a large U.S. natural gas and oil producer with midstream, drilling and oilfield-service operations. It reported 280.0 bcfe of production in Q3 and 766.6 bcfe for the first nine months. Its strategy was shifting toward liquids-rich plays while pursuing debt reduction through preferred-stock financing, debt refinancing and asset sales.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $2.581bn | $1.811bn | $7.391bn | $5.480bn |
| Operating income (loss) | $817m | $397m | $2.476bn | ($8.232bn) |
| Net income (loss) | $558m | $192m | $1.550bn | ($5.306bn) |
| Net income (loss) available to common | $515m | $186m | $1.482bn | ($5.324bn) |
| Diluted EPS | $0.75 | $0.30 | $2.24 | ($8.78) |
| Cash from operations | Not separately stated | Not separately stated | $3.971bn | $3.131bn |
| Cash used in investing | Not separately stated | Not separately stated | $5.665bn | $3.654bn |
- Q3 operating margin was approximately 31.7%, versus 21.9% a year earlier. Nine-month operating margin was approximately 33.5%; the 2009 comparison was materially affected by the property impairment described below.
- Natural gas and oil sales were $1.639bn in Q3 and $4.698bn for nine months. Q3 production grew 23% year over year; nine-month production grew 15%. Derivative gains contributed $512m in Q3 and $1.484bn for nine months.
- Average realized price excluding unrealized derivative effects was $5.67/mcfe in Q3 versus $6.44/mcfe; for nine months, $6.17/mcfe versus $6.14/mcfe. Q3 liquids production grew 50% year over year, and liquids represented 17% of realized natural gas and oil revenue.
- Cash and equivalents were $609m at September 30, up from $307m at year-end 2009. Current assets were $3.273bn and current liabilities $4.123bn, a current ratio of approximately 0.79.
- Long-term debt, net, was $11.445bn, down from $12.295bn at year-end. The company reported $2.237bn outstanding on its $3.5bn corporate revolver and $250m on its $300m midstream revolver; it said it was compliant with facility covenants.
- Nine-month dividends declared were $0.225 per common share. Cash interest paid, net of capitalized interest, was $103m for the nine-month period.
Material changes versus prior periods
- Revenue and production increased, while Q3 realized prices excluding unrealized derivative effects declined. Higher production was the principal driver of the year-over-year sales increase.
- Nine-month 2010 net income replaced the prior-year loss, which included a $9.6bn non-cash impairment of natural gas and oil properties ($6.0bn net of tax). No such property impairment was recorded in 2010.
- Chesapeake issued $2.562bn net of costs in 5.75% convertible preferred stock and $1.967bn net from $2.0bn of senior notes. It used proceeds and other funding to redeem or tender for substantial senior-note principal; reported debt nevertheless remained $11.445bn.
- Effective January 1, 2010, the company stopped consolidating its 50/50 midstream joint venture with Global Infrastructure Partners and began equity-method accounting. Adoption resulted in a $142m after-tax charge to retained earnings.
- Q3 included $121m of gains associated with offerings by Chesapeake Midstream Partners and Chaparral Energy, plus a $16m impairment of other investments. The company also recorded $59m of Q3 losses on debt redemptions or exchanges.
Outlook, management commentary, and risks
- Management projected full-year 2010 production growth of approximately 13% and 2011 growth of 18%. It targeted liquids production growth of 80% in 2011 and 60% in 2012, and expected liquids-rich plays to receive 31% of 2010 drilling and completion capital versus 10% in 2009 and 65% in 2012.
- Budgeted drilling and completion capital expenditures, net of partner carries, were $4.8bn–$5.0bn in each of 2010, 2011 and 2012. Management planned to fund spending through operating cash flow, borrowing and asset monetizations.
- Management targeted asset-sale proceeds of $1.3bn–$1.5bn in Q4 2010 and $3.0bn–$3.5bn in 2011, while cautioning that proposed transactions depended on market conditions and might not close. A CNOOC Eagle Ford transaction announced in October was expected to provide $1.08bn cash at closing plus up to $1.08bn in drilling and completion funding; it was not completed as of quarter-end.
- As of September 30, hedged swaps covered 53% of expected remaining 2010 gas production at $7.66/mcf and 28% of oil production at $89.94/bbl; 2011 coverage was 60% for gas at $6.44/mcf and 3% for oil at $104.75/bbl. These positions can reduce downside exposure but also affect realized prices and require reserve-backed collateral.
- Significant commitments included $3.995bn of pipeline transportation demand payments, minimum undiscounted rig and compressor lease payments of $478m and $441m, respectively, and approximately $1.7bn of planned leasehold acquisitions. The filing also describes long-term minimum-volume delivery commitments.
- Risks highlighted include commodity-price volatility, high indebtedness and financing needs, reserve and production uncertainty, hedge collateral requirements, transportation constraints, environmental and operating risks, and litigation. Management could not estimate potential losses for certain shareholder and derivative lawsuits; it said no known environmental issue or claim was material at quarter-end.
Most important facts for investors to verify
- Confirm issuer identity and ticker: this source is a Chesapeake Energy 10-Q, not an Expand Energy filing.
- Assess how much reported earnings and cash flow depended on derivative settlements and valuation changes, and whether hedge coverage and collateral terms remain consistent with production.
- Check the completion and proceeds of planned asset sales, joint ventures and leasehold acquisitions, including the CNOOC transaction, against management’s stated targets.
- Review debt maturities, revolver availability and covenant headroom; verify the planned replacement of the corporate credit facility due in November 2012.
- Evaluate whether production and liquids-growth targets and capital budgets were achieved, and monitor the substantial off-balance-sheet lease, transportation and delivery commitments.