Chesapeake Energy Corporation — Q1 2021 Form 10-Q
Company and period: The supplied filing is Chesapeake Energy Corporation’s Form 10-Q for the quarter ended March 31, 2021; it is not a filing by Expand Energy Corp. Chesapeake is a U.S. onshore oil and gas exploration and production company. It emerged from Chapter 11 on February 9, 2021 and adopted fresh start accounting, so the post-emergence “Successor” results are not directly comparable with the “Predecessor” results. For operating trends, management presents combined Q1 2021 results for both periods; those combined figures are non-GAAP and not pro forma.
Financial performance and position
- Combined operating revenues: Oil, natural gas and NGL sales were $951 million, up from $894 million in Q1 2020. Marketing revenue was $516 million versus $724 million. Derivatives contributed a combined loss of $336 million, compared with a $907 million gain in Q1 2020; reported total revenue and other was $1.14 billion versus $2.525 billion.
- Profit: The combined periods reported net income of approximately $5.678 billion, including a $5.569 billion net gain from reorganization items, principally the settlement of compromised liabilities. This is not an indicator of ordinary operating earnings. Operating income across the combined periods was $51 million. Q1 2020 reported a net loss of $8.313 billion, including $8.522 billion of impairments.
- Operating costs and margin: Combined gross margin, as defined by Chesapeake, was $624 million, or $15.90/Boe, compared with $433 million, or $9.94/Boe, in Q1 2020. Production costs were $72 million; gathering, processing and transportation costs were $213 million; and severance and ad valorem taxes were $42 million.
- Cash flow and investment: Operating cash flow was $388 million combined ($409 million Successor and $21 million used in the Predecessor period), versus $397 million in Q1 2020. Capital expenditures were $143 million combined, compared with $518 million. At March 31, cash and cash equivalents were $340 million and restricted cash was $68 million.
- Debt and liquidity: Long-term debt, net, was $1.262 billion: $500 million principal of 2026 notes, $500 million of 2029 notes and $221 million of Tranche B loans, with related premiums and issuance costs reflected in the carrying amount. Chesapeake reported $2.064 billion of liquidity, including $1.724 billion of unused Exit Credit Facility capacity; no Tranche A loans were outstanding. The Exit Facility had a $2.5 billion initial borrowing base, subject to redetermination.
- Production: Combined Q1 oil, natural gas and NGL sales were $413 million, $486 million and $52 million, respectively. Management attributed the higher total sales versus Q1 2020 mainly to a $248 million benefit from higher average prices, partly offset by $191 million from lower sales volumes. Average daily production was lower, principally reflecting reduced activity and temporary shut-ins.
Material changes and significant events
- Emergence from Chapter 11 canceled predecessor common and preferred equity without recovery, issued about 97.9 million new common shares and warrants, and reduced debt by approximately $9.4 billion. The company recorded fresh start accounting and estimated enterprise value at $4.851 billion.
- Fresh start accounting reset asset values, including oil and gas properties, and makes post-February 9 results and balance-sheet amounts not directly comparable with predecessor periods. The large Predecessor-period reorganization gain materially drives reported Q1 net income.
- Derivative fair value was a net liability of $375 million at March 31, compared with $118 million at December 31, 2020. The Q1 combined derivative result was strongly affected by mark-to-market movements.
- Proved reserves were reported at 1.099 billion Boe at March 31, up from 802 million Boe at the start of the period; management attributed additions primarily to updates to the five-year development plan following emergence.
Outlook, commentary and risks
- 2021 plan: Chesapeake expected to bring online approximately 120–135 gross wells, operate five to seven rigs and spend $670–$740 million on capital expenditures, with about 80% allocated to natural gas assets. It expected to fund the program from cash on hand and operating cash flow, and said it anticipated adequate operating cash flow to fund investing activity without incremental Exit Facility borrowing.
- Dividend and leadership: After quarter-end, the board announced an intended annual dividend of $1.375 per common share, payable quarterly, with the first payment scheduled for June 10, 2021. CEO Doug Lawler’s departure was effective April 30; board chair Michael Wichterich became interim CEO while a search was underway.
- Management priorities: The company emphasized sustainable free cash flow, capital discipline, operating efficiencies and ESG performance. Its announced targets included net-zero direct greenhouse gas emissions by 2035, eliminating routine flaring from new wells completed from 2021 and enterprise-wide by 2025, and methane and GHG intensity goals for 2025.
- Key risks and commitments: Commodity-price volatility, production and reserve uncertainty, hedging exposure, credit-facility covenants, refinancing and capital-market access, COVID-19 and regulatory or environmental developments could affect results and liquidity. Undiscounted gathering, processing and transportation commitments totaled approximately $3.765 billion through 2034. The company also disclosed Oklahoma earthquake-related lawsuits and discussions with Pennsylvania regulators over gas migration; the latter could involve sanctions exceeding $300,000. Management said it did not expect pending matters to have a material adverse effect, but acknowledged final outcomes could differ from estimates.
- Taxes: A full valuation allowance was recorded against deferred tax assets. The filing estimated approximately $5 billion of cancellation-of-debt income and remaining federal NOL carryforwards of $2.5–$3.0 billion, subject to tax-attribute limitations following the ownership change.
Important facts for investors to verify
- Use the filing’s separate Successor and Predecessor periods when reviewing GAAP results; do not treat the combined management presentation or the bankruptcy-related gain as recurring performance.
- Check whether the planned $670–$740 million capital program, well count and production outlook were achieved, and how commodity prices and volumes affected operating cash flow.
- Monitor Exit Facility borrowing-base redeterminations, covenant compliance, available liquidity, debt service and the ability to fund the announced dividend.
- Review the size, timing and cash-flow effects of derivative settlements and the $375 million net derivative liability, including sensitivity to commodity prices.
- Track the long-term midstream commitments, legal and environmental matters, reserve revisions, tax-attribute limitations, and the new CEO appointment and dividend implementation.