Business Context and Reporting Period
This unaudited Form 10-Q covers Chesapeake Energy Corporation and subsidiaries for the quarter ended March 31, 2014, compared with the quarter ended March 31, 2013. The filing describes a U.S. natural gas and oil producer with marketing, gathering, compression and oilfield-services businesses. The supplied company label, “EXPAND ENERGY Corp,” does not match the registrant named in this filing.
Financial Performance and Position
Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts are in millions.
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Total revenue | $5,046 | $3,424 |
| Income from operations | $733 | $217 |
| Net income | $466 | $102 |
| Net income attributable to Chesapeake | $425 | $58 |
| Net income available to common stockholders | $374; diluted EPS $0.54 | $15; diluted EPS $0.02 |
| Cash provided by operating activities | $1,291 | $924 |
| Cash and cash equivalents | $1,004 at March 31, 2014 | $837 at December 31, 2013 |
| Total debt, net of discounts | $12,969 at March 31, 2014 | $12,886 at December 31, 2013 |
| Working capital | Negative $1,683 at March 31, 2014 | Negative $1,859 at December 31, 2013 |
Q1 operating cash flow less net cash used in investing activities of $999 million was approximately $292 million. Investing included $897 million in drilling and completion costs and $437 million in additions to other property and equipment. Financing used $125 million. Management reported $5.017 billion of cash availability, including unrestricted cash and undrawn revolving capacity; the $4.0 billion corporate revolver was undrawn, with $23 million of letters of credit outstanding. The company reported compliance with credit-facility covenants and a 2.44-to-1 indebtedness-to-EBITDA ratio against a 4.0-to-1 limit.
Production was 60.8 million barrels of oil equivalent (mmboe), averaging approximately 675,000 boe per day. Natural gas, oil and NGL production sales before derivative effects were $2.148 billion; reported sales revenue after derivative losses was $1.766 billion. The filing reports an average realized price excluding derivatives of $35.35/boe, versus $26.71/boe a year earlier. Production expenses were $4.73/boe, production taxes $0.83/boe, and natural-gas-and-oil DD&A $10.33/boe. Marketing and gathering net margin was $35 million; oilfield-services net margin was $45 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 47%, and operating income rose to $733 million from $217 million. Higher natural gas prices, greater oil and NGL volumes, and the prior-year’s restructuring costs contributed to the improvement.
- Average natural gas, oil and NGL sales price excluding derivatives increased to $35.35/boe from $26.71/boe. Natural gas production declined 5%; oil production increased 6%, and NGL production increased 55%.
- Cash from operations increased to $1.291 billion from $924 million. Drilling and completion spending decreased about 50% year over year, and the operated rig count averaged 62 versus 84.
- General and administrative expense declined to $79 million from $110 million; production expense per boe declined to $4.73 from $5.14.
- Derivative losses reduced natural gas, oil and NGL revenue by $382 million, compared with a $142 million reduction a year earlier. The reported commodity-derivative fair-value liability was $726 million at quarter end.
- After the quarter, the company issued $3.0 billion of notes, used part of the proceeds to repay and terminate its $2.0 billion term loan, and tendered for 2015 notes. These are subsequent events, not March 31 balance-sheet transactions.
Outlook, Management Commentary, Risks and Unusual Items
- Management projected 2014 capital expenditures of $5.2–$5.6 billion, approximately 20% below 2013 spending, and said the 2014 budget was expected to approximate operating cash flow and was not dependent on asset sales. The filing says interim results are not necessarily indicative of full-year results.
- Management’s stated priorities were financial discipline, profitable and efficient growth, balancing capital spending with operating cash flow, divesting noncore assets, lowering unit costs and reducing leverage and complexity. Management cautioned that actions to reduce leverage or complexity could bring cash or noncash charges, including impairments, lease terminations, debt-extinguishment costs and charges for unused transportation or gathering capacity.
- For the remainder of 2014, the company reported downside price protection covering approximately 64% of estimated natural gas production at an average $4.10/mcf and 70% of estimated oil production at $94.32/bbl. Derivatives reduce price exposure but can also lower realized prices; production estimates, market prices and counterparties introduce risk.
- Chesapeake was evaluating a possible spin-off or sale of its oilfield-services business. No agreement or board decision had been made, and completion was not assured.
- Contractual gathering, processing and transportation commitments totaled $16.734 billion undiscounted, excluding specified reimbursements and third-party volume credits; these commitments are not recorded as balance-sheet liabilities. Other off-balance-sheet commitments include rig and compressor leases, drilling contracts and purchase commitments.
- Legal and regulatory matters include a Michigan criminal antitrust complaint relating to 2010 leasing activity and ongoing DOJ and state-agency inquiries into leasing practices. The SEC advised on April 8, 2014 that it did not intend to recommend an enforcement action based on information then available. A West Virginia environmental consent decree requires restoration, monitoring for up to 10 years and a compliance program, in addition to a $3.2 million penalty.
- The company reported that disclosure controls were effective as of March 31, 2014, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant identity: the filing is for Chesapeake Energy Corporation, notwithstanding the supplied “EXPAND ENERGY Corp” label.
- Review the quality and sustainability of earnings and cash flow, including the impact of commodity prices, derivative settlements and fair-value changes, investment-sale gains, and the unusually large marketing revenue and associated costs.
- Assess liquidity and refinancing execution: quarter-end debt and negative working capital, the subsequent $3.0 billion notes issuance, completed term-loan repayment, and the outcome of the 2015-note tender offer and 2018-note redemption.
- Evaluate the scale and flexibility of transportation and gathering commitments, other off-balance-sheet obligations, and any charges that may arise from portfolio or organizational changes.
- Track commodity hedges, production performance, capital spending relative to operating cash flow, and progress or decisions concerning a potential oilfield-services separation.
- Monitor litigation and regulatory developments, particularly the Michigan matter, royalty claims and required environmental restoration and compliance work.