Chesapeake Energy Corporation — 2019 Form 10-K
Filing identity: The supplied filing is Chesapeake Energy Corporation’s annual report for the year ended December 31, 2019, filed February 27, 2020. This does not match the request metadata naming EXPAND ENERGY Corp. The filing also provides unaudited quarterly results, including fourth-quarter 2019.
Business context and reporting period
Chesapeake is a U.S. onshore oil and gas exploration and production company. Its principal operating areas include the Marcellus, Haynesville, Eagle Ford, Brazos Valley, Powder River Basin and Mid-Continent. In February 2019, it acquired WildHorse, expanding its southeast Texas oil operations. Comparative financial information was retrospectively recast after the company changed from full cost to successful efforts accounting.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenues and other, including asset-sale gains or losses | $8.595 billion | $10.030 billion |
| Net income (loss) available to common stockholders | $(416) million | $133 million |
| Net income (loss) | $(308) million | $228 million |
| Cash provided by operating activities | $1.623 billion | $1.730 billion |
| Drilling and completion costs | $2.180 billion | $1.848 billion |
| Principal debt outstanding at year-end | $8.916 billion | $8.168 billion |
| Cash at year-end | $6 million | $4 million |
| Net working capital | $(1.141) billion | $(1.289) billion |
- Oil, natural gas and NGL sales were $4.517 billion, down 13%. Oil sales rose 16% to $2.543 billion, while natural gas sales fell 28% to $1.782 billion and NGL sales fell 62% to $192 million.
- Production was 177 million boe, down from 190 million boe. Oil production increased to 43 million barrels from 33 million; natural gas fell to 728 Bcf from 832 Bcf; and NGL fell to 12 million barrels from 19 million.
- Average production sales price was $25.57/boe, versus $27.27/boe. Including realized derivative gains and losses, the average was $26.42/boe versus $25.56/boe.
- Production expense was $2.94/boe, gathering, processing and transportation expense was $6.13/boe, and severance and ad valorem taxes were $1.27/boe. Net income available to common stockholders was negative; the filing does not present a single consolidated operating-margin percentage.
- Operating cash flow less drilling and completion costs was approximately negative $557 million, before acquisitions, divestiture proceeds, preferred dividends and other investing items. This is a simple cash-flow comparison, not a company-reported free-cash-flow measure.
- Total assets were $16.193 billion and total equity was $4.401 billion at year-end. Current maturities of debt were $385 million. Revolver borrowings were $1.590 billion, with about $1.351 billion of borrowing capacity available and $59 million of letters of credit outstanding.
- Proved reserves were 1.572 billion boe, including 726 million boe of proved undeveloped reserves. Standardized measure of discounted future net cash flows was $9.0 billion; this reserve measure is not fair value or a forecast of realized proceeds.
Material changes versus the prior comparable period
- Revenue and operating cash flow declined, driven mainly by lower natural gas and NGL prices and lower gas and NGL volumes. Oil production and oil sales increased, reflecting WildHorse and the company’s shift toward liquids.
- WildHorse was acquired for approximately 717.4 million Chesapeake shares and $381 million cash, with $1.4 billion of WildHorse debt assumed at acquisition. The acquisition added $752 million of revenue from February 1 through year-end.
- Gathering, processing and transportation costs fell to $1.082 billion from $1.398 billion, reflecting the Utica divestiture and contract changes; cost reductions partly offset higher production costs and taxes.
- Common shareholders’ loss followed a profitable 2018. The 2019 result included a $331 million income tax benefit, substantially associated with the WildHorse acquisition and a partial valuation-allowance release; it also included acquisition and severance costs and investment impairments.
- Debt principal increased by $748 million year over year. Chesapeake issued a $1.5 billion secured term loan and exchanged unsecured notes for 11.5% second-lien notes, extended certain maturities, and exchanged debt for common shares. These transactions changed the debt’s maturity, security and cost profile; they did not eliminate the company’s high leverage.
- Common shares outstanding increased substantially, from about 914 million to 1.955 billion, mainly because of the WildHorse acquisition and debt exchanges.
Outlook, risks and unusual items
- Management forecast 2020 capital expenditures of $1.3–$1.6 billion, compared with 2019 spending of $2.2 billion, with most 2020 capital directed to higher-margin oil assets. It targeted flat oil production, sustained positive cash flow and long-term net debt/EBITDAX of 2x. These are targets, not assurances.
- Management reported $250 million of WildHorse-related cost savings in 2019 and projected average annual savings of $200–$280 million, or $1–$1.5 billion cumulatively by 2023. Realization depends on integration and operating execution.
- As of February 19, 2020, about 70% of forecast 2020 production revenue was hedged, including stated downside protection on oil and gas. Hedges mitigate but do not remove commodity-price exposure and may limit gains if prices rise.
- Management said available cash, forecast operating cash flow and revolver capacity were expected to fund planned spending, debt service and commitments for the next 12 months. This outlook is exposed to commodity prices, borrowing-base redetermination, covenant compliance, access to refinancing and collateral requirements. The revolver borrowing base was scheduled for redetermination in Q2 2020.
- The company disclosed an NYSE notice because its average share price had fallen below $1. It intended to pursue a reverse stock split to regain compliance; failure could lead to delisting and potentially give convertible-note holders repurchase rights.
- Material risks include substantial indebtedness and restrictive covenants, volatile commodity prices, reserve-estimation uncertainty, litigation and royalty claims, environmental and regulatory exposure, pipeline capacity and gathering commitments, and counterparty and refinancing risk. Contractual cash obligations included $8.056 billion of operating commitments, largely midstream commitments, in addition to debt and interest.
- Pending matters include royalty disputes and regulatory proceedings; the filing says some reasonably possible losses cannot be estimated. A January 30, 2020 well-control incident in Burleson County, Texas, killed three contractor employees and injured a fourth.
- Subsequent to year-end, Chesapeake agreed to terminate certain gathering contracts for about $70 million in cash and linefill, expecting a $70 million first-quarter 2020 expense and a reduction of approximately $169 million in future commitments.
- Fourth-quarter 2019 revenue was $1.926 billion; operating loss was $173 million and net loss available to common stockholders was $346 million, or $0.18 per share.
Most important facts for investors to verify
- Confirm the issuer: the supplied 10-K is for Chesapeake Energy Corporation, not the company named in the request metadata.
- Review debt maturities, interest costs, collateral, covenant headroom and the Q2 2020 borrowing-base redetermination, including the impact of the high-cost secured financing.
- Assess whether operating cash flow can fund the reduced capital plan, debt service and large midstream commitments under lower commodity-price scenarios.
- Validate WildHorse integration, projected synergies, oil-production performance and the company’s ability to meet its leverage and positive-cash-flow targets.
- Track NYSE listing compliance, the proposed reverse stock split and any convertible-note repurchase exposure.
- Examine the sensitivity of reserves and impairment assumptions to prices, development costs and drilling results, and monitor unresolved legal, environmental and safety matters.