EXPAND ENERGY Corp quarterly report, Q2 FY2021

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Business context and reporting period

The supplied filing is Chesapeake Energy Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2021; it does not identify Expand Energy Corp as the registrant. Chesapeake is a U.S. onshore oil and gas exploration and production company. It emerged from Chapter 11 on February 9, 2021 and applied fresh-start accounting, so post-emergence “Successor” results are not directly comparable with “Predecessor” periods. Management presents combined 2021 successor and predecessor results for some comparisons, but those combined figures are non-GAAP.

Financial and operating highlights

  • Second-quarter revenue: Oil, natural gas and NGL sales were $892 million, up from $440 million in Q2 2020. Marketing revenue was $539 million. A $740 million derivative loss brought total revenues and other to $693 million, versus $507 million in Q2 2020.
  • Profitability: Net loss was $439 million, or $4.48 per diluted share, compared with a $276 million loss, or $28.22 per share, in Q2 2020. Operating loss was $430 million. The filing attributes the sharp rise in depreciation, depletion and amortization partly to fresh-start revaluation.
  • Operating margin and production: Reported gross margin by operating area was $566 million, or $14.38 per Boe, versus $54 million, or $1.39 per Boe, in Q2 2020. Average production was 433 MBoe per day versus 421 MBoe per day; the average realized price was $22.64 per Boe versus $11.46.
  • Cash flow and capital spending: The filing reports $803 million of operating cash flow and $226 million of capital expenditures for the Successor period from February 10 through June 30—not for Q2 alone. It does not provide a clear stand-alone Q2 cash-flow figure. Cash and cash equivalents were $612 million at June 30.
  • Debt and liquidity: Long-term debt, net, was $1.261 billion; cash was $612 million. Management reported total available liquidity of $2.346 billion, including $1.734 billion of unused Exit Credit Facility capacity. There were no Tranche A borrowings and $221 million of Tranche B borrowings outstanding.
  • Derivatives: Net derivative liabilities were $991 million at June 30, including $780 million current and $211 million long-term. Q2 derivative losses were largely unrealized, as discussed in the filing.
  • Balance sheet: Total assets were $6.999 billion and stockholders’ equity was $3.413 billion at June 30. Current assets were $1.354 billion and current liabilities were $1.866 billion.

Material changes versus prior comparable period

  • Q2 oil, gas and NGL sales increased $452 million year over year, primarily due to $440 million of higher realized-price revenue and $12 million from higher sales volumes. Average daily production was modestly higher.
  • Q2 production expense decreased $17 million and gathering, processing and transportation expense decreased $59 million year over year. Management cited the Mid-Continent asset sale and lower gathering costs following Chapter 11 contract negotiations.
  • Q2 DD&A increased to $229 million from $158 million, reflecting the revalued asset base following fresh-start accounting. Interest expense fell to $18 million from $137 million, primarily due to reduced debt after restructuring.
  • Fresh-start accounting and the bankruptcy emergence materially reset assets, liabilities and equity. Prior equity was canceled without recovery; the reorganized company issued new common shares and warrants and reduced total indebtedness by approximately $9.4 billion, according to management.

Outlook, management commentary, risks and unusual items

  • 2021 plan: Chesapeake expected to bring online approximately 120–135 gross wells, invest $670–$740 million in capital expenditures, and operate five to seven rigs. Approximately 80% of planned capital expenditures were expected to go to natural gas assets. Management planned to fund the program with cash on hand and operating cash flow.
  • Dividend: Management described an expected annual common dividend of $1.375 per share, paid quarterly. The filing reports $34 million of common dividends paid during the Successor period and a $0.34375-per-share quarterly dividend declared for payment in September 2021.
  • Liquidity outlook: Management believed cash flow, cash on hand and available Exit Credit Facility capacity would fund liquidity needs for at least the next 12 months. The facility’s borrowing base was scheduled for redetermination around October 1, 2021; financial covenants include leverage and current-ratio tests.
  • Costs and commitments: Undiscounted gathering, processing and transportation commitments totaled approximately $3.596 billion through 2033. These commitments are not recorded as balance-sheet obligations, and future fees may vary under contract terms.
  • Commodity exposure: Management stated that hedges mitigate some price exposure but can limit cash flows when prices rise. A 10% move in forward prices was estimated to change oil derivative valuation by about $150 million and natural gas derivative valuation by approximately $195–$197 million.
  • Risks and contingencies: Risks include commodity-price volatility, COVID-19 and demand uncertainty, reserve and production estimates, drilling and operating hazards, debt covenant compliance, access to capital, environmental and regulatory requirements, and litigation. Management said no pending or threatened matter was expected to have a material adverse effect, while noting actual legal outcomes could exceed accrued amounts. The company disclosed settlement of Pennsylvania gas-migration violations for sanctions exceeding $300,000 and dismissal from numerous Oklahoma earthquake-related lawsuits.
  • Other notable developments: CEO Doug Lawler departed effective April 30, 2021; Chairman Michael Wichterich served as interim CEO during the search for a permanent CEO. Chesapeake announced a goal of net-zero direct greenhouse gas emissions by 2035, with interim methane and emissions-intensity targets.

Important facts for investors to verify

  1. Confirm the registrant: the supplied filing is for Chesapeake Energy Corporation, not Expand Energy Corp.
  2. Use the correct post-bankruptcy reporting basis: successor and predecessor periods are not directly comparable, and combined 2021 comparisons are non-GAAP.
  3. Review derivative positions, realized versus unrealized effects, and the potential impact of commodity-price movements on reported earnings and liquidity.
  4. Check the October 2021 borrowing-base redetermination, covenant headroom, and the company’s ability to fund its capital plan and dividend.
  5. Assess whether production, realized pricing, capital spending and the planned well program support sustainable free cash flow.
  6. Evaluate the long-term midstream commitments, unresolved bankruptcy claims, litigation and environmental exposures.