Business context and reporting period
This is Chesapeake Energy Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The filing is for Chesapeake Energy Corporation, not a registrant named Expand Energy Corp; verify the company and filing identity before relying on this summary. Chesapeake is a U.S. oil and natural gas exploration and production company.
In February 2019, Chesapeake acquired WildHorse Resource Development for approximately 717.4 million Chesapeake shares and $381 million cash, and assumed WildHorse debt. The acquisition expanded Chesapeake’s Eagle Ford and Austin Chalk position.
Financial performance and position
- Second-quarter revenue and earnings: Total revenues and other were $2.386 billion, up from $2.289 billion in the second quarter of 2018. Operating income was $278 million versus an operating loss of $160 million; net income attributable to Chesapeake was $98 million versus a $249 million loss. Income available to common stockholders was $75 million, or $0.05 per diluted share, compared with a $272 million loss, or $0.30 per share.
- First-half results: Total revenues and other were $4.582 billion, down from $4.813 billion. Operating income was $96 million versus an operating loss of $118 million. Net income attributable to Chesapeake was $77 million, including a $314 million income tax benefit related to the WildHorse acquisition and valuation allowance; income available to common stockholders was $31 million, or $0.02 per share, versus a $278 million loss, or $0.31 per share.
- Cash flow and investment: First-half operating cash flow was $853 million, compared with $951 million a year earlier. Drilling and completion costs were $1.070 billion; net investing cash outflow was $1.372 billion. Cash remained $4 million. The filing reports no free-cash-flow measure.
- Debt and liquidity: June 30 debt was $10.161 billion principal amount and $9.701 billion net carrying amount, up from $8.168 billion and $7.722 billion, respectively, at year-end 2018. Cash was $4 million and working capital deficit was $836 million. Chesapeake reported $1.574 billion of available capacity under its revolving facility and BVL reported $614 million under its separate facility. No debt was due in the following 12 months, and the company reported compliance with applicable credit covenants.
- Operating costs and margins: First-half production, G&A, and gathering, processing and transportation expenses together declined $138 million, or 13%, year over year, primarily reflecting prior divestitures and lower gathering costs. Production expense per boe increased 16% to $3.35, while DD&A per boe increased 31% to $12.38. Management said second-quarter margins improved sequentially, primarily due to a higher oil production mix.
Changes, outlook, and risks
- Comparability: Chesapeake voluntarily changed from the full-cost to the successful-efforts method of accounting in the first quarter of 2019 and retrospectively recast comparative periods. This change materially affected reported DD&A and earnings; 2018 figures cited here are recast.
- Acquisition and financing: WildHorse contributed $308 million of revenue and $369 million of direct operating expenses from February 1 through June 30. Chesapeake estimated annual average WildHorse savings of $200 million to $280 million, or $1 billion to $1.5 billion through 2023; these are expectations, not realized results. The company also exchanged about $884 million of notes due 2020–2021 for about $919 million of 8% notes due 2026 and repaid $380 million of notes at maturity using revolving-credit borrowings.
- Management priorities and capital plan: Priorities include reducing net debt/EBITDAX to 2x over the long term, funding capital expenditures with operating cash flow, improving margins, and maintaining environmental and safety performance. 2019 capital expenditures, including capitalized interest, were forecast at $2.1–$2.3 billion. Management expected available cash flow and credit capacity to fund planned spending, debt service, and obligations for the next 12 months, while cautioning that liquidity beyond that period was uncertain.
- Hedging and exposure: As of July 31, including July and August settlements, about 85% of remaining forecast production revenue was hedged; 79% of remaining 2019 oil and 78% of natural gas production was hedged at average prices of $59.38 per barrel and $2.83 per mcf. Commodity prices, production, reserve estimates, access to capital, covenant compliance, and counterparty credit remain important risks.
- Contingencies and unusual items: The filing describes royalty, regulatory, antitrust, securities, and Oklahoma earthquake-related litigation. Certain royalty losses were considered reasonably possible but not estimable; management stated it did not believe pending or threatened matters were likely to have a material adverse effect, while noting final outcomes could exceed accruals. Undiscounted gathering, processing and transportation commitments totaled $5.413 billion. WildHorse-related transaction and severance costs were $61 million in the first half. The WildHorse purchase-price allocation remained preliminary.
- Controls: Management concluded disclosure controls were effective. WildHorse had not yet been included in the company’s assessment of internal control over financial reporting while integration continued.
Important facts for investors to verify
- Confirm the issuer: the supplied filing names Chesapeake Energy Corporation, notwithstanding the Expand Energy Corp request metadata.
- Review debt maturities, borrowing-base redeterminations, covenant headroom, and the separate legal and cash-access restrictions on BVL debt and liquidity.
- Assess whether operating cash flow can support the $2.1–$2.3 billion 2019 capital plan, debt service, and potential collateral demands; the filing says counterparties could request approximately $367 million of additional collateral.
- Track WildHorse integration, realized synergies versus the $200–$280 million annual estimate, and final acquisition accounting.
- Distinguish operating performance from commodity derivative gains and the $314 million discrete tax benefit; validate the effect of the accounting-method change on comparisons.
- Monitor litigation exposures and the $5.413 billion of undiscounted gathering, processing and transportation commitments.