SEC Filing Summary
Entity and period: The supplied filing is Chesapeake Energy Corporation’s unaudited Form 10-Q for the three months ended March 31, 2019. The request metadata names Expand Energy Corp.; that does not match the registrant named in this filing.
Business context and reporting period
Chesapeake is an independent U.S. oil and gas exploration and production company. It completed its acquisition of WildHorse Resource Development on February 1, 2019, adding Eagle Ford and Austin Chalk assets. The acquisition was funded with approximately 717.4 million Chesapeake shares and $381 million in cash, and Chesapeake also assumed WildHorse debt. The quarter’s results include WildHorse only from the acquisition date.
Chesapeake voluntarily changed from the full-cost to the successful-efforts accounting method and retrospectively recast comparative financial information. Year-over-year comparisons below use the recast 2018 figures.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenues | $2.162 billion | $2.489 billion |
| Oil, natural gas and NGL revenue, including derivative results | $929 million | $1.243 billion |
| Operating income (loss) | $(182) million | $42 million |
| Net income (loss) | $(21) million | $18 million |
| Net loss available to common stockholders | $(44) million; $(0.03) per share | $(6) million; $(0.01) per share |
| Cash provided by operating activities | $456 million | $588 million |
| Drilling and completion costs | $515 million | $420 million |
Revenue declined year over year, while the company moved from operating income to an operating loss. The operating loss margin was approximately 8.3% of total revenues and other. The quarter’s $314 million income tax benefit resulted from a discrete partial release of a valuation allowance associated with the WildHorse acquisition; the company continued to maintain a full valuation allowance against its net deferred tax asset. Derivative losses reduced oil, natural gas and NGL revenue by $301 million, versus $117 million in the prior-year quarter.
Cash and cash equivalents were $8 million at quarter-end. Current assets were $1.365 billion and current liabilities were $2.930 billion, producing a reported net working capital deficit of $1.565 billion. Total debt principal was $9.978 billion and debt carrying value, net, was $9.547 billion. Debt principal increased from $8.168 billion at year-end 2018, in part reflecting WildHorse debt and borrowing. Chesapeake reported $2.097 billion of available capacity under its revolver and $565 million under the BVL revolver; it stated that it was in compliance with applicable financial covenants. The $380 million floating-rate notes due in April 2019 were repaid at maturity on April 15 using Chesapeake revolver borrowings.
Material changes versus the prior comparable period
- Oil, natural gas and NGL sales volumes fell overall, while reported average realized price per BOE increased. Oil sales revenue rose 5%; natural gas revenue fell 16% and NGL revenue fell 41%.
- Operating cash flow decreased by $132 million. Management cited lower natural gas and NGL prices and volumes, partly offset by higher oil prices and volumes, as well as $61 million of WildHorse transaction and severance costs.
- Gathering, processing and transportation expense fell by $82 million, primarily due to 2018 asset divestitures. Combined production, G&A, and gathering, processing and transportation expenses declined by $81 million, or 14%, according to management.
- DD&A increased to $519 million from $459 million; DD&A per BOE rose 29% to $11.90, reflecting a higher depletion rate and the acquired, more liquids-rich assets.
- Marketing gross margin improved to $3 million from a loss of $22 million. Q1 2018 included $139 million of investment gains, while Q1 2019 included no comparable gain.
- Average daily production was 484 thousand BOE, down from 554 thousand BOE. The filing attributes changes in production mix to both the acquisition and prior divestitures.
Outlook, management commentary and risks
- Management forecast 2019 capital expenditures, including capitalized interest, of $2.1–$2.3 billion, compared with $2.1 billion in 2018. It said spending could be adjusted as operational plans change.
- Management’s strategic priorities are reducing long-term net debt/EBITDAX to 2x, funding capital expenditures with operating cash flow, improving margins through discipline and efficiencies, and maintaining environmental and safety performance.
- Management projected WildHorse merger savings of $200–$280 million annually on average, totaling $1–$1.5 billion by 2023. These are expectations, not realized results.
- As of May 3, 2019, the company reported approximately 70% of forecast 2019 oil, natural gas and NGL production revenue hedged, including 70% of oil and 80% of natural gas forecast production average prices. Commodity prices, production, and hedge outcomes remain significant uncertainties.
- Management said cash, forecast operating cash flows and revolver availability were expected to fund planned capital expenditures, debt service and other obligations for the next 12 months, while cautioning that liquidity measures might not be sufficient beyond that period. Commodity-price volatility, access to capital, covenant compliance, collateral demands and counterparty credit risk could affect liquidity.
- As of May 3, the company had posted approximately $120 million of collateral for certain contracts and said counterparties might request approximately $377 million more, potentially reducing revolver availability.
- Risks and contingencies include royalty, antitrust, securities and earthquake-related litigation; environmental and regulatory exposure; and $5.597 billion of undiscounted future gathering, processing and transportation commitments. Management said pending or threatened matters were not expected to have a material adverse effect based on its current assessment, but final outcomes could exceed accruals.
- Subsequent to quarter-end, Chesapeake issued approximately $919 million of 8.00% senior notes due 2026 in an exchange for $884 million principal amount of notes due 2020 and 2021, extending maturities but increasing exchanged principal.
Most important facts for investors to verify
- Whether WildHorse’s expected cost savings and production-mix benefits are being achieved, and how the acquisition affects debt and cash generation.
- Debt balances, upcoming maturities, borrowing-base redeterminations, covenant headroom and the availability of both revolving facilities.
- The drivers of reduced operating cash flow and whether operating cash flow can fund capital spending and debt service.
- Actual capital expenditures versus the $2.1–$2.3 billion forecast, and the effect of commodity prices and hedging on realized revenue and cash flow.
- Potential collateral calls, gathering and transportation commitments, and developments in material litigation and regulatory proceedings.
- The completed purchase-price allocation for WildHorse and the continuing effects of the accounting-method change on comparability and reported earnings.