Chesapeake Energy Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. The filing identifies the registrant as Chesapeake Energy Corporation, not Expand Energy Corp.
Business context and financial performance
Chesapeake is a U.S. oil and gas exploration and production company. It reported total production of 554 mboe per day, up 5%; adjusted production excluding divested assets was 540 mboe per day, up 11%.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $2.489 billion | $2.753 billion |
| Income from operations | $278 million | $241 million |
| Net income attributable to Chesapeake | $293 million | $140 million |
| Net income available to common stockholders | $268 million | $75 million |
| Diluted EPS | $0.29 | $0.08 |
| Cash provided by operating activities | $656 million | $99 million |
Operating margin was approximately 11.2%, compared with 8.8% in the prior-year quarter. Oil, natural gas and NGL sales before derivative effects rose 19% to $1.360 billion, driven by higher prices and volumes; derivative losses reduced reported oil, gas and NGL revenue. Total reported revenue fell 10%, including a $115 million reduction in both marketing revenue and marketing expense from adopting the new revenue standard’s net presentation. Operating cash flow improved primarily on higher realized prices and sales volumes.
Liquidity, debt and capital
- Cash was $4 million at quarter-end. Net working capital deficit widened to $1.130 billion from $831 million at December 31, 2017.
- Total debt principal was $9.400 billion, down from $9.981 billion at year-end. Long-term debt, net, was $9.325 billion.
- The revolving facility had a $3.8 billion borrowing base; $200 million was drawn and $157 million supported letters of credit, leaving reported borrowing capacity of $3.428 billion. Chesapeake said it complied with applicable covenants.
- Investing cash outflow was $47 million, including $442 million of drilling and completion spending, partly offset by $319 million of property-sale proceeds and $74 million from investment sales. Financing cash outflow was $610 million, including $581 million of net revolver repayments.
- Stockholders’ equity remained in deficit: total equity deficit was $97 million at March 31, 2018.
Material changes and unusual items
- Q1 included a $139 million gain on investments: $78 million related to dilution of Chesapeake’s FTS International stake in its IPO and $61 million from selling shares. It also received approximately $74 million net proceeds from the share sale.
- A 13% workforce reduction produced a $38 million charge; remaining termination benefits were expected to be paid by the end of Q2 2018. Management estimated the reduction would lower annual cash costs by approximately $70 million.
- Interest expense increased to $123 million from $95 million. Oil and gas depreciation, depletion and amortization increased to $268 million from $197 million, including a higher depletion rate associated in part with prior reserve revisions.
- Chesapeake sold Mid-Continent properties, including Mississippian Lime assets, for approximately $420 million in Q1, subject to customary adjustments; proceeds recorded in investing cash flow were $319 million. It reported aggregate sale proceeds of approximately $500 million through May 2, 2018.
- Adoption of revenue recognition Topic 606 had an $8 million cumulative effect on equity and no material overall financial-statement impact. The company reported no income tax expense and maintained a valuation allowance against substantially all net deferred tax assets.
Outlook, risks and contingencies
Management’s 2018 priorities were to reduce debt by $2–$3 billion, fund capital expenditures with operating cash flow, and improve margins. Forecast 2018 capital expenditures, including capitalized interest, were $2.0–$2.4 billion, approximately 12% below 2017; management anticipated modest production growth adjusted for asset sales. The company said it expected to fund planned capital spending, debt service and other obligations for the next 12 months, while cautioning that liquidity beyond that period was uncertain.
- Commodity prices, reserve estimates, production performance, access to capital, debt and covenant capacity, regulatory matters, and litigation are significant risks. Chesapeake cited possible additional collateral needs of approximately $460 million; about $199 million had been requested and posted as of April 27, 2018.
- Undiscounted gathering, processing and transportation commitments totaled $8.909 billion, including $4.406 billion for 2023–2035; these contractual commitments were not recorded as balance-sheet liabilities.
- Commodity derivatives had a net fair-value liability of $152 million at March 31, 2018, versus $35 million at year-end. Hedging can limit exposure to price declines but also affect realized revenue; approximately $74 million of losses on settled future-period contracts remained to be recognized in later periods.
- Chesapeake reported a tentative April 12 settlement of substantially all Oklahoma civil class-action antitrust cases for an immaterial amount. It also disclosed a Healthcare of Ontario Pension Plan demand seeking $215 million plus other damages related to a 2014 transaction; the company expected suit and said it would defend itself.
- Management anticipated an estimated $11 million tax benefit as early as the next quarter from a projected reduction in state unrecognized tax benefits.
Most important facts for investors to verify
- Whether operating cash flow and asset-sale proceeds support the $2–$3 billion debt-reduction objective while funding the $2.0–$2.4 billion capital program.
- How commodity prices, derivative settlements and any additional collateral requirements affect liquidity and cash generation.
- Progress on refinancing or repayment needs, including the revolving facility’s December 2019 maturity and its scheduled Q2 2018 borrowing-base redetermination.
- Whether production growth and cost improvements offset higher production costs, transportation commitments and the higher depletion rate.
- Developments in the HOOPP claim, antitrust settlement, and the realization of deferred tax assets subject to a substantial valuation allowance.