Business context and reporting period
This is Chesapeake Energy Corporation’s unaudited Form 10-Q for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The filing does not match the request metadata’s company name, “EXPAND ENERGY Corp”; the filing identifies Chesapeake Energy Corporation.
Chesapeake is a U.S. oil and gas producer with marketing, gathering and compression operations. It reported average production of approximately 528 thousand barrels of oil equivalent per day (mboe/d) in Q1 2017.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $2,753 | $1,953 |
| Operating income (loss) | $241 | $(1,099) |
| Net income (loss) | $141 | $(1,068) |
| Net income (loss) available to common stockholders | $75 | $(1,111) |
| Diluted earnings (loss) per share | $0.08 | $(1.66) |
| Cash provided by (used in) operating activities | $99 | $(421) |
- Oil, natural gas and NGL revenue was $1,469 million, including $322 million of net derivative gains. Marketing, gathering and compression revenue was $1,284 million, against $1,328 million of expenses, producing a $44 million net loss.
- Production was 48 million barrels of oil equivalent (mmboe), down 21% year over year. Excluding derivative effects, average realized price increased to $24.13/boe from $13.28/boe.
- Cash and cash equivalents were $249 million at March 31, 2017, down from $882 million at December 31, 2016. Net working capital deficit was $1.428 billion.
- Debt principal totaled $9.081 billion; debt carrying value was $9.524 billion, including the accounting premium on second-lien notes. Total equity deficit was $1.203 billion.
- Quarter-end current assets were $1.360 billion versus current liabilities of $2.788 billion. The company reported $3.088 billion of revolving-credit borrowing capacity available at March 31, with no revolver borrowings and $697 million used for letters of credit.
- Net cash used in investing activities was $380 million, including $892 million in property-sale proceeds and $433 million of drilling and completion costs. Net cash used in financing was $1.112 billion, including $982 million spent to retire debt and $114 million of preferred dividends.
Material changes versus the prior comparable period
- Revenue increased approximately 41% and the company moved from a $1.068 billion net loss to $141 million net income. Higher commodity prices and derivative gains helped; lower production volumes partly offset the benefit.
- Average daily production declined 21% year over year, mainly due to 2016 asset sales and reduced drilling and completion activity. Management said the decline was 5% after adjusting for asset sales.
- Operating cash flow improved by $520 million, from a $421 million use to $99 million provided, principally due to higher realized commodity prices.
- Q1 2016 included a $997 million oil and gas property impairment; no such impairment was recorded in Q1 2017. Q1 2017 instead included $391 million of fixed-asset impairment and other charges, principally $290 million to assign an oil transportation agreement and $103 million to terminate certain natural gas transportation commitments.
- Interest expense rose to $95 million from $62 million, reflecting the term loan and lower capitalized interest, partly offset by lower average senior-note balances.
- The comparative Q1 2016 figures were revised for previously identified immaterial errors, including an additional $144 million of oil and gas impairment and an $11 million increase in legal contingency expense. The company said these revisions did not change Q1 2016 operating cash flow.
Outlook, management commentary, risks and unusual items
- Management forecast 2017 capital expenditures, inclusive of capitalized interest, of $2.1–$2.5 billion, compared with $1.7 billion in 2016. It planned increased activity and expected production growth in the second half of 2017 and into 2018, with the aim of balancing capital spending and operating cash flow in 2018 and beyond.
- Management said it expected cash, forecast operating cash flow and revolver availability to fund planned spending, debt service and other obligations for the next 12 months, but cautioned that liquidity measures might not meet future needs. Potential asset sales and access to capital markets were among contemplated sources of liquidity.
- Subsequent to quarter-end, the Supreme Court declined to review the 2019 Notes litigation. Chesapeake paid $441 million on April 28, 2017 using cash and revolver borrowings; the related $461 million supersedeas bond was released. The payment was not reflected in March 31 balances.
- At May 1, 2017, the company reported approximately $3.3 billion of liquidity after reflecting expected release of the litigation-related letter of credit. It also reported $293 million of collateral posted and possible additional collateral requests of approximately $431 million.
- Commodity hedges provided downside price protection on approximately 64% of remaining projected 2017 oil production at an average $50.25/bbl and 75% of remaining projected 2017 natural gas production at an average $3.05/mcf, as of May 1, 2017. Hedging can also limit gains if market prices rise.
- Holders of the 2.5% contingent convertible notes due 2037 could require repurchase on May 15, 2017; Chesapeake had offered to repurchase the notes at par. The amount holders would put was not yet clear in the filing.
- Key risks include commodity-price volatility, high debt and financing constraints, collateral and covenant requirements, litigation and regulatory proceedings (including royalty and antitrust matters), transportation commitments, and the ability to maintain liquidity and replace reserves. The filing states the company was in compliance with applicable financial covenants at March 31, 2017.
- Disclosure controls were concluded to be ineffective at March 31, 2017 because of a material weakness involving basis-price-differential calculations. Management described remediation efforts but did not report that the weakness had been remediated.
- Chesapeake reinstated preferred dividends in Q1 and paid $92 million of dividends in arrears. A $41 million loss on preferred-stock exchanges reduced income available to common stockholders.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Chesapeake Energy Corporation’s 2017 Q1 10-Q, not a filing identified as Expand Energy Corp.
- Review the effect of the $441 million post-quarter litigation payment, related revolver borrowing, and release of the supersedeas bond on current liquidity and debt.
- Assess the 2017 capital-spending plan against operating cash flow, production trends, asset-sale proceeds and the company’s stated liquidity needs.
- Check the outcome and funding impact of the May 15, 2017 repurchase right on the 2037 contingent convertible notes.
- Monitor potential collateral calls, borrowing-base changes, covenant requirements and the company’s ability to sustain access to financing.
- Review developments in royalty, antitrust, environmental and other legal proceedings, including exposures that the company said could not be estimated.
- Track remediation of the material weakness in internal controls and the reliability of subsequent reported financial information.