Chesapeake Energy Corporation — Q3 2013 Form 10-Q
Filing identity: The supplied filing is for Chesapeake Energy Corporation, not a company identified in the request metadata as EXPAND ENERGY Corp. It covers the quarter and nine months ended September 30, 2013; amounts are in U.S. dollars unless noted.
Business context and reporting period
Chesapeake was an independent U.S. natural gas and oil producer with marketing, gathering, compression and oilfield services operations. Management described a shift toward financial discipline, cost reduction and profitable growth, alongside a portfolio increasingly balanced toward liquids. CEO Aubrey McClendon left April 1, 2013; Robert Lawler was CEO at filing.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $4.867bn | $2.970bn | $12.965bn | $8.778bn |
| Net income (loss) | $240m | $(1.971)bn | $967m | $(938)m |
| Net income (loss) attributable to Chesapeake | $202m | $(2.012)bn | $840m | $(1.069)bn |
| Net income (loss) available to common stockholders | $156m | $(2.055)bn | $629m | $(1.197)bn |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.561bn | $1.978bn |
- Q3 diluted EPS was $0.24, versus a loss of $3.19 in Q3 2012; nine-month diluted EPS was $0.96, versus a loss of $1.86. Q3 2012 results included a $3.315bn natural gas and oil property impairment, a major factor in the year-over-year earnings comparison.
- Q3 production was 371.9 bcfe, down from 381.1 bcfe. Liquids were 27% of production, versus 21%; oil and NGL output rose year over year, while natural gas output fell, primarily reflecting asset sales. Nine-month production increased 4% to 1,099.4 bcfe.
- Q3 realized prices excluding unrealized derivative effects were $4.78/mcfe, versus $4.04; nine-month prices were $4.74/mcfe, versus $3.95. Derivative settlements reduced Q3 oil, gas and NGL revenue by $62m, compared with a $77m increase in Q3 2012.
- Q3 operating income was $436m, compared with an operating loss of $3.194bn. Q3 included $132m of net gains on fixed-asset sales, $85m of fixed-asset and other impairments, and $63m of restructuring and termination costs.
- Q3 marketing, gathering and compression net margin before depreciation was $23m, down from $42m; oilfield services net margin was $38m, up from $36m. These margins are not consolidated operating margins.
- At September 30, cash and cash equivalents were $987m; total debt, net, was $12.736bn; total assets were $42.288bn and equity was $18.348bn. Reported working capital was negative $1.684bn.
- Cash availability was approximately $5.178bn, defined by the company as unrestricted cash plus revolving-facility capacity. The $4bn corporate revolver was undrawn; $285m was drawn on the $500m oilfield-services revolver. The company reported a 2.75-to-1.00 indebtedness-to-EBITDA covenant ratio and compliance with applicable covenants.
- Nine-month investing cash flow was $(2.047)bn and financing cash flow was $(814)m; cash increased by $700m to $987m. Nine-month natural gas and oil expenditures were $5.281bn, including drilling, completion, acquisition, geological and geophysical costs, and capitalized interest.
Material changes versus prior comparable periods
- Revenue and earnings improved substantially, reflecting higher realized commodity prices, increased oil and NGL production, and the prior-year property impairment. The comparison also includes differing derivative effects and asset-sale activity.
- Nine-month operating cash flow rose $1.583bn year over year. Management attributed the increase principally to improved realized gas and oil prices, greater oil and NGL sales volumes, and lower unit operating costs.
- Production expense fell to $0.76/mcfe in Q3 from $0.84 and to $0.80/mcfe for nine months from $0.95. General and administrative expense per mcfe, excluding restructuring and stock compensation as described by management, also declined.
- Debt restructuring included $2.3bn of senior notes issued in 2013 and purchases or redemptions of existing notes. Debt, net of unrestricted cash, decreased approximately $584m during the first nine months.
Outlook, management commentary, risks and unusual items
- Management projected 2013 drilling and completion costs of $5.5bn–$5.8bn, down 36% from 2012, and full-year unproved-property acquisitions of $200m–$250m net of joint-venture reimbursements. The forecast 2013 capital-spending gap versus operating cash flow was approximately $3.5bn, which management said had been covered by asset and joint-venture proceeds received year to date.
- Management expected approximately $500m of additional asset-sale proceeds in Q4 2013 and said the 2014 capital budget would not depend on asset sales. It targeted balancing capital expenditures with operating cash flow over time and retaining flexibility to adjust discretionary spending.
- Management reported downside price protection on approximately 80% of estimated remaining 2013 natural gas production at an average $3.69/mcf and 91% of remaining oil production at $95.59/bbl. 2014 protection covered 251 bcf of gas at $4.22/mcf and 22 million barrels of oil at $93.79/bbl. Derivative positions carry mark-to-market exposure; reported commodity derivative fair value was a net liability of $583m.
- A workforce reduction of approximately 900 employees was expected to cost $70m, with $31m recorded in Q3 and $39m expected in Q4. Including other workforce actions, about 1,000 employees were reduced during the quarter and through October 11. The company also reported $203m of nine-month restructuring and termination charges, including costs related to the former CEO’s departure.
- After quarter-end, Chesapeake terminated a Fort Worth property financing lease for $257m and anticipated a Q4 loss of about $120m. It also bought nine leased rigs for approximately $70m and expected to record a Q4 lease-termination charge.
- Risks include commodity-price volatility, dependence on asset sales and joint ventures to fund capital needs, substantial debt, potential reserve or property impairments, hedge outcomes and counterparty risk, and significant contractual commitments. Undiscounted gathering, processing and transportation commitments totaled $17.739bn.
- Legal and regulatory matters included continuing SEC and government investigations and appeals in shareholder litigation. The company said it could not assess probable loss or estimate a range for certain matters. It expected monetary sanctions exceeding $100,000 for pending EPA matters, but did not expect a material consolidated effect; it also reported a $275,000 West Virginia penalty under a consent order.
Most important facts for investors to verify
- Confirm the issuer and filing identity: the filing is Chesapeake Energy Corporation’s 2013 Form 10-Q.
- Check whether asset-sale proceeds and operating cash flow are sufficient to fund the capital program and reduce leverage without impairing future production or cash generation.
- Review debt maturities, revolver availability, covenant definitions and compliance, and the effects of required collateral for the secured hedging facility.
- Assess the quality and sustainability of earnings, separating recurring operations from impairments, asset-sale gains, derivative mark-to-market effects, tax items and restructuring charges.
- Track production mix and volumes after divestitures, execution against capital-spending estimates, and the expected savings from workforce reductions.
- Monitor post-quarter lease and rig charges, contractual commitments, and developments in litigation, investigations and environmental proceedings.