Business context and reporting period
The filing is Chesapeake Energy Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2011, comparing the three months ended March 31, 2011 with the prior-year quarter. The supplied company label, EXPAND ENERGY Corp, does not match the registrant named in this filing; investors should confirm the filing and issuer identity.
Chesapeake was an oil and natural gas exploration and production company with marketing, gathering, compression, drilling and other service operations. It reported production of 279.6 bcfe and average daily production of 3.107 bcfe in the quarter.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $1.612 billion | $2.798 billion |
| Operating income (loss) | $(284) million | $1.212 billion |
| Net income (loss) | $(162) million | $738 million |
| Net income (loss) available to common shareholders | $(205) million | $732 million |
| Diluted earnings (loss) per share | $(0.32) | $1.14 |
| Cash provided by operating activities | $741 million | $1.183 billion |
| Cash and cash equivalents at period end | $849 million | $516 million |
- Management attributed the quarterly net loss primarily to a $725 million after-tax unrealized mark-to-market loss from natural gas, oil and interest-rate hedging. Natural gas and oil sales included a $1.192 billion unrealized loss on non-qualifying derivatives; realized derivative gains were $488 million.
- Production rose 20% year over year to 279.6 bcfe. Oil and NGL production increased 56%; natural gas production increased 16%. Excluding unrealized derivative gains and losses, weighted average realized price was $5.99 per mcfe versus $6.80.
- Marketing, gathering and compression generated a $32 million net margin before depreciation, versus $29 million. Service operations generated $24 million, versus $7 million.
- Capital expenditures and acquisitions were substantial: cash outflows included $1.692 billion for exploration and development, $1.281 billion for proved and unproved property acquisitions, and $431 million for other property and equipment.
- Long-term debt, net, was $9.915 billion at March 31, down from $12.640 billion at December 31, 2010. The company had no borrowings outstanding under its $4.0 billion corporate and $300 million midstream revolving facilities at quarter end; $13 million of corporate-facility letters of credit were outstanding.
- Current assets were $3.544 billion and current liabilities $4.669 billion, implying negative working capital of approximately $1.125 billion. The common dividend declared remained $0.075 per share.
Material changes and significant transactions
- On March 31, Chesapeake sold its Fayetteville Shale assets to BHP Billiton for approximately $4.65 billion in cash. The assets included about 487,000 net acres, approximately 415 mmcfe per day of production and midstream assets. The sale included about 2.4 tcfe of proved reserves.
- Chesapeake received $570 million at closing for a new CNOOC joint venture covering a 33.3% interest in approximately 800,000 net acres in the Powder River and DJ Basins; CNOOC also committed future drilling and completion-cost funding.
- It issued $1.0 billion of 6.125% senior notes due 2021 and used $977 million of net proceeds to repay revolving credit-facility borrowings. It also repurchased $140 million principal amount of 2.25% convertible notes for approximately $129 million, recording a $2 million loss.
- Cash proceeds from property divestitures were $5.182 billion in Q1 2011, compared with $1.224 billion in Q1 2010. The filing presents Fayetteville proceeds differently in different sections; confirm the transaction’s cash-flow and proceeds classifications.
Outlook, management commentary and risks
- Under its “25/25 Plan,” management targeted a 25% reduction in long-term debt and 25% growth in net production over 2011–2012, relying substantially on asset monetizations and reduced leasehold spending.
- Budgeted drilling and completion capital expenditures, net of partner carries, were $5.5–$6.0 billion in each of 2011 and 2012. Management expected to fund substantially all of these amounts from operating cash flow, with leasehold and other spending funded through credit facilities and asset monetizations.
- Management projected liquids development would represent 50% of drilling and completion capital expenditures in 2011 and 75% in 2012, with oil and NGL production targeted to exceed 150,000 barrels per day by year-end 2012.
- Using assumed 2011 NYMEX averages of $4.50 per mcf for natural gas and $100 per barrel for oil, and including open derivatives, closed contracts and previously collected call premiums, management estimated average realized prices of $5.98 per mcf and $96.22 per barrel. These estimates exclude gathering costs and basis differentials and are subject to market changes.
- After quarter end, Chesapeake completed tenders to repurchase $1.287 billion of notes and had additional tenders pending. It expected an approximately $185 million loss in Q2 2011 related to completed and pending tenders. It also commenced a tender offer for Bronco Drilling for $11 per share, with an estimated funding need of about $315 million.
- Key risks include commodity-price volatility, substantial debt, derivative fair-value exposure and collateral requirements, reserve replacement and production uncertainty, access to capital and execution of planned monetizations, operational and environmental hazards, litigation, and pipeline, gathering or oilfield-service constraints.
- The filing describes a securities class action for which loss probability and range could not be estimated. Environmental matters included Pennsylvania methane-migration enforcement, a West Virginia Clean Water Act permitting matter, and a Pennsylvania well-control incident; the company could not estimate all potential penalties. Chesapeake temporarily suspended Pennsylvania well-completion operations after the incident.
- Undiscounted contractual commitments include $6.225 billion of pipeline transportation demand payments, approximately $468 million of rig lease payments, $415 million of compressor lease payments, and $182 million of drilling-rig commitments. These amounts are not all recorded as balance-sheet liabilities.
Most important facts for investors to verify
- Confirm the issuer identity: the filing is for Chesapeake Energy Corporation, not the company name in the request metadata.
- Reconcile the Fayetteville transaction proceeds across the filing’s disclosures and verify the treatment of related divestiture cash flows.
- Assess how much of the Q1 loss reflects noncash derivative mark-to-market movements versus operating cash generation, and review the portfolio’s derivative exposures and collateral terms.
- Verify the debt-reduction and production-growth targets, funding assumptions, and the status and realized economics of planned asset sales and debt tenders.
- Monitor liquidity and contractual commitments, environmental proceedings and the Pennsylvania well-control investigation, and the outcome and potential cost of litigation.