Business context and reporting period
The supplied filing is Chesapeake Energy Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2019—not a filing identified as Expand Energy Corp in the request metadata. Chesapeake is an independent U.S. oil and gas exploration and production company. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues and other | $2,087 | $2,424 | $6,669 | $7,237 |
| Income (loss) from operations | $46 | $82 | $142 | $(36) |
| Net income (loss) | $(61) | $(146) | $16 | $(377) |
| Net loss available to common stockholders | $(101) | $(169) | $(70) | $(447) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,182 | $1,395 |
Q3 operating margin was approximately 2.2% of revenues and other; nine-month operating margin was approximately 2.1%. Interest expense was $177 million in Q3 and $513 million for the first nine months. The nine-month tax benefit of $315 million included a $314 million discrete benefit related to the WildHorse acquisition; it materially affected reported net income.
- At September 30, cash was $14 million; current assets were $1.403 billion and current liabilities $2.348 billion, a $945 million working-capital deficit.
- Total debt was $9.732 billion principal ($9.341 billion carrying value, net); long-term debt, net, was $9.133 billion. Chesapeake’s revolver had $1.504 billion drawn and $1.443 billion available; BVL’s revolver had $900 million drawn and $400 million available.
- Nine-month investing cash outflow was $1.935 billion, including $1.640 billion for drilling and completion and $353 million net cash for the WildHorse acquisition. Financing cash inflow was $763 million.
- Oil, natural gas and NGL production averaged 486 thousand barrels of oil equivalent per day in the first nine months, versus 540 thousand in 2018; Q3 averaged 478 thousand versus 537 thousand.
Material changes versus prior comparable periods
- Q3 total revenues and other fell 14%; nine-month revenues and other fell 8%. Nine-month oil, natural gas and NGL sales excluding derivative gains/losses declined 13%, to $3.412 billion. Management attributed the decline to lower realized prices and lower sales volumes, especially natural gas and NGL.
- Nine-month operating cash flow declined by $213 million to $1.182 billion, reflecting lower commodity prices and lower natural gas and NGL volumes, partly offset by higher oil volumes; it also included $72 million of WildHorse transaction and severance costs.
- Gathering, processing and transportation expense fell to $815 million from $1.060 billion for nine months, primarily reflecting prior asset divestitures. Production expense rose to $453 million from $417 million, while DD&A rose to $1.672 billion from $1.335 billion, in part due to WildHorse and a higher depletion rate.
- Comparative periods were retrospectively recast after Chesapeake voluntarily changed from the full cost to the successful efforts accounting method in 2019. This changed reported expenses and earnings; comparisons should use the recast figures.
- WildHorse was acquired February 1, 2019, for approximately 717.4 million Chesapeake shares and $381 million cash, with approximately $1.4 billion of debt also acquired. The share issuance, alongside debt and preferred-stock exchanges, significantly increased shares outstanding.
Outlook, risks and unusual items
- Management projected 2019 capital expenditures, including capitalized interest, of $2.1–$2.3 billion and anticipated reducing 2020 capital expenditures by approximately 30% to target free cash flow. It cited a long-term net-debt-to-EBITDAX target of 2x and projected WildHorse annual savings of $200–$280 million, or $1–$1.5 billion cumulatively by 2023; these are forward-looking targets, not achieved results.
- Chesapeake warned that sustained depressed commodity prices and scheduled tightening of its leverage covenant could impair compliance over the next 12 months and raise substantial doubt about its ability to continue as a going concern. It was compliant with applicable covenants at September 30 and said it believed cost reductions, refinancing, exchanges and asset sales would probably enable compliance, but cautioned that financing or asset-sale measures might not be available or sufficient.
- Other key risks include commodity-price volatility, covenant default and potential debt acceleration or collateral foreclosure, limited liquidity, capital-market access, counterparty collateral demands, litigation and environmental claims, and potential limits on tax attributes under Section 382. Management reported up to approximately $356 million of additional collateral could be requested, beyond approximately $71 million posted as of October 31.
- Material unusual items included the WildHorse acquisition and related $34 million transaction costs and $38 million severance costs; a $64 million net gain on Q3 debt-for-equity exchanges; and a $17 million loss on a preferred-stock exchange. The filing also reported a $24 million impairment of the JWH Midstream investment.
- Contingencies include royalty disputes, Oklahoma earthquake litigation and other proceedings; management said certain pending royalty losses were reasonably possible but could not estimate a loss range. Undiscounted gathering, processing and transportation commitments totaled $5.419 billion.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Chesapeake Energy Corporation, while the request metadata names Expand Energy Corp.
- Review the detailed covenant terms, tightening schedule, borrowing-base redeterminations and management’s liquidity assumptions, particularly in light of the going-concern warning.
- Assess the sustainability of operating cash flow and the 2020 capital-spending reduction under commodity-price and production scenarios.
- Verify WildHorse integration progress and realized synergies against management’s savings projections, and consider the dilution from acquisition and debt exchanges.
- Distinguish operating performance from derivative results and the one-time acquisition-related tax benefit; compare periods using the recast successful-efforts accounting figures.
- Monitor contingent litigation exposure, possible collateral calls, gathering commitments and potential Section 382 effects on tax attributes.