Chesapeake Energy Corporation Reports 2016 First Quarter Financial And Operational Results

2016

2015

2015

Q1

Q4

Q1

Average operated rig count

8

14

54

Gross wells completed

57

85

261

Gross wells spud

41

66

244

Gross wells connected

80

100

262

Type of Cost ($ in millions)

Drilling and completion costs

$

281

$

405

$

1,300

16

55

63

Subtotal capital expenditures

$

297

$

460

$

1,363

Capitalized interest

68

88

123

Total capital expenditures

$

365

$

548

$

1,486

Three Months Ended

03/31/16

12/31/15

03/31/15

Oil equivalent production (in mmboe)

61

61

62

Oil production (in mmbbls)

9

9

11

Average realized oil price ($/bbl)(a)

37.74

64.04

65.73

Natural gas production (in bcf)

276

268

264

Average realized natural gas price ($/mcf)(a)

2.29

2.35

3.67

NGL production (in mmbbls)

6

7

7

Average realized NGL price ($/bbl)(a)

11.44

14.07

18.40

Production expenses ($/boe)

(3.36)

(3.62)

(4.84)

Gathering, processing and transportation expenses ($/boe)

(7.88)

(11.34)

(7.40)

Production taxes ($/boe)

(0.30)

(0.19)

(0.45)

General and administrative expenses ($/boe)(b)

(0.66)

(0.84)

(0.72)

Stock-based compensation ($/boe)

(0.13)

(0.18)

(0.19)

DD&A of oil and natural gas properties ($/boe)

(4.43)

(5.37)

(11.08)

DD&A of other assets ($/boe)

(0.48)

(0.50)

(0.57)

Interest expenses ($/boe)(a)

(0.98)

(1.70)

(0.98)

Marketing, gathering and compression net margin ($ in millions)(c)

18

2

(25)

Operating cash flow ($ in millions)(d)

263

386

882

Operating cash flow ($/boe)

4.29

6.35

14.29

Adjusted ebitda ($ in millions)(e)

282

298

928

Adjusted ebitda ($/boe)

4.61

4.90

15.02

Net loss available to common stockholders ($ in millions)

(964)

(2,228)

(3,782)

Earnings (loss) per share – diluted ($)

(1.44)

(3.36)

(5.72)

Adjusted net income (loss) available to common stockholders ($ in millions)(f)

(120)

(168)

42

Adjusted earnings (loss) per share – diluted ($)

(0.10)

(0.16)

0.11

(a)

Includes the effects of realized gains (losses) from hedging, but excludes the effects of unrealized gains (losses) from hedging.

(b) 

Excludes expenses associated with stock-based compensation and restructuring and other termination costs.

(c) 

Includes revenue, operating expenses and $20 million, $5 million and a nominal amount of unrealized gains on supply contract derivatives for the three months ended March 31, 2016, December 31, 2015 and March 31, 2015, respectively. Excludes depreciation and amortization of other assets.

(d) 

Defined as cash flow provided by operating activities before changes in assets and liabilities.

(e) 

Defined as net income before interest expense, income taxes and depreciation, depletion and amortization expense, as adjusted to remove the effects of certain items detailed on page 12.

(f) 

Defined as net income available to common stockholders, as adjusted to remove the effects of certain items detailed on page 10.

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share data)

(unaudited)

Three Months Ended

March 31,

2016

2015

REVENUES:

Oil, natural gas and NGL

$

993

$

1,543

Marketing, gathering and compression

960

1,675

Total Revenues

1,953

3,218

OPERATING EXPENSES:

Oil, natural gas and NGL production

206

299

Oil, natural gas and NGL gathering, processing and transportation

482

458

Production taxes

18

28

Marketing, gathering and compression

942

1,700

General and administrative

48

56

Restructuring and other termination costs

—

(10)

Provision for legal contingencies

22

25

Oil, natural gas and NGL depreciation, depletion and amortization

271

684

Depreciation and amortization of other assets

29

35

Impairment of oil and natural gas properties

853

4,976

Impairments of fixed assets and other

38

4

Net (gains) losses on sales of fixed assets

(4)

3

Total Operating Expenses

2,905

8,258

LOSS FROM OPERATIONS

(952)

(5,040)

OTHER INCOME (EXPENSE):

Interest expense

(62)

(51)

Losses on investments

—

(7)

Loss on sale of investment

(10)

—

Gains on purchases or exchanges of debt

100

—

Other income

3

6

Total Other Income (Expense)

31

(52)

LOSS BEFORE INCOME TAXES

(921)

(5,092)

INCOME TAX BENEFIT:

Current income taxes

—

—

Deferred income taxes

—

(1,372)

Total Income Tax Benefit

—

(1,372)

NET LOSS

(921)

(3,720)

Net income attributable to noncontrolling interests

—

(19)

NET LOSS ATTRIBUTABLE TO CHESAPEAKE

(921)

(3,739)

Preferred stock dividends

(43)

(43)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

$

(964)

$

(3,782)

LOSS PER COMMON SHARE:

Basic

$

(1.44)

$

(5.72)

Diluted

$

(1.44)

$

(5.72)

WEIGHTED AVERAGE COMMON AND COMMON

      EQUIVALENT SHARES OUTSTANDING (in millions):

Basic

668

661

Diluted

668

661

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(unaudited)

March 31, 2016

December 31, 2015

Cash and cash equivalents

$

16

$

825

Other current assets

1,476

1,655

Total Current Assets

1,492

2,480

Property and equipment, (net)

13,291

14,298

Other assets

574

536

Total Assets

$

15,357

$

17,314

Current liabilities

$

2,833

$

3,685

Long-term debt, net

10,062

10,311

Other long-term liabilities

891

921

Total Liabilities

13,786

14,917

Preferred stock

3,036

3,062

Noncontrolling interests

260

259

Common stock and other stockholders' equity

(1,725)

(924)

Total Equity

1,571

2,397

Total Liabilities and Equity

$

15,357

$

17,314

Common shares outstanding (in millions)

683

663

Principal amount of debt outstanding

$

9,425

$

9,706

CHESAPEAKE ENERGY CORPORATION

SUPPLEMENTAL DATA – OIL, NATURAL GAS AND NGL PRODUCTION, SALES AND INTEREST EXPENSE

(unaudited)

Three Months Ended

March 31,

2016

2015

Net Production:

Oil (mmbbl)

9

11

Natural gas (bcf)

276

264

NGL (mmbbl)

6

7

Oil equivalent (mmboe)

61

62

Oil, natural gas and NGL Sales ($ in millions):

Oil sales

$

255

$

486

Oil derivatives – realized gains (losses)(a)

73

235

Oil derivatives – unrealized gains (losses)(a)

(72)

(110)

Total Oil Sales

256

611

Natural gas sales

483

770

Natural gas derivatives – realized gains (losses)(a)

150

200

Natural gas derivatives – unrealized gains (losses)(a)

30

(164)

Total Natural Gas Sales

663

806

NGL sales

74

126

Total NGL Sales

74

126

Total Oil, Natural Gas and NGL Sales

$

993

$

1,543

Average Sales Price – excluding gains (losses) on derivatives:

Oil ($ per bbl)

$

29.34

$

44.33

Natural gas ($ per mcf)

$

1.75

$

2.92

NGL ($ per bbl)

$

11.44

$

18.40

Oil equivalent ($ per boe)

$

13.28

$

22.36

Average Sales Price – including realized gains (losses) on derivatives:

Oil ($ per bbl)

$

37.74

$

65.73

Natural gas ($ per mcf)

$

2.29

$

3.67

NGL ($ per bbl)

$

11.44

$

18.40

Oil equivalent ($ per boe)

$

16.93

$

29.40

Interest Expense ($ in millions):

Interest(b)

$

62

$

62

Interest rate derivatives – realized (gains) losses(c)

(3)

(1)

Interest rate derivatives – unrealized (gains) losses(c)

3

(10)

Total Interest Expense

$

62

$

51

(a)

 Realized gains and losses include the following items: (i) settlements of nondesignated derivatives related to current period production revenues, (ii) prior period settlements for option premiums and for early-terminated derivatives originally scheduled to settle against current period production revenues, and (iii) gains and losses related to de-designated cash flow hedges originally designated to settle against current period production revenues.  Unrealized gains and losses include the change in fair value of open derivatives scheduled to settle against future period production revenues offset by amounts reclassified as realized gains and losses during the period.  Although we no longer designate our derivatives as cash flow hedges for accounting purposes, we believe these definitions are useful to management and investors in determining the effectiveness of our price risk management program.

(b) 

Net of amounts capitalized.

(c) 

Realized (gains) losses include settlements related to the current period interest accrual and the effect of (gains) losses on early termination trades.  Unrealized (gains) losses include changes in the fair value of open interest rate derivatives offset by amounts reclassified to realized (gains) losses during the period.

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED CASH FLOW DATA

($ in millions)

(unaudited)

THREE MONTHS ENDED:

March 31,

2016

March 31,

2015

Beginning cash

$

825

$

4,108

Net cash provided by (used in) operating activities

(421)

423

Cash flows from investing activities:

Drilling and completion costs(a)

(265)

(1,306)

Acquisitions of proved and unproved properties(b)

(67)

(128)

Proceeds from divestitures of proved and unproved properties

62

21

Additions to other property and equipment(c)

(10)

(58)

Proceeds from sales of other property and equipment

9

2

Other

(2)

(3)

Net cash used in investing activities

(273)

(1,472)

Net cash used in financing activities

(115)

(152)

Change in cash and cash equivalents

(809)

(1,201)

Ending cash

$

16

$

2,907

(a)

 Includes capitalized interest of $2 million and $11 million for the three months ended March 31, 2016 and 2015, respectively.

(b) 

Includes capitalized interest of $64 million and $109 million for the three months ended March 31, 2016 and 2015, respectively.

(c)

Includes capitalized interest of $1 million and $1 million for the three months ended March 31, 2016 and 2015, respectively.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

($ in millions, except per share data)

(unaudited)

THREE MONTHS ENDED:

March 31,

 2016

December 31,

 2015

March 31,

 2015

Net loss available to common stockholders

$

(964)

$

(2,228)

$

(3,782)

Weighted average common and common equivalent shares outstanding (a)

668

663

661

Loss per common share (diluted)

(1.44)

(3.36)

(5.72)

Adjustments, net of tax:

Unrealized losses on commodity and interest rate derivatives

45

41

192

Unrealized gains on supply contract derivatives

(20)

(4)

—

Restructuring and other termination costs

—

(2)

(7)

Provision for legal contingencies

22

(5)

18

Impairment of oil and natural gas properties

853

2,183

3,635

Impairments of fixed assets and other

38

21

3

Net (gains) losses on sales of fixed assets

(4)

1

2

Impairment of investment

—

41

—

Loss on sale of investment

10

—

—

Gains on purchases or exchanges of debt

(100)

(215)

—

Tax rate adjustment

—

—

(17)

Other

—

(1)

(2)

Adjusted net income (loss) available to common stockholders(b)

$

(120)

$

(168)

$

42

Preferred stock dividends

43

43

43

Total adjusted net income (loss) attributable to Chesapeake

$

(77)

$

(125)

$

85

Weighted average fully diluted shares outstanding (in millions)(c)

781

777

776

Adjusted earnings (loss) per share assuming dilution(b)

$

(0.10)

$

(0.16)

$

0.11

(a) 

Weighted average common and common equivalent shares outstanding do not include shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.

(b) 

Adjusted net income and adjusted earnings per share assuming dilution are not measures of financial performance under accounting principles generally accepted in the United States (GAAP), and should not be considered as an alternative to net income available to common stockholders or diluted earnings per share.  Adjusted net income available to common stockholders and adjusted earnings per share assuming dilution exclude certain items that management believes affect the comparability of operating results. The company believes these adjusted financial measures are a useful adjunct to earnings calculated in accordance with GAAP because:

(i) 

Management uses adjusted net income available to common stockholders to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies.

(ii)

Adjusted net income available to common stockholders is more comparable to earnings estimates provided by securities analysts.

(iii) 

Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated.  Accordingly, any guidance provided by the company generally excludes information regarding these types of items.

(c)

Weighted average fully diluted shares outstanding include shares that were considered antidilutive for calculating earnings per share in accordance with GAAP. 

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF OPERATING CASH FLOW AND EBITDA

($ in millions)

(unaudited)

THREE MONTHS ENDED:

March 31, 2016

December 31, 2015

March 31, 2015

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

$

(421)

$

179

$

423

Changes in assets and liabilities

684

207

459

OPERATING CASH FLOW(a)

$

263

$

386

$

882

THREE MONTHS ENDED:

March 31,

 2016

December 31,

 2015

March 31,

 2015

NET LOSS

$

(921)

$

(2,185)

$

(3,720)

Interest expense

62

107

51

Income tax benefit

—

(649)

(1,372)

Depreciation and amortization of other assets

29

30

35

Oil, natural gas and NGL depreciation, depletion and amortization

271

326

684

EBITDA(b)

$

(559)

$

(2,371)

$

(4,322)

THREE MONTHS ENDED:

March 31,

 2016

December 31,

 2015

March 31,

 2015

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

$

(421)

$

179

$

423

Changes in assets and liabilities

684

207

459

Interest expense, net of unrealized gains (losses) on derivatives

59

104

61

Gains on commodity derivatives, net

181

284

161

Gains on supply contract derivative, net

20

5

—

Cash receipts on commodity derivative settlements, net

(267)

(273)

(413)

Stock-based compensation

(12)

(17)

(23)

Restructuring and other termination costs

—

3

10

Provision for legal contingencies

(22)

19

(25)

Impairment of oil and natural gas properties

(853)

(2,831)

(4,976)

Impairments of fixed assets and other

(33)

(16)

(2)

Net gains (losses) on sales of fixed assets

4

(1)

(3)

Investment activity

(10)

(92)

(7)

Gains on purchases or exchanges of debt

100

304

—

Other items

11

(246)

13

EBITDA(b)

$

(559)

$

(2,371)

$

(4,322)

(a) 

Operating cash flow represents net cash provided by operating activities before changes in assets and liabilities.  Operating cash flow is presented because management believes it is a useful adjunct to net cash provided by operating activities under GAAP.  Operating cash flow is widely accepted as a financial indicator of an oil and natural gas company's ability to generate cash that is used to internally fund exploration and development activities and to service debt.  This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies within the oil and natural gas exploration and production industry.  Operating cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities as an indicator of cash flows, or as a measure of liquidity.

(b) 

Ebitda represents net income before interest expense, income taxes, and depreciation, depletion and amortization expense.  Ebitda is presented as a supplemental financial measurement in the evaluation of our business.  We believe that it provides additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements.  This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies.  Ebitda is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders pursuant to our bank credit agreements and is used in the financial covenants in our bank credit agreements.  Ebitda is not a measure of financial performance under GAAP.  Accordingly, it should not be considered as a substitute for net income, income from operations or cash flow provided by operating activities prepared in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED EBITDA

($ in millions)

(unaudited)

THREE MONTHS ENDED:

March 31,

 2016

December 31,

 2015

March 31,

 2015

EBITDA

$

(559)

$

(2,371)

$

(4,322)

Adjustments:

Unrealized losses on commodity derivatives

42

51

274

Unrealized gains on supply contract derivatives

(20)

(5)

—

Restructuring and other termination costs

—

(3)

(10)

Provision for legal contingencies

22

(6)

25

Impairment of oil and natural gas properties

853

2,831

4,976

Impairments of fixed assets and other

38

27

4

Net (gains) losses on sales of fixed assets

(4)

1

3

Impairment of investment

—

53

—

Loss on sale of investment

10

—

—

Gains on purchases or exchanges of debt

(100)

(279)

—

Net income attributable to noncontrolling interests

—

—

(19)

Other

—

(1)

(3)

Adjusted EBITDA(a)

$

282

$

298

$

928

(a) 

Adjusted ebitda excludes certain items that management believes affect the comparability of operating results.  The company believes these non-GAAP financial measures are a useful adjunct to ebitda because:

(i) 

Management uses adjusted ebitda to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies.

(ii) 

Adjusted ebitda is more comparable to estimates provided by securities analysts.

(iii)

Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated.  Accordingly, any guidance provided by the company generally excludes information regarding these types of items.

Accordingly, adjusted EBITDA should not be considered as a substitute for net income, income from operations or cash flow provided by operating activities prepared in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

MANAGEMENT'S OUTLOOK AS OF MAY 5, 2016

Chesapeake periodically provides guidance on certain factors that affect the company's future financial performance. Changes from the company's February 24, 2016 Outlook are italicized bold below.

Adjusted Production Growth(a)

(5%) to 0%

Absolute Production

Liquids - mmbbls

55 - 59

Oil - mmbbls

34 - 36

NGL - mmbbls

21 - 23

Natural gas - bcf

1,000 - 1,040

Total absolute production - mmboe

222 - 232

Absolute daily rate - mboe

605 - 635

Estimated Realized Hedging Effects(b) (based on 5/3/16 strip prices):

Oil - $/bbl

$3.63

Natural gas - $/mcf

$0.25

NGL - $/bbl

($0.30)

Estimated Basis to NYMEX Prices:

Oil - $/bbl

$2.35 - $2.55

Natural gas - $/mcf

$0.30 - $0.40

NGL - $/bbl

$4.95 - $5.20

Operating Costs per Boe of Projected Production:

Production expense

$3.40 - $3.60

Gathering, processing and transportation expenses

$7.60 - $8.10

Oil - $/bbl

$3.75 - $3.95

Natural Gas(c) - $/mcf

$1.40 - $1.50

NGL - $/bbl

$7.60 - $7.85

Production taxes

$0.35 - $0.45

General and administrative(d)

$0.60 - $0.70

Stock-based compensation (noncash)

$0.10 - $0.20

DD&A of natural gas and liquids assets

$3.50 - $4.50

Depreciation of other assets

$0.50 - $0.60

Interest expense(e)

$1.05 - $1.15

Marketing, gathering and compression net margin(f)

($20) - ($40)

Book Tax Rate

0%

Capital Expenditures ($ in millions)(g)

$1,000 - $1,500

Capitalized Interest ($ in millions)

$260

Total Capital Expenditures ($ in millions)

$1,260 - $1,760

(a)

Based on 2015 production of 623 mboe per day, adjusted for 2015 and 2016 sales.

(b)

Includes expected settlements for commodity derivatives adjusted for option premiums.  For derivatives closed early, settlements are reflected in the period of original contract expiration.

(c)

Excludes a 2016 fourth quarter minimum volume commitment (MVC) shortfall estimate of approximately $165 to $175 million.

(d) 

Excludes expenses associated with stock-based compensation.

(e) 

Excludes unrealized gains (losses) on interest rate derivatives.

(f) 

Includes revenue and operating expenses. Excludes depreciation and amortization of other assets and unrealized gains (losses) on supply contract derivatives.

(g) 

Includes capital expenditures for drilling and completion, leasehold, geological and geophysical costs, rig termination payments and other property and plant and equipment and excludes approximately $245 million for the expected repurchase of overriding royalty interests associated with the expected sale of certain of the company's properties.

Open Crude Oil Swaps; Gains from Closed

Crude Oil Trades and Call Option Premiums

Open Swaps

(mbbls)

Avg. NYMEX

Price of

Open Swaps

Total Gains from Closed Trades

and Premiums for

Call Options

($ in millions)

Q2 2016

6,279

$

45.86

$

9

Q3 2016

5,980

$

46.31

10

Q4 2016

5,980

$

46.80

10

Total 2016 (a)

18,239

$

46.32

$

29

Total 2017 – 2022

2,920

$

42.53

$

78

(a) Certain hedging arrangements include a sold option to extend at an average price of $53.67 per bbl covering 2.2 mmbbls in 2016. Sold options are included with net written call options.

Crude Oil Net Written Call Options

Call Options

(mbbls)

Avg. NYMEX

Strike Price

Q2 2016

3,451

$

87.25

Q3 2016

3,489

$

87.25

Q4 2016

3,488

$

87.25

Total 2016

10,428

$

87.25

Total 2017

5,293

$

83.50

Open Natural Gas Swaps; Gains (Losses) from Closed

Natural Gas Trades and Call Option Premiums

Open Swaps

(bcf)

Avg. NYMEX

Price of

Open Swaps

Total Losses

from Closed Trades

and Premiums for

Call Options

($ in millions)

Q2 2016

174

$

2.65

$

(26)

Q3 2016

179

$

2.69

(26)

Q4 2016

123

$

2.84

(28)

Total 2016 (a)

476

$

2.71

$

(80)

Total 2017 – 2022

73

$

2.92

$

(78)

(a) Certain hedging arrangements include a sold option to extend at an average price of $2.80 per mmbtu covering 77 bcf in 2016. Sold options are included with net written call options.

Natural Gas Net Written Call Options

Call Options

(bcf)

Avg. NYMEX

Strike Price

Q2 2016

45

$

5.27

Q3 2016

45

$

5.27

Q4 2016

46

$

5.27

Total 2016

136

$

5.27

Total 2017 – 2022

114

$

10.92

Natural Gas Basis Protection Swaps

Volume

(bcf)

Avg. NYMEX plus/(minus)

Q2 2016

10

$

(0.63)

Q3 2016

12

$

(0.66)

Q4 2016

8

$

(0.58)

Total 2016

30

$

(0.63)

Total 2017 - 2022

24

$

(0.48)

Open Ethane Swaps

Volume

(mmgal)

Avg. NYMEX Price of Open Swaps

Q2 2016

57

$

0.17

Q3 2016

58

$

0.17

Q4 2016

20

$

0.17

Total 2016

135

$

0.17

Open Propane Swaps

Volume

(mmgal)

Avg. NYMEX Price of Open Swaps

Q2 2016

50

$

0.46

Q3 2016

50

$

0.46

Q4 2016

17

$

0.46

Total 2016

117

$

0.46

INVESTOR CONTACT:

MEDIA CONTACT:

Brad Sylvester, CFA

Gordon Pennoyer

(405) 935-8870

(405) 935-8878

[email protected]

[email protected]