Chesapeake Energy Corporation Reports 2016 Third Quarter Financial And Operational Results

2016

2016

2015

Operated activity comparison

Q3

Q2

Q3

Average rig count

11

9

18

Gross wells completed

80

131

84

Gross wells spud

63

49

81

Gross wells connected

105

141

112

Type of cost ($ in millions)

Drilling and completion costs

$

332

$

337

$

467

Exploration costs, leasehold and additions to other PP&E

21

56

57

Subtotal capital expenditures

$

353

$

393

$

524

Capitalized interest

59

63

99

Total guided capital expenditures

$

412

$

456

$

623

Principal Amount

11/2/2016

9/30/2015

2016

$

—

$

500

2017

625

2,212

2018

599

1,016

2019

504

1,500

2020-2026 (a)

7,894

6,496

Total

$

9,622

$

11,724

(a) Includes $1.25 billion principal amount of unsecured 5.5% Convertible Senior Notes issued on October 5, 2016.

2016

2016

2015

Operating area net production (mboe/day)

Q3

Q3

Eagle Ford

101

92

108

Haynesville

139

126

106

Marcellus

134

134

135

Utica

127

137

106

Mid-Continent

55

78

118

Powder River Basin

14

16

21

Barnett

59

65

63

Other

9

9

10

Total production

638

657

667

Three Months Ended

09/30/16

06/30/16

09/30/15

Oil equivalent production (in mmboe)

59

60

61

Oil production (in mmbbls)

8

8

11

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

45.24

44.31

66.04

Natural gas production (in bcf)

268

269

263

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

2.13

1.97

2.51

NGL production (in mmbbls)

6

7

7

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

13.70

12.88

10.90

Production expenses ($/boe)

(2.80)

(3.05)

(4.09)

Gathering, processing and transportation expenses ($/boe)

(8.07)

(8.04)

(7.88)

Oil - ($/bbl)

(3.67)

(3.64)

(3.35)

Natural Gas - ($/mcf)

(1.47)

(1.48)

(1.49)

NGL - ($/bbl)

(8.13)

(7.61)

(8.03)

Production taxes ($/boe)

(0.29)

(0.32)

(0.42)

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

(0.90)

(0.86)

(0.64)

Stock-based compensation ($/boe)

(0.18)

(0.16)

(0.15)

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

(4.35)

(4.43)

(7.95)

DD&A of other assets ($/boe)

(0.42)

(0.48)

(0.51)

Interest expenses ($/boe)(a)

(1.20)

(1.00)

(1.41)

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

(162)

(25)

58

Operating cash flow ($ in millions)(d)

209

176

476

Operating cash flow ($/boe)

3.56

2.94

7.76

Adjusted ebitda ($ in millions)(e)

421

252

560

Adjusted ebitda ($/boe)

7.17

4.21

9.12

Net loss available to common stockholders ($ in millions)

(1,197)

(1,792)

(4,695)

Loss per share – diluted ($)

(1.54)

(2.48)

(7.08)

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

27

(145)

(83)

Adjusted income (loss) per share ($)(g)

0.09

(0.14)

(0.06)

(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 unrealized gains (losses) on supply contract derivatives, but excludes depreciation and amortization of other assets. For the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, unrealized gains (losses) were ($280 million), ($37 million) and $70 million, respectively. Additionally, the three months ended September 30, 2016 includes $146 million of proceeds related to the sale of the supply contract.

(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 18.

(f)

Defined as net income available to common stockholders, as adjusted to remove the effects of certain items detailed on page 12.

(g)

We have revised our presentation of adjusted loss per share to exclude shares considered antidilutive when calculating earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share data)

(unaudited)

Three Months Ended September 30,

2016

2015

REVENUES:

Oil, natural gas and NGL

$

1,177

$

1,363

Marketing, gathering and compression

1,099

2,013

Total Revenues

2,276

3,376

OPERATING EXPENSES:

Oil, natural gas and NGL production

164

251

Oil, natural gas and NGL gathering, processing and transportation

473

483

Production taxes

17

25

Marketing, gathering and compression

1,261

1,955

General and administrative

63

49

Restructuring and other termination costs

—

53

Provision for legal contingencies

8

—

Oil, natural gas and NGL depreciation, depletion and amortization

255

488

Depreciation and amortization of other assets

25

31

Impairment of oil and natural gas properties

433

5,416

Impairments of fixed assets and other

751

79

Net gains on sales of fixed assets

—

(1)

Total Operating Expenses

3,450

8,829

LOSS FROM OPERATIONS

(1,174)

(5,453)

OTHER INCOME (EXPENSE):

Interest expense

(73)

(88)

Losses on investments

(1)

(33)

Gains on purchases or exchanges of debt

87

—

Other income (expense)

7

(2)

Total Other Income (Expense)

20

(123)

LOSS BEFORE INCOME TAXES

(1,154)

(5,576)

INCOME TAX BENEFIT:

Current income taxes

—

—

Deferred income taxes

—

(937)

Total Income Tax Benefit

—

(937)

NET LOSS

(1,154)

(4,639)

Net income attributable to noncontrolling interests

(1)

(13)

NET LOSS ATTRIBUTABLE TO CHESAPEAKE

(1,155)

(4,652)

Preferred stock dividends

(42)

(43)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

$

(1,197)

$

(4,695)

LOSS PER COMMON SHARE:

Basic

$

(1.54)

$

(7.08)

Diluted

$

(1.54)

$

(7.08)

WEIGHTED AVERAGE COMMON AND COMMON

      EQUIVALENT SHARES OUTSTANDING (in millions):

Basic

777

663

Diluted

777

663

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share data)

(unaudited)

Nine Months Ended September 30,

2016

2015

REVENUES:

Oil, natural gas and NGL

$

2,610

$

4,122

Marketing, gathering and compression

3,241

5,993

Total Revenues

5,851

10,115

OPERATING EXPENSES:

Oil, natural gas and NGL production

552

826

Oil, natural gas and NGL gathering, processing and transportation

1,436

1,429

Production taxes

54

87

Marketing, gathering and compression

3,410

5,751

General and administrative

172

174

Restructuring and other termination costs

3

39

Provision for legal contingencies

112

359

Oil, natural gas and NGL depreciation, depletion and amortization

791

1,773

Depreciation and amortization of other assets

83

100

Impairment of oil and natural gas properties

2,331

15,407

Impairments of fixed assets and other

795

167

Net (gains) losses on sales of fixed assets

(5)

3

Total Operating Expenses

9,734

26,115

LOSS FROM OPERATIONS

(3,883)

(16,000)

OTHER INCOME (EXPENSE):

Interest expense

(197)

(210)

Losses on investments

(3)

(57)

Loss on sale of investment

(10)

—

Gains on purchases or exchanges of debt

255

—

Other income

13

3

Total Other Income (Expense)

58

(264)

LOSS BEFORE INCOME TAXES

(3,825)

(16,264)

INCOME TAX BENEFIT:

Current income taxes

—

(6)

Deferred income taxes

—

(3,808)

Total Income Tax Benefit

—

(3,814)

NET LOSS

(3,825)

(12,450)

Net income attributable to noncontrolling interests

(1)

(50)

NET LOSS ATTRIBUTABLE TO CHESAPEAKE

(3,826)

(12,500)

Preferred stock dividends

(127)

(128)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

$

(3,953)

$

(12,628)

LOSS PER COMMON SHARE:

Basic

$

(5.47)

$

(19.07)

Diluted

$

(5.47)

$

(19.07)

WEIGHTED AVERAGE COMMON AND COMMON

      EQUIVALENT SHARES OUTSTANDING (in millions):

Basic

722

662

Diluted

722

662

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(unaudited)

September 30,

2016

December 31,

2015

Cash and cash equivalents

$

4

$

825

Other current assets

1,063

1,655

Total Current Assets

1,067

2,480

Property and equipment, (net)

11,051

14,298

Other assets

405

536

Total Assets

$

12,523

$

17,314

Current liabilities

$

3,606

$

3,685

Long-term debt, net

9,022

10,311

Other long-term liabilities

827

921

Total Liabilities

13,455

14,917

Preferred stock

3,036

3,062

Noncontrolling interests

259

259

Common stock and other stockholders' equity

(4,227)

(924)

Total Equity

(932)

2,397

Total Liabilities and Equity

$

12,523

$

17,314

Common shares outstanding (in millions)

776

663

Principal amount of debt outstanding

$

8,717

$

9,706

CHESAPEAKE ENERGY CORPORATION

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

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

Net Production:

Oil (mmbbl)

8

11

25

32

Natural gas (bcf)

268

263

814

802

NGL (mmbbl)

6

7

19

21

Oil equivalent (mmboe)

59

61

180

187

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

Oil sales

$

342

$

469

$

952

$

1,549

Oil derivatives – realized gains (losses)(a)

18

224

102

641

Oil derivatives – unrealized gains (losses)(a)

23

(100)

(217)

(444)

Total Oil Sales

383

593

837

1,746

Natural gas sales

622

590

1,545

1,937

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

(50)

70

192

341

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

131

33

(204)

(198)

Total Natural Gas Sales

703

693

1,533

2,080

NGL sales

84

77

247

296

NGL derivatives – realized gains (losses)(a)

(2)

—

(5)

—

NGL derivatives – unrealized gains (losses)(a)

9

—

(2)

—

Total NGL Sales

91

77

240

296

Total Oil, Natural Gas and NGL Sales

$

1,177

$

1,363

$

2,610

$

4,122

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

Oil ($ per bbl)

$

42.94

$

44.60

$

38.21

$

47.90

Natural gas ($ per mcf)

$

2.32

$

2.25

$

1.90

$

2.41

NGL ($ per bbl)

$

13.93

$

10.90

$

12.90

$

14.06

Oil equivalent ($ per boe)

$

17.86

$

18.52

$

15.27

$

20.21

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

Oil ($ per bbl)

$

45.24

$

66.04

$

42.31

$

67.73

Natural gas ($ per mcf)

$

2.13

$

2.51

$

2.13

$

2.84

NGL ($ per bbl)

$

13.70

$

10.90

$

12.66

$

14.06

Oil equivalent ($ per boe)

$

17.30

$

23.33

$

16.88

$

25.47

Interest Expense ($ in millions):

Interest(b)

$

74

$

88

$

199

$

222

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

(3)

(2)

(9)

(4)

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

2

2

7

(8)

Total Interest Expense

$

73

$

88

$

197

$

210

(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:

September 30, 2016

September 30, 2015

Beginning cash

$

4

$

2,051

Net cash provided by operating activities

376

318

Cash flows from investing activities:

Drilling and completion costs(a)

(339)

(528)

Acquisitions of proved and unproved properties(b)

(157)

(141)

Proceeds from divestitures of proved and unproved properties

24

174

Additions to other property and equipment(c)

(7)

(21)

Proceeds from sales of other property and equipment

—

73

Decrease in restricted cash

—

52

Other

(1)

(2)

Net cash used in investing activities

(480)

(393)

Net cash provided by (used in) financing activities

104

(217)

Change in cash and cash equivalents

—

(292)

Ending cash

$

4

$

1,759

(a)

Includes capitalized interest of $1 million and $3 million for the three months ended September 30, 2016 and 2015, respectively.

(b)

Includes capitalized interest of $56 million and $93 million for the three months ended September 30, 2016 and 2015, respectively.

(c)

Includes capitalized interest of a nominal amount and $1 million for the three months ended September 30, 2016 and 2015, respectively.

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED CASH FLOW DATA

($ in millions)

(unaudited)

NINE MONTHS ENDED:

September 30, 2016

September 30, 2015

Beginning cash

$

825

$

4,108

Net cash provided by operating activities

50

1,055

Cash flows from investing activities:

Drilling and completion costs(a)

(948)

(2,696)

Acquisitions of proved and unproved properties(b)

(583)

(407)

Proceeds from divestitures of proved and unproved properties

988

188

Additions to other property and equipment(c)

(32)

(114)

Proceeds from sales of other property and equipment

70

80

Cash paid for title defects

(69)

—

Additions to investments

—

(1)

Decrease in restricted cash

—

52

Other

(5)

(7)

Net cash used in investing activities

(579)

(2,905)

Net cash used in financing activities

(292)

(499)

Change in cash and cash equivalents

(821)

(2,349)

Ending cash

$

4

$

1,759

(a)

Includes capitalized interest of $5 million and $21 million for the nine months ended September 30, 2016 and 2015, respectively.

(b)

Includes capitalized interest of $179 million and $305 million for the nine months ended September 30, 2016 and 2015, respectively.

(c)

Includes capitalized interest of $1 million and $3 million for the nine months ended September 30, 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:

September 30, 2016

$

Shares(a)

$/Share(c) (d)

Net loss available to common stockholders

$

(1,197)

777

$

(1.54)

Adjustments:

Unrealized gains on commodity derivatives

(163)

(0.21)

Unrealized losses on supply contract derivatives

280

0.36

Provision for legal contingencies

8

0.01

Impairment of oil and natural gas properties

433

0.56

Impairments of fixed assets and other

751

0.97

Gains on purchases or exchanges of debt

(87)

(0.11)

Other

2

—

Tax effect of above items(b)

—

—

Adjusted net income available to common stockholders(c) (Non-GAAP)

27

0.04

Preferred stock dividends

42

0.05

Total adjusted net income attributable to Chesapeake(c) (d) (Non-GAAP)

$

69

(b)

Our effective tax rate in the three months ended September 30, 2016 was 0%; thus, there is no tax effect on the reconciling adjustments.

(c)

Adjusted net income and adjusted earnings per common share 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 earnings per share.  Adjusted net income available to common stockholders and adjusted earnings per share 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.

(d) 

We have revised our presentation of adjusted loss per share to exclude shares considered antidilutive when calculating earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

(in millions, except per share data)

(unaudited)

THREE MONTHS ENDED:

September 30, 2015

$

Shares(a)

$/Share(c) (d)

Net loss available to common stockholders

$

(4,695)

663

$

(7.08)

Adjustments:

Unrealized losses on commodity derivatives

67

0.10

Unrealized gains on supply contract derivatives

(70)

(0.10)

Restructuring and other termination costs

53

0.08

Impairment of oil and natural gas properties

5,416

8.17

Impairments of fixed assets and other

79

0.12

Net gains on sales of fixed assets

(1)

—

Tax effect of above items(b)

(932)

(1.41)

Adjusted net loss available to common stockholders(c) (Non-GAAP)

(83)

(0.12)

Preferred stock dividends

43

0.06

Total adjusted net loss attributable to Chesapeake(c) (d) (Non-GAAP)

$

(40)

$

(0.06)

(a)

Weighted average common and common equivalent shares outstanding do not include 113 million shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.

(b) 

Our effective tax rate in the three months ended September 30, 2015 was 16.8%.

(c) 

Adjusted net income and adjusted earnings per common share 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 earnings per share.  Adjusted net income available to common stockholders and adjusted earnings per share 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.

(d) 

We have revised our presentation of adjusted loss per share to exclude shares considered antidilutive when calculating earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

(in millions, except per share data)

(unaudited)

NINE MONTHS ENDED:

September 30, 2016

$

Shares(a)

$/Share(c) (d)

Net loss available to common stockholders

$

(3,953)

722

$

(5.47)

Adjustments:

Unrealized losses on commodity derivatives

423

0.58

Unrealized losses on supply contract derivatives

297

0.41

Restructuring and other termination costs

3

—

Provision for legal contingencies

112

0.16

Impairment of oil and natural gas properties

2,331

3.23

Impairments of fixed assets and other

795

1.10

Net gains on sales of fixed assets

(5)

(0.01)

Loss on sale of investment

10

0.01

Gains on purchases or exchanges of debt

(255)

(0.35)

Tax rate adjustment

—

—

Other

8

0.01

Tax effect of above items(b)

—

—

Adjusted net loss available to common stockholders(c) (Non-GAAP)

(234)

(0.33)

Preferred stock dividends

127

0.18

Total adjusted net loss attributable to Chesapeake(c) (d) (Non-GAAP)

$

(107)

$

(0.15)

(a)

Weighted average common and common equivalent shares outstanding do not include 113 million shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.

(b)

Our effective tax rate in the nine months ended September 30, 2016 was 0%; thus, there is no tax effect on the reconciling adjustments.

(c)

Adjusted net income and adjusted earnings per share 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 earnings per share.  Adjusted net income available to common stockholders and adjusted earnings per share 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.

(d)

We have revised our presentation of adjusted loss per share to exclude shares considered antidilutive when calculating earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

(in millions, except per share data)

(unaudited)

NINE MONTHS ENDED:

September 30, 2015

$

Shares(a)

$/Share(c) (d)

Net loss available to common stockholders

$

(12,628)

662

$

Adjustments:

Unrealized losses on commodity derivatives

642

0.97

Unrealized gains on supply contract derivatives

(290)

(0.44)

Restructuring and other termination costs

39

0.06

Provision for legal contingencies

359

0.54

Impairment of oil and natural gas properties

15,407

23.27

Impairments of fixed assets and other

167

0.25

Net losses on sales of fixed assets

3

—

Tax rate adjustment

(17)

(0.02)

Other

(17)

(0.02)

Tax effect of above items(b)

(3,827)

(5.78)

Adjusted net loss available to common stockholders(c) (Non-GAAP)

(162)

(0.24)

Preferred stock dividends

128

0.19

Total adjusted net loss attributable to Chesapeake(c) (d) (Non-GAAP)

$

(34)

(0.05)

(a)

Weighted average common and common equivalent shares outstanding do not include 115 million shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.

(b)

Our effective tax rate in the nine months ended September 30, 2015 was 23.5%.

(c)

Adjusted net income and adjusted earnings per common share 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 earnings per share.  Adjusted net income available to common stockholders and adjusted earnings per share 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.

(d)

We have revised our presentation of adjusted loss per share to exclude shares considered antidilutive when calculating earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF OPERATING CASH FLOW AND EBITDA

($ in millions)

(unaudited)

THREE MONTHS ENDED:

September 30,

2016

September 30,

2015

CASH PROVIDED BY OPERATING ACTIVITIES

$

376

$

318

Changes in assets and liabilities

(167)

158

OPERATING CASH FLOW(a)

$

209

$

476

THREE MONTHS ENDED:

September 30, 2016

September 30, 2015

NET LOSS

$

(1,154)

$

(4,639)

Interest expense

73

88

Income tax benefit

—

(937)

Depreciation and amortization of other assets

25

31

Oil, natural gas and NGL depreciation, depletion and amortization

255

488

EBITDA(b)

$

(801)

$

(4,969)

THREE MONTHS ENDED:

September 30, 2016

September 30, 2015

CASH PROVIDED BY OPERATING ACTIVITIES

$

376

$

318

Changes in assets and liabilities

(167)

158

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

71

86

Gains on commodity derivatives, net

129

227

Gains (losses) on supply contract derivatives, net

(134)

70

Cash receipts on commodity and supply contract derivative settlements, net

(101)

(223)

Amendment of natural gas gathering contract

66

—

Stock-based compensation

(15)

(18)

Restructuring and other termination costs

1

(53)

Provision for legal contingencies

27

—

Impairment of oil and natural gas properties

(433)

(5,416)

Impairments of fixed assets and other

(751)

(79)

Net gains on sales of fixed assets

—

1

Investment activity

(1)

(33)

Gains on purchases or exchanges of debt

87

—

Other items

44

(7)

EBITDA(b)

$

(801)

$

(4,969)

(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 OPERATING CASH FLOW AND EBITDA

($ in millions)

(unaudited)

NINE MONTHS ENDED:

September 30, 2016

September 30, 2015

CASH PROVIDED BY OPERATING ACTIVITIES

$

50

$

1,055

Changes in assets and liabilities

598

877

OPERATING CASH FLOW(a)

$

648

$

1,932

NINE MONTHS ENDED:

September 30, 2016

September 30, 2015

NET LOSS

$

(3,825)

$

(12,450)

Interest expense

197

210

Income tax benefit

—

(3,814)

Depreciation and amortization of other assets

83

100

Oil, natural gas and NGL depreciation, depletion and amortization

791

1,773

EBITDA(b)

$

(2,754)

$

(14,181)

NINE MONTHS ENDED:

September 30, 2016

September 30, 2015

CASH PROVIDED BY OPERATING ACTIVITIES

$

50

$

1,055

Changes in assets and liabilities

598

877

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

190

218

Gains (losses) on commodity derivatives, net

(134)

340

Gains (losses) on supply contract derivatives, net

(151)

290

Cash receipts on commodity and supply contract derivative settlements, net

(487)

(859)

Amendment of natural gas gathering contract

66

—

Stock-based compensation

(40)

(61)

Restructuring and other termination costs

(1)

(39)

Provision for legal contingencies

(77)

(359)

Impairment of oil and natural gas properties

(2,331)

(15,407)

Impairments of fixed assets and other

(785)

(159)

Net gains (losses) on sales of fixed assets

5

(3)

Investment activity

(13)

(57)

Gains on purchases or exchanges of debt

255

—

Other items

101

(17)

EBITDA(b)

$

(2,754)

$

(14,181)

(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:

September 30, 2016

September 30, 2015

EBITDA

$

(801)

$

(4,969)

Adjustments:

Unrealized (gains) losses on commodity derivatives

(163)

67

Unrealized (gains) losses on supply contract derivatives

280

(70)

Restructuring and other termination costs

—

53

Provision for legal contingencies

8

—

Impairment of oil and natural gas properties

433

5,416

Impairments of fixed assets and other

751

79

Net gains on sales of fixed assets

—

(1)

Gains on purchases or exchanges of debt

(87)

—

Net income attributable to noncontrolling interests

(1)

(13)

Other

1

(2)

Adjusted EBITDA(a)

$

421

$

560