Chesapeake Energy Corporation Reports 2017 Third Quarter Financial And Operational Results

2017

2017

2016

Operated activity comparison

Q3

Q2

Q3

Average rig count

17

19

11

Gross wells spud

86

102

63

Gross wells completed

120

107

80

122

94

105

Type of cost ($ in millions)

Drilling and completion costs

$

626

$

596

$

332

17

24

21

Subtotal capital expenditures

$

643

$

620

$

353

Capitalized interest

49

47

59

Total capital expenditures

$

692

$

667

$

412

2017

2017

2016

Operating area net production (mboe/day)

Q3

Q2

Q3

Eagle Ford

93

100

101

Haynesville

134

121

139

Marcellus

126

135

134

Utica

120

97

127

Mid-Continent

56

59

55

Powder River Basin

13

16

14

Barnett

—

—

59

Other

—

—

9

Total production

542

528

638

Key Financial and Operational Results

The table below summarizes Chesapeake's key financial and operational results during the 2017 third quarter compared to results in prior periods.

Three Months Ended

09/30/17

06/30/17

09/30/16

Oil equivalent production (in mmboe)

50

48

59

Oil production (in mmbbls)

8

8

8

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

52.33

51.65

45.24

Natural gas production (in bcf)

219

209

268

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

2.52

2.71

2.13

NGL production (in mmbbls)

5

5

6

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

21.26

18.51

13.70

Production expenses ($/boe)

3.03

2.92

2.80

Gathering, processing and transportation expenses ($/boe)

7.40

7.44

8.07

Oil - ($/bbl)

4.33

3.70

3.67

Natural Gas - ($/mcf)

1.34

1.37

1.47

NGL - ($/bbl)

7.40

7.87

8.13

Production taxes ($/boe)

0.43

0.42

0.29

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

0.91

1.20

0.90

Stock-based compensation ($/boe)

0.17

0.25

0.18

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

4.57

4.21

4.26

DD&A of other assets ($/boe)

0.41

0.43

0.42

Interest expense ($/boe)(a)

2.26

1.92

1.20

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

(14)

(25)

(162)

Net cash provided by (used in) operating activities ($ in millions)

331

(157)

376

Net cash provided by (used in) operating activities ($/boe)

6.62

(3.27)

6.37

Operating cash flow ($ in millions)(d)

337

316

214

Operating cash flow ($/boe)

6.74

6.58

3.63

Adjusted ebitda ($ in millions)(e)

468

461

421

Adjusted ebitda ($/boe)

9.36

9.60

7.17

Net income (loss) available to common stockholders ($ in millions)

(41)

470

(1,257)

Income (loss) per share – diluted ($)

(0.05)

0.47

(1.62)

Adjusted net income (loss) attributable to Chesapeake ($ in millions)(f)

106

146

73

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

0.12

0.18

0.09

(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 for the three months ended September 30, 2016, unrealized losses on supply contract derivatives, but excludes depreciation and amortization of other assets. For the three months ended September 30, 2016, unrealized losses on supply contract derivatives were $280 million. No other period presented had such gains (losses).

(d) 

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

(e) 

Defined as net income (loss) 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 (loss) attributable to Chesapeake, as adjusted to remove the effects of certain items detailed on pages 12 - 15.

(g) 

Our presentation of diluted adjusted net income (loss) per share excludes shares considered antidilutive when calculating diluted earnings per share in accordance with GAAP.

INVESTOR CONTACT: 

 MEDIA CONTACT:

Brad Sylvester, CFA

Gordon Pennoyer

(405) 935-8870

(405) 935-8878

[email protected]

[email protected]

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions except per share data)

(unaudited)

Three Months EndedSeptember 30,

2017

2016

REVENUES:

Oil, natural gas and NGL

$

979

$

1,177

Marketing, gathering and compression

964

1,099

Total Revenues

1,943

2,276

OPERATING EXPENSES:

Oil, natural gas and NGL production

151

164

Oil, natural gas and NGL gathering, processing and transportation

369

473

Production taxes

21

17

Marketing, gathering and compression

978

1,261

General and administrative

54

63

Provision for legal contingencies

20

8

Oil, natural gas and NGL depreciation, depletion and amortization

228

251

Depreciation and amortization of other assets

20

25

Impairment of oil and natural gas properties

—

497

Impairments of fixed assets and other

9

751

Net gains on sales of fixed assets

(1)

—

Total Operating Expenses

1,849

3,510

INCOME (LOSS) FROM OPERATIONS

94

(1,234)

OTHER INCOME (EXPENSE):

Interest expense

(114)

(73)

Losses on investments

—

(1)

Gains (losses) on purchases or exchanges of debt

(1)

87

Other income

4

7

Total Other Income (Expense)

(111)

20

LOSS BEFORE INCOME TAXES

(17)

(1,214)

Income Tax Expense

—

—

NET LOSS

(17)

(1,214)

Net income attributable to noncontrolling interests

(1)

(1)

NET LOSS ATTRIBUTABLE TO CHESAPEAKE

(18)

(1,215)

Preferred stock dividends

(23)

(42)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

$

(41)

$

(1,257)

LOSS PER COMMON SHARE:

Basic

$

(0.05)

$

(1.62)

Diluted

$

(0.05)

$

(1.62)

WEIGHTED AVERAGE COMMON AND COMMON      EQUIVALENT SHARES OUTSTANDING (in millions):

Basic

909

777

Diluted

909

777

CHESAPEAKE ENERGY CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ($ in millions except per share data) (unaudited)

Nine Months EndedSeptember 30,

2017

2016

REVENUES:

Oil, natural gas and NGL

$

3,727

$

2,610

Marketing, gathering and compression

3,250

3,241

Total Revenues

6,977

5,851

OPERATING EXPENSES:

Oil, natural gas and NGL production

426

552

Oil, natural gas and NGL gathering, processing and transportation

1,081

1,436

Production taxes

64

54

Marketing, gathering and compression

3,333

3,410

General and administrative

189

172

Restructuring and other termination costs

—

3

Provision for legal contingencies

35

112

Oil, natural gas and NGL depreciation, depletion and amortization

627

791

Depreciation and amortization of other assets

62

83

Impairment of oil and natural gas properties

—

2,564

Impairments of fixed assets and other

426

795

Net gains on sales of fixed assets

—

(5)

Total Operating Expenses

6,243

9,967

INCOME (LOSS) FROM OPERATIONS

734

(4,116)

OTHER INCOME (EXPENSE):

Interest expense

(302)

(197)

Losses on investments

—

(3)

Loss on sale of investment

—

(10)

Gains on purchases or exchanges of debt

183

255

Other income

6

13

Total Other Income (Expense)

(113)

58

INCOME (LOSS) BEFORE INCOME TAXES

621

(4,058)

Income Tax Expense

2

—

NET INCOME (LOSS)

619

(4,058)

Net income attributable to noncontrolling interests

(3)

(1)

NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE

616

(4,059)

Preferred stock dividends

(62)

(127)

Loss on exchange of preferred stock

(41)

—

Earnings allocated to participating securities

(7)

—

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

$

506

$

(4,186)

EARNINGS (LOSS) PER COMMON SHARE:

Basic

$

0.56

$

(5.80)

Diluted

$

0.56

$

(5.80)

WEIGHTED AVERAGE COMMON AND COMMON      EQUIVALENT SHARES OUTSTANDING (in millions):

Basic

908

722

Diluted

908

722

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(unaudited)

September 30,2017

December 31,2016

Cash and cash equivalents

$

5

$

882

Other current assets

1,173

1,260

Total Current Assets

1,178

2,142

Property and equipment, net

10,580

10,609

Other assets

223

277

Total Assets

$

11,981

$

13,028

Current liabilities

$

2,218

$

3,648

Long-term debt, net

9,899

9,938

Other long-term liabilities

568

645

Total Liabilities

12,685

14,231

Preferred stock

1,671

1,771

Noncontrolling interests

253

257

Common stock and other stockholders' equity (deficit)

(2,628)

(3,231)

Total Equity (Deficit)

(704)

(1,203)

Total Liabilities and Equity

$

11,981

$

13,028

Common shares outstanding (in millions)

909

896

Principal amount of debt outstanding

$

9,775

$

9,989

CHESAPEAKE ENERGY CORPORATION

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

(unaudited)

Three Months EndedSeptember 30,

Nine Months EndedSeptember 30,

2017

2016

2017

2016

Net Production:

Oil (mmbbl)

8

8

23

25

Natural gas (bcf)

219

268

639

814

NGL (mmbbl)

5

6

15

19

Oil equivalent (mmboe)

50

59

145

180

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

Oil sales

$

379

$

342

$

1,140

$

952

Oil derivatives – realized gains (losses)(a)

35

18

79

102

Oil derivatives – unrealized gains (losses)(a)

(96)

23

45

(217)

Total oil sales

318

383

1,264

837

Natural gas sales

553

622

1,807

1,545

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

(1)

(50)

(53)

192

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

(3)

131

384

(204)

Total natural gas sales

549

703

2,138

1,533

NGL sales

117

84

328

247

NGL derivatives – realized gains (losses)(a)

(3)

(2)

(1)

(5)

NGL derivatives – unrealized gains (losses)(a)

(2)

9

(2)

(2)

Total NGL sales

112

91

325

240

Total oil, natural gas and NGL sales

$

979

$

1,177

$

3,727

$

2,610

Average Sales Price

 (excluding gains (losses) on derivatives):

Oil ($ per bbl)

$

47.94

$

42.94

$

48.53

$

38.21

Natural gas ($ per mcf)

$

2.52

$

2.32

$

2.83

$

1.90

NGL ($ per bbl)

$

21.83

$

13.93

$

21.28

$

12.90

Oil equivalent ($ per boe)

$

21.06

$

17.86

$

22.53

$

15.27

Average Sales Price

 (including realized gains (losses) on derivatives):

Oil ($ per bbl)

$

52.33

$

45.24

$

51.90

$

42.31

Natural gas ($ per mcf)

$

2.52

$

2.13

$

2.75

$

2.13

NGL ($ per bbl)

$

21.26

$

13.70

$

21.21

$

12.66

Oil equivalent ($ per boe)

$

21.67

$

17.30

$

22.70

$

16.88

Interest Expense ($ in millions):

Interest expense(b)

$

115

$

74

$

302

$

199

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

(1)

(3)

(3)

(9)

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

—

2

3

7

Total Interest Expense

$

114

$

73

$

302

$

197

(a)

Realized gains (losses) include the following items: (i) settlements and accruals for settlements of undesignated 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 (losses) include the change in fair value of open derivatives scheduled to settle against future period production revenues (including current period settlements for option premiums and early terminated derivatives) 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 CORPORATIONCONDENSED CONSOLIDATED CASH FLOW DATA ($ in millions) (unaudited)

THREE MONTHS ENDED:

September 30,2017

September 30,2016

Beginning cash

$

13

$

4

Net cash provided by operating activities

331

376

Cash flows from investing activities:

Drilling and completion costs(a)

(566)

(339)

Acquisitions of proved and unproved properties(b)

(64)

(157)

Proceeds from divestitures of proved and unproved properties

242

24

Additions to other property and equipment(c)

(5)

(7)

Proceeds from sales of other property and equipment

14

—

Other

—

(1)

Net cash used in investing activities

(379)

(480)

Net cash provided by financing activities

40

104

Change in cash and cash equivalents

(8)

—

Ending cash

$

5

$

4

(a) 

Includes capitalized interest of $2 million and $1 million for the three months ended September 30, 2017 and 2016, respectively.

(b) 

Includes capitalized interest of $47 million and $56 million for the three months ended September 30, 2017 and 2016, respectively.

(c)

Includes capitalized interest of a nominal amount for the three months ended September 30, 2017 and 2016, respectively.

CHESAPEAKE ENERGY CORPORATIONCONDENSED CONSOLIDATED CASH FLOW DATA ($ in millions) (unaudited)

NINE MONTHS ENDED:

September 30,2017

September 30,2016

Beginning cash

$

882

$

825

Net cash provided by operating activities

273

50

Cash flows from investing activities:

Drilling and completion costs(a)

(1,597)

(948)

Acquisitions of proved and unproved properties(b)

(226)

(583)

Proceeds from divestitures of proved and unproved properties

1,193

988

Additions to other property and equipment(c)

(12)

(32)

Proceeds from sales of other property and equipment

40

70

Cash paid for title defects

—

(69)

Other

—

(5)

Net cash used in investing activities

(602)

(579)

Net cash used in financing activities

(548)

(292)

Change in cash and cash equivalents

(877)

(821)

Ending cash

$

5

$

4

(a) 

Includes capitalized interest of $7 million and $5 million for the nine months ended September 30, 2017 and 2016, respectively.

(b) 

Includes capitalized interest of $139 million and $179 million for the nine months ended September 30, 2017 and 2016, respectively.

(c)  

Includes capitalized interest of $1 million and $1 million for the nine months ended September 30, 2017 and 2016, respectively.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS ($ in millions except per share data) (unaudited)

THREE MONTHS ENDED:

September 30, 2017

$

$/DilutedShare(b)(c)

Net loss available to common stockholders (GAAP)

$

(41)

$

(0.05)

Adjustments:

Unrealized losses on commodity derivatives

101

0.12

Provision for legal contingencies

20

0.02

Impairments of fixed assets and other

9

0.01

Net gains on sales of fixed assets

(1)

—

Losses on purchases or exchanges of debt

1

—

Income tax expense (benefit)(a)

—

—

Other

(6)

(0.01)

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

83

0.09

Preferred stock dividends

23

0.03

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

$

106

$

0.12

(a) 

Due to our valuation allowance position, no income tax effect from the adjustments has been included in determining adjusted net income.

(b) 

Adjusted net income (loss) available to common stockholders and total adjusted net income (loss) attributable to Chesapeake, both in the aggregate and per dilutive 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 (loss) available to common stockholders or earnings (loss) per share. Adjusted net income (loss) available to common stockholders and adjusted earnings (loss) 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 (loss) 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 (loss) 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) 

Our presentation of diluted adjusted net income (loss) per share excludes 206 million shares considered antidilutive when calculating diluted earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS ($ in millions except per share data) (unaudited)

THREE MONTHS ENDED:

September 30, 2016

$

$/Diluted Share(b)(c)

Net loss available to common stockholders (GAAP)

$

(1,257)

$

(1.62)

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 natural gas properties

497

0.64

Impairments of fixed assets and other

751

0.97

Gains on purchases or exchanges of debt

(87)

(0.11)

Income tax expense (benefit)(a)

—

—

Other

2

—

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

31

0.04

Preferred stock dividends

42

0.05

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

$

73

$

0.09

(a)  

Due to our valuation allowance position, no income tax effect from the adjustments has been included in determining adjusted net income.

(b) 

Adjusted net income (loss) available to common stockholders and total adjusted net income (loss) attributable to Chesapeake, both in the aggregate and per dilutive 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 (loss) available to common stockholders or earnings (loss) per share. Adjusted net income (loss) available to common stockholders and adjusted earnings (loss) 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 (loss) 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 (loss) 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) 

Our presentation of diluted adjusted net income (loss) per share excludes 113 million shares considered antidilutive when calculating diluted earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS ($ in millions except per share data) (unaudited)

NINE MONTHS ENDED:

September 30, 2017

$

$/Diluted Share(b)(c)

Net income available to common stockholders (GAAP)

$

506

$

0.56

Adjustments:

Unrealized gains on commodity derivatives

(427)

(0.47)

Provision for legal contingencies

35

0.04

Impairments of fixed assets and other

426

0.47

Gains on purchases or exchanges of debt

(183)

(0.21)

Loss on exchange of preferred stock

41

0.05

Income tax expense (benefit)(a)

—

—

Other

(3)

—

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

395

0.44

Preferred stock dividends

62

0.07

Earnings allocated to participating securities

7

—

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

$

464

$

0.51

(a) 

Due to our valuation allowance position, no income tax effect from the adjustments has been included in determining adjusted net income.

(b)  

Adjusted net income (loss) available to common stockholders and total adjusted net income (loss) attributable to Chesapeake, both in the aggregate and per dilutive 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 (loss) available to common stockholders or earnings (loss) per share. Adjusted net income (loss) available to common stockholders and adjusted earnings (loss) 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 (loss) 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 (loss) 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)  

Our presentation of diluted adjusted net income (loss) per share excludes 207 million shares considered antidilutive when calculating diluted earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS ($ in millions except per share data) (unaudited)

NINE MONTHS ENDED:

September 30, 2016

$

$/Diluted Share(b)(c)

Net loss available to common stockholders (GAAP)

$

(4,186)

(5.80)

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 natural gas properties

2,564

3.56

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)

Income tax expense (benefit)(a)

—

—

Other

8

0.01

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

(234)

(0.33)

Preferred stock dividends

127

0.18

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

$

(107)

$

(0.15)

(a) 

Due to our valuation allowance position, no income tax effect from the adjustments has been included in determining adjusted net income.

(b)  

Adjusted net income (loss) available to common stockholders and total adjusted net income (loss) attributable to Chesapeake, both in the aggregate and per dilutive 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 (loss) available to common stockholders or earnings (loss) per share. Adjusted net income (loss) available to common stockholders and adjusted earnings (loss) 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 (loss) 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 (loss) 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)  

Our presentation of diluted adjusted net income (loss) per share excludes 113 million shares considered antidilutive when calculating diluted earnings per share in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF OPERATING CASH FLOW AND EBITDA ($ in millions) (unaudited)

THREE MONTHS ENDED:

September 30, 2017

September 30, 2016

CASH PROVIDED BY OPERATING ACTIVITIES

$

331

$

376

Changes in assets and liabilities

6

(162)

OPERATING CASH FLOW(a)

$

337

$

214

THREE MONTHS ENDED:

September 30, 2017

September 30, 2016

NET LOSS

$

(17)

$

(1,214)

Interest expense

114

73

Depreciation and amortization of other assets

20

25

Oil, natural gas and NGL depreciation, depletion and amortization

228

251

EBITDA(b)

$

345

$

(865)

THREE MONTHS ENDED:

September 30, 2017

September 30, 2016

CASH PROVIDED BY OPERATING ACTIVITIES

$

331

$

376

Changes in assets and liabilities

6

(162)

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

114

71

Gains (losses) on commodity derivatives, net

(70)

129

Losses on supply contract derivatives, net

—

(134)

Cash receipts on commodity and supply contract derivative     settlements, net

(20)

(101)

Renegotiation of gas gathering contract

—

66

Stock-based compensation

(11)

(15)

Restructuring and other termination costs

—

1

Provision for legal contingencies

(20)

27

Impairment of oil and natural gas properties

—

(497)

Impairments of fixed assets and other

(8)

(751)

Net gains on sales of fixed assets

1

—

Investment activity

—

(1)

Gains on purchases or exchanges of debt

—

87

Other items

22

39

EBITDA(b)

$

345

$

(865)

(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 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 flows from operating activities prepared in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF OPERATING CASH FLOW AND EBITDA ($ in millions) (unaudited)

NINE MONTHS ENDED:

September 30, 2017

September 30, 2016

CASH PROVIDED BY OPERATING ACTIVITIES

$

273

$

50

Changes in assets and liabilities

366

614

OPERATING CASH FLOW(a)

$

639

$

664

NINE MONTHS ENDED:

September 30, 2017

September 30, 2016

NET INCOME (LOSS)

$

619

$

(4,058)

Interest expense

302

197

Income tax expense

2

—

Depreciation and amortization of other assets

62

83

Oil, natural gas and NGL depreciation, depletion and amortization

627

791

EBITDA(b)

$

1,612

$

(2,987)

NINE MONTHS ENDED:

September 30, 2017

September 30, 2016

CASH USED IN OPERATING ACTIVITIES

$

273

$

50

Changes in assets and liabilities

366

614

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

299

190

Gains (losses) on commodity derivatives, net

452

(134)

Losses on supply contract derivatives, net

—

(151)

Cash (receipts) payments on commodity and supply contract derivative settlements, net

46

(487)

Renegotiation of gas gathering contract

—

66

Stock-based compensation

(38)

(40)

Restructuring and other termination costs

—

(1)

Provision for legal contingencies

(35)

(77)

Impairment of oil and natural gas properties

—

(2,564)

Impairments of fixed assets and other

(9)

(785)

Net gains on sales of fixed assets

—

5

Investment activity

—

(13)

Gains on purchases or exchanges of debt

185

255

Other items

73

85

EBITDA(b)

$

1,612

$

(2,987)

(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 activities as an indicator of cash flows, or as a measure of liquidity. Operating cash flow for the nine months ended September 30, 2017 includes $290 million paid to assign an oil transportation agreement to a third party and $126 million paid to terminate future natural gas transportation commitments.

(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 flows from operating activities prepared in accordance with GAAP.

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED EBITDA ($ in millions) (unaudited)

THREE MONTHS ENDED:

September 30, 2017

September 30, 2016

EBITDA

$

345

$

(865)

Adjustments:

Unrealized (gains) losses on commodity derivatives

101

(163)

Unrealized losses on supply contract derivatives

—

280

Provision for legal contingencies

20

8

Impairment of oil and natural gas properties

—

497

Impairments of fixed assets and other

9

751

Net gains on sales of fixed assets

(1)

—

(Gains) losses on purchases or exchanges of debt

1

(87)

Net income attributable to noncontrolling interests

(1)

(1)

Other

(6)

1

Adjusted EBITDA(a)

$

468

$

421

CHESAPEAKE ENERGY CORPORATIONRECONCILIATION OF ADJUSTED EBITDA ($ in millions) (unaudited)

NINE MONTHS ENDED:

September 30, 2017

September 30, 2016

EBITDA

$

1,612

$

(2,987)

Adjustments:

Unrealized (gains) losses on commodity derivatives

(427)

423

Unrealized losses on supply contract derivatives

—

297

Restructuring and other termination costs

—

3

Provision for legal contingencies

35

112

Impairment of oil and natural gas properties

—

2,564

Impairments of fixed assets and other

426

795

Net gains on sales of fixed assets

—

(5)

Loss on sale of investment

—

10

Gains on purchases or exchanges of debt

(183)

(255)

Net income attributable to noncontrolling interests

(3)

(1)

Other

(6)

(1)

Adjusted EBITDA(a)

$

1,454

$

955

(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.

PV-9 is a non-GAAP metric used in the determination of the value of collateral under Chesapeake's credit facility. PV-10 is a non-GAAP metric used by the industry, investors and analysts to estimate the present value, discounted at 10% per annum, of estimated future cash flows of the company's estimated proved reserves before income tax. The following table shows the reconciliation of PV-9 and PV-10 to the company's standardized measure of discounted future net cash flows, the most directly comparable GAAP measure, for the year ended December 31, 2016 and for the interim period ended September 30, 2017. Management believes that PV-9 provides useful information to investors regarding the company's collateral position and that PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, management believes the use of a pre-tax measure is valuable for evaluating the company. Neither PV-9 nor PV-10 should be considered as an alternative to the standardized measure of discounted future net cash flows as computed under GAAP. With respect to PV-9 and PV-10 calculated as of an interim date, it is not practical to calculate taxes for the related interim period because GAAP does not provide for disclosure of standardized measure on an interim basis.

PV-9 – September 30, 2017 @ NYMEX Strip

$

8,456

Less: Change in discount factor from 9 to 10

(440)

PV-10 – September 30, 2017 @ NYMEX Strip

8,016

Less: Change in pricing assumption from NYMEX Strip to SEC

(85)

PV-10 – September 30, 2017 @ SEC

7,931

Less: Change in PV-10 from 12/31/16 to 9/30/2017

(3,526)

PV-10 – December 31, 2016 @ SEC

4,405

Less: Present value of future income tax discounted at 10%

(26)

Standardized measure of discounted future cash flows – December 31, 2016

$

4,379

CHESAPEAKE ENERGY CORPORATION

MANAGEMENT'S OUTLOOK AS OF NOVEMBER 2, 2017

Chesapeake periodically provides guidance on certain factors that affect the company's future financial performance. New information or changes from the company's September 26, 2017 Outlook are italicized bold below.

Year Ending

12/31/2017

Adjusted Production Growth(a)

(1%) to 1%

Absolute Production

Liquids - mmbbls

51.5 - 53.5

Oil - mmbbls

32.0 - 33.0

NGL - mmbbls

19.5 - 20.5

Natural gas - bcf

855 - 875

Total absolute production - mmboe

194.0 - 199.0

Absolute daily rate - mboe

532 - 545

Estimated Realized Hedging Effects(b) (based on 10/30/17 strip prices):

Oil - $/bbl

$2.61

Natural gas - $/mcf

$0.00

NGL - $/bbl

($0.20)

Estimated Basis to NYMEX Prices:

Oil - $/bbl

$0.45 - $0.55

Natural gas - $/mcf

$0.30 - $0.35

$3.75 - $4.15

Operating Costs per Boe of Projected Production:

Production expense

$2.80 - $2.95

Gathering, processing and transportation expenses

$7.15 - $7.40

Oil - $/bbl

$3.90 - $4.00

Natural Gas - $/mcf

$1.30 - $1.35

NGL - $/bbl

$7.70 - $7.90

Production taxes

$0.40 - $0.50

General and administrative(c)

$1.10 - $1.20

Stock-based compensation (noncash)

$0.10 - $0.20

DD&A of natural gas and liquids assets

$4.00 - $5.00

Depreciation of other assets

$0.40 - $0.50

Interest expense(d)

$2.05 - $2.15

Marketing, gathering and compression net margin(e)

($80) - ($60)

Book Tax Rate

0%

Capital Expenditures ($ in millions)(f)

$2,100 - $2,300

Capitalized Interest ($ in millions)

$200

Total Capital Expenditures ($ in millions)

$2,300 - $2,500

(a)  

Based on 2016 production of 529 mboe per day, adjusted for 2016 and 2017 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 expenses associated with stock-based compensation.

(d) 

Excludes unrealized gains (losses) on interest rate derivatives.

(e) 

Excludes non-cash amortization of approximately $22 million related to the buydown of a transportation agreement.

(f)   

Includes capital expenditures for drilling and completion, leasehold, geological and geophysical costs, rig termination payments and other property and plant and equipment. Excludes any additional proved property acquisitions.

Open Crude Oil Swaps

Gains (Losses) from Closed Crude Oil Trades