Chesapeake Energy Corporation Reports 2019 Second Quarter Financial And Operational Results

OKLAHOMA CITY, Aug. 6, 2019 /PRNewswire/ -- Chesapeake Energy Corporation (NYSE: CHK) today reported financial and operational results for the 2019 second quarter. Highlights include:

• Increasing Oil Production, Enhancing Capital Efficiency, Growing Margins and Progressing Toward Sustainable Free Cash Flow
• Delivered record oil production of 122,000 barrels (bbls) of oil per day, year-over-year growth of 36%, or 10% adjusted for asset purchases and sales; record oil mix of 25%
• Operating cost reductions further enhance margins
• Reduced cash operating expenses consisting of production, gathering, processing and transportation (GP&T) and general and administrative expenses by $57 million, or approximately $0.40 per barrel of oil equivalent (boe), when compared to the prior year quarter
• Highest second quarter operating margin per boe since 2014
• Capital efficiency improvements redefine economics of Brazos Valley assets
• Projected 2019 total savings of $250 to $280 million; eliminated approximately $600,000 in costs per well; recognized up to $2 million in savings on certain wells
• Accelerating cycle times, with approximately 45 oil wells planned to be placed to sales in the second half of 2019 compared to 28 wells in the first half
• Expanded Eagle Ford higher-margin black oil window by approximately 230 locations
• Maximizing Value of Diverse Portfolio Through Returns-Focused Capital Allocation
• Maintaining oil growth trajectory on flat capital
• Oil production poised to increase in the second half of 2019 as ~170 oil wells expected to be placed to sales, an increase of approximately 50% over the first half of 2019
• Projected to grow oil production by double-digits in 2020 on approximately flat year-over-year capex, yielding approximately flat adjusted EBITDAX at current NYMEX strip pricing and current hedge position
• Reducing capital allocation to gas assets, forecasting double-digit gas decline in 2020
• Prudently Managing Maturities to Maintain Future Liquidity
• Exchanged $884 million senior notes maturing 2020 through 2021 into new senior notes maturing 2026
• Reduced maturities prior to 2022 to approximately $600 million
• $1.6 billion of liquidity available under the Chesapeake parent credit facility
• Approximately 85% of 2019 forecasted oil, natural gas and NGL revenue hedged at prices significantly above the current strip

Doug Lawler, Chesapeake's President and Chief Executive Officer, commented, "Driven by the integration of our Brazos Valley asset, steady growth from the PRB and improved base production performance from South Texas and the Mid-Continent, Chesapeake produced approximately 122,000 barrels of oil per day, the highest quarterly oil production in the company's history, and oil production comprised approximately 25% of our total production mix, also a company record. As highlighted above, we have a significant oil growth runway in 2019 and accordingly, we are raising the mid-point of our full-year oil production guidance by approximately 250,000 barrels. In addition, our focus on cash cost leadership has resulted in reducing our full-year guidance for GP&T and production expenses. We believe the trajectory of our oil volume growth and related higher-margin cash flow from those volumes will move higher as we enter 2020.

"As we formulate our initial 2020 plans, we expect to allocate more capital to oil growth areas, with less capital going toward our gas assets. As a result, with an approximately flat capital program to 2019, we project our 2020 oil volumes will show double-digit percentage growth over 2019, while our gas volumes will show a double-digit percentage decline, yet our projected adjusted EBITDAX remains approximately the same at 2019 levels using today's lower NYMEX strip pricing and current hedge position. We look forward to driving further value from our scale, diverse portfolio and capital discipline in 2020 and beyond."

2019 Second Quarter Results

For the 2019 second quarter, Chesapeake reported net income of $98 million and net income available to common stockholders of $75 million, or $0.05 per diluted share.  Adjusting for items typically excluded by securities analysts, the 2019 second quarter adjusted net loss attributable to Chesapeake was $158 million or $0.10 per share while adjusted EBITDAX was $612 million. Reconciliations of financial measures calculated in accordance with GAAP to non-GAAP measures are provided on pages 15-19 of this release.

Average daily production for the 2019 second quarter was approximately 496,000 boe and consisted of approximately 122,000 bbls of oil, 2.034 billion cubic feet (bcf) of natural gas and 35,000 bbls of natural gas liquids (NGL). Average daily production for the 2018 second quarter was approximately 530,000 boe and consisted of approximately 90,000 bbls of oil, 2.311 bcf of natural gas and 55,000 bbls of NGL. Oil production represented approximately 25% of the company's 2019 second quarter aggregate production compared to 17% in the 2018 second quarter.

Despite lower average prices for our oil, natural gas and NGL sold, Chesapeake's cash margins increased significantly in the 2019 second quarter compared to the 2018 second quarter, primarily due to a higher oil production mix and a decrease in GP&T and general and administrative expenses. Chesapeake reduced its cash operating expenses on an absolute basis by $57 million, or approximately $0.40 per boe.

Capital Spending Overview

Chesapeake invested total capital expenditures of approximately $559 million during the 2019 second quarter, including capitalized interest of $6 million, compared to approximately $530 million in the 2018 second quarter. The increase in capital expenditures in the 2019 second quarter was largely attributable to an increase in net wells spud, completed and connected.  See tables below for a summary of activity and expenditures.

Balance Sheet and Liquidity

As of June 30, 2019, Chesapeake's principal amount of debt outstanding inclusive of Brazos Valley debt was approximately $10.161 billion, compared to $8.168 billion as of December 31, 2018. The increase in debt outstanding was largely a result of $1.375 billion in debt assumed by Chesapeake and the $353 million of net cash consideration paid as part of the WildHorse acquisition on February 1, 2019. As of June 30, 2019, the company had borrowed $1.372 billion under the $3.0 billion Chesapeake credit facility, utilized approximately $54 million for various letters of credit and had additional borrowing capacity of approximately $1.574 billion. Under the $1.3 billion Brazos Valley credit facility, the company had borrowed $686 million and had additional borrowing capacity of approximately $614 million. The borrowing bases of both credit facilities were re-affirmed in May 2019 with the next re-determination dates scheduled for the 2019 fourth quarter.

During the 2019 second quarter, Chesapeake exchanged approximately $919 million of new 8.0% Senior Notes due 2026 for approximately $884 million aggregate principal amount of its Senior Notes due 2020 and 2021 and repaid approximately $380 million of its Floating Rate Senior Notes due 2019 at maturity. As a result, Chesapeake currently has remaining maturities in 2020 and 2021 of $301 million and $294 million, respectively.

Chesapeake has protected a significant amount of its remaining 2019 revenue through hedging. As of July 31, 2019, including July and August derivative contracts that have settled, approximately 85% of the company's remaining 2019 forecasted oil, natural gas and NGL production revenue was hedged, including approximately 79% and 78% of its remaining 2019 forecasted oil and natural gas production at average prices of $59.38 per bbl and $2.83 per thousand cubic feet (mcf), respectively. Additionally, Chesapeake has basis protection on approximately 4.1 million barrels (mmbbls) of its remaining projected 2019 Eagle Ford oil production at a premium to WTI of approximately $5.85 per bbl.

In 2020, Chesapeake currently has downside protection on approximately 14.8 mmbbls of its projected oil production at an average price of $59.93 per bbl and on approximately 264.7 bcf of its projected gas production at an average price of $2.76 per mcf.

Operations Update

Chesapeake's average daily production for the 2019 second quarter was approximately 496,000 boe compared to approximately 530,000 boe in the 2018 second quarter. The following tables show average daily production and average sales prices received (excluding gains/losses on derivatives) by the company's operating areas for the 2019 and 2018 second quarters.

Brazos Valley: Driving significant capital efficiencies, business unit expected to be free cash flow positive in 2019

Chesapeake has driven significant changes and improvements through the first six months of its ownership of the Brazos Valley asset, which was acquired on February 1, 2019. Since taking over daily operations, Chesapeake has realized savings of approximately $600,000 per well, with savings of up to $2 million per well on certain individual wells, compared to the previous operator due to better drilling and completion techniques, faster cycle times and lower oilfield service costs.

The company is currently utilizing four rigs in the Brazos Valley area, placed 24 wells on production (four Austin Chalk gas wells and 20 Eagle Ford oil wells) during the 2019 second quarter and expects to place 26 wells, all in the Eagle Ford oil window, on production during the 2019 third quarter. In 2019, the company has already placed 10 wells to sales that have reached maximum 24-hour production rates of more than 900 bbls of oil per day, compared to three wells that reached that level in the same time period in 2018. Of those 10 wells, seven wells have reached maximum 24-hour production rates of more than 1,000 bbls of oil per day. All but one of these wells incorporated Chesapeake's new enhanced flow back techniques. These results, combined with stronger base production, have resulted in production that has exceeded the company's internal expectations since the acquisition.

Additionally, Chesapeake has redefined its understanding of the fluid windows on the acreage, resulting in a larger Eagle Ford oil window than originally thought. The expansion of the black oil window, based on subsurface analytics and validated by production data from wells drilled in the 2019 first quarter, increased the company's confidence of approximately 230 additional locations in the black oil window. With an expected higher oil cut from these locations, the economics of these wells are projected to be significantly stronger when compared to the company's wells in the volatile oil window or dry gas window areas of the play.

Chesapeake is evaluating options to be a shipper on a crude pipeline that will deliver the company's Brazos Valley oil volumes into the Houston, Texas market beginning in the 2020 fourth quarter. Chesapeake is also pursuing a new gathering agreement in the area that would reduce the current reliance on trucking oil volumes and improve its cost structure in the region. The company expects to have this new gathering agreement in place for the operating area during the second half of 2019.

Eagle Ford Shale: Stronger base production exceeds internal forecasts

In the company's Eagle Ford Shale position in South Texas, base production performance has been strong due to adjusted well-spacing and optimized completion designs. Chesapeake's operated sales volumes were affected by planned third-party processing plant maintenance, which reduced sales volumes for approximately one week in June, yet the business unit was still able to exceed internal forecasts for the quarter due to its stronger base production. Chesapeake is currently utilizing four rigs in the area, which were located on large ranch projects during the 2019 second quarter. As a result, 17 wells were placed on production during the 2019 second quarter and the pace will accelerate to 42 wells to be placed on production during the 2019 third quarter as these larger projects are completed.

Powder River Basin: Steadily growing high-margin oil production

In the PRB, where the company moved a sixth rig in April 2019, Chesapeake placed 16 wells on production during the 2019 second quarter and expects to place 26 wells on production during the 2019 third quarter. Development in the Turner formation continues on pace and the field's gas-to-oil ratio is moving lower as more wells are focused on the oil window. Appraisal well results continue to expand field limits, including the company's first "wine rack" test in the western portion of the Turner area in an attempt to better access stacked pays. Chesapeake recently completed the first new Niobrara well in the northern area of the field since 2014 and production testing will take place in August 2019, with two more Niobrara wells planned for later in the year. The company's first Mowry volatile oil window test is also scheduled for later in 2019.

In the 2019 second quarter, Chesapeake connected its first pads into a new oil gathering pipeline system that transports volumes to Guernsey, Wyoming. New and existing pads across the field are being connected to the gathering system weekly, resulting in meaningful GP&T expense savings going forward. As a result, more than 50% of the company's produced PRB oil is now flowing on the gathering system and is expected to grow up to 75% in the second half of the year. Also during the quarter, Chesapeake secured transportation that allows its PRB oil volumes to receive Gulf Coast pricing. Beginning in the 2020 fourth quarter, the company expects to be able to deliver certain oil volumes on a pipeline system, which has the ability to access both markets in Cushing, Oklahoma and Corpus Christi, Texas.

Marcellus Shale: Improving capital efficiency through disciplined capital spending

Chesapeake continues to create significant free cash flow in the Marcellus Shale in northeast Pennsylvania, driven by strong new well performance as a result of refined spacing, longer laterals and optimized completion designs. These capital efficient volumes, coupled with base production strength and access to better realized in-basin pricing, continue to make this a strong free cash flow generator for Chesapeake. The company is currently utilizing two drilling rigs, placed 14 wells on production during the 2019 second quarter and expects to place 12 wells on production during the 2019 third quarter. The company expects to keep its gas-weighted capital spending at prudent levels in 2020, including in its Marcellus operating area. At the current activity level, Chesapeake has approximately 10 years of drilling inventory at a break-even of $1.50 to $1.75/mcf.

Haynesville Shale: Focused on optimizing base production

In the Haynesville Shale in Louisiana, Chesapeake is currently operating one rig, placed nine wells on production during the 2019 second quarter and expects to place five wells on production during the 2019 third quarter. The company currently expects to reduce its Haynesville Shale dry gas area rig count to zero in the near future.

Mid-Continent: Capital allocated to higher-return areas, high-graded program focused on 2020 activity

In the company's Mid-Continent operating area in Oklahoma, Chesapeake placed five wells on production during the 2019 second quarter. The company dropped its only operated rig in April 2019 and expects to place no more wells on production through the end of the year.

Key Financial and Operational Results

The table below summarizes Chesapeake's key financial and operational results during the 2019 second quarter as compared to results in prior periods. The three months ended June 30, 2019 include Brazos Valley operations. The three months ended June 30, 2018 do not include Brazos Valley operations.

2019 Second Quarter Financial and Operational Results Conference Call Update

The conference call to discuss the company's financial and operational results has been scheduled on Tuesday, August 6 at 9:00 am EDT. The telephone number to access the conference call is 1-888-317-6003 or 1-412-317-6061 for international callers. The passcode for the call is 6482113. The conference call will be webcast and can be found at www.chk.com in the "Investors" section of the company's website.

Headquartered in Oklahoma City, Chesapeake Energy Corporation's (NYSE: CHK) operations are focused on discovering and developing its large and geographically diverse resource base of unconventional oil and natural gas assets onshore in the United States.

This news release and the accompanying outlook include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements other than statements of historical fact. They include statements that give our current expectations, management's outlook guidance or forecasts of future events, production and well connection forecasts, estimates of operating costs, anticipated capital and operational efficiencies, planned development drilling and expected drilling cost reductions, expected lateral lengths of wells, anticipated timing and number of wells to be placed into production, anticipated timing of the Brazos Valley business unit becoming cash flow positive, expected oil growth trajectory, anticipated timing of execution of new gathering agreement, expected oil volume growth in connection with new oil gathering system and pipeline system, general and administrative expenses, capital expenditures, projected cash flow and liquidity, our ability to enhance our cash flow and financial flexibility, plans and objectives for future operations, the ability of our employees, portfolio strength and operational leadership to create long-term value, and the assumptions on which such statements are based. Although we believe the expectations and forecasts reflected in the forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate or changed assumptions or by known or unknown risks and uncertainties.

Factors that could cause actual results to differ materially from expected results include those described under "Risk Factors" in Item 1A of our annual report on Form 10-K and any updates to those factors set forth in Chesapeake's subsequent quarterly reports on Form 10-Q or current reports on Form 8-K (available at http://www.chk.com/investors/sec-filings). These risk factors include the volatility of oil, natural gas and NGL prices; the limitations our level of indebtedness may have on our financial flexibility; our inability to access the capital markets on favorable terms; the availability of cash flows from operations and other funds to finance reserve replacement costs or satisfy our debt obligations; downgrade in our credit rating requiring us to post more collateral under certain commercial arrangements; write-downs of our oil and natural gas asset carrying values due to low commodity prices; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves and projecting future rates of production and the amount and timing of development expenditures; our ability to generate profits or achieve targeted results in drilling and well operations; leasehold terms expiring before production can be established; commodity derivative activities resulting in lower prices realized on oil, natural gas and NGL sales; the need to secure derivative liabilities and the inability of counterparties to satisfy their obligations; adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims; charges incurred in response to market conditions and in connection with our ongoing actions to reduce financial leverage and complexity; drilling and operating risks and resulting liabilities; effects of environmental protection laws and regulation on our business; legislative and regulatory initiatives further regulating hydraulic fracturing; our need to secure adequate supplies of water for our drilling operations and to dispose of or recycle the water used; impacts of potential legislative and regulatory actions addressing climate change; federal and state tax proposals affecting our industry; potential OTC derivatives regulation limiting our ability to hedge against commodity price fluctuations; competition in the oil and gas exploration and production industry; a deterioration in general economic, business or industry conditions; negative public perceptions of our industry; limited control over properties we do not operate; pipeline and gathering system capacity constraints and transportation interruptions; terrorist activities and cyber-attacks adversely impacting our operations; an interruption in operations at our headquarters due to a catastrophic event; certain anti-takeover provisions that affect shareholder rights; and our inability to increase or maintain our liquidity through debt repurchases, capital exchanges, asset sales, joint ventures, farmouts or other means.

In addition, disclosures concerning the estimated contribution of derivative contracts to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility. Our production forecasts are also dependent upon many assumptions, including estimates of production decline rates from existing wells and the outcome of future drilling activity. Expected asset sales may not be completed in the time frame anticipated or at all. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this news release, and we undertake no obligation to update any of the information provided in this release or the accompanying Outlook, except as required by applicable law. In addition, this news release contains time-sensitive information that reflects management's best judgment only as of the date of this news release.

Oil, Natural Gas and Natural Gas Liquids Hedging Activities

Chesapeake enters into oil, natural gas and NGL derivative transactions in order to mitigate a portion of its exposure to adverse changes in market prices. Please see the quarterly reports on Form 10-Q and annual reports on Form 10-K filed by Chesapeake with the SEC for detailed information about derivative instruments the company uses, its quarter-end derivative positions and accounting for oil, natural gas and natural gas liquids derivatives.

As of July 31, 2019, including July and August derivative contracts that have settled, approximately 85% of the company's 2019 forecasted oil, natural gas and NGL production revenue was hedged, including approximately 79% and 78% of its remaining 2019 forecasted oil and natural gas production at average prices of $59.38 per bbl and $2.83 per mcf, respectively.

In addition, the company had downside protection on a portion of its 2020 oil production at an average price of $59.93 per bbl and on a portion of its 2020 gas production at an average price of $2.76 per mcf.

The company's crude oil hedging positions were as follows:

The company's natural gas hedging positions were as follows:

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