OilVoice - Chesapeake Reports 2009 First Quarter Financial and Operational Results

Chesapeake Reports 2009 First Quarter Financial and Operational Results

Tuesday, May 05, 2009

Chesapeake Energy Corporation has announced financial and operating results for the 2009 first quarter. For the quarter, Chesapeake reported a net loss to common shareholders of $5.746 billion ($9.63 per fully diluted common share), operating cash flow of $999 million (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of negative $8.694 billion (defined as net income (loss) before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $1.995 billion and production of 213.0 billion cubic feet of natural gas equivalent (bcfe).

Company Details Significant 2009 First Quarter Accounting Items

Chesapeake accounts for its natural gas and oil properties using the full cost method of accounting, which requires the company to perform a ceiling test at the end of each quarter that limits the amount of its capitalized natural gas and oil properties less accumulated amortization and related deferred income taxes to the aggregate of the present value of future net revenues attributable to proved natural gas and oil reserves before tax discounted at 10% (PV-10), plus the present value of certain natural gas and oil hedges and the lower of cost or market value of unproved properties. At the end of the 2009 first quarter, the company was required to recognize a $9.6 billion ($6.0 billion after tax) ceiling test impairment as a result of this test.

The full cost ceiling test impairment charges do not impact the maintenance requirements of the company’s $3.5 billion revolving bank credit facility. Such noncash charges are excluded from the calculation of the company’s “Consolidated Indebtedness to Total Capitalization Ratio” (debt to cap ratio) pursuant to a March 2009 amendment to the credit facility agreement.

On January 1, 2009, the company adopted and applied retrospectively FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion.” FSP APB 14-1 requires the company to recognize additional non-cash interest expense for its outstanding contingent convertible senior notes (principal amount of $2.955 billion as of March 31, 2009 and December 31, 2008 and $2.340 billion as of March 31, 2008). The additional noncash interest expense recognized was largely offset by additional capitalized interest. The restatement of 2008 financial results caused no change to diluted earnings per share in the 2008 first quarter and a decrease of $0.23 per share to diluted earnings per share in the 2008 fourth quarter.

2009 First Quarter Average Daily Production Increases 5% over 2008 First Quarter Production and 2% over 2008 Fourth Quarter Production

Daily production for the 2009 first quarter averaged 2.367 bcfe, an increase of 51 million cubic feet of natural gas equivalent (mmcfe), or 2%, over the 2.316 bcfe produced per day in the 2008 fourth quarter and an increase of 123 mmcfe, or 5%, over the 2.244 bcfe produced per day in the 2008 first quarter. Adjusted for the company’s 2009 first quarter voluntary production curtailments due to low natural gas and oil prices (which averaged approximately 45 mmcfe per day), the company’s three 2008 volumetric production payment sales (which averaged approximately 148 mmcfe per day) and the estimated impact from the company’s 2008 sales of Woodford Shale and Fayetteville Shale properties (which averaged approximately 89 mmcfe per day), Chesapeake’s sequential and year-over-year production growth rates were 3% and 18%, respectively, after making similar adjustments to prior quarters.

Chesapeake’s average daily production for the 2009 first quarter consisted of 2.175 billion cubic feet of natural gas (bcf) and 31,933 barrels of oil and natural gas liquids (bbls). The company’s 2009 first quarter production of 213.0 bcfe was comprised of 195.7 bcf (92% on a natural gas equivalent basis) and 2.9 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis).

Company Continues to Curtail Natural Gas Production due to Low Wellhead Prices

On April 16, 2009, Chesapeake announced it had elected to curtail approximately 400 million cubic feet (mmcf) per day of its gross natural gas production due to continued low wellhead prices. The reduction included the approximate 200 mmcf per day curtailment of natural gas production previously announced on March 2, 2009. The company’s approximate 400 mmcf per day curtailment represents approximately 13% of Chesapeake’s current gross operated natural gas production capacity. The wells that have been curtailed are primarily located in the Mid-Continent and Barnett Shale regions. Until natural gas prices strengthen, the company plans to limit production from most newly completed wells in the Barnett and Fayetteville shales to 2 mmcf per day and in the Marcellus and Haynesville shales to 5 and 10 mmcf per day, respectively, in addition to the approximate 400 mmcf per day curtailment.

The company was able to make this decision because of its strong financial condition and extensive natural gas hedging positions. In addition, because of the steeply declining production profile of new natural gas wells and the upward trending slope of the NYMEX natural gas futures curve, Chesapeake believes deferring production and revenue to future periods with higher natural gas prices creates greater shareholder value than selling production into the current unusually low priced natural gas market. The company currently anticipates continuing to curtail natural gas production through approximately mid-year 2009, but will monitor market conditions to determine an appropriate time to resume full production.

Company Reports Natural Gas and Oil Proved Reserves of 11.9 Tcfe and Delivers 2009 First Quarter Drilling and Net Acquisition Cost of $1.58 per Mcfe

Chesapeake began 2009 with estimated proved reserves of 12.051 trillion cubic feet of natural gas equivalent (tcfe) and ended the quarter with 11.851 tcfe, a decrease of 200 bcfe, or 2%. During the 2009 first quarter, Chesapeake replaced 213 bcfe of production with an estimated 13 bcfe of new proved reserves for a reserve replacement rate of 6%. The quarter’s reserve movement includes 427 bcfe of extensions, 9 bcfe of acquisitions, 397 bcfe of positive performance revisions and 820 bcfe of downward revisions resulting from natural gas price decreases between December 31, 2008 and March 31, 2009. Had natural gas and oil prices at March 31, 2009 been the same as prices at December 31, 2008, Chesapeake’s 2009 first quarter proved reserves would have been an estimated 12.671 tcfe, an increase of 620 bcfe, for a reserve replacement rate of 391% and the second best quarter of organic estimated proved reserve growth in the company’s history.

Chesapeake’s total drilling and net acquisition costs for the 2009 first quarter were $1.58 per mcfe. This calculation excludes costs of $510 million for the acquisition of unproved properties and leasehold, $154 million for capitalized interest on unproved properties, $74 million for seismic and $2 million relating to asset retirement obligations, and also excludes downward revisions of proved reserves from lower natural gas and oil prices. Excluding these items and acquisition and divestiture activity, Chesapeake’s exploration and development costs through the drillbit during the 2009 first quarter were $1.44 per mcfe, net of $269 million in drilling carries associated with the Haynesville ($86 million), Fayetteville ($172 million) and Marcellus ($11 million) joint ventures. Of the $510 million of costs for acquisition of unproved properties, approximately 50% was funded using Chesapeake common stock and a substantial portion was related to the completion of carryover leasing activity from 2008. A complete reconciliation of proved reserves and finding and acquisition costs is presented on page 15 of this release.

During the 2009 first quarter, Chesapeake continued the industry’s most active drilling program and drilled 307 gross operated wells (237 net wells with an average working interest of 77%) and participated in another 219 gross wells operated by other companies (27 net wells with an average working interest of 12%). The company’s drilling success rate was 98% for company-operated wells and 99% for non-operated wells. Also during the 2009 first quarter, Chesapeake invested $1.020 billion in operated wells (using an average of 113 operated rigs) and $166 million in non-operated wells (using an average of 58 non-operated rigs) for total drilling, completing and equipping costs of $1.186 billion.

As of March 31, 2009, Chesapeake’s PV-10 was $8.885 billion using field differential adjusted prices based on NYMEX quarter-end prices of $3.63 per mcf and $49.65 per bbl. Chesapeake’s PV-10 changes by approximately $400 million for every $0.10 per mcf change in natural gas prices and approximately $55 million for every $1.00 per bbl change in oil prices.

By comparison, the December 31, 2008 PV-10 of the company’s proved reserves was $15.601 billion ($11.833 billion applying the SFAS 69 standardized measure) using field differential adjusted prices based on NYMEX year-end prices of $5.71 per mcf and $44.61 per bbl. The March 31, 2008 PV-10 of the company’s proved reserves was $32.359 billion using field differential adjusted prices based on NYMEX quarter-end prices of $9.37 per mcf and $101.60 per bbl.

Chesapeake’s Leasehold and 3-D Seismic Inventories Total 15.2 Million Net Acres and 22.3 Million Acres; Risked Unproved Reserves in the Company’s Inventory Total 58 Tcfe while Unrisked Unproved Reserves Total 166 Tcfe

Since 2000, Chesapeake has invested $13.3 billion in new leasehold and 3-D seismic acquisitions (approximately $8.7 billion after giving effect to the three joint ventures and sales in 2008) and owns the largest combined inventories of onshore leasehold (15.2 million net acres) and 3-D seismic (22.3 million acres) in the U.S. On this leasehold, at March 31, 2009, Chesapeake had an estimated 3.8 tcfe of proved undeveloped reserves and approximately 58 tcfe of risked unproved reserves (166 tcfe of unrisked unproved reserves). The company is currently using 96 operated drilling rigs to further develop its inventory of approximately 36,000 net drillsites, which represents more than a 10-year inventory of drilling projects.

Haynesville Shale (Northwest Louisiana, East Texas): Chesapeake is the largest leasehold owner and most active driller of new wells in the Haynesville Shale play in Northwest Louisiana and East Texas. Chesapeake and its 20% partner Plains Exploration & Production Company (NYSE:PXP) continue to experience outstanding drilling results in the Haynesville play and have drilled and completed 49 Chesapeake-operated horizontal wells. Chesapeake is currently producing approximately 90 mmcfe net per day (160 mmcfe gross operated) with approximately 40 mmcfe net per day (70 mmcfe gross operated) currently curtailed from the play. The company anticipates reaching a production level of approximately 300 mmcfe net per day (600 mmcfe gross operated) by year-end 2009. Chesapeake is currently drilling with 24 operated rigs and anticipates operating an average of approximately 28 rigs in 2009 and 36 rigs in 2010 to drill approximately 125 net wells in 2009 and 175 net wells in 2010 to further develop its 470,000 net acres of Haynesville leasehold. During 2009 and 2010, 50% of Chesapeake’s drilling costs in the Haynesville, or approximately $1.0 billion, will be paid for by its joint venture partner PXP. The company’s estimated pre-tax rate of return from a targeted 6.5 bcfe Haynesville Shale well drilled for $7.0 million (excluding the benefit of drilling carries) is approximately 21% assuming current NYMEX natural gas and oil strip prices.

Marcellus Shale (West Virginia, Pennsylvania and New York): Chesapeake is the largest leasehold owner in the Marcellus Shale play that spans from northern West Virginia across much of Pennsylvania into southern New York. The company expects to end 2009 as the most active driller and the largest producer of natural gas from the play. Chesapeake is currently producing approximately 30 mmcfe net per day (45 mmcfe gross operated) from the play and anticipates reaching approximately 100 mmcfe net per day (220 mmcfe gross operated) by year-end 2009. The company has achieved attractive drilling results in the play to date, including two recent wells that began producing at rates above 6 and 7 mmcfe per day, respectively, and is planning to significantly increase its Marcellus drilling activity during 2009 and 2010. Chesapeake is currently drilling with 11 operated rigs and anticipates operating an average of approximately 14 rigs in 2009 and 28 rigs in 2010 to drill approximately 85 net wells in 2009 and 160 net wells in 2010 to further develop its 1.3 million net acres of Marcellus leasehold. During 2009 and 2010, 75% of Chesapeake’s drilling costs in the Marcellus, or approximately $650 million, will be paid for by its joint venture partner StatoilHydro (NYSE:STO, OSE:STL). The company’s estimated pre-tax rate of return from a targeted 3.75 bcfe Marcellus Shale well drilled for $4.0 million (excluding the benefit of drilling carries) is approximately 38% assuming current NYMEX natural gas and oil strip prices.

Barnett Shale (North Texas): The Barnett Shale is currently the largest and most prolific unconventional gas resource play in the U.S. In this play, Chesapeake is the second-largest producer of natural gas, the most active driller and the largest leasehold owner in the Core and Tier 1 sweet spots of Tarrant and Johnson counties. During the 2009 first quarter, Chesapeake’s average daily net production of 640 mmcfe in the Barnett increased approximately 55% over the 2008 first quarter and approximately 12% over the 2008 fourth quarter. Chesapeake is currently producing approximately 660 mmcfe net per day (960 mmcfe gross operated) at a curtailed rate from the play. Notably, Chesapeake’s Donna Ray #1-H well in Johnson County has been producing an average of 9.6 mmcfe per day during the past 30 days. The company believes this well has likely registered the highest first 30 days average daily production rate of any well in the entire Barnett Shale play to date. Chesapeake anticipates operating an average of approximately 20 rigs in 2009 and 2010 to drill approximately 305 net wells in 2009 and 290 net wells in 2010 to further develop its 310,000 net acres of leasehold, of which 280,000 net acres are located in the prime Core and Tier 1 areas. The company’s estimated pre-tax rate of return from a targeted 2.65 bcfe Barnett Shale well drilled for $2.6 million is approximately 20% assuming current NYMEX natural gas and oil strip prices.

Fayetteville Shale (Arkansas): The Fayetteville Shale is currently the second most productive shale play in the U.S. and one of the nation’s 10 largest fields of any type. In the Fayetteville, Chesapeake is the second-largest leasehold owner in the Core area of the play. During the 2009 first quarter, Chesapeake’s average daily net production of 202 mmcfe in the Fayetteville increased approximately 66% over the 2008 first quarter and approximately 16% over the 2008 fourth quarter. Chesapeake is currently producing approximately 200 mmcfe net per day (270 mmcfe gross operated) from the play and anticipates reaching approximately 280 mmcfe net per day (420 mmcfe gross operated) by year-end 2009. Drilling results by Chesapeake and other prominent operators in the Fayetteville Shale continue to improve. Chesapeake’s most recent 30 operated wells appear to be 30% more productive than its targeted reserve estimate of 2.2 bcfe per well because of drilling longer laterals, better geo-steering and enhanced completion techniques. Chesapeake anticipates operating an average of approximately 20 rigs in 2009 and 16 rigs in 2010 to drill approximately 165 net wells in 2009 and 140 net wells in 2010 to further develop its 440,000 net acres of Core Fayetteville leasehold. During 2009, nearly all of Chesapeake’s drilling costs, or approximately $550 million, will be paid for by its joint venture partner BP America (NYSE:BP). The company’s estimated pre-tax rate of return from a targeted 2.2 bcfe Fayetteville Shale well drilled for $3.0 million (excluding the benefit of drilling carries) is approximately 16% assuming current NYMEX natural gas and oil strip prices.

Company Reduces 2009-2010 Drilling Capital Expenditure Budget by $500 Million, or Approximately 8%; Targets Drilling Exploration and Development Costs of Approximately $1.25 and $1.50 per Mcfe in 2009 and 2010

During 2009 and 2010, Chesapeake anticipates generating attractive returns and delivering drillbit exploration and development costs up to 40% lower than 2008 costs from a combination of lower service costs and the benefit of using approximately $2.4 billion of its joint venture drilling carries in three of its Big 4 shale plays. As a result of lower service costs and a further decrease in planned drilling activity levels, the company has reduced its drilling capital expenditure budget for 2009 and 2010 by approximately $500 million, or approximately 8%, from $6.5 billion to $6.0 billion. Chesapeake anticipates directing approximately 80% of its gross drilling capital expenditures during 2009 and 2010 to its Big 4 shale plays and is targeting drilling exploration and development costs of approximately $1.25 and $1.50 per mcfe in each year, respectively. As a result, Chesapeake believes its maintenance capital expenditure requirement in 2009 and 2010 will only be approximately 20% of projected operating cash flow.

Company Updates Asset Monetization Plans

During 2009 and 2010, Chesapeake plans to increase its liquidity, reduce its borrowings under its revolving credit facility and also strengthen its balance sheet through asset monetizations and the growth of its proved reserve base. As a result of absolute and relative deleveraging, the company aspires to have investment grade credit metrics by year-end 2010, including a key rating agency metric of long-term debt to proved reserves of less than $0.75 per mcfe.

Chesapeake is targeting the monetization of leasehold and producing properties for $1.5 - $2.0 billion in 2009 and $1.0 - $1.5 billion in 2010 and anticipates utilizing the sale proceeds for capital expenditures and to reduce borrowings under its revolving credit facility. The company is currently documenting an agreement to sell certain Chesapeake-operated long-lived producing assets in South Texas in its fifth volumetric production payment transaction (VPP). The assets include proved reserves of approximately 90 bcfe and current net production of approximately 65 mmcfe per day. The company anticipates completing this fifth VPP sale in the 2009 second quarter for proceeds of approximately $475 million, or more than $5.00 per mcfe of proved reserves. The company is planning to sell certain non-Haynesville Shale producing assets in Louisiana in its sixth VPP in the second half of 2009 for approximately $250 million.

The company is in due diligence with a private equity investor to sell a 50% minority interest in its Barnett Shale and Mid-Continent natural gas gathering and processing assets in the company’s midstream business, Chesapeake Midstream Partners. The company anticipates proceeds of more than $550 million and expects to complete the transaction in the 2009 third quarter.

Chesapeake also anticipates selling approximately $300 million of mature producing assets late in the 2009 second quarter and another $200 million in the second half of 2009. Finally, Chesapeake is currently in discussions with several companies about a possible Barnett Shale joint venture transaction and anticipates completing a transaction by year-end 2009 for proceeds of approximately $200-300 million.

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented,
“We are pleased to report our financial and operational results for the 2009 first quarter. The strong performance of our drilling program and successful hedging program enabled us to deliver attractive operating margins for the quarter that should compare well among our peers in the industry. We are also pleased to report progress in our asset monetization programs that should lead to even greater financial flexibility and deleveraging of our balance sheet as we progress through the year with approximately $1.5 - $2.0 billion of planned asset monetizations.

“We are now experiencing substantial savings in service costs from our vendors and anticipate directing approximately 80% of our planned drilling capital expenditures in the remaining three quarters of 2009 to our low-cost Big 4 shale plays. As a result, we anticipate generating exceptional drillbit finding and development costs this year, particularly given the impact of the drilling carries we will receive from our joint venture partners in the Haynesville, Fayetteville and Marcellus Shale plays. In addition, we believe it will be possible during the year to reduce our currently budgeted capex by a further 5-10% as we take advantage of further service cost reductions and much lower leasehold acquisition costs.

“Over the past five years, we have worked aggressively to secure powerful assets in the most important U.S. natural gas resource plays. We have positioned Chesapeake well to prosper in the emerging Age of Natural Gas. We look forward to providing powerful returns and capitalizing on our timely and distinctive investments in the years ahead.”