2006 Fourth Quarter Net Income Available to Common Shareholders Reaches $446 Million and Net Income per Fully Diluted Common Share Reaches $0.96 on Revenue of $1.9 Billion and Production of 152 Bcfe
Full-Year 2006 Net Income Available to Common Shareholders Reaches $1.9 Billion on Revenue of $7.3 Billion and Production of 578 Bcfe; Full-Year 2006 Net Income of $4.35 per Fully Diluted Common Share Increases 73% Over Full-Year 2005
Proved Reserves Reach Record Level of 9.0 Tcfe; Company Delivers Full-Year Reserve Replacement Rate of 348% From 1.4 Tcfe of Additions at a Drilling and Acquisition Cost of $1.93 per Mcfe
Company Provides Updated and Detailed Review of its 17.7 Tcfe of Risked Unproved Reserves Located on its 10.7 Million Net Acres of U.S. Onshore Leasehold
Chesapeake Energy Corporation has reported financial and operating results for the 2006 fourth quarter and for the full-year 2006. For the quarter, Chesapeake generated net income available to common shareholders of $446 million ($0.96 per fully diluted common share), operating cash flow of $1.095 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $1.253 billion (defined as net income before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $1.868 billion and production of 152 billion cubic feet of natural gas equivalent (bcfe). For the quarter, ebitda increased 18% over the 2005 fourth quarter and net income per fully diluted common share decreased 14%.
For the full-year 2006, Chesapeake generated net income available to common shareholders of $1.904 billion ($4.35 per fully diluted common share), operating cash flow of $4.045 billion and ebitda of $5.019 billion on revenue of $7.326 billion and production of 578 bcfe. Full-year 2006 ebitda and net income per fully diluted common share increased 89% and 73%, respectively, over the full-year 2005.
Excluding the items detailed below, Chesapeake generated adjusted net income to common shareholders in the 2006 fourth quarter of $418 million ($0.90 per fully diluted common share) and adjusted ebitda of $1.210 billion. For the full-year 2006, Chesapeake generated adjusted net income to common shareholders of $1.575 billion ($3.61 per fully diluted common share) and adjusted ebitda of $4.449 billion. For the 2006 fourth quarter, adjusted ebitda and adjusted net income per fully diluted common share increased 36% and 7%, respectively, over the 2005 fourth quarter. For the full-year 2006, adjusted ebitda and adjusted net income per fully diluted common share increased 66% and 40%, respectively, over the full-year 2005. The excluded items do not affect the calculation of operating cash flow.
The company's fourth quarter and full-year 2006 net income available to common shareholders and ebitda include various items that are typically not included in published estimates of the company's financial results by certain securities analysts. Such items and their after-tax effects on fourth quarter and full-year reported results are described as follows:
• an unrealized mark-to-market gain of $27 million for the fourth quarter and a $308 million gain for the full-year resulting from the company's oil and natural gas and interest rate hedging programs;
• a realized gain of $73 million for the full-year resulting from the sale of the company's investment in the common stock of Pioneer Drilling Corporation (AMEX:PDC);
• a charge of $34 million for the full-year relating to the acceleration of vesting of stock options and restricted stock in connection with the February 2006 resignation of Chesapeake's President and Chief Operating Officer, Tom L. Ward;
• a reversal of an accrual for the full-year of $7 million for production taxes as a result of the dismissal of certain production tax claims;
• a $15 million income tax accrual for the full-year relating to the adoption of a "margin" tax in Texas; and
• a reduction of net income available to common shareholders of $11 million for the full-year resulting from exchanges of the company's preferred stock for common stock.
Production
Oil and Natural Gas Production Sets Record for 22nd Consecutive Quarter and 17th Consecutive Year; 2006 Fourth Quarter Average Daily Production Increases 17% over the 2005 Fourth Quarter and Full-Year 2006 Production Increases 23% over Full-Year 2005
Daily production for the 2006 fourth quarter averaged 1.653 bcfe, an increase of 235 million cubic feet of natural gas equivalent (mmcfe), or 17%, over the 1.418 bcfe of daily production in the 2005 fourth quarter and an increase of 56 mmcfe, or 4%, over the 1.597 bcfe produced per day in the 2006 third quarter. During October 2006, Chesapeake elected to defer approximately 2.0 billion cubic feet of natural gas (bcf) of production in response to temporarily depressed natural gas prices.
Chesapeake's 2006 fourth quarter production of 152.1 bcfe was comprised of 138.8 bcf (91% on a natural gas equivalent basis) and 2.22 million barrels of oil and natural gas liquids (mmbbls) (9% on a natural gas equivalent basis). Chesapeake's average daily production for the quarter of 1.653 bcfe consisted of 1.508 bcf of natural gas and 24,098 barrels (bbls) of oil. The 2006 fourth quarter was Chesapeake's 22nd consecutive quarter of sequential U.S. production growth. Over these 22 quarters, Chesapeake's U.S. production has increased 322%, for an average compound quarterly growth rate of 6.8% and an average compound annual growth rate of 29.7%.
The company's daily production for the full-year 2006 averaged 1.585 bcfe, an increase of 301 mmcfe, or 23%, over the 1.284 bcfe of daily production for the full-year 2005. Chesapeake's full-year 2006 production of 578.4 bcfe was comprised of 526.5 bcf (91% on a natural gas equivalent basis) and 8.65 mmbbls (9% on a natural gas equivalent basis). Chesapeake's average daily production for the full-year 2006 of 1.585 bcfe consisted of 1.442 bcf of natural gas and 23,710 bbls of oil. The full-year 2006 was Chesapeake's 17th consecutive year of sequential production growth.
Chesapeake's 23% total production growth in 2006 follows growth of 29% in 2005, 35% in 2004, 48% in 2003 and 12% in 2002. The company's current rate of production is approximately 1.7 bcfe per day and based on projected drilling levels and anticipated results, Chesapeake is forecasting total production growth of 14-18% for 2007 and 10-14% for 2008.
Reserves
Year-End 2006 Oil and Natural Gas Proved Reserves Reach Record Level of 9.0 Tcfe; Full-Year 2006 Drilling and Acquisition Costs Average $1.93 per Mcfe as Company Added 1.4 Tcfe for a Reserve Replacement Rate of 348%
Chesapeake began 2006 with estimated proved reserves of 7.521 trillion cubic feet of natural gas equivalent (tcfe) and ended the year with 8.956 tcfe, an increase of 1.435 tcfe, or 19%. During 2006, Chesapeake replaced its 578 bcfe of production with an estimated 2.013 tcfe of new proved reserves for a reserve replacement rate of 348%.
Reserve replacement through the drillbit was 1.345 tcfe, or 233% of production (including 729 bcfe of positive performance revisions and 212 bcfe of downward revisions resulting from oil and natural gas price declines between December 31, 2005 and December 31, 2006) and 67% of the total increase. Reserve replacement through the acquisition of proved reserves was 668 bcfe, or 115% of production and 33% of the total increase.
On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company's total drilling and acquisition costs were $1.93 per mcfe (excluding costs of $154 million for seismic, $3.472 billion for unproved properties and leasehold acquired during the period and $203 million relating to tax basis step-up and asset retirement obligations, as well as downward revisions of proved reserves from lower natural gas prices). Excluding these items described above, Chesapeake's exploration and development costs through the drillbit were $2.00 per mcfe during 2006 while reserve replacement costs through acquisitions of proved reserves were $1.76 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development during the full-year 2006, including seismic, leasehold, unproved properties, capitalized internal costs, non-cash tax basis step-up from corporate acquisitions and asset retirement obligations, were $8.126 billion.
During 2006, Chesapeake continued the industry's most active drilling program and drilled 1,488 gross (1,243 net) operated wells and participated in another 1,534 gross (206 net) wells operated by other companies. The company's drilling success rate was 99% for company-operated wells and 98% for non-operated wells. Also during 2006, Chesapeake invested $2.636 billion in operated wells (using an average of 98 operated rigs), $502 million in non-operated wells (using an average of 79 non-operated rigs), $617 million to acquire new leasehold (exclusive of $2.856 billion in unproved leasehold obtained through corporate and asset acquisitions) and $154 million to acquire 3-D seismic data.
