• Third Quarter Net Income Available to Common Shareholders of $149 Million on Revenue of $1.1 Billion and Production of 120 Bcfe Oil and Natural Gas Production Reaches 1.308 Bcfe per Day, a 28% Increase Over 2004 Third Quarter and 5% Over 2005 Second Quarter;
• 2005 Total Production Growth Expected to Exceed 25%;
• 2005 and 2006 Organic Growth Expected to Exceed 10%;
• Initial 2007 Organic Growth Estimated at 7% Pro Forma for Pending CNR Acquisition
• Proved Reserves Reach 7.3 Tcfe and Total Reserves Reach 14 Tcfe
• First Nine Months 2005 Proved Reserve Adds Total 1.3 Tcfe
• Reserve Replacement Equals 488% at Attractive Drilling and Acquisition Cost of $1.47 Per Mcfe
Chesapeake Energy Corporation has reported financial and operating results for the third quarter of 2005. For the quarter, Chesapeake generated net income available to common shareholders of $149.1 million ($0.43 per fully diluted common share), operating cash flow of $635.2 million (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $581.4 million (defined as income before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $1.083 billion and production of 120.4 billion cubic feet of natural gas equivalent (bcfe).
The company's 2005 third quarter net income available to common shareholders and ebitda include certain items that are not typically included in published estimates of the company's financial results by many securities analysts. Such items and their after-tax effects on third quarter reported results are described as follows:
• an unrealized mark-to-market loss of $66.8 million resulting from the company's oil, natural gas and interest rate hedging programs;
• a $0.5 million loss resulting from the early extinguishment of certain Chesapeake debt securities; and
• a reduction of net income available to common shareholders of $17.7 million resulting from a loss on the exchange of approximately $134 million of Chesapeake's 4.125% cumulative convertible preferred stock into 8.5 million shares of the company's common stock and $70 million of Chesapeake's 5.0% (series 2003) cumulative convertible preferred stock into 4.4 million shares of the company's common stock through unsolicited transactions with holders of the preferred stock.
Adjusted for the above-mentioned items, Chesapeake's net income to common shareholders in the 2005 third quarter would have been $234.1 million ($0.65 per fully diluted common share) and ebitda would have been $686.2 million. The foregoing items do not affect the calculation of operating cash flow. A reconciliation of operating cash flow, ebitda, adjusted ebitda and adjusted net income available to common shareholders to comparable financial measures calculated in accordance with generally accepted accounting principles is presented on pages 13-15 of this release.
Production
Daily production for the 2005 third quarter averaged 1.308 bcfe, an increase of 284 million cubic feet of natural gas equivalent (mmcfe), or 27.7%, over the 1.024 bcfe produced per day in the 2004 third quarter and an increase of 64 mmcfe, or 5.1%, over the 1.244 bcfe produced per day in the 2005 second quarter. Of the 64 mmcfe daily increase in sequential quarterly production, 53% came from organic growth and 47% from acquisition growth, making the company's quarterly organic growth rate 2.9%, its year-to-date organic growth rate 8.0% and its annualized 2005 organic growth rate 10.7%. The company's 2005 third quarter production exceeded its September 7, 2005 forecasted mid-point production by 0.9 bcfe, or 0.7%, because of stronger than projected drilling and operational results. The effects of Hurricane Rita reduced Chesapeake's third quarter production by 0.3 bcfe as a result of onshore facility shut-ins.
Chesapeake's 2005 third quarter production of 120.4 bcfe was comprised of 108.8 billion cubic feet of natural gas (bcf) (90% on a natural gas equivalent basis) and 1.93 million barrels of oil and natural gas liquids (10% on a natural gas equivalent basis). Chesapeake's average daily production rate of 1.308 bcfe consisted of 1.183 bcf of gas and 20,935 barrels of oil and natural gas liquids (bbl).
The 2005 third quarter was Chesapeake's 17th consecutive quarter of production growth. During these 17 quarters, Chesapeake's U.S. production has increased 234%, for an average compound quarterly growth rate of 7.4% and an average compound annual growth rate of 33%.
Oil and Natural Gas Proved Reserves Reach Record Level of 6.2 Tcfe
Chesapeake began 2005 with estimated proved reserves of 4.902 trillion cubic feet of natural gas equivalent (tcfe) and ended the third quarter with an internally estimated 6.213 tcfe, an increase of 1.311 tcfe, or 27%. During the 2005 first nine months, the company replaced its 338 bcfe of production with an estimated 1.649 tcfe of new proved reserves, for a reserve replacement rate of 488% at a drilling and acquisition cost of $1.47 per mcfe. Reserve replacement through the drillbit was 929 bcfe, or 275% of production (including a negative 19 bcfe from performance revisions and a positive 94 bcfe from oil and natural gas price increases), or 56% of the total increase, at a cost of $1.42 per mcfe. Reserve replacement through acquisitions was 720 bcfe, or 213% of production, or 44% of the total increase, at a cost of $1.54 per mcfe. The above figures do not include the impact of the pending CNR acquisition, which should close by December 1, 2005 and will increase Chesapeake's proved reserves by an internally estimated 1.1 tcfe.
Total costs incurred to acquire and develop proved reserves during the first nine months of 2005 were $2.23 per mcfe. These total costs include drilling, completion, acquisition, seismic, leasehold, capitalized internal costs, non-cash tax basis step-up from various corporate acquisitions ($253 million, or $0.15 per mcfe), asset retirement obligations and all other capitalized miscellaneous costs. These costs exclude future development costs of proved undeveloped reserves, but include costs associated with acquisition of unproved properties on which proved reserves have not been booked. A complete reconciliation of finding and acquisition cost information and a roll-forward of proved reserves is presented on page 11 of this release.
As of September 30, 2005, the company's estimated future net cash flows discounted at 10% before taxes (PV-10) from its proved reserves were $28.6 billion using field differential adjusted prices of $62.01 per bbl (based on a NYMEX quarter-end price of $66.38 per bbl) and $11.36 per mcf (based on a NYMEX quarter-end price of $14.20 per mcf). Chesapeake's PV-10 changes by approximately $267 million for every $0.10 per mcf change in gas prices and approximately $49 million for every $1.00 per bbl change in oil prices. The above figures do not include the impact of the pending CNR acquisition, which would have added approximately $4.2 billion to the PV-10 total above had Chesapeake owned the CNR assets as of September 30, 2005.
