Chesapeake Energy Corporation today announced financial and operating results for the 2008 second quarter. For the quarter, Chesapeake's adjusted net income to common shareholders was $479 million ($0.89 per fully diluted common share) and adjusted ebitda was $1.435 billion, increases of 40% and 23%, respectively, over the 2007 second quarter. Chesapeake's adjusted net income to common shareholders excludes the following items that are typically not included in published estimates of the company's financial results by certain securities analysts:
- an unrealized noncash after-tax mark-to-market (MTM) loss of $2.085 billion from future period natural gas, oil and interest rate hedges primarily as a result of higher natural gas and oil prices as of June 30, 2008 compared to March 31, 2008; and
- a reduction of net income available to common shareholders of $43 million resulting from exchanges of the company's preferred stock for common stock that reduced future preferred stock dividend payment requirements.
Including the items noted above, Chesapeake reported a net loss to common shareholders during the quarter of $1.649 billion (a loss of $3.17 per fully diluted common share), operating cash flow of $1.443 billion (defined as cash flow from operating activities before changes in assets and liabilities) and negative ebitda of $1.971 billion (defined as net income (loss) before income taxes, interest expense, and depreciation, depletion and amortization expense) on negative revenue of $455 million and production of 212 billion cubic feet of natural gas equivalent (bcfe).
Chesapeake Becomes the Largest Producer of Natural Gas in the U.S.; Natural Gas and Oil Production Sets Record for 28th Consecutive Quarter; 2008 Second Quarter Average Daily Production Increases 4% over 2008 First Quarter Production and 25% over 2007 Second Quarter Production
Daily production for the 2008 second quarter averaged 2.328 bcfe, an increase of 84 mmcfe, or 4%, over the 2.244 bcfe produced per day in the 2008 first quarter and an increase of 460 mmcfe, or 25%, over the 1.868 bcfe produced per day in the 2007 second quarter. Adjusted for the company's year-end 2007 and second quarter 2008 VPP sales of 55 and 47 mmcfe per day, respectively, Chesapeake's sequential and year-over-year production growth rates were 5% and 29%, respectively.
Chesapeake's average daily production for the 2008 second quarter consisted of 2.143 billion cubic feet of natural gas (bcf) and 30,945 barrels of oil and natural gas liquids (bbls). The company's 2008 second quarter production of 211.9 bcfe was comprised of 195 bcf (92% on a natural gas equivalent basis) and 2.82 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis). Based on 2008 second quarter results reported by the industry to date, Chesapeake believes it has become the largest producer of natural gas in the U.S.
The 2008 second quarter was Chesapeake's 28th consecutive quarter of sequential U.S. production growth. Over these 28 quarters, Chesapeake's U.S. production has increased 488%, for an average compound quarterly growth rate of 6.5% and an average compound annual growth rate of 29%.
Natural Gas and Oil Proved Reserves Reach Record Level of 12.2 Tcfe; During 2008 First Half, Company Adds 1.3 Tcfe of Net Proved Reserves for a Reserve Replacement Rate of 410% at an Average Drilling and Net Acquisition Cost of $1.49 per Mcfe
Chesapeake began 2008 with estimated proved reserves of 10.879 trillion cubic feet of natural gas equivalent (tcfe) and ended the second quarter with 12.170 tcfe, an increase of 1.291 tcfe, or 12%. During the 2008 first half, Chesapeake replaced 416 bcfe of production with an estimated 1.707 tcfe of new proved reserves for a reserve replacement rate of 410%. Reserve replacement through the drillbit was 1.751 tcfe, or 421% of production. This includes 779 bcfe of positive performance revisions (including 703 bcfe related to infill drilling and increased density locations) and 182 bcfe of positive revisions resulting from natural gas and oil price increases between December 31, 2007 and June 30, 2008. Acquisitions of proved reserves completed during the 2008 first half were 85 bcfe at a cost of $122 million, or $1.44 per mcfe, while sales of proved reserves during the 2008 first half totaled 129 bcfe for proceeds of $712 million, or $5.53 per mcfe. Sales of undeveloped leasehold during the 2008 first half generated proceeds of $158 million.
Chesapeake's total drilling and net acquisition costs for the 2008 first half were $1.49 per mcfe. This calculation excludes costs of $2.5 billion for the acquisition of unproved properties and leasehold (net of sales), $168 million for capitalized interest on unproved properties, $150 million for seismic, and $18 million relating to tax basis step-up and asset retirement obligations, as well as positive revisions of proved reserves from higher natural gas and oil prices. Excluding these items and acquisition and divestiture activity, Chesapeake's exploration and development costs through the drillbit during the 2008 first half were $1.82 per mcfe. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves are presented on page 14 of this release.
During the 2008 first half, Chesapeake continued the industry's most active drilling program and drilled 988 gross operated wells (837 net with an average working interest of 84.7%) and participated in another 856 gross wells operated by other companies (95 net with an average working interest of 11.1%). The company's drilling success rate was 99% for company-operated wells and 96% for non-operated wells. Also during the 2008 first half, Chesapeake invested $2.486 billion in operated wells (using an average of 143 operated rigs) and $371 million in non-operated wells (using an average of 104 non-operated rigs) for total drilling, completing and equipping costs of $2.857 billion.
As of June 30, 2008, Chesapeake's estimated future net cash flows from proved reserves, discounted at an annual rate of 10% before income taxes (PV-10), were $51.5 billion using field differential adjusted prices of $11.81 per thousand cubic feet of natural gas (mcf) (based on a NYMEX quarter-end price of $13.10 per mcf) and $135.42 per bbl (based on a NYMEX quarter-end price of $140.02 per bbl). Chesapeake's PV-10 changes by approximately $420 million for every $0.10 per mcf change in natural gas prices and approximately $60 million for every $1.00 per bbl change in oil prices. Chesapeake's enterprise value (market equity value plus long-term debt less working capital excluding current portion of derivative assets and liabilities) as of June 30, 2008 was approximately $51.8 billion.
By comparison, the December 31, 2007 PV-10 of the company's proved reserves was $20.6 billion ($15.0 billion applying the SFAS 69 standardized measure) using field differential adjusted prices of $6.19 per mcf (based on a NYMEX year-end price of $6.80 per mcf) and $90.58 per bbl (based on a NYMEX year-end price of $96.00 per bbl). The June 30, 2007 PV-10 of the company's proved reserves was $18.8 billion using field differential adjusted prices of $6.25 per mcf (based on a NYMEX quarter-end price of $6.80 per mcf) and $65.41 per bbl (based on a NYMEX quarter-end price of $70.33 per bbl).
Since 2000, Chesapeake has invested $12.2 billion in new leasehold and 3-D seismic acquisitions and now owns the largest combined inventories of onshore leasehold (14.9 million net acres) and 3-D seismic (20.8 million acres) in the U.S. On this leasehold, Chesapeake owns an estimated 4.1 tcfe of proved undeveloped reserves and approximately 47.7 tcfe of risked unproved reserves (147 tcfe of unrisked unproved reserves). The company is currently using 156 operated drilling rigs to further develop its inventory of approximately 34,000 net drillsites, representing more than a 10-year inventory of drilling projects. The following summaries highlight the company's activities in its four major shale plays:
Fort Worth Barnett Shale (North Texas): The Fort Worth 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, Johnson and western Dallas counties. During the 2008 second quarter, Chesapeake's average daily net production of 466 mmcfe in the play increased approximately 125% over the 2007 second quarter and approximately 13% over the 2008 first quarter. Chesapeake is currently producing approximately 500 mmcfe net per day from the play and anticipates reaching at least 675 mmcfe net per day by year-end 2008. Chesapeake is currently using approximately 45 operated rigs to further develop its 280,000 net acres of leasehold, of which 240,000 net acres are located in the prime Core and Tier 1 areas.
Haynesville Shale (Northwest Louisiana, East Texas): Chesapeake continues to experience outstanding drilling results in its recent significant Haynesville Shale discovery in Northwest Louisiana and East Texas. Based on its geoscientific, petrophysical and engineering research during the past two years, including analysis of more than 100 wells drilled through the formation by others in the industry, as well as the results of 11 horizontal wells Chesapeake has completed to date, the company believes the Haynesville Shale play will become the largest discovery of natural gas in the U.S. Chesapeake is currently producing approximately 35 mmcfe net per day (45 mmcfe gross) from the play and anticipates reaching at least 75 mmcfe net per day by year-end 2008. Chesapeake is currently using eight operated rigs to further develop its 450,000 net acres of Haynesville Shale leasehold and anticipates operating at least 12 rigs by year-end 2008. The company continues to acquire leasehold in the play with its 20% partner, Plains Exploration & Production Company (PXP).
Fayetteville Shale (Arkansas): In the Fayetteville Shale, Chesapeake is the second-largest leasehold owner in the Core and Tier 1 area of the play. During the 2008 second quarter, Chesapeake's average daily net production of 136 mmcfe in the play increased approximately 475% over the 2007 second quarter and approximately 20% over the 2008 first quarter. Chesapeake is currently producing approximately 150 mmcfe net per day from the play and anticipates reaching at least 200 mmcfe net per day by year-end 2008. Chesapeake is currently using 17 operated rigs to further develop its 550,000 net acres of Core and Tier 1 Fayetteville leasehold and anticipates operating up to 21 rigs by year-end 2008.
Marcellus Shale (West Virginia, Pennsylvania and New York): Chesapeake is the largest leasehold owner in the Marcellus play that spans from West Virginia to southern New York with 1.6 million prospective net acres. During the quarter, Chesapeake completed two horizontal Marcellus wells in West Virginia that together are producing approximately 7 mmcfe per day gross and have combined estimated gross proved reserves of approximately 11 bcfe. The company is pleased with its drilling results to date and is planning to significantly increase its Marcellus Shale drilling activity during the remainder of 2008 and in 2009.
Company Agrees to Sell 93 Bcfe of Proved Reserves for Proceeds of Approximately $605 Million, or $6.50 per Mcfe, in its Second 2008 Volumetric Production Payment Transaction
The company has recently agreed to sell certain interests in Chesapeake-operated long-lived producing assets in the Anadarko Basin in its second volumetric production payment transaction in 2008. Chesapeake will sell assets with estimated proved reserves of approximately 93 bcfe and current net production of approximately 50 mmcfe per day for proceeds of approximately $605 million, or $6.50 per mcfe. Chesapeake will retain drilling rights on the properties below currently producing intervals and retains all remaining production after approximately 11 years. For accounting purposes, the transaction will be treated as a sale and the company's proved reserves and future production will be reduced accordingly. The transaction is expected to close in early August 2008. The company also plans to pursue other undeveloped leasehold sales to high-grade its inventory and monetizations of mature producing properties as needs and opportunities arise.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to report our financial and operational results for the 2008 second quarter. Despite the sale of 47 mmcfe per day of production during the quarter, our production increased 4% sequentially and 25% year over year. In addition, the company's ability to replace its 2008 first half production by over 400% at a drilling and net acquisition cost of only $1.49 demonstrates the value creation capabilities of the Chesapeake drilling machine to continue finding and developing very significant quantities of proved reserves at a very low cost. Given our strong 2008 first half operating performance, we remain confident that we can reach our goal of owning 13 tcfe of estimated proved reserves by year-end 2008 and 15 tcfe of estimated proved reserves by year-end 2009. Our ability to convert leasehold into annual increases of 2.0 to 2.5 tcfe of proved reserves is the foundation for our belief that Chesapeake can continue increasing its net asset value by at least $10 billion per year, assuming NYMEX natural gas prices average above $8.00 per mcf.
"We are also excited to provide updated information on our Barnett, Haynesville, Fayetteville and Marcellus shale plays. All of them are working exceptionally well and, in many respects, we have just scratched the surface of the potential of these plays, especially the Haynesville Shale. Our most recent Haynesville Shale well, the Milton Crow 27-1H, is producing approximately 14 mmcfe per day on a 24/64 choke at flowing casing pressure of more than 5,800 psi. We have now completed 11 horizontal wells in the Haynesville Shale and our current combined gross production from these 11 wells is approximately 45 mmcfe per day. We are extremely pleased with the data points we have seen in the play to date and are eager to begin ramping up our drilling activity with our partner, PXP. By the end of this year, we anticipate using 12 rigs to develop our 450,000 net acres of leasehold in the play and, on average, should be able to complete a new Haynesville well every five days.
"Finally, our asset monetization program is enabling us to high-grade our asset base, reduce financial risk, decrease our DD&A rate and increase our profitability per unit of production, thereby increasing our returns on capital and advancing future value creation to the present. We anticipate closing on more than $7.5 billion of such asset monetizations during the 2008 second half."
