Highlights
- Shareholders of $432 Million on Revenue of $1.751 Billion and Production of 130 Bcfe
- Full-Year 2005 Net Income Available to Common Shareholders of $880 Million on Revenue of $4.665 Billion - Production of 469 Bcfe
- Proved Reserves Reach 7.5 Tcfe from Proved Reserve Adds of 2.6 Tcfe;
- Reserve Replacement Equals 659% at the Attractive Drilling and Acquisition Cost of $1.74 Per Mcfe
- Oil and Gas Production Increases 27% Quarter-Over-Quarter, 29% Year-over-Year,
- 8% Sequential Quarter-Over-Quarter; Organic Growth in 2005 Reaches 12%
Chesapeake Energy Corporation has reported financial and operating results for the fourth quarter of 2005 and for the full-year 2005. For the quarter, Chesapeake generated net income available to common shareholders of $432 million ($1.11 per fully diluted common share), operating cash flow of $833 million (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $1.066 billion (defined as income before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $1.751 billion and production of 130 billion cubic feet of natural gas equivalent (bcfe).
For the full-year 2005, Chesapeake generated net income available to common shareholders of $880 million ($2.51 per fully diluted common share), operating cash flow of $2.426 billion and ebitda of $2.658 billion on revenue of $4.665 billion and production of 469 bcfe.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's announcement of very strong operational and financial results for the fourth quarter and full-year 2005 provides compelling evidence that Chesapeake's business strategy continues to create substantial growth and investor value while also significantly mitigating risk through our proactive commodity price and service cost hedging initiatives.
"The year 2005 marks our most successful year to date. In addition to achieving a record level of proved reserves, production, net income to common shareholders, cash flow and ebitda, Chesapeake's 12% organic growth rate and 659% reserve replacement at an attractive drilling and acquisition cost of $1.74 per mcfe were among the very best of all large-cap public E&P companies.
"In addition, we made a series of value-added acquisitions during 2005, capped off by our $3 billion acquisition of Columbia Natural Resources, a dominant producer and leasehold owner in the Appalachian Basin. We have nearly completed the integration of CNR's operations and are preparing to significantly increase our Appalachian drilling activity. Furthermore, we anticipate continuing to take advantage of our attractively priced oil and natural gas hedges and our deep backlog of drilling projects by increasing our drilling rig count during the year from its current level of 76 to 100 or more, with exact levels of future activity determined by natural gas prices, service costs and other factors.
"The company's business strategy has worked very well for investors. Since our IPO on February 4, 1993, we have delivered an approximate 2,300% increase in our common stock price during the past 13 years. Our business strategy features delivering growth through a balance of acquisitions and organic drilling, focusing on natural gas to take advantage of strong long- term natural gas supply/demand fundamentals, building dominant regional scale to achieve low operating costs and high returns on capital and successfully mitigating risk through the opportunistic hedging of commodity prices and service costs. We believe Chesapeake's management team can continue the successful execution of the company's distinctive business strategy and continue to deliver significant investor value for years to come."
Production
Production for the 2005 fourth quarter was 130.4 bcfe, an increase of 27.5 bcfe, or 27%, over the 102.9 bcfe produced in the 2004 fourth quarter and an increase of 10.0 bcfe, or 8%, over the 120.4 bcfe produced in the 2005 third quarter. The 27.5 bcfe increase in 2005's fourth quarter production over 2004's fourth quarter production consisted of 12.0 bcfe (44%) generated from organic drillbit growth and 15.5 bcfe (56%) generated from acquisitions, making the company's 2005 organic growth rate 12%. The 10.0 bcfe increase in sequential quarterly production consisted of 3.9 bcfe (39%) generated from organic drillbit growth and 6.1 bcfe (61%) generated from acquisitions, making the company's quarterly organic growth rate 4%. Production for the full-year 2005 was 468.6 bcfe, an increase of 106.0 bcfe, or 29%, over the 362.6 bcfe produced in 2004 and an increase of 200.2 bcfe, or 75%, over the 268.4 bcfe produced in 2003.
Chesapeake's 2005 organic growth of 12% follows organic growth of 20% in 2004, 18% in 2003, 6% in 2002 and 9% in 2001. During these five years, Chesapeake's organic growth rate has been 78% and its average annual organic growth rate has been 12%. The company's total U.S. production growth was 29% in 2005, 35% in 2004, 48% in 2003, 12% in 2002 and 20% in 2001. Chesapeake is anticipating a total production growth rate of 24% in 2006 and organic growth rates of at least 10% in 2006 and 7% in 2007.
Chesapeake's 2005 fourth quarter production of 130.4 bcfe was comprised of 118.3 billion cubic feet of natural gas (bcf) (91% on a natural gas equivalent basis) and 2.01 million barrels of oil and natural gas liquids (mmbbls) (9% on a natural gas equivalent basis). Chesapeake's average daily production rate for the quarter was 1.418 bcfe, consisting of 1.286 bcf of gas and 21,891 barrels (bbls) of oil. The 2005 fourth quarter was Chesapeake's 18th consecutive quarter of sequential production growth. During these 18 quarters, Chesapeake's U.S. production has increased 262%, for an average compound quarterly growth rate of 7.4% and an average compound annual growth rate of 32.8%.
Production for the full-year 2005 of 468.6 bcfe was comprised of 422.4 bcf (90% on a natural gas equivalent basis) and 7.70 mmbbls (10% on a natural gas equivalent basis). Chesapeake's average daily production rate for the year was 1.284 bcfe, consisting of 1.157 bcf of gas and 21,090 bbls of oil and natural gas liquids. The full-year 2005 was Chesapeake's 16th consecutive year of sequential production growth. During these 16 years, Chesapeake's production has increased at an average compound annual growth rate of 65%.
Reserves
- Oil and Natural Gas Proved Reserves Reach Record Level of 7.5 Tcfe;
- Drilling and Acquisition Costs Are $1.74 per Mcfe as Company
- Adds 2.6 Tcfe for a Reserve Replacement Rate of 659%
Chesapeake began 2005 with estimated proved reserves of 4.902 trillion cubic feet of natural gas equivalent (tcfe) and ended the year with 7.521 tcfe, an increase of 2.619 tcfe, or 53%. Including 237 bcfe of internally estimated proved reserves acquired or to be acquired in previously announced transactions subsequent to December 31, 2005, the company's pro forma proved reserves as of year-end were 7.758 tcfe.
During 2005, Chesapeake replaced its 469 bcfe of production with an estimated 3.088 tcfe of new proved reserves, for a reserve replacement rate of 659% at a drilling and acquisition cost of $1.74 per thousand cubic feet of natural gas equivalent (mcfe). Reserve replacement through the drillbit was 1.047 tcfe, or 223% of production (including 17 bcfe from performance revisions and 24 bcfe from oil and natural gas price revisions), or 34% of the total increase, at a cost of $1.74 per mcfe. Reserve replacement through acquisitions of proved reserves (reduced for 1 bcfe sold during the year) was 2.041 tcfe, or 436% of production and 66% of the total increase, also at a cost of $1.74 per mcfe.
Total costs incurred, including drilling, completion, acquisition, seismic, leasehold, capitalized internal costs, non-cash tax basis step-up from corporate acquisitions ($252 million in 2005, or $0.08 per mcfe, frequently booked as goodwill in the industry), asset retirement obligations and all other miscellaneous costs capitalized to oil and natural gas properties, were $2.40 per mcfe. These costs exclude future development costs of proved undeveloped reserves. A complete reconciliation of finding and acquisition cost information and a roll forward of proved reserves is presented on page 14 of this release.
Of the company's estimated proved reserves at year-end 2005, 92% were natural gas. Additionally, 65% were proved developed at year-end 2005 compared to 66% in 2004, 74% in 2003, 74% in 2002 and 71% in 2001. By volume, third-party reservoir engineers evaluated 78% of 2005's estimated proved reserves compared to 75% in 2004, 74% in 2003, 73% in 2002 and 71% in 2001. Given that Chesapeake owns an interest in more than 30,000 wells in the U.S., it would be cost prohibitive for third-party reservoir engineers to evaluate 100% of Chesapeake's properties.
Company's Inventory Now 8.8 Tcfe
Chesapeake's exploratory and development drilling programs and production enhancement operations on its existing and acquired properties continue to produce operational results that exceed the company's forecasts and distinguish the company among its peers. During 2005, Chesapeake drilled 902 gross (686 net) operated wells and participated in another 1,066 gross (130 net) wells operated by other companies. The company's drilling success rate was 98% for company-operated wells and 95% for non-operated wells. During the year, Chesapeake invested $1.511 billion in operated wells (using an average of 73 operated rigs), $309 million in non-operated wells (using an average of 66 non-operated rigs) and $362 million in acquiring new 3-D seismic data and leases (exclusive of leases acquired through acquisitions).
Chesapeake attributes its strong organic growth rates during 2005 and in the past five years to management's early recognition that oil and gas prices were undergoing structural change and its subsequent decision to invest aggressively in the building blocks of value creation in the E&P industry -- people, land and seismic. During the past five years, Chesapeake has invested more than $3.0 billion in new leasehold and 3-D seismic acquisitions and now owns what it believes to be the largest inventories of onshore leasehold (8.4 million net acres) and 3-D seismic (11.6 million acres) in the U.S. On this leasehold, the company has identified more than a 10-year drilling inventory of approximately 28,000 drilling locations on which it believes it can develop approximately 2.8 tcfe of proved undeveloped reserves and approximately 8.8 tcfe of unproved reserves.
In addition, Chesapeake has significantly strengthened its technical capabilities during the past five years by increasing its land, geoscience and engineering staff by 400% to over 600 employees. Today, the company has more than 3,300 employees, of which approximately 70% work in the company's E&P operations and 30% work in the company's oilfield service operations.
Chesapeake characterizes its drilling activity by one of four play types: conventional gas resource, unconventional gas resource, emerging gas resource and Appalachian Basin gas resource. The company's leasehold and proved undeveloped and unproved reserve totals by play type are set forth below:
• 2.8 million net acres in its traditional conventional areas (i.e., much of the Mid-Continent, Permian, Gulf Coast, South Texas and other areas) on which it has identified approximately 2,700 drillsites, 1.0 tcfe of proved undeveloped reserves and approximately 1.0 tcfe of unproved reserves;
• 1.1 million net acres in its unconventional gas resource areas (i.e., Sahara, Granite/Cherokee/Atoka Washes, Hartshorne CBM, Barnett Shale and Ark-La-Tex tight sands) on which it has identified approximately 14,000 drillsites, 1.3 tcfe of proved undeveloped reserves and approximately 4.2 tcfe of unproved reserves;
• 1.2 million net acres in its emerging gas resource areas (i.e., Fayetteville Shale, Caney/Woodford Shales, Deep Haley, Deep Bossier and others) on which it has identified approximately 2,000 drillsites, 0.1 tcfe of proved undeveloped reserves and approximately 1.9 tcfe of unproved reserves; and
• 3.3 million net acres in the Appalachian Basin, where play types range from conventional to unconventional to emerging gas resource. On its significant Appalachian Basin acreage base acquired from CNR in November 2005, Chesapeake has identified approximately 9,200 drillsites, 0.4 tcfe of proved undeveloped reserves and more than 1.7 tcfe of unproved reserves.
Chesapeake continues to actively acquire more acreage throughout its operating areas with more than 1.4 million acres acquired in 2005, of which almost 500,000 acres was acquired in the 2005 fourth quarter through an aggressive land acquisition program that is currently utilizing more than 900 contract landmen in the field.
Chesapeake's most significant land acquisition activities during the quarter took place in the Arkansas Fayetteville Shale and Deep Bossier plays in which today the company owns 1,000,000 net acres and 125,000 net acres, respectively. To date, Chesapeake has drilled four vertical wells in the Fayetteville Shale and is preparing to complete its first horizontal well. The company has two rigs dedicated to exploring its Fayetteville Shale acreage position, and if results are encouraging, the company plans to increase its drilling activity during 2006. Chesapeake will drill its first Deep Bossier well in East Texas later this year.
