• Company Reports 2008 First Quarter Production of 2.2 Bcfe per Day; Increase of 31% Over 2007 First Quarter Production
• 2008 First Quarter Net Loss to Common Shareholders of $143 Million, or $0.29 per Fully Diluted Common Share Reported; Adjusted Net Income Available to Common Shareholders Increases 32% Over 2007 First Quarter to $561 Million, or $1.09 per Fully Diluted Common Share, a Company Record
• Proved Reserves Reach Record Level of 11.5 Tcfe and Increase 6% Year-to-Date; Company Delivers First Quarter Reserve Replacement Rate of 395% from 601 Bcfe of Net Additions at a Drilling and Net Acquisition Cost of $1.95 per Mcfe
• Chesapeake Agrees to Sell 94 Bcfe of Proved Reserves for Proceeds of $623 Million, or $6.63 per Mcfe, in a Volumetric Production Payment Transaction; Company Announces Plans to Sell Remaining Arkoma Basin Woodford Shale Properties for Anticipated Proceeds of Over $1.5 Billion
Chesapeake Energy Corporation has announced financial and operating results for the 2008 first quarter. Due to an unrealized non-cash after-tax mark-to-market loss of $704 million from future period natural gas and oil and interest rate hedges primarily as a result of higher natural gas and oil prices as of March 31, 2008 compared to December 31, 2007, Chesapeake reported a net loss to common shareholders during the quarter of $143 million ($0.29 per fully diluted common share), operating cash flow of $1.512 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $438 million (defined as net income (loss) before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $1.611 billion and production of 204 billion cubic feet of natural gas equivalent (bcfe).
The company's $704 million loss referenced above was offset by $132 million in realized after-tax cash gains from hedging activities for actual volumes produced during the quarter. Further, this unrealized loss is an item that is typically not included in published estimates of the company's financial results by certain securities analysts. Excluding this item, Chesapeake's adjusted net income to common shareholders in the 2008 first quarter was $561 million ($1.09 per fully diluted common share) and adjusted ebitda was $1.570 billion, increases of 32% and 27%, respectively, over the 2007 first quarter. This adjusted net income to common shareholders for the quarter of $1.09 per share is the highest achieved in the company's history. The excluded item does not affect the calculation of operating cash flow.
Daily production for the 2008 first quarter averaged 2.244 bcfe, an increase of 25 mmcfe, or 1%, over the 2.219 bcfe produced per day in the 2007 fourth quarter and an increase of 537 mmcfe, or 31%, over the 1.707 bcfe produced per day in the 2007 first quarter. Adjusted for the company's year-end 2007 VPP sale, Chesapeake's sequential and year-over-year production growth rates were 4% and 35%, respectively. Chesapeake's average daily production for the 2008 first quarter consisted of 2.063 billion cubic feet of natural gas (bcf) and 30,176 barrels of oil and natural gas liquids (bbls). The company's 2008 first quarter production of 204.2 bcfe was comprised of 187.8 bcf (92% on a natural gas equivalent basis) and 2.75 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis).
The 2008 first quarter was Chesapeake's 27th consecutive quarter of sequential U.S. production growth. Over these 27 quarters, Chesapeake's U.S. production has increased 467%, for an average compound quarterly growth rate of 6.6% and an average compound annual growth rate of 29.2%.
Natural Gas and Oil Proved Reserves Reach Record Level of 11.5 Tcfe; Company Adds 601 Bcfe of Net Proved Reserves for a Reserve Replacement Rate of 395% at an Average Drilling and Net Acquisition Cost of $1.95 per Mcfe
Chesapeake began 2008 with estimated proved reserves of 10.879 trillion cubic feet of natural gas equivalent (tcfe) and ended the first quarter with 11.480 tcfe, an increase of 601 bcfe, or 6%. During the quarter, Chesapeake replaced its 204 bcfe of production with an estimated 805 bcfe of new proved reserves for a reserve replacement rate of 395%. Reserve replacement through the drillbit was 798 bcfe, or 391% of production. This includes 365 bcfe of positive performance revisions (including 342 bcfe related to infill drilling and increased density locations) and 112 bcfe of positive revisions resulting from natural gas and oil price increases between December 31, 2007 and March 31, 2008. Acquisitions of proved reserves completed during the quarter were 39 bcfe at a cost of $63 million, or $1.59 per mcfe, while sales of proved reserves during the quarter totaled 32 bcfe for proceeds of $86 million, or $2.72 per mcfe. Sales of undeveloped leasehold during the quarter generated proceeds of $159 million.
Chesapeake's total drilling and net acquisition costs for the quarter were $1.95 per mcfe. This calculation excludes costs of $694 million for the acquisition of unproved properties and leasehold (net of sales), $80 million for capitalized interest on leasehold and unproved properties, $84 million for seismic, and $16 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 of proved properties, during the quarter Chesapeake's exploration and development costs through the drillbit were $2.00 per mcfe. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves are presented on page 15 of this release.
During the 2008 first quarter, Chesapeake continued the industry's most active drilling program and drilled 478 gross (400 net) operated wells and participated in another 422 gross (48 net) wells operated by other companies. The company's drilling success rate was 100% for company-operated wells and 98% for non-operated wells. Also during the quarter, Chesapeake invested $1.182 billion in operated wells (using an average of 140 operated rigs) and $192 million in non-operated wells (using an average of 93 non-operated rigs).
As of March 31, 2008, Chesapeake's estimated future net cash flows from proved reserves, discounted at an annual rate of 10% before income taxes (PV-10), were $32.4 billion using field differential adjusted prices of $8.54 per thousand cubic feet of natural gas (mcf) (based on a NYMEX quarter-end price of $9.37 per mcf) and $96.37 per bbl (based on a NYMEX quarter-end price of $101.60 per bbl). By comparison, Chesapeake's enterprise value (market equity value plus long-term debt less working capital) as of March 31 was approximately $39.5 billion. Chesapeake's PV-10 changes by approximately $400 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.
By comparison, the December 31, 2007 PV-10 of the company's proved reserves was $20.6 billion ($15 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 March 31, 2007 PV-10 of the company's proved reserves was $20.2 billion using field differential adjusted prices of $7.01 per mcf (based on a NYMEX quarter-end price of $7.34 per mcf) and $60.75 per bbl (based on a NYMEX quarter-end price of $65.85 per bbl).
The company calculates the standardized measure of future net cash flows in accordance with SFAS 69 only at year end because applicable income tax information on properties, including recently acquired natural gas and oil interests, is not readily available at other times during the year. As a result, the company is not able to reconcile the interim period-end values to the standardized measure at such dates. The only difference between the two measures is that PV-10 is calculated before considering the impact of future income tax expenses, while the standardized measure includes such effects.
In addition to the PV-10 value of its proved reserves, Chesapeake believes the market value of its undeveloped leasehold in just four shale plays - the Fort Worth Barnett, Fayetteville, Haynesville and Marcellus - is approximately $25 billion. Also, the net book value of the company's non-E&P assets (including gathering systems, compressors, land and buildings, investments, long-term derivative instruments and other non-current assets) was $3.6 billion as of March 31, 2008, $3.2 billion as of December 31, 2007 and $2.7 billion as of March 31, 2007.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to report our financial and operational results for the 2008 first quarter. We are especially proud of our 31% increase in average daily production in the 2008 first quarter compared to the 2007 first quarter and by our adjusted net income per share increasing by 25% to an all-time record level. This is strong evidence that our rapid production growth is translating into proportional gains in per-share net income despite inflationary pressure on the industry's cost structure. By investing early in new plays and through our strong technical skills and aggressive cost control measures, we have been able to deliver substantial per-share value to shareholders.
"We are also pleased with our growth in proved reserves and believe that we are on track to reach 13 tcfe of proved reserves by year-end 2008 and 15 tcfe by year-end 2009. In addition, our new Haynesville Shale play continues to look very promising and our acreage acquisition efforts there remain successful. We now own or have commitments for over 300,000 net acres and maintain our goal of reaching 500,000 net acres in the play over time. During the past month, we brought on-line our fourth horizontal Haynesville Shale well and it provides further support for our assessment of the play.
"Finally, our Barnett Shale, Fayetteville Shale and Marcellus Shale plays continue to look very attractive and increasingly more valuable. We now own approximately 260,000 net acres in the Barnett Shale play, 585,000 net acres in the Core area of the Fayetteville Shale play and 1.2 million net acres in the Marcellus Shale play. Based on recent industry transactions and peer company valuations, we believe the undeveloped acreage of these three plays, together with our 300,000 net acres in the Haynesville Shale play, is worth more than $25 billion. When added to the $32 billion of PV-10 of the company's proved reserves, Chesapeake's assets now appear to be worth at least $57 billion, without even considering the substantial value of the company's non-shale leasehold and other non E&P assets. We are excited about our progress and momentum to date, but are even more enthusiastic about our company's ability in the future to produce growing amounts of clean, affordable, abundant and American natural gas to our customers and to deliver substantial value from our continuing growth to our shareholders."
