Chesapeake Energy Corporation Reports Strong Financial and Operational Results for the 2007 Second Quarter
Net Income Available to Common Shareholders Reaches $492 Million on Revenue of $2.1 Billion; Adjusted Net Income Available to Common Shareholders Reaches $342 Million
Chesapeake Energy Corporation today reported strong financial and operating results for the second quarter of 2007. For the quarter, Chesapeake generated net income available to common shareholders of $492 million ($1.01 per fully diluted common share), operating cash flow of $1.076 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $1.401 billion (defined as net income before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $2.105 billion and production of 170 billion cubic feet of natural gas equivalent (bcfe).
The company's 2007 second quarter 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 2007 second quarter reported results are described as follows:
- an unrealized after-tax mark-to-market gain of $98.5 million resulting from the company's oil and natural gas and interest rate hedging programs;
- an after-tax gain of $51.3 million resulting from the sale of the company's investment in Eagle Energy Partners I, L.P.
Excluding the above-mentioned items, Chesapeake generated adjusted net income to common shareholders in the 2007 second quarter of $342 million ($0.71 per fully diluted common share) and adjusted ebitda of $1.167 billion. The excluded items do not affect the calculation of operating cash flow. A reconciliation of operating cash flow, ebitda, adjusted ebitda and adjusted net income to comparable financial measures calculated in accordance with generally accepted accounting principles is presented on pages 21 - 24 of this release.
Key Operational and Financial Statistics Summarized Below for the 2007 Second Quarter, 2007 First Quarter and 2006 Second Quarter
The table below summarizes Chesapeake's key results during the 2007 second quarter and compares them to the 2007 first quarter and the 2006 second quarter.
Three Months Ended:
-------------------------------
6/30/07 3/31/07 6/30/06
--------- --------- ---------
Average daily production (in mmcfe) 1,868 1,707 1,568
Natural gas as % of total production 92 92 91
Natural gas production (in bcf) 156.1 140.8 129.8
Average realized natural gas price
($/mcf) (a) 7.97 9.26 8.04
Oil production (in mbbls) 2,324 2,143 2,143
Average realized oil price ($/bbl) (a) 65.37 61.13 58.80
Natural gas equivalent production (in
bcfe) 170.0 153.7 142.7
Natural gas equivalent realized price
($/mcfe) (a) 8.21 9.33 8.20
Oil and natural gas marketing income
($/mcfe) .11 .10 .08
Service operations income ($/mcfe) .07 .08 .10
Production expenses ($/mcfe) (.90) (.93) (.85)
Production taxes ($/mcfe) (.31) (.27) (.24)
General and administrative costs
($/mcfe) (b) (.25) (.27) (.19)
Stock-based compensation ($/mcfe) (.07) (.07) (.05)
DD&A of oil and natural gas properties
($/mcfe) (2.60) (2.56) (2.30)
D&A of other assets ($/mcfe) (.23) (.23) (.16)
Interest expense ($/mcfe) (a) (.54) (.50) (.51)
Operating cash flow ($ in millions)
(c) 1,076 1,124 914
Operating cash flow ($/mcfe) 6.33 7.31 6.41
Adjusted ebitda ($ in millions) (d) 1,167 1,234 1,001
Adjusted ebitda ($/mcfe) 6.86 8.03 7.02
Net income to common shareholders ($
in millions) 492 232 332
Earnings per share - assuming dilution
($) 1.01 0.50 0.82
Adjusted net income to common
shareholders ($ in millions) (e) 342 425 340
Adjusted earnings per share - assuming
dilution ($) 0.71 0.87 0.82
(a) includes the effects of realized gains or (losses) from hedging, but does not include the effects of unrealized gains or (losses) from hedging
(b) excludes expenses associated with non-cash stock-based compensation
(c) defined as cash flow provided by operating activities before changes in assets and liabilities
(d) defined as net income before income taxes, interest expense, and depreciation, depletion and amortization expense, as adjusted to remove the effects of certain items detailed on page 23
(e) defined as net income available to common shareholders, as adjusted to remove the effects of certain items detailed on page 23
Oil and Natural Gas Production Sets Record for 24th Consecutive Quarter; 2007 Second Quarter Average Daily Production Increases 9% and 19% Over Production in the 2007 First Quarter and the 2006 Second Quarter; Company Now the Largest Independent Producer of U.S. Natural Gas
Daily production for the 2007 second quarter averaged 1.868 bcfe, an increase of 300 million cubic feet of natural gas equivalent (mmcfe), or 19%, over the 1.568 bcfe of daily production in the 2006 second quarter and an increase of 161 mmcfe, or 9%, over the 1.707 bcfe produced per day in the 2007 first quarter.
Chesapeake's 2007 second quarter production of 170.0 bcfe was comprised of 156.1 billion cubic feet of natural gas (bcf) (92% on a natural gas equivalent basis) and 2.324 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis). Chesapeake's average daily production for the quarter of 1.868 bcfe consisted of 1.715 bcf of natural gas and 25,538 barrels (bbls) of oil. Based on 2007 second quarter reported production from continuing operations reported by other public U.S. natural gas producers, Chesapeake believes it has recently become the largest independent and third-largest overall producer of U.S. natural gas.
The 2007 second quarter was Chesapeake's 24th consecutive quarter of sequential U.S. production growth. Over these 24 quarters, Chesapeake's U.S. production has increased 372%, for an average compound quarterly growth rate of 7% and an average compound annual growth rate of 30%.
As a result of better than expected performance from the company's accelerated drilling program and the addition of approximately 40 mmcfe per day of production from its July 2007 transaction with Anadarko Petroleum Corporation in Deep Haley, Chesapeake is raising its previous forecasts for total production growth for 2007 to 18-22% from 14-18% and for 2008 to 14-18% from 10-14%. The company's rate of production has recently exceeded 1.975 bcfe per day and based on projected drilling levels and anticipated results, Chesapeake expects its 2007 production exit rate to be at least 2.05-2.10 bcfe per day.
Oil and Natural Gas Proved Reserves Reach Record Level of 10 Tcfe; Drilling and Acquisition Costs Average $2.11 per Mcfe as Company Adds 1.023 Tcfe for a Reserve Replacement Rate of 416%
Chesapeake began 2007 with estimated proved reserves of 8.956 trillion cubic feet of natural gas equivalent (tcfe) and ended the second quarter with 9.979 tcfe, an increase of 1.023 tcfe, or 11%. During the 2007 first half, Chesapeake replaced its 324 bcfe of production with an estimated 1.347 tcfe of new proved reserves for a reserve replacement rate of 416%. Reserve replacement through the drillbit was 1.145 tcfe, or 354% of production (including 510 bcfe of positive performance revisions and 95 bcfe of positive revisions resulting from oil and natural gas price increases between December 31, 2006 and June 30, 2007) and 85% of the total increase. Reserve replacement through the acquisition of proved reserves completed during the 2007 first half was 202 bcfe, or 62% of production and 15% of the total increase.
On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company's total drilling and acquisition costs for the first half of 2007 were $2.11 per mcfe (excluding costs of $134 million for seismic, $1.075 billion for unproved properties, leasehold acquired and related capitalized interest, and $110 million relating to tax basis step-up and asset retirement obligations, as well as positive revisions of proved reserves from higher oil and natural gas prices). Excluding these same items, Chesapeake's exploration and development costs through the drillbit were $2.14 per mcfe during the 2007 first half while reserve replacement costs through acquisitions of proved reserves were $1.97 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development activities during the 2007 first half, including seismic, leasehold, unproved properties, capitalized interest and internal costs, non-cash tax basis step-up from corporate acquisitions and asset retirement obligations, were $3.962 billion. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves are presented on page 19 of this release.
During the 2007 first half, Chesapeake continued the industry's most active drilling program and drilled 977 gross (835 net) operated wells and participated in another 826 gross (115 net) wells operated by other companies. The company's drilling success rate was 99% for company-operated wells and 97% for non-operated wells. Also during the 2007 first half, Chesapeake invested $1.932 billion in operated wells (using an average of 131 operated rigs), $314 million in non-operated wells (using an average of 102 non-operated rigs), $410 million to acquire new leasehold (exclusive of $665 million in unproved leasehold obtained through corporate and asset acquisitions, as well as other leasehold fees and related capitalized interest) and $134 million to acquire seismic data.
As of June 30, 2007, Chesapeake's estimated future net cash flows from proved reserves, discounted at an annual rate of 10% before income taxes (PV-10) were $18.8 billion using field differential adjusted prices of $65.41 per bbl (based on a NYMEX quarter-end price of $70.33 per bbl) and $6.25 per thousand cubic feet of natural gas (mcf) (based on a NYMEX quarter-end price of $6.80 per mcf).
By comparison, the December 31, 2006 PV-10 of the company's proved reserves was $13.6 billion using field differential adjusted prices of $56.25 per bbl (based on a NYMEX year-end price of $61.15 per bbl) and $5.41 per mcf (based on a NYMEX year-end price of $5.64 per mcf). Including the effect of income taxes, the standardized measure of discounted future net cash flows from proved reserves at year-end 2006 was $10.0 billion. By further comparison, the June 30, 2006 PV-10 of the company's proved reserves was $15.0 billion using field differential adjusted prices of $69.10 per bbl (based on a NYMEX quarter-end price of $73.86 per bbl) and $5.72 per mcf (based on a NYMEX quarter-end price of $6.09 per mcf).
Chesapeake's current PV-10 changes by approximately $365 million for every $0.10 per mcf change in natural gas prices and approximately $53 million for every $1.00 per bbl change in oil prices. 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 oil and natural gas 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, the net book value of the company's other assets (including drilling rigs, gathering systems, compressors, land and buildings, investments, long-term derivative instruments and other non-current assets) was $2.8 billion as of June 30, 2007, $2.8 billion as of December 31, 2006 and $1.8 billion as of June 30, 2006.
Average Realized Prices, Hedging Results and Hedging Positions Detailed
Average prices realized during the 2007 second quarter (including realized gains or losses from oil and natural gas derivatives, but excluding unrealized gains or losses on such derivatives) were $65.37 per bbl of oil and $7.97 per mcf of natural gas, for a realized natural gas equivalent price of $8.21 per mcfe. Chesapeake's average realized pricing differentials to NYMEX during the second quarter were a negative $4.93 per bbl and a negative $0.77 per mcf. Realized gains from oil and natural gas hedging activities during the quarter generated a $5.27 gain per bbl and a $1.19 gain per mcf, for a 2007 second quarter realized hedging gain of $198 million, or $1.16 per mcfe.
The following tables compare Chesapeake's open hedge position through swaps and collars as well as gains from lifted hedges as of August 2, 2007 to those previously announced as of May 3, 2007. Depending on changes in oil and natural gas futures markets and management's view of underlying oil and natural gas supply and demand trends, Chesapeake may either increase or decrease its hedging positions at any time in the future without notice.
Open Swap Positions as of August 2, 2007
Natural Gas Oil
------------------- -------------------
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
============================ ======== ========= ======== =========
2007 Q3 57% 8.29 74% 71.61
2007 Q4 61% 9.00 72% 71.57
============================ ======== ========= ======== =========
2007 Q3-Q4 Total 59% 8.66 73% 71.59
============================ ======== ========= ======== =========
2008 Total 64% 9.22 74% 72.77
============================ ======== ========= ======== =========
2009 Total 16% 9.11 32% 77.58
============================ ======== ========= ======== =========
Open Natural Gas Collar Positions as of August 2, 2007
Average Average
Floor Ceiling
Quarter or Year % Hedged $ NYMEX $ NYMEX
=================================== =========== ========= =========
2007 Q3 13% 6.76 8.20
2007 Q4 11% 7.13 8.88
=================================== =========== ========= =========
2007 Q3-Q4 Total 12% 6.94 8.52
=================================== =========== ========= =========
2008 Total 4% 7.41 9.40
=================================== =========== ========= =========
2009 Total 2% 7.50 10.72
=================================== =========== ========= =========
Gains From Lifted Natural Gas Hedges as of August 2, 2007
Assuming
Natural Gas
Total Gain Production of: Gain
Quarter or Year ($ millions) (bcf) ($ per mcf)
========================== ============ =============== ===========
2007 Q3 111 168.5 0.66
2007 Q4 117 173.5 0.67
========================== ============ =============== ===========
2007 Q3-Q4 Total 228 342.0 0.67
========================== ============ =============== ===========
2008 Total 105 745.5 0.14
========================== ============ =============== ===========
2009 Total 4 816.0 0.01
========================== ============ =============== ===========
Additionally, the company has lifted a portion of its oil hedges securing gains of $4.2 million and $4.8 million for the last half of 2007 and for the full year 2008, respectively.
Open Swap Positions as of May 3, 2007
Natural Gas Oil
------------------- -------------------
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
============================ ======== ========= ======== =========
2007 Q2 53% 8.11 77% 71.22
2007 Q3 54% 8.30 77% 71.61
2007 Q4 55% 8.98 77% 71.57
============================ ======== ========= ======== =========
2007 Q2-Q4 Total 54% 8.49 77% 71.47
============================ ======== ========= ======== =========
2008 Total 64% 9.20 72% 72.61
============================ ======== ========= ======== =========
2009 Total 13% 8.87 19% 75.41
============================ ======== ========= ======== =========
Open Natural Gas Collar Positions as of May 3, 2007
Average Average
Floor Ceiling
Quarter or Year % Hedged $ NYMEX $ NYMEX
=================================== =========== ========= =========
2007 Q2 15% 6.76 8.20
2007 Q3 14% 6.76 8.20
2007 Q4 11% 7.13 8.88
=================================== =========== ========= =========
2007 Q2-Q4 Total 13% 6.88 8.41
=================================== =========== ========= =========
2008 Total 4% 7.41 9.40
=================================== =========== ========= =========
2009 Total 2% 7.50 10.72
=================================== =========== ========= =========
Gains From Lifted Natural Gas Hedges as of May 3, 2007
Assuming
Natural Gas
Total Gain Production of: Gain
Quarter or Year ($ millions) (bcf) ($ per mcf)
===================== ============== ================ =============
2007 Q2 112 147.5 0.76
2007 Q3 105 158.0 0.67
2007 Q4 117 172.5 0.68
===================== ============== ================ =============
2007 Q2-Q4 Total 334 478 0.70
===================== ============== ================ =============
2008 Total 105 701 0.15
===================== ============== ================ =============
2009 Total 4 750 0.01
===================== ============== ================ =============
Certain open natural gas swap positions include knockout swaps with knockout provisions at prices ranging from $5.25 to $6.50 covering 116 bcf in 2007, $5.75 to $6.50 covering 222 bcf in 2008 and $5.90 to $6.50 covering 116 bcf in 2009. Certain open natural gas collar positions include three-way collars that include written put options with strike prices ranging from $5.00 to $6.00 covering 33 bcf in 2007, $5.00 to $6.00 covering 11 bcf in 2008 and $6.00 covering 18 bcf in 2009. Also, certain open oil swap positions include cap-swaps and knockout swaps with provisions limiting the counterparty's exposure below prices ranging from $45.00 to $60.00 covering 1 mmbbls in 2007 and 3 mmbbls in 2008, and from $52.50 to $60.00 covering 3 mmbbls in 2009.
The company's updated forecasts for 2007 and 2008 are attached to this release in an Outlook dated August 2, 2007 labeled as Schedule "A", which begins on page 25. This Outlook has been changed from the Outlook dated May 3, 2007 (attached as Schedule "B", which begins on page 29) to reflect various updated information.
Chesapeake's Leasehold and 3-D Seismic Inventories Now Total 12.2 Million Net Acres and 17.7 Million Acres; Risked Unproved Reserves in the Company's Inventory Now Reach 20.8 Tcfe, Bringing Total Reserve Base to 30.9 Tcfe
Since 2000, Chesapeake has invested $7.8 billion in new leasehold and 3-D seismic acquisitions and now owns the largest combined inventories of onshore leasehold (12.2 million net acres) and 3-D seismic (17.7 million acres) in the U.S. On this leasehold, the company has approximately 28,500 net drilling locations, representing an approximate 10-year inventory of drilling projects, on which it believes it can develop an estimated 3.8 tcfe of proved undeveloped reserves and approximately 20.8 tcfe of risked unproved reserves (82 tcfe of unrisked unproved reserves). Pro forma for its July 2007 transaction with Anadarko in Deep Haley, Chesapeake's 10.1 tcfe of estimated proved reserves and its 20.8 tcfe of estimated risked unproved reserves total approximately 30.9 tcfe.
To aggressively develop these assets, Chesapeake has continued to significantly strengthen its technical capabilities by increasing its land, geoscience and engineering staff to over 1,200 employees. Today, the company has approximately 5,800 employees, of which approximately 60% work in the company's E&P operations and approximately 40% 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 unconventional gas resource and Appalachian Basin gas resource. In these plays, Chesapeake uses a probability-weighted statistical approach to estimate the potential number of drillsites and unproved reserves associated with such drillsites.
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