SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
- --------------------------------------------------------------------------------
JULY 29, 2003 (JULY 28, 2003)
CHESAPEAKE ENERGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
OKLAHOMA 1-13726 73-1395733
- --------------------------------------------------------------------------------
(State or other jurisdict (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6100 NORTH WESTERN AVENUE, OKLAHOMA CITY, OKLAHOMA 73118
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(Address of principal executive offices) (Zip Code)
(405) 848-8000
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 12. DISCLOSURE OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We issued a press release on July 28, 2003, which includes information
regarding our consolidated results of operations and financial condition as of
and for the quarterly period ended June 30, 2003. It also includes updated
information on our 2003 outlook. The text of that press release is attached to
this Report as an exhibit and is incorporated by reference herein.
The press release contains information concerning financial measures
that we use that may be considered "non-GAAP financial measures" under
Securities and Exchange Commission rules. Specifically, the press release
contains information concerning operating cash flow (defined as cash flow from
operating activities before changes in assets and liabilities) and EBITDA, each
of which is reconciled in the press release to cash from operating activities,
the most directly comparable financial measure reported under generally accepted
accounting principles.
With the filing of this report on Form 8-K and the issuance of the
attached press release, we are also updating our future outlook, which can be
found on our website at www.chkenergy.com. We caution you that our outlook is
given as of July 28, 2003 based on currently available information, and that we
are not undertaking any obligation to update our estimates as conditions change
or other information becomes available.
This information, including the exhibit attached hereto, shall not be
deemed "filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the Exchange Act, except
as may be expressly set forth by specific reference in this Report other than
under Item 12 hereof.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
BY: /S/ AUBREY K. MCCLENDON
-----------------------------------
AUBREY K. MCCLENDON
Chairman of the Board and
Chief Executive Officer
Dated: July 29, 2003
CHESAPEAKE ENERGY CORPORATION POSTS STRONG RESULTS FOR SECOND QUARTER 2003;
NATURAL GAS PRODUCTION SETS RECORD FOR EIGHTH CONSECUTIVE QUARTER
SECOND QUARTER 2003 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS REACHES
$76 MILLION ON REVENUE OF $430 MILLION AND PRODUCTION OF 67 BCFE
OKLAHOMA CITY, OKLAHOMA, JULY 28, 2003 - Chesapeake Energy Corporation
(NYSE:CHK) today reported its financial and operating results for the 2003
second quarter. For the quarter, Chesapeake generated net income available to
common shareholders of $76.3 million ($0.31 per fully diluted common share),
operating cash flow of $226.1 million (defined as cash flow from operating
activities before changes in assets and liabilities) and ebitda of $266.1
million (defined as income before income taxes, interest expense, and
depreciation, depletion and amortization expense) on revenue of $429.6 million.
The company's 2003 second quarter net income available to common shareholders
included a $1.9 million after-tax non-cash risk-management gain resulting from
the application of SFAS 133 to the company's derivative contracts that do not
qualify for hedge accounting.
During the second quarter, Chesapeake produced 67.3 billion cubic feet of
natural gas equivalent (bcfe), compared to the company's most recent forecast of
64-65 bcfe. This 67.3 bcfe of production was comprised of 60.0 billion cubic
feet of natural gas (bcf) (89% on an mcf equivalent basis) and 1.2 million
barrels of oil (mmbo) (11% on an mcf equivalent basis).
The 2003 second quarter oil and natural gas production increased 55%
year-over-year from the 2002 second quarter and 19% sequentially from the 2003
first quarter. Of the 10.5 bcfe in sequential production growth during the
second quarter, only 9.5% came from acquisitions closed during the quarter. The
2003 second quarter was Chesapeake's eighth consecutive quarter of sequential
production increase. During these eight quarters, Chesapeake's production has
increased 72%, for an average sequential quarterly growth rate of 7%.
Reserve growth during the 2003 second quarter was also significant as production
of 67 bcfe was replaced by 201 bcfe of new proved reserves (a 300% reserve
replacement rate). This growth was comprised of 112 bcfe from drilling and
revisions and 96 bcfe from acquisitions, partially offset by 7 bcfe of
divestitures that were sold for proceeds of $19 million. Chesapeake's internally
estimated proved reserves now total approximately 2.95 trillion cubic feet of
natural gas equivalent, of which 90% are natural gas and 74% are proved
developed. This marks the company's seventh consecutive quarter of growth in
estimated proved reserves.
Average prices realized during the 2003 second quarter (including hedging) were
$26.24 per barrel of oil (bo) and $4.73 per thousand cubic feet of natural gas
(mcf), for a realized gas equivalent price of $4.70 per thousand cubic feet of
natural gas equivalent (mcfe). Chesapeake's realized pricing differentials to
NYMEX during the quarter averaged a negative $2.15 per bo and a negative $0.70
per mcf and hedging activities generated a $0.52 loss per bo and a $0.03 gain
per mcf.
1
KEY OPERATIONAL AND FINANCIAL STATISTICS FOR THE 2003 SECOND QUARTER
The table below summarizes Chesapeake's key statistics during the 2003 second
quarter and compares them to the 2003 first quarter and the 2002 second quarter:
Key Operational and Financial Statistics: Three Months Ended:
- ----------------------------------------- -------------------
6/30/03 3/31/03 6/30/02
------- ------- -------
Average daily production (in mmcfe) 740 631 477
Gas as % of total production 89 89 89
Natural gas production (in bcf) 60.0 50.4 38.5
Average realized gas price ($/mcf) (a) 4.73 4.51 3.38
Oil production (in mbbls) 1,224 1,060 823
Average realized oil price ($/bbl) (a) 26.24 27.27 26.55
Natural gas equivalent production (in bcfe) 67.3 56.8 43.4
Gas equivalent realized price ($/mcfe) (a) 4.70 4.52 3.50
General and administrative costs ($/mcfe) 0.09 0.10 0.09
Production taxes ($/mcfe) 0.25 0.33 0.18
Lease operating expenses ($/mcfe) 0.51 0.55 0.56
Interest expense ($/mcfe) 0.56 0.62 0.57
DD&A of oil and gas properties ($/mcfe) 1.36 1.35 1.17
Operating cash flow ($ in millions) (b) 226.1 167.7 96.6
Operating cash flow ($/mcfe) 3.36 2.96 2.23
Ebitda ($ in millions) (c) 266.1 230.0 120.8
Ebitda ($/mcfe) 3.95 4.05 2.78
Net income available to common
shareholders ($ in millions) 76.3 70.0 22.5
(a) includes the effects of hedging
(b) cash flow provided by operating activities before changes in assets
and liabilities
(c) defined as income before income taxes, interest expense, and depreciation,
depletion and amortization expense
CHESAPEAKE UPDATES FORECASTS AND HEDGING INFORMATION
Chesapeake's initial 2003 third quarter and updated full-year 2003 and 2004
forecasts are attached to this release in a revised Outlook dated July 28, 2003
and labeled as Schedule "A". The company's previous guidance of June 24, 2003 is
provided for comparative reference only and is labeled as Schedule "B". The new
Outlook reflects an increase in projected 2003 full-year production volumes to
258-262 bcfe, up from 255-260 bcfe included in the company's June 24, 2003
Outlook. This increased production forecast is attributable to Chesapeake's
drilling programs generating better than previously forecasted production
volumes. The company has now increased its full-year 2003 production estimate by
35% since the beginning of the year.
In addition, Chesapeake has added to its hedging positions since the June 24,
2003 update. Currently, the company has hedged the following percentages of its
projected 2003-2007 oil and natural gas production:
Oil Natural Gas
------------------------- ----------------------------
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
- --------------- ---------- --------- ---------- ----------
3Q 2003 79% $28.07 62% $5.50
4Q 2003 79% $28.07 63% $5.72
- --------------------------------------------------------------------------------
REMAINING 2003 79% $28.07 62% $5.61
2004 63% $27.85 26% $5.51
2005 - - 15% $4.79
2006 - - 9% $4.74
2007 - - 9% $4.76
Depending on changes in oil and natural gas futures markets and the company's
view of underlying supply and demand trends, the company may either increase or
decrease its hedging positions in the future.
STANDARD & POOR'S RAISES CHESAPEAKE'S CREDIT RATINGS
On July 10, 2003, Standard & Poor's Rating Services raised Chesapeake's
corporate credit rating to BB-. At the same time, S & P assigned its BBB- rating
to the company's recently amended $350 million secured revolving credit facility
due 2007. This is the first time Chesapeake has received an investment grade
rating on any of its outstanding debt and evidences Chesapeake's continuing
commitment to strengthening its balance sheet.
2
MANAGEMENT COMMENTS
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are
pleased to announce Chesapeake's very strong second quarter earnings report,
which features exceptional growth in production and proved reserves, low
operating and administrative costs, high operating margins and increased
production forecasts for the remainder of 2003 and for 2004. Chesapeake's
value-creating financial and operating results are being driven by its
distinctive Mid-Continent focus on successful deep-gas exploration and on
finding, completing and quickly integrating small and medium-sized acquisitions.
Because of the company's unique scale in the Mid-Continent, its technological
advantages in deep gas exploration and its unrivaled Mid-Continent 3-D seismic
and leasehold inventory, we believe Chesapeake's production and reserve growth
trends should be sustainable and should enable the company to continue
generating significant increases in shareholder value in the years ahead."
CONFERENCE CALL INFORMATION
A conference call has been scheduled for Tuesday morning, July 29, 2003 at 9:00
a.m. EDT to discuss the earnings release. The telephone number to access the
conference call is 913.981.5533. For those unable to participate in the
conference call, a replay will be available from 12:00 p.m. EDT on Tuesday, July
29, 2003 through midnight EDT on Friday, August 15, 2003. The number to access
the conference call replay is 719.457.0820 and the passcode is 448860. The
conference call will also be simulcast live on the Internet and can be accessed
at www.chkenergy.com by selecting "Conference Calls" under the "Investor
Relations" section. The webcast of the conference call will be available on the
website for one year.
This press release and the accompanying Outlooks include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
give our current expectations or forecasts of future events. They include
estimates of oil and gas reserves, expected oil and gas production and future
expenses, projections of future oil and gas prices, planned capital expenditures
for drilling, leasehold acquisitions and seismic data, and statements concerning
anticipated cash flow and liquidity, business strategy and other plans and
objectives for future operations. Disclosures concerning derivative contracts
and their estimated contribution to our future results of operations are based
upon market information as of a specific date. These market prices are subject
to significant volatility. Although we believe the expectations and forecasts
reflected in these and other forward-looking statements are reasonable, we can
give no assurance they will prove to have been correct. They can be affected by
inaccurate assumptions or by known or unknown risks and uncertainties. Factors
that could cause actual results to differ materially from expected results are
described under "Risk Factors" in Item 1 of our 2002 Form 10-K and subsequent
filings with the Securities and Exchange Commission. They include the volatility
of oil and gas prices; adverse effects our substantial indebtedness could have
on our operations and future growth; our ability to compete effectively against
strong oil and gas companies and majors; the cost and availability of drilling
and production services; possible financial losses as a result of our commodity
price risk management activities; uncertainties inherent in estimating
quantities of oil and gas reserves, including reserves we acquire, projecting
future rates of production and the timing of development expenditures; exposure
to potential liabilities of acquired properties; our ability to replace
reserves; the availability of capital; changes in interest rates; and drilling
and operating risks. We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date of this press
release, and we undertake no obligation to update this information.
Chesapeake Energy Corporation is one of the eight largest independent natural
gas producers in the U.S. Headquartered in Oklahoma City, the company's
operations are focused on exploratory and developmental drilling and producing
property acquisitions in the Mid-Continent region of the United States. The
company's Internet address is www.chkenergy.com.
3
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: JUNE 30, 2003 JUNE 30, 2002
$ $/MCFE $ $/MCFE
------------ ------------ ----------- -----------
REVENUES:
OIL AND GAS SALES 316,172 4.69 152,009 3.50
RISK MANAGEMENT INCOME (LOSS) 3,084 0.05 (481) (0.01)
OIL AND GAS MARKETING SALES 110,296 1.64 42,785 0.99
------------ ------------ ----------- -----------
TOTAL REVENUES 429,552 6.38 194,313 4.48
------------ ------------ ----------- -----------
OPERATING COSTS:
PRODUCTION EXPENSES 34,263 0.51 24,242 0.56
PRODUCTION TAXES 17,101 0.25 7,911 0.18
GENERAL AND ADMINISTRATIVE 6,000 0.09 3,859 0.09
OIL AND GAS MARKETING EXPENSES 106,857 1.59 41,181 0.95
DEPRECIATION, DEPLETION, AND AMORTIZATION
OF OIL AND GAS PROPERTIES 91,570 1.36 50,778 1.17
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 4,122 0.06 3,652 0.08
------------ ------------ ----------- -----------
TOTAL OPERATING COSTS 259,913 3.86 131,623 3.03
------------ ------------ ----------- -----------
INCOME FROM OPERATIONS 169,639 2.52 62,690 1.45
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 781 0.01 3,992 0.09
INTEREST EXPENSE (37,773) (0.56) (24,690) (0.57)
LOSS ON REPURCHASES OF DEBT - - (273) (0.01)
------------ ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (36,992) (0.55) (20,971) (0.49)
------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAXES 132,647 1.97 41,719 0.96
INCOME TAX EXPENSE
CURRENT - - - -
DEFERRED 50,407 0.75 16,686 0.38
------------ ------------ ---------- -----------
TOTAL INCOME TAX EXPENSE 50,407 0.75 16,686 0.38
------------ ------------ ----------- -----------
NET INCOME 82,240 1.22 25,033 0.58
PREFERRED STOCK DIVIDENDS (5,979) (0.09) (2,530) (0.06)
------------ ------------ ----------- -----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS 76,261 1.13 22,503 0.52
============ ============ =========== ===========
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
BASIC $ 0.36 $ 0.14
============ ===========
ASSUMING DILUTION $ 0.31 $ 0.13
============ ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN 000'S):
BASIC 214,341 165,963
============ ===========
ASSUMING DILUTION 263,919 191,947
============ ===========
4
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED: JUNE 30, 2003 JUNE 30, 2002
$ $/MCFE $ $/MCFE
------------ ------------ ----------- -----------
REVENUES:
OIL AND GAS SALES 572,504 4.61 293,980 3.45
RISK MANAGEMENT INCOME (LOSS) 30,794 0.25 (79,949) (0.94)
OIL AND GAS MARKETING SALES 200,604 1.62 70,118 0.82
------------ ------------ ----------- -----------
TOTAL REVENUES 803,902 6.48 284,149 3.33
------------ ------------ ----------- -----------
OPERATING COSTS:
PRODUCTION EXPENSES 65,720 0.53 46,302 0.54
PRODUCTION TAXES 35,698 0.29 13,127 0.15
GENERAL AND ADMINISTRATIVE 11,665 0.09 8,153 0.10
OIL AND GAS MARKETING EXPENSES 196,215 1.58 67,688 0.79
DEPRECIATION, DEPLETION, AND AMORTIZATION
OF OIL AND GAS PROPERTIES 168,184 1.36 99,397 1.17
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 7,806 0.06 6,762 0.08
------------ ------------ ----------- -----------
TOTAL OPERATING COSTS 485,288 3.91 241,429 2.83
------------ ------------- ----------- -----------
INCOME FROM OPERATIONS 318,614 2.57 42,720 0.50
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 1,544 0.01 5,537 0.07
INTEREST EXPENSE (72,800) (0.58) (51,650) (0.61)
LOSS ON REPURCHASES OF DEBT - - (864) (0.01)
------------ ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (71,256) (0.57) (46,977) (0.55)
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 247,358 2.00 (4,257) (0.05)
INCOME TAX EXPENSE (BENEFIT)
CURRENT - - - -
DEFERRED 93,998 0.76 (1,704) (0.02)
------------ ------------ ----------- -----------
TOTAL INCOME TAX EXPENSE (BENEFIT) 93,998 0.76 (1,704) (0.02)
------------ ------------ ----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 153,360 1.24 (2,553) (0.03)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX 2,389 0.02 - -
------------ ------------ ----------- -----------
NET INCOME (LOSS) 155,749 1.26 (2,553) (0.03)
PREFERRED STOCK DIVIDENDS (9,505) (0.08) (5,062) (0.06)
------------ ------------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS 146,244 1.18 (7,615) (0.09)
============ ============= =========== ===========
- ---------------------------------------------------------------------------------------------------------------
5
EARNINGS PER COMMON SHARE:
BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.70 $ (0.05)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0.01 -
------------ -----------
NET INCOME (LOSS) $ 0.71 $ (0.05)
============ ===========
ASSUMING DILUTION
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.62 $ (0.05)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0.01 -
------------ -----------
NET INCOME (LOSS) $ 0.63 $ (0.05)
============ ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN 000'S):
BASIC 205,995 165,669
============ ===========
ASSUMING DILUTION 247,391 165,669
============ ===========
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN 000'S)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2003 2002
- --------------------------------------------------------------------------------------------------------------
CASH $ 35,909 $ 247,637
OTHER CURRENT ASSETS 297,558 187,680
--------------- ---------------
TOTAL CURRENT ASSETS 333,467 435,317
--------------- ---------------
PROPERTY AND EQUIPMENT (NET) 3,595,166 2,389,884
DEFERRED TAX ASSET - 2,071
OTHER ASSETS 84,727 48,336
--------------- ---------------
TOTAL ASSETS $ 4,013,360 $ 2,875,608
=============== ===============
CURRENT LIABILITIES $ 415,871 $ 265,552
LONG TERM DEBT 1,968,447 1,651,198
LONG TERM LIABILITIES 73,502 50,983
DEFERRED TAX LIABILITY 92,068 -
--------------- ---------------
TOTAL LIABILITIES 2,549,888 1,967,733
STOCKHOLDERS' EQUITY 1,463,472 907,875
--------------- ---------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,013,360 $ 2,875,608
=============== ===============
COMMON SHARES OUTSTANDING 215,862 190,144
=============== ===============
6
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED CASH FLOW DATA
(IN 000'S)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: JUNE 30, MARCH 31, JUNE 30,
2003 2003 2002
- --------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 277,581 $ 99,052 $ 97,528
CASH (USED IN) INVESTING ACTIVITIES $ (313,485) $ (1,002,289) $ (234,613)
CASH PROVIDED BY FINANCING ACTIVITIES $ 33,809 $ 693,604 $ 21,429
- --------------------------------------------------------------------------------------------------------------
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF CERTAIN FINANCIAL MEASURES
(IN 000'S)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: JUNE 30, MARCH 31, JUNE 30,
2003 2003 2002
- --------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 277,581 $ 99,052 $ 97,528
ADJUSTMENTS:
CHANGES IN ASSETS AND LIABILITIES (51,512) 68,661 (910)
------------ ------------- -------------
OPERATING CASH FLOW* $ 226,069 $ 167,713 $ 96,618
============ ============= =============
* Operating cash flow represents net cash provided by operating activities
before changes in assets and liabilities. Operating cash flow is presented
because management believes it is a useful adjunct to net cash provided by
operating activities under accounting principles generally accepted in the
United States (GAAP). Operating cash flow is widely accepted as a financial
indicator of an oil and gas company's ability to generate cash which is used to
internally fund exploration and development activities and to service debt. This
measure is widely used by investors and rating agencies in the valuation,
comparison, rating and investment recommendations of companies within the oil
and gas exploration and production industry. Operating cash flow is not a
measure of financial performance under GAAP and should not be considered as an
alternative to cash flows from operating, investing, or financing activities as
an indicator of cash flows, or as a measure of liquidity.
7
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: JUNE 30, MARCH 31, JUNE 30,
2003 2003 2002
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 82,240 $ 71,120 $ 25,033
DEFERRED INCOME TAX EXPENSE 50,407 43,591 16,686
INTEREST EXPENSE 37,773 35,027 24,690
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 4,122 3,684 3,652
DEPRECIATION, DEPLETION AND AMORTIZATION OF OIL AND GAS
PROPERTIES 91,570 76,614 50,778
---------- ------------ ----------
EBITDA** $ 266,112 $ 230,036 $ 120,839
============ ============= ===========
**Ebitda represents net income (loss) before cumulative effect of accounting
change, income tax expense (benefit), interest expense, and depreciation,
depletion and amortization expense. Ebitda is presented as a supplemental
financial measurement in the evaluation of our business. We believe that it
provides additional information regarding our ability to meet our future debt
service, capital expenditures and working capital requirements. This measure is
widely used by investors and rating agencies in the valuation, comparison,
rating and investment recommendations of companies. Ebitda is also a financial
measurement that, with certain negotiated adjustments, is reported to our banks
under our bank credit facilities and is used in our financial covenants under
our bank credit facilities and our indentures governing our senior notes. Ebitda
is not a measure of financial performance under GAAP. Accordingly, it should not
be considered as a substitute for net income, income from operations, or cash
flow provided by operating activities prepared in accordance with GAAP. Ebitda
is reconciled to cash provided by operating activities as follows:
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: JUNE 30, MARCH 31, JUNE 30,
2003 2003 2002
- -------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 277,581 $ 99,052 $ 97,528
CHANGES IN ASSETS AND LIABILITIES (51,512) 68,661 (910)
INTEREST EXPENSE 37,773 35,027 24,690
RISK MANAGEMENT INCOME (LOSS) 3,084 27,710 (481)
OTHER NON-CASH ITEMS (814) (414) 12
------------ -------------- ------------
EBITDA $ 266,112 $ 230,036 $ 120,839
============ =============== ============
8
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK
AS OF JULY 28, 2003
QUARTER ENDING SEPTEMBER 30, 2003; YEAR ENDING DECEMBER 31, 2003; YEAR ENDING
DECEMBER 31, 2004. We have adopted a policy of periodically providing investors
with guidance on certain factors that affect our future financial performance.
As of July 28, 2003, we are using the following key operating assumptions in our
projections for the third quarter of 2003, full year 2003, and full year 2004.
The primary changes from our June 24, 2003 guidance are in italicized bold and
are explained as follows:
1) We have updated the projected effects from changes in our hedging positions.
2) We have included our expectations for future NYMEX oil and gas prices to
illustrate hedging effects only, they are not a forecast of our expectations
for 2003 oil and natural gas prices.
3) We have increased our projected oil and natural gas production for the
full year 2003 and 2004.
4) We have included third quarter 2003 projections for the first time.
Quarter Ending Year Ending Year Ending
September 30, 2003 December 31, 2003 December 31, 2004
------------------ ------------------ -------------------
ESTIMATED PRODUCTION
Oil - Mbo 1,200 4,700 4,700
Gas - Bcf 60.5 - 61.0 230 - 234 249 - 253
Gas Equivalent - Bcfe 67.5 - 68.0 258 - 262 277 - 281
Daily gas equivalent midpoint - in Mmcfe 735 710 765
NYMEX PRICES (FOR CALCULATION OF HEDGING EFFECTS ONLY)
Oil - $/Bo $25.00 $28.19 $24.00
Gas - $/Mcf $5.43 $5.79 $4.50
ESTIMATED DIFFERENTIALS TO NYMEX PRICES
Oil - $/Bo -$2.50 -$2.23 -$2.00
Gas - $/Mcf -$0.50 -$0.50 -$0.50
ESTIMATED HEDGING EFFECTS (BASED ON EXPECTED NYMEX PRICES
ABOVE)
Oil - $/Bo +$2.64 -$0.24 +$2.43
Gas - $/Mcf +$0.24 -$0.25 +$0.29
OPERATING COSTS PER MCFE
Production expense $0.53 - 0.57 $0.53 - 0.57 $0.57 - 0.60
Production taxes (generally 6% of O&G revenues) $0.31 - 0.33 $0.31 - 0.33 $0.27 - 0.30
General and administrative $0.09 - 0.10 $0.09 - 0.10 $0.09 - 0.10
DD&A - oil and gas $1.35 - 1.40 $1.35 - 1.40 $1.37 - 1.42
Depreciation of other assets $0.08 - 0.10 $0.08 - 0.10 $0.08 - 0.10
Interest expense $0.60 - 0.65 $0.60 - 0.65 $0.55 - 0.60
OTHER INCOME AND EXPENSE PER MCFE (a)
Marketing and Other income $0.02 - 0.04 $0.02 - 0.04 $0.02 - 0.04
BOOK TAX RATE - ALL DEFERRED 38% 38% 38%
EQUIVALENT SHARES OUTSTANDING
Basic 216,000 m 214,000 m 218,000 m
Diluted 266,000 m 258,000 m 268,000 m
CAPITAL EXPENDITURES:
Drilling, Land and Seismic $150 - $155 mm $600 - $650 mm $600 - $650 mm
(a) Does not include non-cash risk management income or loss (SFAS 133) or the
cumulative effect of the adoption of SFAS 143.
9
COMMODITY HEDGING ACTIVITIES
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include:
(i) swap arrangements that establish an index-related price above which the
Company pays the counterparty and below which the Company is paid by the
counterparty,
(ii) the purchase of index-related puts that provide for a "floor"
price below which the counterparty pays the Company the amount by which the
price of the commodity is below the contracted floor,
(iii) the sale of index-related calls that provide for a "ceiling" price
above which the Company pays the counterparty the amount by which the price of
the commodity is above the contracted ceiling,
(iv) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points, and
(v) collar arrangements that establish an index-related price below
which the counterparty pays the Company and a separate index-related price
above which the Company pays the counterparty.
Commodity markets are volatile, and as a result, Chesapeake's hedging activity
is dynamic. As market conditions warrant, the Company may elect to settle a
hedging transaction prior to its scheduled maturity date and, as a result,
realize a gain or loss on the transaction.
Results from commodity hedging transactions are reflected in oil and gas sales
to the extent related to the Company's oil and gas production. The Company only
enters into commodity hedging transactions related to the Company's oil and gas
production volumes or Chesapeake Energy Marketing, Inc.'s physical purchase or
sale commitments. Gains or losses on crude oil and natural gas hedging
transactions are recognized as price adjustments in the months of related
production.
The Company currently has in place the following natural gas hedging
arrangements:
% Hedged
-----------------------------
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain from Open and Gas Estimated
Swaps of Open Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
------- ------- --------- --------- ------------ ------------
2003:
- ------
3rd Qtr 37.7 $5.45 $0.05 $5.50 60.8 62%
4th Qtr 38.3 $5.65 $0.07 $5.72 60.9 63%
- ------------------------------------------------------------------------------------------------------------------------------
Remaining 2003 76.0 $5.55 $0.06 $5.61 121.7 62%
- ------------------------------------------------------------------------------------------------------------------------------
10
% Hedged
-----------------------------
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain from Open and Gas Estimated
Swaps of Open Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
------- ------- --------- --------- ------------ ------------
2004:
- ----
1st Qtr 26.4 $6.12 $0.08 $6.20 61.4 43%
2nd Qtr 17.0 $5.06 $0.00 $5.06 62.3 27%
3rd Qtr 11.0 $4.92 $0.00 $4.92 63.5 17%
4th Qtr 11.0 $5.13 $0.00 $5.13 63.8 17%
- -----------------------------------------------------------------------------------------------------------------------------
Total 2004 65.4 $5.48 $0.03 $5.51 251.0 26%
- -----------------------------------------------------------------------------------------------------------------------------
Total 2005 40.2 $4.79 $0.00 $4.79 260.0 15%
- -----------------------------------------------------------------------------------------------------------------------------
Total 2006 25.6 $4.74 $0.00 $4.74 270.0 9%
- -----------------------------------------------------------------------------------------------------------------------------
Total 2007 25.6 $4.76 $0.00 $4.76 280.0 9%
- -----------------------------------------------------------------------------------------------------------------------------
Chesapeake has also entered into the following natural gas basis protection
swaps:
Assuming Gas
Annual Production in Bcf's
Volume in Bcf's NYMEX less: of: % Hedged
--------------- -------------- -------------------- ----------
2003 Remaining 82.8 $ 0.188 121.7 68%
2004 157.4 0.173 251.0 63%
2005 109.5 0.156 260.0 42%
2006 47.5 0.155 270.0 18%
2007 63.9 0.166 280.0 23%
2008 64.0 0.166 290.0 22%
2009 37.0 0.160 300.0 12%
--------------- -------------- ------------------- ----------
562.1 $ 0.169* 1,772.7 32%
=============== -------------- =================== ==========
* weighted average
11
The Company has entered into the following crude oil hedging arrangements:
% HEDGED
-----------------------------
Open Swap
Assuming Positions
Avg. Oil as % of
Open NYMEX Production Total
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
-------- ----- ---------- ----------
Q3 - 2003* 948 $28.07 1,200 79%
----------- ------------ -------------- --------------
Q4 - 2003* 948 $28.07 1,200 79%
----------- ------------ -------------- --------------
Remaining 2003 1,896 $28.07 2,400 79%
=========== ============ ============== ==============
Q1 - 2004* 877 $27.76 1,175 75%
----------- ------------ -------------- --------------
----------- ------------ -------------- --------------
Q2 - 2004* 797 $27.81 1,175 68%
----------- ------------ -------------- --------------
----------- ------------ -------------- --------------
Q3 - 2004* 644 $27.94 1,175 55%
----------- ------------ -------------- --------------
----------- ------------ -------------- --------------
Q4 - 2004* 644 $27.94 1,175 55%
----------- ------------ -------------- --------------
----------- ------------ -------------- --------------
TOTAL 2004 2,962 $27.85 4,700 63%
=========== ============ ============== ==============
*Swaps with a knockout provision for days in which NYMEX closes below $21.00.
12
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF JUNE 24, 2003
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF JULY 28, 2003
QUARTER ENDING JUNE 30, 2003; YEAR ENDING DECEMBER 31, 2003; YEAR ENDING
DECEMBER 31, 2004.
We have adopted a policy of periodically providing investors with guidance on
certain factors that affect our future financial performance. As of June 24,
2003, we are using the following key operating assumptions in our projections
for the second quarter of 2003, full year 2003, and full year 2004.
The primary changes from our April 28, 2003 guidance are in italicized bold and
are explained as follows:
1) We have updated the projected effects from changes in our hedging positions.
2) We have included our expectations for future NYMEX oil and gas prices to
illustrate hedging effects only, they are not a forecast of our expectations
for 2003 oil and natural gas prices.
3) We have increased our projected oil and natural gas production for the
second quarter 2003 and full year 2003.
4) We have included 2004 projections for the first time.
Quarter Ending Year Ending Year Ending
June 30, 2003 December 31, 2003 December 31, 2004
--------------- ----------------- -----------------
ESTIMATED PRODUCTION
Oil - Mbo 1,150 4,500 4,500
Gas - Bcf 57 - 58 228 - 233 248 - 253
Gas Equivalent - Bcfe 64 - 65 255 - 260 275 - 280
Daily gas equivalent midpoint - in Mmcfe 710 705 760
NYMEX PRICES (FOR CALCULATION OF HEDGING EFFECTS ONLY)
Oil - $/Bo $27.40 $27.82 $24.00
Gas - $/Mcf $5.40 $5.81 $4.50
ESTIMATED DIFFERENTIALS TO NYMEX PRICES
Oil - $/Bo -$2.00 -$1.92 -$2.00
Gas - $/Mcf -$0.50 - $0.60 -$0.50 - $0.60 -$0.50 - $0.60
ESTIMATED HEDGING EFFECTS (BASED ON EXPECTED NYMEX PRICES
ABOVE)
Oil - $/Bo +$0.50 +$0.03 +$0.29
Gas - $/Mcf +$0.06 -$0.25 +$0.18
OPERATING COSTS PER MCFE
Production expense $0.53 - 0.57 $0.53 - 0.57 $0.57 - 0.60
Production taxes (generally 7% of O&G revenues) $0.31 - 0.33 $0.31 - 0.33 $0.27 - 0.30
General and administrative $0.09 - 0.10 $0.09 - 0.10 $0.09 - 0.10
DD&A - oil and gas $1.32 - 1.37 $1.32 - 1.37 $1.37 - 1.42
Depreciation of other assets $0.08 - 0.10 $0.08 - 0.10 $0.08 - 0.10
Interest expense $0.60 - 0.65 $0.60 - 0.65 $0.55 - 0.60
OTHER INCOME AND EXPENSE PER MCFE (a)
Marketing and Other income $0.02 - 0.04 $0.02 - 0.04 $0.02 - 0.04
BOOK TAX RATE - ALL DEFERRED 38% 38% 38%
EQUIVALENT SHARES OUTSTANDING
Basic 215,000 m 212,000 m 216,000 m
Diluted 262,000 m 255,000 m 264,000 m
CAPITAL EXPENDITURES:
Drilling, Land and Seismic $150 - $155 mm $600 - $650 mm $600 mm
(a) Does not include non-cash risk management income or loss (SFAS 133) or the
cumulative effect of the adoption of SFAS 143.
13
COMMODITY HEDGING ACTIVITIES
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include:
(i) swap arrangements that establish an index-related price above which the
Company pays the counterparty and below which the Company is paid by the
counterparty,
(ii) the purchase of index-related puts that provide for a "floor" price
below which the counterparty pays the Company the amount by which the price of
the commodity is below the contracted floor,
(iii) the sale of index-related calls that provide for a "ceiling" price
above which the Company pays the counterparty the amount by which the price of
the commodity is above the contracted ceiling,
(iv) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points, and
(v) collar arrangements that establish an index-related price below which
the counterparty pays the Company and a separate index-related price above which
the Company pays the counterparty.
Commodity markets are volatile, and as a result, Chesapeake's hedging activity
is dynamic. As market conditions warrant, the Company may elect to settle a
hedging transaction prior to its scheduled maturity date and, as a result,
realize a gain or loss on the transaction.
Results from commodity hedging transactions are reflected in oil and gas sales
to the extent related to the Company's oil and gas production. The Company only
enters into commodity hedging transactions related to the Company's oil and gas
production volumes or Chesapeake Energy Marketing, Inc.'s physical purchase or
sale commitments. Gains or losses on crude oil and natural gas hedging
transactions are recognized as price adjustments in the months of related
production.
The Company has entered into the following natural gas hedging arrangements:
% Hedged
-----------------------------
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain from Open and Gas Estimated
Swaps of Open Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
------- ------- --------- --------- ------------ ------------
2003:
- ----
2nd Qtr 23.0 $4.92 $0.18 $5.10 57.5 40%
3rd Qtr 32.2 $5.46 $0.03 $5.49 61.0 53%
4th Qtr 30.1 $5.67 $0.06 $5.73 61.6 49%
- ---------------------------------------------------------------------------------------------------------------------------
Remaining 2003 85.3 $5.39 $0.08 $5.47 180.1 47%
- ---------------------------------------------------------------------------------------------------------------------------
14
% Hedged
-----------------------------
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain from Open and Gas Estimated
Swaps of Open Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
------- ------- --------- --------- ------------ ------------
2004:
- ----
1st Qtr 16.4 $6.34 $0.05 $6.39 62.0 26%
2nd Qtr 7.6 $5.22 $0.00 $5.22 62.3 12%
Bb
3rd Qtr 2.8 $5.11 $0.00 $5.11 62.7 4%
4th Qtr 2.8 $5.29 $0.00 $5.29 63.0 4%
- --------------------------------------------------------------------------------------------------------------------------
Total 2004 29.6 $5.84 $0.03 $5.87 250.0 12%
- --------------------------------------------------------------------------------------------------------------------------
Total 2005 7.3 $4.99 $0.00 $4.99 260.0 3%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total 2006 7.3 $4.84 $0.00 $4.84 270.0 3%
- --------------------------------------------------------------------------------------------------------------------------
Total 2007 7.3 $4.84 $0.00 $4.84 280.0 3%
- --------------------------------------------------------------------------------------------------------------------------
Chesapeake has also entered into the following natural gas basis protection
swaps:
Assuming Gas
Annual Production in Bcf's
Volume in Bcf's NYMEX less: of: % Hedged
---------------- ---------------- ------------------- --------
2003 Remaining 120.0 $ 0.188 180.1 67%
2004 157.4 0.173 250.0 63%
2005 109.5 0.156 260.0 42%
2006 47.5 0.155 270.0 18%
2007 63.9 0.166 280.0 23%
2008 64.0 0.166 290.0 22%
2009 37.0 0.160 300.0 12%
----------------- ---------------- ------------------- -------
599.3 $ 0.169* 1,830.1 33%
================= ---------------- =================== =======
* weighted average
15
The Company has entered into the following crude oil hedging arrangements:
% Hedged
-----------------------------
Assuming Open Swap
Avg. Oil Positions
Open NYMEX Production as % of
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
-------- ------ ---------- -----------
Q3 - 2003* 948 $28.07 1,145 83%
----------- ------------ -------------- ----------------
Q4 - 2003* 948 $28.07 1,145 83%
----------- ------------ -------------- ----------------
Remaining 2003 2,715 $28.08 3,440 79%
--------------------------------------------------------
Q1 - 2004* 240 $27.30 1,125 21%
--------------------------------------------------------
Q2 - 2004* 160 $27.30 1,125 14%
--------------------------------------------------------
Q3 - 2004* 0 $0.00 1,125 0%
--------------------------------------------------------
Q4 - 2004* 0 $0.00 1,125 0%
--------------------------------------------------------
TOTAL 2004 400 $27.30 4,500 9%
--------------------------------------------------------
*Swaps with a knockout provision for days in which NYMEX closes below $21.00.
16