CHESAPEAKE ENERGY CORPORATION POSTS STRONG OPERATIONAL
AND FINANCIAL RESULTS FOR THE THIRD QUARTER OF 2003
THIRD QUARTER 2003 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS REACHES
$82 MILLION ON REVENUE OF $455 MILLION AND PRODUCTION OF 71 BCFE
COMPANY ALSO REPORTS SIGNIFICANT ADDITIONS TO ITS OIL AND NATURAL GAS HEDGING
POSITIONS, INCREASES ITS 2003 AND 2004 PRODUCTION FORECASTS ONCE AGAIN AND
ANNOUNCES $200 MILLION ACQUISITION OF NATURAL GAS PROPERTIES
OKLAHOMA CITY, OKLAHOMA, OCTOBER 30, 2003 - Chesapeake Energy Corporation
(NYSE:CHK) today reported its financial and operating results for the 2003 third
quarter. For the quarter, Chesapeake generated net income available to common
shareholders of $81.9 million ($0.33 per fully diluted common share), operating
cash flow of $247.7 million (defined as cash flow from operating activities
before changes in assets and liabilities) and ebitda of $285.3 million (defined
as income before income taxes, interest expense, and depreciation, depletion and
amortization expense) on revenue of $454.5 million.
The company's 2003 third quarter net income available to common shareholders
included a $0.4 million ($0.00 per share) after-tax non-cash unrealized gain
recorded in oil and gas sales resulting from the application of SFAS 133 to the
company's oil and natural gas derivative contracts that do not qualify for hedge
accounting. In addition, interest expense included a $1.9 million ($0.01 per
share) after-tax non-cash unrealized loss resulting from the application of SFAS
133 to the company's interest rate derivative contracts that do not qualify for
hedge accounting.
During the third quarter, Chesapeake produced 71.0 billion cubic feet of natural
gas equivalent (bcfe), which compares favorably to the 46.7 bcfe produced in the
2002 third quarter and the 67.3 produced in the 2003 second quarter. The 2003
third quarter's 71.0 bcfe of production was comprised of 63.7 billion cubic feet
of natural gas (bcf) (90% on a natural gas equivalent basis) and 1.2 million
barrels of oil and natural gas liquids (mmbo) (10% on a natural gas equivalent
basis). Chesapeake's average daily production rate for the quarter was 772
million cubic feet of natural gas equivalent production (mmcfe), which consisted
of 692 mmcf of gas and 13,220 barrels of oil and natural gas liquids.
Oil and natural gas production in the 2003 third quarter increased 52%
year-over-year from the 2002 third quarter and 5.4% sequentially from the 2003
second quarter. Of the 3.6 bcfe in sequential production growth during the third
quarter, 34% was internally generated organic drillbit growth. This 1.2 bcfe of
organic sequential production growth equals a sequential quarterly organic
growth rate of just under 2% and an annualized organic growth rate of 8%. The
2003 third quarter was Chesapeake's ninth consecutive quarter of sequential
production growth. During the past nine quarters, Chesapeake's production has
increased 81%, for an average sequential quarterly growth rate of 7% and an
annualized growth rate of 30%.
Average prices realized during the 2003 third quarter (including realized gains
or losses from oil and gas derivatives, but excluding unrealized gains or losses
on such derivatives) were $26.20 per barrel of oil (bo) and $4.92 per thousand
cubic feet of natural gas (mcf), for a realized gas equivalent price of $4.86
per thousand cubic feet of natural gas equivalent (mcfe). Chesapeake's realized
pricing differentials to NYMEX during the quarter averaged a negative $2.07 per
bo and a negative $0.44 per mcf. Realized gains or losses from hedging
activities generated a $1.68 loss per bo and a $0.31 gain per mcf.
KEY OPERATIONAL AND FINANCIAL STATISTICS FOR THE 2003 THIRD QUARTER
The table below summarizes Chesapeake's key statistics during the 2003 third
quarter and compares them to the 2003 second quarter and the 2002 third quarter:
Three Months Ended:
-------------------
9/30/03 6/30/03 9/30/02
------- ------- -------
Average daily production (in mmcfe) 772 740 507
Gas as % of total production 90 89 89
Natural gas production (in bcf) 63.7 60.0 41.4
Average realized gas price ($/mcf) (a) 4.92 4.73 3.39
Oil production (in mbbls) 1,216 1,224 872
Average realized oil price ($/bo) (a) 26.20 26.24 25.67
Natural gas equivalent production (in bcfe) 71.0 67.3 46.7
Gas equivalent realized price ($/mcfe) (a) 4.86 4.70 3.49
General and administrative costs ($/mcfe) 0.08 0.09 0.08
Production taxes ($/mcfe) 0.30 0.25 0.15
Lease operating expenses ($/mcfe) 0.51 0.51 0.53
Interest expense ($/mcfe) (a) 0.53 0.56 0.61
DD&A of oil and gas properties ($/mcfe) 1.38 1.36 1.25
Operating cash flow ($ in millions) (b) 247.7 226.1 101.8
Operating cash flow ($/mcfe) 3.49 3.36 2.18
Ebitda ($ in millions) (c) 285.3 266.4 116.3
Ebitda ($/mcfe) 4.02 3.96 2.49
Net income available to common shareholders 81.9 76.3 14.1
($ millions)
(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) defined as 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 PRODUCTION FORECASTS AND HEDGING INFORMATION
Chesapeake's initial 2003 fourth quarter and updated full-year 2003 and 2004
forecasts are attached to this release in a new Outlook dated October 30, 2003
that is labeled Schedule "A". The company's previous Outlook of July 28, 2003 is
provided as an attachment for comparative reference only and is labeled Schedule
"B".
The October 30 Outlook reflects a projected 2003 fourth quarter production level
of 74.0-74.5 bcfe (807 mmcfe per day) and a projected 2003 full-year production
volume of 269-270 bcfe (738 mmcfe per day), an increase of 3.7% from the 258-262
bcfe projected in the company's July 28 Outlook. The company has now increased
its full-year 2003 production estimate by approximately 40% since the beginning
of the year. Furthermore, the October 30 Outlook reflects a 7.5% increase in the
company's projected 2004 production volumes to 297-303 bcfe (822 mmcfe per day)
from the 277-281 bcfe projected in its July 28 Outlook. Chesapeake believes its
2004 production will exceed 2003's production by at least 11%.
Chesapeake significantly increased its hedging positions during the run-up in
gas prices that occurred earlier this month. During the first two weeks of
October, the company hedged 86 bcf of natural gas at an average NYMEX price of
$5.13 per mcf and 700 mbo at an average NYMEX price of $30.85 per bo. The
following tables compare projected 2003-2007 oil and natural gas production that
was hedged as of October 30, 2003 versus what was hedged as of July 28, 2003:
HEDGED POSITIONS AS OF OCTOBER 30, 2003
Oil Natural Gas
---------------------- ----------------------
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
- ---------------- --------- ------- --------- -------
4Q 2003 100% $28.69 83% $5.64
2004 94% $28.61 51% $5.28
2005 - - 16% $4.82
2006 - - 9% $4.74
2007 - - 8% $4.76
2
HEDGED POSITIONS AS OF JULY 28, 2003
Oil Natural Gas
---------------------- ---------------------
QUARTER OR YEAR % Hedged $ NYMEX % Hedged $ NYMEX
- ---------------- ----_----- -------- --------- -------
4Q 2003 79% $28.07 63% $5.72
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 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.
CHESAPEAKE PROVIDES OPERATIONAL UPDATE AND ANNOUNCES AGREEMENT
TO ACQUIRE $200 MILLION OF NATURAL GAS PROPERTIES IN SOUTH TEXAS
As evidenced by Chesapeake's strong organic production growth during the
quarter, the company's drilling programs continue to generate exceptional
results. During the quarter, Chesapeake drilled 100 gross operated (81 net)
wells, completing 95% of these as successful producers. The company's operated
rig count during the quarter averaged 43 rigs compared to 35 and 28 rigs in the
2003 second and first quarters, respectively. Today the company's operated rig
count is 43.
In addition to Chesapeake's primary focus area of the Mid-Continent, the company
is also active in two secondary areas: the Permian Basin in west Texas and
eastern New Mexico and the onshore Gulf Coast in Texas and Louisiana. These two
areas are currently responsible for 11% of Chesapeake's production and 8% of the
company's proved reserves. Although these areas are and will remain secondary in
importance to the company, Chesapeake periodically finds acquisition candidates
that are attractive in these areas.
The company has recently entered into one such acquisition in south Texas.
Chesapeake has agreed to acquire $200 million of south Texas natural gas assets
from Houston-based privately-owned Laredo Energy, L.P. and its partners. In this
transaction, Chesapeake will acquire an internally estimated 196 bcfe of
reserves, of which 108 bcfe are proved and 88 bcfe are probable or possible.
After allocating $48 million of the $200 million purchase price to unevaluated
leasehold for the probable and possible reserves and exploratory acreage,
Chesapeake's acquisition cost per mcfe of proved reserves will be $1.41.
Including future leasehold and drilling costs for fully developing the proved,
probable and possible reserves, Chesapeake estimates that its all-in acquisition
cost for the 196 bcfe to be acquired will be $1.51 per mcfe.
Current production from the acquired properties is approximately 30 mmcfe per
day. The proved reserves have a reserves-to-production index of 10 years, are
100% natural gas and are 32% proved developed. Initial lease operating expenses
on the acquired properties should average $0.09 per mcfe, compared to $0.52 per
mcfe for Chesapeake during the first three quarters of 2003 and approximately
$0.70 per mcfe for the company's peer group during the first three quarters of
2003. The company has hedged 100% of the projected Laredo production volumes at
average NYMEX prices of $5.76 per mcf for November and December 2003 and $5.20
per mcf for the full-year 2004.
The Laredo acquisition is scheduled to close on October 31, 2003. The company
intends to finance the acquisition using cash on hand and borrowings from its
bank credit facility. Chesapeake expects to repay these borrowings using its
excess cash flow in the months ahead and has not yet made a decision on whether
or how to permanently finance the Laredo acquisition.
The Laredo properties are located in the Zapata County portion of the south
Texas Lobo Trend. Over the past two years, Chesapeake has built a growing
operational presence in south Texas where the company believes its deep
drilling, 3-D seismic and tight sands expertise can provide competitive
advantages and attractive returns on its invested capital.
3
MANAGEMENT COMMENTS
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are
pleased to announce another strong quarter of operational and financial
performance. The 2003 third quarter featured delivery of excellent results from
the business strategy set forth below:
o establishing strong organic production growth from our drilling programs,
o completing focused and complementary acquisitions of high-margin,
geographically concentrated natural gas properties,
o opportunistically hedging high oil and natural gas prices,
o continuing balance sheet improvement,
o maintaining low operating costs, and
o generating high returns on invested capital.
Chesapeake's value-creating financial and operating strategies 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 Friday morning, October 31, 2003 at
9:00 a.m. EST to discuss this 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. EST on Friday,
October 31, 2003 through midnight EST on Friday, November 14, 2003. The number
to access the conference call replay is 719.457.0820 and the passcode is 670672.
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/A 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 independent 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 and interest rate 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.
The Securities and Exchange Commission has generally permitted oil and gas
companies, in their filings with the SEC, to disclose only proved reserves that
a company has demonstrated by actual production or conclusive formation tests to
be economically and legally producible under existing economic and operating
conditions. We use the terms "probable" and "possible" reserves or other
descriptions of volumes of reserves potentially recoverable through additional
drilling or recovery techniques that the SEC's guidelines may prohibit us from
including in filings with the SEC. These estimates are by their nature more
speculative than estimates of proved reserves and accordingly are subject to
substantially greater risk of being actually realized by the company.
Chesapeake Energy Corporation is one of the six largest independent U.S. natural
gas producers. 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.
4
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED: SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
$ $/mcfe $ $/mcfe
------------ ------------ ----------- ------------
REVENUES:
REVENUES:
OIL AND GAS SALES $ 345,587 $ 4.87 $ 154,249 $ 3.30
OIL AND GAS MARKETING SALES 108,962 1.53 42,216 0.90
---------- --------- --------- ---------
TOTAL REVENUES 454,549 6.40 196,465 4.20
---------- --------- --------- ---------
OPERATING COSTS:
PRODUCTION EXPENSES 35,944 0.51 24,950 0.53
PRODUCTION TAXES 21,638 0.30 6,807 0.15
GENERAL AND ADMINISTRATIVE 5,589 0.08 3,777 0.08
OIL AND GAS MARKETING EXPENSES 105,849 1.49 41,148 0.88
OIL AND GAS DEPRECIATION, DEPLETION, AND AMORTIZATION 97,947 1.38 58,334 1.25
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 4,841 0.07 3,727 0.08
---------- --------- --------- ---------
TOTAL OPERATING COSTS 271,808 3.83 138,743 2.97
---------- --------- --------- ---------
INCOME FROM OPERATIONS 182,741 2.57 57,722 1.23
---------- --------- --------- ---------
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME (188) -- 1,806 0.04
INTEREST EXPENSE (40,851) (0.57) (26,599) (0.57)
LOSS ON INVESTMENT IN SEVEN SEAS -- -- (4,770) (0.10)
LOSS ON REPURCHASES OF CHESAPEAKE DEBT -- -- (489) (0.01)
---------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) (41,039) (0.57) (30,052) (0.64)
---------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 141,702 2.00 27,670 0.59
INCOME TAX EXPENSE:
CURRENT 330 0.00 -- 0.00
DEFERRED 53,513 0.76 11,070 0.24
---------- --------- --------- ---------
TOTAL INCOME TAX EXPENSE 53,843 0.76 11,070 0.24
---------- --------- --------- ---------
NET INCOME 87,859 1.24 16,600 0.35
---------- --------- --------- ---------
PREFERRED STOCK DIVIDENDS (5,979) (0.09) (2,526) (0.05)
---------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 81,880 $ 1.15 $ 14,074 $ 0.30
========== ========= ========== =========
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
BASIC $ 0.38 $ 0.08
========== =========
ASSUMING DILUTION $ 0.33 $ 0.08
========== =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN 000'S)
BASIC 216,080 166,144
========== =========
ASSUMING DILUTION 265,545 171,182
========== =========
5
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED: SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
$ $/mcfe $ $/mcfe
------------------------- -----------------------
REVENUES:
OIL AND GAS SALES $ 951,125 $ 4.87 $ 367,810 $ 2.79
OIL AND GAS MARKETING SALES 309,566 1.59 112,334 0.85
---------- --------- --------- ---------
TOTAL REVENUES 1,260,691 6.46 480,144 3.64
---------- --------- --------- ---------
OPERATING COSTS:
PRODUCTION EXPENSES 101,664 0.52 71,252 0.54
PRODUCTION TAXES 57,336 0.29 19,934 0.15
GENERAL AND ADMINISTRATIVE 17,254 0.09 11,930 0.09
OIL AND GAS MARKETING EXPENSES 302,064 1.55 108,836 0.82
OIL AND GAS DEPRECIATION, DEPLETION, AND AMORTIZATION 266,131 1.36 157,731 1.20
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 12,647 0.07 10,489 0.08
---------- --------- --------- ---------
TOTAL OPERATING COSTS 757,096 3.88 380,172 2.88
---------- --------- --------- ---------
INCOME FROM OPERATIONS 503,595 2.58 99,972 0.76
---------- --------- --------- ---------
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 1,356 0.01 7,343 0.06
INTEREST EXPENSE (115,891) (0.59) (77,779) (0.59)
LOSS ON INVESTMENT IN SEVEN SEAS -- -- (4,770) (0.04)
LOSS ON REPURCHASES OF CHESAPEAKE DEBT -- -- (1,353) (0.01)
---------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) (114,535) (0.58) (76,559) (0.58)
---------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 389,060 2.00 23,413 0.18
INCOME TAX EXPENSE:
CURRENT 330 -- -- --
DEFERRED 147,511 0.76 9,366 0.07
---------- --------- --------- ---------
TOTAL INCOME TAX EXPENSE 147,841 0.76 9,366 0.07
---------- --------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 241,219 1.24 14,047 0.11
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX 2,389 0.01 -- --
---------- --------- --------- ---------
NET INCOME 243,608 1.25 14,047 0.11
PREFERRED STOCK DIVIDENDS (15,484) (0.08) (7,588) (0.06)
---------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 228,124 $ 1.17 $ 6,459 $ 0.05
========== ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
BASIC
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 1.08 $ 0.04
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0.01 --
---------- ---------
NET INCOME $ 1.09 $ 0.04
========== =========
ASSUMING DILUTION
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.95 $ 0.04
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0.01 --
---------- ---------
NET INCOME $ 0.96 $ 0.04
========== =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN 000'S):
BASIC 209,394 165,829
========== =========
ASSUMING DILUTION 253,567 171,540
========== =========
6
CHESAPEAKE ENERGY CORPORATION
SUPPLEMENTAL DATA - OIL AND GAS SALES AND INTEREST EXPENSE
(IN 000'S)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
OIL AND GAS SALES:
Oil sales $ 33,908 $ 24,302 $ 101,811 $ 63,017
Oil derivatives - realized gains (losses) (2,045) (1,918) (8,924) 1,176
Oil derivatives - unrealized gains (losses) 185 (1,364) (993) (8,180)
---------- --------- -------- ---------
Total oil sales 32,048 21,020 91,894 56,013
---------- --------- -------- ---------
Gas sales 293,309 116,551 889,598 309,827
Gas derivatives - realized gains (losses) 19,781 24,078 (65,028) 82,973
Gas derivatives - unrealized gains (losses) 449 (7,400) 34,661 (81,003)
---------- --------- -------- ---------
Total gas sales 313,539 133,229 859,231 311,797
---------- --------- -------- ---------
Total oil and gas sales $ 345,587 $ 154,249 $ 951,125 $ 367,810
=========== =========== ========= =========
AVERAGE SALES PRICE
(EXCLUDING GAINS (LOSSES) ON DERIVATIVES):
Oil ($ per bbl) $ 27.88 $ 27.87 $ 29.09 $ 24.96
Gas ($ per mcf) $ 4.61 $ 2.81 $ 5.11 $ 2.65
Gas equivalent ($ per mcfe) $ 4.61 $ 3.02 $ 5.08 $ 2.83
AVERAGE SALES PRICE
(EXCLUDING UNREALIZED GAINS (LOSSES) ON DERIVATIVES):
Oil ($ per bbl) $ 26.20 $ 25.67 $ 26.54 $ 25.42
Gas ($ per mcf) $ 4.92 $ 3.39 $ 4.74 $ 3.36
Gas equivalent ($ per mcfe) $ 4.86 $ 3.49 $ 4.70 $ 3.46
INTEREST EXPENSE:
Interest $ (38,855) $ (29,381) $(113,011) $ (82,616)
Derivatives - realized gains (losses) 1,097 1,065 2,453 2,650
Derivatives - unrealized gains (losses) (3,093) 1,717 (5,333) 2,187
---------- --------- -------- ---------
Total Interest Expense $ (40,851) $ (26,599) $(115,891) $ (77,779)
========== =========== ========= =========
7
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN 000'S)
(UNAUDITED)
===============================================================================
September 30, December 31,
2003 2002
- -------------------------------------------------------------------------------
CASH $ 38,478 $ 247,637
OTHER CURRENT ASSETS 338,252 187,680
------------- ------------
TOTAL CURRENT ASSETS 376,730 435,317
------------- ------------
OIL AND GAS PROPERTIES, NET 3,623,657 2,283,566
OTHER FIXED ASSETS, NET 151,620 106,318
DEFERRED TAX ASSET - 2,071
OTHER ASSETS 105,482 48,336
------------- ------------
TOTAL ASSETS $ 4,257,489 $ 2,875,608
============= =============
CURRENT LIABILITIES 426,177 $ 265,552
LONG TERM DEBT 2,024,336 1,651,198
LONG TERM LIABILITIES 71,282 50,983
DEFERRED TAX LIABILITY 151,324 -
------------- ------------
TOTAL LIABILITIES 2,673,119 1,967,733
SHAREHOLDERS' EQUITY 1,584,370 907,875
------------- ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,257,489 $ 2,875,608
============= ============
COMMON SHARES OUTSTANDING 216,403 190,144
============= ============
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED CASH FLOW DATA
(IN 000'S)
(UNAUDITED)
======================================================================
THREE MONTHS ENDED: September 30, September 30,
2003 2002
----------------------------------------------------------------------
----------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 276,884 $ 138,833
CASH (USED IN) INVESTING ACTIVITIES $ (284,994) $ (292,611)
CASH PROVIDED BY FINANCING ACTIVITIES $ 10,679 $ 172,860
======================================================================
8
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF CERTAIN FINANCIAL MEASURES
(IN 000'S)
(UNAUDITED)
===============================================================================
THREE MONTHS ENDED: September 30, September 30,
2003 2002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 276,884 $ 138,833
ADJUSTMENTS:
CHANGES IN ASSETS AND LIABILITIES (29,175) (37,064)
---------- ----------
OPERATING CASH FLOW* $ 247,709 $ 101,769
========== ===========
* 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.
===============================================================================
THREE MONTHS ENDED: Setpember 30, September 30,
2003 2002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET INCOME $ 87,859 $ 16,600
INCOME TAX EXPENSE 53,843 11,070
INTEREST EXPENSE 40,851 26,599
DEPRECIATION AND AMORTIZATIONOF OTHER ASSETS 4,841 3,727
OIL AND GAS DEPRECIATION, DEPLETION 97,947 58,334
AND AMORTIZATION ---------- ----------
EBITDA** $ 285,341 $ 116,330
========== ==========
**Ebitda represents net income (loss) before 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 the
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: September 30, September 30,
2003 2002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 276,884 $ 138,833
CHANGES IN ASSETS AND LIABILITIES (29,175) (37,064)
INTEREST EXPENSE 40,851 26,599
UNREALIZED GAINS (LOSSES) ON OIL
AND GAS DERIVATIVES 634 (8,764)
OTHER NON-CASH ITEMS (3,853) (3,274)
---------- ----------
EBITDA $ 285,341 $ 116,330
========== ==========
9
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK
AS OF OCTOBER 30, 2003
QUARTER ENDING DECEMBER 31, 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 October 30, 2003, we are using the following key operating assumptions in
our projections for the fourth quarter of 2003, full year 2003, and full year
2004.
The primary changes from our July 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 or 2004 oil and natural gas prices.
3) We have increased our projected natural gas production for the full year
2003 and 2004.
4) We have included fourth quarter 2003 projections for the first time.
Quarter Ending Year Ending Year Ending
December 31, 2003 December 31, 2003 December 31, 2004
------------------- ------------------- -------------------
Estimated Production:
Oil - Mbo 1,200 4,700 4,700
Gas - Bcf 66.8-67.3 241 - 242 269 - 275
Gas Equivalent - Bcfe 74.0-74.5 269 - 270 297 - 303
Daily gas equivalent midpoint - in Mmcfe 807 738 822
NYMEX Prices (for calculation of realized hedging effects only):
Oil - $/Bo $26.00 $29.74 $24.00
Gas - $/Mcf $4.50 $5.36 $4.25
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.50 -$2.23 -$2.50
Gas - $/Mcf -$0.60 -$0.55 -$0.60
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo +$2.73 -$1.20 +$4.22
Gas - $/Mcf +$1.00 +$0.01 +$0.63
Operating Costs per Mcfe of Projected Production:
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 $1.38 - 1.40 $1.38 - 1.40 $1.40 - $1.45
Depreciation of other assets $0.08 - 0.10 $0.08 - 0.10 $0.08 - $0.10
Interest expense(a) $0.55 - 0.60 $0.55 - 0.60 $0.50 - $0.55
Other Income and Expense per Mcfe: (b)
Marketing and other income $0.02 - 0.04 $0.02 - 0.04 $0.02 - $0.04
Book Tax Rate 38% 38% 38%
Equivalent Shares Outstanding:
Basic 217,000 m 212,000 m 220,000 m
Diluted 267,000 m 257,000 m 270,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200mm $675 - $725 mm $675 - $725 mm
(a) Does not include gains or losses on interest rate derivatives
(SFAS133).
(b) Does not include the cumulative effect of the adoption of SFAS 143 as
of January 1, 2003.
10
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) For swap instruments, we receive a fixed price for the hedged commodity and
pay a floating market price, as defined in each instrument, to the
counterparty. The fixed-price payment and the floating-price payment are
netted, resulting in a net amount due to or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a floating market
price. The fixed price received by Chesapeake includes a premium in
exchange for a "cap" limiting the counterparty's exposure. In other words,
there is no limit to Chesapeake's exposure but there is a limit to the
downside exposure of the counterparty.
(iii)Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point. Chesapeake
receives a payment from the counterparty if the price differential is
greater than the stated terms of the contract and pays the counterparty if
the price differential is less than the stated terms of the contract.
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, look
in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in order to
mitigate a portion of its exposure to adverse market changes in oil and natural
gas prices. Accordingly, associated gains or loses from the derivative
transactions are reflected as adjustments to oil and gas sales. All realized
gains and losses from oil and natural gas derivatives are included in oil and
gas sales in the month of related production. Pursuant to SFAS 133, certain
derivatives do not qualify for designation as cash flow hedges. Changes in the
fair value of these non-qualifying derivatives that occur prior to their
maturity (i.e. because of temporary fluctuations in value) are reported
currently in the consolidated statement of operations as unrealized gains
(losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any change
in fair value resulting from ineffectiveness is recognized currently in oil and
natural gas sales.
The Company currently has in place the following natural gas swaps:
% 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:
- ------
4th Qtr 55.4 $5.59 $0.05 $5.64 67.0 83%
2004:
- -----
1st Qtr 45.5 $5.92 $0.05 $5.97 67.6 67%
2nd Qtr 37.3 $4.96 $0.00 $4.96 67.6 55%
3rd Qtr 30.4 $4.84 $0.00 $4.84 68.4 44%
4th Qtr 23.3 $5.01 $0.00 $5.01 68.4 34%
- ---------------------------------------------------------------------------------------------
Total 2004 136.5 $5.26 $0.02 $5.28 272.0 51%
=============================================================================================
=============================================================================================
Total 2005 45.6 $4.82 $0.00 $4.82 282.0 16%
=============================================================================================
=============================================================================================
Total 2006 25.6 $4.74 $0.00 $4.74 292.0 9%
=============================================================================================
=============================================================================================
Total 2007 25.6 $4.76 $0.00 $4.76 302.0 8%
- ---------------------------------------------------------------------------------------------
=============================================================================================
TOTALS
- ---------------------------------------------------------------------------------------------
2003-2007 288.7 $5.16 $0.02 $5.18 1,215 24%
=============================================================================================
11
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 41.4 $ 0.190 67.0 62%
2004 157.4 0.173 272.0 58%
2005 109.5 0.156 282.0 39%
2006 47.5 0.155 292.0 16%
2007 63.9 0.166 302.0 21%
2008 64.0 0.166 312.0 21%
2009 37.0 0.160 322.0 11%
--------------- ----------- ------------------- ---------
Totals 520.7 $ 0.167* 1,849.0 28%
=============== =========== =================== =========
* weighted average
The Company has entered into the following crude oil hedging arrangements:
% Hedged
-----------------------------
Assuming Open Swap
Avg. Oil Positions as
Open NYMEX Production % of Total
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
-------- ------ ---------- ------------
Q4 - 2003* 1,223 $28.69 1,225 100%
-----------------------------------------------------
Q1 - 2004* 1,270 $28.58 1,275 100%
Q2 - 2004* 1,161 $28.62 1,175 99%
Q3 - 2004* 1,044 $28.75 1,150 91%
Q4 - 2004* 920 $28.46 1,100 84%
-----------------------------------------------------
Total 2004 4,395 $28.61 4,700 94%
=====================================================
*Swaps with a knockout price of $21.00, with the exception of 2,000 bopd in
2004 with a knockout price of $24.00, 1,000 bopd in Q3 and Q4 2004 with
aknockout price of $23.00, 1,000 bopd in Q4 2003 with a knockout price of
$26.00,3,000 bopd for 11/03 and 12/03 at a knockout price of $22.00, 2,000 bopd
for 1/04 and 3-8/04 at a knockout price of $22.00, and 3,000 bopd in 2/04 at
a knockout price of $22.00.
12
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF JULY 28, 2003
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF OCTOBER 30, 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, December 31, 2003 December 31, 2004
------------- ----------------- -----------------
2003
----
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 of Projected Production:
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
Diluted 266,000 m 258,000 m 268,000
Capital Expenditures:
Drilling, Land and Seismic $150 - $155 mm $600 - $650 mm $600 - $650 mm
(a) Does not include 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 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%
=============================================================================================
NOW SUPERSEDED BY OUTLOOK AS OF OCTOBER 30, 2003
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 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
NOW SUPERSEDED BY OUTLOOK AS OF OCTOBER 30, 2003
15
The Company has entered into the following crude oil hedging arrangements:
% Hedged
-----------------------------
Assuming Open Swap
Avg. Oil Positions as
Open NYMEX ProdutionN % of 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.
NOW SUPERSEDED BY OUTLOOK AS OF OCTOBER 30, 2003
16