EXHIBIT 99.2
------------
CHESAPEAKE ENERGY CORPORATION ANNOUNCES $510 MILLION OF
ACQUISITIONS, ADDS SIGNIFICANTLY TO HEDGING POSITIONS
AND INCREASES 2004 PRODUCTION FORECASTS
AGREEMENTS WITH CONCHO RESOURCES AND TWO OTHERS FURTHER STRENGTHEN
CHESAPEAKE'S POSITIONS IN THE MID-CONTINENT, PERMIAN BASIN
AND ONSHORE GULF COAST REGIONS
CHESAPEAKE HEDGES 100% OF PROJECTED GAS PRODUCTION VOLUMES FROM THE
ACQUIRED PROPERTIES AT $5.68 PER MCF FOR 2004 AND $5.37 PER MCF FOR 2005
OKLAHOMA CITY, OKLAHOMA, DECEMBER 22, 2003 - Chesapeake Energy Corporation
(NYSE:CHK) today announced that it has entered into agreements to acquire $510
million of Mid-Continent, Permian Basin and onshore Gulf Coast oil and natural
gas assets through recent agreements to acquire privately-owned Concho Resources
Inc. for $420 million and two smaller property acquisitions totaling $90
million. In these transactions, Chesapeake has acquired or agreed to acquire an
internally estimated 320 billion cubic feet of gas equivalent proved reserves
(bcfe), 195 bcfe of probable and possible reserves and current production of 70
million cubic feet of natural gas equivalent production (mmcfe) per day.
Chesapeake's anticipated year-end 2003 proved oil and natural gas reserves, pro
forma for these acquisitions, are expected to exceed 3.4 trillion cubic feet of
natural gas equivalent (tcfe).
After allocating $70 million of the purchase price to unevaluated leasehold,
probable and possible reserves, and gas gathering systems, Chesapeake's
acquisition cost per thousand cubic feet of gas equivalent (mcfe) of proved
reserves will be $1.38. Including leasehold and anticipated future drilling
costs for fully developing the proved, probable and possible reserves, the
company estimates that its all-in acquisition cost for the 515 bcfe of estimated
reserves will be $1.59 per mcfe.
The proved reserves have a reserves-to-production index of 12.5 years, are 75%
natural gas and are 67% proved developed. Initial lease operating expenses on
the acquired properties are expected to average $0.56 per mcfe, which compares
favorably to the $0.52 per mcfe reported by Chesapeake during the first three
quarters of 2003 and the $0.65 per mcfe reported by the company's peer group
during the first three quarters of 2003.
The Concho acquisition is expected to close on January 30, 2004 and is subject
to customary closing conditions. One of the other two transactions has recently
closed and the other will close in January 2004. The company intends to finance
the acquisitions using approximately 50% common equity and 50% short-term and/or
long-term borrowings.
BACKGROUND INFORMATION ON CONCHO RESOURCES INC.
Concho Resources Inc. is a privately-owned Midland-based independent oil and
natural gas producer co-founded by Timothy A. Leach, Steven L. Beal, David W.
Copeland and David A. Chroback in association with New York-based Yorktown
Energy Partners and certain other investors. In 2002, Concho acquired the assets
of Oklahoma City-based independent oil and natural gas producer Ricks
Exploration, Inc., which formed the core of Concho's assets. Ricks Exploration
was formed in 1984 by Art L. Swanson and Ran Ricks, Jr. and it was the successor
to independent oil and natural gas operations first begun in 1970 in Oklahoma
City by Ran Ricks, Jr. Over the years, Ricks and Concho's areas of operational
focus have been primarily in the Permian Basin and the Mid-Continent regions.
In the Mid-Continent region, Chesapeake is the largest natural gas producer with
approximately a 14% market share and daily production of approximately 725 mmcfe
and internally estimated proved reserves of approximately 2,950 bcfe (pro forma
for today's transactions). In the Permian Basin, Chesapeake believes it will
rank among the 20 largest producers in the region after completion of the Concho
acquisition. Pro forma for Concho, Chesapeake estimates its daily production in
the Permian Basin will exceed 75 mmcfe per day and its proved reserves will
exceed 350 bcfe. Chesapeake believes its ownership of the acquired properties
will create operational efficiencies, administrative expense savings and
additional developmental and exploratory drilling opportunities.
The assets acquired in the two smaller transactions are located in the Permian
Basin and in the Goliad County, Texas area of Chesapeake's onshore Gulf Coast
region. In Goliad County, Chesapeake has agreed to purchase a 50% interest in
and operations of a large prospect area in which it had previously acquired a
37.5% working interest through its acquisition of Canaan Energy Corporation in
2002.
CHESAPEAKE INCREASES 2004 PRODUCTION GUIDANCE AND ANNOUNCES SIGNIFICANT
INCREASES IN ITS OIL AND NATURAL GAS HEDGING POSITIONS
To account for the transactions announced today, Chesapeake is increasing its
2004 production forecast by 9% from a range of 297-303 bcfe (820 mmcfe per day
at the mid-point) to a range of 323-329 (890 mmcfe per day at the mid-point).
Approximately 89% of the company's production is expected to be natural gas with
11% from oil and natural gas liquids.
During the past several weeks, Chesapeake has significantly increased its oil
and natural gas hedging positions for 2004 and 2005. During this time, the
company has hedged an additional 108 bcf of natural gas at an average NYMEX
price of $5.38 per mcf and an additional 121 mbo at $31.16. The following tables
compare Chesapeake's projected 2004-2007 oil and natural gas production volumes
that have been hedged as of December 19, 2003 to what had been hedged as of
November 12, 2003:
HEDGED POSITIONS AS OF DECEMBER 19, 2003
Oil Natural Gas
------------------------------ ---------------------------
QUARTER OR YEAR % Hedged $ NYMEX % Hedged $ NYMEX
- --------------- -------------- ------------- ------------- ------------
2004 1Q 88% $28.58 98% $5.97
2004 2Q 88% $28.81 74% $4.97
2004 3Q 72% $28.75 59% $4.89
2004 4Q 63% $28.46 47% $5.08
- --------------- ------------- ------------- ------------- ------------
2004 Total 78% $28.66 69% $5.32
=============== ============== ============= ============= ============
2005 - - 27% $5.04
2006 - - 11% $4.88
2007 - - 8% $4.76
HEDGED POSITIONS AS OF NOVEMBER 12, 2003
Oil Natural Gas
------------------------------ ---------------------------
QUARTER OR YEAR % Hedged $ NYMEX % Hedged $ NYMEX
- --------------- -------------- ------------- ------------- ------------
2004 1Q 100% $28.58 70% $5.93
2004 2Q 99% $28.62 58% $4.95
2004 3Q 91% $28.75 47% $4.84
2004 4Q 84% $28.46 37% $4.99
- -------------- -------------- ------------- ------------- ------------
2004 Total 94% $28.61 53% $5.25
============== ============== ============= ============= ============
2005 - - 16% $4.82
2006 - - 9% $4.74
2007 - - 8% $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.
MANAGEMENT COMMENTS
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's
announcements provide further evidence of our ongoing commitment to creating
industry-leading shareholder value through a sharp strategic focus on further
consolidation of high-quality oil and natural gas assets and on identifying and
executing opportunistic hedging opportunities. Today's announced acquisitions
fit very well with our existing Mid-Continent stronghold and further strengthen
our growing Permian Basin and onshore Gulf Coast asset holdings. In addition,
these transactions are consistent with Chesapeake's business strategy of
creating value by delivering profitable organic growth from our developmental
and exploratory drilling programs and by acquiring and developing low-cost,
long-lived, under-exploited oil and natural gas assets.
In addition, the dramatic increase in oil and natural gas prices during the past
few weeks has given us the ability to lock-in 100% of our anticipated gas
production volumes from today's acquisitions at prices well above the price
decks we used to purchase these properties. In this time of tight oil and
natural gas markets, we believe accretive returns to our shareholders can be
generated from acquisitions by being willing and able to hedge the acquired
production volumes at very attractive prices during periodic price spikes. We
believe our focused acquisitions of high-quality properties followed by
opportunistic hedging and combined with our value-added drilling programs will
continue to be a winning strategy for our shareholders in the years ahead."
2
CONFERENCE CALL INFORMATION
A conference call has been scheduled for this morning, December 22, 2003 at 9:00
a.m. EST to discuss this press release. The telephone number to access the
conference call is 913.981.5518 and the passcode is 209876. For those unable to
participate in the conference call, a replay will be available from 12:00 p.m.
EST on Monday, December 22, 2003 through midnight EST on Tuesday, January 6,
2004. The number to access the conference call replay is 719.457.0820 and the
passcode is 209876. 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.
3
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF DECEMBER 22, 2003
QUARTER ENDING MARCH 31, 2004; 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 December 22,
2003, we are using the following key assumptions in our projections for the
first quarter of 2004 and the full-year 2004.
The primary changes from our November 12, 2003 guidance are in italicized bold
and are explained as follows:
1) We have increased our production forecasts to reflect the three
acquisitions announced today.
2) We have updated the projected effects from changes in our hedging
positions.
3) 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 2004 oil and natural gas prices.
4) We have included the pro forma effects of additional equity and debt
issuance to fund the acquisitions announced today.
Quarter Ending Year Ending
MARCH 31, 2004 DECEMBER 31, 2004
-------------- -----------------
Estimated Production:
Oil - Mbo 1,450 5,800
Gas - Bcf 69 - 70 288 - 294
Gas Equivalent - Bcfe 78 - 79 323 - 329
Daily gas equivalent midpoint - in Mmcfe 875 890
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $25.00 $25.00
Gas - $/Mcf $ 4.50 $4.50
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.50 -$2.50
Gas - $/Mcf -$0.60 -$0.60
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo +$3.13 +$2.72
Gas - $/Mcf +$1.48 +$0.68
Operating Costs per Mcfe of Projected Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7% of O&G revenues) $0.25 - 0.29 $0.25 - 0.29
General and administrative $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.42 - 1.46 $1.42 - 1.46
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense(a) $0.49 - 0.53 $0.49 - 0.53
Other Income and Expense per Mcfe: (b)
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 244,000 m
Diluted 300,000 m 302,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $195 mm $725 - $775 mm
(a) Does not include gains or losses on interest rate derivatives (SFAS 133).
(b) Does not include the cumulative effect of the adoption of SFAS 143 as of
January 1, 2003.
4
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, lock
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.
5
The Company currently has in place the following natural gas swaps:
% Hedged
-------------------------------------
Avg. NYMEX Avg. NYMEX Open Swap
Strike Price Price Including Assuming Gas Positions as a %
Open Swaps of Open Gain from Open & Locked Production of Estimated Total
in Bcf's Swaps Locked Swaps Positions in Bcf's of: Gas Production
--------- ------------ ------------ --------------- ------------ -----------------
2004:
- -----
1st Qtr 69.5 $5.94 $0.03 $5.97 70.9 98%
2nd Qtr 52.8 $4.97 $0.00 $4.97 71.9 74%
3rd Qtr 43.2 $4.89 $0.00 $4.89 73.6 59%
4th Qtr 35.0 $5.08 $0.00 $5.08 74.6 47%
- ---------------------------------------------------------------------------------------------------------------------
Total 2004 200.5 $5.31 $0.01 $5.32 291.0 69%
=====================================================================================================================
=====================================================================================================================
Total 2005 82.1 $5.04 $0.00 $5.04 300.0 27%
=====================================================================================================================
=====================================================================================================================
Total 2006 32.9 $4.88 $0.00 $4.88 310.0 11%
=====================================================================================================================
=====================================================================================================================
Total 2007 25.6 $4.76 $0.00 $4.76 320.0 8%
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
TOTALS
- ---------------------------------------------------------------------------------------------------------------------
2004-2007 341.1 $5.16 $0.01 $5.17 1,220.0 28%
=======================================================================================================================
5
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
--------------- ------------ ------------------- ------
2004 157.4 0.173 291.0 54%
2005 109.5 0.156 300.0 37%
2006 47.5 0.155 310.0 15%
2007 63.9 0.166 320.0 20%
2008 64.0 0.166 330.0 19%
2009 37.0 0.160 340.0 11%
--------------- ------------ ------------------- ------
Totals 479.3 $ 0.164* 1,891.0 25%
=============== ============ =================== ======
*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
-------- ------ ---------- -----------
Q1 - 2004* 1,270 $28.58 1,450 88%
Q2 - 2004* 1,282 $28.86 1,450 88%
Q3 - 2004* 1,044 $28.75 1,450 72%
Q4 - 2004* 920 $28.46 1,450 63%
------------------------------------------------
Total 2004 4,516 $28.68 5,800 78%
================================================
*Swaps with a knockout price of $21.00, with the exception of 2,000 bopd in 2004
with a knockout price of $24.00, with an additional 1,000 bopd in Q2 2004 at
$24, 1,000 bopd in Q3 and Q4 2004 with a knockout price of $23.00, 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.
6
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF NOVEMBER 12, 2003
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF DECEMBER 22, 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 November 12, 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 October 30, 2003 guidance are in italicized bold
and are explained as follows:
1) We are including the effects of recently announced capital transactions on
interest expense and share count. 2) We have updated the projected effects from
changes in our hedging positions. 3) 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.
Quarter Ending Year Ending Year Ending
DECEMBER 31, 2003(c) 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 807 738 820
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $27.45 $30.11 $24.00
Gas - $/Mcf $4.47 $5.36 $4.25
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.50 -$2.11 -$2.50
Gas - $/Mcf -$0.60 -$0.55 -$0.60
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo +$1.47 -$1.52 +$4.22
Gas - $/Mcf +$1.02 +$0.01 +$0.65
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) $0.50 - 0.55 $0.55 - 0.60 $0.45 - $0.50
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 273,000 m 258,000 m 280,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200 mm $675 - $725 mm $675 - $725 mm
(a) Does not include gains or losses on interest rate derivatives (SFAS 133).
(b) Does not include the cumulative effect of the adoption of SFAS 143 as of
January 1, 2003.
(c) Does not include charges to be taken in current quarter related to debt
tender.
7
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, lock
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.
8
The Company currently has in place the following natural gas swaps:
% Hedged
-------------------------------------
Avg. NYMEX Avg. NYMEX Open Swap
Strike Price Price Including Assuming Gas Positions as a %
Open Swaps of Open Gain from Open & Locked Production of Estimated Total
in Bcf's Swaps Locked Swaps Positions in Bcf's of: Gas Production
--------- ------------ ------------ --------------- ------------ -----------------
2003:
- -----
4th Qtr 55.4 $5.59 $0.05 $5.64 67.0 83%
2004:
- -----
1st Qtr 47.3 $5.89 $0.04 $5.93 67.6 70%
2nd Qtr 39.1 $4.95 $0.00 $4.95 67.6 58%
3rd Qtr 32.2 $4.84 $0.00 $4.84 68.4 47%
4th Qtr 25.2 $4.99 $0.00 $4.99 68.4 37%
- ------------------------------------------------------------------------------------------------------------------------
Total 2004 143.8 $5.24 $0.01 $5.25 272.0 53%
========================================================================================================================
========================================================================================================================
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 296.0 $5.16 $0.01 $5.17 1,215 24%
========================================================================================================================
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 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 a knockout
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.
10