EXHIBIT 99.2
------------
CHESAPEAKE ENERGY CORPORATION ANNOUNCES AGREEMENTS TO ACQUIRE
$100 MILLION OF PRODUCING PROPERTIES, ADDS TO ITS
HEDGING POSITIONS AND INCREASES 2004 PRODUCTION FORECAST
AGREEMENTS WITH FOUR PRIVATE COMPANIES FURTHER STRENGTHEN
CHESAPEAKE'S POSITIONS IN THE MID-CONTINENT, PERMIAN
BASIN AND TEXAS GULF COAST REGIONS
CHESAPEAKE HEDGES 100% OF PROJECTED OIL AND NATURAL GAS PRODUCTION
VOLUMES FROM THE ACQUIRED PROPERTIES FOR APRIL 2004-DECEMBER 2005
AT $33.11 PER BARREL OF OIL AND $5.78 PER MCF OF NATURAL GAS
OKLAHOMA CITY, OKLAHOMA, MARCH 23, 2004 - Chesapeake Energy Corporation
(NYSE:CHK) today announced that it has entered into or is completing agreements
to acquire $100 million of Mid-Continent, Permian Basin and Texas Gulf Coast oil
and natural gas assets in four separate transactions. Through these agreements,
Chesapeake anticipates acquiring an internally estimated 68 billion cubic feet
of gas equivalent proved reserves (bcfe), 39 bcfe of probable and possible
reserves and current production of 15 million cubic feet of natural gas
equivalent production (mmcfe) per day. Pro forma for these acquisitions,
Chesapeake's anticipated March 31, 2004 proved oil and natural gas reserves are
expected to be approximately 3.6 trillion cubic feet of natural gas equivalent
(tcfe).
After allocating $16 million of the purchase price to unevaluated leasehold,
probable and possible reserves, and other assets, Chesapeake's acquisition cost
per thousand cubic feet of gas equivalent (mcfe) of proved reserves associated
with these transactions will be $1.24. Including unevaluated 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 107 bcfe of estimated reserves will be $1.39 per mcfe. The proved reserves
have a reserves-to-production index of 12.5 years, are 66% oil and are 74%
proved developed.
Two of the acquisitions are expected to close on April 1, 2004 and two are
expected to close on May 1, 2004. All acquisitions are subject to customary
closing conditions with no single closing conditioned on the closing of any
other acquisition. The company intends to finance the acquisitions with proceeds
from a new private issue of cumulative convertible preferred stock.
CHESAPEAKE INCREASES 2004 PRODUCTION GUIDANCE AND
ANNOUNCES NEW HEDGES FOR OIL AND NATURAL GAS PRODUCTION TO BE ACQUIRED
Chesapeake is today increasing its 2004 production forecast by 7.0 bcfe (2.1%)
from a range of 323-329 bcfe (891 mmcfe per day at the mid-point) to a range of
330-336 (910 mmcfe per day at the mid-point). Approximately 3.8 bcfe of this 7.0
bcfe increase is attributable to today's announced acquisitions while 3.2 bcfe
is attributable to better than expected recent drilling results. The company's
2004 production is expected to be 89% natural gas and 11% oil and natural gas
liquids.
Last week, Chesapeake hedged the anticipated production of 1,600 barrels of oil
per day and 5,000 mcf of natural gas per day expected from the new acquisitions
at attractive prices for April 2004 through December 2005. The hedged prices
averaged $33.11 per barrel of oil and $5.78 per mcf of natural gas. The
following tables compare Chesapeake's projected 2004-2007 oil and natural gas
production volumes that have been hedged as of March 23, 2004 to what had been
previously hedged as of February 23, 2004:
HEDGED POSITIONS AS OF MARCH 23, 2004
OIL NATURAL GAS
--------------------------- ----------------------------
QUARTER OR YEAR % HEDGED $ NYMEX % HEDGED $ NYMEX
- --------------- ----------- ------------ ------------ ------------
2004 1Q 91% $28.58 98% $5.97
2004 2Q 90% $29.63 72% $4.97
2004 3Q 74% $29.47 54% $4.87
2004 4Q 67% $29.15 43% $5.05
- --------------- ------------ ------------ ------------ ------------
2004 TOTAL 80% $29.22 66% $5.32
=============== ============ ============ ============ ============
2005 9% $31.56 27% $5.03
2006 - - 10% $4.88
2007 - - 8% $4.76
HEDGED POSITIONS AS OF MARCH 23, 2004
OIL NATURAL GAS
--------------------------- ----------------------------
QUARTER OR YEAR % HEDGED $ NYMEX % HEDGED $ NYMEX
- --------------- ----------- ------------ ------------ ------------
2004 1Q 88% $28.58 100% $5.97
2004 2Q 88% $28.86 73% $4.97
2004 3Q 72% $28.75 58% $4.89
2004 4Q 63% $28.46 47% $5.08
- --------------- ----------- ------------ ------------ ------------
2004 TOTAL 78% $28.68 69% $5.32
=============== =========== ============ ============ ============
2005 - - 27% $5.04
2006 - - 11% $4.88
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.
Chesapeake's updated 2004 forecast is attached to this release in an Outlook
dated March 23, 2004 labeled Schedule "A". This Outlook has been changed from
the Outlook dated February 23, 2004 (attached as Schedule "B" for investors'
convenience) to reflect the increased production forecast announced today and
the projected effects from changes in our hedging positions.
MANAGEMENT COMMENTS
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's
announcements provide additional confirmation that Chesapeake continues to be
successful in identifying opportunities to further strengthen its proved reserve
base and enhance its production profile through the ongoing consolidation of
high-quality oil and natural gas assets in our operating areas. Today's
transactions are consistent with Chesapeake's balanced business strategy of
creating value by delivering profitable organic growth from our developmental
and exploratory drilling programs complemented by acquiring and developing
long-lived, under-exploited oil and natural gas assets.
In addition, we have locked-in accretive returns from today's acquisitions by
hedging virtually 100% of the anticipated oil and natural gas production volumes
for April 2004 through December 2005 at prices well above the price decks we
used to evaluate the acquired properties. In this time of strong oil and natural
gas markets, we believe unusually attractive returns to Chesapeake's
shareholders can be generated from focused acquisitions and by hedging the
acquired production volumes. We believe our ongoing consolidation of
high-quality properties, followed by opportunistic hedging, and combined with
our value-added drilling programs will continue to be a winning formula for our
shareholders in the years ahead."
2
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
EXPECTATIONS REGARDING CLOSING OF THE ANNOUNCED ACQUISITIONS, ESTIMATES OF OIL
AND GAS RESERVES, EXPECTED OIL AND GAS PRODUCTION AND FUTURE EXPENSES,
PROJECTIONS OF FUTURE OIL AND GAS PRICES, PLANNED CAPITAL EXPENDITURES AND
ESTIMATED COSTS 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 2003 ANNUAL REPORT ON FORM 10-K AND SUBSEQUENT FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION (SEC). 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 SEC HAS GENERALLY PERMITTED OIL AND GAS COMPANIES, IN FILINGS MADE 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.
THE ANNOUNCEMENT OF A PROPOSED OFFERING OF CONVERTIBLE PREFERRED STOCK IN THIS
PRESS RELEASE SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE PREFERRED STOCK. THE PREFERRED STOCK WILL NOT BE REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND STATE
LAWS.
CHESAPEAKE ENERGY CORPORATION IS ONE OF THE FIVE 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, PERMIAN BASIN, SOUTH TEXAS AND TEXAS GULF
COAST REGIONS OF THE UNITED STATES. THE COMPANY'S INTERNET ADDRESS IS
WWW.CHKENERGY.COM.
3
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF MARCH 23, 2004
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 March 23, 2004, 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 February 23, 2004 guidance are in italicized bold
and are explained as follows:
1) We have increased our full-year 2004 production forecast to reflect the
four acquisitions announced today and better than expected recent
drilling results.
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) The equivalent shares outstanding numbers did not change as a result of
today's announced preferred stock offering because the conversion
structure of the preferred stock is not expected to cause an immediate
increase in fully diluted shares.
Quarter Ending Year Ending
MARCH 31, 2004 DECEMBER 31, 2004
-------------- -----------------
Estimated Production:
Oil - Mbo 1,450 6,100
Gas - Bcf 69 - 70 293 - 299
Gas Equivalent - Bcfe 78 - 79 330 - 336
Daily gas equivalent midpoint - in Mmcfe 863 910
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $33.58 $28.06
Gas - $/Mcf $5.69 $4.99
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.69 -$2.55
Gas - $/Mcf -$0.66 -$0.61
Estimated Realized Hedging Effects (based on expected NYMEX prices above):
Oil - $/Bo -$4.56 +$0.86
Gas - $/Mcf +$0.43 +$0.27
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) $0.32 - 0.34 $0.28 - 0.32
General and administrative (a) $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.48 - 1.52 $1.50 - 1.55
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense(b) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 247,000 m
Diluted 302,000 m 304,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200 mm $750 - $800 mm
(a) Does not include non-cash expenses associated with the issuance of
restricted stock.
(b) Does not include gains or losses on interest rate derivatives (SFAS 133).
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.
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 69.5 98%
2nd Qtr 53.2 $4.97 $0.00 $4.97 74.0 72%
3rd Qtr 40.9 $4.87 $0.00 $4.87 75.0 54%
4th Qtr 32.7 $5.05 $0.00 $5.05 76.0 43%
- ---------------------------------------------------------------------------------------------------------------------
Total 2004 196.3 $5.31 $0.01 $5.32 294.5 66%
=====================================================================================================================
=====================================================================================================================
Total 2005 81.2 $5.03 $0.00 $5.03 305.0 27%
=====================================================================================================================
=====================================================================================================================
Total 2006 32.9 $4.88 $0.00 $4.88 315.0 10%
=====================================================================================================================
=====================================================================================================================
Total 2007 25.6 $4.76 $0.00 $4.76 325.0 8%
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
TOTALS
- ---------------------------------------------------------------------------------------------------------------------
2004-2007 336.0 $5.15 $0.01 $5.16 1,239.5 27%
=====================================================================================================================
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 0.173 290.5 54%
2005 109.5 0.156 305.0 36%
2006 47.5 0.155 315.0 15%
2007 63.9 0.166 325.0 20%
2008 64.0 0.166 335.0 19%
2009 37.0 0.160 345.0 11%
--------------- ----------- ------------------- -------
Totals 479.3 $ 0.164* 1,915.5 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 1,390 91%
Q2 - 2004* 1,419 $29.63 1,575 90%
Q3 - 2004* 1,182 $29.47 1,590 74%
Q4 - 2004* 1,058 $29.15 1,590 67%
-------------------------------------------------
Total 2004* 4,929 $29.22 6,145 80%
=================================================
TOTAL 2005* 548 $31.56 6,360 9%
=================================================
*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
$24.00, 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, 3,000 bopd in 2/04 at a
knockout price of $22.00 and 1,500 bopd from 4/04 through 12/05 at a knockout
price of $26.00.
6
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF FEBRUARY 23, 2004
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
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 February 23, 2004, we are using
the following key assumptions in our projections for the first quarter of 2004
and the full-year 2004.
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 863 890
NYMEX Prices (for calculation of realized hedging effects only):
Oil - $/Bo $28.08 $25.77
Gas - $/Mcf $5.47 $4.74
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 +$0.50 +$2.23
Gas - $/Mcf +$0.66 +$0.44
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) $0.32 - 0.34 $0.28 - 0.32
General and administrative $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.48 - 1.52 $1.50 - 1.55
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense(a) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 247,000 m
Diluted 302,000 m 304,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200 mm $750-800 mm
(a) Does not include gains or losses on interest rate derivatives (SFAS 133)
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.
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 69.5 100%
2nd Qtr 52.8 $4.97 $0.00 $4.97 72.0 73%
3rd Qtr 43.2 $4.89 $0.00 $4.89 74.0 58%
4th Qtr 35.0 $5.08 $0.00 $5.08 75.0 47%
- ---------------------------------------------------------------------------------------------------------------------
Total 2004 200.5 $5.31 $0.01 $5.32 290.5 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 1,220.5 28%
=====================================================================================================================
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
8
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 0.173 290.5 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* 1,890.5 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.
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
9