2EXHIBIT INDEX
EXHIBIT DESCRIPTION
99 Press Release issued by the Registrant on April 26, 2004.
EXHIBIT 99
----------
CHESAPEAKE ENERGY CORPORATION POSTS RECORD RESULTS
FOR THE 2004 FIRST QUARTER
COMPANY REPORTS 2004 FIRST QUARTER NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
OF $104 MILLION ON REVENUE OF $563 MILLION AND PRODUCTION OF 79 BCFE
OKLAHOMA CITY, OKLAHOMA, APRIL 26, 2004 - Chesapeake Energy Corporation (NYSE:
CHK) today reported its financial and operating results for the 2004 first
quarter. For the quarter, Chesapeake generated net income available to common
shareholders of $104.4 million ($0.38 per fully diluted common share), operating
cash flow of $327.5 million (defined as cash flow from operating activities
before changes in assets and liabilities) and ebitda of $348.1 million (defined
as income before income taxes, interest expense, and depreciation, depletion and
amortization expense) on revenue of $563.1 million.
The company's 2004 first quarter net income available to common shareholders and
ebitda include an unrealized after-tax mark-to-market loss of $14.6 million
resulting from the company's oil and natural gas and interest rate hedging
programs and an after-tax $4.4 million loss from the exchange or repurchase of
certain Chesapeake debt securities. These are items typically excluded from
analysts' estimates.
Excluding these items, Chesapeake's net income to common shareholders in the
2004 first quarter would have been $123.4 million ($0.44 per fully diluted
common share) and ebitda would have been $369.0 million. These items did not
affect the calculation of operating cash flow.
OIL AND NATURAL GAS PRODUCTION AND PROVED RESERVES SET RECORDS
Production for the 2004 first quarter was 78.9 billion cubic feet of natural gas
equivalent (bcfe), an increase of 22.1 bcfe, or 39%, over the 56.8 bcfe produced
in the 2003 first quarter and an increase of 5.6 bcfe, or 7.6%, over the 73.3
bcfe produced in the 2003 fourth quarter. The 22.1 bcfe increase in this year's
first quarter production over the first quarter of 2003's production consisted
of 11.1 bcfe from organic drillbit growth and 11.0 bcfe generated from
acquisitions. The company's organic growth rate during the past 12 months was
20%, well above the company's forecasted organic growth rate of 5% and among the
very best organic growth performances reported by public mid- and large-cap E&P
companies for the past 12 months. In addition, the 50/50 split between the
company's growth through the drillbit and growth through acquisitions reflects
the company's balanced growth strategy.
The 2004 first quarter's 78.9 bcfe of production was comprised of 70.1 billion
cubic feet of natural gas (bcf) (89% on a natural gas equivalent basis) and 1.47
million barrels of oil and natural gas liquids (mmbo) (11% on a natural gas
equivalent basis). Chesapeake's average daily production rate for the quarter
was 867 million cubic feet of natural gas equivalent production (mmcfe),
consisting of 770 mmcf of gas and 16,099 barrels of oil and natural gas liquids.
The 2004 first quarter was Chesapeake's eleventh consecutive quarter of
sequential production growth. During these eleven quarters, Chesapeake's
production has increased 102%, for an average sequential quarterly growth rate
of 6.6% and an average annualized growth rate of 29%.
Average prices realized during the 2004 first quarter (including realized gains
or losses from oil and gas derivatives, but excluding unrealized gains or losses
on such derivatives) were $27.10 per barrel of oil (bo) and $5.62 per thousand
cubic feet of natural gas (mcf), for a realized gas equivalent price of $5.50
per thousand cubic feet of natural gas equivalent (mcfe). Chesapeake's average
realized pricing differentials to NYMEX during the quarter were a negative $2.56
per bo and a negative $0.73 per mcf. Realized gains or losses from hedging
activities generated a $5.69 loss per bo and a $0.48 gain per mcf, for a 2004
first quarter realized hedging gain of $25.7 million, or $0.33 per mcfe.
The company drilled 118 gross (88 net) operated wells and participated in
another 137 gross wells (21 net) operated by other companies during the 2004
first quarter. Chesapeake invested $129 million in the operated wells and $47
million in the non-operated wells. The company's drilling success rate was 92%
for operated wells and 99% for non-operated wells.
During the 2004 first quarter, the company replaced its 78.9 bcfe of production
by 473%, or 372.8 bcfe at a drilling and acquisition cost of $1.66 per mcfe.
Drillbit replacement was 146% and acquisition replacement was 327%. At the end
of the first quarter, Chesapeake`s estimated proved reserves were 3.5 tcfe.
2
KEY OPERATIONAL AND FINANCIAL STATISTICS FOR THE 2004 FIRST QUARTER
The table below summarizes Chesapeake's key statistics during the 2004 first
quarter and compares them to the 2003 fourth quarter and the 2003 first quarter:
Key Operations or Financial Statistics: THREE MONTHS ENDED:
-------------------
3/31/04 12/31/03 3/31/03
------- -------- -------
Average daily production (in mmcfe) 867 797 631
Gas as % of total production 89 90 89
Natural gas production (in bcf) 70.1 66.3 50.4
Average realized gas price ($/mcf) (a) 5.62 5.15 4.51
Oil production (in mbbls) 1,465 1,165 1,060
Average realized oil price ($/bo) (a) 27.10 23.76 27.27
Natural gas equivalent production (in bcfe) 78.9 73.3 56.8
Gas equivalent realized price ($/mcfe) (a) 5.50 5.03 4.52
General and administrative costs ($/mcfe) .10 .10 .09
Production taxes ($/mcfe) .19 (d) .28 .33
Lease operating expenses ($/mcfe) .57 .49 .55
Interest expense ($/mcfe) (a) .48 .51 .62
DD&A of oil and gas properties ($/mcfe) 1.52 1.41 1.35
Operating cash flow ($ in millions) (b) 327.5 262.4 167.7
Operating cash flow ($/mcfe) 4.15 3.58 2.95
Ebitda ($ in millions) (c) 348.1 257.8 232.0
Ebitda ($/mcfe) 4.41 3.52 4.09
Net income to common shareholders 104.4 62.4 70.0
($ in 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
(d) includes pre-tax benefit of $6.8 million, or $0.09 per mcfe, from
prior period severance tax credits
SIGNIFICANT BALANCE SHEET IMPROVEMENT ACHIEVED DURING 2004 FIRST QUARTER
Since the beginning of 2004, Chesapeake has closed acquisitions totaling $570
million. In conjunction with these acquisitions, the company raised $298 million
of common equity and $305 million of 4.125% convertible preferred equity.
Chesapeake's debt-to-total capitalization ratio is now 46%, the lowest in its 11
years as a public company.
Additionally, through a series of debt exchanges completed during recent months,
Chesapeake has extended the average maturity of its long-term debt to over nine
years and has reduced its average fixed interest rate to 7.7%. The company's
secured credit facility is currently rated as investment grade and the company
believes its business strategy and operational performance will lead to an
investment grade credit rating for its unsecured debt in the future.
3
CHESAPEAKE UPDATES 2004 PRODUCTION FORECASTS AND HEDGING INFORMATION
Chesapeake's updated 2004 second quarter and full-year 2004 forecasts are
attached to this release in an Outlook dated April 26, 2004 labeled Schedule
"A". This Outlook has been changed from the Outlook dated March 23, 2004
(attached as Schedule "B" for investors' convenience) to reflect an initial
forecast for the 2004 second quarter and a revised forecast for the full-year
2004.
Chesapeake's average daily production in 2004 is expected to exceed 2003's
production by approximately 175 mmcfe, or 24%, while average daily production in
the 2004 second quarter is expected to exceed 2003's second quarter production
by approximately 167 mmcfe, or 23%. In addition, average daily production in the
2004 second quarter is expected to exceed 2004's first quarter production by
approximately 40 mmcfe, or 4.6%.
The following table details Chesapeake's hedged oil and natural gas positions:
HEDGED POSITIONS AS OF APRIL 26, 2004
----------------------- -----------------------
Oil Natural Gas
----------------------- -----------------------
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
- --------------- -------- ------- -------- -------
2004 1Q 87% $28.58 99% $5.97
2004 2Q 100% $30.00 75% $5.00
2004 3Q 96% $30.32 58% $4.94
2004 4Q 95% $30.10 47% $5.13
- --------------- -------- ------- -------- --------
2004 Total 95% $29.80 69% $5.35
=============== ======== ======= ======== ========
=============== ======== ======= ======== ========
2005 9% $31.56 27% $5.03
2006 - - 10% $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 hedged positions at any time in the future
without notice.
MANAGEMENT SUMMARY
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Chesapeake generated record results for its shareholders again this quarter,
following an especially strong 2003 performance. With the filing of our peer
companies' Form 10-K reports for 2003, we have now been able to compare our
company's 2003 performance with our peer group's 2003 performance. We hope that
you will agree that Chesapeake's performance in 2003 was exceptional:
o #1 in stock price appreciation, up 75%;
o #1 in proved reserves growth, up 44%;
o #1 in production growth, up 48%;
o #1 in % of gas production, up 90%;
o #1 in shareholders' equity % increase, up 91%;
o #1 (tied) for lowest amount of goodwill booked, zero;
o #1 in oil and natural gas revenue per mcfe, $4.79;
o #1 in lowest G&A per mcfe, $0.09;
o #1 in ebitda per mcfe, $3.88;
o #2 (tied) for lowest LOE per mcfe, $0.51;
o #4 in cash flow per mcfe, $3.37.
o CHK's peer companies are: APA, APC, BR, COG, DVN, ECA, EOG,
FST, KMG, NBL, NFX, PPP, PXD, VPI, and XTO.
Although we obviously can not guarantee a repeat of these rankings in 2004 or in
future years, we do believe the combination of Chesapeake's focused product and
geographic strategies, value-added risk management strategy, balanced
acquisition and drilling programs, high quality assets and low operating costs
will enable our company to continue delivering one of the industry's best track
records of value creation for years to come."
4
CONFERENCE CALL INFORMATION
A conference call has been scheduled for Tuesday morning, April 27, 2004 at 9:00
a.m. EDT to discuss this earnings release. The telephone number to access the
conference call is 913.981.5572. For those unable to participate in the
conference call, a replay will be available from 12:00 p.m. EDT, April 27, 2004
through midnight EDT on Friday, May 14, 2004. The number to access the
conference call replay is 719.457.0820 and the passcode is 149305. 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 2003 10-K. 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.
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, PERMIAN BASIN, SOUTH TEXAS AND ONSHORE TEXAS
GULF COAST REGIONS OF THE UNITED STATES. THE COMPANY'S INTERNET ADDRESS IS
WWW.CHKENERGY.COM.
5
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S, EXCEPT PER SHARE DATA)
(UNAUDITED)
====================================================================================================================
THREE MONTHS ENDED: MARCH 31, 2004 MARCH 31, 2003
$ $/MCFE $ $/MCFE
------------ ------------ ---------- ------------
REVENUES:
OIL AND GAS SALES 419,793 5.32 286,019 5.04
OIL AND GAS MARKETING SALES 143,336 1.82 90,308 1.59
------------ ------------ ---------- -----------
TOTAL REVENUES 563,129 7.14 376,327 6.63
------------ ------------ ---------- -----------
OPERATING COSTS:
PRODUCTION EXPENSES 44,803 0.57 31,457 0.55
PRODUCTION TAXES 14,936 0.19 18,597 0.33
GENERAL AND ADMINISTRATIVE 8,166 0.10 5,379 0.09
STOCK BASED COMPENSATION 1,869 0.02 -- --
PROVISION FOR LEGAL SETTLEMENTS -- -- 286 0.01
OIL AND GAS MARKETING EXPENSES 139,664 1.77 89,358 1.58
OIL AND GAS DEPRECIATION, DEPLETION, AND AMORTIZATION 119,908 1.52 76,614 1.35
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 5,739 0.08 3,684 0.06
------------ ------------ ---------- -----------
TOTAL OPERATING COSTS 335,085 4.25 225,375 3.97
------------ ------------ ---------- -----------
INCOME FROM OPERATIONS 228,044 2.89 150,952 2.66
------------ ------------ ---------- -----------
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 1,343 0.02 763 0.01
INTEREST EXPENSE (46,545) (0.59) (37,004) (0.65)
LOSS ON REPURCHASES OR EXCHANGES OF CHESAPEAKE DEBT (6,925) (0.09) -- --
----------- ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (52,127) (0.66) (36,241) (0.64)
----------- ------------ ----------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 175,917 2.23 114,711 2.02
INCOME TAX EXPENSE:
CURRENT -- -- -- --
DEFERRED 63,327 0.80 43,591 0.77
----------- ------------- ----------- -----------
TOTAL INCOME TAX EXPENSE 63,327 0.80 43,591 0.77
----------- ------------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE, NET OF TAX 112,590 1.43 71,120 1.25
----------- ------------- ----------- -----------
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
INCOME TAX OF $1,464,000 -- -- 2,389 0.04
----------- ------------ ----------- ------------
NET INCOME 112,590 1.43 73,509 1.29
PREFERRED STOCK DIVIDENDS (8,168) (0.11) (3,526) (0.06)
----------- ------------- ----------- ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 104,422 1.32 69,983 1.23
=========== ============= =========== ============
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
BASIC
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.44 $ 0.34
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 0.01
------------ -----------
NET INCOME $ 0.44 $ 0.35
============ ===========
ASSUMING DILUTION
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.38 $ 0.31
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 0.01
------------ -----------
NET INCOME $ 0.38 $ 0.32
============ ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN 000'S)
BASIC 236,884 197,608
============ ==========
ASSUMING DILUTION 299,241 230,672
============ ==========
6
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN 000'S)
(UNAUDITED)
===============================================================================================================
MARCH 31, DECEMBER 31,
2004 2003
- --------------------------------------------------------------------------------------------- -----------------
CASH $ 189,425 $ 40,581
OTHER CURRENT ASSETS 382,043 301,823
--------------- ---------------
TOTAL CURRENT ASSETS 571,468 342,404
--------------- ---------------
PROPERTY AND EQUIPMENT (NET) 4,888,923 4,133,117
OTHER ASSETS 97,071 96,770
--------------- ---------------
TOTAL ASSETS $ 5,557,462 $ 4,572,291
=============== ===============
CURRENT LIABILITIES $ 742,572 $ 513,156
LONG TERM DEBT 2,012,147 2,057,713
ASSET RETIREMENT OBLIGATION 57,476 48,812
LONG TERM LIABILITIES 46,280 28,774
DEFERRED TAX LIABILITY 368,808 191,026
--------------- ---------------
TOTAL LIABILITIES 3,227,283 2,839,481
STOCKHOLDERS' EQUITY 2,330,179 1,732,810
--------------- ---------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,557,462 $ 4,572,291
=============== ===============
COMMON SHARES OUTSTANDING 240,788 216,784
=============== ===============
7
CHESAPEAKE ENERGY CORPORATION
SUPPLEMENTAL DATA - OIL & GAS SALES AND INTEREST EXPENSE
THREE MONTHS ENDED
----------------------------------
MARCH 31,
2004 2003
------------- -------------
OIL AND GAS SALES ($ IN THOUSANDS):
Oil sales $ 48,031 $ 35,140
Oil derivatives - realized gains (losses) (8,330) (6,238)
Oil derivatives - unrealized gains (losses) (6,019) (77)
--------- --------
Total oil sales $ 33,682 $ 28,825
--------- --------
Gas sales $360,101 $314,050
Gas derivatives - realized gains (losses) 33,991 (86,620)
Gas derivatives - unrealized gains (losses) (7,981) 29,764
--------- --------
Total gas sales $386,111 $257,194
-------- --------
Total oil and gas sales $419,793 $286,019
======== ========
AVERAGE SALES PRICE (EXCLUDING GAINS (LOSSES) ON
DERIVATIVES): $ 32.79 $ 33.15
Oil ($ per bbl)
Gas ($ per mcf) $ 5.14 $ 6.23
Gas equivalent ($ per mcfe) $ 5.17 $ 6.15
AVERAGE SALES PRICE
(EXCLUDING UNREALIZED GAINS (LOSSES) ON
DERIVATIVES):
Oil ($ per bbl) $ 27.10 $ 27.27
Gas ($ per mcf) $ 5.62 $ 4.51
Gas equivalent ($ per mcfe) $ 5.50 $ 4.52
INTEREST EXPENSE ($ IN THOUSANDS):
Interest $ 38,564 $ 35,704
Derivatives - realized (gains) losses (758) (674)
Derivatives - unrealized (gains) losses 8,739 1,974
-------- --------
Total Interest Expense $ 46,545 $ 37,004
-------- --------
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED CASH FLOW DATA
(IN 000'S)
(UNAUDITED)
=======================================================================================================
=======================================================================================================
MARCH 31, MARCH 31,
THREE MONTHS ENDED: 2004 2003
-------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 335,733 $ 99,052
CASH (USED IN) INVESTING ACTIVITIES $ (735,434) $ (1,002,289)
CASH PROVIDED BY FINANCING ACTIVITIES $ 548,545 $ 693,604
=======================================================================================================
8
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF CERTAIN FINANCIAL MEASURES
(IN 000'S)
(UNAUDITED)
================================================================================
MARCH 31, MARCH 31,
THREE MONTHS ENDED: 2004 2003
- --------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITY $ 335,733 $ 99,052
ADJUSTMENTS:
CHANGES IN ASSETS AND LIABILITIES (8,216) 68,661
--------------- ---------------
OPERATING CASH FLOW* $ 327,517 $ 167,713
=============== ===============
* 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.
================================================================================
MARCH 31, MARCH 31,
THREE MONTHS ENDED: 2004 2003
- --------------------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT $ 112,590 $ 71,120
OF ACCOUNTING CHANGE
DEFERRED INCOME TAX EXPENSE 63,327 43,591
INTEREST EXPENSE 46,545 37,004
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS 5,739 3,684
OIL AND GAS DEPRECIATION, DEPLETION 119,908 76,614
AND AMORTIZATION --------------- ---------------
EBITDA** $ 348,109 $ 232,013
=============== ===============
**Ebitda represents net income (loss) before cumulative effect of accounting
change, income tax expense (benefit), interest expense, and depreciation,
depletion and amortization expense. Ebitda is presented as a supplemental
financial measurement in the evaluation of our business. We believe that it
provides additional information regarding our ability to meet our future debt
service, capital expenditures and working capital requirements. This measure is
widely used by investors and rating agencies in the valuation, comparison,
rating and investment recommendations of companies. Ebitda is also a financial
measurement that, with certain negotiated adjustments, is reported to our banks
under our bank credit facilities and is used in our financial covenants under
our bank credit facilities and our indentures governing our senior notes. Ebitda
is not a measure of financial performance under GAAP. Accordingly, it should not
be considered as a substitute for net income, income from operations, or cash
flow provided by operating activities prepared in accordance with GAAP. Ebitda
is reconciled to cash provided by operating activities as follows:
================================================================================
MARCH 31, MARCH 31,
THREE MONTHS ENDED: 2004 2003
- --------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 335,733 $ 99,052
CHANGES IN ASSETS AND LIABILITIES (8,216) 68,661
INTEREST EXPENSE, REALIZED 37,806 35,030
UNREALIZED GAINS (LOSSES) ON OIL (14,000) 29,687
AND GAS DERIVATIVES
OTHER NON-CASH ITEMS (3,214) (417)
--------------- --------------
EBITDA $ 348,109 $ 232,013
=============== ==============
9
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF ADJUSTED EARNINGS & ADJUSTED EBITDA
($ IN 000'S, EXCEPT PER SHARE AMOUNTS)
================================================================================
THREE MONTHS ENDED
MARCH 31, 2004
- --------------------------------------------------------------------------------
Net income to common shareholders $ 104,422
Adjustments, net of tax:
Unrealized (gains) losses from hedging 14,553
Loss on repurchases or exchanges of debt 4,432
---------------
Adjusted earnings* $ 123,407
===============
Adjusted earnings per share assuming dilution $ 0.44
EBITDA $ 348,109
Adjustments, before tax:
Unrealized (gains) losses from oil and gas 14,000
hedging
Loss on repurchases or exchanges of debt 6,925
---------------
Adjusted EBITDA* $ 369,034
===============
*Adjusted earnings and adjusted EBITDA, both non-GAAP financial measures,
exclude certain items that management believes affect the comparability of
operating results. The Company discloses these non-GAAP financial measures as a
useful adjunct to GAAP earnings and EBITDA because:
a. Management uses adjusted earnings and adjusted EBITDA to evaluate the
Company's operational trends and performance relative to other oil and
gas producing companies.
b. Adjusted earnings and adjusted EBITDA are more comparable to earnings
and EBITDA estimates provided by securities analysts.
c. Items excluded generally are one-time items, or items whose timing or
amount cannot be reasonably estimated. Accordingly, any guidance
provided by the Company generally excludes information regarding these
types of items.
10
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF APRIL 26, 2004
QUARTER ENDING JUNE 30, 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 April 26,
2004, we are using the following key assumptions in our projections for the
second quarter of 2004 and the full-year 2004.
The primary changes from our March 23, 2004 guidance are in italicized bold and
are explained as follows:
1) We have replaced our 2004 first quarter forecast with our initial
forecast for the 2004 second quarter.
2) We have updated the projected effects from changes in our hedging
positions.
3) We have included estimates of non-cash expense associated with the
issuance of restricted stock under stock-based compensation plans.
4) 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.
QUARTER ENDING YEAR ENDING
JUNE 30, 2004 DECEMBER 31, 2004
------------- -----------------
ESTIMATED PRODUCTION:
Oil - Mbo 1,540 6,185
Gas - Bcf 73 - 74 293 - 299
Gas Equivalent - Bcfe 82 - 83 330 - 336
DAILY GAS EQUIVALENT MIDPOINT - IN MMCFE 907 910
NYMEX PRICES
(FOR CALCULATION OF REALIZED HEDGING EFFECTS ONLY):
Oil - $/Bo $28.67 $29.45
Gas - $/Mcf $4.96 $5.04
ESTIMATED DIFFERENTIALS TO NYMEX PRICES:
Oil - $/Bo -$2.75 -$2.72
Gas - $/Mcf -$0.70 -$0.71
ESTIMATED REALIZED HEDGING EFFECTS
(BASED ON EXPECTED NYMEX PRICES ABOVE):
OIL - $/BO $1.34 $0.57
GAS - $/MCF $0.13 $0.28
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) $0.28 - 0.30 $0.28 - 0.32
General and administrative $0.10 - 0.11 $0.10 - 0.11
Stock based compensation (non-cash) $0.02 - 0.03 $0.02 - 0.03
DD&A - oil and gas $1.52 - 1.56 $1.52 - 1.60
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 36% 36%
Equivalent Shares Outstanding:
Basic 241 mm 247 mm
Diluted 304 mm 305 mm
Capital Expenditures:
Drilling, leasehold and seismic $200 - $225 mm $850 - $900 mm
(a) Does not include gains or losses on interest rate derivatives (SFAS 133).
11
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. 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 69.5 $5.94 $0.03 $5.97 70.1 99%
2nd Qtr 55.0 $5.00 $0.00 $5.00 73.5 75%
3rd Qtr 43.7 $4.94 $0.00 $4.94 75.0 58%
4th Qtr 35.4 $5.13 $0.00 $5.13 76.0 47%
- -------------------------------------------------------------------------------------------
Total 2004 203.6 $5.34 $0.01 $5.35 294.6 69%
===========================================================================================
===========================================================================================
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 343.3 $5.18 $0.01 $5.19 1,239.6 28%
===========================================================================================
12
The company 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 0.173 294.6 53%
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* 1,919.6 25%
================ ================ =================== =======
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
-----------------------------
Assuming Open Swap
Avg. Oil Positions as
Open NYMEX Prodution % of Total
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
-------- ------ ---------- ------------
Q1 - 2004* 1,270 $28.58 1,465 87%
Q2 - 2004* 1,540 $30.00 1,540 100%
Q3 - 2004* 1,519 $30.32 1,590 96%
Q4 - 2004* 1,518 $30.10 1,590 95%
----------- ------------ -------------- --------------
----------- ------------ -------------- --------------
Total 2004* 5,847 $29.80 6,185 95%
=========== ============ ============== ==============
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.
13
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF MARCH 23, 2004
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF APRIL 26, 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, leasehold and seismic $175 - $200 mm $750 - $800 mm
(a) Does not include non-cash expense associated with the issuance of
restricted stock.
(b) Does not include gains or losses on interest rate derivatives (SFAS
133).
14
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. 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:
- -----
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%
===========================================================================================
15
The company 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 ProdutionN % 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.
16