EXHIBIT DESCRIPTION
99 Press Release issued by the Registrant on May 11, 2004.
EXHIBIT 99.2
------------
CHESAPEAKE ENERGY CORPORATION ANNOUNCES AGREEMENT TO
ACQUIRE $425 MILLION OF NATURAL GAS PROPERTIES, ADDITIONS TO
HEDGING POSITIONS AND INCREASES IN 2004 PRODUCTION FORECASTS
THROUGH ACQUISITION OF PRIVATELY-HELD GREYSTONE PETROLEUM LLC,
CHESAPEAKE ACQUIRES ATTRACTIVE NATURAL GAS ASSETS IN THE
ARK-LA-TEX REGION OF NORTHERN LOUISIANA
CHESAPEAKE HEDGES PROJECTED 45 MMCF OF DAILY NATURAL GAS PRODUCTION
FROM THE ACQUIRED PROPERTIES FOR JUNE 2004 THROUGH
JUNE 2005 AT $6.25 PER MCF OF NATURAL GAS
OKLAHOMA CITY, OKLAHOMA, MAY 11, 2004 - Chesapeake Energy Corporation (NYSE:CHK)
today announced that it has entered into an agreement to acquire natural gas
assets in the Ark-La-Tex region of northern Louisiana through the $425 million
acquisition of the equity interests of Houston-based, privately-held Greystone
Petroleum LLC. Greystone's major asset is its 16,100 gross acre contiguous
leasehold position over the crest of the giant Sligo Field located in Bossier
Parish, Louisiana. Discovered in 1938, Sligo has produced 1.6 tcfe of natural
gas from the Rodessa, Pettit, Hosston and Cotton Valley formations at depths of
4,100 feet to 9,600 feet.
Through this transaction, Chesapeake anticipates acquiring an internally
estimated 214 billion cubic feet of gas equivalent proved reserves (bcfe), 51
bcfe of probable and possible reserves and production of 45 million cubic feet
of natural gas equivalent production (mmcfe) per day. Pro forma for this
acquisition, Chesapeake's proved oil and natural gas reserves will be
approximately 3.8 trillion cubic feet of natural gas equivalent (tcfe) and its
projected June 2004 production will exceed 950 million cubic feet of natural gas
equivalent per day. The company plans to increase production from the Greystone
properties by approximately 50% to 65-70 mmcfe per day through a 2-4 rig
drilling program during the next 12-18 months. Chesapeake has identified
approximately 70 proved undeveloped and 75 probable and possible locations on
the acreage.
After allocating approximately $65 million of the purchase price to unevaluated
leasehold and mid-stream gas assets, Chesapeake's acquisition cost per thousand
cubic feet of gas equivalent (mcfe) of proved reserves will be $1.68. Including
anticipated future drilling costs for fully developing the proved, probable and
possible reserves, the company estimates that its all-in acquisition cost for
the 265 bcfe of estimated reserves will be $1.94 per mcfe. The proved reserves
have a reserves-to-production index of 13.0 years, are 98% gas, are 93%
operated, are 55% proved developed and have current lease operating expenses of
$0.39 per mcfe. Greystone's very low lease operating expenses (approximately
$0.35 per mcfe below the industry average) create unusually high economic value
per mcfe of proved reserves.
The acquisition is expected to close on June 2, 2004 and is subject to customary
closing conditions. The company intends to finance the acquisition using a
combination of proceeds from a new private issue of senior notes, borrowings
from the company's newly expanded $500 million bank credit facility and cash on
hand.
Greystone was formed in 1995 by Joe M. Bridges and Michael A. Geffert who later
were joined as equity holders by the private equity firm First Reserve
Corporation to help fund Greystone's acquisition of interests in the Sligo Field
in 2002. Greystone was advised in the sale to Chesapeake by Simmons & Company
International and Griffis & Associates, LLC. Chesapeake was advised by Randall &
Dewey.
CHESAPEAKE INCREASES 2004 PRODUCTION GUIDANCE AND ANNOUNCES NEW
HEDGES FOR THE NATURAL GAS PRODUCTION BEING ACQUIRED
Chesapeake is today increasing its 2004 production forecast by 11.0 bcfe (3.3%)
to a range of 341-347 bcfe (940 mmcfe per day at the mid-point) from a range of
330-336 (910 mmcfe per day at the mid-point). Approximately 9.7 bcfe of this
11.0 bcfe increase is attributable to the anticipated production from the
Greystone transaction while 1.3 bcfe is attributable to anticipated higher
production from better than expected recent drilling results.
Chesapeake has recently hedged the current daily natural gas production of 45
mmcf from the new acquisition at the attractive price of $6.25 per mcf for June
2004 through June 2005. The following tables compare Chesapeake's projected
2004-2007 oil and natural gas production volumes that have been hedged as of May
11, 2004 to what had been previously hedged as of April 26, 2004:
HEDGED POSITIONS AS OF MAY 11, 2004
OIL NATURAL GAS
----------------------------- ---------------------------
QUARTER OR YEAR % HEDGED $ NYMEX % HEDGED $ NYMEX
- ---------------
------------- ------------ ------------ -----------
2004 1Q 87% $28.58 99% $5.97
2004 2Q 100% $30.00 81% $5.11
2004 3Q 96% $30.32 73% $5.28
2004 4Q 95% $30.10 48% $5.27
- --------------- ------------- ------------ ------------ -----------
- --------------- ------------- ------------ ------------ -----------
2004 TOTAL 95% $29.80 74% $5.44
=============== ============= ============ ============ ===========
=============== ============= ============ ============ ===========
2005 9% $31.56 28% $5.12
2006 - - 10% $4.88
2007 - - 7% $4.76
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 hedging positions at any time in the future
without notice.
Chesapeake's updated 2004 forecast is attached to this release in an Outlook
dated May 11, 2004 labeled Schedule "A". This Outlook has been changed from the
Outlook dated April 26, 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.
2
MANAGEMENT COMMENTS
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's
announcement provides additional confirmation that Chesapeake continues to
leverage its successful and balanced strategies of growth through the drillbit
and growth through acquisitions from the Mid-Continent region into new areas
such as the Permian Basin, South Texas, Texas Gulf Coast and now the Ark-La-Tex
region. Today's transaction is consistent with Chesapeake's growth strategy of
creating value by delivering profitable organic growth from our developmental
and exploratory drilling programs complemented by acquiring and developing
attractively-valued and under-exploited natural gas assets.
In addition, we have locked-in highly accretive returns from today's acquisition
by hedging 100% of the anticipated production for June 2004 through June 2005 at
a price well above the assumed prices we used to evaluate the acquired
properties. In addition, by financing this acquisition using cash on hand and
low-cost debt, this transaction will be strongly accretive to our shareholders.
In this time of strong natural gas prices, high gas price volatility and low
interest rates, we believe Chesapeake can generate unusually attractive returns
for its shareholders by acquiring under-exploited, long-lived, onshore natural
gas properties and hedging the acquired production volumes during times of gas
price strength. We believe our ongoing consolidation of high-quality natural gas
properties, followed by opportunistic hedging, and combined with our value-added
drilling expertise will continue to be a winning formula for our shareholders in
the years ahead."
CONFERENCE CALL INFORMATION
A conference call has been scheduled for this afternoon, Tuesday, May 11, 2004
at 5:00 p.m. EDT to discuss this acquisition. The telephone number to access the
conference call is 913.981.5523. For those unable to participate in the
conference call, a replay will be available from 9:00 p.m. EDT, May 11, 2004
through midnight EDT on Wednesday, May 26, 2004. The number to access the
conference call replay is 719.457.0820 and the passcode is 437427. 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.
3
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. WE CANNOT ASSURE YOU THAT WE CAN RECOVER OUR
ESTIMATED VOLUMES OF OIL AND NATURAL GAS RESERVES.
THE ANNOUNCEMENT OF A PROPOSED OFFERING OF SENIOR NOTES IN THIS PRESS RELEASE
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SENIOR NOTES. THE TERMS OF ANY SUCH OFFERING AND THE SENIOR NOTES OFFERED
THEREBY HAVE NOT BEEN DECIDED. THE SENIOR NOTES 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 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, TEXAS GULF COAST
AND ARK-LA-TEX REGIONS OF THE UNITED STATES. THE COMPANY'S INTERNET ADDRESS IS
WWW.CHKENERGY.COM.
4
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK
AS OF MAY 11, 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 May 11,
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 April 26, 2004 guidance are in italicized bold and
are explained as follows:
1) We have increased our production forecast for the second quarter and
full-year 2004 because of the Greystone acquisition and better than
expected recent drilling results.
2) We have included the effects of financing the Greystone transaction with
$300 million of senior notes and $125 million of bank debt.
3) We have updated the projected effects from changes in our hedging
positions.
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 74 - 75 304 - 310
Gas Equivalent - Bcfe 83 - 84 341 - 347
Daily gas equivalent midpoint - in Mmcfe 918 940
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $30.87 $30.00
Gas - $/Mcf $5.35 $5.14
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 -$0.71 +$0.05
Gas - $/Mcf -$0.06 +$0.33
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 $875 - $925 mm
(a) Does not include gains or losses on interest rate derivatives (SFAS 133).
5
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 60.4 $5.11 $0.00 $5.11 74.5 81%
3rd Qtr 58.4 $5.28 $0.00 $5.28 80.0 73%
4th Qtr 39.6 $5.27 $0.00 $5.27 82.4 48%
- ----------------------------------------------------------------------------------------------
Total 2004 227.9 $5.43 $0.01 $5.44 307.0 74%
==============================================================================================
Total 2005 88.4 $5.12 $0.00 $5.12 320.0 28%
==============================================================================================
Total 2006 32.9 $4.88 $0.00 $4.88 330.0 10%
==============================================================================================
==============================================================================================
Total 2007 25.6 $4.76 $0.00 $4.76 340.0 7%
- ----------------------------------------------------------------------------------------------
==============================================================================================
TOTALS
- ----------------------------------------------------------------------------------------------
2004-2007 374.8 $5.26 $0.01 $5.27 1,297.0 29%
==============================================================================================
6
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 0.173 307.0 52%
2005 109.5 0.156 320.0 34%
2006 47.5 0.155 330.0 14%
2007 63.9 0.166 340.0 19%
2008 64.0 0.166 350.0 18%
2009 37.0 0.160 360.0 10%
----------------- ---------------- ------------------ -----
Totals 479.3 $ 0.164* 2,007.0 24%
================= ================ ================== =====
* 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 1,465 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.
7
SCHEDULE "B"
CHESAPEAKE'S OUTLOOK AS OF APRIL 26, 2004
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 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 (SFAS133).
8
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 losses 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%
==============================================================================================
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 2004
9
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 ProdutionN % 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.
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 2004
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