EXHIBIT 99.1
------------
CHESAPEAKE ENERGY CORPORATION ANNOUNCES AGREEMENTS
TO ACQUIRE NATURAL GAS PROPERTIES FROM VARIOUS
PRIVATE SELLERS FOR $686 MILLION
Transactions Include Production of 61 Mmcfe per Day and 566 Bcfe
of Internally Estimated Reserves, Consisting of 289 Bcfe of Proved
Reserves and 277 Bcfe of Probable and Possible Reserves
Acquired Production 100% Hedged at $58.44 per Barrel and $7.65
per Mcf of Natural Gas in 2005 and at $57.98 per Barrel
and $7.53 per Mcf of Natural Gas in 2006
OKLAHOMA CITY, OKLAHOMA, APRIL 12, 2005 - Chesapeake Energy Corporation
(CHK:NYSE) today announced that it has entered into four independent agreements
with private sellers of oil and natural gas assets located in South Texas, East
Texas and the Permian Basin for an aggregate of $686.4 million in cash. Through
these transactions, Chesapeake anticipates acquiring an internally estimated 566
billion cubic feet of natural gas equivalent (bcfe) proved, probable and
possible (3P) reserves, comprised of 289 bcfe of proved reserves and 277 bcfe of
probable and possible reserves. Current net production is an estimated 61
million cubic feet of natural gas equivalent (mmcfe) production per day from 405
existing wells.
After allocating $255.2 million of the $686.4 million purchase price to the
98,000 net acres of leasehold (and related probable and possible reserves) being
acquired from the sellers, Chesapeake's acquisition cost for the 289 bcfe of
internally estimated proved reserves will be $1.49 per thousand cubic feet of
natural gas equivalent (mcfe). Based on the company's projected development plan
which includes $683 million of anticipated future drilling and development
costs, Chesapeake estimates that its all-in cost of acquiring and developing the
566 bcfe of 3P reserves will be $2.42 per mcfe.
The proved reserves associated with these acquisitions have a
reserves-to-production index estimated at 13.0 years, are 89% natural gas, are
36% proved developed and have current lease operating expenses of $0.32 per
mcfe. The properties are located in areas where Chesapeake already has extensive
drilling and producing operations.
On the acquired properties, Chesapeake has identified 276 proved undeveloped and
375 probable and possible drilling locations. Pro forma for these acquisitions,
Chesapeake believes that it will own an internally estimated 5.4 trillion cubic
feet of natural gas equivalent (tcfe) of proved oil and natural gas reserves and
more than 4.0 tcfe of unproven reserves as of December 31, 2004.
Chesapeake has hedged 100% of the 1,200 barrels of current oil production from
the acquired properties at NYMEX oil prices of $58.44 per barrel for 2005 and
$57.98 per barrel for 2006. In addition, the company has hedged 100% of the
54,000 mmcf of current gas production from the acquired properties at NYMEX gas
prices of $7.65 per mmbtu for 2005 and $7.53 mmbtu for 2006, levels well above
the prices used to value the acquisitions.
Chesapeake has recently closed one of the transactions for approximately $228
million in cash and expects to close the remaining acquisitions by May 31, 2005.
The pending acquisitions are subject to customary closing conditions and
purchase price adjustments but are not conditioned on the closing of any of the
other transactions. Chesapeake intends to finance the acquisitions by issuing a
combination of senior notes and preferred stock. As a result of these
acquisitions and the financings contemplated herein, the company has updated its
Outlook, which is attached to this release as Exhibit "A". The company's
previous Outlook, dated February 22, 2005, is attached as Exhibit "B" for
comparative purposes.
The sellers include Houston-based Laredo Energy II, L.L.C and its partners;
Houston-based Pecos Production Company; Midland-based Rubicon Oil & Gas I, L.P:
and a Dallas-based independent oil and gas company. Laredo was advised by Petrie
Parkman & Co. of Houston and Pecos was advised by Waterous & Co. of Houston.
Management Comment
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are
pleased to announce these acquisitions for several reasons. First, they will add
to our growing presence in South Texas, East Texas and the Permian Basin, all
areas of increasing importance to Chesapeake. Second, these acquisitions have
all of the attributes of successful previous Chesapeake transactions -
acquisitions from private companies of low-cost, high-margin proved producing
natural gas reserves, exploitation potential of proved undeveloped, probable and
possible reserves and finally, exploration potential for new reserves. In
addition, the acquisitions are heavily-weighted to natural gas and the
properties have attractive operating and future development costs. We are
confident that Chesapeake can deliver significant shareholder value from the
acquired properties for years to come."
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 THE FAIR VALUE OF
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.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTED
RESULTS ARE DESCRIBED UNDER "RISK FACTORS" IN ITEM 1 OF OUR 2004 ANNUAL REPORT
ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 2005.
THEY INCLUDE THE VOLATILITY OF OIL AND GAS PRICES; ADVERSE EFFECTS OUR LEVEL OF
INDEBTEDNESS COULD HAVE ON OUR OPERATIONS AND FUTURE GROWTH; OUR ABILITY TO
COMPETE EFFECTIVELY AGAINST STRONG INDEPENDENT OIL AND GAS COMPANIES AND MAJORS;
THE AVAILABILITY OF CAPITAL ON AN ECONOMIC BASIS TO FUND RESERVE REPLACEMENT
COSTS; UNCERTAINTIES INHERENT IN ESTIMATING QUANTITIES OF OIL AND GAS RESERVES;
PROJECTING FUTURE RATES OF PRODUCTION AND THE TIMING OF DEVELOPMENT
EXPENDITURES; OUR ABILITY TO REPLACE RESERVES AND SUSTAIN PRODUCTION;
UNCERTAINTIES IN EVALUATING OIL AND GAS RESERVES OF ACQUIRED PROPERTIES AND
ASSOCIATED POTENTIAL LIABILITIES; UNSUCCESSFUL EXPLORATION AND DEVELOPMENT
DRILLING; DECLINES IN THE VALUES OF OUR OIL AND GAS PROPERTIES RESULTING IN
CEILING TEST WRITE-DOWNS; LOWER PRICES REALIZED ON OIL AND GAS SALES AND
COLLATERAL REQUIRED TO SECURE HEDGING LIABILITIES RESULTING FROM OUR COMMODITY
PRICE RISK MANAGEMENT ACTIVITIES; 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.
OUR PRODUCTION FORECASTS ARE DEPENDENT UPON MANY ASSUMPTIONS, INCLUDING
ESTIMATES OF PRODUCTION DECLINE RATES FROM EXISTING WELLS AND THE OUTCOME OF
FUTURE DRILLING ACTIVITY. ALSO, OUR INTERNAL ESTIMATES OF RESERVES, PARTICULARLY
THOSE IN THE PROPERTIES PROPOSED TO BE ACQUIRED WHERE WE MAY HAVE LIMITED REVIEW
OF DATA OR EXPERIENCE WITH THE RESERVES, MAY BE SUBJECT TO REVISION AND MAY BE
DIFFERENT FROM ESTIMATES BY OUR EXTERNAL RESERVOIR ENGINEERS AT YEAR-END.
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.
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 PROPOSED FINANCINGS THROUGH THE ISSUANCE OF SENIOR NOTES AND
PREFERRED STOCK IN THIS PRESS RELEASE SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES. THE TERMS OF ANY SUCH OFFERINGS
HAVE NOT BEEN DECIDED. THE SECURITIES 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 THE FOURTH LARGEST INDEPENDENT PRODUCER OF
NATURAL GAS IN THE U.S. HEADQUARTERED IN OKLAHOMA CITY, THE COMPANY'S OPERATIONS
ARE FOCUSED ON EXPLORATORY AND DEVELOPMENTAL DRILLING AND 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.
2
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF APRIL 12, 2005
Quarter Ending June 30, 2005; Year Ending December 31, 2005; Year Ending
December 31, 2006.
We have adopted a policy of periodically providing investors with guidance on
certain factors that affect our future financial performance. As of April 12,
2005, we are using the following key assumptions in our projections for the
second quarter of 2005, the full-year 2005 and the full-year 2006.
The primary changes from our February 22, 2005 Outlook are in italicized bold in
the table and are explained as follows:
1) We have shown the operational and financial effects of the acquisitions and
anticipated financing of them as described in our press release dated April
12, 2005.
2) We have shown our projections for the quarter ending June 30, 2005 for the
first time.
3) We have updated the projected effects from changes in our hedging positions
since our February 22, 2005 Outlook.
4) We have updated certain of our cost and oil and natural gas price
differentials to reflect changing market conditions.
5) We have included our expectations for future NYMEX oil and gas prices to
illustrate hedging effects only.
Quarter Ending Year Ending Year Ending
June 30, 2005 December 31, 2005 December31, 2006
------------- ----------------- ----------------
Estimated Production:
Oil - Mbo 1,770 7,000 7,300
Gas - Bcf 98-100 403 - 410 452 - 462
Gas Equivalent - Bcfe 108.5 - 110.5 445 - 452 496 - 506
Daily gas equivalent midpoint -in Mmcfe 1,203 1,229 1,373
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $45.00 $46.21 $45.00
Gas - $/Mcf $6.78 $6.51 $6.50
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$4.00 -$4.00 -$4.00
Gas - $/Mcf -$0.80 -$0.80 -$0.80
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo - $0.78 -$0.87 $1.12
Gas - $/Mcf -$0.26 $0.13 $0.10
Operating Costs per Mcfe of Projected Production:
Production expense $0.68 - 0.72 $0.68 - 0.72 $0.72 - 0.77
Production taxes (generally 7% of O&G revenues) (a) $0.40 - 0.45 $0.40 - 0.45 $0.40 - 0.45
General and administrative $0.10 - 0.12 $0.10 - 0.12 $0.11 - 0.13
Stock-based compensation (non-cash) $0.03 - 0.05 $0.03 - 0.05 $0.04 - 0.06
DD&A - oil and gas $1.75 - 1.85 $1.75 - 1.85 $1.85 - 1.95
Depreciation of other assets $0.09 - 0.11 $0.09 - 0.11 $0.10 - 0.12
Interest expense(b) $0.43 - 0.47 $0.43 - 0.47 $0.43 - 0.47
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate (~ 95% deferred) 36.5% 36.5% 36.5%
Equivalent Shares Outstanding:
Basic 312 mm 315 mm 318 mm
Diluted 367 mm 364 mm 370 mm
Capital Expenditures:
Drilling, leasehold and seismic $400 - $450 mm $1,600 - $1,800 mm $1,800 - $2,000 mm
(a) Severance tax per mcfe is based on NYMEX prices of $45.00 per barrel of oil
and natural gas prices ranging from $6.00-$7.20 during Q2 2005, $6.50-$7.50
during calendar 2005, and $6.35-$7.25 during calendar 2006.
(b) Does not include gains or losses on interest rate derivatives (SFAS 133).
3
Commodity Hedging Activities
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.
4
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 (Loss) Open and Gas Estimated
Swaps of Open from Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
-------- ------- ---------- ---------- ------------- ----------
2005:
1st Qtr 62.2 $7.00 -$0.18 $6.82 91.5 68%
2nd Qtr 63.1 $6.29 -$0.17 $6.12 99.0 64%
3rd Qtr 57.0 $6.41 -$0.19 $6.22 105.0 54%
4th Qtr 38.1 $6.64 -$0.28 $6.36 111.0 34%
========================================================================================================
Total 2005(1) 220.4 $6.58 -$0.19 $6.39 406.5 54%
========================================================================================================
========================================================================================================
Total 2006(1) 79.4 $7.10 -$0.31 $6.79 457.0 17%
========================================================================================================
========================================================================================================
TOTALS
- --------------------------------------------------------------------------------------------------------
2005-2006 299.8 $6.72 -$0.22 $6.50 863.5 35%
========================================================================================================
(1) Certain hedging arrangements include swaps with knockout prices
ranging from $3.75 to $5.50 covering 79.5 bcf in 2005 and $3.75 to
$5.50 covering 35.7 bcf in 2006.
Note: Not shown above are collars covering 4.4 bcf of production in 2005 at
a weighted average floor and ceiling of $3.10 and $4.44 and call options
covering 7.3 bcf of production in 2005 at a weighted average price of
$6.00.
The company has also entered into the following natural gas basis protection
swaps:
Assuming Gas
Volume in Bcf's NYMEX less: Production in Bcf's %Hedged
---------------- ---------------- ------------------- -------
2005 188.6 $ 0.26 406.5 46%
2006 130.1 0.32 457.0 28%
2007 126.5 0.28 490.0 26%
2008 118.6 0.27 515.0 23%
2009 86.6 0.29 540.0 16%
----------------- ---------------- ------------------ ------
Totals 650.4 $ 0.28 2,408.5 27%
================= ================ ================== ======
* weighted average
The company has entered into the following crude oil hedging arrangements:
5
% Hedged
----------------------------------------------------------------
Open Swaps Avg. NYMEX Assuming Oil Open Swap Positions as %
in mbo's Strike Price Production in mbo's of: of Total Estimated Production
-------- ------------ ----------------------- -----------------------------
Q1 - 2005 870.5 $41.87 1,650 53%
Q2 - 2005 1,107.0 $43.76 1,770 63%
Q3 - 2005 522.0 $47.59 1,790 29%
Q4 - 2005 429.5 $47.32 1,790 24%
- ----------------------------------------------------------------------------------------------------------------
Total 2005(1) 2,929.0 $44.40 7,000 42%
===============================================================================================
Total 2006(1) 835.0 $55.68 7,300 11%
===============================================================================================
(1) Certain hedging arrangements include swaps with knockout prices ranging from
$26.00 to $42.00 covering 2,317 mbo in 2005 and $40.00 to $42.00 covering
501.5 mbo in 2006.
6
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF FEBRUARY 22, 2005
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF APRIL 12, 2005
Quarter Ending March 31, 2005; Year Ending December 31, 2005; Year Ending
December 31, 2006.
We have adopted a policy of periodically providing investors with guidance on
certain factors that affect our future financial performance. As of February 22,
2005, we are using the following key assumptions in our projections for the
first quarter of 2005, the full-year 2005 and the full-year 2006.
The primary changes from our December 27, 2004 Outlook are in italicized bold in
the table and are explained as follows:
1) We have provided our first production forecast for the first quarter of
2005.
2) We have increased capital expenditures by $100 million in 2005 and $50
million in 2006 to reflect a planned increase in drilling activity on
various company properties.
3) We have updated the projected effects from changes in our hedging
positions since our December 27, 2004 Outlook. 4) We have included our
expectations for future NYMEX oil and gas prices to illustrate hedging
effects only.
Quarter Ending Year Ending Year Ending
March 31, 2005 December 31, 2005 December31, 2006
------------- ----------------- ----------------
Estimated Production:
Oil - Mbo 1,650 6,600 6,600
Gas - Bcf 91 - 92 391 - 399 438 - 448
Gas Equivalent - Bcfe 101 - 102 430 - 438 478 - 488
Daily gas equivalent midpoint -in Mmcfe 1,128 1,190 1,325
NYMEX Prices
(for calculation of realized hedging effects only):
Oil - $/Bo $42.28 $40.57 $40.00
Gas - $/Mcf $6.17 $6.04 $6.00
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.75 -$2.75 -$2.75
Gas - $/Mcf -$0.75 -$0.70 -$0.70
Estimated Realized Hedging Effects (based on expected NYMEX prices above):
Oil - $/Bo -$0.23 $0.04 $0.00
Gas - $/Mcf $0.56 $0.07 $0.00
Operating Costs per Mcfe of Projected Production:
Production expense $0.62 - 0.67 $0.62 - 0.67 $0.68 - 0.72
Production taxes (generally 7% of O&G revenues) $0.38 - 0.40 $0.38 - 0.40 $0.38 - 0.40
General and administrative $0.10 - 0.11 $0.10 - 0.11 $0.11 - 0.12
Stock-based compensation (non-cash) $0.02 - 0.04 $0.04 - 0.06 $0.09 - 0.10
DD&A - oil and gas $1.70 - 1.75 $1.75 - 1.80 $1.80 - 1.90
Depreciation of other assets $0.09 - 0.11 $0.09 - 0.11 $0.10 - 0.12
Interest expense(a) $0.43 - 0.47 $0.43 - 0.47 $0.43 - 0.47
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 36.5% 36.5% 36.5%
Equivalent Shares Outstanding:
Basic 314 mm 315 mm 318 mm
Diluted 352 mm 352 mm 355 mm
Capital Expenditures:
Drilling, leasehold and seismic $350 - $375 mm $1,400 - $1,500 $1,500 -
mm $1,600 mm
(c) Does not include gains or losses on interest rate derivatives (SFAS 133).
7
Commodity Hedging Activities
The company utilizes hedging strategies to hedge the price of a portion of
its future oil and gas production. These strategies include:
(i) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and
the floating-price payment are netted, resulting in a net
amount due to or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside
exposure of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the
price differential is greater than the stated terms of the
contract and pays the counterparty if the price differential
is less than the stated terms of the contract.
Commodity markets are volatile, and as a result, Chesapeake's hedging
activity is dynamic. As market conditions warrant, the company may elect to
settle a hedging transaction prior to its scheduled maturity date and, as a
result, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in order
to mitigate a portion of its exposure to adverse market changes in oil and
natural gas prices. Accordingly, associated gains or loses from the
derivative transactions are reflected as adjustments to oil and gas sales.
All realized gains and losses from oil and natural gas derivatives are
included in oil and gas sales in the month of related production. Pursuant
to SFAS 133, certain derivatives do not qualify for designation as cash
flow hedges. Changes in the fair value of these non-qualifying derivatives
that occur prior to their maturity (i.e. because of temporary fluctuations
in value) are reported currently in the consolidated statement of
operations as unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any
change in fair value resulting from ineffectiveness is recognized currently
in oil and natural gas sales.
8
The company currently has in place the following natural gas swaps:
% Hedged
-------------------------
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain (Loss) Open and Gas Estimated
Swaps of Open from Locked Locked Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
-------- ------- ---------- ---------- ------------- ----------
2005:
1st Qtr 62.2 $7.00 -$0.18 $6.82 91.5 68%
2nd Qtr 52.2 $6.17 -$0.19 $5.98 97.0 54%
3rd Qtr 46.4 $6.19 -$0.23 $5.96 101.5 46%
4th Qtr 27.5 $6.26 -$0.39 $5.87 105.0 26%
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
Total 2005(1) 188.3 $6.46 -$0.22 $6.24 395.0 48%
========================================================================================================================
========================================================================================================================
Total 2006(1) 39.3 $6.77 -$0.62 $6.15 443.0 9%
========================================================================================================================
========================================================================================================================
Total 2007(2) - - - - 470.0 -
========================================================================================================================
========================================================================================================================
TOTALS
- ------------------------------------------------------------------------------------------------------------------------
2005-2007 227.6 $6.51 -$0.29 $6.22 1,308.0 17%
========================================================================================================================
(1) Certain hedging arrangements include swaps with knockout prices ranging
from $3.75 to $5.50 covering 70.0 bcf in 2005 and $3.75 to $5.50 covering
28.4 bcf in 2006.
(2) Swaps covering 25.6 bcf have been locked for 2007. This will result in the
recognition of $11.6 million of losses in 2007 when the hedging
arrangements settle.
Note: Not shown above are collars covering 4.4 bcf of production in 2005 at a
weighted average floor and ceiling of $3.10 and $4.44. and call options covering
7.3 bcf of production in 2005 at a weighted average price of $6.00.
The company has also entered into the following natural gas basis protection
swaps:
Assuming Gas
Volume in Bcf's NYMEX less: Production in Bcf's %Hedged
---------------- ---------------- ------------------- -------
2005 188.6 0.26 392.0 48%
2006 130.1 0.32 440.0 30%
2007 126.5 0.28 470.0 27%
2008 118.6 0.27 495.0 24%
2009 86.6 0.29 520.0 17%
----------------- ---------------- ------------------ ------
Totals 650.4 $ 0.28 2,317.0 28%
================= ================ ================== ======
* weighted average
9
The company has entered into the following crude oil hedging arrangements:
% Hedged
----------------------------------------------------------------
Open Swaps Avg. NYMEX Assuming Oil Open Swap Positions as %
in mbo's Strike Price Production in mbo's of: of Total Estimated Production
-------- ------------ ----------------------- -----------------------------
Q1 - 2005 870.5 $41.87 1,650 53%
Q2 - 2005 1,001.0 $42.39 1,650 61%
Q3 - 2005 246.0 $38.00 1,650 15%
Q4 - 2005 153.5 $32.15 1,650 9%
- ---------------------------------------------------------------------------------------------------------------
Total 2005(1) 2,271.0 $41.02 6,600 34%
===============================================================================================
(1) Certain hedging arrangements include swaps with knockout prices ranging
from $26.00 to $34.00 covering 1,996 mbo in 2005.
10