Chesapeake announced financial and operational results for the 2010 third quarter. For the 2010 third quarter, Chesapeake reported net income to common stockholders of $515 million ($0.75 per fully diluted common share), operating cash flow of $1.068 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $1.344 billion (defined as net income before income taxes, interest expense, and depreciation, depletion and amortization) on revenue of $2.581 billion and production of 280 billion cubic feet of natural gas equivalent (bcfe).
The company's 2010 third quarter results include various items that are typically not included in published estimates of the company's financial results by certain securities analysts. Excluding the items detailed below, for the 2010 third quarter, Chesapeake reported adjusted net income to common stockholders of $478 million ($0.70 per fully diluted common share) and adjusted ebitda of $1.282 billion. The excluded items and their effects on 2010 third quarter reported results are detailed as follows:
The various items described above do not materially affect the calculation of operating cash flow.
Chesapeake's daily production for the 2010 third quarter averaged 3.043 bcfe, an increase of 560 million cubic feet of natural gas equivalent (mmcfe), or 23%, over the 2.483 bcfe produced per day in the 2009 third quarter and an increase of 254 mmcfe, or 9%, above the 2.789 bcfe produced per day in the 2010 second quarter.
Chesapeake's average daily production of 3.043 bcfe for the 2010 third quarter consisted of 2.748 billion cubic feet of natural gas (bcf) and 49,272 barrels of oil and natural gas liquids (NGLs) (bbls). The company's 2010 third quarter production of 280.0 bcfe was comprised of 252.8 bcf (90% on a natural gas equivalent basis) and 4.5 million barrels of oil and NGLs (mmbbls) (10% on a natural gas equivalent basis). The company's year-over-year growth rate of natural gas production was 20% and its year-over-year growth rate of oil and NGL (liquids) production was 50%. The company's percentage of revenue from liquids in the 2010 third quarter was 17% of realized natural gas and oil revenue compared to 14% in the 2009 third quarter.
2010 Third Quarter Average Realized Prices Benefit from Realized Hedging Gains
Average prices realized during the 2010 third quarter (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $5.20 per thousand cubic feet (mcf) and $59.81 per bbl, for a realized natural gas equivalent price of $5.67 per thousand cubic feet of natural gas equivalent (mcfe). Realized gains from natural gas and oil hedging activities during the 2010 third quarter generated a $1.92 gain per mcf and a $5.56 gain per bbl, for 2010 third quarter realized hedging gains of $512 million, or $1.83 per mcfe.
By comparison, average prices realized during the 2009 third quarter (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $6.04 per mcf and $66.42 per bbl, for a realized natural gas equivalent price of $6.44 per mcfe. Realized gains from natural gas and oil hedging activities during the 2009 third quarter generated a $3.20 gain per mcf and a $3.95 gain per bbl, for 2009 third quarter realized hedging gains of $687 million, or $3.00 per mcfe.
The company's natural gas and oil realized net hedging gains for the first nine months of 2010 were $1.5 billion and since January 1, 2001 have been $5.9 billion.
Company Provides 2010-12 Production Outlook and Details Updated Hedging Positions
Chesapeake is projecting full-year production growth of approximately 13% in 2010, 18% in 2011 and 18% in 2012, including production growth from liquids of approximately 60% in 2010, 80% in 2011 and 60% in 2012. Of Chesapeake's projected production growth rates in 2010, 2011 and 2012, approximately 35%, 50% and 55%, respectively, of the growth is projected to come from increased liquids production.
Chesapeake's Proved Natural Gas and Oil Reserves Increase by 2.0 Tcfe; Company Adds Proved Reserves
During the first three quarters of 2010, Chesapeake continued the industry's most active drilling program, drilling 1,041 gross operated wells (676 net wells with an average working interest of 65%) and participating in another 911 gross wells operated by other companies (118 net wells with an average working interest of 13%). The company's drilling success rate was 99% for company-operated wells and 98% for non-operated wells. During the first three quarters of 2010, Chesapeake's drilling and completion costs include the benefit of approximately $745 million of drilling and completion carries from its joint venture partners.
Chesapeake's Leasehold and 3-D Seismic Inventories Total 13.8 Million Net Acres and 27.4 Million Acres; Risked Unproved Resources in the Company's Inventory Total 102 Tcfe
Since 2000, Chesapeake has built the largest combined inventories of onshore leasehold (13.8 million net acres) and 3-D seismic (27.4 million acres) in the U.S. and the largest inventory of U.S. natural gas shale play leasehold (2.8 million net acres) and now owns the largest inventory of leasehold in two of the Top 3 new unconventional liquids-rich plays – the Eagle Ford Shale and the Niobrara Shale.
On its total leasehold inventory, Chesapeake has identified an estimated 16.7 trillion cubic feet of natural gas equivalent (tcfe) of proved reserves (using volume estimates based on the 10-year average NYMEX strip prices at September 30, 2010), 102 tcfe of risked unproved resources and 259 tcfe of unrisked unproved resources. The company is currently using 140 operated drilling rigs to further develop its inventory of approximately 40,000 net drillsites. Of Chesapeake's 140 operated rigs, 95 are drilling wells primarily focused on unconventional natural gas plays (including 48 operated rigs utilizing drilling carries) and 45 are drilling wells primarily focused on liquids-rich plays. In addition, 133 of the company's 140 operated rigs are drilling horizontal wells.
In recognition of the value gap between oil and natural gas prices, during the past two years, Chesapeake has directed a significant portion of its technological and leasehold acquisition expertise to identify, secure and commercialize new unconventional liquids-rich plays. To date, Chesapeake has built leasehold positions and established production in multiple liquids-rich plays on approximately 3.1 million net leasehold acres with 4.3 billion barrels of oil equivalent (bboe) (25.9 tcfe) of risked unproved resources and 13.7 bboe (82.4 tcfe) of unrisked unproved resources. As a result of its success to date, Chesapeake expects to increase its oil and natural gas liquids production through its drilling activities to more than 150,000 bbls per day, or 20%-25% of total production, by year-end 2012 and to more than 250,000 bbls per day, or 25%-30% of total production, through organic growth by year-end 2015.
Company Provides Update on Recently Completed and Pending Asset Sales
At the end of the 2010 third quarter, Chesapeake sold certain of its producing assets in the Barnett Shale in its eighth volumetric production payment (VPP) transaction for proceeds of $1.15 billion. The transaction included approximately 390 bcf of proved reserves and approximately 280 mmcf per day of average net production in 2011. Since December 2007, in a program designed to advance the present value of some of its producing natural gas and oil assets on a tax-advantaged basis, Chesapeake has completed eight VPP transactions and sold approximately 1.0 tcfe of proved reserves for combined proceeds of approximately $4.7 billion, or approximately $4.70 per mcfe.
In October, Chesapeake entered into an industry cooperation agreement whereby CNOOC International Limited, a wholly owned subsidiary of CNOOC Limited (CNOOC), agreed to purchase a 33.3% undivided interest in Chesapeake's 600,000 net natural gas and oil leasehold acres in the Eagle Ford Shale project in South Texas. The consideration for the sale will be approximately $1.08 billion in cash at closing. In addition, CNOOC has agreed to fund 75% of Chesapeake's share of drilling and completion costs until an additional $1.08 billion has been paid, which Chesapeake expects to occur by year-end 2012. Closing of the transaction is anticipated later this month.
Chesapeake has commenced an initiative to create its sixth industry cooperation agreement to develop its liquids-rich plays in the Powder River and DJ Basins, where the company owns a combined approximate 800,000 net acres of leasehold. The company anticipates completing a transaction in the 2011 first quarter.
Additionally, Chesapeake continues to build its industry-leading unconventional liquids portfolio through its new play identification systems and subsequent leasing programs. Recently, the company had the opportunity to acquire a significant additional position in the Appalachian Basin from privately-held Anschutz Corporation. In this transaction, which is scheduled to close later this month, the company has agreed to acquire approximately 500,000 net acres of Appalachian Basin leasehold and option rights for approximately $850 million. Approximately 25% of these assets will be immediately marketed for resale after closing while the remainder of the assets will be combined with Chesapeake leasehold in a play in which the company expects to execute a new industry joint venture in the first half of 2011. As with all of Chesapeake's leasehold acquisitions in new plays, the company's goal remains the same: acquire an industry-leading leasehold position in a new play and then bring in a minority industry partner to help de-risk the play and to provide reimbursement of all or most of Chesapeake's leasehold costs in the new play.
Company Syndicating New Senior Secured Revolving Bank Credit Facility
In anticipation of the maturity of its existing credit facility in November 2012, Chesapeake is in the process of syndicating a new $4.0 billion senior secured revolving bank credit facility. The new facility will replace the company's existing $3.5 billion facility in its entirety and have a term of five years. The syndication of the new facility is anticipated to be completed later this month.
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