Chesapeake Underscores 2008 Financial, Operating Results

Chesapeake has released its financial and operating results for the 2008 full year and fourth quarter. For the 2008 full year, Chesapeake reported net income to common shareholders of $623 million ($1.14 per fully diluted common share), operating cash flow of $5.178 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $3.647 billion (defined as net income (loss) before income taxes, interest expense, and depreciation, depletion and amortization expense) on revenue of $11.629 billion and production of 843 billion cubic feet of natural gas equivalent (bcfe). For the 2008 fourth quarter, Chesapeake reported a net loss to common shareholders of $866 million (a loss of $1.51 per fully diluted common share), operating cash flow of $1.015 billion and ebitda of negative $783 million on revenue of $2.981 billion and production of 213 bcfe.

The company's 2008 full year and fourth quarter results above 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, Chesapeake generated adjusted net income to common shareholders for the 2008 full year of $1.954 billion ($3.55 per fully diluted common share) and adjusted ebitda of $5.633 billion, increases of 25% and 12%, respectively, over the 2007 full year.

For the 2008 fourth quarter Chesapeake generated adjusted net income to common shareholders of $427 million ($0.73 per fully diluted common share) and adjusted ebitda of $1.242 billion. The excluded items and their effects on 2008 full year and fourth quarter reported results are detailed as follows:

  • an unrealized noncash after-tax mark-to-market gain of $434 million for the 2008 full year and $380 million for the 2008 fourth quarter resulting from the company's natural gas, oil and interest rate hedging programs;
  • a noncash after-tax impairment charge of $1.73 billion for the 2008 full year and for the 2008 fourth quarter related to the carrying value of natural gas and oil properties and certain midstream assets;
  • a noncash after-tax impairment charge of $110 million for the 2008 full year and for the 2008 fourth quarter related to certain investments;
  • an after-tax net gain of $144 million for the 2008 full year on exchanges of certain of the company's contingent convertible senior notes for shares of common stock and the early redemption of the company's $300 million 7.75% Senior Notes due 2015 and an after-tax gain of $163 million in the 2008 fourth quarter on exchanges of contingent convertible senior notes;
  • an after-tax consent fee of $6 million for the 2008 full year paid to amend certain debt covenants contained in five of the company's senior note indentures; and
  • a reduction of net income available to common shareholders of $67 million for the full year 2008 resulting from exchanges of the company's preferred stock for common stock that reduced future preferred stock dividend payment requirements.

2008 Fourth Quarter Average Daily Production Increases 4% over 2007 Fourth Quarter Production; 2008 Full Year Production Increases 18% over 2007 Full Year Production, Setting Record for 19th Consecutive Year

Daily production for the 2008 fourth quarter averaged 2.32 bcfe, flat compared to the 2.32 bcfe produced per day in the 2008 third quarter and an increase of 97 million cubic feet of natural gas equivalent (mmcfe), or 4%, over the 2.22 bcfe produced per day in the 2007 fourth quarter. Adjusted for the company's year-end 2007, 2008 second quarter and 2008 third quarter volumetric production payment sales of 55, 47 and 47 mmcfe per day, respectively, as well as the company's sale of Woodford Shale and Fayetteville Shale properties producing 47 and 45 mmcfe per day, respectively, Chesapeake's sequential and year-over-year production growth rates were 2% and 14%, respectively. In addition, voluntary production curtailments due to low wellhead natural gas prices totaled approximately 65 mmcfe per day during the 2008 fourth quarter.

Chesapeake's average daily production for the 2008 fourth quarter consisted of 2.13 billion cubic feet of natural gas (bcf) and 30,956 barrels of oil and natural gas liquids (bbls). The company's 2008 fourth quarter production of 213 bcfe was comprised of 196 bcf (92% on a natural gas equivalent basis) and 2.8 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis).

Chesapeake's 2008 full year production of 843 bcfe was comprised of 775 bcf (92% on a natural gas equivalent basis) and 11.2 mmbbls (8% on a natural gas equivalent basis). Chesapeake's average daily production for the full year 2008 of 2.30 bcfe consisted of 2.12 bcf and 30,656 bbls. The company's growth rate for its full year 2008 natural gas production was 18% and its growth rate for full year 2008 oil production was 14%. The 2008 full year was Chesapeake's 19th consecutive year of sequential production growth.

Average Realized Prices, Hedging Results and Hedging Positions Detailed

Average prices realized during the 2008 fourth quarter (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $7.13 per thousand cubic feet (mcf) and $54.80 per bbl, for a realized natural gas equivalent price of $7.29 per thousand cubic feet of natural gas equivalent (mcfe). Realized gains from natural gas and oil hedging activities during the 2008 fourth quarter generated a $2.25 gain per mcf and a $1.61 gain per bbl for a 2008 fourth quarter realized hedging gain of $445 million, or $2.09 per mcfe. Excluding hedging activity, Chesapeake's average realized pricing basis differentials to NYMEX during the 2008 fourth quarter were a negative $2.07 per mcf and a negative $5.55 per bbl.

By comparison, average prices realized during the 2007 fourth quarter (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $8.11 per mcf and $72.58 per bbl, for a realized natural gas equivalent price of $8.43 per mcfe. Realized gains from natural gas and oil hedging activities during the 2007 fourth quarter generated a $1.73 gain per mcf and a $13.66 loss per bbl for a 2007 fourth quarter realized hedging gain of $287 million, or $1.40 per mcfe. Excluding hedging activity, Chesapeake's average realized pricing basis differentials to NYMEX during the 2007 fourth quarter were a negative $0.59 per mcf and a negative $4.44 per bbl.

For the 2008 full year, average prices realized (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $8.09 per mcf and $70.48 per bbl, for a realized natural gas equivalent price of $8.38 per mcfe. Realized gains and losses from natural gas and oil hedging activities during the 2008 full year generated a $0.34 gain per mcf and a $24.56 loss per bbl for a 2008 full year realized hedging loss of $9 million, or $.01 per mcfe. Excluding hedging activity, Chesapeake's average realized pricing basis differentials to NYMEX during the 2008 full year were a negative $1.30 per mcf and a negative $4.61 per bbl.

By comparison, average prices realized during the 2007 full year (including realized gains or losses from natural gas and oil derivatives, but excluding unrealized gains or losses on such derivatives) were $8.14 per mcf and $67.50 per bbl, for a realized natural gas equivalent price of $8.40 per mcfe. Realized gains from natural gas and oil hedging activities during the 2007 full year generated a $1.85 gain per mcf and a $1.14 loss per bbl for a 2007 full year realized hedging gain of $1.2 billion, or $1.68 per mcfe. Excluding hedging activity, Chesapeake's average realized pricing basis differentials to NYMEX during the 2007 full year were a negative $0.57 per mcf and a negative $3.67 per bbl. During 2006, 2007 and 2008, Chesapeake’s natural gas and oil hedging activities generated a total realized gain of $2.4 billion, or $1.15 per mcfe.

Natural Gas and Oil Proved Reserves Reach 12.1 Tcfe on 1.2 Tcfe of Net Additions; Company Delivers 2008 Full Year Reserve Replacement Rate of 239% and a Drilling and Net Acquisition Cost of $1.61 per Mcfe

Chesapeake began 2008 with estimated proved reserves of 10.879 trillion cubic feet of natural gas equivalent (tcfe) and ended the year with 12.051 tcfe, an increase of 1.172 tcfe, or 11%. During 2008, Chesapeake replaced 843 bcfe of production with an estimated 2.015 tcfe of new proved reserves for a reserve replacement rate of 239%. Reserve replacement through the drillbit was 2.545 tcfe, or 302% of production. This includes 1.248 tcfe of positive performance revisions and 298 bcfe of negative revisions resulting from natural gas and oil price decreases between December 31, 2007 and December 31, 2008. Acquisitions of proved reserves completed during 2008 were 172 bcfe at a cost of $355 million, or $2.06 per mcfe, while sales of proved reserves during 2008 totaled 702 bcfe for proceeds of $2.433 billion, or $3.47 per mcfe. Sales of undeveloped leasehold during 2008 generated cash proceeds of $5.3 billion versus a cost basis of the leasehold sold of approximately $1.1 billion. Under full cost accounting rules, the difference of $4.2 billion was not reported as income but rather was credited to the full cost pool and will consequently lower the company’s future DD&A rate.

Chesapeake's total drilling and net acquisition costs for 2008 were $1.61 per mcfe. This calculation excludes costs of $2.387 billion for the acquisition of unproved properties and leasehold (net of sales), $440 million for capitalized interest on unproved properties, $314 million for seismic, and $23 million relating to tax basis step-up and asset retirement obligations, and also excludes negative revisions of proved reserves from lower natural gas and oil prices. Excluding these items and acquisition and divestiture activity, Chesapeake's exploration and development costs through the drillbit during 2008 were $2.04 per mcfe (net of $271 million in drilling carries associated with the Haynesville and Fayetteville joint ventures). A complete reconciliation of proved reserves and finding and acquisition costs is presented on page 15 of this release.

During 2008, Chesapeake continued the industry's most active drilling program and drilled 1,819 gross operated wells (1,491 net wells with an average working interest of 82%) and participated in another 1,857 gross wells operated by other companies (242 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. Also during 2008, Chesapeake invested $5.043 billion in operated wells (using an average of 145 operated rigs) and $754 million in non-operated wells (using an average of 110 non-operated rigs) for total drilling, completing and equipping costs of $5.797 billion.

As of December 31, 2008, Chesapeake's estimated future net cash flows from proved reserves, discounted at an annual rate of 10% before income taxes (PV-10) and after income taxes (standardized measure) were $15.601 billion and $11.833 billion, respectively, using field differential adjusted prices based on NYMEX year-end prices of $5.71 per mcf and $44.61 per bbl. Chesapeake's PV-10 changes by approximately $400 million for every $0.10 per mcf change in natural gas prices and approximately $55 million for every $1.00 per bbl change in oil prices.

By comparison, the December 31, 2007 PV-10 and standardized measure of the company's proved reserves were $20.573 billion and $14.962 billion, respectively, using field differential adjusted prices based on NYMEX year-end prices of $6.80 per mcf and $96.00 per bbl.

In addition to the PV-10 value of its proved reserves and the very significant value of its undeveloped leasehold, particularly in the Haynesville, Marcellus, Barnett and Fayetteville Shale plays, the net book value of the company's other assets (including gathering systems, compressors, land and buildings, investments and other non-current assets) was $5.836 billion as of December 31, 2008 and $3.153 billion as of December 31, 2007.

Chesapeake’s Leasehold and 3-D Seismic Inventories Increase to 15 Million Net Acres and 22 Million Acres; Risked Unproved Reserves in the Company’s Inventory Reach 57 Tcfe While Unrisked Unproved Reserves Reach 165 Tcfe

Since 2000, Chesapeake has invested $12.6 billion in new leasehold and 3-D seismic acquisitions and owns the largest combined inventories of onshore leasehold (15.2 million net acres) and 3-D seismic (21.6 million acres) in the U.S. On this leasehold, Chesapeake has an estimated 4.0 tcfe of proved undeveloped reserves and approximately 57 tcfe of risked unproved reserves (165 tcfe of unrisked unproved reserves). The company is currently using 112 operated drilling rigs to further develop its inventory of approximately 36,000 net drillsites, which represents more than a 10-year inventory of drilling projects.

Company Maintains Balance Sheet Flexibility and Increases Liquidity; Seeks Investment Grade Credit Metrics by Year-End 2010

During 2008, Chesapeake strengthened its balance sheet though the issuance of common stock for $2.6 billion of cash, the exchange of $455 million of preferred stock for common stock, the exchange of $765 million of contingent convertible senior notes for common stock, the sale of proved and unproved properties in multiple innovative transactions and the addition of $623 million of net income to common for the 2008 full year. As a result, the company's net debt to book capitalization ratio decreased from 47% at December 31, 2007 to 43% at December 31, 2008.

Chesapeake ended 2008 with cash and cash equivalents on hand of approximately $1.75 billion. In the past month, Chesapeake has issued $1.425 billion in new senior notes and used the proceeds from the note offerings and cash on hand to reduce borrowings under its $3.5 billion revolving credit facility. Additionally, the company is working to generate at least $1.0 billion of excess cash in each of 2009 and 2010 through various asset monetization initiatives.

Over the next two years, Chesapeake plans to reduce its financial leverage through asset monetizations and through the growth of its proved reserve base. As a result of absolute and relative deleveraging, the company anticipates it will have investment grade credit metrics by at least year end 2010, including a key rating agency metric of long-term debt to proved reserves of less than $0.75 per mcfe.

Management Comments

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented, "We are pleased to report our financial and operational results for the 2008 full year and fourth quarter. Although we were required to record a non-cash after-tax impairment of our asset values of approximately $1.8 billion during the 2008 fourth quarter, we still were able to report net income available to common shareholders for the year of more than $600 million. Excluding that impairment and other non-cash items detailed in the accompanying tables, our adjusted net income for 2008 reached almost $2 billion, a record for our company.

"Looking ahead, we believe that investors will increasingly recognize Chesapeake's competitive advantages, including our industry-leading asset position in the Big 4 shale plays, our strong hedge position and our $4 billion in drilling carries, which will enable Chesapeake to deliver operational and financial results that we believe will be among the best in the industry for years to come."

 

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