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, April 12 /PRNewswire-FirstCall/ -- Chesapeake Energy
Corporation (NYSE: CHK) 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 http://www.chkenergy.com .
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 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 Dec. 31, 2005 Dec. 31, 2006
Estimated Production:
Oil - Mbo 1,770 7,000 7,300
Gas - Bcf 98-100 403 - 411 457 - 467
Gas Equivalent - Bcfe 108.5 - 110.5 445 - 453 501 - 511
Daily gas equivalent
midpoint -in Mmcfe 1,203 1,230 1,386
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 (approx.
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- $1,600- $1,800-
$450mm $1,800mm $2,000mm
(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).
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.
The company currently has in place the following natural gas swaps:
% Hedged
Avg. NYMEX Open Swap
Avg. NYMEX Gain Price Assuming Positions
Strike (Loss) Including Gas as a % of
Open Price from Open Production Estimated
Swaps Of Open Locked & Locked in Total Gas
in Bcf's Swaps Swaps Positions 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 $6.22 105.5 54%
4th Qtr 38.1 $6.64 -$0.28 $6.36 111.0 34%
Total 2005 (A) 220.4 $6.58 -$0.19 $6.39 407.0 54%
Total 2006 (A) 79.4 $7.10 -$0.31 $6.79 462.0 17%
TOTALS
2005-2006 299.8 $6.72 -$0.22 $6.50 869.0 34%
(A) 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 NYMEX Production in
in Bcf's less:* Bcf's of: % Hedged
2005 188.6 $0.26 407.0 46%
2006 130.1 0.32 462.0 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 2,414.0 27%
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
Open
Swap Positions
as %
Assuming Oil of Total
Open Swaps Avg. NYMEX Production Estimated
in mbo's Strike Price in mbo's of: 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 (A) 2,929.0 $44.40 7,000 42%
Total 2006 (A) 835.0 $55.68 7,300 11%
(A) 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.
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 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 Dec. 31, 2005 Dec. 31, 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- $1,400- $1,500-
$375 mm $1,500 mm $1,600mm
(A) Does not include gains or losses on interest rate derivatives (SFAS
133).
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.
The company currently has in place the following natural gas swaps:
% Hedged
Avg. NYMEX Open Swap
Avg. NYMEX Gain Price Assuming Positions
Strike (Loss) Including Gas as a % of
Open Price from Open Production Estimated
Swaps Of Open Locked & Locked in Total Gas
in Bcf's Swaps Swaps Positions 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 (A) 188.3 $6.46 -$0.22 $6.24 395.0 48%
Total 2006 (A) 39.3 $6.77 -$0.62 $6.15 443.0 9%
Total 2007 (B) --- --- --- --- 470.0 ---
TOTALS
2005-2007 227.6 $6.51 -$0.29 $6.22 1,308.0 17%
(A) 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.
(B) 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 NYMEX Production in
in Bcf's less:* Bcf's of: % 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
The company has entered into the following crude oil hedging arrangements:
% Hedged
Open
Swap Positions
as %
Assuming Oil of Total
Open Swaps Avg. NYMEX Production Estimated
in mbo's Strike Price in mbo's of: 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 (A) 2,271.0 $41.02 6,600 34%
(A) Certain hedging arrangements include swaps with knockout prices
ranging from $26.00 to $34.00 covering 1,996 mbo in 2005.
SOURCE Chesapeake Energy Corporation
 back to top
Related links:
http://www.chkenergy.com
CONTACT:
Marc Rowland, Executive Vice President and
Chief Financial Officer, +1-405-879-9232, or Tom Price, Jr.,
Senior Vice President-Investor Relations, +1-405-879-9257, both
of Chesapeake Energy Corporation
|
