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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20192020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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| | | | |
Oklahoma | 73-1395733 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
6100 North Western Avenue, | Oklahoma City, | Oklahoma | 73118 |
(Address of principal executive offices) | (Zip Code) |
| | (405) | 848-8000 | |
(Registrant’s telephone number, including area code) |
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| | | | |
Securities Registered Pursuant to Section 12(b) of the Act: |
Title of Each Class | | Trading Symbol(s)Symbol(1) | | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 | | CHKCHKAQ | | New York Stock ExchangeN/A |
6.625% Senior Notes due 2020 | | CHK20A* | | New York Stock ExchangeN/A |
6.875% Senior Notes due 2020 | | CHK20* | | New York Stock ExchangeN/A |
6.125% Senior Notes due 2021 | | CHK21* | | New York Stock ExchangeN/A |
5.375% Senior Notes due 2021 | | CHK21A* | | New York Stock ExchangeN/A |
4.875% Senior Notes due 2022 | | CHK22* | | New York Stock ExchangeN/A |
5.75% Senior Notes due 2023 | | CHK23* | | New York Stock ExchangeN/A |
4.5% Cumulative Convertible Preferred Stock | | CHK Pr D* | | New York Stock ExchangeN/A |
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(1) On June 29, 2020, our common stock was suspended from trading on the New York Stock Exchange (the “NYSE”). On June 30, 2020, our common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “CHKAQ.” On July 20, 2020, the NYSE filed a Form 25 delisting our common stock, senior notes and cumulative convertible preferred stock from trading on the NYSE, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the de-registration of our common stock, senior notes and cumulative convertible preferred stock under Section 12(b) of the Exchange Act became effective on October 18, 2020.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated Filer ☐
Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2019,November 5, 2020, there were 1,954,162,6679,780,371 shares of our $0.01 par value common stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 20192020
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| PART I. FINANCIAL INFORMATION | Page |
Item 1. | | |
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| for the Three and Nine Months Ended September 30, 20192020 and 20182019 | |
| for the Three and Nine Months Ended September 30, 20192020 and 20182019 | |
| for the Nine Months Ended September 30, 20192020 and 20182019 | |
| for the Three and Nine Months Ended September 30, 20192020 and 20182019 | |
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Item 2. | | |
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Item 3. | | |
Item 4. | | |
| PART II. OTHER INFORMATION | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
| |
ITEM 1. | Condensed Consolidated Financial Statements |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
ASSETS | | ($ in millions) |
CURRENT ASSETS: | | | | |
Cash and cash equivalents ($2 and $2 attributable to our VIE) | | $ | 306 |
| | $ | 6 |
|
Accounts receivable, net | | 676 |
| | 990 |
|
Short-term derivative assets | | 0 |
| | 134 |
|
Other current assets | | 90 |
| | 121 |
|
Total Current Assets | | 1,072 |
| | 1,251 |
|
PROPERTY AND EQUIPMENT: | | | | |
Oil and natural gas properties, at cost based on successful efforts accounting: | | | | |
Proved oil and natural gas properties ($755 and $755 attributable to our VIE) | | 31,511 |
| | 30,765 |
|
Unproved properties | | 1,738 |
| | 2,173 |
|
Other property and equipment | | 1,786 |
| | 1,810 |
|
Total Property and Equipment, at Cost | | 35,035 |
| | 34,748 |
|
Less: accumulated depreciation, depletion and amortization (($748) and ($713) attributable to our VIE) | | (29,399 | ) | | (20,002 | ) |
Property and equipment held for sale, net | | 10 |
| | 10 |
|
Total Property and Equipment, Net | | 5,646 |
| | 14,756 |
|
Other long-term assets | | 185 |
| | 186 |
|
TOTAL ASSETS | | $ | 6,903 |
| | $ | 16,193 |
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| | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | ($ in millions) |
CURRENT ASSETS: | | | | |
Cash and cash equivalents ($2 and $1 attributable to our VIE) | | $ | 14 |
| | $ | 4 |
|
Accounts receivable, net | | 977 |
| | 1,247 |
|
Short-term derivative assets | | 272 |
| | 209 |
|
Other current assets | | 140 |
| | 138 |
|
Total Current Assets | | 1,403 |
| | 1,598 |
|
PROPERTY AND EQUIPMENT: | | | | |
Oil and natural gas properties, at cost based on successful efforts accounting: | | | | |
Proved oil and natural gas properties ($755 and $755 attributable to our VIE) | | 30,288 |
| | 25,407 |
|
Unproved properties | | 2,200 |
| | 1,561 |
|
Other property and equipment | | 1,810 |
| | 1,721 |
|
Total Property and Equipment, at Cost | | 34,298 |
| | 28,689 |
|
Less: accumulated depreciation, depletion and amortization (($711) and ($707) attributable to our VIE) | | (19,432 | ) | | (17,886 | ) |
Property and equipment held for sale, net | | 10 |
| | 15 |
|
Total Property and Equipment, Net | | 14,876 |
| | 10,818 |
|
LONG-TERM ASSETS: | | | | |
Long-term derivative assets | | 51 |
| | 76 |
|
Other long-term assets | | 249 |
| | 243 |
|
TOTAL ASSETS | | $ | 16,579 |
| | $ | 12,735 |
|
| | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)
|
| | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
LIABILITIES AND EQUITY (DEFICIT) | | ($ in millions) |
CURRENT LIABILITIES: | | | | |
Accounts payable | | $ | 316 |
| | $ | 498 |
|
Current maturities of long-term debt, net | | 1,929 |
| | 385 |
|
Accrued interest | | 2 |
| | 75 |
|
Short-term derivative liabilities | | 105 |
| | 2 |
|
Other current liabilities (nominal and $1 attributable to our VIE) | | 753 |
| | 1,432 |
|
Total Current Liabilities | | 3,105 |
| | 2,392 |
|
Long-term debt, net | | 0 |
| | 9,073 |
|
Long-term derivative liabilities | | 61 |
| | 2 |
|
Asset retirement obligations, net of current portion | | 212 |
| | 200 |
|
Other long-term liabilities | | 16 |
| | 125 |
|
Liabilities subject to compromise | | 8,428 |
| | 0 |
|
Total Liabilities | | 11,822 |
| | 11,792 |
|
CONTINGENCIES AND COMMITMENTS (Note 5) | |
| |
|
EQUITY (DEFICIT): | | | | |
Chesapeake Stockholders’ Equity (Deficit): | | | | |
Preferred stock, $0.01 par value, 20,000,000 shares authorized: 5,563,458 shares outstanding | | 1,631 |
| | 1,631 |
|
Common stock, $0.01 par value, 22,500,000 and 15,000,000 shares authorized: 9,780,371 and 9,772,793 shares issued(a) | | 0 |
| | 0 |
|
Additional paid-in capital(a) | | 16,931 |
| | 16,973 |
|
Accumulated deficit | | (23,538 | ) | | (14,220 | ) |
Accumulated other comprehensive income | | 36 |
| | 12 |
|
Less: treasury stock, at cost; 0 and 26,224 common shares(a) | | 0 |
| | (32 | ) |
Total Chesapeake Stockholders’ Equity (Deficit) | | (4,940 | ) | | 4,364 |
|
Noncontrolling interests | | 21 |
| | 37 |
|
Total Equity (Deficit) | | (4,919 | ) | | 4,401 |
|
TOTAL LIABILITIES AND EQUITY (DEFICIT) | | $ | 6,903 |
| | $ | 16,193 |
|
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | ($ in millions) |
CURRENT LIABILITIES: | | | | |
Accounts payable | | $ | 526 |
| | $ | 763 |
|
Current maturities of long-term debt, net | | 208 |
| | 381 |
|
Accrued interest | | 124 |
| | 141 |
|
Short-term derivative liabilities | | — |
| | 3 |
|
Other current liabilities ($1 and $2 attributable to our VIE) | | 1,490 |
| | 1,599 |
|
Total Current Liabilities | | 2,348 |
| | 2,887 |
|
LONG-TERM LIABILITIES: | | | | |
Long-term debt, net | | 9,133 |
| | 7,341 |
|
Asset retirement obligations, net of current portion | | 177 |
| | 155 |
|
Other long-term liabilities | | 186 |
| | 219 |
|
Total Long-Term Liabilities | | 9,496 |
| | 7,715 |
|
CONTINGENCIES AND COMMITMENTS (Note 7) | |
| |
|
EQUITY: | | | | |
Chesapeake Stockholders’ Equity: | | | | |
Preferred stock, $0.01 par value, 20,000,000 shares authorized: 5,563,458 and 5,603,458 shares outstanding | | 1,631 |
| | 1,671 |
|
Common stock, $0.01 par value, 3,000,000,000 and 2,000,000,000 shares authorized: 1,954,150,951 and 913,715,512 shares issued | | 19 |
| | 9 |
|
Additional paid-in capital | | 16,975 |
| | 14,378 |
|
Accumulated deficit | | (13,896 | ) | | (13,912 | ) |
Accumulated other comprehensive income (loss) | | 3 |
| | (23 | ) |
Less: treasury stock, at cost; 5,623,592 and 3,246,553 common shares | | (36 | ) | | (31 | ) |
Total Chesapeake Stockholders’ Equity | | 4,696 |
| | 2,092 |
|
Noncontrolling interests | | 39 |
| | 41 |
|
Total Equity | | 4,735 |
| | 2,133 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 16,579 |
| | $ | 12,735 |
|
| |
(a) | Amounts and shares have been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | | |
Oil, natural gas and NGL | $ | 511 |
| | $ | 1,170 |
| | $ | 2,579 |
| | $ | 3,553 |
|
Marketing | 448 |
| | 889 |
| | 1,412 |
| | 3,038 |
|
Total Revenues | 959 |
| | 2,059 |
| | 3,991 |
| | 6,591 |
|
Other | 15 |
| | 15 |
| | 45 |
| | 45 |
|
Gains on sales of assets | 1 |
| | 13 |
| | 1 |
| | 33 |
|
Total Revenues and Other | 975 |
| | 2,087 |
| | 4,037 |
| | 6,669 |
|
OPERATING EXPENSES: | | | | | | | |
Oil, natural gas and NGL production | 82 |
| | 135 |
| | 295 |
| | 394 |
|
Oil, natural gas and NGL gathering, processing and transportation | 258 |
| | 270 |
| | 813 |
| | 815 |
|
Severance and ad valorem taxes | 37 |
| | 55 |
| | 116 |
| | 168 |
|
Exploration | 5 |
| | 17 |
| | 417 |
| | 56 |
|
Marketing | 450 |
| | 901 |
| | 1,438 |
| | 3,071 |
|
General and administrative | 52 |
| | 66 |
| | 229 |
| | 258 |
|
Separation and other termination costs | 16 |
| | 0 |
| | 43 |
| | 0 |
|
Provision for legal contingencies, net | 12 |
| | 0 |
| | 20 |
| | 3 |
|
Depreciation, depletion and amortization | 170 |
| | 573 |
| | 931 |
| | 1,672 |
|
Impairments | 0 |
| | 9 |
| | 8,522 |
| | 11 |
|
Other operating expense | 4 |
| | 15 |
| | 92 |
| | 79 |
|
Total Operating Expenses | 1,086 |
| | 2,041 |
| | 12,916 |
| | 6,527 |
|
INCOME (LOSS) FROM OPERATIONS | (111 | ) | | 46 |
| | (8,879 | ) | | 142 |
|
OTHER INCOME (EXPENSE): |
| | | |
| | |
Interest expense | (25 | ) | | (177 | ) | | (307 | ) | | (513 | ) |
Losses on investments | 0 |
| | (4 | ) | | (23 | ) | | (28 | ) |
Gains on purchases or exchanges of debt | 0 |
| | 70 |
| | 65 |
| | 70 |
|
Other income | 2 |
| | 3 |
| | 14 |
| | 30 |
|
Reorganization items, net | (611 | ) | | 0 |
| | (217 | ) | | 0 |
|
Total Other Expense | (634 | ) | | (108 | ) | | (468 | ) | | (441 | ) |
LOSS BEFORE INCOME TAXES | (745 | ) | | (62 | ) | | (9,347 | ) | | (299 | ) |
Income tax benefit | 0 |
| | (1 | ) | | (13 | ) | | (315 | ) |
NET INCOME (LOSS) | (745 | ) | | (61 | ) | | (9,334 | ) | | 16 |
|
Net loss attributable to noncontrolling interests | 0 |
| | 0 |
| | 16 |
| | 0 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | (745 | ) | | (61 | ) | | (9,318 | ) | | 16 |
|
Preferred stock dividends | 0 |
| | (23 | ) | | (22 | ) | | (69 | ) |
Loss on exchange of preferred stock | 0 |
| | (17 | ) | | 0 |
| | (17 | ) |
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (745 | ) | | $ | (101 | ) | | $ | (9,340 | ) | | $ | (70 | ) |
LOSS PER COMMON SHARE:(a) | | | | | | | |
Basic | $ | (76.18 | ) | | $ | (11.89 | ) | | $ | (955.99 | ) | | $ | (8.92 | ) |
Diluted | $ | (76.18 | ) | | $ | (11.89 | ) | | $ | (955.99 | ) | | $ | (8.92 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in thousands):(a) |
Basic | 9,780 |
| | 8,492 |
| | 9,770 |
| | 7,848 |
|
Diluted | 9,780 |
| | 8,492 |
| | 9,770 |
| | 7,848 |
|
| |
(a) | All share and per share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018* | | 2019 | | 2018* |
| | ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | | | |
Oil, natural gas and NGL | | $ | 1,170 |
| | $ | 1,199 |
| | $ | 3,553 |
| | $ | 3,424 |
|
Marketing | | 889 |
| | 1,219 |
| | 3,038 |
| | 3,738 |
|
Total Revenues | | 2,059 |
| | 2,418 |
| | 6,591 |
| | 7,162 |
|
Other | | 15 |
| | 16 |
| | 45 |
| | 48 |
|
Gains (losses) on sales of assets | | 13 |
| | (10 | ) | | 33 |
| | 27 |
|
Total Revenues and Other | | 2,087 |
| | 2,424 |
| | 6,669 |
| | 7,237 |
|
OPERATING EXPENSES: | | | | | | | | |
Oil, natural gas and NGL production | | 155 |
| | 132 |
| | 453 |
| | 417 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 270 |
| | 364 |
| | 815 |
| | 1,060 |
|
Production taxes | | 35 |
| | 34 |
| | 109 |
| | 91 |
|
Exploration | | 17 |
| | 22 |
| | 56 |
| | 123 |
|
Marketing | | 901 |
| | 1,238 |
| | 3,071 |
| | 3,798 |
|
General and administrative | | 66 |
| | 81 |
| | 258 |
| | 273 |
|
Restructuring and other termination costs | | — |
| | — |
| | — |
| | 38 |
|
Provision for legal contingencies, net | | — |
| | 8 |
| | 3 |
| | 17 |
|
Depreciation, depletion and amortization | | 573 |
| | 405 |
| | 1,672 |
| | 1,335 |
|
Impairments | | 9 |
| | 58 |
| | 11 |
| | 122 |
|
Other operating (income) expense | | 15 |
| | — |
| | 79 |
| | (1 | ) |
Total Operating Expenses | | 2,041 |
| | 2,342 |
| | 6,527 |
| | 7,273 |
|
INCOME (LOSS) FROM OPERATIONS | | 46 |
| | 82 |
| | 142 |
| | (36 | ) |
OTHER INCOME (EXPENSE): | |
| | | |
| | |
Interest expense | | (177 | ) | | (165 | ) | | (513 | ) | | (482 | ) |
Gains (losses) on investments | | (4 | ) | | — |
| | (28 | ) | | 139 |
|
Gains (losses) on purchases or exchanges of debt | | 70 |
| | (68 | ) | | 70 |
| | (68 | ) |
Other income | | 3 |
| | 6 |
| | 30 |
| | 62 |
|
Total Other Expense | | (108 | ) | | (227 | ) | | (441 | ) | | (349 | ) |
LOSS BEFORE INCOME TAXES | | (62 | ) | | (145 | ) | | (299 | ) | | (385 | ) |
Income tax expense (benefit) | | (1 | ) | | 1 |
| | (315 | ) | | (8 | ) |
NET INCOME (LOSS) | | (61 | ) | | (146 | ) | | 16 |
| | (377 | ) |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (1 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | (61 | ) | | (146 | ) | | 16 |
| | (378 | ) |
Preferred stock dividends | | (23 | ) | | (23 | ) | | (69 | ) | | (69 | ) |
Loss on exchange of preferred stock | | (17 | ) | | — |
| | (17 | ) | | — |
|
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | | $ | (101 | ) | | $ | (169 | ) | | $ | (70 | ) | | $ | (447 | ) |
LOSS PER COMMON SHARE: | | | | | | | | |
Basic | | $ | (0.06 | ) | | $ | (0.19 | ) | | $ | (0.04 | ) | | $ | (0.49 | ) |
Diluted | | $ | (0.06 | ) | | $ | (0.19 | ) | | $ | (0.04 | ) | | $ | (0.49 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): | | | | | | | | |
Basic | | 1,698 |
| | 910 |
| | 1,570 |
| | 909 |
|
Diluted | | 1,698 |
| | 910 |
| | 1,570 |
| | 909 |
|
* Financial information for 2018 has been recast to reflect the retrospective application of the successful efforts method of accounting. See Note 1.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
NET INCOME (LOSS) | | $ | (745 | ) | | $ | (61 | ) | | $ | (9,334 | ) | | $ | 16 |
|
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | | | |
Reclassification of losses on settled derivative instruments(a) | | 7 |
| | 8 |
| | 24 |
| | 26 |
|
Other Comprehensive Income | | 7 |
| | 8 |
| | 24 |
| | 26 |
|
COMPREHENSIVE INCOME (LOSS) | | (738 | ) | | (53 | ) | | (9,310 | ) | | 42 |
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | 0 |
| | 0 |
| | 16 |
| | 0 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (738 | ) | | $ | (53 | ) | | $ | (9,294 | ) | | $ | 42 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018* | | 2019 | | 2018* |
| | ($ in millions) |
NET INCOME (LOSS) | | $ | (61 | ) | | $ | (146 | ) | | $ | 16 |
| | $ | (377 | ) |
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | | | |
Unrealized gains on derivative instruments(a) | | — |
| | — |
| | — |
| | — |
|
Reclassification of losses on settled derivative instruments(a) | | 8 |
| | 8 |
| | 26 |
| | 25 |
|
Other Comprehensive Income | | 8 |
| | 8 |
| | 26 |
| | 25 |
|
COMPREHENSIVE INCOME (LOSS) | | (53 | ) | | (138 | ) | | 42 |
| | (352 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | — |
| | — |
| | — |
| | (1 | ) |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (53 | ) | | $ | (138 | ) | | $ | 42 |
| | $ | (353 | ) |
* Financial information for 2018 has been recast to reflect the retrospective application of the successful efforts method of accounting. See Note 1. | |
(a) | Deferred tax activity incurred in other comprehensive income was offset by a valuation allowance. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | ($ in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
NET INCOME (LOSS) | | $ | (9,334 | ) | | $ | 16 |
|
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES: | | | | |
Depreciation, depletion and amortization | | 931 |
| | 1,672 |
|
Deferred income tax benefit | | (10 | ) | | (314 | ) |
Derivative gains, net | | (573 | ) | | (137 | ) |
Cash receipts on derivative settlements, net | | 890 |
| | 129 |
|
Stock-based compensation | | 16 |
| | 24 |
|
Gains on sales of assets | | (1 | ) | | (33 | ) |
Impairments | | 8,522 |
| | 11 |
|
Non-cash reorganization items, net | | (300 | ) | | 0 |
|
Exploration | | 409 |
| | 35 |
|
Losses on investments | | 23 |
| | 21 |
|
Gains on purchases or exchanges of debt | | (65 | ) | | (70 | ) |
Other | | (46 | ) | | 42 |
|
Changes in assets and liabilities | | 693 |
| | (214 | ) |
Net Cash Provided By Operating Activities | | 1,155 |
| | 1,182 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Drilling and completion costs | | (946 | ) | | (1,640 | ) |
Business combination, net | | 0 |
| | (353 | ) |
Acquisitions of proved and unproved properties | | (9 | ) | | (31 | ) |
Proceeds from divestitures of proved and unproved properties | | 10 |
| | 110 |
|
Additions to other property and equipment | | (18 | ) | | (27 | ) |
Proceeds from sales of other property and equipment | | 5 |
| | 6 |
|
Net Cash Used In Investing Activities | | (958 | ) | | (1,935 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from pre-petition revolving credit facility borrowings | | 3,806 |
| | 8,805 |
|
Payments on pre-petition revolving credit facility borrowings | | (3,467 | ) | | (7,495 | ) |
Proceeds from DIP credit facility borrowings | | 60 |
| | 0 |
|
Payments on DIP credit facility borrowings | | (60 | ) | | 0 |
|
DIP credit facility and exit facilities financing costs | | (109 | ) | | 0 |
|
Cash paid to purchase debt | | (95 | ) | | (457 | ) |
Cash paid for preferred stock dividends | | (22 | ) | | (69 | ) |
Other | | (10 | ) | | (21 | ) |
Net Cash Provided By Financing Activities | | 103 |
| | 763 |
|
Net increase in cash and cash equivalents | | 300 |
| | 10 |
|
Cash and cash equivalents, beginning of period | | 6 |
| | 4 |
|
Cash and cash equivalents, end of period | | $ | 306 |
| | $ | 14 |
|
| | | | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018* |
| | ($ in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
NET INCOME (LOSS) | | $ | 16 |
| | $ | (377 | ) |
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES: | | | | |
Depreciation, depletion and amortization | | 1,672 |
| | 1,335 |
|
Deferred income tax benefit | | (314 | ) | | (10 | ) |
Derivative (gains) losses, net | | (137 | ) | | 500 |
|
Cash receipts (payments) on derivative settlements, net | | 129 |
| | (162 | ) |
Stock-based compensation | | 24 |
| | 25 |
|
Gains on sales of assets | | (33 | ) | | (27 | ) |
Impairments | | 11 |
| | 122 |
|
Exploration | | 35 |
| | 81 |
|
(Gains) losses on investments | | 21 |
| | (139 | ) |
(Gains) losses on purchases or exchanges of debt | | (70 | ) | | 68 |
|
Other | | 42 |
| | (90 | ) |
Changes in assets and liabilities | | (214 | ) | | 69 |
|
Net Cash Provided By Operating Activities | | 1,182 |
| | 1,395 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Drilling and completion costs | | (1,640 | ) | | (1,407 | ) |
Business combination, net | | (353 | ) | | — |
|
Acquisitions of proved and unproved properties | | (31 | ) | | (118 | ) |
Proceeds from divestitures of proved and unproved properties | | 110 |
| | 395 |
|
Additions to other property and equipment | | (27 | ) | | (11 | ) |
Proceeds from sales of other property and equipment | | 6 |
| | 75 |
|
Proceeds from sales of investments | | — |
| | 74 |
|
Net Cash Used In Investing Activities | | (1,935 | ) | | (992 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from revolving credit facility borrowings | | 8,805 |
| | 9,095 |
|
Payments on revolving credit facility borrowings | | (7,495 | ) | | (9,231 | ) |
Proceeds from issuance of senior notes, net | | — |
| | 1,237 |
|
Cash paid to purchase debt | | (457 | ) | | (1,285 | ) |
Extinguishment of other financing | | — |
| | (122 | ) |
Cash paid for preferred stock dividends | | (69 | ) | | (69 | ) |
Distributions to noncontrolling interest owners | | (2 | ) | | (5 | ) |
Other | | (19 | ) | | (24 | ) |
Net Cash Provided By (Used In) Financing Activities | | 763 |
| | (404 | ) |
Net increase (decrease) in cash and cash equivalents | | 10 |
| | (1 | ) |
Cash and cash equivalents, beginning of period | | 4 |
| | 5 |
|
Cash and cash equivalents, end of period | | $ | 14 |
| | $ | 4 |
|
| | | | |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)
|
| | | | | | | | |
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below: |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | ($ in millions) |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
Cash paid for reorganization items, net | | $ | 118 |
| | $ | 0 |
|
Interest paid, net of capitalized interest | | $ | 201 |
| | $ | 487 |
|
Income taxes paid, net of refunds received | | $ | 1 |
| | $ | (6 | ) |
| | | | |
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | |
Change in accrued drilling and completion costs | | $ | (206 | ) | | $ | 49 |
|
Put option premium on equity backstop agreement | | $ | 60 |
| | $ | 0 |
|
Operating lease obligations recognized | | $ | 32 |
| | $ | 0 |
|
Common stock issued for business combination | | $ | 0 |
| | $ | 2,037 |
|
Debt exchanged for common stock | | $ | 0 |
| | $ | 693 |
|
Preferred stock exchanged for common stock | | $ | 0 |
| | $ | 40 |
|
Change in senior notes exchanged | | $ | 0 |
| | $ | 35 |
|
|
| | | | | | | | |
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below: |
| | Nine Months Ended September 30, |
| | 2019 | | 2018* |
| | ($ in millions) |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
Interest paid, net of capitalized interest | | $ | 487 |
| | $ | 527 |
|
Income taxes paid, net of refunds received | | $ | (6 | ) | | $ | (3 | ) |
| | | | |
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | |
Common stock issued for business combination | | $ | 2,037 |
| | $ | — |
|
Debt exchanged for common stock | | $ | 693 |
| | $ | — |
|
Preferred stock exchanged for common stock | | $ | 40 |
| | $ | — |
|
Change in senior notes exchanged | | $ | 35 |
| | $ | — |
|
Change in accrued drilling and completion costs | | $ | 49 |
| | $ | 142 |
|
Change in divested proved and unproved properties | | $ | (144 | ) | | $ | (5 | ) |
* Financial information for 2018 has been recast to reflect the retrospective application
The accompanying notes are an integral part of
the successful efforts method of accounting. See Note 1.these condensed consolidated financial statements. 9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | | | |
Balance, beginning of period | | $ | 1,631 |
| | $ | 1,671 |
| | $ | 1,631 |
| | $ | 1,671 |
|
Exchange of 0, 40,000, 0, and 40,000 shares of preferred stock for common stock | | 0 |
| | (40 | ) | | 0 |
| | (40 | ) |
Balance, end of period | | 1,631 |
| | 1,631 |
| | 1,631 |
| | 1,631 |
|
COMMON STOCK:(a) | | | | | | | | |
Balance, beginning of period | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Common shares issued for WildHorse Merger | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Balance, end of period | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
ADDITIONAL PAID-IN CAPITAL:(a) | | | | | | | | |
Balance, beginning of period | | 16,924 |
| | 16,396 |
| | 16,973 |
| | 14,387 |
|
Common shares issued for WildHorse Merger | | 0 |
| | 0 |
| | 0 |
| | 2,037 |
|
Exchange of preferred stock for 0, 51,839, 0 and 51,839 shares of common stock | | 0 |
| | 40 |
| | 0 |
| | 40 |
|
Exchange of senior notes for 0, 1,177,817, 0 and 1,177,817 shares of common stock | | 0 |
| | 440 |
| | 0 |
| | 440 |
|
Exchange of convertible senior notes for 0, 366,945, 0 and 366,945 shares of common stock | | 0 |
| | 135 |
| | 0 |
| | 135 |
|
Equity component of convertible notes repurchases | | 0 |
| | (2 | ) | | 0 |
| | (2 | ) |
Stock-based compensation | | 7 |
| | 9 |
| | (20 | ) | | 27 |
|
Dividends on preferred stock | | 0 |
| | (23 | ) | | (22 | ) | | (69 | ) |
Balance, end of period | | 16,931 |
| | 16,995 |
| | 16,931 |
| | 16,995 |
|
ACCUMULATED DEFICIT: | | | | | | | | |
Balance, beginning of period | | (22,793 | ) | | (13,835 | ) | | (14,220 | ) | | (13,912 | ) |
Net income (loss) attributable to Chesapeake | | (745 | ) | | (61 | ) | | (9,318 | ) | | 16 |
|
Balance, end of period | | (23,538 | ) | | (13,896 | ) | | (23,538 | ) | | (13,896 | ) |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | | |
Balance, beginning of period | | 29 |
| | (5 | ) | | 12 |
| | (23 | ) |
Hedging activity | | 7 |
| | 8 |
| | 24 |
| | 26 |
|
Balance, end of period | | 36 |
| | 3 |
| | 36 |
| | 3 |
|
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018* | | 2019 | | 2018* |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | | | |
Balance, beginning of period | | $ | 1,671 |
| | $ | 1,671 |
| | $ | 1,671 |
| | $ | 1,671 |
|
Exchange of 40,000, 0, 40,000 and 0 shares of preferred stock for common stock | | (40 | ) | | — |
| | (40 | ) | | — |
|
Balance, end of period | | 1,631 |
| | 1,671 |
| | 1,631 |
| | 1,671 |
|
COMMON STOCK: | | | | | | | | |
Balance, beginning of period | | 16 |
| | 9 |
| | 9 |
| | 9 |
|
Common shares issued for WildHorse Merger | | — |
| | — |
| | 7 |
| | — |
|
Exchange of senior notes and convertible senior notes | | 3 |
| | — |
| | 3 |
| | — |
|
Balance, end of period | | 19 |
| | 9 |
| | 19 |
| | 9 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | | | |
Balance, beginning of period | | 16,380 |
| | 14,408 |
| | 14,378 |
| | 14,437 |
|
Common shares issued for WildHorse Merger | | — |
| | — |
| | 2,030 |
| | — |
|
Exchange of preferred stock for 10,367,950, 0 10,367,950 and 0 shares of common stock | | 40 |
| | — |
| | 40 |
| | — |
|
Exchange of senior notes for 235,563,519, 0 235,563,519 and 0 shares of common stock | | 438 |
| | — |
| | 438 |
| | — |
|
Exchange of convertible senior notes for 73,389,094, 0, 73,389,094 and 0 shares of common stock | | 134 |
| | — |
| | 134 |
| | — |
|
Equity component of convertible notes repurchases | | (2 | ) | | — |
| | (2 | ) | | — |
|
Stock-based compensation | | 8 |
| | 9 |
| | 26 |
| | 26 |
|
Dividends on preferred stock | | (23 | ) | | (23 | ) | | (69 | ) | | (69 | ) |
Balance, end of period | | 16,975 |
| | 14,394 |
| | 16,975 |
| | 14,394 |
|
ACCUMULATED DEFICIT: | | | | | | | | |
Balance, beginning of period | | (13,835 | ) | | (14,370 | ) | | (13,912 | ) | | (14,130 | ) |
Net income (loss) attributable to Chesapeake | | (61 | ) | | (146 | ) | | 16 |
| | (378 | ) |
Cumulative effect of accounting change | | — |
| | — |
| | — |
| | (8 | ) |
Balance, end of period | | (13,896 | ) | | (14,516 | ) | | (13,896 | ) | | (14,516 | ) |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | | |
Balance, beginning of period | | (5 | ) | | (40 | ) | | (23 | ) | | (57 | ) |
Hedging activity | | 8 |
| | 8 |
| | 26 |
| | 25 |
|
Balance, end of period | | 3 |
| | (32 | ) | | 3 |
| | (32 | ) |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
TREASURY STOCK – COMMON:(a) | | | | | | | | |
Balance, beginning of period | | 0 |
| | (36 | ) | | (32 | ) | | (31 | ) |
Purchase of 0, 267, 17,901 and 13,369 shares for company benefit plans | | 0 |
| | 0 |
| | (2 | ) | | (7 | ) |
Release of 0, 187, 44,126 and 1,484 shares from company benefit plans | | 0 |
| | 0 |
| | 34 |
| | 2 |
|
Balance, end of period | | 0 |
| | (36 | ) | | 0 |
| | (36 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT) | | (4,940 | ) | | 4,697 |
| | (4,940 | ) | | 4,697 |
|
NONCONTROLLING INTERESTS: | | | | | | | | |
Balance, beginning of period | | 21 |
| | 39 |
| | 37 |
| | 41 |
|
Net loss attributable to noncontrolling interests | | 0 |
| | 0 |
| | (16 | ) | | 0 |
|
Distributions to noncontrolling interest owners | | 0 |
| | 0 |
| | 0 |
| | (2 | ) |
Balance, end of period | | 21 |
| | 39 |
| | 21 |
| | 39 |
|
TOTAL EQUITY (DEFICIT) | | $ | (4,919 | ) | | $ | 4,736 |
| | $ | (4,919 | ) | | $ | 4,736 |
|
| |
(a) | Amounts and shares have been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018* | | 2019 | | 2018* |
| | ($ in millions) |
TREASURY STOCK – COMMON: | | | | | | | | |
Balance, beginning of period | | (36 | ) | | (31 | ) | | (31 | ) | | (31 | ) |
Purchase of 53,337, 30,509, 2,673,903, and 1,499,033 shares for company benefit plans | | — |
| | — |
| | (7 | ) | | (4 | ) |
Release of 37,301, 41,617, 296,864 and 431,474 shares from company benefit plans | | — |
| | — |
| | 2 |
| | 4 |
|
Balance, end of period | | (36 | ) | | (31 | ) | | (36 | ) | | (31 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY | | 4,696 |
| | 1,495 |
| | 4,696 |
| | 1,495 |
|
NONCONTROLLING INTERESTS: | | | | | | | | |
Balance, beginning of period | | 39 |
| | 42 |
| | 41 |
| | 44 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | 1 |
|
Distributions to noncontrolling interest owners | | — |
| | (2 | ) | | (2 | ) | | (5 | ) |
Balance, end of period | | 39 |
| | 40 |
| | 39 |
| | 40 |
|
TOTAL EQUITY | | $ | 4,735 |
| | $ | 1,535 |
| | $ | 4,735 |
| | $ | 1,535 |
|
* Financial information for prior periods has been recast to reflect the retrospective applicationThe accompanying notes are an integral part of
the successful efforts method of accounting. See Note 1.these condensed consolidated financial statements.
11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless the context otherwise requires, references to “Chesapeake”, the “Company”, “us”, “we” and “our” in this report are to Chesapeake Energy Corporation together with its subsidiaries. On June 28, 2020, (the “Petition Date”) we and certain of our subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) for relief (the “Bankruptcy Filing”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Non-Filing Entities will continue to operate in the ordinary course of business.
Debtor-In-Possession
We are currently operating as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief we requested that was designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, customers and employees. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing and are also authorized to pay owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Bankruptcy Filing. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against us and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Restructuring Support Agreement
On June 28, 2020, the Debtors entered into a restructuring support agreement (the "RSA") with certain holders (collectively, the "Consenting Stakeholders") of (i) obligations under that certain Amended and Restated Credit Agreement, dated as of September 12, 2018, by and among Chesapeake, as borrower, the Debtor guarantors party thereto, MUFG Union Bank, N.A., as administrative agent, and the other lender, issuer, and agent parties thereto (the "pre-petition revolving credit facility"); (ii) obligations under that certain Term Loan Agreement, dated as of December 19, 2019, by and among Chesapeake, as borrower, the Debtor guarantors party thereto, GLAS USA LLC., as administrative agent, and the lender parties thereto (the "FLLO Term Loan"); and (iii) obligations under the 11.5% Senior Secured Second Lien Notes due 2025 (the "Second Lien Notes") issued pursuant to that certain indenture, dated as of December 19, 2019, by and among Chesapeake, as issuer, certain guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee and collateral trustee to support a restructuring (the "Restructuring") on the terms set forth in the RSA and the term sheet annexed to the RSA (the "Restructuring Term Sheet"). Certain Consenting Stakeholders also hold Unsecured Notes (as defined in the Restructuring Term Sheet) and their Unsecured Notes are also subject to the terms and obligations under the RSA. The RSA contemplates that the Company will implement the Restructuring through the Chapter 11 Cases pursuant to a consensual plan of reorganization (the "Plan") filed in the Chapter 11 proceedings as described further below.
The RSA contains certain covenants on the part of each of the Company and the Consenting Stakeholders, including limitations on the parties’ ability to pursue alternative transactions (subject to customary provisions regarding the ability of the Company’s Board of Directors to satisfy its fiduciary duties), commitments by the Consenting Stakeholders to vote in favor of the Plan and commitments of the Company and the Consenting Stakeholders to negotiate in good faith to finalize the documents and agreements contemplated by and required to implement the Plan. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including, without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA. One such condition is the requirement to obtain sufficient savings on certain midstream obligations (as determined by the required plan sponsors, defined in the RSA) through rejection of such contracts and/or renegotiation of their terms.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The RSA includes a hedging provision that authorizes the Debtors to enter into post-petition hedge agreements with the lenders under the DIP Credit Facility (as defined below). Beginning 30 days after the Petition Date, the Debtors are required to, at a minimum, hedge 50% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves (in each case, calculated separately for (i) crude oil and (ii) natural gas and natural gas liquids, taken together) for a rolling 24-month period. The Debtors notional hedge volumes shall not exceed (a) for the 18-month period from the date such commodity hedge transaction is executed, the lesser of (x) 80% of forecasted production for such months and (y) 80% of the anticipated projected monthly production from proved oil and natural gas reserves, (b) for the 6-month period following, 90% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves and (c) for the 24-month period thereafter, 80% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves.
Although the Company intends to pursue the Restructuring in accordance with the terms set forth in the Plan, there can be no assurance that the Company will be successful in completing the Restructuring or any other similar transaction on the terms set forth in the Plan, on different terms, or at all.
Plan of Reorganization
On September 11, 2020, the Debtors filed the Plan and a related disclosure statement with the Bankruptcy Court. As is customary in bankruptcy proceedings, the Debtors subsequently filed with the Bankruptcy Court an amended plan and amended disclosure statement on October 8, 2020 and a seconded amended plan and second amended disclosure statement on October 30, 2020. The Plan is subject to approval by the Bankruptcy Court. If the Plan is confirmed by the Bankruptcy Court, the Debtors would exit Chapter 11 pursuant to the terms of the Plan. Under the Plan, the claims against and interests in the Debtors are organized into classes based, in part, on their respective priorities. Below is a summary of the treatment that the stakeholders of the Company would receive under the Plan upon the emergence from bankruptcy:
| |
• | Holders of Other Secured Claims. Each holder of Other Secured Claims (as defined in the RSA) would receive, at the Company's option and in consultation with a requisite number of holders of claims who are backstopping a rights offering pursuant to the Plan: (a) payment in full in cash; (b) the collateral securing its secured claim; (c) reinstatement of its secured claim; or (d) such other treatment rendering its secured claim unimpaired in accordance with Section 1124 of the Bankruptcy Code. |
| |
• | Holders of Other Priority Claims. Each holder of Other Priority Claims (as defined in the RSA) would receive treatment in a manner consistent with Section 1129(a)(9) of the Bankruptcy Code. |
| |
• | Holders of Pre-Petition Revolving Credit Facility Claims. On the effective date of the Plan (the "Plan Effective Date"), each holder of obligations under the pre-petition revolving credit facility would receive, at such holder's option, its pro rata share of either Tranche A RBL Exit Facility Loans or Tranche B RBL Exit Facility Loans (each as defined in the Exit Facilities Term Sheet, defined below), each on a dollar for dollar basis. |
| |
• | Holders of FLLO Term Loan Facility Claims. On the Plan Effective Date, each holder of obligations under the FLLO Term Loan Facility would receive its pro rata share of (i) 76% of the reorganized Company's new common equity interests (the "New Common Stock"), subject to the terms set forth in the Restructuring Term Sheet and (ii) the right to participate in a rights offering on the terms set forth in the Restructuring Term Sheet. |
| |
• | Holders of Second Lien Notes Claims. On the Plan Effective Date, each holder of the Second Lien Notes would receive its pro rata share of (i) 12% of the New Common Stock, subject to the terms set forth in the Restructuring Term Sheet, (ii) the right to participate in a rights offering on the terms set forth in the Restructuring Term Sheet, and (iii) warrants to purchase 10% of the New Common Stock on certain terms set forth in the Restructuring Term Sheet, warrants to purchase another 10% of the New Common Stock on certain other terms set forth in the Restructuring Term Sheet, and 50% of warrants to purchase another 10% of the New Common Stock on certain other terms set forth in the Restructuring Term Sheet (the "New Class C Warrants"). |
| |
• | Holders of Unsecured Notes Claims. On the Plan Effective Date, each holder of the Unsecured Notes (as defined in the RSA) would receive its pro rata share of (i) 12% of the New Common Stock, subject to the terms set forth in the Restructuring Term Sheet (the "Unsecured Notes Claims Recovery"), and (ii) 50% of the New Class C Warrants. |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
• | Holders of General Unsecured Claims. On the Plan Effective Date, each holder of allowed general unsecured claims would receive its pro rata share of the General Unsecured Claims Recovery. |
| |
• | Equity Holders. Each holder of an equity interest in Chesapeake, including our common and preferred stock, would have such interest canceled, released, and extinguished without any distribution. |
DIP Credit Facility
On June 28, 2020, prior to the commencement of the Chapter 11 Cases, the Company entered into a commitment letter (the “Commitment Letter”) with certain of the lenders under the pre-petition revolving credit facility and/or their affiliates (collectively, the “Commitment Parties”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties agreed to provide the Debtors with a post-petition senior secured super-priority debtor-in-possession revolving credit facility in an aggregate principal amount of up to approximately $2.104 billion (the “DIP Credit Facility”), consisting of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which includes a sub-facility of up to $200 million for the issuance of letters of credit, and an up to approximately $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility. Pursuant to the Commitment Letter, the Commitment parties have also committed to provide, subject to certain conditions, an up to $2.5 billion exit credit facility, consisting of an up to $1.75 billion revolving credit facility (the “Exit Revolving Facility”) and an up to $750 million senior secured term loan facility (the “Exit Term Loan Facility” and, together with the Exit Revolving Facility, the “Exit Credit Facilities”). The terms and conditions of the DIP Credit Facility are set forth in the Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) attached to the Commitment Letter. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations, and other such purposes consistent with the DIP Credit Facility. The terms and conditions of the Exit Credit Facilities are reflected in an exit facilities term sheet attached as an exhibit to the Restructuring Term Sheet (the “Exit Facilities Term Sheet”). The obligations of the lenders to provide the Exit Credit Facilities are subject to satisfaction of certain conditions set forth in the Exit Facilities Term Sheet, including conditions requiring (i) a minimum liquidity of $500 million, (ii) a leverage ratio no greater than 2.25:1.00 and (iii) asset coverage of credit facilities to PV-10 of at least 1.50:1.00. In the Current Period, we incurred $118 million of fees related to the arrangement and funding of the DIP Credit Facility and Exit Credit Facilities. The DIP Credit Facility was approved by the Bankruptcy Court on a final basis on July 31, 2020 and became effective as of July 1, 2020. See Note 4 for additional information. Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, we may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves us from performing our future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against our estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires us to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with us, including where applicable a quantification of our obligations under any such executory contract or unexpired lease of us, is qualified by any overriding rejection rights we have under the Bankruptcy Code.
Potential Claims
We have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of us and each of our subsidiaries, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims, (the “bar date”), which was set by the Bankruptcy Court as October 30, 2020. Governmental units are required to file proof of claims by December 28, 2020, the deadline that was set by the Bankruptcy Court.
As of November 5, 2020, the Debtors have received approximately 7,350 proofs of claim, approximately half of which represent general unsecured claims, for an aggregate amount of approximately $11.2 billion. We will continue
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
to evaluate these claims throughout the Chapter 11 process and recognize or adjust amounts in future financial statements as necessary using the best information available at such time. Differences between amounts scheduled by us and claims by creditors will ultimately be reconciled and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after we emerge from bankruptcy.
Financial Statement Classification of Liabilities Subject to Compromise
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2020, includes amounts classified as liabilities subject to compromise, which represent liabilities we anticipate will be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.
Liabilities subject to compromise includes amounts related to the rejection of various executory contracts and unexpired leases. Additional amounts may be included in liabilities subject to compromise in future periods if additional executory contracts and unexpired leases are rejected. The nature of many of the potential claims arising under our executory contracts and unexpired leases has not been determined at this time, and therefore, such claims are not reasonably estimable at this time and may be material.
The following table summarizes the components of liabilities subject to compromise included on our unaudited condensed consolidated balance sheet as of September 30, 2020:
|
| | | | |
| | September 30, 2020 |
| | ($ in millions) |
Debt | | $ | 7,166 |
|
Accounts payable | | 148 |
|
Accrued interest | | 235 |
|
Other liabilities | | 879 |
|
Liabilities subject to compromise | | $ | 8,428 |
|
Reorganization Items, Net
We have incurred and will continue to incur significant expenses, gains and losses associated with the reorganization, primarily the write-off of unamortized debt issuance costs and related unamortized premiums and discounts, debt and equity financing fees, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The amount of these items, which are being incurred in reorganization items, net within our accompanying unaudited condensed consolidated statements of operations, are expected to significantly affect our statements of operations. In future periods, we may also incur adjustments for allowable claims related to our legal proceedings and executory contracts approved for rejections by the Bankruptcy Court.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes the components in reorganization items, net included in our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2020:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
Write off of unamortized debt premiums (discounts) | | $ | 0 |
| | $ | 0 |
| | $ | 518 |
| | $ | 0 |
|
Write off of unamortized debt issuance costs | | 0 |
| | 0 |
| | (61 | ) | | 0 |
|
Debt and equity financing fees | | (115 | ) | | 0 |
| | (178 | ) | | 0 |
|
Provision for allowed claims | | (465 | ) | | 0 |
| | (465 | ) | | 0 |
|
Legal and professional fees | | (40 | ) | | 0 |
| | (40 | ) | | 0 |
|
Gain on settlement of pre-petition accounts payable | | 12 |
| | 0 |
| | 12 |
| | 0 |
|
Loss on settlement of pre-petition revenues payable | | (3 | ) | | 0 |
| | (3 | ) | | 0 |
|
Reorganization items, net | | $ | (611 | ) | | $ | 0 |
| | $ | (217 | ) | | $ | 0 |
|
| |
2. | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Chesapeake were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures have been condensed or omitted.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) relates to the three and nine months ended September 30, 20192020 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 20182019 (the “Prior Quarter” and the “Prior Period”, respectively). Our annual report on Form 8-K dated May 9,10-K for the year ended December 31, 2019 (“2019 Form 10-K”) should be read in conjunction with this Form 10-Q. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of our condensed consolidated financial statements and accompanying notes and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which we have a controlling financial interest. Intercompany accounts and balances have been eliminated.eliminated. Recast Financial Information for Change in Accounting PrincipleGoing Concern
In the first quarter of 2019, we voluntarily changed our method of accounting for oil and natural gas exploration and development activities from the full cost method to the successful efforts method. Accordingly, financial information for prior periods has been recast to reflect retrospective application of the successful efforts method. Although the full cost method of accounting for oil and natural gas exploration and development activities continues to be an accepted alternative, the successful efforts method of accounting is the generally preferred method of the SEC and, because it is more widely used in the industry, we expect the change to improve the comparability of ourThe accompanying unaudited condensed consolidated financial statements to our peers. We also believehave been prepared assuming we will continue as a going concern and contemplate the successful efforts method provides a more representational depictionrealization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent on our ability to comply with the financial and other covenants contained in our DIP Credit Facility, the Bankruptcy Court’s approval of the Plan and our ability to successfully implement the Plan and obtain exit financing, among other factors. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating resultsas debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Facility), for amounts other than those reflected in the accompanying unaudited condensed consolidated financial statements. Further, the Plan could materially change the amounts and provides forclassifications of assets and liabilities reported in the condensed consolidated financial statements. The factors noted above raise substantial doubt about our investments in oilability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and natural gas propertiesclassification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to be assessed for impairment in accordance withcontinue as a going concern or as a consequence of the Bankruptcy Filing.
Accounting During Bankruptcy
We have applied Accounting Standards Codification (ASC) Topic 360,852, Property Plant and Equipment,Reorganizations, rather than valuations based on prices and costs prescribed underin preparing the full cost method as ofunaudited condensed consolidated financial statements. ASC 852 requires that the balance sheet date. For detailed information regarding the effects of the changefinancial statements, for periods subsequent to the successful efforts method, see Note 2.Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from Oil and Natural Gas Properties
We follow the successful efforts method of accounting for our oil and natural gas properties. Under this method, exploration costs, such as exploratory geological and geophysical costs, expiration of unproved leasehold, delay rentals and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead and similar activities are also expensed as incurred. All property acquisition costs and development costs are capitalized when incurred.16
Exploratory drilling costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized and are classified as proved properties. Costs of unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory drilling costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operational viability of the project. If we determine that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. We review the status of all suspended exploratory drilling costs quarterly. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of oil and natural gas, are capitalized.
Costs of drilling and equipping successful wells, costs to construct or acquire facilities, and associated asset retirement costs are depreciated using the unit-of-production (UOP) method based on total estimated proved developed oil and gas reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved properties, are depleted using the UOP method based on total estimated proved developed and undeveloped reserves.
Proceeds from the sales of individual oil and natural gas properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depreciation, depletion and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recognized
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
untilthe ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that have been approved for rejection by the Bankruptcy Court, and unamortized deferred financing costs, premiums and discounts associated with debt classified as liabilities subject to compromise, are recorded as reorganization items, net. In addition, pre-petition obligations that may be impacted by the Chapter 11 process have been classified on the unaudited condensed consolidated balance sheet as of September 30, 2020 as liabilities subject to compromise. These liabilities are reported at the amounts we anticipate will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 1 for more information regarding reorganization items.Risks and Uncertainties
The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first nine months of 2020. The pandemic has reached more than 200 countries and territories and has resulted in widespread adverse impacts on the global economy and on our customers and other parties with whom we have business relations. State and local authorities have also implemented multi-step policies with the goal of re-opening. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases. To date, we have experienced limited operational impacts as a result of the restrictions from working remotely or COVID-19 directly. As an entire amortization base is sold.essential business under the guidelines issued by each of the states in which we operate, we have been allowed to continue operations. As a result, since mid-March, we have restricted access to all of our offices and for a period of time directed employees to work remotely to the extent possible. We began to re-open our offices in phases beginning mid-May and special precautions have been implemented to minimize the risk of exposure. These actions have allowed us to maintain the engagement and connectivity of our personnel. However, a gain or loss is recognizeddue to severe impacts from the saleglobal COVID-19 pandemic on the global demand for oil and natural gas, financial results may not be necessarily indicative of less than anoperating results for the entire amortization baseyear. Moreover, future operations could be negatively affected if a significant number of our employees are quarantined as a result of exposure to the dispositionvirus.
There is significant enoughconsiderable uncertainty regarding the extent to materially impactwhich COVID-19 will continue to spread and the depletion rateextent and duration of governmental and other measures implemented to try to slow the spread of the remaining propertiesvirus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. One of the largest impacts of the pandemic has been a significant reduction in global demand for oil and, to a lesser extent, natural gas. Prices in the amortization base.
When circumstances indicate that the carrying value of proved oil and gas properties may notmarket have remained depressed, as the oversupply and lack of demand in the market persist. Oil and natural gas prices are expected to continue to be recoverable, we compare unamortized capitalized costsvolatile as a result of the near-term production instability and the ongoing COVID-19 outbreaks and as changes in oil and natural gas inventories, industry demand and global and national economic performance are reported. The resulting supply/demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. We expect to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on our estimate of future crudesee continued volatility in oil and natural gas prices operating costs, anticipated production from proved reservesfor the foreseeable future, and other relevant data, are lower thansuch volatility, combined with the unamortized capitalized costs, the capitalized costs are reducedcurrent depressed prices, has impacted and is expected to fair value. Fair value is generally estimated using the income approach described in the ASC 820, Fair Value Measurements. If applicable, we utilizecontinue to adversely impact our business. The continued low level of demand and prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value measurements are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a discount rate believed to be consistent with those applied by market participants. We have classified these fair value measurements as Level 3 in the fair value hierarchy.
Capitalized Interest
Interest from external borrowings is capitalized on significant investments in major development projects until the asset is ready for service using the weighted average borrowing rate of outstanding borrowings. Capitalized interest is determined by multiplying our weighted average borrowing cost on debt by the average amount of qualifying costs incurred. Capitalized interest is depreciated over the useful lives of the assets in the same manner as the depreciation of the underlying asset.
Recently Issued Accounting Standards
In February 2016, the FASB issued Auditing Standards Update (ASU) 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessees to recognize a lease liability and a right-of-use (ROU) asset on the balance sheet for all leases, including operating leases, with terms in excess of 12 months. As the implicit rate of the lease is not always readily determinable, the company uses its incremental borrowing rate to calculate the present value of lease payments based on information available at the commencement date. Operating ROU assets are included in other long-term assets while operating lease liabilities are included in other current and other long-term liabilities on the condensed consolidated balance sheet. Finance ROU assets are reflected in total property and equipment, net, while finance lease liabilities are included in other current and other long-term liabilities on the condensed consolidated balance sheet.
ASC 842 does not apply to our leases of mineral rights to explore for or use oil and natural gas resources, including the intangible rights to explore for those natural resources and rights to use the land in which those natural resources are contained.
We adopted the new standard on January 1, 2019 and as permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements, we will not adjust comparative-period financial statementsor otherwise has had and will continue to applyhave a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
We cannot predict the guidance in Topic 840, including its disclosure requirements,full impact that COVID-19 or the significant disruption and volatility currently being experienced in the comparative periods presented prior to adoption. No cumulative-effect adjustment to retained earnings was required as a result of the modified retrospective approach.
Upon adoption of ASC 842, we made certain elections permitting us to not reassess: (1) whether any expired or existing contracts contained leases (2) the lease classification for any expired or existing leases,oil and (3) initial direct costs for any existing leases. Upon adoption of ASC 842, we also made an election permitting us to continue applying our current policy for land easements. The adoption of ASC 842 did not result in a material impactnatural gas markets will have on our balance sheet,business, cash flows, liquidity, financial condition and results of operations or cash flows.
Short-term leasesat this time due to numerous uncertainties. The ultimate impacts will not be recognizeddepend on future developments, including the balance sheet as an asset or a liability,ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of Organization of Petroleum Exporting Countries (OPEC+) and other foreign, oil-exporting countries, governmental authorities, customers and other third parties, workforce availability, and the related rental expense will be expensed as incurred. We have short-term lease agreements relatedtiming and extent to most of our drilling rig arrangementswhich normal economic and hydraulic fracturing arrangements and some of our compressor rental arrangements.operating conditions resume.
See Note 9 for further information regarding leases.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
| |
2. | Change in Accounting Principle |
In the first quarter of 2019, we voluntarily changed our method of accounting for oil and natural gas exploration and development activities from the full cost method to the successful efforts method. Accordingly, financial information for prior periods has been recast to reflect retrospective application of the successful efforts method. In general, under successful efforts, exploration costs such as exploratory dry holes, exploratory geophysical and geological costs, delay rentals, unproved leasehold impairments and exploration overhead are charged against earnings as incurred, versus being capitalized under the full cost method of accounting. The successful efforts method also provides for the assessment of potential property impairments by comparing the net carrying value of oil and natural gas properties to associated projected undiscounted pre-tax future net cash flows. If the expected undiscounted pre-tax future net cash flows are lower than the unamortized capitalized costs, the capitalized costs are reduced to fair value. Under the full cost method of accounting, a write-down would be required if the net carrying value of oil and natural gas properties exceeds a full cost ceiling using an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. In addition, gains or losses, if applicable, are generally recognized on the disposition of oil and natural gas property and equipment under the successful efforts method, as opposed to an adjustment to the net carrying value of the assets remaining under the full cost method. Our condensed consolidated financial statements have been recast to reflect these differences.3. Earnings Per Share
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | |
Oil, natural gas and NGL | | $ | 1,170 |
| | $ | — |
| | $ | 1,170 |
|
Marketing | | 889 |
| | — |
| | 889 |
|
Total Revenues | | 2,059 |
| | — |
| | 2,059 |
|
Other | | — |
| | 15 |
| | 15 |
|
Gains on sales of assets | | — |
| | 13 |
| | 13 |
|
Total Revenues and Other | | 2,059 |
| | 28 |
| | 2,087 |
|
OPERATING EXPENSES: | | | | | | |
Oil, natural gas and NGL production | | 155 |
| | — |
| | 155 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 270 |
| | — |
| | 270 |
|
Production taxes | | 35 |
| | — |
| | 35 |
|
Exploration | | — |
| | 17 |
| | 17 |
|
Marketing | | 901 |
| | — |
| | 901 |
|
General and administrative | | 52 |
| | 14 |
| | 66 |
|
Depreciation, depletion and amortization | | 421 |
| | 152 |
| | 573 |
|
Impairments | | 1 |
| | 8 |
| | 9 |
|
Other operating expense | | 15 |
| | — |
| | 15 |
|
Total Operating Expenses | | 1,850 |
| | 191 |
| | 2,041 |
|
INCOME FROM OPERATIONS | | 209 |
| | (163 | ) | | 46 |
|
OTHER INCOME (EXPENSE): | | | | | | |
Interest expense | | (134 | ) | | (43 | ) | | (177 | ) |
Losses on investments | | (4 | ) | | — |
| | (4 | ) |
Gains on purchases or exchanges of debt | | 70 |
| | — |
| | 70 |
|
Other income | | 2 |
| | 1 |
| | 3 |
|
Total Other Expense | | (66 | ) | | (42 | ) | | (108 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | 143 |
| | (205 | ) | | (62 | ) |
Income tax benefit | | (1 | ) | | — |
| | (1 | ) |
NET INCOME (LOSS) | | 144 |
| | (205 | ) | | (61 | ) |
Net loss attributable to noncontrolling interests | | — |
| | — |
| | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | 144 |
| | (205 | ) | | (61 | ) |
Preferred stock dividends | | (23 | ) | | — |
| | (23 | ) |
Loss on exchange of preferred stock | | (17 | ) | | — |
| | (17 | ) |
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | | $ | 104 |
| | $ | (205 | ) | | $ | (101 | ) |
EARNINGS (LOSS) PER COMMON SHARE: | | | | | | |
Basic | | $ | 0.06 |
| | $ | (0.12 | ) | | $ | (0.06 | ) |
Diluted | | $ | 0.06 |
| | $ | (0.12 | ) | | $ | (0.06 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): | | | | | | |
Basic | | 1,698 |
| | — |
| | 1,698 |
|
Diluted | | 1,698 |
| | — |
| | 1,698 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | |
Oil, natural gas and NGL | | $ | 1,199 |
| | $ | — |
| | $ | 1,199 |
|
Marketing | | 1,219 |
| | — |
| | 1,219 |
|
Total Revenues | | 2,418 |
| | — |
| | 2,418 |
|
Other | | — |
| | 16 |
| | 16 |
|
Losses on sales of assets | | — |
| | (10 | ) | | (10 | ) |
Total Revenues and Other | | 2,418 |
| | 6 |
| | 2,424 |
|
OPERATING EXPENSES: | | | | | | |
Oil, natural gas and NGL production | | 132 |
| | — |
| | 132 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 364 |
| | — |
| | 364 |
|
Production taxes | | 34 |
| | — |
| | 34 |
|
Exploration | | — |
| | 22 |
| | 22 |
|
Marketing | | 1,238 |
| | — |
| | 1,238 |
|
General and administrative | | 66 |
| | 15 |
| | 81 |
|
Provision for legal contingencies, net | | 8 |
| | — |
| | 8 |
|
Depreciation, depletion and amortization | | 291 |
| | 114 |
| | 405 |
|
Impairments | | 5 |
| | 53 |
| | 58 |
|
Total Operating Expenses | | 2,138 |
| | 204 |
| | 2,342 |
|
INCOME FROM OPERATIONS | | 280 |
| | (198 | ) | | 82 |
|
OTHER INCOME (EXPENSE): | | | | | | |
Interest expense | | (127 | ) | | (38 | ) | | (165 | ) |
Losses on purchases or exchanges of debt | | (68 | ) | | — |
| | (68 | ) |
Other income | | 1 |
| | 5 |
| | 6 |
|
Total Other Expense | | (194 | ) | | (33 | ) | | (227 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | 86 |
| | (231 | ) | | (145 | ) |
Income tax expense | | 1 |
| | — |
| | 1 |
|
NET INCOME (LOSS) | | 85 |
| | (231 | ) | | (146 | ) |
Net income attributable to noncontrolling interests | | (1 | ) | | 1 |
| | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | 84 |
| | (230 | ) | | (146 | ) |
Preferred stock dividends | | (23 | ) | | — |
| | (23 | ) |
Earnings allocated to participating securities | | (1 | ) | | 1 |
| | — |
|
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | | $ | 60 |
| | $ | (229 | ) | | $ | (169 | ) |
EARNINGS (LOSS) PER COMMON SHARE: | | | | | | |
Basic | | $ | 0.07 |
| | $ | (0.26 | ) | | $ | (0.19 | ) |
Diluted | | $ | 0.07 |
| | $ | (0.26 | ) | | $ | (0.19 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): | | | | | | |
Basic | | 910 |
| | — |
| | 910 |
|
Diluted | | 911 |
| | (1 | ) | | 910 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | |
Oil, natural gas and NGL | | $ | 3,553 |
| | $ | — |
| | $ | 3,553 |
|
Marketing | | 3,038 |
| | — |
| | 3,038 |
|
Total Revenues | | 6,591 |
| | — |
| | 6,591 |
|
Other | | — |
| | 45 |
| | 45 |
|
Gains on sales of assets | | — |
| | 33 |
| | 33 |
|
Total Revenues and Other | | 6,591 |
| | 78 |
| | 6,669 |
|
OPERATING EXPENSES: | | | | | | |
Oil, natural gas and NGL production | | 453 |
| | — |
| | 453 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 815 |
| | — |
| | 815 |
|
Production taxes | | 109 |
| | — |
| | 109 |
|
Exploration | | — |
| | 56 |
| | 56 |
|
Marketing | | 3,071 |
| | — |
| | 3,071 |
|
General and administrative | | 216 |
| | 42 |
| | 258 |
|
Provision for legal contingencies | | 3 |
| | — |
| | 3 |
|
Depreciation, depletion and amortization | | 1,197 |
| | 475 |
| | 1,672 |
|
Gain on sale of oil and natural gas properties | | (10 | ) | | 10 |
| | — |
|
Impairments | | 3 |
| | 8 |
| | 11 |
|
Other operating expense | | 79 |
| | — |
| | 79 |
|
Total Operating Expenses | | 5,936 |
| | 591 |
| | 6,527 |
|
INCOME FROM OPERATIONS | | 655 |
| | (513 | ) | | 142 |
|
OTHER INCOME (EXPENSE): | | | | | | |
Interest expense | | (400 | ) | | (113 | ) | | (513 | ) |
Losses on investments | | (28 | ) | | — |
| | (28 | ) |
Gains on purchases or exchanges of debt | | 70 |
| | — |
| | 70 |
|
Other income | | 22 |
| | 8 |
| | 30 |
|
Total Other Expense | | (336 | ) | | (105 | ) | | (441 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | 319 |
| | (618 | ) | | (299 | ) |
Income tax benefit | | (315 | ) | | — |
| | (315 | ) |
NET INCOME | | 634 |
| | (618 | ) | | 16 |
|
Net income attributable to noncontrolling interests | | (1 | ) | | 1 |
| | — |
|
NET INCOME ATTRIBUTABLE TO CHESAPEAKE | | 633 |
| | (617 | ) | | 16 |
|
Preferred stock dividends | | (69 | ) | | — |
| | (69 | ) |
Loss on exchange of preferred stock | | (17 | ) | | — |
| | (17 | ) |
Earnings allocated to participating securities | | (2 | ) | | 2 |
| | — |
|
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | | $ | 545 |
| | $ | (615 | ) | | $ | (70 | ) |
EARNINGS (LOSS) PER COMMON SHARE: | | | | | | |
Basic | | $ | 0.35 |
| | $ | (0.39 | ) | | $ | (0.04 | ) |
Diluted | | $ | 0.35 |
| | $ | (0.39 | ) | | $ | (0.04 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): | | | | | | |
Basic | | 1,570 |
| | — |
| | 1,570 |
|
Diluted | | 1,570 |
| | — |
| | 1,570 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions except per share data) |
REVENUES AND OTHER: | | | | | | |
Oil, natural gas and NGL | | $ | 3,424 |
| | $ | — |
| | $ | 3,424 |
|
Marketing | | 3,738 |
| | — |
| | 3,738 |
|
Total Revenues | | 7,162 |
| | — |
| | 7,162 |
|
Other | | — |
| | 48 |
| | 48 |
|
Gains on sales of assets | | — |
| | 27 |
| | 27 |
|
Total Revenues and Other | | 7,162 |
| | 75 |
| | 7,237 |
|
OPERATING EXPENSES: | | | | | | |
Oil, natural gas and NGL production | | 417 |
| | — |
| | 417 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 1,060 |
| | — |
| | 1,060 |
|
Production taxes | | 91 |
| | — |
| | 91 |
|
Exploration | | — |
| | 123 |
| | 123 |
|
Marketing | | 3,798 |
| | — |
| | 3,798 |
|
General and administrative | | 229 |
| | 44 |
| | 273 |
|
Restructuring and other termination costs | | 38 |
| | — |
| | 38 |
|
Provision for legal contingencies, net | | 17 |
| | — |
| | 17 |
|
Depreciation, depletion and amortization | | 867 |
| | 468 |
| | 1,335 |
|
Impairments | | 51 |
| | 71 |
| | 122 |
|
Other operating (income) expense | | 6 |
| | (7 | ) | | (1 | ) |
Total Operating Expenses | | 6,574 |
| | 699 |
| | 7,273 |
|
INCOME (LOSS) FROM OPERATIONS | | 588 |
| | (624 | ) | | (36 | ) |
OTHER INCOME (EXPENSE): | | | | | | |
Interest expense | | (367 | ) | | (115 | ) | | (482 | ) |
Gains on investments | | 139 |
| | — |
| | 139 |
|
Losses on purchases or exchanges of debt | | (68 | ) | | — |
| | (68 | ) |
Other income | | 63 |
| | (1 | ) | | 62 |
|
Total Other Expense | | (233 | ) | | (116 | ) | | (349 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | 355 |
| | (740 | ) | | (385 | ) |
Income tax benefit | | (8 | ) | | — |
| | (8 | ) |
NET INCOME (LOSS) | | 363 |
| | (740 | ) | | (377 | ) |
Net income attributable to noncontrolling interests | | (3 | ) | | 2 |
| | (1 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | 360 |
| | (738 | ) | | (378 | ) |
Preferred stock dividends | | (69 | ) | | — |
| | (69 | ) |
Earnings allocated to participating securities | | (3 | ) | | 3 |
| | — |
|
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | | $ | 288 |
| | $ | (735 | ) | | $ | (447 | ) |
EARNINGS (LOSS) PER COMMON SHARE: | | | | | | |
Basic | | $ | 0.32 |
| | $ | (0.81 | ) | | $ | (0.49 | ) |
Diluted | | $ | 0.32 |
| | $ | (0.81 | ) | | $ | (0.49 | ) |
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions): | | | | | | |
Basic | | 909 |
| | — |
| | 909 |
|
Diluted | | 909 |
| | — |
| | 909 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
NET INCOME (LOSS) | | $ | 144 |
| | $ | (205 | ) | | $ | (61 | ) |
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | |
Unrealized gains on derivative instruments | | — |
| | — |
| | — |
|
Reclassification of losses on settled derivative instruments | | 8 |
| | — |
| | 8 |
|
Other Comprehensive Income | | 8 |
| | — |
| | 8 |
|
COMPREHENSIVE INCOME (LOSS) | | 152 |
| | (205 | ) | | (53 | ) |
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | — |
| | — |
| | — |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | 152 |
| | $ | (205 | ) | | $ | (53 | ) |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
NET INCOME (LOSS) | | $ | 85 |
| | $ | (231 | ) | | $ | (146 | ) |
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | |
Unrealized gains on derivative instruments | | — |
| | — |
| | — |
|
Reclassification of losses on settled derivative instruments | | 8 |
| | — |
| | 8 |
|
Other Comprehensive Income | | 8 |
| | — |
| | 8 |
|
COMPREHENSIVE INCOME (LOSS) | | 93 |
| | (231 | ) | | (138 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (1 | ) | | 1 |
| | — |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | 92 |
| | $ | (230 | ) | | $ | (138 | ) |
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
NET INCOME | | $ | 634 |
| | $ | (618 | ) | | $ | 16 |
|
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | |
Unrealized gains on derivative instruments | | — |
| | — |
| | — |
|
Reclassification of losses on settled derivative instruments | | 26 |
| | — |
| | 26 |
|
Other Comprehensive Income | | 26 |
| | — |
| | 26 |
|
COMPREHENSIVE INCOME | | 660 |
| | (618 | ) | | 42 |
|
COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (1 | ) | | 1 |
| | — |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO CHESAPEAKE | | $ | 659 |
| | $ | (617 | ) | | $ | 42 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
NET INCOME (LOSS) | | $ | 363 |
| | $ | (740 | ) | | $ | (377 | ) |
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX: | | | | | | |
Unrealized gains on derivative instruments | | — |
| | — |
| | — |
|
Reclassification of losses on settled derivative instruments | | 25 |
| | — |
| | 25 |
|
Other Comprehensive Income | | 25 |
| | — |
| | 25 |
|
COMPREHENSIVE INCOME (LOSS) | | 388 |
| | (740 | ) | | (352 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (3 | ) | | 2 |
| | (1 | ) |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | 385 |
| | $ | (738 | ) | | $ | (353 | ) |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | | | | | |
| | Nine Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: |
NET INCOME | | $ | 634 |
| | $ | (618 | ) | | $ | 16 |
|
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: | | | |
| | |
Depreciation, depletion and amortization | | 1,197 |
| | 475 |
| | 1,672 |
|
Deferred income tax benefit | | (314 | ) | | — |
| | (314 | ) |
Derivative losses, net | | (137 | ) | | — |
| | (137 | ) |
Cash receipts on derivative settlements, net | | 129 |
| | — |
| | 129 |
|
Stock-based compensation | | 24 |
| | — |
| | 24 |
|
Gains on sales of assets | | — |
| | (33 | ) | | (33 | ) |
Impairments | | 3 |
| | 8 |
| | 11 |
|
Exploration | | — |
| | 35 |
| | 35 |
|
Losses on investments | | 21 |
| | — |
| | 21 |
|
Gains on purchases of debt | | (70 | ) | | — |
| | (70 | ) |
Other | | 33 |
| | 9 |
| | 42 |
|
Changes in assets and liabilities | | (169 | ) | | (45 | ) | | (214 | ) |
Net Cash Provided By Operating Activities | | 1,351 |
| | (169 | ) | | 1,182 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Drilling and completion costs | | (1,694 | ) | | 54 |
| | (1,640 | ) |
Business combination, net | | (353 | ) | | — |
| | (353 | ) |
Acquisitions of proved and unproved properties | | (146 | ) | | 115 |
| | (31 | ) |
Proceeds from divestitures of proved and unproved properties | | 110 |
| | — |
| | 110 |
|
Additions to other property and equipment | | (27 | ) | | — |
| | (27 | ) |
Proceeds from sales of other property and equipment | | 6 |
| | — |
| | 6 |
|
Net Cash Used In Investing Activities | | (2,104 | ) | | 169 |
| | (1,935 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from revolving credit facility borrowings | | 8,805 |
| | — |
| | 8,805 |
|
Payments on revolving credit facility borrowings | | (7,495 | ) | | — |
| | (7,495 | ) |
Cash paid to purchase debt | | (457 | ) | | — |
| | (457 | ) |
Cash paid for preferred stock dividends | | (69 | ) | | — |
| | (69 | ) |
Distributions to noncontrolling interest owners | | (2 | ) | | — |
| | (2 | ) |
Other | | (19 | ) | | — |
| | (19 | ) |
Net Cash Provided By Financing Activities | | 763 |
| | — |
| | 763 |
|
Net increase in cash and cash equivalents | | 10 |
| | — |
| | 10 |
|
Cash and cash equivalents, beginning of period | | 4 |
| | — |
| | 4 |
|
Cash and cash equivalents, end of period | | $ | 14 |
| | $ | — |
| | $ | 14 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | | | | | |
| | Nine Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: |
NET INCOME (LOSS) | | $ | 363 |
| | $ | (740 | ) | | $ | (377 | ) |
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES: | | | | | | |
Depreciation, depletion and amortization | | 867 |
| | 468 |
| | 1,335 |
|
Deferred income tax benefit | | (10 | ) | | — |
| | (10 | ) |
Derivative losses, net | | 500 |
| | — |
| | 500 |
|
Cash payments on derivative settlements, net | | (162 | ) | | — |
| | (162 | ) |
Stock-based compensation | | 25 |
| | — |
| | 25 |
|
Gains on sales of assets | | — |
| | (27 | ) | | (27 | ) |
Impairments | | 51 |
| | 71 |
| | 122 |
|
Exploration | | — |
| | 81 |
| | 81 |
|
Gains on investments | | (139 | ) | | — |
| | (139 | ) |
Losses on purchases or exchanges of debt | | 68 |
| | — |
| | 68 |
|
Other | | (83 | ) | | (7 | ) | | (90 | ) |
Changes in assets and liabilities | | 116 |
| | (47 | ) | | 69 |
|
Net Cash Provided By Operating Activities | | 1,596 |
| | (201 | ) | | 1,395 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Drilling and completion costs | | (1,482 | ) | | 75 |
| | (1,407 | ) |
Acquisitions of proved and unproved properties | | (244 | ) | | 126 |
| | (118 | ) |
Proceeds from divestitures of proved and unproved properties | | 395 |
| | — |
| | 395 |
|
Additions to other property and equipment | | (11 | ) | | — |
| | (11 | ) |
Proceeds from sales of other property and equipment | | 75 |
| | — |
| | 75 |
|
Proceeds from sales of investments | | 74 |
| | — |
| | 74 |
|
Net Cash Used In Investing Activities | | (1,193 | ) | | 201 |
| | (992 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from revolving credit facility borrowings | | 9,095 |
| | — |
| | 9,095 |
|
Payments on revolving credit facility borrowings | | (9,231 | ) | | — |
| | (9,231 | ) |
Proceeds from issuance of senior notes, net | | 1,237 |
| | — |
| | 1,237 |
|
Cash paid to purchase debt | | (1,285 | ) | | — |
| | (1,285 | ) |
Extinguishment of other financing | | (122 | ) | | — |
| | (122 | ) |
Cash paid for preferred stock dividends | | (69 | ) | | — |
| | (69 | ) |
Distributions to noncontrolling interest owners | | (5 | ) | | — |
| | (5 | ) |
Other | | (24 | ) | | — |
| | (24 | ) |
Net Cash Used In Financing Activities | | (404 | ) | | — |
| | (404 | ) |
Net decrease in cash and cash equivalents | | (1 | ) | | — |
| | (1 | ) |
Cash and cash equivalents, beginning of period | | 5 |
| | — |
| | 5 |
|
Cash and cash equivalents, end of period | | $ | 4 |
| | $ | — |
| | $ | 4 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | |
Balance, beginning of period | | $ | 1,671 |
| | $ | — |
| | $ | 1,671 |
|
Exchange of 40,000 shares of preferred stock for common stock | | (40 | ) | | — |
| | (40 | ) |
Balance, end of period | | 1,631 |
| | — |
| | 1,631 |
|
COMMON STOCK: | | | | | | |
Balance, beginning of period | | 16 |
| | — |
| | 16 |
|
Exchange of senior notes and convertible senior notes | | 3 |
| | — |
| | 3 |
|
Exchange of preferred stock | | — |
| | — |
| | — |
|
Balance, end of period | | 19 |
| | — |
| | 19 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | |
Balance, beginning of period | | 16,380 |
| | — |
| | 16,380 |
|
Exchange of preferred stock for 10,367,950 shares of common stock | | 40 |
| | — |
| | 40 |
|
Exchange of senior notes for 235,563,519 shares of common stock | | 438 |
| | — |
| | 438 |
|
Exchange of convertible senior notes for 73,389,094 shares of common stock | | 134 |
| | — |
| | 134 |
|
Equity component of convertible notes repurchases | | (2 | ) | | — |
| | (2 | ) |
Stock-based compensation | | 8 |
| | — |
| | 8 |
|
Dividends on preferred stock | | (23 | ) | | — |
| | (23 | ) |
Balance, end of period | | 16,975 |
| | — |
| | 16,975 |
|
ACCUMULATED DEFICIT: | | | | | | |
Balance, beginning of period | | (15,171 | ) | | 1,336 |
| | (13,835 | ) |
Net income (loss) attributable to Chesapeake | | 144 |
| | (205 | ) | | (61 | ) |
Balance, end of period | | (15,027 | ) | | 1,131 |
| | (13,896 | ) |
ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | |
Balance, beginning of period | | (5 | ) | | — |
| | (5 | ) |
Hedging activity | | 8 |
| | — |
| | 8 |
|
Balance, end of period | | 3 |
| | — |
| | 3 |
|
TREASURY STOCK – COMMON: | | | | | | |
Balance, beginning of period | | (36 | ) | | — |
| | (36 | ) |
Purchase of 53,337 shares for company benefit plans | | — |
| | — |
| | — |
|
Release of 37,301 shares from company benefit plans | | — |
| | — |
| | — |
|
Balance, end of period | | (36 | ) | | — |
| | (36 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY | | 3,565 |
| | 1,131 |
| | 4,696 |
|
NONCONTROLLING INTERESTS: | | | | | | |
Balance, beginning of period | | 122 |
| | (83 | ) | | 39 |
|
Net loss attributable to noncontrolling interests | | — |
| | — |
| | — |
|
Distributions to noncontrolling interest owners | | — |
| | — |
| | — |
|
Balance, end of period | | 122 |
| | (83 | ) | | 39 |
|
TOTAL EQUITY | | $ | 3,687 |
| | $ | 1,048 |
| | $ | 4,735 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | |
Balance, beginning and end of period | | $ | 1,671 |
| | $ | — |
| | $ | 1,671 |
|
COMMON STOCK: | | | | | | |
Balance, beginning of period | | 9 |
| | — |
| | 9 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | |
Balance, beginning of period | | 14,408 |
| | — |
| | 14,408 |
|
Stock-based compensation | | 9 |
| | — |
| | 9 |
|
Dividends on preferred stock | | (23 | ) | | — |
| | (23 | ) |
Balance, end of period | | 14,394 |
| | — |
| | 14,394 |
|
ACCUMULATED DEFICIT: | | | | | | |
Balance, beginning of period | | (16,257 | ) | | 1,887 |
| | (14,370 | ) |
Net income (loss) attributable to Chesapeake | | 84 |
| | (230 | ) | | (146 | ) |
Balance, end of period | | (16,173 | ) | | 1,657 |
| | (14,516 | ) |
ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | |
Balance, beginning of period | | (40 | ) | | — |
| | (40 | ) |
Hedging activity | | 8 |
| | — |
| | 8 |
|
Balance, end of period | | (32 | ) | | — |
| | (32 | ) |
TREASURY STOCK – COMMON: | | | | | | |
Balance, beginning of period | | (31 | ) | | — |
| | (31 | ) |
Purchase of 30,509 shares for company benefit plans | | — |
| | — |
| | — |
|
Release of 41,617 shares from company benefit plans | | — |
| | — |
| | — |
|
Balance, end of period | | (31 | ) | | — |
| | (31 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT) | | (162 | ) | | 1,657 |
| | 1,495 |
|
NONCONTROLLING INTERESTS: | | | | | | |
Balance, beginning of period | | 123 |
| | (81 | ) | | 42 |
|
Net income attributable to noncontrolling interests | | 1 |
| | (1 | ) | | — |
|
Distributions to noncontrolling interest owners | | (2 | ) | | — |
| | (2 | ) |
Balance, end of period | | 122 |
| | (82 | ) | | 40 |
|
TOTAL EQUITY (DEFICIT) | | $ | (40 | ) | | $ | 1,575 |
| | $ | 1,535 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | |
Balance, beginning of period | | $ | 1,671 |
| | $ | — |
| | $ | 1,671 |
|
Exchange of 40,000 shares of preferred stock for common stock | | (40 | ) | | — |
| | (40 | ) |
Balance, end of period | | 1,631 |
| | — |
| | 1,631 |
|
COMMON STOCK: | | | | | | |
Balance, beginning of period | | 9 |
| | — |
| | 9 |
|
Common shares issued for WildHorse Merger | | 7 |
| | — |
| | 7 |
|
Exchange of senior notes and convertible senior notes | | 3 |
| | — |
| | 3 |
|
Exchange of preferred stock | | — |
| | — |
| | — |
|
Balance, end of period | | 19 |
| | — |
| | 19 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | |
Balance, beginning of period | | 14,378 |
| | — |
| | 14,378 |
|
Common shares issued for WildHorse Merger | | 2,030 |
| | — |
| | 2,030 |
|
Exchange of preferred stock for 10,367,950 shares of common stock | | 40 |
| | — |
| | 40 |
|
Exchange of senior notes for 235,563,519 shares of common stock | | 438 |
| | — |
| | 438 |
|
Exchange of convertible senior notes for 73,389,094 shares of common stock | | 134 |
| | — |
| | 134 |
|
Equity component of convertible notes repurchases | | (2 | ) | | — |
| | (2 | ) |
Stock-based compensation | | 26 |
| | — |
| | 26 |
|
Dividends on preferred stock | | (69 | ) | | — |
| | (69 | ) |
Balance, end of period | | 16,975 |
| | — |
| | 16,975 |
|
ACCUMULATED DEFICIT: | | | | | | |
Balance, beginning of period | | (15,660 | ) | | 1,748 |
| | (13,912 | ) |
Net income attributable to Chesapeake | | 633 |
| | (617 | ) | | 16 |
|
Balance, end of period | | (15,027 | ) | | 1,131 |
| | (13,896 | ) |
ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | |
Balance, beginning of period | | (23 | ) | | — |
| | (23 | ) |
Hedging activity | | 26 |
| | — |
| | 26 |
|
Balance, end of period | | 3 |
| | — |
| | 3 |
|
TREASURY STOCK – COMMON: | | | | | | |
Balance, beginning of period | | (31 | ) | | — |
| | (31 | ) |
Purchase of 2,673,903 shares for company benefit plans | | (7 | ) | | — |
| | (7 | ) |
Release of 296,864 shares from company benefit plans | | 2 |
| | — |
| | 2 |
|
Balance, end of period | | (36 | ) | | — |
| | (36 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY | | 3,565 |
| | 1,131 |
| | 4,696 |
|
NONCONTROLLING INTERESTS: | | | | | | |
Balance, beginning of period | | 123 |
| | (82 | ) | | 41 |
|
Net income (loss) attributable to noncontrolling interests | | 1 |
| | (1 | ) | | — |
|
Distributions to noncontrolling interest owners | | (2 | ) | | — |
| | (2 | ) |
Balance, end of period | | 122 |
| | (83 | ) | | 39 |
|
TOTAL EQUITY | | $ | 3,687 |
| | $ | 1,048 |
| | $ | 4,735 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Under Full Cost | | Successful Efforts Adjustment | | Under Successful Efforts |
| | ($ in millions) |
PREFERRED STOCK: | | | | | | |
Balance, beginning and end of period | | $ | 1,671 |
| | $ | — |
| | $ | 1,671 |
|
COMMON STOCK: | | | | | | |
Balance, beginning and end of period | | 9 |
| | — |
| | 9 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | |
Balance, beginning of period | | 14,437 |
| | — |
| | 14,437 |
|
Stock-based compensation | | 26 |
| | — |
| | 26 |
|
Dividends on preferred stock | | (69 | ) | | — |
| | (69 | ) |
Balance, end of period | | 14,394 |
| | — |
| | 14,394 |
|
ACCUMULATED DEFICIT: | | | | | | |
Balance, beginning of period | | (16,525 | ) | | 2,395 |
| | (14,130 | ) |
Net income (loss) attributable to Chesapeake | | 360 |
| | (738 | ) | | (378 | ) |
Cumulative effect of accounting change | | (8 | ) | | — |
| | (8 | ) |
Balance, end of period | | (16,173 | ) | | 1,657 |
| | (14,516 | ) |
ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | |
Balance, beginning of period | | (57 | ) | | — |
| | (57 | ) |
Hedging activity | | 25 |
| | — |
| | 25 |
|
Balance, end of period | | (32 | ) | | — |
| | (32 | ) |
TREASURY STOCK – COMMON: | | | | | | |
Balance, beginning of period | | (31 | ) | | — |
| | (31 | ) |
Purchase of 1,499,033 shares for company benefit plans | | (4 | ) | | — |
| | (4 | ) |
Release of 431,474 shares from company benefit plans | | 4 |
| | — |
| | 4 |
|
Balance, end of period | | (31 | ) | | — |
| | (31 | ) |
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT) | | (162 | ) | | 1,657 |
| | 1,495 |
|
NONCONTROLLING INTERESTS: | | | | | | |
Balance, beginning of period | | 124 |
| | (80 | ) | | 44 |
|
Net income attributable to noncontrolling interests | | 3 |
| | (2 | ) | | 1 |
|
Distributions to noncontrolling interest owners | | (5 | ) | | — |
| | (5 | ) |
Balance, end of period | | 122 |
| | (82 | ) | | 40 |
|
TOTAL EQUITY (DEFICIT) | | $ | (40 | ) | | $ | 1,575 |
| | $ | 1,535 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
3. | Oil and Natural Gas Property Transactions |
WildHorse Acquisition
On February 1, 2019, we acquired WildHorse Resource Development Corporation (“WildHorse”), an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas for approximately 717.4 million shares of our common stock and $381 million in cash. We funded the cash portion of the consideration through borrowings under the Chesapeake revolving credit facility. In connection with the closing, we acquired all of WildHorse’s debt. See Note 6 for additional information on the acquired debt.Purchase Price Allocation
We have accounted for the acquisition of WildHorse and its corresponding merger (the “Merger”) with and into our wholly owned subsidiary, Brazos Valley Longhorn, L.L.C. (“Brazos Valley Longhorn” or “BVL”), as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of WildHorse to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-acquisition contingencies and final appraisals of assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.
|
| | | |
| Preliminary Purchase Price Allocation |
| ($ in millions) |
Consideration: | |
Cash | $ | 381 |
|
Fair value of Chesapeake’s common stock issued in the Merger (a) | 2,037 |
|
Total consideration | $ | 2,418 |
|
| |
Fair Value of Liabilities Assumed: | |
Current liabilities | $ | 166 |
|
Long-term debt | 1,379 |
|
Deferred tax liabilities | 314 |
|
Other long-term liabilities | 36 |
|
Amounts attributable to liabilities assumed | $ | 1,895 |
|
| |
Fair Value of Assets Acquired: | |
Cash and cash equivalents | $ | 28 |
|
Other current assets | 128 |
|
Proved oil and natural gas properties | 3,264 |
|
Unproved properties | 756 |
|
Other property and equipment | 77 |
|
Other long-term assets | 60 |
|
Amounts attributable to assets acquired | $ | 4,313 |
|
| |
Total identifiable net assets | $ | 2,418 |
|
| |
(a) | Based on 717,376,170 Chesapeake common shares issued at closing at $2.84 per share (closing price as of February 1, 2019). |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
We included in our condensed consolidated statements of operations revenues of $543 million, direct operating expenses of $579 million and other expense of $67 million related to the WildHorse business for the period from February 1, 2019 to September 30, 2019.
Pro Forma Financial Information
The following unaudited pro forma financial information for the nine months ended September 30, 2019 and three and nine months ended September 30, 2018, respectively, is based on our historical consolidated financial statements adjusted to reflect as if the WildHorse acquisition had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in WildHorse’s statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments.
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2019 | | 2018 |
| | ($ in millions except per share data) |
Revenues | | $ | 2,607 |
| | $ | 6,661 |
| | $ | 7,692 |
|
Net income (loss) available to common stockholders | | $ | (199 | ) | | $ | (85 | ) | | $ | (543 | ) |
Earnings per common share: | | | | | | |
Basic | | $ | (0.12 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) |
Diluted | | $ | (0.12 | ) | | $ | (0.05 | ) | | $ | (0.33 | ) |
This unaudited pro forma information has been derived from historical information. The unaudited pro forma financial information is not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor is it necessarily indicative of future results.
Divestitures
In the Prior Period, we sold portions of our acreage, producing properties and other related property and equipment in the Mid-Continent, including our Mississippian Lime assets, for approximately $491 million, subject to certain customary closing adjustments. Included in the sales were approximately 238,500 net acres and interests in approximately 3,200 wells. Also, in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, we received proceeds of approximately $28 million, $8 million, $110 million and $31 million, respectively, subject to customary closing adjustments, for the sale of other oil and natural gas properties covering various operating areas.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
4. | Capitalized Exploratory Well Costs |
A summary of the changes in our capitalized well costs for the Current Period is detailed below. Additions pending the determination of proved reserves excludes amounts capitalized and subsequently charged to expense within the same year.
|
| | | | |
| | 2019 |
| | ($ in millions) |
Balance as of January 1 | | $ | 36 |
|
Additions pending the determination of proved reserves | | 14 |
|
Divestitures and other | | — |
|
Reclassifications to proved properties | | (18 | ) |
Charges to exploration expense | | (8 | ) |
Balance as of September 30 | | $ | 24 |
|
As of September 30, 2019, approximately $1 million of drilling and completion costs on exploratory wells pending determination of proved reserves have been capitalized for greater than one year.
Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding during the period and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide dividend rights.
Diluted EPS is calculated assuming the issuance of common shares for all potentially dilutive securities, provided the effect is not antidilutive. For all periods presented, our convertible senior notes did not have a dilutive effect and, therefore, were excluded from the calculation of diluted EPS.
Shares of common stock for the following securities were excluded from the calculation of diluted EPS as the effect was antidilutive:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | (in thousands) |
Common stock equivalent of our preferred stock outstanding(a) | 58 |
| | 60 |
| | 58 |
| | 60 |
| 290 |
| | 290 |
| | 290 |
| | 290 |
|
Common stock equivalent of our convertible senior notes outstanding(a) | 124 |
| | 146 |
| | 124 |
| | 146 |
| 0 |
| | 621 |
| | 621 |
| | 621 |
|
Common stock equivalent of our preferred stock outstanding prior to exchange(a) | 1 |
| | — |
| | 1 |
| | — |
| 0 |
| | 5 |
| | 0 |
| | 5 |
|
Participating securities(a) | — |
| | 2 |
| | — |
| | 1 |
| 0 |
| | 1 |
| | 0 |
| | 2 |
|
| |
(a) | Amount has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
As a result of the Company’s reverse stock split effective on April 14, 2020, proportionate adjustments were made to the conversion price of Chesapeake’s outstanding 5.5% Convertible Senior Notes due 2026, 4.5% Cumulative Convertible Preferred Stock, 5.00% Cumulative Convertible Preferred Stock (Series 2005B), 5.75% Cumulative Convertible Non-Voting Preferred Stock (Series A) and 5.75% Cumulative Non-Voting Convertible Preferred Stock and to the outstanding awards and number of shares issued and issuable under the Company's equity compensation plans. See Note 9 for additional information.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Our long-term debt consisted of the following as of September 30, 20192020 and December 31, 2018:2019:
| | | September 30, 2019 | | December 31, 2018 | September 30, 2020 | | December 31, 2019 |
| Principal Amount | | Carrying Amount | | Principal Amount | | Carrying Amount | Principal Amount | | Carrying Amount | | Principal Amount | | Carrying Amount |
| ($ in millions) | ($ in millions) |
Floating rate senior notes due 2019 | — |
| | — |
| | 380 |
| | 380 |
| |
DIP credit facility | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Pre-petition revolving credit facility | | 1,929 |
| | 1,929 |
| | 1,590 |
| | 1,590 |
|
Term loan due 2024 | | 1,500 |
| | 1,500 |
| | 1,500 |
| | 1,470 |
|
11.5% senior secured second lien notes due 2025 | | 2,330 |
| | 2,330 |
| | 2,330 |
| | 3,248 |
|
6.625% senior notes due 2020 | 208 |
| | 208 |
| | 437 |
| | 437 |
| 176 |
| | 176 |
| | 208 |
| | 208 |
|
6.875% senior notes due 2020 | 93 |
| | 93 |
| | 227 |
| | 227 |
| 73 |
| | 73 |
| | 93 |
| | 93 |
|
6.125% senior notes due 2021 | 167 |
| | 167 |
| | 548 |
| | 548 |
| 167 |
| | 167 |
| | 167 |
| | 167 |
|
5.375% senior notes due 2021 | 127 |
| | 127 |
| | 267 |
| | 267 |
| 127 |
| | 127 |
| | 127 |
| | 127 |
|
4.875% senior notes due 2022 | 338 |
| | 338 |
| | 451 |
| | 451 |
| 272 |
| | 272 |
| | 338 |
| | 338 |
|
5.75% senior notes due 2023 | 209 |
| | 209 |
| | 338 |
| | 338 |
| 167 |
| | 167 |
| | 209 |
| | 209 |
|
7.00% senior notes due 2024 | 850 |
| | 850 |
| | 850 |
| | 850 |
| 624 |
| | 624 |
| | 624 |
| | 624 |
|
6.875% senior notes due 2025(a) | 618 |
| | 621 |
| | — |
| | — |
| |
6.875% senior notes due 2025 | | 2 |
| | 2 |
| | 2 |
| | 2 |
|
8.00% senior notes due 2025 | 1,245 |
| | 1,237 |
| | 1,300 |
| | 1,291 |
| 246 |
| | 246 |
| | 246 |
| | 245 |
|
5.5% convertible senior notes due 2026(b) | 1,064 |
| | 758 |
| | 1,250 |
| | 866 |
| |
5.5% convertible senior notes due 2026 | | 1,064 |
| | 1,064 |
| | 1,064 |
| | 765 |
|
7.5% senior notes due 2026 | 400 |
| | 400 |
| | 400 |
| | 400 |
| 119 |
| | 119 |
| | 119 |
| | 119 |
|
8.00% senior notes due 2026 | 919 |
| | 885 |
| | — |
| | — |
| 46 |
| | 46 |
| | 46 |
| | 44 |
|
8.00% senior notes due 2027 | 1,090 |
| | 1,089 |
| | 1,300 |
| | 1,299 |
| 253 |
| | 253 |
| | 253 |
| | 253 |
|
2.25% contingent convertible senior notes due 2038 | — |
| | — |
| | 1 |
| | 1 |
| |
Chesapeake revolving credit facility | 1,504 |
| | 1,504 |
| | 419 |
| | 419 |
| |
BVL revolving credit facility(a) | 900 |
| | 900 |
| | — |
| | — |
| |
Debt issuance costs | — |
| | (46 | ) | | — |
| | (53 | ) | — |
| | 0 |
| | — |
| | (44 | ) |
Interest rate derivatives | — |
| | 1 |
| | — |
| | 1 |
| |
Total debt, net | 9,732 |
| | 9,341 |
| | 8,168 |
| | 7,722 |
| 9,095 |
| | 9,095 |
| | 8,916 |
| | 9,458 |
|
Less current maturities of long-term debt, net(c) | (208 | ) | | (208 | ) | | (381 | ) | | (381 | ) | |
Less current maturities of long-term debt | | (1,929 | ) | | (1,929 | ) | | (385 | ) | | (385 | ) |
Less amounts reclassified to liabilities subject to compromise | | (7,166 | ) | | (7,166 | ) | | 0 |
| | 0 |
|
Total long-term debt, net | $ | 9,524 |
| | $ | 9,133 |
| | $ | 7,787 |
| | $ | 7,341 |
| $ | 0 |
| | $ | 0 |
| | $ | 8,531 |
| | $ | 9,073 |
|
___________________________________________
| |
(a) | On February 1, 2019, we acquired the debt of WildHorse which consisted of 6.875% Senior Notes due 2025 and a revolving credit facility. We now refer to this debt as our BVL Senior Notes and our BVL revolving credit facility, respectively. See further discussion below. |
| |
(b) | We are required to account for the liability and equity components of our convertible debt instrument separately and to reflect interest expense through the first demand repurchase date, as applicable, at the interest rate of similar nonconvertible debt at the time of issuance. The applicable rate for our 5.5% Convertible Senior Notes due 2026 is 11.5%. Prior to maturity under certain circumstances and at the holder’s option, the notes are convertible. During the Current Quarter, the price of our common stock was below the threshold level for conversion and, as a result, the holders do not have the option to convert their notes in the fourth quarter of 2019. |
| |
(c) | As of September 30, 2019, net current maturities of long-term debt includes our 6.625% Senior Notes due August 2020. |
Chesapeake Revolving Credit FacilityChapter 11 Proceedings
Our Chesapeake revolving credit facility matures in September 2023 and the current aggregate commitmentFiling of the lendersChapter 11 Cases constituted an event of default with respect to certain of our secured and borrowing baseunsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stays the creditors from taking any action as a result of the default.
The principal amounts outstanding under the facility is $3.0 billion. The revolving credit facility provides for an accordion feature, pursuant to which the aggregate commitments thereunder may be increased to up to $4.0 billion from time to time,FLLO Term Loan, Second Lien Notes and all of our other unsecured senior and convertible senior notes have been reclassified as liabilities subject to agreementcompromise on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2020. Additionally, non-cash adjustments were made to write off all of the participating lendersrelated unamortized debt issuance costs and certainassociated discounts and premiums of approximately $457 million, which are included in reorganization items, net in the accompanying unaudited condensed consolidated statements of operations for the Current Period, as discussed in Note 1. The agreements for our FLLO Term Loan, Second Lien Notes, and unsecured senior and convertible senior notes contain provisions regarding the calculation of interest upon default. Upon default, the interest rate on the FLLO Term Loan increases from LIBOR plus 8.00% to alternative base rate (ABR) (3.25% during the third quarter) plus Applicable Margin (7.00% during the third quarter) plus 2.00%. For the Second Lien Notes and all of our other customary conditions. Scheduled borrowingunsecured senior and convertible senior notes, the interest rate remains the same upon default. However, interest accrues on the amount
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
base redeterminationsof unpaid interest in addition to the principal balance. We will continuenot pay or recognize interest on the FLLO Term Loan, Second Lien Notes, or unsecured senior and convertible senior notes during the Chapter 11 process.
Debtor-in-Possession Credit Agreement
On June 28, 2020, prior to occur semiannually. Our borrowing base was reaffirmed on November 1, 2019, and our next borrowing base redetermination is scheduled for the second quartercommencement of 2020. AsChapter 11 Cases, the Company entered into a commitment letter with certain of September 30, 2019, we had outstanding borrowings of $1.504 billionthe lenders (“New Money Lenders”) under the Chesapeakepre-petition revolving credit facility and/or their affiliates to provide the Debtors with a DIP Credit Facility in an aggregate principal amount of up to approximately $2.104 billion in commitments and had used $53loans from the New Money Lenders. The DIP Credit Facility consists of a revolving loan facility of new money in an aggregate principal amount of up to $925 million (the “New Money Facility”), which includes a sub-facility of up to $200 million for the Chesapeakeissuance of letters of credit, and a $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility: (i) a $925 million term loan reflecting the roll-up of a portion of outstanding existing borrowings made by the New Money Lenders under the existing revolving credit agreement (the “New Money Roll-Up Loans”) and (ii) an up to approximately $254 million term loan reflecting the roll-up or a portion of outstanding existing borrowings made by certain other lenders under the pre-petition revolving credit facility for various lettersagreement (the “Incremental Roll-Up Loans”). The $750 million of credit.
On February 1, 2019, we entered into a first amendment to our Chesapeake credit agreement. Among other things, the amendment (i) designated our subsidiary, Brazos Valley Longhorn, and its subsidiaries as unrestricted subsidiariesoutstanding borrowings under the Chesapeakepre-petition revolving credit facility that were not rolled up (the “Stub Loans”) will remain outstanding throughout the Chapter 11 Cases but will accrue interest at a lower rate than the rolled-up loans. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and (ii) expressly permitted our initial investment in WildHorse underfees for the limitationstransactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations and other such purposes consistent with the DIP Credit Facility. The DIP Credit Facility was approved by the Bankruptcy Court on investments covenant. As a resultfinal basis on July 31, 2020 and became effective as of BVL and its subsidiaries being designated as unrestricted subsidiaries under the Chesapeake revolving credit facility, transactions between BVL and its subsidiaries, on the one hand, and Chesapeake and its subsidiaries (other than BVL and its subsidiaries), on the other hand, are required to be on an arm’s-length basis, subject to certain exceptions, and Chesapeake is limited in the amount of investments it can make in BVL and its subsidiaries.July 1, 2020.
Borrowings under the Chesapeake revolving credit facilityDIP Credit Facility will mature, and the lending commitments thereunder will terminate, upon the earliest to occur of: (a) March 28, 2021 (the 9-month anniversary of the Petition Date); (b) the date of the termination of the commitments and/or the acceleration of all of obligations following the occurrence and continuance of an event of default defined the DIP Credit Facility; (c) the first business day on which the interim order, as defined in the DIP Credit Facility, expires or is terminated; (d) the conversion of any of Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (e) the dismissal of any of the Chapter 11 Cases; (f) the closing of a sale of all or substantially all of the equity or assets of the Debtors; (g) the date of the payment in full in cash of all obligations and termination of all the commitments of the Debtors and; (h) the effective date of any of the Debtors’ approved plan of reorganization.
Borrowings under the DIP Credit Facility bear interest at an alternative base rate (ABR)ABR or LIBOR, at our election, plus an applicable margin ranging from 0.50%-2.00%of 5.00% per annum for ABR loans and 1.50%-3.00%6.00% per annum for LIBOR loans dependingfor the New Money Facility and bear interest at an ABR or LIBOR, at our election, plus an applicable margin of 4.50% per annum for ABR loans and 5.50% per annum for LIBOR loans for the New Money Roll-Up Loans and Incremental Roll-up Loans. The Stub Loans bear interest at LIBOR plus an applicable margin of 3.50% per annum.
In addition to paying interest on outstanding principal under the percentageDIP Credit Facility, we are required to pay a commitment fee of 0.50% per annum to the lenders of the borrowing base then being utilized and whether our leverage ratio exceeds 4.00 to 1.00.
In July 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, the Chesapeake revolving credit facility has a term that extends beyond 2021. The Chesapeake revolving credit facility provides for a mechanism to amend the facility to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of LIBOR. However, we have not yet pursued any technical amendment or other contractual alternative to address this matter. We are currently evaluating the potential impactDIP Credit Facility in respect of the eventual replacementunutilized revolving commitments thereunder and a letter of the LIBOR interest rate.credit fee equal to 0.125% per annum.
The Chesapeake revolving credit facility isDIP Credit Facility includes negative covenants that, subject to various financialsignificant exceptions, limit our ability and other covenants. The termsthe ability of the Chesapeake credit agreement include covenants limiting,our restricted subsidiaries to, among other things, our ability to(i) incur additional indebtedness, (ii) create liens on assets, (iii) engage in mergers, consolidations, liquidations and dissolutions, (iv) sell assets, (v) make investments, loans or loans, incur liens, consummate mergersadvances, except as described in the DIP Credit Facility, (vi) pay dividends and similar fundamental changes, make restricted payments, make investmentsdistributions or repurchase capital stock, (vii) engage in unrestricted subsidiaries and enter intocertain transactions with affiliates.affiliates and (viii) change lines of business. The Chesapeake credit agreement contains financialDIP Credit Facility includes certain customary representations and warranties, affirmative covenants that require us to maintain (i) a leverage ratio, which is the ratioand events of consolidated indebtedness to consolidated EBITDAX, each as defined in the Chesapeake credit agreement to exclude amounts associated with unrestricted subsidiaries, of not more than 5.50 to 1 through the fiscal quarter ending September 30, 2019, which threshold decreases by 25 basis points each quarter until it reaches 4.00 to 1.00 for the fiscal quarter ending March 31, 2021 and every quarter thereafter, (ii) a secured leverage ratio of not more than 2.50 to 1.00 until the later of (x) the fiscal quarter ending March 31, 2021 or (y) the first fiscal quarter in which the Company’s leverage ratio does not exceed 4.00 to 1.00 and (iii) a fixed charge coverage ratio of not less than 2.00 to 1.00 through the fiscal quarter ending December 31, 2019; not less than 2.25 to 1.00 through the fiscal quarter ending June 30, 2020; and not less than 2.50 to 1.00 for the fiscal quarter ended September 30, 2020 and every quarter thereafter.
As of September 30, 2019, we were in compliance with all applicable financial covenants under the credit agreement and we were able to borrow up to the full availability under the Chesapeake revolving credit facility and had $1.443 billion of borrowing capacity thereunder.
Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuations in the future. If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern. Failure to comply with this covenant, if not waived, would result in an event of default, under our Chesapeake revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness. We are actively pursuing with support from the Board of Directors a variety of transactions and cost-cutting measures, including but not limited to reductiondefaults on account of nonpayment, breaches of representations and warranties and covenants, certain bankruptcy-related events, certain events under ERISA, material judgments and a change in corporate discretionary expenditures, refinancing transactions by uscontrol. If an event of default occurs, the lenders under the DIP Credit Facility will be entitled to take various actions, including the acceleration of all amounts due under the DIP Credit Facility and all actions permitted to be taken under the loan documents or our subsidiaries, capital exchange transactions, asset divestitures, reductionsapplication of law. In addition, the DIP Credit Facility is subject to various other financial performance covenants, including compliance with certain financial metrics to an approved budget and a required Asset Coverage Ratio (as defined in capital expenditures by approximately 30% inthe DIP Credit Agreement) of not less than 1.25:1.00. On September 15, 2020, and operational efficiencies. We believe it is probable that these measures, as we continueentered into the first amendment to implement them, will enable us to comply with our leverage ratio covenant.the DIP Credit Agreement. The amendment, among other things, amends the maximum hedging
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
BVL Revolving Credit Facilitycovenant to allow the Debtors to enter into additional non-speculative hedge agreements based on forecasted production.
Senior Notes
In connection with the acquisition of WildHorse, our subsidiary, BVL, became the borrower under the WildHorse revolving credit facility (as amended, the “BVL revolving credit facility”). The BVL revolving credit facility has a maximum creditCurrent Period, we repurchased approximately $160 million aggregate principal amount of $2.0 billion, with currentthe following senior notes for $95 million and recorded an aggregate commitments and a borrowing basegain of $1.3 billion. The BVL revolving credit facility matures in December 2021. Scheduled borrowing base redeterminations occur on at least a semi-annual basis, primarily on the basis of estimated proved reserves. The scheduled borrowing base redetermination for the fourth quarter of 2019 is ongoing, and there can be no assurance that the borrowing base will remain at $1.3 billion. As of September 30, 2019, BVL had outstanding borrowings of $900approximately $65 million under its credit agreement. The BVL revolving credit facility is guaranteed by certain of BVL’s subsidiaries (the “BVL Guarantors”) and is required to be secured, and is secured, by substantially all of the assets of BVL and the BVL Guarantors, including mortgages on not less than 85% of the proved reserves of their oil and gas properties..
On February 1, 2019, BVL, as successor by merger to WildHorse, entered into a sixth amendment to the BVL credit agreement. Among other things, the amendment (i) amended the merger covenant and the definition of change of control to permit our acquisition of WildHorse and (ii) permits borrowings under the BVL revolving credit facility to be used to redeem or repurchase the BVL Senior Notes so long as certain conditions are met. |
| | | | |
| | Notes Repurchased |
| | ($ in millions) |
6.625% senior notes due 2020 | | $ | 32 |
|
6.875% senior notes due 2020 | | 20 |
|
4.875% senior notes due 2022 | | 66 |
|
5.75% senior notes due 2023 | | 42 |
|
Total | | $ | 160 |
|
The obligations under the BVL revolving credit facility are the senior secured obligations of BVL and the BVL Guarantors. The obligations under the BVL revolving credit facility are not obligations of Chesapeake or any of its other subsidiaries. The obligations under the BVL revolving credit facility rank equally in right of payment with all other senior secured indebtedness of BVL and the other BVL Guarantors, and are effectively senior to the BVL and the BVL Guarantors’ senior unsecured indebtedness, including their obligations under the BVL Senior Notes, to the extent of the value of the collateral securing the BVL revolving credit facility.
The BVL revolving credit facility is used for the liquidity and expenses of BVL and its subsidiaries and not Chesapeake and its other subsidiaries. Revolving loans under the BVL revolving credit facility bear interest at an ABR, Eurodollar rate or LIBOR at BVL’s election, plus an applicable margin (ranging from 0.50%-1.50% per annum for ABR loans, 1.50%-2.50% per annum for Eurodollar loans and 1.50%-2.50% per annum for LIBOR Market Index loans), depending on Brazos Valley Longhorn’s total commitment usage. The unused portion of the total commitments are subject to a commitment fee that varies from 0.375% to 0.500%, depending on BVL’s total commitment usage.
In July 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, the BVL revolving credit facility has a stated maturity date in December 2021. Under the terms of the BVL revolving credit facility, the occurrence of certain events related to the phase-out of LIBOR would make Eurodollar borrowings unavailable and require BVL to borrow at the ABR rate or at an alternate rate of interest determined by the lenders under the BVL revolving credit facility as their cost of funds. We are currently evaluating the potential impact of the eventual phasing-out of LIBOR, including the amendment of the BVL revolving credit facility to implement a market-standard approach to the transition from LIBOR.
The terms of the BVL credit agreement include covenants limiting, among other things, the ability of BVL and its restricted subsidiaries (as defined in the BVL credit agreement) to incur additional indebtedness, make investments or loans, incur liens, consummate mergers or similar fundamental changes, make restricted payments, including distributions to Chesapeake, and enter into transactions with affiliates, including Chesapeake and its other subsidiaries. The BVL credit agreement also contains financial covenants that require BVL to maintain (i)(x) if there are no loans outstanding thereunder, a ratio of net debt to EBITDAX (as defined in the BVL credit agreement) of not more than 4.00 to 1.00 as of the last day of each fiscal quarter or (y) if there are such loans outstanding, a ratio of total funded debt to EBITDAX of not more than 4.00 to 1.00 as of the last day of each fiscal quarter and (ii) a ratio of current assets (including availability under the BVL revolving credit facility) to current liabilities of not less than 1.00 to 1.00 as of the last day of each fiscal quarter. As of September 30, 2019, we were in compliance with all applicable financial covenants under the BVL credit agreement and we were able to borrow up to the full availability under the BVL revolving credit facility.
Chesapeake Senior Notes
In the CurrentPrior Quarter, we privately negotiated exchanges of approximately $507 million principal amount of our outstanding senior notes for 235,563,519 shares of common stock and $186 million principal amount of our outstanding convertible senior notes for 73,389,094 shares of common stock. We recorded an aggregate net gain of approximately $64 million associated with the exchanges.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
In the Current Period, we issued at par approximately $919 million of 8.00% Senior Notes due 2026 (“2026 notes”) pursuant to a private exchange offer for the following outstanding senior unsecured notes: |
| | | | |
| | Notes Exchanged |
| | ($ in millions) |
6.625% senior notes due 2020 | | $ | 229 |
|
6.875% senior notes due 2020 | | 134 |
|
6.125% senior notes due 2021 | | 381 |
|
5.375% senior notes due 2021 | | 140 |
|
Total | | $ | 884 |
|
We may redeem some or all of the 2026 notes at any time prior to March 15, 2022 at a price equal to 100% of the principal amount of the notes to be redeemed plus a “make-whole” premium. At any time prior to March 15, 2022, we also may redeem up to 35% of the aggregate principal amount of each series of notes with an amount of cash not greater than the net cash proceeds of certain equity offerings at a specified redemption price. In addition, we may redeem some or all of the 2026 notes at any time on or after March 15, 2022 at the redemption prices in accordance with the terms of the notes, the indenture and supplemental indenture governing the notes. These senior notes are unsecured obligations of Chesapeake and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and rank senior in right of payment to all of our future subordinated indebtedness. Our obligations under the senior notes are jointly and severally, fully and unconditionally guaranteed by all of our wholly owned subsidiaries that guarantee the Chesapeake revolving credit facility and certain other unsecured senior notes. We accounted for the exchange as a modification to existing debt and no gain or loss was recognized.
In the Current Period, we repaid upon maturity $380 million principal amount of our Floating Rate Senior Notes due April 2019 with borrowings from our Chesapeake revolving credit facility.
BVL Senior Notes
As a result of the completion of the acquisition of WildHorse, BVL assumed the obligations under WildHorse’s $700 million aggregate principal amount of 6.875% Senior Notes due 2025 (the “BVL Senior Notes”) and Brazos Valley Longhorn Finance Corp. (“BVL Finance Corp.”), a wholly owned subsidiary of BVL, became a co-issuer of the BVL Senior Notes.
On February 1, 2019, BVL, as successor by merger to WildHorse, and BVL Finance Corp. entered into a fourth supplemental indenture (the “BVL supplemental indenture”) to the indenture governing the BVL Senior Notes (as supplemented, the “BVL indenture”). Pursuant to the BVL supplemental indenture, (i) BVL assumed the rights and obligations of WildHorse as issuer under the BVL indenture and (ii) BVL Finance Corp. was named as a co-issuer of the BVL Senior Notes under the BVL indenture.
The BVL Senior Notes are the senior unsecured obligations of BVL, BVL Finance Corp. and the other BVL Guarantors. The BVL Senior Notes are not obligations of Chesapeake or any of its other subsidiaries. The BVL Senior Notes rank equally in right of payment with all other senior unsecured indebtedness of BVL, BVL Finance Corp. and the other BVL Guarantors, and will be effectively subordinated to BVL’s, BVL Finance Corp.’s and the other BVL Guarantors’ senior secured indebtedness, including their obligations under the BVL revolving credit facility, to the extent of the value of the collateral securing such indebtedness.
The BVL indenture contains customary reporting covenants (including furnishing quarterly and annual reports to the holders of the BVL Senior Notes) and restrictive covenants that, among other things, limit the ability of BVL and its subsidiaries to: (i) pay dividends on, purchase or redeem BVL’s equity interests or purchase or redeem subordinated debt, unless such distributions, purchases or redemptions are permitted by certain exceptions, including for amounts based on BVL’s operating results, subject to the satisfaction of certain conditions, and a $25 million basket; (ii) make certain investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create or incur certain secured debt; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of BVL’s assets; (vii) enter into agreements that restrict distributions or other payments from BVL’s restricted subsidiaries to BVL; (viii) engage in transactions with affiliates, including Chesapeake and its other subsidiaries; and (ix) create unrestricted subsidiaries. These covenants are subject to a number of important qualifications and limitations. In
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
addition, most of the covenants will be terminated before the BVL Senior Notes mature if at any time no default or event of default exists under the BVL indenture and the BVL Senior Notes receive an investment grade rating from both of two specified ratings agencies. The BVL indenture also contains customary events of default.
The BVL credit agreement and the BVL indenture constrain the ability of BVL and its subsidiaries to make distributions or otherwise provide funds to, or guarantee the obligations of, Chesapeake and its other subsidiaries. The provisions of the BVL credit agreement and the BVL indenture require that all transactions between BVL and its subsidiaries, on the one hand, and Chesapeake and its other subsidiaries, on the other hand, be on an arm's-length basis, subject to certain exceptions.
In the CurrentPrior Quarter, we repurchased approximately $82 million principal amount of the BVLour 6.875% Senior Notes due 2025 for $76 million and recorded a $6 million gain.
Phase-Out of LIBOR
In July 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, our pre-petition revolving credit facility and our term loan have terms that extend beyond 2021. Our pre-petition revolving credit facility and our term loan each provide for a mechanism to amend the underlying agreements to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of LIBOR. However, we have not yet pursued any technical amendment or other contractual alternative to our pre-petition revolving credit facility or term loan to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.
Fair Value of Debt
We estimate the fair value of our senior notesLevel 1 debt based on the market value of our publicly traded debt as determined based on the yield of our senior notes (Level 1).notes. The fair value of all otherour Level 2 debt is based on a market approach using estimates provided by an independent investment financial data services firm (Level 2). Fairfirm. Upon emergence from the Chapter 11 Cases, the pre-petition revolving credit facility will be paid in full with proceeds from our exit financing and, therefore, the estimated fair value is compared toequals the carrying value excluding the impact of interest rate derivatives, inand is excluded from the table below:below.
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| | | | ($ in millions) | | | | | | ($ in millions) | | |
Short-term debt (Level 1) | | $ | 208 |
| | $ | 208 |
| | $ | 381 |
| | $ | 379 |
| | $ | 0 |
| | $ | 0 |
| | $ | 385 |
| | $ | 360 |
|
Long-term debt (Level 1) | | $ | 2,790 |
| | $ | 2,245 |
| | $ | 3,495 |
| | $ | 3,173 |
| | $ | 0 |
| | $ | 0 |
| | $ | 753 |
| | $ | 622 |
|
Long-term debt (Level 2) | | $ | 6,343 |
| | $ | 4,980 |
| | $ | 3,846 |
| | $ | 3,644 |
| | $ | 0 |
| | $ | 0 |
| | $ | 8,320 |
| | $ | 6,085 |
|
Liabilities subject to compromise (Level 1) | | | $ | 982 |
| | $ | 38 |
| | $ | 0 |
| | $ | 0 |
|
Liabilities subject to compromise (Level 2) | | | $ | 6,184 |
| | $ | 1,475 |
| | $ | 0 |
| | $ | 0 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
7.5. | Contingencies and Commitments |
There have been no material developments in previously reported legal or environmental contingencies or commitments other than the items discussed below. For a discussion
Contingencies
Chapter 11 Proceedings
Commencement of commitmentsthe Chapter 11 Cases automatically stayed the proceedings and contingencies, see “Contingencies and Commitments,” actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The plan contemplated by the RSA, if confirmed, will provide for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not been satisfied or addressed during the Chapter 11 Cases. See Note 4 to the Consolidated Financial Statements in our 2018 Form 10-K. Contingencies1 for additional information.
Litigation and Regulatory Proceedings
We are involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
Business Operations. We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
We and other natural gas producers have been named in various lawsuits alleging underpayment of royalties and other shares of the proceeds of production. The suitslawsuits against us allege, among other things, that we used below-market prices, made improper deductions, utilized improper measurement techniques, entered into arrangements with affiliates that resulted in underpayment of amounts owed in connection with the production and sale of natural gas and NGL, or similar theories. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class. The lawsuits seek compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our payment practices, pre-and post-judgment interest, and attorney’s fees and costs. Royalty plaintiffs have varying provisions in their respective leases, oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. We have resolved a number of these claims through negotiated settlements of past and future royalty obligations and have prevailed in various other lawsuits. We are currently defending numerous lawsuits seeking damages with respect to underpayment of royalties or other shares of the proceeds of production in multiple states where we have operated, including those discussed below.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that we violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement to which we are a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as a temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid, and a permanent injunction from further violations of the UTPCPL. We intend to vigorously defend these claims.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the divestiture of substantially all of our midstream business and most of our gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights, intentional interference with contractual relations, and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources. These lawsuits seek in aggregate compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our royalty payment practices, pre-and post-judgment interest, and attorney’s fees and costs. On December 20, 2017 and August 9, 2018, we reached tentative settlements to resolve substantially all Pennsylvania civil royalty cases for a total at that time of approximately $35$36 million. In light of our Bankruptcy Filing, the parties have reopened settlement discussions.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the properties and agreements involved, and the applicable production years.
On July 24, 2018, Healthcare of Ontario Pension Plan (HOOPP)HOOPP filed a demand for arbitration with the American Arbitration Association regarding HOOPP’s purchase of our interest in Chaparral Energy, Inc. stock for $215 million on January 5, 2014. HOOPP claims that we engaged in material misrepresentations and fraud, and that we violated the Securities Exchange Act of 1934 (the “Exchange Act”) and Oklahoma Uniform Securities Act. HOOPP seeks either rescission or $215 million in monetary damages, and in either case, interest, attorney’s fees, disgorgement and punitive damages. We intend to vigorously defend these claims.
On January 29, 2020, a well control incident occurred at one of our wellsites in Burleson County, Texas, causing the deaths of three of our contractors’ employees and injuring a fourth. In February 2019, a putative class action lawsuit wasconnection with this incident, eleven lawsuits have been brought against us and our contractors alleging negligence, gross negligence, and breach of contract, and seeking wrongful death damages, survival statute damages, exemplary damages, and interest. Ten of the suits have been filed in the District Court of Dallas County, Texas. A joint motion to consolidate filed by all the parties in nine of the ten Dallas County lawsuits is currently pending before the Texas against FTS International, Inc. (FTSI), certain investment banks, FTSI’s directors including certain ofMultidistrict Litigation Panel. The eleventh suit is pending in Burleson County, Texas. The proceedings are in their early stages and are all stayed due to the pending bankruptcy. Our general and excess liability insurance policies provide coverage for third party bodily injury and wrongful death claims, and the contracts between us and our officers and certain shareholders of FTSI including us. The lawsuit alleges various violations of Sections 11 (withcontractors with respect to certain of our officers in their capacities as directors of FTSI) and 15 (with respect to such officers and us) of the Securities Act of 1933 in connection with public disclosure made duringwell contain customary cross-indemnification provisions. The well control incident liability was not reduced for the initial public offering of FTSI. The suit seeks damages in excess of $1,000,000 and attorneys’ fees and other expenses. We intend to vigorously defend these claims.potential insurance recovery. A receivable for the probable recovery was accrued.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
We are named as a defendant in numerous lawsuits in Oklahoma alleging that we and other companies have engaged in activities that have caused earthquakes. These lawsuits seek compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress. In addition, they seek the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest. We intend to vigorously defend these claims.
We previously disclosed ongoing discussions between our subsidiary, Chesapeake Appalachia, L.L.C. (“CALLC”) and the Pennsylvania Department of Environmental Protection related to gas migration in the vicinity of certain of our wells in Bradford County. Those concerns were resolved by the parties on August 28, 2019. Pursuant to the settlement, CALLC paid a civil penalty of less than $100,000.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded as obligations in the accompanying condensed consolidated balance sheets; however, they are reflected in our estimates of proved reserves.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below:
| | | | September 30, 2019 | | September 30, 2020 |
| | ($ in millions) | | ($ in millions) |
Remainder of 2019 | | $ | 201 |
| |
2020 | | 764 |
| |
Remainder of 2020 | | | $ | 255 |
|
2021 | | 673 |
| | 872 |
|
2022 | | 570 |
| | 804 |
|
2023 | | 480 |
| | 671 |
|
2024 – 2035 | | 2,731 |
| |
2024 | | | 597 |
|
2025 – 2034 | | | 3,051 |
|
Total | | $ | 5,419 |
| | $ | 6,250 |
|
In addition, we have entered into long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees may vary with the applicable agreement.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Other current liabilities as of September 30, 20192020 and December 31, 20182019 are detailed below:
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| | ($ in millions) | | ($ in millions) |
Revenues and royalties due others | | $ | 429 |
| | $ | 687 |
| | $ | 235 |
| | $ | 516 |
|
Accrued drilling and production costs | | 474 |
| | 258 |
| | 88 |
| | 326 |
|
Debt and equity financing fees | | | 69 |
| | 0 |
|
Joint interest prepayments received | | 49 |
| | 73 |
| | 27 |
| | 52 |
|
VPP deferred revenue(a) | | 56 |
| | 59 |
| |
Accrued compensation and benefits | | 156 |
| | 202 |
| |
Operating leases(a) | | | 23 |
| | 9 |
|
Accrued reorganization professional fees | | | 23 |
| | 0 |
|
VPP deferred revenue(b) | | | 22 |
| | 55 |
|
Accrued compensation and benefits(c) | | | 61 |
| | 156 |
|
Other accrued taxes | | 141 |
| | 108 |
| | 123 |
| | 150 |
|
Other | | 185 |
| | 212 |
| | 82 |
| | 168 |
|
Total other current liabilities | | $ | 1,490 |
| | $ | 1,599 |
| | $ | 753 |
| | $ | 1,432 |
|
Other long-term liabilities as of September 30, 20192020 and December 31, 20182019 are detailed below:
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| | ($ in millions) | | ($ in millions) |
VPP deferred revenue(a)(b) | | $ | 22 |
| | $ | 63 |
| | $ | 0 |
| | $ | 9 |
|
Unrecognized tax benefits | | 55 |
| | 53 |
| |
Other | | 109 |
| | 103 |
| | 16 |
| | 116 |
|
Total other long-term liabilities | | $ | 186 |
| | $ | 219 |
| | $ | 16 |
| | $ | 125 |
|
| |
(a) | In the Current Quarter, we entered into a drilling rig contract that extends through 2021 and recorded an operating lease liability and right-of-use asset. |
| |
(b) | At the inception of our volumetric production payment (VPP) agreements, we (i) removed the proved reserves associated with the VPP, (ii) recognized VPP proceeds as deferred revenue which are being amortized on a unit-of-production basis to other revenue over the term of the VPP, (iii) retained responsibility for the production costs and capital costs related to VPP interests and (iv) ceased recognizing production associated with the VPP volumes. The remaining deferred revenue balance will be recognized in other revenues in the consolidated statement of operations through 2021, assuming the related VPP production volumes are delivered as scheduled. |
| |
(c) | In the Current Period, we terminated our nonqualified deferred compensation plan. Accordingly, we derecognized the asset associated with the plan after the participants’ investments were liquidated. The cash was distributed to the participants, and we extinguished the corresponding $43 million accrued liability. |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
We are a lessee under various agreements for compressors, office space, vehicles and other equipment. As of September 30, 2019, these leases have remaining terms ranging from one month to 7.3 years. Certain of our lease agreements include options to renew the lease, terminate the lease early or purchase the underlying asset at the end of the lease. We determine the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when we are reasonably certain to exercise the option. The company’s vehicles are the only leases with renewal options that we are reasonably certain to exercise. The renewals are reflected in the ROU asset and lease liability balances.
Upon adoption of ASC 842 on January 1, 2019, we recognized a nominal operating lease liability and a nominal related ROU asset related to vehicles we lease.
On February 1, 2019, we acquired WildHorse and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $40 million, a related ROU asset of $38 million, and lease incentives of $2 million related to 2 office space leases, a long-term hydraulic fracturing agreement and other equipment leases. Regarding our long-term hydraulic fracturing agreements, we made a policy election to treat both lease and non-lease components as a single lease component.
In 2018, we sold our wholly owned subsidiary, Midcon Compression, L.L.C., to a third party and subsequently leased back some natural gas compressors for 38 months. The lease is accounted for as a finance lease liability.
The following table presents our ROU assets and lease liabilities as of September 30, 2019.
|
| | | | | | | | |
| | Financing | | Operating |
| | ($ in millions) |
ROU assets | | $ | 20 |
| | $ | 22 |
|
| | | | |
Lease liabilities: | | | | |
Current lease liabilities | | $ | 9 |
| | $ | 9 |
|
Long-term lease liabilities | | 11 |
| | 16 |
|
Total lease liabilities | | $ | 20 |
| | $ | 25 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Additional information for the Company’s operating and finance leases is presented below:
|
| | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Lease cost: | | ($ in millions) |
Amortization of ROU assets | | $ | 2 |
| | $ | 6 |
|
Interest on lease liability | | — |
| | 1 |
|
Finance lease cost | | 2 |
| | 7 |
|
Operating lease cost | | 7 |
| | 24 |
|
Short-term lease cost | | 34 |
| | 82 |
|
Total lease cost(a) | | $ | 43 |
| | $ | 113 |
|
| | | | |
Other information: | | | | |
Operating cash outflows from finance lease | | $ | — |
| | $ | 1 |
|
Operating cash outflows from operating leases | | $ | 3 |
| | $ | 8 |
|
Investing cash outflows from operating leases | | $ | 38 |
| | $ | 98 |
|
Financing cash outflows from finance lease | | $ | 2 |
| | $ | 6 |
|
| | | | |
| | | | |
Weighted-average remaining lease term - finance lease | |
|
| | 2.25 years |
|
Weighted-average remaining lease term - operating leases | |
|
| | 4.87 years |
|
Weighted-average discount rate - finance lease | |
|
| | 7.50 | % |
Weighted-average discount rate - operating leases | |
|
| | 4.17 | % |
| |
(a) | Includes $38 million and $98 million of capitalized lease costs for the Current Quarter and the Current Period, respectively. |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Maturity analysis of finance lease liabilities and operating lease liabilities are presented below:
|
| | | | | | | | |
| | September 30, 2019 |
| | Financing Lease | | Operating Leases |
| | ($ in millions) |
Remainder of 2019 | | $ | 3 |
| | $ | 2 |
|
2020 | | 10 |
| | 9 |
|
2021 | | 10 |
| | 5 |
|
2022 | | — |
| | 3 |
|
2023 | | — |
| | 2 |
|
Thereafter | | — |
| | 7 |
|
Total lease payments | | 23 |
| | 28 |
|
Less imputed interest | | (3 | ) | | (3 | ) |
Present value of lease liabilities | | 20 |
| | 25 |
|
Less current maturities | | (9 | ) | | (9 | ) |
Present value of lease liabilities, less current maturities | | $ | 11 |
| | $ | 16 |
|
The aggregate undiscounted minimum future lease payments under previous lease accounting standard, ASC 840, are presented below:
|
| | | | | | | | |
| | December 31, 2018 |
| | Capital Lease | | Operating Leases |
| | ($ in millions) |
2019 | | $ | 10 |
| | $ | 3 |
|
2020 | | 10 |
| | 1 |
|
2021 | | 10 |
| | — |
|
Total minimum lease payments | | $ | 30 |
| | $ | 4 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The FASB issued Revenue from Contracts with Customers (Topic 606) superseding virtually all existing revenue recognition guidance. We adopted this new standard in the Prior Period using the modified retrospective approach. We applied the new standard to all contracts that were not completed as of January 1, 2018 and reflected the aggregate effect of all modifications in determining and allocating the transaction price. The cumulative effect of adoption of $8 million in the Prior Period did not have a material impact on our consolidated financial statements.
The following table shows revenue disaggregated by operating area and product type, for the Current Quarter the Prior Quarter, the Current Period and the Prior Period:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) |
Marcellus | | $ | — |
| | $ | 158 |
| | $ | — |
| | $ | 158 |
|
Haynesville | | — |
| | 129 |
| | — |
| | 129 |
|
Eagle Ford | | 282 |
| | 32 |
| | 22 |
| | 336 |
|
Brazos Valley | | 194 |
| | 10 |
| | 5 |
| | 209 |
|
Powder River Basin | | 97 |
| | 16 |
| | 5 |
| | 118 |
|
Mid-Continent | | 40 |
| | 8 |
| | 5 |
| | 53 |
|
Revenue from contracts with customers | | 613 |
| | 353 |
| | 37 |
| | 1,003 |
|
Gains on oil, natural gas and NGL derivatives | | 124 |
| | 43 |
| | — |
| | 167 |
|
Oil, natural gas and NGL revenue | | $ | 737 |
| | $ | 396 |
| | $ | 37 |
| | $ | 1,170 |
|
| | | | | | | | |
Marketing revenue from contracts with customers | | $ | 603 |
| | $ | 165 |
| | $ | 37 |
| | $ | 805 |
|
Other marketing revenue | | 80 |
| | 4 |
| | — |
| | 84 |
|
Losses on oil, natural gas and NGL derivatives | | — |
| | — |
| | — |
| | — |
|
Marketing revenue | | $ | 683 |
| | $ | 169 |
| | $ | 37 |
| | $ | 889 |
|
| | | | | | | | |
| | Three Months Ended September 30, 2018 |
| | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) |
Marcellus | | $ | — |
| | $ | 184 |
| | $ | — |
| | $ | 184 |
|
Haynesville | | — |
| | 195 |
| | — |
| | 195 |
|
Eagle Ford | | 399 |
| | 36 |
| | 58 |
| | 493 |
|
Powder River Basin | | 78 |
| | 17 |
| | 13 |
| | 108 |
|
Mid-Continent | | 58 |
| | 15 |
| | 12 |
| | 85 |
|
Utica | | 59 |
| | 131 |
| | 76 |
| | 266 |
|
Revenue from contracts with customers | | 594 |
| | 578 |
| | 159 |
| | 1,331 |
|
Losses on oil, natural gas and NGL derivatives | | (100 | ) | | (18 | ) | | (14 | ) | | (132 | ) |
Oil, natural gas and NGL revenue | | $ | 494 |
| | $ | 560 |
| | $ | 145 |
| | $ | 1,199 |
|
| | | | | | | | |
Marketing revenue from contracts with customers | | 707 |
| | 211 |
| | 112 |
| | 1,030 |
|
Other marketing revenue | | 119 |
| | 70 |
| | — |
| | 189 |
|
Marketing revenue | | $ | 826 |
| | $ | 281 |
| | $ | 112 |
| | $ | 1,219 |
|
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) |
Marcellus | | $ | 0 |
| | $ | 137 |
| | $ | 0 |
| | $ | 137 |
|
Haynesville | | 0 |
| | 92 |
| | 0 |
| | 92 |
|
Eagle Ford | | 189 |
| | 26 |
| | 26 |
| | 241 |
|
Brazos Valley | | 127 |
| | 3 |
| | 3 |
| | 133 |
|
Powder River Basin | | 36 |
| | 7 |
| | 4 |
| | 47 |
|
Mid-Continent | | 14 |
| | 5 |
| | 3 |
| | 22 |
|
Revenue from contracts with customers | | 366 |
| | 270 |
| | 36 |
| | 672 |
|
Losses on oil, natural gas and NGL derivatives | | (2 | ) | | (159 | ) | | 0 |
| | (161 | ) |
Oil, natural gas and NGL revenue | | $ | 364 |
| | $ | 111 |
| | $ | 36 |
| | $ | 511 |
|
| | | | | | | | |
Marketing revenue | | $ | 301 |
| | $ | 116 |
| | $ | 31 |
| | $ | 448 |
|
| | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) |
Marcellus | | $ | 0 |
| | $ | 158 |
| | $ | 0 |
| | $ | 158 |
|
Haynesville | | 0 |
| | 129 |
| | 0 |
| | 129 |
|
Eagle Ford | | 282 |
| | 32 |
| | 22 |
| | 336 |
|
Brazos Valley | | 194 |
| | 10 |
| | 5 |
| | 209 |
|
Powder River Basin | | 97 |
| | 16 |
| | 5 |
| | 118 |
|
Mid-Continent | | 40 |
| | 8 |
| | 5 |
| | 53 |
|
Revenue from contracts with customers | | 613 |
| | 353 |
| | 37 |
| | 1,003 |
|
Gains on oil, natural gas and NGL derivatives | | 124 |
| | 43 |
| | 0 |
| | 167 |
|
Oil, natural gas and NGL revenue | | $ | 737 |
| | $ | 396 |
| | $ | 37 |
| | $ | 1,170 |
|
| | | | | | | | |
Marketing revenue from contracts with customers | | $ | 603 |
| | $ | 165 |
| | $ | 37 |
| | $ | 805 |
|
Other marketing revenue | | 80 |
| | 4 |
| | 0 |
| | 84 |
|
Marketing revenue | | $ | 683 |
| | $ | 169 |
| | $ | 37 |
| | $ | 889 |
|
| | | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
| | | | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2020 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) | | ($ in millions) |
Marcellus | | $ | — |
| | $ | 656 |
| | $ | — |
| | $ | 656 |
| | $ | 0 |
| | $ | 445 |
| | $ | 0 |
| | $ | 445 |
|
Haynesville | | — |
| | 494 |
| | — |
| | 494 |
| | 0 |
| | 245 |
| | 0 |
| | 245 |
|
Eagle Ford | | 962 |
| | 117 |
| | 89 |
| | 1,168 |
| | 539 |
| | 77 |
| | 59 |
| | 675 |
|
Brazos Valley | | 513 |
| | 23 |
| | 12 |
| | 548 |
| | 375 |
| | 10 |
| | 9 |
| | 394 |
|
Powder River Basin | | 273 |
| | 59 |
| | 23 |
| | 355 |
| | 133 |
| | 28 |
| | 14 |
| | 175 |
|
Mid-Continent | | 131 |
| | 34 |
| | 26 |
| | 191 |
| | 44 |
| | 19 |
| | 9 |
| | 72 |
|
Revenue from contracts with customers | | 1,879 |
| | 1,383 |
| | 150 |
| | 3,412 |
| | 1,091 |
| | 824 |
| | 91 |
| | 2,006 |
|
Gains (losses) on oil, natural gas and NGL derivatives | | (49 | ) | | 190 |
| | — |
| | 141 |
| | 689 |
| | (116 | ) | | 0 |
| | 573 |
|
Oil, natural gas and NGL revenue | | $ | 1,830 |
| | $ | 1,573 |
| | $ | 150 |
| | $ | 3,553 |
| | $ | 1,780 |
| | $ | 708 |
| | $ | 91 |
| | $ | 2,579 |
|
| | | | | | | | | | | | | | | | |
Marketing revenue from contracts with customers | | $ | 1,830 |
| | $ | 741 |
| | $ | 202 |
| | $ | 2,773 |
| | $ | 930 |
| | $ | 338 |
| | $ | 76 |
| | $ | 1,344 |
|
Other marketing revenue | | 230 |
| | 38 |
| | — |
| | 268 |
| | 67 |
| | 1 |
| | 0 |
| | 68 |
|
Losses on oil, natural gas and NGL derivatives | | — |
| | (3 | ) | | — |
| | (3 | ) | |
Marketing revenue | | $ | 2,060 |
| | $ | 776 |
| | $ | 202 |
| | $ | 3,038 |
| | $ | 997 |
| | $ | 339 |
| | $ | 76 |
| | $ | 1,412 |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 | | Nine Months Ended September 30, 2019 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | ($ in millions) | | ($ in millions) |
Marcellus | | $ | — |
| | $ | 646 |
| | $ | — |
| | $ | 646 |
| | $ | 0 |
| | $ | 657 |
| | $ | 0 |
| | $ | 657 |
|
Haynesville | | 2 |
| | 603 |
| | — |
| | 605 |
| | 0 |
| | 494 |
| | 0 |
| | 494 |
|
Eagle Ford | | 1,148 |
| | 120 |
| | 143 |
| | 1,411 |
| | 962 |
| | 117 |
| | 88 |
| | 1,167 |
|
Brazos Valley | | | 513 |
| | 23 |
| | 12 |
| | 548 |
|
Powder River Basin | | 173 |
| | 40 |
| | 30 |
| | 243 |
| | 273 |
| | 59 |
| | 23 |
| | 355 |
|
Mid-Continent | | 196 |
| | 63 |
| | 42 |
| | 301 |
| | 131 |
| | 34 |
| | 26 |
| | 191 |
|
Utica | | 179 |
| | 350 |
| | 189 |
| | 718 |
| |
Revenue from contracts with customers | | 1,698 |
| | 1,822 |
| | 404 |
| | 3,924 |
| | 1,879 |
| | 1,384 |
| | 149 |
| | 3,412 |
|
Losses on oil, natural gas and NGL derivatives | | (388 | ) | | (85 | ) | | (27 | ) | | (500 | ) | |
Gains (losses) on oil, natural gas and NGL derivatives | | | (49 | ) | | 190 |
| | 0 |
| | 141 |
|
Oil, natural gas and NGL revenue | | $ | 1,310 |
| | $ | 1,737 |
| | $ | 377 |
| | $ | 3,424 |
| | $ | 1,830 |
| | $ | 1,574 |
| | $ | 149 |
| | $ | 3,553 |
|
| | | | | | | | | | | | | | | | |
Marketing revenue from contracts with customers | | 2,125 |
| | 733 |
| | 324 |
| | 3,182 |
| | $ | 1,830 |
| | $ | 741 |
| | $ | 202 |
| | $ | 2,773 |
|
Other marketing revenue | | 381 |
| | 175 |
| | — |
| | 556 |
| | 230 |
| | 38 |
| | 0 |
| | 268 |
|
Losses on marketing derivatives | | | 0 |
| | (3 | ) | | 0 |
| | (3 | ) |
Marketing revenue | | $ | 2,506 |
| | $ | 908 |
| | $ | 324 |
| | $ | 3,738 |
| | $ | 2,060 |
| | $ | 776 |
| | $ | 202 |
| | $ | 3,038 |
|
| | | | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Accounts Receivable
Our accounts receivable are primarily from purchasers of oil, natural gas and NGL and from exploration and production companies that own interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of all our counterparties and we generally require letters of credit or parent guarantees for receivables from parties deemed to have sub-standard credit, unless the credit risk can otherwise be mitigated. We utilize an allowance method in accounting for bad debtestimate expected credit losses using forecasts based on historical trendsinformation and current information, in addition to specifically identifying receivables that we believe may be uncollectible.
On January 1, 2020 we adopted ASU 2016-03, Financial Instruments-Credit Losses. The standard, as further amended, affects trade receivables, financial assets and certain other instruments that are not measured at fair value through net income. This ASU replaced the previously required incurred loss approach for estimating credit losses with an expected loss model. The adoption and implementation of this ASU did not have a material impact on our accounts receivable.
Accounts receivable as of September 30, 20192020 and December 31, 20182019 are detailed below:
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| | ($ in millions) | | ($ in millions) |
Oil, natural gas and NGL sales | | $ | 644 |
| | $ | 976 |
| | $ | 547 |
| | $ | 737 |
|
Joint interest | | 290 |
| | 211 |
| | 91 |
| | 200 |
|
Other | | 64 |
| | 77 |
| | 67 |
| | 74 |
|
Allowance for doubtful accounts | | (21 | ) | | (17 | ) | | (29 | ) | | (21 | ) |
Total accounts receivable, net | | $ | 977 |
| | $ | 1,247 |
| | $ | 676 |
| | $ | 990 |
|
We estimate our annual effective tax rate (AETR) for continuing operations in recording our interim quarterly income tax provision (or benefit) for the various jurisdictions in which we operate. The tax effects of statutory rate changes, significant unusual or infrequentinfrequently occurring items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of our estimated annual effective tax rateAETR as such items are recognized as discrete items in the quarter in which they occur.
ForOur estimated AETR for the Current Quarter our estimated annual effective tax rate is 0.0% as a result0.1%. The impairments of maintaining a full valuation allowance against our netlong-lived assets recorded during the first quarter of 2020 (see Note 13 for additional information on the impairments) resulted in the deferred tax asset. Taking into account our projected operating results for the fourth quarterposition attributable to Texas reverting back to a net asset before valuation allowance. As of December 31, 2019, we project remainingreported Texas as the only tax jurisdiction being in a net deferred tax assetliability position asand recorded an associated income tax expense of $10 million. The $10 million of net deferred tax liability attributable to Texas is being reversed through the determination of the estimated AETR for the year ended December 31, 2019. 2020. The estimated AETR is otherwise low as a result of projecting a full valuation allowance for the year with only the $10 million going through the estimated AETR as a deferred tax benefit.Based on all available positive and negative evidence, including projections of future taxable income, we believe it is more likely than not that theseour deferred tax assets will not be realized.realized, including the deferred tax assets attributable to Texas. A significant piece of objectively verifiable negative evidence evaluated is the cumulative loss incurred over the rolling thirty-six monththirty-six-month period ended September 30, 2019.2020. Such evidence limits our ability to consider various forms of subjective positive evidence, such as any projections forof future growth and earnings. However, should we return to a level of sustained profitability, consideration will need to be given to projections of future taxable income to determine whether such projections provide an adequate source of taxable income for the realization of our deferred tax assets.assets, primarily federal and state net operating loss (NOL) carryforwards. A full valuation allowance was recorded against our net deferred tax asset position for federal and state purposes as of September 30, 20192020 and, with the exception of Texas, which was in a net deferred tax liability position, as of December 31, 2018.2019.
On February 1, 2019, we completed the acquisition of WildHorse.WildHorse Resource Development Corporation (“WildHorse”). For federal income tax purposes, the transaction (the “WildHorse Merger”) qualified as a tax-free merger
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
under Section 368 of the Internal Revenue Code of 1986, as amended, (the “Code”) and, as a result, we acquired carryover tax basis in WildHorse’s assets and liabilities. We recorded a net deferred tax liability of $314 million as part of the business combination accounting for WildHorse. As a consequence of maintaininghaving a full valuation allowance against our net deferred tax asset, a partial release of the valuation allowance was recorded as a discrete income tax benefit of $314 million through the condensed consolidated statement of operations in the first quarter of 2019. The net deferred tax liability acquired includes deferred tax liabilities on plant, property and equipment and prepaid compensation totaling $401 million, partially offset by deferred tax assets totaling $87 million relating to federal net operating loss (NOL)NOL carryforwards, disallowed business interest carryforwards and certain other deferred tax assets. These carryforwards will be subject to an annual limitation under Section 382 of the Code of approximately $61 million. We determined that no separate valuation allowances were required to be established through business combination accounting against any of the individual deferred tax assets acquired.
We are subject to U.S. federal income tax as well as income and capital taxes in various state and local jurisdictions in which we operate. WeAs a result of having a full valuation allowance against our net deferred tax asset position, we did not record an income tax provision for the Current Quarter. However, we recorded an income tax benefit of $1$13 million for the Current Quarter and an incomePeriod, which includes the impact of Texas reverting back to a net deferred tax benefit of $315 million for the Current Period. Theasset position as well as recording a benefit for the Current Period was a resultamounts previously sequestered from refunds of the aforementioned discrete
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
item relating to the partial release of the valuation allowance in the amount of $314 million and state incomecorporate alternative minimum tax refunds resulting from the filing of amended state income tax returns reporting federal audit adjustments.(AMT) credits.
Our ability to utilize NOL carryforwards and possibly other tax attributes to reduce future federal taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of these attributes may be subject to an annual limitation under Section 382 of the Code should transactions involving our equity, including issuances of our stock or the sale or exchange of our stock by certain shareholders, result in a cumulative shift of more than 50% in the beneficial ownership of our stock during any three-year testing period (an “Ownership Change”). (For this purpose, “stock” includes certain preferred stock).stock.) Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change.
As of September 30, 2019,2020, we do not believe that an Ownership Change has occurred that would subject us to an annual limitation on the utilization of our NOL carryforwards disallowed interestand other tax attributes; however, our current ownership shift remains at greater than 40%.
On April 23, 2020, our Board of Directors approved the adoption of a rights plan that is designed to protect the availability of NOL carryforwards and other tax attributes. However,attributes by reducing the exchangeslikelihood of our common stock for certain outstanding senior notes that occurred duringan Ownership Change prior to confirmation of the Current QuarterPlan by the Bankruptcy Court (see Note 69 for further detailsadditional information on the rights plan). Further, as part of the debt exchanges) andChapter 11 Cases, the exchangeBankruptcy Court has granted a first day motion for entry of an order seeking relief that will enable the Company to closely monitor certain transfers of beneficial ownership of our common stock for certain Cumulative Convertible Preferred Stock which also occurred duringso as to be in a position to prevent such transfers with the Current Quarter (see Note 12 for further detailspurpose of the stock exchange) increased our cumulative shift to over 40%. As a result, future transactions involving our equity, including relatively small transactions and transactions beyond our control, could causeavoiding an Ownership Change prior to confirmation of the Plan by the Bankruptcy Court, thereby preserving the value of our NOL carryforwards and thereforeother tax attributes. Certain of the restructuring transactions contemplated by the RSA may have a material impact on the Company’s tax attributes, the full extent of which is currently unknown. Cancellation of indebtedness income resulting from such restructuring transactions may significantly reduce the Company’s tax attributes, including but not limited to NOL carryforwards. Further, the Company will experience an Ownership Change under Section 382 of the Code upon confirmation of the Plan by the Bankruptcy Court which will subject certain remaining tax attributes to an annual limitation under Section 382 of the Code. Additionally, the Company will incur significant one-time costs associated with the Plan, a material amount of which are non-deductible for tax purposes under the Code.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides relief to corporate taxpayers by permitting a five year carryback of NOLs incurred from 2018 through 2020, removing the 80% limitation on the utilization of NOL carryforwards, disallowedcertain NOLs carried forward to years beginning before January 1, 2021, increasing the 30% limitation on interest carryforwards and possibly other tax attributes.
Further, proposed regulations issued on September 10, 2019,expense deductibility under Section 382(h)163(j) of the Code (the “Proposed Regulations”) would, if finalized in their current form, significantly reduce our annual limitation should we experience an Ownership Change on or after the date the Proposed Regulations become final. Amongto 50% of adjusted taxable income for 2019 and 2020 and accelerating refunds for AMT credit carryforwards, along with a few other changes, the Proposed Regulations would, if finalized in their current form, limit the potential increasesprovisions. With respect to the annual limitation amount associated with certain built-in gains existing atCurrent Quarter and the time of an Ownership Change, thereby significantly reducing the ability to utilize tax attributes. As a result, certain NOL carryforwards, disallowed interest carryforwards and other tax attributes may need to be written off or have a valuation allowance maintained against them possibly leading to a material charge toCurrent Period, there was no net impact on our income tax expense.provision from the enactment of the CARES Act.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Common Stock
A summary of the changes in our common shares issued is detailed below.
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended, September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) |
Beginning balance | | 1,634,486 |
| | 913,271 |
| | 913,716 |
| | 908,733 |
|
Common shares issued for WildHorse Merger(a) | | — |
| | — |
| | 717,376 |
| | — |
|
Exchange of convertible notes(b) | | 73,389 |
| | — |
| | 73,389 |
| | — |
|
Exchange of senior notes(b) | | 235,564 |
| | — |
| | 235,564 |
| | — |
|
Exchange of preferred stock(c) | | 10,368 |
| | — |
| | 10,368 |
| | — |
|
Restricted stock issuances (net of forfeitures and cancellations)(d) | | 344 |
| | 421 |
| | 3,738 |
| | 4,959 |
|
Ending balance | | 1,954,151 |
| | 913,692 |
| | 1,954,151 |
| | 913,692 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Beginning balance(a) | | 9,780 |
| | 8,172 |
| | 9,773 |
| | 4,568 |
|
Common shares issued for WildHorse Merger(a) | | 0 |
| | 0 |
| | 0 |
| | 3,587 |
|
Exchange of convertible notes(a)(b) | | 0 |
| | 367 |
| | 0 |
| | 367 |
|
Exchange of senior notes(a)(b) | | 0 |
| | 1,178 |
| | 0 |
| | 1,178 |
|
Exchange of preferred stock(a)(c) | | 0 |
| | 52 |
| | 0 |
| | 52 |
|
Restricted stock issuances (net of forfeitures and cancellations)(a)(d) | | 0 |
| | 2 |
| | 7 |
| | 19 |
|
Ending balance(a) | | 9,780 |
| | 9,771 |
| | 9,780 |
| | 9,771 |
|
| |
(a) | All share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 3below for discussion of WildHorse Merger. additional information. |
| |
(b) | See Note 64 for a discussion of debt exchanges. |
| |
(c) | In the CurrentPrior Quarter, we exchanged 10,367,95051,839 shares of common stock for 40,000 shares of our 5.75% (Series A) Cumulative Convertible Preferred Stock. In connection with the exchange, we recognized a loss equal to the excess of the fair value of all common stock issued in exchange for the preferred stock over the fair value of the common stock issuable pursuant to the original terms of the preferred stock. The loss of $17$17 million is reflected as a reduction to net income available to common stockholders for the purpose of calculating earnings per common share. |
| |
(d) | See Note 1310 for a discussion of restricted stock. |
Reverse Stock Split
On April 13, 2020, our Board of Directors and our shareholders approved a 1-for-200 (1:200) reverse stock split of our common stock and a reduction of the total number of authorized shares of our common stock as determined by a formula based on two-thirds of the reverse stock split ratio. The reverse stock split became effective as of the close of business on April 14, 2020. Our common stock began trading on a split-adjusted basis on the NYSE at the market open on April 15, 2020. The par value of the common stock was not adjusted as a result of the reverse stock split.
The reverse stock split was intended to, among other things, increase the per share trading price of our common shares to satisfy the $1.00 minimum closing price requirement for continued listing on the NYSE. As a result of the reverse stock split, each 200 pre-split shares of common stock outstanding were automatically combined into one issued and outstanding share of common stock. The fractional shares that resulted from the reverse stock split were canceled by paying cash in lieu of the fair value. The number of outstanding shares of common stock were reduced from approximately 1.957 billion as of April 10, 2020 to approximately 9.784 million shares (without giving effect to the liquidation of fractional shares). The total number of shares of common stock that we are authorized to issue was reduced from 3,000,000,000 to 22,500,000 shares. All share and per share amounts in the accompanying condensed consolidated financial statements and notes thereto were retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of our common stock to additional paid-in capital.
Preferred Stock Dividend Suspension
On April 17, 2020, we announced that we were suspending payment of dividends on each series of our outstanding convertible preferred stock. Suspension of the dividends did not constitute an event of default under any of our debt instruments.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Preferred StockAdoption of Rights Plan
A summaryOn April 23, 2020, the Board of Directors of the changes in ourCompany declared a dividend of one preferred share purchase right (a “Right”), payable on May 4, 2020, for each share of common stock, par value $0.01 per share, of the Company outstanding on May 4, 2020 to the stockholders of record on that date. In connection with the distribution of the Rights, the Company entered into a Section 382 Rights Agreement (the “Rights Agreement”), dated as of April 23, 2020, between the Company and Computershare Trust Company, N.A., as rights agent. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Preferred Stock, par value $0.01 per share, of the Company at a price of $90.00 subject to adjustment.
The purpose of the Rights Agreement is to protect value by preserving the Company’s ability to use its tax attributes (e.g., federal NOLs) to offset potential future income taxes for federal income tax purposes. As of December 31, 2019, the Company had federal NOLs of approximately $7.6 billion available to offset future federal taxable income. The Company’s ability to use its federal NOLs as well as other tax attributes would be substantially limited if it experiences an Ownership Change. The Rights Agreement is intended to reduce the likelihood of an Ownership Change by deterring any person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding shares of preferred stock is detailed below.our common stock.
The Rights Agreement will expire on the close of business on the day following the certification of the voting results from the Company’s 2021 annual meeting, unless the Company’s shareholders ratify the Rights Agreement at or prior to such meeting, in which case it will continue in effect until April 22, 2023, unless terminated earlier in accordance with its terms.
|
| | | | | | | | | | | | | | | | |
| | 5.75% | | 5.75% (A) | | 4.50% | | 5.00% (2005B) |
| | (in thousands) |
Shares outstanding as of July 1, 2019 | | 770 |
| | 463 |
| | 2,559 |
| | 1,811 |
|
Exchange of preferred stock(a) | | — |
| | (40 | ) | | — |
| | — |
|
Shares outstanding as of September 30, 2019 | | 770 |
| | 423 |
| | 2,559 |
| | 1,811 |
|
| | | | | | | | |
Shares outstanding as of July 1, 2018 and September 30, 2018 | | 770 |
| | 463 |
| | 2,559 |
| | 1,811 |
|
| | | | | | | | |
Shares outstanding as of January 1, 2019 | | 770 |
| | 463 |
| | 2,559 |
| | 1,811 |
|
Exchange of preferred stock(a) | | — |
| | (40 | ) | | — |
| | — |
|
Shares outstanding as of September 30, 2019 | | 770 |
| | 423 |
| | 2,559 |
| | 1,811 |
|
| | | | | | | | |
Shares outstanding as of January 1, 2018 and September 30, 2018 | | 770 |
| | 463 |
| | 2,559 |
| | 1,811 |
|
| | | | | | | | |
Liquidation price per share | | $ | 1,000 |
| | $ | 1,000 |
| | $ | 100 |
| | $ | 100 |
|
| |
(a) | See discussion above regarding the exchange of our 5.75% (Series A) Cumulative Convertible Preferred Stock in the Current Quarter. |
| |
13.10. | Share-Based Compensation |
Our share-based compensation program consists of restricted stock, stock options, performance share units (PSUs) and cash restricted stock units (CRSUs) granted to employees and restricted stock granted to non-employee directors under our long-term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs and CRSUs are liability-classified awards. On May 5, 2020, all of the outstanding share-based compensation issued to executive officers and designated vice presidents was canceled and replaced with cash retention incentives. Refer to 2020 Compensation Adjustments below for more information.
Equity-Classified Awards
Restricted Stock. We grant restricted stock units to employees and non-employee directors. A summary of the changes in unvested restricted stock during the Current Period is presented below:
|
| | | | | | | |
| | Shares of Unvested Restricted Stock | | Weighted Average Grant Date Fair Value Per Share |
| | (in thousands) | | |
Unvested restricted stock as of January 1, 2019 | | 11,858 |
| | $ | 4.43 |
|
Granted | | 5,370 |
| | $ | 2.85 |
|
Vested | | (5,439 | ) | | $ | 4.46 |
|
Forfeited | | (1,241 | ) | | $ | 3.75 |
|
Unvested restricted stock as of September 30, 2019 | | 10,548 |
| | $ | 3.69 |
|
|
| | | | | | | |
| | Shares of Unvested Restricted Stock(a) | | Weighted Average Grant Date Fair Value Per Share(a) |
| | (in thousands) | | |
Unvested as of January 1, 2020 | | 52 |
| | $ | 710 |
|
Granted | | 68 |
| | $ | 60 |
|
Vested | | (21 | ) | | $ | 794 |
|
Forfeited/canceled | | (97 | ) | | $ | 243 |
|
Unvested as of September 30, 2020 | | 2 |
| | $ | 584 |
|
| |
(a) | All share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
The aggregate intrinsic value of restricted stock that vested during the Current Period was approximately $15$1 million based on the stock price at the time of vesting.
As of September 30, 20192020, there was approximately $24$1 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 1.921.14 years.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
Stock Options. In the Current Period and the Prior Period, we granted members of management stock options that vest ratably over a three-year period. Each stock option award has an exercise price equal to the closing price of our common stock on the grant date. Outstanding options expire seven years to ten years from the date of grant.
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on the average historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account our dividend policy, over the expected life of the option. We used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Period:
|
| | | |
Expected option life – years | | 6.0 |
|
Volatility | | 65.61 | % |
Risk-free interest rate | | 2.47 | % |
Dividend yield | | — | % |
The following table provides information related to stock option activity in the Current Period:
|
| | | | | | | | | | | | | |
| | Number of Shares Underlying Options | | Weighted Average Exercise Price Per Share | | Weighted Average Contract Life in Years | | Aggregate Intrinsic Value(a) |
| | (in thousands) | | | | | | ($ in millions) |
Outstanding as of January 1, 2019 | | 18,096 |
| | $ | 7.20 |
| | 7.15 | | $ | — |
|
Granted | | 1,000 |
| | $ | 2.97 |
| | | | |
Exercised | | — |
| | $ | — |
| | | | $ | — |
|
Expired | | (487 | ) | | $ | 6.49 |
| | | | |
Forfeited | | (589 | ) | | $ | 3.92 |
| | | | |
Outstanding as of September 30, 2019 | | 18,020 |
| | $ | 7.09 |
| | 6.12 | | $ | — |
|
Exercisable as of September 30, 2019 | | 12,999 |
| | $ | 8.30 |
| | 5.31 | | $ | — |
|
|
| | | | | | | | | | | | | |
| | Number of Shares Underlying Options(a) | | Weighted Average Exercise Price Per Share(a) | | Weighted Average Contract Life in Years | | Aggregate Intrinsic Value(b) |
| | (in thousands) | | | | | | ($ in millions) |
Outstanding as of January 1, 2020 | | 90 |
| | $ | 1,420 |
| | 5.70 | | $ | 0 |
|
Granted | | 0 |
| | $ | 0 |
| | | | |
Exercised | | 0 |
| | $ | 0 |
| | | | $ | 0 |
|
Expired | | (21 | ) | | $ | 893 |
| | | | |
Forfeited/canceled | | (47 | ) | | $ | 1,666 |
| | | | |
Outstanding as of September 30, 2020 | | 22 |
| | $ | 1,390 |
| | 4.24 | | $ | 0 |
|
Exercisable as of September 30, 2020 | | 22 |
| | $ | 1,400 |
| | 4.31 | | $ | 0 |
|
| |
(a) | All share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
| |
(b) | The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option. |
As of September 30, 20192020, there was $7 million of total0 unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a weighted average period of approximately 1.26 years, net of actual forfeitures.
Restricted Stock and Stock Option Compensation. We recognized the following compensation costs, net of actual forfeitures, related to restricted stock and stock options for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions) | ($ in millions) |
General and administrative expenses | $ | 6 |
| | $ | 7 |
| | $ | 21 |
| | $ | 24 |
| $ | 7 |
| | $ | 6 |
| | $ | 15 |
| | $ | 21 |
|
Oil and natural gas properties | 1 |
| | — |
| | 2 |
| | 2 |
| 0 |
| | 1 |
| | 1 |
| | 2 |
|
Oil, natural gas and NGL production expenses | 1 |
| | 1 |
| | 3 |
| | 4 |
| 0 |
| | 1 |
| | 1 |
| | 3 |
|
Exploration expenses | — |
| | — |
| | — |
| | — |
| |
Total restricted stock and stock option compensation | $ | 8 |
| | $ | 8 |
| | $ | 26 |
| | $ | 30 |
| $ | 7 |
| | $ | 8 |
| | $ | 17 |
| | $ | 26 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Liability-Classified Awards
Performance Share Units. In the Current Period and the Prior Period, we granted PSUs to senior management that vest ratably over a three-year performance period and are settled in cash. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors. Compensation expense associated with PSU awards is recognized over the service period based on the graded-vesting method. The value of the PSU awards at the end of each reporting period is dependent upon our estimates of the underlying performance measures.
For PSUs granted in 2017, performance metrics include a total shareholder return (TSR) component, which can range from 0% to 100% and an operational performance component based on finding and development costs, which can range from 0% to 100%, resulting in a maximum payout
|
| | | |
Grant Date Assumptions |
Assumption | | 2017 Awards |
Volatility | | 80.65 | % |
Risk-free interest rate | | 1.54 | % |
Dividend yield for value of awards | | — | % |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) |
| | | |
Reporting Period Assumptions |
Assumption | | 2017 Awards |
Volatility | | 95.41 | % |
Risk-free interest rate | | 1.87 | % |
Dividend yield for value of awards | | — | % |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)As the above assumptions and expected satisfaction of performance metrics change, the PSU liabilities will be adjusted quarterly through the end of the performance period.(Unaudited)
For PSUs granted in 2018 and 2019, performance metrics include an operational performance component based on a ratio of cumulative earnings before interest expense, income taxes, and depreciation, depletion and amortization expense (EBITDA) to capital expenditures, for which payout can range from 0% to 200%. For the 2019 award, EBITDA and capital expenditures will be adjusted for changes resulting from our conversion from the full cost method of accounting to the successful efforts method. The vested PSUs are settled in cash on each of the three annual vesting dates. We used the closing price of our common stock on the grant date to determine the grant date fair value of the PSUs. The PSU liability will be adjusted quarterly, based on changes in our stock price and expected satisfaction of performance metrics, through the end of the performance period.
Cash Restricted Stock Units. In 2018, we granted CRSUs to employees that vest straight-line over a three-year period and are settled in cash on each of the three annual vesting dates. The ultimate amount earned is based on the closing price of our common stock on each of the vesting dates. We used the closing price of our common stock on the grant date to determine the grant date fair value of the CRSUs. The CRSU liability will be adjusted quarterly, based on changes in our stock price, through the end of the vesting period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table presents a summary of our liability-classified awards:
|
| | | | | | | | | | | | | | | |
| | | | Grant Date Fair Value | | September 30, 2019 |
| | Units | | | Fair Value | | Vested Liability |
| | | | ($ in millions) | | ($ in millions) |
2019 PSU Awards: | | | | | | | | |
Payable 2020, 2021 and 2022 | | 4,785,372 |
| | $ | 14 |
| | $ | 7 |
| | $ | — |
|
2018 PSU Awards: | | | | | | | | |
Payable 2020 and 2021 | | 2,388,185 |
| | $ | 7 |
| | $ | 3 |
| | $ | — |
|
2017 PSU Awards: | | | | | | | | |
Payable 2020 | | 1,174,973 |
| | $ | 8 |
| | $ | 1 |
| | $ | 1 |
|
2018 CRSU Awards: | | | | | | | | |
Payable 2020 and 2021 | | 9,267,227 |
| | $ | 28 |
| | $ | 13 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | | Grant Date Fair Value | | September 30, 2020 |
| | Units(a) | | | Fair Value | | Vested Liability |
| | | | ($ in millions) | | ($ in millions) |
2018 CRSU Awards: | | | | | | | | |
Payable 2021 | | 14,273 |
| | $ | 9 |
| | $ | 0 |
| | $ | 0 |
|
| |
(a) | All share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information. |
We recognized the following compensation costs (credits), net of actual forfeitures, related to our liability-classified awards for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
General and administrative expenses | | $ | (1 | ) | | $ | (1 | ) | | $ | 7 |
| | $ | 20 |
| | $ | 0 |
| | $ | (1 | ) | | $ | (3 | ) | | $ | 7 |
|
Oil and natural gas properties | | 1 |
| | 1 |
| | 2 |
| | 2 |
| | 0 |
| | 1 |
| | 0 |
| | 2 |
|
Oil, natural gas and NGL production expenses | | — |
| | 1 |
| | 3 |
| | 3 |
| | 0 |
| | 0 |
| | (1 | ) | | 3 |
|
Exploration expenses | | — |
| | — |
| | — |
| | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total liability-classified awards compensation | | $ | — |
| | $ | 1 |
| | $ | 12 |
| | $ | 26 |
| | $ | 0 |
| | $ | 0 |
| | $ | (4 | ) | | $ | 12 |
|
2020 Compensation Adjustments
On May 5, 2020, all of the outstanding share-based compensation, including restricted stock, stock options, PSUs and CRSUs, granted to our executive officers and designated vice presidents was canceled and replaced with cash retention incentives. The cash retention incentives granted to executive officers are equally weighted between achievement of certain specified performance metrics and a service period. The cash retention incentives may be clawed back if an executive officer or vice president terminates employment for any reason other than a qualifying termination prior to the earlier of (i) the effective date of a plan of reorganization under Chapter 11 of the Bankruptcy Code or (ii) May 8, 2021. The transactions were considered a modification to the previously issued equity-classified awards. As such, the remaining unrecognized expense related to restricted stock and stock options will result in $18 million of share-based compensation expense to be amortized over the relevant service period of the new cash retention incentives. The $15 million after-tax fair value of the cash retention incentives was capitalized to other current assets in the condensed consolidated balance sheets in the Current Period and will be amortized over the relevant service period. The difference between the cash and after-tax value of the cash retention incentives of approximately $10 million, which is not subject to the claw back provisions contained within the agreements, was expensed to general and administrative expenses in the condensed consolidated statements of operations for the Current Period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
| |
14.11. | Derivative and Hedging Activities |
We use derivative instruments to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility. All of our oil, natural gas and NGL derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. NaN of our open oil, natural gas or NGL derivative instruments were designated for hedge accounting as of September 30, 20192020 or December 31, 2018.2019. Pursuant to the RSA associated with our Chapter 11 Cases, we are required to hedge a certain amount of our production with our DIP Credit Facility lenders. See Note 1 for additional details regarding these hedging requirements. Oil, Natural Gas and NGL Derivatives
As of September 30, 2019 and December 31, 2018, ourOur oil, natural gas and NGL derivative instruments consistedconsist of the following types of instruments:
| |
• | Swaps: We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options and call swaptions. |
| |
• | Options: We occasionally sell, and occasionally buy, call and put options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options and we receive the excess on bought call options. At the time of settlement, ifIf the market price is lower than the fixed price of the put option, we receive the difference on bought put options and pay the counterparty the difference on sold put options. If the market price settles below the fixed price of the call option or above the fixed price of the put option, no payment is due from either party. |
| |
• | Call Swaptions: We sell call swaptions to counterparties in exchange for a premium thatpremium. Swaptions allow the counterparty, on a specific date, to extend an existing fixed-price swap for a certain period of time or to increase the notional volumes of an existing fixed-price swap. |
| |
• | Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike prices, no payments are due from either party. Three-way collars include the sale by us of an additional put option in exchange for a more favorable strike price on the call option. This eliminates the counterparty’s downside exposure below the second put option strike price. |
| |
• | Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity. |
| |
• | Put spreads: These instruments contain a fixed floor price (bought put) and sub floor price (sold put). If the market price exceeds the bought put strike, we receive the market price. If the market price is between the bought put and sold put strike prices, we receive the bought put price. If the market price falls below the sub floor, we receive the market price plus the difference between the sold put and bought put. |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
The estimated fair values of our oil, natural gas and NGL derivative instrument assets (liabilities) as of September 30, 20192020 and December 31, 20182019 are provided below:
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| | Notional Volume | | Fair Value | | Notional Volume | | Fair Value | | Notional Volume | | Fair Value | | Notional Volume | | Fair Value |
| | | | ($ in millions) | | | | ($ in millions) | | | | ($ in millions) | | | | ($ in millions) |
Oil (mmbbl): | | | | | | | | | | | | | | | | |
Fixed-price swaps | | 22 |
| | $ | 152 |
| | 12 |
| | $ | 157 |
| | 26 |
| | $ | (5 | ) | | 24 |
| | $ | (7 | ) |
Collars | | 3 |
| | 33 |
| | 8 |
| | 98 |
| | 0 |
| | 0 |
| | 2 |
| | 14 |
|
Call swaptions | | 2 |
| | (1 | ) | | — |
| | — |
| |
Put options | | 1 |
| | (2 | ) | | — |
| | — |
| |
Basis protection swaps | | 2 |
| | 4 |
| | 7 |
| | 5 |
| | 0 |
| | 0 |
| | 8 |
| | (2 | ) |
Total oil | | 30 |
| | 186 |
| | 27 |
| | 260 |
| | 26 |
| | (5 | ) | | 34 |
| | 5 |
|
Natural gas (bcf): | | | | | | | | | | | | | | | | |
Fixed-price swaps | | 383 |
| | 139 |
| | 623 |
| | 26 |
| | 780 |
| | (161 | ) | | 265 |
| | 125 |
|
Three-way collars | | 15 |
| | 3 |
| | 88 |
| | 1 |
| |
Collars | | 9 |
| | 3 |
| | 55 |
| | (3 | ) | |
Call options | | 28 |
| | — |
| | 44 |
| | — |
| |
Call options (sold) | | | 0 |
| | 0 |
| | 22 |
| | 0 |
|
Call swaptions | | 136 |
| | (7 | ) | | 106 |
| | (9 | ) | | 0 |
| | 0 |
| | 29 |
| | (2 | ) |
Basis protection swaps | | 54 |
| | (1 | ) | | 50 |
| | — |
| | 0 |
| | 0 |
| | 30 |
| | 2 |
|
Total natural gas | | 625 |
| | 137 |
| | 966 |
| | 15 |
| | 780 |
| | (161 | ) | | 346 |
| | 125 |
|
Contingent consideration: | | | | | | | | | |
Utica divestiture | | | | — |
| | | | 7 |
| |
Total estimated fair value | | | | $ | 323 |
| | | | $ | 282 |
| | | | $ | (166 | ) | | | | $ | 130 |
|
We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss).
Contingent Consideration Arrangements
In 2018, we sold our Utica Shale position to EAP Ohio, LLC (“Encino”). The purchase and sale agreement with Encino provides for additional contingent payments to us of up to $100 million comprised of $50 million in consideration in each case if, on or prior to December 31, 2019, there is a period of twenty (20) trading days out of a period of thirty (30) consecutive trading days where (i) the average of the NYMEX natural gas strip prices for the months comprising the year 2022 equals or exceeds $3.00/mmbtu as calculated pursuant to the purchase agreement, and (ii) the average of the NYMEX natural gas strip price for the months comprising the year 2023 equals or exceeds $3.25/mmbtu as calculated pursuant to the purchase and sale agreement.
In the Current Period, based on the unlikelihood of any payout occurring related to the contingent consideration, we determined the contingent consideration had no fair value and recognized a $7 million unrealized loss, which is included as a reduction in our gains on sales of assets in the condensed consolidated statement of operations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Effect of Derivative Instruments – Condensed Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the condensed consolidated balance sheets as of September 30, 20192020 and December 31, 20182019 on a gross basis and after same-counterparty netting:
| | Balance Sheet Classification | | Gross Fair Value | | Amounts Netted in the Consolidated Balance Sheets | | Net Fair Value Presented in the Consolidated Balance Sheet | | Gross Fair Value | | Amounts Netted in the Consolidated Balance Sheets | | Net Fair Value Presented in the Consolidated Balance Sheets |
| | ($ in millions) | | ($ in millions) |
As of September 30, 2019 | | | | | | | |
As of September 30, 2020 | | | | | | | |
Commodity Contracts: | | | | | | | | | | | | |
Short-term derivative asset | | $ | 294 |
| | $ | (22 | ) | | $ | 272 |
| | $ | 12 |
| | $ | (12 | ) | | $ | 0 |
|
Long-term derivative asset | | 55 |
| | (4 | ) | | 51 |
| | 4 |
| | (4 | ) | | 0 |
|
Short-term derivative liability | | (22 | ) | | 22 |
| | — |
| | (117 | ) | | 12 |
| | (105 | ) |
Long-term derivative liability | | (4 | ) | | 4 |
| | — |
| | (65 | ) | | 4 |
| | (61 | ) |
Contingent Consideration: | | | | | | | |
Short-term derivative asset | | — |
| | — |
| | — |
| |
Total derivatives | | $ | 323 |
| | $ | — |
| | $ | 323 |
| | $ | (166 | ) | | $ | 0 |
| | $ | (166 | ) |
| | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | |
As of December 31, 2019 | | | | | | | |
Commodity Contracts: | | | | | | | | | | | | |
Short-term derivative asset | | $ | 306 |
| | $ | (104 | ) | | $ | 202 |
| | $ | 174 |
| | $ | (40 | ) | | $ | 134 |
|
Long-term derivative asset | | 117 |
| | (41 | ) | | 76 |
| |
Short-term derivative liability | | (107 | ) | | 104 |
| | (3 | ) | | (42 | ) | | 40 |
| | (2 | ) |
Long-term derivative liability | | (41 | ) | | 41 |
| | — |
| | (2 | ) | | 0 |
| | (2 | ) |
Contingent Consideration: | | | | | | | |
Short-term derivative asset | | 7 |
| | — |
| | 7 |
| |
Total derivatives | | $ | 282 |
| | $ | — |
| | $ | 282 |
| | $ | 130 |
| | $ | 0 |
| �� | $ | 130 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Effect of Derivative Instruments – Condensed Consolidated Statements of Operations
The components of oil, natural gas and NGL revenues for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
Oil, natural gas and NGL revenues | | $ | 1,003 |
| | $ | 1,331 |
| | $ | 3,412 |
| | $ | 3,924 |
| | $ | 672 |
| | $ | 1,003 |
| | $ | 2,006 |
| | $ | 3,412 |
|
Gains (losses) on undesignated oil, natural gas and NGL derivatives | | 175 |
| | (124 | ) | | 167 |
| | (475 | ) | | (154 | ) | | 175 |
| | 597 |
| | 167 |
|
Losses on terminated cash flow hedges | | (8 | ) | | (8 | ) | | (26 | ) | | (25 | ) | | (7 | ) | | (8 | ) | | (24 | ) | | (26 | ) |
Total oil, natural gas and NGL revenues | | $ | 1,170 |
| | $ | 1,199 |
| | $ | 3,553 |
| | $ | 3,424 |
| | $ | 511 |
| | $ | 1,170 |
| | $ | 2,579 |
| | $ | 3,553 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The components of marketing revenues for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
Marketing revenues | | $ | 889 |
| | $ | 1,219 |
| | $ | 3,042 |
| | $ | 3,738 |
| | $ | 448 |
| | $ | 889 |
| | $ | 1,412 |
| | $ | 3,042 |
|
Losses on undesignated marketing natural gas derivatives | | — |
| | — |
| | (4 | ) | | — |
| | 0 |
| | 0 |
| | 0 |
| | (4 | ) |
Total marketing revenues | | $ | 889 |
| | $ | 1,219 |
| | $ | 3,038 |
| | $ | 3,738 |
| | $ | 448 |
| | $ | 889 |
| | $ | 1,412 |
| | $ | 3,038 |
|
Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our condensed consolidated statements of stockholders’ equity related to our cash flow hedges is presented below:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| | Before Tax | | After Tax | | Before Tax | | After Tax | | Before Tax | | After Tax | | Before Tax | | After Tax |
| | ($ in millions) | | ($ in millions) |
Balance, beginning of period | | $ | (62 | ) | | $ | (5 | ) | | $ | (97 | ) | | (40 | ) | | $ | (28 | ) | | $ | 29 |
| | $ | (62 | ) | | $ | (5 | ) |
Losses reclassified to income | | 8 |
| | 8 |
| | 8 |
| | 8 |
| | 7 |
| | 7 |
| | 8 |
| | 8 |
|
Balance, end of period | | $ | (54 | ) | | $ | 3 |
| | $ | (89 | ) | | $ | (32 | ) | | $ | (21 | ) | | $ | 36 |
| | $ | (54 | ) | | $ | 3 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Before Tax | | After Tax | | Before Tax | | After Tax |
| | ($ in millions) |
Balance, beginning of period | | $ | (80 | ) | | $ | (23 | ) | | $ | (114 | ) | | (57 | ) |
Losses reclassified to income | | 26 |
| | 26 |
| | 25 |
| | 25 |
|
Balance, end of period | | $ | (54 | ) | | $ | 3 |
| | $ | (89 | ) | | $ | (32 | ) |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | Before Tax | | After Tax | | Before Tax | | After Tax |
| | ($ in millions) |
Balance, beginning of period | | $ | (45 | ) | | $ | 12 |
| | $ | (80 | ) | | $ | (23 | ) |
Losses reclassified to income | | 24 |
| | 24 |
| | 26 |
| | 26 |
|
Balance, end of period | | $ | (21 | ) | | $ | 36 |
| | $ | (54 | ) | | $ | 3 |
|
The accumulated other comprehensive loss as of September 30, 20192020 represents the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. Remaining deferred gain or loss amounts will be recognized in earnings in the month for which
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
the original contract months are to occur. As of September 30, 2019,2020, we expect to transfer approximately $34$16 million of net loss included in accumulated other comprehensive income (loss) to net income (loss) during the next 12 months. The remaining amounts will be transferred by December 31, 2022.
Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that have a high credit rating or are deemed by us to have acceptable credit strength, and are deemed by management to be competent and competitive market-makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of September 30, 2019,2020, our oil, natural gas and NGL derivative instruments were spread among 15seven counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that are also lenders (or affiliates of lenders) under the Chesapeake revolving credit facility and/or the BVL revolving credit facility.our DIP Credit Facility. The contracts entered into with these
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
counterparties are secured by the same collateral that secures the pre-petition revolving credit facilities.facility. In addition, we enter into bilateral hedging agreements with other counterparties. The counterparties’ and our obligations under the bilateral hedging agreements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds. As of September 30, 2019, there were no2020, we did not have any cash or letters of credit or cash posted as collateral for our commodity derivatives.
Fair Value
The fair value of our derivatives is based on third-party pricing models, which utilize inputs that are either readily available in the public market, such as oil, natural gas and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. Since oil, natural gas and NGL swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. All other derivatives have some level of unobservable input, such as volatility curves, and are therefore classified as Level 3. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
The following table provides information for financial assets (liabilities) measured at fair value on a recurring basis as of September 30, 20192020 and December 31, 2018:2019:
| | | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| | | | ($ in millions) | | | | | | ($ in millions) | | |
As of September 30, 2019 | | | | | | | | | |
As of September 30, 2020 | | | | | | | | | |
Derivative Assets (Liabilities): | | | | | | | | | | | | | | | | |
Commodity assets | | $ | — |
| | $ | 307 |
| | $ | 40 |
| | $ | 347 |
| | $ | 0 |
| | $ | 14 |
| | $ | 0 |
| | $ | 14 |
|
Commodity liabilities | | — |
| | (16 | ) | | (8 | ) | | (24 | ) | | 0 |
| | (180 | ) | | 0 |
| | (180 | ) |
Utica divestiture contingent consideration | | — |
| | — |
| | — |
| | — |
| |
Total derivatives | | $ | — |
| | $ | 291 |
| | $ | 32 |
| | $ | 323 |
| | $ | 0 |
| | $ | (166 | ) | | $ | 0 |
| | $ | (166 | ) |
| | | | | | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | |
As of December 31, 2019 | | | | | | | | | |
Derivative Assets (Liabilities): | | | | | | | | | | | | | | | | |
Commodity assets | | $ | — |
| | $ | 319 |
| | $ | 103 |
| | $ | 422 |
| | $ | 0 |
| | $ | 160 |
| | $ | 14 |
| | $ | 174 |
|
Commodity liabilities | | — |
| | (131 | ) | | (16 | ) | | (147 | ) | | 0 |
| | (42 | ) | | (2 | ) | | (44 | ) |
Utica divestiture contingent consideration | | — |
| | — |
| | 7 |
| | 7 |
| |
Total derivatives | | $ | — |
| | $ | 188 |
| | $ | 94 |
| | $ | 282 |
| | $ | 0 |
| | $ | 118 |
| | $ | 12 |
| | $ | 130 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
A summary of the changes in the fair values of our financial assets (liabilities) classified as Level 3 during the Current Period and the Prior Period is presented below:
| | | | Commodity Derivatives | | Utica Contingent Consideration | | Commodity Derivatives | | Utica Contingent Consideration |
| | | ($ in millions) |
Balance, as of January 1, 2020 | | | $ | 12 |
| | $ | 0 |
|
Total gains (losses) (realized/unrealized): | | | | | |
Included in earnings(a) | | | 3 |
| | 0 |
|
Total purchases, issuances, sales and settlements: | | | | | |
Settlements | | | (15 | ) | | 0 |
|
Balance, as of September 30, 2020 | | | $ | 0 |
| | $ | 0 |
|
| | ($ in millions) | | | | |
Balance, as of January 1, 2019 | | $ | 87 |
| | $ | 7 |
| | $ | 87 |
| | $ | 7 |
|
Total gains (losses) (realized/unrealized): | | | | | | | | |
Included in earnings(a) | | (47 | ) | | (7 | ) | | (47 | ) | | (7 | ) |
Total purchases, issuances, sales and settlements: | | | | | | | | |
Settlements | | (8 | ) | | — |
| | (8 | ) | | 0 |
|
Balance, as of September 30, 2019 | | $ | 32 |
| | $ | — |
| | $ | 32 |
| | $ | 0 |
|
| | | | | |
Balance, as of January 1, 2018 | | $ | (15 | ) | | $ | — |
| |
Total gains (losses) (realized/unrealized): | | | | | |
Included in earnings(a) | | (3 | ) | | — |
| |
Total purchases, issuances, sales and settlements: | | | | | |
Settlements | | 13 |
| | — |
| |
Balance, as of September 30, 2018 | | $ | (5 | ) | | $ | — |
| |
___________________________________________ |
| | | | | | | | | | | | | | | | | |
(a) | | | Commodity Derivatives | | Utica Contingent Consideration |
| | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | ($ in millions) |
| Total gains (losses) included in earnings for the period | | $ | 3 |
| | $ | (47 | ) | | $ | 0 |
| | $ | (7 | ) |
| Change in unrealized gains (losses) related to assets still held at reporting date | | $ | 0 |
| | $ | (57 | ) | | $ | 0 |
| | $ | (7 | ) |
|
| | | | | | | | | | | | | | | | | |
(a) | | | Commodity Derivatives | | Utica Contingent Consideration |
| | |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | | ($ in millions) |
| Total gains (losses) included in earnings for the period | | $ | (47 | ) | | $ | (3 | ) | | $ | (7 | ) | | $ | — |
|
| Change in unrealized gains (losses) related to assets still held at reporting date | | $ | (57 | ) | | $ | (3 | ) | | $ | (7 | ) | | $ | — |
|
Qualitative and Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
The significant unobservable inputs for Level 3 derivative contracts include market volatility. Changes in market volatility impact the fair value measurementA summary of our derivative contracts, whichexploration expense for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period is based on an estimate derived from option models. For example, an increase or decrease in the forward prices and volatility ofas follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
Impairments of unproved properties | | $ | 3 |
| | $ | 1 |
| | $ | 402 |
| | $ | 26 |
|
Dry hole expense | | 0 |
| | 8 |
| | 7 |
| | 8 |
|
Geological and geophysical expense and other | | 2 |
| | 8 |
| | 8 |
| | 22 |
|
Exploration expense | | $ | 5 |
| | $ | 17 |
| | $ | 417 |
| | $ | 56 |
|
Unproved oil and natural gas prices decreasesproperties are periodically assessed for impairment by considering future drilling and exploration plans, results of exploration activities, commodity price outlooks, planned future sales and expiration of all or increasesa portion of the fair valueprojects. The exploration expense charges during the Current Period are the result of oilnon-cash impairment charges in unproved properties, primarily in our Brazos Valley, Haynesville, Powder River Basin and natural gas derivatives. The following table presents quantitative information about Level 3 inputs used in the fair value measurement of our commodity derivative contracts at fair value as of September 30, 2019:
|
| | | | | | | | | | |
Instrument Type | | Unobservable Input | | Range | | Weighted Average | | Fair Value September 30, 2019 |
| | | | | | | | ($ in millions) |
Oil trades | | Oil price volatility curves | | 24.62% – 48.77% | | 32.55% | | $ | 33 |
|
Natural gas trades | | Natural gas price volatility curves | | 13.37% – 145.37% | | 37.40% | | $ | (1 | ) |
Mid-Continent operating areas.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
During the Current Period, the decrease in demand for crude oil primarily due to COVID-19 and sharp decline in commodity prices related to the combined impact of falling demand and increases in production from OPEC+ resulted in decreases in current and expected long-term crude oil and NGL sale prices. These conditions resulted in reductions to the market capitalization of peer companies in the energy industry. We determined these adverse market conditions represent a triggering event to perform an impairment assessment of our long-lived assets used in, and in support of, our operations, including proved oil and gas properties, and our sand mine assets.
Proved Oil and Gas Properties
Our impairment test involved a Step 1 assessment to determine if the net book value of our proved oil and natural gas properties is expected to be recovered from the estimated undiscounted future cash flows.
We calculated the expected undiscounted future net cash flows of our long-lived assets using management’s assumptions and expectations of (i) commodity prices, which are based on the NYMEX strip pricing escalated by an inflationary rate after 2 years, (ii) pricing adjustments for differentials, (iii) operating costs, (iv) capital investment plans, (v) future production volumes, and (vi) estimated proved reserves.
Unprecedented volatility in the price of oil due to the decrease in demand has led us to rely on NYMEX strip pricing, which represents a Level 1 input.
Certain oil and gas properties in our Eagle Ford, Brazos Valley, Powder River Basin, and Mid-Continent and other non-core operating areas failed the Step 1 assessment. For these assets, we used a discounted cash flow analysis to estimate fair value. The expected future net cash flows were discounted using a rate of 11%, which we believe represents the estimated weighted average cost of capital of a theoretical market participant. Based on Step 2 of our long-lived assets impairment test, we recognized an $8.446 billion impairment because the carrying value exceeded estimated fair market value as of March 31, 2020.
Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after two years, adjusted for differentials, and (v) a market-based weighted average cost of capital. We utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions.
Sand Mine
Our in-field sand mine assets predominately service the oil and gas properties in our Brazos Valley operating area. Based on management’s assumptions and expectations of (i) future commodity prices, (ii) capital investment plans in the Brazos Valley operating area, and (iii) future operating cost of the sand mine, management expects the market for sand to significantly decrease for the foreseeable future. As a result, we recognized a $76 million impairment related to our sand mine assets for the difference between fair value and the carrying value in the Current Period. The inputs used are classified as Level 3 fair value assumptions.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
14. | Capitalized Exploratory Well Costs |
A summary of the changes in our capitalized well costs for the Current Period is detailed below.
|
| | | | |
| | Nine Months Ended September 30, 2020 |
| | ($ in millions) |
Balance as of January 1 | | $ | 7 |
|
Charges to exploration expense | | (7 | ) |
Balance as of September 30 | | $ | 0 |
|
As of September 30, 2020, there were 0 drilling and completion costs on exploratory wells pending determination of proved reserves capitalized for greater than one year.
In the Current Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the current fair value of our investment in FTS International, Inc. (NYSE: FTSI) falling below book value of $23 million and remaining below that value as of the end of the Current Period. Based on FTSI’s operating results, we determined that the reduction in fair value is other-than-temporary, and recognized an impairment of our entire investment in FTSI of $23 million.
In the Prior Period, in connection with the acquisition of WildHorse, we obtained a 50% membership interest in JWH Midstream LLC (JWH). The carrying value of our investment in JWH, which was being accounted for as an equity method investment, was approximately $17 million as of March 31, 2019. In the CurrentPrior Period, we paid approximately $7 million to terminate our involvement in the partnership. This removed us from any future obligations related to this joint venture and, therefore, we impaired the full value of the investment and recognized approximately $24an approximate $23 million of impairment expense in the CurrentPrior Period.
In the Prior Period, FTS International, Inc. (NYSE: FTSI) completed an initial public offering. Due to the offering, the ownership percentage of our equity method investment in FTSI decreased from approximately 29% to 24% and resulted in a gain of approximately $78 million. In addition, we sold approximately 4.3 million shares of FTSI in the offering for net proceeds of approximately $74 million and recognized a gain of approximately $61 million decreasing our ownership percentage to approximately 20%. We continue to hold approximately 22.0 million shares in the publicly traded company. In the Current Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the current fair value of our investment in FTSI to fall below book value of $65 million at the end of the Current Quarter. Given that the average NYSE closing price for FTSI shares in the Current Quarter exceeded our carrying value per share and more often than not the closing price was greater than our carrying value per share, we have not assessed the reduction in fair value of our investment in FTSI to be other-than-temporary. We will continue to monitor the hydraulic fracturing industry, FTSI operating results and FTSI share price for indications that the reduction in fair value is other-than-temporary, which could result in an impairment of our investment in FTSI.
| |
16. | Other Operating ExpensesExpense |
In the Current Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations. The contract terminations removed approximately $169 million of future commitments related to gathering, processing and transportation agreements. See Note 5 for further discussion of contingencies and commitments. In the CurrentPrior Period, we recorded approximately $34 million of costs related to our acquisition of WildHorse which consisted of consulting fees, financial advisory fees, legal fees and travel and lodging expenses. In addition, we recorded approximately $38 million of severance expense as a result of the acquisition of WildHorse. A majority of the WildHorse executives and employees were terminated. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
| |
17. | RestructuringSeparation and Other Termination Costs |
On January 30, 2018, we underwent a reduction in workforce impacting approximately 13% of employees across all functions, primarily on our Oklahoma City campus. In connection with the reduction,Current Quarter and the Current Period, we incurred a total charge in the Prior Periodcharges of approximately $38$16 million forand $43 million, respectively, related to one-time termination benefits.benefits for certain employees. The Current Quarter amount was paid in October 2020.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
| |
18. | Fair Value Measurements |
Recurring Fair Value Measurements
Other Current Assets. Assets related to our deferred compensation plan are included in other current assets. The fair value of these assets is determined using quoted market prices, as they consist of exchange-traded securities.
Other Current Liabilities. Liabilities related to our deferred compensation plan are included in other current liabilities. The fair values of these liabilities are determined using quoted market prices, as the plan consists of exchange-traded mutual funds.
Financial Assets (Liabilities). The following table provides fair value measurement information for the above-noted financial assets (liabilities) measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| | ($ in millions) |
As of September 30, 2019 | | | | | | | | |
Financial Assets (Liabilities): | | | | | | | | |
Other current assets | | $ | 46 |
| | $ | — |
| | $ | — |
| | $ | 46 |
|
Other current liabilities | | (45 | ) | | — |
| | — |
| | (45 | ) |
Total | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | |
As of December 31, 2018 | | | | | | | | |
Financial Assets (Liabilities): | | | | | | | | |
Other current assets | | $ | 50 |
| | $ | — |
| | $ | — |
| | $ | 50 |
|
Other current liabilities | | (51 | ) | | — |
| | — |
| | (51 | ) |
Total | | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | (1 | ) |
See Note 6 for information regarding fair value measurement of our debt instruments. See Note 14 for information regarding fair value measurement of our derivatives. | |
19. | Condensed ConsolidatingCombined Debtor-in-Possession Financial Information |
Chesapeake Energy Corporation is a holding company, owns no operating assets and has no significant operations independent of its subsidiaries. Our obligations under our outstanding senior notes, convertible senior notes and Chesapeake revolving credit facility listed in Note 6 are fully and unconditionally guaranteed, jointly and severally, by certain of our 100% owned subsidiaries. Our BVL subsidiaries are not guarantors of Chesapeake’s indebtedness and are subject to covenants under the BVL credit agreement and BVL indenture. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries are also non-guarantors.The tables below are condensed consolidating financial statements for Chesapeake Energy Corporation (parent) on a stand-alone, unconsolidated basis, and itsbelow represent the condensed combined guarantor and combined non-guarantor subsidiariesfinancial statements of the Debtors as of September 30, 20192020 and December 31, 20182019 and for the three and sixnine months ended September 30, 20192020 and 2018. This financial information may not necessarily be indicative of our results of operations, cash flows or financial position had these subsidiaries operated as independent entities.2019.
|
| | | | | | | | |
Condensed Combined Balance Sheets | | Total Combined Debtor Entities |
| | September 30, 2020 | | December 31, 2019 |
ASSETS | | ($ in millions) |
CURRENT ASSETS: | | | | |
Cash and cash equivalents | | $ | 304 |
| | $ | 4 |
|
Other current assets | | 765 |
| | 1,244 |
|
Total Current Assets | | 1,069 |
| | 1,248 |
|
PROPERTY AND EQUIPMENT: | | | | |
Oil and natural gas properties, based on successful efforts accounting, net | | 4,637 |
| | 13,586 |
|
Other property and equipment, net | | 992 |
| | 1,118 |
|
Property and equipment held for sale, net | | 10 |
| | 10 |
|
Total Property and Equipment, Net | | 5,639 |
| | 14,714 |
|
Other long-term assets | | 185 |
| | 187 |
|
Investments in subsidiaries and intercompany advances | | (11 | ) | | 6 |
|
TOTAL ASSETS | | $ | 6,882 |
| | $ | 16,155 |
|
LIABILITIES AND EQUITY (DEFICIT) | | | | |
CURRENT LIABILITIES: | | | | |
Current liabilities | | $ | 3,105 |
| | $ | 2,391 |
|
Total Current Liabilities | | 3,105 |
| | 2,391 |
|
Long-term debt, net | | 0 |
| | 9,073 |
|
Deferred income tax liabilities | | 0 |
| | 10 |
|
Other long-term liabilities | | 289 |
| | 317 |
|
Liabilities subject to compromise | | 8,428 |
| | 0 |
|
Total Liabilities | | 11,822 |
| | 11,791 |
|
EQUITY (DEFICIT): | | | | |
Chesapeake Stockholders’ Equity (Deficit) | | (4,940 | ) | | 4,364 |
|
Total Equity (Deficit) | | (4,940 | ) | | 4,364 |
|
TOTAL LIABILITIES AND EQUITY (DEFICIT) | | $ | 6,882 |
| | $ | 16,155 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2019
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
CURRENT ASSETS: | | | | | | | | | | |
Cash and cash equivalents | | $ | 8 |
| | $ | 1 |
| | $ | 10 |
| | $ | (5 | ) | | $ | 14 |
|
Other current assets | | 56 |
| | 1,231 |
| | 102 |
| | — |
| | 1,389 |
|
Intercompany receivable, net | | 6,275 |
| | — |
| | — |
| | (6,275 | ) | | — |
|
Total Current Assets | | 6,339 |
| | 1,232 |
| | 112 |
| | (6,280 | ) | | 1,403 |
|
PROPERTY AND EQUIPMENT: | | | | | | | | | | |
Oil and natural gas properties, at cost based on successful efforts accounting, net | | — |
| | 9,513 |
| | 4,221 |
| | — |
| | 13,734 |
|
Other property and equipment, net | | — |
| | 1,046 |
| | 86 |
| | — |
| | 1,132 |
|
Property and equipment held for sale, net | | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Total Property and Equipment, Net | | — |
| | 10,569 |
| | 4,307 |
| | — |
| | 14,876 |
|
LONG-TERM ASSETS: | | | | | | | | | | |
Other long-term assets | | 336 |
| | 231 |
| | 30 |
| | (297 | ) | | 300 |
|
Investments in subsidiaries and intercompany advances | | 6,013 |
| | 2,338 |
| | — |
| | (8,351 | ) | | — |
|
TOTAL ASSETS | | $ | 12,688 |
| | $ | 14,370 |
| | $ | 4,449 |
| | $ | (14,928 | ) | | $ | 16,579 |
|
| | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | |
Current liabilities | | $ | 325 |
| | $ | 1,805 |
| | $ | 223 |
| | $ | (5 | ) | | $ | 2,348 |
|
Intercompany payable, net | | — |
| | 6,275 |
| | — |
| | (6,275 | ) | | — |
|
Total Current Liabilities | | 325 |
| | 8,080 |
| | 223 |
| | (6,280 | ) | | 2,348 |
|
LONG-TERM LIABILITIES: | | | | | | | | | | |
Long-term debt, net | | 7,612 |
| | — |
| | 1,521 |
| | — |
| | 9,133 |
|
Deferred income tax liabilities | | — |
| | — |
| | 297 |
| | (297 | ) | | — |
|
Other long-term liabilities | | 55 |
| | 277 |
| | 31 |
| | — |
| | 363 |
|
Total Long-Term Liabilities | | 7,667 |
| | 277 |
| | 1,849 |
| | (297 | ) | | 9,496 |
|
EQUITY: | | | | | | | | | | |
Chesapeake stockholders’ equity | | 4,696 |
| | 6,013 |
| | 2,338 |
| | (8,351 | ) | | 4,696 |
|
Noncontrolling interests | | — |
| | — |
| | 39 |
| | — |
| | 39 |
|
Total Equity | | 4,696 |
| | 6,013 |
| | 2,377 |
| | (8,351 | ) | | 4,735 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 12,688 |
| | $ | 14,370 |
| | $ | 4,449 |
| | $ | (14,928 | ) | | $ | 16,579 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2018
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
CURRENT ASSETS: | | | | | | | | | | |
Cash and cash equivalents | | $ | 4 |
| | $ | 1 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 4 |
|
Other current assets | | 60 |
| | 1,532 |
| | 2 |
| | — |
| | 1,594 |
|
Intercompany receivable, net | | 6,671 |
| | — |
| | — |
| | (6,671 | ) | | — |
|
Total Current Assets | | 6,735 |
| | 1,533 |
| | 3 |
| | (6,673 | ) | | 1,598 |
|
PROPERTY AND EQUIPMENT: | | | | | | | | | | |
Oil and natural gas properties, at cost based on successful efforts accounting, net | | — |
| | 9,664 |
| | 48 |
| | — |
| | 9,712 |
|
Other property and equipment, net | | — |
| | 1,091 |
| | — |
| | — |
| | 1,091 |
|
Property and equipment held for sale, net | | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Total Property and Equipment, Net | | — |
| | 10,770 |
| | 48 |
| | — |
| | 10,818 |
|
LONG-TERM ASSETS: | | | | | | | | | | |
Other long-term assets | | 26 |
| | 293 |
| | — |
| | — |
| | 319 |
|
Investments in subsidiaries and intercompany advances | | 3,248 |
| | 9 |
| | — |
| | (3,257 | ) | | — |
|
TOTAL ASSETS | | $ | 10,009 |
| | $ | 12,605 |
| | $ | 51 |
| | $ | (9,930 | ) | | $ | 12,735 |
|
| | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | |
Current liabilities | | $ | 523 |
| | $ | 2,365 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 2,887 |
|
Intercompany payable, net | | — |
| | 6,671 |
| | — |
| | (6,671 | ) | | — |
|
Total Current Liabilities | | 523 |
| | 9,036 |
| | 1 |
| | (6,673 | ) | | 2,887 |
|
LONG-TERM LIABILITIES: | | | | | | | | | | |
Long-term debt, net | | 7,341 |
| | — |
| | — |
| | — |
| | 7,341 |
|
Other long-term liabilities | | 53 |
| | 321 |
| | — |
| | — |
| | 374 |
|
Total Long-Term Liabilities | | 7,394 |
| | 321 |
| | — |
| | — |
| | 7,715 |
|
EQUITY: | | | | | | | | | | |
Chesapeake stockholders’ equity | | 2,092 |
| | 3,248 |
| | 9 |
| | (3,257 | ) | | 2,092 |
|
Noncontrolling interests | | — |
| | — |
| | 41 |
| | — |
| | 41 |
|
Total Equity | | 2,092 |
| | 3,248 |
| | 50 |
| | (3,257 | ) | | 2,133 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 10,009 |
| | $ | 12,605 |
| | $ | 51 |
| | $ | (9,930 | ) | | $ | 12,735 |
|
|
| | | | | | | | | | | | | | | | |
Condensed Combined Statements of Operations | | Total Combined Debtor Entities |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
REVENUES AND OTHER: | | | | | | | | |
Oil, natural gas and NGL | | $ | 510 |
| | $ | 1,167 |
| | $ | 2,574 |
| | $ | 3,543 |
|
Marketing | | 448 |
| | 889 |
| | 1,412 |
| | 3,038 |
|
Total Revenues | | 958 |
| | 2,056 |
| | 3,986 |
| | 6,581 |
|
Other | | 15 |
| | 15 |
| | 45 |
| | 45 |
|
Gains on sales of assets | | 1 |
| | 13 |
| | 1 |
| | 33 |
|
Total Revenues and Other | | 974 |
| | 2,084 |
| | 4,032 |
| | 6,659 |
|
OPERATING EXPENSES: | | | | | | | | |
Oil, natural gas and NGL production | | 82 |
| | 135 |
| | 295 |
| | 394 |
|
Oil, natural gas and NGL gathering, processing and transportation | | 257 |
| | 268 |
| | 810 |
| | 810 |
|
Severance and ad valorem taxes | | 37 |
| | 55 |
| | 116 |
| | 168 |
|
Exploration | | 5 |
| | 17 |
| | 417 |
| | 56 |
|
Marketing | | 450 |
| | 901 |
| | 1,438 |
| | 3,071 |
|
General and administrative | | 52 |
| | 66 |
| | 228 |
| | 257 |
|
Separation and other termination costs | | 16 |
| | 0 |
| | 43 |
| | 0 |
|
Provision for legal contingencies, net | | 12 |
| | 0 |
| | 20 |
| | 3 |
|
Depreciation, depletion and amortization | | 170 |
| | 572 |
| | 929 |
| | 1,668 |
|
Impairments | | 0 |
| | 9 |
| | 8,489 |
| | 11 |
|
Other operating expense | | 4 |
| | 15 |
| | 92 |
| | 79 |
|
Total Operating Expenses | | 1,085 |
| | 2,038 |
| | 12,877 |
| | 6,517 |
|
INCOME (LOSS) FROM OPERATIONS | | (111 | ) | | 46 |
| | (8,845 | ) | | 142 |
|
OTHER INCOME (EXPENSE): | | | | | | | | |
Interest expense | | (25 | ) | | (177 | ) | | (307 | ) | | (513 | ) |
Losses on investments | | 0 |
| | (4 | ) | | (23 | ) | | (28 | ) |
Gains on purchases or exchanges of debt | | 0 |
| | 70 |
| | 65 |
| | 70 |
|
Other income | | 2 |
| | 3 |
| | 14 |
| | 30 |
|
Reorganization items, net | | (611 | ) | | 0 |
| | (217 | ) | | 0 |
|
Equity in net losses of subsidiary | | 0 |
| | 0 |
| | (18 | ) | | 0 |
|
Total Other Expense | | (634 | ) | | (108 | ) | | (486 | ) | | (441 | ) |
LOSS BEFORE INCOME TAXES | | (745 | ) | | (62 | ) | | (9,331 | ) | | (299 | ) |
Income tax benefit | | 0 |
| | (1 | ) | | (13 | ) | | (315 | ) |
NET INCOME (LOSS) | | (745 | ) | | (61 | ) | | (9,318 | ) | | 16 |
|
Other comprehensive income | | 7 |
| | 8 |
| | 24 |
| | 26 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (738 | ) | | $ | (53 | ) | | $ | (9,294 | ) | | $ | 42 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2019
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | | |
Oil, natural gas and NGL | | $ | — |
| | $ | 932 |
| | $ | 238 |
| | $ | — |
| | $ | 1,170 |
|
Marketing | | — |
| | 889 |
| | — |
| | — |
| | 889 |
|
Total Revenues | | — |
| | 1,821 |
| | 238 |
| | — |
| | 2,059 |
|
Other | | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Gains on sales of assets | | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
Total Revenues and Other | | — |
| | 1,849 |
| | 238 |
| | — |
| | 2,087 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Oil, natural gas and NGL production | | — |
| | 129 |
| | 26 |
| | — |
| | 155 |
|
Oil, natural gas and NGL gathering, processing and transportation | | — |
| | 268 |
| | 2 |
| | — |
| | 270 |
|
Production taxes | | — |
| | 25 |
| | 10 |
| | — |
| | 35 |
|
Exploration | | — |
| | 17 |
| | — |
| | — |
| | 17 |
|
Marketing | | — |
| | 901 |
| | — |
| | — |
| | 901 |
|
General and administrative | | — |
| | 43 |
| | 23 |
| | — |
| | 66 |
|
Depreciation, depletion and amortization | | — |
| | 421 |
| | 152 |
| | — |
| | 573 |
|
Impairments | | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Other operating expense | | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Total Operating Expenses | | — |
| | 1,828 |
| | 213 |
| | — |
| | 2,041 |
|
INCOME FROM OPERATIONS | | — |
| | 21 |
| | 25 |
| | — |
| | 46 |
|
OTHER INCOME (EXPENSE): | | | | | | | | | | |
Interest income (expense) | | (161 | ) | | 3 |
| | (19 | ) | | — |
| | (177 | ) |
Losses on investments | | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Gains on purchases or exchanges of debt | | 64 |
| | — |
| | 6 |
| | — |
| | 70 |
|
Other income | | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Equity in net earnings of subsidiary | | 25 |
| | 2 |
| | — |
| | (27 | ) | | — |
|
Total Other Income (Expense) | | (72 | ) | | 4 |
| | (13 | ) | | (27 | ) | | (108 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | (72 | ) | | 25 |
| | 12 |
| | (27 | ) | | (62 | ) |
INCOME TAX (BENEFIT) EXPENSE | | (11 | ) | | — |
| | 10 |
| | — |
| | (1 | ) |
NET INCOME (LOSS) | | (61 | ) | | 25 |
| | 2 |
| | (27 | ) | | (61 | ) |
Net loss attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | (61 | ) | | 25 |
| | 2 |
| | (27 | ) | | (61 | ) |
Other comprehensive income | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (61 | ) | | $ | 33 |
| | $ | 2 |
| | $ | (27 | ) | | $ | (53 | ) |
|
| | | | | | | | |
Condensed Combined Statements of Cash Flows | | Total Combined Debtor Entities |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | ($ in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net Cash Provided By Operating Activities | | $ | 1,153 |
| | $ | 1,178 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Drilling and completion costs | | (946 | ) | | (1,640 | ) |
Business combination, net | | 0 |
| | (353 | ) |
Acquisitions of proved and unproved properties | | (9 | ) | | (31 | ) |
Proceeds from divestitures of proved and unproved properties | | 10 |
| | 110 |
|
Additions to other property and equipment | | (18 | ) | | (27 | ) |
Proceeds from sales of other property and equipment | | 5 |
| | 6 |
|
Net Cash Used In Investing Activities | | (958 | ) | | (1,935 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from pre-petition revolving credit facility borrowings | | 3,806 |
| | 8,805 |
|
Payments on pre-petition revolving credit facility borrowings | | (3,467 | ) | | (7,495 | ) |
Proceeds from DIP credit facility borrowings | | 60 |
| | 0 |
|
Payments on DIP credit facility borrowings | | (60 | ) | | 0 |
|
DIP credit facility and exit facilities financing costs | | (109 | ) | | 0 |
|
Cash paid to purchase debt | | (95 | ) | | (457 | ) |
Cash paid for preferred stock dividends | | (22 | ) | | (69 | ) |
Other financing activities | | (8 | ) | | (19 | ) |
Net Cash Provided By Financing Activities | | 105 |
| | 765 |
|
Net increase in cash and cash equivalents | | 300 |
| | 8 |
|
Cash and cash equivalents, beginning of period | | 4 |
| | 3 |
|
Cash and cash equivalents, end of period | | $ | 304 |
| | $ | 11 |
|
| | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –- (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2018
($On October 13, 2020, we filed a notice with the Bankruptcy Court that we reached an agreement with Tapstone Energy as the “Stalking Horse” bidder to sell our Mid-Continent asset for $85 million in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | | |
Oil, natural gas and NGL | | $ | — |
| | $ | 1,194 |
| | $ | 5 |
| | $ | — |
| | $ | 1,199 |
|
Marketing | | — |
| | 1,219 |
| | — |
| | — |
| | 1,219 |
|
Total Revenues | | — |
| | 2,413 |
| | 5 |
| | — |
| | 2,418 |
|
Other | | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
Losses on sales of assets | | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Total Revenues and Other | | — |
| | 2,419 |
| | 5 |
| | — |
| | 2,424 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Oil, natural gas and NGL production | | — |
| | 132 |
| | — |
| | — |
| | 132 |
|
Oil, natural gas and NGL gathering, processing and transportation | | — |
| | 362 |
| | 2 |
| | — |
| | 364 |
|
Production taxes | | — |
| | 33 |
| | 1 |
| | — |
| | 34 |
|
Exploration | | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Marketing | | — |
| | 1,238 |
| | — |
| | — |
| | 1,238 |
|
General and administrative | | — |
| | 81 |
| | — |
| | — |
| | 81 |
|
Provision for legal contingencies, net | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Depreciation, depletion and amortization | | — |
| | 403 |
| | 2 |
| | — |
| | 405 |
|
Impairments | | — |
| | 58 |
| | — |
| | — |
| | 58 |
|
Total Operating Expenses | | — |
| | 2,337 |
| | 5 |
| | — |
| | 2,342 |
|
INCOME FROM OPERATIONS | | — |
| | 82 |
| | — |
| | — |
| | 82 |
|
OTHER INCOME (EXPENSE): | | | | | | | | | | |
Interest expense | | (163 | ) | | (2 | ) | | — |
| | — |
| | (165 | ) |
Losses on purchases or exchanges of debt | | (68 | ) | | — |
| | — |
| | — |
| | (68 | ) |
Other income | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Equity in net earnings of subsidiary | | 86 |
| | — |
| | — |
| | (86 | ) | | — |
|
Total Other Income (Expense) | | (145 | ) | | 4 |
| | — |
| | (86 | ) | | (227 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | (145 | ) | | 86 |
| | — |
| | (86 | ) | | (145 | ) |
INCOME TAX EXPENSE | | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
NET INCOME (LOSS) | | (146 | ) | | 86 |
| | — |
| | (86 | ) | | (146 | ) |
Net (income) loss attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | (146 | ) | | 86 |
| | — |
| | (86 | ) | | (146 | ) |
Other comprehensive income | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (146 | ) | | $ | 94 |
| | $ | — |
| | $ | (86 | ) | | $ | (138 | ) |
a 363 transaction under the Bankruptcy Code. A Bankruptcy Court supervised auction will be held on November 10, 2020, in which other pre-qualified buyers may submit bids for the asset. We will then present the results of the auction process to the Bankruptcy Court for its final approval of the sale on November 13, 2020. We anticipate the transaction will close on December 11, 2020.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)SUPPLEMENTARY INFORMATION
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2019
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | | |
Oil, natural gas and NGL | | $ | — |
| | $ | 3,000 |
| | $ | 553 |
| | $ | — |
| | $ | 3,553 |
|
Marketing | | — |
| | 3,038 |
| | — |
| | — |
| | 3,038 |
|
Total Revenues | | — |
| | 6,038 |
| | 553 |
| | — |
| | 6,591 |
|
Other | | — |
| | 45 |
| | — |
| | — |
| | 45 |
|
Gains on sales of assets | | — |
| | 33 |
| | — |
| | — |
| | 33 |
|
Total Revenues and Other | | — |
| | 6,116 |
| | 553 |
| | — |
| | 6,669 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Oil, natural gas and NGL production | | — |
| | 384 |
| | 69 |
| | — |
| | 453 |
|
Oil, natural gas and NGL gathering, processing and transportation | | — |
| | 802 |
| | 13 |
| | — |
| | 815 |
|
Production taxes | | — |
| | 83 |
| | 26 |
| | — |
| | 109 |
|
Exploration | | — |
| | 53 |
| | 3 |
| | — |
| | 56 |
|
Marketing | | — |
| | 3,071 |
| | — |
| | — |
| | 3,071 |
|
General and administrative | | — |
| | 193 |
| | 65 |
| | — |
| | 258 |
|
Provision for legal contingencies, net | | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Depreciation, depletion and amortization | | — |
| | 1,295 |
| | 377 |
| | — |
| | 1,672 |
|
Impairments | | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Other operating expense | | — |
| | 41 |
| | 38 |
| | — |
| | 79 |
|
Total Operating Expenses | | — |
| | 5,936 |
| | 591 |
| | — |
| | 6,527 |
|
INCOME (LOSS) FROM OPERATIONS | | — |
| | 180 |
| | (38 | ) | | — |
| | 142 |
|
OTHER INCOME (EXPENSE): | | | | | | | | | | |
Interest income (expense) | | (475 | ) | | 13 |
| | (51 | ) | | — |
| | (513 | ) |
Losses on investments | | — |
| | (4 | ) | | (24 | ) | | — |
| | (28 | ) |
Gains on purchases or exchanges of debt | | 64 |
| | — |
| | 6 |
| | — |
| | 70 |
|
Other income | | — |
| | 28 |
| | 2 |
| | — |
| | 30 |
|
Equity in net earnings of subsidiary | | 129 |
| | (88 | ) | | — |
| | (41 | ) | | — |
|
Total Other Expense | | (282 | ) | | (51 | ) | | (67 | ) | | (41 | ) | | (441 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | (282 | ) | | 129 |
| | (105 | ) | | (41 | ) | | (299 | ) |
INCOME TAX BENEFIT | | (298 | ) | | — |
| | (17 | ) | | — |
| | (315 | ) |
NET INCOME (LOSS) | | 16 |
| | 129 |
| | (88 | ) | | (41 | ) | | 16 |
|
Net loss attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | 16 |
| | 129 |
| | (88 | ) | | (41 | ) | | 16 |
|
Other comprehensive income | | — |
| | 26 |
| | — |
| | — |
| | 26 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | 16 |
| | $ | 155 |
| | $ | (88 | ) | | $ | (41 | ) | | $ | 42 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2018
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | | |
Oil, natural gas and NGL | | $ | — |
| | $ | 3,410 |
| | $ | 14 |
| | $ | — |
| | $ | 3,424 |
|
Marketing | | — |
| | 3,738 |
| | — |
| | — |
| | 3,738 |
|
Total Revenues | | — |
| | 7,148 |
| | 14 |
| | — |
| | 7,162 |
|
Other | | — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Gains on sales of assets | | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
Total Revenues and Other | | — |
| | 7,223 |
| | 14 |
| | — |
| | 7,237 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Oil, natural gas and NGL production | | — |
| | 417 |
| | — |
| | — |
| | 417 |
|
Oil, natural gas and NGL gathering, processing and transportation | | — |
| | 1,055 |
| | 5 |
| | — |
| | 1,060 |
|
Production taxes | | — |
| | 90 |
| | 1 |
| | — |
| | 91 |
|
Exploration | | — |
| | 123 |
| | — |
| | — |
| | 123 |
|
Marketing | | — |
| | 3,798 |
| | — |
| | — |
| | 3,798 |
|
General and administrative | | — |
| | 272 |
| | 1 |
| | — |
| | 273 |
|
Restructuring and other termination costs | | — |
| | 38 |
| | — |
| | — |
| | 38 |
|
Provision for legal contingencies, net | | — |
| | 17 |
| | — |
| | — |
| | 17 |
|
Depreciation, depletion and amortization | | — |
| | 1,330 |
| | 5 |
| | — |
| | 1,335 |
|
Impairments | | — |
| | 122 |
| | — |
| | — |
| | 122 |
|
Other operating income | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Total Operating Expenses | | — |
| | 7,261 |
| | 12 |
| | — |
| | 7,273 |
|
INCOME (LOSS) FROM OPERATIONS | | — |
| | (38 | ) | | 2 |
| | — |
| | (36 | ) |
OTHER INCOME (EXPENSE): | | | | | | | | | | |
Interest expense | | (480 | ) | | (2 | ) | | — |
| | — |
| | (482 | ) |
Gains on investments | | — |
| | 139 |
| | — |
| | — |
| | 139 |
|
Losses on purchases or exchanges of debt | | (68 | ) | | — |
| | — |
| | — |
| | (68 | ) |
Other income | | — |
| | 62 |
| | — |
| | — |
| | 62 |
|
Equity in net earnings of subsidiary | | 162 |
| | 1 |
| | (1 | ) | | (162 | ) | | — |
|
Total Other Income (Expense) | | (386 | ) | | 200 |
| | (1 | ) | | (162 | ) | | (349 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | | (386 | ) | | 162 |
| | 1 |
| | (162 | ) | | (385 | ) |
INCOME TAX BENEFIT | | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
NET INCOME (LOSS) | | (378 | ) | | 162 |
| | 1 |
| | (162 | ) | | (377 | ) |
Net income attributable to noncontrolling interests | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | (378 | ) | | 161 |
| | 1 |
| | (162 | ) | | (378 | ) |
Other comprehensive income | | — |
| | 25 |
| | — |
| | — |
| | 25 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE | | $ | (378 | ) | | $ | 186 |
| | $ | 1 |
| | $ | (162 | ) | | $ | (353 | ) |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2019
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net Cash Provided By Operating Activities | | $ | — |
| | $ | 898 |
| | $ | 287 |
| | $ | (3 | ) | | $ | 1,182 |
|
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
Drilling and completion costs | | — |
| | (1,204 | ) | | (436 | ) | | — |
| | (1,640 | ) |
Business combination, net | | — |
| | (381 | ) | | 28 |
| | — |
| | (353 | ) |
Acquisitions of proved and unproved properties | | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) |
Proceeds from divestitures of proved and unproved properties | | — |
| | 110 |
| | — |
| | — |
| | 110 |
|
Additions to other property and equipment | | — |
| | (12 | ) | | (15 | ) | | — |
| | (27 | ) |
Other investing activities | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Net Cash Used In Investing Activities | | — |
| | (1,512 | ) | | (423 | ) | | — |
| | (1,935 | ) |
| | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Proceeds from revolving credit facility borrowings | | 8,096 |
| | — |
| | 709 |
| | — |
| | 8,805 |
|
Payments on revolving credit facility borrowings | | (7,011 | ) | | — |
| | (484 | ) | | — |
| | (7,495 | ) |
Cash paid to purchase debt | | (381 | ) | | — |
| | (76 | ) | | — |
| | (457 | ) |
Cash paid for preferred stock dividends | | (69 | ) | | — |
| | — |
| | — |
| | (69 | ) |
Other financing activities | | (13 | ) | | (6 | ) | | (5 | ) | | 3 |
| | (21 | ) |
Intercompany advances, net | | (620 | ) | | 620 |
| | 1 |
| | (1 | ) | | — |
|
Net Cash Provided By Financing Activities | | 2 |
| | 614 |
| | 145 |
| | 2 |
| | 763 |
|
Net increase in cash and cash equivalents | | 2 |
| | — |
| | 9 |
| | (1 | ) | | 10 |
|
Cash and cash equivalents, beginning of period | | 4 |
| | 1 |
| | 1 |
| | (2 | ) | | 4 |
|
Cash and cash equivalents, end of period | | $ | 6 |
| | $ | 1 |
| | $ | 10 |
| | $ | (3 | ) | | $ | 14 |
|
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2018
($ in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net Cash Provided By Operating Activities | | $ | 86 |
| | $ | 1,312 |
| | $ | 7 |
| | $ | (10 | ) | | $ | 1,395 |
|
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
Drilling and completion costs | | — |
| | (1,407 | ) | | — |
| | — |
| | (1,407 | ) |
Acquisitions of proved and unproved properties | | — |
| | (118 | ) | | — |
| | — |
| | (118 | ) |
Proceeds from divestitures of proved and unproved properties | | — |
| | 395 |
| | — |
| | — |
| | 395 |
|
Additions to other property and equipment | | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
Other investing activities | | — |
| | 149 |
| | — |
| | — |
| | 149 |
|
Net Cash Used In Investing Activities | | — |
| | (992 | ) | | — |
| | — |
| | (992 | ) |
| | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Proceeds from revolving credit facility borrowings | | 9,095 |
| | — |
| | — |
| | — |
| | 9,095 |
|
Payments on revolving credit facility borrowings | | (9,231 | ) | | — |
| | — |
| | — |
| | (9,231 | ) |
Proceeds from issuance of senior notes, net | | 1,237 |
| | — |
| | — |
| | — |
| | 1,237 |
|
Cash paid to purchase debt | | (1,285 | ) | | — |
| | — |
| | — |
| | (1,285 | ) |
Cash paid for preferred stock dividends | | (69 | ) | | — |
| | — |
| | — |
| | (69 | ) |
Other financing activities | | (2 | ) | | (127 | ) | | (9 | ) | | (13 | ) | | (151 | ) |
Intercompany advances, net | | 170 |
| | (193 | ) | | 1 |
| | 22 |
| | — |
|
Net Cash Used In Financing Activities | | (85 | ) | | (320 | ) | | (8 | ) | | 9 |
| | (404 | ) |
Net increase (decrease) in cash and cash equivalents | | 1 |
| | — |
| | (1 | ) | | (1 | ) | | (1 | ) |
Cash and cash equivalents, beginning of period | | 5 |
| | 1 |
| | 2 |
| | (3 | ) | | 5 |
|
Cash and cash equivalents, end of period | | $ | 6 |
| | $ | 1 |
| | $ | 1 |
| | $ | (4 | ) | | $ | 4 |
|
Oil, Natural Gas and NGL Reserve Quantities
Presented below is a summary of changes in estimated reserves through March 31, 2020:
|
| | | | | | | | | | | | |
| | Oil | | Natural Gas | | NGL | | Total |
| | (mmbbl) | | (bcf) | | (mmbbl) | | (mmboe) |
March 31, 2020 | | | | | | | | |
Proved reserves, beginning of period | | 358 |
| | 6,566 |
| | 120 |
| | 1,572 |
|
Extensions, discoveries and other additions | | 3 |
| | 91 |
| | 1 |
| | 19 |
|
Revisions of previous estimates | | (136 | ) | | (2,298 | ) | | (40 | ) | | (560 | ) |
Production | | (12 | ) | | (173 | ) | | (3 | ) | | (43 | ) |
Proved reserves, end of period | | 213 |
| | 4,186 |
| | 78 |
| | 988 |
|
Proved developed reserves: | | | | | | | | |
Beginning of period | | 201 |
| | 3,377 |
| | 82 |
| | 846 |
|
End of period | | 198 |
| | 3,371 |
| | 73 |
| | 832 |
|
Proved undeveloped reserves: | | | | | | | | |
Beginning of period | | 157 |
| | 3,189 |
| | 38 |
| | 726 |
|
End of period | | 15 |
| | 815 |
| | 5 |
| | 156 |
|
Reflected above represents material changes to estimated reserves from December 31, 2019 through March 31, 2020. There were no material changes to estimated reserves in the second quarter of 2020 or in the Current Quarter. During the quarter ended March 31, 2020, revisions of previous estimates decreased primarily due to updates to our five-year development plan in contemplation of ongoing market conditions and uncertainty regarding our ability to finance the development of our proved reserves over a five-year period.
| |
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The following discussion should be read together with the condensed consolidated financial statements included in Item 1 of Part I of this report and in Item 8 of our 2019 Form 8-K dated May 9, 2019.10-K. We are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs. We own a large and geographically diverse portfolio of onshore U.S. unconventional natural gas and liquids assets, including interests in approximately 13,90013,700 oil and natural gas wells. We have leadingsignificant positions in the liquids-rich resource plays of the Eagle Ford Shale in South Texas, the stacked pay in the Powder River Basin in Wyoming and the Anadarko Basin in northwestern Oklahoma. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana.
Our strategy is to create shareholder value through the development ofdevelop our significant resource plays. Weplays in a manner that generates cash flow from operating activities and improves margins through financial discipline and operating efficiencies, while maintaining exceptional environmental and safety performance. Current market conditions make it difficult to execute on this strategy, as evidenced by our voluntary filing for Chapter 11 protection on June 28, 2020; however, we continue to focus on reducing debt, increasing cash provided by operating activities, improving margins through financial discipline and operating efficiencies and maintaining exceptional environmental and safety performance. To accomplish these goals, we intend to allocate our capital expenditures to projects we believe offer the highest return and value, regardless of the commodity price environment, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our cost structure and our portfolio. Increasing our margins means not only increasing our absolute level of cash flows from operations, but also increasing our cash flows from operations generated per barrel of oil equivalent production. We continue to seek opportunities to reduce cash costs per barrel of oil equivalent production (production, gathering, processing and transportation and general and administrative) through operational efficiencies, including but not limited to improving our production volumes from existing wells. In response to current market conditions, we have reduced our workforce, curtailed production and reduced capital, which will further reduce future production.
OilRecent Developments
Voluntary Reorganization Under Chapter 11
On June 28, 2020 (the “Petition Date”), we and natural gas prices have a material impact oncertain of our financial position, resultssubsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) for relief (the “Bankruptcy Filing”) under Chapter 11 of operations, cash flows and quantitiesTitle 11 of oil, natural gas and NGL reserves that may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuationsthe United States Code (the “Bankruptcy Code”) in the future. OurUnited States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233 (DRJ). Subsidiaries with noncontrolling interests, consolidated EBITDAX (as defined invariable interest entities and certain de minimis subsidiaries (collectively, the Chesapeake credit agreement to exclude amounts associated with unrestricted subsidiaries) has been, and“Non-Filing Entities”) were not part of the Bankruptcy Filing. The Non-Filing Entities will continue to operate in the ordinary course of business.
We are currently operating as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted first day motions filed by us that were designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, customers and employees. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing and are authorized to pay owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.
For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A. “Risk Factors.” As a result of these risks and uncertainties, the number of our shares of common stock and stockholders, assets, liabilities, officers and/or directors could be negatively impacted bysignificantly different following the recent substantial declineoutcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in oil, natural gasthis Form 10-Q may not accurately reflect our operations, properties and NGL prices. The reduction incapital plans following the Chapter 11 Cases.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as Restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated EBITDAXfinancial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the Bankruptcy Filing. In addition, we have incurred significant professional fees and other costs in
connection with preparation for the Chapter 11 Cases and expect that we will adversely affectcontinue to incur significant professional fees and costs throughout our ability to complyChapter 11 Cases.
On October 13, 2020, we filed a notice with the leverage ratio covenant containedBankruptcy Court that we reached an agreement with Tapstone Energy as the “Stalking Horse” bidder to sell our Mid-Continent asset for $85 million in our revolving credit facility duringa 363 transaction under the next 12 months, absent a reductionBankruptcy Code. A Bankruptcy Court supervised auction will be held on November 10, 2020, in our total indebtedness excluding amounts associated with unrestricted subsidiaries. Please read “Liquidity and Capital Resources.”
Management continues to review operational planswhich other pre-qualified buyers may submit bids for 2019 and beyond and anticipates reducing capital expenditures in 2020 by approximately 30% to target free cash flow.
Our focus remains concentrated on four strategic priorities:
reduce total leverage to achieve long-term net debt/EBITDAXthe asset. We will then present the results of 2x;
increase net cash provided by operating activities to fund capital expenditures;
improve margins through financial discipline and operating efficiencies; and
maintain industry leading environmental and safety performance.
During the Current Period, we changed our method of accounting for our oil and natural gas exploration and development activities from the full cost methodauction process to the successful efforts method of accounting. Financial informationBankruptcy Court for all periods has been recast to reflect retrospective applicationits final approval of the successful efforts method of accounting. sale on November 13, 2020. We anticipate the transaction will close on December 11, 2020.
See Note 1 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this 10-Qreport for furthera complete discussion of the changeChapter 11 Cases. Delisting of our Common Stock from the New York Stock Exchange
Our common stock was previously listed on the New York Stock Exchange (the “NYSE”) under the symbol “CHK.” As a result of our failure to satisfy the continued listing requirements of the NYSE, on June 29, 2020, our common stock ceased to trade on the NYSE. Since June 30, 2020, our common stock has been quoted on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “CHKAQ.” On July 20, 2020, the NYSE filed a Form 25 with the SEC to delist our common stock, senior notes and cumulative convertible preferred stock from the NYSE. The delisting was effective 10 days after the Form 25 was filed and our common stock, senior notes and cumulative convertible preferred stock were deregistered under Section 12(b) of the Exchange Act on October 18, 2020.
COVID-19 Pandemic and Impact on Global Demand for Oil and Natural Gas
The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first nine months of 2020. The pandemic has reached more than 200 countries and territories and has resulted in accounting principle.widespread adverse impacts on the global economy and on our customers and other parties with whom we have business relations. State and local authorities have also implemented multi-step policies with the goal of re-opening. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases. To date, we have experienced limited operational impacts as a result of the restrictions from working remotely or COVID-19 directly. As an essential business under the guidelines issued by each of the states in which we operate, we have been allowed to continue operations. As a result, since mid-March, we have restricted access to all of our offices and for a period of time directed employees to work remotely to the extent possible. We began to re-open our offices in phases beginning mid-May and special precautions have been implemented to minimize the risk of exposure. These actions have allowed us to maintain the engagement and connectivity of our personnel. However, due to severe impacts from the global COVID-19 pandemic on the global demand for oil and natural gas, financial results may not necessarily be indicative of operating results for the entire year. Moreover, future operations could be negatively affected if a significant number of our employees are quarantined as a result of exposure to the virus.
OverviewOur first priority in our response to this crisis has been the health and safety of our employees and those of our other business counterparties. We have implemented preventative measures and developed corporate and regional response plans to minimize unnecessary risk of exposure and prevent infection, while supporting our employees, contractors and vendors to the best of our ability in the circumstances. We have a business continuity team for health, safety and environmental matters and personnel issues, and we have activated this business continuity team to address various impacts of the situation, as they develop. We also have modified certain business practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to protect the health and safety of our employees, contractors and communities in which we operate by conforming to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities.
HighlightsThere is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of 2019 includegovernmental and other measures implemented to try to slow the following:
acquired WildHorse, anspread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. One of the largest impacts of the pandemic has been a significant reduction in global demand for oil and, to a lesser extent, natural gas. Prices in the oil and gas company with operationsmarket have remained depressed, as the oversupply and lack of demand in the Eagle Ford Shalemarket persist. Oil and Austin Chalk formationsnatural gas prices are expected to continue to be volatile as a result of the near-term production instability and the ongoing COVID-19 outbreaks and as changes in southeast Texas,oil and natural gas inventories, industry demand and global and national economic performance are reported. The resulting supply/demand imbalance
is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. We expect to see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined with the current depressed prices, has impacted and is expected to continue to adversely impact our business. The continued low level of demand and prices for oil and natural gas or otherwise has had and will continue to have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
As of the date of this Form 10-Q, our efforts to respond to the challenges presented by the conditions described above and minimize the impacts to our business have yielded results. We have moved quickly to implement strategies to reduce costs, increase operational efficiencies and lower our capital spending. In April we underwent a reduction in workforce impacting approximately 717.413% of our employees, and in September we underwent an additional reduction in workforce impacting another 12% of our employees. In connection with such reductions, we recorded non-recurring charges of approximately $16 million and $43 million in the Current Quarter and the Current Period, respectively, and we anticipate an estimated annualized savings of approximately $70 million. Due to the significant drop in oil prices and midstream constraints in the Current Quarter and the Current Period, we shut-in wells and delayed turn-in-lines, which reduced our oil production by approximately 50%, 25% and 10% in May, June and July, respectively. As market conditions improve, we have returned most wells to production and intend to complete most of our drilled but uncompleted wells. We anticipate our capital expenditures for the remainder of the year will be focused primarily on our natural gas assets. We have not received any funding under the CARES Act or other federal programs to support our operations and do not anticipate that we will. We are continuing to address concerns to protect the health and safety of our employees and those of our customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.
We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of Organization of Petroleum Exporting Countries (OPEC+) and other foreign, oil-exporting countries, governmental authorities, customers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A “Risk Factors” in this report.
Reverse Stock Split
On April 13, 2020, our Board of Directors and our shareholders approved a 1-for-200 (1:200) reverse stock split of our common stock and a reduction of the total number of authorized shares of our common stock and $381 million in cash, andas determined by a formula based on two-thirds of the acquisition of WildHorse’s debt of $1.4 billionreverse stock split ratio. The reverse stock split became effective as of February 1, 2019. We anticipate the acquisition to materially increase our oil production and enhance our oil production mix as well as significantly reduce costs due to operational synergies that we believeclose of business on April 14, 2020. Our common stock began trading on a split-adjusted basis on the combined company will achieve. We expect
thatNYSE at the WildHorse Merger will provide substantial cost savings with $200 million to $280 million in projected average annual savings, totaling $1 billion to $1.5 billion by 2023, due to operational and capital efficienciesmarket open on April 15, 2020. The par value of the common stock was not adjusted as a result of Chesapeake’s significant expertise with unconventional assets and technical and operational excellence;the reverse stock split.
restructured gas gathering and crude oil transportation contracts inThe reverse stock split was intended to, among other things, increase the Eagle Ford, improving future returns and liquidity;
privately negotiated exchanges of approximately $507 million principal amountper share trading price of our outstanding senior notescommon shares to satisfy the $1.00 minimum closing price requirement for 235,563,519continued listing on the NYSE. The price condition will be deemed cured if on the last trading day of any calendar month within six months following the receipt from the NYSE of the notice of non-compliance, we have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. On April 1, 2020, the NYSE tolled the compliance period through June 30, 2020. As a result of the reverse stock split, each 200 pre-split shares of common stock outstanding were automatically combined into one issued and $186 million principal amountoutstanding share of ourcommon stock. The fractional shares that resulted from the reverse stock split were canceled by paying cash in lieu of the fair value. The number of outstanding convertible senior notes for 73,389,094 shares of common stock reducing annual interest payments;
exchanged 40,000were reduced from approximately 1.957 billion as of April 10, 2020 to approximately 9.784 million shares (without giving effect to the liquidation of our 5.75% (Series A) Cumulative Convertible Preferred Stock for 10,367,950fractional shares). The total number of shares of common stock reducing annual preferredthat we are authorized to issue was reduced from 3,000,000,000 to 22,500,000 shares. All share and per share amounts in the accompanying condensed consolidated financial statements and notes thereto were retroactively adjusted for all periods presented to give effect to this reverse stock dividend payments;
extended our debt maturity profile by privately exchanging approximately $884 million aggregate principalsplit, including reclassifying an amount equal to the reduction in par value of our existing senior notes due incommon stock to additional paid-in capital.
Adoption of Rights Plan
On April 23, 2020, and 2021our Board of Directors declared a dividend of one Right payable on May 4, 2020 for approximately $919 million aggregate principal amounteach share of new 8.00% Senior Notes due 2026; and
improved our cost structure in the Current Period comparedcommon stock outstanding on May 4, 2020 to the Prior Periodshareholders of record on that date. In connection with the
distribution of the Rights, we entered into a Rights Agreement with Computershare Trust Company, N.A., as rights agent. Each Right entitles the registered holder to purchase from us Preferred Shares.
The Rights Agreement is intended to protect value by reducing combined production, generalpreserving our ability to use our tax attributes to offset potential future income taxes for federal income tax purposes. Our ability to use our tax attributes would be substantially limited if we experience an Ownership Change. The Rights Agreement is intended to reduce the likelihood of an Ownership Change prior to confirmation of the Plan by the Bankruptcy Court by deterring any person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding shares of our common stock.
The Rights Agreement will expire on the close of business on the day following the certification of the voting results from our 2021 annual meeting of shareholders, unless our shareholders ratify the Rights Agreement at or prior to such meeting, in which case it will continue in effect until April 22, 2023, unless terminated earlier in accordance with its terms. This summary description of the rights plan does not purport to be complete and administrative, and gathering, processing and transportation expensesis qualified in its entirety by $224 million, or 13%. The primary driver inreference to the reduction is lower gathering, processing and transportation expenses dueRights Agreement, which was filed as an exhibit to certain 2018 divestitures.our current report on Form 8-K filed on April 23, 2020.
Liquidity and Capital Resources
Liquidity Overview
Our primary sources of capital resources and liquidity have historically consisted of internally generated cash flows from operations, borrowings under certain credit agreements, dispositions of non-core assets and the capital markets when conditions are favorable. Our ability to grow, makeissue additional indebtedness, dispose of assets or access the capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and NGL we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves thatmarkets may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuations in the future. If depressed prices persistsubstantially limited or decline throughout 2020, our ability to comply with the leverage ratio covenant under our revolving credit facilitynonexistent during the next 12 monthsChapter 11 Cases and will be adversely affectedrequire court approval in most instances. Accordingly, our liquidity will depend mainly on cash generated from operating activities and may cause doubt about our ability to continue as a going concern. Failure to comply with this covenant, if not waived, would result inavailable funds under the DIP Credit Facility discussed below.
Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under our Chesapeakethese debt instruments became immediately due and payable. However, the creditors are stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code.
Recent Events Affecting Liquidity
On June 28, 2020, prior to the commencement of the Chapter 11 Cases, the Company entered into a commitment letter (the “Commitment Letter”) with certain of the lenders under the pre-petition revolving credit facility and/or their affiliates (collectively, the potential acceleration“Commitment Parties”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties agreed to provide the Debtors with a post-petition senior secured super-priority debtor-in-possession revolving credit facility in an aggregate principal amount of up to approximately $2.104 billion (the “DIP Credit Facility”), consisting of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which includes a sub-facility of up to $200 million for the issuance of letters of credit, and an up to approximately $1.179 billion term loan that reflects the roll-up of a portion of outstanding debt thereunder andborrowings under the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness. We are actively pursuing a variety of transactions and cost-cutting measures, including but not limited to, reducing corporate discretionary expenditures, refinancing transactions by us or our subsidiaries, capital exchange transactions, asset divestitures, reductions in capital expenditures by approximately 30% in 2020 and operational efficiencies, which we believe have the potential to positively impact our ability to comply with our leverage ratio covenant. There can be no assurance that such refinancing transactions, capital exchange transactions or asset divestitures will be available to us on acceptable terms or at all, or that such transactions, reductions in capital expenditures or other measures will be sufficient to alleviate liquidity concerns. Other risks and uncertainties that could affect our liquidity include, but are not limited to, counterparty credit risk for our receivables, access to capital markets, regulatory risks and our ability to meet financial covenants in our financing agreements.
Based on our cash balance, forecasted cash flows from operating activities and availability under ourpre-petition revolving credit facilities, we expectfacility. Pursuant to be ablethe Commitment Letter, the Commitment Parties also committed to provide, subject to certain conditions, an up to $2.5 billion exit credit facility, consisting of an up to $1.75 billion revolving credit facility (the “Exit Revolving Facility”) and an up to $750 million senior secured term loan facility (the “Exit Term Loan Facility” and, together with the Exit Revolving Facility, the “Exit Credit Facilities”). The terms and conditions of the DIP Credit Facility are set forth in the DIP Credit Agreement (the “DIP Credit Agreement”) attached to the Commitment Letter. The financing package provides us the capital necessary to fund our plannedoperations during the Court-supervised Chapter 11 reorganization proceedings. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, expenditures, meet our debt service requirementspermitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fund our other commitments and obligationsfees for the next 12 months, subjecttransactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations, and other such purposes consistent with the DIP Credit Facility. On July 1, 2020, the Company, as borrower, entered into the DIP Credit Agreement along with the Debtor guarantors party thereto, MUFG Union Bank, N.A., as agent, and the other lender, issuer, and agent parties thereto with the other Debtors party thereto. On September 15, 2020, we entered into the first amendment to our abilitythe DIP Credit Agreement. The amendment, among other things, amends the maximum hedging covenant to comply with our financial covenants.
As of September 30, 2019 and December 31, 2018, we had a cash balance of $14 million and $4 million, respectively. As of September 30, 2019 and December 31, 2018, we had a net working capital deficit of $945 million and $1.289 billion, respectively. As of September 30, 2019 and December 31, 2018, our working capital deficit included $208 million and $380 million, respectively, of debt due inallow the next 12 months. As of September 30, 2019, we had $1.443 billion of borrowing capacity available under our Chesapeake revolving credit facility, with outstanding borrowings of $1.504 billion and $53 million utilized for various letters of credit. In addition, as of September 30, 2019, we had $400 million of borrowing capacity available under our BVL revolving credit facility with outstanding borrowings of $900 million.Debtors to enter into additional non-speculative hedge agreements based on forecasted production. See Note 64 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our debt obligations,DIP Credit Facility.As of September 30, 2020 and December 31, 2019, we had a cash balance of $306 million and $6 million, respectively. As of September 30, 2020 and December 31, 2019, we had a net working capital deficit of $2.033 billion and $1.141 billion, respectively. Additionally, our DIP Credit Facility was approved by the Bankruptcy Court on a final basis on July 31, 2020 which allows us up to $925 million of borrowing capacity. As of September 30, 2020, we had no outstanding borrowings under our DIP Credit Facility.
We believe our cash flow from operations, borrowing capacity under the DIP Credit Facility and cash on hand will provide sufficient liquidity during the bankruptcy process. We expect to incur significant costs associated with the bankruptcy process, including principalfees for legal, financial and carrying amountsrestructuring advisors to the Company, certain of our notes.creditors and royalty interest owners. Therefore, our ability to obtain confirmation of the Plan in a timely manner is critical to ensuring our liquidity is sufficient during the bankruptcy process.
Our ability to continue as a going concern is contingent on our ability to comply with the financial and other covenants contained in our DIP Credit Facility, the Bankruptcy Court’s approval of the Plan and our ability to successfully implement the Plan and obtain exit financing, among other factors. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under
We closely monitorChapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Facility), for amounts other than those reflected in the accompanying condensed consolidated financial statements. Further, the Plan could materially change the amounts and timingclassifications of our sourcesassets and uses of funds, particularly as they affectliabilities reported in the condensed consolidated financial statements. The factors noted above raise substantial doubt about our ability to maintain compliance with the financial covenants of our revolving credit facilities. Furthermore, ourcontinue as a going concern.
Credit Risk
Our customers and counterparties are experiencing uncertain economic conditions which may impact their ability to generate operatingmake payments to us, which could adversely affect our business, cash flow inflows, liquidity, financial condition and results of operations. We monitor the current commodity price environment, sell assets, access capital marketscreditworthiness of all our counterparties and we generally require letters of credit or take any other actionparent guarantees for receivables from parties deemed to improve our liquidity and manage our debt is subject tohave sub-standard credit, unless the risks discussed above and the other risks and uncertainties that exist in our industry, some of which we may notcredit risk can otherwise be able to anticipate or control at this time.mitigated.
Derivative and Hedging Activities
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL. To mitigate a portion of our exposure to adverse market price changes, we have enteredenter into various derivative instruments. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to better predict the total revenue we expect to receive.
We utilize various oil, natural gas and NGL derivative instruments Pursuant to
protectthe RSA associated with our Chapter 11 Cases, we are required to hedge a
portioncertain amount of our
cash flow against downside risk. production with our DIP Credit Facility lenders. See Note 1 for additional details regarding these hedging requirements.As of October 31, 2019,November 5, 2020, including October and November derivative contracts that have settled, approximately 80%we had 2020 downside oil price protection through swaps at an average price of our remaining forecasted oil, natural$41.97 per bbl. We had 2020 downside gas and NGL production revenue was hedged, including 74% and 75% of our remaining forecasted 2019 oil and natural gas productionprice protection through swaps at average prices of $59.34$2.45 per barrel and $2.83 per mcf, respectively.mcf.
| | Oil Derivatives(a) | Oil Derivatives(a) | Oil Derivatives(a) |
Year | | Type of Derivative Instrument | | Notional Volume | | Average NYMEX Price | | Type of Derivative Instrument | | Notional Volume | | Average NYMEX Price |
| | (mmbbls) | | | (mmbbls) | |
2019 | | Swaps | | 7 |
| | $60.24 | |
2019 | | Two-way collars | | 1 |
| | $58.00/$67.75 | |
2019 | | Basis protection swaps | | 2 |
| | $5.67 | |
2019 | | Puts | | 1 |
| | $54.43 | |
2020 | | Swaps | | 15 |
| | $58.60 | | Fixed-price swaps | | 4 |
| | $41.97 |
2020 | | Two-way collars | | 2 |
| | $65.00/$83.25 | |
2020 | | Call swaptions | | 2 |
| | $63.15 | |
2020 | | Basis protection swaps | | 5 |
| | $2.45 | |
2021 | | | Fixed-price swaps | | 15 |
| | $42.18 |
2022 | | | Fixed-price swaps | | 6 |
| | $42.34 |
Natural Gas Derivatives(a) | Natural Gas Derivatives(a) | Natural Gas Derivatives(a) |
Year | | Type of Derivative Instrument | | Notional Volume | | Average NYMEX Price | | Type of Derivative Instrument | | Notional Volume | | Average NYMEX Price |
| | (bcf) | | | (bcf) | |
2019 | | Swaps | | 118 |
| | $2.84 | |
2019 | | Two-way collars | | 9 |
| | $2.75/$2.91 | |
2019 | | Three-way collars | | 15 |
| | $2.50/$2.80/$3.10 | |
2019 | | Calls | | 6 |
| | $12.00 | |
2019 | | Basis protection swaps | | 29 |
| | ($0.10) | |
2020 | | Swaps | | 265 |
| | $2.76 | |
2020 | | Basis protection swaps | | 30 |
| | $0.08 | |
2020 | | Call swaptions | | 106 |
| | $2.77 | | Fixed-price swaps(b) | | 121 |
| | $2.45 |
2020 | | Calls | | 22 |
| | $12.00 | | Basis protection swaps | | 9 |
| | ($0.64) |
2021 | | Call swaptions | | 15 |
| | $2.80 | | Fixed-price swaps(b) | | 518 |
| | 2.67 |
2021 | | | Two-way collars | | 30 |
| | $2.80/$3.29 |
2021 | | | Basis protection swaps | | 13 |
| | ($0.64) |
2022 | | Call swaptions | | 15 |
| | $2.80 | | Fixed-price swaps | | 209 |
| | $2.52 |
| |
(a) | Includes amounts settled in October and November 2019.2020. |
| |
(b) | Includes non-NYMEX fixed-price swaps. |
See Note 1411 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of derivatives and hedging activities.
Debt
We are committed to reducing total leverage to achieve long-term net debt/EBITDAX of 2x. To accomplish this goal, we intend to allocate our capital expenditures to projects we believe offer the highest return and value regardless of the commodity price environment, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our cost structure and our portfolio. Increasing our margins means not only increasing our absolute level of cash flows from operations, but also increasing our cash flows from operations generated per barrel of oil equivalent production. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative), improve our production volumes from existing wells, and achieve additional operating and capital efficiencies with a focus on growing our oil volumes.
We may continue to use a combination of cash, borrowings and issuances of our common stock or other securities and the proceeds from asset sales to retire our outstanding debt and/or preferred stock through privately negotiated transactions, open market repurchases, redemptions, exchanges, tender offers or otherwise, but we are under no obligation to do so.
Chesapeake Revolving Credit Facility
The Chesapeake revolving credit facility is currently subject to a $3.0 billion borrowing base that matures in September 2023. As of September 30, 2019, we had $1.443 billion of borrowing capacity available under our revolving credit facility. Our next borrowing base redetermination is scheduled for the second quarter of 2020. As of September 30, 2019, we had outstanding borrowings of $1.504 billion under the revolving credit facility and had used $53 million of the revolving credit facility for various letters of credit. Borrowings under the facility bear interest at a variable rate. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion of the terms of the Chesapeake revolving credit facility. As of September 30, 2019, we were in compliance with all applicable financial covenants under the credit agreement. Our total leverage ratio was approximately 3.88 to 1.00, our first lien secured leverage ratio was approximately 0.74 to 1.00 and our interest coverage ratio was approximately 3.55 to 1.00.Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuations in the future. If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern. Failure to comply with this covenant, if not waived, would result in an event of default under our Chesapeake revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness. We are actively pursuing with support from the Board of Directors a variety of transactions and cost-cutting measures, including but not limited to, reduction in corporate discretionary expenditures, refinancing transactions by us or our subsidiaries, capital exchange transactions, asset divestitures, reductions in capital expenditures by approximately 30% in 2020 and operational efficiencies. We believe it is probable that these measures, as we continue to implement them, will enable us to comply with our leverage ratio covenant.
BVL Revolving Credit Facility
The BVL revolving credit facility is currently subject to a $1.3 billion borrowing base that matures in December 2021. The scheduled borrowing base redetermination for the fourth quarter of 2019 is ongoing, and there can be no assurance that the borrowing base will remain at $1.3 billion. As of September 30, 2019, we had $400 million of borrowing capacity available under the BVL revolving credit facility, with outstanding borrowings of $900 million. Borrowings under the facility bear interest at a variable rate. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion of the terms of the BVL revolving credit facility. As of September 30, 2019, we were in compliance with all applicable financial covenants under the credit agreement. Our ratio of net debt to EBITDAX was 2.97 to 1.00 and our ratio of current assets to current liabilities was 2.23 to 1.00 as of September 30, 2019.Contractual Obligations and Off-Balance Sheet Arrangements
From time to time, we enter into arrangements and transactions that can give rise to contractual obligations and
off-balance sheet commitments. As of September 30, 2019,2020, these arrangements and transactions included (i) certain
operating lease agreements, (ii) open purchase commitments, (iii) open delivery commitments, (iv) open drilling commitments, (v) undrawn letters of credit, (vi) open gathering and transportation commitments, and (vii) various other commitments we enter into in the ordinary course of business that could result in future cash obligations.
Capital Expenditures
Our 2019 capital expenditures program is expected to generate greater capital efficiency than our 2018 program as we focus on expanding our margins through disciplined investing in the highest-return projects. Our forecasted 2019 capital expenditures, inclusive of capitalized interest, are $2.1 – $2.3 billion compared to our 2018 capital spending level of $2.1 billion. We have significant control and flexibility over the timing and execution of our development plan, enabling us to reduce our capital spending as needed. As a result of the impact to global oil demand primarily caused by the COVID-19 pandemic, we have significantly reduced our forecasted 2020 capital expenditures to a range of $1.0 billion - $1.2 billion compared to our 2019 capital spending level of $2.2 billion. This reduction in spending will reduce our future production levels. Management continues to review operational plans for 20192020 and beyond, and anticipates reducingwhich could result in changes to projected capital expenditures in 2020 by approximately 30% to target free cash flow.
Credit Risk
Someand projected revenues from sales of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as gathering, processing, transportationoil, natural gas and hedging agreements. As of October 31, 2019, we have received requests and posted approximately $71 million of collateral related to certain of our marketing and other contracts. We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately $356 million, which may be in the form of additional letters of credit, cash or other acceptable collateral. However, we have substantial long-term business relationships with each of these counterparties, and we may be able to mitigate any collateral requests through ongoing business arrangements and by offsetting amounts that the counterparty owes us. Any posting of collateral consisting of cash or letters of credit reduces availability under our revolving credit facility and negatively impacts our liquidity.NGL.
Sources of Funds
The following table presents the sources of our cash and cash equivalents for the Current Period and the Prior Period. See Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of divestitures of oil and natural gas assets. | | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
Cash provided by operating activities | | $ | 1,182 |
| | $ | 1,395 |
| | $ | 1,155 |
| | $ | 1,182 |
|
Proceeds from divestitures of proved and unproved properties, net | | 110 |
| | 395 |
| | 10 |
| | 110 |
|
Proceeds from revolving credit facility borrowings, net | | 1,310 |
| | — |
| |
Proceeds from issuance of senior notes, net | | — |
| | 1,237 |
| |
Proceeds from revolving pre-petition credit facility borrowings, net | | | 339 |
| | 1,310 |
|
Proceeds from sales of other property and equipment, net | | 6 |
| | 75 |
| | 5 |
| | 6 |
|
Proceeds from sales of investments | | — |
| | 74 |
| |
Total sources of cash and cash equivalents | | $ | 2,608 |
| | $ | 3,176 |
| | $ | 1,509 |
| | $ | 2,608 |
|
Cash Flows from Operating Activities
Cash provided by operating activities was $1.182$1.155 billion in the Current Period compared to $1.395$1.182 billion in the Prior Period. The decrease in the Current Period is primarily due to the result of lower prices for the oil, natural gas and NGL we sold and lower volumes of oil, natural gas and NGL sold offset by higher oil volumes sold. Additionally, cash provided by operating activities in the Current Period included one-time charges for transaction and severance costs of $72 million related to our acquisition of WildHorse. Cash flows from operations are largely affected by the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of assets, deferred income taxes and mark-to-market changes in our open derivative instruments. The Current Period was impacted by COVID-19 and the related economic volatility and a continued low level of demand or depressed prices for oil and natural gas has had a continued material adverse effect on our cash flows. See further discussion below under Results of Operations.
Uses of Funds
The following table presents the uses of our cash and cash equivalents for the Current Period and the Prior Period: | | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
Oil and Natural Gas Expenditures: | | | | | | | | |
Drilling and completion costs | | $ | 1,640 |
| | $ | 1,407 |
| | $ | 946 |
| | $ | 1,640 |
|
Acquisitions of proved and unproved properties | | 31 |
| | 118 |
| | 9 |
| | 31 |
|
Total oil and natural gas expenditures | | 1,671 |
| | 1,525 |
| | 955 |
| | 1,671 |
|
Other Uses of Cash and Cash Equivalents: | | | | | | | | |
Payments on revolving credit facility borrowings, net | | — |
| | 136 |
| |
Cash paid to purchase debt | | | 95 |
| | 457 |
|
DIP credit facility and exit facilities financing costs | | | 109 |
| | — |
|
Business combination, net | | 353 |
| | — |
| | — |
| | 353 |
|
Additions to other property and equipment | | 27 |
| | 11 |
| | 18 |
| | 27 |
|
Cash paid to purchase debt | | 457 |
| | 1,285 |
| |
Extinguishment of other financing | | — |
| | 122 |
| |
Dividends paid | | 69 |
| | 69 |
| |
Preferred stock dividends paid | | | 22 |
| | 69 |
|
Other | | 21 |
| | 29 |
| | 10 |
| | 21 |
|
Total other uses of cash and cash equivalents | | 927 |
| | 1,652 |
| | 254 |
| | 927 |
|
Total uses of cash and cash equivalents | | $ | 2,598 |
| | $ | 3,177 |
| | $ | 1,209 |
| | $ | 2,598 |
|
Drilling and Completion Costs
Our drilling and completion costs increaseddecreased in the Current Period compared to the Prior Period primarily as a result of increaseddecreased drilling and completion activity mainly in our oilliquids-rich plays. Our average operated rig count was 18 rigs and spud wells were 258 in
Cash Paid to Purchase Debt
In the Current Period, comparedwe repurchased approximately $160 million aggregate principal amount of our senior notes for $95 million. See Note 4 of the notes to an average operated rig countour condensed consolidated financial statements included in Item 1 of 17 rigs and 240 spud wells inPart I of this report for further discussion of the Prior Period. We completed 290 operated wells innotes repurchased. DIP Credit Facility Financing Costs
In the Current Period, comparedwe paid $109 million of one-time fees to 242 in the Prior Period.lenders to establish our DIP Credit Facility and Exit Credit Facilities.
Business Combination - Acquisition of WildHorse
In the CurrentPrior Period, we acquired WildHorse for approximately 717.4 million shares of our common stock, or 3.6 million shares retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020, and $381 million less $28 million of cash held by WildHorse as of the acquisition date.
Dividends
We paid dividends of $22 million and $69 million on our preferred stock in the Current Period and the Prior Period, respectively. On April 17, 2020, we announced that we were suspending payment of dividends on each series of our outstanding convertible preferred stock. Pursuant to the RSA associated with our Chapter 11 Cases, each holder of an equity interest in Chesapeake would have such interest canceled, released, and extinguished without any distribution. See Note 31 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion ofadditional information about the acquisition.Chapter 11 Cases. Cash Paid to Purchase Debt
In the Current Quarter, we repurchased approximately $82 million principal amount of the BVL Senior Notes for $76 million. In the Current Period, we repaid upon maturity $380 million principal amount of our Floating Rate Senior Notes due April 2019 with borrowings from our Chesapeake revolving credit facility. In the Prior Period, we used $1.285 billion of cash from the issuance of senior notes together with cash on hand and borrowings under our revolving credit facility to repay in full $1.233 billion principal amount of borrowings under our secured term loan due 2021 plus a call premium of $52 million.
Extinguishment of Other Financing
In the Prior Quarter, we repurchased previously conveyed overriding royalty interests (ORRIs) from CHK Utica, L.L.C. investors and extinguished our obligation to convey future ORRIs to the investors for combined consideration of $199 million. The cash paid was bifurcated between extinguishment of the obligation and acquisition of the ORRI.
Dividends
We paid dividends of $69 million on our preferred stock in both the Current Period and the Prior Period. We eliminated common stock dividends in the 2015 third quarter and do not anticipate paying any common stock dividends in the foreseeable future.
Results of Operations
Oil, Natural Gas and NGL Production and Average Sales Prices | | | | Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2020 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe | | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe |
Marcellus | | — |
| | — |
| | 928 |
| | 1.85 |
| | — |
| | — |
| | 154 |
| | 32 |
| | 11.11 |
| | — |
| | — |
| | 1,069 |
| | 1.40 |
| | — |
| | — |
| | 178 |
| | 40 |
| | 8.37 |
|
Haynesville | | — |
| | — |
| | 694 |
| | 2.03 |
| | — |
| | — |
| | 116 |
| | 24 |
| | 12.17 |
| | — |
| | — |
| | 549 |
| | 1.81 |
| | — |
| | — |
| | 91 |
| | 21 |
| | 10.86 |
|
Eagle Ford | | 51 |
| | 60.13 |
| | 161 |
| | 2.13 |
| | 16 |
| | 14.24 |
| | 94 |
| | 20 |
| | 38.62 |
| | 51 |
| | 39.79 |
| | 132 |
| | 2.08 |
| | 22 |
| | 12.81 |
| | 95 |
| | 21 |
| | 27.31 |
|
Brazos Valley | | 36 |
| | 58.23 |
| | 62 |
| | 1.70 |
| | 6 |
| | 8.84 |
| | 53 |
| | 11 |
| | 43.07 |
| | 36 |
| | 38.45 |
| | 43 |
| | 0.80 |
| | 5 |
| | 6.69 |
| | 49 |
| | 11 |
| | 29.82 |
|
Powder River Basin | | 20 |
| | 54.17 |
| | 86 |
| | 1.96 |
| | 5 |
| | 11.49 |
| | 39 |
| | 8 |
| | 33.09 |
| | 10 |
| | 38.69 |
| | 41 |
| | 1.79 |
| | 3 |
| | 15.94 |
| | 20 |
| | 4 |
| | 25.98 |
|
Mid-Continent | | 8 |
| | 55.24 |
| | 57 |
| | 1.63 |
| | 5 |
| | 12.06 |
| | 22 |
| | 5 |
| | 26.26 |
| | 4 |
| | 40.12 |
| | 31 |
| | 1.63 |
| | 3 |
| | 11.58 |
| | 12 |
| | 3 |
| | 20.15 |
|
Retained assets(a) | | 115 |
| | 58.18 |
| | 1,988 |
| | 1.93 |
| | 32 |
| | 12.44 |
| | 478 |
| | 100 |
| | 22.79 |
| | 101 |
| | 39.31 |
| | 1,865 |
| | 1.56 |
| | 33 |
| | 11.94 |
| | 445 |
| | 100 |
| | 16.40 |
|
Divested assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 5.38 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | 115 |
| | 58.18 |
| | 1,989 |
| | 1.93 |
| | 32 |
| | 12.44 |
| | 478 |
| | 100 | % | | 22.79 |
| | 101 |
| | 39.31 |
| | 1,867 |
| | 1.57 |
| | 33 |
| | 11.94 |
| | 445 |
| | 100 | % | | 16.40 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 | | Three Months Ended September 30, 2019 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe | | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe |
Marcellus | | — |
| | — |
| | 812 |
| | 2.46 |
| | — |
| | — |
| | 135 |
| | 25 |
| | 14.77 |
| | — |
| | — |
| | 928 |
| | 1.85 |
| | — |
| | — |
| | 154 |
| | 32 |
| | 11.11 |
|
Haynesville | | — |
| | — |
| | 769 |
| | 2.74 |
| | — |
| | — |
| | 128 |
| | 24 |
| | 16.44 |
| | — |
| | — |
| | 694 |
| | 2.03 |
| | — |
| | — |
| | 116 |
| | 24 |
| | 12.17 |
|
Eagle Ford | | 58 |
| | 74.38 |
| | 121 |
| | 3.26 |
| | 21 |
| | 28.94 |
| | 100 |
| | 19 |
| | 53.48 |
| | 51 |
| | 60.13 |
| | 162 |
| | 2.13 |
| | 16 |
| | 14.24 |
| | 94 |
| | 20 |
| | 38.62 |
|
Brazos Valley | | | 36 |
| | 58.23 |
| | 62 |
| | 1.70 |
| | 6 |
| | 8.84 |
| | 53 |
| | 11 |
| | 43.07 |
|
Powder River Basin | | 12 |
| | 69.24 |
| | 73 |
| | 2.50 |
| | 5 |
| | 27.89 |
| | 29 |
| | 5 |
| | 39.76 |
| | 20 |
| | 54.20 |
| | 86 |
| | 1.96 |
| | 5 |
| | 11.49 |
| | 39 |
| | 8 |
| | 33.08 |
|
Mid-Continent | | 9 |
| | 69.76 |
| | 60 |
| | 2.50 |
| | 4 |
| | 29.73 |
| | 23 |
| | 4 |
| | 38.64 |
| | 8 |
| | 55.24 |
| | 57 |
| | 1.63 |
| | 5 |
| | 12.06 |
| | 22 |
| | 5 |
| | 26.28 |
|
Retained assets(a) | | 79 |
| | 73.07 |
| | 1,835 |
| | 2.63 |
| | 30 |
| | 28.86 |
| | 415 |
| | 77 |
| | 27.66 |
| | 115 |
| | 58.18 |
| | 1,989 |
| | 1.93 |
| | 32 |
| | 12.44 |
| | 478 |
| | 100 |
| | 22.79 |
|
Divested assets | | 10 |
| | 67.02 |
| | 497 |
| | 2.91 |
| | 29 |
| | 29.34 |
| | 122 |
| | 23 |
| | 24.38 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | 89 |
| | 72.39 |
| | 2,332 |
| | 2.69 |
| | 59 |
| | 29.09 |
| | 537 |
| | 100 | % | | 26.92 |
| | 115 |
| | 58.18 |
| | 1,989 |
| | 1.93 |
| | 32 |
| | 12.44 |
| | 478 |
| | 100 | % | | 22.79 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2020 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe | | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe |
Marcellus | | — |
| | — |
| | 935 |
| | 2.57 |
| | — |
| | — |
| | 156 |
| | 32 |
| | 15.45 |
| | — |
| | — |
| | 1,032 |
| | 1.57 |
| | — |
| | — |
| | 172 |
| | 38 |
| | 9.43 |
|
Haynesville | | — |
| | — |
| | 734 |
| | 2.46 |
| | — |
| | — |
| | 122 |
| | 25 |
| | 14.78 |
| | — |
| | — |
| | 535 |
| | 1.66 |
| | — |
| | — |
| | 89 |
| | 20 |
| | 9.95 |
|
Eagle Ford | | 57 |
| | 61.95 |
| | 153 |
| | 2.77 |
| | 20 |
| | 16.75 |
| | 102 |
| | 21 |
| | 41.95 |
| | 51 |
| | 38.27 |
| | 136 |
| | 2.08 |
| | 19 |
| | 11.58 |
| | 93 |
| | 21 |
| | 26.56 |
|
Brazos Valley(b) | | 31 |
| | 60.38 |
| | 47 |
| | 1.80 |
| | 5 |
| | 8.89 |
| | 44 |
| | 9 |
| | 45.75 |
| |
Brazos Valley | | | 38 |
| | 36.52 |
| | 54 |
| | 0.68 |
| | 6 |
| | 4.61 |
| | 53 |
| | 12 |
| | 27.00 |
|
Powder River Basin | | 18 |
| | 54.26 |
| | 86 |
| | 2.51 |
| | 5 |
| | 15.66 |
| | 38 |
| | 8 |
| | 34.15 |
| | 14 |
| | 35.71 |
| | 60 |
| | 1.71 |
| | 4 |
| | 13.19 |
| | 28 |
| | 6 |
| | 23.25 |
|
Mid-Continent | | 9 |
| | 55.57 |
| | 58 |
| | 2.16 |
| | 5 |
| | 17.05 |
| | 23 |
| | 5 |
| | 29.25 |
| | 4 |
| | 37.49 |
| | 39 |
| | 1.85 |
| | 3 |
| | 11.44 |
| | 14 |
| | 3 |
| | 19.43 |
|
Retained assets(a) | | 115 |
| | 59.81 |
| | 2,013 |
| | 2.52 |
| | 35 |
| | 15.50 |
| | 485 |
| | 100 |
| | 25.71 |
| | 107 |
| | 37.32 |
| | 1,856 |
| | 1.62 |
| | 32 |
| | 10.31 |
| | 449 |
| | 100 |
| | 16.32 |
|
Divested assets | | — |
| | — |
| | 2 |
| | 1.37 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 3.23 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | 115 |
| | 59.78 |
| | 2,015 |
| | 2.51 |
| | 35 |
| | 15.50 |
| | 486 |
| | 100 | % | | 25.70 |
| | 107 |
| | 37.32 |
| | 1,857 |
| | 1.62 |
| | 32 |
| | 10.31 |
| | 449 |
| | 100 | % | | 16.32 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, 2018 | | Nine Months Ended September 30, 2019 |
| | Oil | | Natural Gas | | NGL | | Total | | Oil | | Natural Gas | | NGL | | Total |
| | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe | | mbbl per day | | $/bbl | | mmcf per day | | $/mcf | | mbbl per day | | $/bbl | | mboe per day | | % | | $/boe |
Marcellus | | — |
| | — |
| | 830 |
| | 2.85 |
| | — |
| | — |
| | 138 |
| | 26 |
| | 17.14 |
| | — |
| | — |
| | 935 |
| | 2.57 |
| | — |
| | — |
| | 156 |
| | 32 |
| | 15.45 |
|
Haynesville | | — |
| | — |
| | 810 |
| | 2.72 |
| | — |
| | — |
| | 135 |
| | 25 |
| | 16.34 |
| | — |
| | — |
| | 734 |
| | 2.46 |
| | — |
| | — |
| | 122 |
| | 25 |
| | 14.78 |
|
Eagle Ford | | 60 |
| | 70.35 |
| | 134 |
| | 3.26 |
| | 19 |
| | 26.93 |
| | 101 |
| | 19 |
| | 50.88 |
| | 57 |
| | 61.95 |
| | 153 |
| | 2.77 |
| | 20 |
| | 16.75 |
| | 102 |
| | 21 |
| | 41.95 |
|
Brazos Valley(b) | | | 31 |
| | 60.38 |
| | 47 |
| | 1.80 |
| | 5 |
| | 8.89 |
| | 44 |
| | 9 |
| | 45.75 |
|
Powder River Basin | | 9 |
| | 67.02 |
| | 59 |
| | 2.48 |
| | 4 |
| | 27.86 |
| | 23 |
| | 4 |
| | 38.28 |
| | 18 |
| | 54.28 |
| | 86 |
| | 2.51 |
| | 5 |
| | 15.66 |
| | 38 |
| | 8 |
| | 34.15 |
|
Mid-Continent | | 9 |
| | 66.27 |
| | 61 |
| | 2.52 |
| | 4 |
| | 26.62 |
| | 24 |
| | 4 |
| | 36.78 |
| | 9 |
| | 55.57 |
| | 58 |
| | 2.16 |
| | 5 |
| | 17.05 |
| | 23 |
| | 5 |
| | 29.25 |
|
Retained assets(a) | | 78 |
| | 69.47 |
| | 1,894 |
| | 2.80 |
| | 27 |
| | 27.00 |
| | 421 |
| | 78 |
| | 27.25 |
| | 115 |
| | 59.78 |
| | 2,013 |
| | 2.52 |
| | 35 |
| | 15.50 |
| | 485 |
| | 100 |
| | 25.71 |
|
Divested assets | | 13 |
| | 63.35 |
| | 475 |
| | 2.87 |
| | 28 |
| | 26.73 |
| | 119 |
| | 22 |
| | 24.25 |
| | — |
| | — |
| | 2 |
| | 1.37 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Total | | 91 |
| | 68.63 |
| | 2,369 |
| | 2.82 |
| | 55 |
| | 26.87 |
| | 540 |
| | 100 | % | | 26.59 |
| | 115 |
| | 59.78 |
| | 2,015 |
| | 2.51 |
| | 35 |
| | 15.50 |
| | 486 |
| | 100 | % | | 25.70 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
(a) | Includes assets retained as of September 30, 2019.2020. |
(b) Average production per day since the date of the WildHorse acquisition on February 1, 2019, 242 days, was 35 mbbl, 53 mmcf and 6 mbbl for oil, natural gas and NGL, respectively.
Oil, Natural Gas and NGL Sales | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions) | | ($ in millions) |
Oil | | $ | 613 |
| | $ | 594 |
| | 3 | % | | $ | 1,879 |
| | $ | 1,698 |
| | 11 | % | | $ | 366 |
| | $ | 613 |
| | (40 | )% | | $ | 1,091 |
| | $ | 1,879 |
| | (42 | )% |
Natural gas | | 353 |
| | 578 |
| | (39 | )% | | 1,384 |
| | 1,822 |
| | (24 | )% | | 270 |
| | 353 |
| | (24 | )% | | 824 |
| | 1,384 |
| | (40 | )% |
NGL | | 37 |
| | 159 |
| | (77 | )% | | 149 |
| | 404 |
| | (63 | )% | | 36 |
| | 37 |
| | (3 | )% | | 91 |
| | 149 |
| | (39 | )% |
Oil, natural gas and NGL sales | | $ | 1,003 |
| | $ | 1,331 |
| | (25 | )% | | $ | 3,412 |
| | $ | 3,924 |
| | (13 | )% | | $ | 672 |
| | $ | 1,003 |
| | (33 | )% | | $ | 2,006 |
| | $ | 3,412 |
| | (41 | )% |
The net decrease in oil, natural gas and NGL sales in the Current Quarter of $331 million is primarily attributable to (i) $262 million decrease in revenues due to decreases in the average price received per boe in the Current Quarter resulted in a $182and (ii) $69 million decrease in revenues anddue to decreased sales volumes resultedfrom production curtailments, natural declines and shut-in wells.
The net decrease in a $146 millionoil, natural gas and NGL sales in the Current Period of $1.406 billion is primarily attributable to (i) $1.152 billion decrease in revenues for a total net decrease in revenues of $328 million. The decreasedue to decreases in the average price received per boe in the Current Period resulted in a $118and (ii) $254 million decrease in revenues anddue to decreased sales volumes resulted in a $394 million decrease in revenues, for a total net decrease in revenues of $512 million.from production curtailments, natural declines and shut-in wells.
Oil and Natural Gas and NGL Derivatives | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
Oil derivatives – realized gains (losses) | | $ | 26 |
| | $ | (112 | ) | | $ | 18 |
| | $ | (273 | ) | | $ | 2 |
| | $ | 26 |
| | $ | 698 |
| | $ | 18 |
|
Oil derivatives – unrealized gains (losses) | | 98 |
| | 12 |
| | (67 | ) | | (115 | ) | | (4 | ) | | 98 |
| | (9 | ) | | (67 | ) |
Total gains (losses) on oil derivatives | | 124 |
| | (100 | ) | | (49 | ) | | (388 | ) | | (2 | ) | | 124 |
| | 689 |
| | (49 | ) |
| | | | | | | | | | | | | | | | |
Natural gas derivatives – realized gains (losses) | | 83 |
| | (1 | ) | | 71 |
| | 83 |
| | 5 |
| | 83 |
| | 179 |
| | 71 |
|
Natural gas derivatives – unrealized gains (losses) | | (40 | ) | | (17 | ) | | 119 |
| | (168 | ) | | (164 | ) | | (40 | ) | | (295 | ) | | 119 |
|
Total gains (losses) on natural gas derivatives | | 43 |
| | (18 | ) | | 190 |
| | (85 | ) | | (159 | ) | | 43 |
| | (116 | ) | | 190 |
|
| | | | | | | | | |
NGL derivatives – realized gains (losses) | | — |
| | (10 | ) | | — |
| | (14 | ) | |
NGL derivatives – unrealized gains (losses) | | — |
| | (4 | ) | | — |
| | (13 | ) | |
Total gains (losses) on NGL derivatives | | — |
| | (14 | ) | | — |
| | (27 | ) | |
Total gains (losses) on oil, natural gas and NGL derivatives | | $ | 167 |
| | $ | (132 | ) | | $ | 141 |
| | $ | (500 | ) | |
Total gains (losses) on oil and natural gas derivatives | | | $ | (161 | ) | | $ | 167 |
| | $ | 573 |
| | $ | 141 |
|
See Note 1411 of the notes to our condensed consolidated financial statements included in Item 1 of this report for a discussion of our derivative activity. Marketing Revenues and Expenses
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions) | | ($ in millions) |
Marketing revenues | | $ | 889 |
| | $ | 1,219 |
| | (27 | )% | | $ | 3,038 |
| | $ | 3,738 |
| | (19 | )% | | $ | 448 |
| | $ | 889 |
| | (50 | )% | | $ | 1,412 |
| | $ | 3,038 |
| | (54 | )% |
Marketing expenses | | 901 |
| | 1,238 |
| | (27 | )% | | 3,071 |
| | 3,798 |
| | (19 | )% | | 450 |
| | 901 |
| | (50 | )% | | 1,438 |
| | 3,071 |
| | (53 | )% |
Marketing gross margin | | $ | (12 | ) | | $ | (19 | ) | | 37 | % | | $ | (33 | ) | | $ | (60 | ) | | 45 | % | |
Marketing margin | | | $ | (2 | ) | | $ | (12 | ) | | (83 | )% | | $ | (26 | ) | | $ | (33 | ) | | 21 | % |
Marketing revenues and expenses decreased in the Current Quarter and the Current Period primarily as a result of decreased oil, natural gas, and NGL prices received in our marketing operations as well decreases from the termination of a marketing contract related to our Utica divestiture. Grossand less volumes being marketed. Marketing margin increased in the Current Quarter and the Current Period primarily due to improved margins related to non-equity transactions including decreases in transportation costs offset by losses on throughput transportation and inventory due to lower prices. Gross margin increased in the Current Period due to improved margins related to non-equity transactions including decreases in transportation costs as well as marketing services provided to acquires of our divested wells offset by losses on throughput transportation and inventory due to lower prices.transactions.
Other Revenue
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| | ($ in millions) |
Other revenue | | $ | 15 |
| | $ | 16 |
| | (6 | )% | | $ | 45 |
| | $ | 48 |
| | (6 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions) |
Other revenue | | $ | 15 |
| | $ | 15 |
| | — | % | | $ | 45 |
| | $ | 45 |
| | — | % |
Other revenue relates primarily to the amortization of deferred VPP revenue. Our remaining deferred revenue balance of $78$22 million will be amortized on a straight-line basis through 2021. See Note 86 of the notes to our condensed consolidated financial statements included in Item 81 of this report for further discussion of our VPP.
Oil, Natural Gas and NGL Production Expenses | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions) | | ($ in millions, except per unit) |
Marcellus | | 9 |
| | 8 |
| | 13 | % | | 27 |
| | 25 |
| | 8 | % | | $ | 8 |
| | $ | 9 |
| | (11 | )% | | $ | 24 |
| | $ | 27 |
| | (11 | )% |
Haynesville | | 12 |
| | 15 |
| | (20 | )% | | 39 |
| | 45 |
| | (13 | )% | | 10 |
| | 12 |
| | (17 | )% | | 32 |
| | 39 |
| | (18 | )% |
Eagle Ford | | 45 |
| | 42 |
| | 7 | % | | 141 |
| | 141 |
| | — | % | | 24 |
| | 45 |
| | (47 | )% | | 85 |
| | 141 |
| | (40 | )% |
Brazos Valley | | 25 |
| | — |
| | n/a |
| | 62 |
| | — |
| | n/a |
| | 17 |
| | 25 |
| | (32 | )% | | 67 |
| | 62 |
| | 8 | % |
Powder River Basin | | 20 |
| | 12 |
| | 67 | % | | 51 |
| | 35 |
| | 46 | % | | 9 |
| | 20 |
| | (55 | )% | | 37 |
| | 51 |
| | (27 | )% |
Mid-Continent | | 24 |
| | 27 |
| | (11 | )% | | 75 |
| | 73 |
| | 3 | % | | 14 |
| | 24 |
| | (42 | )% | | 50 |
| | 75 |
| | (33 | )% |
Retained Assets(a) | | 135 |
| | 104 |
| | 30 | % | | 395 |
| | 319 |
| | 24 | % | | 82 |
| | 135 |
| | (39 | )% | | 295 |
| | 395 |
| | (25 | )% |
Divested Assets | | — |
| | 12 |
| | (100 | )% | | (1 | ) | | 50 |
| | (102 | )% | | — |
| | — |
| | — | % | | — |
| | (1 | ) | | (100 | )% |
Total | | 135 |
|
| 116 |
| | 16 | % | | 394 |
| | 369 |
| | 7 | % | |
| | | | | | | | | | | | | |
Ad valorem tax | | 20 |
| | 16 |
| | 25 | % | | 59 |
| | 48 |
| | 23 | % | |
| | | | | | | | | | | | | |
Total oil, natural gas and NGL production expenses | | $ | 155 |
| | $ | 132 |
| | 17 | % | | $ | 453 |
| | $ | 417 |
| | 9 | % | | $ | 82 |
| | $ | 135 |
| | (39 | )% | | $ | 295 |
| | $ | 394 |
| | (25 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ per boe) | | ($ per boe) |
Marcellus | | $ | 0.63 |
| | $ | 0.66 |
| | (5 | )% | | $ | 0.63 |
| | $ | 0.67 |
| | (6 | )% | | $ | 0.49 |
| | $ | 0.63 |
| | (22 | )% | | $ | 0.51 |
| | $ | 0.62 |
| | (18 | )% |
Haynesville | | $ | 1.16 |
| | $ | 1.28 |
| | (9 | )% | | $ | 1.16 |
| | $ | 1.21 |
| | (4 | )% | | $ | 1.20 |
| | $ | 1.16 |
| | 3 | % | | $ | 1.30 |
| | $ | 1.13 |
| | 15 | % |
Eagle Ford | | $ | 5.24 |
| | $ | 4.52 |
| | 16 | % | | $ | 5.08 |
| | $ | 5.10 |
| | — | % | | $ | 2.73 |
| | $ | 5.23 |
| | (48 | )% | | $ | 3.34 |
| | $ | 4.94 |
| | (32 | )% |
Brazos Valley | | $ | 5.26 |
| | $ | — |
| | n/a |
| | $ | 5.17 |
| | $ | — |
| | n/a |
| | $ | 3.83 |
| | $ | 5.28 |
| | (27 | )% | | $ | 4.61 |
| | $ | 5.92 |
| | (22 | )% |
Powder River Basin | | $ | 5.47 |
| | $ | 4.40 |
| | 24 | % | | $ | 4.90 |
| | $ | 5.48 |
| | (11 | )% | | $ | 4.53 |
| | $ | 5.47 |
| | (17 | )% | | $ | 4.74 |
| | $ | 4.76 |
| | — | % |
Mid-Continent | | $ | 12.03 |
| | $ | 12.97 |
| | (7 | )% | | $ | 11.66 |
| | $ | 11.49 |
| | 1 | % | | $ | 13.11 |
| | $ | 12.04 |
| | 9 | % | | $ | 13.69 |
| | $ | 11.36 |
| | 21 | % |
Retained Assets(a) | | $ | 3.09 |
| | $ | 2.72 |
| | 14 | % | | $ | 2.97 |
| | $ | 2.78 |
| | 7 | % | | $ | 1.99 |
| | $ | 3.09 |
| | — | % | | $ | 2.40 |
| | $ | 2.97 |
| | — | % |
Divested Assets | | $ | — |
| | $ | 1.11 |
| | (100 | )% | | $ | — |
| | $ | 1.52 |
| | (100 | )% | | $ | — |
| | $ | — |
| | — | % | | $ | — |
| | $ | — |
| | — | % |
Total | | $ | 3.09 |
| | $ | 2.36 |
| | 31 | % | | $ | 2.97 |
| | $ | 2.50 |
| | 19 | % | |
| | | | | | | | | | | | | |
Ad valorem tax | | $ | 0.45 |
| | $ | 0.32 |
| | 41 | % | | $ | 0.44 |
| | $ | 0.33 |
| | 33 | % | |
| | | | | | | | | | | | | |
Total oil, natural gas and NGL production expenses per boe | | $ | 3.54 |
| | $ | 2.68 |
| | 32 | % | | $ | 3.41 |
| | $ | 2.83 |
| | 20 | % | | $ | 1.99 |
| | $ | 3.09 |
| | (36 | )% | | $ | 2.40 |
| | $ | 2.97 |
| | (19 | )% |
(a) Includes assets retained as of September 30, 2019.2020.
The absolute and per unit increasedecrease in the Current Quarter and the Current Period wasis primarily the result of the acquisition of WildHorse in 2019, partially offset by the sale of certain oilproduction curtailments and natural gas properties in 2018 and 2019.
Production expenses associated with VPP production volumesreduced workover activity in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period included approximately $4 million, $4 million, $11 million and $12 million, respectively. We anticipate a continued decrease in production expenses as the contractually scheduled volumes under our remaining VPP agreement decrease andliquids-rich operating efficiencies generally improve.areas due to lower commodity prices.
Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions, except per unit) | | ($ in millions, except per unit) |
Oil, natural gas and NGL gathering, processing and transportation expenses | | $ | 270 |
| | $ | 364 |
| | $ | 815 |
| | $ | 1,060 |
| | $ | 258 |
| | $ | 270 |
| | (4 | )% | | $ | 813 |
| | $ | 815 |
| | — | % |
Oil ($ per bbl) | | $ | 3.53 |
| | $ | 3.83 |
| | $ | 3.12 |
| | $ | 3.75 |
| | $ | 4.23 |
| | $ | 3.53 |
| | 20 | % | | $ | 3.82 |
| | $ | 3.12 |
| | 22 | % |
Natural gas ($ per mcf) | | $ | 1.19 |
| | $ | 1.33 |
| | $ | 1.21 |
| | $ | 1.30 |
| | $ | 1.19 |
| | $ | 1.19 |
| | — | % | | $ | 1.29 |
| | $ | 1.21 |
| | 7 | % |
NGL ($ per bbl) | | $ | 5.19 |
| | $ | 8.59 |
| | $ | 5.27 |
| | $ | 8.62 |
| | $ | 4.52 |
| | $ | 5.19 |
| | (13 | )% | | $ | 5.20 |
| | $ | 5.27 |
| | (1 | )% |
Total ($ per boe) | | $ | 6.12 |
| | $ | 7.36 |
| | $ | 6.14 |
| | $ | 7.18 |
| | $ | 6.28 |
| | $ | 6.12 |
| | 3 | % | | $ | 6.61 |
| | $ | 6.14 |
| | 8 | % |
The absolute and per unit decreaseincrease in oil, natural gas and NGL gathering, processing and transportation expenses was primarily due to certain 2018 divestitures.the increase in transportation expense related to oil deficiency fees for our Eagle Ford operating area and production curtailments.
ProductionSeverance and Ad Valorem Taxes |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| | ($ in millions, except per unit) |
Production taxes | | $ | 35 |
| | $ | 34 |
| | 3 | % | | $ | 109 |
| | $ | 91 |
| | 20 | % |
Production taxes per boe | | $ | 0.79 |
| | $ | 0.69 |
| | 14 | % | | $ | 0.82 |
| | $ | 0.62 |
| | 32 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions, except per unit) |
Severance taxes | | $ | 20 |
| | $ | 35 |
| | (43 | )% | | $ | 63 |
| | $ | 109 |
| | (42 | )% |
Ad valorem taxes | | 17 |
| | 20 |
| | (15 | )% | | 53 |
| | 59 |
| | (10 | )% |
Severance and ad valorem taxes | | $ | 37 |
| | $ | 55 |
| | (33 | )% | | $ | 116 |
| | $ | 168 |
| | (31 | )% |
| | | | | | | | | | | | |
Severance taxes per boe | | $ | 0.50 |
| | $ | 0.79 |
| | (37 | )% | | $ | 0.51 |
| | $ | 0.82 |
| | (38 | )% |
Ad valorem taxes per boe | | 0.40 |
| | 0.44 |
| | (9 | )% | | 0.43 |
| | 0.44 |
| | (2 | )% |
Severance and ad valorem taxes per boe | | $ | 0.90 |
| | $ | 1.23 |
| | (27 | )% | | $ | 0.94 |
| | $ | 1.26 |
| | (25 | )% |
The absolute and per unitdecrease in severance taxes was primarily due to the reduction in net revenue value as a result of decreased prices in areas where tax is calculated on net revenue instead of production. The decrease in ad valorem taxes is primarily due to lower assessed property values for 2020 compared to 2019.
Exploration Expense
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions) |
Impairments of unproved properties | | $ | 3 |
| | $ | 1 |
| | 200 | % | | $ | 402 |
| | $ | 26 |
| | 1,446 | % |
Dry hole expense | | — |
| | 8 |
| | — | % | | 7 |
| | 8 |
| | (13 | )% |
Geological and geophysical expense and other | | 2 |
| | 8 |
| | (75 | )% | | 8 |
| | 22 |
| | (64 | )% |
Exploration expense | | $ | 5 |
| | $ | 17 |
| | (71 | )% | | $ | 417 |
| | $ | 56 |
| | 645 | % |
The increase in production taxesexploration expense in the Current Period is the result of non-cash impairment charges in unproved properties, primarily in our Brazos Valley, Haynesville, Powder River Basin and Mid-Continent operating areas. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion. General and Administrative Expenses |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions, except per unit) |
Gross compensation and overhead | | $ | 122 |
| | $ | 150 |
| | (19 | )% | | $ | 472 |
| | $ | 530 |
| | (11 | )% |
Allocated to production expenses | | (24 | ) | | (33 | ) | | (27 | )% | | (78 | ) | | (105 | ) | | (26 | )% |
Allocated to marketing expenses | | (3 | ) | | (3 | ) | | — | % | | (9 | ) | | (11 | ) | | (18 | )% |
Allocated to exploration expenses | | — |
| | (2 | ) | | (100 | )% | | — |
| | (8 | ) | | (100 | )% |
Allocated to sand mine expenses | | — |
| | (2 | ) | | (100 | )% | | (3 | ) | | (5 | ) | | (40 | )% |
Capitalized general and administrative expenses | | (11 | ) | | (11 | ) | | — | % | | (48 | ) | | (37 | ) | | 30 | % |
Reimbursed from third parties | | (32 | ) | | (33 | ) | | (3 | )% | | (105 | ) | | (106 | ) | | (1 | )% |
General and administrative expenses, net | | $ | 52 |
| | $ | 66 |
| | (21 | )% | | $ | 229 |
| | $ | 258 |
| | (11 | )% |
| | | | | | | | | | | | |
General and administrative expenses, net per boe | | $ | 1.27 |
| | $ | 1.48 |
| | (14 | )% | | $ | 1.86 |
| | $ | 1.94 |
| | (4 | )% |
The $14 million decrease in general and administrative expenses in the Current Quarter is primarily attributable to $27 million in cost reduction initiatives, including decreases in salary and benefits resulting from reductions in workforce in the Current Quarter, the second quarter of 2020 and the fourth quarter of 2019. These decreases were partially offset by a decrease in allocated compensation expense of $13 million.
The $29 million decrease in general and administrative expenses in the Current Period is primarily attributable to $100 million in cost reduction initiatives, including decreases in salary and benefits resulting from reduction in workforce in the Current Period and the fourth quarter of 2019. These decreases were partially offset by $43 million in fees for legal, financial and restructuring advisors in preparation for the Chapter 11 Cases and a decrease in allocated compensation expense of $28 million.
Separation and Other Termination Costs
In the Current Quarter and the Current Period, was primarily due to the addition of Texas assets through our acquisition of WildHorse and the divestiture of Ohio assets that were taxed at a lower rate.
Exploration Expenses
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| | ($ in millions, except per unit) |
Impairments of unproved properties | | $ | 1 |
| | $ | 7 |
| | (86 | )% | | $ | 26 |
| | $ | 60 |
| | (57 | )% |
Dry hole expense | | 8 |
| | — |
| | — | % | | 8 |
| | 21 |
| | (62 | )% |
Geological and geophysical expense and other | | 8 |
| | 15 |
| | (47 | )% | | 22 |
| | 42 |
| | (48 | )% |
Exploration expense | | $ | 17 |
| | $ | 22 |
| | (23 | )% | | $ | 56 |
| | 123 |
| | (54 | )% |
General and Administrative Expenses |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| | ($ in millions, except per unit) |
Gross compensation and overhead | | $ | 150 |
| | $ | 174 |
| | (14 | )% | | $ | 530 |
| | $ | 563 |
| | (6 | )% |
Allocated to production expenses | | (33 | ) | | (36 | ) | | (8 | )% | | (105 | ) | | (112 | ) | | (6 | )% |
Allocated to marketing expenses | | (3 | ) | | (5 | ) | | (40 | )% | | (11 | ) | | (16 | ) | | (31 | )% |
Allocated to exploration expenses | | (2 | ) | | (3 | ) | | (33 | )% | | (8 | ) | | (7 | ) | | 14 | % |
Allocated to sand mine expenses | | (2 | ) | | — |
| | n/a |
| | (5 | ) | | — |
| | n/a |
|
Capitalized general and administrative expenses | | (11 | ) | | (13 | ) | | (15 | )% | | (37 | ) | | (42 | ) | | (12 | )% |
Reimbursed from third parties | | (33 | ) | | (36 | ) | | (8 | )% | | (106 | ) | | (113 | ) | | (6 | )% |
General and administrative expenses, net | | $ | 66 |
| | $ | 81 |
| | (19 | )% | | $ | 258 |
| | $ | 273 |
| | (5 | )% |
| | | | | | | | | | | | |
General and administrative expenses, net per boe | | $ | 1.48 |
| | $ | 1.63 |
| | (9 | )% | | $ | 1.94 |
| | $ | 1.85 |
| | 5 | % |
Restructuring and Other Termination Costs
On January 30, 2018, we underwent a reduction in workforce impacting approximately 13% of employees across all functions, primarily on our Oklahoma City campus. In connection with the reduction, we incurred a total chargecharges of approximately $38$16 million in the Prior Period forand $43 million, respectively, related to one-time termination benefits. The charge consisted of $33 million in salary expense and $5 million of other termination benefits.benefits for certain employees.
Depreciation, Depletion and Amortization | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | ($ in millions, except per unit) | | ($ in millions, except per unit) |
Depreciation, depletion and amortization | | $ | 573 |
| | $ | 405 |
| | 41 | % | | $ | 1,672 |
| | $ | 1,335 |
| | 25 | % | | $ | 170 |
| | $ | 573 |
| | (70 | )% | | $ | 931 |
| | $ | 1,672 |
| | (44 | )% |
Depreciation, depletion and amortization per boe | | $ | 13.04 |
| | $ | 8.20 |
| | 59 | % | | $ | 12.60 |
| | $ | 9.05 |
| | 39 | % | | $ | 4.17 |
| | $ | 13.04 |
| | (68 | )% | | $ | 7.58 |
| | $ | 12.60 |
| | (40 | )% |
The absolute and per unit increasedecrease in the Current Quarter and the Current Period is primarily the result of a higher depletion rate. The increase in depletion rate per boe primarily reflects our acquisition of WildHorse, coupled with our higher concentration of capital deployment in liquids-rich operating areas, which generally involve higher finding costs per boe relative to our gas-rich operating areas, as we focus on expanding our margins through disciplined investingan $8.446 billion impairment recognized in the highest-return projects.Current Period on our proved oil and natural gas properties due to lower forecasted commodity prices, which reduced the depletable carrying value.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | ($ in millions) |
Impairments due to lower forecasted commodity prices | | $ | 8 |
| | $ | — |
| | $ | 8 |
| | $ | 16 |
|
Impairments due to anticipated sale | | — |
| | 53 |
| | — |
| | 55 |
|
Total impairments of oil and natural gas properties | | 8 |
| | 53 |
| | 8 |
| | 71 |
|
Impairments of other fixed assets | | 1 |
| | 5 |
| | 3 |
| | 51 |
|
Total impairments | | $ | 9 |
| | $ | 58 |
| | $ | 11 |
| | $ | 122 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
Impairments of proved oil and natural gas properties | | $ | — |
| | $ | 8 |
| | $ | 8,446 |
| | $ | 8 |
|
Impairments of other fixed assets and other | | — |
| | 1 |
| | 76 |
| | 3 |
|
Total impairments | | $ | — |
| | $ | 9 |
| | $ | 8,522 |
| | $ | 11 |
|
In the Current Period, we recorded impairments of proved oil and natural gas properties related to Eagle Ford, Brazos Valley, Powder River Basin, Mid-Continent and other non-core assets, all of which are due to lower forecasted commodity prices. Additionally, in the Current Period we recorded a $76 million impairment of our sand mine assets that support our Brazos Valley operating area for the difference between fair value and the carrying value of the assets. See TABLE OF CONTENTSNote 13
of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion.
Other Operating (Income) Expense |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | ($ in millions) |
Other operating (income) expense | | $ | 15 |
| | $ | — |
| | $ | 79 |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
Other operating expense | | $ | 4 |
| | $ | 15 |
| | $ | 92 |
| | $ | 79 |
|
In the Current Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations. The contract terminations removed approximately $169 million of future commitments related to gathering, processing and transportation agreements.
In the Prior Period, we recorded $34 million of costs related to our acquisition of WildHorse, which consisted of consulting fees, financial advisory fees, legal fees and travel and lodging expenses. Additionally, we recorded $38 million of severance expense as a result of our acquisition of WildHorse. A majority of the WildHorse executives and employees were terminated. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
Interest Expense
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions, except per unit) | | ($ in millions, except per unit) |
Interest expense on DIP credit facility | | | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
Interest expense on senior notes | | $ | 147 |
| | $ | 146 |
| | $ | 444 |
| | $ | 434 |
| | — |
| | 139 |
| | 239 |
| | 420 |
|
Interest expense on term loan | | — |
| | 29 |
| | — |
| | 87 |
| | — |
| | — |
| | 71 |
| | — |
|
Amortization of loan discount, issuance costs and other | | 7 |
| | 8 |
| | 19 |
| | 18 |
| |
Interest expense on pre-petition revolving credit facility | | | 23 |
| | 29 |
| | 65 |
| | 69 |
|
Amortization of discount, issuance costs and other | | | 2 |
| | 15 |
| | 30 |
| | 43 |
|
Amortization of premium | | — |
| | (24 | ) | | — |
| | (72 | ) | | — |
| | — |
| | (87 | ) | | — |
|
Interest expense on revolving credit facilities | | 29 |
| | 11 |
| | 69 |
| | 29 |
| |
Realized gains on interest rate derivatives | | (1 | ) | | (1 | ) | | (2 | ) | | (2 | ) | | — |
| | (1 | ) | | — |
| | (2 | ) |
Unrealized losses on interest rate derivatives | | 1 |
| | 1 |
| | 2 |
| | 2 |
| | — |
| | 1 |
| | — |
| | 2 |
|
Capitalized interest | | (6 | ) | | (5 | ) | | (19 | ) | | (14 | ) | | (2 | ) | | (6 | ) | | (13 | ) | | (19 | ) |
Total interest expense | | $ | 177 |
| | $ | 165 |
| | $ | 513 |
| | $ | 482 |
| | $ | 25 |
| | $ | 177 |
| | $ | 307 |
| | $ | 513 |
|
| | | | | | | | | | | | | | | | |
Interest expense per boe(a) | | $ | 3.99 |
| | $ | 3.32 |
| | $ | 3.85 |
| | $ | 3.26 |
| |
Interest expense per boe | | | $ | 0.60 |
| | $ | 4.00 |
| | $ | 2.49 |
| | $ | 3.86 |
|
| | | | | | | | | | | | | | | | |
Average senior notes borrowings | | $ | 7,930 |
| | $ | 8,021 |
| | $ | 8,098 |
| | $ | 7,985 |
| | n/a |
| | $ | 7,930 |
| | n/a |
| | $ | 8,098 |
|
Average credit facilities borrowings | | $ | 2,301 |
| | $ | 642 |
| | $ | 1,852 |
| | $ | 540 |
| | n/a |
| | $ | 2,301 |
| | $ | 1,230 |
| | $ | 1,852 |
|
Average term loan borrowings | | $ | — |
| | $ | 1,179 |
| | $ | — |
| | $ | 1,215 |
| |
Pre-petition revolving credit facility | | | $ | 1,929 |
| | $ | — |
| | $ | 643 |
| | $ | — |
|
DIP credit facility | | | $ | 19 |
| | $ | — |
| | $ | 6 |
| | $ | — |
|
| |
(a) | Includes the effects of realized (gains) losses from interest rate derivatives, excludes the effects of unrealized (gains) losses from interest rate derivatives and is shown net of amounts capitalized. |
The decrease in interest expense on senior notes in the term loanCurrent Quarter and the Current Period is due to the repurchase of our term loan in the third quarter of 2018. The decrease in amortization of premium is due to the repurchase of our senior secured second lien notes in the fourth quarter of 2018. The increase inongoing Chapter 11 proceedings. We are not paying or recognizing interest expense on revolving credit facilities is due to interest onany of our outstanding debt other than the BVLpre-petition revolving credit facility assumed in the WildHorse acquisition as well as increased borrowings to fund operations.and DIP credit facility.
Gains (Losses)Losses on Investments
In the Current Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the current fair value of our investment in FTSI falling below book value of $23 million and remaining below that value as of the end of the Current Period. Based on FTSI’s operating results, we determined that the reduction in fair value is other-than-temporary and recognized an impairment of our entire investment in FTSI of $23 million.
In the Prior Period, in connection with the acquisition of WildHorse, we obtained a 50% membership interest in JWH Midstream LLC (JWH). The carrying value of our investment in JWH, which was being accounted for as an equity method investment, was approximately $17 million as of March 31, 2019. In the CurrentPrior Period, we paid approximately $7 million to terminate our involvement in the partnership. This removed us from any future obligations related to this joint venture and, therefore, we impaired the full value of the investment and recognized approximatelyan approximate $24 million of impairment expense in the CurrentPrior Period.
In the Prior Period, we recognized $139 million of gains related to our equity investment in FTSI, including the sale of a portion of that investment. See Note 15 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion. In the Current Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the current fair value of our investment in FTSI to fall below book value at the end of the Current Quarter. Given the average NYSE closing price for FTSI shares in the Current Quarter exceeded our carrying value per share and more often than not the closing price was greater than our carrying value per share, we have not assessed the reduction in fair value of our investment in FTSI to be other-than-temporary. We will continue to monitor the hydraulic fracturing industry, FTSI operating results and FTSI share price for indications that the reduction in fair value is other-than-temporary, which could result in an impairment of our investment in FTSI.Gains (Losses) on Purchases or Exchanges of Debt
In the Current Period, we repurchased approximately $160 million aggregate principal amount of senior notes for $95 million and recorded an aggregate gain of approximately $65 million.
In the Prior Quarter, we privately negotiated exchanges of approximately $507 million principal amount of our outstanding senior notes for 235,563,519 shares of common stock and $186 million principal amount of our outstanding convertible senior notes for 73,389,094 shares of common stock. We recorded an aggregate net gain of approximately $64 million associated with the exchanges. Also in the CurrentPrior Quarter, we repurchased approximately $82 million principal amount of the BVLour 6.875% Senior Notes due 2025 and recorded a $6 million gain.
Other IncomeReorganization Items, Net
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) |
Write off of unamortized debt premiums (discounts) | | $ | — |
| | $ | — |
| | $ | 518 |
| | $ | — |
|
Write off of unamortized debt issuance costs | | — |
| | — |
| | (61 | ) | | — |
|
Debt and equity financing fees | | (115 | ) | | — |
| | (178 | ) | | — |
|
Provision for allowed claims | | (465 | ) | | — |
| | (465 | ) | | — |
|
Legal and professional fees | | (40 | ) | | — |
| | (40 | ) | | — |
|
Gain on settlement of pre-petition accounts payable | | 12 |
| | — |
| | 12 |
| | — |
|
Loss on settlement of pre-petition revenues payable | | (3 | ) | | — |
| | (3 | ) | | — |
|
Reorganization items, net | | $ | (611 | ) | | $ | — |
| | $ | (217 | ) | | $ | — |
|
In the Current Quarter and the Current Period, we recorded $115 million and $178 million, respectively, of expense related to the arrangement and funding of our DIP Credit Facility, Exit Credit Facilities, and rights offering. In the Current Quarter and the Current Period we recorded a $465 million provision for expected allowed claims including estimated damages on certain rejected executory contracts. In the Current Period, we recognized $8recorded $518 million of other income from the salerelated to pre-petition premiums and discounts, offset by $61 million of seismic data licensesexpense related to third parties.deferred charges on debt that is considered subject to compromise. In the PriorCurrent Quarter and the Current Period, we extinguished our obligation to convey future ORRIsrecorded $40 million of legal and professional fees incurred subsequent to the CHK Utica L.L.C. investors and recognized a $61 million gain included in other income on our condensed consolidated statement of operations.Chapter 11 filings for the restructuring process.
Income Tax Expense (Benefit)Benefit
We recorded a $1 millionNo income tax benefitprovision was recorded in the Current Quarter and a $315$13 million income tax benefit was recorded in the Current Period. We recorded a $1 million income tax expensebenefit in the Prior Quarter and an $8a $315 million income tax benefit in the Prior Period. Our effective income tax rate was 1.6%0.0% for the Current Quarter and 105.4%1.6% for the Current Period.Prior Quarter. The rate for the Current Period iswas 0.1% whereas the effective income tax rate for the Prior Period was 105.4%. The rate for the Prior Period was due to the partial release of the valuation allowance associated withagainst our net deferred tax asset position as a result of the acquisition of WildHorse and a nominal amount of state income tax refunds resulting from the filing of amended state income tax returns reporting federal audit adjustments. The effective income tax rate was (0.7%) for the Prior Quarter and 2.1% for the Prior Period.WildHorse. Our effective tax rate can fluctuate as a result of the impact of variousdiscrete items, including state income taxes and permanent differences, tax law changes and adjustments to the valuation allowance.differences. See Note 118 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of income taxes.Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements include our current expectations or forecasts of future events, including matters relating to the continuing effects of the COVID-19 pandemic and the impact thereof on our business, financial condition, results of operations and cash flows, the potential effects of the Chapter 11 Cases on our operations, management, and employees, our ability to consummate the Restructuring, actions by, or disputes among or between, members of OPEC+, market factors, market prices, our ability to meet debt service requirements, our ongoing evaluation and implementation of strategic alternatives, cost-cutting measures, reductions in capital expenditures, proposed refinancing transactions, capital exchange transactions, asset divestitures, reductions in capital expenditures, operational efficiencies cost savings due to operational and capital efficiencies related to the WildHorse Merger and the other items discussed in the Introduction to Item 2 of this report.future impairments. In this context, forward-looking statements often address our expected future business, financial performance and financial condition, and often contain words such as "expect," “could,” “may,” "anticipate," "intend," "plan," “ability,” "believe," "seek," "see," "will," "would," “estimate,” “forecast,” "target," “guidance,” “outlook,” “opportunity” or “strategy.”
Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
uncertainties relating to our Chapter 11 Cases, including but not limited to: our ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases; the effects of the Chapter 11 Cases on us and our various constituents; the impact of Bankruptcy Court rulings in the Chapter 11 Cases; our ability to develop and implement the Plan and whether that Plan will be approved by the Bankruptcy Court and the ultimate outcome of the Chapter 11 Cases in general; the length of time we will operate under the Chapter 11 Cases; attendant risks associated with restrictions on our ability to pursue our business strategies; risks associated with third-party motions in the Chapter 11 Cases; the potential adverse effects of the Chapter 11 Cases on our liquidity; the potential cancellation of our common and preferred stock in the Chapter 11 Cases; the potential material adverse effect of claims that are not discharged in the Chapter 11 Cases; uncertainty regarding our ability to retain key personnel; and uncertainty and continuing risks associated with our ability to achieve our stated goals and continue as a going concern;
the impact of the COVID-19 pandemic and its effect on our business, financial condition, employees, contractors, vendors and the global demand for oil and natural gas and U.S. and world financial markets;
our ability to comply with the covenants under our revolving credit facilityDIP Credit Facility and other indebtedness and the related impact on our ability to continue as a going concern;
the significant changes in our stock price, the liquidity of the market for our common stock and the risk of future declines or fluctuations, including limitations caused by the delisting of our common stock from the New York Stock Exchange and the subsequent trading of our common stock in less established markets;
the volatility of oil, natural gas and NGL prices;prices, which are affected by general economic and business conditions, as well as increased demand for (and availability of) alternative fuels and electric vehicles;
uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves and projecting future rates of production and the amount and timing of development expenditures;
our ability to replace reserves and sustain production;
drilling and operating risks and resulting liabilities;
our ability to generate profits or achieve targeted results in drilling and well operations;
the limitations our level of indebtedness may have on our financial flexibility;
our inability to access the capital markets on favorable terms;
the availability of cash flows from operations and other funds to finance reserve replacement costs or satisfy our debt obligations;
adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims;
effectslegislative and regulatory initiatives, including as a result of the November election, addressing environmental protection laws and regulation on our business;concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal;
terrorist activities and/or cyber-attacks adversely impacting our operations;
effects of acquisitions and dispositions, including our acquisition of WildHorse and our ability to realize related synergies and cost savings;
effects of purchase price adjustments and indemnity obligations; and
| |
• | other factors that are described under Risk Factors in Item 1A of our 20182019 Form 10-K and this Form 10-Q. |
We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures in this report and our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
Information About Us
Investors should note that we make available, free of charge on our website at chk.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also furnish quarterly, annual, and current reports for certain of our subsidiaries free of charge on our website at chk.com. We also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent news releases. We may use the Investors section of our website to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. Documents and information on our website are not incorporated by reference herein.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Chesapeake, that file electronically with the SEC.
| |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Oil, Natural GasThe primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to market risk. The term market risk relates to our risk of loss arising from adverse changes in oil, natural gas, and NGL Derivativesprices and interest rates. These disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL.NGL, which have been historically volatile and are even more volatile as a result of COVID-19 and the OPEC+ decisions discussed in this Form 10-Q. To mitigate a portion of our exposure to adverse price changes, we have enteredenter into various derivative instruments. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
Our general strategy for protecting short-term cash flows and attempting to mitigate exposure to adverse oil, natural gas and NGL price changes is to hedge into strengthening oil, natural gas and NGL futures markets when prices reach levels that management believes are unsustainable for the long term, have material downside risk in the short term or provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends. Executive management is involved in our risk management activities and the Board of Directors reviews our derivative program at quarterly board meetings. We believe we have sufficient internal controls to prevent unauthorized trading.
We use derivative instruments to achieve our risk management objectives, including swaps, collars and options. All of these are described in more detail below. We typically use swaps and collars for a large portion of the oil and natural gas price risk we hedge. We have also sold calls, taking advantage of premiums associated with market price volatility.
We determine the notional volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions would be reversed. The actual fixed price on our derivative instruments is derived from the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow NYMEX futures. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty.
We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate this risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we review when deciding to enter into the original derivative position. Gains or losses related to closed positions will be recognized in the month specified in the original contract.
We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 1411 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the fair value measurements associated with our derivatives.
As of For the nine months ended September 30, 2019, our2020, oil, natural gas, and NGL revenue, excluding any effect of our derivative instruments, consisted of the following types of instruments:
| |
• | Swaps: We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options and call swaptions.
|
| |
• | Options: We occasionally sell and buy call and put options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options and we receive the excess on bought call options. At the time of settlement, if the market price is lower than the fixed price of the put option, we receive the difference on bought put options and pay the counterparty the difference on sold put options. If the market price settles below the fixed price of the call option or above the fixed price of the put option, no payment is due from either party.
|
| |
• | Call Swaptions: We sell call swaptions to counterparties in exchange for a premium that allow the counterparty, on a specific date, to extend an existing fixed-price swap for a certain period of time or to increase the notional volumes of an existing fixed-price swap.
|
| |
• | Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike prices, no payments are due from either party. Three-way collars include the sale by us of an additional put option in exchange for a more favorable strike price on the call option. This eliminates the counterparty’s downside exposure below the second put option strike price.
|
| |
• | Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity.
|
As of September 30, 2019, we had the following openwere $1.091 billion, $824 million and $91 million, respectively. Based on production, oil, natural gas, and NGL derivative instruments:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted Average Price | | Fair Value |
| | Volume | | Fixed | | Call | | Put | | Differential | | Asset (Liability) |
| | (mmbbl) | | ($ per bbl) | | ($ in millions) |
Oil: | | | | | | | | | | | | |
Swaps: | | | | | | | | | | | | |
Short-term | | 19 |
| | $ | 59.17 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 123 |
|
Long-term | | 3 |
| | $ | 58.71 |
| | $ | — |
| | $ | — |
| | $ | — |
| | 29 |
|
Collars: | | | | | | | | | | | | |
Short-term | | 3 |
| | $ | — |
| | $ | 75.22 |
| | $ | 61.37 |
| | $ | — |
| | 26 |
|
Long-term | | — |
| | $ | — |
| | $ | 83.25 |
| | $ | 65.00 |
| | $ | — |
| | 7 |
|
Call Swaptions: | | | | | | | | | | | | |
Short-term | | 2 |
| | $ | 63.15 |
| | $ | — |
| | $ | — |
| | $ | — |
| | (1 | ) |
Put Options (bought): | | | | | | | | | | | | |
Short-term | | 1 |
| | $ | — |
| | $ | — |
| | $ | 54.43 |
| | $ | — |
| | 2 |
|
Deferred Premiums (Put Options): | | | | | | | | | | | | |
Short-term | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | (4 | ) |
Basis Protection Swaps: | | | | | | | | | | | | |
Short-term | | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5.67 |
| | 4 |
|
Total Oil | | 186 |
|
| | (bcf) | | ($ per mcf) | |
|
Natural Gas: | | | | | | | | | | | | |
Swaps: | | | | | | | | | | | | |
Short-term | | 316 |
| | $ | 2.79 |
| | $ | — |
| | $ | — |
| | $ | — |
| | 120 |
|
Long-term | | 67 |
| | $ | 2.76 |
| | $ | — |
| | $ | — |
| | $ | — |
| | 19 |
|
Three-Way Collars: | | | | | | | | | | | | |
Short-term | | 15 |
| | $ | — |
| | $ | 3.10 |
| | $2.50/$2.80 |
| | $ | — |
| | 3 |
|
Collars: | | | | | | | | | | | | |
Short-term | | 9 |
| | $ | — |
| | $ | 2.91 |
| | $ | 2.75 |
| | $ | — |
| | 3 |
|
Call Options (sold): | | | | | | | | | | | | |
Short-term | | 22 |
| | $ | — |
| | $ | 12.00 |
| | $ | — |
| | $ | — |
| | — |
|
Long-term | | 6 |
| | $ | — |
| | $ | 12.00 |
| | $ | — |
| | $ | — |
| | — |
|
Call Swaptions: | | | | | | | | | | | | |
Short-term | | 79 |
| | $ | 2.77 |
| | $ | — |
| | $ | — |
| | $ | — |
| | (3 | ) |
Long-term | | 57 |
| | $ | 2.78 |
| | $ | — |
| | $ | — |
| | $ | — |
| | (4 | ) |
Basis Protection Swaps: | | | | | | | | | | | | |
Short-term | | 54 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.01 | ) | | (1 | ) |
Total Natural Gas | | 137 |
|
Total Commodities | | $ | 323 |
|
In addition torevenue for the open derivative positions disclosed above, as of nine months ended September 30, 2019, we had $402020 would have increased or decreased by approximately $109 million, $82 million, and $9 million, respectively, for each 10% increase or decrease in prices. As of net derivative losses related to settled contracts for future periods that will be recorded within oil, natural gas and NGL revenues as realized gains (losses) on derivatives once they are transferred from either accumulated other comprehensive income or unrealized gains (losses) on derivatives inSeptember 30, 2020, the month specified in the original contract as noted below:
|
| | | | |
| | September 30, 2019 |
| | ($ in millions) |
Short-term | | $ | (22 | ) |
Long-term | | (18 | ) |
Total | | $ | (40 | ) |
The table below reconciles the changes in fair valuevalues of our oil and natural gas derivatives duringwere net liabilities of $5 million and $161 million, respectively. A 10% increase or decrease in forward oil prices would decrease or increase the Current Period. Ofvaluation of oil derivatives by approximately $109 million. A 10% increase or decrease in forward natural gas prices would decrease or increase the $323 million fair value liability asvaluation of September 30, 2019, a $272 million asset relatesnatural gas derivatives by approximately $211 million. See Note 11 of the notes to contracts maturingour condensed consolidated financial statements included in the next 12 months and a $51 million asset relates to contracts maturing after 12 months. AllItem 1 of Part I of this report for further information on our open derivative instruments as of September 30, 2019 are expected to mature by December 31, 2020.
|
| | | | |
| | September 30, 2019 |
| | ($ in millions) |
Fair value of contracts outstanding, as of January 1, 2019 | | $ | 282 |
|
Change in fair value of contracts | | 109 |
|
Contracts realized or otherwise settled | | (68 | ) |
Fair value of contracts outstanding, as of September 30, 2019 | | $ | 323 |
|
positions.Interest Rate Risk
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates, using the earliest demand repurchase date for contingent convertible senior notes.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years of Maturity | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| ($ in millions) |
Liabilities: | | | | | | | | | | | | | |
Debt – fixed rate | $ | — |
| | $ | 301 |
| | $ | 294 |
| | $ | 338 |
| | $ | 209 |
| | $ | 6,186 |
| | $ | 7,328 |
|
Average interest rate | — | % | | 6.70 | % | | 5.80 | % | | 4.86 | % | | 5.75 | % | | 7.29 | % | | 7.05 | % |
Debt – variable rate | $ | — |
| | $ | — |
| | $ | 900 |
| | $ | — |
| | $ | 1,504 |
| | $ | — |
| | $ | 2,404 |
|
Average interest rate | — | % | | — | % | | 4.04 | % | | — | % | | 4.03 | % | | — | % | | 4.03 | % |
Changes in interest rates affect the amount of interest we earn on our cash, cash equivalents and short-term investments and theOur exposure to interest rate we pay onchanges relates primarily to borrowings under our pre-petition revolving credit facility and DIP Credit Facility. Interest is payable on borrowings under the pre-petition revolving credit facility and DIP Credit Facility based on a floating rate. See Note 4 for additional information. As of September 30, 2020, we had $1.929 billion in borrowings outstanding under our floating rate senior notes. Allpre-petition revolving credit facility and no outstanding borrowings under our DIP Credit Facility. A 1.0% increase in interest rates based on the variable borrowings as of September 30, 2020 would result in an increase in our other indebtedness is fixed rate and, therefore, does not expose us to the riskinterest expense of fluctuations in earnings or cash flows due to changes in market interest rates. However, changesapproximately $19 million per year. Changes in interest rates do affect the fair value of our fixed-rate debt.In July 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, the BVL revolving credit facility has a stated maturity date in December 2021. Under the terms of the BVL revolving credit facility, the occurrence of certain events related to the phase-out of LIBOR would make Eurodollar borrowings unavailable and require BVL to borrow at the ABR rate or at an alternate rate of interest determined by the lenders under the BVL revolving credit facility as their cost of funds. We are currently evaluating the potential impact of the eventual phasing-out of LIBOR, including the amendment of the BVL revolving credit facility to implement a market-standard approach to the transition from LIBOR.
As of September 30, 2019, we had $3 million of net gains related to settled interest rate derivative contracts that will be recorded within interest expense as realized gains or losses once they are transferred from our senior note liability or within interest expense as unrealized gains or losses over the remaining six-year term of our related senior notes.
Realized and unrealized (gains) or losses from interest rate derivative transactions are reflected as adjustments to interest expense on the condensed consolidated statements of operations.
| |
ITEM 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 20192020 that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
As previously disclosed, we acquired WildHorse on February 1, 2019 (see Note 3 in Part 1, Item 1 in this Quarterly Report on Form 10-Q) and are in the process of fully integrating its operations into our overall system of internal control over financial reporting. As permitted by U.S. Securities and Exchange Commission rules and regulations, we have not yet included WildHorse in our assessment of the effectiveness of our internal control over financial reporting.There were no other changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
There have been no material developmentsFor more information on the Chapter 11 Cases, see Note 1 of the notes to our condensed consolidated financial statements included in previously reported legal or environmental proceedings. ForItem 1 of Part I of this report and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Voluntary Reorganization Under Chapter 11.Litigation and Regulatory Proceedings
We are involved in a descriptionnumber of other legallitigation and regulatory proceedings affectingincluding those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
Business Operations. We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
We and other natural gas producers have been named in various lawsuits alleging underpayment of royalties and other shares of the proceeds of production. The lawsuits against us see Item 3allege, among other things, that we used below-market prices, made improper deductions, utilized improper measurement techniques, entered into arrangements with affiliates that resulted in underpayment of amounts owed in connection with the production and sale of natural gas and NGL, or similar theories. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class. The lawsuits seek compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our payment practices, pre-and post-judgment interest, and attorney’s fees and costs. Royalty plaintiffs have varying provisions in their respective leases, oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. We have resolved a number of these claims through negotiated settlements of past and future royalty obligations and have prevailed in various other lawsuits. We are currently defending numerous lawsuits seeking damages with respect to underpayment of royalties or other shares of the proceeds of production in multiple states where we have operated, including those discussed below.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that we violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement to which we are a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as a temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid, and a permanent injunction from further violations of the UTPCPL. We intend to vigorously defend these claims.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the divestiture of substantially all of our midstream business and most of our gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights, intentional interference with contractual relations, and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources. These lawsuits seek in aggregate compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our royalty payment practices, pre-and post-judgment interest, and attorney’s fees and costs. On December 20, 2017 and August 9, 2018, we reached tentative settlements to resolve all Pennsylvania civil royalty cases for a total value at that time of approximately $36 million. In light of our Bankruptcy Filing, the parties have reopened settlement discussions.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the properties and agreements involved, and the applicable production years.
On July 24, 2018, HOOPP filed a demand for arbitration with the American Arbitration Association regarding HOOPP’s purchase of our interest in Chaparral Energy, Inc. stock for $215 million on January 5, 2014. HOOPP claims that we engaged in material misrepresentations and fraud, and that we violated the Securities Exchange Act of 1934 (the “Exchange Act”) and Oklahoma Uniform Securities Act. HOOPP seeks either rescission or $215 million in monetary damages, and in either case, interest, attorney’s fees, disgorgement and punitive damages. We intend to vigorously defend these claims.
On January 29, 2020, a well control incident occurred at one of our wellsites in Burleson County, Texas, causing the deaths of three of our contractors’ employees and injuring a fourth. In connection with this incident, eleven lawsuits have been brought against us and our contractors alleging negligence, gross negligence, and breach of contract, and seeking wrongful death damages, survival statute damages, exemplary damages, and interest. Ten of the suits have been filed in Dallas County, Texas. A joint motion to consolidate filed by all the parties in nine of the ten Dallas County lawsuits is currently pending before the Texas Multidistrict Litigation Panel. The eleventh suit is pending in Burleson County, Texas. The proceedings are in their early stages and are all stayed due to the pending bankruptcy. Our general and excess liability insurance policies provide coverage for third party bodily injury and wrongful death claims, and the contracts between us and our contractors with respect to the well contain customary cross-indemnification provisions.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our 2018 Form 10-K.environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
We are named as a defendant in numerous lawsuits in Oklahoma alleging that we and other companies have engaged in activities that have caused earthquakes. These lawsuits seek compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress. In addition, they seek the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest. We intend to vigorously defend these claims. Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock, preferred stock or senior notes are described under “Risk Factors” in Item 1A of our 20182019 Form 10-K, which risk factors could also be affected by the potential effects of the COVID-19 pandemic discussed herein, and our 10-Q for the three months ended March 31, 2019.in this Form 10-Q. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC. Restrictive covenantsRisk Factors Relating to the Chapter 11 Cases
The Chapter 11 Cases may have a material adverse impact on our business, financial condition, results of operations and cash flows. In addition, the consummation of a plan of reorganization will result in certainthe cancellation and discharge of our debtequity securities, including our common stock.
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and cash flows. During the pendency of the Chapter 11 Cases, our management may be required to spend a significant amount of time and effort dealing with restructuring matters rather than focusing exclusively on our business operations. Bankruptcy Court protection and operating as debtors-in-possession also may make it more difficult to retain management and the key personnel necessary to the success of our business. In addition, during the pendency of the Chapter 11 Cases, our customers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, renegotiate the terms of our agreements, couldterminate their relationships with us or require financial assurances from us. Customers may lose confidence in our ability to provide them the level of service they expect, resulting in a significant decline in our revenues, profitability and cash flow.
Other significant risks include or relate to the following:
the effects of the filing of the Chapter 11 Cases on our business and the interests of various constituents, including our shareholders;
Bankruptcy Court rulings in the Chapter 11 Cases, including with respect to our motions and third-party motions, as well as the outcome of other pending litigation;
our ability to operate within the restrictions and the liquidity limitations of the DIP Credit Agreement and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
our ability to maintain strategic control as debtors-in-possession during the pendency of the Chapter 11 Cases;
the length of time that we will operate with Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;
increased advisory costs during the pendency of the Chapter 11 Cases;
the risks associated with restrictions on our ability to pursue some of our business strategies during the pendency of the Chapter 11 Cases;
our ability to satisfy the conditions precedent to consummation of a plan of reorganization;
the potential adverse effects of the Chapter 11 Cases on our business, cash flows, liquidity, financial condition and results of operations;
the ultimate outcome of the Chapter 11 Cases in general;
the cancellation of our existing equity securities, including our outstanding shares of common stock and preferred stock, in the Chapter 11 Cases;
the potential material adverse effects of claims that are not discharged in the Chapter 11 Cases;
uncertainties regarding the reactions of our customers, prospective customers and service providers to the Chapter 11 Cases;
uncertainties regarding our ability to retain and motivate key personnel; and
uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern.
Further, under Chapter 11, transactions outside the ordinary course of business, including our proposed disposition of our Mid-Continent asset, are subject to the prior approval of the Bankruptcy Court, which may limit our growthability to respond in a timely manner to certain events, to take advantage of certain opportunities or adapt to changing market or industry conditions.
Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we provide any assurance as to our ability to continue as a going concern.
As a result of the Chapter 11 Cases, realization of assets and liquidation of liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements.
Delays in the Chapter 11 Cases may increase the risk of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.
There can be no assurance that a plan of reorganization will become effective in accordance with its terms on the timeline we anticipate, or at all. Prolonged Chapter 11 proceedings could adversely affect our relationships with customers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.
Our debt agreements impose operating and financial restrictions on us. These restrictions limit our ability and thatcontinue as a going concern. A weakening of our restricted subsidiaries to, among other things:
incur additional indebtedness;
make investments or loans;
create liens;
consummate mergersfinancial condition, liquidity and similar fundamental changes;
make restricted payments;
make investments in unrestricted subsidiaries;
enter into transactions with affiliates; and
use the proceedsresults of asset sales.
We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under certain of our debt agreements. The restrictions contained in the covenants could:
limit our ability to plan for, or react to, market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and
operations could adversely affect our ability to financeimplement a plan of reorganization (or any other Chapter 11 plan). If we are unable to consummate a plan of reorganization, we may be forced to liquidate our assets.
We are subject to the risks and uncertainties associated with our exclusive right to file a plan of reorganization.
At the outset of the Chapter 11 Cases, the Bankruptcy Code provides debtors-in-possession the exclusive right to file and solicit acceptance of a plan of reorganization for the first 120 days of the bankruptcy case, subject to extension at the discretion of the court. All other parties are prohibited from filing or soliciting a plan of reorganization during this period. If the Bankruptcy Court terminates that right or the exclusivity period expires, there could be a material adverse effect on our ability to achieve confirmation of a plan in order to achieve our stated goals. The possible decision of creditors and/or other third parties, whose interest may be inconsistent with our own, to file alternative plans of reorganization could further protract the Chapter 11 Cases, leading us to continue to incur significant professional fees and costs. Because of these risks and uncertainties associated with the termination or expiration of our exclusivity rights, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, enter into acquisitionsnor can we predict the ultimate impact that events occurring during the Chapter 11 Cases may have on our corporate or divestiturescapital structure.
Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses.
Adverse publicity or news coverage relating to engageus, including, but not limited to, publicity or news coverage in other business activities that would beconnection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote a positive image after emergence from the Chapter 11 Cases.
Trading in our interest.common stock and preferred stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.
Also,All of our credit facilities requireindebtedness is senior to the existing common stock in our capital structure. The RSA contemplates that our existing equity interests will be canceled and discharged in connection with the Chapter 11 Cases and the holders of those equity interests, including the holders of our common and preferred stock, will be entitled to no recovery. Accordingly, any trading in our common and preferred stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common and preferred stock.
Risks of trading in an over-the-counter market.
Since June 30, 2020, our common stock has been trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “CHKAQ.” Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange, due to factors such as a reduction in the number of investors that will consider investing in the securities, the number of market makers in the securities, reduction in securities analyst and news media coverage and lower market prices than might otherwise be obtained. In addition to those factors, the market for the outstanding shares of our common stock has been adversely affected by the provisions of the RSA that contemplate that our existing equity interests will be cancelled and discharged in connection with the Chapter 11 Cases and the holders of those equity interests, including the holders of our outstanding shares of common stock, will be entitled to no recovery relating to those equity interests. We can provide no assurance that our common stock will continue to trade on the OTC Pink Marketplace, whether broker-dealers will continue to provide public quotes of our common stock on that market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue to be provided on that market in the future.
The RSA is subject to significant conditions and milestones that may be difficult for us to maintain compliance with specified financial ratiossatisfy.
There are certain material conditions we must satisfy under the RSA, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummation of the financing contemplated by the Exit Credit Facilities and satisfy certain financial condition tests.other transactions contemplated by a plan of reorganization. Our ability to comply with these ratiostimely complete such milestones is subject to risks and financial condition testsuncertainties, many of which are beyond our control.
A plan of reorganization may not become effective.
Even if a plan of reorganization is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied and, therefore, that a plan of reorganization will become effective and that the Debtors will emerge from the Chapter 11 Cases as contemplated by a plan of reorganization. If the effective date of a plan of reorganization is delayed, the Debtors may not have sufficient cash available to operate their businesses. In that case, the Debtors may need new or additional post-petition financing, which may increase the cost of consummating a plan of reorganization. There can be no assurance of the terms on which such financing may be affectedavailable or if such financing will be available. If the transactions contemplated by events beyonda plan of reorganization are not completed, it may become necessary to amend the plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Cases.
Even if a Chapter 11 plan of reorganization is consummated, we may not be able to achieve our controlstated goals.
Even if a Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as changes in economic conditions, changes in our industry, changes in demand for our services and asincreasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the transactions under a Chapter 11 plan of reorganization will close. As a result of these and other risks, we cannot guarantee that a Chapter 11 plan of reorganization will achieve our stated goals. Furthermore, even if our debts are reduced or discharged through a plan of reorganization, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing may be unable to meet these ratioslimited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms.
As a result, a plan of reorganization may not become effective and, financial condition tests. These financial ratio restrictions and financial condition tests could limitthus, we cannot assure you of our ability to obtain future financings, make neededcontinue as a going concern.
Our long-term liquidity requirements and the adequacy of our capital expenditures, withstand a continued downturnresources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources and have extremely limited, if any, access to additional financing. In addition to the cash requirements necessary to fund our ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and other costs throughout the Chapter 11 Cases. We cannot assure you that cash on hand and cash flow from operations will be sufficient to continue to fund our businessoperations and allow us to satisfy our obligations related to the Chapter 11 Cases. Although we entered into the
DIP Credit Agreement providing for new money in an aggregate principal amount of up to $925 million pursuant to the DIP Credit Facility in connection with the Chapter 11 Cases, we cannot assure you that such financing will be sufficient, that we will be able to secure additional interim financing or a downturn in the economy in general or otherwise conduct necessary corporate activities. Further declines in oil, NGL and natural gas prices, or a prolonged period of low oil, NGL and natural gas prices could eventually result in our failingadequate exit financing sufficient to meet one or more of the financial covenants under our credit facilities, which could requireliquidity needs (or if sufficient funds are available, that they will be offered to us on acceptable terms).
Our liquidity, including our ability to refinance or amend suchmeet our ongoing operational obligations, resulting in the payment of consent fees or higher interest rates, or require us to raise additional capital at an inopportune time ordepends on, terms not favorable to us. Specifically, the leverage ratio required by the covenants in our revolving credit begins to decrease by 25 basis points each quarter beginning with the fiscal quarter ending December 31, 2019 until it reaches 4.00 to 1.00 for the fiscal quarter ending March 31, 2021 and each quarter thereafter. If depressed prices persist or decline throughout 2020,among other things: (1) our ability to comply with the leverage ratio covenantterms and conditions of any order governing the use of cash collateral that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (2) our ability to access credit under the DIP Credit Facility, (3) our revolving credit facilityability to maintain adequate cash on hand, (4) our ability to generate cash flow from operations, (5) our ability to consummate a plan of reorganization or other alternative restructuring transaction, and (6) the cost, duration and outcome of the Chapter 11 Cases.
In certain limited instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a plan of reorganization because of: (1) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern; (2) additional administrative expenses involved in the appointment of a Chapter 7 trustee; and (3) additional expenses and claims, some of which would be entitled to priority, that would be generated during the next 12 months will be adversely affectedliquidation and may causefrom the rejection of executory contracts in connection with a cessation of operations.
The unaudited condensed consolidated financial statements included in this Form 10-Q for the period ended September 30, 2020 contain disclosures that express substantial doubt about our ability to continue as a going concern.
The WildHorse revolving credit facilityunaudited condensed consolidated financial statements included in this Form 10-Q for the period ended September 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the WildHorse Indenture constrainsatisfaction of liabilities and other commitments in the normal course of business and does not include any adjustments that might result from uncertainty about our ability of WildHorse and its subsidiaries to make distributions or otherwise provide funds to, or guarantee the obligations of, Chesapeake and its other subsidiaries. The provisions of the WildHorse revolving credit facility and the WildHorse Indenture require that
all transactions between WildHorse and its subsidiaries, on the one hand, and Chesapeake and its other subsidiaries, on the other hand, be on an arm's-length basis.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result incontinue as a default under our credit facilities that, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and cross-default rights under our other debt. If that should occur, we may be unable to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, itgoing concern. Such assumption may not be justified. Our liquidity has been negatively impacted by the prolonged depressed prices we receive for the oil, natural gas and NGL we sell and our substantial indebtedness and associated debt-related expenses. As a result of these and other factors, we entered into the RSA and commenced the Chapter 11 Cases. The RSA contemplates that our equity investors, including the holders of our common and preferred stock, will lose the entire value of their investment in our business. The inclusion of disclosures that express substantial doubt about our ability to continue as a going concern may negatively impact the trading price of our common and preferred stock and have an adverse impact on terms that are acceptable to us. In addition, in the eventour relationships with third parties with whom we do business, including our customers, subcontractors, suppliers and employees, and could have a material adverse impact on our business, financial condition, results of an event of default under oneoperations and cash flows.
As a result of the credit facilities, the affected lenders could foreclose on the collateral securing such credit facility and require repayment of all borrowings outstanding thereunder. If the amounts outstanding under the credit facilities or any ofChapter 11 Cases, our other indebtedness were to be accelerated, our assetshistorical financial information may not be sufficientindicative of our future performance, which may be volatile.
During the Chapter 11 Cases, we expect our financial results to repay in fullcontinue to be volatile as restructuring activities and expenses impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases. In addition, if we emerge from Chapter 11, the amounts owedreported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements. We also will be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our historical consolidated balance sheets. Our financial results after the application of fresh start accounting may be different from historical trends.
The actual results achieved during the periods covered by our recently issued projections will vary from those set forth in those projections, and such variations may be material.
In connection with the commencement of the Chapter 11 Cases, we were required to file with the SEC certain projections that we had previously provided to our lenders and others under confidentiality arrangements and
subsequently filed updated projections with the SEC (the “Projections”). Although we believe the Projections were made on a reasonable basis, no representation was or can be made regarding, and there can be no assurance as to, their attainability. Our actual results achieved during the periods covered by the Projections will vary from those set forth in the Projections, and those variations may be material. The Projections are dependent upon numerous assumptions with respect to commodity prices, operating expenses, availability and cost of capital and performance. In addition, as disclosed elsewhere in this “Risk Factors” section, our business and operations are subject to substantial risks which increase the uncertainty inherent in the Projections. Many of the facts disclosed in this “Risk Factors” section could cause actual results to differ materially from those projected in the Projections. The Projections were not prepared with a view towards public disclosure or complying with the guidelines established by the American Institute of Certified Public Accountants or the SEC’s published guidelines regarding projections or forecasts. Our independent public accountants did not examine, compile, review or perform any procedures with respect to the lendersProjections, and, accordingly, assumed no responsibility for the Projections. No independent expert reviewed the Projections on our behalf. The Projections have not been included or incorporated by reference in this Quarterly Report on Form 10-Q, and, except as may be required by applicable law, we do not intend to our other debt holders.update or otherwise revise the Projections, even if any or all the underlying assumptions are not realized.
The issuance of our common stock to shareholders of WildHorse as well as other stock transactions could lead to a limitation on the utilization of our loss carryforwards to reduce future taxable income.
Our ability to utilize NOL carryforwards, disallowed interest carryforwards and possibly other tax attributes to reduce future taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of such attributesWe may be subject to an annual limitationclaims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a plan of reorganization. With few exceptions, all claims against the Debtors that arose prior to June 28, 2020 or before consummation of a plan of reorganization (i) would be subject to compromise and/or treatment under Section 382a plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of a plan of reorganization. Subject to the terms of a plan of reorganization and orders of the Code uponBankruptcy Court, any claims not ultimately discharged pursuant to a plan of reorganization could be asserted against the occurrencereorganized entities and may have an adverse effect on our business, cash flows, liquidity, financial condition and results of an Ownership Change. operations on a post-reorganization basis.
The annual limitation is generally equal toChapter 11 Cases limit the product of (a) the fair market valueflexibility of our equity multipliedmanagement team in running our business.
While we operate our businesses as debtor-in-possession under supervision by (b) the long-term tax-exempt rate in effect for the month in which an Ownership Change occurs. IfBankruptcy Court, we are in a net unrealized built-in gain position atrequired to obtain the time of an Ownership Change, then the limitation is increased by recognized built-in gains occurring within a five year period following the Ownership Change, but only to the extentapproval of the net unrealized built-in gain which existed atBankruptcy Court, and in some cases certain lenders, prior to engaging in activities or transactions outside the timeordinary course of the Ownership Change. However, the Proposed Regulations would, if finalized in their current form, limit the potential increases to the annual limitation amount for certain built-in gains existing at the timebusiness. Bankruptcy Court approval of an Ownership Change, thereby significantly reducing the ability to utilize tax attributes. If we are in a net unrealized built-in loss position at the timenon-ordinary course activities entails preparation and filing of an Ownership Change, then the limitation may apply to tax attributes other than just NOL carryforwards and disallowed interest carryforwards, such as depreciable basis of tangible equipment. Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change.
We believe that, based on information currently available, neither the WildHorse Merger, the exchanges of our common stock for certain outstanding senior notes that occurred during the Current Quarter nor the exchange of our common stock for certain Cumulative Convertible Preferred Stock that also occurred during the Current Quarter resulted in an Ownership Change. Therefore,appropriate motions with the exception ofBankruptcy Court, negotiation with the WildHorse NOL carryforwards and disallowed interest carryforwards acquired earlier this year, we do not believe we have a limitation on the ability to utilize our carryforwardsvarious creditors’ committees and other tax attributes under Section 382 of the Code as of September 30, 2019. However, issuances, sales and/parties-in-interest and one or exchanges of our stock (including, potentially, relatively small transactionsmore hearings. The creditors’ committees and transactions beyond our control) occurring after September 30, 2019, taken together with other prior transactionsparties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to our stock, could trigger an Ownership Changethese motions. This process may delay major transactions and therefore a limitation onlimit our ability to utilizerespond quickly to opportunities and events. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
We may experience employee attrition as a result of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, we have experienced, and may continue to experience, employee attrition, and our carryforwardsemployees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by certain restrictions on the implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our business strategies and implement operational initiatives, which may have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
Upon emergence from bankruptcy, the composition of our Board of Directors will change significantly.
The composition of our Board of Directors is expected to change significantly following the Chapter 11 Cases. Any new directors may have different backgrounds, experiences and perspectives from those individuals who currently serve on our Board of Directors and, thus, may have different views on the issues that will determine the future of our company. As a result, our future strategy and plans may differ materially from those of the past.
Risk Factors Relating to the COVID-19 Pandemic
The ongoing coronavirus (COVID-19) pandemic and related economic turmoil have affected and could continue to adversely affect our business, financial condition, results of operations and cash flows.
The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first nine months of 2020. The ongoing COVID-19 outbreak has reached more than 200 countries and has continued to be a rapidly evolving economic and public health situation. The pandemic has resulted in widespread adverse impacts on the global economy, and there is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other tax attributes. Furthermore, ifmeasures implemented to try to slow the spread of the virus, such an Ownership Change wereas quarantines, shelter-in-place orders and business and government shutdowns. State and local authorities have also implemented multi-step policies with the goal of re-opening. However, certain jurisdictions began re-opening only to occurreturn to restrictions in the face of increases in new COVID-19 cases. We have taken certain precautionary measures intended to help minimize the risk to our employees, our business and the Proposed Regulationscommunities in which we operate, and we are finalizedactively assessing and planning for various operational contingencies in their current form, the severityevent one or more of our operational employees experiences any symptoms consistent with COVID-19.However, we cannot guarantee that any actions taken by us will be effective in preventing future disruptions to our business. Moreover, future operations could be negatively affected if a significant number of our employees are quarantined as a result of exposure to the virus.
We regularly monitor the credit worthiness of our customers and derivative contract counterparties. Although we have not received notices from our customers or counterparties regarding non-performance issues or delays resulting from the pandemic, we may have to temporarily shut down or further reduce production, which could result in significant downtime and have significant adverse consequences for our business, financial condition, results of operations, and cash flows. In addition, most of our non-operational employees are now working remotely, which could increase the risk of security breaches or other cyber-incidents or attacks, loss of data, fraud and other disruptions.
Furthermore, the impact of the limitation may worsen duepandemic, including a resulting reduction in demand for oil and natural gas, coupled with the sharp decline in commodity prices following the announcement of price reductions and production increases in March 2020 by members of OPEC+ has led to significant global economic contraction generally and in our industry in particular. While an agreement to cut production has since been announced by OPEC+ and its allies, the inabilitysituation, coupled with the impact of COVID-19, has continued to consider certain recognized built-in gains in the calculation of the annual limitation amount. Any such limitation could result in a significant portiondownturn in the oil and gas industry. In April 2020, OPEC+ finalized an agreement to cut oil production by 9.7 million barrels per day during May and June 2020. On June 6, 2020, OPEC+ agreed to extend such production cuts until the end of July 2020. In July 2020, OPEC+ reduced the cut in production to 7.7 million barrels per day for August through December 2020. Despite the production cuts, crude oil prices have remained depressed as a result of an increasingly utilized global storage network and the decrease in crude oil demand due to COVID-19. Oil and natural gas prices are expected to continue to be volatile as a result of the near term production increases and the ongoing COVID-19 outbreak and as changes in oil and natural gas inventories, industry demand and national and economic performance are reported, and we cannot predict when prices will improve and stabilize. We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our NOL carryforwards expiring before we would be ablebusiness, financial condition and results of operations at this time due to utilize them to reduce taxable income innumerous uncertainties.
The ultimate impact of COVID-19 will depend on future periods. Based ondevelopments, including, among others, the foregoing, certain NOL carryforwards, disallowed interest carryforwardsultimate geographic spread and severity of the virus, the consequences of governmental and other tax attributes may needmeasures designed to be written off or have a valuation allowance maintained against themprevent the spread of the virus, the development of effective treatments, the duration of the outbreak, further actions taken by members of OPEC+, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which in turn, may result in a material charge to income tax expense.normal economic and operating conditions resume.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents information aboutThere were no repurchases of our common stock during the quarter ended September 30, 2019:2020.
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased(a) | | Average Price Paid Per Share(a) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | ($ in millions) |
July 1, 2019 through July 31, 2019 | | 31,565 |
| | $ | 1.98 |
| | — |
| | $ | — |
|
August 1, 2019 through August 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | — |
|
September 1, 2019 through September 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | — |
|
Total | | 31,565 |
| | $ | 1.98 |
| | — |
| | |
| |
(a) | Includes shares of common stock purchased on behalf of our deferred compensation plan. |
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ITEM 3. | Defaults Upon Senior Securities |
None.Our Bankruptcy Filing described above constitutes an event of default that accelerated our obligations under our senior credit facility, our senior secured notes and our unsecured notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against us as a result of an event of default. See Note 4 and Note 1 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional details about the principal and interest amounts of debt included in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2020 and our Bankruptcy Filing and the Chapter 11 Cases.Under the terms of our 5.75% Cumulative Convertible Preferred Stock, 5.75% Cumulative Convertible Preferred Stock (Series A), 4.50% Cumulative Convertible Preferred Stock and 5.00% (Series 2005B) Cumulative Convertible Preferred Stock, we may suspend payments of our cumulative quarterly dividends. We have exercised our contractual right to suspend regularly scheduled quarterly payments of dividends on each series of our preferred stock beginning with the quarterly dividend payment for the second quarter of 2020, and are therefore currently in arrears with the dividend payments. No dividends have been accrued on our convertible preferred stock subsequent to the Petition Date. Pursuant to the RSA associated with our Chapter 11 Cases, each holder of an equity interest in Chesapeake would have such interest canceled, released, and extinguished without any distribution. See Note 1 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for additional information about the Chapter 11 Cases. | |
ITEM 4. | Mine Safety Disclosures |
The information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17CFR 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.
Not applicable.
The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.
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| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | SEC File Number | | Exhibit | | Filing Date | | Filed or Furnished Herewith |
3.1.1 | | | | 10-K | | 001-13726 | | 3.1.1 | | 2/27/2019 | | |
| | | | | | | | | | | | |
3.1.2 | | | | 10-Q | | 001-13726 | | 3.1.4 | | 11/10/2008 | | |
| | | | | | | | | | | | |
3.1.3 | | | | 10-Q | | 001-13726 | | 3.1.6 | | 8/11/2008 | | |
| | | | | | | | | | | | |
3.1.4 | | | | 8-K | | 001-13726 | | 3.2 | | 5/20/2010 | | |
| | | | | | | | | | | | |
3.1.5 | | | | 10-Q | | 001-13726 | | 3.1.5 | | 8/9/2010 | | |
| | | | | | | | | | | | |
3.2 | | | | 8-K | | 001-13726 | | 3.2 | | 6/19/2014 | | |
| | | | | | | | | | | | |
4.1 | | | | 8-K | | 001-37964 | | 4.1 | | 2/1/2017 | | |
| | | | | | | | | | | | |
4.2 | | | | 8-K | | 001-37964 | | 4.1 | | 2/1/2019 | | |
| | | | | | | | | | | | |
4.3 | | | | 10-Q | | 001-37964 | | 4.6 | | 8/9/2018 | | |
| | | | | | | | | | | | |
4.4 | | | | 10-K | | 001-37964 | | 4.6 | | 3/12/2018 | | |
| | | | | | | | | | | | |
4.5 | | | | 10-Q | | 001-37964 | | 4.6 | | 8/10/2017 | | |
| | | | | | | | | | | | |
4.6 | | | | 8-K | | 001-13726 | | 4.2 | | 4/5/2019 | | |
| | | | | | | | | | | | |
4.7 | | | | 8-K | | 001-13726 | | 4.4 | | 4/5/2019 | | |
| | | | | | | | | | | | |
10.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | SEC File Number | | Exhibit | | Filing Date | | Filed or Furnished Herewith |
3.1.1 | | | | 10-K | | 001-13726 | | 3.1.1 | | 2/27/2019 | | |
| | | | | | | | | | | | |
3.1.2 | | | | 8-K | | 001-13726 | | 3.1 | | 4/13/2020 | | |
| | | | | | | | | | | | |
3.1.3 | | | | 10-Q | | 001-13726 | | 3.1.4 | | 11/10/2008 | | |
| | | | | | | | | | | | |
3.1.4 | | | | 10-Q | | 001-13726 | | 3.1.6 | | 8/11/2008 | | |
| | | | | | | | | | | | |
3.1.5 | | | | 8-K | | 001-13726 | | 3.2 | | 5/20/2010 | | |
| | | | | | | | | | | | |
3.1.6 | | | | 10-Q | | 001-13726 | | 3.1.5 | | 8/9/2010 | | |
| | | | | | | | | | | | |
3.1.7 | | | | 8-K | | 001-13726 | | 3.1 | | 4/13/2020 | | |
| | | | | | | | | | | | |
3.2 | | | | 8-K | | 001-13726 | | 3.2 | | 6/19/2014 | | |
| | | | | | | | | | | | |
10.1 | | | | 8-K | | 001-13726 | | 10.1 | | 6/29/2020 | | |
| | | | | | | | | | | | |
10.2 | | | | 8-K | | 001-13726 | | 10.2 | | 9/18/2020 | | |
| | | | | | | | | | | | |
22.1 | | | | 10-Q | | 001-13726 | | 22.1 | | 5/11/2020 | | |
| | | | | | | | | | | | |
31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
32.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
32.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
95.1 | | | | | | | | | | | | X |
|
| | | | | | | | | | | | |
31.2 | | | | | | | | | | | | X |
| | | | | | | | | | Incorporated by Reference | | |
32.1Exhibit Number | | Exhibit Description | | Form | | Number | | Exhibit | | | | | | | | X |
| | | | | | | | | | | | |
32.2Filing Date | | | | | | | | | | | | X |
| | | | | | | | | | | | |
95.1 | | | | | | | | | | | | XHerewith |
| | | | | | | | | | | | |
101 INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
| | | | | | | | | | | | |
101 SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
101 CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
101 DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
101 LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
101 PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | | | X |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
† | | Management contract or compensatory plan or arrangement |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| CHESAPEAKE ENERGY CORPORATION |
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Date: November 5, 20199, 2020 | By: | | /s/ ROBERT D. LAWLER |
| | | Robert D. Lawler President and Chief Executive Officer |
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Date: November 5, 20199, 2020 | By: | | /s/ DOMENIC J. DELL’OSSO, JR. |
| | | Domenic J. Dell’Osso, Jr. Executive Vice President and Chief Financial Officer |