Chesapeake Energy (ticker: CHK, exchange: New York Stock Exchange (.N))
News Release -
23-Mar-2004
Chesapeake Energy Corporation Announces Agreements to Acquire $100 Million of Producing Properties, Adds to Its Hedging Positions and Increases 2004 Production ForecastPrinter Friendly Version (pdf format)
Agreements With Four Private Companies Further Strengthen Chesapeake's
Positions in the Mid-Continent, Permian Basin and Texas Gulf Coast Regions
Chesapeake Hedges 100% of Projected Oil and Natural Gas Production Volumes
From the Acquired Properties for April 2004-December 2005 at $33.11 Per Barrel
of Oil and $5.78 Per Mcf of Natural Gas
OKLAHOMA CITY, March 23 /PRNewswire-FirstCall/ -- Chesapeake Energy
Corporation (NYSE: CHK) today announced that it has entered into or is
completing agreements to acquire $100 million of Mid-Continent, Permian Basin
and Texas Gulf Coast oil and natural gas assets in four separate transactions.
Through these agreements, Chesapeake anticipates acquiring an internally
estimated 68 billion cubic feet of gas equivalent proved reserves (bcfe),
39 bcfe of probable and possible reserves and current production of 15 million
cubic feet of natural gas equivalent production (mmcfe) per day. Pro forma
for these acquisitions, Chesapeake's anticipated March 31, 2004 proved oil and
natural gas reserves are expected to be approximately 3.6 trillion cubic feet
of natural gas equivalent (tcfe).
After allocating $16 million of the purchase price to unevaluated
leasehold, probable and possible reserves, and other assets, Chesapeake's
acquisition cost per thousand cubic feet of gas equivalent (mcfe) of proved
reserves associated with these transactions will be $1.24. Including
unevaluated leasehold and anticipated future drilling costs for fully
developing the proved, probable and possible reserves, the company estimates
that its all-in acquisition cost for the 107 bcfe of estimated reserves will
be $1.39 per mcfe. The proved reserves have a reserves-to-production index of
12.5 years, are 66% oil and are 74% proved developed.
Two of the acquisitions are expected to close on April 1, 2004 and two are
expected to close on May 1, 2004. All acquisitions are subject to customary
closing conditions with no single closing conditioned on the closing of any
other acquisition. The company intends to finance the acquisitions with
proceeds from a new private issue of cumulative convertible preferred stock.
Chesapeake Increases 2004 Production Guidance and Announces New Hedges for Oil
and Natural Gas Production To Be Acquired
Chesapeake is today increasing its 2004 production forecast by 7.0 bcfe
(2.1%) from a range of 323-329 bcfe (891 mmcfe per day at the mid-point) to a
range of 330-336 (910 mmcfe per day at the mid-point). Approximately 3.8 bcfe
of this 7.0 bcfe increase is attributable to today's announced acquisitions
while 3.2 bcfe is attributable to better than expected recent drilling
results. The company's 2004 production is expected to be 89% natural gas and
11% oil and natural gas liquids.
Last week, Chesapeake hedged the anticipated production of 1,600 barrels
of oil per day and 5,000 mcf of natural gas per day expected from the new
acquisitions at attractive prices for April 2004 through December 2005. The
hedged prices averaged $33.11 per barrel of oil and $5.78 per mcf of natural
gas. The following tables compare Chesapeake's projected 2004-2007 oil and
natural gas production volumes that have been hedged as of March 23, 2004 to
what had been previously hedged as of February 23, 2004:
Hedged Positions as of March 23, 2004
Oil Natural Gas
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
2004 1Q 91% $28.58 98% $5.97
2004 2Q 90% $29.63 72% $4.97
2004 3Q 74% $29.47 54% $4.87
2004 4Q 67% $29.15 43% $5.05
2004 Total 80% $29.22 66% $5.32
2005 9% $31.56 27% $5.03
2006 --- --- 10% $4.88
2007 --- --- 8% $4.76
Hedged Positions as of February 23, 2004
Oil Natural Gas
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
2004 1Q 88% $28.58 100% $5.97
2004 2Q 88% $28.86 73% $4.97
2004 3Q 72% $28.75 58% $4.89
2004 4Q 63% $28.46 47% $5.08
2004 Total 78% $28.68 69% $5.32
2005 --- --- 27% $5.04
2006 --- --- 11% $4.88
2007 --- --- 8% $4.76
Depending on changes in oil and natural gas futures markets and
management's view of underlying oil and natural gas supply and demand trends,
Chesapeake may either increase or decrease its hedging positions at any time
in the future without notice.
Chesapeake's updated 2004 forecast is attached to this release in an
Outlook dated March 23, 2004 labeled Schedule "A". This Outlook has been
changed from the Outlook dated February 23, 2004 (attached as Schedule "B" for
investors' convenience) to reflect the increased production forecast announced
today and the projected effects from changes in our hedging positions.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Today's announcements provide additional confirmation that Chesapeake
continues to be successful in identifying opportunities to further strengthen
its proved reserve base and enhance its production profile through the ongoing
consolidation of high-quality oil and natural gas assets in our operating
areas. Today's transactions are consistent with Chesapeake's balanced
business strategy of creating value by delivering profitable organic growth
from our developmental and exploratory drilling programs complemented by
acquiring and developing long-lived, under-exploited oil and natural gas
assets.
In addition, we have locked-in accretive returns from today's acquisitions
by hedging virtually 100% of the anticipated oil and natural gas production
volumes for April 2004 through December 2005 at prices well above the price
decks we used to evaluate the acquired properties. In this time of strong oil
and natural gas markets, we believe unusually attractive returns to
Chesapeake's shareholders can be generated from focused acquisitions and by
hedging the acquired production volumes. We believe our ongoing consolidation
of high-quality properties, followed by opportunistic hedging, and combined
with our value-added drilling programs will continue to be a winning formula
for our shareholders in the years ahead."
This press release and the accompanying Outlooks include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements give our current expectations or forecasts of future events. They
include expectations regarding closing of the announced acquisitions,
estimates of oil and gas reserves, expected oil and gas production and future
expenses, projections of future oil and gas prices, planned capital
expenditures and estimated costs for drilling, leasehold acquisitions and
seismic data, and statements concerning anticipated cash flow and liquidity,
business strategy and other plans and objectives for future operations.
Disclosures concerning derivative contracts and their estimated contribution
to our future results of operations are based upon market information as of a
specific date. These market prices are subject to significant volatility.
Although we believe the expectations and forecasts reflected in these and
other forward-looking statements are reasonable, we can give no assurance they
will prove to have been correct. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. Factors that
could cause actual results to differ materially from expected results are
described under "Risk Factors" in Item 1 of our 2003 Annual Report on
Form 10-K and subsequent filings with the Securities and Exchange Commission
(SEC). They include the volatility of oil and gas prices; adverse effects our
substantial indebtedness could have on our operations and future growth; our
ability to compete effectively against strong independent oil and gas
companies and majors; the cost and availability of drilling and production
services; possible financial losses as a result of our commodity price and
interest rate risk management activities; uncertainties inherent in estimating
quantities of oil and gas reserves, including reserves we acquire, projecting
future rates of production and the timing of development expenditures;
exposure to potential liabilities of acquired properties; our ability to
replace reserves; the availability of capital; changes in interest rates; and
drilling and operating risks. We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
press release, and we undertake no obligation to update this information.
The SEC has generally permitted oil and gas companies, in filings made
with the SEC, to disclose only proved reserves that a company has demonstrated
by actual production or conclusive formation tests to be economically and
legally producible under existing economic and operating conditions. We use
the terms "probable" and "possible" reserves or other descriptions of volumes
of reserves potentially recoverable through additional drilling or recovery
techniques that the SEC's guidelines may prohibit us from including in filings
with the SEC. These estimates are by their nature more speculative than
estimates of proved reserves and accordingly are subject to substantially
greater risk of being actually realized by the company.
The announcement of a proposed offering of convertible preferred stock in
this press release shall not constitute an offer to sell or a solicitation of
an offer to buy the preferred stock. The preferred stock will not be
registered under the Securities Act of 1933 or any state securities laws, and
may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements of the Securities Act
and state laws.
Chesapeake Energy Corporation is one of the five largest independent U.S.
natural gas producers. Headquartered in Oklahoma City, the company's
operations are focused on exploratory and developmental drilling and producing
property acquisitions in the Mid-Continent, Permian Basin, South Texas and
Texas Gulf Coast regions of the United States. The company's Internet address
is www.chkenergy.com .
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF MARCH 23, 2004
Quarter Ending March 31, 2004; Year Ending December 31, 2004.
We have adopted a policy of periodically providing investors with guidance
on certain factors that affect our future financial performance. As of
March 23, 2004, we are using the following key assumptions in our projections
for the first quarter of 2004 and the full-year 2004.
The primary changes from our February 23, 2004 guidance are explained as
follows:
1) We have increased our full-year 2004 production forecast to reflect
the four acquisitions announced today and better than expected recent
drilling results.
2) We have updated the projected effects from changes in our hedging
positions.
3) We have included our expectations for future NYMEX oil and gas prices
to illustrate hedging effects only. They are not a forecast of our
expectations for 2004 oil and natural gas prices.
4) The equivalent shares outstanding numbers did not change as a result
of today's announced preferred stock offering because the conversion
structure of the preferred stock is not expected to cause an
immediate increase in fully diluted shares.
Quarter Ending Year Ending
March 31, 2004 December 31, 2004
Estimated Production:
Oil - Mbo 1,450 6,100
Gas - Bcf 69 - 70 293 - 299
Gas Equivalent - Bcfe 78 - 79 330 - 336
Daily gas equivalent midpoint - in Mmcfe 863 910
NYMEX Prices (for calculation of
realized hedging effects only):
Oil - $/Bo $33.58 $28.06
Gas - $/Mcf $5.69 $4.99
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.69 -$2.55
Gas - $/Mcf -$0.66 -$0.61
Estimated Realized Hedging Effects
(based on expected
NYMEX prices above):
Oil - $/Bo -$4.56 +$0.86
Gas - $/Mcf +$0.43 +$0.27
Operating Costs per Mcfe of Projected
Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7%
of O&G revenues) $0.32 - 0.34 $0.28 - 0.32
General and administrative (A) $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.48 - 1.52 $1.50 - 1.55
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (B) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 247,000 m
Diluted 302,000 m 304,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200 mm $750 - $800 mm
(A) Does not include non-cash expenses associated with the issuance of
restricted stock.
(B) Does not include gains or losses on interest rate derivatives (SFAS
133).
Commodity Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include:
(i) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due to
or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside exposure
of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
Commodity markets are volatile, and as a result, Chesapeake's hedging
activity is dynamic. As market conditions warrant, the Company may elect to
settle a hedging transaction prior to its scheduled maturity date and, as a
result, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in
order to mitigate a portion of its exposure to adverse market changes in oil
and natural gas prices. Accordingly, associated gains or loses from the
derivative transactions are reflected as adjustments to oil and gas sales.
All realized gains and losses from oil and natural gas derivatives are
included in oil and gas sales in the month of related production. Pursuant to
SFAS 133, certain derivatives do not qualify for designation as cash flow
hedges. Changes in the fair value of these non-qualifying derivatives that
occur prior to their maturity (i.e. because of temporary fluctuations in
value) are reported currently in the consolidated statement of operations as
unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any
change in fair value resulting from ineffectiveness is recognized currently in
oil and natural gas sales.
The Company currently has in place the following natural gas swaps:
% Hedged
Open Swap
Avg. NYMEX Positions
Avg. NYMEX Price Assuming as a % of
Strike Including Gas Estimated
Price Gain from Open & Production Total
Open Swaps Of Open Locked Locked in Bcf's Gas
in Bcf's Swaps Swaps Positions of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 69.5 98%
2nd Qtr 53.2 $4.97 $0.00 $4.97 74.0 72%
3rd Qtr 40.9 $4.87 $0.00 $4.87 75.0 54%
4th Qtr 32.7 $5.05 $0.00 $5.05 76.0 43%
Total
2004 196.3 $5.31 $0.01 $5.32 294.5 66%
Total
2005 81.2 $5.03 $0.00 $5.03 305.0 27%
Total
2006 32.9 $4.88 $0.00 $4.88 315.0 10%
Total
2007 25.6 $4.76 $0.00 $4.76 325.0 8%
TOTALS
2004-2007 336.0 $5.15 $0.01 $5.16 1,239.5 27%
Chesapeake has also entered into the following natural gas basis
protection swaps:
Assuming Gas
Annual Production in
Volume in NYMEX Bcf's
Bcf's less: of: % Hedged
2004 157.4 0.173 290.5 54%
2005 109.5 0.156 305.0 36%
2006 47.5 0.155 315.0 15%
2007 63.9 0.166 325.0 20%
2008 64.0 0.166 335.0 19%
2009 37.0 0.160 345.0 11%
Totals 479.3 $0.164* 1,915.5 25%
* weighted average
The Company has entered into the following crude oil hedging arrangements:
% Hedged
Assuming Open Swap
Avg. Oil Positions as
Open NYMEX Production % of Total
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
Q1 - 2004* 1,270 $28.58 1,390 91%
Q2 - 2004* 1,419 $29.63 1,575 90%
Q3 - 2004* 1,182 $29.47 1,590 74%
Q4 - 2004* 1,058 $29.15 1,590 67%
Total 2004* 4,929 $29.22 6,145 80%
Total 2005* 548 $31.56 6,360 9%
* Swaps with a knockout price of $21.00, with the exception of 2,000 bopd
in 2004 with a knockout price of $24.00, with an additional 1,000 bopd
in Q2 2004 at $24.00, 1,000 bopd in Q3 and Q4 2004 with a knockout
price of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of
$22.00, 3,000 bopd in 2/04 at a knockout price of $22.00 and 1,500 bopd
from 4/04 through 12/05 at a knockout price of $26.00.
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF FEBRUARY 23, 2004
(Provided for Reference Only)
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
Quarter Ending March 31, 2004; Year Ending December 31, 2004.
We have adopted a policy of periodically providing investors with guidance
on certain factors that affect our future financial performance. As of
February 23, 2004, we are using the following key assumptions in our
projections for the first quarter of 2004 and the full-year 2004.
Quarter Ending Year Ending
March 31, 2004 December 31, 2004
Estimated Production:
Oil - Mbo 1,450 5,800
Gas - Bcf 69 - 70 288 - 294
Gas Equivalent - Bcfe 78 - 79 323 - 329
Daily gas equivalent midpoint - in Mmcfe 863 890
NYMEX Prices (for calculation of
realized hedging effects only):
Oil - $/Bo $28.08 $25.77
Gas - $/Mcf $5.47 $4.74
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.50 -$2.50
Gas - $/Mcf -$0.60 -$0.60
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo +$0.50 +$2.23
Gas - $/Mcf +$0.66 +$0.44
Operating Costs per Mcfe of Projected
Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7%
of O&G revenues) $0.32 - 0.34 $0.28 - 0.32
General and administrative $0.10 - 0.11 $0.10 - 0.11
DD&A - oil and gas $1.48 - 1.52 $1.50 - 1.55
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (A) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 38% 38%
Equivalent Shares Outstanding:
Basic 240,000 m 247,000 m
Diluted 302,000 m 304,000 m
Capital Expenditures:
Drilling, Land and Seismic $175 - $200 mm $750-800 mm
(A) Does not include gains or losses on interest rate derivatives
(SFAS 133)
Commodity Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include:
(i) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due
to or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside
exposure of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
Commodity markets are volatile, and as a result, Chesapeake's hedging
activity is dynamic. As market conditions warrant, the Company may elect to
settle a hedging transaction prior to its scheduled maturity date and, as a
result, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in
order to mitigate a portion of its exposure to adverse market changes in oil
and natural gas prices. Accordingly, associated gains or loses from the
derivative transactions are reflected as adjustments to oil and gas sales.
All realized gains and losses from oil and natural gas derivatives are
included in oil and gas sales in the month of related production. Pursuant to
SFAS 133, certain derivatives do not qualify for designation as cash flow
hedges. Changes in the fair value of these non-qualifying derivatives that
occur prior to their maturity (i.e. because of temporary fluctuations in
value) are reported currently in the consolidated statement of operations as
unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent effective in
offsetting cash flows attributable to hedged risk, are recorded in other
comprehensive income until the hedged item is recognized in earnings. Any
change in fair value resulting from ineffectiveness is recognized currently in
oil and natural gas sales.
The Company currently has in place the following natural gas swaps:
% Hedged
Open Swap
Avg. NYMEX Positions
Avg. NYMEX Price Assuming as a % of
Strike Including Gas Estimated
Price Gain from Open & Production Total
Open Swaps Of Open Locked Locked in Bcf's Gas
in Bcf's Swaps Swaps Positions of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 69.5 100%
2nd Qtr 52.8 $4.97 $0.00 $4.97 72.0 73%
3rd Qtr 43.2 $4.89 $0.00 $4.89 74.0 58%
4th Qtr 35.0 $5.08 $0.00 $5.08 75.0 47%
Total
2004 200.5 $5.31 $0.01 $5.32 290.5 69%
Total
2005 82.1 $5.04 $0.00 $5.04 300.0 27%
Total
2006 32.9 $4.88 $0.00 $4.88 310.0 11%
Total
2007 25.6 $4.76 $0.00 $4.76 320.0 8%
TOTALS
2004-2007 341.1 $5.16 $0.01 $5.17 1,220.5 28%
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
Chesapeake has also entered into the following natural gas basis
protection swaps:
Assuming Gas
Annual Production in
Volume in NYMEX Bcf's
Bcf's less: of: % Hedged
2004 157.4 0.173 290.5 54%
2005 109.5 0.156 300.0 37%
2006 47.5 0.155 310.0 15%
2007 63.9 0.166 320.0 20%
2008 64.0 0.166 330.0 19%
2009 37.0 0.160 340.0 11%
Totals 479.3 $0.164* 1,890.5 25%
* weighted average
The Company has entered into the following crude oil hedging arrangements:
% Hedged
Assuming Open Swap
Avg. Oil Positions as
Open NYMEX Production % of Total
Swaps in Strike in Mmbo's Estimated
Mmbo's Price of: Production
Q1 - 2004* 1,270 $28.58 1,450 88%
Q2 - 2004* 1,282 $28.86 1,450 88%
Q3 - 2004* 1,044 $28.75 1,450 72%
Q4 - 2004* 920 $28.46 1,450 63%
Total 2004 4,516 $28.68 5,800 78%
* Swaps with a knockout price of $21.00, with the exception of 2,000 bopd
in 2004 with a knockout price of $24.00, with an additional 1,000 bopd
in Q2 2004 at $24, 1,000 bopd in Q3 and Q4 2004 with a knockout price
of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of
$22.00, and 3,000 bopd in 2/04 at a knockout price of $22.00.
NOW SUPERSEDED BY OUTLOOK AS OF MARCH 23, 2004
SOURCE Chesapeake Energy Corporation
CONTACT: Marc Rowland, Executive Vice President and Chief Financial
Officer, +1-405-879-9232, or Tom Price, Jr., Senior Vice President, Investor
Relations, +1-405-879-9257, both of Chesapeake Energy Corporation
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Chesapeake Energy
