SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 30, 2002 (April 29, 2002)
CHESAPEAKE ENERGY CORPORATION
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(Exact name of Registrant as specified in its Charter)
Oklahoma 1-13726 73-1395733
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6100 North Western Avenue, Oklahoma City, Oklahoma 73118
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(Address of principal executive offices) (Zip Code)
(405) 848-8000
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
Chesapeake Energy Corporation ("Chesapeake") issued a Press Release on
April 29, 2002 announcing first quarter 2002 earnings. The following was
included in the Press Release:
CHESAPEAKE ENERGY CORPORATION POSTS STRONG
RESULTS FOR FIRST QUARTER OF 2002
Company Reports First Quarter 2002 Recurring Net Income of $18 Million,
Cash Flow of $85 Million and Ebitda of $112 Million
on Recurring Revenue of $169 Million
Quarterly Production and Proved Reserves Reach Record Levels of 42 Bcfe
and 2 Tcfe, Production Increases for Third Consecutive Quarter,
Operating and Financial Forecasts Increased for 2002
Chesapeake reported strong financial and operating results for the first quarter
of 2002. For the quarter, Chesapeake generated recurring net income available to
common shareholders of $17.6 million ($0.11 per fully diluted common share),
operating cash flow of $85.2 million ($0.45 per fully diluted common share), and
ebitda (operating cash flow plus interest expense) of $112.2 million on
recurring revenue of $169.3 million.
These results exclude a non-cash $47.7 million after-tax risk management loss
($79.5 million before-tax) related to the mark-to-market valuation of certain
hedging positions under SFAS 133. During 2001, the company reported a non-cash
$50.9 million after-tax risk management gain ($84.8 million before-tax) from the
application of SFAS 133. Beginning with the adoption of SFAS 133 in 2001,
Chesapeake has consistently excluded the fluctuations recorded in risk
management income when discussing the company's performance and operating
results because all such amounts initially recorded in risk management income
(or loss) are ultimately reversed and are included in oil and gas sales during
the appropriate contract periods. Large changes in SFAS 133 non-cash gains and
losses are likely to continue because of the effects that frequent changes in
oil and natural gas prices have on certain of the company's commodity hedging
contracts.
Hedging activities increased first quarter 2002 realizations by $49 million
($2.89 per barrel and $1.25 per mcf, or $1.16 per mcfe). Combining first quarter
2002 hedging gains of $49 million with 2001 hedging gains of $105 million and
with the $34 million current mark-to-market value of the company's remaining
hedges provides a total of $188 million of realized and unrealized hedging gains
from the company's risk management activities.
2
Production for the first quarter of 2002 reached the record level of 41.9
billion cubic feet of natural gas equivalent (bcfe), comprised of 36.9 billion
cubic feet of natural gas (bcf) (88%) and 0.83 million barrels of oil (mmbo)
(12%). Production increased 4.4% from the first quarter of 2001 and 1.3% from
the fourth quarter of 2001. This was the company's third consecutive quarter of
production growth. In addition, since the beginning of the year, the company's
estimated proved reserves have increased from 1.8 tcfe to 2.0 tcfe (pro forma
for the 100 bcfe expected from the recently announced Canaan Energy Corporation
acquisition).
The table below summarizes Chesapeake's key statistics during the 2002 first
quarter and compares them to the fourth and first quarters of 2001:
Three
Months
Ended
3/31/02 12/31/01 3/31/01
------- -------- -------
Average daily production (in mmcfe) 466 450 446
Gas as % of total production 88 88 90
Natural gas production (in bcf) 36.9 36.5 36.0
Average realized gas price ($/mcf) 3.30 3.88 5.59
Oil production (in mbbls) 830 807 686
Average realized oil price ($/bbl) 24.05 24.07 29.01
Natural gas equivalent production (in bcfe) 41.9 41.4 40.2
Gas equivalent realized price ($/mcfe) 3.39 3.90 5.51
General and administrative costs ($/mcfe) .10 .10 .10
Production taxes ($/mcfe) .12 .04 .36
Lease operating expenses ($/mcfe) .53 .47 .44
Interest expense ($/mcfe) .64 .61 .64
DD&A of oil and gas properties ($/mcfe) 1.16 1.16 .95
Operating cash flow ($ in millions) 85.2 112.7 161.5
Operating cash flow ($/mcfe) 2.03 2.72 4.02
Ebitda ($ in millions) 112.2 138.0 187.4
Ebitda ($/mcfe) 2.68 3.34 4.67
Recurring net income to common shareholders 17.6 35.9 71.8
($ in millions)
Chesapeake Updates Progress on its Numerous
High-Impact Exploration Projects
During the past three years, Chesapeake has assembled one of the best onshore
U.S. natural gas exploration inventories in the industry, investing more than
$125 million in land and 3-D seismic and doubling its geological and geophysical
professional staff during this period. As a result, Chesapeake has built an
exploration program in 2002 that should expose it to more than 1,000 bcfe of
unbooked potential reserves. Developed by the company's exploration staff, these
prospects have an average depth of 19,000 feet and have been delineated using
detailed subsurface geological analysis and 3-D seismic. In addition, Chesapeake
believes it has industry-leading deep drilling expertise onshore in the U.S. and
that it is presently conducting the deepest drilling program in the U.S.
Chesapeake's deep drilling effort is highlighted by the Cat Creek 1-19 well in
Beckham County, Oklahoma, which recently reached total depth of 24,800 feet.
Completion operations will begin later this quarter on this potentially
significant discovery.
3
Chesapeake is currently drilling 23 operated wells. Twelve of these are
targeting deep potential gas reserves below 15,000 feet and seven are targeting
ultra-deep potential gas reserves at 19-23,000 feet. The company's current
inventory of more than 1,500 undrilled locations includes at least 50 additional
ultra-deep drilling locations. Areas of particular exploration focus during the
year will include the Deep Anadarko, Bray, Knox/Chitwood, Cement and
Watonga-Chickasha projects of southern and western Oklahoma.
Management Summary
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Chesapeake's performance in the first quarter of 2002 and recent years is the
result of the company's clear and focused strategy, high-quality asset base and
talented and hard-working employees. During this year when the industry's
natural gas production is likely to shrink by at least 5%, Chesapeake expects
its production to increase by more than 7-10%, much of which will come from
organic production growth generated by the company's successful developmental
and exploratory drilling programs. The combination of our focus on gas in the
Mid-Continent, our value-added risk management strategy, our balanced
acquisition and drilling programs, our high quality assets and our low operating
costs has positioned Chesapeake as a leader in value creation. With the
increasing visibility of strengthening supply/demand fundamentals for natural
gas and Chesapeake's increasingly valuable gas franchise, we believe our company
can continue delivering one of the industry's best track records of value
creation in the years to come."
Conference Call Information
Chesapeake's management invites your participation in a conference call tomorrow
morning, April 30 at 8:00 a.m. CDT to discuss the contents of this release.
Please call 913-981-5533 between 7:50 and 8:00 a.m. CDT on April 30 if you would
like to participate in the call. For those unable to participate, the call will
also be available over the Internet by visiting our home page at
www.chkenergy.com and clicking on the link under Shareholder Information or by
going directly to www.ccbn.com. In addition, a replay of the call will also be
available through May 13 by calling 719-457-0820. The passcode for the replay is
563827.
This document contains 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 include estimates and give our current
expectations or forecasts of future events. They are based on our historical
operating trends, our existing commodity hedging position and our current
estimate of proved reserves. Although we believe our forward-looking statements
are reasonable, they can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. For example, statements concerning the fair
values of derivative contracts and their estimated contribution to our future
results of operations are based upon market information as of a specific date.
These market prices are subject to significant volatility. Factors that could
cause actual operating and financial results to differ materially from expected
results include the volatility of oil and gas prices, our substantial
indebtedness, our commodity price risk management activities, the cost and
availability of drilling and production services, our ability to replace
reserves, the availability of capital, uncertainties inherent in evaluating our
own reserves and the reserves we acquire, drilling and operating risks and other
risk factors described in the company's 2001 annual report on Form 10-K and
subsequent filings with the Securities and Exchange Commission.
Chesapeake Energy Corporation is one of the 10 largest independent natural gas
producers in the U.S. Headquartered in Oklahoma City, the company's operations
are focused on exploratory and developmental drilling and producing property
acquisitions in the Mid-Continent region of the United States. The company's
Internet address is www.chkenergy.com.
4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
THREE MONTHS ENDED: March 31, 2002 March 31, 2001
$ $/mcfe $ $/mcfe
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REVENUES:
Oil and gas sales 141,971 3.39 221,219 5.51
Risk management income (79,468) (1.90) -- --
Oil and gas marketing sales 27,333 0.65 56,165 1.40
--------- --------- --------- ----------
Total revenues 89,836 2.14 277,384 6.91
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OPERATING COSTS:
Production expenses 22,060 0.53 17,788 0.44
Production taxes 5,216 0.12 14,295 0.36
General and administrative 4,294 0.10 4,001 0.10
Oil and gas marketing expenses 26,507 0.63 54,478 1.36
Depreciation, depletion, and amortization
of oil and gas properties 48,619 1.16 38,173 0.95
Depreciation and amortization of other assets 3,110 0.08 1,953 0.05
--------- --------- --------- ----------
Total operating costs 109,806 2.62 130,688 3.26
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INCOME (LOSS) FROM OPERATIONS (19,970) (0.48) 146,696 3.65
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OTHER INCOME (EXPENSE):
Interest and other income 954 0.02 569 0.01
Interest expense (26,960) (0.64) (25,889) (0.64)
Gothic standby credit facility costs -- -- (3,392) (0.08)
--------- --------- --------- ----------
Total other income (expense) (26,006) (0.62) (28,712) (0.71)
--------- --------- --------- ----------
Income (Loss) Before Income Taxes (45,976) (1.10) 117,984 2.94
Income Tax Expense (Benefit) (18,390) (0.44) 47,696 1.19
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NET INCOME (LOSS) (27,586) (0.66) 70,288 1.75
Preferred Stock Dividends (2,532) (0.06) (546) (0.01)
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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS (30,118) (0.72) 69,742 1.74
========== ========= ========= ==========
EARNINGS RECONCILIATION:
Earnings per Common Share - Basic
Income Before Risk Management Income
and Gothic standby credit facility cost (1) 0.11 0.45
Risk Management Income and Gothic standby
credit facility cost (1) (0.29) (0.01)
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Net Income (Loss) (0.18) 0.44
========== =========
Earnings Per Common Share - Assuming
Dilution
Income Before Risk Management
Income and Gothic standby credit
facility cost (1) 0.11 0.42
Risk Management Income and Gothic standby
credit facility cost (1) (0.29) (0.01)
--------- ---------
Net Income (Loss) (0.18) 0.41
========= =========
Average Common Shares and Common
Equivalent Shares Outstanding
Basic 165,372 157,707
Assuming Dilution (2) 165,372 170,326
Operating Cash Flow (3) 85,221 2.03 161,502 4.02
1. All items are shown on an after-tax basis.
2. Diluted shares outstanding for the three months ended March 31, 2002 does
not include the effect of the assumed conversion at the beginning of the
period of the outstanding preferred stock, the dilutive stock options or
the dilutive warrants, as the effect was antidilutive. Diluted shares
outstanding for the three months ended March 31, 2001 includes the effect
of dilutive stock options and the effect of the assumed conversion of all
preferred stock as of the beginning of the period.
3. Income before income taxes, depreciation, depletion, and amortization,
Gothic standby credit facility cost and risk management income.
5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's)
(unaudited)
========================================================================== =================== ===================
March 31, December 31,
2002 2001
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Cash and cash equivalents $ 122,207 $ 124,960
Other current assets 149,976 236,423
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TOTAL CURRENT ASSETS 272,183 361,383
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Property and equipment (net) 1,826,942 1,785,581
Deferred tax asset 103,875 67,781
Other assets 56,390 72,023
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TOTAL ASSETS $ 2,259,390 $ 2,286,768
=============== ===============
Current liabilities $ 179,313 $ 173,381
Long term debt 1,308,424 1,329,453
Revenue and royalties due others 12,643 12,696
Other long term liabilities 42,922 3,831
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TOTAL LIABILITIES 1,543,302 1,519,361
STOCKHOLDERS' EQUITY 716,088 767,407
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,259,390 $ 2,286,768
=============== ===============
COMMON SHARES OUTSTANDING 165,796 164,742
ITEM 9. REGULATION FD DISCLOSURE
The following was included in the Press Release:
The following forecasts and estimates revise and replace in their entirety
previous projections last updated on February 21, 2002. The company's forecasts
and estimates are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
due to the risks and uncertainties described in the company's filings with the
Securities and Exchange Commission. Furthermore, these projections do not
reflect the potential impact of unforeseen events that may occur subsequent to
the issuance of this release.
Today's updated guidance for 2002 projects production of 173-177 bcfe (89% gas),
up 4% from previous projections of 166-170 bcfe. This is the company's second
increase of its 2002 forecasts during the past two months. Of the projected
seven bcfe production increase, 57% is attributable to an expected six-month
contribution from the Canaan properties and 43% is from better than expected
operational performance. Moreover, if the company's current rates of production
can be maintained through the remainder of the year, further increases in
operating and financial guidance are likely.
Reflecting Chesapeake's disciplined approach to keeping its costs low,
projections for operating expenses per mcfe remain substantially unchanged from
prior guidance: $0.50-0.55 for lease operating expense, $0.18-0.22 for
production taxes, $0.62-0.67 for interest expense, $0.10-0.11 for general and
administrative costs, $1.15-1.25 for DD&A of oil and gas properties and
$0.06-0.08 for DD&A of other assets (up from $0.05-0.06 in prior guidance). The
company expects its book income tax rate during 2002 to average 40%, of which
virtually all should be deferred.
6
Because of Chesapeake's better than expected drilling success during the past
six months and the current low-cost drilling environment, the company has
recently increased its drilling, land and seismic cap-ex budget for 2002 by 10%
to $330 million. Chesapeake will fund this cap-ex budget from operating cash
flow, which is now expected to reach $400 million, an increase of $75 million
from our February 21 guidance of $325 million. In addition, the company has $110
million of cash on hand and has an undrawn $225 million revolving bank credit
facility. Additionally, the company has recently acquired $22 million of its
outstanding senior notes in open market purchases.
Chesapeake does not budget for acquisitions because of the inability to predict
when properties attractive to the company will become available. However, in
addition to its recently announced agreement to acquire Canaan's 100 bcfe of
high-quality Mid-Continent focused natural gas reserves for $118 million, the
company anticipates having the opportunity to acquire other high-quality
properties in 2002 at similarly attractive prices. Chesapeake's acquisition team
delivered an excellent year in 2001, investing $741 million through 160
acquisitions to acquire 648 bcfe of proved reserves and an estimated 275 bcfe of
probable and possible reserves.
7
SIGNATURE
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.
CHESAPEAKE ENERGY CORPORATION
By: /s/ Aubrey K. McClendon
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Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Dated: April 30, 2002
8