CHESAPEAKE ENERGY CORPORATION 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 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 onshoreU.S. unconventional natural gas and liquids assets, including interests in approximately 13,600 oil and natural gas wells. We have significant positions in the liquids-rich resource plays of theEagle Ford Shale inSouth Texas , the stacked pay in thePowder River Basin inWyoming and theAnadarko Basin in northwesternOklahoma . Our natural gas resource plays are theMarcellus Shale in the northernAppalachian Basin inPennsylvania and theHaynesville /Bossier Shales in northwesternLouisiana . Our strategy is to develop our significant resource plays 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 onJune 28, 2020 ; however, we continue to focus on 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, 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. 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. Recent Developments Voluntary Reorganization Under Chapter 11 OnJune 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 theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). OnJune 29, 2020 , theBankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In reChesapeake Energy Corporation , Case No. 20-33233 (DRJ). 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. 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 theBankruptcy 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 significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this Form 10-Q may not accurately reflect our operations, properties and capital 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 financial 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 44
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connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 Cases. See Note 1 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a complete discussion of the Chapter 11 Cases. Delisting of our Common Stock from theNew York Stock Exchange Our common stock was previously listed on theNew York Stock Exchange (the "NYSE") under the symbol "CHK." As a result of our failure to satisfy the continued listing requirements of the NYSE, onJune 29, 2020 , our common stock ceased to trade on the NYSE. SinceJune 30, 2020 , our common stock has been quoted on theOTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol "CHKAQ." OnJuly 20, 2020 , the NYSE filed a Form 25 with theSEC 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. The deregistration of our common stock, senior notes and cumulative convertible preferred stock under Section 12(b) of the Exchange Act will become effective 90 days after the filing date of the Form 25. COVID-19 Pandemic and Impact on Global Demand forOil and Natural Gas The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first six 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 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. Our 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 theCenters for Disease Control and Prevention , theWorld Health Organization and other governmental and regulatory authorities. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread 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. This significant decline in demand has been met with a sharp decline in oil prices following the announcement of price reductions and production increases inMarch 2020 by members of theOrganization of Petroleum Exporting Countries (OPEC+) and other foreign, oil-exporting countries. Further, inApril 2020 , OPEC+ finalized an agreement to cut oil production by 9.7 million barrels per day during May andJune 2020 . OnJune 6, 2020 , OPEC+ agreed to extend such production cuts until the end ofJuly 2020 . However, prices in the oil and gas market 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 volatile 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 see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined 45
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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 13% of our employees. In connection with the reduction, we recorded a non-recurring charge of approximately$22 million in theCurrent Quarter and we anticipate an estimated annualized savings of approximately$36 million . Due to the significant drop in oil prices and midstream constraints in theCurrent Quarter , we shut-in wells and delayed turn-in-lines, which reduced our oil production by approximately 50% and 25% in May and June, 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 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 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 OnApril 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 onApril 14, 2020 . Our common stock began trading on a split-adjusted basis on the NYSE at the market open onApril 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. 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. OnApril 1, 2020 , the NYSE tolled the compliance period throughJune 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 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 ofApril 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. Adoption of Rights Plan OnApril 23, 2020 , our Board of Directors declared a dividend of one Right payable onMay 4, 2020 for each share of our common stock outstanding onMay 4, 2020 to the shareholders of record on that date. In connection with the distribution of the Rights, we entered into a Rights Agreement withComputershare 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 preserving 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 46
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limited if we experience an "ownership change," as such term is defined in Section 382 of the Code. A company generally experiences an ownership change if the percentage of its shares of stock owned by its "5-percent shareholders," as such term is defined in Section 382 of the Code, increases by more than 50 percentage points over a rolling three-year period. The Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 of the Code by deterring any person or group of affiliated or associated persons from acquiring 4.9% or more of our outstanding shares of 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 untilApril 22, 2023 , unless terminated earlier in accordance with its terms. This summary description of the rights plan does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which was filed as an exhibit to our current report on Form 8-K filed onApril 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 issue additional indebtedness, dispose of assets or access the capital markets may be substantially limited or nonexistent during the Chapter 11 Cases and will require court approval in most instances. Accordingly, our liquidity will depend mainly on cash generated from operating activities and available 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 these 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 OnJune 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 theBankruptcy 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 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 operations 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, 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. OnJuly 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. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our DIP Credit Facility. As ofJune 30, 2020 andDecember 31, 2019 , we had a cash balance of$82 million and$6 million , respectively. As ofJune 30, 2020 andDecember 31, 2019 , we had a net working capital deficit of$1.699 billion and$1.141 billion , respectively. Additionally, our DIP Credit Facility was approved by theBankruptcy Court on a final basis onJuly 31, 2020 which allows us up to$925 million of borrowing capacity. 47
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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 fees for legal, financial and restructuring advisors to the Company, certain of our 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, theBankruptcy 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 Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of theBankruptcy 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 classifications of assets and liabilities reported in the condensed consolidated financial statements. The factors noted above raise substantial doubt about our ability to continue as a going concern. Credit Risk Our customers and counterparties are experiencing uncertain economic conditions which may impact their ability to make payments to us, which could adversely affect our business, cash flows, liquidity, financial condition and results of operations. 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 48
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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 enter 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. 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 and see Note 19 for details regarding hedges entered into subsequent toJune 30, 2020 . As ofAugust 7, 2020 , including July and August derivative contracts that have settled, we had 2020 downside oil price protection through swaps at an average price of$41.69 per bbl. We had 2020 downside gas price protection through swaps at$2.45 per mcf. Oil Derivatives(a) Year Type of Derivative Instrument Notional Volume Average NYMEX Price (mmbbls) 2020 Swaps 6$41.69 2021 Swaps 12$41.90 2022 Swaps 5$41.41 Natural Gas Derivatives(a) Year Type of Derivative Instrument Notional Volume Average NYMEX Price (bcf) 2020 Swaps 164$2.45 2021 Swaps 235$2.44 2022 Swaps 133$2.46
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(a) Includes amounts settled in July and
See Note 11 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. 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 ofJune 30, 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 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 are significantly reducing our forecasted 2020 capital expenditures to a range of$1.0 billion -$1.2 billion compared to our 2019 capital spending level of$2.2 billion . This reduction in spending will reduce our future production levels. Management continues to review operational plans for 2020 and beyond, which could result in changes to projected capital expenditures and projected revenues from sales of oil, natural gas and NGL. 49
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Sources of Funds
The following table presents the sources of our cash and cash equivalents for
the Current Period and the Prior Period.
Six Months Ended
June 30,
2020 2019
($ in millions)
Cash provided by operating activities $ 773 $ 853
Proceeds from divestitures of proved and unproved
properties, net 7 82
Proceeds from revolving pre-petition credit facility borrowings, net
339 964
Proceeds from sales of other property and equipment, net 4
4
Total sources of cash and cash equivalents$ 1,123
Cash Flows from Operating Activities Cash provided by operating activities was$773 million in the Current Period compared to$853 million in the Prior Period. The decrease in the Current Period is primarily due to the lower prices for the oil, natural gas and NGL we sold and lower volumes of oil, natural gas and NGL sold. Cash flows from operations are largely affected by the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of assets, deferred income taxes and mark-to-market changes in our open derivative instruments. The Current Period was impacted by COVID-19 and the related economic volatility and a continued low level of demand or depressed prices for oil and natural gas has had a continued material adverse effect on our cash flows. See further discussion below under Results of Operations. Uses of Funds The following table presents the uses of our cash and cash equivalents for the Current Period and the Prior Period: Six Months Ended June 30, 2020 2019 ($ in millions) Oil and Natural Gas Expenditures: Drilling and completion costs$ 843 $ 1,070 Acquisitions of proved and unproved properties 9 17 Total oil and natural gas expenditures 852 1,087 Other Uses of Cash and Cash Equivalents: Cash paid to purchase debt 95 381 DIP credit facility financing costs 55 - Business combination, net - 353 Additions to other property and equipment 15 18 Dividends paid 22 46 Other 8 18 Total other uses of cash and cash equivalents 195 816
Total uses of cash and cash equivalents
Drilling and Completion Costs
Our drilling and completion costs decreased in the Current Period compared to
the Prior Period primarily as a result of decreased drilling and completion
activity.
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Cash Paid to Purchase Debt In the Current Period, we repurchased approximately$160 million aggregate principal amount of our senior notes for$95 million . See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the notes repurchased. DIP Credit Facility Financing Costs In the Current Period, we paid$55 million of one-time fees to lenders to establish our DIP Credit Facility. Business Combination - Acquisition of WildHorse In the Prior Period, we acquired WildHorse for approximately 717.4 million shares of our common stock and$381 million less$28 million of cash held by WildHorse as of the acquisition date. Dividends We paid dividends of$22 million and$46 million on our preferred stock in the Current Period and the Prior Period, respectively. OnApril 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 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.
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Results of Operations
Oil, Natural Gas and NGL Production and Average Sales Prices
Three Months Ended June 30, 2020
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boe
Marcellus - - 1,051 1.38 - - 175 41 8.26
Haynesville - - 502 1.46 - - 84 20 8.75
Eagle Ford 40 20.15 117 1.95 16 9.68 75 18 15.76
Brazos Valley 36 23.42 49 0.69 6 1.93 50 12 17.58
Powder River Basin 13 23.80 52 1.44 3 10.59 25 6 16.96
Mid-Continent 4 24.41 36 1.50 3 8.03 12 3 13.39
Retained assets(a) 93 22.06 1,807 1.42 28 7.86 421 100 11.46
Divested assets - - (1 ) 2.92 - - - - .
Total 93 22.06 1,806 1.42 28 7.86 421 100 % 11.46
Three Months Ended June 30, 2019
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boe
Marcellus - - 929 2.33 - - 155 31 13.99
Haynesville - - 751 2.39 - - 125 25 14.36
Eagle Ford 58 65.82 152 2.69 19 12.78 102 21 43.89
Brazos Valley 35 63.34 55 1.81 5 9.33 49 10 47.57
Powder River Basin 20 57.05 89 2.26 5 16.30 40 8 35.58
Mid-Continent 9 58.12 59 2.03 6 16.97 25 5 30.53
Retained assets(a) 122 63.09 2,035 2.35 35 13.50 496 100 26.13
Divested assets - - (1 ) 4.66 - - - - -
Total 122 63.04 2,034 2.35 35 13.43 496 100 % 26.12
Six Months Ended June 30, 2020
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boeMarcellus - - 1,013 1.66 - - 168 38 9.99 Haynesville - - 528 1.58 - - 88 20 9.46 Eagle Ford 52 37.49 138 2.08 18 10.79 92 20 26.17 Brazos Valley 38 35.62 59 0.63 7 3.82 56 12 25.77 Powder River Basin 15 34.71 71 1.69 4 12.37 32 7 22.40 Mid-Continent 4 36.35 42 1.93 3 11.37 14 3 19.14 Retained assets(a) 109 36.39 1,851 1.64 32
9.48 450 100 16.28
Divested assets - - 1 1.00 - - - - -
Total 109 36.39 1,852 1.64 32 9.48 450 100 % 16.28
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Six Months Ended June 30, 2019
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boeMarcellus - - 939 2.94 - - 156 32 17.63 Haynesville - - 755 2.67 - - 126 26 15.99 Eagle Ford 60 62.73 150 3.13 21 17.74 106 21 43.42 Brazos Valley(b) 28 61.76 39 1.88 4 8.93 39 8 47.56 Powder River Basin 18 54.31 85 2.79 6 17.54 38 8 34.70 Mid-Continent 9 55.72 59 2.47 6 19.14 24 5 30.62 Retained assets(a) 115 60.64 2,027 2.81 37 16.89 489 100 27.16 Divested assets - - 2 1.33 - - 1 - 18.97 Total 115 60.59 2,029 2.81 37 16.86 490 100 % 27.15
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(a) Includes assets retained as of
(b) Average production per day since the date of the WildHorse acquisition onFebruary 1, 2019 , 150 days, was 34 mbbl, 47 mmcf and 5 mbbl for oil, natural gas and NGL, respectively. Oil, Natural Gas and NGL Sales Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in millions) Oil$ 186 $ 700 (73 )%$ 725 $ 1,266 (43 )% Natural gas 234 436 (46 )% 554 1,031 (46 )% NGL 20 43 (53 )% 55
112 (51 )%
Oil, natural gas and NGL sales
The net decrease in oil, natural gas and NGL sales in theCurrent Quarter of$739 million is primarily attributable to (i)$561 million decrease in revenues due to decreases in the average price received per boe and (ii)$178 million decrease in revenues due to decreased sales volumes from production curtailments, natural declines and shut-in wells. The net decrease in oil, natural gas and NGL sales in the Current Period of$1.075 billion is primarily attributable to (i)$889 million decrease in revenues due to decreases in the average price received per boe and (ii)$186 million decrease in revenues due to decreased sales volumes from production curtailments, natural declines and shut-in wells. 53
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Oil and Natural Gas Derivatives
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
($ in millions)
Oil derivatives - realized gains (losses)
$ 696 $ (8 ) Oil derivatives - unrealized gains (losses) (717 ) 104 (5 ) (165 ) Total gains (losses) on oil derivatives (148 ) 86 691 (173 ) Natural gas derivatives - realized gains (losses) 123 24 174 (12 ) Natural gas derivatives - unrealized gains (losses) (148 ) 165 (131 ) 159 Total gains (losses) on natural gas derivatives (25 ) 189 43 147 Total gains (losses) on oil and natural gas derivatives$ (173 ) $ 275 $ 734 $ (26 ) See Note 11 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 Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in millions) Marketing revenues$ 240 $ 916 (74 )%$ 964 $ 2,149 (55 )% Marketing expenses 242 940 (74 )% 988 2,170 (54 )% Marketing margin$ (2 ) $ (24 ) (92 )%$ (24 ) $ (21 ) (14 )% Marketing revenues and expenses decreased in theCurrent Quarter and the Current Period primarily as a result of decreased oil, natural gas, and NGL prices received in our marketing operations and less volumes being marketed. Marketing margin increased in theCurrent Quarter primarily due to improved margins related to non-equity transactions. Marketing margin decreased in the Current Period primarily as a result of decreased inventory due to lower prices offset by improved margins related to non-equity transactions. Other Revenue Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in millions) Other revenue$ 14 $ 15 (7 )%$ 30 $ 30 - % Other revenue relates primarily to the amortization of deferred VPP revenue. Our remaining deferred revenue balance of$36 million will be amortized on a straight-line basis through 2021. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion of our VPP. 54
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Oil, Natural Gas and NGL Production Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
($ in millions, except per unit)
Marcellus $ 7 $ 8 (13 )% $ 16 $ 18 (11 )%
Haynesville 11 12 (8 )% 22 25 (12 )%
Eagle Ford 25 52 (52 )% 61 93 (34 )%
Brazos Valley 22 31 (29 )% 50 45 11 %
Powder River Basin 10 16 (38 )% 28 30 (7 )%
Mid-Continent 16 24 (33 )% 36 49 (27 )%
Retained Assets(a) 91 143 (36 )% 213 260 (18 )%
Divested Assets - 1 (100 )% - (1 ) (100 )%
Total oil, natural gas and NGL
production expenses $ 91 $ 144 (37 )% $ 213 $ 259 (18 )%
($ per boe)
Marcellus $ 0.46 $ 0.59 (22 )% $ 0.52 $ 0.61 (15 )%
Haynesville $ 1.41 $ 1.01 40 % $ 1.36 $ 1.11 23 %
Eagle Ford $ 3.72 $ 5.52 (33 )% $ 3.66 $ 4.81 (24 )%
Brazos Valley $ 4.91 $ 6.91 (29 )% $ 4.95 $ 6.35 (22 )%
Powder River Basin $ 4.13 $ 4.42 (7 )% $ 4.81 $ 4.39 10 %
Mid-Continent $ 13.94 $ 10.45 33 % $ 13.94 $ 11.04 26 %
Retained Assets(a) $ 2.37 $ 3.14 (25 )% $ 2.60 $ 2.92 (11 )%
Divested Assets $ - $ - - % $ - $ - - %
Total oil, natural gas and NGL
production expenses per boe $ 2.37 $ 3.17 (25 )% $ 2.60 $ 2.91 (11 )%
___________________________________________
(a) Includes assets retained as ofJune 30, 2020 . The absolute and per unit decrease in theCurrent Quarter and the Current Period is primarily the result of production curtailments in the liquids-rich operating areas due to lower commodity prices. Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in millions, except per unit) Oil, natural gas and NGL gathering, processing and transportation expenses$ 270 $ 271 - %$ 555 $ 545 2 % Oil ($ per bbl)$ 3.94 $ 2.42 63 %$ 3.63 $ 2.92 24 % Natural gas ($ per mcf)$ 1.36 $ 1.23 11 %$ 1.34 $ 1.22 10 % NGL ($ per bbl)$ 5.35 $ 5.01 7 %$ 5.55 $ 5.30 5 % Total ($ per boe)$ 7.04 $ 6.00 17 %$ 6.78 $ 6.14 10 %
The per unit increase in oil, natural gas and NGL gathering, processing and
transportation expenses was primarily due to the increase in transportation
expense related to oil deficiency fees for our
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Severance and Ad Valorem Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
($ in millions, except per unit)
Severance taxes $ 12 $ 40 (70 )% $ 43 $ 74 (42 )%
Ad valorem taxes 13 22 (41 )% 36 39 (8 )%
Severance and ad valorem taxes $ 25 $ 62 (60 )% $ 79 $ 113 (30 )%
Severance taxes per boe $ 0.31 $ 0.88 (65 )% $ 0.52 $ 0.83 (37 )%
Ad valorem taxes per boe 0.35 0.51 (31 )%
0.45 0.44 2 %
Severance and ad valorem taxes per boe
The decrease 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. The lower valuations were achieved during theCurrent Quarter , resulting in the lower absolute and per unit amounts for theCurrent Quarter as compared to the Prior Quarter. Exploration Expense Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in
millions)
Impairments of unproved properties
- - - % 7 - n/a
Geological and geophysical expense
and other 3 8 (63 )% 6 14 (57 )%
Exploration expense $ 130 $ 15 767 % $ 412 $ 39 956 %
The increase in exploration expense in the Current Quarter is the result of
non-cash impairment charges in unproved properties, primarily in our Haynesville
operating area. The increase in exploration expense in the Current Period is the
result of non-cash impairment charges in unproved properties, primarily in our
Brazos Valley , Powder River Basin , Haynesville 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.
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General and Administrative Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
($ in millions, except per unit)
Gross compensation and overhead $ 189 $ 185 2 % $ 350 $ 380 (8 )%
Allocated to production expenses (24 ) (37 ) (35 )% (54 ) (72 ) (25 )%
Allocated to marketing expenses (2 ) (4 ) (50 )% (6 ) (8 ) (25 )%
Allocated to exploration expenses - (2 ) (100 )% - (6 ) (100 )%
Allocated to sand mine expenses (1 ) (3 ) (67 )% (3 ) (3 ) n/a
Capitalized general and
administrative expenses (16 ) (13 ) 23 % (37 ) (26 ) 42 %
Reimbursed from third parties (34 ) (37 ) (8 )% (73 ) (73 ) - %
General and administrative expenses,
net $ 112 $ 89 26 % $
177
General and administrative expenses, net per boe$ 2.91 $ 1.99 46 % $
2.16
The$23 million increase in general and administrative expenses in theCurrent Quarter is primarily attributable to$42 million in fees for legal, financial and restructuring advisors in preparation for the Chapter 11 Cases and a decrease in allocated compensation expense of$18 million . These increases were partially offset by$37 million in cost reduction initiatives including decreases in salary and benefits resulting from reductions in workforce in theCurrent Quarter . The$15 million decrease in general and administrative expenses in the Current Period is primarily attributable to$72 million in cost reduction initiatives including decreases in salary and benefits resulting from reduction in workforce in theCurrent Quarter and the fourth quarter of 2019. These decreases were partially offset by$42 million in fees for legal, financial and restructuring advisors in preparation for the Chapter 11 Cases and a decrease in allocated compensation expense of$15 million . Separation and Other Termination Costs In theCurrent Quarter and the Current Period, we incurred charges of approximately$22 million and$27 million , respectively, related to one-time termination benefits for certain employees. Depreciation, Depletion and Amortization Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change ($ in millions, except per unit) Depreciation, depletion and amortization$ 158 $ 580 (73 )%$ 761 $ 1,099 (31 )% Depreciation, depletion and amortization per boe$ 4.12 $ 12.84 (68 )% $
9.28
The absolute and per unit decrease in the
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Impairments
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
($ in millions)
Impairments of proved oil and natural gas
properties $ - $ - $ 8,446 $ -
Impairments of other fixed assets and other - 1 76 2
Total impairments $ - $ 1 $ 8,522 $ 2
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
$76 million impairment of our sand mine assets that support our Brazos Valley
operating area for the difference between fair value and the carrying value of
the assets. See Note 13 of the notes to our condensed consolidated financial
statements included in Item 1 of this report for further discussion.
Other Operating Expense
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
($ in millions)
Other operating expense $ 5 $ 3 $ 88 $ 64
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 $26 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 $38 million of
severance expense as a result of our acquisition of WildHorse. A majority of the
WildHorse executives and employees were terminated. These executives and
employees were entitled to severance benefits in accordance with existing
employment agreements.
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Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
($ in millions, except per unit)
Interest expense on senior notes $ 117 $ 142 $ 239 $ 281
Interest expense on term loan 33 - 71 -
Interest expense on pre-petition revolving
credit facility 20 24 42 40
Amortization of discount, issuance costs and
other 14 15 28 28
Amortization of premium (43 ) - (87 ) -
Realized gains on interest rate derivatives - (1 ) - (1 )
Unrealized losses on interest rate
derivatives - 1 - 1
Capitalized interest (4 ) (6 ) (11 ) (13 )
Total interest expense $ 137 $ 175 $ 282 $ 336
Interest expense per boe $ 3.56 $ 3.86 $ 3.44 $ 3.79
Average senior notes borrowings $ 5,666 $ 8,161 $ 5,725 $ 8,183
Average credit facilities borrowings $ 2,043 $ 2,032 $ 1,845 $ 1,627
Average term loan borrowings $ 1,500 $ - $ 1,500 $ -
The decrease in interest expense on senior notes is due to the decrease of the
average outstanding balance on our senior notes. The increase in interest
expense on the term loan is due to the issuance of our term loan in the fourth
quarter of 2019. The increase in amortization of premium is due to the issuance
of our senior secured second lien notes in the fourth quarter of 2019.
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
Prior Quarter, 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 an approximate $23 million expense in the Prior Quarter.
Gains 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 . See Note 4 of the notes to our condensed
consolidated financial statements included in Item 1 of this report for further
discussion.
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Reorganization Items, Net In theCurrent Quarter , we recorded$394 million of reorganization items consisting of$518 million of income related to pre-petition premiums and discounts offset by$61 million of expense related to deferred charges on debt that is considered subject to compromise and$63 million of expense for debtor-in-possession financing fees to lenders for funding. Income Tax Benefit No income tax provision was recorded in theCurrent Quarter and a$13 million income tax benefit was recorded in the Current Period. No income tax provision was recorded in the Prior Quarter and a$314 million income tax benefit was recorded in the Prior Period. Our effective income tax rate was 0.0% for theCurrent Quarter and for the Prior Quarter. The rate for the Current Period was 0.2% whereas the effective income tax rate for the Prior Period was 132.5%. The rate for the Prior Period was due to the partial release of the valuation allowance against our net deferred tax asset position as a result of the acquisition of WildHorse. Our effective tax rate can fluctuate as a result of the impact of discrete items, state income taxes and permanent differences. See
Note 8 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.
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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, refinancing
transactions, capital exchange transactions, asset divestitures, operational
efficiencies and 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 theultimate 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
• our ability to comply with the covenants under our DIP 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
less established markets;
• the volatility of oil, natural gas and NGL 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;
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• adverse developments or losses from pending or future litigation and
regulatory proceedings, including royalty claims;
• legislative and regulatory initiatives addressing environmental 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 2019
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 theSEC 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, theSEC . 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. TheSEC 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 theSEC . 62
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