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 13,700 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 create shareholder value through the development of our significant resource plays. Current market conditions make it difficult to execute on this strategy; however, we continue to focus on reducing debt, increasing cash provided by operating activities, improving margins through financial discipline and operating efficiencies and maintaining exceptional environmental and safety performance. To accomplish these goals, we intend to allocate our capital expenditures to projects we believe offer the highest return and value regardless of the commodity price environment, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our cost structure and our portfolio. 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 COVID-19 Pandemic and Impact on Global Demand forOil and Natural Gas OnMarch 11, 2020 , theWorld Health Organization declared the ongoing coronavirus (COVID-19) outbreak a pandemic and recommended containment and mitigation measures worldwide. 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. To date, we have experienced limited operational impacts as a result of 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, although for the health and safety of our employees we chose to have our non-essential personnel work remotely. As a result, since mid-March, we have restricted access to all of our offices and have directed employees to work remotely to the extent possible. Those employees who are unable to work remotely are being closely monitored and are taking precautions to minimize the risk of exposure. We will begin to re-open our offices in phases beginning mid-May. These actions since mid-March have allowed us to maintain the engagement and connectivity of our personnel, as well as minimize the number of employees required in the office and field. However, due to severe impacts from the global COVID-19 pandemic on the global demand for oil and natural gas, financial results for the three months endedMarch 31, 2020 are not necessarily indicative of operating results for the entire year as only one month of theCurrent Quarter was impacted by COVID-19 and the related economic volatility. 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. 32
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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. 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. These industry conditions, coupled with those resulting from the COVID-19 pandemic, are expected to lead to significant global economic contraction generally and in our industry in particular. Oil and natural gas prices have historically been volatile; however, the volatility in the prices for these commodities has substantially increased as a result of COVID-19 and the OPEC+ decisions mentioned above. While an agreement to cut production has since been announced by OPEC+ and its allies, the situation, coupled with the impact of COVID-19, has continued to result in a significant downturn in the oil and gas industry. Oil prices declined sharply inApril 2020 and remain volatile. Strip pricing for natural gas has increased as a result of the oil price war; however, the impact of these recent developments and our business are unpredictable. We expect to see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined with the current depressed prices, has impacted and is expected to continue to adversely impact our business. A continued low level of demand or prices for oil and natural gas or otherwise would have a continued 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 expect to record a non-recurring charge of approximately$22 million in the second quarter of 2020 and we anticipate an estimated annualized savings of approximately$36 million . Due to current oil prices and midstream constraints, we have shut-in wells and delayed turn-in-lines, which will reduce our projected oil production by approximately 50% and 37% in May and June, respectively. As market conditions improve, we will return wells to production and complete our drilled but uncompleted wells. We anticipate our capital expenditures for the remainder of the year will range between$500 and$700 million and 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 33
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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 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 ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and NGL we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been volatile; however, the volatility in the prices for these commodities has substantially increased as a result of COVID-19 and the OPEC+ decisions discussed in this Form 10-Q. Oil prices in particular have plummeted in the past few weeks. We expect to see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined with the current depressed prices, has impacted and is expected to continue to adversely impact our business. A continued low level of oil, natural gas and NGL prices has affected and could continue to negatively affect the amount of cash we generate and have available for capital expenditures and debt service and has had and could continue to have a material impact on our financial position, results of operations, cash flows and on the quantities of reserves that we can economically produce or provide as collateral to our secured lenders and creditors. If the current depressed prices persist or decline throughout 2020, our ability to comply with financial covenants under our revolving credit facility during the next 12 months will be adversely affected. Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020. Failure to comply with these covenants, if not waived, would result in an event of default under our revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness. Other risks and uncertainties that could affect our liquidity include, but are not limited to, counterparty credit risk for our receivables, access to capital markets, regulatory risks and our ability to meet financial covenants in our financing agreements. As a result of the impacts to the Company's financial position resulting from declining industry conditions and in consideration of the substantial amount of long-term debt outstanding, the Company has engaged advisors to assist 34
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with the evaluation of strategic alternatives, which may include, but not be limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the Bankruptcy Code. However, there can be no assurances that the Company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions. As a result of these uncertainties and the likelihood of a restructuring or reorganization, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern. As ofMarch 31, 2020 andDecember 31, 2019 , we had a cash balance of$82 million and$6 million , respectively. As ofMarch 31, 2020 andDecember 31, 2019 , we had a net working capital deficit of$442 million and$1.141 billion , respectively. As ofMarch 31, 2020 andDecember 31, 2019 , our working capital deficit included$420 million and$385 million , respectively, of debt due in the next 12 months. As ofMarch 31, 2020 , we had$1.011 billion of borrowing capacity available under our revolving credit facility, with outstanding borrowings of$1.900 billion and$89 million utilized for various letters of credit. 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 debt obligations, including principal and carrying amounts of our notes. We closely monitor the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our revolving credit facility. Furthermore, our ability to generate operating cash flow in the current commodity price environment, sell assets, access capital markets or take any other action to improve our liquidity and manage our debt is subject to the risks discussed above and the other risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time or control. We currently have no access to capital and other financial markets. In response to the lack of new capital and funding, we are considering strategic alternatives, which may include but are not limited to additional expense reductions; seeking a restructuring, amendment or refinancing of existing debt through a private restructuring; and reorganization under Chapter 11 of the Bankruptcy Code. Additionally, 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. 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. As ofMay 8, 2020 , including April and May derivative contracts that have settled, we had 2020 downside oil price protection through swaps and collars at an average price of$59.95 per bbl. We had 2020 downside gas price protection through swaps at$2.76 per mcf and under put spread arrangements based on an average bought put NYMEX price of$2.06 per mcf and exposure below an average sold put NYMEX price of$1.80 per mcf. 35
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Oil Derivatives(a)
Year Type of Derivative Instrument Notional Volume Average NYMEX Price
(mmbbls)
2020 Swaps 21 $59.63
2020 Two-way collars 1 $65.00 /$83.25
2020 Basis protection swaps 10 $2.58
2021 Calls 5 $61.58
2022 Calls 4 $61.58
Natural Gas Derivatives(a)
Year Type of Derivative Instrument Notional Volume Average NYMEX Price
(bcf)
2020 Swaps 199 $2.76
2020 Calls 17 $12.00
2020 Basis protection swaps 46 ($0.28 )
2020 Put spread 94 $2.06 /$1.80
2021 Calls 96 $2.75
2021 Call swaptions 14 $2.80
2022 Call swaptions 15 $2.80 ___________________________________________
(a) Includes amounts settled in April 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. Debt We are committed to reducing total leverage to achieve long-term net debt/EBITDAX of 2x. To accomplish this goal, we intend to allocate our capital expenditures to projects we believe offer the highest return and value regardless of the commodity price environment, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our cost structure and our portfolio. Increasing our margins means not only increasing our absolute level of cash flows from operations, but also increasing our cash flows from operations generated per barrel of oil equivalent production. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative), improve our production volumes from existing wells, and achieve additional operating and capital efficiencies with a focus on growing our oil volumes. We may continue to use a combination of cash and borrowings and the proceeds from asset sales to retire our outstanding debt or preferred stock through privately negotiated transactions, open market repurchases, redemptions, exchanges, tender offers or otherwise, but we are under no obligation to do so. Revolving Credit Facility Our revolving credit facility matures inSeptember 2023 and the current aggregate commitment of the lenders and borrowing base under the facility is$3.0 billion . The revolving credit facility provides for an accordion feature, pursuant to which the aggregate commitments thereunder may be increased to up to$4.0 billion from time to time, subject to agreement of the participating lenders and certain other customary conditions. Scheduled borrowing base redeterminations will continue to occur semiannually. Our borrowing base was reaffirmed onNovember 1, 2019 . Borrowings under the facility bear interest at a variable rate. As ofMarch 31, 2020 , we had outstanding borrowings of$1.900 billion under our revolving credit facility and had used$89 million of our revolving credit facility for various letters of credit. Our next borrowing base redetermination, scheduled for the second quarter of 2020, is not complete. Although we believe we have adequate reserves value to support the reaffirmation of our full borrowing base, we believe it is likely the lending group will reduce our borrowing base due to our distressed financial position. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion of the terms 36
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of our revolving credit facility. As ofMarch 31, 2020 , we were in compliance with all applicable financial covenants under the credit agreement. As ofMarch 31, 2020 , our total leverage ratio was approximately 3.70 to 1.00, our first lien leverage ratio was approximately 1.44 to 1 and our fixed charge coverage ratio was approximately 3.55 to 1. Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced. Historically, oil and natural gas prices have been volatile, and may be subject to wide fluctuations in the future. If the current depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected. Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020. Failure to comply with this covenant, if not waived, would result in an event of default under our revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness. 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 ofMarch 31, 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 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. Credit Risk Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as gathering, processing, transportation and hedging agreements. As ofMay 7, 2020 , we have received requests and posted approximately$95 million of collateral related to certain of our marketing and other contracts. We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately$172 million , which may be in the form of additional letters of credit, cash or other acceptable collateral. However, we have substantial long-term business relationships with each of these counterparties, and we may be able to mitigate any collateral requests through ongoing business arrangements and by offsetting amounts that the counterparty owes us. Any posting of collateral consisting of cash or letters of credit reduces availability under our revolving credit facility and negatively impacts our liquidity. Sources of Funds The following table presents the sources of our cash and cash equivalents for theCurrent Quarter and the Prior Quarter. Three Months Ended March 31, 2020 2019 ($ in millions) Cash provided by operating activities$ 397 $ 456 Proceeds from divestitures of proved and unproved properties, net 7
26
Proceeds from revolving credit facility borrowings, net 310
436
Proceeds from sales of other property and equipment, net -
1
Total sources of cash and cash equivalents$ 714 $ 919 37
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Cash Flows from Operating Activities Cash provided by operating activities was$397 million in theCurrent Quarter compared to$456 million in the Prior Quarter. The decrease in theCurrent Quarter is primarily due to the result of lower prices for the oil, natural gas and NGL we sold and lower volumes of natural gas and NGL sold offset by higher oil volumes sold. Cash flows from operations are largely affected by the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of assets, deferred income taxes and mark-to-market changes in our open derivative instruments. Only one month of theCurrent Quarter was impacted by COVID-19 and the related economic volatility and a continued low level of demand or depressed prices for oil and natural gas or otherwise would have a continued material adverse effect on our cash flows. See further discussion below under Results of Operations. Uses of Funds The following table presents the uses of our cash and cash equivalents for theCurrent Quarter and the Prior Quarter: Three Months Ended March 31, 2020 2019 ($ in millions) Oil and Natural Gas Expenditures: Drilling and completion costs$ 501 $
515
Acquisitions of proved and unproved properties 6 6 Total oil and natural gas expenditures 507
521
Other Uses of Cash and Cash Equivalents: Cash paid to purchase debt 93 1 Business combination, net -
353
Additions to other property and equipment 11 9 Dividends paid 22 23 Other 5 8 Total other uses of cash and cash equivalents 131
394
Total uses of cash and cash equivalents$ 638 $
915
Drilling and Completion Costs Our drilling and completion costs decreased in theCurrent Quarter compared to the Prior Quarter primarily as a result of decreased drilling and completion activity. Our average operated rig count was 14 rigs and spud wells were 71 in theCurrent Quarter compared to an average operated rig count of 20 rigs and 79 spud wells in the Prior Quarter. We completed 74 operated wells in theCurrent Quarter compared to 83 in the Prior Quarter. Cash Paid to Purchase Debt In theCurrent Quarter , we repurchased approximately$156 million aggregate principal amount of our senior notes for$93 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. Business Combination - Acquisition of WildHorse In the Prior Quarter, 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$23 million on our preferred stock in theCurrent Quarter and the Prior Quarter, respectively. OnApril 17, 2020 , we announced that we were suspending payment of dividends on each series of our outstanding convertible preferred stock. Suspension of the dividends did not constitute an event of default under any of our debt instruments. We eliminated common stock dividends in the 2015 third quarter and do not anticipate paying any common stock dividends in the foreseeable future. 38
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Results of Operations
Oil, Natural Gas and NGL Production and Average Sales Prices
Three Months Ended March 31, 2020
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boe
Marcellus - - 976 1.97 - - 163 34 11.85
Haynesville - - 556 1.68 - - 93 19 10.10
Eagle Ford 63 48.53 159 2.18 19 11.71 108 23 33.38
Brazos Valley 41 46.30 69 0.60 9 5.26 61 13 32.55
Powder River Basin 17 43.23 89 1.84 6 13.30 38 8 26.01
Mid-Continent 5 44.75 49 2.24 3 14.06 16 3 23.38
Retained assets(a) 126 46.93 1,898 1.86 37 10.71 479 100 20.53
Divested assets - - - - - - - - -
Total 126 46.93 1,898 1.86 37 10.71 479 100 % 20.53
Three Months Ended March 31, 2019
Oil Natural Gas NGL Total
mbbl mmcf mbbl mboe
per day $/bbl per day $/mcf per day $/bbl per day % $/boeMarcellus - - 948 3.54 - - 158 33 21.23 Haynesville - - 759 2.94 - - 126 26 17.63 Eagle Ford 61 59.78 148 3.58 24 21.70 109 23 43.01 Brazos Valley(b) 23 59.32 23 2.04 3 8.25 30 6 47.55 Powder River Basin 16 50.93 82 3.38 6 18.57 36 7 33.70 Mid-Continent 8 52.93 58 2.82 6 21.64 23 5 30.77 Retained assets(a) 108 57.85 2,018 3.27 39 20.03 482 100 28.23 Divested assets 1 48.05 5 2.48 - - 2 - 25.59 Total 109 57.80 2,023 3.27 39 20.03 484 100 % 28.22
___________________________________________
(a) Includes assets retained as of
(b) Average production per day since the date of the WildHorse acquisition onFebruary 1, 2019 , 59 days, was 35 mbbl, 35 mmcf and 5 mbbl for oil, natural gas and NGL, respectively. Oil, Natural Gas and NGL Sales Three Months Ended March 31, 2020 2019 Change ($ in millions) Oil$ 539 $ 566 (5 )% Natural gas 320 595 (46 )% NGL 35 69 (49 )%
Oil, natural gas and NGL sales
The decrease in the average price received per boe in the
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Oil and Natural Gas Derivatives
Three Months Ended
March 31,
2020 2019
($ in millions)
Oil derivatives - realized gains (losses) $ 127 $ 10
Oil derivatives - unrealized gains (losses) 712 (269 )
Total gains (losses) on oil derivatives 839 (259 )
Natural gas derivatives - realized gains (losses) 51 (36 ) Natural gas derivatives - unrealized gains (losses) 17 (6 ) Total gains (losses) on natural gas derivatives 68 (42 ) Total gains (losses) on oil and natural gas derivatives$ 907 $ (301 ) 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 March 31, 2020 2019 Change ($ in millions) Marketing revenues$ 724 $ 1,233 (41 )% Marketing expenses 746 1,230 (39 )% Marketing margin$ (22 ) $ 3 833 % Marketing revenues and expenses decreased in theCurrent Quarter primarily as a result of decreased oil, natural gas, and NGL prices received in our marketing operations. Marketing margin decreased in theCurrent Quarter primarily due to loss on inventory due to lower prices. Other Revenue Three Months Ended March 31, 2020 2019 Change ($ in millions) Other revenue$ 16 $ 15 7 % Other revenue relates primarily to the amortization of deferred VPP revenue. Our remaining deferred revenue balance of$50 million will be amortized on a straight-line basis through 2021. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion of our VPP. 40
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Oil, Natural Gas and NGL Production Expenses
Three Months Ended
March 31,
2020 2019 Change
($ in millions, except per unit)
Marcellus $ 9 $ 9 - %
Haynesville 11 14 (21 )%
Eagle Ford 36 41 (12 )%
Brazos Valley 27 14 93 %
Powder River Basin 18 14 29 %
Mid-Continent 21 25 (16 )%
Retained Assets(a) 122 117 4 %
Divested Assets - (2 ) (100 )%
Total oil, natural gas and NGL production expenses $ 122 $ 115 6 %
Marcellus $ 0.58 $ 0.63 (8 )%
Haynesville $ 1.30 $ 1.22 7 %
Eagle Ford $ 3.62 $ 4.15 (13 )%
Brazos Valley $ 4.98 $ 5.36 (7 )%
Powder River Basin $ 5.28 $ 4.36 21 %
Mid-Continent $ 13.95 $ 11.79 18 %
Retained Assets(a) $ 2.80 $ 2.69 4 %
Divested Assets $ - $ (10.24 ) (100 )%
Total oil, natural gas and NGL production expenses per boe $ 2.80 ___________________________________________
(a) Includes assets retained as ofMarch 31, 2020 . The absolute and per unit increase in theCurrent Quarter was the result of the acquisition of WildHorse in 2019 and our higher production in liquids-rich operating areas, which generally involve higher production expense per boe relative to our gas-rich operating areas. Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses Three Months Ended March 31, 2020 2019 Change ($ in millions, except per unit) Oil, natural gas and NGL gathering, processing and transportation expenses $ 285$ 274 4 % Oil ($ per bbl)$ 3.40 $ 3.47 (2 )% Natural gas ($ per mcf)$ 1.32 $ 1.21 9 % NGL ($ per bbl)$ 5.70 $ 5.57 2 % Total ($ per boe)$ 6.55 $ 6.29 4 %
The absolute and per unit increase in oil, natural gas and NGL gathering, processing and transportation expenses was primarily due to the acquisition of WildHorse in 2019 and an increase in oil production.
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Severance and Ad Valorem Taxes
Three Months Ended
March 31,
2020 2019 Change
($ in millions, except per unit)
Severance taxes $ 31 $ 34 (9 )%
Ad valorem taxes 23 17 35 %
Severance and ad valorem taxes $ 54 $ 51 6 %
Severance taxes per boe $ 0.71 $ 0.78 (9 )%
Ad valorem taxes per boe 0.53 0.37 43 %
Severance and ad valorem taxes per boe $ 1.24 $ 1.15 8 %
The per unit decrease in severance taxes was primarily due to the reduction in net revenue value brought by decreased prices in areas where tax is calculated on net revenue instead of production. The absolute and per unit increase in ad valorem taxes was primarily due to the addition ofTexas assets through our acquisition of WildHorse, which increased the amount of oil and natural gas reserves that were subject to ad valorem taxes. Exploration Expense Three Months Ended March 31, 2020 2019 Change ($ in millions) Impairments of unproved properties$ 272 $ 18 1,411 % Dry hole expense 7 - n/a
Geological and geophysical expense and other 3 6 (50 )% Exploration expense
$ 282 $ 24 1,075 % The increase in exploration expense is the result of non-cash impairment charges in unproved properties, primarily in ourBrazos 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. General and Administrative Expenses Three Months Ended March 31, 2020 2019 Change ($ in millions, except per unit) Gross compensation and overhead$ 161 $ 195 (17 )% Allocated to production expenses (30 ) (35 ) (14 )% Allocated to marketing expenses (4 ) (4 ) - % Allocated to exploration expenses - (4 ) (100 )% Allocated to sand mine expenses (2 ) - n/a Capitalized general and administrative expenses (21 ) (13 ) 62 % Reimbursed from third parties (39 ) (36 ) 8 % General and administrative expenses, net$ 65
General and administrative expenses, net per boe$ 1.50
The decrease in general and administrative expenses is primarily due to a reduction in compensation expense.
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Restructuring and Other Termination Costs In theCurrent Quarter , we incurred a charge of approximately$5 million related to one-time termination benefits for certain employees. Depreciation, Depletion and Amortization Three Months Ended March 31, 2020 2019 Change ($ in millions, except per unit) Depreciation, depletion and amortization $ 603$ 519 16 % Depreciation, depletion and amortization per boe$ 13.83
The absolute and per unit increase in the
Three Months Ended
March 31,
2020 2019
($ in millions)
Impairments of proved oil and natural gas properties
$ - Impairments of other fixed assets and other 76 1 Total impairments$ 8,522 $ 1 In theCurrent Quarter , we recorded impairments of proved oil and natural gas properties related toEagle 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 theCurrent Quarter we recorded a$76 million impairment of our sand mine assets that support ourBrazos Valley operating area for the difference between fair value and the carrying value of the assets. See Note 13 of the notes to our condensed consolidated financial statements included in Item 1 of this report for further discussion. Other Operating Expense Three Months Ended March 31, 2020 2019 ($ in millions) Other operating expense$ 83 $ 61 In theCurrent Quarter , we terminated certain gathering, processing and transportation contracts and recognized a non-recurring$79 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 Quarter, we recorded$23 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$38 million of severance expense as a result of our acquisition of WildHorse. A majority of the WildHorse executives and employees were terminated. These executives and employees were entitled to severance benefits in accordance with existing employment agreements. 43
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Interest Expense
Three Months Ended
March 31,
2020 2019
($ in millions,
except per unit)
Interest expense on senior notes $ 129 $ 144
Interest expense on term loan 38 -
Amortization of discount, issuance costs and other 7 6
Amortization of premium (44 ) -
Interest expense on revolving credit facility 22 17
Realized gains on interest rate derivatives - (1 )
Unrealized losses on interest rate derivatives - 1
Capitalized interest (7 ) (6 )
Total interest expense $ 145 $ 161
Interest expense per boe $ 3.34 $ 3.72
Average senior notes borrowings $ 5,783 $ 8,207
Average credit facilities borrowings $ 1,648 $ 1,021
Average term loan borrowings $ 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 Quarter , 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 Quarter . Based on FTSI's operating
results and FTSI's share price of $0.22 per share as of March 31, 2020 , 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 .
Gains on Purchases or Exchanges of Debt
In the Current Quarter , we repurchased approximately $156 million aggregate
principal amount of senior notes for $93 million and recorded an aggregate gain
of approximately $63 million . See Note 4 of the notes to our condensed
consolidated financial statements included in Item 1 of this report for further
discussion.
Income Tax Benefit
We recorded a $13 million income tax benefit in the Current Quarter compared to
a $314 income tax benefit in the Prior Quarter. Our effective income tax rate
was 0.2% for the Current Quarter compared to 93.7% for the Prior Quarter. The
rate for the Prior Quarter 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. For
the Current Quarter , our estimated AETR remains nominal as a result of having a
full valuation allowance against our net deferred tax asset position for federal
and state purposes. 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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Financial and Non-Financial Disclosures for Certain Securities Registered or
Being Registered
Chesapeake Energy Corporation is a holding company, owns no operating assets and
has no significant operations independent of its subsidiaries. Our obligations
under our revolving credit facility, term loan, senior secured second lien notes
and outstanding senior unsecured notes and convertible senior notes listed in
Note 4 of the notes to our condensed consolidated financial statements
included in Item 1 are fully and unconditionally guaranteed, jointly and
severally, by certain of our 100% owned subsidiaries. Our BVL subsidiaries are
guarantors of our obligations under the revolving credit facility, term loan and
senior secured second lien notes, but are not guarantors of our obligations
under our outstanding senior unsecured notes or convertible senior notes as of
March 31, 2020 . Chesapeake has an obligation to add our BVL subsidiaries as
guarantors of our obligations under such notes on or before June 20, 2020 in
accordance with the various indentures governing the same. Subsidiaries with
noncontrolling interests, consolidated variable interest entities and certain de
minimis subsidiaries are non-guarantors.
The tables below are summarized financial information provided in conformity
with the SEC's Regulation S-X Rule 13-01 for Chesapeake Energy Corporation
(parent) on a stand-alone, unconsolidated basis and its combined guarantor
subsidiaries as of March 31, 2020 and December 31, 2019 and for the three months
ended March 31, 2020 . This financial information may not necessarily be
indicative of our results of operations, cash flows or financial position had
these subsidiaries operated as independent entities.
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