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 the consolidated financial statements included in Item 8 of our 2020 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 7,500 gross oil and natural gas wells atSeptember 30, 2021 . Our natural gas resource plays are theMarcellus Shale in the northernAppalachian Basin inPennsylvania ("Appalachia") and theHaynesville /Bossier Shales in northwesternLouisiana ("Gulf Coast "). Our liquids-rich resource plays are theEagle Ford Shale inSouth Texas ("South Texas" and "Brazos Valley ") and the stacked pay in thePowder River Basin inWyoming ("Powder River Basin "). Our strategy is to create shareholder value by generating sustainable free cash flow from our oil and natural gas development and production activities. We continue to focus on improving margins through operating efficiencies and financial discipline and improving our Environmental, Social, and Governance (ESG) performance. To accomplish these goals, we intend to allocate our human resources and capital expenditures to projects we believe offer the highest cash return on capital invested, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our portfolio. We also intend to continue to dedicate capital to projects that reduce the environmental impact of our oil and natural gas producing activities. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative) per barrel of oil equivalent production through operational efficiencies by, among other things, improving our production volumes from existing wells. Leading a responsible energy future is foundational to Chesapeake's success. Our core values and culture demand we continuously evaluate the environmental impact of our operations and work diligently to improve our ESG performance across all facets of our Company. Our path to leading a responsible energy future begins with our initiative to achieve net-zero direct greenhouse gas emissions by 2035, which we announced inFebruary 2021 . To meet this challenge, we have set meaningful initial goals including: •Eliminate routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025; •Reduce our methane intensity to 0.09% by 2025; and •Reduce our GHG intensity to 5.5 by 2025. InJuly 2021 , we announced our plan to receive independent certification of our natural gas production under the MiQ methane standard and EO100 Standard forResponsible Energy Development . We anticipate that certified natural gas will be available in ourGulf Coast basin by the end of 2021 and in our Appalachia basin by the end of the second quarter of 2022. The MiQ certification will provide a verified approach to tracking our commitment to reduce our methane intensity to 0.09% by 2025, as well as support our overall objective of achieving net-zero direct greenhouse gas emissions by 2035. Our results of operations as reported in our condensed consolidated financial statements for the 2021Successor Quarter , 2021 Successor Period, 2021 Predecessor Period, 2020Predecessor Quarter and 2020 Predecessor Period are in accordance with GAAP. Although GAAP requires that we report on our results for the periodsJanuary 1, 2021 throughFebruary 9, 2021 andFebruary 10, 2021 throughSeptember 30, 2021 separately, management views our operating results for the nine months endedSeptember 30, 2021 by combining the results of the 2021 Predecessor Period and the 2021 Successor Period because management believes such presentation provides the most meaningful comparison of our results to prior periods. We are not able to compare the 40 days fromJanuary 1, 2021 throughFebruary 9, 2021 operating results to any of the previous periods reported in the condensed consolidated financial statements and do not believe reviewing this period in isolation would be useful in identifying any trends in, or reaching any conclusions regarding, our overall operating performance. We believe the key performance indicators such as operating revenues and expenses for the 2021 Successor Period combined with the 2021 Predecessor Period provide more meaningful comparisons to other periods and are useful in understanding operational trends. Additionally, there were no changes in policies between the periods, and any 47 -------------------------------------------------------------------------------- Table of Contents material impacts as a result of fresh start accounting were included within the discussion of these changes. These combined results do not comply with GAAP and have not been prepared as pro forma results under applicable regulations, but are presented because we believe they provide the most meaningful comparison of our results to prior periods. Recent Developments Emergence from Bankruptcy On the Petition Date the Debtors filed the Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in theBankruptcy 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. 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 have continued to operate in the ordinary course of business.The Bankruptcy Court confirmed the Plan and the Debtors entered the Confirmation Order onJanuary 16, 2021 . The Debtors emerged from bankruptcy on the Effective Date. In connection with our exit from bankruptcy, we filed a registration statement with theSEC to facilitate future sales of our equity by certain holders of our New Common Stock and warrants. Sales of a substantial number of the New Common Stock in the public markets, or the perception that these sales might occur, could reduce the value of our equity and impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity. See Note 2 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. Chief Executive Officer OnApril 27, 2021 , we announced the departure ofDoug Lawler from his positions as Chief Executive Officer and Director of Chesapeake, effectiveApril 30, 2021 .Michael Wichterich , the Chairman of our Board of Directors, served as Interim Chief Executive Officer while the Board of Directors conducted a search for a new Chief Executive Officer.Mr. Wichterich intends to continue in his role as Chair of the Board of Directors following the appointment of Chesapeake's new Chief Executive Officer. During the period thatMr. Wichterich was both the Chair of the Board of Directors and Interim Chief Executive Officer,Matt Gallagher , the Chair of theNominating and Governance Committee of the Board of Directors, served as Lead Independent Director. OnOctober 11, 2021 , we announced that the Board of Directors appointedDomenic "Nick" Dell'Osso as President and Chief Executive Officer and as member of the Board, effectiveOctober 11, 2021 . Additionally,Mr. Dell'Osso will remain in his role as Chief Financial Officer until his replacement has been announced. OnOctober 11, 2021 , the Board of Directors of the Company appointedMichael Wichterich , who resigned as Interim Chief Executive Officer upon the appointment ofMr. Dell'Osso , as Executive Chairman of the Company. Vine Acquisition OnNovember 1, 2021 , we completed our acquisition of Vine pursuant to a definitive agreement with Vine datedAugust 10, 2021 . The transaction strengthens Chesapeake's competitive position, meaningfully increasing our free cash flow outlook and deepening our inventory of premium natural gas locations, while preserving the strength of our balance sheet. 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 2020 and into 2021. 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 COVID-19 or related governmental restrictions. While we cannot predict the full impact that COVID-19 or the current significant disruption and volatility in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations, we believe demand is recovering and prices will continue to be positively impacted. For additional discussion regarding risks associated with the COVID-19 pandemic, see Part II, Item 7. Management's 48 -------------------------------------------------------------------------------- Table of Contents Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K and Item 1A "Risk Factors" in our 2020 Form 10-K. Liquidity and Capital Resources Liquidity Overview For the 2021 Successor Period, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been for the development of our oil and gas properties and return of value to shareholders through dividends. Historically, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, borrowings under certain credit agreements and dispositions of non-core assets. Our ability to issue additional indebtedness, dispose of assets or access the capital markets was substantially limited during the Chapter 11 Cases and required court approval in most instances. Accordingly, our liquidity in the Predecessor Periods depended mainly on cash generated from operations and available funds under certain credit agreements including the DIP Facility in the 2021 Predecessor Period and revolving credit facility in the 2020 Predecessor Period. We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger company, built to generate sustainable free cash flow with a strengthened balance sheet, geographically diverse asset base and continuously improving ESG performance. As a result of the Chapter 11 Cases, we reduced our total indebtedness by$9.4 billion by issuing equity in a reorganized entity to the holders of our FLLO Term Loan, Second Lien Notes, unsecured notes and allowed general unsecured claimants. We believe our cash flow from operations, cash on hand and borrowing capacity under the Exit Credit Facility, as discussed below, will provide sufficient liquidity during the next 12 months and the foreseeable future. As ofSeptember 30, 2021 , we had$2.577 billion of liquidity available, including$849 million of cash on hand and$1.728 billion of aggregate unused borrowing capacity available under the Exit Credit Facility. As ofSeptember 30, 2021 , we had no outstanding borrowings under our Exit Credit Facility - Tranche A Loans and$221 million in borrowings under our Exit Credit Facility - Tranche B Loans. See Note 5 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 carrying and fair value of our senior notes. Dividend With our strong liquidity position, we initiated a new dividend strategy. We expect the annual dividend on our common shares will be paid quarterly. We made the first dividend payment of$0.34375 per share onJune 10, 2021 to stockholders of record at the close of business onMay 24, 2021 , and we made the second dividend payment of$0.34375 per share onSeptember 9, 2021 to stockholders of record at the close of business onAugust 24, 2021 . OnNovember 2, 2021 , Chesapeake's Board of Directors increased the quarterly dividend on its common shares to$0.4375 per share, or 27% higher compared to the previous amount. The third dividend payment will be payable onDecember 9, 2021 to stockholders of record at the close of business onNovember 24, 2021 . OnAugust 10, 2021 , we announced a variable return program that will result in the payment of an additional dividend, payable beginning inMarch 2022 , equal to the sum of free cash flow from the prior quarter less the base dividend, multiplied by 50%. Derivative and Hedging Activities Our results of operations and cash flows are impacted by changes in market prices for oil and natural gas. We enter into various derivative instruments to mitigate a portion of our exposure to oil and natural gas price declines, but these transactions may also limit our cash flows in periods of rising oil and natural gas prices. 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. See Item 3. Quantitative and Qualitative Disclosures About Market Risk included in Part I of this report for further discussion on the impact of commodity price risk on our financial position. Contractual Obligations and Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , our material contractual obligations included repayment of senior notes, outstanding borrowings and interest payment obligations under the Exit Credit Facility, asset retirement obligations, lease obligations, undrawn letters of credit and various other commitments we enter into in the ordinary course of business that could result in future cash obligations. In addition, we have contractual commitments with midstream 49 -------------------------------------------------------------------------------- Table of Contents companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. The estimated gross undiscounted future commitments under these agreements were approximately$3.4 billion as ofSeptember 30, 2021 . As discussed above, we estimate the sources of our capital will continue to be adequate to fund our near and long-term contractual obligations. Post-Emergence Debt On the Effective Date, pursuant to the terms of the Plan, the Company, as borrower, entered into a reserve-based credit agreement (the "Credit Agreement") providing for the Exit Credit Facility which features an initial borrowing base of$2.5 billion . The borrowing base will be redetermined semiannually on or aroundMay 1 andNovember 1 of each year. Our borrowing base was reaffirmed inOctober 2021 , and the next scheduled redetermination will be on or aboutMay 1, 2022 . The aggregate initial elected commitments of the lenders under the Exit Credit Facility will be$1.75 billion of revolving Tranche A Loans and$221 million of fully funded Tranche B Loans. The Exit Credit Facility provides for a$200 million sublimit of the aggregate commitments that are available for the issuance of letters of credit. The Exit Credit Facility bears interest at the ABR (alternate base rate) or LIBOR, at our election, plus an applicable margin (ranging from 2.25-3.25% per annum for ABR loans and 3.25-4.25% per annum for LIBOR loans, subject to a 1.00% LIBOR floor), depending on the percentage of the borrowing base then being utilized. The Tranche A Loans mature 3 years after the Effective Date and the Tranche B Loans mature 4 years after the Effective Date. The Tranche B Loans can be repaid if no Tranche A Loans are outstanding. OnFebruary 2, 2021 , the Company issued$500 million aggregate principal amount of its 2026 Notes and$500 million aggregate principal amount of its 2029 Notes. The offering of the Notes was part of a series of exit financing transactions undertaken in connection with the Debtors' Chapter 11 Cases and meant to provide the exit financing originally intended to be provided by the Exit Term Loan Facility pursuant to the Commitment Letter. Based upon the business plan approved by the Court and our hedging activities we expect to generate adequate cash flows from operating activities to fully fund all investing activities without incremental borrowings under our Exit Credit Facility. Assumption and Repayment of Vine Debt In conjunction with the Vine Acquisition, Vine's Second Lien Term Loan was repaid and terminated for$163 million inclusive of a$13 million make whole premium with cash on hand due to the agreement containing a change in control provision making the term loan callable upon closing. Vine's reserve based loan facility, which had no borrowings as ofNovember 1, 2021 , was terminated at the time of the acquisition. Additionally, Vine's 6.75% Senior Notes with a principal amount of$950 million were assumed by the Company. Capital Expenditures For the year endingDecember 31, 2021 , we currently expect to bring or have online approximately 125 to 140 gross wells by investing approximately$740 -$810 million in capital expenditures while operating approximately eight rigs inclusive of the Vine Acquisition. We expect that approximately 80% of our 2021 capital expenditures will be directed toward our natural gas assets. For the year endingDecember 31, 2022 , we currently expect to invest approximately$1.3 -$1.6 billion in capital expenditures while operating approximately 10 to 12 rigs. We currently plan to fund our capital program through cash on hand and expected cash flow from our operations. We may alter or change our plans with respect to our capital program and expected capital expenditures based on developments in our business, our financial position, our industry or any of the markets in which we operate. 50 -------------------------------------------------------------------------------- Table of Contents Sources of Funds The following table presents the sources of our cash and cash equivalents for the Successor and Predecessor periods. Successor Predecessor Period from Period from January 1, February 10, 2021 Nine Months 2021 through through Ended September 30, February 9, September 30, 2021 2021 2020 Cash provided by (used in) operating activities$ 1,246 $ (21) $ 1,155 Proceeds from issuance of senior notes - 1,000 - Proceeds from issuance of common stock - 600 - Proceeds from warrant exercise 2 - - Proceeds from divestitures of property and equipment 9 - 15
Proceeds from revolving pre-petition credit facility borrowings, net
- - 339
Total sources of cash and cash equivalents $ 1,257 Cash Flows from Operating Activities Cash provided by operating activities was$1.246 billion in the 2021 Successor Period, cash used in operating activities was$21 million in the 2021 Predecessor Period, and cash provided by operating activities was$1.155 billion in the 2020 Predecessor Period. The increase in the 2021 Successor Period is primarily due to higher prices for the oil, natural gas and NGL we sold partially offset by lower volumes of oil and NGL sold. The cash used in the 2021 Predecessor Period was primarily due to the payment of professional fees related to the Chapter 11 Cases. 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. See further discussion below under Results of Operations. Proceeds from Issuance of Common Stock and Senior Notes In the 2021 Predecessor Period, we issued$500 million aggregate principal amount of 5.5% 2026 Notes and$500 million aggregate principal amount of 5.875% 2029 Notes for total proceeds of$1.0 billion . Additionally, upon emergence from Chapter 11, we issued 62,927,320 shares of New Common Stock in exchange for$600 million of cash as agreed upon in the Plan. 51 -------------------------------------------------------------------------------- Table of Contents Uses of Funds The following table presents the uses of our cash and cash equivalents for the Successor and Predecessor periods: Successor Predecessor Period from Period from January 1, February 10, 2021 Nine Months 2021 through through Ended September 30, February 9, September 30, 2021 2021 2020 Oil and Natural Gas Expenditures: Capital expenditures$ 404 $ 66 $ 973 Other Uses of Cash and Cash Equivalents: Payments on Exit Credit Facility - Tranche A Loans, net 50 479 - Payments on DIP Facility borrowings - 1,179 - Cash paid to purchase debt - - 95 Debt issuance and other financing costs 3 8 109 Common stock dividends paid 67 - - Preferred stock dividends paid - - 22 Other 1 - 10 Total other uses of cash and cash equivalents 121 1,666 236 Total uses of cash and cash equivalents$ 525 $ 1,732 $ 1,209 Capital Expenditures Our capital expenditures significantly decreased in the combined 2021 Successor and Predecessor Periods primarily as a result of decreased drilling and completion activity mainly in our liquids-rich plays. Payments on DIP Facility Borrowings On the Effective Date, the DIP Facility was terminated, and the holders of obligations under the DIP Facility received payment in full in cash; provided that to the extent such lender under the DIP Facility was also a lender under the Exit Credit Facility, such lender's allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date. Cash Paid to Purchase Debt In the 2020 Predecessor Period, we repurchased approximately$160 million aggregate principal amount of our senior notes for$95 million . Common Stock Dividends As part of our dividend program, we paid dividends of$67 million on our common stock in the 2021 Successor Period. Preferred Stock Dividends We paid dividends of$22 million on our preferred stock in the 2020 Predecessor Period. OnApril 17, 2020 , we announced that we were suspending payment of dividends on each series of our outstanding convertible preferred stock. On the Effective Date of the Chapter 11 Cases, each holder of an equity interest in Chesapeake had their interest canceled, released, and extinguished without any distribution. See Note 2 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. 52 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Oil, Natural Gas and NGL Production and Average Sales Prices
Successor
Three Months Ended September 30, 2021
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Appalachia - - 1,302 3.20 - - 217 19.21
Gulf Coast - - 589 3.81 - - 98 22.84
South Texas 34 70.96 107 4.46 15 34.60 66 51.02
Brazos Valley 25 69.54 33 2.82 3 27.41 34 56.88
Powder River Basin 9 69.31 53 4.33 3 44.53 21 47.48
Total 68 70.22 2,084 3.46 21 35.14 436 29.14
Predecessor
Three Months Ended September 30, 2020
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Appalachia - - 1,070 1.40 - - 178 8.37
Gulf Coast - - 550 1.81 - - 91 10.86
South Texas 51 39.79 132 2.08 22 12.81 95 27.31
Brazos Valley 36 38.45 43 0.80 5 6.69 49 29.82
Powder River Basin 10 38.69 41 1.79 3 15.94 20 25.98
Mid-Continent 4 40.12 31 1.63 3 11.58 12 20.15
Total 101 39.31 1,867 1.57 33 11.94 445 16.40
Successor
Period from February 10, 2021 through September 30, 2021
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Appalachia - - 1,289 2.57 - - 215 15.43
Gulf Coast - - 552 3.11 - - 92 18.67
South Texas 36 67.02 108 3.85 15 28.88 69 47.25
Brazos Valley 27 65.60 34 3.74 4 20.91 36 54.37
Powder River Basin 10 65.02 55 3.94 3 36.91 22 43.45
Total 73 66.23 2,038 2.84 22 28.85 434 25.85
Predecessor
Period from January 1, 2021 through February 9, 2021
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Appalachia - - 1,233 2.42 - - 206 14.49
Gulf Coast - - 543 2.44 - - 90 14.62
South Texas 42 54.12 127 3.00 14 26.04 78 39.20
Brazos Valley 32 52.37 38 1.14 4 16.09 42 42.23
Powder River Basin 10 51.96 61 2.92 4 34.31 24 34.25
Total 84 53.21 2,002 2.45 22 25.92 440 22.63
Predecessor
Nine Months Ended September 30, 2020
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Appalachia - - 1,032 1.57 - - 172 9.43
Gulf Coast - - 536 1.66 - - 89 9.95
South Texas 51 38.27 136 2.08 19 11.58 93 26.56
Brazos Valley 38 36.52 54 0.68 6 4.61 53 27.00
Powder River Basin 14 35.71 60 1.71 4 13.19 28 23.25
Mid-Continent 4 37.49 39 1.85 3 11.44 14 19.43
Total 107 37.32 1,857 1.62 32 10.31 449 16.32
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Oil, Natural Gas and NGL Sales
Successor
Three Months Ended
Oil Natural Gas NGL Total
Appalachia $ - $ 383 $ - $ 383
Gulf Coast - 207 - 207
South Texas 221 44 47 312
Brazos Valley 158 9 8 175
Powder River Basin 58 21 14 93
Oil, natural gas and NGL revenue $ 437 $ 664 $ 69 $ 1,170
Predecessor
Three Months Ended
Oil Natural Gas NGL Total
Appalachia $ - $ 137 $ - $ 137
Gulf Coast - 92 - 92
South Texas 189 26 26 241
Brazos Valley 127 3 3 133
Powder River Basin 36 7 4 47
Mid-Continent 14 5 3 22
Oil, natural gas and NGL revenue $ 366
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Successor
Period from
Oil Natural Gas NGL Total
Appalachia $ - $ 772 $ - $ 772
Gulf Coast - 401 - 401
South Texas 562 97 102 761
Brazos Valley 409 30 17 456
Powder River Basin 144 51 30 225
Total oil, natural gas and NGL sales $ 1,115 $ 1,351 $ 149 $ 2,615
Predecessor
Period from
Oil Natural Gas NGL Total
Appalachia $ - $ 119 $ - $ 119
Gulf Coast - 53 - 53
South Texas 92 15 15 122
Brazos Valley 67 2 2 71
Powder River Basin 20 7 6 33
Total oil, natural gas and NGL sales $ 179 $ 196 $ 23 $ 398
Non-GAAP Combined
Nine
Months Ended
Oil Natural Gas NGL Total
Appalachia $ - $ 891 $ - $ 891
Gulf Coast - 454 - 454
South Texas 654 112 117 883
Brazos Valley 476 32 19 527
Powder River Basin 164 58 36 258
Total oil, natural gas and NGL sales $ 1,294 $ 1,547 $ 172 $ 3,013
Predecessor
Nine
Months Ended
Oil Natural Gas NGL Total
Appalachia $ - $ 445 $ - $ 445
Gulf Coast - 245 - 245
South Texas 539 77 59 675
Brazos Valley 375 10 9 394
Powder River Basin 133 28 14 175
Mid-Continent 44 19 9 72
Total oil, natural gas and NGL sales $ 1,091 $
824
Oil, natural gas and NGL sales in the 2021Successor Quarter increased$498 million compared to the 2020Predecessor Quarter . The increase is primarily attributable to a$511 million increase in revenues from higher average prices received, partially offset by a$13 million decrease in revenues due to slightly lower sales volumes, which primarily resulted from the sale of Mid-Continent properties in 2020. The higher average prices received are consistent with the upward trend in index prices for all products seen throughout the 2021Successor Quarter . 55 -------------------------------------------------------------------------------- Table of Contents Oil, natural gas and NGL sales in the combined 2021 Successor and Predecessor Periods increased$1,007 million compared to the 2020 Predecessor Period. The increase is primarily attributable to a$1,074 million increase in revenues from higher average prices received, partially offset by a$72 million reduction from the sale of Mid-Continent properties in 2020. Excluding the decrease in volumes related to the sale of Mid-Continent properties in 2020, average daily production is consistent in the combined 2021 Successor and Predecessor Periods and 2020 Predecessor Period due to an increase in new well completions in Appalachia andGulf Coast offset by a reduction inSouth Texas ,Brazos Valley , andPowder River Basin wells turned-in-line. Production Expenses Successor Predecessor Three Months Ended Three Months Ended September 30, September 30, 2021 2020 $/Boe $/Boe Appalachia $ 9 0.47 $ 8 0.49 Gulf Coast 13 1.42 10 1.20 South Texas 31 5.04 24 2.73 Brazos Valley 18 5.96 17 3.83 Powder River Basin 9 4.38 9 4.53 Mid-Continent - - 14 13.11 Total production expenses $ 80 1.99 $ 82 1.99 Successor Predecessor Non-GAAP Combined Predecessor Period from February 10, 2021 Period from through January 1, 2021 through Nine Months Ended Nine Months EndedSeptember 30, 2021 February 9, 2021 September 30, 2021 September 30, 2020 $/Boe $/Boe $/Boe $/Boe Appalachia$ 23 0.47 $ 4 0.50$ 27 0.47 $ 24 0.51Gulf Coast 30 1.39 4 1.12 34 1.35 32 1.30South Texas 74 4.60 12 3.90 86 4.48 85 3.24Brazos Valley 46 5.52 9 4.85 55 5.41 67 4.61Powder River Basin 21 4.07 3 3.37 24 3.96 37 4.74 Mid-Continent - - - - - - 50 13.69 Total production expenses$ 194 1.92 $ 32 1.80$ 226 1.90 $ 295 2.40 Production expenses in the 2021Successor Quarter decreased$2 million as compared to the 2020Predecessor Quarter . The decrease was primarily due to a$14 million reduction from the sale of Mid-Continent properties in 2020, partially offset by increased workover expense and repair and maintenance expense inSouth Texas andGulf Coast . Production expenses in the combined 2021 Successor and Predecessor Periods decreased$69 million as compared to the 2020 Predecessor Period. The decrease was primarily due to a$50 million reduction from the sale of Mid-Continent properties in 2020 and a$25 million reduction in ourBrazos Valley andPowder River Basin operating areas due to lower production volumes from reduced capital allocation. 56 -------------------------------------------------------------------------------- Table of Contents Gathering, Processing and Transportation Expenses Successor Predecessor Three Months Ended September 30, Three Months Ended September 30, 2021 2020 $/Boe $/Boe Appalachia$ 83 4.14 $ 73 4.39 Gulf Coast 28 3.09 46 5.42 South Texas 82 13.38 106 12.08 Brazos Valley 3 0.98 7 1.49 Powder River Basin 23 11.95 21 11.84 Mid-Continent - - 5 5.10 Total gathering, processing and transportation expenses$ 219 5.45$ 258 6.28 Successor Predecessor Non-GAAP Combined Predecessor Period from February 10, 2021 Period from through January 1, 2021 through Nine Months Ended Nine Months EndedSeptember 30, 2021 February 9, 2021 September 30, 2021 September 30, 2020 $/Boe $/Boe $/Boe $/Boe Appalachia$ 204 4.07 $ 34 4.17$ 238 4.08 $ 217 4.60Gulf Coast 64 2.98 11 2.93 75 2.98 137 5.59South Texas 203 12.56 42 13.35 245 12.69 338 13.28Brazos Valley 8 1.03 3 1.92 11 1.18 21 1.40Powder River Basin 62 12.00 12 12.53 74 12.08 79 10.46 Mid-Continent - - - - - - 21 5.83 Total gathering, processing and transportation expenses$ 541 5.45 $ 102 5.78$ 643 5.41 $ 813 6.61 Gathering, processing and transportation expenses in the 2021Successor Quarter decreased$39 million as compared to the 2020Predecessor Quarter .Gulf Coast decreased$18 million as a result of contract negotiations in the Chapter 11 Cases.South Texas decreased$24 million primarily as a result of reduced production due to fewer wells brought on line in 2021. Additionally, the sale of Mid-Continent properties in 2020 resulted in a$5 million reduction. These decreases were partially offset by a$10 million increase in Appalachia as a result of increased production. Gathering, processing and transportation expenses in the combined 2021 Successor and Predecessor Periods decreased$170 million as compared to the 2020 Predecessor Period.Gulf Coast decreased$62 million as a result of contract negotiations in the Chapter 11 Cases.South Texas decreased$93 million primarily as a result of reduced production as well as contract negotiations in the Chapter 11 Cases. Additionally, the sale of Mid-Continent properties in 2020 resulted in a$21 million reduction. These decreases were partially offset by a$21 million increase in Appalachia as a result of increased production. 57 -------------------------------------------------------------------------------- Table of Contents Severance and Ad Valorem Taxes Successor Predecessor Three Months Ended September 30, Three Months Ended September 30, 2021 2020 $/Boe $/Boe Appalachia$ 2 0.13 $ 1 0.09 Gulf Coast 5 0.55 4 0.52 South Texas 17 2.72 16 1.79 Brazos Valley 8 2.63 10 2.05 Powder River Basin 9 4.59 5 2.65 Mid-Continent - - 1 1.13 Total severance and ad valorem taxes$ 41 1.03 $ 37 0.90 Successor Predecessor Non-GAAP Combined Predecessor Period from February 10, 2021 Period from through January 1, 2021 through Nine Months Ended Nine Months Ended September 30, 2021 February 9, 2021 September 30, 2021 September 30, 2020 $/Boe $/Boe $/Boe $/Boe Appalachia$ 6 0.13 $ 1 0.07 $ 7 0.12 $ 4 0.09 Gulf Coast 12 0.55 2 0.54 14 0.55 14 0.60 South Texas 42 2.56 8 2.53 50 2.55 43 1.68 Brazos Valley 25 3.03 5 2.99 30 3.03 33 2.23 Powder River Basin 21 4.15 2 2.88 23 3.95 18 2.37 Mid-Continent - - - - - - 4 1.07 Total severance and ad valorem taxes$ 106 1.05 $ 18 1.03$ 124 1.05 $ 116 0.94 Severance and ad valorem taxes in the 2021Successor Quarter increased$4 million as compared to the 2020Predecessor Quarter . The severance tax increase of$4 million was primarily driven by increased revenue as a result of improved pricing. Severance and ad valorem taxes in the combined 2021 Successor and Predecessor Periods increased$8 million as compared to the 2020 Predecessor Period. The severance tax increase of$12 million was primarily driven by increased revenue as a result of improved pricing. The ad valorem tax decrease of$4 million was primarily driven by lower assessed property values in the combined 2021 Successor and Predecessor Periods forBrazos Valley andSouth Texas . 58
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Gross Margin by Operating Area
The table below presents the gross margin for each of our operating areas. Gross
margin by operating area is defined as oil, natural gas and NGL sales less
production expenses, gathering, processing and transportation expenses, and
severance and ad valorem taxes.
Successor Predecessor
Three Months Ended September 30, Three Months Ended September 30,
2021 2020
$/Boe $/Boe
Appalachia $ 289 14.47 $ 55 3.40
Gulf Coast 161 17.78 32 3.72
South Texas 182 29.88 95 10.71
Brazos Valley 146 47.31 99 22.45
Powder River Basin 52 26.56 12 6.96
Mid-Continent - - 2 0.81
Gross margin by operating area $ 830 20.67 $ 295 7.23
Successor Predecessor Non-GAAP Combined Predecessor
Period from February 10, 2021 Period from
through January 1, 2021 through Nine Months Ended Nine Months Ended September 30,
September 30, 2021 February 9, 2021 September 30, 2021 2020
$/Boe $/Boe $/Boe $/Boe
Appalachia $ 539 10.76 $ 80 9.75 $ 619 10.63 $ 200 4.23
Gulf Coast 295 13.75 36 10.03 331 13.21 62 2.46
South Texas 442 27.53 60 19.42 502 26.22 209 8.36
Brazos Valley 377 44.79 54 32.47 431 42.72 273 18.76
Powder River Basin 121 23.23 16 15.47 137 22.02 41 5.68
Mid-Continent - - - - - - (3) (1.16)
Gross margin by operating
area $ 1,774 17.43 $ 246 14.02 $ 2,020 17.01 $ 782 6.37
Oil and Natural Gas Derivatives
Successor Predecessor
Three Months
Ended
September 30, Three Months Ended
2021 September 30, 2020
Oil derivatives - realized gains (losses) $ (128) $ 2
Oil derivatives - unrealized gains (losses) 62 (4)
Total losses on oil derivatives (66) (2)
Natural gas derivatives - realized gains (losses) (163) 5
Natural gas derivatives - unrealized losses (681) (164)
Total losses on natural gas derivatives (844) (159)
Total losses on oil and natural gas derivatives $ (910) $ (161)
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Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September February 9, September 30,
30, 2021 2021 2020
Oil derivatives - realized gains (losses) $ (302) $ (19) $ 698
Oil derivatives - unrealized losses (138) (190) (9)
Total gains (losses) on oil derivatives (440) (209) 689
Natural gas derivatives - realized gains (losses) (179) 6 179
Natural gas derivatives - unrealized losses (985) (179) (295)
Total losses on natural gas derivatives (1,164) (173) (116)
Total gains (losses) on oil and natural gas
derivatives $ (1,604)
See Note 12 of the notes to our condensed consolidated financial statements
included in Item 1 of Part I of this report for a discussion of our derivative
activity.
Marketing Revenues and Expenses
Successor Predecessor
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
Marketing revenues $ 627 $ 448
Marketing expenses 625 450
Marketing margin $ 2 $ (2)
Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Marketing revenues $ 1,443 $ 239 $ 1,412
Marketing expenses 1,440 237 1,438
Marketing margin $ 3 $ 2 $ (26)
Marketing margin increased in the 2021 Successor Quarter primarily due to
increased profit on third-party marketing as a result of improved pricing.
Marketing margin increased in the 2021 Successor Period primarily due to the
significant drop in oil prices during the 2020 Predecessor Period that resulted
in an unfavorable inventory valuation adjustment.
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Exploration Expense
Successor Predecessor
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
Impairments of unproved properties $ 1 $ 3
Geological and geophysical expense and other 1 2
Total exploration expense $ 2 $ 5
Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Impairments of unproved properties $ 1 $ 2 $ 402
Dry hole expense - - 7
Geological and geophysical expense and other 3 - 8
Total exploration expense $ 4 $ 2 $ 417 The 2020 Predecessor Period exploration expense is the result of non-cash
impairment charges in unproved properties, primarily in our
of
the notes to our condensed consolidated financial statements included in Item 1
of Part I of this report for further discussion.
General and Administrative Expenses
Successor Predecessor
Three Months
Ended
September 30, Three Months Ended
2021 September 30, 2020
Gross compensation and benefits $ 68 $ 93
Non-labor 24 29
Allocations and reimbursements (62) (70)
Total general and administrative expenses, net $ 30 $ 52
General and administrative expenses, net per Boe $ 0.74 $ 1.27
Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Gross compensation and benefits $ 162 $ 32 $ 305
Non-labor 60 12 167
Allocations and reimbursements (153) (23) (243)
Total general and administrative expenses, net $ 69 General and administrative expenses, net per Boe$ 0.68
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Compensation and benefits before reimbursements and allocations during the 2021
Successor Quarter decreased $25 million compared to the 2020 Predecessor Quarter
due to reductions in workforce in the 2020 and 2021 Predecessor Periods.
Non-labor before reimbursements and allocations during the 2021 Successor
Quarter decreased $5 million compared to the 2020 Predecessor Quarter primarily
due to cost reduction initiatives for professional services. The decrease in
allocations and reimbursements was the result of staffing reductions and the
sale of Mid-Continent properties in 2020.
Compensation and benefits before reimbursements and allocations during the
combined 2021 Successor and Predecessor Periods decreased $111 million compared
to the 2020 Predecessor Period due to reductions in workforce in the 2020 and
2021 Predecessor Periods. Non-labor before reimbursements and allocations during
the combined 2021 Successor and Predecessor Periods decreased $95 million
compared to the 2020 Predecessor Period due to cost reduction initiatives for
professional services as well as $43 million in fees for legal, financial and
restructuring advisors incurred in preparation for the Chapter 11 Cases in the
2020 Predecessor Period. The decrease in allocations and reimbursements during
the combined 2021 Successor and Predecessor Periods compared to the 2020
Predecessor Period was the result of reduced drilling, staffing reductions and
the sale of Mid-Continent properties in 2020.
Separation and Other Termination Costs
Successor Predecessor
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
Separation and other termination costs $ - $ 16
Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Separation and other termination costs $ 11
Separation and other termination costs relate to one-time termination benefits
for certain employees.
Depreciation, Depletion and Amortization
Successor Predecessor
Three Months
Ended
September 30, Three Months Ended
2021 September 30, 2020
Depreciation, depletion and amortization $ 228 $ 170
Depreciation, depletion and amortization per Boe $ 5.67 $ 4.17
Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Depreciation, depletion and amortization $ 579 $ 72 $ 931
Depreciation, depletion and amortization per Boe $ 5.72 The absolute and per unit increase in depreciation, depletion and amortization for the 2021Successor Quarter compared to the 2020Predecessor Quarter was primarily the result of the revaluation of the depletable asset base occurring in connection with our emergence from bankruptcy. Fresh start accounting requires that new fair values be established for our assets as of the emergence date. See Note 3 for additional information on revaluation of oil and gas properties. 62
-------------------------------------------------------------------------------- Table of Contents The per unit decrease in the 2021 Predecessor Period compared to the 2020 Predecessor Period was attributable to an$8.4 billion impairment to the Predecessor's proved oil and natural gas properties recognized atMarch 31, 2020 . Impairments Successor Predecessor Period from Period from February 10, January 1, Nine Months 2021 through 2021 through Ended September 30, February 9, September 30, 2021 2021 2020 Impairments of proved oil and natural gas properties $ - $ -$ 8,446 Impairments of other fixed assets and other 1 - 76 Total impairments$ 1 $ -$ 8,522 In the 2020 Predecessor Period, we recorded impairments of proved oil and natural gas properties related toSouth Texas ,Brazos Valley ,Powder River Basin , Mid-Continent and other non-core assets, all of which were due to lower forecasted commodity prices. Additionally, in the 2020 Predecessor Period, 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 14 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion. Other Operating Expense (Income), Net Successor Predecessor Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 Other operating expense, net $ 3 $ 1 Successor Predecessor Period from Period from February 10, January 1, Nine Months 2021 through 2021 through Ended September 30, February 9, September 30, 2021 2021 2020 Other operating expense (income), net$ 1
In the 2020 Predecessor Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring$80 million expense related to the contract terminations as well as$29 million of other operating expense primarily related to royalty settlements offset by$42 million of income from the amortization of volumetric production payment deferred revenue. Interest Expense Successor Predecessor Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 Interest expense on debt $ 19 $ 25 Amortization of premium, discount, issuance costs and other 1 2 Capitalized interest (3) (2) Total interest expense $ 17 $ 25 63
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Successor Predecessor
Period from Period from
February 10, January 1, Nine Months
2021 through 2021 through Ended
September 30, February 9, September 30,
2021 2021 2020
Interest expense on debt $ 50 $ 11 $ 377
Amortization of premium, discount, issuance costs
and other 4 - (57)
Capitalized interest (7) - (13)
Total interest expense $ 47 $ 11 $ 307
The decrease in total interest expense in the 2021 Successor Quarter and 2021
Successor Period compared to the 2020 Predecessor Quarter and 2020 Predecessor
Period resulted from the decrease in outstanding debt obligations between
periods. Upon emergence from the Chapter 11 Cases, all outstanding obligations
under our Predecessor senior notes and term loan were cancelled in exchange for
shares of New Common Stock and Warrants. See Note 3 and Note 5 of the
notes to our condensed consolidated financial statements included in Item 1 of
Part I of this report for a discussion of the Chapter 11 Cases.
Gains on Purchases or Exchanges of Debt
In the 2020 Predecessor Period, we repurchased approximately $160 million
aggregate principal amount of senior notes for $95 million and recorded an
aggregate gain of approximately $65 million .
Other Income (Expense)
Successor Predecessor
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
Other income $ - $ 2
Successor Predecessor
Period from Period from
February 10, January 1, 2021 Nine Months
2021 through through Ended
September 30, February 9, September 30,
2021 2021 2020
Other income (expense) $ 31 $ 2 $ (9)
In the 2021 Successor Period, we recorded a gain of $22 million for a refund
from a midstream provider.
Reorganization Items, Net
Successor Predecessor
Three Months
Ended
September 30, Three Months Ended
2021 September 30, 2020
Accrual for allowed claims $ - $ (465)
Debt and equity financing fees - (115)
Professional service provider fees and other - (40)
Gains on the settlement of liabilities subject to compromise - 9
Total reorganization items, net $ - $ (611)
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Successor Predecessor
Period from Period from
February 10, January 1, 2021 Nine Months
2021 through through Ended
September 30, February 9, September 30,
2021 2021 2020
Gains on the settlement of liabilities subject to
compromise $ - $ 6,443 $ 9
Accrual for allowed claims - (1,002) (465)
Write off of unamortized debt premiums (discounts) on Predecessor debt
- - 518
Write off of unamortized debt issuance costs on
Predecessor debt - - (61)
Gain on fresh start adjustments - 201 -
Gain from release of commitment liabilities - 55 -
Debt and equity financing fees - - (178)
Professional service provider fees and other - (60) (40)
Success fees for professional service providers - (38) -
Surrender of other receivable - (18) -
FLLO alternative transaction fee - (12) -
Total reorganization items, net $ - In the 2021 and 2020 Predecessor Periods, we recorded a net gain of$5.569 billion and a net loss of$217 million , respectively, in reorganization items, net related to the Chapter 11 Cases. See Note 2 and Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the Chapter 11 Cases and for discussion of adoption of fresh start accounting. Income Taxes An income tax benefit of$10 million was recorded for the 2021 Successor Period as a result of projecting current state income taxes. Although we are projecting a current state tax liability, a benefit has been recorded in the 2021 Successor Period due to the application of our estimated annual effective tax rate to the 2021 Successor Period book net loss before income taxes. An income tax benefit of$57 million was recorded for the 2021 Predecessor Period and an income tax benefit of$13 million was recorded for the 2020 Predecessor Period. Our effective income tax rate was 2.0% for the 2021 Successor Period, (1.1%) for the 2021 Predecessor Period and 0.1% for the 2020 Predecessor Period. Our effective tax rate can fluctuate as a result of the impact of discrete items, state income taxes and permanent differences. See Note 9 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. 65 -------------------------------------------------------------------------------- Table of Contents 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 Plan restructuring on our operations, management, and employees, actions by, or disputes among or between, members of OPEC+ and other foreign oil-exporting countries, market factors, market prices, our ability to meet debt service requirements, our ability to continue to pay cash dividends, and the amount and timing of any cash dividends, and our ESG initiatives. 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: •the ability to execute on our business strategy following emergence from bankruptcy; •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 andU.S. and world financial markets; •risks related to the Vine Acquisition, including our ability to successfully integrate the business of Vine into the Company and achieve the expected synergies from the Vine Acquisition within the expected timeframe; •our ability to comply with the covenants under our Exit Credit Facility and other indebtedness; •our ability to realize anticipated cash cost reductions; •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 fund cash dividends, finance reserve replacement costs or satisfy our debt obligations; •adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims; •legislative, regulatory and ESG initiatives, including as a result of the change in theU.S. presidential administration, 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 purchase price adjustments and indemnity obligations; and •other factors that are described under Risk Factors in Item 1A of our 2020 Form 10-K and Risk Factors in Item 1A of Part II of this report. 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 66 -------------------------------------------------------------------------------- Table of Contents 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 . 67
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