Press Releases
Chesapeake Energy Corporation
Current production from the acquired properties is approximately 35 million cubic feet of natural gas equivalent production (mmcfe) per day and the proved reserves have a reserves-to-production index of 10.6 years, are 99% natural gas and are 75% proved developed. Initial lease operating expenses on the acquired properties are expected to average $0.45 per thousand cubic feet of gas equivalent (mcfe), compared to $0.54 per mcfe for Chesapeake during 2002 and approximately $0.70 per mcfe for the company's peer group during 2002.
The Oxley acquisition closed on May 30, 2003 and the other transactions have closed in recent months or will close before July 31, 2003. The company intends to finance the acquisitions using cash on hand and short-term borrowings from its $350 million bank credit facility.
Background Information on Oxley Petroleum Company
Oxley Petroleum was founded in Tulsa in 1962 by John C. Oxley and has been managed in recent years by Stephen M. "Mike" Oxley. Over the past 41 years, the Oxley family built one of the premier privately-owned natural gas companies in Oklahoma. Oxley's primary focus was the Arkoma Basin, a prolific gas-producing region located in eastern Oklahoma and western Arkansas where Chesapeake already owns approximately 250 bcfe of estimated proved reserves and produces approximately 50 mmcfe per day. Of the properties being acquired, 82% are located in townships in which Chesapeake owns existing interests. Chesapeake believes its consolidation of assets in these townships will create numerous operational efficiencies and enhanced drilling opportunities.
The majority of the other acquired assets are located in the Greater Mayfield area of Beckham County in western Oklahoma, where Chesapeake is very active. In Greater Mayfield, Chesapeake is currently drilling seven deep Springer wells to an average depth of 20,000 feet. Greater Mayfield is Chesapeake's most important exploratory area and in 2003 the company expects to spend approximately 10% of its projected $600 million capital expenditure budget further exploring and developing this area.
Chesapeake Benefits from Increasing Mid-Continent Scale
Chesapeake remains focused on continuing to build an unprecedented scale of operations in the prolific natural gas fields of the Anadarko and Arkoma basins in the Mid-Continent. During the past five years, the company has actively consolidated ownership in key Mid-Continent gas fields through acquisitions of long-lived gas reserves owned by AnSon, Hugoton, DLB, Enervest, OXY, Barrett, Apache, Gothic, Staghorn, Questar, Sapient, Ram, Canaan, Focus, EnCana, Priam, Williams, OG&E, ONEOK, Vintage, El Paso and now Oxley. Through these and other acquisitions since 1998, Chesapeake has acquired 2.5 trillion cubic feet of gas equivalent proved reserves (tcfe) at an average cost of $1.14 per mcfe.
Through this consolidation effort, Chesapeake has emerged as Oklahoma's largest natural gas producer, with an estimated 2003 gas production market share of 16%. In addition, the company is the operator of or a participant in approximately 50% of the 125 wells currently being drilled in Oklahoma, providing the company with unequalled access to current geological information across the state. Chesapeake believes this knowledge provides it with unique competitive advantages in executing its business strategy.
Chesapeake Increases 2003 Production Guidance, Provides Initial 2004
Production Guidance and Announces Significant Increases
in its Natural Gas and Oil Hedging Positions
Chesapeake is increasing its 2003 production forecast by 6% from a range of 240-245 bcfe to a range of 255-260 bcfe to reflect the transactions announced today and the success of the company's exploration drilling program. In April 2003, Chesapeake estimated that its daily production during the second quarter of 2003 would average 675 mmcfe per day. The company now estimates that its second quarter production will average more than 710 mmcfe per day. Of the 35 mmcfe per day estimated increase, 20% is attributable to the Oxley transaction (which contributed 20 mmcfe per day to the last month of the quarter, for an average for the quarter of 7 mmcfe per day) and 80% is attributable to better than forecasted drilling results.
Furthermore, Chesapeake now expects its second half of 2003 production to exceed 740 mmcfe per day, an increase of 65 mmcfe per day over April's forecast of 675 mmcfe per day. Of this increase, 50% is attributable to the transactions announced today and 50% is attributable to better than forecasted drilling results. In addition, Chesapeake's initial production forecast for 2004 is 275-280 bcfe, or 760 mmcfe per day at the mid-point of this range.
During the past six weeks, Chesapeake has added substantial natural gas and oil hedges to the hedging positions it had previously announced in April 2003. Currently, the company has hedged the following amounts of its estimated 2003 - 2007 oil and natural gas production:
Oil Natural Gas Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX 2Q 2003 71% $28.12 40% $5.10 3Q 2003 83% $28.07 53% $5.49 4Q 2003 83% $28.07 49% $5.73 Remaining 2003 79% $28.08 47% $5.47 2004 9% $27.30 12% $5.87 2005 --- --- 3% $4.99 2006 --- --- 3% $4.84 2007 --- --- 3% $4.84
Depending on changes in oil and natural gas futures markets and underlying supply and demand trends, the company may either increase or decrease its hedging positions in the future.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's announcements provide further evidence of our ongoing commitment to creating industry-leading shareholder value through a sharp strategic focus on further consolidation of high-quality Mid-Continent gas assets, timely hedging decisions and successful Mid-Continent deep gas exploration. Today's announced acquisitions fit perfectly with our existing Mid-Continent assets and with Chesapeake's business strategy of creating value by delivering profitable organic growth from our unique deep gas exploration program and by acquiring and developing low-cost, long-lived, under-exploited natural gas assets in the Mid-Continent region.
"Today's announced transactions and Chesapeake's highly successful drilling results during the second quarter should increase our company's estimated proved reserves at June 30, 2003 to approximately 3.0 tcfe. Based on the results achieved from our previous acquisitions in the Mid-Continent, we expect to substantially increase the value of these newly acquired properties through additional drilling and by reducing administrative and operating costs. We are especially excited about enhancing our Arkoma Basin position and increasing our already strong position in the Greater Mayfield area of the Anadarko Basin, where our recent drillbit performance has been exceptional.
"In addition, our increased oil and natural gas hedging positions should further strengthen the company's financial performance in the quarters ahead. For some time now, our company had been predicting that natural gas prices would sharply increase this summer. We have already successfully taken advantage of higher gas prices early this summer to lock-in very attractive financial returns for our shareholders on a significant portion of our production. We will be on the lookout for additional attractive hedging opportunities later this summer and fall."
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include estimates and give our current expectations or forecasts of future events. They are based on our historical operating trends, our existing commodity hedging position and our current estimate of proved reserves. Although we believe our forward-looking statements are reasonable, they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. For example, statements concerning the fair values of derivative contracts and their estimated contribution to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility. Factors that could cause actual operating and financial results to differ materially from expected results include the volatility of oil and gas prices, our substantial indebtedness, our commodity price risk management activities, the cost and availability of drilling and production services, our ability to replace reserves, the availability of capital, uncertainties inherent in evaluating our own reserves and the reserves we acquire, drilling and operating risks and other risk factors described in the company's 2002 annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.
Chesapeake Energy Corporation is one of the eight largest independent natural gas producers in the U.S. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and producing property acquisitions in the Mid-Continent region of the United States. The company's Internet address is www.chkenergy.com .
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK
As of June 24, 2003
Quarter Ending June 30, 2003; Year Ending December 31, 2003; Year Ending December 31, 2004.
We have adopted a policy of periodically providing investors with guidance on certain factors that affect our future financial performance. As of June 24, 2003, we are using the following key operating assumptions in our projections for the second quarter of 2003, full year 2003, and full year 2004.
The primary changes from our April 28, 2003 guidance are explained as follows:
1) We have updated the projected effects from changes in our hedging
positions.
2) We have included our expectations for future NYMEX oil and gas prices
to illustrate hedging effects only, they are not a forecast of our
expectations for 2003 oil and natural gas prices.
3) We have increased our projected oil and natural gas production for
the second quarter 2003 and full year 2003.
4) We have included 2004 projections for the first time.
Quarter Ending Year Ending Year Ending
June 30, Dec. 31, Dec. 31,
2003 2003 2004
Estimated Production
Oil - Mbo 1,150 4,500 4,500
Gas - Bcf 57 - 58 228 - 233 248 - 253
Gas Equivalent - Bcfe 64 - 65 255 - 260 275 - 280
Daily gas equivalent
midpoint - in Mmcfe 710 705 760
NYMEX Prices (for
calculation of
hedging effects only)
Oil - $/Bo $27.40 $27.82 $24.00
Gas - $/Mcf $5.40 $5.81 $4.50
Estimated Corporate
Differentials to NYMEX
Prices
Oil - $/Bo -$2.00 -$1.92 -$2.00
Gas - $/Mcf -$0.50 - $0.60 -$0.50 - $0.60 -$0.50 - $0.60
Estimated Hedging
Effects (based on
expected NYMEX
prices above)
Oil - $/Bo +$0.50 +$0.03 +$0.29
Gas - $/Mcf +$0.06 -$0.25 +$0.18
Operating Costs
per Mcfe
Production expense $0.53 - 0.57 $0.53 - 0.57 $0.57 - $0.60
Production taxes
(generally 7% of
O&G revenues) $0.31 - 0.33 $0.31 - 0.33 $0.27 - $0.30
General and
administrative $0.09 - 0.10 $0.09 - 0.10 $0.09 - $0.10
DD&A - oil and gas $1.32 - 1.37 $1.32 - 1.37 $1.37 - $1.42
Depreciation of
other assets $0.08 - 0.10 $0.08 - 0.10 $0.08 - $0.10
Interest expense $0.60 - 0.65 $0.60 - 0.65 $0.55 - $0.60
Other Income and Expense
per Mcfe (A)
Marketing and Other
income $0.02 - 0.04 $0.02 - 0.04 $0.02 - $0.04
Book Tax Rate -
All Deferred 38% 38% 38%
Equivalent Shares
Outstanding
Basic 215,000 m 212,000 m 216,000
Diluted 262,000 m 255,000 m 264,000
Capital Expenditures:
Drilling, Land
and Seismic $150 - $155 mm $600 - $650 mm $600 mm
(A) Does not include non-cash risk management income or loss (SFAS 133)
or the cumulative effect of the adoption of SFAS 143.
Commodity Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas production. These strategies include:
(i) swap arrangements that establish an index-related price above which
the Company pays the counterparty and below which the Company is
paid by the counterparty,
(ii) the purchase of index-related puts that provide for a "floor" price
below which the counterparty pays the Company the amount by which
the price of the commodity is below the contracted floor,
(iii) the sale of index-related calls that provide for a "ceiling" price
above which the Company pays the counterparty the amount by which
the price of the commodity is above the contracted ceiling,
(iv) basis protection swaps, which are arrangements that guarantee the
price differential of oil or gas from a specified delivery point or
points, and
(v) collar arrangements that establish an index-related price below
which the counterparty pays the Company and a separate index-related
price above which the Company pays the counterparty.
Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the Company may elect to settle a hedging transaction prior to its scheduled maturity date and, as a result, realize a gain or loss on the transaction.
Results from commodity hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company only enters into commodity hedging transactions related to the Company's oil and gas production volumes or Chesapeake Energy Marketing, Inc.'s physical purchase or sale commitments. Gains or losses on crude oil and natural gas hedging transactions are recognized as price adjustments in the months of related production.
The Company has entered into the following natural gas hedging arrangements:
% Hedged
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions
Strike Gain Including Assuming as a % of
Open Price from Open and Gas Estimated
Swaps Of Open Closed Closed Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
2003:
2nd Qtr 23.0 $4.92 $0.18 $5.10 57.5 40%
3rd Qtr 32.2 $5.46 $0.03 $5.49 61.0 53%
4th Qtr 30.1 $5.67 $0.06 $5.73 61.6 49%
Remaining 2003 85.3 $5.39 $0.08 $5.47 180.1 47%
% Hedged
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions
Strike Gain Including Assuming as a % of
Open Price from Open and Gas Estimated
Swaps Of Open Closed Closed Production Total Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
2004:
1st Qtr 16.4 $6.34 $0.05 $6.39 62.0 26%
2nd Qtr 7.6 $5.22 $0.00 $5.22 62.3 12%
3rd Qtr 2.8 $5.11 $0.00 $5.11 62.7 4%
4th Qtr 2.8 $5.29 $0.00 $5.29 63.0 4%
Total 2004 29.6 $5.84 $0.03 $5.87 250.0 12%
Total 2005 7.3 $4.99 $0.00 $4.99 260.0 3%
Total 2006 7.3 $4.84 $0.00 $4.84 270.0 3%
Total 2007 7.3 $4.84 $0.00 $4.84 280.0 3%
Chesapeake has also entered into the following natural gas basis hedging arrangements:
Assuming Gas
Annual Production
Volume in Bcf's NYMEX less: in Bcf's of: % Hedged
2003 Remaining 120.0 $0.188 180.1 67%
2004 157.4 0.173 250.0 63%
2005 109.5 0.156 260.0 42%
2006 47.5 0.155 270.0 18%
2007 63.9 0.166 280.0 23%
2008 64.0 0.166 290.0 22%
2009 37.0 0.160 300.0 12%
599.3 $0.169* 1,830.1 33%
* weighted average
The Company has entered into the following crude oil hedging arrangements:
% Hedged
Open Swap
Positions
Avg. Assuming as % of
Open NYMEX Oil Total
Swaps in Strike Production Estimated
Mmbo's Price in Mmbo's of: Production
Q2 - 2003* 819 $28.12 1,150 71%
Q3 - 2003* 948 $28.07 1,145 83%
Q4 - 2003* 948 $28.07 1,145 83%
Remaining 2003 2,715 $28.08 3,440 79%
Q1 - 2004* 240 $27.30 1,125 21%
Q2 - 2004* 160 $27.30 1,125 14%
Q3 - 2004* 0 $0.00 1,125 0%
Q4 - 2004* 0 $0.00 1,125 0%
Total 2004 400 $27.30 4,500 9%
*Swaps with a knockout provision for days in which NYMEX closes below $21.00.
SCHEDULE "B"
CHESAPEAKE'S OUTLOOK
As of April 28, 2003
Quarter Ending June 30, 2003; Year Ending December 31, 2003.
We have adopted a policy of periodically providing investors with guidance on certain factors that affect our future financial performance. As of April 28, 2003, we are using the following key operating assumptions in our projections for the second quarter of 2003 and full year 2003.
The primary changes from our April 9, 2003 guidance are explained as follows:
(1) We have updated the projected effects from changes in our hedging
positions.
(2) We have included our expectations for future NYMEX oil and gas prices
to illustrate hedging effects only, they are not a forecast of our
expectations for 2003 oil and natural gas prices.
(3) We have increased our projected production for the remainder of 2003.
Quarter Ending Year Ending
June 30, 2003 December 31, 2003
Estimated Production
Oil - Mbo 950 - 1,000 3,600 - 3,700
Gas - Bcf 55 - 56 218 - 223
Gas Equivalent - Bcfe 61 - 62 240 - 245
NYMEX Prices (for calculation of
hedging effects only)
Oil - $/Bo $25.33 $26.80
Gas - $/Mcf $5.05 $5.41
Estimated Corporate Differentials
to NYMEX Prices
Oil - $/Bo -$2.00 -$1.92
Gas - $/Mcf -$0.50 - $0.60 -$0.50 - $0.60
Estimated Hedging Effects (based
on expected NYMEX prices above)
Oil - $/Bo +$2.39 +$0.70
Gas - $/Mcf +$0.21 -$0.23
Operating Costs per Mcfe
Production expense $0.53 - 0.57 $0.53 - 0.57
Production taxes (generally 7%
of O&G revenues) $0.31 - 0.33 $0.31 - 0.33
General and administrative $0.09 - 0.10 $0.09 - 0.10
DD&A - oil and gas $1.32 - 1.37 $1.32 - 1.37
Depreciation of other assets $0.08 - 0.10 $0.08 - 0.10
Interest expense $0.65 - 0.70 $0.65 - 0.70
Other Income and Expense per Mcfe (A)
Marketing and Other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate - All Deferred 38% 38%
Equivalent Shares Outstanding
Basic 215,000 m 212,000 m
Diluted 262,000 m 255,000 m
Capital Expenditures:
Drilling, Land and Seismic $150 - $155 mm $575 - $600 mm
(B) Does not include non-cash risk management income or loss (SFAS 133) or
the cumulative effect of the adoption of SFAS 143.
Commodity Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas production. These strategies include:
(i) swap arrangements that establish an index-related price above which
the Company pays the counterparty and below which the Company is
paid by the counterparty,
(ii) the purchase of index-related puts that provide for a "floor" price
below which the counterparty pays the Company the amount by which
the price of the commodity is below the contracted floor,
(iii) the sale of index-related calls that provide for a "ceiling" price
above which the Company pays the counterparty the amount by which
the price of the commodity is above the contracted ceiling,
(iv) basis protection swaps, which are arrangements that guarantee the
price differential of oil or gas from a specified delivery point or
points,
(v) collar arrangements that establish an index-related price below
which the counterparty pays the Company and a separate index-related
price above which the Company pays the counterparty, and
Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the Company may elect to settle a hedging transaction prior to its scheduled maturity date and, as a result, realize a gain or loss on the transaction.
Results from commodity hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company only enters into commodity hedging transactions related to the Company's oil and gas production volumes or Chesapeake Energy Marketing, Inc.'s physical purchase or sale commitments. Gains or losses on crude oil and natural gas hedging transactions are recognized as price adjustments in the months of related production.
The Company has entered into the following natural gas hedging arrangements:
% Hedged
Avg. Avg. NYMEX Open Swap
NYMEX Price Positions as
Strike Including Assuming a % of
Open Price Gain from Open and Gas Total
Swaps Of Open Closed Closed Production Gas
in Bcf's Swaps Swaps Positions in Bcf's of: Production
2003:
2nd Qtr 21.6 $4.81 $0.20 $5.01 55.0 39%
3rd Qtr 16.6 $4.68 $0.11 $4.79 57.0 29%
4th Qtr 14.4 $4.85 $0.17 $5.02 58.0 25%
Remaining
2003 52.5 $4.78 $0.16 $4.94 170.0 31%
2004:
1st Qtr 0.6 $5.68 $1.33 $7.01 59.0 1%
The Company has entered into the following natural gas basis hedging arrangements:
Annual Assuming Gas
Volume (mmcf) NYMEX less: Production of: % Hedged
2003 Remaining 107.8 0.188
2003 Total 143.3 0.182 220.0 65%
2004 157.4 0.173 223.0 71%
2005 109.5 0.156 223.0 49%
2006 47.5 0.155 223.0 21%
2007 63.9 0.166 223.0 29%
2008 64.1 0.166 223.0 29%
2009 35.5 0.160 223.0 16%
622.0 0.169*
* weighted average
The Company has entered into the following crude oil hedging arrangements:
% Hedged
Open
Swap
Assuming Positions
Avg. Oil as %
Open NYMEX Production of Total
Swaps in Strike in Mmbo's Estimated
Mbo's Price of: Production
Q2 - 2003* 819 28.12 860 95%
Q3 - 2003* 828 28.12 865 96%
Q4 - 2003* 828 28.12 865 96%
Remaining 2003 2,475 28.12 2,590 96%
* Swaps with a knockout provision for days in which NYMEX closes below
$21.00.
SOURCE: Chesapeake Energy Corporation
CONTACT: Marc Rowland, Executive Vice President and Chief Financial
Officer, +1-405-879-9232, or Tom Price, Jr., Senior Vice President Investor
Relations, +1-405-879-9257, both of Chesapeake Energy Corporation
Web site: http://www.chkenergy.com/
Company News On-Call: http://www.prnewswire.com/comp/138877.html
