Press Releases
Chesapeake Energy Corporation
Through this transaction, Chesapeake anticipates acquiring an internally estimated 214 billion cubic feet of gas equivalent proved reserves (bcfe), 51 bcfe of probable and possible reserves and production of 45 million cubic feet of natural gas equivalent production (mmcfe) per day. Pro forma for this acquisition, Chesapeake's proved oil and natural gas reserves will be approximately 3.8 trillion cubic feet of natural gas equivalent (tcfe) and its projected June 2004 production will exceed 950 million cubic feet of natural gas equivalent per day. The company plans to increase production from the Greystone properties by approximately 50% to 65-70 mmcfe per day through a 2-4 rig drilling program during the next 12-18 months. Chesapeake has identified approximately 70 proved undeveloped and 75 probable and possible locations on the acreage.
After allocating approximately $65 million of the purchase price to unevaluated leasehold and mid-stream gas assets, Chesapeake's acquisition cost per thousand cubic feet of gas equivalent (mcfe) of proved reserves will be $1.68. Including anticipated future drilling costs for fully developing the proved, probable and possible reserves, the company estimates that its all-in acquisition cost for the 265 bcfe of estimated reserves will be $1.94 per mcfe. The proved reserves have a reserves-to-production index of 13.0 years, are 98% gas, are 93% operated, are 55% proved developed and have current lease operating expenses of $0.39 per mcfe. Greystone's very low lease operating expenses (approximately $0.35 per mcfe below the industry average) create unusually high economic value per mcfe of proved reserves.
The acquisition is expected to close on June 2, 2004 and is subject to customary closing conditions. The company intends to finance the acquisition using a combination of proceeds from a new private issue of senior notes, borrowings from the company's newly expanded $500 million bank credit facility and cash on hand.
Greystone was formed in 1995 by Joe M. Bridges and Michael A. Geffert who later were joined as equity holders by the private equity firm First Reserve Corporation to help fund Greystone's acquisition of interests in the Sligo Field in 2002. Greystone was advised in the sale to Chesapeake by Simmons & Company International and Griffis & Associates, LLC. Chesapeake was advised by Randall & Dewey.
Chesapeake Increases 2004 Production Guidance and Announces New
Hedges for the Natural Gas Production Being Acquired
Chesapeake is today increasing its 2004 production forecast by 11.0 bcfe (3.3%) to a range of 341-347 bcfe (940 mmcfe per day at the mid-point) from a range of 330-336 (910 mmcfe per day at the mid-point). Approximately 9.7 bcfe of this 11.0 bcfe increase is attributable to the anticipated production from the Greystone transaction while 1.3 bcfe is attributable to anticipated higher production from better than expected recent drilling results.
Chesapeake has recently hedged the current daily natural gas production of 45 mmcf from the new acquisition at the attractive price of $6.25 per mcf for June 2004 through June 2005. The following tables compare Chesapeake's projected 2004-2007 oil and natural gas production volumes that have been hedged as of May 11, 2004 to what had been previously hedged as of April 26, 2004:
Hedged Positions as of May 11, 2004
Oil Natural Gas
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
2004 1Q 87% $28.58 99% $5.97
2004 2Q 100% $30.00 81% $5.11
2004 3Q 96% $30.32 73% $5.28
2004 4Q 95% $30.10 48% $5.27
2004 Total 95% $29.80 74% $5.44
2005 9% $31.56 28% $5.12
2006 --- --- 10% $4.88
2007 --- --- 7% $4.76
Hedged Positions as of April 26, 2004
Oil Natural Gas
Quarter or Year % Hedged $ NYMEX % Hedged $ NYMEX
2004 1Q 87% $28.58 99% $5.97
2004 2Q 100% $30.00 75% $5.00
2004 3Q 96% $30.32 58% $4.94
2004 4Q 95% $30.10 47% $5.13
2004 Total 95% $29.80 69% $5.35
2005 9% $31.56 27% $5.03
2006 --- --- 10% $4.88
2007 --- --- 8% $4.76
Depending on changes in oil and natural gas futures markets and management's view of underlying oil and natural gas supply and demand trends, Chesapeake may either increase or decrease its hedging positions at any time in the future without notice.
Chesapeake's updated 2004 forecast is attached to this release in an Outlook dated May 11, 2004 labeled Schedule "A". This Outlook has been changed from the Outlook dated April 26, 2004 (attached as Schedule "B" for investors' convenience) to reflect the increased production forecast announced today and the projected effects from changes in our hedging positions.
Management Comments
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "Today's announcement provides additional confirmation that Chesapeake continues to leverage its successful and balanced strategies of growth through the drillbit and growth through acquisitions from the Mid-Continent region into new areas such as the Permian Basin, South Texas, Texas Gulf Coast and now the Ark-La-Tex region. Today's transaction is consistent with Chesapeake's growth strategy of creating value by delivering profitable organic growth from our developmental and exploratory drilling programs complemented by acquiring and developing attractively-valued and under- exploited natural gas assets.
In addition, we have locked-in highly accretive returns from today's acquisition by hedging 100% of the anticipated production for June 2004 through June 2005 at a price well above the assumed prices we used to evaluate the acquired properties. In addition, by financing this acquisition using cash on hand and low-cost debt, this transaction will be strongly accretive to our shareholders. In this time of strong natural gas prices, high gas price volatility and low interest rates, we believe Chesapeake can generate unusually attractive returns for its shareholders by acquiring under- exploited, long-lived, onshore natural gas properties and hedging the acquired production volumes during times of gas price strength. We believe our ongoing consolidation of high-quality natural gas properties, followed by opportunistic hedging, and combined with our value-added drilling expertise will continue to be a winning formula for our shareholders in the years ahead."
Conference Call Information
A conference call has been scheduled for this afternoon, Tuesday, May 11, 2004 at 5:00 p.m. EDT to discuss this acquisition. The telephone number to access the conference call is 913.981.5523. For those unable to participate in the conference call, a replay will be available from 9:00 p.m. EDT, May 11, 2004 through midnight EDT on Wednesday, May 26, 2004. The number to access the conference call replay is 719.457.0820 and the passcode is 437427. The conference call will also be simulcast live on the Internet and can be accessed at www.chkenergy.com by selecting "Conference Calls" under the "Investor Relations" section. The webcast of the conference call will be available on the website for one year.
This press release and the accompanying Outlooks include "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 give our current expectations or forecasts of future events. They include expectations regarding closing of the announced acquisitions, estimates of oil and gas reserves, expected oil and gas production and future expenses, projections of future oil and gas prices, planned capital expenditures and estimated costs for drilling, leasehold acquisitions and seismic data, and statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations. Disclosures concerning 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. Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results are described under "Risk Factors" in Item 1 of our 2003 Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission (SEC). They include the volatility of oil and gas prices; adverse effects our substantial indebtedness could have on our operations and future growth; our ability to compete effectively against strong independent oil and gas companies and majors; the cost and availability of drilling and production services; possible financial losses as a result of our commodity price and interest rate risk management activities; uncertainties inherent in estimating quantities of oil and gas reserves, including reserves we acquire, projecting future rates of production and the timing of development expenditures; exposure to potential liabilities of acquired properties; our ability to replace reserves; the availability of capital; changes in interest rates; and drilling and operating risks. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release, and we undertake no obligation to update this information.
The SEC has generally permitted oil and gas companies, in filings made with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We use the terms "probable" and "possible" reserves or other descriptions of volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC's guidelines may prohibit us from including in filings with the SEC. These estimates are by their nature more speculative than estimates of proved reserves and accordingly are subject to substantially greater risk of being actually realized by the company. We cannot assure you that we can recover our estimated volumes of oil and natural gas reserves.
The announcement of a proposed offering of senior notes in this press release shall not constitute an offer to sell or a solicitation of an offer to buy the senior notes. The terms of any such offering and the senior notes offered thereby have not been decided. The senior notes will not be registered under the Securities Act of 1933 or any state securities laws, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and state laws.
Chesapeake Energy Corporation is one of the six largest independent U.S. natural gas producers. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and producing property acquisitions in the Mid-Continent, Permian Basin, South Texas, Texas Gulf Coast and Ark-La-Tex regions of the United States. The company's Internet address is www.chkenergy.com .
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK
AS OF MAY 11, 2004
Quarter Ending June 30, 2004; 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 May 11, 2004, we are using the following key assumptions in our projections for the second quarter of 2004 and the full-year 2004.
The primary changes from our April 26, 2004 guidance are explained as follows:
1) We have increased our production forecast for the second quarter and
full-year 2004 because of the Greystone acquisition and better than
expected recent drilling results.
2) We have included the effects of financing the Greystone transaction
with $300 million of senior notes and $125 million of bank debt.
3) We have updated the projected effects from changes in our hedging
positions.
4) 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 2004 oil and natural gas prices.
Quarter Year
Ending Ending
June 30, December 31,
2004 2004
Estimated Production:
Oil - Mbo 1,540 6,185
Gas - Bcf 74 - 75 304 - 310
Gas Equivalent - Bcfe 83 - 84 341 - 347
Daily gas equivalent midpoint -
in Mmcfe 918 940
NYMEX Prices (for calculation of
realized hedging effects only):
Oil - $/Bo $30.87 $30.00
Gas - $/Mcf $5.35 $5.14
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.75 -$2.72
Gas - $/Mcf -$0.70 -$0.71
Estimated Realized Hedging Effects
(based on expected NYMEX prices above):
Oil - $/Bo -$0.71 +$0.05
Gas - $/Mcf -$0.06 +$0.33
Operating Costs per Mcfe of Projected
Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally 7%
of O&G revenues) $0.28 - 0.30 $0.28 - 0.32
General and administrative $0.10 - 0.11 $0.10 - 0.11
Stock based compensation (non-cash) $0.02 - 0.03 $0.02 - 0.03
DD&A - oil and gas $1.52 - 1.56 $1.52 - 1.60
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (A) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 36% 36%
Equivalent Shares Outstanding:
Basic 241 mm 247 mm
Diluted 304 mm 305 mm
Capital Expenditures:
Drilling, leasehold and seismic $200 - $225 mm $875 - $925 mm
(A) Does not include gains or losses on interest rate derivatives (SFAS
133).
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) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due
to or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside
exposure of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
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, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in order to mitigate a portion of its exposure to adverse market changes in oil and natural gas prices. Accordingly, associated gains or loses from the derivative transactions are reflected as adjustments to oil and gas sales. All realized gains and losses from oil and natural gas derivatives are included in oil and gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e. because of temporary fluctuations in value) are reported currently in the consolidated statement of operations as unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales.
The company currently has in place the following natural gas swaps:
% Hedged
Open Swap
Avg. NYMEX Assuming Positions
Avg. NYMEX Price Gas as a % of
Strike Price Including Open Produc- Estimated
Open Swaps Of Open Gain from & Locked tion in Total Gas
in Bcf's Swaps Locked Swaps Positions Bcf's of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 70.1 99%
2nd Qtr 60.4 $5.11 $0.00 $5.11 74.5 81%
3rd Qtr 58.4 $5.28 $0.00 $5.28 80.0 73%
4th Qtr 39.6 $5.27 $0.00 $5.27 82.4 48%
Total 2004 227.9 $5.43 $0.01 $5.44 307.0 74%
Total 2005 88.4 $5.12 $0.00 $5.12 320.0 28%
Total 2006 32.9 $4.88 $0.00 $4.88 330.0 10%
Total 2007 25.6 $4.76 $0.00 $4.76 340.0 7%
TOTALS
2004-2007 374.8 $5.26 $0.01 $5.27 1,297.0 29%
The company has also entered into the following natural gas basis protection swaps:
Assuming Gas
Annual Production
Volume in NYMEX in Bcf's
Bcf's less: of: % Hedged
2004 157.4 0.173 307.0 52 %
2005 109.5 0.156 320.0 34 %
2006 47.5 0.155 330.0 14 %
2007 63.9 0.166 340.0 19 %
2008 64.0 0.166 350.0 18 %
2009 37.0 0.160 360.0 10 %
Totals 479.3 $0.164* 2,007.0 24 %
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
Assuming Open Swap
Open Avg. Oil Positions as
Swaps in NYMEX Production % of Total
Mmbo's Strike in Mmbo's Estimated
Price of: Production
Q1 - 2004* 1,270 $28.58 1,465 87 %
Q2 - 2004* 1,540 $30.00 1,540 100 %
Q3 - 2004* 1,519 $30.32 1,590 96 %
Q4 - 2004* 1,518 $30.10 1,590 95 %
Total 2004* 5,847 $29.80 6,185 95 %
Total 2005* 548 $31.56 6,360 9 %
* Swaps with a knockout price of $21.00, with the exception of 2,000 bopd in 2004 with a knockout price of $24.00, with an additional 1,000 bopd in Q2 2004 at $24.00, 1,000 bopd in Q3 and Q4 2004 with a knockout price of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of $22.00, 3,000 bopd in 2/04 at a knockout price of $22.00 and 1,500 bopd from 4/04 through 12/05 at a knockout price of $26.00.
SCHEDULE "B"
CHESAPEAKE'S OUTLOOK AS OF APRIL 26, 2004
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 2004
Quarter Ending June 30, 2004; 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 April 26, 2004, we are using the following key assumptions in our projections for the second quarter of 2004 and the full-year 2004.
The primary changes from our March 23, 2004 guidance are explained as follows:
1) We have replaced our 2004 first quarter forecast with our initial
forecast for the 2004 second quarter.
2) We have updated the projected effects from changes in our hedging
positions.
3) We have included estimates of non-cash expense associated with the
issuance of restricted stock under stock-based compensation plans.
4) 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 2004 oil and natural gas prices.
Quarter Year
Ending Ending
June 30, 2004 December 31, 2004
Estimated Production:
Oil - Mbo 1,540 6,185
Gas - Bcf 73 - 74 293 - 299
Gas Equivalent - Bcfe 82 - 83 330 - 336
Daily gas equivalent midpoint
- in Mmcfe 907 910
NYMEX Prices (for calculation
of realized hedging effects only):
Oil - $/Bo $28.67 $29.45
Gas - $/Mcf $4.96 $5.04
Estimated Differentials to NYMEX Prices:
Oil - $/Bo -$2.75 -$2.72
Gas - $/Mcf -$0.70 -$0.71
Estimated Realized Hedging
Effects (based on expected
NYMEX prices above):
Oil - $/Bo $1.34 $0.57
Gas - $/Mcf $0.13 $0.28
Operating Costs per Mcfe of
Projected Production:
Production expense $0.55 - 0.60 $0.55 - 0.60
Production taxes (generally $0.28 - 0.30 $0.28 - 0.32
7% of O&G revenues)
General and administrative $0.10 - 0.11 $0.10 - 0.11
Stock based compensation (non-cash) $0.02 - 0.03 $0.02 - 0.03
DD&A - oil and gas $1.52 - 1.56 $1.52 - 1.60
Depreciation of other assets $0.07 - 0.09 $0.07 - 0.09
Interest expense (A) $0.49 - 0.53 $0.45 - 0.50
Other Income and Expense per Mcfe:
Marketing and other income $0.02 - 0.04 $0.02 - 0.04
Book Tax Rate 36 % 36 %
Equivalent Shares Outstanding:
Basic 241 mm 247 mm
Diluted 304 mm 305 mm
Capital Expenditures:
Drilling, leasehold and seismic $200 - $225 mm $850 - $900 mm
(A) Does not include gains or losses on interest rate derivatives
(SFAS 133).
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) For swap instruments, we receive a fixed price for the hedged
commodity and pay a floating market price, as defined in each
instrument, to the counterparty. The fixed-price payment and the
floating-price payment are netted, resulting in a net amount due to
or from the counterparty.
(ii) For cap-swaps, Chesapeake receives a fixed price and pays a
floating market price. The fixed price received by Chesapeake
includes a premium in exchange for a "cap" limiting the
counterparty's exposure. In other words, there is no limit to
Chesapeake's exposure but there is a limit to the downside exposure
of the counterparty.
(iii) Basis protection swaps are arrangements that guarantee a price
differential of oil or gas from a specified delivery point.
Chesapeake receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and
pays the counterparty if the price differential is less than the
stated terms of the contract.
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, lock in the gain or loss on the transaction.
Chesapeake enters into oil and natural gas derivative transactions in order to mitigate a portion of its exposure to adverse market changes in oil and natural gas prices. Accordingly, associated gains or losses from the derivative transactions are reflected as adjustments to oil and gas sales. All realized gains and losses from oil and natural gas derivatives are included in oil and gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e. because of temporary fluctuations in value) are reported currently in the consolidated statement of operations as unrealized gains (losses) within oil and gas sales.
Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales.
The company currently has in place the following natural gas swaps:
% Hedged
Avg. Avg. Open Swap
NYMEX NYMEX Price Positions
Strike Including Assuming Gas as a % of
Open Price Gain from Open & Production Estimated
Swaps Of Open Locked Locked in Total Gas
in Bcf's Swaps Swaps Positions Bcf's of: Production
2004:
1st Qtr 69.5 $5.94 $0.03 $5.97 70.1 99%
2nd Qtr 55.0 $5.00 $0.00 $5.00 73.5 75%
3rd Qtr 43.7 $4.94 $0.00 $4.94 75.0 58%
4th Qtr 35.4 $5.13 $0.00 $5.13 76.0 47%
Total 2004 203.6 $5.34 $0.01 $5.35 294.6 69%
Total 2005 81.2 $5.03 $0.00 $5.03 305.0 27%
Total 2006 32.9 $4.88 $0.00 $4.88 315.0 10%
Total 2007 25.6 $4.76 $0.00 $4.76 325.0 8%
TOTALS
2004-2007 343.3 $5.18 $0.01 $5.19 1,239.6 28%
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 2004
The company has also entered into the following natural gas basis protection swaps:
Assuming Gas
Annual Production in
Volume in Bcf's NYMEX less: Bcf's of: % Hedged
2004 157.4 0.173 294.6 53%
2005 109.5 0.156 305.0 36%
2006 47.5 0.155 315.0 15%
2007 63.9 0.166 325.0 20%
2008 64.0 0.166 335.0 19%
2009 37.0 0.160 345.0 11%
Totals 479.3 $0.164* 1,919.6 25%
* weighted average
The company has entered into the following crude oil hedging arrangements:
% Hedged
Assuming Open Swap
Oil Positions as
Production % of Total
Open Swaps Avg. NYMEX in Mmbo's Estimated
in Mmbo's Strike Price of: Production
Q1 - 2004* 1,270 $28.58 1,465 87%
Q2 - 2004* 1,540 $30.00 1,540 100%
Q3 - 2004* 1,519 $30.32 1,590 96%
Q4 - 2004* 1,518 $30.10 1,590 95%
Total 2004* 5,847 $29.80 6,185 95%
Total 2005* 548 $31.56 6,360 9%
*Swaps with a knockout price of $21.00, with the exception of 2,000 bopd in 2004 with a knockout price of $24.00, with an additional 1,000 bopd in Q2 2004 at $24.00, 1,000 bopd in Q3 and Q4 2004 with a knockout price of $23.00, 2,000 bopd for 1/04 and 3-8/04 at a knockout price of $22.00, 3,000 bopd in 2/04 at a knockout price of $22.00 and 1,500 bopd from 4/04 through 12/05 at a knockout price of $26.00.
NOW SUPERSEDED BY OUTLOOK AS OF MAY 11, 2004
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
