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TheStreet Open House

Chesapeake Energy Corporation Reports Financial And Operational Results For The 2012 Third Quarter

Stock quotes in this article: CHK

Management Comments

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, said, “We are pleased to report our liquids production continues its impressive growth, led by a 96% year-over-year and 21% sequential increase in our oil production. Three years ago when Chesapeake was producing only 33,000 bbls per day of liquids, we embarked on a strategy to transform our asset base from one focused almost exclusively on natural gas to one that would provide more balance between liquids and natural gas production and that would likely also lead to higher returns on capital. Our current liquids production now exceeds 140,000 bbls per day, even after excluding 21,000 bbls per day recently sold in the Permian transactions. We believe the company remains on target to reach our goal of 250,000 bbls per day of net liquids production in 2015.

“I am also pleased to see our 2012 third quarter adjusted ebitda and operating cash flow increase 27% and 25% sequentially, respectively. Improving natural gas market fundamentals, combined with our increasing liquids production, the completion of our 2012-13 asset sales program and our long-term debt reduction to below $9.5 billion, should enable Chesapeake to continue making significant financial progress in the 2012 fourth quarter and in 2013 as well.”

2012 Third Quarter Financial and Operational Results Conference Call Information

A conference call to discuss this release has been scheduled for Friday, November 2, 2012 at 9:00 am EDT. The telephone number to access the conference call is 913-312-0381 or toll-free 888-778-8907. The passcode for the call is 8299445. We encourage those who would like to participate in the call to place calls between 8:50 and 9:00 am EDT. For those unable to participate in the conference call, a replay will be available for audio playback at 1:00 pm EDT on Friday, November 2, 2012 and will run through midnight Friday, November 16, 2012. The number to access the conference call replay is 719-457-0820 or toll-free 888-203-1112. The passcode for the replay is 8299445. The conference call will also be webcast live on Chesapeake’s website at www.chk.com in the “Events” subsection of the “Investors” section of the company’s website. The webcast of the conference will be available on the company’s website for one year.

This news 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 are statements other than statements of historical fact that give our current expectations or forecasts of future events. They include estimates of natural gas and oil reserves, projected production, estimates of operating costs, planned development drilling and use of joint venture drilling carries, effects of anticipated asset sales, projected cash flow and liquidity, business strategy and other plans and objectives for future operations. Disclosures concerning the estimated contribution of derivative contracts to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this news release, and we undertake no obligation to update this information.

Factors that could cause actual results to differ materially from expected results are described under “Risk Factors” in Item 1A of our 2011 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 29, 2012. These risk factors include the volatility of natural gas and oil prices; the limitations our level of indebtedness may have on our financial flexibility; declines in the values of our natural gas and oil properties resulting in ceiling test write-downs; the availability of capital on an economic basis, including through planned asset sales, to fund reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of natural gas and oil reserves and projecting future rates of production and the amount and timing of development expenditures; inability to generate profits or achieve targeted results in drilling and well operations; leasehold terms expiring before production can be established; hedging activities resulting in lower prices realized on natural gas and oil sales; the need to secure hedging liabilities and the inability of hedging counterparties to satisfy their obligations; drilling and operating risks, including potential environmental liabilities; legislative and regulatory changes adversely affecting our industry and our business, including initiatives related to hydraulic fracturing; general economic conditions negatively impacting us and our business counterparties; oilfield services shortages and transportation capacity constraints and interruptions that could adversely affect our cash flow; and losses possible from pending or future litigation. We do not have binding agreements for all of our planned 2012 asset sales. Our ability to consummate each of these transactions is subject to changes in market conditions and other factors. If one or more of the transactions is not completed in the anticipated time frame or at all or for less proceeds than anticipated, our ability to fund budgeted capital expenditures, reduce our indebtedness as planned and maintain our compliance with bank revolving credit agreement covenants could be adversely affected.

Our production forecasts are dependent upon many assumptions, including estimates of production decline rates from existing wells and the outcome of future drilling activity. 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.

Chesapeake Energy Corporation (NYSE:CHK) is the second-largest producer of natural gas, a Top 15 producer of oil and natural gas liquids and the most active driller of new wells in the U.S. Headquartered in Oklahoma City, the company's operations are focused on discovering and developing unconventional natural gas and oil fields onshore in the U.S. Chesapeake owns leading positions in the Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara unconventional liquids plays and in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays. The company has also vertically integrated its operations and owns substantial marketing, midstream and oilfield services businesses directly and indirectly through its subsidiaries Chesapeake Energy Marketing, Inc., Chesapeake Midstream Development, L.P. and COS Holdings, L.L.C. Further information is available at www.chk.com where Chesapeake routinely posts announcements, updates, events, investor information, presentations and news releases.

   
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per-share and unit data)
(unaudited)
           
September 30,

2012

September 30,

2011

THREE MONTHS ENDED:      
$   $/mcfe $   $/mcfe
REVENUES:    
Natural gas, oil and NGL 1,437 3.77 2,402 7.84
Marketing, gathering and compression 1,381 3.62 1,422 4.64
Oilfield services   152   0.40   153   0.50
Total Revenues   2,970   7.79   3,977   12.98
 
OPERATING EXPENSES:
Natural gas, oil and NGL production 320 0.84 282 0.92
Production taxes 53 0.14 50 0.16
Marketing, gathering and compression 1,339 3.51 1,392 4.55
Oilfield services 116 0.30 118 0.39
General and administrative 148 0.39 151 0.49
Natural gas, oil and NGL depreciation, depletion and

amortization

762 2.00 423 1.38
Depreciation and amortization of other assets 66 0.17 75 0.24
Impairment of natural gas and oil properties 3,315 8.70
Losses on sales and impairments of fixed assets

and other

  45   0.12   3   0.01
Total Operating Expenses   6,164   16.17   2,494   8.14
 
INCOME (LOSS) FROM OPERATIONS   (3,194 )   (8.38 )   1,483   4.84
 
OTHER INCOME (EXPENSE):
Interest expense (36 ) (0.10 ) (4 ) (0.01 )
Earnings (losses) on investments (23 ) (0.06 ) 28 0.09
Gain on sale of investment 31 0.08
Other income   (9 )   (0.02 )   4   0.01
Total Other Income (Expense)   (37 )   (0.10 )   28   0.09
 
INCOME (LOSS) BEFORE INCOME TAXES (3,231 ) (8.48 ) 1,511 4.93
 
INCOME TAX EXPENSE (BENEFIT):
Current income taxes 22 0.05 (1 )
Deferred income taxes   (1,282 )   (3.36 )   590   1.92
Total Income Tax Expense (Benefit)   (1,260 )   (3.31 )   589   1.92
 
NET INCOME (LOSS) (1,971 ) (5.17 ) 922 3.01
 
Net income attributable to noncontrolling interests   (41 )   (0.11 )    
 
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE   (2,012 )   (5.28 )   922   3.01
 
Preferred stock dividends   (43 )   (0.11 )   (43 )   (0.14 )
 

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

  (2,055 )   (5.39 )   879   2.87
 
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (3.19 ) $ 1.38
Diluted $ (3.19 ) $ 1.23
 

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):

Basic   644   638
Diluted   644   753
 
   
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per-share and unit data)
(unaudited)
           
September 30,

2012

September 30,

2011

NINE MONTHS ENDED:      
$   $/mcfe $   $/mcfe
REVENUES:    
Natural gas, oil and NGL 4,622 4.36 4,688 5.43
Marketing, gathering and compression 3,710 3.50 3,844 4.45
Oilfield services   446   0.42   376   0.44
Total Revenues   8,778   8.28   8,908   10.32
 
OPERATING EXPENSES:
Natural gas, oil and NGL production 1,005 0.95 782 0.91
Production taxes 141 0.13 140 0.16
Marketing, gathering and compression 3,631 3.43 3,744 4.34
Oilfield services 321 0.30 287 0.33
General and administrative 440 0.41 410 0.47
Natural gas, oil and NGL depreciation, depletion and

amortization

1,856 1.75 1,147 1.33
Depreciation and amortization of other assets 233 0.22 206 0.24
Impairment of natural gas and oil properties 3,315 3.13
Losses on sales and impairments of fixed assets

and other

  286   0.27   7   0.01
Total Operating Expenses   11,228   10.59   6,723   7.79
 
INCOME (LOSS) FROM OPERATIONS   (2,450 )   (2.31 )   2,185   2.53
 
OTHER INCOME (EXPENSE):
Interest expense (63 ) (0.06 ) (37 ) (0.04 )
Earnings (losses) on investments (87 ) (0.08 ) 100 0.11
Gain on sales of investments 1,061 1.00
Losses on purchases or exchanges of debt (176 ) (0.20 )
Other income   2     9   0.01
Total Other Income (Expense)   913   0.86   (104 )   (0.12 )
 
INCOME (LOSS) BEFORE INCOME TAXES (1,537 ) (1.45 ) 2,081 2.41
 
INCOME TAX EXPENSE (BENEFIT):
Current income taxes 24 0.02 11 0.01
Deferred income taxes   (623 )   (0.59 )   801   0.93
Total Income Tax Expense (Benefit)   (599 )   (0.57 )   812   0.94
 
NET INCOME (LOSS) (938 ) (0.88 ) 1,269 1.47
 
Net income attributable to noncontrolling interests   (131 )   (0.13 )    
 
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE   (1,069 )   (1.01 )   1,269   1.47
 
Preferred stock dividends   (128 )   (0.12 )   (128 )   (0.15 )
 

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

  (1,197 )   (1.13 )   1,141   1.32
 
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (1.86 ) $ 1.79
Diluted $ (1.86 ) $ 1.69
 

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):

Basic   643   636
Diluted   643   752
 
     
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
(unaudited)
           
September 30, December 31,
    2012 2011
 
Cash and cash equivalents $ 142 $ 351
Other current assets   3,469   2,826
Total Current Assets   3,611   3,177
 
Property and equipment (net) 40,603 36,739
Other assets   1,457   1,919
Total Assets $ 45,671 $ 41,835
 
Current liabilities $ 6,456 $ 7,082
Long-term debt, net of discounts 15,755 10,626
Other long-term liabilities 2,351 2,682
Deferred income tax liabilities   3,418   3,484
Total Liabilities   27,980   23,874
 
Chesapeake stockholders' equity 15,327 16,624
Noncontrolling interests   2,364   1,337
Total Equity   17,691   17,961
 
Total Liabilities and Equity $ 45,671 $ 41,835
 
Common Shares Outstanding (in millions)   665   659
 
     
CHESAPEAKE ENERGY CORPORATION
CAPITALIZATION
($ in millions)
(unaudited)
           
September 30, December 31,
    2012     2011
 
Total debt, net of unrestricted cash $ 16,076 $ 10,275
Chesapeake stockholders' equity 15,327 16,624
Noncontrolling interests (a)   2,364     1,337  
Total $ 33,767   $ 28,236  
 
Debt to capitalization ratio 48 % 36 %
 
(a) Includes third-party ownership as follows:

CHK Cleveland Tonkawa, L.L.C.

$ 1,015 $
CHK Utica, L.L.C. 950 950
Chesapeake Granite Wash Trust 365 380
Cardinal Gas Services, L.L.C.   34     7  
Total $ 2,364   $ 1,337  
 
 
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF 2012 CHANGES TO NATURAL GAS AND OIL PROPERTIES
BASED ON SEC PRICING OF TRAILING 12-MONTH AVERAGE PRICES AS OF SEPTEMBER 30, 2012
($ in millions, except per-unit data)
(unaudited)
       
    Proved Reserves
Cost     Bcfe (a)   $/Mcfe
PROVED PROPERTIES:

Well costs on proved properties (b) (c)

$ 7,430 3,878 (d) 1.92
Acquisition of proved properties (e) 319 37 8.67
Sale of proved properties  

(1,322

) (544 ) 2.43
Total net proved properties  

6,427

  3,371 1.91
 
Revisions – price (4,878 )
 
UNPROVED PROPERTIES:
Well costs on unproved properties (f) (195 )
Acquisition of unproved properties, net (g) 1,628
Sale of unproved properties   (930 )
Total net unproved properties   503  
 
OTHER:
Capitalized interest on unproved properties 766
Geological and geophysical costs 148
Asset retirement obligations   16  
Total other   930  
 
Total $ 7,860   (1,507 )
 
 
CHESAPEAKE ENERGY CORPORATION
ROLL-FORWARD OF PROVED RESERVES
NINE MONTHS ENDED SEPTEMBER 30, 2012
BASED ON SEC PRICING OF TRAILING 12-MONTH AVERAGE PRICES AS OF SEPTEMBER 30, 2012
(unaudited)
     
    Bcfe (a)
 
Beginning balance, January 1, 2012 18,789
Production (1,060 )
Acquisitions 37
Divestitures (544 )
Revisions – changes to previous estimates (596 )
Revisions – price (4,878 )
Extensions and discoveries   4,474  
Ending balance, September 30, 2012   16,222  
 
Proved reserves decline rate before acquisitions and divestitures (11 )%
Proved reserves decline rate after acquisitions and divestitures (14 )%
 
Proved developed reserves 9,608
Proved developed reserves percentage 59 %
 
PV-10 ($ in billions) (a) $ 18,451
 
(a)   Reserve volumes and PV-10 value estimated using SEC reserve recognition standards and pricing assumptions based on the trailing 12-month average first-day-of-the-month prices as of September 30, 2012 of $2.83 per mcf of natural gas and $95.05 per bbl of oil, before field differential adjustments.
 
(b) Net of well cost carries of $655 million associated with the Statoil-Marcellus, CNOOC-Eagle Ford, CNOOC-Niobrara and Total-Utica joint ventures.
 
(c) Includes $1.055 billion of well costs incurred in prior quarters (previously classified as well costs on unproved properties) related to wells that were evaluated for the existence of proved reserves in the current quarter.
 
(d) Includes 596 bcfe of downward revisions resulting from changes to previous estimates and excludes downward revisions of 4.9 tcfe primarily resulting from lower natural gas prices using the average first-day-of-the-month price for the twelve months ended September 30, 2012, compared to the twelve months ended December 31, 2011.
 
(e) Includes 28 bcfe of proved reserves associated with the company’s Permian Basin volumetric production payment repurchased by the company for $313 million and subsequently resold to multiple parties in September and October 2012.
 
(f) Includes $860 million of well costs on unproved properties incurred in the current quarter, offset by the transfer of $1.055 billion previously classified as well costs on unproved properties that were evaluated for the existence of proved reserves in the current quarter. See footnote (e).
 
(g) Net of joint venture partner reimbursements.
 
       
CHESAPEAKE ENERGY CORPORATION
SUPPLEMENTAL DATA – NATURAL GAS, OIL AND NGL SALES AND INTEREST EXPENSE
(unaudited)
             
Three Months Ended Nine Months Ended
September 30, September 30,
2012     2011 2012     2011
Natural Gas, Oil and NGL Sales ($ in millions):
Natural gas sales $ 543 $ 861 $ 1,359 $ 2,412
Natural gas derivatives – realized gains (losses) 52 364 391 1,322
Natural gas derivatives – unrealized gains (losses)   (90 )   (28 )   (401 )   (693 )
 
Total Natural Gas Sales   505     1,197     1,349     3,041  
 
Oil sales 792 386 2,038 1,048
Oil derivatives – realized gains (losses) 25 (8 ) 6 (51 )
Oil derivatives – unrealized gains (losses)   (14 )   645     803     247  
 
Total Oil Sales   803     1,023     2,847     1,244  
 
NGL sales 129 180 401 432
NGL derivatives – realized gains (losses) (12 ) (9 ) (31 )
NGL derivatives – unrealized gains (losses)       14     34     2  
 
Total NGL Sales   129     182     426     403  
 
Total Natural Gas, Oil and NGL Sales $ 1,437   $ 2,402   $ 4,622   $ 4,688  
 

Average Sales Price – excluding gains (losses) on derivatives:

Natural gas ($ per mcf) $ 1.80 $ 3.39 $ 1.60 $ 3.30
Oil ($ per bbl) $ 88.07 $ 84.18 $ 91.31 $ 89.78
NGL ($ per bbl) $ 31.22 $ 44.04 $ 30.86 $ 42.17
Natural gas equivalent ($ per mcfe) $ 3.84 $ 4.66 $ 3.58 $ 4.51
 

Average Sales Price – excluding unrealized gains (losses) on derivatives:

Natural gas ($ per mcf) $ 1.97 $ 4.82 $ 2.06 $ 5.10
Oil ($ per bbl) $ 90.79 $ 82.47 $ 91.55 $ 85.45
NGL ($ per bbl) $ 31.22 $ 41.16 $ 30.17 $ 39.10
Natural gas equivalent ($ per mcfe) $ 4.04 $ 5.78 $ 3.95 $ 5.94
 
Interest Expense (Income) ($ in millions):
Interest (a) $ 38 $ 4 $ 67 $ 18
Derivatives – realized (gains) losses 6
Derivatives – unrealized (gains) losses   (2 )       (4 )   13  
Total Interest Expense $ 36   $ 4   $ 63   $ 37  
(a)   Net of amounts capitalized.
 
     
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED CASH FLOW DATA
($ in millions)
(unaudited)
           
THREE MONTHS ENDED: September 30, September 30,
  2012 2011
 
Beginning cash $ 1,024   $ 109  
 
Cash provided by operating activities   949     1,631  
 
Cash flows from investing activities:
Well costs on proved and unproved properties (2,353 ) (1,895 )
Acquisition of proved and unproved properties (a) (936 ) (1,116 )
Sale of proved and unproved properties 808 55
Geological and geophysical costs (52 ) (55 )
Additions to other property and equipment (605 ) (554 )
Proceeds from sales of other assets 140 157
Additions to investments (133 ) (86 )
Other   (102 )   19  
Total cash used in investing activities   (3,233 )   (3,475 )
 
Cash provided by financing activities   1,409     1,846  
 
Cash and cash equivalents classified in current assets

held for sale

  (7 )    
 
Ending cash $ 142   $ 111  
(a)   Includes capitalized interest of $327 million and $151 million for the current quarter and the prior quarter, respectively.
 
           
NINE MONTHS ENDED:   September 30,     September 30,
  2012 2011
 
Beginning cash $ 351   $ 102  
 
Cash provided by operating activities   1,978     3,724  
 
Cash flows from investing activities:
Well costs on proved and unproved properties (7,360 ) (5,177 )
Acquisition of proved and unproved properties (b) (2,594 ) (3,300 )
Sale of proved and unproved properties 2,226 5,883
Geological and geophysical costs (165 ) (168 )
Additions to other property and equipment (1,916 ) (1,416 )
Proceeds from sales of other assets 219 682
Acquisition of drilling company (339 )
Proceeds from (additions to) investments (261 ) 126
Proceeds from sale of select midstream investment 2,000
Other   (303 )   (6 )
Total cash used in investing activities   (8,154 )   (3,715 )
 
Cash provided by (used in) financing activities   5,981      
 
Cash and cash equivalents classified in current assets

held for sale

  (14 )    
 
Ending cash $ 142   $ 111  
(b)   Includes capitalized interest of $653 million and $478 million for the current period and the prior period, respectively.
 
         
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF OPERATING CASH FLOW AND EBITDA
($ in millions)
(unaudited)
                 
September 30, June 30, September 30,
THREE MONTHS ENDED:   2012     2012     2011
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 949 $ 755 $ 1,631
 
Changes in assets and liabilities   169     140     (222 )
 
OPERATING CASH FLOW (a) $ 1,118   $ 895   $ 1,409  
                 
September 30, June 30, September 30,
THREE MONTHS ENDED:   2012     2012     2011
 
NET INCOME (LOSS) $ (1,971 ) $ 1,037 $ 922
 
Income tax expense (benefit) (1,260 ) 663 589
Interest expense 36 14 4
Depreciation and amortization of other assets 66 83 75
Natural gas, oil and NGL depreciation, depletion

and amortization

  762     588     423  
 
EBITDA (b) $ (2,367 ) $ 2,385   $ 2,013  
                 
September 30, June 30, September 30,
THREE MONTHS ENDED:   2012     2012     2011
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 949 $ 755 $ 1,631
 
Changes in assets and liabilities 169 140 (222 )
Interest expense 36 14 4
Unrealized gains (losses) on natural gas, oil and NGL

Derivatives

(104 ) 810 631
Impairment of natural gas and oil properties (3,315 )
Losses on sales and impairments of fixed

assets and other

(25 ) (243 ) (3 )
Gains (losses) on investments 4 943 (4 )
Stock-based compensation (30 ) (31 ) (40 )
Other items   (51 )   (3 )   16  
 
EBITDA (b) $ (2,367 ) $ 2,385   $ 2,013  
(a)   Operating cash flow represents net cash provided by operating activities before changes in assets and liabilities. Operating cash flow is presented because management believes it is a useful adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP). Operating cash flow is widely accepted as a financial indicator of a natural gas and oil company's ability to generate cash which is used to internally fund exploration and development activities and to service debt. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies within the natural gas and oil exploration and production industry. Operating cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities as an indicator of cash flows, or as a measure of liquidity.
 
(b) Ebitda represents net income (loss) before income tax expense, interest expense and depreciation, depletion and amortization expense, Ebitda is presented as a supplemental financial measurement in the evaluation of our business. We believe that it provides additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Ebitda is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders pursuant to our bank credit agreements and is used in the financial covenants in our bank credit agreements. Ebitda is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income, income from operations, or cash flow provided by operating activities prepared in accordance with GAAP.
 
     
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF OPERATING CASH FLOW AND EBITDA
($ in millions)
(unaudited)
           
September 30, September 30,
NINE MONTHS ENDED:   2012     2011
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,978 $ 3,724
 
Changes in assets and liabilities   946     274  
 
OPERATING CASH FLOW (a) $ 2,924   $ 3,998  
           
September 30, September 30,
NINE MONTHS ENDED:   2012     2011
 
NET INCOME (LOSS) $ (938 ) $ 1,269
 
Income tax expense (benefit) (599 ) 812
Interest expense 63 37
Depreciation and amortization of other assets 233 206
Natural gas, oil and NGL depreciation, depletion and amortization   1,856     1,147  
 
EBITDA (b) $ 615   $ 3,471  
           
September 30, September 30,
NINE MONTHS ENDED:   2012     2011
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,978 $ 3,724
 
Changes in assets and liabilities 946 274
Interest expense 63 37
Unrealized gains (losses) on natural gas, oil and NGL derivatives 436 (444 )
Impairment of natural gas and oil properties (3,315 )
Losses on sales and impairments of fixed assets and other (262 ) (7 )
Gains on investments 914 19
Stock-based compensation (93 ) (119 )
Other items   (52 )   (13 )
 
EBITDA (b) $ 615   $ 3,471  
(a)   Operating cash flow represents net cash provided by operating activities before changes in assets and liabilities. Operating cash flow is presented because management believes it is a useful adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP). Operating cash flow is widely accepted as a financial indicator of a natural gas and oil company's ability to generate cash which is used to internally fund exploration and development activities and to service debt. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies within the natural gas and oil exploration and production industry. Operating cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities as an indicator of cash flows, or as a measure of liquidity.
 
(b) Ebitda represents net income (loss) before income tax expense, interest expense and depreciation, depletion and amortization expense, Ebitda is presented as a supplemental financial measurement in the evaluation of our business. We believe that it provides additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Ebitda is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders pursuant to our bank credit agreements and is used in the financial covenants in our bank credit agreements. Ebitda is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income, income from operations, or cash flow provided by operating activities prepared in accordance with GAAP.
 
         
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF ADJUSTED EBITDA
($ in millions)
(unaudited)
                 
September 30, June 30, September 30,
THREE MONTHS ENDED:   2012     2012     2011
 
EBITDA $ (2,367 ) $ 2,385 $ 2,013
 
Adjustments:
Unrealized (gains) losses on natural gas, oil and

NGL derivatives

104 (810 ) (631 )
Impairment of natural gas and oil properties 3,315
Losses on sales and impairments of

fixed assets and other

45 243 3
Net income attributable to noncontrolling interests (41 ) (65 )
Gains on investments (31 ) (957 )
Other   (4 )   7      
 
Adjusted EBITDA (a) $ 1,021   $ 803   $ 1,385  
(a)   Adjusted ebitda excludes certain items that management believes affect the comparability of operating results. The Company believes these non-GAAP financial measures are a useful adjunct to ebitda because:
(i)   Management uses adjusted ebitda to evaluate the Company's operational trends and performance relative to other natural gas and oil producing companies.
(ii) Adjusted ebitda is more comparable to estimates provided by securities analysts.
(iii) Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items.
 
           
  September 30,     September 30,
NINE MONTHS ENDED:   2012     2011
 
EBITDA $ 615 $ 3,471
 
Adjustments:
Unrealized (gains) losses on natural gas, oil and NGL derivatives (436 ) 444
Impairment of natural gas and oil properties 3,315
Losses on sales and impairments of fixed assets and other 286 7
Net income attributable to noncontrolling interests (131 )
Losses on purchases or exchanges of debt 176
Gains on investments (988 )
Other   1    
 
Adjusted EBITDA (a) $ 2,662   $ 4,098
(a)   Adjusted ebitda excludes certain items that management believes affect the comparability of operating results. The Company believes these non-GAAP financial measures are a useful adjunct to ebitda because:
(i)   Management uses adjusted ebitda to evaluate the Company's operational trends and performance relative to other natural gas and oil producing companies.
(ii) Adjusted ebitda is more comparable to estimates provided by securities analysts.
(iii) Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items.
 
         
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
($ in millions, except per-share data)
(unaudited)
                 
September 30, June 30, September 30,
THREE MONTHS ENDED:   2012     2012     2011
 
Net income (loss) available to common stockholders $ (2,055 ) $ 929 $ 879
 
Adjustments, net of tax:
Unrealized (gains) losses on derivatives 63 (498 ) (385 )
Impairment of natural gas and oil properties 2,022
Losses on sales and impairments of

fixed assets and other

28 148 2
Gains on investments (19 ) (584 )
Other   (6 )   8      
 
Adjusted net income available to common

stockholders (a)

33 3 496
Preferred stock dividends   43     43     43  
Total adjusted net income $ 76   $ 46   $ 539  
 
Weighted average fully diluted shares outstanding (b) 754 751 753
 
Adjusted earnings per share assuming dilution (a) $ 0.10 $ 0.06 $ 0.72
(a)   Adjusted net income available to common stockholders and adjusted earnings per share assuming dilution exclude certain items that management believes affect the comparability of operating results. The Company believes these non-GAAP financial measures are a useful adjunct to GAAP earnings because:
(i)   Management uses adjusted net income available to common stockholders to evaluate the Company's operational trends and performance relative to other natural gas and oil producing companies.
(ii) Adjusted net income available to common stockholders is more comparable to earnings estimates provided by securities analysts.
(iii) Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items.
 
(b) Weighted average fully diluted shares outstanding include shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.
 
     
CHESAPEAKE ENERGY CORPORATION
RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
($ in millions, except per-share data)
(unaudited)
           
September 30, September 30,
NINE MONTHS ENDED:   2012   2011
 
Net income (loss) available to common stockholders $ (1,197 ) $ 1,141
 
Adjustments, net of tax:
Unrealized (gains) losses on derivatives (268 ) 279
Impairment of natural gas and oil properties 2,022
Losses on sales and impairments of fixed assets and other 174 4
Losses on purchases or exchanges of debt 107
Loss on foreign currency derivatives 11
Gains on investments (603 )
Other   2    
 
Adjusted net income available to common stockholders (a) 130 1,542
Preferred stock dividends   128     128
Total adjusted net income $ 258   $ 1,670
 
Weighted average fully diluted shares outstanding (b) 753 752
 
Adjusted earnings per share assuming dilution (a) $ 0.34 $ 2.22
(a)   Adjusted net income available to common stockholders and adjusted earnings per share assuming dilution exclude certain items that management believes affect the comparability of operating results. The Company believes these non-GAAP financial measures are a useful adjunct to GAAP earnings because:
(i)   Management uses adjusted net income available to common stockholders to evaluate the Company's operational trends and performance relative to other natural gas and oil producing companies.
(ii) Adjusted net income available to common stockholders is more comparable to earnings estimates provided by securities analysts.
(iii) Items excluded generally are one-time items or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items.
 
(b) Weighted average fully diluted shares outstanding include shares that were considered antidilutive for calculating earnings per share in accordance with GAAP.
 

SCHEDULE “A” MANAGEMENT’S OUTLOOK AS OF NOVEMBER 1, 2012

Chesapeake periodically provides management guidance on certain factors that affect its future financial performance. The primary changes from the company’s August 6, 2012 Outlook are in italicized bold and reflect estimated natural gas curtailments of approximately 60 bcf in the 2012 first half and also include estimated future production decreases of approximately 45 bcfe in 2012 and 140 bcfe in 2013 associated with the company’s completed and planned asset sales. Management and the board of directors continue to review operational plans for 2013 and beyond which could result in changes to this Outlook.

Chesapeake Energy Corporation Consolidated Projections
For Years Ending December 31, 2012 and 2013
       
Year Ending

12/31/12

Year Ending

12/31/13

Estimated Production:
Natural gas – bcf 1,120 – 1,140 1,030 – 1,070
Oil – mbbls 30,000 – 31,000 36,000 – 38,000
NGL – mbbls 17,000 – 18,000 24,000 – 26,000
Natural gas equivalent – bcfe 1,402 – 1,434 1,390 – 1,454
 
Daily natural gas equivalent midpoint – mmcfe 3,870 3,895
 
YOY estimated production increase (adjusted for planned asset sales) 18% 1%
 
NYMEX Price (a) (for calculation of realized hedging effects only):
Natural gas - $/mcf $2.77 $4.00
Oil - $/bbl $94.66 $90.00
 
Estimated Realized Hedging Effects (based on assumed NYMEX prices above):
Natural gas - $/mcf $0.30 $0.00
Oil - $/bbl $0.99 $4.50
 
Estimated Gathering/Marketing/Transportation Differentials to NYMEX Prices:
Natural gas - $/mcf $1.00 –1.10 $1.15 – 1.25
Oil - $/bbl $4.50 – 6.50 $4.50 – 6.50
NGL - $/bbl $67.00 – 70.00 $63.00 – 67.00
 
Operating Costs per Mcfe of Projected Production:
Production expense $0.90 – 1.00 $0.90 – 1.00
Production taxes (~5% of O&G revenues) $0.15 – 0.20 $0.25 – 0.30
General and administrative (b) $0.39 – 0.44 $0.39 – 0.44
Stock-based compensation (noncash) $0.04 – 0.06 $0.04 – 0.06
DD&A of natural gas and liquids assets $1.65 – 1.85 $1.65 – 1.85
Depreciation of other assets $0.22 – 0.27 $0.25 – 0.30
Interest expense (c) $0.05 – 0.10 $0.05 – 0.10
 
Other ($ millions):
Marketing, gathering and compression net margin (d) $90 – 100 $50 – 75
Oilfield services net margin (d) $175 – 200 $200 – 250
Other income (including certain equity investments) $25
Net income attributable to noncontrolling interest (e) ($180) – (200) ($200) – (240)
 
Book Tax Rate 39% 39%

 

Weighted average shares outstanding (in millions):
Basic 640 – 645 645 – 650
Diluted 753 – 758 758 – 763
 
Operating cash flow before changes in assets and liabilities (f)(g) $3,800 $4,250 – 5,250
Well costs on proved and unproved properties ($8,750) ($5,750 – 6,250)
Acquisition of unproved properties, net ($1,750) ($400)

a) NYMEX natural gas and oil prices have been updated for actual contract prices through October and September, respectively.b) Excludes expenses associated with noncash stock-based compensation.c) Does not include unrealized gains or losses on interest rate derivatives.d) Includes revenue and operating costs and excludes depreciation and amortization of other assets.e) Net income attributable to noncontrolling interests of Chesapeake Granite Wash Trust, CHK Utica, L.L.C., CHK Cleveland Tonkawa, L.L.C. and Cardinal Gas Services, L.L.C.f) A non-GAAP financial measure. We are unable to provide a reconciliation to projected cash provided by operating activities, the most comparable GAAP measure, because of uncertainties associated with projecting future changes in assets and liabilities.g) Assumes NYMEX prices on open contracts of $3.50 per mcf and $90.00 per bbl in 2012 and $3.50 to $4.50 per mcf and $90.00 per bbl in 2013 .

Natural Gas, Oil and NGL Hedging Activities

Chesapeake enters into natural gas, oil and NGL derivative transactions in order to mitigate a portion of its exposure to adverse changes in market prices. Please see the quarterly reports on Form 10-Q and annual reports on Form 10-K filed by Chesapeake with the SEC for detailed information about derivative instruments the company uses, its quarter-end derivative positions and the accounting for natural gas, oil and NGL derivatives.

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