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Chesapeake Energy Corporation Reports Financial And Operational Results For The 2013 Second Quarter

2013 Second Quarter Financial and Operational Results Conference Call Information

A conference call to discuss this release has been scheduled for Thursday, August 1, 2013, at 9:00 am EDT. The telephone number to access the conference call is 913-312-0968 or toll-free 888-215-6895. The passcode for the call is 3533928. 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 2:00 pm EDT on Thursday, August 1, 2013, and will run through 2:00 pm EDT on Thursday, August 15, 2013. The number to access the conference call replay is 719-457-0820 or toll-free 888-203-1112. The passcode for the replay is 3533928. 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.

Chesapeake Energy Corporation (NYSE:CHK) is the second-largest producer of natural gas, a Top 11 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/Hogshooter, Cleveland, Tonkawa, Mississippi Lime and Niobrara unconventional liquids plays and in the Marcellus, Haynesville/Bossier and Barnett unconventional natural gas shale plays. The company also owns substantial marketing and oilfield services businesses through its subsidiaries Chesapeake Energy Marketing, Inc. and Chesapeake Oilfield Operating, L.L.C. Further information is available at www.chk.com where Chesapeake routinely posts announcements, updates, events, investor information, presentations and news releases.

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 production forecasts, estimates of operating costs, planned development drilling, expected capital expenditures, anticipated asset sales, projected cash flow and liquidity, business strategy and other plans and objectives for future operations. Although we believe the expectations and forecasts reflected in the 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 1A of our 2012 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2013. These risk factors include the volatility of natural gas, oil and NGL prices; the limitations our level of indebtedness may have on our financial flexibility; declines in the prices of natural gas and oil potentially resulting in a write-down of our asset carrying values; 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, oil and NGL reserves and projecting future rates of production and the amount and timing of development expenditures; our ability 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, oil and NGL 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, air emissions and endangered species; current worldwide economic uncertainty which may have a material adverse effect on our results of operations, liquidity and financial condition; oilfield services shortages, gathering system and transportation capacity constraints and various transportation interruptions that could adversely affect our revenues and cash flow; losses possible from pending or future litigation and regulatory investigations; cyber attacks adversely impacting our operations; and the loss of key operational personnel or inability to maintain our corporate culture. In addition, 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. Our production forecasts are also dependent upon many assumptions, including estimates of production decline rates from existing wells and the outcome of future drilling activity. We do not have binding agreements for all of our planned 2013 asset sales. Our ability to consummate each of these transactions is subject to changes in market conditions and other factors. 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.

   

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share and unit data)

(unaudited)

           
June 30, June 30,
THREE MONTHS ENDED:   2013     2012
$   $/mcfe $   $/mcfe
REVENUES:    
Natural gas, oil and NGL 2,406 6.51 2,117 6.11
Marketing, gathering and compression 2,057 5.57 1,113 3.21
Oilfield services   212   0.58   159   0.46
Total Revenues   4,675   12.66   3,389   9.78
 
OPERATING EXPENSES:
Natural gas, oil and NGL production 288 0.78 335 0.97
Production taxes 59 0.16 41 0.12
Marketing, gathering and compression 2,028 5.49 1,096 3.16
Oilfield services 177 0.48 109 0.31
General and administrative 106 0.29 155 0.45
Employee retirement and other termination benefits 7 0.02 1 0.00

Natural gas, oil and NGL depreciation, depletion and amortization

645 1.75 588 1.70
Depreciation and amortization of other assets 76 0.21 83 0.24
Impairments of fixed assets and other 231 0.62 243 0.70
Net gains on sales of fixed assets   (109 )   (0.30 )    
Total Operating Expenses   3,508   9.50   2,651   7.65
 
INCOME FROM OPERATIONS   1,167   3.16   738   2.13
 
OTHER INCOME (EXPENSE):
Interest expense (104 ) (0.28 ) (14 ) (0.04 )
Earnings (losses) on investments 23 0.06 (59 ) (0.17 )
Gains (losses) on sales of investments (10 ) (0.03 ) 1,030 2.97
Losses on purchases of debt (70 ) (0.19 )
Other income   3   0.01   5   0.01
Total Other Income (Expense)   (158 )   (0.43 )   962   2.77
 
INCOME BEFORE INCOME TAXES 1,009 2.73 1,700 4.90
 
INCOME TAX EXPENSE:
Current income taxes 2 0.01 2
Deferred income taxes   382 1.03 661 1.91
Total Income Tax Expense   384 1.04 663 1.91
 
NET INCOME 625 1.69 1,037 2.99
 
Net income attributable to noncontrolling interests   (45 )   (0.12 )   (65 )   (0.19 )
 
NET INCOME ATTRIBUTABLE TO CHESAPEAKE   580   1.57   972   2.80
 

Preferred stock dividends

(43 ) (0.11 ) (43 ) (0.12 )
Earnings allocated to participating securities (11 ) (0.03 )

 

Premium on purchase of preferred shares of a subsidiary

  (69 )   (0.19 )    
 
NET INCOME AVAILABLE TO COMMON

STOCKHOLDERS

  457   1.24   929   2.68
 
EARNINGS PER COMMON SHARE:
Basic $ 0.70 $ 1.45
 
Diluted $ 0.66 $ 1.29
 
WEIGHTED AVERAGE COMMON AND COMMON

EQUIVALENT SHARES OUTSTANDING (in millions):

Basic   653   642
 
Diluted   760   751
   

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share and unit data)

(unaudited)

           
June 30, June 30,
SIX MONTHS ENDED:   2013     2012
$   $/mcfe $   $/mcfe
REVENUES:    
Natural gas, oil and NGL 3,858 5.30 3,185 4.69
Marketing, gathering and compression 3,838 5.28 2,328 3.43
Oilfield services   402   0.55   294   0.43
Total Revenues   8,098   11.13   5,807   8.55
 
OPERATING EXPENSES:
Natural gas, oil and NGL production 595 0.82 685 1.01
Production taxes 112 0.15 89 0.13
Marketing, gathering and compression 3,772 5.19 2,292 3.37
Oilfield services 332 0.46 205 0.30
General and administrative 216 0.30 291 0.43
Employee retirement and other termination benefits 140 0.19 1

Natural gas, oil and NGL depreciation, depletion and amortization

1,293 1.78 1,094 1.61
Depreciation and amortization of other assets 154 0.21 166 0.25
Impairments of fixed assets and other 258 0.35 243 0.36
Net gains on sales of fixed assets   (158 )   (0.22 )   (2 )  
Total Operating Expenses   6,714   9.23   5,064   7.46
 
INCOME FROM OPERATIONS   1,384   1.90   743   1.09
 
OTHER INCOME (EXPENSE):
Interest expense (124 ) (0.17 ) (26 ) (0.04 )
Losses on investments (4 ) (0.01 ) (64 ) (0.09 )
Impairment of investment (10 ) (0.01 )
Gains (losses) on sales of investments (10 ) (0.01 ) 1,030 1.51
Losses on purchases of debt (70 ) (0.10 )
Other income   8   0.01   11   0.02
Total Other Income (Expense)   (210 )   (0.29 )   951   1.40
 
INCOME BEFORE INCOME TAXES 1,174 1.61 1,694 2.49
 
INCOME TAX EXPENSE:
Current income taxes 3 2
Deferred income taxes   443   0.61   659   0.97
Total Income Tax Expense   446   0.61   661   0.97
 
NET INCOME 728 1.00 1,033 1.52
 
Net income attributable to noncontrolling interests   (89 )   (0.12 )   (89 )   (0.13 )
 
NET INCOME ATTRIBUTABLE TO CHESAPEAKE   639   0.88   944   1.39
 
Preferred stock dividends (86 ) (0.12 ) (86 ) (0.13 )
Earnings allocated to participating securities (11 ) (0.02 )
Premium on purchase of preferred shares of a subsidiary   (69 )   (0.09 )    
 
NET INCOME AVAILABLE TO COMMON

STOCKHOLDERS

  473   0.65   858   1.26
 
EARNINGS PER COMMON SHARE:
Basic $ 0.72

 

$ 1.34
 
Diluted $ 0.72

 

$ 1.25
 
WEIGHTED AVERAGE COMMON AND COMMON

EQUIVALENT SHARES OUTSTANDING (in millions):

Basic   653   642
 
Diluted   653   752
     

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(unaudited)

           
June 30, December 31,
    2013     2012
 
Cash and cash equivalents $ 677 $ 287
Other current assets   2,915   2,661
Total Current Assets   3,592   2,948
 
Property and equipment (net) 37,349 37,167
Other assets   1,204   1,496
Total Assets $ 42,145 $ 41,611
 
Current liabilities $ 5,620 $ 6,266
Long-term debt, net of discounts 13,057 12,157
Other long-term liabilities 2,004 2,485
Deferred income tax liabilities   3,260   2,807
Total Liabilities   23,941   23,715
 
Preferred stock 3,062 3,062
Noncontrolling interests 2,169 2,327
Common stock and other stockholders’ equity   12,973   12,507
Total Equity   18,204   17,896
 
Total Liabilities and Equity $ 42,145 $ 41,611
 
Common Shares Outstanding (in millions)   667   664
     

CHESAPEAKE ENERGY CORPORATION

CAPITALIZATION

($ in millions)

(unaudited)

           
June 30, December 31,
    2013     2012
 
Total debt, net of unrestricted cash $ 12,380 $ 12,333
Preferred stock 3,062 3,062
Noncontrolling interests (a) 2,169 2,327
Common stock and other stockholders’ equity   12,973   12,507
Total $ 30,584 $ 30,229
Total debt to capitalization ratio 40% 41%
 

(a) Includes third-party ownership as follows:

CHK Cleveland Tonkawa, L.L.C. $ 1,015 $ 1,015
CHK Utica, L.L.C. 807 950
Chesapeake Granite Wash Trust 338 356
Other   9   6
Total $ 2,169 $ 2,327
 

CHESAPEAKE ENERGY CORPORATION

SUPPLEMENTAL DATA - NATURAL GAS, OIL AND NGL PRODUCTION, SALES AND INTEREST EXPENSE

(unaudited)

       
Three Months Ended Six Months Ended
June 30,   June 30,   June 30,   June 30,
2013 2012 2013 2012
 
Net Production:
Natural gas (bcf) 277.6 275.4 550.8 546.3
Oil (mmbbl) 10.5 7.3 19.8 13.3
NGL (mmbbl) 4.8 4.5 9.6 8.9
Natural gas equivalents (bcfe) 369.4 346.5 727.5 679.4
 
Natural Gas, Oil and NGL Sales ($ in millions):
Natural gas sales $ 779 $ 336 1,352 $ 815
Natural gas derivatives – realized gains (losses) (53 ) 182 (45 ) 339
Natural gas derivatives – unrealized gains (losses)   347   (164 )     68   (311 )
.
Total Natural Gas Sales   1,073   354     1,375   843
 
Oil sales 975 656 1,859 1,247
Oil derivatives – realized gains (losses) 14 15 10 (19 )
Oil derivatives – unrealized gains (losses)   229   955     361   817
 
Total Oil Sales   1,218   1,626     2,230   2,045
 
NGL sales 115 120 253 272
NGL derivatives – realized gains (losses) (2 ) (9 )
NGL derivatives – unrealized gains (losses)     19       34
 
Total NGL Sales   115   137     253   297
 
Total Natural Gas, Oil and NGL Sales $ 2,406 $ 2,117 $   3,858 $ 3,185
 
Average Sales Price –

excluding gains (losses) on derivatives:

Natural gas ($ per mcf) $ 2.81 $ 1.22 $ 2.45 $ 1.49
Oil ($ per bbl) $ 92.53 $ 89.49 $ 93.79 $ 93.49
NGL ($ per bbl) $ 24.22 $ 26.40 $ 26.26 $ 30.68
Natural gas equivalent ($ per mcfe) $ 5.06 $ 3.21 $ 4.76 $ 3.43
 
Average Sales Price –

excluding unrealized gains (losses) on derivatives:

Natural gas ($ per mcf) $ 2.62 $ 1.88 $ 2.37 $ 2.11
Oil ($ per bbl) $ 93.81 $ 91.58 $ 94.29 $ 92.06
NGL ($ per bbl) $ 24.22 $ 25.94 $ 26.26 $ 29.68
Natural gas equivalent ($ per mcfe) $ 4.96 $ 3.77 $ 4.71 $ 3.89
 
Interest Expense (Income) ($ in millions):
Interest (a) $ 54 $ 21 $ 70 $ 28
Derivatives – realized (gains) losses (1 ) (1 ) (3 )
Derivatives – unrealized (gains) losses   51   (6 )     57   (2 )
Total Interest Expense $ 104 $ 14 $   124 $ 26
 

(a) Net of amounts capitalized.

   

CHESAPEAKE ENERGY CORPORATION

CONDENSED CONSOLIDATED CASH FLOW DATA

($ in millions)

(unaudited)

           
THREE MONTHS ENDED: June 30, June 30,
  2013     2012
 
Beginning cash $ 33 $ 438
 
Cash provided by operating activities   1,298   755
 
Cash flows from investing activities:

Drilling and completion costs on proved and unproved properties (a)

(1,565 ) (2,516 )

Acquisition of proved and unproved properties (b)

(242 ) (529 )
Sale of proved and unproved properties 1,674 615
Geological and geophysical costs (15 ) (42 )
Additions to other property and equipment (176 ) (621 )
Proceeds from sales of other assets 258 31
Investments, net 101 1,945
Other   118   (154 )
Total cash provided by (used in) investing activities   153   (1,271 )
 
Cash provided by (used in) financing activities   (807 )   1,109
 

Change in cash and cash equivalents classified as current assets held for sale

    (7 )
 
Change in cash and cash equivalents   644 586
 
Ending cash $ 677 $ 1,024
 

(a) Includes capitalized interest of $31 million and $12 million for the three months ended June 30, 2013 and 2012, respectively.

 

(b) Includes capitalized interest of $159 million and $152 million for the three months ended June 30, 2013 and 2012, respectively.

 
 
SIX MONTHS ENDED: June 30, June 30,
  2013     2012
 
Beginning cash $ 287 $ 351
 
Cash provided by operating activities   2,222   1,029
 
Cash flows from investing activities:

Drilling and completion costs on proved and unproved properties (c)

(3,131 ) (5,019 )
Acquisition of proved and unproved properties (d) (497 ) (1,646 )
Sale of proved and unproved properties 1,839 1,418
Geological and geophysical costs (28 )

(113

)

Additions to other property and equipment (506 ) (1,311 )
Proceeds from sales of other assets 459 79
Investments, net 98 1,872
Other   174   (201 )
Total cash provided by (used in) investing activities   (1,592 )   (4,921 )
 
Cash provided by (used in) financing activities   (240 )   4,572
 
Change in cash and cash equivalents classified as current assets held for sale     (7 )
 
Change in cash and cash equivalents   390   673
 
Ending cash $ 677 $ 1,024
 

(c) Includes capitalized interest of $46 million and $12 million for the six months ended June 30, 2013 and 2012, respectively.

 
 
(d) Includes capitalized interest of $366 million and $314 million for the six months ended June 30, 2013 and 2012, respectively.
 
 
     

CHESAPEAKE ENERGY CORPORATION

RECONCILIATION OF ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

($ in millions, except per share data)

(unaudited)

                 
June 30, March 31, June 30,
THREE MONTHS ENDED:   2013     2013     2012
 
Net income available to common stockholders $ 457 $ 15 $ 929
 
Adjustments, net of tax:
Unrealized (gains) losses on derivatives (325 ) 94 (490 )
Net gains on sales of fixed assets (68 ) (30 )
Impairments of fixed assets and other 143 16 148
Impairment of investment 6

Employee retirement and other termination benefits

5 83
(Gains) losses on sales of investments 6 (584)
Losses on purchases of debt 44
Premium on purchase of preferred shares of a subsidiary 69
Other   3   (1 )  
 

Adjusted net income available to common stockholders (a)

334 183 3
Preferred stock dividends 43 43 43
Earnings allocated to participating securities   11    
Total adjusted net income $ 388 $ 226 $ 46
 
Weighted average fully diluted shares outstanding (in millions) (b) 763 758 751
 
Adjusted earnings per share assuming dilution (a) $ 0.51 $ 0.30 $ 0.06
 
(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 adjusted financial measures are a useful adjunct to earnings under accounting principles generally accepted in the United States (GAAP) 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)

           
June 30, June 30,
SIX MONTHS ENDED:   2013     2012
 
Net income available to common stockholders $ 473 $ 858
 
Adjustments, net of tax:
Unrealized gains on derivatives (230 ) (331 )
Net gains on sales of fixed assets (98 ) (1 )
Impairments of fixed assets and other 160 148
Impairment of investment 6

Employee retirement and other termination benefits

87
(Gains) losses on sales of investments 6 (584 )
Losses on purchases of debt 44
Premium on purchase of preferred shares of a subsidiary 69
Other     7
 

Adjusted net income available to common stockholders (a)

517 97
Preferred stock dividends 86 86
Earnings allocated to participating securities   11  
Total adjusted net income $ 614 $ 183
 
Weighted average fully diluted shares outstanding (in millions) (b) 764 752
 
Adjusted earnings per share assuming dilution (a) $ 0.80 $ 0.24
 
(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 adjusted 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 OPERATING CASH FLOW AND EBITDA

($ in millions)

(unaudited)

                 
June 30, March 31, June 30,
THREE MONTHS ENDED:   2013     2013     2012
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,298 $ 924 $ 755
 
Changes in assets and liabilities   72   252   140
 
OPERATING CASH FLOW (a) $ 1,370 $ 1,176 $ 895
                       
June 30, March 31, June 30,
THREE MONTHS ENDED:   2013     2013     2012
 
NET INCOME $ 625 $ 102 $ 1,037
 
Interest expense 104 21 14
Income tax expense 384 63 663
Depreciation and amortization of other assets 76 78 83

Natural gas, oil and NGL depreciation, depletion and amortization

  645   648   588
 
EBITDA (b) $ 1,834 $ 912 $ 2,385
                       
June 30, March 31, June 30,
THREE MONTHS ENDED:   2013     2013     2012
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,298 $ 924 $ 755
 
Changes in assets and liabilities 72 252 140
Interest expense, net of unrealized gains (losses) on derderivatives derivatives
53 15 21

Unrealized gains (losses) on natural gas, oil and NGL derivatives

576 (146 ) 810
Net gains on sales of fixed assets 109 49
Impairments of fixed assets and other (231 ) (27 ) (243 )
Employee retirement and other termination benefits 1 (105 )
Gains (losses) on sales of investments (10 ) 1,030
Earnings (losses) on investments 22 (29 ) (87 )
Impairment of investment (10 )
Stock-based compensation (24 ) (32 ) (26 )
Losses on purchases of debt (17 )
Other items   (15 )   21   (15 )
 
EBITDA (b) $ 1,834 $ 912 $ 2,385
 
(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 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 interest expense, income taxes, 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)

           
June 30, June 30,
SIX MONTHS ENDED:   2013     2012
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 2,222 $ 1,029
 
Changes in assets and liabilities   324   776
 
OPERATING CASH FLOW (a) $ 2,546   $ 1,805
 
               
June 30, June 30,
SIX MONTHS ENDED:   2013     2012
 
NET INCOME $ 728 $ 1,033
 
Interest expense, net of unrealized gains 124 26
Income tax expense 446 661
Depreciation and amortization of other assets 154 166
Natural gas, oil and NGL depreciation, depletion

and amortization

  1,293   1,094
 
EBITDA (b) $ 2,745   $ 2,980
 
               
June 30, June 30,
SIX MONTHS ENDED:   2013     2012
 
CASH PROVIDED BY OPERATING ACTIVITIES $ 2,222 $ 1,029
 
Changes in assets and liabilities 324 776
Interest expense, net of unrealized gains on derivatives 67 28

Unrealized gains on natural gas, oil and NGL derivatives

429 540
Net gains on sales of fixed assets 158 2
Impairments of fixed assets and other (258 ) (243 )
Employee retirement and other termination benefits (104 )
Gains (losses) on sales of investments (10 ) 1,030
Losses on investments (7 ) (120 )
Impairment of investment (10 )
Stock-based compensation (56 ) (63 )
Losses on purchases of debt (17 )
Other items   7

 

  1
 
EBITDA (b) $ 2,745 $ 2,980
 

(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 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 interest expense, income taxes, 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)

                 
June 30, March 31, June 30,
THREE MONTHS ENDED:   2013     2013     2012
 
EBITDA $ 1,834 $ 912 $ 2,385
 
Adjustments:
Unrealized (gains) losses on natural gas, oil and NGL derivatives (576 ) 146 (810 )
Impairment of investment 10
Net gains on sales of fixed assets (109 ) (49 )
Impairments of fixed assets and other 231 27 243
Net income attributable to noncontrolling interests (45 ) (44 ) (65 )
(Gains) losses on sales of investments 10 (957 )
Losses on purchases of debt 70

Employee retirement and other termination benefits

7 133 1
Other   2   (1 )   6
 
Adjusted EBITDA (a) $ 1,424 $ 1,134 $ 803
 
                       
  June 30, June 30,
SIX MONTHS ENDED:   2013     2012
 
EBITDA $ 2,745 $ 2,980
 
Adjustments:
Unrealized (gains) losses on natural gas, oil and NGL derivatives (429 ) (540 )
Impairment of investment 10
Net gains on sales of fixed assets (158 ) (2 )
Impairments of fixed assets and other 258 243
Net income attributable to noncontrolling interests (89 ) (89 )
(Gains) losses on sales of investments 10 (957 )
Losses on purchases of debt 70

Employee retirement and other termination benefits

140 1
Other   1   5
 
Adjusted EBITDA (a) $ 2,558 $ 1,641
 

(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.

SCHEDULE “A”

MANAGEMENT’S OUTLOOK AS OF AUGUST 1, 2013

Chesapeake periodically provides management guidance on certain factors that affect its future financial performance. The primary changes from the company’s May 1, 2013 Outlook are in italicized bold below. The production guidance provided below assumes that Chesapeake closes asset sales of approximately $4 billion during 2013. Estimated production decreases of approximately 37 bcfe in 2013 are associated with these assets sales and are reflected in the production guidance set forth below. To the extent the company completes asset sales in excess of $4 billion during 2013, production guidance may need to be reduced to reflect such incremental sales.

       

Chesapeake Energy Corporation Consolidated Projections

 
Year Ending

12/31/13

Estimated Production:
Natural gas – bcf 1,080 – 1,100
Oil – mbbls 38,000 – 40,000
NGL – mbbls (a) 21,000 – 23,000
Natural gas equivalent – bcfe 1,434 – 1,478
 
Daily natural gas equivalent midpoint – mmcfe 3,990
 
YOY estimated production increase (adjusted for planned asset sales) 3%
 
NYMEX Price (b) (for calculation of realized hedging effects only):
Natural gas - $/mcf $3.73
Oil - $/bbl $97.15
 
Estimated Realized Hedging Effects (based on assumed NYMEX prices above): above):
Natural gas - $/mcf ($0.05)
Oil - $/bbl ($1.70)
 
Estimated Gathering/Marketing/Transportation Differentials to NYMEX Prices:
Natural gas - $/mcf $1.25 – 1.40
Oil - $/bbl $1.00 – 3.00
NGL - $/bbl $69.00 – 73.00
 
Operating Costs per Mcfe of Projected Production:
Production expense $0.85 – 0.90
Production taxes $0.15 – 0.20
General and administrative (c) $0.25 – 0.30
Stock-based compensation (noncash) $0.04 – 0.06
DD&A of natural gas and liquids assets $1.65 – 1.85
Depreciation of other assets $0.20 – 0.25
Interest expense (d) $0.10 – 0.15
 
Other ($ millions):
Marketing, gathering and compression net margin (e) $100 – 125
Oilfield services net margin (e) $125 – 175
Net income attributable to noncontrolling interests and other (f) ($160 – 200)
 
Book Tax Rate 38%

 

Weighted average shares outstanding (in millions):
Basic 650 – 655
Diluted 760 – 765
 
Operating cash flow before changes in assets and liabilities (g)(h) $5,050 – 5,100
Drilling and completion costs on proved and unproved properties ($5,700 – 6,000)
Acquisition of unproved properties, net ($300 – 350)
 
a) Reflects actual and assumed ethane rejection in the 2013 second quarter and 2013 third quarter, respectively.
b) NYMEX natural gas and oil prices have been updated for actual contract prices through July and June, respectively.
c) Excludes expenses associated with noncash stock-based compensation.
d) Does not include unrealized gains or losses on interest rate derivatives.
e) Includes revenue and operating costs and excludes depreciation and amortization of other assets.
f) Net income attributable to noncontrolling interests of Chesapeake Granite Wash Trust, CHK Utica, L.L.C. and CHK Cleveland Tonkawa, L.L.C.
g) A non-GAAP financial measure. We are unable to provide 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.
h) Assumes NYMEX prices on open contracts of $3.75 to $4.00 per mcf and $100.00 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 and year-end derivative positions and the accounting for natural gas, oil and NGL derivatives.

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