SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported) November 5, 2002
(November 4, 2002)
CHESAPEAKE ENERGY CORPORATION
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(Exact name of Registrant as specified in its Charter)
Oklahoma 1-13726 73-1395733
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6100 North Western Avenue, Oklahoma City, Oklahoma 73118
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(Address of principal executive offices) (Zip Code)
(405)848-8000
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
Chesapeake Energy Corporation ("Chesapeake") issued a Press Release on
November 4, 2002 announcing third quarter 2002 earnings. The following was
included in the Press Release:
Chesapeake today reported strong financial and operating results for
the third quarter of 2002. For the quarter, Chesapeake generated net income
available to common shareholders of $14.1 million ($0.08 per fully diluted
common share), operating cash flow of $102.0 million ($0.54 per fully diluted
common share), and ebitda (operating cash flow plus interest expense) of $130.4
million on revenue of $198.2 million.
The financial results described above include several special items
that reduced net income by a total of $7.4 million. These items consisted of a
non-cash after-tax $4.2 million risk management loss ($7.0 million before-tax)
arising from the mark-to-market valuation of certain of the company's oil,
natural gas and interest rate hedging positions under SFAS 133. In addition, the
company recorded a non-cash after-tax impairment of $2.9 million ($4.8 million
before-tax) representing 100% of the allocated cost of the company's Seven Seas
common stock warrants and a $0.3 million after-tax loss ($0.5 million
before-tax) from repurchases of debt. Excluding these special items, the company
generated recurring net income to common shareholders of $21.5 million ($0.13
per fully diluted share).
Chesapeake's oil and natural gas production for the third quarter of
2002 reached a record level of 46.7 billion cubic feet of natural gas equivalent
(bcfe), comprised of 41.4 billion cubic feet of natural gas (bcf) (89%) and 0.87
million barrels of oil (mmbo) (11%). Production increased 14.4% from the third
quarter of 2001 and 7.5% from the second quarter of 2002. This was the company's
fifth consecutive quarter of sequential production growth. In addition,
Chesapeake's estimated proved reserves have grown from 1.8 tcfe to 2.2 tcfe
since the beginning of the year, an increase of 22%.
The table below summarizes Chesapeake's key statistics during the third
quarter of 2002 and compares them to the second quarter of 2002 and the third
quarter of 2001:
Three Months Ended:
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9/30/02 6/30/02 9/30/01
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Average daily production (in mmcfe) 507 477 443
Gas as % of total production 89 89 90
Natural gas production (in bcf) 41.4 38.5 36.5
Average realized gas price ($/mcf) 3.39 3.38 4.34
Oil production (in mbbls) 872 823 705
Average realized oil price ($/bbl) 25.67 26.55 27.37
Natural gas equivalent production (in bcfe) 46.7 43.4 40.8
Gas equivalent realized price ($/mcfe) 3.49 3.50 4.36
General and administrative costs ($/mcfe) .08 .09 .08
Production taxes ($/mcfe) .15 .18 .17
Lease operating expenses ($/mcfe) .53 .56 .47
Interest expense ($/mcfe) .61 .57 .59
DD&A of oil and gas properties ($/mcfe) 1.25 1.17 1.15
Operating cash flow ($ in millions) 102.0 96.9 125.1
Operating cash flow ($/mcfe) 2.19 2.23 3.07
Ebitda ($ in millions) 130.4 121.6 149.2
Ebitda ($/mcfe) 2.79 2.80 3.66
Net income to common shareholders ($ in millions) 14.1 22.5 65.0
Recurring net income to common shareholders ($ in 21.5 23.0 45.7
millions)
Chesapeake's Risk Management Program Continues to Play Key Role in
Company's Success; Substantial New Hedges Added in Past Month
Commodity hedging activities increased third quarter 2002 cash
realizations by $22.2 million (comprised of a loss of $2.20 per barrel of oil
(bo) and a gain of $0.58 per thousand cubic feet of natural gas (mcf), or $0.47
per thousand cubic feet of natural gas equivalent (mcfe) and the first three
quarters of 2002's cash realizations by $84.1 million ($0.47 per bo and $0.71
per mcf, or $0.64 per mcfe). Combining the first three quarters of 2002's
hedging gains of $84 million with 2001's hedging gains of $105 million and
adding the approximate $43 million mark-to-market value of the company's
remaining locked and open hedges provides a total of $232 million of realized
and unrealized hedging gains from the company's oil and natural gas risk
management activities during 2001-03.
In the past month, Chesapeake has added significant new oil and natural
gas hedging positions. The company has now hedged 22 bcf (approximately 50%) of
its estimated fourth quarter 2002 gas production and 31 bcf (approximately 72%)
of its estimated first quarter 2003 gas production at average NYMEX prices of
$4.47 and $4.12 per mmbtu, respectively. In addition, Chesapeake has hedged 100%
of its estimated fourth quarter 2002 oil production and 100% of its estimated
full year 2003 oil production at average NYMEX prices of $25.00 and $27.80 per
bo, respectively. Based on the company's belief that North American gas
production will continue its multi-year decline in 2003, Chesapeake anticipates
that gas prices are likely to increase further during the final three quarters
of 2003. Accordingly, the company's gas production remains unhedged for that
period at this time.
Chesapeake Delivers Fifth Consecutive Sequential Quarterly Production Increase
During the past three years, Chesapeake has developed one of the most
active and value-added onshore drilling programs in the industry. The company
has built this program through a focused commitment to internally generated
drillbit growth, having invested approximately $200 million in undeveloped land
and 3-D seismic data and doubling the size of its engineering and geoscientific
staffs during that period. In addition, Chesapeake anticipates investing an
additional $75 million to acquire undeveloped land and 3-D seismic during the
next 12 months. The company currently owns approximately 1.9 million net acres
of U.S. onshore leasehold on which it has identified more than 1,500 drillsites,
roughly a five-year backlog of drilling prospects.
Chesapeake's drilling efforts in the third quarter of 2002 were
highlighted by exploratory successes in the Deep Anadarko, Greater Mayfield,
Cement and Watonga-Chickasha areas of western Oklahoma. Gas prices are higher
and drilling costs are lower than they were at this time last year and therefore
the company continues to drill aggressively, with 25 rigs currently active. Of
these 25 rigs, nine are currently drilling wells with projected total depths
greater than 15,000'. Chesapeake believes its competitive advantages in deep
Mid-Continent gas exploration will continue to provide significant reserve and
production growth in the years ahead.
Chesapeake's Mid-Continent Gas Consolidation Activities Complement Drillbit
Growth; Four Transactions Totaling $165 Million Closed in Third Quarter
To complement its exploratory and development drilling programs and to
continue building on its economies of scale, Chesapeake actively pursues
value-added Mid-Continent gas acquisitions. Acquisitions made during the third
quarter included privately-held Focus Energy, Inc. and related partnerships, the
Mid-Continent assets of publicly-traded EnCana Corporation, the Mid-Continent
assets of OGE Energy Corp. and the Anadarko Basin assets of The Williams
Company. These four Mid-Continent gas acquisitions added approximately 125 bcfe
of proved reserves and more than 100 new unproven drillsites.
Management Summary
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Chesapeake's strong performance during the first three quarters of 2002 and in
recent years is a result of the company's successful and uniquely focused
strategy on Mid-Continent natural gas, our high-quality asset base and our
talented and hard-working employees. During a year when our industry's natural
gas production will decrease by at least 5%, Chesapeake expects its production
to increase by approximately 12%, much of which will come from organic
production growth generated by the company's drilling programs.
We firmly believe that Chesapeake has built one of the very best
onshore gas exploration programs in the U.S. and our ongoing drilling success
increasingly distinguishes Chesapeake as a prospect rich company in a prospect
poor industry. The combination of our focus on gas in the Mid-Continent, our
value-added risk management strategy, our balanced acquisition and drilling
programs, our high quality assets and our low operating costs should enable
Chesapeake to continue delivering one of the best track records of value
creation in the industry."
Conference Call Information
Chesapeake's management invites your participation in a conference call
tomorrow morning, November 5, 2002 at 8:00 a.m. CST to discuss the contents of
this release. Please call 913-981-5518 between 7:50 and 8:00 a.m. CST on
November 5 if you would like to participate in the call. For those unable to
participate, the call will also be available over the Internet by visiting our
home page at www.chkenergy.com and clicking on the link under "Investor
Relations" and "Conference Calls" or by going directly to www.ccbn.com. In
addition, a replay of the call will also be available through November 19 by
calling 719-457-0820. The passcode for the replay is 725635.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements include estimates and give our current
expectations or forecasts of future events. They are based on our historical
operating trends, our existing commodity hedging position and our current
estimate of proved reserves. Although we believe our forward-looking statements
are reasonable, they can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. For example, statements concerning the fair
values of derivative contracts and their estimated contribution to our future
results of operations are based upon market information as of a specific date.
These market prices are subject to significant volatility. Factors that could
cause actual operating and financial results to differ materially from expected
results include the volatility of oil and gas prices, our substantial
indebtedness, our commodity price risk management activities, the cost and
availability of drilling and production services, our ability to replace
reserves, the availability of capital, uncertainties inherent in evaluating our
own reserves and the reserves we acquire, drilling and operating risks and other
risk factors described in the company's 2001 annual report on Form 10-K and
subsequent filings with the Securities and Exchange Commission.
Chesapeake Energy Corporation is one of the 10 largest independent natural gas
producers in the U.S. Headquartered in Oklahoma City, the company's operations
are focused on exploratory and developmental drilling and producing property
acquisitions in the Mid-Continent region of the United States. The company's
Internet address is www.chkenergy.com.
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
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THREE MONTHS ENDED: September 30, 2002 September 30, 2001
$ $/mcfe $ $/mcfe
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REVENUES:
Oil and gas sales 163,012 3.49 177,746 4.36
Risk management income (7,046) (0.15) 32,260 0.79
Oil and gas marketing sales 42,216 0.90 28,905 0.71
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Total revenues 198,182 4.24 238,911 5.86
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OPERATING COSTS:
Production expenses 24,950 0.53 19,303 0.47
Production taxes 6,807 0.15 7,063 0.17
General and administrative 3,777 0.08 3,240 0.08
Oil and gas marketing expenses 41,148 0.88 27,946 0.69
Depreciation, depletion, and amortization
of oil and gas properties 58,334 1.25 46,821 1.15
Depreciation and amortization of other assets 3,727 0.08 2,164 0.05
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Total operating costs 138,743 2.97 106,537 2.61
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INCOME FROM OPERATIONS 59,439 1.27 132,374 3.25
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OTHER INCOME (EXPENSE):
Interest and other income 1,806 0.04 132 -
Interest expense (28,316) (0.61) (24,104) (0.59)
Impairment of Seven Seas warrants (4,770) (0.10) - -
Loss on repurchase of debt (489) (0.01) - -
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Total other income (expense) (31,769) (0.68) (23,972) (0.59)
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Income Before Income Taxes 27,670 0.59 108,402 2.66
Income Tax Expense 11,070 0.24 43,394 1.06
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NET INCOME 16,600 0.35 65,008 1.60
Preferred Stock Dividends (2,526) (0.05) - -
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS 14,074 0.30 65,008 1.60
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EARNINGS PER COMMON SHARE:
Basic $ 0.08 $ 0.40
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Assuming dilution $ 0.08 $ 0.38
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WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 166,144 164,440
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Assuming dilution (1) 171,182 170,384
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1. Diluted shares outstanding for the three months ended September 30, 2002 do
not include the effect of the assumed conversion at the beginning of the
period of the outstanding preferred stock as the effect was antidilutive.
CHESAPEAKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
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NINE MONTHS ENDED: September 30, 2002 September 30, 2001
$ $/mcfe $ $/mcfe
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REVENUES:
Oil and gas sales 456,992 3.46 574,190 4.78
Risk management income (86,995) (0.66) 94,715 0.79
Oil and gas marketing sales 112,334 0.85 123,071 1.02
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Total revenues 482,331 3.65 791,976 6.59
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OPERATING COSTS:
Production expenses 71,252 0.54 55,933 0.47
Production taxes 19,934 0.15 31,349 0.26
General and administrative 11,930 0.09 10,114 0.08
Oil and gas marketing expenses 108,836 0.82 119,337 0.99
Depreciation, depletion, and amortization
of oil and gas properties 157,731 1.20 124,904 1.04
Depreciation and amortization of other assets 10,489 0.08 5,954 0.05
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Total operating costs 380,172 2.88 347,591 2.89
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INCOME FROM OPERATIONS 102,159 0.77 444,385 3.70
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OTHER INCOME (EXPENSE):
Interest and other income 7,343 0.06 1,384 0.01
Interest expense (79,966) (0.60) (72,977) (0.60)
Impairment of Seven Seas warrants (4,770) (0.04) - -
Loss on repurchase of debt (1,353) (0.01) - -
Gothic standby credit facility costs - - (3,392) (0.03)
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Total other income (expense) (78,746) (0.59) (74,985) (0.62)
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Income Before Income Taxes and
Extraordinary Item 23,413 0.18 369,400 3.08
Income Tax Expense 9,366 0.07 148,619 1.24
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NET INCOME BEFORE EXTRAORDINARY ITEM 14,047 0.11 220,781 1.84
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax - - (46,000) (0.38)
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NET INCOME 14,047 0.11 174,781 1.46
Preferred Stock Dividends (7,588) (0.06) (728) (0.01)
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NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS 6,459 0.05 174,053 1.45
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EARNINGS PER COMMON SHARE:
Basic $ 0.04 $ 1.08
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Assuming dilution $ 0.04 $ 1.02
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WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 165,829 161,603
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Assuming dilution (1) 171,540 170,937
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1. Diluted shares outstanding for the nine months ended September 30, 2002 do
not include the effect of the assumed conversion at the beginning of the
period of the outstanding or converted preferred stock as the effect was
antidilutive.
CHESAPEAKE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's)
(unaudited)
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September 30, December 31,
2002 2001
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Cash and cash equivalents $ 25,509 $ 124,960
Other current assets 150,340 236,423
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TOTAL CURRENT ASSETS 175,849 361,383
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Property and equipment (net) 2,317,713 1,785,581
Deferred tax asset 9,717 67,781
Other assets 41,354 72,023
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TOTAL ASSETS $ 2,544,633 $ 2,286,768
=============== ===============
Current liabilities $ 246,353 $ 173,381
Long term debt 1,494,180 1,329,453
Revenue and royalties due others 14,191 12,696
Long term derivative instruments 49,358 -
Other long term liabilities 5,764 3,831
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TOTAL LIABILITIES 1,809,846 1,519,361
STOCKHOLDERS' EQUITY 734,787 767,407
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,544,633 $ 2,286,768
=============== ===============
COMMON SHARES OUTSTANDING 166,227 164,742
=============== ===============
ITEM 9. REGULATION FD DISCLOSURE
Chesapeake Updates its Operational and Financial Guidance
for the Fourth Quarter of 2002 and for the Full Year 2003
The following forecasts and estimates replace in their entirety those
set forth in the company's September 3, 2002 outlook update. The company's
forecasts and estimates are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially due to the risks and uncertainties described in the company's filings
with the Securities and Exchange Commission. Furthermore, these projections do
not reflect the potential impact of unforeseen events that may occur subsequent
to the issuance of this release.
As a result of the drilling successes and acquisitions discussed above,
Chesapeake is today announcing a fourth increase in its 2002 forecasts.
Production for the year is now projected at 180 bcfe (89% gas), up from
September's projection of 178-180 bcfe and up from the company's initial 2002
production forecast of 162-166 bcfe. Fourth quarter 2002 production is projected
at 47.5 bcfe (90% natural gas), compared to 46 bcfe projected in September. The
company's forecasted 2003 production levels remain unchanged from September's
guidance at 190-195 bcfe (90% natural gas). The company's guidance does not
include the effects of a possible trade or sale of its Permian Basin assets. The
evaluation of how best to pursue such a transaction is still under review.
Projections for expenses in 2003 per mcfe are as follows: $0.58-0.62
for lease operating expense (up from $0.53-0.57 in previous guidance),
$0.22-0.24 for production taxes, $0.60-0.65 for interest expense, $0.10-0.11 for
general and administrative costs, $1.30-1.35 for DD&A of oil and gas properties
and $0.10-0.11 for DD&A of other assets (all unchanged from previous guidance).
The company expects its book income tax rate during 2003 to average 40%, all of
which should be deferred.
With the filing of this report on Form 8-K, we are updating the
outlook on our website at www.chkenergy.com. We caution you that our
outlook is given as of November 4, 2002 based on currently available
information, and that we are not undertaking any obligation to update our
estimates as conditions change or other information becomes available.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
By: /s/ Aubrey K. McClendon
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Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Dated: November 5, 2002