Chesapeake Energy Corporation Reports Strong Financial and Operational Results for the 2007 First Quarter.Net Income Available to Common Shareholders Reaches $232 Million on Revenue of $1.6 Billion and Production of 154 Bcfe; Adjusted Net Income Available to Common Shareholders Reaches $425 Million Proved Reserves proved reserves The quantity of minerals expected to be recoverable under current economic and operating conditions. The amount of proved reserves is important in valuing the stock of a company with significant holdings in natural resources. Reach Record Level of 9.4 Tcfe; Company Delivers First Quarter Reserve Replacement Rate of 410% from 475 Bcfe of Additions Company Provides Updated and Detailed Review of its 18.3 Tcfe of Risked Unproved Reserves Located on its 11.2 Million Net Acres of U.S. Onshore on·shore adj. 1. Moving or directed toward the shore: an onshore wind. 2. Located on the shore: an onshore beacon; an onshore patrol. adv. Leasehold An estate, interest, in real property held under a rental agreement by which the owner gives another the right to occupy or use land for a period of time. leasehold n. OKLAHOMA CITY Oklahoma City (1990 pop. 444,719), state capital, and seat of Oklahoma co., central Okla., on the North Canadian River; inc. 1890. The state's largest city, it is an important livestock market, a wholesale, distribution, industrial, and financial center, and a farm -- Chesapeake Energy Chesapeake Energy (NYSE: CHK) is a producer of natural gas in the United States and according to their 3Q 2007 report, is the largest independent producer, third overall (including majors) and the most active driller of new wells in the US. Corporation (NYSE NYSE See: New York Stock Exchange :CHK CHK Check CHK CHKDSK (File Name Extension) CHK Chuuk, Caroline Islands, Micronesia (airport code) CHK Check File ) today reported strong financial and operating results for the first quarter of 2007. For the quarter, Chesapeake Chesapeake, ship Chesapeake, U.S. frigate, famous for her role in the Chesapeake affair (June 22, 1807) and for her battle with the H.M.S. Shannon (June 1, 1813). The Chesapeake left Norfolk, Va. generated net income available to common shareholders of $232 million ($0.50 per fully diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. common share), operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. of $1.124 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $924 million (defined as net income before income taxes, interest expense, and depreciation, depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able and amortization expense) on revenue of $1.580 billion and production of 154 billion cubic feet of natural gas equivalent (bcfe). The company's 2007 first quarter net income available to common shareholders and ebitda include an unrealized after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. mark-to-market Mark-to-market Adjustment of the book value or collateral value of a security to reflect current market value. loss of $193 million resulting from the company's oil and natural gas and interest rate hedging programs. This type of item is typically not included in published estimates of the company's financial results by certain securities analysts. Excluding this item, Chesapeake generated adjusted net income to common shareholders in the 2007 first quarter of $425 million ($0.87 per fully diluted common share) and adjusted ebitda of $1.234 billion. The excluded item does not affect the calculation of operating cash flow. A reconciliation of operating cash flow, ebitda, adjusted ebitda and adjusted net income to comparable financial measures calculated in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting is presented on pages 19 - 20 of this release. Key Operational and Financial Statistics Summarized Below for the 2007 First Quarter, 2006 Fourth Quarter and 2006 First Quarter The table below summarizes Chesapeake's key results during the 2007 first quarter and compares them to the 2006 fourth quarter and the 2006 first quarter. [TABLE OMITTED] (a) includes the effects of realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. or (losses) from hedging, but does not include the effects of unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. or (losses) from hedging (b) excludes expenses associated with non-cash stock-based compensation (c) defined as cash flow provided by operating activities before changes in assets and liabilities (d) defined as net income before income taxes, interest expense, and depreciation, depletion and amortization expense, as adjusted to remove the effects of certain items detailed on page 20 (e) defined as net income available to common shareholders, as adjusted to remove the effects of certain items detailed on page 20 Oil and Natural Gas Production Sets Record for 23(rd) Consecutive Quarter; 2007 First Quarter Average Daily Production Increases 12% and 3% Over Production in the 2006 First Quarter and the 2006 Fourth Quarter Daily production for the 2007 first quarter averaged 1.707 bcfe, an increase of 188 million cubic feet of natural gas equivalent (mmcfe), or 12%, over the 1.519 bcfe of daily production in the 2006 first quarter and an increase of 54 mmcfe, or 3%, over the 1.653 bcfe produced per day in the 2006 fourth quarter. Chesapeake's 2007 first quarter production of 153.7 bcfe was comprised of 140.8 billion cubic feet of natural gas (bcf) (92% on a natural gas equivalent basis) and 2.14 million barrels of oil and natural gas liquids (mmbbls) (8% on a natural gas equivalent basis). Chesapeake's average daily production for the quarter of 1.707 bcfe consisted of 1.564 bcf of natural gas and 23,811 barrels (bbls) of oil. The 2007 first quarter was Chesapeake's 23rd consecutive quarter of sequential One after the other in some consecutive order such as by name or number. U.S. production growth. Over these 23 quarters, Chesapeake's U.S. production has increased 326%, for an average compound quarterly growth rate of 6.5% and an average compound annual growth rate of 29%. The company's rate of production has recently exceeded 1.8 bcfe per day and based on projected drilling levels and anticipated results, Chesapeake is affirming its previous forecasts for total production growth of 14-18% for 2007 and 10-14% for 2008. Oil and Natural Gas Proved Reserves Reach Record Level of 9.4 Tcfe; Drilling and Acquisition Costs Average $2.58 per Mcfe as Company Added 475 Bcfe for a Reserve Replacement Rate of 410% Chesapeake began 2007 with estimated proved reserves of 8.956 trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time. (mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed. In the USA and Canada, 10^12. cubic feet of natural gas equivalent (tcfe) and ended the quarter with 9.431 tcfe, an increase of 475 bcfe, or 5.3%. During the quarter, Chesapeake replaced its 154 bcfe of production with an estimated 629 bcfe of new proved reserves for a reserve replacement rate of 410%. Reserve replacement through the drillbit was 535 bcfe, or 349% of production (including 205 bcfe of positive performance revisions and 135 bcfe of positive revisions resulting from oil and natural gas price increases between December December: see month. 31, 2006 and March 31, 2007) and 85% of the total increase. Reserve replacement through the acquisition of proved reserves was 94 bcfe, or 61% of production and 15% of the total increase. On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company's total drilling and acquisition costs were $2.58 per mcfe (excluding costs of $50 million for seismic, $405 million for unproved properties and leasehold acquired during the quarter and $12 million relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc tax basis step-up step-up A scheduled increase in the exercise or conversion price at which a warrant, an option, or a convertible security may be used to acquire shares of common stock. and asset retirement obligations Asset Retirement Obligations provide for future disposal of assets as required by SFAS 143 [1]. Firms must recognize the ARO liability in the period it was acquired, generally acquisition. , as well as positive revisions of proved reserves from higher oil and natural gas prices). Excluding these items described above, Chesapeake's exploration and development costs through the drillbit were $2.66 per mcfe during the 2007 first quarter while reserve replacement costs through acquisitions of proved reserves were $2.21 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development during the quarter, including seismic, leasehold, unproved properties, capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. internal costs, non-cash tax basis step-up from corporate acquisitions and asset retirement obligations, were $1.741 billion. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves are presented on page 17 of this release. During the 2007 first quarter, Chesapeake continued the industry's most active drilling program and drilled 476 gross (404 net) operated wells and participated in another 394 gross (57 net) wells operated by other companies. The company's drilling success rate was 99% for company-operated wells and 98% for non-operated wells. Also during the quarter, Chesapeake invested $906 million in operated wells (using an average of 129 operated rigs), $160 million in non-operated wells (using an average of 94 non-operated rigs), $148 million to acquire new leasehold (exclusive of $258 million in unproved leasehold obtained through corporate and asset acquisitions) and $50 million to acquire seismic data. As of March 31, 2007, Chesapeake's estimated future net cash flows, discounted at an annual rate of 10% before income taxes (PV-10) were $20.2 billion using field differential adjusted prices of $60.75 per bbl (based on a NYMEX See New York Mercantile Exchange. NYMEX See New York Mercantile Exchange (NYM). quarter-end price of $65.85 per bbl) and $7.01 per thousand cubic feet of natural gas (mcf) (based on a NYMEX quarter-end price of $7.34 per mcf). By comparison, the December 31, 2006 PV-10 of the company's proved reserves was $13.6 billion using field differential adjusted prices of $56.25 per bbl (based on a NYMEX year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. price of $61.15 per bbl) and $5.41 per mcf (based on a NYMEX year-end price of $5.64 per mcf). Additionally, the March 31, 2006 PV-10 of the company's proved reserves was $17.6 billion using field differential adjusted prices of $62.06 per bbl (based on a NYMEX year-end price of $66.33 per bbl) and $6.69 per mcf (based on a NYMEX year-end price of $7.18 per mcf). Chesapeake's current PV-10 changes by approximately $360 million for every $0.10 per mcf change in natural gas prices and approximately $50 million for every $1.00 per bbl change in oil prices. The company calculates the standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. measure of future net cash flows in accordance with SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System 69 only at year-end because applicable income tax information on properties, including recently acquired oil and natural gas interests, is not readily available at other times during the year. As a result, the company is not able to reconcile the interim period-end values to the standardized measure at such dates. The only difference between the two measures is that PV-10 is calculated before considering the impact of future income tax expenses, while the standardized measure includes such effects. In addition to the PV-10 value of its proved reserves, the net book value of the company's other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. (including drilling rigs, land and buildings, investments in companies, securities, long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. derivative instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. and other non-current assets) was $2.7 billion as of March 31, 2007, $2.8 billion as of December 31, 2006 and $1.6 billion as of March 31, 2006. Average Realized Prices, Hedging Results and Hedging Positions Detailed Average prices realized during the 2007 first quarter (including realized gains or losses from oil and natural gas derivatives derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. , but excluding unrealized gains or losses on such derivatives) were $61.13 per bbl and $9.26 per mcf, for a realized natural gas equivalent price of $9.33 per mcfe. Chesapeake's average realized pricing differentials to NYMEX during the first quarter were a negative $5.36 per bbl and a negative $0.46 per mcf. Realized gains from oil and natural gas hedging activities during the quarter generated an $8.33 gain per bbl and a $2.95 gain per mcf, for a 2007 first quarter realized hedging gain of $433 million, or $2.82 per mcfe. The following tables compare Chesapeake's open hedge position through swaps and collars as well as gains from lifted hedges as of May 3, 2007 to those previously announced as of February February: see month. 22, 2007. Depending on changes in oil and natural gas futures markets futures market, a commodity exchange where contracts for the future delivery of grain, livestock, and precious metals are bought and sold. Speculation in futures serves to protect both the developers and the users of the commodities from unfavorable and unpredictable and management's view of underlying oil and natural gas supply and demand trends, Chesapeake may either increase or decrease its hedging positions at any time in the future without notice. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Additionally, the company has lifted a portion of its oil hedges securing gains of $6.3 million and $4.8 million for the second through fourth quarters of 2007 and for the full year 2008, respectively. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Certain open natural gas swap positions include "knockout" provisions at prices ranging from $5.25 to $6.50 covering 152 bcf in 2007, $5.75 to $6.50 covering 189 bcf in 2008 and $5.90 to $6.25 covering 79 bcf in 2009, and certain open natural gas collar positions include "knockout" provisions at prices ranging from $5.00 to $6.00 covering 52 bcf in 2007, $5.00 to $6.00 covering 11 bcf in 2008 and $6.00 covering 18 bcf in 2009. Also, certain open oil swap positions include "knockout" provisions at prices ranging from $45.00 to $60.00 covering 2.2 mmbbls in 2007, 2.9 mmbbls in 2008 and 1.5 mmbbls in 2009. The company's updated forecasts for 2007 and 2008 are attached to this release in an Outlook dated May 3, 2007 labeled as Schedule "A", which begins on page 21. This Outlook has been changed from the Outlook dated February 22, 2007 (attached as Schedule "B", which begins on page 25) to reflect various updated information. Chesapeake's Leasehold and 3-D Seismic Inventories Now Total 11.2 Million Net Acres and 16.7 Million Acres; Risked Unproved Reserves in the Company's Inventory Now Reach 18.3 Tcfe, Bringing Total Reserve Base to 27.7 Tcfe Since 2000, Chesapeake has invested $7.1 billion in new leasehold and 3-D seismic acquisitions and now owns one of the largest inventories of onshore leasehold (11.2 million net acres) and 3-D seismic (16.7 million acres) in the U.S. On this leasehold, the company has approximately 26,500 net drilling locations, representing an approximate 10-year inventory of drilling projects, on which it believes it can develop an estimated 3.5 tcfe of proved undeveloped reserves and approximately 18.3 tcfe of risked unproved reserves (73 tcfe of unrisked unproved reserves). Chesapeake's 9.4 tcfe of proved reserves and its 18.3 tcfe of risked unproved reserves total approximately 27.7 tcfe. To aggressively develop these assets, Chesapeake has continued to significantly strengthen its technical capabilities by increasing its land, geoscience ge·o·sci·ence n. Any one of the sciences, such as geology or geochemistry, that deals with the earth. ge and engineering staff to nearly 1,100 employees. Today, the company has over 5,000 employees, of which approximately 60% work in the company's E&P operations and approximately 40% work in the company's oilfield service operations. Chesapeake characterizes its drilling activity by one of four play types: conventional gas resource, unconventional gas resource, emerging unconventional gas resource and Appalachian Ap`pa`la´chi`an a. 1. Of or pertaining to a chain of mountains in the United States, commonly called the Allegheny ltname> mountains. Noun 1. Basin gas resource. In these plays, Chesapeake uses a probability-weighted statistical approach to estimate the potential number of drillsites and unproved reserves associated with such drillsites. The following summarizes Chesapeake's ownership and activity in each gas resource play type and highlights notable projects in each play. Conventional Gas Resource Plays - In its traditional conventional areas (i.e., portions of the Mid-Continent, Permian, Gulf Coast and South Texas regions), where exploration targets are typically deep and defined using 3-D seismic data, Chesapeake believes it has a meaningful competitive advantage due to its operating scale, deep drilling expertise and over 13.1 million acres of 3-D seismic data. In these plays, Chesapeake owns 3.4 million net acres on which it has an estimated 3.0 tcfe of proved developed reserves, 1.0 tcfe of proved undeveloped reserves and approximately 3.3 tcfe of risked unproved reserves and is currently using 28 operated drilling rigs to further develop its inventory of approximately 3,600 drillsites. Three of Chesapeake's most important conventional gas resource plays are described below: * Southern Oklahoma Oklahoma (ōkləhō`mə), state in SW United States. It is bordered by Missouri and Arkansas (E); Texas, partially across the Red R. (S, W); New Mexico, across the narrow edge of the Oklahoma Panhandle (W); and Colorado and Kansas (N). (generally Pennsylvanian-aged formations in Bray, Cement cement, binding material used in construction and engineering, often called hydraulic cement, typically made by heating a mixture of limestone and clay until it almost fuses and then grinding it to a fine powder. , Golden Trend, Sholem Alechem and Texoma Texoma, a portmanteau of the words Texas and Oklahoma, is used to describe the area on either side of the border between these two states along the Red River valley, in particular the area around Lake Texoma, a popular recreation area. ): From various formations located in the Marietta Marietta (mârēĕt`ə). 1 City (1990 pop. 44,129), seat of Cobb co., NW Ga.; inc. 1834. The principal manufactures of this suburb of Atlanta are related to aircraft production. At the foot of Kennesaw Mt. , Ardmore Ardmore, city (1990 pop. 23,079), seat of Carter co., S Okla.; inc. 1898. It is the commercial center of an oil and farm area. Its industries include oil refining, tourism, and the manufacture of electronic equipment, plastics, fabricated metal products, and feeds. and Anadarko Basins The Anadarko Basin is one of the most prolific natural gas reserves in North America, with ultimate gas production in excess of 100 trillion cubic feet of gas.[1] External links
References 1. , the company is producing approximately 170 mmcfe net per day. The company is currently using nine operated rigs to further develop its 415,000 net acres of leasehold. Chesapeake's proved developed reserves in southern Oklahoma are an estimated 564 bcfe, its proved undeveloped reserves are an estimated 242 bcfe and its risked unproved reserves are approximately 900 bcfe after applying a 75% risk factor and assuming an additional 650 net wells are drilled in the years ahead. The company's targeted results for vertical southern Oklahoma wells are $3.5 million to develop 2.2 bcfe on approximately 120 acre spacing. * South Texas: Located primarily in Zapata County, Texas Zapata County is a county located in the U.S. state of Texas. In 2000, its population was 12,182. Its county seat is Zapata6. Zapata is named for Antonio Zapata, a rancher in the area and rebel against Mexico. History Geography According to the U.S. , Chesapeake's South Texas assets are producing approximately 145 mmcfe net per day. The company is currently using six operated rigs to further develop its 140,000 net acres of leasehold. Chesapeake's proved developed reserves in South Texas are an estimated 315 bcfe, its proved undeveloped reserves are an estimated 158 bcfe and its risked unproved reserves are approximately 300 bcfe after applying a 75% risk factor and assuming an additional 330 net wells are drilled in the years ahead. The company's targeted results for vertical South Texas wells are $2.8 million to develop 1.8 bcfe on approximately 80 acre spacing. * Mountain Front (primarily Morrow mor·row n. 1. The following day: resolved to set out on the morrow. 2. The time immediately subsequent to a particular event. 3. Archaic The morning. and Springer springer a North American term commonly used to describe heifers close to term with their first calf. formations in western Oklahoma Western Oklahoma can usually be defined as all territory west of Interstate 35, and west of Oklahoma City. It is usually broken up into two primary regions: Northwestern Oklahoma and Southwestern Oklahoma. ): From these prolific formations located in the Anadarko Basin, the company is producing approximately 110 mmcfe net per day. The company is currently using two operated rigs to further develop its 150,000 net acres of Mountain Front leasehold. Chesapeake's proved developed reserves in the Mountain Front area are an estimated 190 bcfe, its proved undeveloped reserves are an estimated 57 bcfe and its risked unproved reserves are approximately 250 bcfe after applying a 70% risk factor and assuming an additional 100 net wells are drilled in the years ahead. The company's targeted results for vertical Mountain Front wells are $8.0 million to develop 4.0 bcfe on approximately 320 acre spacing. Unconventional Gas Resource Plays - In its unconventional gas resource areas, Chesapeake owns 2.7 million net acres on which it has an estimated 1.9 tcfe of proved developed reserves, 2.0 tcfe of proved undeveloped reserves and approximately 10.5 tcfe of risked unproved reserves and is currently using 83 operated drilling rigs to further develop its inventory of approximately 12,600 net drillsites. Six of Chesapeake's most important unconventional gas resource plays are described below: * Fort Worth Barnett Shale The Barnett Shale is a geological formation of economic significance. It consists of sedimentary rocks of Mississippian age in the U.S. State of Texas. The formation is estimated to stretch from the city of Dallas to west of the city of Fort Worth and south, covering 5,000 square (North Texas): The Fort Worth Barnett Shale is the largest and most prolific unconventional gas resource play in the U.S. In this play, Chesapeake is the fourth largest producer of natural gas, the most active driller and the largest leasehold owner in the Tier 1 sweet spot of Tarrant Tarrant is the name of two places in the United States:
* Fayetteville Fayetteville (fā`ĕtvĭl). 1 City (1990 pop. 42,099), seat of Washington co., NW Ark., in the Ozarks; inc. 1836. It is an agricultural trade center with canneries and food processors. The Univ. Shale (Arkansas Arkansas, river, United States Arkansas (ärkăn`zəs, är`kənsô'), river, c.1,450 mi (2,330 km) long, rising in the Rocky Mts., central Colo. ): In this region of growing importance to Chesapeake, the company is the largest leasehold owner in the play (second largest in the core area of the play) and is producing approximately 15 mmcfe net per day. As a result of extensive analysis and successful drilling results over the last year by Chesapeake and others, the company has become more confident in the economic merits of the Fayetteville Shale play and has upgraded the play from its emerging unconventional gas resource play category. In the past two months, Chesapeake has increased its drilling activity levels more than three-fold to ten operated rigs and will increase its drilling activity level to 12 operated rigs by mid-year 2007 to further develop its 370,000 net acres of leasehold in the core area of the play. Chesapeake's proved developed reserves in the Fayetteville Shale are an estimated 34 bcfe, its proved undeveloped reserves are an estimated 55 bcfe and its risked unproved reserves are approximately 3.0 tcfe after applying a 50% risk factor to its core area acreage and assuming an additional 2,300 net wells are drilled in the years ahead. The company's targeted results for horizontal core area Fayetteville Shale wells are $2.9 million to develop 1.6 bcfe on approximately 80 acre spacing using approximately 3,000' horizontal laterals. The company is currently risking its 700,000 net acres of non-core area leasehold at 100%. * Sahara Sahara (səhâr`ə) [Arab.,=desert], world's largest desert, c.3,500,000 sq mi (9,065,000 sq km), N Africa; the western part of a great arid zone that continues into SW Asia. (primarily Mississippi Mississippi, state, United States Mississippi (mĭs'əsĭp`ē), one of the Deep South states of the United States. It is bordered by Alabama (E), the Gulf of Mexico (S), Arkansas and Louisiana, with most of the border formed by , Chester Chester, city and district, England Chester, city (1991 pop. 80,154) and district, Cheshire, W central England, on a sandstone height above the Dee River. It is a railroad junction. Manufactures include electrical equipment, paint, and window panes. , Hunton Hunton, as a person, may refer to:
* Deep Haley Ha·ley , Alex 1921-1992. American writer best known for Roots (1976), a fictionalized chronicle tracing his family history back to its African origins. Noun 1. (primarily Strawn Strawn can refer to either of two places in the United States:
adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. drilling results that have increased the company's production from the Deep Haley area more than 50% over the last three months to approximately 50 mmcfe net per day. The company is currently using seven operated rigs to further develop its 260,000 net acres of leasehold. Chesapeake's proved developed reserves in Deep Haley are an estimated 61 bcfe, its proved undeveloped reserves are an estimated 60 bcfe and its risked unproved reserves are approximately 800 bcfe after applying a 75% risk factor and assuming an additional 200 net wells are drilled in the years ahead. The company's targeted results for vertical Deep Haley wells are $12.0 million to develop 6.0 bcfe on approximately 320 acre spacing. * Ark-La-Tex The Ark-La-Tex, Arklatex, or ArkLaTex is a U.S. socio-economic region where Arkansas, Louisiana, Texas and Oklahoma intersect. Some prefer the more inclusive Arklatexoma. Tight Gas Sands (primarily Travis Trav·is , William Barret 1809-1836. American military leader who commanded the Texans who died in the defense of the Alamo (1836). Peak, Cotton Valley, Pettit and Bossier Bossier may refer to:
 ē'–), state in the S central United States. It is bounded by Mississippi, with the Mississippi R. , Chesapeake has assembled as·sem·ble v. as·sem·bled, as·sem·bling, as·sem·bles v.tr. 1. To bring or call together into a group or whole: assembled the jury. 2. a strong portfolio of unconventional gas resource plays. Chesapeake is one of the ten largest producers of natural gas, the third most active driller and one of the largest leasehold owners in the area. Chesapeake is producing approximately 130 mmcfe net per day in the Ark-La-Tex area. The company is currently using 14 operated rigs to further develop its 200,000 net acres of leasehold. Chesapeake's unconventional proved developed reserves in the Ark-La-Tex region are an estimated 365 bcfe, its proved undeveloped reserves are an estimated 310 bcfe and its unconventional risked unproved reserves are approximately 250 bcfe after applying a 70% risk factor and assuming an additional 750 net wells are drilled in the years ahead. The company's targeted results for medium-depth vertical Ark-La-Tex wells are $1.7 million to develop 1.0 bcfe on approximately 60 acre spacing. * Granite granite, coarse-grained igneous rock of even texture and light color, composed chiefly of quartz and feldspars. It usually contains small quantities of mica or hornblende, and minor accessory minerals may be present. , Atoka and Colony colony, any nonself-governing territory subject to the jurisdiction of a usually distant country. The term is also applied to a group of nationals who settle in a foreign country or territory but retain political or cultural connections with their parent state. Washes (western Oklahoma and Texas Panhandle panhandle, in geography, a strip of land projecting from the main body of an area and shaped like the handle of a pan, such as the panhandles of West Virginia, Texas, and Alaska. ): Chesapeake is the largest producer of natural gas, the most active driller and the largest leasehold owner in the various Wash plays of the Anadarko Basin. Chesapeake is producing approximately 105 mmcfe net per day from these plays. The company is currently using eight operated rigs to further develop its 150,000 net acres of leasehold. Chesapeake's proved developed reserves in the Wash plays are an estimated 298 bcfe, its proved undeveloped reserves in the Wash plays are an estimated 418 bcfe and its risked unproved reserves are approximately 400 bcfe after applying a 50% risk factor and assuming an additional 700 net wells are drilled in the years ahead. The company's targeted results for vertical Wash wells are $2.8 million to develop 1.4 bcfe on approximately 80 acre spacing. Emerging Unconventional Gas Resource Plays - In its emerging unconventional gas resource areas where commercial production has only recently been established but the future reserve potential could be substantial, Chesapeake owns 1.5 million net acres on which it has an estimated 20 bcfe of proved developed reserves, 20 bcfe of proved undeveloped reserves and approximately 2.0 tcfe of risked unproved reserves and is currently using eight operated drilling rigs to further develop its inventory of approximately 900 net drillsites. Three of Chesapeake's most important emerging unconventional gas resource plays are described below: * Delaware Basin Shales (primarily Barnett Barnett as a personal name can refer to:
Coordinates: Woodford formations in West Texas): Chesapeake's most significant land acquisition activities during 2006 took place in the Delaware Basin Barnett and Woodford Shale plays in far West Texas where Chesapeake is now the largest leasehold owner. The company is producing approximately 1 mmcfe net per day from the Delaware Basin Barnett and Woodford Shales. The company is currently using four operated rigs to further develop its 680,000 net acres of leasehold. Chesapeake's proved developed reserves in the Delaware Basin shales are an estimated 1 bcfe and it has not yet booked any proved undeveloped reserves, although its risked unproved reserves are an estimated 1.0 tcfe after applying a 90% risk factor and assuming an additional 425 net wells are drilled in the years ahead. The company's targeted results for Delaware Basin vertical Barnett and Woodford Shale wells are $4.5 million to develop 3.0 bcfe on approximately 160 acre spacing. The company has not yet developed a model for targeted results from horizontal wells in the play. * Woodford Shale (southeastern Oklahoma Arkoma Basin): Chesapeake is the second largest leasehold owner in the Woodford Shale play, an unconventional gas play in the southeastern Oklahoma portion of the Arkoma Basin. The company is producing approximately 10 mmcfe net per day from the Woodford Shale. The company is currently using three operated rigs to further develop its 100,000 net acres of leasehold. Chesapeake's proved developed reserves in the Woodford Shale are an estimated 17 bcfe, its proved undeveloped reserves in the play are an estimated 17 bcfe and its risked unproved reserves are approximately 500 bcfe after applying a 50% risk factor and assuming an additional 300 net wells are drilled in the years ahead. The company's targeted results for horizontal Woodford Shale wells are $4.3 million to develop 2.2 bcfe on approximately 160 acre spacing. * Deep Bossier (East Texas and northern Louisiana): Chesapeake is one of the top three leasehold owners in the Deep Bossier play. The company is producing approximately 3 mmcfe net per day in the Deep Bossier play. The company is currently using one operated rig and plans to increase its operated rig count to six rigs by year-end 2007 to further develop its 350,000 net acres of leasehold. Chesapeake's proved developed reserves in the Deep Bossier are an estimated 3 bcfe, its proved undeveloped reserves are an estimated 3 bcfe and its risked unproved reserves are approximately 400 bcfe after applying a 90% risk factor and assuming an additional 100 net wells are drilled in the years ahead. The company's targeted results for vertical Deep Bossier wells are $10.0 million to develop 5.0 bcfe on approximately 320 acre spacing. Appalachian Basin Gas Resource Plays - Chesapeake's Appalachia Appalachia, region: see Appalachian Mountains. Appalachia West Virginia coal mining region known for its abysmal poverty. [Am. Hist.: NCE, 160] See : Poverty play types include conventional, unconventional and emerging unconventional in the Devonian Shale and other formations. Chesapeake is the largest leasehold owner in the region with 3.6 million net acres and is producing approximately 133 mmcfe net per day. The company is currently using a range of 7-12 operated rigs to further develop its extensive leasehold position. In Appalachia, Chesapeake has an estimated 978 bcfe of proved developed reserves, an estimated 528 bcfe of proved undeveloped reserves and its risked unproved reserves are approximately 2.5 tcfe after applying a 35% risk factor and assuming an additional 9,300 net wells are drilled in the years ahead. The company's targeted results for vertical Devonian Shale wells are $0.5 million to develop 0.35 bcfe on approximately 160 acre spacing. In addition, Chesapeake continues to actively generate new prospects and acquire additional leasehold throughout the company's areas of operation in various conventional, unconventional and emerging unconventional plays not described above. Management Comments Aubrey Au·brey , John 1626-1697. English antiquarian and writer whose Brief Lives, published posthumously, contains character sketches of his notable friends, including Thomas Hobbes, John Milton, and Francis Bacon. K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to report outstanding financial and operational results for the 2007 first quarter. The company delivered attractive production and reserve growth and generated impressive profit margins that were enhanced by the company's well-executed hedging strategy. Our focused business strategy, value-added val·ue-add·ed adj. Of or relating to the estimated value that is added to a product or material at each stage of its manufacture or distribution: growth, tremendous inventory of undrilled locations and valuable hedge positions clearly differentiate Chesapeake in the industry. We are pleased to again be recognized by Fortune this year as one the fastest growing and most profitable companies among the country's 500 largest corporations. In the magazine's recent Fortune 500 survey, we were ranked #325 by revenues (up from #451 last year - the third largest ranking increase in the survey), #96 by net income, #25 by earnings per share growth over the last ten years and #14 by profits as a percentage of revenues. Additionally, Chesapeake was recognized in this year's Forbes Forbes , B(ertie) C(harles) 1880-1954. American publisher and businessman who founded and edited (1916-1954) Forbes magazine. His son Malcolm Stevenson Forbes Global 2000 listing as one of the 500 largest companies in the world based on sales, profits, assets and market value. We look forward to another successful year in 2007 as our shift in focus from resource inventory capture to resource inventory conversion continues to generate impressive results and create substantial shareholder value. Through the industry's most active drilling program, we plan to increase our average daily production rate by 14-18% in 2007 and we expect to exceed 10 tcfe of proved reserves by year-end 2007. The Fort Worth Barnett Shale play will be the largest contributor to the company's 2007 success and we are also pleased with our recent progress in the Fayetteville Shale and Deep Haley plays. Furthermore, the combination of attractive natural gas prices with decreasing oilfield service costs may well make 2007 a golden year of value creation for Chesapeake and the E&P industry. Looking forward, we believe that Chesapeake is well positioned to prosper for years to come. As the debate in America America [for Amerigo Vespucci], the lands of the Western Hemisphere—North America, Central (or Middle) America, and South America. The world map published in 1507 by Martin Waldseemüller is the first known cartographic use of the name. intensifies about how to become more energy independent in an increasingly dangerous world and at the same time reduce greenhouse gas greenhouse gas n. Any of the atmospheric gases that contribute to the greenhouse effect. greenhouse gas emissions in a growing economy, natural gas is emerging as the most practical solution to the challenge at hand. The vast majority of greenhouse gas emissions are caused by transportation vehicles burning gasoline gasoline or petrol, light, volatile mixture of hydrocarbons for use in the internal-combustion engine and as an organic solvent, obtained primarily by fractional distillation and "cracking" of petroleum, but also obtained from natural gas, by and diesel and by power plants and factories burning coal. Today, we see policymakers promoting alternative fuels such as wind, solar, biofuels and nuclear. These are all legitimate alternatives (although some much less so than others), yet none can offer energy in great abundance Abundance See also Fertility. Amalthea’s horn horn of Zeus’s nurse-goat which became a cornucopia. [Gk. Myth.: Walsh Classical, 19] cornucopia conical receptacle which symbolizes abundance. [Rom. Myth. at a reasonable price anytime soon. However, burning natural gas instead of gasoline, diesel or coal reduces greenhouse gas emissions by approximately 50%. We believe the evidence clearly demonstrates that natural gas is by far the most practical solution to the problem - it is abundant, affordable, reliable, clean burning and domestically produced. For many years, natural gas has been valued at a BTU Btu: see British thermal unit. discount to oil. We believe the opportunity is now at hand for the climate change debate to lead to an increased appreciation of natural gas and a higher valuation for the superior fuel we produce. We intend to do well for our shareholders by doing well for our country and our world." Conference Call Information A conference call to discuss this release has been scheduled for Friday Friday: see Sabbath; week. Friday young Indian rescued by Crusoe and kept as servant and companion. [Br. Lit.: Robinson Crusoe] See : Servant morning, May 4, 2007 at 9:00 a.m. EDT EDT abbr. Eastern Daylight Time EDT Eastern Daylight Time EDT n abbr (US) (= Eastern Daylight Time) → hora de verano de Nueva York EDT . The telephone number to access the conference call is 913-981-4911 and the confirmation code is 9507142. We encourage those who would like to participate in the call to dial the access number between 8:50 and 8:55 a.m. EDT. For those unable to participate in the conference call, a replay will be available for audio playback Playback could mean:
Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the and can be accessed by going to Chesapeake's website at www.chkenergy.com and selecting the "News & Events" section. The webcast of the conference call will be available on our website for one year. This press release and the accompanying Outlooks include "forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. " within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations or forecasts of future events. They include estimates of oil and natural gas reserves, expected oil and natural gas production and future expenses, projections of future oil and natural gas prices, planned capital expenditures for drilling, leasehold acquisitions and seismic data, and statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations. Disclosures concerning the fair value of derivative derivative: see calculus. derivative In mathematics, a fundamental concept of differential calculus representing the instantaneous rate of change of a function. 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. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this press 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 2006 annual report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. filed with the Securities and Exchange Commission on March 1, 2007. They include the volatility of oil and natural gas prices; the limitations our level of indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. may have on our financial flexibility; our ability to compete effectively against strong independent oil and natural gas companies and majors; the availability of capital on an economic basis to fund reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of oil and natural gas reserves and projecting future rates of production and the timing of development expenditures; uncertainties in evaluating oil and natural gas reserves of acquired properties and associated potential liabilities; our ability to effectively consolidate and integrate acquired properties and operations; unsuccessful exploration and development drilling; declines in the values of our oil and natural gas properties resulting in ceiling test write-downs; lower prices realized on oil and natural gas sales and collateral collateral (kəlăt`ərəl), something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although required to secure hedging liabilities resulting from our commodity price risk management activities; the negative impact lower oil and natural gas prices could have on our ability to borrow; drilling and operating risks Operating risk The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk. ; and pending or future litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. . 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. The SEC has generally permitted oil and natural gas companies, in filings made with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive Determinative; beyond dispute or question. That which is conclusive is manifest, clear, or obvious. It is a legal inference made so peremptorily that it cannot be overthrown or contradicted. formation tests to be economically and legally producible under existing economic and operating conditions. We use the term "unproved" to describe volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC's guidelines guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. may prohibit pro·hib·it tr.v. pro·hib·it·ed, pro·hib·it·ing, pro·hib·its 1. To forbid by authority: Smoking is prohibited in most theaters. See Synonyms at forbid. 2. us from including in filings with the SEC. These estimates are by their nature more speculative Speculative Securities that involve a high level of risk. speculative Of or relating to an asset or a group of assets with uncertain returns. The greater the degree of uncertainty the more speculative the asset. than estimates of proved reserves and accordingly are subject to substantially greater risk of actually being realized by the company. While we believe our calculations of unproved drillsites and estimation estimation In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator. of unproved reserves have been appropriately risked and are reasonable, such calculations and estimates have not been reviewed by third party engineers or appraisers. Chesapeake Energy Corporation is the third largest independent and sixth largest overall producer of natural gas in the U.S. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and corporate and property acquisitions in the Mid-Continent, Fort Worth Barnett Shale, Fayetteville Shale, Permian Basin The Permian Basin is a sedimentary basin largely contained in the western part of the U.S. state of Texas. It reaches from just south of Lubbock, Texas, to just south of Midland & Odessa, extending westward into the southeastern part of the adjacent state of New Mexico. , Delaware Basin, South Texas, Texas Gulf Coast, Ark-La-Tex and Appalachian Basin regions of the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . The company's Internet address There are two kinds of addresses that are widely used on the Internet. One is a person's e-mail address, and the other is the address of a Web site, which is known as a URL. Following is an explanation of Internet e-mail addresses only. For more on URLs, see URL and Internet domain name. is www.chkenergy.com. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] (a) Includes positive performance revisions of 205 bcfe and excludes upward revisions of 135 bcfe resulting from oil and natural gas price increases between December 31, 2006 and March 31, 2007. [TABLE OMITTED] (a) The company uses the reserve replacement ratio as an indicator of the company's ability to replenish re·plen·ish v. re·plen·ished, re·plen·ish·ing, re·plen·ish·es v.tr. 1. To fill or make complete again; add a new stock or supply to: replenish the larder. 2. annual production volumes and grow its reserves, thereby providing some information on the sources of future production. It should be noted that the reserve replacement ratio is a statistical indicator that has limitations. The ratio is limited because it typically varies widely based on the extent and timing of new discoveries and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not imbed im·bed v. Variant of embed. imbed Verb [-bedding, -bedded] same as embed Verb 1. the cost or timing of future production of new reserves, it cannot be used as a measure of value creation. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] (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 adjunct (aj´ungkt), n a drug or other substance that serves a supplemental purpose in therapy. adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ). Operating cash flow is widely accepted as a financial indicator of an oil and natural gas 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 oil and natural gas 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. [TABLE OMITTED] (b) Ebitda represents net income 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 Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. . 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 agreement and is used in the financial covenants in our bank credit agreement and our senior note indentures. 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. Ebitda is reconciled to cash provided by operating activities as follows: [TABLE OMITTED] [TABLE OMITTED] (1) Adjusted net income available to common and adjusted earnings per share assuming dilution Dilution A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Notes: Adding to the number of shares outstanding reduces the value of holdings of existing shareholders. exclude certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to GAAP earnings because: a. Management uses adjusted net income available to common to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted net income available to common is more comparable to earnings estimates provided by securities analysts. c. Items excluded generally are one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. 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. (2) Weighted average fully diluted shares outstanding includes shares that were considered antidilutive antidilutive Of or relating to the conversion of convertible securities into common stock when such conversion would result in an increase in diluted earnings per share or a decrease in diluted loss per share. for calculating earnings per share in accordance with GAAP. [TABLE OMITTED] (1) Adjusted ebitda excludes certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to ebitda because: a. Management uses adjusted ebitda to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted ebitda is more comparable to estimates provided by securities analysts. c. 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" CHESAPEAKE'S OUTLOOK AS OF MAY 3, 2007 Quarter Ending June June: see month. 30, 2007; Year Ending December 31, 2007; and Year Ending December 31, 2008. We have adopted a policy of periodically providing investors with guidance on certain factors that affect our future financial performance. As of May 3, 2007, we are using the following key assumptions in our projections for the second quarter of 2007, the full-year 2007 and the full-year 2008. The primary changes from our February 22, 2007 Outlook are in italicized bold in the table and are explained as follows: 1) We have provided our first guidance for the quarter ending June 30, 2007; 2) We have updated the projected effect of changes in our hedging positions; and 3) Production, certain costs and capital expenditure assumptions have been updated. [TABLE OMITTED] (a) Oil NYMEX prices have been updated for actual contract prices through March 2007 and natural gas NYMEX prices have been updated for actual contract prices through April 2007. (b) Severance tax severance tax n. A tax imposed by a state on the extraction of natural resources, such as oil, coal, or gas, that will be used in other states. per mcfe is based on NYMEX prices of $56.25 per bbl of oil and $7.40 to $8.40 per mcf of natural gas during Q2 2007, $56.73 per bbl of oil and $7.40 to $8.40 per mcf of natural gas during calendar 2007 and $56.25 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2008. (c) Does not include gains or losses on interest rate derivatives An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. The interest rate derivatives market is the largest derivatives market in the world. (SFAS 133). Commodity Hedging Activities The company utilizes hedging strategies to hedge the price of a portion of its future oil and natural gas production. These strategies include: (i) For swap instruments, we receive a fixed price for the hedged commodity and pay a floating market price, as defined in each instrument, to the counterparty Counterparty The other participant, including intermediaries, in a swap or contract. . The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. (ii) For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a "cap" limiting the counterparty's exposure. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , there is no limit to Chesapeake's exposure but there is a limit to the downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. exposure of the counterparty. (iii) Basis protection swaps are arrangements that guarantee a price differential of oil or natural gas from a specified delivery point. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the company may elect to settle a hedging transaction prior to its scheduled maturity date and lock in the gain or loss on the transaction. Chesapeake enters into oil and natural gas derivative transactions in order to mitigate mit·i·gate v. To moderate in force or intensity. mit  i·ga tion n. a portion of its exposure to adverse market changes
in oil and natural gas prices. Accordingly, associated gains or losses
from the derivative transactions are reflected as adjustments to oil and
natural gas sales. All realized gains and losses from oil and natural
gas derivatives are included in oil and natural gas sales in the month
of related production. Pursuant to SFAS 133, certain derivatives do not
qualify for designation DESIGNATION, wills. The expression used by a testator, instead of the name of the person or the thing he is desirous to name; for example, a legacy to. the eldest son of such a person, would be a designation of the legatee. Vide 1 Rop. Leg. ch. 2.2. as cash flow hedges A cash flow hedge is a hedge of the exposure to the variability of cash flow that
Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness in·ef·fec·tive adj. 1. Not producing an intended effect; ineffectual: an ineffective plea. 2. Inadequate; incompetent: an ineffective teacher. is recognized currently in oil and natural gas sales. Excluding the swaps assumed in connection with the acquisition of CNR See riser card. CNR - Communication and Network Riser which are described below, the company currently has the following open natural gas swaps in place and also has the following gains from lifted natural gas swaps: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $5.25 to $6.50 covering 152 bcf in Q2-Q4 2007, $5.75 to $6.50 covering 189 bcf in 2008 and $5.90 to $6.25 covering 79 bcf in 2009. The company currently has the following open natural gas collars in place: [TABLE OMITTED] (1) Certain collar arrangements include knockout prices ranging from $5.00 to $6.00 covering 52 bcf in Q2-Q4 2007, $5.00 to $6.00 covering 11 bcf in 2008 and $6.00 covering 18 bcf in 2009. Note: Not shown above are written call options covering 63.3 bcf of production in Q2-Q4 2007 at a weighted average price of $9.48 for a weighted average premium of $0.54, 104.0 bcf of production in 2008 at a weighed average price of $10.39 for a weighted average premium of $0.68 and 53.8 bcf of production in 2009 at a weighed average price of $11.51 for a weighted average premium of $0.50. The company has the following natural gas basis protection swaps in place: [TABLE OMITTED] (1) weighted average We assumed certain liabilities related to open derivative positions in connection with the CNR acquisition in November November: see month. 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as as a liability of $592 million ($293 million as of March 31, 2007). The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes listed below at their fair values on the date of our acquisition of CNR. Pursuant to SFAS 149 "Amendment of SFAS 133 on Derivative Instruments and Hedging Activities," the assumed CNR derivative instruments are deemed to contain a significant financing element and all cash flows associated with these positions are reported as financing activity in the statement of cash flows. The following details the CNR derivatives (natural gas swaps) we have assumed: [TABLE OMITTED] Note: Not shown above are collars covering 3.7 bcf of production in 2009 at an average floor and ceiling of $4.50 and $6.00. The company also has the following crude oil swaps in place: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $45.00 to $60.00 covering 2,200 mbbls in Q2-Q4 2007, 2,928 mbbls in 2008 and 1,460 mbbls in 2009. Note: Not shown above are written call options covering 732 mbbls of production in 2008 at a weighted average price of $75.00 for a weighted average premium of $4.90 and 730 mbbls of production in 2009 at a weighed average price of $75.00 for a weighted average premium of $5.90. SCHEDULE "B" CHESAPEAKE'S PREVIOUS OUTLOOK AS OF FEBRUARY 22, 2007 (PROVIDED FOR REFERENCE ONLY) NOW SUPERSEDED BY OUTLOOK AS OF MAY 3, 2007 Quarter Ending March 31, 2007; Year Ending December 31, 2007; and Year Ending December 31, 2008. We have adopted a policy of periodically providing investors with guidance on certain factors that affect our future financial performance. As of February 22, 2007, we are using the following key assumptions in our projections for the first quarter of 2007, the full-year 2007 and the full-year 2008. The primary changes from our December 11, 2006 Outlook are in italicized bold in the table and are explained as follows: 1) We have updated the projected effect of changes in our hedging positions; and 2) Production, certain costs and capital expenditure assumptions have been updated. [TABLE OMITTED] (a) Oil NYMEX prices have been updated for actual contract prices through January January: see month. 2007 and natural gas NYMEX prices have been updated for actual contract prices through February 2007. (b) Severance tax per mcfe is based on NYMEX prices of $55.62 per bbl of oil and $7.40 to $8.40 per mcf of natural gas during Q1 2007, $56.09 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2007 and $56.25 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2008. (c) Does not include gains or losses on interest rate derivatives (SFAS 133). Commodity Hedging Activities The company utilizes hedging strategies to hedge the price of a portion of its future oil and natural gas production. These strategies include: (i) For swap instruments, we receive a fixed price for the hedged commodity and pay a floating market price, as defined in each instrument, to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. (ii) For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a "cap" limiting the counterparty's exposure. In other words, there is no limit to Chesapeake's exposure but there is a limit to the downside exposure of the counterparty. (iii) Basis protection swaps are arrangements that guarantee a price differential of oil or natural gas from a specified delivery point. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the company may elect to settle a hedging transaction prior to its scheduled maturity date and lock in the gain or loss on the transaction. Chesapeake enters into oil and natural gas derivative transactions in order to mitigate a portion of its exposure to adverse market changes in oil and natural gas prices. Accordingly, associated gains or losses from the derivative transactions are reflected as adjustments to oil and natural gas sales. All realized gains and losses from oil and natural gas derivatives are included in oil and natural gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., because of temporary fluctuations in value) are reported currently in the consolidated statement of operations as unrealized gains (losses) within oil and natural gas sales. Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales. Excluding the swaps assumed in connection with the acquisition of CNR which are described below, the company currently has the following open natural gas swaps in place and also has the following gains from lifted natural gas swaps: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $5.25 to $6.50 covering 146 bcf in 2007, $5.75 to $6.50 covering 160 bcf in 2008 and $5.90 to $6.25 covering 36 bcf in 2009. The company currently has the following open natural gas collars in place: [TABLE OMITTED] (1) Certain collar arrangements include knockout prices ranging from $5.00 to $6.00 covering 52 bcf in 2007 and $5.00 to $6.00 covering 11 bcf in 2008. Note: Not shown above are written call options covering 64.4 bcf of production in 2007 at a weighted average price of $9.56 for a weighted average premium of $0.54, 93.0 bcf of production in 2008 at a weighed average price of $10.20 for a weighted average premium of $0.70 and 42.9 bcf of production in 2009 at a weighed average price of $11.41 for a weighted average premium of $0.50. The company has the following natural gas basis protection swaps in place: [TABLE OMITTED] (1) weighted average We assumed certain liabilities related to open derivative positions in connection with the CNR acquisition in November 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation as a liability of $592 million ($357 million as of December 31, 2006). The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes listed below at their fair values on the date of our acquisition of CNR. Pursuant to SFAS 149 "Amendment of SFAS 133 on Derivative Instruments and Hedging Activities," the assumed CNR derivative instruments are deemed to contain a significant financing element and all cash flows associated with these positions are reported as financing activity in the statement of cash flows. The following details the CNR derivatives (natural gas swaps) we have assumed: [TABLE OMITTED] Note: Not shown above are collars covering 3.7 bcf of production in 2009 at an average floor and ceiling of $4.50 and $6.00. The company also has the following crude oil swaps in place: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $45.00 to $60.00 covering 1,460 mbbls in 2007 and $45.00 to $60.00 covering 1,098 mbbls in 2008. |
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