EXE 10-Q
EXPAND ENERGY Corp (EXE)
10-Q
2023-10-31
For: 2023-09-30
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2023
For the transition period from to
Commission File No. 001-13726
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of October 27, 2023, there were 131,072,227 shares of our $0.01 par value common stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2023
| Definitions | ||
Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Chesapeake,” the “Company” and “Registrant” refer to Chesapeake Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
“ASC” means Accounting Standards Codification.
“Bankruptcy Code” means Title 11 of the United States Code, 11 U.S.C. §§ 101–1532, as amended.
“Bankruptcy Court” means the United States Bankruptcy Court for the Southern District of Texas.
“Bbl” or “Bbls” means barrel or barrels.
“Bcf” means billion cubic feet.
“Chapter 11 Cases” means, when used with reference to a particular Debtor, the case pending for that Debtor under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, and when used with reference to all the Debtors, the procedurally consolidated Chapter 11 cases pending for the Debtors in the Bankruptcy Court.
“Chief” means Chief E&D Holdings, LP.
“Class A Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan, the Class B Warrants, and the Class C Warrants), at an initial exercise price per share of $27.63. The Class A Warrants are exercisable from the Effective Date until February 9, 2026.
“Class B Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan and the Class C Warrants), at an initial exercise price per share of $32.13. The Class B Warrants are exercisable from the Effective Date until February 9, 2026.
“Class C Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan), at an initial exercise price per share of $36.18. The Class C Warrants are exercisable from the Effective Date until February 9, 2026.
“Confirmation Order” means the order confirming the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, Docket No. 2915, entered by the Bankruptcy Court on January 16, 2021.
“Current Period” means the nine months ended September 30, 2023.
“Current Quarter” means the three months ended September 30, 2023.
“DD&A” means depreciation, depletion and amortization.
“Debtors” means the Company, together with all of its direct and indirect subsidiaries that have filed the Chapter 11 Cases.
“Effective Date” means February 9, 2021.
“ESG” means environmental, social and governance.
“Exit Credit Facility” means the reserve-based revolving credit facility available upon emergence from bankruptcy.
“G&A” means general and administrative expenses.
“GAAP” means U.S. generally accepted accounting principles.
“General Unsecured Claim” means any Claim against any Debtor that is not otherwise paid in full during the Chapter 11 Cases pursuant to an order of the Bankruptcy Court and is not an Administrative Claim, a Priority Tax Claim, an Other Priority Claim, an Other Secured Claim, a Revolving Credit Facility Claim, a FLLO Term Loan Facility Claim, a Second Lien Notes Claim, an Unsecured Notes Claim, an Intercompany Claim, or a Section 510(b) Claim.
“LNG” means liquefied natural gas.
“LTIP” means the Chesapeake Energy Corporation 2021 Long-Term Incentive Plan.
“Marcellus Acquisition” means Chesapeake’s acquisition of Chief and associated non-operated interests held by affiliates of Radler and Tug Hill, Inc., which closed on March 9, 2022 with an effective date of January 1, 2022.
“MBbls” means thousand barrels.
“MMBbls” means million barrels.
“Mcf” means thousand cubic feet.
“Mcfe” means one thousand cubic feet of natural gas equivalent, with one barrel of oil or NGL converted to an equivalent volume of natural gas using the ratio of one barrel of oil or NGL to six Mcf of natural gas.
“MMcf” means million cubic feet.
“MMcfe” means million cubic feet of natural gas equivalent.
“New Common Stock” means the single class of common stock issued by Reorganized Chesapeake on the Effective Date.
“NGL” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC+” means Organization of the Petroleum Exporting Countries Plus.
“Petition Date” means June 28, 2020, the date on which the Debtors commenced the Chapter 11 Cases.
“Plan” means the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, attached as Exhibit A to the Confirmation Order.
“Prior Period” means the nine months ended September 30, 2022.
“Prior Quarter” means the three months ended September 30, 2022.
“Radler” means Radler 2000 Limited Partnership.
“Rights Offering” means the New Common Stock rights offering for the Rights Offering Amount consummated by the Debtors on the Effective Date.
“SEC” means United States Securities and Exchange Commission.
“SOFR” means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator, the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).
“Vine Acquisition” means Chesapeake’s acquisition of Vine Energy Inc. which closed on November 1, 2021.
“Warrants” means collectively, the Class A Warrants, Class B Warrants and Class C Warrants.
“/Bbl” means per barrel.
“/Mcf” means per Mcf.
“/Mcfe” means per Mcfe.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| ($ in millions, except per share data) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Short-term derivative assets | ||||||||||||||
| Assets held for sale | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment: | ||||||||||||||
| Natural gas and oil properties, successful efforts method | ||||||||||||||
| Proved natural gas and oil properties | ||||||||||||||
| Unproved properties | ||||||||||||||
| Other property and equipment | ||||||||||||||
| Total property and equipment | ||||||||||||||
| Less: accumulated depreciation, depletion and amortization | ( | ( | ||||||||||||
| Total property and equipment, net | ||||||||||||||
| Long-term derivative assets | ||||||||||||||
| Deferred income tax assets | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and stockholders' equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued interest | ||||||||||||||
| Short-term derivative liabilities | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net | ||||||||||||||
| Long-term derivative liabilities | ||||||||||||||
| Asset retirement obligations, net of current portion | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| ($ in millions, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Revenues and other: | ||||||||||||||||||||||||||
| Natural gas, oil and NGL | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||
| Natural gas and oil derivatives | ( | ( | ||||||||||||||||||||||||
| Gains (losses) on sales of assets | ( | |||||||||||||||||||||||||
| Total revenues and other | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Production | ||||||||||||||||||||||||||
| Gathering, processing and transportation | ||||||||||||||||||||||||||
| Severance and ad valorem taxes | ||||||||||||||||||||||||||
| Exploration | ||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Separation and other termination costs | ||||||||||||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||||||||||||
| Other operating expense, net | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income | ||||||||||||||||||||||||||
| Total other expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average common shares outstanding (in thousands): | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||
| Deferred income tax expense | ||||||||||||||
| Derivative (gains) losses, net | ( | |||||||||||||
| Cash receipts (payments) on derivative settlements, net | ( | |||||||||||||
| Share-based compensation | ||||||||||||||
| Gains on sales of assets | ( | ( | ||||||||||||
| Exploration | ||||||||||||||
| Other | ||||||||||||||
| Changes in assets and liabilities | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Business combination, net | ( | |||||||||||||
| Contributions to investments | ( | |||||||||||||
| Proceeds from divestitures of property and equipment | ||||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from New Credit Facility | ||||||||||||||
| Payments on New Credit Facility | ( | |||||||||||||
| Proceeds from Exit Credit Facility | ||||||||||||||
| Payments on Exit Credit Facility | ( | |||||||||||||
| Funds held for transition services | ||||||||||||||
| Proceeds from warrant exercise | ||||||||||||||
| Cash paid to repurchase and retire common stock | ( | ( | ||||||||||||
| Cash paid for common stock dividends | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | |||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)
Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
| Nine Months Ended September 30, | ||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Interest paid, net of capitalized interest | $ | $ | ||||||||||||
| Income taxes paid (refunds) received, net | $ | ( | $ | |||||||||||
| Supplemental disclosure of significant non-cash investing and financing activities: | ||||||||||||||
| Change in accrued drilling and completion costs | $ | ( | $ | |||||||||||
| Common stock issued for business combination | $ | $ | ||||||||||||
| Operating lease obligations recognized | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| ($ in millions) | Shares | Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Total Stockholders' Equity | ||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | — | ||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | — | ||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | ( | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | — | ||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | ( | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
(Unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| ($ in millions) | Shares | Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Total Stockholders' Equity | ||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of common stock for Marcellus Acquisition | — | — | |||||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | |||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | |||||||||||||||||||||||||||
| Issuance of reserved common stock and warrants | — | — | — | — | |||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | |||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies | ||||
Description of Company
Chesapeake Energy Corporation (“Chesapeake,” “we,” “our,” “us” or the “Company”) is a natural gas and oil exploration and production company engaged in the acquisition, exploration and development of properties for the production of natural gas, oil and NGL from underground reservoirs. Our operations are located onshore in the United States.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) relates to our financial position as of September 30, 2023 and December 31, 2022, and our results of operations for the three months ended September 30, 2023 (“Current Quarter”), the nine months ended September 30, 2023 (“Current Period”), the three months ended September 30, 2022 (“Prior Quarter”) and the nine months ended September 30, 2022 (“Prior Period”). Our annual report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”) should be read in conjunction with this Form 10-Q. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our condensed consolidated financial statements and accompanying notes and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which we have a controlling financial interest. Intercompany accounts and balances have been eliminated. For the time periods covered by this Form 10-Q, we did not have any changes or items impacting other comprehensive income.
Segments
Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating an enterprise’s resources and assessing its operating performance. We have concluded that we have only one reportable operating segment due to the similar nature of the exploration and production business across Chesapeake and its consolidated subsidiaries and the fact that our marketing activities are ancillary to our operations.
Restricted Cash
As of September 30, 2023, we had restricted cash of $73 million. Our restricted cash represents funds legally restricted for payment of certain convenience class unsecured claims following our emergence from bankruptcy, as well as for future payment of certain royalties.
11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 2. | Natural Gas and Oil Property Transactions | ||||
Marcellus Acquisition
On March 9, 2022, we closed the Marcellus Acquisition for total consideration of approximately $2.77 billion, consisting of approximately $2 billion in cash, including working capital adjustments and approximately 9.4 million shares of our common stock, to acquire high quality producing assets and a deep inventory of premium drilling locations in the prolific Marcellus Shale in Northeast Pennsylvania. The Marcellus Acquisition was indebtedness free, effective as of January 1, 2022, and was subject to customary purchase price adjustments. We funded the cash portion of the consideration with cash on hand and $914 million of borrowings under the Company’s Exit Credit Facility. During the Prior Period, we recognized approximately $40 million of costs related to the Marcellus Acquisition, which included integration costs, consulting fees, financial advisory fees, legal fees and change in control expense in accordance with Chief’s existing employment agreements. These acquisition-related costs are included within other operating expense, net within our condensed consolidated statements of operations.
Marcellus Acquisition Purchase Price Allocation
We have accounted for the Marcellus Acquisition as a business combination, using the acquisition method. The following table represents the allocation of the total purchase price to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. We finalized the acquisition accounting for this transaction during 2022.
| Purchase Price Allocation | |||||
| Consideration: | |||||
Cash | $ | ||||
Fair value of Chesapeake’s common stock issued in the merger (a) | |||||
| Working capital adjustments | |||||
Total consideration | $ | ||||
| Fair Value of Liabilities Assumed: | |||||
Current liabilities | $ | ||||
Other long-term liabilities | |||||
Amounts attributable to liabilities assumed | $ | ||||
| Fair Value of Assets Acquired: | |||||
| Cash, cash equivalents and restricted cash | $ | ||||
Other current assets | |||||
| Proved natural gas and oil properties | |||||
Unproved properties | |||||
Other property and equipment | |||||
Other long-term assets | |||||
Amounts attributable to assets acquired | $ | ||||
Total identifiable net assets | $ | ||||
____________________________________________
12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Natural Gas and Oil Properties
For the Marcellus Acquisition, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved natural gas and oil properties as of the acquisition date was based on estimated natural gas and oil reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. We utilized NYMEX strip pricing adjusted for inflation to value the reserves. We then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the natural gas and oil properties acquired. Additionally, the fair value estimate of proved and unproved natural gas and oil properties was corroborated by utilizing a market approach, which considers recent comparable transactions for similar assets.
The inputs used to value natural gas and oil properties require significant judgment and estimates made by management and represent Level 3 inputs.
Marcellus Acquisition Revenues and Expenses Subsequent to Acquisition
For the period from March 10, 2022 to September 30, 2022, we included in our condensed consolidated statements of operations natural gas, oil and NGL revenues of $959 million, marketing revenues of $20 million, net losses on natural gas and oil derivatives of $542 million, and direct operating expenses of $329 million, including depreciation, depletion and amortization related to the Marcellus Acquisition businesses.
Pro Forma Financial Information
As the Marcellus Acquisition closed on March 9, 2022, the condensed consolidated statements of operations for the Prior Quarter and Current Period include all activity related to the acquired properties. The following unaudited pro forma financial information is based on our historical consolidated financial statements adjusted to reflect as if the Marcellus Acquisition occurred on January 1, 2022. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the estimated tax impact of the pro forma adjustments.
| Nine Months Ended September 30, 2022 | ||||||||
| Revenues | $ | |||||||
| Net income | $ | |||||||
| Earnings per common share: | ||||||||
| Basic | $ | |||||||
| Diluted | $ | |||||||
Eagle Ford Divestitures
In January 2023, we entered into an agreement to sell a portion of our Eagle Ford assets to WildFire Energy I LLC for approximately $1.425 billion, subject to customary closing adjustments. Approximately $225 million of the purchase price was recorded as deferred consideration and treated as a non-interest-bearing note to be paid in installments of $60 million per year for the next three years, with $45 million to be paid in the fourth year following the transaction close date. The deferred consideration is recorded at fair value with an imputed rate of interest as a Level 2 input, and approximately $57 million of the deferred consideration is reflected within other current assets and approximately $132 million is reflected within other long-term assets on the condensed consolidated balance sheets as of September 30, 2023. The divestiture, which closed on March 20, 2023 (with an effective date of October 1, 2022), resulted in a gain of approximately $337 million, inclusive of post-closing adjustments, based on the difference between the carrying value of the assets and consideration received. As of December 31, 2022, approximately $811 million of property and equipment, net, and $8 million of other assets were classified as assets held for sale on the condensed consolidated balance sheets. Additionally, approximately $65 million of derivative liabilities, $57 million of asset retirement obligations and $22 million of other liabilities were classified as held for sale and included within other current liabilities on the condensed consolidated balance sheets as of December 31, 2022.
13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In February 2023, we entered into an agreement to sell a portion of our remaining Eagle Ford assets to INEOS Upstream Holdings Limited (“INEOS Energy”) for approximately $1.4 billion, subject to customary closing adjustments. Approximately $225 million of the purchase price was recorded as deferred consideration and treated as a non-interest-bearing note to be paid in installments of approximately $56 million per year for the next four years. The deferred consideration is recorded at fair value with an imputed rate of interest as a Level 2 input, and approximately $54 million of the deferred consideration is reflected within other current assets and approximately $141 million is reflected within other long-term assets on the condensed consolidated balance sheets as of September 30, 2023. The divestiture, which closed on April 28, 2023 (with an effective date of October 1, 2022), resulted in a gain of approximately $470 million, based on the difference between the carrying value of the assets and consideration received. Included within the liabilities assumed by INEOS Energy was approximately $53 million of asset retirement obligations. As part of the transition services agreement related to this divestiture, we have continued to collect and disburse cash on behalf of the parties in the divested properties. On our condensed consolidated balance sheets as of September 30, 2023, cash and cash equivalents includes approximately $91 million representing the net of cash inflows and outflows associated with these properties, with the corresponding liabilities reflected in accounts payable and other current liabilities.
In August 2023, we entered into an agreement to sell the final portion of our Eagle Ford assets to SilverBow Resources, Inc. (“SilverBow”) for approximately $700 million, subject to customary post-closing adjustments. Subject to the satisfaction of certain commodity price triggers, we may receive additional cash consideration in an amount of up to $50 million shortly following the first anniversary of the transaction close date. We classified approximately $510 million of property and equipment, net and $10 million of other assets as held for sale included within current assets held for sale on the condensed consolidated balance sheets as of September 30, 2023. Additionally, approximately $11 million of asset retirement obligation liabilities were classified as held for sale and included within other current liabilities on the condensed consolidated balance sheets as of September 30, 2023. We expect this transaction to close during the fourth quarter of 2023.
Powder River Divestiture
14
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 3. | Earnings Per Share | ||||
Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated in the same manner but includes the impact of potentially dilutive securities. Potentially dilutive securities consists of issuable shares related to warrants, unvested restricted stock units (“RSUs”), and unvested performance share units (“PSUs”).
The reconciliations between basic and diluted earnings per share are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Numerator | ||||||||||||||||||||||||||
| Net income, basic and diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator (in thousands) | ||||||||||||||||||||||||||
| Weighted average common shares outstanding, basic | ||||||||||||||||||||||||||
| Effect of potentially dilutive securities | ||||||||||||||||||||||||||
| Warrants | ||||||||||||||||||||||||||
| Restricted stock units | ||||||||||||||||||||||||||
| Performance share units | ||||||||||||||||||||||||||
| Weighted average common shares outstanding, diluted | ||||||||||||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
During the Current Quarter and Current Period, the diluted earnings per share calculation excludes the effect of 789,458 1,489,337
15
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 4. | Debt | ||||
Our long-term debt consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value(a) | Carrying Amount | Fair Value(a) | ||||||||||||||||||||
| New Credit Facility | $ | $ | $ | $ | |||||||||||||||||||
| Premiums on senior notes | — | — | |||||||||||||||||||||
| Debt issuance costs | ( | — | ( | — | |||||||||||||||||||
| Total long-term debt, net | $ | $ | $ | $ | |||||||||||||||||||
____________________________________________
(a)The carrying value of borrowings under our New Credit Facility approximate fair value as the interest rates are based on prevailing market rates; therefore, they are a Level 1 fair value measurement. For all other debt, a market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value.
New Credit Facility. In December 2022, we entered into a senior secured reserve-based credit agreement (the “New Credit Agreement”) with the lenders and issuing banks party thereto (the “Lenders”), and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Administrative Agent”), providing for a reserve-based credit facility (the “New Credit Facility”) with an initial borrowing base of $3.5 billion and aggregate commitments of $2.0 billion. The New Credit Facility matures in December 2027. The New Credit Facility provides for a $200 million sublimit available for the issuance of letters of credit and a $50 million sublimit available for swingline loans.
Initially, the obligations under the New Credit Facility are guaranteed by certain of Chesapeake’s subsidiaries (the “Guarantors”), and the New Credit Facility is secured by substantially all of the assets owned by the Company and the Guarantors (subject to customary exceptions), including mortgages on not less than 85 % of the total PV-9 of the borrowing base properties evaluated in the most recent reserve report (where PV-9 is the net present value, discounted at 9 % per annum, of the estimated future net revenues). The borrowing base will be redetermined semi-annually in or around April and October of each year, with one interim “wildcard” redetermination available to each of the Company and the Administrative Agent, the latter at the direction of the Required Lenders (as defined in the New Credit Agreement), between scheduled redeterminations. Our borrowing base was reaffirmed in October 2023, and the next scheduled redetermination will be in or around April 2024. The New Credit Agreement contains restrictive covenants that limit Chesapeake and its subsidiaries’ ability to, among other things but subject to exceptions customary to reserve-based credit facilities: (i) incur additional indebtedness, (ii) make investments, (iii) enter into mergers; (iv) make or declare dividends; (v) repurchase or redeem certain indebtedness; (vi) enter into certain hedges; (vii) incur liens; (viii) sell assets; and (ix) engage in certain transactions with affiliates. The New Credit Agreement requires Chesapeake to maintain compliance with the following financial ratios: (A) a current ratio, which is the ratio of Chesapeake’s and its restricted subsidiaries’ consolidated current assets (including unused commitments under the New Credit Facility but excluding certain non-cash assets) to their consolidated current liabilities (excluding the current portion of long-term debt and certain non-cash liabilities), of not less than 1.00 to 1.00; (B) a net leverage ratio, which is the ratio of total indebtedness (less unrestricted cash up to a specified threshold) to Consolidated EBITDAX (as defined in the Credit Agreement) for the prior four fiscal quarters, of not greater than 3.50 to 1.00 and (C) a PV-9 coverage ratio of the net present value, discounted at 9 % per annum, of the estimated future net revenues expected in the proved reserves to Chesapeake’s and its restricted subsidiaries’ total indebtedness of not less than 1.50 to 1.00.
Borrowings under the New Credit Agreement may be alternate base rate loans or term SOFR loans, at our election. Interest is payable quarterly for alternate base rate loans and at the end of the applicable interest period for
16
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
term SOFR loans. Term SOFR loans bear interest at term SOFR plus an applicable rate ranging from 175 to 275 basis points per annum, depending on the percentage of the commitments utilized, plus an additional 10 basis points per annum credit spread adjustment. Alternate base rate loans bear interest at a rate per annum equal to the greatest of: (i) the prime rate; (ii) the federal funds effective rate plus 50 basis points; and (iii) the adjusted term SOFR rate for a one-month interest period plus 100 basis points, plus an applicable margin ranging from 75 to 175 basis points per annum, depending on the percentage of the commitments utilized. Chesapeake also pays a commitment fee on unused commitment amounts under the Credit Facility ranging from 37.5 to 50 basis points per annum, depending on the percentage of the commitments utilized.
The New Credit Facility is subject to customary events of default, remedies, and cure rights for credit facilities of this nature. The Company has no additional secured debt outstanding as of September 30, 2023.
| 5. | Contingencies and Commitments | ||||
Contingencies
Business Operations and Litigation and Regulatory Proceedings
We are involved in, and expect to continue to be involved in, various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates, and our final liabilities may ultimately be materially different.
The majority of the Company’s pre-petition legal proceedings were settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court, together with actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. Any allowed claim related to such litigation will be treated in accordance with the Plan. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is indeterminate.
Environmental Contingencies
The nature of the natural gas and oil business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of natural gas, oil and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded as obligations in the accompanying condensed consolidated balance sheets; however, they are reflected in our estimates of proved reserves.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below:
| September 30, 2023 | ||||||||
| Remainder of 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028-2036 | ||||||||
| Total | $ | |||||||
During the Current Period, certain gathering, processing and transportation agreements were transferred to the buyer of a portion of our Eagle Ford assets. In addition, we have long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees may vary with the applicable agreement.
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with acquisitions and divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party and/or other specified matters. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of entering into or consummating a particular transaction. For divestitures of natural gas and oil properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title or environmental defects.
17
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 6. | Other Current Liabilities | ||||
Other current liabilities as of September 30, 2023 and December 31, 2022 are detailed below:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Revenues and royalties due to others | $ | $ | ||||||||||||
| Accrued drilling and production costs | ||||||||||||||
| Accrued hedging costs | ||||||||||||||
| Accrued compensation and benefits | ||||||||||||||
| Taxes payable | ||||||||||||||
| Operating leases | ||||||||||||||
| Joint interest prepayments received | ||||||||||||||
Current liabilities held for sale(a) | ||||||||||||||
| Other | ||||||||||||||
| Total other current liabilities | $ | $ | ||||||||||||
_________________________________________
(a)Current liabilities held for sale are associated with the divestiture transactions related to our Eagle Ford assets. See Note 2 for additional information.
| 7. | Revenue | ||||
The following table shows revenue disaggregated by operating area and product type:
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | $ | $ | $ | ||||||||||||||||||||||
| Haynesville | ||||||||||||||||||||||||||
| Eagle Ford | ||||||||||||||||||||||||||
| Natural gas, oil and NGL revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketing revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | $ | $ | $ | ||||||||||||||||||||||
| Haynesville | ||||||||||||||||||||||||||
| Eagle Ford | ||||||||||||||||||||||||||
| Natural gas, oil and NGL revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketing revenue | $ | $ | $ | $ | ||||||||||||||||||||||
18
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | $ | $ | $ | ||||||||||||||||||||||
| Haynesville | ||||||||||||||||||||||||||
| Eagle Ford | ||||||||||||||||||||||||||
| Natural gas, oil and NGL revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketing revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | $ | $ | $ | ||||||||||||||||||||||
| Haynesville | ||||||||||||||||||||||||||
| Eagle Ford | ||||||||||||||||||||||||||
| Powder River Basin | ||||||||||||||||||||||||||
| Natural gas, oil and NGL revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Marketing revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Accounts Receivable
Our accounts receivable are primarily from purchasers of natural gas, oil and NGL and from exploration and production companies that own interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of all our counterparties, and we generally require letters of credit or parent guarantees for receivables from parties deemed to have sub-standard credit, unless the credit risk can otherwise be mitigated. We utilize an allowance method in accounting for bad debt based on historical trends in addition to specifically identifying receivables that we believe may be uncollectible.
Accounts receivable as of September 30, 2023 and December 31, 2022 are detailed below:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Natural gas, oil and NGL sales | $ | $ | ||||||||||||
| Joint interest | ||||||||||||||
| Other | ||||||||||||||
| Allowance for doubtful accounts | ( | |||||||||||||
| Total accounts receivable, net | $ | $ | ||||||||||||
| 8. | Income Taxes | ||||
We estimate our annual effective tax rate (“AETR”) for continuing operations in recording our interim quarterly income tax provision for the various jurisdictions in which we operate. The tax effects of statutory rate changes, significant unusual or infrequently occurring items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of our estimated AETR as such items are recognized as discrete items in the quarter in which they occur. Our estimated AETR during the Current Period was 22.4 % as a result of projecting current and deferred federal and state income taxes and a partial valuation allowance against our anticipated net deferred tax asset position at December 31, 2023. Our estimated AETR during the Prior Period was 5.9 % as a result of projecting current federal and state income taxes and maintaining a full valuation allowance against our net deferred tax asset position.
19
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
As of December 31, 2022, we were in a net deferred tax asset position and anticipate being in a net deferred tax asset position as of December 31, 2023. Based on all available positive and negative evidence, including projections of future taxable income, we believe it is more likely than not that some of our deferred tax assets will not be realized. As such, a partial valuation allowance was recorded against our net deferred tax asset position for federal and state purposes as of September 30, 2023 and December 31, 2022.
On August 16, 2022, the President of the United States signed into law the Inflation Reduction Act of 2022, which includes provisions for a 15% corporate alternative minimum tax (“CAMT”) on book income for companies whose average book income exceeds $1 billion for any three consecutive years preceding the tax year and a 1% excise tax on stock buybacks. These changes are generally in effect for tax years beginning after December 31, 2022. Although we do not currently project that we will be subject to the CAMT on book income for the 2023 tax period, we do anticipate that we will be subject to the CAMT on book income in the foreseeable future. The impact of the 1% excise tax was immaterial during the Current Period.
| 9. | Equity | ||||
Dividends
In May 2021, we initiated a new annual dividend on our shares of common stock, expected to be paid quarterly. The table below presents the dividends paid during the Current Period and Prior Period:
| Base | Variable | Rate Per Share | Total | |||||||||||||||||||||||
| 2023: | ||||||||||||||||||||||||||
| First Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
| Second Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
| Third Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
| 2022: | ||||||||||||||||||||||||||
| First Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
| Second Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
| Third Quarter | $ | $ | $ | $ | ||||||||||||||||||||||
On October 31, 2023, we declared a base quarterly dividend payable of $0.575 per share, which will be paid on December 6, 2023 to stockholders of record at the close of business on November 16, 2023.
Share Repurchase Program
As of December 2, 2021, the Company was authorized to purchase up to $1.0 billion of the Company’s common stock and/or warrants under a share repurchase program, and in March 2022, we commenced our share repurchase program. In June 2022, our Board of Directors authorized an expansion of the share repurchase program by $1.0 billion, bringing the total authorized share repurchase amount to $2.0 billion for stock and/or warrants. The share repurchase program will expire on December 31, 2023.
20
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The table below presents the shares purchased under our share repurchase program:
| Shares Purchased (thousands) | Dollar Value of Shares Purchased | Average Price Per Share | ||||||||||||||||||
| 2022 | ||||||||||||||||||||
| First Quarter | $ | $ | ||||||||||||||||||
| Second Quarter | $ | $ | ||||||||||||||||||
| Third Quarter | $ | $ | ||||||||||||||||||
| Fourth Quarter | $ | $ | ||||||||||||||||||
| 2023 | ||||||||||||||||||||
| First Quarter | $ | $ | ||||||||||||||||||
Second Quarter(a) | $ | $ | ||||||||||||||||||
Third Quarter(b) | $ | $ | ||||||||||||||||||
| Total to date | $ | |||||||||||||||||||
(a)On May 26, 2023, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $50 million of shares of our common stock. Under the terms of the ASR agreement, we received an initial delivery of 515,265 shares representing approximately 80 % of the expected total to be repurchased. Upon final settlement of the ASR agreement on July 31, 2023, we received an additional 108,556 shares of common stock.
The repurchased shares of common stock were retired and recorded as a reduction to common stock and retained earnings. All share repurchases made after January 1, 2023 are subject to a 1% excise tax on share repurchases, as enacted under the Inflation Reduction Act of 2022. We are able to net this 1% excise tax on share repurchases against the issuance of shares of our common stock. The impact of this 1% excise tax was immaterial during the Current Period.
Warrants
| Class A Warrants | Class B Warrants | Class C Warrants(a) | |||||||||||||||
| Outstanding as of December 31, 2022 | |||||||||||||||||
Converted into common stock(b) | ( | ( | ( | ||||||||||||||
| Outstanding as of March 31, 2023 | |||||||||||||||||
Converted into common stock(b) | ( | ( | |||||||||||||||
| Outstanding as of June 30, 2023 | |||||||||||||||||
Converted into common stock(b) | ( | ||||||||||||||||
| Outstanding as of September 30, 2023 | |||||||||||||||||
(a)As of September 30, 2023, we had 1,489,337 of reserved Class C Warrants.
21
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 10. | Share-Based Compensation | ||||
On the Effective Date, the Board of Directors adopted the 2021 Long-Term Incentive Plan (the “LTIP”) with a share reserve equal to 6,800,000 shares of common stock. The LTIP provides for the grant of RSUs, restricted stock awards, stock options, stock appreciation rights, performance awards and other stock awards to the Company’s employees and non-employee directors.
Restricted Stock Units. During the Current Period, we granted RSUs to employees and non-employee directors under the LTIP, which will vest over a three-year period and one-year period, respectively. The fair value of RSUs is based on the closing sales price of our common stock on the date of grant, and compensation expense is recognized ratably over the requisite service period. A summary of the changes in unvested RSUs is presented below:
| Unvested Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| (in thousands) | ||||||||||||||
| Unvested as of December 31, 2022 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Vested | ( | $ | ||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Unvested as of September 30, 2023 | $ | |||||||||||||
The aggregate intrinsic value of RSUs that vested during the Current Period was approximately $24 million based on the stock price at the time of vesting.
As of September 30, 2023, there was approximately $54 million of total unrecognized compensation expense related to unvested RSUs. The expense is expected to be recognized over a weighted average period of approximately 2.34 years.
Performance Share Units. During the Current Period, we granted PSUs to senior management under the LTIP, which will generally vest over a three-year period and will be settled in shares. The performance criteria include total shareholder return (“TSR”) and relative TSR (“rTSR”) and could result in a total payout between 0 % - 200 % of the target units. The fair value of the PSUs was measured on the grant date using a Monte Carlo simulation, and compensation expense is recognized ratably over the requisite service period because these awards depend on a combination of service and market criteria.
The following table presents the assumptions used in the valuation of the PSUs granted in 2023.
| Assumption | TSR, rTSR | |||||||
| Risk-free interest rate | % | |||||||
| Volatility | % | |||||||
22
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
A summary of the changes in unvested PSUs is presented below:
| Unvested Performance Share Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| (in thousands) | ||||||||||||||
| Unvested as of December 31, 2022 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Unvested as of September 30, 2023 | $ | |||||||||||||
As of September 30, 2023, there was approximately $17 million of total unrecognized compensation expense related to unvested PSUs. The expense is expected to be recognized over a weighted average period of approximately 1.87 years.
RSU and PSU Compensation.
We recognized the following compensation costs, net of actual forfeitures, related to RSUs and PSUs for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| General and administrative expenses | $ | $ | $ | $ | ||||||||||||||||||||||
| Natural gas and oil properties | ||||||||||||||||||||||||||
| Production expense | ||||||||||||||||||||||||||
| Total RSU and PSU compensation | $ | $ | $ | $ | ||||||||||||||||||||||
| Related income tax benefit | $ | $ | $ | $ | ||||||||||||||||||||||
| 11. | Derivative and Hedging Activities | ||||
We use derivative instruments to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility. These commodity derivative financial instruments include financial price swaps, basis protection swaps, collars, three-way collars and options. All of our natural gas and oil derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. We do not intend to hold or issue derivative financial instruments for speculative trading purposes and have elected not to designate any of our derivative instruments for hedge accounting treatment.
As of December 31, 2022, approximately $65 million of derivative liabilities (notional volume of 9.6 Bcf of natural gas and notional volume of 4.8 MMBbls of oil) were classified as liabilities held for sale. These derivative instruments were novated to WildFire Energy I LLC upon completion of the sale of a portion of our Eagle Ford assets on March 20, 2023. See Note 2 for more details.
23
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Notional Volume | Fair Value | Notional Volume | Fair Value | |||||||||||||||||||||||
| Natural gas (Bcf): | ||||||||||||||||||||||||||
| Fixed-price swaps | $ | $ | ( | |||||||||||||||||||||||
| Collars | ||||||||||||||||||||||||||
| Three-way collars | ( | |||||||||||||||||||||||||
| Call options | ( | |||||||||||||||||||||||||
| Basis protection swaps | ( | ( | ||||||||||||||||||||||||
| Total natural gas | ( | |||||||||||||||||||||||||
| Oil (MMBbls): | ||||||||||||||||||||||||||
| Fixed-price swaps | ( | |||||||||||||||||||||||||
| Collars | ||||||||||||||||||||||||||
| Basis protection swaps | ||||||||||||||||||||||||||
| Total oil | ( | |||||||||||||||||||||||||
| Total estimated fair value | $ | $ | ( | |||||||||||||||||||||||
The following table presents the fair value and location of each classification of derivative instrument included in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 on a gross basis and after same-counterparty netting:
Gross Fair Value(a) | Amounts Netted in the Condensed Consolidated Balance Sheets | Net Fair Value Presented in the Condensed Consolidated Balance Sheets | ||||||||||||||||||
| As of September 30, 2023 | ||||||||||||||||||||
| Commodity Contracts: | ||||||||||||||||||||
| Short-term derivative asset | $ | $ | ( | $ | ||||||||||||||||
| Long-term derivative asset | ( | |||||||||||||||||||
| Short-term derivative liability | ( | ( | ||||||||||||||||||
| Long-term derivative liability | ( | ( | ||||||||||||||||||
| Total derivatives | $ | $ | $ | |||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| Commodity Contracts: | ||||||||||||||||||||
| Short-term derivative asset | $ | $ | ( | $ | ||||||||||||||||
| Long-term derivative asset | ( | |||||||||||||||||||
| Short-term derivative liability | ( | ( | ||||||||||||||||||
| Long-term derivative liability | ( | ( | ||||||||||||||||||
| Total derivatives | $ | ( | $ | $ | ( | |||||||||||||||
___________________________________________
Fair Value
The fair value of our derivatives is based on third-party pricing models, which utilize inputs that are either readily available in the public market, such as natural gas, oil and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes, and, as such, are classified as Level 2. These values are
24
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
compared to the values given by our counterparties for reasonableness. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are highly rated or deemed by us to have acceptable credit strength and deemed by management to be competent and competitive market-makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of September 30, 2023, our derivative instruments were spread among 14 counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that were also lenders (or affiliates of lenders) under our New Credit Facility. The contracts entered into with these counterparties are secured by the same collateral that secures the New Credit Facility. The counterparties’ obligations must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us exceed defined thresholds. As of September 30, 2023, we did no
| 12. | Investments | ||||
25
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
| Introduction | ||
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, liquidity, results of operations and certain other factors that may affect our future results. The following discussion should be read together with the condensed consolidated financial statements included in Item 1 of Part I of this report and the consolidated financial statements included in Item 8 of our 2022 Form 10-K.
We are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce natural gas, oil and NGL from underground reservoirs. We own a large portfolio of onshore U.S. unconventional natural gas and liquids assets, including interests in approximately 5,400 natural gas and oil wells as of September 30, 2023. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania (“Marcellus”) and the Haynesville/Bossier Shales in northwestern Louisiana (“Haynesville”). Our liquids-rich resource play is in the Eagle Ford Shale in South Texas (“Eagle Ford”). In August 2022, we announced that we viewed the assets in Eagle Ford as non-core to our future capital allocation strategy. As of September 30, 2023, we have completed two divestiture transactions and entered into an agreement for a third divestiture transaction, which, upon closing of the third transaction, will complete our exit from Eagle Ford, with proceeds from these three transactions exceeding $3.5 billion, subject to customary post-closing adjustments.
Our strategy is to create shareholder value through the responsible development of our significant resource plays while continuing to be a leading provider of affordable, reliable, low carbon energy to the United States. We continue to focus on improving margins through operating efficiencies and financial discipline and improving our ESG performance. To accomplish these goals, we intend to allocate our human resources and capital expenditures to projects we believe offer the highest cash return on capital invested, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our portfolio. We also intend to continue to dedicate capital to projects that reduce the environmental impact of our natural gas and oil producing activities. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative), through operational efficiencies and improving our production volumes from existing wells.
Leading a responsible energy future is foundational to Chesapeake's success. Our core values and culture demand we continuously evaluate the environmental impact of our operations and work diligently to improve our ESG performance across all facets of our Company. Our path to answering the call for affordable, reliable, low carbon energy begins with our goal to achieve net zero greenhouse gas emissions (Scope 1 and 2) by 2035. To meet this challenge, we have set meaningful goals including:
•Eliminate routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025;
•Reduce our methane intensity to 0.02% by 2025 (achieved 0.05% in 2022); and
•Reduce our GHG intensity to 3.0 metric tons CO2 equivalent per thousand barrel of oil equivalent by 2025 (achieved 4.0 in 2022).
In July 2021, we announced our plan to receive independent certification of our natural gas production under the MiQ methane standard and EO100™ Standard for Responsible Energy Development. By the end of 2022, we had received certifications for all our operated gas assets in Haynesville and Marcellus as responsibly sourced gas (production associated with assets from the Vine Acquisition remains certified under Project Canary), and we intend to maintain annual certifications. The MiQ certification provides a verified approach to tracking our progress towards our commitment to reduce our methane intensity, as well as supporting our overall objective of achieving net-zero Scope 1 and 2 greenhouse gas emissions by 2035.
26
| Recent Developments | ||
Acquisition
On March 9, 2022, we closed our Marcellus Acquisition pursuant to definitive agreements with Chief, Radler and Tug Hill, Inc. dated January 24, 2022. This transaction strengthened Chesapeake’s competitive position, meaningfully increasing our operating cash flows and adding high quality producing assets and a deep inventory of premium drilling locations, while preserving the strength of our balance sheet.
Divestitures
On March 25, 2022, we closed the sale of our Powder River Basin assets in Wyoming to Continental Resources, Inc. for $450 million in cash, subject to post-closing adjustments, which resulted in the recognition of a gain of approximately $293 million.
On January 17, 2023, we entered into an agreement to sell a portion of our Eagle Ford assets to WildFire Energy I LLC for $1.425 billion, subject to post-closing adjustments. This transaction closed on March 20, 2023 (with an effective date of October 1, 2022) and resulted in the recognition of a gain of approximately $337 million.
On February 17, 2023, we entered into an agreement to sell a portion of our remaining Eagle Ford assets to INEOS Energy for $1.4 billion, subject to post-closing adjustments. This transaction closed on April 28, 2023 (with an effective date of October 1, 2022) and resulted in the recognition of a gain of approximately $470 million.
On August 11, 2023, we entered into an agreement to sell the final portion of our remaining Eagle Ford assets to SilverBow Resources, Inc. for $700 million, subject to post-closing adjustments. Subject to the satisfaction of certain commodity price triggers, we may receive up to an additional $50 million in additional cash consideration shortly following the first anniversary of the transaction close date. We expect this transaction to close during the fourth quarter of 2023.
Investments - Momentum Sustainable Ventures LLC
During the fourth quarter of 2022, we entered into an agreement with Momentum Sustainable Ventures LLC to build a new natural gas gathering pipeline and carbon capture and sequestration project, which will gather natural gas produced in the Haynesville Shale for re-delivery to Gulf Coast markets, including LNG export. The pipeline is expected to have an initial capacity of 1.7 Bcf/d expandable to 2.2 Bcf/d. The carbon capture portion of the project anticipates capturing and permanently sequestering up to 2.0 million tons per annum of CO2. The natural gas gathering pipeline in-service is projected for the fourth quarter of 2024, and the carbon sequestration portion of the project is subject to regulatory approvals. Through the end of the Current Period, we have made total capital contributions of $166 million to the project.
Repurchases of Equity Securities and Dividends
In June 2022, our Board of Directors authorized an increase in the size of our share repurchase program from $1.0 billion to up to $2.0 billion in aggregate value of our common stock and/or warrants. Since March 2022, through October 27, 2023, we repurchased approximately 15.5 million shares of our common stock pursuant to the share repurchase program and had approximately $613 million available under the share repurchase program, as of October 27, 2023. In addition, we paid dividends of approximately $412 million, in aggregate, on our common stock during the Current Period.
Economic and Market Conditions
Current instability in Europe and the Middle East has caused, and could intensify, volatility in natural gas, oil and NGL prices, and may have an impact on global growth prospects, which could in turn affect demand for natural gas and oil. In addition, a milder winter in 2022 and increased inventory levels, has resulted in an observed decline in pricing in 2023. Our 2023 estimated cash flow is partially protected from commodity price volatility due to our current hedge positions that cover approximately 70% of our projected natural gas volumes for the remainder of 2023. We believe our cost structure and liquidity position will enable us to successfully navigate continued price volatility.
27
In addition to the weakening of commodity prices in 2023, the industry has experienced inflationary pressures, including increased demand for oilfield service equipment, rising fuel costs, and labor shortages, which have resulted in observed increases to our operating and capital costs that were not fixed. Uncertainty regarding a potential economic downturn or recession in certain regions, or globally, may introduce new pressures or accelerate or intensify the pressures currently facing the industry. Recent reductions in rig activity in the lower 48 states of the United States have allowed service costs to stabilize in the Current Quarter. We continue to monitor these situations and assess their impact on our business, including business partners and customers. For additional discussion regarding risks associated with price volatility and economic deterioration, see Part I, Item 1A “Risk Factors” in our 2022 Form 10-K.
| Liquidity and Capital Resources | ||
Liquidity Overview
Our primary sources of capital resources and liquidity are internally generated cash flows from operations and borrowings under our credit agreements, and our primary uses of cash are for the development of our natural gas and oil properties, acquisitions of additional natural gas properties and return of value to stockholders through dividends and equity repurchases. We believe our cash flow from operations, proceeds from our recent Eagle Ford divestitures, cash on hand and borrowing capacity under the New Credit Facility, as discussed below, will provide sufficient liquidity during the next 12 months and the foreseeable future. As of September 30, 2023, we had $2.7 billion of liquidity available, including $713 million of cash on hand and $2.0 billion of aggregate unused borrowing capacity available under the New Credit Facility. As of September 30, 2023, we had no outstanding borrowings under our New Credit Facility. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our debt obligations, including the carrying and fair value of our senior notes.
Dividends
We paid dividends of $412 million on our common stock during the Current Period. See Note 9 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
On October 31, 2023, we declared a base quarterly dividend payable of $0.575 per share, which will be paid on December 6, 2023 to stockholders of record at the close of business on November 16, 2023.
The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of the Board and will depend on the Company’s financial results, cash requirements, future prospects and other relevant factors. The Company’s ability to pay dividends to its stockholders is restricted by (i) Oklahoma corporate law, (ii) its Certificate of Incorporation, (iii) the terms and provisions of the credit agreement governing its New Credit Facility and (iv) the terms and provisions of the indentures governing its 5.50% Senior Notes due 2026, 5.875% Senior Notes due 2029 and 6.75% Senior Notes due 2029.
Derivative and Hedging Activities
Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. We enter into various derivative instruments to mitigate a portion of our exposure to commodity price declines, but these transactions may also limit our cash flows in periods of rising commodity prices. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to better predict the total revenue we expect to receive. See Item 3. Quantitative and Qualitative Disclosures About Market Risk included in Part I of this report for further discussion on the impact of commodity price risk on our financial position.
Contractual Obligations and Off-Balance Sheet Arrangements
As of September 30, 2023, our material contractual obligations include repayment of senior notes, derivative obligations, asset retirement obligations, lease obligations, capital commitments relating to our investments, undrawn letters of credit and various other commitments we enter into in the ordinary course of business that could result in future cash obligations. In addition, we have contractual commitments with midstream companies and pipeline carriers for future gathering, processing and transportation of natural gas, oil and NGL to move certain of our production to market. The estimated gross undiscounted future commitments under these agreements were approximately $2.7 billion as of September 30, 2023. As discussed above, we believe our existing sources of liquidity will be sufficient to fund our near and long-term contractual obligations. See Notes 4, 5, 11 and 12 of the
28
notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
New Credit Facility
On December 9, 2022, the Company, as borrower, entered into a senior secured reserve-based credit agreement providing for the New Credit Facility, which features an initial borrowing base of $3.5 billion and aggregate commitments of $2.0 billion. Subject to certain exceptions, the borrowing base will be redetermined semi-annually in or around April and October of each year. The New Credit Facility provides for a $200 million sublimit available for the issuance of letters of credit and a $50 million sublimit available for swingline loans. Borrowings under the credit agreement may be alternate base rate loans or term SOFR loans, at the Company’s election. The New Credit Facility contains certain features that, upon receipt and maintenance of investment grade ratings from S&P, Moody’s and/or Fitch and the satisfaction of certain other conditions, result in the removal or relaxation of specified negative and financial covenants, among other favorable adjustments. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Capital Expenditures
For the year ending December 31, 2023, we currently expect to bring or have online approximately 150 to 175 gross wells across 10 to 12 rigs and plan to invest between approximately $1.765 – $1.835 billion in capital expenditures. We expect that approximately 85% of our 2023 capital expenditures will be directed toward our natural gas assets. We currently plan to fund our 2023 capital program through cash on hand, expected cash flow from our operations and borrowings under our New Credit Facility. We may alter or change our plans with respect to our capital program and expected capital expenditures based on developments in our business, our financial position, our industry, or any of the markets in which we operate.
29
Sources and (Uses) of Cash and Cash Equivalents
The following table presents the sources and uses of our cash and cash equivalents for the periods presented:
| Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash provided by operating activities | $ | 1,910 | $ | 3,075 | ||||||||||
| Proceeds from divestitures of property and equipment | 1,967 | 409 | ||||||||||||
| Proceeds from Exit Credit Facility, net | — | 450 | ||||||||||||
| Funds held for transition services | 91 | — | ||||||||||||
| Proceeds from warrant exercise | — | 3 | ||||||||||||
| Capital expenditures | (1,450) | (1,299) | ||||||||||||
| Business combination, net | — | (1,967) | ||||||||||||
| Contributions to investments | (149) | — | ||||||||||||
| Payments on New Credit Facility, net | (1,050) | — | ||||||||||||
| Cash paid to repurchase and retire common stock | (313) | (667) | ||||||||||||
| Cash paid for common stock dividends | (412) | (788) | ||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 594 | $ | (784) | ||||||||||
Cash Flow from Operating Activities
Cash provided by operating activities was $1,910 million and $3,075 million during the Current Period and Prior Period, respectively. The decrease during the Current Period is primarily due to lower prices for the natural gas, oil and NGL we sold as well as decreased sales volumes related to our Eagle Ford divestitures. Cash flows from operations are largely affected by the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of assets, deferred income taxes and mark-to-market changes in our open derivative instruments. See further discussion below under Results of Operations.
Proceeds from Divestitures of Property and Equipment
During the Current Period, we sold a portion of our Eagle Ford assets to WildFire Energy I LLC and also sold a portion of our remaining Eagle Ford assets to INEOS Energy (each transaction with an effective date of October 1, 2022). During the Prior Period, we sold our Powder River Basin assets to Continental Resources, Inc. See Note 2 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Proceeds from Exit Credit Facility, net
During the Prior Period, we borrowed a net $450 million on the Exit Credit Facility, which was primarily used to fund a portion of the Marcellus Acquisition. A portion of the borrowings were repaid with internally generated cash provided by operating activities.
Funds Held for Transition Services
During the Current Period, we held $91 million of funds relating to transition services associated with our Eagle Ford divestitures.
Capital Expenditures
Our capital expenditures increased during the Current Period compared to the Prior Period, primarily as a result of continued drilling and completion activity within our Marcellus and Haynesville operating areas. This increase was slightly offset by reduced activity in Eagle Ford due to our Eagle Ford divestitures. See Note 2 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
30
Business Combination
During the Prior Period, we closed the Marcellus Acquisition for approximately $2 billion and 9.4 million shares of our common stock. See Note 2 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Contributions to Investments
During the Current Period, contributions to investments primarily consisted of $149 million, which we contributed to our investment with Momentum Sustainable Ventures LLC to build a new natural gas gathering pipeline and carbon capture project. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Payments on New Credit Facility, net
During the Current Period, we made net repayments of $1,050 million on the New Credit Facility, utilizing a portion of the divestiture proceeds from the Eagle Ford divestitures and also from internally generated cash provided by operating activities.
Cash Paid to Repurchase and Retire Common Stock
In March 2022, we commenced our share repurchase program. During the Current Period, we repurchased 3.7 million shares for an aggregate price of $313 million. During the Prior Period, we repurchased 7.6 million shares of common stock for an aggregate price of $667 million. The repurchased shares of common stock were retired and recorded as a reduction to common stock and retained earnings.
Cash Paid for Common Stock Dividends
As part of our dividend program, we paid common stock dividends of $412 million and $788 million during the Current Period and Prior Period, respectively. See Note 9 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
31
Results of Operations | ||
Natural Gas, Oil and NGL Production and Average Sales Prices
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| MMcf per day | $/Mcf | MBbl per day | $/Bbl | MBbl per day | $/Bbl | MMcfe per day | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||
| Marcellus | 1,734 | 1.63 | — | — | — | — | 1,734 | 1.63 | ||||||||||||||||||||||||||||||||||||||||||
| Haynesville | 1,568 | 2.15 | — | — | — | — | 1,568 | 2.15 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 76 | 2.52 | 9 | 82.33 | 10 | 25.76 | 193 | 6.36 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 3,378 | 1.89 | 9 | 82.33 | 10 | 25.76 | 3,495 | 2.12 | ||||||||||||||||||||||||||||||||||||||||||
| Average NYMEX Price | 2.55 | 82.26 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Average Realized Price (including realized derivatives) | 2.58 | 82.33 | 25.76 | 2.79 | ||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| MMcf per day | $/Mcf | MBbl per day | $/Bbl | MBbl per day | $/Bbl | MMcfe per day | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||
| Marcellus | 1,987 | 7.25 | — | — | — | — | 1,987 | 7.25 | ||||||||||||||||||||||||||||||||||||||||||
| Haynesville | 1,605 | 7.40 | — | — | — | — | 1,605 | 7.40 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 121 | 7.04 | 50 | 94.62 | 16 | 37.53 | 516 | 11.99 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 3,713 | 7.31 | 50 | 94.62 | 16 | 37.53 | 4,108 | 7.90 | ||||||||||||||||||||||||||||||||||||||||||
| Average NYMEX Price | 8.20 | 91.56 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Average Realized Price (including realized derivatives) | 4.10 | 65.90 | 37.53 | 4.65 | ||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| MMcf per day | $/Mcf | MBbl per day | $/Bbl | MBbl per day | $/Bbl | MMcfe per day | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||
| Marcellus | 1,845 | 2.24 | — | — | — | — | 1,845 | 2.24 | ||||||||||||||||||||||||||||||||||||||||||
| Haynesville | 1,569 | 2.26 | — | — | — | — | 1,569 | 2.26 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 96 | 2.22 | 26 | 77.41 | 12 | 25.61 | 323 | 7.82 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 3,510 | 2.25 | 26 | 77.41 | 12 | 25.61 | 3,737 | 2.73 | ||||||||||||||||||||||||||||||||||||||||||
| Average NYMEX Price | 2.69 | 77.39 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Average Realized Price (including realized derivatives) | 2.56 | 72.10 | 25.61 | 2.99 | ||||||||||||||||||||||||||||||||||||||||||||||
32
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| MMcf per day | $/Mcf | MBbl per day | $/Bbl | MBbl per day | $/Bbl | MMcfe per day | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||
| Marcellus | 1,801 | 6.27 | — | — | — | — | 1,801 | 6.27 | ||||||||||||||||||||||||||||||||||||||||||
| Haynesville | 1,624 | 6.16 | — | — | — | — | 1,624 | 6.16 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 127 | 6.10 | 51 | 100.11 | 16 | 40.40 | 526 | 12.35 | ||||||||||||||||||||||||||||||||||||||||||
| Powder River Basin | 13 | 5.45 | 2 | 95.18 | 1 | 53.96 | 34 | 10.66 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 3,565 | 6.21 | 53 | 99.87 | 17 | 41.14 | 3,985 | 7.07 | ||||||||||||||||||||||||||||||||||||||||||
| Average NYMEX Price | 6.77 | 98.09 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Average Realized Price (including realized derivatives) | 3.77 | 66.91 | 41.14 | 4.44 | ||||||||||||||||||||||||||||||||||||||||||||||
Natural Gas, Oil and NGL Sales
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | 259 | $ | — | $ | — | $ | 259 | ||||||||||||||||||
| Haynesville | 310 | — | — | 310 | ||||||||||||||||||||||
| Eagle Ford | 18 | 71 | 24 | 113 | ||||||||||||||||||||||
| Total natural gas, oil and NGL sales | $ | 587 | $ | 71 | $ | 24 | $ | 682 | ||||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | 1,324 | $ | — | $ | — | $ | 1,324 | ||||||||||||||||||
| Haynesville | 1,093 | — | — | 1,093 | ||||||||||||||||||||||
| Eagle Ford | 79 | 437 | 54 | 570 | ||||||||||||||||||||||
| Total natural gas, oil and NGL sales | $ | 2,496 | $ | 437 | $ | 54 | $ | 2,987 | ||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | 1,126 | $ | — | $ | — | $ | 1,126 | ||||||||||||||||||
| Haynesville | 968 | — | — | 968 | ||||||||||||||||||||||
| Eagle Ford | 59 | 548 | 83 | 690 | ||||||||||||||||||||||
| Total natural gas, oil and NGL sales | $ | 2,153 | $ | 548 | $ | 83 | $ | 2,784 | ||||||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| Natural Gas | Oil | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | 3,085 | $ | — | $ | — | $ | 3,085 | ||||||||||||||||||
| Haynesville | 2,733 | — | — | 2,733 | ||||||||||||||||||||||
| Eagle Ford | 211 | 1,390 | 173 | 1,774 | ||||||||||||||||||||||
| Powder River Basin | 20 | 66 | 13 | 99 | ||||||||||||||||||||||
| Total natural gas, oil and NGL sales | $ | 6,049 | $ | 1,456 | $ | 186 | $ | 7,691 | ||||||||||||||||||
Natural gas, oil and NGL sales during the Current Quarter decreased $2,305 million compared to the Prior Quarter. Lower average prices, which were consistent with the downward trend in index prices for all products, drove a $2,071 million decrease during the Current Quarter. A $188 million decrease in Eagle Ford was primarily
33
due to the Eagle Ford divestitures. Additionally, lower sales volumes in Marcellus and Haynesville resulted in an aggregate decrease of $46 million.
Natural gas, oil and NGL sales during the Current Period decreased $4,907 million compared to the Prior Period. Lower average prices, which were consistent with the downward trend in index prices for all products, drove a $4,465 million decrease during the Current Period. A $435 million decrease in Eagle Ford was primarily due to the Eagle Ford divestitures. Additionally, lower sales volumes in Haynesville resulted in a decrease of $34 million. Partially offsetting these decreases was an increase of $27 million due to increased sales volumes in Marcellus, primarily due to the Marcellus Acquisition in March 2022.
Production Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| $/Mcfe | $/Mcfe | $/Mcfe | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||||||
| Marcellus | $ | 21 | 0.13 | $ | 22 | 0.12 | $ | 64 | 0.13 | $ | 54 | 0.11 | ||||||||||||||||||||||||||||||||||||||
| Haynesville | 44 | 0.31 | 38 | 0.26 | 143 | 0.33 | 109 | 0.25 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 8 | 0.45 | 61 | 1.28 | 86 | 0.98 | 176 | 1.22 | ||||||||||||||||||||||||||||||||||||||||||
| Powder River Basin | — | — | — | — | — | — | 10 | 0.94 | ||||||||||||||||||||||||||||||||||||||||||
| Total production expenses | $ | 73 | 0.23 | $ | 121 | 0.32 | $ | 293 | 0.29 | $ | 349 | 0.32 | ||||||||||||||||||||||||||||||||||||||
Production expenses during the Current Quarter decreased $48 million compared to the Prior Quarter. The decrease was primarily due to the Eagle Ford divestitures.
Production expenses during the Current Period decreased $56 million compared to the Prior Period. The decrease was primarily due to the Eagle Ford and Powder River Basin divestitures, partially offset by an increase in saltwater disposal expenses in Marcellus and Haynesville.
Gathering, Processing and Transportation Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| $/Mcfe | $/Mcfe | $/Mcfe | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||||||
| Marcellus | $ | 106 | 0.66 | $ | 106 | 0.58 | $ | 325 | 0.64 | $ | 282 | 0.57 | ||||||||||||||||||||||||||||||||||||||
| Haynesville | 65 | 0.45 | 89 | 0.60 | 198 | 0.46 | 240 | 0.54 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 21 | 1.23 | 91 | 1.91 | 140 | 1.59 | 258 | 1.80 | ||||||||||||||||||||||||||||||||||||||||||
| Powder River Basin | — | — | — | — | — | — | 22 | 2.32 | ||||||||||||||||||||||||||||||||||||||||||
| Total GP&T | $ | 192 | 0.60 | $ | 286 | 0.76 | $ | 663 | 0.65 | $ | 802 | 0.74 | ||||||||||||||||||||||||||||||||||||||
Gathering, processing and transportation expenses during the Current Quarter decreased $94 million compared to the Prior Quarter. The decrease was primarily related to a $70 million decrease due to the Eagle Ford divestitures. Additionally, Haynesville decreased $24 million, primarily due to lower rates driven by decreased prices.
Gathering, processing and transportation expenses during the Current Period decreased $139 million compared to the Prior Period. The decrease was primarily related to a $140 million decrease due to the Eagle Ford and Powder River Basin divestitures. Additionally, Haynesville decreased $42 million, primarily due to lower rates driven by decreased prices. These decreases were partially offset by a $43 million increase in Marcellus, primarily due to the Marcellus Acquisition in March 2022.
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Severance and Ad Valorem Taxes
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| $/Mcfe | $/Mcfe | $/Mcfe | $/Mcfe | |||||||||||||||||||||||||||||||||||||||||||||||
| Marcellus | $ | 4 | 0.03 | $ | 5 | 0.03 | $ | 11 | 0.02 | $ | 13 | 0.03 | ||||||||||||||||||||||||||||||||||||||
| Haynesville | 17 | 0.11 | 24 | 0.17 | 80 | 0.19 | 48 | 0.11 | ||||||||||||||||||||||||||||||||||||||||||
| Eagle Ford | 6 | 0.38 | 38 | 0.81 | 45 | 0.52 | 115 | 0.80 | ||||||||||||||||||||||||||||||||||||||||||
| Powder River Basin | — | — | — | — | — | — | 11 | 1.09 | ||||||||||||||||||||||||||||||||||||||||||
| Total severance and ad valorem taxes | $ | 27 | 0.08 | $ | 67 | 0.18 | $ | 136 | 0.13 | $ | 187 | 0.17 | ||||||||||||||||||||||||||||||||||||||
Severance and ad valorem taxes during the Current Quarter decreased $40 million compared to the Prior Quarter. The decrease was primarily related to a $32 million decrease due to the Eagle Ford divestitures. Additionally, Haynesville severance and ad valorem taxes were lower due to a decrease in the ad valorem taxable value based on actual assessments received.
Severance and ad valorem taxes during the Current Period decreased $51 million compared to the Prior Period. The decrease was primarily related to a $81 million decrease due to the Eagle Ford and Powder River Basin divestitures, partially offset by an increase of $32 million in the Haynesville due to legislative action that led to changes in the Haynesville severance tax rates and ad valorem taxable value methodology.
Natural Gas and Oil Derivatives
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Natural gas derivatives - realized gains (losses) | $ | 216 | $ | (1,096) | $ | 302 | $ | (2,381) | ||||||||||||||||||
| Natural gas derivatives - unrealized gains (losses) | (110) | (110) | 843 | (1,046) | ||||||||||||||||||||||
| Total gains (losses) on natural gas derivatives | $ | 106 | $ | (1,206) | $ | 1,145 | $ | (3,427) | ||||||||||||||||||
| Oil derivatives - realized losses | $ | — | $ | (132) | $ | (38) | $ | (480) | ||||||||||||||||||
| Oil derivatives - unrealized gains | — | 309 | 88 | 239 | ||||||||||||||||||||||
| Total gains (losses) on oil derivatives | — | 177 | 50 | (241) | ||||||||||||||||||||||
| Total gains (losses) on natural gas and oil derivatives | $ | 106 | $ | (1,029) | $ | 1,195 | $ | (3,668) | ||||||||||||||||||
See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our derivative activity.
General and Administrative Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Total G&A, net | $ | 29 | $ | 40 | $ | 95 | $ | 102 | ||||||||||||||||||
| G&A, net per Mcfe | $ | 0.09 | $ | 0.11 | $ | 0.09 | $ | 0.09 | ||||||||||||||||||
Total general and administrative expenses, net during the Current Quarter decreased $11 million compared to the Prior Quarter, primarily due to a decrease in compensation and other corporate expenses. Total general and administrative expenses, net during the Current Period decreased $7 million compared to the Prior Period, primarily due to a decrease in compensation and other corporate expenses.
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Depreciation, Depletion and Amortization
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| DD&A | $ | 382 | $ | 440 | $ | 1,148 | $ | 1,300 | ||||||||||||||||||
| DD&A per Mcfe | $ | 1.19 | $ | 1.16 | $ | 1.13 | $ | 1.19 | ||||||||||||||||||
The decreases in depreciation, depletion and amortization for the Current Quarter and Current Period compared to the Prior Quarter and Prior Period, respectively, are primarily related to our Eagle Ford divestitures, partially offset by an increase related to the Marcellus Acquisition in March 2022. We cease recording depreciation on assets that are classified as held for sale.
Other Operating Expense, Net
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Other operating expense, net | $ | 3 | $ | 1 | $ | 15 | $ | 32 | ||||||||||||||||||
During the Prior Period, we recognized approximately $40 million of costs related to the Marcellus Acquisition, which included integration costs, consulting fees, financial advisory fees, legal fees and change in control expense in accordance with Chief’s existing employment agreements.
Interest Expense
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Interest expense on debt | $ | 33 | $ | 49 | $ | 111 | $ | 131 | ||||||||||||||||||
| Other | — | 13 | — | 13 | ||||||||||||||||||||||
| Amortization of premium, issuance costs and other | (2) | (1) | (7) | (2) | ||||||||||||||||||||||
| Capitalized interest | (8) | (9) | (22) | (22) | ||||||||||||||||||||||
| Total interest expense | $ | 23 | $ | 52 | $ | 82 | $ | 120 | ||||||||||||||||||
The decreases in total interest expense during the Current Quarter and Current Period compared to the Prior Quarter and Prior Period, respectively, were primarily due to lower average debt outstanding between periods. Additionally, $12 million of interest expense was recorded during the Prior Quarter pertaining to a tax interest assessment.
Other Income
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Other income | $ | 15 | $ | 4 | $ | 48 | $ | 29 | ||||||||||||||||||
The increase in other income during the Current Quarter compared to the Prior Quarter was due to a $9 million increase in interest income, related to our higher average cash balance during the Current Quarter, as well as an $8 million increase in deferred consideration amortization. The increase in other income during the Current Period compared to the Prior Period was due to a $19 million increase in interest income, related to our higher average cash balance during the Current Period, as well as a $15 million increase in deferred consideration amortization.
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Income Taxes
Income tax expense was $532 million for the Current Period. Of this amount, $213 million was the result of projecting current federal and state income taxes, predominately as a result of taxable gains on closed divestitures, and the remainder is related to projections of deferred federal and state income taxes. Income tax expense of $105 million was recorded during the Prior Period. Of this amount, $84 million was the result of projecting current federal and state income taxes and $19 million was related to an increase to the valuation allowance as a result of the adjustment to the deferred tax liability through business combination accounting for the Vine Acquisition. Our effective income tax rate was 22.3% and 7.2% during the Current Period and the Prior Period, respectively. The fluctuation in the effective tax rate is mainly because we are no longer maintaining a full valuation allowance against our net deferred tax asset position during the Current Period, as we were during the Prior Period. Our effective tax rate can also fluctuate due to the impact of discrete items, state income taxes and permanent differences. See Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of income taxes.
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Forward-Looking Statements | ||
This report includes “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 (the “Exchange Act”). Forward-looking statements include our current expectations or forecasts of future events, including matters relating to the continuing effects of the impact of inflation and commodity price volatility resulting from instability in Europe and the Middle East, COVID-19 and related supply chain constraints, and the impact of each on our business, financial condition, results of operations and cash flows, the potential effects of the Plan on our operations, management, and employees, actions by, or disputes among or between, members of OPEC+ and other foreign oil-exporting countries, market factors, market prices, our ability to meet debt service requirements, our ability to continue to pay cash dividends, the amount and timing of any cash dividends, and our ESG initiatives. Forward-looking and other statements in this Form 10-Q regarding our environmental, social and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking environmental, social and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Forward-looking statements often address our expected future business, financial performance and financial condition, and often contain words such as "expect," “could,” “may,” "anticipate," "intend," "plan," “ability,” "believe," "seek," "see," "will," "would," “estimate,” “forecast,” "target," “guidance,” “outlook,” “opportunity” or “strategy.”
Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
•the impact of inflation and commodity price volatility resulting from instability in Europe and the Middle East, COVID-19 and related labor and supply chain constraints, along with the effects of the current global economic environment, including impacts from higher interest rates and recent bank closures and liquidity concerns at certain financial institutions, on our business, financial condition, employees, contractors, vendors and the global demand for natural gas and oil and U.S. and on world financial markets;
•our ability to comply with the covenants under the credit agreement for our New Credit Facility and other indebtedness;
•risks related to acquisitions or dispositions, or potential acquisitions or dispositions;
•our ability to realize anticipated cash cost reductions;
•the volatility of natural gas, oil and NGL prices, which are affected by general economic and business conditions, as well as increased demand for (and availability of) alternative fuels and electric vehicles;
•a deterioration in general economic, business or industry conditions;
•uncertainties inherent in estimating quantities of natural gas, oil and NGL reserves and projecting future rates of production and the amount and timing of development expenditures;
•our ability to replace reserves and sustain production;
•drilling and operating risks and resulting liabilities;
•our ability to generate profits or achieve targeted results in drilling and well operations;
•the limitations our level of indebtedness may have on our financial flexibility;
•our ability to achieve and maintain ESG certifications, goals and commitments;
•our inability to access the capital markets on favorable terms;
•the availability of cash flows from operations and other funds to fund cash dividends and repurchases of equity securities, to finance reserve replacement costs and/or satisfy our debt obligations;
•write-downs of our natural gas and oil asset carrying values due to low commodity prices;
•charges incurred in response to market conditions;
•limited control over properties we do not operate;
38
•leasehold terms expiring before production can be established;
•commodity derivative activities resulting in lower prices realized on natural gas, oil and NGL sales;
•the need to secure derivative liabilities and the inability of counterparties to satisfy their obligations;
•potential over-the-counter derivatives regulations limiting our ability to hedge against commodity price fluctuations;
•adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims;
•our need to secure adequate supplies of water for our drilling operations and to dispose of or recycle the water used;
•pipeline and gathering system capacity constraints and transportation interruptions;
•legislative, regulatory and ESG initiatives, addressing environmental concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal;
•terrorist activities and/or cyber-attacks adversely impacting our operations;
•an interruption in operations at our headquarters due to a catastrophic event;
•federal and state tax proposals affecting our industry;
•competition in the natural gas and oil exploration and production industry;
•negative public perceptions of our industry;
•effects of purchase price adjustments and indemnity obligations;
•the ability to execute on our business strategy following emergence from bankruptcy; and
We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures in this report and our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
Information About Us | ||
Investors should note that we make available, free of charge on our website at chk.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent news releases. We may use the Investors section of our website to communicate with investors. It is possible that the financial and other information posted on the Investors section of our website could be deemed to be material information. Documents and information on our website are not incorporated by reference herein.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Chesapeake, that file electronically with the SEC.
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| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to market risk. The term market risk relates to our risk of loss arising from adverse changes in natural gas, oil and NGL prices and interest rates. These disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL, which have historically been volatile. To mitigate a portion of our exposure to adverse price changes, we enter into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
We determine the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the fair value measurements associated with our derivatives.
Our natural gas, oil and NGL revenues during the Current Period, excluding any effect of our derivative instruments, were $2,153 million, $548 million and $83 million, respectively. Based on production, natural gas, oil and NGL revenue for the Current Period would have increased or decreased by approximately $215 million, $55 million, and $8 million, respectively, for each 10% increase or decrease in prices. As of September 30, 2023, the fair value of our natural gas derivatives were net assets of $331 million. As of September 30, 2023, we did not have any open oil or NGL derivative positions. A 10% increase in forward natural gas prices would decrease the valuation of natural gas derivatives by approximately $237 million. A 10% decrease in forward natural gas prices would increase the valuation of natural gas derivatives by approximately $242 million. See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further information on our open derivative positions.
Interest Rate Risk
Our exposure to interest rate changes relates primarily to borrowings under our New Credit Facility for the Current Period and the Exit Credit Facility for the Prior Period. Interest is payable on borrowings under each respective credit facility based on floating rates. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part 1 of this report for additional information. As of September 30, 2023, we did not have any outstanding borrowings under our New Credit Facility.
40
| ITEM 4. | Controls and Procedures | ||||
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2023 that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
| ITEM 1. | Legal Proceedings | ||||
Business Operations and Litigation and Regulatory Proceedings
We are involved in various pre-petition lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The majority of these prepetition legal proceedings were settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court, together with actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. Any allowed claim related to such litigation will be treated in accordance with the Plan. We were involved in a number of litigation and regulatory proceedings as of the Petition Date. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is currently indeterminate. See Note 5 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information regarding our estimation and provision for potential losses related to litigation and regulatory proceedings. Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are referred to above. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases.
Environmental Contingencies
The nature of the natural gas and oil business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
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| ITEM 1A. | Risk Factors | ||||
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock are described under “Risk Factors” in Item 1A of our 2022 Form 10-K. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Repurchases of Equity Securities
On December 2, 2021, we announced that our Board of Directors authorized the repurchase of up to $1.0 billion in aggregate value of our common stock and/or warrants from time to time. In June 2022, our Board of Directors authorized an increase in the size of the share repurchase program from $1.0 billion to $2.0 billion in aggregate value of our common stock and/or warrants. The repurchase authorization permits repurchases on a discretionary basis as determined by management, subject to market conditions, applicable legal requirements, available liquidity, compliance with the Company’s debt agreements and other appropriate factors. The share repurchase program expires on December 31, 2023. The following table provides information regarding purchases of our common stock made by us during the quarter ended September 30, 2023.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||||||||||||
| July 1 - July 31 | 331,044 | $ | 86.02 | 331,044 | $ | 725 | ||||||||||||||||||||
| August 1 - August 31 | 443,612 | $ | 85.83 | 443,612 | $ | 687 | ||||||||||||||||||||
September 1 - September 30(a) | 734,835 | $ | 86.41 | 734,835 | $ | 622 | ||||||||||||||||||||
| Total | 1,509,491 | $ | 86.16 | 1,509,491 | ||||||||||||||||||||||
_____________________________________
(a)On September 15, 2023, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $50 million of shares of our common stock. Under the terms of the ASR agreement, we received an initial delivery of 468,055 shares representing approximately 80% of the expected total to be repurchased. Upon final settlement of the ASR agreement on October 26, 2023, we received an additional 116,250 shares of common stock which are not reflected in the table above.
| ITEM 3. | Defaults Upon Senior Securities | ||||
None.
| ITEM 4. | Mine Safety Disclosures | ||||
Not applicable. On March 20, 2023, we divested our mining assets to WildFire Energy I LLC.
| ITEM 5. | Other Information | ||||
During the three months ended September 30, 2023, no director or officer of the Company adopted terminated
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| ITEM 6. | Exhibits | ||||
The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.
INDEX OF EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | SEC File Number | Exhibit | Filing Date | Filed or Furnished Herewith | ||||||||||||||||||||||||||||||||
| 2.1 | 8-K | 001-13726 | 2.1 | 1/19/2021 | ||||||||||||||||||||||||||||||||||
| 2.2 | 8-K | 001-13726 | 2.1 | 8/11/2021 | ||||||||||||||||||||||||||||||||||
| 2.3 | 10-K | 001-13726 | 10.36 | 2/24/2022 | ||||||||||||||||||||||||||||||||||
| 2.4 | 10-K | 001-13726 | 10.37 | 2/24/2022 | ||||||||||||||||||||||||||||||||||
| 2.5 | 10-K | 001-13726 | 10.38 | 2/24/2022 | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-13726 | 3.1 | 2/9/2021 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-13726 | 3.2 | 2/9/2021 | ||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101 INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||||||||||||||||||||||||||||
| 101 SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | SEC File Number | Exhibit | Filing Date | Filed or Furnished Herewith | ||||||||||||||||||||||||||||||||
| 101 CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101 DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101 LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101 PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | X | ||||||||||||||||||||||||||||||||||||
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Signatures
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 | |||||||||||
| Date: October 31, 2023 | By: | /s/ DOMENIC J. DELL’OSSO, JR. | |||||||||
| Domenic J. Dell’Osso, Jr. President and Chief Executive Officer | |||||||||||
| Date: October 31, 2023 | By: | /s/ MOHIT SINGH | |||||||||
| Mohit Singh Executive Vice President and Chief Financial Officer | |||||||||||
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