Provides Preliminary Estimated 2015
Production Growth and Capital Expenditure Ranges
Chesapeake Energy Corporation (NYSE:CHK) today updated its
currently anticipated 2014 asset sales and divestitures and the
projected impact of such transactions on its 2014 Outlook. The
company also introduced preliminary estimated ranges for its 2015
adjusted production growth and total capital expenditures. These
items will be discussed in more detail at the company's 2014
Analyst Day event, to be held in Oklahoma City this morning.
Chesapeake continues to divest of noncore assets in order to
focus its resources on its highest rate of return opportunities and
reduce balance sheet leverage and complexity. The company currently
anticipates the following transactions will be completed during the
2nd and 3rd quarters of 2014.
Chesapeake to Proceed with the Spin-off of its Oilfield
Services Business
Chesapeake previously announced on February 24, 2014, that it is
pursuing strategic alternatives for its oilfield services business,
which is currently conducted through its wholly owned subsidiary
Chesapeake Oilfield Operating, L.L.C. (COO). Chesapeake announced
today, after completing its review of strategic alternatives, that
it intends to proceed with a spin-off of COO to Chesapeake's
shareholders. COO has filed a Registration Statement on Form 10
with the SEC and expects to update it in the coming weeks.
Chesapeake intends for the potential spin-off to be tax-free to its
shareholders for U.S. federal income tax purposes and, to that end,
has obtained a private letter ruling from the Internal Revenue
Service.
Upon completion of the spin-off, and an expected
recapitalization, approximately $1.1 billion of consolidated COO
debt will be eliminated from Chesapeake’s balance sheet and
Chesapeake will receive an approximate $400 million dividend that
will be applied to pay off intercompany debt from the oilfield
services business. COO will also convert into a corporation and
change its name to Seventy Seven Energy Inc. Chesapeake anticipates
that the spin-off and recapitalization transactions will be
completed by June 30, 2014.
Chesapeake to Divest Ownership of CHK Cleveland Tonkawa,
L.L.C.
Chesapeake has entered into a non-binding letter agreement with
the preferred members of CHK Cleveland Tonkawa, L.L.C. (CHKCT), a
Chesapeake subsidiary, for a proposed transfer of Chesapeake's
common shares in CHKCT to the preferred members and the termination
of the existing agreements between Chesapeake and CHKCT. The
agreement contemplates that Chesapeake would transfer operatorship
of the CHKCT properties, but would provide certain transition
services to the new owner group. The proposed transaction, which is
expected to close in the third quarter of 2014, would favorably
impact Chesapeake’s balance sheet by eliminating approximately $1.0
billion of equity attributable to third parties (in the form of a
non-controlling interest) and $160 million of balance sheet
liabilities for future overriding royalty interest obligations,
partially offset by the reduction in restricted cash held by the
CHKCT entity.
Chesapeake's Chief Executive Officer Doug Lawler commented,
"Exiting our CHKCT preferred equity arrangement will reduce
Chesapeake's balance sheet complexity and future commitments. The
CHKCT assets will provide more strategic value to other entities
and we feel this is an opportune time to complete this transaction
for all parties."
Chesapeake Announces Additional Noncore Asset Sales
The company has agreed to sell, subject to execution of mutually
acceptable purchase and sale agreements, noncore producing assets
in Southwestern Oklahoma, East Texas and South Texas. The East
Texas and South Texas assets have associated volumetric production
payments (VPP #5 and #6, respectively) that will transfer to the
buyer upon closing. Chesapeake expects to receive approximately
$310 million in cash proceeds combined for these three asset
sales.
Additionally, the company has reached an agreement to sell,
subject to the execution of a mutually acceptable purchase and sale
agreement, a noncore acreage package with minimal associated
production in southwest Pennsylvania. Chesapeake has also entered
into a purchase and sale agreement to divest a portion of its
noncore acreage position in the Powder River Basin in Wyoming.
Proceeds from these transactions are anticipated to be
approximately $290 million.
Combined with the more than $925 million of asset sale proceeds
received year to date as of May 7, the transactions listed above,
if completed, would bring total value of sales and divestitures in
2014 to more than $4 billion.
Lawler noted, "We expect that the transactions we are announcing
today will result in a net leverage reduction to Chesapeake of
nearly $3.0 billion, while only reducing our 2014 production by 2%
and our operating cash flow by $250 million. Further, these
transactions would reduce Chesapeake's 2014 interest expense and
dividend payments by approximately $70 million and eliminate $200
million of projected capital expenditures for the remainder of
2014."
A revised 2014 Outlook is attached to this release and provides
additional detail regarding the financial impact of these proposed
transactions.
Chesapeake Provides Preliminary Estimate Ranges for 2015
Adjusted Production Growth and Capital Expenditures; Establishes
Five Year Annual Production Growth Target
Chesapeake estimates that 2015 production will grow 7-10%
compared to its 2014 adjusted production, which reflects the
anticipated impact of the asset sales detailed above. The company
believes that it can deliver this production growth rate in 2015
with a total capital expenditure budget (including capitalized
interest) of $5.5 to $6.0 billion. Chesapeake has also established
a five year annual production growth target of 7-9%.
2014 Analyst Day Webcast Information
A live audio webcast of the event will begin at 8:30 am EDT on
May 16, 2014 and can be accessed by visiting the “Investors”
section of the Chesapeake website at www.chk.com. The replay of the webcast will be
available on the company’s website for approximately 30 days.
Additionally, the company plans to post financial and operational
data pertaining to the company to the “Investors” section of its
website prior to the event.
Chesapeake Energy Corporation (NYSE:CHK) is the
second-largest producer of natural gas and the 10th largest
producer of oil and natural gas liquids in the U.S.
Headquartered in Oklahoma City, the company's operations are
focused on discovering and developing its large and geographically
diverse resource base of unconventional natural gas and oil assets
onshore in the U.S. The company also owns substantial
marketing, compression and oilfield services businesses. Further
information is available at www.chk.com where
Chesapeake routinely posts announcements, updates, events, investor
information, presentations and news releases.
This news release and the accompanying Outlook include
"forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are
statements other than statements of historical fact that give our
current expectations or forecasts of future events. They include
production forecasts, estimates of operating costs, planned
development drilling, expected capital expenditures, expected
efficiency gains, anticipated asset sales and proceeds to be
received therefrom, projected cash flow and liquidity, business
strategy and other plans and objectives for future operations.
Although we believe the expectations and forecasts reflected in the
forward-looking statements are reasonable, we can give no assurance
they will prove to have been correct. They can be affected by
inaccurate assumptions or by known or unknown risks and
uncertainties.
Factors that could cause actual results to differ materially
from expected results include those described under "Risk Factors”
in Item 1A of our 2013 annual report on Form 10-K filed with the
U.S. Securities and Exchange Commission on February 27, 2014. These
risk factors include the volatility of natural gas, oil and NGL
prices; the limitations our level of indebtedness may have on our
financial flexibility; declines in the prices of natural gas and
oil potentially resulting in a write-down of our asset carrying
values; the availability of capital on an economic basis, including
through planned asset sales, to fund reserve replacement costs; our
ability to replace reserves and sustain production; uncertainties
inherent in estimating quantities of natural gas, oil and NGL
reserves and projecting future rates of production and the amount
and timing of development expenditures; our ability to generate
profits or achieve targeted results in drilling and well
operations; leasehold terms expiring before production can be
established; hedging activities resulting in lower prices realized
on natural gas, oil and NGL sales; the need to secure hedging
liabilities and the inability of hedging counterparties to satisfy
their obligations; drilling and operating risks, including
potential environmental liabilities; legislative and regulatory
changes adversely affecting our industry and our business,
including initiatives related to hydraulic fracturing, air
emissions and endangered species; a deterioration in general
economic, business or industry conditions having a material adverse
effect on our results of operations, liquidity and financial
condition; oilfield services shortages, gathering system and
transportation capacity constraints and various transportation
interruptions that could adversely affect our revenues and cash
flow; adverse developments and losses in connection with pending or
future litigation and regulatory investigations; cyber attacks
adversely impacting our operations; and an interruption at our
headquarters that adversely affects our business.
In addition, disclosures concerning the estimated contribution
of derivative contracts to our future results of operations are
based upon market information as of a specific date. These market
prices are subject to significant volatility. Our production
forecasts are also dependent upon many assumptions, including
estimates of production decline rates from existing wells and the
outcome of future drilling activity. Further, the timing of and
amount of proceeds from future asset sales, which are subject to
changes in market conditions and other factors beyond our control,
will affect our ability to further reduce financial leverage and
complexity. Any spin-off of COS or divestment of Chesapeake's
ownership of CHKCT is subject to satisfaction of several
conditions, some of which are beyond our control, including market
conditions, board approvals, consents, regulatory review and
approvals, among others. There can be no assurance that the
proposed spin-off or any other separation transaction, or that if
any transaction is pursued, it will be consummated. We caution you
not to place undue reliance on our forward-looking statements,
which speak only as of the date of this news release, and we
undertake no obligation to update any of the information provided
in this release or the accompanying Outlook, except as required by
applicable law.
SCHEDULE "A”
MANAGEMENT’S OUTLOOK AS OF MAY 16, 2014
Chesapeake periodically provides
management guidance on certain factors that affect the company’s
future financial performance. The primary changes from the
company’s May 7, 2014 Outlook are in italicized bold
below.
Chesapeake Energy Corporation Consolidated
Projections
Year Ending12/31/2014
Production Growth (adjusted for asset sales)(a): Liquids:
29 –
33% Oil
11 – 15% NGL(b)
63 – 68% Natural gas 4 –
6% Total Adjusted Production Growth 9 – 12% Daily Equivalent
Rate - mboe
675 – 695 NYMEX Price(c) (for calculation of
realized hedging effects only): Oil - $/bbl $95.92 Natural gas -
$/mcf $4.62 Estimated Realized Hedging Effects(d) (based on assumed
NYMEX prices above): Oil - $/bbl
($6.36) Natural gas - $/mcf
($0.32) Estimated Gathering/Marketing/Transportation
Differentials to NYMEX Prices: Oil - $/bbl $3.25 – 5.25 NGL - $/bbl
$67.50 – 71.50 Natural gas - $/mcf $1.60 – 1.70 Operating Costs per
Boe of Projected Production: Production expense $4.25 – 4.75
Production taxes $0.85 – 0.95 General and administrative(e) $1.20 –
1.30 Share-based compensation (noncash) $0.15 – 0.20 DD&A of
natural gas and liquids assets $10.00 – 11.00 Depreciation of other
assets
$0.90 – 1.00 Interest expense(f)
$0.65 – 0.75
Other ($ millions): Marketing, gathering and compression net
margin(g) $50 – 75 Oilfield services net margin(g)
$80 – 130
Net income attributable to noncontrolling interests and other(h)
($120 – 150) Book Tax Rate 37.5% Weighted Average Shares
Outstanding (in millions): Basic 657 – 661 Diluted
769 – 773
Operating Cash Flow before Changes in Assets and Liabilities ($ in
millions) (i)(j)
$5,550 – 5,750 Total Capital Expenditures
($ in millions)
$5,000 – 5,400 Capitalized interest,
dividends and distributions ($ in millions)
$1,110 – 1,160
a) Growth ranges based on 2013 production
of 600 mboe/day adjusted for assets sales in 2013 and 2014.
b) Assumes ethane recovery in the Utica
and southern Marcellus to fulfill Chesapeake’s pipeline
commitments, no ethane recovery in the Rockies and the Eagle Ford
and partial ethane recovery in the Mid-Continent.
c) NYMEX natural gas and oil prices have
been updated for actual contract prices through April and March,
respectively.
d) Includes expected settlements for
commodity derivatives adjusted for option premiums. For derivatives
closed early, settlements are reflected in the period of original
contract expiration.
e) Excludes expenses associated with
share-based compensation and restructuring and other termination
costs.
f) Excludes unrealized gains (losses) on
interest rate derivatives.
g) Includes revenue and operating expenses
and excludes depreciation and amortization of other assets.
h) Net income attributable to
noncontrolling interests of Chesapeake Granite Wash Trust, CHK
Utica, LLC and CHK Cleveland Tonkawa, LLC.
i) A non-GAAP financial measure. We are
unable to provide reconciliation to projected cash provided by
operating activities, the most comparable GAAP measure, because of
uncertainties associated with projecting future changes in assets
and liabilities.
j) Assumes NYMEX prices on open contracts
of $95.00 per bbl and $4.50 per mcf and production growth ranges as
shown above.
Chesapeake Energy CorporationInvestor Contact:Gary
T. Clark, CFA, 405-935-8870ir@chk.comorMedia Contact:Gordon
Pennoyer, 405-935-8878media@chk.com
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