SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported) July 31, 2002 (July 25, 2002)
CHESAPEAKE ENERGY CORPORATION
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(Exact name of Registrant as specified in its Charter)
Oklahoma 1-13726 73-1395733
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6100 North Western Avenue, Oklahoma City, Oklahoma 73118
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(Address of principal executive offices) (Zip Code)
(405) 848-8000
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
This Form 8-K/A amends the Form 8-K dated July 25, 2002 and filed on
July 25, 2002 by Chesapeake Energy Corporation ("Chesapeake") that included
Chesapeake's second quarter earnings for 2002 under Item 5. This Form 8-K/A is
being filed to restate certain disclosures made by Chesapeake previously under
Item 5 of the Form 8-K dated July 25, 2002 as disclosures under Item 9, in
compliance with the requirements of Regulation FD of the Securities Exchange Act
of 1934.
ITEM 5. OTHER EVENTS
Chesapeake reported strong financial and operating results for the
second quarter of 2002. For the quarter, Chesapeake generated net income
available to common shareholders of $22.5 million ($0.13 per fully diluted
common share), operating cash flow of $96.6 million ($0.50 per fully diluted
common share), and ebitda (operating cash flow plus interest expense) of $121.3
million on revenue of $194.3 million.
Production for the second quarter of 2002 reached a record level of
43.4 billion cubic feet of natural gas equivalent (bcfe), comprised of 38.5
billion cubic feet of natural gas (bcf) (89%) and 0.82 million barrels of oil
(mmbo) (11%). Production increased 10.9% year-over-year from the second quarter
of 2001 and 3.6% sequentially from the first quarter of 2002. This was the
company's fourth consecutive quarter of sequential production growth, in
contrast to what is likely to be the industry's fourth consecutive quarter of
sequential production decline. In addition, the company's estimated proved
reserves have grown from 1.8 tcfe to 2.0 tcfe, an increase of 12% since the
beginning of the year. The growth in proved reserves was generated equally from
drilling success and acquisitions.
The financial results described above include a non-cash $0.3 million
after-tax risk management loss ($0.5 million before-tax) arising from the
mark-to-market valuation of certain of the company's commodity and interest rate
hedging positions under SFAS 133. For comparative purposes, during the first
quarter of 2002, the company reported a non-cash $47.7 million after-tax risk
management loss ($79.5 million before-tax) and during 2001, the company reported
a non-cash $50.9 million after-tax risk management gain ($84.8 million
before-tax) from the application of SFAS 133. All of these gains and losses are
non-cash and ultimately are included in either oil and gas sales or in interest
expense.
Commodity hedging activities increased second quarter 2002 cash
realizations by $13.4 million ($0.84 per barrel and $0.33 per mcf, or $0.31 per
mcfe) and first half 2002 cash realizations by $62.0 million ($1.87 per barrel
and $0.78 per mcf, or $0.73 per mcfe). Combining these first half 2002 hedging
gains of $62 million with 2001's hedging gains of $105 million and then adding
the $40 million current mark-to-market value of the company's remaining locked
and open hedges, provides a total of $207 million of realized and unrealized
hedging gains from the company's risk management activities during 2001-02.
Chesapeake believes its risk management activities to date in 2001 and 2002 have
been among the most productive of all independent U.S. oil and gas producers.
The table below summarizes Chesapeake's key statistics during the
second quarter of 2002 and compares them to the first quarter of 2002 and the
second quarter of 2001:
Three Months Ended:
-------------------
6/30/02 3/31/02 6/30/01
------- ------- -------
Average daily production (in mmcfe) 477 466 430
Gas as % of total production 89 88 90
Natural gas production (in bcf) 38.5 36.9 35.0
Average realized gas price ($/mcf) 3.38 3.30 4.46
Oil production (in mbbls) 823 830 682
Average realized oil price ($/bbl) 26.55 24.05 27.70
Natural gas equivalent production (in bcfe) 43.4 41.9 39.1
Gas equivalent realized price ($/mcfe) 3.50 3.39 4.48
General and administrative costs ($/mcfe) .09 .10 .07
Production taxes ($/mcfe) .18 .12 .26
Lease operating expenses ($/mcfe) .56 .53 .48
Interest expense ($/mcfe) .57 .64 .59
DD&A of oil and gas properties ($/mcfe) 1.17 1.16 1.02
Operating cash flow ($ in millions) 96.6 85.2 122.3
Operating cash flow ($/mcfe) 2.23 2.03 3.13
Ebitda ($ in millions) 121.3 112.2 145.3
Ebitda ($/mcfe) 2.80 2.68 3.71
Net income to common shareholders ($ in millions) 22.5 (30.1) 39.3
During the past three years, Chesapeake has assembled one of the most
active onshore drilling programs in the industry that has delivered an
outstanding organic production growth track record. Chesapeake has achieved this
record through a focused commitment to drillbit growth, having invested $175
million in undeveloped land and 3-D seismic data and doubled the size of its
engineering and geoscientific staffs during the past few years. In addition,
Chesapeake anticipates investing an additional $75 million to acquire
undeveloped land and 3-D seismic during the next 12 months.
Chesapeake's exploratory drilling efforts in 2002 have been recently
highlighted by the success of the Cat Creek 1-19 in the Comanche Lodge area of
Beckham County, Oklahoma. This well is the deepest well drilled onshore in the
U.S. during the past several years and represents a major discovery for
Chesapeake. Chesapeake owns a 70% working interest and a 52% net revenue
interest in the Hunton zones in the Cat Creek 1-19.
Because the Upper Hunton's gas is sweet (only 2 parts per million (ppm)
of H2S) and the Middle Hunton's gas should be slightly sour (up to 300 ppm of
H2S), the company plans to produce the Upper Hunton separately for several
months until additional gas transportation arrangements can be made and both
zones commingled. Any additional gas facilities needed to accommodate Middle
Hunton production should cost less than $1 million. To date, Chesapeake's net
cost to drill and complete the Cat Creek 1-19 has been $12 million.
Conference Call Information
Chesapeake's management invites your participation in a conference call
tomorrow morning, July 26 at 8:00 a.m. CDT to discuss the contents of this
release. Please call 913-981-5592 between 7:50 and 8:00 a.m. CDT on July 26 if
you would like to participate in the call. For those unable to participate, the
call will also be available over the Internet by visiting our home page at
www.chkenergy.com and clicking on the link under "Investor Relations" and
"Conference Calls" or by going directly to www.ccbn.com. In addition, a replay
of the call will also be available through August 9 by calling 719-457-0820. The
passcode for the replay is 519396.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
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THREE MONTHS ENDED: June 30, 2002 June 30, 2001
$ $/mcfe $ $/mcfe
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REVENUES:
Oil and gas sales 152,009 3.50 175,225 4.48
Risk management income (481) (0.01) 62,455 1.60
Oil and gas marketing sales 42,785 0.99 38,001 0.97
--------- --------- -------- --------
Total revenues 194,313 4.48 275,681 7.05
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OPERATING COSTS:
Production expenses 24,242 0.56 18,842 0.48
Production taxes 7,911 0.18 9,991 0.26
General and administrative 3,859 0.09 2,873 0.07
Oil and gas marketing expenses 41,181 0.95 36,913 0.94
Depreciation, depletion, and amortization
of oil and gas properties 50,778 1.17 39,910 1.02
Depreciation and amortization of other assets 3,652 0.08 1,837 0.05
--------- --------- -------- --------
Total operating costs 131,623 3.03 110,366 2.82
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INCOME FROM OPERATIONS 62,690 1.45 165,315 4.23
--------- --------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income 3,719 0.08 683 0.02
Interest expense (24,690) (0.57) (22,984) (0.59)
--------- --------- --------- --------
Total other income (expense) (20,971) (0.49) (22,301) (0.57)
--------- --------- --------- --------
Income Before Income Taxes and
Extraordinary Item 41,719 0.96 143,014 3.66
Income Tax Expense 16,686 0.38 57,529 1.47
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NET INCOME BEFORE EXTRAORDINARY ITEM 25,033 0.58 85,485 2.19
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax - - (46,000) (1.18)
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NET INCOME 25,033 0.58 39,485 1.01
Preferred Stock Dividends (2,530) (0.06) (182) -
--------- --------- -------- --------
(2,532)
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS 22,503 0.52 39,303 1.01
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EARNINGS PER COMMON SHARE:
Basic 0.14 $ 0.24
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Assuming dilution $ 0.13 $ 0.23
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WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 165,963 162,588
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Assuming dilution (1) 191,947 171,321
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1. Diluted shares outstanding includes the effect of dilutive stock options
and warrants and the assumed conversion at the beginning of the period of
the preferred stock outstanding or preferred stock converted during the
period for the three months ended June 30, 2002 and 2001.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000's, except per share data)
(unaudited)
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SIX MONTHS ENDED: June 30, 2002 June 30, 2001
$ $/mcfe $ $/mcfe
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REVENUES:
Oil and gas sales 293,980 3.45 396,444 5.00
Risk management income (79,949) (0.94) 62,455 0.79
Oil and gas marketing sales 70,118 0.82 94,166 1.19
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Total revenues 284,149 3.33 553,065 6.98
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OPERATING COSTS:
Production expenses 46,302 0.54 36,630 0.46
Production taxes 13,127 0.15 24,286 0.31
General and administrative 8,153 0.10 6,874 0.09
Oil and gas marketing expenses 67,688 0.79 91,391 1.15
Depreciation, depletion, and amortization
of oil and gas properties 99,397 1.17 78,083 0.98
Depreciation and amortization of other assets 6,762 0.08 3,790 0.05
--------- -------- -------- --------
Total operating costs 241,429 2.83 241,054 3.04
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INCOME FROM OPERATIONS 42,720 0.50 312,011 3.94
--------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and other income 4,673 0.06 1,252 0.02
Interest expense (51,650) (0.61) (48,873) (0.62)
Gothic standby credit facility costs - - (3,392) (0.04)
--------- -------- -------- --------
Total other income (expense) (46,977) (0.55) (51,013) (0.64)
--------- -------- -------- --------
Income (Loss) Before Income Taxes and
Extraordinary Item (4,257) (0.05) 260,998 3.30
Income Tax Expense (Benefit) (1,704) (0.02) 105,225 1.33
--------- -------- -------- --------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (2,553) (0.03) 155,773 1.97
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of
applicable income tax - - (46,000) (0.58)
--------- -------- -------- --------
NET INCOME (LOSS) (2,553) (0.03) 109,773 1.39
Preferred Stock Dividends (5,062) (0.06) (728) (0.01)
--------- -------- -------- --------
(5,062)
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS (7,615) (0.09) 109,045 1.38
========= ======== ======== ========
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EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.05) $ 0.68
========= ========
Assuming dilution $ (0.05) $ 0.64
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WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 165,669 160,161
========= ========
Assuming dilution (1) 165,669 170,835
========= ========
1. Diluted shares outstanding for the six months ended June 30, 2002 does not
include the effect of the assumed conversion at the beginning of the period
of the outstanding or converted preferred stock, the dilutive stock options
or dilutive warrants, as the effect was antidilutive. Diluted shares
outstanding for the six months ended June 30, 2001 includes the effect of
dilutive stock options and warrants and the effect of the assumed
conversion of all preferred stock as of the beginning of the period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in 000's)
(unaudited)
========================================================================== =================== ===================
June 30, December 31,
2002 2001
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Cash and cash equivalents $ 6,427 $ 124,960
Other current assets 171,652 236,423
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TOTAL CURRENT ASSETS 178,079 361,383
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Property and equipment (net) 2,068,566 1,785,581
Deferred tax asset 35,405 67,781
Other assets 48,178 72,023
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TOTAL ASSETS $ 2,330,228 $ 2,286,768
=============== ===============
Current liabilities $ 197,658 $ 173,381
Long term debt 1,326,351 1,329,453
Revenue and royalties due others 12,948 12,696
Long term derivative instruments 52,016 -
Other long term liabilities 7,833 3,831
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TOTAL LIABILITIES 1,596,806 1,519,361
STOCKHOLDERS' EQUITY 733,422 767,407
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,330,228 $ 2,286,768
=============== ===============
COMMON SHARES OUTSTANDING 166,119 164,742
=============== ===============
ITEM 9. REGULATION FD DISCLOSURE
Chesapeake Again Increases its Operational and
Financial Guidance for 2002
The following forecasts and estimates replace in their entirety those
set forth in the company's April 29, 2002 earnings release. The company's
forecasts and estimates are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially due to the risks and uncertainties described in the company's filings
with the Securities and Exchange Commission. Furthermore, these projections do
not reflect the potential impact of unforeseen events that may occur subsequent
to the issuance of this release.
As a result of the drilling successes and pending acquisitions
discussed above, Chesapeake is today announcing a third increase in its 2002
forecasts. Production for the year is now projected at 178-180 bcfe (89% gas),
up from last quarter's projection of 173-177 bcfe and up from the company's
initial 2002 production forecast of 162-166 bcfe issued on December 4, 2001.
Projections for expenses per mcfe remain substantially similar to prior
guidance: $0.53-0.57 for lease operating expense (up from $0.50-0.55 in prior
guidance), $0.18-0.22 for production taxes (no change from prior guidance),
$0.57-0.60 for interest expense (down from $0.62-0.67 in prior guidance),
$0.10-0.11 for general and administrative costs (no change from prior guidance),
$1.25-1.30 for DD&A of oil and gas properties (up from $1.15-1.25 in prior
guidance) and $0.08-0.10 for DD&A of other assets (up from $0.06-0.08 in prior
guidance). The company expects its book income tax rate during 2002 to average
40%, all of which should be deferred.
Based on initial gas sales rates, flowing tubing pressures and
geological and production analogies to nearby Northeast Mayfield Hunton wells,
Chesapeake believes the Cat Creek's gross proved reserves will be approximately
25 billion cubic feet of natural gas equivalent (bcfe), 10 bcfe from the Upper
Hunton and 15 bcfe from the behind-pipe Middle Hunton.
Deep gas production was first established in the Mayfield and Northeast
Mayfield fields of Beckham County in the late 1970's. Since then, the Hunton
formation in this area has produced more than 520 bcfe and has an estimated
ultimate recovery (EUR) of 600 bcfe. The closest analogous field to Comanche
Lodge is Northeast Mayfield, where the Hunton will average an estimated EUR of
36 bcfe per well. These Mayfield area Hunton reserves are limited to existing
producing wells and do not include the projected 250 bcfe (130 bcfe net to
Chesapeake) attributable to the Comanche Lodge Prospect.
Virtually all of the area's Hunton production has been produced from
the Middle Hunton, which makes Chesapeake's discovery of production in the Upper
Hunton in the Cat Creek 1-19 especially significant. The company believes that
full development of the Hunton in Comanche Lodge will require drilling seven
additional wells, two of which should begin drilling in the next 60 days
offsetting the Cat Creek 1-19. Chesapeake believes these wells will reach total
depth of 25,000' within 240-270 days from spud at a gross completed per well
cost of $13-15 million. Targeted per well gross reserves are 25-35 bcfe.
In addition, Chesapeake has recently reached total depth on two deep
(20,000') exploratory Morrow/Springer tests in the Greater Mayfield area. The
Morrow/Springer zones in this area have produced 110 bcfe with an EUR of 235
bcfe from existing wells and not including potential Morrow/Springer reserves in
Greater Mayfield. Chesapeake has a substantial inventory of Morrow/Springer
prospects in Greater Mayfield delineated by its extensive 3-D seismic database.
The company expects to keep 2-4 Morrow/Springer rigs active in this area for the
foreseeable future. Based on shows and log results from these two wells and from
the Morrow/Springer shows encountered in the Cat Creek 1-19, Chesapeake believes
that it can find more than 100 gross bcfe (50 bcfe net to Chesapeake) of
Morrow/Springer reserves on its Greater Mayfield acreage. Estimated gross
completed well costs are $5 million for targeted reserves of 5-15 bcfe.
Moreover, the Greater Mayfield area accounts for only three of the
company's 30 rigs currently active. Other deep exploratory wells with
significant potential are underway in the Arkoma, Bray, Cement, Chitwood, Knox
and Watonga-Chickasha areas of Oklahoma. The company's current inventory of more
than 1,500 undrilled locations includes approximately 50 additional ultra-deep
(>19,000') drilling locations.
Exploration Potential
As a result of the company's contrarian growth strategies, Chesapeake
has built an industry-leading onshore exploration program that should expose it
to more than one tcfe of gross unbooked potential reserves in 2002 and early
2003. Developed by the company's exploration staff, these prospects have an
average depth of 19,000 feet and have been delineated using detailed subsurface
geological analysis and 3-D seismic. Chesapeake believes its distinctive
approach to deep Mid-Continent gas exploration can continue to deliver
additional significant exploratory successes in the years to come.
Chesapeake Mid-Continent Gas Consolidation Activities Complement
Drillbit Growth; Four Niche Transactions Totaling
$165 Million to Close in Third Quarter
To complement its exploratory and development drilling programs,
Chesapeake continues to actively pursue niche Mid-Continent gas acquisitions. In
late June, the company completed its previously announced acquisition of
publicly-traded Canaan Energy Corporation and its approximate 100 bcfe of
reserves for a total cost of approximately $125 million.
In addition, the company has recently reached agreements to acquire
privately-held Focus Energy Corporation and its related partnerships, the
Mid-Continent assets of publicly-traded EnCana Corporation, the Mid-Continent
assets of a publicly-traded utility and the Anadarko Basin assets of a
publicly-traded pipeline company. The cost of these four new Mid-Continent gas
acquisitions will be approximately $165 million.
The transactions will increase Chesapeake's reserves by approximately
130 bcfe to more than 2.1 tcfe and daily production by approximately 28 mmcfe to
more than 500 mmcfe. In addition, the company will acquire new drillsites and
additional interests in certain existing drillsites. Closing for all four
transactions should occur in the third quarter and the company intends to use
either its bank credit facility or long-term debt markets to finance the
transactions.
Management Summary
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Chesapeake's strong performance in the first half of 2002 and in recent years
is the result of the company's clear and focused strategy on Mid-Continent
natural gas, our high-quality asset base and our talented and hard-working
employees. During a year when the industry's natural gas production is likely to
shrink by up to 5%, Chesapeake expects its production to increase by 12%, much
of which will come from organic production growth generated by the company's
drilling programs.
Chesapeake's recent significant drilling success at Comanche Lodge is
an excellent confirmation of the substantial and largely unrecognized
exploratory upside that exists in our company. We firmly believe that Chesapeake
has built the highest potential onshore gas exploration program in the U.S. and
that more exploration success can be expected in the months ahead.
The combination of our focus on gas in the Mid-Continent, our
value-added risk management strategy, our balanced acquisition and drilling
programs, our high quality assets and our low operating costs has positioned
Chesapeake as a leader in value creation. With the company's increasingly
distinctive organic growth track record now supplemented by big-time exploration
potential, we believe Chesapeake can continue delivering one of the industry's
best track records of creating shareholder value in the years to come."
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements include estimates and give our current
expectations or forecasts of future events. They are based on our historical
operating trends, our existing commodity hedging position and our current
estimate of proved reserves. Although we believe our forward-looking statements
are reasonable, they can be affected by inaccurate assumptions or by known or
unknown risks and uncertainties. For example, statements concerning the fair
values of derivative contracts and their estimated contribution to our future
results of operations are based upon market information as of a specific date.
These market prices are subject to significant volatility. Factors that could
cause actual operating and financial results to differ materially from expected
results include the volatility of oil and gas prices, our substantial
indebtedness, our commodity price risk management activities, the cost and
availability of drilling and production services, our ability to replace
reserves, the availability of capital, uncertainties inherent in evaluating our
own reserves and the reserves we acquire, drilling and operating risks and other
risk factors described in the company's 2001 annual report on Form 10-K and
subsequent filings with the Securities and Exchange Commission.
Chesapeake Energy Corporation is one of the 10 largest independent natural gas
producers in the U.S. Headquartered in Oklahoma City, the company's operations
are focused on exploratory and developmental drilling and producing property
acquisitions in the Mid-Continent region of the United States. The company's
Internet address is www.chkenergy.com.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
By: /s/ Aubrey K. McClendon
---------------------------------
Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Dated: July 31, 2002