SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the transition period from __________ to __________
Commission File No. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1395733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
(Address of principal executive offices) (Zip Code)
(405) 848-8000
(Registrant's telephone number, including area code)
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 X NO
At October 31, 1996 there were 30,128,321 shares of the registrant's $.10
par value Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Index to Financial Statements
and
Management's Discussion and Analysis
Page
Chesapeake Energy Corporation:
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1996
and June 30, 1996
Consolidated Statements of Income for the Three
Months Ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Chesapeake Exploration Limited Partnership:
Item 1. Financial Statements
Balance Sheets at September 30, 1996 and
June 30, 1996
Statements of Income for the Three
Months Ended September 30, 1996 and 1995
Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1995
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
September 30, June 30,
1996 1996
--------- ---------
($ in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,444 $ 51,638
Accounts receivable:
Oil and gas sales 14,409 12,687
Oil and gas marketing sales 8,413 6,982
Joint interest and other, net of allowance for
doubtful accounts of $340,000 19,822 27,661
Related parties 3,007 2,884
Inventory 10,461 5,163
Other 4,694 2,158
--------- --------
Total Current Assets 63,250 109,173
--------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full
cost accounting:
Evaluated oil and gas properties 428,309 363,213
Unevaluated properties 185,433 165,441
Less: accumulated depreciation, depletion and
amortization (109,749) (92,720)
--------- ---------
503,993 435,934
Other property and equipment 19,701 18,162
Less: accumulated depreciation and amortization (3,358) ( 2,922)
--------- ---------
Total Property and Equipment 520,336 451,174
--------- ---------
OTHER ASSETS 11,965 11,988
--------- ---------
TOTAL ASSETS $595,551 $572,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $ 10,642 $ 6,755
Accounts payable 56,946 54,514
Accrued liabilities and other 13,869 14,062
Revenues and royalties due others 28,200 33,503
--------- ---------
Total Current Liabilities 109,657 108,834
--------- ---------
LONG-TERM DEBT, NET 277,323 268,431
--------- ---------
REVENUES AND ROYALTIES DUE OTHERS 5,588 5,118
--------- ---------
DEFERRED INCOME TAXES 16,326 12,185
--------- ---------
CONTINGENCIES AND COMMITMENTS - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; 0 shares issued and outstanding - -
Common Stock, $.10 par value, 45,000,000 shares
authorized at September 30, 1996; 30,126,372
and 30,079,913 shares issued and outstanding
at September 30, 1996 and June 30, 1996, respectively 3,013 3,008
Paid-in capital 137,463 136,782
Accumulated earnings 46,181 37,977
--------- ---------
Total Stockholders' Equity 186,657 177,767
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $595,551 $572,335
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
-------------------
1996 1995
------ ------
($ in thousands,
except per share data)
<S> <C> <C>
REVENUES:
Oil and gas sales $36,753 $19,831
Oil and gas marketing sales 12,184 -
Oil and gas service operations - 2,157
Interest and other 848 1,514
------- -------
Total Revenues 49,785 23,502
------- -------
COSTS AND EXPENSES:
Production expenses and taxes 2,530 1,696
Oil and gas marketing expenses 11,866 -
Oil and gas service operations - 1,852
Oil and gas depreciation,
depletion and amortization 17,029 10,435
Depreciation and amortization
of other assets 952 696
General and administrative 1,671 941
Interest 2,817 3,363
------- -------
Total Costs and Expenses 36,865 18,983
------- -------
INCOME BEFORE INCOME TAXES 12,920 4,519
INCOME TAX EXPENSE
Current - -
Deferred 4,716 1,604
------- -------
Total Income Tax Expense 4,716 1,604
------- -------
NET INCOME $ 8,204 $ 2,915
======= =======
NET INCOME PER COMMON SHARE:
Primary $ .26 $ .10
======= =======
Fully-diluted $ .26 $ .10
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 32,129 28,526
======= =======
Fully-diluted 32,169 28,772
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
-------------------
1996 1995
----- -----
($ in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,204 $ 2,915
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 17,545 10,833
Deferred taxes 4,716 1,604
Amortization of loan costs 436 298
Amortization of bond discount 142 140
Gain (loss) on sale of fixed assets
and other 6 (433)
Investments in securities (2,912) (713)
Other adjustments (206) -
Changes in current assets and liabilities (1,978) 2,741
-------- --------
Cash provided by operating activities 25,953 17,385
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition
of oil and gas properties (87,350) (46,004)
Proceeds from sale of assets 8,642 4,247
Investment in service operations (2,545) -
Additions to property, equipment and other (1,870) (979)
-------- --------
Cash used in investing activities (83,123) (42,736)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 10,000 -
Payments on long-term borrowings (2,135) (1,016)
Cash received from exercise of stock
options 191 113
Other (80) -
-------- --------
Cash provided by financing activities 7,976 (903)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (49,194) (26,254)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 51,638 55,535
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,444 $29,281
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
1. Accounting Principles
The accompanying unaudited consolidated financial
statements of Chesapeake Energy Corporation and
Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as
prescribed by the Securities and Exchange Commission. All
material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the
results for the interim periods have been reflected. The
results for the three months ended September 30, 1996, are
not necessarily indicative of the results for the full
fiscal year.
As used in this Form 10-Q, the terms "Restricted
Subsidiaries" and "Subsidiary Guarantors" include
Chesapeake Operating, Inc. ("COI"), Lindsay Oil Field
Supply, Inc., Sander Trucking Company, Inc., Whitmire
Dozer Service, Inc., and Chesapeake Exploration Limited
Partnership ("CEX"), and the terms "Unrestricted
Subsidiaries" and "Non-Guarantor Subsidiaries" include
Chesapeake Gas Development Corporation ("CGDC") and
Chesapeake Energy Marketing, Inc. ("CEM"), each of which
is a direct or indirect wholly owned subsidiary of the
Company.
2. Recent Events
On October 28, 1996 the Company filed a registration
statement with the Securities and Exchange Commission with
respect to a proposed public offering of 3,250,000 shares
of Common Stock of the Company (3,737,500 shares if the
underwriters' over-allotment option is fully exercised).
The Company intends to use the net proceeds from the
offering to reduce debt, to fund expanded exploration and
development capital expenditures and for general corporate
purposes.
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company in the United States District Court for the Northern
District of Texas alleging (a) infringement of UPRC's claimed patent
(the "UPRC patent") for an invention involving a method of maintaining a
bore hole in a stratigraphic zone during drilling, and (b) tortious
interference with contracts between UPRC and a third party vendor (the
"Vendor") regarding the confidentiality of proprietary information of
UPRC. UPRC is seeking injunctive relief, damages of an unspecified
amount, including actual, enhanced, consequential and punitive damages,
interest, costs and attorney's fees. The Company believes that it has
meritorious defenses to UPRC's allegations, including, without
limitation, the Company's belief that the UPRC Patent is invalid. The
Company will vigorously defend the lawsuit. No assurance can be given
as to the outcome of the matter or the ultimate impact on the Company of
any damages (which could be substantial) that may be awarded to UPRC
because litigation is inherently uncertain.
3. Senior Notes
12% Notes
The Company has outstanding $47.5 million in aggregate
principal amount of 12% Notes which mature in March 2001.
The 12% Notes bear interest at an annual rate of 12%,
payable semiannually on each March 1 and September 1.
The 12% Notes are senior obligations of the Company and
are secured by a pledge of all of the issued and
outstanding capital stock of, and partnership interests
in, the Company=s Restricted Subsidiaries. In addition,
the 12% Notes are fully and unconditionally guaranteed,
jointly and severally, by the Restricted Subsidiaries.
The only subsidiary's securities which constitute a
substantial portion of the collateral for the 12% Notes
are the partnership interests in CEX, a limited
partnership which is 10% owned by COI, as the sole
general partner, and 90% owned directly by the Company, as
the sole limited partner. Separate financial statements
of CEX are presented elsewhere in this Form 10-Q.
10 1/2% Notes
The Company has outstanding $90 million in aggregate
principal amount of 10 1/2% Notes which mature June 2002.
The 10 1/2% Notes bear interest at an annual rate of 10
1/2%, payable semiannually on each June 1 and December 1.
The 10 1/2% Notes are senior, unsecured obligations of the
Company, and are fully and unconditionally guaranteed,
jointly and severally, by the Company's Restricted
Subsidiaries.
9 1/8% Notes
On April 9, 1996 the Company issued $120 million in
aggregate principal amount of 9 1/8% Senior Notes due 2006
which mature April 15, 2006. The 9 1/8% Notes bear
interest at an annual rate of 9 1/8%, payable semiannually
on each April 15 and October 15, commencing October 15,
1996. The 9 1/8% Notes are senior, unsecured obligations
of the Company, and are fully and unconditionally
guaranteed, jointly and severally, by the Company's
Restricted Subsidiaries.
Set forth below are condensed consolidating financial
statements of CEX, the other Subsidiary Guarantors, all
Subsidiary Guarantors combined, the Non-Guarantor
Subsidiaries and the Company. The CEX limited partnership
condensed financial statements were prepared on a separate
entity basis as reflected in the Company's books and
records and include all material costs of doing business
as if the partnership were on a stand-alone basis except
that interest is not charged or allocated on intercompany
advances. No provision has been made for income taxes
because the partnership is not a tax paying entity.
Separate financial statements of each Subsidiary
Guarantor, other than CEX, have not been provided because
management has determined they are not material to
investors.
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1996
($ in thousands)
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------
All Non-Guarantor Company
CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated
--- ------ -------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ - $(11,972) $(11,972) $ 5,999 $ 8,417 $ - $ 2,444
Accounts receivable, net 18,685 20,969 39,654 9,478 - (3,481) 45,651
Inventory - 10,381 10,381 80 - - 10,461
Other 1,066 655 1,721 46 2,927 - 4,694
---------- --------- --------- -------- -------- ----------- --------
Total Current Assets 19,751 20,033 39,784 15,603 11,344 (3,481) 63,250
---------- --------- --------- -------- -------- ----------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties 409,286 (5,589) 403,697 24,612 - - 428,309
Unevaluated leasehold 185,433 - 185,433 - - - 185,433
Other property and equipment - 10,106 10,106 68 9,527 - 19,701
Less: accumulated depreciation,
depletion and amortization (101,099) (2,846) (103,945) (8,650) (512) - (113,107)
---------- -------- --------- -------- -------- ----------- ---------
Total Property & Equipment 493,620 1,671 495,291 16,030 9,015 - 520,336
---------- -------- --------- -------- -------- ----------- ---------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 64,934 524,033 588,967 6,266 429,908 (1,025,141) -
---------- -------- ---------- -------- -------- ------------ --------
OTHER ASSETS 762 1,818 2,580 939 8,446 - 11,965
---------- --------- ----------- -------- -------- ----------- --------
TOTAL ASSETS $579,067 $547,555 $1,126,622 $ 38,838 $458,713 $(1,028,622) $595,551
========== ========= ========== ========= ========= ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ - $ 8,002 $ 8,002 $ 2,610 $ 30 $ - $ 10,642
Accounts payable and other 2,105 82,350 84,455 9,315 8,726 (3,481) 99,015
---------- -------- ---------- -------- -------- ------------ -------
Total Current Liabilities 2,105 90,352 92,457 11,925 8,756 (3,481) 109,657
---------- -------- ---------- -------- -------- ------------ -------
LONG-TERM DEBT 10,000 1,502 11,502 9,390 256,431 - 277,323
---------- -------- ---------- -------- -------- ------------ -------
REVENUES PAYABLE - 5,588 5,588 - - - 5,588
---------- -------- ---------- -------- -------- ------------ --------
DEFERRED INCOME TAXES - 26,086 26,086 540 (10,300) - 16,326
---------- -------- ---------- -------- -------- ------------ -------
INTERCOMPANY PAYABLES 465,046 460,636 925,682 8,039 87,650 (1,021,371) -
---------- -------- ---------- -------- -------- ------------- --------
STOCKHOLDERS' EQUITY:
Common Stock - 117 117 2 2,896 (2) 3,013
Other 101,916 (36,726) 65,190 8,942 113,280 (3,768) 183,644
---------- --------- ---------- -------- -------- ------------ --------
Total Stockholders' Equity 101,916 (36,609) 65,307 8,944 116,176 (3,770) 186,657
---------- --------- ---------- -------- -------- ------------ --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $579,067 $547,555 $1,126,622 $ 38,838 $458,713 $(1,028,622) $595,551
========== ======== ========== ========= ======== ============ =========
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ in thousands)
<CAPTION>
SUBSIDIARY GUARANTORS
----------------------------------
All Non-Guarantor Company
CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated
--------- -------- --------- ------------ -------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ - $ 4,061 $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638
Accounts receivable, net 14,778 29,302 44,080 7,723 - (1,589) 50,214
Inventory - 4,947 4,947 216 - - 5,163
Other 1,891 264 2,155 3 - - 2,158
-------- -------- ---------- -------- -------- -------- --------
Total Current Assets 16,669 38,574 55,243 10,693 44,826 (1,589) 109,173
-------- -------- ---------- -------- -------- -------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties 346,821 (8,211) 338,610 24,603 - - 363,213
Unevaluated leasehold 165,441 - 165,441 - - - 165,441
Other property and equipment - 9,608 9,608 61 8,493 - 18,162
Less: accumulated depreciation,
depletion and amortization (84,726) (2,467) (87,193) (8,007) (442) - (95,642)
------- -------- -------- -------- ------- -------- --------
Total Property & Equipment 427,536 (1,070) 426,466 16,657 8,051 - 451,174
------- -------- -------- -------- ------- -------- -------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 56,055 463,331 519,386 8,132 382,388 (909,906) -
------ ------- ---------- -------- -------- --------- --------
OTHER ASSETS 694 1,616 2,310 940 8,738 - 11,988
------- -------- -------- -------- -------- --------- --------
TOTAL ASSETS $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
======== ======== ========== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current
maturities of
long-term debt $ - $ 3,846 $ 3,846 $ 2,880 $ 29 $ - $ 6,755
Accounts payable and other 789 90,280 91,069 7,339 5,260 (1,589) 102,079
-------- -------- ---------- -------- -------- ---------- -------
Total Current Liabilities 789 94,126 94,915 10,219 5,289 (1,589) 108,834
-------- -------- ---------- -------- -------- ---------- -------
LONG-TERM DEBT - 2,113 2,113 10,020 256,298 - 268,431
-------- -------- ---------- -------- -------- ---------- -------
REVENUES PAYABLE - 5,118 5,118 - - - 5,118
-------- -------- ---------- -------- -------- ---------- -------
DEFERRED INCOME TAXES - 23,950 23,950 1,335 (13,100) - 12,185
-------- -------- ---------- -------- -------- ---------- -------
INTERCOMPANY PAYABLES 413,726 410,581 824,307 8,182 73,647 (906,136) -
-------- -------- ---------- -------- -------- ---------- -------
STOCKHOLDERS' EQUITY:
Common Stock - 117 117 2 2,891 (2) 3,008
Other 86,439 (33,554) 52,885 6,664 118,978 (3,768) 174,759
-------- -------- ---------- -------- -------- --------- --------
Total Stockholders' Equity 86,439 (33,437) 53,002 6,666 121,869 (3,770) 177,767
-------- -------- ---------- -------- -------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $500,954 $502,451 $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
======== ======== ========== ======== ======== ========= ========
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ in thousands)
<CAPTION>
SUBSIDIARY GUARANTORS
------------------------------
All Non-Guarantor Company
CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated
-------- ------- ------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1996:
REVENUES:
Oil and gas sales $ 34,789 $ - $34,789 $ 1,691 $ - $ 273 $36,753
Oil and gas marketing sale - - - 21,914 - (9,730) 12,184
Interest and other - 115 115 409 324 - 848
-------- ------- ------- ------- -------- --------- -------
Total Revenues 34,789 115 34,904 24,014 324 (9,457) 49,785
-------- ------- ------- ------- -------- --------- -------
COSTS AND EXPENSES:
Production expenses and taxe 2,432 (85) 2,347 183 - - 2,530
Oil and gas marketing expenses - - - 21,323 - (9,457) 11,866
Oil and gas depreciation,
depletion and amortization 16,373 - 16,373 656 - - 17,029
Other depreciation and amortization 107 427 534 31 387 - 952
General and administrative 198 975 1,173 236 262 - 1,671
Interest and other 11 22 33 105 2,679 - 2,817
------ ------- ------- ------- -------- --------- -------
Total Costs & Expenses 19,121 1,339 20,460 22,534 3,328 (9,457) 36,865
-------- ------- ------- ------- -------- --------- -------
INCOME (LOSS) BEFORE INCOME TAXE 15,668 (1,224) 14,444 1,480 (3,004) - 12,920
INCOME TAX EXPENSE (BENEFIT) - 5,272 5,272 540 (1,096) - 4,716
-------- ------- ------- ------- -------- --------- -------
NET INCOME (LOSS) $15,668 $(6,496) $ 9,172 $ 940 $(1,908) $ - $ 8,204
======== ======= ======= ======= ======== ========= =======
For the Three Months Ended September 30, 1995:
REVENUES:
Oil and gas sales $18,609 $ (1) $18,608 $ 1,223 $ - $ - $19,831
Oil and gas service operation - 2,157 2,157 - - - 2,157
Interest and other - 1,021 1,021 - 493 - 1,514
-------- ------- ------- ------- -------- --------- -------
Total Revenues 18,609 3,177 21,786 1,223 493 - 23,502
-------- ------- ------- ------- -------- --------- -------
COSTS AND EXPENSES:
Production expenses and taxes 1,405 143 1,548 148 - - 1,696
Oil and gas service operation - 1,852 1,852 - - - 1,852
Oil and gas depreciation,
depletion and amortization 9,880 - 9,880 555 - - 10,435
Other depreciation and amortization 54 378 432 5 259 - 696
General and administrative 258 560 818 29 94 - 941
Interest and other 12 27 39 185 3,139 - 3,363
-------- ------- ------- ------- -------- --------- -------
Total Costs & Expenses 11,609 2,960 14,569 922 3,492 - 18,983
-------- ------- ------- ------- -------- --------- -------
INCOME (LOSS) BEFORE INCOME TAX 7,000 217 7,217 301 (2,999) - 4,519
INCOME TAX EXPENSE - 1,604 1,604 - - - 1,604
-------- -------- ------- ------- -------- --------- -------
NET INCOME (LOSS) $ 7,000 $ (1,387) $ 5,613 $ 301 $(2,999) $ - $ 2,915
======== ======== ======= ======= ======== ========= =======
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ in thousands)
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------
All Non-Guarantor Company
CEX Others Combined Subsidiaries (Parent) Eliminations Consolidated
-------- ------- -------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Three Months Ended September 30, 1996:
CASH FLOWS FROM
OPERATING ACTIVITIES $ 32,274 $(4,607) $27,667 $ 222 $ (1,936) $ - $ 25,953
-------- ------- ------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (82,457) (4,884) (87,341) (9) - - (87,350)
Proceeds from sale of assets - 8,642 8,642 - - - 8,642
Investment in service operations - (2,545) (2,545) - - - (2,545)
Other additions (611) (585) (1,196) (49) (625) - (1,870)
-------- ------- ------- -------- -------- -------- --------
(83,068) 628 (82,440) (58) (625) - (83,123)
-------- ------- ------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term
borrowings 10,000 - 10,000 - - - 10,000
Payments on borrowings - (1,230) (1,230) (900) (5) - (2,135)
Cash received from exercise
of stock options - - - - 191 - 191
Other - - - - (80) - (80)
Intercompany advances, net 40,794 (10,824) 29,970 3,984 (33,954) - -
-------- ------- ------- -------- -------- -------- --------
50,794 (12,054) 38,740 3,084 (33,848) - 7,976
-------- ------- ------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents - (16,033) (16,033) 3,248 (36,409) - (49,194)
Cash, beginning of period - 4,061 4,061 2,751 44,826 - 51,638
-------- -------- -------- ------- ------- -------- --------
Cash, end of period $ - $(11,972) $(11,972) $ 5,999 $ 8,417 $ - $ 2,444
======== ======== ======== ======= ======= ======== ========
For the Three Months Ended September 30, 1995:
CASH FLOWS FROM
OPERATING ACTIVITIES $ 18,995 $ 470 $19,465 $ 852 $(2,932) $ - $ 17,385
-------- -------- ------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (46,004) - (46,004) - - - (46,004)
Proceeds from sale of assets 107 4,140 4,247 - - - 4,247
Other additions (39) (481) (520) (10) (449) - (979)
------- -------- ------- ------- ------- -------- --------
(45,936) 3,659 (42,277) (10) (449) - (42,736)
------- -------- ------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings - (309) (309) (700) (7) - (1,016)
Cash received from exercise
of stock options - - - - 113 - 113
Intercompany advances, net 26,941 (29,677) (2,736) 73 2,663 - -
------- -------- ------- ------- ------- -------- --------
26,941 (29,986) (3,045) (627) 2,769 - (903)
------- -------- ------- ------- ------- -------- --------
Net increase (decrease)in cash
and cash equivalents - (25,857) (25,857) 215 (612) - (26,254)
Cash, beginning of period - 53,227 53,227 5 2,303 - 55,535
-------- -------- ------- ------- ------- -------- -------
Cash, end of period $ - $27,370 $27,370 $ 220 $ 1,691 $ - $29,281
======== ======== ======= ======= ======= ======== =======
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
On October 28, 1996 the Company filed a registration statement with the
Securities and Exchange Commission with respect to a proposed public
offering of 3,250,000 shares of Common Stock of the Company (3,737,500
shares if an over-allotment option granted by the Company to the underwriters
is exercised in full). The Company intends to use approximately $53
million of the net proceeds to purchase or otherwise satisfy the Company's
obligations in respect of $47.5 million principal amount of the Company's
outstanding 12% Senior Notes and such additional amounts as may be necessary
to fully repay the outstanding balance of its bank revolving credit facility.
The balance of the net proceeds will be used to fund expanded exploration and
development capital expenditures and for general corporate purposes.
The prepayment of the Company's 12% Senior Notes, together with repayment of
the amount outstanding under the bank revolving credit facility, will result
in an extraordinary charge to the Company of approximately $7 million, net of
tax. The Company anticipates, subject to the completion of the pending
Common Stock offering, to record this extraordinary charge to earnings
in the Company's quarter ending December 31, 1996.
In October 1996, a patent infringement suit was filed against the Company by
Union Pacific Resources Company. Management believes that the Company has
meritorious defenses to this action, although the Company is unable to
predict the ultimate outcome of this lawsuit because litigation is
inherently uncertain. See Part II, Item 1 - Legal Proceedings.
THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. SEPTEMBER 30, 1995
Net income for the three months ended September 30, 1996 (the "Current Quarter")
was $8.2 million, a $5.3 million increase from net income of $2.9 million for
the quarter ended September 30, 1995 (the "Prior Quarter"). This increase
was caused primarily by the Company's significantly higher oil and gas
production and increases in oil and gas sales prices.
Revenues from oil and gas sales for the Current Quarter were $36.8 million,
an increase of $17.0 million, or 86%, from the Prior Quarter. Gas production
increased to 15.3 billion cubic feet ("Bcf"), an increase of 4.6 Bcf, or 43%,
compared to the Prior Quarter. Oil production increased 156 thousand
barrels ("MBbls"), or 46%, from 342 MBbls to 498 MBbls. The increase in oil
and gas production was accompanied by increases in the average oil and gas
prices realized. In the Current Quarter, the Company received an average
oil price of $21.19 per barrel ("Bbl") net of hedging losses of $0.7
million, an increase of $4.55 per Bbl, or 27%, from the $16.64 per Bbl
realized in the Prior Quarter. Gas price realizations increased to $1.71
per thousand cubic feet ("Mcf") in the Current Quarter net of hedging losses
of $4.9 million, an increase of 30% from the $1.32 per Mcf realized in the
Prior Quarter.
The following table sets forth oil and gas production for the Company's primary
operating areas during the Current Quarter.
<TABLE>
<CAPTION>
Oil Gas Total Percent
Operating Areas Wells<F1> (MBls) (MMcf) (MMcfe) %
--------------- --------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Giddings 185 137 10,785 11,606 63%
Southern Oklahoma 192 144 2,965 3,830 21%
Louisiana Trend 15 154 777 1,701 9%
All Other 121 63 797 1,175 7%
-------- ------ ------ ------- -------
Total 513 498 15,324 18,312 100%
======== ====== ====== ======= =======
<FN>
<F1> Includes wells being drilled at September 30, 1996.
</FN>
</TABLE>
Revenues from the Company's oil and gas marketing operations in the Current
Quarter, which commenced in December 1995 with the purchase of Chesapeake
Energy Marketing, Inc. ("CEM"), were $12.2 million. Oil and gas marketing
expenses were $11.9 million, resulting in a gross profit margin during the
Current Quarter of $0.3 million, as compared to no activity in the Prior
Quarter. The Company had no revenues or expenses for oil and gas service
operations in the Current Quarter, as a result of the sale of this business
in June 1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited
partnership formed by Peak Oilfield Services Company (a joint venture
between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company.
As a result of this investment, the Company recorded $84,000 in net profit in
interest and other revenue in the Current Quarter, utilizing the equity
accounting method.
Production expenses and taxes increased to $2.5 million in the Current Quarter
from $1.7 million in the Prior Quarter. This increase was the result of a
significant increase in oil and gas production volumes during the Current
Quarter. On a gas equivalent production unit ("Mcfe") basis, production
expenses and taxes were $0.14 per Mcfe in the Current Quarter compared to
$0.13 per Mcfe in the Prior Quarter. Much of the Company's gas production
from wells drilled before September 1996 in the downdip Giddings Field
qualifies for exemption from Texas state production taxes for production
through August 31, 2001. Additionally, certain oil and gas production from
the Company's wells in the Knox and Sholem Alechem fields in Oklahoma and the
Louisiana Austin Chalk Trend qualifies for production tax exemption until
well costs are recovered. These exemptions, combined with the fact that
many of the Company's wells are high volume gas wells that tend to have
lower operating costs per Mcfe than lower volume wells, result in the
Company's historically low production costs per Mcfe. The Company expects that
operating costs in fiscal 1997 will increase because of the Company's
expansion of drilling efforts into the Louisiana Trend and the Williston
Basin, both of which are oil prone areas with significant associated
water production which results in higher operating costs than gas prone areas,
and because limited severance tax exemptions will be available in these areas
as compared to existing exemptions in the Giddings Field.
Depreciation, depletion and amortization ("DD&A") of oil and gas properties
for the Current Quarter was $17.0 million, an increase of $6.6 million from
the Prior Quarter. The increase in DD&A expense for oil and gas properties
between quarters is the result of a 5.6 billion cubic feet equivalent
("Bcfe") increase in production volumes and an increase in the DD&A rate per
Mcfe. The average DD&A rate per Mcfe, a function of capitalized and
estimated future development costs and the related proved reserves, was
$0.93 for the Current Quarter and $0.82 for the Prior Quarter. The
Company believes the DD&A rate will increase during fiscal 1997 based on
projected higher finding costs for wells drilled in the Louisiana Trend.
Depreciation and amortization of other assets increased to $1.0 million in the
Current Quarter as compared to $0.7 million in the Prior Quarter. This increase
is primarily the result of higher amortization expense related to debt
issuance costs, and higher depreciation related to the Company's acquisition
of additional buildings in its Oklahoma City office complex.
General and administrative expenses increased to $1.7 million during the
Current Quarter, a $0.8 million, or 89%, increase from the Prior Quarter.
This increase is the result of the continued growth of the Company. On an
Mcfe basis, general and administrative expenses were $0.09 per Mcfe in the
Current quarter as compared to $0.07 per Mcfe in the Prior Quarter. The
Company capitalized $0.7 million and $0.3 million of payroll and other
internal costs directly related to oil and gas exploration and development
activities, net of partner reimbursements, in the Current Quarter and
Prior Quarter, respectively.
Interest expense decreased to $2.8 million during the Current Quarter, a $0.6
million decrease from the Prior Quarter, as a result of higher levels of
interest capitalized during the Current Quarter. During the Current Quarter,
the Company capitalized $4.2 million of interest costs representing the
estimated costs to carry its unevaluated leasehold inventory, compared to
$0.9 million in the Prior Quarter. This increase in capitalized interest
costs is the result of larger investments being carried during the Current
Quarter in leasehold that has yet to be evaluated than in the Prior Quarter.
Income tax expense increased to $4.7 million in the Current Quarter from $1.6
million in the Prior Quarter. The Company's estimated effective income tax
rate was 36.5% for the Current Quarter, compared to 35.5% for the Prior
Quarter. The Company estimates its effective rate based on anticipated
levels of income for the year and estimated production in excess of that allowed
in computing statutory depletion for tax purposes. The provision for income
tax expense is deferred because the Company is not currently a cash income
taxpayer. The Company has significant tax net operating loss carryforwards
generated from the intangible drilling cost deduction for income tax purposes
associated with the Company's drilling activities which are available to
offset regular taxable income in the future.
HEDGING ACTIVITIES
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include swap
arrangements that establish an index-related price above which the Company
pays the hedging partner and below which the Company is paid by the hedging
partner, the purchase of index-related puts that provide for a "floor"
price to the Company to be paid by the counter-party to the extent the price
of the commodity is below the contracted floor, and basis protection swaps.
Results from hedging transactions are reflected in oil and gas sales to the
extent related to the Company's oil and gas production.
The Company has the following oil swap arrangements for periods after the
Current Quarter:
<TABLE>
<CAPTION>
Monthly NYMEX-Index
Month Volume(Bbls) Strike Price (per Bbl)
----- ------------ ----------------------
<S> <C> <C>
October 1996 31,000 $17.69
November 1996 30,000 $17.65
December 1996 31,000 $17.62
December 1996 62,000 $23.89
January 1997 31,000 $20.01
January 1997 62,000 $23.27
February 1997 28,000 $19.72
February 1997 56,000 $22.74
March 1997 31,000 $19.46
April 1997 30,000 $19.22
May 1997 31,000 $18.97
June 1997 30,000 $18.79
July 1997 31,000 $18.60
August 1997 31,000 $18.43
September 1997 30,000 $18.30
October 1997 31,000 $18.19
November 1997 30,000 $18.13
December 1997 31,000 $18.08
</TABLE>
The Company has the following gas swap arrangements for periods after the
Current Quarter:
<TABLE>
<CAPTION>
Monthly Houston Ship Channel
Months Volume (MMBtu) Index Strike Price (per MMBtu)
------ -------------- ------------------------------
<S> <C> <C>
March 1997 620,000 $2.222
April 1997 600,000 $2.022
May 1997 620,000 $1.937
</TABLE>
The Company has the following gas floor arrangements for periods after the
Current Quarter:
<TABLE>
<CAPTION>
Monthly Houston Ship Channel
Months Volume(MMBtu) Index Strike Price (per MMBtu)
------ ------------- ------------------------------
<S> <C> <C>
November 1996 600,000 $2.175
December 1996 620,000 $2.255
January 1997 620,000 $2.260
February 1997 560,000 $2.155
</TABLE>
Gains or losses on the crude oil and natural gas hedging transactions are
recognized as price adjustments in the month of related production. The
Company estimates that had all of the crude oil and natural gas swap
agreements in effect for production periods beginning October 1, 1996
terminated on October 25, 1996, based on the closing prices for NYMEX
futures contracts as of that date, the Company would have paid the
counterparty approximately $1.8 million, which would have represented
the "fair value" at that date. These agreements were not terminated.
CAPITAL RESOURCES AND LIQUIDITY
On October 28, 1996 the Company filed a registration statement with the
Securities and Exchange Commission with respect to a proposed public offering
of 3,250,000 shares of Common Stock of the Company (3,737,500 shares if an
over-allotment option granted by the Company to the underwriters is
exercised in full). The Company intends to use approximately $53 million
of the net proceeds to purchase or otherwise satisfy the Company's
obligations in respect of $47.5 million principal amount of the Company's
outstanding 12% Senior Notes and such additional amounts as may be necessary
to fully repay the outstanding balance of its bank revolving credit facility.
The outstanding balance was $10 million at September 30, 1996 and $35 million
as of October 31, 1996. The balance of the net proceeds will be used to fund
expanded exploration and development capital expenditures and for general
corporate purposes.
As of September 30, 1996 the Company had a working capital deficit of $46.4
million. This deficit was created as a result of the Company's capital
expenditure program for acreage acquisition and exploratory and development
drilling expenditures exceeding the Company's cash flow from operations. The
Company had credit availability under its revolving credit facility at
September 30, 1996 to satisfy this working capital deficit.
The Company's cash provided by operating activities increased to $26.0 million
during the Current Quarter, compared to $17.4 million during the Prior Quarter.
The increase of $8.6 million is the result of increases in net income, adjusted
for non-cash charges (such as DD&A and deferred income taxes), and cash provided
by changes in current assets and current liabilities between the two periods.
Net cash used in investing activities increased to $83.1 million in the Current
Quarter, up from $42.7 million in the Prior Quarter. The $40.4 million increase
is a result of the Company's increased drilling activity and increased
investment in leasehold during the Current Quarter.
The Company's expected cash flow from operations is subject to a number of
factors, many of which are beyond the Company's control, including the level of
production and oil and gas prices. In the event the Company experiences
unforeseen changes in its working capital position or capital resources,
management will revise its capital expenditure program accordingly.
The Company has budgeted approximately $300 million for exploratory and
developmental drilling, acreage acquisition and general corporate purposes for
fiscal 1997. The Company may increase this budget if favorable drilling
results continue, oil and gas prices remain firm, and the pending equity
offering is consummated. The capital expenditure budget is largely
discretionary, and can be adjusted by the Company based on operating
results, capital availability or other factors.
Consolidated cash provided by financing activities was $8.0 million during the
Current Quarter, as compared to consolidated cash used by financing activities
of $1.0 million during the Prior Quarter. The increase resulted primarily from
additional borrowings under the Company's revolving and term credit
facilities during the Current Period.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact contained in this Form
10-Q, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
When used herein, the words "budget", "budgeted", "anticipate", "expects",
"believes", "seeks", "goals", "intends", or "projects" and similar
expressions are intended to identify forward-looking statements. It is
important to note that Chesapeake's actual results could differ materially
from those projected by such forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations
will prove correct. Factors that could cause the Company's results to differ
materially from the results discussed in such forward-looking statements
include but are not limited to the following: production variances from
expectations, volatility of oil and gas prices, the need to develop and
replace its reserves, the substantial capital expenditures required to
fund its operations, environmental risks, drilling and operating risks,
risks related to exploration and development drilling, uncertainties about
estimates of reserves, competition government regulation, and the ability
of the Company to implement its business strategy. All forward-looking
statements in this document are expressly qualified in their entirety by the
cautionary statements in this paragraph.
<PAGE>
<TABLE>
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(a wholly-owned partnership of Chesapeake Energy Corporation)
BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
September 30, June 30,
1996 1996
------------- ----------
($ in thousands)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable $ 18,685 $ 14,778
Prepaid expenses 1,066 1,891
-------- --------
Total Current Assets 19,751 16,669
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based
on full cost accounting:
Evaluated oil and gas properties 409,286 346,821
Unevaluated properties 185,433 165,441
Less: accumulated depreciation,
depletion and amortization (101,099) ( 84,726)
-------- --------
Total Property and Equipment 493,620 427,536
-------- --------
INTERCOMPANY RECEIVABLES:
Chesapeake Energy Corporation 56,538 47,502
Chesapeake Gas Development Corporation 8,015 8,171
Other 381 382
-------- --------
64,934 56,055
OTHER ASSETS 762 694
-------- --------
TOTAL ASSETS $579,067 $500,954
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accrued Expenses $ 2,105 $ 789
-------- --------
Total Current Liabilities 2,105 789
-------- --------
LONG-TERM DEBT 10,000 -
-------- --------
INTERCOMPANY PAYABLES:
Chesapeake Operating, Inc. 462,856 411,536
Lindsay Oil Field Supply, Inc. 2,190 2,190
-------- --------
465,046 413,726
-------- --------
CONTINGENCIES AND COMMITMENTS
PARTNERS' CAPITAL:
Contributions 424 424
Accumulated Earnings 101,492 86,015
-------- --------
Total Partners' Capital 101,916 86,439
-------- --------
TOTAL LIABILITIES & PARTNERS' CAPITAL $579,067 $500,954
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(a wholly-owned partnership of Chesapeake Energy Corporation)
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
------------------
1996 1995
------ ------
($ in thousands)
<S> <C> <C>
REVENUES:
Oil and gas sales $34,789 $18,609
------- -------
Total revenues 34,789 18,609
------- -------
COSTS AND EXPENSES:
Production expenses and taxes 2,432 1,405
Oil and gas depreciation,
depletion and amortization 16,373 9,880
Amortization 107 54
General and administrative 198 258
Interest expense and other 11 12
------- -------
Total costs and expenses 19,121 11,609
------- -------
NET INCOME $15,668 $ 7,000
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
(a wholly-owned partnership of Chesapeake Energy Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
------------------
1996 1995
------ --------
($ in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,668 $ 7,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Oil and gas depreciation 16,373 9,636
Amortization 107 54
Changes in current assets and liabilities 126 2,305
------- -------
Cash provided by operating activities 32,274 18,995
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development and acquisition of oil
and gas properties (82,457) (46,004)
Proceeds from sale of assets - 107
Other additions (611) (39)
------- -------
Cash used in investing activities (83,068) (45,936)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 10,000 -
Intercompany advances 94,198 45,124
Intercompany payments (53,404) (18,183)
Cash provided by financing activities 50,794 26,941
------- -------
Net increase (decrease) in cash - -
Cash & cash equivalents, beginning of period - -
------- -------
Cash & cash equivalents, end of period $ - $ -
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. Accounting Principles
The accompanying unaudited financial statements of Chesapeake Exploration
Limited Partnership ("CEX") have been prepared in accordance with the
instructions to Form 10-Q as prescribed by the Securities and Exchange
Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of the results for the interim
periods have been reflected. The results for the three months ended
September 30, 1996, are not necessarily indicative of the results to
be expected for the full fiscal year.
The CEX financial statements were prepared on a separate entity basis as
reflected in the Company's books and records and include all material
costs of doing business as if the partnership were on a stand-alone basis,
except that interest is not charged on intercompany accounts, or allocated.
These financial statements should be read in conjunction with the September 30,
1996 consolidated financial statements and related notes of Chesapeake Energy
Corporation and Subsidiaries included in this Form 10-Q and the Company's
annual report on Form 10-K for the year ended June 30, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30, 1996 VS. SEPTEMBER 30, 1995
CEX represents substantially all of the Company's oil and gas operations.
Therefore, the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in this report, for
the Company relate primarily to CEX.
CEX is a member of the consolidated group of companies of which Chesapeake
Energy Corporation is the parent company. Although CEX has separate financing
capabilities, CEX is largely dependent on the Company and the Company is
dependent on the operations of CEX. Accordingly, capital resources and
liquidity issues for CEX are not typical of an entity that operates on a stand
alone basis and therefore should be considered only in conjunction with the
discussion of the Company's capital resources and liquidity included elsewhere
in this report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company in the United States District Court for the Northern
District of Texas alleging (a) infringement of UPRC's claimed patent (the
"UPRC patent") for an invention involving a method of maintaining a bore hole
in a stratigraphic zone during drilling, and (b) tortious interference with
contracts between UPRC and a third party vendor (the "Vendor") regarding the
confidentiality of proprietary information of UPRC. UPRC is seeking
injunctive relief, damages of an unspecified amount, including actual,
enhanced, consequential and punitive damages, interest, costs and attorney's
fees. The Company believes that it has meritorious defenses to UPRC's
allegations, including, without limitation, the Company's belief that the UPRC
Patent is invalid. The Company will vigorously defend the lawsuit. No
assurance can be given as to the outcome of the matter or the ultimate impact
on the Company of any damages (which could be substantial) that may be awarded
to UPRC because litigation is inherently uncertain.
Since February 1994, the Vendor has assisted the Company in the analysis
of horizontal drilling data. In May 1994, the UPRC Patent was issued to UPRC
by the U.S. Patent Office and, in August 1995, UPRC advised the Company that
the Vendor's services infringed the UPRC Patent. Promptly following receipt
of such notification, the Company retained patent counsel who, in December
1995, provided the Company with a legal opinion that the UPRC Patent was
invalid.
In September 1995, litigation to which the Company was not a party
commenced between UPRC and the Vendor. On October 11, 1996, the litigation
was settled with an agreed judgment reciting the validity of the UPRC Patent
and finding that the services provided by the Vendor violated the UPRC Patent.
The agreed judgment enjoined the Vendor from further infringement of the UPRC
Patent and use of UPRC's trade secrets.
By letter dated October 16, 1996, the Vendor advised the Company that
the Vendor expected to offer alternative services in the near future which,
according to the Vendor, will not violate the Vendor's settlement agreement
with UPRC and will not infringe the UPRC Patent. The Vendor also advised the
Company that UPRC had agreed to permit the Vendor to complete work in progress
which, under the agreed judgment, had been found to infringe the UPRC Patent.
The Company believes that alternative services offered by the Vendor and other
third party vendors will allow the Company to continue its horizontal drilling
program without material interruption.
ITEM 2. CHANGES IN SECURITIES
- - Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
- - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit No.
11 Statement regarding computation of earnings
per common share
27 Financial Data Schedule
(b) Form 8-K
On July 5, 1996, the Company filed a current report on Form 8-K
reporting under Item 4 the resignation on July 1, 1996 of Price
Waterhouse LLP as the independent accountants of the Company as a
result of the purchase of Price Waterhouse LLP's Oklahoma City practice
by Coopers & Lybrand L.L.P.
On August 2, 1996, the Company filed a current report on Form 8-K
reporting under Item 5 the announcement on July 26, 1996 of the
Company's operating updates.
On September 11, 1996, the Company filed a current report on Form 8-K
reporting under Item 5 the issuance on August 29, 1996 of the Company's
announcement of the fourth quarter earnings and cash flow results for
the fiscal year ended June 30, 1996.
On September 17, 1996, the Company filed a current report on From 8-K
reporting under Item 5 the announcement on September 4, 1996 of an
agreement with Mitchell Energy & Development to construct an associated
gathering system in south-central Louisiana, and further, that the
Company and Enron Louisiana Energy Company reached an agreement whereby
Enron will expand its Eunice facility to process the Company's gas.
<PAGE>
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
(Registrant)
November 14, 1996 AUBREY K. MCCLENDON
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
November 14, 1996 MARCUS C. ROWLAND
Date Marcus C. Rowland
Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
Index to Exhibits
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
11 Statement regarding computation Filed herewith electronically
of earnings per common share
27 Financial Data Schedule Filed herewith electronically
</TABLE>
EXHIBIT 11
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT OF NET INCOME PER SHARE
---------------------------------
($ in thousands, except per share)
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
----------------------
1996 1995
------ ------
<S> <C> <C>
PRIMARY INCOME PER SHARE
Computation for statement of income
Net income per statement of income $ 8,204 $ 2,915
======== ========
Common shares outstanding 30,126 26,404
Adjustment to weighted average
common shares outstanding:
Add dilutive effect of:
Employee Options 2,003 2,122
-------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 32,129 28,526
======== ========
Net income per common share,
as adjusted $ .26 $ .10
======== ========
FULLY DILUTED INCOME PER SHARE
Net income applicable to common stock as
shown in primary computation above $ 8,204 $ 2,915
======== ========
Common shares outstanding 30,126 26,404
Adjustment to weighted average
common shares outstanding:
Add fully dilutive effect of:
Employee Options 2,043 2,368
-------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 32,169 28,772
======== ========
Fully diluted net income per common share $ .26 $ .10
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND STATEMENT OF INCOME FOR 3
MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q SEPTEMBER 30, 1996.
</LEGEND>
<CIK> 0000895126
<NAME> CHESAPEAKE ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 2,444
<SECURITIES> 2,912
<RECEIVABLES> 45,991
<ALLOWANCES> 340
<INVENTORY> 10,461
<CURRENT-ASSETS> 63,250
<PP&E> 633,443
<DEPRECIATION> 113,107
<TOTAL-ASSETS> 595,551
<CURRENT-LIABILITIES> 109,657
<BONDS> 277,323
0
0
<COMMON> 3,013
<OTHER-SE> 183,644
<TOTAL-LIABILITY-AND-EQUITY> 595,551
<SALES> 48,937
<TOTAL-REVENUES> 49,785
<CGS> 34,048
<TOTAL-COSTS> 36,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,817
<INCOME-PRETAX> 12,920
<INCOME-TAX> 4,716
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,204
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
