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 March 31, 1997
[ ] 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)
OKLAHOMA 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 April 30, 1997, there were 69,709,906 shares of the registrant's $.01
par value Common Stock outstanding.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
PAGE
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at March 31, 1997
and June 30, 1996
Consolidated Statements of Income for the Three
and Nine Months Ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
--------- --------
($ IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $300,810 $ 51,638
Short-term investments 62,003 -
Accounts receivable:
Oil and gas sales 10,384 12,687
Oil and gas marketing sales 15,630 6,982
Joint interest and other, net of allowance for
doubtful accounts of $182,000 and $340,000 25,273 27,661
Related parties 5,191 2,884
Inventory 7,454 5,163
Other 12,333 2,158
--------- ---------
Total Current Assets 438,978 109,173
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full cost accounting:
Evaluated oil and gas properties 653,400 363,213
Unevaluated properties 211,337 165,441
Less: accumulated depreciation, depletion and amortization (153,625) (92,720)
--------- --------
711,112 435,934
Other property and equipment 26,669 18,162
Less: accumulated depreciation and amortization ( 4,410) ( 2,922)
--------- ---------
Total Property and Equipment 733,371 451,174
--------- ---------
OTHER ASSETS 17,697 11,988
--------- ---------
TOTAL ASSETS $1,190,046 $572,335
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 4,375 $ 6,755
Accounts payable 86,691 54,514
Accrued liabilities and other 15,716 14,062
Revenues and royalties due others 34,532 33,503
---------- ---------
Total Current Liabilities 141,314 108,834
---------- ---------
LONG-TERM DEBT, NET 508,961 268,431
---------- ---------
REVENUES AND ROYALTIES DUE OTHERS 6,928 5,118
---------- ---------
DEFERRED INCOME TAXES 29,787 12,185
---------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued - -
Common Stock, 100,000,000 shares authorized;
$.01 par value at March 31, 1997, $.05 par value
at June 30, 1996; 69,665,457 and 60,159,826 shares
issued and outstanding at March 31, 1997, and
June 30, 1996, respectively 697 3,008
Paid-in capital 429,976 136,782
Accumulated earnings 72,383 37,977
---------- ---------
Total Stockholders' Equity 503,056 177,767
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,190,046 $572,335
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $57,399 $30,887 $147,566 $77,237
Oil and gas marketing sales 22,410 11,558 52,429 15,345
Oil and gas service operations - 1,700 - 5,317
Interest and other 3,277 250 5,793 2,041
-------- -------- -------- --------
Total revenues 83,086 44,395 205,788 99,940
-------- -------- -------- --------
COSTS AND EXPENSES
Production expenses and taxes 4,308 2,136 10,182 5,839
Oil and gas marketing expenses 21,747 10,788 51,295 14,554
Oil and gas service operations - 1,244 - 4,263
Oil and gas depreciation,
depletion and amortization 24,663 13,035 60,906 35,268
Depreciation and amortization
of other assets 873 766 2,709 2,151
General and administrative 2,481 1,435 6,220 3,347
Interest 3,654 3,173 9,870 9,717
-------- -------- -------- --------
Total costs and expenses 57,726 32,577 141,182 75,139
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND
EXTRAORDINARY ITEM 25,360 11,818 64,606 24,801
-------- -------- -------- --------
INCOME TAX EXPENSE
Current - - - -
Deferred 9,255 4,195 23,580 8,804
-------- -------- -------- --------
Total income tax expense 9,255 4,195 23,580 8,804
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 16,105 7,623 41,026 15,997
EXTRAORDINARY ITEM:
Loss on early extinguishment
of debt, net of applicable
income tax of $101 and $3,804,
respectively ( 177) - ( 6,620) -
-------- -------- -------- --------
NET INCOME $15,928 $ 7,623 $34,406 $15,997
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(PRIMARY)
Income before extraordinary
item $ .22 $ .13 $ .60 $ .28
Extraordinary item - - ( .10) -
-------- -------- -------- --------
Net Income $ .22 $ .13 $ .50 $ .28
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(FULLY DILUTED)
Income before extraordinary
item $ .22 $ .13 $ .60 $ .27
Extraordinary item - - ( .10) -
-------- -------- -------- --------
Net Income $ .22 $ .13 $ .50 $ .27
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 73,493 58,470 68,683 57,984
======== ======== ======== ========
Fully-diluted 73,493 58,642 68,680 58,692
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------ ------
($ in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 34,406 $ 15,997
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 62,553 36,550
Deferred taxes 19,776 8,804
Amortization of loan costs 1,062 869
Amortization of bond discount 196 421
Gain on sale of fixed assets and other ( 504) ( 366)
Extraordinary item before income tax benefit 10,424 -
Equity in earnings of subsidiary ( 269) -
Other adjustments - ( 129)
Bad debt expense 88 -
CHANGES IN CURRENT ASSETS AND LIABILITIES ( 46,145) 37,969
--------- ---------
Cash provided by operating activities 81,587 100,115
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acquisition
of oil and gas properties (344,998) (171,523)
Proceeds from sale of assets 15,124 9,149
Investment in gas marketing company,
net of cash acquired - ( 363)
Investment in service operations ( 3,048) -
Long-term loan made to a third party ( 2,000) -
Additions to property, equipment and other ( 9,334) ( 6,334)
--------- ---------
Cash used in investing activities (344,256) (169,071)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 342,626 41,650
Payments on long-term borrowings (119,495) ( 3,267)
Cash received from issuance of common stock 288,091 -
Cash received from exercise of stock options 898 986
Other financing ( 279) -
--------- ---------
Cash provided by financing activities 511,841 39,369
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 249,172 ( 29,587)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,638 55,535
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $300,810 $ 25,948
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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 and nine months ended March 31, 1997, are not
necessarily indicative of the results to be expected for the full
fiscal year.
2. Recent Events
On March 17, 1997, the Company issued in a private offering $150
million in 7-7/8% Senior Notes due 2004 and $150 million in 8-1/2%
Senior Notes due 2012, which resulted in net proceeds to the Company of
approximately $293 million. Using a portion of the proceeds from this
offering the Company paid off all balances outstanding under its
commercial bank credit facilities.
On April 23, 1997, the Company commenced an offer to exchange all of
the outstanding 7-7/8% and 8-1/2% Senior Notes for substantially
identical notes registered under the Securities Act of 1933. The
exchange offer is scheduled to expire on May 23, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128"). FAS 128 will change the computation, presentation and
disclosure requirements for earnings per share. FAS 128 requires
presentation of "basic" and "diluted" earnings per share, as defined,
on the face of the income statement for all entities with complex
capital structures. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share amounts. The
Company has not yet determined the impact that FAS 128 will have on its
earnings per share when adopted.
3. Legal Proceedings
As previously disclosed, on October 15, 1996, Union Pacific Resources
Company ("UPRC") filed suit against the Company alleging patent
infringement and tortious interference with contracts regarding
confidentiality and proprietary information of UPRC. UPRC is seeking
injunctive relief and damages in an unspecified amount, including
actual, enhanced, consequential and punitive damages. The Company
believes it has meritorious defenses to the allegations, including its
belief that the subject patent is invalid. Given the subject of the
claims, the Company is unable to predict the outcome of the matter or
estimate a range of financial exposure.
4. Senior Notes
10-1/2% Notes
The Company has outstanding $90 million in aggregate principal amount
of 10-1/2% Senior Notes which mature June 1, 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 guaran-
teed, jointly and severally, by certain subsidiaries of the
Company (the "Guarantor Subsidiaries").
9-1/8% Notes
The Company has outstanding $120 million in aggregate principal amount
of 9-1/8% Senior Notes 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. The 9-1/8% Notes are senior, unsecured
obligations of the Company and are fully and unconditionally guaran-
teed, jointly and severally, by the Guarantor Subsidiaries.
7-7/8% Notes
The Company has outstanding $150 million in aggregate principal amount
of 7-7/8% Senior Notes which mature March 15, 2004. The 7-7/8% Notes
bear interest at the rate of 7-7/8%, payable semiannually on each
March 15 and September 15. The 7-7/8% Notes are senior, unsecured
obligations of the Company and are fully and unconditionally guaranteed,
jointly and severally, by the Guarantor Subsidiaries.
8-1/2% Notes
The Company has outstanding $150 million in aggregate principal amount
of 8-1/2% Senior Notes which mature March 15, 2012. The 8-1/2% Notes
bear interest at the rate of 8-1/2%, payable semiannually on each
March 15 and September 15. The 8-1/2% Notes are senior, unsecured
obligations of the Company and are fully and unconditionally guaranteed,
jointly and severally, by the Guarantor Subsidiaries.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company.
Prior to fiscal 1997, the Guarantor Subsidiaries were Chesapeake
Operating, Inc. ("COI") and Chesapeake Exploration Limited Partnership
("CELP"), as well as the Company's service company subsidiaries:
Lindsay Oil Field Supply, Inc., Sander Trucking Company, Inc. and
Whitmire Dozer Service, Inc. (collectively, the "Service Companies").
The assets of the Service Companies were sold effective June 30, 1996,
and the Service Companies' operations ceased. Prior to fiscal 1997,
Chesapeake Gas Development Corporation ("CGDC") was a Non-Guarantor
Subsidiary. In conjunction with the issuance of the 7-7/8% Senior
Notes and the 8-1/2% Senior Notes in March 1997, CGDC became a guaran-
tor of all the Company's outstanding senior notes. As of March 31,
1997, the Guarantor Subsidiaries were COI, CELP and CGDC, and the Non-
Guarantor Subsidiaries were Chesapeake Energy Marketing, Inc. and
Chesapeake Canada Corporation, and the Company has reported the Guaran-
tor and Non-Guarantor Subsidiaries accordingly in the following
fiscal 1997 financial statements. Separate financial statements of
each Guarantor Subsidiary have not been included because management
has determined that they are not material to investors.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------- -------------- -------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $( 13,929) $ 6,662 $308,077 $ - $ 300,810
Short-term investments - - 62,003 - 62,003
Accounts receivable, net 46,771 15,632 100 ( 6,025) 56,478
Inventory 7,202 252 - - 7,454
Other 801 26 11,406 - 12,233
----------- -------- -------- --------- ----------
Total Current Assets 40,845 22,572 381,586 ( 6,025) 438,978
----------- -------- -------- --------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties 653,382 18 - - 653,400
Unevaluated leasehold 211,281 56 - - 211,337
Other property and equipment 12,592 109 13,968 - 26,669
Less: accumulated depreciation,
depletion and amortization ( 157,367) - ( 668) - ( 158,035)
----------- -------- -------- -------- ----------
Total Property & Equipment 719,888 183 13,300 - 733,371
----------- -------- -------- -------- ----------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 403,106 - 577,241 (980,347) -
----------- -------- ------- -------- ----------
OTHER ASSETS 4,591 693 12,413 - 17,697
----------- -------- ------- -------- ----------
TOTAL ASSETS $1,168,430 $ 23,448 $984,540 $(986,372) $1,190,046
=========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 4,375 $ - $ - $ - $ 4,375
Accounts payable and other 117,584 16,106 9,274 ( 6,025) 136,939
----------- -------- -------- -------- ----------
Total Current Liabilities 121,959 16,106 9,274 ( 6,025) 141,314
----------- -------- -------- -------- ----------
LONG-TERM DEBT 32 - 508,929 - 508,961
----------- -------- -------- -------- ----------
REVENUES PAYABLE 6,928 - - - 6,928
----------- -------- -------- -------- ----------
DEFERRED INCOME TAXES 24,708 890 4,189 - 29,787
----------- -------- -------- -------- ----------
INTERCOMPANY PAYABLES 924,868 8 51,630 (976,506) -
----------- -------- -------- -------- ----------
STOCKHOLDERS' EQUITY:
Common Stock 11 1 687 ( 2) 697
Other 89,924 6,443 409,831 ( 3,839) 502,359
----------- -------- -------- -------- ----------
Total Stockholders' Equity 89,935 6,444 410,518 ( 3,841) 503,056
----------- -------- -------- -------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,168,430 $ 23,448 $984,540 $(986,372) $1,190,046
=========== ======== ======== ========= ==========
<PAGE>
</TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638
Accounts receivable, net 44,080 7,723 - ( 1,589) 50,214
Inventory 4,947 216 - - 5,163
Other 2,155 3 - - 2,158
---------- -------- -------- --------- --------
Total Current Assets 55,243 10,693 44,826 ( 1,589) 109,173
---------- -------- -------- --------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties 338,610 24,603 - - 363,213
Unevaluated leasehold 165,441 - - - 165,441
Other property and equipment 9,608 61 8,493 - 18,162
Less: accumulated depreciation,
depletion and amortization ( 87,193) ( 8,007) ( 442) - ( 95,642)
---------- -------- -------- --------- --------
Total Property & Equipment 426,466 16,657 8,051 - 451,174
---------- -------- -------- --------- --------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 519,386 8,132 382,388 (909,906) -
---------- -------- -------- --------- --------
OTHER ASSETS 2,310 940 8,738 - 11,988
---------- -------- -------- --------- --------
TOTAL ASSETS $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 $ 2,880 $ 29 $ - $ 6,755
Accounts payable and other 91,069 7,339 5,260 ( 1,589) 102,079
---------- -------- -------- --------- --------
Total Current Liabilities 94,915 10,219 5,289 ( 1,589) 108,834
---------- -------- -------- --------- --------
LONG-TERM DEBT 2,113 10,020 256,298 - 268,431
---------- -------- -------- --------- --------
REVENUES PAYABLE 5,118 - - - 5,118
---------- -------- -------- --------- --------
DEFERRED INCOME TAXES 23,950 1,335 ( 13,100) - 12,185
---------- -------- -------- --------- --------
INTERCOMPANY PAYABLES 824,307 8,182 73,647 (906,136) -
---------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY:
Common Stock 117 2 2,891 ( 2) 3,008
Other 52,885 6,664 118,978 ( 3,768) 174,759
---------- -------- ------- --------- --------
Total Stockholders' Equity 53,002 6,666 121,869 ( 3,770) 177,767
---------- -------- ------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
========== ======== ======== ========= ========
</TABLE>
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED MARCH 31, 1997:
REVENUES:
Oil and gas sales $ 56,795 $ - $ - $ 604 $ 57,399
Oil and gas marketing sales - 45,568 - (23,158) 22,410
Interest and other 177 197 2,903 - 3,277
-------- -------- -------- -------- --------
Total Revenues 56,972 45,765 2,903 (22,554) 83,086
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 4,308 - - - 4,308
Oil and gas marketing expenses - 44,301 - (22,554) 21,747
Oil and gas depreciation,
depletion and amortization 24,663 - - - 24,663
Other depreciation and amortization 508 20 345 - 873
General and administrative 1,757 235 489 - 2,481
Interest 172 - 3,482 - 3,654
-------- -------- -------- -------- --------
Total Costs & Expenses 31,408 44,556 4,316 (22,554) 57,726
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 25,564 1,209 ( 1,413) - 25,360
INCOME TAX EXPENSE (BENEFIT) 9,330 441 ( 516) - 9,255
-------- -------- -------- -------- --------
NET INCOME (LOSS)
BEFORE EXTRAORDINARY ITEM 16,234 768 ( 897) - 16,105
-------- -------- -------- -------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 179) - 2 - ( 177)
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 16,055 $ 768 $( 895) $ - $ 15,928
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 1996:
REVENUES:
Oil and gas sales $ 28,579 $ 2,308 $ - $ - $ 30,887
Oil and gas marketing sales - 13,594 - ( 2,036) 11,558
Oil and gas service operations 1,700 - - - 1,700
Interest and other 143 99 8 - 250
-------- -------- -------- -------- --------
Total revenues 30,422 16,001 8 ( 2,036) 44,395
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 1,929 207 - - 2,136
Oil and gas marketing expenses - 12,824 - ( 2,036) 10,788
Oil and gas service operations 1,244 - - - 1,244
Oil and gas depreciation,
depletion and amortization 12,300 735 - - 13,035
Other depreciation and amortization 507 26 233 - 766
General and administrative 1,043 190 202 - 1,435
Interest 324 201 2,648 - 3,173
-------- -------- -------- -------- --------
Total Costs & Expenses 17,347 14,183 3,083 ( 2,036) 32,577
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX 13,075 1,818 ( 3,075) - 11,818
-------- -------- --------- -------- --------
INCOME TAX EXPENSE 4,713 646 ( 1,164) - 4,195
-------- -------- --------- -------- --------
NET INCOME (LOSS) $ 8,362 $ 1,172 $( 1,911) $ - $ 7,623
======== ======== ========= ======== ========
</TABLE>
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED MARCH 31, 1997:
REVENUES:
Oil and gas sales $146,310 $ - $ - $ 1,256 $147,566
Oil and gas marketing sales - 104,175 - (51,746) 52,429
Interest and other 344 768 4,681 - 5,793
-------- -------- -------- -------- --------
Total Revenues 146,654 104,943 4,681 (50,490) 205,788
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 10,182 - - - 10,182
Oil and gas marketing expenses - 101,785 - (50,490) 51,295
Oil and gas depreciation,
depletion and amortization 60,906 - - - 60,906
Other depreciation and amortization 1,582 60 1,067 - 2,709
General and administrative 4,370 660 1,190 - 6,220
Interest 707 - 9,163 - 9,870
-------- -------- -------- ------- --------
Total Costs & Expenses 77,747 102,505 11,420 (50,490) 141,182
-------- -------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 68,907 2,438 ( 6,739) - 64,606
INCOME TAX EXPENSE (BENEFIT) 25,150 890 ( 2,460) - 23,580
-------- -------- -------- ------- --------
NET INCOME (LOSS)
BEFORE EXTRAORDINARY ITEM 43,757 1,548 ( 4,279) - 41,026
-------- -------- -------- ------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 769) - ( 5,851) - ( 6,620)
-------- -------- -------- ------- --------
NET INCOME (LOSS) $ 42,988 $ 1,548 $( 10,130) $ - $ 34,406
======== ======== ========= ======= ========
FOR THE NINE MONTHS ENDED MARCH 31, 1996:
REVENUES:
Oil and gas sales $ 72,112 $ 5,125 $ - $ - $ 77,237
Oil and gas marketing sales - 17,964 - ( 2,619) 15,345
Oil and gas service operations 5,317 - - - 5,317
Interest and other 1,379 105 557 - 2,041
-------- -------- -------- ------- --------
Total Revenues 78,808 23,194 557 ( 2,619) 99,940
-------- -------- -------- ------- --------
COSTS AND EXPENSES:
Production expenses and taxes 5,321 518 - - 5,839
Oil and gas marketing expenses - 17,173 - ( 2,619) 14,554
Oil and gas service operations 4,263 - - - 4,263
Oil and gas depreciation,
depletion and amortization 33,359 1,909 - - 35,268
Other depreciation and amortization 1,357 44 750 - 2,151
General and administrative 2,542 291 514 - 3,347
Interest 405 551 8,761 - 9,717
-------- -------- -------- ------- --------
Total Costs & Expenses 47,247 20,486 10,025 ( 2,619) 75,139
-------- -------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX 31,561 2,708 ( 9,468) - 24,801
INCOME TAX EXPENSE (BENEFIT) 11,275 962 ( 3,433) - 8,804
-------- -------- -------- ------- --------
NET INCOME (LOSS) $ 20,286 $ 1,746 $( 6,035) $ - $ 15,997
======== ======== ======== ======= ========
</TABLE>
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED MARCH 31, 1997:
CASH FLOWS FROM OPERATING ACTIVITIES: $ 160,431 $( 3,557) $( 75,287) $ - $ 81,587
--------- ---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (344,998) - - - (344,998)
Proceeds from sale of assets 15,124 - - - 15,124
Investment in service operations ( 3,048) - - - ( 3,048)
Long-term loan to third party ( 2,000) - - - ( 2,000)
Other additions ( 3,044) ( 204) ( 6,086) - ( 9,334)
---------- --------- --------- ---------- --------
(337,966) ( 204) ( 6,086) - (344,256)
---------- --------- --------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 50,000 - 292,626 - 342,626
Payments on borrowings (118,815) - ( 680) - (119,495)
Cash received from exercise
of stock options - - 898 - 898
Cash received from issuance
of common stock - - 288,091 - 288,091
Other financing - - ( 279) - ( 279)
Intercompany advances, net 228,277 7,755 (236,032) - -
---------- --------- --------- ---------- --------
159,462 7,755 344,624 - 511,841
---------- --------- --------- ---------- --------
Net increase (decrease) in cash (18,073) 3,994 263,251 - 249,172
Cash, beginning of period 4,144 2,668 44,826 - 51,638
--------- --------- --------- ---------- --------
Cash, end of period $( 13,929) $ 6,662 $ 308,077 $ - $300,810
========= ========= ========= ========== ========
FOR THE NINE MONTHS ENDED MARCH 31, 1996:
CASH FLOWS FROM OPERATING ACTIVITIES: $ 103,967 $ 2,877 $( 6,729) $ - $100,115
--------- --------- --------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (164,843) ( 11,980) - 5,300 (171,523)
Proceeds from sales 14,449 - - ( 5,300) 9,149
Investment in gas marketing company - 266 ( 629) - ( 363)
Other additions ( 3,400) ( 40) ( 2,894) - ( 6,334)
--------- --------- --------- ---------- --------
(153,794) ( 11,754) ( 3,523) - (169,071)
--------- --------- --------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 31,350 10,300 - - 41,650
Payments on borrowings ( 753) ( 2,494) ( 20) - ( 3,267)
Cash received from exercise
of stock options - - 986 - 986
Intercompany advances, net ( 21,705) 2,461 19,244 - -
--------- --------- ---------- ---------- --------
8,892 10,267 20,210 - 39,369
--------- --------- ---------- ---------- --------
Net increase (decrease) in cash
and cash equivalents ( 40,935) 1,390 9,958 - ( 29,587)
Cash, beginning of period 53,227 5 2,303 - 55,535
--------- --------- ---------- ---------- --------
Cash, end of period $ 12,292 $ 1,395 $ 12,261 $ - $ 25,948
========= ========= ========== ========== ========
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
On March 17, 1997, the Company issued through a private offering $150 million
in 7-7/8% Senior Notes due 2004 and $150 million in 8-1/2% Senior Notes due
2012, which resulted in net proceeds to the Company of approximately $293 mil-
lion. Using a portion of the proceeds from this offering, the Company repaid all
balances outstanding under its commercial bank credit facilities.
On April 23, 1997, the Company commenced an offer to exchange all of the
outstanding 7-7/8% and 8-1/2% Senior Notes for substantially identical notes
registered under the Securities Act of 1933. The exchange offer is scheduled
to expire on May 23, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996
Net income for the three months ended March 31, 1997 (the "Current Quarter")
was $15.9 million, an $8.3 million increase from net income of $7.6 million for
the quarter ended March 31, 1996 (the "Prior Quarter"), after giving effect to
an extraordinary loss of $0.2 million (net of income tax) incurred during the
Current Quarter. This increase in net income 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 $57.4 million, an
increase of $26.5 million, or 86%, from the Prior Quarter. Gas production
increased to 15.7 billion cubic feet ("Bcf"), an increase of 2.2 Bcf, or 16%,
compared to the Prior Quarter. Oil production increased 459 thousand barrels
("MBbls"), or 134%, from 342 MBbls to 801 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
$21.55 per barrel ("Bbl"). This was an increase of $3.11 per Bbl, or 17%, from
the $18.44 per Bbl realized in the Prior Quarter. Gas price realizations
increased to $2.55 per thousand cubic feet ("Mcf") in the Current Quarter, an
increase of 39% from the $1.83 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>
Producing Oil Gas Total Percent
OPERATING AREAS WELLS<F1> (MBBLS) (MMCF) (MMCFE) (%)
--------------- --------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Giddings 206 106 10,389 11,025 54%
Louisiana Trend 37 414 1,550 4,034 20%
Southern Oklahoma 211 147 2,729 3,611 17%
All Other 133 134 1,074 1,878 9%
------- ------- ------- ------- -------
Total 587 801 15,742 20,548 100%
======= ======= ======= ======= =======
<FN>
<F1>
Includes producing wells as of March 31, 1997 and wells being drilled as of
that date.
</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 $22.4 million compared to $11.6 million in
the Prior Quarter. Oil and gas marketing expenses were $21.7 million during the
Current Quarter, resulting in a gross profit margin of $0.7 million. In the
Prior Quarter, the gross profit margin was $0.8 million.
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. The Company's investment in
Peak is accounted for using the equity method.
The Company had interest and other revenues of $3.3 million in the Current
Quarter compared to $0.3 million in the Prior Quarter. This significant
increase resulted from the Company's large cash balances that are invested in
short term interest and dividend earning investments until needed for the
Company's oil and gas exploration and development activities. The Company
expects this revenue to decrease through fiscal 1998 as cash balances decrease.
Production expenses and taxes increased to $4.3 million in the Current Quarter
from $2.1 million in the Prior Quarter. This increase was the result of a
significant increase in oil and gas production volumes during the Current
Quarter, higher oil and gas prices which increased severance taxes and slightly
higher lifting costs per unit of production. On a gas equivalent production
unit ("Mcfe") basis, production expenses and taxes were $0.21 per Mcfe in the
Current Quarter compared to $0.14 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, help generate the
Company's historically low production costs per Mcfe. The Company expects that
production expenses and taxes in fiscal 1997 will continue to increase because
of the Company's expansion of drilling efforts in the Louisiana Trend which is
an oil prone area with significant associated water production which results in
higher operating costs than gas prone areas, and because severance tax
exemptions will be more limited in the Louisiana Trend compared to existing
exemptions in the Giddings Field.
Depreciation, depletion and amortization ("DD&A") of oil and gas properties for
the Current Quarter was $24.7 million, an increase of $11.7 million from the
Prior Quarter. The increase in DD&A expense for oil and gas properties between
quarters is the result of a 32% 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 $1.20 for the Current Quarter and $0.84 for the Prior Quarter.
The Company believes the DD&A rate will continue to increase during fiscal 1997
and into fiscal 1998 based on projected higher finding costs for wells drilled
in the Louisiana Trend and as a result of increasing drilling costs throughout
the industry.
Depreciation and amortization of other assets increased to $0.9 million in the
Current Quarter compared to $0.8 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 and equipment in its Oklahoma City headquarters complex to
support the Company's growth.
General and administrative expenses increased to $2.5 million during the
Current Quarter, a $1.1 million, or 79%, increase from the Prior Quarter. This
increase is the result of the continued growth of the Company. General and
administrative expenses were $0.12 per Mcfe in the Current Quarter as compared
to $0.09 per Mcfe in the Prior Quarter. The Company capitalized $1.4 million
and $0.4 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 increased to $3.7 million during the Current Quarter, from
$3.2 million in the Prior Quarter, as a result of higher levels of total debt
during the Current Quarter. During the Current Quarter, the Company capitalized
$2.7 million of interest costs representing the estimated costs to carry its
unevaluated leasehold inventory, compared to $1.6 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 have yet to be
evaluated than in the Prior Quarter.
Income tax expense increased to $9.3 million in the Current Quarter (before
giving effect to the income tax benefit applicable to the extraordinary item)
from $4.2 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, estimated production in excess of that allowed
in computing statutory depletion for tax purposes, the interplay between state
location of production revenue and the related state income tax, and other
factors. The provision for income tax expense is deferred in its entirety
because the Company is not currently a cash income taxpayer. The Company has a
significant tax net operating loss carryforward 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.
The Company recorded an extraordinary loss in the Current Quarter of $0.2
million, net of applicable income tax effect. This loss was the result of the
Company paying all amounts outstanding under the Company's term bank credit
facility from the proceeds of the senior note offerings during the Current
Quarter, and terminating its commercial bank credit facilities.
NINE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996
Net income for the nine months ended March 31, 1997 (the "Current Period") was
$34.4 million, an $18.4 million increase from net income of $16 million for the
nine months ended March 31, 1996 (the "Prior Period"), after giving effect to
an extraordinary loss of $6.6 million (net of income tax) incurred in the
Current Period. This increase was caused 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 Period were $147.6 million, an
increase of $70.4 million, or 91%, from the Prior Period. Gas production
increased to 45.8 Bcf, an increase of 9.4 Bcf, or 26%, compared to the Prior
Period. Oil production increased to 1,917 MBbls, an increase of 881 MBbls, or
85%, compared to the Prior Period. In the Current Period the Company realized
an average gas price of $2.31 per Mcf. This was an increase of $0.69 per Mcf,
or 43%, as compared to the $1.62 per Mcf realized in the Prior Period. The
Company realized an average oil price of $21.74 per Bbl. This was an increase
of $4.28 per Bbl, or 25%, compared to the $17.46 per Bbl realized in the Prior
Period.
The following table sets forth oil and gas production for the Company's primary
operating areas during the Current Period.
<TABLE>
<CAPTION>
Producing Oil Gas Total Percent
OPERATING AREAS WELLS<F1> (MBBLS) (MMCF) (MMCFE) (%)
--------------- ---------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Giddings 206 399 31,021 33,415 58%
Southern Oklahoma 211 445 8,929 11,599 20%
Louisiana Trend 37 865 3,362 8,552 15%
All Other 133 208 2,525 3,773 7%
------- ------- ------- ------- -------
Total 587 1,917 45,837 57,339 100%
======= ======= ======= ======= =======
<FN>
<F1>
Includes producing wells as of March 31, 1997 and wells drilled as of that
date.
</FN>
</TABLE>
Revenues from the Company's oil and gas marketing operations were $52.4 million
in the Current Period compared to $15.3 million in the Prior Period, which
included only four months of operation. Oil and gas marketing expenses were
$51.3 million in the Current Period, resulting in a gross profit margin of $1.1
million.
The Company had no revenues or expenses for oil and gas service operations in
the Current Period as a result of the sale of this business in June 1996 to
Peak.
The Company had interest and other investment revenues of $5.8 million in the
Current Period compared to $2 million in the Prior Period. This significant
increase resulted from the Company's large cash balances that are invested in
short term interest and dividend earning investments until needed for the
Company's oil and gas exploration and development activities. The Company
expects this revenue to decrease through fiscal 1998 as cash balances decrease.
Production expenses and taxes increased to $10.2 million in the Current Period,
an increase of $4.4 million, or 76%, from $5.8 million incurred in the Prior
Period. This increase was the result of a significant increase in oil and gas
production volumes during the Current Period, higher oil and gas prices which
increase severance taxes, and slightly higher lifting costs per unit of
production. On an Mcfe basis, production expenses and taxes were $0.18 per Mcfe
in the Current Period compared to $0.14 in the Prior Period. The Company
expects that production expenses will continue to increase in fiscal 1997 and
throughout fiscal 1998 because of the Company's expansion of drilling efforts
in the Louisiana Trend which is an oil prone area with significant associated
water production which results in higher operating costs than gas prone areas,
and because severance tax exemptions will be more limited in the Louisiana
Trend compared to existing exemptions in the Giddings Field.
DD&A of oil and gas properties in the Current Period was $60.9 million, an
increase of $25.6 million, or 73%, from $35.3 million expensed in the Prior
Period. The increase in DD&A expense is the result of a 35% increase in
production volumes and an increase in the DD&A rate per Mcfe. The average DD&A
rate per Mcfe was $1.06 in the Current Period as compared to $0.83 in the Prior
Period. The Company believes the DD&A rate will continue to trend higher
during fiscal 1997 and fiscal 1998 based on higher projected finding costs for
wells drilled in the Louisiana Trend and as a result of increasing drilling
costs throughout the industry.
Depreciation and amortization of other assets increased to $2.7 in the Current
Period, a $0.5 million, or 23%, increase from the Prior Period. This increase
is the result of higher amortization expense related to debt issuance costs,
and higher depreciation related to the Company's acquisition of additional
buildings and equipment in its Oklahoma City headquarters complex to support
the Company's growth.
General and administrative expenses increased to $6.2 million during the
Current Period, a $2.9 million, or 88%, increase from the Prior Period. This
increase is the result of the continued growth of the Company. General and
administrative expenses were $0.11 per Mcfe in the Current Period, compared to
$0.08 per Mcfe in the Prior Period. The Company capitalized $2.5 million and
$0.8 million of payroll and other internal costs directly related to oil and
gas exploration and development activities, net of partner reimbursements, in
the Current Period and Prior Period, respectively.
Interest expense increased to $9.9 million in the Current Period from $9.7
million in the Prior Period as a result of higher levels of total debt during
the Current Period compared to the Prior Period. During the Current Period, the
Company capitalized $10.4 million of interest costs representing the estimated
costs to carry its unevaluated leasehold inventory, compared to $3.5 million in
the Prior Period.
Income tax expense increased to $23.6 million in the Current Period (before
giving effect to the income tax benefit applicable to the extraordinary item)
from $8.8 in the Prior Period. The Company's estimated effective income tax
rate was 36.5% for the Current Period, compared to 35.5% for the Prior Period.
The Company estimates its effective rate based on anticipated levels of income
for the year, estimated production in excess of that allowed in computing
statutory depletion for tax purposes, the interplay between state location of
production revenue and the related state income tax, and other factors. The
provision for income tax expense is deferred in its entirety because the
Company is not currently a cash income taxpayer. The Company has a significant
federal tax net operating loss carryforward 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. The Company expects its effective tax rate to remain between 36.5% and
37.5% for the foreseeable future.
RISK MANAGEMENT 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 counterparty 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 not entered into
hedging transactions unrelated 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>
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
January through June 1998 124,000 $19.72
</TABLE>
The Company has entered into oil swap arrangements to cancel the effect of the
swaps for the months of August through December at an average price of $22.10
per Bbl.
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>
April 1997 600,000 $2.022
May 1997 620,000 $1.937
</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 April 1, 1997 terminated on March
31, 1997, based on the closing prices for NYMEX futures contracts as of that
date, the Company would have paid the counterparty approximately $0.4 million,
which would have represented the "fair value" at that date. These agreements
were not terminated.
CAPITAL RESOURCES AND LIQUIDITY
During the Current Quarter the Company completed an offering of $300 million in
senior notes resulting in net proceeds to the Company of approximately $293
million. The Company used approximately $11 million to repay and terminate the
Company's commercial bank credit facilities. The Company used approximately $2
million to repay other debt outstanding. The balance of the net proceeds has
been and will be used to fund oil and gas exploration and development
expenditures and for general corporate purposes.
As of March 31, 1997, the Company had working capital of $297.7 million. The
Company has estimated that its capital expenditures for fiscal 1997 will be
approximately $425 million, including approximately $320 million for drilling,
completion and production expenditures, $30 million for pipeline and gathering
facilities, and the balance for acreage acquisition, seismic programs and
general corporate purposes. The capital expenditure budget is largely
discretionary, and can be adjusted by the Company based on operating results or
other factors. The Company believes it has sufficient capital resources,
including expected cash flow from operations, to fund its capital program for
the foreseeable future.
During the Current Quarter, the Company received a senior debt credit rating
increase from Moody's Investors Service to Ba2. Standard & Poor's Rating
Services has currently rated the Company's senior debt as BB. The Company's
long-term debt to total book capitalization is approximately 50% as of March
31, 1997.
The Company's cash provided by operating activities decreased to $81.6 million
during the Current Period, compared to $100.1 million during the Prior Period.
The decrease of $18.5 million is the result of additional investments in short-
term marketable securities during the Current Period partially offset by
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.
Cash used in investing activities increased to $344.3 million in the Current
Period, up from $169.1 million in the Prior Period. The $175.2 million
increase is a result of the Company's increased drilling activity and increased
investment in leasehold during the Current Period.
Cash provided by financing activities was $511.8 million during the Current
Period, as compared to consolidated cash provided by financing activities of
$39.4 million during the Prior Period. The increase resulted primarily from the
Company's issuance of $300 million in senior notes and 8,972,000 shares of
common stock offset by the repayment of balances outstanding on the Company's
commercial bank credit facilities.
The Company is subject to certain routine legal proceedings, none of which are
expected to have a material adverse effect upon the Company's financial
condition or operations. The Company is also involved in certain litigation
that the Company is unable to predict the ultimate financial impact (see Part
II, Item 1).
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 the Company'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>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Form 10-Q for the quarter ended
September 30, 1996, on October 15, 1996, Union Pacific Resources Company
("UPRC") filed suit against the Company alleging patent infringement and
tortious interference with contracts regarding confidentiality and proprietary
information of UPRC. UPRC is seeking injunctive relief and damages in an
unspecified amount, including actual, enhanced, consequential and punitive
damages. The Company believes it has meritorious defenses to the allegations,
including its belief that the subject patent is invalid. Given the subject of
the claims, the Company is unable to predict the outcome of the matter or
estimate a range of financial exposure.
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
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
EXHIBIT NO.
-----------
4.1 Indenture dated as of March 15, 1997 among the
registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation, and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 7-7/8% Senior Notes due
2004. Incorporated herein by reference to Exhibit
4.1 to registrant's registration statement on Form
S-4 (No. 333-24995).
4.2 Indenture dated as of March 15, 1997 among the
registrant, as issuer, Chesapeake Operating, Inc.,
Chesapeake Gas Development Corporation, and Chesapeake
Exploration Limited Partnership, as Subsidiary
Guarantors, and United States Trust Company of New York,
as Trustee, with respect to 8-1/2% Senior Notes due
2012. Incorporated herein by reference to Exhibit 4.3
to registrant's registration statement on Form S-4 (No.
333-24995).
4.3 Registration Rights Agreement dated March 12, 1997 among
the registrant, Chesapeake Operating, Inc., Chesapeake
Gas Development Corporation, and Chesapeake Exploration
Limited Partnership, and Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc., J.P.
Morgan Securities Inc. and Lehman Brothers Inc.
Incorporated herein by reference to Exhibit 4.5 to
registrant's registration statement on Form S-4 (No.
333-24995).
11 Statement regarding computation of earnings per common
share
27 Financial Data Schedule
_______________________
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed since January 1,
1997:
On March 6, 1997, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release on March 6, 1997
announcing its planned private offering of debt securities.
On April 4, 1997, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release on April 2, 1997
announcing the completion of its Brown #1-H in Washington County, Texas.
On May 2, 1997, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release on April 24,
1997, reporting third quarter and first nine months fiscal 1997 results.
<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)
MAY 15, 1997 AUBREY K. MCCLENDON
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
MAY 15, 1997 MARCUS C. ROWLAND
Date Marcus C. Rowland
Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
METHOD OF
EXHIBIT NO. DESCRIPTION FILING
- ----------- ----------- -------------
<S> <C> <C>
4.1 Indenture dated as of March 15, 1997 among the Incorpora-
registrant, as issuer, Chesapeake Operating, Inc., ted by
Chesapeake Gas Development Corporation, and reference
Chesapeake Exploration Limited Partnership, as
Subsidiary Guarantors, and United States Trust
Company of New York, as Trustee, with respect to
7-7/8% Senior Notes due 2004. Incorporated herein by
reference to Exhibit 4.1 to registrant's
registration statement on Form S-4 (No. 333-24995).
4.2 Indenture dated as of March 15, 1997 among the Incorpora-
registrant, as issuer, Chesapeake Operating, Inc., ted by
Chesapeake Gas Development Corporation, and reference
Chesapeake Exploration Limited Partnership, as
Subsidiary Guarantors, and United States Trust
Company of New York, as Trustee, with respect to
8-1/2% Senior Notes due 2012. Incorporated herein
by reference to Exhibit 4.3 to registrant's
registration statement on Form S-4 (No. 333-24995).
4.3 Registration Rights Agreement dated March 12, 1997 Incopora-
among the registrant, Chesapeake Operating, Inc., ted by
Chesapeake Gas Development Corporation, and reference
Chesapeake Exploration Limited Partnership, and
Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co. Inc., J.P. Morgan Securities
Inc. and Lehman Brothers Inc. Incorporated herein by
reference to Exhibit 4.5 to registrant's
registration statement on Form S-4 (No. 333-24995).
11 Statement regarding computation of earnings per Filed
common share herewith
electronically
27 Financial Data Schedule Filed
herewith
electronically
</TABLE>
EXHIBIT 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
STATEMENT OF NET INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -----------------
1997 1996 1997 1996
----- ------ ----- ------
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE
Computation for statement of income
Net income per statement of income
Income before extraordinary item $ 16,105 $ 7,623 $ 41,026 $ 15,997
Extraordinary item (177) - (6,620) -
-------- -------- -------- --------
Net income $ 15,928 $ 7,623 $ 34,406 $ 15,997
======== ======== ======== ========
Weighted average
Common shares outstanding 69,534 53,529 64,478 53,529
Adjustment to weighted average
common shares outstanding:
Add dilutive effect of:
Employee Options 3,959 4,941 4,205 4,455
------- -------- ------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 73,493 58,470 68,683 57,984
======= ======== ======= ========
Primary net income per common share:
Income before extraordinary item $ .22 $ .13 $ .60 $ .28
Extraordinary item - - (.10) -
-------- -------- -------- --------
Net income $ .22 $ .13 $ .50 $ .28
======== ======== ======== ========
FULLY DILUTED INCOME PER SHARE
Net income per statement of income
Income before extraordinary item $ 16,105 $ 7,623 $ 41,026 $ 15,997
Extraordinary item (177) - (6,620) -
-------- -------- -------- --------
Net income $ 15,928 $ 7,623 $ 34,406 $ 15,997
======== ======== ======== ========
Weighted average
Common shares outstanding 69,534 53,529 64,478 53,529
Adjustment to weighted average
common shares outstanding:
Add fully dilutive effect of:
Employee Options 3,959 5,113 4,202 5,163
-------- -------- -------- --------
Weighted average common shares and common
equivalent shares outstanding, as adjusted 73,493 58,642 68,680 58,692
======== ======== ======== ========
Fully diluted net income per common share:
Income before extraordinary item $ .22 $ .13 $ .60 $ .27
Extraordinary item - - (.10) -
-------- -------- -------- ---------
Net income $ .22 $ .13 $ .50 $ .27
======== ======== ======== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from (A) Balance
Sheet as of March 31, 1997 and Statement of Income for nine months ended March
31, 1997 and is qualified in its entirety by reference to such (B) Form 10-Q
dated March 31, 1997.
</LEGEND>
<CIK> 0000895126
<NAME> CHESAPEAKE ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 300,810
<SECURITIES> 62,003
<RECEIVABLES> 56,660
<ALLOWANCES> 182
<INVENTORY> 7,454
<CURRENT-ASSETS> 438,978
<PP&E> 891,406
<DEPRECIATION> 158,035
<TOTAL-ASSETS> 1,190,046
<CURRENT-LIABILITIES> 141,314
<BONDS> 508,961
0
0
<COMMON> 697
<OTHER-SE> 502,359
<TOTAL-LIABILITY-AND-EQUITY> 1,190,046
<SALES> 199,995
<TOTAL-REVENUES> 205,788
<CGS> 131,312
<TOTAL-COSTS> 141,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 9,870
<INCOME-PRETAX> 64,606
<INCOME-TAX> 23,580
<INCOME-CONTINUING> 41,026
<DISCONTINUED> 0
<EXTRAORDINARY> (6,620)
<CHANGES> 0
<NET-INCOME> 34,406
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
