01—Abstract
Summary
Summary of the 10-K filed October 14, 1997. Cited figures are marked; the original filing is the authoritative source.
This Form 10-K from Chesapeake Energy Corporation (NYSE: CHK) covers fiscal year ended June 30, 1997.
The filing names Chesapeake Energy Corporation rather than EXPAND ENERGY Corp, so the analysis below reflects this document's contents. The company reported a net loss of $183.4 milliona ($2.79 per share) on revenues of $280.3 million, driven mainly by a $236 million full-cost ceiling writedown recorded in the fourth quarter. The writedown followed disappointing exploration results in the Louisiana Austin Chalk Trend outside the Masters Creek area, along with lower year-end oil and gas prices and rising drilling costs.
Operationally the company grew, with oil and gas sales up 74% to $192.9 millionb, production up 31% to 78.6 Bcfe, and proved reserves of 403 Bcfe, down 5% from the prior year. Total assets reached $949 million and stockholders' equity was $287 million. For fiscal 1998, management plans to cut capital spending to roughly $250-275 million, concentrate Louisiana drilling in Masters Creek, use more 3-D seismic, and reduce unproven leasehold acquisitions.
Management expects production growth of 10-15% per year from drilling, and it expects interest expense to rise significantly because of the $300 millionc of Senior Notes issued in March 1997. Long-term debt represented about 64% of total capital, and the company has no commercial bank facility.
Investors also face securities class action lawsuits filed in August and September 1997 alleging inflated stock prices, plus a patent infringement suit from Union Pacific Resources. Management has not yet concluded the outcome of either matter.
02—Key points
Key Highlights
- Net loss of $183.4 million ($2.79 per share) in FY1997, versus net income of $23.4 million in FY1996, driven by a $236 million impairment of oil and gas properties under the full cost method.
- Oil and gas sales rose 74% to $192.9 million; production grew 31% to 78.6 Bcfe at an average realized price of $2.45 per Mcfe (up from $1.84).
- Proved reserves declined 5% to 403 Bcfe (PV-10 of $437 million), with downward revisions of about 174 Bcfe, largely in Knox, Giddings and Louisiana Trend areas.
- Louisiana Austin Chalk exploration largely failed outside Masters Creek; the company invested about $179 million in leasehold and $163 million in drilling there, and 80% of Louisiana areas were unsuccessful.
- FY1998 capex is budgeted at $250-275 million, with about 50% directed to Louisiana Trend and expected production growth of 10-15% per year.
- Interest expense is expected to rise significantly in FY1998 after the $300 million Senior Notes issued in March 1997; debt ratings are Ba3 (Moody's) and BB- (S&P).
- Pending items include an investment in Bayard Drilling (30.4% stake, planned IPO with about $74 million in proceeds and a possible $40 million pre-tax gain), a $50 million buyback authorization, and an initial $0.02 quarterly dividend.
03—Questions
Frequently Asked Questions
Why did the company report a large loss in fiscal 1997?
The loss was primarily caused by a $236 million full-cost ceiling writedown recorded in the fourth quarter. Capitalized costs exceeded the present value of proved reserves after disappointing Louisiana Trend drilling results, about $91 million of previously unevaluated leasehold being moved into the cost pool, rising drilling costs, and lower oil and gas prices at June 30, 1997 ($18.38 per barrel and $2.12 per Mcf).
Is the company's growth strategy still on track?
The company is shifting its strategy. For FY1998 it plans lower capital spending, more 3-D seismic before drilling, less unproven leasehold acquisition, and selective purchases of proved reserves. Management expects production growth to slow to 10-15% per year. The Louisiana Trend remains risky: only the Masters Creek area has consistently produced commercial quantities, and management acknowledges that failure there could have a material adverse effect on future results.
What are the main financial and legal risks for shareholders?
Key risks include high leverage (long-term debt about 64% of total capital, with interest expense expected to rise), no committed bank credit facility, and a net operating loss carryforward of about $300 million with a $64.1 million valuation allowance against deferred tax assets. Legal exposure includes multiple securities class actions filed in August and September 1997 alleging artificially inflated stock prices, and a patent infringement suit from Union Pacific Resources. The company says these claims are without merit, but no outcome can be predicted.
Will the company return cash to shareholders?
The board initiated a quarterly dividend of $0.02 per share, paid July 15, 1997 (about $1.4 million total). Future dividends depend on financial condition and are restricted by the Senior Note indentures. The board also authorized up to $50 million in share repurchases in August 1997, but as of the filing no shares had been repurchased under that authorization.
What non-core assets could generate cash in fiscal 1998?
The company holds a stake in Bayard Drilling Technologies, which filed for an IPO in August 1997. If the IPO proceeds as planned at about $15 per share, Chesapeake expects roughly $74 million in net proceeds and a pre-tax gain of about $40 million. It also owns a 50% interest in the Louisiana Austin Chalk Gathering System and a 15.5% interest in the Masters Creek Gas Plant, which it may sell; their cost basis is $16.8 million. None of these transactions is guaranteed.
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