Why did the company post a loss in the transition period, and is the loss likely to recur?

The six-month loss of $31.6 million was driven by a $110.0 million full-cost ceiling writedown, caused by lower oil prices (from $18.38 to $17.62 per barrel), escalating drilling costs, and disappointing Louisiana Trend results. A Bayard stock gain of $73.8 million offset part of it. The company expects a further writedown of $175 million to $200 million in Q1 1998, so losses are likely to continue in the near term unless commodity prices recover.

How is the company funding its acquisitions and capital program?

Acquisitions are being funded through a combination of commercial bank debt, long-term debt, and preferred or common equity. In January 1998 the company arranged a $500 million revolving credit facility with an initial borrowing base of $200 million ($168 million until the DLB acquisition closes). Of that, $120 million was used to repay Hugoton's bank debt. The company believes cash flow from operations can fund its roughly $235 million 1998 capital budget, but it notes that continued low oil prices or further ratings downgrades could limit financing and force cuts to discretionary drilling.

What is the company's exposure to Louisiana drilling and the Austin Chalk, and how is that changing?

Louisiana and Tuscaloosa leasehold represented about $66 million of the $125 million in unevaluated and unproved leasehold at December 31, 1997. About 42% of the 1998 drilling budget ($98 million) is tied to those areas. Austin Chalk represented 43% of proved reserves at year-end 1997 but falls to about 17% pro forma for the acquisitions. Management has cut Louisiana rigs from nine to six and is concentrating remaining Austin Chalk drilling in the Masters Creek area, while the Mid-Continent and western Canada become the primary growth areas.

What legal and shareholder risks should investors weigh?

The company faces a consolidated securities class action (filed January 1998) alleging that it misrepresented Louisiana Trend drilling results between January 1996 and June 1997, and separate class actions tied to the November 1997 Bayard Drilling IPO, in which the company held 30.1% of pre-IPO shares. A patent and misappropriation suit by Union Pacific Resources seeks damages that UPRC's experts put at up to $18 million, although the company's experts argue for no more than $25,000. Management believes the claims are without merit, and the company states it cannot estimate probable losses. Insiders, including CEO Aubrey McClendon and COO Tom Ward, control about 24% to 27% of outstanding stock and can significantly influence shareholder votes.

EXPAND ENERGY Corp 10-K Filed Mar 31, 1998

01—Abstract

Summary

Summary of the 10-KT filed March 31, 1998. Cited figures are marked; the original filing is the authoritative source.

This is Chesapeake Energy Corporation's (NYSE: CHK) Transition Report on Form 10-K covering the six months from July 1 to December 31, 1997, filed March 1998.

The filing identifies the registrant as Chesapeake Energy Corporation, not Expand Energy Corp as stated in the request. Expand Energy is the later name of this company, so the content below reflects the Chesapeake filing. The period followed a difficult 1997: a $236 million^a full-cost writedown in fiscal Q4 1997 and a $110 million writedown in the transition period, which together drove a net loss of $31.6 million for the six months ($0.45 per share) on revenue of $232.9 million.

Results were helped by a $73.8 million^b gain on the sale of Bayard Drilling stock. Oil and gas sales were $95.7 million on 38.5 Bcfe of production at $2.49 per Mcfe. Management has refocused strategy away from high-risk Louisiana Austin Chalk exploration toward acquiring long-lived, proved natural gas reserves, mainly in the Mid-Continent and western Canada.

Since October 1997 the company has announced about 10 acquisitions totaling roughly 690 to 716 Bcfe for about $717 million^c, with pro forma proved reserves of approximately 1,138 Bcfe, up from 448 Bcfe at December 31, 1997. The balance sheet is stretched: long-term debt of $509 million represents about 65% of book capitalization against shareholders' equity of $280 million. The company warned of an additional writedown of $175 million to $200 million in Q1 1998 based on March 1998 prices, and Moody's and S&P have placed its ratings under review with negative implications.

Investors also face material risks: concentrated Louisiana drilling exposure, securities class actions tied to the 1997 Louisiana disclosures and to Bayard's IPO, a patent suit from Union Pacific Resources seeking up to $18 million^d, and significant insider control, with management and directors holding about 27% of shares outstanding. Oil prices fell to ten-year lows in March 1998, which pressures both reserve values and the funding plan for the acquisitions.

02—Key points

Key Highlights

Net loss of $31.6 million ($0.45 per share) for the six-month transition period, versus net income of $18.5 million in the comparable prior-year period, reflecting a $110.0 million impairment of oil and gas properties partly offset by a $73.8 million gain on the Bayard stock sale.
Revenue of $232.9 million for the transition period. Oil and gas sales rose 6% to $95.7 million on 38.5 Bcfe of production at an average $2.49 per Mcfe.
Strategic pivot to long-life natural gas: about 10 acquisitions for roughly $717 million covering about 690 to 716 Bcfe, pushing pro forma proved reserves to about 1,138 Bcfe, with 71% in the Mid-Continent.
Balance sheet pressure: long-term debt of $509 million (about 65% of capitalization) against shareholders' equity of $280 million, with Moody's (Ba3) and S&P (BB-) ratings under review with negative implications.
Expected additional full-cost writedown of $175 million to $200 million in Q1 1998, based on March 25, 1998 NYMEX prices of $16.50 per barrel of oil and $2.35 per Mcf of gas.
Proved reserves of 448 Bcfe at December 31, 1997 (about 53% proved developed), with a PV-10 of $466.5 million, and a 1998 exploration and development budget of about $225 to $235 million.
Litigation and governance risks: consolidated securities class action over Louisiana Trend disclosures, a Bayard IPO securities suit, a UPRC patent suit with damages claimed up to $18 million, and insiders controlling about 27% of common stock.

03—Questions

Frequently Asked Questions

Why did the company post a loss in the transition period, and is the loss likely to recur?
The six-month loss of $31.6 million was driven by a $110.0 million full-cost ceiling writedown, caused by lower oil prices (from $18.38 to $17.62 per barrel), escalating drilling costs, and disappointing Louisiana Trend results. A Bayard stock gain of $73.8 million offset part of it. The company expects a further writedown of $175 million to $200 million in Q1 1998, so losses are likely to continue in the near term unless commodity prices recover.
How is the company funding its acquisitions and capital program?
Acquisitions are being funded through a combination of commercial bank debt, long-term debt, and preferred or common equity. In January 1998 the company arranged a $500 million revolving credit facility with an initial borrowing base of $200 million ($168 million until the DLB acquisition closes). Of that, $120 million was used to repay Hugoton's bank debt. The company believes cash flow from operations can fund its roughly $235 million 1998 capital budget, but it notes that continued low oil prices or further ratings downgrades could limit financing and force cuts to discretionary drilling.
What is the company's exposure to Louisiana drilling and the Austin Chalk, and how is that changing?
Louisiana and Tuscaloosa leasehold represented about $66 million of the $125 million in unevaluated and unproved leasehold at December 31, 1997. About 42% of the 1998 drilling budget ($98 million) is tied to those areas. Austin Chalk represented 43% of proved reserves at year-end 1997 but falls to about 17% pro forma for the acquisitions. Management has cut Louisiana rigs from nine to six and is concentrating remaining Austin Chalk drilling in the Masters Creek area, while the Mid-Continent and western Canada become the primary growth areas.
What legal and shareholder risks should investors weigh?
The company faces a consolidated securities class action (filed January 1998) alleging that it misrepresented Louisiana Trend drilling results between January 1996 and June 1997, and separate class actions tied to the November 1997 Bayard Drilling IPO, in which the company held 30.1% of pre-IPO shares. A patent and misappropriation suit by Union Pacific Resources seeks damages that UPRC's experts put at up to $18 million, although the company's experts argue for no more than $25,000. Management believes the claims are without merit, and the company states it cannot estimate probable losses. Insiders, including CEO Aubrey McClendon and COO Tom Ward, control about 24% to 27% of outstanding stock and can significantly influence shareholder votes.

04—Continue

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