10-QPeriod: Q2 FY2008

EXPAND ENERGY Corp Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 11, 2008For Securities:EXEEXEELEXEEWEXEEZ

Summary

Chesapeake Energy Corporation (now EXPAND ENERGY Corp) reported a significant net loss of $1.597 billion for the quarter ended June 30, 2008, primarily driven by a $2.094 billion unrealized non-cash after-tax mark-to-market loss on natural gas and oil hedges due to increased commodity prices. Despite the reported loss, the company's operational performance showed growth, with a 25% increase in natural gas and oil equivalent production compared to the previous quarter, marking the 28th consecutive quarter of production growth. The company also reported substantial investment in exploration and development activities, alongside significant capital raising efforts through stock and debt offerings and asset sales. While the company experienced a substantial increase in total assets to $38.023 billion from $30.734 billion at the end of 2007, it also saw a rise in total liabilities to $27.747 billion from $18.504 billion. This growth in liabilities, particularly current liabilities, contributed to a working capital deficit. Management's focus remains on continued production growth, strategic asset monetization, and managing its significant hedging portfolio, with a stated belief that the company's financial position and liquidity remain adequate despite the quarterly loss.

Financial Highlights

28 data points
Beta

Revenue

-$455.00M

Net Income

-$1.59B

349.9% Net Margin

EPS (Diluted)

$-3.16

Cash & Equivalents

$0.00

Free Cash Flow

$2.80B

Financial Statements
Beta
Revenue-$455.00M
Operating Expenses$2.08B
Operating Income-$2.53B
Interest Expense$54.00M
Net Income-$1.59B
EPS (Basic)$-3.16
EPS (Diluted)$-3.16
Shares Outstanding (Basic)521.00M
Shares Outstanding (Diluted)521.00M

Key Highlights

  • 1Significant Net Loss: Reported a net loss of $1.597 billion for the quarter, largely due to a $2.094 billion unrealized loss on derivative instruments.
  • 2Production Growth Continues: Achieved a 25% increase in production (211.9 bcfe) compared to the prior quarter, extending a streak of 28 consecutive quarters of production growth.
  • 3Substantial Capital Expenditures: Invested heavily in exploration and development, with capital expenditures totaling $2.857 billion for drilling and related activities in the six-month period.
  • 4Increased Indebtedness: Total debt increased, with long-term debt and senior notes totaling $13.014 billion at June 30, 2008, up from $10.950 billion at December 31, 2007.
  • 5Large Derivative Liability: Held a substantial net derivative liability of $6.551 billion related to natural gas and oil hedging activities at quarter-end.
  • 6Strategic Asset Monetization: Engaged in asset sales and joint ventures to raise capital and fund growth, including a $1.65 billion joint venture for Haynesville Shale acreage and a $1.75 billion sale of Arkoma Basin assets.
  • 7Working Capital Deficit: Reported a working capital deficit of $4.1 billion as of June 30, 2008, primarily due to the large derivative liability.

Frequently Asked Questions

The net loss of $1.597 billion was primarily driven by an unrealized, non-cash mark-to-market loss of $2.094 billion on the company's natural gas and oil derivative instruments. This loss is a result of the significant increase in natural gas and oil prices during the quarter, which negatively impacted the fair value of the company's hedging positions.

The company holds a significant net derivative liability of $6.551 billion. Management notes that natural gas and oil prices have decreased significantly since the end of the quarter, which is expected to reverse a substantial portion of the unrealized loss in the subsequent quarter. The company manages liquidity impacts through collateral arrangements with hedging counterparties, potentially involving its bank credit facility or direct pledging of natural gas and oil properties.

Chesapeake Energy Corporation demonstrated strong operational performance with a 25% increase in production for the quarter, marking its 28th consecutive quarter of growth. The company's strategy remains focused on aggressive exploration and development, particularly in key unconventional plays, and it has significant capital budgets planned for continued growth and reserve replacement.

The company is employing a multi-faceted approach to funding. This includes strong cash flow from operations, significant borrowings under its revolving credit facility, proceeds from equity and debt offerings, and strategic asset monetization through sales and joint ventures. The company is actively pursuing further monetization transactions to support its substantial 2008 and 2009 capital expenditure plans.