filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Chesapeake Energy Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Chesapeake Energy Corporation and its subsidiaries (Successor) (the “Company”) as of December 31, 2021, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for the period from February 10, 2021 through December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period from February 10, 2021 through December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis of Accounting
As discussed in Note 2 to the consolidated financial statements, Chesapeake Energy Corporation and certain of its subsidiaries (collectively the “Debtors”) filed voluntary petitions on June 28, 2020 with the United States Bankruptcy Court for the Southern District of Texas for relief under the provisions of Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Debtors’ joint plan of reorganization on January 16, 2021 and the Debtors emerged from bankruptcy on February 9, 2021. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of February 9, 2021.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Vine Energy Inc. from its assessment of internal control over financial reporting as of December 31, 2021, because it was acquired by the Company in a purchase business combination during 2021. We have also excluded Vine Energy Inc. from our audit of internal control over financial reporting. Vine Energy Inc. is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 20% and 7%, respectively, of the related consolidated financial statement amounts as of December 31, 2021 and for the period from February 10, 2021 through December 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The Impact of Proved Oil and Natural Gas Reserves on Proved Oil and Natural Gas Properties, Net
As described in Note 1 to the consolidated financial statements, the Company’s property and equipment, net balance was approximately $8.8 billion as of December 31, 2021, and depreciation, depletion, and amortization (DD&A) expense for the period from February 10, 2021 through December 31, 2021 was approximately $919 million, both of which substantially related to proved oil and natural gas properties. The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, all capitalized well costs and leasehold costs of proved oil and natural gas properties are depreciated by the units-of-production (UOP) method based on total estimated proved developed reserves and proved reserves, respectively. As disclosed by management, estimates of oil and natural gas reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of management’s estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves volumes may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. The estimates of proved oil and natural gas reserves have been developed by specialists, specifically petroleum engineers.
The principal considerations for our determination that performing procedures relating to the impact of proved oil and natural gas reserves on proved oil and natural gas properties, net is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural
gas reserves, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists in developing the estimates of proved oil and natural gas reserves volumes and the assumptions applied to the data related to the commodity pricing differentials and future development costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimates of proved oil and natural gas reserves. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the proved oil and natural gas reserves volumes. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the methods and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. These procedures also included, among others, testing the completeness and accuracy of the data related to commodity pricing differentials and future development costs. Additionally, these procedures included evaluating whether the assumptions applied to the aforementioned data were reasonable considering the past performance of the Company.
Acquisition of Vine Energy, Inc. - Valuation of Proved and Unproved Oil and Natural Gas Properties
As described in Note 4 to the consolidated financial statements, on November 1, 2021, the Company acquired Vine Energy, Inc. (Vine), an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana. Accordingly, the Company recorded the estimated fair values of the acquired proved and unproved oil and natural gas properties of approximately $2.2 billion and approximately $1.1 billion for proved oil and gas properties and unproved properties, respectively. As disclosed by management, management determines the fair value of acquired oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area are prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The estimates of proved oil and natural gas reserves have been developed by specialists, specifically petroleum engineers.
The principal considerations for our determination that performing procedures relating to the valuation of the acquired Vine proved and unproved oil and natural gas properties is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the fair value of proved and unproved oil and natural gas properties; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists related to recoverable reserves; production rates; future operating and development costs; future commodity prices escalated by an inflationary rate after five years, adjusted for differentials; and a market-based weighted average cost of capital by operating area; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing the effectiveness of controls relating to management’s estimates of the fair value of proved and unproved oil and natural gas properties. These procedures also included, among others, (i) testing management’s process for developing the fair value of proved and unproved oil and natural gas properties; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the data, methods, and significant assumptions used by management related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area. Evaluating the reasonableness of management’s assumptions related to future commodity prices adjusted for differentials involved comparing the prices against observable market data and evaluating differentials through inspection of the underlying contracts. Evaluating future operating and development costs involved evaluating the reasonableness of the costs as compared to the past performance of the acquired business,
comparing to the current performance of the Company, consistency with external market and industry data, and whether the assumptions were consistent with evidence obtained in other areas of the audit. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the recoverable reserves and production rates. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the data, methods, and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and market-based weighted average cost of capital by operating area.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
We have served as the Company’s auditor since 1992.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Chesapeake Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Chesapeake Energy Corporation and its subsidiaries (Predecessor) (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for the period from January 1, 2021 through February 9, 2021 and for the years ended December 31, 2020 and 2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the period from January 1, 2021 through February 9, 2021 and for the years ended December 31, 2020 and 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Note 2 to the consolidated financial statements, Chesapeake Energy Corporation and certain of its subsidiaries (collectively the “Debtors”) filed voluntary petitions on June 28, 2020 with the United States Bankruptcy Court for the Southern District of Texas for relief under the provisions of Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Debtors’ joint plan of reorganization on January 16, 2021 and the Debtors emerged from bankruptcy on February 9, 2021. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting. This matter is also described in the “Critical Audit Matters” section of our report.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Proved and Unproved Oil and Natural Gas Properties in Connection with the Application of Fresh Start Accounting
As described in Note 3 to the consolidated financial statements, in connection with the Company’s emergence from bankruptcy, management applied fresh start accounting on February 9, 2021 and recorded the estimated fair values of its proved and unproved oil and natural gas properties of approximately $4.7 billion and approximately $483 million, respectively. Management determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area.
The principal considerations for our determination that performing procedures relating to the valuation of proved and unproved oil and natural gas properties in connection with the application of fresh start accounting is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the fair value of proved and unproved oil and natural gas properties; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the data, methods, and assumptions used by management and its specialists related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the fair value of proved and unproved oil and natural gas properties; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the data, methods, and significant assumptions used by management related to recoverable reserves, production rates, future operating and development costs, future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and a market-based weighted average cost of capital by operating area. Evaluating the reasonableness of management’s assumptions related to future commodity prices adjusted for differentials involved comparing the prices against observable market data and evaluating differentials through inspection of the underlying contracts. Evaluating future operating costs involved evaluating the reasonableness of the costs as compared to the past performance of the Company. Evaluating future development costs involved evaluating whether the costs were reasonable considering the current performance of the Company, the consistency with external market and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit. The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the recoverable reserves and production rates. As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the data, methods, and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and market-based weighted average cost of capital by operating area.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
We have served as the Company’s auditor since 1992.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 905 | $ | 279 | |||||||||||||
| Restricted cash | 9 | — | |||||||||||||||
| Accounts receivable, net | 1,115 | 746 | |||||||||||||||
| Short-term derivative assets | 5 | 19 | |||||||||||||||
| Other current assets | 69 | 64 | |||||||||||||||
| Total current assets | 2,103 | 1,108 | |||||||||||||||
| Property and equipment: | |||||||||||||||||
| Oil and natural gas properties, successful efforts method | |||||||||||||||||
| Proved oil and natural gas properties | 7,682 | 25,734 | |||||||||||||||
| Unproved properties | 1,530 | 1,550 | |||||||||||||||
| Other property and equipment | 495 | 1,754 | |||||||||||||||
| Total property and equipment | 9,707 | 29,038 | |||||||||||||||
| Less: accumulated depreciation, depletion and amortization | (908) | (23,806) | |||||||||||||||
| Property and equipment held for sale, net | 3 | 10 | |||||||||||||||
| Total property and equipment, net | 8,802 | 5,242 | |||||||||||||||
| Other long-term assets | 104 | 234 | |||||||||||||||
| Total assets | $ | 11,009 | $ | 6,584 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS – (Continued)
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Liabilities and stockholders’ equity (deficit) | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 308 | $ | 346 | |||||||||||||
| Current maturities of long-term debt, net | — | 1,929 | |||||||||||||||
| Accrued interest | 38 | 3 | |||||||||||||||
| Short-term derivative liabilities | 899 | 93 | |||||||||||||||
| Other current liabilities | 1,202 | 723 | |||||||||||||||
| Total current liabilities | 2,447 | 3,094 | |||||||||||||||
| Long-term debt, net | 2,278 | — | |||||||||||||||
| Long-term derivative liabilities | 249 | 44 | |||||||||||||||
| Asset retirement obligations, net of current portion | 349 | 139 | |||||||||||||||
| Other long-term liabilities | 15 | 5 | |||||||||||||||
| Liabilities subject to compromise | — | 8,643 | |||||||||||||||
| Total liabilities | 5,338 | 11,925 | |||||||||||||||
| Contingencies and commitments (Note 7) | |||||||||||||||||
| Stockholders’ equity (deficit): | |||||||||||||||||
| Predecessor preferred stock, $0.01 par value, 20,000,000 shares authorized: 0 and 5,563,458 shares outstanding | — | 1,631 | |||||||||||||||
| Predecessor common stock, $0.01 par value, 22,500,000 shares authorized: 0 and 9,780,547 shares issued | — | — | |||||||||||||||
| Predecessor additional paid-in capital | — | 16,937 | |||||||||||||||
| Predecessor accumulated other comprehensive income | — | 45 | |||||||||||||||
| Successor common stock, $0.01 par value, 450,000,000 shares authorized: 117,917,349 and 0 shares issued | 1 | — | |||||||||||||||
| Successor additional paid-in capital | 4,845 | — | |||||||||||||||
| Retained earnings (accumulated deficit) | 825 | (23,954) | |||||||||||||||
| Total stockholders’ equity (deficit) | 5,671 | (5,341) | |||||||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 11,009 | $ | 6,584 |
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Revenues and other: | |||||||||||||||||||||||||||||
| Oil, natural gas and NGL | $ | 4,401 | $ | 398 | $ | 2,745 | $ | 4,517 | |||||||||||||||||||||
| Marketing | 2,263 | 239 | 1,869 | 3,967 | |||||||||||||||||||||||||
| Oil and natural gas derivatives | (1,127) | (382) | 596 | 5 | |||||||||||||||||||||||||
| Gains on sales of assets | 12 | 5 | 30 | 43 | |||||||||||||||||||||||||
| Total revenues and other | 5,549 | 260 | 5,240 | 8,532 | |||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Production | 297 | 32 | 373 | 520 | |||||||||||||||||||||||||
| Gathering, processing and transportation | 780 | 102 | 1,082 | 1,082 | |||||||||||||||||||||||||
| Severance and ad valorem taxes | 158 | 18 | 149 | 224 | |||||||||||||||||||||||||
| Exploration | 7 | 2 | 427 | 84 | |||||||||||||||||||||||||
| Marketing | 2,257 | 237 | 1,889 | 4,003 | |||||||||||||||||||||||||
| General and administrative | 97 | 21 | 267 | 315 | |||||||||||||||||||||||||
| Separation and other termination costs | 11 | 22 | 44 | 12 | |||||||||||||||||||||||||
| Depreciation, depletion and amortization | 919 | 72 | 1,097 | 2,264 | |||||||||||||||||||||||||
| Impairments | 1 | — | 8,535 | 11 | |||||||||||||||||||||||||
| Other operating expense (income), net | 84 | (12) | 80 | 48 | |||||||||||||||||||||||||
| Total operating expenses | 4,611 | 494 | 13,943 | 8,563 | |||||||||||||||||||||||||
| Income (loss) from operations | 938 | (234) | (8,703) | (31) | |||||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||||||
| Interest expense | (73) | (11) | (331) | (651) | |||||||||||||||||||||||||
| Gains on purchases or exchanges of debt | — | — | 65 | 75 | |||||||||||||||||||||||||
| Other income (expense) | 31 | 2 | (4) | (32) | |||||||||||||||||||||||||
| Reorganization items, net | — | 5,569 | (796) | — | |||||||||||||||||||||||||
| Total other income (expense) | (42) | 5,560 | (1,066) | (608) | |||||||||||||||||||||||||
| Income (loss) before income taxes | 896 | 5,326 | (9,769) | (639) | |||||||||||||||||||||||||
| Income tax benefit | (49) | (57) | (19) | (331) | |||||||||||||||||||||||||
| Net income (loss) | 945 | 5,383 | (9,750) | (308) | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | — | — | 16 | — | |||||||||||||||||||||||||
| Net income (loss) attributable to Chesapeake | 945 | 5,383 | (9,734) | (308) | |||||||||||||||||||||||||
| Preferred stock dividends | — | — | (22) | (91) | |||||||||||||||||||||||||
| Loss on exchange of preferred stock | — | — | — | (17) | |||||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | 945 | $ | 5,383 | $ | (9,756) | $ | (416) | |||||||||||||||||||||
| Earnings (loss) per common share: | |||||||||||||||||||||||||||||
| Basic | $ | 9.29 | $ | 550.35 | $ | (998.26) | $ | (49.97) | |||||||||||||||||||||
| Diluted | $ | 8.12 | $ | 534.51 | $ | (998.26) | $ | (49.97) | |||||||||||||||||||||
| Weighted average common shares outstanding (in thousands): | |||||||||||||||||||||||||||||
| Basic | 101,754 | 9,781 | 9,773 | 8,325 | |||||||||||||||||||||||||
| Diluted | 116,341 | 10,071 | 9,773 | 8,325 |
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Net income (loss) | $ | 945 | $ | 5,383 | $ | (9,750) | $ | (308) | |||||||||||||||||||||
| Other comprehensive income, net of income tax: | |||||||||||||||||||||||||||||
| Reclassification of losses on settled derivative instruments(a) | — | 3 | 33 | 35 | |||||||||||||||||||||||||
| Other comprehensive income | — | 3 | 33 | 35 | |||||||||||||||||||||||||
| Comprehensive income (loss) | 945 | 5,386 | (9,717) | (273) | |||||||||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interests | — | — | 16 | — | |||||||||||||||||||||||||
| Comprehensive income (loss) attributable to Chesapeake | $ | 945 | $ | 5,386 | $ | (9,701) | $ | (273) |
(a)Deferred tax activity incurred in other comprehensive income was offset by a valuation allowance.
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 945 | $ | 5,383 | $ | (9,750) | $ | (308) | |||||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 919 | 72 | 1,097 | 2,264 | |||||||||||||||||||||||||
| Deferred income tax benefit | (49) | (57) | (10) | (305) | |||||||||||||||||||||||||
| Derivative (gains) losses, net | 1,127 | 382 | (596) | (3) | |||||||||||||||||||||||||
| Cash receipts (payments) on derivative settlements, net | (1,142) | (17) | 884 | 202 | |||||||||||||||||||||||||
| Share-based compensation | 9 | 3 | 21 | 30 | |||||||||||||||||||||||||
| Gains on sales of assets | (12) | (5) | (30) | (43) | |||||||||||||||||||||||||
| Impairments | 1 | — | 8,535 | 11 | |||||||||||||||||||||||||
| Non-cash reorganization items, net | — | (6,680) | (213) | — | |||||||||||||||||||||||||
| Exploration | 2 | 2 | 417 | 49 | |||||||||||||||||||||||||
| Gains on purchases or exchanges of debt | — | — | (65) | (79) | |||||||||||||||||||||||||
| Other | 46 | 45 | (41) | 59 | |||||||||||||||||||||||||
| Changes in assets and liabilities | (37) | 851 | 915 | (254) | |||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 1,809 | (21) | 1,164 | 1,623 | |||||||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Capital expenditures | (669) | (66) | (1,142) | (2,263) | |||||||||||||||||||||||||
| Business combination, net | (194) | — | — | (353) | |||||||||||||||||||||||||
| Proceeds from divestitures of property and equipment | 13 | — | 150 | 136 | |||||||||||||||||||||||||
| Net cash used in investing activities | (850) | (66) | (992) | (2,480) | |||||||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Proceeds from Exit Credit Facility - Tranche A Loans | 30 | — | — | — | |||||||||||||||||||||||||
| Payments on Exit Credit Facility - Tranche A Loans | (80) | (479) | — | — | |||||||||||||||||||||||||
| Proceeds from pre-petition revolving credit facility borrowings | — | — | 3,656 | 10,676 | |||||||||||||||||||||||||
| Payments on pre-petition revolving credit facility borrowings | — | — | (3,317) | (10,180) | |||||||||||||||||||||||||
| Proceeds from DIP Facility borrowings | — | — | 60 | — | |||||||||||||||||||||||||
| Payments on DIP Facility borrowings | — | (1,179) | (60) | — | |||||||||||||||||||||||||
| Proceeds from issuance of senior notes, net | — | 1,000 | — | 108 | |||||||||||||||||||||||||
| Proceeds from issuance of term loan, net | — | — | — | 1,455 | |||||||||||||||||||||||||
| Proceeds from issuance of common stock | — | 600 | — | — | |||||||||||||||||||||||||
| Proceeds from warrant exercise | 2 | — | — | — | |||||||||||||||||||||||||
| Debt issuance and other financing costs | (3) | (8) | (109) | — | |||||||||||||||||||||||||
| Cash paid to purchase debt | — | — | (94) | (1,073) | |||||||||||||||||||||||||
| Cash paid for common stock dividends | (119) | — | — | — | |||||||||||||||||||||||||
| Cash paid for preferred stock dividends | — | — | (22) | (91) | |||||||||||||||||||||||||
| Other | (1) | — | (13) | (36) | |||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (171) | (66) | 101 | 859 | |||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 788 | (153) | 273 | 2 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 126 | 279 | 6 | 4 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 914 | $ | 126 | $ | 279 | $ | 6 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 905 | $ | 40 | $ | 279 | $ | 6 | |||||||||||||||||||||
| Restricted cash | 9 | 86 | — | — | |||||||||||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 914 | $ | 126 | $ | 279 | $ | 6 | |||||||||||||||||||||
| Supplemental disclosures to the consolidated statements of cash flows are presented below: | |||||||||||||||||||||||||||||
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Supplemental cash flow information: | |||||||||||||||||||||||||||||
| Cash paid for reorganization items, net | $ | 65 | $ | 66 | $ | 140 | $ | — | |||||||||||||||||||||
| Interest paid, net of capitalized interest | $ | 34 | $ | 13 | $ | 224 | $ | 691 | |||||||||||||||||||||
| Income taxes paid, net of refunds received | $ | (9) | $ | — | $ | — | $ | (6) | |||||||||||||||||||||
| Supplemental disclosure of significant non-cash investing and financing activities: | |||||||||||||||||||||||||||||
| Change in accrued drilling and completion costs | $ | 30 | $ | (5) | $ | (216) | $ | (19) | |||||||||||||||||||||
| Put option premium on equity backstop agreement | $ | — | $ | 60 | $ | 60 | $ | — | |||||||||||||||||||||
| Operating lease obligations recognized | $ | — | $ | — | $ | 32 | $ | — | |||||||||||||||||||||
| Common stock issued for business combination | $ | 1,232 | $ | — | $ | — | $ | 2,037 | |||||||||||||||||||||
| Debt exchanged for common stock | $ | — | $ | — | $ | — | $ | 693 | |||||||||||||||||||||
| Preferred stock exchanged for common stock | $ | — | $ | — | $ | — | $ | 40 | |||||||||||||||||||||
| Change in senior notes exchanged | $ | — | $ | — | $ | — | $ | 971 |
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Attributable to Chesapeake | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 (Predecessor) | 5,563,358 | $ | 1,631 | 9,780,547 | $ | — | $ | 16,937 | $ | (23,954) | $ | 45 | $ | — | $ | — | $ | (5,341) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 67 | — | 3 | — | — | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedging activity | — | — | — | — | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 5,383 | — | — | — | 5,383 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of Predecessor equity | (5,563,358) | (1,631) | (9,780,614) | — | (16,940) | 18,571 | (48) | — | — | (48) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Successor common stock | — | — | 97,907,081 | 1 | 3,330 | — | — | — | — | 3,331 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Successor Class A warrants | — | — | — | — | 93 | — | — | — | — | 93 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Successor Class B warrants | — | — | — | — | 94 | — | — | — | — | 94 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Successor Class C warrants | — | — | — | — | 68 | — | — | — | — | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 9, 2021 (Predecessor) | — | $ | — | 97,907,081 | $ | 1 | $ | 3,585 | $ | — | $ | — | $ | — | $ | — | $ | 3,586 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 10, 2021 (Successor) | — | $ | — | 97,907,081 | $ | 1 | $ | 3,585 | $ | — | $ | — | $ | — | $ | — | $ | 3,586 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 248,487 | — | 21 | — | — | — | — | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Vine acquisition | — | — | 18,709,399 | — | 1,237 | — | — | — | — | 1,237 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for warrant exercise | — | — | 188,292 | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of reserved common stock and warrants | — | — | 864,090 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 945 | — | — | — | 945 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | (120) | — | — | — | (120) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 (Successor) | — | $ | — | 117,917,349 | $ | 1 | $ | 4,845 | $ | 825 | $ | — | $ | — | $ | — | $ | 5,671 |
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
| Attributable to Chesapeake | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 (Predecessor) | 5,563,458 | $ | 1,631 | 9,772,793 | $ | — | $ | 16,973 | $ | (14,220) | $ | 12 | $ | (32) | $ | 37 | $ | 4,401 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 7,753 | — | (14) | — | — | — | — | (14) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (22) | — | — | — | — | (22) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedging activity | — | — | — | — | — | — | 33 | — | — | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Chesapeake | — | — | — | — | — | (9,734) | — | — | — | (9,734) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of preferred stock into common stock | (100) | — | 1 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of shares for company benefit plans | — | — | — | — | — | — | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Release of shares for company benefit plans | — | — | — | — | — | — | — | 34 | — | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | — | — | — | — | — | — | — | — | (16) | (16) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Divestiture of underlying assets | — | — | — | — | — | — | — | — | (21) | (21) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 (Predecessor) | 5,563,358 | $ | 1,631 | 9,780,547 | $ | — | $ | 16,937 | $ | (23,954) | $ | 45 | $ | — | $ | — | $ | (5,341) |
| Attributable to Chesapeake | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 (Predecessor) | 5,603,458 | $ | 1,671 | 4,568,581 | $ | — | $ | 14,387 | $ | (13,912) | $ | (23) | $ | (31) | $ | 41 | $ | 2,133 | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for WildHorse Merger | — | — | 3,586,880 | — | 2,037 | — | — | — | — | 2,037 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 20,731 | — | 27 | — | — | — | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (91) | — | — | — | — | (91) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedging activity | — | — | — | — | — | — | 35 | — | — | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Chesapeake | — | — | — | — | — | (308) | — | — | — | (308) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of contingent convertible notes into common stock | — | — | 366,945 | — | 135 | — | — | — | — | 135 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of senior notes into common stock | — | — | 1,177,817 | — | 440 | — | — | — | — | 440 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of preferred stock into common stock | (40,000) | (40) | 51,839 | — | 40 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity component of contingent convertible notes repurchased | — | — | — | — | (2) | — | — | — | — | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of shares for company benefit plans | — | — | — | — | — | — | — | (7) | — | (7) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Release of shares for company benefit plans | — | — | — | — | — | — | — | 6 | — | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | — | (4) | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 (Predecessor) | 5,563,458 | $ | 1,631 | 9,772,793 | $ | — | $ | 16,973 | $ | (14,220) | $ | 12 | $ | (32) | $ | 37 | $ | 4,401 |
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Description of Company
Chesapeake Energy Corporation ("Chesapeake," “we,” “our,” “us” or the "Company") is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of oil, natural gas and NGL from underground reservoirs. Our operations are located onshore in the United States. As discussed in Note 2 below, we filed the Chapter 11 Cases on the Petition Date and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until emergence on February 9, 2021. To facilitate our financial statement presentations, we refer to the post-emergence reorganized Company in these consolidated financial statements and footnotes as the “Successor” for periods subsequent to February 9, 2021, and to the pre-emergence Company as “Predecessor” for periods on or prior to February 9, 2021.
Basis of Presentation
The accompanying consolidated financial statements of Chesapeake were prepared in accordance with GAAP and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
This Annual Report on Form 10-K (this “Form 10-K”) relates to the financial position of the Successor as of December 31, 2021 and Predecessor as of December 31, 2020, and the periods of February 10, 2021 through December 31, 2021 (“2021 Successor Period”), January 1, 2021 through February 9, 2021 (“2021 Predecessor Period”), and the years ended December 31, 2020 (“2020 Predecessor Period”) and December 31, 2019 (“2019 Predecessor Period”).
Accounting During Bankruptcy
We have applied Accounting Standards Codification (ASC) 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements, for periods subsequent to the filing of a petition of Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that were approved for rejection by the Bankruptcy Court, and unamortized debt issuance costs, premiums and discounts associated with debt classified as liabilities subject to compromise, are recorded as reorganization items, net on our accompanying consolidated statements of operations. In addition, pre-petition obligations that could have been impacted by the Chapter 11 process have been classified on the consolidated balance sheet as of December 31, 2020, as liabilities subject to compromise. See Note 2 for more information regarding reorganization items.
Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosures in the financial statements. Management evaluates its estimates and related assumptions regularly, including those related to the impairment of oil and natural gas properties, oil and natural gas reserves, derivatives, income taxes, unevaluated properties not subject to evaluation, impairment of other property and equipment, environmental remediation costs, asset retirement obligations, litigation and regulatory proceedings and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ significantly from these estimates.
The accompanying notes are an integral part of these consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidation
We consolidate entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights and variable interest entities (“VIEs”) in which we are the primary beneficiary. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether we own a variable interest in a VIE, we perform a qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements. See Note 12 for further discussion of our previous VIE. We use the equity method of accounting to record our net interests where we have the ability to exercise significant influence through our investment but lack a controlling financial interest. Under the equity method, our share of net income (loss) is included in our consolidated statements of operations according to our equity ownership or according to the terms of the applicable governing instrument. Undivided interests in oil and natural gas properties are consolidated on a proportionate basis.
Segments
Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating an enterprise’s resources and assessing its operating performance. We have concluded that we have only one reportable operating segment, due to the similar nature of the exploration and production business across Chesapeake and its consolidated subsidiaries and the fact that our marketing activities are ancillary to our operations.
Noncontrolling Interests
Noncontrolling interests represent third-party equity ownership in certain of our consolidated subsidiaries and are presented as a component of equity. See Note 12 for further discussion of noncontrolling interests.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, we consider investments in all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted Cash
As of December 31, 2021, we had restricted cash of $9 million. The restricted funds are maintained primarily to pay certain convenience class unsecured claims following our emergence from bankruptcy.
Accounts Receivable
Our accounts receivable are primarily from purchasers of oil, natural gas and NGL and from exploration and production companies that own interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of all our counterparties and we generally require letters of credit or parent guarantees for receivables from parties deemed to have sub-standard credit, unless the credit risk can otherwise be mitigated. We utilize an allowance method in accounting for bad debt based on historical trends in addition to specifically identifying receivables that we believe may be uncollectible. See Note 10 for further discussion of our accounts receivable.
Oil and Natural Gas Properties
We follow the successful efforts method of accounting for our oil and natural gas properties. Under this method, exploration costs such as exploratory geological and geophysical costs, expiration of unproved leasehold, delay rentals and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead and similar activities are also expensed as incurred. All property acquisition costs and development costs are capitalized when incurred.
Exploratory drilling costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized and are classified as proved properties. Costs of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory drilling costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operational viability of the project. If we determine that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. We review the status of all suspended exploratory drilling costs quarterly. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of oil and natural gas are capitalized.
Costs of drilling and equipping successful wells, costs to construct or acquire facilities, and associated asset retirement costs are depreciated using the unit-of-production (“UOP”) method based on total estimated proved developed oil and gas reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved properties, are depleted using the UOP method based on total estimated proved developed and undeveloped reserves.
Proceeds from the sales of individual oil and natural gas properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depreciation, depletion and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recognized until an entire amortization base is sold. However, a gain or loss is recognized from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.
When circumstances indicate that the carrying value of proved oil and natural gas properties may not be recoverable, we compare unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on our estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized costs, the capitalized costs are reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820, Fair Value Measurements. If applicable, we utilize prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value measurements are typically based on judgmental assessments of commodity prices, pricing adjustments for differentials, operating costs, capital investment plans, future production volumes, and estimated proved reserves, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a market-based weighted average cost of capital. We have classified these fair value measurements as Level 3 in the fair value hierarchy.
Other Property and Equipment
Other property and equipment consists primarily of buildings and improvements, land, vehicles, computers and office equipment. Major renewals and betterments are capitalized while the costs of repairs and maintenance are charged to expense as incurred. Other property and equipment costs, excluding land, are depreciated on a straight-line basis and recorded within depreciation, depletion and amortization in the consolidated statement of operations.
Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset, including any disposal value, is less than the carrying amount of the asset. If any asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. An estimate of fair value is based on the best information available, including prices for similar assets and discounted cash flow. See Note 17 for further discussion of other property and equipment.
Capitalized Interest
Interest from external borrowings is capitalized on significant investments in major development projects until the asset is ready for service using the weighted average borrowing rate of outstanding borrowings. Capitalized interest is determined by multiplying our weighted average borrowing cost on debt by the average amount of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
qualifying costs incurred. Capitalized interest is depreciated over the useful lives of the assets in the same manner as the depreciation of the underlying asset.
Accounts Payable
Included in accounts payable as of December 31, 2021 are liabilities of approximately $23 million representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts. There were no corresponding liabilities as of December 31, 2020.
Debt Issuance Costs
Costs associated with the arrangement of our Exit Credit Facility are included in other long-term assets and are amortized over the life of the facility using the straight-line method. The Exit Credit Facility unamortized issuance costs as of December 31, 2021 were $23 million. Costs associated with the issuance of the Successor senior notes are included in long-term debt and the remaining unamortized issuance costs are amortized over the life of the senior notes using the effective interest method. Unamortized issuance costs associated with the Successor senior notes as of December 31, 2021 totaled $9 million.
Costs associated with the issuance and amendments of our pre-petition revolving credit facility were included in other long-term assets and the remaining unamortized issuance costs were being amortized over the life of the facility using the straight-line method. Costs associated with the issuance of our Predecessor senior notes were included in long-term debt and the remaining unamortized issuance costs were being amortized over the life of the Predecessor senior notes using the effective interest method. In 2020, our Chapter 11 Cases constituted an event of default under our pre-petition revolving credit facility and our senior notes, and non-cash adjustments were made to write off all related unamortized debt issuance costs which are included in reorganization items, net in the accompanying consolidated statements of operations for the year ended December 31, 2020. See Note 2 and Note 6 herein for further discussion of our Chapter 11 Cases and debt issuance costs, respectively.
Litigation Contingencies
We are subject to litigation and regulatory proceedings, claims and liabilities that arise in the ordinary course of business. We accrue losses associated with litigation and regulatory claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss but can estimate a range of loss, our best estimate within the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or third-party recoveries. Legal defense costs associated with loss contingencies are expensed in the period incurred. See Note 7 for further discussion of litigation contingencies.
Environmental Remediation Costs
We record environmental reserves for estimated remediation costs related to existing conditions from past operations when the responsibility to remediate is probable and the costs can be reasonably estimated. Expenditures that create future benefits or contribute to future revenue generation are capitalized. See Note 7 for discussion of environmental contingencies.
Asset Retirement Obligations
We recognize liabilities for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets. We recognize the fair value of a liability for a retirement obligation in the period in which the liability is incurred. For oil and natural gas properties, this is the period in which an oil or natural gas well is acquired or drilled. The liability is then accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. See Note 23 for further discussion of asset retirement obligations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition
Revenue from the sale of oil, natural gas and NGL is recognized upon the transfer of control of the products, which is typically when the products are delivered to customers. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to receive in exchange for those products.
Revenue from contracts with customers includes the sale of our oil, natural gas and NGL production (recorded as oil, natural gas and NGL revenues in the consolidated statements of operations) as well as the sale of certain of our joint interest holders’ production which we purchase under joint operating arrangements (recorded in marketing revenues in the consolidated statements of operations). In connection with the marketing of these products, we obtain control of the oil, natural gas and NGL we purchase from other interest owners at defined delivery points and deliver the product to third parties, at which time revenues are recorded.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no significant judgments that significantly affect the amount or timing of revenue from contracts with customers.
We also generate revenue from other sources, including from a variety of derivative and hedging activities to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility, as well as a variety of oil, natural gas and NGL purchase and sale contracts with third parties for various commercial purposes, including credit risk mitigation and satisfaction of our pipeline delivery commitments (recorded within marketing revenues in the consolidated statements of operations).
In circumstances where we act as an agent rather than a principal, our results of operations related to oil, natural gas and NGL marketing activities are presented on a net basis. See Note 10 for further discussion of revenue recognition.
Fair Value Measurements
Certain financial instruments are reported on a recurring basis at fair value on our consolidated balance sheets. We also use fair value measurements on a nonrecurring basis when a qualitative assessment of our assets indicates a potential impairment. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants (i.e., an exit price). To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The carrying values of financial instruments comprising cash and cash equivalents, accounts payable and accounts receivable approximate fair values due to the short-term maturities of these instruments. See Notes 6 and 15 for further discussion of fair value measurements.
Derivatives
Derivative instruments are recorded at fair value, and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are followed. As of December 31, 2021, none of our open derivative instruments were designated as cash flow hedges.
Derivative instruments reflected as current in the consolidated balance sheets represent the estimated fair value of derivatives scheduled to settle over the next twelve months based on market prices/rates as of the respective balance sheet dates. Cash settlements of our derivative instruments are generally classified as operating
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
cash flows unless the derivatives are deemed to contain, for accounting purposes, a significant financing element at contract inception, in which case these cash settlements are classified as financing cash flows in the accompanying consolidated statement of cash flows. All of our derivative instruments are subject to master netting arrangements by contract type which provide for the offsetting of asset and liability positions within each contract type, as well as related cash collateral if applicable, by counterparty. Therefore, we net the value of our derivative instruments by contract type with the same counterparty in the accompanying consolidated balance sheets.
We have established the fair value of our derivative instruments using established index prices, volatility curves and discount factors. These estimates are compared to our counterparty values for reasonableness. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. Derivative transactions are subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. See Note 15 for further discussion of our derivative instruments.
Share-Based Compensation
Our share-based compensation program consists of restricted stock, performance share units and cash restricted stock units granted to employees and restricted stock granted to non-employee directors under our Long Term Incentive Plan. We recognize the cost of services received in exchange for restricted stock based on the fair value of the equity instruments as of the grant date. This value is amortized over the vesting period, which is generally three years from the grant date. Because performance share units are settled in shares, they are classified as equity and are measured at fair value as of the grant date.
To the extent compensation expense relates to employees directly involved in the acquisition of oil and natural gas leasehold and development activities, these amounts are capitalized to oil and natural gas properties. Amounts not capitalized to oil and natural gas properties are recognized as general and administrative expense, production expense, exploration expense, or marketing expense, based on the employees involved in those activities. See Note 13 for further discussion of share-based compensation.
Liability Management
Liability management expense includes third party legal and professional service fees incurred for our activities to restructure our debt and in preparation for our bankruptcy petition. As a result of our Chapter 11 Cases, such expenses, to the extent that they were incremental and directly related to our bankruptcy reorganization, are reflected in reorganization items, net in our consolidated statements of operations.
| 2. | Chapter 11 Proceedings |
On June 28, 2020 (the “Petition Date”), the Debtors filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. The Non-Filing Entities were not part of the Chapter 11 Cases. The Debtors and the Non-Filing Entities continued to operate in the ordinary course of business during the Chapter 11 Cases.
The Bankruptcy Court confirmed the Plan in a bench ruling on January 13, 2021 and entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on February 9, 2021 (the “Effective Date”). The Company’s bankruptcy proceedings and related matters have been summarized below.
Debtor-In-Possession
During the pendency of the Chapter 11 Cases, we operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief we requested that was designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, vendors, suppliers, customers and employees. As a result, we were able to conduct normal business activities and pay all associated obligations for the period following the Petition Date and were also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against us and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Effective Date.
Plan of Reorganization
In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company’s emergence from bankruptcy on February 9, 2021:
-
On the Effective Date, we issued 97,907,081 shares of the reorganized company (“New Common Stock”), reserved 2,092,918 shares of New Common Stock for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims and reserved 37,174,210 shares of New Common Stock for issuance upon exercise of the Warrants, which were the result of the transactions described below. We also entered into a registration rights agreement, a warrants agreement and amended our articles of incorporation and bylaws for the authorization of the New Common Stock and to provide registration rights thereunder, among other corporate governance actions. See Note 12 for further discussion of our post-emergence equity.
-
Each holder of a Predecessor equity interest in Chesapeake, including our common and preferred stock, had such interest canceled, released, and extinguished without any distribution.
-
Each holder of obligations under the pre-petition revolving credit facility received, at such holder's prior determined allocation, its pro rata share of either Tranche A Loans or Tranche B Loans, on a dollar for dollar basis.
-
Each holder of obligations under the FLLO Term Loan Facility received its pro rata share of 23,022,420 shares of New Common Stock.
-
Each holder of an Allowed Second Lien Notes Claim received its pro rata share of 3,635,118 shares of New Common Stock, 11,111,111 Class A Warrants to purchase 11,111,111 shares of New Common Stock, 12,345,679 Class B Warrants to purchase 12,345,679 shares of New Common Stock, and 6,858,710 Class C Warrants to purchase 6,858,710 shares of New Common Stock.
-
Each holder of an Allowed Unsecured Notes Claim received its pro rata share of 1,311,089 shares of New Common Stock and 2,473,757 Class C Warrants to purchase 2,473,757 shares of New Common Stock.
-
Each holder of an Allowed General Unsecured Claim received its pro rata share of 231,112 shares of New Common Stock and 436,060 Class C Warrants to purchase 436,060 shares of New Common Stock; provided that to the extent such Allowed General Unsecured Claim is a Convenience Claim, such holder instead received its pro rata share of $10 million, which pro rata share shall not exceed five percent of such Convenience Claim.
-
Participants in the Rights Offering extending to the applicable classes under the Plan received 62,927,320 shares of New Common Stock.
-
In connection with the rights offering described above, the Backstop Parties under the Backstop Commitment Agreement received 6,337,031 shares of New Common Stock in respect to the Put Option Premium, and 442,991 shares of New Common Stock were issued in connection with the backstop obligation thereunder to purchase unsubscribed shares of the New Common Stock.
-
2,092,918 shares of New Common Stock and 3,948,893 Class C Warrants were reserved for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims. The reserved New Common Stock and Class C Warrants will be issued on a pro rata basis upon the
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
determination of the allowed portion of all disputed General Unsecured Claims and Unsecured Notes Claims.
-
The 2021 Long Term Incentive Plan (the “LTIP”) was approved with a share reserve equal to 6,800,000 shares of New Common Stock.
-
Each holder of an Allowed Other Secured Claim will receive, at the Company's option and in consultation with the Required Consenting Stakeholders (as defined in the Plan): (a) payment in full in cash; (b) the collateral securing its secured claim; (c) reinstatement of its secured claim; or (d) such other treatment that renders its secured claim unimpaired in accordance with Section 1124 of the Bankruptcy Code.
-
Each holder of an Allowed Other Priority Claim (as defined in the Plan) will receive cash up to the allowed amount of its claim.
Additionally, pursuant to the Plan confirmed by the Bankruptcy Court, the Company’s post-emergence Board of Directors is comprised of seven directors, including the Company’s Chief Executive Officer, Domenic J. Dell’Osso Jr., the Company’s Executive Chairman, Michael Wichterich, and five non-employee directors, Timothy S. Duncan, Benjamin C. Duster, IV, Sarah Emerson, Matthew M. Gallagher and Brian Steck.
DIP and Exit Credit Facilities
On June 28, 2020, prior to the commencement of the Chapter 11 Cases, the Company entered into a commitment letter (the “Commitment Letter”) with certain of the lenders under the pre-petition revolving credit facility and/or their affiliates (collectively, the “Commitment Parties”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties agreed to provide the Debtors with a post-petition senior secured super-priority debtor-in-possession revolving credit facility in an aggregate principal amount of up to approximately $2.104 billion (the “DIP Credit Facility”), consisting of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which includes a sub-facility of up to $200 million for the issuance of letters of credit, and an up to approximately $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility. Pursuant to the Commitment Letter, the Commitment parties have also committed to provide, subject to certain conditions, an up to $2.5 billion exit credit facility, consisting of an up to $1.75 billion revolving credit facility (the “Exit Revolving Facility”) and an up to $750 million senior secured term loan facility (the “Exit Term Loan Facility” and, together with the Exit Revolving Facility, the “Exit Credit Facilities”). The terms and conditions of the DIP Credit Facility are set forth in the Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) attached to the Commitment Letter. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations, and other such purposes consistent with the DIP Credit Facility. On the Effective Date, the DIP Credit Facility was terminated and the holders of obligations under the DIP Credit Facility received payment in full in cash; provided that to the extent such lender under the DIP Credit Facility is also a lender under the Exit Revolver, such lender’s allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 3. | Fresh Start Accounting |
Fresh Start Accounting
In connection with our emergence from bankruptcy and in accordance with ASC 852, we qualified for and applied fresh start accounting on the Effective Date. We were required to apply fresh start accounting because (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan of approximately $6.8 billion was less than the post-petition liabilities and allowed claims of $13.2 billion.
In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations. Accordingly, the consolidated financial statements after February 9, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Effective Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor.
Reorganization Value
Reorganization value is derived from an estimate of enterprise value, or fair value of the Company’s interest-bearing debt and stockholders’ equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $3.5 billion and $4.9 billion. With the assistance of third-party valuation advisors, we determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. For GAAP purposes, the Company valued the Successor’s individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $4.85 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of February 9, 2021. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
The following table reconciles the enterprise value to the implied fair value of the Successor’s equity as of the Effective Date:
| February 9, 2021 | ||||||||
| Enterprise value | $ | 4,851 | ||||||
| Plus: Cash and cash equivalents(a) | 48 | |||||||
| Less: Fair value of debt | (1,313) | |||||||
| Successor equity value | $ | 3,586 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
The following table reconciles the enterprise value to the reorganization value as of the Effective Date:
| February 9, 2021 | ||||||||
| Enterprise value | $ | 4,851 | ||||||
| Plus: Cash and cash equivalents(a) | 48 | |||||||
| Plus: Current liabilities | 1,582 | |||||||
| Plus: Asset retirement obligations (non-current portion) | 236 | |||||||
| Plus: Other non-current liabilities | 97 | |||||||
| Reorganization value of Successor assets | $ | 6,814 |
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
Valuation Process
The fair values of our oil and natural gas properties, other property and equipment, other long-term assets, long-term debt, asset retirement obligations and warrants were estimated as of the Effective Date.
Oil and natural gas properties. The Company’s principal assets are its oil and natural gas properties, which are accounted for under the successful efforts accounting method. The Company determined the fair value of its oil and natural gas properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area.
Other property and equipment. The fair value of other property and equipment such as buildings, land, computer equipment, and other equipment was determined using replacement cost method under the cost approach which considers historical acquisition costs for the assets adjusted for inflation, as well as factors in any potential obsolescence based on the current condition of the assets and the ability of those assets to generate cash flow.
Long-term debt. A market approach, based upon quotes from major financial institutions, was used to measure the fair value of the $500 million aggregate principal amount of 5.50% Senior Notes due 2026 (the “2026 Notes”) and $500 million aggregate principal amount of 5.875% Senior Notes due 2029 (the “2029 Notes” and, together with the 2026 Notes, the “Notes”). The carrying value of borrowings under our Exit Credit Facility approximated fair value as the terms and interest rates are based on prevailing market rates.
Asset retirement obligations. The fair value of the Company’s asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, an appropriate long-term inflation adjustment, and our revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of our credit standing.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Warrants. The fair values of the Warrants issued upon the Effective Date were estimated using a Black-Scholes model, a commonly used option-pricing model. The Black-Scholes model was used to estimate the fair value of the warrants with an implied stock price of $20.52; initial exercise price per share of $27.63, $32.13 and $36.18 for Class A, Class B and Class C Warrants, respectively; expected volatility of 58% estimated using volatilities of similar entities; risk-free rate using a 5-year Treasury bond rate; and an expected annual dividend yield which was estimated to be zero.
Condensed Consolidated Balance Sheet
The following consolidated balance sheet is as of February 9, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Effective Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets, liabilities and warrants.
| Predecessor | Reorganization Adjustments | Fresh Start Adjustments | Successor | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 243 | $ | (203) | (a) | $ | — | $ | 40 | ||||||||||||||
| Restricted cash | — | 86 | (b) | — | 86 | ||||||||||||||||||
| Accounts receivable, net | 861 | (18) | (c) | — | 843 | ||||||||||||||||||
| Short-term derivative assets | — | — | — | — | |||||||||||||||||||
| Other current assets | 66 | (5) | (d) | — | 61 | ||||||||||||||||||
| Total current assets | 1,170 | (140) | — | 1,030 | |||||||||||||||||||
| Property and equipment: | |||||||||||||||||||||||
| Oil and natural gas properties, successful efforts method | |||||||||||||||||||||||
| Proved oil and natural gas properties | 25,794 | — | (21,108) | (o) | 4,686 | ||||||||||||||||||
| Unproved properties | 1,546 | — | (1,063) | (o) | 483 | ||||||||||||||||||
| Other property and equipment | 1,755 | — | (1,256) | (o) | 499 | ||||||||||||||||||
| Total property and equipment | 29,095 | — | (23,427) | (o) | 5,668 | ||||||||||||||||||
| Less: Accumulated depreciation, depletion and amortization | (23,877) | — | 23,877 | (o) | — | ||||||||||||||||||
| Property and equipment held for sale, net | 9 | — | (7) | (o) | 2 | ||||||||||||||||||
| Total property and equipment, net | 5,227 | — | 443 | (o) | 5,670 | ||||||||||||||||||
| Other long-term assets | 198 | — | (84) | (p) | 114 | ||||||||||||||||||
| Total assets | $ | 6,595 | $ | (140) | $ | 359 | $ | 6,814 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Predecessor | Reorganization Adjustments | Fresh Start Adjustments | Successor | ||||||||||||||||||||
| Liabilities and stockholders’ equity (deficit) | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Accounts payable | $ | 391 | $ | 24 | (e) | $ | — | $ | 415 | ||||||||||||||
| Current maturities of long-term debt, net | 1,929 | (1,929) | (f) | — | — | ||||||||||||||||||
| Accrued interest | 4 | (4) | (g) | — | — | ||||||||||||||||||
| Short-term derivative liabilities | 398 | — | — | 398 | |||||||||||||||||||
| Other current liabilities | 645 | 124 | (h) | — | 769 | ||||||||||||||||||
| Total current liabilities | 3,367 | (1,785) | — | 1,582 | |||||||||||||||||||
| Long-term debt, net | — | 1,261 | (i) | 52 | (q) | 1,313 | |||||||||||||||||
| Long-term derivative liabilities | 90 | — | — | 90 | |||||||||||||||||||
| Asset retirement obligations, net of current portion | 139 | — | 97 | (r) | 236 | ||||||||||||||||||
| Other long-term liabilities | 5 | 2 | (j) | — | 7 | ||||||||||||||||||
| Liabilities subject to compromise | 9,574 | (9,574) | (k) | — | — | ||||||||||||||||||
| Total liabilities | 13,175 | (10,096) | 149 | 3,228 | |||||||||||||||||||
| Contingencies and commitments (Note 7) | |||||||||||||||||||||||
| Stockholders’ equity (deficit): | |||||||||||||||||||||||
| Predecessor preferred stock | 1,631 | (1,631) | (l) | — | — | ||||||||||||||||||
| Predecessor common stock | — | — | — | — | |||||||||||||||||||
| Predecessor additional paid-in capital | 16,940 | (16,940) | (l) | — | — | ||||||||||||||||||
| Successor common stock | — | 1 | (m) | — | 1 | ||||||||||||||||||
| Successor additional paid-in-capital | — | 3,585 | (m) | — | 3,585 | ||||||||||||||||||
| Accumulated other comprehensive income | 48 | — | (48) | (s) | — | ||||||||||||||||||
| Accumulated deficit | (25,199) | 24,941 | (n) | 258 | (t) | — | |||||||||||||||||
| Total stockholders’ equity (deficit) | (6,580) | 9,956 | 210 | 3,586 | |||||||||||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 6,595 | $ | (140) | $ | 359 | $ | 6,814 |
Reorganization Adjustments
(a)The table below reflects the sources and uses of cash on the Effective Date from implementation of the Plan:
| Sources: | |||||
| Proceeds from issuance of the Notes | $ | 1,000 | |||
| Proceeds from Rights Offering | 600 | ||||
| Proceeds from refunds of interest deposit for the Notes | 5 | ||||
| Total sources of cash | $ | 1,605 | |||
| Uses: | |||||
| Payment of roll-up of DIP Facility balance | $ | (1,179) | |||
| Payment of Exit Credit Facility - Tranche A Loan | (479) | ||||
| Transfers to restricted cash for professional fee reserve | (76) | ||||
| Transfers to restricted cash for convenience claim distribution reserve | (10) | ||||
| Payment of professional fees | (31) | ||||
| Payment of DIP Facility interest and fees | (12) | ||||
| Payment of FLLO alternative transaction fee | (12) | ||||
| Payment of the Notes fees funded out of escrow | (8) | ||||
| Payment of RBL interest and fees | (1) | ||||
| Total uses of cash | $ | (1,808) | |||
| Net cash used | $ | (203) |
(b)Represents the transfer of funds to a restricted cash account for purposes of funding the professional fee reserve and the convenience claim distribution reserve.
(c)Reflects the removal of an insurance receivable associated with a discharged legal liability.
(d)Reflects the collection of an interest deposit for the senior unsecured notes.
(e)Changes in accounts payable include the following:
| Accrual of professional service provider success fees | $ | 38 | |||
| Accrual of convenience claim distribution reserve | 10 | ||||
| Accrual of professional service provider fees | 5 | ||||
| Reinstatement of accounts payable from liabilities subject to compromise | 2 | ||||
| Payment of professional fees | (31) | ||||
| Net impact to accounts payable | $ | 24 |
(f)Reflects payment of the pre-petition credit facility for $1.179 billion and transfer of the Tranche A and Tranche B Loans to long-term debt for $750 million.
(g)Reflect payments of accrued interest and fees on the DIP Facility.
(h)Changes in other current liabilities include the following:
| Reinstatement of other current liabilities from liabilities subject to compromise | $ | 191 | |||
| Accrual of the Notes fees | 2 | ||||
| Settlement of Put Option Premium through issuance of Successor Common Stock | (60) | ||||
| Payment of DIP Facility fees | (9) | ||||
| Net impact to other current liabilities | $ | 124 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(i)Changes in long-term debt include the following:
| Issuance of the Notes | $ | 1,000 | |||
| Issuance of Tranche A and Tranche B Loans | 750 | ||||
| Payments on Tranche A Loans | (479) | ||||
| Debt issuance costs for the Notes | (10) | ||||
| Net impact to long-term debt, net | $ | 1,261 |
(j) Reflects reinstatement of a long-term lease liability.
(k) On the Effective Date, liabilities subject to compromise were settled in accordance with the Plan as follows:
| Liabilities subject to compromise pre-emergence | $ | 9,574 | |||
| To be reinstated on the Effective Date: | |||||
| Accounts payable | $ | (2) | |||
| Other current liabilities | (191) | ||||
| Other long-term liabilities | (2) | ||||
| Total liabilities reinstated | $ | (195) | |||
| Consideration provided to settle amounts per the Plan or Reorganization: | |||||
| Issuance of Successor common stock associated with the Rights Offering and Backstop Commitment and settlement of the Put Option Premium | $ | (2,311) | |||
| Proceeds from issuance of Successor common stock associated with the Rights Offering and Backstop Commitment | 600 | ||||
| Issuance of Successor common stock to FLLO Term Loan holders, incremental to the Rights Offering and Backstop Commitment | (783) | ||||
| Issuance of Successor common stock to second lien note holders, incremental to the Rights Offering and Backstop Commitment | (124) | ||||
| Issuance of Successor common stock to unsecured note holders | (45) | ||||
| Issuance of Successor common stock to general unsecured claims | (8) | ||||
| Fair value of Class A Warrants | (93) | ||||
| Fair value of Class B Warrants | (94) | ||||
| Fair value of Class C Warrants | (68) | ||||
| Proceeds to holders of general unsecured claims | (10) | ||||
| Total consideration provided to settle amounts per the Plan | $ | (2,936) | |||
| Gain on settlement of liabilities subject to compromise | $ | 6,443 |
(l)Pursuant to the Plan, as of the Effective Date, all equity interests in Predecessor, including Predecessor’s common and preferred stock, were canceled without any distribution.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(m)Reflects the Successor equity including the issuance of 97,907,081 shares of New Common Stock, 11,111,111 shares of Class A Warrants, 12,345,679 shares of Class B Warrants and 9,768,527 shares of Class C Warrants pursuant to the Plan.
| Issuance of Successor equity associated with the Rights Offering and Backstop Commitment | $ | 2,371 | |||
| Issuance of Successor equity to holders of the FLLO Term Loan, incremental to the Rights Offering and Backstop Commitment | 783 | ||||
| Issuance of Successor equity to holders of the Second Lien Notes, incremental to the Rights Offering and Backstop Commitment | 124 | ||||
| Issuance of Successor equity to holders of the unsecured senior notes | 45 | ||||
| Issuance of Successor equity to holders of allowed general unsecured claims | 8 | ||||
| Fair value of Class A warrants | 93 | ||||
| Fair value of Class B warrants | 94 | ||||
| Fair value of Class C warrants | 68 | ||||
| Total change in Successor common stock and additional paid-in capital | 3,586 | ||||
| Less: Par value of Successor common stock | (1) | ||||
| Change in Successor additional paid-in capital | $ | 3,585 |
(n) Reflects the cumulative net impact of the effects on accumulated deficit as follows:
| Gain on settlement of liabilities subject to compromise | $ | 6,443 | |||
| Accrual of professional service provider success fees | (38) | ||||
| Accrual of professional service provider fees | (5) | ||||
| Surrender of other receivable | (18) | ||||
| Payment of FLLO alternative transaction fee | (12) | ||||
| Total reorganization items, net | 6,370 | ||||
| Cancellation of predecessor equity | 18,571 | ||||
| Net impact on accumulated deficit | $ | 24,941 |
Fresh Start Adjustments
(o)Reflects fair value adjustments to our (i) proved oil and natural gas properties, (ii) unproved properties, (iii) other property and equipment and (iv) property and equipment held for sale, and the elimination of accumulated depletion, depreciation and amortization.
(p)Reflects the fair value adjustment to record historical contracts at their fair values.
(q)Reflects the fair value adjustments to the 2026 Notes and 2029 Notes for $22 million and $30 million, respectively.
(r)Reflects the adjustment to our asset retirement obligations using assumptions as of the Effective Date, including an inflation factor of 2% and an average credit-adjusted risk-free rate of 5.18%.
(s)Reflects the fair value adjustment to eliminate the accumulated other comprehensive income of $9 million related to hedging settlements offset by the elimination of $57 million of income tax effects which has resulted in the recording of an income tax benefit of $57 million. See Note 11 for a discussion of income taxes.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(t)Reflects the net cumulative impact of the fresh start adjustments on accumulated deficit as follows:
| Fresh start adjustments to property and equipment | $ | 443 | |||
| Fresh start adjustments to other long-term assets | (84) | ||||
| Fresh start adjustments to long-term debt | (52) | ||||
| Fresh start adjustments to long-term asset retirement obligations | (97) | ||||
| Fresh start adjustments to accumulated other comprehensive income | (9) | ||||
| Total fresh start adjustments impacting reorganizations items, net | 201 | ||||
| Income tax effects on accumulated other comprehensive income | 57 | ||||
| Net impact to accumulated deficit | $ | 258 |
Reorganization Items, Net
We have incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, write-off of unamortized debt issuance costs and related unamortized premiums and discounts, debt and equity financing fees, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, we do not believe any existing unresolved claims will result in a material adjustment to the financial statements. The amount of these items, which were incurred in reorganization items, net within our accompanying consolidated statements of operations, have significantly affected our statements of operations.
The following table summarizes the components in reorganization items, net included in our consolidated statements of operations:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Gains on the settlement of liabilities subject to compromise | $ | — | $ | 6,443 | $ | 12 | $ | — | |||||||||||||||||||||
| Accrual for allowed claims | — | (1,002) | (879) | — | |||||||||||||||||||||||||
| Write off of unamortized debt premiums (discounts) on Predecessor debt | — | — | 518 | — | |||||||||||||||||||||||||
| Write off of unamortized debt issuance costs on Predecessor debt | — | — | (61) | — | |||||||||||||||||||||||||
| Gain on fresh start adjustments | — | 201 | — | — | |||||||||||||||||||||||||
| Gain from release of commitment liabilities | — | 55 | — | — | |||||||||||||||||||||||||
| Debt and equity financing fees | — | — | (145) | — | |||||||||||||||||||||||||
| Loss on divested assets | — | — | (128) | — | |||||||||||||||||||||||||
| Professional service provider fees and other | — | (60) | (113) | — | |||||||||||||||||||||||||
| Success fees for professional service providers | — | (38) | — | — | |||||||||||||||||||||||||
| Surrender of other receivable | — | (18) | — | — | |||||||||||||||||||||||||
| FLLO alternative transaction fee | — | (12) | — | — | |||||||||||||||||||||||||
| Total reorganization items, net | $ | — | $ | 5,569 | $ | (796) | $ | — |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 4. | Oil and Natural Gas Property Transactions |
Vine Acquisition
On November 1, 2021, we acquired Vine Energy, Inc. (“Vine”), an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana pursuant to a definitive agreement with Vine dated August 10, 2021, for total consideration of approximately $1.5 billion, consisting of approximately 18.7 million shares of our common stock and $90 million in cash. In conjunction with the Vine Acquisition, Vine’s Second Lien Term Loan was repaid and terminated for $163 million inclusive of a $13 million make whole premium with cash on hand due to the agreement containing a change in control provision making the term loan callable upon closing. Vine’s reserve based loan facility, which had no borrowings as of November 1, 2021, was terminated at the time of the acquisition. Additionally, Vine’s 6.75% Senior Notes with a principal amount of $950 million were assumed by the Company. See Note 6 for additional discussion of the assumed debt. We funded the cash portion of the consideration with cash on hand.
Preliminary Vine Purchase Price Allocation
We have accounted for the acquisition of Vine as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of Vine to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-acquisition contingencies, final tax returns that provide the underlying tax basis of Vine’s assets and liabilities and final appraisals of assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Preliminary Purchase Price Allocation | |||||
| Consideration: | |||||
| Cash | $ | 253 | |||
| Fair value of Chesapeake’s common stock issued in the merger | 1,231 | ||||
| Restricted stock unit replacement awards | 6 | ||||
| Total consideration | $ | 1,490 | |||
| Fair Value of Liabilities Assumed: | |||||
| Current liabilities | $ | 765 | |||
| Long-term debt | 1,021 | ||||
| Deferred tax liabilities | 49 | ||||
| Other long-term liabilities | 272 | ||||
| Amounts attributable to liabilities assumed | $ | 2,107 | |||
| Fair Value of Assets Acquired: | |||||
| Cash and cash equivalents | $ | 59 | |||
| Other current assets | 206 | ||||
| Proved oil and natural gas properties | 2,181 | ||||
| Unproved properties | 1,118 | ||||
| Other property and equipment | 1 | ||||
| Other long-term assets | 32 | ||||
| Amounts attributable to assets acquired | $ | 3,597 | |||
| Total identifiable net assets | $ | 1,490 |
Oil and Natural Gas Properties
For the Vine Acquisition, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved oil and natural gas properties as of the acquisition date was based on estimated oil and natural gas reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. We utilized NYMEX strip pricing adjusted for inflation to value the reserves. We then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. Additionally, the fair value estimate of proved and unproved oil and natural gas properties was corroborated by utilizing the market approach, which considers recent comparable transactions for similar assets.
The inputs used to value oil and natural gas properties require significant judgment and estimates made by management and represent Level 3 inputs.
Financial Instruments and Other
The fair value measurements of long-term debt were estimated based on a market approach using estimates provided by an independent investment data services firm and represent Level 2 inputs.
Restricted Stock Unit Replacement Awards
Included in consideration for the Vine Acquisition is approximately $6 million related to pre-combination service recognized on Vine’s restricted stock unit awards. For restricted stock units that were accelerated or transitioned at
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the time of the merger, we recognized expense for the portion of the award that was accelerated and included in consideration the portion of the award related to pre-combination service.
Vine Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations oil, natural gas and NGL revenues of $290 million, net gains on oil and natural gas derivatives of $144 million, direct operating expenses of $177 million, including depreciation, depletion and amortization, and other expense of $12 million related to the Vine business for the period from November 1, 2021 to December 31, 2021.
Vine Pro Forma Financial Information
The following unaudited pro forma financial information for the 2021 Successor Period is based on our historical consolidated financial statements adjusted to reflect as if the Vine Acquisition had occurred on February 10, 2021. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in Vine’s statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments.
| Successor | ||||||||
| Period from February 10, 2021 through December 31, 2021 | ||||||||
| Revenues | $ | 5,448 | ||||||
| Net income available to common stockholders | $ | 128 | ||||||
| Earnings per common share: | ||||||||
| Basic | $ | 1.09 | ||||||
| Diluted | $ | 0.97 |
Mid-Continent Divestiture
On October 13, 2020, we filed a notice with the Bankruptcy Court that we reached an agreement with Tapstone Energy in a Section 363 transaction under the Bankruptcy Code. An auction supervised by the Bankruptcy Court was held on November 10, 2020 in which other pre-qualified buyers submitted bids for the asset. We presented the results of the auction process to the Bankruptcy Court and the sale was approved on November 13, 2020. On December 11, 2020, we closed the transaction with Tapstone Energy for $130 million, subject to post-closing adjustments which resulted in the recognition of a gain of approximately $27 million.
Haynesville Exchange
On November 22, 2020, we filed notice with the Bankruptcy Court that we had reached an agreement with Williams Companies to transfer certain Haynesville assets, including interests in 144 producing wells and approximately 50,000 net acres, in exchange for improved midstream contract terms with respect to assets we retained. On December 15, 2020, the Court approved the transaction with Williams Companies and the exchange resulted in the recognition of loss of approximately $128 million based on the difference between the carrying value of the assets and the fair value of the assets surrendered. The exchange was executed to obtain sufficient savings on midstream obligations as required by the Plan. Therefore, the loss was recorded to reorganization items, net in our consolidated statements of operations.
WildHorse Acquisition
On February 1, 2019, we acquired WildHorse Resource Development Corporation (“WildHorse”), an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, for approximately 3.6 million shares of our reverse stock split adjusted Predecessor common stock and $381 million in cash. We funded the cash portion of the consideration through borrowings under the pre-petition revolving credit facility. In connection with the closing, we acquired all of WildHorse’s debt.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
WildHorse Purchase Price Allocation
We have accounted for the acquisition of WildHorse and its corresponding merger with and into our wholly owned subsidiary, Brazos Valley Longhorn, L.L.C. (“Brazos Valley Longhorn” or “BVL”), as a business combination, using the acquisition method. The following table represents the final allocation of the total purchase price of WildHorse to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date.
| Purchase Price Allocation | |||||
| Consideration: | |||||
| Cash | $ | 381 | |||
| Fair value of Chesapeake’s common stock issued in the merger | 2,037 | ||||
| Total consideration | $ | 2,418 | |||
| Fair Value of Liabilities Assumed: | |||||
| Current liabilities | $ | 166 | |||
| Long-term debt | 1,379 | ||||
| Deferred tax liabilities | 314 | ||||
| Other long-term liabilities | 36 | ||||
| Amounts attributable to liabilities assumed | $ | 1,895 | |||
| Fair Value of Assets Acquired: | |||||
| Cash and cash equivalents | $ | 28 | |||
| Other current assets | 128 | ||||
| Proved oil and natural gas properties | 3,264 | ||||
| Unproved properties | 756 | ||||
| Other property and equipment | 77 | ||||
| Other long-term assets | 60 | ||||
| Amounts attributable to assets acquired | $ | 4,313 | |||
| Total identifiable net assets | $ | 2,418 |
Oil and Natural Gas Properties
For the acquisition of WildHorse, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved oil and natural gas properties as of the acquisition date was based on estimated oil and natural gas reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. Management utilized the assistance of a third-party valuation expert to estimate the value of the oil and natural gas properties acquired. Additionally, the fair value estimate of proved and unproved oil and natural gas properties was corroborated by utilizing the market approach which considers recent comparable transactions for similar assets.
The inputs used to value oil and natural gas properties require significant judgment and estimates made by management and represent Level 3 inputs.
Financial Instruments and Other
The fair value measurements of long-term debt were estimated based on a market approach using estimates provided by an independent investment data services firm and represent Level 2 inputs.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
WildHorse Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations revenues of $752 million, direct operating expenses of $810 million, including depreciation, depletion and amortization, and other expense of $83 million related to the WildHorse business for the period from February 1, 2019 to December 31, 2019.
WildHorse Pro Forma Financial Information
The following unaudited pro forma financial information for the years ended December 31, 2019 and 2018, respectively, is based on our historical consolidated financial statements adjusted to reflect as if the WildHorse acquisition had occurred on January 1, 2018. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including adjustments to conform the classification of expenses in WildHorse’s statements of operations to our classification for similar expenses and the estimated tax impact of pro forma adjustments.
| Predecessor | ||||||||||||||
| Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| Revenues | $ | 8,587 | $ | 11,211 | ||||||||||
| Net income (loss) available to common stockholders | $ | (431) | $ | 195 | ||||||||||
| Earnings (loss) per common share: | ||||||||||||||
| Basic | $ | (51.77) | $ | 42.89 | ||||||||||
| Diluted | $ | (51.77) | $ | 42.89 |
This unaudited pro forma information has been derived from historical information. The unaudited pro forma financial information is not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor is it necessarily indicative of future results.
2019 Transactions
In 2019, we received proceeds of approximately $130 million, net of post-closing adjustments, and recognized a gain of approximately $46 million, primarily for the sale of non-core oil and natural gas properties.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 5. | Earnings Per Share |
Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is calculated in the same manner, but includes the impact of potentially dilutive securities. Potentially dilutive securities during the Successor Period consist of issuable shares related to warrants, unvested restricted stock units, and unvested performance share units and during the Predecessor Period have historically consisted of unvested restricted stock, contingently issuable shares related to preferred stock and convertible senior notes unless their effect was antidilutive.
The reconciliations between basic and diluted earnings (loss) per share are as follows:
| Successor | Predecessor | |||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||
| Numerator | ||||||||||||||||||||||||||
| Net income (loss), basic and diluted | $ | 945 | $ | 5,383 | $ | (9,756) | $ | (416) | ||||||||||||||||||
| Denominator (in thousands) | ||||||||||||||||||||||||||
| Weighted average common shares outstanding, basic | 101,754 | 9,781 | 9,773 | 8,325 | ||||||||||||||||||||||
| Effect of potentially dilutive securities | ||||||||||||||||||||||||||
| Preferred stock | — | 290 | — | — | ||||||||||||||||||||||
| Warrants | 14,376 | — | — | — | ||||||||||||||||||||||
| Restricted stock | 200 | — | — | — | ||||||||||||||||||||||
| Performance share units | 11 | — | — | — | ||||||||||||||||||||||
| Weighted average common shares outstanding, diluted | 116,341 | 10,071 | 9,773 | 8,325 | ||||||||||||||||||||||
| Earnings (loss) per common share | ||||||||||||||||||||||||||
| Earnings (loss) per common share, basic | $ | 9.29 | $ | 550.35 | $ | (998.26) | $ | (49.97) | ||||||||||||||||||
| Earnings (loss) per common share, diluted | $ | 8.12 | $ | 534.51 | $ | (998.26) | $ | (49.97) |
Successor
During the 2021 Successor Period, the diluted earnings (loss) per share calculation excludes the effect of 1,228,828 reserved shares of common stock and 2,318,446 reserved Class C Warrants related to the settlement of General Unsecured Claims associated with the Chapter 11 Cases as all necessary conditions had not been met to be considered dilutive shares for the 2021 Successor Period.
Predecessor
The diluted earnings (loss) per share calculation for the 2020 Predecessor Period excludes the antidilutive effect of 290,716 shares of common stock equivalent of our preferred stock.
The diluted earnings (loss) per share calculation for the 2019 Predecessor Period excludes the antidilutive effect of 295,731 shares of common stock equivalent of our preferred stock and 2,210 shares of restricted stock.
We had the option to settle conversions of the 5.50% convertible senior notes due 2026 with cash, shares or common stock or any combination thereof. As the price of our common stock was below the conversion threshold level for any time during the conversion period, there was no impact to diluted earnings (loss) per share.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 6. | Debt |
Our long-term debt consisted of the following as of December 31, 2021 and 2020:
| Successor | Predecessor | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Carrying Amount | Fair Value**(a)** | Carrying Amount | Fair Value**(a)** | |||||||||||||||||||||||
| Exit Credit Facility - Tranche A Loans | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Exit Credit Facility - Tranche B Loans | 221 | 221 | — | — | ||||||||||||||||||||||
| 5.50% senior notes due 2026 | 500 | 526 | — | — | ||||||||||||||||||||||
| 5.875% senior notes due 2029 | 500 | 535 | — | — | ||||||||||||||||||||||
| 6.75% senior notes due 2029(b) | 950 | 1,031 | — | — | ||||||||||||||||||||||
| DIP Facility | — | — | — | — | ||||||||||||||||||||||
| Pre-petition revolving credit facility | — | — | 1,929 | 1,929 | ||||||||||||||||||||||
| Term loan due 2024 | — | — | 1,500 | 1,220 | ||||||||||||||||||||||
| 11.50% senior secured second lien notes due 2025 | — | — | 2,330 | 373 | ||||||||||||||||||||||
| 6.625% senior notes due 2020 | — | — | 176 | 8 | ||||||||||||||||||||||
| 6.875% senior notes due 2020 | — | — | 73 | 3 | ||||||||||||||||||||||
| 6.125% senior notes due 2021 | — | — | 167 | 7 | ||||||||||||||||||||||
| 5.375% senior notes due 2021 | — | — | 127 | 5 | ||||||||||||||||||||||
| 4.875% senior notes due 2022 | — | — | 272 | 12 | ||||||||||||||||||||||
| 5.75% senior notes due 2023 | — | — | 167 | 8 | ||||||||||||||||||||||
| 7.00% senior notes due 2024 | — | — | 624 | 29 | ||||||||||||||||||||||
| 6.875% senior notes due 2025 | — | — | 2 | 2 | ||||||||||||||||||||||
| 8.00% senior notes due 2025 | — | — | 246 | 10 | ||||||||||||||||||||||
| 5.50% convertible senior notes due 2026 | — | — | 1,064 | 42 | ||||||||||||||||||||||
| 7.50% senior notes due 2026 | — | — | 119 | 5 | ||||||||||||||||||||||
| 8.00% senior notes due 2026 | — | — | 46 | 2 | ||||||||||||||||||||||
| 8.00% senior notes due 2027 | — | — | 253 | 11 | ||||||||||||||||||||||
| Premiums on senior notes | 116 | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (9) | — | — | — | ||||||||||||||||||||||
| Total debt, net | 2,278 | 2,313 | 9,095 | 3,666 | ||||||||||||||||||||||
| Less current maturities of long-term debt, net | — | — | (1,929) | (1,929) | ||||||||||||||||||||||
| Less amounts reclassified to liabilities subject to compromise | — | — | (7,166) | (1,737) | ||||||||||||||||||||||
| Total long-term debt, net | $ | 2,278 | $ | 2,313 | $ | — | $ | — |
(a)The carrying value of borrowings under our Exit Credit Facility approximate fair value as the interest rates are based on prevailing market rates; therefore, they are a Level 1 fair value measurement. For all other debt, a market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value.
(b)On November 1, 2021, we acquired the debt of Vine, which consisted of 6.75% senior notes due 2029. See further discussion below.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Successor Debt
Our post-emergence exit financing consists of the Exit Credit Facility, which includes a reserve-based revolving credit facility and a non-revolving loan facility, and the Notes.
Exit Credit Facility. On the Effective Date, pursuant to the terms of the Plan, the Company, as borrower, entered into a reserve-based credit agreement (the “Credit Agreement”) providing for a reserve-based credit facility with an initial borrowing base of $2.5 billion. The borrowing base will be redetermined semiannually on or around May 1 and November 1 of each year. Our borrowing base was reaffirmed in October 2021, and the next scheduled redetermination will be on or about May 1, 2022. The aggregate initial elected commitments of the lenders under the Exit Credit Facility were $1.75 billion of Tranche A Loans and $221 million of fully funded Tranche B Loans.
The Exit Credit Facility provides for a $200 million sublimit of the aggregate commitments that are available for the issuance of letters of credit. The Exit Credit Facility bears interest at the ABR (alternate base rate) or LIBOR, at our election, plus an applicable margin (ranging from 2.25–3.25% per annum for ABR loans and 3.25–4.25% per annum for LIBOR loans, subject to a 1.00% LIBOR floor), depending on the percentage of the borrowing base then being utilized. The Tranche A Loans mature three years after the Effective Date and the Tranche B Loans mature four years after the Effective Date. The Tranche B Loans can be repaid if no Tranche A Loans are outstanding.
The Credit Agreement contains financial covenants that require the Company and its guarantors, on a consolidated basis, to maintain (i) a first lien leverage ratio of not more than 2.75 to 1:00, (ii) a total leverage ratio of not more than 3.50 to 1:00, (iii) a current ratio of not less than 1.00 to 1:00 and (iv) at any time additional secured debt is outstanding, an asset coverage ratio of not less than 1.50 to 1:00, defined as PV10 of PDP reserves to total secured debt. The Company has no additional secured debt outstanding as of December 31, 2021.
The Credit Agreement also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements, conduct of business, maintenance of property, maintenance of insurance, restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments, and other customary covenants.
The Company is required to pay a commitment fee of 0.50% per annum on the average daily unused portion of the current aggregate commitments under the Tranche A Loans. The Company is also required to pay customary letter of credit and fronting fees.
Outstanding Senior Notes. On February 2, 2021, Chesapeake Escrow Issuer LLC, then an indirect wholly owned subsidiary of the Company, issued $500 million aggregate principal amount of its 2026 Notes and $500 million aggregate principal amount of its 2029 Notes. The Notes included a $52 million premium to reflect fair value adjustments at the date of emergence.
The Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that guarantee the Exit Credit Facility.
The Notes were issued pursuant to an indenture, dated as of February 5, 2021, among the Issuer, the Guarantors and Deutsche Bank Trust Company Americas, as trustee.
Interest on the Notes is payable semi-annually, on February 1 and August 1 of each year, commencing on August 1, 2021, to holders of record on the immediately preceding January 15 and July 15.
The Notes are the Company’s senior unsecured obligations. Accordingly, they rank (i) equal in right of payment to all existing and future senior indebtedness, including borrowings under the Exit Credit Facility, (ii) effectively subordinate in right of payment to all of existing and future secured indebtedness, including indebtedness under the Exit Credit Facility, to the extent of the value of the collateral securing such indebtedness, (iii) structurally subordinate in right of payment to all existing and future indebtedness and other liabilities of any future subsidiaries that do not guarantee the Notes and any entity that is not a subsidiary that does not guarantee the Notes and (iv) senior in right of payment to all future subordinated indebtedness. Each guarantee of the Notes by a guarantor is a general, unsecured, senior obligation of such guarantor. Accordingly, the guarantees (i) rank equally in right of payment with all existing and future senior indebtedness of such guarantor (including such guarantor’s guarantee of indebtedness under the Exit Credit Facility), (ii) are subordinated to all existing and future secured indebtedness of
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
such guarantor, including such guarantor’s guarantee of indebtedness under our Exit Credit Facility, to the extent of the value of the collateral of such guarantor securing such secured indebtedness, (iii) are structurally subordinated to all indebtedness and other liabilities of any future subsidiaries of such guarantor that do not guarantee the notes and (iv) rank senior in right of payment to all future subordinated indebtedness of such guarantor.
Vine Senior Notes
As a result of the completion of the Vine Acquisition, the Company and certain of its subsidiaries entered into a supplemental indenture pursuant to which the Company assumed the obligations under Vine’s $950 million aggregate principal amount of 6.75% senior notes due 2029 (the “Vine Notes”) issued under the indenture dated April 7, 2021 with Wilmington Trust, National Association, as Trustee (the “Vine Indenture”). The Vine Notes included a $71 million premium to reflect fair value adjustments at the date of acquisition.
The Company and certain of its subsidiaries have agreed to guarantee such obligations under the Vine Indenture. Additionally, certain subsidiaries of Vine entered into a supplemental indenture to the Company’s existing indenture, dated February 5, 2021 with Deutsche Bank Trust Company Americas as trustee (the “CHK Indenture”), pursuant to which such subsidiaries of Vine have agreed to guarantee obligations under the CHK Indenture.
Interest on the Vine Notes is payable semi-annually, on April 15 and October 15 of each year to holders of record on the immediately preceding April 1 and October 1. Our first interest payment will be on April 15, 2022.
Phase-Out of LIBOR
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The purpose of ASU 2020-04 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates such as LIBOR, which is no longer being used on new loans as of December 31, 2021, to alternative reference rates. ASU 2020-04 applies only to contracts, hedging relationships, debt arrangements and other transactions that reference a benchmark reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.
Chapter 11 Proceedings - Predecessor Debt
Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our previous secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stayed the creditors from taking any action as a result of the default.
The principal amounts outstanding under the FLLO Term Loan, Second Lien Notes and all of our other unsecured senior and convertible senior notes were reclassified as liabilities subject to compromise on the accompanying consolidated balance sheet as of December 31, 2020.
The agreements for our FLLO Term Loan, Second Lien Notes, and unsecured senior and convertible senior notes contained provisions regarding the calculation of interest upon default. Upon default, the interest rate on the FLLO Term Loan increased from LIBOR plus 8.00% to alternative base rate (ABR) (3.25% during the fourth quarter of the 2020 Predecessor Period) plus Applicable Margin (7.00% during the fourth quarter of the 2020 Predecessor Period) plus 2.00%. For the Second Lien Notes and all of our other unsecured senior and convertible senior notes, the interest rate remained the same upon default. However, interest accrued on the amount of unpaid interest in addition to the principal balance. We did not pay or recognize interest on the FLLO Term Loan, Second Lien Notes, or unsecured senior and convertible senior notes during the Chapter 11 process.
Debtor-in-Possession Credit Agreement
On June 28, 2020, prior to the commencement of Chapter 11 Cases, the Company entered into a commitment letter with certain of the lenders (“New Money Lenders”) under the pre-petition revolving credit facility and/or their affiliates to provide the Debtors with a debtor-in-possession credit agreement in an aggregate principal amount of up to approximately $2.104 billion in commitments and loans from the New Money Lenders. The DIP Facility consisted of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which included a sub-facility of up to $200 million for the issuance of letters of credit, and a $1.179 billion term loan that
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
reflected the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility: (i) a $925 million term loan reflected the roll-up of a portion of outstanding existing borrowings made by the New Money Lenders under the existing revolving credit agreement and (ii) an up to approximately $254 million term loan reflected the roll-up or a portion of outstanding existing borrowings made by certain other lenders under the pre-petition revolving credit facility agreement. The $750 million of outstanding borrowings under the pre-petition revolving credit facility that were not rolled up remained outstanding throughout the Chapter 11 Cases but accrued interest at a lower rate than the rolled-up loans. The proceeds of the DIP Facility were used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations and other such purposes consistent with the DIP Facility. On the Effective Date, the DIP Facility was terminated and the holders of obligations under the DIP Facility received payment in full in cash; provided that to the extent such lender under the DIP Facility was also a lender under the Exit Credit Facility, such lender’s allowed DIP claims were first reduced dollar-for-dollar and satisfied by the amount of its Exit RBL Loans provided as of the Effective Date.
Predecessor Debt Issuances and Retirements 2020
In the 2020 Predecessor Period, we repurchased approximately $160 million aggregate principal amount of the following senior notes for $95 million and recorded an aggregate gain of approximately $65 million.
| Notes Repurchased | ||||||||
| 6.625% senior notes due 2020 | $ | 32 | ||||||
| 6.875% senior notes due 2020 | 20 | |||||||
| 4.875% senior notes due 2022 | 66 | |||||||
| 5.75% senior notes due 2023 | 42 | |||||||
| Total | $ | 160 |
Predecessor Debt 2019
In December 2019, we entered into a secured 4.5-year term loan facility in an aggregate principal amount of $1.5 billion for net proceeds of approximately $1.455 billion. We used the net proceeds to finance tender offers for our unsecured BVL senior notes and to repay amounts outstanding under our BVL revolving credit facility. We recorded an aggregate net gain of approximately $4 million associated with the retirement of our BVL senior notes and the BVL revolving credit facility.
We privately negotiated exchanges of approximately $507 million principal amount of our outstanding senior notes for 235,563,519 shares of common stock and $186 million principal amount of our outstanding convertible senior notes for 73,389,094 shares of common stock. We recorded an aggregate net gain of approximately $64 million associated with the exchanges.
Pre-Petition Revolving Credit Facility
Our pre-petition revolving credit facility was scheduled to mature in September 2023 and the aggregate commitment of the lenders and borrowing base under the facility was $3.0 billion. The pre-petition revolving credit facility provided for an accordion feature, pursuant to which the aggregate commitments thereunder may be increased to up to $4.0 billion from time to time, subject to agreement of the participating lenders and certain other customary conditions. As of December 31, 2020, we had outstanding borrowings of $1.929 billion under our pre-petition revolving credit facility and had used $54 million for various letters of credit.
Borrowings under our pre-petition revolving credit facility bore interest at an alternative base rate (ABR) or LIBOR, at our election, plus an applicable margin ranging from 1.50%-2.50% per annum for ABR loans and 2.50%-3.50% per annum for LIBOR loans, depending on the percentage of the borrowing base then being utilized.
Our pre-petition revolving credit facility was subject to various financial and other covenants. The terms of the pre-petition revolving credit facility included covenants limiting, among other things, our ability to incur additional
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
indebtedness, make investments or loans, incur liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates.
| 7. | Contingencies and Commitments |
Contingencies
Chapter 11 Proceedings
Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. See Note 2 for additional information.
Litigation and Regulatory Proceedings
We were involved in a number of litigation and regulatory proceedings as of the Petition Date. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is indeterminate. Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
We are involved in, and expect to continue to be involved in, various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The majority of the prepetition legal proceedings have been settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
We were recently dismissed as a defendant from numerous lawsuits in Oklahoma alleging that we and other companies engaged in activities that have caused earthquakes. The lawsuits sought compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress. In addition, they sought the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, they are reflected in our estimates of proved reserves.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below:
| Successor | ||||||||
| December 31, 2021 | ||||||||
| 2022 | $ | 564 | ||||||
| 2023 | 500 | |||||||
| 2024 | 459 | |||||||
| 2025 | 356 | |||||||
| 2026 | 318 | |||||||
| 2027 – 2036 | 1,631 | |||||||
| Total | $ | 3,828 |
In addition, we have long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees may vary with the applicable agreement.
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with acquisitions and divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party and/or other specified matters. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of entering into or consummating a particular transaction. For divestitures of oil and natural gas properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title or environmental defects.
While executing our strategic priorities, we have incurred certain cash charges, including contract termination charges, financing extinguishment costs and charges for unused natural gas transportation and gathering capacity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 8. | Other Liabilities |
Other current liabilities as of December 31, 2021 and 2020 are detailed below:
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Revenues and royalties due others | $ | 617 | $ | 236 | |||||||||||||
| Accrued drilling and production costs | 142 | 104 | |||||||||||||||
| Accrued hedging costs | 113 | 7 | |||||||||||||||
| Accrued compensation and benefits | 91 | 59 | |||||||||||||||
| Other accrued taxes | 86 | 82 | |||||||||||||||
| Operating leases | 29 | 24 | |||||||||||||||
| Joint interest prepayments received | 14 | 8 | |||||||||||||||
| Debt and equity financing fees | — | 69 | |||||||||||||||
| Other | 110 | 134 | |||||||||||||||
| Total other current liabilities | $ | 1,202 | $ | 723 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 9. | Leases |
We are a lessee under various agreements for drilling rigs, compressors, vehicles, office space and gas treating plants. As of December 31, 2021, these leases have remaining terms ranging from one month to three years. Certain of our lease agreements include options to renew the lease, terminate the lease early or purchase the underlying asset at the end of the lease. We determine the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when we are reasonably certain to exercise the option. The company’s vehicles are the only leases with renewal options that we are reasonably certain to exercise. The renewals are reflected in the ROU asset and lease liability balances.
Our operating ROU assets are included in other long-term assets while operating lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet. Finance ROU assets are reflected in total property and equipment, net, while finance lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet.
On November 1, 2021, we acquired Vine and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $32 million and a related ROU asset of $32 million related to drilling rig leases, an office space lease and gas treating plant leases.
On February 1, 2019, we acquired WildHorse and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $40 million, a related ROU asset of $38 million, and lease incentives of $2 million related to two office space leases, a long-term hydraulic fracturing agreement and other equipment leases. Regarding our long-term hydraulic fracturing agreements, we made a policy election to treat both lease and non-lease components as a single lease component. All of these acquired leases were approved for rejection during our bankruptcy process and subsequently removed from our balance sheet.
In 2018, we sold our wholly owned subsidiary, Midcon Compression, L.L.C., to a third party and subsequently leased back certain natural gas compressors for 38 months. The lease was accounted for as a finance lease liability until the contract was renegotiated as part of our bankruptcy process and the changes to the contract resulted in the reclassification of the finance lease as an operating lease in March 2021.
The following table presents our ROU assets and lease liabilities as of December 31, 2021 and 2020.
| Successor | Predecessor | ||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Finance | Operating | Finance | Operating | ||||||||||||||||||||||||||
| ROU assets | $ | — | $ | 38 | $ | 9 | $ | 29 | |||||||||||||||||||||
| Lease liabilities: | |||||||||||||||||||||||||||||
| Current lease liabilities | $ | — | $ | 29 | $ | 9 | $ | 27 | |||||||||||||||||||||
| Long-term lease liabilities | — | 9 | — | 2 | |||||||||||||||||||||||||
| Total lease liabilities | — | 38 | 9 | 29 | |||||||||||||||||||||||||
| Less amounts reclassified to liabilities subject to compromise | — | — | (9) | (5) | |||||||||||||||||||||||||
| Total lease liabilities, net | $ | — | $ | 38 | $ | — | $ | 24 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additional information for the Company’s operating and finance leases is presented below:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Lease cost: | |||||||||||||||||||||||||||||
| Amortization of ROU assets | $ | — | $ | 1 | $ | 9 | $ | 8 | |||||||||||||||||||||
| Interest on lease liability | — | — | 1 | 2 | |||||||||||||||||||||||||
| Finance lease cost | — | 1 | 10 | 10 | |||||||||||||||||||||||||
| Operating lease cost | 33 | 3 | 17 | 26 | |||||||||||||||||||||||||
| Short-term lease cost | 13 | — | 32 | 112 | |||||||||||||||||||||||||
| Total lease cost | $ | 46 | $ | 4 | $ | 59 | $ | 148 | |||||||||||||||||||||
| Other information: | |||||||||||||||||||||||||||||
| Operating cash outflows from finance lease | $ | — | $ | — | $ | 1 | $ | 2 | |||||||||||||||||||||
| Operating cash outflows from operating leases | $ | 7 | $ | — | $ | 9 | $ | 11 | |||||||||||||||||||||
| Investing cash outflows from operating leases | $ | 39 | $ | 3 | $ | 40 | $ | 127 | |||||||||||||||||||||
| Financing cash outflows from finance lease | $ | — | $ | 1 | $ | 9 | $ | 8 |
| Successor | Predecessor | ||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Weighted average remaining lease term - finance lease | N/A | 1.00 year | |||||||||||||||||||||||||||
| Weighted average remaining lease term - operating leases | 1.44 years | 1.12 years | |||||||||||||||||||||||||||
| Weighted average discount rate - finance lease | N/A | 7.50 | % | ||||||||||||||||||||||||||
| Weighted average discount rate - operating leases | 3.80 | % | 6.46 | % |
Maturity analysis of operating lease liabilities are presented below:
| Successor | ||||||||
| December 31, 2021 | ||||||||
| 2022 | $ | 29 | ||||||
| 2023 | 8 | |||||||
| 2024 | 1 | |||||||
| Total lease payments | 38 | |||||||
| Less imputed interest | — | |||||||
| Present value of lease liabilities | 38 | |||||||
| Less current maturities | (29) | |||||||
| Present value of lease liabilities, less current maturities | $ | 9 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 10. | Revenue Recognition |
The following table shows revenue disaggregated by operating area and product type, for the periods presented:
| Successor | ||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | ||||||||||||||||||||||||||
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | — | $ | 1,370 | $ | — | $ | 1,370 | ||||||||||||||||||
| Haynesville | — | 998 | — | 998 | ||||||||||||||||||||||
| Eagle Ford | 1,354 | 179 | 179 | 1,712 | ||||||||||||||||||||||
| Powder River Basin | 202 | 75 | 44 | 321 | ||||||||||||||||||||||
| Oil, natural gas and NGL revenue | $ | 1,556 | $ | 2,622 | $ | 223 | $ | 4,401 | ||||||||||||||||||
| Marketing revenue | $ | 1,158 | $ | 908 | $ | 197 | $ | 2,263 | ||||||||||||||||||
| Predecessor | ||||||||||||||||||||||||||
| Period from January 1, 2021 through February 9, 2021 | ||||||||||||||||||||||||||
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | — | $ | 119 | $ | — | $ | 119 | ||||||||||||||||||
| Haynesville | — | 53 | — | 53 | ||||||||||||||||||||||
| Eagle Ford | 159 | 17 | 17 | 193 | ||||||||||||||||||||||
| Powder River Basin | 20 | 7 | 6 | 33 | ||||||||||||||||||||||
| Oil, natural gas and NGL revenue | $ | 179 | $ | 196 | $ | 23 | $ | 398 | ||||||||||||||||||
| Marketing revenue | $ | 141 | $ | 78 | $ | 20 | $ | 239 | ||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | — | $ | 631 | $ | — | $ | 631 | ||||||||||||||||||
| Haynesville | — | 362 | — | 362 | ||||||||||||||||||||||
| Eagle Ford | 1,202 | 129 | 97 | 1,428 | ||||||||||||||||||||||
| Powder River Basin | 170 | 41 | 20 | 231 | ||||||||||||||||||||||
| Mid-Continent | 55 | 25 | 13 | 93 | ||||||||||||||||||||||
| Oil, natural gas and NGL revenue | $ | 1,427 | $ | 1,188 | $ | 130 | $ | 2,745 | ||||||||||||||||||
| Marketing revenue from contracts with customers | $ | 1,195 | $ | 494 | $ | 110 | $ | 1,799 | ||||||||||||||||||
| Other marketing revenue | 67 | 3 | — | 70 | ||||||||||||||||||||||
| Marketing revenue | $ | 1,262 | $ | 497 | $ | 110 | $ | 1,869 | ||||||||||||||||||
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| Marcellus | $ | — | $ | 856 | $ | — | $ | 856 | ||||||||||||||||||
| Haynesville | — | 620 | — | 620 | ||||||||||||||||||||||
| Eagle Ford | 2,010 | 185 | 135 | 2,330 | ||||||||||||||||||||||
| Powder River Basin | 369 | 77 | 32 | 478 | ||||||||||||||||||||||
| Mid-Continent | 164 | 44 | 25 | 233 | ||||||||||||||||||||||
| Oil, natural gas and NGL revenue | $ | 2,543 | $ | 1,782 | $ | 192 | $ | 4,517 | ||||||||||||||||||
| Marketing revenue from contracts with customers | $ | 2,473 | $ | 900 | $ | 246 | $ | 3,619 | ||||||||||||||||||
| Other marketing revenue | 311 | 41 | — | 352 | ||||||||||||||||||||||
| Losses on marketing derivatives | — | (4) | — | (4) | ||||||||||||||||||||||
| Marketing revenue | $ | 2,784 | $ | 937 | $ | 246 | $ | 3,967 |
Accounts Receivable
Accounts receivable as of December 31, 2021 and 2020 are detailed below:
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Oil, natural gas and NGL sales | $ | 922 | $ | 589 | |||||||||||||
| Joint interest billings | 158 | 119 | |||||||||||||||
| Other | 38 | 68 | |||||||||||||||
| Allowance for doubtful accounts | (3) | (30) | |||||||||||||||
| Total accounts receivable, net | $ | 1,115 | $ | 746 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 11. | Income Taxes |
The components of the income tax expense (benefit) for each of the periods presented below are as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Current | |||||||||||||||||||||||||||||
| Federal | $ | — | $ | — | $ | (3) | $ | — | |||||||||||||||||||||
| State | — | — | (6) | (26) | |||||||||||||||||||||||||
| Current Income Taxes | — | — | (9) | (26) | |||||||||||||||||||||||||
| Deferred | |||||||||||||||||||||||||||||
| Federal | (45) | (54) | — | (297) | |||||||||||||||||||||||||
| State | (4) | (3) | (10) | (8) | |||||||||||||||||||||||||
| Deferred Income Taxes | (49) | (57) | (10) | (305) | |||||||||||||||||||||||||
| Total | $ | (49) | $ | (57) | $ | (19) | $ | (331) |
The income tax expense (benefit) reported in our consolidated statement of operations is different from the federal income tax expense (benefit) computed using the federal statutory rate for the following reasons:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Income tax expense (benefit) at the federal statutory rate of 21% | $ | 188 | $ | 1,119 | $ | (2,051) | $ | (134) | |||||||||||||||||||||
| State income taxes (net of federal income tax benefit) | (86) | 238 | (41) | (21) | |||||||||||||||||||||||||
| Partial release of valuation allowance due to Acquisitions | (49) | — | — | (314) | |||||||||||||||||||||||||
| Change in valuation allowance excluding impact of Acquisitions | (179) | (1,191) | 2,010 | 114 | |||||||||||||||||||||||||
| Reorganization items | 60 | (173) | 41 | — | |||||||||||||||||||||||||
| Transaction costs | 11 | — | — | — | |||||||||||||||||||||||||
| Removal of stranded tax effects in accumulated other comprehensive income | — | (57) | — | — | |||||||||||||||||||||||||
| Equity-based compensation (non-officer) | — | 7 | 10 | 4 | |||||||||||||||||||||||||
| Officer compensation limited under Section 162(m) | 2 | — | 9 | 3 | |||||||||||||||||||||||||
| Other | 4 | — | 3 | 17 | |||||||||||||||||||||||||
| Total | $ | (49) | $ | (57) | $ | (19) | $ | (331) |
After taking into account the effect of the Vine Acquisition, we have increased our estimate of state apportionment to Louisiana. This results in a shift of our state profile towards a higher overall state tax rate, and as such our deferred tax assets associated with that state have increased resulting in a deferred tax benefit in our state tax provision. Such increase was offset in full by an increase to our valuation allowance. We recognize certain permanent book-to-tax differences relating to reorganization items such as differences in the treatment of the extinguishment of liabilities, differences due to the non-deductibility of certain expenses associated with administering the plan of reorganization, and the adjustment to deferred tax assets which are subject to expiration before they are utilizable. In the Successor Period, we recognized a difference due to the non-deductibility of certain transaction costs and other post-combination expenses.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We reassessed the realizability of our deferred tax assets and continue to maintain a full valuation allowance against our net deferred tax asset positions for federal and state purposes. Of the net decrease in our valuation allowance, $1.191 billion is reflected as a component of income tax benefit in our consolidated statement of operations for the 2021 Predecessor Period, and $228 million is reflected as a component of income tax benefit in our consolidated statement of operations for the 2021 Successor Period.
Deferred income taxes are provided to reflect temporary differences in the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax-effected temporary differences, net operating loss (“NOL”) carryforwards and excess business interest expense carryforwards that comprise our deferred income taxes are as follows:
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Deferred tax liabilities: | |||||||||||||||||
| Other | $ | (3) | $ | (3) | |||||||||||||
| Deferred tax liabilities | (3) | (3) | |||||||||||||||
| Deferred tax assets: | |||||||||||||||||
| Property, plant and equipment | 340 | 907 | |||||||||||||||
| Net operating loss carryforwards | 784 | 2,066 | |||||||||||||||
| Carrying value of debt | 31 | 48 | |||||||||||||||
| Excess business interest expense carryforward | 684 | 293 | |||||||||||||||
| Asset retirement obligations | 86 | 34 | |||||||||||||||
| Investments | 66 | 71 | |||||||||||||||
| Accrued liabilities | 38 | 288 | |||||||||||||||
| Derivative instruments | 289 | 53 | |||||||||||||||
| Other | 68 | 51 | |||||||||||||||
| Deferred tax assets | 2,386 | 3,811 | |||||||||||||||
| Valuation allowance | (2,383) | (3,808) | |||||||||||||||
| Deferred tax assets after valuation allowance | 3 | 3 | |||||||||||||||
| Net deferred tax liability | $ | — | $ | — |
As of December 31, 2021, and 2020, we had deferred tax assets of $2.386 billion and $3.811 billion upon which we had a valuation allowance of $2.383 billion and $3.808 billion, respectively. Of the net change in the valuation allowance of $1.425 billion for both federal and state deferred tax assets, $1.419 billion is reflected as a component of income tax benefit in the consolidated statement of operations and the difference is reflected in components of stockholders’ equity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A valuation allowance against deferred tax assets, including NOL carryforwards and disallowed business interest carryforwards, is recognized when it is more likely than not that all or some portion of the benefit from the deferred tax assets will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of existing taxable temporary differences, tax planning strategies, as well as the current and forecasted business economics of our industry. Management assesses all available evidence, both positive and negative, to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. Based on all available positive and negative evidence, including projections of future taxable income, we believe it is more likely than not that our deferred tax assets will not be realized. As such, a full valuation allowance was recorded against our net deferred tax asset position for federal and state purposes. A significant piece of objectively verifiable negative evidence consists of the losses incurred in prior quarters. The current quarter’s pre-tax book income is a source of positive evidence, however given the absence of a trend of multiple successive quarters with book income, such evidence does not outweigh the negative evidence. Should future results of operations demonstrate a trend of profitability, additional weight may be placed upon other evidence, such as future forecasts of taxable income. Additionally, future events and new evidence, such as the integration of and realization of profit from the recently acquired assets could lead to increased weight being placed upon future forecasts and the conclusion that some or all of the deferred tax assets are more likely than not to be realizable. Therefore, we believe that there is a possibility that some or all of the valuation allowance could be released in the foreseeable future.
Our ability to utilize NOL carryforwards, disallowed business interest carryforwards, tax credits and possibly other tax attributes to reduce future taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of such attributes may be subject to an annual limitation under Section 382 of the Code should transactions involving our equity result in a cumulative shift of more than 50% in the beneficial ownership of our stock during any three-year testing period (an “Ownership Change”).
As a result of emergence from bankruptcy on February 9, 2021, the Company did experience an Ownership Change. We did not qualify for the exception under Section 382(l)(5) of the Code, and therefore an annual limitation was determined under Section 382(l)(6) of the Code, which is based on the post-emergence value of our equity multiplied by the adjusted federal long-term rate in effect for the month in which the ownership change occurred. The amount of the annual limitation has been computed to be $54 million and was prorated for the 2021 tax year based on the number of days attributable to the post-Effective Date portion of the year. The limitation applies to our NOL carryforwards, disallowed business interest carryforwards and general business credits until such attributes expire or are fully utilized. As we believe we were in an overall net unrealized built-in loss position at the Effective Date, the limitation also applies to any recognized built-in losses incurred for a period of five years but only to the extent of the overall net unrealized built-in loss. Recognized built-in losses incurred during 2021 include a portion of our tax depreciation, depletion, and amortization deductions along with a portion of our realized hedging losses. We have incurred enough of those items for the 2021 tax year and have thus disallowed deductions up to the net unrealized built-in loss. Accordingly, we estimate no further restriction on the company’s deduction for such items. Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change.
In Chapter 11 bankruptcy cases, the cancellation of debt income (“CODI”) realized upon emergence from bankruptcy is excludible from taxable income but results in a reduction of tax attributes in accordance with the attribute reduction and ordering rules of Section 108 of the Code. The amount of our CODI is estimated to be $5 billion, all of which will reduce our NOL carryforwards. This attribute reduction occurs after the close of the tax year, however we have included the estimated effect of such reduction in our ending deferred tax assets as of December 31, 2021. As a result of the Section 382 limitation, $593 million of federal NOLs remaining after the CODI reduction are estimated to expire before they would become utilizable and as such have been removed from our deferred tax assets. The states we operate in generally have similar rules for attribute reduction and Section 382 limitation which results in the reduction of certain of our state NOL carryforwards.
On November 1, 2021, we completed the acquisition of Vine. For federal income tax purposes, the transaction qualified as a tax-free merger under Section 368 of the Code and, as a result, we acquired carryover tax basis in Vine’s assets and liabilities. A net deferred tax liability of $49 million determined through business combination accounting includes deferred tax liabilities on plant, property and equipment totaling $298 million, partially offset by deferred tax assets totaling $249 million relating to federal NOL carryforwards, disallowed business interest carryforwards and certain other deferred tax assets. These carryforwards are subject to a base annual Section 382 limitation of approximately $2 million. The base annual limitation is estimated to be increased over the first five years for recognized
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
built-in gains of approximately $14 million per year. We determined that no separate valuation allowances were required to be established against any of the individual deferred tax assets acquired. We determined that the acquired deferred tax liability was a source of evidence to release valuation allowance, and as such $49 million was recorded as a tax benefit in the successor period.
As of December 31, 2021, and after taking into account each of the foregoing matters, the federal NOLs and excess business interest attributes are as follows:
| Attributes subject to Section 382 base annual limitation | Attributes not subject to Section 382 limitation | |||||||||||||||||||
| $54 million | $2 million | |||||||||||||||||||
| Net operating losses, by year of expiration: | ||||||||||||||||||||
| 2037 | $ | 858 | $ | 10 | $ | — | ||||||||||||||
| Indefinitely lived | 1,919 | 112 | — | |||||||||||||||||
| Total federal net operating losses | $ | 2,777 | $ | 122 | $ | — | ||||||||||||||
| Excess business interest expense (indefinitely lived) | $ | 1,455 | $ | 58 | $ | 1,459 |
We had state NOL carryforwards of approximately $3.541 billion. Several states adopt the federal NOL carryforward period such that our more recent state NOLs do not expire. The state NOL carryforwards are subject to apportioned amounts of the federal Section 382 limitations.
Accounting guidance for recognizing and measuring uncertain tax positions requires a more likely than not threshold condition be met on a tax position, based solely on the technical merits of being sustained, before any benefit of the tax position can be recognized in the financial statements. Guidance is also provided regarding recognition, classification and disclosure of uncertain tax positions. As of both December 31, 2021, and 2020, the amount of unrecognized tax benefits related to NOL carryforwards and tax liabilities associated with uncertain tax positions was $74 million, of which, as of both December 31, 2021 and December 31, 2020, $29 million is related to state tax receivables not expected to be recovered and the remainder is related to NOL carryforwards. If recognized, $29 million of the uncertain tax positions identified would have an effect on the effective tax rate. As of December 31, 2021, and 2020, we had no amounts accrued for interest related to these uncertain tax positions. We recognize interest related to uncertain tax positions as a component of interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses. $24 million of the state tax receivable relates to claims for refund of Pennsylvania income taxes. During the fourth quarter of 2021, a court case with similar claims as ours was decided in favor of the taxpayer. We have considered this new information and determined that we have no change to our assessment of the recognition and measurement of our position. Should the state exhaust its appeals so that the taxpayer ultimately prevails we may be successful in applying that precedent to our claims. As such, it is possible that we may reassess that refund claim in the next twelve months and ascertain it to be more likely than not to be sustained. Should this occur, we will record a current tax benefit and income tax receivable for the amount we determine we are likely to sustain.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Unrecognized tax benefits at beginning of period | $ | 74 | $ | 74 | $ | 74 | $ | 79 | |||||||||||||||||||||
| Additions based on tax positions related to the current year | — | — | — | — | |||||||||||||||||||||||||
| Additions to tax positions of prior years | — | — | — | 27 | |||||||||||||||||||||||||
| Settlements | — | — | — | (32) | |||||||||||||||||||||||||
| Expiration of the applicable statute of limitations | — | — | — | — | |||||||||||||||||||||||||
| Reductions to tax positions of prior years | — | — | — | — | |||||||||||||||||||||||||
| Unrecognized tax benefits at end of period | $ | 74 | $ | 74 | $ | 74 | $ | 74 |
Our federal and state income tax returns are subject to examination by federal and state tax authorities. Notification was received from the IRS during February 2021 that the examination of the WildHorse 2017 federal income tax return has been closed as a no-change audit. Our tax years 2018 through 2021 remain open for all purposes of examination by the IRS as do the WildHorse 2018 federal income tax return and the WildHorse short period return for January 1, 2019, through February 1, 2019. However, certain earlier tax years remain open for adjustment to the extent of their NOL carryforwards available for future utilization.
In addition, tax years 2018 through 2021 as well as certain earlier years remain open for examination by state tax authorities. Currently, several state examinations are in progress of various years. We do not anticipate that the outcome of any federal or state audit will have a significant impact on our financial position or results of operations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 12. | Equity |
New Common Stock.
As discussed in Note 2, on the Effective Date, we issued an aggregate of 97,907,081 shares of New Common Stock, par value $0.01 per share, to the holders of allowed claims, and approximately 2,092,918 shares of New Common Stock were reserved for future distributions under the Plan. During the 2021 Successor Period, 864,090 reserved shares were issued to resolve allowed unsecured claims.
As discussed in Note 4, on November 1, 2021, we acquired Vine and issued 18,709,399 shares of New Common Stock.
Dividends
In the 2021 Successor Period, we initiated a new annual dividend on our common shares, expected to be paid quarterly. The following table summarizes our dividend payments in the 2021 Successor Period:
| Payment Date | Stockholders of Record Date | Dividend Payment | Rate Per Share | |||||||||||||||||
| June 10, 2021 | May 24, 2021 | $ | 34 | $ | 0.34375 | |||||||||||||||
| September 9, 2021 | August 24, 2021 | 33 | $ | 0.34375 | ||||||||||||||||
| December 9, 2021 | November 24, 2021 | 52 | $ | 0.43750 | ||||||||||||||||
| Total dividends paid | $ | 119 |
Warrants
| Class A Warrants | Class B Warrants | Class C Warrants**(a)** | |||||||||||||||
| Issued as of February 10, 2021 | 11,111,111 | 12,345,679 | 9,768,527 | ||||||||||||||
| Converted into New Common Stock(b) | (254,259) | (32,406) | (10,603) | ||||||||||||||
| Issued for General Unsecured Claims | — | — | 1,630,447 | ||||||||||||||
| Outstanding as of December 31, 2021 | 10,856,852 | 12,313,273 | 11,388,371 |
(a)As of December 31, 2021, we had 2,318,446 of reserved Class C Warrants.
(b)As of December 31, 2021, we issued 188,292 common shares as a result of Warrant exercises.
As discussed in Note 2, on the Effective Date, we issued Class A, Class B and Class C Warrants that are initially exercisable for one share of New Common Stock per Warrant at initial exercise prices of $27.63, $32.13 and $36.18 per share, respectively, subject to adjustments pursuant to the terms of the Warrants. The Warrants are exercisable from the Effective Date until February 9, 2026. The Warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. The exercise prices of the Warrants were adjusted to prevent the dilution of rights for the effects of the quarterly dividend distribution on December 9, 2021, and the adjusted exercise prices are $27.08, $31.49, and $35.46 per share for the Class A, Class B and Class C Warrants, respectively.
Chapter 11 Proceedings
Upon our emergence from Chapter 11 on February 9, 2021, as discussed in Note 2, Predecessor common stock and preferred stock were canceled and released under the Plan without receiving any recovery on account thereof.
Noncontrolling Interests
In the 2019 Predecessor Period and part of the 2020 Predecessor Period, we owned 23,750,000 common units in the Chesapeake Granite Wash Trust (the “Trust”) representing a 51% beneficial interest. We determined that the Trust was a VIE and that we were the primary beneficiary. As a result, the Trust was included in our consolidated financial statements. In the 2020 Predecessor Period, we sold our interests in the Mid-Continent operating area and the units we owned in the Trust. See Note 4 for additional discussion.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 13. | Share-Based Compensation |
As discussed in Note 2, on the Effective Date, our Predecessor common stock was canceled and New Common Stock was issued. Accordingly, our then existing share-based compensation awards were also canceled, which resulted in the recognition of any previously unamortized expense related to the canceled awards on the date of cancellation. Share-based compensation for the Predecessor and Successor Periods is not comparable.
Successor Share-Based Compensation
As of the Effective Date, the Board adopted the 2021 Long Term Incentive Plan (the “LTIP”) with a share reserve equal to 6,800,000 shares of New Common Stock. The LTIP provides for the grant of restricted stock units, restricted stock awards, stock options, stock appreciation rights, performance awards and other stock awards to the Company’s employees and non-employee directors.
Restricted Stock Units. In the 2021 Successor Period, we granted restricted stock units to employees and non-employee directors under the LTIP, which will vest over a three-year and one-year period, respectively. The fair value of restricted stock units is based on the closing sales price of our common stock on the date of grant, and compensation expense is recognized ratably over the requisite service period. A summary of the changes in unvested restricted stock units is presented below:
| Unvested Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| (in thousands) | ||||||||||||||
| Unvested as of February 10, 2021 | — | $ | — | |||||||||||
| Granted (a) | 1,202 | $ | 52.60 | |||||||||||
| Vested (a) | (377) | $ | 65.66 | |||||||||||
| Forfeited | (50) | $ | 44.37 | |||||||||||
| Unvested as of December 31, 2021 | 775 | $ | 46.77 |
(a)Due to the Vine Acquisition, each Vine restricted stock unit was converted into a Company restricted stock unit. As a result, approximately 430 thousand Vine restricted stock units were converted to Company restricted stock units, of which approximately 375 thousand restricted stock units were accelerated. We recognized accelerated share-based compensation expense in other operating expense on our consolidated statement of operations.
The aggregate intrinsic value of restricted stock units that vested during the 2021 Successor Period was approximately $25 million based on the stock price at the time of vesting.
As of December 31, 2021, there was approximately $27 million of total unrecognized compensation expense related to unvested restricted stock units. The expense is expected to be recognized over a weighted average period of approximately 2.28 years.
Performance Share Units. In the 2021 Successor Period, we granted performance share units (“PSUs”) to senior management under the LTIP, which will generally vest over a three-year period and will be settled in shares. The performance criteria include share price hurdles, total shareholder return (“TSR”), and relative TSR (“rTSR”). The share price hurdle award could result in a payout between 0% - 100% of the target units, and the TSR and rTSR awards could result in a total payout between 0% - 200% of the target units. The fair value of the PSUs was measured on the grant date using a Monte Carlo simulation, and compensation expense is recognized ratably over the requisite service period because these awards depend on a combination of service and market criteria.
The following table presents the assumptions used in the valuation of the PSUs granted in 2021:
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Assumption | Share Price Hurdle | TSR, rTSR | |||||||||
| Risk-free interest rate | 0.30 | % | 0.23 | % | |||||||
| Volatility | 68.4 | % | 71.4 | % |
A summary of the changes in unvested PSUs is presented below:
| Unvested Performance Share Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| (in thousands) | ||||||||||||||
| Unvested as of February 10, 2021 | — | $ | — | |||||||||||
| Granted | 201 | $ | 64.41 | |||||||||||
| Vested | (9) | $ | 38.95 | |||||||||||
| Forfeited | (9) | $ | 55.42 | |||||||||||
| Unvested as of December 31, 2021 | 183 | $ | 66.12 |
The aggregate intrinsic value of PSUs that vested during the 2021 Successor Period was approximately $0.6 million based on the stock price at the time of vesting.
As of December 31, 2021, there was approximately $10 million of total unrecognized compensation expense related to unvested PSUs. The expense is expected to be recognized over a weighted average period of approximately 2.44 years.
Predecessor Share-Based Compensation
Our Predecessor share-based compensation program consisted of restricted stock, stock options, PSUs and cash restricted stock units (“CRSUs”) granted to employees and restricted stock granted to non-employee directors under our long-term incentive plans. The restricted stock and stock options were equity-classified awards and the PSUs and CRSUs were liability-classified awards.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Units. We granted restricted stock units to employees and non-employee directors. The following table provides information related to restricted stock units activity for the Predecessor periods presented:
| Unvested Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| (in thousands) | ||||||||||||||
| Unvested as of January 1, 2021 | 1 | $ | 616.57 | |||||||||||
| Granted | — | $ | — | |||||||||||
| Vested | — | $ | — | |||||||||||
| Forfeited/canceled | (1) | $ | 611.47 | |||||||||||
| Unvested as of February 9, 2021 | — | $ | — | |||||||||||
| Unvested as of January 1, 2020 | 52 | $ | 709.85 | |||||||||||
| Granted | 68 | $ | 60.00 | |||||||||||
| Vested | (21) | $ | 791.69 | |||||||||||
| Forfeited | (98) | $ | 243.13 | |||||||||||
| Unvested as of December 31, 2020 | 1 | $ | 616.57 | |||||||||||
| Unvested as of January 1, 2019 | 59 | $ | 886.20 | |||||||||||
| Granted | 30 | $ | 530.44 | |||||||||||
| Vested | (30) | $ | 876.18 | |||||||||||
| Forfeited | (7) | $ | 744.74 | |||||||||||
| Unvested as of December 31, 2019 | 52 | $ | 709.85 |
Stock Options. In the 2020 Predecessor Period, we granted members of management stock options that vested ratably over a three-year period. Each stock option award had an exercise price equal to the closing price of our common stock on the grant date. Outstanding options expired seven years to ten years from the date of grant.
We utilized the Black-Scholes option-pricing model to measure the fair value of stock options. The expected life of an option was determined using the simplified method. Volatility assumptions were estimated based on the average historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate was based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield was based on an annual dividend yield, taking into account our dividend policy, over the expected life of the option.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table provides information related to stock option activity for the Predecessor periods presented:
| Number of Shares Underlying Options | Weighted Average Exercise Price Per Share | Weighted Average Contract Life in Years | Aggregate Intrinsic Value**(a)** | |||||||||||||||||||||||
| (in thousands) | ($ in millions) | |||||||||||||||||||||||||
| Outstanding as of January 1, 2021 | 20 | $ | 1,429.11 | 4.27 | $ | — | ||||||||||||||||||||
| Granted | — | $ | — | |||||||||||||||||||||||
| Exercised | — | $ | — | $ | — | |||||||||||||||||||||
| Expired | (1) | $ | 741.86 | |||||||||||||||||||||||
| Forfeited/canceled | (19) | $ | 1,452.40 | |||||||||||||||||||||||
| Outstanding as of February 9, 2021 | — | $ | — | — | $ | — | ||||||||||||||||||||
| Exercisable as of February 9, 2021 | — | $ | — | — | $ | — | ||||||||||||||||||||
| Outstanding as of January 1, 2020 | 90 | $ | 1,420.90 | 5.70 | $ | — | ||||||||||||||||||||
| Granted | — | $ | — | |||||||||||||||||||||||
| Exercised | — | $ | — | $ | — | |||||||||||||||||||||
| Expired | (23) | $ | 914.50 | |||||||||||||||||||||||
| Forfeited | (47) | $ | 1,666.21 | |||||||||||||||||||||||
| Outstanding as of December 31, 2020 | 20 | $ | 1,429.11 | 4.27 | $ | — | ||||||||||||||||||||
| Exercisable as of December 31, 2020 | 19 | $ | 1,439.55 | 4.35 | $ | — | ||||||||||||||||||||
| Outstanding as of January 1, 2019 | 90 | $ | 1,440.18 | 7.15 | $ | — | ||||||||||||||||||||
| Granted | 5 | $ | 594.00 | |||||||||||||||||||||||
| Exercised | — | $ | — | $ | — | |||||||||||||||||||||
| Expired | (2) | $ | 1,272.94 | |||||||||||||||||||||||
| Forfeited | (3) | $ | 793.40 | |||||||||||||||||||||||
| Outstanding as of December 31, 2019 | 90 | $ | 1,420.90 | 5.70 | $ | — | ||||||||||||||||||||
| Exercisable as of December 31, 2019 | 65 | $ | 1,656.14 | 4.86 | $ | — |
(a)The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
Restricted Stock, Stock Option, and PSU Compensation. We recognized the following compensation costs, net of actual forfeitures, related to restricted stock, stock options, and PSUs for the periods presented:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| General and administrative expense | $ | 7 | $ | 3 | $ | 20 | $ | 26 | |||||||||||||||||||||
| Oil and natural gas properties | 2 | — | 1 | 2 | |||||||||||||||||||||||||
| Oil, natural gas and NGL production expense | 2 | — | 1 | 3 | |||||||||||||||||||||||||
| Exploration expense | — | — | — | 1 | |||||||||||||||||||||||||
| Total restricted stock, stock option, and PSU compensation | $ | 11 | $ | 3 | $ | 22 | $ | 32 |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 14. | Employee Benefit Plans |
Our qualified 401(k) profit sharing plan (“401(k) Plan”) is the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, which is open to employees of Chesapeake and all our subsidiaries. Eligible employees may elect to defer compensation through voluntary contributions to their 401(k) Plan accounts, subject to plan limits and those set by the IRS. We match employee contributions dollar for dollar (subject to a maximum contribution of 6% of an employee's base salary and performance bonus) in cash. In April 2021, the 401(k) match was changed from 15% to 6%. We contributed $8 million, $2 million, $24 million and $29 million to the 401(k) Plan in 2021 Successor Period, 2021 Predecessor Period, 2020 Predecessor Period and 2019 Predecessor Period, respectively.
| 15. | Derivative and Hedging Activities |
We use derivative instruments to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility. All of our oil and natural gas derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. None of our open oil and natural gas derivative instruments were designated for hedge accounting as of December 31, 2021 and 2020.
Oil and Natural Gas Derivatives
As of December 31, 2021 and 2020, our oil and natural gas derivative instruments consisted of the following types of instruments:
*•*Swaps: We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options and swap options.
-
Options: We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.
-
Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike prices, no payments are due from either party. Three-way collars include the sale by us of an additional put option in exchange for a more favorable strike price on the call option. This eliminates the counterparty’s downside exposure below the second put option strike price.
*•*Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair values of our oil and natural gas derivative instrument assets (liabilities) as of December 31, 2021 and 2020 are provided below:
| Successor | Predecessor | |||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Notional Volume | Fair Value | Notional Volume | Fair Value | |||||||||||||||||||||||
| Oil (mmbbl): | ||||||||||||||||||||||||||
| Fixed-price swaps | 13 | $ | (356) | 27 | $ | (136) | ||||||||||||||||||||
| Basis protection swaps | 9 | (2) | 7 | (1) | ||||||||||||||||||||||
| Total oil | 22 | (358) | 34 | (137) | ||||||||||||||||||||||
| Natural gas (bcf): | ||||||||||||||||||||||||||
| Fixed-price swaps | 637 | (675) | 728 | 10 | ||||||||||||||||||||||
| Collars | 205 | (82) | 53 | 8 | ||||||||||||||||||||||
| Call options | 18 | (17) | — | — | ||||||||||||||||||||||
| Basis protection swaps | 252 | (11) | 66 | 1 | ||||||||||||||||||||||
| Total natural gas | 1,112 | (785) | 847 | 19 | ||||||||||||||||||||||
| Total estimated fair value | $ | (1,143) | $ | (118) |
We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss).
Effect of Derivative Instruments – Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the consolidated balance sheets as of December 31, 2021 and 2020 on a gross basis and after same-counterparty netting:
| Gross Fair Value | Amounts Netted in the Consolidated Balance Sheets | Net Fair Value Presented in the Consolidated Balance Sheets | ||||||||||||||||||
| Successor | ||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||
| Commodity Contracts: | ||||||||||||||||||||
| Short-term derivative asset | $ | 56 | $ | (51) | $ | 5 | ||||||||||||||
| Short-term derivative liability | (950) | 51 | (899) | |||||||||||||||||
| Long-term derivative liability | (249) | — | (249) | |||||||||||||||||
| Total derivatives | $ | (1,143) | $ | — | $ | (1,143) | ||||||||||||||
| Predecessor | ||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| Commodity Contracts: | ||||||||||||||||||||
| Short-term derivative asset | $ | 84 | $ | (65) | $ | 19 | ||||||||||||||
| Long-term derivative asset | 5 | (5) | — | |||||||||||||||||
| Short-term derivative liability | (158) | 65 | (93) | |||||||||||||||||
| Long-term derivative liability | (49) | 5 | (44) | |||||||||||||||||
| Total derivatives | $ | (118) | $ | — | $ | (118) |
As of December 31, 2021 and 2020, we did not have any cash collateral balances for these derivatives.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Effect of Derivative Instruments – Consolidated Statements of Operations
The components of oil and natural gas derivatives are presented below:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Gains (losses) on undesignated oil and natural gas derivatives | $ | (1,127) | $ | (379) | $ | 629 | $ | 40 | |||||||||||||||||||||
| Losses on terminated cash flow hedges | — | (3) | (33) | (35) | |||||||||||||||||||||||||
| Total oil and natural gas derivatives | $ | (1,127) | $ | (382) | $ | 596 | $ | 5 |
Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our consolidated statements of stockholders’ equity related to our cash flow hedges is presented below:
| Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | — | $ | — | $ | (12) | $ | 45 | $ | (45) | $ | 12 | $ | (80) | $ | (23) | |||||||||||||||||||||||||||||||||||||
| Losses reclassified to income | — | — | 3 | 3 | 33 | 33 | 35 | 35 | |||||||||||||||||||||||||||||||||||||||||||||
| Fresh start adjustments | — | — | 9 | 9 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Elimination of tax effects | — | — | — | (57) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | — | $ | — | $ | — | $ | — | $ | (12) | $ | 45 | $ | (45) | $ | 12 |
Our accumulated other comprehensive loss represented the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. The remaining deferred gain or loss amounts were to be recognized in earnings in the month for which the original contract months were to occur. In connection with our adoption of fresh start accounting, we recorded a fair value adjustment to eliminate the accumulated other comprehensive income related to hedging settlements including the elimination of tax effects. See Note 3 for a discussion of fresh start accounting adjustments.
Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are highly rated or deemed by us to have acceptable credit strength and deemed by management to be competent and competitive market-makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of December 31, 2021, our oil and natural gas derivative instruments were spread among ten counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that were also lenders (or affiliates of lenders) under our DIP Credit Facility. The contracts entered into with these counterparties are secured by the same collateral that secures the pre-petition revolving credit facility. The counterparties’ obligations must be secured by
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
cash or letters of credit to the extent that any mark-to-market amounts owed to us exceed defined thresholds. As of December 31, 2021, we did not have any cash or letters of credit posted as collateral for our commodity derivatives.
Fair Value
The fair value of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil, natural gas and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. As our oil, natural gas and NGL derivatives do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
The following table provides information for financial assets (liabilities) measured at fair value on a recurring basis as of December 31, 2021 and 2020:
| Successor | Predecessor | ||||||||||||||||
| Significant Other Observable Inputs (Level 2) | December 31, 2021 | December 31, 2020 | |||||||||||||||
| Derivative Assets (Liabilities): | |||||||||||||||||
| Commodity assets | $ | 56 | $ | 88 | |||||||||||||
| Commodity liabilities | (1,199) | (206) | |||||||||||||||
| Total derivatives | $ | (1,143) | $ | (118) |
| 16. | Capitalized Exploratory Well Costs |
A summary of the changes in our capitalized exploratory well costs for the periods presented is detailed below. Additions pending the determination of proved reserves excludes amounts capitalized and subsequently charged to expense within the same year.
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | — | $ | — | $ | 7 | $ | 36 | |||||||||||||||||||||
| Additions pending the determination of proved reserves | 24 | — | — | 7 | |||||||||||||||||||||||||
| Divestitures and other | — | — | — | (3) | |||||||||||||||||||||||||
| Reclassifications to proved properties | (10) | — | — | (17) | |||||||||||||||||||||||||
| Charges to exploration expense | — | — | (7) | (16) | |||||||||||||||||||||||||
| Balance, end of period | $ | 14 | $ | — | $ | — | $ | 7 |
We had no projects with suspended exploratory well costs capitalized for a period greater than one year as of December 31, 2021, 2020 and 2019, respectively.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 17. | Other Property and Equipment |
Other Property and Equipment
A summary of other property and equipment held for use and the estimated useful lives thereof is as follows:
| Successor | Predecessor | Estimated Useful Life | |||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (in years) | |||||||||||||||||||||||
| Buildings and improvements | $ | 330 | $ | 1,038 | 10 – 39 | ||||||||||||||||||
| Computer equipment | 87 | 356 | 5 | ||||||||||||||||||||
| Land | 37 | 113 | |||||||||||||||||||||
| Sand mine | 2 | 81 | 10 – 30 | ||||||||||||||||||||
| Natural gas compressors(a) | — | 36 | 3 – 20 | ||||||||||||||||||||
| Other | 39 | 130 | 5 – 20 | ||||||||||||||||||||
| Total other property and equipment, at cost | 495 | 1,754 | |||||||||||||||||||||
| Less: accumulated depreciation | (26) | (799) | |||||||||||||||||||||
| Total other property and equipment, net | $ | 469 | $ | 955 |
(a) Includes assets under finance lease of $27 million, less accumulated depreciation of $18 million as of December 31, 2020. The related amortization expense for assets under finance lease is included in depreciation, depletion and amortization expense on our consolidated statement of operations. The lease contract was renegotiated as part of our bankruptcy process and the changes to the contract resulted in the reclassification of the finance lease as an operating lease in March 2021.
| 18. | Investments |
FTS International, Inc. (NYSE: FTSI). In the 2019 Predecessor Period, the hydraulic fracturing industry experienced challenging operating conditions resulting in the fair value of our investment in FTSI falling below book value of $65 million and remaining below that amount as of the end of the year. Based on FTSI’s 2019 operating results and FTSI’s share price of $1.04 per share as of December 31, 2019, we determined that the reduction in fair value was other-than-temporary, and recognized an impairment of our investment in FTSI of approximately $43 million.
In the 2020 Predecessor Period, FTSI filed for Chapter 11 bankruptcy and we recognized an impairment of our entire investment of $23 million. FTSI emerged from bankruptcy on November 19, 2020, and this restructuring resulted in a reduction of the common stock we owned in FTSI from 20% to less than 2%. The decreased ownership percentage and the loss of significant influence required us to measure the investment at fair value as of December 31, 2020.
In the 2021 Successor Period, FTSI announced it would be acquired in an all cash deal that is expected to close in 2022. As of December 31, 2021, the investment continues to be measured at fair value.
JWH Midstream LLC. In the 2019 Predecessor Period, in connection with the acquisition of WildHorse, we obtained a 50% membership interest in JWH Midstream LLC (“JWH”). The carrying value of our investment in JWH, which was being accounted for as an equity method investment, was approximately $17 million. In the 2019 Predecessor Period, we paid approximately $7 million to terminate our involvement in the partnership. This removed us from any future obligations related to this joint venture and, therefore, we impaired the full value of the investment and recognized approximately $24 million of impairment expense in the 2019 Predecessor Period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 19. | Impairments |
Impairments of Oil and Natural Gas Properties
A summary of our impairments of oil and natural gas properties for the periods presented is as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Total impairments of oil and natural gas properties | $ | — | $ | — | $ | 8,446 | $ | 8 |
During the 2020 Predecessor Period, the decrease in demand for crude oil primarily due to the combined impacts of COVID-19 and the OPEC+ production increases resulted in decreases in then current and then expected long-term crude oil and NGL sale prices. These conditions resulted in reductions to the market capitalization of peer companies in the energy industry. We determined these adverse market conditions represented a triggering event to perform an impairment assessment of our long-lived assets used in, and in support of, our operations, including proved oil and gas properties, and our sand mine assets.
Proved Oil and Gas Properties
Our impairment test involved a Step 1 assessment to determine if the net book value of our proved oil and natural gas properties is expected to be recovered from the estimated undiscounted future cash flows.
-
We calculated the expected undiscounted future net cash flows of our long-lived assets using management’s assumptions and expectations of (i) commodity prices, which are based on the NYMEX strip pricing escalated by an inflationary rate (ii) pricing adjustments for differentials, (iii) operating costs, (iv) capital investment plans, (v) future production volumes, and (vi) estimated proved reserves.
-
Unprecedented volatility in the price of oil due to the decrease in demand led us to rely on NYMEX strip pricing, which represents a Level 1 input.
Certain oil and gas properties in our Eagle Ford, Powder River Basin, and Mid-Continent and other non-core operating areas failed the Step 1 assessment. For these assets, we used a discounted cash flow analysis to estimate fair value. The expected future net cash flows were discounted using a rate of 11%, which we believe represents the estimated weighted average cost of capital of a theoretical market participant. Based on Step 2 of our long-lived assets impairment test, we recognized an $8.446 billion impairment because the carrying value exceeded estimated fair market value as of March 31, 2020.
- Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate, adjusted for differentials, and (v) a market-based weighted average cost of capital. We utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairments of Fixed Assets
A summary of our impairments of fixed assets by asset class and other charges for the Successor and Predecessor Periods is as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Sand mine | $ | — | $ | — | $ | 76 | $ | — | |||||||||||||||||||||
| Natural gas compressors | — | — | 13 | — | |||||||||||||||||||||||||
| Buildings and land | — | — | — | 1 | |||||||||||||||||||||||||
| Other | 1 | — | — | 2 | |||||||||||||||||||||||||
| Total impairments of fixed assets and other | $ | 1 | $ | — | $ | 89 | $ | 3 |
In the 2020 Predecessor Period, we recorded a $76 million impairment of our sand mine assets that support our Eagle Ford operating area for the difference between the fair value and carrying value of the assets as well as a $13 million impairment of compressor inventory due to a lack of a current market for compressors.
| 20. | Exploration Expense |
A summary of our exploration expense for the Successor and Predecessor Periods is as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Impairments of unproved properties | $ | 1 | $ | 2 | $ | 411 | $ | 32 | |||||||||||||||||||||
| Dry hole expense | 1 | — | 7 | 25 | |||||||||||||||||||||||||
| Geological and geophysical expense and other | 5 | — | 9 | 27 | |||||||||||||||||||||||||
| Exploration expense | $ | 7 | $ | 2 | $ | 427 | $ | 84 |
Unproved oil and natural gas properties are periodically assessed for impairment by considering future drilling and exploration plans, results of exploration activities, commodity price outlooks, planned future sales and expiration of all or a portion of the projects. The exploration expense charges during the 2020 Predecessor Period are primarily the result of non-cash impairment charges in unproved properties, primarily in our Eagle Ford, Haynesville, Powder River Basin and Mid-Continent operating areas. The decrease in geological and geophysical expense in the 2021 Successor Period, 2021 Predecessor Period and 2020 Predecessor Period was due to fewer exploratory geological and geophysical projects.
| 21. | Other Operating Expense (Income), Net |
In the 2021 Successor Period, we recognized approximately $59 million of costs related to our acquisition of Vine, which included consulting fees, financial advisory fees, and legal fees. Additionally, we recognized approximately $36 million of severance expense as a result of the Vine Acquisition, which included $15 million of cash severance and $21 million of non-cash severance, primarily related to the issuance of New Common Stock for the acceleration of certain Vine restricted stock unit awards. A majority of Vine executives and employees were terminated on the date of the acquisition. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In the 2020 Predecessor Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations. The contract terminations removed approximately $169 million of future commitments related to gathering, processing and transportation agreements. Additionally, we recognized $9 million of expense related to the impairment of sand mine inventory and $42 million of other operating expense primarily related to royalty settlements and other legal matters offset by $51 million of income from the amortization of VPP deferred revenue. In the 2020 Predecessor Period, we sold the assets related to our remaining volumetric production payment and extinguished the liability related to the production volume delivery obligation.
In the 2019 Predecessor Period, we recorded approximately $37 million of costs related to our acquisition of WildHorse which consisted of consulting fees, financial advisory fees, legal fees and travel and lodging expenses. In addition, we recorded approximately $38 million of severance expense as a result of the acquisition of WildHorse. A majority of the WildHorse executives and employees were terminated on the date of acquisition. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
| 22. | Separation and Other Termination Costs |
In the 2021 Successor Period and 2021 Predecessor Period, we incurred charges in of approximately $11 million and $22 million, respectively, related to one-time termination benefits for certain employees. In the 2020 Predecessor Period and 2019 Predecessor Period, we incurred charges of approximately $44 million and $12 million, respectively, related to one-time termination benefits for certain employees.
| 23. | Asset Retirement Obligations |
The components of the change in our asset retirement obligations are shown below:
| Successor | Predecessor | ||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | |||||||||||||||||||||
| Asset retirement obligations, beginning of period | $ | 241 | $ | 144 | $ | 211 | |||||||||||||||||
| Additions(a) | 48 | — | 1 | ||||||||||||||||||||
| Revisions (b) | 63 | — | (14) | ||||||||||||||||||||
| Settlements and disposals(c) | (3) | (1) | (66) | ||||||||||||||||||||
| Accretion expense | 11 | 1 | 12 | ||||||||||||||||||||
| Impact of fresh start accounting | — | 97 | — | ||||||||||||||||||||
| Asset retirement obligations, end of period | 360 | 241 | 144 | ||||||||||||||||||||
| Less current portion | 11 | 5 | 5 | ||||||||||||||||||||
| Asset retirement obligations, long-term | $ | 349 | $ | 236 | $ | 139 |
(a) During the 2021 Successor Period, approximately $44 million of additions relate to the acquisition of Vine. See Note 4 for further discussion of these transactions.
(b) Revisions primarily represent changes in the present value of liabilities resulting from changes in estimated costs and economic lives of producing properties.
(c) During the 2020 Predecessor Period, approximately $49 million and $14 million of disposals related to our Mid-Continent and Haynesville assets, respectively. See Note 4 for further discussion of these transactions.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 24. | Major Customers |
For the 2021 Successor Period, sales to Valero Energy Corporation and Energy Transfer Crude Marketing accounted for approximately 14% and 11%, respectively, of total revenues (before the effects of hedging). For the 2021 Predecessor Period, sales to Valero Energy Corporation accounted for approximately 19% of total revenues (before the effects of hedging). For the 2020 and 2019 Predecessor Periods, sales to Valero Corporation constituted 17% and 12% of total revenues (before the effects of hedging). No other purchasers accounted for more than 10% of our total revenues during the 2021 Successor Period or 2021, 2020 or 2019 Predecessor Periods.
| 25. | Subsequent Events |
On January 24, 2022, Chesapeake entered into definitive agreements to acquire Chief and associated non-operated interests held by affiliates of Tug Hill, Inc. ("Tug Hill"), for $2.0 billion in cash and approximately 9.44 million common shares. Chief and Tug Hill hold producing assets and an inventory of premium drilling locations in the Marcellus Shale in Northeast Pennsylvania. The cash portion of the transaction will be financed with cash on hand and the use of our Exit Credit Facility. The transaction, which is subject to customary closing conditions, including certain regulatory approvals, is expected to close by the end of the first quarter of 2022. In January 2022, we announced our intent to increase the base quarterly dividend to $0.50 per share beginning in the second quarter of 2022, reflecting the cash flow accretion of the transaction.
Additionally, on January 24, 2022, Chesapeake signed an agreement to sell its Powder River Basin assets in Wyoming to Continental Resources, Inc. (NYSE: CLR) for approximately $450 million in cash. The transaction, which is subject to certain customary closing conditions, is expected to close in the first quarter of 2022. At closing, net proceeds from the sale will go toward the purchase price of the Chief Acquisition. The Powder River Basin assets were not classified as held for sale as of December 31, 2021, as the agreement had not been finalized and formal authorization from Chesapeake’s Board of Directors had not yet been obtained.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Supplemental Disclosures About Oil, Natural Gas and NGL Producing Activities (unaudited) |
Net Capitalized Costs
Capitalized costs related to our oil, natural gas and NGL producing activities are summarized as follows:
| Successor | Predecessor | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Oil and oil and natural gas properties: | |||||||||||||||||
| Proved | $ | 7,682 | $ | 25,734 | |||||||||||||
| Unproved | 1,530 | 1,550 | |||||||||||||||
| Total | 9,212 | 27,284 | |||||||||||||||
| Less accumulated depreciation, depletion and amortization | (882) | (23,007) | |||||||||||||||
| Net capitalized costs | $ | 8,330 | $ | 4,277 |
Unproved properties as of December 31, 2021 and 2020, consisted mainly of leasehold acquired through direct purchases of significant oil and natural gas property interests. We will continue to evaluate our unproved properties, and although the timing of the ultimate evaluation or disposition of the properties cannot be determined, we can expect the majority of our unproved properties not held by production to be transferred into the amortization base over the next five years.
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development
Costs incurred in oil and natural gas property acquisition, exploration and development, including capitalized interest and asset retirement costs, are summarized as follows:
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Acquisition of Properties(a): | |||||||||||||||||||||||||||||
| Proved properties | $ | 2,183 | $ | — | $ | 3 | $ | 3,264 | |||||||||||||||||||||
| Unproved properties | 1,121 | — | 6 | 792 | |||||||||||||||||||||||||
| Exploratory costs | 31 | — | 8 | 42 | |||||||||||||||||||||||||
| Development costs | 717 | 58 | 887 | 2,177 | |||||||||||||||||||||||||
| Costs incurred | $ | 4,052 | $ | 58 | $ | 904 | $ | 6,275 |
(a) Includes $2.181 billion and $1.118 billion of proved and unproved property acquisitions, respectively, related to our acquisition of Vine in 2021.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Results of Operations from Oil, Natural Gas and NGL Producing Activities
The following table includes revenues and expenses associated directly with our oil, natural gas and NGL producing activities for the periods presented. It does not include any interest costs or indirect general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of our oil, natural gas and NGL operations.
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Period from February 10, 2021 through December 31, 2021 | Period from January 1, 2021 through February 9, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Oil, natural gas and NGL sales | $ | 4,401 | $ | 398 | $ | 2,745 | $ | 4,517 | |||||||||||||||||||||
| Oil and natural gas derivatives and VPP revenue | (1,127) | (382) | 652 | 68 | |||||||||||||||||||||||||
| Production expenses | (297) | (32) | (373) | (520) | |||||||||||||||||||||||||
| Gathering, processing and transportation expenses | (780) | (102) | (1,082) | (1,082) | |||||||||||||||||||||||||
| Severance and ad valorem taxes | (158) | (18) | (149) | (224) | |||||||||||||||||||||||||
| Exploration | (7) | (2) | (427) | (84) | |||||||||||||||||||||||||
| Depletion and depreciation | (882) | (64) | (1,014) | (2,177) | |||||||||||||||||||||||||
| Accretion of asset retirement obligations | (11) | (1) | (12) | (11) | |||||||||||||||||||||||||
| Impairment of oil and natural gas properties | — | — | (8,446) | (8) | |||||||||||||||||||||||||
| Imputed income tax provision(a) | (269) | 48 | 1,840 | (125) | |||||||||||||||||||||||||
| Results of operations from oil, natural gas and NGL producing activities | $ | 870 | $ | (155) | $ | (6,266) | $ | 354 |
(a) The imputed income tax provision is hypothetical (at the statutory tax rate) and determined without regard to our deduction for general and administrative expenses, interest costs and other income tax credits and deductions, nor whether the hypothetical tax provision (benefit) will be payable (receivable).
Oil, Natural Gas and NGL Reserve Quantities
Our petroleum engineers and independent petroleum engineering firms estimated all of our proved reserves as of December 31, 2021, 2020 and 2019. Independent petroleum engineering firm LaRoche Petroleum Consultants, Ltd. estimated an aggregate of 91% of our estimated proved reserves (by volume) as of December 31, 2021.
Proved oil, natural gas and NGL reserves are those quantities of oil, natural gas and NGL which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. Based on reserve reporting rules, the price is calculated using the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within the period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. A project to extract hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes: (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering or performance data and reliable technology establish a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities.
Developed oil, natural gas and NGL reserves are reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods where production can be initiated or restored with relatively low expenditure compared to the cost of drilling a new well.
The information provided below on our oil, natural gas and NGL reserves is presented in accordance with regulations prescribed by the SEC. Our reserve estimates are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, these estimates will change as future information becomes available and as commodity prices change. These changes could be material and could occur in the near term.
Presented below is a summary of changes in estimated reserves for the periods presented:
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| (mmbbl) | (bcf) | (mmbbl) | (mmboe) | |||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Proved reserves, beginning of period (Predecessor) | 161.3 | 3,530 | 52.0 | 802 | ||||||||||||||||||||||
| Extensions, discoveries and other additions | 41.0 | 1,744 | 16.9 | 348 | ||||||||||||||||||||||
| Revisions of previous estimates | 33.3 | 1,522 | 21.1 | 308 | ||||||||||||||||||||||
| Production | (25.9) | (807) | (8.0) | (168) | ||||||||||||||||||||||
| Sale of reserves-in-place | — | — | — | — | ||||||||||||||||||||||
| Purchase of reserves-in-place | — | 1,835 | — | 306 | ||||||||||||||||||||||
| Proved reserves, end of period (Successor) | 209.7 | 7,824 | 82.0 | 1,596 | ||||||||||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 158.1 | 3,196 | 51.4 | 742 | ||||||||||||||||||||||
| End of period (Successor) | 165.7 | 4,246 | 61.7 | 935 | ||||||||||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 3.2 | 334 | 0.6 | 60 | ||||||||||||||||||||||
| End of period(a) (Successor) | 44.0 | 3,578 | 20.3 | 661 | ||||||||||||||||||||||
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
| Oil | Natural Gas | NGL | Total | |||||||||||||||||||||||
| (mmbbl) | (bcf) | (mmbbl) | (mmboe) | |||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Proved reserves, beginning of period (Predecessor) | 358.0 | 6,566 | 120.0 | 1,572 | ||||||||||||||||||||||
| Extensions, discoveries and other additions | 1.1 | 100 | 0.4 | 18 | ||||||||||||||||||||||
| Revisions of previous estimates | (148.2) | (2,326) | (50.6) | (586) | ||||||||||||||||||||||
| Production | (37.3) | (684) | (11.3) | (163) | ||||||||||||||||||||||
| Sale of reserves-in-place | (12.3) | (126) | (6.5) | (39) | ||||||||||||||||||||||
| Purchase of reserves-in-place | — | — | — | — | ||||||||||||||||||||||
| Proved reserves, end of period (Predecessor) | 161.3 | 3,530 | 52.0 | 802 | ||||||||||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 201.4 | 3,377 | 82.1 | 846 | ||||||||||||||||||||||
| End of period (Predecessor) | 158.1 | 3,196 | 51.4 | 742 | ||||||||||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 156.6 | 3,189 | 37.9 | 726 | ||||||||||||||||||||||
| End of period(a) (Predecessor) | 3.2 | 334 | 0.6 | 60 | ||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Proved reserves, beginning of period (Predecessor) | 215.5 | 6,777 | 103.3 | 1,448 | ||||||||||||||||||||||
| Extensions, discoveries and other additions | 52.2 | 897 | 13.9 | 216 | ||||||||||||||||||||||
| Revisions of previous estimates | (40.9) | (516) | (15.8) | (143) | ||||||||||||||||||||||
| Production | (43.0) | (728) | (12.3) | (177) | ||||||||||||||||||||||
| Sale of reserves-in-place | (1.8) | (23) | (1.4) | (7) | ||||||||||||||||||||||
| Purchase of reserves-in-place | 176.0 | 159 | 32.3 | 235 | ||||||||||||||||||||||
| Proved reserves, end of period (Predecessor) | 358.0 | 6,566 | 120.0 | 1,572 | ||||||||||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 127.6 | 3,314 | 67.9 | 748 | ||||||||||||||||||||||
| End of period (Predecessor) | 201.4 | 3,377 | 82.1 | 846 | ||||||||||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||||
| Beginning of period (Predecessor) | 87.9 | 3,463 | 35.4 | 700 | ||||||||||||||||||||||
| End of period(a) (Predecessor) | 156.6 | 3,189 | 37.9 | 726 |
(a) As of December 31, 2021, 2020 and 2019, there were no PUDs that had remained undeveloped for five years or more.
During 2021, we acquired 306 mmboe primarily related to the acquisition of Vine. We recorded extensions and discoveries of 348 mmboe following our emergence from bankruptcy on February 9, 2021 and certainty regarding our ability to finance the development of our proved reserves over a five-year period. We recorded 308 mmboe of upward revisions of previous estimates, which consisted of 214 mmboe due to lateral length adjustments, performance and updates to our five-year development plan and 94 mmboe due to higher oil, natural gas and NGL prices in 2021. The oil and natural gas prices used in computing our reserves as of December 31, 2021, were $66.56 per bbl and $3.60 per mcf, respectively, before basis differential adjustments.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
During 2020, we recorded extensions and discoveries of 18 mmboe primarily in the Marcellus and Haynesville primarily related to successfully drilled new well additions. We sold 39 mmboe of proved reserves for approximately $136 million primarily in the Mid-Continent. We recorded 586 mmboe of downward revisions of previous estimates consisting of 423 mmboe of downward revisions due to updates to our five-year development plan in contemplation of ongoing market conditions and uncertainty regarding our ability to finance the development of our proved reserves over a five-year period, downward revisions of 208 mmboe due to lower oil, natural gas and NGL prices in 2020, and upward revisions of 45 mmboe due to ongoing portfolio evaluation including performance adjustments. The oil and natural gas prices used in computing our reserves as of December 31, 2020, were $39.57 per bbl and $1.98 per mcf, respectively, before basis differential adjustments.
During 2019, we acquired 235 mmboe primarily related to the acquisition of WildHorse. We recorded extensions and discoveries of 216 mmboe, primarily related to undeveloped well additions in the Marcellus and Eagle Ford operating areas. In addition, we recorded downward revisions of 110 mmboe due to lower oil, natural gas and NGL prices in 2019, and downward revisions of 33 mmboe due to ongoing portfolio evaluation including lateral length adjustments, performance and updates to our five-year development plan. The oil and natural gas prices used in computing our reserves as of December 31, 2019, were $55.69 per bbl and $2.58 per mcf, respectively, before basis differential adjustments.
Standardized Measure of Discounted Future Net Cash Flows
Accounting Standards Codification Topic 932 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Chesapeake has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs as of December 31, 2021, 2020 and 2019 were determined by applying the average of the first-day-of-the-month prices for the 12 months of the year and year-end costs to the estimated quantities of oil, natural gas and NGL to be produced. Actual future prices and costs may be materially higher or lower than the prices and costs used. For each year, estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on continuation of the economic conditions applied for that year. Estimated future income taxes are computed using current statutory income tax rates including consideration of the current tax basis of the properties and related carryforwards, giving effect to permanent differences and tax credits. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and do not necessarily reflect our expectations of actual revenue to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates reflect the valuation process.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
The following summary sets forth our future net cash flows relating to proved oil, natural gas and NGL reserves based on the standardized measure:
| Years Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| Future cash inflows | $ | 33,700 | (a) | $ | 8,247 | (b) | $ | 29,857 | (c) | ||||||||||||||
| Future production costs | (6,735) | (2,963) | (6,956) | ||||||||||||||||||||
| Future development costs | (3,687) | (563) | (5,757) | ||||||||||||||||||||
| Future income tax provisions | (2,254) | (9) | (75) | ||||||||||||||||||||
| Future net cash flows | 21,024 | 4,712 | 17,069 | ||||||||||||||||||||
| Less effect of a 10% discount factor | (8,737) | (1,626) | (8,069) | ||||||||||||||||||||
| Standardized measure of discounted future net cash flows | $ | 12,287 | $ | 3,086 | $ | 9,000 |
(a) Calculated using prices of $66.56 per bbl of oil and $3.60 per mcf of natural gas, before basis differential adjustments.
(b) Calculated using prices of $39.57 per bbl of oil and $1.98 per mcf of natural gas, before basis differential adjustments.
(c) Calculated using prices of $55.69 per bbl of oil and $2.58 per mcf of natural gas, before basis differential adjustments.
The principal sources of change in the standardized measure of discounted future net cash flows are as follows:
| Years Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Standardized measure, beginning of period(a) | $ | 3,086 | $ | 9,000 | $ | 9,495 | ||||||||||||||
| Sales of oil and natural gas produced, net of production costs and gathering, processing and transportation(b) | (3,414) | (1,140) | (2,691) | |||||||||||||||||
| Net changes in prices and production costs | 6,674 | (5,576) | (3,457) | |||||||||||||||||
| Extensions and discoveries, net of production and development costs | 2,834 | 71 | 991 | |||||||||||||||||
| Changes in estimated future development costs | (459) | 1,933 | 366 | |||||||||||||||||
| Previously estimated development costs incurred during the period | 130 | 665 | 775 | |||||||||||||||||
| Revisions of previous quantity estimates | 2,034 | (1,839) | (793) | |||||||||||||||||
| Purchase of reserves-in-place | 2,807 | — | 3,435 | |||||||||||||||||
| Sales of reserves-in-place | — | (112) | (57) | |||||||||||||||||
| Accretion of discount | 309 | 902 | 953 | |||||||||||||||||
| Net change in income taxes | (1,423) | 14 | 17 | |||||||||||||||||
| Changes in production rates and other | (291) | (832) | (34) | |||||||||||||||||
| Standardized measure, end of period(a) | $ | 12,287 | $ | 3,086 | $ | 9,000 |
(a) The impact of cash flow hedges has not been included in any of the periods presented.
(b) Excludes gains and losses on derivatives.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
SUPPLEMENTARY INFORMATION - (Continued)
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