filings.toolsExpand Energy 10-Q 2021-09-30
Filed 2021-11-02. 8 sections, 347K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1395733 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 6100 North Western Avenue, | Oklahoma City, | Oklahoma | 73118 | |||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
| (405) | 848-8000 | |||||||||||||
| (Registrant’s telephone number, including area code) |
| Securities Registered Pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, $0.01 par value per share | CHK | The Nasdaq Stock Market LLC | ||||||||||||
| Class A Warrants to purchase Common Stock | CHKEW | The Nasdaq Stock Market LLC | ||||||||||||
| Class B Warrants to purchase Common Stock | CHKEZ | The Nasdaq Stock Market LLC | ||||||||||||
| Class C Warrants to purchase Common Stock | CHKEL | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☒
Smaller Reporting Company ☒ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court Yes ☒ No ☐
As of November 1, 2021, there were 117,105,845 shares of our $0.01 par value common stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
| Definitions |
Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Chesapeake,” the “Company” and “Registrant” refer to Chesapeake Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
“ASC” means Accounting Standards Codification.
“Backstop Commitment Agreement” means that certain Backstop Commitment Agreement, dated as of June 28, 2020, by and between Chesapeake and the Backstop Parties, as may be further amended, modified, or supplemented from time to time, in accordance with its terms.
“Backstop Parties” means the members of the FLLO Ad Hoc Group that are signatories to the Backstop Commitment Agreement and Franklin Advisers, Inc., as investment manager on behalf of certain funds and accounts.
“Bankruptcy Code” means Title 11 of the United States Code, 11 U.S.C. §§ 101–1532, as amended.
“Bankruptcy Court” means the United States Bankruptcy Court for the Southern District of Texas.
“Bbl” or “Bbls” means barrel or barrels.
“Bcf” means billion cubic feet.
“Boe” means barrel of oil equivalent. Natural gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the natural gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of natural gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.
“Chapter 11 Cases” means, when used with reference to a particular Debtor, the case pending for that Debtor under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, and when used with reference to all the Debtors, the procedurally consolidated Chapter 11 cases pending for the Debtors in the Bankruptcy Court.
“Class A Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan, the Class B Warrants, and the Class C Warrants), at an initial exercise price per share of $27.63. The Class A Warrants are exercisable from the Effective Date until February 9, 2026.
“Class B Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan and the Class C Warrants), at an initial exercise price per share of $32.13. The Class B Warrants are exercisable from the Effective Date until February 9, 2026.
“Class C Warrants” means warrants to purchase 10 percent of the New Common Stock (after giving effect to the Rights Offering, but subject to dilution by the Management Incentive Plan), at an initial exercise price per share of $36.18. The Class C Warrants are exercisable from the Effective Date until February 9, 2026.
“Confirmation Order” means the order confirming the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, Docket No. 2915, entered by the Bankruptcy Court on January 16, 2021.
“Debtors” means the Company, together with all of its direct and indirect subsidiaries that have filed the Chapter 11 Cases.
“DIP Facility” means that certain debtor-in-possession financing facility documented pursuant to the DIP Documents and DIP Order.
“Effective Date” means February 9, 2021.
“Exit Credit Facility” means the reserve-based revolving credit facility available upon emergence from bankruptcy.
“FLLO Term Loan Facility” means the facility outstanding under the FLLO Term Loan Facility Credit Agreement.
“FLLO Term Loan Facility Credit Agreement” means that certain Term Loan Agreement, dated as of December 19, 2019 ((i) as supplemented by that certain Class A Term Loan Supplement, dated as of December 19, 2019 (as amended, restated or otherwise modified from time to time), by and among Chesapeake, as borrower, the Debtor guarantors party thereto, GLAS USA LLC, as administrative agent, and the lenders party thereto, and (ii) as further amended, restated, or otherwise modified from time to time), by and among Chesapeake, the Debtor guarantors party thereto, GLAS USA LLC, as administrative agent, and the lenders party thereto.
“GAAP” means U.S. generally accepted accounting principles.
“General Unsecured Claim” means any Claim against any Debtor that is not otherwise paid in full during the Chapter 11 Cases pursuant to an order of the Bankruptcy Court and is not an Administrative Claim, a Priority Tax Claim, an Other Priority Claim, an Other Secured Claim, a Revolving Credit Facility Claim, a FLLO Term Loan Facility Claim, a Second Lien Notes Claim, an Unsecured Notes Claim, an Intercompany Claim, or a Section 510(b) Claim.
“MBbls” means thousand barrels.
“MMBbls” means million barrels.
“MBoe” means thousand Boe.
“MMBoe” means million Boe.
“Mcf” means thousand cubic feet.
“MMcf” means million cubic feet.
“New Common Stock” means the single class of common stock issued by Reorganized Chesapeake on the Effective Date.
“NGL” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC” means Organization of the Petroleum Exporting Countries.
“Petition Date” means June 28, 2020, the date on which the Debtors commenced the Chapter 11 Cases.
“Plan” means the Fifth Amended Joint Chapter 11 Plan of Reorganization of Chesapeake Energy Corporation and its Debtor Affiliates, attached as Exhibit A to the Confirmation Order.
“Put Option Premium” means a nonrefundable aggregate fee of $60 million, which represents 10 percent of the Rights Offering Amount, payable to the Backstop Parties in accordance with, and subject to the terms of the Backstop Commitment Agreement based on their respective backstop commitment percentages at the time such payment is made.
“Rights Offering” means the New Common Stock rights offering for the Rights Offering Amount consummated by the Debtors on the Effective Date.
“SEC” means United States Securities and Exchange Commission.
“Second Lien Notes” means the 11.500% senior notes due 2025 issued by Chesapeake pursuant to the Second Lien Notes Indenture.
“Second Lien Notes Claim” means any Claim on account of the Second Lien Notes.
“Tranche A Loans” means the fully revolving loans made under and on the terms set forth under the Exit Credit Facility which will be partially funded on the Effective Date, will have a scheduled maturity of 3 years from the Effective Date, and shall at all times be repaid prior to the repayment of the Tranche B Loans.
“Tranche B Loans” means term loans made under and on the terms set forth under the Exit Credit Facility which will be fully funded on the Effective Date, will have a scheduled maturity of 4 years from the Effective Date, will be repaid or prepaid only after there are no Tranche A Loans outstanding, and once so prepaid or repaid, may not be reborrowed.
“Warrants” means collectively, the Class A Warrants, Class B Warrants and Class C Warrants.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/Boe” means per Boe.
“/Mcf” means per Mcf.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| Successor | Predecessor | ||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||
| Assets | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 849 | $ | 279 | |||||||||||||
| Restricted cash | 9 | — | |||||||||||||||
| Accounts receivable, net | 815 | 746 | |||||||||||||||
| Short-term derivative assets | — | 19 | |||||||||||||||
| Other current assets | 61 | 64 | |||||||||||||||
| Total current assets | 1,734 | 1,108 | |||||||||||||||
| Property and equipment: | |||||||||||||||||
| Oil and natural gas properties, successful efforts method | |||||||||||||||||
| Proved oil and natural gas properties | 5,163 | 25,734 | |||||||||||||||
| Unproved properties | 421 | 1,550 | |||||||||||||||
| Other property and equipment | 492 | 1,754 | |||||||||||||||
| Total property and equipment | 6,076 | 29,038 | |||||||||||||||
| Less: accumulated depreciation, depletion and amortization | (571) | (23,806) | |||||||||||||||
| Property and equipment held for sale, net | 3 | 10 | |||||||||||||||
| Total property and equipment, net | 5,508 | 5,242 | |||||||||||||||
| Other long-term assets | 84 | 234 | |||||||||||||||
| Total assets | $ | 7,326 | $ | 6,584 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)
| Successor | Predecessor | ||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||
| Liabilities and stockholders’ equity (deficit) | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 257 | $ | 346 | |||||||||||||
| Current maturities of long-term debt | — | 1,929 | |||||||||||||||
| Accrued interest | 10 | 3 | |||||||||||||||
| Short-term derivative liabilities | 1,345 | 93 | |||||||||||||||
| Other current liabilities | 898 | 723 | |||||||||||||||
| Total current liabilities | 2,510 | 3,094 | |||||||||||||||
| Long-term debt, net | 1,259 | — | |||||||||||||||
| Long-term derivative liabilities | 265 | 44 | |||||||||||||||
| Asset retirement obligations, net of current portion | 244 | 139 | |||||||||||||||
| Other long-term liabilities | 10 | 5 | |||||||||||||||
| Liabilities subject to compromise | — | 8,643 | |||||||||||||||
| Total liabilities | 4,288 | 11,925 | |||||||||||||||
| Contingencies and commitments (Note 6) | |||||||||||||||||
| 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: 98,286,731 and 0 shares issued | 1 | — | |||||||||||||||
| Successor additional paid-in capital | 3,594 | — | |||||||||||||||
| Accumulated deficit | (557) | (23,954) | |||||||||||||||
| Total stockholders’ equity (deficit) | 3,038 | (5,341) | |||||||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 7,326 | $ | 6,584 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Successor | Predecessor | ||||||||||||||||
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||||||||
| Revenues and other: | |||||||||||||||||
| Oil, natural gas and NGL | $ | 1,170 | $ | 672 | |||||||||||||
| Marketing | 627 | 448 | |||||||||||||||
| Oil and natural gas derivatives | (910) | (161) | |||||||||||||||
| Gains on sales of assets | 3 | 1 | |||||||||||||||
| Total revenues and other | 890 | 960 | |||||||||||||||
| Operating expenses: | |||||||||||||||||
| Production | 80 | 82 | |||||||||||||||
| Gathering, processing and transportation | 219 | 258 | |||||||||||||||
| Severance and ad valorem taxes | 41 | 37 | |||||||||||||||
| Exploration | 2 | 5 | |||||||||||||||
| Marketing | 625 | 450 | |||||||||||||||
| General and administrative | 30 | 52 | |||||||||||||||
| Separation and other termination costs | — | 16 | |||||||||||||||
| Depreciation, depletion and amortization | 228 | 170 | |||||||||||||||
| Other operating expense, net | 3 | 1 | |||||||||||||||
| Total operating expenses | 1,228 | 1,071 | |||||||||||||||
| Loss from operations | (338) | (111) | |||||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest expense | (17) | (25) | |||||||||||||||
| Other income |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| Introduction |
The following discussion should be read together with the condensed consolidated financial statements included in Item 1 of Part I of this report and the consolidated financial statements included in Item 8 of our 2020 Form 10-K.
We are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs. We own a large and geographically diverse portfolio of onshore U.S. unconventional natural gas and liquids assets, including interests in approximately 7,500 gross oil and natural gas wells at September 30, 2021. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania (“Appalachia”) and the Haynesville/Bossier Shales in northwestern Louisiana (“Gulf Coast”). Our liquids-rich resource plays are the Eagle Ford Shale in South Texas (“South Texas” and “Brazos Valley”) and the stacked pay in the Powder River Basin in Wyoming (“Powder River Basin”).
Our strategy is to create shareholder value by generating sustainable free cash flow from our oil and natural gas development and production activities. We continue to focus on improving margins through operating efficiencies and financial discipline and improving our Environmental, Social, and Governance (ESG) performance. To accomplish these goals, we intend to allocate our human resources and capital expenditures to projects we believe offer the highest cash return on capital invested, to deploy leading drilling and completion technology throughout our portfolio, and to take advantage of acquisition and divestiture opportunities to strengthen our portfolio. We also intend to continue to dedicate capital to projects that reduce the environmental impact of our oil and natural gas producing activities. We continue to seek opportunities to reduce cash costs (production, gathering, processing and transportation and general and administrative) per barrel of oil equivalent production through operational efficiencies by, among other things, improving our production volumes from existing wells.
Leading a responsible energy future is foundational to Chesapeake's success. Our core values and culture demand we continuously evaluate the environmental impact of our operations and work diligently to improve our ESG performance across all facets of our Company. Our path to leading a responsible energy future begins with our initiative to achieve net-zero direct greenhouse gas emissions by 2035, which we announced in February 2021. To meet this challenge, we have set meaningful initial goals including:
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Eliminate routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025;
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Reduce our methane intensity to 0.09% by 2025; and
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Reduce our GHG intensity to 5.5 by 2025.
In July 2021, we announced our plan to receive independent certification of our natural gas production under the MiQ methane standard and EO100 Standard for Responsible Energy Development. We anticipate that certified natural gas will be available in our Gulf Coast basin by the end of 2021 and in our Appalachia basin by the end of the second quarter of 2022. The MiQ certification will provide a verified approach to tracking our commitment to reduce our methane intensity to 0.09% by 2025, as well as support our overall objective of achieving net-zero direct greenhouse gas emissions by 2035.
Our results of operations as reported in our condensed consolidated financial statements for the 2021 Successor Quarter, 2021 Successor Period, 2021 Predecessor Period, 2020 Predecessor Quarter and 2020 Predecessor Period are in accordance with GAAP. Although GAAP requires that we report on our results for the periods January 1, 2021 through February 9, 2021 and February 10, 2021 through September 30, 2021 separately, management views our operating results for the nine months ended September 30, 2021 by combining the results of the 2021 Predecessor Period and the 2021 Successor Period because management believes such presentation provides the most meaningful comparison of our results to prior periods. We are not able to compare the 40 days from January 1, 2021 through February 9, 2021 operating results to any of the previous periods reported in the condensed consolidated financial statements and do not believe reviewing this period in isolation would be useful in identifying any trends in, or reaching any conclusions regarding, our overall operating performance. We believe the key performance indicators such as operating revenues and expenses for the 2021 Successor Period combined with the 2021 Predecessor Period provide more meaningful comparisons to other periods and are useful in understanding operational trends. Additionally, there were no changes in policies between the periods, and any
material impacts as a result of fresh start accounting were included within the discussion of these changes. These combined results do not comply with GAAP and have not been prepared as pro forma results under applicable regulations, but are presented because we believe they provide the most meaningful comparison of our results to prior periods.
| Recent Developments |
Emergence from Bankruptcy
On the Petition Date the Debtors filed the Chapter 11 Cases under Chapter 11 of 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. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Non-Filing Entities have continued to operate in the ordinary course of business.
The Bankruptcy Court confirmed the Plan and the Debtors entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on the Effective Date. In connection with our exit from bankruptcy, we filed a registration statement with the SEC to facilitate future sales of our equity by certain holders of our New Common Stock and warrants. Sales of a substantial number of the New Common Stock in the public markets, or the perception that these sales might occur, could reduce the value of our equity and impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity. See Note 2 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a complete discussion of the Chapter 11 Cases.
Chief Executive Officer
On April 27, 2021, we announced the departure of Doug Lawler from his positions as Chief Executive Officer and Director of Chesapeake, effective April 30, 2021. Michael Wichterich, the Chairman of our Board of Directors, served as Interim Chief Executive Officer while the Board of Directors conducted a search for a new Chief Executive Officer.
Mr. Wichterich intends to continue in his role as Chair of the Board of Directors following the appointment of Chesapeake's new Chief Executive Officer. During the period that Mr. Wichterich was both the Chair of the Board of Directors and Interim Chief Executive Officer, Matt Gallagher, the Chair of the Nominating and Governance Committee of the Board of Directors, served as Lead Independent Director.
On October 11, 2021, we announced that the Board of Directors appointed Domenic “Nick” Dell’Osso as President and Chief Executive Officer and as member of the Board, effective October 11, 2021. Additionally, Mr. Dell
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to market risk. The term market risk relates to our risk of loss arising from adverse changes in oil, natural gas, and NGL prices and interest rates. These disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL, which have been historically volatile. To mitigate a portion of our exposure to adverse price changes, we enter into various derivative instruments. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
We determine the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also 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. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. 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. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the fair value measurements associated with our derivatives.
For the combined 2021 Successor and Predecessor Periods, oil, natural gas, and NGL revenue, excluding any effect of our derivative instruments, were $1,294 million, $1,547 million and $172 million, respectively. Based on production, oil, natural gas, and NGL revenue for the 2021 Successor and Predecessor Periods would have increased or decreased by approximately $129 million, $154 million, and $18 million, respectively, for each 10% increase or decrease in prices. As of September 30, 2021, the fair values of our oil and natural gas derivatives were net liabilities of $467 million and $1,143 million, respectively. A 10% increase or decrease in forward oil prices would decrease or increase the valuation of oil derivatives by approximately $124 million. A 10% increase in forward natural gas prices would decrease the valuation of natural gas derivatives by approximately $259 million. A 10% decrease in forward natural gas prices would increase the valuation of natural gas derivatives by approximately $258 million. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further information on our open derivative positions.
Interest Rate Risk
Our exposure to interest rate changes relates primarily to borrowings under our Exit Credit Facility for the 2021 Successor Period and pre-petition revolving credit facility and DIP Facility for the 2020 and 2021 Predecessor Periods. Interest is payable on borrowings under the Exit Credit Facility, pre-petition revolving credit facility and DIP Facility based on floating rates. See Note 5 for additional information. As of September 30, 2021, we had no outstanding borrowings under our Exit Credit Facility - Tranche A Loans and $221 million under our Exit Credit Facility - Tranche B Loans. A 1.0% increase in interest rates based on the variable borrowings as of September 30, 2021 would result in an increase in our interest expense of approximately $2 million per year.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2021 that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. Legal Proceedings |
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 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report 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 currently indeterminate. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information regarding our estimation and provision for potential losses related to litigation and regulatory proceedings.
Business Operations. We are 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 these prepetition legal proceedings, including the matters below, 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 addressing 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.
Item 1A. Risk Factors
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock are described under “Risk Factors” in Item 1A of our 2020 Form 10-K and the additional risk factors provided below, which supplement the risk factors included in our 2020 Form 10-K. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
Risks Relating to the Vine Acquisition
The synergies attributable to the Vine Acquisition may vary from expectations.
We may fail to realize the anticipated benefits and synergies expected from the Vine Acquisition, which could adversely affect our business, financial condition and operating results. The success of the Vine Acquisition will depend, in significant part, on our ability to successfully integrate the acquired business, grow the revenue of the combined company and realize the anticipated strategic benefits and synergies from the combination, such as operational and financial scale, and increased free cash flow. However, achieving these goals requires, among other things, realization of the targeted cost synergies expected from the merger. The growth and the anticipated benefits of the transactions may not be realized fully or at all, or may take longer to realize than expected. Actual operating, technological, strategic and revenue opportunities, if achieved at all, may be less significant than expected or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Vine Acquisition within the anticipated timing or at all, our business, financial condition and operating results may be adversely affected.
We and Vine will be subject to business uncertainties for a period of time after the closing of the Vine Acquisition, which could adversely affect the combined company after the Vine Acquisition.
Uncertainty about the effect of the merger on employees, industry contacts and business partners may have an adverse effect on the combined company. These uncertainties may impair the combined company’s ability to attract, retain and motivate key personnel for a period of time after the closing of the Vine Acquisition and could cause industry contacts, business partners and others that deal with the combined company to seek to change their existing business relationships with the combined company.
Uncertainties associated with the Vine Acquisition may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.
The Company and Vine are dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. The combined company’s success after the Vine Acquisition will depend in part upon the ability of the Company and Vine to retain key management personnel and other key employees. Current and prospective employees of the Company and Vine may experience uncertainty about their roles within the combined company following the Vine Acquisition, which may have an adverse effect on the ability of the Company to attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will achieve the same success attracting or retaining key management personnel and other key employees as the Company may have independently achieved prior to the Vine Acquisition.
We have incurred and will continue to incur significant transaction and merger-related costs in connection with the Vine Acquisition, which may be in excess of our expectations.
We have incurred and expect to continue to incur a number of non-recurring costs associated with negotiating and completing the Vine Acquisition, combining the operations of the two companies and achieving desired synergies. These fees and costs have been, and will continue to be, substantial. The substantial majority of non-recurring expenses will consist of transaction costs related to the Vine Acquisition and include, among others, employee retention costs, fees paid to financial, legal and accounting advisors, severance and benefit costs and filing fees.
We will also incur transaction fees and costs related to the integration of the companies, which may be substantial. Moreover, we may incur additional unanticipated expenses in connection with the Vine Acquisition and the integration, including costs associated with any stockholder litigation related to the Vine Acquisition. Although we expect that the elimination of duplicative costs as well as the realization of other efficiencies related to the
integration of the businesses should offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
The costs described above, as well as other unanticipated costs and expenses, could have a material adverse effect on our financial condition and operating results.
Completion of the Vine Acquisition may have triggered change in control or other provisions in certain agreements to which Vine or its subsidiaries is a party.
The completion of the Vine Acquisition may trigger change in control or other provisions in certain agreements to which Vine or its subsidiaries is a party. If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under such agreements, potentially terminating the agreement or seeking monetary damages. Additionally, even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the combined company.
We have substantial indebtedness after giving effect to the Vine Acquisition, which may limit our financial flexibility and adversely affect our financial results.
Under the merger agreement, Vine’s outstanding senior notes remained outstanding, and following certain internal reorganization transactions, we became the successor obligor of the senior notes. As of September 30, 2021, the aggregate principal amount of such outstanding senior notes was approximately $950 million. As of September 30, 2021, we had total long-term debt of approximately $1.3 billion, consisting primarily of the amounts outstanding under our credit facility and our senior unsecured notes.
The combined company’s pro forma indebtedness as of September 30, 2021, assuming consummation of the Vine Acquisition had occurred on such date and Vine’s senior notes remained outstanding, would have been approximately $2.2 billion, representing an increase in comparison to our recent, historical indebtedness. This increase in our indebtedness could have adverse effects on our financial condition and results of operations, including:
- increasing the difficulty of us to satisfy our debt obligations, including any repurchase obligations
that may arise thereunder;
- diverting a portion of our cash flows to service our indebtedness, which could reduce the funds
available for operations and other purposes;
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increasing our vulnerability to general adverse economic and industry conditions;
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placing us at a competitive disadvantage compared to our competitors that are less leveraged and,
therefore, may be able to take advantage of opportunities that we would be unable to pursue due to
our indebtedness;
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limiting our ability to access the capital markets to raise capital on favorable terms;
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impairing our ability to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate or other purposes; and
- increasing our vulnerability to interest rate increases, as our borrowings under our revolving credit
facility are at variable interest rates.
We believe that the combined company will have flexibility to repay, refinance, repurchase, redeem, exchange or otherwise terminate large portions of its outstanding debt obligations. However, there can be no guarantee that we will be able to execute such refinancings on favorable terms, or at all, and a high level of indebtedness increases the risk that we may default on our debt obligations, including from the debt obligations assumed from Vine. Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance. Our future performance depends on many factors independent of the Vine Acquisition, some of which are beyond our control, such as general economic conditions and oil and natural gas prices. We may not be able to generate sufficient cash flows to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt.
Lawsuits have been filed and may be filed against the Company, Vine and their respective affiliates in connection with the Vine Acquisition. An adverse ruling in any such lawsuit could result in substantial costs to the Company and Vine.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements like the merger agreement. Even if any of the lawsuits which have been filed and may be filed are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.
Additionally, there can be no assurance that any of the defendants in any potential future lawsuits will be successful in the outcome of such lawsuits. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect our business, financial condition, results of operations and cash flows.
Our integration of Vine into the Company may not be as successful as anticipated, and we may not achieve the intended benefits or do so within the intended timeframe.
The Vine Acquisition involves numerous operational, strategic, financial, accounting, legal, tax and other risks, potential liabilities associated with the acquired business, and uncertainties related to design, operation and integration of Vine’s internal control over financial reporting. Difficulties in integrating Vine into the Company may result in Vine performing differently than expected, operational challenges, or the failure to realize anticipated expense-related efficiencies. Potential difficulties that may be encountered in the integration process include, among others:
- the inability to successfully integrate the business of Vine into the Company in a manner that
permits the Company to achieve the full revenue and cost savings anticipated from the Vine
Acquisition;
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complexities associated with managing the larger, more complex integrated business;
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not realizing anticipated operating synergies;
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integrating personnel from the two companies and the loss of key employees;
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potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated
with the Vine Acquisition;
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integrating relationships with industry contacts and business partners;
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performance shortfalls as a result of the diversion of management’s attention caused by completing
the Vine Acquisition and the integration process; and
- the disruption of, or the loss of momentum in, ongoing business or inconsistencies in standards,
controls, procedures and policies.
Additionally, the success of the Vine Acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the two businesses, including operational and other synergies that we believe the combined company will achieve. The anticipated benefits and cost savings of the Vine Acquisition may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee.
Our results may suffer if we do not effectively manage our expanded operations following the Vine Acquisition.
The success of the Vine Acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the two businesses, including the need to integrate the operations and business of Vine into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with customers, vendors, industry contacts and business partners.
The anticipated benefits and cost savings of the Vine Acquisition may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee. Some of the assumptions that we have made, such as the achievement of operating synergies, may not be realized. There could also be unknown liabilities and unforeseen expenses associated with the Vine Acquisition that were not discovered in the due diligence review conducted by each company prior to entering into the transaction.
The market price of our common stock may be affected by factors different from those that historically have affected the price of our common stock.
Our business differs from that of Vine in certain respects, and, accordingly, the financial position or results of operations and/or cash flows of the combined company, as well as the market price of our common stock, may be affected by factors different from those currently affecting our financial position or results of operations and/or cash flows as an independent standalone company.
As a result of the Vine Acquisition, we have incorporated Vine’s hedging activities into our business, and we may be exposed to additional commodity price risks arising from such hedges.
To mitigate its exposure to changes in commodity prices, Vine hedges natural gas prices from time to time, primarily through the use of certain derivative instruments. As a result of the merger, we assumed Vine’s existing derivative instruments. Actual natural gas prices may differ from our expectations and, as a result, such derivative instruments may have a negative impact on our business, financial condition and operating results.
The combined company may not be able to retain customers or suppliers, and customers or suppliers may seek to modify contractual obligations with the combined company, either of which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with the Company or Vine as a result of the Vine Acquisition.
As a result of the Vine Acquisition, the combined company may experience impacts on relationships with customers and suppliers that may harm the combined company’s business and results of operations. Certain customers or suppliers may seek to terminate or modify contractual obligations following the Vine Acquisition whether or not contractual rights are triggered as a result of the Vine Acquisition. There can be no guarantee that customers and suppliers will remain with or continue to have a relationship with the combined company or do so on the same or similar contractual terms following the merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue their relationships with the combined company, then the combined company’s business and results of operations may be harmed. If the combined company’s suppliers were to seek to terminate or modify an arrangement with the combined company, then the combined company may be unable to procure necessary supplies or services from other suppliers in a timely and efficient manner and on acceptable terms, or at all.
Vine also has contracts with vendors, landlords, licensors and other business partners that may require Vine to obtain consents from these other parties in connection with the Vine Acquisition. If these consents cannot be obtained, the combined company may suffer a loss of potential future revenue, incur costs and/or lose rights that may be material to the business of the combined company. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the Vine Acquisition.
We are subject to risks related to health epidemics and pandemics, including the ongoing COVID-19 pandemic, and it is difficult to predict what effect, if any, this might have on the combined company after the Vine Acquisition.
We face various risks related to public health issues, including epidemics, pandemics and other outbreaks, including the ongoing COVID-19 pandemic. The actual and potential effects of COVID-19 include, but are not limited to, its impact on general economic conditions, trade and financing markets, changes in customer behavior and continuity in business operations, all of which create significant uncertainty. In addition, the pandemic has resulted in governmental authorities implementing significant and varied measures to contain the spread of COVID-19, including travel bans and restrictions, quarantines, shelter in place and stay at home orders and business shutdowns. Governmental authorities may enact additional restrictions, or tighten existing measures if COVID-19 continues to spread. These measures, as well as the COVID-19 pandemic broadly, may have a negative effect on the combined company after the Vine Acquisition, which effect will be difficult to predict.
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
There were no repurchases of our common stock during the quarter ended September 30, 2021.
| Item 3. Defaults Upon Senior Securities |
Our bankruptcy filing described above constituted an event of default that accelerated our obligations under our senior credit facility, our senior secured notes and our unsecured notes. Under the Bankruptcy Code, the creditors under these debt agreements were stayed from taking any action against us as a result of an event of default. See Note 5 and Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional details about the principal and interest amounts of debt included in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of December 31, 2020 and our Bankruptcy Filing and the Chapter 11 Cases.
Under the terms of our 5.75% Cumulative Convertible Preferred Stock, 5.75% Cumulative Convertible Preferred Stock (Series A), 4.50% Cumulative Convertible Preferred Stock and 5.00% (Series 2005B) Cumulative Convertible Preferred Stock, we may suspend payments of our cumulative quarterly dividends. We exercised our contractual right to suspend regularly scheduled quarterly payments of dividends on each series of our preferred stock beginning with the quarterly dividend payment for the second quarter of 2020, and were therefore in arrears with the dividend payments. No dividends were accrued on our convertible preferred stock subsequent to the Petition Date. Pursuant to the Plan, each holder of an equity interest in Chesapeake had such interest canceled, released, and extinguished without any distribution. See Note 2 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for additional information about the Chapter 11 Cases.
| Item 4. Mine Safety Disclosures |
The information concerning mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17CFR 229.104) is included in Exhibit 95.1 to this Form 10-Q.
Item 5. Other Information
Item 6. Exhibits
The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.
INDEX OF EXHIBITS
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHESAPEAKE ENERGY CORPORATION | |||||||||||
| Date: November 2, 2021 | By: | /s/ DOMENIC J. DELL’OSSO, JR. | |||||||||
| Domenic J. Dell’Osso, Jr. President, Chief Executive Officer and Chief Financial Officer |