CHESAPEAKE ENERGY CORPORATION 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 202 1 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 onshoreU.S. unconventional natural gas and liquids assets, including interests in approximately 8,200 gross oil and natural gas wells. Our natural gas resource plays are theMarcellus Shale in the northernAppalachian Basin inPennsylvania ("Marcellus") and theHaynesville /Bossier Shales in northwesternLouisiana ("Haynesville"). Our liquids-rich resource play is theEagle Ford Shale inSouth Texas ("Eagle Ford"). Our strategy is to create stockholder 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 inFebruary 2021 . To meet this challenge, we set meaningful initial goals including:
•Eliminate routine flaring from all new wells completed from 2021 forward, and enterprise-wide by 2025;
•Reduce our methane intensity to 0.09% by 2025; and
•Reduce our GHG intensity to 5.5 by 2025.
We achieved our interim goals for both intensity measures by exiting 2021 with a 0.07% methane intensity and a 4.5 GHG intensity, respectively. InJuly 2021 , we announced our plan to receive independent certification of our natural gas production under the MiQ methane standard and EO100 Standard forResponsible Energy Development . OurHaynesville assets were certified as responsibly sourced gas at the end of 2021, and we expect our legacy Marcellus assets to receive dual certification as responsibly sourced 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, 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 2022 Successor Period, 2021 Successor Period and 2021 Predecessor Period are in accordance with GAAP. Although GAAP requires that we report on our results for the periodsJanuary 1, 2021 throughFebruary 9, 2021 andFebruary 10, 2021 throughMarch 31, 2021 separately, management views our operating results for the three months endedMarch 31, 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 fromJanuary 1, 2021 throughFebruary 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 42
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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 Acquisitions OnMarch 9, 2022 , we completed our Marcellus Acquisition pursuant to definitive agreements with Chief,Radler and Tug Hill, Inc. datedJanuary 24, 2022 . OnNovember 1, 2021 , we completed our Vine Acquisition pursuant to a definitive agreement with Vine datedAugust 10, 2021 . These transactions strengthen Chesapeake's competitive position, meaningfully increasing our operating cash flows and adding high quality producing assets and a deep inventory of premium drilling locations, while preserving the strength of our balance sheet.
Divestiture
On
COVID-19 Pandemic and Impact on Global Demand for
The global spread of COVID-19 and its variants created, and continues to create, significant volatility, uncertainty, and economic disruption during 2020, 2021 and into 2022. The ongoing pandemic has resulted in widespread adverse impacts on the global economy and on our customers and other parties with whom we have business relations. To date, we have experienced limited operational impacts as a result of COVID-19 or related governmental restrictions. While we cannot predict the full impact that COVID-19 and its variants, or the related significant disruption and volatility in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations, we believe demand is recovering and prices will continue to be positively impacted in the near term. For additional discussion regarding risks associated with the COVID-19 pandemic, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our
202 1 Form 10-K and Part I, Item 1A "Risk Factors" in our
202 1 Form 10-K .
In lateFebruary 2022 ,Russia launched a military invasion againstUkraine . Sustained conflict and disruption in the region is likely in the near term, and the longer-term duration of the war is uncertain. The Russian invasion has caused, and could intensify, volatility in oil, natural gas and NGL prices, driving a sharp upward spike in the short term, and may have an impact on global growth prospects, which could in turn affect demand for natural gas and oil. The global market is also currently experiencing inflationary pressures, including rising fuel costs, a tightening steel market and labor and supply chain shortages, which could result in increases to our operating and capital costs that are not fixed. We are monitoring the situation and assessing its impact on our business, including our business partners and customers.
Liquidity and Capital Resources
Liquidity Overview
For the 2022 Successor Period, our primary sources of capital resources and
liquidity have consisted of internally generated cash flows from operations and
borrowings under our Exit Credit Facility, and our primary uses of cash have
been for the development of our oil and natural gas properties, acquisitions of
additional oil and natural gas properties and return of value to stockholders
through dividends. Historically, our primary sources of capital resources and
liquidity have consisted of internally generated cash flows from operations,
borrowings under certain credit agreements and dispositions of non-core assets.
Our ability to issue additional indebtedness, dispose of assets or access the
capital markets was substantially limited during the Chapter 11 Cases and
required court approval in most instances. Accordingly, our liquidity in the
2021 Predecessor Period depended mainly on cash generated from operations and
available funds under certain credit agreements.
We believe we have emerged from the Chapter 11 Cases as a fundamentally stronger
company, built to generate sustainable Free Cash Flow with a strengthened
balance sheet, geographically diverse asset base and continuously improving ESG
performance. As a result of the Chapter 11 Cases, we reduced our total
indebtedness
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by$9.4 billion by issuing equity in a reorganized entity to the holders of our FLLO Term Loan, Second Lien Notes, unsecured notes and allowed general unsecured claimants. We believe our cash flow from operations, cash on hand and borrowing capacity under the Exit Credit Facility, as discussed below, will provide sufficient liquidity during the next 12 months and the foreseeable future. As ofMarch 31, 2022 , we had$1.252 billion of liquidity available, including$19 million of cash on hand and$1.233 billion of aggregate unused borrowing capacity available under the Exit Credit Facility. As ofMarch 31, 2022 , we had$500 million of outstanding borrowings under our Exit Credit Facility - Tranche A Loans and$221 million in borrowings under our Exit Credit Facility - Tranche B Loans. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our debt obligations, including carrying and fair value of our senior notes.
Dividend
With our strong liquidity position, we initiated a new dividend strategy in the 2021 Successor Period. We paid dividends of$210 million on our common stock in the 2022 Successor Period. See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion. OnMay 4, 2022 , we declared a quarterly dividend payable of$2.34 per share, which will be paid onJune 2, 2022 to stockholders of record at the close of business onMay 19, 2022 . The dividend consists of a base quarterly dividend in the amount of$0.50 per share and a variable quarterly dividend in the amount of$1.84 per share. The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of the Board of Directors and will depend on the Company's financial results, cash requirements, future prospects and other relevant factors. The Company's ability to pay dividends to its stockholders is restricted by (i)Oklahoma corporate law, (ii) its Certificate of Incorporation, (iii) the terms and provisions of its Credit Agreement and (iv) the terms and provisions of the indentures governing its 5.50% 2026 Notes, 5.875% 2029 Notes and 6.75% Senior Notes due 2029 assumed in the Vine Acquisition.
Derivative and Hedging Activities
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL. We enter into various derivative instruments to mitigate a portion of our exposure to commodity price declines, but these transactions may also limit our cash flows in periods of rising commodity prices. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to better predict the total revenue we expect to receive. See Item 3. Quantitative and Qualitative Disclosures About Market Risk included in Item 1 of Part I of this report for further discussion on the impact of commodity price risk on our financial position.
Contractual Obligations and Off-Balance Sheet Arrangements
As ofMarch 31, 2022 , our material contractual obligations included repayment of senior notes, outstanding borrowings and interest payment obligations under the Exit Credit Facility, derivative obligations, asset retirement obligations, lease obligations, undrawn letters of credit and various other commitments we enter into in the ordinary course of business that could result in future cash obligations. In addition, we have contractual commitments with midstream companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. The estimated gross undiscounted future commitments under these agreements were approximately$4.4 billion as ofMarch 31, 2022 . As discussed above, we estimate the sources of our capital will continue to be adequate to fund our near and long-term contractual obligations. See Notes 6 , 7 and 1 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Post-Emergence Debt
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 the Exit Credit Facility which features an initial borrowing base of$2.5 billion . The borrowing base will be redetermined semiannually on or aroundMay 1 andNovember 1 of each year. Our borrowing base was reaffirmed inApril 2022 , and the next scheduled redetermination will be on or aboutOctober 1, 2022 . The aggregate initial elected commitments of the lenders under the Exit Credit Facility is$1.75 billion of revolving Tranche A Loans and$221 million of fully funded Tranche B Loans. 44
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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 3 years after the Effective Date and the Tranche B Loans mature 4 years after the Effective Date. The Tranche B Loans can be repaid if no Tranche A Loans are outstanding. OnFebruary 2, 2021 , the Company issued$500 million aggregate principal amount of its 2026 Notes and$500 million aggregate principal amount of its 2029 Notes. The offering of the Notes was part of a series of exit financing transactions undertaken in connection with the Debtors' Chapter 11 Cases and meant to provide the exit financing originally intended to be provided by the Exit Term Loan Facility pursuant to the Commitment Letter.
Assumption and Repayment of Vine Debt
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 ofNovember 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.
Capital Expenditures
For the year endingDecember 31, 2022 , we currently expect to bring or have online approximately 190 to 220 gross wells across 11 to 14 rigs and plan to invest approximately$1.5 -$1.8 billion in capital expenditures. We expect that approximately 75% of our 2022 capital expenditures will be directed toward our natural gas assets. We currently plan to fund our 2022 capital program through cash on hand, expected cash flow from our operations and borrowings under our Exit Credit Facility. We may alter or change our plans with respect to our capital program and expected capital expenditures based on developments in our business, our financial position, our industry or any of the markets in which we operate. Sources of Funds The following table presents the sources of our cash and cash equivalents for the periods presented. Successor Predecessor Period from Period from Three Months February 10, January 1, 2021 Ended 2021 through through March 31, March 31, February 9, 2022 2021 2021 Cash provided by (used in) operating activities$ 853 $ 409 $ (21) Proceeds from Exit Credit Facility - Tranche A Loans, net 500 - - Proceeds from issuance of senior notes - - 1,000 Proceeds from issuance of common stock - - 600 Proceeds from warrant exercise 1 - - Proceeds from divestitures of property and equipment 403 4 - Total sources of cash and cash equivalents$ 1,757 $ 413 $ 1,579 45
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Cash Flows from Operating Activities
Cash provided by operating activities was$853 million in the 2022 Successor Period, cash provided by operating activities was$409 million in the 2021 Successor Period and cash used in operating activities was$21 million in the 2021 Predecessor Period. The increase in the 2022 Successor Period is primarily due to higher prices for the oil, natural gas and NGL we sold and increased volumes sold due to the Vine and Marcellus Acquisitions. The cash used in the 2021 Predecessor Period was primarily due to the payment of professional fees related to the Chapter 11 Cases. Cash flows from operations are largely affected by the same factors that affect our net income, excluding various non-cash items, such as depreciation, depletion and amortization, certain impairments, gains or losses on sales of assets, deferred income taxes and mark-to-market changes in our open derivative instruments. See further discussion below under Results of Operations.
Proceeds from Exit Credit Facility - Tranche A Loans, net
In the 2022 Successor Period, we borrowed a net$500 million on the Exit Credit Facility - Tranche A Loans. We funded a portion of the Marcellus Acquisition with borrowings under the Company's Exit Credit Facility. A portion of the borrowings were repaid with internally generated cash from operating activities.
Proceeds from Issuance of Senior Notes and Common Stock
In the 2021 Predecessor Period, we issued$500 million aggregate principal amount of 5.50% 2026 Notes and$500 million aggregate principal amount of 5.875% 2029 Notes for total proceeds of$1.0 billion . Additionally, upon emergence from Chapter 11, we issued 62,927,320 shares of New Common Stock in exchange for$600 million of cash as agreed upon in the Plan.
Uses of Funds
The following table presents the uses of our cash and cash equivalents for the Successor and Predecessor periods:
Successor Predecessor
Period from Period from
Three Months February 10, January 1, 2021
Ended 2021 through through
March 31, March 31, February 9,
2022 2021 2021
Oil and Natural Gas Expenditures:
Capital expenditures $ 344 $ 77 $ 66
Other Uses of Cash and Cash Equivalents:
Business combination, net 2,006 - -
Payments on Exit Credit Facility - Tranche A Loans, net
- 50 479
Payments on DIP Facility borrowings - - 1,179
Debt issuance and other financing costs - 3 8
Cash paid for common stock dividends 210 - -
Cash paid to repurchase and retire common stock 83 - -
Other - 1 -
Total other uses of cash and cash equivalents 2,299 54 1,666
Total uses of cash and cash equivalents $ 2,643 $ 131 $ 1,732
Capital Expenditures
Our capital expenditures significantly increased in the 2022 Successor Period
compared to the combined 2021 Successor and Predecessor Periods primarily as a
result of increased drilling and completion activity primarily in the
Haynesville following the Vine Acquisition.
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Business Combination
In the 2022 Successor Period, we completed the Marcellus Acquisition for approximately$2 billion and 9.4 million shares of our common stock. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Payments on DIP Facility Borrowings
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.
Cash Paid for Common Stock Dividends
As part of our dividend program, we paid quarterly common stock base dividends of$52 million ($0.4375 per share) and paid our first quarterly common stock variable dividend of$158 million ($1.33 per share) in the 2022 Successor Period.
Cash Paid to Repurchase and Retire Common Stock
InMarch 2022 , we commenced our share repurchase program and repurchased 1 million shares of our common stock for an aggregate price of$83 million . The repurchased shares of common stock were retired and recorded as a reduction to common stock and retained earnings. 47
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Oil, Natural Gas and NGL Production and Average Sales Prices
Successor
Three Months Ended March 31, 2022
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Marcellus - - 1,452 4.66 - - 242 27.97
Haynesville - - 1,625 4.46 - - 271 26.73
Eagle Ford 52 95.00 129 4.04 16 41.09 90 68.67
Powder River Basin 8 95.18 41 5.45 3 53.96 17 63.98
Total 60 95.02 3,247 4.54 19 43.05 620 34.31
Successor
Period from February 10, 2021 through March 31, 2021
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Marcellus - - 1,283 2.53 - - 214 15.21
Haynesville - - 524 2.68 - - 87 16.09
Eagle Ford 66 61.51 143 6.04 18 25.72 107 50.07
Powder River Basin 10 58.95 57 4.82 3 34.75 23 42.57
Total 76 61.19 2,007 2.89 21 27.20 431 25.57
Predecessor
Period from January 1, 2021 through February 9, 2021
Oil Natural Gas NGL Total
MBbl MMcf MBbl MBoe
per day $/Bbl per day $/Mcf per day $/Bbl per day $/Boe
Marcellus - - 1,233 2.42 - - 206 14.49
Haynesville - - 543 2.44 - - 90 14.62
Eagle Ford 74 53.37 165 2.57 18 23.94 120 40.27
Powder River Basin 10 51.96 61 2.92 4 34.31 24 34.25
Total 84 53.21 2,002 2.45 22 25.92 440 22.63
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Oil, Natural Gas and NGL Sales
Successor
Three Months Ended March 31, 2022
Oil Natural Gas NGL Total
Marcellus $ - $ 609 $ - $ 609
Haynesville - 652 - 652
Eagle Ford 450 47 57 554
Powder River Basin 66 20 13 99
Total oil, natural gas and NGL sales $ 516 $ 1,328 $ 70 $ 1,914
Successor
Period from
Oil Natural Gas NGL Total
Marcellus $ - $ 163 $ - $ 163
Haynesville - 70 - 70
Eagle Ford 206 43 23 272
Powder River Basin 28 14 6 48
Total oil, natural gas and NGL sales $ 234 $ 290 $ 29 $ 553
Predecessor
Period from
Oil Natural Gas NGL Total
Marcellus $ - $ 119 $ - $ 119
Haynesville - 53 - 53
Eagle Ford 159 17 17 193
Powder River Basin 20 7 6 33
Total oil, natural gas and NGL sales $ 179 $ 196 $ 23 $ 398
Non-GAAP Combined
Three Months Ended March 31, 2021
Oil Natural Gas NGL Total
Marcellus $ - $ 282 $ - $ 282
Haynesville - 123 - 123
Eagle Ford 365 60 40 465
Powder River Basin 48 21 12 81
Total oil, natural gas and NGL sales $ 413 $
486
Oil, natural gas and NGL sales in the 2022 Successor Period increased$963 million compared to the combined 2021 Successor and Predecessor Periods. The increase includes$569 million due to increased sales volumes, which is primarily related to the Vine Acquisition and Marcellus Acquisition inNovember 2021 andMarch 2022 , respectively. The increase also includes$394 million due to higher average prices received. The higher average prices are consistent with the upward trend in index prices for all products throughout the 2022 Successor Period. 49
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Production Expenses
Successor Predecessor Non-GAAP Combined
Period from February 10, 2021 Period from
Three Months Ended through January 1, 2021 through Three Months Ended
March 31, 2022 March 31, 2021 February 9, 2021 March 31, 2021
$/Boe $/Boe $/Boe $/Boe
Marcellus $ 13 0.62 $ 5 0.50 $ 4 0.50 $ 9 0.50
Haynesville 32 1.32 6 1.50 4 1.12 10 1.32
Eagle Ford 55 6.87 24 4.40 21 4.24 45 4.32
Powder River Basin 10 5.63 5 4.37 3 3.37 8 3.91
Total production
expenses $ 110 1.97 $ 40 1.88 $ 32 1.80 $ 72 1.85
Production expenses in the 2022 Successor Period increased
Gathering, Processing and Transportation Expenses
Successor Predecessor Non-GAAP Combined
Period from February 10, 2021 Period from
Three Months Ended through January 1, 2021 through Three Months Ended
March 31, 2022 March 31, 2021 February 9, 2021 March 31, 2021
$/Boe $/Boe $/Boe $/Boe
Marcellus $ 71 3.27 $ 42 3.94 $ 34 4.17 $ 76 4.04
Haynesville 65 2.67 11 2.45 11 2.93 22 2.67
Eagle Ford 84 10.41 44 8.05 45 9.32 89 8.65
Powder River Basin 22 13.93 14 12.65 12 12.53 26 12.59
Total gathering,
processing and
transportation expenses $ 242 4.34 $ 111 5.12 $ 102 5.78 $ 213 5.42
Gathering, processing and transportation expenses in the 2022 Successor Period
increased $29 million as compared to the combined 2021 Successor and Predecessor
Periods. Haynesville increased $43 million primarily due to the Vine Acquisition
in November 2021 . Marcellus decreased $5 million resulting from a decrease of
$14 million due to contract renegotiations partially offset by an increase of $9
million due to the Marcellus Acquisition in March 2022 . Eagle Ford and Powder
River Basin decreased by $5 million and $4 million , respectively, primarily due
to natural declines in production.
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Severance and Ad Valorem Taxes
Successor Predecessor Non-GAAP Combined
Period from February 10, 2021 Period from
Three Months Ended through January 1, 2021 through Three Months Ended
March 31, 2022 March 31, 2021 February 9, 2021 March 31, 2021
$/Boe $/Boe $/Boe $/Boe
Marcellus $ 4 0.15 $ 1 0.09 $ 1 0.07 $ 2 0.08
Haynesville 12 0.54 2 0.56 2 0.54 4 0.55
Eagle Ford 36 4.49 16 3.00 13 2.69 29 2.86
Powder River Basin 11 6.52 5 3.92 2 2.88 7 3.44
Total severance and ad
valorem taxes $ 63 1.13 $ 24 1.11 $ 18 1.03 $ 42 1.08
Severance and ad valorem taxes in the 2022 Successor Period increased
Gross Margin by Operating Area
The table below presents the gross margin for each of our operating areas. Gross margin by operating area is defined as oil, natural gas and NGL sales less production expenses, gathering, processing and transportation expenses, and severance and ad valorem taxes.
Successor Predecessor Non-GAAP Combined
Period from February 10, 2021 Period from
Three Months Ended through January 1, 2021 through Three Months Ended
March 31, 2022 March 31, 2021 February 9, 2021 March 31, 2021
$/Boe $/Boe $/Boe $/Boe
Marcellus $ 521 $ 23.93 $ 115 10.68 $ 80 9.75 $ 195 10.28
Haynesville 543 22.20 51 11.58 36 10.03 87 10.88
Eagle Ford 379 46.90 188 34.62 114 24.02 302 29.63
Powder River Basin 56 37.90 24 21.63 16 15.47 40 18.81
Gross margin by operating
area $ 1,499 26.87 $ 378 17.46 $ 246 14.02 $ 624 15.90
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Oil and Natural Gas Derivatives
Successor Predecessor
Period from Period from
February 10, January 1, 2021
Three Months 2021 through through
Ended March 31, February 9,
March 31, 2022 2021 2021
Oil derivatives - realized losses $ (159) $ (62) $ (19)
Oil derivatives - unrealized losses (166) (6) (190)
Total losses on oil derivatives (325) (68) (209)
Natural gas derivatives - realized gains
(losses) (428) (6) 6
Natural gas derivatives - unrealized gains
(losses) (1,372) 120 (179)
Total losses on natural gas derivatives (1,800) 114 (173)
Total gains (losses) on oil and natural gas
derivatives $ (2,125) $ 46 $ (382)
See Note 13 of the notes to our condensed consolidated financial statements
included in Item 1 of Part I of this report for a discussion of our derivative
activity.
General and Administrative Expenses
Successor Predecessor
Period from Period from
February 10, January 1, 2021
Three Months 2021 through through
Ended March 31, February 9,
March 31, 2022 2021 2021
Gross compensation and benefits $ 70 $ 35 $ 32
Non-labor 25 12 12
Allocations and reimbursements (69) (32) (23)
Total general and administrative expenses, net
$ 15 $ 21
General and administrative expenses, net per Boe
$ 0.68 $ 1.19 Gross compensation and benefits and non-labor expenses during the 2022 Successor Period were consistent with the combined 2021 Successor and Predecessor Periods. Allocations and reimbursements during the 2022 Successor Period increased$14 million compared to the combined 2021 Successor and Predecessor Periods primarily due to increased drilling and production activity due to the Vine Acquisition and Marcellus Acquisition.
Depreciation, Depletion and Amortization
Successor Predecessor
Period from Period from
February 10, January 1, 2021
Three Months 2021 through through
Ended March 31, February 9,
March 31, 2022 2021 2021
Depreciation, depletion and amortization $ 409 $ 122 $ 72
Depreciation, depletion and amortization per Boe
$ 5.72 $ 4.11 The absolute and per unit increase in depreciation, depletion and amortization for the 2022 Successor Period compared to the 2021 Successor Period is primarily the result of the Vine Acquisition. 52
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Other Operating Expense (Income), Net
Successor Predecessor
Period from
Period from January 1, 2021
February 10, through
Three Months Ended 2021 through February 9,
March 31, 2022 March 31, 2021 2021
Other operating expense (income), net $ 23 $ 2 $ (12)
In the 2022 Successor Period, we recognized approximately $23 million of costs
related to the Marcellus Acquisition, which included consulting fees, financial
advisory fees, legal fees and change in control expense.
Interest Expense
Successor Predecessor
Period from Period from
February 10, January 1, 2021
2021 through through
Three Months Ended March 31, February 9,
March 31, 2021 2021 2021
Interest expense on debt $ 38 $ 12 $ 11
Amortization of premium, issuance costs and
other (1) 1 -
Capitalized interest (5) (1) -
Total interest expense $ 32 $ 12 $ 11
The increase in total interest expense in the 2022 Successor Period compared to
the combined 2021 Successor and Predecessor Periods resulted from the increase
in outstanding debt obligations between periods. In November 2021 , we assumed
Vine's $950 million of senior notes as part of the Vine Acquisition, and in
March 2022 we borrowed $914 million on our Exit Credit Facility to finance, in
part, the Marcellus Acquisition.
Reorganization Items, Net
Successor Predecessor
Period from
February 10,
2021 through Period from January
Three Months Ended March 31, 1, 2021 through
March 31, 2022 2021 February 9, 2021
Gains on the settlement of liabilities subject to
compromise $ - $ - $ 6,443
Accrual for allowed claims - - (1,002)
Gain on fresh start adjustments - - 201
Gain from release of commitment liabilities - - 55
Professional service provider fees and other - - (60)
Success fees for professional service providers - - (38)
Surrender of other receivable - - (18)
FLLO alternative transaction fee - - (12)
Total reorganization items, net $ - $ - $ 5,569
In the 2021 Predecessor Period, we recorded a net gain of
Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the Chapter 11 Cases and for discussion of adoption of fresh start accounting.
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Income Taxes
An income tax benefit of$46 million was recorded for the 2022 Successor Period as a result of projecting current federal and state income taxes. Although we are projecting a current federal and state tax liability, a benefit has been recorded in the 2022 Successor Period due to the application of our estimated annual effective tax rate to the 2022 Successor Period book net loss before income taxes. An income tax benefit of$57 million was recorded for the 2021 Predecessor Period. Our effective income tax rate was 5.7% for the 2022 Successor Period, 0.0% for the 2021 Successor Period, and (1.1%) for the 2021 Predecessor Period. Our effective tax rate can fluctuate as a result of the impact of discrete items, state income taxes and permanent differences. See
Note 10 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of income taxes.
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Table of Contents Forward-Looking Statements This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements include our current expectations or forecasts of future events, including matters relating to the continuing effects of the impact of inflation and commodity price volatility resulting fromRussia's invasion ofUkraine , COVID-19 and related supply chain constraints, and the impact of each on our business, financial condition, results of operations and cash flows, the potential effects of the Plan on our operations, management, and employees, actions by, or disputes among or between, members of OPEC+ and other foreign oil-exporting countries, market factors, market prices, our ability to meet debt service requirements, our ability to continue to pay cash dividends, the amount and timing of any cash dividends, and our ESG initiatives. In this context, forward-looking statements often address our expected future business, financial performance and financial condition, and often contain words such as "expect," "could," "may," "anticipate," "intend," "plan," "ability," "believe," "seek," "see," "will," "would," "estimate," "forecast," "target," "guidance," "outlook," "opportunity" or "strategy." Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, they are inherently subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. No assurance can be given that such forward-looking statements will be correct or achieved or that the assumptions are accurate or will not change over time. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
•the ability to execute on our business strategy following emergence from bankruptcy;
•the impact of inflation and commodity price volatility resulting fromRussia's invasion ofUkraine , COVID-19 and related supply chain constraints, along with the effect on our business, financial condition, employees, contractors, vendors and the global demand for oil and natural gas andU.S. and world financial markets;
•risks related to the Vine Acquisition, including our ability to successfully integrate the business of Vine into the Company and achieve the expected synergies from the Vine Acquisition within the expected timeframe;
•risks related to the Marcellus Acquisition, including our ability to successfully integrate the business of Chief into the Company and achieve the expected synergies from the Marcellus Acquisition within the expected timeframe;
•our ability to comply with the covenants under our Exit Credit Facility and other indebtedness;
•our ability to realize anticipated cash cost reductions;
•the volatility of oil, natural gas and NGL prices, which are affected by general economic and business conditions, as well as increased demand for (and availability of) alternative fuels and electric vehicles;
•uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves and projecting future rates of production and the amount and timing of development expenditures;
•our ability to replace reserves and sustain production;
•drilling and operating risks and resulting liabilities;
•our ability to generate profits or achieve targeted results in drilling and well operations;
•the limitations our level of indebtedness may have on our financial flexibility;
•our inability to access the capital markets on favorable terms;
•the availability of cash flows from operations and other funds to fund cash dividends, finance reserve replacement costs or satisfy our debt obligations;
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•adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims;
•legislative, regulatory and ESG initiatives, including as a result of the change in theU.S. presidential administration, addressing environmental concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal;
•terrorist activities and/or cyber-attacks adversely impacting our operations;
•effects of purchase price adjustments and indemnity obligations; and
•other factors that are described under Risk Factors in Item 1A of our
202 1 Form 10-K and Risk Factors in Item 1A of Part II of this report.
We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures in this report and our other filings with theSEC that attempt to advise interested parties of the risks and factors that may affect our business. Information About Us Investors should note that we make available, free of charge on our website at chk.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC . We also furnish quarterly, annual, and current reports for certain of our subsidiaries free of charge on our website at chk.com. We also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent news releases. We may use the Investors section of our website to communicate with investors. It is possible that the financial and other information posted on the Investors section of our website could be deemed to be material information. Documents and information on our website are not incorporated by reference herein.
The
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