Chesapeake Energy 1998 Annual Report Download - page 28

Additionally, significant declines in prices can cause proved undeveloped reserves to become uneconomic, and
long-lived production to become "economically truncated", further reducing proved reserves and increasing any
writedown. Such economic truncation resulted in the Company's reserves being approximately 100 Bcfe less at
December 31, 1998 than they would have been using pricing in effect as of December31, 1997. The Company's
reserve values were calculated using weighted average prices at December 31, 1998 of $10.48 per barrel of oil and
$1.68 per Mcf of natural gas. If prices in future periods are below the prices used at December 31, 1998, future
impairment charges will likely be incurred. Although the Company has taken steps to reduce drilling risk, reduce
operating costs, and reduce investment in unproved leasehold, these steps may not be sufficient to enhance future
economic results or prevent additional leasehold impairment and full-cost ceiling writedowns, which are highly
dependent on future oil and gas prices.
Drilling and Oil and Gas Operations Present Unique Risks.
Drilling activities are subject to many risks, including well blowouts, cratering, uncontrollable flows of oil,
natural gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gases and other
environmental hazards and risk, any of which could result in substantial losses. In addition, we incur the risk that
we will not encounter any commercially productive reservoirs through our drilling operations. We cannot assure
you that the new wells we drill will be productive or that we will recover all or any portion of our investment in
wells drilled. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but from wells that
are productive but do not produce enough reserves to return a profit after drilling, operating and other costs.
Existing Debt Covenants Restrict Our Operations.
The indentures which govern our long-term debt contain covenants which restrict our ability, and the ability of
our subsidiaries other than CEMI, to engage in the following activities:
incurnng additional debt,
creating liens,
paying dividends and making other restricted payments,
merging or consolidating with any other entity,
selling, assigning, transferring, leasing or otherwise disposing of all or substantially all Of our
assets, and
guaranteeing any indebtedness.
At December 31, 1998, the Company did not meet a debt incurrence test contained in two of the senior note
indentures. Thus, we will be unable to incur unsecured non-bank debt until there is significant improvement in oil
and gas prices and/or our production levels. Additionally, the Company will not be able to resume the payment of
dividends on its common and preferred stock until it meets the debt incurrence test.
Canadian Operations Present the Risks Associated with Conducting Business Outside the US.
A portion of our business is conducted in Canada. You may review the amounts of revenue, operating losses
and identifiable assets attributable to our Canadian operations in Note 8 of the Notes to Consolidated Financial
Statements in Item 8. Also, Note 11 of the Consolidated Financial Statements provides disclosures about our
Canadian oil and gas producing activities. Our operations in Canada are subject to the risks associated with
operating outside of the United States. These risks include the following:
adverse local political or economic developments,
exchange controls,
currency fluctuations,
royalty and tax increases,
retroactive tax claims,
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