Chesapeake Energy 1998 Annual Report Download - page 43

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Although the Company's oil and gas revenues, production, and proved reserves reached record levels during the
year ended December 31, 1998 (the "Current Year"), significant declines in oil and gas prices as of December 31,
1998 resulted in downward revisions in estimates of the Company's proved oil and gas reseiyes and the related
present value of the estimated future net revenues from its proved reserves. The Company recorded an $826 million
oil and gas property writedown and a net loss of $934 million during the Current Year.
In response to disappointing drilling results in Louisiana and changes occurring in oil and natural gas markets,
the Company significantly revised its business strategy during the six months ended December 31, 1997 (the
"Transition Period"). These revisions included (i) reducing the size and risk of its exploratory drilling program,
especially in the Louisiana Trend, (ii) acquiring significant volumes of long-lived natural gas reserves, particularly
in the Mid-Continent region of the U.S., and (iii) building a larger inventory of lower risk drilling opportunities
through acquisitions and joint ventures. Further, the Company reduced its capital expenditure budget for
exploration and development to more closely match anticipated cash flow from operations.
As part of this revised strategy, the Company acquired various proved oil and gas reserves through merger or
through purchases of oil and gas properties. During the Current Year, the Company acquired approximately 750
Bcfe of proved reserves primarily in eight major transactions. Of these transactions, three were closed in the first
quarter of 1998, and five were closed during the second quarter of 1998. These acquisitions increased oil and gas
production volumes and revenues, decreased DD&A per Mcfe, and increased production expenses during the
Current Year. Long-term debt and interest expense also increased as a result of the fmancing required to fund these
acquisitions. The total consideration given for the acquisitions was 30.8 million shares of Companycommon stock,
$280 million of cash, the assumption of $205 million of debt, and the incurrence of approximately $20 million of
other acquisition related costs.
The Company incurred an $826 million impairment of oil and gas properties in the Current Year. The
writedown was caused by a combination of several factors, including the acquisitions completed by the Company
during the Current Year, which were accounted for using the purchase method, and the significant decreases in oil
and gas prices throughout the Current Year. Oil and gas prices used to value the Company's proved reserves
decreased from $17.62 per Bbl of oil and $2.29 per Mcf of gas at December 31, 1997, to $10.48 per Bbl of oil and
$1.68 per Mcf of gas at December 31, 1998. Higher drilling and completion costs and the evaluation of certain
leasehold, seismic and other exploration-related costs that were previously unevaluated were the remaining
contributing factors which led to the writedown in the Current Year.
During the Current Year, the Company participated in 242 gross (135.2 net) wells, 156 of which were Company
operated. A summary of the Company's drilling activities and capital expenditures by primary operating area is as
follows ($ in thousands):
The Company's proved reserves increased 144% to an estimated 1,091 Bcfe at December 31, 1998, an increase
of 643 Bcfe from the 448 Bcfe of estimated proved reserves at December 31, 1997 (see Note 11 of Notes to
Consolidated Financial Statements in Item 8).
23
Gross
Wells Net
Wells
Capital Expenditures - Oil and Gas Properties
Drilling Sale of
Leasehold Sub-Total Acquisitions Properties Total
Mid-Continent 165 96.1 $ 63,431 $ 4,779 $ 68,210 $662,104 $(15,712) $714,602
GulfCoast 37 17.8 109,122 13,921 123,043 123,043
Canada 20 6.4 10,011 2,535 12,546 78,176 90,722
All other areas 20 14.9 41,611 5,134 46,745 46,745
Total 242 135.2 $224,175 $26,369 $250,544 $740,280 $(15,712) $975,112