Chesapeake Energy 1998 Annual Report Download - page 45

Natural gas production represented approximately 72% of the Company's total production volume on an
equivalent basis in the Current Year, compared to 74% in the Prior Year. This decrease in gas production as a
percentage of total production was primarily the result of new production in the Louisiana Trend, which tends to
produce more oil than gas. In 1999, the Company's production is estimated to be approximately 80% gas.
For the Current Year, the Company realized an average price per barrel of oil of $12.70, compared to $19.39 in
the Prior Year. Gas price realizations decreased from $2.20 per Mcf in the Prior Year to $1.92 per Mcf in the
Current Year. The Company's hedging activities resulted in an increase in oil and gas revenues of $11 8 million in
the Current Year and a decrease in oil and gas revenues of $4.6 million in the Prior Year.
Oil and Gas Marketing Sales. The Company realized $1211 million in oil and gas marketing sales for third
parties in the Current Year, with corresponding oil and gas marketing expenses of $119 0 million, for a net margin
of $2.1 million This compares to sales of $104.4 million, expenses of $103.8 million, and a margin of $0.6 million
in the Prior Year.
Production Expenses and Taxes. Production expenses and taxes, which include lifting costs, production taxes
and ad valorem taxes, increased to $59.5 million in the Current Year, compared to $19.3 million in the Prior Year.
These increases were primarily the result of increased production and increased operating costs. On a unit of
production basis, production expenses and taxes increased to $0.45 per Mcfe compared to $0.24 per Mcfe in the
Prior Year due primarily to the higher per unit operating costs associated with many of the oil and gas properties
acquired during the Current Year. The Company expects that production expenses per Mcfe will generally remain
the same in 1999.
Impairment of Oil and Gas Properties. The Company utilizes the full-cost method to account for its investment
in oil and gas properties. Under this method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and geophysical expenditures, certain
capitalized internal costs, dry hole costs and tangible and intangible development costs) are capitalized as incurred.
These oil and gas property costs, along with the estimated future capital expenditures to develop proved
undeveloped reserves, are depleted and charged to operations using the unit-of-production method based on the
ratio of current production to proved oil and gas reserves as estimated by the Company's independent engineering
consultants and Company engineers. Costs directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization computation until it is determined whether or not proved reserves can
be assigned to the property or whether impairment has occurred. The excess of capitalized costs of oil and gas
properties, net of accumulated depreciation, depletion and amortization and related deferred income taxes, over the
discounted future net revenues of proved oil and gas properties is charged to operations.
The Company incurred an impairment of oil and gas properties charge of $826 million 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 factors
which contributed to the writedown in the Current Year.
Impairment of Other Assets. The Company incurred a $55 million impairment charge during the Current Year.
Of this amount, $30 million relates to the Company's investment in preferred stock of Gothic Energy Corporation,
and the remainder was related to certain of the Company's gas processing and transportation assets located in
Louisiana. No such charge was recorded in the Prior Year.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization ("DD&A") of
oil and gas properties for the Current Year was $146.6 million, $19 2 million higher than the Prior Year's expense
of $127.4 million The average DD&A rate per Mcfe, which is a function of capitalized costs, future development
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