Chesapeake Energy 1994 Annual Report Download - page 23

This is a result of the company's drilling in deeper, more gas
proven areas of the Giddings and Golden Trend Fields.
This change in production mix, along with decreasing
average oil prices realized by the company, contributed to
the decrease in average realized prices per Mcfe from fIscal
1992 to 1994.
For fIscal 1994, the company realized an average price
per barrel of$ 15.09, as compared to $20.20 in fiscal 1993
and $21.85 in fiscal 1992. Oil prices remained volatile in
fiscal 1994, reaching a low in early calendar 1994 of
approximately $12.00 per barrel, but rebounding to above
$18.00 for oil sold by the company in June 1994. The
company markets its oil on day-to-day spot price contracts,
and typically receives approximately the price posted for
West Texas intermediate crude oil.
The company realized an average $2.06 per Mcf of
natural gas sold during fiscal 1994, down approximately
8% from fiscal 1993, but up approximately 10% from
1992. Much of the company's natural gas is processed for
natural gas liquids, which the company accounts for as
natural gas revenues and production. The lower prices
realized in 1994 were partially the result of low natural gas
liquids prices that accompanied lower crude oil prices. The
company typically sells its natural gas under three year
contracts that provide for monthly price adjustments to
reflect market conditions. Frequently the contracts provide
for the company to share in natural gas liquids processed
from the natural gas stream. This liquid sharing, along with
frequently high Btu content, allows the company often to
receive gas prices per Mcf in excess of spot prices.
OIL AND GAS SERVICE OPERATIONS Revenues from oil and
gas service operations were $6.4 million in fiscal 1994, up
17% from $5.5 million in 1993, but down 16% from
1992. The related costs and expenses of these operations
were $5.2 million, $3.7 million and $4.1 million for the
three years ended June 30, 1994, 1993 and 1992,
respectively. The gross profit margin was 19% in fiscal
1994, down from 34% in fiscal 1993 and 46% in fiscal
1992. The gross profit derived from these operations is a
function of drilling activities in the period, costs of
materials and supplies and the mix of operations between
lower margin trucking operations versus higher margin
labor oriented service operations. During fiscal 1994,
activity increased due to a higher number of wells drilled,
but revenues did not increase proportionately because of
the company's higher retained working interest in wells
being provided services. The company anticipates that
revenues and costs in fiscal 1995 will increase over 1994
based on current drilling plans, although not
proportionately higher due to the company's higher
retained working interests.
INTEREST AND OTHER Interest and other income for fiscal
1994 was $981,000 which compares to $880,000 in 1993
and $542,000 for fiscal 1992. Changes in this revenue
result from factors such as changes in interest rates, average
cash balances and other factors.
Periodically the company enters into futures contracts to
hedge a portion of its future oil or gas production. The
costs and the market value changes of these contracts are
recognized as gain or loss when the contracts are closed as
Interest and Other.
PRODUCTION EXPENSES AND TAXES Production expenses
and taxes, which include lifting costs and production and
excise taxes, increased to $3.6 million in fiscal 1994, as
compared to $2.9 million and $2.1 million in fiscal 1993
and 1992, respectively. These increases on a year to year
basis were the result of increased production. On an Mcfe
production unit basis, production expenses and taxes
decreased to $.36 per Mcfe in fiscal 1994, as compared to
$.67 and $60 per unit in 1993 and 1992, respectively. The
company expects that operating costs in fiscal 1995 will
remain stable or decline slightly on a per unit basis absent
a significant change in oil and gas prices upward which
would increase production taxes, or a change in the
composition of its property base.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization ("DD&A") of
oil and gas properties for fiscal 1994 was $8.1 million, $3.9
million higher than fiscal 1993's expense of $4.2 million,
and $5.2 million higher than fiscal 1992's expense of $2.9
million. The average DD&A per Mcfe, which rate is a
function of capitalized costs and related underlying reserves
in the periods presented, decreased to $80 in fiscal 1994,
from $97 and $.83 in fiscal 1993 and 1992, respectively.
Due to the significantly higher levels of production,
DD&A expense increased in 1994 despite the 18%
decrease in the per unit rate. The company's DD&A rate in
the future will be a function of the results of future
acquisition, exploration, development and production
results. However, the company anticipates comparable
DD&A rates for 1995.
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS
Depreciation and amortization ("D&A") of other assets
increased to $1.9 million in fiscal 1994, compared to $0.6
million and $1.0 million in 1993 and 1992, respectively.
This increase includes $285,000 of nonrecurring
CHESAPEAKE ENERGY CORPORATION 21