Chesapeake Energy 1995 Annual Report Download - page 27

Natural gas production represented approximately 79% of
Chesapeake's total production volumes on an equivalent basis
in fiscal 1995. This compares to 68% in fiscal 1994 and 62%
in fiscal 1 993. This increasing natural gas concentration is a
result of the company's drilling in deeper, more gas prone areas
of the Giddings and Knox Fields. The change in production
mix and the decreasing average gas prices realized by
Chesapeake contributed to the decrease in average realized
prices per Mcfe from fiscal 1993 to fiscal 1995.
OIL AND GAS PRICES For fiscal 1995, Chesapeake realized an
average price per barrel of oil of$ 17.36, compared to $1 5.09
in fiscal 1994 and $20.20 in fiscal 1993. The company
markets its oil on monthly average equivalent spot price
contracts.
Chesapeake realized an average $1 .48 per McI of natural
gas sold during fiscal 1995, down 28% from fiscal 1994's
average price of $2.06 per Mcf, and down 34% from fiscal
1993's average price of $2.25 per Mcf. The lower prices
realized in fiscal 1995 resulted from lower natural gas prices
and from an increasing portion of the company's gas
production produced from areas with leaner natural gas that
contains less liquids per Mcf. Chesapeake typically sells its
natural gas under contracts that reflect spot market
conditions.
HEDGING ACTIVITIES Periodically Chesapeake 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 revenue when the contracts
are closed. Chesapeake had no open hedging positions as of
June 30, 1995.
SERVICE OPERATIONS Revenues from Chesapeake's service
operations were $8.8 million in fiscal 1995, up 38% from
$6.4 million in fiscal 1994, and up 60% from $5.5 million
in 1993. The related costs and expenses of these operations
were $7.7 million, $5.2 million and $3.7 million for the
three years ended June 30, 1995, 1994 and 1993,
respectively. The gross profit margin was 12% in fiscal
1995, down from 19% in fiscal 1994, and down from 34%
in fiscal 1993. The gross profit margin 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
1995, 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.
INTERESTAND OTHER Interest and other income for fiscal 1995
was $1.5 million compared to $1.0 million in 1994 and
$0.9 million in 1993. This increase resulted from the
company's larger average cash balances during fiscal 1995.
PRODUCTION EXPENSES AND TAXES Production expenses and
taxes, which include lifting costs and production and excise
taxes, increased to $4.3 million in fiscal 1 995, as compared
to $3.6 million in fiscal 1994, and $2.9 million in fiscal
1993. These increases on a year-to-year basis were the
result of increased production. On a unit-of- production
basis, production expenses and taxes decreased to $0.13 per
Mcfe in fiscal 1995 compared to $0.36 per Mcfe in fiscal
1994 and $0.67 in fiscal 1993.
The decrease on a per unit basis is attributable to
Chesapeake's high per well production average and to
severance tax exemptions applicable to much of the
company's gas production in the Navasota River,
Independence and Knox areas during fiscal 1995.
DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation,
depletion and amortization ("DD&A") of oil and gas
properties for fiscal 1995 was $25.4 million, $17.3 million
higher than fiscal 1994's expense of $8.1 million, and $21.2
million higher than fiscal 1993's expense of $4.2 million.
The average DD&A rate per Mcfe, which is a function of
capitalized costs and related underlying reserves in the
periods presented, remained constant at $0.80 in fiscal
1995 and 1994 and down from $0.97 in fiscal 1993.
DEPRECIATION AND AMORTIZATION OF OTHER ASSETS
Depreciation and amortization ('D&A") of other assets
decreased to $1.8 million in fiscal 1995, compared to $1.9
million in fiscal 1994, and increased from $0.6 million in
1993. 'Ihis decrease was caused by $285,000 of
nonrecurring accelerated write-offs of capitalized loan costs
incurred in fiscal 1994 for debts that were paid in full prior
CHESAPEAKE ENERGY CORPORATION 25