Chesapeake Energy 1996 Annual Report Download - page 64

On April 30, 1996, the company purchased interests
in certain producing and non-producing oil and gas prop-
erties, including approximately 14,000 net acres of
unevaluated leasehold, from Amerada Hess Corporation
for $35 million, subject to adjustment for activity after
the effective date of January 1, 1996. The properties are
located in the Knox and Golden Trend fields of southern
Oklahoma, most of which are operated by the company.
In October 1993, the company entered into a joint
development agreement covering a 20,000 gross acre de-
velopment area in the Fayette County portion of the
Giddings Field in southern Texas. The company's own-
ership interests in the proved undeveloped properties
covered by the joint development agreement were sig-
nificantly less than those used in the June 30, 1993 re-
serve report. The impact of the reduced ownership per-
centages is reflected as sales of reserves in place in fiscal
1994 in the preceding table.
Standardized Measure of Discounted
Future Net Cash Flows (unaudited)
Statement of Financial Accounting Standards No. 69
("SFAS 69") prescribes guidelines for computing a stan-
dardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The com-
pany has followed these guidelines which are briefly dis-
cussed below.
Future cash inflows and future production and devel-
opment costs are determined by applying year-end prices
and costs to the estimated quantities of oil and gas to be
produced. Estimates are made of quantities of proved
reserves and the future periods during which they are
expected to be produced based on year-end economic
conditions. Estimated future income taxes are computed
using current statutory income tax rates including con-
sideration for the current tax basis of the properties and
related carryforwards, giving effect to permanent differ-
ences and tax credits. The resulting future net cash flows
are reduced to present value amounts by applying a 10%
annual discount factor.
The assumptions used to compute the standardized
measure are those prescribed by the Financial Account-
ing Standards Board and, as such, do not necessarily re-
flect the company's expectations of actual revenue to be
derived from those reserves nor their present worth. The
limitations inherent in the reserve quantity estimation
process, as discussed previously, are equally applicable to
CHESAPEAKE ENERGY CORPORATION
the standardized measure computations since these esti-
mates are the basis for the valuation process.
The following summary sets forth the company's fu-
ture net cash flows relating to proved oil and gas reserves
based on the standardized measure prescribed in SFAS
69:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 1995 1994
($ in thousands)
Future cash inflows $1,101,642 $427,377 $307,600
Future production
costs (168,974) (75,927) (50,765)
Future development
costs (137,068) (76,543) (47,040)
Future income tax
provision (173,439) (46,537) (36,847)
Future net cash flows 622,161 228,370 172,948
Less effect of a 10%
discount factor (171,973) (69,359) (54,340)
Standardized measure
of discounted future
net cash flows $ 450,188 $159,011 $118,608