Chesapeake Energy 1997 Annual Report Download - page 36

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Chesapeake's revenue, operating cash flow (exclusive of changes in working capital) and production
reached record levels in fiscal 1997. However, significant expenditures for acreage acquisition and drilling costs
followed by unfavorable exploration and production results, together with increases in drilling and equipment
costs and declines in oil and gas prices as of June 30, 1997, resulted in downward revisions in estimates of the
Company's proved oil and gas reserves and the present value of the estimated future net revenues from these
reserves. Such excess caused the Company to record a $236 million asset writedown during the fourth quarter
of the year and caused the Company to report a net loss of $183 million for the year.
Chesapeake's strategy during fiscal 1997, and particularly in the third and fourth quarters of the year, was
to identify the potential of the various areas of the Louisiana Trend by exploratory drilling. In several large
areas outside of the Masters Creek portion of the Louisiana Trend, this exploration program was unsuccessful.
In these areas significant leasehold and drilling costs were added to the evaluated oil and gas property pool
while insignificant quantities of oil and gas reserves were added to the Company's proved reserve base.
During fiscal 1997, the Company participated in 171 gross (107 net) wells, of which 129 wells were
operated by the Company. A summary of the Company's drilling activities and capital expenditures by
primary operating area is as follows ($ in thousands):
The Company's proved reserves decreased 5% to an estimated 403 Bcfe at June 30, 1997, down 22 Bcfe
from 425 Bcfe of estimated proved reserves at June 30, 1996 (see Note 11 of Notes to Consolidated Financial
Statements in Item 8 and "Results of Operations - Impairment of Oil and Gas Properties"). Due to the
numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of
production and timing of development expenditures, including many factors beyond. the control of the
Company, there can be no assurance that the Company's estimated proved reserves will not decrease in the
future.
The Company's business strategy in fiscal 1997 continued to emphasize the acquisition of large
prospective leasehold positions which potentially provide a multi-year inventory of drilling locations. As of
June 30, 1997, the Company had approximately 277,000 gross acres of developed leasehold and 2.7 million
gross acres of undeveloped leasehold. The fiscal 1997 drilling program, particularly in Louisiana, consisted of
more exploratory drilling than in previous years. The Company's strategy for fiscal 1998 is to reduce its capital
expenditure program to approximately $250-$275 million, concentrate its Louisiana Trend drilling activities in
Masters Creek, utilize more 3-D seismic prior to conducting drilling operations, reduce the acquisition of
additional unproven leasehold, and selectively acquire proved reserves. This strategy will likely have the effect
of reducing the Company's anticipated production growth rate from exploration and development drilling to
between 10% and 15% per year.
To assist the Company in reducing exploratory risks and increasing economic returns the Company has
increased its use of 3-D seismic. The Company has conducted, participated in, or is actively pursuing more
than 25 3-D seismic programs to more fully evaluate the Company's acreage inventory.
19
Gross
Wells Net
Wells Capital Expenditures
Drilling Leasehold Total
Louisiana Trend 50 28.7 $141,581 $ 81,287 $222,868
Oklahoma 51 31.8 67,689 4,556 72,245
Texas 51 31.7 64,514 41,112 105,626
Other 19 14.8 51,237 13,391 64,628
Total 171 107.0 $325,021 $140,346 $465,367