Chesapeake Energy 1998 Annual Report Download - page 49

significantly higher average oil and gas prices. For fisëal 1997, the Company produced 78.6 Bcfe at a weighted
average price of $2.45 per Mcfe, compared to 60.2 Bcfe produced in fiscal 1996 at a weighted average price of
$1.84 per Mcfe. This represents production growth of 31% for fiscal 1997 compared to fiscal 1996.
The following table shows the Company's production by region for fiscal 1997 and fiscal 1996:
For the Year Ended June 30,
Natural gas production represented approximately 79% of the Company's total production volume on an
equivalent basis in fiscal 1997. This compares to 86% in fiscal 1996 and 79% in fiscal 1995. This decrease in gas
production as a percentage of total production in fiscal 1997 was the result of drilling in the Louisiana Trend, which
tends to produce more oil than gas.
For fiscal 1997, the Company realized an average price per barrel of oil of $20.93, compared to $17.85 in fiscal
1996. The Company markets its oil on monthly average equivalent spot price contracts and typically receives a
premium to the price posted for West Texas Intermediate crude oil.
Gas price realizations increased from fiscal 1996 to 1997 from $1.66 per Mcf to $2.18 per Mcf, or 31%,
generally as the result of market conditions. The Company's gas price realizations in fiscal 1997 were also higher
due to the increase in Louisiana Trend gas production, which generally receives premium prices at least equivalent
to Henry Flub indexes due to the high Btu content and favorable market location of the production.
The Company's hedging activities resulted in decreases in oil and gas revenues of $7.4 million and $5.9 million
in fiscal 1997 and 1996, respectively.
Oil and Gas Marketing Sales. In December 1995, the Company entered into the oil and gas marketing business
by acquiring a subsidiary to provide natural gas marketing services, including commodity price structuring, contract
administration and nomination services, for the Company, its partners and other oil and natural gas producers in
geographical areas in which the Company is active. The Company realized $76 2 million in oil and gas marketing
sales for third parties in fiscal 1997, with corresponding oil and gas marketing expenses of $75 1 million, resulting
in a gross margin of $1.1 million This compares to sales of $28.4 million, expenses of $27 5 million, and a margin
of $0.9 million in fiscal 1996.
Oil and Gas Service Operations. On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between Cook Inlet Region, Inc. and
Nabors Industries, Inc.) and Chesapeake for the purpose of purchasing the Company's oilfield service assets and
providing rig moving, transportation and related site construction services to the Company and others in the
industry. The Company sold its service company assets to Peak for $6.4 million, and simultaneously invested $2.5
million in exchange for a 33.3% partnership interest in Peak. This transaction resulted in recognition of a $1.8
million pre-tax gain during the fourth fiscal quarter of 1996 (reported in interest and other revenues). A deferred
gain from the sale of service company assets of $0.9 million was recorded as a reduction in the Company's
investment in Peak and was amortized to income over the estimated useful lives of the Peak assets. The Company's
investment in Peak was accounted for using the equity method, and resulted in $0.5 million of income being
included in interest and other revenues in fiscal 1997. The Company sold its partnership interest in Peak in June
1998.
Revenues from oil and gas service operations were $6.3 million in fiscal 1996. The related costs and expenses
of these operations were $4.9 million for the year ended June 30, 1996. The gross profit margin was 22% in fiscal
29
1997 1996
MMcfe Percent MMcfe Percent
Mid-Continent 17,370 22% 10,420 17%
Gulf Coast 57,377 73 47,234 78
Other areas 55
Total production 712 100% P12 100%