Chesapeake Energy 1999 Annual Report Download - page 34

For 1999, the Company realized an average price per barrel of oil of $16.01, compared to $12.70 in 1998 and
$19.39 in 1997. Gas price realizations fluctuated from an average of $1.92 per Mcf in 1998 and $2.20 in 1997 to
$1.97 per Mcf in 1999. The Company's hedging activities resulted in a decrease in oil and gas revenues of $1.7
million in 1999, an increase in oil and gas revenues of $11.3 million in 1998, and a decrease in oil and gas revenues
of $4.6 million in 1997.
Oil and Gas Marketing Sales. The Company realized $74.5 million in oil and gas marketing sales for third
parties in 1999, with corresponding oil and gas marketing expenses of $71.5 million, for a net margin of $3.0
million This compares to sales of $121.1 million and $104.4 million, expenses of $119.0 million and $103.8
million, and a margin of $2.1 million and $0.6 million in 1998 and 1997, respectively.
Production Expenses and Taxes. Production expenses and taxes, which include lifting costs, production taxes
and ad valorem taxes, were $59.6 million in 1999, compared to $59.5 million and $19.3 million in 1998 and 1997,
respectively. On a unit of production basis, production expenses and taxes were $0.45 per Mcfe in 1999 and 1998,
and $0.24 per Mcfe in 1997. The Company expects that lease operating expenses per Mcfe will generally remain at
current levels throughout 2000, although production taxes will increase as a result of increased oil and gas prices.
Impafrment of Oil and Gas Properties. The Company utilizes the full-cost method to account for its investment
in oil and gas properties. Under this method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and geophysical expenditures, certain
capitalized internal costs, dry hole costs and tangible and intangible development costs) are capitalized as incurred.
These oil and gas property costs, along with the estimated future capital expenditures to develop proved undeveloped
reserves, are depleted and charged to operations using the unit-of-production method based on the ratio of current
production to proved oil and gas reserves as estimated by the Company's independent engineering consultants and
Company engineers. Costs directly associated with the acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined whether or not proved reserves can be assigned to
the property or whether impairment has occurred. The excess of capitalized costs of oil and gas properties, net of
accumulated depreciation, depletion and amortization and related deferred income taxes, over the discounted future
net revenues of proved oil and gas properties is charged to operations.
The Company incurred an impairment of oil and gas properties charge of $826 million in 1998. No such charge
was incurred in 1999. The 1998 writedown was caused by a combination of several factors, including the
acquisitions completed by the Company during 1998, which were accounted for using the purchase method, and the
significant decreases in oil and gas prices throughout 1998. Oil and gas prices used to value the Company's proved
reserves decreased from $17.62 per Bbl of oil and $2.29 per Mcf of gas at December 31, 1997, to $10.48 per Bbl of
oil and $1.68 per Mcf of gas at December 31, 1998. Higher drilling and completion costs and the evaluation of
certain leasehold, seismic and other exploration-related costs that were previously unevaluated were the remaining
factors which contributed to the writedown in 1998.
The Company incurred an impairment of oil and gas properties charge of $346 million during 1997. The
writedown in 1997 was caused by several factors, including declining oil and gas prices during the year, escalating
drilling and completion costs, and poor drilling results primarily in Louisiana.
Impairment of Other Assets. The Company incurred a $55 million impairment charge during 1998. Of this
amount, $30 million related to the Company's investment in preferred stock of Gothic Energy Corporation, and the
remainder was related to certain of the Company's gas processing and transportation assets located in Louisiana. No
such charge was recorded in 1999 or 1997.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization ('DD&A") of
oil and gas properties was $95.0 million, $146.6 million and $127.4 million during 1999, 1998 and 1997,
respectively. The average DD&A rate per Mcfe, which is a function of capitalized costs, future development costs,
and the related underlying reserves in the periods presented, was $0.71 ($0.73 in U.S. and $0.52 in Canada), $1.13
($1.17 in U.S. and $0.43 in Canada) and $1.59 in 1999, 1998 and 1997, respectively. The Company did not have
operations in Canada prior to 1998. The Company expects the 2000 DD&A rate to be between $0.75 and $0.80 per
Mcfe.
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