Chesapeake Energy 2010 Annual Report Download - page 159

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2010, Chesapeake acquired approximately 89 bcfe of proved reserves through purchases of
natural gas and oil properties for consideration of $243 million (primarily in 5 separate transactions of greater
than $10 million each), and we sold 1.493 tcfe of our proved reserves for approximately $2.876 billion including
divestitures related to three volumetric production payment transactions, the sale of a portion of our Barnett
Shale assets and other non-core asset sales. During 2010, we recorded positive revisions of 183 bcfe to the
December 31, 2009 estimates of our reserves. Included in the revisions were 189 bcfe of positive revisions
resulting from higher natural gas prices as of December 31, 2010 and 6 bcfe of downward revisions resulting
from changes to previous estimates. Higher prices extend the economic lives of the underlying natural gas and
oil properties and thereby increase the estimated future reserves. The natural gas and oil prices used in
computing our reserves as of December 31, 2010 were $4.38 per mcf and $79.42 per barrel before price
differentials.
During 2009, Chesapeake acquired approximately 33 bcfe of proved reserves through purchases of
natural gas and oil properties for consideration of $61 million (primarily in two separate transactions of greater
than $10 million each) and we sold 220 bcfe of our proved reserves for approximately $576 million. During
2009, we recorded downward revisions of 1.397 tcfe to the December 31, 2008 estimates of our reserves.
Included in the revisions were 952 bcfe of downward revisions resulting from lower natural gas prices using the
average 12-month price in 2009 compared to the spot price as of December 31, 2008, and 445 bcfe of
downward revisions resulting from changes to previous estimates. Lower prices decrease the economic lives of
the underlying natural gas and oil properties and thereby decrease the estimated future reserves. The natural
gas and oil prices used in computing our reserves as of December 31, 2009 were $3.87 per mcf and $61.14
per barrel before price differentials.
During 2008, Chesapeake acquired approximately 172 bcfe of proved reserves through purchases of
natural gas and oil properties for consideration of $355 million (primarily in five separate transactions of greater
than $10 million each) and we sold 702 bcfe of our proved reserves for approximately $2.433 billion. During
2008, we recorded positive revisions of 950 bcfe to the December 31, 2007 estimates of our reserves. Included
in the revisions were 298 bcfe of negative adjustments caused by lower natural gas and oil prices at
December 31, 2008 compared to prices at December 31, 2007 and 1.248 tcfe of positive performance related
revisions. Lower prices decrease the economic lives of the underlying natural gas and oil properties and
thereby decrease the estimated future reserves. The natural gas and oil prices used in computing our reserves
as of December 31, 2008 were $5.71 per mcf and $44.61 per barrel before price differentials.
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
Accounting Standards Topic 932 prescribes guidelines for computing a standardized measure of future net
cash flows and changes therein relating to estimated proved reserves. Chesapeake has followed these
guidelines which are briefly discussed below.
Future cash inflows and future production and development costs as of December 31, 2010 and 2009,
were determined by applying the trailing average 12-month prices and year-end costs to the estimated
quantities of natural gas and oil to be produced. Actual future prices and costs may be materially higher or
lower than the 12-month average prices and year-end costs used. Amounts as of December 31, 2008 were
determined using year-end prices and costs. For each year, estimates are made of quantities of proved
reserves and the future periods during which they are expected to be produced based on continuation of the
economic conditions applied for such year. Estimated future income taxes are computed using current statutory
income tax rates including consideration for the current tax basis of the properties and related carryforwards,
giving effect to permanent differences 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
Accounting Standards Board and, as such, do not necessarily reflect our 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 the standardized measure computations since
these estimates reflect the valuation process.
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