Chesapeake Energy 2012 Annual Report Download - page 39

29
impact of derivatives accounted for as cash flow hedges. We are required to write down the carrying value of our
natural gas and oil assets if capitalized costs exceed the ceiling limit, and such write-downs can be material.
The risk that we will be required to write down the carrying value of our natural gas and oil properties increases
when natural gas and oil prices are low. Natural gas prices declined significantly in late 2011 and 2012 to the lowest
level in recent years and while prices have risen from their lows, they remain depressed. As a result, our financial
statements for the year ended December 31, 2012 reflect an impairment of approximately $3.315 billion recorded in
the 2012 third quarter with respect to our natural gas and oil properties. Sustained low natural gas prices and other
factors could cause us to be required to write down our natural gas and oil properties or other assets in the future and
incur a non-cash charge against future earnings.
Significant capital expenditures are required to replace our reserves and conduct our business.
Our exploration, development and acquisition activities and our oilfield services businesses require substantial
capital expenditures and we plan to make capital expenditures in 2013 that exceed our estimated 2013 cash flows
from operations. Thus, we intend to fund our capital expenditures through a combination of cash flows from operations
and borrowings under our corporate and oilfield services revolving bank credit facilities and, to the extent those sources
are not sufficient, from debt and equity issuances, other financings and asset sales. Our ability to generate operating
cash flow is subject to many of the risks and uncertainties that exist in our industry, some of which we may not be able
to anticipate at this time. Future cash flows from operations are subject to a number of risks and variables, such as
the level of production from existing wells, prices of natural gas and oil, our success in developing and producing new
reserves and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital
markets, other financings and asset sales, is dependent upon many of those same factors as well as the orderly
functioning of credit and capital markets. If such proceeds are inadequate to fund our planned spending, we would be
required to reduce our capital spending, seek to sell different or additional assets or pursue other funding alternatives,
and we could have a reduced ability to replace our reserves and increase liquids production.
If we are not able to replace reserves, we may not be able to sustain production.
Our future success depends largely upon our ability to find, develop or acquire additional natural gas and oil
reserves that are economically recoverable. Unless we replace the reserves we produce through successful
development, exploration or acquisition activities, our proved reserves and production will decline over time. In addition,
approximately 43% of our total estimated proved reserves (by volume) as of December 31, 2012 were undeveloped.
Recovery of such reserves will require significant capital expenditures and successful drilling operations. Our reserve
estimates at December 31, 2012 reflected a decline in the production rate on producing properties of approximately
33% in 2013 and 22% in 2014. Thus, our future natural gas and oil reserves and production and, therefore, our cash
flow and income are highly dependent on our success in efficiently developing and exploiting our current reserves and
economically finding or acquiring additional recoverable reserves.
The actual quantities and present value of our proved reserves may be different than we have estimated.
This report contains estimates of our proved reserves and the estimated future net revenues from our proved
reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating
to natural gas, oil and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.
The process of estimating natural gas, oil and NGL reserves is complex and involves significant decisions and
assumptions associated with geological, geophysical, engineering and economic data for each well. Therefore, these
estimates are subject to future revisions.
Actual future production, natural gas, oil and NGL prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable natural gas, oil and NGL reserves most likely will vary from these estimates.
Such variations may be significant and could materially affect the estimated quantities and present value of our proved
reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration
and development drilling, prevailing natural gas and oil prices and other factors, many of which are beyond our control.
At December 31, 2012, approximately 43% of our estimated proved reserves (by volume) were undeveloped.
These reserve estimates reflect our plans to make significant capital expenditures to convert our proved undeveloped
reserves (PUDs) into proved developed reserves, including approximately $12.0 billion during the five years ending
in 2017. You should be aware that the estimated development costs may not be accurate, development may not occur
as scheduled and results may not be as estimated. If we choose not to develop PUDs, or if we are not otherwise able
to successfully develop them, we will be required to remove the associated volumes from our reported proved reserves.