Chesapeake Energy 2012 Annual Report Download - page 55

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of costs excluded from amortization, the timing and impact of asset sales, future development costs and service costs.
We refer you to the risk factor “Declines in the prices of natural gas and oil could result in a write-down of our asset
carrying values” included in Item 1A of this report and the discussion below of the full cost method of accounting under
Application of Critical Accounting Policies – Natural Gas and Oil Properties in this Item 7. In addition, see Natural Gas
and Oil Properties in Note 1 of the notes to our consolidated financial statements included in Item 8 of this report. The
1.349 tcfe downward revisions to previous estimates were primarily the result of altering our development plans as we
made changes in rig allocations to shift rigs from natural gas to liquids-rich plays and to focus drilling on the core areas
of our plays. See Note 10 of the notes to our consolidated financial statements included in Item 8 of this report for
further discussion.
Production. Our 2012 production of 1.422 tcfe consisted of 1.129 tcf of natural gas (80% on a natural gas equivalent
basis), 31.3 mmbbls of oil (13% on a natural gas equivalent basis) and 17.6 mmbbls of NGL (7% on a natural gas
equivalent basis). Daily production for 2012 averaged 3.886 bcfe, an increase of 614 mmcfe, or 19%, over the 3.272
bcfe produced per day in 2011. During 2012, Chesapeake curtailed approximately 70 bcf of net natural gas production,
or an average of approximately 190 mmcf per day of natural gas spread across the year. We undertook these
curtailments primarily in the first half of 2012 in response to continued low natural gas prices. The curtailed volumes
were located primarily in the Haynesville and Barnett shale plays.
In recognition of the value gap between liquids and natural gas prices, Chesapeake directed a significant portion
of its technological and leasehold acquisition expertise during the past four years to identify, secure and commercialize
new unconventional liquids-rich plays. This planned transition will result in a more balanced and, we believe, more
profitable portfolio between natural gas and liquids. In 2012, our production of liquids averaged approximately 133,550
bbls per day, a 54% increase over the 2011 average, as a result of the increased development of our unconventional
liquids-rich plays. We expect to increase our liquids production through our drilling activities by approximately 27% in
2013 compared to 2012.
Other Operating Segments. In addition to our exploration and production operating segment, we also have a
marketing, gathering and compression operating segment and an oilfield services operating segment that we utilize
as a financial and operational hedge against inflation and to help assure that we have access to quality services. In
October 2011, we formally segregated our oilfield services businesses under our wholly owned subsidiary, COS, and
its wholly owned subsidiary COO. COO's subsidiaries include a leading U.S. drilling contractor, oilfield trucking company,
oilfield rental provider and a hydraulic fracturing business. Our oilfield services operating segment is separately
capitalized, has its own revolving bank credit facility and COO issued senior notes in 2011. In September 2009, we
formally segregated our midstream gathering services under a wholly owned subsidiary, Chesapeake Midstream
Development, L.L.C. (CMD). During 2012, we sold the majority of our midstream business, including our investment
in Access Midstream Partners, L.P. (NYSE:ACMP), as described under Recent Sales - Midstream Sales below. We
have retained a minor portion of our midstream gathering business and still own significant marketing and compression
operations businesses.
Sales. Our business strategy is to create value for investors by building, developing and now harvesting what we
believe is the largest onshore natural gas and liquids-rich resource base in the U.S. After years of building our resource
base, we are focused on developing the 10 plays where we have a #1 or #2 ownership position and selling assets
(outright or through joint venture transactions) that are non-core or do not fit our long-term plans. During 2012, we
completed sales of non-core natural gas and oil properties, our midstream business and preferred equity interests in
a subsidiary for proceeds of approximately $11.6 billion. We have announced our intention to sell natural gas and oil
properties, midstream and other assets for expected total proceeds of $4 - $7 billion in 2013. Our sales program,
together with our forecasted operating cash flow and borrowings under our corporate revolving bank credit facility, are
anticipated to fully fund the Company’s 2013 capital expenditure program and further reduce the Company’s long-term
debt. We refer you to risks associated with our sales plans, as described in Planned Sales below.
Recent Developments
On January 29, 2013, Aubrey K. McClendon, our President, Chief Executive Officer (CEO) and a director, agreed
to retire from the Company. Mr. McClendon will continue to serve as CEO, President and a director until the earlier of
April 1, 2013 or the time at which his successor is appointed. Mr. McClendon's departure from the Company will be
treated as a termination without cause under his employment agreement.
Also on January 29, 2013, the Compensation Committee of our Board of Directors approved retention awards
for 14 of the Company's senior management team in the form of time-vested stock options to purchase an aggregate
of 2.56 million shares of common stock. These awards, ranging from 150,000 to 360,000 stock options, have an