Chesapeake Energy 2012 Annual Report Download - page 72

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(d) Our Western division primarily includes the Eagle Ford Shale, which held approximately 21% of our estimated
proved reserves by volume as of December 31, 2012. Production for the Eagle Ford Shale for the years ended
2012, 2011 and 2010 was 84.3 bcfe, 21.3 bcfe and 2.3 bcfe, respectively.
As the Eagle Ford Shale continues to be a developing play where additional infrastructure is being added to meet
the growing production, we experienced lower natural gas price realizations in 2012 as a result of higher
transportation costs compared to more developed plays.
(e) 2012, 2011 and 2010 production reflects various asset sales. See Note 11 of the notes to our consolidated financial
statements included in Item 8 of this report for information on our natural gas and oil property divestitures.
Our average daily production of 3.886 bcfe for 2012 consisted of 3.084 bcf of natural gas (80% on a natural gas
equivalent basis) and approximately 133,550 bbls of liquids, consisting of approximately 85,420 bbls of oil (13% on a
natural gas equivalent basis) and approximately 48,130 bbls of NGL (7% on a natural gas equivalent basis). Our year-
over-year growth rate of natural gas production was 12%, our year-over-year growth rate of oil production was 84%
and our year-over-year growth rate of NGL production was 19%. Because of the value gap between natural gas and
liquids prices, as liquids production has increased as a percentage of our total production the percentage of revenue
generated through the sale of liquids production has increased substantially. Our percentage of unhedged revenues
from natural gas, oil and NGL is shown in the following table.
2012 2011 2010
Natural gas ............................................................................ 37% 60% 75%
Oil .......................................................................................... 53% 29% 19%
NGL ....................................................................................... 10% 11% 6%
Total ................................................................................ 100% 100% 100%
Marketing, Gathering and Compression Sales and Expenses. Marketing, gathering and compression sales and
expenses consist of third-party revenue and expenses related to our marketing, gathering and compression operations.
Marketing, gathering and compression activities are performed by Chesapeake primarily for owners in Chesapeake-
operated wells. Chesapeake recognized $5.431 billion in marketing, gathering and compression sales in 2012 with
corresponding expenses of $5.312 billion, for a net margin before depreciation of $119 million. See Depreciation and
Amortization of Other Assets below for the depreciation and amortization recorded on our marketing, gathering and
compression assets. This compares to sales of $5.090 billion and $3.479 billion, expenses of $4.967 billion and $3.352
billion and margins before depreciation of $123 million and $127 million in 2011 and 2010, respectively. In 2012 and
2011, Chesapeake realized an increase in marketing, gathering and compression sales and expenses primarily due
to an increase in third-party marketing volumes. These increases were offset by lower margins per mcfe as a result of
certain marketing arrangements whereby we resold natural gas and NGL at marginally lower market prices as compared
to the contract price purchases of the natural gas and NGL. We sold substantially all of our gathering business in the
2012 fourth quarter which will have a future impact on our marketing, gathering and compression sales and expenses.
Our gathering business provided approximately $51 million, $44 million and $52 million of the total marketing, gathering
and compression net margin, or 43%, 36% and 41%, in 2012, 2011 and 2010, respectively.
Oilfield Services Revenues and Expenses. Oilfield services consist of third-party revenue and expenses related
to our oilfield services operations. Chesapeake recognized $607 million in oilfield services revenues in 2012 with
corresponding expenses of $465 million, for a net margin before depreciation of $142 million. See Depreciation and
Amortization of Other Assets below for the depreciation and amortization recorded on our oilfield services assets. This
compares to revenue of $521 million and $240 million, expenses of $402 million and $208 million and a net margin
before depreciation of $119 million and $32 million in 2011 and 2010, respectively. Oilfield services revenues, expenses
and margins have increased as our oilfield services business has grown, in addition to an increase in service rates
throughout 2011 and 2012. These increases were offset by losses recognized in 2012 related to certain consolidated
investments. Our oilfield services segment was negatively impacted by impairments and early lease termination
payments in 2012. See Note 14 of the notes to our consolidated financial statements included in Item 8 of this report
for further discussion.
Natural Gas, Oil and NGL Production Expenses. Production expenses, which include lifting costs and ad valorem
taxes, were $1.304 billion in 2012, compared to $1.073 billion and $893 million in 2011 and 2010, respectively. On a
unit-of-production basis, production expenses were $0.92 per mcfe in 2012 compared to $0.90 and $0.86 per mcfe in
2011 and 2010, respectively. The per unit expense increase in 2012 was primarily the result of a new fee retroactively
imposed in Pennsylvania on spud wells, which had a $15 million, or $0.01 per mcfe effect, in addition to an overall