Chesapeake Energy 2013 Annual Report Download - page 31

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Volumetric Production Payment (VPP). As we use the term, a volumetric production payment represents a limited-
term overriding royalty interest in natural gas and oil reserves that (i) entitles the purchaser to receive scheduled
production volumes over a period of time from specific lease interests; (ii) is free and clear of all associated future
production costs and capital expenditures; (iii) is nonrecourse to the seller (i.e., the purchaser's only recourse is to the
reserves acquired); (iv) transfers title of the reserves to the purchaser; and (v) allows the seller to retain the remaining
reserves, if any, after the scheduled production volumes have been delivered.
Working Interest. The operating interest which gives the owner the right to drill, produce and conduct operating
activities on the property and a share of production.
ITEM 1A. Risk Factors
Natural gas, oil and NGL prices fluctuate widely, and lower prices for an extended period of time are likely
to have a material adverse effect on our business.
Our revenues, operating results, profitability and ability to grow depend primarily upon the prices we receive for
the natural gas, oil and NGL we sell. We require substantial expenditures to replace reserves, sustain production and
fund our business plans. Lower natural gas, oil and NGL prices can negatively affect the amount of cash available for
capital expenditures and our ability to borrow money or raise additional capital and, as a result, could have a material
adverse effect on our financial condition, results of operations and reserves. In addition, lower prices may result in
ceiling test write-downs of our natural gas and oil properties. We urge you to read the risk factors below for a more
detailed description of each of these risks.
Historically, the markets for natural gas, oil and NGL have been volatile and they are likely to continue to be
volatile. Wide fluctuations in natural gas, oil and NGL prices may result from relatively minor changes in the supply of
and demand for natural gas and oil, market uncertainty and other factors that are beyond our control, including:
• domestic and worldwide supplies of natural gas, oil and NGL, including U.S. inventories of natural gas and
oil reserves;
• weather conditions;
• changes in the level of consumer and industrial demand;
• the price and availability of alternative fuels;
• the effectiveness of worldwide conservation measures;
• the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities;
• the level and effect of trading in commodity futures markets, including by commodity price speculators and
others;
• potential U.S. exports of oil and/or liquefied natural gas;
• the price and level of foreign imports;
• the nature and extent of domestic and foreign governmental regulations and taxes;
• the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil
price and production controls;
• political instability or armed conflict in oil and gas producing regions; and
• domestic and global economic conditions.
These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil
and NGL price movements with any certainty. In the U.S., record-high supplies of natural gas and weak demand during
2012 resulted in natural gas prices at 10-year lows in early 2012, and although prices have risen from their lows, they
remain volatile.
Further, the prices of natural gas, oil and NGL have not moved in tandem in recent years, creating a value gap
that has caused us to shift our focus from dry gas plays to liquids-rich plays. In 2013, oil and NGL production accounted
for only 25% of our total production but 64% of our revenue, including the effects of realized hedging, and we anticipate
that approximately 62% of our 2014 revenue will come from our oil and NGL production, based on current NYMEX
strip prices and our current derivative positions. Nevertheless, natural gas prices can significantly affect our future
results as approximately 73% of our estimated proved reserves at December 31, 2013 were natural gas. A substantial
or extended decline in natural gas, oil or NGL prices could negatively affect future revenue and the quantities of reserves