Chesapeake Energy 2013 Annual Report Download - page 32

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that may be economically produced. Even with natural gas and oil derivatives currently in place to mitigate price risks
associated with our future production (58% of our forecasted 2014 oil production through swaps and 68% of our
forecasted 2014 natural gas production through swaps and three-way collars), our revenue and results of operations
will be significantly exposed to changes in future commodity prices.
Our level of indebtedness may limit our financial flexibility.
As of December 31, 2013, we had long-term indebtedness of approximately $12.886 billion and unrestricted cash
of $837 million, and our net indebtedness represented 40% of our total book capitalization, which we define as the
sum of total equity and total current and long-term debt less unrestricted cash. We had $405 million of outstanding
borrowings drawn under our oilfield services revolving bank credit facility and no outstanding borrowings under our
corporate revolving bank credit facility as of December 31, 2013.
Our level of indebtedness affects our operations in several ways, including the following:
• a portion of our cash flows from operating activities must be used to service our indebtedness and is not
available for other purposes;
• we may be at a competitive disadvantage as compared to similar companies that have less debt;
• the covenants contained in the agreements governing our outstanding indebtedness and future indebtedness
may limit our ability to borrow additional funds, pay dividends and make certain investments and may also
affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
• the oilfield services revolving bank credit facility and the indenture governing the COO 6.625% Senior Notes
due 2019 restrict the payment of dividends or distributions to Chesapeake;
• additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or
other purposes may have higher costs and more restrictive covenants; and
• a lowering of the credit ratings of our debt may negatively affect the cost, terms, conditions and availability
of future financing, and lower ratings will increase the interest rate we pay on our corporate revolving bank
credit facility.
The borrowing base of our corporate revolving bank credit facility is subject to periodic redetermination and is
based in part on natural gas and oil prices. A lowering of our borrowing base because of lower natural gas and oil
prices or for other reasons could require us to repay indebtedness in excess of the borrowing base, or we might need
to further secure the lenders with additional collateral. We may incur additional debt, including secured indebtedness,
in order to develop our properties and make future acquisitions. A higher level of indebtedness increases the risk that
we may default on our obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness
depends on our future performance. General economic conditions, natural gas, oil and NGL prices and financial,
business and other factors affect our operations and our future performance and many of these factors are beyond
our control. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of
our debt include financial market conditions, the value of our assets and our performance at the time we require
additional capital. In addition, our failure to comply with the financial and other restrictive covenants relating to our
indebtedness could result in a default and acceleration of such indebtedness and lead to cross defaults under our
other indebtedness. In this circumstance, our ability to refinance indebtedness may be limited.
Significant capital expenditures are required to replace our reserves and conduct our business.
Our exploration, development and acquisition activities and our oilfield services business require substantial
capital expenditures. We intend to fund our capital expenditures through cash flows from operations and to the extent
that is not sufficient, borrowings under our corporate and oilfield services revolving bank credit facilities. 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.
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 32% of our total estimated proved reserves (by volume) as of December 31, 2013 were undeveloped.