Chesapeake Energy 2013 Annual Report Download - page 33

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Recovery of such reserves will require significant capital expenditures and successful drilling operations. Our reserve
estimates at December 31, 2013 reflected a decline in the production rate on producing properties of approximately
30% in 2014 and 20% in 2015. 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 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
and declines in the prices of natural gas and oil could result in a write-down of our asset carrying values.
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, 2013, approximately 32% of our estimated proved reserves (by volume) were undeveloped.
These reserve estimates reflect our plans to make significant capital expenditures to convert our PUDs into proved
developed reserves, including approximately $8.54 billion during the five years ending in 2018. You should be aware
that the estimated development costs may not equal our actual costs, 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. In addition,
under the SEC's reserve reporting rules, because PUDs generally may be booked only if they relate to wells scheduled
to be drilled within five years of the date of booking, we may be required to remove any PUDs that are not developed
within this five-year time frame.
You should not assume that the present values included in this report represent the current market value of our
estimated reserves. In accordance with SEC requirements, the estimates of our present values are based on prices
and costs as of the date of the estimates. The price on the date of estimate is calculated as the average natural gas
and oil price during the 12 months ending in the current reporting period, determined as the unweighted arithmetic
average of prices on the first day of each month within the 12-month period. The December 31, 2013 present value is
based on $3.67 per mcf of natural gas and $96.82 per barrel of oil before price differential adjustments. Actual future
prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate.
The timing of both the production and the expenses from the development and production of natural gas and oil
properties will affect both the timing of actual future net cash flows from our proved reserves and their present value.
Any changes in consumption by natural gas, oil and NGL purchasers or in governmental regulations or taxation will
also affect the actual future net cash flows from our production. In addition, the 10% discount factor which is required
by the SEC to be used in calculating discounted future net cash flows for reporting purposes is not necessarily the
most accurate discount factor. The effective interest rate at various times and the risks associated with our business
or the natural gas and oil industry in general will affect the accuracy of the 10% discount factor.
Further, declines in the prices of natural gas and oil could result in a write-down of our asset carrying values. We
utilize the full cost method of accounting for costs related to our natural gas and oil properties. Under this method, all
such costs (for both productive and nonproductive properties) are capitalized and amortized on an aggregate basis
over the estimated lives of the properties using the unit-of-production method. However, these capitalized costs are
subject to a quarterly ceiling test that limits such pooled costs to the aggregate of the present value of future net
revenues attributable to proved natural gas, oil and NGL reserves discounted at 10% plus the lower of cost or market
value of unproved properties, adjusted for the 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.