Chesapeake Energy 2013 Annual Report Download - page 34

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Our development and exploratory drilling efforts and our well operations may not be profitable or achieve
our targeted returns.
We have acquired significant amounts of undeveloped properties. Development and exploratory drilling and
production activities are subject to many risks, including the risk that no commercially productive reservoirs will be
discovered. We have acquired undeveloped properties that we believe will enhance our growth potential and increase
our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will
not abandon our initial investments. Additionally, there can be no assurance that undeveloped properties acquired by
us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we
will recover all or any portion of our investment in such undeveloped properties or wells.
Drilling for natural gas and oil may involve unprofitable efforts, not only from dry wells but also from wells that are
productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost
of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of
a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions,
equipment failures or accidents, shortages of equipment or personnel, environmental issues, state or local bans or
moratoriums on hydraulic fracturing and for other reasons. In addition, wells that are profitable may not meet our internal
return targets, which are dependent upon the current and future market prices for natural gas and oil, costs associated
with producing natural gas, oil and NGL and our ability to add reserves at an acceptable cost. We rely to a significant
extent on seismic data and other advanced technologies in evaluating undeveloped properties and in conducting our
exploration activities. The seismic data and other technologies we use do not allow us to know conclusively, prior to
acquisition of undeveloped properties, or drilling a well, whether natural gas or oil is present or may be produced
economically.
Certain of our undeveloped leasehold assets are subject to leases that will expire over the next several
years unless production is established on units containing the acreage.
Leases on natural gas and oil properties typically have a term of three to five years, after which they expire unless,
prior to expiration, a well is drilled and production of hydrocarbons in paying quantities is established. If our leases
expire and we are unable to renew the leases, we will lose our right to develop the related properties. Although we
seek to actively manage our undeveloped properties, our drilling plans for these areas are subject to change based
upon various factors, including drilling results, natural gas and oil prices, the availability and cost of capital, drilling and
production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints
and regulatory approvals.
Our commodity price risk management activities may reduce the prices we receive for our natural gas,
oil and NGL sales, require us to provide collateral for derivative liabilities and involve risk that our
counterparties may be unable to satisfy their obligations to us.
In order to manage our exposure to price volatility in marketing our production, we enter into natural gas and oil
price derivative contracts for a portion of our expected production. Commodity price derivatives may limit the prices
we actually realize and therefore reduce natural gas, oil and NGL revenues in the future. Our commodity price risk
management activities will impact our earnings in various ways, including recognition of certain mark-to-market gains
and losses on derivative instruments. The fair value of our natural gas and oil derivative instruments can fluctuate
significantly between periods. In addition, our commodity price risk management transactions may expose us to the
risk of financial loss in certain circumstances, including instances in which our production is less than expected.
Derivative transactions involve the risk that counterparties, which are generally financial institutions, may be
unable to satisfy their obligations to us. Although the counterparties to our multi-counterparty secured hedging facility
are required to secure their obligations to us under certain scenarios, if any of our counterparties were to default on
its obligations to us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on
our ability to fund our planned activities and could result in a larger percentage of our future production being subject
to commodity price changes.
Most of our natural gas and oil derivative contracts are with the 16 counterparties to our multi-counterparty hedging
facility. Our obligations under the facility are secured by natural gas and oil proved reserves, the value of which must
cover the fair value of the transactions outstanding under the facility by at least 1.65 times. Under certain circumstances,
such as a spike in volatility measures without a corresponding change in commodity prices, the collateral value could
fall below the coverage designated, and we would be required to post additional reserve collateral to our hedging
facility. If we did not have sufficient unencumbered natural gas and oil properties available to cover the shortfall, we