Chesapeake Energy 2013 Annual Report Download - page 92

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Oilfield Services Revenue. Our oilfield services operating segment is responsible for contract drilling, hydraulic
fracturing, oilfield rentals, oilfield trucking and other oilfield services operations for both Chesapeake-operated wells
and wells operated by third parties.
• Drilling. Revenues are generated by drilling oil and natural gas wells for our customers under daywork contracts
and recognized for the days completed based on the dayrate specified in each contract. Revenue generated
and costs incurred for mobilization services are recognized over the days of actual mobilization.
• Hydraulic Fracturing. Revenue is recognized upon the completion of each fracturing stage. Typically one or
more fracturing stages per day per active crew is completed during the course of a job. A stage is considered
complete when the customer requests or the job design dictates that pumping discontinue for that stage.
Invoices typically include a lump sum equipment charge determined by the rate per stage specified in each
contract and product charges for sand, chemicals and other products actually consumed during the course of
providing fracturing services.
• Oilfield Rentals. Oilfield equipment rentals include drill pipe, drill collars, tubing, blowout preventers, and frac
and mud tanks, and services include air drilling services and services associated with the transfer of fresh
water to the wellsite. Rentals and services are priced by the day or hour based on the type of equipment being
rented and the service job performed. Revenue is recognized ratably over the term of the rental.
• Oilfield Trucking. Oilfield trucking provides rig relocation and logistics services as well as fluid handling services.
Trucks move drilling rigs, crude oil, other fluids and construction materials to and from the wellsites and also
transport produced water from the wellsites. These services are priced on a per barrel basis based on mileage
and revenue is recognized as services are performed.
• Other Operations. A manufacturing subsidiary designs, engineers and fabricates natural gas compressor
packages that are purchased primarily by Chesapeake. Compression units are priced based on certain
specifications such as horsepower, stages and additional options. Revenue is recognized upon completion
and transfer of ownership of the natural gas compression unit.
Fair Value Measurements
Certain financial instruments are reported at fair value on our consolidated balance sheets. Under fair value
measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an
asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To
estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly
to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are
unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2
inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach
and a cost approach. A market approach uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future
amounts to a single present amount based on current market expectations, including present value techniques, option-
pricing models and the excess earnings method. The cost approach is based on the amount that currently would be
required to replace the service capacity of an asset (replacement cost).
Derivatives
Derivative instruments are recorded on the consolidated balance sheets as derivative assets or derivative liabilities
at fair value, and changes in a derivative’s fair value are recognized currently in earnings unless specific hedge
accounting criteria are met. For qualifying commodity derivative instruments designated as cash flow hedges, changes
in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item
is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings.
Changes in the fair value of interest rate derivative instruments designated as fair value hedges are recorded on the
consolidated balance sheets as assets or liabilities, and the debt's carrying value amount is adjusted by the change
in the fair value of the debt subsequent to the initiation of the derivative. Differences between the changes in the fair
values of the hedged item and the derivative instrument, if any, represent hedge effectiveness and are recognized
currently in earnings.