Chesapeake Energy 2014 Annual Report Download - page 31

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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.
West Texas Intermediate (WTI). A grade of crude oil used as a benchmark in oil pricing.
ITEM 1A. Risk Factors
Oil, natural gas 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
our share of the oil, natural gas and NGL we sell. We require substantial expenditures to replace reserves, sustain
production and fund our business plans. Lower oil, natural gas 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 oil and natural gas properties. We urge you to read the risk factors below
for a more detailed description of each of these risks.
Historically, the markets for oil, natural gas and NGL have been volatile and they are likely to continue to be
volatile. Wide fluctuations in oil, natural gas and NGL prices may result from relatively minor changes in the supply of
or demand for oil and natural gas, market uncertainty and other factors that are beyond our control, including:
• domestic and worldwide supplies of oil, natural gas and NGL, including U.S. inventories of oil and natural
gas 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 natural 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 oil, natural gas
and NGL price movements with any certainty. Oil and natural gas prices declined significantly in the second half of
2014 and have remained low compared to prices in the first half of 2014. Even with oil and natural gas derivatives
currently in place to mitigate price risks associated with our future production (43% of our forecasted 2015 oil production
and 43% of our forecasted 2015 natural gas production through swaps and three-way collars), our 2015 revenue and
results of operations will be adversely affected if commodity prices remain at current levels. Further, a prolonged
extension of prices at these levels will reduce the quantities of reserves that may be economically produced and will
require us to impair the carrying value of our oil and natural gas assets in 2015.
We expect to write down the carrying value of our oil and natural gas properties in 2015 if commodity
prices remain low.
Under the full cost method of accounting for costs related to our oil and natural gas properties, we are required
to write down the carrying value of our oil and natural gas assets if capitalized costs exceed the quarterly ceiling limit,
which is based on the average of commodity prices on the first day of the month over the trailing 12-month period.
Such write-downs can be material. For example, in 2012, we reported a non-cash impairment charge on our oil and
natural gas properties of $3.315 billion, primarily resulting from a 10% decrease in trailing 12-month average first-day-