Chesapeake Energy 2014 Annual Report Download - page 32

24
of-the-month natural gas prices as of September 30, 2012, as compared to June 30, 2012, and the impairment of
certain undeveloped leasehold interests. In the second half of 2014, the NYMEX West Texas Intermediate (WTI) index
price of oil declined significantly from $105.37 per bbl as of June 30, 2014 to $53.27 per bbl as of December 31, 2014,
and the Henry Hub index price of natural gas declined from $4.46 per mcf to $2.89 per mcf over the same period. Oil
prices have declined further in 2015. The NYMEX WTI index price of oil on February 20, 2015 was $50.34 per bbl,
and the Henry Hub index price of natural gas was $2.95 per mcf. Based on the first-day-of the-month prices we have
received over the 11 months ended February 2015, we expect to have a material write-down in the carrying value of
our oil and natural gas properties in the first quarter of 2015. Further material write-downs in subsequent quarters will
occur if the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior
quarters.
Significant capital expenditures are required to replace our reserves and conduct our business.
Our exploration, development and acquisition activities require substantial capital expenditures. We intend to fund
our capital expenditures through cash flows from operations and to the extent that is not sufficient, cash on hand and
borrowings under our revolving credit facility. 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 oil, natural gas and NGL, our success in developing and producing new reserves and the other risk
factors discussed herein. If we are unable to fund our capital expenditures as planned, we could experience a curtailment
of our exploration and production operations, a loss of properties and a decline in our oil, natural gas and NGL reserves.
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 oil and natural gas
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 25% of our total estimated proved reserves (by volume) as of December 31, 2014 were undeveloped.
Recovery of such reserves will require significant capital expenditures and successful drilling operations. Our reserve
estimates at December 31, 2014 reflect an expected decline in the production rate on our producing properties of
approximately 30% in 2015 and 20% in 2016. Thus, our future oil and natural gas 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 of and future net revenues from our proved reserves may differ from our estimates.
This Form 10-K 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 oil, natural gas and NGL prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.
The process of estimating oil, natural gas 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, oil, natural gas and NGL prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable oil, natural gas 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 oil and natural gas prices and other factors, many of which are beyond our control.
As of December 31, 2014, approximately 25% 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 $6.3 billion during the five years ending in 2019. 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.