Chesapeake Energy 2015 Annual Report Download - page 30

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oil, NGL and natural gas prices at depressed levels, could eventually result in our failing to meet one or more of the
financial covenants under our credit facility, which could require us to refinance or amend such obligations resulting in
the payment of consent fees or higher interest rates, or require us to raise additional capital at an inopportune time or
on terms not favorable to us.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition
tests could result in a default under our credit facility. A default under our credit facility, if not cured or waived, could
result in acceleration of all indebtedness outstanding thereunder. The accelerated debt would become immediately
due and payable, which would in turn trigger cross-acceleration and cross-default rights under our other debt. If that
should occur, we may be unable to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing
were then available, it may not be on terms that are acceptable to us. In addition, in the event of an event of default
under the credit facility, the lenders could foreclose on the collateral securing the credit facility and require repayment
of all borrowings outstanding. If the amounts outstanding under the credit facility or any of our other indebtedness were
to be accelerated, our assets may not be sufficient to repay in full the money owed to the lenders or to our other debt
holders. Moreover, any new indebtedness we incur may impose financial restrictions and other covenants on us that
may be more restrictive than our existing debt agreements.
A further downgrade in our credit rating could negatively impact our availability and cost of capital and
could require us to post more collateral under certain commercial arrangements.
Since December 2015, Moody’s Investor Services, Inc. has lowered the Company’s senior unsecured credit rating
from “Ba3” to “Caa3”, and Standard & Poor’s Rating Services has lowered the Company’s senior unsecured credit
rating from “BB-” to “CC”. The downgrades were primarily a result of the effect of low oil and natural gas prices on our
ability to generate cash flow from operations. We cannot provide assurance that our credit ratings will not be further
reduced if commodity prices continue to remain low. Any further downgrade to our credit ratings could negatively impact
our availability and cost of capital.
Some of our counterparties have requested or required us to post collateral as financial assurance of our
performance under certain contractual arrangements, such as transportation, gathering, processing and hedging
agreements. As of February 24, 2016, we have received requests to post approximately $220 million in collateral, of
which we have posted approximately $92 million. We have posted the required collateral, primarily in the form of letters
of credit and cash, or are otherwise complying with these contractual requests for collateral. We may be requested or
required by other counterparties to post additional collateral in an aggregate amount of approximately $698 million
(excluding the supersedeas bond with respect to the 2019 Notes litigation discussed in Note 3 of the notes to our
consolidated financial statements included in Item 8 of this report), which may be in the form of additional letters of
credit, cash or other acceptable collateral. Any posting of collateral consisting of cash or letters of credit, which would
reduce availability under our credit facility, will negatively impact our liquidity.
We expect to have further significant write downs of the carrying value of our oil and natural gas properties
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, for the year ended December 31, 2015, we reported non-cash
impairment charges on our oil and natural gas properties totaling $18.238 billion, primarily resulting from a substantial
decrease in the trailing 12-month average first-day-of-the-month oil and natural gas prices throughout 2015, and the
impairment of certain undeveloped leasehold interests. The trailing 12-month average first-day-of-the-month prices
used to calculate our oil and natural gas reserves decreased from $94.98 per bbl of oil and $4.35 per mcf of natural
gas as of December 31, 2014 to $50.28 per bbl of oil and $2.58 per mcf of natural gas as of December 31, 2015. Oil
and natural gas prices have continued to decline further in the 2016 first quarter. The NYMEX WTI index price of oil
on February 22, 2016 was $31.48 per bbl, and the Henry Hub index price of natural gas was $1.82 per mcf. As of
December 31, 2015, the present value of estimated future net revenue of our proved reserves, discounted at an annual
rate of 10%, was $4.7 billion. Estimated future net revenue represents the estimated future gross revenue to be
generated from the production of proved reserves, net of estimated production and future development costs, using
prices and costs under existing economic conditions as of that date. Based on first-day-of-the-month index prices for
January and February of 2016, as well as recent strip prices for March 2016, we reasonably expect a decrease of
approximately $4.50 per barrel of oil and $0.15 per mcf of natural gas in the prices we will be using to calculate the
estimated future net revenue of our proved reserves as of March 31, 2016, and such decreases are expected to reduce