Chesapeake Energy(CHK) - 2023 Q4 - Annual Report

Definitions Key Terms and Abbreviations This section provides definitions for key terms and abbreviations used throughout the Annual Report on Form 10-K, covering financial, operational, and regulatory terminology specific to the natural gas and oil industry, as well as company-specific events like the Southwestern Merger and past acquisitions - The report defines 'Southwestern Merger' as Chesapeake's planned all-stock merger with Southwestern Energy Company, targeted to close in Q2 2024, subject to shareholder and regulatory approvals[36][51] - Key financial terms include 'PV-10 (non-GAAP)' for estimated future net revenues discounted at 10%, and 'Adjusted Free Cash Flow' (non-GAAP) for net cash from operating activities less capital expenditures, adjusted for certain items[18][117] - Operational terms like 'Bcfe' (billion cubic feet of natural gas equivalent), 'Proved Reserves', 'Proved Undeveloped Reserves (PUDs)', and 'Working Interest' are defined to clarify production and ownership metrics[20][33][145] Forward-Looking Statements Nature and Risks of Forward-Looking Statements This section outlines the nature of forward-looking statements within the report, emphasizing that they are subject to numerous inherent risks and uncertainties beyond the company's control, cautioning against undue reliance and highlighting factors that could cause actual results to differ materially - Forward-looking statements address expected future business, financial performance, and financial condition, often using words like 'expect,' 'could,' 'may,' 'anticipate,' 'intend,' 'plan,' 'believe,' 'seek,' 'will,' 'would,' 'estimate,' 'forecast,' 'target,' 'guidance,' 'outlook,' 'opportunity,' or 'strategy'[69] - Key uncertainties include market factors, commodity price volatility (due to global economic environment, armed conflicts, OPEC+ actions), ability to meet debt service, pay dividends, and achieve ESG initiatives[69] - Risks related to the pending Southwestern Merger are significant, including potential termination, failure to obtain approvals, delays, imposition of conditions, and challenges in integrating businesses and achieving anticipated synergies[46][69] - Other risks encompass negative public perceptions of the industry, ability to replace reserves, operational uncertainties, cyber-attacks, inability to access capital markets, and legislative/regulatory changes, particularly those addressing environmental concerns and climate change[45][46][70][71] PART I Item 1. Business Chesapeake is an independent U.S. E&P company focused on natural gas, oil, and NGL, pursuing a merger and emphasizing sustainability - Chesapeake is an independent E&P company focused on natural gas, oil, and NGL production from onshore U.S. unconventional assets, holding interests in approximately 5,000 gross natural gas wells[74] - The company entered an all-stock merger agreement with Southwestern Energy on January 10, 2024, expected to close in Q2 2024, subject to shareholder and regulatory approvals[51] - During 2023, Chesapeake completed its exit from Eagle Ford assets through three divestiture transactions, generating over $3.5 billion in proceeds[75] - The business strategy focuses on creating shareholder value through responsible development, superior capital returns, and sustainability leadership, with a goal to achieve net-zero Scope 1 and 2 GHG emissions by 2035[56][80][81] Production Volumes by Operating Area (2021-2023) | Operating Area | 2023 Total (Bcfe) | 2022 Total (Bcfe) | 2021 Total (Bcfe) | |:---------------|:------------------|:------------------|:------------------| | Marcellus | 669 | 670 | 421 | | Haynesville | 566 | 588 | 243 | | Eagle Ford | 100 | 193 | 198 | | Total | 1,335 | 1,461 | 905 | Average Sales Prices and Production Expenses per Mcfe (2023 vs. 2022) | Metric (per Mcfe) | 2023 Successor Period | 2022 Successor Period | |:------------------|:----------------------|:----------------------| | Natural Gas Sales Price ($/Mcf) | $2.25 | $5.96 | | Oil Sales Price ($/Bbl) | $77.80 | $96.07 | | NGL Sales Price ($/Bbl) | $25.62 | $37.48 | | Total Sales Price ($/Mcfe) | $2.66 | $6.77 | | Production Expenses ($/Mcfe) | $0.27 | $0.33 | | GP&T Expenses ($/Mcfe) | $0.64 | $0.73 | Estimated Proved Reserves as of December 31, 2023 | Reserve Type | Natural Gas (Bcf) | Oil (MMBbl) | NGL (MMBbl) | Total (Bcfe) | |:-------------------|:------------------|:------------|:------------|:-------------| | Proved developed | 6,363 | — | — | 6,363 | | Proved undeveloped | 3,325 | — | — | 3,325 | | Total proved | 9,688 | — | — | 9,688 | - As of December 31, 2023, Marcellus and Haynesville accounted for approximately 73% and 27%, respectively, of the company's estimated proved reserves by volume[68] - The company's estimated proved undeveloped reserves (PUDs) decreased from 4,321 Bcfe in 2022 to 3,325 Bcfe in 2023. Approximately $674 million was invested in 2023 to convert 1,125 Bcfe of PUDs to proved developed reserves[92][105] - The company operates approximately 98% of its current daily production volumes[61] - The company's marketing operations provide natural gas, oil, and NGL marketing services, including commodity price structuring and securing transportation, to enhance production value[341] - Sales to Valero Energy Corporation and Shell Energy North America accounted for approximately 17% and 10%, respectively, of total revenues (before hedging) in 2023[269][344] - The company is subject to extensive federal, state, and local regulations covering exploration, production, environmental protection, health and safety, and taxation, which can increase operating costs and impact business strategy[227][346][375] - Chesapeake maintains a 'One CHK' culture focused on inclusion, diversity, and safety, with approximately 1,000 employees as of December 31, 2023[261][391][392] Company Overview Chesapeake Energy Corporation is an independent exploration and production company focused on natural gas, oil, and NGL from onshore U.S. unconventional assets, currently pursuing an all-stock merger with Southwestern Energy targeted for Q2 2024, and having recently divested Powder River Basin assets in 2022 and exited the Eagle Ford in 2023 - Chesapeake is an independent E&P company engaged in the acquisition, exploration, and development of natural gas, oil, and NGL properties in the onshore U.S[74] - On January 10, 2024, Chesapeake and Southwestern Energy entered into an all-stock merger agreement, with the merger targeted to close in Q2 2024, pending shareholder and regulatory approvals[51] - In 2023, the company completed its exit from the Eagle Ford region through three divestiture transactions, generating over $3.5 billion in aggregate proceeds[75] - The company sold its Powder River Basin assets in Wyoming for approximately $450 million on March 25, 2022[52] - The acquisition of Vine Energy, focused on Haynesville and Mid-Bossier shale plays, was completed on November 1, 2021[53] Information About Us Chesapeake provides its SEC filings and other investor information on its website, with a core business strategy to create shareholder value through responsible development of its resource plays, aiming to be a leading provider of affordable, reliable, lower-carbon energy - Chesapeake makes its SEC reports (10-K, 10-Q, 8-K) and amendments available free of charge on its website (chk.com)[79] - The company's business strategy is to create shareholder value through responsible development of significant resource plays and to be a leading provider of affordable, reliable, lower-carbon energy[56] Business Strategy Chesapeake's business strategy is built on three pillars: deep, attractive inventory in premier natural gas fields, maintaining a premier balance sheet with low net leverage and prudent hedging, and sustainability leadership through environmental protection and reduced footprint - The company holds leading positions in the two premier U.S. natural gas fields, focusing on best-in-class execution to unlock resources[57] - Maintaining low net leverage is integral to the business strategy, aiming for lower fixed costs, improved margins, and capital program flexibility, supported by natural gas hedging to reduce volatility[58] - Commitment to sustainability includes protecting natural resources, reducing environmental footprint, and fostering a culture of stewardship and environmental excellence[81] Operating Areas Chesapeake focuses its acquisition, exploration, development, and production efforts primarily in the Marcellus Shale in Northern Appalachian Basin, Pennsylvania, and the Haynesville/Bossier Shales in Northwestern Louisiana - The company's primary operating areas are the Marcellus Shale in Northern Appalachian Basin, Pennsylvania, and the Haynesville/Bossier Shales in Northwestern Louisiana[59][60][82] Well Data As of December 31, 2023, Chesapeake held interests in approximately 5,000 gross productive gas wells, with 3,300 (1,900 net) working interest wells and 1,700 overriding or royalty interest wells, operating 2,800 gross wells and completing 166 gross (108 net) wells as operator in 2023 - As of December 31, 2023, Chesapeake held interests in approximately 5,000 gross productive gas wells, including 3,300 (1,900 net) working interest wells and 1,700 overriding or royalty interest wells[61] - The company operated 2,800 gross wells and completed 166 gross (108 net) wells as operator in 2023, also participating in 28 gross (1 net) wells completed by other operators[61] - Chesapeake operates approximately 98% of its current daily production volumes[61] Drilling Activity In 2023, Chesapeake completed 194 gross (109 net) development wells, with no exploratory wells, marking a decrease from 237 gross (151 net) development wells in 2022, and as of December 31, 2023, 92 gross (58 net) wells were in the process of being drilled or completed Wells Completed or Participated In (Gross/Net) | | 2023 Gross | 2023 Net | 2022 Gross | 2022 Net | 2021 Gross | 2021 Net | |:-------------|:-----------|:---------|:-----------|:---------|:-----------|:---------| | Development | 194 | 109 | 237 | 151 | 137 | 74 | | Exploratory | — | — | 1 | 1 | 2 | 1 | | Total | 194 | 109 | 238 | 152 | 139 | 75 | - As of December 31, 2023, 92 gross (58 net) wells were in the process of being drilled or completed[86] Production Volumes, Sales Prices, Production Expenses and Gathering, Processing and Transportation Expenses In 2023, total production decreased to 1,335 Bcfe from 1,461 Bcfe in 2022, primarily due to Eagle Ford divestitures, with average natural gas sales prices significantly declining from $5.96/Mcf in 2022 to $2.25/Mcf in 2023, and production and GP&T expenses also decreasing due to divestitures and lower prices Production Volumes by Product Type (2021-2023) | | 2023 Successor Period | 2022 Successor Period | 2021 Successor Period | |:-------------------|:----------------------|:----------------------|:----------------------| | Natural Gas (Bcf) | 1,266 | 1,308 | 727 | | Oil (MMBbl) | 7.7 | 19.4 | 22.5 | | NGL (MMBbl) | 3.8 | 6.0 | 7.1 | | Total (Bcfe) | 1,335 | 1,461 | 905 | Average Sales Prices and Expenses per Mcfe (2021-2023) | Metric (per Mcfe) | 2023 Successor Period | 2022 Successor Period | 2021 Successor Period | |:------------------|:----------------------|:----------------------|:----------------------| | Natural Gas Sales Price ($/Mcf) | $2.25 | $5.96 | $3.61 | | Oil Sales Price ($/Bbl) | $77.80 | $96.07 | $69.07 | | NGL Sales Price ($/Bbl) | $25.62 | $37.48 | $31.37 | | Total Sales Price ($/Mcfe) | $2.66 | $6.77 | $4.87 | | Production Expenses ($/Mcfe) | $0.27 | $0.33 | $0.33 | | GP&T Expenses ($/Mcfe) | $0.64 | $0.73 | $0.86 | - Total production decreased from 1,461 Bcfe in 2022 to 1,335 Bcfe in 2023, primarily due to Eagle Ford divestitures[87] - Average natural gas sales price decreased significantly from $5.96/Mcf in 2022 to $2.25/Mcf in 2023[66] Natural Gas, Oil and NGL Reserves As of December 31, 2023, Chesapeake's total proved reserves were 9,688 Bcfe, a decrease from 13,002 Bcfe in 2022, primarily due to Eagle Ford divestitures and lower commodity prices, with proved undeveloped reserves (PUDs) decreasing to 3,325 Bcfe, and Marcellus and Haynesville plays constituting the majority of proved reserves Estimated Proved Reserves as of December 31, 2023 | Reserve Type | Natural Gas (Bcf) | Oil (MMBbl) | NGL (MMBbl) | Total (Bcfe) | |:-------------------|:------------------|:------------|:------------|:-------------| | Proved developed | 6,363 | — | — | 6,363 | | Proved undeveloped | 3,325 | — | — | 3,325 | | Total proved | 9,688 | — | — | 9,688 | - Total proved reserves decreased from 13,002 Bcfe in 2022 to 9,688 Bcfe in 2023, mainly due to Eagle Ford divestitures (2,127 Bcfe) and downward revisions from lower commodity prices (1,623 Bcfe)[104][1119] - Proved Undeveloped Reserves (PUDs) decreased from 4,321 Bcfe in 2022 to 3,325 Bcfe in 2023. In 2023, $674 million was invested to convert 1,125 Bcfe of PUDs to proved developed reserves[92][105] - Marcellus and Haynesville accounted for approximately 73% and 27%, respectively, of estimated proved reserves by volume as of December 31, 2023[68] Changes in Proved Undeveloped Reserves (2023) | Category | Total (Bcfe) | |:----------------------------------|:-------------| | Beginning of period | 4,321 | | Extensions and discoveries | 301 | | Revisions of previous estimates | 236 | | Conversion to proved developed | (1,125) | | Purchase of reserves-in-place | 40 | | Sales of reserves-in-place | (448) | | End of period | 3,325 | - The estimated future net revenue attributable to PUDs was $2.36 billion, with a present value (PV-10) of $843 million as of December 31, 2023, assuming approximately $2.0 billion in development expenditures over the next five years[106] Reserves Estimation Chesapeake's estimated proved reserves are prepared by its Corporate Reserves Department using standard geological and engineering technologies, and audited by a third-party engineering firm, Netherland, Sewell & Associates, Inc., with internal controls and a continuous education program ensuring reliability and accuracy - Chesapeake's Corporate Reserves Department prepares estimated proved reserves using standard geological and engineering technologies, including drilling results, well performance, decline curve analysis, and seismic data[109] - Netherland, Sewell & Associates, Inc., a third-party engineering firm, audited the total proved reserves as of December 31, 2023[97] - Internal controls for reserves estimation include comprehensive SEC-compliant policies, quarterly reviews by Reservoir Managers and VPs, independent reporting of the Corporate Reserves Department, and annual approval of the five-year PUD development plan[111] Acreage As of December 31, 2023, Chesapeake held 2,876 gross (2,439 net) acres, comprising 1,243 gross (952 net) developed acres and 1,633 gross (1,487 net) undeveloped acres, actively managing lease expirations with no material expirations anticipated within the next three years Gross and Net Acreage by Operating Area (December 31, 2023) | Operating Area | Developed Gross Acres | Developed Net Acres | Undeveloped Gross Acres | Undeveloped Net Acres | Total Gross Acres | Total Net Acres | |:---------------|:----------------------|:--------------------|:------------------------|:----------------------|:------------------|:----------------| | Marcellus | 576 | 337 | 182 | 152 | 758 | 489 | | Haynesville | 354 | 322 | 100 | 59 | 454 | 381 | | Other | 313 | 293 | 1,351 | 1,276 | 1,664 | 1,569 | | Total | 1,243 | 952 | 1,633 | 1,487 | 2,876 | 2,439 | - Most leases have a three- to five-year primary term, and the company actively manages lease expirations to avoid unintended material expirations[340] - No material lease expirations are anticipated within the next three years[340] Marketing Chesapeake's marketing operations provide services such as commodity price structuring, securing transportation, and contract administration for its own and other interest owners' production, with an aggregation strategy aiming to attract larger, creditworthy customers and maximize prices, and delivery commitments of approximately 3,100 Bcf over the next 10 years - Marketing operations provide natural gas, oil, and NGL marketing services, including commodity price structuring, transportation negotiation, and contract administration[341] - The aggregation of volumes helps attract larger, more creditworthy customers to maximize prices received[341] - As of December 31, 2023, Chesapeake had delivery commitments for approximately 3,100 Bcf over the next 10 years, expected to be fulfilled primarily by proved developed reserves[342] Major Customers In 2023, Valero Energy Corporation and Shell Energy North America were Chesapeake's major customers, accounting for 17% and 10% of total revenues (before hedging), respectively, representing a continued concentration of sales to a few key purchasers - For the 2023 Successor Period, Valero Energy Corporation accounted for approximately 17% of total revenues (before hedging)[269][344] - Shell Energy North America accounted for approximately 10% of total revenues (before hedging) in the 2023 Successor Period[269][344] Competition Chesapeake operates in a highly competitive natural gas and oil exploration and production industry, facing competition from major integrated companies, independent producers, and alternative energy sources, with competitors potentially having greater financial resources and competitive conditions influenced by legislation, regulations, and market factors - Chesapeake competes with major integrated and independent natural gas and oil companies in all aspects of its business, including exploration, development, operations, and marketing[345][997] - Some competitors possess larger financial and other resources, potentially enabling them to address industry challenges more effectively[345][997] - The company also faces indirect competition from alternative energy sources like wind, solar, and electric power[345][997] Public Policy and Government Regulation Chesapeake's operations are subject to extensive federal, state, tribal, and local laws and regulations covering environmental, health, safety, and operational aspects of the natural gas and oil industry, with recent regulatory developments potentially increasing compliance costs, impacting demand, and affecting future business strategy - Operations are subject to extensive governmental regulations covering well design, drilling, completion, production, environmental protection (emissions, waste disposal), and safety[227][375][376] - The EPA's final rule in December 2023 imposes more stringent requirements on the natural gas and oil industry for methane and volatile organic compound emissions, including routine leak monitoring and minimizing emissions from equipment[347] - In January 2024, the Biden administration announced a temporary pause on DOE's review of pending LNG export applications to non-Free Trade Agreement countries, which could affect demand for Chesapeake's products[378] - Increased focus on climate change impacts by the Biden Administration could lead to additional restrictions on onshore drilling and federal lease availability[259][48] - Failure to comply with environmental laws and regulations can result in remedial liabilities, administrative/civil/criminal fines, penalties, or injunctions limiting operations[228] Title to Properties Chesapeake's property titles are subject to customary industry interests and encumbrances, with cursory title investigations common at acquisition and drilling title opinions prepared before operations, and the company believes it holds satisfactory title to its active properties but may face disputes - Property titles are subject to royalty, overriding royalty, carried, net profits, working, and other similar interests, as well as liens for current taxes[353] - Chesapeake believes it has satisfactory title to substantially all active properties, but title disputes may arise[353] Operating Hazards and Insurance The natural gas and oil business involves significant operating risks such as fires, explosions, and environmental hazards, and Chesapeake maintains various insurance policies, including control of well, comprehensive general liability, and pollution liability, but these may not fully cover all losses or liabilities, especially for penalties or fines - Natural gas and oil operations involve risks like fire, explosions, blow-outs, pipe failure, and environmental hazards (oil spills, gas leaks)[229] - Chesapeake maintains a $50 million control of well insurance policy, a $300 million comprehensive general liability umbrella policy, and a $50 million pollution liability insurance policy[354] - Insurance coverage may not be adequate for all losses or liabilities, and does not cover penalties or fines assessed by governmental authorities[354] Facilities Chesapeake owns an office complex in Oklahoma City and owns or leases various field offices in its operating areas - The company owns an office complex in Oklahoma City and owns or leases various field offices in its operating areas[355] Executive Officers This section lists the key executive officers of Chesapeake Energy Corporation, including Domenic J. Dell'Osso, Jr. (President and CEO), Mohit Singh (EVP and CFO), Joshua J. Viets (EVP and COO), and Benjamin E. Russ (EVP, General Counsel and Corporate Secretary), along with their ages and brief professional backgrounds - Domenic J. Dell'Osso, Jr. serves as President and Chief Executive Officer, having previously been EVP and CFO since November 2010[386][993] - Mohit Singh is the Executive Vice President and Chief Financial Officer, joining Chesapeake in December 2021 after six years at BPX Energy[357][387] - Joshua J. Viets is the Executive Vice President and Chief Operating Officer since February 2022, with 20 years of operational experience at ConocoPhillips Company[358][388] - Benjamin E. Russ serves as Executive Vice President – General Counsel and Corporate Secretary since June 2021, with prior roles at Chesapeake and Gulfport Energy Corporation[230][358] Human Capital Resources Chesapeake's human capital strategy is centered on its 'One CHK' culture and core values, promoting an inclusive, diverse, and productive workplace, emphasizing safety through its S.A.F.E. program, and providing comprehensive employee wellness and benefits - Chesapeake's 'One CHK' culture and core values (Integrity and Trust, Respect, Transparency and Open Communication, Commercial Focus, Change Leadership) promote an inclusive, diverse, and productive workplace[261][391][994] - The company had approximately 1,000 employees as of December 31, 2023, none covered by collective bargaining agreements[261] - A board committee dedicated to ESG oversight, including inclusion and diversity efforts, was formed on February 9, 2021. Two of seven board members are from underrepresented backgrounds[360] - The 'Stay Accident Free Everyday (S.A.F.E.)' program reinforces personal responsibility for safety, with targeted training and a Stop Work Authority for all employees and contractors[361][394][395] - Comprehensive employee benefits include full medical, dental, vision, prescription drug insurance, life insurance, disability coverage, 401(k) with company match, parental leave, and flexible work hours[429] Item 1A. Risk Factors This section details numerous material risks that could adversely affect Chesapeake's business, financial position, and results of operations, categorized into operational, financial, merger-related, legal, regulatory, and taxation risks, highlighting inherent uncertainties, commodity price volatility, and complexities of the pending Southwestern Merger - The company faces risks from natural gas, oil, and NGL price volatility, which can significantly impact revenues, profitability, liquidity, and capital expenditures[31][407][409] - Significant capital expenditures are required to replace reserves and conduct business, with forecasted 2024 capital expenditures of $1.25 billion - $1.35 billion[411][443] - The pending Southwestern Merger introduces substantial risks, including potential delays, failure to obtain regulatory/shareholder approvals, inability to achieve anticipated synergies, and business disruptions prior to closing[46][368][400][467][470][498] - Extensive governmental regulations, including those related to environmental matters (e.g., methane emissions, climate change), hydraulic fracturing, and pipeline safety, can increase compliance costs and restrict operations[71][228][379][454][496][521][545][547][579] - Increasing attention to ESG matters and the ability to achieve ESG certifications, goals, and commitments may impact business, financial results, or stock price due to increased costs, demand shifts, and potential litigation[46][233][528][551] - Cyber-attacks and data privacy breaches pose risks to operations, data confidentiality, and reputation, potentially leading to significant costs and liabilities[46][366][37][424][456][458][489][1001] Summary Risk Factors This section provides a high-level overview of the material risks facing Chesapeake, encompassing operational challenges, financial market volatility, merger-related uncertainties, and regulatory and taxation changes, serving as an introduction to more detailed discussions - Key risk categories include operating business risks (e.g., commodity price volatility, reserve replacement, operational hazards), financial risks (e.g., capital needs, debt covenants), and legal/regulatory risks (e.g., environmental regulations, taxation)[365][366][367][430][431][996] - Risks related to the pending Southwestern Merger are also highlighted, such as completion uncertainties, integration challenges, and potential loss of key personnel[368][400] Risks Related to Operating our Business Operating risks include reduced demand for natural gas and oil due to conservation and technological advances, negative public perception, and intense competition, with the business highly susceptible to commodity price fluctuations, requiring significant capital expenditures for reserve replacement, and operational activities inherently uncertain and subject to disruption - Conservation measures and technological advances could reduce demand for natural gas and oil, adversely impacting earnings and cash flows[263][366][402] - Negative public perception, particularly regarding hydraulic fracturing and climate change, can lead to increased regulatory scrutiny, operational delays, and litigation risks[30][366][403] - The natural gas and oil industry is highly competitive, with some competitors possessing greater financial resources, and intense competition for talent and equipment[345][366][406][437][997] - Volatility in natural gas, oil, and NGL prices, driven by global supply/demand, geopolitical events, and market speculation, significantly impacts the company's financial performance[31][366][407][409][438][440] - Significant capital expenditures are required to replace reserves and conduct business, with the ability to fund these dependent on operating cash flows and commodity prices[366][411][443][444] - Natural gas and oil operations are uncertain and involve substantial costs and risks, including unprofitable drilling efforts, unexpected conditions, equipment failures, and environmental hazards[229][352][366][416][451][1000] - The company's ability to produce economically can be impaired by inadequate water supplies or difficulties in disposing of/recycling water used in operations[366][421][483] - Operations may be adversely affected by pipeline, trucking, and gathering system capacity constraints and interruptions, impacting cash flow[237][366][422][453] - Cyber-attacks targeting systems and infrastructure are an increasing risk, potentially leading to operational disruptions, data breaches, financial liabilities, and reputational harm[46][366][37][424][456][1001] - Operations are subject to disruption from natural or human causes beyond control, including extreme weather, civil unrest, political events, and system failures[367][427][459] Financial Risks Related to our Business Chesapeake faces financial risks including limited access to capital markets on favorable terms, especially given industry conditions and restrictions by certain financial institutions on fossil fuel investments, with restrictive covenants in debt agreements limiting growth and financial flexibility, and post-bankruptcy financial results potentially not comparable to historical data due to fresh start accounting - Disruptions in capital and credit markets, particularly for the energy sector, could limit access to financing or significantly increase borrowing costs[367][432][463][493] - Certain financial institutions have restricted or eliminated investments in fossil fuel-related activities, potentially limiting Chesapeake's funding access[233][493] - Restrictive covenants in debt agreements limit the company's ability to incur additional debt, make investments, create liens, and engage in other business activities, potentially hindering growth and flexibility[294][366][401][465][495] - Actual financial results after emergence from bankruptcy may not be comparable to historical financial information due to the implementation of the Plan and fresh start accounting[366][403][466][1003] Risks Related to the Southwestern Merger The pending Southwestern Merger is subject to significant risks, including the possibility of not being completed due to failure to obtain regulatory or shareholder approvals, or delays that could diminish anticipated benefits, with the merger agreement containing restrictions on business activities prior to closing and potentially triggering change-in-control provisions, substantial transaction costs, and uncertainties that could lead to a loss of key personnel and potential litigation - The Southwestern Merger may not be completed on contemplated terms or timeline, or at all, due to failure to obtain governmental and regulatory approvals (e.g., antitrust clearance) or shareholder approvals[46][368][400][467][470][496][498] - Delays in completing the merger could reduce or eliminate expected benefits and negatively impact Chesapeake's stock price and future business[368][470][498][507] - The merger agreement restricts Chesapeake's and Southwestern's business activities prior to closing, potentially preventing them from pursuing certain opportunities[46][368][476][505] - Completion of the merger may trigger change-in-control provisions in existing agreements, potentially leading to contract terminations or renegotiations on less favorable terms[46][474][503] - Significant transaction costs are expected, many of which will be incurred regardless of whether the merger is completed, potentially impacting financial condition[475][504] - Uncertainties associated with the merger may cause a loss of management personnel and other key employees, adversely affecting the combined company's future operations[46][477][531][532] - Litigation related to the merger could result in injunctions, substantial costs, and adverse effects on the combined company's business and financial condition[46][479][510][534][536] Risks Relating to the Combined Company Following the Merger Post-merger, the combined company faces risks related to integrating the businesses of Chesapeake and Southwestern, potentially failing to realize anticipated benefits and synergies, with expanded operations posing management challenges, a risk of losing customers, suppliers, and key business partners, and significant indebtedness limiting liquidity and financial flexibility, with potential adverse impacts from credit rating downgrades - The combined company may be unable to successfully integrate the businesses of Chesapeake and Southwestern, leading to failure in achieving anticipated revenue opportunities, cost savings, and other benefits[44][511][512][537][538][540] - Managing the significantly expanded operations of the combined company will pose substantial challenges, including integrating complex systems and addressing increased scrutiny from governmental authorities[45][516][541] - The merger may result in a loss of customers, suppliers, vendors, landlords, joint venture partners, and other business partners, or the termination of existing contracts if consents are not obtained[45][517][542] - The combined company will have substantial indebtedness (approximately $6.1 billion as of September 30, 2023), limiting liquidity and financial flexibility, and increasing vulnerability to adverse economic conditions[46][519][544] - Any credit downgrades post-merger could adversely impact the combined company's access to financing, require additional collateral, and increase interest rates[46][520] Legal and Regulatory Risks Chesapeake is subject to extensive and evolving federal, state, and local regulations, including those related to environmental protection, climate change, hydraulic fracturing, and pipeline safety, with changes in public policy potentially increasing compliance costs, impacting demand, and affecting business strategy, and increasing attention to ESG matters posing risks including potential litigation and impacts on access to capital - Operations are subject to extensive federal, state, local, and tribal laws and regulations concerning environmental matters, worker health and safety, and natural gas/oil gathering and transportation[46][521][545] - Changes in public policy, including tax advantages for alternative energy and methane emissions reduction programs (e.g., IRA's waste emissions charge), could reduce demand for fossil fuels and increase operating costs[48][577] - The DOE's temporary pause on LNG export applications to non-Free Trade Agreement countries may affect demand for Chesapeake's products and impact its future business strategy[48][523][545] - Continuing political and social attention to climate change has resulted in legislative and regulatory initiatives to reduce GHG emissions, such as new EPA methane rules, which could impose reporting obligations and increase costs[49][549][579] - Regulations regarding hydraulic fracturing and injection wells (e.g., seismicity response programs) could impose more stringent requirements, leading to delays, increased costs, or operational bans[48][524][525] - Increasing attention to ESG matters, including voluntary initiatives and evolving stakeholder expectations, may lead to increased costs, demand shifts, reputational harm, and litigation risks[46][233][528][551][580] Taxation Risks Chesapeake is subject to federal, state, and local taxation, and changes in tax law, such as those proposed by the Biden administration, could increase its cost of doing business, with the Southwestern Merger anticipated to trigger an annual limitation on the utilization of tax attributes, potentially increasing future income tax liabilities - New legislation by federal, state, or local authorities could increase the tax burden on independent producers, making it more costly to produce natural gas and oil[51][530][554] - The Inflation Reduction Act of 2022 (IRA) includes a 15% corporate alternative minimum tax (CAMT) and a 1% excise tax on stock buybacks, which could impact the company in future years[51][554][1013] - The completion of the Southwestern Merger is anticipated to trigger a Section 382 Ownership Change, imposing an annual limitation on the utilization of tax attributes (NOL carryforwards, business interest carryforwards), potentially increasing income tax liabilities[46][51][584][585][996][1124] - A prior Section 382 Ownership Change occurred upon emergence from bankruptcy on February 9, 2021, which already imposed an annual limitation on existing tax attributes[51][555] Item 1B. Unresolved Staff Comments This section states that there are no unresolved staff comments from the SEC - The company has no unresolved staff comments from the SEC[52][558][1096] Item 1C. Cybersecurity Chesapeake has implemented a cybersecurity risk management program guided by the NIST Cybersecurity Framework, integrated into its overall enterprise risk management, including risk assessments, a dedicated security team, external service providers, monitoring systems, employee training, and an incident response plan, with the Board of Directors overseeing cybersecurity risks through its Audit Committee - Chesapeake's cybersecurity risk management program is guided by the NIST Cybersecurity Framework and integrated into its overall enterprise risk management program[52][559][588] - Key elements of the program include risk assessments, a security team, use of external service providers, threat protection systems, employee training, an incident response plan, and a third-party risk management process[52][560][589] - The Board of Directors, through its Audit Committee, oversees cybersecurity and other information technology risks, receiving quarterly updates and briefings from management[53][562][563][591] - The Cybersecurity Manager is responsible for assessing and managing risks, overseeing the program, and reporting material incidents to the Cybersecurity Committee[53][592] - The company has not identified known cybersecurity threats that have materially affected or are reasonably likely to materially affect its operations, business strategy, results of operations, or financial condition[52][560] Item 2. Properties Information regarding Chesapeake's properties is included in Item 1. Business and the Supplementary Information in Item 8 of Part II of this report - Information on properties is cross-referenced to Item 1. Business and Supplementary Information in Item 8 of Part II[53][565] Item 3. Legal Proceedings Chesapeake is involved in various lawsuits and disputes incidental to its business operations, with the majority of pre-petition legal proceedings settled during Chapter 11 bankruptcy or to be resolved through claims reconciliation, and management believes no pending or threatened lawsuit is likely to have a material adverse effect on future financial position or results - Chesapeake is involved in various regulatory proceedings, lawsuits, and disputes arising in the ordinary course of business[304][594] - The majority of pre-petition legal proceedings were settled during the Chapter 11 Cases or will be resolved through the claims reconciliation process[306][594] - Environmental reserves are established for estimated remediation costs when responsibility is probable and costs are reasonably estimable[307][568] - Management believes no pending or threatened lawsuit is likely to have a material adverse effect on future consolidated financial position, results of operations, or cash flows[308][567] Item 4. Mine Safety Disclosures Chesapeake's mine safety disclosures are included in Exhibit 95.1, following the divestiture of its mining assets to WildFire Energy I LLC on March 20, 2023 - Mine safety disclosures are provided in Exhibit 95.1[569] - Chesapeake divested its mining assets to WildFire Energy I LLC on March 20, 2023[569] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Upon emergence from Chapter 11 bankruptcy on February 9, 2021, Chesapeake issued new common stock and warrants, initiated quarterly dividends in Q2 2021, including a variable component, and authorized a $2.0 billion share repurchase program which expired on December 31, 2023, with 130,794,770 shares of common stock outstanding as of February 15, 2024 - Upon emergence from Chapter 11 bankruptcy on February 9, 2021, all existing equity was canceled, and 97,097,081 shares of New Common Stock were issued, listed on Nasdaq under CHK[77][624] - The company also issued Class A, B, and C Warrants, exercisable for one share of common stock each, expiring on February 9, 2026[624] - Chesapeake declared its first quarterly dividend in Q2 2021, and in March 2022, adopted a variable return program, paying an additional variable dividend based on Adjusted Free Cash Flow[572][599][667] - The Board of Directors authorized a share repurchase program, increased to $2.0 billion in June 2022, which expired on December 31, 2023[611][626] Common Stock Repurchases (Q4 2023) | Period | Total Shares Purchased | Average Price Per Share ($) | |:------------------------|:-----------------------|:----------------------------| | October 1 - October 31 | 149,050 | 85.95 | | November 1 - November 30| 348,600 | 82.54 | | December 1 - December 31| 129,797 | 76.13 | | Total | 627,447 | 82.03 | - As of February 15, 2024, there were 130,794,770 shares of common stock outstanding[3][627] Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Chesapeake's financial condition, liquidity, and results of operations, highlighting the company's strategy to create shareholder value through responsible development, operational efficiencies, and ESG performance, with key recent developments including the pending Southwestern Merger, Eagle Ford divestitures, and an LNG export deal, and the company maintaining strong liquidity primarily from cash flows and its New Credit Facility, while discussing the impact of economic conditions and commodity price volatility on its financial results - Chesapeake's strategy focuses on creating shareholder value through responsible development of resource plays, improving margins via operating efficiencies and financial discipline, and enhancing ESG performance[630] - The company aims to achieve net-zero Scope 1 and 2 GHG emissions by 2035, with specific goals including eliminating routine flaring by 2025 and reducing methane intensity to 0.02% by 2025[604][631] - Recent developments include the all-stock merger agreement with Southwestern Energy (January 2024), completion of Eagle Ford divestitures (2023) for over $3.5 billion, and an LNG export deal with Delfin LNG LLC and Gunvor Group Ltd (February 2024)[58][51][603][606][607][608][633][636](index=636&type=chunk] - As of December 31, 2023, Chesapeake had $3.1 billion in liquidity, including $1.1 billion cash on hand and $2.0 billion unused borrowing capacity under its New Credit Facility[60][645] - Cash provided by operating activities decreased to $2.38 billion in 2023 from $4.12 billion in 2022, primarily due to lower natural gas, oil, and NGL prices and decreased sales volumes from Eagle Ford divestitures[63][675] - Capital expenditures for 2024 are projected to be $1.25 billion - $1.35 billion, funded by cash on hand, operating cash flow, and the New Credit Facility[62][673] - The company repurchased 4.4 million shares of common stock for approximately $355 million in 2023, as part of a $2.0 billion program that expired on December 31, 2023[64][685] - Total natural gas, oil, and NGL sales decreased by $6.345 billion in 2023 compared to 2022, driven by lower average prices and Eagle Ford/Powder River Basin divestitures[66][714] - The company recorded income tax expense of $698 million in 2023, compared to a benefit of $1.3 billion in 2022, with the 2022 benefit largely from a $1.4 billion partial release of valuation allowance[70][726] Introduction This introduction sets the stage for the Management's Discussion and Analysis, outlining Chesapeake's identity as an independent E&P company and its strategic focus on responsible development, operational efficiencies, financial discipline, and ESG performance to create shareholder value, also highlighting the company's commitment to achieving net-zero GHG emissions by 2035 - Chesapeake is an independent exploration and production company focused on natural gas, oil, and NGL from onshore U.S. unconventional assets, primarily Marcellus and Haynesville[603] - The company's strategy is to create shareholder value through responsible development, optimizing resource base, deploying leading technology, and pursuing M&A opportunities[630] - A foundational goal is to achieve net-zero Scope 1 and 2 GHG emissions by 2035, with interim targets including eliminating routine flaring by 2025 and reducing methane intensity to 0.02% by 2025[604][631] - All operated gas assets in Haynesville and Marcellus received independent certification as responsibly sourced gas by the end of 2022[604] Recent Developments Recent key developments for Chesapeake include the announcement of an all-stock merger with Southwestern Energy in January 2024, the completion of Eagle Ford divestitures in 2023, and an LNG export deal in February 2024, along with capital contributions to a natural gas gathering pipeline and carbon capture project, establishment of a new credit facility, and share repurchases and warrant exchange offers - On January 10, 2024, Chesapeake and Southwestern Energy entered an all-stock merger agreement, targeted to close in Q2 2024[58][633] - Completed three separate Eagle Ford divestiture transactions in 2023, generating approximately $3.5 billion in aggregate proceeds and recognizing gains of $337 million and $140 million from two of these sales[603][606][607][636](index=636&type=chunk] - Announced an LNG export deal in February 2024, involving long-term liquefaction offtake from Delfin LNG LLC and sales to Gunvor Group Ltd, with a targeted start date in 2028[58][608][637] - Contributed $238 million to a natural gas gathering pipeline and carbon capture and sequestration (CCUS) project with Momentum Sustainable Ventures LLC through 2023[59][609][639] - Entered into a new senior secured reserve-based credit agreement (New Credit Facility) in December 2022, with an initial borrowing base of $3.5 billion and aggregate commitments of $2.0 billion[59][610][640] - Authorized a $2.0 billion share repurchase program, which expired on December 31, 2023, and paid approximately $487 million in dividends in 2023[59][611][640] - Completed warrant exchange offers in October 2022, resulting in the issuance of 16,305,984 shares of common stock for the cancellation of various warrants[59][612][641] Economic and Market Conditions In 2023, Chesapeake's industry experienced inflationary pressures, including increased demand for oilfield services, rising fuel costs, and labor shortages, leading to a decline in natural gas prices due to a mild winter and high inventory levels, with the company's 2024 cash flow partially protected by hedging approximately 60% of projected natural gas volumes, and its cost structure and liquidity expected to help navigate continued price volatility - The industry experienced inflationary pressures in 2023, including increased demand for oilfield service equipment, rising fuel costs, and labor shortages[59][642] - A mild winter in 2023 and historically higher inventory levels resulted in a decline in natural gas pricing in 2023 and early 2024[59][613] - Chesapeake's 2024 estimated cash flow is partially protected by current hedge positions covering approximately 60% of projected natural gas volumes[59][613] - The company believes its cost structure and liquidity position will enable it to successfully navigate continued price volatility[59][613] Liquidity and Capital Resources Chesapeake's liquidity primarily stems from internally generated cash flows, asset divestitures, and its New Credit Facility, with $3.1 billion in available liquidity as of December 31, 2023, and projected 2024 capital expenditures of $1.25 - $1.35 billion funded by cash on hand, operating cash flow, and the New Credit Facility, while managing commodity price exposure through derivative instruments and having significant contractual obligations for gathering, processing, and transportation - Primary capital sources in 2023 included internally generated cash flows from operations, proceeds from Eagle Ford divestitures, and borrowings under the New Credit Facility[60][615] - As of December 31, 2023, total liquidity was $3.1 billion, comprising $1.1 billion cash on hand and $2.0 billion unused borrowing capacity under the New Credit Facility[60][645] - Cash provided by operating activities decreased to $2.38 billion in 2023 from $4.12 billion in 2022, mainly due to lower commodity prices and reduced sales volumes from Eagle Ford divestitures[63][675] - Capital expenditures for 2024 are projected to be $1.25 billion - $1.35 billion, with plans to drill approximately 95 to 115 gross wells[62][673] - The company uses derivative instruments to mitigate commodity price exposure, which can limit cash flows during rising prices but provide predictability[61][618][647] - Material contractual obligations include repayment of senior notes, derivative obligations, asset retirement obligations, lease obligations, and approximately $2.1 billion in gathering, processing, and transportation agreements as of December 31, 2023[61][648] Sources and (Uses) of Cash and Cash Equivalents (2021-2023) | Category | 2023 Successor Period ($M) | 2022 Successor Period ($M) | 2021 Successor Period ($M) | 2021 Predecessor Period ($M) | |:----------------------------------------------|:---------------------------|:---------------------------|:---------------------------|:-----------------------------| | Cash provided by (used in) operating activities | 2,380 | 4,125 | 1,809 | (21) | | Proceeds from divestitures | 2,533 | 407 | 13 | — | | Proceeds from New Credit Facility, net | 1,125 | 1,600 | — | — | | Capital expenditures | (1,829) | (1,823) | (669) | (66) | | Business combination, net | — | (1,967) | (194) | — | | Contributions to investments | (231) | (18) | — | — | | Payments on New Credit Facility, net | (2,175) | (550) | — | — | | Cash paid to repurchase common stock | (355) | (1,073) | — | — | | Cash paid for common stock dividends | (487) | (1,212) | (119) | — | Results of Operations Chesapeake's results o