Change in Accounting Principle

In the Current Quarter, we voluntarily changed our method of accounting for oil and natural gas exploration and development activities from the full cost method to the successful efforts method. Accordingly, financial information for prior periods has been recast to reflect retrospective application of the successful efforts method. In general, under successful efforts, exploration costs such as exploratory dry holes, exploratory geophysical and geological costs, delay rentals, unproved leasehold impairments and exploration overhead are charged against earnings as incurred, versus being capitalized under the full cost method of accounting. The successful efforts method also provides for the assessment of potential property impairments by comparing the net carrying value of oil and natural gas properties to associated projected undiscounted pre-tax future net cash flows. If the expected undiscounted pre-tax future net cash flows are lower than the unamortized capitalized costs, the capitalized costs are reduced to fair value. Under the full cost method of accounting, a write-down would be required if the net carrying value of oil and natural gas properties exceeds a full cost ceiling using an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. In addition, gains or losses, if applicable, are generally recognized on the disposition of oil and natural gas property and equipment under the successful efforts method, as opposed to an adjustment to the net carrying value of the assets remaining under the full cost method. Our condensed consolidated financial statements have been recast to reflect these differences.



	Three Months Ended March 31, 2019
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions except per share data)
REVENUES AND OTHER:
Oil, natural gas and NGL	$	929		$	—		$	929
Marketing	1,233			—			1,233
Total Revenues	2,162			—			2,162
Other	—			15			15
Gains on sales of assets	—			19			19
Total Revenues and Other	2,162			34			2,196
OPERATING EXPENSES:
Oil, natural gas and NGL production	132			—			132
Oil, natural gas and NGL gathering, processing and transportation	274			—			274
Production taxes	34			—			34
Exploration	—			24			24
Marketing	1,230			—			1,230
General and administrative	88			15			103
Depreciation, depletion and amortization	357			162			519
Impairments	1			—			1
Other operating expense	51			10			61
Total Operating Expenses	2,167			211			2,378
LOSS FROM OPERATIONS	(5		)	(177		)	(182		)
OTHER INCOME (EXPENSE):
Interest expense	(135		)	(26		)	(161		)
Losses on investments	(1		)	—			(1		)
Other income	7			2			9
Total Other Expense	(129		)	(24		)	(153		)
LOSS BEFORE INCOME TAXES	(134		)	(201		)	(335		)
Income tax benefit	(314		)	—			(314		)
NET INCOME (LOSS)	180			(201		)	(21		)
Net income attributable to noncontrolling interests	(1		)	1			—
NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE	179			(200		)	(21		)
Preferred stock dividends	(23		)	—			(23		)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$	156		$	(200	)	$	(44	)
EARNINGS (LOSS) PER COMMON SHARE:
Basic	$	0.11		$	(0.14	)	$	(0.03	)
Diluted	$	0.11		$	(0.14	)	$	(0.03	)
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):
Basic	1,380			—			1,380
Diluted	1,380			—			1,380



	Three Months Ended March 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions except per share data)
REVENUES AND OTHER:
Oil, natural gas and NGL	$	1,243		$	—		$	1,243
Marketing	1,246			—			1,246
Total Revenues	2,489			—			2,489
Other	—			16			16
Gains on sales of assets	—			19			19
Total Revenues and Other	2,489			35			2,524
OPERATING EXPENSES:
Oil, natural gas and NGL production	147			—			147
Oil, natural gas and NGL gathering, processing and transportation	356			—			356
Production taxes	31			—			31
Exploration	—			81			81
Marketing	1,268			—			1,268
General and administrative	72			15			87
Restructuring and other termination costs	38			—			38
Provision for legal contingencies, net	5			—			5
Depreciation, depletion and amortization	286			173			459
Impairments	—			10			10
Other operating expense	8			(8		)	—
Total Operating Expenses	2,211			271			2,482
INCOME FROM OPERATIONS	278			(236		)	42
OTHER INCOME (EXPENSE):
Interest expense	(123		)	(39		)	(162		)
Gains on investments	139			—			139
Other expense	—			(1		)	(1		)
Total Other Income (Expense)	16			(40		)	(24		)
INCOME BEFORE INCOME TAXES	294			(276		)	18
Income tax expense (benefit)	—			—			—
NET INCOME	294			(276		)	18
Net income attributable to noncontrolling interests	(1		)	—			(1		)
NET INCOME ATTRIBUTABLE TO CHESAPEAKE	293			(276		)	17
Preferred stock dividends	(23		)	—			(23		)
Earnings allocated to participating securities	(2		)	2			—
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$	268		$	(274	)	$	(6	)
EARNINGS (LOSS) PER COMMON SHARE:
Basic	$	0.30		$	(0.31	)	$	(0.01	)
Diluted	$	0.29		$	(0.30	)	$	(0.01	)
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):
Basic	907			—			907
Diluted	1,053			(146		)	907



	Three Months Ended March 31, 2019
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions)
NET INCOME (LOSS)	$	180		$	(201	)	$	(21	)
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX:
Unrealized gains on derivative instruments	—			—			—
Reclassification of losses on settled derivative instruments	10			—			10
Other Comprehensive Income	10			—			10
COMPREHENSIVE INCOME (LOSS)	190			(201		)	(11		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	(1		)	1			—
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE	$	189		$	(200	)	$	(11	)



	Three Months Ended March 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions)
NET INCOME	$	294		$	(276	)	$	18
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX:
Unrealized gains on derivative instruments	—			—			—
Reclassification of losses on settled derivative instruments	10			—			10
Other Comprehensive Income	10			—			10
COMPREHENSIVE INCOME	304			(276		)	28
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	(1		)	—			(1		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CHESAPEAKE	$	303		$	(276	)	$	27




	Three Months Ended March 31, 2019
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)	$	180		$	(201	)	$	(21	)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization	357			162			519
Deferred income tax benefit	(314		)	—			(314		)
Derivative losses, net	304			—			304
Cash receipts on derivative settlements, net	14			—			14
Stock-based compensation	6			—			6
Gains on sales of assets	—			(19		)	(19		)
Impairments	1			—			1
Exploration	—			18			18
Losses on investments	1			—			1
Other	31			9			40
Changes in assets and liabilities	(78		)	(15		)	(93		)
Net Cash Provided By Operating Activities	502			(46		)	456
CASH FLOWS FROM INVESTING ACTIVITIES:
Drilling and completion costs	(533		)	18			(515		)
Business combination, net	(353		)	—			(353		)
Acquisitions of proved and unproved properties	(34		)	28			(6		)
Proceeds from divestitures of proved and unproved properties	26			—			26
Additions to other property and equipment	(9		)	—			(9		)
Proceeds from sales of other property and equipment	1			—			1
Net Cash Used In Investing Activities	(902		)	46			(856		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility borrowings	3,572			—			3,572
Payments on revolving credit facility borrowings	(3,136		)	—			(3,136		)
Cash paid to purchase debt	(1		)	—			(1		)
Cash paid for preferred stock dividends	(23		)	—			(23		)
Other	(8		)	—			(8		)
Net Cash Provided By Financing Activities	404			—			404
Net increase in cash and cash equivalents	4			—			4
Cash and cash equivalents, beginning of period	4			—			4
Cash and cash equivalents, end of period	$	8		$	—		$	8




	Three Months Ended March 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	Under Full Cost			Successful Efforts Adjustment			Under Successful Efforts
	($ in millions )
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	294		$	(276	)	$	18
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization	286			173			459
Derivative losses, net	117			—			117
Cash receipts on derivative settlements, net	13			—			13
Stock-based compensation	9			—			9
Gains on sales of assets	—			(19		)	(19		)
Impairments	—			10			10
Exploration	—			68			68
Gains on investments	(139		)	—			(139		)
Other	(28		)	(8		)	(36		)
Changes in assets and liabilities	104			(16		)	88
Net Cash Provided By Operating Activities	656			(68		)	588
CASH FLOWS FROM INVESTING ACTIVITIES:
Drilling and completion costs	(442		)	22			(420		)
Acquisitions of proved and unproved properties	(63		)	46			(17		)
Proceeds from divestitures of proved and unproved properties	319			—			319
Additions to other property and equipment	(3		)	—			(3		)
Proceeds from sales of other property and equipment	68			—			68
Proceeds from sales of investments	74			—			74
Net Cash Provided by (Used In) Investing Activities	(47		)	68			21
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility borrowings	2,904			—			2,904
Payments on revolving credit facility borrowings	(3,485		)	—			(3,485		)
Cash paid for preferred stock dividends	(23		)	—			(23		)
Distributions to noncontrolling interest owners	(2		)	—			(2		)
Other	(4		)	—			(4		)
Net Cash Used In Financing Activities	(610		)	—			(610		)
Net decrease in cash and cash equivalents	(1		)	—			(1		)
Cash and cash equivalents, beginning of period	5			—			5
Cash and cash equivalents, end of period	$	4		$	—		$	4



	Three Months Ended March 31, 2019
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	Under Full Cost			Adjustment			Under Successful Efforts
	($ in millions)
PREFERRED STOCK:
Balance, beginning and end of period	$	1,671		$	—		$	1,671
COMMON STOCK:
Balance, beginning of period	9			—			9
Common shares issued for WildHorse Merger	7			—			7
Balance, end of period	16			—			16
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	14,378			—			14,378
Common shares issued for WildHorse Merger	2,030			—			2,030
Stock-based compensation	7			—			7
Dividends on preferred stock	(23		)	—			(23		)
Balance, end of period	16,392			—			16,392
ACCUMULATED DEFICIT:
Balance, beginning of period	(15,660		)	1,748			(13,912		)
Net income (loss) attributable to Chesapeake	179			(200		)	(21		)
Balance, end of period	(15,481		)	1,548			(13,933		)
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Balance, beginning of period	(23		)	—			(23		)
Hedging activity	10			—			10
Balance, end of period	(13		)	—			(13		)
TREASURY STOCK – COMMON:
Balance, beginning of period	(31		)	—			(31		)
Purchase of 2,539,473 shares for company benefit plans	(6		)	—			(6		)
Release of 110,796 shares from company benefit plans	1			—			1
Balance, end of period	(36		)	—			(36		)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY	2,549			1,548			4,097
NONCONTROLLING INTERESTS:
Balance, beginning of period	123			(82		)	41
Net income attributable to noncontrolling interests	(1		)	1			—
Distributions to noncontrolling interest owners	—			—			—
Balance, end of period	122			(81		)	41
TOTAL EQUITY	$	2,671		$	1,467		$	4,138



	Three Months Ended March 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	Under Full Cost			Adjustment			Under Successful Efforts
	($ in millions)
PREFERRED STOCK:
Balance, beginning and end of period	$	1,671		$	—		$	1,671
COMMON STOCK:
Balance, beginning of period	9			—			9
Balance, end of period	9			—			9
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	14,437			—			14,437
Stock-based compensation	5			—			5
Dividends on preferred stock	(23		)	—			(23		)
Balance, end of period	14,419			—			14,419
ACCUMULATED DEFICIT:
Balance, beginning of period	(16,525		)	2,395			(14,130		)
Net income attributable to Chesapeake	293			(276		)	17
Cumulative effect of accounting change	(8		)	—			(8		)
Balance, end of period	(16,240		)	2,119			(14,121		)
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Balance, beginning of period	(57		)	—			(57		)
Hedging activity	10			—			10
Balance, end of period	(47		)	—			(47		)
TREASURY STOCK – COMMON:
Balance, beginning of period	(31		)	—			(31		)
Purchase of 1,451,478 shares for company benefit plans	(4		)	—			(4		)
Release of 275,407 shares from company benefit plans	3			—			3
Balance, end of period	(32		)	—			(32		)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT)	(220		)	2,119			1,899
NONCONTROLLING INTERESTS:
Balance, beginning of period	124			(80		)	44
Net income attributable to noncontrolling interests	1			—			1
Distributions to noncontrolling interest owners	(2		)	—			(2		)
Balance, end of period	123			(80		)	43
TOTAL EQUITY (DEFICIT)	$	(97	)	$	2,039		$	1,942