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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies Description of Company Chesapeake Energy Corporation ("Chesapeake" or the "Company") is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of oil, natural gas and natural gas liquids (NGL) from underground reservoirs. We also own oil and natural gas marketing and natural gas gathering and compression businesses, and prior to June 30, 2014, an oilfield services business (see Note 13). Our operations are located onshore in the United States. Basis of Presentation The accompanying consolidated financial statements of Chesapeake were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates of oil and natural gas reserves and their values, future production rates and future costs and expenses are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in oil, natural gas or NGL prices could result in actual results differing significantly from our estimates. Risks and Uncertainties Chesapeake’s strategy for 2016 is to focus on improving liquidity and generating cash. Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and NGL we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The recent substantial decline in oil, natural gas and NGL prices has negatively affected the amount of cash we have available for capital expenditures and debt service. Throughout 2015, our capitalized costs of oil and natural gas properties exceeded our full cost ceiling, resulting in a noncash impairment in the carrying value of our oil and natural gas properties of $18.238 billion, which was the primary driver of our net loss in 2015 of $14.635 billion. Based on first-of-the-month index prices over the 11 months ended February 1, 2016, we expect to record additional downward reserve revisions and another material write-down in the carrying value of our oil and natural gas properties in the first quarter of 2016. 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. As of December 31, 2015, we had a cash balance of approximately $825 million and a net working capital deficit of $1.205 billion. Based on our cash balance, forecasted cash flows from operating activities and availability under our revolving credit facility, we expect to be able to fund our planned capital expenditures budget, meet our debt service requirements, and fund our other commitments and obligations for 2016. Oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced. If depressed prices persist throughout 2017 and we are unable to restructure or refinance our debt or generate additional liquidity through other actions, this would adversely impact our ability to comply with the financial covenants under our revolving credit facility and to make scheduled debt payments. To the 82

Profile for Chesapeake Energy

2015 Annual Report  

2015 Annual Report