CHESAPEAKE GRANITE WASH TRUST (CHKR)·Q1 2019 Earnings Summary

Executive Summary

• Q1 2019 distribution was $0.0303 per common unit, down ~52% q/q from $0.0631, driven by lower sales volumes, weaker realized prices, and a large administrative cash advance; distributable income fell to $1.42M from $2.95M q/q .
• The trustee initiated a new cash reserve policy (greater of $70,000 or 3.5% of funds each quarter), further reducing distributable cash beginning with 2019 distributions .
• Chesapeake advanced a $275,000 loan in March to cover Trust expenses (Chesapeake consented to the May distribution while the loan was outstanding), highlighting tight near‑term liquidity at the Trust level .
• Operations continue to be pressured by natural production declines across Producing and Development wells; management expects declines to persist, keeping a downward bias on future distributable income .

What Went Well and What Went Wrong

• What Went Well

  • Oil price realizations in the Sep–Nov 2018 production period improved y/y ($61.22/bbl vs $47.43), supporting the March 1 distribution despite volume declines .
  • No impairment was recorded on the Royalty Interests for Q1 2019 under the quarterly ceiling test .
  • The May 2019 distribution was paid despite a March loan draw, after Chesapeake consented in writing—avoiding a distribution interruption .

• What Went Wrong

  • Q1 2019 declared distribution (for Dec–Feb production) dropped to $0.0303/unit as total sales volumes fell to 158 mboe and realized prices declined materially (oil $46.43/bbl; NGL $16.30/bbl) .
  • The Trust began withholding additional cash reserves (≥$70k or 3.5% of funds), incrementally reducing quarterly distributions to unitholders .
  • A $275k loan from Chesapeake was required to cover ordinary course expenses, underscoring pressure from lower royalty receipts and timing/expense dynamics .

Financial Results

Quarterly distribution and cash flow bridge (oldest → newest):

Additional GAAP-reported period data (Q1 2019 Form 10-Q):

• Statements of distributable income (3 months ended Mar 31): Royalty income $3,363k; production taxes $241k; admin $63k; cash reserves withheld $107k; distributable income $2,952k; $0.0631 per unit (reflecting Sep–Nov production, paid Mar 1) .
• “Subsequent events” (Dec–Feb production for May distribution): Royalty income $2,510k; production taxes $182k; admin (incl. cash advance) $841k; reserves $70k; distributable income $1,417k; $0.0303/unit .

Key KPIs and y/y for Q1 period:

Notes:

• There is no segment reporting; the Trust’s sole source of cash flows is royalty interests in the Colony Granite Wash AMI .

Guidance Changes

Management does not provide revenue/EPS/margin guidance; distributions will continue to vary with production volumes, realized prices, post‑production costs, taxes, and Trust expenses .

Earnings Call Themes & Trends

No earnings call transcript was filed; themes below reflect 8‑K/10‑Q disclosures.

Management Commentary

• “The Trust's revenues and distributable income available to unitholders were adversely affected throughout 2018 and to date in 2019 due to natural declines in production. The Trust expects production to continue to decline” .
• “Chesapeake loaned $275,000 to the Trust in March 2019 to cover Trust expenses and consented in writing to the Trust making the May 2019 Distribution while the loan is outstanding” .
• “Commencing with the distribution to unitholders payable in first quarter 2019, the Trustee began withholding the greater of $70,000 or 3.5% … to gradually increase existing cash reserves by a total of approximately $850,000” .
• “During the three‑month production period ended February 28, 2019, sales volumes and realized prices were both lower than initial Trust estimates” (press release) .

Q&A Highlights

No analyst Q&A was provided in filings; key clarifications included in the 10‑Q:

• Distribution mechanics and timing of production periods included in each distribution .
• Details of the loan usage and consent to maintain the May distribution .
• Reserve withholding policy and flexibility to adjust amounts .

Estimates Context

• S&P Global consensus estimates for CHKR’s quarterly EPS/revenue were unavailable at the time of analysis; therefore, versus‑estimates comparisons are not provided. For royalty trusts, Street coverage is often limited, and distributions are primarily a function of production and realized prices disclosed in Trust filings .

Key Takeaways for Investors

• The sharp q/q distribution cut to $0.0303 reflects lower Dec–Feb volumes and weaker oil/NGL pricing, compounded by a sizable administrative cash advance and new reserve withholding; absent a commodity rebound or cost relief, near‑term distributions remain pressured .
• Natural production declines are the primary structural headwind; management explicitly expects further declines, which can outweigh pricing tailwinds over time .
• The new reserve policy (≥$70k or 3.5% per quarter) is a recurring headwind to distributable cash until the ≈$850k target is met or the trustee adjusts policy .
• Liquidity backstop is functioning: a $275k loan bridged expenses and avoided a distribution interruption, but it underscores sensitivity to cash flow timing and expenses .
• Monitoring realized price mixes is critical: gas realizations improved q/q while oil/NGLs weakened in Dec–Feb; commodity mix and post‑production costs materially influence cash generation .
• For modeling, anchor to Trust mechanics: distribution timing (last month of prior quarter + first two months of the current), reserve withholding, and potential variability in administrative expenses .
• With no operating control or growth capex at the Trust, distribution volatility will track commodity prices and natural declines; risk‑reward skews to commodity recovery and operating cost/transport dynamics beyond the Trust’s control .