Chesapeake Energy Makes Barnett Shale Acquisitions

Barnett Shale lease area
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Chesapeake Energy has entered into an agreement to acquire from Four Sevens Oil Co. Ltd. and its equal equity partner, Sinclair Oil Corporation (collectively referred to as "Four Sevens/Sinclair"), 39,000 net acres of Barnett Shale leasehold, 30 million cubic feet of natural gas equivalent (mmcfe) current production and $55 million of mid-stream natural gas assets for $845 million in cash. Of the 39,000 net acres, 26,000 net acres are located in Johnson and Tarrant Counties, Texas, where Chesapeake has identified 500 net potential drillsites, and 13,000 net acres are located in counties outside the company's core focus area where the company has not yet identified any drilling opportunities where the returns are competitive with those in its core focus area. After allocating $55 million of the $845 million Four Sevens/Sinclair purchase price to mid-stream natural gas assets and adding an estimated $1.2 billion of capital needed to fully develop the 870 bcfe of proved and unproved reserves, Chesapeake's all-in acquisition cost for the Four Sevens/Sinclair transaction will be a very attractive $2.32 per thousand cubic feet of natural gas equivalent (mcfe).

Chesapeake has also recently acquired or agreed to acquire an additional 28,000 net acres of leasehold, primarily in Johnson and Tarrant Counties, from various additional sellers for $87 million. On this acreage, Chesapeake anticipates drilling 400 net wells to develop 650 bcfe of unproved reserves. Including an estimated $1.1 billion of capital needed to fully develop the 650 bcfe of unproved reserves, Chesapeake's all-in acquisition cost for the additional acreage will be $1.80 per mcfe.

Through these transactions, Chesapeake anticipates acquiring an internally estimated 1.5 trillion cubic feet of natural gas equivalent (tcfe) of proved and unproved reserves, comprised of 0.16 tcfe of proved reserves and 1.36 tcfe of unproved reserves. Including an estimated $2.3 billion of capital needed to fully develop the 1.5 tcfe of proved and unproved reserves, Chesapeake's all-in acquisition cost for the Four Sevens/Sinclair properties and the additional acreage will be $2.10 per mcfe.

Chesapeake anticipates increasing the 30 mmcfe of net daily production from the Four Sevens/Sinclair assets to at least 45-50 mmcfe by year-end 2006 and 80-100 mmcfe by year-end 2007. The company has not yet estimated a production ramp-up from the other Barnett Shale acquisitions, but believes it will also be significant. Chesapeake plans to close all of today's announced Barnett Shale transactions by July 31, 2006 and anticipates permanently financing the acquisitions by issuing a balance of senior notes and preferred equity in the near future.

Today's announcements increase Chesapeake's total leasehold in the Barnett Shale to approximately 153,000 net acres, including 110,000 net acres in Johnson and Tarrant Counties, which are in the heart of the most prolific portion of the horizontally developed Barnett Shale play. The company has pro forma current net production of 140 mmcfe per day (200 mmcfe gross) and believes it can drill an additional 2,100 net Barnett Shale wells to potentially develop 3.4 tcfe of unproved reserves compared to 1.1 tcfe of unproved reserves estimated as of March 31, 2006. To develop this significant backlog of value, Chesapeake plans to increase its current Barnett Shale drilling rig count from 12 (including 4 from Four Sevens/Sinclair) to 24 by year-end 2006. At that rig count, Chesapeake believes that it can drill 350- 400 Barnett Shale gross wells per year.

Chesapeake's current overall development plan for its 110,000 net acres of Johnson and Tarrant County leasehold is to drill 14-18 horizontal Barnett Shale wells per 640 acres using an average horizontal lateral length of 3,000 feet and an average spacing between wells of 500 feet. Using these parameters, Chesapeake believes its Johnson and Tarrant County horizontal drilling will develop an average of 2.2 bcfe of reserves per well at an average cost of $2.7 million, resulting in finding costs of approximately $1.64 per mcfe before leasehold or acquisition costs and after an approximate 25% average royalty burden.

To ensure strong returns on the acquisitions, the company has hedged 100% of the projected full-year 2007 and 2008 natural gas production volumes from the Four Sevens/Sinclair properties at an average NYMEX natural gas price of $10.50 per mmbtu, well above the gas price used to value the properties. Furthermore, Chesapeake has entered or will enter into multiple firm capacity pipeline transportation agreements that should help expand Barnett Shale takeaway capacity, reduce the company's basis differentials and enhance overall returns on its invested capital.

Company Expects Existing Barnett Shale Proved Reserves to be Revised Upward by 22% in the 2006 Second Quarter

As of March 31, 2006, the company's Barnett Shale proved reserves were 464 bcfe of the company's total proved reserves of 7.8 tcfe. Following a review of Chesapeake's Barnett Shale drilling results over the past 18 months and a comprehensive study of industry production data, the company has raised its estimate of average recoverable reserves on its existing proved Barnett Shale assets by approximately 100 bcfe, or an increase of 22%. Pro forma for the announced Barnett Shale acquisitions, its increased estimate of recoverable reserves and its anticipated development plan, Chesapeake estimates its total proved and unproved Barnett Shale reserve potential on its 153,000 net acres to be approximately 4.0 tcfe as of June 30, 2006.

With the anticipated growth in the company's proved reserves base and pro forma for the acquisitions announced today, Chesapeake expects to report 8.2 - 8.4 tcfe of proved reserves (based on March 31, 2006 oil and natural gas prices) and total proved and unproved reserves of approximately 20 tcfe as of June 30, 2006. To calculate its unproved reserves, Chesapeake uses a probability-weighted statistical approach to estimate the potential number of drillsites and potential unproved reserves associated with such drillsites.

Today's developments follow a consistent path of achievement for Chesapeake in the Barnett Shale. In the 18 months prior to today's announcements, Chesapeake invested approximately $800 million to acquire approximately 55,000 net acres in three significant transactions with Hallwood Energy Corporation and a private independent producer. In those acquisitions, the company acquired 49 mmcfe of initial net daily production and approximately 250 bcfe of proved reserves. After investing an additional $212 million to drill 91 wells in Johnson and Tarrant Counties, Chesapeake's Barnett Shale net production now exceeds 110 mmcfe per day and development costs to date have averaged only $1.47 per mcfe.

The keys to success for Chesapeake in the Barnett Shale play have been threefold:

     -- focus on acquiring leasehold in the Johnson and Tarrant County "sweet
        spot" where the Barnett Shale is greater than 250 feet thick, where
        the frac barrier is non-water bearing and where the shale is thermally
        mature and in the dry gas window;

     -- utilize the company's horizontal drilling expertise to generate better
        production and lower costs.  Since 1990, Chesapeake has drilled almost
        800 horizontal wells in the U.S. and has been a leader in improving
        horizontal drilling and completion technologies; and

     -- leverage the company's industry-leading shale expertise.  Chesapeake
        is the only company in the U.S. active in shale plays in West Texas,
        North Texas, southeastern Oklahoma, Arkansas and throughout the
        Appalachian Basin.

Company Enters West Texas Barnett and Woodford Shale Plays Through Acquisition of 150,000 Net Acres and Announces its First Commercial Production from the Barnett Shale in West Texas and from the Fayetteville Shale in Arkansas

Chesapeake has acquired or agreed to acquire approximately 150,000 net acres in Brewster, Pecos and Reeves Counties in West Texas in two separate transactions. In these transactions, Chesapeake has assumed operation of one producing vertical Barnett Shale well and is drilling one vertical Barnett and Woodford Shale well and one horizontal Barnett Shale well. In addition, Chesapeake has assumed completion operations on two vertical Barnett and Woodford Shale wells, one horizontal Barnett Shale well and one horizontal Woodford Shale well. Chesapeake intends to commence an aggressive 3-D seismic and drilling program to determine the potential of these assets. In this area in West Texas, the Barnett Shale is 400-950 feet thick (compared to 100-400 feet in the Fort Worth Basin) and the deeper Woodford Shale is 400-500 feet thick (compared to approximately 150-250 feet thick in southeastern Oklahoma). Chesapeake's first vertical well is producing natural gas in commercial quantities from the Barnett Shale in Reeves County, Texas.

In addition, Chesapeake has recently completed several wells in the Fayetteville Shale play in Arkansas. Results to date cause the company to believe that at least 300,000 of its 1.1 million net acre leasehold position in the Fayetteville Shale will be commercially productive. Based on its analysis of its own wells and those drilled by others in the play, Chesapeake has concluded that per-well reserves of 1.2-1.5 bcfe may be achievable over a broad area of the play using a spacing pattern of approximately 10 wells per 640 acres. If so, Chesapeake believes its 300,000 net acres of potentially productive leasehold could support the drilling of up to 4,600 net wells on an unrisked basis. Efforts remain underway to determine the commercial potential of Chesapeake's other 800,000 net acres.

Drilling, completing and operating costs in the Fayetteville Shale remain high and current economics in the area do not yet rank the play among Chesapeake's 15 best plays. Nevertheless, the company remains hopeful that it can achieve further engineering and operational breakthroughs that will make the play more economically attractive than it is today.

Chesapeake Significantly Increases its Oil and Natural Gas Hedging Positions

In addition to the hedges associated with the Four Sevens/Sinclair acquisition, Chesapeake has also significantly added to its 2007 and 2008 oil and natural gas hedging positions on its existing production over the past month to secure exceptional margins and profitability. The following tables compare Chesapeake's hedged production volumes (including only swaps and also including the hedges assumed in the CNR acquisition) as of June 5, 2006 to those as of May 1, 2006.

                      Swap Positions as of June 5, 2006

                                Natural Gas                   Oil
    Quarter or Year        % Hedged     $ NYMEX      % Hedged     $ NYMEX
    2006 2Q                    86%        $8.88          69%       $61.85
    2006 3Q                    93%        $8.85          84%       $63.90
    2006 4Q                    86%        $9.50          85%       $63.76
    2006 Total Remaining       88%        $9.08          79%       $63.24
    2007 Total                 69%        $9.86          56%       $68.79
    2008 Total                 55%        $9.34          48%       $69.50
    2009 Total                  3%        $7.57           2%       $66.26

                       Swap Positions as of May 1, 2006

                                Natural Gas                   Oil
    Quarter or Year        % Hedged     $ NYMEX      % Hedged     $ NYMEX
    2006 2Q                    86%        $8.88          69%       $61.85
    2006 3Q                    94%        $8.85          84%       $63.90
    2006 4Q                    88%        $9.50          85%       $63.76
    2006 Total Remaining       89%        $9.08          79%       $63.24
    2007 Total                 65%        $9.82          44%       $67.07
    2008 Total                 48%        $9.06          37%       $68.20
    2009 Total                  3%        $7.57           2%       $66.26

Depending on changes in oil and natural gas futures markets and management's view of underlying oil and natural gas supply and demand trends, Chesapeake may either increase or decrease its hedging positions at any time in the future without notice.

The company has updated its 2006 and 2007 forecasts to reflect the acquisitions announced today, the anticipated acquisition financing and additional hedges.

                             Management Comments

Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are excited to announce the acquisition of 26,000 net acres of high-quality Barnett Shale properties in Johnson and Tarrant Counties from Four Sevens/Sinclair, the additional 28,000 net acres of other high-quality Barnett Shale leasehold, our acquisition of 150,000 net acres in the Barnett and Woodford Shale play in West Texas and our initial commercial production success in the Barnett Shale in West Texas and in the Fayetteville Shale in Arkansas. Each of these announcements is based on our considerable expertise in drilling and completing horizontal wells in shale, tight sands and other unconventional formations. We believe that Chesapeake has industry-leading expertise in these areas and further believe these new acquisitions and successes in the Barnett, Woodford and Fayetteville shale plays will accelerate the company's already ambitious growth plans".


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