Chesapeake Touts 2.789 Bcfe in 2Q10

Chesapeake provided an update on its operational activities. For the 2010 second quarter, daily production averaged 2.789 billion cubic feet of natural gas equivalent (bcfe), an increase of 203 million cubic feet of natural gas equivalent (mmcfe), or 8%, above the 2.586 bcfe produced per day in the 2010 first quarter and an increase of 336 mmcfe, or 14%, over the 2.453 bcfe produced per day in the 2009 second quarter.

Chesapeake's average daily production of 2.789 bcfe for the 2010 second quarter consisted of 2.497 billion cubic feet of natural gas (bcf) and 48,670 barrels of oil and natural gas liquids (NGLs) (bbls). The company's 2010 second quarter production of 253.8 bcfe was comprised of 227.2 bcf (90% on a natural gas equivalent basis) and 4.4 million barrels of oil and NGLs (mmbbls) (10% on a natural gas equivalent basis). The company's year-over-year growth rate of natural gas production was 11% and its year-over-year growth rate of oil and NGLs (liquids) production was 41%. The company's percentage of revenue from liquids in the 2010 second quarter was 17% of realized production revenue compared to 14% in the 2009 second quarter.

Chesapeake is projecting full-year production growth of approximately 13% in 2010 and 18% in 2011, including production growth from liquids of approximately 60% in 2010 and 80% in 2011. Of Chesapeake's projected 13% and 18% growth rates in 2010 and 2011, approximately 37% and 50%, respectively, of the growth is projected to come from increased liquids production.

Chesapeake's Leasehold and 3-D Seismic Inventories Total 13.9 Million Net Acres and 25.5 Million Acres; Risked Unproved Resources in the Company's Inventory Total 95 Tcfe

Since 2000, Chesapeake has built the largest combined inventories of onshore leasehold (13.9 million net acres) and 3-D seismic (25.5 million acres) in the U.S. and the largest inventory of U.S. natural gas shale play leasehold (2.8 million net acres) and now owns the largest inventory of leasehold in two of the Top 3 new unconventional liquids-rich plays – the Eagle Ford Shale and the Niobrara Shale.

On its total leasehold inventory, Chesapeake has identified an estimated 16.1 tcfe of proved reserves (using volume estimates based on the 10-year average NYMEX strip prices at June 30, 2010), 95 tcfe of risked unproved resources and 225 tcfe of unrisked unproved resources. The company is currently using 133 operated drilling rigs to further develop its inventory of approximately 40,000 net drillsites. Of Chesapeake's 133 operated rigs, 91 are drilling wells primarily focused on unconventional natural gas plays and 42 are drilling wells primarily focused on liquids-rich plays. In addition, 126 of the company's 133 operated rigs are drilling horizontal wells.

Marcellus Shale (West Virginia, Pennsylvania and New York): With approximately 1.55 million net acres, an increase of approximately 50,000 net acres from the 2010 first quarter, Chesapeake is the largest leasehold owner, second-largest producer and most active driller in the Marcellus Shale play that spans from northern West Virginia across much of Pennsylvania into southern New York. On its Marcellus leasehold, Chesapeake estimates it has approximately 460 bcfe of proved reserves (based on the 10-year average NYMEX strip prices at June 30, 2010) and 34.1 tcfe of risked unproved resources. As a result of continued strong production results, the company has recently raised its average estimated ultimate recovery (EUR) on its Marcellus Shale acreage by approximately 24% from 4.2 bcfe per well to 5.2 bcfe per well.

During the 2010 second quarter, Chesapeake's average daily net production of 105 mmcfe in the Marcellus increased approximately 65% over the 2010 first quarter and approximately 250% over the 2009 second quarter. The company's average daily net production rate in the Marcellus in July 2010 was approximately 130 mmcfe and the company anticipates adding more than 60 mmcfe of net production in the West Virginia portion of the play in the second half of 2010 once new natural gas processing facilities become operational. Chesapeake is currently drilling with 26 operated rigs in the Marcellus and anticipates operating an average of approximately 28 rigs in 2010 to drill approximately 150 net wells. During the 2010 second quarter, Chesapeake received approximately $144 million of drilling and completion carries from its Marcellus joint venture partner Statoil (NYSE:STO, OSE:STL). From July 2010 through 2012, Chesapeake should receive approximately $1.7 billion in additional drilling carries from STO.

Three notable recent wells completed by Chesapeake in the Marcellus are as follows:

  • The Mowry 1H in Bradford County, PA achieved a peak 24-hour rate of 9.9 million cubic feet of natural gas (mmcf) per day;
  • The Przybyszewski 4H in Susquehanna County, PA achieved a peak 24-hour rate of 9.7 mmcf per day; and
  • The White 2H in Susquehanna County, PA achieved a peak 24-hour rate of 9.0 mmcf per day.

Haynesville and Bossier Shales (Northwest Louisiana and East Texas): Chesapeake is the largest leasehold owner, largest producer and most active driller of new wells in the Haynesville Shale play in Northwest Louisiana and East Texas. Chesapeake owns approximately 530,000 net acres of leasehold in the Haynesville Shale play, under which approximately 195,000 net acres is prospective for the Bossier Shale. On its Haynesville and Bossier leasehold, Chesapeake estimates it has approximately 2.9 tcfe of proved reserves (based on the 10-year average NYMEX strip prices at June 30, 2010) and 23.7 tcfe of risked unproved resources.

The company has drilled and completed 252 gross Chesapeake-operated horizontal wells in the Haynesville and Bossier since discovering the play in 2007. During the 2010 second quarter, Chesapeake's average daily net production of 560 mmcfe in the Haynesville increased approximately 30% over the 2010 first quarter and approximately 315% over the 2009 second quarter. The company's average daily net production rate in the Haynesville in July 2010 was approximately 615 mmcfe. The company is currently drilling with 35 operated rigs in the Haynesville and anticipates operating an average of approximately 36 rigs in 2010 to drill approximately 175 net wells. The company anticipates having the vast majority of its Haynesville Shale leasehold held by production (HBP) by year-end 2011 and as such will have greater drilling flexibility in the years ahead.

Three notable recent wells completed by Chesapeake in the Haynesville are as follows:

  • The Sloan H-1 in DeSoto Parish, LA achieved a peak 24-hour rate of 22.2 mmcf per day;
  • The Brasch Family H-1 in DeSoto Parish, LA achieved a peak 24-hour rate of 22.0 mmcf per day; and
  • The Wren H-1 in DeSoto Parish, LA achieved a peak 24-hour rate of 21.6 mmcf per day.

Barnett Shale (North Texas): The Barnett Shale is currently the largest natural gas-producing field in the U.S. In this play, Chesapeake is the second-largest producer, the most active driller and the largest leasehold owner in the Core and Tier 1 sweet spots of Tarrant and Johnson counties. Following the sale of 25% of its interests in the Barnett Shale to Total E&P USA, Inc., a wholly owned subsidiary of Total S.A. (NYSE:TOT, FP:FP), in January 2010, the company owns approximately 220,000 net acres of leasehold. Chesapeake estimates it has approximately 2.9 tcfe of proved reserves (based on the 10-year average NYMEX strip prices at June 30, 2010) and 3.4 tcfe of risked unproved resources in the Barnett play. As a result of continued strong production results, the company has recently raised its average EUR on its Barnett Shale acreage by approximately 13% from 2.65 bcfe per well to 3.0 bcfe per well.

During the 2010 second quarter, Chesapeake's average daily net production of 535 mmcfe in the Barnett decreased approximately 5% over the 2010 first quarter and decreased approximately 20% over the 2009 second quarter. Adjusted for the company's sale of a 25% joint venture interest to Total in the 2010 first quarter, the company's sequential and year-over-year production growth rate in the Barnett Shale was 5% and 10%, respectively. The company's average daily net production rate in the Barnett in July 2010 was approximately 535 mmcfe. Chesapeake is currently drilling with 22 operated rigs in the Barnett and anticipates operating an average of approximately 22 rigs in the Barnett in 2010 to drill approximately 245 net wells. During the 2010 second quarter, Chesapeake received approximately $110 million of drilling and completion carries from Total. From July 2010 through 2012, Chesapeake should receive approximately $1.2 billion in additional drilling carries from Total.

Three notable recent wells completed by Chesapeake in the Barnett are as follows:

  • The Brown 7H in Johnson County, TX achieved a peak 24-hour rate of 8.0 mmcf per day;
  • The Fellowship 5H in Dallas County, TX achieved a peak 24-hour rate of 7.9 mmcf per day; and
  • The Greenbriar 2H in Tarrant County, TX achieved a peak 24-hour rate of 7.0 mmcf per day.

Fayetteville Shale (Arkansas): In the Fayetteville, Chesapeake is the second-largest leasehold owner and producer and the most active driller in the play with 465,000 net acres. On its Fayetteville leasehold, the company estimates it has approximately 2.4 tcfe of proved reserves (based on the 10-year average NYMEX strip prices at June 30, 2010) and 7.7 tcfe of risked unproved resources. As a result of continued strong production results, the company has recently raised its average EUR on its Fayetteville Shale acreage by approximately 8% from 2.4 bcfe per well to 2.6 bcfe per well.

During the 2010 second quarter, Chesapeake's average daily net production of 370 mmcfe in the Fayetteville increased approximately 5% over the 2010 first quarter and approximately 65% over the 2009 second quarter. The company's average daily net production rate in the Fayetteville in July 2010 was approximately 370 mmcfe. The company is currently drilling with eight operated rigs in the Fayetteville and anticipates operating an average of approximately 10 rigs in 2010 to drill approximately 85 net wells. The Fayetteville provides an excellent example of how the company is able to reduce its drilling activity once a play is substantially HBP. Chesapeake lowered its drilling activity from an average of 18 operated rigs in 2009 to eight operated rigs currently and an average of eight operated rigs projected for 2011 and beyond.

Three notable recent wells completed by Chesapeake in the Fayetteville are as follows:

  • The Merideth 7-16 2-2H in Conway County, AR achieved a peak 24-hour rate of 7.3 mmcf per day;
  • The Ransom 7-8 1-21H16 in White County, AR achieved a peak 24-hour rate of 6.0 mmcf per day; and
  • The Heggie 7-9 5-12H1 in White County, AR achieved a peak 24-hour rate of 4.9 mmcf per day.

Granite Wash (western Oklahoma and Texas Panhandle): Chesapeake is the largest leasehold owner and producer and the most active driller with approximately 200,000 net acres, an increase of 5,000 net acres from the 2010 first quarter, in the unconventional liquids-rich Granite Wash plays in the Anadarko Basin, which include the Oklahoma Colony and the Texas Panhandle Granite Wash plays. On its Granite Wash leasehold, Chesapeake estimates it has approximately 200 million barrels of oil equivalent (mmboe) (1.2 tcfe) of proved reserves (based on the 10-year average NYMEX strip prices at June 30, 2010) and 900 mmboe (5.4 tcfe) of risked unproved resources.

During the 2010 second quarter, Chesapeake's average daily net production of 260 mmcfe (43 thousand barrels of oil equivalent (mboe)) in the Greater Granite Wash play increased approximately 5% over the 2010 first quarter and 80% over the 2009 second quarter. Chesapeake anticipates operating an average of approximately 12 rigs in the Granite Wash in 2010 to drill approximately 75 net wells. Due in large part to the play's high oil and natural gas liquids content, the Granite Wash is currently Chesapeake's highest rate-of-return play and serves as an example of how the company is implementing a transition to increased drilling activity and production to liquids-rich plays. Chesapeake increased its drilling activity in the Granite Wash from an average of eight operated rigs in 2009 to 14 operated rigs currently and an average of 16 operated rigs projected for 2011.

Three notable recent wells completed by Chesapeake in the Colony Granite Wash are as follows:

  • The James 1-33H in Washita County, OK achieved a peak 24-hour rate of 10.0 mmcf and 2,490 bbls per day, or 24.9 mmcfe per day;
  • The Huls USA 1-13H in Washita County, OK achieved a peak 24-hour rate of 13.3 mmcf and 1,780 bbls per day, or 24.0 mmcfe per day; and
  • The Gwendolyn 2-22H in Washita County, OK achieved a peak 24-hour rate of 8.0 mmcf and 1,980 bbls per day, or 19.9 mmcfe per day.

Three notable recent wells completed by Chesapeake in the Texas Panhandle Granite Wash are as follows:

  • The Ruby Lee 104H in Wheeler County, TX achieved a peak 24-hour rate of 25.3 mmcf and 2,920 bbls per day, or 42.8 mmcfe per day;
  • The Dowell 1-31H in Roger Mills County, OK achieved a peak 24-hour rate of 16.2 mmcf and 2,440 bbls per day, or 30.6 mmcfe per day; and
  • The Zybach 2010H in Wheeler County, TX achieved a peak 24-hour rate of 8.0 mmcf and 1,270 bbls per day, or 15.6 mmcfe per day.

Eagle Ford Shale (South Texas): Chesapeake has built a leading position in the liquids-rich portion of the Eagle Ford Shale in South Texas with approximately 550,000 net acres of Eagle Ford Shale leasehold, an increase of approximately 150,000 net acres from the 2010 first quarter. Chesapeake has drilled and completed seven gross wells to date and anticipates operating an average of approximately five rigs in the Eagle Ford in 2010. In 2011 and 2012, the company expects to increase its drilling activity to an average of 16 and 27 rigs, respectively. Chesapeake expects to conclude ongoing Eagle Ford Shale joint venture discussions and announce a joint venture transaction by the end of the 2010 third quarter.

Three notable recent wells completed by Chesapeake in the Eagle Ford Shale are as follows:

  • The PGE Browne 1-H in Webb County, TX achieved a peak 24-hour rate of 4.0 mmcf and 1,200 bbls per day, or 11.2 mmcfe per day;
  • The Lazy A Cotulla 1H in Dimmit County, TX achieved a peak 24-hour rate of 0.3 mmcf and 930 bbls per day, or 5.9 mmcfe per day; and
  • The Traylor North 1H in Zavala County, TX achieved a peak 24-hour rate of 0.3 mmcf and 930 bbls per day, or 5.9 mmcfe per day.

Anadarko Basin Unconventional Liquids Plays (western Oklahoma and Texas Panhandle): Chesapeake is the largest leasehold owner in the Anadarko Basin unconventional liquids plays, which include horizontal drilling in the Cleveland, Tonkawa and Mississippian formations, with approximately 730,000 net acres, an increase of 65,000 net acres from the 2010 first quarter. The company has drilled and completed 55 gross wells to date in these three plays. Chesapeake anticipates operating an average of approximately six rigs in its Anadarko Basin unconventional liquids plays in 2010 to drill approximately 55 net wells and expects to increase its average operated rig count to 11 in 2011 and 13 in 2012.

Permian Basin Unconventional Liquids Plays (West Texas and southern New Mexico): Chesapeake has built a strong position of approximately 290,000 net acres of leasehold in four Permian Basin unconventional liquids plays: the Avalon Shale, Bone Spring, Wolfcamp and Spraberry in West Texas and in southern New Mexico. The company has drilled and completed 100 gross wells to date in these four plays. Chesapeake anticipates operating an average of approximately five rigs in its Permian Basin unconventional liquids plays in 2010 to drill approximately 60 net wells. In 2011 and 2012, the company plans to increase its operated rig count as it continues its transition away from natural gas drilling to more liquids-rich drilling.

Rocky Mountain Unconventional Liquids Plays (southern Wyoming and northern Colorado): Chesapeake has developed a leading position in the horizontal Niobrara and Frontier plays in the Powder River Basin in Wyoming with approximately 470,000 net acres acquired during the past two years. The company has also recently entered the Niobrara play in the DJ Basin of northern Colorado and southern Wyoming with 205,000 net acres. The company has drilled and completed two gross wells to date in these plays. Chesapeake expects to initiate joint venture discussions in the Niobrara play in the 2010 second half. In 2011 and 2012, the company plans to increase its Niobrara and Frontier operated rig count to an average of approximately six operated rigs as it continues its transition away from natural gas drilling to more liquids-rich drilling.

Management Comments

Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to deliver strong operational performance in the 2010 second quarter highlighted by 8% production growth over the 2010 first quarter and drilling and completion costs of $0.87 per mcfe for the 2010 first half. We also have reduced our projected 2011 natural gas drilling and completion capital expenditures by approximately $400 million and increased our projected liquids-rich drilling and completion capital expenditures by approximately $400 million compared to 2010. Additionally, after a very aggressive effort to capture leasehold in the first half of 2010 in a large number of highly competitive liquids-rich unconventional plays, the company expects to become a significant seller of leasehold in the second half of 2010 and in 2011 through planned joint venture transactions.

"Chesapeake's goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible. We plan to shift our capital spending mix between natural gas plays and liquids-rich plays to approximately 45/55 by year-end 2012. By year-end 2015, we expect to increase our liquids production to approximately 200,000 bbls per day, or approximately 25% of total production and 40% of production revenue. This will be a remarkable achievement for a company of our size, one that we expect to deliver to our investors from organic drilling, rather than through acquisitions, at very low per net acre leasehold acquisition costs and low drilling and completion costs. Chesapeake's transition will be transformative for our company and its shareholders.

"Our strategy to accomplish this goal is set forth below:

  • Reduce drilling of natural gas wells except for those required to HBP leasehold or to use a drilling carry provided by a joint venture partner until such time as natural gas prices rise above $6.00 per mcf;
  • Lease and develop substantial new liquids-rich plays in which the company can acquire very large leasehold positions of 250,000-750,000 net acres;
  • Within one year of acquisition, sell a minority interest in a new play, recovering all or virtually all of the cost to acquire the leasehold in the play and to fund approximately a significant portion of Chesapeake's future drilling costs in the play;
  • Accelerate drilling of liquids-rich plays until year-end 2012 when the company's drilling capital expenditures are balanced approximately 50/50 between natural gas plays and liquids-rich plays;
  • Continue adding proved reserves, net of monetizations and divestitures, of approximately 2.5 - 3.0 tcfe (415 - 500 mmboe) annually; and
  • Accomplish these goals without the issuance of additional equity and with a reduction of debt levels such that the company becomes investment grade within the next few years."
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