Chesapeake Reduces '09-'10 Capital Expenditure Plans

Chesapeake has announced updated financial and operational plans through 2010 in response to turbulent financial markets and increased uncertainty about the U.S. economy and natural gas and oil markets.

Chesapeake has further reduced its capital expenditure plans for 2009 and 2010 to achieve a cash neutral budget that does not depend on future asset sales. The company also plans to build up to $4 billion in additional cash resources in 2009 and 2010 through further asset monetizations.

From the budget presented in its November 3, 2008 Outlook, the company has decreased its drilling capital expenditure budget for 2009 and 2010 by a combined $2.9 billion, or 31%, and has also reduced its leasehold and producing property acquisition budget for 2009 and 2010 by a combined $2.2 billion, or 78%. In total, since July 31, 2008, Chesapeake has reduced its planned 2009 and 2010 drilling, leasehold and producing property acquisition budget by approximately $9.8 billion, or 58%, to approximately $7.2 billion.

Since August 2008, the company has steadily reduced its drilling and leasing activities in anticipation of a worsening U.S. economy, lower natural gas and oil prices and limited capital markets. The company is now utilizing approximately 130 operated rigs, down from a peak of 158 operated rigs in August 2008, and plans to further reduce its operated rig count to 110 to 115 rigs early in the 2009 first quarter. Chesapeake's costs in approximately 50% of these rigs will be fully or partially paid for by its third-party joint venture partners.

Chesapeake anticipates its drilling carries will save the company approximately $1.2 billion of capital expenditures in 2009 and approximately $1.1 billion in 2010. The company will continue to monitor oil and natural gas markets and economic conditions and will further adjust its drilling and leasing activity levels if needed. Chesapeake is now anticipating production growth of approximately 5-10% in 2009 and 10-15% in 2010.

The company anticipates the combination of its joint venture drilling carries, 10-20% lower oilfield service costs and continued operational excellence will lead to very attractive drillbit finding costs and financial returns in 2009 and 2010. In its 2009 drilling program, for example, Chesapeake is targeting the addition of approximately 2.5 trillion cubic feet of natural gas equivalent (tcfe) of proved reserve additions from approximately $3.0 billion of net drilling capital expenditures, which would imply a production replacement rate of over 250% and a drillbit finding and development cost of approximately $1.20 per million cubic feet of natural gas equivalent (mcfe).

Approximately 1.1 tcfe of the forecasted proved reserve additions are attributable to the company's interests in its three shale joint ventures and are based on approximately $500 million in drilling capital expenditures, net to Chesapeake, at a drillbit finding and development cost of approximately $0.45 per mcfe. Chesapeake is targeting to have proved reserves of 13.5 - 14.0 tcfe by year-end 2009, net of anticipated sales of proved reserves through volumetric production payments (VPPs).

To create additional value from its proved and unproved properties and to further enhance its financial liquidity, Chesapeake plans to continue selectively monetizing mature assets and undeveloped leasehold. Chesapeake is in discussions to sell certain Chesapeake-operated producing assets in the Anadarko and Arkoma Basins in its fourth VPP transaction. In this transaction, Chesapeake plans to sell producing assets with proved reserves of approximately 100 bcfe and current net production of approximately 55 mmcfe per day for proceeds of approximately $450 million, or $4.50 per mcfe. Chesapeake will retain future drilling rights on the properties.

For accounting purposes, the transaction will be treated as a sale and the company's proved reserves and production will be reduced accordingly. The company anticipates completing this transaction by year-end 2008.
While Chesapeake received multiple bids for the purchase of its assets in South Texas, it believes the monetization of all or a portion of the producing assets though a VPP will be a more attractive transaction alternative. As a result, Chesapeake intends to market its fifth VPP transaction for a portion of its South Texas assets instead of selling the entire asset package. The company now anticipates selling producing assets in South Texas with proved reserves of approximately 80 bcfe and current net production of approximately 70 mmcfe per day for proceeds of approximately $450 million, or $5.60 per mcfe, and completing the transaction on these assets in the 2009 first quarter.

Additionally, the company continues to have discussions with multiple parties for either a minority investment in its midstream operations or the purchase of portion of its existing midstream assets. Chesapeake anticipates completing a midstream transaction, subject to reaching an agreement on acceptable terms, in the 2009 first quarter.

Over the past month, Chesapeake has also restructured its hedging position to provide further downside price protection. Chesapeake currently has approximately 76% of its anticipated 2009 natural gas production hedged through swaps and collars at an average swap and floor price of $8.20 per thousand cubic feet (mcf), including only 12% of its anticipated production hedged through swaps with knockout provisions, much of which is concentrated in the 2009 fourth quarter.

Given the company's ample current and projected financial liquidity and in response to an unexpectedly negative market reaction to the company's November 26, 2008 filings with the Securities and Exchange Commission (SEC), Chesapeake plans to terminate the Distribution Agency Agreements it has with three securities firms and will not issue any shares under the equity distribution program described in its prospectus supplement dated November 26, 2008. Additionally, the company plans to amend its acquisition shelf registration statement filed on Form S-4 to reduce the number of common shares to be registered from 50 million to 25 million.

Management Comment

Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to announce our cash neutral budget for 2009 and 2010 that does not depend on future asset sales. In addition, we plan to build up to $4 billion in additional cash resources over the next two years by continuing to monetize mature assets and undeveloped leasehold. The company has ample financial liquidity and we will monitor market conditions and proactively manage our capital spending levels in order to remain within our cash resources.

"Over the past year, we have captured significant value for our shareholders by monetizing a portion of our producing assets and undeveloped leasehold through VPPs and joint ventures. So far this year, we have received approximately $11.7 billion in cash and carried working interests through the sale of two VPPs, the creation of three joint ventures and the sale of our Arkoma Woodford Shale assets. Our cost basis in those assets was approximately $3.0 billion, creating a gain of approximately $8.7 billion. In addition, we still retain 80% of our Haynesville assets, 75% of our Fayetteville assets and 67.5% of our Marcellus assets with indicated combined values of more than $25 billion.

"We believe our approach of selectively monetizing mature assets and undeveloped leasehold is an attractive supplement to the traditional E&P industry business model of simply drilling wells and collecting proceeds from production over future years and decades. While that traditional activity will remain the foundation of our business, we believe Chesapeake’s asset monetization activities increase our financial flexibility and create immediate value for shareholders with less risk. In time, we believe investors will more fully appreciate this aspect of our business as we successfully complete additional monetization transactions.

"The market response to our SEC fillings on November 26, 2008 was obviously very negative. We underestimated how the market would assess the purpose, implication, timing and magnitude of our filings. Our intent was to create broad financial flexibility for an uncertain economic and commodity market environment over the next few quarters. In retrospect, we made a mistake and we are terminating the Distribution Agency Agreements that permitted us to sell shares under a prospectus supplement and we are amending our acquisition shelf registration statement filed on Form S-4 to reduce the number of common shares registered from 50 million to 25 million.

"While the economy, stock market and natural gas and oil prices have made the second half of 2008 a brutal year for industry investors, Chesapeake has generated strong financial and operating results this year. We can not predict how the U.S. economy will perform in 2009 and 2010, but Chesapeake will continue executing its innovative, value-creating strategies and will continue building shareholder value in the years ahead, just as we have for the past 15 years as a public company."