Chesapeake energy by grace colavito

Chesapeake Energy Chesapeake Energy CorporationCorporationBy: Grace Colavito

PresentationPresentation Overview Business Operation/Mission Legislative/Industry Outlook Comparables Valuation Why Lease

Business │ Operations │ Outlook │ Valuation & Comparables | Why Lease

Chesapeake Energy Chesapeake Energy OverviewOverview Founded in 1989 Headquartered in Oklahoma City, OK

◦ Offices regionally located in Charleston, WV, Jane Lew, WV, Mt. Morris, PA, Canonsburg, PA, Harrisburg, PA, and Towanda, PA

Exclusive U.S. onshore focus One of the nation’s largest natural gas producers

◦ 1Q ‘10 natural gas production of 2.328bcf/d Nation’s most active explorer 1993-2010 Nation’s most active horizontal driller 1993-2010 Exceptional drilling success rate – 98%


Chesapeake Energy Chesapeake Energy OverviewOverview Most active driller in U.S. 1993-2010

◦ 133 operated rigs currently 26 rigs currently drilling in the Marcellus Shale area

◦ CHK responsible for 1 of 8 new gas wells being drilled in U.S.

Consistent production growth◦ 20th consecutive year of sequential production

growth Unparalleled inventory of U.S. onshore leasehold and

3-D seismic◦ Lower risk of suboptimal return on capital◦ Higher production rates


BusinessBusiness Largest independent producer of natural gas in the

United States As of December 31, 2008, we had 12.051 trillion

cubic feet equivalent of proved reserves, of which 94% were natural gas and all of which were onshore in the U.S.

During 2008, we produced an average of 2.303 bcfe per day, an 18% increase over the 1.957 bcfe per day produced in 2007. (billion cubic feet equivalent)

During the second half of 2008, we entered into joint venture arrangements that monetized a portion of our investment in three of the Big 4 Shale plays and provide drilling cost carries for our retained interest.


Business StrategyBusiness Strategy Create value for investors by building one of the

largest onshore natural gas resource bases in the United States

1. Grow through the drillbit

2. Control Substantial Land and Drilling Location Inventories

3. Develop Proprietary Technological Advances

4. Build Regular Scale

5. Focus on Low Costs

6. Mitigate Natural Gas and Oil Price Risk

7. Form Unique Joint Venture Arrangements


Mitigate Price RiskMitigate Price Risk Chesapeake Energy have been able to

deliver attractive profit margins and financial returns through all phases of the commodity price cycle.

1. proactively hedging the prices we receive for a majority of our natural gas and oil production

2. We believe this price volatility is likely to continue in the years ahead

3. As of February 17, 2009, we have natural gas and oil swaps and collars in place covering 78% and 48% of our expected production in 2009 and 2010


Low Cost ControlsLow Cost Controls Chesapeake Energy believe

their low cost structure is the result of:

1. Management’s effective cost-control programs

2. A high-quality asset base

3. Extensive and competitive services and natural gas processing and transportation infrastructures that

exist in our key operating areas. 4. significant investments in our drilling rig and

trucking service operations and in our midstream

gathering and compression operations.


Joint Venture AgreementsJoint Venture Agreements

In the second half of 2008, the company entered into three joint venture arrangements covering three of the company’s Big 4 shale plays

In the joint ventures, the company has collaborated with other leading energy companies to accelerate the development of the company’s properties

Sold leasehold and producing property assets which had a cost basis of approximately $1.2 billion to these three joint venture partners for total cash consideration of $4.0 billion and up to $4.6 billion of future drilling cost carries while retaining a majority interest in each joint venture.


Diverse Shale ProductionDiverse Shale Production

“Big Four” Shale Plays1. Barnett Shale = Forth Worth Basin of north-central

Texas 2. Haynesville Shale = Ark-La-Tex area of northwestern

Louisiana and East Texas 3. Fayetteville Shale = Arkoma Basin of central Arkansas 4. Marcellus Shale = northern Appalachian Basin of West

Virginia, Pennsylvania and New York

Substantial Secondary Plays1. Mid-Continental Basin2. Appalachian Basin3. Permian Basin4. Delaware Region5. Texas Gulf Coast Region


Diverse Shale ProductionDiverse Shale Production


OperationsOperations

Shale gas is the fastest growing energy sector in the United States.

In late 1990’s, the application of horizontal drilling enabled more aggressive development

Although the basic technology of shale gas production has now been proven, the differences in rock mineralogy and geology that occur when moving over such large distances means that each new area still requires that the approach be refined, and proven of delivering commercial rates of production. (barriers to entry)


OperationsOperations

Production of gas from the shales is not new, although development on a large scale is relatively recent, the best known example of which is the Barnett shale in the Fort Worth Basin of Texas.

Gas is held in the shale not only in tiny pores, but also in a solid solution bound onto the rock grains. The key to producing these shales is connecting the pores through the introduction of an artificial fracture system, and lowering the pressure in the rock


Natural Gas Performance


Legislative OutlookLegislative Outlook On September 22, 2008 Barack Obama proposed a

bill in the Senate:

◦ Democrat candidate and Illinois Senator, Barack Obama, still found time last week to introduce legislation (S.3506) that would increase the tax credit for individuals that purchase natural gas vehicles and extend the credit through to the end of 2017. The Obama administration may be a shot in the arm for Haynesville Shale producers.

http://online.wsj.com/video/can-obama-save-the-us-naturalgas-industry/7F633C4C-B9E1-417E-AC9C-D80711942D30.html


Industry OutlookIndustry Outlook

Domestic Alternative to Crude OilClean and Affordable Alternative to Coal

Production◦ Natural Gas plants cost 25% less than capital intensive

coal plantsTax Credits for individuals and cities that utilize

natural gas vehicles (increased demand)◦ Compressed natural gas expected to grow annually 5.8%

from 2007-2030, according to the Energy Info Administration

Utilities are accessing natural gas over coal for electricity (increased demand)


Company IssuesCompany Issues

1. Level of Indebtedness could limit financial flexibility We may incur additional debt, including secured indebtedness,

or issue additional series of preferred stock in order to develop our properties and make future acquisitions.

2. Price declines in 2008 resulted in write-downs of their

assets carrying value and further price declines could result in additional write-downs in the future

Financial statements as of and for the year ended December 31, 2008 reflect an impairment of approximately $1.7 billion, net of income tax, of our natural gas and oil properties.


Company IssuesCompany Issues

3. Significant capital expenditures are required to replace reserves Our exploration, development and acquisition activities require

substantial capital expenditures. Historically, we have funded our capital expenditures through a combination of cash flows from operations, our revolving bank credit facility and debt and equity.

4. Certain of our undeveloped leasehold acreage is subject to leases that will expire over the next several years unless production is established on units containing the acreage.

As of December 31, 2008, we had leases on approximately 0.46 million and 1.25 million net acres, respectively, in the Haynesville and Marcellus Shale areas. A sizeable portion of this acreage is not currently held by production. Unless production in paying quantities is established on units containing these leases during their terms, the leases will expire.


Executive CompensationExecutive Compensation1. Base Salary2. Cash Bonuses3. Long-Term Incentives

◦ Restricted Stock – four year vesting period◦ 401K Matching Contributions - match up to 15%

4. Perquisites◦ Monthly Country Club Dues◦ Personal Aircraft Use◦ Accounting Services


Executive Compensation Executive Compensation (cont.)(cont.)Chesapeake Energy has not

reported its Fiscal 2008 Definitive Proxy Statement

General and Administrative Expenses, which comprise stock-based compensation:◦$377 million in 2008◦$243 million in 2007 ◦$139 million in 2006


Executive Compensation Executive Compensation (cont.)(cont.)Stock-Based Compensation

◦$85 million for 2008◦$58 million for 2007◦Due to an increase in the number of

unvested restricted shares outstanding in 2008

Stock-Based Compensation represented $.10 per mcfe produced in 2008 and guidance is between $.10 - $.12 for 2009


Credit OutlookCredit Outlook

Moody’s◦Jan. 28, 2009: assigns Ba3 to

Chesapeake Energy senior unsecured notes; stable outlook

Standard and Poor’s◦Jan. 28, 2009: assigns BB to

Chesapeake Energy senior unsecured notes; stable outlook


Debt OutlookDebt Outlook

February 2009:◦Issuance of $1.425 billion of 9.5% Senior

Notes due 2015 Total Indebtedness sums to $14.184

billion◦A majority of these obligations are not

maturing within the upcoming 5 years◦ Indebtedness represents 43% of our total

book capitalization


Debt OutlookDebt Outlook

Total

Less than *1-3 *3-5 More than

1 Year Years Years 5 years

Long term debt:

Principal $ 14,058 $ — $ — $ 4,798 $ 9,260

Interest 6,048 567 1,133 1,133 3,215

Capital lease obligations 4 3 1 — —

Operating lease obligations 946 142 266 270 268

Asset retirement obligations (a) 269 19 21 6 223

Purchase obligations (b) 2,349 807 487 320 735

Unrecognized tax benefits (c) 60 — 60 — —

Standby letters of credit 15 15 — — —

Total contractual cash obligations $ 23,749 $ 1,553 $ 1,968 $ 6,527 $ 13,701


Lease OutlookLease Outlook

As of December 31, 2008, minimum future lease payments were as follows ($ in millions):

Rigs Compressors Other Total 2009 $94 $40 $8 $142 2010 95 34 5 134 2011 95 34 3 132 2012 96 36 2 134 2013 97 39 1 137 After 143 125

268 Total $620 $308 $19

$947


Reserve OutlookReserve Outlook

Proved developed producing reserves (PDPs) are obviously the most objective, whereas proved undeveloped reserves (PUDs) have the most to prove


Shareholder OverviewShareholder Overview

Shareholder Layout

4.20%

67.90%

27.90%

1 Percentage of Insiders

2 Percentage of Institutions

3 Percentage of Others


Equity Equity Repurchases/DividendsRepurchases/Dividends

October 2008◦ Repurchased 24,174 shares at $22.388

November 2008◦ Repurchased 15,976 shares at $20.658

December 2008◦ Repurchased 5,285 shares at $15.829

Repurchases used to pay tax burden on restricted stock grants (43,000 shares repurchased)

Increased dividend payout in 2008 to $.075/share each quarter from $.0675/share over the previous year.


Correlation StructureCorrelation Structure


Comparable CompaniesComparable CompaniesAnadarko Petroleum Corp. (APC)

◦ engages in the exploration and production of oil and gas properties primarily in the United States, the deepwater of the Gulf of Mexico, and Algeria.

Questar Corp. (STR)◦ engages in oil and gas exploration and production,

midstream field services, energy marketing, interstate gas transportation, and retail gas distribution.

Southwestern Energy Corp. (SWN)◦ engages in the exploration, development, and

production of natural gas and crude oil in the United States.


Comparable CompaniesComparable Companies

Name Location Market Cap P/E Price/Sales Price/Book

Chesapeake Energy Oklahoma 11.45 16.05 1.02 0.73

Anadarko Petroleum Corp. Texas 18.67 5.89 1.33 1.04

Questar Corp. Utah 5.30 7.90 1.60 1.63

Southwestern Energy Co. Texas 10.99 19.49 5.04 4.64

Industry 11.653 11.093 2.657 2.437


Stock Performance


ValuationsValuations

1. Comparables = Fairly Valued2. CAPM WACC = 9.27%3. ROE WACC = 9.1%4. Goal-Post Theory Valuation =

$30.425. Range: 27.38 - 33.46


Eight Major 2011 AccomplishmentsEight Major 2011 Accomplishments

1. Reduced long-term net debt by 25% per proved mcfe

From $0.73/mcfe to $0.55/mcfe

2. Reduced long-term net debt by $2.3 billion to $10.3 billion, or 18% Achieved more than 70% of CHK’s two-year 25% debt reduction

goal

3. Increased production by 15% (net of asset sales) to an average of 3.27 bcfe/day

4. Increased liquids production by 72% to ~110 mbbls/d (YE exit rate)

5. Increased proved reserves by 10% to 18.8 tcfe, despite the sale of 2.8 tcfe(1)

6. Increased fully diluted shares outstanding by only 0.6% (all ~13,000 employees receive restricted stock awards)

7. Created ~$15 of NAV per share(2)

8. Made strategic investments in natural gas demand creation initiatives (Clean Energy convertible debt, Sundrop Fuel preferred stock, fleet vehicle, drilling rig and frac crew conversions)


Why Lease With Chesapeake Why Lease With Chesapeake Energy?Energy? Most experience shale operator in the U.S. 21-year track record of production increases Best management practices utilized throughout

drilling and completion process Financial strength through joint ventures in multiple

operating areas◦ Total, StatoilHydro, BP, Plains Exploration and Production

Company Advanced technological capabilities translate into

higher production rates and reserve recoveries◦ Unparalleled inventory of onshore U.S. 3-D seismic

data◦ In-house geology core lab
