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James Lambert

Jason Blauvelt

Prabhava Upadrashta

Monday, April 02, 2012

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CONTENTS

Executive Summary ..................................................................................................................... 4

Overview and History ................................................................................................................. 5

Financial Analysis ........................................................................................................................ 8

Recent Financial Performance ................................................................................................ 8

Consolidated Balance Sheets (USD $ In Millions) ............................................................... 9

Consolidated Statements Of Operations (USD $) In Millions ......................................... 11

Consolidated Statements Of Cash Flows (USD $) In Millions ........................................ 13

Production Data ..................................................................................................................... 16

Industry Comparison ............................................................................................................ 18

Financial Indicators: Seven Largest Domestic Natural Gas Producers .......................... 18

Stock Price and Analyst Opinions ....................................................................................... 19

Price: Chesapeake vs. S&P 500 ............................................................................................. 20

U.S. Natural Gas Wellhead Price (Dollars per Thousand Cubic Feet) ........................... 20

Competitive Analysis ................................................................................................................ 21

Internal Rivalry ...................................................................................................................... 21

Entry Threat ............................................................................................................................ 22

Buyer Power............................................................................................................................ 22

Supplier Power ....................................................................................................................... 23

Substitutes ............................................................................................................................... 23

Complements .......................................................................................................................... 24

SWOT Analysis .......................................................................................................................... 24

Strengths .................................................................................................................................. 24

Weaknesses ............................................................................................................................. 25

Opportunities.......................................................................................................................... 26

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Threats ..................................................................................................................................... 27

Strategic Recommendations ..................................................................................................... 28

Shift production towards oil ................................................................................................ 28

Improve the balance sheet .................................................................................................... 28

Invest in natural gas technologies ....................................................................................... 29

Lobby Congress to implement pro-natural gas regulations ............................................ 30

Encourage the development of export capabilities ........................................................... 31

Endnotes ...................................................................................................................................... 32

4

EXECUTIVE SUMMARY

Over the past five years, Chesapeake Energy has doubled its production of natural gas

and oil and grown into the second largest producer of natural gas in the United States.

The company has also established itself as an expert in unconventional drilling

methods, such as hydraulic fracturing and horizontal drilling, which allow it to reach

deposits that were previously uneconomical.

However, as a natural gas extractor, the success of Chesapeake Energy’s business is

highly dependent on natural gas prices. Plummeting prices since 2008 have ensured

that even with operational expertise and the rapid expansion in production,

Chesapeake has been met with only limited growth in revenue and profits. At the same

time, the firm has seen its balance sheet deteriorate because of the debt it has taken on

to finance its expansion.

Despite these frustrations, Chesapeake can put itself in a position to succeed in the

years to come. To do so, it must accomplish several things: First, it must restructure its

operations to better manage the current environment of low natural gas prices. By

shifting its balance of production away from natural gas and towards oil in the short

term, Chesapeake can earn a higher return on its invested capital and also further

diversify its sources of revenue.

Second, Chesapeake must improve its balance sheet. Cost management is

particularly important in a commodity based industry such as natural gas extraction. By

reducing the amount of debt the company is carrying and improving its liquidity,

Chesapeake can lower its financing costs. The firm should divest existing assets and

enter into more joint ventures in order to accomplish this objective.

Third, Chesapeake needs to invest in opportunities that will stimulate domestic

natural gas consumption. Emerging natural gas technologies, particularly in the ground

transportation industry, are becoming increasingly economical as prices stay low. By

accelerating the development of these technologies, Chesapeake will stimulate demand

in the long term. Chesapeake should also leverage natural gas’s status as the cleanest

carbon fuel to promote pro-natural gas environmental legislation.

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Finally, Chesapeake must encourage the development of liquefied natural gas

infrastructure that will allow for large scale export of natural gas. Currently there are

enormous disparities in prices in different regions of the world, and overseas export

capacity is limited. As more LNG transport capacity is developed, relatively low prices

in the United States will rise, to Chesapeake’s benefit.

OVERVIEW AND HISTORY

Chesapeake Energy is the United States’ second largest producer of natural gas, and

also a top 15 producer of oil and natural gas liquids. The company is headquartered in

Oklahoma City and has 12,600 employees. In 2011, Chesapeake recorded revenues of

$11.6 billion and an EBITDA of $4.45 billion1. Chesapeake’s main business strategy

centers on natural gas extraction from unconventional sources. This broad category is

used to describe natural gas deposits that had been difficult or uneconomical to remove,

including those that are especially deep, near impermeable rock formations, or located

in shale. Chesapeake uses a variety of techniques in its extraction, including horizontal

well drilling and hydraulic fracturing.

Chesapeake was founded in 1989 by CEO Aubrey K. McClendon and former

President and Chief Operating Officer Tom L. Ward, who sought to employ emerging

technologies to establish a natural gas exploration and production firm. The duo, in

private partnership since 1983, had both graduated from college less than a decade

earlier at the peak of the oil boom. McClendon and Ward began with just ten

employees and a $50,000 initial investment, looking to seize on a strategy of horizontal

drilling. By concentrating on drilling and developing horizontal natural gas wells in

unconventional reservoirs, the young company built significant positions in the Golden

Trend and Sholem Alechem fields of South-central Oklahoma and in the Giddings field

along the Gulf Coast.

Propelled by its initial success, the firm increased production and grew its reserves

rapidly. McClendon sought funding for continued growth, and as a result, Chesapeake

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completed its IPO at a split-adjusted price of $1.33 per share in February of 1993. The

firm debuted on the NASDAQ, but would later move its shares to the NYSE, listed as

CHK.

Following an important natural gas discovery in the Deep Giddings portion of the

Austin Chalk formation in Southeastern Texas (in 1994), the company began another

wave of enormous growth. Between 1994 and 1996, the firm had the highest growth rate

in the industry2, and continued its widespread use of horizontal drilling and innovative

geological assessment techniques.

The successes wouldn't last however, as attempts to extend the Austin Chalk

investment from Southeastern Texas along the Gulf Coast into Western and Central

Louisiana failed. High drilling costs and unanticipated geological and engineering

challenges doomed the project's continuation into Louisiana. The coinciding collapse of

oil and natural gas prices to their lowest levels in twenty years compounded the firm's

woes, forcing the firm to reconsider its strategy.

On the heels of operational disappointments and a commodity price collapse, the

firm sought to reinvent itself, rediscovering its roots in Oklahoman natural gas. The

company revised its strategy, focusing almost exclusively on natural gas production,

and largely abandoning the Austin Chalk for a return to Oklahoma. The new focus

centered on using the newest technologies to discover new reserves, and to target a

more diversified, longer reserve life and lower risk asset base. For the first time, the

firm began to incorporate growth by acquisitions into its business plan.

Spearheaded by its new strategy, the firm rekindled its earlier growth, expanding its

production and presence through a balance of acquisitions and new drilling. Owing in

part to tightening supply, natural gas prices began to rise, accelerating all the way

through 2007. Recognizing that rocketing prices paired with improvements in

horizontal drilling and completion technologies would enable the industry to develop

monumental new supplies of natural gas from unconventional reservoirs, Chesapeake

expanded its land positions to include fractured carbonates, tight sandstone and shales,

such as the Barnett, Fayetteville, and Marcellus shales. The commitment to horizontal

drilling and exploring unconventional reservoirs proved successful, and Chesapeake

began to transform the industry itself, as others began to abandon the increasingly

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elusive and expensive search for undiscovered conventional natural gas reserves. The

firm's foresight led to its installation as one of the nation's largest natural gas producers,

and in 2006 Chesapeake was added to the S&P 500, displacing Dana Corporation.

In 2008, Chesapeake announced its discovery of Haynesville shale in East Texas and

northwestern Louisiana. This breakthrough is expected to play a major role in the

firm's future, as Haynesville shale is now projected to become the nation's largest

natural gas producer by 2015. In addition to turning its attention towards developing

and drilling fields in these and other areas, the firm now seeks to incorporate

unconventional liquids-rich reservoirs, having invested nearly $4.7 billion in 2010. The

transition towards liquids-rich wells has already begun, with approximately 30% of

drilling and capital expenditures in 2010 allocated to liquids-rich plays, compared to

10% in 2009 and a projected 75% in 2012.

The company currently holds interests in over 45,700 productive wells positioned on

15.3 million net acres of drilling land. It is the most active driller of new wells in the

United States, with a working interest in almost 3,000 new wells over the past year. In

2011, Chesapeake produced approximately 1.2 trillion cubic feet of natural gas

equivalent (tcfe), 84% of which was in the form of dry natural gas and 16% of which

was oil and natural gas liquids. The company holds an estimated 19.9 tcfe in proved

reserves. As such, Chesapeake represents a significant percentage of both the United

States’ total natural gas production (4.3%) and its proved reserves (5.7%).3

Production is divided into regional divisions. The Southern Division is composed

mostly of natural gas plays in the Haynesville, Barnett, and Bossier shales in Texas and

Louisiana. These are Chesapeake’s most significant holdings as they account for 47% of

total production and 43% of proved reserves. The Northern Division holds interests

across Oklahoma and northern Texas, including the Anadarko Basin. Chesapeake’s

Eastern division primarily consists of the Utica Shale in Ohio and Western

Pennsylvania, as in December 2011 Chesapeake sold most of its holdings in the

Marcellus Shale. The Western Division spreads across West Texas, New Mexico,

Colorado, and Wyoming. Major plays include the Permian and Delaware Basins, the

Eagle Ford Shale, and the Rocky Mountain/Williston Basin.

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Chesapeake is vertically integrated and has several affiliates and subsidiaries that

help bring its product to market. Chesapeake Energy Marketing provides price

structuring and contract administration services to for Chesapeake and its buyers. Two

midstream companies, Chesapeake Midstream Development and Chesapeake

Midstream Partners, provide pipeline infrastructure and are involved in compressing,

processing and treating natural gas. Chesapeake NG Ventures, formed in 2011,

identifies and invests in technologies that will increase demand for natural gas.

Chesapeake also owns companies that provide drill site service and equipment

Chesapeake also participates in several joint ventures wherein the company sells a

minority interest in its leasehold on certain wells in order to offset some of its capital

costs. The company’s partners in these plays are largely multinational petroleum

companies such as China National Offshore Oil Corporation, Total S.A., and British

Petroleum.

FINANCIAL ANALYSIS

Chesapeake’s current financial situation is a major weakness that management must

address. The company has been able to rapidly expand both its holdings and

production in recent years, and its relatively high gross profit margin indicates that it is

able to operate more efficiently than its competitors. However, falling natural gas prices

have limited the revenue and earnings gains from these activities. Moreover,

Chesapeake is currently highly levered with debt and has issues with liquidity.

RECENT FINANCIAL PERFORMANCE

Over the past five years, Chesapeake’s total asset value has grown at a 6.4% CAGR from

30.7 to 41.8 Billion dollars. Over 85% of the value of these assets is either in the form of

the property that the firm holds leases on or the equipment used in extraction.

Chesapeake stands to benefit significantly if it can divest or otherwise monetize some of

these property and equipment assets and use the proceeds to reduce debt.

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Chesapeake is currently highly illiquid. At year-end 2011, the company’s current

ratio was only .45, down from 1.18 in 2008. This indicates that Chesapeake may have

problems meeting its short term debts.

The firm has used a large amount of debt to finance its rapid growth and as a result it

is highly levered. Its debt to equity ratio, when defined as total liabilities over total

equity, is 1.33. Chesapeake also carries $10.8 billion in interest-bearing long term debt,

which represents .64 of total equity; this is considerably higher than the industry

median of .44. It has been successful in recent years in reducing the scale of this

obligation, but it has also seen current liabilities increase greatly over the same period.

CONSOLIDATED BALANCE SHEETS (USD $ IN MILLIONS)

Dec. 31,

2011

Dec. 31,

2010

Dec. 31,

2009

Dec. 31,

2008

Dec. 31,

2007

CURRENT ASSETS:

Cash and cash equivalents $351 $102 $307 $1,749 $1

Accounts receivable 2,505 1,974 1,325 1,324 1,074

Short-term derivative assets 13 947 692 1,082 203

Deferred income tax asset 139 139 24 0 0

Other current assets 125 104 98 137 118

Total Current Assets 3,177 3,266 2,446 4,292 1,396

PROPERTY AND

EQUIPMENT:

Evaluated natural gas and oil

properties 41,723 38,952 35,007 28,965 27,656

Unevaluated properties 16,685 14,469 10,005 11,379 5,641

Natural gas gathering systems

and treating plants 1,763 1,545 3,516 2,717 1,135

Other property and equipment 4,858 3,726 3,235 2,609 1,312

Total Property and Equipment,

at Cost 65,029 58,692 51,763 45,670 35,744

Less: accumulated depreciation,

depletion and amortization (($6)

and $0 attributable to our VIE) -28,290 -26,314 -25,053 -12,362 -7,407

Total Property and Equipment,

Net 36,739 32,378 26,710 33,308 28,337

LONG-TERM ASSETS:

Investments 1,531 1,208 464 701 616

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Other long-term assets 388 327 294 288 385

TOTAL ASSETS 41,835 37,179 29,914 38,593 30,734

CURRENT LIABILITIES:

Accounts payable 3,311 2,069 957 1,611 1,262

Short-term derivative liabilities 191 15 27 66 174

Accrued interest 183 191 218 167 175

Other current liabilities 3,397 2,215 1,486 1,777 1,150

Total Current Liabilities 7,082 4,490 2,688 3,621 2,761

LONG-TERM LIABILITIES:

Long-term debt, net 10,626 12,640 12,295 13,175 10,950

Deferred income tax liabilities 3,484 2,384 1,059 4,200 3,966

Long-term derivative liabilities

($10 and $0 attributable to our

VIE) 1,541 1,693 787 111 408

Asset retirement obligations 323 301 282 269 236

Other long-term liabilities 818 407 462 200 283

Total Long-Term Liabilities 16,792 17,425 14,885 17,955 15,843

STOCKHOLDER'S EQUITY:

Preferred stock 3,062 3,065 466 505 960

Common stock 7 7 6 6 5

Paid-in capital 12,146 12,194 12,146 11,680 7,032

Retained earnings 1,608 190 -1,261 4,569 4,150

Accumulated other

comprehensive income (loss) -166 -168 102 267 -11

Less: treasury stock, at cost;

1,552,533 and 1,221,299 common

shares -33 -24 -15 -10 -6

Total Chesapeake Stockholders'

Equity 16,624 15,264 11,444 17,017 12,130

Noncontrolling interests 1,337 0 897 0 0

Total Equity 17,961 15,264 12,341 17,017 12,130

TOTAL LIABILITIES AND

EQUITY $41,835 $37,179 $29,914 $38,593 $30,734

Source: Chesapeake Energy Corporation 2007-11 Form 10-K’s

With the exception of a large loss in 2009 due to impairment (where an asset is found to

be worth less than its book value and the loss has to be carried on the year’s income

statement), Chesapeake has exhibited reliable profitability over the past five years.

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Revenue peaked in 2008 due to high natural gas and oil prices, but has increased over

the past two years.

Chesapeake’s three main revenue streams come from the production, processing

services, and oilfield services. The production operating segment is responsible for both

exploring and extracting natural gas and oil deposits. The processing segment is

responsible for marketing, gathering and compression of natural gas and oil primarily

from Chesapeake-operated wells. The oilfield services operating segment is responsible

for contract drilling, oilfield trucking, oilfield rental, pressure pumping and other

oilfield services operations for both Chesapeake-operated wells and wells operated by

third parties. Each of these segments operates profitably, but sales of oil and natural gas

account for over half of revenue and over 90% of operating income.

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) IN MILLIONS

12 Months Ending: Dec. 31,

2011

Dec. 31,

2010

Dec. 31,

2009

Dec. 31,

2008

Dec. 31,

2007

REVENUES:

Natural gas and oil $6,024 $5,647 $5,049 $7,858 $5,624

Marketing, gathering and

compression 5,090 3,479 2,463 3,598 2,040

Oilfield services 521 240 190 173 136

Total Revenues 11,635 9,366 7,702 11,629 7,800

OPERATING EXPENSES:

Natural gas and oil production 1,073 893 876 889 640

Production taxes 192 157 107 284 216


compression 4,967 3,352 2,316 3,505 1,969

Oilfield services 402 208 182 143 94

General and administrative 548 453 349 377 243

Natural gas and oil depreciation,

depletion and amortization 1,632 1,394 1,371 1,970 1,835

Depreciation and amortization of

other assets 291 220 244 174 153

(Gains) losses on sales and

impairments of fixed assets -391 -116 168 0 0

Impairment of natural gas and oil

properties 0 0 11,000 2,830 0

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Restructuring 0 0 34 0 0

Total Operating Expenses 8,714 6,561 16,647 10,172 5,150

INCOME (LOSS) FROM

OPERATIONS 2,921 2,805 -8,945 1,457 2,650

OTHER INCOME (EXPENSE):

Interest expense -44 -19 -113 -271 -401

Earnings (losses) on investments 156 227 -39 0 83

Losses on purchases or exchanges of

debt -176 -129 -40 -4 0

Impairment of investments -16 -162 -180 0

Other income 23 16 11 -11 15

Total Other Income (Expense) -41 79 -343 -466 -303

INCOME (LOSS) BEFORE INCOME

TAXES 2,880 2,884 -9,288 991 2,347

INCOME TAX EXPENSE

(BENEFIT):

Current income taxes 13 4 423 29

Deferred income taxes 1,110 1,110 -3,487 -36 863

Total Income Tax Expense (Benefit) 1,123 1,110 -3,483 387 892

NET INCOME (LOSS) 1,757 1,774 -5,805 604 1,455

Net (income) attributable to

noncontrolling interests -15 -25 0 0

NET INCOME (LOSS)

ATTRIBUTABLE TO CHESAPEAKE 1,742 1,774 -5,830 604 1,455

Preferred stock dividends -172 -111 -23 -33 -94

NET INCOME (LOSS) AVAILABLE

TO COMMON STOCKHOLDERS 1,570 1,663 -5,853 504 1,233


Chesapeake’s operations have generated roughly $5 billion in cash each of the previous

five years. This method of accounting eliminates the influence of impairment and

illustrates the large cash flows Chesapeake generates annually. Overall cash flows from

operations have increased at a modest 3.5% over the period shown below because while

production has expanded, natural gas and oil prices have fallen (see next paragraph for

more detail).

Chesapeake’s two major investing cash expenses include well drilling and

completion costs ($7.47B in 2011), and property and corporate acquisitions costs ($5.31B

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in 2011); these are offset to some degree by proceeds from divestitures of property

($7.65B in 2011).

The net impact of financing on cash flow was relatively small in the past year but

there were large amounts associated on both proceeds from credit facilities borrowing

($15.5B in 2011) and payments to credit facilities borrowing ($17.4B in 2011).

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) IN MILLIONS

12 Months Ended Dec. 31,

2011

Dec. 31,

2010

Dec. 31,

2009

Dec. 31,

2008

Dec. 31,

2007

CASH FLOWS FROM

OPERATING ACTIVITIES:

NET INCOME (LOSS) $1,757 $1,774 -$5,805 $604 $1,455

ADJUSTMENTS TO RECONCILE

NET INCOME TO CASH

PROVIDED BY OPERATING

ACTIVITIES:

Depreciation, depletion and

amortization 1,923 1,614 1,615 2,144 1,988

Deferred income tax expense

(benefit) 1,110 1,110 -3,487 -36 863

Unrealized (gains) losses on

derivatives 796 592 497 -712 415

Stock-based compensation 153 147 140 132 84

Accretion of discount on contingent

convertible notes 78 79 79 37

(Gains) losses or impairments on

sales of other property and

equipment -391 -116 168 0 0

(Gains) losses on investments -41 -107 39 38 0

Losses on purchases or exchanges of

debt 5 29 40 4 0

Impairment of natural gas and oil

properties 0 0 11,000 2,830 0

Impairment of investments 0 16 162 180 0

Other -3 32 39 -2 8

(Increase) decrease in accounts

receivable and other assets -530 -769 -31 -22 -257

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Increase (decrease) in accounts

payable, accrued liabilities and other 1,124 717 -100 76 430

Cash provided by operating

activities 5,903 5,117 4,356 5,357 4,974

CASH FLOWS FROM INVESTING

ACTIVITIES:

Drilling and completion costs on

proved and unproved properties -7,467 -5,242 -3,572 -6,104 -5,305

Acquisitions of natural gas and oil

companies, proved and unproved

properties, net of cash acquired -5,313 -6,945 -2,268 -8,593 -3,003

Proceeds from divestitures of proved

and unproved properties 7,651 4,292 1,926 7,670 1,089

Additions to other property and

equipment -2,009 -1,326 -1,683 -3,073 -1,439

Proceeds from sales of other assets 1,312 883 176 41 36

Proceeds from (additions to)

investments 101 -134 -40 -74 -8

Cash used in investing activities -5,812 -8,503 -5,462 -9,965 -7,964

CASH FLOWS FROM

FINANCING ACTIVITIES:

Proceeds from credit facilities

borrowings 15,509 15,117 7,761 13,291 7,932

Payments on credit facilities

borrowings -17,466 -13,303 -9,758 -11,307 -6,160

Proceeds from issuance of senior

notes, net of offering costs 1,614 1,967 1,346 2,136 1,607

Proceeds from issuance of preferred

stock, net of offering costs 0 2,562 0 2,598 0

Cash paid to purchase debt -2,015 -3,434 0 -312 0

Cash paid for common stock

dividends -207 -189 -181 -148 -115

Cash paid for preferred stock

dividends -172 -92 -23 -35 -95

Cash received on financing

derivatives 1,043 621 109 -167 -91

Proceeds from sale of noncontrolling

interest 1,348 0 588 0 0

Proceeds from other financings 300 0 199 0 0

15

Distributions to noncontrolling

interests -9 0 -10 0 0

Net increase (decrease) in

outstanding payments in excess of

cash balance 353 20 -249 330 -98

Other -140 -88 -118 25 8

Cash provided by (used in)

financing activities 158 3,181 -336 6,356 2,988

Net increase (decrease) in cash and

cash equivalents 249 -205 -1,442 1,748 -2

Cash and cash equivalents,

beginning of period 102 307 1,749 1 3

Cash and cash equivalents, end of

period 351 102 307 1,749 1


Chesapeake’s total production has expanded extremely rapidly over the past five years,

from 578.4 bcfe to 1,194 bcfe; this constitutes a 15.6% CAGR. Natural gas currently

accounts for 84% of Chesapeake’s production on an energy equivalence basis. This is a

notable decrease from the recent production composition, which tended to be in the

range of 92% natural gas, and represents a reaction to falling natural gas prices over the

past few years.

Indeed, the average sales price Chesapeake has received for natural gas fell from a

high of $7.74 per thousand cubic feet (mcf) in 2008 to only $3.12 per mcf in 2011,

without the use of derivatives. While natural gas accounts for 84% of production, it is

less than 70% of total sales value after hedging is accounted for.

On a per unit of production basis, Chesapeake’s largest expenses have been those

directly related to production, and those associated with the depreciation of the value of

natural gas and oil reserves. Interest expenses expressed in the following data are

misleadingly low as they are net of capitalized interest. Total interest expenses in 2011,

when not net of capitalized interest, are $776 million, or equivalent to $.65 per mcfe.30

Since 2006, Chesapeake has also aggressively expanded both the amount of proven

reserves it holds (16.0% CAGR) and the amount of reserves that are developed (10.9%).

It now holds reserves equal to more than 15 times current production levels.

16

PRODUCTION DATA

Net Production: 2011 2010 2009 2008 2007 2006

Natural gas (bcf) 1,004.1 924.9 834.8 775.4 655.0 526.5

Oil (mmbbl) 31.7 18.4 11.8 11.2 9.9 8.7

Natural gas equivalent (bcfe) 1,194.2 1,035.2 905.5 842.7 714.3 578.4

Natural Gas and Oil Sales ($ in

millions):

Natural gas sales $3,133 $3,169 $2,635 $6,003 $4,117 $3,343

Natural gas derivatives – realized

gains (losses) $1,656 $1,982 $2,313 $267 $1,214 $1,269

Natural gas derivatives – unrealized

gains (losses) -$669 $425 -$492 $521 -$139 $467

Total natural gas sales $4,120 $5,576 $4,456 $6,791 $5,192 $5,079

Oil sales $2,126 $1,079 $656 $1,066 $678 $527

Oil derivatives – realized gains

(losses) -$102 $74 $33 -$275 -$11 -$15

Oil derivatives – unrealized gains

(losses) -$120 -$1,082 -$96 $276 -$235 $28

Total oil sales $1,904 $71 $593 $1,067 $432 $540

Total natural gas and oil sales $6,024 $5,647 $5,049 $7,858 $5,624 $5,619

Average Sales Price (excluding

gains (losses) on derivatives):

Natural gas ($ per mcf) $3.12 $3.43 $3.16 $7.74 $6.29 $6.35

Oil ($ per bbl) $67.11 $58.67 $55.60 $95.04 $68.64 $60.86

Natural gas equivalent ($ per mcfe) $4.40 $4.10 $3.63 $8.39 $6.71 $6.69

Average Sales Price (excluding

unrealized gains (losses) on

derivatives):

Natural gas ($ per mcf) $4.77 $5.57 $5.93 $8.09 $8.14 $8.76

Oil ($ per bbl) $63.90 $62.71 $58.38 $70.48 $67.50 $59.14

Natural gas equivalent ($ per mcfe) $5.70 $6.09 $6.22 $8.38 $8.40 $8.86

Other Operating Income(c) ($ in

millions):


compression net margin $123 $127 $147 $93 $71 $55

17

Oilfield services net margin $119 $32 $8 $30 $42 $62

Other Operating Income(c) ($ per

mcfe):


compression net margin $0.10 $0.12 $0.16 $0.11 $0.10 $0.09

Oilfield services net margin $0.10 $0.03 $0.01 $0.04 $0.06 $0.11

Expenses ($ per mcfe):

Production expenses $0.90 $0.86 $0.97 $1.05 $0.90 $0.85

Production taxes $0.16 $0.15 $0.12 $0.34 $0.30 $0.31

General and administrative

expenses $0.46 $0.44 $0.38 $0.45 $0.34 $0.24

Natural gas and oil depreciation,

depletion and amortization $1.37 $1.35 $1.51 $2.34 $2.57 $2.35

Depreciation and amortization of

other assets $0.24 $0.21 $0.27 $0.21 $0.22 $0.18

Interest expense $0.03 $0.08 $0.22 $0.27 $0.51 $0.52

Interest Expense ($ in millions):

Interest expense $30 $99 $227 $235 $365 $301

Interest rate derivatives – realized

(gains) losses $7 -$14 -$23 -$6 $1 $2

Interest rate derivatives –

unrealized -gains) losses $7 -$66 -$91 $85 $40 -$2

Total interest expense $44 $19 $113 $314 $406 $301

Wells

Net Wells Drilled 1,282 1,149 1,003 1,733 1,919 1,449

Net Producing Wells as of the End

of Period . 22,617 22,919 22,813 21,404 19,079

Proved Reserves

Natural Gas (bcf) 15,515 15,455 13,510 11,327 10,137 8,319

Oil (mmbbl) 545.5 273.4 124.0 120.6 123.6 106.0

Total (bcfe) 18,789 17,096 14,254 12,051 10,879 8,956

Proved developed reserves

Natural Gas (bcf) 8,578 8,246 7,859 7,582 6,409 5,113

Oil (mmbbl) 254.6 149.3 78.8 84.9 88.8 76.7

18

Total (bcfe) 10,106 17,096 8,331 8,091 6,941 5,573


INDUSTRY COMPARISON

The table below compares key statistics among the seven largest domestic producers of

natural gas. Chesapeake is dwarfed in size by the multinational integrated petroleum

firms that it competes with, but it is one of the largest dedicated extractors. Anadarko

Petroleum and Devon Energy are most similar to Chesapeake in size. While

Chesapeake has more employees than these companies due to its high level of vertical

integration, it has a smaller market capitalization because more of its capital takes the

form of debt.

In terms of profitability measures, it is difficult to make a perfect comparison

between Chesapeake and the multinational petroleum companies whose operations are

more focused on oil and are integrated along the entire supply chain. However,

Chesapeake compares favorably to both its closest competitors and the industry in

general. Its gross profit margin is highest among this group, indicating that Chesapeake

operates very efficiently. Net profit margin, return on equity, and return on assets are

all higher than industry average.

Chesapeake trades at a discount relative to the industry and most of its key

competitors. This is likely a reflection of two things: First; that investors are wary of

Chesapeake’s debt-heavy and illiquid financial position. Indeed, Chesapeake is much

more levered and less liquid than its competitors. Second, Chesapeake places a larger

emphasis on natural gas extraction over oil extraction than many of its competitors, and

investors are reacting to the recent fall in natural gas prices.

FINANCIAL INDICATORS: SEVEN LARGEST DOMESTIC NATURAL GAS PRODUCERS

XOM CHK APO DVN BP ECA COP Industry

Key Statistics

Annual NG

Production

(bcf) 1,424

1,004

876 730 694 657

584 28,576

19

Natural Gas as

% of Total

Production 49 84 68 81 -- 95 48

Annual Sales

(Billion US$) $486.4 $11.6 $14.0 $11.5 $386.5 $8.5 $251.2

Employees 82,100 12,600 4,800 5,200 83,400 4,276 29,800

Market Cap

(Billion US$) $401.3 $14.7 $38.0 $25.0 $135.2 $13.6 $93.7

Profitability

Gross Profit

Margin 36.9% 87.3% 58.4% 68.9% 19.9% 65.9% 21.7% 69.3%

Net Profit

Margin 8.4% 13.5% -19.0% 41.1% 6.7% 1.5% 5.0% 12.2%

Return on

Equity 27.3% 12.2% -13.7% 23.1% 24.9% 0.8% 18.6% 7.5%

Return on

Assets 13.0% 4.0% -5.1% 12.7% 9.1% 0.4% 8.0% 3.7%

Valuation

Price/Sales

Ratio 0.87 1.5 2.79 2.6 0.37 1.71 0.42 4.35

Price/Earnings

Ratio 10.3 9.99 -14.73 13.95 5.58 114.94 8.47 27.32

Price/Book

Ratio 2.65 1.13 2.16 1.34 1.28 0.89 1.49 2.58

Price/Cash

Flow Ratio 7.64 2.95 15.58 4.78 6.48 3.59 5.37 9.07

Financial

Current Ratio 0.94 0.45 1.41 1.38 1.16 1.75 1.08 1.2

Quick Ratio 0.66 0.41 1.22 1.25 0.69 0.82 0.82 0.87

Leverage Ratio 2.14 3.08 2.86 1.92 2.63 2.08 2.35 2.02

Total

Debt/Equity 0.25 0.78 0.84 0.46 0.4 0.5 0.35 0.44

Source: Hoover’s

STOCK PRICE AND ANALYST OPINIONS

Chesapeake’s stock price reached a recent peak of over $65 in June 2008, but dropped

over 75% by February 2009 as a result of falling natural gas prices and the recession.

Earnings expectations are very dependent on natural gas prices, and as such natural gas

prices have a large influence on Chesapeake’s stock price. The current consensus

20

analyst opinion on Chesapeake is a weak buy. Average revenue estimates forecast 13%

growth each year for the next two years.4

PRICE: CHESAPEAKE VS. S&P 500

Source: Yahoo Finance

U.S. NATURAL GAS WELLHEAD PRICE (DOLLARS PER THOUSAND CUBIC FEET)

Source: Energy Information Administration

0

200

400

600

800

1000

1200

1400

1600

1800

0

10

20

30

40

50

60

70

CHK

S&P 500

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Jan

-20

03

Jul-

20

03

Jan

-20

04

Jul-

20

04

Jan

-20

05

Jul-

20

05

Jan

-20

06

Jul-

20

06

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Jul-

20

11

21

COMPETITIVE ANALYSIS

The main source of competitive pressure in the natural gas extraction industry is

internal rivalry; there is a high level of existing competition due to the numerous large,

established companies involved and the commodity-based nature of the product. High

capital costs and the need for specialized technology ensure that the threat of entry is

very low. Neither the suppliers nor the buyers of this industry wield significant power

over its participants. The substitutability of the product is low in the short run but

becomes much higher over time. In the current environment of low natural prices, this

means that competition is increased in the short term but will decrease if prices return

to previous levels.

INTERNAL RIVALRY

Chesapeake faces competition from both independent firms focused on natural gas

extraction and large multinational petroleum companies. Independent natural gas

extractors range from large firms such as Devon Energy and Anadarko Petroleum that

are similar in size to Chesapeake and operate on a national scale to smaller players such

as Delta Petroleum that only operate one field. At the other end of the scale, Exxon

Mobil is the nation’s largest extractor of natural gas, producing 3.9 bcf of dry natural

gas a day to Chesapeake’s 2.6 bcf.5 BP, ConocoPhillips, and Chevron are also major

producers. There are few economies of scale in this industry, and thus Chesapeake faces

competition from firms both large and small. The market is fairly fragmented; the five

largest domestic producers of natural gas only account for 16.5% of total US

production.6,7 Extractors compete over contracts to sell their natural gas and liquids as

well as properties for exploration and development and the personnel needed to

perform the extraction.

Natural gas extractors suffer increased competition because there is no product

differentiation in the market. Contracts for natural gas delivery are settled largely on

price; because of this, firms are forced to manage costs intensely as a way of obtaining

competitive advantage. There are two main ways in which firms in the natural gas

industry commonly attempt to gain a cost advantage. First, they vertically integrate into

the midstream in order to deliver their product at a lower cost. Second, they attempt to

22

use advanced drilling techniques and equipment, such as horizontal drilling to access

unconventional sources. The recent fall in price of natural gas has only added to the

need for firms in this industry to manage cost.

ENTRY THREAT

The threat of entry in the natural gas extraction market is low primarily because of the

high capital costs involved and the need for specialized, often proprietary, equipment

and knowledge. The installation and operation of a gas well is a complex process,

especially as shale drilling, horizontal drilling and other techniques become more

popular; one report estimates that unconventional methods will account for more than

half of production by 2020.8 In a commodity-based, cost-driven industry such as this, a

new entrant also cannot afford to learn by doing so the only credible threat of entrance

comes from those who already have industry experience.

Other factors also add to the difficulty of entering this market. Natural gas extraction

is location dependent and as such new entrants on any significant scale must compete

with existing players, who have already developed reputations and relationships, for

land leasing rights. On the other end of the value chain, most natural gas extractors rely

on an existing set of distribution pipeline, and unless an entrant is able to construct their

own system they also have to compete on that end as well. The complex environmental

regulations surrounding the industry add to the difficulty as well. Perhaps the sole

advantage entrants have in the natural gas industry is the lack of significant economies

of scale.

BUYER POWER

The commodity nature and structure of the natural gas market ensures that neither

extractors nor their buyers tend to have significant power over one another. Depending

on their level of vertical integration, natural gas extractors sell to marketers,

distributors, or directly to the end user. In any case, the lack of product differentiation

and multitude of different channels to purchase natural gas guarantee that most

extractors have many buyers to choose from. At the same time, the lack of product

differentiation ensures that most buyers also have a large number of different options in

23

the market. Transportation prices tend to determine sales patterns, and only for very

small or remote extractors is buyer power significant.

SUPPLIER POWER

Natural gas extraction requires two main inputs: Land rich in gas deposits and oilfield

service teams. Supplier power is low for all of these inputs in most circumstances.

In the case of land, suppliers are those holding real estate in areas thought to be rich

in natural gas. They do not wield considerable power because of the imprecision

typically involved in estimating the value of land thought to contain natural gas. The

quantities and ease of extracting gas deposits are not well known until after a thorough

geological study, and cannot be determined exactly until a well is drilled. Extractors

typically establish leasehold over land before these tasks are performed. Because of this

uncertainty and the impairment loss associated with drilling an empty well, extractors

are typically unwilling to commit many resources to single investments. Even in

situations where the size of natural gas deposits is well known, the commodity nature

of the product means that the value of the land is fairly fixed and cannot be raised high

than is economical for the extractors. Moreover, the geologic formations that tend to

contain natural gas are broad in extent.

Oilfield service companies provide a range of services on a drill site, ranging from

drilling rig operation to compression to transportation. Supplier power from oilfield

services companies can be substantial because of the specialized nature of modern

unconventional drilling techniques. However, no major suppliers dominate the market,

and vertical integration between extraction companies like Chesapeake and oilfield

service teams is common, preventing suppliers of these services from exploiting their

key role in the production process.

SUBSTITUTES

The substitutability of natural gas is low in the short term but in the medium to long

term. Natural Gas’s primary uses are in industry (32%), electricity generation (24%),

and residential applications (22%).9 In all of these areas it is used as an energy and heat

source, and its primary substitutes are other carbon fuels like coal and oil. The low

short-term substitutability between gas and other carbon fuel sources comes from the

24

large capital investments required for their installation. This creates a large switching

cost associated with changing between different fuel sources. There are a limited

number of power plants that are able to switch between oil and natural gas as their fuel

source, but they only represent a small proportion of overall capacity.10

In the long term, natural gas can be adapted to a number of different usages,

including fueling smaller motor vehicles through compressed natural gas, or larger

long-haul vehicles such as trucks, planes, and ships through more compact liquefied

natural gas. These technologies are not currently widespread because historical natural

gas prices have not been low enough to make them economical, but in the current era of

low prices they are undergoing rapid development starting with fleet vehicles which

can refuel every day at a central location and short haul truck operations that originate

and deliver to consistent locations.

COMPLEMENTS

Natural gas use is especially concentrated in the pulp and paper, metal, chemical,

petroleum, plastic, and food processing industries, which together account for over 84

percent of all industrial natural gas usage.11 As such, the products produced by these

industries are complements to natural gas use. Because a major use of natural gas is in

residential heating, usage is also highly positively correlated to the severity of winter.

Finally, as the aforementioned emerging natural gas technologies become more

prevalent, those new products will serve as complements as well.

SWOT ANALYSIS

STRENGTHS

Expertise in unconventional drilling methods. Chesapeake’s business strategy

emphasizes using drilling techniques such as hydraulic fracturing and

horizontal drilling to allow them to access deposits that would not otherwise

be economical. This allows Chesapeake to differentiate themselves from other

25

drillers who are not focused on using these techniques, reducing the degree to

which they are competing over the same reserves.

Extensive land and drilling inventory. In recognition of the potential for new

drilling methods to access previously inaccessible deposits, Chesapeake has

aggressively purchased leaseholds in major oil and natural gas plays for the

past six years. Their current level of proven reserves is enough to provide for

nearly twenty years of drilling at this year’s rate of roughly 1.2 tcfe.

Proprietary technology. Chesapeake has developed three major pieces of

technology that complement its drilling programs. The first of these is a large

inventory of 3D seismic data which identifies deposits that were previously

undiscovered and allows for more accurate placement of wells. Second is an

information system that gives management the ability to monitor new plays

and competitors’ activity. Lastly, Chesapeake has developed a geologic center

in Oklahoma City that analyzes cores from newly drilled wells to better

evaluate the productivity of newly drilled wells and the likelihood of other

nearby productive deposits.

WEAKNESSES

Debt level. Chesapeake’s high level of debt is disadvantageous in a number of

ways. Financing the existing debt may be difficult if cash flows are not steady.

This is particularly relevant in the current environment of depressed natural

gas prices. Furthermore, high levels of debt will make it more expensive for

the company to finance additional acquisitions. While Chesapeake already has

a large leasehold inventory, land acquisition is critically important to an

extraction company, and the inability to do this may impede future growth.

Environmental and Safety Liabilities. The production and transport of natural

gas and petroleum products is inherently dangerous and Chesapeake is

vulnerable to legal action in the event of an accident. In May 2011, a pipeline

blowout in Bradford County, Pennsylvania cost Chesapeake more than

$500,000 dollars in punitive fees from the Pennsylvania Department of

Environmental Protection.12 While these fees are largely significant given the

26

scale of Cheapeake’s operations, they illustrate the general level of

vulnerability to these kinds of accidents.

Large capital requirements. The process of acquiring, exploring, developing,

and processing natural gas and oil is very capital intensive, and if Chesapeake

cannot fund these expenditures, they will be forced to reduce the scale of their

operations. This is a problem because even though Chesapeake holds leases

over a large amount of real estate, many of these leases are structured such

that if the company does not begin drilling operations within three to five

years of the contract’s inception, it will lose leasehold over the land.

OPPORTUNITIES

Joint ventures. Chesapeake has already entered into several joint ventures

with multinational petroleum companies wherein the company sells a share of

its interest in a leasehold in exchange for cash. In all of these arrangements,

Chesapeake continues to operate the leasehold as normal and also gains

revenue for processing the partner’s share of the extracted natural gas and oil.

These arrangements allow Chesapeake to recover some of the capital costs

associated with production, effectively monetizing existing assets

immediately.13

Technologies that increase US demand for gas. Natural gas can serve in many

of the roles that oil currently does. However, historical natural gas prices have

been too high to justify developing the infrastructure and technology

necessary to do this in all applications. The most significant opportunities are

in transportation, and there are several initiatives, such as the Pickens Plan, to

develop national infrastructure for natural gas vehicles. These technologies

would increase domestic demand for natural gas and thus increase prices.

Export gas to more profitable markets. Another technology that may provide

opportunities for Chesapeake is mass liquefied natural gas transport.

Container ships built expressly for this purpose carry gas compressed at 600

times its normal density, and allow economical transport of natural gas across

oceans, which was not previously possible. Liquefaction terminals are

27

currently being constructed throughout the United States, and once more of

these are operational, Chesapeake’s gas can be exported to other places where

prices are much higher. While gas trades at roughly $2.50 per million BTUs in

the United States, it costs as much as $9 per million BTUs in Europe and up to

$16 in Asia.14

THREATS

Price fluctuation / Value of reserves less than expected. Low gas prices directly

affect Chesapeake’s income from operations. In addition, much of

Chesapeake’s current value is tied to the estimated value of the deposits in the

land that it leases. If these decline in value, either because natural gas prices

fall or because the deposits are less productive than expected, Chesapeake

stands to lose a great deal of money. In 2009, Chesapeake had impairment

costs of $11 billion, which was greater than total revenue for the year.15

Chesapeake may also be harmed if unproved deposits, which have not yet

been accurately estimated, on the land it leases are less than estimated. There

is a great deal of uncertainty as to the value of unproved reserves; the

government’s Energy Information Administration recently halved its

estimates for the quantity of unproved reserves in the United States.16

Legislation. Chesapeake is vulnerable to legislation that would increase costs,

in particular environmental legislation. Even though natural gas is cleaner

than oil or coal in terms of carbon output per unit of energy produced, it is

still a source of greenhouse gases. Hydraulic fracturing, which Chesapeake

uses in virtually all of its wells to increase productivity, is also subject to

scrutiny on the basis of groundwater contamination and releasing pollutants.

As such, Chesapeake may faced increased costs, bureaucracy, or monitoring if

the government passes environmental laws

Development of other energy sources. Given natural gas’s substitutability

with other carbon fuel sources, expanded production of those energy sources

may drive down prices of those products and thus reduce demand for natural

gas. A notable example of this is the oil sand in central Canada. If the

Keystone XL pipeline is approved in 2013, the increase in the supply of oil to

28

the United States may adversely affect natural gas prices and thus

Chesapeake’s profitability. Even if the Keystone project is not approved, oil

could be piped to Canada’s west coast for export to Asia through the

proposed Enbridge Northern Gateway Project.

STRATEGIC RECOMMENDATIONS

SHIFT PRODUCTION TOWARDS OIL

Currently, 84% of Chesapeake’s production is natural gas on an energy equivalent

basis17. Over the past five years, oil has become increasingly attractive relative to natural

gas. While in 2006, the average sales price Chesapeake received for oil was 60% greater

than that of an equivalent amount of natural gas, in 2011 oil was priced at 241% more

than its natural gas equivalent.18

Chesapeake will benefit from shifting more production to oil in three main ways.

First, Chesapeake will simply be earning a higher return on the capital it invests in

exploring, drilling, and completing new wells. Production costs are not significantly

different between the two resources, so shifting to oil should not significantly increase

overall costs.31

Second, more production of oil increases the diversification of Chesapeake’s revenue

sources. Oil and natural gas prices are not perfected correlated, and thus by achieving a

more balanced mix, Chesapeake can in effect reduce the risk of future revenue without

the use of derivatives such as futures.

Finally, shifting production to oil is essential because efforts to increase domestic

natural gas demand will require substantial time to take effect and natural gas prices

may stay low for years.

IMPROVE THE BALANCE SHEET

Natural gas extraction is an extremely capital intensive industry; as such, it is natural

that Chesapeake has used substantial amounts of corporate debt to finance its

29

expansion. However, carrying excessive debt has many drawbacks. Chesapeake’s

current debt rating from Moody’s is Ba3, indicating that it is below investment grade.

Higher levels of debt cause reduced credit ratings, making capital more expensive.

When income is highly variable and interest payments are large, there is also a

substantial risk of default. The threat of default also exerts downward pressure on stock

price, harming shareholders.

Chesapeake should continue to reduce debt by divesting its existing assets. These

assets may either be undeveloped leaseholds or operational wells. In either case, selling

these assets will reduce Chesapeake’s reserves, and possibly future production.

Fortunately, Chesapeake has proved reserves equal to more than fifteen times current

production levels. The benefit of a lowered financing cost structure is well worth it, as

cost control is essential for success in a commodity based market.

Chesapeake should also seek to negotiate additional joint ventures in order to reduce

the capital requirements of its operations. Partners in these joint ventures can take many

forms. Most of Chesapeake’s partners at year end 2011 were foreign multinational

petroleum companies such as Total S.A. or the China National Offshore Oil

Corporation.20 However, in March 2012, Chesapeake also made a $250 million deal with

private equity firm Kohlberg, Kravis, and Roberts.21 By selling a stake in production of a

well in exchange for cash, it can rely less on debt in its operational structure.

INVEST IN NATURAL GAS TECHNOLOGIES

Historically, natural gas prices have been high enough to discourage the development

of natural gas equivalents of common oil technology. However, with prices at their

current levels, natural gas has become a much more attractive alternative. This is

especially true in transportation, where natural gas can serve as a replacement for

gasoline and diesel. In 2011, nationwide average prices for gasoline and diesel were

$3.69 and $4.04 per gallon respectively. An equivalent amount of natural gas cost only

$2.03.22 By encouraging the development of technologies that use natural gas,

Chesapeake will increase future demand.

Chesapeake has already made several investments to promote natural gas usage.

Through its subsidiary NG Ventures, it has spent $160 million to partner with Clean

30

Energy Fuels Corporation to build national natural gas refueling infrastructure, and

another $150 on hybrid natural gas / bio-fuel technology.23 Chesapeake must further

increase spending on infrastructure development, as the current plans will provide less

than a third of what is required to build an effective national infrastructure.24 It should

also invest in technologies that allow the conversion of the nation’s existing diesel fleet

to natural gas, minimizing the switching costs vehicle owners are forced to pay.

LOBBY CONGRESS TO IMPLEMENT PRO-NATURAL GAS REGULATIONS

As mentioned earlier, legislation unfriendly to natural gas is one of the greatest threats

Chesapeake faces. At the same time, natural gas can be an attractive fuel source

politically for several reasons, and Chesapeake must take advantage of this by using the

government to help promote natural gas over its substitutes.

First, of course, is natural gas’s relatively low cost to consumers. In regions where

cities are structured with the automobile as the primary method of transportation,

particularly in the west, high gasoline prices bear a heavy cost on the general

population. By legislating subsidies for natural gas usage, elected officials can reduce

the burden of transportation costs on their constituents.

A second political argument for natural gas concerns energy independence. In 1970,

the United States imported less than quarter of its oil. In 2011, it imported almost 60%.25

Much of this oil comes from potentially unstable and hostile OPEC nations, and as a

result energy concerns play a major role in foreign policy. Several movements, such as

the Pickens Plan, have identified natural gas as a potential replacement for foreign oil

imports. By partnering with these organizations and reach out to members of congress

that are concerned with energy security, Chesapeake can further its support in the

government.

The environmental movement is a final political consideration that works in favor of

natural gas. Among carbon fuel sources, natural gas has the lowest output of green

house gases; it creates 117 pounds of carbon dioxide per million btu of energy input,

versus oil’s 164 and coal’s 208.26 This is particularly relevant because the two sectors

that are responsible for the most greenhouse gas output are transportation and

electricity generation; transportation is almost completely reliant on oil, and coal is the

31

largest source of domestic power generation.27 Thus, natural gas can also satisfy those

politicians with an environmental agenda.

ENCOURAGE THE DEVELOPMENT OF EXPORT CAPABILITIES

Liquefied natural gas transport technology allows natural gas to be compressed to

1/600th of its normal volume and transported across oceans where pipelines are

uneconomical. The Western Hemisphere has developed LNG import infrastructure, but

is lacking in export terminals. In all of North and South America, there are currently

only three operational LNG export terminals, in Peru, Trinidad, and Alaska.28 The

expansion of shale gas drilling activity, economic growth in Asia, and incidents like the

Fukushima meltdown have shifted prices so that it is now much more economical to

export natural gas to the East, and LNG export facilities are currently being built, with

most projected to come online some time from 2015 to 2017.29

The size and speed with which LNG exports increase will have an enormous

influence on the domestic price of natural gas. The Energy Information Administration

recently conducted a study on this matter, using different assumptions about the rate

and scale of adoption. In the high estimate that assumes that about 18% of current

production levels will be exported annually, long term natural gas prices range from

thirty to twenty percent higher than in the reference case with no exports. In the low

estimate, where half that amount is exported, exports result in ten percent higher

natural gas prices. The speed with which these effects take places also greatly varies,

from roughly 2016 in the rapid cases to 2025 or later in the slow scenarios.32

Given the wide range of possible outcomes, and the large effect they could have

on domestic gas prices, Chesapeake needs to use its size and influence in the extraction

segment of the natural gas industry to increase the scale of and accelerate the

construction of these terminals in whatever way it can. In particular, Chesapeake must

protect the development of LNG liquefaction terminals from legislation that seeks to

maintain low natural gas prices in the United States.

.

32

ENDNOTES

1Chesapeake Energy Corporation 2011 Form 10-K

2http://www.chk.com/About/Pages/History.aspx


4http://finance.yahoo.com/q/ao?s=CHK+Analyst+Opinion

5http://marcellusdrilling.com/2011/09/the-10-largest-natural-gas-drillers-in-the-u-s/

6http://marcellusdrilling.com/2011/09/the-10-largest-natural-gas-drillers-in-the-u-s/

7http://www.eia.gov/dnav/ng/hist/n9190us3m.htm

8http://www.pennenergy.com/index/articles/display/359003/articles/oil-gas-

journal/drilling-production/ziff-us-unconventional-gas-share-to-leap.html

9http://www.naturalgas.org/overview/uses.asp

10http://seekingalpha.com/article/162361-fuel-substitution-power-plants-currently-

switching-to-natural-gas

11http://www.naturalgas.org/overview/uses_industry.asp

12http://www.essentialpublicradio.org/story/2012-02-10/bradford-county-blow-out-

costs-chesapeake-more-250k-10157


14http://seekingalpha.com/article/448401-exporting-natural-gas-would-be-very-

profitable-for-north-american-e-p-companies


16AML Macro Limited 3-7-2012



33

19http://www.moodys.com/credit-ratings/Chesapeake-Energy-Corporation-credit-

rating-600013391#


21http://seekingalpha.com/article/442481-chesapeake-energy-is-making-a-lot-of-the-

right-moves

22http://www.ngvc.org/about_ngv/index.html

23http://www.chk.com/Affiliates/Chesapeake-NG-Ventures/Investment-

Portfolio/Pages/information.aspx

24http://seekingalpha.com/article/442481-chesapeake-energy-is-making-a-lot-of-the-

right-moves

25http://www.pickensplan.com/theplan/

26http://www.naturalgas.org/environment/naturalgas.asp

27http://www.eia.gov/electricity/monthly/pdf/execsum.pdf

28http://seekingalpha.com/article/472141-investing-in-the-lng-market

29http://seekingalpha.com/article/472141-investing-in-the-lng-market


31http://www.eia.gov/pub/oil_gas/natural_gas/data_publications/cost_indices_equipme

nt_production/current/coststudy.html

32http://205.254.135.7/analysis/requests/fe/

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