Chesapeake Energy 1998 Annual Report Download - page 22

PART I
ITEM 1. Business
General
Chesapeake Energy Corporation ("Chesapeake" or the "Company") is an independent oil and gas company
primarily engaged in the exploration, acquisition, development and production of onshore naturalgas reserves in the
United States and Canada. Chesapeake began operations in 1989, completed an initial public offering in 1993, and
trades on the New York Stock Exchange under the symbol CHK. The Company's principal offices are located at
6100 North Western Avenue, Oklahoma City, Oklahoma 73118 (telephone [phone]).
Chesapeake currently owns interests in approximately 5,300 producing oil and gas wells concentrated in three
primary operating areas: the Mid-Continent region consisting of Oklahoma, southwestern Kansas and the Texas
Panhandle; the Gulf Coast region consisting primarily of the Austin Chalk Trend in Texas and Louisiana and the
Tuscaloosa Trend in Louisiana; and the Helmet area of northeastern British Columbia. During 1998 the Company
produced 130.3 Bcfe, of which 72% was natural gas, making Chesapeake one of the top 20 public independent oil
and gas companies in the United States as measured by production.
The following table sets forth the Company's estimated proved reserves, the related present value (discounted at
10%) of the proved reserves (based on weighted average prices at December 31, 1998 of $10.48 per barrel of oil
and $1.68 per Mcf of gas), and the estimated capital expenditures required to develop the Company's proved
undeveloped reserves at December 31, 1998:
Estimated
Percent Present CapEx to
Gas of Value Develop
Oil Gas Equivalent Proved (Disc. @10%) PUD's
(Milbi) (MMcf) (MMcfe) Reserves (Sin 000's) (S in 000's)
From inception through mid-1997, Chesapeake's primaiy business strategy was growth through the drillbit. In
1997, however, disappointing drilling results in the Louisiana Austin Chalk Trend, combined with the industry's
rapidly escalating drilling costs and falling oil prices, caused management to change the Company's business
strategy. As a result of this change, in late 1997 and 1998 the Company significantly reduced its capital
expenditures for exploration drilling and acreage acquisition and focusedon the acquisition of long-lived natural gas
properties in the Mid-Continent and Canada that contain numerous low risk development opportunities. During
1998, the Company acquired approximately 750 Bcfe primarily in eight separate transactions. The total
consideration given for the acquisitions was 30.8 million shares of Company common stock, $280 million in cash,
the assumption of $205 million in debt, and the incurrence of approximately $20 million of other acquisition related
costs.
The oil and gas industry is characterized by volatile product prices. During late 1998, inflation-adjusted prices
for oil reached lows not seen in 50 years. Also, a second consecutive mild winter and the resulting high inventory
of natural gas in storage have caused gas prices to fall. These low oil and gas prices, combined with the Company's
high level of indebtedness, have caused the Company to focus on decreasing operating and general and
administrative costs and reducing drilling capital expenditures to a level that can be financed from operating cash
flow, including proceeds from the sale of non-core, low-value oil properties. The Company's strategy for 1999is to
maintain appropriate liquidity levels while concentrating on further developing its core naturalgas assets.
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Mid-Continent 11,009 558,754 624,811 57% $347,937 $ 72,398
Canada 33 231,773 231,969 21 156,843 28,298
GulfCoast 3,836 128,419 151,434 14 111,135 34,120
Other areas 36,845 83,134 845,076 9,674
Total 955,791 1,091,348 100?/o $660,991 $144,490