Chesapeake Energy 2001 Annual Report Download - page 6

Leading the Way in 2002 -
Extending Our Track Record
We are excited about Chesapeake’s prospects
for 2002 and have set three major goals that
will help us extend our strong performance of
the past three years. First, we will continue
addressing a weakness that some investors
still associate with our company - a very
volatile stock price from our IPO date in 1993
through early 1999. During that six-year period,
our stock began trading at $1.33 per share
(split-adjusted), decreased to $0.44 per share
in 1994, increased to $34.44 in 1996, then
declined to $0.63 per share early in 1999. From
that low point, our stock rebounded impres-
sively to $11.06 per share in 2001.
This past stock price volatility resulted from a
completely different asset base, business
strategy and shareholder base than we have
today. While our track record of value creation
during the past nine years (as measured by
comparing our IPO stock price to today’s stock
price) is still the best among all large and mid-
cap independent producers, we recognize our
early stock price volatility may still create con-
cern for some prospective investors. We
believe the passage of time and continued
excellent performance will eliminate this con-
cern and will enable us to achieve our first goal
for 2002: making sure the market’s valuation of
Chesapeake more accurately reflects our com-
pany’s strong record of value creation and our
impressive growth potential.
Leading the Way in 2002 -
Continuing to Reduce Our Debt
Our second goal for 2002 is to continue reduc-
ing the company’s debt, which has decreased
by 18% per mcfe of proved reserves during the
past three years. In addition to reducing our
debt over time, we have also structured
Chesapeake’s debt very attractively - the aver-
age maturity is more than eight years and the
average interest rate is fixed at only 8.1%.
In addition, our debt is not reserve-based
(unlike bank debt), which further insulates
the company from the potentially harmful
effects of oil and natural gas pricing volatility.
We expect that Chesapeake will generally
carry more debt than the majority of our com-
petitors. This reflects our view that over time
we can consistently earn returns on our invest-
ed capital significantly in excess of its cost. By
keeping our costs low and profits high and by
continuing to grow our natural gas reserves,
Chesapeake’s debt per mcfe of proved
reserves should continue to decrease. We
believe this will result in higher trading multi-
ples for our stock in the years ahead.
Leading the Way in 2002 –
Delivering Significant Exploration
Upside
Our final goal for 2002 is to dispel the miscon-
ception that the Mid-Continent region is
“played out” and that consequently
Chesapeake is not capable of delivering signif-
icant exploration upside. We believe this view
results from a lack of awareness about our
excellent exploration record of locating large
new reserves of natural gas in the target-rich
environment of the Anadarko and Arkoma
Basins of the Mid-Continent.
Chesapeake’s core competency has always
been growing through the drillbit. While most
investors understand that we can hit singles
and doubles as well as anyone in the industry,
many do not realize that Chesapeake has built
an unrivalled Mid-Continent lease and 3-D
seismic inventory that enables us to hit home
runs as well. Presently we have 19 rigs drilling,
of which 10 are targeting depths below
15,000’ and six are working toward objectives
below 19,000’. We believe this may be the
deepest drilling campaign underway in the
industry today and reflects our view that very
substantial gas reserves remain undiscovered
at these great depths.
We have recently drilled one of the deepest
wells in the U.S., the Cat Creek 1-19 located in
the Deep Anadarko Basin of western
Oklahoma. Anticipated to begin producing in
the second quarter, the Cat Creek 1-19 and the
other deep tests we have underway should
make investors increasingly aware of the
upside potential of Chesapeake’s extensive
prospect inventory. We believe this upside
exceeds 1.1 trillion cubic feet of natural gas
equivalent (tcfe) and can significantly increase
our proved reserves beyond their present size
of 1.8 tcfe.
Looking Forward
As we close the books on our record-breaking
year in 2001 and look ahead to another great
year in 2002, we believe it is worth repeating
the conclusion from our 1999 letter to share-
holders: “As this decade unfolds, we believe
investors will increasingly envision the 21st
century as the age of natural gas. Just as great
wealth was created during the 20th century in
the age of oil and during the 19th century in the
age of coal, we believe investors can greatly
profit from embracing the tremendous poten-
tial of the natural gas industry in the century
ahead.” Two years later, we still feel the same
way and believe that many more investors will
share this view in the future.
Although exceptionally proud of Chesapeake’s
accomplishments of 2001, we believe 2002
may hold even greater promise. The combina-
tion of the outlook for natural gas and our
focused geographic strategy, value added risk-
management policies, balanced and success-
ful drilling and acquisition programs, high qual-
ity assets, low operating costs and high profit
margins should enable Chesapeake to contin-
ue creating industry-leading shareholder
value. We look forward to updating you as the
year unfolds on our progress in meeting the
company’s goals for 2002.
Best regards,
Aubrey K. McClendon
Tom L. Ward
March 31, 2002
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