Chesapeake Energy 2004 Annual Report Download - page 9

FOCUSED ON ORGANIC GROWTH
We believe the best way to create value in the natural gas industry
is to grow production organically, often referred to as “growing
through the drillbit.” Given the nation’s ongoing natural gas
production declines, growing through the drillbit has obviously
proven challenging in the increasingly mature U.S. gas producing
regions. However, because growing through the drillbit is potentially
much more rewarding than growing through acquisitions,
Chesapeake maintains a primary focus on organic growth and has
built a drilling machine that is unequalled in the industry.
Chesapeake manages its growth strategies by attempting to balance
growth through the drillbit with growth through strategic acquisitions.
In 2004, for example, our organic growth was an industry-leading
20% and our growth through acquisitions was an excellent 15%.
Most impressively, we generated this strong growth in an industry
marking its fourth consecutive year of U.S. natural gas production
declines.
How did Chesapeake lead the industry in organic growth in 2004?
It was a combination of anticipation, preparation and execution.
We correctly determined in 1998 and early 1999 the future would
reward companies that anticipated the unfolding U.S. gas production
shortfall. We then prepared for the opportunity by making acquisitions
of producing properties and companies, by building a portfolio of
more than 7,000 drillsites (that provide an approximate seven-year
inventory of future growth opportunities) and by hiring more than
300 of the most talented landmen, geoscientists and engineers we
could find (thereby quadrupling our human capital in the three
major technical disciplines of the E&P industry).
We successfully executed this focused strategy and the proof is in
our results – during the past four years, Chesapeake’s annual organic
growth has averaged an industry-leading 14% and our stock price
has increased by approximately 150%. For those companies only
now realizing the opportunities our industry offers today, it would
be impossible to duplicate what Chesapeake has built over the past
seven years. This is particularly true in Oklahoma, the third largest
gas producing state in the U.S. In just seven years, we have moved
from fifth to first in natural gas production in Oklahoma and we
are proud to say our gas production market share of 19% is the
largest of any company in any major gas producing state.
FOCUSED ON ACQUISITIONS
Our focused acquisition strategy fits hand-in-glove with our focused
organic growth strategy. Over time, we have learned that successful
drilling creates significant acquisition opportunities and in turn,
successful acquisitions create attractive drilling opportunities.
Chesapeake’s integrated approach to acquisitions is enhanced by
our very tight focus on the geography and size of the assets we
acquire. With regard to geography, we only acquire properties that
are located onshore in the southwestern U.S., comprised of
Oklahoma, Texas, New Mexico, Louisiana, Kansas and Arkansas.
These contiguous states collectively produce about 50% of the
nation’s natural gas. They also generally promote a PIMBY (Please
In My Backyard) business environment, rather than the NIMBY
(Not In My Backyard) attitude often found in other regions of the
U.S. Furthermore, they offer reserve life profiles, operating costs and
drilling upside that we know and understand as well as anyone in
the industry.
In addition, even though the company has grown ten-fold in the
past seven years, we have remained focused on acquisitions of less
than $600 million. Acquisitions of this size are easier to assimilate,
have less execution risk and have traditionally offered more attractive
value than bigger transactions. While we may someday find an
attractive acquisition of greater scale, we intend to stay primarily
focused on the small-to-medium sized deals that have worked so
well for us to date. Having completed more than $5.4 billion of
acquisitions over the past seven years, mainly in 48 transactions
CHESAPEAKE ENERGY CORPORATION ANNUAL REPORT 2004
5
“In 2004... our organic growth was an industry-
leading 20% and our growth through acquisitions
was an excellent 15%. Most impressively, we
generated this strong growth in an industry
marking its fourth consecutive year of U.S.
natural gas production declines.”