Chesapeake Energy 1995 Annual Report Download - page 9

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LETTER TO SHAREHOLDERS
SUPERIOR OPERATING MARGIN
Chesapeake's fourth competitive advantage is our industry-leading operating
margin. This margin is defined on a per-unit-of-production basis as oil and
natural gas sales revenues minus operating costs (defined as lease operating
expenses, production taxes, general and administrative expenses, and oil and gas
depreciation, depletion, and amortization expenses). The key to creating
shareholder value in the energy industry is the ability to generate high levels of
cash flow that can be reinvested in a profitable search for new reserves.
Chesapeake maximizes its cash flow per unit of production by increasing its
top-line revenues through production growth while carefully managing bottom-
line costs. We have developed this industry-leading cost structure by:
Utilizing horizontal drilling technology to reduce the per unit cost
of finding and producing the company's oil and natural gas reserves;
Concentrating the company's drilling in areas which provide the
critical mass necessary to spread operating and overhead costs over
a large number of wells;
Operating 86% of the company's production, thereby allowing our
employees to implement the most cost-effective and technologically
advanced drilling, completing, and operating procedures, and;
Maintaining a flat organizational structure which allows Chesapeake
to evaluate and quickly respond to attractive opportunities.
Because we believe oil and natural gas prices are likely to remain flat in the
near term, the most profitable Mcfofgas or barrel of oil that can be produced is
the one produced today. This is because long-lived reserves, burdened by future
operating, financing, and administrative costs and adversely effected by the time
value of money and the risk of future mechanical or reservoir problems, are less
valuable than reserves that can be produced more quickly. As a result, reserves
produced sooner rather than later have higher operating margins and are more
likely to create shareholder value than those reserves produced in the future.
CHESAPEAKE ENERGY CORPORATION
IMPROVING
OPERATING EFFICIENCY
1$ per Mete)
LU
$3.00 r
91. 92 93 94 95
Chesapeake's industry-leading
operating cost structure is a key
to creating shareholder value.
7
2.50
2.00
1.50
1,00
.50
.00
CASH FLOW GROWTH
)$ in thousends)
$50,000
40,000
30,000
20,000
10,000
91 92 93 94 95
Chesapeake's drilling success
has generated substantial cash
flow growth.