Chesapeake Energy 2002 Annual Report Download - page 6

acquisitions without disrupting the normal flow of our
work. We also have a team of acquisition experts that
focuses on purchasing smaller working and mineral
interest owners in the company’s existing wells. Because
Chesapeake operates 5,700 wells and has more than
33,000 co-owners, we find numerous opportunities
each year to consolidate ownership in the company’s
wells at very attractive acquisition costs.
Given that further consolidation among public compa-
nies in our industry is likely and that smaller private
companies will continue experiencing more challenging
operational and financial environments, Chesapeake
expects to continue making value-added Mid-Continent
gas acquisitions in the years ahead. One of the keys to
success in this industry is the ability to generate bal-
anced growth. Sometimes it is more advantageous to
drill, and sometimes it is better to acquire. Chesapeake’s
historical performance demonstrates that its excellence
in both areas is a key competitive advantage.
Chesapeake’s History
As Chesapeake’s co-founders, we would like to put into
historical context the company’s achievements of the
past ten years. Chesapeake’s roots go back to 1983
when we were 24-year-old landmen competing for
leases in a hot play near the Oklahoma City airport.
We were both native Oklahomans with third genera-
tion roots who had recently left the companies we were
working for to go out on our own.
From 1983 to 1989, we operated a small 50/50 part-
nership on a handshake, generating oil and gas
prospects for sale to the industry and participating as
non-operators in the drilling of wells by others.
Around the time of our 30th birthdays in 1989, we
decided to start operating wells and incorporated
Chesapeake with a $50,000 investment.
Our first drilling efforts focused on the Golden Trend
and Sholem Alechem fields in southern Oklahoma and
on the Giddings field in south Texas. As a result of ini-
tial drilling successes in these three fields, the company
grew quickly, and in February 1993 Chesapeake com-
pleted its IPO at the split-adjusted price of $1.33 per
share. This valued the company at approximately $70
million and reduced our common stock ownership
position to just under 60% from 100%.
After a rocky start in 1993 (the stock declined 65%),
Chesapeake began to grow rapidly from 1994 through
1996 through a series of major natural gas discoveries
in the Giddings Field in southeast Texas. During this
extraordinary three-year period, the company’s stock
price increased 73-fold from $0.47 per share to $34.44
per share, making Chesapeake the #1 performing stock
in America. During this time, the company’s enterprise
value soared from a low of $35 million in early 1994 to
a peak of $2.7 billion in late 1996. However, because
of a failed effort to extend the company’s success in
the Austin Chalk trend from Texas into Louisiana
and a dramatic collapse in oil and natural gas prices,
Chesapeake’s stock fell during 1997 through early
1999 reaching a low of $0.63 per share.
Facing the need to redefine Chesapeake’s strategy and
underpin the company with longer-lived assets and
lower-risk drilling opportunities, we decided to return
to our roots in Oklahoma as Mid-Continent natural
gas producers. We were convinced that supply-con-
strained U.S. natural gas prices would outperform oil
prices in the years ahead and that tremendous opportu-
nities existed in the Mid-Continent for producing
property acquisitions and corporate consolidations and
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