Chesapeake Energy 2005 Annual Report Download - page 7

GROWTH, VALUE AND OPPORTUNITY
The development of our annual report each year is guided by a theme
that is unique for the year at hand and also articulates the consistent
strategy we have successfully pursued during the past several years.
This year, we have chosen to focus on three words – growth, value
and opportunity
. As this letter unfolds, I hope you will see why we
believe these three words best describe Chesapeake in 2005 and
should define our performance in 2006 and beyond.
2005 IN REVIEW Let me first provide some context for this
year’s discussion. Certainly 2005 was an extraordinary year for
Chesapeake, as it was for energy producers and consumers across
the globe. Hot summers, mild winters, multiple hurricanes, geopolitical
events and peak oil theories were just a few of the topics that dominated
the news in 2005. Each of these topics dramatically impacted the
worldwide energy business and all touched Chesapeake and its
shareholders as well.
Following a mild winter, U.S. natural gas prices began 2005 just
below $6 per mmbtu and remained relatively stable through May.
Natural gas prices then climbed steadily through the summer’s heat
and exceeded the $10 per mmbtu level by late August. In the aftermath
of Hurricanes Katrina and Rita, natural gas prices skyrocketed to over
$15 per mmbtu in December before slumping back to the $7
per mmbtu range in March 2006 after yet another record-breaking
mild winter.
Oil prices were volatile as well. Continued resilient demand driven
by strong global economic growth, war in Iraq, tribal unrest in Nigeria,
political uncertainty in Venezuela, terrorism risks in many parts of the
world, multiple hurricanes and limited excess global production and
refining capacity all impacted oil prices. Furthermore, mounting
concerns regarding whether world oil production can stay ahead of
world oil consumption in the longer term have contributed to additional
price volatility. From a beginning price of about $43 per bbl in January
2005, oil prices climbed to a high of nearly $70 per bbl after Hurricane
Katrina and have since eased back into a trading range of $60 to $68
per bbl during the past six months.
Against this backdrop of instability and uncertainty, Chesapeake
delivered consistently superior operational and financial results
throughout the year and our stock price increased by 92%. We
accomplished this through our simple and focused business strategy,
the safe location of our assets onshore in the U.S. and the predictable
base of production we generate every day from our 30,000 wells.
These attributes enabled us to create substantial shareholder value
from a business managed as an oasis of calm within the turmoil that
defines today’s global energy business.
A closer look at the company’s achievements in 2005 reflects
the following financial and operational highlights:
•Average daily oil and natural gas production increased 30%
from 991 mmcfe to 1,284 mmcfe;
•Organic production growth reached 12%;
•Proved oil and natural gas reserves increased 53% from
4.9 tcfe to 7.5 tcfe;
•Reserve replacement for the year reached 659% at a drilling
and acquisition cost of only $1.74 per mcfe;
•Revenues rose 72% from $2.7 billion to $4.7 billion;
•Ebitda1 increased 69% from $1.6 billion to $2.7 billion;
CHK 2005 ANNUAL REPORT 3
“Against this back-
drop of instability
and uncertainty,
Chesapeake delivered
consistently superior
operational and
financial results
throughout the year
and our stock price
increased by 92%.”
DEAR FELLOW SHAREHOLDERS: