Chesapeake Energy 2010 Annual Report Download - page 51

Build Operating Focus and Scale. We believe one of the keys to success in the U.S. exploration and
production industry is to build significant operating scale in areas that share many similar geological and
operational characteristics. Achieving such scale provides many benefits, including superior geoscientific and
engineering information, higher per unit revenues, lower per unit operating costs, greater rates of drilling
success, higher returns from more easily integrated acquisitions and higher returns on drilling investments. By
focusing most of our future activities in virtually all of the nation’s major unconventional resource plays and
avoiding investing offshore and internationally, we will continue to achieve the significant benefits of focus and
scale.
Focus on Low Costs and Vertical Integration. By minimizing lease operating costs and general and
administrative expenses through focused activities, vertical integration and increasing scale, we have been
able to deliver attractive profit margins and financial returns through all phases of the commodity price cycle.
We believe our low cost structure is the result of management’s effective cost-control programs, a high-quality
asset base and extensive access to oilfield services and to natural gas processing and transportation
infrastructures that exist in our key operating areas. In addition, to control costs and service provider quality,
we have made significant investments in our drilling rig, compression and trucking service operations and in
our midstream gathering operations that create substantial benefits from vertical integration. In 2011 and 2012,
we also intend to make significant investments in building our capability to hydraulically fracture our wells. As of
December 31, 2010, we operated approximately 26,000 of our 46,000 wells, which delivered approximately
80% of our daily production volume. This large percentage of operated properties provides us with a high
degree of operational flexibility and cost control.
Mitigate Natural Gas and Oil Price Risk. We have used and intend to continue using hedging programs to
mitigate the risks inherent in developing and producing natural gas and oil reserves, commodities that are often
subject to significant price volatility. We intend to use this volatility to our benefit by taking advantage of prices
when they reach levels that management believes are either unsustainable for the long term or provide
unusually high rates of return on our invested capital. Assuming future NYMEX natural gas settlement prices
average $4.50 per mcf for 2011, and including the effect of the company’s open derivatives as of February 22,
2011, closed contracts and previously collected call premiums, the company estimates its average natural gas
price will be $5.98 per mcf for 2011. This estimate does not include the effect of basis differentials and
gathering costs.
Form Value-Creating Industry Participation Agreements. Since 2008, the company has entered into six
significant industry participation agreements. Through these agreements, the company has collaborated with
other leading energy companies to accelerate the development of the company’s properties in the Haynesville
and Bossier Shales, the Fayetteville Shale, the Marcellus Shale, the Barnett Shale, the Eagle Ford Shale and
the Niobrara Shale. Including the Niobrara agreement, which we entered into on February 16, 2011, we have
sold leasehold and producing property assets with an original cost to us of approximately $3.4 billion to our
partners for $6.5 billion of total cash consideration and $7.7 billion of drilling cost carries while retaining a
majority interest in each play. The remaining drilling cost carries of approximately $4.0 billion (including the
Niobrara industry participation agreement), as of December 31, 2010, will be extremely valuable in the years
ahead by enabling the company to develop reserves in these unconventional plays at greatly reduced costs.
We are also considering opportunities for additional industry participation agreements to develop certain of our
other properties. Additionally, in 2009 we formed a joint venture with GIP for certain of our midstream assets in
the Barnett Shale and Mid Continent. We and GIP have since sold a portion of the equity in this venture to the
public through a master limited partnership, Chesapeake Midstream Partners, L.P.
Maintain an Entrepreneurial Culture. Chesapeake was formed in 1989 with an initial capitalization of
$50,000 and fewer than ten employees. We completed our initial public offering of common stock in early 1993
and subsequent to those early corporate milestones, our management team has guided the company through
various operational and industry challenges and opportunities and extremes of natural gas and oil prices to
create the nation’s second-largest producer of natural gas, a top 20 producer of oil and natural gas liquids, the
most active driller of new wells and an employer of approximately 10,000 people and an indirect employer of
tens of thousands more. The company takes pride in its innovative and aggressive implementation of its
business strategy and strives to be as entrepreneurial today as it has been in its past. We have maintained an
unusually flat organizational structure as we have grown to help ensure that important information travels
rapidly through the company and decisions are made and implemented quickly.
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