Chesapeake Energy Corporation Reports Strong Results for the Fourth Quarter and Full-Year 2006.2006 Fourth Quarter Net Income Available to Common Shareholders Reaches $446 Million and Net Income per Fully Diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. Common Share Reaches $0.96 on Revenue of $1.9 Billion and Production of 152 Bcfe Full-Year 2006 Net Income Available to Common Shareholders Reaches $1.9 Billion on Revenue of $7.3 Billion and Production of 578 Bcfe; Full-Year 2006 Net Income of $4.35 per Fully Diluted Common Share Increases 73% Over Full-Year 2005 Proved Reserves proved reserves The quantity of minerals expected to be recoverable under current economic and operating conditions. The amount of proved reserves is important in valuing the stock of a company with significant holdings in natural resources. Reach Record Level of 9.0 Tcfe; Company Delivers Full-Year Reserve Replacement Rate of 348% From 1.4 Tcfe of Additions at a Drilling and Acquisition Cost of $1.93 per Mcfe Company Provides Updated and Detailed Review of its 17.7 Tcfe of Risked Unproved Reserves Located on its 10.7 Million Net Acres of U.S. Onshore on·shore adj. 1. Moving or directed toward the shore: an onshore wind. 2. Located on the shore: an onshore beacon; an onshore patrol. adv. Leasehold An estate, interest, in real property held under a rental agreement by which the owner gives another the right to occupy or use land for a period of time. leasehold n. OKLAHOMA CITY Oklahoma City (1990 pop. 444,719), state capital, and seat of Oklahoma co., central Okla., on the North Canadian River; inc. 1890. The state's largest city, it is an important livestock market, a wholesale, distribution, industrial, and financial center, and a farm -- Chesapeake Energy Chesapeake Energy (NYSE: CHK) is a producer of natural gas in the United States and according to their 3Q 2007 report, is the largest independent producer, third overall (including majors) and the most active driller of new wells in the US. Corporation (NYSE NYSE See: New York Stock Exchange :CHK CHK Check CHK CHKDSK (File Name Extension) CHK Chuuk, Caroline Islands, Micronesia (airport code) CHK Check File ) today reported financial and operating results for the 2006 fourth quarter and for the full-year 2006. For the quarter, Chesapeake Chesapeake, ship Chesapeake, U.S. frigate, famous for her role in the Chesapeake affair (June 22, 1807) and for her battle with the H.M.S. Shannon (June 1, 1813). The Chesapeake left Norfolk, Va. generated net income available to common shareholders of $446 million ($0.96 per fully diluted common share), operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. of $1.095 billion (defined as cash flow from operating activities before changes in assets and liabilities) and ebitda of $1.253 billion (defined as net income before income taxes, interest expense, and depreciation, depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able and amortization expense) on revenue of $1.868 billion and production of 152 billion cubic feet of natural gas equivalent (bcfe). For the quarter, ebitda increased 18% over the 2005 fourth quarter and net income per fully diluted common share decreased 14%. For the full-year 2006, Chesapeake generated net income available to common shareholders of $1.904 billion ($4.35 per fully diluted common share), operating cash flow of $4.045 billion and ebitda of $5.019 billion on revenue of $7.326 billion and production of 578 bcfe. Full-year 2006 ebitda and net income per fully diluted common share increased 89% and 73%, respectively, over the full-year 2005. Excluding the items detailed below, Chesapeake generated adjusted net income to common shareholders in the 2006 fourth quarter of $418 million ($0.90 per fully diluted common share) and adjusted ebitda of $1.210 billion. For the full-year 2006, Chesapeake generated adjusted net income to common shareholders of $1.575 billion ($3.61 per fully diluted common share) and adjusted ebitda of $4.449 billion. For the 2006 fourth quarter, adjusted ebitda and adjusted net income per fully diluted common share increased 36% and 7%, respectively, over the 2005 fourth quarter. For the full-year 2006, adjusted ebitda and adjusted net income per fully diluted common share increased 66% and 40%, respectively, over the full-year 2005. The excluded items do not affect the calculation of operating cash flow. The company's fourth quarter and full-year 2006 net income available to common shareholders and ebitda include various items that are typically not included in published estimates of the company's financial results by certain securities analysts. Such items and their after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. effects on fourth quarter and full-year reported results are described as follows: * an unrealized mark-to-market Mark-to-market Adjustment of the book value or collateral value of a security to reflect current market value. gain of $27 million for the fourth quarter and a $308 million gain for the full-year resulting from the company's oil and natural gas and interest rate hedging programs; * a realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. of $73 million for the full-year resulting from the sale of the company's investment in the common stock of Pioneer Drilling Corporation (AMEX AMEX See: American Stock Exchange :PDC (1) (Primary Domain Controller) A Windows NT/2000 service that manages security for its local domain. Every domain has one PDC, which contains a database of usernames, passwords and permissions. ); * a charge of $34 million for the full-year relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc the acceleration of vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: of stock options and restricted stock in connection with the February February: see month. 2006 resignation of Chesapeake's President and Chief Operating Officer Chief Operating Officer (COO) The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president. , Tom L. Ward; * a reversal reversal n. the decision of a court of appeal ruling that the judgment of a lower court was incorrect and is reversed. The result is that the lower court which tried the case is instructed to dismiss the original action, retry the case, or is ordered to change its of an accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. for the full-year of $7 million for production taxes as a result of the dismissal A discharge of an individual or corporation from employment. The disposition of a civil or criminal proceeding or a claim or charge made therein by a court order without a trial or prior to its completion which, in effect, is a denial of the relief sought by the commencement of the of certain production tax claims; * a $15 million income tax accrual for the full-year relating to the adoption of a "margin" tax in Texas; and * a reduction of net income available to common shareholders of $11 million for the full-year resulting from exchanges of the company's preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. for common stock. A reconciliation of operating cash flow, ebitda, adjusted ebitda and adjusted net income to comparable financial measures calculated in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting is presented on pages 21-24 of this release. Key Operational and Financial Statistics Summarized Below for the 2006 Fourth Quarter, 2006 Third Quarter, 2005 Fourth Quarter and for the Full-Years 2006 and 2005 The table below summarizes Chesapeake's key results during the 2006 fourth quarter and compares them to the 2006 third quarter and the 2005 fourth quarter and also compares the 2006 full-year to the 2005 full-year. [TABLE OMITTED] (a) includes the effects of realized gains or (losses) from hedging, but does not include the effects of unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. or (losses) from hedging (b) excludes expenses associated with non-cash stock-based compensation (c) defined as cash flow provided by operating activities before changes in assets and liabilities (d) defined as net income before income taxes, interest expense, and depreciation, depletion and amortization expense, as adjusted to remove the effects of certain items detailed on pages 23 and 24 (e) defined as net income available to common shareholders, as adjusted to remove the effects of certain items detailed on pages 23 and 24 Oil and Natural Gas Production Sets Record for 22(nd) Consecutive Quarter and 17(th) Consecutive Year; 2006 Fourth Quarter Average Daily Production Increases 17% over the 2005 Fourth Quarter and Full-Year 2006 Production Increases 23% over Full-Year 2005 Daily production for the 2006 fourth quarter averaged 1.653 bcfe, an increase of 235 million cubic feet of natural gas equivalent (mmcfe), or 17%, over the 1.418 bcfe of daily production in the 2005 fourth quarter and an increase of 56 mmcfe, or 4%, over the 1.597 bcfe produced per day in the 2006 third quarter. During October October: see month. 2006, Chesapeake elected to defer de·fer 1 v. de·ferred, de·fer·ring, de·fers v.tr. 1. To put off; postpone. 2. To postpone the induction of (one eligible for the military draft). v.intr. approximately 2.0 billion cubic feet of natural gas (bcf) of production in response to temporarily depressed natural gas prices. Chesapeake's 2006 fourth quarter production of 152.1 bcfe was comprised of 138.8 bcf (91% on a natural gas equivalent basis) and 2.22 million barrels of oil and natural gas liquids (mmbbls) (9% on a natural gas equivalent basis). Chesapeake's average daily production for the quarter of 1.653 bcfe consisted of 1.508 bcf of natural gas and 24,098 barrels (bbls) of oil. The 2006 fourth quarter was Chesapeake's 22nd consecutive quarter of sequential One after the other in some consecutive order such as by name or number. U.S. production growth. Over these 22 quarters, Chesapeake's U.S. production has increased 322%, for an average compound quarterly growth rate of 6.8% and an average compound annual growth rate of 29.7%. The company's daily production for the full-year 2006 averaged 1.585 bcfe, an increase of 301 mmcfe, or 23%, over the 1.284 bcfe of daily production for the full-year 2005. Chesapeake's full-year 2006 production of 578.4 bcfe was comprised of 526.5 bcf (91% on a natural gas equivalent basis) and 8.65 mmbbls (9% on a natural gas equivalent basis). Chesapeake's average daily production for the full-year 2006 of 1.585 bcfe consisted of 1.442 bcf of natural gas and 23,710 bbls of oil. The full-year 2006 was Chesapeake's 17th consecutive year of sequential production growth. Chesapeake's 23% total production growth in 2006 follows growth of 29% in 2005, 35% in 2004, 48% in 2003 and 12% in 2002. The company's current rate of production is approximately 1.7 bcfe per day and based on projected drilling levels and anticipated results, Chesapeake is forecasting total production growth of 14-18% for 2007 and 10-14% for 2008. Year-End year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. 2006 Oil and Natural Gas Proved Reserves Reach Record Level of 9.0 Tcfe; Full-Year 2006 Drilling and Acquisition Costs Average $1.93 per Mcfe as Company Added 1.4 Tcfe for a Reserve Replacement Rate of 348% Chesapeake began 2006 with estimated proved reserves of 7.521 trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time. (mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed. In the USA and Canada, 10^12. cubic feet of natural gas equivalent (tcfe) and ended the year with 8.956 tcfe, an increase of 1.435 tcfe, or 19%. During 2006, Chesapeake replaced its 578 bcfe of production with an estimated 2.013 tcfe of new proved reserves for a reserve replacement rate of 348%. Reserve replacement through the drillbit was 1.345 tcfe, or 233% of production (including 729 bcfe of positive performance revisions and 212 bcfe of downward revisions resulting from oil and natural gas price declines between December December: see month. 31, 2005 and December 31, 2006) and 67% of the total increase. Reserve replacement through the acquisition of proved reserves was 668 bcfe, or 115% of production and 33% of the total increase. On a per thousand cubic feet of natural gas equivalent (mcfe) basis, the company's total drilling and acquisition costs were $1.93 per mcfe (excluding costs of $154 million for seismic, $3.472 billion for unproved properties and leasehold acquired during the period and $203 million relating to tax basis step-up step-up A scheduled increase in the exercise or conversion price at which a warrant, an option, or a convertible security may be used to acquire shares of common stock. and asset retirement obligations Asset Retirement Obligations provide for future disposal of assets as required by SFAS 143 [1]. Firms must recognize the ARO liability in the period it was acquired, generally acquisition. , as well as downward revisions of proved reserves from lower natural gas prices). Excluding these items described above, Chesapeake's exploration and development costs through the drillbit were $2.00 per mcfe during 2006 while reserve replacement costs through acquisitions of proved reserves were $1.76 per mcfe. Total costs incurred in oil and natural gas acquisition, exploration and development during the full-year 2006, including seismic, leasehold, unproved properties, capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. internal costs, non-cash tax basis step-up from corporate acquisitions and asset retirement obligations, were $8.126 billion. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves are presented on page 19 of this release. During 2006, Chesapeake continued the industry's most active drilling program and drilled 1,488 gross (1,243 net) operated wells and participated in another 1,534 gross (206 net) wells operated by other companies. The company's drilling success rate was 99% for company-operated wells and 98% for non-operated wells. Also during 2006, Chesapeake invested $2.636 billion in operated wells (using an average of 98 operated rigs), $502 million in non-operated wells (using an average of 79 non-operated rigs), $617 million to acquire new leasehold (exclusive of $2.856 billion in unproved leasehold obtained through corporate and asset acquisitions) and $154 million to acquire 3-D seismic data. As of December 31, 2006, Chesapeake's estimated future net cash flows discounted at an annual rate of 10% before income taxes (PV-10) and after income taxes (standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. measure) from its proved reserves were $13.6 billion and $10.0 billion, respectively, using field differential adjusted prices of $56.25 per barrel of oil (bbl) (based on a NYMEX See New York Mercantile Exchange. NYMEX See New York Mercantile Exchange (NYM). year-end price of $61.15 per bbl) and $5.41 per thousand cubic feet of natural gas (mcf) (based on a NYMEX year-end price of $5.64 per mcf). Chesapeake's PV-10 changes by approximately $350 million for every $0.10 per mcf change in natural gas prices and approximately $50 million for every $1.00 per bbl change in oil prices. By comparison, the December 31, 2005 PV-10 and standardized measure of the company's proved reserves were $22.9 billion and $16.0 billion, respectively, using field differential adjusted prices of $56.41 per bbl (based on a NYMEX year-end price of $61.11 per bbl) and $8.76 per mcf (based on a NYMEX year-end price of $10.08 per mcf). In addition to the PV-10 value of its proved reserves, the net book value of the company's other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. (including drilling rigs, land and buildings, investments in companies, securities, long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. derivative instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. and other non-current assets) was $2.8 billion as of December 31, 2006 and $1.3 billion as of December 31, 2005. Average Realized Prices, Hedging Results and Hedging Positions Detailed Average prices realized during the 2006 fourth quarter (including realized gains or losses from oil and natural gas derivatives derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. , but excluding unrealized gains or losses on such derivatives) were $59.95 per bbl and $9.03 per mcf, for a realized natural gas equivalent price of $9.11 per mcfe. Chesapeake's average realized pricing differentials to NYMEX during the fourth quarter were a negative $5.14 per bbl and a negative $0.67 per mcf. Realized gains from oil and natural gas hedging activities during the quarter generated a $4.88 gain per bbl and a $3.14 gain per mcf, for a 2006 fourth quarter realized hedging gain of $447 million, or $2.94 per mcfe. For the full-year 2006, average prices realized were $59.14 per bbl and $8.76 per mcf, for a realized natural gas equivalent price of $8.86 per mcfe. Chesapeake's average realized pricing differentials to NYMEX during the full-year were a negative $5.36 per bbl and a negative $0.89 per mcf. Realized gains and losses from oil and natural gas hedging activities during the full-year generated a $1.72 loss per bbl and a $2.41 gain per mcf, for a full-year 2006 realized hedging gain of $1.254 billion, or $2.17 per mcfe. After lifting a portion of its 2007-2009 hedges during periods of natural gas price weakness in the past six months and securing gains of approximately $738 million, the company has recently reestablished most of these hedges at equally attractive prices. The following tables compare Chesapeake's hedged production volumes through swaps and collars as of February 22, 2007 to those previously announced as of February 5, 2007. Additionally, the gains from lifted natural gas hedges are presented as of February 22, 2007. Depending on changes in oil and natural gas futures markets futures market, a commodity exchange where contracts for the future delivery of grain, livestock, and precious metals are bought and sold. Speculation in futures serves to protect both the developers and the users of the commodities from unfavorable and unpredictable and management's view of underlying oil and natural gas supply and demand trends, Chesapeake may either increase or decrease its hedging positions at any time in the future without notice. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Additionally, the company has lifted a portion of its oil hedges during periods of oil price weakness in the past six months, securing gains of $8.8 million and $4.8 million in 2007 and 2008, respectively. [TABLE OMITTED] [TABLE OMITTED] Certain open natural gas swap positions include "knockout" provisions at prices ranging from $5.25 to $6.50 covering 146 bcf in 2007, $5.75 to $6.50 covering 160 bcf in 2008 and $5.90 to $6.25 covering 36 bcf in 2009, and certain open natural gas collar positions include "knockout" provisions at prices ranging from $5.00 to $6.00 covering 52 bcf in 2007 and $5.00 to $6.00 covering 11 bcf in 2008. Also, certain open oil swap positions include "knockout" provisions at prices ranging from $45.00 to $60.00 covering 1.5 mmbbls in 2007 and 1.1 mmbbls in 2008. Combining the company's 2006 realized hedging gains, the 2007-2009 gains from lifted hedges that will be recognized in the periods for which production was originally hedged and the approximate $525 million of current mark-to-market value of open hedges, management has created $2.5 billion of value for shareholders from Chesapeake's 2006 full-year and 2007 to-date hedging activities. These best-in-the-industry results further demonstrate Chesapeake's ability to create value and achieve substantial risk mitigation MITIGATION. To make less rigorous or penal. 2. Crimes are frequently committed under circumstances which are not justifiable nor excusable, yet they show that the offender has been greatly tempted; as, for example, when a starving man steals bread to satisfy through its hedging programs. The company's updated forecasts for 2007 and 2008 are attached to this release in an Outlook dated February 22, 2007 labeled as Schedule "A", which begins on page 26. This Outlook has been changed from the Outlook dated December 11, 2006 (attached as Schedule "B", which begins on page 30) to reflect various updated information. Balance Sheet and Credit Quality Further Improved in 2006 As of December 31, 2006, Chesapeake's long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. was $7.376 billion and its stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. was $11.251 billion, for a debt-to-total capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. ratio of 40%, compared to a debt-to-total capitalization ratio of 47% at year-end 2005. At year-end 2006, the company's long-term debt to adjusted ebitda ratio was 1.7x compared to a long-term debt to adjusted ebitda ratio of 2.0x at year-end 2005. After attributing $1.0 billion of the company's long-term debt to non-oil and natural gas assets that have a current book value of $2.8 billion, Chesapeake's long-term debt per mcfe of proved reserves at year-end 2006 was $0.71. This compares to $0.66 per mcfe at year-end 2005 after attributing $500 million of the company's long-term debt to the company's year-end 2005 non-oil and natural gas assets that had a book value of $1.3 billion. Chesapeake's Leasehold and 3-D Seismic Inventories Now Total 10.7 Million Net Acres and 16.3 Million Acres; Risked Unproved Reserves in the Company's Inventory Now Reach 17.7 Tcfe, Bringing Total Reserve Base to 26.7 Tcfe Since 2000, Chesapeake has invested $6.6 billion in new leasehold and 3-D seismic acquisitions and now owns one of the largest inventories of onshore leasehold (10.7 million net acres) and 3-D seismic (16.3 million acres) in the U.S. On this leasehold, the company has approximately 26,000 net drilling locations, representing an approximate 10-year inventory of drilling projects, on which it believes it can develop an estimated 3.4 tcfe of proved undeveloped reserves and approximately 17.7 tcfe of risked unproved reserves (71 tcfe of unrisked unproved reserves). Chesapeake's 9.0 tcfe of proved reserves and its 17.7 tcfe of risked unproved reserves total approximately 26.7 tcfe. To aggressively develop these assets, Chesapeake has continued to significantly strengthen its technical capabilities by increasing its land, geoscience ge·o·sci·ence n. Any one of the sciences, such as geology or geochemistry, that deals with the earth. ge and engineering staff to approximately 1,000 employees. Today, the company has approximately 5,000 employees, of which approximately 60% work in the company's E&P operations and approximately 40% work in the company's oilfield service operations. Chesapeake characterizes its drilling activity by one of four play types: conventional gas resource, unconventional gas resource, emerging unconventional gas resource and Appalachian Ap`pa`la´chi`an a. 1. Of or pertaining to a chain of mountains in the United States, commonly called the Allegheny ltname> mountains. Noun 1. Basin gas resource. In these plays, Chesapeake uses a probability-weighted statistical approach to estimate the potential number of drillsites and unproved reserves associated with such drillsites. The following summarizes Chesapeake's ownership and activity in each gas resource play type and highlights notable projects in each play. Conventional Gas Resource Plays - In its traditional conventional areas (i.e., portions of the Mid-Continent, Permian, Gulf Coast and South Texas regions), where exploration targets are typically deep and defined using 3-D seismic data, Chesapeake believes it has a meaningful competitive advantage due to its operating scale, deep drilling expertise and over 13.3 million acres of 3-D seismic data. In these plays, Chesapeake owns 3.2 million net acres on which it has an estimated 1.0 tcfe of proved undeveloped reserves and approximately 3.1 tcfe of risked unproved reserves and is currently using 35 operated drilling rigs to further develop its inventory of approximately 3,500 drillsites. Three of Chesapeake's most important conventional gas resource plays are described below: * Southern Oklahoma Oklahoma (ōkləhō`mə), state in SW United States. It is bordered by Missouri and Arkansas (E); Texas, partially across the Red R. (S, W); New Mexico, across the narrow edge of the Oklahoma Panhandle (W); and Colorado and Kansas (N). (generally Pennsylvanian-aged formations in Bray, Cement cement, binding material used in construction and engineering, often called hydraulic cement, typically made by heating a mixture of limestone and clay until it almost fuses and then grinding it to a fine powder. , Golden Trend, Sholem Alechem and Texoma Texoma, a portmanteau of the words Texas and Oklahoma, is used to describe the area on either side of the border between these two states along the Red River valley, in particular the area around Lake Texoma, a popular recreation area. ): From various formations located in the Marietta Marietta (mârēĕt`ə). 1 City (1990 pop. 44,129), seat of Cobb co., NW Ga.; inc. 1834. The principal manufactures of this suburb of Atlanta are related to aircraft production. At the foot of Kennesaw Mt. , Ardmore Ardmore, city (1990 pop. 23,079), seat of Carter co., S Okla.; inc. 1898. It is the commercial center of an oil and farm area. Its industries include oil refining, tourism, and the manufacture of electronic equipment, plastics, fabricated metal products, and feeds. and Anadarko Basins The Anadarko Basin is one of the most prolific natural gas reserves in North America, with ultimate gas production in excess of 100 trillion cubic feet of gas.[1] External links
References 1. , the company is producing approximately 155 mmcfe net per day. The company is currently using 10 operated rigs and plans to drill approximately 36 net wells in 2007 to further develop its 390,000 net acres of leasehold. Chesapeake's proved undeveloped reserves in southern Oklahoma are an estimated 238 bcfe and its risked unproved reserves are approximately 800 bcfe after applying a 75% risk factor and assuming an additional 600 net wells are drilled in the years ahead. The company's targeted results for southern Oklahoma wells are $3.5 million to develop 2.2 bcfe on approximately 120 acre spacing. * South Texas: Located primarily in Zapata County, Texas Zapata County is a county located in the U.S. state of Texas. In 2000, its population was 12,182. Its county seat is Zapata6. Zapata is named for Antonio Zapata, a rancher in the area and rebel against Mexico. History Geography According to the U.S. , Chesapeake's South Texas assets are producing approximately 150 mmcfe net per day. The company is currently using six operated rigs and plans to drill approximately 50 net wells in 2007 to further develop its 160,000 net acres of leasehold. Chesapeake's proved undeveloped reserves in South Texas are an estimated 174 bcfe and its risked unproved reserves are approximately 340 bcfe after applying a 75% risk factor and assuming an additional 390 net wells are drilled in the years ahead. The company's targeted results for vertical South Texas wells are $2.8 million to develop 1.8 bcfe on approximately 80 acre spacing. * Mountain Front (primarily Morrow mor·row n. 1. The following day: resolved to set out on the morrow. 2. The time immediately subsequent to a particular event. 3. Archaic The morning. and Springer springer a North American term commonly used to describe heifers close to term with their first calf. formations in western Oklahoma Western Oklahoma can usually be defined as all territory west of Interstate 35, and west of Oklahoma City. It is usually broken up into two primary regions: Northwestern Oklahoma and Southwestern Oklahoma. ): From these prolific formations located in the Anadarko Basin, the company is producing approximately 100 mmcfe net per day. The company is currently using four operated rigs and plans to drill approximately five net wells in 2007 to further develop its 130,000 net acres of Mountain Front leasehold. Chesapeake's proved undeveloped reserves in the Mountain Front are an estimated 55 bcfe and its risked unproved reserves are approximately 200 bcfe after applying a 70% risk factor and assuming an additional 85 net wells are drilled in the years ahead. The company's targeted results for vertical Mountain Front wells are $8.0 million to develop 4.0 bcfe on approximately 320 acre spacing. Unconventional Gas Resource Plays - In its unconventional gas resource areas, Chesapeake owns 1.3 million net acres on which it has an estimated 1.8 tcfe of proved undeveloped reserves and approximately 6.6 tcfe of risked unproved reserves and is currently using 67 operated drilling rigs to further develop its inventory of approximately 9,800 net drillsites. Four of Chesapeake's most important unconventional gas resource plays are described below: * Fort Worth Barnett Shale The Barnett Shale is a geological formation of economic significance. It consists of sedimentary rocks of Mississippian age in the U.S. State of Texas. The formation is estimated to stretch from the city of Dallas to west of the city of Fort Worth and south, covering 5,000 square (North Texas): The Fort Worth Barnett Shale is the largest and most prolific unconventional gas resource play in the U.S. In this play, Chesapeake is the fourth largest producer of natural gas, the most active driller and the largest leasehold owner in the Tier 1 sweet spot of Tarrant Tarrant is the name of two places in the United States:
* Sahara Sahara (səhâr`ə) [Arab.,=desert], world's largest desert, c.3,500,000 sq mi (9,065,000 sq km), N Africa; the western part of a great arid zone that continues into SW Asia. (primarily Mississippi Mississippi, state, United States Mississippi (mĭs'əsĭp`ē), one of the Deep South states of the United States. It is bordered by Alabama (E), the Gulf of Mexico (S), Arkansas and Louisiana, with most of the border formed by , Chester Chester, city and district, England Chester, city (1991 pop. 80,154) and district, Cheshire, W central England, on a sandstone height above the Dee River. It is a railroad junction. Manufactures include electrical equipment, paint, and window panes. , Hunton Hunton, as a person, may refer to:
* Ark-La-Tex The Ark-La-Tex, Arklatex, or ArkLaTex is a U.S. socio-economic region where Arkansas, Louisiana, Texas and Oklahoma intersect. Some prefer the more inclusive Arklatexoma. Tight Gas Sands (primarily Travis Trav·is , William Barret 1809-1836. American military leader who commanded the Texans who died in the defense of the Alamo (1836). Peak, Cotton Valley, Pettit and Bossier Bossier may refer to:
 ē'–), state in the S central United States. It is bounded by Mississippi, with the Mississippi R. , Chesapeake has assembled as·sem·ble v. as·sem·bled, as·sem·bling, as·sem·bles v.tr. 1. To bring or call together into a group or whole: assembled the jury. 2. a strong portfolio of unconventional gas resource plays. Chesapeake is one of the ten largest producers of natural gas, the third most active driller and one of the largest leasehold owners in the area. Chesapeake is producing approximately 115 mmcfe net per day in the Ark-La-Tex area. The company is currently using 15 operated rigs and plans to drill approximately 125 net wells in 2007 to further develop its 210,000 net acres of leasehold. Chesapeake's unconventional proved undeveloped reserves in the Ark-La-Tex region are an estimated 318 bcfe and its unconventional risked unproved reserves are approximately 300 bcfe after applying a 70% risk factor and assuming an additional 800 net wells are drilled in the years ahead. The company's targeted results for medium-depth vertical Ark-La-Tex wells are $1.7 million to develop 1.0 bcfe on approximately 60 acre spacing. * Granite granite, coarse-grained igneous rock of even texture and light color, composed chiefly of quartz and feldspars. It usually contains small quantities of mica or hornblende, and minor accessory minerals may be present. , Atoka and Colony colony, any nonself-governing territory subject to the jurisdiction of a usually distant country. The term is also applied to a group of nationals who settle in a foreign country or territory but retain political or cultural connections with their parent state. Washes (western Oklahoma and Texas Panhandle panhandle, in geography, a strip of land projecting from the main body of an area and shaped like the handle of a pan, such as the panhandles of West Virginia, Texas, and Alaska. ): Chesapeake is the largest producer of natural gas, the most active driller and the largest leasehold owner in the Wash plays in the Anadarko Basin. Chesapeake is producing approximately 115 mmcfe net per day from these plays. The company is currently using 12 operated rigs and plans to drill approximately 40 net wells in 2007 to further develop its 130,000 net acres of leasehold. Chesapeake's proved undeveloped reserves in the Wash plays are an estimated 361 bcfe and its risked unproved reserves are approximately 300 bcfe after applying a 50% risk factor and assuming an additional 600 net wells are drilled in the years ahead. The company's targeted results for vertical Wash wells are $2.8 million to develop 1.4 bcfe on approximately 80 acre spacing. Emerging Unconventional Gas Resource Plays - In its emerging unconventional gas resource areas where commercial production has only recently been established but the future reserve potential could be substantial, Chesapeake owns 2.7 million net acres on which it has approximately 100 bcfe of proved undeveloped reserves and approximately 5.6 tcfe of risked unproved reserves and is currently using 19 operated drilling rigs to further develop its inventory of approximately 3,300 net drillsites. Five of Chesapeake's most important emerging unconventional gas resource plays are described below: * Fayetteville Fayetteville (fā`ĕtvĭl). 1 City (1990 pop. 42,099), seat of Washington co., NW Ark., in the Ozarks; inc. 1836. It is an agricultural trade center with canneries and food processors. The Univ. Shale (Arkansas Arkansas, river, United States Arkansas (ärkăn`zəs, är`kənsô'), river, c.1,450 mi (2,330 km) long, rising in the Rocky Mts., central Colo. ): In this region of growing importance to Chesapeake, the company is the largest leasehold owner in the play (second largest in the core area of the play). Chesapeake is producing approximately 10 mmcfe net per day from the Fayetteville Shale. The company is currently using three operated rigs and will gradually increase its drilling activity level to 12 operated rigs by mid-year 2007 in order to drill approximately 110 net wells in 2007 to further develop its 350,000 net acres of leasehold in the core area of the play. Chesapeake's proved undeveloped reserves in the Fayetteville core area are an estimated 41 bcfe and its risked unproved reserves are approximately 2.9 tcfe after applying a 50% risk factor to its core area acreage and assuming an additional 2,200 net wells are drilled in the years ahead. The company's targeted results for horizontal core area Fayetteville Shale wells are $2.9 million to develop 1.6 bcfe on approximately 80 acre spacing. The company is currently risking its 700,000 net acres of non-core area leasehold at 100%. * Deep Haley Ha·ley , Alex 1921-1992. American writer best known for Roots (1976), a fictionalized chronicle tracing his family history back to its African origins. Noun 1. (primarily Strawn Strawn can refer to either of two places in the United States:
* Delaware Basin Shales (primarily Barnett and Woodford
Coordinates: Woodford formations in West Texas): Chesapeake's most significant land acquisition activities during 2006 took place in the Delaware Basin Barnett and Woodford Shale plays in far West Texas where Chesapeake is now the largest leasehold owner. The company is producing approximately 1.0 mmcfe net per day from the Delaware Basin Barnett and Woodford Shales. The company is currently using six operated rigs and plans to drill approximately 25 net wells in 2007 to further develop its 670,000 net acres of leasehold. Chesapeake has not yet booked any proved undeveloped reserves in the Delaware Basin shales play although its risked unproved reserves are an estimated 1.0 tcfe after applying a 90% risk factor and assuming an additional 400 net wells are drilled in the years ahead. The company's targeted results for Delaware Basin vertical Barnett and Woodford Shale wells are $4.5 million to develop 3.0 bcfe on approximately 160 acre spacing. The company has not yet developed a model for targeted results from horizontal wells in the play. * Woodford Shale (southeastern Oklahoma Arkoma Basin): Chesapeake is the second largest leasehold owner in the Woodford Shale play, an unconventional gas play in the southeastern Oklahoma portion of the Arkoma Basin. The company is producing approximately 10 mmcfe net per day from the Woodford Shale. The company is currently using two operated rigs and plans to drill approximately 20 net horizontal Woodford Shale wells in 2007 to further develop its 100,000 net acres of leasehold. Chesapeake's proved undeveloped reserves in the play are an estimated 15 bcfe and its risked unproved reserves are approximately 500 bcfe after applying a 50% risk factor and assuming an additional 300 net wells are drilled in the years ahead. The company's targeted results for horizontal Woodford Shale wells are $4.0 million to develop 2.2 bcfe on approximately 160 acre spacing. * Deep Bossier (East Texas and northern Louisiana): Chesapeake is one of the top three leasehold owners in the Deep Bossier play. The company is producing approximately 1.0 mmcfe net per day in the Deep Bossier play. The company plans to drill approximately five net wells in 2007 to further develop its 260,000 net acres of leasehold. Chesapeake's proved undeveloped reserves in the Deep Bossier play are an estimated 2 bcfe and its risked unproved reserves are approximately 300 bcfe after applying a 90% risk factor and assuming an additional 80 net wells are drilled in the years ahead. The company's targeted results for Deep Bossier wells are $10.0 million to develop 5.0 bcfe on approximately 320 acre spacing. Appalachian Basin Gas Resource Plays - In this newest core area of the company's operations, play types include conventional, unconventional and emerging unconventional in the Devonian Shale and other formations. Chesapeake is the largest leasehold owner in the region with 3.5 million net acres. The company is producing approximately 130 mmcfe net per day. The company is currently using 11 operated rigs and plans to drill approximately 375 net wells in 2007 to further develop its extensive leasehold position. In Appalachia Appalachia, region: see Appalachian Mountains. Appalachia West Virginia coal mining region known for its abysmal poverty. [Am. Hist.: NCE, 160] See : Poverty , Chesapeake has an estimated 533 bcfe of proved undeveloped reserves and its risked unproved reserves are approximately 2.4 tcfe after applying a 35% risk factor and assuming an additional 9,000 net wells are drilled in the years ahead. The company's targeted results for vertical Devonian Shale wells are $0.5 million to develop 0.35 bcfe on approximately 160 acre spacing. In addition, Chesapeake continues to actively generate new prospects and acquire additional leasehold throughout the company's areas of operation in various conventional, unconventional and emerging unconventional plays not described above. Management Comments Aubrey Au·brey , John 1626-1697. English antiquarian and writer whose Brief Lives, published posthumously, contains character sketches of his notable friends, including Thomas Hobbes, John Milton, and Francis Bacon. K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to report outstanding financial and operational results for the 2006 fourth quarter and full-year. The company delivered attractive production and reserve growth and generated impressive profit margins at the top of our large-cap Large-cap A stock with a high level of capitalization, usually at least $5 billion market value. large-cap 1. Of or relating to the common stock of a big corporation that has considerable retained earnings and a large amount of peer group that were enhanced by the company's well-executed hedging strategy. Our focused business strategy, value-added val·ue-add·ed adj. Of or relating to the estimated value that is added to a product or material at each stage of its manufacture or distribution: growth, tremendous inventory of undrilled locations and valuable hedge positions clearly differentiate differentiate /dif·fer·en·ti·ate/ (dif?er-en´she-at) 1. to distinguish, on the basis of differences. 2. to develop specialized form, character, or function differing from that surrounding it or from the original. Chesapeake in the industry. In light of continued strong returns available through the drillbit on our extensive prospect inventory, we have increased our industry-leading U.S. drilling activity to accelerate development of our substantial proved undeveloped and unproved reserve base. We currently have 132 operated rigs working, up from an average of 73 operated rigs in 2005 and an average of 123 operated rigs in the 2006 fourth quarter. We anticipate keeping our operated rig count between 130 and 140 rigs during 2007. Our business strategy continues to feature delivering growth through a balance of acquisitions and organic drilling, focusing on clean-burning Adj. 1. clean-burning - leaving little contamination while consuming fuel; "natural gas is a clean-burning fuel" fueled - heated, driven, or produced by burning fuel , domestically-produced natural gas to take advantage of strong long-term natural gas supply and demand fundamentals, building dominant regional scale to achieve low operating costs operating costs npl → gastos mpl operacionales and high returns on equity and mitigating mit·i·gate v. mit·i·gat·ed, mit·i·gat·ing, mit·i·gates v.tr. To moderate (a quality or condition) in force or intensity; alleviate. See Synonyms at relieve. v.intr. To become milder. financial and operational risks through opportunistic opportunistic /op·por·tu·nis·tic/ (op?er-tldbomacn-is´tik) 1. denoting a microorganism which does not ordinarily cause disease but becomes pathogenic under certain circumstances. 2. hedging. We believe Chesapeake's management team can continue the successful execution of the company's distinctive business strategy and continue to deliver significant value to the company's investors for years to come." Conference Call Information A conference call to discuss this release has been scheduled for Friday Friday: see Sabbath; week. Friday young Indian rescued by Crusoe and kept as servant and companion. [Br. Lit.: Robinson Crusoe] See : Servant morning, February 23, 2007 at 9:00 a.m. EST EST electroshock therapy. EST abbr. electroshock therapy . The telephone number to access the conference call is 913-981-5543 and the confirmation code is 5800842. We encourage those who would like to participate in the call to dial the access number between 8:50 and 8:55 am EST. For those unable to participate in the conference call, a replay will be available for audio playback Playback could mean:
Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the and can be accessed by going to Chesapeake's website at www.chkenergy.com and selecting the "News & Events" section. The webcast of the conference call will be available on our website for one year. This press release and the accompanying ac·com·pa·ny v. ac·com·pa·nied, ac·com·pa·ny·ing, ac·com·pa·nies v.tr. 1. To be or go with as a companion. 2. Outlooks include "forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. " within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations or forecasts of future events. They include estimates of oil and natural gas reserves, expected oil and natural gas production and future expenses, projections of future oil and natural gas prices, planned capital expenditures for drilling, leasehold acquisitions and seismic data, and statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations. Disclosures concerning the fair value of derivative derivative: see calculus. derivative In mathematics, a fundamental concept of differential calculus representing the instantaneous rate of change of a function. contracts and their estimated contribution to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility. We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this press release, and we undertake no obligation to update this information. Factors that could cause actual results to differ materially from expected results are described under "Risk Factors" in the Prospectus Supplement dated December 8, 2006 for our offering of common stock filed with the Securities and Exchange Commission on December 8, 2006. They include the volatility of oil and natural gas prices; the limitations our level of indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. may have on our financial flexibility; our ability to compete effectively against strong independent oil and natural gas companies and majors; the availability of capital on an economic basis to fund reserve replacement costs; our ability to replace reserves and sustain production; uncertainties inherent in estimating quantities of oil and natural gas reserves and projecting future rates of production and the timing of development expenditures; uncertainties in evaluating oil and natural gas reserves of acquired properties and associated potential liabilities; our ability to effectively consolidate Consolidate To combine the assets, liabilities, and other financial items of two or more entities into one. Notes: This term is generally used in the context of consolidated financial statements. and integrate acquired properties and operations; unsuccessful exploration and development drilling; declines in the values of our oil and natural gas properties resulting in ceiling test write-downs; lower prices realized on oil and natural gas sales and collateral collateral (kəlăt`ərəl), something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although required to secure hedging liabilities resulting from our commodity price risk management activities; the negative impact lower oil and natural gas prices could have on our ability to borrow; and drilling and operating risks Operating risk The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk. . Our production forecasts are dependent upon many assumptions, including estimates of production decline rates from existing wells and the outcome of future drilling activity. Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The SEC has generally permitted oil and natural gas companies, in filings made with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive Determinative; beyond dispute or question. That which is conclusive is manifest, clear, or obvious. It is a legal inference made so peremptorily that it cannot be overthrown or contradicted. formation tests to be economically ec·o·nom·i·cal adj. 1. Prudent and thrifty in management; not wasteful or extravagant. See Synonyms at sparing. 2. Intended to save money, as by efficient operation or elimination of unnecessary features; economic: and legally producible under existing economic and operating conditions. We use the term "unproved" to describe volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC's guidelines guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. may prohibit pro·hib·it tr.v. pro·hib·it·ed, pro·hib·it·ing, pro·hib·its 1. To forbid by authority: Smoking is prohibited in most theaters. See Synonyms at forbid. 2. us from including in filings with the SEC. These estimates are by their nature more speculative Speculative Securities that involve a high level of risk. speculative Of or relating to an asset or a group of assets with uncertain returns. The greater the degree of uncertainty the more speculative the asset. than estimates of proved reserves and accordingly are subject to substantially greater risk of actually being realized by the company. While we believe our calculations of unproved drillsites and estimation estimation In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator. of unproved reserves have been appropriately risked and are reasonable, such calculations and estimates have not been reviewed by third party engineers or appraisers. Chesapeake Energy Corporation is the third largest independent producer of natural gas in the U.S. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and corporate and property acquisitions in the Mid-Continent, Fort Worth Barnett Shale, Appalachian Basin, Fayetteville Shale, South Texas, Permian Basin The Permian Basin is a sedimentary basin largely contained in the western part of the U.S. state of Texas. It reaches from just south of Lubbock, Texas, to just south of Midland & Odessa, extending westward into the southeastern part of the adjacent state of New Mexico. , Delaware Basin, Ark-La-Tex and Texas Gulf Coast regions of the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . The company's Internet address There are two kinds of addresses that are widely used on the Internet. One is a person's e-mail address, and the other is the address of a Web site, which is known as a URL. Following is an explanation of Internet e-mail addresses only. For more on URLs, see URL and Internet domain name. is www.chkenergy.com. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] (a) Includes positive performance revisions of 729 bcfe and excludes downward revisions of 212 bcfe resulting from natural gas price declines between December 31, 2006 and 2005. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] *Operating cash flow represents net cash provided by operating activities before changes in assets and liabilities. Operating cash flow is presented because management believes it is a useful adjunct adjunct (aj´ungkt), n a drug or other substance that serves a supplemental purpose in therapy. adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ). Operating cash flow is widely accepted as a financial indicator of an oil and natural gas company's ability to generate cash which is used to internally fund exploration and development activities and to service debt. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies within the oil and natural gas exploration and production industry. Operating cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing, or financing activities as an indicator of cash flows, or as a measure of liquidity. [TABLE OMITTED] **Ebitda represents net income before income tax expense, interest expense, and depreciation, depletion and amortization expense. Ebitda is presented as a supplemental financial measurement in the evaluation of our business. We believe that it provides additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. . This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Ebitda is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders pursuant to our bank credit agreement and is used in the financial covenants in our bank credit agreement and our senior note indentures. Ebitda is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income, income from operations, or cash flow provided by operating activities prepared in accordance with GAAP. Ebitda is reconciled rec·on·cile v. rec·on·ciled, rec·on·cil·ing, rec·on·ciles v.tr. 1. To reestablish a close relationship between. 2. To settle or resolve. 3. to cash provided by operating activities as follows: [TABLE OMITTED] [TABLE OMITTED] *Operating cash flow represents net cash provided by operating activities before changes in assets and liabilities. Operating cash flow is presented because management believes it is a useful adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP). Operating cash flow is widely accepted as a financial indicator of an oil and natural gas company's ability to generate cash which is used to internally fund exploration and development activities and to service debt. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies within the oil and natural gas exploration and production industry. Operating cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing, or financing activities as an indicator of cash flows, or as a measure of liquidity. [TABLE OMITTED] **Ebitda represents net income before income tax expense, interest expense, and depreciation, depletion and amortization expense. Ebitda is presented as a supplemental financial measurement in the evaluation of our business. We believe that it provides additional information regarding our ability to meet our future debt service, capital expenditures and working capital requirements. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Ebitda is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders pursuant to our bank credit agreement and is used in the financial covenants in our bank credit agreement and our senior note indentures. Ebitda is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income, income from operations, or cash flow provided by operating activities prepared in accordance with GAAP. Ebitda is reconciled to cash provided by operating activities as follows: [TABLE OMITTED] [TABLE OMITTED] *Adjusted net income available to common and adjusted earnings per share assuming dilution Dilution A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Notes: Adding to the number of shares outstanding reduces the value of holdings of existing shareholders. exclude certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to GAAP earnings because: a. Management uses adjusted net income available to common to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted net income available to common is more comparable to earnings estimates provided by securities analysts. c. Items excluded generally are one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. items, or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items. **Weighted average fully diluted shares outstanding includes shares that were considered antidilutive antidilutive Of or relating to the conversion of convertible securities into common stock when such conversion would result in an increase in diluted earnings per share or a decrease in diluted loss per share. for calculating earnings per share in accordance with GAAP. [TABLE OMITTED] *Adjusted ebitda excludes certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to ebitda because: a. Management uses adjusted ebitda to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted ebitda is more comparable to earnings estimates provided by securities analysts. c. Items excluded generally are one-time items, or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items. [TABLE OMITTED] *Adjusted net income available to common and adjusted earnings per share assuming dilution exclude certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to GAAP earnings because: a. Management uses adjusted net income available to common to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted net income available to common is more comparable to earnings estimates provided by securities analysts. c. Items excluded generally are one-time items, or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items. **Weighted average fully diluted shares outstanding includes shares that were considered antidilutive for calculating earnings per share in accordance with GAAP. [TABLE OMITTED] *Adjusted ebitda excludes certain items that management believes affect the comparability of operating results. The company discloses these non-GAAP financial measures as a useful adjunct to ebitda because: a. Management uses adjusted ebitda to evaluate the company's operational trends and performance relative to other oil and natural gas producing companies. b. Adjusted ebitda is more comparable to earnings estimates provided by securities analysts. c. Items excluded generally are one-time items, or items whose timing or amount cannot be reasonably estimated. Accordingly, any guidance provided by the company generally excludes information regarding these types of items. [TABLE OMITTED] PV-10 is discounted (at 10% per year) future net cash flows before income taxes. The standardized measure of discounted future net cash flows includes the effects of estimated future income tax expenses and is calculated in accordance with SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System 69. Management uses PV-10 as one measure of the value of the company's current proved reserves and to compare relative values among peer companies without regard to income taxes. We also understand that securities analysts and rating agencies use this measure in similar ways. While PV-10 is based on prices, costs and discount factors which are consistent from company to company, the standardized measure is dependent on the unique tax situation of each individual company.
SCHEDULE "A"
CHESAPEAKE'S OUTLOOK AS OF FEBRUARY 22, 2007
Quarter Ending March 31, 2007; Year Ending December 31, 2007;
and Year Ending December 31, 2008.
We have adopted a policy of periodically providing investors with
guidance on certain factors that affect our future financial
performance. As of February 22, 2007, we are using the following key
assumptions in our projections for the first quarter of 2007, the
full-year 2007 and the full-year 2008.
The primary changes from our December 11, 2006 Outlook are in
italicized bold in the table and are explained as follows:
1) We have updated the projected effect of changes in our hedging
positions; and
2) Production, certain costs and capital expenditure assumptions
have been updated.
[TABLE OMITTED]
(a) Oil NYMEX prices have been updated for actual contract prices through January January: see month. 2007 and natural gas NYMEX prices have been updated for actual contract prices through February 2007. (b) Severance tax severance tax n. A tax imposed by a state on the extraction of natural resources, such as oil, coal, or gas, that will be used in other states. per mcfe is based on NYMEX prices of $55.62 per bbl of oil and $7.40 to $8.40 per mcf of natural gas during Q1 2007, $56.09 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2007 and $56.25 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2008. (c) Does not include gains or losses on interest rate derivatives An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. The interest rate derivatives market is the largest derivatives market in the world. (SFAS 133). Commodity Hedging Activities The company utilizes hedging strategies to hedge the price of a portion of its future oil and natural gas production. These strategies include: (i) For swap instruments, we receive a fixed price for the hedged commodity and pay a floating market price, as defined in each instrument, to the counterparty Counterparty The other participant, including intermediaries, in a swap or contract. . The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. (ii) For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a "cap" limiting the counterparty's exposure. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , there is no limit to Chesapeake's exposure but there is a limit to the downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. exposure of the counterparty. (iii) Basis protection swaps are arrangements that guarantee a price differential of oil or natural gas from a specified delivery point. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the company may elect to settle a hedging transaction prior to its scheduled maturity date and lock in the gain or loss on the transaction. Chesapeake enters into oil and natural gas derivative transactions in order to mitigate mit·i·gate v. To moderate in force or intensity. mit  i·ga tion n. a portion of its exposure to adverse market changes
in oil and natural gas prices. Accordingly, associated gains or loses
from the derivative transactions are reflected as adjustments to oil and
natural gas sales. All realized gains and losses from oil and natural
gas derivatives are included in oil and natural gas sales in the month
of related production. Pursuant to SFAS 133, certain derivatives do not
qualify for designation DESIGNATION, wills. The expression used by a testator, instead of the name of the person or the thing he is desirous to name; for example, a legacy to. the eldest son of such a person, would be a designation of the legatee. Vide 1 Rop. Leg. ch. 2.2. as cash flow hedges A cash flow hedge is a hedge of the exposure to the variability of cash flow that
Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness in·ef·fec·tive adj. 1. Not producing an intended effect; ineffectual: an ineffective plea. 2. Inadequate; incompetent: an ineffective teacher. is recognized currently in oil and natural gas sales. Excluding the swaps assumed in connection with the acquisition of CNR See riser card. CNR - Communication and Network Riser which are described below, the company currently has the following open natural gas swaps in place and also has the following gains from lifted natural gas swaps: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $5.25 to $6.50 covering 146 bcf in 2007, $5.75 to $6.50 covering 160 bcf in 2008 and $5.90 to $6.25 covering 36 bcf in 2009. The company currently has the following open natural gas collars in place [TABLE OMITTED] (1) Certain collar arrangements include knockout prices ranging from $5.00 to $6.00 covering 52 bcf in 2007 and $5.00 to $6.00 covering 11 bcf in 2008. Note: Not shown above are written call options covering 64.4 bcf of production in 2007 at a weighted average price of $9.56 for a weighted average premium of $0.54, 93.0 bcf of production in 2008 at a weighed average price of $10.20 for a weighted average premium of $0.70 and 42.9 bcf of production in 2009 at a weighed average price of $11.41 for a weighted average premium of $0.50. The company has the following natural gas basis protection swaps in place: [TABLE OMITTED] * weighted average We assumed certain liabilities related to open derivative positions in connection with the CNR acquisition in November November: see month. 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as as a liability of $592 million ($357 million as of December 31, 2006). The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes listed below at their fair values on the date of our acquisition of CNR. Pursuant to SFAS 149 "Amendment of SFAS 133 on Derivative Instruments and Hedging Activities", the assumed CNR derivative instruments are deemed to contain a significant financing element and all cash flows associated with these positions are reported as financing activity in the statement of cash flows. The following details the CNR derivatives (natural gas swaps) we have assumed: [TABLE OMITTED] Note: Not shown above are collars covering 3.7 bcf of production in 2009 at an average floor and ceiling of $4.50 and $6.00. The company also has the following crude oil swaps in place: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $45.00 to $60.00 covering 1,460 mbbls in 2007 and $45.00 to $60.00 covering 1,098 mbbls in 2008.
SCHEDULE "B"
CHESAPEAKE'S PREVIOUS OUTLOOK AS OF DECEMBER 11, 2006
(PROVIDED FOR REFERENCE ONLY)
NOW SUPERSEDED BY OUTLOOK AS OF FEBRUARY 22, 2007
Quarter Ending December 31, 2006; Year Ending December 31, 2006; Year
Ending December 31, 2007; and Year Ending December 31, 2008.
We have adopted a policy of periodically providing investors with
guidance on certain factors that affect our future financial
performance. As of December 11, 2006, we are using the following key
assumptions in our projections for the fourth quarter of 2006, the
full-year 2006, the full-year 2007 and the full-year 2008.
The primary changes from our October 26, 2006 Outlook are in
italicized bold in the table and are explained as follows:
1) We have updated the projected effect of changes in our hedging
positions;
2) We have updated for our EUR 600 million Senior Note Offering; and
3) We have updated for our 30 million share Common Stock offering
announced on December 7, 2006.
[TABLE OMITTED]
(a) Oil NYMEX prices have been updated for actual contract prices through November 2006 and natural gas NYMEX prices have been updated for actual contract prices through December 2006. (b) Severance tax per mcfe is based on NYMEX prices of $58.26 per bbl of oil and $6.40 to $7.20 per mcf of natural gas during Q4 2006, $65.73 per bbl of oil and $6.20 to $7.20 per mcf of natural gas during calendar 2006, $56.25 per bbl of oil and $7.50 to $8.50 per mcf of natural gas during calendar 2007 and 2008. (c) Does not include gains or losses on interest rate derivatives (SFAS 133). Commodity Hedging Activities The company utilizes hedging strategies to hedge the price of a portion of its future oil and natural gas production. These strategies include: (i) For swap instruments, we receive a fixed price for the hedged commodity and pay a floating market price, as defined in each instrument, to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. (ii) For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a "cap" limiting the counterparty's exposure. In other words, there is no limit to Chesapeake's exposure but there is a limit to the downside exposure of the counterparty. (iii) Basis protection swaps are arrangements that guarantee a price differential of oil or natural gas from a specified delivery point. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Commodity markets are volatile, and as a result, Chesapeake's hedging activity is dynamic. As market conditions warrant, the company may elect to settle a hedging transaction prior to its scheduled maturity date and lock in the gain or loss on the transaction. Chesapeake enters into oil and natural gas derivative transactions in order to mitigate a portion of its exposure to adverse market changes in oil and natural gas prices. Accordingly, associated gains or loses from the derivative transactions are reflected as adjustments to oil and natural gas sales. All realized gains and losses from oil and natural gas derivatives are included in oil and natural gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., because of temporary fluctuations in value) are reported currently in the consolidated statement of operations as unrealized gains (losses) within oil and natural gas sales. Following provisions of SFAS 133, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable to hedged risk, are recorded in other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales. Excluding the swaps assumed in connection with the acquisition of CNR which are described below, the company currently has the following open natural gas swaps in place and also has the following gains from lifted natural gas swaps: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $3.75 to $5.50 covering 8.6 bcf in 2006, $5.30 to $6.50 covering 70.6 bcf in 2007 and $5.75 to $6.50 covering 76.9 bcf in 2008, respectively. Note: Not shown above are call options covering 1.8 bcf of production in 2006 at a weighted average price of $12.50, 7.3 bcf of production in 2007 at a weighted average price of $12.50 and 7.3 bcf of production in 2008 at a weighed average price of $12.50. The company has the following natural gas basis protection swaps in place: [TABLE OMITTED] * weighted average We assumed certain liabilities related to open derivative positions in connection with the CNR acquisition in November 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation as a liability of $592 million ($415 million as of September September: see month. 30, 2006). The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes listed below at their fair values on the date of our acquisition of CNR. Pursuant to SFAS 149 "Amendment of SFAS 133 on Derivative Instruments and Hedging Activities", the derivative instruments assumed in connection with the CNR acquisition are deemed to contain a significant financing element and all cash flows associated with these positions are reported as financing activity in the statement of cash flows. The following details the CNR derivatives (natural gas swaps) we have assumed: [TABLE OMITTED] Note: Not shown above are collars covering 3.7 bcf of production in 2009 at an average floor and ceiling of $4.50 and $6.00, respectively. The company also has the following crude oil swaps in place: [TABLE OMITTED] (1) Certain hedging arrangements include swaps with knockout prices ranging from $40.00 to $60.00 covering 184 mbbls in 2006, $45.00 to $60.00 covering 1,460 mbbls in 2007 and $45.00 to $60.00 covering 1,098 mbbls in 2008, respectively. |
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