Chesapeake energy by grace colavito

Chesapeake Energy Corporation
 By: Grace Colavito

Presentation
 Overview
 Business
 Operation/Mission
 Legislative/Industry Outlook
 Comparables
 Valuation
 Why Lease

Business │ Operations │ Outlook │ Valuation & Comparables | Why Lease

Chesapeake Energy Overview
 Founded in 1989
 Headquartered in Oklahoma City, OK
◦ Offices regionally located in Charleston, WV, Jane Lew, WV, Mt.
Morris, PA, Canonsburg, PA, Harrisburg, PA, and Towanda, PA
 Exclusive U.S. onshore focus
 One of the nation’s largest natural gas producers
◦ 1Q ‘10 natural gas production of 2.328bcf/d
 Nation’s most active explorer 1993-2010
 Nation’s most active horizontal driller 1993-2010
 Exceptional drilling success rate – 98%


Chesapeake Energy Overview
 Most active driller in U.S. 1993-2010
◦ 133 operated rigs currently
 26 rigs currently drilling in the Marcellus Shale area
◦ CHK responsible for 1 of 8 new gas wells being drilled in
U.S.
 Consistent production growth
◦ 20th consecutive year of sequential production growth
 Unparalleled inventory of U.S. onshore leasehold and 3-D
seismic
◦ Lower risk of suboptimal return on capital
◦ Higher production rates


Business
 Largest independent producer of natural gas in the United
States
 As of December 31, 2008, we had 12.051 trillion cubic feet
equivalent of proved reserves, of which 94% were natural
gas and all of which were onshore in the U.S.
 During 2008, we produced an average of 2.303 bcfe per
day, an 18% increase over the 1.957 bcfe per day
produced in 2007. (billion cubic feet equivalent)
 During the second half of 2008, we entered into joint
venture arrangements that monetized a portion of our
investment in three of the Big 4 Shale plays and provide
drilling cost carries for our retained interest.


Business Strategy
 Create value for investors by building one of the largest
onshore natural gas resource bases in the United States
1. Grow through the drillbit
2. Control Substantial Land and Drilling Location Inventories
3. Develop Proprietary Technological Advances
4. Build Regular Scale
5. Focus on Low Costs
6. Mitigate Natural Gas and Oil Price Risk
7. Form Unique Joint Venture Arrangements


Mitigate Price Risk
 Chesapeake Energy have been able to
deliver attractive profit margins and financial
returns through all phases of the commodity
price cycle.
1. proactively hedging the prices we receive for a majority of
our natural gas and oil production
2. We believe this price volatility is likely to continue in the
years ahead
3. As of February 17, 2009, we have natural gas and oil
swaps and collars in place covering 78% and 48% of our
expected production in 2009 and 2010


Low Cost Controls
 Chesapeake Energy believe their low
cost structure is the result of:
1. Management’s effective cost-control programs
2. A high-quality asset base
3. Extensive and competitive services and natural gas
processing and transportation infrastructures that exist in
our key operating areas.
4. significant investments in our drilling rig and trucking
service operations and in our midstream gathering and
compression operations.


Joint Venture Agreements
 In the second half of 2008, the company entered into
three joint venture arrangements covering three of the
company’s Big 4 shale plays
 In the joint ventures, the company has collaborated with
other leading energy companies to accelerate the
development of the company’s properties
 Sold leasehold and producing property assets which had a
cost basis of approximately $1.2 billion to these three joint
venture partners for total cash consideration of $4.0 billion and
up to $4.6 billion of future drilling cost carries while retaining a
majority interest in each joint venture.


Diverse Shale Production

 “Big Four” Shale Plays
1. Barnett Shale = Forth Worth Basin of north-central Texas
2. Haynesville Shale = Ark-La-Tex area of northwestern Louisiana
and East Texas
3. Fayetteville Shale = Arkoma Basin of central Arkansas
4. Marcellus Shale = northern Appalachian Basin of West Virginia,
Pennsylvania and New York

 Substantial Secondary Plays
1. Mid-Continental Basin
2. Appalachian Basin
3. Permian Basin
4. Delaware Region
5. Texas Gulf Coast Region


Diverse Shale Production


Operations

 Shale gas is the fastest growing
energy sector in the United States.
 In late 1990’s, the application of
horizontal drilling enabled more
aggressive development
 Although the basic technology of
shale gas production has now been
proven, the differences in rock
mineralogy and geology that occur
when moving over such large
distances means that each new area
still requires that the approach be
refined, and proven of delivering
commercial rates of production.
(barriers to entry)


Operations

 Production of gas from the shales is
not new, although development on a
large scale is relatively recent, the
best known example of which is the
Barnett shale in the Fort Worth Basin
of Texas.
 Gas is held in the shale not only in
tiny pores, but also in a solid solution
bound onto the rock grains. The key
to producing these shales is
connecting the pores through the
introduction of an artificial fracture
system, and lowering the pressure in
the rock


Natural Gas Performance


Legislative Outlook
 On September 22, 2008 Barack Obama proposed a bill in the
Senate:

◦ Democrat candidate and Illinois Senator, Barack Obama,
still found time last week to introduce legislation (S.3506)
that would increase the tax credit for individuals that
purchase natural gas vehicles and extend the credit
through to the end of 2017. The Obama administration may
be a shot in the arm for Haynesville Shale producers.

 http://online.wsj.com/video/can-obama-save-the-us-
naturalgas-industry/7F633C4C-B9E1-417E-AC9C-
D80711942D30.html


Industry Outlook

 Domestic Alternative to Crude Oil
 Clean and Affordable Alternative to Coal Production
◦ Natural Gas plants cost 25% less than capital intensive coal
plants
 Tax Credits for individuals and cities that utilize
natural gas vehicles (increased demand)
◦ Compressed natural gas expected to grow annually 5.8%
from 2007-2030, according to the Energy Info Administration
 Utilities are accessing natural gas over coal for
electricity (increased demand)


Company Issues

1. Level of Indebtedness could limit financial flexibility
 We may incur additional debt, including secured indebtedness, or issue
additional series of preferred stock in order to develop our properties and
make future acquisitions.

2. Price declines in 2008 resulted in write-downs of their assets
carrying value and further price declines could result in
additional write-downs in the future
 Financial statements as of and for the year ended December 31, 2008
reflect an impairment of approximately $1.7 billion, net of income tax, of
our natural gas and oil properties.


Company Issues

3. Significant capital expenditures are required to replace reserves
 Our exploration, development and acquisition activities require substantial
capital expenditures. Historically, we have funded our capital expenditures
through a combination of cash flows from operations, our revolving bank
credit facility and debt and equity.

4. Certain of our undeveloped leasehold acreage is subject to leases
that will expire over the next several years unless production is
established on units containing the acreage.
 As of December 31, 2008, we had leases on approximately 0.46 million
and 1.25 million net acres, respectively, in the Haynesville and Marcellus
Shale areas. A sizeable portion of this acreage is not currently held by
production. Unless production in paying quantities is established on units
containing these leases during their terms, the leases will expire.


Executive Compensation
1. Base Salary
2. Cash Bonuses
3. Long-Term Incentives
◦ Restricted Stock – four year vesting period
◦ 401K Matching Contributions - match up to 15%
4. Perquisites
◦ Monthly Country Club Dues
◦ Personal Aircraft Use
◦ Accounting Services


Executive Compensation (cont.)
 Chesapeake Energy has not reported
its Fiscal 2008 Definitive Proxy
Statement
 General and Administrative Expenses,
which comprise stock-based
compensation:
◦ $377 million in 2008


Executive Compensation (cont.)
 Stock-Based Compensation
◦ $85 million for 2008
◦ $58 million for 2007
◦ Due to an increase in the number of
unvested restricted shares outstanding in
2008
 Stock-Based Compensation
represented $.10 per mcfe produced
in 2008 and guidance is between $.10
- $.12 for 2009


Credit Outlook

 Moody’s
◦ Jan. 28, 2009: assigns Ba3 to Chesapeake
Energy senior unsecured notes; stable
outlook
 Standard and Poor’s
◦ Jan. 28, 2009: assigns BB to Chesapeake
Energy senior unsecured notes; stable
outlook


Debt Outlook

 February 2009:
◦ Issuance of $1.425 billion of 9.5% Senior
Notes due 2015
 Total Indebtedness sums to $14.184
billion
◦ A majority of these obligations are not maturing
within the upcoming 5 years
◦ Indebtedness represents 43% of our total book
capitalization


Debt Outlook
Less than *1-3 *3-5 More than
Total 1 Year Years Years 5 years

Long term debt:
Principal $ 14,058 $ — $ — $ 4,798 $ 9,260
Interest
6,048 567 1,133 1,133 3,215
Capital lease obligations
4 3 1 — —
Operating lease obligations 946 142 266 270 268
Asset retirement obligations (a)
269 19 21 6 223
Purchase obligations (b) 2,349 807 487 320 735
Unrecognized tax benefits (c)
60 — 60 — —
Standby letters of credit 15 15 — — —
Total contractual cash
obligations $ 23,749 $ 1,553 $ 1,968 $ 6,527 $ 13,701


Lease Outlook

 As of December 31, 2008, minimum future lease payments
were as follows ($ in millions):

 Rigs Compressors Other Total
 2009 $94 $40 $8 $142
 2010 95 34 5 134
 2011 95 34 3 132
 2012 96 36 2 134
 2013 97 39 1 137
 After 143 125 268
 Total $620 $308 $19 $947


Reserve Outlook

 Proved developed producing reserves (PDPs) are obviously the
most objective, whereas proved undeveloped reserves (PUDs)
have the most to prove


Shareholder Overview

1 Percentage of Insiders
Shareholder Layout
2 Percentage of Institutions
3 Percentage of Others

4.20%
27.90%

67.90%


Equity Repurchases/Dividends

 October 2008
◦ Repurchased 24,174 shares at $22.388
 November 2008
 December 2008
 Repurchases used to pay tax burden on restricted
stock grants (43,000 shares repurchased)
 Increased dividend payout in 2008 to $.075/share
each quarter from $.0675/share over the previous
year.


Correlation Structure


Comparable Companies
 Anadarko Petroleum Corp. (APC)
◦ engages in the exploration and production of oil and gas
properties primarily in the United States, the deepwater of the
Gulf of Mexico, and Algeria.
 Questar Corp. (STR)
◦ engages in oil and gas exploration and production, midstream
field services, energy marketing, interstate gas transportation,
and retail gas distribution.
 Southwestern Energy Corp. (SWN)
◦ engages in the exploration, development, and production of
natural gas and crude oil in the United States.


Comparable Companies

Name Location Market Cap P/E Price/Sales Price/Book

Chesapeake Energy Oklahoma 11.45 16.05 1.02 0.73

Anadarko Petroleum Corp. Texas 18.67 5.89 1.33 1.04

Questar Corp. Utah 5.30 7.90 1.60 1.63

Southwestern Energy Co. Texas 10.99 19.49 5.04 4.64

Industry 11.653 11.093 2.657 2.437


Stock Performance


Valuations
1. Comparables = Fairly Valued
2. CAPM WACC = 9.27%
3. ROE WACC = 9.1%
4. Goal-Post Theory Valuation = $30.42
5. Range: 27.38 - 33.46


Eight Major 2011 Accomplishments
1. Reduced long-term net debt by 25% per proved mcfe
 From $0.73/mcfe to $0.55/mcfe
2. Reduced long-term net debt by $2.3 billion to $10.3 billion, or 18%
 Achieved more than 70% of CHK’s two-year 25% debt reduction goal
3. Increased production by 15% (net of asset sales) to an average of 3.27
bcfe/day
4. Increased liquids production by 72% to ~110 mbbls/d (YE exit rate)
5. Increased proved reserves by 10% to 18.8 tcfe, despite the sale of 2.8 tcfe(1)
6. Increased fully diluted shares outstanding by only 0.6% (all ~13,000
employees receive restricted stock awards)
7. Created ~$15 of NAV per share(2)
8. Made strategic investments in natural gas demand creation initiatives (Clean
Energy convertible debt, Sundrop Fuel preferred stock, fleet vehicle, drilling
rig and frac crew conversions)


Why Lease With Chesapeake Energy?
 Most experience shale operator in the U.S.
 21-year track record of production increases
 Best management practices utilized throughout drilling and
completion process
 Financial strength through joint ventures in multiple operating
areas
◦ Total, StatoilHydro, BP, Plains Exploration and Production
Company
 Advanced technological capabilities translate into higher
production rates and reserve recoveries
◦ Unparalleled inventory of onshore U.S. 3-D seismic data
◦ In-house geology core lab


Chesapeake energy by grace colavito

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