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Chesapeake Caps 'Most Successful Year to Date' with Double-Digit Production Growth

Chesapeake Energy Corp. reported its oil and natural gas production jumped 27.4% and net income more than doubled in the final quarter of 2005, as higher U.S.-based production boosted revenue. The Oklahoma City-based independent posted earnings of $452.5 million ($1.11/), compared with $208.5 million (52 cents), for the same period a year ago. Excluding mark-to-market gains on hedging programs and other items, earnings were 84 cents/share, well ahead of Wall Street's expectations of 79 cents.

Revenue jumped 85% to $1.75 billion, from $942 million in 4Q2004. Of the company's estimated proved reserves at year-end 2005, 92% were natural gas. Additionally, 65% were proved developed at year-end 2005 compared with 66% in 2004.

CEO Aubrey K. McClendon said 2005 "marks our most successful year to date." He said Chesapeake's 12% organic growth rate and 659% reserve replacement at a drilling and acquisition cost of $1.74/Mcfe "were among the very best of all large-cap public E&P [exploration and production] companies.

"In addition, we made a series of value-added acquisitions during 2005, capped off by our $3 billion acquisition of Columbia Natural Resources (CNR), a dominant producer and leasehold owner in the Appalachian Basin (see NGI, Nov. 21, 2005). "We have nearly completed the integration of CNR's operations and are preparing to significantly increase our Appalachian drilling activity."

Production, heavily weighted toward natural gas, grew to 130.4 Bcfe in the final quarter from 102.9 Bcfe in 4Q2004 and was up more than 8% sequentially from 3Q2005's 120.4 Bcfe. The 4Q2005 hike in output consisted of 12.0 Bcfe (44%) generated from organic drillbit growth and 15.5 Bcfe (56%) generated from acquisitions, making the company's 2005 organic growth rate 12%. The 10.0 Bcfe increase in sequential quarterly production consisted of 3.9 Bcfe (39%) generated from organic drillbit growth and 6.1 Bcfe (61%) generated from acquisitions, making the company's quarterly organic growth rate 4%.

Chesapeake's 4Q2005 output consisted of 118.3 Bcf of gas (91% on a gas equivalent basis) and 2.01 million bbl of oil and natural gas liquids (9% on a gas equivalent basis). Average daily production rates for the quarter were 1.418 Bcfe/d, consisting of 1.286 Bcf/d of gas and 21,891 bbl/d of oil.

For the year, production reached 468.6 Bcfe, an increase of 106.0 Bcfe, or 29%, from the 362.6 Bcfe produced in 2004 and an increase of 200.2 Bcfe, or 75%, from the 268.4 Bcfe produced in 2003. The year's output was comprised of 422.4 Bcf (90% on a natural gas equivalent basis) and 7.70 million bbl (10% on a natural gas equivalent basis). Chesapeake's average daily production rate for the year was 1.284 Bcfe, consisting of 1.157 Bcf of gas and 21,090 bbl of oil and natural gas liquids.

Chesapeake began 2005 with estimated proved reserves of 4.902 Tcfe, and it ended the year with 7.521 Tcfe, an increase of 2.619 Tcfe, or 53%. Including 237 Bcfe of internally estimated proved reserves acquired or soon to be acquired from transactions announced last year, pro forma proved reserves as of year-end were 7.758 Tcfe.

The independent replaced its 469 Bcfe of production with an estimated 3.088 Tcfe of new proved reserves last year, for a reserve replacement rate of 659% at a drilling and acquisition cost of $1.74/Mcfe. Reserve replacement through the drillbit was 1.047 Tcfe, or 223% of production (including 17 Bcfe from performance revisions and 24 Bcfe from oil and natural gas price revisions), or 34% of the total increase, at a cost of $1.74/Mcfe. Reserve replacement through acquisitions of proved reserves (reduced for 1 Bcfe sold during the year) was 2.041 Tcfe, or 436% of production and 66% of the total increase, also at a cost of $1.74/Mcfe.

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