For the first time in the last eight quarters, Chesapeake EnergyCorp. of Oklahoma City, OK, turned a profit. The improvement was inspite of decreased production.

In the second quarter, Chesapeake Energy Corp. of Oklahoma City,OK, generated net income of $8.1 million on 33.6 Bcfe ofproduction. The average gas price realized during the quarter was$1.88/Mcf. Factoring in oil sales, the gas equivalent commodityprice was $2.03/Mcfe. By comparison, during the second quarter of1998 Chesapeake generated a net loss before extraordinary items of$234.7 million on production of 37.2 Bcfe and a realized gasequivalent price of $2.03/Mcfe.

“Chesapeake’s gas production increased despite production lossesfrom asset sales,” said CEO Aubrey K. McClendon. “Lease operatingexpenses declined by 15%. Our depreciation rate remains among thelowest in the industry. Our drilling operations and assetrationalization program are adding value, and most importantly, wewere profitable for the first time in the past eight quarters.

“We are optimistic about the continued attractiveness of thenatural gas industry. Because of Chesapeake’s 87% natural gasreserve concentration, the company’s asset value, cash flow andearnings have significant leverage to improving natural gas prices.In fact, for each $0.10 increase in natural gas prices,Chesapeake’s annual earnings and cash flow increased byapproximately $0.10 per share and net asset value increased byapproximately $0.50 per share.”

Chesapeake increased its 1999 drilling budget to $120 millionfrom $90 million. The company anticipates funding its 1999 drillingcap-ex from cash on hand and cash flow from operations.Chesapeake’s current 1999 budget forecast assumes a realized gasequivalent price of $2.06/Mcfe. This is based on average 1999 Nymexprices of $16.75/barrel and $2.23/Mcf and average differentials toNymex prices of $1.75/barrel and $0.30/Mcf, production of 125 Bcfe(80% gas), lease operating expenses (including production taxes) of$0.47/Mcfe, interest costs of $0.65/Mcfe, and general andadministrative costs of $0.12/Mcfe. Using current Nymex stripprices, Chesapeake’s estimated second half 1999 average revenuerealization would be $2.50/Mcfe, including differentials to Nymexprices that are currently being realized of $1.25/barrel and$0.25/Mcf. At these prices, the company’s earnings, cash flow, andEBITDDA during the second quarter would have increased by about $15million.

During the first half of 1999, Chesapeake produced 66.9 Bcfe andreplaced this production through the drillbit by about 140% at anestimated finding cost of $0.75/Mcfe. The company is beginning tohedge a portion of its gas production for April – October 2000.

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