With its stock price languishing around a dollar, ChesapeakeEnergy is watching the depressed gas and oil market from atop a$900 million mountain of debt. The view, according to CEO Aubrey K.McClendon, is one of opportunity. “We think our company has one ofthe best upside stories for natural gas prices down the road.”

One would hope so for its sake. For the second year in a row,Chesapeake has made the “major laggards” list of John S. Herold’s”Oil Share Market Performance Year-End Review.” Chesapeake gaveshareholders a negative total return of 86.5%. According to Herold,it’s share price plummeted from $7.56 on Dec. 31, 1997 to 94 centson Dec. 31, 1998. Nine companies on the laggards list did worsethan Chesapeake, though. Among companies on the list, “balancesheet weakness appears to have been the dominant factor in 1998,”Herold wrote in its report.

“[There’s] not much we can do about that other than peopleprobably haven’t completely factored in that none of our debt isdue for five years and the average maturity is eight years. andnone of it is secured,” McClendon told NGI. More on the brightside, McClendon points to ownership of 1.3 Tcf of gas, a $100million 1999 drilling program and $25 million acquisition program.Cash flow from producing properties is to pay for drilling, anddivestitures will finance acquisitions, he said.

Also in its favor, Chesapeake is heavily weighted toward naturalgas, about 84%. “It’s difficult to get it above 90%, so I would saywe’ll probably be comfortable with a 90% number.” The company’saverage reserve life is 11 years, 12 in gas and seven or eight inoil.

Chesapeake is forecasting gas at $2/Mcf and oil at $14/barrel(NYMEX) for 1999. “Our view of the industry is that it issub-economic below those prices, and so we view any time spentthere as unlikely to last very long. Nobody makes money for anextended period of time at those prices. And I think that’s why weare so happy with the North American gas situation. .[I]n naturalgas, 20% of our production disappears every year. Oversupplies likewe have right now take care of themselves very quickly because ofdepletion.”

Chesapeake’s trouble’s aren’t limited to the market. The companystill faces a class action brought by shareholders who allege theywere misled about the company’s prospects for success in theLouisiana Austin Chalk. Chesapeake currently has a motion todismiss pending in federal court in Oklahoma.

More bad news is expected, McClendon said, in the form ofanother asset write-down. “We don’t know the magnitude of it now,but we’ll know in the next 30 days,” he said.

Going forward, Chesapeake intends to strengthen its gas assetbase, McClendon said. One thing it won’t be doing is pitching itsstory to investors. “Investors in our view don’t want to hear it,and so we’re not wasting our time trying to tell it.” The companyis playing a waiting game, he said, and when commodity prices turnaround investors who waited to get on board will be late. “In ’96,’97, everyone wanted to hear from oil and gas companies and now noone does.” Chesapeake closed up 1/16 Friday at 1 1/16.

Joe Fisher, Houston

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