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Chesapeake Playing Price Waiting Game

Chesapeake Playing Price Waiting Game

With its stock price languishing around a dollar, Chesapeake Energy 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 of the 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 gave shareholders a negative total return of 86.5%. According to Herold, it's share price plummeted from $7.56 on Dec. 31, 1997 to 94 cents on Dec. 31, 1998. Nine companies on the laggards list did worse than Chesapeake, though. Among companies on the list, "balance sheet 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 people probably haven't completely factored in that none of our debt is due for five years and the average maturity is eight years. and none of it is secured," McClendon told NGI. More on the bright side, McClendon points to ownership of 1.3 Tcf of gas, a $100 million 1999 drilling program and $25 million acquisition program. Cash flow from producing properties is to pay for drilling, and divestitures will finance acquisitions, he said.

Also in its favor, Chesapeake is heavily weighted toward natural gas, about 84%. "It's difficult to get it above 90%, so I would say we'll probably be comfortable with a 90% number." The company's average reserve life is 11 years, 12 in gas and seven or eight in oil.

Chesapeake is forecasting gas at $2/Mcf and oil at $14/barrel (NYMEX) for 1999. "Our view of the industry is that it is sub-economic below those prices, and so we view any time spent there as unlikely to last very long. Nobody makes money for an extended period of time at those prices. And I think that's why we are so happy with the North American gas situation. .[I]n natural gas, 20% of our production disappears every year. Oversupplies like we have right now take care of themselves very quickly because of depletion."

Chesapeake's trouble's aren't limited to the market. The company still faces a class action brought by shareholders who allege they were misled about the company's prospects for success in the Louisiana Austin Chalk. Chesapeake currently has a motion to dismiss pending in federal court in Oklahoma.

More bad news is expected, McClendon said, in the form of another 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 asset base, McClendon said. One thing it won't be doing is pitching its story 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 company is playing a waiting game, he said, and when commodity prices turn around investors who waited to get on board will be late. "In '96, '97, everyone wanted to hear from oil and gas companies and now no one does." Chesapeake closed up 1/16 Friday at 1 1/16.

Joe Fisher, Houston

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