“The industry’s acreage land grab of the last five years is largely over. Virtually every conventional and unconventional gas resource play in the U.S. is totally locked up. The winners for the next 10 to 20 years have already been chosen and the losers will pay the price for years to come for being left behind.”

That pronouncement was made July 28, 2006 by one of the industry’s great acquirers, Chairman Aubrey McClendon of Chesapeake Energy Corp., announcing in a second quarter conference call that the company would be “accelerating development of our 10-plus year backlog of drilling opportunities.”

Clearly among the winners, Oklahoma City-based Chesapeake estimates it has one of the largest inventories of onshore leasehold (9.7 million net acres) and 3-D seismic (12.9 million acres) in the U.S. with an estimated 24,000 net drilling locations. It expects to develop about 3.3 Tcfe of proved undeveloped reserves and approximately 14 Tcfe of unproved reserves. Counting proved and unproved Chesapeake estimates its total reserves at 22.1 Tcfe.

While continuing to set records in production, revenue and earnings growth the company is protecting those records with an extensive hedging program that covers 90% of production through the rest of the year at an average $9.17/Mcf. It is 72% hedged for 2007 at an average $9.88/Mcf and 57% hedged for 2008 at an average $9.37/Mcf.

“We put as much into managing revenue as we do into managing cost,” McClendon said. The object is to mitigate commodity price risk. “We have very low exposure to gas prices over the next two and a half years.” The company collected $257 million or about $1.80/Mcfe in realized hedging gains during the second quarter 2006. Total realized hedging gains in the first half of this year were $505 million.

Those gains were part of the $1.6 billion in revenue Chesapeake reported in the second quarter, along with 143 Bcfe in production, a gain in proved reserves to 8.1 Tcfe, a first-half reserve replacement rate of 308% from 860 Bcfe of additions at a drilling and acquisition cost of $1.80/Mcfe. McClendon pointed out the company expects organic production growth both this year and next to be 10%.

Net income increased 58% to $332 million or 82/cents per fully diluted common share. McClendon noted Chesapeake’s production was up for the 20th consecutive quarter — from 395 MMcf/d five years ago to 1.658 Bcf/d today, a record rivaled only by XTO Energy. Overall production growth this year should be 26%, he said. Currently the company has 101 drilling rigs operating, up from 73 last year. It expects to have 135 operated rigs by year-end 2006.

Since early 1998 when it set its acquisition course, Chesapeake claims it “has been one of the most active consolidators of onshore U.S. natural gas assets, having purchased approximately 6.1 Tcfe of proved reserves at a total cost of approximately $11.3 billion.”

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