Oklahoma-based Chesapeake Energy Corp. is exploring”alternatives to enhance shareholder value, including a possiblesale or merger of the company.” The word comes on the heels of anexpected $250 million second quarter loss stemming from awrite-down due to lower gas and oil prices. The company’s boardalso adopted a shareholder rights plan, or poison pill.

The announcement also follows a recent shopping spree mounted bythe company. In October, Chesapeake added 160 Bcf equivalent of gaswhen it bought two Oklahoma-based producers, the Midcontinentoperations of DLB Oil & Gas, and AnSon Production Corp., for atotal of $193 million (See NGI Oct. 27, 1997). In JanuaryChesapeake made two other acquisitions for $88 million, adding 107Bcfe of proven reserves and future drilling opportunities (See NGIJanuary 19, 1998). The company paid $50 million for 67 Bcfe ofreserves in a deal with Calgary-based Ranger Oil. The company alsobought the Midcontinent properties of privately owned EnervestManagement for $38 million.

In March, Chesapeake completed its acquisition of HugotonEnergy, growing the company to about 1,050 Bcfe of proved oil andgas reserves, 80% of which are gas (See NGI March 16, 1998). InApril, a deal was done with Oklahoma-based Gothic Energy givingChesapeake the right for five years to develop 50% of Gothic’s current and subsequently acquired undeveloped reserves (See NGIApril 6, 1998). That agreement was part of a $70 million dealgiving Chesapeake a portion of Gothic’s proved developed reserves.

Last year, Chesapeake took a $236 million charge on fourthquarter earnings to cover disappointing drilling results. It washit with a series of class-action suits after announcing its 1997write-down. Shareholders alleged the company violated securitieslaws, which the company denies.

In the company’s Tuesday announcement, CEO Aubrey K. McClendonlamented Chesapeake stock is undervalued. “With our attractiveMidcontinent and Canadian natural gas assets and with initialdrilling results from three of our four major natural gasexploration projects expected in the next 30-60 days, we believethe full value of Chesapeake’s assets are not recognized by themarket. As owners of approximately 30% of the company’s commonstock, management and the Board are committed to seeing thatChesapeake’s shareholders are able to realize the full benefit oftheir investment in our company. The company has begun the processof selecting financial advisors.”

Chesapeake said it expects 1999 production to reach 140-145 Bcfof gas equivalent, of which 75% should be natural gas. Ifproduction goals are realized, and based on average realizedwellhead prices of $18.00 per barrel of oil and $2.40 per Mcf ofgas, the company believes earnings, before interest expense, taxes,depreciation and amortization (EBITDA) could total $270 million.These goals also anticipate a 1999 drilling capital expenditurebudget of about $200 million and a cost structure of $0.52/Mcfe forlease operating and production tax expenses and $0.15/Mcfe forgeneral and administrative expense.

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