Characterizing itself as “prospect-rich in a prospect-poor industry,” Chesapeake Energy Corp. of Oklahoma City lined up more of those prospects Monday with an agreement to acquire $530 million of Mid-Continent natural gas assets in two transactions with the bulk of the assets in a western Oklahoma package from El Paso Corp. and the rest from Vintage Petroleum Inc.

Chesapeake said it will pay El Paso $500 million for an internally estimated 328 Bcfe of proved gas reserves, 70 bcfe of probable and possible gas reserves, 293,000 leasehold acres and current production of 67 MMcfe/d. The El Paso proved reserves have a reserves-to-production index of 13 years, are 96% natural gas (or natural gas liquids) and are 71% proved developed.

From Vintage Petroleum. Inc. Chesapeake is acquiring an internally estimated 22 Bcfe of proved gas reserves, 8 Bcfe of probable and possible gas reserves and current gas production of 3.5 MMcfe/d for $30 million. The Vintage proved reserves have a reserves-to-production index of 17 years, are 97% natural gas and are 56% proved developed.

The transactions will increase Chesapeake’s currently estimated proved reserves (pro forma for the ONEOK closing that occurred in January 2003) to 2.75 Tcfe (an increase of 15%) and Chesapeake’s projected April 2003 production rate to approximately 640 MMcfe/d (an increase of 13%). The company intends to finance the acquisitions by issuing a combination of equity and long-term debt.

During the past several years, Chesapeake has continued building its interests in the prolific natural gas fields of western Oklahoma, consolidating interests in these key fields through its transactions with Gothic, Sapient, Ram, Canaan, Focus, Williams, Enogex/OG&E, ONEOK and now El Paso. Of the properties being acquired from El Paso, 96% are located within townships in which Chesapeake already owns assets. Chesapeake believes that the further consolidation of ownership in these fields will result in considerable drilling and operational efficiencies and greatly reduced administrative costs.

The company believes the acquisition of these under-exploited assets from El Paso and Vintage in combination with Chesapeake’s 2.2 million net acre leasehold inventory and 9,000 square mile 3-D seismic database provides the company with over 1,500 prospective drillsites.

After allocating $50 million of the El Paso purchase price to unevaluated leasehold for El Paso’s probable and possible reserves, Chesapeake’s acquisition cost for the proved reserves will be $1.37/Mcfe. The acquisition is expected to close before the end of March and will have an effective date of April 1, 2003. It is subject only to satisfaction of customary closing conditions.

The latest acquisitions follow on Chesapeake’s agreement last November to acquire $300 million of Mid-Continent natural gas assets from ONEOK, Inc. In that transaction, which closed as scheduled on Jan. 31, 2003, Chesapeake acquired an internally estimated 200 Bcfe of proved gas reserves, an estimated 60 Bcfe of probable and possible gas reserves and initial gas production of 47 MMcf/d.

When combined with Chesapeake’s existing 11.6% market share as Oklahoma’s largest natural gas producer, the El Paso properties will increase Chesapeake’s gas production market share in Oklahoma to 14%.

Chesapeake now projects 2003 production of 230-235 Bcfe (increased from 207-212 Bcfe). Its drilling, land and seismic cap-ex budget for 2003 is currently projected to range between $475-525 million, compared to $403 million expended on these items in 2002. This increase is largely attributable to cap-ex that will be invested in the El Paso and Vintage properties. Chesapeake intends to fund its planned 2003 drilling, land and seismic cap-ex budget from its discretionary cash flow, which is now expected to exceed $700 million.

“Since January 1998, Chesapeake has discovered or acquired 3.3 tcfe of proved natural gas reserves at the very attractive average cost of $1.27 per mcfe,” said Aubrey K. McClendon, the company’s CEO. As a result, Chesapeake has become the largest producer of natural gas in the Mid-Continent, one of the eight largest independent gas producers in the U.S. and one of the most profitable companies in the industry measured by per unit of production. We believe the combination of our successful acquisition and drilling programs, high wellhead revenue realizations, low operating costs and value-added hedging strategies will enable Chesapeake to continue generating top-tier returns to our investors for years to come.”

The company has hedged 90% of its projected oil production for 2003 at an average NYMEX price of $27.78, and 55% of its expected 2003 gas production at an average NYMEX price of $4.70/MMbtu. In addition, the company has hedged 50% of its estimated 2003 gas production at a basis differential to NYMEX of minus $0.16/MMBtu. In 2002, this basis differential averaged minus $0.31/MMBtu, while in January and February 2003, it averaged approximately minus $0.50/MMBtu. Chesapeake has established significant basis differential hedges through 2009, which are described in detail in a revised Outlook dated Feb. 24.

Besides the El Paso announcement, the independent also reported its financial and operating results for the fourth quarter and full-year 2002, which marked its 11th consecutive year of production growth.

For the fourth quarter, Chesapeake generated net income of $23.7 million (13 cents a diluted share), discretionary cash flow of $125.4 million and earnings before interest and taxes (EBIT) of $156.7 million on revenue of $255.4 million. For the year, Chesapeake’s earnings totaled $30.2 million (17 cents), while discretionary cash flow was $410.2 million and EBIT was $521.5 million on revenue of $737.8 million.

Fourth quarter income included a $0.6 million after-tax risk management loss related to the company’s hedging contracts as well as a $7.4 million after-tax loss from an investment in Seven Seas Petroleum Inc. Chesapeake also lost $0.8 million to pay off some of its debt securities. Without all of the special items, Chesapeake’s net income in the quarter would have been $32.5 million (18 cents), or 3 cents better than analysts’ consensus estimates.

Production for 4Q02 was 49.5 Bcfe, including of 43.9 Bcf of gas, or 89%. Average prices realized during the quarter after hedging were $24.67/bbl and $4/Mcf, for a realized gas equivalent price of $4.01/Mcfe. Hedging activities decreased quarterly oil price realizations by $2.3 million ($2.41/bbl) and increased 4Q02 gas price realizations by $14.2 million (32 cents/Mcf), for a total revenue increase from hedging activities of $11.9 million (24 cents/Mcfe).

For 2002, Chesapeake averaged prices after hedging were $25.22/bbl and $3.54/Mcf, for an equivalent price of $3.61/Mcfe. Hedging activities decreased 2002 oil price realizations by $1.1 million (32 cents/bbl) and increased gas price realizations by $97.1 million (61 cents/Mcf) for a total revenue increase of $96.0 million (53 cents/Mcfe).

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