NEWS

WIRES

OTHER

Chesapeake Energy (CHK) Plans To Reduce Drilling Budget

By Drew F. Bush

<http://www.streetinsider.com/stock_lookup.php?q=CHK> ) announced plans to reduce its drilling capital expenditure (capex) budget during the second half of 2008 through year-end 2010 by approximately $3.2 billion, or 17%, in response to an approximate 50% decrease in natural gas prices since June 30, 2008 and concerns about the possibility of an emerging U.S. natural gas surplus in advance of increased demand from the U.S. transportation sector. Of the $3.2 billion drilling capex reduction, $0.8 billion is attributable to the drilling capex carry associated with the company's recently closed Fayetteville Shale joint venture with BP America (NYSE: BP <http://www.streetinsider.com/stock_lookup.php?q=BP> ), $0.5 billion is attributable to the drilling capex carry anticipated in a Marcellus Shale joint venture and $1.9 billion is attributable to reduced drilling activity. The company plans to reduce its current operated drilling rig count of 157 rigs to approximately 140 rigs by year-end 2008 and expects to keep its rig count relatively flat through 2009 and 2010.

In addition to reducing drilling capex, Chesapeake has elected to temporarily curtail a portion of its unhedged natural gas production in the Mid-Continent region due to unusually weak wellhead natural gas prices that are substantially below industry breakeven costs. The company has curtailed approximately 100 million cubic feet (mmcf) per day of net natural gas production (approximately 125-150 mmcf per day gross) and plans to restore this production once natural gas prices recover from recently depressed wellhead price levels of $3.00 - 5.00 per thousand cubic feet (mcf). This curtailment represents approximately 4% of the company's current net natural gas and oil production capacity of over 2.3 billion cubic feet of natural gas equivalent per day (92% natural gas).

The company has also reduced its full-year 2008 production growth estimate to 18% from 21% to account for the temporary curtailment discussed above, the sale of 45 million cubic feet of natural gas equivalent (mmcfe) per day of production associated with its Fayetteville Shale joint venture with BP, the anticipated sale of 60 mmcfe per day of production in the 2008 fourth quarter associated with the company's fourth volumetric production payment (VPP) and shut-ins in the 2008 third quarter of onshore production associated with natural gas processing plant limitations as a result of damage by Hurricane Ike.

Additionally, as a result of reduced drilling activity levels announced today, the company has lowered its anticipated production growth forecasts in 2009 and 2010 to 16% per year from 19% per year. At these levels, Chesapeake believes its production growth will still remain at or near the top of its large-cap peer group, particularly in light of continued strong drilling results from its shale plays. Notably, during the month of September, Chesapeake completed three additional horizontal Haynesville Shale wells with average per well initial production rates exceeding 10 mmcfe per day bringing its total horizontal Haynesville Shale wells on production to 14.[SM]

Drew F. Bush
Communications Associate
The Wilderness Society
drew_bush@tws.org

The Wilderness Society's mission is to protect wilderness and inspire Americans to care for our wild places.