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By RedneckRoleModel
August 2, 2006

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The CHK call last week had a very different tone than previous calls, so I thought I'd post the takeaways I got from the call.

1.) On the future of acquisitions: Aubrey McClendon said that the good plays throughout the US have now been all acquired, and all are tightly held by strong operating companies. The opportunity to buy leaseholds and acreage like what CHK has done in the last five years is likely to be over. CHK put a ton of detail about its land positions in its press release for the first time, which suggests that they don't perceive the release of that information as being a threat to acquisitions in the future. This is a big change from them.

2.) The company is rapidly increasing its drilling fleet. Started with 75 rigs, adding 65 in 2006 alone. #2 driller in US has just 65 rigs total, so CHK is adding a #1 sized driller in 2006 alone.

3.) Service cost inflation has peaked and Aubrey said late 2006 and 2007 will be "a great time to be drilling."

4.) Natural gas inventory drew down in late July for the first time that anyone can remember. Aubrey said that in future years, there could be 2 to 3 weeks of drawdowns in the July & August time frame. In February, Aubrey predicted that a hot summer could affect inventory more than a cold winter, and it appears that his prediction has come true. If, in future years, the summer months cease to be net add months for inventory, the implication for the long-term trend of gas prices could be very bullish.

5.) Hedging gains were over $1 billion in last 6 months, essentially severing the stock price from the price of natural gas for the near future. 90%+ hedging in 2006, 70% in 2007, and about 50% in 2009, all at prices above $9.00 per MCFE. The hedging program has been truly brilliant in the last 24 months.

6.) The 14 TCFE of unproved reserves are reported after very conservative risk adjustments. Unrisked, the company could be sitting on 56 TCFE, which is a mind-boggling number. I didn't appreciate this before, and if even one quarter of the difference between 56 and 14 TCFE is realized by the company in coming years, it could push the stock price above $100. Proving any substantial increment of gas above the 14 TCFE currently in the unproven column would make the company's acquisitions in the last 5 years turn out to be wildly profitable, with IRRs in excess of 100%.

Pretty interesting stuff. With that inventory drawdown last week due to the heat, it appears that we may have seen the bottom in natural gas for some time to come.

Best,
Redneck


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