Chesapeake Energy Corp.
Analyst Day Presentation

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By MDCigan
October 21, 2008

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I listened to all of Day 1, but only listened to the very beginning of Day 2. Day 1 was pretty much 100% McClendon and Rowland talking business strategy and the financials. From the beginning of Day 2, it sounded like it was just going to be the nitty gritty details of operations which I took a pass on (but might listen later).

Find the time to listen to Day 1 as I think it is excellent and you really get a glimpse into exactly how Aubrey thinks about the business, how to create value, and Rowland gets into the specifics of the hedging and how they think about NG prices.

There really is a ton of material covered, and some good analyst questions, although you can definitely tell at points that Aubrey sounds frustrated and exasperated (bit of an uncomfortable exchange with one analyst about CHK getting criticized for selling assets). He sounded to me like he had accepted what had happened with the stock position, and was ready to get down to business going forward, and highlighted on a couple of occasions just how ridiculous he thought the stock price was. At one point, when talking about what the value would be if they essentially monetized 100% of their proved developed properties as a VPP, he laughed (at the absurdity) of what the enterprise value of the company was that day, and pointed out that the value of the Haynesville as implied by the stock price was ZERO.

Like I said, a ton was covered, but I think the biggest takeaway for me was McClendon really trying to articulate and hammer home his strategy for creating value because I think he thinks both the market and the analyst community don't "get it" and it will become much clearer the next couple of years (because of accounting rules).

He said that the way he thinks about it is "there are 2 ways to make money" in the business:

1. Drill wells & produce gas
2. Asset monetization - Buy leasehold for X and sell leasehold for 5-10X

He specifically stated that #2 was a lot easier and more profitable than #1. Now in my view, #2 only works or creates value for CHK if ***somebody*** ultimately believes they can create value doing #1. The leasehold doesn't have value as a trading card that can just be passed around from one E&P company to the next.

He specifically stated there was unwarranted skepticism (in a very frustrated tone) about CHK's ability to sell assets and said "I can assure you" there is interest in these various assets. IMO, the real test here and Aubrey's credibility is on the line given his strong insistence on this point, is their ability to close some kind of deal on the Marcellus. If for any reason this falls through, he is going to have even more egg on his face, and it casts doubt on his idea of #2 as a stable value creator.

He stated they already generated a $10 billion profit on these asset monetizations but that it doesn't show up on the income statement because of the "successful efforts" versus "full cost" accounting. They use full cost accounting so the gains on these asset sales don't show up as immediate profits on the income statement but will result in much lower expenses down the road because their DD&A rate will be much lower. Further hammering the point, he was like look, we sold 1/4, entirely captured our cost back, and still own 75%, and basically said no one could possibly argue that financial model. He said this works for CHK because "we have the capability to find things" and "put our land machine into motion".

Anyways, I found it a very interesting way of looking at things.

Rowland also talked about how they think about NG prices and decide to start layering on hedges. He mentioned they viewed the ceiling for NG as parity with crude oil, and the floor as the marginal cost of new supply. Interestingly, when you think about it, those two numbers are starting to converge in this current environment with basically little to no range in between them. Crude oil is at 70ish, but let's just say it heads to 60. Let's use the 8 to 1 ratio. That basically gets you to 7.50ish. Well, most of the discussions I've heard indicate 6-7 is the cost of marginal supply so you are basically looking at 6-7.50 being the floor-ceiling range.