Chesapeake Energy Corp (CHK) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chesapeake Energy first quarter earnings results conference call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jeff Mobley.

Good morning and thank you for joining Chesapeake's 2008 first quarter earnings conference call.

Hopefully you've had a chance to review our press release and updated investor presentation that we've posted to our website.

Before I turn the call over to Aubrey and Marc, I need to provide you with disclosure concerning the forward-looking statements that Chesapeake's management will make during the course of this call.

The statements that describe our beliefs, goals, expectations, projections, or assumptions are considered forward-looking.

Please note that the Company's actual results may differ from those contained in such forward-looking statements.

Additional information concerning these statements is available in the Company's SEC filings.

In addition, I would also like to point out that during the course of our discussion this morning we will mention terms such as operating cash flow and EBITDA and we will also mention items that we believe are typically excluded from analyst estimates.

These are all non-GAAP financial measures.

Reconciliations to the comparable GAAP measures can be found on pages -- on page 18 of our press release issued yesterday afternoon.

While these are not GAAP measures of financial performance we believe they are common and useful tools in evaluating the Company's overall performance.

Our prepared comments this morning should last about five to ten minutes and then we will move to Q&A.

I will now turn the call over to Aubrey who will introduce the rest of the participants on the call.

Thanks, Jeff.

Good morning.

Probably it will take closer to 15 minutes, I think.

We've got Marc Rowland, our CFO here; Steve Dixon, our COO; Mark Lester, our Executive VP of Exploration.

And Marc is going to lead off today with his thoughts and then I will follow with mine.

Thanks, Aubrey, and good morning everyone.

Jumping right in, this quarter wasn't just a great one for Chesapeake, it was a record quarter.

On an adjusted basis we earned $1.09 per share, the highest in the Company's 15-year history.

Over the years our common and preferred share issuance has led some to comment that we have grown absolutely but not on a per share basis.

Not true.

Not only have we grown reserves and production per share but now earnings per share sets a 15-year high watermark.

Mentioning preferred stock as I just did, we have continued to convert those shares into common equity.

At the end of this quarter preferred stood at 956 million down from 1.955 billion at September 30.

In April we have converted an additional $100 million plus of preferred into common shares.

This, of course, reduces our fixed charges without materially changing fully diluted shares outstanding.

On the cost side of the equation we continue to see service cost at moderate or decreasing levels, just about everywhere except in the steel area, which is on the upswing for numerous reasons and, of course, fuel costs for diesel and our rig cost for diesel are higher reflective of current oil prices.

We just returned from London visiting our underwriters there and insurance rates for example, should be down by 15 to 20% next year for our drilling program.

You may have noted our DD&A rate which was also down again, in the last four quarters our DD&A rate has steadily gone down from $2.60 one year ago to $2.57 an Mcf in the third quarter to $2.55 and now $2.52.

This is partially due to declining service cost in 2007 and today in 2008 but substantially due to a shift in CapEx to our shale plays where increasing efficiencies, lower basic finding costs and higher internal rates return along with positive reserve revisions all helped to improve this number.

Of course you noted that we were all set to close on the sale of our second VPP transaction with our press release.

Shortly thereafter, we in fact did close and funded yesterday for $622.7 million.

This transaction was very attractive for us as we were able to sell 94.3 Bcf equivalent to be produced over 11 years for $6.60 per Mcf at an implied capital cost of just six and seven-eighths percent.

This compared to a price of about $5.23 per Mcf in our December '07 VPP Capital costs were up slightly and we had a slightly steeper decline on this VPP but of course with higher gas prices that we were able to hedge out our per Mcf number was substantially higher.

Continuing to discuss capital-like transactions we have made excellent progress on our midstream monetization formation.

We expect to have something definitive to announce within the next couple of weeks and expect to close in this quarter.

To remind you, we are seeking a $1 billion investment for a minority equity interest in a new entity which will contain all of our midstream gathering assets except our Appalachian assets.

Current EBITDA on an approximate annualized basis is $150 million.

This entity will continue to be consolidated with CHK and our partner share will be treated as a minority interest on the income and balance sheets.

The tremendous upward move in natural gas and oil prices caused our mark-to-market position to substantially move against us during the quarter which of course to remind you is a non-cash unrealized loss.

But just as the hurricane induced price run up of the final quarters in 2005 substantially lifted prices for 2006 and '07.

The move this quarter has lifted prices in 2009 and 2010.

This has allowed CHK to substantially increase our future hedging positions which are noted in our release through 2010.

Again, our hedging position is put on not out of fear of substantially lower sustained prices but out of the ability to lock in great margins at $9.56 which is our average 2002 gas hedge level we create operating cash flow margins based on current cost of over $7.50 per Mcf.

Today we have 21 different hedging counterparties that we do business with.

This has allowed us to hedge today 195,000 contracts in gas, 38,000 additional basis contracts and over 29 million barrels of oil to allow us to pursue the hedging positions and margin creation that we have become known for.

Let's finish up with a discussion of production guidance and CapEx expenditures.

At least one comment logged into the Company since last night questioned our production guidance being flat as compared to our previous guidance while CapEx was guided up.

This analysis fails to recognize the significant production decrease from previous guidance of March 31, due to our decision since then to exit our remaining Arkoma Woodford shale assets which currently produce over 40 million cubic feet per day and we had projected to be at 50 million cubic feet a day by the end of June.

We have projected these assets to average over 120 million cubic feet per day in 2009.

So without the Woodford shale divestiture that we've now announced plans for we have been looking to produce nearly 2.9 Bcf equivalent per day in 2009.

Our March 31, guidance at the midpoint for 2008 for CapEx was $5.4 billion on a net expenditure basis as compared to our current guidance of $5.3 billion.

Which is guidance of course net of planned asset sales.

Simply put we are electing to monetize assets with lower rates of return and reinvest into plays with much higher rates of return than we have, that we have discovered.

Our March 31, guidance for 2009 from midpoint CapEx again net of divestitures was $5.8 billion and now it's $6.8 billion.

This is due to preliminary budget increases of $300 million in that year for acreage and $700 million for rig count increases primarily in Haynesville and hopefully some conservatism on our part on cost based on our belief of higher gas prices.

Note also that we have introduced 2010 guidance with production levels up 15% over the 2009 levels to a fairly incredible number of 3.2 Bcf per day and, as usual, we will work hard to exceed these targets.

Now to Aubrey.

Thanks, Marc.

And in addition to the points you made I would like to focus on three major points of my own.

First, I'd like to highlight how well our major plays are doing individually and how well the Company is doing overall operationally.

Secondly, I'd like to provide some color on the industry and the stock markets validation of the value of our leasehold inventory; the advantages of our first mover strategy in various shale plays and the remarkable opportunity this creates for our shareholders.

Finally, I would like to offer some commentary in the gas market both in the U.S.

and also internationally.

First I hope you noticed that the first time inclusion of the two tables on page nine of our press release detailing our results over the past five quarters from new wells in the Barnett and Fayetteville plays.

We saw similar tables in Southwestern's press release last week and that it provided some nice disclosure so we have adopted it as well.

Later this year we expect to be able to add a similar table for the Haynesville and perhaps next year we can also add the Marcellus.

As I hope you can tell our well completion in the Barnett and the Fayetteville have become better with time.

Our finding costs per Mcfe have decreased over time and we expect further improvements in the quarters ahead.

This is a central key to understanding shale plays these days.

They almost always get better over time.

This is very different from most conventional plays where well results tend to get worse over time.

I think this also bodes well for our Haynesville play.

We are very happy with our well results to date but I really doubt that our first four horizontal wells are going to be the best four wells we ever drilled in this play.

I'd also like to note that we are the only mid or large-cap Company -- E&P Company that we know of that provides quarterly finding costs and proved reserve information.

In analyzing our release, I hope you noted that in the Barnett our proved reserves were up 13% sequentially and 78% year over year.

While in the Fayetteville our proved reserves were up 28% sequentially and 380% year over year.

Moreover, our production in the Barnett was up 12% sequentially and 125% year over year, while in the Fayetteville our production was up 50% sequentially and 700% year over year.

We believe these are exceptional numbers and should be well noted.

Those two plays along with the Haynesville will remain fundamental drivers of Chesapeake's production, proved reserves and net asset value growth for years to come.

One last thought on my operational update.

Please recall that we are recovering less than a third of the gas in plays on average in these shales and so some day we or others will figure out how to extract ever higher percentages of gas in place from these remarkable rocks.

That's just one reason why it's so critical to spend the capital necessary to lock down these big leasehold positions in these emerging shale plays very early on.

The costs are a tough burden to carry, in the beginning, but they become once in a generation assets and will create value for decades to come.

Secondly, the value of our unique 14 million net acre leasehold position is becoming more apparent every week as we continue to see aggressive and increasing competitor activity in virtually all of our plays.

This activity is establishing new acreage pricing values on almost a weekly basis and often on a daily basis in our major unconventional plays.

Whether it's the Marcellus, Fayetteville, Haynesville, Woodford or Barnett, other companies without a previous presence in these plays have apparently decided they don't want to be left any further behind in the shale sweepstakes and are routinely paying up to ten times what we have paid for our acreage position to date.

This is not criticism of these companies.

It's just a statement of a simple truth that we believe Chesapeake's leasehold inventory of 14 million net acres in the U.S.

should be seen for what it is.

A very valuable and unique asset that is worth far more than the value that is ascribed to it in our stock price.

Here's some math for you to consider.

The PV-10 of our proved reserve was $32.5 billion as of March 31, 2008, while on that very same day our enterprise value was $39.5 billion.

Also on that day, the book value of our non E&P assets, mainly our midstream assets, that Marc talked about earlier, was about $3.5 billion.

That means all of our developed acreage, rather our undeveloped acreage, on which we have identified 34,000 drill sites, and have more than 37 trillion cubic feet of gas equivalent of unproved reserves on a risked basis, and 115 Tcfe on an unrisked basis is somehow worth only $3.5 billion according to the stock market.

We believe that value is off buy at least a factor of 7.

Here's some additional math for you.

Take the Fayetteville and the Barnett, we believe our 585,000 Fayetteville net acres and 260,000 Barnett acres, less proved reserves in both of those areas are worth around $15 billion using per acre values of around $15,000 and $30,000 per net acre respectively.

Values that are well supported by competitors recent acquisitions in those areas and by stock market valuations of certain companies.

In addition, we believe our 1.2 million net acres of Marcellus and 300,000 net acres in the Haynesville are worth at least an additional $10 billion combined.

And since those plays are still in their infancy we believe their values are likely to increase substantially over time as the plays become more proven.

So in just these four shale plays alone our unproved assets are worth at least $25 billion based on recent transactions in the industry and other companies stock market valuations.

And this ignores the value of our 1 million net acres of West Texas leasehold, our 500,000 acres of lower Huron shale, our 200,000 acres of Texoma Woodford shale in southern Oklahoma, the approximate 4.2 million net acres of non-shale leasehold that we own that is also very valuable.

Furthermore our land acquisition machine rolls on.

In just the past quarter, for example, we have acquired 235,000 net acres in the Haynesville, 170,000 net acres in the Marcellus, 295,000 net acres elsewhere in the Company's inventory just from off the ground leaving as opposed to big transactions with big price tags associated with them.

It means that we have a durable land acquisition advantage that will become even more valuable in the future as prospective plays become harder and harder to get into.

All in all, we don't believe you can find a better combination of great growth in value in the industry and are excited about the shareholder value creation that has occurred to date and lies ahead for Chesapeake and its shareholders.

Finally, I have a few thoughts about natural gas prices that I would like to share with you.

First of all, what a remarkable time it is to be a natural gas producer.

For example, food riots have broken out in many places around the world with probable results over time of a slowing of biofuel supply growth and increased demand for fertilizer much of which will come from natural gas.

I believe the biofuel slowdown should also result in a greater emphasis on natural gas powered vehicles and plug in hybrids in addition.

Which both should lead to direct -- to greater direct and indirect demand for natural gas.

A good thing we believe for food and energy consumers around the world and also for the environment around the world as well.

In addition we are witnessing electricity shortages in South America, the southern half of Africa and in the Mid East, China, India and other emerging economies as well.

And just two days ago, as American Electric Power CEO announced plans for a new gas-fired power plant in Oklahoma he said he feared looming electricity shortage in the U.S.

in the next few years.

So what's the quickest way to solve an electricity shortage either in the U.S.

or elsewhere around the world?

Really there are only two ways to do it.

First, you can conserve which no one really likes to do or secondly you can go out and by some gas turbines and run natural gas through them.

And most likely that natural gas in countries' outside of the United States will be from LNG not from indigenous sources of natural gas.

So any time you read an article about electricity shortages around the world please remember that hugely bullish for worldwide natural gas prices directly and U.S.

gas prices indirectly.

Likewise, rising demand for electricity leads to greater coal consumption and not surprisingly we have seen a doubling of coal prices in the past year both nationally and internationally.

This puts a very strong and much higher floor price on the natural gas prices in the U.S.

than there has ever been in the past.

Next we have oil prices above $100 per barrel that, in our opinion, continue to properly reflect the imbalance between the visibility of forward demand growth versus the lack of visibility of forward supply growth.

In all that we have really learned about oil demand elasticity in the past year or so is that a 50% increase in U.S.

gasoline prices apparently leads to only about a 1% decline in gasoline demand.

While around the world transportation fuel demand continues to march inexorably upward.

Finally, environmental trends are obviously very favorable to natural gas these days and we believe the trend towards cleaner fuels, such as natural gas, are likely to become even stronger in the years ahead.

As a consequence of all these favorable trends, the natural gas market looks fundamentally solid and U.S.

natural gas equities appear very under priced to me especially after this weeks pull back.

To me the only question is will there be too much gas in the U.S.

market from producers such as Chesapeake with rapidly growing production profiles.

I personally believe that both U.S.

natural gas demand and supply growth will remain strong for the foreseeable future and that U.S.

natural gas prices will likely continue to trade at a discount to world gas prices because of the very capable efforts of a handful of large and mid-cap U.S.

E&P companies who have discovered and conquered the brave new world of unconventional reservoirs.

We are excited to be a leader in that group and look forward to continuing to deliver abundant new supplies of natural gas into the U.S.

market.

Against a pretty ugly backdrop of all that is not working well in the U.S.

economy these days, I believe a very important and under appreciated fact is that U.S.

natural gas prices should remain lower than those in virtually all other industrialized countries.

This should give you as U.S.

manufacturers of electricity and natural gas consumers a big advantage against some of America's competitors around the world.

This is very good news for sure but not nearly well enough known.

That's why we hope you will take the time to visit two new websites.

The first is called, cleanskies.org and the other is called cleanskies.tv.

At both of these websites I believe you will be able to see the leadership role that Chesapeake has taken in supporting organizations that promote the greater use of natural gas.

We believe it is vital to the health of our industry and our country and we welcome your financial support if you agree with our mission and our message.

We also hope will you download our annual report and take the time to read our message in there about clean, affordable, abundant, and American natural gas.

Before I turn the call over to the moderator for questions I did want to highlight an interesting coincidence in our financial results.

If you'll turn to page two of our release and look at the table of information we provide there, please notice that in this quarter and in the year ago quarter Chesapeake's price realized per Mcfe was exactly the same at $9.33 per Mcfe.

However, because of the 31% increase in our production and only a 2% increase in our operating cost to $4.43 per Mcfe, our adjusted net income per share was up 25% in just the past year, again on a flat price realization per Mcfe.

Going forward, we believe there will be a very tight correlation between production growth and per share increases in net income growth and net asset value growth because so many of our costs are either locked in or are not likely to increase.

For example, in addition to the strong hedging positions in place that help us capture very strong margins, we have many competitive advantages through our substantial acreage position that reflect past costs rather than current values.

Through our vertical integration in the service business and through our enormous operating scale and leverage.

These advantages are enduring and I believe they will become even more distinctive and valuable in the years ahead as we, as Chesapeake continues to offer a unique combination of growth, scale and play diversity at a very attractive valuation to our existing and prospective shareholders.

One last thing.

I do hope you'll notice we rolled out our 2010 forecast yesterday at a time when many other companies had not even revealed their 2009 plans yet.

Marc mentioned that we are forecasting the 15% increase in our production during this time.

We do provide this forecast early for a couple of reasons.

First of all, because we can.

Our business produces a very predictable result.

And, secondly, we would like to imagine what the value of our company might look like at year end 2010.

At that time we'll have 17 Tcfe of proved reserves and production increase from today of about 40%.

Because we believe our unit cost structure is relatively flat and because our hedges provide down side protection we look forward to net asset value and earnings per share increasing proportionately.

And as we create this value day in and day out we know that our stock price should at least keep pace with that growth in value.

We are now available to your questions.

Moderator, we will turn it over to you.

Thank you.

(OPERATOR INSTRUCTIONS) With will go to David Heikkinen with Tudor Pickering.

Good morning.

I had a question.

As you think about selling assets and then reinvesting that capital into thing like the Haynesville, can you talk about the rate of return difference between the Woodford assets that you're selling and the Haynesville assets that you're deploying that capital into?

Probably easier, David, to think about the rate of return difference from the assets we sold to VPP.

Marc mentioned that we sold those at 6.78% rate of return.

I think we are on record as saying that we think the Haynesville returns to us probably better than Barnett returns and I think those are well-established in the marketplace today.

So I will let other people do that math.

So we like divesting let's call it 7% and reinvesting at many multiples of that in new assets.

With regard to the Woodford it really, I can't tell you that answer because I don't know how people will ends up bidding for the acreage but again we think that in some other plays that we have our rates of return will be higher than what they have been in the Woodford.

And the Woodford has really turned around in the past year.

We trimmed some acreage a couple of quarters ago that we considered to be non-core.

And as we looked at our programs in the Barnett and in the Haynesville and Fayetteville, we recognize that we probably needed to high trade our portfolio a little bit and there's a lot of industry interest in the Woodford where a lot of companies have done well there over the past couple of years and so we are excited about the possibility of seeing those assets fall into some hands of people that it might be a better fit for them than for us.

So that's how we think about divesting of lower valued assets and putting them into assets we think have higher return.

And then as you think about the Haynesville and your Barnett position, the growth that you're projecting in the Haynesville, can you talk about access to gas markets, the impact on the Perryville hub, what you are doing to get your gas from the Haynesville to the East and then what you're doing as far as the Barnett gas that you're already producing as you project your impact on the moving gas East out of Texas into Louisiana?

And that's it.

Midstream company I think you're aware and it's a good bit of it is going to get dropped into this new MLP.

They've been working for the last year on the Haynesville challenge and nothing is easy these days but as I mentioned in our conference call on this when we first started to talk about the Haynesville, the fact that this gas is going to get priced at Perryville as opposed to being priced further back to the West means that somewhere between $0.25 and $0.40 better per Mcfe, than say Barnett gas probably, with lower gathering costs as well and perhaps lower compression costs also.

It's our view that probably Perryville over time becomes a more important pricing hub than Henry hub and we are confident that we will be able to get our gas out of this area and that from Perryville there are a number of additional projects that I know you're aware of some of which takes the gas to the Southeast which is probably the market in there that will show the most growth in electrical fire generation in ten years to come.

So it's never easy to get huge amounts of gas out of a play but it's going to be much easier to get them out of Northern Louisiana than it would be out of downtown Fort Worth for example.

Can you talk about commitment volumes that you're lining up already or is it too soon?

We are not prepared to do that yet but we don't intend to have stranded gas there.

We'll go next to Michael Hall with Stifel Nicolaus.

Great quarter, just wanted to kind of think about 2009, I guess, and kind of in context of the Woodford sale or announced intent to sale, should we thinking about additional high grading as you call it, going forward and to what extent do you think maybe there's upside to asset sale figures?

Michael, if you -- you may not have noticed this yet but on the bottom of page 19 in our outlook we, and on top of page 20 we did highlight that we plan to sell additional properties in 2009 and 2010.

And we included in there the words undeveloped leasehold.

So we think it's very reasonable to consider that not only do we like to sell proved reserves for let's call it $6 mcfe or $6.50 and make new ones at $2 to $2.50, I think it's also reasonable to be early to some of these plays and buy acreage at X and around and sell some of it at 5, 10, 15 times X and so I think we will continue to do that.

And I got a few e-mails and I guess the other guys did here about some concern about increase in CapEx.

And I think Marc did a nice job of going through it on a net basis.

It's really not that big of a deal in what we are doing something that people in the past have accused us of not doing which is basically high-grading the portfolio, not doing enough of that.

And so going forward, everywhere we turn we have acreage, there are people that want that acreage that were late to a play and it's one of our greatest competitive strengths, it's also been a kind of corporate finance challenge to be able to pay for all this stuff.

So we believe that we can trim up in some areas and sell some nice acreage to some other companies that maybe are looking for a new play and at the end of the day keep our CapEx equivalent to where our cash flow is projected to be in 2009, 2010.

So we've got a lot of options around that 14 million acres leasehold to do a lot of value creating things with it.

I did see the footnote and definitely agree.

I like the strategy.

It seems like that's a great way to make some quick value for shareholders.

What would be the impact on the cost pool then?

How do we think about that?

I would imagine--?

Sure, well -- this is Marc.

The cost of our full cost pool gets reduced by the gross proceeds from either of a VPP which is treated as a sale for accounting purposes or from the acreage.

Part of that could be undeveloped or unevaluated acreage and so it would reduce that part if it was strictly unevaluated acreage.

Almost anything we do is likely to have some evaluated portion, for example, the Arkoma stuff that we talked about, the Arkoma Woodford shale sale would almost all come out of the full cost pool.

And would further reduce our DD&A rate which is another way of saying that we are selling for more than we had originally cost us plus the future cost of development.

Great.

I appreciate the time and great quarter.

Thanks, guys.

Thank you, Michael.

We'll go next to Tom Gardner with Simmons and Company.

Good morning, guys.

Aubrey, I wanted to focus on the Marcellus for a minute.

We heard some cautionary statements by some companies with respect to how fast production can be ramped up due to infrastructure issues.

Do you share this view?

Yes, we've been on record now for over a year that this is a play that will go a lot slower than some parts of the Barnett, certainly slower than the Fayetteville and Woodford.

And a lot slower than the Haynesville.

If anyone has ever flown from New York to virtually anywhere west you've flown over Pennsylvania and it's a rugged area, beautiful area, but rugged and no real gathering infrastructure, certainly no high pressure or high air pressure gathering infrastructure, very little modern service company infrastructure.

So we've had a lot of experience in building gathering infrastructure in terms of Company infrastructure in Arkansas.

That was a little bit of a wild and wooly area to begin with.

So it will take several years.

But what Pennsylvania has that Arkansas doesn't is a lot of topographical complexity, so I don't think you are going to see that play go to multiple hundreds of rigs in a short period of time.

And that's why as you get excited about companies buying leases up there, you need to focus on how long the lease terms are because three to five years is not likely to get it for most leases up there.

So at any rate it's a play that we are thrilled to be the leading, leasehold owner in it.

We drilled our first well, spud our first well in northern Pennsylvania in the next, in May and our second rig comes in this summer.

So we concentrate our efforts to date on some of our legacy CNR acreage down in West Virginia and have been blocking up our position in Pennsylvania and so look forward to doing that.

The challenge to gas markets over the next years is going to come from more from a play like the Haynesville than it's ever going to come from a play like the Marcellus in my opinion.

Do you see any other issues in the Marcellus?

I've heard reports of water issue.

I don't know if they are speaking of procurement issues or potential water product issues.

Have you--?

I believe they are talking about surface water issues and we had the same problem in Arkansas.

And did a couple of innovative things there.

We built a lake and used, and then built a water distribution system.

So it's going to require companies that have the experience and scale to be able to create those kind of innovative solutions.

I will say to build a lake these days is not the easiest thing and it took us probably close to two years to get it done in the Fayetteville.

So it's just another reminder that if you're worried about the Marcellus swamping the U.S.

in the gas I think there are other plays to be worried about more.

At the same time we like the rock and certain parts of the play and that's where we concentrated our buying efforts.

I guess that's another thing, I've seen maps that the Marcellus that goes from southern New York down to West Virginia and if you do that math it's something like 40 million acres or 45 million acres of prospective Marcellus.

We think the play will be much smaller than that just like if you look at the Barnett today it's not a 12 county play.

It's really a two or three or four county play.

So we think that's the way it will end up for the Marcellus as well.

Appreciate your thoughts on that.

One last question on your view of gas supply growth for '08 and '09 domestic U.S.?

I think it will be higher.

Jeff, are we thinking --

We think it will be higher if everyone else is flat just because of us.

At our rate we are producing just over, just under I guess 4% of the Nations's gas and we are going to be adding close to 1% increase in the Nations's gas supply just ourselves.

So going forward I've told everybody who will listen that I think the U.S.

will be able to increase its gas supply by at least 5% per year pretty much as far as the eye can see until you get to a point where plays like the Barnett rollover and we don't see that happening probably until 2013, 2014, something like that.

So it's really just, it's a perfect match between a time when we can't attract much LNG here because of worldwide demand for natural gas but luckily it's at a time when we don't need much LNG because of the efforts of again probably a handful of the no more than two handfuls of companies that are leading the charge in finding new reserves in natural gas.

I think that's longer term how we ever deal with our transportation fuels problem in the U.S.

and around the world is we are going to have to rely on something other than something made from oil and in my view that's going to be abundant natural gas.

So I'm really excited about the role that natural gas is going to play in this countries' economy and I do believe it is going to be a durable economic advantage over some places around the world where gas prices might end up trading at over twice what they go for in the U.S.

At the same time I think there will be plenty of money to be made here by the producers.

Jeff are you working on a higher number than I am 5% for the year.

The EIA-914 data came out and the year over year increase for February was pretty large but last year's numbers had freeze off and you had the start up of independence hub which is not repeatable.

So on a sustained basis something plus or minus 2.5 to 3.5 bcf might be doable depending on the rig count.

We don't believe the whole industry increased its production by 10% year over year from February to February on any kind of a sustainable basis so I kind of throw that headline number out that a lot of people have been focused on the last couple of days.

Thank you, I appreciate your comments.

We'll go next to David Cameron with Wachovia.

Good morning.

A question for you, how do you think about production volumes, you will have doubled production volumes by the end of '09 from '05, '06 levels.

How do you manage that type of growth as a CEO and how do you put in place systems or infrastructure that doesn't allow costs to escalate et cetera when you are growing at that rapid a pace?

You anticipate it and that's one of the things that again I think is important about our ability to project growth.

We today are already thinking about 2010 here in the first part of 2008 because we can see it over the horizon.

And 2005, 2006 I think we could see some things over the horizon that have shown up.

If you come to see us on our campus and I hate to use this forum to drop this big news, but I think we are actually going to have an analyst day, what do you call it, I don't even know what to call it -- analyst day, whatever, we are actually going to have one and you are going to get to come to Oklahoma City and you will see 2,500 employees at work here, our headquarters complex which is before too long will be 1 million square feet, 40% of our employees are under the age of 30 so we have got a lot of hard working young people that we've been bringing into the business.

And I'd like to tell you it's easy to double the size of the Company over the past few years but it's not but we've got hard working cohesive motivated management team here that feels like they are collectively at the top of their games and we are excited about what we are doing and feel like we run a very, very tight ship and I think the best way to see that is to come see us in action.

So if you can't wait to this fall, come see us in the next couple of months and we will be happy to give you the grand tour.

And on the same lines, let me just ask one more question about the Barnett.

It seems you are one of the few companies this quarter that's been able to grow sequential production, I may be way off base on that but is that accurate just looking at the numbers from XTO EOG, Encana, Range, and you guys grew, can you talk about maybe what differentiates you, it is particularly a midstream issue.

I'm sorry, I missed the question, can you begin again.

When I look at volumes coming out of the Barnett from XTO, Encana, Range, et cetera, EOG, which did disclose theirs, but it looks like sequential production 1Q over 4Q is flat or down?

For the industry?

Just for those individual producers in the Barnett and you guys seem to grow.

So what's the difference?

We compete against a lot of companies that are obviously excellent companies.

I would just say that if you look at our sequential production growth and I do think we don't hide behind numbers, we give you our numbers every quarter so you can track our progress, I think that we have an excellent operation that is integrated from top to bottom and we have got midstreamers and we've got upstreamers that work together.

And we have the toughest area to get gas out of.

I mean, we are drilling inside of Fort Worth city limits.

So it happens to be, in all Tarrant county we think the best rock in the whole play but the hardest place to get gas out of and I would just tip my hat to our midstream teams working with our upstream teams that we've been able to move gas in ways that other people haven't and I think that's, again I think very few people really appreciate the scale of our operation.

And I think Marc would like to say some other things about how we have anticipated this growth and how we've built systems for it and why you don't see this Company report surprises that result from unanticipated bottlenecks in our growth.

And remember on a quarterly basis and we are building the equivalent of multi-billion dollar companies every quarter over the course of a year if we can increase our gas production 400 million, 500 million a day, that's the equivalent of a top 15 gas producer in the U.S.

We build that every year.

So we've been doing this for awhile.

But I think Marc has some thoughts he'd like to share.

That was exactly what I was going to chime in with.

If you think about the areas of integration and I don't follow every one of our peer group company's, that carefully but I suspect we are quite a bit different, and I just tick off a few things.

The rig business, I know we are completely different here.

We've got 81 rigs that we operate that we own that are custom built for our plays and are brand new.

We've got an additional ten rigs on order to satisfy the increase in drilling that we talked about in the several plays.

If you think about the midstream business we are operating one of the largest midstream businesses now in the whole country and we've built that through Jim Johnson and his crews help in the last three years.

This is a business that is going to be valued by independent parties within the next month at around $3.5 billion.

That's all been built by Chesapeake with an investment of about $800 million to date.

We have our own compression business where we supply our compression equipment now of which a lot of it we manufacture.

We have a 100,000 square foot compression manufacturing business leads by Al Lavenue and his crew and we are able to build equipment and not have bottlenecks on receiving that.

Then if you look at just the business from the third-parties that we do business with which are sort of the further downstream from our gathering and compression efforts, we've made take away commitments to half a dozen to eight or ten different large projects, some of which came up in the first question today with respect to Haynesville.

People recognize us as a leader and they are in there building facilities and we are in there committing to those facilities so that we can take it away.

Reservoir technology business, the same thing.

Last year over year and the analysts will see this when they come, this is a business where we are doing our own coring and shale analysis work and we don't have to go to the limited number of people that are capable of doing it or are even in the business to do it.

Our integration while we are not integrated in the sense of the traditional downstream, upstream major business our integration in the part of the business that we do focus on I think is well, either unknown our under appreciated.

Thanks, Marc, thanks, Aubrey.

We'll go next to Jeff Robertson with Lehman Brothers.

Thanks, good morning, Aubrey.

Yes.

Could you talk a little bit more about the recent increase in the rates you all have seen in the Fayetteville shale and whether or not that's tied to the increased laterals that you're drilling or is it that plus a combination of better completions or better geology or all of the above?

I actually think you have it there with all of the above.

I will mention that we were second into the play but this was not our first shale play and so we didn't get sidetracked on different kinds of completion treatments.

We went in with kind of slick water jobs that we've been using ever since the get go and so we started off drilling longer laterals than others and really completing the wells I think in the right way.

We also were early to shoot seismic.

This is a complicated area geologically and you want to stay away from faults.

And so having that 3D advantage I think enabled to us drill some longer laterals and to have fewer wells that were nonproductive or under par.

So looking then at our results you can see that in the first quarter 2008 and our peak rate was the highest that we've ever had, and our lateral length was longer as well.

So I think it's a combination of remember this Company drills more shale than any other company in the industry.

We are fracing different types of shale in environments all the way from far West Texas to up to Pennsylvania.

And so we have an information advantage over other companies that honestly we should be better than others because we've got more information.

Marc mentioned our reservoir technology center.

Not only can it evaluate shale cores but we can also model different completion techniques.

So, Jeff, I think it's really kind of the best of Chesapeake and some of these plays where we were able to bring to bear our petro-physical advantages, our geological and geophysical advantages and operating experience in shales and that's why I think when we started in the Fayetteville we were about 1.6 Bcfe per well and today we are up to 2.2 and my guess is over time we are going to try and continue to better.

That, again is the nature of these shale plays that we are in that they do tend to get better over time.

Secondly, you talked about the lease term in the Marcellus if you are 1.2 million net acres, about how much of do is you think is production?

Excellent question and I'm going to, and I need to get back to you on the exact number but knowing how much we had from CNR I'm going to guess that it's right around the 50% number.

But Mark Lester here thinks that's about the number as well.

I can tie that down for you.

Finally, Aubrey, in the guidance you all, it looks like you have added 1 million barrels to your oil guidance for 2009.

You're sharp.

Is that because of some of the unconventional oil plays that you referenced a few weeks back?

Jeff, I will just put it to you this way.

We've seen continued growth on our oil product.

We do think some of those plays are going to work.

And so the answer is yes.

Okay.

Thank you.

We'll go next to Brian Singer with Goldman Sachs.

Thanks.

I was going to ask another question on your oil plays as well.

It sounds like you weren't that interested in providing some additional color on that but perhaps you still could.

And maybe talk about how much income is CapEx you are assuming for oil related activities in the next couple of years?

Brian, we really don't break it out by oil and gas.

I think we covered this six weeks or so again ago when we said, actually five weeks ago where we said we had a number of plays that we thought were going to be very successful and we are working on those and not enough has happened since that time to really be more forthcoming.

I'll just remind everybody we are working on five different oil plays four of which are shale and they are in four different states and in various stages, various stages of activity.

I think we did talk about how oily our Colony Wash play is in Western Oklahoma and that's been a big area of growth for us.

Also we talked about, again five weeks ago the Mountain Front Granite Wash play and the southern extension of that is a very oily as well.

We've had several 500 barrel of day wells come from some horizontal Granite Wash wells down in the southwestern part of the Mountain Granite Wash play.

Again, a number of oil plays underway and as we are able to for competitive reasons to talk about it we will certainly do that.

We are well aware of the value of a barrel of oil these days relative to Mcf of gas and are focused on finding more of those barrels.

Can you give us an update on just where you feel like that you are in the process with regard to the land grab at 2.1 to 2.6 billion in acquisition guidance for this year less for next year?

How do you think about the areas existing versus new regions where you look to acquire and what kind of volatility around the '09 and '10 guidance do you expect?

Brian, almost, it's a very good question but almost impossible to answer because so much of it is dependent upon the actions of people that we'd like to control but we can't.

Our competitors.

And so really just we think these are good numbers based on what we know today.

Clearly a very large percentage of the increase in leasehold that we are projecting for 2008 is focused in the Haynesville and secondarily in the Marcellus.

Those are plays where acreage values have escalated dramatically over the past couple of months and so we have the option of either dropping out or continuing the play.

And we think it makes sense to continue the play.

Will there be a point at which time we won't want to?

Sure, that's theoretically possible.

But we started out with 300,000 acres in the Haynesville at a cost basis that will always be very, very substantially below what anybody else will have on any kind of acreage base that could even remotely approach that.

Same with the Marcellus that 400,000, 500,000, 600,000 acres that came from CNR, we allocated, I believe, $500 -- $500 million from the whole Company, I think it was about $150 an acre has been allocated to that on our books since we bought that, made that acquisition November, 2005.

So at any rate it's a lot of money but the opportunities are quite substantial as well, 100,000 acres of Haynesville leasehold might give you the opportunity to drill as many as 1,250 wells and you kind of do the math on how much CapEx that can require, that can require and how much gas that might bring forward.

So locking down these acreage positions early is credibly important but very expensive and along the way we have been and will be criticized by others in the financial community who would rather us pass by some of these opportunities but I believe that we are benefiting our shareholders for a few years if not decades by making these commitments to these acreage positions.

And I think we found some pretty innovative ways to finance some of this as well.

So I'm pleased to walk everybody through that today as well.

Thank you.

Okay, thank you, Brian.

We'll go next to Gil Yang with Citi.

Hi, Aubrey, in answer to a previous question you said you were that the Barnett is a three or four county play.

Can you comment on your certainty about the Fayetteville as to how -- of the 250,000 acres or 300,000 acres you have there, how consistent that acreage is and how confident you are that it's all prospective?

You said the Fayetteville I assume you meant the Haynesville.

I actually meant the Fayetteville, I could have asked the question of the Haynesville as well.

Okay, well, I wouldn't answer it, but you quoted acreage figure that I would like to correct, we have 585,000 acres in the, what is called the box and that's a box that I think is southwestern was probably first to put out and we have modified it somewhat.

We've drawn in some of the borders.

We had a bunch of acreage in the Eastern part of the state that didn't work.

The Fayetteville in my view has all four corners identified.

And so I'm very certain that statistically inside that box we are going to be able to generate the type of per well reserves that we've been talking about.

On the northern side it will be less but, costs will be less on other parts.

We do have some 4 Bcfe wells in there as well.

I think the Fayetteville is really a proven commodity at this point.

And we are going to drill and go to our table on page, our table on page eight, I think, gives you all the information you need to know about that really that will in that area using 80 acres we think that we've got another 5,400 wells to go and a 2.2 Bcfe we think that's on a risk basis 9.6 Tcfe and we have 429 Bcf proved so it's a 10 Tcfe play.

I know if that were a standalone company what it would be valued at because I can see how another company is valued and we would just say that there's an enormous amount of value in our Company that's not using that similar value and how we will get to that value we will just continue to drill it up and you'll see the production reserve grow.

Can you update us on what's going on in West Texas?

Yes.

A couple of things there.

We continue to kind of round the corner on the shale.

We have two new wells we talked about this morning that are our best wells to date in the play.

And are very economic, I think, at the best flow rates that we've seen.

So is that shale aspect to that play compatible with our other shale plays?

No, not yet.

But we are making progress in the commerciality.

The other thing probably maybe more important and we talked about this in the beginning is that we new we would stumble across some other conventional, unconventional plays and we've done that and we have two big plays out there that are not shale plays that we are in the process of beginning to develop and it may -- I can't -- I don't know if the shale there will ever rise to the level where it's competitive with our other shale play returns but I know that these other couple of plays could make us kind of forget why we were there in the first place and appreciate what we were able to find as a consequence of just being in a very big basin, grossly underdeveloped basin with a pretty large stratographic column of a lot of oil and gas in play.

So we are pretty excited about west Texas at this point.

Is that play right on top of the, or coincidental, in the same column as the shale plays you are talking about or is it in a different set of acreage?

No, it's on the same acreage as the shale play acreage was bought for.

Thank you.

We'll go next Scott Hanold with RBC Capital Markets.

Good morning.

Hey, Scott.

Can I ask you, I'm going to try to delve a little bit into the Haynesville, I know you are not really saying a whole lot at this point in time and it sounds like later in the year we may get some detailed results but can you kind of give us a sense on the thought process?

I know you obviously made it clear to the market that you think it could be a very impactful play, and just kind of get a sense regarding obviously a big capital raise to help fund the development and acreage purchase.

Why not just kind of give us a general sense of some of the initial results you've seen on your wells?

Scott, I'd love to if you promise not to tell anybody else and I know that you can't promise that.

And so we can't share that information.

We spent a lot of money to develop information that's proprietary.

If there was perfect knowledge of everything that we knew in the marketplace we might not be able to be as effective in buying leaseholds.

So there's a time and a place to talk about that play in more detail.

There's a lot of rumors out there and I'll just let you do your own independent research on that for now.

But there will be a day when we can be more chatty about it but today is not in our shareholders best short-term or long-term interest to talk more about it.

I mean just sort of on that point, is it your opinion that by providing an idea of what have you believe the IP rates or EURs or even well costs on what you're doing out there will give competitors an advantage with leasing out there?

I'm sorry, can you repeat it again, Scott.

Just to get to the point of not providing information just so it doesn't get out there, obviously to competitors, is there, do you believe it would put your competitors in an advantageous position buy providing some general information like, hey, we've drilled five wells, our IP rates have averaged X to Y and we did this at X cost, is that--?

I would think there would be pretty widespread information -- interest in that kind of information and so I think that's why we would prefer to not discuss it at this point.

Okay.

And moving to your hedge position it looks like you added some, it sounds like you are pretty bullish on the gas market going forward, can you kind of just give us a sense of what you're thinking, adding to your hedge position with, the potential bullish view going ahead?

Scott, yes.

I would just say and real quickly turn it over to Marc, I am bullish for a number of reason, the reason I am bearish is our own success at finding gas and that of a handful of other companies that I consider peers we are finding a lot of gas.

And I'm concerned, always concerned about the ability of the country to be able to handle the gas and so I think that we are not hedging at 7, we are hedging at 9.50 or 10 and that, that would guarantee the highest investment financial results for the company ever seen before.

So, Marc, I will let you go ahead.

This really hasn't changed over the last several years from our technical way of implementing our strategy.

You go back four years ago and our gas price range was probably 5 to 7 and kind of moving up a $1 per year, 6 to 8, 7 to 9, now we're at 8 to 10.

As far as the kind of an expected range, which I think would be viewed as pretty bullish.

It's above the Street's range on either what people are building in for this year or the next couple of years.

And we have had in the last month the opportunity to hedge a lot of gas, sometimes in the winter of '09 for well above $11 as you can see the average for 2010, $9.56, and what we've said is we are locking in for margin.

As we get to the higher end of a reasonable range, not to say that it couldn't spike out of there on weather events or world political LNG events and I it very well may.

I think there's as much upside of it spiking up at some point as there is of it going down.

But we want to ensure the budgets we've set forward get paid for and we want to ensure the profitability and the margin per unit that we've been able to report and continue to report and will be able to report.

So we are going to continue to layer in on these kind of spikes that take gas above a fair market value range that's pretty wide and not set in stone and that's what we have done and I think we will continue to.

Okay, yes, fair enough.

Maybe I'll ask the question a different way and kind of put you on the spot Aubrey, to see if will you answer my question.

Do you think gas prices now are a bit too high considering what you are seeing from your end as a growing producer here in the U.S.?

No, I don't think so.

I think worldwide gas prices being what they are, given coal prices where they are, given problems with Independence Hub I'm not surprised that you have gas prices where they are.

So going into the summertime, certainly I see a scenario where gas prices could be significantly higher but it's going to matter a lot on what the heat, what kind of heat we have and where we have it.

The best type of heat for us of course would be in Texas and across the South and into New England.

And I think that there's a high likelihood that Texas' weather will be different this year than it was last year.

So at any rate we are not -- we believe that this is a marketplace that is influenced by a lot of important fundamental factors right now and a lot of them are lining up in the bullish camp.

But at the same time I can look at our own production and look at other companies production and see that there's a lot more gas coming into the U.S.

market and I just think that's a good thing for the American economy but I'm not willing to expose our shareholders to price risk at $7 or $8 an Mcf when we can hedge it for $9.50 or $10.

Right.

What are the near term pricing on rig rates?

It doesn't sound like there's been too much pressure yet but what do you perceive in 2Q and 3Q and going into early '09?

It's just really a function of gas prices and higher gas prices go there will be pressure.

I would note though that what I saw yesterday that, I looked at it yesterday that the top 20 operators of rigs in the U.S.

have increased their rigs at a net rate that means that everybody else in the industry has actually reduced their rig utilization in the last 12 weeks.

So the kind of halves, those that have these big acreage plays, those that dominate these shale plays, that's where the rigs are coming into and I want to be clear that the business is not becoming easier for somebody who doesn't have the kind of acreage position that we and a handful of other companies have in these big plays.

If you are a private company out trying to drill a couple of wells a year, the world is not really a -- or the industry is not really a more favorable place to you.

I think you will see more and more consolidation of rig growth and no more than probably 25 companies.

And I wouldn't be surprised to see rig utilization actually fall off among the other 4,000 or 5,000 operators that are out there.

We'll go next to Mike Rehaut with Hodges Capital.

(Inaudible)The sale you made recently was about $6.50 an Mcf, the property sale that just closed, was that something that was negotiated several months ago before gas prices ran up or does that reflect the current gas price?

That was based on a hedging that we did within the past two weeks and it's reflective of strip.

Remember, we don't, there has to be a return to the buyer so we can't sell gas for what, for 11 years into the future on a present value for what it sells for today on a spot basis.

And Mike, just to be clear on how these things work, when we go out and present a package of properties to someone and they look at it, they are bidding a yield over LIBOR cost.

And the winner is the lowest LIBOR bid or the lowest spread over LIBOR and then it's up to us to go execute the properties in both locking down LIBOR and the gas hedges and so all that was done as Aubrey said once two or three weeks and just reflect what the current prices for both of those items are out into the curve.

Okay.

Thank you.

Thank you.

We'll go next to Biju Perincheril with Jefferies and Company.

A couple of quick questions.

I think you mentioned 120 million cubic feet a day in 2009 from the Woodford properties that you are selling.

Do you think that's a year end '09 or a average?

That's an average number, Biju.

Can you say anything about the capital that you would have spent on those properties, say in 2008 or '09?

I don't have that off the top of my head.

Steve is sitting here.

Steve, what kind of rig count were we projecting to run?

I don't know that we have the exact capital numbers.

I can do it pretty quick.

Quite a few rigs.

Yes, up to 10 rigs next year for '09 and then there's been about 20 non operated rigs running on our property.

Okay, makes sense.

Instead of throwing out a number we can get back to you on that.

That's okay.

Then moving on to the Haynesville, are any of the four or I guess the eight vertical and horizontal wells, are they producing a pipeline or are you setting in after you are testing those wells?

We have production from our horizontal wells and some actually are, two of our four horizontal wells are former vertical wells.

And then we also have three wells that are waiting on completion.

And horizontal wells, and those start completing, one completes next week.

So it will start to be a program that accelerates over time and at the end of the day all of our vertical wells either will or have been converted into horizontal wells.

Just to be clear though, when you say we are producing into a pipeline we have installed some gathering infrastructure there that takes the gas to a pipeline.

So we are both, we producing in our own gathering system and then selling to an intrastate line or interstate line.

And can you say anything about the decline ratios that you have seen on those wells and how does that compare to say what you are seeing in other shale plays not getting?

We are not ready to go there yet but I appreciate the reason for the question and the answers to it.

But it's one of those thing I talked to Brian about, it just would divulge competitor -- information to competitors that we are not ready to divulge yet.

Fair enough.

And then lastly, just taking a look at your conventional resource plays it looks like production is essentially staying flat.

Can you talk about, are those properties, are those properties candidates for outright divestitures or VPPs as you high-grade your portfolio?

I think the answer is yes, on both of those, we prefer VPPs simply because we like to get the tail back after 10, 11, 15 years, whatever it is.

So I don't know what that tail is going to be worth out there but at any time in the past it probably has been worthwhile to hang on to it.

You don't get paid that much for it up front.

That's why we have preferred going the VPP route.

To the extent that we do other VPPs more likely than not it would come out of that other conventional category.

Okay.

Thank you.

Thank you.

We'll go next to Marshall Carver with Capital One Southcoast.

I just had one question on the Marcellus.

You used to show vertical wells at 1.25 Bs in your summary tables.

Now you are showing 2 Bcf wells, likely horizontal, I'm guessing.

Would you be willing to share your decline assumptions of the type curve that you have for that horizontal well like you have in other plays?

There will be a time when we are willing to do that.

We have not drilled a horizontal well in Pennsylvania.

We have drilled horizontal Marcellus wells in West Virginia and again that's a level of detail that we are not willing to disclose at this point in West Virginia and just don't have enough information yet in Pennsylvania.

But I mention that those tables on page nine that we showed for the Barnett and Fayetteville certainly anticipate being able to do that some day for the Haynesville and the Marcellus.

Just thought I would try.

Thank you.

We appreciate your effort.

Is that it or anybody else?

Moderator do we have any other questions?

We'll go next to Joe Magner with Tristone Capital.

Good morning, a couple questions on your, some of your other shale plays that have been talked about in the past, the Deep Bossier, the Deep Haley and also the Alabama shale plays and wonder what the status is there and how those fit into how those fit into your go forward strategy?

Thanks, Joe.

We'll finish up on that.

Actually only one of those three plays is actually a shale play, that would be the Alabama shale plays who we are targeting both the Conasauga and the Chattanooga.

And we are drilling our second well there in our 50/50 partnership with Energen and in respect and deference to them I will let you approach them for information about that play.

We are the operator but they are the home team there and so I will move on from that.

The other two plays you talked about were Bossier and that's really Bossier sands.

Very excited about our leasehold position there.

Our first 3D has come in, I believe this summer, and hope to drill some of those big high rate wells in Encana, Burlington, and drilled.

And you also I think talked about Deep Haley.

That's where most of our assets are in a partnership with Anadarko and in that particular area we continue to drill good wells and some bad wells and continuing to try and improve the formula there so that we can increase our rig count, at this point we've just got some other plays that are commanding the larger increases in our rig count going forward.

So we will continue to be excited about all that we have in West Texas and feel like we are turning the corner on a number of plays there.

Okay.

With that, Joe, appreciate your questions and, moderator, we will go over and out here and appreciate everybody's interest in what we are doing these days.

Thank you very much, good bye.

Thank you.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.