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Spring 2010

Executive Profile:

Henry Hood

"As a predominant player wherever we operate, we have a high profile and we have to be a leader in effecting policy. We are not just the most vocal, we are the most proactive."

Henry Hood likes the art of the deal. And his position as Chesapeake's Senior Vice President - Land and Legal and General Counsel gives him ample opportunity to pursue the deals he enjoys. Hood directs the company’s leasing, legal and regulatory activities, and works with employees throughout Chesapeake’s operating areas. He also provides legal expertise for the company’s innovative transactions, such as the joint venture partnerships now in place in four of the Big 6 shale plays. 

 
Henry Hood
Senior Vice President -
Land and Legal and General Counsel

What does he like best about his job? “Everyday is different,” he said. “If we are working on a very active leasing play, I will focus more on that. When we have a pressing legal issue, I will deal with that. My focus changes constantly and my role touches every aspect of the company.”

One of the biggest changes he has seen is significantly increased emphasis on regulatory issues. “When I joined the company we had one person in what was then called ‘compliance’,” he said. “Now we have more than 100 people in our industry-leading Regulatory Department. As a predominant player wherever we operate, we have a high profile and we have to be a leader in influencing public policy. We are not just the most vocal, we are the most proactive: educating and working cooperatively with state and federal regulatory agencies. If not us, who?”

Hood began serving the company as a consultant in 1992. “At that time the company was just going public and really didn’t need a full-time lawyer,” he recalled. “I was comfortable with that, but it changed as Chesapeake grew. At first, when I was still with the law firm, I would bring my briefcase over and walk the halls stopping to meet with all my clients. I felt like a clothing salesman.”

In 1995, Hood joined the company full time as Vice President – Land and Legal. Later, he was named Senior Vice President – Land and Legal, and in 2006 his title was expanded to include General Counsel.

“When I started with Chesapeake, the company operated in southern Oklahoma, the Anadarko Basin in Oklahoma and the Austin Chalk in Texas. We were incredibly busy, but our assets were more concentrated in these two primary districts; now we have 12 districts, all of which are much larger and diverse than those first areas. We had about 30 rigs then – and were already the third most active driller in the industry – but we were number #32 or so in volume with about 160 wells. We may have had a half million acres of leasehold total.”

He compared that to Chesapeake today: the nation’s most active driller operating 120 rigs; one of the top natural gas producers in the U.S. with an interest in 44,000 wells, and the nation’s largest leaseholder with more than 16 million acres.

His explanation for Chesapeake’s success? “We’re not a complacent company,” he understated, “partly because we are so dominant wherever we operate.

We have credibility and there is a presumption we know what we’re talking about.” Hood agreed that presumption is true, and added, “When you have thrice the activity of your nearest competitor, you gain experience very quickly.”

According to Hood, one of the most rewarding aspects of his Chesapeake career has been watching the company grow to be the employer of choice. “I now see my friends’ children working here, growing into the Chesapeake lifestyle and starting careers and families as Chesapeake employees; that’s very rewarding and makes me even more proud of what we have accomplished at Chesapeake.”

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The Technology: Production Water Recycling

Aqua Renew
By Brandi Wessel

Known for its pioneering and innovative spirit, it's no surprise Chesapeake is breaking ground with its newest initiative, the Aqua Renew program.

Founded under the concept of water recovery and reuse, the Aqua Renew program is utilizing state-of-the-art technology in an effort to recycle produced water. This naturally occurring water is generally laden with various minerals and travels from the producing formation through the wellbore to the surface with natural gas during completion and production operations.

Aqua Renew initiatives like the one at
the Brentwood facility in east Tarrant
County, Texas, establish working
partnerships with entities like the City
of Fort Worth.

 

“The quality of produced water differs greatly with varying amounts of salt, sand or silt, depending on the formation in which it is found,” said Rick McCurdy, Senior Engineering Advisor - Chemicals & Water Reclamation. “Due to its normally high salt content, reuse in completion operations has been considered impossible by the industry for a long time.”

The company began to intently focus on water reclamation and conservation after a 2006 – 2007 Barnett Shale drought started to affect drilling and completion activities.

That experience, along with Chesapeake’s involvement in the Barnett Shale Water Conservation and Management Committee, evolved into an agreement with the City of Fort Worth to study water evaporation systems as a potential way to reduce the amount of produced water being injected into saltwater disposal wells. Using an Evaporative Reduction and Solidification System (EVRAS) to capture heat generated by natural gas compressor stations, an energy source that would typically be wasted, a portion of the produced water is filtered and reduced to water vapor. The resulting clean vapor is then released into the atmosphere where it eventually returns to the earth as rain.

Since this preliminary reclamation project, Chesapeake’s focus on reuse and water conservation has become a company- wide endeavor, stretching from the Barnett Shale of north-central Texas to northern Pennsylvania. In fact, the Aqua Renew program is helping to right the long-standing industry assumptions that produced water is unusable.

“For years our industry believed that if you used anything other than freshwater with a clay control additive downhole, you would harm the ultimate potential of the well,” said McCurdy. “As a result, operators have only used freshwater resources in drilling and completion procedures. We decided to test that theory and see if it was true or if there was a limit to how much recycled water you could use without compromising the well production.”

Cory Snyder, Completion Foreman, inspects
operations at the Barrett Water Impalement in
Bradford County, Pennsylvania.

Almost a year and dozens of wells later, Chesapeake still hasn’t found a limit. In fact, the company’s northern and central districts of its Eastern Division operations are treating and recycling 100% of the initial produced water from the flowback process.

At each wellsite, produced water is collected and stored in on-site holding tanks where it is pumped through a 20-micron filter designed to remove any suspended solids or particles. The filtered water is then either stored in on-site tanks or transported to the next well scheduled for hydraulic fracturing, commonly referred to as fracing. The water is tested for salt content and total hardness to determine the rate at which it can be blended with freshwater to ensure proper quality and quantity for reuse.

“We still have to mix the recycled produced water with freshwater in order to ensure the proper mixture for fracing, but every gallon of produced water we can filter and reuse is one less gallon of water that has to be trucked to a disposal and one less gallon of freshwater we have to purchase and use,” said McCurdy.

Recycling produced water for use in hydraulic fracturing jobs
in the Marcellus Shale saves Chesapeake an average of
$6 million a year.

On average, the Aqua Renew process is able to filter and reuse almost four million gallons of produced water a month in Marcellus Shale fracing operations. With such large volumes of recycled water, the company is seeing more than just environmental advantages. Its accounting department has estimated that this aspect of the process is saving the company an average of $6 million a year in the Eastern Division alone.

The program is garnering results like these throughout Chesapeake’s shale plays: in the Fayetteville Shale of Arkansas, 30% of the water being used during the completion process comes from recycled produced water. And the Aqua Renew program is expected to continue to grow, thanks to recent regulatory changes in the state of Louisiana allowing for easier usage of recycled produced water and continued technological advances.

“We’re always evaluating new technology both on our own and through partnerships like the one we have with the Barnett Shale Water Conservation Group and others,” said McCurdy. “We’re extremely proud of the environmental implications the Aqua Renew program is providing. It’s an added bonus that these processes are also good for the company’s bottom line.”​

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The Play: Marcellus Shale

Endless Opportunity in the Endless Mountains
By Cheryl Hudak

The Endless Mountains of northeastern Pennsylvania are part of the vast Appalachian Mountain chain that extends from Alabama to Newfoundland.  Geologically speaking, the Endless Mountains are not mountains at all, but a plateau of sedimentary rocks, primarily sandstone and shale. And as a rich source of natural gas, those rocks are creating endless opportunities.

Chesapeake entered the Appalachian Basin in November 2005 with the acquisition of Columbia Natural Resources, a West Virginia based natural gas producer. By early 2008, the company had accelerated leasehold acquisitions and was preparing for its first drilling activities in the basin’s Marcellus Shale formation.

The Susquehanna River runs a wandering course through northeastern
Pennsylvania before emptying into Chesapeake Bay.

The Marcellus Shale, with risked unproved reserves of almost 17 trillion cubic feet of natural gas equivalent, net to Chesapeake, is likely to become one of the two largest natural gas fields in the U.S. Chesapeake has a number-one position in the play, with more than 1.6 million acres of leasehold and 24 operated rigs drilling around the clock.

Chesapeake’s Marcellus Shale drilling began in West Virginia and has since extended northeast to the Endless Mountain Region in Tioga, Bradford, Susquehanna, Lycoming, Sullivan and Wyoming counties, Pennsylvania.

“Northeast Pennsylvania is definitely one of the sweet spots of the Marcellus Shale,” said James Lardner, Geoscience Manager – Northern District, Eastern Division. “The Marcellus lies about 7,000 feet below the surface and runs about 280 feet thick here.”

“The latest wells in Susquehanna County, Pennsylvania, are very good,” noted Jim Govenlock, District Manager – Northern District, Eastern Division. “The Clapper 2H has been on line 167 days, producing over 12 mmcf/d on 70 of those days with peak production at 17 million. The wells in this area are great –even better performers than those in the Barnett Shale.”

Nomac rig 38 punctuates a wintry landscape in
Bradford County, Pennsylvania.

Not only are the Pennsylvania wells top performers, so are the teams who have undertaken the tasks of drilling and producing them. “We’ll have come from four rigs in March 2009 to 19 by spring 2010,” Govenlock said. “I think this may be one of the most aggressive ramp-ups in the history of the industry.”

Wise decisions are critical. “We’re in the beginning stages here,” explained Gary Gould, Manager, Reservoir Engineering. “We’re still experimenting at targeting our laterals within the Marcellus Shale formation, which varies from 50 to 280 feet in depth. One depth is certainly better than another here. We are also experimenting with completion techniques.”

In some areas of eastern Bradford and western Susquehanna counties, a limestone formation bisects the upper and lower portions of the Marcellus Shale. This feature, called the Cherry Valley member, cuts the Marcellus in half horizontally and can present a fracturing and reservoir barrier.

“In any shale play, if you figure out early in the game how and where to drill, you can multiply the impact of the decision thousands of times,” Gould said. “A $100,000 profit improvement in one well may not seem huge when you consider the enormous sums of money involved in drilling and producing natural gas. But when you multiply that by the 10,000 wells in a huge play like the Marcellus, you are talking about a billion dollars.”

Leasehold acquisitions are critical. Serena Branch, Land Manager – Northern District, Eastern Division, has led her land team through many challenges in the region. “We spend a lot of time educating landowners, helping them calculate the opportunities they gain by leasing with Chesapeake versus our competitors. This area doesn’t have an established history of natural gas exploration and production, so there is a lack of knowledge about the process and people are very concerned about it, particularly hydraulic fracturing.”

A long way from Fort Worth, James Mills,
Pipeline Technician, transferred to the
Marcellus Shale to share the expertise
he gained in the Barnett Shale in North
Texas.

The land group also deals with the region’s “non-Jeffersonian” metes and bounds land system, which results in legal descriptions of properties being bounded in ways quite different from the familiar systems of the Mid-Continent region. “Leasing is very complicated here,” Branch said. “The land descriptions and leasing forms are complicated and the legal aspects are significant. But our Wyoming County leasing program went very well, and we’re working with landowners who are forming parcels to strengthen negotiations."

According to Govenlock, the greatest challenge of developing the Marcellus Shale of northeastern Pennsylvania is the regulatory environment. “Drilling regulations are very stringent here,” Govenlock said. “Many of our people operating here are used to different rules because they have come from other areas of the country. We’re learning. And we are learning well.

“Chesapeake’s environmental and safety standards adhere strictly to all local, state and federal rules. And we insist that the standards of our contractors do too. We are firm about that. We recently had a training meeting for contractors and expected 600 people to attend – we had 800.”

How does an industry operate effectively in an area where it has a negative perception?

“We have to convince people that we are the most responsible company – a best friend and a good corporate neighbor,” Govenlock said. “We have to follow through on our commitments. If we say we’re going to do something, we do it."

Development of massive shale plays requires many decisions: which land to acquire, adherence to regulations, where to drill, how to complete and how to transport the gas to sales.

Its ability to coordinate development makes Chesapeake unique, according to Lardner. “We are learning what each of our groups brings to the table,” he claimed. “I’ve never worked so closely, so often, with Reservoir, Land, Operations and Regulatory departments. That not only makes Chesapeake a better company, it makes us better employees.”

The team extends far beyond the Appalachian Basin, all the way to the company’s proprietary core lab located on its Oklahoma City headquarters campus.

Building an infrastructure for the future, the
Mowery 2 pipeline is under construction.

“Much of our strategy will involve confirming and drilling pilot and core wells to learn more about the rocks than our competitors have,” said Lardner. “We are using our Reservoir Technology Center in Oklahoma City for all our core analysis. This is a great advantage from a time and quality perspective. Our information and analysis turnaround is a matter of weeks instead of months – or years.”

Each member of the company’s development team constantly refers to teamwork and opportunity when they discuss the Marcellus Shale.

“Chesapeake won the land rush,” said Gould, “and that gave us great opportunities in all the shale plays. My job is to help make the most of those great opportunities.”

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The Investment: Joint Venture Partners

Major Plays, Major Players
By Cheryl Hudak

Joint venture partnerships are agreements that unite two or more companies in a business undertaking. The companies each contribute cash or assets and then share in the profits of the joint venture.

Putting its own twist on the tried-and-true investment tool called a “joint venture,” Chesapeake gained powerful partners in four of the nation’s largest shale plays while it redefined the future of American natural gas.

•  In July 2008, Chesapeake announced the signing of a joint venture agreement with Plains Exploration and Production Company, selling a 20% interest in the massive Haynesville Shale play in northwestern Louisiana and East Texas for $3.3 billion of cash and future drilling carries.

•  In September 2008, Chesapeake entered into a similar joint venture in the Fayetteville Shale, selling 25%
of its interest in the Arkansas play to energy giant, BP, for $1.9 billion and future drilling carries.

•  In November 2008, Chesapeake completed its third joint venture, this time selling 32.5% of its interests in the Marcellus Shale to Norway-based Statoil ASA, for $3.375 billion and future drilling carries.

•  In January 2010, Chesapeake completed a fourth joint venture transaction, with Paris-based Total S.A. acquiring a 25% interest in the company’s upstream Barnett Shale assets for $2.25 billion and future drilling carries.

“Our company’s unique position as a leader in the aggregation of quality leasehold within four major shale gas plays, as well as our technological expertise in developing such resources, made Chesapeake an ideal candidate to attract world class partners,” said Doug Jacobson, Executive Vice President – Acquisitions & Divestitures.

The ventures are significant not only for their size but for their structures. “Chesapeake’s joint ventures are structured in an innovative way to offer wholesale participation in an enormous resource play, through a tax-efficient, staged funding of the acreage purchase,” explained Jeff Mobley, Senior Vice President – Investor Relations and Research.

“As we explored the most effective way to fund the development of the premier shale plays, we correctly recognized that a portion of the assets could be sold to industry partners at attractive prices,” Mobley continued. “This was far more appealing than issuing debt or equity securities at discounted evaluations.”

The company’s early entry into the shale gas plays and its experienced transaction teams resulted in Chesapeake capturing substantial profits, even as the industry and global economy melted down, according to Jacobson.

Through its joint ventures, Chesapeake sold minority interests in its shale positions for $10.8 billion versus a cost basis of $2.7 billion. The company was able not only to recoup its costs of purchasing acreage, but to retain 67.5 to 80% of the assets involved. In addition, the joint venture partners pay varying portions of drilling costs.

Developing billion-dollar investment deals was not simple in a financial atmosphere that went from boom to doom in a matter of months. Financial markets around the world took a nosedive. At the same time, natural gas prices encountered unprecedented volatility, with gas prices rising from $4 per thousand cubic feet (mcf) in late 2007 to $13 by mid-2008, only to fall to $3 in 2009, and recover to approximately $6 in February 2010, before falling back to $4 in March.

Chesapeake’s first joint venture was completed in July 2008, taking place at almost the peak of oil and gas prices.

“My sense is that most industry participants and investors were quite surprised and excited about the transaction,” said Mobley. “But at the time, it verified that our Haynesville discovery was for real, given that a well-respected company like Plains was willing to pay $30,000 per acre on a new and emerging play.”

The deal may also have signaled to natural gas markets that a new, low-cost supply was on the way. It may also have been a factor in the pullback in natural gas prices. Fortunately, Chesapeake’s insight into natural gas markets and its understanding of supply implications helped motivate the company to hedge a substantial amount of natural gas, lock in returns, mitigate risks, and ultimately contribute approximately $2 billion of realized hedging gains in 2009.

Chesapeake’s partners in the JVs gained a stake in some of the most promising natural gas plays in the world, and have opportunities to participate in future acreage on “promoted terms,” meaning they pay for their share of acreage cost, plus a premium to Chesapeake. They also gain access to Chesapeake’s industry-leading technical expertise and substantial scale in the development of shale plays.

Chesapeake routinely receives praise from its partners for its expertise across the board to take undeveloped leasehold and use its outstanding scientific knowledge base to convert those assets into production and cash-flow-producing properties in a timely and efficient manner.

Like most complicated transactions, Chesapeake’s successful joint ventures were the result of teamwork. CEO Aubrey McClendon served as the chief architect of the JVs, and along with Doug Jacobson was instrumental in negotiations with world-renowned industry partners, with Steve Dixon, Executive Vice President – Operations & Geoscience & COO, leading the technical presentations.

In addition to the efforts of senior management, employees in virtually every department of the company played roles in showcasing the caliber of its asset positions and operational talent, and by grinding through the documentation required to make these joint ventures successful for both Chesapeake and its partners.

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The Company: Our Workplace

Three Years & Counting
By Laura Bauer

For the third consecutive year, Chesapeake has been named to the FORTUNE 100 Best Companies to Work For® list. This year the company made a jump from #73 to #34.

“We are very pleased to have placed in the top 35,” explained Martha Burger, Senior Vice President - Human & Corporate Resources. “We feel we have created something unique at Chesapeake, and it means a lot to have it recognized by such a prestigious organization.”

Picking the top 100

To choose the 100 Best Companies, FORTUNE partners with the Great Place to Work Institute to conduct an extensive employee survey and culture audit. Two-thirds of a company’s score is based on the results of the survey, which is sent to a random sample of employees. The survey asks questions related to their attitudes about management’s credibility, job satisfaction and camaraderie.

One-third of the score is based on the company’s responses to the Institute’s Culture Audit, an in-depth questionnaire where companies detail their practices in the areas of recruitment, benefits, rewards and recognition, community service, communications, diversity, and training and development.

“It’s one thing to be validated by FORTUNE, but it means a lot to also be validated by our own employees – that they think Chesapeake is a great place to work and communicate such through the anonymous survey,” Burger explained.

 

What does it take to be a great place to work?

From field employees to lab technicians, the
company cultivates an environment where
employees feel appreciated and valued.

“There’s not a formula for creating a great place to work,” said Burger. “I think it evolves out of a company culture devoted to making and keeping employees happy. We work hard to create an environment where people feel valued, taken care of and like they are part of something special.”

Chesapeake’s amazing perks don’t hurt either: an on-site health and dental clinic and 72,000-square-foot fitness center at the Oklahoma City corporate headquarters, stock and bonuses awarded twice a year, a generous 401(k) match of up to 15% of pay, adoption and fertility benefits and coming soon to headquarters – an employee garden and on-site daycare center. These are only some of the advantages of being a Chesapeake employee and what keeps the work force of more than 8,200 smiling.

“Being a best company also helps our bottom line,” Burger explained. “Chesapeake receives approximately 10,000 job applications a month. Being on the list helps us recruit and retain the best and the brightest candidates.”

Oklahoma rocked the list

Oklahoma has three companies headquartered in Oklahoma City that placed within the top 35 spots and a fourth company with a location in the state, giving Oklahoma the largest per-capita representation on the FORTUNE list.

“Oklahoma’s footprint on the FORTUNE list further illustrates the city’s renaissance as a premiere environment to grow and prosper as a business,” Burger said. “Making the list is more than good news for Chesapeake – it’s good for the state.”

As Chesapeake continues to grow and expand, its reputation as a great place to work continues to play a critical role in its success by helping recruit employees from suits to coveralls who share a common goal – to be the best in the industry.

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Inside CHK

A closer look at Chesapeake’s people and progress

 

H.E.L.P. Champion

Chesapeake employees dedicate thousands of hours each year to the communities that they call home through volunteerism and community service. To recognize their efforts, Chesapeake has established the H.E.L.P. Champion award, recognizing an employee whose extraordinary spirit of volunteerism in a single focused project exemplifies the company’s commitment as a good neighbor. Each quarterly honoree receives a H.E.L.P. Champion trophy. In addition, a $1,000 donation is made in their honor to the charity or nonprofit organization of their choice.

Orgren’s love for architecture and renovation helped
restore the historic Harding Charter Preparatory
High School auditorium to its former glory.

The first H.E.L.P. Champion is Mark Orgren, Chesapeake Manager - Geoscience Technology. Orgren, who saw that the historic auditorium of Harding Charter Preparatory High School was in desperate need of repair, spearheaded a campaign to renovate the facility.

Designed in 1926, the auditorium had to be left aside when essential renovations were performed before the charter school’s reopening in 2003. Over the course of several weekends in autumn 2009, Orgen and a team of Chesapeake H.E.L.P. volunteers restored the auditorium to its former beauty.

Mark Orgren

“To see all of the people who came together to accomplish something like this is heartwarming,” said Orgren. Some of the new renovations include a rebuilt stage floor, resurfaced chairs, and repainted and detailed auditorium walls. The school is a historic preservation site, so great care was taken when its interior was repainted.

“The columns were painted a seafoam green color back in the 1950s,” said Orgren. “We cleaned them thoroughly and added more stately colors to reflect a more historic color scheme to match their design.”

With the interior redone, another anonymous donation allowed for the purchase of large drapes to cover the stage – a fitting curtain call for the project.

Chesapeake partners with Rebuilding Together, a tenant of
Chesapeake Community Plaza, for the organization’s annual
work day. More than 200 employees and their family members
volunteered for the build.

Chesapeake Community Plaza provides subsidized rent for nonprofits

The slow economy has taken its toll on many nonprofit groups across the country. For many, donations are down and they are struggling with basic administrative costs. To help reduce this impact, the company recently opened the Chesapeake Community Plaza in Oklahoma City, providing more than 67,000 square feet of office space to nonprofit groups at low monthly rates. “To date, 10 nonprofit groups ranging from the Oklahoma Visual Arts Coalition to Citizens Caring for Children have relocated offices to the space,” explained Teresa Rose, Chesapeake Director - Community Relations. “They can now focus on their mission instead of worrying about how to pay rent.”

Chesapeake named 2009 elite

Chesapeake has been named the Energy Producer of the Year for the second time in three years at the 11th annual Platts’ Global Energy Awards in New York City. The company also received the Platts’ Industry Leadership Award. The Platts’ Global Energy Awards recognize excellence and innovation by companies and executives throughout the global energy industry.

The award goes to – Martha Burger, Chesapeake Senior Vice
President - Human & Corporate Resources (left), McClendon
(center) and Jeff Mobley, Senior Vice President - Investor
Relations & Research, receive the Energy Producer of the Year
and Industry Leadership awards at the annual Platts’ Global
Energy Awards ceremony.

The Energy Producer of the Year Award is given for excellence in the upstream energy sector to companies that have set world-class standards in exploring for and finding new resources, maximizing technical excellence and innovation in resource extraction, and bringing complex or difficult projects to completion on schedule and on budget.

Judges applauded Chesapeake, saying the company did “a masterful job of campaigning for natural gas to become the fuel of the future,” earning the company this year’s Industry Leadership Award. The award is given to companies that demonstrate the vision to change the way the energy industry works or finds new ways of doing things that become the standard by which other companies are measured.

“We are proud of the accomplishments of our 8,200 employees and honored to be selected for these prestigious awards,” said Chesapeake CEO Aubrey McClendon. “Our industry-leading position in the Big 6 shale plays has generated tremendous growth for the company and delivered new supplies of natural gas to consumers.”

The company was also a finalist for the Deal of the Year, CEO of the Year and Community Development Program of the Year awards.

Fortune 100 Best Places to Work