1989 – 93: The Beginning
Chesapeake was founded in 1989 by our founder and former CEO Aubrey K. McClendon and our founder and former President and COO Tom L. Ward, with only a $50,000 initial investment and an objective to build a sizable natural gas exploration and production company through the application of new technologies, primarily horizontal drilling. McClendon and Ward had worked together since 1983 in a private partnership, after graduating from college in 1981 at the height of the oil boom.
Focusing on this strategy of drilling horizontal natural gas wells in unconventional reservoirs, we built sizable leasehold positions in the Golden Trend and Sholem Alechem fields of south-central Oklahoma and in the Giddings field of southeast Texas. Our initial success helped grow our reserves and production rapidly and in February 1993, we completed an IPO to help fund our growth at a split-adjusted price of $1.33 per share.
1994 – 96: Continued Success
In 1994, we made a major natural gas discovery in the Deep Giddings portion of the technologically challenging Austin Chalk trend that launched a major growth phase for the company.
Through extensive use of horizontal drilling technology and an innovative geological assessment, we had outstanding success from this high-pressured, high-production-rate formation. In fact, from 1994 to 1996, we delivered the highest growth rate in our industry and the best stock price performance in the U.S among more than 8,000 publicly listed companies.
1997 – 99: Operational Disappointments and Commodity Price Collapse
In the mid-1990s, we attempted to extend the Austin Chalk play from southeast Texas into western and central Louisiana. This strategy ultimately failed as the play eventually was found to be less prolific and consistent in Louisiana than in Texas due to unanticipated geological and engineering challenges in addition to high drilling costs. Concurrently, natural gas and oil prices collapsed to their lowest levels in 20 years and added to our financial and operational challenges.
2000 – 02: Corporate Reinvention
As a result of our challenges in the late 1990s, we substantially modified our strategy from being solely a drillbit-oriented, short reserve life, Austin Chalk-focused natural gas producer and returned to our roots in Oklahoma.
Our revised strategy not only focused on using the newest technologies to find new reserves of natural gas, but also targeted a more diversified, longer reserve life and lower risk asset base and, for the first time, incorporated acquisitions into our business plan.
2003 – 07: Executing the Land Rush Plan
Through consistent execution of our simple and highly focused and revamped strategy, we rapidly grew through a relatively equal balance of acquisitions and drilling. In addition, we were one of the first companies to recognize and capitalize on tightening supply/demand fundamentals and the permanent upward shift in U.S. natural gas prices that began in 2000 and accelerated through 2007.
In addition, we were among the first to recognize that the combination of higher natural gas prices and improvements in horizontal drilling and completion technologies would enable the industry to develop vast new supplies of natural gas from unconventional reservoirs such as fractured carbonates, tight sandstone and shales such as the Barnett Shale and Fayetteville Shale.
During this time, we rapidly increased our acreage positions in these unconventional plays as we won what we have called the “gas shale land grab.” We believed that by winning this land grab, we could establish Chesapeake as the premier U.S. natural gas producer for decades to come.
2008 – 2012: The Modern Chesapeake
These years mark a further evolution of the company’s strategy as we have become one of the nation’s largest natural gas producers and have led a complete reinvention of our industry. Gone are the days when flamboyant “wildcatters” drilled deep and expensive wells in the increasingly elusive search for undiscovered conventional natural gas reserves.
Instead, Chesapeake today leads the new natural gas industry that focuses on discovering massive new reserves of unconventional natural gas. Having cracked the technological code in plays such as the Marcellus, Haynesville, Barnett, Fayetteville and Bossier shales, we now have turned our attention to the manufacturing-like process of drilling tens of thousands of wells in these areas to develop some of the largest natural gas fields in the world. In doing so, Chesapeake believes natural gas can become the primary solution to many of our country’s and our world’s most challenging environmental and energy issues.
In recognition of the value gap between oil and natural gas prices, Chesapeake has directed a significant portion of its technological and leasehold acquisition expertise during the past four years to identify, secure and commercialize new unconventional liquids-rich plays. This planned transition will result in a more balanced and likely more profitable portfolio between natural gas and liquids. To date, we have built leasehold positions and established production in multiple liquids-rich plays on approximately 5.4 million net acres. Our production of oil and natural gas liquids averaged 143,000 barrels (bbls) per day during the third quarter of 2012, a 51% increase over the average during the third quarter of 2011, as a result of the increased development of our unconventional liquids-rich plays. In 2011, approximately 50% of our drilling and completion expenditures were allocated to liquids-rich plays, compared to 30% in 2010 and 10% in 2009. We project that the portion of our operated drilling and completion expenditures allocated to liquids development will reach approximately 85% in 2012, and we expect to increase our liquids production through our drilling activities to an average of approximately 130,000 bbls per day in 2012, 170,000 bbls per day in 2013 and at least 250,000 bbls per day in 2015.