View 2016 Annual Report

Dear Fellow Shareholders:

In 2016, Chesapeake made significant progress in strengthening our financial position and improving our operational efficiencies, thanks to the commitment of our outstanding employees and the competitive advantages within our assets. While the low commodity price environment remains a challenge, we continue to make improvements and drive value across every aspect of our business.

Operating responsibly is a top priority, and as a result of our environmental, health and safety efforts, our worksites were safer in 2016. We are extremely proud of our employees for minimizing our environmental footprint, reducing motor vehicle incidents by 22% and reducing our Total Recordable Incident Rate (TRIR) by 25% over 2015.

The strength of Chesapeake’s portfolio continues to grow as we capture efficiencies and develop new ways to leverage our technology to increase the value of our assets. By the end of 2016, our portfolio contained approximately 5,600 locations with a rate of return above 40%, at a specified price deck of $3 per mcf for natural gas and $60 per barrel for oil. During 2016, we drilled laterals of 10,000 – 15,000 feet in three of our operating areas, creating faster payouts and improved capital efficiencies.

Between September 2015 and the end of January 2017, we delivered on our commitment to improve our financial health by eliminating approximately $4.0 billion of leverage from our capital structure, including a reduction in both debt and preferred stock obligations. The reaffirmation of our revolving credit facility in April 2016 was a significant achievement, as were the numerous transactions that addressed our near-term debt maturities, which further enhanced our liquidity. We also divested approximately $2.3 billion of noncore, non-operated or low-return assets, surpassing our goal of $2.0 billion. Combined with similar transactions, these efforts helped reduce our total leverage by more than 50%, or $11.3 billion, between 2012 and January 2017.

Our focus on capital efficiencies resulted in cost improvements across our operating areas and helped us maintain production comparable to 2015 despite a capital budget that was roughly half of our 2015 investment. Our employees further reduced our cash costs in lease operating expenses (LOE) and G&A, resulting in savings of $331 million from 2015. Additionally, our relentless focus on cash costs and capital efficiencies delivered the lowest production expense per boe and lowest finding and development costs across our peer group in 2016.

In 2016 we continued to optimize our gathering, processing and transportation expenses and future commitments, resulting in a reduction of $264 million in these expenses compared to 2015. By divesting our Barnett Shale asset, we eliminated $200 – $300 million of annual midstream commitments impacting EBITDA through 2019. Since 2014 we have achieved gathering, processing and transportation commitment reductions totaling approximately $7 billion, with additional reductions expected in 2017 of more than $500 million.

While we are pleased with the tremendous progress made in 2016, we have more work to do. We are committed to removing an additional $2 – $3 billion of debt. We are targeting a return to profitable and efficient growth, highlighted by a 10% exit-to-exit oil growth rate from the fourth quarter 2016 to the fourth quarter 2017 and an additional 20% exit-to-exit oil growth rate from the fourth quarter 2017 to the fourth quarter 2018. Reducing debt and increasing oil production, combined with our employees’ tireless drive to lower cash costs, will enable us to reach an important financial goal — cash flow neutrality — which is achievable in 2018.

With six major assets offering significant growth potential and providing product and geographic diversity, we have great confidence in the competitiveness of our portfolio. Chesapeake’s leadership team and our talented employees remain driven to create differential performance and long-term shareholder value while maintaining our outstanding environmental, health and safety record. Thank you for your investment in Chesapeake.

R. Brad Martin
Chairman of the Board

Robert D. Lawler
President, Chief Executive Officer and Director