Chesapeake's Strengths
We believe that our high-quality asset base, large inventory of drilling projects, successful acquisition program, low-cost structure, dynamic hedging program and entrepreneurial management distinguish our past performance and differentiate our future growth potential from other independent natural gas producers:
High-Quality Asset Base
Our producing properties are characterized by long-lived reserves, established production profiles and an emphasis on onshore natural gas. Based upon current production and proved reserve estimates, our proved reserves-to-production ratio, or reserve life, is approximately 14 years. In addition, we believe we are the third-largest producer of natural gas in the U.S. (second among independents). In each of our operating areas, our properties are concentrated in locations that enable us to establish substantial economies of scale in drilling and production operations and facilitate the application of more effective reservoir management practices. We intend to continue building our asset base in each of our operating areas through a balance of acquisitions, exploitation and exploration.
Large Inventory of Drilling Projects
During the 19 years since our inception, we have been the most active driller of new wells in the U.S. and presently, we remain the most active driller in the U.S. with 145 operated and 91 non-operated rigs drilling. Through this high level of activity over the years, we have developed an industry-leading expertise in drilling deep vertical and horizontal wells in search of large natural gas reserves in conventional and unconventional reservoirs. As a result of our successful acquisition program, active leasehold acquisition, and seismic acquisition strategies, we have been able to accumulate a U.S. onshore leasehold position of approximately 13.9 million net acres and have acquired rights to 20 million acres of onshore 3-D seismic data to provide informational advantages over our competitors and to help evaluate our large acreage inventory. On this very large acreage position, we believe we have approximately 33,700 net exploratory and developmental drilling locations, representing a backlog of more than ten years of future drilling opportunities at current drilling rates.
Successful Acquisition Program
Our experienced acquisition team focuses on enhancing and expanding our existing assets in each of our operating areas. These areas are characterized by long-lived natural gas reserves, low lifting costs, multiple geological targets, generally favorable basis differentials to benchmark commodity prices, well-developed natural gas and oil transportation infrastructures and considerable potential for further consolidation of assets. Since 1998, we have completed $18.4 billion in acquisitions at an estimated average cost of $1.44 per mcfe of proved reserves. Excluded from this amount is $8.4 billion for unproved leasehold and $1.1 billion of deferred income taxes established in connection with certain corporate acquisitions. We believe we are well-positioned to continue making attractive acquisitions as a result of our extensive track record of identifying, completing and integrating multiple successful acquisitions, our large operating scale and our knowledge and experience in the regions in which we operate. However, our present focus is on leasehold and making smaller tactical acquisitions around our existing assets instead of the larger strategic acquisitions we have focused on in the past.
Low-Cost Producer
Our high-quality asset base, the work ethic of our employees, our hands-on management style and our headquarters location in Oklahoma City have enabled us to achieve a low operating and administrative cost structure. During 2008 first quarter, our operating costs per unit of production were $1.74 per mcfe, which consisted of production expenses of $0.98 per mcfe, production taxes of $0.37 per mcfe and general and administrative expenses of $0.39 per mcfe (including non-cash stock-based compensation of $0.09 per mcfe). We believe this is one of the lowest cost structures among publicly-traded, large-cap independent natural gas and oil producers. We also believe that natural gas and oil leasehold costs will continue to rise in the U.S. Our industry-leading leasehold inventory, built through heavy investment during the past ten years, provides us a continuing cost advantage relative to competitors that are more recent large-scale acquirers of leasehold.
Effective Hedging Program
We have used and intend to continue using hedging programs to reduce the risks inherent in acquiring and producing natural gas and oil reserves, commodities that are frequently characterized by significant price volatility. We believe this price volatility is likely to continue in the years ahead and that we can use this volatility to our benefit by taking advantage of prices when they reach levels that management believes are either unsustainable for the long-term or provide unusually high rates of return on our invested capital. Changes in market prices for natural gas and oil directly impact the level of our cash flow from operations. While a decline in natural gas and oil prices would affect the amount of cash flow that would be generated from operations, as of the 2008 first quarter we have natural gas hedges in place covering 74% and 80% of our expected natural gas production in 2008 and 2009, respectively and 72% and 92% of our expected oil production in 2008 and 2009, respectively, thereby providing certainty for a substantial portion of our future cash flow. Our natural gas and oil hedges are detailed in our Outlook as of May 1, 2008. Depending on changes in natural gas and oil futures markets and management's view of underlying natural gas and oil supply and demand trends, we may increase or decrease our current hedging positions. During the 2008 first quarter, we realized gains from our hedging program of approiximately $214 million which increased our realized price per mcfe by $1.05. From 2006 through the 2008 first quarter Chesapeake's natural gas and oil hedging activities generated a total realized gain of $2.7 billion.
Entrepreneurial Management
Chesapeake was formed in 1989 with an initial capitalization of $50,000 and fewer than ten employees. Since then, our management team has guided the company through various operational and industry challenges and extremes of natural gas and oil prices to create the largest independent producer of natural gas in the U.S. with approximately 6,600 employees currently and an enterprise value of approximately $39.5 billion. Our CEO and co-founder, Aubrey K. McClendon, has been in the natural gas and oil industry for 27 years and beneficially owns as of May 1, 2008, approximately 29.5 million shares of our common stock.