CHESAPEAKE ENERGY CORPORATION (CHK)

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� Natural Gas Markets

� Company Overview

Company Overview

Thesis points

Key risks

Value-added research

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� Thesis points

� Key risks

� Value-added research

� Current spot= $4.33

� Futures markets in contango

� Volatile industry

Futures markets in contango

Volatile industry

No perfect oil-gas parity

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� Volatile industry

� No perfect oil-gas parity

� Brief history

� Operations

Operations

Financials

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� Financials

� Founded 1989◦ Aubrey McClendon (current CEO)

� Started with 10 employees

Funded startup with $50,000

Entrepreneurial culture

Aggressive growth strategy

Recognized value of unconventional plays

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� Funded startup with $50,000

� Entrepreneurial culture

� Aggressive growth strategy

� Recognized value of unconventional plays

� Leading independent producer of natural gas

� Most active driller of natural gas

Primarily focused on production and exploration

Thrive in shale plays

Leader in technology

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� Primarily focused on production and exploration

� Thrive in shale plays

� Leader in technology

Revenues by Segment

Exploration and

Production

Marketing

Other Operations

Operations Geographically

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� Positioned for growth◦ Large 2008 investment

� Well-hedged through 2010

Scaled-down operations

Innovative joint ventures

Employee retention

Strong lessor reputation

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� Scaled-down operations

� Innovative joint ventures

� Employee retention

� Strong lessor reputation

Market ValuationCompany Current Price (3/23) 52 wk low 52 wk high EV/EBITDA P/E (fwd fye 2010) Debt/Equity (3/23)

CHK 19.50 9.84 74.00 4.4 x 6.89 1.17

XTO 35.37 23.80 73.74 5.8 x 14.44 0.58

RRC 45.85 23.77 76.81 8.8 x 45.85 0.25

SWN 34.14 19.05 52.69 8.9 x 17.33 0.06

HK 20.94 8.49 54.49 10.1 x 72.21 0.43

PXD 18.74 11.88 82.21 4.0 x 15.75 1.36

Average P/E (qtly avg trailing 5 yrs) 11

25%-75% 9 to 12

� Trading much closer to 52-wk low

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� Trading much closer to 52-wk low

� Stock price is highly correlated with natural gas prices which are currently low

� EV/EBITDA attractive, but more capital intensive operations boost EBITDA

� Fwd-looking P/E is well below comps and historical average

� Highly-levered

� Market over-concerned with debt management

Profitability

� Middle-of-the-pack operating performance◦ Cost-cutting should ease margins

Balance SheetHighly liquid5 flexible

Asset monetizationLong-term maturities

Tangible assets that ‘sweat’ cash

Financial PerformanceOutperforming competitors

One-time impairment in 2008 artificially lowered 2008 ROE

2006 2007 2008 Average

CHK 59.641 69.208 62.577 63.809

XTO 79.090 79.904 78.942 79.312

RRC 80.833 82.668 81.665 81.722

SWN 50.586 52.097 53.810 52.164

HK 78.401 77.980 81.268 79.217

PXD 79.366 74.521 75.099 76.329

2006 2007 2008

CHK 38.007 47.341 33.962 39.770

XTO 55.363 56.182 52.363 54.636

RRC 40.619 48.144 39.489 42.750

SWN 36.361 32.272 30.393 33.009

Gross Profit Margin

Operating Margin

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Balance Sheet

� Highly liquid@ flexible◦ Asset monetization

◦ Long-term maturities

◦ Tangible assets that ‘sweat’ cash

Financial Performance

� Outperforming competitors◦ One-time impairment in 2008 artificially

lowered 2008 ROE

HK 40.261 26.293 28.373 31.642

PXD 36.068 27.399 29.357 30.941

2006 2007 2008

CHK 19.716 20.603 12.149 17.489

XTO 27.370 31.714 21.295 26.793

RRC 15.929 15.732 9.663 13.774

SWN 13.308 11.336 13.433 12.692

HK (3.243) 6.033 2.633 1.808

PXD 19.112 5.774 7.953 10.946

Return on Equity

� Natural gas will rally

� Market misperceptions

Market misperceptions

Well-positioned for growth

Other considerations

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� Well-positioned for growth

� Other considerations

� Economy recovery improves fundamentals

� Rig reductions tighten supply

� Policy (US CC&T) supports LT price

Policy (US CC&T) supports LT price

Inflationary concern bullish for commodities

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� Policy (US CC&T) supports LT price

� Inflationary concern bullish for commodities

� Debt servicing will not be a problem◦ Liquid assets

◦ Operations scaled-down

◦ Access to financing

Operations scaled-downAccess to financing

Management is an assetDo not plan to access capital markets

Entrepreneurial culture slow to adapt to downturnAttracts employees

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� Management is an asset◦ Do not plan to access capital markets

◦ Entrepreneurial culture slow to adapt to downturn

◦ Attracts employees

� Access to capital for strong reserve replacement during downturn (239%)◦ Off-sheet financing

◦ Cash carries

Nation’s largest on-shore leasehold inventory“land grab” strategy

Largest 3D seismic inventory

Shale will dominateIncreasing margins as conventionals decrease

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� Nation’s largest on-shore leasehold inventory◦ “land grab” strategy

� Largest 3D seismic inventory

� Shale will dominate◦ Increasing margins as conventionals decrease

� Energy valuation unusual

� CHK is takeover target

Energy valuation unusual

CHK is takeover target

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� History of takeover rumors

� Top-notch asset base

Top-notch asset base

Reduced management stake

Instant gains from premium

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� Reduced management stake

� Instant gains from premium

� Sustained low NG prices◦ Liquid natural gas imports

◦ Prolonged economic recession

◦ Policy reform fails to pass

Off-balance sheet financing

Share dilution

Counterparty risk

Lack of transparency

Miss entry price

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� Off-balance sheet financing

� Share dilution

� Counterparty risk

� Lack of transparency

Miss entry price

� “Ratios and reduced capex plans shows discipline. They have lots of valuable assets that buyers line up for.”

� Chris O’Sullivan, Chairman and CEO, Paloma Resources

� “Simple! CHK has the best acreage, best operations, and the best development team.”

“Simple! CHK has the best acreage, best operations, and the best development team.”

Jim Flores, Chairman and CEO, Plains Exploration and Production

“They produce their gas in good markets and manage their acquisitions well. They got overlevered but they were in great

plays, so once the market recognizes gas can be worth something, they will go right back up.”

S.P. Johnson IV, CEO, Carrizo Oil and Gas

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development team.”� Jim Flores, Chairman and CEO, Plains Exploration and Production

� “They produce their gas in good markets and manage their acquisitions well. They got overlevered but they were in great plays, so once the market recognizes gas can be worth something, they will go right back up.”

� S.P. Johnson IV, CEO, Carrizo Oil and Gas

� “Chesapeake has a strong reputation with its lessors. The general counsel deserves a lot of credit.”

� Antone Peterson, Streit, Peterson, Hall & Keeney, LLP

� “Natural gas is the bridge fuel for the future. Because carbon emissions will be costly, natural gas companies are bound to come

general counsel deserves a lot of credit.”Antone Peterson, Streit, Peterson, Hall & Keeney, LLP

“Natural gas is the bridge fuel for the future. Because carbon emissions will be costly, natural gas companies are bound to

come out on top.”Dr. Mark White, PHD, Professor of Finance, McIntire School of Commerce

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emissions will be costly, natural gas companies are bound to come out on top.”

� Dr. Mark White, PHD, Professor of Finance, McIntire School of Commerce