Chesapeake Energy (CHK)

Acquisition and Financial Rewards

In anticipation of today’s tight drilling rig market, Chesapeake began making a series of investments in drilling rigs in 2001. In that year, Chesapeake formed its 100% owned drilling rig subsidiary, Nomac Drilling Corporation, with an investment of $26 million to build and refurbish five drilling rigs. Chesapeake has invested a total of $123 million in Nomac’s 19 operating rigs, invested another $26 million in 25 rigs that Nomac is currently building, and budgeted an additional $191 million for completion of these rigs.

In addition to Nomac, Chesapeake has also made four other major drilling rig investments. The first of these was its ownership of approximately 17% of the common stock of Pioneer Drilling Corporation (AMEX:PDC), which it began acquiring in 2003. The company recently sold its PDC stock, realizing proceeds of $159 million and a pre-tax profit of $116 million that it will recognize in the 2006 first quarter. Chesapeake then re-invested the PDC proceeds to acquire 13 rigs from privately held Martex Drilling Company, L.L.P. for $150 million. The company believes it was able to acquire the Martex rigs at an approximate 33% discount to the stock market valuation of PDC’s rigs.

Chesapeake has invested $43 million in two private drilling rig contractors, DHS Drilling Company and Mountain Drilling Company, in which Chesapeake owns 45% and 49%, respectively. DHS owns ten rigs and has five more rigs on order. Mountain owns one rig and has ordered another nine rigs for delivery in 2006 and 2007. Chesapeake’s rig investments have served as a partial hedge to rising service costs and have also provided competitive advantages in making acquisitions and in developing its own leasehold on a more timely basis.