Chesapeake Energy (CHK)

Company Adds 860 Bcfe for a Reserve Replacement Rate of 308%

Chesapeake began 2006 with estimated proved reserves of 7.521 trillion cubic feet of natural gas equivalent (tcfe) and ended the second quarter with 8.101 tcfe, an increase of 580 bcfe, or 7.7%. During the 2006 first half, Chesapeake replaced its 279 bcfe of production with an estimated 860 bcfe of new proved reserves, for a reserve replacement rate of 308%. Reserve replacement through the drillbit was 590 bcfe, or 211% of production (including 352 bcfe of positive performance revisions and 196 bcfe of downward revisions resulting from natural gas price declines between December 31, 2005 and June 30, 2006) and 69% of the total increase. Reserve replacement through the acquisition of proved reserves was 269 bcfe, or 97% of production and 31% of the total increase.

Total costs incurred during the 2006 first half, including drilling, completion, acquisition, seismic, leasehold, capitalized internal costs, non-cash tax basis step-up from corporate acquisitions, asset retirement obligations and all other miscellaneous costs capitalized to oil and natural gas properties, were $3.6 billion. The company’s total drilling and acquisition costs were $1.80 per thousand cubic feet of natural gas equivalent (mcfe), excluding costs of $1.6 billion for leasehold and unproved properties acquired during the period and $93 million relating primarily to tax basis step-up and asset retirement obligations, as well as downward revisions of proved reserves from lower natural gas prices. Excluding the same costs as described above, Chesapeake’s exploration and development costs through the drillbit were $1.70 per mcfe during the 2006 first half while reserve replacement costs through acquisitions of proved reserves were $1.84 per mcfe. A complete reconciliation of finding and acquisition costs and a roll-forward of proved reserves is presented on page 16 of this release.

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As of June 30, 2006, the estimated future net cash flows of Chesapeake’s proved reserves, before income taxes and discounted at 10% (PV-10), were $15.0 billion using field differential adjusted prices of $69.10 per barrel of oil (bbl) (based on a NYMEX quarter-ending price of $73.86 per bbl) and $5.72 per thousand cubic feet of natural gas (mcf) (based on a NYMEX quarter-ending price of $6.09 per mcf). In addition to the PV-10 value of its proved reserves, the net book value of the company’s other assets (including drilling rigs, land and buildings, investments in securities and other non-current assets) was $1.8 billion as of June 30, 2006.

Chesapeake’s PV-10 changes by approximately $310 million for every $0.10 per mcf change in natural gas prices and approximately $49 million for every $1.00 per bbl change in oil prices. The company calculates the standardized measure of future net cash flows in accordance with SFAS 69 only at year-end because applicable income tax information on properties, including recently acquired oil and natural gas interests, is not readily available at other times during the year. As a result, the company is not able to reconcile the June 30, 2006 PV-10 value to the standardized measure at such date. The only difference between the two measures is that PV-10 is calculated before considering the impact of future income tax expenses, while the standardized measure includes such effects.