Chesapeake Energy (CHK)

Stock and Incurs Charge Related to Early Retirement of Tom L. Ward

In February, Chesapeake elected to sell its 17% ownership interest in the common stock of Pioneer Drilling Corporation (AMEX:PDC) as public company valuations for onshore U.S. land drilling rigs reached levels that substantially exceeded the private market valuation of comparable rigs. On February 10, 2006, Chesapeake sold its 7.7 million shares of Pioneer and received proceeds of $159 million. The sale resulted in a pre-tax gain to Chesapeake of $117 million, or a pre-tax profit margin of 275%, on an investment which had an average holding period of approximately 2.3 years. With proceeds from the Pioneer sale, the company acquired 13 U.S. onshore drilling rigs from privately-owned Martex Drilling Company for $150 million in February 2006.

The Martex acquisition bolstered the company’s 100% owned drilling rig subsidiary, Nomac Drilling Corporation, in which to date Chesapeake has invested a total of $283 million to build or acquire 34 operating rigs, has invested another $47 million in 23 rigs that Nomac is currently building and has budgeted an additional $157 million for completion of these rigs. In total, Chesapeake’s rig fleet should reach 57 rigs within the next 12 months, which should represent one of the ten largest drilling rig fleets in the U.S.

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Chesapeake has also invested $52 million in two private drilling rig contractors, DHS Drilling Company and Mountain Drilling Company, in which Chesapeake owns 45% and 49%, respectively. DHS owns 12 rigs and has three more rigs under construction. Mountain owns one rig and has ordered another nine rigs for delivery later in 2006 and 2007. Chesapeake’s rig investments have served as an effective hedge to rising service costs and have also provided competitive advantages in making acquisitions and in developing its own leasehold on a more timely and efficient basis.

Also in the quarter, Chesapeake’s co-founder, President and Chief Operating officer, Tom L. Ward, announced his retirement from the company and his resignation from the Board of Directors. As part of a negotiated separation agreement, Mr. Ward agreed to remain as a consultant to the company for no cash compensation through the term of his non-compete agreement, which expires on August 10, 2006. In recognition of Mr. Ward’s role as a co-founder of the company and a key member of the senior management team that has guided Chesapeake to the second best stock price performance in the E&P industry since the company’s IPO in February 1993 (and the #1 stock price performance since January 1, 1999 among all U.S. public companies with starting market capitalizations of greater than $50 million), the company’s Board agreed to accelerate the vesting of Mr. Ward’s unvested stock options and restricted stock. In connection with the early vesting, Chesapeake recognized an after-tax charge of $34 million during the 2006 first quarter. Subsequently, Mr. Ward exercised all of his stock options on March 14, 2006 and paid the company an aggregate exercise price of $37 million.