SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported) July 23, 2002 (July 22, 2002)
CHESAPEAKE ENERGY CORPORATION
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(Exact name of Registrant as specified in its Charter)
Oklahoma 1-13726 73-1395733
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6100 North Western Avenue, Oklahoma City, Oklahoma 73118
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(Address of principal executive offices) (Zip Code)
(405) 848-8000
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
Chesapeake Energy Corporation ("Chesapeake") announced a significant
gas discovery at Comanche Lodge in the Greater Mayfield area of western
Oklahoma's Anadarko Basin.
Chesapeake today announced the successful completion and initial sales
from a major natural gas discovery at its Cat Creek 1-19 well in the Comanche
Lodge Prospect in the Greater Mayfield area of the Deep Anadarko Basin in
western Oklahoma. During the past 24 hours, the well has produced 17 million
cubic feet of natural gas equivalent (mmcfe) per day through a choke size of
20/64" with flowing tubing pressure of 5,700 lbs. from the Upper Hunton
formation. This test flow may differ significantly from sustained production
rates. Chesapeake owns a 70% working interest and a 52% net revenue interest in
the Hunton zones in the Cat Creek 1-19.
Because the Upper Hunton's gas is sweet (only 2 parts per million (ppm)
of H2S) and the Middle Hunton's gas should be slightly sour (up to 300 ppm of
H2S), the company plans to produce the Upper Hunton separately for several
months until additional gas transportation arrangements can be made so that both
zones may be commingled. Any additional gas facilities needed to accommodate
Middle Hunton production should cost less than $1 million. To date, Chesapeake's
net cost to drill and complete the Cat Creek 1-19 has been $12 million.
In addition, Chesapeake has recently reached total depth on two deep
(20,000') exploratory Morrow/Springer tests in the Greater Mayfield area.
ITEM 9. REGULATION FD DISCLOSURE
Chesapeake also released the following additional statements in
connection with the announcements described in Item 5:
Based on initial gas sales rates, flowing tubing pressures and
geological and production analogies to nearby Northeast Mayfield Hunton wells,
Chesapeake believes the Cat Creek 1-19's gross proved reserves are approximately
25 billion cubic feet of natural gas equivalent (bcfe), 10 bcfe from the Upper
Hunton and 15 bcfe from the behind-pipe Middle Hunton.
Deep gas production was first established in the Mayfield and Northeast
Mayfield fields of Beckham County in the late 1970's. Since then, the Hunton
formation in this area has produced more than 520 bcfe and has an estimated
ultimate recovery (EUR) of 600 bcfe. The closest analogous field to Comanche
Lodge is Northeast Mayfield, where the Hunton will average an estimated EUR of
36 bcfe per well. These Mayfield area Hunton reserves do not include the
projected 250 bcfe (130 bcfe net to Chesapeake) of Comanche Lodge Hunton
reserves.
Virtually all of the area's Hunton production has been produced from
the Middle Hunton, which makes Chesapeake's discovery of production in the Upper
Hunton in the Cat Creek 1-19 especially significant. The company believes that
full development of the Hunton in Comanche Lodge will require drilling seven
additional wells, two of which should begin drilling in the next 60 days
offsetting the Cat Creek 1-19. Chesapeake believes these wells will reach total
depth of 25,000' within 240-270 days from spud at a gross completed per well
cost of $13-15 million. Targeted per well reserves are 25-35 bcfe.
The Morrow/Springer zones in this area have produced 110 bcfe with an
EUR of 235 bcfe (not including potential Morrow/Springer reserves at Comanche
Lodge). Chesapeake has a substantial inventory of Morrow/Springer prospects in
Greater Mayfield delineated by its extensive 3-D seismic database. The company
expects to keep 2-4 Morrow/Springer rigs active in this area for the foreseeable
future. Based on shows and log results from these two wells and from the
Morrow/Springer shows encountered in the Cat Creek 1-19, Chesapeake believes
that it can find more than 100 gross bcfe (50 bcfe net to Chesapeake) of
Morrow/Springer reserves on its Greater Mayfield acreage. Estimated completed
well costs are $5 million for targeted reserves of 5-15 bcfe.
Moreover, the Greater Mayfield area accounts for only two of the
company's 29 rigs currently active. Other deep exploratory wells with
significant potential are underway in the Arkoma, Bray, Cement, Chitwood, Knox
and Watonga-Chickasha areas of Oklahoma. The company's current inventory of more
than 1,500 undrilled locations includes approximately 50 additional ultra-deep
(>19,000') drilling locations.
Management Summary
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented,
"Comanche Lodge is a major gas discovery for Chesapeake and for Oklahoma's deep
gas industry."
For several reasons, Chesapeake has accelerated its drilling activity
in 2002 despite this year's downturn in gas prices. First, we are extremely
enthusiastic about evolving natural gas market fundamentals that we believe will
provide much higher prices in 2003 and 2004 than what we have seen to date in
2002. Second, we are taking advantage of today's very attractive drilling costs,
which are 30-50% lower than the drilling costs that prevailed in 2001. Finally,
in an effort to spur additional deep gas drilling in Oklahoma, we worked with
the Oklahoma Legislature to create a five-year severance tax abatement for
6/7ths of the state's 7.1% severance tax on production from all wells spud in
the next year that target formations below 17,500'. On a 10 bcfe Morrow/Springer
well in Greater Mayfield, these severance tax savings could offset up to 40% of
a well's total cost and will provide an additional incentive for continued
exploration of new reserves of ultra-deep gas.
Chesapeake's extensive prospect inventory of over 1,500 identified
drillsites and our exploration and operations teams that are capable of drilling
more than 300 wells per year on home-grown prospects provide our company with
the unusual ability to generate significant organic production growth. We
believe investors will increasingly appreciate this aspect of Chesapeake's
distinctiveness and will enjoy learning more about our company's considerable
exploration upside potential in the year ahead."
Earnings Release Conference Call Information
Chesapeake's management invites participation in a conference call this
Friday morning, July 26 at 8:00 a.m. CDT to discuss the contents of this release
and our second quarter 2002 earnings announcement that will be released after
the market closes on Thursday, July 25, 2002. Please call 913-981-5592 between
7:50 and 8:00 a.m. CDT on July 26 if you would like to participate in the call.
For those unable to participate, the call will also be available over the
Internet by visiting our home page at www.chkenergy.com and clicking on the link
under Shareholder Information or by going directly to www.ccbn.com. In addition,
a replay of the call will also be available through August 9 by calling
719-457-0820. The passcode for the replay is 519396.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 in both Items 5 and 9 herein. Forward-looking statements include
estimates and give our current expectations or forecasts of future events. They
are based on our historical operating trends, our existing commodity hedging
position and our current estimate of proved reserves. Although we believe our
forward-looking statements are reasonable, they can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. For example,
statements concerning future production and its contribution to future results
of operations are based upon operational, engineering and marketing information
available as of a specific date. These market prices are subject to significant
volatility. Factors that could cause actual operating and financial results to
differ materially from expected results include the volatility of oil and gas
prices, our substantial indebtedness, our commodity price risk management
activities, the cost and availability of drilling and production services, our
ability to replace reserves, the availability of capital, uncertainties inherent
in evaluating our own reserves and the reserves we acquire, drilling and
operating risks and other risk factors described in the company's 2001 annual
report on Form 10-K and subsequent filings with the Securities and Exchange
Commission.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
By: /s/ Aubrey K. McClendon
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Aubrey K. McClendon
Chairman of the Board and
Chief Executive Officer
Dated: July 23, 2002