View Full Version : Letter from McClendon to CHK employees

10-15-2008, 08:36 AM
Letter from Aubrey McClendon to Chesapeake employees
Daily Oklahoman
October 14, 2008

Here's a letter from Chesapeake's Energy Corp.'s Chairman and CEO Aubrey McClendon to his employees on Friday, Oct. 10, the same day he disclosed he had to sell substantially all of his shares in the Oklahoma City natural gas company.

Dear CHKers: As you no doubt have observed, the world around us is changing daily, and not for the better - that is especially true in financial markets, where the current meltdown is having profound implications on our industry, on our country and around the world. The challenges our industry, country and world faces are daunting - however, among the three, I would prefer to have to deal with those of our industry, whose primary challenge is a combination of lower oil and natural gas prices, tougher credit markets, and, as a result, substantially lower stock market valuations - the country's and world's problems seem more intractable by comparison. Our company has not been immune to these challenges as several members of our bank group have been bought under duress recently, one of them went under (Lehman), and others are just plain struggling to stay in business.
The biggest challenges facing the big financial institutions are twofold: first, the biggest ones hold lots of illiquid financial derivative "assets" that few people know how to value and these assets currently have very little resale value or liquidity. Second, these large financial institutions' ability to conduct business relies on the confidence that their peers must have in doing business with them - this is called "counterparty risk". In normal times, most companies and big financial institutions don't think twice about doing business with another big financial institution, now most people worry if they can get their money out of a transaction with one of these big financial institutions because they have no idea about the financial status of the counterparty.
On the other hand, our company has "real" assets: natural gas and oil properties that produce products that are vital to modern human existence and that are easily valued and readily saleable for cash, both on a monthly basis and in the A&D market in bulk. In fact, we believe we have the nation's best natural gas assets and they form the foundation of our position as the nation's #1 natural gas producer. Our 36,000 wells produce every day and every month and we are paid cash for that production by reputable end users - companies such as utilities, industrials, pipelines, etc. The price of natural gas is set by many factors, but primarily by seasonal demand patterns that are driven mostly by unpredictable weather patterns - it's pretty simple actually, cold winters and hot summers bring higher nat gas prices and warmer winters and cooler summers bring lower nat gas prices. To reduce our exposure to those pricing swings, we hedge (or "lock in") a large percentage of our natural gas and oil production, often with the same financial institutions I described above, which these days is a bit disconcerting. Even though we are exceptionally well-hedged, it's hard to ignore that natural gas prices have declined by 50% in the past 90 days and oil prices are down almost as much.
So, where does this all leave us as a company? Actually, despite a ridiculously low stock price, in excellent shape. We have over $1 bln of cash on hand and we are well hedged at prices significantly above current prices with counterparties that are generally among the strongest still standing. We will generate almost $6 billion in cash flow in 2009 (or about $10 per share) and about $6.7 bln in 2010 (or about $11 per share), plus we have asset sales planned in each of 2009 and 2010 of several billion more. In addition, we have several property sales and joint venture initiatives under way that should allow us to end the year with even greater liquidity than we now enjoy.
Although we are in a strong position financially, in tough times such as these, we all need to be more careful with expenses. It is imperative that we negotiate lease prices reflective of today's economic conditions. So make sure you negotiate everything extra long and hard. What was a fair price 90 days ago for a lease is now overpriced by a factor of at least 2x given the dramatic worsening of the natural gas and financial markets. The same is true on drilling, completing, operating and overhead costs - in fact, everything that we do everyday to run this business should have a sharper focus on cost control and all of us can help in that regard. Together, we will emerge from these trying times as a stronger and even more efficient and successful company. For those who are relatively new to the company, look at our stock price chart from the late 1990's - we've been through tough times before, in fact, much tougher than today, and prospered and became the industry leader we are today.
Finally, let's talk about the stock price, and what can I say? It's ridiculous at a multiple of 1.5x 2009 cash flow, but it's real and my advice to all of you is just to ignore it. There is nothing that either you or your management team has done to reduce the value of the company by 80% in the past 90 days and 65% in the past two weeks - it's just investors in full scale panic across the globe right now, selling whatever they can. Over time, the stock price will take care of itself, but in the meantime, just ignore it - it does not reflect how well we are doing as a company.
So, while all is not well in the world at this moment, Chesapeake financially and operationally is actually doing very well. So let's keep our heads down, sharpen our pencils, tighten our belts, lower leasing and drilling costs, ignore the stock price and instead stay focused on how much net asset value the company is creating for our shareholders, how much natural gas and oil we are producing, reducing our finding costs, growing our reserves, identifying top notch JV partners, etc - in short, attending to those things that we can control, and ignore the stock price, something we can not control.
I hope you have a great weekend, and I appreciate your hard work and that of your colleagues on behalf of our shareholders. I am proud to be your CEO and promise to continue to direct this company with all the energy and enthusiasm that I've had since we began Chesapeake in 1989.
Warm regards,

Aubrey K. McClendon
Chesapeake Energy Corporation
6100 North Western Avenue, 73118
Post Office Box 18496, 73154-0496
Oklahoma City, Oklahoma

10-15-2008, 08:47 AM
I posted key parts of that several days ago, as it was sent last Friday.

Interestingly, what prompted this was clearly nothing in CHK operations but what happened with McClendon in his personal dealings, which he doesn't address here.