As natural gas power Chesapeake moves more into oil, CEO says he hopes it changes perceptions

Gas power Chesapeake continues move into oil

OKLAHOMA CITY — Chesapeake Energy Corp. CEO Aubrey McClendon told shareholders Friday that he hopes the company’s gradual move into oil and natural gas liquids will diversify its image beyond that of a standard-bearer for natural gas prices.

During the meeting, McClendon said Chesapeake — long known for natural gas production and promotion — now is active in 12 oil plays in Oklahoma, Texas, New Mexico, Colorado and Wyoming.

Chesapeake remains one of the nation’s top independent producers of natural gas, which accounted for about 90 percent of Chesapeake’s production in the first quarter of 2010. But that’s down 3 percent from the previous year, and McClendon told The Associated Press he foresees a day when Chesapeake’s revenues will be split evenly between oil and natural gas.

Because of Chesapeake’s image as a natural gas leader, its stock price has been tied to that fuel, McClendon said. He wants to end that connection.

“I think it’s going to be an important feature of the company going forward, that we’re not so tied to natural gas prices,” McClendon said. “Our view is that the world is short oil over the long term, and our country probably has plenty of natural gas.”

McClendon said market prices dictated that Chesapeake expand its oil inventory. Benchmark crude for July delivery closed at $73.78 a barrel Friday on the New York Mercantile Exchange, while natural gas closed at $4.781 per 1,000 cubic feet — a far cry from the summer of 2008, when the price peaked at $13.69.

“We’re paid to make money for shareholders, and right now … we’re going to be paid three to four times more for finding the oil” than for finding natural gas, he said. “I don’t foresee the company becoming an oil company, but I do believe that our oil production can increase to a level to where our revenues are balanced. That’s our goal.”

Chesapeake’s stock closed Friday at $24.64, up 23 cents.

McClendon said Chesapeake decided within the last two years that the horizontal drilling technology it has used to extract natural gas from shale formations could also be used to extract oil from areas previously thought to be unfavorable to drilling. That helped change McClendon’s long-held belief that the era of new North American onshore oil finds had ended.

Chesapeake hopes to reach a joint venture agreement within the next 90 days with another company in an oil play in the Eagle Ford Shale in south Texas, McClendon said. He also said BP remains a viable partner with Chesapeake in the Fayetteville Shale in Arkansas, even as BP struggles to deal with the massive Gulf of Mexico oil spill.

Chesapeake’s meeting lacked the fireworks of last year’s gathering, when one shareholder lectured McClendon for taking a $75 million bonus at the end of 2008 even as the company was losing billions in stock value.

The bonus was awarded after McClendon was forced to sell more than 31 million shares of Chesapeake stock — valued at $550 million and down from a peak of $2.2 billion only three months earlier — to cover bank demands for repayment of loans in October 2008.

Chesapeake’s stock went on a roller coaster ride in 2008, dipping to $9.84 in December, its lowest since August 2003. Chesapeake shares had reached as high as $74 the previous summer. The bonus raised McClendon’s total compensation for 2008 to $112.5 million, more than four times his $25.5 million pay package in 2007.

When he received the bonus, McClendon agreed to a five-year contract with Chesapeake that capped his annual salary at the 2008 level of $975,000 and limited his annual cash bonuses to $1.95 million.

Four of the six shareholders’ proposals discussed at the meeting dealt with executive compensation or stock transactions. All four were voted down, as was another proposal requesting Chesapeake’s board to produce a report on the environmental impact of hydraulic fracturing — a drilling technique that injects massive amounts of water, sand and chemicals underground to crack rock and force natural gas to the surface.

Former Oklahoma Gov. Frank Keating was among three men re-elected to Chesapeake’s nine-member board of directors.