Monday, May 7, 2012

Mason Hawkins Letter To Chesapeake

Aubrey K. McClendon
Chairman of the Board and Chief Executive Officer
Chesapeake Energy Corporation Board of Directors
c/o Jennifer M. Grigsby, Corporate Secretary
6100 North Western Avenue
Oklahoma City, Oklahoma 73118

Dear Aubrey and Board of Directors,

We urge the company to take action in three areas: debt targets, management
focus, and strategic options.

1. We do not think that managing to an arbitrary target like the "25/25 Plan"
makes sense. On the production "25," we would prefer that management
simply focus on maximizing operational cash flow after capex, instead of
going for a volume growth target and spending significantly above
maintenance capex currently to grow production to targeted levels. On the
debt "25," while we are in favor of the company reducing debt, we don't think
that management needs to be managing to a specific target there either. This
target has been twisted by some constituencies such that it is sometimes
confused with debt maturities actually coming due rather than a worthy goal.
We applaud current management efforts to do an Eagle Ford VPP, sell the
Permian assets and do a Mississippi Lime JV at a time of good oil prices. We
would also urge the company to accelerate monetizing any assets that are not
core to the E&P business (such as midstream & oil services assets) and/or any
more E&P assets which are not overly reliant on depressed spot natural gas
prices and where the company does not have a leading position. We also
believe that the company should make every effort to limit devoting
additional capital to these non-core assets. We applaud recent statements by
management that the era of large spending on new plays is over. While there
are theoretically attractive IRRs from some of the spend on midstream and oil
field services assets and we understand the appeal of vertical integration,
there are creative ways to monetize the company's already substantial
investments in these areas and share in some of this future upside without
having to use the company's balance sheet and capital spending to keep
growing the amounts devoted to these areas.

2. Our second set of concerns relates to management's focus, and the time spent
on unproductive communications. We urge management to simply put their
heads down and get the items in #1 done. Sell-side conferences, media
interviews with no hope of a fair hearing, and meetings all over the U.S. with
groups who may have only a casual interest but don't mind hearing the "story"
use valuable amounts of top management's time with no apparent benefit and
plenty of misinterpretation detriment. Trading volumes highlight that CHK
stock has far too many renters and not enough owners, so we would suggest
the current system of shareholder communications is not working.

3. The last point may be taken out of context, but is important: we urge the
board to be open to any offers to acquire the whole company. We
acknowledge that today's low market price is far below the company's net
asset value per share and would not encourage any action that would
generate a lowball bid vs. this NAV. We recognize the dangers of opening
such conversations which can sometime put a company "in play" at an
inopportune time. We therefore want to make clear that we would not
support a bid which might be a large premium to today's stock price but is
meaningfully below NAV per share. However, we also don't want to use
this large price-to-value gap as an excuse to refuse discussions with any
potential acquirers who would be willing to pay a price today that
recognizes the longer term value of the company.

/s/ O. Mason Hawkins
O. Mason Hawkins
Chairman & Chief Executive Officer

/s/ G. Staley Cates
G. Staley Cates
President & Chief Investment Officer

/s/ Ross Glotzbach
Ross Glotzbach
Senior Analyst & Principal

Disclosure: None


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