Jim (cont'd):     

Yesterday Chesapeake priced $1B in senior debt… which is twice the amount they announced they were selling in the previous day… frankly that was a great sign for the debt market… if not for Chesapeake… since September 22nd Chesapeake has cut its capital expenditure and land acquisition budget by $9.8B all together… the company has temporarily curtailed its unhedged natural gas production… about 4% of its total production… lowering its active rate count… selling assets… it completed the sale of some undeveloped acreage in Arcamo and the Anadarko basin for $412 million…it is still trying to sale its south Texas assets for $450 million… and its mid stream business for $1B… plus there is the joint venture with BP that we like so much… that will ultimately give Chesapeake $1.9B… smackers as I would say … the companies business update was fairly positive… Chesapeake’s reserves 12.1 trillion cubic feet at the end of 2008... 239% reserve replacement rate… extraordinary… and its fining cost are $3.24 per thousand cubic feet… even with natural gas at $4.45 where we went out… it still makes sense for Chesapeake to explore… especially given that 2009 the companies hedged on 82% of its gas… we have to find out what price… it looks like Chesapeake has done what it needed to right size the business and shore up its balance sheet… although I prefer the safety of Conoco and BP, because of their big dividends… diversified operations… Chesapeake might be down here at $16 the way to go if you are betting on a natural gas comeback… but let’s check in with the man himself… Chesapeake’s CEO and our good friend Aubrey McClendon…

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Start of CEO Interview with
Aubrey McClendon, CEO of Chesapeake Energy...

Jim:        Mr. McClendon, welcome back to Mad Money. How are you?

Aubrey:   Thank you, Jim. I appreciate it very much.

Jim:        What the heck happened? There was a great ad campaign. The American people seemed to be completely understanding that we could be independent energy wise, that we have a cheap clean fuel. But somehow it just got lost, what happened?

Aubrey:   I think it got lost in all the economic turmoil of the fall. We started to worry about banks. We stopped worrying about how much oil we were importing. Oil went from $140 a barrel to September 30th it was $100 a barrel. The end of the year $40 a barrel. So I think it just got all lost in the greater concern about what is going to happen to the economy going forward.

Jim:        You do not think it is because it is basically just carbon, and this President just doesn’t favor anything carbon?

Aubrey:   Oh, I think this President favors natural gas quite heavily. I think his staff does and I think the leadership on capital hill does to. So I think over the next 5 to 6 years, or 8 years, in this two administrations perhaps you are going to see natural gas be heavily favored over more carbon heavy fuel such as coal and oil.

Jim:        Natural gas seems to be still in free fall. This $4.50 level, is it going to $3?

Aubrey:   I don’t think so. But anything can happen. It is a matter of the weather, and it is a matter of the economy. What we do know is this. That the fix is in. Rig counts are falling. We are going to see a recovery in natural gas prices in 2010 and 2011. The speed at which they do so is going to be highly dependent on the recovery in the economy. But our industry is doing it’s share to right size the level of production needed for the market place.

Jim:        Is everybody cutting back? I saw a lot of companies still pumping like mad.

Aubrey:   Well, everybody is cutting back the future cap x. Very few companies shut end production, because the variable cost of producing natural gas is quite low. So we go ahead and produce, but this is a commodity its supply declines by 30% per year if you don’t go out and drill new wells. So, we are in the process of fixing the over supply for natural gas. It is still the feel for the 21st century, way too early to give up… give up on natural gas to fix this countries environmental and energy problems.

Jim:        Okay, let’s cut to Chesapeake chase. You have been a faithful buyer all the way, we always followed you. And then you had a forced sale, tell us about the forced sale… whether… obviously I think you would have preferred not to have it happen… just give us what went through.

Aubrey:   I heard your admonition about not buying stock on margin, but I only heard it now. The reality is that I would not have owned 31 million shares if I hadn’t bought it on margin. And my view was that the company was in good shape. We had hedged our gas production. I thought the market for natural gas was going to continue to go up. I could have sold the stock along the way. I could have hedged the stock along the way. But I thought it was a dishonorable thing to do. I couldn’t look my shareholders in the eye and say I got out, you didn’t, very sorry. I am the captain of the ship, I said I was going to ride it down if it goes down. And I got caught up in something that was much bigger than me, which was a financial conflagration started by sub prime. And I would have gotten it wrong a million times out of a million. Never would have seen that coming.

Jim:        I think that is honest. Most people will not admit that they didn’t see… most people including our government were saying look there was nothing they could do… of course, they could have done something… but I think you were caught up… it was $18, was that the price?

Aubrey:   Yes, more or less. In there.

Jim:        Are you allowed to buy it back?

Aubrey:   Not for 6 months. So not until April would I be allowed to do so. And I look forward to trying to rebuild my position in the company. I was a co-founder of it in 1989. I have always been one of the two largest share holders on a personal basis, a private basis. And I will probably never have that same level of ownership again. But I love the company, love what we do, love the fuel. And know that we have a very important role to play in the future economy of this company. And I am going to try to buy back as much of it as I can.

Jim:        The scale back is a bit of a come-uppance though. You had decided to become the largest. Can you maintain that after all these cutbacks?

Aubrey:   We never really set out to be the largest gas producer in the country. It happened, okay. Consequence of some good decisions that we made. But going forward we absolutely think that we will remain in that position. And we talk about come-uppance, I have been at this for 27 years. This is a hard business. I have probably only had 2 or 3 easy years in my life. We started the company with $50,000 20 years ago. And so it is a lot of hard work. And have we made some bad decisions, sure. But have we made many more good decisions, you bet. Ten years ago we were in Auseran, today we produce twice as much gas in the U.S. as Exxon does for example. This company is going to continue to grow going forward. And we are in the right place at the right time. With the intersection of environmental and energy issues today, we are set for a really bright future.

Jim:        Every time the stock jumps people say that BP is going to buy you. You have no intention of selling this company down here, do you?

Aubrey:   That is a decision for shareholders and for our board to make. I expect to retire from this company, though. And I believe that it will be at a much higher stock price than today. I am 49, and in Chesapeake years that means that I am closer to 99. But I think that I still have a good run in front of us. And the company is exceptionally well positioned to do well here.

Jim:        Let’s talk about the hedges. What is the price that you have locked in?

Aubrey:   We were about 80% hedged at around $7.50 for 2000.

Jim:        Which is about $3 more than the current?

Aubrey:   That is right. So we should be able to make about $2B, or have about $2B extra of cash in 2009 than we otherwise would have. And that is how we run our business. We are willing to give up some upside in gas prices in exchange for having more money than we otherwise would have in a down time. This is when you make money in this business. When prices are low. People are disparing, and that is when we make our best deals. It is when we drill our best wells.

Jim:        Has the country pulled back entirely? I mean we were discovering shale, after shale, after shale. Have we kind of done that? Or are there still some unexplored areas?

Aubrey:   Well, I think the game changed when we announced the discovery of the Haynesville Shale play in July of 2008. Gas prices were at $12 at that time. Today we are at $4. So we announced the biggest gas discovery in the history of the U.S. I think when the top five fields in the world, our stock goes from $74 to $9. So I lose all my stock. No good deed goes unpunished. It’s a reminder of that.

Jim:        There are still some pending sales. We mentioned Mid-stream, we mentioned some of that other stuff.

Aubrey:   Yes, we still got some asset monetizations that we want to do, but they are not mandatory in terms of meeting our goal this year.

Jim:        Is that in part because you got so much money in the yesterday?

Aubrey:   Actually, yesterday’s deal was just to term out some bank debt. No not increase, cap x is not going to go up as a result of it. But what we want to do is to continue to build cash and be able to pay down some debt in the future. And then the companies assets are going to grow by a third over the next two years.

Jim:        Excellent, Aubrey McClelland, thank you for being a stand up guy and coming on. Most people would not talk about a margin dell.

Aubrey:   Happy to do so Jim. Thanks very much. Hope I don’t have to talk about it a second time.

Jim:        Thank you very much. The CEO of Chesapeake... Thank you sir.
 

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