This is McClendon's comments only, does not include the Q&A section, but there is definitely some interesting stuff in here, particularly about Barnett production constraints, Haynesville potential and pipeline issues, as well what's working best in terms of well completion, plus the assertion that the ng is coming out practically pristine (little to no refinement costs) and with such pressure (no need for compression). Good stuff. The full transcription should be coming out in a few days, but I couldn't wait and did this one myself, so please excuse any typos!

CHK 2nd qtr results conference call Aug. 1, 2008:
Aubrey McClendon, CEO:
Let's begin with a review of some of the recent negative comments from a colleague and a friend from another company...

When Chesapeake arrived in the Barnett Shale in 2004 we didn't arrive thinking it was a 10 county play. Instead our careful petrophysical analysis of the play predicted that the horizontal core and tier one area would include only about 1.2 m acres, situated primarily in Johnson and Tarrant counties. Other companies might have thought the play had greater areal extent, but we knew then and know now, the heart of the Barnett horizontal play is only about 1.2M net acres in size - almost exactly what we predicted four years ago. What has changed over the past 3 years is that our estimated ultimate recoveries in the Barnett have increased from about 2.45bcfe for every 100 acres to about 2.65 bcfe per every 55 acres. This increase has been caused by a steady improvement in the technology to drill, complete and produce horizontal Barnett wells.

We now believe the Barnett Shale will ultimately produce at least 60 tcf of NG, and the MAJORITY OF will come from Johnson and Tarrant Counties. But before the tcf # 60 makes you want to throw in the towel on current or out-year ng prices, please remember that it'll take 50+ yrs to to produce all that gas. Please also remember that the decline rate from the first month of a Barnett well til it's 12th month is about 65% and to it's 24th month, it's almost 80 percent. So yes we believe Barnett gas production will steadily increase over time, but depletion rates, pipeline constraints and urban drilling issues are likely to keep those incremental volume gains much more modest than most observers are predicting. Probably on the order of less than 750M per day per year over the next few years and then leveling off to a plateau of no more than 6 or 6.5 bcf a day a half a day by 2012 or so. This is a sharp contrast to the 1.5 to 1.7 bcf a day increase in production we have witnessed from the Barnett over the past year.

But back to the Haynesville Shale. Two years ago our scientists and petrophycisists began studying the Haynesville Shale, on the heels of our Barnett and Fayettville successes and concluded that the Haynesville could be an attractive target. I suspect other companies did not arrive at the same conclusion bc they did not have the right geoscientists or did not think that a shale as young or as deep as the hv could economically produce. We were fortunate in that there were over 100 historical penetrations of the hville in our study area. and We were also lucky to get our hands on a hv core from a well drilled by another company and once we analyzed by our team, this core confirmed the potential of the play.

We then outlined an irregularly shaped 'buy' area for leasing - something we have internally called 'the blob.' the area our scientists outlined two years ago was about 3 million acres in size, the approx same size as we see the play as being today. the blobs outlines have evolved over time, but the same basic area where we have focused our leasing is about 90% unchanged. What has changed is that we are now producing about 45MCFE of natural gas per day on a gross basis from our first 11 horizontal wells.

Let me tell you more about these 11 wells. The first well has been on about 300 days. and is on a 9/64th choke and is making about 700mcfe per day. It was a 5 stage frac job, and a short lateral. For 10 months, we have kept it on a 9/64ths choke, so that we can obtain more consistent rate and pressure information on this constant choke over time. 4 wells are short lateral re-entries, one of which is also only making 700mcf per day because of a mechanical problem with a fish downhole. The other three have been online an avg of 4 months and are producing around 3 million per day each through 14 or 16/64ths chokes, again for the same reason as the first well I described. the next 4 wells have been online an average of 2 months and have been producing an average of 4 million a day from 6-stage completion wells, and our final two wells are producing on 24/64ths chokes and are making a combined 20mcf of gas per day. One of these last two wells we have used - only one we have completed using 8-stages in our completion techniques and this well is making 14mcf of gas per day after it's 1st week, the best shale well we have ever drilled, among the more than 2k we have been involved in.

It is remarkable that after just 11 days - we are already - sorry, 11 wells, we are already able to bring in wells making 14mcf of gas per day. The learning curve in every other shale play has taken dozens if not hundreds wells and we know of no other shale well in any other shale play that is averaged more than 9 million per day during the first several weeks. from ehre on all of our wells will be long laterals with at least 8 completion stages and we will likely produce them on 24/64th chokes rather than the smaller chokes we competed our first wells on. This will greatly increase the likelihood of completing wells that will begin producing at 10mcf/day or even better. I'd also like to point out that the Haynesville is overpressured. Very substantially. And as a result, the Haynesville wells have a very real advantage, as the compression costs can be avoided for years as the reservoir pressure will exceed line pressure.

Another very positive attribute of the Haynesville will be it's superior gas price, compared to the Barnett, Woodford and Fayettville. In July, our Haynesville wellhead gas price exceeded our Barnett wellhead gas price by about $1.50/mcfe, and this month, with gas prices about $4 lower, it will still be about $1.35 higher than in the Barnett.

As to recently expressed doubts about our calculation of Haynesville gas in place, if you'd studied the 100 existing hville logs and taken Haynesville shale cores from your first 4 vertical hville wells, and had been able to evaluate them in your own proprietary shale core laboratory, then maybe you might have been able to do the same math on gas in place, and recoverable gas that we have. Our experience and analysis tells us that on average, every sq mi of core and tier 1 Haynesville shale contains an averageg of 180bcf gas in place. This is based on an avg formation thickness of 220ft across the 3million acres, original formation pressure of almost 10k psi, and porosity, permeability and water saturation measurements that, for now, we will keep confidential.

From that gas in place, we estimate that we will recover about 52bcf per sqare mile through the drilling of 8 wells per sqare mile. This would result in per well avg recoveries of about 29% of the gas in place, which is consistent with expected Barnett recoveries, although Barnett drilling is 50% more dense than planned Haynesville drilling. This is a somewhat smaller recovery factor than expected from the Woodford and Fayettville. Now how much gas is really in the Haynesville play? Well, that math is actually pretty easy as well. With about 3million acres in the blob, there's roughly 4,700 square miles. At 52bcf of recoverable gas per sq mile, thatquals about 245tcf of recoverable gas in the Haynesville, exactly consistent with what we have predicted from the beginning. So rather than this being hype, it instead an entirely reasonable number based on scientific examimation reinforced by actual drilling resutls to date. And those of you who have followed Chesapeake will recall how conservative we've been historically in estimating the initial potential of the barnett, fayettville, woodford and marcellus shale plays. our approach with the Haynesville has not changed. Of course, these reserve estimates are not 'proved' under current SEC definitions, nor have we ever claimed otherwise. btu rather these are reasonable early estimates of the total resources that we and others plan to produce over time -- a time like in the Barnett, that will probably require at least 50 years.

Now before you become concerned about longer term natural gas prices, as a result of the sheer size of the Haynesville, please remember some likely natural constraints to the play's growth: first, it's sheer size. The play will require decades to fully develop, and since much of the play includes leases that have been held by production for as many as 50 years, many companies will take a very methodical approach to developing their Haynesville asset. secondly the shale is found at about 11,500 feet deep on average and takes rigs that must have at least 1k hp engine, 600k lb rated mast, 1600 hp triplex pump -- and top drive. There are not many spare rigs with these capabilities, so the availability of rigs will be the second serious impediment to the play's production ramp-up. Third, we believe that for the next 2-3 years, there's probably NOT more than 1.5 bcf/day of incremental pipeline capacity out of the Haynesville, much of which we have tied up.

In the meantime, major new transmission pipelines WILL be planned and WILL be built to serve rapidly growing southeastern markets. but we do not believe you should model for the haynesville to be producing more than 1.5bcf/day by more than 3yrs from today. this pipeline constraint, along with slowing growth from the Barnett over the next few years and very little incremental growth possible for the next 2-3 years in the Rockies and ongoing declines in the Gulf of Mexico and in Canada, plus increasing demands from the US power sector should be sufficient in our view to prevent a US gas glut from developing and we believe gas prices will generally settle in an average range of $9-$11/mmbtu at Henry Hub pricing.

One further thought: please recall that roughly %30 of today's US gas production comes from wells placed in service in the past year and approximately 40% of US gas production comes from wells less than 2 years old. So, should gas prices decline further, we would see less drilling and therefore less production growth, if any, as these aggressive 1st and 2nd year declines kick in.

I have a few other thoughts on gas markets these days. First of all, by all accounts, production gains in 2008 have been simply extraordinary, running somewhat greater than 4bcf/day than last year's level. as we analyze those gains, we quickly note that three have been two one-time production gains that have accounted for about 50% of that increase: the Rockies Express Pipeline and the Independent Sub. taking those two one-time events away, we believe you are left with organic gains of somewhere around 2 to 2.5 bcf/day or so. we believe these gains are likely to be about the same or slightly less in 2009 and 2010 and we believe demand can grow quickly enough, particularly in the price range that I've outlined to absorb these additional volumes in the years ahead.

I'd next like to update you on our other big shale plays, and on our business strategy evolution during 2008.
As many of you recall, about 10 years ago we became very bullish about natural gas prices and created an aggressive business strategy focused on building a very signif asset base of US natural gas, especially in oncovential reserervoirs. however in the past yr you began to see a powerful new aspect of our biz strategy develop. We've now become an seller of assets occasionally rather than just a developer of assets. Why the change, you might ask? Well...in our view, if gas prices are likley to remain relatively flat for a while, in the 9 to11 range, then it makes sense to bring some of our more distant present value forward and monetize it at today's attractive prices. We've chosen two ways of advancing this present value forward. The first is through volumetric production payments, or VPPs. They give us the ability to monetize some of the low decline mature gas assets that are valued in the stock market from Chesapeake that are less than $3/mcfe and monetize them at about double that level. so far, including a 3rd VOO we should close on later today or Monday, we have sold VPPs for proceeeds of 2.3 billion dollars. The reserve volumes sold were 395bcfe, so we monetized those assets for cash, $5.90/mcfe and took the cash and reinvested it in our gas manufacturing machine that today is consistently developing reserves at around $2/mcfe. so if we can find it for $2 and the stock market only values it at $3, and we can sell it for nearly $6 through a VPP, and still keep the tail reserve, what's not to like about that?

In addition, for income tax purposes, these VPPs are treated as loans, so there's no cash - income cash leakage from the transaction. furthermore the proceeds from the VPPs go into our full cost pool of credit. so as we all (blah blah blah...) our BB rate (?) going forward, enhance or profitability and improve our returns on capital. In all likelhood, we will sell another 500 million VPP in the 2nd half of this year and probably 1 to 2 billon dollars worth next year as well. The second part of this new aspect to our biz plan is demonstrated by the recent transaction we entered into with PXP in the Haynesville. In that transaction we sold 20% of our 550k net acres for $3.3B. half in cash up front and half in cash over time in the next few years. To date, our total investment in the Haynesville is around 4B, so by selling 20% for 3.3B, we have recouped 80% of our costs, lowered our per acre average cost by 77% from $7,100/net acre to $1,600/per net acre and established a remaining value of about $22 per share for our remaining $80% of this unique asset. This transaction reduced our risk, lowered our cost and aggressively advanced present value creation forward and has provided valuation transparency for this enormous asset. In time, we believe this acreage will be worth at least $50k/per net acre to us, or $37/share. I might note that last week there was an announcement of a transaction in the Barnett that valued non-producing, high quality Tarrant County leaseholds at more than $50k/net acre. If it happened in the Barnett, it will happen in the Haynesville over time.

The next two areas for potential partnerships will likely be in the Fayetville and in the Marcellus. We are also planning to pursue one in the West Texas shale play, because we have recently drilled a series of excellent wells there. So in the past, once we found gas, we only had one way to make money from it and that was to sell the gas over time as the well gradually depleted. Now however, we have developed a way to accellerate that process, and that's by selling off a portion of our new plays to partners at very attractive prices. And similarly to the VPPs, as the sale proceeds go into our full cost pool as credits well in excess of our costs incurred to date, our future (DD&A?)rates should decline as well, which will lead to higher profitability and greater returns on our capital. Just at a time other companies are rising finding costs and higher DD&A rates, Chesapeake will be headed in the opposite direction.

Next I'd like to update you on some of our other important shale plays. First in the Barnett, we are currently producing about 775M per day gross, from the Barnett, and 500M/day net. during the quarter we averaged 466M/day in net from the Barnett, which is a sequential quarterly increase of 13% and a year over year increase of 126%. Clearly all is well in the Barnett for Chesapeake. We are running around 45 rigs there and are on pace to drill about 700 wells per year in that play for many more years to come. Our best new Barnett wells continue to be located in southeast Tarrant in an area of particular leasehold strength for where our 2008 drilling has averaged over 3.8bcfe per well compared to our overall average of 2.65 bcfe.

In the Fayetteville, we are drilling our best wells ever, due to improvements in where we position our laterals within the Fayetteville, longer lateral lengths, better completion techniques and the arrival of certain 3d info that helps us avoid geological pitfalls such as faults. Today we are producing approximately 150M/day from the play, are utilizing 17 rigs, many of which are drilling to HBP our 550k net acres of leasehold there. We plan to increase our rig count gradually to about 25 rigs in 2009 and then keep it there for the foreseeable future. Finally, I mentioned on our PXP conference call a month ago that we had drilled two very nice horizontal Marcellus wells. they are located in WV and are today producing on a combined basis of about 7M/day and we believe these wells have a combined EUR of about 11 bcfe. last week we read Range's announcement of their activity in southwestern Pennsylvania and their view that the horizontal Marcellus EUR as at 3.5 to 4 bcfe and their Tier 1 area - reasonable. Based on our study of their area and our own in northwest VA, we concur with their EUR estimate. That makes the play very very attractive. However, again I would caution natural gas observers to not expect the Barnett shale ramp-up for gas production from the Marcellus. There are way too many regulatory topographic, water and infrastructure issues that will keep the Marcellus from making a meaningful contribution to our countries gas production until at least the 2013-2015 time frame. That's why we are pleased that so much of our more than 1.6 million net acres of Marcellus leasehold is either HBP or on 10 year leases. we have plenty of time to work through the substantial challenges of developing this very promising play.

In conclusion then, I believe we've addressed these important questions this morning: why is the Haynesville so good, and why can it be as large as we have previously stated? Why should gas prices stay at an equally consumer and producer-friendly range of around $9 to 11/mmbtu? Why is it good to be hedged for the next two years just in case? Why our business strategy shift of advancing present value creations through VPPs and partnerships is working so well and how will it cause our business costs to go down as the industry is going up?