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Executives

Aubrey McClendon - Chairman and CEO

Marc Rowland - EVP and CFO

Jeff Mobley - SVP of IR and Research

Steve Dixon - EVP, Operations and COO

Analysts

Tom Gardner - Simmons and Company.

David Heikkinen - Tudor Pickering Holt & Co.

David Tameron - Wachovia Securities

Michael Hall - Stifel Nicolaus

Eric Hagen - Merrill Lynch

Brian Singer - Goldman Sachs

Gil Yang - CitiGroup

Eric Hagin - Merrill Lynch

Michael Angst - TIAA-CREF

Jeff Davis - Waterstone Capital

Marshall Carver - Capital One

Monroe Helm - CM Energy Partners

Joseph Magner - Tristone Capital

Justin Hansen - Wells Fargo

Chesapeake Energy Corporation (CHK) Q3 2008 Earnings Conference Call October 31, 2008 9:00 AM ET

Operator

Good day everyone and welcome to the Chesapeake Energy Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Jeff Mobley. Please go ahead, sir.

Jeff Mobley

Good morning and thank you for joining Chesapeake's 2008 third quarter earnings conference call. Hopefully, you had a chance to review our press release that we posted to our website yesterday afternoon.

Before I turn the call over to Aubrey and Mark, I need to provide you with disclosure concerning the forward-looking statements that Chesapeake’s management will make during the course of this call.

The statements that describe our beliefs, goals, expectations, projections or assumptions are considered forward-looking. Please note, that the company's actual results may differ from those contained in such forward-looking statements. Additional information concerning these statements is available on the company's SEC filings.

In addition, I would also like to point out that during the course of our discussion this morning, we will mention terms such as operating cash flow and EBITDA and will also mention items that we believe are typically excluded from analyst's estimates. These are all non-GAAP financial measures. Reconciliations to the comparable GAAP measures can be found on page 16 of our press release issued yesterday afternoon. While these are not GAAP measures of financial performance, we believe they are common and useful tools in evaluating the company's overall performance.

Our prepared comments should last about five to ten minutes this morning, and then we will move to Q&A. Aubrey?

Aubrey McClendon

Thank you, Jeff. The third quarter of 2008 was the most successful, yet the most unusual in the company's history. On June 30th, Chesapeake’s stock price was $66 per share. Natural gas prices were $13 per Mcf and oil prices were $140 per barrel. Just 100 days later, Chesapeake's stock price was down 75% and natural gas and oil prices were down 50%. And yet during that 20 days and the 20 days since that period, the company's expected operating cash flow and earnings for the fourth quarter of 2008 and for the full year, 2009 and 2010 remained unchanged.

These are indeed unusual times, but I am absolutely convinced that better days lie ahead for all of us. Because we just hosted a two-day investor conference two weeks ago, Marc and I will both keep our comments brief today. From my part, I just wanted to share with you 10 observations about the quarter behind us and the world before us, and then I will turn the call over to Marc.

First, we open the third quarter with a bang, in announcing a very innovative sale of 20% of Chesapeake's Haynesville acreage position in the Plains for $3.3 billion in cash and drilling carry. This was a great transaction for both parties and established a $13 billion value for our remaining 80% in the Haynesville, a value that today ironically exceeds our entire market cap. That does seem very unusual to me.

In the Haynesville, our results continued to be impressive. We are producing more than 80 million cubic feet of gas per day there and our two most recent wells, both of which have the name Walton on them are producing a combined 25 million to 26 million cubic feet of gas per day.

Second, in early August, we completed another innovative JV transaction, this time in the Fayetteville Shale with British Petroleum to whom we sold 25% of our Fayetteville assets for $1.9 billion, leaving our remaining 75% position in the Fayetteville worth about $6 billion or roughly $10 per share which is about one half of our stock price today. For the record, only about 4% of our proved reserves are booked to the Fayetteville yet this transaction alone established a remaining Fayetteville value equal to 50% of our stock price; again, very unusual.

Third, after that we sold our Arkoma Woodford assets to XTO and the British Petroleum for $2 billion or over $3 per share and at the time of the sale less than 2% of our crude reserves were in the Arkoma, Woodford.

Fourth, also in August, we sold our third Volumemetric Production Payment or VPP for $600 million at a value of $6.27 per Mcfe. You might have noticed our year-to-date finding and net acquisition costs were only $1.35 per Mcfe. I like finding gas for less than $1.50 per Mcfe and selling it for up to four times that amount per Mcfe. I believe property sales can and should remain an integral part of our business strategy.

Some people seem to question the wisdom of that strategy, but I wonder why. Why hang on to every Mcf you find to sell at some distant time in the future at some unknowable price. Why not sell some Mcf now at a big profit and take some chips off the table. We think it makes great sense to do so and believe the credit markets will likely improve from here giving us more confidence about our ability to continue selling VPPs later this year and in 2009 and 2010. We also believe the asset acquisition market remains more liquid than other people give it credit for, and believe that will strengthen in 2009 and 2010 as well.

Fifth, our hedging positions demonstrated their value, as they created over $6 billion of mark-to-market value improvement during the quarter leading the record earnings of nearly $3.3 billion.

Sixth, our quarterly production reached a record level of 214 Bcfe; this is despite asset sales, involuntary hurricane shut-ins and involuntary price related shut-ins. Our asset portfolio is performing very well and as we outlined in our Investor and Analyst Meeting earlier this month, many years of continued production growth lie ahead, particularly given the ongoing impressive results from our big four shale plays; the Haynesville, Marcellus, Barnett, and Fayetteville.

Seventh, our proved reserves have increased to 11% year-to-date to 12.1Bcfe, or 2 billion barrels of oil equivalent even after sales of over 600 Bcfe of proved reserve during the first three quarters of the year. This was achieved by a very attractive year-to-date drillbit finding cost of only $1.94 per Mcfe for almost 2.3 Tcfe of additions.

Our finding cost goals for 2009 and 2010 remain the same and that is to find and develop about 3 Tcfe of natural gas every year for between $1.50 and $1.75 and to produce about one-third of that and add the remainder to our proved reserve.

We are excited about taking advantage of the upcoming significant reduction in drilling and completing costs as well as the almost $3 billion value of the drilling carries we have earned through various joint ventures.

As I mentioned at our Analyst Meeting, I also would like to highlight that the SEC is in the middle of amending the modernizing the reserve recognition standards, which we think will have a significant uptick -- will provide a significant uptick in Chesapeake's proved reserves such that it is possible by the end of 2009 and the beginning of 2010, Chesapeake could have 20 Tcfe of proved reserves.

Eighth, our DD&A rate declined 15% year-over-year from $2.57 -- $2.57 per Mcfe to $2.25 per Mcfe. We would suspect that no other large E&P company or for that matter any E&P company has been able to generate a similar reduction in their DD&A rate during the past 12 months, especially during the inflationary part of the oil and gas business cycle that we have experienced during the past year.

Our goal is to take advantage of the current deflationary part of the cycle, utilize our drilling carries, and execute further asset monetizations at attractive prices to drive our DD&A rate well below $2 per Mcfe for both 2009 and 2010.

Ninth, we remain optimistic that our previously announced asset monetization plans for the fourth quarter of 2008 remain on track. Our goal is to end the year with approximately $3 billion of cash on hand or bank credit availability and to grow that cash stockpile by at least $1 billion per year in each of 2009 and 2010.

Tenth, and in conclusion, I am enormously proud of our company's achievements during the third quarter. Although natural gas and oil prices have both dropped by more than 50% in the past four months, it is only a matter of time before demand growth kicks back in and supply growth especially in oil will inevitably lag -- and prices will likely rise in response and maybe very significantly. In my view, deferred demand growth is much easier and faster to restore than deferred supply growth.

I would like to end on an optimistic note. No matter how high oil prices become in the future, I believe we will always have sufficient quantities of clean burning affordable American natural gas to save the day and I look forward to watching it all play out very profitably for our shareholders in the years ahead.

I will now turn the call over to Marc before we head to Q&A.

Marc Rowland

Thanks, Aub and good morning. Happy Halloween to everyone. As Aubrey noted, we completed a two day investor conference here in Oklahoma City just two weeks ago and remind you that the webcast replay of that with slides is still available. So, I will be very brief here this morning.

In the asset disposition area, we continue to work, as Aubrey mentioned, on the Marcellus joint venture, the south Texas asset sales, where bids are due next Tuesday. We have had very good interest in those assets. On the VPP transaction, what we call VPP Number 4, we have had several serious indications of interest.

We closed on our South Oklahoma asset package for $180 million in proceeds. And our Chesapeake Midstream bank facility is now closed, at $460 million of committed availability.

We have worked hard over the last two weeks to restructure many of our kick out swaps for November, 2008, through October of 2009. We have generally restructured most of those, into straight swaps or collars. Most, but not all of these restructuring, shows up in our new hedging guidance contained in the press release.

Also, we are restructuring calls as we speak, previously written, we are restructuring those into collars as there is virtually no chance in $11 or $12 call will be "in the money".

Further reductions in CapEx, particularly, in Acreage acquisition are underway. And as a lack of new leasing activity occurs across many of our plays, acreage prices are falling, particularly, in the Barnett and in the Haynesville.

Finally, I would note, we have exchanged some convertible notes, highly discounted, for common stock in the last couple of weeks. And just to alert you, there will be an 8-K filing on that, this afternoon that I want to call your attention to.

Moderator, let us open up our question-and-answer session please.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Tom Gardner with Simmons and Company.

Tom Gardner - Simmons and Company.

Hi, Aubrey. How are you doing?

Aubrey McClendon

I am doing good, Tom. Thanks for asking.

Tom Gardner - Simmons and Company.

All right. Aubrey we were seeing CapEx reductions, 20% to 25% announced by publicly traded companies. Wanted to get your thoughts on what that meant to a reduction in rig count and how fast you think gas supply responds to that reduced rig count?

Aubrey McClendon

Tom, like everybody in the industry we have been thinking about that a lot. And I think, you know, over the past 60 days or so we pulled our own CapEx down by $4 billion, or so, for the remainder of this year, in 2009, 2010. We hit a high water mark of 158 rigs and in August we were down to 145 now, headed to a low of 128 by the end of the year. We do have contingency plans to take that further down, if we need to, as we have stated before. We will not outspend our cash resources in 2009 and 2010.

The exact number of rigs that goes away is really anybody's guess, but from my perspective, it would seem to me that, probably at least, 300 it maybe as many as 400 or 500, are likely on their way down. And previously, I guess, I would have thought that it would take well into 2009 to achieve those levels, but I think, with the credit crunch now, probably playing a bigger role even than lower gas prices, and affecting producer's drilling plans, I think, you will start to see that melt away pretty quickly.

The only reason that I think it might be stickier than what anybody from the outside looking in would say, is that companies often times have multi-well rig commitments, or even, multi month, or multi year rig commitments. So, that will keep things perhaps a little stickier, and maybe that is why, things have not dropped off as quickly as some people think.

So, with that, I suspect we will start to see much healthier supply/demand balances in the first part of 2009. Certainly by the summer of 2009, I think things will be back on the upswing, and I think, I can almost guarantee a much better 2010 than I would have guessed just a few months ago.

So I am pretty upbeat about where we are headed with gas prices say, in the next nine months and beyond, and also, I think gas will be treated very favorably, in a Obama administration, if he were to be elected. And, I think, that there are a number of other favorable macro-trends out there that will help natural gas prices in the years ahead.

Tom Gardner - Simmons and Company.

Thank you for that. With respect to the asset, M&A market, if you will, can you give us a sense on where that is today, relative to where it was? I mean perhaps as a fraction of value, what are you sensing? What does it take to get a deal done relative to what expectations might have been six months ago?

Aubrey McClendon

Well, I mean clearly values are down, but so is the value of the enterprise that is selling those assets. So, I think, on a relative basis things remain pretty much as they were, if you look at it just on a relationship between commodity prices, and asset prices, and companies, corporate values and asset prices.

So, we heard it two weeks ago at our investment conference, people think there are no buyers for assets in the industry, or that if there are, they cannot get any credit and we are just not seeing that, but we would get some feedback next week on an asset sale. We are working on another VPP as Marc talked about and have had multiple parties express interest in that. So clearly not the easiest time but in terms of whether or not there is just a complete shutdown in asset activity, I have never seen it in the past and I do not believe its true today and I think that we will be successful in achieving our objectives as we have laid them out for the fourth quarter.

Tom Gardner - Simmons and Company

Thank you for that Aubrey. And just one last housekeeping question then I will hop off. Just wanted to understand the driver behind the reduced Q4 guidance in yesterday's release?

Aubrey McClendon

Yeah, simply I believe its all responsible to the shut-ins. We have got about 100 million a day, net shut-in, I believe that is about 160 million a day, of gross gas shut-in. And we have seen some real dislocations in the mid-continent, gas price market in the last 60 days or so, and we expect these to continue into November, December is anybody's guess. But we decided to go ahead and in our guidance, assume that we kept those volumes off the market.

We are being affected by some [recs.] issues right now and some back-up issues that we think some pipelines that come on line in December of this year and also in the first quarter of '09, are likely to help fix, but Oklahoma gas prices are pretty poor right now and, as a consequence, we have elected to shut-in some of our Oklahoma production rather than let it go on the market at what we think would be prices that would diminish shareholder value.

Tom Gardner - Simmons and Company

I understand. Thanks for the color Aubrey.

Aubrey McClendon

Okay, Tom. Thanks for your question.

Operator

Our next question comes from David Heikkinen with Tudor Pickering Holt & Co.

David Heikkinen - Tudor Pickering Holt & Co.

The question kind of looking at the amendments to senior note in ventures and the prepayment or conversion of the converts and then the also repayment of the $300 million of notes. Can you just walked through the logic of each of those transactions? And what the benefits are of each?

Marc Rowland

Sure. I will take a stab at that David, sort of in reverse order. The notes that we have redeemed for common stock, I think that is a pretty obvious value creation, equation. These notes are currently in the market trading for as little as $0.45, $0.48 on the dollar and we are able to go out and give current value of common stock to redeem those, not costing us anything in cash and equating to selling stock at substantially higher values if you use the inverse of that. And that is before we count the value of interest saved and future potential dilution, when the stock returns to levels that were originally contemplated when those issues were issued.

On the amendments, that the single amendment that we passed around that covered several qualifying or quantifying. I guess, situation that was simply to allow us to freely transact our bank credit facility in Chesapeake midstream. And there was and some are actually what we call our investment grade and ventures. There was some question as to whether having a restricted versus unrestricted conflict, which was not contemplated in those in those indentures. It is fairly technical but whether or not that was actually doable.

So, we were making sure that that language was clear and acceptable for the transaction that we did and we had to do that to actually put in place our credit facility, down at the Chesapeake midstream level, which is an unrestricted subsidiary for our non-investment grade indenture language. Was there one other question, embedded…?

David Heikkinen - Tudor Pickering Holt & Co.

The P&L redemption that started in the third quarter, as a follow on from the nets that we issued in the second quarter? $300 million issue?

Aubrey McClendon

$300 million.

Marc Rowland

The $300 million issue was simply called at the time, and replaced because the replacement debt costs were less than the call value, and actually we extended the maturities on that, we were able to call them at no present value costs. And that is something that we have routinely done when it makes sense. We actually have another note issue that is callable as of this past September. Obviously the interest rate costs on the existing notes are much less than what we could replace it for. So, we have not chosen to call those.

David Heikkinen - Tudor Pickering Holt & Co.

Okay. And on the comments about new SEC reserves, a lot of that additional reserves is just bookings offset to horizontal wells. Can you kind of walk through where you see the biggest changes? Is it mainly just in your horizontal shale’s or what are your initial thoughts there?

Aubrey McClendon

It is wherever -- I think the words are continuous accumulation reservoirs. And ideally or more likely that does cover the shale’s. But there will be some plays in our say, in Oklahoma perhaps up in the Sahara area, and maybe in Western Oklahoma where those -- where we can prove that a reservoir extends across a large area and that we are not restricted to the one offset per crude developed producing rule.

So, it has been something that we have been working on really for the last couple of years, because, it has been my view that we have been making poor public policy choices with regard to natural gas for years, based on the perceived shortage of natural gas, or scarcity of natural gas. That is normally arrived at by market observers through noticing that the industry basically never has more than a 10, 11, 12-year RP, and so some of our competing fuels are able to point to that short reserve life, and say that natural gas is a fuel that cannot be relied on to generate more electricity, or cannot be relied on to fuel our transportation network, and so, I have felt personally, that it is very important, for the SEC to understand that the rules needed to be modernized from 30 years ago, and that by doing so, investors and physical market participants could see just the true extent of the nation's natural gas reserves.

So, we welcome this rule. We are active in making recommendations and comments to it. And expect to be one of those companies that benefit through greater transparency into our asset base, and into our proved reserves, that will result as a consequence of the modernization of the SEC reserve recognition rules. If I have got it right, I believe it takes effect for any reserve report prepared as of 12/31/09.

David Heikkinen - Tudor Pickering Holt & Co.

Okay. So really it is defining the field boundaries and extending that to a much larger areas is the biggest change?

Aubrey McClendon

Yes, I mean you still have to prove all the things that you have to prove today, that the reservoir exists, and that it has got hydrocarbon in it, and these hydrocarbons are recoverable, and we think, you will have to prove that you’ve got the resources to be able, both technological, as well as financial, to be able to recover those. And, I think, there probably is likely to be some restriction on how many years you can assume in your development plan, and I think, that Steve is that still an item of open discussion, right?

Steve Dixon

Yes

Aubrey McClendon

So, that will have some restriction. Companies won't be able to just say, we are going to be booking puds that we will drill over the next 100 years. That is not going to happen. So, anyway those rules have not been finalized. And many in the industry have helped with that, and certainly we have as well, and look forward to the final rules being issued in the coming months.

David Heikkinen - Tudor Pickering Holt & Co.

Thank you.

Jeff Mobley

Thank you, David.

Operator

Our next question is from David Tameron with Wachovia Securities.

David Tameron - Wachovia Securities

Hello everyone. Marc, can you talk about the cash income tax piece, it ramped up a little bit in the quarter. Is that just a reflection of the acquisition mix? Can you talk about that for fourth quarter?

Marc Rowland

It’s a reflection Dave, of a couple of different things; first of all, the additional sales that we have. We have now consumed our net operating loss carryovers both for AMT and regular-way tax, and so, to the extent that we sell properties in excess of our basis, for example, of the $180 million transaction, we are going to owe cash income taxes.

And also, the second part of that is a reflection of reducing our rig count. We will have less IDC deductions, and so as we have less of those against the same mix of otherwise unchanged cash income; we will be paying a little bit more income tax as well.

Okay. Thanks. And then there is one more question, and this is for Aubrey. If the oil plays, that you have kind of alluded to people, I guess in the software stand, in the lab, and on the tour out at the campus, can you talk a little bit about the timing of those, where you see that playing out over the next 12 months, when we will hear more about those type of plays?

Aubrey McClendon

Well, I think we will know more over the next 12 months, if you will recall, David, when we talked, we really started to mention these in March of this past year. We talked about, I think, five different oil plays. We actually have developed a sixth idea that we are working on, but of those, one was a non-shale play, and I think, some of you all had the opportunity at the Investor Day conference to go look at that. That is the WEHLU, West Edmond Hunton Lime Unit field, up in North Western Oklahoma County that Petrohawk is in, as well.

That is working well for us, and we are looking at extending the field limits of that and the other areas, surrounding that field where we have it and extensive leasehold position. All I can say there is that we have rigs at work, testing the extendibility of that concept. I think, our last well in the WEHLU Unit came in, Steve remarked, 500 barrels a day.

Steven Dixon

400 to 500 barrels a day.

Aubrey McClendon

400 to 500 barrels a day, so those are wells that we have found up to half a million barrels of oil per well. And that is an old field developed right before the 1940s, and kind of blown down, or blown through during World War II, and as it consequence, a lot of oil was left behind.

With regard to the shale plays. I am just thinking off the top of my head, but I think that we have rigs working on three of those, what did you say, four?

David Tameron - Wachovia Securities

Three.

Aubrey McClendon

Yeah, three of those plays right now we have rigs that have either just finished drilling, and we are analyzing core results, or have rigs on them right now. So, the trick on all these is not so much finding the oil in place, we think we have done that before now. Now, the question is what is the right technological solution to getting the oil out? Is it vertical wells on tight spacing? Is it horizontal wells, is it multihorizontal laterals? Is there a CO2 component to any of the recovery drive mechanisms?

So, I think 2009 will be obviously the year in which we are going to know whether or not any of these oil shale plays work. But we were optimistic seven or eight months ago when we first started to talk about it and we remain so today.

David Tameron - Wachovia Securities

Okay. And then one more big picture question for you Aubrey. If I go back to the start of the year there was a lot of chatter, the capital gains tax was, I guess an incentive or motivation for a lot of private families to sell. It seems like reading some literature now. Sounds like that capital gains tax may be pushed back a couple of years as far as the potential increase. Are you hearing any chatter about that on the M&A market? Is that in the conversations today like it was six months ago?

Aubrey McClendon

I am tempted to say something about capital gains and private companies selling stock. But I am not going to go there. But what. I think you are referring to of course are oil and gas assets in private hands and whether or not we have seen any rush for people to sell prior to that. And you know, I -- I think people sell all the time for lots of different reasons. We have bought a lot of private assets overtime. I would think anybody today would probably take the chance on perhaps -- higher taxes down the road and wait on a recovery and gas prices so -- that is another reason why I think there is going to be good reception for the assets that we will like to sell in that a lot of buyers are probably not going to see the traditional flow of assets from private sellers simply because I think they will hold assets off the market in a lower price environment like we are in today.

So, happens going forward, don't know, and this, say one more political comment which if the election were held today it appears that Senator Obama would win and we think actually that could be very favorable to natural gas prices going forward. We feel like President Clinton's policies greatly favored natural gas demand growth.

We feel like President Bush's policies have more favored coal than they favored natural gas and we look forward, if Senator Obama were elected we look forward to four to eight years of Federal policies that we think will impose some kind of carbon cost on fuels, and we believe that will be very favorable to natural gas and we also view that this administration will be very favorably inclined to try to do something about introducing natural gas into the transportation network in a more aggressive way than what’s happened in the past four to eight years. So we are looking forward to that with some optimism.

David Tameron - BMO Capital Market

All right, thanks.

Jeff Mobley

Okay David, thank you.

Operator

And our next question comes from Michael Hall with Stifel Nicolaus.

Michael Hall - Stifel Nicolaus

Thank you. Kind of keeping on the policy topics. Natural gas has proven to be a pretty volatile commodity relative to some competing fuels. When you're talking about policy makers and consumer groups, how do you kind of address the concerns of volatility in a fuel as it relates to gas?

Aubrey McClendon

Michael, other than just to let everybody know that it’s there, there’s not much we can do about it as you well know. Most of it has to do with weather pattern volatility and I think most people know we have our own meteorological service here at Chesapeake and I did notice in their report on Wednesday that, I think it was Tuesday of this week we set over 200, temperature records in the US. And about 100 were for record cold, record lows, and the other 100 were for record highs. And so, that is just a feature of weather patterns today, that I thought that they absolutely kind of highlighted that.

I then say to people about volatility that I mean, use volatility, take advantage of volatility. And we take advantage of it from a producer perspective. I mean at the end of the day, I’ve been on record many times, that Chesapeake in general favors low prices for natural gas. We think its great to stimulate long-term demand. We have -- we think, and at least, well, more than 12 Tcfe approved reserves and many, many 10s of Tcfs of probable reserves, and those need to be consumed by somebody some day. So, we generally favor lower prices.

Having said that, every year or two we need you know two or three months of higher prices to get our hedging done and we have been pretty good at being able to take advantage of those market opportunities.

And the consumers say the same thing. Now is a great time to be locking in your natural gas needs for the next couple of years. Prices are probably below industry break even today and any time you can buy a commodity, below a industry's break even it’s probably a pretty good time to buy that.

So, I think volatility creates opportunities both ways. Its oftentimes, difficult to endure, when you're in the middle of volatile swings, but we know that prices will be higher at times in the future and we will take advantage of that and prices will be lower at times in the future and we hope consumers will take advantage of that as well.

Michael Hall - Stifel Nicolaus

Very good. And then, we hear about profit shortages in some regional markets. I guess in the past you’ve have taken an active role in alleviating some supply constraints in the service markets and things along those lines. Do you have any intention of getting in that market?

Aubrey McClendon

I am going to make a comment then turn it over to Steve Dixon our Chief Operating Officer for further comments. Just to remind everybody, we own 19.9%, I think it is, Frac Tech Energy Services, which Marc Rowland today is a country's what third largest segment?

Marc Rowland

Second.

Aubrey McClendon

I think we are the second or third largest pressure pumper in America, and I think by 2009, end of the year, maybe 2010, I expect to have the most horsepower. So, we get pretty good visibility into what's happening in the profit market, and have been working with Frac Tech to make sure they have adequate supplies of proppant for us, but I will let Steve further comment for you.

Steven Dixon

That is all I can say about our other vendors also, is that its communication, we work with them on forecasting our needs, and we are very large customer for them, so, we just, through planning, make sure that we have enough proppant to meet our needs.

Aubrey McClendon

At the end of the day it's good that it's sand. It's relatively abundant resource that the earth has. You just have to have the ability to get it mined and then get it treated, if it needs to be resin coated, or something like that.

Michael Hall - Stifel Nicolaus

Very good. Thank you.

Aubrey McClendon

Michael, thank you.

Operator

And our next question is from Eric Hagen with Merrill Lynch.

Eric Hagen - Merrill Lynch

Good morning, Aubrey, Marc.

Aubrey McClendon

Hi, Eric.

Eric Hagen - Merrill Lynch

Some questions for Marc on liquidity. Can you talk it really…

Marc Rowland

Eric your question is not coming good. If you're on a speaker phone, can you pick up your hand set, please?

Jeff Mobley

Moderator, are we still live on the line?

Operator

It seems we have lost Mr. Hagen.

Aubrey McClendon

Okay let's move on and maybe Eric can come back to us.

Operator

Our next question comes from Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Good morning.

Aubrey McClendon

Hi, Brian.

Brian Singer - Goldman Sachs

Can you give us an update on leasehold values in The Barnet, Marcellus and Haynesville? Obviously, as you have mentioned, you're probably doing a little bit less activity than you were, but can you comment on the impact that current markets have had in terms of acreage value today?

Aubrey McClendon

Sure, would be happy to. Brian, we have seen a dramatic reduction in leasehold values in the Haynesville and in The Barnet. I guess, I shouldn’t use the word values, I should say costs, because the values remain very attractive to us, but in the Barnet, I think, we led the way by saying that in this gas price environment it no longer made sense to pay $15,000, $20,000, $25,000 an acre. And we are on public record in Fort Worth as not being willing to pay more than $5,000 per net acre there. And, I think, the rest of the industry has followed suit.

And, while we are still acting independently and competitively of each other, it is an absolute truth that leasehold values have been dramatically pushed down. Not values, sorry our leasehold costs, acquisition costs have dramatically have pushed down in The Barnet. That is also true in the Haynesville. And, I think, we have had some leadership there as well.

In the Marcellus actually prices never went through the roof there. Those prices have remained resilient. And, we expect them probably to go up over time, rather than go down. So, I would separate the Marcellus from these other two areas.

Marc Rowland

Particularly, let me try him in on the Marcellus. We have not seen basis separation there and so the value of both BTU contribution and location of the molecule has further distinguished it from the many other plays, such as the Mid-Continent. Aubrey mentioned that we have some dislocation going there right now. We have seen wellhead prices down in the $3 range in the Mid-Continent recently, where as wellhead prices in the Marcellus are $8 or plus. So really distinguished that play from the ones back behind the pipeline problems.

Brian Singer - Goldman Sachs

Thanks. Until I get to tie that in with Tom's earlier question to kick things off, if you think about the amount of acreage or assets that you would be selling in the Marcellus today should we assume that hasn't changed from where you were a few months ago to get the same cash proceeds or change modestly, how should we think about that?

Aubrey McClendon

We think about it all the time and remain in discussions with multiple parties about our plans there. So, at this point I will just say that we, those discussions and, negotiations, are ongoing. And we will have more to say when we are able to say more.

Brian Singer - Goldman Sachs

Great. And lastly, when are you assuming that the production you have shut-in currently comes back online? And from a Mid-Continent basis perspective it sounds like you think things can improve, even in the absence of (inaudible) getting Rocky's gas away from the Mid-Continent area.

Aubrey McClendon

We have formally budgeted for those shut-ins to continue through 12/31. So we will see how that goes. A lot of it will depend, of course on, weather during the next 60 days or so. It is not, it is (inaudible) has caused the problem, it is now up to, two pipeline projects, both will end up helping Oklahoma gas, one more specifically eastern Oklahoma gas and the other western Oklahoma gas and those projects should be completed in the next four to five months. Actually, sorry one of them, we complete this year and the other in the first part of 2009, sorry.

Brian Singer - Goldman Sachs

Thank you.

Aubrey McClendon

Okay. Brian, thank you.

Operator

And our next question comes from GIL Yang with Citi.

Gil Yang - CitiGroup

Hi, Aubrey. I was wondering if you could elaborate a little bit at the SEC rules. Just in the sense of what is your philosophy going to be in terms of taking full advantage of the ability to book more reserves. Would you do so to the fullest extent allowable or would you do it more moderately and pace out your ability to keep F&D lower for a long period of time rather than just -- I am not sure how the rules would be stated, but presumably if you booked multiple [Ts] one year all of a sudden your F&D would be very low for that year?

Aubrey McClendon

Yes, we really haven't talked about that internally or reached any conclusions, Gil. I think it’s going to be completely dependent on how the rules are written. All I try to say is that, were we under those rules today, our preliminary work would indicate that our reserves would be in the 20 Tcf range rather than the 12 Tcf range.

So, there are all kinds of interpretive issues that will come with those rules. You still have third-party reservoir engineers that you will have to satisfy as well. So, it’s not simply that the SEC writes it and the industry reacts to, but you also have to have three-way discussions with all the third-party reservoir and independent reservoir engineers as well.

So, I cannot really predict for you whether or not we would say the rules are the rules and we followed them before, to the strict -- in the strictest way possible and we are going to do so now. And so, look at all at once or do more of a ramp-in as you suggested we might want to. So, we know, we will see. And in terms of you know what my conclusion will be rather than it vastly understating our costs in any one year. I think what this is going to show is that our costs have been vastly overstated in the past. And I still see some analysts calculating our finding costs by including in their calculation the leasehold that we buy today, to which we are not booking any reserves and leading people to the conclusion that our filing costs are $3 an Mcfe, when they are absolutely not.

So, you know our company has been buying acreage over the last three years to five years, that in our view not necessarily in the SEC’s see, but in our view has reserves associated with them. We were not able to book those. But most people did include those costs and their finding cost calculation. We think that was not the appropriate way to do it, and this will fix that going forward. So, I think again, we will see not understated costs going forward but accurate costs going forward, that will hopefully correct the overstated costs over the past few years, specifically with regard to our company.

Gil Yang - Citi

And that is fair. insight. But the basic message, was more directly to my question, just that we should not necessarily expect on January 1, 2010 that you will be a 20 plus Tcfe. You may be or may not be depending on how you implement the rules?

Aubrey McClendon

Yeah, that is true. We may or we may not be.

Marc Rowland

GIL, keep in mind the rules haven't been finalized yet. We are reacting to a couple of additions of inquiry and response by the industry. And at this point nothing has been finalized. So, you know we are kind of speculating here and I would just leave it at that. It is speculation as to what the rules will say and how we will react to it.

Gil Yang - Citi

Okay. The second question, Aubrey is that, if you do get into this range of 300 to 500 rigs being laid down, what do you anticipate would happen to your service costs in that kind of scenario?

Aubrey McClendon

Well, we are very excited to talk about that. We think it could result in as much as a 15% to 20% reduction and we think it's already happening today. Of course, diesel prices are down. We consume a lot of diesel in the drilling process and those prices are now in half. Steel prices have rolled over and we have certainly seen the worse of that. I think we are about to get the better end of that stick.

Drilling rig rates are starting to come down. I think that will accelerate and then you will see it all across. It won't be just -- some people I’ve seen have said well, it's just this drilling rig rates. It will be cost across the industry and across all components of well costs.

So, again we are, I think the biggest consumer of drilling completion services in the US, and these things go up and down and as our margins get squeezed, we think it's only fair of course that our partners on the service side, lower their prices to enable us to continue to make a profit on what we are doing.

So, we expect to continue to work lard on that and to see very visible responses to those initiatives during the next couple of quarters.

Gil Yang - Citi

Would there be any downward pressure on labor costs possible?

Aubrey McClendon

Oh, I think so for sure. We are already working to get land brokerage costs down, for example. I cannot comment specifically on personnel on rigs, but obviously with the unemployment rate rising in the US oil field service jobs are going to become I think even more competitive in the future and we will see more people try to get those jobs. So I would expect labor costs to go down, throughout the industry as well.

Gil Yang - Citi

And, how about operating costs, other than fuel component of operating costs, which obviously would be down.

Aubrey McClendon

Well, one of our components that definitely will be down is ad valorem taxes. Many of our states have ad valorem taxes. which on an annual basis is assessed based on the value of the oil and gas in the ground. And that value is based on the well head price. So if prices are down 50%, ad valorem taxes without a rate increase would be down 50% as well and that could easily change operating costs for us by a nickel an Mcf just right there, which is approximately 5%. The other components which are [pumper] fuel costs, driving the pickup trucks, diesel and so forth, chemicals, all of those kinds of things will be off and or already coming down.

Gil Yang - Citi

Okay, great, thanks a lot.

Operator

Our next question comes from Eric Hagin with Merrill Lynch.

Eric Hagin - Merrill Lynch

Thanks good morning and I am back. Question was for Marc. In light of the comments you made at the analyst day that your working capital… I think you said it could swing by $600 million-$700 million either way each month. And given you ended the quarter with about $1.9 billion in cash and cash equivalents, can you give us an idea of what you have on the balance sheet now, cash and cash equivalents and how that might look at the end of this quarter if you don't get the asset sales, the planned asset sales done?

Marc Rowland

Sure. Eric. Yeah, today we have well over a billion dollars in cash on our balance sheet. And I did say that at any 30 day period, as cash comes in and goes out during the month, that you can have six, I think to even $800 million of swing depending on prices. Obviously our plan is to have several deals closed by the end of the quarter and we have talked about our projected cash balance. To the extent any one of those doesn't close, then it would reduce the expected cash on hand, but, I don't know how to handicap what is, four or five different transactions. Each one has a substantially different potential value.

The bids for our South Texas assets, I mentioned are due next Tuesday. I haven't seen any bids at this point. So I don't know what the expected value or whether we will even sell if the value is not there., But we have had a lot of interest. Many people through, some have already sent notices confirming that they have fully financed offers and to make sure that we don't sell before they get their chance to bid.

So. almost impossible to answer the question without knowing the results of each one of these different transactions and the amounts. So, we’ll just keep adequate liquidity and as we have in the past.

Eric Hagen - Merrill Lynch

And adequate liquidity would be that $600 million or $800 million you need to manage that working capital swing? Is that correct?

Marc Rowland

Well, I think -- yeah Eric I think at the investor day I said that was the swing. And that on top of that then we would want to keep $0.50 billion to $1 billion of surplus. So, we want to have as much liquidity as we can obviously.

Eric Hagen - Merrill Lynch

Okay the follow-up final question was, what’s the rationale I mean beyond the $3 billion target, Aubrey mentioned you were going to add a $1 billion per year of additional cash and cash equivalents. What’s the rationale behind keeping that much cash on hand?

Aubrey McClendon

Well, we would love to be able to pay our bank lines down. We just want to make sure the banks are capable of giving it back to us if we need it. So when we talk -- I mean I think it's unlikely that we end up at 2010 with $5 billion of cash and a $3.5 billion revolving line of credit fully withdrawn. We do anticipate that at some point things get back to normal.

So the rationale is simply that, we think it makes sense to build cash overtime and use that cash to buy back debt, opportunistically or perhaps stock. We have obviously answered a lot of questions over the last few months, about cash. And those do become tiresome overtime. And so, we want to make sure that we always have plenty of cash on hand and people find something else to worry about besides that.

Eric Hagen - Merrill Lynch

Okay. Thanks Aubrey. That is more of a like a free cash flow number. And I won't ask any more questions on cash. Thanks, I appreciate it.

Aubrey McClendon

You can. I just told you that you they become tiresome after awhile.

Eric Hagen - Merrill Lynch

That is great gentlemen.

Aubrey McClendon

Thanks.

Operator

And our next question comes from [Michael Angst] with TIAA-CREF]

Michael Angst - TIAA-CREF

Can you hear me.

Aubrey McClendon

Yes, Michael we can.

Michael Angst - TIAA-CREF

Oh, thank you. Actually my question has just been answered. So thank you.

Aubrey McClendon

It glad -- its good to know you're online.

Operator

And our next question is comes from Jeff Davis with Waterstone Capital.

Jeff Davis - Waterstone Capital

Thanks. Just curious, what’s the total amount, if any, of committed leasehold purchases, committed but unpaid leasehold purchases?

Aubrey McClendon

Jeff, it's Aubrey, that is not a number that we discuss publicly. We always have backlog of projects underway, or I guess, undertaken. Some of which are subject to, negotiations, some are subject to hand shakes and some are subject to definitive documents.

Jeff Davis - Waterstone Capital

Okay. And then what should we think about G&A costs as the company gets a little smaller here as you lay down some rigs, those types of things. It's up 75% year-over-year. How should that kind of go, moving forward?

Aubrey McClendon

Okay. The company is not getting smaller. So the first part of your question -- I will say that while I acknowledge our G&A cost have been higher, but you said, as our company gets smaller overtime, we are actually, probably become somewhat less active. But we will be increasing our production, as I am sure you've noticed by 17% in 2009 and 16% in 2010. So, on a compounded basis, in two years, the company will be probably a third higher.

I will take probably personal responsibility for a good bit of the G&A expense increase, which is as we have embarked over the last six months on a public education campaign about the values of natural gas, all that has flown through the G&A account. So, if you look back at our G&A over the past four or five years, basically it's remained pretty much unchanged, lets call it the, low-to-mid-$0.20 per Mcfe. And just as the company added people overtime, we added production.

And so, there was proportionality between G&A cost and between the size of the company and number of people. But we have spent several tens-of-millions of dollars in the past six months and especially in the third quarter promoting our product. Given all the financial crisis concerns over past month or two and given the political campaign, we decided to dramatically reduce our advertising campaign over the last 30 days, given that we just didn't think it was money well spent in this environment. And so we kind of got it on the shelf and we’ll wait for the new President to come on board and the Congress to convene and then consider what needs to be done at this point.

But we are the only industry I know that really doesn't do much to try and stimulate long-term demand and -- for its product. And I don't particularly understand that, I certainly don't agree with it and we hope to develop some conversations with some of our colleagues over time to make sure that they are doing that. That they are helping out as well. But for right now we are not spending as much as we were and that is I think the most significant factor in the G&A cost increase versus the previous quarter and also the year-ago quarter.

Jeff Davis - Waterstone Capital

Okay, and Marc, the converts that you talked about inducing, is that the preferred or is that actual, the notes.

Marc Rowland

Actually that is the 2.25%, 2.5% and 2.75% convertible notes and I hope I didn’t use the word induce. We don't have any program. We have just been approached on an unsolicited basis by numerous holders of those. Evidently, and I am not expert at this, but evidently in the convertible market the opportunity for those people to sell on in this market has been particularly hampered by some people's perception of not being able to short certain stocks and do an arbitrage on those.

And so particularly in those converts the value went down substantially. I saw some trades on the 2.25 notes that were as low as $0.45 on the dollar and about two weeks ago we began to be approached by some of those. When they couldn't evidently develop liquidity they were willing to trade for common stock at those distress values and our perception distressed values and then, evidently, satisfied the previously shorted positions by us delivering stock for them so -- that is what we have been doing. We have not done anything recently, on the preferred stocks, I think 90 to 100 days ago was the last preferred stock that we did and that was a relative small amount.

Jeff Davis - Waterstone Capital

Okay.

Aubrey McClendon

I would like to emphasize that the programs is one that has been opportunistic and been driven by the face value of those instruments. It’s not that we want to issue a bunch of equity at $20 a share. It’s simply that if we can reduce a liability at –

Jeff Davis - Waterstone Capital

At $0.45 on the dollar that is what we look at?

Aubrey McClendon

It seems to make pretty good sense to us.

Jeff Davis - Waterstone Capital

Yes, by the way, are you doing that at parity or parity plus something?

Marc Rowland

We are doing it, if you were to look at the conversion technically I think you were referring to what the notes would be convertible into.

Jeff Davis - Waterstone Capital

Yes.

Marc Rowland

It is slightly greater than parity, but we look at it as face value if it’s $0.45 or $0.52 or $0.53 on the dollar of face. Parity doesn't mean anything if you're not in the money.

Jeff Davis - Waterstone Capital

Right and what’s the notional of how much have you done of that?

Marc Rowland

We have done just over $300 million so far.

Jeff Davis - Waterstone Capital

Okay.

Marc Rowland

At face.

Jeff Davis - Waterstone Capital

Face value, yes, right. And the VPP looks like the midpoint and the update last night. I wasn't down at the Analyst Day meeting, but think it’s a little bit lower than you guys had communicated in the past. I was thinking $600 million, the midpoint is now 450, is that a function of lower prices, is that a function of what’s going on in the credit markets, continued choppiness. What is going on there?

Marc Rowland

Yes, I believe it’s identical to what we said at the Analysts Day. It is down from our earlier guidance, when we first initiated the efforts to get it done. It is a function of the discount rate effectively increasing in this credit market, and of lower future gas and oil prices.

Jeff Davis - Waterstone Capital

Okay. That is it for me, thanks.

Aubrey McClendon

Thank you.

Operator

And our next question comes from Marshall Carver with Capital One.

Marshall Carver - Capital One

Yes, a quick question on your two most recent Haynesville wells. Were those in southwest Caddo where most of your areas where activity has been concentrated or were some of the step-out wells that you mentioned at the analysts meeting?

Aubrey McClendon

No, they were not step-out wells I think, these are in 15, 16 or 15, 15. I am not sure of the township. I think, Steve or Marc might be able to come up with a more [we are seeing]. Dixon might be able to but they are in the same general area as southwestern Caddo.

The other wells are all underway and I don't believe we have completed any of the ones that would be starting to kind of look at the four corners of our course. Petrohawk has had excellent results in their Elm Grove area and other people at some four corners are doing as well.

I know, there have been disappointing results perhaps come out of some of the play in East Texas. I just remind you, what we reminded everybody of at the conference, which is, when we started in the Barnett, we started with a very specific buy area that was essentially two counties Johnson and Tarrant. And a lost of people wanted to buy acreage over 17 counties. And we said we acknowledge the Rock exists under 17 counties. But we are going, where we think the best is and the Haynesville today -- we have an outline of where we want to be that is just under 3.5 million acres and a lot of people claim to have Haynesville acreage and they do, but just to remind you that is not what everybody else claims this Haynesville perspective is something, that we would give any value to.

So, and people need to be prepared for disappointing results from time to time from companies that do not have assets in the heart of the play and, we are still very excited about what we are seeing there and I think these latest two wells. Steve Dixon, where we -- eight stages or 10 or where were we on those?

Steve Dixon

Those were 10, I believe.

Aubrey McClendon

I think these were our first two, 10-stage completion treatments and they are..

Steve Dixon

Not as we were in 15, 15.

Aubrey McClendon

I mean those were in township 15 North, 15 West, and not coincidentally they are our two best wells so far, I think.

Marshall Carver - Capital One

Okay, thank you very much.

Aubrey McClendon

Okay, Marshall.

Operator

And our next question comes from Monroe Helm with CM Energy Partners.

Monroe Helm - CM Energy Partners

Thanks a lot. This is for Marc Rowland. Just trying to get your answer about cash flows and but just looking at what you reported in your second quarter Q about the proceeds that were coming after June for the cash portion of the play in shale in Haynesville and volumetric production payment of the Woodford Shale, common stock offering, reflect just about $5.3 billion in cash coming in. Looks like your CapEx-to -cash flow differential in the third quarter was maybe a short fall of $300 million.

So that leaves about $5 billion of cash, its a little hard to reconcile on your abbreviated cash flow statement. But you got cash then to the third quarter $1.96 billion, which included $1 billion dollar drawn down on your bank line. So, just wondering what happened to the other $4 billion of cash.

Marc Rowland

I cannot quite follow all of that. But generally, I think you're asking what is the reconciliation of all of our expenditures for the quarter. Obviously, we will have a complete detailed analysis here in another week on our 10-Q which will identify every item. We tried to identify most of it in our reconciliation of expenditures on page 12 of our press release but I am not -- I don't have in front of me, nor am I going to go through every...…

Aubrey McClendon

I mean Monroe You know the obvious answer is, that most of it went to Haynesville acreage. And we have said on page 12 how much went for acquisition of proved properties and it hasn't been much this year and then if you looked at unproved properties almost $7 billion so. --

Monroe Helm - CM Energy Partners

Okay.

Aubrey McClendon

And that is, those are year to date numbers but you can go back to the June 30th and --

Monroe Helm - CM Energy Partners

Okay.

Aubrey McClendon

When we saw the difference between those two.

Monroe Helm - CM Energy Partners

Okay.

Aubrey McClendon

So it’s pretty transparent. I am sorry I don't have that break down right in front of us but….

Monroe Helm - CM Energy Partners

That is okay. It is also, just to follow-up there’s a pretty big change in working capital between the second quarter and the third quarter and it looked like a swing of over $4 billion. And just wondered if you had any comments on that?

Aubrey McClendon

Yeah, that is an easy one as well

Marc Rowland

There is a big change in the, there frequently is but I think you will find a lot of that is related to the derivative change, shot-term derivatives, the value of our obligations that become due in a year under our derivative programs.

Aubrey McClendon

I think in the end of the second quarter, if I recall there was something like $4 billion of short-term liabilities that were related to our mark-to-market losses on derivatives hence it would have gone away this quarter.

Monroe Helm - CM Energy Partners

Okay, well thanks for your comments.

Aubrey McClendon

Okay Monroe. Thank you.

Operator

And our next question comes from Joseph Magner with Tristone Capital.

Joseph Magner - Tristone Capital

I have several questions. Just during the quarter you reported actual balances were around $2 billion. At the analysts meeting you mentioned cash at the end of the third quarter was around $1.5 billion. And then also year-end balance of cash and available capacity was expected around $3 billion, down from 3.5 you discussed at the analysts meeting.

Can you just explain maybe the reason for the difference in the actual Q3 balance and then any changes or to either the timing or the expected value of any of the divestitures in the fourth quarter may have effected that year-end expectation?

Aubrey McClendon

Well take a crack at that -- I think I did used the number of approximately $1.5 billion. I was hoping to be and I was in fact conservative. We hadn't closed out our final books yet and it turned out to be 1.9 and some change billion dollars versus the 1.5.

With respect to our expected cash, as of 12/31, it’s not materially different than what we talked about before. We have reduced our expectations, as we just talked about slightly for the VPP and perhaps the asset sales. But again, hopefully we are trying to be conservative on that.

Joseph Magner - Tristone Capital

Okay. I guess the change from…

Marc Rowland

Well, Joe if you just – Joe if you look at the second page of the outlook you will see that the potentially cash resources is very similar to the October 14th guidance. The only minor difference is that we are using a lower range for Nymex gas prices in the fourth quarter.

Aubrey McClendon

Yeah, our operating cash flow expectation went down with a couple $100 million alone for the fourth quarter, simply because of we moved our gas price expectations down.

Marc Rowland

And already have knowledge of what October gas prices were.

Joseph Magner - Tristone Capital

Okay, thanks. And then Aubrey just one question with respect, you mentioned comments about, excluding leasehold costs from your F&D calculations. Can you just explain how and when those costs are ever accounted for or when you capture those in your S&D calculations?

Aubrey McClendon

Yeah. They go in and when they move through cost pool, obviously we think our DD&A rate is a pretty good way to look at what our finding costs are. So you could do it that way.

And going forward it depends, -- we always report out what our actual finding costs were, on a per Mcfe basis for the quarter excluding those costs and you can do it any number of ways, one you can add back as some people do all of current quarter costs and current quarter drilling. You will get a number. The number will be meaningless as to what we actually did during the quarter or you can develop your own math and say as the company works through its leasehold inventory over certain number of years, you can allocate part of that.

Or you can simply do it the way GAAP requires you to do it, which is, as we evaluate leasehold remove it from the unevaluated to the evaluated that moves through our cost pool that way.

Joseph Magner - Tristone Capital

Okay. Just, yeah I guess it just seems like in the way it is reported or calculated, it never quite gets captured in the quarter-to-quarter evaluation but -

Aubrey McClendon

Well, I think it's pretty clear that when we report what our costs are we always give it to you, every way. Which is we give it to you for drill bit finding costs.

We define those drill bit finding costs, we give you acquisition costs, and we define what those are. And then we give it to you on the roll forward on page, Marc is looking for that where it puts it all in. And then we also give it to you net of acquisition, or divestiture proceeds as well.

So it's a calculation that seems like everybody has there own little approach to what's the right way, and so I think we try to give you four different ways to look at it.

Joseph Magner - Tristone Capital

Okay. Thanks for your comments.

Aubrey McClendon

Okay, thank you.

Operator

And our next question is from Michael Hall with Stifel Nicolaus.

Michael Hall - Stifel Nicolaus

Thanks, just a follow-up. I just wanted to try and summarize kind of where Gill was getting at on cost, maybe, wasn't getting at it. But I want to see if you could summarize kind of where maybe break even costs are moving or the industry's break even price as you see all those costs coming in.

Aubrey McClendon

No, I think you're seeing, a real bifurcation in the industry develop. Something I don't think we have really had in the past where the shale players are going to have significantly lower break even costs than the conventional players. I know that it is conventional wisdom in the industry to consider the shale costs break evens are higher, but that is not actually the case. Certainly not the truth, in our company. And the finding cost and our four important shale plays on drill bit cost alone are all under $2. Whereby, or but in comparison or contrast that, the finding costs in most of our conventional plays are well over $2.

So, we also are the nation's most active non-operator and have an insight into what other companies’ costs are. I think during the quarter, we were using an average of 118 non-operated rigs. So, we get great information from what everybody else is doing and we see again, this clear line developing, in the industry, between the haves and the have-nots on shale. And the haves, with regard to shale, I mean there are probably only a dozen companies that really matter when you look at shale and probably only half a dozen of those that are the key drivers in the shale plays. And so, we see that in general, as the industry moves forward, that you're likely to see higher finding costs across the industry and higher break evens.

Yet we believe our break evens will be moving lower and believe that all shale players break evens will probably be lower, as well, over time. So the rig lay downs in my view are likely to come more from the non-shale plays than from the shale plays.

Michael Hall - Stifel Nicolaus

Great, thank you.

Operator

(Operator Instructions). And our next question comes from [Justin Hansen] with Wells Fargo.

Justin Hansen - Wells Fargo

Hey good morning gentlemen. How are you?

Aubrey McClendon

Doing fine. Thank you.

Justin Hansen - Wells Fargo

Excellent. I had to step away for a second. Can you tell me, I understand that the South Texas asset packages, bids are due next Tuesday. But can you kind of give me a -- when do you expect the anticipated closing of those divestitures and then also the Marcellus joint venture.

Aubrey McClendon

Well we still expect both of those to close in the fourth quarter and since it’s October 31, it won't happen in this month. It’ll probably happen in late November or early December. so we will – we got a couple of holidays to work around in there but we are quite confident again that we’ll be able to get something done on both of those. The good news is we don't have to have them both. And of course we got a BPP in there as well. So, we don't know yet which of these will end up with attractive results but there’s a good chance that all three of them will. If not any one or two of the three will be fine to meet our liquidity goals.

Justin Hansen - Wells Fargo

All right. Thank you gentlemen

Aubrey McClendon

All right, I think that wraps the call up. I just wanted to mention also that we had a press release this morning. I don't know how many of you all saw, but wanted to highlight that we have added a new gentleman to our Senior Management team, Mike Stice comes to us from Conoco Philips.

Mike will be President and Chief Operating Officer of Chesapeake Midstream Partners. This is our Midstream Limited Partnership. Also Mike will have the title of Senior Vice President of Gas Projects and Mike comes to us with an extensive background in liquefied natural gas projects, both on the regas side and on the liquefaction side. And very excited about Mike joining the management team and as we look to broaden our initiatives with regard to expanding demand for US natural gas, and we know that. Mike Stice will be a key player with us in that and we welcome Mike, who will be here this weekend to start working on Monday.

So, thank you very much for your attention today. If you have any additional questions please direct them to Jeff. We would be happy to respond. Thank you.

Operator

And that does conclude today's conference. You may now disconnect

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