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to identifying, securing and commercializing new unconventional liquids-rich plays. This planned transition will
result in a more balanced portfolio between natural gas and liquids. To date, we have built leasehold positions
and established production in multiple unconventional liquids-rich plays on approximately 4.1 million net
leasehold acres. In 2010, we invested approximately $4.7 billion, net of divestitures, primarily in liquids-rich
acreage, and we allocated approximately 30% of our $5.4 billion drilling and completion capital expenditures to
these plays, compared to 10% in 2009. Our production of oil and natural gas liquids was 50,397 bbls per day
during 2010, a 56% increase over the average for 2009 as a result of the increased development of our
unconventional liquids-rich plays. We are projecting that the portion of drilling and completion capital
expenditures allocated to liquids development will reach 50% in 2011 and 75% in 2012, and we expect to
increase our oil and natural gas liquids production through our drilling activities to more than 150,000 bbls per
day, or 20%-25% of total production, by year-end 2012.
This shift to a greater emphasis on liquids production is a continuation of our general business strategy
outlined in Item 1. Business. Our goal is to create value for investors by focusing on developing unconventional
resource plays onshore in the U.S. We do so by:
Growing through the drillbit – We are the most active driller in the U.S., have our own fleet of 105
drilling rigs and are currently using 157 operated rigs. Our integrated marketing, gathering,
compression and trucking services operations support our drilling activities so that we are able to
manage the development of our leasehold efficiently and strategically.
Controlling substantial land and drilling location inventories and building regional scale – We have
been first movers in capturing both natural gas and liquids-rich unconventional leasehold and
resources. During 2010, we invested heavily in a large number of highly competitive liquids-rich
unconventional plays in order to accelerate our transition to increased liquids production. We now
have achieved many of our leasehold acquisition goals and are becoming a significant seller of
leasehold through new industry participation agreements and the pending sale of our Fayetteville
Shale assets.
Developing proprietary technological advantages – We support the scale of our operations with what
we believe is the nation’s largest inventory of 3-D seismic information and our state-of-the-art
Reservoir Technology Center, or RTC. The RTC provides us a substantial competitive advantage,
enabling us among other things to more quickly, accurately and confidentially analyze core data from
wells drilled through unconventional formations on a proprietary basis and then identify new plays and
leasing opportunities ahead of our competition and reduce the likelihood of investing in plays that
ultimately are not commercial. Our 3-D seismic data permits us to image reservoirs of natural gas and
oil that might otherwise remain undiscovered and to drill our horizontal wells more accurately inside
the targeted formation.
Focusing on low costs – We minimize lease operating costs and general and administrative expenses
through focused activities, vertical integration and increasing scale. As of December 31, 2010, our
operated wells accounted for approximately 80% of our daily production volume, providing us with a
high degree of operational flexibility and cost control.
Mitigating natural gas and oil price risk – We actively seek to manage our exposure to adverse market
prices for natural gas and oil through our hedging program. Hedging allows us to predict with greater
certainty the effective prices we will receive for our hedged natural gas and oil production. Our realized
cash hedging gains for 2010 were $2.056 billion and since January 1, 2001 have been $6.478 billion.
Using industry participation agreements – Through industry participation property sales, we have
recouped substantially all of our lease acquisition costs in six of our significant unconventional
operating areas, and we hold leasehold in new plays which we believe will be best developed through
future industry participation agreements. In addition, drilling cost carries allow us to accelerate the
development of new plays at a reduced cost to us. We pioneered the industry participation model of
unconventional natural gas and oil development, and many other E&P companies have followed with
their own industry participation agreements in the past two years.
Our strategic and financial plan for 2011-2012, announced on January 6, 2011 as our “25/25 Plan”, calls
for a 25% reduction in our outstanding long-term debt while growing net natural gas and oil production by 25%
by the end of 2012. We expect to achieve the reduction in debt through asset monetizations. Among the
several benefits of lower debt are lower borrowing costs, and we believe improved credit metrics will lead to a
more favorable debt rating by the major ratings agencies.
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