CHESAPEAKE ENERGY CORP, 10-Q, 1997-02-14

CHESAPEAKE ENERGY CORP
10-Q, 1997-02-14
CRUDE PETROLEUM & NATURAL GAS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended December 31, 1996

[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of
1934

For the transition period from __________ to __________

Commission File No. 1-13726

CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

Oklahoma 73-1395733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6100 North Western Avenue
Oklahoma City, Oklahoma 73118
(Address of principal executive offices) (Zip Code)

(405) 848-8000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES X NO

At January 31, 1997, there were 69,562,725 shares of the registrant's $.01
par value Common Stock outstanding.
<PAGE>

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Index to Financial Statements
and
Management's Discussion and Analysis

Page

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets at December 31, 1996
and June 30, 1996

Consolidated Statements of Income for the Three
and Six Months Ended December 31, 1996 and 1995

Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1996 and 1995

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
ASSETS
December 31, June 30,
1996 1996
------------ --------
($ in thousands)
CURRENT ASSETS:
<S> <C> <C>

Cash and cash equivalents $140,739 $ 51,638
Short-term investments 29,092 -
Accounts receivable:
Oil and gas sales 15,313 12,687
Oil and gas marketing sales 20,793 6,982
Joint interest and other, net of allowance for
doubtful accounts of $198,000 and $340,000 26,066 27,661
Related parties 4,000 2,884
Inventory 7,071 5,163
Other 7,199 2,158
-------- --------
Total Current Assets 250,273 109,173
======== ========
PROPERTY AND EQUIPMENT:

Oil and gas properties, at cost based on full
cost accounting:
Evaluated oil and gas properties 527,566 363,213
Unevaluated properties 181,774 165,441
Less: accumulated depreciation, depletion and
amortization (128,963) (92,720)
--------- --------
580,377 435,934
Other property and equipment 22,052 18,162
Less: accumulated depreciation and amortization (3,880) (2,922)
-------- --------
Total Property and Equipment 598,549 451,174
-------- -------
OTHER ASSETS 11,775 11,988
-------- -------

TOTAL ASSETS $860,597 $572,335

======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable and current maturities of long-
term debt $ 6,718 $ 6,755
Accounts payable 72,256 54,514
Accrued liabilities and other 10,144 14,062
Revenues and royalties due others 37,974 33,503
-------- --------
Total Current Liabilities 127,092 108,834
-------- --------
LONG-TERM DEBT, NET 220,149 268,431
-------- --------
REVENUES AND ROYALTIES DUE OTHERS 6,126 5,118
-------- --------
DEFERRED INCOME TAXES 23,168 12,185
-------- --------
STOCKHOLDERS' EQUITY:

Preferred Stock, $.01 par value, 10,000,000
shares authorized; none issued - -

Common Stock, 100,000,000 shares authorized;
$.01 par value at December 31, 1996, $.10 par value
at June 30, 1996; 69,276,935 and 60,159,826 shares
issued and outstanding at December 31, 1996 and
June 30, 1996, respectively 693 3,008

Paid-in capital 426,914 136,782

Accumulated earnings 56,455 37,977
-------- --------
Total Stockholders' Equity 484,062 177,767
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $860,597 $572,335
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)

<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:

Oil and gas sales $53,414 $26,519 $90,167 $46,350
Oil and gas marketing sales 17,835 3,787 30,019 3,787
Oil and gas service opera-
tions - 1,460 - 3,618
Interest and other 1,668 277 2,516 1,791
-------- -------- -------- --------
Total revenues 72,917 32,043 122,702 55,546
-------- -------- -------- -------
COSTS AND EXPENSES

Production expenses and taxes 3,344 2,007 5,874 3,703
Oil and gas marketing expenses 17,682 3,766 29,548 3,766
Oil and gas service operations - 1,167 - 3,019
Oil and gas depreciation,
depletion and amortization 19,214 11,798 36,243 22,234
Depreciation and amortization
of other assets 884 689 1,836 1,384
General and administrative 2,068 971 3,739 1,912
Interest 3,399 3,181 6,216 6,544
-------- -------- -------- --------
Total costs and expenses 46,591 23,579 83,456 42,562
-------- -------- -------- --------

INCOME BEFORE INCOME TAX AND
EXTRAORDINARY ITEM 26,326 8,464 39,246 12,984

INCOME TAX EXPENSE
Current - - - -
Deferred 9,609 3,005 14,325 4,609
-------- -------- -------- --------
Total income tax expense 9,609 3,005 14,325 4,609
-------- -------- -------- --------

INCOME BEFORE EXTRAORDINARY
ITEM 16,717 5,459 24,921 8,375

EXTRAORDINARY ITEM:
Loss on early extinguishment
of debt, net of applicable
income tax of $3,703 ( 6,443) - ( 6,443) -
-------- -------- -------- --------

NET INCOME $10,274 $ 5,459 $18,478 $ 8,375
======== ======== ======== ========

NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(PRIMARY)
Income before extraordinary
item $ .25 $ .10 $ .38 $ .15
Extraordinary item ( .10) - ( .10) -
-------- -------- -------- --------
Net Income $ .15 $ .10 $ .28 $ .15
======== ======== ======== ========

NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(FULLY DILUTED)
Income before extraordinary
item $ .25 $ .09 $ .38 $ .14
Extraordinary item ( .10) - ( .10) -
-------- -------- -------- --------
Net Income $ .15 $ .09 $ .28 $ .14
======== ======== ======== ========

WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 68,108 57,454 66,300 57,148
======== ======== ======== ========
Fully-diluted 68,108 58,044 66,300 57,968
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
December 31,
---------------------------------
1996 1995
-------- --------
($ in thousands)
<S> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $18,478 $ 8,375

Adjustments to reconcile net income
to ne cash provided by operating
activities:

Depreciation, depletion and amorti-
zation 37,317 23,044
Deferred taxes 10,622 4,609
Amortization of loan costs 762 574
Amortization of bond discount 191 280
Gain on sale of fixed assets and
other ( 522) ( 412)
Investments in securities, net ( 34,777) 406
Extraordinary item before income
tax benefit 10,146 -
Equity in earnings of subsidiary ( 178) -
Other adjustments - ( 130)

Changes in current assets and
liabilities ( 138) 10,383
--------- ---------
Cash provided by operating
activities 41,901 47,129
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

Exploration, development and acqui-
sition of oil and gas properties (186,753) ( 91,160)
Proceeds from sale of assets 12,274 6,473
Investment in gas marketing company,
net of cash acquired - ( 320)
Investment in service operations ( 3,048) -
Long-term loan made to a third party ( 2,000) -
Additions to property, equipment and
other ( 4,622) ( 3,671)
--------- ---------

Cash used in investing activities (184,149) ( 88,678)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term borrowings 50,000 16,650
Payments on long-term borrowings (106,831) ( 2,181)
Cash received from issuance of
common stock 288,091 -
Cash received from exercise of
stock options 273 458
Other financing ( 184) -
--------- ---------
Cash provided by financing
activities 231,349 14,927
-------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 89,101 ( 26,622)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 51,638 55,535
--------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $140,739 $ 28,913
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)

1. Accounting Principles

The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the
Securities and Exchange Commission. All material adjustments (consisting
solely of normal recurring adjustments) which, in the opinion of management,
are necessary for a fair presentation of the results for the interim periods
have been reflected. The results for the three months and six months ended
December 31, 1996, are not necessarily indicative of the results to be
expected for the full fiscal year.

2. Recent Events

On November 25, 1996, the Company issued 8,000,000 shares of Common Stock in
a public offering at a price of $33.63 per share, which resulted in net
proceeds to the Company of approximately $256.9 million. On December 2,
1996, the underwriters of the Company's Common Stock offering exercised an
over-allotment option to purchase an additional 972,000 shares of Common
Stock at a price of $33.63 per share, resulting in additional net proceeds
to the Company of approximately $31.2 million, and total proceeds of $288.1
million.

Using a portion of the proceeds from the Common Stock offering, the Company
exercised its covenant defeasance rights under Section 8.03 of the Indenture
dated as of March 31, 1994 with respect to all of its outstanding $47.5
million of 12% Senior Notes. A combination of cash and non-callable U.S.
Government Securities in the amount of $55 million was irrevocably deposited
in trust to satisfy the Company's obligations, including accrued but unpaid
interest through the date of defeasance of $1.3 million. The Company also
repaid in full the outstanding balance of its revolving bank credit facility.

Effective December 31, 1996, the Company changed its state of incorporation
from Delaware to Oklahoma. As part of this transaction, the authorized
capital stock of the Company was increased to 100,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock,
par value $.01 per share. Also effective December 31, 1996, the Company
effected a 2-for-1 split of its common stock. All par value, share and
per share information, common stock options and exercise prices included
in these consolidated financial statements and related footnotes have been
restated to reflect the stock split.

3. Legal Proceedings

On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company alleging patent infringement and tortious interference
with contracts regarding confidentiality and proprietary information of
UPRC. UPRC is seeking injunctive relief and damages in an unspecified
amount, including actual, enhanced, consequential and punitive damages.
The Company believes it has meritorious defenses to the allegations,
including its belief that the subject patent is invalid. Given the
subject of the claims, the Company is unable to predict the outcome
of the matter or estimate a range of financial exposure.

4. Senior Notes

10 1/2% Notes

The Company has outstanding $90 million in aggregate principal amount of
10 1/2% Notes which mature June 2002. The 10 1/2% Notes bear interest at
an annual rate of 10 1/2%, payable semiannually on each June 1 and
December 1. The 10 1/2% Notes are senior, unsecured obligations of
the Company, and are fully and unconditionally guaranteed, jointly and
severally, by certain subsidiaries of the Company (the "Guarantor
Subsidiaries").

9 1/8% Notes

The Company has outstanding $120 million in aggregate principal amount of
9 1/8% Senior Notes due 2006 which mature April 15, 2006. The 9 1/8% Notes
bear interest at an annual rate of 9 1/8%, payable semiannually on each
April 15 and October 15. The 9 1/8% Notes are senior, unsecured obligations
of the Company, and are fully and unconditionally guaranteed, jointly and
severally, by the Guarantor Subsidiaries.

Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company.
Separate financial statements of each Guarantor Subsidiary have
not been included because management has determined that they are not
material to investors.
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
($ in thousands)
<CAPTION>
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------- -------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:

Cash and cash equivalent $ 4,782 $ 6,182 $ 129,775 $ - $140,739
Accounts receivable, net 53,866 21,369 - ( 9,063) 66,172
Inventory 6,702 369 - - 7,071
Other 931 33 35,327 - 36,291
---------- ---------- --------- ----------- --------
Total Current Assets 66,281 27,953 165,102 ( 9,063) 250,273
---------- ---------- --------- ----------- --------

PROPERTY AND EQUIPMENT:

Oil and gas properties 502,928 24,638 - - 527,566
Unevaluated leasehold 181,774 - - - 181,774
Other property and equipment 10,824 103 11,125 - 22,052
Less: accumulated depreciation,
depletion and amortization ( 122,962) ( 9,287) ( 594) - (132,843)
--------- ---------- --------- ----------- --------
Total Property & Equipment 572,564 15,454 10,531 - 598,549
--------- ---------- --------- ----------- --------

INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 628,415 6,850 514,075 (1,149,340) -
--------- ---------- --------- ----------- --------

OTHER ASSETS 4,482 1,019 6,274 - 11,775
--------- ---------- --------- ----------- --------

TOTAL ASSETS $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597
========== ========== ========= =========== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable and current
maturities of long-term debt $ 4,268 $ 2,450 $ - $ - $ 6,718
Accounts payable and other 104,859 21,389 3,189 ( 9,063) 120,374
---------- -------- -------- ----------- --------
Total Current Liabilities 109,127 23,839 3,189 ( 9,063) 127,092
---------- -------- -------- ----------- --------

LONG-TERM DEBT 1,486 8,740 209,923 - 220,149
---------- -------- -------- ----------- --------

REVENUES PAYABLE 6,126 - - - 6,126
---------- -------- -------- ----------- --------

DEFERRED INCOME TAXES 14,916 1,014 7,238 - 23,168
---------- -------- -------- ----------- --------
INTERCOMPANY PAYABLES 1,057,860 7,917 79,793 (1,145,570) -
---------- -------- -------- ----------- --------

STOCKHOLDERS' EQUITY:

Common Stock 116 2 577 ( 2) 693
Other 82,111 9,764 395,262 ( 3,768) 483,369
---------- -------- -------- ----------- --------
Total Stockholders' Equity 82,227 9,766 395,839 ( 3,770) 484,062
---------- -------- -------- ----------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597
========== ======== ======== ============ ========
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ in thousands)
<CAPTION>
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ -------------- ----------- ------------ ------------

ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:

Cash and cash equivalents $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638
Accounts receivable, net 44,080 7,723 - ( 1,589) 50,214
Inventory 4,947 216 - - 5,163
Other 2,155 3 - - 2,158
---------- ---------- ---------- ---------- ---------
Total Current Assets 55,243 10,693 44,826 ( 1,589) 109,173
---------- ---------- ---------- ---------- ---------

PROPERTY AND EQUIPMENT:

Oil and gas properties 338,610 24,603 - - 363,213
Unevaluated leasehold 165,441 - - - 165,441
Other property and equipment 9,608 61 8,493 - 18,162
Less: accumulated depreciation,
depletion and amortization ( 87,193) ( 8,007) ( 442) - ( 95,642)
---------- ---------- ---------- ---------- ---------
Total Property & Equipment 426,466 16,657 8,051 - 451,174
---------- ---------- ---------- ---------- ---------

INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 519,386 8,132 382,388 (909,906) -
---------- ---------- ---------- ---------- ---------

OTHER ASSETS 2,310 940 8,738 - 11,988
---------- ---------- ---------- ---------- ----------

TOTAL ASSETS $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
========== ========== ========== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable and current
maturities of long-term debt $ 3,846 $ 2,880 $ 29 $ - $ 6,755
Accounts payable and other 91,069 7,339 5,260 ( 1,589) 102,079
---------- ---------- ---------- ---------- ----------
Total Current Liabilities 94,915 10,219 5,289 ( 1,589) 108,834
---------- ---------- ---------- ---------- ----------

LONG-TERM DEBT 2,113 10,020 256,298 - 268,431
---------- ---------- ---------- ---------- ----------

REVENUES PAYABLE 5,118 - - - 5,118
---------- ---------- ---------- ---------- -----------

DEFERRED INCOME TAXES 23,950 1,335 (13,100) - 12,185
---------- ---------- ---------- ---------- -----------

INTERCOMPANY PAYABLES 824,307 8,182 73,647 (906,136) -
---------- ---------- ---------- ---------- -----------

STOCKHOLDERS' EQUITY:

Common Stock 117 2 2,891 ( 2) 3,008
Other 52,885 6,664 118,978 ( 3,768) 174,759
---------- ---------- ---------- ---------- -----------
Total Stockholders' Equity 53,002 6,666 121,869 ( 3,770) 177,767
---------- ---------- ---------- ---------- -----------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
========== ========== ========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ in thousands)
<CAPTION>
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
For the Three Months Ended December 31, 1996:
REVENUES:
Oil and gas sales $ 51,147 $ 1,888 $ - $ 379 $ 53,414
Oil and gas marketing sales - 36,693 - (18,858) 17,835
Interest and other 52 162 1,454 - 1,668
-------- -------- -------- -------- --------
Total Revenues 51,199 38,743 1,454 (18,479) 72,917
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 3,116 228 - - 3,344
Oil and gas marketing expenses - 36,161 - (18,479) 17,682
Oil and gas depreciation,
depletion and amortization 18,577 637 - - 19,214
Other depreciation and amortization 509 40 335 - 884
General and administrative 1,370 259 439 - 2,068
Interest 275 122 3,002 - 3,399
-------- -------- -------- -------- --------
Total Costs & Expenses 23,847 37,447 3,776 (18,479) 46,591
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 27,352 1,296 ( 2,322) - 26,326
INCOME TAX EXPENSE (BENEFIT) 9,983 474 ( 848) - 9,609
-------- -------- -------- -------- --------
NET INCOME (LOSS)
BEFORE EXTRAORDINARY ITEM 17,369 822 ( 1,474) - 16,717
-------- -------- -------- -------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 590) - ( 5,853) - ( 6,443)
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 16,779 $ 822 $( 7,327) $ - $ 10,274
======== ======== ======== ======== ========
For the Three Months Ended December 31, 1995:
REVENUES:
Oil and gas sales $ 24,925 $ 1,594 $ - $ - $ 26,519
Gas marketing sales - 4,370 - ( 583) 3,787
Oil and gas service operations 1,460 - - - 1,460
Interest and other 215 6 56 - 277
-------- -------- -------- -------- --------
Total revenues 26,600 5,970 56 ( 583) 32,043
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 1,844 163 - - 2,007
Gas marketing expenses - 4,349 - ( 583) 3,766
Oil and gas service operations 1,167 - - - 1,167
Oil and gas depreciation 11,179 619 - - 11,798
Other depreciation and amortization 418 13 258 - 689
General and administrative 686 67 218 - 971
Interest 42 165 2,974 - 3,181
-------- -------- -------- -------- --------
Total Costs & Expenses 15,336 5,376 3,450 ( 583) 23,579
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX 11,264 594 ( 3,394) - 8,464
-------- -------- -------- -------- --------
INCOME TAX EXPENSE 4,958 316 ( 2,269) - 3,005
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 6,306 $ 278 $( 1,125) $ - $ 5,459
======== ======== ======== ======== ========
</TABLE>
<PAGE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ in thousands)

Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
For the Six Months Ended December 31, 1996:
REVENUES:
Oil and gas sales $ 85,936 $ 3,579 $ - $ 652 $ 90,167
Oil and gas marketing sales - 58,607 - (28,588) 30,019
Interest and other 167 571 1,778 - 2,516
-------- -------- ------- -------- --------
Total Revenues 86,103 62,757 1,778 (27,936) 122,702
-------- -------- ------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 5,463 411 - - 5,874
Oil and gas marketing expenses - 57,484 - (27,936) 29,548
Oil and gas depreciation,
depletion and amortization 34,950 1,293 - - 36,243
Other depreciation and amor-
tization 1,043 71 722 - 1,836
General and administrative 2,543 495 701 - 3,739
Interest 308 227 5,681 - 6,216
-------- -------- ------- -------- --------
Total Costs & Expenses 44,307 59,981 7,104 (27,936) 83,456
-------- -------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 41,796 2,776 ( 5,326) - 39,246
INCOME TAX EXPENSE (BENEFIT) 15,255 1,014 ( 1,944) - 14,325
NET INCOME (LOSS) -------- -------- -------- -------- --------
BEFORE EXTRAORDINARY ITEM 26,541 1,762 ( 3,382) - 24,921
-------- -------- -------- -------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 590) - ( 5,853) - ( 6,443)
-------- -------- ------- ------- --------
NET INCOME (LOSS) $ 25,951 $ 1,762 $( 9,235) $ - $ 18,478
======== ======== ======== ======= ========

For the Six Months Ended December 31, 1995:
REVENUES:
Oil and gas sales $ 43,533 $ 2,817 $ - $ - $ 46,350
Gas marketing sales - 4,370 - ( 583) 3,787
Oil and gas service operations 3,618 - - - 3,618
Interest and other 1,236 6 549 - 1,791
-------- -------- ------- ------- --------
Total Revenues 48,387 7,193 549 ( 583) 55,546
-------- -------- ------- ------- --------
COSTS AND EXPENSES:
Production expenses and taxes 3,392 311 - - 3,703
Gas marketing expenses - 4,349 - ( 583) 3,766
Oil and gas service operations 3,019 - - - 3,019
Oil and gas depreciation,
depletion and amortization 21,059 1,175 - - 22,234
Other depreciation and amor-
tization 850 17 517 - 1,384
General and administrative 1,499 101 312 - 1,912
Interest 81 350 6,113 - 6,544
-------- -------- ------- ------- --------
Total Costs & Expenses 29,900 6,303 6,942 ( 583) 42,562
-------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX 18,487 890 ( 6,393) - 12,984
INCOME TAX EXPENSE (BENEFIT) 6,562 316 ( 2,269) - 4,609
-------- -------- ------- ------- --------
NET INCOME (LOSS) $ 11,925 $ 574 $( 4,124) $ - $ 8,375
======== ======== ======= ======= ========
</TABLE>
<PAGE>
<TABLE>
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ in thousands)

<CAPTION>
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Elimination Consolidated
------------ ------------- -------- ----------- ------------

<S> <C> <C> <C> <C> <C>
For the Six Months Ended December 31, 1996:

CASH FLOWS FROM OPERATING
ACTIVITIES: $ 89,669 $( 5,642) $( 42,126) $ - $ 41,901

CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (186,718) ( 35) - - (186,753)
Proceeds from sale of assets 12,274 - - - 12,274
Investment in service opera-
tions ( 3,048) - - - ( 3,048)
Other additions ( 4,185) ( 204) ( 2,233) - ( 6,622)
-------- -------- -------- -------- --------
(181,677) ( 239) ( 2,233) - (184,149)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 50,000 - - - 50,000
Payments on borrowings ( 51,246) ( 1,710) ( 53,875) - (106,831)
Cash received from exercise
of stock options - - 273 - 273
Cash received from issuance
of common stock - - 288,091 - 288,091
Other financing - - ( 184) - ( 184)
Intercompany advances, net 93,975 11,022 (104,997) - -
-------- -------- -------- -------- --------
92,729 9,312 129,308 - 231,349
-------- -------- -------- -------- --------

Net increase (decrease) in cash 721 3,431 84,949 - 89,101
Cash, beginning of period 4,061 2,751 44,826 - 51,638
-------- -------- -------- -------- --------
Cash, end of period $ 4,782 $ 6,182 $129,775 $ - $140,739
======== ======== ======== ======== ========

For the Six Months Ended December 31, 1995:

CASH FLOWS FROM OPERATING
ACTIVITIES: $ 50,475 $ 599 $( 3,945) $ - $ 47,129
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (84,998) (11,462) - 5,300 (91,160)
Proceeds from sales 11,773 - - (5,300) 6,473
Investment in gas marketing
company - 256 ( 576) - (320)
Other additions ( 2,812) ( 25) ( 834) - ( 3,671)
-------- -------- -------- -------- --------
(76,037) (11,231) ( 1,410) - (88,678)
-------- -------- -------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term
borrowings 11,350 5,300 - - 16,650
Payments on borrowings ( 582) ( 1,585) ( 14) - ( 2,181)
Cash received from exercise
of stock options - - 458 - 458
Intercompany advances, net (57,930) 9,738 48,192 - -
-------- -------- -------- -------- --------
(47,162) 13,453 48,636 - 14,927
-------- -------- -------- -------- --------

Net increase (decrease) in cash
and cash equivalents (72,724) 2,821 43,281 - (26,622)
Cash, beginning of period 53,227 5 2,303 - 55,535
-------- -------- -------- -------- --------
Cash, end of period $(19,497) $ 2,826 $ 45,584 $ - $ 28,913
======== ======== ======== ======== ========
</TABLE>
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RECENT EVENTS

Using a portion of the proceeds from the Common Stock offering, the Company
exercised its covenant defeasance rights under Section 8.03 of the Indenture
dated as of March 31, 1994, with respect to all of its outstanding $47.5
million of 12% Senior Notes. A combination of cash and non-callable U.S.
Government Securities in the amount of $55.0 million was irrevocably
deposited in trust to satisfy the Company's obligations, including accrued
but unpaid interest through the date of defeasance of $1.3 million. The
Company also repaid in full the outstanding balance of its revolving bank
credit facility.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995

Net income for the three months ended December 31, 1996 (the "Current Quarter")
was $10.3 million, a $4.8 million increase from net income of $5.5 million for
the quarter ended December 31, 1995 (the "Prior Quarter"), after giving effect
to an extraordinary loss of $6.4 million (net of income tax) incurred during
the Current Quarter. This increase in net income was caused primarily by the
Company's significantly higher oil and gas production and increases in oil
and gas sales prices.

Revenues from oil and gas sales for the Current Quarter were $53.4 million,
an increase of $26.9 million, or 101%, from the Prior Quarter. Gas pro-
duction increased to 14.8 billion cubic feet ("Bcf"), an increase of 2.5
Bcf, or 20%, compared to the Prior Quarter. Oil production increased 266
thousand barrels ("MBbls"), or 76%, from 352 MBbls to 618 MBbls. The
increase in oil and gas production was accompanied by increases in the
average oil and gas prices realized. In the Current Quarter, the Company
received an average oil price of $22.43 per barrel ("Bbl"), net of hedging
losses of $0.8 million. This was an increase of $5.15 per Bbl, or 30%,
from the $17.28 per Bbl realized in the Prior Quarter. Gas price realiza-
tions increased to $2.68 per thousand cubic feet ("Mcf") in the Current
Quarter, net of hedging losses of $0.8 million, an increase of 61% from the
$1.66 per Mcf realized in the Prior Quarter.

The following table sets forth oil and gas production for the Company's
primary operating areas during the Current Quarter.

<TABLE>
<CAPTION>
Producing Oil Gas Total Percent
Operating Areas Wells<F1> (MBbls) (MMcf) (MMcfe) %
<S> <C> <C> <C> <C> <C>

Giddings 195 158 9,475 10,423 56%

Southern Oklahoma 205 149 3,237 4,131 22%

Louisiana Trend 26 238 1,068 2,496 14%

All Other 115 73 991 1,429 8%
--- --- ------ ------ ----
Total 541 618 14,771 18,479 100%
=== === ====== ====== ====
<FN>
<F1> Includes wells being drilled at December 31, 1996

</TABLE>

Revenues from the Company's oil and gas marketing operations in the Current
Quarter, which commenced in December 1995 with the purchase of Chesapeake
Energy Marketing, Inc. ("CEM"), were $17.8 million compared to $3.8 million
in the Prior Quarter. The Prior Quarter included only one month of
operations. Oil and gas marketing expenses were $17.7 million during the
Current Quarter, resulting in a gross profit margin of $0.1 million. In
the Prior Quarter the gross profit margin was $21,000.

The Company had no revenues or expenses for oil and gas service operations
in the Current Quarter, as a result of the sale of this business in June
1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited
partnership formed by Peak Oilfield Services Company (a joint venture
between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the
Company.

Production expenses and taxes increased to $3.3 million in the Current
Quarter from $2.0 million in the Prior Quarter. This increase was the
result of a significant increase in oil and gas production volumes during
the Current Quarter, higher oil and gas prices which increased severance
taxes and slightly higher lifting costs per unit of production. On a gas
equivalent production unit ("Mcfe") basis, production expenses and taxes
were $0.18 per Mcfe in the Current Quarter compared to $0.14 per Mcfe in
the Prior Quarter. Much of the Company's gas production from wells
drilled before September 1996 in the downdip Giddings Field qualifies for
exemption from Texas state production taxes for production through August
31, 2001. Additionally, certain oil and gas production from the Company's
wells in the Knox and Sholem Alechem fields in Oklahoma and the Louisiana
Austin Chalk Trend qualifies for production tax exemption until well costs
are recovered. These exemptions, combined with the fact that many of the
Company's wells are high volume gas wells that tend to have lower operating
costs per Mcfe than lower volume wells, help generate the Company's
historically low production costs per Mcfe. The Company expects that
operating costs in fiscal 1997 will continue to increase because of the
Company's expansion of drilling efforts into the Louisiana Trend and the
Williston Basin, both of which are oil prone areas with significant
associated water production which results in higher operating costs than
gas prone areas, and because severance tax exemptions will be more
limited in these areas compared to existing exemptions in the Giddings
Field.

Depreciation, depletion and amortization ("DD&A") of oil and gas properties
for the Current Quarter was $19.2 million, an increase of $7.4 million from
the Prior Quarter. The increase in DD&A expense for oil and gas properties
between quarters is the result of a 4.1 billion cubic feet equivalent
("Bcfe") increase in production volumes and an increase in the DD&A rate
per Mcfe. The average DD&A rate per Mcfe, a function of capitalized and
estimated future development costs and the related proved reserves, was
$1.04 for the Current Quarter and $0.82 for the Prior Quarter. The Company
believes the DD&A rate will continue to increase during fiscal 1997 based
on projected higher finding costs for wells drilled in the Louisiana Trend.

Depreciation and amortization of other assets increased to $0.9 million in
the Current Quarter compared to $0.7 million in the Prior Quarter. This
increase is primarily the result of higher amortization expense related to
debt issuance costs, and higher depreciation related to the Company's
acquisition of additional buildings and equipment in its Oklahoma City
headquarters complex to support the Company's growth.

General and administrative expenses increased to $2.1 million during the
Current Quarter, a $1.1 million, or 110%, increase from the Prior Quarter.
This increase is the result of the continued growth of the Company. General
and administrative expenses were $0.11 per Mcfe in the Current Quarter
as compared to $0.07 per Mcfe in the Prior Quarter. The Company capitalized
$0.4 million and $0.1 million of payroll and other internal costs directly
related to oil and gas exploration and development activities, net of
partner reimbursements, in the Current Quarter and Prior Quarter,
respectively.

Interest expense increased to $3.4 million during the Current Quarter, from
$3.2 million in the Prior Quarter, as a result of higher levels of interest
costs due to increased levels of total debt during the Current Quarter.
During the Current Quarter, the Company capitalized $3.4 million of interest
costs representing the estimated costs to carry its unevaluated leasehold
inventory, compared to the $1.1 million in the Prior Quarter. This increase
in capitalized interest costs is the result of larger investments being
carried during the Current Quarter in leasehold that have yet to be
evaluated than in the Prior Quarter.

Income tax expense increased to $9.6 million in the Current Quarter (before
giving effect to the income tax benefit applicable to the extraordinary
item) from $3.0 million in the Prior Quarter. The Company's estimated
effective income tax rate was 36.5% for the Current Quarter, compared to
35.5% for the Prior Quarter. The Company estimates its effective rate based
on anticipated levels of income for the year, estimated production in excess
of that allowed in computing statutory depletion for tax purposes, the
interplay between state location of production revenue and the related state
income tax, and other factors. The provision for income tax expense is
deferred because the Company is not currently a cash income taxpayer.
The Company has significant tax net operating loss carryforwards generated
from the intangible drilling cost deduction for income tax purposes
associated with the Company's drilling activities which are available to
offset regular taxable income in the future.

The Company recorded an extraordinary loss in the Current Quarter of $6.4
million, net of applicable income tax effect of $3.7 million. This loss
was the result of the Company retiring by defeasance all of its $47.5
million 12% Senior Notes and paying all amounts outstanding under the
Company's revolving bank credit facility from the proceeds of an equity
offering concluded during the Current Quarter.

SIX MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995

Net income for the six months ended December 31, 1996 (the "Current Period")
was $18.5 million, a $10.1 million increase from net income of $8.4 million
for the six months ended December 31, 1995 (the "Prior Period"), after
giving effect to an extraordinary loss of $6.4 million (net of income tax)
incurred in the Current Period. This increase was caused by the Company's
significantly higher oil and gas production and increases in oil and gas
sales prices.

Revenues from oil and gas sales for the Current Period were $90.2 million,
an increase of $43.8 million, or 94%, from the Prior Period. Gas production
increased to 30.1 Bcf, an increase of 7.1 Bcf, or 31%, compared to the Prior
Period. Oil production increased to 1,116 MBbls, an increase of 422 MBbls,
or 61%, compared to the Prior Period. In the Current Period the Company
realized an average gas price of $2.18 per Mcf, net of hedging losses of
$5.6 million. This was an increase of $0.67 per Mcf, or 44%, as compared
to the $1.51 per Mcf realized in the Prior Period. The Company realized an
average oil price of $21.88 per Bbl, net of hedging losses of $1.5 million.
This was an increase of $4.92 per Bbl, or 29%, compared to the $16.96 per
Bbl realized in the Prior Period.

Revenues from the Company's oil and gas marketing operations were $30.0
million in the Current Period compared to $3.8 million in the Prior Period,
which included only one month of operations. Oil and gas marketing expenses
were $29.5 million in the Current Period, resulting in a gross profit
margin of $0.5 million.

Production expenses and taxes increased to $5.9 million in the Current Period,
an increase of $2.2 million, or 59%, from $3.7 million incurred in the Prior
Period. This increase was the result of a significant increase in oil and
gas production volumes during the Current Period, higher oil and gas prices
which increase severance taxes, and slightly higher lifting costs per unit
of production. On an Mcfe basis, production expenses and taxes were $0.16
per Mcfe in the Current Period compared to $0.14 in the Prior Period. The
Company expects that production expenses will continue to increase in fiscal
1997 because of the Company's expansion of drilling efforts into the
Louisiana Trend and the Williston Basin, both of which are oil prone
areas with significant associated water production which results in higher
operating costs than gas prone areas. The Company expects that production
taxes will trend higher during fiscal 1997 due to higher taxes resulting
from higher oil and gas prices, and because severance tax exemptions will
be more limited in the Louisiana Trend compared to existing exemptions in
the Giddings Field.

DD&A of oil and gas properties in the Current Period was $36.2 million,
an increase of $14.0 million, or 63%, from $22.2 million expensed in the
Prior Period. The increase in DD&A expense is the result of a 9.7 Bcfe
increase in production volumes and an increase in the DD&A rate per Mcfe.
The average DD&A rate per Mcfe was $0.99 in the Current Period as compared
to $0.82 in the Prior Period. The Company believes the DD&A rate will
continue to trend higher in fiscal 1997 based on higher projected finding
costs for wells drilled in the Louisiana Trend which will represent a
significant portion of the Company's activities.

Depreciation and amortization of other assets increased to $1.8 in the
Current Period, a $0.4 million, or 29%, increase from the Prior Period.
This increase is the result of higher amortization expense related to
debt issuance costs, and higher depreciation related to the Company's
acquisition of additional buildings and equipment in its Oklahoma City
headquarters complex to support the Company's growth.

General and administrative expenses increased to $3.7 million during the
Current Period, a $1.8 million, or 95%, increase from the Prior Period.
This increase is the result of the continued growth of the Company.
General and administrative expenses were $0.10 per Mcfe in the Current
Period, compared to $0.07 per Mcfe in the Prior Period. The Company
capitalized $1.1 million and $0.4 million of payroll and other internal
costs directly related to oil and gas exploration and development
activities, net of partner reimbursements, in the Current Period and Prior
Period, respectively.

Interest expense decreased to $6.2 million in the Current Period from $6.5
million in the Prior Period. This decrease occurred despite an increase
in total interest costs as a result of higher average long-term debt
levels in the Current Period compared to the Prior Period. However, the
increase was more than offset by the amount of interest capitalized by the
Company in the Current Period. During the Current Period the Company
capitalized $7.6 million of interest costs representing the estimated costs
to carry its unevaluated leasehold inventory, compared to $1.9 million in
the Prior Period.

Income tax expense increased to $14.3 million in the Current Period (before
giving effect to the income tax benefit applicable to the extraordinary item)
from $4.6 in the Prior Period. The Company's estimated effective income tax
rate was 36.5% for the Current Period, compared to 35.5% for the Prior
Period. The Company estimates its effective rate based on anticipated levels
of income for the year, estimated production in excess of that allowed in
computing statutory depletion for tax purposes, the interplay between state
location of production revenue and the related state income tax, and other
factors. The provision for income tax expense is deferred because the
Company is not currently a cash income taxpayer. The Company has significant
federal tax net operating loss carryforwards generated from the intangible
drilling cost deduction for income tax purposes associated with the
Company's drilling activities which are available to offset regular taxable
income in the future.

RISK MANAGEMENT ACTIVITIES

Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include swap
arrangements that establish an index-related price above which the Company
pays the hedging partner and below which the Company is paid by the hedging
partner, the purchase of index-related puts that provide for a "floor" price
to the Company to be paid by the counter-party to the extent the price of
the commodity is below the contracted floor, and basis protection swaps.
Results from hedging transactions are reflected in oil and gas sales to the
extent related to the Company's oil and gas production. The Company has not
entered into hedging transactions unrelated to the Company's oil and gas
production.

The Company has the following oil swap arrangements for periods after the
Current Quarter:

<TABLE>
<CAPTION>
Monthly NYMEX-Index
Month Volume(Bbls) Strike Price (per Bbl)
- ------ ------------ ----------------------
<S> <C> <C>
January 1997 31,000 $20.01
January 1997 62,000 $23.27
February 1997 28,000 $19.72
February 1997 56,000 $22.74
March 1997 31,000 $19.46
April 1997 30,000 $19.22
May 1997 31,000 $18.97
June 1997 30,000 $18.79
July 1997 31,000 $18.60
August 1997 31,000 $18.43
September 1997 30,000 $18.30
October 1997 31,000 $18.19
November 1997 30,000 $18.13
December 1997 31,000 $18.08
</TABLE>

The Company has entered into oil swap arrangements to cancel the effect
of the swaps for the months of August through December at an average price
of $22.10 per Bbl.

The Company has the following gas swap arrangements for periods after the
Current Quarter:
<TABLE>
<CAPTION>

Monthly Houston Ship Channel
Months Volume (MMBtu) Index Strike Price (per MMBtu)
- ------ -------------- ------------------------------
<S> <C> <C>
March 1997 620,000 $2.222
April 1997 600,000 $2.022
May 1997 620,000 $1.937
</TABLE>

The Company has the following gas floor arrangements for periods after the
Current Quarter:
<TABLE>
<CAPTION>
Monthly Houston Ship Channel
Months Volume(MMBtu) Index Strike Price (per MMBtu)
- ------ ------------- ------------------------------
<S> <C> <C>
January 1997 620,000 $2.260
February 1997 560,000 $2.155
</TABLE>

Gains or losses on the crude oil and natural gas hedging transactions are
recognized as price adjustments in the month of related production. The
Company estimates that had all of the crude oil and natural gas swap
agreements in effect for production periods beginning January 1, 1997
terminated on January 28, 1997, based on the closing prices for NYMEX futures
contracts as of that date, the Company would have paid the counterparty
approximately $1.8 million, which would have represented the "fair value"
at that date. These agreements were not terminated.

CAPITAL RESOURCES AND LIQUIDITY

During the Current Quarter the Company completed an offering of 8,972,000
shares of Common Stock at a price of $33.63 per share resulting in net
proceeds to the Company of approximately $288.1 million. The Company used
approximately $55.0 million to retire through convenant defeasance the
Company's $47.5 million 12% Senior Notes, including accrued but unpaid
interest through the date of defeasance of $1.3 million. The Company used
$50 million to repay all amounts outstanding under its revolving bank credit
facility. The balance of the net proceeds has been and will be used to fund
exploration and development capital expenditures and for general corporate
purposes.

As of December 31, 1996, the Company had working capital of $123.2 million.
Additionally, the Company had credit availability of $68 million under its
$125 million revolving credit facility, with no amounts outstanding. The
Company has estimated that its capital expenditures for fiscal 1997 will
be approximately $360 million, including approximately $265 million for
drilling, completion and production expenditures, $30 million for pipeline
and gathering facilities, and the balance for acreage acquisition, seismic
programs and general corporate purposes. The capital expenditure budget
is largely discretionary, and can be adjusted by the Company based on
operating results or other factors. The Company believes it has sufficient
capital resources, including expected cash flow from operations, to fund its
capital program for the foreseeable future.

During the Current Quarter, and as a result of its Common Stock offering
and subsequent reduction of debt levels, the Company received a senior
debt credit rating increase from Standard & Poor's Rating Services to BB.
Additionally, the Company has been placed on Credit Watch with positive
implications by Moody's Investors Service, which has currently rated the
Company's senior debt as Ba3. The Company's long-term debt to total book
capitalization had been reduced to approximately 32% as of December 31, 1996.

The Company is negotiating with its commercial bank group to obtain a $100
million unsecured credit facility with the Company as the sole direct
borrower. This would replace its existing $125 million secured credit
facility under which a subsidiary of the Company is the borrower and the
Company is the guarantor. While the successful negotiation of this facility
is not assured, the Company believes the facility will be put in place during
the third fiscal quarter with financial terms substantially similar to the
existing revolving credit facility.

The Company's cash provided by operating activities decreased to $42 million
during the Current Period, compared to $47 million during the Prior Period.
The decrease of $5 million is the result of additional investments in short-
term marketable securities during the Current Period partially offset by
increases in net income, adjusted for non-cash charges (such as DD&A and
deferred income taxes), and cash provided by changes in current assets and
current liabilities between the two periods.

Cash used in investing activities increased to $184 million in the Current
Period, up from $89 million in the Prior Period. The $95 million increase
is a result of the Company's increased drilling activity and increased
investment in leasehold during the Current Period.

Cash provided by financing activities was $231 million during the Current
Period, as compared to consolidated cash provided by financing activities
of $15 million during the Prior Period. The increase resulted primarily
from the Company's issuance of Common Stock reduced by $54 million for
the defeasance of the Company's $47.5 million 12% Senior Notes and $50
million for the repayment of the Company's revolving credit facility.

LEGAL PROCEEDINGS

On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company alleging patent infringement and tortious interference
with contracts regarding confidentiality and proprietary information of UPRC.
UPRC is seeking injunctive relief and damages in an unspecified amount,
including actual, enhanced, consequential and punitive damages. The Company
believes it has meritorious defenses to the allegations, including its
belief that the subject patent is invalid. Given the subject of the claims,
the Company is unable to predict the outcome of the matter or estimate a
range of financial exposure.

FORWARD LOOKING STATEMENTS

All statements other than statements of historical fact contained in this
Form 10-Q, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking
statements. When used herein, the words "budget", "budgeted",
"anticipate", "expects", "believes", "seeks", "goals", "intends", or
"projects" and similar expressions are intended to identify forward-looking
statements. It is important to note that the Company's actual results
could differ materially from those projected by such forward-looking
statements. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in
such forward-looking statements include but are not limited to the
following: production variances from expectations, volatility of oil and
gas prices, the need to develop and replace its reserves, the substantial
capital expenditures required to fund its operations, environmental risks,
drilling and operating risks, risks related to exploration and development
drilling, uncertainties about estimates of reserves, competition, government
regulation, and the ability of the Company to implement its business
strategy. All forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to this item in the Company's quarterly report on Form 10-Q
for the three months ended September 30, 1996 for a description of a pending
legal proceeding.

ITEM 2. CHANGES IN SECURITIES

On December 31, 1996, the Company changed its state of incorporation from
Delaware to Oklahoma by the merger of Chesapeake Energy Corporation, a
Delaware corporation, with and into its newly formed wholly-owned
subsidiary, Chesapeake Oklahoma Corporation. The surviving corporation
changed its name to Chesapeake Energy Corporation. Each outstanding share
of Common Stock, par value $.10, of the merged Delaware corporation was
converted into one share of Common Stock, par value $.01, of the surviving
corporation. As a result of the merger, the surviving corporation succeeded
to all of the assets and is responsible for all of the liabilities of the
merged Delaware corporation. On matters of corporate governance, the
rights of the Company's security holders are now governed by Oklahoma
law, which is similar to the corporate law of Delaware.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

- - Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of shareholders was held on December 13, 1996.
In addition to electing two directors, shareholders voted to change the
Company's state of incorporation from Delaware to Oklahoma, which included
merging with and into Chesapeake Oklahoma Corporation, the Company's
wholly-owned subsidiary, and increasing the Company's authorized capital
stock to 100,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share.

The shareholders also approved amendments to the Company's 1992 Nonstatutory
Stock Option Plan and its 1994 Stock Option Plan and adopted the Company's
1996 Stock Option Plan.

In the election of directors, Aubrey K. McClendon received 55,530,182 votes
for election, and 770 shares withheld from voting. Shannon T. Self received
55,011,352 votes for election, and 541,016 shares withheld from voting. The
proposal to change the Company's state of incorporation from Delaware to
Oklahoma was approved by a vote of 49,618,962 shares for, representing 82%
of the outstanding shares of common stock; 3,326,750 shares voted against
the proposal, 22,238 shares abstained from voting and 2,584,418 shares were
broker non-votes. The proposal to approve amendments to the Company's 1992
Nonstatutory Stock Option Plan and its 1994 Stock Option Plan and to adopt
the Company's 1996 Stock Option Plan was approved by a vote of 38,931,478
shares for, which represented 65% of the outstanding common stock;
13,782,600 shares voted against the proposal, 35,100 shares abstained from
voting and 2,803,190 shares were broker non-votes.

ITEM 5. OTHER INFORMATION

- - Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The following exhibits are filed as a part of this report:

Exhibit No.
- -----------
3.1 Registrant's Certificate of Incorporation.

3.2 Registrant's Bylaws. Incorporated herein by reference to
Exhibit 3.2 to Registrant's registration statement on Form 8-B.

10.1.2* Registrant's 1992 Nonstatutory Stock Option Plan, as amended.

10.1.3* Registrant's 1994 Stock Option Plan, as amended.

10.1.4* Registrant's 1996 Stock Option Plan. Incorporated herein by
reference to Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders.

11 Statement regarding computation of earnings
per common share

27 Financial Data Schedule
_______________________

* Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

None
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CHESAPEAKE ENERGY CORPORATION
(Registrant)

February 14, 1997 AUBREY K. MCCLENDON
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer

February 14, 1997 MARCUS C. ROWLAND
Date Marcus C. Rowland
Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
3.1 Registrant's Certificate of Filed herewith electronically
Incorporation.

3.2 Registrant's Bylaws. Incorporated herein by
reference to Exhibit
3.2 to Registrant's
registration statement
on Form 8-B.

10.1.2 Registrant's 1992 Nonstatutory Filed herewith electronically
Stock Option Plan, as amended.

10.1.3 Registrant's 1994 Stock Option Filed herewith electronically
Plan, as amended.

10.1.4 Registrant's 1996 Stock Option Incorporated herein by
Plan reference to Registrant's
Proxy Statement for its 1996
Annual Meeting of Shareholders.

11 Statement regarding computation Filed herewith electronically
of earnings per common share

27 Financial Data Schedule Filed herewith electronically
</TABLE>

OFFICE OF THE SECRETARY OF STATE

STATE OF OKLAHOMA

CERTIFICATE OF INCORPORATION

WHEREAS, the Certificate of Incorporation of,

CHESAPEAKE OKLAHOMA CORPORATION

has been filed in the office of the Secretary of State of the State
of Oklahoma.

NOW, THEREFORE, I, the undersigned, Secretary of State of
the State of Oklahoma, by virtue of the powers vested in me by law,
do hereby issue this certificate evidencing such filing.

IN TESTIMONY WHEREOF, I hereunto set my hand and cause to
be affixed the Great Seal of the State of Oklahoma.

[OKLAHOMA STATE SEAL] Filed in the City of Oklahoma City
this 19th day of November, 1996.

TOM COLE
Tom Cole, Secretary of State

BETH N. GARNER
Beth N. Garner
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CHESAPEAKE OKLAHOMA CORPORATION

ARTICLE I

Name

The name of the Corporation is:

CHESAPEAKE OKLAHOMA CORPORATION

ARTICLE II

Registered Office and Agent

The address of the Corporation's registered office in the
State of Oklahoma is 6104 N. Western Avenue, Oklahoma City,
Oklahoma 73118. The Corporation's registered agent at such address
is Janice A. Dobbs.

ARTICLE III

Purposes

The nature of the business and the purpose of the
Corporation shall be to engage in any lawful act or activity and to
pursue any lawful purpose for which a corporation may be formed
under the Oklahoma General Corporation Act (the "Act"). The
Corporation is authorized to exercise and enjoy all powers, rights
and privileges which corporations organized under the Act may have
as in force from time to time, including, without limitation, all
powers, rights and privileges necessary or convenient to carry out
the purposes of the Corporation.

ARTICLE IV

Capital Stock

The total number of shares of capital stock which the
Corporation shall have authority to issue is One Hundred Ten
Million (110,000,000) shares, consisting of Ten Million
(10,000,000) shares of Preferred Stock, par value $0.01 per share
and One Hundred Million (100,000,000) shares of Common Stock, par
value $0.01 per share. The preferences, qualifications,
limitations, restrictions and the special or relative rights in
respect of the shares of each class are as follows:

Section 1. Preferred Stock. The Preferred
Stock may be issued from time to time in one or more series. All
shares of Preferred Stock shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed and
determined by the board of directors as hereinafter provided, and
each share of each series shall be identical with all other shares
of such series, except as to the date from which dividends are
cumulative. The board of directors hereby is authorized to cause
such shares to be issued in one or more series and with respect to
each such series prior to the issuance thereof to fix and determine
the designation, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or
restrictions thereof.

The authority of the board with respect to each series
shall include but not be limited to, determination of the
following:

A. The number of shares
constituting a series, the distinctive designation of a
series and the stated value of the series, if different
from the par value;

B. Whether the shares of a series
are entitled to any fixed or determinable dividends, the
dividend rate (if any) on the shares, whether the
dividends are cumulative and the relative rights of
priority of dividends on shares of that series;

C. Whether a series has voting
rights in addition to the voting rights provided by law
and the terms and conditions of such voting rights;

D. Whether a series will have or
receive conversion or exchange privileges and the terms
and conditions of such conversion or exchange privileges;

E. Whether or not the shares of a
series are redeemable and the terms and conditions of
such redemption, including, without limitation, the
manner of selecting shares for redemption if less than
all shares are to be redeemed, the date or dates on or
after which the shares in the series will be redeemable
and the amount payable in case of redemption;

F. Whether a series will have a
sinking fund for the redemption or purchase of the shares
in the series and the terms and the amount of such
sinking fund;

G. The right of a series to the
benefit of conditions and restrictions on the creation of
indebtedness of the Corporation or any subsidiary, on the
issuance of any additional capital stock (including
additional shares of such series or any other series), on
the payment of dividends or the making of other
distributions on any outstanding stock of the Corporation
and the purchase, redemption or other acquisition by the
Corporation, or any subsidiary, of any outstanding stock
of the Corporation;

H. The rights of a series in the
event of voluntary or involuntary liquidation,
dissolution or winding up of the corporation and the
relative rights of priority of payment of a series; and

I. Any other relative,
participating, optional or other special rights,
qualifications, limitations or restrictions of such
series.

Dividends on outstanding shares of Preferred Stock shall
be paid or set apart for payment before any dividends shall be paid
or declared or set apart for payment on the common shares with
respect to the same dividend period.

If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation the assets available
for distribution to holders of shares of Preferred Stock of all
series shall be insufficient to pay such holders the full
preferential amount to which they are entitled, then such assets
shall be distributed ratably among the shares of all series in
accordance with the respective preferential amounts (including
unpaid cumulative dividends, if any) payable with respect thereto.

Section 2. Common Stock. The Common Stock
shall be subject to the express terms of the Preferred Stock and
any series thereof. Each share of Common Stock shall be equal to
every other share of Common Stock. The holders of shares of Common
Stock shall be entitled to one vote for each share of such stock
upon all matters presented to the shareholders. Shares of Common
Stock authorized hereby shall not be subject to preemptive rights.
The holders of shares of Common Stock now or hereafter outstanding
shall have no preemptive right to purchase or have offered to them
for purchase any of such authorized but unissued shares. The
holders of shares of Common Stock now or hereafter outstanding
shall have no preemptive right to purchase or have offered to them
for purchase any shares of Preferred Stock, Common stock, or other
equity securities issued or to be issued by the Company.

Subject to the preferential and other dividend rights
applicable to Preferred Stock, the holders of shares of Common
Stock shall be entitled to receive such dividends (payable in cash,
stock or otherwise) as may be declared on the Common Stock by the
Board of Directors at any time or from time to time out of any
funds legally available therefor.

In the event of any voluntary or involuntary liquidation,
distribution or winding up of the Corporation, after distribution
in full of the preferential and/or other amounts to be distributed
to the holders of shares of Preferred Stock, the holders of shares
of Common Stock shall be entitled to receive all of the remaining
assets of the Corporation available for distribution to its
shareholders, ratably in proportion to the number of shares of
Common Stock held by them.

ARTICLE V

Limitation of Director Liability

A director of the Corporation shall not be personally
liable to the Corporation or its shareholders for damages for
breach of fiduciary duty as a director, except for personal
liability for (i) acts or omissions by such director not in good
faith or which involve intentional misconduct or a knowing
violation of law; (ii) the payment of dividends or the redemption
or purchase of stock in violation of Section 1053 of the Act; (iii)
any breach of such director's duty of loyalty to the Corporation or
its shareholders; or (iv) any transaction from which such director
derived an improper personal benefit.

ARTICLE VI

Certain Stock Purchases

Section 1. Certain Definitions. For the
purposes of this Article VI:

"Continuing Director" means any member of the Board of
Directors of the Corporation (the "Board") who is unaffiliated with
the Interested Shareholder and was a member of the Board prior to
the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Continuing Director who is
unaffiliated with the Interested Shareholder and is recommended to
succeed a Continuing Director by a majority of Continuing Directors
then on the Board.

"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.

"Fair Market Value" means: (1) in the case of stock, the
highest closing sale price during the 30-day period ending on the
date in question of a share of such stock on a principal United
States securities exchange registered under the Exchange Act on
which such stock is listed or in the national market system
maintained by the National Association of Securities Dealers, Inc.,
or, if the stock is not listed on any such exchange or designated
as a national market system security, the highest closing bid
quotation with respect to a share of such stock during the 30-day
period ending on the date in question on the National Association
of Securities Dealers, Inc. Automated Quotations system or any
system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock
as determined by the Board in good faith.

"Interested Shareholder" shall have the meaning ascribed
to such term under Section 1090.3 of the Act.

Section 2. Vote Required for Certain Stock
Purchases.

A. Any direct or indirect purchase by the Corporation, or
any subsidiary of the Corporation, of any capital stock from a
person or persons known by a majority of the Continuing Directors
of the Corporation to be an Interested Shareholder who has
beneficially owned such capital stock for less than three years
prior to the date of such purchase, or any agreement in respect
thereof, at a price in excess of the Fair Market Value shall
require the affirmative vote of no less than 66 2/3% of the votes
cast by the holders, voting together as a single class, of all then
outstanding shares of capital stock, excluding for this purpose the
votes by the Interested Shareholder, unless a greater vote shall be
required by law.

B. Such affirmative vote shall not be required for a
purchase or other acquisition of securities of the same class made
on substantially the same terms to all holders of such securities
and complying with the applicable requirements of the Exchange Act,
and the rules and regulations thereunder (or any subsequent
provisions replacing the Exchange Act, rules or regulations).
Furthermore, such affirmative vote shall not be required for any
purchase effected on the open market and not the result of a
privately-negotiated transaction.

Section 3. Powers of Continuing Directors.
The Continuing Directors of the Corporation shall have the power
and duty to determine for the purposes of this Article VI, on the
basis of information known to them after reasonable inquiry,
whether a person is an Interested Shareholder, and the number of
shares of capital stock owned beneficially by any person.

ARTICLE VII

Board of Directors

Section 1. Management by Board of Directors.
The business and affairs of the Corporation shall be under the
direction of the Board of Directors.

Section 2. Number of Directors. The number
of Directors which shall constitute the whole board shall be not
less than three nor more than fifteen, and shall be determined by
resolution adopted by a vote of two-thirds (2/3) of the entire
board, or at an annual or special meeting of shareholders by the
affirmative vote of sixty-six and two-third percent (66 2/3%) of
the outstanding stock entitled to vote. No reduction in number
shall have the effect of removing any director prior to the
expiration of his term. The number of directors of the Corporation
may, from time to time, be increased or decreased in such manner as
may be provided in the bylaws of the Corporation.

Section 3. Classes of Directors; Election by
Shareholders; Vacancies. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the
total number of directors constituting the entire Board of
Directors. The term of the initial Class I directors shall
terminate on the date of the 1997 annual meeting of shareholders;
the term of the initial Class II directors shall terminate on the
date of the 1998 annual meeting of shareholders and the term of the
initial Class III directors shall terminate on the date of the 1999
annual meeting of shareholders. At each annual meeting of
shareholders beginning in 1997, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director
shall hold office until the annual meeting for the year in which
his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board
of directors, however resulting, may be filled by a majority of the
directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy shall
hold office for a term that shall coincide with the term of the
class to which such director shall have been elected. No election
of directors need be by written ballot.

Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of
Preferred Stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of
office, filling of vacancies and other features of such
directorships shall be governed by the terms of the Certificate of
Designation attributable to such Preferred stock or the resolution
or resolutions adopted by the Board of Directors pursuant to
Section 2 of this Article VII applicable thereto, and such
directors so elected shall not be divided into classes pursuant to
this Article VII unless expressly provided by such terms.

ARTICLE VIII

Indemnity

Section 1. Third Party Claims. The
Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture or other enterprise against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interest of the Corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent shall not of itself
create a presumption that the person did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to
the best interest of the Corporation and with respect to any
criminal action or proceeding had reasonable cause to believe that
his conduct was unlawful.

Section 2. Derivative Claims. The Corporation
shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit, if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the
court in which such action or suit was brought shall determine,
upon application, that despite the adjudication of liability, but
in the view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.

Section 3. Expenses. Expenses, including fees
and expenses of counsel, incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding may be
paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such
amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized herein.

Section 4. Insurance. The Corporation may
purchase (upon resolution duly adopted by the board of directors)
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability.

Section 5. Reimbursement. To the extent that
a director, officer, employee or agent of, or any other person
entitled to indemnity hereunder by, the Corporation has been
successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to herein or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him
in connection therewith.

Section 6. Enforcement. Every such person
shall be entitled, without demand by him upon the Corporation or
any action by the Corporation, to enforce his right to such
indemnity in an action at law against the Corporation. The right
of indemnification and advancement of expenses hereinabove provided
shall not be deemed exclusive of any rights to which any such
person may now or hereafter be otherwise entitled and specifically,
without limiting the generality of the foregoing, shall not be
deemed exclusive of any rights pursuant to statute or otherwise, of
any such person in any such action, suit or proceeding to have
assessed or allowed in his favor against the Corporation or
otherwise, his costs and expenses incurred therein or in connection
therewith or any part thereof.

ARTICLE IX

Amendments; Bylaws; Control Shares Act; Written Consent

Section 1. Amendments to Certificate of
Incorporation. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the issued and outstanding stock having voting power,
voting together as a single class, shall be required to amend,
repeal or adopt any provision inconsistent with Articles V, VI,
VII, VIII and this Article IX of this Certificate of Incorporation.

Section 2. Bylaws. Prior to the receipt of
any payment for any of the Corporation's stock, the Bylaws of the
Corporation shall be adopted, amended or repealed by the
Incorporator. Thereafter, in furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is
expressly authorized to adopt, repeal, alter, amend or rescind the
Bylaws of the Corporation. In addition, the Bylaws of the
Corporation may be adopted, repealed, altered, amended, or
rescinded by the affirmative vote of the holders of sixty-six and
two-thirds percent (66 2/3%) of the outstanding stock of the
Corporation entitled to vote thereon.

Section 3. Control Shares Act. The
Corporation shall not be subject to the Oklahoma Control Shares Act
as codified at Sections 1145-1155 of the Act. This election shall
be effective on the date of filing this Certificate.

Section 4. Action By Written Consent. Any
action required or permitted to be taken at a meeting of the
shareholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of corporate action without a meeting by less
than unanimous written consent shall be given to those shareholders
who have not consented in writing.

ARTICLE X

Incorporator

The name and mailing address of the Incorporator is as
follows:

W. Chris Coleman Tenth Floor
Two Leadership Square
Oklahoma City, OK 73102

I, the undersigned, for the purpose of forming a corpo-
ration under the laws of the State of Oklahoma, do make, file and
record this Certificate, and do certify that the facts herein
stated are true, and I have accordingly hereunto set my hand this
18th day of October, 1996.

W. CHRIS COLEMAN
W. Chris Coleman

<PAGE>
CONSENT TO SIMILAR NAME

TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA;

Pursuant to 18 O.S. 1986 Supp. Section 1141 or 54 O.S. Supp.
1984, Section 303, whichever is applicable, the undersigned
corporation or limited partnership hereby consents to the use of
the name or a similar name.

1. The name of the consenting corporation or limited partnership
is:

CHESAPEAKE LIMITED PARTNERSHIP

and is organized under the laws of the State of Oklahoma.

2. The proposed name of the corporation or limited partnership to
which this consent is given is:

CHESAPEAKE OKLAHOMA CORPORATION

and is organized or is to be organized under the laws of the State
of Oklahoma.

3. In the event the proposed corporation name is identical to the
consenting corporation's name the consenting corporation is about
to:

A. Change its name _____.
B. Cease to do business X.
C. Withdraw from Oklahoma _____.
D. Be wound up _____.

IN WITNESS WHEREOF, this corporation or limited partnership
has caused this consent to be executed this 14th day of November,
1996.

CHESAPEAKE OPERATING, INC., General
Partner

By TOM L. WARD
Tom L. Ward, Chief Operating
Officer

ATTEST:

JANICE A. DOBBS
Janice A. Dobbs, Secretary

<PAGE>
OFFICE OF THE SECRETARY OF STATE

STATE OF OKLAHOMA

STATE SEAL OF OKLAHOMA

CERTIFICATE OF MERGER

WHEREAS, CHESAPEAKE ENERGY CORPORATION formerly: CHESAPEAKE
OKLAHOMA CORPORATION, a corporation organized under the laws of the
State of OKLAHOMA, has filed in the office of the Secretary of
State duly authenticated evidence of a merger whereby said
corporation is the surviving entity, as provided by the laws of the
State of Oklahoma.

NOW THEREFORE, I, the undersigned Secretary of State of
Oklahoma, by virtue of the Powers vested in me by law, do hereby
issue this Certificate evidencing such merger.

IN TESTIMONY WHEREOF, I hereunto set my hand and cause to be
affixed the Great Seal of the State of Oklahoma.

EFFECTIVE DATE: DECEMBER 31, 1996

Filed in the City of Oklahoma City this 23rd day of December,
1996.

TOM COLE
Tom Cole, Secretary of State
STATE SEAL OF OKLAHOMA
BETH GARNER
Beth Garner

<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
CHESAPEAKE ENERGY CORPORATION
INTO
CHESAPEAKE OKLAHOMA CORPORATION

CHESAPEAKE ENERGY CORPORATION, a Delaware corporation
(the "Corporation"), DOES HEREBY CERTIFY:

FIRST: That it owns 100% of the issued and outstanding
shares of the capital stock of CHESAPEAKE OKLAHOMA CORPORATION, an
Oklahoma corporation ("Chesapeake Oklahoma").

SECOND: That its board of directors at a meeting held on
the 15th day of October, 1996, determined to merge the Corporation
into CHESAPEAKE OKLAHOMA CORPORATION, and did adopt the following
resolutions:

WHEREAS, the officers of the Corporation recommended that
the Corporation reincorporate under the laws of the State
of Oklahoma and the Board of Directors, after discussing
the issue, has determined that the reincorporation is in
the best interest of the shareholders and the
Corporation; and

WHEREAS, to facilitate the Corporation's reincorporation,
the officers of the Corporation recommended that the
Corporation form Chesapeake Oklahoma Corporation
("Chesapeake Oklahoma") to be organized and exist under
and by virtue of the laws of the State of Oklahoma, with
an authorized capitalization of (i) 100 million shares of
common stock, $.01 par value ("Chesapeake Oklahoma Common
Stock"), 10 shares of which will be issued and
outstanding prior to the reincorporation, and (ii) 10
million shares of preferred stock, $.01 par value, no
shares of which will be issued and outstanding prior to
the reincorporation (all shares of Chesapeake Oklahoma
Common Stock outstanding prior to the reincorporation
will be held of record and beneficially by the
Corporation).

NOW, THEREFORE, BE IT RESOLVED, that the officers of the
Corporation be, and each of them hereby is, authorized
and directed to take any and all actions required to
reincorporate the Corporation under the laws of the State
of Oklahoma, including without limitation, the forming of
Chesapeake Oklahoma as a new transitory subsidiary, in
accordance with the recitations set forth herein, the
listing of the shares of Chesapeake Oklahoma on the New
York Stock Exchange, the registration of such shares with
the Securities and Exchange Commission and any state
securities agency, the assumption by Chesapeake Oklahoma
of all existing plans and registration statements of the
Corporation and such other actions as may be necessary to
the effect that the rights and obligations of Chesapeake
Oklahoma will be virtually identical to the rights and
obligations of the Corporation.

WHEREAS, after the formation of Chesapeake Oklahoma, the
Board of Directors deems it advisable and in the best
interests of the Corporation and its shareholders that
the Corporation merge with and into Chesapeake Oklahoma
pursuant to Section 1083 of the Oklahoma General
Corporation Act and Section 253 of the Delaware General
Corporation Law (the "Merger") and immediately thereafter
for Chesapeake Oklahoma to change its name to Chesapeake
Energy Corporation; and

WHEREAS, the Corporation and Chesapeake Oklahoma will
hereinafter be know as the "Constituent Corporations;"
and

WHEREAS, the Board of Directors deems it advisable and in
the best interests of the Corporation and its
shareholders that the Corporation be merged with and into
Chesapeake Oklahoma in the manner contemplated herein
(the "Plan") and recommend that the Merger and the Plan
be approved and adopted by the shareholders of the
Corporation;

NOW, THEREFORE, BE IT RESOLVED, that the Constituent
Corporations will be merged into a single corporation by
the Corporation merging with and into Chesapeake
Oklahoma, which will survive the Merger, pursuant to the
provisions of Section 1083 of the Oklahoma General
Corporation Act and Section 253 of the Delaware General
Corporation Law. Upon such Merger, the separate
existence of the Corporation will cease, and Chesapeake
Oklahoma will become the owner, without transfer, of all
rights and property of the Constituent Corporations, and
will be subject to all the liabilities of the Constituent
Corporations in the same manner as if Chesapeake Oklahoma
had itself incurred such liabilities all as provided by
the Oklahoma General Corporation Act.

FURTHER RESOLVED, that, on the Effective Date of the
Merger, which will be 5:00 p.m., CST, on December 31,
1996 (the "Effective Date of the Merger"), the
Certificate of Incorporation and Bylaws of Chesapeake
Oklahoma, as currently in effect, will be the Certificate
of Incorporation and Bylaws of Chesapeake Oklahoma until
they are duly amended, except that the name of Chesapeake
Oklahoma will be changed to Chesapeake Energy
Corporation.

FURTHER RESOLVED, that on the Effective Date of the
Merger, the directors and officers of the Corporation
will become the directors and officers of Chesapeake
Oklahoma until their successors are duly elected and
qualified.

FURTHER RESOLVED, that on the Effective Date of the
Merger (i) each share of Chesapeake Common Stock issued
and outstanding immediately prior to the Effective Date
of the Merger, by virtue of the Merger and without any
action on the part of the holder thereof, will be
converted into one share of Chesapeake Oklahoma Common
Stock, (ii) each share of Chesapeake Oklahoma Common
Stock issued and outstanding immediately prior to the
Effective Date of the Merger, by virtue of the Merger and
without any action on the part of the holder thereof,
will be cancelled and no payment will be made in respect
thereof, and (iii) upon surrender of any certificates
representing Chesapeake Common Stock, stock certificates
representing Chesapeake Oklahoma Common Stock will be
reissued to the holder thereof.

FURTHER RESOLVED, that this Plan will be submitted to the
shareholders of the Corporation for approval in the
manner provided by applicable Oklahoma and Delaware law.
After approval by the vote of the holders representing
not less than a majority of the issued and outstanding
shares of Chesapeake Common Stock entitled to vote on the
Merger, the officers are, and each of them hereby is,
authorized and directed to execute and file with the
Secretary of State of the States of Oklahoma and Delaware
a Certificate of Ownership and Merger and to make any
such further filings as may be necessary to effectuate
the Merger.

FURTHER RESOLVED, that the officers of the Corporation
are authorized and directed to execute any and all
agreements, documents or consents, and to take any and
all actions deemed necessary or desirable to permit the
consummation of the Merger as required by: (a) that
certain Indenture dated as of March 31, 1994, as
supplemented, among the Corporation, its subsidiaries
signatory thereto as Subsidiary Guarantors and United
States Trust Company of New York, as trustee; (b) that
certain Indenture dated as of May 15, 1995 among the
Corporation, its subsidiaries signatory thereto as
Subsidiary Guarantors and United States Trust Company of
New York, as trustee; and (c) that certain Indenture
dated as of April 1, 1996 among the Corporation, its
subsidiaries signatory thereto as Subsidiary Guarantors
and United States Trust Company of New York, as trustee.
The execution by the officers, or any one of them, of any
such document or agreement, or the doing by them of any
act in connection with the foregoing matter, will
conclusively establish their authority therefor from this
Board and from the Corporation and the approval,
ratification and adoption of any documents or agreements
executed and any action taken.

FURTHER RESOLVED, that the officers of the Corporation
be, and they hereby are, authorized and directed to
execute and deliver on behalf of the Corporation all
agreements and documents contemplated by the Plan,
together with any and all documents and related
agreements deemed necessary or desirable by said officer
or officers to effectuate the foregoing, each in
accordance with the recitations contained herein, and
containing such further and different terms and
conditions as said officer or officers will deem
necessary or desirable to accomplish the objectives set
forth herein, and further, that the execution by the
officers, or any one of them, of any such document or
agreement, or the doing by them of any act in connection
with the foregoing matter, will conclusively establish
their authority therefor from this Board and from the
Corporation and the approval, ratification and adoption
of any documents or agreements executed and any action
taken.

THIRD: The merger has been approved by a majority of the
outstanding stock of the Corporation entitled to vote thereon at a
meeting duly called and held after twenty days' notice of the
purpose of the meeting mailed to each such stockholder at his
address as it appears in the records of the Corporation.

FOURTH: Chesapeake Oklahoma hereby agrees that it may be
served with process in the state of Delaware in any proceeding for
enforcement of any obligation of any constituent corporation of
Delaware, as well as for enforcement of any obligation of
Chesapeake Oklahoma arising from the merger, including any suit or
other proceeding to enforce the right of any shareholders as
determined in appraisal proceedings pursuant to the provisions of
Section 262 of the Delaware General Corporation Law, and hereby
irrevocably appoints the Secretary of State of the State of
Delaware as its agent to accept service of process in any such suit
or other proceeding. The address to which a copy of such process
shall be mailed by the Secretary of State of Delaware is 6100 N.
Western Avenue, Oklahoma City, OK 73118.

IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by its President and attested to by its
Secretary effective the 13th day of December, 1996.

CHESAPEAKE ENERGY CORPORATION

THOMAS L. WARD
Thomas L. Ward
President

ATTEST:

JANICE DOBBS
Janice Dobbs
Secretary
[Seal]

CHESAPEAKE ENERGY CORPORATION
1992 NONSTATUTORY STOCK OPTION PLAN

As amended and restated through October 15, 1996
Reflects stock splits through December 31, 1996
<PAGE>

CHESAPEAKE ENERGY CORPORATION
1992 NONSTATUTORY STOCK OPTION PLAN
As amended and restated through October 15, 1996
Reflects stock splits through December 31, 1996

1. Purpose. The purpose of the Chesapeake Energy Corporation Third
Amended and Restated 1992 Nonstatutory Stock Option Plan (the "Plan") is to
aid Chesapeake Energy Corporation (the "Company") and its Subsidiaries, in
attracting and retaining (a) members on their Board of Directors
("Directors") and (b) professionals and independent consultants
(collectively, "Consultants") of outstanding competence and to enable
Directors and Consultants of the Company and any Subsidiary to acquire
or increase ownership interests in the Company on a basis that will
encourage them to use their best efforts to promote the growth and
profitability of the Company or any Subsidiary. Consistent with these
objectives, the Plan authorizes the granting to Directors and Consultants
of options to acquire shares of Company stock pursuant to the terms and
conditions hereinafter set forth.

2. Definitions. The following terms have the meanings set forth unless
the context clearly indicates to the contrary:

2.1 Board shall mean the Board of Directors of the Company.

2.2 Code shall mean the Internal Revenue Code of 1986, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.

2.3 Committee shall mean the Stock Option Committee of the Board.

2.4 Company shall mean Chesapeake Energy Corporation.

2.5 Consultant shall mean a person who is engaged by the
Company or a Subsidiary to provide services to the Company or a Subsidiary
on a regular basis but who is not an employee. The term includes, but is not
limited to, attorneys and accountants.

2.6 Date of Grant shall mean the date on which an Option is
granted under the Plan to an Optionee.

2.7 Director shall mean a member of the Board.

2.8 ERISA shall mean the Employee Retirement Income Security
Act of 1974, as amended, and any successor statute of similar import,
together with the regulations thereunder, in each case as in effect from
time to time.

2.9 Exchange shall mean the Securities Exchange Act of 1934,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.

2.10 Option shall mean a "stock option" to purchase
Shares of the Company granted pursuant to the provisions of Paragraph 6
hereof.

2.11 Option Period shall mean the period during which an Option
may be exercised by the Optionee or Successor Optionee.

2.12 Option Price shall mean the price to be paid by the Optionee
to the Company upon the exercise of an Option.

2.13 Optionee shall mean a Director or Consultant to whom an
Option has been granted under the Plan.

2.14 Parent shall mean any future corporation which is a "parent"
of the Company as defined in Sections 424(e) and (g) of the Code.

2.15 Plan shall mean the Chesapeake Energy Corporation Amended
and Restated 1992 Nonstatutory Stock Option Plan.

2.16 Shares shall mean the $0.01 par value common stock of the
Company.

2.17 Stock Option Agreement shall mean the agreement entered
into between the Company and the Optionee under which the Optionee may
purchase Shares pursuant to the Plan.

2.18 Subsidiary shall mean any present or future corporation
which is a "subsidiary" of the Company as defined in Sections 424(f) and
(g) of the Code.

2.19 Successor Company shall mean any future corporation which
succeeds to or is assigned or has transferred to it the business of the
Company as a result of or in connection with a corporate merger, consolidation,
combination, reorganization or liquidation.

2.20 Successor Optionee shall mean the personal representative
of the estate of a deceased Optionee.

3. Administration. The Plan shall be administered by the Committee
appointed by the Board.

3.1 Composition of Committee. The Committee shall consist of
two (2) or more members of the Board appointed by the Board. The members of
the Committee shall serve, and may be removed, at the pleasure of the Board.
The grant of an Option under the Plan and any participation in the Plan by an
Optionee who is a member of the Committee must be ratified and approved by a
majority of the Directors who are not employees of the Company or a
Subsidiary. Any member may serve concurrently as a member of any other
administrative committee of any other plan of the Company or any of its
affiliates entitling participants therein to acquire stock, stock options
or deferred compensation rights (including stock appreciation rights).

3.2 Duties and Powers of Committee. Except with respect to
Options granted or to be granted pursuant to Paragraph 6.11 of this Plan,
the Committee shall have the power where consistent with the general purpose
and intent of the Plan (a) to establish policies and to adopt rules and
regulations for carrying out the purposes and provisions of the Plan;
(b) to interpret and construe the Plan and determine all questions arising
under the Plan and any agreement made pursuant to the Plan, and any such
interpretation, construction or determination made by the Committee shall
be final, binding and conclusive; (c) to determine the number of Shares
covered by each Option; (d) to determine the time or times when Options
will be granted and exercised; (e) to determine the conditions and
restrictions under which Options may be granted and exercised; (f) to
determine if the Shares will be subject to any restrictions upon the
exercise of such Option; and (g) to prescribe the form of the instruments
relating to the grant, exercise and other terms of Options. With respect to
participation in the Plan by an Optionee who is a member of the Committee,
the exercise of the foregoing powers must be ratified and approved by a
majority of the Directors who are not employees of the Company or any
Subsidiary.

3.3 Majority Rule. A majority of the members of the Committee
(but not less than two (2)) shall constitute a quorum for the transaction
of any business under the Plan and any action taken by a majority present
at a meeting at which a quorum is present shall constitute the action of
the Committee. Notwithstanding anything herein to the contrary, any action
with respect to participation in the Plan by any Optionee who is a
member of the Committee must be ratified and approved by not less
than a majority of the Directors who are not employees of the Company or
any Subsidiary.

3.4 Company Assistance. The Company shall supply full and
timely information to the Committee on all matters relating to (a) eligible
Directors, their membership on the Board, death, retirement, disability or
other termination of membership on the Board, (b) eligible Consultants,
the term of their engagement with the Company or with a Subsidiary, death,
retirement, disability or other termination as a Consultant for the Company
or for a Subsidiary and (c) such other pertinent facts as the Committee may
require. The Company shall furnish the Committee with such clerical and
other assistance as is necessary in the performance of its duties.

3.5 Reliance on Reports. Each member of the Committee and
each member of the Board shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the
Company, its Subsidiaries and Successor Companies and upon any other
information furnished in connection with the Plan by any person or persons.
In no event shall any person who is or shall have been a member of the
Committee or the Board be liable for any determination made or other action
taken or any omission to act in reliance upon any such report or information
or for any action or failure to act if made or done in good faith.

4. Eligibility; Participation in the Plan. Options may be granted only
to Directors and Consultants. Subject to the terms and conditions of the Plan,
the Committee shall determine from time to time those Directors and Consultants
who are to be granted Options. Except as provided in paragraph 6.11 of this
Plan, in making any determination as to Optionees to whom Options shall be
granted and as to the number of Shares to be covered by such Options, the
Committee shall take into account the duties of the respective Optionees,
their present and potential contributions to the success of the Company,
and such other factors as the Committee shall deem relevant in connection
with accomplishing the purposes of the Plan.

5. Shares Subject to Plan. Subject to any adjustment required by
Paragraph 5.1, the aggregate number of Shares which may be issued and sold
hereunder shall not exceed 3,132,000 Shares. Such Shares may be either
authorized and unissued Shares or Shares issued and thereafter acquired
by the Company. If any Option for Shares granted under the Plan lapses,
or is otherwise terminated, the Committee may grant Options for such
Shares to other Optionees.

5.1 Adjustments. If the outstanding Shares are hereafter
increased, decreased, changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation
by reason of merger, consolidation, reorganization, recapitalization,
reclassification, combination of shares, stock split-up, spin-off, or
stock dividend, then the following shall apply:

(a) Subject to the provisions of Paragraph 5.1(b), the
aggregate number and kind of Shares subject to Options which may be
granted hereunder shall be adjusted accordingly. For example, if there
were a two-for-one stock split, or if there were declared a stock dividend
of one share per Share, the aggregate number of Shares which may be issued
and sold hereunder would increase from 290,000 Shares to 580,000 Shares.

(b) Where dissolution or liquidation of the Company or any
merger or combination in which the Company is not a surviving corporation
is involved and no provision is made for the assumption of outstanding
Options or the substitution therefor, consistent with Paragraph 6.4
hereof, each outstanding Option granted hereunder shall terminate, but
the Optionee shall have the right, immediately prior to such dissolution,
liquidation, merger, or combination, to exercise his or her Option, in
whole or in part, to the extent that it shall not have been previously
exercised, without regard to any vesting provisions.

(c) Subject to the provisions of Paragraph 5.1(b), rights
under outstanding Options granted hereunder, both as to the number of Shares
and the Option Price, shall be adjusted accordingly. For example, if an
Option were granted under this Plan to purchase 1,000 Shares at $13.00 per
Share and there were a two-for-one stock split or if there were declared a
stock dividend of one share per Share, the aggregate number of Shares which
could be purchased and sold under the Option would increase from 1,000
Shares to 2,000 Shares and the Option Price for the Shares would decrease
from $13.00 per Share to $6.50 per Share.

5.2 Determination by Committee. The adjustments required by
Paragraph 5.1 and the manner of application of Paragraph 5.1 shall be
determined solely by the Committee, and any such adjustments may provide
for the elimination of fractional Share interests.

6. Option Grant and Stock Option Agreement. Each Option granted under
this Plan shall be evidenced by the minutes of a meeting of the Committee or
by the written consent of the Committee and by a written Stock Option
Agreement effective on the Date of Grant and executed by the Company and
the Optionee. Each Option granted hereunder shall contain such terms,
restrictions and conditions as the Committee may determine, which terms,
restrictions and conditions may or may not be the same in each case, subject
to the following provisions of this Paragraph 6. Optionees may be granted
more than one Option. The granting of an Option shall not affect any
outstanding Option previously granted to an Optionee under the Plan.

6.1 Option Price. The Option Price for Shares shall be
determined by the Committee but in no event shall such Option Price for
Options granted after the initial public offering of the Shares be less than
the greater of (a) the fair market value of the common stock of the Company
on the date of grant or (b) the par value of the Shares. "Fair market
value" shall be determined by the Committee as follows: (i) if the common
stock of the Company is listed for trading on one or more national securities
exchanges (including the NASDAQ National Market System), the reported last
sales price on such principal exchange as of the granting date, or other
relevant date, or if such common stock shall not have been traded
on such principal exchange on such date, the reported last sales price on
such principal exchange on the first day prior thereto on which such common
stock was so traded; or (ii) if the common stock of the Company is not
listed for trading on a national securities exchange (including the
NASDAQ National Market System) but is traded in the over-the-counter market,
the mean of the highest and lowest bid prices for such common stock as of
the granting date, or other relevant date, or if there are no such bid
prices for such common stock on such date, the mean of the highest and
lowest bid prices on the first day prior thereto on which such prices existed.
Provided, if the price of such common stock is not reported or listed as
aforesaid, then the "fair market value" of such common stock shall be
determined by the Committee as of the relevant date, and the Committee
shall utilize any reasonable and prudent method in determining such fair
market value, including without limitation, the obtaining of opinions of
independent and well-qualified experts.

6.2 Option Period. No Options may be granted under the Plan
after December 10, 2002. The maximum Option Period for exercise of an Option
shall be established by the Committee at the Date of Grant, but the Option
Period shall not be more than ten (10) years from the Date of Grant or such
shorter period as provided in Paragraph 6.3 with respect to early termination.

6.3 Vesting of Options. Each Option granted hereunder may
only be exercised to the extent that the Optionee is vested in such Option.
An Optionee shall vest separately in each Option granted hereunder in
accordance with a schedule determined by the Committee in its sole
discretion, which will be included in the Stock Option Agreement.

6.4 Merger, Consolidation, Etc. In the event that the Company
shall, pursuant to action by its Board, at any time propose to merge into,
consolidate with, or sell or otherwise transfer all or substantially all
of its assets to another corporation and provision is not made pursuant
to the terms of such transaction for the assumption by the surviving,
resulting or acquiring corporation of outstanding Options under the
Plan, or for the substitution of new options therefor, the Committee
shall cause written notice of the proposed transaction to be given to
each Optionee not less than forty (40) days prior to the anticipated
effective date of the proposed transaction, and his or her Option shall
become one hundred percent (100%) vested and, prior to a date specified
in such notice, which shall be not more than ten (10) days prior to the
anticipated effective date of the proposed transaction, each Optionee
shall have the right to exercise his or her Option to purchase any or all
of the Shares then subject to such Option, including those, if any, which
by reason of other provisions of the Plan have not then become available
for purchase. Each Optionee, by so notifying the Company in writing, may,
in exercising his or her Option, condition such exercise upon, and provide
that such exercise shall become effective at the time of, but immediately
prior to, the consummation of the transaction, in which event such Optionee
need not make payment for the Shares to be purchased upon exercise of such
Option until five (5) days after written notice by the Company to such
Optionee that the transaction has been consummated. If the transaction
is consummated, each Option, to the extent not previously exercised prior
to the date specified in the foregoing notice, shall terminate on the
effective date of such consummation. If the transaction is abandoned,
(i) any Shares not purchased upon exercise of such Option shall continue
to be available for purchase in accordance with the other provisions of
the Plan and (ii) to the extent that any Option not exercised prior to
such abandonment shall have vested solely by operation of this Paragraph
6.4, such vesting shall be deemed annulled, and the vesting schedule set
forth in Paragraph 6.3 shall be reinstituted, as of the date of such
abandonment.

6.5 Option Exercise. At all times during the period commencing
with the date an Option is granted to an Optionee and ending on the earlier
of the expiration of the Option Period applicable to such Option or the date
which is one (1) year prior to the date the Option is exercised by such
Optionee, such Optionee must be a Director, a Consultant or an employee
of the Company or a Subsidiary (in the event that after the date an Option
is granted a Director is or becomes a Consultant or an employee of the
Company or a Subsidiary or a Consultant is or becomes a Director or an
employee of the Company or a Subsidiary). In the event an Optionee's
membership on the Board, his engagement as a Consultant for the Company
or a Subsidiary or his employment by the Company or a Subsidiary is
terminated by reason of his death, the Successor Optionee may exercise
any unexercised Option granted to the Optionee under the Plan at any time
within three (3) years after the Optionee's death but in any event not
after the expiration of the Option Period applicable to such Option.
If an Optionee's membership on the Board, his engagement as a Consultant
for the Company or a Subsidiary or his employment by the Company or a
Subsidiary is terminated for cause, the Optionee's Option shall expire
thirty (30) days after such termination. Discharge for cause shall
include termination for malfeasance or gross misfeasance in the
performance of duties, conviction of illegal activity in connection
therewith, or any conduct detrimental to the interests of the Company,
and in any event the determination of the Committee with respect
thereto shall be final and conclusive. Notwithstanding the foregoing,
the Committee, in its sole discretion at the time an Option is granted,
may establish an earlier date (or dates) on which an Option must be exercised.

6.6 Notice of Option Exercise and Payment. Options may be exercised
in whole at any time, or in part from time to time, with respect to
whole shares only, within the period provided for the exercise thereof in
the Stock Option Agreement, and such Option shall be exercised by a written
notice of intent to exercise the Option with respect to a specified number
of Shares delivered to the Company at its principal office in Oklahoma
City, Oklahoma. Payment for Shares purchased under this Plan shall be
made in full, either in cash, or in common stock of the Company or in a
combination of cash and common stock of the Company, at the time of the
exercise of the Option as a condition thereof. If common stock of the
Company is utilized as consideration for the purchase of Shares upon
exercise of an Option, such common stock shall be valued at the "fair
market value" as determined in Paragraph 6.1 hereof as of the exercise
date or other relevant date. In addition to the foregoing procedure
which may be available for the exercise of any Option, the Optionee
may deliver to the Company a notice of exercise including an irrevocable
instruction to the Company to deliver the stock certificate representing
the Shares subject to an Option to a broker authorized to trade in the
common stock of the Company. Upon receipt of such notice, the Company
will acknowledge receipt of the executed notice of exercise and forward
the notice to the broker. Upon receipt of the copy of the notice which
has been acknowledged by the Company, and without waiting for issuance of
the actual stock certificate with respect to the exercise of the Option,
the broker may sell the Shares (or that portion of the Shares necessary to
cover the Option Price and any withholding taxes due). Upon receipt of
the stock certificate from the Company, the broker will deliver directly
to the Company that portion of the sales proceeds to cover the Option
Price and any withholding taxes. Further, the broker may also facilitate
a loan to the Optionee upon receipt of the notice of exercise in advance
of the issuance of the actual stock certificate as an alternative means
of financing and facilitating the exercise of any Option. For all
purposes of effecting the exercise of an Option, the date on which the
Optionee gives the notice of exercise to the Company will be the date he
becomes bound contractually to take and pay for the Shares underlying the
Option.

6.7 Limited Transferability of Options. The Committee may, in
its discretion, authorize all or a portion of the Options to be granted to an
Optionee who is a Director to be on terms which permit transfer by such
Optionee to (I) the ex-spouse of the Optionee pursuant to the terms of a
domestic relations order, (ii) the spouse, children or grandchildren of
the Optionee ("Immediate Family Members"), (iii) a trust or trusts for
the exclusive benefit of such immediate Family Members, or (iv) a
partnership in which such Immediate Family Members are the only
partners. In addition (x) there may be no consideration for any such
transfer, (y) the stock option agreement pursuant to which such Options
are granted must be approved by the Committee, and must expressly provide
for transferability in a manner consistent with this paragraph, and (z)
subsequent transfers of transferred Options shall be prohibited except
those in accordance with paragraph 6.8 hereof. Following transfer, any such
Options shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer, provided that for purposes of
paragraphs 6.5 and 6.11 hereof the term "Optionee" shall be deemed to refer
to the transferee. The events of termination of employment of paragraphs
6.5 and 6.11 hereof shall continue to be applied with respect to the
original Option, following which the Options shall be exercisable by the
transferee only to the extent, and for the periods specified in paragraphs
6.5 and 6.11 hereof. No transfer pursuant to this paragraph 6.7 shall be
effective to bind the Company unless the Company shall have been furnished
with written notice of such transfer together with such other documents
regarding the transfer as the Committee shall request.

6.8 Transfers By Will or the Laws of Descent and Distribution.
Options shall be transferable by will or the laws of descent and distribution;
however, no such transfer of an Option by the Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice of such transfer and an authenticated copy of the will and/or such
other evidence as the Committee may deem necessary to establish the
validity of the transfer and the acceptance by the Successor Optionee of
the terms and conditions of such Option.

6.9 No Rights as Stockholder or to Continued Membership on the
Board or to Continued Engagement as a Consultant. No Optionee shall have
any rights as a stockholder of the Company with respect to any Shares
prior to the date of issuance to him or her of the certificate or
certificates for such Shares and neither the Plan nor any Option granted
under the Plan shall confer upon an Optionee any right to continuance of
membership on the Board or Board of Directors of a Subsidiary, to
continuance of engagement as a Consultant for the Company or for a
Subsidiary or to continuance of employment by the Company or a Subsidiary
(in the event a Director or Consultant is or becomes an employee of the
Company after the date an Option is granted to any such Optionee) or
interfere in any way with the right of the shareholders of the Company
to terminate the Optionee's membership on the Board or Board of Directors
of a Subsidiary or interfere in any way with the right of any officer
of the Company or a Subsidiary to terminate the engagement of any
Consultant or the employment of any employee.

6.10 Surrender of Options. The Committee may permit the
voluntary surrender of all or a portion of any Option to be conditioned
upon the granting to the Optionee under this Plan of a new Option for the
same or a different number of Shares as the Option surrendered, or may
require such voluntary surrender as a condition precedent to a grant of
a new Option to such Optionee. Such new Option shall be exercisable at
the price, during the period, and in accordance with any other terms or
conditions specified by the Committee at the time the new Option is
granted, all determined in accordance with the provisions of this Plan
without regard to the price, period of exercise, or any other terms or
conditions of the Option surrendered.

6.11 Director Formula Awards. Notwithstanding anything to the
contrary in this Plan, each Director, who is not an executive officer of the
Company on the date this Paragraph 6.11 is approved by the shareholders of
the Company, shall be granted on such date an Option for the purchase of
5,000 Shares, and thereafter each person serving as a Director on the
second Tuesday of each succeeding October, other than any Director
who is an executive officer of the Company, shall be granted on such
date an option to purchase 10,000 Shares. A Director shall be eligible
to exercise any Option granted under this Paragraph 6.11 immediately.
The Option Price for Options granted under this Paragraph 6.11 shall be
equal to the fair market value (as defined in Paragraph 6.1 of this Plan)
on the date of grant. The number of shares and the option price shall be
subject to adjustment as provided in Paragraph 5.1 and the option price
shall be payable as provided in Paragraph 6.6. The terms of each option
granted under this Paragraph 6.11 shall be for a period which shall expire
upon the first to occur of (x) ten (10) years from the date of grant or
(y) one (1) year after the date that the Optionee ceases to be a Director
of the Company; provided, however, if an Optionee ceases to be a
Director by reason of his death or is terminated for cause, the exercise
period shall be as provided in Paragraph 6.5 hereof. Notwithstanding anything
herein to the contrary, pursuant to Rule 16(b)-3(c)(2)(ii)(B) promulgated
under the Exchange Act (or any successor rule) the provisions of this
Paragraph 6.11 cannot be amended more than once every six (6) months, other
than to comport with changes to the Code or rules and regulations thereunder.

7. Issuance of Shares; Restrictions. Subject to the conditions and
restrictions provided in this Paragraph 7, the Company shall, within twenty
(20) business days after an Option has been duly exercised in whole or in
part, deliver to the person who exercised the Option a certificate,
registered in the name of such person, for the number of Shares with respect
to which the Option has been exercised. The Company may legend any stock
certificate issued hereunder to reflect any restrictions provided for in
this Paragraph 7.

7.1 Registration. Unless the Shares subject to Options granted
under the Plan have been registered under the Securities Act of 1933, as
amended, and any applicable state securities laws (collectively, the "Act")
(and, in the case of any Optionee who may be deemed an "affiliate" of the
Company as defined in Rule 405 under the Act (or any successor rule), such
Shares have been registered under the Act for resale by such Optionee),
or the Company has determined that an exemption from registration is
available, the Company may require prior to and as a condition of the
issuance of any Shares that the person exercising an Option hereunder furnish
the Company with a written representation in a form prescribed by the
Committee to the effect that such person is acquiring such Shares solely
with a view to investment for his or her own account and not with a view to
the resale or distribution of all or any part thereof, and that such person
will not dispose of any of such Shares otherwise than in accordance with
the provisions of Rule 144 under the Act (or any successor rule) unless and
until either the Shares are registered under the Act or the Company is
satisfied that an exemption for such registration is available.

7.2 No Obligation to Issue. Anything contained herein to the
contrary notwithstanding, the Company shall not be obligated to sell or
issue any Shares under the Plan unless and until the Company is satisfied
that such sale or issuance complies with (i) all applicable requirements
of any stock exchange on which the Shares are listed for trading or all
requirements of the National Association of Securities Dealers, Inc. if the
Shares are included in the NASDAQ National Market System (or the governing
body of the principal market in which such Shares are traded), (ii) all
applicable provisions of the Act, and (iii) all other laws or regulations
by which the Company is bound or to which the Company is subject.

7.3 Disposition. Each Stock Option Agreement shall authorize
the Company (or a Subsidiary) to make such provision as it may deem
appropriate for the withholding of any applicable federal, state or local
taxes that it determines it may be obligated to withhold or pay in
connection with the grant or exercise of such Option or the disposition of
Shares acquired upon exercise of such Option.

8. Amendment and Termination of the Plan. The Plan shall terminate
after December 10, 2002, provided that the Plan shall continue with respect
to Options which are in effect as of such date. Prior to any such
termination, the Plan may be terminated, altered, changed, modified or
amended by the Board for any reason including, but not limited to, the
necessity of modifying requirements of the Plan to conform with the law
or to meet special circumstances not anticipated or covered by the Plan;
provided that except as required by Paragraph 5.1 hereof, no action of the
Board may, without the approval of the shareholders of the Company, (a)
increase the aggregate number of Shares which may be purchased under Options
granted under the Plan; (b) materially change the persons or class of persons
eligible to participate in the Plan; (c) withdraw the administration of the
Plan from the Committee; (d) amend or alter the Option Price; (e) extend
the maximum Option Period or extend the term of the Plan; (f) materially
increase the benefit accruing to participants under the Plan; or (g) amend
the Plan in any manner which would impair the applicability of Rule 16b-3
as promulgated under the Exchange Act (or any successor rule) to the Plan.
No amendment, modification or termination of the Plan shall in any manner
adversely affect any Option theretofore granted under the Plan without
the consent of the affected Optionee.

9. Indemnification. Each person who is or shall have been a member
of the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability or expense that may be
imposed upon or be reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may
be a party or in which he may be involved by reason of any action taken
or failure to act under the Plan and against and from any and all amounts
paid by him in settlement thereof with the Company's approval or paid by
him in satisfaction of a judgment in any such action, suit, or proceeding
against him; provided, he shall give the Company an opportunity, at its own
expense, to defend the same before he undertakes to handle and defend it on
his own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such person may
be entitled by the Company's Certificate of Incorporation, Bylaws, as a
matter of law, or otherwise. This indemnification shall not apply or be
available if it is determined by the Company that such acts or omissions
to act were willfully committed by the person involved.

10. General.

10.1 Other Compensation Plans. The adoption of this Plan shall not
affect any other stock option or incentive or other compensation plans in
effect for the Company, any Subsidiary or Successor Company, nor shall the
Plan preclude the Company from establishing any other forms of incentive
or other compensation for employees, directors or consultants of the
Company, its Subsidiaries or Successor Company.

10.2 Plan Binding on Successors. This Plan shall be binding on the
successors of the Company (including any Successor Company) and any Optionee
hereunder.

10.3 Singular, Plural; Gender. Whenever used herein, nouns in the
singular shall include the plural and the masculine pronoun shall include the
feminine gender.

10.4 Headings No Part of Plan. Headings of paragraphs are inserted
for convenience and reference only and they constitute no part of the
Plan.

10.5 Requirements of Law. If required, the granting of Options and
the issuance of Shares upon the exercise of an Option shall not be issued
except upon the approval of proper governmental agencies or securities
exchanges, if required, and only in compliance with the Act, and any other
applicable securities law or pursuant to an exemption therefrom.

10.6 Unsecured Obligation. Optionees under this Plan shall not have
any interest in any fund or specific asset of the Company by reason of this
Plan.

10.7 Expenses of the Plan. The expenses of administering the Plan
shall be borne by the Company, its Subsidiaries and its Successor
Companies.

CHESAPEAKE ENERGY CORPORATION

1994 STOCK OPTION PLAN

as Amended Through October 15, 1996
Restated to Reflect Stock Splits
Through December 31, 1996
<PAGE>
CHESAPEAKE ENERGY CORPORATION
1994 STOCK OPTION PLAN
Page

ARTICLE I General Provisions . . . . . . . . . . . . 1
1.1 Purpose. . . . . . . . . . . . . . . 1
1.2 General. . . . . . . . . . . . . . . 1
1.3 Administration of the Plan . . . . . 1
1.4 Shares Subject to the Plan . . . . . 2
1.5 Participation in the Plan. . . . . . 2
1.6 Determination of Fair Market
Value. . . . . . . . . . . . . . . . 2
1.7 Grants of Options Under Stock
Option Agreement . . . . . . . . . . 3
1.8 Amendment and Termination of the
Plan . . . . . . . . . . . . . . . . 3
1.9 Effective Date . . . . . . . . . . . 3
1.10 Securities Law Requirements. . . . . 4
1.11 Stock Certificates . . . . . . . . . 4
1.12 Option Exercise and
Payment for Stock. . . . . . . . . . 4
1.13 Stock Options and ISO
Options Granted Separately . . . . . 5
1.14 Use of Proceeds. . . . . . . . . . . 5
1.15 Non-Transferability of Options . . . 5
1.16 Additional Documents on Death
of Participant . . . . . . . . . . . 5
1.17 Changes in Employment . . . . . . . 6
1.18 Stockholder Rights . . . . . . . . . 6
1.19 Adjustments Upon Changes in
Capitalization . . . . . . . . . . . 6
1.20 Payment of Withholding Taxes . . . . 6
1.21 Assumption of Outstanding
Options. . . . . . . . . . . . . . . 7
1.22 Retirement and Disability. . . . . . 7

ARTICLE II Stock Options. . . . . . . . . . . . . . . 7
2.1 General Terms. . . . . . . . . . . . 7
2.2 Grant and Terms for Stock Options. . 7

ARTICLE III ISO Options. . . . . . . . . . . . . . . . 9
3.1 General Terms. . . . . . . . . . . . 9
3.2 Grant and Terms of ISO Options . . . 9

ARTICLE IV Acceleration of Options Upon Corporate
Event . . . . . . . . . . . . . . . . . . 10
4.1 Acceleration of Options . . . . . . 10
4.2 Procedures for Acceleration and
Exercise . . . . . . . . . . . . . . 11
4.3 Certain Additional Payments by the
Company . . . . . . . . . . . . . . . 11

ARTICLE V Options Not Qualifying as Incentive Stock
Options. . . . . . . . . . . . . . . . . . 12
<PAGE>
CHESAPEAKE ENERGY CORPORATION
1994 STOCK OPTION PLAN

ARTICLE I

General Provisions

1.1 Purpose. The purpose of CHESAPEAKE ENERGY CORPORA-
TION 1994 STOCK OPTION PLAN (the "Plan") shall be to attract,
retain and motivate employees (the "Participants") of Chesapeake
Energy Corporation (the "Company") and of any parent or subsidiary
of the Company by way of granting (i) nonqualified stock options
("Stock Options") and (ii) incentive stock options ("ISO Options").
For purposes of this Plan, Stock Options and ISO Options are
sometimes collectively herein called "Options." The ISO Options to
be granted under the Plan are intended to be qualified pursuant to
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Stock Options to be granted are intended to be
"nonqualified stock options" as described in Sections 83 and 421 of
the Code. Further, under the Plan, the terms "parent" and
"subsidiary" shall have the same meaning as set forth in
Subsections (e), (f) and (g) of Section 424 of the Code unless the
context clearly indicates to the contrary.

1.2 General. The terms and provisions of this Article
I shall be applicable to both Stock Options and ISO Options unless
the context clearly indicates to the contrary.

1.3 Administration of the Plan.

(a) Deemed Separate Plans. For purposes of
administration, the Plan shall be deemed to consist of two separate
stock option plans, a "Non-Director Plan" which is limited to
Participants who are employees of the Company or any parent or sub-
sidiary of the Company but are not directors of the Company ("Non-
Director Participants") and a "Director Plan" which is limited to
Participants who are employees of the Company or any parent or sub-
sidiary of the Company and also directors of the Company ("Director
Participants"). Except for administration and the category of
Participants eligible to receive Options, the terms of the Non-
Director Plan and the Director Plan are identical.

(b) Committee Membership. The Non-Director Plan
shall be administered by a committee, designated the Regular Option
Committee (the "Regular Committee"), of two or more directors of
the Company, and the Director Plan shall be administered by a
committee, designated the Special Option Committee (the "Special
Committee"), of two or more directors of the Company. It is
intended that, unless otherwise determined by the Board of
Directors of the Company (the "Board"), the members of the Special
Committee shall be directors who are not Director Participants.
Accordingly, with respect to all decisions relating to Non-Director
Participants, including the grant of Options, the term "Committee"
shall apply only to the Regular Committee; and, with respect to all
decisions relating to Director Participants, including the grant of
Options, the term "Committee" shall apply only to the Special
Committee.

(c) Appointment. The members of the Committee
shall be appointed by the Board and shall serve at the pleasure of
the Board.

(d) Authority of Committee. The Committee shall
have the power where consistent with the general purpose and intent
of the Plan to (i) modify the requirements of the Plan to conform
with the law or to meet special circumstances not anticipated or
covered in the Plan, (ii) suspend or discontinue the Plan, (iii)
establish policies and (iv) adopt rules and regulations and
prescribe forms for carrying out the purposes and provisions of the
Plan including the form of any stock option agreement between the
Company and any Participant with respect to any Option granted
under the Plan (a "Stock Option Agreement"). Unless otherwise
provided in the Plan, the Committee shall have the authority to
interpret and construe the Plan, and determine all questions
arising under the Plan and any Stock Option Agreement made pursuant
to the Plan. Any interpretation, decision or determination made by
the Committee shall be final, binding and conclusive. A majority
of the Committee shall constitute a quorum, and an act of the
majority of the members present at any meeting at which a quorum is
present shall be the act of the Committee.

1.4 Shares Subject to the Plan. Shares of stock
("Stock") covered by Stock Options and ISO Options shall consist of
Four Million Eight Hundred Eighty-Six Nine Hundred Ten (4,886,910)
shares of the voting common stock, par value $.01, of the Company.
Either authorized and unissued shares or treasury shares may be
delivered pursuant to the Plan. If any Option for shares of Stock
granted to a Participant lapses, or is otherwise terminated, the
Committee may grant Stock Options or ISO Options for such shares of
Stock to other Participants.

1.5 Participation in the Plan. The Committee shall
determine from time to time those Participants who are to be
granted Stock Options and ISO Options and the number of shares of
Stock covered thereby. Provided, in no event may any Participant
be granted more than One Million One Hundred Twenty-Five Thousand
(1,125,000) Options during any consecutive three calendar year
period under the Plan.

1.6 Determination of Fair Market Value. As used in the
Plan, "fair market value" shall have the following meaning: (i) if
the common stock of the Company is listed for trading on one or
more national securities exchanges or the Nasdaq National Market
System (the "NMS"), the reported last sales price on such principal
exchange or the NMS as of the granting date, or other relevant
date, or if such common stock shall not have been traded on such
date, the reported last sales price on such principal exchange or
the NMS on the first day prior thereto on which such common stock
was so traded; or (ii) if the common stock of the Company is not
listed for trading on a national securities exchange or the NMS but
is traded in the over-the-counter market, the mean of the highest
and lowest bid prices for such common stock as of the granting
date, or other relevant date, or if there are no such bid prices
for such common stock on such date, the mean of the highest and
lowest bid prices on the first day prior thereto on which such
prices existed. Provided, if the price of such common stock is not
reported or listed as aforesaid, then the "fair market value" of
such common stock shall be determined by the Committee as of the
relevant date, and the Committee shall utilize any reasonable and
prudent method in determining such fair market value, including,
without limitation, the obtaining of opinions of independent and
well-qualified experts.

1.7 Grants of Options Under Stock Option Agreement.
Each Stock Option or ISO Option granted under this Plan shall be
evidenced by the minutes of a meeting of the Committee or by the
written consent of the Committee and by a written Stock Option
Agreement effective on the date of grant and executed by the
Company and the Participant. Each Option granted hereunder shall
contain such terms, restrictions and conditions as the Committee
may determine, which terms, restrictions and conditions may or may
not be the same in each case.

1.8 Amendment and Termination of the Plan. The Plan
shall terminate at midnight, October 17, 2004, but prior thereto
may be altered, changed, modified, amended or terminated by written
amendment approved by the Board. Provided, that no action of the
Board may, without the approval of the holders of a majority of the
Company's securities present in person or represented by proxy at
a meeting of stockholders entitled to vote thereon, increase the
aggregate number of shares of Stock which may be purchased under
Stock Options or ISO Options granted under the Plan; materially
increase the benefits accruing to Participants under the Plan; or
materially modify the requirements as to eligibility for participa-
tion in the Plan. Except as provided in this Article I, no
amendment, modification or termination of the Plan shall in any
manner adversely affect any Stock Option or ISO Option theretofore
granted under the Plan without the consent of the affected
Participant.

1.9 Effective Date. The Plan was approved by the Board
on October 18, 1994, subject to approval of the holders of a
majority of the Company's securities present in person or repre-
sented by proxy at a meeting of stockholders entitled to vote
thereon, which meeting must occur within twelve (12) months of
October 18, 1994. Hereafter, any reference to the effective date
of the Plan shall mean the date of approval by the Board.

1.10 Securities Law Requirements. The Company shall
have no obligation to issue any Stock hereunder unless the issuance
of such shares would comply with any applicable federal or state
securities laws or any other applicable law or regulations
thereunder. The Company may legend any stock certificate issued
hereunder to reflect any restrictions under federal or state
securities laws.

1.11 Stock Certificates. Upon the exercise of any Stock
Option or ISO Option, a Participant shall be issued one or more
certificates, as requested by the Participant, representing the
Stock purchased pursuant to the exercised Option.

1.12 Option Exercise and Payment for Stock. To exercise
an Option, a Participant shall give written notice of exercise to
the person designated by the Committee at the Company's principal
office. Payment in full for shares of Stock purchased under this
Plan shall accompany a Participant's notice of exercise of an
Option, together with payment for any applicable withholding taxes
as provided in Section 1.20. Payment shall be made in cash or by
check, Stock of the Company or a combination thereof, and no loan
or advance shall be made by the Company for the purpose of
financing, in whole or in part, the purchase of Stock unless such
loan or advance has been approved by the Board. In the event that
common stock of the Company is utilized as consideration for the
purchase of Stock upon the exercise of a Stock Option or an ISO
Option, then, such common stock shall be valued at the "fair market
value," as defined in Section 1.6 of the Plan, as of the date of
exercise. In addition to the foregoing procedure which may be
available for the exercise of any Stock Option or ISO Option, the
Participant may deliver to the Company a notice of exercise which
includes, in lieu of any other payment, an irrevocable instruction
to the Company to deliver the stock certificate representing the
shares of Stock being purchased, issued in the name of the
Participant, to a broker approved by the Company and authorized to
trade in the common stock of the Company. Upon receipt of such
notice, the Company shall acknowledge receipt of the executed
notice of exercise and forward this notice to the broker. Upon
receipt of the copy of the notice which has been acknowledged by
the Company, and without waiting for issuance of the actual stock
certificate with respect to the exercise of the Option, the broker
may sell the Stock or any portion thereof. The broker shall
deliver directly to the Company that portion of the sales proceeds
sufficient to cover the Option Price and withholding taxes, if any.
Further, the broker may also facilitate a loan to the Participant
upon receipt of the notice of exercise in advance of the issuance
of the actual stock certificate as an alternative means of
financing and facilitating the exercise of any Option. For all
purposes of effecting the exercise of an Option, the date on which
the Participant delivers the notice of exercise to the Company,
together with payment for the shares of Stock being purchased as
provided in this Section 1.12 and payment for any applicable
withholding taxes as provided in Section 1.20, shall be the "date
of exercise." If a notice of exercise and payment are delivered at
different times, the date of exercise shall be the date the Company
first has in its possession both the notice and full payment as
provided herein. The Committee may adopt such other procedures
which it desires for the payment of the purchase price upon the
exercise of a Stock Option or ISO Option which are not inconsistent
with the applicable provisions of the Code which relate to Stock
Options and ISO Options. In addition to the foregoing, the
Committee may, in its sole discretion, permit payment of the
exercise price of Stock Options granted under the Plan by the
Participant directing the Company to withhold from the shares of
Stock to be delivered to the Participant upon exercise of the Stock
Option shares of Stock having a "fair market value" as defined in
Section 1.6 of the Plan on the date of payment equal to the amount
of the exercise price.

1.13 Stock Options and ISO Options Granted Separately.
Since the Committee is authorized to grant Stock Options and ISO
Options to Participants, the grants thereof and Stock Option
Agreements relating thereto will be made separately and totally
independent of each other. Except as it relates to the total
number of shares of Stock which may be issued under the Plan, the
grant or exercise of a Stock Option shall in no manner affect the
grant and exercise of any ISO Options. Similarly, the grant and
exercise of an ISO Option shall in no manner affect the grant and
exercise of any Stock Options.

1.14 Use of Proceeds. The proceeds received by the
Company from the sale of Stock pursuant to the exercise of Options
granted under the Plan shall be added to the Company's general
funds and used for general corporate purposes.

1.15 Non-Transferability of Options. Except as
otherwise herein provided, any Option granted shall not be
transferable otherwise than by will or the laws of descent and
distribution, and the Option may be exercised, during the lifetime
of the Participant, only by the Participant. More particularly
(but without limiting the generality of the foregoing), the Option
shall not be assigned, transferred (except as provided above),
pledged or hypothecated in any way whatsoever, shall not be
assignable by operation of law and shall not be subject to
execution, attachment, or similar process. Any attempted assign-
ment, transfer, pledge, hypothecation, or other disposition of the
Option contrary to the provisions hereof shall be null and void and
without effect.

1.16 Additional Documents on Death of Participant. No
transfer of an Option by the Participant by will or the laws of
descent and distribution shall be effective to bind the Company
unless the Company shall have been furnished with written notice
and an authenticated copy of the will and/or such other evidence as
the Committee may deem necessary to establish the validity of the
transfer and the acceptance by the successor to the Option of the
terms and conditions of such Option.

1.17 Changes in Employment. So long as the Participant
shall continue to be an employee of the Company or its parent or
one of its subsidiaries, any Option granted to him or her shall not
be affected by any change of duties or position. Nothing in the
Plan or in any Stock Option Agreement which relates to the Plan
shall confer upon any Participant any right to continue in the
employ of the Company or its parent or any of its subsidiaries, or
interfere in any way with the right of the Company or its parent or
any of its subsidiaries to terminate the Participant's employment
at any time.

1.18 Stockholder Rights. No Participant shall have any
rights as a stockholder with respect to any shares of Stock subject
to an Option prior to the purchase of such shares of Stock by
exercise of the Option.

1.19 Adjustments Upon Changes in Capitalization. The
aggregate number of shares of Stock available for Options to be
granted under the Plan, the Option Price and the ISO Price and the
total number of shares of Stock which may be purchased by a
Participant on exercise of a Stock Option and an ISO Option shall
be appropriately adjusted or modified by the Committee to reflect
any recapitalization, stock split, merger, consolidation, reorgani-
zation, combination, liquidation, stock dividend or similar
transaction involving the Company. Provided, any such adjustment
shall be made in such a manner as to not constitute a modification
as defined in Section 424(h) of the Code.

1.20 Payment of Withholding Taxes. No exercise of any
Option may be effected until the Company receives full payment for
the Stock purchased, as provided in Section 1.12, and for any
required state and federal withholding taxes. Payment for
withholding taxes shall be made in cash or by check unless the
Committee otherwise provides. The Committee may permit payment to
be made in the form of common stock of the Company either by the
Participant surrendering, or the Company retaining from the shares
of Stock to be issued upon exercise of the Stock Option, that
number of shares of Stock (based on fair market value) that would
be necessary to satisfy the requirements for withholding any
amounts of taxes due upon the exercise of such Stock Option. The
Committee shall also have the discretion to require that the
Company retain shares of Stock issuable upon the exercise of a
Stock Option to satisfy any Participant's tax withholding obliga-
tions. For the purpose of calculating the fair market value of
shares surrendered or retained to pay withholding taxes, the
relevant date shall be the date of exercise. In the event a
Participant uses the "cashless" exercise/same-day sale procedure
set forth in Section 1.12 hereof to pay withholding taxes, the
actual sale price of shares sold to satisfy payment shall be used
to determine the amount of withholding taxes payable. Nothing
herein, however, shall be construed as requiring payment of
withholding taxes at the time of exercise if payment of taxes is
deferred pursuant to any provision of the Code, and actions
satisfactory to the Company are taken which are designed to
reasonably insure payment of withholding taxes when due. Each
Stock Option Agreement shall provide that, in the event a Partici-
pant disposes of any Stock acquired by the exercise of an ISO
Option within the two-year period following grant, or within the
one-year period following exercise, of the ISO Option, the
Participant shall so inform the Company. In such event, the
Company shall have the right to require the Participant to remit to
the Company an amount sufficient to satisfy all federal, state and
local withholding tax requirements.

1.21 Assumption of Outstanding Options. To the extent
permitted by the then applicable provisions of the Code, any
successor to the Company succeeding to, or assigned the business
of, the Company as the result of or in connection with a merger,
consolidation, combination, reorganization, liquidation or other
similar transaction may assume Options outstanding under the Plan
or issue new Options in place of outstanding Options under the Plan
with such assumption to be made on a fair and equivalent basis in
accordance with the applicable provisions of Section 424(a) of the
Code; provided, in no event shall such assumption result in a
modification of any Option as defined in Section 424(h) of the
Code.

1.22 Retirement and Disability. For the purpose of this
Plan, "Retirement" shall mean the voluntary termination of
employment of a Participant with the Company, its parent or any of
its subsidiaries after attaining at least 55 years of age, and
"Disability" shall mean termination of employment of a Participant
after incurring a "disability" as defined in Section 22(e)(3) of
the Code.

ARTICLE II

Stock Options

2.1 General Terms. With respect to Stock Options
granted on or after the effective date of the Plan, the following
provisions of this Article II shall apply. The Stock Options
granted under this Article II are intended to be "nonqualified
stock options" as described in Sections 83 and 421 of the Code.

2.2 Grant and Terms for Stock Options. Stock Options
shall be granted on the following terms and conditions. No Stock
Option shall be exercisable more than ten (10) years from the date
of grant. Subject to such limitations, the Committee shall have
the discretion to fix the period ("Option Period") during which
Stock Options may be exercised. At all times during the period
commencing with the date a Stock Option is granted to a Participant
and ending on the earlier of the expiration of the Option Period
applicable to such Stock Option or the date which is three (3)
months prior to the date the Stock Option is exercised by such
Participant, such Participant must be an employee of either (i) the
Company, (ii) a parent or a subsidiary of the Company, or (iii) a
successor to the Company or parent or a subsidiary of such
successor issuing or assuming a Stock Option in a transaction to
which Section 424(a) of the Code applies. Provided, in the case of
a Participant who has incurred a Disability, the aforesaid three
(3) month period shall mean a one (1) year period. Provided
further, in the event a Participant's employment is terminated by
reason of death, the Participant's personal representative may
exercise any unexercised Stock Option granted to the Participant
under the Plan at any time within three (3) years after the
Participant's death but in any event not after the expiration of
the Option Period applicable to such Stock Option.

(a) Option Price. The option price ("Option
Price") for shares of Stock subject to any Stock Option shall be
determined by the Committee, but in no event shall the Option Price
be less than the par value of the Stock.

(b) Acceleration of Otherwise Unexercisable Stock
Options on Retirement, Death, Disability or Other Special Circum-
stances. The Committee, in its sole discretion, may permit (i) a
Participant who terminates employment due to Retirement, (ii) a
Participant who terminates employment due to a Disability, (iii)
the personal representative of a deceased Participant, or (iv) any
other Participant who terminates employment upon the occurrence of
special circumstances (as determined by the Committee) to purchase
(within three (3) months of such date of termination of employment
or one (1) year in the case of a Participant suffering a Disability
or three (3) years in the case of a deceased Participant) all or
any part of the shares subject to any Stock Option on the date of
the Participant's Retirement, Disability, death, or as the
Committee otherwise so determines, notwithstanding that all
installments, if any, with respect to such Stock Option, had not
yet accrued on such date.

(c) Number of Stock Options Granted. Participants
may be granted more than one Stock Option. In making any such
determination, the Committee shall obtain the advice and recommen-
dation of the officers of the Company, its parent, or a subsidiary
of the Company who have supervisory authority over such Partici-
pants. The granting of a Stock Option under the Plan shall not
affect any outstanding Stock Option previously granted to a
Participant under the Plan (or any other plans of the Company).

ARTICLE III

ISO Options

3.1 General Terms. With respect to ISO Options granted
on or after the effective date of the Plan, the following provi-
sions in this Article III shall apply to the exclusion of any
inconsistent provision in any other Article in this Plan since the
ISO Options to be granted under the Plan are intended to qualify as
"incentive stock options" as defined in Section 422 of the Code.

3.2 Grant and Terms of ISO Options. No ISO Options
shall be granted to any person who is not eligible to receive
"incentive stock options" as provided in Section 422 of the Code.
No ISO Options shall be granted to any Participant if, immediately
before the grant of an ISO Option, such employee owns more than 10%
of the total combined voting power of all classes of stock of the
Company, its parent or its subsidiaries (as determined in accor-
dance with the stock attribution rules contained in Sections 422
and 424(d) of the Code). Provided, the preceding sentence shall
not apply if, at the time the ISO Option is granted, the ISO Price
(as defined below) is at least 110% of the "fair market value" of
the Stock subject to the ISO Option, and such ISO Option by its
terms is exercisable no more than five (5) years from the date such
ISO Option is granted.

(a) ISO Option Price. The option price for shares
of Stock subject to an ISO Option ("ISO Price") shall be determined
by the Committee, but in no event shall such ISO Price be less than
the greater of (a) the "fair market value" of the Stock on the date
of grant or (b) the par value of the Stock.

(b) Annual ISO Option Limitation. With respect to
ISO Options granted, in no event during any calendar year will the
aggregate "fair market value" (determined as of the time the ISO
Option is granted) of the Stock for which the Participant may first
have the right to exercise under any "incentive stock options"
granted under the Plan and all other plans qualified under Section
422 of the Code which are sponsored by the Company, its parent and
any subsidiary exceed $100,000. ISO Options which are in excess of
the applicable $100,000 limitation will be recharacterized as Stock
Options as provided under Article V herein.

(c) Terms of ISO Options. ISO Options shall be
granted on the following terms and conditions: No ISO Option shall
be exercisable more than ten (10) years from the date of grant.
Subject to such limitation, the Committee shall have the discretion
to fix the period (the "ISO Period") during which any ISO Option
may be exercised. ISO Options granted shall not be transferable
except by will or by laws of descent and distribution. At all
times during the period commencing with the date an ISO Option is
granted to a Participant and ending on the earlier of the expira-
tion of the ISO Period applicable to such ISO Options or the date
which is three (3) months prior to the date the ISO Option is
exercised by such Participant, such Participant must be an employee
of either (i) the Company, (ii) a parent or a subsidiary of the
Company, or (iii) a successor to the Company or a parent or a
subsidiary of such successor issuing or assuming an ISO Option in
a transaction to which Section 424(a) of the Code applies.
Provided, in the case of a Participant who incurs a Disability, the
aforesaid three (3) month period shall mean a one (1) year period.
Provided further, in the event a Participant's employment is
terminated by reason of death, the Participant's personal represen-
tative may exercise any unexercised ISO Option granted to the
Participant under the Plan at any time within three (3) years after
the Participant's death but in any event not after the expiration
of the ISO Period applicable to such ISO Option.

(d) Acceleration of Otherwise Unexercisable ISO
Options on Retirement, Death, Disability or Other Special Circum-
stances. The Committee, in its sole discretion, may permit (i) a
Participant who terminates employment due to Retirement, (ii) a
Participant who terminates employment due to a Disability, (iii)
the personal representative of a deceased Participant, or (iv) any
other Participant who terminates employment upon the occurrence of
special circumstances (as determined by the Committee) to purchase
(within three (3) months of such date of termination of employment
or one (1) year in the case of a Participant suffering a Disability
or three (3) years in the case of a deceased Participant) all or
any part of the shares subject to any ISO Option on the date of the
Participant's Retirement, Disability, death, or as the Committee
otherwise so determines, notwithstanding that all installments, if
any, had not accrued on such date.

(e) Number of ISO Options Granted. Subject to the
applicable limitations contained in the Plan with respect to ISO
Options, Participants may be granted more than one ISO Option. In
making any such determination, the Committee shall obtain the
advice and recommendation of the officers of the Company, its
parent or a subsidiary of the Company who have supervisory
authority over such Participants. Further, the granting of an ISO
Option under the Plan shall not affect any outstanding ISO Option
previously granted to a Participant under the Plan.

ARTICLE IV

Acceleration of Options Upon Corporate Event

4.1 Acceleration of Options. Where dissolution or
liquidation of the Company or any merger, consolidation, combina-
tion, reorganization or similar transaction in which the Company is
not a surviving corporation is involved and no provision is made
for the assumption of outstanding Options or the substitution
therefor, consistent with Section 4.2 hereof, each outstanding
Option granted hereunder shall terminate upon the occurrence of the
transaction, but the Participant shall have the right, immediately
prior thereto, to exercise his or her Option, in whole or in part,
to the extent that it shall not have been previously exercised,
without regard to any vesting provisions.

4.2 Procedures for Acceleration and Exercise. If the
Company shall, pursuant to action by its Board, at any time propose
to dissolve or liquidate or merge into, consolidate with, or sell
or otherwise transfer all or substantially all of its assets to
another corporation and provision is not made pursuant to the terms
of such transaction for the assumption by the surviving, resulting
or acquiring corporation of outstanding Options under the Plan, or
for the substitution of new options therefor, the Committee shall
cause written notice of the proposed transaction to be given to
each Participant not less than forty (40) days prior to the
anticipated effective date of the proposed transaction, and his or
her Option shall become one hundred percent (100%) vested and,
prior to a date specified in such notice, which shall be not more
than ten (10) days prior to the anticipated effective date of the
proposed transaction, each Participant shall have the right to
exercise his or her Option to purchase any or all of the Stock then
subject to such Option. Each Participant, by so notifying the
Company in writing, may, in exercising his or her Option, condition
such exercise upon, and provide that such exercise shall become
effective at the time of, but immediately prior to, the consumma-
tion of the transaction, in which event such Participant need not
make payment for the Stock to be purchased upon exercise of such
Option until five (5) days after written notice by the Company to
such Participant that the transaction has been consummated. If the
transaction is consummated, each Option, to the extent not
previously exercised prior to the date specified in the foregoing
notice, shall terminate on the effective date of such consummation.
If the transaction is abandoned, (i) any Stock not purchased upon
exercise of such Option shall continue to be available for purchase
in accordance with the other provisions of the Plan and (ii) to the
extent that any Option not exercised prior to such abandonment
shall have vested solely by operation of this Section 4.2, such
vesting shall be deemed annulled, and the vesting schedule set
forth in the Participant's Stock Option Agreement shall be
reinstituted, as of the date of such abandonment.

4.3 Certain Additional Payments by the Company. The
Committee may, in its sole discretion, provide in any Stock Option
Agreement for certain payments by the Company in the event that
acceleration of vesting of any Option under the Plan is considered
a payment by the Company (a "Payment") subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties
with respect to such excise tax (such excise tax, interest and
penalties, collectively, the "Excise Tax"). A Stock Option
Agreement may provide that the Participant shall be entitled to
receive a payment (a "Gross-Up Payment") in an amount such that
after payment by the Participant of all taxes (including any
interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the
Participant retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.

ARTICLE V

Options Not Qualifying as Incentive Stock Options

With respect to all or any portion of any Option granted
under the Plan not qualifying as an "incentive stock option" under
Section 422 of the Code, such Option shall be considered as a Stock
Option granted under this Plan for all purposes. Further, this
Plan and any ISO Options granted hereunder shall be deemed to have
incorporated by reference all the provisions and requirements of
Section 422 of the Code (and the Treasury Regulations issued
thereunder) which are required to provide that all ISO Options
granted hereunder shall be "incentive stock options" described in
Section 422 of the Code. Further, in the event that the Committee
grants ISO Options under this Plan to a Participant, and, in the
event that the applicable limitation contained in Section 3.2 (b)
herein is exceeded, then, such ISO Options in excess of such
limitation shall be treated as Stock Options under this Plan
subject to the terms and provisions of the applicable Stock Option
Agreement, except to the extent modified to reflect recharacteriza-
tion of the ISO Options as Stock Options.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
<TABLE>
STATEMENT OF NET INCOME PER SHARE
(in thousands, except per share)
<CAPTION>

Three Months Ended Six Months Ended
December 31, December 31,
------------------ --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE

Computation for statement of income

Net income per statement of income
Income before extraordinary item $ 16,717 $ 5,459 $ 24,921 $ 8,375
Extraordinary item (6,443) - (6,443) -
Net income $ 10,274 $ 5,459 $ 18,478 $ 8,375

Weighted average
Common shares outstanding 63,774 53,136 61,985 53,136

Adjustment to weighted average
common shares outstanding:

Add dilutive effect of:
Employee Options 4,334 4,318 4,315 4,012

Weighted average common shares and common
equivalent shares outstanding, as adjusted 68,108 57,454 66,300 57,148

Primary net income per common share:
Income before extraordinary item $ .25 $ .10 $ .38 $ .15
Extraordinary item (.10) - (.10) -
Net income $ .15 $ .10 $ .28 $ .15

FULLY DILUTED INCOME PER SHARE

Net income per statement of income
Income before extraordinary item $ 16,717 $ 5,459 $ 24,921 $ 8,375
Extraordinary item (6,443) - (6,443) -
Net income $ 10,274 $ 5,459 $ 18,478 $ 8,375

Weighted average
Common shares outstanding 63,774 53,136 61,985 53,136

Adjustment to weighted average
common shares outstanding:

Add fully dilutive effect of:
Employee Options 4,334 4,908 4,315 4,832

Weighted average common shares and common
equivalent shares outstanding, as adjusted 68,108 58,044 66,300 57,968

Fully diluted net income per common share:
Income before extraordinary item $ .25 $ .09 $ .38 $ .14
Extraordinary item (.10) - (.10) -
Net income $ .15 $ .09 $ .28 $ .14
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
BALANCE SHEET AS OF DECEMBER 31, 1996 AND STATEMENT OF INCOME FOR SIX
MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FORM 10-Q FOR THE PERIOD DECEMBER 31, 1996.
</LEGEND>
<CIK> 0000895126
<NAME> CHESAPEAKE ENERGY CORPORATION
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 140,739
<SECURITIES> 35,317
<RECEIVABLES> 66,370
<ALLOWANCES> 198
<INVENTORY> 7,071
<CURRENT-ASSETS> 250,273
<PP&E> 731,392
<DEPRECIATION> 132,843
<TOTAL-ASSETS> 860,597
<CURRENT-LIABILITIES> 127,092
<BONDS> 220,149
0
0
<COMMON> 693
<OTHER-SE> 483,369
<TOTAL-LIABILITY-AND-EQUITY> 860,597
<SALES> 120,186
<TOTAL-REVENUES> 122,707
<CGS> 77,240
<TOTAL-COSTS> 83,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,216
<INCOME-PRETAX> 83,456
<INCOME-TAX> 14,325
<INCOME-CONTINUING> 24,921
<DISCONTINUED> 0
<EXTRAORDINARY> (6,443)
<CHANGES> 0
<NET-INCOME> 18,478
<EPS-PRIMARY> .28
<EPS-DILUTED> .28

</TABLE>