Risk Factors Concentration of Un evaluated Leasehold in Louisiana Chesapeake's future performance will be affected by the results from the development of its existing proved undeveloped reserves and unevaluated leasehold, including the Louisiana Trend and the Tuscaloosa Trend. As of December 31, 1997, Chesapeake had an investment in total unevaluated and unproved leasehold of approximately $125 million, of which approximately $66 million was located in the Louisiana Trend and the Tuscaloosa Trend. Approximately 42%, or $98 million, of Chesapeake's 1998 drilling budget is associated with drilling, construction of production facilities and seismic activity in the Louisiana Trend and the Tuscaloosa Trend. Failure of the Company's drilling activities to achieve anticipated quantities of economically attractive reserves and production would have an adverse impact on Chesapeake's operations and financial results and could result in future full-cost ceiling writedowns.
Impairment of Asset Value Chesapeake reported full-cost ceiling writedowns of $110 million and $236 million during the Transition Period and the fiscal year ended June 30, 1997, respectively. Beginning in the quarter ended September 30, 1997, Chesapeake reduced its drilling budget for the Austin Chalk in the Louisiana Trend overall and concentrated remaining Austin Chalk drilling activity in the Masters Creek area. In addition, Chesapeake began to pursue a strategy to replace and expand its oil and gas reserves through acquisitions as a complement to its historical strategy of adding reserves through drilling. Chesapeake has also reduced its emphasis on acquiring unproved leasehold acreage to be developed through exploratory drilling. While these actions are intended to mitigate the higher risks associated with a growth strategy based on significant exploratory drilling, there can be no assurance that this change in strategy will result in enhanced future economic results or will prevent additional leasehold impairment and full-cost ceiling writedowns. Since December 31, 1997, oil and gas prices have declined, with oil prices reaching ten-year lows in March 1998. In addition, the Company has completed several acquisitions based on expectations of higher oil and gas prices than those currently being received. Based on NYMEX oil prices of $16.50 per Bbl and NYMEX gas prices of $2.35 per Mcf in effect on March 25, 1998, and estimates of the Company's proved reserves as of December 31, 1997 (pro forma for the acquisitions completed during the quarter ended March 31, 1998), the Company estimates it will incur an additional full cost ceiling write down of between $175 million and $200 million as of March 31, 1998. If this occurs, the Company will incur a substantial loss for the first quarter of 1998 which would further reduce shareholders' equity and reported earnings. Following Chesapeake's announcement in late June 1997 of disappointing drilling results in the Louisiana Trend and a full-cost ceiling writedown, a number of purported class action lawsuits alleging violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule lOb-5 thereunder were filed against the Company and certain of its officers and directors. See "- Patent and Securities Litigation."
Risks of Acquisition Strategy Acquisition Risks The Company's growth strategy includes the acquisition of oil and gas properties. There can be no assurance, however, that the Company will be able to identify attractive acquisition opportunities, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets, including the pending Acquisitions. Future acquisitions may be financed through the incurrence of additional indebtedness to the extent permitted under the terms of the Company's then existing indebtedness or through the issuance of capital stock. Furthermore, there can be no assurance that competition for acquisition opportunities in the oil and gas industry will not escalate, thereby increasing the cost to the Company of making further acquisitions or causing the Company to refrain from making additional acquisitions. The Company is subject to risks that properties acquired by it and estimates of value made with respect to the properties acquired (including those acquired and to be acquired in the Acquisitions) will not perform as 12