BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA CIMAREX ENERGY CO. REPORT OF THE ADMINISTRATIVE LAW JUDGE

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1 APPLICANT : RELIEF REQUESTED : BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA CIMAREX ENERGY CO. POOLING LEGAI, DESCRIPTION : SECTION 21, TOWNSHIP 13 NORTH, RANGE 9 WEST, CANADIAN COUNTY, OKLAHOMA ILE D FC `T 0 1?01 0 COURT CLERK'S C?FFICE - TULSA CORPORATION COMMISSIO N OF OKLAHOMA CD "I, APP LICANT: CHESAPEAKE OPERATING, INC. AND CHESAPEAKE EXPLORATION, LLC RLI..IEF SOUHT: POOLIN G CAUSE CD N O /1' LEGAL DESCRIPTIUN : SECTION 21, TOWNSHIP 13 NORTH, RANGE 9 WEST, CANADIAN COUNTY, OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE These causes came on for hearing before Kathleen M. McKeown, Administrative Law Judge (ALJ in the Oklahoma Corporation Commission's (Commission courtroom, Kerr Building, Tulsa, Oklahoma, pursuant to notice given as required by law and the rules of the Commission for the purpose of taking testimony and reporting to the Commissioners. CASE SUMMARY Both applicants seek to be named operator of the proposed Woodford horizontal well to be drilled on the subject lands. Parties agree on all initial and subsequent election, well cost payment, bonus payment and total drilling time periods to be included in an order issuing from these causes; further, there is no dispute as to well costs, fair market value and respondents named. Cimarex Energy Co. (CIM obtained its % unit working interest by way of a partial oil and gas lease assignment from Devon Energy Production Company, L.P. (Devon subject to a term assignment that expires December 1, 2011 if continuous drilling operations are not in progress at that time. The Chesapeake Operating, Inc. and Chesapeake Exploration, LLC (CHK % working interest in the unit is subject to a 90% term overriding royalty interest in favor of Sooner Gas Trust. CIM requests that any Commission pooling order issuing in these causes include a

2 Report of lhc Administrative I.aw Judge CD T-Cintarex Energy Co. CD O/T--C'hesapeake Operating, Inc. finding that the 90% burden should be set aside if CHK does not participate in the subject well because such burden is unreasonable and would prevent the unit from being developed on an economic basis. RECOMMENDATIONS 1 CIM should be named operator for 90 days from the date of the arder. If no well is timely commenced by CIM, CHK will become the operator for the remaining 90 days of the 180-day drilling period. 2 The 90% term overriding royalty interest on the CHK working interest will remain with CHK and not be absorbed by any other operating party if CHK does not participate in the well. HEARING DATE September 8, APPEARANCES CIM, represented by Stephen R. McNamara ; CHK, represented by Richard K. Books. SUMMARY OF EVID ENCE 1. CD T and CD /T request an order pooling the interests of oil and gas owners in the Woodford common source of supply underlying the captioned lands as spaced by Order No There were no dismissals of any of the named respondents in either application and the respondent lists attached to the application in each cause were combined for purposes of the hearing and any order issuing from the hearing. 2. Exhibits were marked and accepted into evidence as follows (exhibit sponsor in parentheses : 1. January 2 5, 2010 proposal letter to CHK (CIM 2. May 18, 2010 proposal letter to CIM (CHK 3. Cana I Iorizontal Woodford Play Summary (CIM 4. Production Plat (CIM 5. August 25, 2010 Devon support letter (CIM 6. Unit Working Interest Ownership List (CIM 7. Memorandum of Term Assignment (CIM 8. Partial Assignment of Oil and Gas Leases (CIM 9. CIM Authority for Expenditure (CIM 10. CIIK Authority for Expenditure (CIM 11. Conveyance of Term Overriding Royalty Interest (CIM Section Plat (CIM 3. On behalf of CIM expert testimony was presented through Matt Hood, petroleum landman, and Donald Black, petroleum engineer. Page 2 of 6

3 Report of the Administrative Law Judge CD T-C'imarex Lner g y Co, CD /T-C:hesapcake Operating, Inc. A. CIM owns % of the unit by virtue of the partial assignment of a term lease fro m Devon; the term lease requires that "Continuous Drilling Operations [be] in progress a t the expiration of the Primary Term...." which term is defined as lasting 2 years from th e effective date of December 1, 2009, or the lease will terminate. CIM is supported for unit operations by Devon who also owns % of the unit for a total working interest of 56.25% that supports CIM as operator. CIM has drilled/operated 44 horizontal wells, has 9 active rigs, field supervisors, pumpers and other knowledgeable field personnel i n the subject area. CIM has also negotiated a one-year agreement with a surface owne r allowing use of water for the drilling of the subject well. CHK owns % of the unit. CHK currently operates two existing vertically drilled wells in the unit which produce from the Woodford and other zones on a commingled basis ; these wells were drilled under private agreements between CHK and the other well owners, therefore, no pooling orders have issued regarding these wells ; CHK amended the completion report for one of the existing wells to change the producing formation from Meramec to Woodford although the perforations in the well did not change. Any order issuing from these causes will not affect the operations of the two existing wells. CHK operates shallow wells throughout Canadian County and therefore has operating personnel in the area. B. The CHK interest is subject to a 9 0% term overriding royalty interest effective August 1, 2009 until August 1, 2019 and payable to Sooner Gas Trust. CIM requested that any order issued by the Commission contain provisions that the burden on CHK's interes t will not be borne by any party other than CHK if CHK should choose not to participat e in the subject well. CIM believes that the burden is inherently unreasonable, is not indicative of fair market value and forcing CIM (if named operator to run the risk o f having to absorb the burden (in the event that CHK elects a cash option and royalty would result in the well not being drilled due to economics. This would not be in the interest of the protection of correlative rights and prevention of waste. C. CIM and CHK agree on the fair market value options, all time periods for elections, payment of well costs, payment of bonuses, drilling period for the well to be commenced and subsequent well provisions. If named operator, CHK agreed to drill the well under the CIM AFE which lists completed well costs as $7,126,000 and dry hole costs as $3,704, On behalf of CHK expert testimony was presented through Marilyn Pollard, petroleum landman. A. CHK is seeking to be named operator under any order issuing from these causes becaus e it is the only party with Woodford wells in the subject unit. The term overriding royalty interest agreement between CHK and Sooner Gas Trust requires that CHK participate i n the subject well and CHK intends to do so ; CHK stipulated at the hearing that the burden on its interest would not shift to CIM or Devon or any other party seeking to develop th e unit; the only party receiving a reduced income as a result of the override would b e CHK; Sooner Gas Trust is not related to CHK or any entity of CHK. If CHK is named operator for the first part of the commencement period and then fails to drill the well, th e Page 3 of 6

4 Report of he Administrative Law Judge Cl =f-- Cim arex F.nergy Co. CD /T- -Chesapeakc Operating, Inc. only "delay" that CIM would experience would be minimal and, ultimately, not prevent CIM from drilling the well. B. CHK agrees with CIM that an additional Woodford horizontal well is needed in th e subject unit. CHK has a current title opinion, will drill under the CIM AFE and is the single largest owner in the unit ; no surface damages, agreement has been negotiate d because CHK has no surface location under contract at this time. CHK has drilled 20 0 horizontal wells in Oklahoma with 77 of those being Woodford producers in southeas t Oklahoma; it has 8 rigs under contract (some in Washita County next to Canadia n County which will be available to drill the subject well ; the current pumpers an d personnel servicing the existing wells will be available to work on the subject well. While all of CC-IK's Woodford rights in the offsetting units have been sold to CIM, C(-IK is the only company that has developed the Woodford in the unit, currently operates 2 Woodford unit wells and should be named operator of the subject well. RECOMMENDATIONS AND CONCLUSIONS 1. After taking into consideration all of the facts, circumstances, evidence and testimon y presented in the causes, it is the recommendation of the ALJ that both applications in C D 201OU1480-T and /T be granted. CIM should be named operator for the firs t 60 days of the 6-month commencement period with CHK named operator for the balance o f the period if CIM does not timely commence a well under any order issuing from thes e causes. 2. CIM and CHK have agreed that the following options and various response times be mad e available to respondents under any order issuing out of the causes : 1 participation ; 2 receive a cash bonus of $1250 per acre with a 3/16ths royalty; or 3 receive no cash bonu s retaining a 1/0' royalty. Twenty (20 days from the date of the order were requested fo r respondents to elect between the options; twenty-five (25 days from the date of the orde r were requested for respondents wanting to participate to pay their proportionate share of th e completed well costs or reach another satisfactory arrangement with the operator as t o payment of well costs ; thirty (30 days from the date of the order were requested for th e operator to pay any cash bonuses to those parties entitled to such bonuses; one hundred eighty (180 days from the date of the order were requested for the commencement of' th e well. As previously stated, the operations for the well will be split with CIM receiving th e first 60 days to commence and, if CIM fails to timely do so, for the balance of th e commencement period, operations will shift to CHK. If no well is timely commenced within the one hundred eighty (180 day time period, the provisions of any order issuing ou t of these causes will become void with the exception of the requirement for the payment o f bonuses. Respondents failing to timely elect or failing to timely pay their share of the wel l costs after electing to participate will be deemed to have accepted the highest cash bonu s and royalty their interest qualifies for under the order. If the bonus and any accrued royalty cannot be paid within ninety (90 days from the date of the order, an escrow account will be established to hold funds for the entitled parties with such funds not being commingled with any funds of the operator. Both applicants agreed that the CIM AFE should be the propose d Page 4 of 6

5 Report ot' lhe Adminislrative Law Judge CD T-Cimarex k; pergy Co. CD /' I'-C hesapeake Operating, Inc. well costs for any pooling order issuing from the causes. Therefore, the completed well costs will be $7,126,000 and the dryhole costs will be $3,704,000. This is a unit pooling but will not affect the two (2 existing wells in the unit currently operated by CI-IK. Under subsequent operations provisions, twenty (20 days from the receipt of the proposal will be given to the parties to elect to participate or take one of the cash bonuses with associated royalty ; twenty-five (25 days will be given to parties electing to participate in a subsequent well to pay their proportionate share of the well costs ; thirty (30 days will be given to pay any bonuses to the parties entitled to such. The operator (CIM or CHK oi'the subject well can propose subsequent wells and receive sixty ( 60 days to commence operations; if no well is timely commenced, the second party (CIM or CHK would receive the remainder of the one hundred eighty (180 days to commence the subsequent well. If no well is ultimately commenced, all parties will return to their original positions in the unit prior to the subsequent well proposal with the exception of payment of any bonuses due to the parties. The question of well operations revolves around several factors including, but not limited to unit interest and experience. CHK is the majority interest holder but CIM, with the support of Devon, controls more of the unit. CIM acquired the surrounding Woodford interests in Canadian County from CHK in 2008 and has consistently been drilling Woodford horizontal wells in the area. CIM first proposed the unit well to CHK in January 2010 and filed its pooling application on April 19, 2010 with an amended application filed April 23, CI-IK first proposed its well to CIM on May 18, 2010 and filed its pooling application on May 25, CIM has reached an agreement with the surface owner for water use in drilling; no surface owner agreements have been reached in the area by CHK. While C(IK does operate the two existing vertical wells in the unit, these wells have commingled production from the Woodford and other zones; no testimony or evidence was received to indicate the extent of Woodford production in these wells ; in fact, CHK agrees with CIM that a horizontal Woodford well is needed in the unit and there is no question that horizontal wells and vertical wells in the unit can exist concurrently and no question that this pooling will not disturb the existing wells and their operations. Based on their preparation for this hearing, the interest CIM controls in the unit, the support personnel being in place and ready to immediately commence drilling operations and CIM's familiarity with horizontal Woodford wells, it is the recommendation of the AL.1 that the initial commencement period for operations be given to CIM. 4. The issue that CIM raised in regard to the override on the CHK interest was sufficientl y addressed at the hearing by CHK wherein CHK stipulated that it does not want the burden on its interest to pass to any other party in the unit through the use of any pooling order issuing out of these causes. CHK stated it intends to participate, if it does not operate, th e subject well and it will bear the override it has entered into with Sooner Gas Trust. This i s persuasive to the ALJ that any pooling order issued here will not require CIM, as operator, nor any other royalty/mineral owner to be required to assume this burden. It is not fai r market value, nor does CHK assert this, and requiring the burden to be absorbed by an operator other than CHK would result in the unit not being developed and owners ' Page 5 of 6

6 Report of the Administrative Law Judge CD T- Cimarex Energy Co. CD /T-Chesapeake Operating, Inc. correlative rights not being sufficiently protected as the reserves underlying the unit will be lost. Thus, in light of the aforementioned conclusions, it is the recommendation of the ALJ that the applications in CD T and CD O/T be granted. Any order issuing out of these causes should contain the recommendations set forth above. Respectfully submitted this lst day of October 2010, KATHLEEN M. MCKEOWN Administrative Law Judge Page 6 of 6