Chesapeake Energy Corp (CHK) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Chesapeake Energy Corporation Q2 2013 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jeff Mobley, Senior Vice President, Investor Relations and Research.

Good morning, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2013 second quarter.

Hopefully, you've had a chance to review our press release and updated investor presentation that we have posted to our website.

During the course of this call, our commentary will include forward-looking statements regarding our beliefs, goals, expectations, forecasts, projections, and future performance and the assumptions underlying such statements.

Please note there are a number of factors that could cause our actual results to differ materially from such forward-looking statements.

Additional information concerning these factors is available in our earnings release and the Company's SEC filings.

We also refer to certain non-GAAP financial measures and we encourage you to read the full disclosure and GAAP reconciliation that's located on our website and in this morning's press release.

I would next like to introduce the members of management who are on the call with me today.

Doug Lawler, our Chief Executive Officer; Steve Dixon, our Chief Operating Officer; Nick Dell'Osso, our Chief Financial Officer; Jeff Fisher, our Executive Vice President of Production; Jim Webb, our General Counsel and Gary Clark, our Vice President of Investor Relations and Research.

We will next turn to prepared commentary from Doug and then we will move to Q&A.

Doug?

Thanks, Jeff, and good morning.

As most of you have seen by now, Chesapeake has delivered a strong quarter both operationally and financially.

We are pleased with these results which are a testament to the dedication and focus that has been demonstrated by the entire employee base during a period of transition.

Once I've discussed our performance on this call, I will spend some time briefly outlining some fundamental tenants underlying our approach to achieving key financial and strategic priorities for Chesapeake as well as some specific goals for us going forward.

But first, let's look at the quarter.

Chesapeake reported adjusted earnings per share of $0.51 which compares to $0.06 in a year ago quarter.

Adjusted EBITDA for the quarter was $1.424 billion, up 26% sequentially and 77% year-over-year.

Total production growth was also strong, up 2% sequentially and 7% year-over-year.

Oil production was the primary driver of our growth this quarter.

It was up more than 35,000 barrels per day, or 44% year-over-year, to approximately 116,000 barrels per day.

This growth was once again led by the Eagle Ford shale play.

Our oil production grew 8,200 barrels per day sequentially and 32,700 barrels per day year-over-year to 57,000 barrels per day.

I'd also like to highlight that our percentage of production from liquids plays increased again this quarter to 25% and also accounts for 60% of our realized oil and gas revenue.

Given the better-than-expected results we are seeing primarily in the Eagle Ford from both well performance and improved cycle times on both drilling and completions, we are raising the midpoint of our 2013 full-year oil production guidance by 1 million barrels.

Importantly, during the second quarter, Chesapeake generated this strong production growth through greater capital discipline resulting in significantly lower capital spending compared to last year.

In the second quarter, we spent approximately $1.6 billion on drilling and completion activities which was down approximately 35% year-over-year.

Our total leasehold and other capital expenditures during the second quarter were $245 million, which was down approximately 75% versus the year ago quarter.

As a result of substantial anticipated efficiency gains and continued focus, we see further opportunities to reduce CapEx going forward.

On the expense side, we did a good job reducing production expenses despite our increasing liquids mix.

Per unit production expenses were $0.78 per MCFE, which was down 20% from year ago quarter driven by cost leadership from our field personnel.

And reduced salt water disposal costs as infrastructure projects have been placed into service.

G&A was a similar story as per unit costs, excluding stock-based compensation, were $0.25 per MCFE, which was down 36% from the year ago quarter.

From a balance sheet and liquidity perspective, I am pleased with the accomplishments of the Company year-to-date.

We ended the quarter with $4.7 billion liquidity and net long-term debt was held essentially flat compared to year-end 2012.

The Company's financial position has strengthened considerably over the past nine months and as a result we recently elected to terminate our bank covenant amendment early.

And return our maximum long-term debt-to-EBITDA ratio limit back to 4.0 times from the 4.5 times ratio that would've applied on the amendment for June 30, 2013.

I would note that at June 30, our long-term debt-to-EBITDA ratio had improved to approximately 3.0 times.

During the first half of 2013, the Company received proceeds of approximately $2.4 billion from asset sales.

During the 2013 third quarter to date the Company has completed the sale of additional assets for total consideration of approximately $1 billion, including the sale of assets in the Haynesville Shale and Eagle Ford Shale.

And we also anticipate to complete the sale today of certain midstream assets in the Mississippi Lime play for a total consideration of approximately $300 million.

These asset sales combined with forecasted net operating cash flow enable Chesapeake to fully fund its 2013 capital expenditure budget.

Additional asset sales are contemplated for later this year which may be used to reduce long-term debt and further enhance our financial liquidity.

Moving beyond the quarterly results, I'd like to take a few minutes and highlight Chesapeake's key strategic priorities.

In order to deliver near and long-term returns, increase our competitiveness, and improve our relative stock price performance, our go-forward strategic priorities will consist of two fundamental tenants.

The first is financial discipline, and the second is profitable and efficient growth from captured resources.

I want to share with you exactly what these two strategic priorities mean.

Regarding financial discipline, our capital expenditures will be balanced with our cash flow from operations.

We are implementing a new, competitive capital allocation process to ensure the highest quality projects are funded.

We will continue to divest our non-core assets and non-core affiliates.

We will reduce our financial and operational risk in complexity and we will achieve investment-grade credit metrics.

Profitable and efficient growth from captured resources is a continuation of our focus on developing the highest quality core of the core properties.

Chesapeake has a world-class inventory with significant growth potential in multiple basins.

This inventory will provide competitive production reserve growth for years to come.

We will target top quartile operating and financial metrics and aggressively benchmark and post-appraise on our performance.

We will pursue continuous improvement in all aspects of our business and we will drive value leakage out of our operations.

In my initial discussions with Archie Dunham, the Company's board and some of Chesapeake's largest shareholders, I had a great opportunity to see and understand their commitment and confidence in the Company.

This confidence is underpinned by the quality of the people and the quality of the assets at Chesapeake.

Seeing that level of conviction and how they view the future of the Company was very important to me.

I chose to come to Chesapeake and lead a new strategic direction because of the abundance of opportunity and the strong foundation that has been built for future success.

I believe I have picked the right company and I share the board's view regarding the quality of the people and the assets.

I've been impressed by many aspects of Chesapeake.

It's an organization that is very nimble for its size, it's good at adapting and making decisions, and it's especially good at responding with speed to clear directives and objectives.

It is no accident that this company grew to be one of the largest domestic energy producers in a very short period of time.

There are also, however, many areas where I see opportunity and room for improvement including capital efficiency, capital allocation, cost control, organizational process and strategic focus.

During the past six weeks, I've launched a comprehensive review of our assets in the organization.

As part of this review I'm working with the Senior Management team to determine our best path forward for driving meaningful shareholder value and realizing our full potential.

This path will be designed to execute a strategy of becoming a more focused and efficient E&P company.

And it is critical, I repeat, that we balance our capital expenditures with our cash flow from operations.

Chesapeake is at a key juncture in its history and we have a laser focus on positioning the Company to execute more competitively.

Going forward we are targeting to deliver top quartile performance in several key metrics including absolute and per debt adjusted share, reserve growth, production and cash flow growth.

Returns on capital employed, returns on equity as well as lease operating, overhead, drilling and completion costs.

While I cannot give you an exact time frame today for when we will achieve the top quartile results in these metrics, we intend to get there as quick as possible and we will pursue it with a high sense of urgency.

In closing, I'd like to thank the Chesapeake employees for their dedication and their hard work.

Transition and change are not easy, but I know the collective effort of our employees focused on this new strategy will drive improved performance for our shareholders.

And with that, Steve, Nick and I'd be happy to answer or take any of your questions.

(Operator Instructions)

Dave Kistler, Simmons & Company.

Real quickly, Doug, you'd mentioned, I believe I heard this correctly, that on the financial discipline commitment that it would be supported by trying to live within cash flow.

Did I hear that correctly?

Yes you did, Dave.

Okay.

And so just thinking about that, obviously that rig count reduction that you guys put in place is driving down the E&P CapEx spending, production growth higher and pretty impressive from that perspective.

Can you share what that means for 2014?

Just rough guess that production would be coming down, i.e., bringing cash flows down a little bit and then just trying to think for modeling, trying to tie CapEx to whatever we are projected for cash flow as endless?

Sure.

It's a good question, Dave.

First I'd like to note that in 2013 we've demonstrated the ability to grow production while reducing the capital.

We are not at this point providing any guidance towards 2014.

But what I would ask you to do is to look at the quality of the assets.

As I highlighted and the team's highlighted in the past, the core of the core has tremendous growth potential.

And so as we look at our capital efficiency, how we can reduce our costs as we are already seeing efficiencies result in more wells being drilled despite a lower rig count, living within our cash flow and targeting that financial discipline is a key priority to me and the team.

And we will be providing information on 2014 later this year.

Great.

I appreciate that color.

And then just thinking about the impressive production growth on the quarter, yet seeing a slight slippage in the initial production rates for the Eagle Ford, Utica and Anadarko Basin, did you guys change maybe the well design or are you more aggressively managing initial production rates to manage declines?

Just trying to think about what the impact of that is going forward.

Dave, I will answer that.

This is Steve.

Really, it's just that corridor's well set.

We have not seen any back off in the performance of our wells in any of the areas.

So I think that will just come in flow with the well set that's being turned online.

Some areas, they're older wells, they're just being hooked up.

So I think it is more of a function of the well set and not an overall decay in any of our areas.

Okay.

I appreciate that.

And one last one.

Just looking at the transport cost.

They look like they crept up a little bit for your forward guidance.

Can you talk about what the main driver of that is?

Sure, Dave, this is Nick.

A couple of key drivers there.

The biggest is the basis differential widening in the Marcellus.

So I think you have seen with other producers and the markets pretty well aware that there's a lot of infrastructure being constructed there this summer and some things have been offline, there's been some back-up in the basin.

That's a big driver of it.

We have been pretty conservative in projecting that out through the rest of the year.

And then in the Anadarko basin we've seen some basis as well.

Okay.

I appreciate that clarification.

Thanks, guys.

On the oil side I'll add that we've also taken into account the consolidation of WTI and LOS.

Great.

Thank you, guys.

Brian Singer, Goldman Sachs.

Thank you.

Good morning.

Just following up on the point on balancing CapEx and cash flow.

I think you mentioned some of the metrics you expect to be in the top quartile on and that you didn't really have a time period for when you would achieve that.

But in terms of when you balance CapEx and cash flow is something that you can control.

When do you see that happening?

Is that something that you expect would be immediate?

Is that something we should look for for 2014?

And this is maybe a follow-up to the earlier question, are there one or two key levers you think you can pull to get the bulk of the way there from where Chesapeake's been historically?

Yes.

Thanks, Brian.

It is our target in 2014 to achieve that.

So directionally, that so you know like as we look at the different metrics and how we proceed forward establishing criteria and goals to achieve those top quartile metrics, to live within that cash flow is all targeted towards 2014 performance.

Just a few of the primary factors that will help contribute to that is that when you look at the Company's history and how we have grown to this point in time, it basically, all of the production growth has taken place from single-well pads.

And as we focus and concentrate on our capital efficiencies, synergies that can be achieved moving from the held by production -- or, excuse me, by the land capture to held by production drilling program and concentrating on the best areas, those efficiencies and that production growth we believe will come from those primary areas that we'll be investing in.

So part of that capital allocation process that I described and how projects compete will give us that ability to optimize our cash flow growth, our production growth and with that target of being within the cash flow from operations.

Great.

Thanks.

And then as a follow-up then as we look at your plans to reduce rig count in some of these areas and then given the efficiency point that you have mentioned, should we expect that your well count will fall, arise or stay flat in these areas?

And as I assume there's a big difference, but how are you thinking about core of core in the Eagle Ford and Marcellus and other areas versus the rest of your positions?

That is a good question.

I think that what you will see is that it should be relatively flat in balance because of the efficiencies we expect to achieve.

Seeing reduced cycle times not only on the drilling side, on the completion side, also compressing with a more focused attention in the core areas that infrastructure cost and getting the overall cycle times reduced is a primary target of ours.

I believe that without having given guidance for 2014 yet, it will be fairly balanced.

And the way that we're going to get there is through efficiencies and concentration in those core of the core assets.

Great.

Thank you.

David Heikkinen, Heikkinen Energy Advisors.

Good morning, Doug.

Just want to be clear that your balancing cash flow and CapEx, so it's just cash flow from operations and your balance sheet improvement comes from non-core asset and affiliate sales?

Yes.

Hey, David, that is what we are targeting, yes.

Okay.

And can you talk about what you would consider non-core affiliates?

Well this is part of the process.

We are in this comprehensive review, David, where we're looking at all of the assets.

We are looking at all of the affiliates that the Company has ownership in and determining what is the return that we are generating from those assets and affiliates and going forward what is the best strategic positioning for us to be more competitive should we be continuing to own and invest in?

At this point, I am not going to share with you on it but that is something that we're really focused on because if it's not adding value and not return-centric that adds to our competitive position we will look to divest of it.

And then to get into detail on the defining top quartile, who are the peers that you're going to be measuring yourself against?

Well I think it is the standard group that you would expect that have similar footprints as Chesapeake.

So you know you look at -- I can name them but you know who they are.

Basically we're looking at the strong competitors in North America and those who have achieved good performance.

We're going to be focused on elevating our performance to be more competitive.

And then just on one very kind of very detailed question.

Can you talk about back half of the year, your completion plans for third quarter in your four key assets, Eagle Ford, Utica, Anadarko and Marcellus?

We can get to drilling plans, I want to just get some details on completion plans and activity.

Yes, David.

This is Steve.

It will be down slightly.

We did quite a bit of catch-up here in the first half of the year.

And so our pace of bringing those on will be slowed in the second half.

And part of that will be a little less drilling activity.

But most of it was kind of the acceleration more in the first half on catching up on excess inventory.

Maybe another way to ask the question is with your planned exit rate for activity level, what's a normal backlog of wells waiting on pipeline and completion?

Just to establish a baseline of -- with a ten-rig program in Eagle Ford you'd normally have 120 wells or whatever the number would be.

That would be helpful.

You are right.

You do have a working inventory that will always be there.

And so, yes, I think of it more as excess inventory and working inventory.

Again, we made big strides in reducing that excess here in the first half.

And part of that is always moving with pipeline and compression and processing also by play-to-play.

So we have right-sized the second half of this year to match up with infrastructure availability.

So no specific numbers is what I'm getting to?

That is correct, David.

Okay.

Thanks guys.

Doug Leggate, Bank of America Merrill Lynch.

Good morning, everybody.

Doug, I think this is the first time we've spoken so congratulations on your appointment.

I got a couple of things for you.

You mentioned in your prepared remarks about balancing cash flow, but you also mentioned about addressing the complexity of the organization.

Can you elaborate on what you are talking about there?

I'm guessing you're relating to things like your preference, your structure, the myriad of joint ventures that you have.

And if you could just elaborate as to what you are really getting at there?

Thanks, Doug.

I think you nailed it.

Part of this process is looking at all of the different affiliates, all of the different structures that we have.

Are they adding the proper returns to Chesapeake?

Are they giving us competitive advantage?

And without giving you the exact detail on it at this point in time, and really I can't because the process is underway and we are evaluating it.

But I think that, as you know well, the Company is involved in many different activities.

Vertical integration has proven to be efficient and enabled some very distinct competitive advantages for us in the past.

As we look at all the different affiliates we want to make sure that we're getting the long-term value creation and the focus we need to be as competitive as we can, Doug, with our peers.

So I guess the best way to answer it is that it's a comprehensive review and that each of those will be evaluated.

Forgive me for following up on this, Doug.

The joint ventures, I'm guessing they're kind of set in stone and the preference shares similarly are -- I'm just curious as to what, how would you -- if you decided they weren't appropriate what kind of steps would you envisage taking to address those?

Well I think some of those JVs, some of those commitments, are we getting the best returns out of them and looking for ways to improve either with our capital program in those JVs, how we can demonstrate better performance or just simply looking at all of the different options that exist.

It's early in that process, Doug.

And so I think it's important to note that you can expect that our goal, and I would ask you to look more at the goal, is to reduce the complexity and to provide better clarity on where we are getting our best returns from.

Okay.

I will take that offline.

Two quick follow-ups if I may.

One operationally, the Utica volume's still pretty low.

Are you guys still thinking in the low 330s for an exit rate?

Yes, Doug.

This is Steve.

Yes, as more processing and compression come online, we should be able to get to that.

Okay.

And finally, back to your cash flow comment, Doug, are you talking about drilling and completion costs matching operating cash flow?

Or are you also including the other spending unit leasehold and I guess the other oil service CapEx and so on?

And just on that lesser point if you could maybe talk to guidance on the 2014 non-E&P CapEx that would be great.

Thanks.

We are targeting the drilling and completion and will be looking at the other capital expenditures as well as we follow-up, Doug.

So the focus is on all of our capital expenditures with specific focus in the near-term on the drilling and completion.

And it's just early for us to provide anything else on 2014.

All right.

Thanks.

Doug, I'd just add, this is Nick, I'd just add that on the other CapEx remember that in the first half of this year we still had some midstream assets that we just completed the sale of today that we were spending some money on and we were taking delivery of some rigs and pressure pumping equipment that had been ordered in some cases more than 12 months in advance.

And so we do expect that that other CapEx line will be materially lower in 2014.

That's helpful, Nick, thanks.

Scott Hanold, RBC.

Thanks.

Good morning.

Can you guys just answer one thing?

I'm looking at the financial discipline piece where you're reducing complexity, looking at your assets, these various structures.

What kind of timing do you have?

Is this something that we should hear about in the coming quarter or by year end?

Can you give us a flavor of when you're going to have that kind of wrapped up and plan to go forward?

Sure cost Scott.

I think it's going to be an ongoing process.

As you know, some of those arrangements have fairly long terms and commitments associated with them.

So I think what you will see is that it is not necessarily a one day we're going to make an announcement on how we deal with it, but over time improvements we'll be announcing and sharing that with you as we progress.

Do you have anything, Nick, you want to add to that?

No, I think that's exactly right.

As we have cash flow and liquidity freed up from the improved capital program, improved cash flow from our business as well as from non-core asset sales, we're determining the best places to put that capital to work and that's a process that will yield different results based on the opportunities that are in front of us at the time.

Okay.

Okay.

So no specific time to see the progress on that.

Is that right?

Okay.

I think you will see continual progress over a period of time.

There's no one day.

Okay.

Understood.

And then relative to your current plan of reducing the rig count in the second half of the year, can you remind me what the plan had been in terms of rig count and well comps compared to what you've planned at this point?

I'm trying to think back to first of the year.

I'm guessing that was in around 80, low 80s and now we're down to 64.

So a pretty significant reduction.

And as you can see from the cycle times that we released, it's a significant improvements in our cycle times to be able to do that.

Okay.

From a well count perspective it has not decreased nearly as much as the rig count - just a point there.

Okay.

That's exactly what I was looking for.

One last question in the Utica, can you give a sense of what you're seeing on the well performance in terms of the oil and gas splits out there?

Has it trended a little bit more gassy relative to some of the initial expectations, I guess, has been our sense?

Can you just give a little color and elaborate on that?

This is Steve again.

I would say from when we entered the play it certainly had been gassier but not quarter-over-quarter this year.

We are still performing well.

We're very pleased with the results and anxious to get more of it on this year as we get compression and processing in place.

Okay.

Specifically what I was referring to is if you look in your little Utica write up it gives some of the gas production and MMCFE per day where I think BOE per day was something you've spoke about before.

So I didn't know if that was sort of a signal we should think about?

No, I don't think so.

I think it is still early until we get bigger wells set on which, again, is going to happen here in the second half of this year.

So more to come.

Okay.

Understood.

Thanks.

Arun Jayaram, Credit Suisse.

Good morning, gentlemen.

Morning.

Doug, I just wanted to talk to you a little bit about, you're thinking about putting a new blueprint from Chesapeake.

One of the historical challenges or recent challenges given the pullback in gas, has been the balance sheet and the funding gap.

The shares have done really year-to-date.

And I was just wondering what your thoughts would be on doing potentially a significant equity raise so you can get away from needing to do the asset sales and things like that and perhaps give you some flexibility as you look towards a newer strategy?

Thoughts on that, Doug.

Sure.

Those options are out there and could always be a possibility that we would consider.

I would tell you, though, that the focus right now is on being the most efficient with our capital as we possibly can and targeting that capital towards the very best projects that we have, which compared to our peers and compared to some other operators, we've got -- we just have some outstanding assets.

And so prior to looking to do something like that, we need to really focus on our operations and focus very, very intently on how we can improve our capital efficiency.

Right now, we are just basically going to be looking at asset sales to get the portfolio right.

And that's not the focus with the capital and the asset sales is not to solve for a funding gap, it's to get the discipline in our program, get to the best projects, get to the multiple wells per pad and some of the best assets in the country.

And so raising equity at this time is not a primary driver.

I think it always exists as an option but that's not something we're focused on.

Fair enough.

That's very helpful in terms of your thought process.

My final one is just trying to think about the Utica and the overall macro potential regarding gas.

What are your thoughts, Doug?

You have a couple hundred wells that you plan to put on later this year, early next year.

Does this change the way you think about the gas market where you have, potentially, a resource which has a lot of potential similar to the Marcellus?

First let me say that I really am encouraged by what I have seen in the Utica.

As Steve noted, we've got a lot of wells that we are getting ready to bring online.

I think if the option is there we have a ton of options available to us.

And focusing on the best areas there and getting our capital online is part of the program as we see the Utica to be a very strong asset going forward.

As it compares with Marcellus, I hate to get into some of those comparisons at this point, because we still have several wells to bring online and evaluate and determine the right amount of capital to be investing in that program years to come.

But I will tell you I'm very encouraged by it.

And with my experience in all of the other shale plays I think it is an exciting area for the Company.

All right.

Thanks a lot, Doug, and best of luck.

Bob Morris, Citigroup.

Good morning gentlemen.

One operating question on the increase in the oil guidance for the year.

You mentioned that part of that was the timing of asset sales.

Can you tell me what proportion of that increase in the mid-point guidance was the timing of asset sales?

Yes, Bob, this is Steve.

It was roughly two-thirds created by the delays in the asset sales and one-third of that is just performance increase.

Okay.

And then, Doug, the second question is you talked about matching CapEx with cash flow and allocation and focusing on the best projects.

Does this mean that you are contemplating a lot of expiration of leases or acreage?

I know you'd rather sell acreage but in this market it's tough to sell non-producing acreage.

So do you anticipate that in this program, in this new strategy that there will be material or significant lease expirations that will occur here?

There might be, Bob.

Our focus in the past has been to not let any leasehold expire.

As a result of that and as a result of the aggressive land capture strategy, we have got a tremendous opportunity to high grade within that.

As you look at where we start investing and where we start improving our efficiencies, we're not going to ramp-up the rigs to hold leases.

And we may -- our rig count, why we haven't given any particular guidance in one area may increase, in another area it might decrease but it's all going to be centered on how we can drive the greatest capital discipline and the greatest returns for our shareholders.

As a result of that we may lose a little bit of acreage.

We obviously will look at opportunities to monetize that acreage.

If we don't see us focusing in the near-term on it so we don't have stranded capital there that's been invested.

The Company is tremendously blessed with a huge land resource base.

And obviously, as we go forward we're not going to be able to develop all of it.

But what we are going to develop is going to be very competitive.

We will be looking for continuous improvement in capturing the growth metrics for us to be more competitive.

Great.

Thanks, Doug.

Neal Dingmann, SunTrust.

Good morning, guys.

This first question would be a question probably for Steve.

Just looking at the Eagle Ford, obviously tremendous continued results especially on those spud-to-spud cycle times.

So I'm just wondering, you know Steve, kind of the thought about -- is just going from the 15 to 10 rigs just because the efficiency?

I'm just wondering if you had decided to stay with the same amount of rigs if you had been able to take production up just that much more?

A little bit more.

We are -- have some constraints there that are continually to be improved.

But, yes, we would have been restricted.

We couldn't have stayed at that same pace.

Part of it was, though, we had to have that pace to HBP all of our leasehold first half of this year.

We are basically done there now in the Eagle Ford so you haven't seen all what we can do once we are now in a pure pad drilling mode going forward to the second half of this year and into 2014.

We're going to get a lot done with those 10 rigs.

And to add to what Steve said, Neil, when you think about some of the strengths that resided in Chesapeake one of those is the speed at which we can ramp-up our operations and ramp-down those operations.

So as we are pursuing value and our competitiveness and how we improve that, that rig number, we may go from 10 to 12 to 15, maybe more than that.

Or we may pull it back based on efficiencies and how we develop our portfolio to be more competitive.

I think it is important to not note or focus too intently on the rig count.

But to focus on the efficiency, the cycle times, the capital discipline that we're building into the program.

That's great color, Doug.

And then maybe, Steve, back to your HBP comment, where do you sit now with that in the Utica?

I know you guys have like you did in the Eagle Ford in the first half, is most of that held as well?

Oh, no.

The Utica is a long ways from being HBP but we've got long-term leases there.

So we have done some pad drilling and tried to be in a more focused area in the Utica to get started along pipelines.

But, no, we'll have a lot of work to do in 2014 and 2015 to HBP our excellent leasehold position in the Utica.

Okay.

Just lastly, I noticed -- maybe for Nick or one of the guys as far as just I noticed on the guidance for the oil field services net margin just was taken down slightly.

Is that just a result of less rigs running or what should we attribute that to?

Yes.

Well, that's a result of less rigs running, it's also a result of just general pricing pressure across the oil field services segment.

Our services are market priced and they follow the market.

Margins in that industry have been tight all year.

That's a good thing for us from a cost perspective at the end of the day and it ends up just coming out in that margin number.

Very good.

Thank you all.

Matt Portillo, Tudor, Pickering, Holt.

Good morning, guys.

Just a few quick questions for me.

In terms of the Eagle Ford backlog, could you give us an idea of where that stands today?

And specifically, I guess with the 10 rigs that you guys have running in the play, how many wells do you roughly think you could drill next year?

Just looking at the second quarter, it looks like you completed about 140 wells, which was up quite a bit.

So just trying to understand the rate of change.

Well, as Doug had just mentioned we can ramp up and down pretty quickly.

So 2014 we really have no guidance for you there yet on that because it could be a pretty big spread.

You saw the numbers that we turned the online in the second quarter.

We did a lot of catch-up in the Eagle Ford.

I guess your question was more what our kind of excess inventory is left in the Eagle Ford.

It is not a great number.

We are trying to get those wells completed and online here in the second half.

I don't think we will exit with a big excess inventory in the Eagle Ford.

I think just adding to what Steve said, we're not going to park capital on the ground that is not going to give us a return.

And so if the infrastructure and the ability to get the wells online, if there is some limit to it, we'll direct that capital elsewhere, direct the rig activity elsewhere so that we can optimize our efficiencies and our returns.

I think it is still just a little bit early to say.

I would expect that that inventory with our rig activity will fluctuate and it will fluctuate for a couple of reasons, with the dependency of the infrastructure and also with the efficiencies that we expect to achieve there.

I am excited about it.

I think it's a great time to focus on this backlog with oil at $107 a barrel.

We will be doing as much as we can to bring it on as quickly as possible and as efficiently as possible.

Great.

And then just on the back of that I guess, looking at your full-year oil guidance if you look at the first half of the year you've done about 20 million barrels.

It would imply kind of at the midpoint of the range I guess post-asset sales that oil growth is slowing or maybe decelerating a little bit in the back half.

Is that a fair assumption given the completions that you guys are looking at?

Or how should we think about the trajectory of growth going forward from here?

We'll slow a little bit because of that inventory we worked off here in the first half.

And then we just sold some oil in these asset sales.

That was all pretty much in full second quarter or first half and has just come out now.

Great.

And then just last question for me on the NGL front.

It looks like on a run-rate basis there's going to be a huge uplift in the back half of the year to get to guidance.

I was hoping we could get a little more color on the plan going forward in terms of ramping your NGL volumes to meet the guidance range.

A second follow-up question just in regards to the Utica, as you bring on additional NGL capacity, how do you guys think about dealing with ethane in that market and moving those volumes in terms of the liquids component?

Thank you.

Well, in terms of the NGL production, we have the Kensington plant that just started in the Utica.

We have additional plants coming online later this year.

That ramp is significantly driven by that infrastructure in the Utica as well as in some other plays as well.

That's really the driver there.

As far as ethane, the ATEX pipeline is scheduled to come online around the beginning of 2014.

And that is a significant assistance to us in moving ethane out of the basin.

We're an anchor ship, we're in that line, we think that's a good advantage to us.

Just a follow-up there.

So in regards to ethane for the back half of this year, is the guidance assuming rejection out of the Utica or should we basically model in ethane rejection until ATEX comes on?

We're able to do some blending with our ethane in the Utica.

What we modeled in the way of rejection is rejection for July and August.

Beyond that we have not modeled any projection.

As you know, it's possible.

We've had some rejections this year as well.

They are hard to predict.

The pricing has been right around break even on a lot of our contracts for several months now.

One month ahead, one month below and we monitor that very closely and make the most economic decision each month.

Thank you very much.

Bob Brackett, Bernstein Research.

Quick question around the divestment of non-core affiliates.

Could you just give us a list of your affiliates, just for our information?

I think most of that information is available if you look at our 10-Q and the public information we have rather than going into all of that at this point in time.

The key focus there is that we're looking to drive the greatest return from any affiliate that we are associated with.

And that is what I just would ask you to know and that strategically that's an important part of our program going forward.

Okay.

I will try it different.

Is this competitive capital allocation process, could you contrast that to what Chesapeake had been doing?

Certainly.

The key there is that our previous strategy was focused largely on preserving the leasehold.

I have been very, very impressed with the geoscientists within Chesapeake and the team's ability to rapidly, not only from an external perspective prior to joining the Company, but also internally now that I have been here.

I've been very impressed with the Company's ability to identify and rapidly move in and acquire significant core positions.

It's simply some of the best rock in the country.

And the focus has been to not lose any of that acreage.

The shift in the strategy today and the capital required to do that previous strategy had put us in a very difficult position.

And as we go forward, that capital and that focus is on driving the greatest value out of that acreage and being the most competitive we can be against our peer group.

And so by using that focus and that speed and that technical ability that resides is very strong inside the Company.

We are focusing that speed and that strength on value.

I am very excited about it.

We have a lot of work to do but we are shifting that strategy from preservation of the land to capturing the most value from the land in the core areas that we have identified.

Thank you, Doug.

Mike Kelly, Global Hunter Securities.

Hi, good morning.

Obviously there's a lot of variables to consider as it pertains to 2014 growth and I'd like to touch on a couple of specifics there.

First, in the midstream take-away additions that you would potentially be adding here at the end of the year and into 2014, hopefully you can kind of direct our attention to there what's meaningful.

I know you're constrained in a number of these basins.

Obviously the Utica but also in the Marcellus and the Powder River Basin, and just talk about how coming slow to capacity there could also play an important factor in 2014's growth.

Then the other thing I wanted to ask you about was just a baseline decline on your natural gas assets here.

How's it been faring?

What's your model so far in 2013 and what's a good number to dial in in 2014?

Thanks.

I'll try to remember all those, Mike, this is Steve.

We do have a number of projects coming online in the next 12 months that will help significantly in the Utica.

To begin with, Nick kind of mentioned we've got 200 million of processing coming on now.

We've got another 200 million towards the end of the year there and capacity for another 200 million in probably second quarter of 2014.

Lots of ramp up room there in the Utica.

In the Marcellus, those pipes additional take away there will come on at the end of the year, November, December time frame will allow more capacity in the Marcellus.

The Eagle Ford is kind of a number of things with both pipeline, both treating and compression that will continue to help throughout the year to improve it.

Niobrara.

Oh yes, Niobrara, that's probably second quarter of 2014 on it before we have any really meaningful big step rate change there.

We've got a little bit of incremental but that's when that gets relieved.

And so again, that's all factored in our 2013 guidance.

We are not giving any 2014 guidance yet.

We will factor all those in when we provide 2014.

Okay.

In terms of -- I just want to make sure I'm characterizing this correct, your comments earlier, did you state that you think you could have a very similar completion count in 2014 versus 2013 while getting CapEx to come in line with cash flow?

Mike, we did not say that because we have not provided 2014 guidance.

What we said is that we are getting more efficient and probably our completions per CapEx will be improved, but we have not provided that CapEx number yet.

Okay.

Thank you.

Joe Allman, JP Morgan.

Hey, Doug.

In terms -- so just let me clarify.

So for 2014 your expectation is that your all-in CapEx is going to be at or below operating cash flow?

Am I understanding that correctly?

Joe, our target is our drilling and completion CapEx will be within cash flow with the overall target that we continue to pull all of the CapEx within our operating cash flow.

The messaging there and then what I would like for you to focus on and I want to convey is that we have a very strong strategic element in this company going forward to live within our cash flow.

Okay.

So, again just to clarify, so it's going to be the D&C CapEx plus other CapEx you're targeted to have it at or below operating cash flow?

We're going to focus intently on balancing our CapEx program to be within cash flow, yes.

Okay.

What are the dynamics that allow you to do that now?

Because I know Chesapeake in the past has been in a very tight situation and probably wanted to spend less but was precluded from doing so.

Obviously, one of the things you mentioned in the call was Eagle Ford Shale's largely HBP at this point.

But what are some other dynamics that enable Chesapeake to live within cash flow?

Well, there's two or three central elements to accomplish that, Joe.

The first you highlighted in that we are not going to preserve every acre.

And we are going to focus on the very best areas.

Inside those best areas you can expect to see greater efficiencies from our drilling and completion program.

As I mentioned, the production growth that's been realized by the Company is from single-well pads.

And as you look at our percentages of multi-well will be significantly improving as we focus on those key areas and as a result from that you'll see likely fewer rigs, greater capital efficiency and continued growth.

That is a huge element as a part of it.

As then as we also look to reduce the complexity in the program, the things that are not giving us the returns that we're targeting, we are looking to eliminate that waste, that's not providing the greatest return for us.

So looking to drive the greatest value, to drive the leakage out of the program, to identify waste where it exists in our operations and is not getting us the competitive return.

That all rolled up is going to create a much more competitive program.

Doug, are there any commitments, whether its acreage commitments or pipeline commitments, that might preclude you from doing what you want to do?

We are in the process of evaluating all of that, Joe.

I think that there are going to be some that we have to evaluate and scrutinize really closely.

But my observation at this point in time is that we are going to be able to accomplish that.

We are going to be targeting and working as quickly as we can.

And so I will reiterate the issue around providing 2014 guidance that this is the strategic tenets that we are trying to accomplish and we are very focused on trying to get there as quickly as possible.

Got you.

And then is debt pay down also still a big goal for Chesapeake?

Yes, this is Nick, absolutely it's still a major goal of ours.

We expect to have a simplified and improved balance sheet in the coming years.

In the coming months for that matter as well.

What was the last part, Nick, sorry?

I mean months as well as years.

Okay.

So does that mean that your intention is to pay down at least a few billion dollars worth of long-term debt?

I'm going to stay away from an exact number, Joe, because it's going to depend on, again, the opportunity sets in front of us when we are at a point of excess liquidity and we make that decision.

But we are continuing to target investment-grade metrics.

It's a goal of the Company to be investment-grade.

We have been making good progress on improving our liquidity and the next step will be to apply that excess liquidity towards our balance sheet when we are ready to do so, which we will do at some point in a relatively near future.

Especially as we consider our non-core asset sale program.

We have significant liquidity today, remember it's in the release that we ended the quarter with an undrawn revolver and we've closed a couple of very large asset sales since then.

So we have quite a bit of liquidity today.

Okay.

And then lastly, Doug, I know it is relatively new for you, but when you look at the portfolio what would you identify as the top three plays that you likely are not really to sell or touch in terms of any monetizations?

I hesitate to say that, Joe.

I would ask you just to focus on the strategic things we are driving at capturing the greatest value and being the most competitive to the Company.

There may be some non-core positions in the best assets that we've got that we look to monetize to accelerate the value.

We may consider asset sales across the whole portfolio.

But the driver here is where we can capture the greatest value and where we can be more competitive.

And so I just would prefer to stay away from saying any one particular asset is untouchable or that we wouldn't focus on, but I will also comment that I'm really excited about our strong portfolio.

I think that the Eagle Ford assets, the Marcellus assets, Haynesville, although it's hurt a little bit by gas prices, the position there is outstanding.

The Utica is outstanding.

And we have several other emerging areas that are in the evaluation process that we will be looking at.

I think that it is important to note that as we allocate our capital in creating this competitive process for funding in 2014 and beyond that there will be opportunities for other areas that we will invest in.

But those other areas will be invested in based on substitution not addition.

The competitiveness within the portfolio to make sure that we're doing the best thing for our shareholders is our focus.

And if we've got new opportunities and new plays that we can run with, that will add value to the Company we will be looking to do that.

But the overarching statement there is that the financial discipline is very, very critical to the Company going forward.

Got you.

Very helpful.

Thank you.

We will take our next question from Amir Arif with Stifel.

Thanks.

Good morning, guys.

Just a couple of quick questions.

First, once you finish your review of capital allocation, can you give us sense of when you'd be ready to provide 2014 guidance or color?

I hesitate to give that at this point.

I mean obviously our CapEx program will be reviewed with our board.

And so we're just not going to provide any information about that.

But the key, we're working it very hard and very diligently and you guys will be hearing more from us soon.

Okay.

In terms of timing, though, of when you'd be willing to provide that?

Well what's critical there is making sure that we do the comprehensive analysis and determine the best opportunities set for us to invest in.

So I don't want to put a time limit on it simply because we want to make sure we evaluate it properly.

Sure.

That make sense.

Second question.

You had great sequential growth this quarter.

But as you cut your rig count here in the second half and based on your guidance, there's no sequential growth showing up in the second half on an absolute production basis.

Is that basically a conservative reflection in your guidance?

Or should I look at the second half run-rate CapEx as a good reflection of what you need to maintain your production?

This is Steve.

It is a function of sales that we just had.

We just sold quite a bit of production in Miss Lime JV, Haynesville and the north Eagle Ford.

So it is a reduction of that that we're seeing now in the second half that wasn't in the first half.

But there is a reduction in CapEx spending and a reduction in wells turned online also 20% less than the second half in the first half.

All of those factors and, hopefully conservatism also.

Sounds good.

Thank you.

Jason Gilbert, Goldman Sachs.

Hi, thanks for taking my questions.

I want to put a finer point on one of the strategic questions from earlier which is so far it appears you've been pruning and optimizing within your legacy plays and your divestiture program for the most part.

I was just wondering how you thought about complete exits from plays.

And I guess where I'm coming from is that if you think there's a real strategic benefit to being in eight major plays and if there might be fewer distractions if the Company was able to focus on a smaller number?

Furthermore, with a larger sale you might be able to accelerate the repair of the balance sheet?

Wanted to hear your thoughts on that.

Well, your question is very good.

I guess the way I would answer is, yes.

We've exited plays before including the Fayetteville, Permian and we potentially, for those that are non-core, will be have complete exits.

I think it is all a part of the portfolio evaluation that is underway.

Okay.

Thanks.

And then the last question would be, you mentioned you want to reach IG metrics.

I think I know what your answer's going to be here, but I was just wondering if you could put any sort of time frame around that?

No, we really can't put any time frame around that.

We are focused on it.

We have a number of things that we are looking at that will help us to get there.

But it's going to be a combination of improved operational performance, taking the proceeds from non-core assets sales, applying them to our balance sheet, et cetera.

So it's a process that will take some period of time and we don't have an exact time frame for it.

Okay.

Great.

Thanks very much.

Brad Crup, Wells Fargo.

Good morning, everyone.

Thanks for taking my question in the last few minutes here.

A couple quick ones regarding IG metrics.

Doug, you mentioned it in your prepared remarks, but just curious is that a standalone strategic goal or is that more or less a byproduct of other strategic goals such as efficient capital allocation, balancing of CapEx and CFO and so on?

It's a part of the financial discipline.

I think in terms of those things that I mentioned, they're all A priorities.

But it falls under that financial discipline umbrella.

Okay, great.

Thanks.

And then are there any specific metrics associated with that?

Is it kind of just debt per BOE and so on?

Any specific numbers surrounding those?

There's obviously a number of metrics that we look at, the agency's look at, that you all look at.

We could go through the list but there's -- different companies rank stronger in some metrics than others when they get to investment-grade.

We're looking at the entire suite.

We know what our strengths are and we know what our weaknesses are and we're focused on having our entire set of metrics look investment-grade over time.

Great.

Fantastic.

And then, final one just on asset sales, if I can.

Based on where you're at year-to-date seems like you're right around that lower end of the $4 billion to $7 billion guidance.

Do you see yourselves falling in the lower half of that for the full-year or -- basically what would it take to get you to that upper half?

I think you've kind of touched on it throughout the call.

I think the key there is that we are very pleased with what we have accomplished to date.

And as we look for other assets that don't meet the criteria for the portfolio going forward we may have more asset sales.

The key there is how we continue to build the portfolio to be the most competitive as possible.

And so in some cases it may be accelerate the value.

In some cases it may be hanging on to the assets for longer term.

But at this point in time I think that the range that we provided is good.

And we will continue to look for opportunities to improve our balance sheet, improve our liquidity and the component of that is definitely asset sales.

Okay.

Fantastic.

Thank you much.

I think out of respect for the other calls today, I think we will go ahead and bring it to closure.

A couple key things I just would like to note is that -- one is that I'm extremely excited.

I am very pleased to be a part of Chesapeake.

And as I review the portfolio and the quality of the assets and the people, I see a tremendous amount of potential.

I think that the key there is that we build that financial discipline into the program.

That we focus on the profitable and efficient growth from our captured resources.

And I also know we have a lot of work to do.

But the focus is there, the strategic discipline is there and we are excited about the future.

If you have any additional questions, please follow up with Jeff and Gary.

They will be available to answer those questions.

We appreciate your time today.

Thank you.

That does conclude today's conference.

Thank you for your participation.