Chesapeake Energy Corp (CHK) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Chesapeake Energy Corporation Q3 2014 conference call.

Today's conference is being recorded.

At this time, I'd like to turn the call over to Mr. Brad Sylvester.

Please go ahead, sir.

Good morning, everyone, and thank you for joining us today.

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

During this morning's call, we will be making forward-looking statements which consist of statements that cannot be confirmed by reference to existing information, including statements regarding beliefs, goals, expectations, forecasts, and projections of future performance and the assumptions underlying such statements.

So please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our earnings release today and in the Company's other SEC filings.

Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements and you should not place undue reliance on such statements.

Now I would like to introduce the members of our Management team who are on the call with me today, Doug Lawler, our Chief Executive Officer; Nick Dell'Osso, our Chief Financial Officer; Chris Doyle, our Senior Vice President of Operations for the Northern Division; and Jason Pigott, our Senior Vice President of Operations for the Southern Division.

With that, I'd like to now turn the teleconference over to Doug and Nick for some prepared comments and then we'll open up the floor for a Q&A session.

Thank you, Brad, and good morning.

As Brad noted, I hope everyone's had a chance to review our press release that we issued earlier this morning.

I'd also like to extend a special welcome to Brad.

He's an outstanding addition to our leadership team.

We're happy to have Brad Sylvester with us.

Chesapeake had a truly outstanding third quarter.

We are gaining significant momentum in all of our operating areas, while continuing to create more value with less capital investment.

I am very pleased with the progress that Chesapeake is making to become a more profitable and less complex company.

In mid-2013, the Board, Management and employees of Chesapeake set out to transform a company, and that's exactly what we've done.

Quarter-over-quarter for the last four quarters, we have met or exceeded our production targets, met or reduced our capital expenditure budget, and consecutively reduced our cash costs.

The financial and operational improvements we have achieved in the past year position Chesapeake to be highly competitive, even in a reduced commodity price environment.

We have significant flexibility today in our capital program and activity levels.

The strength and quality of our diverse, unconventional portfolio, combined with our strategies of financial discipline and profitable and efficient growth, provide a compelling investment opportunity.

As you'll note in the appendix of our slide deck, differential values being created in all of our assets through capital efficiency and cost leadership.

We have generated double-digit quarter-over-quarter production growth in the Eagle Ford, Haynesville, Powder River Basin and Utica assets.

Production in the third quarter averaged 726,000 barrels of oil equivalent per day, which represents an 11% increase compared to last year and 5% growth sequentially, after adjusting for the asset sales we have accomplished.

This is noteworthy, because we have been able to increase production with a capital investment program that is substantially lower year-to-date than the same period in FY13.

We expect our well inventory at the end of 2014 to be relatively flat to 2013 as a result of our efficiencies and shift to multi-well pads.

We are increasing the low end of our 2014 annual production guidance by 10,000 barrels of oil equivalent per day, and we anticipate that our year-end production rate will between 730,000 and 750,000 barrels of oil equivalent per day on an adjusted basis.

Please note that the timing of previously announced investments and planned expansion projects could impact the exit rate.

But the strength and efficiency of our portfolio is exciting.

Finally, I'd like to make a few comments about our recent announcement to sell our Southern Marcellus assets.

This transaction is a transformational event for our Company.

We expect to close in December, subject to certain closing conditions, including the receipt of third-party consents and the waiver of participation rights.

Upon closing, the optionality that this strategic transaction provides Chesapeake is extremely valuable and we anticipate many opportunities to continue building shareholder value.

We plan to provide our 2015 capital and production outlook in early 2015.

As noted, the quality of our assets, our talented employees, the operating efficiencies achieved in our capital program and our financial strength provide significant flexibility and optionality for our program in this volatile market.

We are confident in our ability to be competitive, regardless of the pricing environment.

In closing, I couldn't be more happy with our results for the third quarter.

But importantly, I also want you to know that we are not done.

There is a deep and strong commitment here at Chesapeake to become a top quartile E&P company, and we are progressing steadily toward that goal.

We believe that our core values, our focus on Chesapeake being an industry leader in every aspect of the E&P business, and our commitment to creating shareholder value is more evident each and every day.

Our talented employees are attacking every part of our business to be more competitive and more profitable.

While 2013 was our year of transformation, 2014 has been our foundational year, driving capital, operating and financial efficiencies, while improving our competitiveness.

2015 will be a year of value and leadership.

As I've noted in the past, Chesapeake is just getting started.

So you can expect further improvements in our capital efficiency in 2015 and a continued focus on driving value and growth for our shareholders.

That concludes my comments.

So I'm going to pass it now to Nick Dell'Osso, our Chief Financial Officer, for some additional financial information.

Thank you, Doug, and good morning, everyone.

As Doug mentioned, our third quarter results were outstanding, and the progress we've made over the past 12 months in transforming our Company has been significant.

Our strategy to add greater shareholder value is working, as evidenced by the decreased capital costs and increased performance in each of our operating divisions.

Simplification and improvement of our balance sheet and the resulting lower cost of capital -- we have seen extremely positive momentum across the board.

As we look forward to what lies ahead in 2015, we couldn't be more excited about the future and believe that Chesapeake is in a unique position to show differential results in the quarters and years ahead.

Specifically, we are very proud of our highly competitive position, operationally and financially, in the industry during this period of commodity price volatility.

We reported adjusted earnings of $0.38 per diluted share and adjusted EBITDA of $1.24 billion in the third quarter of 2014.

As Doug noted, we had strong sequential production growth during the quarter of 5%, while growing 11% year-over-year adjusted for asset sales.

As a reminder, we cut rigs throughout most of 2013 in an effort to balance our capital expenditures with our operating cash flows and to improve our capital efficiency.

We are continuing to see per well capital cost improvements in every play and have ramped rigs higher throughout 2014.

We are now seeing the production impact of those rig ramps materialize and we're very pleased with the results.

We continue to exceed our production growth targets, while coming in below our capital budget.

So more production is being added per dollar of capital invested than ever before.

We also saw improvements in our cash costs per BOE, both year-over-year and sequentially.

So our volume growth, along with margins that are expanding, are helping to offset the effect of lower commodity pricing.

To address our outlook on commodity prices for the rest of the year, we increased our expected natural gas differentials by $0.05 due to the continuation of low regional prices we saw in October in the Northeast.

We want to remind everyone that differentials consist of two components, basis, which is typically a field price discount to Henry Hub pricing, and non-basis items, such as gathering, transportation, processing and marketing costs.

The increase in our basis outlook for fourth quarter is primarily related to the former in the northeast part of the country, reflecting the low field pricing in Pennsylvania.

The prices that all gas producers receive for their Marcellus production have been particularly low over the past six months, due to the abundant supply of gas volumes and lack of regional demand in the summer and fall.

However, we do expect those local and regional prices to improve over the next 4 months to 5 months with the onset of increased demand due to winter weather.

Looking forward to 2015, we expect basis, particularly in the Northeast, to remain challenged as we come out of the winter months, and we will likely reduce our activity in our northern Marcellus play accordingly.

From a hedging perspective, we have relatively significant position of Q1 2015 gas hedges at attractive prices, averaging $4.51 per MCF.

We also have hedged a substantial amount of oil at just under $95 a barrel and will continue to look to add to both positions, should prices justify doing so.

Switching to our capital investment program, our comparative capital investments for the third quarter were down 8%, to $1.351 billion, as compared to $1.461 billion in the same quarter a year ago.

We continue to drive greater capital efficiency in our E&P business by delivering greater production at lower levels of capital investment and look for this to continue in the future.

Moving to the balance sheet, we have made significant progress this year in simplifying our balance sheet and maintaining strong liquidity.

This reduction in complexity continued in the third quarter with the redemption of our CHK Utica preferred shares.

This transaction took one of our highest cost financing instruments out of our capital structure.

With over $6 billion in debt and other reductions to long-term commitments that we have closed or are in process of negotiating during the past two years, we believe our balance sheet and liquidity position will serve us well in this current period of reduced commodity prices.

Further, I'd like to highlight that we will spend approximately $250 million less on interest expense and preferred dividends on an annualized basis pro forma for these balance sheet reductions.

Our focus on efficiency can be seen in all parts of the Company, including here.

Chesapeake has never been stronger financially.

That concludes my comments, so I will now turn the conference over to the operator for questions.

Thank you.

(Operator Instructions)

Mike Kelly, Global Hunter Securities.

On the capital efficiency front, you guys had a slide at your Analyst Day, I think, that really hit home, where you detailed the number of wells and the percentage of wells that were PV-10 positive going back a couple years.

And it looked, quite frankly, pretty atrocious versus where you are now.

And was wondering if you have any other marker, maybe it's on an internal rate of return front, if you look at each one of your plays to really assess where you are today with drilling costs coming down, cycle times decreasing, productivity increasing, and IRRs to compare where you are today versus where you have been in the past, akin to what you did at the Analyst Day.

Sure, Mike.

Thanks for the question.

Yes.

We absolutely have that type of post appraisal and are incorporating the information based on our results that we obtain from our investment activities into our future capital program.

We, in addition to what you described, just evaluating the PV-10 of the investment program, we also have a significant amount of scrutiny on all the cycle time improvements that we've been able to accomplish in each of the assets, looking at the improving IRRs, looking at the cost -- just all of the metrics in a look-back fashion and incorporating that as we go forward.

That's particularly what gives us confidence and strength going forward in our ability to be competitive and add differential value to our shareholders is the results that we've accomplished there.

So we will -- in every asset area, we provide a little bit of that information in our appendix -- but we'll be continuing to update that as we have our year-end numbers, but demonstrating how that capital efficiency continues to improve.

I'll tell you, I just have been super impressed with the focus of the leadership and the employees inside of Chesapeake.

I'm not kidding you.

It's like weapons grade attacking cost and driving value that is unlike anything I've ever seen before.

And it's just really exciting, and you can just expect to see that continued trend.

And I know there'll be questions today about 2015, our capital program.

But the best way to look at 2015 is to look at how the Company's performed in 2014.

And Mike, I'll just note that as you think about the cost reductions, we've seen play over play across Northern and Southern Division, think about how those cost reductions have been reinvested in improved completion designs and ultimately showing higher well performance in nearly every play, along with those cost reductions.

So it's really driving to what you're looking for there, which is higher returns, not just reduced costs in every play.

Mike, this is Chris Doyle.

Just to add a little bit of color, Jason and I sit down with the teams every quarter, as you know, and post appraise.

And I think what has been really gratifying for both of us to see is sequential improvement across the board, and in almost every play continually redefining what efficiency means.

And I'll just point to the release and the team in the Marcellus North that completed a well flowing 30 million a day and did it for under $8 million.

It's something that the Company hadn't been able to do to date.

And yet, the team, just like a lot of teams across the board, have continued to not only drive efficiency, not only drive cost down, but also rethink completions, rethink how we're investing those dollars.

And it is evident across the entire portfolio.

Great.

Thanks.

And a question, Doug, on the M&A front.

To date, you guys have largely been on the sell side of any transactions here.

With the cleaned up balance sheet, liquidity better than it's ever been before -- at least since I've been covering Chesapeake -- your desire to potentially look to do bolt-on deals or potentially jump into a new basin entirely, I'd like to hear your thoughts on that front.

Certainly.

Well, we look forward to closing this transaction in the fourth quarter, or in December, as we noted, Mike.

And we absolutely are evaluating every single opportunity to drive greater shareholder value, which includes bolt-on acquisitions or turning the strength and expertise that's demonstrated in our ability to operate and efficiently deploy capital into new assets.

And we are looking at that.

We will continue to look at that.

The key there is that anything we do will be focused at driving the greatest amount of shareholder value.

And we look forward to sharing more information on that as we firm up and develop those plans.

All right.

Thanks a lot, guys.

I'll hand it over.

Brian Singer, Goldman Sachs.

You've highlighted the strong rates of return, particularly in the Eagle Ford and the Utica, that's driven strong production here.

And one of the questions coming out of the analyst meeting is how next year's inventory, from a rate of return perspective and a well productivity perspective and future year inventory, compares to the types of wells that you're drilling now.

Can you talk about how you see the opportunity set next year and in future years versus this year, both in terms of well productivity and in terms of capital versus operating costs?

Certainly.

I believe that you will continue to see that portfolio set increase.

As I have noted in the past, our focus on expanding the core through improved capital efficiencies and through additional EUR, adding more value, will open up more opportunities for us going forward.

I think that when you look at the individual program IRRs and you look at the investment level that we have in the assets at present, we are very pleased with the continued improvements.

And obviously, price will play a large component in the IRR, but when you just price normalize everything, we are continuing to see good improvements and that portfolio set is expanding.

This is Jason.

Again, all across the board, we've seen our rate of returns go up because of the cost reductions.

I think one of the things we're kind of in progress last quarter, this quarter, through the end of the year is looking at how we optimize the completions and get the EUR side of the equation up that further drives the value on the per well basis, increases our rate of return.

So getting more out of the wells that we've already got in inventory.

Little things like the Haynesville drilling cross unit laterals, we're continuing to do those next year and will have almost -- I don't know -- 60% or 70% of our inventory next year will be cross unit laterals.

And we see with those, we spend about $500,000 extra and gain of $2 million of MPV for every well in the Haynesville that we can drill a cross unit lateral.

So it's the little things that tend to make a big difference for us, and we're continuing to just drive our completion efficiency on the capital side down, but reinvest that, in a lot of cases, to get the EURs up, which just have a compounded value to it.

The only thing I would add is I might point you to the inventory slide we put in the deck.

And we obviously had a really strong quarter in production growth.

And what is really, I think, exciting is you see that inventory and it's essentially flat year-over-year.

And so that boost in production has been driven by better completions.

It's been driven by more capital efficient investments and not by a draw down in the inventory.

So that gives us a lot of comfort, as we look forward, to what these assets can deliver.

And just a shout out to the Utica team.

At the Analyst Day, we pointed to a year-end exit rate of 100,000 barrels equivalent per day net.

We just touched 96,500 barrels.

We are continuing to execute about as well as anybody out there and riding capacity all the way up.

We've got three additional projects the team's working on, two compression capacity expansions, one processing capacity expansion is going to get us to the end of the year, and couldn't be more proud of those guys.

Great.

Thank you.

And then as a follow-up, since you mentioned you expected questions on 2015, may as well ask that.

How do you think -- you have very strong balance sheet here, particularly after the asset sale to Southwestern.

How do you think about activity levels next year versus this year and your willingness to drill through lower prices and use the balance sheet a little bit versus reduced activity from what it would otherwise have been?

Sure, Brian.

It's a great question and one that we are evaluating very closely.

The financial discipline that we have driven into the Company and the focus on capital and our cash generating capabilities is an issue that we discuss continuously inside Chesapeake.

When we look at 2015, the key that we just would ask you to focus on is that we're going to invest at the appropriate rate to add the greatest value to our shareholders.

And so as we have really tightened up our program in 2013 and 2015, the focus for us is driving the greatest amount of value.

And it's really, when you think of slightly over spending cash flow, under spending cash flow, adding to the program, the key strategic tenet in that is that we are driving for the greatest value and evaluating those options.

And we're really confident in our ability to be competitive, even in this low price environment.

Great.

Thanks.

Neal Dingmann, SunTrust.

Good morning, guys.

Doug, just one general question first and then just two specific.

First, on the efficiencies.

Obviously, you and Nick really detailed and it shows in the press release just how well you're continuing to cut those costs.

I'm wondering, like Brian's question, in 2015, I know you don't have budgets out there yet.

But how do you -- when you think about spending when you guys are looking at this budget, are you assuming that costs can even go lower with these efficiencies?

You certainly have done a heck of a job bringing them down already.

Just your thoughts about that.

Sure, Neal.

What I really love about the program, the asset reviews that I have sat in over the past few months, the teams just continue to drive further improvements.

And it's very, very exciting to see.

When we look at 2015, obviously, we take our post appraisal information and incorporate those current estimates for our individual wells and the capital program and run our models to determine the optimum allocation of capital to drive the greatest amount of value for us.

But what we know inherent in our program is that we will continue to see additional improvements.

And what's exciting about it is the teams, the leadership that has taken place in each of the teams.

It's the contagious environment of driving more value.

And so the way that we look at 2015 -- we're using the most current well information, and we will base our program off of current costs.

But what's really cool about it is we continue to see, and I'm very confident that we will see, further efficiencies as we execute in 2015.

So if your question is, do we estimate additional savings that will come up with the capital program in 2015, the answer is no.

Do I anticipate or expect that we will see it?

You better believe it.

Great to hear.

Two Utica questions for either you or Chris.

Just wondering first, you or Chris' thoughts on the oily part of the play after seeing the recent -- I know the well that you had mentioned that you were going to have up there, and then your thoughts down in that Southeastern part around the dry gas right now, I think you've got a couple rigs running.

Sure, Neal.

This is Chris.

On the oil window, we continue to be pleased with our latest results.

We're seeing that well, I think we mentioned on the last call, came in the highest IP.

It's continuing to outperform our expectations.

It's still flowing naturally.

We're going to install some lift and give it a little help.

But our plan is we've got four or five additional wells between now and probably second quarter, as we look to expand capacity out there and get some more tests out there.

The window is growing.

It's not shrinking.

As we've said, it's not a company changer, but it is, I think, a testament to the value driven culture that is here at Chesapeake of expanding that core is a perfect example of that.

So we continue to be pleased, Neal, on that and with more results to come.

On the dry gas, we still have, of the seven rigs that we've got running, we still have a pretty large portion of that program that is HBP-driven.

And we like, as we've said all along, we've like the play.

We like the dry gas window.

We like where our core position is, and we're expanding out to the well window.

The big issue with the dry gas is just infrastructure, honestly.

I will point you and everyone else back to the fact that no one has more production data than Chesapeake on all of these windows.

We know this play exceptionally well.

We have had recent tests that have confirmed our thoughts, and we like the play.

It's a great asset for us.

And then, Chris, just real quick on that, why was it -- it was very minor, but I noticed the average peak production rate was just slightly lower for this quarter versus last, despite I think continuing to add more frac stages?

Just your thoughts there.

On the Utica, I think what I'd to point you to, Neal, is just the steady, continuing ramp, and just this week hitting that 96.5, as I mentioned before, and the assets just continuing to execute and the team's doing a fantastic job of riding that capacity.

Really not massive capacity expansion from the beginning of the quarter to the end.

But we've just continue to ride that line.

So they're doing a fantastic job.

All right, guys.

Great job.

Doug Leggate, Bank of America.

Thanks.

Good morning, everybody, and Doug, congrats on all the progress you're making.

I've got a couple, please.

The first one is, just as we think about obviously the lower oil price environment, I just wanted to be clear on your messaging going into 2015.

So should we still expect Chesapeake to be living within cash flow or, given that you've done great strides with your balance sheet, obviously, you've got a lot more flexibility, but I think that that capital discipline message has been a hallmark of your tenure to date.

So could you just give us a reiteration of how you see that?

And if I may, how you would rank your place in terms of incremental capital in the event that you did have to curtail the dominant spending?

Sure.

Thanks for the question, Doug.

So as we look at 2015 and we look at capital allocation, what our budget could potentially be and how that fits with respect to cash flow, the most important thing to me is how we create the greatest amount of value long-term.

And so while we have had a very strong focus on approximating our capital program with our cash flow, we will continue to look at that very closely on how do we drive the greatest value?

We have significant flexibility in our program.

We're no longer shackled to all kinds of activity commitments and things that don't give us the ability to move rigs around and drive the greatest amount of value.

And so I think that yes, we want to continue to be very, very focused on our cash generating capability in this price environment.

But stronger than that is we're focused on value and focused on how to continue to develop our assets to create the most efficient portfolio and value we can for our shareholders?

So without saying where our capital budget will be, I think that all of that is under consideration and it'll be evaluated based on the flexibility we've driven into our program and how we optimize the value for our shareholders.

So when you think about where the capital, competition for capital, call it, inside the Company is very, very strong.

And as I have noted before in the past, perhaps at Analyst Day and in other investor discussions, the scarcity of capital drives tremendous value.

When the teams see rigs moving away, the fight to drive greater value through technology, through innovation, through synergies, through creativity, just is an awesome thing to watch.

And so even today when we look at our programs, the IRR of our gas investments, as a Jason noted, are continuing to improve.

The quality of the Marcellus gas investments is still very strong and competitive for capital.

And obviously, the oil, the Eagle Ford, the Powder River Basin, and the Mid-Con investments, as well as the Utica, we have a robust portfolio.

And so rather than talk about what we would take away or what we've cut back on, I'd rather point to, these teams are fighting viciously for funding and for driving more value for our shareholders.

And it's just a great thing to watch.

Appreciate the full answer, Doug.

If I may, I'm just going to try two very quick follow-ups.

One is housekeeping, really.

When the Marcellus -- southern Marcellus Utica is gone, one of the big drags on your guidance has been the wide gas spaces differentials.

And I know that may be largely a function of the northern Marcellus, but it's also a transportation issue.

So I'm just curious, does that guidance change dramatically when the Marcellus -- talking about the basis differential -- does that change dramatically when the Marcellus is gone?

And my final one, if I may, is when you say you're just getting started after this Marcellus sale, I'm just wondering if you could give us some thoughts as to what additional, if any, material asset disposals you might see, or the magnitude, as opposed to specifics, on the plays, because I guess you wouldn't want to give us those?

And I'll leave it there.

Thank you.

Sure, Doug.

What I mean when I say we're just getting started is similar to when we described that we saw a value gap in our valuation of that asset back at Analyst Day.

I think you specifically asked me exactly what does that mean.

And the comment I had is we are going to absolutely drive the greatest shareholder value that we can possibly capture.

And that's what we've done.

And so rather than be specific about what asset sales we might consider, what acquisitions we might consider, or what capital program, I just would like to draw the attention that the way we're performing and the way we're going to continue to perform is that our shareholders can take great confidence that we're going to drive great value in this Company.

And we are 100% aligned in the organization, the culture's aligned to it.

And I just couldn't be more excited about it.

And so you can continue to expect great things from Chesapeake.

And Nick, I think, will provide you a little more color on the differentials as we dispose of that asset.

So Doug, when you think about the amount of production in the southern Marcellus, it represented only approximately 7% of our total production in the Company.

So it did have a relatively high gas differential compared to some of our other plays.

And so it has a minor positive impact.

But overall, remember it's only about 7%.

despite the size of the proceeds being very large, it's a relatively small amount of our production.

So on a pro forma basis, you should be able to estimate what the impact is.

All right, fellows.

Thanks for my questions.

I look forward to seeing you next week.

Thanks.

Thanks, Doug.

David Tameron, Wells Fargo.

Good morning, Doug.

Most of the questions have been asked, but can I circle to the Powder?

And I know you talked about it at Analyst Day, and since then it seems like it's had an increasingly growing position in the presentation and in some of your verbage.

So can you just talk about -- I think in the presentation, you said you have three rigs running right now.

Can you talk about what activity levels look like out there next year, what you guys are seeing?

Just give us an overall update on the Powder.

Sure, Dave.

We love the Powder River.

We love the acquisition up there and are excited about that program.

And we are presently evaluating with the available capacity that we have coming online later this year, what exactly that program is going to look like.

We consider it to be another strong growth engine for the Company, and the teams are doing a great job in driving the capital down up there and being more efficient.

And I think Chris may want to add a little bit more color to it.

Sure.

The acquisition -- the trade that we made with RKI was all about unleashing additional assets into the hands of this operating team that has driven so much value into that area for us.

We're currently at four rigs.

That fourth rig we brought in to drill the first Shannon, it is continuing to test the other multiple stack pays that we have out there.

When we look at where we are today to the end of the year, we've got Bucking Horse coming on scheduled later this month.

We'll build it to that capacity.

When we think of our program next year, it's probably going to be split about half Niobrara, half Upper Cretaceous, as we continue to see phenomenal results in those multiple stack pays.

When we think about the Niobrara, we've got a lot of really interesting, very powerful value-driven tests coming up.

We have a couple pads where we're testing four different benches within the 200-250-foot Nio stretch.

So you think about stacking laterals and what that can do to this resource play, it's a huge value lever for us.

And those will be coming online at the end of this year and first part of next.

So we've got stack Nio coming.

We've got the next five Sussex wells, including some long laterals, coming in February.

We're drilling the second Parkman today.

We're drilling a teapot.

Just lots of really cool stuff.

We're extending that Nio out.

And it's just a team that has taken their destiny into their own hands and continued to deliver a ton of value for our shareholders.

So just great job by that team.

Okay.

And let me give one more shot at that.

When you start thinking about the Sussex versus the Upper Cretaceous can you talk about, is one looking better than other?

Is one more prospective?

Do you care to give us any more color, just drilling down one more level?

Sure.

The Niobrara is a larger resource, and so we like that.

It's delivering really strong returns.

The Sussex, we've seen the first three tests that have out paced our expectations.

We see a lot of running room there.

It's not a blanket like the Nio.

The resource is significant, but probably not as large as the Niobrara, but also offers higher returns and a little bit higher oil cut.

So the mix between the Niobrara, the Sussex, the Parkman, the Shannon, the Teapot, in addition to other plays, I think, when you roll it all up, you have a tremendous opportunity in the liquids growth engine for this Company.

So I would think, just to characterize it for you, Niobrara is extensive, huge resource, good returns.

Sussex and other Upper Cretaceous, probably a little bit better returns, but not as huge of a resource, but very significant.

Okay.

That's helpful.

I'll let somebody else jump on.

Thanks for the color.

Joseph Allman, JPMorgan.

Doug, in the second quarter earnings conference call, you said that you weren't quite happy with the portfolio and the product mix.

And it sounds, from earlier comments, that you're still not fully satisfied.

So do you still see a need to reshape the portfolio, sell some assets, buy some additional assets?

And what about the portfolio is not ideal?

And what's missing?

That's a great question, Joe.

Something that we are internally discussing all the time.

And it's all centered on really with the size of the Company and organization producing right at 730,000 barrels of equivalent per day, and you look at our current weighting, we're right in that 70/30 split, gas and oil.

While we love the quality of the portfolio that we have, we also want to be as competitive as possible in our cash generating capability and the efficiency of our investments.

And so we're going to continue to look at opportunities of the existing assets and potential new assets to further strengthen that portfolio to be more competitive.

The key is, as like Jason noted and Chris have highlighted, that the focus on the portfolio we have and where we're investing today is very strong and we expect to see continued improvements and better returns in each of those plays.

But we do know that there are a few assets that we have that still are not attracting capital, and we may look at potential other asset sales.

But the key is, it all points back, Joe, to how we drive the greater value and how we be more competitive.

And so the flexibility we have today, operating commitments, financial obligations, all those things that drove decisions that weren't optimum for shareholders in the past, are gone.

And so we can make decisions with proceeds from asset sales on what we want to fund, whether it be acquisitions, whether it be additional drilling activity, all those things give us a lot of flexibility in driving towards the greater value story.

That's helpful, Doug.

And then a follow-up, and so in terms of your move to just improve efficiency, lower cost, improve rates of return, so what metrics should we look at to see those operational improvements?

So like for example, when I look at, say, LOE on a unit basis, I see that it's come down some.

But with all the moves in the portfolio, it's hard to see how much of an improvement in LOE is portfolio moves and how much is just really internal improvement and efficiencies on a same-store sales basis?

I

If I look at DD&A, DD&A is relatively flat over the past several quarters.

So if we're seeing improved capital efficiency, why aren't we seeing an improvement in DD&A on the income statement?

So if you could just point us to the metrics that we can really look at to really represent what's going on internally.

Yes, Joe.

I agree and we appreciate your comment.

We've had so much noise in the portfolio and so many transactions that it really does make it difficult on just a normalized type of basis to see all those improvements.

I think that what you will continue to see, though, is the quarterly improvements -- and you'll see in 2015 is a lot of these transactions get closed, assets get moved off of our books -- a more steady state by which you can compare our continued improving performance.

You look at each -- whether it be a cash cost metric, a capital efficiency, or just a standard financial metric, you look at all of them, anyway.

You know what they are.

I wouldn't say to point you to any particular one.

Just keep watching them, and you'll see the clarity and it clean up with time, as we get into the noise of all of this transactional stuff taken care of.

And we'll continue to do our best in our presentations and discussions, and certainly, any one-off call and questions you might have to try to answer those questions better.

All right.

Very helpful.

Thank you.

Matt Portillo, Tudor Pickering Holt.

Just one quick question.

Heading into Q4 and early 2015, I was wondering if you could provide us an update on your thoughts around catching up on the completion front, as well as any kind of remaining carry outstanding, and just some context around how we should think about the MVC commitments from a payment perspective.

Okay.

So several questions in there.

When we look going forward with the carry, we anticipate that basically all the carries are going to be exhausted this year.

We may have a little bit of residual carry roll into 2015.

As far as how we incorporate that, and you look at the inventory, what is important to know we put that slide in the presentation to show that basically the 2014 year-end inventory's going to be the same as what we were year-end 2013.

And the reason to note that is that with the efficiencies -- the production -- our production increases are not coming from inventory reduction.

Inventory is relatively flat, because of the continued efficiencies that we're recognizing and the multi-well pad drilling.

And we will eventually reach a steady state of inventory in each of the assets that's a function of efficient operations and efficient capital development.

So we're getting close to that.

But I think the key of how we mobilize that inventory and as we look forward in 2015 is again focused on how do we drive the greatest value?

And then I'll just note on the question you had about the MVC, Matt, that will be paid out in the fourth quarter, as projected.

Really no changes to our expectations there.

Great.

And then I guess just a second follow-up question for Doug or the team.

I was wondering if you could provide us maybe a little bit of context, as you've said there's been a lot of moving parts in terms of assets improving in the portfolio, as well as well costs coming down and other efficiencies you've driven through the drill bit.

I was wondering if you could provide us potentially some color today on how you think about ranking your top three or four assets and allocating capital to those as we head into next year.

Sure.

So as I've noted earlier there, Matt, I'm a little hesitant to rank them.

Because as the competitive capital allocation process inside of this Company is so fierce, it's just an awesome thing to watch the way the teams are driving for improved efficiencies.

We're seeing continued improvement across the board.

If you look at it on an IRR basis, the quality of some of the gas investments are just outstanding.

You look at it from a total portfolio perspective, the continued development and quality of the investments we're seeing in the Eagle Ford and in the Powder River and Utica, and as well as emerging activity in the Mid-Con.

We're seeing really good things everywhere.

I really hesitate to say one is any better than another, because what the beauty of Chesapeake and our assets is a really strong portfolio of investment opportunities.

Thank you very much.

Dave Kistler, Simmons and Company.

Real quickly, you talked about rig flexibility as far as moving it around the portfolio.

Can you talk a little bit about rig flexibility as far as ramping up or down relative to commodity prices, contractual commitments, and maybe talk towards completion contractual commitments, as well?

Sure.

So we specifically have designed our program and our number of contracts and longer-term commitments around just for this point in time, Dave, that when we may need to make adjustments we can make those adjustments, whether it's standardizing the fleet to be able to move to different assets or whether it's a situation if we want to ramp up or ramp down.

We've got that flexibility.

And as I noted previously, we are no longer shackled to activity commitments or minimum well commitments or things like that, or rigs or anything that's going to encumber or inhibit our performance.

Great.

That's helpful.

And then just thinking about the efficiency gains that you outlined, and obviously keeping completion backlog the same, can we read into that that with the current rig count you could be looking at the same number of wells next year, if not more?

Just trying to get some handle on what activity would look like on a year-over-year basis on a well productivity standpoint.

Dave, this is Chris Doyle.

I think you could exactly see that, if given the same rig count, we would deliver more wells.

And if you dissect into that inventory graph, what it's telling you is multiple things.

One, the wells that have come online in areas where we have capacity constraints, the wells have outperformed what we initially thought.

And so we didn't have to bring as many wells on.

And so we've kept a backlog.

It also says that the drilling teams across the entire company are delivering more wells into that backlog than originally anticipated.

And so I love the story of the Marcellus North.

This is a team that had drilled 800 wells going into this year.

And from the beginning of the year to where we are now, they've cut 25% off their cycle times.

This is a revolution of drilling efficiency that we have seen.

And what it has caused is something we're not terribly proud about, which is our inventory's flat.

It's a fantastic problem to have.

But yes, absolutely, given the same rig count, this team will deliver more wells next year than it did this year.

Great.

And then just thinking about that, when Doug made the comments earlier -- about the Marcellus and flexing activity to match seasonal gas prices, should we assume we'll see similar activity in the Utica?

Well, in the Utica it's a little bit different, where we are maxing out to capacity.

We have additional capacity we could tap into in the Marcellus North that gives us the ability to flex up, flex down, as needed.

Utica's a little bit different.

I wouldn't expect us to have that same sort of game plan.

But honestly, we'd have some flexibility to do that, but probably to a lesser extent in the Utica.

Okay.

Really appreciate the added color, guys.

Great work.

This is Jason.

I'd add on a little bit to what Chris said, as far as the South.

I look back at 2012, when we had 31 rigs running in Eagle Ford.

We're drilling the same number of wells today with 21 rigs as we did with 31 back then.

Just the efficiencies are huge.

We're pushing the boundaries on cost.

Again, I can see another 10% coming almost out of every asset for next year.

You just think about what that does to our value as a Company.

It's huge in areas which you got thousands of wells to go drill, and if you can cut another $500,000 off an Eagle Ford well, it's significant to us, and we can keep our rigs running and reinvest that capital.

As far as inventory build for us, again, we are running more rigs than we planned earlier this year, because we've saved money and been able to keep the rig count high.

But we're adding 2 frac crews in the Eagle Ford these last two months.

So we should pull down our Eagle Ford inventory a little bit by year-end.

We won't really see the production from those extra frac crews until next year.

But we're working on that.

But it's just been inventory build because of all of our efficiencies.

So it's been a great story for us in the South.

Outstanding, guys.

Thanks so much.

Thank you, Dave.

Dan McSpirit, BMO Capital Markets.

How much of the capital efficiency gains achieved to date can be described as maybe just picking the low hanging fruit, that is squeezing out the obvious inefficiencies, versus something that's more innovative?

And how many of those same easier opportunities remain?

So that's a great question, Dan.

And when I came into the Company, our focus was how do we drive greater cost management, ultimately leading for what I call cost leadership.

Cost management means that we stop doing things that aren't adding value to our shareholders.

Cost leadership means that we deliver more for less, deliver something unexpected or more value than what we had previously.

It also means, cost leadership, that we compete strongly, if not the leader, in all of the areas in which we're investing.

And I am so happy to see what our teams have accomplished across the portfolio, whether it be cycle time, feet per day, the value achieved, it's across this portfolio.

The cost leadership demonstrated and efficiency improvements, it's no longer cost management.

It is absolute cost leadership.

We've made a reference in the past that there were a lot of opportunities for low hanging fruit.

And as we have worked through the past year, we've cleaned that up.

That's all cleaned up.

And now it's just pure cost leadership.

That's great.

And just as a follow-up to that, and appreciating that it's not yet 2015.

But looking into 2015, the new year, what could a weaker commodity price environment mean for those same capital efficiency gains?

That is, is there already an expectation of cost deflation more than offsetting lower commodity prices?

I guess that's just another way of asking whether the capital efficiency rate of change is likely to decelerate or accelerate going forward.

Well, there's so much volatility right now with the pricing.

I think that just operational synergies, EUR improvements, things that we can control, you will absolutely see a continued improvement in 2015.

As we look at the supply chain side of our business and you think of the significant purchasing power that Chesapeake has with the amount of activity that we have in the United States, we will be capturing those supply chain opportunities, working with our vendors in a new commodity price environment to secure the best pricing that we possibly can and be as competitive as possible.

So we are not building in to our forecast that we expect a certain reduction in any of our services.

But I can tell you that the power and strength of our portfolio that we will be absolutely reviewing that and looking for the most competitive pricing in order to execute our program.

Great.

Thanks for taking my questions.

Yes.

Did you have anything you wanted to add, Chris?

Yes.

I'll just add on the supply chain front that really our focus, with the Energy 77 spend, that does give us the ability to tap into the full purchasing power.

But our focus going forward is, our partners, our service providers are going to want to work with the best in the basin.

They're going to want to work for the Company, let's say in the Utica, that's going to put away nine stages every day for an entire week versus two.

They want to work for a company that's going to turn wells around in 10 days, not 30.

So that is the focus.

This is going to be a partnership going forward, and we are very confident, not only will we see the full purchasing power deliver value for our shareholders, but a strong partnership where companies want to work for the most efficient operator out there.

And that's our focus going forward.

Great.

Thanks again.

Charles Meade, Johnson Rice.

Good morning, Doug and Nick and the rest of your team there.

If I could go back -- I know you fielded a number of questions and people want to know how you rank the plays, and I think it's understandable that you guys have some of the best gas plays, but you also have some great oil plays, as well.

So you're a little bit unusual in that respect.

I think we can imagine how this is going on, as you talk about your competitive capital allocation that the fellows with the more liquids heavy plays have the heat on them now.

Can you maybe talk about -- is there some aspect or some portion of your portfolio that you think is an unrecognized option value in the market?

I'm thinking maybe, perhaps a gas here, part of the Eagle Ford that would rise to the top, or maybe a gassier portion of your PRB acreage that's not recognized that is a candidate for a surprise in 2015?

Well, Charles, I think our entire portfolio is undervalued.

I think every single asset is undervalued.

You guys certainly showed that with that West Virginia deal.

Well, the thing that we are focused on internally and the excitement inside of Chesapeake is driving value.

And I know it's been a little while since you've been on our campus.

It is the coolest thing to see the excitement and energy level of these teams and this Company and driving the highest quality investments out of these programs and these great assets.

And I will highlight that one area that has not caught a lot of attention for us and has not been one of a lot of focus is our Mid-Continent assets in Oklahoma.

And we have a huge acreage position.

We've got a lot of stack pays.

As we've been working through our portfolios, we see a lot of upside potential in Oklahoma, and we will be working hard across the portfolio to recognize the value that we believe exists.

And Mid-Con is an area that just, to answer your question, to get around to it in a long-winded way, I think that we really need to highlight the great things that are taking place in Oklahoma, because it is contributing substantially to our program and we expect it to contribute significantly in the future.

So the entire portfolio is undervalued.

That's what I was looking for.

And then if I could just ask one question on CapEx.

So your capital efficiency clearly on display with what you guys have done, coming in below what a lot of people are looking for in Q3.

But that implies -- you've kept the annual guidance intact, so that implies a guide up -- or it implies not a guide up, but a ramp-up into Q4.

And so is that what we should be looking for?

And is that a sign of where you're looking to begin 2015?

Or is it more likely that you're going to stay on your trajectory and come in below your guidance?

Well, are you talking about for production?

CapEx.

CapEx.

Okay.

We're executing really well in all the programs.

I think that we've put out there what our annual guidance is and we feel very comfortable with that range.

And as you would expect, the teams inside of this Company are going to continue to drive for further improvements.

And I'm looking forward to seeing what they continue to deliver.

Because it's really good work, and I think capital and production and other value drivers will continue to see the improvements and the value created.

So should we expect a ramp-up in Q4 and is that a prelude to 2015?

Or is that reading too far into it?

This is Jason again.

We'll ramp-up in at least the Eagle Ford this quarter.

Again, we've increased frac crews.

We've been running the 21 rigs.

We've also added three spudders, because we see every well that has a spudder rig on it saves $60,000 a well.

So we'll be higher next quarter than this quarter, especially in Eagle Ford, because we're just continuing to work down that inventory via the increased stimulation crew count and running that higher rig count through the end of the year.

So we'll definitely see some capital pressure there, or increase going forward.

We'll do the same in Powder.

We'll keep a second frac crew running.

We mobilized it about a month ago.

And so you'll see that flow through to higher investment in the fourth quarter than the third.

That sounds good.

Thanks a lot.

Thanks a lot, Charles.

We're at the top of the hour.

I'd like to thank everyone for joining us today.

This concludes our teleconference.

And please follow-up with Brad and his team if you have any other questions.

And you can expect to see continued improvement from Chesapeake.

Thank you, all.

Thank you.

And that does conclude today's conference.

Thank you for your participation.