Chesapeake Energy Corp (CHK) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the Chesapeake Energy Corporation Q4 2015 conference call.

Today's conference call is being recorded.

At this time, I would like to turn the conference over to Mr. Brad Sylvester.

Please go ahead.

Good morning and thank you, everyone, for joining our call today to discuss Chesapeake's financial and operational results for the 2015 full year and fourth quarter.

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 our beliefs, goals, expectations, forecasts, projections, and future performance and the assumptions underlying such statements.

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 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 any undue reliance on such statements.

With me on the call today are Doug Lawler, our Chief Executive Officer; Nick Dell'Osso, our Chief Financial Officer; Chris Doyle, our Executive Vice President of Operations for the northern division; Jason Pigott, our Executive Vice President of Operations for the southern division; and Frank Patterson, our Executive Vice President of Exploration.

Doug will begin the call and then turn the call over to Nick for a review of our financial results before we turn the conference over for questions and answers.

So with that, thank you.

And I will now turn the teleconference over to Doug.

Thank you, Brad and good morning.

I hope you've had the opportunity to review our press release issued earlier this morning.

We also have a few slides related to our call, as Brad noted today, that can be found on our website.

Despite the challenging commodity market, we've made significant progress in 2015.

Further details regarding our financial and operating performance can be found in the press release.

For the purpose of this call, I want to focus more specifically on our strategy and plans for 2016.

I want to address today the primary issues facing the Corporation and hopefully answer any questions you have about Chesapeake.

To start, I'm very pleased with the meaningful progress in asset sales year to date.

We have closed on or have under a purchase and sale agreement approximately $700 million of divestitures.

This amount significantly exceeds our prior 2016 first-quarter projection of $200 million to $300 million.

The asset sale areas include properties that are covered by three VPPs, or volumetric production payments, and we will use a portion of the proceeds to repurchase these VPPs at favorable prices and further reduce the complexity of our balance sheet.

Net proceeds from these property sales will be approximately $500 million.

In addition, we also have line of sight on another $500 million to $1 billion of further asset sales that we expect to close by year end.

Due to the size and diversity of Chesapeake's portfolio, we have received several inbound offers and sales inquiries for smaller, non-core, non-operated properties from strategic buyers.

These smaller packages can range anywhere from $10 million to $500 million with limited EBITDA and production.

The interest level in larger $1 billion-plus sized asset sales is very low in the current market.

We expect to continue to make progress on several smaller asset divestitures, which when taken together can add up to meaningful amounts until we can evaluate the possibility of divesting a larger asset.

The quality and diversity of our portfolio provide tremendous opportunities to further optimize our current assets and bring additional value forward.

Secondly, we are addressing the operational leverage and commitments we have as a Company.

In 2015, we were able to renegotiate two gathering agreements with mutually beneficial solutions to Chesapeake and Williams in our Haynesville and dry gas Utica areas.

In 2016, we will continue to actively pursue improving our gathering and transportation costs, as demonstrated by two recently signed agreements with other midstream service providers.

These two agreements will enhance our EBITDA by an additional $50 million this year through lower firm transportation volume commitments and lower fees on certain pipelines in our Haynesville, Barnett, and Eagle Ford areas.

These achievements were primarily with our midstream partner Energy Transfer and were achieved by awarding additional business for services we need in our core basins at market rates.

We continue to work with all of our midstream partners in each of our major operating areas to find cost-effective, mutually beneficial solutions reflective of the current operating environment.

By leveraging Chesapeake's future midstream business opportunities for incremental dedications, for gathering services, processing, fractionation, liquids handling, and marketing, we expect to continue to negotiate improved gathering processing and transportation costs for our Company in 2016.

Turning to our cost structure, in 2015, we reduced our production cost on a per-barrel-of-oil-equivalent basis by 10% compared to 2014.

We also reduced our general and administrative costs per barrel oil equivalent by 24% in 2015, including non-cash stock-based compensation.

Our confidence remains very high that we can continue to lower these costs even further in 2016, as we are targeting another 10% reduction in our production costs and a 15% reduction in our G&A cost on a BOE basis.

On an absolute dollar basis, this represents a combined reduction of over $200 million compared to 2015.

As we plan for 2016, our current capital program is 50% lower than in 2015 using the midpoint of our guidance.

And we will focus on shorter cash cycle projects that generate positive rates of return in today's commodity price environment.

The improving quality of our operations, our capital efficiency, and lower service costs all give us incrementally positive point-forward economics, even with today's price deck.

In 2016, we will be focusing on more completions and less drilling, with our completion dollars representing 70% of our total drilling and completion program.

We plan to place 330 to 370 wells on production this year, resulting in a flat to modest decline of 5% compared to 2015, adjusted for asset sales.

Commodity prices are front of mind for all of us, so we will remain flexible in our capital program, depending on prices and market conditions.

Finally, we've made significant progress since the third quarter of 2015 to reduce our overall debt level by $2.2 billion through an exchange using second-lien secured debt in December that also reduced cash interest expense due to redemption of convertible notes in November and through ongoing open market purchases.

This is a stunning accomplishment and it is also no secret that we are looking forward to reducing our debt load even further in 2016.

We expect continued pressure on commodity prices, the current deposition, and the high operational leverage associated with our midstream commitments to exacerbate the challenge here at Chesapeake.

However, we have multiple levers available to us to further strengthen our financial and operational stability and strength.

Liability management initiatives are underway for 2016, asset sales are progressing, and our capital efficiency and cost structure continue to improve.

We will continue to demonstrate our commitment and passion to create value for our shareholders using all of our available resources in this current market.

I'll now pass the call to Nick, who will share more with you regarding our balance sheet and liquidity.

Thank you, Doug, and good morning, everyone.

I want to start by addressing our strategy in managing our near-term maturities.

We made significant progress in 2015 to reduce our overall debt level by $2.2 billion, primarily through an exchange using second-lien secured debt in December, but also reduced our cash interest expense.

However, there is much more work to do.

The primary focus for Chesapeake is the reduction or removal of our 2017 and 2018 debt maturities.

We are pursuing several avenues to reduce these obligations, including the use of additional secured debt, private negotiations with bondholders, and other types of exchange and tender offers.

We will continue to be active in the market to exchange or repurchase our debt and reduce these principle balances even further.

Turning to our liquidity, our undrawn revolving credit facility has just under $4 billion of availability to us, with about $92 million of [L] season collateral posted.

We went back to a secured facility in late September, with our oil and gas assets acting as the collateral for the credit facility lenders.

However, there were unencumbered assets and assets that have been pledged to our collateralized hedge facility properties that were not pledged to the credit facility lenders.

As of this month, our collateralized hedge facility has been terminated, which gives us more flexibility as we move into the spring redetermination season.

If necessary, we can pledge our unencumbered assets and assets previously pledged to the hedge facility to be used as collateral for the credit facility lenders in April.

As a result, we feel good about our ability to maintain robust liquidity through the upcoming borrowing base, despite the significant drop in commodity price strips.

We expect to end the month of February with approximately $300 million in cash on hand, which reflects having already used approximately $230 million of cash to retire bonds due March 15 at an average price below $95.

This cash balance also reflects only $135 million of the approximately $700 million of asset sales Doug referred to in his comments that have already closed., the remainder of sales for which we have signed purchase and sales agreements and expect to close between now and end of the second quarter.

Along with these pending sales, we will repurchase three of the Company's previously sold volumetric production payments, our VPPs 2, 3, and 10, for approximately $200 million.

The total projected net impact of these expected sales after purchasing the VPPs will be a reduction of approximately 25,000 barrels a day of equivalent production, which has been adjusted in our outlook provided this morning.

We are pursuing additional asset sales targeted at $500 million to $1 billion of proceeds in 2016 to further improve our near-term liquidity.

I look forward to updating you on our asset sales progress throughout the coming months.

As you have seen in our press release, we have broken out our gathering, processing, and transportation charges in a line item in the income statement to provide greater transparency into these costs.

Previously, these were reported as deductions to oil and natural gas and NGL revenues.

We continue to work to further reduce these costs and expect to optimize additional gathering, processing, and transportation agreements in 2016.

As Doug noted in his comments, we are proud to announce that we recently completed an agreement to reduce our Haynesville transportation volume commitment and fees, primarily on Energy Transfer's Tiger Pipeline, to better align with our volume profile, resulting in a $0.06 per Mcf reduction in our total Company gas gathering transportation costs in 2016.

To further maximize our cash flow in 2016 and provide additional protection against even lower commodity prices, we have hedged over half of our projected natural gas production, at approximately $2.84 per Mcf, and over half of our projected oil, at approximately $47.74 per barrel.

So to close, we have a lot of work to do to execute our strategy.

We will rely on our extremely talented workforce, outstanding portfolio of oil and gas assets, and strong partner relationships to attack our challenges.

Based on these strengths, we believe we can continue to adjust our business to reflect the new operating environment as a result of lower prices and return to significant profitability as a highly efficient developer of high-quality unconventional US oil and gas assets.

We appreciate your time today.

That concludes my comments and I will now turn the call over to the operator for questions.

(Operator Instructions) Neal Dingmann, SunTrust.

Doug, just a sort of philosophical question.

How do you guys think -- obviously you've laid out the plan on your CapEx, so I'm just kind of wondering when you think about bond repurchasing and some other finances in that respect versus drilling dollars, how do you all think about that this year and going forward?

Good morning, Neal.

Thank you for the question.

The discounts that we recognize today for open market purchases are very, very attractive.

And so what you can expect is we will continue to look for opportunities to buy back in that debt at a discount.

And that has been taking place and we will continue to look for those opportunities for those near-term maturities.

And we will weigh that very closely against the opportunities to invest in our portfolio.

Very mindful of the current pricing environment and mindful of getting the best return for our shareholders.

So that balance is ongoing on a daily basis and right now, we see a lot of opportunity in trying to pull in some of that debt at the discounts that we recognize.

All right.

Then just maybe quick question for Nick.

Nick, if you could just further talk a little bit about the credit redetermination -- you mentioned about the collateralized hedges gone.

Your thoughts about as you come into April any concern about the redetermination or just anything more you can say about that?

Well, the process will be completed in April.

We stay in regular communication with the bank group.

We understand where they are on prices today; they very closely match the strip.

We can run that through our models ourselves.

No ability to be precise about where things will land, but we feel good about our ability to get through the redetermination season with a really strong credit facility.

Got it.

And then the last question -- just maybe an ops question, Doug, for you or obviously for Chris or Jason.

To me, those STACK results looked as good as we've seen by anybody out there, and I know you mentioned in the release that you plan to operate up to three rigs in the area.

Just your thoughts -- any of those assets on the block to potentially sell?

Or now given the results you are seeing in there, is that going to continue to be one of your larger growth areas?

Sure, Neal.

I'm very excited about what we see in the STACK.

I continue to say that our Mid-Continent area is one of the most undervalued assets in our portfolio.

I've been super pleased with the recent performance that we've seen there and I think -- like you said, I think we have an excellent position.

We will be very closely monitoring our capital program; that is a extremely competitive area at these low prices.

But also mindful if we can accelerate value to our shareholders, we will consider that.

So at this point in time, we do not have any intention of selling that area, but it doesn't mean that we wouldn't if we couldn't capture an excellent value for the Company.

Okay.

Thank you, all.

Excellent quarter.

David Tameron, Wells Fargo.

Doug, as I think about the credit restructuring news that came out, can you give us any color as far as timing or when you'd want that to be resolved by?

Can you give us anything around that?

I'm sorry, Dave -- you're saying the credit restructuring is -- what are you asking about there?

Just the news that you had hired somebody to restructure the debt and some of that news that came out a couple weeks ago?

Sure, Dave.

Look, this is a pretty challenging time in the market and we had hired Evercore to help us out with our exchange back in December.

That news was released and generated some headlines.

We also have brought in counsel that is pretty adept at debt exchanges and other more complicated transactions around balance sheet restructurings like this, where there are restructurings.

And that context to me can mean a lot of things and debt exchanges are much more complicated than your regular way transactions.

And it makes a lot of sense to have counsel around that works on these types of things on a regular basis.

And is very, very helpful in navigating all the things that need to be considered when going through this type of an effort.

We have debt securities that trade at a significant discount.

There is real opportunity in that and we are going to continue to think through the various avenues the Company can take to deal with the near-term maturities we have, try to capture some of that discount that's there, and position the Company for better success in years to come.

Okay.

Now let me ask, going forward, if I think about the rig activity level coming down, I guess four to seven is kind of what you put in the press release as far as 2016.

How should we think about the ability to ramp on the backend?

Is the goal still, Doug, to stay within cash flow?

Let's say we get through the summer season, gas prices firm up a little bit.

Are you still thinking about staying with the cash flow of 2017 and how quickly could you step on the pedal if need be on the backend?

The plan there as we look forward to 2017, Dave, is just to continue to be very, very prudent in our capital expenditures, mindful of the opportunities to purchase the debt at a discount.

I will tell you that inside of Chesapeake, there is a remarkable air force ready to take flight if we decide to ramp up our drilling activity.

That said, we just have to be very mindful of the balance sheet.

We have to be very mindful of our cash flow.

I'm not in any way concerned about the Company's ability to ramp up and deliver the efficiencies that we've recognized across the portfolio -- the operating synergies, capital efficiencies, the recoveries that we see, productivity on a per-well basis.

Our asset position and opportunity to drive value very quick there I think is as good or better than anyone in the industry.

But that all has to be tempered with we have to be very mindful of our financial position and make sure that we're making the best investment across the portfolio, which could include still working on the balance sheet.

So no commitment on how we will respond in 2017 at this point in time with higher prices.

But definitely want to be as balanced as we possibly can be, using asset sales as a measure to help with that activity and as a measure to help buy down debt at a discount.

Okay.

I appreciate the answers.

I'll let somebody else jump on.

Doug Leggate, BofA Merrill Lynch.

Good morning.

This is John Abbott.

I'm calling in for Doug Leggate.

Just really quickly, with regards to your asset sales, could you provide some color as far as production that you're sort of thinking about potentially selling with those assets?

And then secondly, you did provide a relatively wide range for CapEx in 2016.

How should we think about your activity levels in relation to commodity prices?

Thank you.

Sure.

I'll take the asset sales question and then I think Doug has something he wants to say on CapEx.

But on asset sales, like I said, our outlook has been adjusted for the impact of the asset sales on the purchase and sale agreement of about 26,000 barrels a day.

So that's already included in our guidance.

As to additional assets that we may sell, I'll stay away from production guidance at this point, but just remind you that we are looking for things that will be accretive to our situation.

So we're looking to sell assets that are going to have an amount of cash flow with them to make them attractive to a buyer and yet, not fundamentally change our position relative to the cash proceeds we get versus what we sell.

So it depends on proceeds we get and how things go; those are obviously transactions that are in negotiations and there's several of them that could combine to be in that range.

And John, just on the CapEx question, just a little more color there.

So the range that we provide is $1.3 billion to $1.8 billion, inclusive of our capitalized interest.

And our drilling and completion program that we have a wide range on -- and the purpose for that is to account for flexibility in the program.

We also know that our teams will continue to do a very good job in capturing all the synergies and cost -- capital cost savings possible.

So we have that range on there.

Obviously as prices stay at lower levels, we will be pushing for the low end of that, but we have some flexibility as well depending on what our best investment may be, whether that be repurchasing debt or investing on programs.

So we've specifically had a wide range to account for flexibility going forward in the year.

I appreciate it.

Thank you.

Charles Meade, Johnson Rice.

I wonder -- you guys mentioned in your press release about bringing on some curtailed volumes in 4Q.

But I'm wondering if you could give us a little bit more detail on whether you brought back all your curtailed volumes and whether you anticipate or what conditions under which you would anticipate curtailing volumes in 2016, if that's even a possibility?

Charles, this is Chris.

We did -- the curtailed volumes that we brought on were primarily out of the Utica that led to the big bump in Utica production quarter over quarter.

We did bring on all of those volumes.

We are currently producing about 1.1 Bcf a day out of that asset, gross, and that's full bore.

We're seeing some good cash realizations -- not fantastic, good.

But it's something we look at daily and we will adjust accordingly.

We have also brought on some curtailed volumes in the Marcellus.

We probably entered the quarter with about 500 million a day behind choke.

We bumped that over 2 Bcf towards the end of the year and currently sit just shy of 2.2 Bcf.

Again, good cash realizations, but a daily conversation will occur and we will adjust accordingly.

Thank you for the detail, Chris.

Just so make sure I understood, so if you were at 500 curtailed year end, now you think you are down to around 300 in the Marcellus?

Yes, probably 200 to 300.

Okay, that's great.

And then Doug, if I could just go back to that last question you fielded and get you to elaborate a little bit more on that range for the CapEx.

If I understood you correctly, you identified two things that could swing that.

One would be commodity prices and the second would be your appetite for deploying dollars into debt buybacks versus the -- your E&P program.

Is there also an aspect that you would swing -- you would move around in that range based on these asset sales?

Can you just - I know there's multiple dimensions here, but I just want to get a feel for what the big levers are in your mind.

That's a possibility, Charles.

That's not something that we're targeting at this point in time, so we continue to -- we will be evaluating each of those opportunities as we progress through the year.

Prices will dictate a lot and the efficiency of the program and opportunities for where we can get the best return to improve the Company for the long haul.

So everything we're doing is focused on strengthening the Company from a financial standpoint for the longer term.

And those decisions that we make will be focused on that.

Okay.

That's helpful.

Thanks, Doug.

Arun Jayaram, JPMorgan.

Good morning.

Nick, I wanted to ask you a little bit more details around the spring redetermination.

Your borrowing base stands at $4 billion.

Some of the headlines that we've read suggests that there may be 15% to 20% industry-wide declines in terms of borrowing basis.

I was wondering if you could maybe comment on -- you talked about pledging some unencumbered assets.

What kind of a tailwind could that provide in the spring period?

Just order of magnitude?

It's pretty significant, Arun.

We had -- and again, this would be -- I'll preface it by saying we have the ability to do that if we need to and we have to get through where the price decks are and see where the banks come out on collateral.

It's a calculation that's somewhat negotiated between companies and their bank group as they look at their reserves.

They look at where their capital budgets are.

They look at all the various factors.

So we will continue to work with our bank group and determine the best answer as to whether or not we want to pledge additional reserves there, need to, etc., to get the borrowing base where we think it should be.

But I feel really good about our ability to maintain a very robust borrowing base.

It's impossible for me to say at this point that it will remain exactly at $4 billion, but there's a lot of moving pieces to it.

And we have a lot of collateral to move around to support that calculation if we need to or want to.

Okay.

And just a quick follow-up on that.

Nick, obviously you've had discussions with the banks.

Would you say that the current focus is on additional covenant tweaks or more just on that total commitment amount?

Well, we may ask for additional covenant tweaks ourselves, but banks don't really have an opportunity to ask us for that unless we have an ask of them, right?

So we'll see how the year goes.

We'll see what we decide we want to do and how we decide we want to do things.

But as far as a redetermination goes, it's a process that if we just go through the process and have the collateral we need, the banks really don't have an opportunity to ask us for anything in that process.

Okay.

Thanks for clarifying that.

My final question really regards the minimum volume commitments on the midstream.

Doug, you mentioned that there's some levers that CHK could pull in this process.

I was wondering if -- I'm interested to understand if Chesapeake could, call it, normalize some of the midstream commitments through, call it, industry standards?

What kind of cash flow or cost benefit could you see on an annualized basis?

So what is the prize if you are to successfully renegotiate these contracts on an annualized basis?

It's a great question, Arun.

It's very large.

Substantial opportunity exists there, and either through negotiating directly with our midstream partners, where we have good relationships, or through the award of additional business -- negotiating contract extensions through awarding additional business that we have that's a part of our normal program, we see significant opportunity there.

And we are pursuing it aggressively.

Okay.

So I take this to be in the hundreds of millions of dollars kind of range?

I know it's probably hard for you to give us an exact number.

That's correct.

That is absolutely right, Arun.

Okay.

Thank you very much.

All right.

I think that concludes the prepared remarks we wanted to have today.

We thank you for joining us and please feel free to reach out to Brad with any questions you might have.

That concludes our conference call.

Thank you, operator.

Thank you, everyone.

And this does conclude today's program.

Thanks for your participation.

You may now disconnect.

Have a great day.