Chesapeake Energy Corp (CHK) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Chesapeake Energy Corporation Q3 2017 Conference Call.

Today's conference is being recorded.

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

Please go ahead, sir.

Good morning, everyone, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2017 third 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 statement, and you should not place undue reliance on such statements.

We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers.

For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found on our website and in our earnings release.

With me on the call today are Doug Lawler, Nick Dell'Osso, Frank Patterson and Jason Pigott.

Doug will begin the call, and then turn the call over to Nick for a review of our financial results before we turn the teleconference over for Q&A.

So with that, thank you, and I will now turn the teleconference over to Doug.

Thanks, Brad.

Good morning, everyone.

I'd first like to reiterate this morning Chesapeake Energy's strategic priorities.

They remain unchanged and drive all of our business activities in every investment.

Improving our balance sheet is our top priority and indeed, a journey.

We've made great progress during the last few years reducing our total leverage through debt and obligation retirement, debt for equity exchanges and refinancing.

We intend to further reduce our leverage and improve our debt-to-EBITDA multiple through additional asset sales and accretive acquisitions in the near term.

Our stated target of free cash flow neutrality is critical to the financial strength of the company and is achievable within the next 1 to 2 years due to the quality of our assets and our industry-leading capital efficiency.

Enhancing our returns and margins is also key to our financial stability and will be accomplished through increasing our oil volumes as a percentage of total production and aggressive cash cost leadership.

Now moving to our performance for the third quarter.

I'm pleased to report our production has started to climb as forecasted following the previously announced weather and related operational delays experienced during the quarter.

As of October 30, our fuel production reached a daily rate of 584,000 barrels of oil equivalent, including 99,000 barrels of oil.

Our fourth quarter volumes will be dominated by heavy turn-in-line schedule in our South Texas Eagle Ford asset, and we remain on target deliver our goal of averaging 100,000 barrels of oil per day in the fourth quarter.

On the operations front, our people, technology and portfolio continue to combine to drive improvement in our productivity and value across all of our assets.

This effort has most recently been demonstrated in the Marcellus, where we've begun deploying enhanced completion techniques on the Upper Marcellus.

Results have been impressive.

Our 2 Upper Marcellus Maris pad wells placed on production in September have achieved peak rates of 30 million cubic feet of gas per day.

Both wells averaged roughly 6,700-foot laterals or fracture-stimulated with over 3,000 pounds of sand per foot and were rate constrained by service production and equipment limits.

Not only are their rates over 50% higher than previous peak rates from our Upper Marcellus wells that were placed on production back in September of 2015, but these results confirm further delineation of our Upper Marcellus resource potential, significantly increasing our core position across the play.

We plan to place the (inaudible) well, another Upper Marcellus well with enhanced completion, online in December.

I'll take you on our Lower Marcellus McGavin well, which we placed on production in late July with an enhanced completion and a booming 61 million cubic foot per day rate, has produced 4.3 Bcf of gas in its first 90 days with an average daily gross production rate of 48 million cubic feet of gas per day.

This is an incredible well, which will pay out in roughly 9 months, and it provides a glimpse of things still to come from this world-class resource.

Our progress in the Marcellus is a continuation of our technology and learnings across the entire portfolio.

It all started in the Haynesville about a year ago when we began these larger completion jobs with powerful results.

Accordingly, we believe the data we have in-house and the technology we're utilizing today are revolutionizing the productivity in every one of our operating areas.

Our Haynesville asset has evolved from an underappreciated asset to one of the most powerful gas basins in North America, rivaling even the Marcellus.

Thanks to our unique ability to successfully couple long laterals with enhanced completions, an IP of 30 million cubic feet per day is now the new normal for Chesapeake.

Just 3 years ago, our Haynesville wells had initial production rates of only 12 million cubic feet per day.

While the production growth alone is impressive, I'm especially proud that our teams have accomplished this feat while improving our capital efficiency by 30%.

We turned 12 wells to sales in the third quarter highlighted by 4 wells on our BSNR pad in DeSoto Parish, which combined are making 134 million cubic feet of gas per day.

Last week, our net production in the Haynesville hit 1 Bcf of gas per day to reiterate on a net basis, which is our highly -- the highest daily gas rate since November 2012.

In addition, we have a new 10,000-foot Bossier well that will be turned in line in a few days, and our first 15,000-foot Haynesville well will be online early in the first quarter.

We're excited about our progress in this redefined prolific play.

In South Texas, the Eagle Ford continues to drive our oil production growth.

We placed 31 wells on production in the third quarter.

In the fourth quarter, we plan to place approximately 73 wells on production.

We're seeing encouraging results from completions, targeting and longer laterals highlighted by Vesper unit well, which featured a 3-mile lateral with an enhanced completion resulting in key production of more than 2,000 barrels of oil per day.

Additionally, we also turned in line 2 Austin Chalk appraisal tests in the third quarter and are pleased by current performance as both wells have been steadily climbing (inaudible), each well reaching over 1,000 barrels of oil equivalent per day.

We'll continue to monitor productivity and update you on the progress in the Austin Chalk.

Moving on to the Powder River Basin.

Perhaps no asset better demonstrates our ability to create future differential value for our shareholders than this asset.

Technology, capital efficiency, geoscience expertise and smart creative employees have truly intersected in Converse County.

As you know, it's only a few years ago that we removed all rigs and essentially all capital from the Powder.

Our team made the most of the downtime, deepening our understanding of the tremendous stacked pay potential of our acreage, which ultimately will make the play the most promising all-growth opportunity in our portfolio.

In September, our third Turner well was completed with a 4,500-foot lateral and placed on production, achieving a peak rate of more than 1,700 barrels of oil equivalent per day, of which 82% was oil.

We recently placed 2 new Turner wells on production 2 days -- just 2 days ago, and we'll have peak rates to report in a few days.

We added a third rig in October and expect to place on production a total of 11 wells in the fourth quarter.

Looking to 2018, we expect to provide operational performance and CapEx guidance in early February.

We anticipate reducing our capital expenditures during 2018 and still delivering a relatively flat to a slightly increasing production profile for the year.

Capital efficiency is a proven strength at Chesapeake.

And the powerful combination of technology, high-quality assets and talented driven employees will continue to deliver improving results for our shareholders.

A little over 4 years ago, we started a major financial and operational transformation here at Chesapeake.

There was a significant challenge prior to the collapse of commodity price.

Chesapeake continues to grow stronger every day, and the improvements over the past few years serve as a strong foundation for greater returns and competitiveness.

I am more confident in the future of the company than I've ever been.

And as you can expect, further differential improvements and value growth will come from Chesapeake Energy.

I'll now pass the call to Nick for some additional details regarding the third quarter financial results.

Thank you, Doug, and good morning, everyone.

As Doug mentioned, our total production during the third quarter grew 3% sequentially and 4% sequentially after adjusting for asset sales.

We look forward to the acceleration of this rate in the fourth quarter as we see the benefit of our significant Q2 to Q3 capital investments come online, and we are well on our way to averaging 100,000 barrels of oil per day, up 16% from our third quarter oil production.

On the cost side, our combined production, gathering, processing and transportation and G&A expenses decreased slightly in the third quarter compared to Q2.

We have seen some pressure on LOE as we increased our oil volumes, but have made room for that through our continued focus on G&A.

We have seen and expect to see further synergies from volume growth on GP&T expenses this year and next.

In October, we refinanced various secured and unsecured debt with $850 million of longer-dated unsecured notes, resulting in a reduction of the principal amount of secured debt of $557 million.

In total, we have reduced the principal amount of our secured debt by approximately $1.2 billion this year to date and will look to further reduce our secured debt balances as the opportunities arise.

On the capital front, we have seen a high for the year with our third quarter CapEx and expect our fourth quarter CapEx to be approximately $500 million.

As a result, we raised the bottom end of our total capital guidance to a midpoint of $2.4 billion, which is approximately where we expect to land for the year.

As Doug mentioned, we are currently working our 2018 capital plan and will provide more color on this in February.

As we consider our capital allocation for 2018, we remain focused on value versus volumes and believe that value for our shareholders will be enhanced by a more balanced cash flow profile.

We will remain flexible with our capital should prices rise or fall dramatically, but we do not plan to chase capital higher as a result of the recent modest increase in the 2018 strip.

As a reminder, we had some large onetime events in 2017, including outlays of approximately $550 million to resolve legal issues, primarily the Bank of New York matter, and approximately $400 million in buy-downs of marketing and midstream contracts, but we do not project anything equivalent in 2018.

As we look forward to 2018, we anticipate spending less capital than 2017 while keeping our overall production flat to slightly higher compared to 2017, again, subject to change with market conditions.

On the A&D front, we've closed multiple producing property and acreage shales for approximately $1.2 billion to date in 2017, which include our Haynesville Shale assets that closed earlier in the year and several smaller Mid-Continent packages.

We continue to work other noncore asset packages, particularly in the Mid-Continent, as well as larger assets as we work toward our goal of removing $2 billion to $3 billion of debt from our balance sheet.

Finally and most importantly, we have 579 Bcf of gas -- of 2018 production gas hedged at $3.10 per Mcf and nearly 21 million barrels of our 2018 oil production hedged at $51.33 per barrel.

Further, we have significantly reduced 2 of our more volatile basis pricing exposures for 2018: in-basin Marcellus gas sales and LLS oil sales out of the Eagle Ford.

Marcellus in-basin prices have strengthened significantly over the summer and into late fall due to anticipation of new takeaway pipeline projects combined with the slowdown in production growth.

We have hedged roughly 50% of our Marcellus in-basin exposure for 1 year, which is the November '17 to October '18 period or about 190 million cubic feet a day.

Average basis differential captured on these trades is $0.77 compared to our 2017 realized basis differential of $1.34 for this area.

We're also actively pursuing discussions with other parties on longer-term contracts to alternative markets, creating incremental demand in the region at competitive pricing.

On the oil side, we sell approximately 60% of our total company net oil production on LLS-based contracts.

The LLS index began the year trading at small premium to WTI of around $1.50 per barrel, and it has climbed significantly in the past few months.

Given the recent strength, we've hedged over 30% of our LLS-exposed volumes for 2018.

Current LLS trades for 2018 average $3.20 basis differential to NYMEX versus average 2017 realized basis differential of $2.86 for LLS volumes.

These index and basis trades have given us a very strong level of protection on our 2018 cash flow.

Operator, that concludes my comments.

I'll now turn the call over for questions.

(Operator Instructions) We'll go first to Neal Dingmann with SunTrust.

So Doug, given the 2017 activity and your new comments on '18 in the press release, you all have seemed to really lay out a plan.

To me, it appears to show the stable '18 production yet as Nick and you pointed out the moderate to materially lower spending.

My question there is, how much lower do you believe CapEx really can go next year while still growing oil and keeping overall production relatively flat?

Yes, thanks, Neal.

It's a great question.

And while we aren't providing any guidance today on 2018 in absolute terms or percentage of reduction, I would like to highlight, it's just that the capital efficiency numbers that we're providing and the capital discipline that you see across the company is -- we're very encouraged by.

And as a result, that's what gives us that ability to further reduce the capital outlay and keep the production flat.

So I'm going to hold off on giving any further detail other than that Frank, Jason and the teams are doing a really good job.

And that's evidenced in each of these well results that we share with you: greater productivity, greater recovery, greater efficiency for a lower cost.

And that will manifest itself into a lower capital program in 2018.

Okay.

And then just one broader question, Doug.

I'm just really wondering overall.

I haven't asked in a while.

How satisfied you are now with the overall restructuring since joining Chesapeake about 4.5 years ago, where you sit now and where you want to be, if you could just give a little bit of broad color on that.

Yes, sure.

Thanks, Neal.

The -- when we started this transformation roughly 4.5 years ago, we knew we had a number of significant challenges, and we hit it head on.

And then you have a low commodity price environment, which further exacerbates or increases that challenge.

And what I'll tell you is the same way I felt the first day I walked into this company, is that the energy and quality of the assets are outstanding and phenomenal.

And while we're on a journey of restoring our balance sheet and working to improve our competitiveness, I'm as encouraged today as I've ever been, and I believe that the opportunity is as great as it's ever been.

And while we have made great progress on the debt and made good progress on our profitability in each of our investments, I'll say that we still have a good way to go.

And that's what creates the value for our shareholders, and that's what creates the value for other investors.

And it's -- I think there's tremendous upside in the company, and we'll keep driving to capture that upside.

And we'll take our next question from Doug Leggate with Bank of America.

Doug is on the other line.

Please move on to the next speaker.

And we'll take our next question from Subash Chandra.

We'll go next to Charles Meade with Johnson Rice.

Nick, I appreciate you offered some prepared comments on the state of your divestitures, but I wondered if -- a question for me is not to get you to elaborate a little bit more on where you are and what we might be thinking about for the next -- I don't know, before year-end or into the first quarter of 2018 on that front.

Sure, Charles.

Great question and happy to address.

It's always difficult to be precise in talking about what we expect in the way of transactions, whether they be divestitures or any other form of transaction because they are hard to predict timing, hard to predict exactly what will play out.

I can assure you that we work tirelessly to continue to reform our balance sheet, and the way that that's going to happen is through asset sales.

We have always considered asset sales in 3 buckets: There are truly noncore assets, which this company and every well-run E&P company should sell every year.

There are assets that we own a significant position in, where we can trim a bit of our position and still own a good, solid position going forward to accelerate value from a part of the play that we wouldn't get to in a reasonable period of time.

A great example of that for this company would be the sales that we have out of our Haynesville position, which closed at the beginning of 2017, the last of the full-basin exit.

We work all 3 of those buckets of asset sales every day.

We have active discussions going on, on those types of transactions every day.

Transactions through the middle of 2017 have been challenging.

The availability of capital to this industry has been limited, while the broad capital markets across all industries have been very strong, and there have been brief windows where we and others have been able to access the high-yield capital markets and other points of capital successfully.

Broad-based access to capital for growth has been limited.

What that results in is a difficulty to bring transactions to fruition, but there are many motivated buyers out there seeking that capital, and we're talking to many of them, and we will remain laser focused on delivering on our asset sales to reduce our debt.

We'll stay away from deadlines that are ultimately somewhat artificial, whether they be the end of this year or the beginning of next year.

We'll get that done.

We'll get it done at the right time for the right value.

We won't be driving for the last dollar, so to speak.

We're thinking of the big strategic picture here, but we have to get it done right.

Just I'll add on top of that.

Charles, just if you don't mind, I'll just add on top of that.

So I think Nick answered that extremely well.

And as we laid out that $2 billion to $3 billion reduction, we were very careful to note that it was over a few year time frame that we were going to execute on that.

And the purpose in that time frame is that we have an extremely strong asset base, and that asset base continues to get better.

And while we balance capital, commodity price and the potential to drive the greatest value for our shareholders, we're not in the process of giving away these high-quality assets.

We're not going to do it.

And the financial strength and improvements to the company position us that we'll continue to work it, we'll find the right opportunity and we'll execute upon it.

As Nick has highlighted many times, we are prudently impatient at the pace at which we're attacking the balance sheet, but that doesn't mean that we're going to sacrifice value given the quality of these assets.

Doug, that's helpful, in fact, particularly in light of the success you guys had in going to the capital market yourselves.

Doug, I'm wondering if I could ask my second question.

You mentioned the success you had in a couple of Austin Chalk wells in South Texas.

And from the perspective of my seat, we've heard of a number of successes from -- you guys have talked about it, some other companies have talked about it, but it's kind of difficult to piece together a picture of how extensive that play might be and how repeatable it might be.

So I'm wondering if you could just talk a little bit more about what you guys saw with these -- your most recent wells and your view on that looking into 2018.

Charles, this is Frank Patterson.

So the Austin Chalk, we haven't talked much about the Austin Chalk.

We've had the wells on for a couple months.

We went out and took all the industry data that we had seen in the play.

It kind of covers the Southwest portion footprint of our acreage and designed a program just to test the concept.

And we drilled the wells and put relatively large fracs on them.

It took a while for the wells to come back.

They were a little bit slow coming back, but now they're -- they've just been climbing.

And for the last month, we've seen really good response.

We think we can change the frac program and get the same result.

You're going to see us look at potentially an Austin Chalk program that will augment our lower Eagle Ford program next year and the following years.

But what it does is it basically gives us a stacked play within our Eagle Ford program, which we really can push on and have a lot of efficiency.

It won't interfere with our lower Eagle Ford program.

It'll actually be supplemental to that.

And we'll move next to Arun Jayaram with JPMorgan.

Nick, as you highlighted kind of a fourth quarter run rate in terms of CapEx around $500 million, I think you're running 14 rigs.

Is that something that we could think about for 2018, that kind of run rate in terms of about $500 million in CapEx, something around that level?

We're going to stay away from any specifics about 2018 like that.

All we're wanting to note this morning is that given the current market environment and given our goals, we see it prudent to have less capital in 2018 versus 2017.

2017, we really needed to restore our level of cash flow-generating capability off of a very low investment in 2016.

So we needed to catch up a bit in some areas.

We've done that.

You could see those wells coming online here in the fourth quarter.

And so exactly where we level out to a run rate, we're going to hold off.

We're still running a lot of scenarios around that at this point, Arun, and prices remain somewhat volatile.

We continue to hedge, which we are pleased about, the risks, how we think about that capital program next year.

We'll continue to look at what we achieve in the A&D market.

And all that will influence -- we also look at our well results.

All of that will influence the ultimate capital allocation for the portfolio next year.

The takeaway that we wanted to leave everybody with this morning is that the inherent capital efficiency of the underlying portfolio and what we've delivered so far this year is that we can spend less money than we did this year and still grow next year.

We may not choose to spend that much.

We may choose to not grow if prices were to fall apart.

We may choose -- if prices were to really run and we can hedge them accordingly, we may choose to spend a little bit more.

But don't look for us to change the strip higher with every move.

We are really showing internally that we can do better with some discipline here.

And the scenarios we're running highlight that we need to be focused on delivery of these financial goals over time, which is going to result in a -- at this point, we think, a pretty modest capital program next year.

Again, we'll give more information on that as we get into '18.

And as we firm it up, things could change, but that's what we're looking at right now.

Nick, just as a quick follow-up.

Your comment -- your limited comments on '18, where growth relative to on a year-over-year basis, right, not relative to the 4Q exit rate?

That is what I said, Arun, but let me be clear that we pay attention to what that means on an exit to exit, and we wouldn't be excited about a program that guides coming out of '18 and yet we could call it flat year-over-year.

So that -- I did refer to it as a year-over-year.

I'll leave my comments at that, but we wouldn't set up a program that was declining in that way and be proud of that.

Okay.

Great, great.

A couple thoughts.

You guys have highlighted some optimism around the Turner.

We'll have to wait for details in the next couple wells.

What -- as you think about potential returns here, Doug, versus single-well NPVs, how do you think about potential returns for a rig line here relative to other opportunities you have in the Eagle Ford or in the Marcellus?

We love it.

I think I'm going to let Frank share his passion and excitement about it.

Yes, Arun, this is Frank again.

The Turner is one of the best-performing assets we have to date.

Now it's early days.

We only have a handful of wells, but the rates are good.

The wells are holding in.

We have a lot of running room.

We're -- just to give you a feel for where we are in the portfolio, we're actually -- we've moved a third rig in, and that rig -- so we'll have 2 rigs focused primarily on the Turner for 2018 and actually, the remainder of 2017.

I got to give real kudos to the culture and especially the operations team in the Turner.

As we went out there, we didn't know much about it.

Wells were in excess of 35, 40 days, the initial wells doing some science, and the costs were a little bit higher than what we wanted.

Since we've gotten the program going, Jason's team has knocked these wells down to under 30 days.

We just brought 2 wells on this week, our most recent wells, and those 2 wells we've adjusted the completions.

And we knocked $1.5 million off of each of those completions.

So where we are today in the Turner is not where we're going to be tomorrow in the Turner.

It's only going to get better.

Kudos for the field team as well.

They've been stretched pretty thin, and the culture of the company I think is so strong now.

We've had people from Mid-Con and Gulf Coast volunteer to go up and help that team out.

So we've got people from all over the country helping us get that Turner program stood up.

I'd love Jason to talk about his thoughts on that as well.

Yes.

He most of the highlights there.

We're really excited about the program.

It's continuing to evolve.

As Doug mentioned, one of our strengths is the way that we use data information across the company to optimize the asset and each take technology from Haynesville and Utica and Eagle Ford and transfer those to these new plays.

So there's nothing but upside and a bright future for it.

Again, we're early with that.

We get better and better with our drilling and completion operation, the more swings to get at the play.

So excited about the future, and it's only going to get better.

We'll take our final question today from David Heikkinen with Heikkinen Energy Advisors.

Just wanted to hit on your capital efficiency and new well designs.

Could you just pick through your completed well costs in each region kind of quickly in the third quarter?

Yes.

We've got -- we're -- again, we're continuing to test our different designs, so those are something that evolve over time.

When we start to look at '18, lateral length is also a big driver for those as well.

So I mean, when we're talking Haynesville, for example, they're 10,000-foot wells that'll cost about $11.4 million.

Turner wells, 8,700-foot laterals for $9.5 million, I'd say, right now.

But again, expect all those to improve.

But we'll -- I mean, ultimately, rather than going through each one of these wells, well by well.

We'll -- Just give us a call back to Brad, and we'll try to give you more information on those wells.

And gentlemen, I'll turn the call back to you for any additional or closing remarks.

Okay.

Well, thank you all for joining our call today.

As we've highlighted here, the company is focused on the capital discipline, improving our capital efficiency, and our priorities remain unchanged.

Our strategic priorities are further reducing our debt, achieving free cash flow neutrality in the near term and further enhancing our margins.

So we thank you all for participating.

Please feel free to call Brad with further questions.

Thank you.

Thank you, and that does conclude today's conference.

Thank you for your participation.

You may now disconnect.