Q3 2019 Earnings Call
Good morning, and welcome to the Chesapeake Energy third quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask a question.
To ask a question you May press Star then one touchtone phone.
Withdraw your question. Please press Star then too.
No. This event is being recorded I would now like turn the conference over to Brad Sylvester. Please go ahead.
Good morning, and thank you for joining our call today to discuss Chesapeakes financial and operational result for the 2019 third quarter hopefully you've had a chance to review our press release and the updated investor presentation, we posted to our website. This morning. During this morning's call, we'll be making forward looking statements.
Which consist of statements I cannot be confirmed by reference to existing information, including statements regarding our beliefs goals expectations for cat.
Projections in future performance and the assumptions underlying such statement. 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 as discussed in our earnings release today and in other FTC pilot.
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.
We may also refer to some non-GAAP financial measures, which helped facilitate comparisons across periods and with peers Granny non-GAAP measures. We use a reconciliation to the nearest corresponding GAAP measure can be found on our website and ended the earnings release.
With me on the call. This morning, our Doug Lawler net DLA, so and Frank Patterson Double review, our operational and financial results and then we will open up the teleconference up for Q1 night, so with that thank you and I'll now turn the teleconference overdone.
Thank you Brad and good morning, everyone.
Please if you are with you today Chesapeake Energy's third quarter performance highlights into affirm our full year 2019 guidance range for production a capital expenditures is wilshere directional guidance regarding our 2020 capital program.
Despite significant commodity price volatility Chesapeake continues to deliver higher margins and balance sheet improvement, while positioning for sustainable free cash flow generation.
In the third quarter, we achieved several notable milestones highlighted by record production into Brazos Valley asset continued capital efficiency improvements is demonstrated by shorter cycle times greater productivity lower capex.
Cash cost reductions were recognized on an absolute basis across DNA, Halloween and G.P.T. as compared to the second quarter.
As you'll recall, we raised our full year production well production guidance and the second quarter. Despite a few operational and timing challenges in the third quarter, we remain confident in delivering production in capital expenditures within our full year guidance range due to the balance of the strength of our portfolio.
Turning to our assets, our progress continues and Brazos Valley, which set a new monthly production record in October of approximately 55000 barrels oil equivalent per day, including more than 40000 barrels of oil per day, despite running one less rig in the 2018 program.
Capital efficiency efficiency improvements continued to deliver impressive result, the team is turns 13 wells just wells to sales this year with a peak rate above 1000 barrels oil per day, well, averaging 824 barrels of oil per day peak rates in the third quarter.
I'm also reduce cost per lateral foot by approximately 21% since our acquisition.
Additionally, we've made significant improvement to the fields base decline through our well optimization and Workover program.
Importantly, as our subsurface understanding evolved the commercial black oil window on the field continues to expand further going or deep inventory of high margin future oil locations.
The development program in our legacy South, Texas asset continues to deliver as we turned in line. The majority of our new drill completions in the latter part or the third quarter.
As a result, our production in the basin has steadily grown since the beginning of the fourth quarter, averaging approximately 58000 barrels of oil per day in October further cycle times.
Continued to improve and importantly, even after drilling roughly 3000 wells in the field, we recognized an 8% improvement in cycle time this quarter.
Additionally, our drilling team set a single well field footage record up 6800 feet and one day during October .
And the powder River Basin. The company continues to eliminate operating costs and the Turner development program year to date, we've reduced cycle times by 25% year over year and recognize per well savings of approximately 10% or $800000.
Our efficiency enhancements have resulted in a recent turner pad being drilled uncompleted for approximately $6 million per well. The last 25 wells turned to sales in the Turner have averaged approximately $7.2 million per well.
While we continue to improve our capital and operational efficiency in the powder production volumes were below our expectations in the third quarter due to a group of isolated well located in the northern edge or Turner acreage, which encountered lesser reservoir quality, resulting in lower than expected performance compared to other Chesapeake well. Additionally field production was that.
Personally affected by third party electrical outages that have interrupted our midstream take away.
We're actively working with our third party utility in midstream partners to mitigate recent power constraints.
As we've discussed at length, we remain excited about the stacked pay potential of the powder River basin. We recently placed on production our first Niobrara wells since 2014, achieving record results with a longer lateral and a modern completion design. The well has quickly become the best performing Niobrara well in the basin, reaching a 20.
For our peak rate of 1600 barrels of oil per day, while producing more than 106000 barrels of oil and its initial 87 days, we anticipate turning for additional Niobrara wells to sales in the fourth quarter and expect approximately 25% of our 2020 powder River Basin capital program will be directed.
Towards the Niobrara formation.
In the Marcellus shale capital efficiency gains continue to result in prolific well performance highlighted by nine recent well, reaching peak 24 hour flow rates between 60 to 85 million cubic feet of gas per day.
The quality of our Marcellus acreage and operational efficiencies positions Chesapeake to continue our strategy of maintaining relatively flat operated production to capture the value from season seasonal basin congestion in pricing with minimal investment required.
We continue to improve our cash cost structure across the company. In addition to quarter over quarter reductions in all cash cost categories. We also made meaningful progress in reducing our GP Aegean gionee expenses by totaled 100, a $9 million compared to third quarter 2018.
We also restructured several gathering and transportation agreements during the quarter progress we made this quarter in improving our future midstream and downstream commitments is significant.
First we were able to restructure our gas gathering and treating agreements in south Texas from a cost of service to a fixed fee structure.
Second we negotiated a new Brazos Valley crude transportation agreement via pipeline, which provides access to premium Gulf coast markets.
Finally, we're currently in the RFP process to award additional Brazos Valley wellhead crude gathering business.
On the balance sheet, we reduced approximately $733 million a face value of debt and preferred and preferred shares in exchange for approximately 319 million common shares resulting in total debt decreasing to approximately 9.7 billion compared to 10.2 billion at June Thirtyth.
We believe these transactions along with our planned reduction in capital expenditures next year and other efficiency measures will reduce our debt levels improved the ratios under our revolver. Additionally, we reaffirmed the borrowing base for our Chesapeake credit facility with no change in the Brazos Valley facility Redetermination what happened later this year.
We continue to evaluate multiple opportunities that can further improve our balance sheet, including divestitures deleveraging acquisitions and capital funding options.
Finally, we have a significant portion of our 2020 production volumes hedged with approximately 265 billion cubic feet of gas 17 million barrels of oil hedged at $2.76 per Mcf $59 in 28 cents per barrel of oil.
We have a proven track record of capital efficiency in cash cost leadership across our business and we look forward to further improvements in the year ahead.
Lower commodity prices, we've updated our 2020 forecast to reflect an approximate 30% reduction in our drilling and completion activity. While we will provide full detailed guidance at a later date. We currently anticipate delivering flat all production, while utilizing 10 to 13 rigs project between 1.3 billion to 1.6 doing.
In total capital expenditures, we will continue directing the majority of our capital capital to our highest margin oil assets and our capital spend will be ultimately be determined by commodity prices and 2020.
Additionally, we expect to reduce our production in G.N. a related expenses by approximately 10% continuing our track record of cash cost leadership.
We believe this capital program, along with our strong projected finish to 2019 and continued capital efficiency improvements will position us to target free cash flow in 2020.
We remain confident in our strategy asset portfolio and our talented employees and we'll continue to utilize all of our resources to drive for greater shareholder value in returns. Our board management employees are fully aligned and focused on our strategic priorities of delivering higher margins sustainable free cash flow the further de levering.
Our balance sheet to achieve a net debt to EBITDA ratio of two times.
The volatile commodity price environment has pressured the speed and timing of accomplishing these goals, but we will continue to make incremental progress and improve our competitive competitiveness and profitability.
I'd now like to turn the call over for a few questions.
We will now begin the question and answer session to ask a question.
Star then one on your Touchtone phone.
Using speakerphone, please pick up your handset before pricing.
To withdraw your question. Please press Star then.
Our first question comes from Devon, Mcdermott with Morgan Stanley .
Good morning.
Wanted to him.
My first questions on the indicative side.
Directional 2020 guidance just wondering if you could help us bridge in a bit more detail some of the year over year reductions in spending so and what are the key drivers of that reduction where you kind of back activity and then as we think about how that spending my flex and that 1.3 to 1.6 billion range, where some of those flex items. There to extent you can provide detail.
Yeah sure. Thank you Dan for the question.
We actually because of the quality of the portfolio and the strength of the assets see will reduction taking place in.
In activity across most of the assets.
While we are not.
I have not finalized exactly where the rig count will be.
Next year, what we do you know is that 1.3 to 1.6 billion.
We will be directed across the higher margin all assets. So you'll see a two to three rigs and the powder two to three in South, Texas, two to three and Brazos Valley and two to three and the.
Marcellus assets.
That will vary based on pricing and we have that flexibility in our program that we can make those adjustments.
But due to the quality of the assets and the high grading of where we direct to capital.
We expect to see reductions across each of the assets and that competitive capital tension that has.
Proven to be so helpful to us in the past.
Got it makes sense and then my second it's similar but on the operating costs and GNS Science your point to a 10% reduction in overall cost next year.
Similar and what's driving some of those reductions or just how much is coming from some of the transport restructuring that you just announced versus cost reductions elsewhere and whats the timeline for that 10% being realized the full year average over average or we're going to enter the year at a run rate this 10% lower how should we think about the cadence.
I think the best way to look at that is is we we are we continue as as I was trying to highlight there in my.
Comments to make quarter over quarter improvements.
So I think you can expect to see that continue across the year.
Specific targets for a week.
Excuse me a gionee is we attack.
All parts of the cost structure in Gionee anello we.
We see continued efficiencies in surgery synergies.
Either through technology or through more efficient ways to do our business we really.
Project that to be across the year and more.
Reduction on absolute basis compared to 2019.
The way I look at that is that historically the company has.
Continued to make improvements in those areas to find better ways to do things to find better and more efficient ways to operate and did that continued reduction is really just a reflection of the operating philosophy that we've had over the past several years.
Got it makes sense. Thank you very much.
Thanks to.
Our next question comes from Subash Chandra with Guggenheim.
Yeah, Hi, Doug It seems like you have achieved what a lot MPS will like to do which is you know shed legacy GPN Ti costs I'm. Just curious if you give us a magnitude of of this reduction and.
And I think the Eagleford.
If I recall correctly was you most expensive she PMT contract in the past so anymore color there.
Yes, Hey service Nick.
So what we did in the Eagle Ford as we went from the cost of service contract structure to a fixed fee structure. The primary benefit of doing this is the clarity it gives us on our development program going forward.
Hi year over year, we won't actually see an immediate decrease.
In the rate paid.
And what we get again as the clarity in the development program going forward and a better long term rate of return as we think about the the embedded cost of that cost of service over time. So it's a big win for us to have that clarity to understand long term economics of the field and not have the uncertainty.
The cost of service contract and then when you marry that with what we were able to do on the long haul takeaway side, where.
We took out transportation, you know gosh, almost 10 years ago.
For much higher delivery of oil volumes, we have great access to the Gulf Coast markets, we were able to.
Work with our midstream partners to get access to the Gulf Coast markets now for our new Brazos Valley asset and better utilize that transportation that we pay for out of South Texas across the board. We think there's a lot of potential for for future economic benefit here the immediate impact is greater clarity.
Gotcha, Thanks, Nick and a follow up.
Any any sort of a you know the non traditional assets in the portfolio that you can monetize whether it be water assets are over LT assets.
Yes, you buy should we have a number of opportunities like that whether it be non traditional assets our portfolio whether it be.
Opportunities for non core areas across the acreage across the country.
Or as we look to do evaluate and in the current market opportunities to divest of a larger assets. So I think that that space to continue to watch we are we are.
I've seen interest in different things some some the nontraditional some the non core and we'll continue to focus on that as a as a primary impressed by way of further delevering.
Got it if I could ask one final one place.
Any way to hazard, a guess on what the oil ratio might be.
In 2020 for total volumes.
Sure.
As we forecasted because of the reduced capital spend on the gas side next year.
And maintaining the oil production it will likely maintain that 25% to 30% on the ratio.
As we exit 2020.
Great. Thank you.
Yeah. Thanks Bye.
Our next question comes from our own.
With JP Morgan.
Yeah, Yeah. Good morning, Nick I wanted to start with few other said language in the 10-Q around the leverage ratio covenant and the credit facilities wondering if he could comment on you know your revised thoughts on 2020 and your confidence of staying.
In compliance with that let that covenant.
Sure absolutely around so I think most of you may be familiar with the way. This disclosure comes about and it's based on our projections over the next 12 months and and the ability to keep up with the covenants and the credit facility I'll remind you that in our credit facility, we have a decrease in covenant.
Debt to EBITDA throughout 2020.
So it's a reflection as much of the covenant structure that was put in place over a year ago much higher prices than it is underlying business and how it we are progressing with our debt reduction.
As as you're aware and as we've talked about at length. We've been keenly focused on absolute debt reduction we've made great strides we expect to continue to make strides using all the same levers that we have cost discipline and all aspects of our business asset sales hedging prices as they rise capital markets transactions.
And of course, working very closely with our bank group, which we do on a regular basis, we could go out and seek a waiver at any time from our bank group, but at the moment work continued to be focused on the strategic levers that result in permanent debt reduction.
Got it got it and shifting gears a little bit you know that I wanted to see if you could talk about maybe some implications to the gas macro from your.
The initial outlook comments on 2020.
What would that imply if your oil production stays relatively flat.
For natural gas volumes next year.
Well as you'd expect if we're not investing.
Significant amount of capital you will see our gas production decline in the Marcellus, we anticipate to be relatively flat or in for the year running two to three rigs up there.
In the capital efficiency and and the quality of the asset the rock that we have in the Marcellus is just outstanding.
You made a comment about the greater macro environment than I think that thats.
An interesting con Ed because when you see a company like Chesapeake with the strength and quality of our gas portfolio reducing capital.
I think it.
It should be good indication, directionally, where others should be reducing activity as well.
We are we have that gas lever available to us and our in our portfolio.
At present, we don't.
Want to invest there because of the higher margin greater returns we can get.
From our oil assets and.
I think that from a macro level, you'll you'll see others reduce or pull back spending because the as a company like Chesapeake is investing with the quality of our inventory it ought to be an indicator that other shouldn't be either.
Great. Thanks, a lot Doug.
Thank you.
Our next question comes from Bryan singer with Goldman Sachs.
Thank you good morning.
Hey, Brian .
With the slower growth path and 2020 to get to the flat oil production year on year can you just talked about how you see trajectory for oil, particularly at the end of the year and then how you see the implications on 2021, and if you could just touched on the impact on decline rate and at the end of next year as well as a result, the slower past that would be helpful.
Hey, Brian the sprint Patterson.
It's a good question I, we're still working that 2020 plan as far as exactly where we're going to put all the capital to drive the best performance as as you probably have figured out we're going to enter the year at a relatively high rate and we'll we'll go into somewhat of a decline.
The 2020 2021 program has not been fleshed out at all.
I think we have an opportunity to move capital around and drive better 2021 outcome than people might might be guessing.
But definitely we're going to see some decline from the beginning of year towards the end of year will work very very hard for 2021 to create inflection moving up into 2021 to keep that relatively flat. If if the price of oil stays where it is I think you probably need to be thinking kind of flattish in 2021.
And that would be something that we would strive for.
I might just add on them Brian that.
The apartment just for second there that that really the culmination of all the work that's taking place in Chesapeake to capital efficiency improvements the cash cost structure that we recognize over the past several years is what positions us in this volatile period to be able to reduce the capital and maintain that relatively flat oil production. So we are.
Ever mindful of what those impacts our to future cash flows with reduced capital program, but because of that capital efficiency the quality of our assets the allocation of capital across the portfolio.
We have confidence in a reduced program to the tune up 30% that doesn't compromise. Those later years now indeed, if you're not investing with the given decline rate in nature of the of the shale production profile, you're going to see you're going to see.
Need to fight that decline, but that's really what we're trying to communicate is that the capital efficiency in it that spend level will be roughly in that flat type of range as Frank highlighted.
And what what oil price are you now assuming versus versus.
The with the second quarter as an example, when youre talking more preliminarily about next year.
We've actually we're assuming current market prices actually have to what we've been modeling is something a little less.
Than current current strip. So I think we're in pretty good shape, we forecast, how that's going to turn out in a year.
Great and then my follow up is on the Powder River Basin can you talk to white GPM Ti costs have fallen in the area at any implications for further reduction into 2020, and then you highlighted some of the negative results. It seems like you think that those one off can you just add some set set some color on whether this.
Represents an inventory reduction or just did attempt to push out the that that the limit set the limits of field.
Hi, Brian Nick I'll answer the GP in T.. So couple of things happening there one just the sheer increased volumes in the field drive some economies of scale, which are attractive. The second is that a earlier. This year, we've moved from trucking our oil from the wellhead to a sales point to enroll gathering system at a very attractive.
Right. So thats starting to show up we expect to see some continued reductions as economies of scale drive more efficiencies on the gas side, there is going to be a step down at some point in future. We had a restructuring of the gas gathering agreement here at the end to 2016, and there's an opportunity for us once we achieve certain volumes have stepped down in rate that will happen.
And at some point in the relatively near future. So I would expect the GP in tea in the powder to continue to decline.
Hi, Brian as Frank So the we're calling out some wells in the Turner on the very north end of our field kind of vet that for this northern extent of our acreage position those wells are underperforming our expectations.
We put a slide in the deck to kind of give you some color on that if you look at those wells they kind of perform at the basin average.
But not to our expectations.
What we think we saw there was probably some lower reservoir.
Quality.
It's also in an area, where there's there's quite a bit of congestion and offset operator drilled four wells per section, which is something that.
We don't think is the right answer we actually had an opportunity to join those wells and sold out we drilled we space softened drilled those wells at two to three wells per section, which is the right answer we believe from our work to the south.
The rock is just not performing as expected in that not isolated area. If you look at the rest of the turnaround program. What you can see is that.
The remainder of our wells inclusive of those nine were actually outperforming the basin by about 40%.
Which we think is good we want more.
So, we're pushing or a better completions better well design man and better spacing solutions. So we just wanted to called that out because it's important it represented about 2000 barrels a day of under delivery and the powder.
We have to admit that in the third quarter.
But we're going to make that up through the rest of the program. So.
Just wanted to highlight there is some variability we understand that variability we don't have to drill wells up in that area any further.
Great. Thank you.
Our next question comes from David.
Hi.
Good morning, guys and thanks for taking my question had one operating question first and then one financial question on the operating side as you think about your improved cycle times and really the the reduction in rig count how does that impact like your ratio of rigs to frac fleets by region can you maintain.
In a similar.
Stable Frac fleet or do you have to flex that up and down with rigs.
Just as you've improved your drilling times.
David This is Frank that is very important to us. The operational efficiency is is imperative. We're working through that we do believe a two to three rig program in most basins, we'll keep one frac crew if not a.
Frac crew and a half Dizzy our goal will be to align as as much as possible the rigs with the the frac crews and that's what we're going through right now Dave We're also negotiating contracts with our.
Vendors suppliers to get the best possible price going into 2020, so thats all work in progress, but we are keeping that that kind of alignment between drilling crews and frac crews very much on the on the front burner.
Sure, we get that Don right now it looks like will probably be able to keep one frac crew fully busy and all of our basins with exception of maybe powder, if we move to more and more niobrara in the powder that will allow us to expand that frac crew in the more time, because those frac jobs take quite a bit.
Longer than the the Turner wells Okay.
That's helpful. Just on the efficiency side beyond next year and then.
As you think about the transition to free cash flow and 2020 in the cut which is the necessary move how do you guys think about the criticality of your to free cash flowing gas assets in the Marcellus and Haynesville relative to your covenant than long term free cash flow plan.
And that's a good question the gas still assets are still very important in critical part of our portfolio that give us balanced and diversity that we really really like.
The quality the Marcellus is simply outstanding and.
And the cash flow projection in profile there that we expect over the next several years is quite significant and quite meaningful to us.
The reduced activity in the Haynesville as you would expect is how we model our cash flows there.
We.
Fully incorporate that profile that decline that will experience until we start redirecting capital that direction again.
And that's all been considered in weighed into the covenants situation and.
Projected cash flow and returns and free cash flow neutrality, and the sustainable free cash flow that we seek to deliver on the coming years. So.
It's the way I'd look at that and asked the question is that the gas assets are very important and critical the Chesapeake there are tremendous lever and we.
Evaluate the capital program and the cash flows very closely with respect to.
Our financial performance in future.
Profitability the company.
And any exit would have to be at a premium to your covenant multiple that assume.
I think thats.
I think thats simplistic way to think about it.
But I think we'd be cautious to guide you to expect there's a big exit of a large gas asset at a price that isn't something that we would find attractive shareholders across the board. So.
I don't I don't think we would be driven just by that one metric.
Okay. Thank you.
Yes.
I would like to turn the conference back over to Doug Lawler for any closing remarks.
Yes, thank you for joining us today, and just to reiterate our confidence in our program and execution of our strategy.
Remains very high.
Our oil production will continue to ramp in the last few months of the year growing over 10% in the fourth quarters compared to third quarter and we're on track to meet our 2019 production in capital guidance.
Looking forward to the year ahead will reduce our capital spend by approximately 30% as I shared on delivering plateau production in maximizing our cash flow or capital efficiency improvements combined with the proposed development plan positions the company to target free cash flow in 2020, and we'll continue to build a business, which is resilient to the fluctuation of the commodity market is can.
Fluids, our conference call and if you have any further questions. Please do not hesitate to reach out to us we're happy to address any questions. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.