Q4 2019 Earnings Call

on such statements

We may also refer to some non-gaap Financial measures which helped facilitate comparisons across periods in with peers for any non-gaap measures. 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 De La Soul in Patterson dog will review our operational and financial results for 2019. And then we will open up the the teleconference for questions. So with that thank you and I will now turn the teleconference today. Thank you for adding. Good morning. Everyone 2019 was a year of significant change in important Progressive accomplishments for Chesapeake Energy after selling a lower margin asset at the end of 2018. We transformed our asset portfolio to the acquisition of a high-margin oil growth asset. We're notably we achieved our goal of capturing 250 million dollars in cost savings and Revenue synergies.

and the first year

Continue to identify and deliver cost savings across our multi base and diversified portfolio. And we executed several transactions to reduce the total amount of debt outstanding as well as refinance portions of our new age Charities the second half of the year was marked by rapidly falling commodity prices particularly for natural gas and Trend which continued today causing a much softer commodity price Outlook in 2018, despite the challenging macro pricing environment, which is further deteriorated in recent weeks with the global reduction and economic activity. We have built on our progress from 2019 to deliver strong execution on our oil weighted Capital program and Approved Cash Flow generation relative to our expectations so far this year today in the face of challenging market conditions. We highlight a plan for 2020 wage is built on Capital discipline and cash flow maximization reducing year-over-year capex by approximately 30% We're targeting flat oil volumes Decline and gas production and a free cash flow neutral business. Yep.

2020

Have three hundred million in debt maturing in the second half of this year and we are confident in our ability to generate three hundred million to five hundred million dollars of proceeds through non-core assets sales to fund these maturities and preserve the liquidity under our revolving credit facility are three billion dollar credit facility is supported by a very large proved Reserve Base, which you will see is valued at 9 billion in our 2019 a sec 10-K filing and valued at approximately 7 to 7.5 billion under current bank methodology further why we have a stock price that has fallen to very low levels. We will commence actions took a split the number of shares with the filing of the proxy in a few weeks given the quality of our assets the competitive strength of our operating platform Capital efficiencies and our track record of balance sheet improvements am confident in the stability and future of the company with the improvements to our margins and the changes we made to strengthen our balance sheet and liquidity in the fourth quarter. The previous going concern language will not be present in our mm.

15 SEC 10-K filing

We will continue to take the necessary steps to improve the financial position of the company and better align the balance sheet with our operating expertise with these improvements. We will restore Chesapeake's ability to create shareholder value in the current market environment. We have stripped massive costs from our system and reduced over $12 in debt and liabilities since we began our transformation all while building and maintaining a standard operational excellence and execution that is Paramount for long-term value-creation. We fully demonstrated our operating capabilities through the successful integration and achievement of synergies and our oil weighted towards acquisition last year. We are confident in our multi base and operating expertise and we are working towards consolidating additional assets into our portfolio to capture further value synergies and efficiency for shareholders. We firmly believe the industry needs further reduction development costs and corporate overhead, and we have a proven track record in these areas.

At the onset of 2019 we said we would increase our competitiveness by growing oil production oil mix and improving our cost structure and that is exactly what we did despite average wage realize prices before Hedges that were 12% lower for oil 18% lower for gas and 41% lower for ngls. We were able to increase our adjusted ebitda margin per equivalent by 14% during the year. We increased our total oil production by 30% primarily driven by the Wildhorse acquisition resulting in a massive shift in the composition of our own gas revenues from 42% being derived from oil and 2018 to 56% in 2019. We also reduced $336 in Combined combined g p and t and G&A sensors in the fourth quarter. We reported adjusted ebitda $665 million dollars a 19% increase compared to a year ago and again in the face of commodity prices that were significant. Yep.

for the last year, especially

For gas and NGL we averaged 126,000 barrels of oil per day moving our oil our overall oil production mix to 26% of total production the highest level and Company. Meanwhile g p and t g n a and interest expenses were all lower compared to the 2018 fourth-quarter. It is on this strong fourth-quarter that we had built the foundation to achieve fully capped free-cash-flow neutrality in 2020.

Moving to our operations the primary driver of our impressive growth was the successful integration of Brazos Valley into our portfolio in February of last year. When commodity prices were higher. We believe the acts it could be free cash flow positive by year-end while while we ultimately realize significantly lower prices during 2019 the assets still achieved positive free cash flow for the first time in the 2019 fourth quarter and more importantly is currently projected to generate almost $100 in free cash flow in 2020. And that's you need last week's trip prices to spray despite running one last rig in 2019 in Brazos Valley. We placed 81 on production in group oil production 6% year-over-year. This performance was driven by a 40% improved lower eagleford Peak reach with 2019 wall is averaging approximately 900 barrels of oil per day overall. We were able to recognize approximately $250 in savings and revenue wage.

In the 11 months Chesapeake on the asset average completed gross well.

Cost for lower Eagle for Eagle for the wells and 2019 or approximately $909 per lateral foot a 14% Improvement compared to 2018 and we expect mm. Mm. Well car cost to decline over 10% further for lateral foot.

Overall why we tend to focus the vast majority of our 2020 capital on our highest margin opportunities the breadth and depth of the strong portfolio affords us the flexibility to react Ever Changing market conditions while staying within our proposed 1.3 to 1.6 billion dollar Capital program. We believe this level of capital optimizes the quality Investments. We are making in this difficult commodity price environment with the need for Capital discipline debt reduction and cash flow generation. We are committed to further reducing all cash costs with a specific focus on reducing our production expenses in 2024. The Year, we're projecting a reduction of over 10% in both Joey and GNA for a total cost reduction of more than a hundred million dollars compared to 2019 and accordingly. We have moved our 2020 L o e and g n a guidance lower to reflect these projected cost savings we expect to achieve production expense savings through more efficient work over dead.

water hauling optimization

Treating program adjustments and greater supply chain synergies across all business units. The G&A savings will be achieved primarily through overhead expense reductions.

On Monday, we reduced our Jeep ENT commitments with bios of certain contracts for total consideration comprised of $54 in cash and $16 in line Phil inventory. These bounce will remove approximately $169 million dollars of cost associated with future commitments related to these g p and t agreements and will further improve our marketing margin angsting in the 2020 first quarter moving to the balance sheet reducing leverage remains of top priority for the company in the fourth quarter. We eliminated approximately $900 in principle Thursday through exchanges and revise covenants and our credit facility providing greater flexibility and preserving our liquidity. We also retire the Brazos Valley secured revolving credit facility and debt structure and relax virtually all of the unrestricted subsidiary debt with the term loan.

Today we have liquidity of aprox.

We one point four billion dollars, which is ample to retire 2020 and 2021 maturities. We continue to aggressively pursue all avenues to further improve our liquidity including Advance conversations around asset dispositions Capital Market transactions and further cost discipline.

If we manage the commodity price marketing Market volatility and diligently focus on optimizing cash flow. We have a significant portion of our projected 2020 production volumes hedged approximately 6% of our oil is hedged at $59.90 per barrel additionally more than 50% of our gas production is protected with roughly 39% hedge volumes through swaps at $5.76 per mcf and 24% of April to October forecasted production under put spreads with a floor of $2.06 per mcf.

To close we are committed to reaching free cash flow in 2020 to get there. We are reducing our Capital program to range of 1.3 to 1.6 billion dollars. We plan to make meaningful reductions to certain age cost without sacrificing our higher-margin oil volumes, which we intend to keep relatively flat year-over-year. We expect third quarter oil production will dip slightly due to anticipated maintenance and South Texas. Just how are we projected uplift to finish the year essentially flat with our 2019 fourth-quarter volumes while our portfolio strength or just the flexibility to respond to market conditions. We anticipate a gas production will decline year-over-year would reduce capital investment and is prices dictate. Finally, we expect to achieve meaningful deleveraging from future A&D transactions and look forward to being able to provide them about our progress soon with that will now turn the call over for a few questions.

We will now begin the question-and-answer session to ask a question plus, please press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question comes from Neil Diamond from SunTrust. Go ahead.

First question centers on your activity, you know and really kind of what you're saying. I think it's about the capital discipline. You were previously pressing activity in you know, even even the more I would call it the liquid area like such as long as those and prb and it looks like pulling back a rig or so on each of those that this really just just purely on Capital discipline, or is there anything we should be read into just on return these plays?

Yeah, good morning. Thanks for questioning. The best way to look at is just as I described and that we have quality investment opportunities across the portfolio and we are closed. We are adjusting that Capital based on the amount of cash flow generation that we have maintaining. Our production volumes is we look forward through twenty twenty and twenty Twenty-One. And so I it's uh, uh good Capital level and I think it reflects the confidence in all the assets that we have and as we've shared before each of our assets is begging for additional funding should we have that additional Capital that were available, but the cost discipline is coming in with with the achieving that free cash flow position for the year great great details than just my second question. You mentioned a couple of hundred five hundred million potential non-core assets or those things that are already in the works or just based on your your your large portfolio. You just see the potential for for this with the year. Thank you God.

Sure, the as you're aware Chesapeake has a very large portfolio. We still have a very significant lamp position we have.

Significant portions of assets that uh are presently not attracting Capital funding and as we think about the opportunities to meet the near-term maturities, we should have a very large portfolio of things that we are presently working on and will continue to look at 4 for for divestiture of this year.

Very good. Thank you.

Our next question is from David Conan from honking and energy advisors. Go ahead.

Taking the question looking at the Marcellus activity without the Hedge book. Can you just talk through what your current margins and free cash expectations off for the Marcellus this year?

Yeah, Dave, we we see the Marcellus still as just a phenomenal asset even in the current pricing environment. We expect as in the presentation to generate a really strong production there with a minimal amount of capital and asset that generates really strong cash flow for us wage. Um, so the the limited amount of capital that we're spending there. We believe to be extremely attractive and still raised to some of the best returns in the portfolio month. But what's your freak out expectation? Okay, David snack, I would just add that. We don't look at our Capital allocation inclusive of hedges hedges or a financial instrument that are separate and they help our own corporate results. But we we allocate Capital based on pre hedging returns and it's an unpopular answer but the reality is the Marcellus generates fantastic returns even in today's strip we test.

Tested and retested and we look back on our results from last year, and they hold up last year the year before.

Or in the year before that it is a phenomenal asset and the cash flow to this generates is absolutely justified in our Capital allocation. This is Brent Patterson. Um, I'm just just point you back to I think one or two quarters ago. We put out some kind of guidance on the margins Associated or the Breakeven price associated with the gas and Marcellus. I think is 150 to 175 is kind of where the the wells break out on the the lower Marcellus. The other thing I would point there is to drive additional Foundation see in our system. We've been running that field at about nine hundred pounds back pressure on the system. So we're in the middle of dropping our our line pressure down using some very cost-effective compression and we're going to start bringing the blood pressure down two more what the offset operators are are producing against so we're going to see some really good phone number.

Volume associated with that at a very very low Capital cost.

It's versus the $320 free cash for the last year. I know I'm harping on this. What what do you expect 2023 cash flow to be

I'm just trying to dial in with that assets free cash yield and and either in the Marcellus specifically. I think it'll be I think it'll be just a little below that Dave think we're going to guide to a specific cash flow number for an asset, but it won't be dramatically different than that number. Maybe just a little lower and then annual free cash flow neutrality. You get free cash be probably early in the year and then dip down but do the full year you would expect to be neutral as well as the is the target. That's perfect. Thank you.

Our next question is from Erin from JPMorgan. Go ahead.

That was close. This is Arun. Jayaram JPM Nick. I was wondering if you could help preview your thoughts as we enter the spring re-determine Nation season. I think you mentioned or Doug mentioned one point four billion in liquidity. I know you're probably already started the discussion with the banks, but I was wondering if you could give us some thoughts on potential changes to your liquidity position of the spring determination.

Sherwin

Thanks for the question. So yeah, we highlighted in Doug's notes the value of the collateral that we have available to us under the credit facility today, which is pretty significant relative to the three billion dollar borrowing base. It's 9 a.m. And in our in our 10-K under SEC rules and then when you look at it under the bank methodology, which is uh, um, relatively similar, but they're going to use a lower price tags are going to adjust the way they think about the assets a little bit. There's some risking on the plugs and things you still end up with a uh-huh collateral value that's uh north of seven billion dollars and so often when we think about when we think about what that means from a expectations on the borrowing base, we really don't expect to have any changes whatsoever. The pressure that we have with our bank rate is around the multiple of debt-to-ebitda the amount of collateral that's there is vastly in excess of any traditional metric of what a multiple of the phone number.

They should be you know, I think history.

Barclays Banks of like to see a borrowing approved Reserve or collateral base of one and half times the bar and bass were well in advance of that. In fact, uh, we are well in advance of that just on proved developed a loan approved developed under Bank methodology. We would estimate to be around five and half billion and this is all using recent bank pricing. So, you know, this is all all current stuff anything can change. Of course as you approach, you know, the next couple of months here leading into boring bass season, but we feel really good about where we stand from a collateral base standpoint and we have good and Opeth on going dialog with our bank group and some in the industry are ugh, you know, really, uh thinking hard about how they want to bank the industry going forward, but we do have a facility that I'm not sure until 2023 and under that facility. We're in pretty good shape and they have great coverage against our loan. They would like to see the debt to ebitda improve and so would we and we talked to them regular wage?

about all of our efforts

To do that. Yeah. Thanks for that color a follow-up maybe for Frank. It looks like in 2020 in terms of your oil your assets. You're leaning harder on the eagleford and Brazos Valley Thursday. We were a bit surprised to see the magnitude of the declines in the Powder River Basin a Franco just comment. I was wondering if you could come in a little bit about your delineation appraisal efforts out of river and and maybe talk through why you're you're you're cutting activity here more than in the Eagle Ford versus Brazos Valley.

Sure ruined so in the Powder River, we actually saw a good fourth quarter in the Powder River. We talked to you on the third quarter about some wells that were outperforming substantially to our expectations up on the North End of the field. We had to overcome those wells in the fourth quarter and we had a we had a really good fourth-quarter outcome associate with out as we have gone in and and and kind of dissected what's going on in the entire basing not not just our acreage but all set operators as well. You're probably aware that a lot of The Operators ran out and talked about four wheels perception for the Turner. We said no to 2 to 3. So we never got to that 5 perception point which I think is was a good move on our part as we look at it today what it looks like is that there's there's actually two zones in our acreage dead.

there's the Turner and then the

Onto your underneath that that zone we thought they would act as one they don't appear to be acting as one and so what it looks like is the tournament should be on to Wells Perfection, maybe even in a fractured area one well perception. So we're having to rethink our development plan on the Turner. They're still good wealth, but you just can't drill them as close to each other as much as what people had thought if I were listening this conversation, I would say within your location count is going to go down in the Turner and that's correct or location account will go down, but we'll a fax from front to your on on a wine racking system to to offset that and then then the the thing we really want to get too and we've started now is niobrara a library the wells that we put on in the last quarter are beating the the kind of basin type curve pretty dramatically so dead.

We don't want we don't want to rush the library because it is relatively we need to understand.

Spacing there. It's probably going to be more like three Wells perception, maybe two and some real fractured instant instances. So we're working through a Redevelopment plan their life and pretty pretty pleased with where we are on costs pretty pleased on where we are on operations. It's just we have to cut back in some aspects and that asset has the best potential to cut back because we hold big acreage on units.

Great. Thanks a lot Frank.

Our next question is from Doug lagati from Bank of America. Go ahead.

Good morning. This is John Abbott.

Hello morning John. We lost you there Yeah Yeahs appears that Doug is on the other line here on this is John Leggett just several questions for us. First you know, what are your thoughts on maintaining free cash flow heading on into 2021? Well, as we stated that is a goal the company and a priority for us and we have the portfolio and the asset capital investment flexibility to a Josh. I think that in 2021 and Beyond it requires, what is what is the pricing environment look like John? I mean, it's just, you know, it's going to be largely dictated activity levels and change based on on a pricing but we are pleased with the portfolio. We are pleased with the transactions we expect to execute upon this year and confident in the cash flow generating. Uh,

a profile that we're getting

From our assets and so, uh, it's not a one-year goal is never been intended to be a one-year goal. So, uh, you know our projection this point in time would be to continue to build upon a free cash flow neutral or positive business from this point forward. And then the second question for us is what are your thoughts about just on the preferred paying the preferred dividend going forward given commodity volatility.

Hey John, good question. It's something we look at all the time. And you know, we are very protective of our cash flow and will remain very protective of our cash flow. And so I think all I would tell you at this point is that we look very very closely at that analysis each time. All right. Thank you very much.

Our next question is from Charles me from Johnson dry Rice. Go ahead. Good morning Doug to you and your whole team there, I felt like I heard you would loot at least twice to to you know, the industry m&a environment and you know, I think what, was about about the need for more consolidation. So can you elaborate on what what you see, you know, either as the opportunity set or what needs to happen in the industry. And in what role you see just the bulb in that sure you bet Charleston and it's a great question. I think we all agree know that there is continued opportunities for companies with top quarter of operating expertise to further consolidate and to capture further cost savings whether it be in a capital program with just experience and expertise or further supply chain synergies that can be accomplished.

but there's also a significant need to further reduce the

We're all corporate uh overhead and we believe as we have proven with the Wildhorse acquisition that we have that strength and capability to to execute them to conduct our operations in a way to capture further value for our shareholders. Um, we as we look at the portfolio we know there are several things that we can execute upon to Thursday meet our near-term maturities and and further improve our balance sheet and reduce debt, but we're also mindful of what is the strength of this company. That's the operating platform that that week and will continue to use all these levels and all these weapons that we have available and we believe the the market requires it and we intend to be a part of it.

Got it. Thanks for that elaboration Doug. That's it for me.

Thanks.

Our next question is from Kashi Harrison from Simmons energy. Go ahead. Good morning all and thank you for taking my questions Doug in the prepared remarks. I asked me if I'm wrong. It sounded like you said oil production volumes decline, uh through Q3 and then grow into Q4 to keep the Q4 rate flat year-on-year one wanted to get a confirmation of that and then to should we think about the maintenance Capital to hold 20 20 oil values flatten to 20 21 as as pretty much what you're spending this year in the oil levered regions. Is that how to think about maintenance capex the whole the whole flat? Yes it is. So, I mean the answer that second question Kashi, the the maintenance capex is approximately 1 a.m. We will be investing this year and and to maintain those relatively flat oil volumes going forward and then to your first question on the quarterly production there. Are we dead

there will be some maintenance work in the

South Texas area in the third quarter. We also the timing of our tills results in a little bit of a dip not significant. I mean we're talking about a couple percent or so in the back in the third quarter. So when you look at the profile of the oil production over the year, it's relatively flat but we just called to note that there is a little bit of a dip in the third quarter and we'll be working two jobs and you had maintenance and and also be working are till timing to keep all those volumes flat but there isn't anything concerning regarding the the production profile or the amount of capital be investing there.

Got it, that that's helpful on both fronts. And then as my follow-up you also talked about the softening economic environment. You're also really well heads for 2020. And so it was just, you know, trying to understand you know, what that break-even point for you where you say, you know guys we need to pull back. We need to reduce activity and 20.8 as of 45-42 and then you know, and and and I think you touched on this a little bit earlier, but you know, you know in 20 21, should we just think about the overarching goal regardless of wherever the strip is as free cash flow neutrality. Absolutely and that's exactly the way we want you to think about it Kashi and then in addition to that that are focused on further reducing debt is is the top priority the company, So when when we look forward we're very comfortable with our hedge position and twenty twenty and as we look at all the levers we have available looking forward to Thursday.

Twenty-One, obviously the

Pricing environment will play a heavy role and and the and the those future Capital programs. But the key to note with the company is I think it's often forgotten is that this this is not a single Basin company. We had multiple levels that we can pull we can execute upon diversity and geography diversity and product and excellent outstanding operations in each of the areas that we operate and so we'll continue to build and improve on that strength and and look to gain further momentum as we go into twenty Twenty-One regardless of what the pricing environment looks like got it off and the pricing threshold for 2020 would be somewhere in the 40s that the right way to fix about it. You know, when we want to make sure it very very clear that the the capital allocation is not based on. Well, we're at fifty so we'll maintain our Capital program. We constantly are evaluating and thinking about the the profile the the capital investment level. Yep.

what we're returning and so it's it's an ongoing process even with the the Hedge pricing that

We have uh have secured for the year. Definitely as we think of about a sub $50, uh-uh oil price and a sub $2 gas prices. We are rigorously evaluating the capital program and I think that the the best way to answer that question is that anything less than $50 and really and even get a price as we continue to evaluate and make sure that that's a prudent investment is we look for what we're trying to deliver on 2020 and also in those later years, so it isn't so much a price as much as our operating philosophy and and capital discipline that we will continue to evaluate the capital spend and and obviously as prices declined will be even more approved in quick to to to pull back if it if it deteriorates below fifty.

Got it. Thanks for all the color. I really appreciate it. Yeah. Okay. Well, I think everyone for joining us today. I thought oh, sorry operator with just a few closing remarks.

we

You want to reiterate as we look toward the year ahead that I'm confident can assure you that achieving free cash flow is not just a goal but a mandate the Chesapeake or employees are are focused and addressing all parts of our profitability with great energy and focus and I'm I'm I'm very pleased with that energy and and the direction that we're heading given all the circumstances that the industry wage in in the some of the internal challenges. Our oil production will remain strong in 2020 and will continue reducing reducing or cash costs and continue to improve upon our Capital efficiencies. We are absolutely determined and focused on strengthening our balance sheet and we intend to move quickly as quickly as possible using future and d and Capital Market transactions to to expedite and improve the balance sheet off. So this concludes the call for us today and encourage you to follow up with us if you have additional questions,

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.