Q1 2021 Chesapeake Energy Corp Earnings Call
[music].
Good morning, and welcome to the Chesapeake Energy Corporation first quarter 2021 earnings teleconference. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Brad Sylvester. Please go ahead.
Thank you Andrea and good morning, Thank you for joining our call today to discuss Chesapeake <unk> financial and operational results from the 2021 first quarter.
You've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday.
During this mornings 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.
And that will cause actual results to differ materially from our forward looking statements, including the factors identified and discussed on our earnings release yesterday 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 undue reliance on such statements. We may also refer to some non-GAAP financial measures, which may help facilitate comparisons across periods, Andrew peers for any non-GAAP measure.
We use a reconciliation to the nearest corresponding GAAP measure can be found on our website.
With me on the call. This morning are Mike West Wits, Stritch, Nick Bill ASO and Frank Patterson Mike.
Mike will give a brief overview of our results and recent events and then we will open up the teleconference for Q&A. So with that thank you and I will now turn the teleconference over to Mike.
Thanks, Brad and good morning, and welcome to the call. We appreciate you making time price this morning.
Before we go through the quarterly results I'd like to take a few minutes to discuss our change in leadership and also answer answer would be getting into sort of the most common common questions and so we'll just take any question sort of format.
First question is was there any action that that resulted in this change and the answer to that is I've been pretty clear about through both press releases and just Didnt public there was no action, we like Doug we thought he'd left the company in a great position and we wish him. The best second most common question is.
Is this change in strategy. The answer is absolutely not a there is no change from the post emergent strategy, we're focused on free cash flow capital discipline, and returning cash to shareholders and being a good corporate citizen.
But we have to put this in perspective, the company has had a huge change.
In strategy between what it was for the past eight years and what it is today.
On the past eight years have been a strategy of value preservation today, we're talking about a strategy of creating value that is vastly different than the execution of it is different.
The shareholders understood. This which is why they decided to change the board in its entirety with the concept of it needed fresh perspective, the company has an opportunity with a new balance sheet and a way to create value and so that perspective.
The change and they made it made it at the board level. The board has taken several months to get to know the company and decided that management also needed to change and fresh perspective, and which is why why why we made the change.
CEO search first question I, usually get is art is someone on the board considering interviewing.
Interviewing for the job as CEO. The answer is no no members of the board are currently interviewing for the job I don't expect it to occur.
Next question is how long it will take of course this will take several months, we expect it to take several months and we plan planned for several months, we formed a search committee, Matt Gallagher will lead that committee, we're looking for someone who will be accretive to our strategy not to change our strategy.
But with that said that said the board was very clear and we have a very clear mandate at the management level. We want change now we one fresh perspective, now which is why I'm here at the company is spending 100 per cent on my time working with the existing management team working with the existing employees.
We make a lot about C O change, we make a lot about how important the CEO is but honestly I think too much is made of it it's really about the employees and can we execute.
First order of business for the board was to evaluate the staff and get a feeling for where their head laws and truthfully. They have every reason to be demoralized after eight hard years in bankruptcy.
I can tell you from early observations in my my time here that this team is ready to go.
Have a chip on its shoulder I can tell you theres a energy on campus, which is contagious.
I think they're tired of getting punched in the face with a bad balance sheet and they would like to get away from that cloud and move on to execution.
Now ill talk is cheap we get that we have to have great results and I think the first quarter is a good start in that direction.
So now I'd like to move to the slide deck, we're gonna start on page three a webex, but also on page four of the deck that you saw last night vision Chesapeake value drivers.
On the middle of the page is what's telling the story today, we've moved that number from 3 billion from 2 billion to $3 billion. We think that's pretty impressive we're proud of it now the first action that we're taking of course is returning cash to shareholders. You'll see we instituted the dividend that is a fixed dividend, we will consider and we plan on doing additional.
General returns of capital and we'll make those decisions towards the end of the year. After we have a few quarters under our belt.
So the bottom left in order to have free cash flow you have to have financial discipline. We believe in this reinvestment rate. We will continue this investment range reinvestment rate and that will be one of the keys to our success.
Top left corner the balance sheet is in great shape. Our long term goal is to keep balance sheet under one times Levered. This is a competitive advantage. It gives us optionality that the company has never enjoyed this will be a big part of how to create value.
Finally, ESG, we have goals, it's part of our compensation structure, we're taking it serious it's not just admissions. It's also social governance. The company is preparing and making changes every day.
Moving to page four of the slide deck again, let's go to the first first middle section. The company is producing free cash flow I've always said if you have a great company you also build cash to the rights on top right. You see were building cash on the balance sheet $340 million. We're pleased with it you can see it continued.
To build and its also driving down our debt, which is exactly what we hope for is exactly what we modeled and exactly what our goals are.
Moving to page five a lot of talk about the balance sheet I don't think it could be overemphasized that this is a competitive strength I know you've seen this slide I would like to reiterate this is our advantage that we plan on taking advantage of.
Page six.
Our business is moving to scale efficiency and cost of capital becoming investment grade is a priority. We think we're well positioned to get there very soon.
This will also help us be competitive.
Page.
Seven.
Not only is our balance sheet fixed the management has done a great job on bankruptcy to reset all of our cost metrics G&A has decreased L O a.
Transportation of course, that's driving EBITDAX is opened up opportunities on assets. This recalibration, we have more opportunities lower breakeven than we've ever had.
And finally I'd like to talk about stuff that's happening outside of the bankruptcy renegotiation something that the team is executing on when you look on page eight I focus on.
Cost per lateral foot.
In particular take a look at Appalachia, we're pretty proud to get to 700 to $750 a foot and 2019 it was $985 a foot.
During bankruptcy. This says the team continues to execute its about execution going forward and I think we will continue to execute.
With that I'll open it up to questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one.
On a touchtone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Scott Hanold with RBC capital markets. Please go ahead.
Thank you great quarter, guys and you know I guess my first question is on.
On the opportunity set that you all see out there to continue to build scale. You know obviously there was a big transaction that happened in Appalachia can you just give us your sense of strategically how you look at these opportunities you know what's out there are the target areas and if you you know and in the end.
In the midst of a CEO search is it likely you guys kind of put that on hold until you get somebody permanent.
Sure sure I figure, you're referring to the the Altra transaction number one we loved that transaction. It I mean, if you think put it in perspective Cabot's told you for years that assets great. We've told you for years the asset has great and now EQT is telling you northeast, Pennsylvania is great.
So in general we like it for us to think about acquisitions, we'd have to look at a little bit different than others, which is it's not one we can't bring our balance sheet too we're not going to change our our reinvestment rate and three it's gotta be accretive at that level that transactions not particularly accretive.
For us and so so we're not going to do that we have discipline on all of our acquisitions.
On your question on are we going to pause the answer is absolutely not a while we search for a CEO team has a mandate the board as it currently is completely aligned I can I can tell you, bringing on the board we're absolutely ready to move forward. So I do not expect to have any transaction any action.
That will take will be waiting for a new CEO, we're moving now.
Understood Thanks for that and as my follow up question.
You know it was a impressive you guys started your shareholder returns. This quick and you know at a at a pretty strong 3% fixed dividend yield.
Can you give us a sense of like what you know what what were you looking at to start. This initial dividend I mean, that's a pretty healthy output initially and and it sounds like you guys are gonna be holding off on on incremental sort of shareholder returns until as you said get a couple of quarters under your belt, but.
You know first address you know that you know sitting at 3% you know why that rate and then as you start looking beyond in 2022 like you know what what should we expect.
Hey, Scott, it's Nick the lawsuits. So we looked at setting a base dividend here that would be sustainable through all cycles and so we ran a lot of sensitivities on this and we thought about good time, good years and bad years in and we stress tested it pretty hard now in reality, we still could have increased the dividend beyond this and lived within.
That stress tested view.
We want to build on our execution and have room to methodically increased this dividend over time, and so we looked at where the <unk>.
Competitive landscape is in terms of yield.
Where do we want our stock to be.
In the coming quarters, where we think is a more appropriate value. We looked at that stress test and we used all of those things to come back and say what is the appropriate yield for this company to begin now we expect that yield to grow we expect to have significant cash flow free cash flow beyond what we're paying out in dividends and as Mike noted.
Earlier on the call on as we put on our press release as we approach year end and begin to build that cash on the balance sheet will detail for shareholders. Other ways that we plan to return capital to our investors, we're going to take our return of capital to investors very seriously.
This is a business that should generate very significant free cash flow.
And we expect to be able to deploy that cash flow on our business in a very accretive manner, but we also expect to return quite a bit of it to shareholders along the way, we're not going to just become a cash hoarding machine here, so that cash will be returned to shareholders.
I appreciate it thank you.
The next question comes from Josh Silverstein with Wolfe Research. Please go ahead.
Yeah. Thanks, good morning, guys.
Some comments here based on the on the Florida outlook heading into 2022 it implies that.
Net gas is growing while oil decline.
I'm just curious why not increase the oil activity, if we remain in a $50 environment.
And then just on the gas side I'm, assuming that this would the growth would all be coming from the haynesville given that the Marcellus basis differential concern. So I was hoping you can touch on on that.
Well, let me give you a general thought on on sort of oil.
Then when we react to it in.
The first thing about oil is where we're looking at programs here and they have to be big and sustainable and so we're not focused on the prop month, we're focused on the long term the long term rate of oil we need sustainability and we need programs that that that can just take a rig program and continue to get the efficiency and scale that we're looking for.
Sure.
Assuming you can get all of that it still has to compete with rate of return on our other projects, we have a good inventory and the oil.
And some on the other basins, and particularly Marcellus and Haynesville, we'd like those returns. So oil has to compete on a rate of return. This is not on oil or gas conversation for us. It's a rate of return Nick you have some months from Boston, Yes.
Yes, so our capital allocation model is very much as Mike has described and it is not just about the prompt month I mean, as we think about standing up a program. We there's a lot of there's a lot of friction costs and standing up a rig and then dropping that rig in the months following prices wobble. So we want to see a strip that goes out at least through the.
Payout of the wells you would be drilling so call. It two to three years from the time you make a decision until the time you are going to get payout on that activity that you feel comfortable on your sustaining an attractive rate of return we're getting closer.
In South Texas, you May have noticed we added a few wells to our capital allocation here towards the back half of the year, we had a rig running on some obligation drilling and we've chosen to keep that rig going for a few more wells that are going to be great rate of return wells and we'll evaluate that as we move into next year to determine if it makes sense.
To again continue to keep that rig running.
We think about capital allocation and again driving for returns chasing returns maximizing returns across the portfolio of opportunities that we have so it takes a few years of price.
And it takes it likely inability to hedge in some of that price. We believe when you allocate capital you should derisk that capital.
Through through a hedging program that thinks about how to how to hedge and derisk. The volumes that are coming on line associated with the capital you've allocated so it is a pretty thorough analysis that would drive us to increased capital we're getting closer in some of our assets and we think about that quite a bit but we.
We'll be very methodical on this we will protect our 60% to 70% reinvestment ratio, which clearly we have quite a bit of room in between here and there, but we will also protect our cash flow metrics will protect our return metrics. We will continue to drive for improving cash return on capital investors as well as return on cash.
Employed and you'll see us talk more and more about all of those things as we move through periods.
Periods and have more history post bankruptcy.
Hey, Josh this is Frank so to answer the second part of your question.
Yes, Haynesville is where the the the volumes are going to come to displace that that decline we have in <unk>.
Assets, we've now moved to three rigs in Haynesville.
We are seeing really good base production support and all the field. So we're working this is a program.
As far as growing are the the Marcellus you you're very aware that we have kind of a on a cap on our volumes there at about 3334 Bcf a day growth.
So we would grow that those are great rate of return opportunities, but we're not going to overwhelm our system over to mark.
Great Thanks for that guidance.
But he investing strategically youll booth or with with a potential transaction.
Given the free cash flow profile of the company.
Do you feel like Chesapeake needs to do something right now given that the balance sheet. We will go to a negative net debt position by the end of next year Leverages already it just happened that return one on just run out and asset for for its free cash flow profile. So just any sort of strategic thoughts around true.
The actions on the divestiture side.
Yeah.
This is Mike you know number one we don't have to do anything and that's a great position for the past eight years, they've had to sell assets.
Some companies don't have enough inventory and they have to buy assets. We're not neither one of those positions and so I don't feel like we have money burning a hole in our pocket to get something done and so it is not our focus our focus is internally first with that said with that said, we operate in and some great basins and anytime we can create value.
By adding to it or subtracting to it we'll do it.
That means knowing everything that's going on in the market looking at every transaction staying current on everything and so so although I don't think that's our first first order thinking think about transactions. It is definitely always will be there and will always be ready for when the right one sort of shows up we're ready.
Either on the buy side or sell side.
Nick you have more.
No just just very much agree that.
We expect there's going to be a lot of continued discussion around consolidation on the strength of our balance sheet puts us in the center of those discussions we like the Optionality that gives us to be in the center of those discussions.
But we will drive for accretion in value and anything that we look at whether it's a sale or a purchase there's plenty of work. We can do with this portfolio. When you own a large diversified portfolio gives you a lot of options as to how to think about creating value for shareholders. We will do that we will buy some stuff we will sell some stuff most likely over time, but we will have disciplined with it.
We will drive for accretion and we will drive per value.
Great.
The next question comes from Charles Meade with Johnson Rice. Please go ahead.
Good morning, Mike.
I'll get back to you.
Just dig a little bit more maybe on the same thing but.
But going back to your prepared comments and it caught my attention. When you said you were talking about the balance sheet and you said you said this is our advantage this balance sheet and.
I Wonder if you could elaborate on that a bit more because there's two things that immediately came from my number one is that actually there's a lot of companies with relatively low.
Relatively low balance sheet leverage and so you know maybe more of a minute that's an advantage versus chesapeake in the past or or perhaps you theres another way of looking at it advantage.
On the industry or versus the industry and then and then second.
When I think about or you know when I heard that comment on my mind immediately turn to M&A and it is that defense.
You were saying that the the balance sheets and advantage.
Hum breaking down break it down just a bit.
<unk> companies have great balance sheet, absolutely those are the best competitors and we were happy to be part of that and I am separating us from old Chesapeake in the past and also sort of just weaker competitors, who have strained balance sheets. It gives an option for us to do absolutely nothing or something and so when you have.
The that that choice then you are starting to be able to think about it only and value perspective, not in I have to perspective. So this doesn't mean again that we were absolutely fixated on a N D or divestitures were fixated on making the company better and make it making sure sort of value.
Better.
You know I think I think ultimately.
Obviously, we don't want to keep cash on the balance sheet, obviously, we're not going to sit around and just let it let it sit Nick already said that we're going to return return cash to shareholders. So A&D feels second or third second and third.
Got it.
Mike Thank you.
And then second question.
Nick you mentioned.
I guess, the overall message that that.
Send it up on the rig and an oil asset has to compete against your your great gas assets, but I'm looking at the inventory slides that you guys put together one of the things that debt that I noticed is that the it looks like your your Brazos Valley is really where the you know where that inventory expands as is the <unk>.
Oil price moves.
It moves up it so is that where we ought to think about a rig going back to work and in Brazos. If you did see the strip.
Move higher in a sustained fashion.
Hey, Charles So I'm really glad you asked about those inventory numbers, we haven't shown inventory numbers in a couple of years and we're really proud of them Frank and his team have worked extremely hard to build a robust inventory waiting for us to be in a healthier position prosecute that inventory. There's a lot more that we believe we will do to enhance that.
Inventory over time, just on what we own and so we're really excited about this part of our story you're also right to note that our Brazos valley asset gears around pricing on inventory a little bit more than some some others and so it is something that will pay a lot of attention to if theres a big run in prices and think about what that could mean for an asset.
Like that it's nice to own a big portfolio of assets, where you have those options, but that also drives to exactly the multi year price stability that we talked about from a capital allocation standpoint, when you see a play that has inventory that.
Scales noticeably add on.
A $5 move near where you are on the strip today give a little bit less confidence in driving our program into that based on immediately you'd like to have a little bit more cushion on that so I don't think that's necessarily the first place Charles.
Because of that sensitivity to price right. There there are some great wells that we can go drill in Brazos Valley, two day, and we really hope that we will have an opportunity with more stable or increasing prices to go drill a bunch up but that's not where we are yet.
Thanks, Nick the Charles Charles Let me add a couple of things. So you know if you were looking at Brazos Valley and it was your only assets that would be one way to look at the world when when and if you look at the way those graphs kind of fall out as oil price goes up the entire portfolio goes on so they're competing against each other so you're going to be.
Basically look at those graphs and say, okay. If oil went up whereas the first place you would spend a dollar and the oil assets and its south Texas.
Then the next place would either be browsers or powder River basin and that's the way we look at the world. Its not just can we get.
Rigs stood up in a given asset it's where do you stand up a rig inside your portfolio as prices go up and as Nick said we.
We have to have confidence in our longer term oil price and we're moving that direction now which is a really positive thing and it gives us a lot of flexibility.
Thanks, Brian.
Okay.
The next question comes from Nicholas Pope with Seaport Global. Please go ahead.
Good morning, guys.
Good day.
Good morning.
I was.
Hoping to understand a little bit it was mentioned in the in the 10-K from the end of the year.
The Williams transaction of assets.
At the end of 'twenty, what was the impact of that on production on the Haynesville from net exchange of assets with the midstream.
Restructure.
It was on that area of the of the Haynesville net we we traded for that that agreement was a pretty small producing area.
For the for the asset and we can more than make up for that loss with the remainder of the assets. The bigger issue there was in.
In the stack of opportunities in the Haynesville.
Acreage didn't draw fire for a long time and so the net present value of that acreage to us in our portfolio was relatively low moving at someone else's hands it might move higher and their stock, but we have a lot of quality asset or a lot of quality locations in front of that so.
We were we were in jeopardy of losing some of that acreage due to loss of production. So it was a really good trade for US now we can focus all our effort all of our capital on on the best opportunities within the Haynesville.
Yeah.
Got it.
The production it came out in December.
Yeah, that's right. It was yes, that's right. It was not included in any of our first quarter production. It wasn't a large amount of production as Frank noted I don't have that number right in front of me today, maybe 25 a day.
Uh huh.
So yeah yeah.
That's.
That's helpful and.
You mentioned the moving assets.
You mentioned you have this governor on just your capacity in Marcellus.
Three three to three four Bcf growth.
Where are you guys on a growth rate.
Now relative to that number.
So it depends on the on the market and the day, we have reached a I believe a record right now is 338.
A few days in the last few months, where a little bit behind that today, because the market's just not accepting the gas as far as there's a lot of.
Construction on our maintenance being done on pipelines right now, but we arent going on we are able to move 3233 to three four.
At any time.
That's kind of where we're going to flow to them that probably three two to three three range.
Got it.
That's helpful. Thanks, guys.
The next question comes from Neal Dingmann with Truest Securities. Please go ahead.
Well it all Mike for you on Nick My first question is just on your overall plans you guys have did a good job already commented, but I just had maybe a further question on that other companies you know, let's use pioneer habits.
Total return target out where they comprise the base dividend variable dividend oil growth. So I'm just wondering when you know you or the board or Nick set in and look at this is that something that you you did talk to all of our as I've mentioned about the base dividend, which is certainly notable would you put out a ton.
Return target or something like that.
Okay.
So of course, we're thinking about those things at the board level and at management first goal was to get through the quarter show show results then start the dividend and then over the next couple of quarters will determine the best way to go about this but if the answer is are we expecting to do more of it.
It's clear yes, yes.
Yeah, and you know I would just note that.
What we're looking at is that there's going to be incremental cash generated well beyond the base dividend, we expect to return a significant portion of that cash to shareholders.
And.
Keep some amount of cash on the balance sheet as reserves, if you will for.
Whatever events May may come around to need cash in what is still a cyclical business.
That said the manner at which and the size at which we return cash to shareholders. We're going to again like Mac said take the next couple of quarters to watch the cadence of cash flow generation.
It could.
<unk> to monitor the market conditions and how the variable return structures that others are using are being.
<unk> received by investors and and and what investors are preferring is going to influence us of it.
And we'll make a decision, but it will likely be something in the in a similar neighborhood and what you've seen some of our peers do we do think that a variable dividend.
Or share buybacks, both play a role in how you think about incremental return depending on the conditions for that point in time, and I think you'll you'll hear us talk about somewhat of an all of the above approach where material amounts of cash return to shareholders.
So Nick is the growth like where some others more of a byproduct and versus our goal our focus for your question for you Mike.
Did you say the growth from them.
The production growth I mean, a lot of folks some of it is that is there a certain you know.
Number you're targeting there or is that just more based on.
You know as I said is that more of a byproduct.
I think I think it's a byproduct and it's just we're just working on our value getting cash per share flow per share up so not growth that's not our cause on okay.
And then just lastly on <unk>.
Frank's comment Craig you mentioned on the comments on you know where you'd start to stand up a rig and agree you know south Texas still great assets My question's more on on Peter B, There's it's obviously.
It's sort of less delineated, but there is certainly high potential there. So I'm just wondering how noticed you don't have a rig there now.
But how do you sort of you.
Tackled that play it is it just purely about where you can get the best return or because I guess when I look at is the potential is there, but but you know theres a little more obviously exploitation and exploration to be done in that area. So how do you sort of factor that in.
Yes.
This is Frank we see that as an option on future option for the company.
We just put a little bit of capital to it this year to complete some docs. Those ducks are now on the team continues to work and and drive for better outcomes as far as drilling and completion. The biggest the biggest issue there those are great wells.
The biggest issue there is the the cost per foot is a little bit high and we're working through our teamwork effort, which is what we do on every field and drive costs down.
The teams go from the top to the bottom trying to find places that we can drive costs down we're continuing to work at that same effort is going on in browses. Our goal from a team perspective is to get every single opportunity to compete within the portfolio and that's what we're focused on powder just not does just that.
Compete at the current forward strip as well as South Texas. So the first dollar goes to south, Texas potentially future dollars could go to powder as we start to evolve and understand that the the.
The opportunities are better.
Thank you.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Thanks, guys.
Welcome everybody on glad to be on all the conversation than P. J.
Taking my questions.
Mike is on some of US take another hard look at Chesapeake after the process you've just gone through there are a number of questions that come up.
From the our long history.
So really covering the stock and I wanted to ask you I'm trying to delicately, but.
I want to ask you why we should be confident in the strategic vision you've laid out.
Because there's been a lot of strategic vision, a little lost.
10 years.
And to be not an indelicate that's it.
Some of the management of our policy to those decisions are still there so why <unk>.
Hi, Doug Doug take the full for this.
And does this speak to on that.
It went from potential M&A that the CEO of the company as long as no longer there.
I don't think Doug has taken the fall I think it's such a change in perspective, because you need a fresh set of eyes. You you have to turn over every rock and look at everything different and you don't want someone burdened with the decisions of the past and so that's that's so I don't think this is Doug taken to fall more more of a just a change.
<unk> as far as why you should believe the strategy well I mean, it's easy to see that the balance sheet is fixed it's easy to see the cost has come down and really I think even historically if you looked at the execution on the operations front. The company has been pretty darn. Good. So you sort of put together the right capital the right structure and it should sort of work.
And then you come to the quarter here and you like is it working and I think it's early and you know again, you'll have to see the quarter over quarter to get some confidence but the answer is is it seems to be working and you should build confidence over time, but you're right you need to make your own decision about that.
As far as you know doing M&A or are we are we going to do that do something well number one we believe in scale and we understand the industry has to be efficient at scale and it's our job to create value and whatever form that takes.
Today, we think it's executing on our existing assets. We think we'll do a good job of that we think our quarter results will show up but if someone.
As a super value proposition, it's our job to take it to the board discuss it decide if it's the best course of action and we'll do that you have a very shareholder centric board of directors you have a very.
Shareholder.
Centric business plan I think that's a little bit different we're not covering up we're showing you everything transparency there and we think people will make the decision to start looking at this a little harder.
Hey.
On the jump in on this if you don't mind so.
I want you to think about going back and looking at the history of the company's cash flow generation.
This company has been plagued for my entire history here with way too much debt and we've put the company in position over the last many years, where the assets were generating significant cash flow.
But not enough to cover the debt service. So if you if you strip away the interest expense the preferred dividends and some of the excess G. P and T and you look at the history of the cash flow of the company.
Cash flow that Youre seeing show up this quarter isn't new it didn't get created out of thin air from an asset perspective, it just isn't getting soaked up from the balance sheet and when you think about what Mike talked about in his opening comments about the balance sheet being a competitive advantage. We now no longer have to figure out how to deploy that cash flow in a way.
It just tries to attack that debt load, we get to deploy that cash flow now on the way that maximizes returns for shareholders. So this isn't necessarily a fundamental shift in the way that we run the company from an operational perspective or an asset perspective. It is absolutely a fundamental shift in the way the company can be run to generate returns for shareholders.
<unk>.
I know, it's not an easy questions on so you guys I guess, what I was really getting.
The balance sheet and not positioned in the first place all the complexities of the DLC.
The P.
Forward sales all the complexity of the basically call into the opposition that's kind of what I'm getting on we all understand what the cash power business is all day, but.
On the decisions made.
Prior to Doug's arrival is what I was getting on.
On spot. So I appreciate your answer the question my follow up if you real quick on mic, creating value you talked about delivering differential returns I just wonder if you could define what that is because theres a lot of companies doing a lot of the same things that you've just described so what differentiates Chesapeake here and I'll leave it there. Thank you.
Yeah, a lot of great companies can create value, we want to be one of them.
So number one I think we actually have assets that are working and we have the inventory to execute so nothing has to be done we can focus internally and generate returns. It has a scarcity that not everyone has great inventory every place and this company has at its had a good subsurface team to be able to identify it and so I think.
That differentiates us and sort of sort of in general.
We are operating in a number of basins I would get it we want to build scale on some of those basins may be even more but because of the footprint. We get to look at a lot of transactions that can be accretive because frankly once you have operations somewhere there is efficiency. There. So our playbook is open we're not burdened with only one.
We're going to use that and we'll follow where the value is can be derived where we're not stuck in one place. We're not stuck in one basin I know people like that for efficiency, but if youre looking for value you should be looking everywhere, it's tough to get a lot of value in it and frankly on the Permian Guy, it's tough to get value when you're paying.
Six times cash flow for the assets, it's very very difficult to do that here. The playbook is open we think we have optionality drilling a great balance sheet. It feels like it feels like you have something to work around.
Appreciate the answers guys. Thanks, so much.
Right.
The next question comes from David Heikkinen with Heikkinen Energy Advisors.
Go ahead.
Good morning, everybody and thanks for taking the question.
I'm thinking about Chesapeake a lot over the last month or so and as I think about some of the best investment opportunities. They stem from uncertainty I'm, sorry, I was going through and looking at Chesapeake you have uncertainty and management.
[noise] uncertainty on your assets and you have some uncertainty in your long term shareholders. So first on the management side, what's the board's commitment to the remaining management as many new Ceos want to bring in their own team and then second can you define the metrics of accretion that the board looks at and can you define the rates of return on.
Free cash flow assets that secure the 60% of investment are there any assets that will 100% being on the portfolio and then third for the shareholder base to move to more natural long term shareholders number one and number two needs to be addressed first so can you think about the timing and path to remove the uncertainty.
How the legacy bond holders transition.
To more natural long term equity holders.
Sure sure. Thanks, Thanks for the question.
Management generally we don't have.
Any plans to change management and we like the team we the board boards working with them I'm here working with them. So no no expected changes.
Two on the assets themselves.
We're hyper focused on cash flow per share.
The good cash flow per share up you got to have returns.
And so when I think about accretion I'm thinking about how to give more money back to shareholders. Every day that is the most important metric for us today are Nick you Havent different definition of accretion no I mean, I think accretion certainly youre going to pay attention to.
Cash flow per share youre going to pay attention to EBITDA multiples and youre going to pay attention.
To the way you generate returns out of the assets really just like Mike said in and the way we look at returns at the asset level and at the corporate level is on a cash returns on capital invested and return on capital employed will use both of those and again, we'll highlight more about.
About how how we perform on those metrics as we put a little more space between us and the emergence from bankruptcy.
But on a cash flow per share basis, and on an EBITDA multiple basis, where actually valued in a in a way today, that's a pretty high bar to go out and do a deal and so when you think about some of the transactions that have been announced recently, we paid a lot of attention to those deals will pay a lot of attention to other stuff. That's in the market and we will be very <unk>.
<unk> over what accretion looks like accretion is hard to achieve and so the bar for doing something as high.
But we will be very disciplined around it.
I think your last question is about the overhang of the shareholders in a natural shareholders. So look we had an opportunity and this happens in bankruptcy, where the board has selected by those shareholders. They give direct feedback before we emerge we've had.
A tremendous amount of conversations at all level. The board management has also had that ability to talk to the shareholder on what they want the good news here is although we have what I would consider a few unnatural holders long term holders they answered they seem and they've told us they're committed and they don't have to make any quick quick decision. So I don't think this is a six month.
I don't think it's a 12 month problem, but I do think once we get past 12 months 18 months, we have to start finding ways to attract new investors, we have to fight for market share for these investors.
With results with action I believe we'll get there.
And I hope it happens before the 12 month, Mark we plan on acting today, but I don't feel like there is gonna be a weird announcement, where people have to get out or want to get out.
Okay and then just on the assets are there any assets that are.
Rate of return and free cash flow.
100% part of the portfolio.
Oh, you mean are we committed to holding on to any particular assets.
You know look like in order to create value you can't have sacred cows, you have to be willing to buy and sell everywhere. So I don't think we have sacred cows here I mean tell me tell I'm, just trying to create value and if somebody walks in and gives us a julien.
Take it we're not we're not done.
So I don't think there's any anything in particular that we said we must keep no matter what.
Okay.
The next question comes from Jeff Robertson with water Tower Research. Please go ahead.
Thank you a question on gathering and processing Chesapeake made substantial strides during the restructuring process to lower costs.
And I'm wondering if there are steps that could be taken post restructuring to further enhance your gathering processing agreements to.
Increase the cash generation from some of the existing assets you have and also maybe make those.
Part of the capital allocation discussion or even enhance the value for for somebody else to own.
Yeah, Let me, let me take the macro and I'll, let Nick take take a deeper dive so generally speaking.
You had pre bankruptcy you had a very uncertain partner in Chesapeake from a midstream perspective, where your customers. We've now gone to a very certain partner, we've gone to a very predictable plan and so when you have that when you hopefully we get investment grade rating. Soon now we are great counterparty risk.
Whenever you have a great counterparty now you have negotiation ability at the table and we think we think just macro we are absolutely figuring out ways to lower transportation. Nick you May talk specifics yeah, absolutely. So we do have a couple of things that are front of mind that we will go after and then.
There are plenty of other things that will evolve.
One element of G. P N T of course escape and as we continue to grow volumes out of our core assets, we'll have some opportunities to leverage that scale to reduce the per unit cost. Another element is that as we emerged from bankruptcy one contract that stood out as higher costs that we were unable.
Due to the contractual specifics of it deal with in bankruptcy was the gas gathering agreement.
In our South Texas assets.
We've worked with Williams quite a bit on that we've been able to achieve a number of changes to our contracts with Williams over many years, but in particular in the bankruptcy that ultimately are going to be good for both companies.
We will continue to work on that with Williams. We believe there is a path to enhance the value of our south Texas asset by working with Williams.
We're definitely not going to sit still on that.
We will be working hard on that and I would expect we'll have more to say about that as we move through this year.
It'll be good for both companies that Williams has no no need to do something with us that isn't good for them.
And we have no need to do something that isn't good for us we've been able to achieve that many times in the past and I think we have an opportunity to achieve that here.
One other just technical matter is that there is a pending change to our northeast contract structure, where one of the contracts that we negotiated for a change in bankruptcy rolls off in October of this year and so you'll see and you've seen in our projections in the back of our investor deck that our Appalachian business unit will see a rich.
Duction and G. P. <unk> 22 versus 21, so we will continue to work all of those fronts there on.
Our opportunities there and then I think the next big leg for US as Mike noted that we're really excited about is how to take our improved credit profile and go and work further downstream through the selling of product as you think about the LNG markets. As you think about the fact that Chesapeake is half.
Having our gas stamped with the RFG seals of certification around being a responsible producer.
We expect to continue to advance our efforts there and work with downstream users of our products to enhance the value that we deliver to our shareholders and ultimately we deliver to the buyer community by giving them a higher quality source of commodity.
<unk> that they know is minimizing its impact on the environment.
Thank you Nick.
The next question comes from Eric <unk> with Goldentree. Please go ahead.
Hi, guys. Thank you for the update call and strong quarter.
One question I was hoping you could help us with on the modeling front in terms of trying to reconcile your guidance and just trying to understand at the midpoint of your EBITDA guidance can you, let us know what the annual hedge losses.
Or just trying to make sure I can I can square the numbers.
Sure So Eric all of our hedged detail is in our Q, which will be filed very shortly and you'll be able to see that but we.
Our our EBITDA guidance is at the strip and so you can back into a number based on those hedges, it's going to approximate a little under $400 million.
A little under $400 million of hedge losses as of the $4 30 strip is that correct right mark to market for 2021.
Okay.
Full year.
Terrific. Thanks, guys that was my only question.
Congratulations on the emergence on the strong first.
Earnings call.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Michael wished rich for any closing remarks.
Guys. Thank you. Thank you for taking the time this morning.
We're here to answer questions give us a call.
We're excited about going forward I think our team is excited about going forward.
So so looking forward to two good quarters in the future. Thank you.
The conference has concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.
Yes.
Yeah.
[music].