Q2 2021 Chesapeake Energy Corp Earnings and At-Market Acquisition of Vine Evergy Inc Call
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Good day and welcome to the Chesapeake Energy Corporation second quarter 2021 earnings Conference call.
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Now I'd like to turn the conference over to Brad Sylvester. Please go ahead Sir.
Thank you Rocco and good morning, everyone and thank you for joining our call today to discuss Chesapeake financial and operational results for the 2021 second quarter, hopefully you've had a chance to review our press releases and the updated presentation that we posted to our website yesterday and this morning. During this morning's call we will be making.
Forward looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs goals expectations forecasts projections and future performance.
Benefits of our proposed transaction with buying energy, Inc. The expected timing for the completion of the transaction and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward looking statements, including those factors identified and discussed in our earnings.
Please yesterday and in other SEC filings. Please note 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 help facilitate comparisons across.
[noise] periods and with peers for any non-GAAP measure we use a reconciliation to the nearest nearest corresponding GAAP measure can be found in our materials and on our website.
With me on the call. This morning are Mike, what's your edge, Nick the Lasso, Sheldon Burleson and Tim Beard.
Mike will give a brief overview of our recent results and events and then we will open the teleconference up for Q&A. So with that thank you and I'll now turn the teleconference over to Mike.
Hi, Good morning. Thank you. Thank you for joining we're pretty excited today here at Chesapeake and we're glad you're here.
So when I do a quick just a quick fly over on our quarter second quarter was pretty great. We were pretty excited about it.
Old you in the first quarter that this company is going to generate a lot of free cash flow. That's what we've done in the second quarter, we did not disappoint with $429 million and EBITDAX of 300 million ish.
Free cash flow that went to the balance sheet. That's how you know it's real when it shows up in cash in the bank and so we're pretty pleased with.
I don't think this is the one time events its trend, which is why we're updating our guidance, you'll see where 16% we want to raise guidance on EBITDA by 16%, we reduced G&A by 15%, we're not changing our capex and that'll also feels pretty good.
We do generate a lot of cash we have a bunch of cash question becomes what to do with it. We told you really clearly in the first quarter and goal is to return cash to shareholders.
That's why we started a fixed dividend in the first quarter. We told you at that time that we would buy define a variable variable dividend strategy by year end today's that day Doug.
We're going to implement a variable return program, that's going to take 50 per cent of our free cash flow quarterly and pay it out that's going to start in the beginning of next year, we're pretty thrilled about it.
The very bottom of the page you may have seen this in a previous press release, our commitment to the environment and be in a good good steward of assets.
We are pledge that we will turn our haynesville area into an R. S. G. A basin for US we think that is not only the right thing to do and the smart thing to do and we're pretty pleased and we're making great progress.
Turning to the Vine acquisition, which we were really excited and fired up about during the.
Quarterly calls and last time in every every time I had an investor call I get the question often about Chesapeake participate in the A&D market Hollywood look what are the what's where's wins in house and honestly.
We are very picky, and we're picky and we think this acquisition absolutely reflects that we have what we think of five non negotiable and any transaction. The first non negotiable is you can't overpay. We don't think we are this is zero premium deal. When you look at it if you want to calculate the price you can do yourself, it's basically the <unk>.
30 day exchange ratio that is how we baked it no premium feels great we're not overpaying.
Second non negotiable is we're not going to break our balance sheet, we're not Chesapeake in the past. We think this is a competitive advantage you'll see our leverage is still below our long term goal.
Which is sort of a fantastic we're going to keep at it was hard to get here now.
Now you could ask that he did you build some overhang on your stock with new bond shareholders and I'd say, maybe you could think about it that way, we don't think about it that way Devine holdings shareholders have been very clear on their intent the intended they like Chesapeake they like the story they want to participate in the upside and frankly, we're happy to have them.
Third non negotiable, it's gotta be accretive on the metrics that matter. We think this transaction is you guys will calculate it we feel great about our fourth is hey, we're looking to be better not just bigger and so we think this transaction does it better to us means adding low breakeven drilling locations. This transaction does it.
It means having scale you combine low break evens in scale and size and I think you have a winning formula and to generate a lot of free cash flow. We have the locations with this we're happy about it. We also are going to be the largest haynesville producer is the scale. We're looking for the beautiful thing about this is this is an area that we've already operated in.
In 2008, we know the area, we can execute and we will execute.
Feel great about it.
Finally, we talked about our pledge to be our S. G. In the Haynesville, we talked about it in our own assets. It was very important to us not just to do it on those assets or buying assets. So our pledge extends also to the volume of acreage.
Next page page four looking picture says a thousand words. The picture tells you the story, which is our next door neighbor.
Makes total sense, we have the people in place already to execute and we feel great.
Next slide I'm, a keep harping on this about being a good operator, we think it's obviously the right thing to do on ESG Haynesville is the right place to be and not only that we think it is not just right. We also think it is a competitive advantage. It is a smart thing to do we know that the haynesville.
Oil gas goes into the LNG complex, we know the buyers of LNG wanted to be certified Orange G. We're gonna deliberate we listened to our customers we wanted to provide it.
Turning to page six of the deck again back to the picture tells a thousand words, we talk a lot about basis, you guys talked a lot about basis to us about the Appalachia. It's obviously a hot topic on the basis is this is perfectly situated to take that out. This is the place to be we're happy to be building here. It is a core strength for us.
Yes.
Page seven unit cost savings synergies are always sort of a it feels mostly like a gas its not a gas for us we have operations here. We have expertise. We know we can do I've already mentioned I don't think anyone has drilled more haynesville wells in us we have the people here to execute so we think these <unk>.
Energy are absolutely real.
Page seven we talk about cash to shareholders like to me. This is put your money where your mouth is it's one thing to talk about generating a lot of free cash flow and about synergies. It's another thing to actually promised to give it back to shareholders. First step is we're going to increase our fixed dividend and the synergies that we're talking about we're going to get to the shareholders. We're gonna.
Raised our fixed dividend by 27%, we think it's the right thing to do and we're happy to do it also with the new variable dividend plan that we just discussed did apply from these assets as well and so giving back cash to shareholders is what great companies do and we're happy to be the partner with that Nick why don't we go through the numbers.
Thanks, Mike.
Everyone.
Our pro forma outlook that we provided in the presentation. We think sets up really great for the next couple of years.
End of 'twenty, one you can see we've raised our numbers, we're raising our numbers on production. We've pointed in our press release to the fact that we have improved base decline rates.
Is really evidenced to the great work of our teams and how we've shifted our focus throughout this year and we're delivering better results better information better technical understanding of our assets and maturing the way, we think about the decline curves and the way we manage them well.
We've also had great performance out of our wedge.
We're delivering well in Appalachian Haynesville and as we noted before we're going to bring online some wells in south Texas towards the end of the year, which I think ties well together with the fact that the where the base is performing very well there.
Some of the biggest moves on the page that we're really pleased to highlight or in the cost structure. When you look just at 21 alone you can see we've reduced our G&A and it's a pretty significant move and you can see that as we move into 'twenty two that's sustained and so when you look at the aggregate cost structure. That's on this page of low E. G. P&C in G&A and you go for.
Where we were in 'twenty, one our previous outlook to where we're now guiding pro forma the transaction going forward, where we're taking into consideration greater scale and some efficiencies of the transaction is a 20% decrease from the total cost structure.
It's a pretty impressive move.
For a transaction like this and for just the current evolution of our business and how we're taking costs out that does result in higher EBITDA per barrel equivalent.
When you think about how we're investing again, there's some things that Mike talked about is non negotiable and important tenants of how we run the company from an M&A perspective, and there are from a financial.
<unk> perspective, as well, our reinvestment rate stays well under our 60% to 70% target, but we are able to stem the decline in our oil assets with this investment profile the rate of return that we're going to target with pretty modest investment to stem that decline is outstanding.
And so we're really pleased about being able to lay this out and being able to show a free cash flow profile.
That's really attractive on the right side of this page you have to pay attention to the fact that this transaction is really accretive to our cash flow metrics and when you see a transaction that is.
Notably accretive to cash flow metrics and a company can raise their dividend on the heels of that transaction immediately you know that the confidence level in that accretion is high we feel really good about that we're pleased to be able to deliver that and look forward to executing on that program to find out what's next.
Going to the next page we have some stats on just Chesapeake relative to the peer group.
Obviously, we're a relatively big company and so the peer group that we aspire to measure ourselves against companies that are bigger than us we talked about that scale matters. We've talked about that we think there's an advantage to having cost structure benefits from scale, where evidenced that in our transaction. This morning, and you can see that we're moving along the scale.
Not where we want to be yet, but we are if you look at the payout ratio punching at a higher level, we think than many peers of our size and so we believe we're headed for a <unk>.
Position of greater scale in the industry.
Net payout ratio is really attractive and it's sustainable given the reinvestment profile and given the low leverage and so we're really pleased to be able to lay this out and put out the variable dividend that we announced this morning that we know is going to offer a really attractive aggregate yield.
So moving on to the.
The last page that we're going to cover is really just the checklist of how we thought about this acquisition and really what it's delivering to us.
This is just a tremendous deal for us it's accretive.
It takes advantage of our scale and our knowledge and our history, Mike talked about we drilled more wells in this space and we have more data in this space and we understand this space and better than any other operator.
The position that it gives us around marketing of gas and the proximity to LNG and the fact that we're going to have such a large aggregation of <unk> in the market. This close to the Gulf coast in the industrial and export markets.
We think a really significant competitive advantage when you marry that with our balance sheet, which now has a credit profile that is very strong and a much more attractive counterparty in these transactions, we think it's a really powerful combination.
What it does to our inventories great you've seen some of the numbers already we are increasing our.
Our premium locations and we've measured that before you. This morning by talking about locations that are greater than a 50% return.
At $2.50 gas and it's a.
That's a really robust profile of an incremental 370 million locations dividends.
Dividends, we've talked about a bit.
The fact that it strengthens our ESG performance. This is a pretty well run asset from an ESG perspective, and it offers us an opportunity to showcase and highlight our commitment to continuing to drive our emissions metrics down and improve our ESG profile.
Overall, we're just really pleased with this transaction, we think it sets up really well for Chesapeake as we move into 2022, and we think about how to continue to take advantage of our scale and deliver higher returns for our shareholders in the form of cash showing up in dividends.
With that operator, I think we'll open it up for questions.
Thank you we will now begin the question and answer session.
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Today's first question comes from Scott Hanold with RBC capital markets. Please go ahead.
Thanks, Thanks, all a good quarter and I guess congrats on the deal.
My question. My first question here is who.
Who's running the combined company it really didn't discuss that obviously buying has an established management team and I know you all are in the process of searching for a CEO. So can you give us some sense of where that process is and you know whether or not some of the vine management team our candidates.
Sure sure.
Generally the CEO search is ongoing we've had tremendous interest in the position of course is what you'd expect the committee is working its process, we thought it would take several months.
It's on target and so we expect to have answered you know relatively soon.
Certainly we'd never thought about.
Who would run the company's Doug we werent trying to buy a CEO in this transaction absolutely not what's happening here, we wanted to buy the company and the assets.
And so so we'll just let that process, but that process go I think the real question, you're sort of answering is on who the next CEO and what's going to happen is hey, with the strategy change, where we have we have differences and the answer is no strategy. The same we're telling you we're going to execute this business plan. This is the business plan, we're going forward.
Okay just to clarify.
It is the device management team part of the CEO consideration or the C suite consideration.
Yeah.
We haven't we haven't got that far to think about it.
Okay understood and my follow up question is could you just give us a little bit of color around the inventory additions that you're getting from buying in their published presentations. They've talked you know somewhere around eight to 900 locations that have breakeven points close to $2 and I know you all highlighted something on you know.
The order of 370 of 370 locations that get a 50% rate of return.
And then I think in slide four indicates there maybe 600, but there's a little bit of a difference could you could you give us some color on an on net variance.
Sure so.
The 370 or premium locations and we measure that with showing.
Again, greater than 50% return at $2.50 gas.
On slide four if we get the total location number.
So there are a lot more locations and that is a big asset and we're really pleased about how the acreage a bus our position.
Generally we're looking at four wells per section here. There are some places we probably keep it at three and we think theres the potential in the future to downspacing some areas to five but we really haven't baked that into our analysis that would be upside so.
Look this is a big asset the acreage gives us some opportunities to drill longer laterals and that's really important to thinking about how the value has put together here and so.
A lot of locations and a lot of.
Premium locations at that high rate of return and low gas price.
When you said longer laterals it.
Some of that difference just extending laterals assumptions with Chesapeake acreage or is that just a comment of their length versus your length.
It's really more of the latter there are a few places where we're going to be able to extend some laterals by combining our acreage position, but just because the history of drilling more longer laterals than others.
You've done a lot of it it's a little harder we have the confidence to do it. We also have the mapping and the seismic and the data to do it well, we can pick our locations very well and so that's something where you're really bringing in expertise and technology in a data picture.
Picture to the to the equation here, that's buying just from a scale perspective didn't have all of that on their own.
Understood. Thank you.
And our next question today comes from Nick <unk> Kumar with Wells Fargo. Please go ahead.
Hi, good morning, gentlemen.
Thanks for taking my question I guess my first question is around capital allocation for next year as I look at your slide nine.
You had a standalone number of almost.
One $1 billion or so for <unk>.
Next year.
Adding soon with wine, but it seems like youre investing in oil quite a bit.
Just to hold the production.
Production flat so could you just speak of it and what do you how are you looking at cash.
Capital allocation for next year and why is it so much higher than this year.
Sure. So first I would just point out that as you think about our capital allocation year over year.
We're still at a reinvestment rate, that's well below our target and we think that's really important because we have a commitment and a discipline around how we think about deploying capital in the business, but we're absolutely going to chase returns and the rate of return that's available to us and our south Texas assets today is very attractive.
When you think about the fact that we came out with our budget for this year as we emerged from bankruptcy and we were wrestling with $45 to $50 longer term oil price curve. The world is a very different place today in the rate of return opportunity for us is very attractive and we have production. That's in decline. There is no reason, we shouldnt be drilling are absolutely.
Net locations in South, Texas, bringing on a few wells in our other areas that are also great rate of return and stemming that decline in a way that is very accretive to cash flow year over year. If you look at what we are ultimately going to deliver again, we're going to have a more stable longer lives reinvestment rate relative.
Two the cash flow that we can generate with this investment profile.
Okay and I guess the second question is Blackstone owned I think 70% oil.
Why.
You alluded to their commitment to Chesapeake stuff, but just is there a lockup or something formal that prevents them from selling their store.
There is there's a 60 day lock up that's been negotiated here there'll be less than 10% of the fully diluted shares.
But really our conversations with them have been about being long term shareholders. They are believers in the story. They are believers in the idea of consolidating for scale are believers in natural gas. This story for them offers an opportunity for enhanced returns over what they were able to accomplish which they accomplished quite a bit as a standalone company, but they've reached a point here after going.
Where they felt they were offering they had a chance for a better rate of return profile through the combination we expect blackstone to be shareholders for a while and we welcome them as shareholders.
They are eager to the shareholders in this combined company.
Got it thank you.
And our next question today comes from Josh I've ever seen.
With Wolfe Research. Please go ahead.
Yeah. Thanks, good morning, guys.
Like you mentioned before on the CEO search you had some comments there.
Between the 2022 now that the acquisition's dividend announcements the forward outlook for Chesapeake seems pretty clear.
You've clearly been a big part of this I'm just wondering if you have your hat in the ring here because you had suggested otherwise.
Differently, otherwise, but beforehand. So just wanted to see how youre thinking about your role here at Chesapeake.
Sure I think in my role as the chairman of the board.
I have not interviewed for the job of CEO. Michael Here is just just to help guide the company too.
Better place, where I think we're heading.
Okay.
And then you also said you remain pretty active in the energy markets you did the volume transaction here.
The past, we've talked about the Eagle Ford being a potential a potential divestiture candidate, but that seems off the table right now with the increased activity. There can you just give your updated thoughts on the oil portfolio and how you guys you kind of the overall mix of the production profile.
You're putting yourself against peers in the slides that are a bit more diversified. So I just wanted to see how you view kind of the overall portfolio construct now.
Sure.
But number one we think we have great gas asset both from the Marcellus and the Haynesville. We're believers Eagle Ford is interesting. It's large it's one of our big three.
Think that the currently at the current prices today.
It's really attracted to go drill down there.
We're going to do it we're going to chase returns and that will be sort of a first in.
This call do we have work to do down there. We do we have costs, we have pipelines with other stuff that we have to take care of them and that area is going to have to compete for capital today. It does if it ever turns out to where it can't compete for capital then we'll have to do something about it then but right now it sure looks good and we want to keep going.
Okay. Thanks.
And our next question today comes from Charles Meade of Johnson Rice. Please go ahead.
Good morning, Mike, Nick and the rest of the team there.
A little went back I think it was said to <unk> question on the 'twenty two allocations so.
If my understanding is right you guys were talking about adding one to two rigs in in all of the assets and Mike you were just talking about.
South, Texas, but is up.
Obviously, it seems like one rig is going to go there, but he has another one maybe going to go to either the <unk> or Brazos Valley or are we should we just be thinking about the uptick being in your Eagle Ford.
You shouldn't think about it that way, we're going to go to the best return locations clearly the bigger one in South, Texas, that's where the activity is going to be.
We can probably do a handful of wells.
In Brazos Valley and its core where we think it is best best place.
And then.
So to go from there.
<unk> is a little bit of a tail wagging the dog.
We are drilling some obligation wells there this year.
It has to.
Sort of competing if it doesn't compete more.
Stay around very long.
Got it got it and then and then.
On the same point too.
You haven't been asked but you beat on <unk> oil volumes right.
You guys are talking about adding a rig activity, but but you've also mentioned that.
Your base declines your PDP declines are turning out better so.
Yeah.
Your oil outlook for 'twenty, two is a good bit over where I've been and where consensus is and.
Do you have a sense of how much of that is related to more activity, you're planning and how much of that is is.
Better base declines.
So now lets take that Charles So certainly we're seeing excellent performance in our base and overall assets two biggest drivers our south Texas in Brazos Valley, and so south, Texas really stems back to the decision to kind of start to widen space from a couple of years ago, and so we're seeing really outperformance of those wells.
Over the last couple of years and then also the key work by the team to look at optimization.
Our performance there BV is similar story.
It's really the transition to the power of our team. After we took over that asset and then we've really been focused on artificial lift optimization and then accelerating our accretive Workover program. So both of those assets have contributed a big piece of it powder is also had as well book I'd think of it as really just solid performance and really focus on net debt.
Program Marty.
Alright, thanks for that color.
And our next question today comes from David Chowdhry with AB Inbev.
Ma'am. Please go ahead.
Hi, guys. Thank you guys for taking the call or the channel question and congrats on the deal on the deal it seems like a win win for everyone involved.
We're just kind of wondering how you guys are thinking about kind of the net debt profile going forward and kind of how you think about the volume that is that going to be bound to the balance sheet or is that can be taken out.
So volume has three basic pieces of debt they have their $950 million of bonds. They have a term loan and they have a revolving credit facility. The term loan and a revolving credit facility will go away as a result of the transaction will pay those off from cash.
And the bonds will stay outstanding.
Bonds are due in 2029 for the stack into our maturity profile and if we get an opportunity to refinance that at some point, where it's attractive to do so and there's not too much friction in the transaction, we would do that.
Okay.
That's all I had thank you guys.
Thanks, a lot. Our next question today comes from Nicolas purpose Seaport. Please go ahead.
Good morning, guys.
Morning, Nick.
I was trying to reconcile.
The share count and make sure I have that right with this.
This transaction.
Okay.
What.
What is the I guess what is the <unk>.
The volume share count right now and what is the total number of new shares at that conversion rate.
Sure. So the volume share count you have to take into consideration shares at best as a result of the deal.
So it's almost 77 million shares just just a tick under and then the share count pro forma the transaction is $135 million Chesapeake shares. So we're issuing about $19.1 million Chesapeake shares in the transaction.
And.
The volume share count that I don't cover volume so.
Is there.
Is that a different class of shares because I'm, just saying in a 41 million number and I'm trying to understand what I don't know what I haven't followed them before so what's that number different share there are two classes of shares with volume.
It just seems from there it stems from the private equity backing and the IPO. They have two classes of shares.
Yes.
And then can you talk a little bit about speed of drilling.
Kind of where you guys are versus where we're buying is and what because I think you all talked about 30 wells. This year, you're running three rigs from now as you kind of ramp that up.
Is that linear or I mean, how do you think about what three to six rigs what kind of well count or are we talking about the haynesville for a combined cut.
We're still assuming 10 wells per rig per year, that's a good pace.
And we believe that continues.
Got it that answers my questions. Thank you. Thank.
Thank you unit.
And our next question today comes from Doug Leggate with Bank of America. Please go ahead.
Hi, Good morning, guys. Thanks for getting me on Mike.
Mike.
Maybe this is for next day.
Capital guidance talks about adding activity.
So the oil assets I think net.
And you touched on this earlier book was stable.
Stabilize these production is that how we should think about the strategy of an oil asset going forward.
I would say just to think about us targeting returns Doug so.
Right now, we see it pretty attractive to.
Bring.
Our rig plus a little bit of additional activity to south Texas from Mike Mike noted.
Take care of some obligation wells in the CRB see how those do and then we're going to bring on some really high rate of return wells from the BV as well. So we know that those are.
Really low risk high rate of return targets. They makes sense for us to drill in this environment and so that's how we're going to chase returns with our capital. We think it makes a lot of sense by.
By stemming the oil decline obviously it puts a boost in.
Our EBITDA.
Our efficiency of capital turning into cash flow in the near term is great on those assets and so look it's a really attractive capital allocation move for us as we think about the fact that EBITDA is growing we think about our ideal reinvestment rate, we think about the way to maximize cash flow for shareholders. This is a better answer than not drilling those wells.
Okay. Thank you.
Most of the sustaining capital question is coming from him as well.
One offline.
Two other quick ones, Nick if I may tighten we discover volume over here.
Other types of recoverable agreement with it.
Well I'll just shareholders you know whats the status of that going forward for the new company and what does it mean for the combined company cash tax trajectory.
Sure Great question, Doug So the tax receivable agreement that existed between buying and Blackstone will be terminated as a result of this transaction.
And theres been negotiated to be no payment under that agreement at termination.
The cash tax position of the combined company going forward is unchanged from where we were before.
We're pressuring up against a point, where we will project to pay some cash taxes as we have a lot more cash flow as prices rise.
But as of right now we would still project to be I think our outlook has a very modest amount of cash taxes forecast. We think thats right. We think there is still a chance we end up at zero for the year.
So we're watching that closely we're gonna be right near the line and adding buying into the mix is effectively neutral to our view on forward cash taxes.
Sounds like a big win.
Last one from me.
Hedging I mean, obviously, you're kind of locked in for 2022, but if you are generating as much free cash flow and the balance sheet in such good shape and now youre thinking about the variable payout.
Why hedged what is the purpose and philosophy of hedging because it obviously not protecting necessarily.
Our balance sheet position.
Protecting growth capital, so why not a lot of investors see.
The headroom to what might be upside if you like going forward given your lower risk overall portfolio.
Sure.
Yes, sure Great question and I Love answering this question. So we did put a lot of hedges on as we exited bankruptcy. It was required in the agreement and you guys have seen that we did not add any hedges this quarter, because we have a pretty robust hedge profile going forward. So we don't disagree with your sentiment that investors should have pretty good exposure to rising commodity prices going.
Forward.
The way, we do think about it though is that we're going to spend a lot of money each year. I mean, if you just think about our capital profile here in front of you today.
On a stand alone business were just over $1 billion with volume, we're obviously a little higher than that.
And that capital is targeting new drilling and that new drilling has an expected rate of return thats very attractive at these levels and we should de risked that capital program over time. So we should still have some hedge profile over time. Despite the fact that we have a great balance sheet.
We won't be able to maintain our cash flow profile, our dividend profile the attractive high level of variable dividend that we all can project at this point would be at risk. If we didn't protect the cash flows that we expect to come out of our capital program. So what does that really mean over time I think what that means is that you can expect us to be around <unk>.
50% hedged in a given year. So if you look forward into 'twenty, two we have a pretty robust hedge profile volume has a good hedge position coming in they're heavily hedged as well. So we're going to manage through that but you should expect us to continue to think about matching our hedge program to derisking the decision to either offset decline.
Or have modest growth in our cash flow do you expect to come from that and then I'll, let I'll add up to somewhere around 50% in a given year.
Performance of our swaps or collars Nick.
Yes.
It always depends a little bit on price, Doug I mean, as Ive been Washington, the market. The last few weeks some of the callers look absolutely fantastic. So I love the idea of collars when they're priced effectively as you know sometimes the skew on those can make them really unattractive, but when you can lock in a price that's at or above your breakeven levels.
Ideally well above your breakeven levels and you can maintain some real exposure to the upside we love that and that's a place where really our strong balance sheet gives us a lot more flexibility than it did in the past where we might have looked at the past and said we need every penny of cash price per dollar of oil price that we can get.
The strength of the balance sheet says that you absolutely can take some risk around getting exposure to the upside and still protecting yourself to the downside with some cushion that you're comfortable accepting so love callers. They just have to be price effectively.
Thanks for taking my question sales.
And the next question today comes from Neal Dingmann of Tour Securities. Please go ahead.
Yeah.
Good morning, guys.
Just a quick follow on what Doug was asking on the hedges Nick what's your thoughts on basis hedges and while were talking about just the basis could you talk about just your thoughts on.
Your various regions on how youre seeing sort of basis for the rest of the year. It looks like everything sort of trended in line, but just would love to hear your thoughts on the hedging around that and kind of where we are.
Yes, absolutely great question Neal.
If youre not hedged in basis, and you have a lot of production in the northeast and Youre not hedged. So we think about the percentage of gas that we want to have hedged out of that northeast production, we should hedges basis as well and so we just manage that pretty carefully now you can't hedge as far out in the future on basis typically without seeing some slippage in <unk>.
Price so the timing doesn't always match, but yes, we absolutely want to continue to proactively manage that but you're also manager transportation profile.
We're going to.
As you know we had.
A bit of transportation on the <unk> line.
That's going to expire due to the negotiation of our bankruptcy, we can have an opportunity to add backs from transportation to that area here.
We can talk more about in the future, but it's a modest amount, but it is going to give us a little bit of tailwind to our realized pricing.
We feel good about that.
And we will continue to very proactively manage how we expose ourselves to realized prices in the basin through hedging through transportation and through curtailment of gas when prices just don't work so.
We like all of those dynamics theres been a lot of noise about basis in the northeast the summer there's been a lot of maintenance, we've navigated all of that pretty well you can see that in our results from today, our realized price held up pretty well there've been a lot of intra basin dynamics that have been interesting there have been times, where some of the maintenance and other parts of the basin actually.
Lifted our in basin sales in northeast <unk>, where we are and then there have been other times, where we had some of the same pressure that others had to so it's been a very very proactive.
Sure.
Management from our team our team does a great job, we've got a marketing team that stays in really close contact with our production team and they work that every day really hard to maximize the value we receive from our gas I think they do a great job and we expect them to continue to do what the outlook is pretty good as much as basis has been why the realized price that we're seeing in the field.
Right now this month is on our side.
Very very strong so.
You can take a wide basis to an IMAX from your realized price, it's elevated quite a bit and that's what we've seen but right now.
Basis looks good this quarter and realized price is very attractive.
Great Great details, Nick and then maybe just one follow up Nick for you or Mike.
Just on I think I see this on slide four I want to make sure I understand when looking at the bond deal.
You know that that overall inventory does does it go there's a good piece of that go to upper quartile or I'm, just I guess another way to say that is.
When you sort of look at what youre going to be drilling.
Well a lot of that fall in the front of the line now once that deal is complete.
Yes.
Yeah, absolutely that 370 locations that were talking about those premium locations absolutely pushed their way to the front of the curve, we have our own in that bucket too, but those wells will compete on day, one and I would say that there is definitely a tough quarter.
Thanks, Mike.
And our next question today comes from Jordan Stewart of Golden Tree. Please go ahead.
Hey, guys. Thanks for taking the question just somewhat of a follow up to this last question curious how we're thinking about the portfolio as a whole now northeast PPA versus Haynesville, where you guys have obviously made this acquisition versus some of the oil or stuff just as we think about force shrinking.
How should we be thinking about that now and going forward how that might change.
Yes, I mean look we're chasing returns you know in the Appalachia, we have a constraint on how much we can get out. So that's sort of your first baseline best return area. After that you have to compete and compete in the Haynesville gets a bunch of the capital you can see we will go from three to six.
And then the App.
After that we'll look at the balance between the two between the oil assets. So I would say three six and then the rest of oil.
On rig count.
Great and then.
Obviously, the macros improve materially enough for you guys to add activity in the oil here.
Assets curious what type of pullback or what type of volatility you would have to be introduced here that maybe we can see moving the other direction.
Down the road.
I think we showed you in the bankruptcy coming out that 45 to 50.
The oil wells didn't attract any capital and I think if you got in the long term price of that I think you'd have the same zone.
Great very helpful guys. Thank you.
And our next question today comes from Gregg Brody of Bank of America. Please go ahead.
Okay.
Congrats on the transaction.
Just just quickly I know you've talked about investment grade before and I'm. Just curious how you how do you think this transaction.
And the potential impacts of that and I think from the past next you've said you were not particularly interested in and get answered right. Im curious if you think a little differently about that.
It does seem to help the team escalate story.
Yes, I think it helps the investment grade story and.
I think we absolutely share about our rating I wouldn't ever want to give you any any sense of that I think one of the things I've said in the past is that we can only put forward great results and ask the agencies to rate us appropriately and Thats what were going to continue to do.
We've already spoken to the agencies a little bit about these transactions to try to get them up to speed.
And we will continue to do that over the next few weeks. This is a pretty big deal for us It add some scale and scale is one of the places that I think the agencies would like to see us be a little stronger they'd like to see as the bigger and this does that which gives us sustainability of cash flows. There is a little bit of that that comes with this transaction for sure but on a pro forma basis.
We're still well below one times and we are generating a ton of free cash flow, which is going to continue to grow net debt lower so we feel good about this and obviously, we're going to use some cash to pay off a bit of their debt at closing.
So that again helps the total quantum of debt and net debt will continue to grind lower over time. So we feel really good about what this does for our pro forma credit profile and then again one of the reasons why we care about it a lot is that if we're going to have a meaningful.
Seat at the table and talking about long term gas sales agreements, which we absolutely will with the quantum of gas that we will have available for supply here you have to have a strong credit profile and you need to be driving towards investment grade. So it's probably more of a renewed goal to get to investment grade because of the fact that we have that ability too.
Play in a different way and long term gas marketing and were pretty intentional about getting there we're going to be we're going to be very focused on.
Does that make killing of saturating a little bit more important.
Fitch rating.
<unk>.
We certainly have a relationship with those guys and we've talked to them.
And we will continue to think about that.
And just last one have you indicated at each table sees whether there'd be cross guarantees here.
From Chesapeake to volume and vice versa, whereas that that's still.
Okay. So determined.
No you should think about these bonds is basically becoming a part of the Chesapeake credit profile, it's all going to be one it will not be.
In a separate <unk>.
Guarantor entity like Wild horse this is going to be all folded in.
Great really appreciate the time guys. Thanks. Thank.
Thank you.
And our next question comes from Karl Blunden Goldman Sachs. Please go ahead.
Hi, Good morning, guys. Thanks, very much for the time just wanted to build on one question that Greg had their R&D day.
The investment grade ratings or at least progress toward that scale is clearly something the agencies have rewarded and youre doing that here are there other considerations maybe specific to Chesapeake you can talk about the agencies, sometimes you'll talk about companies coming out of a restructuring or needing a set management team.
For them to get more comfortable in moving the ratings quickly is there any color on those items you can discuss with us.
Yes, good morning, Carl I think both of those items are important to the agencies time away from bankruptcy and showing a track record of delivery is important and we now have two quarters, where we've done that so we're well on our way. We believe we expect to continue to deliver we expect to continue to show strong results. We expect to continue to show disciplined results I'll go back to reminding you of what Mike.
Started the call with around the non negotiable is and the fact that this transaction meets those non negotiable is in one of those is that we will not break the balance sheet and we won't overpay per transactions you can't do those things and warrant and investment grade credit profile. So this is all aligned and it all hangs together about how we think about.
What we're trying to accomplish and who we want to be as a company. So yes, they're going to care about are how long we've been out of bankruptcy and our track record. Since then we feel great about that concern they're going to want to know who the CEO is and as Mike noted.
The board expects to conclude that process and its due course and it's moving forward and so we don't think those are long term concerns, but we know that they are points that the agencies are still thinking about.
That's helpful I guess just.
My follow up is is there room for more transactions like this in the near term or is it kind of digest. This and then take a look at essentially the North Dakota environment looks like.
We're focused on this transaction and we focus on them one at a time.
So don't think about the next one necessarily right away, but when you have opportunities to beat those non negotiable and it's our job to look at them and so we will continue to look we will continue to participate in all processes in there.
In our areas of operations, but again pretty hard to get them through that through the hoop, because it's pretty small hope when we got a pretty big ball.
Okay. Thanks for the time good luck.
Yes.
And ladies and gentlemen. This concludes today's question and answer session I would like to turn the conference back over to the management team for any final remarks.
Before.
Before we leave I do have a couple of things to say number one I want to congratulate the buying team Eric margin you guys did and team have done a beautiful job, they're good operators with clean operator, and it's really attributed to the success of vaccines, where we are today they've been nothing book professional and I would tell you our team has impressed and congratulation Erik and team.
I would also like to thank Blackstone Blackstone as a new shareholder of ours, we're happy to have them as a shareholder it's great. When you have sophisticated investors who want to be in your stock. We have them. We welcome them I expect to have a great relationship.
And thank you Sir This concludes today's conference call. Thank you all for attending today's presentation and you may.
Now disconnect your lines and have a wonderful day.