Q3 2021 Chesapeake Energy Corp Earnings Call
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Hello, and welcome to the Chesapeake Energy Corporation, 2021 third quarter earnings Conference call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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Please note today's event is being recorded.
I'd now like to turn the conference over to your host today, Brad Sylvester Sylvester. Please go ahead.
Thank you Keith and good morning, everyone and thank you for joining our call today to discuss Chesapeake financial and operational results for the 2021 third quarter, hopefully 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.
Statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs goals expectations forecasts projections future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially.
Really from our forward looking statements, including the factors identified and discussed in our earnings release and in other SEC filings.
Please note that except as required by applicable law, we will 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 periods and with peers for any.
The non-GAAP measures, we use a reconciliation to the nearest corresponding GAAP measure can be found on our website.
With me on the call today are Nick the Lasso, Sheldon Burleson, Tim Beard, and Mike Westridge, Nick will give a brief overview of our recent results and then we'll open up the teleconference up for Q&A. So with that thank you again and I will now turn the teleconference over to Nick.
Good morning, and thank you Brian. Thank you all for joining our earnings call I can't tell you how honored I am to lead this company and to collaborate with our exceptional colleagues.
Our exceptional employees, who I'm proud to call my colleagues.
I'm very pleased with our strong third quarter results and could not be more encouraged about the direction. We're heading as a company behind our talented workforce strong balance sheet, great operational track record and advantage ESG profile I firmly believe Chesapeake sits in an incredibly strong position today.
Poised to consistently deliver best in class returns to our shareholders.
We're focused on executing the strategy, we've articulated over the last eight months behind.
Behind our disciplined capital allocation approach and continued focus on our cost structure, we intend to increase free cash flow enhance our scale and returned significant cash to shareholders within that strategy our priorities over the coming year will be to refine our portfolio to assets, where we intend to run development program scale continue to leverage our technical ability and efficiency.
To reduce breakeven.
And lower our operating costs across our business.
We will accomplish this while remaining steadfast in our commitment to ESG excellence and achieved net zero direct emissions by 2035.
Our earnings release and updated outlook for 2020 to highlight our progress on all of these fronts.
For the quarter, we once again had strong performance across our portfolio led by production, beating our and the street's expectations on lower spending.
Our EBITDA $519 million was certainly aided by commodity prices. However, our production outperformance was meaningful.
And allowed us to increase our oil production estimates for the full year by 1 million barrels.
Our gas production is up materially as a result of our base and wedge outperformance as well as the earlier than forecast closing of our acquisition of volume.
Importantly, we raised our EBITDAX estimate by $150 million, while not raising our capex aside from the incorporation of mine for November and December.
Not surprisingly this resulted in a significant increase in our free cash flow and projected dividends for 2022.
We were pleased to have closed the vine acquisition earlier than our original estimated timeline, allowing us to initiate the full integration process well before year end.
We have been working closely with the talented buying team and very much appreciate their support in the transition process. We are continuing volume current drilling program of three rigs and two completion crews and look forward to highlighting the progress of the integration of our strong teams and asset basis as we get into 2022.
Turning to 2022, we made a fairly material increase to our estimated EBITDAX for the full year that certainly bodes well for our free cash flow and variable dividend program.
We're pleased to maintain our capex guidance for the year at a midpoint of 145 billion. Despite the fact, despite the material increase in EBITDAX, we expect to recognize we're going to remain focused on our disciplined approach to capital allocation simply put we have a clear strategy for each asset and that strategy holds regardless of near term fluctuation in prices.
Approximately 85% of our 2022 Capex will go to our highest certainty return opportunities in the Marcellus Haynesville and South Texas Eagle Ford each of these assets is a clear rationale for the rig count we laid out previously.
The Marcellus is constrained and so we will stay with three rigs there.
The Haynesville is performing extremely well and we will have a pretty significant increase in Chesapeake activity given the integration of the incremental three vine rigs.
In our South, Texas Eagle Ford, we're planning to run one to two rigs focused on the lower Eagle Ford.
Our reduced cost structure and materially higher prices versus a year ago give us confidence in this multi year program.
Approximately 15% of our 2022 Capex will be focused on further portfolio delineation, including activity in the Austin chalk and testing of wider spacing assumptions in Brazos Valley and powder River, which we expect will deliver superior results.
Ultimately this capital investment will help us determine where these assets and opportunities fit in our portfolio.
Switching gears slightly with much of the world's attention focused on Glasgow. This week I think it's important to reiterate the central role, we believe Chesapeake will play in supporting a lower carbon future, while continuing to deliver reliable affordable energy.
We've seen proposed EPA rulemaking announced at Cop 26, this week targeting methane emissions from our sector. This follows proposed federal legislation released last week and posing a fee for emissions exceeding our methane intensity rate of 2%.
We believe responsible production from unconventional resources in the U S has a critical role to play in helping meet these goals and we're proud to produce the energy that is so desperately needed across the world today.
To put our emissions performance in perspective, we closed out the 2020 year with an enterprise wide reported methane intensity of one 3% and now with our recent abatement efforts coupled with our vine acquisition, we're rapidly accelerating our path to reaching our 2025 methane intensity target 0.09%.
Further we remain on track to fully certify 100% of our Gulf Coast production as responsibly sourced gas this year in Appalachia production by the middle of 2022.
We expect the gas coming out of these two plays to have methane intensity of 0.0% to 2.03% once complete Chesapeake will be positioned to directly deliver approximately three bcf a day of certified responsibly sourced gas end users around the globe.
While we're proud of our current emissions profile, we're not satisfied with the status quo, which is why we plan to invest over $30 million in ESG related and emissions reducing programs by year end 2022.
As part of this effort the company anticipates retrofitting more than 19000 nomadic devices, primarily focused on our oil assets. This retrofit program commenced in the third quarter initially focusing on our Brazos Valley business unit and is now expanding throughout our oil plays.
Once complete the effort is expected to reduce Chesapeake ghd and methane emissions by approximately 40% and 80% respectively.
Look forward to addressing your questions momentarily, but first I wanted to provide some additional color on my initial weeks, leading Chesapeake since being named CEO I've had the opportunity to visit with employees across each of our operating areas and was energized by the passion and commitment to excellence that resides in this company. Our colleagues asked me many thoughtful questions regarding our commitment to capital discipline.
Path to increasing cash flow plan to enhance our scale outlet for returning cash to our shareholders and commitment to lowering our emissions profile. Our employees pressed me on these questions because they care greatly about our future.
Firmly believe in our strategy and they don't want to lose momentum, which has been steadily building across our company over the last eight months my conversations with our employees only strengthened my confidence in what lies ahead for our company our employees will and excitement for what we can accomplish together.
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Yes.
Yes.
Okay.
Hmm.
Hello. This is the operator can you hear me.
Okay I'm sorry, you certainly saw self speaking so I thought you lost traction here during the call.
Okay great.
I had I had finished speaking was ready to turn it over for questions did did that did I get cut off at some point. There. Operator, you you must have in Colorado right. Now you are ready for questions about that that makes up for a good transition. So at this time, we will begin the question and answer session to ask a question. Please press Star then one on you touched on phone if youre using a speakerphone. Please pick up your <unk>.
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Time, we will pause momentarily to assemble the roster.
And today's first question comes from Scott Hanold with RBC capital markets.
Yeah, Thanks, Hey, Nick.
<unk> gave a.
Obviously a.
That preliminary 2022 outlook and considering you all have some pretty good exposure to the commodity it looks like that free cash flow is going to be fairly robust next year and you do have the variable.
Dividend the fixed dividend program that do take care of some of that but to the extent that the current commodity strip plays out it looks like Theres still a lot of free cash flow remaining can you kind of give us a sense of like how you think about that is it debt reduction is it giving it back to investors or is it selectively looking at act.
<unk>.
Well Scott it theoretically.
Theoretically could be any of those we believe in having a little bit of a cash balance around.
It certainly doesn't need to be too large we've said before we don't intend to become a bank and hold large amounts of cash.
All of those things would be things, we would consider throughout the year.
As far as further return to shareholders certainly as cash builds and we're thinking about the best ways to maximize return for shareholders, that's always going to be front of mind.
And so we've talked before about how we believe our board should have the flexibility to consider variable dividends to consider stock buybacks and we've set out now a 50% of free cash flow a variable dividend program. So certainly one of the things that is possible out of that incremental cash as it builds would be a buyer.
Back on top of that but look its early we want to see how cash builds through the year, we want to see what opportunities present themselves to the company.
And we're we'll be watching that closely but were.
Pretty focused on making sure that cash flow comes in is that step one.
Understood and then.
What are your first comments was talking about refining activity in the portfolio to areas, where you've got scale and it sounds like you know certainly the haynesville in Appalachia would be two of the most prominent areas can can you talk about some of the oil assets.
And where they fit in the portfolio both on a short term and a longer term perspective.
Sure so.
I talked about the fact that 85% of our Capex is going to go to a combination of the Marcellus the haynesville and the South Texas Eagle Ford.
And you should think about those as being long term programs that we feel really good about and then we are spending a little bit of money.
Now and into next year.
Looking at wider spacing in both the Brazos Valley in powder River business units above.
Will those be use have shown that the parent wells that we've drilled.
<unk> had some really great results.
And so we're going to watch these results really closely but clearly we're trying to determine if there are if there is an ability to stand up a long term development program in those assets of scale and if there's not then we'll make a different decision about owning them but.
We think we're going to drill good wells and we think we'll have some decisions to make and we look forward to that as we get into next year.
So if I'm interpreting that right.
We shouldn't think of the <unk> Brazos assuming goes or.
Divestiture candidates.
Got some work to do and you could keep them within Chesapeake if it made sense.
That's possible, yes, yes, we're drilling the wells we're drilling because we think we can make the assets more valuable and we will make a decision about whether or not there should be more valuable to us are more valuable than the A&D market.
Okay understood. Thank you.
Okay.
And the next question comes from Josh Silverstein with Wolfe Research.
Yeah.
Hey, good morning, guys.
So maybe just flipping around the portfolio the other way.
Just just.
<unk> completed the Vine acquisition is a couple more.
<unk> equity.
Foundation opportunities up in the Marcellus and the Haynesville as well.
Talk about your thoughts on using the balance sheet and free cash flow profile for continued consolidation in both those basins.
Sure. So we definitely believe in scale when you think about what we've been able to accomplish with the vine acquisition, we've been able to buy something that met all of our non negotiable.
And those non negotiable remain we think about those non negotiable is just to repeat them as not overpaying not breaking our balance sheet being accretive to our cash flow metrics and having an ESG an emissions profile that we can incorporate and make better within our portfolio and those are going to.
Remain really important to us and we're not going to stray from that so as we think about those other opportunities that are that are there. If we can achieve greater scale in a basin, where we know we have had success and where we have an opportunity for synergies on top of all of those non negotiable than sure. We will think about further M&A, but.
This non negotiable is create a high bar and we were able to meet that bar in the vine acquisition, we're really going to be focused here in the near term on integration of that acquisition, but the A&D market is active as you note and we'll pay attention.
Okay. Thanks for that Nick and then just on the <unk>.
Two questions here within the framework of oil volumes in 2022 versus 2021 or all of the decline in the CRB in East, Texas Eagle Ford stabilizing in that outlook.
And then I know the Eagle Ford also has a high cost structure on the natural gas side and I'm wondering now that you guys are you know a few quarters into post bankruptcy in a high price environment, if there's any opportunity to restructure that debt agreement.
Sure I'll comment first and then Sheldon or Tim May want to comment as well on the decline rates, but we are seeing the decline rates in our oil assets.
Lesson.
We're doing a lot of work in the field too.
Prove upon those decline rates, we've spent some good workover dollars over the last year and we'll continue to do that we are seeing good results from it.
On the contract front.
We have talked about the fact that our gas gathering contract in the Eagle Ford remains high.
We're exploring things with Williams to improve upon that over time.
Encouraging further development.
We're still very optimistic on that front.
I would say stay tuned we hope to have.
Something to talk about there in the future.
Negotiations are always long, but.
The asset is strong the geology encourages more development when you have the right cost structure above ground and we and Williams are aligned with wanting to make sure that that plays out.
Great and I can say this is Tim I can touch on the decline rate across the board first and foremost our base decline.
And the work that the field teams are doing is leading that base decline to be better than we've ever seen across the board and I can touch on from asset to asset what we're doing in the Gulf coast, they've done some things from changing our drawdown practices, both to better optimize our economics, but it's also not hurting our well and.
In South Texas. The team has done a great job of identifying a capital Cleanout program.
That's been very accretive to what we're doing there on the oil side Brazos Valley, we've had some clean up as well, but we've also seen continued lift evaluation and some actions across the board where that field team in conjunction with engineering and Oklahoma City has done a fantastic job of identifying artificial lift plans.
That has continued to improve that base in Appalachia, you can look at an accelerated drawdown to benefit from our wellhead compression program I'm very accretive to what we're doing from an economic perspective across the field. There and then finally in the PRP once again artificial lift accelerating plunger lift installed gas gas lift conversions.
Et cetera, once again it goes back to the men and women that we have in the field Theyre just doing a fantastic job, making sure that that base production not only improves stabilizes across the board. It's just a team effort and couldnt be more proud of that team.
Thank you and our next question comes from Charles Meade with Johnson Rice.
Yeah.
Good morning, Nick and Jim and Brad and the whole team there.
I wanted to ask a question.
That.
How you're approaching.
Allocating capex with this.
Steep backwardation in the natural gas curve.
Ed.
And it's not just back related for the early part of 'twenty, two but that into 'twenty. Three so can you give us a sense of.
Well start to see these these high gas prices in the near term how are you guys approaching.
The allocation across assets in 'twenty, two and then out into 'twenty three if that's not too far out.
Yes, Thanks, Charles and I. Appreciate the question, we talked about or I talked about in my prepared comments the concept that our capital allocation is not heavily influenced by short term fluctuations in price when we laid out our capital allocation. Initially for 2022, which is some number of months ago now and we continue to.
Iterate around it we laid out a strategy that said, we know the Marcellus has takeaway capacity constraints and so there is a limited amount of capital that makes sense to spend there and we think we're spending an optimal amount and the haynesville, we're integrating an acquisition and so we know we're going to be focused on that integration, we want that to go well, we're going to be really.
<unk>.
Intently focused on our execution in the near term here incorporating the volume team incorporating the learnings we get from the vine team and assets and making sure that we are moving forward.
And realizing the synergies that we had estimated for that transaction. So we feel good about that capital allocation and don't see that moving at least not materially in the near term.
The Haynesville has the capacity to take more capital in the future and as we see the market play out and as we see our execution succeed you could see us add capital to that.
In coming years.
In the Eagle Ford again.
Less of a you are asking about gas but.
We feel good about that capital allocation, there being stable until something shows us differently that we should that we should accelerate and so.
When we see $5 on the strip or even the November Nymex price settled at $6 20, which is just remarkable and we don't really want to chase that we know that is well above our own breakeven breakeven for.
Nick.
Sorry, I had a little bit of a mic problem there we expect that.
That.
The prices should moderate in the way of the strip is backward dated.
That said I mean, the backwardation that you see out into 'twenty, three and even into 'twenty four still delivers a pretty great price for natural gas relative to our portfolio. So we think we can be very prudent in planning for long term development programs and these assets, we don't want to chase prices higher in the near.
Term.
With a rapid growth ramp and we want to lay out a stable.
And predictable development program, which resulted in stable and predictable cash flows.
Got it got it and then picking up a little bit maybe on the on the South Texas piece.
With that 15% of your Capex you talked about.
PRP in Brazos Valley, but the other one you mentioned is the Austin chalk.
That kind of sits on top of yourself, Texas assets. So can you can you talk about what you're pursuing in the Austin chalk, whether it's the whether you see it as more prospective on your acreage for oil or gas and and what you are.
What you're testing there and what are going to be some of the key outcomes, you're you're focused on.
And.
End of 'twenty, one into 'twenty two.
Sure. So we've been paying a lot of attention to what offset operators are doing in the chalk near us.
Begun to test it we don't have any results to report yet we've seen some some very interesting and encouraging results in the offset operators.
We think we have a lot of acreage that is prospective for similar outcomes. We don't yet know exactly what the aerial extent is across our acreage and we have a lot to learn about it but I'll, let Sheldon tell you more about it.
Thank you Nick.
Yes, we have the Austin chalk is prospective over a wide area and our asset and so really when you look at where we're at others really more dry gas in the south. So we believe in our area is going to be more volatile oil and then potentially gas condensate, so primarily oil window and our asset. So that's why we're focused on we've got plans to drill well the wells there.
And then as we see those results.
Can be sharing those but very encouraged by what we've seen is quite a bit of offset activity right around our position and so that's a focus area for us at the end of this year and into 'twenty two.
Thank you I appreciate it.
Thank you and the next question comes from Matt Portillo with <unk>.
Good morning, all.
Good morning, Matt.
Quick question on the balance sheet, Nick where would you like to see your absolute debt load.
The the Vine acquisition, I guess disclosed roll through and then on the maturity window. What left can you do from a balance sheet a debt reduction perspective, as you look out over the next four to five years.
Well.
Very comfortable with the debt that we're absorbing in the vine acquisition, we're still going to be well below one times leverage we are generating a lot of free cash and so as you roll forward the balance sheet to future periods, you see that net debt level continue to decline.
We have a little bit of that that we could go out and prepay, we may do that at some point.
Just to manage cash flows and the.
The appropriate with how we look at it but we're really not in a rush to reduce debt further than it is we think some amount of leverage on the balance sheet is good and helps.
Achieve.
Better returns to equity and so we're very comfortable maintaining.
Any balance sheet below one times and that's really what we have today and what we expect to continue so we'll engage and maturity management as it makes sense to do so we will always pay a lot of attention to.
Whether or not there is an opportunity to refinance something accretively and if there is then we would do it.
If prices don't encourage us to do that then will allow that to mature and pay it off as it matures. We expect to have cash reserves to be able to do that and plan for that over time without a challenge.
Perfect and then I guess, just a dovetail to that question given how pristine balance sheet is and given the maturity window as you think about two.
22 capital allocation and return of capital with the equity trading at an attractive 20 plus percent free cash flow yield our buybacks more attractive in your view at this point as you think about incremental returns versus incremental variable dividends or just more broadly how do buybacks play into the broader strategy to step forward.
Buybacks play a role.
Obviously, you you have to be cautious about in cyclical businesses the history of buybacks.
Right.
These tend to have excess cash in a time of their stocks are high at the moment.
No one would call our valuation high.
On a multiple of cash flow and so as you look at where things sit today buybacks would be something that we would likely discuss and consider with excess cash, but we've got we've got a ways to go we need to execute we need to generate the cash we need to get there before we begin to make any promises about that so.
But just philosophically.
Quickly, we're very open to buybacks, we're just mindful of making sure that.
You don't fall into a timing trapped in a cyclical business.
Thank you and if I could squeeze one last one in on the operational front just curious if you could give us an update on your learnings around the upper Marcellus and Appalachia, just how youre thinking about that and its potential role in future development.
Yes.
Yes. Thanks for the question this is Tim.
The upper Marcellus frankly is looking very good right, we have plus or minus 550 locations in the upper Marcellus that we really like moving forward. If we look back at our trailing 12 months at the rate of return in the upper relative to the lower it's just a tick beneath we're looking at and this is at a lower commodity price.
Looking at plus or minus $80 to 90% rate of return in the upper versus 90% to 100% in the lower and granted that was probably it.
$225 $2 50 gas price, so today's commodity prices and the upper Marcellus.
Is this a star performer in the portfolio frankly.
Okay.
Yes.
Thank you and the next question comes from Doug Leggate with Bank of America.
Hey, good morning, guys, Nick congratulations on getting the CEO spot.
Interested to see what the long term strategy is that you come out with over time so.
Look forward to working with you on that.
I have a couple of questions related to how you think about our strategy and I guess the first one really tails picks up on a comment you made a second ago about.
You don't look expensive on the multiple.
As you know.
Multiple as the output. So I'm curious how you think about how you're defining volume.
You've obviously presided over very different strategies in the past how do you think about the finding and creating value going forward.
Sure. So I guess my perspective on the multiple today I agree with you. The multiple is the output, but it is usually a good short hand way to identify whether or not a company is over undervalued and if we're undervalued in the market today based on a multiple than my takeaway from that is the market is telling us that they.
Don't yet have confidence in the sustainability of the cash flow that we can generate right. So they're not willing to pay as much for our cash flow as they are for our peers and so one of the key ways that I think we need to define value for our shareholders is to execute and show.
Our cash flows are sustainable and that we have a multi year program that can generate attractive returns across our portfolio, we're going to do that by continuing to have a very logical and returns oriented capital allocation, we're going to do that by delivering cash to shareholders around the free.
Cash flow that we generate from that capital allocation and we will do that by continuing to improve upon our profitability along the way as we drill.
Lower our breakeven is across our portfolio and continue to improve our operating costs. It really has to be all of those things that drive to investors' understanding that this is a business that can generate predictable and sustainable cash flows through cycles.
I appreciate the perspective, because we completely concur with that.
Ask as a maybe as a comment on the question Roswell, an awesome job of giving us disclosure to date.
Sustaining capital breakeven levels sustainable inventory those are the key inputs.
And you can really get your thoughts market expectation. So that he can help us with ocwen on a go forward basis that would be appreciated my follow up is a quick one on on cash returns you obviously have a lot of companies like <unk>.
Pull opportunity to decide how best to do that.
But again I'll want to lean into this tissue about.
Sustainable volume variable dividends basically take cash off the balance sheet after you've earned it.
And if you think about depleting asset base with a finite inventory, which is the generic E&P.
It does actually dilutes equity value and you pay a variable converse leases share buybacks or more I guess permanent.
If you really believe that the stock is undervalued so.
Curious if you could walk us through how you're thinking about the relative bias between those two and how you might return cash.
Again, I mean, we set our variable dividend at 50% of free cash flow for a reason, meaning that the other 50%. We now can go to other returns oriented opportunities and whether thats buybacks or its reducing data if that needs to be done or it's consolidation of other assets that help achieve.
Great capital allocation cost reduction scale and sustainability of the cash flow profile all of those things should work together.
The variable dividend is clearly in place to recognize that at times like right now when you have a very robust commodity price environment. There's no draw on this industry to grow its supply at the moment in a material way outside of in the short term clearly the market is asking for more gas.
Then you have excess cash and that excess cash ought to be returned to shareholders.
And variable allows that to be something that can happen. When there is excess cash and if you get into a downturn in the market we're in.
There is less excess cash then it would obviously shrink.
Layering on a buyback on top of that as I noted before is clearly something that we would be open to and the right time and with the right cash resources. So I would say, we think about it as a balanced Doug we think that our board will continue to debate the best way to create optimal returns.
For shareholders and.
We expect to have a portion of that would be in dividends, which we've set as 50% of free cash flow. So.
I think I think the all of the above approach.
Still matters that we've talked about as early as last spring when we forecasted that we would have a lot of excess free cash flow and we and we talked about what's the best way to start returning that to shareholders. We think theres a balance there and part of that balance again is due to the cyclicality of the industry, they're going to be times, where if you are just always using your free cash to buy back stock.
Youll be buying back stock at the wrong time, so again balancing how you deliver cash we think makes some sense.
I appreciate the perspective, thanks, Nick.
Yes.
Thank you.
A question and answer session I would like to trend for the management for any closing comments.
Great well, thanks again for joining our call. This morning in closing.
Just want to.
Remind you to think about a couple of things as you continue to evaluate Chesapeake.
And there's three principles from which we just from Australia and the first is that we're committed to delivering sustainable free cash flow and returning it to our shareholders.
The second is that we're grounded in our disciplined capital allocation process and regardless of the price environment. You can trust that we will remain focused on an allocation that maximizes returned to shareholders through an appropriate level of investment and a return of capital and.
And finally, we firmly embraced a lower carbon future and believe our portfolio is uniquely positioned to help responsibly supply the energy that is desperately needed across the globe. Today. So we look forward to consistently delivering on these principles in the weeks and months ahead and look forward to speaking with you next quarter if not before thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now.
Disconnect your lines.
Yeah.