Q4 2021 Chesapeake Energy Corp Earnings Call
[music].
Good day, and welcome to the Chesapeake Energy 2021 fourth quarter and full year results teleconference.
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I would now like to turn the conference over to Brad Sylvester. Please go ahead.
Thank you Sarah good morning, everyone and thank you for joining our call today to discuss Chesapeake <unk> fourth quarter, and 2021 financial and operating results.
Hopefully you 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 forecast.
Cash projections and 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 from our forward looking statements, including the factors identified and discussed in our press 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 help facilitate comparisons across periods and with 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 today are Nick the Lasso, Mohit thing and Josh speeds.
Nick will give a brief overview of our results and then we will open up the teleconference to Q&A. So with that thank you again and I will now turn the teleconference over to Nick.
Good morning, Thank you for joining our call this morning.
To address your questions. However, before doing so I want to quickly highlight a few items.
First I'd like to welcome a couple of new members of our executive management team.
We have windows Mohit joined.
Joined for bps, and Josh beats has joined from Conoco.
They are both proven leaders with diverse skill sets that strengthen an already deep and strong team here at Chesapeake.
Additionally, they bring an external perspective from leading organizations that we found valuable immediately as they joined.
Many of you have met them already and for the rest of you I look forward to you being able to spend time with them in the coming weeks.
I recognize that you are likely most interested to discuss our 2022 outlook. However, I think it's important to highlight how we clarify the strategy of Chesapeake and what we believe will drive attractive returns for shareholders for several years to come.
First we strengthened our portfolio around great assets with significant inventory of high return drilling locations and have done so while protecting our very strong balance sheet.
We've established a capital allocation program with the importance of discipline, a significant return to shareholders annually.
Finally, we prioritized our commitment to deliver reliable affordable and lower carbon energy solutions to the market.
Through our continued focus on ESG programs.
The events unfolding in eastern Europe . This morning highlight the crucial role our industry can play in the energy security of the globe.
Being in a position to do so with as low a carbon footprint as we can is more important than ever.
Our results in transactions pursued in 2021, a great evidence of the early success of this strategy and set us up to continue to deliver sustainable results in future periods.
A couple of the most significant highlights from the year from the full year 2021.
We delivered on our capital program, we generated over $1 2 billion and adjusted free cash flow on a $735 million Capex program.
We established what we believe is one of the most compelling frameworks in the industry to return cash to shareholders through our aggressive dividend and buyback programs.
We'll be paying out over $1 76 per share consisting of our first variable dividend of $1 33 per common share as well as our base dividend of <unk> 43, and three quarter cents per common share in March.
We announced the $1 billion common stock repurchase program, which we expect will be executed by year end 'twenty three we.
We closed on the Vine acquisition. The integration has begun and continues to go quite well.
We remain on target to close the cheap acquisition and the powder River Basin sale later this quarter.
These transactions position us to focus on operational excellence in 2022, a hallmark strength of Chesapeake.
Turning to 2022, we're squarely focused on continuing to demonstrate the sustainable cash flow generating capabilities of the company and returning differential cash to our shareholders.
In the year ahead, we will maintain our disciplined approach to capital allocation across our three high return assets efficiently generate free cash flow as we anticipate $1 90 to $2 1 billion of cash generated in 2022, which is a 60% increase year over year.
This illustrates what we mean by our acquisition non negotiable the transactions must make us better not just bigger.
We will return significant cash to shareholders.
Projected to pay between $901 $1 billion in total cash dividends and Additionally, we expect material progress on our $1 billion authorized share repurchase.
If you assume we execute on half of our repurchase program. This year, our combined yield for dividends and repurchases would reach about 18%.
I firmly believe the magnitude of our program to return cash to shareholders consistently over time is a critical competitive advantage for our company.
We're encouraged with where we sit today and we look forward to executing our business in the year ahead and now welcome your questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset.
<unk>.
To withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Josh Silverstein with Wolfe Research. Please go ahead.
Yeah, Hey, Thanks. Good morning, guys. Just wanted to ask a question Nick on that the yield you talked about flexi.
Flexible are you on the buyback program versus additional dividends.
Maybe to take advantage of some some stock dislocation relative to the commodity price.
So if any.
Any help there would be great.
Sure. So we're really pleased to have that buyback authorization in place and it's pretty large and $1 billion.
Pro forma for the Chief transaction it's.
It's going to be in the neighborhood of 10% of our market cap.
If we find ourselves with more cash this year than we are currently expecting I think we'd probably stick with our framework of 50% of cash flow.
Going to the variable dividend, but that would still mean that there's more cash available. So.
The question is would we contemplate increasing our buyback if we find ourselves with more cash than we anticipate the answer is sure, but we've got plenty to to execute on in the near term and we're going to go get after it.
Got it and then.
I know there's been a lot of focus recently.
What's going on with pipelines up in Appalachia, but in the <unk>.
Fourth quarter, there was some widening differentials down in Louisiana, just address what's going on there.
Whether there is infrastructure concerns there.
Now with the growing.
Opportunity to potentially export more LNG from the U S.
If you guys are able to sign up some marketing agreements to go and get exposure to international pricing.
Good morning, Josh. This is mohit. Thank you for that question there are.
Two parts of your question, maybe I'll take the second one first about the LNG.
We are pretty excited about the ability to take some of our molecules and get them on the water. So we are in active dialogue with different counterparties.
Nothing is quite to a stage, where we're ready to make an announcement, but I think youll be pleased to know that we are in active dialog with <unk>.
Several different companies and counterparties that potentially get our gas.
On the water such that we can get pricing, which is linked to international LNG pricing so more to come on that.
On the first part of your question around the basis, Yes, we did see.
The widening of the basis in the Haynesville in December and that's similar to what I would say our peers in Haynesville also witnessed.
We werent unique in that sense from a pipeline perspective, yes, the CGT had some repair and maintenance going on but in December .
Led to some backup.
It very well, but as that pipeline came back on that Debottleneck. The volumes, we're able to move and what we have seen since then is that the basis has normalized.
The last thing I would say as we actively monitor it Josh and as we see opportunities to lock in some basis hedges, we're opportunistically doing that.
Thank you for your question.
Okay.
Okay.
Our next question comes from that.
Okay.
P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my question.
I guess first on the buyback.
Clearly got the $1 billion authorization out there can you just talk a little bit about how soon you plan to start buying back shares and how you will allocate capital to the buyback in the near term.
Yes, absolutely so.
As as you might imagine we announced this buyback program in December you see that we haven't.
Bought any shares yet and so.
Pretty much as soon as we announced the buyback program, we found ourselves in possession of.
Material nonpublic information related to the transactions, we announced in January .
The possession of NPI, there probably happened a little faster than we anticipated and so we didn't get to start on that before year end.
So now as we have announced those transactions.
We have the quarter completed and we are approaching.
We're approaching a time of close of those transactions we will.
Soon be in position to have all the information out related to those transactions, we need to so that we can be clear two two to act in the public markets.
We've got to get all that done and as soon as we do we'll be ready to go.
We just have to navigate the rules here, but we're eager to get started.
As far as capital allocation goes to it.
We have $1 billion authorized we've given you some assumptions both in my comments this morning and in our slides around half of it were to get done this year, what it means to our yields there is no reason why it would need to be half or would be limited to have in this calendar year.
We will be.
Cognizant of market conditions, we will be cognizant of trading liquidity, we will try to be efficient.
As you might imagine we also won't be terribly prescriptive publicly ahead of doing what we're going to do we need to make sure that we approach the market with the appropriate.
Manner that doesn't.
It doesn't position.
Trains against Us and so, we'll we'll approach and I think appropriately but.
Eagerly.
Thanks, Doug.
Color, maybe one on an basis.
Theres been some fears in the market on Appalachia basis, blowing out, especially with the recent delay of the MVP pipeline can you just talk a little bit about your outlook for basis in Appalachia.
Zach this is mohit.
I'll try to address that.
As I said before that's something that we actively monitor.
If you recall, when we announced the chief deal in January .
We had talked about some of the synergies which are coming in from increasing amount of getting our <unk>.
Volume out of the basin, such that it gets out of basin pricing and get it to better markets.
It is overall as we all know Vince.
Constrained market. So that's something that we actively monitor as well.
What gives us most hope and maybe I'll pivot around too is just the quality of the asset.
Good that even at the kind of prices in the netback that we have we are realizing some very very attractive economics.
The plan is to just run the asset obviously, we won't be growing it too much because it's constrained, but the basis, we keep monitoring it and to the extent, we can try to get some physical and financial hedges in place to protect ourselves.
Just one quick follow up one of your peers in Appalachia, you added last night that there'll be allow us or elaborate northeast Appalachia production to fall slightly this year, how do you think about filling that gap.
Of capacity there.
Hey, Zach this is Nick.
We have great assets, and we consistently pointed out that.
This asset has the highest return asset in our portfolio and so what you've seen us do over the last couple of years is as there's been market capacity, we've been willing to fill it.
Should that continue to play out we would.
We would look to do the same thing.
We talked about when we announced the chief transaction then.
We expect to be able to deliver more volumes out of the combined base assets of chief and Chesapeake given the way that we will be able to manage pressure across the joint gathering system. So.
If there are other volumes declining in the basin, we welcome having access to more market we.
We generally believe that.
The market should be filled by Marcellus volumes before any others. Just if you think about the supply stack and so.
We own a lot of it and if there is an opportunity to do so we will continue to do that I think we can probably do it with the.
The Capex program, we have in place it might just be able to accelerate how we think about those incremental volumes, but if theyre became an opportunity in the future too.
To grow volumes in that basin, we would be eager to do so.
Got it thanks, guys I appreciate the color.
Our next question comes from Doug Leggate with Bank of America. Please go ahead.
Thank you good morning, everybody.
Post chief.
What is the inventory depths for the portfolio. We know we're in a depleting business with a finite inventory.
Your ex growth.
I guess strategy as it stands today, what do you think thats sustainable inventory depth looks like the number of things cleaned up after the deal is closed.
Hey, Doug.
So yes, our inventory depth is really pretty attractive in the Marcellus and Haynesville, we have quite a lot of acreage tremendous rates of return and a pretty robust very long inventory, obviously, it's super dependent on how many rigs you run but at the current pace that inventory is going to be.
Quite quite a bit far out into the model.
Certainly in the in the decade range.
A little longer.
On the Eagle Ford.
As we think about allocating capital across what was our Brazos Valley in our South Texas positions as one broad Eagle Ford position.
That inventory is quite long as well, there's a number of things that we've talked about doing in the near term that we believe are going to enhance that inventory over time.
Such as the Austin chalk and proving out some of the spacing and what was the Brazos Valley area, but that also is an inventory that should approach 10 years as well. So we feel really good about the length of inventory we have in our portfolio. We've obviously just added quite a bit of inventory with both divine and the chief transactions.
And think that we have.
A very sustainable model for a long period of time here around the cash flow generating capabilities that we're putting out.
Okay. So so basically a decade, plus how we should be thinking about it.
Correct.
So five years from now you've got five years of inventory.
Five years from now you are talking about having paid out $5 billion in dividends.
The easiest way to destroy value Nick why are you doing that.
So I think Doug we've talked about this quite a bit and.
Our dividend program. We believe is important to return cash to shareholders, particularly in times, where like right. Now you have pretty robust commodity prices that are generating cash flows well above where you believe you should invest we've shown a willingness to consolidate more inventory into the portfolio and we've shown.
On.
We can do that in a pretty efficient manner with our capital structure. We did one with most of the equity we did another with a lot of cash.
The cash flow profile that we have as a company has plenty of room for continuing to do things like that when they make sense when they meet our non negotiable and after we've digested. These two transactions so.
I don't think that our dividend approach.
<unk> counter to a strategy that results in a sustainable business over a long period of time.
No I wasn't referring to M&A opportunities, Nick was talking about but I realize youre bankruptcy sponsors wanted to get some money back, but if you really believe there is a dislocation in your stock a variable distribution 1 billion, which is the short term holders. It does not pay new equity holders looking to exploit what you have said.
In the past is an undervalued stock yesterday range resources was up 13% on a buyback announcement, how long will it take you.
In terms of whether the market recognizes your strategy in terms of cash returns would you consider pivoting how long will it take you to pivot because if you really believe your stock is cheap up $5 billion could buy back a heck of a lot of stock.
Yes, I think it's a fair question, Doug I mean, we've we've said all along that.
We believed in all of the above approach here made sense and if shareholders are not benefited from what we're doing then.
And then we would pivot in the future.
Just like we said on the last call. When we discussed this the first variable dividend Hasnt hit People's accounts, yet, we just announced it today wed.
We'd like to see that play out.
<unk> had a lot of conversations with shareholders.
Around this topic and there is a real appetite to see cash dividends.
And we believe that it.
It does help to have the all of the above approach I mean, we do have a buyback authorized that again pro forma for the chief transaction is about 10% of our market cap. So we.
We certainly agree with you the buybacks play a really important role here and if returns are not being maximized through a combination program or through the weighting we have of dividends and buybacks.
Would we consider changing that in the future sure of course.
But we feel pretty committed to the strategy we have today, so we're going to.
Go down that path and then.
If things need to change they'll change.
Thanks, Nick.
Yes.
Our next question comes from.
With Wells Fargo. Please go ahead.
Hi, Good morning, guys and thanks for taking my questions.
The first one is around the hedging strategy, we noticed that you added some hedges portfolio in gas.
Nick or move it.
Maybe talk a little bit about how do you see hedging in your longer term plans.
Hey, Nick this is Nick so, yes, we think about hedging as I've described before as important to underpinning.
The capital program.
As we talk about we.
We have a pretty large capital program in a capital intensive business like this the midpoint of our Capex guidance for 2022 is 165 billion.
And so we expect a pretty robust return on that capital program.
We don't set our budgets with a view on only the strip we know that there is volatility and we plan for that volatility.
But it's great to be able to underpin the return profile of that capital program through a hedge.
Through a set of hedges that allow you to know you have some downside protection to the money Youre putting out there is always a big lag when you decided to drill a well until you actually see.
See the benefit of that well being online generating revenue and a lot can happen during that lag time, and so derisking. The return profile of each of those capital decisions is absolutely. How we think about our hedging program one of the things you've seen us do over the last year that we think is evidence of our balance sheet strength and a really positive way is used a lot more callers.
And the SKU around collars has been pretty attractive and so you see that the hedges we've added have been primarily callers.
And we think provide certainly plenty of protection on the floor side with some nice exposure to the upside as well.
Yeah.
That's very helpful.
My other questions.
On service cost inflation.
Noticed.
It's a two part question one you saw some things in the Eagle Ford and Haynesville that you did raise cost compared to last year.
If you can talk a little bit about what items, specifically youre seeing inflation on end and whether you think those are more permanent changes to your cost structure or maybe just a little bit.
Driven by the current economic reopening and then the second part is.
In the Appalachia LOE costs were pretty flat, if not down actually so so what's going on out there.
Yes. Good morning. This is this is Josh I think in general if we look at year over year costs.
We're seeing roughly 12% inflation.
Across the board from 2021 into 2022.
Most of this cost inflation I would say by and large we see in pressure pumping.
Sand itself and then sand logistics.
We do feel like we have some protection within our contracting strategy, where we are able to lock in a good majority of about 85% of our capital is tied to existing contracts and.
And so we do feel like there'll be some pricing protection as we work through the year now as you've seen we have baked in some inflation.
Into our budgets most of that is captured in our current estimates and we left a little bit in reserve as well with anticipation that we see a little bit more inflation.
Specifically, we think that inflation is going to come from <unk>.
Labor and also also trucking.
To your question there about the Marcellus.
One of the things that I think is important to point out is.
That we do in fact have some of the best acreage in the Marcellus and what that affords us is to right size completion designs. So really there's a couple of things at play. There first is we have a long long long term contract with our pumping provider, which again I think is it providing us some.
With offsetting a little bit of inflation and then also with the right size of the completions, we feel like that's going to again afford us an opportunity to manage cost.
And then maybe just the last point is our average lateral length is going to be up by about 500 feet on a year over year, which again is helping to balance the cost per foot metric.
Great. Thank you for that color.
Our next question comes from Nicholas Pope with Seaport Research. Please go ahead.
Good morning, everyone.
Nick.
I was hoping you guys could could talk a little bit about.
How about the Eagle Ford can be combined and how you're kind of presenting things.
South Texas in the Eagle Ford.
I was hoping you could talk a little bit about what.
The focus is going to be.
In terms of where we're going to be drilling and.
Maybe you.
You mentioned it in response to Doug I think the.
The Austin chalk is still a part of kind of what youre looking to kind of expand and try to understand a little better I guess.
What are you going to be looking at in 2022 and kind of maybe what are the mile markers, we should be looking for there.
Yes. Thanks for the question that this is Josh again, let me, maybe just provide a little bit of color on our plans for this year and as I talk about the Eagle Ford I'll, maybe start in South, Texas with the asset there.
Right now we have plans to drill right around 60 wells within that program.
50 of those are going to be targeting the lower Eagle Ford.
It's a play we definitely understand.
We very much like the <unk>.
Aaron's well over 100% rate of return on the economics, there and then in addition to that the other the remaining 10 is going to be targeting the Austin chalk and really what we're hoping to achieve there is with some targeted.
Targeted test that allows us to assess spacing as well as completion designs and what that positions us to do is we look at the next year or two.
It's really as we get into a full scale development of the Austin Chalk. We go in optimal and Thats, what were hoping to achieve and Thats why you see the overall balance of well mix. There as you move up into deposits, maybe just a little bit different story, we have 10 to 12 wells that we'll drill in that area.
Majority of them over 80% are going to be targeting lower Eagle Ford really the game that we're playing is one enhanced returns within that we want that to be competitive with the rest of the portfolio and what that's leading us to us a little bit wider spacing.
So we will be drilling wells at about 2000, 2000 feet inner well spacing.
Again, we think that's going to only enhance the competitiveness of that within the portfolio and we also have a couple of wells planned within the Austin chalk within the Brazos Valley area up in the northeastern part of the play we see that that play starting mature a little bit with some pretty interesting.
Partner operated wells that we actually participated in the last in the last year.
That will give us some more data points and even potentially expand our inventory as we think about the future <unk> Valley development.
That's actually very helpful.
Thank you and I'm also curious I mean as you look at.
<unk> kind of simplifying the operational structure you got three big assets now to have had big acquisitions in the last.
Eight months.
The last year.
I guess, what does the opportunity set look like an eagle Ford potential consolidation. It seems like it's been a little bit slower than the rest of the U S.
Basins for for M&A, I'm curious what that what you how you all view kind of the potential or.
The opportunity set for M&A.
Go for it.
Sure so.
There is a fair amount being talked about in that basin as there are in really all basins.
The big disparity I would say across the basin.
<unk>.
The.
Maturity of what's left to develop.
And that matters as we think about what could make us better not just bigger what meets our non negotiable is you have to be able to think about consolidation is something where we could really improve our portfolio and improve our ability to create returns for shareholders over time. So.
I don't I don't know that Theres anything immediate for us in the Eagle Ford there could be.
And we will pay attention to that just like we will continue to pay attention in the Marcellus and the Haynesville. We've continued to say that we think consolidation is an important trend in this industry and we'll continue.
We've also said that at the moment, we're focused on digesting the two acquisitions, we've done so that's where our attention is today, but.
But I think there could be potential for consolidation in the Eagle Ford as well.
It would need to meet our non negotiable and.
There is.
There is probably some stuff out there that could.
But it may take a little bit of time still to come together.
Okay, that's really helpful.
Thanks for the time Thats all I had.
Thanks, Nick.
Our next question comes from Charles Meade with.
Johnson Rice. Please go ahead.
Good morning, Nick and two to the rest of the team there.
I wanted to pick up on that thread that you just dropped off.
On your coal for the.
The chief deal I remember you, saying that you were pushing back from the M&A table and it sounds like Youre still.
You are still in that mode, but.
On the other side of that you're supposed to Doug legacy question.
You mentioned that M&A is going to be part of your longer term strategy.
What are you thinking that you are going to be pushed back from that table and what are the what are the conditions that they would.
Gets you back on your front foot when Youre looking at the M&A market.
Sure well.
It's only been three weeks since we said that so we haven't made a whole lot of progress on.
How do we think about it in three short weeks, but.
<unk>.
We said we wanted to be.
Really focused on integration and that's going to take some period of time, Charles and it's a little hard to predict exactly how long that takes.
The integration of volume is going extremely well.
Our teams are engaged in what now we have a bit of a process around both operationally we took over operations day one.
That went great. We are working the back office integration quickly and efficiently those things take a lot of time and devotion of resources and you want to make sure you get them right. Because if you don't they can impact how you run your business for a very long time and so.
It's going great and.
We're doing all of the planning work ahead of closing chief.
Ready to hit the ground running on the integration of that business as soon as it closes so.
Got a lot of resources devoted to integration at the moment and we have some pretty big expectations about what that integration will yield to us in the way of creating value through that consolidation. So that's where our attention is at the moment.
The non negotiable are real and they matter when and how you would think about future transactions and I guess, one way to say it is that they create a high bar, but when youre in the middle of integrating two others that bar probably moves even higher.
So.
How long it will take us is really a function of what becomes available that would meet those non negotiable and where we sit.
Along the path of integration.
We may never do another deal there is no need to do another deal all that we want to continue to communicate is that we have seen value in the consolidation that we pursued so far.
And we don't foreclose that that may not be possible in future transactions, but it takes a lot of very specific circumstances for that to be true and if it becomes true again, then we will move and if it doesn't then we'll continue to execute on what we have.
Alright, thanks for that elaboration, Nick and then.
Yes.
I'd like to ask a question about the about your buyback approach, but maybe from a different angle.
With the Chief close you could have $2 billion go out the door as part of that consideration is there.
Is there a.
But that target that you want to get too.
Before you working down some of that some of that.
Net debt balance before you.
<unk>.
Uh huh.
A big step up or I guess are really an initiation of the buyback program.
Hey, Charles this is mohit I'll take that so we've publicly said one of our non negotiable says that the net debt to EBITDA target should stay below below one turn and Thats a pretty firm boundary condition. That's all been monitored.
And even when we did achieve deal youre right the $2 billion going out the door because thats the cash part of the consideration that we stressed.
Our financials at different price decks and looked at the liquidity situation and debt metrics and we felt pretty comfortable paying that amount of cash because obviously, we had cash on the balance sheet and then theres cash coming in from the powder divestments, which helps pay for some of it.
Overall, the target I think the way you should think about it is the one turn of net debt to EBITDA.
Is are pretty firm boundary condition and Thats, how we look at it.
But to be clear Charles were on a pro forma basis at closing were well below so we can start the buyback program right way yes.
Thank you guys.
Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Matt Dallas.
So for any closing comments.
Great. Thank you Sara and thanks for joining our call. This morning, we look forward to 2022, where we plan to have an analyst day, and we will go into deeper dive on the technical details of each of our assets and their ability to drive returns over a long period of time.
To be successful in today's market I believe an E&P company must consistently demonstrate three things a portfolio of high return assets with scale manner and ability to generate sustainable free cash flow and return it to shareholders.
And our commitment to ESG excellent.
Chesapeake answers to call for what the market demands today, we have the team portfolio and strategy to deliver differential value in years ahead, and I look forward to continuing to update you on our progress have a good morning.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.