Q1 2023 Chesapeake Energy Corporation Earnings Call
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Morning, and woke up to the Chesapeake energy first quarter, 20th 20th three earnings Conference call.
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Thank you Andrea good morning, everyone and thank you for joining our call today to discuss chest speaks first quarter 2023 financial and operating results hopefully you've had a chance to review our press releases and the updated materials that we posted to our website yesterday. During this morning's call we will be making forward looking.
[noise] statements, which consists of statements that cannot be confirmed by reference to your existing information, including statements regarding our beliefs goals expectations forecast projections in future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause the actual results.
For materially from our forward looking statements, including the factors identified in disgust in our press release yesterday and another S. D C filings.
Please recognize that is 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 will help facilitate comparisons across periods and much peers for any non.
<unk> manager, we use of reconciliation to the nearest corresponding gap measure that can be found on our website with me today are Nick they'll also <unk> and Joshua Weitz, Nick will give a brief overview of our results and then we were all open up the teleconference. Q&A. So with that thank you again and now turn it over to Nick.
Good morning, and thank you all for joining our call.
Take a few minutes to highlight are strong quarter of execution and some other recent accomplishments and then I'll get right to your questions.
Are your ears off to a strong start we remain focused on executing on our strategic pillars. There are disciplined capital program, which maximizes returns and deliver sustainable free cash flow to fund, our pure leading dividend buyback program.
Operationally, we turned in line 53, well seeing solid productivity in both the Haynesville in Marcellus with Haynesville I P nineties, having improved about 8% from 2022.
If any from new gas gathering off loads and incremental treating capacity put in place in 2022.
Capex a slightly ahead of expectations on the heels of very strong execution from our drilling and completion teams, where we drilled three of the five fastest all time footage per day wells in the geologically complex southern portion of our Haynesville acreage position.
We averaged 690 feet per day in the quarter on this acreage, which is 30% faster than our closest offset operator.
In addition, we've deployed a continuous pumping wellhead technology that enabled our teams to pump a record 36 consecutive hours on a handful of rock.
In the face of a volatile market, we generated 350 million of free cash flow.
About 240 million when adjusted for asset sales, which will translate to a total dividend of one dollar and 18 cents per share for the quarter.
When combined with our buyback program year to date, we've already returned more than 250 million to shareholders.
We also continued to make important progress on our path to be LNG ready.
Connect our production to international markets pricing or gun Bar agreement is a great example of our approach to leverage our operational and financial strength to capture a meaningful share of the incremental LNG capacity coming on line by 2025 and beyond.
Cremant will ultimately provide up to 2 million tons of LNG per annum index to J K, Yeah, an important first step for Chesapeake.
As market volatility continues to be top of mind for investors were very pleased with our position at this point in the ear.
As I said before Chesapeake adult thrive in this environment.
This starts with the strength of our balance sheet, which has only gotten stronger with the closing of our two initial eagle for sales for $2.8 billion as of April 30th we have 1.2 billion of cash on hand, and greater than 3 billion of available liquidity.
This cash is available to fund our ongoing buyback program under which we purchased another 1 million shares since our last call, bringing our total buyback onto this authorization to greater than $1.1 billion with $850 million remaining.
We remain actively engaged with other parties regarding the remainder of article for position, which is primarily in the rich gas portion of the pie.
We're pleased to have recently received a fitch credit rating upgrade the double B plus with a positive outlook, we announced it one notch below investment grade with Fitch attributed the strength of our scale Conservative financial policy. The cash Optionality is foundational to our continued writing improvement.
The drink to a capital program as you saw capital came out on the low end up guidance cause we dropped a reagan the haynesville and Frack ruin both the Haynesville in Marcellus.
Just on the mid points of our <unk> guidance, we expect D. N C capital to decline approximately 10% and natural gas production from them ourselves in haynesville to decline approximately 5% quarter over quarter.
This decline was part of our plan for the year, which is why we reiterated our full year capital in production guidance today.
We will maintain a disciplined approach to executing our capital program in the year ahead, producing an additional Reagan haynesville in Marseilles in the third quarter as previously announced we believe our financial flexibility as a competitive strength and we intend to use it.
We were built to thrive in all markets, including this low gas price environment, and we continued to adjust our program as warranted by market conditions.
Despite the current market volatility, which we do expect to persist.
To the premium rock returns and runway of our portfolio are best in class execution, Christine balance sheet and the added financial flexibility provided by our Eagle for an asset sales or confidence in the strength of our longterm outlook remains unchanged I'd.
I'd like to now turn the call over to questions.
[noise] My question.
To ask a question.
That's one on your telephone keypad.
If you aren't careful.
Okay.
John Your question.
Yeah.
At this time.
Trust him on the roster.
Well. Thank you good morning, everyone on the appreciate you getting me on the call Nick.
Ask you first about your comments in the.
And the prepared remarks or actually in your press release about.
Being prepared to adjust the activity and then you just talked about you've kept your guidance and your Capex guidance unchanged. So can you walk through what it would take for you to to to.
To make those adjustments I'm, assuming laura activity or perhaps slow things done some whether it be capital of smoking wells or whatever you could walk us through that and maybe and I don't need to that what are you seeing in your nose operated.
Activity as well is there any sign of things slowing down, particularly the Angel I'll go to follow up please.
Sure. Thanks for the question.
From an activity perspective, we're pretty pleased with the way we're setup right now we've reduced our activity coming out of last year, which has allowed production to fall a bit.
We know that further activity reductions at this point really you're gonna have an impact on 2024, and we think it's a bit premature to make that decision. The contango that's present in the curb for 2024.
Looks pretty constructive at the moment.
And if the activity reductions that are predicted throughout the market come through we think 2024, you should follow the contango. That's there you know maybe not perfectly but it should be certainly more constructive than this year.
So we want to maintain our productive capacity for 2024 now in the near term we have a lot of flexibility in how we think about managing R.
Production and managing our exposure to the market first of course, we have our hedges in place and they give us a nice cushion but.
More importantly, we have a lot of decisions. We can make every time, we go to turn in line well as to whether or not it makes sense to turn that well in line are different and we haven't forecasted doing any of that any further of that then we've already done we've done a little bit through the beginnings of the shoulder season, we've already seen the need to curtail some volumes.
We're gonna do some maintenance that we are choosing to do now in the Haynesville they'll take a little production offline for a couple of months. Now. These are all things that are really prudent decisions to do during a low price environment.
And we'll keep making decisions like that and this is where again I think the financial flexibility. We have is a real strength and we plan to lenient on it and use it as we go through the summer if prices are weak and it's not productive to turn wells in line, we can choose to hold off on turning them in line, but having the activity completed.
We can rely on the contango a curve to make those decisions.
Positive from in N P V standpoint.
<unk>. So in other words, we're pretty happy with where we sit today, if we saw 2024 or the longer term curve change its shape and and fall off then we would definitely change activity more but as we see the longer term curve looking more positive we wanna keep activity, where it is so we maintain that productive capacity.
I'll ask Josh to comment on what we're seeing from a non out perspective, yeah. Good morning, Doug we are absolutely starting to see some pullback in our third party well proposals and we saw a little bit of pick up right at the first of the year.
And are seen as many as 25 proposals kind of come through the door to the first quarter quarter. Today. You know, we're seeing you know maybe 10% of that that same level.
And also those partners that we tend to.
Join up with on well proposals, we're hearing of them pulling back activity. So we do expect to see slowdowns and are not all with activity through the course of the year. It represents a pretty minor part of our program, we have roughly $20 million allocated to that with a good portion of apps that already in the first quarter.
Georgia, I wonder could you translate that to rig activity what would you anticipate.
Gainesville, Big drops loot likes to for the summer.
Yeah. So we think that we've seen roughly can take place to date again year to date, we think you'll probably see another five to probably 10 Riggs continued to come out. This is just based upon her until with our partners, but also even some of our big contractors that are you know signalling.
Of notices the receiving for <unk>, So maybe maybe up to 20 rigs and in total as we get through the end of the summer and we think a lot of that is just <unk>.
Operators, providing notices and then attempting to fulfill the obligations associated with any contract. They may have lap had so that's why we see maybe a little bit of a delay here.
But thank you for that Michael loves a quick one you've got.
First of all I'm getting the cash in the door on the equal for it but.
You've got a sizable amount of your share buyback authorization left I'm. Just wondering how you were thinking about that in terms of use of proceeds the pacing of.
When you might want to start using that cash given the environment on whether or not five G might reset up by Biculturalism nation at some point I'll leave it there.
Yeah. Good question Doug.
We're pretty happy with the pace that we've achieved so far and we came out with originally.
$1 billion buyback, we opted to 2 billion, we've completed well over 50 per cent of that authorization now Uhm. We started again this year following the closing of the first of the Eagle for transactions you've seen.
An incremental million shares bought since our last call.
You know, we don't want to be in a rush to complete this authorization.
We said.
The authorization runs through the end of the year. So we're focused on that timeframe, but I would not expect it to necessarily be rainbow doesn't need to be <unk> and so we expect to have an ongoing program and we think will have opportunities to be more aggressive at times and so.
We'll try to again leaned into that flexibility we've provided ourselves.
Yeah, I think the.
The idea that the company would likely have an ongoing buyback program. After this authorization is clearly on our minds that we want to get a little bit further through this and see how the the next phase of this goes before we decide how and when to address that but you know I think will we we like her.
Having an authorization out there with like having the ability to continue to buy back our shares with free cash flow and I would expect us to continue to do that.
Appreciate it ends with guys. Thanks, so much.
[noise], Yeah, I think that if a if I can just take along a little bit on that that last commentary I mean, your cash balance has ballooned pretty nicely here and I.
I appreciate that Optionality that you know to be opportunistic good just out of curiosity do you see any you know opportunities to use that cash for any kind of M&A or or bolt on acquisitions. At this point in time. It with you know obviously the private companies you are taken off their rigs and gas.
Mark and little bit weak right. Now is is there an opportunity to do some very creative bolt on with some of that cash.
Good question Scott I think these are really two very separate questions.
We.
Have an authorized buyback will use that buyback we believe it's important to follow through on what we projected at we are pretty proud of our track record of having done that thus far under our fireback and we think that holds up well relative to the way a lot of other companies talk about and then execute under buybacks.
Separate from that are there opportunities for.
Acquisitions or or M&A out there maybe.
They're hard I would say, they're hard, especially in a down market, where where sellers are not wanting to think about the current market conditions and wanting to look forward to.
Improvement in market conditions.
We stay engaged on the Andy front.
We do believe in consolidation, we think there's value in consolidation. When you follow are non negotiable. So you don't overpay and you buy good assets, where you can have real synergies that are not just.
Radical, but they're driven by operational realities in the field. If we can do any of those things then will absolutely continue to pursue them I view that as somewhat separate from having cash on the balance sheet because anytime that we think about doing any sort of an acquisition. We would always think about is it financeable now.
If we have the cash certainly.
That makes the cost of financing.
More clear to us because we know when our cost of capital is.
Rather than having to think about if there is incremental costs to go out and attract new capital, but that is an important element of how you should think about whether or not it's a good decision to deploy capital <unk> capital worked on the market today, Yes, you haven't but what's it worth on the market and does does the deal major hurdles. So I continued to say that having cash around.
And is a fantastic point of flexibility in something that we.
Want to maintain that kind of flexibility in our business, having that liquidity that cash around.
That said, it's not a justification for doing a deal the deal has to stand on its own.
Okay, that's fair enough and in my follow up question is is on the gas macro I mean, obviously you talked about the contango on the market but.
You know we'd be interested to hear on your thoughts of what you think the gas micro looks like in how does that form your view of of hedging you did add some hedges, but given the contango why not get more aggressive or is there a concern the market pivots bullishly again in in your you know kind of caught overheads.
Well look I think we have a pretty methodical hedging program that takes into account all of those things we.
We know that the market is going to be volatile. We're encouraged in the shape of the contango relative to where we sit today, but throughout last year, we put in place a lot of trades for 23, and 24 and beginning to even put on some trades for 25, where we've been able to look at some wide collars.
To capture that volatility in a different way and it really productive way.
And we think a continued methodical approach will allow you to protect yourself against what is inevitably but uncertain timing from downside and inevitably an uncertain timing from upside and so we're gonna continue to hedge with a methodical approach. We think it's been the right answer.
And.
I think it it works.
Okay and just your view of the gas in my car I've, just kind of curious do you have a <unk> you know like what what is Chesapeake position on you know the current contango did you think it makes sense or you know what what is your crystal ball C.
Yeah, I think the current contango off of a prompt price in the low twos makes a lotta sense.
But I also know that there will be a ton of volatility in the future. I mean, we're excited about the LNG export capacity that's coming on line, that's going to represent true structural demand growth, but you know, let's recognize that that will not just yield a straight.
Up to the right curve, there will be plenty of volatility. These projects are lumpy and so as they come online they have to have lumpy demand to match to them. There's plenty of unmet demand internationally right now but were you actually can bring out a lot of LNG capacity and we have to be prepared for the volatility that comes with that so.
Business should drive.
In that environment, where we have assets that are at the lower end of the cost curve and hold up well through these points of volatility you can see how we're holding up this past quarter and how we hold up for the rest of the year at very low prices. So.
So you know that we will hold up well and prices go back up a bit will continue to work on our cost structure will continue to try to drive our breakevens lower through our business every day. Our team is motivated to do that our team thinks about that everyday and our our actions drive for those outcomes.
And you do that through lowering your costs and increasing your productivity, we think about both sides of that equation.
That to me is the most important way that you manage through volatility hedging is an important component of how you think about cushioning that volatility, but the best way to manage it has to stay at the low end of the cost curve.
I appreciate those comments Nick thanks.
Oh.
Go ahead.
Yeah. Thanks for taking my question.
I guess first just on cause you talked about some rigs coming off the haynesville with expectations that one we're gonna drop are you starting to see any cough deflation and maybe any thoughts on what the magnitude of that deflation could be later this year and then to 24.
Yeah exactly gosh, you know we are definitely seeing trends at the <unk> Costa flattening with maybe some minor sign starting to develop a declining in certain areas and of course a lot of this is just driven by the pullback in activity that we're seeing across you know all the U S mm shell gas basins.
We're seeing bread counts in that sector down about 10% relative.
Relatives, we were you know where we were maybe around the end of this past year.
I'll also seen Frank really starting to come out yeah, I think at its peak Haynesville was around 30, you know we're anticipating that may drop down to this fee was 20 by the end of this year.
I think it remains to be seen how does that impact pricing you know I think that if you listen to some of the service providers there indicating.
Their willingness to relocate some of this equipment out of the gas basins and into areas such as the permanent so that creates a little bit of uncertainty is how that might impact pricing.
But but I'd just say the signs are very positive we're seeing improved operations as well we've kind of using this use this time as well to upgrade some of our service provider. So that you know paying dividends for us right now.
But but again, we are seeing that some potential upside and the cost structure, but I would say, it's just probably too early to change anything just yet.
Just given the uncertainty around tiny and and just overall materiality of the cost reductions.
Got it thanks for that color Josh.
Maybe one for you we've seen some some of your Ian P P or ship their cash return programs away for variable dividends to focus more on buybacks any.
Thoughts on on shifting away from the base dividend program and in favor of more buybacks.
You know will continue to do what we're doing right. Now Zac are are free cash flow, obviously is coming down as we move through this year with lower prices and so.
The variable dividends come down with that we love having the buyback there to continue to use the cash we have to return cash to shareholders.
Yeah, we think it's worked pretty well.
So far we get a lot of varying feedback from investors with.
With some investors really favouring the.
Implied discipline of the dividend balanced with the buyback.
<unk> you know as I've said, all along we're not.
Dogmatic about any of this and will continue to think about what what makes most sense.
He'd like to what we've done so far we think it makes sense to continue it but we'll continue to monitor it and if there's some change in the future that makes sense, we would do it otherwise I'd say, we'll keep doing what we're doing.
Yeah.
The next question comes from Josh Silverstein.
Yeah.
Go ahead.
You know things good morning, guys you.
You've talked about dropping some activity is planned in both the haynesville in them ourselves in in <unk> in three Q, which will define volumes a little bit I know, there's a lot of flexibility in the program you talked about some improved Boston and efficiency gains, but how are you thinking about kind of sustaining that activity into 2024 will you have to add that activity back.
He needs to stay in that that level. The second half activity tastes, though I'm just curious how that looks into the next year. Thanks.
Yeah, I'll I'll sequel, Josh if we see a good strong market next year, we would add activity back or.
Our program requires somewhere in between four and five regs to stay flat in the Marcellus in about six weeks to stay flat in the Haynesville. So.
As we dip below that we know that we are leaning into the concept that the market's oversupplied. That's the right thing to do and at some point when the market is healthy we wanna be back to a maintenance level.
The ability to ramp into modest growth when that makes sense. So yeah, we would add back at some point.
But we're we're not there yet we want to wait and see how 2024 plays out.
Got it and then as part of the the Marcellus program for this year you have almost correctly 50, 50 split between the upper and lower Marcello.
Just wanted to see how upper ourselves well productivity is going in and how you think you know act.
Activity may shift between the two zones going forward, knowing that'd be the upper is a bigger part of the inventory base.
Yeah, Josh you know what I'd say on that is this year. The program is designed to be about 55 per cent lower 45 per cent upper we expect that trend to hold true to that probably for the next couple of years at least.
I would say you know clearly the upper Marcellus has productivity per foot that is less than about 20% to 25% less than.
Where we've seen the lower historically, but again you know we had the opportunities there to extend moderate links you know up to 30% more on average and and so what we tend to focus on when we tried to pro our <unk>. Our drilling schedule is really you know assessing the overall return and capital efficiency and so when you you know take that.
Tiffany in the account for the along with idols, we really see the up or being able to compete with the bulk of our remaining lower.
Inventory and so we really liked the spread that we have today, we've been pleased with the results that we've gotten and uhm yeah look for to continue developing that in conjunction with our remain more inventory.
Great. Thanks, guys.
The next question.
Hello.
Go ahead.
Good morning, all.
I just have a few quick questions on infrastructure side, just curious if you could give us an update on infield infrastructure and your last year, there were quite a deacon strange surround processing and treating and just curious how you guys feel about the progress of that infrastructure expansion in 2023 and potentially twenty-two.
Any for just trying to get a better picture of how things are going at the field level.
Yeah. This is Josh we've made a lot of progress on that and have been really pleased with how that starting to show up you know in our our production both with her base, but also the benefits is providing to the tales that we've had today Nick referenced in his prepared comments that we've seen an 8% improvement.
And are in the 90 day I PS and we think that's directly attributable to the fact that we're seeing lower gathering pressures and the <unk>.
System, which is allowing us to no more optimally manage our chokes.
In addition to that you know one of the reasons that we were a little bit ahead of our our guidance and the Haynesville on production as you know as we see third party maintenance occurring across the field, we have more opportunity now to offload gas into adjacent gathering of trading systems, which is minimizing the impact.
Of those third party outages. So again really really pleased with the progress that we've made we're gonna continue to be working that to ensure that you know the capacity we have in our midstream spaces as matching production, we expect from the asset.
Perfect and then as a follow up to the the Haynesville question. They're just curious if you can give us an update on the progress around momentum how you're feeling about the project moving forward and then maybe if you could just speak to the.
The base and infrastructure expansion from a takeaway perspective as it progressed through 24, and 25 and what that might mean for basis, especially if we start to see a flattening out of painesville growth going into next year.
Yeah. Good morning. This was on the first part of the question. So the the Punch line is the momentum project is on track. We are actively engaged with the momentum there in terms of monitoring the progress and everything in terms of securing right away then bye and other equipment that's in.
Needed to get the project and service is all on track.
We have previously guided the in service data is end of 2024, and that's still on track So I'm pretty pleased with that project and how it's progressing.
On the second part of the question around overall infrastructure bills.
I think it it it will <unk>.
Continue to develop let me think about long haul pipes several different projects are being billed.
<unk> N G three being one of them.
Essentially that'll allow production to the <unk> to be picked up at the <unk> gathering system, and Haynesville and bring it down to Gillis, which is closer to the LNG conflicts. We we know of other projects, which are also being billed at the same time. So at least the good news is in Louisiana theirs.
The environment is friendly enough that'd be think more of those kinds of pipelines can be built.
The other thing, which was going which is happening in conjunction with that is all these different liquefaction facilities are being built so all of that.
I think is is what gets us bullish about the natural gas my crew and when we looked at the contango, that's reflecting that overall as Nick said earlier, we are setting up our business to be LNG ready and as in Linda demand comes through will be ready to deliver into it.
The next question.
Oh.
Let's go ahead.
Thanks, guys and thanks for taking my question I guess I'll start on the Eagle soared rats on getting the first two packages done.
Multi prices had been a bit volatile and interest rates.
A rising just any thoughts on the progress of the last piece of rich gas assets and I think last quarter, you had said that EBITDA, but that actually it was about 300 million.
What's the estimated now with with lower commodity prices.
Well so.
This is a moment on the first part of your question. So we we demand an active dialogue with the interested parties. There you currently reference that commodity prices and seen volatility and then.
Interest rate environment has been equally volatile so financing market remains challenge. The good news is the the buyers there'd be had been engaged with all throughout the process have been actively in dialogue with us that that bodes well the as we've said all along we are prepared to hold on to be answered if you.
Don't get to do the right price.
So again all those options are on the table and we are continuing to work through through all of that.
On the second part of your question around EBITDA for the <unk>.
It's about 250 million for the year is would be able to guide you at this point.
Great. Thank thanks for that Mole, then I guess, you've talked a little bit of a N G.
You mentioned the contango in the gas curve.
Just any thoughts on the current and maybe near term LNG feed gas demand.
<unk> seemed to have slowed down a little bit since freeport came on towards the end of March.
And then there's been some talk of Golden past, maybe putting some gas earlier than expected. So just.
Ah more near term look on on what you're seeing from the LNG guys Oh.
Oh.
I don't think we're hearing anything different than you guys here Uhm, but you were encouraged by what we're hearing it sounds like Golden past is making great progress it sounds like a better global is making great progress.
But again, we don't have anything proprietary there.
Encouraged by all of it it seems like those projects are moving along and.
Hope to have.
Great. Thanks for the answers.
Thanks.
[noise], Hey morning, Guy just following up on Nick's comment on the the potential pivot in production in 24 uhm it sounded like maybe you're implying that the the.
24 production profile could kind of Max match the strip.
Currently about $4 at the end of the year, but I wanted to clarify would you still grow that four dollar handled dropped back into the three's, because it's still above your breakevens or or if you're looking at that that high level of <unk>.
And we're looking at all kinds of scenarios for 2024, and we're not ready to give you an exact answer of how we think about allocating capital to the year, yet because we don't have the full set of information just set our plans for the year, we have a lot of flexibility and all I'm trying to convey is that if prices weekend.
And 24, we can either keep activity at a low level, where it is today are lower level, where it is today and we can lower it further and if prices show the strength in contango that they have or or strengthen we can bring activity back in put ourselves back in a position to grow as we approach 25.
All I'm really trying to highlight is that we're encouraged by the contango that we see and we're encouraged by the changes that we're seeing in the market that we believe should help to underpin that contango now there's many things that could still happen between now and then that could change those outcomes and so we'll watch it closely and.
We'll make decisions about how to allocate capital for 24, if we get closer to the end of the year.
That's a great color. Thanks, and then follow up on on LNG I think that you know you've indicated before that you do want to kinda limit your exposure exposure to international pricing, maybe 10% to 15% of your total profile could you maybe walk through you know why you don't feel comfortable with a higher level or why you pick that level.
Well I think we've said probably 15 to 20, but there's none of the real magic number within that range.
The way that we have come up with that range as we think about the capacity of export that will ultimately be present in the U S and and today, we would say that should be about 20 ish percent of the U S market would be a demand for the U S would be represented <unk>.
Four capacity.
It could be a little higher could be a little less depending on exactly which project show up and so we feel like 15.
15 to 20 per cent of our production is exposed to international pricing that would match.
The demand and the you ask that is exposed international pricing and that would keep us balanced to the drivers of what's gonna pull on supply from the U S.
So you know, we'll we think that's a good place to start it's gonna take us a while to get there as you've seen these contracts move fairly slowly.
Learning a lot about the way they come together, we're learning a lot about the players in the industry. We're really pleased with the progress that we've made we don't want to be in a rush here. So that is meant to be a long term target.
And we think it makes sense for now and as we moved through time, if that needs to change will change it.
I appreciate that thanks.
[noise] go ahead.
Hi, good morning, and thank you for taking my questions.
Good morning.
You talked about what a bad gas price and madmen going forward gas prices have weak today, and obviously a plan to lean more to what's shaped both just more contrast cyclically.
But thinking more long Tom would love your thoughts around the optimal leverage in cash or would like to have on the balance sheet when prices improve.
Yeah, I think among this is mohammed.
The way, we think about it is the.
The the balance sheet is pretty.
Pretty pristine condition, we we love that we would love to maintain it that way.
The the.
The way I'd like you to think about it also is just think of it in terms of what the boundary conditions are we have publicly in previously said that one turn of <unk> kind of the the Max that we would want to get too.
In terms of what the lower end might be I mean, a little bit of leverage is good. So you know it all depends on what point you are in the cycle. So would you trained more closer to the <unk> EBITDA win.
Potentially at the low point in the cycle versus you want to keep the leverage lower when you're ready to high point in the cycle and kind of flexing it through through the cycle would be that would be the we we mentally think about it but the Max is as I said the boundary condition, we certainly don't want to to exceed one turn.
Three by dying the logic Notionally being if we have if if all things go south and be able to shed.
Activity down then the EBITDA there'll be a generating allows us to pay it off in one year. So we we tend to think of it more in terms of what the Max leveraged should be.
And within within that 021 turn the optimal would kind of flicks through the cycles.
Very helpful. Thank you and also the other point, which we which Nick up made up earlier it was around reducing the free cash flow break even for the company right to perdition had booked for the upcycling abroad. So when prices are lower beyond your marketing efforts and B N G ready <unk>.
G. Any Ada is where do you see potential for for the improvement of Ah make even slum with them.
Oh I'd say, it's just more of what we've continued to do among we've continued to work on longer laterals. We've continued to work on how we target locations within the field, we continued to work on the.
The efficiency of our completions the efficiency of the drill bit.
Every bit of that matters and that's something that we've.
Tried to make it a part of the just everyday thought process around here.
To drive costs, lower while driving productivity higher it's not just about one side of the equation and it's about both.
Yeah as long and I would just say you know are you know well cost you, we talked a little bit about inflation earlier and and really of course, we're starting to talk now about deflation, but clearly that's a <unk> of a tailwind for us and it's gonna pride some opportunities to produce Breakevens. We're also working our water infrastructure really hard in the in the hands.
Bill, which has a pretty material impact to overall operating margins there and so those are just a couple of points that I would just add onto that.
Thank you. Thank you so much.
The next question.
Please go ahead.
Thank you and good morning, and thanks for taking my calls.
Just a quick question. So you talked about some of the operational efficiency improvements in southern names that you guys have seen recently I just wanted to get my head around how you should we think of those is progressing further along with linear track or I guess, how much would be G. C stolen about there.
Yeah, Paul I mean, those are I would say just continue to prevent progress along the linear track I mean, we've been operating the Haynesville I enter Marcellus for well over a decade and so I think the big step changes have been made and so it's really about just incremental improvements and continue to chip away <unk>.
<unk> you know part of that is you know off as I mentioned earlier.
Upgrading our service providers, when we can but that our teams are engaged in looking at the lowest level of detail around how we grill, our wells you know faster cheaper safer.
And the same thing can be said on the completion fraud and so it's a daily discussion about you know how do we make our our business more efficient than it than it was yesterday.
Understood. Thanks, and just one quick follow up more talking about no longer term, it's split between the Haynesville in Marcellus does that something we should stick is relatively set in stone or is there. Some your potential modularity based on whether it's take away constraints or in base in <unk>.
Nice and risks or other infrastructure or is that pretty often.
You know that that's a pretty fluid and and a lot of it does end up depending on how the gas markets within their respective basins are playing out and then clearly the overall return is going to be stronger in the Marcellus you know given the strength of our position there, but I would just maybe point too you know our decision earlier in the year.
Pull out a frat crew in Marcellus you know one of the reasons. We did that is we we were seen the set up of a weakening demand situation through the end of the first quarter and into the second quarter and we simply didn't Wanna be completing wells and then turning it on line and enter that week or environment, and so will actually see ourselves down a little bit on pills and.
And the second quarter I think we'll end up with you know somewhere around 13 tales come in in line and again, that's just simply to acknowledge that that market will be weaker in that period of time, but that doesn't necessarily represent a long term view again, just a short term impact.
Impact due to a local market conditions.
I think the only thing I would add to that ball is you should think of Marcellus is kind of the base load because we maximize capital allocation to it that is our best athletes and you should think of Haynesville as the flicks engine, which allows us to flakes up or down depending on what they are seeing with the with the prompt pricing.
Understood makes perfect sense.
The next question comes from Y'all parks.
Others.
<unk>.
Hi, good morning.
Good morning.
Wanted to check in on.
Something around the servicing by on that.
I.
Is it safe to say that that they are still in those signs out there among the larger service vendors of any appetite for them.
<unk>.
Rolling out additional equipment, new builds an and so forth and I was thinking about that in the context of sort of.
If if service coffee with a little bit of.
Really fun inflation, if if they stay high if you know or the Reagan.
For the industry are relatively static.
It.
It does it.
It seems like that would be an upward pressure on the price that the industry would need to get for gas in order to be able to supply the LNG demands going for it. So I just wanted to check on that as far as you can tell so I'm no signs of any relief I've, Sir the the overall equipment capacity front.
Yeah, No I mean, clearly through the end of last year. We saw you know really high utilization rates of you know the high spec rigs and <unk> you know as we're out you know talking to service providers you know, we're not seeing any strong signals.
Then you in deploying capital into new equipment, but where where we are seeing that is I think I could use. The example of the dual fuel or probably even a better example is that E fleets.
You know they are starting to realize the operational efficiencies and cost efficiencies associated with those so we are seeing some of those start to come out into the market, but in most cases, when they bring that and that means they're retiring <unk>.
Less efficient older piece of equipment again generally the diesel fuel units.
You know as that overall capacity across the service sector remains tight I do think that you know can potentially no longer term you know create a little bit of a headwind force from a service cost standpoint, but that's why we remain so focused on partnering with the best service providers in the industry.
To help you know drive additional operation efficiencies, which in turn offsets any future inflation that we could see.
Great Thanks and.
Just wonder you know as we have had a a few more months tick by with.
Oil remaining relatively strong and near term gas.
Ah struggling a bit.
Do you have any updated thoughts on on sort of the associated gas piece of the puzzle.
And the from the Permian in terms of.
Well I guess, you know supply a supplier to the golf or.
In terms of what what impact that might might have on sort of longer term LNG.
Generally no you know, we think with oil prices remaining constructive the pipes that are built from the Permian.
To the east are gonna be <unk>.
That's kind of how we think about how to model associated gas.
Okay.
No. Thanks a lot.
[noise].
Benchmark.
Go ahead.
Alright, thanks, good morning.
Just a follow up.
Follow up on the the Haynesville break view.
So you know another 10 to the end of the summer.
Curious if that's your current visibility if you think that's sort of trough or it's really dependent on whether somewhere materializes, all that macro stuff that could pressure prices in the third quarter for instance that we could see another leg down and specific to Chesapeake.
What is your willingness to incur any you know early contract termination penalties.
Celebrate.
Rick drops on your end.
All of your questions to us.
I think further drops then what are currently projected are gonna be reliant on the.
2024, and beyond curb moving.
Don't think you're gonna see red drops come from just a summer crash of prices should that happen should we hit a wall of storage going into November 1st and and late summer fall prices really fall on the front months, but.
If the longer term curb holds up I don't think you see rig changes.
The longer term curved notes down then I think you do see rate changes.
As far as our willingness to think.
Think about any.
Penalties for.
Reducing rigs that are under contracts, usually we can navigate that we can navigate it because we have scale and we have big relationships with are rigged providers and we have a staggered set.
Set of contracts and so we try to maintain flexibility where you.
You could make decisions like that and not incur penalties that would be cumbersome.
Okay. Thanks for that.
Nick I guess on you know some clarification on the LNG ready you know strategy because it seems like you have ample coverage of your current LNG direct LNG exposure.
So is is it.
That I think reading between the lines LNG ready does not need maintenance it means some level of growth.
So does that mean, you know willingness or desire to have more direct exposure cause I think you've sort of said that you know is it you would like a bit more but maybe not a lot more but yeah, I guess blowing the question down.
You have more than enough.
Local production to satisfy Europe , LNG exposure, so white growth at all.
Yeah, I think we've been pretty.
Clear and consistent and our message that we're comfortable with 15% to 20% of our total gas production as a company being priced under international prices.
The concept of being LNG ready means that we want to be connected to the right infrastructure have the contracts in place and then as the U S market grows from a you know approximately 100 101 Bcf market today to 110 over the next few years and eventually towards <unk>.
115, or 120, we wanna be in a position to help supply that growth.
That.
The decision around growing is far out in the future. We want to you know the concept of being LNG ready is to be in a position that if the economics of supplying that growth are attractive we can choose to do it.
Okay. Thank you yeah I appreciate that clarification.
Okay.
I'd like to try that.
Hello, So Friday closing remark.
Thanks again, thanks, everybody again for the time. This morning, you know again, we're looking forward to the second half of the year here as we go through the summer months, there's gonna be.
Plenty of volatility in the market and a lot of decisions that we think we have the flexibility to make in our business, we like that flexibility, we intend to use it and.
And we look forward to continuing to generate good returns for shareholders throughout all all these points of the cycle. Thanks again for your time, and we'll see everybody at conferences and their other engagements over the next couple of months.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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