Q4 2023 Chesapeake Energy Corp Earnings Call
Speaker Change: [music].
Operator: Good day, and welcome to the Chesapeake Energy fourth quarter and full year 2023 results conference call. All participants will be in listen-only mode.
Good day.
Welcome to the Chesapeake Energy's fourth quarter and full year 2023 results conference call.
All participants will be in listen only mode.
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Operator: To answer your question, please press start. Please note, today's event is being recorded. I'd now like to turn the conference over to Chris Ayers, Vice President, Investor Relations, and Treasurer. Thank you, Rocco. Good morning, everyone, and thank you for joining our call today to discuss Chesapeake's fourth quarter and full year 2023 financial and operating results. 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 morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections, and future performance, and the assumptions underlying such statements. Please note that there are a number of factors that could cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our press release and other SEC filings.
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I'd now like to turn the conference over to Chris <unk>, Vice President of Investor Relations and Treasurer. Please go ahead.
Chris: Thank you Rocco good morning, everyone and thank you for joining our call today to discuss Chesapeake fourth quarter and full year 2023 financial and operating results 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 looking statements.
Chris: Which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs goals expectations forecasts projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward looking statements.
Chris: Including the factors identified and discussed in our press release and other SEC filings. Please also recognize that as except required by 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 helped us.
Operator: Please also recognize that, except as required by 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 with peers. For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure, which can be found on our website.
Chris: So take comparisons across periods with peers for any non-GAAP measure we use a reconciliation to the nearest corresponding GAAP measure, which can be found on our website with me today on the call are Nick del ASO MAU, It sing and Josh beats, Nick will give a brief overview of our results and then we'll open up the teleconference to Q&A so with that thank you again.
Chris Ayers: With me today on the call are Nick DellOsso, Mohit Singh, and Josh Vietz. Nick will give a brief overview of the results, and then we'll open up the teleconference to Q&A. So with that, thank you again, and I'll now turn the conference over to Nick. Good morning, and thank you for joining our call. We continue to execute on our strategic pillars in 2023, proving we're a company built to deliver sustainable value to shareholders through the cycle. The Marcellus team had another strong year, with well cost improving 17% since Q1. We increased our footage drilled per day by 40% and drilled 9 of the 10 longest laterals in our history in the basin. In Haynesville, we delivered strong production performance throughout the year, benefiting from improved gathering system hydraulics, while our drilling performance continues to outpace our peers in the most difficult drilling environment in the lower 48. Importantly, we accomplished these operational milestones while improving our total recordable incident rate by 40% to an industry-leading 0.14 injury rate. Additional highlights for the year include returning approximately $840 million to shareholders via dividends and buybacks.
Chris: And I'll now turn the conference over to Nick.
Nick: Good morning, and thank you for joining our call.
Nick: We continue to execute on our strategic pillars in 2023, proving where a company built to deliver sustainable value to shareholders through cycles.
Nick: The Marcellus team had another strong year with well cost improving 17% since Q1.
Nick: We increased our footage drilled per day by 40% and drilled nine of the 10 longest laterals in our history in the basin.
Nick: In the Haynesville, we delivered strong production performance throughout the year benefiting from improved gathering system hydraulics, while our drilling performance continues to outpace our peers in the most difficult drilling environment in the lower 48.
Nick: Importantly, we accomplished these operational milestones, while improving our total recordable incident rate by 40% to an industry, leading 0.1 for injury rate.
Nick: Additional highlights for the year include.
Nick: Returning approximately $840 million to shareholders via dividends and buybacks.
Domenic J. DellOsso: Advancing our path to be LNG ready by securing HOAs up to 3 million tons per annum linked to JKM and recently signing an LNG sales and purchase agreement with Delfin and Gunvor for long-term liquefaction offtake, completing our Eagleford exit for a total consideration of greater than $3.5 billion, and receiving credit upgrades from all three agencies and exiting the year with a cash balance of approximately $1.1 billion. Turning our attention to 2024, we started the year by announcing our shareholder value-driven merger with Southwestern. Our combined company will accelerate America's energy reach by accessing more markets, effectively mitigating price volatility, and ultimately increasing the revenue per unit of the product we sell. We are very encouraged about the growth and long-term demand for natural gas, the affordable, reliable, lower-carbon energy the world needs.
Nick: Advancing our path to be LNG ready by securing HOA is up to 3 million tonnes per annum linked to J P. A M and recently signing an LNG sales and purchase agreement with Delta and <unk> for long term liquefaction offtake.
Nick: Completing our Eagle Ford exit for a total consideration of greater than $3 5 billion.
Nick: And receiving credit upgrades from all three agencies and exiting the year with a cash balance of approximately $1 1 billion.
Nick: Turning our attention to 2024, we started the year by announcing our shareholder value driven merger with southwestern our combined company will accelerate America's energy reach by accessing more markets effectively mitigating price volatility and ultimately increasing the revenue per unit of the product we sell.
Nick: We are very encouraged about the growth in long term demand for natural gas the affordable reliable lower carbon energy the world needs.
Domenic J. DellOsso: Today, the market is clearly oversupplied. In addition, we see capital supply cycles that can take 12 to 18 months to evolve while demand fluctuates quarterly. While we will benefit from a strong hedge position, we are responding accordingly with our 2024 capital and operational plan. First, we are reducing capital by nearly 20 percent and production by approximately 15 percent from the preliminary outlook we provided last quarter.
Nick: Today, the market is clearly oversupplied.
Nick: In addition, we see capital supply cycles that can take 12 to 18 months to evolved while demand fluctuate quarterly.
Nick: While we will benefit from a strong hedge position, we are responding accordingly, with our 2020 for capital and operational plan.
Nick: First we are reducing capital by nearly 20% and production approximately 15% from the preliminary outlook, we provided last quarter.
Domenic J. DellOsso: Under our revised capital program, we plan to limit our turn-in-line count to 30 to 40 wells, with the majority having already occurred in January and February, drop two frac crews, leaving one frac crew in each basin, and drop two rigs, resulting in four rigs in the Haynesville beginning in March and three rigs in the Marcellus beginning midyear. We believe limiting turn-in lines and building ducks is the Doing so will shorten our cycle of supply to appropriately and effectively meet market demand. This results in shorter-cycle, capital-efficient decisions that will ultimately offer incremental capacity of up to one BCF per day by the fourth quarter, ensuring we have ample supply to provide customers when demand recovers. Ultimately, our plan is designed to maintain productive capacity, which positions us to quickly return to over 3 BCF per day with minimal incremental capital investment. We will be prudent in our approach, bringing production back online efficiently as consumer demand warrants.
Nick: Under our revised capital program, we plan to limit our turn in line count to 30 to 40 wells with the majority having already occurred in January and February.
Nick: Dropped two frac crews, leaving one frac crew in each basin and dropped two rigs, resulting in four rigs in the Haynesville beginning in March and three rigs in the Marcellus beginning mid year.
Nick: We believe limiting turn in lines and building docs as the prudent response to today's market.
Nick: Doing so will shorten our cycle of supply to them.
Nick: Appropriately and effectively meet market demand.
Nick: This results in shorter cycle capital efficient decisions that will ultimately offer incremental capacity of up to one bcf per day by the fourth quarter, ensuring we have ample supply to provide customers when demand recovers.
Nick: Ultimately our plan is designed to maintain productive capacity, which positions us to quickly return to over three Bcf per day with minimal incremental capital investment.
Nick: We will be prudent in our approach, bringing production back online efficiently as consumer demand warrants.
Domenic J. DellOsso: Overall, our 2024 program demonstrates Chesapeake's continued focus on capital discipline, operational efficiency, and free cash flow generation, while building the capacity to consistently deliver for consumers and shareholders through all demand cycles. Simply put, Chesapeake is built for the volatility we are experiencing today, and our strategy is positioning the company to thrive as the market rebalances into 2025. We have the portfolio, balance sheet, and demonstrated operational track record to continue driving capital efficiencies, maximizing returns, and reducing risk. I look forward to updating you on our progress throughout the year, and we're now pleased to address your questions. I'll begin the question and answer session. To ask a question, you may press star then one on your telephone.
Nick: Overall, our 2024 program demonstrates Chesapeake continued focus on capital discipline operational efficiency and free cash flow generation, while building the capacity to consistently deliver for consumers and shareholders through all demand cycles.
Nick: Simply put Chesapeake is built for the volatility we are experiencing today and our strategy is positioning the company to thrive as the market rebalance is into 2025.
Nick: We have the portfolio balance sheet and demonstrated operational track record to continue driving capital efficiencies maximizing returns and reducing risk.
Speaker Change: I look forward to updating you on our progress throughout the year and we're now pleased to address your questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Operator: Thank you for using the speaker phone. We ask that you please pick up your... If at any point your question has been addressed and you'd like to remove yourself... Douglas Goldstein, CFP®, Financial Planners & Investment Advisors. Our first question comes from Josh Silverstein. Good morning, everybody down there.
Speaker Change: Using a speaker phone, we ask that you. Please pickup your handset before pressing the keys.
Speaker Change: Any point your question has been addressed I would like to remove yourself from queue. Please press Star then two.
Speaker Change: Today's first question comes from Josh Silverstein with UBS. Please go ahead.
Speaker Change: Yes.
Speaker Change: <unk>.
Josh Silverstein: Down there.
Domenic J. DellOsso: So I wanted to start just on the game plan that you guys have outlined here. Why is the one BCFD reduction in this plan? Was this a function of the base declines that you have with the lower rig count? Or put another way, what are the other kind of iterations you guys came up with for the outlook? Thanks. That's a great question, Josh.
Josh Silverstein: So I wanted to start just on the game plan that you guys have outlined here what are the one Bcf a day reduction in this plan.
Josh Silverstein: As a function of the base declines that you have with a lower rig count or asked another way what are the other iterations you guys come up with for the outlook.
Speaker Change: Good luck.
Speaker Change: It's a great question, Josh So I want you to think about the production decline that we're seeing today as a function of the base decline because what we're really doing is we're just stopping turning in line wells that we have had in progress.
Domenic J. DellOsso: So I want you to think about the production decline that we're seeing today as a function of the base decline because what we're really doing is we're just stopping turning in new wells that we have had in progress. And the reason we're doing that is that we see that the market is oversupplied right now. CapEx reductions that we and anybody else in the industry take on have an impact on production several months out, as long as 12 months out. And we need to, for our business, believe the right answer is to reduce production today. The market is oversupplied today with low-quality products.
Josh: And the reason we're doing that is that we see that the market is oversupplied right now.
Josh: Capex reductions that we and anybody else in the industry take on have an impact to production.
Josh: Several months out is as long as 12 months out and we need to for our business. We believe the right answer is to reduce production today.
Josh: The market is oversupplied today, the value that you would receive for turning in.
Domenic J. DellOsso: The value that you would receive for turning in wells today reflects the fact that the market is oversupplied. And so we think we should hold onto that productive capacity so that you can turn it in line when there is greater demand and when the market is not oversupplied. This allows us to be responsive quickly.
Josh: Wells today reflects the fact that the market is oversupplied and so we think we should hold onto that productive capacity.
Josh: And then turn it in line when there is greater demand and when the market is not oversupplied.
Josh: This allows us to be responsive quickly.
Domenic J. DellOsso: And so that amount of production that we've quoted is really just to give you a sense of how much productive capacity we would build up to be responsive to the market as the demand is there by the end of this year. We've quoted it as a BCF a day if all of those wells were turned in line in one quarter. Now, that's probably not a very realistic answer.
Josh: And so that that.
Josh: Amount of production that we've quoted is really just to give you a sense of how much productive capacity, we would build up to be responsive to the market as well as the demand is there by the end of this year with quoted it as a Bcf a day if if all of those wells were turned in line in one quarter.
Josh: Now that's probably not a very realistic answer we would probably layer those in.
Domenic J. DellOsso: We would probably layer those in. We would assume that demand would come back in some measured fashion, and therefore, we could return production in a measured fashion. But that would be the aggregate volume that would be sitting and ready to respond. Got it.
Josh: We would assume that demand would come back and some measured fashion and therefore, we could return production in a measured fashion, but that would be the aggregate volume that would be sitting.
Josh: And ready to respond.
Speaker Change: Got it and then just given the volatility in natural gas prices, we've seen over the past couple of years.
Domenic J. DellOsso: And then just given the volatility in natural gas prices we've seen over the past couple of years, do you think you'd want to operate with a backlog of wells going forward? This way, you can respond to the changes in price environments, your balance sheets, and interest rates so that you can afford it. So I'm curious how you're thinking about operating that. It's another really good question.
Speaker Change: Thank you would want to operate with a backlog of wells going forward.
Speaker Change: This way you can.
Speaker Change: Following the changes in pricing environments.
Speaker Change: Balance sheet interest rates, certainly afford bank Im curious, how youre thinking about operating.
Speaker Change: It's another really good question I think the fact that we feel comfortable pausing turn in lines and slowing completions activity.
Domenic J. DellOsso: I think the fact that we feel comfortable pausing turn-in lines and slowing completions activity, and slowing drilling activity to match that cadence should be considered as we would also be comfortable accelerating those cycle times in the future when needed. Really, all we're doing here is extending cycle times of past capital that's been deployed. We would have the flexibility to increase those cycle times in the future if market conditions warrant it and deliver more production in a shorter period of time relative to the dollars that we're spending. So, you know, we like the flexibility in our business. And then at some point, if the market proved to continue to be undersupplied in the future, you could add capital and grow your productive capacity beyond where we sit today. But this change is really designed to maintain productive capacity in that neighborhood of 3.2 BCF a day. You should consider maintenance capital of $1.5 to $1.6 billion at around that level of production.
Speaker Change: Slowing drilling activity to match that cadence.
Speaker Change: Should be considered as as we would also be comfortable accelerating those cycle times in the future when needed really all we're doing here is we're extending cycle times of past capital that's been deployed.
Speaker Change: We would have the flexibility to increase those cycle times in the future if market conditions warranted and deliver more production on a shorter period of time relative to the dollars that we're spending so.
Speaker Change: We like the flexibility in our business and then at some point if the market proved to continue to be under supplied in the future you could add capital and grow your productive capacity beyond where we sit today, but.
Speaker Change: This change is really designed to maintain productive capacity in that neighborhood of $3 two Bcf a day.
Speaker Change: You should consider maintenance capital of one five to $1 6 billion around that level of production all of that remains unchanged for the business that we're presenting to the market today, we're just allowing cycle times to expand out, allowing our base decline too.
Domenic J. DellOsso: All of that remains unchanged for the business that we're presenting to the market today. We're just allowing cycle times to expand out, allowing our base decline to reduce the oversupply that we see today, which would cause us to receive a very low price for our gas and to hold on to that production for a time when the market needs it better, and we can better deliver it where customers need the gas. Thanks a lot.
Speaker Change: Reduce the oversupply that we see today, which would cause us to receive a very low price for our gas and to hold onto that production for a time when the market needs it better and we can better deliver it where customers need the gas.
Speaker Change: Thanks, Nick.
Domenic J. DellOsso: And our next question today comes from Charles Meade with Johnson Radio, www. FEMA.gov. Good morning, Nick, to you and the whole Chesapeake team there. Morning, Charles. I want to actually continue along that kind of line of questioning, and you've already given us a lot of insight here, but what you're laying out here is a new approach from what we've seen, or at least from what I've seen over the last several years in the industry, not just building dogs, but also building tills, and I'm wondering if you could elaborate a bit on, you recognize that Spending money on ducks versus bringing pills online.
Speaker Change: And our next question today comes from Charles Meade with Johnson Rice. Please go ahead.
Charles Meade: Good morning, Nick do you and the whole Chesapeake team there good.
Charles Meade: Morning, Charles.
Charles Meade: I Wonder I wasn't actually.
Charles Meade: Actually continue along that that that kind of line of questioning and you've already given us a lot of insight here, but this is this what's your what you're laying out here is a new approach.
Charles Meade: From from what we've seen.
Charles Meade: Or at least from what I've seen in the last several years in the industry not just building dogs, but also also building pills and I Wonder if you can elaborate a bit on.
Charles Meade: Recognize that this is a little bit.
Charles Meade: Terra incognita, but elaborate a bit on how you're thinking of the sequence of of.
Charles Meade: Spending money on ducks versus bringing tools online and actually pick up at least a couple of different ways or it might go.
Domenic J. DellOsso: And I can think of at least a couple of different ways it might go. You know, I don't expect you'll give us a price at which you'll act, but maybe you'll surprise me on that. But I could imagine one scenario where you would, you know, just when you got to the price you wanted, you would just bring your tills online, and then you'd backfill with the ducks. But I could also imagine a scenario where you guys are still running a completion crew, and you don't want to bring wells online, and so you'd actually work down that duck inventory ahead of time. So can you just elaborate a bit on how you're dealing with these kind of novel pieces that you now have on the board?
Charles Meade: I don't expect you'll give us a price at which you asked but maybe it will surprise me on that but I could imagine one scenario, where you would just when you when you got to the price you wanted you would just bring your tools online and then you'd backfill with the ducks, but I could also imagine a scenario where you guys are still running a completion crew.
Charles Meade: And and you don't want to bring wells online and so you'd actually worked down that DUC inventory ahead of time. So can you just elaborate a bit on how how youre dealing with these kind of novel pieces that you now have on the board.
Domenic J. DellOsso: I'll start, and Josh may have something to add here, but, you know, the way we're thinking about this, Charles, is we will be paying very close attention to the underlying fundamentals, the underlying supply and demand situation in the market, and we'll try to bring gas online when we see that there is demand that needs gas. Today we are filling storage or not drawing from storage at levels consistent with the past, which is setting us up to have pretty full storage going into the next storage season next fall, and so we can see very clearly that the market has more supply today than there is demand on an annualized basis, and so we think we should hold back our supply to better meet that demand in the future. We know that demand will grow in the future.
Speaker Change: I'll start and Josh may have something to add here, but the way we're thinking about this Charles as we will be paying very close attention to the under underlying fundamentals the underlying supply and demand situation in the market and we'll try to bring gas online when we see that there is demand that that needs the gas today.
Speaker Change: Today, we are filling storage or not drawing from storage at the levels consistent with the past, which is setting us up to have pretty full storage going into the.
Speaker Change: The next next storage season next fall.
Josh: So we can see very clearly that the market has more supply today than there is demand.
Josh: On an annualized basis, and so we think we should hold back our supply to better meet that.
Josh: That demand in the future, we know that demand will grow in the future we have confidence in that and we believe we should be more efficient with the capital. We have spent the wells that we have in cycle and the wells that we will continue to have in cycle and so this really is about making sure that we are.
Domenic J. DellOsso: We have confidence in that, and we believe we should be more efficient with the capital we have spent, the wells that we have in cycle, and the wells that we will continue to have in cycle. And so this really is about making sure that we are continuing a business from a capital perspective that is efficient at drilling wells and efficient at delivery. Productive capacity, but that we can then have the flexibility to hold that production for the times that it's better needed. I want to reiterate that we are pretty optimistic about the future for gas markets, and this allows us to better deliver production when it's needed, where it's needed, into those markets as demand is present and ready for it. Yeah, Charles. This is Josh.
Josh: Our continuing a business from a capital perspective that is efficient pad drilling wells as efficient at delivering.
Josh: Productive capacity, but that we can then have the flexibility to hold that production for the times that it's better needed.
Josh: I want to reiterate that we are pretty optimistic about the future for gas markets.
Josh: And this allows us to better deliver production when it's needed where it's needed into those markets as as demand is present and ready for it.
Josh: Yes, Charles this is Josh I think just the other thing I would comment on as you know we're going to be very prudent around how we activate production and the optionality that we like about the deferred Hill's is that it gives us an immediate response when we see that structural change in the gas markets and so we would anticipate that we would start to activate that.
Josh Silverstein: I think just the other thing I would comment on is, you know, we're going to be very prudent around how we activate production. And the optionality that we like about the deferred tills is that it gives us an immediate response when we see that structural change in the gas markets. And so we, you know, we would anticipate that we would start to activate the tills, and then we would, you know, likely soon after begin, you know, starting to activate some of the ducts.
Josh: Hills, and then we would likely soon after began starting to activate some of the dogs, but one thing to keep in mind is there.
Josh Silverstein: But one thing to keep in mind is that any production associated with those deferred completions is effectively going to lag by a quarter. And so we do see that as effectively starting to backfill the tills that we're starting to activate in the prior quarter. So we really like the rhythm that is set up by this. And again, we think it offers quite a bit of flexibility for us going forward. Got it. That's a great detail. Thank you, both of you, for that.
Josh: Any production associated with those deferred completions is effectively going to lag by a quarter and so he does we do see that as effectively starting to backfill the tails that were starting to activate in the prior quarter. So we really like the cadence that is set up by this and again, we think it offers quite a bit of flexibility for us going forward.
Speaker Change: Got it that's great detail. Thank you both of you for that and then and then my follow up the it looks like to us like on a pro forma basis like a 20% decline 24 versus $23 and that's a little bit higher than I would've guessed and Nicky maybe giving part of the answer already with the majority.
Domenic J. DellOsso: And then my follow-up. It looks to us like, on a pro forma basis, like a 20% decline, 24 versus 23. And that's a little bit higher than I would have guessed. And Nick, you may have given part of the answer already with the majority of your kills for the year already having happened.
Speaker Change: Your your tools for the year.
Domenic J. DellOsso: But I'm wondering, is there also some, perhaps some kind of elective, you know, production restriction in there, maybe from, you know, deferred midstream projects? Or is there anything else that is contributing to that decline beyond just the pause until... No, Charles, this is Josh again. You know, really, the decline is being set up by the deferred tills. You know, we have a material amount of production that we're simply choosing not to enter into the system. And so that's ultimately what's leading to the decline. And so what you see on a year over year basis, or if you want to think about it from Q4 to Q4, is effectively the underlying base decline of the assets that we operate today. Great, thanks for the clarification. Thank you. And our next question comes from Matt Portillo with TPH. Please go ahead.
Speaker Change: Already having happened, but I'm wondering is there also some perhaps some kind of elective.
Speaker Change: Production restriction in there maybe through deferred midstream projects or is there anything else that that.
Speaker Change: Contributing to that decline beyond just the.
Speaker Change: The.
Speaker Change: The pause until.
Speaker Change: No. Charles this is Josh again, you know really the decline has been set up by the deferred pills.
Josh: Do you have a material amount of production that we're simply choosing not to enter into the system and so that's that is ultimately what's leading the decline and so what you see on a year over year basis, or if you want to think about it from Q4 to Q4 is is effectively the underlying base decline of the assets that we operate today.
Speaker Change: Great. Thanks for the clarification.
Speaker Change: Thank you and our next question comes from Matt Portillo with PVH. Please go ahead.
Domenic J. DellOsso: Good morning, all. Maybe Nick, just starting out at a high level, just wanted to come back to the philosophical view on the capital allocation cut here. Looking at the hedge book that you have in place, it looks like your breakeven could have been justified on maintenance capital at a very low gas price in 2024. And you've obviously taken a very decisive step here to help correct the market from an oversupply perspective. Just curious how the team arrived at that decision and how this may kind of play out in regards to your views on return on capital and how you might think about adding back to the market in 25 and 26 as it relates to production. All great questions.
Matthew Merrel Portillo: Good morning, all.
Matthew Merrel Portillo: Maybe Nick just starting out at a high level just wanted to come back to the philosophical view on the capital allocation cut here.
Looking at your hedge book that you have in place it looks like your breakeven.
Matthew Merrel Portillo: Have been justified on maintenance capital at a very low gas price in 2024, and you've obviously taken a very decisive.
Matthew Merrel Portillo: <unk> here to help correct the market from an oversupply perspective, just curious how the team arrived at that decision and how this may play out in regards to your views on return on capital and how you might think about adding back to the market and 25 and 26 as it relates to production.
Speaker Change: All great questions, let me start by saying.
Domenic J. DellOsso: Let me start by saying we don't view this change as something that we are attempting to, quote, unquote, fix the market. We view this as what we think is prudent to manage our assets, and our ability to generate cash flow for our shareholders. And that's really how we think about this. One company is not positioned to, quote, unquote, fix the market. And so we're really thinking just about what makes sense for our company and our shareholders each day. From a hedge perspective, we always separate hedges from the decision to deploy capital. Hedges are really about how you've deployed capital. Historically, they're a financial protection, they're available to you for paper gains and losses, and there's no need to mentally tie hedges to the production that we deliver to market each and every day.
Speaker Change: We don't view this change as something that we are attempting to quote unquote fixed the market. We view. This as what we think is prudent to manage our assets our ability to generate cash flow for our shareholders.
Speaker Change: And that's really how we think about this one company.
Speaker Change: Is not positioned to to quote unquote fix the market.
Speaker Change: So we're really thinking just about what makes sense for our company and our shareholders each day.
Speaker Change: From a hedge perspective, we always separate hedges from.
Speaker Change: The decision to deploy capital hedges are really about how you deploy capital historically, there are financial protection, they're available to you for paper gains and losses, and there's no need to mentally tie hedges to the production that we deliver to mark.
Domenic J. DellOsso: So said in another way, because you have hedges should not divorce you from paying attention to supply and demand fundamentals that are in front of you and impacting the price you receive for your physical product that you sell every day. And so the decision that we've made today is 100% about having a productive capacity that we have spent money on throughout 2023, looking at the market today, recognizing that the market is pretty clearly telling us that it doesn't need our gas today, and knowing that we have the flexibility to hold off on delivering that gas to the market until such time that there is higher demand. So we're happy to do that. We ran a lot of different scenarios and thought about different changes to the capital program.
Speaker Change: <unk> each and every day so set another way.
Speaker Change: Because you have hedges should not divorce you from paying attention to supply demand fundamentals that are in front of you and impacting the price you receive for your physical product that you sell everyday.
Speaker Change: And so the decision that we've made today is 100% about having a productive capacity that we have spent money on throughout 2023 looking at the market today, recognizing that the market is pretty clearly telling us that it doesn't need our gas today.
Speaker Change: And knowing that we have the flexibility to hold off on delivering that gas to the market until such time that there is higher demand.
Speaker Change: So we're happy to do that.
We did run a lot of different scenarios and thought about different changes to the capital program.
Domenic J. DellOsso: We certainly thought about reducing the capital program in a more significant manner than we are here today, but what that really results in is bigger changes to 2025 production. And we don't believe that's prudent, given the fundamentals that we see today.
Speaker Change: We certainly thought about reducing the capital program and a more significant manner than we are here today.
Speaker Change: And what that really results in is bigger changes to 2025 production and we don't believe that is prudent given the fundamentals that we see today, we expect there to still be a step change in demand in 2025 as incremental LNG capacity comes online as the market continues to grow for natural gas domestically. We also think the supply dynamics would be.
Domenic J. DellOsso: We expect there to still be a step change in demand in 2025 as incremental LNG capacity comes online, as the market continues to grow for natural gas domestically. We also think the supply dynamics will be better by 2025. Remember that there was a lot of capital cut across the industry last summer, and the results of those capital changes just haven't shown up yet. That's why I referenced in my opening comments that we see the cycle of capital and supply being as long as 12 to 18 months. Think about the fact that this past fall was when we really saw maximum supply on the market. We're really still seeing it today.
Speaker Change: Better by 2025 remember that there's a lot of capital cut across the industry last summer and the results of those capital changes haven't shown up yet and that's why I referenced in my opening comments that we see the cycle of capital and supply being as long as 12 to 18 months think about the fact that this past fall.
Speaker Change: Is when we really saw maximum supply to the market are really still seeing it today and the capex increases associated with that supply response started in the fall of 'twenty well really in the summer of 2022 and carried through the beginning of 2023 with the big reductions in cash.
Domenic J. DellOsso: And the CapEx increases associated with that supply response started in the fall of – well, really in the summer of 2022 and carried through the beginning of 2023, with the big reductions in capital not occurring until the summer of 2023. So the lag time for CapEx decisions is very long. And what we're really attempting to do is be responsive to the market conditions that we see in front of us today, knowing that a capital decision has a much longer time to take effect. So stopping drilling in line wells has an immediate impact on the economics that we see for our resource, www. FEMA.gov, Great
Speaker Change: <unk> not occurring until the summer of 2023, so the lag time of Capex decisions is very long.
Speaker Change: And what we're really attempting to do is be responsive to the market conditions that we see in front of us today, knowing that a capital decision has a much longer time to take effect. So stopping turning in line wells has an immediate impact on the economics that we see for our resource.
Speaker Change: <unk>.
Speaker Change: Okay.
Josh Silverstein: And then maybe as a follow-up question for Josh, just curious how we should be thinking about the outlook for 2025. I know it's still a long way off, but trying to think through how long it might take you to get back to more of a maintenance program as it relates to your rigs and your frack fleets. And then effectively, it's still fair to think about the timing being from about six months from when a rig hits the ground to when we should be expecting production to turn in line. I know you've got obviously the deferred tills, but just thinking about kind of the base program, how that might progress over the next 12 to 18 months and what we'd need to see maybe fundamentally to start to pick back up towards a maintenance level on the base Yeah, sure. Thanks, Matt.
Speaker Change: Great and then maybe as a follow up question for Josh just curious.
Speaker Change: How we should be thinking about the outlook for 2025, I know, it's still a long ways off but trying to think through how long it might take you to get back to more of a maintenance program as it relates to your rigs and Frac fleets and then effectively is it still fair to think about the timing being from.
Speaker Change: About six months from when a rig hits the ground.
Speaker Change: Until then we should be expecting production to turn in line I know you've got obviously the deferred pills, but just thinking about kind of the base program, how that might progress over the next 12 months to 18 months and what we need to see maybe fundamentally two to start to pick back up towards a maintenance level on the base program.
Speaker Change: Yeah sure. Thanks, Matt.
Josh Silverstein: You know, first of all, I mean, we clearly are looking for structural shifts on the demand side of the equation for us to be thinking about getting back up to some maintenance level of activity. You know, but I think the way, again, that we would likely start to phase in activity is by starting to activate our deferred tills first. We then begin to activate our incremental frac crews, which would take us to a total of four frac crews across our business today. And the way we would think about any additional rig additions, so again, as we go down from, you know, five to four rigs in the Haynesville and then from four to three in the Marcellus, is as we start to deplete the deferred completion inventory down to something that we would consider to And you're absolutely right.
Speaker Change: First of all I mean, we clearly are looking for structural shifts in the demand side of the equation for us to be thinking about getting back up to some maintenance level of activity.
Speaker Change: But I think the way again that we would likely start to phase in activity is starting to activate our deferred hills first we then begin to activate our incremental frac crews, which would take us to a total of four frac crews across our business today.
Speaker Change: And the way we would think about any additional rig addition, so again as we go down from five to four rigs in the Haynesville and then from four to three in the in the Marcellus is as we start to deplete the deferred completion inventory down to something that we would consider to be a more working normal working level. We would then start.
Speaker Change: To bring those rigs back and you're absolutely right you know as far as you know kind of the typical cycle time, you are looking at roughly six months from the time, you add a rig to actually start seeding it seen any meaningful production impact from those from those rigs.
Domenic J. DellOsso: You know, as far as kind of a typical cycle time, you are looking at roughly six months from the time you add a rig to actually start seeing any meaningful production impact from those rigs. Thank you. Thank you, and our next question comes from Nitin Kumar with Mizzouho. Please go ahead. Good morning, guys, and thanks for taking my questions. I guess I'm going to start off, Nick, and just as you came up with this framework, to us, it looks like you're maintaining the balance between the Appalachian and the Haynesville. Both of them are declining roughly about the same percentages, and the mix stays the same. Why that sort of allocation across the two assets? Would it have been maybe better to reduce the Haynesville a little bit faster, just any color around that?
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from Lytton Kumar with Mizuho. Please go ahead.
Nitin Kumar: Hey, good morning, guys and thanks for taking my questions I guess, what I'm going to start off.
Speaker Change: Nick.
Nitin Kumar: As you came up with this framework.
Nitin Kumar: To us it looks like you're maintaining the balance between the Appalachian Haynesville both of them are declining roughly about the same percentages and the mix stays the same.
Nitin Kumar: Would it not have why why did that sort of allocation across the two assets would have been maybe better to reduce the haynesville a little bit faster.
Domenic J. DellOsso: Well, just keep in mind that, you know, pricing is different in both of these aspects. And so certainly today, when the market is oversupplied, you're receiving quite a low value for gas in the Marcellus storage system, which is quite full in the northeast. And so we do see it prudent to reduce turn-in lines in both basins to something, you know, pretty close to zero for the rest of the year. The good news is we can change that quickly if the market changes and shows us that the gas is needed. And we can change that by region; if there is a shortfall or improved market in the northeast, we can change that separately and apart from Hainesville. So we maintain full flexibility, but we just see pretty similar market conditions in both places. Thanks.
Nitin Kumar: Called.
Speaker Change: Color on that.
Speaker Change: Well just keep in mind that pricing is different in both of the assets and so certainly today when the market is oversupplied.
Speaker Change: You are receiving quite a low value for gas in the Marcellus storage is quite full and the northeast and so we do see it prudent to.
Speaker Change: Reduce turn in lines in both basins to what is something pretty close to zero for the rest of the year.
Speaker Change: Good news is we can change that quickly if the market changes and shows us that the gas is needed and.
Speaker Change: And we can change that by region.
Speaker Change: If there is a shortfall or.
Speaker Change: Improved market in the northeast, we can change that separate and apart from the Haynesville. So we maintain full flexibility, but we just see pretty similar market conditions in both places right now.
Domenic J. DellOsso: And then for my follow-up, you mentioned that, you know, one company cannot, quote-unquote, fix the market, but you're about to become much bigger somewhere in the second quarter. The size of this deferred-till inventory that you're holding, I know you can't comment on Southwestern's plans, but is this the right size for just Chesapeake, or do you think this could be the right size for We're just thinking about Chesapeake here.
Speaker Change: Got it thanks, and then for my follow up you mentioned that you know one company cannot quote unquote fixed.
Speaker Change: Market, but youre about to become much bigger.
Speaker Change: We're in the second quarter.
Speaker Change: The size of this deferred till inventory that you're holding.
Hum.
Speaker Change: I know you can't comment on southwestern plans, but.
Speaker Change: Is this the right size for just Chesapeake or do you think this could be the right size for our combined company down the road.
Speaker Change: We're just thinking about Chesapeake here.
Domenic J. DellOsso: Great. Thanks. I thought I'd try it.
Speaker Change: Great. Thanks, I thought I'd try.
Josh Silverstein: Thank you, and our next question comes from Burt Donis with TruViz Securities. Please go ahead. Hey, good morning, guys. I just wanted to follow up and clarify one of your previous comments. Is there a limit to the amount of ducts you would build if we see, you know, a prolonged down cycle? You know, maybe the one BCF is, is kind of the limit, maybe like that amount as you're, you know, saved up ammo, or, you know, would you start dropping rigs immediately in 25, we saw a sustained down cycle? Yeah, good morning, Bert. Josh here.
Speaker Change: Thank you and our next question comes from Bert.
Bert: So the securities. Please go ahead.
Bert: Hey, good morning, guys I, just wanted to follow up and clarify one of your previous comments is there a limit to the amount of docs you would build if we see a prolonged down cycle.
Bert: Maybe the one Bcf is kind of the limit maybe like that amount as your saved up ammo or.
Would you start dropping rigs immediately in 25 years and we saw.
Bert: Sustained down cycle.
Speaker Change: Yes, good morning, Bert Josh here.
Josh Silverstein: You know, that was part of our rationale for why we wanted to start taking rigs out now. You get to a certain point with duck inventory where it simply starts to, you know, look and feel like an inefficient use of capital. And so that's why we'll be dropping a rig, you know, next month in Hainesville and then another rig in the Marcellus in July. So that is absolutely a consideration for us. You know, as we think about, you know, the allocation of capital to rigs and frack rigs, and sorry, is the was it a duff limit?
Josh: Was that part of our rationale for why we wanted to start taking rigs out now.
Speaker Change: You get to a certain point with a DUC inventory, where it simply starts to look and feel like inefficient use of capital.
Josh: And so that's why we'll be dropping a rig.
Josh: Next month in the Haynesville and then another rig in the Marcellus in July so that is absolutely a consideration for us as.
Josh: As we think about.
Josh: The allocation of capital to rigs and Frac crews.
Speaker Change: Okay Alright.
Josh Silverstein: Or was the amount of production the limit? It just seems like a nice clean number at one BCS. I didn't know if that was kind of the solver for it or whether it was how many, the way your rig's frack crew was played out.
Speaker Change: Was it a DUC limit or what the amount of production the limit it just seemed like a nice clean number at one Bcf. So I didn't know if that was kind of the the solver for it or whether it was how many.
Speaker Change: The way your rig Frac crew would play out.
Josh Silverstein: Yeah, I mean, we clearly looked at both. But, you know, we really just tried to balance what we thought was a meaningful amount of production that we could activate with, you know, an efficient use of capital going forward. So there was, you know, simply a balance that we tried to strike between the two. It makes sense. And then I'll shift gears to stop hammering that point. Just trying to understand the buyback activity in 4Q. Was that, you know, cut short due to the merger announcement? Or would there have been a similar amount, even if you didn't enter a blackout period?
Yeah, I mean, we clearly looked at looked at both but we really just tried to balance what we thought was a meaningful amount of production that we can activate them with.
Speaker Change: With that inefficient use of capital going forward. So there was simply a balance that we tried to strike between the two.
Speaker Change: Makes sense and then I'll I'll shift gears to stop hammer on that point, just trying to understand the buyback activity in <unk> was that.
Speaker Change: Cut short due to the merger announcement or would there have been kind of a similar amount. Even if you didn't enter a blackout period and and maybe if you could reconcile that against the.
Domenic J. DellOsso: And maybe if you could reconcile that against, you know, the cash free cash flow being technically negative in 4Q, yet you still had some activity. Thanks. Yeah, you know, look, we were really comfortable executing our buyback throughout 2024. Obviously, once we got deep into the merger discussions, that activity had to pause. We are not able to restart that activity while we have a pending transaction like the merger out there.
Speaker Change: The cash free cash flow being technically negative in <unk>, yet you still had some activity.
Speaker Change: Yeah look we were really comfortable executing our buyback throughout 2024, obviously once we got deep into the merger discussions that activity had to pause.
Speaker Change: We are not able to restart that activity.
Speaker Change: While we have a pending transaction like the merger out there so.
Domenic J. DellOsso: So, you know, in the future, we'll be back to buying back stock when we can and look forward to that day. But, you know, I just want to remind you that, inclusive of buybacks and dividends, in 2023, we had a 8 percent return on equity, pretty robust. And we felt good about that number. And, you know, I guess it's a fair statement to say that if we weren't engaged in those discussions, we probably would have continued to buy some stock through the end of the year. That's what I was looking for.
Speaker Change: We're in the future will be back to.
Speaker Change: To buying back stock when we can and look forward to that day, but I would just remind you that inclusive of buybacks and dividends in 2023, we had an 8% return to equity.
Speaker Change: Pretty robust and we felt good about that.
Speaker Change: That number in.
Speaker Change: I guess, it's I guess, it's a fair statement to say that if we werent engaged in those discussions we probably would have continued to buy some stock through the end of the year.
Speaker Change: That's what I was looking for thank you.
Domenic J. DellOsso: And our next question comes from Doug Leggate with Bank of America. Good morning, everyone. Note to self, don't forget to hit star one.
Speaker Change: Thank you and our next question comes from Doug Leggate with Bank of America. Please go ahead.
Doug Leggate: Good morning, everyone note to self don't forget to hit Star one so yes.
Doug Leggate: Sorry about the late attendance. Nick, the market's just opened. The gas stocks are all up. Gas prices are up 17%. I just want to say a strong message and taking leadership like this on how to navigate this is something I think the rest of the industry could pay attention to. So well done on that. My question is about two things, kind of related.
Doug Leggate: Lately attendance.
Doug Leggate: Nick the markets just opened the guests stocks are all up gas prices are up 17% I just want to say.
Doug Leggate: Strong message.
Doug Leggate: And taken leadership like based on how to navigate this is something I think the rest of the industry could pay attention to so it so well done on that.
Speaker Change: My Mike My question is two things Kevin related.
Doug Leggate: First, you are still spending $1.3 billion this year, but the way I look at it is, the way we look at it, I should say, you're putting in place by the end of the year a BCF a day of spare capacity, but a 30% decline. If I simply add those two numbers together, you're, you know, the exit rate, call it, you know, 2.2 plus a BCF, you're pretty much back to your maintenance kind of level, but you do it or production, but you do it with a substantially lower capital number, 1.3 versus what you tell us is 1.5 to 1.6. What am I missing?
Speaker Change: First you are still spending $1 $3 billion this year, but the way I look at it is we've looked at it I should say youre, putting in place by the end of the Euro a bcf a day of spare capacity, but a 30% decline.
Speaker Change: Simplistically I add those two numbers together.
Speaker Change: Your the exit rate call. It two two plus a bcf.
Speaker Change: Pretty much back to your maintenance kind of level that youre doing or production that youre doing it with a substantially lower capital number one three versus what you'd tell us is one five to one six what am I missing.
Josh Silverstein: Yeah, Doug, I think the key element to that is, in order to sustain that, and again, assuming all of the production comes on in the fourth quarter and you're back at that 3.2 to 3.3 level, we need to get back on a pretty normal cadence of maintenance activity, which includes, you know, completing, you know, say 15 to 20 wells a month and then ultimately getting back to having five and four rigs between So the key there is, you know, we can add production back, and then we need to be deploying capital at a maintenance level in order to support that going forward. Okay, so we shouldn't think that there's an implicit reset in sustaining capital now that EcoFert is gone. No, no, we don't see that.
Speaker Change: Yeah, Doug I mean, I think the key element to that is in order to then to sustain that and again, assuming all of the production comes on in the fourth quarter and you're back at that three two to three three level, we need to get back on a pretty normal cadence of maintenance activity, which includes completing say 15 to 20 wells a month.
Speaker Change: And then ultimately getting back to having five and four rigs between the Haynesville and Marcellus. So the key there is we can add the production back and then we needed to be deploying that capital at a maintenance level in order to support that going forward.
Doug Leggate: Okay. So we Shouldnt think that there is a there was an implicit reset and sustaining capital and that the Eagle Ford has gone.
Speaker Change: No no we don't see that okay, alright, okay. That's helpful.
Josh Silverstein: Okay. All right. Okay, that's helpful. I would add, Doug, you know, we did say in our opening comments that we're continuing to see some good capital efficiencies across the assets. We had record wells drilled in both the Marcellus and Haynesville.
Speaker Change: And I would add Doug we did say in our opening comments that we're continuing to see some good capital efficiencies across the assets, we had a record wells drilled in both the Marcellus and Haynesville, we continue to focus on capital efficiencies across our assets and generally we find that.
Domenic J. DellOsso: We continue to focus on capital efficiencies across our assets. And generally, we find that these times when you reduce activity or when you make real progress, and so we're looking forward to 2024 being another very strong year from a capital efficiency standpoint, continuing to improve our pace of drilling, our cost per stage of completion, and our overall effectiveness at bringing wells online for the maximum productivity for that given location at the lowest possible cost. Okay, very clear, Nick, and obviously, I know you don't want to talk about Southwestern, but presumably, this would be the strategy for the combined company. Fair point.
Speaker Change: These times when you reduce activity or when you make real progress and so we're looking forward to 2024 being another very strong year from a capital efficiency standpoint, continuing to improve our pace of drilling our cost per stage of completions and our overall effectiveness at bringing wells online for the maximum productivity.
Speaker Change: For that given location at the lowest possible cost.
Speaker Change: Okay, very clear and I can obviously I know you don't want to talk about southwestern but presumably this this would be the strategy for the combined company.
Domenic J. DellOsso: Well, I mean, again, you know, when we think about the decisions we're making for capital allocation for this year, it has nothing to do with our merger. This is just simply looking at the productive capacity we have today, the market conditions we see in front of us, and making the best decisions we can make for our shareholders. Now, the concept that a company with a very strong balance sheet and a large production base can basically use the turn-in-line cadence available to us much the way that we would use Storage if there was more storage available in the market is a strategy that I think could be deployed in the future. And we would look forward to considering those opportunities. But, you know, our hope is that by the time you get to 2025, you will have a step change in demand.
Speaker Change: Yeah.
Speaker Change: Well I mean again, you know when we think about the decisions, we're making for capital allocation for this year. It has nothing to do with our merger. This is just simply looking at the productive capacity. We have today the market conditions, we see in front of us, making the best decisions. We can make for our shareholders now the concept that a company with a very.
Speaker Change: Our balance sheet.
Speaker Change: And a large production base.
Speaker Change: Ken.
Speaker Change: Basically.
Speaker Change: Use the turn in line cadence available to us much the way that we would use storage. If there was more storage available in the market is a strategy that I think could be deployed.
Speaker Change: And in the future.
Speaker Change: And we would look forward to considering those opportunities, but our hope is that by the time you get to 2025, you have a step change in demand, we see growing demand for gas.
Domenic J. DellOsso: We see growing demand for gas, and we will be in a position to continue to deliver the most efficient, lowest cost gas we can to the market as quickly as we possibly can to a market that needs it. We think that's the more likely future for us. Very clear. My follow-up is a quick one. Again, to the extent you can speak to this, Nick, you haven't had an FTC request, a second FTC request, I should say. You're still talking in, you know, notionally about the second quarter close.
Speaker Change: We'll be in a position to.
Speaker Change: To deliver the most efficient lowest cost gas, we can to the market as quickly as we possibly can to a market that needs. It.
Speaker Change: We think that's the more likely future for us.
Speaker Change: Very clear my follow ups a quick one.
Speaker Change: Again to the extent you can speak to this Nick.
Nick: Haven't had an FTC requests a second FTC requests I should say youre still talking.
Nick: Notionally about second quarter calls.
Domenic J. DellOsso: If we look at everything else going on in the market, one would assume you're probably going to get a second FTC request. My question is, does that have any impact on integration planning, or does that go ahead anyway? No, we're, we're, well into the weeds of integration planning at this point. We have a tremendous amount to work on. Very busy.
Nick: If we look at everything else going on in the market one would assume that youre, probably going to get a second FTC request. My question is does that have any impact on integration planning or does that go ahead anyway.
Nick: No.
Nick: Well into the weeds of integration planning at this point, we have a tremendous amount to work on.
Nick: Very busy we have teams that have been set up and working through how to think about our pro forma organizational structure all the business processes. All the it systems all of the things that you plan for.
Domenic J. DellOsso: We have teams that have been set up and are working through how to think about a pro forma organizational structure, all the business processes, all the IT systems, all of the things that you plan for. We will be ready for a quick close. We can continue to work on things from an integration standpoint. If it takes longer, we won't let that distract us or bother us in any way.
Nick: We'll be ready for a quick close we can continue to work on things from an integration standpoint, if it takes longer.
Nick: We won't let that distract us or bother us in any way we are.
Domenic J. DellOsso: We're well into the work required for a successful integration. Great. I appreciate the questions, guys. Thanks so much.
Nick: Well into the work required for a successful integration.
Speaker Change: Great I appreciate the questions guys. Thanks, so much.
Domenic J. DellOsso: Next time. And our next question today comes from Paul Diamond with... Please go ahead. Thank you. Good morning all, thanks for taking my call. Just a quick one on the, kind of, more operational side of those deferred tills. How should we think about any potential movement just on the type curves? Whether it's increased pressure bleed or maybe increased saturation.
Speaker Change: Thanks, Doug.
Speaker Change: And our next question today comes from Paul Diamond with Citi. Please go ahead.
Thank you and good morning, all thanks for taking my taking my call.
Paul Diamond: A quick one on the kind of more of the operational side of it is deferred tells how should we think about any potential movement. Just from your type curves, whether it's increased quite pressure bleed or maybe increase saturation you guys anticipate those type curves, which is any different from or just normal of completed wells and normally Todd wells.
Josh Silverstein: Do you guys anticipate those type curves looking any different from if it's normally completed well? and normally Todd Wells. Yeah, good morning, Paul. No, we don't. You know, we've been operating these assets for well over a decade, and so we have a lot of experience of being in a situation where we had to defer completions, and, in this case, defer rents. And actually, you know, through the years, we've seen some benefits to this, where we simply see the water imbibe into the reservoir.
Paul Diamond: Yeah. Good morning, Paul No. We don't you know we've been operating these assets for well over a decade and so we have a lot of experience of being in a situation, where we had to defer completions and in this case, the FERC pills and actually through the years, we've seen some benefits to this where we simply see the water and dive into the reservoir and so.
Josh Silverstein: And so as we start to reactivate production, we see similar gas productivity but less water production, which, of course, is beneficial from an operating cost standpoint. So, no, we do not anticipate any change in type. Okay. I'm just kind of circling back on one of the comments from the prepared remarks. We've talked about a 70% well-cost improvement in Marcellus. Just wanted to see how you were thinking about a progression of that, whether there's more meat on the bone or, I guess how much. What is your guys' internal target for how much more you can improve things up there? Yeah, sure, Paul.
Paul Diamond: We start to reactivate the production, we see similar gas productivity less water production, which of course is beneficial from a from an operating cost standpoint. So no. We do not anticipate any change to the type curves.
Paul Diamond: Understood.
Speaker Change: Just kind of circling back on one of the comments from the prepared remarks, you just talked about a 70% well cost improvement in Marcellus just wanted to see how you were thinking about the progression of that.
Speaker Change: Whether theres more meat on the bone or I guess how much.
Speaker Change: Your guys internal target is for how much more you can improve things up there.
Speaker Change: Yeah sure Paul I mean, the teams have done an unbelievable job this year really across the whole company capturing inefficiencies, we quoted there a 40% improvement in our footage per day.
Josh Silverstein: I mean, you know, the teams have done an unbelievable job this year, really across the whole company, capturing efficiencies. You know, we quoted there a 40% improvement in our footage per day. On top of that, you know, starting the fourth quarter, we're starting to see some, you know, deflationary elements start to show up in the cost, you know, with the biggest mover being on the OCTG side, which has come off for us around 40%. So we do think there's some, you know, tailwind coming into the year. You know, we got excited at the end of last year about, you know, around a 5% to 7% deflation from, you know, kind of, you know, year-over-year levels. And we still feel pretty good about that right now.
Speaker Change: On top of that starting in the fourth quarter, we are starting to see some deflationary elements start to show up in the cost.
Speaker Change: With the biggest mover being on the <unk> side, which has come off for us around 40%.
Paul Diamond: So we do think there's some tailwind coming into the year, we guided at the end of last year to around a 5% to 7% deflation.
Paul Diamond: From kind of year over year levels, we still feel pretty good about that right now.
Josh Silverstein: You know, we're anticipating the Marcellus to be, you know, around 10% year-over-year cost improvements, which is a combination of deflation, extended laterals, which are going to be up about 15% or so, and just, you know, execution efficiencies that we see showing up in the system. And, you know, my expectation is that we continue to get better as well. And, you know, we start to see costs beyond that 10% that I've quoted. Thanks for your time.
Paul Diamond: We're anticipating the Marcellus to be around 10% year over year cost improvements, which is a combination of deflation extended laterals, which youre going to be up about 15% or so and just execution efficiencies that we see showing up in the system.
And my expectation is we continue to get better as well and we start to see cost beyond that 10% that I've quoted here.
Speaker Change: Understood. Thanks for your time and I'll leave it there.
Josh Silverstein: I'll leave it there. Thank you. And our next question comes from Michael Sevilla with Stephen, www.larryweaver.com. Yeah, good morning, everybody. Nick, you mentioned you probably wouldn't bring back the one BCF per day in any given quarter. But if you do get the step change in demand that you're anticipating, how quickly could you bring that BCF per day online? Does it take a full quarter, or is it something less than that?
Speaker Change: Thank you and our next question comes from Michael Severe Stevens. Please go ahead.
Speaker Change: Yes, good morning, everybody.
Speaker Change: Nick You mentioned, you probably wouldn't bring back the one bcf per day.
Speaker Change: In any given quarter, but if you do get the step change in demand that youre anticipating how quickly could you bring that Bcf per day online does it take a full quarter or is it something less than that.
Josh Silverstein: Are there any infield constraints or anything that you need to be thinking about there? Yeah, hey Mike, this is Josh. There's going to be some operational considerations as we start to reactivate production. It's just simply logistics planning around, you know, managing gas coming into gas gathering systems and water. And so, you know, we think that, you know, over the course of weeks, it's not months or a quarter, it's over the matter of weeks, so, you know, say, you know, a month, we think we can, you know, start to reactivate that production. But I'll just remind you, you know, we're obviously going to be monitoring the markets in each of the basins. They are very different; they have different market dynamics.
Speaker Change: Are there any infill constraints or anything that you need to be thinking about there.
Speaker Change: Yeah, Hey, Mike This is Josh theres going to be some operational considerations as we start to reactivate the production.
Josh: It's just simply logistics planning around managing gas coming into the gas gathering systems and water and so we think that over the course of weeks, it's not months or a quarter. It's over the matter of weeks, So say month.
Josh: We think we can start to reactivate that production, but I'll just remind you and you know, we're obviously going to be monitoring the markets and each of the basins that they are very different they have different market dynamics and so it could be that we start to phase into hills in one area and not the other what that may be lagging behind and so I think there's just a number of.
Josh Silverstein: And so, it could be that we start to phase in tills in one area and not in the other, with it maybe lagging behind. And so, I think there's just a number of considerations. But, you know, the teams are well prepared to manage this type of activity and anxious to see what they do with it. www. FEMA.gov. And just to follow up on that, with the reduction in volumes you'll have, are there any commitments with momentum or any other pipelines that will come into play that you need to keep an eye on? Hey, Mike. Good morning. This is Mohit.
Josh: <unk>, but the teams are well prepared to manage this type of activity.
Josh: And anxious to see what they do with it.
Josh: Yeah.
Speaker Change: Understood and just.
Speaker Change: Follow up to that.
Speaker Change: With the reduction in volumes, you'll have are there any commitments with the landrum or any other pipelines that will come into play that you need to keep an eye on.
Speaker Change: Hey, Mike Good morning, this is mohit.
Mohit Singh: So the way you should think about momentum pipeline, the volumes that we have committed there, which is 700 million a day, are essentially volumes that we would reroute from existing pipelines. So this is not a volume that we are growing into, and that's just altering the flow path and moving volumes around on the pipeline network. So it doesn't really constrain us or put any restrictions on us with regard to how we grow them.
Mohit: The way you should think about momentum pipeline the volumes that we have committed their which is 700 million a day.
Mohit: Is essentially volumes that we would read out from existing pipelines. So this is not the volume that we are growing into and that's just.
Mohit: Altering the flow path, then moving volumes around on the pipeline network. So it doesn't really constrain us or put any restrictions on us with regards to hobby. Good. So you shouldn't really worry about that constraint.
Mohit Singh: So you shouldn't really worry about that. Got it. Thank you. Thank you. And our next question comes from Papi Modak with Goldman Sachs. Please go ahead.
Speaker Change: Got it thank you.
Speaker Change: Thank you and our next question comes from Todd <unk> with Goldman Sachs. Please go ahead.
Domenic J. DellOsso: Hi, good morning team. Just curious if you can provide any color on how you are thinking about the deleveraging plan given where the strip is and what that means for free cash flow this year. I know you have cash on the balance sheet. But is there a minimum amount of cash you would like to retain through the year as you go paying down debt? Yeah, hey, Toddy, this is Nick.
Todd: Hi, Good morning team just curious if you can provide any color on how you are thinking about the deleveraging plan given where the strip is and what that means for free cash flow. This year I know you have cash on the balance sheet.
Todd: But is there a minimum cash you would like to retain through the year as you go to paying down debt.
Todd: Yeah, Hey, Todd This is Nick I'll start and then Mike may have more to add here.
Domenic J. DellOsso: I'll start, and then Moit may have more to add here. I just would reiterate that, you know, as a standalone company, we don't have a debt reduction target. And so as we think about our 2024 plan, we're very, very comfortable with all of the decisions we're making and the, you know, very strong balance sheet we have, frankly, with and without these decisions being made. That said, pro forma for the close, we will be very focused on debt reduction. One of the reasons we find ourselves in the position we're in today, which is to be able to be a very efficient consolidator in a merger context with Southwestern, to be able to have the capital flexibility we're showing with how we're directing our production cadence this year, all relate to having a very strong balance sheet.
Nick: Just would reiterate that as a standalone company, we don't have a debt reduction target and so as we think about our 2024 plan.
Nick: We're very very comfortable with all of the decisions we're making.
Speaker Change: And the very strong balance sheet, we have.
Speaker Change: Frankly with and without these decisions being made.
Speaker Change: That said pro forma for the close we will.
Speaker Change: Be very focused on debt reduction one of the reasons, we find ourselves in the position. We're in today, which is to be able to be a very efficient consolidator in a merger context with southwestern to be able to have the capital flexibility, we're showing with how were directing our.
Speaker Change: <unk> cadence this year all relates to having a very strong balance sheet. It will be a top priority of this company to maintain a strong balance sheet through these cycles, and we see that being absolutely front and center for our strategy and something we expect to deliver on regardless of the market conditions.
Domenic J. DellOsso: It will be a top priority of this company to maintain a strong balance sheet through these cycles, and we see that as absolutely front and center for our strategy and something we expect to deliver on, regardless of the market conditions. The only thing I would add to that is, coupled with a very strong hedge book and 1.1 billion dollars of cash that we have on hand, it's a pretty strong balance sheet, so from a leverage point of view, we feel pretty comfortable. And then when you start looking at the maturity profile of the debt that we have, there are no near-term maturities that are coming up.
Speaker Change: Sorry.
Speaker Change: The only thing I would add to that is coupled with a very strong hedge book and $1 $1 billion of cash that we have on hand, it's a pretty strong balance sheet. So from a leverage point of view, we feel pretty comfortable and then when you start looking at the maturity profile of the debt that we have also so there's no near term maturities, which are coming up.
Domenic J. DellOsso: So, as a stand-alone company, we are pretty comfortable with where we are. And, as Nick said, once we are post-closed with Southwestern, then we'll have a slightly different approach. And then, with the activity and production guidance you've given, how should we think about the cadence of production through the rest of the year? It sounds like it could be a steady quarterly reduction, but any color you can provide there on whether it's going to be a step change or not.
Speaker Change: <unk>.
Speaker Change: So as a Standalone company, we are pretty comfortable with where we are and as Nick said once we once we have post close with southwestern then then we will have a slightly different broach.
Speaker Change: Got it that makes sense, and then would be activity and production guidance, you've given how should we think about the cadence of production through the rest of the sounds like it could be a steady quarterly reduction, but any color you can provide there if it's going to be a step change our steady and then also help us understand what the cadence is between the Appalachian Basin.
Josh Silverstein: And then also help us understand what the cadence is between the Appalachian and the Haines Velasquez. Yeah, maybe just to kind of address the second question first. You know, really, at this point, that's just undetermined. Again, there are different market dynamics between each area. Each of the assets has, you know, different cost structures that's going to guide that ultimate decision on how we, you know, restart drilling wells or activate completions.
Speaker Change: So a lot of it.
Speaker Change: Yeah, maybe just kind of address that the second question first.
Speaker Change: So really at this point, that's just undetermined again theres different market dynamics between each areas each of the assets have different cost structures, that's going to guide that ultimate decision on how we restart.
Speaker Change: You know telling wells or activating completions.
Josh Silverstein: You know, as far as the production cadence, you know, again, we stated that we'd have 30 to 40 turn-in lines for the year. We've already turned in 25 of those. And so as a result, you know, we are anticipating a quarter over quarter decline. And, you know, as we look at kind of Q4 of 23 to Q4 of 24, we see that equating at a corporate level to, you know, just under 30% with Haynesville being slightly above that and Marcellus being, you know, slightly under 30%. So it'll be a pretty steady decline.
Speaker Change: As far as the production cadence again, we stated that we will have 30 to 40 turned in lines for the year.
Speaker Change: We've already turned in line 25 of those and so as a result, we are anticipating quarter over quarter decline.
Speaker Change: And as we look at kind of Q4 of 23% in Q4 of 24.
Speaker Change: So we see that equating at a corporate level to just just under 30%.
With haynesville being slightly above that in Marcellus.
Speaker Change: Slightly under 30%.
Speaker Change: So it'll be it'll be a pretty steady decline.
Josh Silverstein: Thank you for taking the question. Thank you. And our final question today comes from Phillips Johnston with Capital One. Please go ahead.
Speaker Change: Got it thank you for taking the questions.
Speaker Change: Thank you and our final question today comes from sort of Johnston with capital one. Please go ahead.
Phillips Johnston: Hey guys, thanks. I appreciate your comments. But you can't really speak for Southwestern.
Johnston: Hey, guys. Thanks.
Johnston: Appreciate your comments you can't really speak for southwestern just wondering from a housekeeping perspective, when you guys.
Phillips Johnston: Just wondering from a housekeeping perspective when you guys plan to provide performance guidance that includes the impact of the deal. Is that probably the timing there probably around when it closes? I think that's a good, safe assumption, Phillips. Okay, thanks.
Johnston: Plan to provide pro forma guidance that includes the impact of the deal is that is that a.
Johnston: Timing of probably around when it closes.
Johnston: I think that's a good safe assumption Phillips.
Phillips: Okay. Thanks, and then Nick I'd be curious to hear your high level thoughts just on the administrations.
Domenic J. DellOsso: And then Nick, I'd be curious to hear your high-level thoughts just on the administration's, Paul's, on the LNG front and what you think that might mean for the long-term gas market. You know, we are still really optimistic about the long-term gas market, and that's just based on the underlying view that natural gas is the most efficient answer to energy supply challenges around the world. Those supply challenges come from shortages or limited access to energy broadly. They also come from climate concerns. They come from political instability concerns.
Nick: Paul is on the LNG front, and where you think that might mean for the long term gas market.
Nick: We are still really optimistic on the long term gas market and that's just based on the underlying view that natural gas is the most efficient answer to energy supply challenges around the world the supply challenges come from shortages or limited access to energy broadly they come from climate concerns they come from.
Nick: Co instability concerns and natural gas is really the best answer, especially natural gas in the U S is the best answer to all of those challenges as a result, we think that.
Domenic J. DellOsso: And natural gas is really the best answer, especially natural gas in the U.S. is the best answer to all of those challenges. As a result, we think that the administration will ultimately find a very strong answer as it reviews the need for permitting approvals here. We expect that that will be, you know, seen positively as we see it, and we expect this will move on in due time. I think it's unfortunate. I think it's not good for those parts of the economy that need incremental energy and need it as quickly as they can get it.
Nick: The administration will ultimately find a very strong answer as they review the need for permitting approvals here, we expect that that will be seen positively as we see it.
Nick: And we expect this will we'll move on.
Nick: In due time I think it's unfortunate I think it's not good for for those parts of the economy that need incremental energy and needed as quickly as they can get at this pause will slow things down a little which is unfortunate.
Domenic J. DellOsso: This pause will slow things down a little, which is unfortunate and not great for those that are seeking incremental gas, but we have confidence that the merits of LNG export from the U.S. will be seen by all and that approvals will be taken back again in the future. Sounds good. Thanks, Nick. Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks. Okay, thanks, Rocco. I really appreciate everybody's time today. We know that our approach for 2024 is a little bit different than we've been able to do in the past as a company and what we think we've seen from others. We think it very much addresses the challenge that is seen in the market today, which is a near-term oversupply and a long-term, very structurally positive natural gas market.
Nick: And not great for for those that are seeking incremental gas, but we have confidence.
Nick: Since that the merits of LNG export from the U S will be seen by all in that approvals will be taken back up again in the future.
Speaker Change: Sounds good thanks, Nick.
Speaker Change: Thank you and this concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to the management team for any closing remarks.
Speaker Change: Okay. Thanks Rocco.
Management team: Really appreciate everybody's time today, we know that our approach for 2024 is a little bit different than we've been able to do in the past as a company and that we think we've seen from others. We think it very much addresses the challenge that is seen in the market today, which is a near term oversupply and a long term a very structurally.
Management team: <unk> ER positive natural gas market.
Domenic J. DellOsso: We're excited about the position we're in. We look forward to the ultimate aligning of supply and demand in the market and a recovery for natural gas broadly associated with that alignment, and we think we're really well positioned for that. So I look forward to continuing to discuss this with all of you. We'll be out on the road at a number of different conferences and events in the next week to two weeks and look forward to engaging throughout the year. Thanks very much for your time again today, and we'll talk soon. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. 2013 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services, BF-WATCH TV 2021
Management team: We're excited about the position we're in we look forward to the ultimate aligning of supply and demand in the market and recovery for natural gas broadly associated with that alignment and we think we're really well positioned for that so look forward to continuing to discuss this with all of you will be out on the road in a number of different conferences.
Management team: And events in the next.
Management team: Week to two weeks and look forward to engaging throughout the year. Thanks very much for your time again today and we'll talk soon.
Speaker Change: Thank you. This concludes today's conference call. Thank you all for attending today's presentation.
Speaker Change: You may now disconnect your lines and have a wonderful day.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yeah.