Q3 2024 Expand Energy Corp Earnings Call
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Speaker Change: I'm a little bit tired. I'm a little bit tired.
Speaker Change: Thank you.
Speaker Change: Thank you for standing by and welcome to the Expand Energy Corporations 3rd, Quarter-Corder, 2024 earnings call. At this time, all participants are on a snow-need mode after this because presentation there will be a question and answer session.
Speaker Change: During this mornings call, we will be making forward looking statements, which consist of statements that can either be confirmed by reference to existing information including statements regarding our.
Speaker Change: Goals beliefs expectations forecasts projections and future performance and the assumption underlying such statements. Please also note. There are a number of factors that will cause actual results to differ materially from our forward looking statements, including the factors identified and discussed in our press release yesterday and in other SEC filings.
Speaker Change: 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 and with peers for any non-GAAP measure we use a reconciliation.
Speaker Change: The nearest corresponding GAAP measure and can be found on our website with me today on the call are Nick del ASO Moats thing and Josh feet, Nick will give a brief overview of our results and then we will open up the teleconference to Q&A. So with that thank you again and turn the time over to Nick.
Nick: Good morning.
Nick: And thank you for joining expand <unk> first earnings call it.
Nick: This is an exciting time for our company and I look forward to briefly highlighting our third quarter results and providing a preliminary outlook for 2025.
Nick: The integration of our two companies is off to a great start.
Nick: Through the first month, we've seen plenty of accomplishments and are ahead of schedule with our integration plans.
Nick: Our early success is a testament to the quality of our employees and their commitment to making expand energy a leading energy producer.
Nick: For the two Standalone companies, we see significant momentum heading into 2025 with solid third quarter results.
Nick: Delivering impressive operational gains, which will enhance future margins and profitability.
Nick: A few notable achievements from the quarter include.
Nick: The combined company produced $6 75 Bcf per day, while continuing to build productive capacity through our deferred completions and turn in lines.
Nick: Legacy Chesapeake drilling operations delivered record quarterly feet per day in the Haynesville in northeast Appalachia, while the company also set monthly and quarterly completion records for total hours pumped in northeast Appalachia.
Nick: Not to be outdone legacy southwestern drove a 25191 foot lateral in southwest Appalachia, a record lateral length for a lower 48 onshore well.
Nick: Now I'd like to talk about why we are so excited about what this company will deliver for our shareholders and energy consumers alike, starting with 2025.
Nick: Our preliminary capital and operational plans illustrate the powerful combination of expand energy and our outlook for enhanced operational efficiencies.
Nick: We are truly better together with a portfolio that will be more competitive and resilient in oil price cycles.
Nick: Our preliminary outlook for 2025 includes approximately $2 $7 billion of total capital to deliver an average of seven Bcf per day.
Compared to Chesapeake Standalone maintenance level. This represents a 120% increase in production with only an 80% increase in capital.
Our strong outlook will be driven by the achievement of our synergies and capturing significant capital and operating efficiencies.
Nick: I recognize many companies promised synergies for us the definition of success is clear, it's all about capital and operating efficiencies, resulting in spending less while producing more.
Nick: In 2025, our capital efficiency should benefit from the deferred activity we built during 2024.
Nick: Importantly, however, we expect this capital efficiency ratio to hold as our synergy realization builds and operating efficiencies continued to deliver higher value for every dollar spent.
Nick: This ensures we deliver better financial performance during down cycles, and more free cash flow during periods of higher prices.
Our confidence in our preliminary plan is based on our early integration wins, which have positioned us to raise our expected annual synergies target by 25% to $500 million.
The extended period between deal announcement and close allowed us to hit the ground running.
Nick: In the initial weeks of expand energy, we have already successfully drilled telemetry data from all drilling rigs.
Successfully streamed drilling telemetry data from all drilling rigs to our drilling drilling op center, allowing real time optimization.
Nick: Redirected legacy southwestern produced water to owned water disposal assets saving $1 per barrel and implemented a new org structure to ensure expand energy is comprised of the best talent, while capturing the best work processes from both organizations.
Nick: Given our strong start we expect to achieve approximately $225 million in synergies, which is more than 50% of our original synergy target next year and are well on our way to achieving the full $500 million annual target by year end 2027.
Nick: Our strategy to build productive capacity will also provide a strong tailwind into 2025.
Nick: We're on track to build approximately 80 deferred sales and up to one Bcf per day of short cycle capacity by year end.
Nick: We will be prudent and turning production online.
Nick: And ready to rapidly respond to market condition.
Nick: When pricing improves.
Nick: Ultimately, what we don't know exactly how prices will respond we do expect market volatility to continue.
Nick: Expand energy was built to deliver through cycles and our hedge the wedge strategy provides great confidence in our financial outlook as we benefit from attractive collars in ceilings that are priced well into the $4 per M and Btu range.
Nick: But we have effectively protected our 2025 program from a prolonged down cycle, while ensuring we can still capture significant upside value in periods of higher prices.
Nick: While our powerful portfolio and efficient operations are keys to our sustainable success. So too has our resilient balance sheet and capital returns program.
Nick: We achieved an investment grade credit rating upon close, allowing us to transition our RVO to unsecured eliminate financial financing costs and ultimately access capital at more attractive rates.
Nick: Our investment grade rating strengthens our position with Counterparties as we continue to execute our LNG ready strategy and supply power to domestic markets in need we understand the importance of a strong balance sheet and peer leading shareholder returns both hallmarks of legacy Chesapeake since our restructuring.
Nick: To ensure our financial strength remains a pillar of expand energy we are enhancing our capital return framework to reduce net debt, while maintaining an attractive capital return to shareholders or.
Nick: Our new framework prioritizes, the base dividend and debt reduction, while including a $1 billion share repurchase authorization and the opportunity for future variable dividends when market conditions warrant.
I have said before the world is short energy.
Nick: As the largest domestic producer of natural gas with an advantaged portfolio resilient financial foundation and geographically diverse assets. We are built to answer the call of increased domestic and international demand as well as driving the volatility that will naturally follow this rapidly evolving market.
Nick: In doing so we are prime to expand opportunity for all stakeholders.
Nick: I look forward to updating you on our progress and we're now pleased to address your questions.
Speaker Change: Certainly and our first question comes from the line of Kevin Mccarthy from Pickering Energy Partners. Your question. Please.
Kevin Mccarthy: Hey, good morning.
Kevin Mccarthy: My first question is on the.
Kevin Mccarthy: The capital costs.
Kevin Mccarthy: I think the outlook for $2 7 billion in 2025 with lower than expected.
Kevin Mccarthy: My question is.
Speaker Change: Got any <unk>.
Speaker Change: How does the $225 million of synergies in 2025 compare to your original target and what else are you seeing on the well cost and your legacy asset it looks like quarterly production came in.
Speaker Change: Quarterly Capex came in lower than expected again this quarter.
Yeah, I'll just start by noting that the $225 million increase is a combination of a few things. It is heavy on the capital side, though I will let Josh give you the specifics.
Speaker Change: Hey, Ken.
Speaker Change: But on the 225.
Speaker Change: About $75 million of that is going to be attributed to capex, but just as a as a comparison to where we started one of the things that we had talked about with the $400 million, which is what we described at the transaction rollout is that 400 would be delivered.
Speaker Change: A third a third a third so cumulative building over a three year time period.
Speaker Change: You are talking about almost $100 million increase in year, one as far as what we're able to deliver from a synergy standpoint.
Speaker Change: Your second question just in regards to kind of well cost trends really just incredibly pleased with the execution performance that we've seen Nick referenced a couple of the highlights for the quarter record pumping months within a neat northeast app.
Speaker Change: We've seen record footage per day really across the entire company, including one of the more challenging places to drill in the NFC at the Haynesville, where we averaged just under 900 feet a day.
Speaker Change: Which again is a record for for the company.
Speaker Change: And then of course, we have seen some deflationary elements show up as well and Thats really carrying on into the fourth quarter, and we expect to see a little bit more market softness heading into the first quarter and all of that's been accounted for within the current plan.
Speaker Change: Great and my follow up is.
On Opex I know you don't have all the details yet on 2025, but just.
Speaker Change: Just curious if the <unk> opex guidance is a good starting point for next year or is there anything else that you've identified.
Speaker Change: Identified synergies on the Opex side in the near term.
Speaker Change: Yes, I think the Q4 number is relatively good as far as where we've pegged the range there.
Speaker Change: We'll start to see a little more synergy so specifically on the water disposal side of the business in the Haynesville and then of course the plan that we've rolled out we've shown production modestly growing through the course of the year, but the Q4 number is in the guide that we've offered there is a relatively good starting point for you.
Speaker Change: Thank you and congratulations on closing the deal.
Speaker Change: Yes.
Speaker Change: Yes.
Thank you and our next question comes from the line of Doug Leggate from Wolfe Research. Your question. Please.
Doug Leggate: Thanks, everyone. Good morning.
Doug Leggate: I guess Nick.
Doug Leggate: First of all I'll also add my congratulations to the synergy uptick but for.
Speaker Change: Forgive me for this one I guess, we're never happy with with synergy targets because they tend to.
Speaker Change: The risks at the outset, you obviously never wanted to put a number on that you can deliver.
Speaker Change: So I guess my question is that.
Speaker Change: Are you done in terms of your view of what you think the merger can deliver there are a lot of things discussed and we went to the haynesville, but two last year and in terms of what you could do differently.
Speaker Change: Obviously, you've got a chance to potentially refinance some of the higher cost debt, although debt maturity site looks pretty attractive. There is a lot of things that you could take off a bunch of different things. So I guess my question is how have your risked the delivery of the synergies.
Speaker Change: How would you characterize the medium term outlook, where youre going to be sitting this time next year in terms of how this target looks.
Speaker Change: Got it.
Speaker Change: Frankly, I love that question, Doug So to directly answer. The question are we done I certainly hope not.
Speaker Change: We are pretty methodical and deliberate about how we determine.
Speaker Change: What we're going to consider a synergy.
Speaker Change: How are we going to project it and ensure that it is.
Speaker Change: Tangible and quantitative.
Speaker Change: In nature.
Speaker Change: That said.
Speaker Change: This is now a huge portfolio of assets with tons of opportunity in it and the opportunity exists across the entire portfolio as you think about.
Speaker Change: All of the learnings that come together from operating across.
Speaker Change: Both legacy companies portfolios, you think about the talent and the teams that come together and you think about the number of rigs that we're running the number of acres that were maintaining on a daily basis the operating.
Speaker Change: Platform that we will manage and then in addition to that as you noted the balance sheet implications of this larger stronger organization.
Speaker Change: There's a lot of things for us to do here and we believe that scale can offer a lot of of really significant opportunities we captured.
Speaker Change: A good many of those in our synergy projection, we've been able to increase it today, because we had a good long time period to plan for closing.
Speaker Change: And we were able to gain confidence in some things that we thought were potential but we now consider to be absolutely part of our plan I would love for us to continue to add to that number over time.
Speaker Change: But in order for us to do that and call something a synergy it's going to have to meet the same criteria that we've put into calling with the $500 million that you see in our model today is synergies and it's a.
Speaker Change: Reasonably high bar and a high bar for a good reason, we want to be able to deliver something that we have great confidence that we can deliver and that we can prove when we call something a synergy like this.
Speaker Change: The last thing I'd say is keep in mind.
Speaker Change:
Speaker Change: Legacy Chesapeake did two acquisitions.
Over the last couple of years legacy southwestern did three.
Speaker Change: Over the last three or four years as well. So we have a lot of practice at bringing together operating teams creating synergies tracking.
Speaker Change: And understanding what is possible and what's not and so I think our track record here is is something that we're going to rely on.
Speaker Change: And the learning history is important to us as we think about how we have confidence in what's in front of us in knowing that we can deliver on the numbers that we're providing.
Speaker Change: Very cool uncertainly can I guess youre right.
Speaker Change: Record the history and the experience you've got a integration is something that I don't think all of us should.
Speaker Change: Forget.
Speaker Change: My follow up is kind of a I guess, it's kind of a macro question. We told me ask you. This question a lot but on slide 10.
Speaker Change: You've laid out.
Speaker Change: The cadence potentially bringing back production.
Speaker Change: I guess I'll be.
Speaker Change: I think there was some skepticism on the capital efficiency benefits you're getting from <unk>.
Speaker Change: Drilling wells, not completed and not bringing them online.
Speaker Change: And so I wonder if I could ask you to speak to your confidence in the $2 $72 eight sustaining capital and more importantly, what are the conditions under which you would not bring back this production in 2025.
Speaker Change: Another great question. So first our confidence in it is very very high and it's not just confidence in the two 7% for 2025. We gave you. In addition to that another slide in the deck, where we show you a 2027 look.
Speaker Change: <unk> is an opportunity for us to show you, what our capital efficiency looks like when all of the tailwind of the deferred activity from 2024 has rolled completely through the system.
Speaker Change: What happens is that you have capital efficiency benefit from the deferred activity in 'twenty five.
Speaker Change: As that capital efficiency winds down from that tailwind that efficiency is replaced with the synergies associated with our cost reductions from the merger and so we think that the.
Speaker Change: Ratio effectively of Capex to production that you see in 2025 is sustainable going forward.
Speaker Change: Now what could cause us not to do it.
Speaker Change: Are things, we have complete control over to reference the same slide slide 10, there is a way.
Speaker Change: <unk> of production on those slides on that slide that shows in a light blue color that represents the volumes from the deferred activity that's completely in our control as to whether or not we bring that online.
Speaker Change: And if prices are soft as we come through winter and if we have congestion and storage and the supply demand fundamentals are weaker than the forward strip would indicate today then.
Speaker Change: When these volumes don't need to come online and we can moderate this.
Speaker Change: Accordingly, so we have a lot of control over this in a lot of confidence in our ability to deliver on it.
Speaker Change: And we have a lot of confidence in our ability to hold this capital efficiency into the future.
Speaker Change: Great. Thanks, guys.
Thank you and our next question comes from the line of Matthew Portillo from T. P. H. Your question. Please.
Speaker Change: Yeah.
Speaker Change: Good morning, all.
Speaker Change: Good morning, just.
Speaker Change: A quick question.
Speaker Change: Around the opportunities for additional optimization as you mentioned, maybe a bit longer dated but curious on the midstream side.
Speaker Change: Typically thinking about maybe some of your contracts in the northeast, but also in the Haynesville do you guys see any opportunity over the next few years to optimize your midstream and marketing side of the business.
Speaker Change: Good morning, Matt. This is mohit, that's a great question as well.
Speaker Change: Just a reminder, we closed the transaction on October <unk>. So fast forward 30 days. So it's still very early days.
Speaker Change: Right now if you look at the state of the business, we are operating two marketing books, but.
Speaker Change: But we do have plans to combine the books come January one 2025 and continue to flush out what marketing synergies that we're expecting.
Speaker Change: To get a little bit more specific around what we're doing around M&A integration.
Speaker Change: I mentioned, joining the trade books.
Speaker Change: Name updates in the contracts <unk> consolidations.
Speaker Change: The ETR and back office integration.
Speaker Change: The high level answer to your question is we are beginning to optimize flows we're trying to get more of our production to premium markets and we are beginning to have some early wins.
Speaker Change: You start looking at northeast App, there is certain amount of equity gas that we were able to move from Chesapeake production and moving into some ft that Sweden had which was idle.
Speaker Change: In Haynesville, we haven't moved.
Speaker Change: We have utilized some of the swing the ft to move Chesapeake equity gas to more premium markets.
Speaker Change: Using some specific pipes that we had access to and similarly, we are in southwest App using the southwest app firm capacity to fill Chesapeake legacy.
Speaker Change: Full sales and so on.
Speaker Change: All of those are early wins, we are super excited at this point of time over time as we bring the two trade books together and integrate the two.
Speaker Change: Businesses together then.
Speaker Change: Share some more details around that.
Speaker Change: Great and then maybe just as a follow up on drilling and completion I know you all had highlighted really the opportunity to drive down cost at the drill bit given faster cycle times.
Speaker Change: Specifically in the Haynesville, but I was curious if you landed on a fluid loading design. There I think there was a bit of a difference in how you all historically at Chesapeake looked at fluid loading versus how maybe southwestern looked at it and if that's been incorporated into your outlook in 2025 and beyond in terms of cost savings.
Speaker Change: Yes, good morning, Matt, Yes, we absolutely did and I guess, maybe to go back to our original synergy target the.
Speaker Change: <unk> $400 million a year $130 million of that was attributed to what we described as drilling and completion synergies, but that was really.
Speaker Change: Entirely tied to drilling and improvements.
Speaker Change: And the reasons, we decided to not at the time, including the completion synergies is we just know how sensitive completion designs are.
Speaker Change: To productivity and therefore, well economics.
Speaker Change: And so we really wanted to take our time, which we have now done through the integration planning process to be able to combine the two companies datasets.
Speaker Change: SaaS the implications of various design changes and its impact to productivity and therefore, well economics and so as we've come out now with an incremental $100 million. We have now included.
Speaker Change: Some synergies that we see associated with completion designs.
Speaker Change: And some of the components of that.
Speaker Change: You mentioned fluid intensity.
Speaker Change: We'll be dialing back fluid intensity, a little bit but on the flip side will be increasing proppant intensity, we expect in the haynesville going forward in.
Speaker Change: In addition, there are some savings we think we can realize by changing the perforation design as well.
Speaker Change: Such as increasing our stage lengths and using an extreme limited entry completion designs. So these are all things that the combined teams with these new datasets that we can look at and its entirety really start to think about how we optimize the program going forward. So.
Speaker Change: To <unk> earlier point, we're not done and we think as the.
The teams continue to work together, we will be able to push synergies even higher.
Speaker Change: Thanks Al.
Speaker Change: Yes.
Speaker Change: Thank you and our next question comes from the line.
Kaylee alchemy.
Speaker Change: Question. Please from Bank of America.
Kaylee alchemy: Hey, good morning, guys. Thanks for taking that question. This question also goes to the capital budget and maybe the optics of it wondering if you can remind us how much capital is southwestern with capitalizing and then maybe offer some soft guide for interest expense in 2025. The rub here is that you guys have done a great job of grinding down that capital number.
Kaylee alchemy: And I guess some are just trying to bridge from our previous reference point.
Speaker Change: Yeah, Hey, Ken I'll start with that.
Speaker Change: Let's start with.
Speaker Change: The capitalization will.
Speaker Change: We will be able to give you full details on how things are.
Speaker Change: Were capitalized and what they look like under our program as we give full guidance next year, but it's not a huge number that comes out of Capex. It's in the.
Speaker Change: I would say mid to low single digit percentages of the capital number.
Speaker Change: So then on the.
Speaker Change: On the next point about <unk>.
Speaker Change: Interest expense, our weighted average cost of interest is going to be in the five seven to $5 range and so you can take that across the debt stack and come up with a pretty good number there.
Speaker Change: Got it I appreciate that my second one is just more housekeeping can you remind us how much production capacity that you currently have curriculum by basin and maybe offer any insight as to where you think the industry is and I'll leave it there. Thanks.
Yes. Good morning, So you know for US internally, we today, we have around 200 million cubic feet a day of net gas, that's curtailed and thats pretty evenly split across the haynesville in the northeast.
That 200 million a day, that's really something that we look at day in and day out and just understanding how market conditions.
Speaker Change: Are you are going to be moving.
Speaker Change: By the by the day and by the week.
Speaker Change: Just given local changes in demand and so that's a pretty fluid number.
Speaker Change: And just like we've been in the past will be responsive to market conditions.
Speaker Change: Asked about the industry number.
Speaker Change: I would say a little bit harder to peg down.
Speaker Change: And it's probably something we've shied away from commenting on directly just because we don't have direct access to individual companies data.
Speaker Change: Thanks, guys I appreciate it.
Speaker Change: <unk>.
Speaker Change: Thank you and our next question comes from the line of Neil Mehta from Goldman Sachs. Your question. Please.
Neil Mehta: Yes, good morning, Nick and team. Thanks, Ed Thanks for doing that so first question is just the enhanced capital return framework Slide 13, maybe you could spend some time talking about as you evaluated all the different strategies about allocating and returned capital y.
Neil Mehta: Why do you optimize towards this design.
Neil Mehta: And how should investors be thinking about the cadence of capital returns as we get into 'twenty five.
Neil Mehta: We know that you have a little more visibility through the hedging program.
Neil Mehta: Yeah. Thanks for that question Neal. This is Mohit, let me start by first acknowledging that the two things that we're trying to address with this framework one is.
Neil Mehta: As you said returning cash back to the shareholders and number two would be.
Neil Mehta: Reducing our net debt.
Neil Mehta: So when we look at the framework that you outlined are referenced on slide 13, the first tranche of free cash flow will what we're doing is reiterating our commitment to the base dividend, which we deem as sacrosanct so that is not changing.
Neil Mehta: That will be roughly $500 million per annum.
Neil Mehta: Next tranche of free cash flow, if theres any we acknowledged that.
Neil Mehta: The prior framework did not do enough to bring consistent and will deleveraging.
Neil Mehta: Efforts into place, where we're trying to use the tranche two of free cash flow towards net debt reduction.
Neil Mehta: Which essentially formalizes the debt Paydown post the merger we have inherited the swing dead. So we need to have a formal plan for paying debt paying down that debt.
Neil Mehta: And finally in <unk> three.
Neil Mehta: Which will be any remaining free cash flow. What we are trying to do is provide a higher portion, which is 75% of that tranche three as opposed to 50% before of the remaining free cash flow, which will go towards additional returns to equity in the form of <unk>.
Neil Mehta: Either buybacks or a variable dividend, which we will determine based on market condition. So in summary, we see this enhanced framework is a strong way to reassure shareholders that we are committed to net debt pay down while continuing to continuing to deliver shareholder insurance.
Speaker Change: Okay. Thanks, and just a follow up on the macro and Nick you.
Neil Mehta: <unk> talked about.
Speaker Change: You have mid cycle over the years I'd be just curious how you think about the moving pieces here.
Speaker Change: Go to 25% and 26, you've got obviously huge LNG ramp as we go through 'twenty six but you've got global capacity on the other side and we're seeing power demand really surprised to the upside, but there's less spare capacity.
Speaker Change: It feels like there are a lot of moving pieces curious on your views and has this enthusiasm around AI empowered demand changed your view of mid cycle to the upside at all.
Speaker Change: Yes. Good question, Neil So I would say first thing I very much agree theres a lot of moving pieces and what that means to US is there will be volatility I think you touched on the key moving pieces, which are that.
Speaker Change: LNG demand or LNG export capacity is growing rapidly.
Speaker Change: Exactly how that demand manifests itself with a call on U S. Gas is a function of demand internationally as well as competing supply internationally. Those two things will continue to move around.
Speaker Change: Demand domestically is clearly growing and growing.
Faster than I think a lot of models, we're predicting I'll say one to two years ago in the form of power generation.
Speaker Change: So thats, a pretty encouraging sign a lot of the power Gen around AI is going to take several more years to develop and so we expect that trend to be structural and long term and provide a pretty important tailwind. The only other thing I would comment on.
Speaker Change: In that macro picture is that currently and continuing through we believe.
Speaker Change: At least most of 2025, we're going to see supply.
Speaker Change: The flat to down.
Speaker Change: Right now at this very current moment, you've seen supply tick up over the last actually just few days, but through October end of October it's pretty common to see volumes pick up as people have managed there.
Speaker Change: Capital allocation for the year to bring more volumes on during the winter. It's something I think the industry has done a better job of aligning production with demand around winter weather.
Speaker Change: So that's not a surprising trend to see but if you think about the rig count that we have for gas.
Speaker Change: In the lower 48.
Speaker Change: It's down quite a bit and it is not positioned to grow.
Speaker Change: The only offset being Permian will grow as Permian has capacity in transportation, we saw the Matterhorn pipeline come online in October it is filling up it is not quite full yet so we will see that capacity fill over the next <unk>.
Speaker Change: Several weeks and maybe months and then after that I think you see.
Speaker Change: <unk> growth in the Permian until the next big pipe comes online and.
Speaker Change: And you see the capital allocation around dry gas.
Speaker Change: And rich gas areas driving production to be flat to down.
Speaker Change: And we don't see a rig count change in the immediate future given that the forward strip really doesn't encourage growth.
Speaker Change: For for anything that has a breakeven.
Speaker Change: Anywhere around $3, you're kind of right. There. So I think I think youre seeing the industry.
Some discipline around how we allocate capital and learning from cycles and that the trend that we believe we are observing is that supply is going to be.
Speaker Change: Flat to down.
Speaker Change: And probably remain that way until you see a rig count change, which then has quite a lag time to it so.
Speaker Change: The dynamics for <unk>.
Speaker Change: Supply demand fundamentals for gas or very strong.
Speaker Change: We are terrible predictors about when that shows up.
Winter weather will have a huge impact on the timing of when supply and demand come together to change the character of the strip, but we definitely see it changing.
Some time in the relatively near future.
Speaker Change: Thank you Nick I appreciate it.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Next question comes from the line of <unk> Kumar from Mizuho. Your question. Please.
Speaker Change: Yeah.
Speaker Change: You might have your phone on mute.
Speaker Change: Sorry.
Speaker Change: Good morning, guys. Thanks for taking my question.
Speaker Change: Obviously, theres a lot of things.
Speaker Change: Things were trying to unpack, what the long term efficiencies here.
Speaker Change: So sort of <unk>.
Speaker Change: Asked this but in 2025, you've said $2 7 billion, a $1 billion and I think Nick you mentioned long term in 2027, when all of the synergies are under our belt. It's about $2. Eight can you help us basically GAAP in 2026.
Speaker Change: You should still have some ducks by our math, but also you should probably be adding activity. So.
Speaker Change: How does coupled trend between 25 and 26.
Speaker Change: Between 25, and 26 and 27.
Speaker Change: Well, yes, it's a good question and I'll take that.
Speaker Change: Clearly, we're going to have some benefits heading into 2026 from the the docs as you as you indicated and so of course, we'll be drawing down that capacity as we head to the end of the ended the year. So you are leveraging some of that productive capacity even in 2006 as as you mentioned will be.
Speaker Change: Adding some activity back in fact included in the 2025 plan.
Speaker Change: We start adding back a little bit of rig activity, which is accounted for in the $2 7 billion. So youre going to be exiting 'twenty five at around 12 rigs. So you are assuming a little bit higher activity, but I think the other key thing to remember is that the synergy realization increases as well going into 2026 and so our.
Speaker Change: <unk> for the 26 capital would be that.
Speaker Change: We are in line with what the $2 seven maybe even just slightly below.
Given the realization pace for synergies.
Great Thanks for that color.
Speaker Change: The second part I Wonder if maybe talk about is marketing when you announced the deal that southwestern you had talked about the expanded scale of the company and you've got the investment grade.
Speaker Change: So maybe if you can give us a little color on how the efforts to market gas to more premium price points is growing at.
Speaker Change: And specifically.
Speaker Change: The market is focused on.
Speaker Change: Yes.
Speaker Change: Direct supply to AI data centers and power generation any thoughts on sort of how that market shaping up.
Speaker Change: Yes Nathan.
Speaker Change: Thanks for those questions I'll take the first one first as I said earlier on the <unk> side, we are.
Speaker Change: Beginning to optimize flow to premium markets and we've had some early wins, which I outlined earlier in the call.
Speaker Change: You should remember that.
Speaker Change: Marketing is one side of the business, where due to commercial sensitivity, we could not truly get into the contractual details until the merger had closed. So we are still in the early innings. So October one the merger close and then we are going through all the contracts.
Speaker Change: Figuring out where the optimization lives, but very encouraged by the early wins that we've had.
Speaker Change: On that front.
Speaker Change: On the other part of your question, which is around the AI data center power demand. So again those conversations have been happening in the background and we are in the process of consolidating the efforts that legacy southwestern was doing on it and then what legacy Chesapeake was doing.
Speaker Change: On our end.
It's fair to say, there's lots of interest.
Speaker Change: From all the different stakeholders involved in that value chain, whether its developers, whether it's power generation companies, whether its end users.
And obviously, the midstream and the upstream suppliers. So trying to bring the consortium together, we are having tons of conversations with all of the REIT stakeholders and these things take a little bit of time, but we remain very encouraged and very engaged with all the stakeholders.
Speaker Change: And let me just add that one of the things we really like about our portfolio is the geographic diversity that allows us to be responsive to both of these really significant trends and demand in the industry, which is growing LNG export capacity as well as growing domestic power generation and having gas across both northeast, Pennsylvania.
Speaker Change: And West, Virginia, Ohio areas of Appalachia, and then also.
Speaker Change: Proximity to the Gulf Coast with the Haynesville, where we're really uniquely positioned to respond to both our haynesville gas can go directly south it can move east.
Speaker Change: Obviously Appalachia has its various outlets that move gas south.
Speaker Change: The southeast and then some gas that can get west as well so.
Speaker Change: We really like the setup of this business and the scale of production that we have in our ability to meet multiple markets from a company that has the financial strength to create the customer relationships for very long periods of time.
Speaker Change: Great. Thanks for the color guys.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Josh Silverstein from UBS. Your question. Please.
Josh Silverstein: Hey, Thanks. Good morning, guys. So you showed a pretty big step change in capital efficiency on the pro forma outlook, but you also were seeing as a standalone company.
Josh Silverstein: I'm curious where the bigger step change in efficiency is whether that's in the haynesville or the Marcellus.
Speaker Change: Yes. Good question, Josh I mean, I would say, it's pretty equal between the two.
Speaker Change: I think both of our operating teams in those areas have done a tremendous job.
Speaker Change: This year and so we're seeing both operational efficiencies as well as conjunction with their supply chain teams capturing deflation.
Speaker Change: And so I think its equitable and my expectation is we continue to see these step changes through time as well.
Speaker Change: Got it and then.
Speaker Change: Looking back at the Standalone companies before the merger.
Speaker Change: You guys were had the capacity to produce over eight Bcf per day the outlook for next year is seven.
Speaker Change: Do you see for <unk>.
Speaker Change: Nerio longer term, where you get back to that level does that all come from the Haynesville is more growth there.
I'm, just curious how youre thinking about the longer term production profile of the company.
Speaker Change: Yeah, Hey, Josh It's a great question, we love. The fact that this portfolio has the capacity to grow.
Speaker Change: <unk>.
Obviously, if theres growth volumes that will primarily come from the haynesville, but we do have curtailed capacity across the.
Speaker Change: Appalachian region right now as well so some of that volume can come back and then true growth can come from.
Speaker Change: From the Haynesville.
Speaker Change: Choosing to be at seven Bcf a day in 2025 is exactly that its a choice.
Speaker Change: And how and when we decide to bring volumes back is going to be directly informed by the macro conditions and seeing the market have call for the gas that we can produce.
Speaker Change: And we expect that to happen, but we also expect there to be continued volatility. So what we've liked about what we did in 2024 is that we use the strengths of the company, which is our capital efficiency and our balance sheet strength to allow for a continued efficient.
Development capital program that did not necessarily have to tie to the immediate delivery of volumes associated with that so that we can better timed the delivery of volumes to the market needs without having to ramp our capital program up and down too severely.
Speaker Change: We expect to be able to continue that kind of decision making.
Speaker Change: In the new company and the combined portfolio and frankly, we expect to be able to do it better because scale helps balance sheet strength helps and you have to have an active hedging program all of those things get better with our size and with our efficiencies.
Speaker Change: Of the of the synergies that we're bringing together so.
Speaker Change: It's a choice we can ramp when and as needed and we can ramp down when and as needed and we have the complete flexibility to do that and I think we've shown a willingness to do that probably beyond what anybody else is shown.
Speaker Change: Yes, Josh I'll, just add onto that a little bit I, just wanted to kind of reinforce the production profile that we show on slide 10.
We've always said, we wanted to be incredibly responsive to market conditions, and we think the plan that we've laid out does that will be at our low point in production at around six four Bcf a day equivalent in Q4.
Speaker Change: And then as we begin to activate that FERC pills, when we start to activate the ducks, we do see a pretty steady growth trajectory throughout 2025 and of course. This is all kind of predicated on our view of the markets today.
Speaker Change: But most importantly, I just want to point out as we're exiting 2025, we anticipate being above seven Bcf a day will be around seven two.
Speaker Change: And that's a number that.
Speaker Change: Not saying, we're going to hold that flat, but it's really just pointing to the fact that we do have some underlying growth occurring and we think it matches fairly well the demand trends that we see showing up throughout the course of the next 12 months.
Speaker Change: Yes.
Thank you and our next question comes from the line of Charles Meade from Johnson Rice. Your question. Please.
Speaker Change: Okay.
Charles Meade: Good morning, Nick do you in the whole expand team there.
Charles Meade: Nick I wanted to go back to <unk>, you talked a lot you've got a lot of questions on the on the capital efficiency and the progression and it makes sense because.
Charles Meade: As positive as you're 25 guide is for Capex I think the bigger surprise to be and I think there are a lot of people is the two point any number for 2006, So I wanted to ask you.
Speaker Change: He asked you a question along these lines, but from a from a different angle. If I look at slide nine and this goes back to a comment you made earlier in the year, where you talked about.
Speaker Change: 24, investing in working capital and if I look at that I look at your out your DUC and your til count there for Q I recognize those are gross numbers, but it looks to me like you've kind of have up.
Speaker Change: On a net basis of working capital.
Sure.
Speaker Change: Unproductive working capital investment of working capital of about $800 million.
Speaker Change: At year end.
Speaker Change: And so.
Speaker Change: Maybe roll off 500 of that in 'twenty, five and another $300 million in.
Speaker Change: In 26, as you talked about I think Josh talked about this earlier, where you get the benefit of appeals in 'twenty, five and the ducks in 'twenty, six but still issue, even though you're rolling in.
Speaker Change: You're rolling it synergies is still at least to me in this framework it looks like your your longer term.
Speaker Change: Sustainable Capex is actually something north of two ways more like two nine or three so.
Speaker Change: Is that a fair framework and if it is what am I missing there.
Speaker Change: Well, Yeah, Hey, Charles I'll take that one of the things I just need to remind folks is that we have layered in synergies and it was just important that as we work out through out 2027 that those synergies start to show up in a more way more heavy way and though the synergy today is going to be probably more geared towards.
Speaker Change: The P&L, specifically G&A as you work out over the next three years to be he became more efficient from a capital standpoint, and it's really those capital efficiencies that start to help and support the two eight number that we've that we've rolled out.
Speaker Change: Yesterday.
Charles Meade: Okay. Okay. Thank you for that Josh and then.
Speaker Change: One other question there was a.
Speaker Change: There was a transaction announced this morning on a.
Northeast Marcellus, where you guys are an operator and to me it looked like a pretty attractive price to the seller, but I'm sure you guys are paying attention, but I wonder if you could just offer any comment on on <unk>.
Speaker Change: How involved you were in the process or weather or your thoughts on the valuation or anything you'd like to share there.
Speaker Change: No. We don't really have anything to add to that obviously, we've been pretty focused on getting this merger closed in.
Speaker Change: Working on delivering the synergies that are in front of us today, which is our top priority.
Great. Thanks, Nick.
Speaker Change: Thank you and our next question comes from the line of Leo Mariani from Roth. Your question. Please.
Leo Mariani: I just wanted to follow up a little bit on the comments around sort of maintenance capex here. So I think you guys are kind of saying that the $2 8 billion is more kind of related to the seven Bcf per day here I wanted to see if maybe we could get any kind of census.
Speaker Change: <unk> Rao.
Speaker Change: Around that for example, if the protection eventually grow to something more like seven five Bcf a day.
Speaker Change: Do you have a maintenance capex level.
Speaker Change: Associated with that.
Speaker Change: Yeah.
Speaker Change: Yes, we're going to hold off on giving anybody an exact number to tie to what.
Future production profiles would look like obviously, if youre going to grow volumes up to seven five Bcf a day, you would spend a little bit more but we still think it should be in the neighborhood of $3 billion ish all else equal.
Speaker Change: Of course, when you get to that point, probably all else will not be equal. So it's really hard for us to give you an exact number.
Speaker Change: But.
Speaker Change: The efficiency here holds and we're really pleased with how it sets up and we know we have the ability to grow this.
Speaker Change: Production profile, when and how we choose.
Speaker Change: Okay I appreciate that.
Speaker Change: And then just wanted to ask you guys on the debt reduction target. So I think you guys are talking about a $1 1 billion debt reduction by the end of 2025 I'm. Just curious does that number include I.
Speaker Change: I think southwestern had around a $500 million revolver balance I think you guys paid off.
Speaker Change: Roughly at the close of the deal I'm, just trying to get a sense. If that's included in the $1, one, which I guess would imply maybe an additional $600 million next year, just trying to understand how the debt gets paid down here.
Speaker Change: Yes. Thanks for that question Leo This is mohit. So let me give you a walk from the Chesapeake side, we had $1 billion of roughly $1 billion of cash on hand.
Speaker Change: You are correct that southwestern that clothing had $585 million drawn on the revolver.
Speaker Change: And that was all repaid in full in that.
Speaker Change: Credit facility has been retired and paid off.
Speaker Change: We also inherited $126 million of cash that southwestern had on the balance sheet.
Speaker Change: So that that also comes into play when you think about forecasting what will happen into <unk> will play the employee will pay the employee severance costs, we will pay the transaction cost will be.
Speaker Change: The dividend which is.
Speaker Change: Paid out in <unk>.
Speaker Change: In fact.
Speaker Change: Factor all of that and we predict that we'll end the quarter and the year by.
Speaker Change: 2024, with roughly $200 million to $300 million of cash on hand.
Speaker Change: To your other point, we have the swing of $5, 7% notes coming due in January 2025, So it's redeemable at par.
Speaker Change: Utilize some of the cash on hand to redeem it at bar somewhere along the course, but but the good number to keep in mind would be $200 million to $300 million of cash ended the year.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you and our next question.
Speaker Change: Comes from the line of Michael shallow from Stephens. Your question. Please.
Speaker Change: Okay.
Speaker Change: Good morning, everybody.
Speaker Change: To see how the 25 plan might change in a downside case, if we had a mild winter.
Speaker Change: Market remained oversupplied would you hold off on bringing the differed tills back online or how do you weigh that against the holding off on spending the capital on the.
Speaker Change: The ducks.
Speaker Change: Yeah, we'd certainly look to.
Speaker Change: Hold back on volumes in one way or another either by spending less money in 2025 are holding back on the deferred activity from 2020 for probably some combination thereof, but we don't want to do is continue to add to our deferred activity balance. So if we are.
Speaker Change: Not wanting to see volumes increase from these levels will be.
Speaker Change: Pulling back capital at the same time.
Speaker Change: But.
Speaker Change: Now, we have tons of flexibility and ready to be completely responsive to the market.
Speaker Change: Yes, Michael I'll, just maybe add onto that.
Speaker Change: The other thing that the plan is reflecting is that we're going from 12 to 10 rigs in the first quarter of the year and again that that decision is really around the fact that we feel that productive capacity that we built is just simply adequate and we don't want to we don't want to add onto that.
Speaker Change: So as we work down the DUC inventory throughout the course of the year, what we had assumed in our plan and included in the $2 7 billion is starting to add rigs back in the second half of the year and of course in a weaker environment. We would just simply choose not to add those rigs back.
Speaker Change: That makes sense okay.
Speaker Change: And then.
Speaker Change: You walked us through slide 13 on the new.
Speaker Change: Capital returns framework wanted to see as things stand right now.
Thinking about buyback versus variable dividend, just given where the.
Speaker Change: The stock prices today.
Speaker Change: Yes, Thanks for that question, Mike that's something that we constantly monitor.
Speaker Change: You can imagine we were restricted to limp transaction closed, but now that that's behind us.
Speaker Change: Something that we constantly as I said reevaluate.
Speaker Change: Could think of.
Speaker Change: In terms of where we are in the cycle right. So if you are in the up cycle.
Speaker Change: Prices are higher the business is generating a lot more free cash flow.
Speaker Change: And we like the variable dividend in that scenario because it introduces some element of rigor and discipline in terms of distributions back to the shareholders.
Speaker Change: And Conversely, when you were in the down part of the cycle, which is where you can expect there to be some dislocation in the stock price where it is.
Speaker Change: Where we think the valuation intrinsic value is then maybe that's the time to be more proactive on the buyback.
Speaker Change: When you put the two things together in an up cycle, maybe youre doing more variable dividends in a down cycle, maybe youre doing more buybacks and blended between the two of them.
Speaker Change: Kind of delivering something which is more which is less volatile and more even even for the investors, but thats roughly how we think about it.
Speaker Change: Obviously quite a bit more detail around it but that would be that's how I would describe it at a high level.
Speaker Change: That's helpful. I appreciate it.
Thank you and our next question comes from the line of Jeff J from Daniel Energy Partners. Your question. Please.
Jeff J: Hi, guys. Thanks for taking the question.
My question is kind of on the $2 eight maintenance Capex that you threw out there what sort of activity level does that contemplate in terms of rig count in other words, I know youre going to turn here in the first quarter you take it back to 12 fourth quarter does that $2 a ton of platelets 12 or to buy some 14, you had in the third quarter, just kind of trying to understand kind of what the initial product.
Thought there is.
Speaker Change: Yes, Jeff we would expect that that to point at $2 8 billion number that we'd be averaging in at around the 12 rigs.
Speaker Change: Okay, Great and then maybe to take the in versus some of the other questions. What would you have to see in terms of market conditions or future strip to bring back those two rigs are dropping quicker.
Speaker Change: Well I think it's just all about the fundamentals Jeff I mean, we've talked all year about how we have looked at the decision to defer turn in lines and defer completions and pointing to the fact that it's not just about price on the screen it's about real.
Speaker Change: Looking at a number of different measures that we think are indicative of the underlying fundamentals of the market, we really want to see that the market needs incremental volume.
Speaker Change: And when we believe that the market needs incremental volume then we believe that bringing volume back should provide a more sustainable economic benefit to us.
Speaker Change: What we don't want to do you see a very short term spike in price respond to that trying to bring activity back no that there is a much longer lag time and destroy capital in the process. So we're really looking for the structural need for.
Speaker Change: For supply.
Speaker Change: To be called for and then we'll bring activity back when we see that.
Speaker Change #100: Perfect. Thank you.
Speaker Change: Yes.
Speaker Change #101: Thank you and our final question for today comes from the line of Phillips Johnston from capital One Securities. Your question. Please.
Phillips Johnston: Hey, Thanks for the question just one for me, it's a follow up just on the new return of capital framework.
Speaker Change #103: The tranche two net debt reduction component.
Speaker Change #104: The idea is to pay down $500 million annually not just next year, but also kind of going forward as well should.
Speaker Change #104: Should we think about the $4 5 billion net debt.
Speaker Change #104: Level target in the sub one times leverage ratio target is kind of the point, where you would.
Speaker Change #104: So the mix more towards.
Speaker Change #104: Return to shareholders. Once those are achieved or would you continue to ratchet down.
Speaker Change #104: $500 million year per year.
Speaker Change #104: Yeah.
Speaker Change #105: Okay. Thanks for that question Phillips.
Speaker Change #105: So just as a reminder, the 500 number that we have laid out for 2025.
Speaker Change #105: That's a number that we intend to reap big every year, so it could be different in 2026.
Speaker Change #105: But at the very least our game plan is to get the absolute debt level down to $4 $5 billion as you pointed out and just as a reminder, the way we view that is trying to get our gearing.
Speaker Change #105: One turn so at mid cycle pricing, so think of $3 per Mcf gas price at that point business generates around $4 $5 billion. So of EBITDA. So we're thinking that's where it begs the $4 $5 billion of debt target that we have.
Speaker Change #105: The comfort I would give you is we are that strike trying to strike the right balance between trying to get cash back to the shareholders and hence the earlier comment about the deeming the base dividend is sacrosanct, but then also prioritizing debt paydown, which is extremely important given that we have.
Speaker Change #105: Pro forma company has is higher debt than legacy Chesapeake did so we need to address the debt stack that's in front of us and with this new framework we are.
Speaker Change #105: I think we are addressing both of those two drivers and we'd like to reassure shareholders and our creditors as well.
Things are a priority for us.
Speaker Change #106: Makes sense. Thank you.
Thank you Doug.
Speaker Change #107: This does conclude the question and answer session of today's program I'd now like to hand, the program back to Nick <unk> for any further remarks.
Nick: Well, thanks, very much I appreciate everybody, taking the time to dial in this morning, obviously, we've got a lot to talk about.
Nick: And we'll be around to answer any questions anybody has follow ups and we'll be out on the road over the coming weeks to meet with many of you all in person we couldn't be more excited about the way that the market is setting up for expand energy as we get into the end of 'twenty four and 2025, we have our hands full with integration and achieving the synergies, but the path to do all.
Nick: Of that we believe is very clear and we're ready to go so look forward to giving you guys updates on our progress as we get through next year and seeing you on the road thanks very much.
Speaker Change #108: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Nick: Okay.
Nick: Okay.
Nick: [music].
Okay.
Nick: Yes.
Nick: [music].
Nick: Okay.
Nick: Hum.