Chesapeake Energy Corporation (NASDAQ:CHK) Q3 2023 Earnings Call Transcript

Chesapeake Energy Corporation (NASDAQ:CHK) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning and welcome to the Chesapeake Energy Corporation Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Ayers, Vice President of Investor Relations and Treasurer. Please go ahead.

Chris Ayres: Thank you, Anthony. Good morning, everyone, and thank you for joining our call today to discuss Chesapeake’s third quarter 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 statements that cannot be confirmed by reference to existing information, including statements regarding beliefs, goals, expectations, forecasts, projections, future performance, and the assumptions underlying such statements. Please 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.

Please recognize that as except required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP measures, which help facilitate comparisons across periods and 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 on the call today are Nick Dell’Osso, Mohit Singh, and Josh Viets. 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. Now, we’ll turn it over to Nick.

Nick Dell’Osso: Good morning. Thank you for joining the call. I’ll start off by discussing a few of our third quarter highlights, and then I’ll get right to your questions. We delivered another strong quarter, advancing our strategy to deliver sustainable value to shareholders through cycles. As you’ve seen from our third quarter results, we came in on the low end of capital and the high end of production, despite the 60% deferral of planned third quarter turn-in lines and the extension of elective curtailments in the Marcellus. In the Marcellus this quarter, our rig fleet set a new company record, averaging 1,367 feet per day, marking a 16% improvement over the prior quarter. Overall, we drilled four of the top 10 fastest Marcellus wells in our company’s history.

That’s a pretty significant accomplishment given our long and successful history in the basin. Importantly, our decreased cycle times have also been accompanied by achieving a lower cost per foot, which means we will now be able to drill another well per rig year at a lower cost compared to what we projected at the beginning of the year. This is a great example of efficiency offsetting inflation. In the Haynesville, we delivered another robust quarter of base production with strong wedge volumes. Additionally, our sustained efforts to debottleneck our midstream has resulted in lower line pressures and higher production. We’ve realized a 15% quarter-over-quarter reduction in interrupted volumes attributable to midstream disruptions. The combination of our improved base production and effort to optimize gas flow assurance has led us to increasing our Q4 production guidance by 35 million cubic feet a day or approximately 2.5%.

Our strong operational performance serves as the backbone to our commitment to deliver superior capital returns for shareholders. We continue to execute our peer-leading return program in the quarter, repurchasing $130 million in shares and delivering our base dividend. Through the third quarter, we have returned approximately $725 million to shareholders through our buyback and dividend programs. We also announced another important step on our path to be LNG-ready with today’s LNG supply announcement with Vitol. Similar to our past agreement with Gunvor, under today’s heads of agreement with Vitol, Chesapeake will supply up to 1 million tons per annum of LNG to Vitol with the purchase price indexed to JKM. As we continue exploring these types of agreements, we see an appreciation of the premium rock returns and runway of our advantaged portfolio and the strength of our financial position.

Our approach to executing our LNG strategy has been consistent and benefits from production that is physically linked to LNG markets, access to international prices and downside protection through cancellation optionality. Our portfolio, balance sheet, and approach represents a clear competitive advantage among our gas peers and we continue to complete LNG agreements as we see export capacity come online over the next few years. Before opening the call for questions, I’d like to touch on our trajectory headed into 2024. We expect to maintain our current rig count of five rigs in the Haynesville and four rigs in the Marcellus for the first part of the year. Should gas prices firm up in line with the current 2025 strip, we believe there may be an opportunity to add an additional rig in the Haynesville during the second half of the year, which would positively impact volumes in 2025.

As you look to model our business in 2024, a fair starting point is to assume our annual production should be in line with our fourth quarter run rate of 3.2 Bcf a day in the Marcellus and Haynesville. Our CapEx for the full year should approximate $1.6 billion, assuming an additional Haynesville rig in the second half of the year. We’re now pleased to address your questions. Operator, if you want to assemble the queue?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Doug Leggate with Bank of America. You may now go ahead.

Doug Leggate: Hey good morning everyone. Thanks for taking my questions. Nick, I wonder if I could pick up on the 2024 outlook here because for quite some time now, you’ve talked about managing your production to maintain production capacity. I don’t know if I’m missing up the description of that. But as you think about the capital required in to maintain, let’s say, your exit rate and then set yourself up into 2025, what do you think that cadence of production and that associated capital looks like ex-Eagle Ford, obviously?

Nick Dell’Osso: Well, I’ll start here, and Josh may have some more color to add. But essentially, Doug, we’re starting the year with maintaining the production where it is today, right? five rigs in the Haynesville, four rigs in the Marcellus. That’s going to keep us where we are today at about 3.2 Bcf a day. We are paying attention to the fact that the export capacity for LNG should come online by the end of the year, setting up for unmet demand in 2025. If that looks like it’s going to play out and the strip looks like it’s going to hold up, then we would add a rig in the second half of the year. And so the $1.6 billion of CapEx that I gave you a minute ago does assume that we add a rig in the second half of the year in the Haynesville. If we didn’t have that rig, we would just stay at that level of production, it would be a little bit less.

Doug Leggate: Okay. That makes it ton of sense. Thanks. Nick, I don’t expect you to answer this question directly, but I wonder if I could ask you to frame your views on just broader industry consolidation. For Chesapeake, you’ve talked — we were in Haynesville with you in July. You said there was — there were no conversations happening, Mohit countered that a little bit in our bus tour basically saying, well, actually, there are a lot of conversations happening that was just two months later. So, how do you see the landscape and Chesapeake’s role within that, whether it be private or public?

Nick Dell’Osso: Well, I think you touched on some themes there that are pretty interesting and we’ve been very consistent in saying that we believe in consolidation in the industry. So, we’ve been pleased to see Exxon and Chevron do the deals that they’ve done. We think those are constructive for the industry. And the dialogue for M&A does come in ebbs and flows. And there are times in the market where it seems like more people are having conversations than others. Overall, we’ve continued to say that we’re very happy with the portfolio that we own. So, we don’t feel compelled to do anything and we certainly don’t feel compelled to do anything on near-term timetable. But at the same time, we believe in consolidation. We believe in the merits of attempting to have consolidation make the industry a more profitable, more productive place and we’ve been also very consistent in talking about how we would define that for ourselves.

And so for us, we go back to our non-negotiables and just to remind everybody, that means that we — in the context of consolidation, we don’t want to overpay, we will look for accretion in the transaction, we will protect our balance sheet, we will look for a good emissions profile or one we can quickly make better. And what that really means at the end of the day is that you have to make your company better through consolidation, not just bigger. And that’s not an easy thing to do, that’s a pretty high bar. So, we believe in consolidation and we’ll continue to pay attention.

Doug Leggate: Just a quick add-on to that very quickly, Nick. Is there interest in outside of the two basins that you’re in? Or when you say you’re happy with your portfolio, would that imply there for that any consolidation you would pursue would be focused on those two basins?