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Chesapeake Granite Wash Trust (NYSE:CHKR)

Q4 2012 Earnings Conference Call

February 11, 2013 10:00 AM ET

Executives

Nick Dell'Osso – Executive Vice President and CFO

Steve Dixon – Executive Vice President and COO

Sarah Newell – Vice President, Bank of New York Mellon Trust Company

Analysts

Justin Albert – Raymond James

Minyoung Sohn – Arrowpoint Partners

Operator

Good day and welcome to the Chesapeake Granite Wash Trust 2012 Fourth Quarter results conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Nick Dell'Osso. Please go ahead, sir.

Nick Dell'Osso

Good morning and welcome to the Chesapeake Granite Wash Trust Distribution Conference Call. This is Nick Dell'Osso, Executive Vice President and Chief Financial Officer at Chesapeake Energy. Also, joining me for the call this morning is, Steve Dixon, Executive Vice President and Chief Operating Officer of Chesapeake, and via teleconference is Sarah Newell, Vice President of Bank of New York Mellon Trust Company, the trustee for Chesapeake Granite Wash Trust.

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I have a few prepared remarks, and then we will take any questions you may have. Please note that today's call will contain certain forward-looking statements and assumptions that are subject to inherent risks and uncertainties. The actual results may differ materially from those projected in the forward-looking statements. Additional information about risk factors and other factors that could potentially affect the Trust and its financial results are included in the Trust's press release issued last Friday, and in the Trust filings with the SEC.

As a reminder, CHKR is a statutory Trust, which is required to distribute all cash flow after expenses. The trust has no employees or officers and Chesapeake Energy as the sponsor of the trust is responsible for operating the properties, in which the trust has an interest in fulfilling certain drilling commitments, which is also detailed in the trust's filings with the SEC.

As stated in the press release on Friday, the distribution for the three-month period ended November 30, 2012 from CHKR will be $0.67 per common unit and approximately $0.38 per subordinated unit. Worth noting, Chesapeake Energy owns 100% of the subordinated units. The distribution will be paid on March 1, 2013, to unit holders of record at the close of business on February 19, 2013.

The calculated distribution for this period is approximately $0.60 per unit, however since this is below the predetermined subordination threshold for the quarter of $0.67 per unit, the distribution per subordinated unit will be reduced in order to make a distribution of $0.67 per common unit.

Now I’ll turn it over to Steve Dixon.

Steve Dixon

Thanks, Nick. For the three month period of September 1 to November 30 of 2012, total sales volumes attributed to the trust royalty interest were 151,000 barrels of oil, that’s up from a 146,000 or 3% quarter-over-quarter increase, 329,000 barrels of natural gas liquids, that’s up from 288,000 or that’s a 14% quarter-over-quarter increase and 3.06 billion cubic feet of natural gas, and that’s down from 3.204 billion cubic feet, a 4% quarter-over-quarter decrease. This were total sales of approximately 990,000 barrels equivalent or BOE and that’s up from 968,000 barrels equivalent or about 2% quarter-over-quarter.

The production mix in the fourth quarter was 15% oil, 33% NGLs and 52% natural gas. Realized prices for the period were $86.26 per barrel of oil, $31.92 per barrel of natural gas liquids and $1.94 per Mcf for natural gas. These prices include the effects of transportation and third-party deductions.

When comparing quarter-over-quarter changes in realized price for 2012 fourth quarter, unhedged realized oil prices were higher by $2.04 per barrel, natural gas liquid prices were higher by $4.43 per barrel and natural gas prices were higher by $0.22 per Mcf.

Turning to hedges, the actual NYMEX oil prices were above swap contract prices held by the trust. This results in a realized loss on oil contracts of approximately $609,000 for the period. These fixed oil swap contracts were initially established to hedge approximately 50% of projected oil and natural gas liquids volumes.

The use of crude oil derivates to partially mitigate the price risk of NGL production is subject to basis risk to the extent oil and NGL prices are not highly correlated. The initial forecasted revenue of the trust assumed in NGL price of 49% of WTI, actual results were lower at 37%. The trust has no natural gal hedges in place.

Turning to drilling results in the Trust AMI, during the quarter Chesapeake brought online 9 gross operated wells. These 9 gross wells equated to approximately 9 development wells towards Chesapeake's overall commitment of 118 development wells under the development agreement with the trust. Due January, Chesapeake has now drilled 58 equivalent wells and is ahead of schedule in meeting this 118 development well commitment to the trust. Chesapeake is currently operating 4 rigs in the Trust AMI and this level of drilling is consistent with the original drilling plans outlined in the trust SEC filings.

We will now take any questions you may have. Operator, please open up the line for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Justin Albert with Raymond James.

Justin Albert – Raymond James

Hey guys, how are you?

Nick Dell'Osso

Good morning.

Justin Albert – Raymond James

Quick one, I hopped on the call a little late. Did you guys, was production affected by any ethane rejection this quarter?

Nick Dell'Osso

We’ll follow up with our department and will look and see particularly if the wells in this well set would have had any rejection. I’m not sure, I know we had some in the general area, but I can’t tell you it’s specifically on this well set.

Justin Albert – Raymond James

Okay, and then regarding the 9 wells that you guys brought online, was that pace relatively even throughout the quarter? Or was that lumpy towards the latter half or the beginning?

Nick Dell'Osso

I think it was pretty lumpy towards the end.

Steve Dixon

That’s towards the end.

Justin Albert – Raymond James

Alright, that’s all I have, thanks guys.

Nick Dell'Osso

Okay, great.

Operator

We will take our next call from Minyoung Sohn with Arrowpoint Partners.

Minyoung Sohn – Arrowpoint Partners

Good morning. Just a follow up on the 9 development wells drilled in the period. I know you said that (inaudible), could you give us some sense for how these wells came on in terms of initial production, or maybe a 30-day rate with regard to oil, NGL or natural gas?

Nick Dell'Osso

We don’t have the IPs with us here this morning, but we did look at it same rule with IPs last week, so I answered a bit generically in that.

Steve Dixon

We did have a number, we had some variability for sure in the IP rates and we had some couple of pretty good wells and a few that were a little abrupt below performance.

Minyoung Sohn – Arrowpoint Partners

Of the 151,000 barrels of oil, average daily production, can you give me a sense for how many of these were from the initial producing wells conveyed into the trust, as opposed to those coming from the development wells?

Steve Dixon

No Sir, I don’t have that data here.

Nick Dell'Osso

We don’t break it out that way and have it previously.

Minyoung Sohn – Arrowpoint Partners

Might there be a way for you to be able to provide Investors with broader transparency of regarding these well because we find it very difficult to try to analyze the cash flows of the trust without having a greater sense for the well productivity that’s being put into it. And then, lastly if I could just on natural gas, can you give me a sense for how your gas is being priced, all we’ve being using front month prices and then taking in month averages and looking at deduction. The thing that I’ve noticed is that the differential in terms of your realized price versus the averages in the period seemed to have widened by that $0.45 in this trust period.

Nick Dell'Osso

The methodology for determining realized price for this, or for the realized price of these wells received has been change, it is as you described, where it’s a forward price for that month and then deducts for transportation and for processing charges.

Minyoung Sohn – Arrowpoint Partners

Okay, thank you.

Nick Dell'Osso

We will look into giving a better sense for the breakout of new well production versus like a seed production on the next call.

Minyoung Sohn – Arrowpoint Partners

Yeah, that will be very helpful. I know that things obviously change, but I thought that there is a tremendous amount of detail provided in the registration statements and all the amendments that were filed later. And then, from there obviously I’ve to make assumptions regarding production rates and decline, but what I’ve sensed is just kind of a growing disparity from trend that I would have otherwise thought would have been reasonable four to six quarters ago. I just think it’s critical information for an Investor to be able to have to access whether or not this is a worthwhile investment going forward. Thank you.

Nick Dell'Osso

Very good.

Operator

(Operator Instructions)

Nick Dell'Osso

Okay, thank you all very much for dialing in and your time.

Operator

Thank you. That concludes today’s conference call and thank you for your participation.

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