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Chesapeake Energy Corporation (NYSE:CHK)

2014 Outlook and Capital Program Conference Call

February 6, 2014 9:00 am ET

Executives

Gary Clark - CFA

Doug Lawler - CEO

Nick Dell'Osso - CFO

Chris Doyle - SVP Operations, Northern Division

Jason Pigott - SVP Operations, Southern Division

Analysts

David Tameron - Wells Fargo

David Heikkinen - Heikkinen Energy Advisors

Brian Singer - Goldman Sachs

Stephen Shepherd - Simmons & Company

Arun Jayaram - Credit Suisse

Neal Dingmann - SunTrust

Scott Hanold - RBC Capital Markets

Doug Leggate - Bank of America Merrill Lynch

Charles Meade - Johnson Rice

Mike Kelly - Global Hunter

Joe Allman - JP Morgan

Tim Rezvan - Sterne Agee

Operator

Good day, everyone, and welcome to the Chesapeake Energy Corporation 2014 Outlook and Capital Program Conference Call. Today's call is being recorded. And now, your host for today's call, Mr. Gary Clark. Mr. Clark, please go ahead sir.

Gary Clark

Thank you, Rufus. Good morning everyone, and thank you for joining our call today to discuss Chesapeake's 2014 outlook and capital program. Hopefully you've had a chance to review our press release and 2014 outlook presentation that we posted to our website this morning.

During this morning's call we will be making forward-looking statements which include 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.

Including factors identified and discussed in our outlook release today, and the company's SEC filings, please recognize that except as required by applicable law we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements.

I would like to introduce the members of management who are here on the call with me today. Doug Lawler, our Chief Executive Officer; Nick Dell'Osso, our Chief Financial Officer; Chris Doyle, our Senior Vice President of Operations, Northern Division; and Jason Pigott, our Senior Vice President of Operations, Southern Division.

Please note that in order to align with our large cap peers Chesapeake has changed its oil and natural gas and unit equivalent reporting convention to oil equivalents. Combined oil, natural gas, and NGL volume amounts are shown in boe rather than mcfe.

I would also like to point out that our guidance issued today does not take into consideration the impact of potential divestitures on our production, capital expenditures, expenses, operating cash flow, earnings, and other financial and operational metrics.

We will next turn to prepared commentary from Doug and Nick and then we will move to Q&A. Doug?

Doug Lawler

Thanks, Gary, and good morning. Like Gary said I hope you had an opportunity to review our 2014 outlook and capital program that we issued this morning. I'm very excited to share additional detail with you today regarding our 2014 business delivery expectations. As customary we plan to provide our 2013 full year results in late February.

In mid 2013 we kick off a transformation this year designed to deliver competitive growth and return to our shareholders. We began executing on a new strategy of financial discipline and profitable efficient growth from our captured resources.

We restructured the company into business units to unlock value and drive accountability at all level and in all disciplines. We created a comprehensive portfolio assessment to competitive capital allocation process to ensure that the highest value projects would be drilled. We critically analyze capital efficiency and cycle times to improve profitability and drive value leakage out of our investment programs. We significantly reduced cash cost during the year with major efficiency improvements in production, G&A, and overhead. And for the first time, we've established a critical linkage between strategy, top-quartile performance metrics, company and individual goals, and compensation.

On previous investor call, I've noted two major priorities that are essential to our future success. First, and in line with our strategy of financial discipline, we intend to demonstrate positive production growth on an absolute basis while approximating our 2014 capital program with operating cash flow. The inefficient production growth of the past was not linearly correlated with the previous capital spend. In other words, not all capital expenditures contributed to production growth. Going forward, our high quality assets, combined with current and planned operational efficiencies, will drive competitive growth and improved returns to our shareholders.

The second priority is to materially improve the balance sheet through debt reduction and reduce complexity. I will address this priority in more detail after covering the highlights for 2014 guidance.

We're pleased to announce today that our 2014 CapEx and operating cash flow will be relatively balance this year. Total CapEx is expected to range from $5.2 billion to $5.6 billion, while operating cash flow is projected to be $5.1 billion to $5.3 billion. If you take the midpoint of these two ranges then the funding gap is only $200 million. This gap has effectively been closed already by sales of our investment in Chaparral Energy for $215 million, which we announced a few weeks ago.

Further, the operating cash flow set forth in the 2014 outlook is calculated using a flat $4 gas price and $90 oil price for the remainder of the year on our unhedged volumes. When calculated using current NYMEX strip prices our operating cash flow had increased by approximately $200 million. Further we have implemented an aggressive supply chain management initiative to capture the significant purchasing power of Chesapeake and we are excited and encouraged with the capital efficiency that this program has generated.

2014 capital program represents more than 20% decrease compared to the 2013 capital spend. In 2014, we plan to deliver year-over-year production growth on both an absolute reported basis and on a divestiture adjusted basis. To be clear, when we use the term adjusted it simply means that we're giving an effect to production losses associated with previous asset sales. Page 5 of our company slide deck provides a reconciliation of how we arrived at our 8% to 10% adjusted production growth stated in the press release.

I won't spend time reviewing this slide on this call but please feel free to follow-up with us if you have any questions.

We are targeting long-term production growth per debt adjusted share of 5% to 9% annually. We believe this growth rate is very achievable under a relatively balanced CapEx cash flow budget and will rank us among the top-quartile in this metric among our large cap peers.

After significant cash cost reductions in 2013 versus 2012, we continue to project further substantial cash cost decreases in 2014. On a per unit basis, we anticipate more than 25% year-over-year reduction in G&A, and an approximate 10% reduction in LOE cost.

I'd now like to comment briefly on our production profile. You will note in today's press release that we have provided our average daily production rates by play for the month of December. This gives you a good sense of our production profile as we exit 2013. Our average daily production during the month of December was approximately 649,000 barrels equivalent, which is well below our 2014 guidance range of 680,000 barrels equivalent to 695,000 barrels equivalent.

In light of some winter weather challenges experienced in December, and year-to-date thus far in January and February, we anticipate that the fourth quarter 2013 and first quarter 2014 timeframe will mark our production low point and that we will see a significant quarter-to-quarter ramp up beginning in the second quarter of 2014.

It's also important to note that we have retooled our integrated development plan to each field to capture value versus capturing land. I'm very pleased with the progress our operating teams have made during the fourth quarter with respect to cycle time improvements and simultaneous operations planning. The effect of these improvements will be highly visible in 2014.

With regard to oil production, in particular, during 2013 we completed the majority of our planned inventory work-off in the Eagle Ford during the second and third quarter. And we expect production volume growth to resume its upward trend as we increase our rig count to more than 15 rigs compared to our recent level of 10 rigs in the fourth quarter of 2013.

Turning back on our efforts to improve our balance sheet, we continue to make progress evaluating non-core assets sales as we will be divesting additional properties in 2014. Our 2014 capital program and production growth profile is not dependent on any asset sale. We will update you on the status of any divestitures as those develop throughout the year.

This concludes my prepared remarks. I will now turn the call over to Nick Dell'Osso, our Chief Financial Officer, to discuss natural gas differentials and our hedging program. Nick?

Nick Dell'Osso

Thanks, Doug, and good morning. As Gary noted at the outset we posted an updated Investor Presentation on our website this morning to accompany the outlook and capital program press release. I would like to point out a couple things I see as notable in the slides.

On Slide 9 of the presentation we provided a detail breakdown of the components of our natural gas price differential. You will note for 2014 that Chesapeake's total gas price differentials are projected to range from $1.60 to $1.70 per mcfe, which is an increase of $0.20 to $0.30 per mcfe year-over-year.

I'd like to take a moment to discuss the drivers of this increase and some of the things we're doing to mitigate further increase. To begin with, we are experiencing an increase in gathering and transportation cost less mature basin such as the Eagle Ford, Utica, and Powder River basin. These systems are in a heavy capital build out phase yet the product throughput is relatively low. Thus, cost per mcfe in these areas is relatively high versus our overall blended differential number.

Second, our minimum volume commitment or MVC shortfall payment is expected to increase by approximately $0.10 in 2014 primarily due to projected volume declines in Barnett as we have reduced our activity there only one rig.

In the Haynesville, you can see that we also expect to incur a relatively smaller MVC payment during 2014. But in general I believe we can mitigate our Haynesville MVC with a seven to nine rig drilling program. Those rigs will drill wells we expect to be highly economic and we're pleased to be in a position to return some activity in the Haynesville in 2014.

The final contributor to the increase in natural gas basis differentials is the expected decrease in the ethane related BTU uplift. In 2014 we plan to recover more ethane than in 2013 particularly in the Utica and Southern Marcellus. As a result, our average gas stream will be less rich and thus we will see less BTU pricing premium in 2014.

As a positive offset to these factors I just listed you can see on Slide 9 that we're projecting 2014 regional basis differentials to compress, primarily due to the highly profitable northeast regional spot gas sales and basic hedges we were able to take advantage of during the recent cold weather snap.

We are currently undertaking several actions to mitigate gas differential increases going forward. These include rightsizing and planning with our midstream partner to better align with our lower drilling program. Drilling in areas where we have already invested more heavily in midstream build out and engaging in discussions with our midstream partner on various aspects cost control, planning, logistics, and efficiency measures that will ultimately be beneficial to both parties.

Turning now to hedges, we've been actively locking in oil and gas prices for 2014 and beyond via both swaps and three-way collars. As shown on Slide 8 in our presentation, we have entered into swaps to establish an average natural gas price for $4.17 per mcf on approximately 47% of our projected production for 2014. Additionally, we have entered into three-way collars on 21% of our estimated production that offers upside exposure to natural gas prices between $4.09 and $4.38.

Looking into 2015 recent strength in the NYMEX strip has also enabled us to enter into swaps and collars that provide exposure to prices north of $4.40. On the oil side we have hedged nearly 60% of projected 2014 oil volumes at approximately $94 per barrel, a price that is fairly close to the current NYMEX strip.

I'd like to conclude by reminding everyone that the outlook we issued today does not take into consideration the impact of potential divestitures on our production, capital expenditures, expenses, operating cash flow, earnings, oil and gas differentials, and other financial and operational metrics. We are working on some divestiture transactions with the strategic goal of high-grading our portfolio and reducing leverage and complexity on the balance sheet. We hope to have more to say on this front in the coming weeks and months and look forward to continue to focus our portfolio of the assets with the highest rates of return and opportunities for differential performance.

Thank you for your time this morning. We will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And for our first question we go to David Tameron with Wells Fargo.

David Tameron - Wells Fargo

First, can you just give a little more detail on the CapEx budget, ethanol number you gave us, can you give us an allocation what's E&P, what's -- do you have capitalized interest in there? What's the expectations for kind of other CapEx outside E&P?

Doug Lawler

Sure, David. The budget range or our capital range we provided will represent about 95% E&P related expenditures. And so to address to your question regarding capitalized interest it is not included in there but that the capital range we provided does include any leasehold acquisitions that we would be looking at in 2014.

David Tameron - Wells Fargo

Let me ask one more. Just on the -- as you look at the overall portfolio today when you start picking up what you have in the asset base. I know you talked about some additional divestitures but -- should we expect -- should we feel a little more strength to grow over there, 6 to 12 months are there areas you want to bolster. Can you talk about your big picture view of the portfolio today and where you want to pick it over the next couple of years?

Doug Lawler

Sure. The way I'm looking at it is not necessarily like a shrink to grow but the way I'm focused on it is in the way that our teams are and how can we capture the most value from the portfolio of assets that we've got. I think that as everyone is aware we have a tremendous portfolio, a lot of strength. And so when we apply the competitive capital allocation and look at our strategic growth metrics and how we can be more competitive, drive more value for our shareholders and be more competitive versus our peer group, what projects and what areas are going to attract capital within that competitive process. And so it's -- we're going to continue to be working it not just in a current year profile, but over the three and five year time frame and we will be making divestitures accordingly, it will lead to how that capital spend and the growth of the company can best be optimized.

David Tameron - Wells Fargo

Okay. Doug, go ahead. Sorry.

Nick Dell'Osso

David, this is Nick. I'm just going to add that as we're refining that capital allocation process and just to build on really what Doug has already said, strategically there is some assets that we think fit better in the portfolio and some that probably fits a little less well. And so any divestitures that we do are going to be strategically driven first, but they have the great benefit from my perspective that they will generate some cash proceeds that we can apply to the balance sheet to continue to improve our finance metrics that we are very focused on.

David Tameron - Wells Fargo

And that color is helpful. But Doug, do you -- any areas you want to take the other side and may be add to your acreage position?

Doug Lawler

We will continue to look for opportunities to increase our liquids. We love our Eagle Ford position. We like our Rockies position very much and we also like a mid-composition in Utica, where we are driving oil and liquid. So those areas are going to continue to be a big driver for our growth programs in the future.

Operator

And we go next to David Heikkinen with Heikkinen Energy Advisors

David Heikkinen - Heikkinen Energy Advisors

Just Doug, with the new management and new paper performance incentives, can you kind of walk us through the guidance process and kind of how you pull it together given the shift first, kind of out your guidance and then any conservatism built in, in kind of where those factors might be?

Doug Lawler

Sure, Dave. In looking at the portfolio and the strategy that we want to pursue to improve Chesapeake's balance sheet as well as and deliver the higher quality return to our shareholders, we have put in place this financial discipline, which says that that we're going to approximate our cash -- our capital expenditures with our operating cash flow.

And in doing so, and recognizing in going through a very thorough analysis of the competitive metrics against our peer group, we recognize and drive that portfolio of allocation based on where is the best investments to lead and it will lead to those most efficient metrics and how we can and those that where we can improve and reach higher performing standard. We're going to be a low cost producer and we're going to be efficient in our investment. And so as we look at the process in the guidance it's our portfolio needs to be optimized on net asset value. And when we look at the strategic targets around production growth on a debt adjusted basis, reserve growth on a debt adjusted basis, our cash margins, how we manage and drive further efficiencies into our cash cost, those things all on variables that were optimized within the capital allocation to drive a higher net asset value for the corporation.

And the way I look at the portfolio at this point in time and just noted in the prepared remarks, we have significant opportunity of assets and the recognition that in the past all the capital that has been spent has not led to efficient production growth. And as we've reduced this capital spend now significantly over the past year, and even further over the past two years, we are targeting the higher quality areas and those higher quality areas have definitely an identified core what we believe is the better area. But the significant reduction we're seeing with our capital synergies and efficiencies in our drilling and completions program and the opportunity as we're now focused on driving value in drilling more wells if really the majority all of our wells are multiwell pads now gives us the opportunity to also look at all the opportunities to drive greater EUR on a per well basis.

And so I expect -- I fully expect that the great work being done by our teams on cost and the ability to evaluate EUR efficiencies on a recovery, on a per well basis, we will continue to see that core area growth providing further value to our shareholders.

David Heikkinen - Heikkinen Energy Advisors

And then just looking at all versus peers and dissecting your growth in 2014, your oil growth lags the peers. Can you talk about the components of oil, gas, and NGL growth in your 5% to 9% long-term growth target?

Doug Lawler

Yes, it' a great question. And keep in mind as we ramp down from running in excess of a 100 rigs over the past year or so that developing simultaneous operations programs and integrated field development programs to ensure that we are minimizing the logistic spend, minimizing the efficiencies from drilling single well pads, getting that coordinated and inline has taken a little bit of time.

What I'm really please about as the team has done a great job in a very rapid way and a characteristic to some of Chesapeake's culture and strong attribute is how quickly the organization can move. And as we're focused on value now and mostly well pads, we anticipate that we will continue to see strong oil and liquids growth from our assets. The core of these assets is expanding and I think you'll continue to see growth. It will be a material component on that 5% to 9% target that we have for the next several years. And then on top of that just the tremendous potential that exists in our gas assets is that with competitive pricing and further cost improvements there it's a tremendous option that we have available that we can exercise at discretion.

David Heikkinen - Heikkinen Energy Advisors

May be I should just be more specific. What do you expect your oil growth rate to be in that 5% to 9% plan?

Doug Lawler

Well we haven't provided that at this point in time. Keep in mind that the target is 5% to 9% in our liquids. The liquids growth is reflected in the 2014 guidance is going to be the primary driver of that.

Operator

And for our first question we go to Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs

Can you give us a sense of your waiting of growth among your key areas for this year; certainly the Utica is expected to see a nice step-up extensively in the first half? How much of your growth is coming from the Utica versus your other key players?

Doug Lawler

Well, the Utica program is performing extremely well despite some significant challenges with weather in the past several months. We see a very strong ramp in the production in Utica in 2014 as infrastructure and compression processing comes available to us and we're very excited Brian at what we see up there.

I think rather than getting into too much detail specific on the asset we're going to be providing you a lot heavy intricate detail at our Investor Day. And so rather than getting into the -- too far down into individual assets we're just going to point it to that point in time.

Brian Singer - Goldman Sachs

You mentioned the weather disruptions in December that carry into the first quarter. Could you quantify the impact of that in the December number, in the December forecast or December production that you put up in the release?

Doug Lawler

Well, if you remember that as you all know that impacts because of freezing conditions across the country that caused some weather interruptions. At this point it's providing exact clarity on that, I don't have the exact number off the top of my head, but it's still -- it's something that we're working through and what you can expect to see is that the weather is not going to be something that last too long and we will be continuing to drive that value into the subsequent quarters.

Brian Singer - Goldman Sachs

And lastly on the ethane processing side, which you mentioned is increasing in 2014 versus 2013. Just big picture on the economics there, is the increase in ethane capping because the economic supported that your base case $4 gas price or is it because of the need to meet pipeline specifications in areas like Appalachia?

Doug Lawler

It's really both, Brian, pardon me. It's really both. We have some nice commitments that allow us to get ethane out of the basin, out of the Utica and Southern Marcellus basin. Remember a lot of the areas out there you just can't reject all that ethane to ridge. And so we have a nice advantage in having the ability to get considerable amount on ethane to the Gulf. And so that pipeline comes on line this year until we will be utilizing that and that allows us to probably flow more production that we may be otherwise would have with winter storm rejection.

So it does have an impact in short-term there from an economic standpoint and that the ethane prices are challenged right now. But we, in other parts of the country we're seeing some improvement and we're trying to forecast the best we can around that but just always recognize that recovery versus rejection is a month-to-month decision and we optimize that every period.

Operator

And for our next question we go to Stephen Shepherd with Simmons & Company

Stephen Shepherd - Simmons & Company

I'm just wondering if you could provide some more detail behind this 1300 gross wells connected to sales figure that appears in the press release. What's the regional breakout on that number by major operating area?

Doug Lawler

Steve, we're not going to go into that detail at this time. We can follow-up with you a little bit later. We were just trying to target being a little bit higher level here in what we're forecasting for 2014. But as you know and you've seen we will be coming forward in later February with our earnings release for the year and we could provide with some additional detail in the meantime.

Stephen Shepherd - Simmons & Company

So we can expect, what you're saying is we will expect to get something on that front as part of the fourth year earnings release?

Doug Lawler

I think that's fine, yes.

Operator

And for our next question we go to Arun Jayaram I apologize Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

I just wanted to talk a little bit about the motivation to put seven to nine rigs in the Haynesville. And if you look at your slide the rates of return in the Marcellus North are higher there, but just wanted to see if you could comment on that? And how big a part were your midstream commitments in the Haynesville driving that decision to run eight rigs next year or this year?

Doug Lawler

Sure that it's a very good question. The Haynesville asset is just simply world class. A world class gas asset that has not been optimized with respect to capital efficiency and the opportunity there we see very, very competitive. We have already recognized with the base level rigs we've ran in the later part of 2013 significant cost improvements. And those cost improvements make the Haynesville a much more competitive investment for the company and it's an area that we believe has significant growth potential for the company.

With respect to minimum volume commitment that definitely weighs into it, it's not the primary driver though, because we see excellent value in the investments there and minimum volume commitment is essentially at some cost. We're looking how we can drive the greatest value with the capital that we invest and Haynesville is a very attractive area for us. As you compare it Marcellus, the question there is what's the efficient? How do we efficiently grow the portfolio in the best way optimizing around those top-quartile metrics that I described and how do we further increase and optimize the value of the company and so that's what's driving some of that rig distribution.

Arun Jayaram - Credit Suisse

And just may be a follow-up if you look at the overall guidance you're better than the Street math on natural gas and NGL, and a little bit worse on the oil. Versus where sat in 90 days ago, did you reallocate rigs to gas and obviously the Haynesville and perhaps that's why the oil guidance is a little bit below the Street math?

Doug Lawler

No, I think there is a couple of things to consider with the oil. We're targeting 15 to 18 rigs in the Eagle Ford and we have pulled back some of the activity driven oil investments in other areas that were not the most efficient. So reducing our rig count in the Mid-Continent area where we in the past have experienced some oil production and growth but it wasn't the most efficient investment. Pulling back our rig activity has resulted in better returns as the teams have been able to capture better synergies as well as making sure that we can do the appraisal work necessary to optimize our cost and also making sure that we're drilling the next best location not just the next location.

But the key part in that reduction in that activity, I think that the leverage we have available to us based on the acreage and the quality position in these oily plays that we will continue to be driving hard for increasing the liquid further and the oil in particular further. Keep in mind also that we rushed it back with the program in the Eagle Ford, because of what I noted as simultaneous operations were not optimized and the lack of a full field integrated development plan because of the need that we're pursuing trying to capture and hold the leasehold. So as all those things are coming together we recalibrated and still have significant opportunity to grow the oil volumes over time.

Operator

And we go next to Neal Dingmann with SunTrust.

Neal Dingmann - SunTrust

May be sort of a play specific question. Just looking at kind of your Eagle Ford slide there on Slide 13, wondering now given the improved spud to spud days and then obviously the plan to run 15, 18 rigs, any thoughts on now with the efficiencies you continue to see there just how many wells, an idea obviously a rough range that you might be able to complete this year sort of versus what you had last year on a kind of general percentage terms?

Doug Lawler

Yes, it's a good question, Neal. We're really excited about it and about what the opportunity set is there. I tell you without like you noted I mean, we'll be providing more of that detail but I think what you can expect is in the 350 to 400 range that we will be turning in line to Eagle Ford this year.

Neal Dingmann - SunTrust

And then with that those costs coming down, Doug, is it fair to say I mean I guess returns there I mean, rival, I think you mentioned in the slides some of the 100% returns in the Northern Marcellus, the returns would rival at least that Northern Marcellus area.

Doug Lawler

Absolutely. We are very excited about it. And part of the reason in providing some of the supplemental operational data is to demonstrate that with this focus on the pad drilling and how that's ramped up over the last year and the cycle time, the expectations of the cycle time improvements and the average well cost, you can expect to see continued value creation there.

Neal Dingmann - SunTrust

And then just looking obviously now, turning over to the Utica, it looks like obviously some of your other areas primarily it's most in the oil pad drilling this year, the seven to nine rigs, is it fair to say most of those will continue to be where they were around Carol County and some of that area? I'm just wondering, number one, kind of regionally what you would be focusing on? And then number two, given that pad drilling and the number of rigs running, would you be able to hold most of that acreage that you have in that play?

Chris Doyle

Yes, it's Chris Doyle. I'll just comment quickly on that. I think a fair thing what we will be focused on is filling the capacity that we've got; we'll probably push a little bit to the south. One thing I'd like to point out to you guys though if you look at a seven to nine rig program, the cycle times that we're putting up there, there honestly very few if any of our competitors are able to do, that seven to nine operator rig program is more like a 20 rig program and wells shops. So we don't see issues, own acreage it's going to be value driven and really excited by what we're seeing.

Neal Dingmann - SunTrust

And Chris just one follow-up in that area I mean given now what you all mentioned in the amount of processing capacity that's coming on obviously for material amount this year especially in the second half of this year. I know you were restricted a bit on capacity this year and you had a number of wells that are either not fully completed yet or were chocked back or restricted because of capacity. Will that still continue to be the case for most of this year or at a certain point where most of those build kind of really flowing?

Chris Doyle

2014 is huge year for us we've got a lot of gas behind shale price, now as you said we finished the year strong. We brought in the second train of Kensington. We will continue to ramp as you see on the slide doubling our exit capacity from where we ended 2013. We will see less gas behind the choke as we move through the year. But honestly the well results that we're seeing are very favorable and like I said we're really excited about this asset.

Neal Dingmann - SunTrust

Then last question, may be for Doug, you Chris, just wanted may be this might be an Analyst Day question, but just you certainly have a lot of acreage, it looks like to me the perspective over in that Southern Marcellus, it could also perspective for Utica, you didn't mention anything here yet as far as may be targeting some Utica wells in that either West Virginia area or some of that other Southern Marcellus area. Is that something that you will consider this year?

Doug Lawler

Absolutely it's just yet another value option we have in the portfolio, Neal.

Operator

And we go next to Scott Hanold with RBC Capital Markets.

Scott Hanold - RBC Capital Markets

Just another question on production in 2014. You talk in terms when I look at the chart on page 6, oil production growth why didn't you address -- why it wasn't a little as more robust as you would have anticipated. But when I look at sort of some of the dry gas growth and especially the associated growth I mean it's very strong and so kind of getting back to the point of long-term what can you grow acreage or volumes. When you sit back and look at it, really in your view would you say you still think that you're going to have a balanced profile going forward or should we still kind of think Chesapeake as very high gas levered company?

Doug Lawler

We will continue to be driving the liquids and particularly the oil, as the primary target in our program. I think its worth to note that if you look at the divestiture adjusted numbers the oil growth was 8% to 12%. I think it's also important to note that we're going to deliver a growth with 20% -- more than 20% less capital than what we spent for the same production growth on equivalent basis in 2013.

So I think that the thing to focus on here is that from the apples-to-apples assets you've got 8% to 12% in the oil growth and opportunity set with these high quality assets is unbelievable. And so we're focused on our cost, we're focused on how we improve the EURs and how we optimize this capital program going forward. I'm just very excited about it and I see tremendous potential in it.

Scott Hanold - RBC Capital Markets

So when you look at your portfolio, I mean what is -- I mean is the Eagle Ford pretty much the primary oil growth asset that you all have at this point or what are the assets that you have. It sounds like you scaled some stuff back in the Mid-Continent obviously when you see more activity in the Haynesville. Just from a rate of return perspective is, is really the Eagle Ford the primary growth driver here of oil going forward?

Doug Lawler

Well, we see other opportunities for oil growth in Mid-Continent and as well as our Rockies position and we will provide more details to Scott at the Analyst Day on that.

Scott Hanold - RBC Capital Markets

And just one, where do you consider in this dry gas shale versus associated gas production, where would the Utica be classified is that -- is the gas coming out there would that be associated gas?

Doug Lawler

Well, we view Utica as huge liquid lever for us.

Scott Hanold - RBC Capital Markets

So dry gas would be dry gas from Marcellus and Haynesville though?

Doug Lawler

(Inaudible)

Scott Hanold - RBC Capital Markets

Yes. And then on the Haynesville you planned to have seven to nine rigs running, what were you running like in the fourth quarter in terms of like Haynesville rig count?

Doug Lawler

We're running three rigs kind of at the year-end last year. We started ramping up. I think we probably averaged four for the quarter but we started ramping up rigs October, November, December. I think we've got seven or so rigs now, we're adding another one in a month -- within a month.

Scott Hanold - RBC Capital Markets

So those are all recent adds. Okay. Got it.

Doug Lawler

Right.

Operator

For our next question we go to Doug Leggate with Bank of America Merrill Lynch.

Doug Leggate - Bank of America Merrill Lynch

I apologize I was a bit late getting on the call. Let's actually go back to the Haynesville, Doug, real quick. Looking at your slides, you've given percentage of acreage HBP on most of the place, but you've not given that on the Haynesville. I'm just wondering is there an element of acreage holding driving your moves to accelerate the rig count yet or is it all economics?

Doug Lawler

All economics, Doug. It's all acreage already held by production.

Doug Leggate - Bank of America Merrill Lynch

So the whole thing is held by production, great stuff. My follow-on is on the carries, obviously there has been a lot of moving parts in the capital that you're having offset by some of the legacy arrangements. Can you just give us a quick rundown as to what outstanding carries if any you will have left on the respective place?

Doug Lawler

Sure. The outstanding carries that we have still a small amount remaining up in the Rockies and some as well in Utica and that totals about $650 million to $750 million.

Doug Leggate - Bank of America Merrill Lynch

That's across the whole portfolio?

Doug Lawler

Right.

Doug Leggate - Bank of America Merrill Lynch

And that holds as far as this year then?

Doug Lawler

That this year, Doug, right.

Nick Dell'Osso

Rockies expires this year, Utica will carry some into '15.

Doug Lawler

It's going to be impacted by our drilling program, Doug. We'll spend what we spend and then we will get the benefit of $650 million to $750 million additional this year.

Doug Leggate - Bank of America Merrill Lynch

My last one if I may is I know you haven't given a lot of commentary or any commentary frankly around potential disposals. But when we look at the production targets for this year, are you assuming any net reduction as a result of asset sales or is without the -- would that change your guidance as we go forward. Have you made some assumptions reasonable assumptions about as it relates to potential asset sales with associated production?

Doug Lawler

Everything we have identified on an absolute basis. And then we provided the divestiture adjusted, which is only takes into consideration what was sold in 2013. So as we go forward depending on which assets we could potentially sell then we will be looking at changing that guidance accordingly depending on what those volumes are.

Doug Leggate - Bank of America Merrill Lynch

Can you offer any kind of lightness there Doug or we're going to hold off for the Analyst Day?

Doug Lawler

We're going to hold tight on that, Doug.

Operator

And we go next to Charles Meade with Johnson Rice.

Charles Meade - Johnson Rice

If I could flog the 2014 oil growth story just a little bit more it sounds to me that based on the comments you made Doug about dropping activity in the Eagle Ford and picking back up that your growth is going to be back-end weighted on the year, would that be the right interpretation?

Doug Lawler

That's exactly right Charles.

Charles Meade - Johnson Rice

So in that sense your -- I guess it would follow that your 4Q '14 or the 4Q '13 would be higher then?

Doug Lawler

That's correct.

Charles Meade - Johnson Rice

And then if I could also go back a bit to the gas differential question and that was great info that you guys put in there, I know you guys making a lot of questions on it. I am curious about how you might see that evolve as you go into '15 and beyond because a lot of the dynamics that Nick laid out about being relatively new fields and you've incentivized gathers to build towards you. That seems to me that that would be mitigated as you move to '15 and beyond. I guess we don't know where you're going to be investing in '15. But would that be the right way to think about it that we should expect that gathering short stuff to decrease over time as volumes ramp?

Doug Lawler

Charles, I will just preference my comments to say that we certainly don't want to give any 2015 guidance at this point. But we're focused on there again is making sure that our current activity is aligned with what our mainstream partners are constructing and that we're focused on helping them with cost controls and sizing of the assets appropriately. Further, I would note that the rapid decrease in activity we've had over the past year or so leaving to catch-up in terms of the volume that will be delivered over time into the mainstream systems. So and it's just something we have to continue to work through, if you just think about the way those agreements were under proper service mechanism that the capital gets spent and then we through the volumes and we have a rate set accordingly.

So there is some catch-ups to do there, but we're focused on optimizing our flow volumes to do that and working closely with them to make sure that their activity is focused on the right place and size appropriately and that everybody is focused on helping each other keeps costs down.

Charles Meade - Johnson Rice

Yes that makes sense and may be some of that catch-up is what we're seeing here in '14 as it reduced catch-up from reduced to only '13, would that be some reason for that increment in '14?

Doug Lawler

I think that's fair.

Operator

And for our next question, we go to Mike Kelly with Global Hunter.

Mike Kelly - Global Hunter

Slide 12, if I'm looking at this right now, just I'm curious if the rig count and CapEx mix here if this is really fully representative of this recalibration of how you're optimizing the capital allocation going forward or is this some limitations here on that front you should see this continue to ship throughout the year, we continue to drop rigs in the Mid-Continent and reallocate capital and rig count to other areas?

Doug Lawler

Yes, Mike what you see is a result of our portfolio evaluation and where we see the best opportunities at this point in time. I think what you will also see through the year if we put some ranges on the number of rigs that could be in certain area and that range is going to be based on flexibility in reacting to where we can capture the greatest value.

So we will continue to maintain flexibility in our capital allocation and within our operations program such that we can direct rigs to the areas that are going to generate the greatest returns for us. So I think that to answer your question, it is the best estimate that we have going forward and it's -- I think it's going to provide good growth for us and we're going to be flexible as we evaluate and post appraise those opportunities going forward.

Mike Kelly - Global Hunter

And then I'll follow up on Leggate's question on the drilling carriers and I just know this question is going to be from my way by investors in terms of $650 million dropping off in terms of carries after this year. Yet you're calling for kind of acceleration of growth on a debt adjusted per share basis going forward just how does that match, how do you overcome and continue to really accelerate from here on out with that dropping off ? Thank you.

Doug Lawler

I think part of it is greater efficiencies that we're already recognizing the program and at the end of 2013 and as we go forward to 2014 and then in 2015 as well. That plays a big part of it. I've made no other prepared comments about our supply chain initiatives and that program going forward we expect continued capital efficiencies and reductions as a result of that and we've become more efficient and taken advantage of the purchasing power of the company.

So there is a number of things that are going to wade into offsetting that capital exposure as well as optimizing the returns in cash flow generating capability the company that we can invest in other areas based on improved returns. So I think that to answer your question it's all really driven around capital efficiency and what we're building into the program.

Mike Kelly - Global Hunter

And a quick one from me on Q1 and maybe I missed this, you had $649,000 a day in December for production, your comments were that the rig count, completion count peaked Q3, Q4, Q1 is the drop in production, how should we think about Q1 just in particular on the production front. Is that $649,000 does that represent a good place to start or is that impacted by weather just any color if you can give there it would be helpful. Thank you.

Doug Lawler

Sure it's going to be about flat that we look forward for the first quarter. So it's a good proxy for first quarter as we're going forward what growth is expected in the program.

Mike Kelly - Global Hunter

Flat at Q4 or flat on that December rate hikes?

Doug Lawler

It's really more flat in that December rate.

Operator

We go next to Joe Allman with JP Morgan.

Joe Allman - JP Morgan

Doug, in terms of the CapEx, so if we add in the capitalized interest then your CapEx really is over $6 billion. And so and then your cash from operations is just over $5 billion. So that am I correct in saying that funding gap is really closer to $1 billion or do I have a misinterpretation there?

Doug Lawler

That's correct.

Joe Allman - JP Morgan

So why -- because it's a big number why not disclose that upfront and talk about that capitalized interest number instead of having people ask for that?

Doug Lawler

Joe, I think what we were trying to focus everybody on here today is the efficiency of the assets and the portfolio and the growth that can be created out of the portfolio given a certain amount in capital expenditures. And so again that capitalized interest is certainly a cash flow seems to be pretty well understood and all the questions that we've been receiving and people are focused on are what amount of capital was obtained in this asset base to growth efficiently and in the right ways. And so that's really the questions that we're trying to answer here. But again it's pretty well understood number and we're happy to talk about it.

Gary Clark

Joe, this is Gary. There has been no departure on how we discuss that number. I mean, capitalized interest has never been included in our CapEx.

Joe Allman - JP Morgan

I understand. When you're talking about your funding gap, so the funding gap is really not just a couple of hundred million, it's really more than that. But just hits your CapEx spending I mean, you really need to sell about $1 billion of assets this year just to hit the CapEx number and then to reduce that you really need to sell beyond the $1 billion. If I'm not mistaken, so is your plan to actually to sell at least $1 billion worth of assets and is your plan still to reduce that even in 2014, meaning that you really need to sell more than $1 billion worth of assets just to start reducing debt?

Doug Lawler

Joe, we'll start for people we've said before which is that we intend to reduce debt this year and that we're not ready to talk about what we're going to do in the way of assets -- asset sales.

Joe Allman - JP Morgan

I mean, I know Doug, you previously said that you're not going to be selling equity. So if you're not selling equity could you discuss some of the other options, I mean it just seems to me the math works out such that you need to reduce that this year, you need to sell more than $1 billion worth of assets. I don't need to hear about the specifics of the assets, but what are the other funding options?

Doug Lawler

Look, I mean we're very focused on the strategic portfolio that we want to hold going forward. We've been very clear that there is a much of stuff in our portfolio that we think make sense for us to do that stuff. What we don't want to do Joe, because it's not the way we're thinking about it from a strategy standpoint and say the first and foremost we're going to sell assets right now to pay down debt.

But what we're going to do is a continued review of the strategic merits of the assets in our portfolio and at the right time for the right value to the best of the assets that we think are best held by somebody else and that's an active thing in our plan and that's we will continue to do throughout the year and we're going to do that every year. And then by the way some years we will be added. So it's a living analysis of what the proper portfolio is and we'll continue to be focused on getting that right.

Chris Doyle

I think just to add on that the message here to the investment community is that the financial discipline that's recognized in our 2014 program has never been recognized in Chesapeake Energy, never, and the direction and the focus of these teams is how we can drive the greatest shareholder value, and we are going to continue to strive for top-quartile growth metrics compared to our peers and we have the assets to better capable of doing it. 2013 was a marked transformational year for this company. 2014 is a foundational year in which continued capital and operating efficiencies are going to be recognized throughout the year in our programs.

The information we provided to you on a supplemental basis and the operations it is very evident the direction that we are taking this company. We will be a low cost provider, we have the asset base to compete very competitive versus our peers. The funding gap that you have identified or that exist there, there is not any lack of recognition on our part of that. We will continue to use the balance sheet in the most efficient way to drive value for our shareholders. That's why have targeted that we have done a long term strategic growth target 5% to 9% on a debt adjusted basis, and we believe we will be able to easily accomplish that.

So if you look forward and you take carries and you look at all these things that are involved in the program that the communication here is that the financial discipline is a different day at Chesapeake, and we have the assets and we've got the talented employees to drive value that will be top-quartile.

So there is a billion dollars approximately there that associated we are going to continue to investing that in these programs to provide the future growth and we are going to look very hard on the funding gap and what are those opportunities that we can improve the balance sheet going forward that may cover that funding gap. So there are many different things that we can do.

Joe Allman - JPMorgan

Now, in terms of what you are saying is very clear. It's very clear that there is a focus on value, which is different than before and a focus on operational efficiency and you are showing that by allowing your LOE by quite a bit. It's just in terms of the strategy, I understand this strategy trying to have the best return assets and maintaining a good portfolio, but is it also a strategy to improve the balance sheet and so --

Doug Lawler

That’s the (inaudible).

Joe Allman - JPMorgan

Okay. And then is that the strategy, so what are some of the options for making that happen, if you could lay out, we don't need the real specifics but as specific as you can.

Nick Dell'Osso

The key is that non-core assets that do not competitively add to our long term value and our value creation opportunity for our shareholders are going to continue to be rationalized and evaluated for divestiture. And so that we have a number of opportunities and number of things that we better evaluated and a number of things that we will be progressing in 2014.

Joe Allman - JPMorgan

Okay. Very helpful. Just a couple of other questions. On the Haynesville rig increase, so I am not sure if you are saying this, but are you saying, Doug, at this point you have no better investment opportunity in the portfolio than increasing the rig on the Haynesville?

Doug Lawler

No, what I am saying is that the Haynesville is a very competitive investment opportunity.

Joe Allman - JPMorgan

Okay. And then just a couple of quick ones. So the 5% to 9% annual net adjusted per share production growth what's the starting period of that and what's the ending period?

Doug Lawler

We've haven't provided a guidance on that yet. We wanted to make sure that the investment community knew that strategically that utilizing the entire balance sheet that's the target they were working for us.

And remember too that when you look at these investment opportunities it's focused on rate of return and value it's not focused on retaining leasehold or other expenditures that are not adding to the value of the company.

Joe Allman - JPMorgan

I understand. Okay. And it is a follow up to Charles question, just to clarify, did you say that the oil growth itself will be up from 4Q '13 and 4Q '14, is it oil production growth will be up?

Doug Lawler

Yes.

Operator

And for our next question, we go to Tim Rezvan with Sterne Agee.

Tim Rezvan - Sterne Agee

Good morning folks. In your prepared comments you mentioned trying to right size midstream obligations. Can we take that to mean that you will look to extricate the company from some of these commitments such as what have in Haynesville?

Doug Lawler

Our position there is we will continue to work with our midstream service provider to drive the best value for our shareholders looking at the different options that could be available with the growth we expect in our program.

Tim Rezvan - Sterne Agee

Okay. And then if we think about your cash flow outlook for the year, you still have a lot of spot pricing exposure, we have seen gas well above your kind of $4 base case price. One, would you look at more hedging right now with the strip doing what's it's doing and, two, would you take excess cash flow and redeploy that back into drilling or maybe continuing to retire some of these preferred equity shares you have out there?

Nick Dell'Osso

I'll jump in and answer that. We're reasonably well hedged here for the year. We look at our head opportunities every day. We have a relatively low amount of production left that's exposed for the remainder of the year. So, we feel good about our hedging position but again we do look at it every day and trying to optimize where we think the positions are to be driven adding throughout the last several weeks as you have seen in our presentation this morning.

As far as excess cash flow as we have said before we look at our opportunities to deploy cash very competitively and in concert with our strategy. So we have set a drilling program this year that we believe can maximize our efficient rate of return in our business. What that means is that while there are certainly some places that we could spend a little bit more money, we like the amounts that we are spending this year, we are comfortable with the rig count that we have and the program that will deploy and the planning that we will do around that. And so the most likely place for all excess cash would be to the balance sheet. And again I hate to talk in absolute, but that's where the cash is going to go.

Doug Lawler

Operator, since we are at the top of the hour, I'm going to ask that we draw the call to a close. Just a few closing remarks. I thank you all for tuning in and joining us today on this call. Just like to reiterate that the focus of this company is to drive value for our shareholders. We will be a low cost provider and the efficiency improvements that have been demonstrated in the past few quarters are going to continue to improve in 2014.

We are excited about our program and we see significant opportunity and we look forward to seeing you in our Analyst Day here in Oklahoma City on May 16, where we will go into further asset detail and provide you a longer term view of the company and the direction we're heading. So thank you all for joining us today and have a great day.

Operator

And ladies and gentlemen, that will conclude today's conference. Thank you for our participation.

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