Chesapeake Energy's (CHK) CEO Doug Lawler on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Chesapeake Energy (CHK)

Chesapeake Energy Corporation (NYSE:CHK)

Q1 2014 Earnings Call

May 7, 2014 9:00 a.m. ET

Executives

Gary Clark – VP, IR and Communications

Doug Lawler – President and CEO

Nick Dell'Osso – EVP and CFO

Chris Doyle – SVP, Operations, Northern Division

Jason Pigott – SVP, Operations, Southern Division

John Reinhart – SVP, Operations and Technical Services.

Analysts

Mike Kelly – Global Hunter Securities

Doug Leggate – Bank of America Merrill Lynch

Charles Meade – Johnson Rice Brokerage

David Heikkinen – Heikkinen Energy Advisors

Brian Singer – Goldman Sachs

David Tameron – Wells Fargo Securities, LLC

Jason Wangler – Wunderlich Securities

Neal Dingmann – SunTrust Robinson Humphrey

Arun Jayaram – Credit Suisse

Subash Chandra – Jefferies & Company

Dave Kistler – Simmons & Company International

Matt Portillo – Tudor, Pickering & Holt

Joe Magner – Macquarie Capital

Operator

Good day, and welcome to the Chesapeake Energy Corporation's Q1 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gary Clark. Please go ahead, sir.

Gary Clark

Thank you, Lauren and good morning and thank you all for joining our call today to discuss Chesapeake's financial and operational results for the 2014 first quarter.

Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website this morning. During this morning's call, we will be making forward-looking statements which consists of statements that cannot to be confirmed by reference to existing information. Including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our earnings release today and at Pages 23 to 31 of our February 27, 2014, 10-K and in the Company's other 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 next like to introduce the members of management who are 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; Jason Pigott, our Senior Vice President of Operations, Southern Division; and John Reinhart, our Senior Vice President of Operations and Technical Services.

As a reminder, we will be hosting our 2014 Analyst Day in Oklahoma City on Friday, May 16. This event will be webcasted and details can be found on our website. We will next turn to prepared commentary from Doug and Nick, and then we will move to Q&A. Doug?

Doug Lawler

Thank you, Gary, and good morning. I hope that everyone's had the opportunity to review our 2014 first quarter results issued earlier this morning. It was an excellent growth quarter for Chesapeake. We reported year-over-year adjusted net productions growth of 11%, adjusted EBITDA growth of 34% and adjusted earnings per share growth of 97%.

I'm particularly proud that we've achieved this growth, while running a disciplined capital expenditure program that is approximately 50% less than a year ago. This morning, we're also very pleased to note that we've raised our 2014 full year operating cash flow guidance by $700 million to $5.8 billion to $6 billion.

We've increased our production growth guidance to 9% to 12% up from 8% to 10% on an adjusted basis and we've maintained our capital guidance to $5.2 billion to $5.6 billion. The ability to provide this growth and capital efficiency demonstrates the power of Chesapeake portfolio as the industry is beginning emerge from a prolonged period of depressed natural gas prices and as we focus our efforts on generating incremental shareholder value out of every $1 spent.

Our cash flow increase is prompted by a number of factors including better than expected first quarter operating cash flow performance and increase in our production outlook, a decrease in our expense outlook for the remainder of the year and an increase in our benchmark oil and natural gas price deck to $95 and $4.50 respectively, which is more reflective to the current pricing.

Nick, will cover the rest of our outlook changes in more detail later in the call. As noted in our press release this morning, overall production that quarter was impacted by approximately 7,600 barrels of oil equivalent per day of weather related down time. Mainly affecting our mid-continent assets but still within our forecasted weather related downtime that's in our guidance.

In the Eagle Ford, production was down slightly on a sequential basis due to a combination of factors including gas gathering and processing facility down time. Operator and competitor offset activity related shut-ins and weather related activity reductions.

April production trends in both the Mid-Continent and the Eagle Ford give us a high degree of confidence that most of these issues are now behind us and we believe the production growth particularly on the oil side, is poised to grow sequentially for the remainder of the year.

Notably, our average daily production rate in the Eagle Ford is currently 95,000 barrels of oil equivalent which is roughly 8% above the daily average rate in the first quarter and I'd like to note, that we plan to exist the year in the Eagle Ford at a substantially higher rate than December of 2013.

In the Utica and Southern Marcellus, the startup of our ATEX pipeline shipments ahead of forecast combined with stronger first quarter production from these areas has resulted in a very robust NGL growth profile. These are primary factors behind the increase in our 2014 adjusted production growth outlook to 10% to 12% as the lowest cost anchored ship are on ATEX.

Chesapeake is well positioned to maximize its margins and its region via our valuable ownership of firm transportation on the ATEX pipeline. Chesapeake has and will continue to evaluate opportunities to utilize third-party ethane volumes to fulfill capacity commitments and reject the portion of our own ethane.

Given the rapidly growing regional production profile and the potential for BTU related pipeline restrictions we are very pleased with our transportation on ATEX and we intend to use this asset strategically to maximize our margins and maintain ethane recovery flexibility.

Turning to capital expenditures, despite a very low level of spending in the first quarter. We still anticipate total CapEx within our previously stated range of $5.2 billion to $5.6 billion for the full year 2014. Total capital expenditures in the 2014 first quarter were approximately $850 million of which drilling and completion capital were approximately $729 million.

We invested cash of $882 million during the first quarter and drilling and completion activities which was partially offset by lower than estimated drilling and completion costs and other adjustments related to prior period of approximately $153 million. Net expenditures for the acquisition of unproved properties were approximately $24 million and other capital expenditures were approximately $97 million.

In the first quarter, our drilling and completion CapEx decreased 37% sequentially from the 2013, fourth quarter in part because we completed approximately 15% fewer well. This decrease in completions is largely due to the timing impact of increased pad drilling, which can delay the completion and connection of new level until an entire pad is drilled out. We expect many of the pads drilled during the first quarter will be completed and connected during the second quarter and the E&P CapEx will rise accordingly.

Additionally and given the severe weather experienced during the first quarter. We voluntarily delayed some completion activity from the first quarter to the second quarter. Improved capital efficiency was also an important driver of our lower spending during the first quarter. We reduced our average capital cost per well by several $100,000 in the first quarter of 2014 compared to our 2013 average well cost.

Consequently, we are spending substantially fewer capital dollars year-over-year while still achieving or exceeding our production growth targets. As part of the strategic initiative to reduce future corporate obligations and complexity. We chose to utilize a portion of the excess cash we generated during the quarter, to purchase a number of rigs and compressors subject to long-term lease agreements.

These transactions will reduce future cash commitments and help facilitate asset sales in the possible spin-off or sale or our Chesapeake oil filled services unit. Chesapeake has undergone a remarkable transformation. Our strategies and financial discipline and profitable and efficient growth from captured resources are becoming readily apparent in our results and are generating foundational improvements across the business.

I'm extremely proud of the Chesapeake team and the rapid pace in which we had embraced our challenges and opportunities. We will relentlessly pursue continuous improvement and drive towards our goal of becoming a top performing E&P Company. This concludes my prepared remarks. I'll now turn the call over to Nick Dell'Osso, our Chief Financial Officer. Nick?

Nick Dell'Osso

Thanks, Doug and good morning. I'm very pleased with our financial performance this quarter and the progress we continue to make in simplifying our balance sheet and reducing leverage cost. In our updated investor presentation posted at chk.com this morning. We've included slides to provide more detail in some of the topics that I'm going to discuss on this call including changes to our 2014 outlook, natural gas differentials and basis hedging and balance sheet improvements.

As Doug mentioned in his opening remarks. We increased our 2014 operating cash flow outlook to the range of $5.8 billion to $6 billion. Which is an increase to $700 million from the prior outlook midpoint. The drivers of this increase are attributable to the following. First, approximately $340 million is associated with an increase in our benchmark oil and gas price forecast for the remainder of 2014.

Net of hedging impacts and increases in oil and NGL differential. Note that, our new oil and gas price deck per second quarter through fourth quarter is $95 per barrel and $4.50 per Mcf that from our previous assumptions of $90 per barrel and $4 per Mcf.

Second; approximately $190 million of our operating cash flow increase is associated with a change in the hedging presentation assumptions embedded in our outlook. Previously our outlook guidance treated all realized hedging gains and losses as cash and all unrealized gains and losses as non-cash.

However, a portion of our realized hedging gains and losses actually consists of non-cash amortization from previously closed our hedges. The new outlook guidance presentation we've adopted includes only cash related to hedging, gains and losses and excludes non-cash amortization which we believe more accurately aligns with reported cash flow.

Please note that, cash flow from operating activities on a GAAP basis is unaffected by this presentation change, they only effect our outlook and improves the accuracy of our estimated cash flow. Lastly, approximately $117 million of the operating cash flow increased projected for 2014 is associated with our increased production outlook for 2014 coupled with Chesapeake oil field services net margin improvements as well as the various other expense improvement that I'll cover shortly.

Next I would like to discuss the positive impact that strong Northeast natural gas price realizations had on our first quarter results and I would also like to provide some detail in our natural gas basis hedges for the months of April through October of 2014.

On a companywide basis, our natural gas price differential decrease to a $1.08 per Mcf in the first quarter from a $1.76 per Mcf in the fourth quarter; very cold winter temperatures and increased heating demand in the first quarter coupled with Chesapeake's beneficial firm gas transportation positioned in the Northeast was the primary driver of the quarter-over-quarter improvement in differentials.

As a reminder, in November 2013 Chesapeake began delivering natural gas from its Northern Marcellus play into the Spectra pipeline which receives pricing at the TETCO-M3 hub and accesses the Manhattan market.

During the 2014 first quarter, the company delivered approximately $425 million a day to the TETCO-M3 hub where we received an average premium to Nymex Henry Hub prices in excess of $5 per Mcf.

These volumes represented approximately 30% at Chesapeake net northern Marcellus production during the first quarter. The company estimates at this firm transportation commitment on the Spectra line enabled it to generate $210 million of incremental operating cash flow over sales and the Basin during the first quarter.

It is important to point out that the positive effects of the premium pricing in the Northeast I just described were largely known at the time we issued our 2014 outlook guidance on February 6 and as a result our full year 2014 natural gas price outlook remains unchanged at a $1.60 to $1.70 per Mcf.

Looking ahead, Chesapeake expect the TETCO-M3 natural gas prices will revert to a discount to Nymex Henry Hub in the months of May through October and as accordingly entered into basis hedges on a significant portion of its 2014 gas to be delivered at TETCO-M3 as well as other sales points related to its northern Marcellus production.

Please refer to Slides 12 and 13 of our updated investor presentation on chk.com which includes new disclosure on our natural gas sales points, basis hedges and associated volumes in the Northeast Marcellus, the Utica and the Southern Marcellus.

To wrap up, I'd like to walk you through a few of our other outlook changes and key elements that drove the quarterly results on the cost of margin side. We are pleased to increase our projected oil field services operations, net margin by $25 million for 2014 which reflect the general impact of improving industry trends and increase third-party utilization of our services equipment.

On the cost side, we are reducing the high-end of our G&A expense range to a $1.30 per boe from $1.40 per boe as we continue to achieve cost savings to discipline spending. Production cost during the first quarter came in at $4.73 per boe.

Our full year 2014 outlook range anticipate decrease in unit production cost as we realized additional volume growth throughout the year. However, so we are leading our production cost range of $4.25 to $4.75 per Mboe unchanged.

Turning to interest expense, we are reducing the expect to grant by $0.20 per boe to reflect the impact of our recently completed $3 billion debt refinancing, which reduces our weighted average interest cost from 5.9% to 5.1% and its projected to generate an estimated annual cash interest cost saving of $115 million.

We are also beginning to see the benefit of our capital efficiency programs in our DD&A rate and accordingly have produced our DD&A outlook by $0.50 per boe. That concludes my remarks, thank you for your time this morning and we will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will start the question-and-answer session. (Operator Instructions). Our first question comes from Mike Kelly with Global Hunter Securities. Please go ahead.

Mike Kelly – Global Hunter Securities

Nick, you had some comments on the differential outlook going forward. Just hoping, you take this one step further and for modeling purposes what should we dial in for 2Q and 3Q, if you kind of give us a head start there?

Nick Dell'Osso

Well to avoid getting into too much granularity on the call, Mike. I'll just remind you that we did keep our range at a $1.60 to $1.70 and also I'll point out that in the first quarter we did bank in our expectations of cold weather as we presented our outlook in February. However, when we did so we still did see incremental high prices through the remainder of the quarter.

What that ends up doing in certain contracts where we have basically a value component to the transportation price is that, when you have the spikes in prices there are some contracts we pay higher transportation cost and so actually even though our realized prices came in even higher than expected at that time in February, so did our transportation cost as a result.

So while we bank in a big portion of that improvement there was an incremental transaction cost in the first quarter that we couldn't predict at that time. So relative to where we were then, the $1.60 to $1.70 for the remainder of this year takes into account that incremental cost at first quarter stood it's actually the better than it was in February.

Mike Kelly – Global Hunter Securities

Okay, appreciate that and if I look at your guidance in terms of the real drivers of the increased here in the production side. It looks like it is NGL driven primarily and we certainly could talk about the composition of that. Is this mostly, more ethane stripping which is the driver of that and if it is – maybe can you just talk about the fact there's that would potentially take oil production guidance higher as you go throughout the year here, given comments that the Eagle Ford looks fairly south going into Q1 here. Thanks

Chris Doyle

Hi, Mike this is Chris Doyle. Let me touch on the NGL's, the big driver there is really in our at south business unit, which includes the Marcellus South and Utica and thus ATEX came online in January. We started recovering NGL's shipping ethane down ATEX through January Marcellus South and we brought in Utica in March.

Haynesville came in a little bit ahead of schedule which is great. The team's on the field executing on a significant production ramp that we had risked down in our forecast and that we should start seeing plans saying thus, we get very comfortable with the ethane and NGL reserves from those stream and so that gives us the confidence looking forward to go ahead and range that guidance.

Already a very stout NGL growth guidance we put out in February. In terms of oil, I'll just touch on the Rocky's. As we know we are hard to constrain until the fourth quarter. We are moving ahead with [indiscernible] there's a big chunk in oil volumes in the fourth quarter. I'll get you to Jason to touch on Eagle Ford and Mid-Con and the other two oil [indiscernible].

Jason Pigott

As far as Eagle Ford again, we had a transition with a rig fleet. So we've moved from of high enough 32 rigs in 2012 to low of 10 in 2013. So we've ramped back up during this first quarter up to 20 rigs with two stutters and we've also transitioned the pad drilling. So we've had a little bit low down this first quarter but that was totally anticipated so looking forward to grow oil volumes out of that.

Eagle Ford and those first set pad could drills and then the wells start to come online and looking forward to the growth there and Mid-Cons is really spanning storage for especially in our mid mine plays. We hit out record rate down there at 30 pounds in barrels a day in Mid-Con north.

So very excited about the progress we are seeing Mid-Con as far as our big oil growth engine there. So again, I think we're going to look probably well by a year end, as far as oil growth in part.

Mike Kelly – Global Hunter Securities

Appreciate that, if I [speak] one more just on the capital efficiency front here. Doug, I was hoping you would -- could quantify just give us your thoughts on how far along we are in the goal to get well cost down to $1 million across the board in each one of your basins, per well. Thanks.

Doug Lawler

Sure, Mike excuse me. I'm glad you asked that question. As everyone is aware, we set out a goal at the end of 2013, fourth quarter. As part of our capital efficiency improvements in the company we are going to drive $1 million per well of our capital program. And we have made substantial progress in every single area in which we are investing.

Our outlook for the year that was a program that we were looking to achieve and accomplish over the course of 2014. We essentially have captured good amount of that, if not all of it in several areas and we still have more opportunities through efficiencies and synergies that we anticipate that we can capture and so excellent progress with that respect.

We'll be providing more detail on an asset basis at the Analyst Day next week and provide more color around how all those capital efficiencies are getting captured and where we anticipate further capital efficiency to be recognized in our program going forward.

Mike Kelly – Global Hunter Securities

Good deal, great quarter and look forward to the update next week. Thanks.

Operator

Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Please go ahead.

Doug Leggate – Bank of America Merrill Lynch

I appreciate the detailed explanation on the basis differential, but obviously some things that's never enough. So if you comment, I'm just trying to dig thought a little bit more in to this. What I'm curious about is, as per Haynesville production kicks back in towards the back end of the year in terms of growth that is an obvious with the big ramp you have in the Utica.

What is the mix change due to the basis outlook because I'm guessing you've got a bit more flexibility then perhaps beyond your current mid-stream commitments to be able to see improvements perhaps you're not making for numbers right now. So I'm just wondering if that was part of what we saw in Q1 or if I'm just completely off base and appreciate that color.

Nick Dell'Osso

Sure, Doug this is Nick. I'll take that. So we are expecting an increase in our Haynesville production this year, as we ramp a rig activity there, as we previously noted. The timing on that of course to key to figuring out exactly how many volumes come in this year versus next year and determining what the MBC impact will be, so as you think about what I said earlier about the $1.60 to $1.70 staying where it is for the remainder of the year and that being actually an improvement on where we thought it would be in February for the remaining three quarters.

The Haynesville MBC as we are getting ramped up there is probably a bit higher than we thought it would be then and the Barnett is lower as we have seen better production come out of our Barnett wells than we anticipated beginning of the year and as we see some opportunities to bring on some low cost completions and things like that in the second half of the year.

So we continue to stay on top of the forecast of that overall MBC impact and our second half of the year is lower than we anticipated originally and we'll always continue to try to optimize our capital program around this types of items that we can take advantage of opportunities where they'd be basis like we saw in the Northeast or whether they'd be transportation related to optimize the contracts we have in place.

Doug Leggate – Bank of America Merrill Lynch

Forgive me for pushing this, but if you look into 2015 and beyond. Can you – just given the rough start is to how you would expect that basis differential to evolve?

Nick Dell'Osso

You know, there's so many components to it there, Doug when you talk about transportation as well as basis. So it's a bit hard for me to do that until we get into really giving the streaks and detail on our capital allocation across our assets and where we see the best return coming out for shareholders and how we go about prosecuting the program for 2015.

I'll say you that, it certainly would not be in our forecast to have the same strength of winter that we had this year. We'd all love to forecast that, but that's probably not realistic so we wouldn't necessarily have that basis improvement there and from a transportation side. We will have some of the same types of challenges around, where our firm transportation and MBC's are but we think its manageable was this year, where we optimize our capital program around that.

And we think potentially there is opportunities to continue to do that and improve what we see.

Doug Leggate – Bank of America Merrill Lynch

Thanks, my follow-up maybe a little bit more philosophical and Doug I guess this one would be for you, but there's been a little bit of speculation that perhaps you would be prepared to look outside the US strategically as you move forward. Now obviously other than from analyst update but I just wonder if there was really any substance to that or obviously you've got lot of winter chop to-date but how do you feel about the overall direction and the company going forward, now I'll leave it there. Thanks.

Doug Lawler

Thanks, Doug that's a great question and I really appreciate you asking it. I think you categorize it properly that we've got a lot of wood to chop. I think we've making a lot of progress on several fronts. The efficiency in our programs, our cash costs, our capital program, the synergies, operationally that we are capturing. I just – I cannot be more excited about the progress that we are making.

What we see with our high quality assets is great growth potential and excellent running room and as the company continues to grow. The strength of our assets provide us live flexibility, I think we have an outstanding portfolio highly competitive portfolio compared to our peers. So I'm very pleased with that and I want to highlight and point to our strategy which is the financial discipline, which were making great progress on.

And the second point, profitable and efficient growth from capturing resources and the emphasis there, is that the captured word is there for a specific reason, Doug. It is there because we are focused on driving the greatest value from these assets unless said, I think that it's important to note and I've shared in an few external presentations that the Chesapeake [indiscernible] besides talent, the company's speed, the operational capability and expertise is outstanding.

And as the world and countries around the world look for opportunities to develop their own unconventional or shale resources. Chesapeake has that expertise and could potentially be part of it. I believe it's something that we should evaluate, we have not made any commitments to enter into the international arena, but I do believe that in the company's future that could be a possibility, we just have to be very careful that we do not comprise the value creation story from our current assets and it has to be very prudent value accretive to our shareholders.

So as everyone is aware, there's different risk profile international and the last thing we are going to do is, in anyway what so ever sacrifice any value for our shareholders in our growth stories. So that's, we'll leave it in response to your question, but there is extremely good growth opportunities in our current assets and for the size of the company there's an optional lever there that can potentially be pulled but it has to make good sense for our shareholders and the company's growth progress going forward.

Doug Leggate – Bank of America Merrill Lynch

I appreciate the answer, Doug. I'll see you next week. Thank you.

Doug Lawler

Great. Thanks. Doug.

Operator

Our next question is from Charles Meade with Johnson Rice Brokerage. Please go ahead.

Charles Meade – Johnson Rice Brokerage

Good morning, thanks for taking my question. Doug, I want to go back to a kind of discrete comment you made in your prepared remarks about the ATEX line. It sounds like, what you're considering is perhaps not doing just doing partial ethane recover to get down to pipelines back and then using your extra capacity on the ATEX line to buy heavily discounted ethane that other people have to strip out to meet, pipelines back. Have it got the right read on that?

Doug Lawler

Yes, that's a fairer look at of what we're trying to describe. The ATEX pipeline, gives us a tremendous amount of flexibility and strength there with our production.

Charles Meade – Johnson Rice Brokerage

And I guess what I'm really after is, what is – so you're able to where is that going to be show up, I'm guessing it will be in the marketing midstream line and what kind of order magnitude are you up, are we talking about as far as the value capture opportunity there?

Doug Lawler

Well, we haven't put that exactly level of detail out in our guidance yet. The key in my mind is the flexibility that it offer too much with the production growth area and it's optionality how we can capture the greatest value for our shareholders, given that assets and that those that capacity that we have available to us.

Charles Meade – Johnson Rice Brokerage

Got it, so several birds and the bush just none in the hand yet and then shifting back over to the Utica. I'm wondering, you guys had some midstream challenges with the Natrium plant fire and but that's in the past. You now got the ATEX line up, can you talk about how that play whether more interested in the well performance and the takeaway that kind of thing, how that is performing versus your expectations of maybe three or six months ago.

Chris Doyle

Hi, Charles this is Chris Doyle. I'm exceptionally pleased with the continue performance and honestly our performance of the team that we have working the Utica. When I came on six months ago, I had many of the same questions. I think some of you guys have, I've spend six months looking at the results of this team has executed upon really looking forward to sharing that with you guys next week at Analyst Day.

I can tell you everything is lined up. As you've said, we've had some challenges, had some challenges late last year and we came back taking, we were set in production records probably two or three a week as we continue up this aggressive production ramp.

As the press release indicated, we average about 50,000 barrels a day equivalent net from that asset and we are significant higher than that today. Just an update, the next tranche, the next bump up will come in the form of Kensington, the third train in Kensington. Now they're $100 million a day.

We are on track for June startup which is reflected in our forecast. We tied in that third train a couple weeks ago; we are finishing sort of final adjustments. Electrical and should be commissioned in couple weeks. This is the team that continues to out execute just starting volume in that play and you'll see that in black and white next week and couldn't be proud of anything.

Charles Meade – Johnson Rice Brokerage

Thank you. I'll be tuned in, when we see you next week. Thanks a lot.

Operator

Our next question is from David Heikkinen with Heikkinen Energy Advisors. Please go ahead.

David Heikkinen – Heikkinen Energy Advisors

I just wanted to check my math on differential first, with a $1.08 in the first quarter in guidance does that basically mean second quarter guess will be a $1.85 to $1.90 for in third quarter and fourth quarter?

Nick Dell'Osso

Didn't calculate that out in front me, Dave but was a $1.08 in the first quarter and $1.70 for the end of the year, that's the math.

Unidentified Company Representative

Fourth quarter should be radically be the highest, Dave because you've got the MBC coming back in.

David Heikkinen – Heikkinen Energy Advisors

And then the on the NGL realizations and NGL growth. You basically added 10,000 barrels to 15,000 barrels a day of NGL volumes to increase your guidance. As I look at the differential increase for the NGL's and just kind of attribute the volume increase and the differential increase to the same out, that would be like a $99 a barrel differential on the incremental NGL's, is that just tied to those incremental NGL's being primarily ethane?

Nick Dell'Osso

A lot of those NGL's are ethane, Dave you're right at that, but I would also remind you that when you look at the NGL differential as it suggested here keep in mind that we increased our oil price by $5 and so if you look at the projected realized price for NGL's, they're actually a little bit higher than they were previously.

So what we've really done as we've said, NGL prices that we expect to receive our flat to a little bit higher and the delve set to Nymex oil is wider as we've continued to see that NGL pricing is challenged in a way that oil is more volatile.

So what we are really projecting there is less volatility in the NGL price this year, than we've seen short-term in the oil price as we've gone from $90 to $95 barrel.

David Heikkinen – Heikkinen Energy Advisors

Okay and then, Doug you talked about first quarter CapEx being down and 15% reduction completions, can you give us your outlook for second quarter CapEx and 1% increase in completions as those pads come online?

Doug Lawler

We'll share more of that detail with you, next week Dave. The key there's noting that, the strength of the portfolio, the capital efficiency; things that we are driving forward towards that were maintaining that CapEx were projected for the full year and very confident on production profile.

So we will get into more details there on the asset side.

David Heikkinen – Heikkinen Energy Advisors

Just take the full year minus first quarter and divide by three for second quarter, third quarter and fourth quarter is that fair?

Doug Lawler

Well, the key to remind the comments that we shared about some of the timing of the first quarter completion activity. It probably a rough approximation is okay, but there will be some volatility around the quarter just based on the pad drilling and the activity.

David Heikkinen – Heikkinen Energy Advisors

Okay. See you next week.

Operator

Our next question is from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Going back to the Utica. Can you just talk about the trajectory of your production mix in terms of oil gases versus NGL's? Both based the various midstream be bottlenecking, but also as you contemplate doing more or looking more to dry gas window versus the liquids rich window?

Chris Doyle

Hi, Brian this is Chris Doyle. I think we'll probably get into that kind of detail next week. What I'll say is that, our trajectory has not changed. You look at our total gross process in capacity. We've laid out back in February. We said we're going to ride that capacity all the way up through the end of the year. We are definitely in line to do exactly that.

I'd say right now, just rough approximation the components splits probably 10% oil, 30% NGL and 60% gas plus or minus. You mentioned the dry gas and we're excited about some of the test that we've seen, we have some of our own dry gas test but honestly there's probably two or three generations of completions to go.

So we are out there, we will be out there testing that dry gas window and excited about hundreds of thousands of acres we've got in it, but when I also say it's not just about dry gas window. We are testing every part of that play and just have a tremendous amount of excitement about what we are seeing and we'll share a lot more next week.

Brian Singer – Goldman Sachs

Great, thank you and then shifting to the Haynesville, you talked about production bottoming here starting to return a sequential growth in the third quarter. How you're thinking about that, as you look in the 59 annual basis. I think you said flattish and in the past, is that still the case. Do you expect a more secular trend in growth?

Jason Pigott

Right, now we're trying. Sorry this is Jason. We are still kind of working on the 15 rig allocation is going to be, we are looking at a steady kind of eight rigs probably again, we're factoring in as a portfolio just MBC again. First of all, we've got great economics in there. We had our first quarter, post-appraisal but we just finished last week in those wells average about over 50% rate of returns, so real excited about the economics and results that we are seeing from that program, but again the Haynesville program is designed to optimize the cash flow at a corporate level.

So we are kind of avoid our 15 discussions, right now and kind of touch on those maybe more at Analyst Day, but for this year. We are planning on eight rig program that will get us up above our MBC by the end of – post that, by the end of the year.

Operator

Our next question is from David Tameron at Wells Fargo. Please go ahead.

David Tameron – Wells Fargo Securities, LLC

All my questions have already been asked, but if we look at back at the Eagle Ford looks like that oil, the percentage coming from oil, went down in the quarter from 4Q to 1Q. Was that infrastructure, can you just talk about anything changing out there?

Jason Pigott

The only thing, I could point to again I hadn't looked at that actually from percentage going forward, but then we did have some downtime issue that impacted oil more than the gas, so that could be influencing. We lost about 120,000 barrels just again gas and stuff just due to some processing problems and gathering problems.

So again, I don't think about overall fluid composition out of Eagle Ford is going to change long-term, it's a pretty steady profile. So I just made -- have been kind of something that happened during the quarter.

David Tameron – Wells Fargo Securities, LLC

Okay, so no change to what you're drilling or you're?

Jason Pigott

No, we're 75% liquids pretty much out of the program and 25% gas. So nothing, again there may be minor fluctuations here and there but I don't think it's anything major or long-term.

David Tameron – Wells Fargo Securities, LLC

Okay and then Nick or Doug whoever wants to take this? The natural gas side, you know I think I asked you about this before but as far as hedging for 2015, you're not that hedged and just given the focus on debt repayment and in a little more conservative approach on financials, why not go ahead and just lock some of that gas in rather than pick that bet that gas move higher, can you guys just talk about that?

Doug Lawler

Yes, Dave it's a good question. One which we continue to look at and what would be the hedging program to be very important and critical to protect our cash flows and we look at it very often and we will continue to look at it, so I think that there is opportunity there and that the way look at it right now, I think there is we've got a lot of strength in the pricing and as you're well aware. We're focused on protecting our cash flows and improving our balance sheet, their key elements and what you can expect that we'll continue to hedge and too opportunistic time and we think it's the best for the portfolio.

David Tameron – Wells Fargo Securities, LLC

All right. Let me slip in more and hear this. You guys have put this capital discipline slide in here, cash flow versus the CapEx and you're finally I guess for the first time at least 5 years on that chart here above CapEx.

If we maintain a positive, let's say we maintain current prices, should we see that GAAP widen in 2015 and 2016.

Nick Dell'Osso

Doug, I'm sure will want to have something to say here too, but Dave we held off on given any kind of guidance on what we're going to do for 2015 because we're going to continue to assess our opportunities there. All things equal, if prices stay high relative to how we have things planned, yet that guidance that GAAP would widen, but I'd just remind the strength of the portfolio and the places we have to invest capital at a very high rate of return, when you think about that question.

Doug Lawler

And I think, just to add there that everything we do, we tied back to our strategy and that strategy is to provide top quartile, growth metrics from a operating perspective and capital perspective and a financial perspective and so we are not looking for one quarter win or one year win, we are looking for the long haul steady, repeatable performance that's in the top quartile category.

We are making great strides in that way and as we look forward to 2015 and we'll be sharing some additional color by that next week. We just – we have a lot of opportunity.

David Tameron – Wells Fargo Securities, LLC

Okay, thanks for the color. Good luck, next week. We'll see you out there.

Operator

Our next question is from Jason Wangler with Wunderlich Securities. Please go ahead.

Jason Wangler – Wunderlich Securities

I'm curious on just with obvious reason the commodity prices in what we've seen in just general. Whether it's within individual basis or just across the entire portfolio, are you seeing much of change in just the activity plans for the year or even as you look even further out?

Doug Lawler

Well, the portfolio that we have give us a lot of flexibility and as we look at our capital program and we plan going forward looking to capture the greatest margins. We have a considerable amount of flexibility and being able to average in certain area, pull rigs from another area and we will do that as we see necessary.

I don't expect that you're going to see major deviations in our program but because we have the strength like in Haynesville, you could see say increase a rig there, but it is not like you're going to see this ramp up to 15 rigs or something like that.

So we really are trying to take a very discipline approach to it, but the strength and the prices, the strength and realizations. We will opportunistically look to capture that value, but it will not be significant deviation from our planned programs.

Jason Wangler – Wunderlich Securities

I'm sure that's helpful and then maybe just on a high level, I'm sure we will get into this more next week, but from the asset sale perspective just non-core side, it seems like you're just kind of keep peeling things off. I mean, do you have an idea at least on the high level, how far along that process you're is there much left to do, have you kind of gotten through that portion of that last year or so?

Nick Dell'Osso

You know there's still a fair amount to do there, it will come in pieces, it won't be a big wave necessarily like we've had in the past of as many kind of volume of deals, but we do have a large portfolios, we continue to note there's a number of things in the portfolio that others look at and feel they would [covet] more highly than we do and therefore put more capital into and therefore be worth more to them, then would to us.

So things that we are not investing in, that become non-core to us overtime. We will either determine if there is ways to improve them and make them more competitive in our portfolio or we will look at divesting them, so that's an active process that this company will be in perpetuity as given the breadth of the portfolio.

Doug Lawler

So just to add to what Nick said there, I think that our target about that financial disciple in improving the balance sheet and the strength of our balance sheet is something that we're actively working and we will continue to work.

Operator

Our next question is from Neal Dingmann with SunTrust Financial Services. Please go ahead.

Neal Dingmann – SunTrust Robinson Humphrey

Say just two questions, first just on, I noticed that obviously the CapEx for the acquisitions of unproved properties, you know you've got that down now and I think it was $24 million or so for the last quarter. your thoughts as, are you continuing to add just some bolt on things to block up some acreage or Doug, is it fair to say that especially in your Eagle Ford and Utica most of that now is pretty blocked up?

Doug Lawler

You described it perfectly, we will have some small incremental acquisition cost in there for bolt on type of stuff filling in acreage, but it's not a significant part of our program and you won't see any major deviations from that?

Neal Dingmann – SunTrust Robinson Humphrey

Okay, I'm sure you'll probably get this next week definitely more detailed in the Utica, but just questions on, I think you said for the 47 wells as in release that the average was about 1,180 boe per day, just went an on now on the for the wells that you're doing, you know existing what does the completions look like, I mean are you extending the laterals and so I guess, two questions there just on that overall cost of these wells and then, how you're seeing the laterals sort of developed?

Chris Doyle

Hi, Neal this is Chris as you and I discussed probably couple months ago, our focus for this year is capital efficiency and what that means for us in Utica is extending those laterals out and actually optimizing our completions and so we are seeing quarter-over-quarter, year-over-year increase in EURs and performance.

We are as you know, not aggressive when it comes to the choke. We think the long-term performance of these wells and it's interesting to see some of our competitors come out and now do the same thing. We think long-term performance is not driven by the first month production, it's driven from the first year, two years production and how you bring these wells on.

As we've said, we're exceptionally pleased with the performance. We'll get into heck lot more detailed next week, but for the discussion you and I had earlier this year is still on track and longer laterals and optimized completions and well cost, we were talking was, we could drive well cost into the sixes.

We are staying right around the low sevens, but reallocating some of the efficiency gains that we are seeing some of the cost reductions that we are seeing into better wells.

Operator

Our next question is from Arun Jayaram with Credit Suisse. Please go ahead.

Arun Jayaram – Credit Suisse

Doug, I just wanted to see if you could maybe highlight maybe your opportunity set regarding, Powder River Basin oil as well as the Niobrara, haven't gotten an update from me guys on that in a while?

Doug Lawler

We are going to give you good review in that, within next week. We are excited about, what we see up there. We think there is good opportunity. I view it as a another strong asset this will be important in our future and for our oil growth strategy. So we'll be sharing a little more detail with that view, next week on that.

Arun Jayaram – Credit Suisse

Okay, fair enough. Doug, as you think about as we look at the big-cap pierced to-date and earning season. We have been seeing really any of the large-caps putting incremental dollars in the gas. So I just wanted to get your thoughts on, what it will take for CHK, obviously it had summer rigs in the Haynesville but to get, more capital allocation towards dry gas.

Is there a gas price, what are you looking towards to do that?

Doug Lawler

It's not really driven by gas price, Arun it's more focused on how we can drive the greatest value of our program and how can we continue to sustain that overtime. So we have tremendous flexibility in our rig fleet and how we can move our rigs around, I don't see as materially changing as I've commented on our previous question.

Materially changing our program as gas and the current gas price environment, but keeping mind with four assets it can produce greater than 1 Bcf a day several of those can produce greater than 2 Bcf a day, we have a tremendous value lever there that, as proven in the past this company's ability to ramp production very quickly and take advantage of strong opportunity, we can do that.

The key in my mind is that we are going to do at a prudent pace; we are going to do it at a value capture pace and not do anything to comprise the long-term growth profile of a company. So that said, you can see few rigs move around to capture value, greater value and we will do that and just react in a more opportunistic way, but we are certainly pleased with the gas prices and looking to capture greater value there.

Operator

Our next question is from Subash Chandra with Jefferies. Please go ahead.

Subash Chandra – Jefferies & Company

I'm trying to understand, I guess I might struggle in asking this question but should we think about these cost goals per well and sort of initial stage of cost reduction that is heading towards best practices or is it sort of phase I of cutting the fat and best practices might involve putting more horsepower into completion there or stages etc to weigh your maximizing output.

I mean, it doesn't seem at all like your stocks pricing output, while you're reducing cost but trying to understand, if I – as you – if this is the best practice completion you're looking for based in the basin, in the current program?

Doug Lawler

That's a great question and I appreciate you asking and I would answer it in a, the way I would describe it as that issues that are in place are driven and how do we capture the greatest value and my mission is that few times in different presentations but, there's a difference between cost management and cost leadership and what you're seeing take place in Chesapeake's program is somewhat both.

We are managing cost in my mind the differentiation between the two, is managing cost is driving the things out of our program, out of our expenditures that we know, the efficiency gains that we know exist, cost leadership is how we continue to deliver the same results in driving further value and cost reductions into our program.

The teams have done a fantastic job, we made significant progress. I think we still have a long way to go, the excitement in our teams and on campus here is very strong. The asset reviews, the opportunities for further synergies, further cost reductions are just are fantastic, so I think we've got lot more opportunity on the cost leadership side and the focus that we have there is great.

And so you'll continue to see improvements on the cost, but as Chris was highlighting a little bit there, we also are very mindful, how do we capture the greatest value. So as we look for ways to reduce our cost and to be more efficient in some cases, that maybe adding additional frac stages to give greater recovery or to optimize on a rate, that optimize a program.

So the key there is, drive the cost out, cost leadership but also, I would capture the greatest value.

Subash Chandra – Jefferies & Company

Okay, thanks and I'll probably more about that next week, as well. Along the same lines, you're talking about optionality in the portfolios wondering, if you had a limited dollars, if you can put in context what more you'd rather be doing and if you, given the competitive hiring environment out there. Are you currently staffed to pursue these options?

Doug Lawler

We – but with respect to the staffing question, we are. And we've got a great group of talented employees that are doing fantastic job in our strategy. As we look to grow the program, it's all really focused on, where -- how can we drive the most competitive metrics for the company and the greatest profitability for the company and we're just ever mindful, it's not one metric, it's several metrics.

Its several things that we need to be competitive and driving towards, top quartile performance. So as we look at that, we are not going to sacrifice value and we will staff accordingly and we will maintain the discipline in our programs, that we'll perform not only this year, but we will perform in the subsequent year.

So it's a little hard to answer that question and if we had – if we allocated some additional capital or we have some additional money to spend, we are building the programs. Where we know, when you capture the next value opportunity for our shareholders.

Operator

Your next question comes from Dave Kistler with Simmons & Company. Please go ahead.

Dave Kistler – Simmons & Company International

Really quickly looking at your full year CapEx budget and then reflecting back on Q1, Doug you mentioned $850 million in the release and on the call, but that obviously had some nuanced adjustments to it, was that $850 million factored into the budget.

In other words, were you anticipating these accounting adjustments divestitures that sort of balanced it out to $850 million?

Doug Lawler

In general yes, keeping mind that is we had some weather related issue, we deferred some of the completion activity to the second quarter, Dave there is some variances across all of the different areas there, but in general yes, it's all accounted for.

Dave Kistler – Simmons & Company International

Okay and should we expect similar things going forward, I mean DNC budget?

Doug Lawler

Yes, absolutely. The recognition of the capital efficiency is also very, very significant and how we continue to capture cost savings on our accountable program and that's a huge driver for us.

Nick Dell'Osso

Dave, just though when you say significant things, I just want to be clear, we would not expect those types of adjustments to be recurred.

Dave Kistler – Simmons & Company International

Okay, that's exactly what I was trying to understand. So then switching over back operationally real quick on the Haynesville, well cost have got down to $7 million as you highlight in your presentation, you highlighted that 50% rate of returns has there been any incremental productivity of wells or is that $7 million just the benefit of going back to existing pads, any kind of color you can give us on, how those have been driven down, so aggressively versus the rest of the industry?

Jason Pigott

Well, this is Jason. We've done a little bit of everything there; we've been really playing with different completion techniques to get our cost down. So it's been over reduction and sand or anything like that, that we would accomplish is reducing chemicals that we use, just testing some slick water fracs etc, so those are really, a lot of the savings is driven by the completion side.

The drillings doing, a phenomenal job as well. So we've seen almost $2 million come off those cost in a year, we are very excited about that program going forward. As far as productivity again, we clock the performance of these wells on these test to see if there's been any negative impact, so far we haven't see anything, so time will tell for that, but we are really encouraged by what we've seen so far, we do follow these back on our restricted rate choke, just like they do in the Utica.

So you won't see big IP performance changes in those wells because we restrict, well on restricted rate every well that we bring on, so they're performing exactly [indiscernible] expect from those wells. We monitor pressure and rate to make sure that we are not seeing performance degradations but again it's just been a great program, great turnaround for us in a short amount of time, so really excited about the Haynesville program overall and just, putting value to the company over, as a whole.

Dave Kistler – Simmons & Company International

Great, I appreciate that, one last one and maybe this is going to be held off to the Analyst Day, but when you look at what you're doing, you're driving down the cost dramatically and you've given us some examples that, can you give us the examples that correspond with also increasing recoveries, while those cost have come down?

Doug Lawler

Yes, we'll re-point to the Analyst Day on that, Dave.

Operator

Your next question is from Matt Portillo with Tudor, Pickering & Holt. Please go ahead.

Matt Portillo – Tudor, Pickering & Holt

Just a quick question from me, in regards to your inventory across a number of basins, could you give us a little bit of color as to how you think about working that down overtime in particular just trying to get a better sense of, how we should think about finding your Marcellus growth trajectory over the year.

And then just a second quick follow-up question in regards to service cost trends, just curious if you can provide some color on how you're seeing the service market evolved, as we've seen some uptick in activity from the industry?

Doug Lawler

I'll comment real quick, Matt and then Chris may want to throw some additional comments in as we talk about few of the areas, the inventory has come down significantly and compared to previous years, we've made huge progress on that, keeping mind that as we made this big shift, this efficiency shift to the pad drilling that you'll have some inventory build associated with the timing of the wells coming online just by virtue of drilling four or six wells on a pad.

The one area that we still have some inventories in the Utica and we will be working that down over the years as well, but we anticipate that throughout 2014 that we will be in a steady state or a state type of inventory based on the capital program and the timing of the pad drilling and bringing the wells online and then Chris, do you want to add any comments up for one?

Chris Doyle

Yes, Matt the question of balance for Marcellus growth and how we should we think about that through the end of the year, I'll add some color there. I'll say, what we're forecasting is not requiring any growth out of that asset honestly, what we have is a tremendous position in one of the greatest dry gas basins known and our wells continue to outperform our expectations and industry's expectation and so what we are focused on is capital efficiency and we've got a lot of optionality and we'll share that, with you next week, where we could ramp up and potentially grow the asset, but we are not, we don't need that growth to grow the company and we are fantastic position and lock the flexibility, when it comes our expectations for Marcellus.

Doug Lawler

On the service comp side, Matt this is comment real quick on that John Reinhart and his team are focused on supply changes in capturing part of our savings on our put forward basis have been heavily driven by focused on supply chain capturing the greater [average] purchasing power of the company and so in general, there is some sort of price pressure, but we are addressing that through various energies and greater cost management through our supply chain and John, you want to comment on that?

John Reinhart

Yes, I think we've been really pleased with the supply chain group. This is an organization started up in Q4 and just in a very short period of time has really driven a lot of value throughout the organization and as Doug said, we are very early on in our capital improvements, but this is certainly been a big part of the improvements we've seen year-to-date and look forward to further success throughout the year.

Operator

Our next question comes from Joe Magner with Macquarie. Please go ahead.

Joe Magner – Macquarie Capital

And thanks for taking my question, just curios some accounting adjustments that were made and there was a comment in the release about capital interest has gone down as the unevaluated pool has been reduced, how should we think about the management of that? we don't have the detailed balance sheet in the release, but how's that come down and meaningfully recently or is there more to come and how should we think about that in the context of your DD&A guidance has come down, but how will that be accounted for going forward, a lot of moving questions maybe I'll follow-up offline, but just curios on the high level, what's driving some of these changes and how should we think about as role through?

Doug Lawler

Sure, Joe. We'll file our 10-Q later today, so you can follow-up or those of you have any further detail after that, but just to comment at a high level, as we decreased our leasehold spending and we continue to evaluate properties to the drilling program and other evaluations that we perform from time-to-time, you'll see unevaluated pool decrease, just by nature of our activity level.

So as a result of that, you'll just see cash. Here you'll see interest expense, be recognized in the income statement more than it was in the cash flow statement in the past. I'll remind you though, that when you think about modeling this company from evaluation standpoint that we did decrease our cash interest expense on analyzed basis by $115 million through our recent refinancing.

So what you're seeing there is a geography change from the cash flow statement to the income statement and certainly is important to modeling EPS correctly, but overall the trends on interest expense are decreasing.

Joe Magner – Macquarie Capital

Okay, I guess I'll just follow-up afterwards once we've chance to take a closer look. I'll leave it there. Thanks.

Doug Lawler

Okay, we're going to cease taking calls now. We have over our time just a little bit, just for a highlight if you have any questions that weren't answered today in the call and please follow-up with Gary Clark, he'll be happy to help. With that and then also in addition, we are really excited about the Analyst Day next week and continue to share further detail in Chesapeake growth program as we go forward and additional asset detail.

So we look forward to seeing you next week, thank you operator. We appreciate everyone's time.

Operator

And that does concludes today's conference. We thank you for your participation.

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