Chesapeake Energy Corporation (NYSE:CHK)
Barclays CEO Energy Power Conference Call
September 03, 2014, 01:05 PM ET
Doug Lawler - President and Chief Executive Officer
I would like to introduce our next speaker and company; it’s a pleasure to welcome Chesapeake Energy to the conference this year. With us from the company today for the presentation we have Doug Lawler, who is Chesapeake's Chairman. It's been a very busy year for Doug and based on some of the conversations last night it sounds like he is looking a lot more forward to looking forward into 2015 and beyond and looking back at some of the reorganizational things they have been undertaking in the last year or so.
So with that I'll turn it over to Doug.
Thank you very much. It's great to be here with you today. Good afternoon everyone. Just want to first start off by saying there is a lot of great things going on in Chesapeake. I am really excited about the progress that we've made in the past year. I think it was last year at Barclays that we revealed what our strategy is for the company going forward. I'll share more with you how we're executing on that in just a few minutes. But it's been an exciting and transformational year one in which I believe we have tremendous opportunity to continue to add value to our shareholders.
And also before we get started just want to recognize we have an outstanding addition to our management team in Brad Sylvester who joined us here just recently as Vice President of Investor Relations. It's pleasure to have Brad on board and a blessing. He will be an extreme complement as many of you know and appreciate the fine talent that he is.
So first I’ll just cover our forward-looking statements and required obligatory comments. So this is the strategy that we laid out a year ago. And basically this strategy is still unchanged today with two core tenets. First is financial discipline and second is profitable and efficient growth from our captured resources.
I’m excited to say to you today or to share with you that we've made tremendous progress. When we look at the opportunities to balance our capital expenditures with our operating cash flow the company has done a very good job and we've made excellent progress in that respect. I'll also note that when we look at balancing our CapEx or operating cash flow that, that is a product of running a good business and a sustainable business.
There will be time to time periodically that we may be in the next several years a little bit higher than our cash flow. Sometimes it may be a little bit less but the opportunity set that we have and the quality of our portfolio we believe we can provide very strong competitive growth versus our peers and still be approximating our cash flow with our capital program.
We've made excellent progress on our asset divestitures in looking at ways to reduce our financial obligations and complexity on the balance sheet that has been difficult to understand for many. We're also targeting and continue to target achieving investment grade metrics or investment grade rating. I would say that this also is not necessarily in and of itself goal or a stated strategic objective, it’s a byproduct of running our business right.
When you look at the profitable and efficient growth from our captured resources in this past year we have just seen unbelievable progress and capital efficiency in driving greater profitability in the high quality assets that we have at Chesapeake. We have continued to target top quartile metrics, operating metrics, financial metrics, capital efficiency metrics, and how we can distinguish the company in the high quality assets and high quality employees that we have at Chesapeake versus our peers.
Continuous improvement is part of our culture. It’s something that we live and we really basically today we have a company of value bar variance where no matter where you are in the company people are continually looking for opportunities to improve, ways that we can save money, ways that we can add more value to our shareholders and part of that we will continue to ways to drive the value leakage out of our program and out of our operations.
As part of this transformation process that took place in the past year some of you might have seen this slide before but building off of that strategy and looking at all of those efficiency metrics that drive shareholders return and how do we integrate and build it into a performance management system and link it to a compensation system to drive better performance. Part of that was structure in building a business unit where the strategic metrics and the performance metrics are driven to all levels of the organization, focusing on capital efficiency, looking at our cash cost reduction initiatives, all of these things we have made significant progress on.
What I am really excited about though is the progress that’s been made with our capital allocation and the competitive nature of our portfolio. Basically inside of Chesapeake and our high quality assets every single project competes for funding. The law of scarcity, the competitive nature of our program acquires that post appraisal that we in the evaluation of projects that we continuously evaluate and looks for ways to improve and we make sure on every single investment we get what we had intended or what we planned for.
This has resulted in high grading our portfolio and I’ll be sharing a little bit more with you in just a moment on that. And just importantly the metrics in which that I am measured and the performance metrics are the same throughout the entire company. So we all own the same performance metrics and the compensation system.
So, our program is based on improving capital efficiency and one of the core building blocks has been reducing the complexity of the company. Core expansion is also critical with the huge inventory of acreage that the company has amassed in the past few years has given us an opportunity today to look for ways to continue to improve on this core and build on what’s our profitable area for operations. I have shared with some of you in the past that I am anti-core guy.
I did believe [Louis] talked about our core, what you doing is you put a finite limit on your investment opportunities, that discounts the opportunities that can be captured through capital efficiencies, that discounts the opportunities that can be captured through EUR enhancements and other technology and synergies all those things, capital efficiency EUR improvements as well as technology and new synergies can result in expanding that core and that’s the focus that we have in our company.
We are also very focused on our cash flow growth. I think it’s interesting to note that when you look at the peer-group we are growing production while de-levering. Many companies have come out and said that they are increasing CapEx and increasing production or they are maintaining or increasing the CapEx and maintaining the same production. Well Chesapeake is we are reducing -- we have reduced our CapEx forecast, we continue to increase our production and the capital efficiency continues to improve in the program.
This slide tells quite a great deal about the company and the performance in the past few years. Basically in 2012 we had a capital program that exceeded $14 billion. In 2013, it was cut basically in half to $7.6 billion. In 2014, we said about $5.8 billion and we forecast that same amount for 2015. It’s important to note that’s still as I have noted is going to approximate cash flow but this is the strength of this portfolio and it’s important to note that the capital efficiency improvements that we have made give us the opportunity to do more with less.
That’s probably best illustrated on this graph. When you look at this chart on the left axis is absolute production growth by volume compared to our peers of Chesapeake in the green bar on the left. The blue square represents the amount of capital and corresponds with the secondary y axis on the right. And basically what you can see is while why you are spending less and adding more volume then most of the peers which is a testament to the quality and the strength of our program and our assets it also speaks very highly of the capital efficiency and improvement. I think it’s very important to note as well as in terms of absolute volume growth this year Chesapeake is adding more volume with half the rig count and a fraction of the capital is illustrated before.
The company is presently producing about a little over 700,000 barrels equivalent per day and still seeing this type of growth offsetting what's basically a 30% decline. For our peer group and for the size of this company it's an outstanding accomplishment.
Just quickly want to share with you a few notes on our operations. Some of these we've announced previously one of which is moving the guide, the midpoint of our guidance up by 10,000 barrels a day just recently. We also have made the announcement that we plan to exit the year in excess of 730,000 barrels equivalent per day and we know in going into the later part of the year, the next several months in the last quarter of the year that we have a significant increase in the number of wells that we'll be bringing online.
The pie chart down at the bottom or the doughnut basically shows an indication, there is about 75% of our capital in 2014 is deployed towards our liquid rich assets, towards our oily assets. We've also built into our program a significant amount of flexibility with how we deploy our rigs. We basically with the rig fleet can move to any of the assets and respond accordingly based on continued capital efficiency improvements and profitability that we can share with our -- where we can share more value with our investors.
So I want to highlight a few things just real quickly on the asset level first with the Powder River Basin where we just made a significant acquisition. Up there in the Powder River we had a joint - our partnership where we just recently announced and concluded in August that we've acquired, increased our interest in Powder River from about 38% to 79%. This is an oil rich area with stack pays. One in which we believe will be a very strong oil growth engine for the company in the future adding yet again another strong oil growth engine for Chesapeake. At present we're running about three rigs in the area, we anticipate running a fourth very soon in 2015, we anticipate ramping that up to seven to nine rigs.
There are two formations that we have been very interested in at present but there are also a few others that we see as having good upside potential. The first is Niobrara where we see rate of returns of about 40% and in the Sussex, and I'll share more information on both of these where we're seeing return, a rate of return of greater than 50%.
So this graft just quickly highlights what has happened. On the left you can see pre-transaction, the acreage split that we have with RKI. RKI is the operator in the north part of the red line that goes across the middle of slide. The Chesapeake operated areas to the south and you can see basically with the post-transaction we've increased our acreage by about 66,000 net acres in the south and we've completely exited the northern area, increasing that working interest in the south of approximately 79%. We also picked up about 4,500 barrels a day of production with the transaction and as I noted it will be increasing our rig count there as we proceed later in the year and in 2015.
This is a huge resource opportunity for Chesapeake. We see that it have more than or greater than 2 billion barrels of oil potential. This is principally concentrated in the Niobrara where we have several tests and we are excited about continuing to drill the Upper Cretaceous and namely the Sussex Formation. We've seen some really good results here recently giving us further confidence in the acquisition that we made and we're excited about that as well and then there are several others including the Parkman, Teapot and other formations that we see is having good potential.
Just to give a more clarity around the Sussex Formation, this area that we have been testing and delineating in the past year basically it covers 100 square mile area. It’s about 20 miles north and south and about a five mile east west band. So if you look at the bottom you can see that the number, the first well the Sussex I has been on line for about six months. This well is producing still at rates of around 1,500 barrels of oil equivalent per day, still over 1,000 barrels a day. This is with 5,100 foot lateral. The second one we drilled the Sussex II right in the middle of the page was about 4,100 foot lateral as was as the number III well which was a 4,100 foot lateral.
So the second and third well both are doing about 1,000 barrels equivalent per day at present. We've done some additional drilling the IV and V well down to the south, testing additional lateral links which is a key part of our value enhancing program not just cutting cost but the fourth well is a 6,000 foot lateral and then the fifth well is actually a 9,200 foot lateral. So we see significant opportunity here to continue to develop the Sussex formation. We anticipate to bringing these wells on line in the fourth quarter as well as a few other tests that are being drilled from that same multi-well pad.
We're excited about the Niobrara as well. In the past year we've basically seen an uplift around 20% rate of return to get us an excess of 40% rate of return. This has been driven by a number of initiatives as we've looked at cycle time improvements and ways to improve our lateral links and to get better recovery. We also are reinvesting some of that money back into improved efficiency so that we can capture better returns. And we also note that a very common and strong characteristic of every asset that we have where we have reduced cycle times, increasing laterals and better completion efficiency.
Just want to talk a little bit about the Haynesville as well. We've seen tremendous success in the Haynesville in the past year. This is an asset where industry as a whole destroyed a lot of value in the past. It's one though in which Chesapeake has some of the best core acreage in the Haynesville. We've been excited about it as we've seen huge reductions in cost. This is an area where wells were cost in the $9 million to $10 million range a year plus ago and now we're seeing wells on a field estimate basis that are less than $7 million.
This is a 10 TCF field that we're going to average 8 to 9 rigs. We're excited about the opportunity that we see there and you can see by the well cost there what actually has been recognized and our continued performance trend and we don't have a bar on there yet but the field estimate show that some of the continued completion efficiencies and progress are going to put us below $7 million very soon.
I think it's important to note when you look at some of these assets and some of the continued improvements that we've made these are fields that have 800 wells drilled, 800. Typically you expect to see fields that have that number of wells you might see a 2% improvement, 3%, 5% improvement maybe. Chesapeake is recognizing in the Haynesville, in the Marcellus and several areas where we have 800 wells drilled, 10%, 20%, 30% improvements in cost, 40% improvement in cycle times, it's unbelievable testament to the quality and focus of our employees, focus on how we're adding value to our shareholders and building on that culture of continuous improvement in driving greater value, it's a real exciting time.
We talk a little bit here about the economics and why we're in the Haynesville focusing the best operating procedures and the highest quality rock in the Haynesville is what we're doing. Basically on an unburden basis when you eliminate or consider the minimum volume commitments and the infrastructure build out at sunk cost, we have a greater than 100% rate of return at a $4 gas price. This is an outstanding achievement, this is based on a $7.5 million well and as I noted we have field estimates that are less than $7 million at present, and so that's only going to go up and continue to improve.
I want to talk just a little bit about some of the things going on in the Utica. That continues to be an exciting core focus area for us. It's one of our strong emerging plays. We have introduced the idea of returning to the oil window in the Utica and that's only made possible because of the cost leadership that Chesapeake has demonstrate, the continuous improvement that we have, we have had a few tests where we have had more than 500 barrels of oil in IP, we will continue to be testing this area. It's an exciting time. We also know that applying some of the experience and expertise from other parts of our portfolio to this area, the continued improvements in cost could potentially result in another growth area for additional oil here. So I really like the Utica and this oil potential that we have.
Looking at the actually the wet gas area. We're seeing outstanding performance there as well. When we look at our drilling time there is a significant improvement there, also when you look at our CapEx and our cost per foot it's basically half of what it was in 2013. And you see the rate of return with those improvements in the capital efficiency drastically improved to approximately 45% at present.
This just highlights again some of those improvements on the cost and also important to note that there are two parts to the value equation and what we've focused on in the past year is driving very hard at how we reduce capital and we become more efficient. I’ll classify it in two ways cost management is getting to where we need to be, eliminating the costs that are necessary to brings us to a more competitive cost compared to our peers. Cost leadership and that's what's in progress now is how we provide more with less and doing it more efficiently.
All of the teams across all of our assets are doing an outstanding job with that. What it also does though it gives us now the opportunity with those reduced cost for us to start testing some of the different things to improve the EUR whether it's lateral links, increased cluster spacing, different chemistry sand concentration whatever may be in the completion design. And so the targets that we set in reducing cost last year in recognizing those in all the assets today the second phase now is how we really improve the value that comes from the EUR optimization.
And so in some cases here like in Utica we're actually putting money back into those programs so that we can improve the returns getting up to that 45% as noted on the previous slide as a result of this plugging and plowing the money back in from saving into better completion in it to accomplish the better EURs.
We're also are continuing to make good progress in the Eagle Ford been excited here just as recently as Tuesday of this week this yesterday results coming in from the field on just outstanding drilling cycle times are leading the industry. What you have not seen from Chesapeake in the past is industry leading operations performance. But I will tell you that it's been so exciting to see the drive, the initiative and the focus on creating value and this continuous improvement in our drilling completion and operating teams.
They're doing a fantastic job with it as illustrated on this curve you can see the reduction in the number of days per well in the green line you also see that continued progression downward with our well cost and you can expect to see continued improvement in that respect as well.
Eagle Ford will continue to be a very strong growth asset for the company for several years to come. We're basically are running 20 to 21 rigs in their present and have approximately 95% multi well plans where we continue to test new things and new opportunities to drive even further value.
So what can you expect from Chesapeake going forward and what to expect from kind of through 2014 and into 2015? We can expect to see a continued improvements or capital efficiency. As I noted just even in the past week, several improvements that we were excited about that. Many people ask me, many investors ask where are we on the cost learning curve, where are we at what inning in this capital efficiency gain. I'll tell you that I'll never tell you that we are more than 50% there. We’re about it the third inning in my mind. We still have significant opportunity.
I will never doubt the talent and the capability of our employees as they continue to just do great things and outstanding things it’s just really exciting to see. Several areas where we have some appraisal testing going on as noted the Sussex wells in the Powder River Basin where we expect to see results in the fourth quarter.
We have a big dry gas Utica that we're expecting to bring online soon as well as continued testing in that Utica oil window. We also have made note that we are evaluating options for the Southern Marcellus; Southern Marcellus is a very strong that presently is not getting a lot of funding in our program. As we look at the Southern Marcellus the strength and the quality of the Marcellus acreage and the dry gas Utica that is included in that asset has strong growth potential for the company. We see it as contributing in our production profile in the next few years. And it could be a very strong and productive asset for us.
The issue and as we know there is a lot of market arbitrage that exists for the pure play Appalachia companies. And so we're evaluating other potential options which include a spin or spin merge and could actually include selling the property. So there is a number of different alternatives that we're pursuing but all along while we continue to look at ways to improve and we look forward to this dry gas Utica test that will be in that area soon.
You also can expect continued non-core divestitures as we look at our portfolio and our efforts to continue to improve our balance sheet we'll be evaluating opportunities on assets that don't fit in to our E&P growth strategy whether they are complementary businesses or if they are actual E&P assets that don't fit in that growth strategy of the company. We'll continue to look for those divestiture opportunities, applying those proceeds towards reducing our debt or our leverage or towards other corporate purposes which couldn’t be similar to like the RKI transaction that we had in the Powder River Basin.
As you look at the company and where we anticipate to be in terms of our leverage reduction at the end of 2014. Over a two year period we’ve reduced our total leverage by about $6 billion. I think this is a significant improvement. It's one that we have been recognized by the credit agencies and this year recognized a few -- a double notch upgrade by Moody's and S&P.
As noted we do anticipate that we'll because of the way we're managing the business today in the financial discipline that we'll be an investment grade company at some point in time in the near future. Basically on the delivery of our 2014 keeping the promises that we laid out we anticipate to see our production growth in the 9% to 12% range. As previously forecasted our cash flow is in the $5.35 billion to $5.55 billion range. Our capital remains in the $5 billion to $5.4 billion range, continuing to see improvements on our cash cost and we continue to see improvements on our leverage.
So just in conclusion I just want to highlight that the company is well on its way with the major overall that’s taking place in the past year continues. I am excited about the program I actually will share with you that I am more excited today as we work pass these transformational and foundational issues that I have never been before in the company as I think that the quality of the assets the growth trajectory that we have laid out in previously presentations is based on the high quality assets we are not requiring exploration. We are not requiring other major projects as the assets that we have presently, that we’re presently developing, that we presently operate they will provide that 7% to 9% production growth for the next five years. Thank you very much.
Thanks Doug. We have time for some questions in the room before the break-out. Doug to start can you talk about prioritizing from the capital allocation standpoint with the efficiencies you all have achieved. What -- can you force rank the plays you are in terms of rate of return and where the capital will go?
So when we look at our growth trajectory we see about 75% of the capital going towards the old [place]. We have a very strong conviction that we’re driving for cash, [where] that cash comes from gas or oil. The key is our capital efficiency and the programs have to drive for greater returns; so what we are seeing in the Haynesville the efficiency improvements and EUR improvements in the Marcellus. These areas are strong, higher rate of return projects. So I hesitate to really to for strengthen but we are going to continue to drive high value and drill the best parts that we have.
Any other questions for Doug? Thanks for your remarks.
Okay, great. Thank you very much.
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