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Chesapeake Granite Wash Trust (NYSE:CHKR)

Q2 2012 Earnings Call

August 13, 2012 11:00 am ET

Executives

Nick Dell'Osso - Executive Vice President and Chief Financial Officer

Steve Dixon - Executive Vice President - Operations and Geosciences and Chief Operating Officer

Analysts

Justin Albert - Raymond James

Ted Durbin - Goldman Sachs

Aaron Terry - Kayne Anderson

Operator

Good day and welcome to the 2012 Second Quarter Chesapeake Granite Wash Trust Earnings Call. As a reminder, today's call is being recorded.

At this time, I'd like to turn the call over to Nick Dell'Osso. Please go ahead, sir.

Nick Dell'Osso

Good morning and welcome to the Chesapeake Granite Wash Trust's conference call. Also, joining me today this morning is, Steve Dixon, Executive Vice President and Chief Operating Officer of Chesapeake, and via teleconference is Michael Ulrich, Vice President of Bank of New York Mellon Trust Company, the Trustee for the Chesapeake Granite Wash Trust. Also, here to assist with some Q&A is John Kilgallon of the Investor Relations Group in Chesapeake.

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

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

As stated in the press release, last Friday, the distribution for the three-month period ended June 30, 2012 CHKR will be $0.6100 per common unit and approximately $0.4800 per subordinated unit.

Worth noting, Chesapeake Energy owns 100% of these subordinated units. The distribution we paid in August 30, 2012, the unitholders of record at the close of business on August 20, 2012.

The capital distribution for this period is approximately $0.58 per unit, however since this is below the predetermined subordination threshold for the quarter of $0.6100 per unit, a distribution per subordinated unit will be reduced in order to make a distribution of $0.6100 per common unit.

The low distribution was driven by lower natural gas and natural gas liquids prices. For the three-month period of March 1st through May 2012, total sales volumes contributed to the Trust royalty interest worth 168,000 barrels of oil, 328,000 barrels of natural gas liquids and 3.14 billion cubic feet of natural gas for total sales of 1.02 million barrels of oil equivalent or BOE. This is slightly above the previous projected sales volumes for the period of 972,000 BOE.

Realized prices for the period were $97.96 per barrel of oil, $32.83 per barrel of natural gas liquids and $1.17 per Mcf of natural gas. These prices include the effect of transportation and third-party deductions.

When comparing quarter-over-quarter changes in realized prices for the 2012 second quarter, unhedged realized oil prices are higher by $0.93 per barrel, however this is offset by unhedged realized natural gas liquid prices, which were lower by $3.73 per barrel and natural gas prices, which were also lower by $0.73 per Mcf.

Turning to hedges, actual non-accrual prices were above swap contract prices held by the trust resulting in a realized loss on oil contracts of approximately $2.6 million for the period. These fixed oil swap contracts were initially established to help hedge approximately 50% of oil and natural gas liquids volumes.

However, historically, we had the natural gas prices coupled with strong domestic natural liquids growth ahead of existing infrastructure has resulted in reduced prices of natural gas liquids as a percentage of NYMEX oil. The trust has forecasted 2012 second quarter natural gas liquids to WTI oil ratio of 49%, and actual results for the quarter were 34%. Additionally, the trust has no natural gas hedges in place.

Turning to drilling results in the Trust AMI, Chesapeake brought online 14 gross wells, which include 12 operated and two non-op, in the three-month period from March 1st through May 31, 2012 at varied net working interest. These 14 gross wells equated to approximately 11.7 development wells towards Chesapeake's overall commitment of 118 development wells under the development agreement with the trust.

With this activity, Chesapeake is on pace with its planned drilling activity in order to satisfy the 118 development commitment to the trust having drilled or participated in 35 development wells since inception.

Chesapeake plans to operate five to six rigs in the Trust AMI and this level of drilling is consistent with the original plans outlined in the trust SEC filings.

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

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Justin Albert with Raymond James.

Justin Albert - Raymond James

Hi, good morning. You guys mentioned that you brought online 14 gross loans during the quarter. Is it fair to assume that for May, you brought on seven?

Nick Dell'Osso

I think it was six in May, if I remember right.

Justin Albert - Raymond James

Okay. Six in May. Then for the rig count, I know you guys mentioned five to six rigs, but for this previous quarter, was it more six rigs and five rigs or?

Nick Dell'Osso

Yes. The average is six plus even for this past quarter.

Justin Albert - Raymond James

Six plus? Then for the second half, just the five to six rigs going forward?

Nick Dell'Osso

Yes, sir.

Justin Albert - Raymond James

Then regarding NGL prices, once again there were weak this past quarter, but they've rebounded pretty significantly in the third quarter. I was just hoping to get some color on your thought for the second half of the year.

Nick Dell'Osso

Remember that the quarter, in discussion now, would include the months of June, July and August more significant rebound in NGL prices just been in the last two weeks or so, and so we'll see some benefit of that towards the very end of the current quarter, but most of the quarter and that's our NGL prices at Conway in the 27% range and so it will be another relatively weak quarter of NGL prices. We don't yet have an estimate of where we came on unrealized prices for July suffice to say given where quoted prices were for that month won't be terribly attractive.

Justin Albert - Raymond James

All right. Great. Thanks, guys.

Operator

We'll take our next question from Ted Durbin with Goldman Sachs. Thanks.

Ted Durbin - Goldman Sachs

Thanks. Question on your oil volumes here, you're down pretty significantly, sequentially sort of versus the first quarter '12, and pretty far below where you were in the prospect I think you were looking for [101,000] barrels of oil and you do 168. Is there anything in the quarter we ought to be aware of whether it's one-time stuff or what not? What is, can you explain there, the sequential drop there?

Nick Dell'Osso

There are just a little bit different results across the well. Some wells are little gassier than others, so it looks like this quarter we may have drilled some wells that had little more gas content, little less oil content, but no there's nothing broadly moving there.

Steve Dixon

No, and I'd only show that we're 3% below forecast.

Ted Durbin - Goldman Sachs

Okay. Yes. Just to click here a lot higher on versus your gas forecast versus what was in the perspective and again down 8%, sequentially on the oil side, so I am just wondering, on a go-forward basis, maybe this was just gassier wells that we drilled this quarter and we'll come back and kind of hit the tight curve we were looking for. I am thinking about over the multi-quarters, multi-years here.

Steve Dixon

Yes, Ted. I think it's more of this well set.

Ted Durbin - Goldman Sachs

Okay. That's it for me thanks.

Operator

(Operator Instructions). We'll move next to Aaron Terry with Kayne Anderson.

Aaron Terry - Kayne Anderson

Thanks. Just wanted to get a little bit color. It looks like on your gas realizations and gas prices, you guys are continuing to see a little bit of a chop off, maybe a little faster than the Henry Hub reference prices. Is there anything that would be driving that? Am I looking at those numbers right?

Nick Dell'Osso

We have pretty good differentials out here, where we bake in some of the processing cost of NGLs onto the gas differential just by the virtue of the way those contracts are structured as well as, there's quite a bit transportation cost in this part of the country, so there's nothing different this quarter versus last other than NGL prices.

Aaron Terry - Kayne Anderson

As far as realizations relative to Henry Hub, is there a percentage that you guys kind of expect or seeing either not seeing difference quarter-over-quarter?

Nick Dell'Osso

No. Nothing structural. No.

Aaron Terry - Kayne Anderson

Okay. Thank you, guys.

Nick Dell'Osso

Operator, is there any more questions queued up?

Operator

There are no additional questions in queue at this time.

Nick Dell'Osso

Thank you, everyone for joining us for our call. We will look forward to speaking with you in the future. Thank you.

Operator

Thank you, ladies and gentlemen. That will conclude today's presentation.

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