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Executives

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

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

Analysts

Kevin Smith – Raymond James

Minyoung Sohn – Arrowpoint Partners

Chesapeake Granite Wash Trust (CHKR) Q3 2012 Earnings Call November 8, 2012 10:00 AM ET

Operator

Good day and welcome to the 2012 Q3 Chesapeake Granite Wash Trust Earnings Call. Today's conference is being recorded.

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

Nick Dell'Osso

Good morning and welcome to the Chesapeake Granite Wash Trust Distribution Conference Call. This is Nick Dell'Osso, Executive Vice President and Chief Financial Officer at Chesapeake Energy. Also, joining me for the call this morning is, Steve Dixon, Executive Vice President and Chief Operating Officer of Chesapeake, and John Kilgallon, Senior Director of Investor Relations at Chesapeake.

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

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

As stated in the press release yesterday, the distribution for the three-month period ended September 30, 2012 from CHKR will be $0.63 per common unit and approximately $0.22 per subordinated unit. Worth noting, Chesapeake Energy owns 100% of the subordinated units. The distribution will be paid on November 29, 2012, the unitholders of record at the close of business on November 19, 2012.

The calculated distribution for this period is approximately $0.53 per unit, however since this is below the predetermined subordination threshold for the quarter of $0.63 per unit, the distribution per subordinated unit will be reduced in order to make a distribution of $0.63 per common unit.

With that, I’m going to turn the call over to Steve Dixon who is going to talk a little bit more about the performance this quarter.

Steve Dixon

Thanks, Nick. For the three month period June 1 through August 2012, total sales volumes attributed to the trust royalty interest were 146,000 barrels of oil, that’s down from a 168,000 or 13% quarter-over-quarter; 288,000 barrels of natural gas liquids, that’s down from 328,000 or 12% quarter-over-quarter; and 3.2 billion cubic feet of natural gas, that’s up from 3.14 billion or 2% quarter-over-quarter. This were total sales of approximately 968,000 barrels of oil equivalent BOE that’s down from 1.02 or about 5% quarter-over-quarter.

Production mix in the third quarter 2012 was 15% oil, NGLs at 30% and 55% natural gas.

Worth noting natural gas liquid production in this quarter was negatively impacted by the company's economic decision to reject ethane rather than process it in a region of Conley Kansas which has experienced wide differentials on ethane as compared to the primary NGL clearing hub of Mt. Belvieu Texas.

Realized prices for the period were $84.22 per barrel of oil, $27.49 per barrel of NGL liquids and $1.72 per Mcf natural gas. These prices include the effects of transportation and third-party deductions.

When comparing quarter-over-quarter changes in realized price for the 2012 third quarter, unhedged realized oil prices were lower by $13.74 per barrel, natural gas liquid prices were lower by $5.34 per barrel and natural the gas prices were higher by $0.55 per Mcf.

Turning to hedges, actual NYMEX oil prices were above swap contract prices held by the trust resulting in a realized loss on oil contracts of approximately $375,000 for the period. These fixed oil swap contracts were initially established to hedge approximately 50% of our projected oil and natural gas liquids volumes.

However, historically, low natural gas prices coupled with strong domestic natural liquids growth ahead of existing infrastructure has resulted in reduced prices for natural gas liquids as a percentage of NYMEX oil. At the time of IPO the trust originally had forecasted 2012 third quarter natural gas liquids to WTI oil ratio of 49%, and actual results for the quarter were 33%. Additionally, the trust has no natural gas hedges in place.

Turning to our drilling results in the Trust AMI, Chesapeake brought on line 9 gross wells, which were all operated wells in the three-month period from June 1 through August 2012 at varied net working interest. These 9 gross wells equated to approximately 11 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 well commitment to the trust having drilled or participated in 52 development wells do October. Chesapeake is currently operating 4 rigs in the Trust AMI and this level of drilling is consistent with the original drilling plans outlined in the trust SEC filings.

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

Question-and-Answer Session

Operator

All right. Thank you. (Operator Instructions) And we'll take our first question from Kevin Smith of Raymond James.

Kevin Smith – Raymond James

Hi, good morning gentlemen.

Nick Dell'Osso

Good morning.

Kevin Smith – Raymond James

Would you weren’t talking little bit about the production results from the 9 gross wells, and may be just the ethane impact – rejection impact on production. I guess the high level things, I was surprised to see production fall sequentially?

Steve Dixon

Hi, Kevin. This is Steve, production were actually been flat and we not rejected that that for the quarter, and again that just a pricing decision to maximize value.

Kevin Smith – Raymond James

Okay, so I guess the question that where you happy with the drilling results and checking about nine gross wells a quarters is just really good enough to maintain production at this point and the production and trust is for most of our [feet]?

Nick Dell'Osso

No, I wouldn't characterize that way at all, Kevin, we’ve got yes we ultimately few hundred wells in the trust and eight or nine that well mix on quarter-to-quarter can have changes. We are certainly looking at our sales, looking at IPs or looking at our declines, spacing or we’re working that to make sure not picking and not going to meet our forecast, but haven't seen anything that we’re alarmed about.

Kevin Smith – Raymond James

Okay, so I guess for this quarter would be fair to characterize well results just little bit low expectations?

Nick Dell'Osso

Yes sir, that is correct.

Kevin Smith – Raymond James

Okay. All right, thank you.

Operator

(Operator Instructions) And we'll take our next question from Minyoung Sohn from Arrowpoint Partners.

Minyoung Sohn – Arrowpoint Partners

Good morning. I had a couple of questions if I could. My first question is could you give us a sense for up to 968,000 BOE, what percentage of that we can attribute roughly to the producing bucket versus those coming in from the development bucket?

Steve Dixon

You mean from the originally defined PDP versus the wells that have come online since the trust launched?

Minyoung Sohn – Arrowpoint Partners

Correct.

Steve Dixon

I don't have that breakout with us here today, once you follow-up with our IR department and they might be able to help you out there.

Minyoung Sohn – Arrowpoint Partners

Great. Second question is I think you've done a really wonderful job setting the trust up with respect to natural gas exposure in terms of the volume mix going into basically – just fundamentally recovering prices. How should we think about delayed which you might be targeting the oil delinquent versus gas mix may be in the coming quarters.

Steve Dixon

Well, the well set is fine. The property set is fine. So we wouldn’t expect there to be a dramatic shift in oil and NGL versus gas mix overtime in the play. This quarter, we did see – every quarter we will see some variability just depending on the specific wells that are drilled and the natural variability of the play. But overtime we don’t really expect that variability to results in anything different than our original assumptions.

Minyoung Sohn – Arrowpoint Partners

Okay. Just last question, it looks like at the end of last year, industry was using something around $50, $52 in terms of establishing their CPV10 values. With NGLs likely to stay may be substantially 40% who knows like to low that reference price. Will the trust have to take a write down in terms of the value of the royalties subscribed to it? And I am wondering if so, how would that loss be handled in terms of distribution to unit holders?

Steve Dixon

Well, the distributions are all based on cash. So…

Minyoung Sohn – Arrowpoint Partners

Nothing. Not distribution, but I mean the allocation of any loss from a write-down. Would those be more or less passed on to the partners and the trust as well.

Steve Dixon

But there is no concept of a loss from a write-down that would be passed along or not passed along. The royalty is based on the production that actually blows out of the ground and distributions are based on the cash generated from that. So on accounting driven write-down based on backward looking prices, we would have no impact on what’s distributed.

Minyoung Sohn – Arrowpoint Partners

Okay. Thank you

Operator

(Operator Instructions) And we will take our next question again from Minyoung Sohn of Arrowpoint Partners.

Minyoung Sohn – Arrowpoint Partners

Thanks again. Just like to get a sense of your thinking as far as the best way to hedge for NGL price exposure in the quarters ahead. I realized that you had up to your oil bump to basically try to cost hedge that. I'm guessing your sense as far as might that need to be increased to now make up for the fact that the price ratio has deteriorate further. That's question one.

And then secondly, just long-term, when you, yourself are aware of the magnitude of activity that’s happening lot of these new play areas. What is likely to be sort of the longer-term potential in terms of NGL pricing? Might we see an effect that might last multi-years in terms of the ratio depression similar to what we saw with natural gas in the previous three years?

Nick Dell'Osso

Sure. The answer to your first question is that the trust is statutory trust and we cannot hedge additional volumes in the trust, the hedges that are put in place at formation are fixed, and there is no ability that we have as operator of the properties nor does the trustee have the ability to add any hedges to it, it's a statutory fixed set of assets and that would include hedges.

On the NGL side just from a macro perspective, there's a lot of NGLs being produced in this part of the world over the last year, and will be for several years going forward. The big macro driver that we’re looking forward to is the increasing infrastructure connecting Conley Kansas to (inaudible) Texas and we believe that will aid in closing the differential between those two pricing points much of this liquids from this part of the basin are priced or sold in Conley Kansas and so closing that differential will be a benefit to this trust over time. That infrastructure comes on at varying times during 2013 and so we're looking forward to the results from that. But liquid production is going to up and that does have the potential to impact prices over the long run particularly on ethane, so we’re mindful of that and would you look forward to an increasing gas price as well, so you kind of hope to have some offsets there.

Minyoung Sohn – Arrowpoint Partners

Great, thank you.

Operator

And we’ll take our next question from Troy Smith of [HBank].

Nick Dell'Osso

Good morning, Troy.

Operator

Mr. Smith, please check your mute function.

Unidentified Analyst

Excuse me I was on mute. What is the tax is going to look like for 2012 or the tax reporting to K-1s, can you give us any guidance for forecast what that might look like?

Nick Dell'Osso

We don't have that prepared for this call this morning, but might just ask you to follow-up with our Investor Relations department.

Unidentified Analyst

Very well.

Operator

And there are no further questions at this time. I would like to turn the conference back over to Mr. Dell'Osso.

Nick Dell'Osso

Okay, well that will conclude our call for the day and we appreciate everyone dialing in and your interest in the trust and look forward to speaking with you again next quarter. Thank you.

Operator

And this concludes today's conference. Thank you for joining. And have a nice day.

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