Chesapeake Energy Corporation (NASDAQ:CHK) Q1 2024 Earnings Call Transcript

Chesapeake Energy Corporation (NASDAQ:CHK) Q1 2024 Earnings Call Transcript May 1, 2024

Chesapeake Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Chesapeake Energy Corporation’s First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Ayres, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Chris Ayres: Thank you. Good morning, everyone and thank you for joining our call today to discuss Chesapeake’s first quarter 2024 financial and operating results. Hopefully, you’ve had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning’s call, we will be making forward-looking statements, which consists of statements that cannot 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 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 press release yesterday and in other SEC filings.

Please also 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. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measure, there is a reconciliation to the nearest corresponding GAAP measure on our website. With me today on the call today are Nick Dell’Osso, Mohit Singh, and Josh Viets. Nick will give a brief overview of our results, and then we will open up the teleconference to Q&A. So with that, thank you again and I’ll now turn the time over to Nick.

Nick Dell’Osso: Good morning and thank you for joining us today. We continue to execute on our 2024 financial and operating plan and our first quarter results further demonstrate that we are a company built to efficiently meet consumer demand and deliver sustainable value to shareholders through cycles. Today, the natural gas market is clearly oversupplied. 2024 plan is focused on discipline, operational efficiency and free cash flow generation while building the productive capacity needed to deliver for consumers when demand recovers. Through the first quarter, we have deferred 22 turn in lines and built 24 drilled but uncompleted wells. In addition, we began curtailing base production in February, averaging approximately 200 million cubic feet a day of curtailment in the first quarter.

As we continue building productive capacity, we expect to curtail approximately 400 million cubic feet a day in the second quarter. We believe this strategy will leave us well positioned to meet demand for natural gas when the market recovers. In the meantime, our base business continues to deliver. We generated free cash flow in the first quarter, allowing us to maintain our commitment to return cash to shareholders through our base and variable dividend program. Our capital structure remained strong. Our lending partners recently reaffirmed our credit facility and increased the aggregate commitments to $2.5 billion. As we continue to deliver on our sustainability commitments as demonstrated by the company meeting our interim GHG and methane intensity goals a full two years ahead of schedule.

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Q&A Session

Importantly, we remain encouraged about the long term trajectory for natural gas, the affordable, reliable, lower carbon energy the world needs. Over the next few years, we will see significant increases in demand for U.S. natural gas from LNG exports as well as power generation and industrial activity. Additionally, the current clear trajectory of supply in the U.S. is falling. We believe this sets up a much more constructive market backdrop for natural gas in future periods and believe our portfolio is well positioned to deliver gas supply where and when needed. Consumers demand that energy is reliable and efficient, both economically and environmentally. Simply put, natural gas will play a critical role in the energy future, both domestically and abroad, and Chesapeake and our pro forma merge company with Southwestern is poised to ensure natural gas delivers on its promise.

We remain very focused in our integration planning efforts on delivering the cost synergies identified at the announcement of the merger to ensure our supply meets the demand of energy consumers at a most efficient price. We will be LNG ready and in an advantaged position as LNG capacity continues to come online. With our well positioned portfolio, investment grade quality, balance sheet and disciplined strategy Chesapeake is built to not only weather the current market, but to thrive when the market rebalances. I look forward to updating you on our progress throughout the year. We’re now pleased to address your questions. Operator, if you could start the queue.

Q – Nitin Kumar: Hey, good morning, guys and thanks for taking my question. I want to start on CapEx. That came in quite a bit below what your guidance was for the quarter, and you’re a little bit ahead of schedule in terms of building the deferred TILs and DUCs. So I just want to get a sense of what were the drivers of that CapEx number and how does that shape for the rest of the year?

Josh Viets: Yes, good morning, this is Josh. Yes, we had a really good quarter to start off the year. We ended up around 16% under our guide for capital. About half of that is just purely related to timing, and a lot of the timing was on the non-D&C side. And so just as we’re getting some of our leasing ramped up and infrastructure projects ongoing, that will just occur later in the year. But the other half of that was really just related to lower realized cost. We had a really good quarter on the drilling and completion side. We saw lower cost than planned as a result of being able to accelerate the use of the lower cost casing that we procured late in the year. We were also able to realize some savings associated with lower service contracts.

And then also we had several wells up in the northeast that we had planned that are drilled in a pretty challenging part of the field that typically require contingency casing strings. The team was able to do some work with the mud company and identify a way at which we can mitigate the wellbore stability issues that we have there. So that’s real structural cost changes, and that really sets us up now for the full year to where we’re tracking towards the lower end of our capital guide. And so we’ll continue to monitor the service markets and see how that plays out, but again, got off to a pretty good start this year. On the second part of your question, we are just a little bit ahead of schedule with the DUCs. That’s just how activity was kind of falling between the quarters.

But as far as how we think about the full year setup with our total DUC billed, I would say we still see ourselves on track for the full year.

Nitin Kumar: Thanks for the detail, Josh. And Nick I have to say I was a little bit disappointed that there wasn’t obligatory slide on AI demand and power gen demand for gas in your decks last night. I just wanted to get a sense of where you guys see that evolving and what are the early thoughts at Chesapeake about the growth for power gen in the U.S.

Nick Dell’Osso: Yes, that’s a good question. And for years we’ve been a little puzzled by the forecasts that have had power generation or demand for power flat in the U.S. We know that over the last several summers we’ve seen pretty real increase in power demand, and particularly natural gas fired power demand. We do think the utilities have struggled to voice the need for incremental generation capacity, given a number of the challenges that they have within their own stakeholder base. And that’s got to change and so we’re really encouraged to hear the market talk about the growing demand for power. And one of the reasons we’re really encouraged by that is it’s evidence of a very healthy economy. We have investment in the U.S. economy that’s driving growing demand for power from consumer and industrial side, which is really the continuation of the impact of all of the stimulus money that’s come through the economy over the last several years and then, of course, the IRA as well.

So that’s showing up. But what has really taken hold in the last couple of months is that there is a recognition that the massive growth in demand for data centers, significantly driven by the growth in demand around AI tools, is going to put a big draw on power grids and we think that’s all very real and very interesting. There’s a lot to unpack to understand exactly how and when and where that demand will show up. And what we’re excited about in this backdrop, Nitin is that, we as a standalone company, have a really large production base and as a pro forma combined company have the largest production base in both the Appalachia and Haynesville, with which to be ready to respond. And having the geographic advantage of two locations if you think about where we sit in Northeast Pennsylvania, then we’ll be in Southwest Appalachia and West Virginia, and then also in the Haynesville.

Keep in mind that we talked a lot about growth and demand for Haynesville gas flowing to the LNG corridor, but we deliver a lot of gas to Perryville every day, which is directly east of our field and from there connects into a series of pipeline networks that feed the Southeast. And so the opportunity to increase flow to the east is also very real and something that we stand ready to do and we’ll continue to work with our midstream counterparties as well as the utility counterparties to understand where that demand is needed or where that gas is going to be needed and how we may get it there. It’s incumbent upon us as an industry to make sure that we continue to supply those markets at a really efficient cost and that’s something that we think the pro forma combined company is set to do.

Nitin Kumar: Great. Thanks for the color Nick.

Operator: Your next question will come from Burt Donnes with Truist Securities. Please go ahead.