Chesapeake Energy Corporation (NASDAQ:CHK) Q4 2022 Earnings Call Transcript

Chesapeake Energy Corporation (NASDAQ:CHK) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good day and welcome to the Chesapeake Energy Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. Please note this event is being recorded. I would now like to turn the conference over to Chris Ayres, Vice President of Investor Relations and Treasurer. Please go ahead.

Chris Ayres: Thank you, Betsy. Good morning, everyone and thank you for joining our call today to discuss Chesapeake’s fourth quarter and full year 2022 financial and operating results. Hopefully, you have had a chance to review our press release and the updated presentation that we posted to our website yesterday. During this morning’s call, we will be making forward-looking statements, which consist 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 recognize that except by required €“ except where required by applicable law, we undertake no duty to update any forward-looking statements and you should not place any undue reliance on such statements. We may also refer to some non-GAAP financial measures, which will help facilitate comparisons across periods and with peers. For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure that can be found on our website. With me 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 will now turn the teleconference over to Nick.

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Nick Dell’Osso: Good morning and thank you for joining our call. This morning, we are going to talk about two key announcements we made yesterday. First, we are pleased to highlight our fourth quarter results and 2023 outlook. Second, we announced the next significant step toward exiting our Eagle Ford assets. The fourth quarter finished off a strong year for Chesapeake. Production in capital were essentially in line with expectations and EBITDAX was slightly ahead. Based on those results and adjusted for the October 1 effective date of the Eagle Ford asset sales, we are delivering a dividend for the quarter of $1.29 per share. Overall, in 2022, we delivered company record free cash flow, resulting in $2.3 billion in cash returned to shareholders in the form of dividends and buybacks.

The second announcement yesterday was the $1.4 billion sale of our black oil Eagle Ford assets in Dimmit, LaSalle and McMullen counties to INEOS Energy. This is another important step as we solidify our focus on the premium rock returns and runway of our Marcellus and Haynesville assets. We are pleased with the progress we have made to-date in our Eagle Ford exit and look forward to completing the process. In aggregate, from the first two sales, we expect to receive approximately $1.7 billion in after-tax proceeds at closing with an incremental $450 million to come over the next few years. The proceeds will be used to drive value for shareholders by reducing debt to maintain our balance sheet strength and support our ongoing buyback program as we work to complete the remaining authorization, which sits at over $900 million.

We are strong believers in the value of cash and liquidity in the soft market and the proceeds from the sales. In addition to the cash, we expect to generate from our operations will be a key strategic advantage as we continue to allocate capital in a prudent and value-oriented manner with an eye on our ability to be countercyclical. Pro forma the sale of the Brazos Valley and black oil areas, Chesapeake will have approximately 21,000 barrels a day of oil and NGLs and 80 million cubic feet a day of gas production remaining on our Eagle Ford position, which is in the rich gas window of the basin. We are actively engaged with several parties regarding these assets, which include acreage that is prospective for the attractive and maturing Upper Austin Chalk play, where we have delivered strong well results in recent months.

As we planned our initial capital allocation for 2023, we are proactively addressing the macro challenges affecting our industry with year-over-year natural gas prices lowering while service costs remain inflated. Our preliminary capital allocation and outlook for the year clearly demonstrate we believe the prudent step is to show capital discipline and reduce our activity levels in the Marcellus and Haynesville. While we never wish for low prices, Chesapeake is built for the volatility we are experiencing today. We have the assets, balance sheet, cost structure and hedges to allocate capital prudently, allowing modest production declines and saving CapEx for better investments, including repurchasing our shares. Overall, we are dropping 2 rigs in the Haynesville and 1 rig in the Marcellus as we move through the year.

In addition, we are reducing our completion activity in the near-term as the market is currently oversupplied with the warm winter we are experiencing in North America. Year-over-year, despite the inflationary environment, our annual drilling and completion CapEx will be modestly lower, but we expect to see only a slight production decline of approximately 2% in the Marcellus and Haynesville, allowing us to maintain our cash flow resiliency and continue our leading shareholder return profile. We find ourselves in this position today, thanks to several important strategic actions taken over the last 2 years, including our well-timed Haynesville and Marcellus acquisitions, which bolstered the depth of our high-return, low-cost inventory as well as our decision to exit the Eagle Ford.

All of this positions our company to provide consistent results and cash returns to shareholders as we move through this cycle and prepare for the increase in natural gas demand in the coming years from the growth in LNG export capacity. Reducing activity today helps to ensure Chesapeake remains LNG ready to capture the value of strong growth and demand for gas in the coming years and preserves cash for us to allocate capital in a countercyclical manner, many in our industry have not achieved historically. We look forward to updating you on our continued progress and I am now happy to address your questions.

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Q&A Session

Operator: The first question today comes from Zach Parham from JPMorgan. Please go ahead.

Zach Parham: Hey, guys. Thanks for taking my question. I guess just on the buyback, you talked about being countercyclical with the buyback. You’re going to have a significant amount of proceeds coming in shortly when the Brazos and the oil window sale closed, can you give us some thoughts about how you plan to utilize those proceeds kind of in the first half of €˜23 and into the back half of the year via the buyback, debt reduction and other potential uses?

Nick Dell’Osso: Well, we don’t even have the cash yet. So we don’t plan to announce very specific actions around the buyback other than just to note that we will have a lot of liquidity to pursue the buyback. We expect the market conditions to offer us some attractive opportunities to do it, and we want to be opportunistic with it. So we will be patient. We’ll let the market come to us. We think there is ample opportunity in the coming year to put this cash to work.

Zach Parham: Got it. Thanks for that. And then my follow-up is just on well productivity. Within the industry, there has been a lot of talk about degradation of well productivity. Looking at some state data, it does seem like your well productivity has trended a bit lower in both the Marcellus and Haynesville in €˜22. In the slide deck, you did highlight a lower drawdown in the Haynesville, so maybe that’s one of the drivers. But could you give us just some color on well productivity in general and how you expect productivity to trend in 2023 and in future years?

Josh Viets: Good morning, Zach. This is Josh. We’ve looked at this data as well. And of course, we recognize that the trends into 2022 did show a drop off and to address maybe the Haynesville first. We are looking at incremental drawdown strategies that will have an impact on early time rates and really, that starts to show up in the first 3 to 6 months of the production history. But really, we start to see something that looks like an incremental gain as you get out beyond 12 months. The other thing, just to remind you, that’s impacted our position within the Haynesville this past year. And I suspect in some others is the increased line pressures. And so with increased line pressures that does lead to lower IPs but ultimately flatter declines through the first 12 months of the year.

In the Marcellus, I think the thing that we need to remember is that we’ve been operating the Marcellus for well over a decade. We’ve drilled over 700 wells within our Lower Marcellus core and these are unbelievable wells, really the best shale gas basin in the world. The other thing, I think, to point out as you look back at historical trends in 2020, 2021, really across the industry, we were having to high-grade locations and this is no different for Chesapeake. And so we absolutely drilled the very best wells with a relatively modest program in the heart of our core. And so I think if you were to look back and compare our 2022 well results to something in the 2018 and 2019 time frame, you’ll actually see productivity that’s on par. In fact, on an absolute basis, when you adjust for lateral lengths, you’ll see a slight advantage on productivity.