Chesapeake Energy Corporation

Good morning and welcome to the Chesapeake Energy Corporation first quarter 2021 earnings teleconference. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brad Sylvester. Please go ahead.

Thank you, Andrew, and good morning. Thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2021 first quarter. 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 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 that 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 earnings relief yesterday and in other SEC filings. Please 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 may help facilitate comparisons across periods and with peers. For any non-GAAP measures we use, a reconciliation to the nearest corresponding GAAP measure can be found. on our website. With me on the call this morning are Mike Wisterich, Nick DiLasso, and Frank Patterson. Mike will give a brief overview of our results and recent events, and then we will open up the teleconference for Q&A. So with that, thank you, and I will now turn the teleconference over to Mike.

Thanks, Brad, and good morning, and welcome to the call. We appreciate you making time for us this morning. Before we go through the quarterly results, I'd like to take a few minutes to discuss our change in leadership and also answer what I've been getting as sort of the most common questions. And so we'll just take it in question sort of format. First question is, was there any action that resulted in this change? And the answer to that I've been pretty clear about through both press releases and just in public. There was no action we liked, Doug. We thought he'd left the company in a great position and we wish him the best. Second most common question is, is this a change in strategy? The answer is absolutely not. There is no change from the post-emergence strategy. We're focused on free cash flow, capital discipline and returning cash to shareholders and being a good corporate citizen. But we have to put this in perspective. The company has had a huge change in strategy between what it was for the past eight years and what it is today. The past eight years have been a strategy of value preservation. Today, we're talking about a strategy of creating value. That is vastly different and the execution of it is different. The shareholders understood this, which is why they decided to change the board in its entirety with the concept of immediate fresh perspective. The company has an opportunity with a new balance sheet. and a way to create value. And so that perspective needed to change, and they made it at the board level. The board has taken several months to get to know the company, and decided that management also needed to change in fresh perspective, which is why we made the change. CEO search. The first question I usually get is, is someone on the board considering interviewing for the job as CEO? The answer is no. No members of the board are currently interviewing for the job. I don't expect it to occur. Next question is, how long will it take? Of course, this will take several months. We expect it to take several months, and we've planned for several months. We've formed a search committee. Matt Gallagher will lead that committee. We're looking for someone who will be accretive to our strategy, not to change our strategy. But with that said, the board was very clear and we have a very clear mandate at the management level. We want change now. We want fresh perspective now, which is why I'm here at the company spending 100% of my time working with the existing management team, working with the existing employees. We make a lot about CEO change. We make a lot about how important the CEO is. But honestly, I think too much is made of it. It's really about the employees and can we execute. First order of business for the board was to evaluate the staff and get a feeling for where their head was. And truthfully, they have every reason to be demoralized after eight hard years and bankruptcy. I can tell you from early observations and my time here that this team is ready to go. It has a chip on its shoulder. I can tell you there's an energy on campus which is contagious. I think they're tired of getting punched in the face with a balance sheet and they would like to get away from that cloud and move on to execution. Now talk is cheap, we get that. We have to have great results. And I think the first quarter is a good start in that direction. So now I'd like to move to the slide deck. We're gonna start on page three of WebEx, but also on page four of the deck that you saw last night. This is the Chesapeake Value Drivers. The middle of the page is what's telling the story. Today, we moved that number from $2 billion to $3 billion. We think that's pretty impressive. We're proud of it. Now, the first action that we're taking, of course, is returning cash to shareholders. You'll see we instituted a dividend. That is a fixed dividend we will consider, and we plan on doing additional returns of capital, and we'll make those decisions towards the end of the year after we have a few quarters under our belt. To the bottom left, in order to have free cash flow, you have to have financial discipline. We believe in this reinvestment rate. We will continue this reinvestment rate, and that will be one of the keys to our success. Top left corner, the balance sheet is in great shape. Our long-term goal is to keep the balance sheet under one-time leverage. This is a competitive advantage. It gives us optionality that the company has never enjoyed. This will be a big part of how to create value. Finally, ESG, we have goals. It's part of our compensation structure. We're taking it serious. It's not just admissions. It's also social governance. The company is preparing and making changes every day. Moving to page four of the slide deck. Again, let's go to the first middle section. The company is producing free cash flow. I've always said if you have a great company, you also build cash. To the right side, top right, you see we're building cash on the balance sheet, $340 million. We're pleased with it. You can see it continues to build, and it's also driving down our debt, which is exactly what we hoped for. It's exactly what we modeled and exactly what our goals are. Moving to page five. A lot of talk about the balance sheet. I don't think it could be overemphasized that this is a competitive strength. I know you've seen this slide. I would like to reiterate, this is our advantage that we plan on taking advantage of. Page six, our business is moving to scale, efficiency, and cost of capital. Becoming investment grade is a priority. We think we're well positioned to get there very soon. This will also help us be competitive. Page seven, not only is our balance sheet fixed, the management has done a great job in bankruptcy to reset all of our cost metrics. G&A has decreased, LOE, transportation, of course that's driving EBITDA. It's opened up opportunities on assets, this recalibration. We have more opportunities, lower break evens than we've ever had. And finally, I'd like to talk about stuff that's happening outside of the bankruptcy renegotiation, something that the team is executing on. When you look at page eight, I focus on cost per lateral foot. In particular, take a look at Appalachia. We're pretty proud to get to $700 to $750 a foot. In 2019, it was $985 a foot. Now, during bankruptcy, this says the team continues to execute It's about execution going forward, and I think we'll continue to execute. With that, I'll open it up to questions.