Chesapeake Energy Corporation

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

Thank you, Rocco, and good morning, everyone, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2021 second quarter. Hopefully, you've had a chance to review our press releases and the updated presentations that we posted to our website yesterday and this morning. 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, the benefits of our proposed transaction with Vine Energy, Inc., the expected timing for the completion of the transaction, 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 those factors identified and discussed in our earnings yesterday and in other SEC filings. Please note 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, we use a reconciliation to the nearest corresponding GAAP measure can be found in our materials and on our website. With me on the call this morning are Mike Wisterich, Nick DiLasso, Sheldon Burleson, and Tim Beard. Mike will give a brief overview of our recent results and events, and then we will open the teleconference up for Q&A. So with that, thank you, and I will now turn the teleconference over to Mike.

Hi, good morning. Thank you for joining. We're pretty excited today here at Chesapeake, and we're glad you're here. So we're going to do just a quick flyover on our quarter. Second quarter was pretty great. We're pretty excited about it. We told you in the first quarter that this company is going to generate a lot of free cash flow. That's what we've done in the second quarter. We did not disappoint. We had $429 million in EBITDAX, $300 million-ish in free cash flow. That went to the balance sheet. That's how you know it's real when it shows up in cash in the bank. And so we're pretty pleased. We don't think this is a one-time event. It's a trend, which is why we're updating our guidance. You'll see we're at 16%. We want to raise guidance on Evodex by 16%. We reduced G&A by 15%. We're not changing our CapEx, and that all feels pretty good. We do generate a lot of cash. We have a bunch of cash. The question becomes is what to do with it. We've told you really clearly in our first quarter, the goal is to return cash to shareholders. That's why we started a fixed dividend in the first quarter. We told you at that time that we would define a variable dividend strategy by year end. Today is that day. So we're going to implement a variable return program that's going to take 50% of our free cash flow quarterly and pay it out. That's going to start in the beginning of next year. We're pretty thrilled about it. The very bottom of the page, you may have seen this in the previous press release, our commitment to the environment and being a good steward of assets. We are pledged that we will turn our Haynesville area into an RSG basin for us. We think that is not only the right thing to do and the smart thing to do, and we're pretty pleased and we're making great progress. Turning to the vine acquisition, which we're really excited and fired up about. During the quarterly calls and last time and every time I have an investor call, I get a question often about, you know, will Chesapeake, participate in the A&D market, how will it look, what are the what's, where's, when's, and how's. And honestly, we're very picky, and we're picky, and we think this acquisition absolutely reflects that. We have what we think are five non-negotiables in any transaction. The first non-negotiable is you can't overpay. We don't think we are. This is a zero premium deal. When you look at it, if you want to calculate the price, you can do it yourself. It's basically the 30-day exchange ratio. That is how we based it. no premium, feels great, we're not overpaying. The second non-negotiable is we're not going to break our balance sheet. We're not Chesapeake of the past. We think this is a competitive advantage. You'll see our leverage is still below our long-term goal, which is sort of fantastic. We're going to keep it. It was hard to get here. Now, you could ask, hey, did you build some overhang on your stock with the new buying shareholders? And I'd say, maybe you could think about it that way. We don't think about it that way. Divine Holder shareholders have been very clear on their intent. The intent is they like Chesapeake. They like the story. They want to participate in the upside. And frankly, we're happy to have them. Third, non-negotiable. It's got to be creative. On the metrics that matter. We think this transaction is. You guys will calculate it. We feel great about it. Fourth is, hey, we're looking to be better, not just bigger. And so we think this transaction does it. Better to us means adding low break-even drilling locations. This transaction does it. It means having scale. You combine low break-evens and scale and size, and I think you have a winning formula to generate a lot of free cash flow. We have the locations with this. We're happy about it. We also are going to be the largest Hainesville producer is the scale we're looking for. The beautiful thing about this is this is an area that we've already operated in since 2008. We know the area, we can execute, we will execute. We feel great about it. Finally, we talked about our pledge to be RSG in the Haynesville. We talked about it in our own assets. It was very important to us, not just to do it on those assets, but vine assets. So our pledge extends also to the vine acreage. Next page, page four. Look, picture is a thousand words. The picture tells you the story, which is they're our next door neighbor. It makes total sense. We have the people. in place, all ready to execute, and we feel great. Next slide. I'm going to keep harping on this about being a good operator. We think it's obviously the right thing to do on ESG. Haynesville is the right place to be. And not only that, we think it is not just right, we also think it is a competitive advantage. It is a smart thing to do. We know that Haynesville Gas goes into the LNG complex. We know the buyers of LNG want it to be certified RSG. We're going to deliver it. We listen to our customers. We want to provide it. Turning to page six of the deck, again, back to the picture tells a thousand words. We talk a lot about basis. You guys talk a lot about basis to us, about the Appalachia. It's obviously a hot topic. The basis is this is perfectly situated. to take that out. This is the place to be. We're happy to be building here. It is a core strength for us. Page seven, cost savings. Synergies are always sort of a, it feels mostly like a guess. It's not a guess for us. We have operations here. We have expertise. We know we can do. I've already mentioned, I don't think anyone has drilled more Hainesville wells than us. We have the people here to execute. So we think these synergies are absolutely real. Page 7, we talk about cash to shareholders. To me, this is put your money where your mouth is. It's one thing to talk about generating a lot of free cash flow and about synergies. It's another thing to actually promise to give it back to shareholders. First step is we're going to increase our fixed dividend. The synergies that we're talking about, we're going to give to the shareholders. We're going to raise our fixed dividend by 27%. We think it's the right thing to do, and we're happy to do it. Also, with the new variable dividend plan that we just discussed, it applies to these assets as well. And so giving back cash to shareholders is what great companies do, and we're happy to be part of it. With that, Nick, why don't we go through the numbers?