Chesapeake Energy Corporation

Hello, and welcome to the Chesapeake Energy Corporation 2021 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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 telephone keypad. 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 your host today, Brad Sylvester. Mr. Sylvester, please go ahead.

Thank you, Keith, and good morning, everyone, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2021 third 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 It cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections, 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 release and in other SEC filings. Please note that except as required by applicable law, we will 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 measures we use, a reconciliation to the nearest corresponding GAAP measure can be found on our website. With me on the call today are Nick Delosso, Sheldon Burleson, Tim Beard and Mike Wisterich. Nick will give a brief overview of our recent results and then we will open up the teleconference up for Q&A. So with that, thank you again and I will now turn the teleconference over to Nick.

Good morning and thank you Brad. Thank you all for joining our earnings call. I can't tell you how honored I am to lead this company and to collaborate with our exceptional colleagues who are exceptional employees who I'm proud to call my colleagues. I'm very pleased with our strong third quarter results and could not be more encouraged about the direction we're heading as a company. Behind our talented workforce, strong balance sheet, great operational track record, and advantaged ESG profile, I firmly believe Chesapeake sits in an incredibly strong position today and is poised to consistently deliver best-in-class returns to our shareholders. We're focused on executing the strategy we've articulated over the last eight months. Behind our disciplined capital allocation approach and continued focus on our cost structure, we intend to increase free cash flow, enhance our scale, and return significant cash to shareholders. Within that strategy, our priorities over the coming year will be to refine our portfolio to assets where we intend to run development programs of scale, continue to leverage our technical ability and efficiency to reduce break-evens, and lower our operating costs across our business. We'll accomplish this while remaining steadfast in our commitment to ESG excellence and achieve net zero direct emissions by 2035. Our earnings release and updated outlook for 2022 highlight our progress on all of these fronts. For the quarter, we once again had strong performance across our portfolio, led by production beating our and the street's expectations on lower spending. Our EBITDA of $519 million was certainly aided by commodity prices. However, our production outperformance was meaningful. and allowed us to increase our oil production estimates for the full year by 1 million barrels. Our gas production is up materially as a result of our base and wedge outperformance, as well as the earlier-than-forecast closing of our acquisition of Vine. Importantly, we raised our EBITDAX estimate by $150 million while not raising our CAPEX, aside from the incorporation of Vine for November and December. Not surprisingly, this results in a significant increase in our free cash flow and projected dividends for 2022. We were pleased to have closed the Vine acquisition earlier than our original estimated timeline, allowing us to initiate the full integration process well before year end. We have been working closely with the talented Vine team and very much appreciate their support in the transition process. We are continuing Vine's current drilling program of three rigs and two completion crews and look forward to highlighting the progress of the integration of our strong teams and asset bases as we get into 2022. Turning to 2022, we made a fairly material increase to our estimated EBITDAX for the full year that certainly bodes well for our free cash flow and variable dividend program. We're pleased to maintain our CapEx guidance for the year at a midpoint of $1.45 billion. Despite the material increase in EBITDAX we expect to recognize, we're going to remain focused on our disciplined approach to capital allocation. Simply put, we have a clear strategy for each asset, and that strategy holds regardless of near-term fluctuation in prices. Approximately 85% of our 2022 CapEx will go to our highest certainty return opportunities in the Marcellus, Haynesville, and South Texas Eagle Ford. Each of these assets has a clear rationale for the rig count we laid out previously. The Marcellus is constrained, and so we will stay with three rigs there. The Haynesville is performing extremely well, and we will have a pretty significant increase in Chesapeake activity given the integration of the incremental three vine rigs. In the South Texas Eagle Ford, we're planning to run one to two rigs focused on the lower Eagle Ford. Our reduced cost structure and materially higher prices versus a year ago give us confidence in this multi-year program. Approximately 15% of our 2022 CapEx will be focused on further portfolio delineation, including activity in the Austin Chalk and testing of wider spacing assumptions in Brazos Valley and Powder River, which we expect will deliver superior results. Ultimately, this capital investment will help us determine where these assets and opportunities fit in our portfolio. Switching gears slightly, with much of the world's attention focused on Glasgow this week, I think it's important to reiterate the essential role we believe Chesapeake will play in supporting a lower carbon future while continuing to deliver reliable, affordable energy. We've seen proposed EPA rulemaking announced at COP26 this week targeting methane emissions from our sector. This follows proposed federal legislation released last week imposing a fee for emissions exceeding a methane intensity rate of 0.2%. We believe responsible production from unconventional resources in the U.S. has a critical role to play in helping meet these goals, and we're proud to produce the energy that is so desperately needed across the world today. To put our emissions performance in perspective, we closed out the 2020 year with an enterprise-wide reported methane intensity of 0.13%. And now with our recent abatement efforts, coupled with our vine acquisition, we're rapidly accelerating our path to reaching our 2025 methane intensity target of 0.09%. Further, we remain on track to fully certify 100% of our Gulf Coast production as responsibly sourced gas this year and Appalachia production by the middle of 2022. We expect the gas coming out of these two plays to have methane intensity of 0.02% to 0.03%. Once complete, Chesapeake will be positioned to directly deliver approximately 3 BCF a day of certified responsibly sourced gas to end users around the globe. While we're proud of our current emissions profile, we're not satisfied with the status quo, which is why we plan to invest over $30 million in ESG-related and emissions-reducing programs by year-end 2022. As part of this effort, the company anticipates retrofitting more than 19,000 pneumatic devices primarily focused on our oil assets. This retrofit program commenced in the third quarter, initially focusing on our Brazos Valley business unit, and is now expanding throughout our oil plays. Once complete, the effort is expected to reduce Chesapeake's GHG and methane emissions by approximately 40% and 80% respectively. I look forward to addressing your questions momentarily, but first I wanted to provide some additional color on my initial week's leading Chesapeake. Since being named CEO, I've had the opportunity to visit with employees across each of our operating areas, and was energized by the passion and commitment to excellence that resides in this company. Our colleagues asked me many thoughtful questions regarding our commitment to capital discipline, path to increasing cash flow, plan to enhance our scale, outlook for returning cash to our shareholders, and commitment to lowering our emissions profile. Our employees pressed me on these questions because they care greatly about our future. They firmly believe in our strategy, and they don't want to lose momentum, which has been steadily building across our company over the last eight months. My conversations with our employees only strengthen my confidence in what lies ahead for our company. Our employees will and excitement for what we can accomplish together.