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Chesapeake Energy Corp
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Good morning and welcome to the Chesapeake Energy second quarter 2022 earnings teleconference. All participants will be in a 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 a touchtone phone. To withdraw your question, please press star then two. Please note that this event is being recorded.
I would now like to turn the conference over to Brad Sylvester. Please go ahead.
Good morning. Thank you Joe, and thank you everyone for joining us on the call today. This is Chesapeake’s second quarter 2022 financial and operational results call. 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 press release 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 any 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 this morning 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 for Q&A.
With that, thank you so much, and I will now turn the teleconference over to Nick.
Good morning and thank you for joining our call. We had another great quarter and we’ve announced another important step in improving our business and solidifying our portfolio around our outstanding natural gas assets.
We continued to execute our business in the second quarter, generating very strong cash flows through our capital efficient development. The integration of Vine and Chief into our portfolio has been a success and contributed to the company delivering strong cash flows and returning meaningful capital to our shareholders in the form of dividends and buybacks. In fact, year-to-date we have repurchased shares of our common stock equal to approximately 75% of the shares we issued in the Chief transaction.
The consistency of our quarterly execution is a result of continuing to take steps to make our business better, not just bigger, since emerging from restructuring. We believe today’s decision to reallocate capital from the Eagle Ford to the Haynesville, leading to the Eagle Ford becoming non-core to our future capital allocation strategy, is the next step. Our focus on making Chesapeake better underpinned our strategy to acquire the Vine and Chief assets and has served as the foundation for our strategic pillars, which we believe maximize shareholder value. Those are to generate superior capital returns, maintain a deep and attractive inventory, a premier balance sheet, and pursue excellence from an environmental and overall ESG standpoint.
As the macro environment has evolved and we conclude the successful integration of the Vine and Chief assets into our portfolio, we believe more strongly than ever that we have the premier natural gas portfolio in the U.S. Our Marcellus and Haynesville positions clearly possess the characteristics to finding the best assets. We have industry-leading capital efficiency, deep runway of low breakeven inventory situated next to the premier demand centers, strong operating margins and advantaged emissions profiles.
Additionally, as you will see in Slide 5 in our presentation on our website today, our relative position with capital efficiency, operating efficiency and well performance is peer leading in both basins. Each of these strengths when combined with our balance sheet delivers a truly differentiated capital returns profile which is unmet among the gas names in this space.
While the Eagle Ford is a strong asset, as we look to the future, it simply does not compete today with the exceptional returns, rock and runway of our gas assets. The Eagle Ford has become non-core to our future capital allocation strategy and we believe that we will be a better company if we focus all of our resources, both capital and human, on the Marcellus and Haynesville. By doing so, investors will have a clearer path to investing in our great gas assets and we believe will ultimately Chesapeake more appropriately relative to the quality of our assets, strength of our balance sheet, and magnitude of our capital returns profile.
With respect to the Eagle Ford, we will now turn our attention to accelerating value for our shareholders through a strategic exit from the basin. This is a large asset across a wide geography with several subsets of asset characteristics; therefore, in order to maximize shareholder value during an exit, we expect the process may take some time and could even require multiple transactions.
Our approach will be guided by two principles. First, anything we do must be accretive to our strategy. Our strong financial position and balance sheet and the exceptional cash flow generated out of these assets allow us to be prudent in our approach, so this just will not be a fire sale. Second, the proceeds will go to enhancing our capital returns program. As you’ll see in our slide deck, our capital returns framework already leads the gas names by a significant margin. This will allow us to make it even better.
As I stated at the beginning of this call, we’ll begin reallocating capital away from the Eagle Ford to the Haynesville. Since the Vine transaction, we’ve been consistent with our six rig program aimed at keeping the Haynesville production relatively flat. We’ve also shared that we have some short term constraints, primarily from gathering and treating facilities in the basin. As you’ll see in Slide 12 of our deck, we’ve identified a clear path to increasing Haynesville capacity by the second half of 2023 and intend to increase our rig count from five, where we stood last week, to seven by the end of the year, allowing us to match our production growth to the capacity expansions. Ultimately, we plan to deliver 5% to 7% growth from year end 2022 to year end 2023.
In closing, we believe Chesapeake is the only gas-weighted company who can definitively say it has the returns profile, assets, balance sheet, access to markets in LNG, and ESG performance to deliver across each of these critical areas. We’re excited about or sharpened strategic direction and the opportunity to demonstrate that we are the premier gas investment opportunity in this sector.
Operator, we’ll now open the call for questions.
[Operator instructions]
Our first question will come from Scott Hanold with RBC Capital Markets. Please go ahead.
Thanks, good morning all.
Morning Scott.
Good morning. Looking at the Eagle Ford, it’s a pretty big asset. I mean, obviously you guys aren’t probably going to put a marker on it, but we’re talking into the billions. When you think about that kind of cash coming in the door, two questions. One, what are the tax implications generally speaking on it; and number two, how do you think about distributing that or utilizing that cash? You talked about within your shareholder framework, but when you’re talking about getting multiple billions of dollars, is that the right direction, or does it make sense to use some of that to look at strategic bolt-ons and other things in your core areas?
Yes, great question, Scott. On the tax side, I’ll answer that first, it’s a little early for us to start talking about what the tax implications could be. We’ll probably stay away from those details today. There’s a lot for us to explore with the buyer universe here and thinking about exactly how an exit here will work. As I noted, I think it’s likely to be more than one transaction, and so it’s probably just a little early to give that kind of guidance.
On the proceeds, we’ve talked a lot about power value today and we’ve talked a lot about what that means to us and how we think about capital allocation, so pretty clearly we have devoted a significant amount of our free cash flow to returning cash to shareholders, both through an attractive yield as well as through a very sizeable buyback. We increased our buyback to $2 billion in June and we’ve continued to execute on that. We’re up to $670 million total, which is nearly $200 million higher than our last update to the market on that point, and so we’re continuing to press that.
Given where we’re valued today, the capital allocation analysis that would come from a bunch of proceeds from an asset sale is going to lean pretty hard towards buybacks. You asked about would we buy something. We’ve talked a lot about in the past that we think scale matters, but we just achieved pretty great scale in our Haynesville and Marcellus assets, so we feel no pressure, need, obligation to run out and buy something.
We’ve also been really clear that if we do consider acquisitions, we have our non-negotiables that are designed to be very protective over accretion and shareholder value creation, and they create a really high bar. When you have a stock price that you think is undervalued or attractively valued if you’re a buyer, that raises the bar even higher.
So look, we’ll continue to run our business the way we have been running it. The capital allocation model at Chesapeake is getting simpler with this, so now you have the opportunity to return capital to shareholders or reinvest in the Haynesville and the Marcellus. Those are your three choices, and that’s a pretty straightforward analysis when you think about how we are in a position of modestly growing the Haynesville and maintaining our fantastic position in market share in the Marcellus, which is capacity constrained. So again, that analysis is pretty straightforward. We think we can maximize shareholder value by staying focused on that pretty tight capital allocation model, and that’s what we’ll do.
All right, great. Great color. As my follow-up, as you look focus on the Marcellus and the Haynesville, you have a path with the Haynesville through 2023. When you start thinking about beyond that, I think the Marcellus--you know, there’s not a ton of growth opportunities, so when you look at the Haynesville longer term, is the idea post-2023 to maintain relatively flat production, or do you like that modest growth trajectory in that basin and is there capacity to do so beyond 2023?
The answer to the second question is yes, we think there will be capacity to continue to grow beyond 2023. Will we grow is something we will determine over time, at what rate we will grow, but it’s really important to have the ability to grow. You referenced and I referenced that the Marcellus is generally constrained, but I would also point out that over the last couple of years, we have managed to grow in the Marcellus and we think that growth is a function of how competitive our assets are.
What that basically came from was during the COVID pandemic shutdown, there was capacity that softly opened up in the basin and we were able to take advantage of that and fill it, and we grew production, so when we have opportunities to grow in the Marcellus, we’ll do that. It’s really hard to predict those opportunities in an environment where gas prices are high - there should be less of those than when gas prices were low. That said, we’ll always pay attention to that opportunity, and then having the ability to grow in the Haynesville is a great lever, and we’ll be really disciplined and prudent about how we approach that over time.
In the current moment, we’ve been able to line out how we’re going to expand takeaway capacity from our gathering and treating facilities, and that gives us confidence to step into from a low single digit growth rate to a higher single digit growth rate on an exit basis from end of ’22 to the end of ’23. How we’ll position ’24 and beyond is something that we’ll look at as we go through 2023.
Appreciate it, thanks.
Our next question will come from Doug Leggate with Bank of America. Please go ahead.
Thanks, good morning everyone. Nick, I’ve got two questions, I guess I would frame it as consistency of strategy. I think it’s kind of important for us to have some view as to what Chesapeake is going to look like and obviously the five-year plan you laid out is probably not the best guide today, given these changes, so I guess my first question on the Eagle Ford is what changed here? Is this a reaction to [indiscernible]? Last quarter, you talked about outstanding returns and significant free cash flow, so I’m just wondering what the trigger was for this. Was it an unsolicited approach, was it something else about the program that wasn’t as successful as you thought? Maybe if you could frame your expectations to what you think the value would be, not to have you negotiate that against yourself but [indiscernible] turned out to be pretty important, I guess, as part of that discussion as well.
So what changed, and what are your expectations in terms of value?
Sure, good morning Doug. I’ll do my best to answer what I think you asked. You were pretty fuzzy in your voice there.
We came out with a presentation in June which I think pretty successfully highlighted a lot of the individual characteristics of each of our assets - Haynesville, Marcellus, and Eagle Ford, and that was intentional. We wanted to start highlighting the asset level quality a bit more on its own as we knew that this decision was potentially coming soon. I think that did a good job - I think investors have a bit of better clarity as to what the Eagle Ford generates on its own.
You asked about the results of this year. We’re actually pretty pleased with what we’re seeing so far this year. The turn-in lines for the Eagle Ford that are coming out of our capital program are pretty heavily weighted to the fourth quarter, and so that’s going to give us quite a bit of volume momentum going into 2023, which is a nice time to be thinking about a decision like this. Really, what has changed is the super high quality of the Vine and Chief assets as we complete the integration of those assets and think about how it all fits in a long term capital allocation model.
Yes, we can show a capital allocation model that looks quite attractive with the Eagle Ford in it - there’s no question about that, and we have shown that and we know the Eagle Ford is in a position to generate a tremendous amount of free cash flow. But we think we can make it better over time by being focused on just the Haynesville and the Marcellus, so this is really about the strength of those two assets and how the capital allocation model comes together and how we continue to make it better.
You know, really not a lot has changed other than us clarifying that strategy and beginning to talk about if we’re good with the Eagle Ford, we’re going to be great in a more refined capital allocation model going forward.
Sorry to press, Nick, and I apologize for my line, but have you had unsolicited approaches for this?
We get calls about all kinds of things all the time, Doug, so we’ll just leave that comment with that. Some of those calls, we don’t know if they’re valuable, and some of them probably are.
My follow-up, Nick, and again I hope you can hear me okay, you know we’ve obviously, you and I, have had a thorough debate about variables versus buybacks. Your share price, I was just looking, it was about the same level as it was on the last call, but now you’re talking about the value of your stock and the redeployment of proceeds for share buybacks. Why would that not apply to organic free cash flow, in other words are we now seeing an end to the debate over variables versus buybacks and you’re going to pivot harder into the buybacks in favor over the variable?
I’ll leave it there, thanks.
Sure, thanks Doug. You and I have discussed this quite a bit and I’m sure we’ll continue to discuss it. We have an approach here that is all of the above - we’ve continued to talk about that. We know that quite a few of our investors appreciate that approach. We’re going to maintain an open mind about what the best way is to return capital to shareholder, and obviously with an announcement like this today, where we’re talking about leaning towards buybacks with proceeds, given what we see and the valuation of the company today, we think our stock is undervalued and we think that incremental cash beyond what we’ve designed in our returns profile should go to buybacks.
But we like the approach we have, we like the all-of-the-above approach, and so we’re going to keep doing that for the moment. I think the dividends we’re paying out this quarter are fantastic, there’s great opportunity to see those grow over time. Obviously commodity price dependent - that’s the nature of a variable, and we think it’s a pretty attractive stream of cash for investors.
Thanks Nick, I appreciate it.
Our next question will come from Zach Parham with JP Morgan. Please go ahead.
Hey guys, thanks for taking my question. I guess first off, maybe just a follow-up on the buyback, do you have room on the revolver to buy back shares this quarter? You’ve been very aggressive with the buyback thus far. Do you plan to continue to draw on the buyback--or draw on the revolver to buy back shares in the near term? Clearly you’ve got some proceeds planned to come in with the Eagle Ford sale, so just thoughts on kind of the near term outlook for the buyback.
Yes, it’s a good question, Zach. We’re expecting a pretty significant amount of free cash flow for the company, so no, it’s a free cash flow driven return strategy.
Got it, and just a follow-up on the Haynesville. You talked about constraints there in the near term and working with some of your midstream partners to alleviate those. Can you give us a little more color on what’s going on there and maybe a timeline for when you could start to grow your Haynesville assets? Just looking at the 3Q guide, it’s pretty flat quarter over quarter.
It is flat quarter over quarter, and so what we’ve detailed on the slide in our presentation around the Haynesville is some--you can follow a few steps in capacity additions that will come on. A lot of these things are small projects. As we noted the last time, these are constraints at the gathering and treating level, and so you have either a new offtake agreement to use treating capacity with a neighboring system or you have an expansion of existing treating capacity, or you have a new offtake line for takeaway that will allow you to bypass some treating. There’s a number of different things embedded in this, several different projects, and we’ve modeled it out for you so you can see the steps at which we expect it will come online next year.
Thanks guys, that’s all for me.
Thanks Zach.
Our next question will come from Matt Portillo with TPH. Please go ahead.
Good morning all.
Morning Matt.
Just a follow-up question on the balance sheet. I think the expectations were to possibly start to pay down the revolver heading into 2023 and beyond. I guess with where the stock’s trading today and obviously the ability to continue to redeploy free cash flow towards the buyback, is that view still one that we should be thinking about or are you comfortable with the leverage profile and continuing to recycle more and more excess free cash flow towards the buyback moving forward?
Well, we’ve clearly been willing to deploy a lot of free cash flow towards the buyback here in the recent past, and we had an opportunity in the second quarter to do a lot, and so you saw us do that and then you saw us increase the buyback authorization as a result.
Will we always work at that pace? That kind of depends on what happens in the market and our ability to access sellers of stock in larger chunks. We may or may not. We can be opportunistic about that. We have the financial flexibility to do it. I would not expect that to be a straightline trend. When we’re not buying back at that pace, then free cash flow will be applied to the revolver. This is not a signal that our balance sheet is going to bloat up here for buybacks.
In addition, I would just point out that--and I think some of the notes this morning highlighted we did have a working capital draw this quarter. That is purely a function of the timing of hedge settlements relative to when revenue comes in - hedges settle first and revenue comes a month later, so that should normalize in the third quarter. That pulled a bit more on our free cash flow this quarter, and it is purely a short term timing issue, so no, our balance sheet commitments remain as rock solid as they could be. That is something that you will not see us deviate from.
Perfect, and then I guess a follow-up question, with the divestiture of the Eagle Ford, you obviously have kind of pure dry gas exposure here. Just curious how you’re thinking about your hedge strategy moving forward, particularly late ’23, heading into 2024, balances might start to loosen a bit. Obviously a bit of a long road between now and then, but as we get into ’25 and beyond with a second wave of LNG, the market looks quite strong, so just curious how you guys are thinking about protecting some of those cash flows, especially given the strength in the curve and how you might approach hedging as you lose some of the oil revenues and become more of a dry gas pure play.
Yes Matt, good morning, this is Mohit. I’ll take that.
The hedge strategy stays consistent through the cycles. Our view is that on a rolling eight quarter basis, you want to keep looking at hedging. What we’ve done lately is just be more opportunistic as prices firmed up, and we were seeing significant volatility especially to the upside - that’s the time to monetize that volatility and that’s what we did through some very attractive costless collars that we were able to lock in.
We’ll keep looking for those kind of windows where we can opportunistically go in and layer more hedges, but the view remains consistent that we will look at it on a rolling eight quarter basis. Some of the legacy hedges that we have are beginning to roll off, and I would say what we have going forward are more hedges that we have tactically put in place, so we feel pretty good about that.
Perfect, thank you.
Thank you.
Our next question will come from Umang Choudhary with Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my questions.
My first question was on Eagle Ford. I believe one of the areas which you were evaluating to decide the future capital allocation in the basin was on the Austin Chalk program. Any update on the program, and how is that influencing your plans for sale?
Yes, good morning, this is Josh. At this point, it’s still really early. We’ve only brought on seven wells in total in the first half of the year, so we’re still early in the program. Our first Austin Chalk well just came on just in the last couple weeks, so that well is still cleaning up, so we still have quite a bit to learn as we get into the second half of the year from that program specifically.
Great, very helpful. Then on the second question, can you walk us a little bit about your hedge strategy, and specifically your basis hedges in the Haynesville. It looks like because of the gathering and treating facilities and with potential for more growth in the basin, there could be some basis concerns for the Haynesville in the back half. I notice that you are 50% hedged already. Do you plan to add more hedges to protect that differential?
Yes Umang, this is Mohit. I’ll take that. The short answer is yes, we are always looking for opportunities to pair our NYMEX hedges with the basis hedges as well. It’s not quite where we’d like to be on a one-to-one basis, but we are trying to whenever the market is there and we are trying to layer those in.
Thank you.
Our next question will come from Subash Chandra with Benchmark. Please go ahead.
Yes, thanks. Good morning.
First question is as you sort of shift capital from Eagle Ford to the Haynesville in advance of the sale, what do you think about capital efficiency, because on the one hand I sort of see the Eagle Ford wells are cheaper, the margins are better because of the oil; but on the other hand, your gas wells are so much more prolific, so how do we think that balances out here in the near to intermediate term?
Well, actually when we look at our returns, and that’s how we choose to allocate capital, the returns today, even at the commodity prices you see and the margins you might expect in oil assets, the returns are still far superior in the Haynesville and in the Marcellus, and that’s really what’s ultimately guiding this decision. We feel really good about this shift in capital and we think it’s going to only enhance our capital efficiency in the near term, in addition to as we look out to the horizon.
Okay.
We’ve put a slide in the deck today, Subash, that shows capital efficiency as measured by the amount of capital you spend relative to 36 months of production from all new wells that you bring on, and we’re really proud of our track record there. We did that just for our gas assets this time. You can look at it across our whole portfolio as well. While our Eagle Ford asset has attractive capital efficiency, our gas asset capital efficiency is just off the charts good.
Yes, [indiscernible] impressive. I might come back on that afterwards.
The other question I wanted to ask was as you’re looking for these sales-type agreements for LNG, you’re a huge player there in the Haynesville, how much competition is there for the LNG fairway, and do you think--is it sort of a zero sum game and how do some of these privates that are for sale - you know, Athlon and Rockcliff, sort of fit into that? I don’t know if there is a place for someone to consolidate those to enhance their market position for future LNG exports.
Yes, those are all good questions. We’re still really excited about the LNG opportunity. You saw we announced our first significant contract in the LNG world with this release - we’ve done a deal to sell some gas to Golden Pass. What’s unique about that contract is that it does give credit for us producing responsibly sourced gas, so we think this is a good step towards recognition of what responsibly sourced gas means to the LNG buyer universe.
I can’t go into the details of pricing we received there, other than just to point out that it’s a domestic price - we didn’t do a deal on TTF or something here, and we’re pleased with the price. We think this is a better price than we would get just from putting gas in a pipe and sending it south, and so it’s a great transaction for us. It gives you surety of flow, it gives you surety of differential, and we think we’ve made a good deal on both of those points.
We’ll continue to stay focused on LNG from the standpoint of how do you get the best pricing contracts. We’ve talked a lot about how if you’re going to pursue LNG on an internationally priced basis, you need to think about it as a diversification strategy, and we still very much think about it that way. So what’s the best way to get that? You do need to be large, you need to be responsible, you need to be a great operator, you need to have depth of inventory and a quality of inventory that buyers understand that if they’re buying something from you over a five, 10, 15-year contract, you’ll be there to deliver, so you need to be resilient from a quality of inventory standpoint but also from an environmental standpoint.
When you stack all that together, we think we are a preferred seller of gas into the LNG world. We’re right there on the doorstep of the facilities, we have a tremendous amount of gas, we have good connectivity to market. There’s a lot of projects that are in the works to increase the connectivity to market and increase the connectivity directly to certain facilities, so you can imagine that today it is competitive and those strengths of depth and quality of inventory, the ESG position that we have, our overall operating efficiency play all as strengths into that discussion.
Okay, thanks guys. I’ll jump back in the queue. Thanks.
Thank Subash.
Our next question comes from Nicholas Pope with Seaport Research. Please go ahead.
Morning everyone.
Morning.
I was hoping you guys could talk a little bit--I mean, now that we’re three, four months in, I guess more than that, into the Chief and Tug Hill acquisition, maybe talk a little bit about the integration, how that’s progressing relative to your plan, where you’re seeing some of the benefits of that larger footprint on operating costs, your transport costs. Just kind of curious how things are progressing there on that acquisition.
Yes, good morning Nick. This is Josh. I’ll answer that.
You know, we’re really excited about what we’ve seen. We’re only four months into it, but really pleased with how the teams have come together and identifying a number of opportunities.
A couple things maybe to highlight for you. One of them is we’re really just seeing the benefits of seeing a common owner within the gathering system. Of course, our acreage with Chief was really [indiscernible] with one another. To date, we’ve already added about 80 million cubic feet a day of gross gas that we’re able to flow incremental to what the two companies could have done before, and that’s just simply to have a complete overview of that gathering system and then working with the midstream provider to ensure that we’re directing gas flows to where there is available capacity, so that’s already starting to realize itself.
Then also, I look at what was done on the drilling side and just since we’ve taken over operations, as we utilize our remote optimization center here in Oklahoma City, we’ve already realized about a 7% improvement in our footage per day on the drilling side just by sharing common drilling practices.
Just a couple of things to highlight, but again it’s gone really, really well. The integration, I would say is essentially complete. We still have a few back end financial systems to tie together, but things have gone really well so far.
Thanks, that’s appreciated. Moving to the other asset in the Haynesville, you guys provided this chart showing the split of Bossier and Haynesville. Kind of curious what the current level of activity split is between those two formations and what the expectation is here over the near term in terms of that split and where you think we are in understanding the optimal targets there in those two formations.
We’re still going to be pretty heavily geared towards the Haynesville in the program. There’s about 10 or so wells in the Bossier that we’ll plan. We do like the Bossier; in fact, we brought on earlier in the year a 15,000 foot lateral that Vine had drilled in the Bossier. Over the first three months, we’ll average about 40 million cubic feet a day, and so if you actually were to take that and to place it on Slide 5 of the best gas wells across North America, it’s going to be right there at the top as soon as that hits the public databases.
Again, we’ll be more geared towards the Haynesville just because that’s more prominent across a greater portion of the acreage, but Bossier looks great and we’ll continue to assess and incorporate that into our development plans.
Got it, appreciate it. That’s all I had. Thank you everyone.
Our next question will come from Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning. I just wanted to ask a bit about the service environment and how it maybe plays into your longer term thinking. When you were talking about LNG contracts a few minutes ago, you mentioned giving the LNG operators confidence that you’d be there to deliver five, 10, 15 years out. As you sort of rationalize the portfolio on the one hand and think more about LNG pricing on the other, I’m just wondering, do you have some embedded assumptions or some scenarios in there about what the service cost environment looks like, and particularly just thinking if you see it reaching a sort of peak of costs and then moderating, or do you consider a scenario that we might be in an ever-intensifying cycle of inflation in the gassy basins in particular?
Sure, I’ll take that, Noel, and others may have things to chime in with here.
We pay really close attention to inflation, and obviously inflation has been a big theme in 2022. We talk very often and in depth with our service providers about how they think about capacity in the industry, and they’re making very rational decisions not dissimilar to how the upstream has responded to these higher prices here over the last, call it 18 months, so they’re being prudent and disciplined about how and when they decide to bring incremental capacity to market.
But there is incremental capacity showing up. It’s not showing up at the rates that it has in past cycles, and frankly that’s probably healthier. We are seeing inflation but we also are seeing some additions to capacity, albeit at a slower scale than in past cycles.
I think the cycle continues to play out the way it always does. There is significant margin to be had, so therefore people will bring capacity to market, but it seems to be working healthier than it has in the past. We think that will continue.
Overall, we have a great relationship with our service providers. We remain an operator of choice. We push our suppliers on performance, and when we achieve great performance, they make more money and so it’s a very symbiotic and great relationship. That’s the way we structure our contracts, and that works well for us.
Great. Just following up on that, do you foresee contract structures ahead where, especially when we’re talking about the longer term, where there is some ability to mitigate or maybe share the risk on the production cost side, so that you don’t have a long term top line scenario, pricing scenario for what you’re receiving while you have exposure, maybe, on the cost side?
Yes, this is Josh. We work obviously pretty closely with our service providers, regularly talking about what the contracts should look like as we look out into the future. Generally, we’re not seeing much appetite at this point for longer term contracts. There’s still quite a bit of movement potentially to be had in the service side. Clearly, I think it’s pretty well documented that the service market is tight, you’re not seeing a ton of capital being injected into the oilfield service sector, and so I think generally we’re looking at month to month to maybe six months out. But getting any further beyond that is just not really what we’re working towards today. It’s just simply too hard to predict in the environment we’re in.
Noel, if I may add to what Josh said, I’ll refer you back to Slide 5 because, again, in an inflationary environment, our firm view is if you have a portfolio which is competitive, which is cost efficient, and your operating margins are healthy, then you can absorb the inflationary pressures. Obviously we track it very closely, as Nick said, but at the same time it’s the robustness of the portfolio which allows you to absorb that kind of variability.
Right, thanks. That’s all for me.
Our next question is a follow-up from Subash Chandra with Benchmark. Please go ahead.
Yes, thanks. So Slide 5, just wanted to give you guys an opportunity--you know, impressive Marcellus results. What are the drivers here? If you could do some sort of attribution analysis, possible between geology and the things that you can control.
Well obviously in our business, it starts with rocks, and we are advantaged that we were early movers in the Marcellus and in the Haynesville, and so we really like the acreage positions that we’ve accumulated. We’ve only strengthened that with the Vine and the Chief acquisitions, so clearly that works to our benefit.
But at the same time, we consider ourselves to be a premier operator, and what that really comes down to is our ability to manage capital. Our experience that we have, the technical expertise that we’ve developed, the contracts that we’ve put in place and how we partner with service providers also allows us to be able to manage our cost performance in these basins, and so you put these two together and you end up with that chart that you see in the upper left-hand side of Slide 5, with us providing you the best capital efficiency across our gas basins.
What about initiatives to drive IP rates in the--you know, looking at the evidence on the right side of this slide?
Yes, so we’re not really in the game, I would say, of necessarily creating headline rates. This is just really the nature of having great wells and maximizing a return on an investment. Clearly we want to be efficient with capital, but our goal at the end of the day is to purely maximize the return that we get, not necessarily in IP.
Yes, we kind of like the fact that we showed the first 90 days of production, 17 of the top 20 wells are by Chesapeake, but then we also balance that by showing the amount of capital that we have to spend to bring on production over a several year period. We shine in both, and so we bring on wells big in the beginning, we don’t spend a lot of money relative to others to do it, and they’re holding up well, so.
It really--when you think about what this slide highlights and then also operating efficiency, our cost structure is quite competitive. We don’t have any liquids contribution and yet we’re hanging out in a pretty competitive spot from a margin standpoint, and so when you think about all of the pieces here, it really is about rock, returns and runway. We can deliver all of these returns today and we can do it for a very long time, given the depth of inventory we’ve put together as we’ve continued to make this company better through the acquisitions that we’ve done with Vine and Chief.
We’re achieving the synergies that we sought there. We’re pushing for a lot of incremental synergies beyond what we were able to identify day one. When you have the kind of scale and operating capability we have in a basin like this, you’re running the rigs we’re running, you have the history, you have the data, you have the ability to execute and the service provider relationships, you can continue to perform at a high level, and that’s something that we take a lot of pride in, our team works very, very hard on every day and delivers a fantastic result.
This takes every employee at Chesapeake to deliver on this kind of performance. We’re very proud of that, and we expect to continue to do that over the long haul and know that with the quality of rock, as Josh said, but then also the quality of operations, we sit at the top.
Thanks guys. It’s a good slide.
Okay, I think that’s probably the last question, so in closing, I just want to comment that we recognize that accelerating value for shareholders through a strategic exit of our Eagle Ford will not happen overnight; however, I would like to reiterate our key principles for this process.
We’ll ensure that it’s accretive to our strategy, and with our balance sheet and the cash flow from these assets, we can be prudent in that approach. We’re looking forward to applying the proceeds through our capital allocation philosophy which is going to lean towards our leading capital returns program. We’re very excited about this, and I hope you all can sense that.
The confidence we have in the strategic direction we’re undertaking is very, very high. It’s both firmly grounded in our belief that Chesapeake has the strongest assets, capital returns and balance sheet of any gas name today, and that by focusing all of our attention on the Marcellus and Haynesville, we’ll demonstrate that we’re the premier gas investment opportunity in the sector.
We look forward to updating you on the progress as we move along, and we’ll talk to everybody soon.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.