Chesapeake Energy Corp

NASDAQ:CHK

Earnings Call Analysis

Expand Energy's Strong Q3 Performance and 2025 Outlook

In its third quarter of 2024, Expand Energy reported significant operational achievements, producing 6.75 Bcfe per day. Looking ahead, the company aims for a 2025 target of 7 Bcfe daily with a $2.7 billion capital plan, reflecting a 120% production increase over Chesapeake’s previous levels. Early integration synergies are expected at $500 million annually, 25% higher than before. Expand Energy's capital efficiency aims to reduce spending while maximizing output, supported by a solid balance sheet and a commitment to maintain a $500 million base dividend amidst fluctuating market conditions.

Strong Beginnings Post-Merger

Expand Energy Corporation is currently navigating a transformative period following the merger of two major energy companies. As they step into this new chapter, the management has expressed optimism about integration efficiency, highlighting that they are already ahead of schedule with their integration plans. This early success is attributed to the committed workforce dedicated to establishing Expand Energy as a preeminent energy producer.

Impressive Operational Performance

In Q3 2024, Expand Energy achieved significant production milestones, with a combined output of 6.75 Bcfe per day. The legacy operations of Chesapeake achieved record-breaking feet per day in prominent markets such as Haynesville and Northeast Appalachia, while Southwestern set a record with a lateral drilling of 25,191 feet. These operational efficiencies not only solidified the company’s performance but are pivotal for enhancing future profit margins.

Promising Projections for 2025

Looking forward, the company outlined an ambitious 2025 plan with a capital commitment of approximately $2.7 billion, aimed at delivering an average production of 7 Bcfe per day. This presents a remarkable 120% increase in production compared to Chesapeake's previous levels, achieved with an only 80% increase in capital expenditure. This capital efficiency is a cornerstone of the company’s strategy to maximize shareholder value by ensuring more production at reduced costs.

Synergies and Efficiency Targets

Management announced a notable increase in expected annual synergies from the merger, now targeting $500 million, up 25% from previous estimates. They anticipate realizing about $225 million of this within the next year, which is over 50% of their original synergy target. The accelerated achievement of these synergies is expected to enhance their financial performance considerably during market downturns and contribute to a sustained free cash flow despite price volatility.

Proactive Balance Sheet Management

Expand Energy is also focusing on maintaining a strong balance sheet. The company successfully attained an investment-grade credit rating, which helps reduce financing costs and enhances their borrowing capabilities. The new capital return framework is designed to prioritize both debt reduction and attractive returns for shareholders. This involves maintaining a base dividend of around $500 million annually, complemented by a $1 billion share repurchase authorization, ensuring a balanced approach to capital allocation.

Market Responsiveness and Future Growth

The leadership emphasized their flexibility in reacting to market conditions. In 2025, they plan to strategically manage production, with an anticipated average production of 7 Bcf per day. This production strategy is contingent on real-time market demand, providing the company the agility to ramp up operations when favorable conditions arise while holding back during less favorable periods. As they exit 2025, they aim to sustain production levels around 7.2 Bcf per day, aligning growth with demand trends.

Navigating Market Challenges

Despite their positive outlook, the company remains cautious about potential market volatility, driven by fluctuating LNG demand and broader energy supply dynamics. The executives acknowledged the intricacies of balancing production levels amid unpredictable market conditions. They reiterated a commitment to capital efficiency and maintaining operational excellence, key strategies to thrive in varying economic climates.

Conclusion: A Path of Optimism

In summary, Expand Energy Corporation stands at a pivotal moment filled with promise, driven by operational achievements, strong synergy projections, and a robust financial strategy. Their ability to adapt to market conditions, combined with proactive management of resources, positions them favorably for future growth. Investors should monitor the successful execution of their comprehensive plans, as these elements will ultimately dictate their performance in this volatile market landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Expand Energy Corporation's Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your roots for today's program, Christopher Ayres, Vice President, Investor Relations. Please go ahead.

[Chris Ayres, executive]

Thanks, Jonathan. Good morning, everyone, and thank you for joining our call to discuss Expand Energy's Third Quarter 2024 Financial and Operating Results. 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 can neither be confirmed by reference to existing information, including statements regarding our goals, beliefs, expectations, forecasts, projections and future performance and the assumption underlying such statements. Please also 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 also recognize that except as required by 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 and can be found on our website.

With me today on the call are Nick Dell'Osso, Mohit Singh and Josh Viets. Nick will give a brief overview of our results, and then we'll open up the teleconference to Q&A. So with that, thank you again and turn the time over to Nick.

[Domenic Dell'Osso, executive]

Good morning, and thank you for joining Expand Energy's first earnings call. This is an exciting time for our company, and I look forward to briefly highlighting our third quarter results and providing our preliminary outlook for 2025. The integration of our 2 companies is off to a great start. Through the first month, we've seen plenty of accomplishments and are ahead of schedule with our integration plans. Our early success is a testament to the quality of our employees and their commitment to making Expand Energy a leading energy producer. For the 2 stand-alone companies, we see significant momentum heading into 2025 with solid third quarter results, delivering impressive operational gains, which will enhance future margins and profitability.

A few notable achievements from the quarter include the combined company produced 6.75 Bcfe per day while continuing to build productive capacity through our deferred completions and turn-in lines. Legacy Chesapeake drilling operations delivered record quarterly feet per day in the Haynesville and Northeast Appalachia. While the company also set monthly and quarterly completion records, for total hours pumped in Northeast Appalachia.

Not to be outdone, legacy Southwestern drilled a 25,191-foot lateral in Southwest Appalachia, a record lateral length for a lower 48 onshore well. Now I'd like to talk about why we are so excited about what this company will deliver for our shareholders and energy consumers alike, starting with 2025. Our preliminary capital and operational plans illustrate the powerful combination of Expand Energy and our outlook for enhanced operational efficiencies.

We are truly better together with a portfolio that will be more competitive and resilient in all price cycles. Our preliminary outlook for 2025 includes approximately $2.7 billion of total capital to deliver an average of 7 Bcfe per day. Compared to Chesapeake's stand-alone maintenance level, this represents a 120% increase in production with only an 80% increase in capital.

Our strong outlook will be driven by the achievement of our synergies and capturing significant capital and operating efficiencies. I recognize many companies promise energies. For us, the definition of success is clear. It's all about capital and operating efficiencies, resulting in spending less while producing more. In 2025, our capital efficiency should benefit from the deferred activity we built during 2024.

Importantly, however, we expect this capital efficiency ratio to hold as our synergy realization builds and operating efficiencies continue to deliver higher value for every dollar spent. This ensures we deliver better financial performance during down cycles and more free cash flow during periods of prices. Our confidence in our preliminary plan is based on our early integration wins which have positioned us to raise our expected annual synergies target by 25% to $500 million.

The extended period between deal announcement and close allowed us to hit the ground running. In the initial weeks of Expand Energy, we have already successfully drilled telemetry data from all drilling rigs, successfully streamed drilling telemetry data from all drilling rigs to our drilling ops center, allowing real-time optimization, redirected legacy Southwestern produced water to owned water disposal assets, saving $1 per barrel and implemented a new org structure to ensure Expand Energy is comprised of the best talent while capturing the best work processes from both organizations.

Given our strong start, we expect to achieve approximately $225 million in synergies, which is more than 50% of our original synergy target next year and are well on our way to achieving the full $500 million annual target by year-end 2027. Our strategy to build productive capacity will also provide a strong tailwind into 2021. We're on track to build approximately 80 deferred TILs and up to 1 Bcf per day of short-cycle capacity by year-end. We will be prudent in turning production online and ready to rapidly respond to market condition when pricing improves.

Ultimately, while we don't know exactly how prices will respond, we do expect market volatility to continue. Expand Energy was built to deliver through cycles and our hedge the wedge strategy provides great confidence in our financial outlook as we benefit from attractive collars and ceilings that are priced well into the $4 per MMBtu range.

Simply put, we have effectively protected our 2025 program from a prolonged down cycle while ensuring we can still capture significant upside value in periods of higher prices. While our powerful portfolio and efficient operations are key to our sustainable success, so too is our resilient balance sheet and capital returns program.

We achieved an investment-grade credit rating upon close, allowing us to transition our RBL to unsecured, eliminate financing costs and ultimately access capital at more attractive rates. Our investment-grade rating strengthens our position with counterparties as we continue to execute our LNG-ready strategy and supply power to domestic markets in need. We understand the importance of a strong balance sheet and peer-leading shareholder returns, both hallmarks of legacy Chesapeake since our restructuring.

To ensure financial strength remains a pillar of Expand Energy, we are enhancing our capital return framework to reduce net debt, while maintaining an attractive capital return to shareholders. Our new framework prioritizes the base dividend and debt reduction while including a $1 billion share repurchase authorization and the opportunity for future variable dividends when market conditions warrant.

I have said before, the world is short energy. As the largest domestic producer of natural gas with an advantaged portfolio, resilient financial foundation and geographically diverse assets, we are built to answer the call of increased domestic and international demand as well as thrive in the volatility that will naturally follow this rapidly evolving market. In doing so, we are prime to expand opportunity for all stakeholders. I look forward to updating you on our progress, and we're now pleased to address your questions.

[Operator]

And our first question comes from the line of Kevin MacCurdy from Pickering Energy Partners.

[Kevin MacCurdy, analyst]

My first question is on the capital costs. I think the outlook for $2.7 billion in 2025 was lower than expected. My question is, how did the $225 million of synergies in 2025 compared to your original target? And what else are you seeing on the well cost in your legacy assets? It looks like quarterly production came in -- quarterly CapEx came in lower than expected again this quarter.

[Domenic Dell'Osso, executive]

Yes. I'll just start by noting that the $225 million increase is a combination of a few things. It is heavy on the capital side, though, I'll let Josh give you the specifics.

[Josh Viets, executive]

Yes. Kevin, on the $225 million, about $75 million of that is going to be attributed to CapEx, but just as a comparison to where we started. One of the things that we had talked about with the $400 million, which is what we described at the transaction rollout. Is that $400 million would be delivered about 1/3, 1/3, 1/3, so cumulative building over a 3-year time period? So you're talking about almost a $100 million increase in year 1 as far as what we're able to deliver from a synergy standpoint.

Your second question, just in regards to kind of well cost trends, really just incredibly pleased with the execution performance that we've seen. Nick referenced a couple of the highlights for the quarter, record pumping month within our Northeast app. We've seen record footage per day really across the entire company, including one of the more challenging places to drill in the NFC at the Haynesville where we averaged just under 900 feet a day, which, again, is a record for the company. And then, of course, we have seen some deflationary elements show up as well, and that's really carrying on into the fourth quarter, and we expect to see a little bit more market softness heading into the first quarter and all of that's been accounted for within the current plan.

[Kevin MacCurdy, analyst]

Great. And my follow-up is on OpEx. And I know you don't have all the details yet on 2025. But just curious if the 4Q OpEx guidance is a good starting point for next year. Or is there anything else that you've identified synergies on the OpEx side in the near term?

[Josh Viets, executive]

Yes. I think the Q4 number is relatively good as far as where we've pegged the range there. We will start to see a little more synergy show up, specifically on the water disposal side of the business in the Haynesville. And then, of course, the plan that we've rolled out, we've shown production modestly growing through the course of the year. But the Q4 number is -- and the guide that we've offered there is a relatively good starting point for you.

[Operator]

And our next question comes from the line of Doug Leggate from Wolfe Research.

[Douglas George Blyth Leggate, analyst]

I guess, Nick, first of all, I'll also add my congratulations to the synergy uptick. But forgive me for this one, I guess we're never happy with synergy targets because they tend to be risked at the outset, you obviously never want to put a number out that you can't deliver. So I guess my question is that, are you done in terms of your view of what you think the merger can deliver? There are a lot of things discussed when you went to the Haynesville with you last year and in terms of what you could do differently. Obviously, you've got a chance to potentially refinance some of the higher cost debt, although the debt maturity side looks pretty attractive. There's a lot of things that you could take off a bunch of different things. But I guess my question is, how have you risked the delivery of the synergies? How would you characterize the medium-term outlook? Where are we going to be sitting this time next year in terms of how this target looks?

[Domenic Dell'Osso, executive]

Yes. Frankly, I love that question, Doug. So to directly answer the question, are we done? I certainly hope not. We are pretty methodical and deliberate about how we determine what we're going to consider a synergy, how we're going to project it and ensure that it is tangible and quantitative in nature. That said, this is now a huge portfolio of assets with tons of opportunity in it. And the opportunity exists across the entire portfolio as you think about all of the learnings that come together from operating across both legacy companies portfolios, you think about the talent and the teams that come together, you think about the number of rigs that we're running, the number of acres that were maintaining on a daily basis, the operating platform that we will manage.

And then in addition to that, as you noted, the balance sheet implications of this larger, stronger organization, there's a lot of things for us to do here. And we believe that scale can offer a lot of really significant opportunities. We captured a good many of those in our synergy projection, we've been able to increase it today because we had a good long time period to plan for closing. And we were able to gain confidence in some things that we thought were potential but we now consider to be absolutely part of our plan.

I would love for us to continue to add to that number over time. But in order for us to do that and call something a synergy, it's going to have to meet the same criteria that we've put into calling with $500 million that you see in our model today as synergies. And it's a reasonably high bar and a high bar for a good reason. We want to be able to deliver something that we have great confidence that we can deliver and that we can prove when we call something a synergy like this.

The last thing I would say is, keep in mind, legacy Chesapeake did 2 acquisitions. Over the last couple of years, Legacy Southwestern did 3 over the last 3 or 4 years as well. So we have a lot of practice at bringing together operating teams, creating synergies, tracking them and understanding what is possible and what's not. And so I think our track record here is something that we're going to rely on and the learning history is important to us as we think about how we have confidence and what's in front of us and knowing that we can deliver on the numbers that we're providing.

[Douglas George Blyth Leggate, analyst]

Very fair answer, Nick. And I guess you're right. The track record, the history and the experience you've got of integration is something that I don't think all of us should forget. My follow-up is kind of, I guess it's kind of a macro question. We ask you this question a lot, but on Slide 10 you've laid out the cadence potentially of bringing back production. I guess I'll be blunt. I think there's some skepticism on the capital efficiency benefits that you're getting from drilling wells, not completing them up or bringing them online. And so I wonder if I could ask you to speak to your confidence in the 2.7, 2.8 sustaining capital. And more importantly, what are the conditions under which you would not bring back this production in 2025?

[Domenic Dell'Osso, executive]

Another great question. So first, our confidence in it is very, very high. And it's not just confidence in the 2.7 for 2025. we gave you, in addition to that, another slide in the deck where we show you a 2027 look, which is an opportunity for us to show you what our capital efficiency looks like when all of the tailwind of the deferred activity from 2024 has rolled completely through the system. And what happens is that you have capital efficiency benefit from the deferred activity in '25. As that capital efficiency winds down from that tailwind, that efficiency is replaced with the synergies associated with our cost reductions from the merger. And so we think that the ratio effectively of CapEx to production that you see in 2025 is sustainable going forward.

Now what could cause us not to do it, lots of things. We have complete control over -- to reference the same slide, Slide 10. There is a wedge of production on the slides -- on a slide that shows in a light blue color that represents the volumes from the deferred activity. That's completely in our control as to whether or not we bring that online. And if prices are soft as we come through winter and if we have congestion in storage and the supply-demand fundamentals are weaker than the forward strip would indicate today, then these volumes don't need to come online, and we can moderate this accordingly. So we have a lot of control over this and a lot of confidence in our ability to deliver on it. And we have confidence in our ability to hold this capital efficiency into the future.

[Operator]

And our next question comes from the line of Matthew Portillo from TPH.

[Matthew Portillo, analyst]

Just a question around the opportunities for additional optimization, as you mentioned, maybe a bit longer dated. But curious on the midstream side, specifically thinking about maybe some contracts in the Northeast, but also in the Haynesville. Do you guys see any opportunity over the next few years to optimize your midstream and marketing side of the business?

[Mohit Singh, executive]

Matt, this is Mohit. That's a great question as well. Just a reminder, we closed the transaction on October 1. So fast forward 30 days. So still very early days. Right now, if you look at the state of the business, we are operating 2 marketing books, but we do have plans to combine the books come January 1, 2025, and continue to flush out what marketing synergies that we are expecting. To get a little bit more specific around what we are doing around M&T integration. As I mentioned, joining the trade books, name updates in the contracts, and ASB consolidations, Endur -- ETRM back-office integration. The high-level answer to your question is we are beginning to optimize flows.

We are trying to get more of our production to premium markets, and we are beginning to have some early wins. If you start looking at Northeast App, there's a certain amount of equity gas that we were able to move from Chesapeake production and move it into some FT that SWN had, which was idle. In Haynesville, we have moved -- we have utilized some of the SWN FT to move Chesapeake equity gas to more premium markets using some specific pipes that we had access to.

And similarly, we are in Southwest App using the Southwest App firm capacity to fill Chesapeake legacy pool sales. So all those are early wins. We are super excited at this point of time. Over time, as we bring the 2 trade books together and integrate the 2 businesses together, then we'll share some more details around that.

[Matthew Portillo, analyst]

Great. And then maybe just as a follow-up on drilling and completion. I know you all had highlighted really the opportunity to drive down cost at the drill bit given faster cycle times specifically in the Haynesville, but I was curious if you landed on a fluid loading design there. I think there was a bit of a difference in how you all historically at Chesapeake looked at fluid loading versus how maybe Southwestern looked at it? And if that's been incorporated into your outlook in 2025 and beyond in terms of cost savings?

[Josh Viets, executive]

Yes, we absolutely did. And I guess maybe to go back to our original synergy target, the $400 million a year, $130 million of that was attributed to what we described as drilling and completion synergies, but that was really entirely tied to drilling improvements. And the reasons we decided to not at the time, include any completion synergies as we just know how sensitive completion designs are to productivity and therefore, well economics. And so we really wanted to take our time, which we have now done through the integration planning process to be able to combine the 2 companies' data sets, assess the implications of various design changes and its impact to productivity and therefore, well economics.

And so as we've come out now with an incremental $100 million, we have now included some synergies that we see associated with completion designs. And some of the components of that, you mentioned fluid intensity, we will be dialing back fluid intensity a little bit. But on the flip side, we'll be increasing proppant intensity, we expect in the Haynesville going forward. In addition, there are some savings we think we can realize by changing the perforation line as well, such as increasing our stage links and using an extreme limited entry complete design.

So these are all things that the combined teams with these new data sets that we can look at in its entirety, really start to think about how we optimize the program going forward. So to Nick's earlier point, we're not done, and we think as the teams continue to work together, we'll be able to push synergies even higher.

[Operator]

And our next question comes from the line of Kalei Akamine. Your question please, from Bank of America.

[Kaleinoheaokealaula Akamine, analyst]

This question also goes to the capital budget and maybe the optics of it. Wondering if you can remind us how much capital Southwestern was capitalizing? And then maybe offer some soft guide for interest expense in 2025. The rub here is that you guys have done a great job in grinding down that capital number. And I guess some are just trying to bridge from a previous reference point.

[Domenic Dell'Osso, executive]

Yes. Kalei, I'll start with that. Let's start with the capitalization. We'll be able to give you full details on how things were capitalized and what they look like under our program as we give full guidance next year. But it's not a huge number that comes out of CapEx. It's in the, I would say, mid- to low single-digit percentages of the capital number. So then on the on the next point about interest expense. Our weighted average cost of interest is going to be in the 5.7% to 5.8% range. And so you can take that across the debt stack and come up with a pretty good number there.

[Kaleinoheaokealaula Akamine, analyst]

Got it. I appreciate that. My second 1 is just more housekeeping. Can you remind us how much production capacity that you currently have curtailed by basin and maybe offer any insight as to where you think the industry is? And I'll leave it there.

[Josh Viets, executive]

Yes. So for us internally, we -- today, we have around 200 million cubic feet a day of net gas that's curtailed and that's pretty evenly split across the Haynesville and the Northeast. That's $200 million a day, that's really something that we look at day in and day out and just understanding how market conditions are going to be moving by the day and by the week just given local changes in demand. And so that's a pretty fluid number. And just like we've been in the past, we'll be responsive to market conditions. You asked about the industry number. That's, I would say, a little bit harder to peg down. And it's probably something we've shied away from commenting on directly just because we don't have direct access to individual companies data.

[Operator]

And our next question comes from the line of Neil Mehta from Goldman Sachs.

[Neil Mehta, analyst]

So first question is just the enhanced capital returns framework Slide 13. Maybe you could spend some time talking about as you evaluated all the different strategies about allocating and returning capital. Why do you optimize towards this design? And how should investors be thinking about the cadence of capital returns as we get into '25 now that you have a little more visibility through the hedging program?

[Mohit Singh, executive]

Yes. Thanks for that question, Neil. This is Mohit. Let me start by first acknowledging that the 2 things that we are trying to address with this framework. One is, as you said, returning cash back to the shareholders. And number 2 would be reducing our net debt. So when we look at the framework that you outlined or referenced on Slide 13, the first tranche of free cash flow will -- what we are doing is reiterating our commitment to the base dividend, which we deem as sacrosanct. So that is not changing. That will be roughly $500 million per annum.

The next tranche of free cash flow, if there's any, we acknowledge that the prior framework did not do enough to bring consistent and annual deleveraging efforts into place. So we are trying to use the Tranche 2 of free cash flow towards net debt reduction, which essentially formalizes the debt paydown. Post the merger, we have inherited the SWN debt, so we need to have a formal plan for paying down that debt.

And finally, in Tranche 3 which will be any remaining free cash flow. What we are trying to do is provide a higher portion, which is 75% of that Tranche 3 as opposed to 50% before of the remaining free cash flow, which will go towards additional returns to equity in the form of either buybacks or a variable dividend, which we will determine based on market condition. So in summary, we see this enhanced framework as a strong way to reassure shareholders that we are committed to net debt paydown, while continuing to deliver shareholder returns.

[Neil Mehta, analyst]

And just a follow-up on the macro. Nick, and you've talked about your view of mid-cycle over the years. I'd be just curious how you think about the moving pieces here. There's -- as we go through '25 and '26, you've got, obviously, huge LNG's ramp as we go through '26, but you've got global capacity on the other side. And we're seeing power demand really surprised to the upside, but there's a lot of spare capacity. So it feels like there are a lot of moving pieces, curious on your views and how's this enthusiasm around AI and power demand changed your view of mid-cycle to the upside at all.

[Domenic Dell'Osso, executive]

Yes. Good question, Neil. So I would say first thing I very much agree, there's a lot of moving pieces. And what that means to us is there will be volatility. I think you touched on the key moving pieces, which are that LNG demand or LNG export capacity is growing rapidly. Exactly how that demand manifests itself for the call on U.S. gas as a function of demand internationally as well as competing supply internationally, those 2 things will continue to move around. Demand domestically is clearly growing and growing faster than I think a lot of models we're predicting, I'll say, 1 to 2 years ago in the form of power generation. So that's a pretty encouraging sign. A lot of the power gen around AI is going to take several more years to develop.

And so we expect that trend to be structural and long term and provide a pretty important tailwind. The only other thing I would comment on in that macro picture is that currently and continuing through, we believe, at least most of 2025, we're going to see supply be flat to down. Right now, at this very current moment, you've seen supply tick up over the last, actually just a few days, but through October, end of October, it's pretty common to see volumes tick up as people have managed their capital allocation for the year to bring more volumes on during the winter.

It's something I think the industry has done a better job of aligning production with demand around winter weather. So that's not a surprising trend to see, but if you think about the rig count that we have for gas in the lower 48, it's down quite a bit, and it's not positioned to grow.

The only offset being Permian will grow as Permian has capacity in transportation. We saw the Matterhorn Pipeline come online in October. It is filling up. It is not quite full yet. So we will see that capacity fill over the next several weeks and maybe months. And then after that, I think you see limited growth in the Permian until the next big pipe comes online and you see the capital allocation around dry gas and rich gas areas driving production to be flat to down. And we don't see a rig count change in the immediate future given that the forward strip really doesn't encourage growth for anything that has a breakeven anywhere around $3. You're kind of right there.

So I think you're seeing the industry shows some discipline around how we allocate capital and learning from cycles and the trend that we believe we're observing is that supply is going to be flat to down and probably remain that way until you see a rig count change, which then has quite a lag time to it. So the dynamics for supply-demand fundamentals for gas are very strong.

We are terrible predictors about when that shows up. Winter weather will have a huge impact on the timing of when supply and demand come together to change the character of the strip, but we definitely see it changing sometime in the relatively near future.

[Operator]

And our next question comes from the line of Nitin Kumar from Mizuho.

[Nitin Kumar, analyst]

Obviously, there's a lot of things we're trying to unpack with the long-term efficiencies here. So sorry to ask this, but in 2025, you've said $2.7 billion. And I think, Nick, you mentioned long term in 2027 when all the synergies are under your belt, it's about $2.8 billion. Can you help us face the gap in 2026, you should still have some DUCs by our math, but also you should probably be adding activity. So how does capital trend between '25 and '26 -- between '25 and '26 and '27.

[Josh Viets, executive]

Yes, it's a good question, Nitin. I'll take that. Clearly, we're going to have some benefits heading into 2026 from the DUCs as you indicated. And so of course, we'll be drawing down that capacity as we head to the end of the year. So you are leveraging some of that productive capacity even in '26. As you mentioned, we'll be adding some activity back. And in fact, included in the 2025 plan, we start adding back a little bit of rig activity, which is accounted for in the $2.7 billion. So you're going to be exiting '25 at around 12 rigs. So you are assuming a little bit higher activity. But I think the other key thing to remember is that the synergy realization increases as well going into 2026. And so our expectation for the '26 capital would be that we're in line with the 2.7 billion, maybe even just slightly below given the realization pace for synergies?

[Nitin Kumar, analyst]

Great. The second part I want to maybe talk about is marketing. When you announced the deal with Southwestern, you had talked about the expanded scale of the company and you've got the investment grade. So maybe if you can give us a little color on how the efforts to market gas to more premium price points is going? And specifically, the market is focused on direct supply to AI data centers and power generation. Any thoughts on sort of how that market is shaping up?

[Mohit Singh, executive]

Yes, Nitin, Mohit here. Thanks for those questions. I'll take the first one first. As I said earlier, on the M&T side, we are beginning to optimize flow to premium markets and we've had some early wins, which I outlined earlier in the call. You should remember that marketing is one side of the business where due to commercial sensitivity, we could not truly get into the contractual details till the merger had closed. So we are still in the early innings. So October 1, the merger closed and we are going through all the contracts. And figuring out where the optimization lies, but very encouraged by early wins that we have had on that front.

On the other part of your question, which is around the AI data center power demand. So again, those conversations have been happening in the background, and we are in the process consolidating the efforts that legacy Southwestern was doing on its end and what legacy Chesapeake was doing on our end. It's fair to say there's lots of interest from all the different stakeholders involved in that value chain, whether it's developers, whether it's power generation companies, whether it's end users and obviously, the midstream and the upstream suppliers.

So trying to bring the consortium together. We are having tons of conversations with all the right stakeholders and these things take a little bit of time, but we remain very encouraged and very engaged with all the right stakeholders.

[Domenic Dell'Osso, executive]

And let me just add that one of the things we really like about our portfolio is the geographic diversity that allows us to be responsive to both of these really significant trends in demand in the industry, which is growing LNG export capacity as well as growing domestic power duration and having gas across both Northeast Pennsylvania and West Virginia, Ohio areas of Appalachia and then also proximity to the Gulf Coast with the Haynesville, we're really uniquely positioned to respond to both.

Our Haynesville gas can go directly south. It can move East. Obviously, Appalachia has its various outlets that move gas South, Southeast and then some gas that can get West as well. So we really like the setup of this business and the scale of production that we have and our ability to meet multiple markets from a company that has the financial strength to create the customer relationships for very long periods of time.

[Operator]

And our next question comes from the line of Josh Silverstein from UBS.

[Joshua Silverstein, analyst]

So we've a pretty big step change in capital efficiency on the pro forma outlook, but you also were seeing is a stand-alone company. I'm curious where the bigger step change in efficiency is, whether it's in the Haynesville or the Marcellus?

[Josh Viets, executive]

Yes, it's a good question, Josh. I mean I would say it's pretty equitable between the 2. I think both of our operating teams in those areas have done a tremendous job this year. And so we're seeing both operational efficiencies as well as in conjunction with their supply chain teams capturing deflation. And so I think it's equitable and my expectation is we continue to see these step changes through time as well.

[Joshua Silverstein, analyst]

Got it. And then looking back at the stand-alone companies before the merger, you guys were -- had the capacity to produce over 8 Bcfe per day. The outlook for next year is 7 Bcfe. Do you see a scenario longer term where you get back to that level? Does that all come from Haynesville as there's more growth there? I'm just curious how you're thinking about the longer-term production profile of the company.

[Domenic Dell'Osso, executive]

Yes. Josh. It's a great question. We love the fact that this portfolio has the capacity to grow. And obviously, if there's growth volumes, it will primarily come from the Haynesville, but we do have curtailed capacity across the Appalachia region right now as well. So some of that volume can come back and then true growth can come from the Haynesville. Choosing to be at 7 Bcf a day in 2025 is exactly that. It's a choice.

And how and when we decide to bring volumes back is going to be directly informed by the macro conditions and seeing the market have a call for the gas that we can produce. And we expect that to happen, but we also expect there to be continued volatility. So what we've liked about what we did in 2024 is that we used the strength of the company, which is our capital efficiency and our balance sheet strength to allow for a continued efficient development capital program that did not necessarily have to tie to the immediate delivery of volumes associated with that so that we can better time the delivery of volumes to the market needs without having to ramp our capital program up and down too severely.

We expect to be able to continue that kind of decision-making in the new company and the combined portfolio. And frankly, we expect to be able to do it better because scale helps, balance sheet strength helps and you have to have an active hedging program. All of those things get better with our size and with our efficiencies of the synergies that we're bringing together. So it's a choice. We can rank when and as needed, and we can ramp down when and as needed. And we have the complete flexibility to do that. And I think we've shown a willingness to do that probably beyond what anybody else has shown.

[Josh Viets, executive]

Yes. And Josh, I'll just add on to that a little bit. I just want to kind of reinforce the production profile that we show on Slide 10. We've always said we want to be incredibly responsive to market conditions, and we think the plan that we've laid out does that we'll be at our low point in production at around 6.4 Bcf a day equivalent in Q4. And then as we begin to activate the deferred TILs, we start to activate the DUCs we do see a pretty steady growth trajectory throughout 2025. And of course, this is all kind of predicated on our view of the markets today.

But most importantly, I just want to point out is we're exiting 2025, we anticipate being above 7 Bcf a day. We'll be around 7.2. And that's a number that not saying we're going to hold that flat, but it's really just on to the fact that we do have some underlying growth occurring, and we think it matches fairly well the demand trends that we see showing up throughout the course of the next 12 months.

[Operator]

And our next question comes from the line of Charles Meade from Johnson Rice.

[Charles Meade, analyst]

Nick, I want to go back to -- you've talked a lot, you've got a lot of questions on the capital efficiency and the progression, and it makes sense because as positive as your '25 guide is for CapEx. I think the bigger surprise to me, and I think to a lot of people is the 2.8 number for 2006. So I wanted to ask you, maybe ask you the question along these lines, but from a different angle, if I look at Slide 9, and this goes back to a comment you made earlier in the year where you talked about '24 investing in working capital. And if I look at that, look at your DUC and your TIL count there for 4Q, I recognize those are gross numbers, but it looks to me like you kind of have on a net basis of working capital kind of unproductive working capital or investment in working capital of about $800 million at year-end.

And so maybe roll off $500 million of that in '25 and another $300 million in '26 as you talked about, I think Josh talked about this earlier where you get the benefit of the TILs in '25 and the DUCs in '26. But still, as you -- even though you're rolling in synergies is still at least to me in this framework, it looks like your longer-term sustainable CapEx is actually something north of 2 ways, more like 2.9 or 3. So is that a fair framework? And if it is, what am I missing there?

[Josh Viets, executive]

Well, yes, Charles, I'll take that. One of the things I just need to remind folks is that we have layered in synergies. And it's just important that as we work out throughout 2027 that those synergies start to show up in a more way -- more heavy way. And though the synergy today is going to be probably more geared towards the P&L, specifically G&A. As you work out over the next 3 years, you became more efficient from a capital standpoint. And it's really those capital efficiencies that start to help them support the 28 number that we've rolled out yesterday.

[Charles Meade, analyst]

Okay. Okay. And then one other question. There was a transaction announced this morning on Northeast Marcellus where you guys are an operator. And to me, that looks a pretty attractive price to the seller, but I'm sure you guys were paying attention, but I wondered if you could just offer any comment on how involved you are in the process or whether your thoughts on the valuation or anything you'd like to share there?

[Domenic Dell'Osso, executive]

No, we don't really have anything to add to that. Obviously, we've been pretty focused on getting this merger closed and working on delivering the synergies that are in front of us today, which is our top priority.

[Operator]

And our next question comes from the line of Leo Mariani from ROTH.

[Leo Mariani, analyst]

I just wanted to follow up a little bit on the comments around sort of maintenance CapEx here. So I think you guys are kind of saying that the $2.8 billion is more kind of related to the 7 Bcfe per day here. Wanted to see if maybe we could get any kind of sensitivity around that. For example, if the production eventually grows to something more like 7.5 Bcfe a day, would you have a maintenance CapEx level kind of associated with that?

[Domenic Dell'Osso, executive]

Yes. We're going to hold off on giving anybody that number to tie to what future production profiles would look like. Obviously, if you're going to grow volumes up to 7.5 Bcf a day, you'd spend a little bit more, but we still think it should be in the neighborhood of $3 billion-ish, all else equal. Of course, when you get to that point, probably all else will not be equal. So it's really hard for us to give you an exact number. But look, the efficiency here, holds, and we're really pleased with how it sets up. And we know we have the ability to grow this production profile, when and how we choose.

[Leo Mariani, analyst]

Okay. Appreciate that. And I just wanted to ask you guys on the debt reduction target. So I think you guys are talking about a $1.1 billion debt reduction by the end of 2025. Just curious, does that number include, I think Southwestern had around a $500 million revolver balance? I think you guys paid off roughly at the close of the deal. So I'm just trying to get a sense that that's included in the $1.1 million, which I guess would imply maybe an additional $600 million next year. Just trying to understand how the debt gets paid down here.

[Mohit Singh, executive]

Yes. Thanks for that question, Leo. This is Mohit. So let me give you a walk from the Chesapeake side, we had $1 billion -- roughly $1 billion of cash on hand. You are correct that Southwestern at closing had $585 million drawn on the revolver, and that was all repaid in full and that credit facility has been retired and paid off. We also inherited $126 million of cash that Southwestern had on the balance sheet. So that also come into play. When you think about forecasting what will happen into 4Q will play the employee -- will pay the employee severance costs, will pay the transaction cost, will pay the dividend, which is paid out in 4Q. And when you factor all of that in, we predict that we'll end the quarter or end the year by -- of 2024 with roughly $200 million to $300 million of cash in hand.

To your other point, we have the SWN 5.7% note coming due in January 2025. So it's redeemable at par. We'll utilize some of the cash on hand to redeem it at par, somewhere along the course. But the good number to keep in mind would be $200 million to $300 million of cash end of the year.

[Operator]

And our next question comes from the line of Michael Scialla from Stephens.

[Michael Scialla, analyst]

I wanted to see how the '25 plan might change in a downside case, if we had a mild winter market remained oversupplied. Would you hold off on bringing the deferred TILs back online? Or how do you weigh that against holding off on spending on the capital on the DUCs?

[Domenic Dell'Osso, executive]

Yes, we'd certainly look to hold back on volumes in one way or another, either by spending less money in 2025 or holding back on the deferred activity from 2024, probably some combination thereof. What we don't want to do is continue to add to our deferred activity balance. So if we are not wanting to see volumes increase from these levels will be pulling back capital at the same time. But now we have tons of flexibility and ready to be completely responsive to the market.

[Josh Viets, executive]

Yes. And Mike, I'll just maybe add on to that. The other thing that the plan is reflecting is that we're going from 12 to 10 rigs in the first quarter of the year. And again, that decision is really around the fact that we feel the productive capacity that we've built is just simply adequate, and we don't want to add on to that. And so as we work down the DUC inventory throughout the course of the year, what we had assumed in the plan and included in the $2.7 billion is starting to add rigs back in the second half of the year. And of course, in a weaker environment, we would just simply choose not to add those rigs back.

[Michael Scialla, analyst]

That makes sense. Okay. And then Mohit you walked us through Slide 13 on the new enhanced capital returns framework. I wanted to see, as things stand right now, how you're thinking about buyback versus variable dividend, just given where the stock price is today.

[Mohit Singh, executive]

Thanks for that question, Mike. That's something that we constantly monitor. You can imagine, we were restricted till the transaction closed, but now that's behind us, that's something that we constantly, as I said, reevaluate. You should think of it in terms of where we are in the cycle, right? So if you are in the upcycle, the prices are higher. The business is generating a lot more free cash flow. And we like the variable dividend in that scenario because it introduces some element of regular and discipline in terms of distributions back to the shareholders. And conversely, when you're in the down part of the cycle, which is where you can expect there to be some dislocation in the stock price versus where we think the valuation -- intrinsic value is, then maybe that's the time to be more proactive on the buyback.

When you put the 2 things together in an upcycle, maybe you're doing more variable dividends. In a down cycle, maybe you're doing more buybacks and blended between the 2 of them, you're kind of delivering something which is more -- which is less volatile and more even for the investors. But that's roughly how we think about it. There's obviously quite a bit more detail around it, but that would be -- that's how I would describe it at a high level.

[Operator]

And our next question comes from the line of Geoff Jay from Daniel Energy Partners.

[Geoff Jay, analyst]

My question is kind of on the $2.8 billion maintenance CapEx that you threw out there. What sort of activity level does that contemplate in terms of rig count. In other words, I know you're going to 10 in the first quarter. You take it back to 12, fourth quarter. Does that $2.8 billion contemplate like 12, or would you get back to the 14, you had in the third quarter? Just kind of trying to understand kind of what the initial thought there is.

[Josh Viets, executive]

Yes, Geoff, we would expect that, that $2.8 billion number that we'd be averaging in and around the 12 rigs.

[Geoff Jay, analyst]

Okay. Great. And then maybe to take the inverse of some of the other questions, what would you have to see in terms of market conditions or future strip to bring back those 2 rigs or dropping quicker.

[Domenic Dell'Osso, executive]

I think it's just all about the fundamentals, Geoff. I mean we've talked all year about how we have looked at the decision to defer turn in lines and defer completions and pointing to the fact that it's not just about a price on the screen, it's about really looking at a number of different measures that we think are indicative of the underlying fundamentals of the market. We really want to see that the market needs an incremental volume.

And when we believe that the market needs incremental volume, then we believe that bringing volume back should provide a more sustainable economic benefit to us. What we don't want to do is see a very short-term spike in price respond to that, try to bring activity back, know that there's a much lag time and destroy capital in the process.

So we're really looking for the structural need for supply to be called for, and then we'll bring activity back when we see that.

[Operator]

And our final question for today comes from the line of Phillips Johnston from Capital One Securities.

[Phillips Johnston, analyst]

Just one for me. It's a follow-up for Mohit. Just on the new return of capital framework. And really, the Tranche 2 net debt reduction component I think you noted the idea is to pay down $500 million annually, not just next year, but also kind of going forward as well. Should we think about the $4.5 billion net debt level target and the sub 1x leverage ratio target? That's kind of the point where you would sort of tilt the mix more towards return to shareholders once those are achieved. Or would you continue to ratchet down debt with $500 million a year per year of debt payout?

[Mohit Singh, executive]

Yes. Thanks for that question, Phillips. So just as a reminder, the $500 million number that we have laid out, that's for 2025. That's a number that we intend to repeg every year. So it could be different in 2026. But at the very least, our game plan is to get the absolute debt level down to $4.5 billion, as you pointed out. And just as a reminder, the way we view that is trying to get our gearing to 1 turn. So at mid-cycle pricing. So think of $3 per Mcf gas price. At that point, business generates around $4.5 billion so -- of EBITDA. So we are thinking of that's where it pegs the $4.5 billion of debt target that we have.

The comfort I would give you is we are trying to strike the right balance between trying to get cash back to the shareholders. And hence, the earlier comment about the -- deeming the base dividend is sacrosanct, but then also prioritized paydown, which is extremely important given that we have -- the pro forma company has higher debt than legacy Chesapeake did. So we need to address the debt stack that's in front of us.

And with this new framework, we are -- I think we are addressing both of those 2 drivers and would like to reassure the shareholders and our creditors as well that both things are a priority for us.

[Operator]

This does conclude the question-and-answer session of today's program. I'd now like to hand the program back to Nick Dell'Osso for any further remarks.

[Domenic Dell'Osso, executive]

Well, thanks very much. I appreciate everybody taking the time to dial in this morning. Obviously, we've got a lot to talk about, and we'll be around to answer any questions anybody has as follow-ups, and we'll be out on the road over the coming weeks to meet with many of you all in person. We could be more excited about the way that the market is setting up for Expand Energy as we get into the end of '24 and 2025. We have our hands full with integration and achieving these synergies, but the path to do all of that, we believe, is very clear and we're ready to go. So I look forward to giving you guys updates on our progress as we get through next year and seeing you all on the road. Thanks very much.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.