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Chesapeake Energy Q2 2010 Earnings Call Transcript

Chesapeake Energy Q2 2010 Earnings Call Transcript

Chesapeake Energy (CHK)

Q2 2010 Earnings Call

August 04, 2010 9:00 am ET


Steven Dixon - Chief Operating Officer, Executive Vice President of Operations & Geoscience and Member of Employee Compensation & Benefits Committee

Aubrey McClendon - Co-Founder, Chairman, Chief Executive Officer and Chairman of Employee Compensation & Benefits Committee

Jeffrey Mobley - Senior Vice President of Investor Relations & Research

Marcus Rowland - Chief Financial Officer, Executive Vice President of Finance and Member of Employee Compensation & Benefits Committee


Brian Singer - Goldman Sachs Group Inc.

Dan McSpirit - BMO Capital Markets U.S.

Biju Perincheril - Jefferies & Company, Inc.

Yves Siegel - Crédit Suisse AG

David Kistler - Simmons & Company

Joseph Allman - JP Morgan Chase & Co

David Heikkinen - Tudor, Pickering & Co. Securities, Inc.

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Good day, and welcome to the Chesapeake Energy 2010 Second Quarter Operational Update and Earnings Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Jeff Mobley. Please go ahead, sir.

Jeffrey Mobley

Good morning, and thank you for joining our 2010 Second Quarter Earnings and Operational Update Conference Call.

Joining me today is Aubrey McClendon, our Chief Executive Officer; Steve Dixon, our Chief Operating Officer; Marc Rowland, our Chief Financial Officer; Nick Dell'Osso, our Vice President of Finance; and John Kilgallon, Manager of Investor Relations and Research.

Our prepared remarks this morning should last 10 to 15 minutes and we will then move to Q&A.


Aubrey McClendon

Thank you, Jeff, and good morning to you all. We hope you had time to review Monday's operational release and yesterday's financial release. We always strive to provide the most detailed information in the industry to our investors.

On the operational side, our daily production for the first quarter was very strong at 2.8 Bcfe, up 14% year-over-year, and that's after selling a significant amount of production through various VPPs, asset sales and our Barnett joint venture deal with Total. On a sequential basis, our production was up 8%, and most importantly, our liquids production was up 41% year-over-year.

Because of the strength of our drilling program and the outstanding performance of our wells, we are increasing our 2010 and 2011 production growth forecast to 13% for 2010 and 18% for 2011. Much of that growth will come from our rapidly increasing liquids production. In fact, we expect our liquids production to increase by 60% in 2010 and 80% in 2011, both of which are remarkable numbers, especially for a company of our size.

Next, I'd like to highlight our exceptionally low finding cost rate in for the first half of the year. We added a net 1.2 Tcfe at a drilling and completion cost of only $0.87 per Mcfe. I don't believe there's another company in the industry as capable of adding 2.5 to 3 Tcf per year to there proved reserves at under $1 per Mcfe. And this success has been achieved by the nation's most active and highest quality drilling program, led by our industry-leading leasehold positions in America's best unconventional natural gas liquids plays.

The growth in our liquids production and in our proved reserves and our planned slowdown in natural gas drilling are our most important messages today. I want to make clear, in fact, crystal clear that Chesapeake is pursuing a differentiated growth model for many of our colleagues in the industry. The CHK model is not a commitment to increasing gas productions without regard to natural gas prices. Quite the opposite, in fact. Unless gas prices increase over $6 per MCF, Chesapeake is committed to continuing to reduce its gas drilling CapEx, increase its liquids drilling CapEx.

In fact, in 2011, we will see an $800-million swing as we reduce gas CapEx by $400 million and increase liquids CapEx by that same $400 million, all the while planning to keep year-over-year CapEx flat. I'll repeat, we are reducing natural gas CapEx, while increasing liquids CapEx, while planning to keep overall drilling CapEx flat in 2011 versus 2010.

With regard to the oil and liquids plays that will drive Chesapeake's growth model in the years ahead, I want to remind you that we started to make this transition back in 2008 when it became clear to us that oil prices were likely to outperform natural gas prices for a long time to come. However, because of the long lead time in developing the technological expertise to find and test unconventional oil plays and the length of time it takes to put leasehold plays together, it is only now that we are really starting to see the payoff from the strategy shift that we initiated in 2008.

This will be the single largest strategy shift in Chesapeake's history. And once it has been completed during the next few years, it will generate huge benefits to our shareholders. And we believe that unlike with natural gas, Chesapeake's success in finding large new reserves of unconventional oil in the U.S. will not negatively affect oil prices. Obviously, this has not been the case with our large discoveries of unconventional natural gas during the past few years.

One final thought on our liquids plays. For now, we are disclosing the names and locations of 12 of these plays, but there are more on the way. In these 12 plays, we have drilled about 280 wells and have a amassed an industry-leading position of 2.4 million acres, on which we have identified more than 8 billion barrels of potential unrisk liquids-rich resources.

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