Chesapeake Energy Q3 2010 Earnings Call Transcript
Chesapeake Energy (CHK)
Q3 2010 Earnings Call
November 04, 2010 9:00 am ET
Executives
Steven Dixon - Chief Operating Officer, Executive Vice President of Operations & Geoscience and Member of Employee Compensation & Benefits Committee
Domenic Dell'Osso - Chief Financial Officer and Senior Vice President
Nick Dell'Osso -
Aubrey McClendon - Co-Founder, Chairman, Chief Executive Officer and Chairman of Employee Compensation & Benefits Committee
Jeffrey Mobley - Senior Vice President of Investor Relations & Research
Analysts
Brian Singer - Goldman Sachs Group Inc.
Jeffrey Robertson - Barclays Capital
Dan McSpirit - BMO Capital Markets U.S.
David Kistler - Simmons & Company International
Biju Perincheril - Jefferies & Company, Inc.
David Tameron - Wells Fargo Securities, LLC
Steven Parla
Joseph Allman - JP Morgan Chase & Co
Scott Hanold - RBC Capital Markets Corporation
Presentation
Operator
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Chesapeake Energy Q2 2010 Earnings Call Transcript
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Chesapeake Energy Q1 2010 Earnings Call Transcript
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Chesapeake Energy Corporation Q4 2009 Earnings Call Transcript
Good day, and welcome to the Chesapeake Energy 2010 Third Quarter Operational Update and Earnings Result Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jeff Mobley. Please go ahead, sir.
Jeffrey Mobley
Good morning, everyone, and thank you for joining our conference call this morning. With me today is Aubrey McClendon, our CEO; Steve Dixon, our COO; Nick Dell'Osso, our CFO; and John Kilgallon, our Manager for Investor Relations and Research. Our prepared comments this morning should be about 10 or 12 minutes and then we'll open it up for Q&A. Aubrey?
Aubrey McClendon
Good morning. Thank you, Jeff. We hope you had time to review yesterday's operational and financial release, and we're pleased with our results.
On the operational side, our daily production for the second quarter was very strong at 3.0 Bcfe, up 23% year-over-year and 9% sequentially. An added highlight is our rapidly growing liquids production, which was up 50% year-over-year.
We are currently producing more than 55,000 barrels of liquids per day and have our sights set on exceeding 150,000 barrels per day by year end 2012 and 250,000 barrels per day by year end 2015. We think that will make us a top five producer of liquids in the U.S. by the end of 2005.
Next, I'd like to highlight our exceptionally low finding cost during the first nine months of the year. We added, on a gross basis, 4.0 Tcfe of proved reserves at a drilling and completion cost of only $0.97 per Mcfe. Basically, we are building a top 10 U.S. natural gas producer every year inside our company, an incredible achievement we believe.
And not only are we good at finding gas cheaply at the $0.97 per Mcfe level, we are also good at selling it for much more. To date this year, we have received well north of $3 per Mcfe when we have sold properties through VPPs. It's always good to buy low and sell high, and that's what we try to do around here, whether it's leasehold or proved reserves.
Our latest JV, the CNOOC deal in the Eagle Ford, is expected to close in the near future. And our data room is open for the Niobrara Shale JV, in which we own 800,000 net acres, evenly split between the Powder River and D-J Basins. We expect to also sell a 33% working interest in this play at what we believe will be an attractive price both to us and to our future partner.
We believe the recoverable resource under our 800,000 net acres is an unrisked approximate 4.6 billion barrels of oil, representing potentially $400 billion of future undiscounted revenue. This is a reminder that the size of the plays that we have chased and have captured is quite remarkable.
Some of you may be wondering what's next in our liquids plays. I can tell you that we have several new plays under evaluation or development, including an almost 100,000-acre new position in the Williston Basin and a 1 million-acre position in another play that will probably be ready for disclosure in the JV data room in the first half of 2011. We believe there will be worldwide interest in this next big play of ours.
One other thing. On the Anschutz deal, we will be selling about 25% of the assets we acquired that aren't a great fit for us. We'll do that as soon as we can after we close. And then with what's left, we'll combine it with some other acreage we have then do a JV in the first half of 2011. I know that several analysts were confused on this point, so I thought we should clear it up.
Finally, I'd like to point out that our realized cash hedging gains since 2001 now reached almost $6 billion. In addition, we have hedged approximately 80% of our anticipated gas production in the first half of 2011 with swaps at an average strike price of $6.35 per Mcf and approximately 43% in the second half of 2011, the swaps at an average strike price of $6.61 per Mcf. If today's 2011 strip holds true, we should record another $1.5 billion in hedging gains in 2011.
That $1.5 billion, along with an expected $2 billion in drilling carried in 2011, will provide Chesapeake with $3.5 billion in cash from two important competitive advantages and what most expect will be a tough industry environment in 2011. We also expect to generate more than $1.5 billion in cash and $1.5 billion in additional drilling carries from two new JVs that we should close in 2011. So that's a total of $6.5 billion in competitive advantages before we even consider the expected $3.5 billion in operating cash flow we should generate in 2011 without any hedges.
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