Chesapeake Energy (CHK)

Q4 2011 Earnings Call

February 22, 2012 9:00 am ET

Executives

Jeffrey L. Mobley - Senior Vice President of Investor Relations & Research

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

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

Analysts

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

David W. Kistler - Simmons & Company International, Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Marshall H. Carver - Capital One Southcoast, Inc., Research Division

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good day, and welcome to the Chesapeake Energy 2011 Fourth Quarter Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jeff Mobley. Please go ahead, sir.

Jeffrey L. Mobley

Good morning, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2011 fourth quarter and full year. I would like to begin by directing your attention to the slide presentation available on our website that we will refer to in our prepared remarks this morning. The slides can be accessed at www.chk.com, then selecting the Investor tab near the top of the page, followed by the Presentations section in the menu bar.

I would next like to introduce the other members of our management team who are with me today on the call: Aubrey McClendon, our Chief Executive Officer; Steve Dixon, our Chief Operating Officer; Nick Dell'Osso, our Chief Financial Officer; and John Kilgallon, our Director of Investor Relations and Research. Our prepared comments today will be a bit longer than our typical call as we have added additional detail on our operational performance that will be highlighted by Steven Dixon. We will then move to Q&A. I'd now like to turn the call over to Aubrey.

Aubrey K. McClendon

Thank you, Jeff, and good morning. We are very pleased with our company's operational and financial performance during 2011. Here are a few highlights to consider when analyzing our performance for the year.

Turning to Slide #2. For the full year, we increased our production by 26% before asset sales and 15% after asset sales. Chesapeake remains the largest gas producer in the U.S. on a gross basis and the second largest on a net basis. More importantly, we moved up to the 11th largest oil producer in the U.S. during 2011 from the 15th largest in 2010 and from the 21st largest in 2009. We increased our proved reserves by 26% before asset sales and 10% after asset sales. And we now have proved reserves of approximately 19 Tcfe or the equivalent of 3.1 billion barrels of proved reserves. We found through the drillbit a remarkable 5.6 Tcfe of proved reserves at the very low drilling and completion cost of only $1.08 per Mcfe. Stated on a BOE basis, we found almost 1 billion barrels of oil organically. These results are unmatched in the industry and form the core of our ability to continue creating shareholder net asset value every year of at least $10 billion.

Chesapeake's risk unproved resources are now in excess of 110 Tcfe. And between our proved reserves and unproved resources, we control more oil and natural gas resources in the U.S. than any other company. Based on our present market valuation, this unproved resource base is quite amazingly available free of cost to our investors. During 2011, our net long-term debt on an absolute basis declined by 18% and on a relative basis, which includes benefit of the growth of our proved reserves base, net debt for proved reserves declined by 25%. Further, we believe approximately $1 billion of our total long-term debt should be reasonably allocated through our midstream and oilfield service businesses. After this allocation, our E&P debt is only $0.49 per proved Mcfe, which is clearly an investment-grade metric and is in fact, lower than at least one of our investment-grade rated peers.

We are focusing on creating per share value for our investors, and so we are proud to deliver strong operational and financial performance without incremental equity from the public markets. During 2011, our fully diluted share count increased by only 0.6%, which is solely related to employee stock compensation. I believe we still remain the only large cap E&P company that distributes restricted stock to virtually all of its employees, in our case today, nearly 13,000 people. I believe this practice at least partially accounts for the hardworking, creative and motivated organization that we have built.

Speaking of which, on Slide #3, I am proud to highlight that recently, Chesapeake was named by FORTUNE Magazine as the 18th Best Company to Work For in the U.S., including the fifth best among companies with more than 10,000 employees. In addition, we were #1 among all companies in the oil and gas business. This is our fifth consecutive year on this prestigious list, and we have moved up from #61 to #18 in those 5 years. I would also like to mention that our fellow Oklahoma City producer Devon is ranked #28th on the list. That means that of the more than 400 publicly listed oil and gas producers in the U.S., only 3 made the top 100 Best Companies to Work For, and 2 of those 3 are located right here in Oklahoma City, a very noteworthy achievement for our community.

Turning to Slide #4. During 2011, we sold assets for $8.5 billion, reaping pretax economic gains of $5.6 billion from those sales, or a profit margin of approximately 65%. Please note, however, that because of the conservatism of full cost accounting, only $437 million of those gains appeared on our income statement. On a percentage basis, our liquids production increased by 72% in 2011 versus 2010. This is the second-best track record of oil production growth in the industry on a relative basis. On an absolute basis, our liquids production increased by 36,000 barrels per day, also the second-best performance in the industry. Further impressive liquids production growth lies ahead for Chesapeake. For 2012, we believe our liquids production will increase by more than 70% or approximately 63,000 barrels per day compared to 2011. We remain convinced that Chesapeake will become a top 5 producer of liquids in the U.S. by 2015, with more than 250,000 barrels per day of liquids production.

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