Chesapeake Energy Earnings Call INSIGHTS: Production and Asset Sales Guidance, Eagle Ford VPP

On Tuesday, Chesapeake Energy Corp (NYSE:CHK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Production and Asset Sales Guidance

Brian Singer – Goldman Sachs: I wanted to see if you could connect a few dots with regards to the production and asset sales guidance that you revised. It seems like you expect less proceeds from asset sales in aggregate in 2012 to 2013, a greater negative impact on ongoing production resulting from these asset sales; but as you highlighted, both oil and gas production guidance is taken higher and in the interest of trying to determine how much of this change in guidance is driven by performance versus restructuring, can you just add a little bit of color on the moving pieces, please?

A Closer Look: Chesapeake Energy Corp Earnings Cheat Sheet>>

Domenic J. Dell’Osso, Jr. – EVP and CFO: Brian, when you talked about less asset sale proceeds, I think what you really point to is that we took BCP off a while ago. The increase in production relative to performance and unrelated to asset sales is about 140 bcfe in 2013. Does that answer your question or…?

Brian Singer – Goldman Sachs: Yeah. I guess can you break this into both oil and gas is impacted? Can you break that down or – you highlighted the Eagle Ford in Steve’s comments, but are there major drivers on the oil side versus the gas side?

Domenic J. Dell’Osso, Jr. – EVP and CFO: There are and so it’s approximately 50%-50% of that would be gas versus liquids and then the oil and NGL split would be as related to our base production, so a little better than 60%-40% to the oil.

Brian Singer – Goldman Sachs: Then you highlighted your Eagle Ford backlog. You’ve got a big backlog in the Marcellus. What are your expectations for how this backlog will change and what’s baked into that guidance for 2013?

Steven C. Dixon – EVP, Operations and Geosciences and COO: Brian, this is Steve. We are working a part of that off and part of that was our overspend on capital running quite a few frac crews in the Eagle Ford to catch that up as well as Marcellus.

Brian Singer – Goldman Sachs: So, do you expect that backlog to be eliminated by the end of next year? Is that what’s baked in?

Domenic J. Dell’Osso, Jr. – EVP and CFO: A good portion of our Eagle Ford backlog is normal course. We don’t expect it to be eliminated. The Marcellus backlog will stay with us for sometime as we are doing some appropriate backlog reduction there but we are not exactly raising it.

Brian Singer – Goldman Sachs: If I could as one more, you highlighted in the release that expectation for maybe a greater strategic update with third quarter results. Can you just talk to whether you think that will be dramatically different versus this latest change in 2013?

Aubrey K. McClendon – CEO: I do not expect it to be dramatically different, no.

Eagle Ford VPP

David Kistler – Simmons & Company: Just following up on Brian’s real quick, can you break out just specifically the Eagle Ford VPP and the implications that had on production guidance for ’12 and for ’13?

Aubrey K. McClendon – CEO: The VPP in and of itself was projected into our 2012 and ’13 production guidance. When we pulled it out we’ve had a reduction or an add back of about 30 bcfe in 2012 and again, about 50% of that is – sorry – I misspoke earlier when I gave the number to Brian. About 50% of that is oil, 25% NGL and 25% gas of the Eagle Ford of what we’re adding back in 140 bcfe to 2013 that is performance-related, that’s about 50%-50%. (In 2013), the VPP impact was about 35 bcfe.

David Kistler – Simmons & Company: Then are we come to the assumption though that the VPP for the Eagle Ford is completely off the table or is that something that comes back on the table as perhaps crude prices get a little bit better, NGL prices get a little bit better, any color on that would be helpful as we think about divestiture plans into ’13?

Domenic J. Dell’Osso, Jr. – EVP and CFO: For now it’s off the table.

David Kistler – Simmons & Company: Then one last one just on the Niobrara as you guys talked about fracing the code there, can you talk a little bit about what you are thinking the initial rates of return on those wells look like and maybe anything around well cost, well design et cetera?

Steven C. Dixon – EVP, Operations and Geosciences and COO: Dave, this is Steve. It’s still pretty early there. I think we have improvements that we want to make on our well cost, but we certainly found a sweet spot with this over pressured high in liquids basin center that we’re really hoping to get some production history and improve on.

David Kistler – Simmons & Company: So to be determined over time is best way to think that?

Steven C. Dixon – EVP, Operations and Geosciences and COO: So it’s still early. We’ve got some – I think some big improvements to make on the cost side. We’ve been still doing lot of science in defining this sweet spot.

Aubrey K. McClendon – CEO: Then I’d just say that anytime we’re in a liquids play the goal is to have greater than 50% rate of return. So, if we’re for some reason not there yet on these production rates we intend to get our cost to that point. So, these are big wells and they come in at 1,000, 1,500 boe per day. We’ve got some gas production take away issues that are going to take a little bit of time to resolve. We probably have some flaring issues associated with that, but we really like where we are and of course now we got CNOOC paying most of the costs there. So, if you take in the consideration that carry, our returns from the Niobrara basically, well, through the stratosphere when you’re only paying for a quarter of your cost.