Aug 1, 2013
Executives
Doug Lawler - CEO Steve Dixon - COO Nick Dell’Osso - CFO Jeff Fisher - EVP, Production Jim Webb - General Counsel Gary Clark - VP, Investor Relations and Research
Analysts
Dave Kistler - Simmons & Company Brian Singer - Goldman Sachs David Heikkinen - Heikkinen Energy Advisors Doug Leggate - Bank of America Merrill Lynch Scott Hanold - RBC Capital Markets Arun Jayaram - Credit Suisse Neal Dingmann - SunTrust Matt Portillo - Tudor, Pickering, and Holt Bob Brackett - Sanford Bernstein Michael Kelly - Global Hunter Securities Joe Allman - JPMorgan Amir Avif - Stifel Nicolaus Jason Gilbert - Goldman Sachs Brad Karp - Wells Fargo
Operator
Good day everyone, welcome to the Chesapeake Energy Corporation Q2 2013 earnings conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Jeff Mobley, senior vice president, investor relations and research.
Jeffrey L. Mobley
Good morning, and thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2013 second quarter. Hopefully, you've had a chance to review our press release and updated investor presentation that we have posted to our website.
During the course of this call, our commentary will include forward-looking statements regarding our beliefs, goals, expectations, forecasts, projections, and future performance and the assumptions underlying such statements. Please note that there are a number of factors that could cause our actual results to differ materially from such forward-looking statements.
Additional information concerning these factors is available in our earnings release and the Company’s SEC filings. We also refer to certain non-GAAP financial measures and we encourage you to read the full disclosure and GAAP reconciliations located on our website in this morning’s press release.
I would next like to introduce the members of management who are here on the call with me today; Doug Lawler, our chief executive officer; Steve Dixon, our chief operating officer; Nick Dell’Osso, our chief financial officer; Jeff Fisher, our executive vice president of production; Jim Webb, our general counsel; and Gary Clark, our vice president of investor relations and research. We will next turn to prepared commentary from Doug, and then we will move to Q&A.
Doug?
Doug Lawler
Thanks, Jeff, and good morning. As most of you have seen by now, Chesapeake has delivered a strong quarter, both operationally and financially.
We are pleased with these results, which are a testament to the dedication and focus that has been demonstrated by the entire employee base during a period of transition. Once I’ve discussed our performance on this call, I will spend some time briefly outlining some fundamental tenets underlying our approach to achieving key financial and strategic priorities for Chesapeake, as well as some specific goals for us going forward, but first let’s look at the quarter.
Chesapeake reported adjusted earnings per share of $0.51, which compares to $0.06 in the year ago quarter. Adjusted EBITDA for the quarter was $1.42 billion, up 26% sequentially and 77% year over year.
Total production growth was also strong, up 2% sequentially and 7% year over year. Oil production was the primary driver of our growth this quarter.
It was up more than 35,000 barrels per day, or 44% year over year, to approximately 116,000 barrels per day. This growth was once again led by the Eagle Ford Shale play, where oil production grew 8,200 barrels per day sequentially and 32,700 barrels per day year over year to 57,000 barrels per day.
I’d also like to highlight that our percentage of production from liquids plays increased again this quarter to 25%, and also accounts for 60% of our realized oil and gas revenue. Given the better than expected results we are seeing primarily in the Eagle Ford, from both well performance and improved cycle times on both drilling and completions, we are raising the midpoint of our 2013 full year oil production guidance by 1 million barrels.
Importantly, during the second quarter, Chesapeake generated this strong production growth through greater capital discipline, resulting in significantly lower capital spending compared to last year. In the second quarter, we spent approximately $1.6 billion on drilling and completion activities, which was down approximately 35% year over year.
Our total lease hold and other capital expenditures during the second quarter were $245 million, which was down approximately 75% versus the year ago quarter. As the result of substantial anticipated efficiency gains and continued focus, we see further opportunities to reduce capex going forward.
On the expense side, we did a good job of reducing production expenses despite our increasing liquids mix. Per-unit production expenses were $0.78 per Mcfe, which was down 20% from the year ago quarter, driven by cost leadership from our field personnel and reduced saltwater disposal costs as infrastructure projects have been placed into service.
G&A was a similar story, as per-unit costs, excluding stock based compensation, were $0.25 per Mcfe, which was down 36% from the year ago quarter. From a balance sheet and liquidity perspective, I’m pleased with the accomplishments of the company year to date.
We ended the quarter $4.7 billion of liquidity and net long term debt was essentially flat compared to year-end 2012. The company’s financial position has strengthened considerably over the past 9 months, and as a result, we recently elected to terminate our bank covenant amendment early.
In return, our maximum long term debt to EBITDA ratio limit is back to 4.0 times from the 4.5 times ratio that would have applied in the amendment for June 30, 2013. I would note that at June 30, our long term debt to EBITDA ratio had improved to approximately 3.0 times.
During the first half of 2013, the company received proceeds of approximately $2.4 billion from asset sales. During the 2013 third quarter to date, the company has completed the sale of additional assets for total consideration of approximately $1 billion, including the sale of assets in the Haynesville Shale and Eagle Ford Shale, and we also anticipate to complete the sale today of certain midstream assets in the Mississippi Lime play, for a total consideration of approximately $300 million.
These asset sales, combined with forecasted net operating cash flow, enable Chesapeake to fully fund its 2013 capital expenditure budget. Additional asset sales are contemplated for later this year, which may be used to reduce long term debt and further enhance our financial liquidity.
Moving beyond the quarterly results, I’d like to take a few minutes and highlight Chesapeake’s key strategic priorities. In order to deliver near and long term returns, increase our competitiveness, and improve our relative stock price performance, our go-forward strategic priorities will consist of two fundamental tenets.
The first is financial discipline, and the second is profitable and efficient growth from captured resources. I want to share with you exactly what these two strategic priorities mean.
Regarding financial discipline, our capital expenditures will be balanced with our cash flow from operations. We’re implementing a new competitive capital allocation process to ensure the highest quality projects are funded.
We will continue to divest our noncore assets and noncore affiliates. We will reduce our financial and operational risk and complexity, and we will achieve investment-grade credit metrics.
Profitable and efficient growth from captured resources is a continuation of our focus on developing the highest-quality core of the core properties. Chesapeake has a world-class inventory with significant growth potential and multiple bases.
This inventory will provide competitive production reserve growth for years to come. We will target top quartile operating and financial metrics and aggressively benchmark and post-appraise our performance.
We will pursue continuous improvement in all aspects of our business and will drive value leakage out of our operations. In my initial discussions with Archie Dunham, the company’s board, and some of Chesapeake’s largest shareholders, I had a great opportunity to see and understand their commitment and confidence in the company.
This confidence is underpinned by the quality of the people and the quality of the assets at Chesapeake. Seeing that level of conviction and how they view the future of the company was very important to me.
I chose to come to Chesapeake and lead a new strategic direction because of the abundance of opportunity and the strong foundation that has been built for future success. I believe I have picked the right company and I share the board’s view regarding the quality of the people and the assets.
I’ve been impressed by many aspects of Chesapeake. It’s an organization that is very nimble for its size.
It’s good at adapting and making decisions, and it’s especially good at responding with speed to clear directives and objectives. It is no accident that this company grew to be one of the largest domestic energy producers in a very short period of time.
There are also, however, many areas where I see opportunity and room for improvement, including capital efficiency, capital allocation, cost control, organizational process, and strategic focus. During the past six weeks, I’ve launched a comprehensive review of our assets in the organization.
As part of this review, I’m working with the senior management team to determine our best path forward for driving meaningful shareholder value and realizing our full potential. This path will be designed to execute a strategy of becoming a more focused and efficient E&P company, and it is critical, I repeat, that we balance our capital expenditures with our cash flow from operations.
Chesapeake is at a key juncture in its history, and we have a laser focus on positioning the company to execute more competitively. Going forward, we are targeting to deliver top-quartile performance in several key metrics, including absolute and per-[unintelligible] adjusted share reserve growth, production, and cash flow growth, returns on capital deployed, returns on equity, as well as lease operating, overhead, and drilling and completion costs.
While I cannot give you an exact timeframe today for when we will achieve the top-quartile results in these metrics, we intend to get there as quick as possible and we will pursue it with a high sense of urgency. In closing, I’d like to thank the Chesapeake employees for their dedication and their hard work.
Transition and change are not easy, and I know the collective effort of our employees focused on this new strategy will drive improved performance for our shareholders. And with that, Steve, Nick, and I would be happy to take any of your questions.
Operator
[Operator instructions.] We’ll take our first question from Dave Kistler with Simmons & Company.
Dave Kistler - Simmons & Company
Real quickly, Doug, you’d mentioned, I believe I heard this correctly, that on the financial discipline commitment, that it would be supported by trying to live within cash flow. Did I hear that correctly?
Doug Lawler
Yes, you did.
Dave Kistler - Simmons & Company
Okay, and so just thinking about that, obviously that rate count reduction that you guys put in place is driving down the [E&D] capex spending, production growth, higher and pretty impressive from that perspective. Can you share what that means for ’14?
I would just roughly guess that production would be coming down, i.e. bringing cash flows down a little bit.
And then just trying to think for modeling, trying to tie capex to whatever we’re projecting for cash flow as analysts.
Doug Lawler
It’s a good question. First, I’d like to note that in 2013 we’ve demonstrated the ability to grow production while reducing the capital.
We’re not at this point providing any guidance towards 2014, but what I would ask you to do is to look at the quality of the assets. As I highlighted, and the team’s highlighted in the past, the core of the core has tremendous growth potential.
And so if you look at our capital efficiency, how we can reduce our costs, as we’re already seeing efficiencies result in more wells being drilled despite a lower rig count, living within our cash flow and targeting that financial discipline is a key priority to me and the team. And you know, we’ll be providing information on 2014 later this year.
Dave Kistler - Simmons & Company
And then just thinking about the impressive production growth on the quarter, yet seeing a slight slippage in the initial production rates for the Eagle Ford, Utica, and Anadarko Basin, could you guys change maybe the well design, or are you more aggressively managing initial production rates to kind of manage declines? Just trying to think about what the impact of that is going forward.
Steve Dixon
Really it’s just that quarter’s well set. We have not seen any back off in the performance of our wells in any of the areas.
So I think that will just come and flow with the well set that’s being turned online. In some areas, the older wells are just getting hooked up.
So I think it’s more of a function of the well set and not an overall decay in any of our areas.
Dave Kistler - Simmons & Company
And one last one. Just looking at the transport costs, they look like they crept up a little bit for your forward guidance.
Can you talk about what the main driver of that is?
Nick Dell’Osso
A couple of key drivers there. The biggest is the basis differential widening in the Marcellus.
So I think you’ve seen, with other producers in the market [unintelligible] well where there’s a lot of infrastructure being constructed there this summer, and some things have been offline, and there’s been some backup in the basin. So that’s a big driver of it.
We’ve been pretty conservative in projecting that out through the rest of the year. And then in the Anadarko Basin, we’ve seen some [basis] as well.
On the oil side, I’ll add that we’ve also taken into account the consolidation of WTI and [LLS].
Operator
Our next question comes from Brian Singer with Goldman Sachs.
Brian Singer - Goldman Sachs
Just following up on the point on balancing capex and cash flow, I think you mentioned some of the metrics you expect to be in the top quartile on, and that you didn’t really have a time period for when you’d achieve that. But in terms of when you balance capex and cash flow is something that you can control.
When do you see that happening? Is that something that you expect would be immediate?
Is that something we should look for for 2014? And as maybe a follow up to the earlier question, are there one or two key levers you think you can pull to get the bulk of the way there from where Chesapeake’s been historically?
Doug Lawler
It is our target in 2014 to achieve that. So directionally, just so you know, we look at the different metrics and how we proceed forward.
Establishing criteria and goals to achieve those top-quartile metrics to live within that cash flow is all targeted towards 2014 performance. Just a few of the primary factors that will help contribute to that is that when you look at the company’s history and how we have grown to this point in time, and basically all the production growth is taking place from single-well pads.
And as we focus and concentrate on our capital efficiencies, synergies that can be achieved, learning from the land capture to the [held-by] production drilling program and concentrating on the best areas, those efficiencies and that production growth we believe will come from those primary areas that we’ll be investing in. So part of that capital allocation process that I described and how projects compete will give us that ability to optimize our cash flow growth, our production growth, and with that target of being within the cash flow from operations.
Brian Singer - Goldman Sachs
And then as a follow up, as we look at your plans to reduce rig count in some of these areas, and then given the efficiency points that you’ve mentioned, should we expect that your well count will fall, rise, or stay flat in these areas? And I assume there’s a big difference, but how are you thinking about core of core in the Eagle Ford and Marcellus and other areas versus the rest of your positions?
Doug Lawler
That’s a good question. I think what you’ll see is that it should be relatively flat in balance, because of the efficiency we expect to achieve.
Seeing reduced cycle times not only on the drilling side, on the completion side, also compressing with the more focused tension in the core areas that infrastructure costs and getting the overall cycle times reduced is a primary target of ours. So I believe that without giving guidance for 2014 yet, that it will be fairly balanced, and the way that we’re going to get there is through efficiencies and the concentration in those core of core assets.
Operator
Our next question comes from David Heikkinen with Heikkinen Energy Advisors.
David Heikkinen - Heikkinen Energy Advisors
Just want to be clear that you’re balancing cash flow and capex, versus cash flow from operations and your balance sheet improvement comes from non-core asset affiliate sales?
Doug Lawler
That is what we’re targeting, yes.
David Heikkinen - Heikkinen Energy Advisors
And can you talk about what you would consider noncore affiliates?
Doug Lawler
Well, this is part of the process. We’re in this comprehensive review.
We’re looking at all of the assets. We’re looking at all of the affiliates that the company has ownership in, and determining what is the return that we’re generating from those assets and affiliates and going forward, what is the best strategic positioning for us to be more competitive, should we be continuing to own and invest in.
So at this point, I’m not going to share with you on it, but that’s something that we’re really focused on, because if it’s not adding value and not return-centric, that adds to our competitive position, we’ll look to divest of it.
David Heikkinen - Heikkinen Energy Advisors
And then to get into detail on defining top-quartile, who are the peers that you’re going to be measuring yourself against?
Doug Lawler
Well, I think it’s the standard group that you’d expect, that have similar footprints as Chesapeake. I can name them, but you know who they are.
Basically we’re looking at the strong competitors in North America and those that have achieved good performance, and we’re going to be focused on elevating our performance to be more competitive.
David Heikkinen - Heikkinen Energy Advisors
And then just one very detailed question. Can you talk about back half of the year, your completion plans for third quarter in your 4PS at Eagle Ford, Utica, Anadarko, and Marcellus?
We can get to drilling plans, but want to just get some details on completion plans and activity.
Steve Dixon
It will be down slightly. We did quite a bit of catch up here in the first half of the year, and so our pace of bringing those on will be slow in the second half.
And part of that will be a little less drilling activity, but most of it was kind of acceleration more in the first half, on catching up on excess inventory.
David Heikkinen - Heikkinen Energy Advisors
Maybe another way to ask the question is, with your planned exit rate for activity level, what’s the normal backlog of wells waiting on pipeline and completions, just to establish a baseline. Say, with a 10-rig program in the Eagle Ford you’d normally have 120 wells, or whatever the number would be.
That would be helpful.
Steve Dixon
You’re right. You do have a working inventory that will always be there.
So yeah, I think of it more as excess inventory and working inventory. We made big strides in reducing that excess here in the first half.
And part of that is always moving with pipeline and compression and processing, also, by play to play. So we have rightsized the second half of the year to match up with infrastructure availability.
David Heikkinen - Heikkinen Energy Advisors
So no specific numbers?
Steve Dixon
That’s correct, David.
Operator
Our next question comes from Doug Leggate with Bank of America Merrill Lynch.
Doug Leggate - Bank of America Merrill Lynch
You mentioned in your prepared remarks about balancing cash flow, but you also mentioned about addressing the complexity of the organization. Can you elaborate on what you’re talking about there?
Because I’m guessing you’re relating to things like your [unintelligible] structure, the myriad of joint ventures that you have, and if you could just elaborate as to what you’re really getting at there.
Doug Lawler
I think you nailed it. Part of this procedure is looking at all the different affiliates, all the different structures that we have.
Are they adding the proper returns to Chesapeake? Are they getting us competitive advantage?
And without getting into exact detail on it, at this point in time, and really I can’t because the process is underway, and we’re evaluating it. But I think that as you know well, the company is involved in many different activities.
Vertical integration has proven to be efficient and enable some very distinct competitive advantages for us in the past. And as we look at all the different affiliates, we want to make sure that we’re getting the long term value creation and the focus we need to be as competitive as we can with our peers.
So I guess the best way to answer it is that it’s a comprehensive review, and each of those will be evaluated.
Doug Leggate - Bank of America Merrill Lynch
The joint ventures, I’m guessing their kind of set in stone, and the [preference] shares similarly. I’m just curious as to how would you, if you decided they weren’t appropriate, what kind of steps would you envision taking to address those?
Doug Lawler
Well, I think some of those JVs, some of those commitments, are we getting the best returns out of them? And looking for ways to improve, either with our capital program in those JVs, how we can demonstrate better performance.
Or just simply looking at all the different options that exist. It’s early in that process, and so I think it’s important to note that you can expect that our goal - and I’d ask you to look more at the goal - is to reduce the complexity and to provide better clarity on where we’re getting our best returns from.
Doug Leggate - Bank of America Merrill Lynch
Two quick followups if I may. One operationally: the Utica volume is still pretty low.
Are you guys still thinking in the low 330s for an exit rate?
Steve Dixon
Yes, as more processing and compression come online, we should be able to get to that.
Doug Leggate - Bank of America Merrill Lynch
And finally on [unintelligible] cash flow, are you talking about drilling and completion costs matching operating cash flow? Or are you also including the other spending, unit lease hold and I guess the other oil service capex and so on?
And just on that last one, if you could maybe talk to guidance on the 2014 non-E&P capex, that would be great.
Doug Lawler
We are targeting the drilling and completion, and will be looking at the other capital expenditures as well as we follow up. So the focus is on all of our capital expenditures with specific focus in the near term on the drilling and completion.
And it’s just early for us to provide anything else on 2014.
Nick Dell’Osso
I’d just add that on the other capex, remember that in the first half of this year we still had some midstream assets that we just completed the sale of today, that we were spending some money on, and we’re taking delivery of some rigs [unintelligible] that have been ordered in some cases more than 12 months in advance. And so we do expect that that other capex line will be materially lower in 2014.
Operator
Our next question comes from Scott Hanold with RBC.
Scott Hanold - RBC Capital Markets
Can you guys just answer one thing? I’m looking at the piece where you’re reducing complexity.
You’re looking at your assets, the various structures. What kind of timing do you have?
Is this something that we should hear about in the coming quarter? By year end?
Can you give us a flavor of when you’re going to have that wrapped up, and the plan to go forward?
Doug Lawler
I think it’s going to be an ongoing process. As you know, some of those arrangements have fairly long terms and commitments associated with them.
So I think what you’ll see is that it’s not necessarily a one day we’re going to make an announcement on how we deal with it, but over time, improvements we’ll be announcing and sharing that with you as we progress.
Nick Dell’Osso
I think that’s exactly right. We have cash flow and liquidity freed up from the improved capital programs, improved cash flow from our business, as well as noncore asset sales.
We’re determining the best places to put that capital to work, and that’s a process that will yield different results based on the opportunities that are in front of us at the time.
Scott Hanold - RBC Capital Markets
So no specific time [unintelligible] progress on that. Is that right?
Nick Dell’Osso
You’ll see continual progress over a period of time. There’s no one day.
Scott Hanold - RBC Capital Markets
And then relative to your current plan of reducing the rig count in the second half of the year, can you remind me what the plan had been in terms of rig count and well counts compared to what you’d planned at this point?
Steve Dixon
I’m trying to think back to the first of the year. I’m guessing it was around the low 80s, and now we’re down to 64.
So a pretty significant reduction. And as you can see from the cycle times that we released, significant improvements in our cycle times to be able to do that.
Doug Lawler
From a well count perspective, it has not decreased nearly as much as the rig count, is the point there.
Scott Hanold - RBC Capital Markets
And then one last question, in the Utica, can you give a sense of what you’re seeing on the well performance in terms of the oil and gas splits out there? Has it trended a little bit more gassy relative to some of the initial expectations.
I guess that’s been our sense. Can you give us a little color and elaborate on that?
Steve Dixon
I would say from when we entered the play it certainly had been gassier, but not quarter over quarter this year. The well set is performing well.
We’re very pleased with the results and anxious to get more of it on this year as we get compression and processing in place.
Scott Hanold - RBC Capital Markets
Okay. And specifically what I was referring to is if you look in your little Utica write-up, it gives some of the gas production in Mcfe per day, where I think BOE per day was something you spoke [unintelligible] before.
So I didn’t know if that was sort of a signal we should think about.
Steve Dixon
No, I don’t think so. I think it’s still early until we get a bigger well set on, which, again, is going to happen here in the second half of this year.
So more to come.
Operator
Our next question comes from Arun Jayaram with Credit Suisse.
Arun Jayaram - Credit Suisse
Doug, I just wanted to talk to you a little bit about, you’re thinking about putting in a new blueprint for Chesapeake. You know, one of the recent challenges given the pullback in gas has been the balance sheet and the funding gap.
The shares have done really well year to date. And I was just wondering what your thoughts would be on doing potentially a significant equity raise so you can get away from needing to do the asset sales and things like that and perhaps give you some flexibility as you look towards a newer strategy.
Thoughts on that, Doug?
Doug Lawler
Those options are out there, and could always be a possibility that we would consider. I will tell you, though, that the focus right now is on being the most efficient with our capital as we possibly can, and targeting that capital toward the very best projects that we have, which, compared to our peers and compared to some other operators, we just have some outstanding assets.
And so prior to looking to do something like that, we need to really focus on our operations and focus very, very intently on how we can improve our capital efficiency. And right now we’re just basically going to be looking at asset sales to get the portfolio right.
And the focus with the capital and the asset sales is not to solve for a funding gap, it’s to get the discipline in our program, get the best projects, get the multiple wells per pad, and some of the best assets in the country. And so raising equity at this time is not a primary driver.
I think it always exists as an option, but that’s not something we’re focused on.
Arun Jayaram - Credit Suisse
And my final one is just trying to think about the Utica and the overall macro potential regarding gas. What are your thoughts, Doug?
You have a couple hundred wells that you plan to put on later this year, early next year. Does this change the way you think about the gas market, where you have potentially a resource which has a lot of potential similar to the Marcellus?
Doug Lawler
First let me say that I really am encouraged by what I’ve seen in the Utica. As Steve noted, we’ve got a lot of wells that we’re getting ready to bring online.
And I think the options there, we have a ton of options available to us. And focusing on the best areas there, and getting our capital in line, is part of the program, as we see the Utica to be a very strong asset going forward.
So as it compares to Marcellus, I hate to get into some of those comparisons at this point, because we still have several wells to bring online to evaluate and determine the right amount of capital to be investing in that program in the years to come. But I will tell you that I’m very encouraged by it, and with my experience in all the other shale plays, I think it’s an exciting area for the company.
Operator
Our next question comes from Bob Morris with Citigroup.
Robert Morris - Citigroup
One operating question on the increase in the oil guidance for the year. You mentioned part of that was the timing of asset sales.
Can you tell me what proportion of that increase in the midpoint guidance was, the timing of asset sales?
Steve Dixon
It was roughly two-thirds created by the delays in the asset sales. And one third of that is just performance increase.
Robert Morris - Citigroup
You talked about matching capex with cash flow and allocation, and focusing on the best projects. Does this mean that you’re contemplating a lot of expiration of leases or acreage?
I know you’d rather sell acreage. But in this market, it’s tough to sell nonproducing acreage.
So do you anticipate that in this program, in this new strategy, that there will be materially significant lease expirations that will occur here?
Doug Lawler
There might be. And you know, our focus in the past has been to not let any lease hold expire.
As a result, of that, and as a result of the aggressive land capture strategy, we’ve got a tremendous opportunity to high grade within that. And as you look at where we start investing and where we start improving our efficiencies, we’re not going to ramp up the rigs to hold leases.
And our rig count, while we haven’t given any particular guidance, and one area may increase and in another area it might decrease, but it’s all centered on how we can drive the greatest capital discipline and the greatest returns for our shareholders. And so as a result of that, we may lose a little bit of acreage.
We obviously will look at opportunities to monetize that acreage. We don’t see us focusing in the near term on it, so we don’t have stranded capital that has been invested, but the company’s just tremendously blessed with a huge land resource base.
And obviously as we go forward, we’re not going to be able to develop all of it. But what we are going to develop is going to be very competitive, and we’ll be looking for continuous improvement and capturing the growth metrics for it to be more competitive.
Operator
Our next question comes from Neal Dingmann with SunTrust.
Neal Dingmann - SunTrust
Just looking at the Eagle Ford, obviously tremendous continued results, especially on those spud to spud cycle times. So I’m just wondering, is this going from the 15 to 10 rigs just because of the efficiency?
I’m just wondering if you had decided to stay with the same amount of rigs if you had been able to take production up just that much more.
Steve Dixon
A little bit more. We have some constraints there that are continuing to be improved.
But yeah, we would have been restricted, couldn’t have stayed at that same pace. Part of it was, though, we had to have that pace to HBP all of our lease hold first half of this year.
We’re basically done there now in the Eagle Ford, so you haven’t seen all that we can do once we’re now in a pure pad drilling mode going forward the second half of the year and into ’14. So we’re going to get a lot done with those 10 rigs.
Doug Lawler
And to add to what Steve said, when you think about some of the strengths that reside in Chesapeake, one of those is the speed at which we can ramp up our operations and ramp down those operations. So as we are pursuing value, and our competitiveness, and how we improve that, that rig number, we may go from 10 to 12 to 15, and maybe more than that.
But we may pull it back based on efficiencies and how we develop our portfolio to be more competitive. So I think it’s important to not note our focus too intently on the rig count, but to focus on the efficiency, the cycle times, the capital discipline, that we’re building into the program.
Neal Dingmann - SunTrust
And then maybe Steve, back to your HBP comment, where do you sit now with that in the Utica? You guys have, like you did in the Eagle Ford in the first half, is most of that held as well?
Steve Dixon
Oh, no. The Utica is a long ways from being HBP.
But we’ve got long term leases there, so we have done some pad drilling and tried to be in a more focused area in the Utica to get started along pipelines. But no, we’ll have a lot of work to do in ’14 and ’15 to HBP our excellent lease hold position in the Utica.
Neal Dingmann - SunTrust
And just lastly, I noticed on the guidance for the oil field services net margin just was taken down slightly. Is that just a result of less rigs running?
What should we attribute that to?
Doug Lawler
That’s a result of less rigs running and it’s also a result of just general pricing pressure across the oil field services segment. Our services are market priced, and they follow the market.
So margins in that industry have been tight all year. That’s a good thing for us from a cost perspective at the end of the day, and it ends up just coming out in that margin number.
Operator
Our next question comes from Matt Portillo with Tudor, Pickering, and Holt.
Matt Portillo - Tudor, Pickering, and Holt
Just a few quick questions for me. In terms of the Eagle Ford backlog, can you give us an idea of where that stands today?
And specifically, I guess with the 10 rigs that you have running in the play, how many wells do you roughly think you could drill next year? Just looking at the second quarter it looks like you completed about 140 wells, which was up quite a bit.
So just trying to understand kind of the rate of change.
Steve Dixon
Well, as Doug had just mentioned, we can ramp up and down pretty quickly. So 2014, we really have no guidance for you there yet on that, because it could be a pretty big spread.
You saw the numbers that we turned on in the second quarter. We did a lot of catch up in the Eagle Ford.
So I guess your question was more what our kind of excess inventory is left in the Eagle Ford. It’s not a great number.
We’re trying to get those wells completed and online here in the second half. So I don’t think we will exit with a big excess inventory in the Eagle Ford.
Doug Lawler
I think just adding to what Steve said, we’re not going to park capital on the ground that’s not going to give us a return. And so if the infrastructure and the ability to get the wells online, there’s some limit to it, we’ll direct that capital elsewhere, direct the rig activity elsewhere, so that we can optimize our efficiencies and our returns.
So I think it’s still just a little bit early to say. I would expect that that inventory, with our rig activity, will fluctuate, and fluctuate for a couple of reasons.
With the dependency of the infrastructure, and also with the efficiencies that we expect to achieve there. And so I’m excited about it.
I think it’s a great time to focus on this backlog with oil at $107 a barrel, and we’ll be doing as much as we can to bring it on as quickly as possible, and as efficiently as possible.
Matt Portillo - Tudor, Pickering, and Holt
And just on the back of that, looking at your full year oil guidance, if you look at the first half of the year you’ve done about 20 million barrels. It would imply kind of the midpoint of the range, I guess post-asset sales, that oil growth is slowing or maybe decelerating a little bit in the back half.
Is that a fair assumption, just given the completions that you guys are looking at? How should we think about the trajectory of growth going forward from here?
Steve Dixon
We’ll slow a little bit, because of that inventory we worked off during the first half, and then we just sold some oil in these asset sales. So that was all pretty much in full second quarter or first half, and it’s just come out now.
Matt Portillo - Tudor, Pickering, and Holt
And just last question for me, on the NGL front, it looks like on a run rate basis there’s going to be a huge uplift in the back half of the year to get to guidance. I was hoping we could get a little more color on the plan going forward in terms of ramping your NGL volumes to meet the guidance range.
And then a second follow up question, just in regards to the Utica, as you bring on additional NGL capacity, how do you guys think about dealing with ethane in that market and moving those volumes in terms of the liquids component?
Doug Lawler
Well, in terms of the NGL production, we have the Kensington plant that just started in the Utica. We have additional plant coming online later this year.
So that ramp is significantly driven by that infrastructure in the Utica, as well as in [unintelligible] and some other plays as well. And so that’s really the driver there.
As far as ethane, the Apex Pipeline is scheduled to come online around the beginning of 2014, and that’s a significant assistance to us in moving ethane out of the basin. We’re an anchor shipper in that line, and we think that’s a good advantage to us.
Matt Portillo - Tudor, Pickering, and Holt
Just a follow up there. So in regards to ethane for the back half of this year, is the guidance assuming a rejection out of the Utica?
Or should we basically model in ethane rejection until Apex comes on?
Doug Lawler
We’re able to do some blending with our ethane in the Utica. What we’ve modeled in the way of rejection is rejection for July and August.
Beyond that, we have not modeled any rejection, but as you know, it’s possible. We’ve had some rejections this year as well.
So hard to predict. The pricing has been right around breakeven on a lot of our contracts for several months now, one month ahead, one month below.
And we monitor that very closely, and make the most economic decision each month.
Operator
Our next question comes from Bob Brackett with Bernstein Research.
Bob Brackett - Sanford Bernstein
Quick question around the divestment of noncore affiliate. Could you just give us a list of your affiliates, just for our information?
Doug Lawler
I think most of that information is available if you will look at our 10-Q and public information we have, rather than going into that at this point in time. Key focus there is that we’re looking to drive the greatest returns from any affiliate that we’re associated with.
And that’s what I would just ask you to know and that strategically it’s an important part of our program going forward.
Bob Brackett - Sanford Bernstein
Okay, I’ll try a different… This competitive capital allocation procedure, could you contrast that to what Chesapeake had been doing?
Doug Lawler
Certainly. The key there is that our previous strategy was focused largely on preserving the lease hold.
I’ve been very, very impressed with the geoscientists within Chesapeake, and the team’s ability to rapidly - not only from an external perspective prior to joining the company but also internally now that I’ve been here - I’ve been very impressed with the company’s ability to identify and rapidly move in and acquire significant core positions, simply some of the best rock in the country. And the focus has been to not lose any of that acreage, and the shift in the strategy today, and the capital required to do that previous strategy, had put us in a very difficult position.
And as we go forward, that capital and that focus is on driving the greatest value out of that acreage and being the most competitive we can be against our peer group. And so by using that focus and that speed and that technical ability that resides and is very strong inside the company, we’re focusing that speed and that strength on value.
And so I’m very excited about it. We have a lot of work to do, but we’re shifting that strategy from preservation of the land to capturing the most value from the land in the core areas that we’ve identified.
Operator
Our next question comes from Michael Kelly with Global Hunter Securities.
Michael Kelly - Global Hunter Securities
Obviously there’s a lot of variables to consider as it pertains to 2014 growth, and I’d just like to touch on a couple of specifics there. First, on the midstream takeaway additions that you would potentially be adding here at the end of the year and into 2014, hopefully you can direct our attention there to what’s meaningful.
I know you’re constrained in a number of these basins. Obviously the Utica, but also in the Marcellus and Powder River Basin.
And just talk about how their coming [slow] to capacity there could also play an important factor in 2014’s growth. And then the other thing I wanted to ask you about is just the baseline decline on your natural gas assets here.
How’s it been faring? What’s your model so far in ’13, and what’s a good number to dial in for ’14?
Steve Dixon
We do have a number of projects coming online in the next 12 months that will help significantly in the Utica, I guess to begin with. We’ve got 200 million in processing coming on now, another 200 million towards the end of the year there, and capacity for another 200 million in probably second quarter of ’14.
So lots of ramp up room there in the Utica. In the Marcellus, those pipes, additional takeaway there, come on at the end of the year, November-December timeframe.
It will allow more capacity in the Marcellus. The Eagle Ford is kind of a number of things, pipeline, treating, and compression, that will continue to help throughout the year to improve it.
Niobrara, that’s probably ’14 on it, before we have any really meaningful, big step rate change there. We’ve got a little bit of incremental, but that’s when that gets relieved.
And so again, that’s all factored in our ’13 guidance. And we are not giving any ’14 guidance yet.
But we will factor all those in when we provide ’14.
Michael Kelly - Global Hunter Securities
And I just want to make sure I’m characterizing this correctly. Did you say that you think you could have a very similar completion count in ’14 versus’13 while getting capex to come in line with cash flow?
Steve Dixon
We did not say that, because we have not provided ’14 guidance. What we said was that we are getting more efficient and our completions per capex will be improved, but we have not provided that capex number yet.
Operator
Our next question comes from Joe Allman with JPMorgan.
Joe Allman - JPMorgan
Let me clarify, for 2014, your expectation is that your all-in capex is going to be at or below operating cash flow? Am I understanding that correctly?
Doug Lawler
Our target is our drilling and completion capex will be within cash flow with the overall target that we continue to pull all the capex within our operating cash flow. So the messaging there, and what I would like for you to focus on, and I want to convey, is that it’s a very strong strategic element in this company going forward to live within our cash flow.
Joe Allman - JPMorgan
Again, just to clarify, the DNC capex plus other capex, you’re targeted to have it at or below operating cash flow?
Doug Lawler
We’re going to focus intently on balancing our capex program to be within cash flow, yes.
Joe Allman - JPMorgan
And what are the dynamics that allow you to do that now? Because Chesapeake in the past has been in a very tight situation and probably wanted to spend less, but was precluded from doing so.
So obviously one of the things you mentioned in the call was Eagle Ford Shale is largely HBP at this point, but what are some other dynamics that enable Chesapeake to live within cash flow?
Doug Lawler
Well, there’s two or three central elements to accomplish that. And the first, you highlighted, in that we’re not going to preserve every acre.
And we are going to focus on the very best areas. And inside those best areas, you can expect to see greater efficiencies from our drilling and completion program.
As I mentioned, the production growth that’s been realized by the company is from single well pads. And as you look at our percentages of multi-well pads, we’ll be significantly improving as we focus on those key areas.
And as a result from that, we’ll see likely fewer rigs, greater capital efficiency, and continued growth. So that’s a huge element as a part of it.
And then as we also look to reduce the complexity in the program, the things that are not getting us the returns that we’re targeting, we’re looking to eliminate that waste, or that’s not providing the greatest return for us. So looking to drive the greatest value to drive the leakage out of the program, to identify waste where it exists in our operations and is not getting us the competitive return.
That all rolls up, is going to create a much more competitive program.
Joe Allman - JPMorgan
Are there any commitments, whether it’s acreage commitments or pipeline commitments, that might preclude you from doing what you want to do?
Doug Lawler
We’re in the process of evaluating all that. I think there are going to be some that we have to evaluate and scrutinize really closely, but my observation at this point in time is that we’re going to be able to accomplish that, and we’re going to be targeting working as quickly as we can.
And so I’ll reiterate the issue around providing 2014 guidance, that this is the strategic tenets that we’re trying to accomplish, and we’re very focused on trying to get there as quickly as possible.
Joe Allman - JPMorgan
And then is debt paydown also still a big goal for Chesapeake?
Nick Dell’Osso
Absolutely. It’s still a major goal of ours.
We expect to have a simplified and improved balance sheet in the coming years. In the coming months, as well as years.
Joe Allman - JPMorgan
So does that mean that your intention is to pay down at least a few billion dollars of long term debt?
Nick Dell’Osso
I’m going to stay away from an exact number, because it’s going to depend on the opportunity set that’s in front of us when we are at a point of excess liquidity and we make that decision. But we are continuing to target investment grade metrics.
It’s a goal of the company to be investment grade. We have been making good progress on improving our liquidity, and the next step will be to apply that excess liquidity towards our balance sheet when we’re ready to do so, which we will do at some point in the relatively near future, especially as we consider a noncore asset sale program.
We have significant liquidity today. Remember, it’s in the release that we ended the quarter with an undrawn revolver.
We’ve closed a couple of very large asset sales since then, so we have quite a bit of liquidity today.
Joe Allman - JPMorgan
And then lastly, Doug, I know it’s relatively new for you, but when you look at the portfolio, what would you identify as the top three plays that you likely are not willing to sell or touch in terms of any monetization?
Doug Lawler
I hesitate to say that. I would ask you just to focus on the strategic things we’re driving, and capturing the greatest value and being the most [competitive] to the company.
So there may be some noncore positions in the best assets that we’ve got that we’d look to monetize to accelerate the value. And we may consider asset sales across the whole portfolio.
But the driver here is where we can capture the greatest value, and where we can be more competitive, and so I just would prefer to stay away from saying any one particular asset is untouchable or that we wouldn’t focus on. But I will also comment that I’m really excited about our strong portfolio.
I think the Eagle Ford assets, the Marcellus assets, Haynesville although it’s hurt a little bit by gas prices. The position there is outstanding.
The Utica is outstanding, and we have several other emerging areas that are in the evaluation process that we’ll be looking at. I think that it’s important to note that as we allocate our capital in creating this competitive process for funding in 2014 and beyond, that there will be opportunities for other areas that we’ll invest in.
But those other areas will be invested in based on substitution, not addition. So the competitiveness within the portfolio to make sure that we’re doing the best things for our shareholders is our focus, and if we’ve got new opportunities in a new place that we can run with, that will add to the value of the company, we’ll be looking to do that, but the overarching statement there is that the financial discipline is very, very critical to the company going forward.
Operator
Our next question comes from Amir Avif with Stifel.
Amir Avif - Stifel Nicolaus
Just a couple of quick questions. First, once you finish your review of capital allocation, can you give us a sense of when you’d be ready to provide ’14 guidance or color?
Doug Lawler
I hesitate to give that at this point. Obviously our capex program will be reviewed with our board, and so I’m just not going to provide any information about that.
But we’re working it very hard and very diligently, and you guys will be hearing more from us soon.
Amir Avif - Stifel Nicolaus
But in terms of timing, though, when you’d be willing to provide that.
Doug Lawler
What’s critical there is making sure that we do the comprehensive analysis and determine the best opportunity set for us to invest in. So I don’t want to put a time limit on it, simply because we want to make sure we evaluate it properly.
Amir Avif - Stifel Nicolaus
And you had great sequential growth this quarter. But as you cut your rig count here in the second half, and based on your guidance, there’s no sequential growth showing up in the second half on an absolute production basis.
Is that basically a conservative reflection in your guidance? Or should I look at the second half run rate capex as a good reflection of what you need to maintain your production?
Steve Dixon
It’s a function of the sales that we just had. You know, we sold quite a bit of production in the Miss Lime JV, Haynesville, and north Eagle Ford.
So it’s a reduction of that that we’re seeing now in the second half that wasn’t in the first half. But there is a reduction in capex spending, and a reduction in wells turned online also, 20% less in the second half than in the first half.
So all those factors, and hopefully conservatism also.
Operator
Our next question comes from Jason Gilbert with Goldman Sachs.
Jason Gilbert - Goldman Sachs
I wanted to put a finer point on one of the strategic questions earlier, which is so far it appears you’ve been pruning and optimizing within your legacy plays with your divestiture program, for the most part. I was just wondering how you thought about complete exits from plays.
And I guess where I’m coming from is that if you think there’s a real strategic benefit to being in eight major plays, and there might be fewer distractions if the company was able to focus on a smaller number, and furthermore with a larger sale you might be able to accelerate the repair of the balance sheet. So I just wanted to hear your thoughts on that.
Doug Lawler
Your question is very good, and I guess the way I’d answer it is yes. We’ve exited plays before, including Fayetteville, Permian, and we potentially, for those that are noncore, will have complete exits.
So I think it’s all a part of the portfolio evaluation that’s underway.
Jason Gilbert - Goldman Sachs
And then the last question would be, you mentioned you want to reach IG metrics, and I think I know what your answer’s going to be here, but I was just wondering if you could put any sort of timeframe around that.
Nick Dell’Osso
No, we really can’t put any timeframe around that. We are focused on it.
We have a number of things that we’re looking at that will help us to get there, but it’s going to be a combination of improved operational performance, taking the proceeds from noncore asset sales, applying them to our balance sheet, etc. So it’s a process that will take some period of time, and we don’t have an exact timeframe for it.
Operator
Our next question comes from Brad Karp with Wells Fargo.
Brad Karp - Wells Fargo
Regarding IG metrics, Doug, you mentioned it in your prepared remarks. Just curious, is that a standalone strategic goal?
Or is that more or less a byproduct of other strategic goals such as efficient capital allocation and balancing capex and [unintelligible] and so on?
Doug Lawler
It’s a part of the financial discipline. So I think in terms of those things that I mentioned, they’re all A priorities.
But it falls under that financial discipline umbrella.
Brad Karp - Wells Fargo
And then are there any specific metrics associated with that? Is it just kind of debt per BOE and so on?
Any specific numbers surrounding those?
Nick Dell’Osso
There’s obviously a number of metrics that we look at, the agencies look at, and you all look at. We could go through the list, but different companies rank stronger in some metrics than others when they get to investment grade.
And we’re looking at the entire suite. We know what our strengths are, and we know what our weaknesses are, and we’re focused on having our entire set of metrics look investment grade over time.
Brad Karp - Wells Fargo
And then final one just on asset sales. Just based on where you’re at year to date, it seems like you’re right around that lower end of the $4-7 billion guidance.
Do you see yourselves falling into the lower half of that for the full year? Or basically what would it take you to get to that upper half that you’ve kind of touched on throughout the call?
Doug Lawler
I think the key there is that we’re very pleased with what we’ve accomplished to date, and as we look for other assets that don’t meet the criteria for the portfolio going forward, we may have more asset sales. And the key there is how we continue to build the portfolio to be the most competitive as possible.
So in some cases it may be accelerate value and in some cases it may be hanging on to the assets for longer term. But at this point in time, I think the range that we’ve provided is good, and we’ll continue to look for opportunities to improve our balance sheet, improve our liquidity, and a component of that is definitely asset sales.
I think out of respect for the other calls today, I think we’ll go ahead and bring it to closure. A couple of key things I just would like to note.
One is that I’m extremely excited. I’m very pleased to be a part of Chesapeake, and as I review the portfolio and the quality of the assets and the people, I see a tremendous amount of potential.
And I think the key there is that we rebuild that financial discipline into the program, that we focus on the profitable and efficient growth from our captured resources. And I also note that we have a lot of work to do.
But the focus is there, the strategic discipline is there, and we’re excited about the future. So if you have any additional questions, please follow up with Jeff and Gary.
They’ll be available to answer those questions and we appreciate your time today. Thank you.