Nov 5, 2014
Executives
Brad Sylvester - IR Doug Lawler - CEO Nick Dell'Osso - CFO Chris Doyle - SVP, Operations, Northern Division Jason Pigott - SVP, Operations, Southern Division
Analysts
Mike Kelly - Global Hunter Securities Brian Singer - Goldman Sachs Neal Dingmann - SunTrust Robinson Humphrey Doug Leggate - Bank of America Merrill Lynch David Tameron - Wells Fargo Securities Joseph Allman - JPMorgan Matt Portillo - Tudor, Pickering, Holt Dave Kistler - Simmons & Company Charles Meade - Johnson Rice
Operator
Good day everyone and welcome to the Chesapeake Energy Corporation Q3 2014 Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Mr. Brad Sylvester.
Please go ahead sir.
Brad Sylvester
Good morning everyone and thank you for joining us today. Hopefully you’ve had a chance to review our press release and the updated investor presentation at that we posted to our Web site this morning.
During this morning's call, we will be making forward-looking statements, which consist of statements that cannot to be confirmed by reference to existing information, including statements regarding beliefs, goals, expectations, forecasts and projections of future performance, and the assumptions underlying such statements. So, please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our earnings release today and in the Company’s other SEC filings.
Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. Now I would like to introduce the members of our management who are on the call with me today, Doug Lawler, our Chief Executive Officer; Nick Dell'Osso, our Chief Financial Officer; Chris Doyle, our Senior Vice President of Operations for the Northern Division; and Jason Pigott, our Senior Vice President of Operations for our Southern Division.
With I’d like to now turn to teleconference over to Doug and Nick for some prepared comments. And then we’ll open up the floor for a Q&A session.
Doug Lawler
Thank you, Brad and good morning. As Brad noted, I hope everyone has had a chance to review our press release that we issued earlier this morning.
I’d also like to extend a special welcome to Brad he’s an outstanding addition to our leadership team. We’re happy to have Brad Sylvester with us.
Chesapeake had a truly outstanding third quarter. We’re gaining significant momentum in all of our operating areas while continuing to create more value at less capital investment.
I’m very pleased with the progress that Chesapeake is making to become a more profitable and less complex company. In mid 2013 the Board, management and employees of Chesapeake set out to transform a Company and that’s exactly what we’ve done.
Quarter-over-quarter for the last four quarters we have met or exceed our production targets, met or reduced our capital expenditure budget and consecutively reduced our cash cost. The financial and operational improvements we’ve achieved in the past year have positioned Chesapeake to be highly competitive even in a reduced commodity price environment.
We have significant flexibility today in our capital program and activity levels, the strength and quality of our diverse, unconventional portfolio combined with our strategies of financial discipline and profitable and efficient growth provide a compelling investment opportunity. As you’ll note in the appendix of our slide deck, differential value is being created in all of our assets through capital efficiency and cost leadership.
We’ve generated double-digit quarter-over-quarter production growth in the Eagle Ford and Haynesville, Powder River Basin and Utica assets. Production in the third quarter averaged 726,000 barrels of oil equivalent per day, which represents an 11% increase compared to last year and 5% growth sequentially after adjusting for the asset sales we’ve accomplished.
This is noteworthy because we’ve been able to increase production with a capital investment program that is substantially lower year-to-date than the same period in 2013. We expect our well inventory at the end of 2014 to be relatively flat to 2013 as a result of our efficiencies and shift to multi-well pads.
We are increasing the low-end of our 2014 annual production guidance by 10,000 barrels of oil equivalent per day and we anticipate that our year-end production rate will be between 730,000 and 750,000 barrels of oil equivalent per day on an adjusted basis. Please note that the timing of previously announced investments and planned expansion projects could impact the exit rate but the strength and efficiency of our portfolio was exciting.
Finally I’d like to make a few comments about our recent announcement to sell our Southern Marcellus assets. This transaction is transformational event for our company, we expect to close in December, subject to certain closing conditions including the receipt of third-party consensus in the waver participation right.
Upon closing the optionality that this strategic transaction provides Chesapeake is extremely valuable and we anticipate many opportunities to continue building shareholder value. We plan to provide our 2015 capital and production outlook in early 2015.
As noted the quality of assets, our talented employees, the operating efficiencies achieved in our capital program and our financial strength provides significant flexibility and optionality for our program in this volatile market. We’re confident in our ability to be competitive regardless of the pricing environment.
In closing, I couldn’t be more happy with our results for the third quarter, but importantly I also wanted you to know that we’re not done. There is a deep and strong commitment here at Chesapeake to become a top cortile E&P company and we’re progressing steadily towards that goal.
We believe that our core values, our focus on Chesapeake being an industry leader in every aspect of the E&P business and our commitment to creating shareholder value is more evident each and every day. Our talented employees are attacking every part of our business to be more competitive and more profitable.
While 2013 was our year of transformation, 2014 has been our foundational year, driving capital, operating and financial efficiencies while improving our competitiveness. 2015 will be a year of value and leadership as I’ve noted in the past Chesapeake is just getting started.
So you can expect further improvements in our capital efficiency in 2015 and a continued focus on driving value and growth for our shareholders. I conclude with comments.
So I’m going to pass it now to Nick Dell'Osso, our Chief Financial Officer for some transitional and financial information.
Nick Dell'Osso
Thank you, Doug and good morning everyone. As Doug mentioned our third quarter results were outstanding and the progress we’ve made over the past 12 months in transforming our company has been significant.
Our strategy to add greater shareholder value is working as evidenced by the decreased capital cost and increased performance in each of our operating divisions. The simplification and improvement of our balance sheet and the resulting lower cost of capital.
We’ve seen extremely positive momentum across the board. As we look forward to what lies ahead in 2015 we couldn’t be more excited about the future and believe that Chesapeake is in a unique position should differential results in the quarters and years ahead.
Specifically, we’re very proud of our highly competitive position operationally and financially in the industry during this period of commodity price volatility. We reported adjusted earnings of $0.38 per diluted share and adjusted EBITDA of 1.24 billion in the third quarter of 2014.
As Doug noted, we had strong sequential production growth during the quarter of 5% while growing 11% year-over-year adjusted for assets sales. As a reminder, we cut rigs throughout most of 2013 in an effort to balance our capital expenditures with our operating cash flows and to improve our capital efficiency.
We are continuing to see per well capital cost improvements in every play and have ramped rigs higher throughout 2014. We’re now seeing the production impact of those rig ramps materialize and we’re very pleased with the results.
We continue to exceed our production growth targets while coming in below our capital budget. Some more production is being added per dollar of capital invested than ever before.
We also saw improvements in our cash cost per Boe both year-over-year and sequentially. So our volume growth along with margins that are expanding are helping to offset the effect of lower commodity pricing.
To address our outlook on commodity prices for the rest of the year we increased our expected natural gas differentials by $0.05 due to the continuation of low regional prices we saw in October in the Northeast. We want to remind everyone that differentials consist of two components, basis, which is typically a field price discount to Henry Hub pricing and non-basis items such as gathering, transportation, processing and marketing costs.
The increase in our basis outlook for fourth quarter is primarily related to the former in the Northeast part of the country reflecting the low field pricing in Pennsylvania. The prices in our gas producers received for the Marcellus production have been particularly low over the past six months due to the abundant supply of gas volumes and lack of regional demand in the summer and fall.
However, we do expect those local and regional prices to improve over the next four to five months with the onset of increased demand due to winter weather. Looking forward to 2015, we expect basis particularly in the Northeast to remain challenged as we come out of the winter months and we will likely to reduce our activity in our Northern Marcellus play accordingly.
From a hedging perspective, we have relatively significant position of Q1 2015 gas hedges at attractive prices averaging $4.51 per Mcf. We also have had substantial amount of oil at just under $95 a barrel and we’ll continue to look to add both positions should prices justify doing so.
Switching to our capital investment program, our competitive capital investments for the third quarter were down 8% to 1.351 billion as compared to 1.461 billion in the same quarter a year ago. We continue to drive greater capital efficiency in our E&P business by delivering greater production at lower levels of capital investment and look for this to continue in the future.
Moving to the balance sheet, we have made significant progress this year in simplifying our balance sheet and maintaining strong liquidity. This reduction in complexity continued in the third quarter with the redemption of our CHK Utica preferred shares.
This transaction took one of our highest cost financing instruments out of our capital structure with over $6 billion in debt and other reductions to long-term commitments that we have closed or are in process of negotiating during the past two years, we believe our balance sheet and liquidity position will service well in this current period of reduced commodity prices. Further, I’d like to highlight that we will spend approximately $250 million less on interest expense and preferred dividends on an annualized basis pro forma for this balance sheet reductions.
Our focus on efficiency can be seen in all parts of the Company including here. Chesapeake has never been stronger financially.
That concludes my comments, so I will now turn the conference over to the operator for questions.
Question
and
Operator
Thank you. (Operator Instructions) And we’ll take our first question today from Mike Kelly of Global Hunter Securities.
Mike Kelly
On the capital efficiency front you guys had a slide at your Analyst Day I think you really hit home where you detailed the number of wells, or the percentage of wells that were PV-10 positive going back a couple of years and it looked quite frankly pretty ferocious versus where you are now and I was wondering if you have any sort of other marker, maybe it’s on an internal rate of return front if you look at each one of your plays to really assess where you are today with drilling cost coming down cycle times decreasing, productivity increasing and IRRs to compare where you are at today versus where you have been in the past kind of a inverse you did at the Analyst Day?
Global Hunter Securities
On the capital efficiency front you guys had a slide at your Analyst Day I think you really hit home where you detailed the number of wells, or the percentage of wells that were PV-10 positive going back a couple of years and it looked quite frankly pretty ferocious versus where you are now and I was wondering if you have any sort of other marker, maybe it’s on an internal rate of return front if you look at each one of your plays to really assess where you are today with drilling cost coming down cycle times decreasing, productivity increasing and IRRs to compare where you are at today versus where you have been in the past kind of a inverse you did at the Analyst Day?
Doug Lawler
Sure Mike. Thanks for the question.
Yes, we absolutely have that type of post appraisal and are incorporating the information based on the results that we obtained from our investment activities into our future capital program. We in addition to what you described as evaluating the PV-10 of the investment program we also have a significant amount of scrutiny on all the cycle time improvements that we have been able to accomplish in each of the assets looking at the improving IRRs, looking at the cost, just all of the metrics in a look back fashion and incorporating that as we go forward, that’s particularly what gives us confidence and strengthen going forward in our ability to be competitive and add differential value to our shareholders is the results that we’ve accomplished there.
So we will in very asset area we provide a little bit of that information in our appendix but we will be continuing to update that as we have our year-end numbers but demonstrating how that capital efficiency continues to improve. I’ll say I just have been super impressed with the focus of the leadership and employees inside of Chesapeake.
I’m not kidding you it’s like weapons grade attacking cost and driving value that is unlike anything I’ve ever seen before and it’s just really exciting and you can just expect to see that continued trend and I know there will questions today about 2015 our capital program, but the best way to look at 2015 is to look at how the company has performed in 2014.
Nick Dell'Osso
And Mike I’ll just note that as you think about the cost reductions we’ve seen play-over-play across Northern and Southern division, think about how those cost reductions have been reinvested in improved completion designs and ultimately showing higher well performance in nearly every play along with those cost reductions. So it’s really driving to what you’re looking for their which is higher returns not just reduced cost in every play.
Chris Doyle
Mike, this is Chris Doyle. Just to add a little bit of color Jason and I sit down with the teams every quarter as you know in post appraise and I think what has been really gratifying for both of us to see is sequential improvement across the board and in almost every play continually redefining what efficiency means and I’ll just point to the release and team in the Marcellus North that completed following 30 million a day and did it for under $8 million, it’s something that the company hadn’t been able to do to-date, and yet the team just like a lot of teams across the board have continued to not only drive efficiency, not only drive cost down but also re-think completions, re-think how we’re investing those dollars and it is evident across the entire portfolio.
Mike Kelly
A question Doug on the M&A front, today you guys have largely been on the sales side of any transactions here, with the cleaned up balance sheet, liquidity better than it has ever been before at least since I have been covering Chesapeake, your desire to potentially look to do bolt-on deals or potentially jump into a new basin entirely, I’d like to hear your thoughts on that front?
Global Hunter Securities
A question Doug on the M&A front, today you guys have largely been on the sales side of any transactions here, with the cleaned up balance sheet, liquidity better than it has ever been before at least since I have been covering Chesapeake, your desire to potentially look to do bolt-on deals or potentially jump into a new basin entirely, I’d like to hear your thoughts on that front?
Doug Lawler
Certainly well, we look forward to closing this transaction in the fourth quarter or in December as we noted Mike. And we absolutely are evaluating every single opportunity to drive greater shareholder value which includes bolt-on acquisitions or turning the strength in expertise that’s demonstrated in our ability to operate and efficiently deploy capital into new assets.
And we’re looking at that, we will continue to look at that, the key there is that anything we do will be focused at driving the greatest amount of shareholder value and we look forward to sharing more information on that as we firm up and develop those plans.
Operator
And we’ll take our next question from Brian Singer with Goldman Sachs.
Brian Singer
You highlighted the strong rates of return particularly in the Eagle Ford and the Utica that’s driven strong production here. And one of the questions coming out of the analyst meeting is how next year’s inventory from a rate of return perspective and a well productivity perspective and future year inventory compares the types of wells that you’re drilling now.
Can you talk about how you see the opportunity set in next year and in future years versus this year, both in terms of well productivity and in terms of capital versus operating costs?
Goldman Sachs
You highlighted the strong rates of return particularly in the Eagle Ford and the Utica that’s driven strong production here. And one of the questions coming out of the analyst meeting is how next year’s inventory from a rate of return perspective and a well productivity perspective and future year inventory compares the types of wells that you’re drilling now.
Can you talk about how you see the opportunity set in next year and in future years versus this year, both in terms of well productivity and in terms of capital versus operating costs?
Doug Lawler
Certainly I believe that you will continue to see that portfolio set increase as I have noted in the past we are all focused on expanding the core through improved capital efficiencies and through additional EUR adding more value will open up more opportunities for us going forward. I think that when you look at the individual program IRRs and you look at the investment level that we have in the assets at present we’re very pleased with the continued improvement and obviously price will play a large component in the IRR but when you just price normalize everything we’re continuing to see good improvements and that portfolio set is expanding.
Jason Pigott
And it’s Jason. Again all across the board we’ve seen again our rates of returns go up because of the cost reductions.
I think one of the things we’re kind of in progress last quarter or this quarter as with the end of the year is looking at how we optimize the completions and get the EUR side of the equation up, that further drives the value on a per well basis, increases our rate of return. So getting more out of the wells that we’ve already got in inventory, little things like the Haynesville drilling cross unit laterals, we’re continuing to do those next year and we’ll have almost 60% or 70% of our inventory next year will be cross unit laterals.
And we see with those, we spend about $500,000 extra and gained $2 million of NPV for every well in the Haynesville that we can drill across unit lateral. So it’s the little things that tend to make a big difference for us and we’re continuing to just drive our completion efficiency on the capital side down but, reinvest that in a lot of cases to get the EURs up which just has a compounded value to it.
Doug Lawler
And the only thing I would add is, I might point you to the inventory slide we have put in the deck and we obviously had a really strong quarter in production growth and what is really I think exciting is you see that inventory and it’s essentially flat year-over-year. And so that boost in production has been driven by better completions, it’s been driven by more capital efficient investments and not by a draw down in the inventory.
So that gives us a lot of comfort as we look forward to what these assets can deliver and just a shout out to the Utica team, at the Analyst Day we pointed to year-end active rate of 100,000 barrels of equivalent per day net. We just touched 965 we’re continuing to execute about as well as anybody out there and riding capacity all the way up, we’ve got three additional projects the team is working on through compression capacity expansions, one processing capacity expansion is going to get us to the end of the year and couldn’t be more proud of those guys.
Brian Singer
And then as a follow-up, since you mentioned you expected questions on 2015 I may well ask that, how do you think you have very strong balance sheet here particularly after the asset sale to Southwestern. How do you think about activity levels next year versus this year and your willingness to drill through lower prices and use the balance sheet a little bit versus reduced activity from what it would otherwise have been?
Goldman Sachs
And then as a follow-up, since you mentioned you expected questions on 2015 I may well ask that, how do you think you have very strong balance sheet here particularly after the asset sale to Southwestern. How do you think about activity levels next year versus this year and your willingness to drill through lower prices and use the balance sheet a little bit versus reduced activity from what it would otherwise have been?
Doug Lawler
Sure Brian it’s a great question and one that we’re evaluating very closely, the financial discipline that we have driven into the company and the focus on capital and our cash generating capabilities is an issue that we discussed continuously inside of Chesapeake. When you look at 2015 the key that we just would ask you to focus on is that we’re going to invest at the appropriate rate to add the greatest value to our shareholders.
And so as we’ve really tightened up our program in the 2013 and 2015, the focus for us is driving the greatest amount of value and it’s really when you think of slightly over spending cash flow, under spending cash flow, adding to the program, the key strategic tenant in that is that we’re driving for the greatest value and evaluating those options and we’re really confident in our ability to be competitive even in this low price environment.
Operator
And we’ll take our next question from Neal Dingmann with SunTrust.
Neal Dingmann
Say Doug, just one general question first and just two specific, first on just the efficiencies obviously Nick, really detailed and it shows in the press release just how well you are continuing to cut those cost. I’m wondering I guess kind of like Brian’s question in 2015 I know you have budgets out there yet but how do you when you think about spending when you guys are looking at this budget, are you assuming that cost can even go lower with these efficiencies, you certainly have done a heck of a job bringing them down already just your thoughts about that?
SunTrust Robinson Humphrey
Say Doug, just one general question first and just two specific, first on just the efficiencies obviously Nick, really detailed and it shows in the press release just how well you are continuing to cut those cost. I’m wondering I guess kind of like Brian’s question in 2015 I know you have budgets out there yet but how do you when you think about spending when you guys are looking at this budget, are you assuming that cost can even go lower with these efficiencies, you certainly have done a heck of a job bringing them down already just your thoughts about that?
Doug Lawler
Sure Neal. What I really love about the program that the asset reviews that I have sat in, in the past few months the team is just continuing to drive further improvements and it’s very-very exciting to see when we look at 2015 obviously we take our post appraisal information and incorporate those current estimates for individual wells and the capital program and run our miles to determine the optimum allocation of capital to drive the greatest amount of value for us, but what we know inherent in our program is that we’ll continue to see additional improvements and what’s exciting about it is it’s the team, the leadership has taken place and each of the teams it’s a contiguous environment of driving more value and so the way that we look at 2015 we’re using the most current well information and we’ll base our program off of current cost but what’s just really cool about it as we continue to see and I’m very confident that we’ll see further efficiencies as we execute in 2015.
So if your question is, do we estimate additional savings that we’ll come up with the capital program in 2015? The answer is no.
Do I anticipate or expect that we’ll see it, you better believe it.
Neal Dingmann
Two it’s questions for either you or Chris, just wondering first you and Chris’s thoughts on early part of the play after seeing the recent I know the well that you’d mentioned that you were going to have up there and then your thoughts down in that sort of Southeastern part on running the dry gas right now I think you’ve got a couple of rigs running?
SunTrust Robinson Humphrey
Two it’s questions for either you or Chris, just wondering first you and Chris’s thoughts on early part of the play after seeing the recent I know the well that you’d mentioned that you were going to have up there and then your thoughts down in that sort of Southeastern part on running the dry gas right now I think you’ve got a couple of rigs running?
Chris Doyle
Sure Neal, this is Chris. On the oil window we continue to be pleased with our latest results we’re seeing that well I think we mentioned on the last call came in at the highest IP it’s continuing to outperform our expectations it’s still flowing naturally we’re going to install some lift and give it a little help but what our plan is, we’ve got four or five additional wells between now and probably second quarter as we look to expand capacity out there and get some more tests out there.
The window is growing, it’s not shrinking, it’s as we have said it’s not a company changer but it is I think a testament to the value-driven culture that is here at Chesapeake of expanding that core is a perfect example of that. So, we continue to be pleased Neal on that and we have more results to come.
And on the dry gas, we still have of the seven rigs that we’ve got running we still have a pretty large portion of that program that is HBP driven and we like that as we said all along we like the play, we like the dry gas window, we like where our core position is and where we’re expanding out to the oil window. The big issue with the dry gas is just infrastructure honestly.
I’ll point you and everyone else back to the fact that no one has more production data than Chesapeake on all of these windows, we know this play exceptionally well. We’ve had recent tests that had confirmed our thoughts and we like the play, it’s a great asset for us.
Neal Dingmann
And then Chris, just real quick on that, why was it, it was very minor but I noticed the average peak production rate was just slightly lower for this quarter versus last despite I think continuing to add more frac stages just your thoughts there?
SunTrust Robinson Humphrey
And then Chris, just real quick on that, why was it, it was very minor but I noticed the average peak production rate was just slightly lower for this quarter versus last despite I think continuing to add more frac stages just your thoughts there?
Chris Doyle
On the Utica I think what I’d pointed you to Neal is just a steady continuing ramp and just this week getting it at 965 as I mentioned before and the asset is just continuing to execute and the team is doing a fantastic job of riding that capacity really not massive capacity expansion from the beginning of the quarter to the end but we’ll just continue to ride that line so we’re doing a fantastic job.
Operator
And we’ll take our next question from Doug Leggate with Bank of America.
Doug Leggate
I got a couple please, the first one just as we think about obviously the lower oil price environment I just wanted to be clear on your messaging going into 2015, so should we still expect Chesapeake to be living with any cash flow or given that you’ve done great strides in your balance sheet obviously you’ve got a lot more flexibility but I think that capital discipline message has been a hallmark of your 10 year to-date, so could you just give us a like a reiteration of how you see that and if I may how you would like your plays in terms of incremental capital in the event that you did have to curtail the dollar spend there?
Bank of America Merrill Lynch
I got a couple please, the first one just as we think about obviously the lower oil price environment I just wanted to be clear on your messaging going into 2015, so should we still expect Chesapeake to be living with any cash flow or given that you’ve done great strides in your balance sheet obviously you’ve got a lot more flexibility but I think that capital discipline message has been a hallmark of your 10 year to-date, so could you just give us a like a reiteration of how you see that and if I may how you would like your plays in terms of incremental capital in the event that you did have to curtail the dollar spend there?
Doug Lawler
Sure. Thanks for the question Doug.
So as we look at 2015 and we look at capital allocation what our budget could potential be and how that sits with respect to cash flow. The most important thing to me is that is how we create the greatest amount of value long-term.
And so while we’ve had a very strong focus on approximating our capital program with our cash flow, we will continue to look at the very closely on how do we drive the greatest value. We have significant flexibility in our program.
We no longer shackle the, all kinds of activity commitments and things that don’t get us the ability to move rigs around to drive the greatest amount of value. And so I think that yes we want to continue to be very-very focused on our cash generating capability in this price environment.
But we also stronger than that as we’re focused on value and focused on, how do we continue to develop our assets to create the most efficient portfolio and value we can for our shareholders. So without saying where our capital budget will be I think that it’s, all of that is under consideration and it will be evaluated based on the flexibility we have driven into our program and how we optimize the value for our shareholders.
So when you think about where the competition for competition for capital call it inside the company is very-very strong and as I had noted before in the past perhaps at Analyst Day and other investor discussions the scarcity of capital drives tremendous value when the teams see rigs moving away the fight to drive greater value through technology through innovation, through synergies, through creativity, just is an awesome thing to watch. And so even today when we look at our programs the IRR of our gas investments that Jason noted are continuing to improve.
The quality of the Marcellus gas investments is still very strong and competitive for capital. And obviously the Eagle Ford, the Powder River Basin and the Mid-Con investments as well as the Utica we have a robust portfolio and so rather than talk about what we would take away or what we cut back on I’d rather point to these teams are fighting viciously for funding and for driving more value for our shareholders and it’s just a great thing to watch.
Doug Leggate
I appreciate your answer Doug there, if I may, I am just going to try two very quick follow-ups, one is housekeeping really, when the Southern Marcellus Utica is gone one of the things drives on your guidance I guess has been the wide gas basis differentials none that maybe largely a function of the Northern Marcellus, but it is also transportation issues, so I’m just curious does that guidance changes dramatically when the Marcellus I am talking about the basis differential does that change dramatically when the Marcellus is gone? And my final one if I may is, when you say you’re just getting started after the Marcellus sale I’m just wondering if you could give us some thoughts as to what additional if any material asset disposals you might see order magnitude as opposed to specifics on the plays, so I guess you wouldn’t want to give us those?
And I will leave it there. Thank you.
Bank of America Merrill Lynch
I appreciate your answer Doug there, if I may, I am just going to try two very quick follow-ups, one is housekeeping really, when the Southern Marcellus Utica is gone one of the things drives on your guidance I guess has been the wide gas basis differentials none that maybe largely a function of the Northern Marcellus, but it is also transportation issues, so I’m just curious does that guidance changes dramatically when the Marcellus I am talking about the basis differential does that change dramatically when the Marcellus is gone? And my final one if I may is, when you say you’re just getting started after the Marcellus sale I’m just wondering if you could give us some thoughts as to what additional if any material asset disposals you might see order magnitude as opposed to specifics on the plays, so I guess you wouldn’t want to give us those?
And I will leave it there. Thank you.
Doug Lawler
Sure Doug. What I mean when I say we’re just getting started is similar to when we describe that we saw a value gap in our valuation of that asset back at Analyst Day I think you specifically asked me exactly what does that mean and the comment I had, is we’re going to absolutely drive the greatest shareholder value that we can possibly capture and that’s what we’ve done.
And so rather than be specific about what asset sales we might consider what acquisitions we might consider, what capital program I just would like to draw your attention that they way we’re performing and the way we’re going to continue to perform is that our shareholders can take great confidence that we’re going to drive great value in this company and we’re 100% aligned in the organization, the culture is aligned to it and I just couldn’t be more excited about it and so you can continue to expect great things from Chesapeake and Nick I think will provide you a little more color on the differentials as we dispose that asset.
Nick Dell'Osso
So Doug when you think about the amount of production in the Southern Marcellus that represented only approximately 7% of our total production in the Company. So it did have relatively high gas differential compared to some of other plays and so it has a minor positive impact but overall remember it’s only about 7% despite the size of the proceeds being very large it’s a relatively small amount of our production.
So, on a pro forma basis you should be able to estimate what the impact is.
Operator
And we’ll take our next question from David Tameron with Wells Fargo.
David Tameron
Most of the questions have been asked. But can I circle to the Powder?
And I know you talked about it at Analyst Day and since then it seems like it’s had an increasingly growing position in the presentations and kind of some of your verbiage. So can you just talk about, I know I think in the presentation you said we have three rigs running right now.
Can you talk about what activity levels look like out there next year, what you guys are seeing? Just kind of give us an overall update on the Powder?
Wells Fargo Securities
Most of the questions have been asked. But can I circle to the Powder?
And I know you talked about it at Analyst Day and since then it seems like it’s had an increasingly growing position in the presentations and kind of some of your verbiage. So can you just talk about, I know I think in the presentation you said we have three rigs running right now.
Can you talk about what activity levels look like out there next year, what you guys are seeing? Just kind of give us an overall update on the Powder?
Doug Lawler
Sure Dave we love the Powder River, we love the acquisition up there and are excited about that program and we’re presently evaluating with the available capacity that we have coming online later this year. What exactly our program is going to look like?
We consider it to be another strong growth engine for the company and the teams are doing a great job in driving the capital down up there and being more efficient. I think Chris may want to add a little more color to it.
Chris Doyle
Sure. The acquisition, the trade that we made with RKI was all about unleashing additional assets into the hands of this operating team that has driven so much value into that area for us.
We’re currently at four rigs, that fourth rig we brought in to drill the first Shannon it is continuing to test the other multiple stack pays that we had out there. When we look at where we’re today to the end of the year we’ve got Bucking Horse coming on scheduled later this month, we’ll build into that capacity when we think of our program next year it’s probably going to be split about half, Niobrara, half Upper Cretaceous as we continue to see phenomenal results in those multiple stack pays.
When we think about the Niobrara we got a lot of really interesting very powerful value driven tests coming up. We have a couple pads where we’re testing four different benches within the 200-250 foot Nio stretch.
So you think about stacking laterals and what that can do to this resource play, it’s a huge value lever for us and those will be coming online at the end of this year and first part of next. So we got stack Nio coming, we’ve got the next five Sussex wells including some long laterals coming in February, we’re drilling the second Parkman today, we’re drilling a Teapot just lots of lots of really cool stuff, we’re extending that Nio out and it’s just a team that had taken their destiny in their own hands and continued to deliver a tonne of value for our shareholders.
So that’s just great job by that team.
David Tameron
And let me give one more shot at that. When you start thinking about the Sussex versus the Upper Cretaceous or I am sorry the Niobrara, you obviously want to characterize it Sussex versus Upper Cretaceous.
Can you talk about is one looking better than the other? Is one more perspective?
You care to give us anymore color just filling that one more level?
Wells Fargo Securities
And let me give one more shot at that. When you start thinking about the Sussex versus the Upper Cretaceous or I am sorry the Niobrara, you obviously want to characterize it Sussex versus Upper Cretaceous.
Can you talk about is one looking better than the other? Is one more perspective?
You care to give us anymore color just filling that one more level?
Doug Lawler
The Niobrara is a larger resource and so we like that it’s delivering really strong returns, at the Sussex we’ve seen the first three tests that have outpaced our expectations, we see a lot of running room there, it’s not a blanket like the Nio the resource is significant but probably not as large as the Niobrara but also offers higher returns and a little bit higher oil cut. And so the mix between the Niobrara, the Sussex, the Parkman, the Shannon, the Teapot in addition to other plays I think when you roll it all up you have a tremendous opportunities in the liquids growth engine for this company.
So I would think just to characterize it for you Niobrara is extensive huge resource, good returns, Sussex and other Upper Cretaceous probably a little bit better returns but not as huge of a resource, but very significant.
Operator
And we’ll take our next question from Joseph Allman with JPMorgan.
Joseph Allman
Doug in the second quarter earnings conference call you said that you weren’t quite happy with the portfolio and the product mix and it sounds from earlier comments that you’re still not fully satisfied. So do you still see a need to reshape the portfolio and sell some assets, buy some additional assets?
And what about the portfolio is not ideal and what’s missing?
JPMorgan
Doug in the second quarter earnings conference call you said that you weren’t quite happy with the portfolio and the product mix and it sounds from earlier comments that you’re still not fully satisfied. So do you still see a need to reshape the portfolio and sell some assets, buy some additional assets?
And what about the portfolio is not ideal and what’s missing?
Doug Lawler
It’s a great question Joe, it’s something that we’re internally discussing all the time and it’s all centered on really with the size of that company an organization producing right at 730,000 barrels of equivalent per day. And you look at our current weighting we’re right in that 70-30 split gas and oil.
While we love the quality of the portfolio that we have, we also want to be as competitive as possible in our cash generating capability and the efficiency of our investments. And so we’re going to continue to look at opportunities of the existing assets and potential new assets to further strengthen that portfolio to be more competitive.
The key is, is like Jason noted and Chris has highlighted that the focus on the portfolio we have and where we’re investing today is very strong and we expect to see continued improvements and better returns in each of those plays. But we do know that there are a few assets that we have that still are not attracting capital and we may look at potential other asset sales.
But the key is if all points back Joe to how we drive the greater value and how we’d be more competitive. And so the flexibility we have today operating commitments financial obligations all those things that drove decisions that weren’t optimum for shareholders in the past are gone and so we can make decisions with proceeds from asset sales on what we want to fund whether it would be acquisitions, whether it would be additional drilling activity, all those things give us a lot of flexibility in driving towards the greater value story.
Joseph Allman
And then a follow-up and so in terms of your move to just improve efficiency, lower cost, improve rates of return. So what metrics should we look at to see those operational improvements so like for example like when I look at say LOE on a unit basis I see that it’s come down some but with all the moves in the portfolio it’s hard to see how much of an improvement in LOE is portfolio moves and how much is just really internal improvement and efficiencies on a same-store sales basis?
As I look at say DD&A, DD&A is relatively flat over the past several quarters so if we’re seeing improved capital efficiency, like why are we seeing an improvement in DD&A on income statement. So if you could just point us to the metrics that we can really look at to see, that really represent what’s going on internally?
JPMorgan
And then a follow-up and so in terms of your move to just improve efficiency, lower cost, improve rates of return. So what metrics should we look at to see those operational improvements so like for example like when I look at say LOE on a unit basis I see that it’s come down some but with all the moves in the portfolio it’s hard to see how much of an improvement in LOE is portfolio moves and how much is just really internal improvement and efficiencies on a same-store sales basis?
As I look at say DD&A, DD&A is relatively flat over the past several quarters so if we’re seeing improved capital efficiency, like why are we seeing an improvement in DD&A on income statement. So if you could just point us to the metrics that we can really look at to see, that really represent what’s going on internally?
Doug Lawler
Yes, Joe I really appreciate your comments. We’ve had so much noise in the portfolio in so many transactions that it really does make it difficult on just a normalized type of basis to see all those improvements I think that, what you will continue to see though is the quarterly improvements and you’ll see in 2015 as a lot of these transactions get closed, assets get moved off of our books a more steady state by which you can compare our continued improving performance.
When you look at each whether it would be a cash cost metric or capital efficiency or just the standard financial metric, you look at all of them anyway, you know what they are, I wouldn’t say it would point you to any particular one, just keep watching them and you’ll see that the clarity in it clean up with time as we get at the noise of all this transactional stuff taken care of and we’ll continue to do our best to in our presentations and discussions and certainly any one off call and questions you might have to try to answer those questions better.
Operator
And we’ll take our next question from Matt Portillo with Tudor, Pickering, Holt.
Matt Portillo
Just a one quick question, heading into Q4 and early 2015, I was wondering if you could provide us an update on your thoughts around catching up on the completion front, as well as any kind of remaining carry outstanding and just in context around how we should think about the MVC commitments from a payment perspective?
Tudor, Pickering, Holt
Just a one quick question, heading into Q4 and early 2015, I was wondering if you could provide us an update on your thoughts around catching up on the completion front, as well as any kind of remaining carry outstanding and just in context around how we should think about the MVC commitments from a payment perspective?
Doug Lawler
So several questions in there, when we look going forward with the carry we anticipate that basically all the carries are going to be exhausted this year we may have a little bit of residual carry roll into 2015. And as far as how we incorporate that when you look at the inventory what is important to know we have put that slide in the presentation to show that basically the 2014 year-end inventory is going to be the same as what we were at year-end 2013.
And the reason to note that is that what the efficiencies, our production increases are not coming from inventory reduction. Inventory is relatively flat because of the continued efficiencies that we’re recognizing in the multi-well pad drilling and we’ll eventually reach steady state of inventory in each of the assets that’s a function of efficient operations and efficient capital development.
So, we’re getting close to that but I think the key to how we mobilize that inventory and as we look forward in 2015 is again focused on, how do we drive the greatest value?
Nick Dell'Osso
And then I’ll just note on the question you had about the MVC, Matt that will be paid out in the fourth quarter as projected really no changes to our expectations there.
Matt Portillo
And then I guess just a second follow-up question for Doug or the team, I was wondering if you could provide us maybe a little bit of context as you have said there has been a lot of moving parts in terms of assets improving in the portfolio, as well as well cost coming down and other efficiencies you’ve driven through the drill there. I was wondering if you could provide us potentially some color today on how you think about ranking your top three or four assets and allocating capital to those as we head into next year?
Tudor, Pickering, Holt
And then I guess just a second follow-up question for Doug or the team, I was wondering if you could provide us maybe a little bit of context as you have said there has been a lot of moving parts in terms of assets improving in the portfolio, as well as well cost coming down and other efficiencies you’ve driven through the drill there. I was wondering if you could provide us potentially some color today on how you think about ranking your top three or four assets and allocating capital to those as we head into next year?
Doug Lawler
Sure, so as I have kind of noted earlier there Matt, I’m a little hesitate rank them because as the competitive capital allocation process inside of this company is so fierce it’s just an awesome thing to watch that the way the teams are driving for improved efficiencies, we’re seeing continued improvement across the board if you look at it on IRR basis the quality of some of the gas investments are just outstanding. You look at it from a total portfolio perspective the continued development and quality of the investments we’re seeing in the Eagle Ford and in the Power River and Utica and as well as emerging activity in the Mid-Con we are seeing really good things everywhere I really hesitate to say one is any better than another because what the beauty of Chesapeake in our assets is a really strong portfolio of investment opportunities.
Operator
And we’ll take our next question from Dave Kistler with Simmons & Company.
Dave Kistler
Real quickly, you talked about rig flexibility as far as moving it around the portfolio, can you talk a little bit about rig flexibility as far as ramping up or down relative to commodity prices contractual commitments and maybe talk towards completion contractual commitments as well?
Simmons & Company
Real quickly, you talked about rig flexibility as far as moving it around the portfolio, can you talk a little bit about rig flexibility as far as ramping up or down relative to commodity prices contractual commitments and maybe talk towards completion contractual commitments as well?
Doug Lawler
Sure so we specifically have designed our program and our number of contracts and longer term commitments around just for this point in time Dave that when we need to make adjustments, we can make those adjustments whether it’s standardizing the fleet to be able to move to different assets or whether it’s a situation if we want to ramp-up or ramp-down we’ve got that flexibility and as I noted previously we are no longer shackled to activity commitments or minimum well commitments or things like that or rigs or anything that’s going to encumber or inhibit our performance.
Dave Kistler
And then just thinking about the efficiency gains that you outlined and obviously keeping kind of completion backlog the same, can we read into that that with the current rig count you could be looking at the same number of wells next year if not more, just trying to get some handle on what activity would look like on a year-over-basis on a well productivity standpoint?
Simmons & Company
And then just thinking about the efficiency gains that you outlined and obviously keeping kind of completion backlog the same, can we read into that that with the current rig count you could be looking at the same number of wells next year if not more, just trying to get some handle on what activity would look like on a year-over-basis on a well productivity standpoint?
Chris Doyle
Dave it’s Chris Doyle I think you could exactly see that if given the same rig count we would deliver more wells and if you dissect into that inventory graph what it’s telling you is multiple things; one, the wells that have come online in areas where we have capacity constraints, the wells have outperformed what we initially thought and so we didn’t have to bring as many wells on and so we’ve kept the backlog. It also says that the drilling teams across the entire company are delivering more wells into that backlog than originally anticipated.
And so I love the story of the Marcellus North this is the team that it drilled 800 wells going in this year and from the beginning of the year to where we are now they have cut 25% of their cycle times. This is a revolution of drilling efficiency that we have seen and it has caused is something we’re not terribly proud of which is our inventories there it’s a fantastic problem to have but yes, absolutely given the same rig count this team will deliver more wells next year than they did this year.
Dave Kistler
And then just thinking about that when you made the comments earlier, Doug made the comments earlier about the Marcellus and flexing activity to match seasonal gas prices, should we assume we’ll see similar activity in the Utica?
Simmons & Company
And then just thinking about that when you made the comments earlier, Doug made the comments earlier about the Marcellus and flexing activity to match seasonal gas prices, should we assume we’ll see similar activity in the Utica?
Doug Lawler
Well, in the Utica it is a little bit different where we are maxing out to capacity we have additional capacity we could tap into in Marcellus North it gives us the ability to flex up, flex down as needed. Utica is a little bit different I wouldn’t expect us to have that same sort of game plan.
But honestly we have some flexibility to do that but probably to a lesser extent in the Utica.
Dave Kistler
Okay. Really appreciate the added color guys, great work.
Simmons & Company
Okay. Really appreciate the added color guys, great work.
Jason Pigott
This is Jason, and a add on a little bit to what Chris said as far as the South you know what I look back at 2012 when we had 31 rigs running in Eagle Ford, we’re drilling the same number of wells today with 21 rigs as we did with 31 back then so just the efficiencies are huge we are pushing the boundaries on cost, so I can see another 10% coming on Marcellus every asset for next year and you just think what that does to our value as a company, it’s huge in areas which you’ve got thousands of wells to go drill and as you can cut another $5,000 off in Eagle Ford it’s significant to us and we can keep our rigs running and reinvest that capital. As far as inventory build for us again we’re running more rigs than we planned earlier this year because we’ve saved money and been able to keep the rig count high but we’re adding two frac crews in the Eagle Ford these last two months so we should pull down our Eagle Ford inventory a little bit by year-end.
We won’t really see the production from those extra frac crews till next year but we’re working on that but it has just been inventory build because of all of our efficiency. So it’s been a great story for us in the South.
Operator
And we’ll take our next question from Dan McSpirit with BMO Capital Markets.
Dan McSpirit
How much of the capital efficiency gains achieved to-date can be describe as maybe just picking the low hanging fruit that is squeezing out the obvious inefficiencies for something that’s more innovative and how many of those same easier opportunities remain?
BMO Capital Markets
How much of the capital efficiency gains achieved to-date can be describe as maybe just picking the low hanging fruit that is squeezing out the obvious inefficiencies for something that’s more innovative and how many of those same easier opportunities remain?
Doug Lawler
So that’s a great question Dan, and when I came into the company our focus was how do we drive greater cost management ultimately leading to what I call cost leadership. Cost management means that we stop doing things that aren’t adding value to our shareholders.
Cost leadership means that we deliver more for less, deliver something unexpected or more value than what we have previously. It also means cost leadership that we compete strongly if not that leader in all of the areas in which we’re investing and I am so happy to see what our teams have accomplished across the portfolio whether it be cycle time, feet per day, the value achieved, it’s across this portfolio.
The cost leadership demonstrated and efficiency improvements, it’s no longer cost management it is absolute cost leadership. We’ve made reference in the past that there are a lot of opportunities for low hanging fruit and as we have worked through the past year we cleaned that up, that’s all cleaned up.
And now it’s just pure cost leadership.
Dan McSpirit
And just as a follow-up to that and appreciating that it’s not yet 2015 but looking into 2015 the New Year what could a weaker commodity price environment mean for the same capital efficiency gains. That is, is there already an expectation of cost deflation more than offsetting lower commodity prices?
I guess it is just another way of asking whether the capital efficiency rate of change is likely to decelerate or accelerate going forward?
BMO Capital Markets
And just as a follow-up to that and appreciating that it’s not yet 2015 but looking into 2015 the New Year what could a weaker commodity price environment mean for the same capital efficiency gains. That is, is there already an expectation of cost deflation more than offsetting lower commodity prices?
I guess it is just another way of asking whether the capital efficiency rate of change is likely to decelerate or accelerate going forward?
Doug Lawler
Well, there is so much volatility right now with the pricing. I think that just operational synergies, EUR improvements, things that we can control you will absolutely see continued improvement in 2015.
As we look at the supply chain side of our business and you think of the significant purchasing power that Chesapeake has with the amount of activity that we have in the United States, we will be capturing those supply chain opportunities, working with our vendors in a new commodity price environment to secure the best pricing that we possibly can and be as most competitive as possible. So we’re not building into our forecast, so we expect a certain reduction in any of our services but I can tell you that the power and strength of our portfolio we will be absolutely reviewing that and looking for the most competitive pricing in order to execute our program.
Dan McSpirit
Great, thanks for taking my questions.
BMO Capital Markets
Great, thanks for taking my questions.
Doug Lawler
Yes just did you have anything you want to add Chris?
Chris Doyle
Yes I’ll just add on the supply chain front, that really our focus with the energy 77 spin that does give us the ability to tap into the full purchasing power. But our focusing going forward is our partners our service providers are going to want to work with the best in the basin.
They are going to want to work for the Company, let’s say in the Utica that’s going to put away nine stages every day for the entire week versus two. They want to work for a company that’s going to turn wells around in 10 days not 30.
So that is the focus, this is going to be a partnership going forward, we’re very confident not only will we see the full purchasing power deliver value for our shareholders but a strong partnership where companies want to work for the most efficient operator out there. And that’s our focus going forward.
Operator
And we’ll take our next question from Charles Meade with Johnson Rice.
Charles Meade
If I could go back, Doug I know you filled the number of questions and people want to know how you rank the plays and I think it’s understandable that you guys have some of the best guys placed but you also have some great oil plays as well. So you are a little bit unusual in that respect.
I think we can imagine how this is going on as you talk about your competitive capital allocation that the fellows that the liquids -- what liquids have you placed? Can I have the heat on them now?
Can you maybe talk about, is there some aspect or some portion of your portfolio that you think is kind of unrecognized option value in the market. I mean I am thinking maybe perhaps a guess you are part of the Eagle Ford that really would rise to the top or maybe I guess your portion of your PRB acreage that’s not recognized, that is a candidate for a surprise in 2015?
Johnson Rice
If I could go back, Doug I know you filled the number of questions and people want to know how you rank the plays and I think it’s understandable that you guys have some of the best guys placed but you also have some great oil plays as well. So you are a little bit unusual in that respect.
I think we can imagine how this is going on as you talk about your competitive capital allocation that the fellows that the liquids -- what liquids have you placed? Can I have the heat on them now?
Can you maybe talk about, is there some aspect or some portion of your portfolio that you think is kind of unrecognized option value in the market. I mean I am thinking maybe perhaps a guess you are part of the Eagle Ford that really would rise to the top or maybe I guess your portion of your PRB acreage that’s not recognized, that is a candidate for a surprise in 2015?
Doug Lawler
Well Charles I think our entire portfolio is undervalued. I think every single asset is undervalued and…
Charles Meade
Well you guys certainly showed that with that West Virginia deal.
Johnson Rice
Well you guys certainly showed that with that West Virginia deal.
Doug Lawler
Well the thing that we’re focused on internally and the excitement inside of Chesapeake is driving value. And I know it’s been a while since we have been on campus, it is the coolest thing to see the excitement and energy level of these teams and this company in driving the highest quality investments out these programs in these great assets.
And I will highlight that one area that has not caught a lot of attention for us and is not been one of a lot of focus is our Mid Continent assets in Oklahoma. And we have a huge acreage position, we have got a lot of stack pays as we’ve been working through our portfolios we see a lot of upside potential in Oklahoma, and we will be working hard across the portfolio to recognize the value that we believe exists and Mid-Con is an area that just to answer your question to get around to it in a long winded way, I think that we really needed to highlight the great things that are taking place in Oklahoma, because it is contributing substantially to our program and we expect it to contribute significantly in the future.
So that portfolio is undervalued.
Charles Meade
That’s what I was looking for. And then if I could just ask one question on CapEx, so your capital efficiency clearly on display with what you guys have done coming in below what a lot of people are looking for in Q3.
But that implies -- you have kept the annual guidance it actually implies a guide up or not a guide up but a ramp-up into Q4 and so is that what we should be looking for and is that a sign of where you’re looking to begin 2015 or is it more likely that you’re going to kind of stay on your trajectory and come in below your guidance?
Johnson Rice
That’s what I was looking for. And then if I could just ask one question on CapEx, so your capital efficiency clearly on display with what you guys have done coming in below what a lot of people are looking for in Q3.
But that implies -- you have kept the annual guidance it actually implies a guide up or not a guide up but a ramp-up into Q4 and so is that what we should be looking for and is that a sign of where you’re looking to begin 2015 or is it more likely that you’re going to kind of stay on your trajectory and come in below your guidance?
Doug Lawler
Well are you talking about the production?
Charles Meade
CapEx.
Johnson Rice
CapEx.
Doug Lawler
CapEx, okay. We’re executing really well in all the programs I think that we’ve kind of put out there what our annual guidance is and we feel very comfortable with that range and as you would expect the teams inside of this company are going to continue to drive for further improvements and I’m looking forward to seeing what they continue to deliver because it’s just it’s really good work and I think capital and production and other value drivers will continue to see the improvements in the value created.
Charles Meade
So should we expect a ramp-up in Q4, is that kind of a prelude to 2015 or is that reading too far into it?
Johnson Rice
So should we expect a ramp-up in Q4, is that kind of a prelude to 2015 or is that reading too far into it?
Jason Pigott
This is Jason again, we’ll ramp-up in at least the Eagle Ford this quarter again we’ve increased frac crews, we’ve been running the 21 rigs, we’ve also added three spudders because we see every well it has a spudder rig on it, it saves $60,000 a well and we’ll be higher next quarter than this quarter especially in Eagle Ford because we’re just continuing to work down that inventory via the increased stimulation crude count and running that higher rig count through the end of the year. So, we’ll definitely see some capital pressure there increase going forward.
Doug Lawler
We will do the same in Powder or will keep the second frac crew running, we mobilized it about a month ago and so you’ll see that flow through to higher investment in the fourth quarter than the third.
Charles Meade
That sounds good, thanks a lot.
Johnson Rice
That sounds good, thanks a lot.
Doug Lawler
Okay, thanks a lot Charles. We’re at the top of the hour.
I would like to thank everyone for joining us today. This concludes our teleconference and please follow-up with Brad and his team if you have any other questions and you can expect to see continued improvement from Chesapeake.
Thank you all.
Operator
Thank you, and that does conclude today’s conference. Thank you for your participation.