Chesapeake Granite Wash Trust (CHKR)

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Chesapeake Granite Wash Trust (CHKR)

Q3 2012 Earnings Call

November 8, 2012 10:00 am ET

Executives

Nick Dell'Osso – Executive Vice President and Chief Financial Officer

Steve Dixon – Executive Vice President - Operations and Geosciences and Chief Operating Officer

Analysts

Kevin Smith – Raymond James

Minyoung Sohn – Arrowpoint Partners

Presentation

Operator

Good day and welcome to the 2012 Q3 Chesapeake Granite Wash Trust Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Dell'Osso. Please go ahead, sir.

Nick Dell'Osso

Good morning and welcome to the Chesapeake Granite Wash Trust Distribution Conference Call. This is Nick Dell'Osso, Executive Vice President and Chief Financial Officer at Chesapeake Energy. Also, joining me for the call this morning is, Steve Dixon, Executive Vice President and Chief Operating Officer of Chesapeake, and John Kilgallon, Senior Director of Investor Relations at Chesapeake.

I have a few prepared remarks, and then we will take any questions you may have. Please note that today's call will contain certain forward-looking statements and assumptions that are subject to inherent risks and uncertainties. The actual results may differ materially from those projected in the forward-looking statements. Additional information about risk factors and other factors that could potentially affect the Trust and its financial results are included in the Trust's press release issued last Friday, and in the Trust filings with the SEC.

As a reminder, CHKR is a statutory Trust, which is required to distribute all cash flow after expenses. The trust has no employees or officers and Chesapeake Energy as the sponsor of the trust is responsible for operating the properties, in which the trust has an interest in fulfilling certain drilling commitments, which is also detailed in the trust's filings with the SEC.

As stated in the press release yesterday, the distribution for the three-month period ended September 30, 2012 from CHKR will be $0.63 per common unit and approximately $0.22 per subordinated unit. Worth noting, Chesapeake Energy owns 100% of the subordinated units. The distribution will be paid on November 29, 2012, the unitholders of record at the close of business on November 19, 2012.

The calculated distribution for this period is approximately $0.53 per unit, however since this is below the predetermined subordination threshold for the quarter of $0.63 per unit, the distribution per subordinated unit will be reduced in order to make a distribution of $0.63 per common unit.

With that, I’m going to turn the call over to Steve Dixon who is going to talk a little bit more about the performance this quarter.

Steve Dixon

Thanks, Nick. For the three month period June 1 through August 2012, total sales volumes attributed to the trust royalty interest were 146,000 barrels of oil, that’s down from a 168,000 or 13% quarter-over-quarter; 288,000 barrels of natural gas liquids, that’s down from 328,000 or 12% quarter-over-quarter; and 3.2 billion cubic feet of natural gas, that’s up from 3.14 billion or 2% quarter-over-quarter. This were total sales of approximately 968,000 barrels of oil equivalent BOE that’s down from 1.02 or about 5% quarter-over-quarter.

Production mix in the third quarter 2012 was 15% oil, NGLs at 30% and 55% natural gas.

Worth noting natural gas liquid production in this quarter was negatively impacted by the company's economic decision to reject ethane rather than process it in a region of Conley Kansas which has experienced wide differentials on ethane as compared to the primary NGL clearing hub of Mt. Belvieu Texas.

Realized prices for the period were $84.22 per barrel of oil, $27.49 per barrel of NGL liquids and $1.72 per Mcf natural gas. These prices include the effects of transportation and third-party deductions.

When comparing quarter-over-quarter changes in realized price for the 2012 third quarter, unhedged realized oil prices were lower by $13.74 per barrel, natural gas liquid prices were lower by $5.34 per barrel and natural the gas prices were higher by $0.55 per Mcf.

Turning to hedges, actual NYMEX oil prices were above swap contract prices held by the trust resulting in a realized loss on oil contracts of approximately $375,000 for the period. These fixed oil swap contracts were initially established to hedge approximately 50% of our projected oil and natural gas liquids volumes.

However, historically, low natural gas prices coupled with strong domestic natural liquids growth ahead of existing infrastructure has resulted in reduced prices for natural gas liquids as a percentage of NYMEX oil. At the time of IPO the trust originally had forecasted 2012 third quarter natural gas liquids to WTI oil ratio of 49%, and actual results for the quarter were 33%. Additionally, the trust has no natural gas hedges in place.

Turning to our drilling results in the Trust AMI, Chesapeake brought on line 9 gross wells, which were all operated wells in the three-month period from June 1 through August 2012 at varied net working interest. These 9 gross wells equated to approximately 11 development wells towards Chesapeake's overall commitment of 118 development wells under the development agreement with the trust.

With this activity, Chesapeake is on pace with its planned drilling activity in order to satisfy the 118 development well commitment to the trust having drilled or participated in 52 development wells do October. Chesapeake is currently operating 4 rigs in the Trust AMI and this level of drilling is consistent with the original drilling plans outlined in the trust SEC filings.

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