Good day, and welcome to the Chesapeake Energy Corporation second quarter 2021 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question you may press star and one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Brad Sylvester. Please go ahead, sir.
Thank you, Rocco. Good morning, everyone. Thank you for joining our call today to discuss Chesapeake's financial and operational results for the 2021 second quarter. Hopefully, you've had a chance to review our press releases and the updated presentations that we posted to our website yesterday and this morning. During this morning's call, we will be making forward-looking statements which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance, the benefits of our proposed transaction with Vine Energy Inc, the expected timing for the completion of the transaction, and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including those factors identified and discussed in our earnings release yesterday and in other SEC filings.
Please note 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. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our materials and on our website. With me on the call this morning are Mike Wichterich, Nick Dell'Osso, Sheldon Burleson, and Tim Beard. Mike will give a brief overview of our recent results and events, and then we will open the teleconference up for Q&A. With that, thank you, and I will now turn the teleconference over to Mike.
Hi. Good morning. Thank you for joining. We're pretty excited today here at Chesapeake, and we're glad you're here. We're going to do just a quick flyover on our quarter. Second quarter was pretty great. We're pretty excited about it. We told you in the first quarter that this company's going to generate a lot of free cash flow. That's what we've done in the second quarter. We did not disappoint. We had $429 million in EBITDAX, $300 million-ish in free cash flow. That went to the balance sheet. That's how you know it's real, when it shows up in cash in the bank. We're pretty pleased. We don't think this is a one-time event. It's a trend, which is why we're updating our guidance. You'll see we're 16%. We want to raise guidance on EBITDAX by 16%. We reduced G&A by 15%.
We're not changing our CapEx, and that all feels pretty good. We do generate a lot of cash. We have a bunch of cash. The question becomes, what to do with it? We've told you really clearly in our first quarter, the goal is to return cash to shareholders. That's why we started a fixed dividend in the first quarter. We told you at that time that we would define a variable dividend strategy by year-end. Today is that day. We're going to implement a variable return program that's going to take 50% of our free cash flow quarterly and pay it out. That's going to start in the beginning of next year. We're pretty thrilled about it. The very bottom of the page, you may have seen this in a previous press release.
Our commitment to the environment and being a good steward of assets, we are pledged that we will turn our Haynesville area into an RSG basin forest. We think that is not only the right thing to do and the smart thing to do, and we're pretty pleased, and we're making great progress. Turning to the Vine acquisition, which we're really excited and fired up about. During the quarterly calls and last time, and every time I have an investor call, I get a question often about will Chesapeake participate in the A&D market? How will it look? What are the what's, where's, when's, and how's? Honestly, we are very picky. We're picky, and we think this acquisition absolutely reflects that. We have what we think are five non-negotiables in any transaction. The first non-negotiable is you can't overpay. We don't think we are.
This is a zero premium deal. When you look at it, if you want to calculate the price, you can do it yourself. It's basically the 30-day exchange ratio. That is how we based it. No premium. Feels great. We're not overpaying. The second non-negotiable is we're not going to break our balance sheet. We're not Chesapeake of the past. We think this is a competitive advantage. You'll see our leverage is still below our long-term goal, which is sort of fantastic. We're going to keep it. It was hard to get here. Now, you could ask that, "Hey, did you build some overhang on your stock with the new Vine shareholders?" I'd say, maybe you could think about it that way. We don't think about it that way. The Vine shareholders have been very clear on their intent. The intent is they like Chesapeake. They like the story.
They want to participate in the upside, and frankly, we're happy to have them. Third non-negotiable, it's got to be accretive on the metrics that matter. We think this transaction is. You guys will calculate it. We feel great about it. Fourth is, hey, we're looking to be better, not just bigger. We think this transaction does it. Better to us means adding low break-even drilling locations. This transaction does it. It means having scale. You combine low break-evens and scale and size, and I think you have a winning formula, and to generate a lot of free cash flow. We have the locations with this. We're happy about it. We also are going to be the largest Haynesville producer, is the scale we're looking for. The beautiful thing about this is this is an area that we've already operated in since 2008. We know the area.
We can execute. We will execute. We feel great about it. Finally, we talked about our pledge to be RSG in the Haynesville. We talked about it in our own assets. It was very important to us not just to do it on those assets, but Vine assets. Our pledge extends also to the Vine acreage. Next page four. Look, picture says 1,000 words. The picture tells you the story, which is they're our next door neighbor. It makes total sense. We have the people in place already to execute, and we feel great. Next slide. I'm going to keep harping on this, about being a good operator. We think it's obviously the right thing to do on ESG. Haynesville is the right place to be. Not only that, we think it is not just right, we also think it is a competitive advantage.
It is the smart thing to do. We know that Haynesville gas goes into the LNG complex. We know the buyers of LNG want it to be certified RSG. We're going to deliver it. We listen to our customers. We want to provide it. Turning to page six of the deck. Again, back to the picture tells a 1,000 words. We talk a lot about basis. You guys talk a lot about basis to us, about the Appalachia. It's obviously a hot topic. The basis is this is perfectly situated to take that out. This is the place to be. We're happy to be building here. It is a core strength for us. Page seven, cost savings. Synergies are always feels mostly like a guess. It's not a guess for us. We have operations here. We have expertise. We know we can do.
I've already mentioned, I don't think anyone has drilled more Haynesville wells than us. We have the people here to execute, we think these synergies are absolutely real. Page seven, we talk about cash to shareholders. Look, to me, this is put your money where your mouth is. It's one thing to talk about generating a lot of free cash flow and about synergies. It's another thing to actually promise to give it back to shareholders. First step is we're going to increase our fixed dividend. The synergies that we're talking about, we're going to give to the shareholders. We're going to raise our fixed dividend by 27%. We think it's the right thing to do, and we're happy to do it. Also, with the new variable dividend plan that we just discussed, it applies to these assets as well.
Giving back cash to shareholders is what great companies do, and we're happy to be part of it. With that, Nick, why don't we go through the numbers?
Thanks, Mike. Good morning, everyone. Our pro forma outlook that we've provided in the presentation, we think sets up really great for the next couple of years. At the end of 2021, you can see we've raised our numbers. We're raising our numbers on production. We've pointed in our press release to the fact that we have improved base decline rates. This is really evidence of the great work of our teams and how we've shifted our focus throughout this year. We're delivering better results, better information, better technical understanding of our assets and maturing the way we think about the decline curves and the way we manage them. We've also had great performance out of our wedge. We're delivering well in Appalachia and Haynesville .
As we noted before, we're going to bring online some wells in South Texas towards the end of the year, which I think ties well together with the fact that the base is performing very well there. Some of the biggest moves on the page that we're really pleased to highlight are in the cost structure. When you look just at 2021 alone, you can see we've reduced our G&A, it's a pretty significant move. You can see that as we move into 2022, that's sustained. When you look at the aggregate cost structure that's on this page of LOE, GP&T, and G&A, you go from where we were in 2021, our previous outlook, to where we're now guiding pro forma the transaction going forward, where we're taking into consideration greater scale and some efficiencies of the transaction.
There's a 20% decrease in the total cost structure. That's a pretty impressive move for a transaction like this and for just the current evolution of our business and how we're taking costs out. That does result in higher EBITDA per barrel equivalent. When you think about how we're investing, again, there's some things that Mike talked about as non-negotiables and important tenets of how we run the company from an M&A perspective, and there are from a financial approach perspective as well. Our reinvestment rate stays well under our 60%-70% target, but we are able to stem the decline in our oil assets with this investment profile. The rate of return that we're going to target with pretty modest investment to stem that decline is outstanding.
We're really pleased about being able to lay this out and being able to show a free cash flow profile that's really attractive. On the right side of this page, you have to pay attention to the fact that this transaction is really accretive to our cash flow metrics. When you see a transaction that is notably accretive to cash flow metrics and a company can raise their dividend on the heels of that transaction immediately, you know that the confidence level in that accretion is high. We feel really good about that. We're pleased to be able to deliver that and look forward to executing on that program to find out what's next. Going to the next page, we have some stats on just Chesapeake gross to the peer group.
Obviously, we're a relatively big company, the peer group that we aspire to measure ourselves against are companies that are bigger than us. We've talked about that scale matters. We've talked about that we think there's an advantage to having cost structure benefits from scale. We're evidencing that in our transaction this morning. You can see that we're moving along this scale. Not where we want to be yet, but we are, if you look at the payout ratio, punching at a higher level, we think, than many peers of our size. We believe we're headed for a position of greater scale in the industry. That payout ratio is really attractive, and it's sustainable given the reinvestment profile and given the low leverage.
We're really pleased to be able to lay this out and put out the variable dividend that we announced this morning that we know is going to offer a really attractive aggregate yield. Moving on to the last page that we're going to cover is really just a checklist of how we thought about this acquisition and really what it's delivering to us. This is just a tremendous deal for us. It's accretive. It takes advantage of our scale and our knowledge and our history. Mike talked about we've drilled more wells in this basin. We have more data in this basin. We understand this basin better than any other operator.
The position that it gives us around marketing of gas and the proximity to LNG and the fact that we're going to have such a large aggregation of RSG in the market this close to the Gulf Coast and the industrial and export markets is, we think, a really significant competitive advantage. When you marry that with our balance sheet, which now has a credit profile that's very strong and a much more attractive counterparty in these transactions, we think it's a really powerful combination. What it does to our inventory is great. You've seen some of the numbers already. We're increasing our premium locations, and we've measured that for you this morning by talking about locations that are greater than a 50% return at $2.50 gas. That's a really robust profile of an incremental 370 million locations. Dividends, we've talked about a bit.
The fact that it strengthens our ESG performance. This is a pretty well-run asset from an ESG perspective. It offers us an opportunity to showcase and highlight our commitment to continuing to drive our emissions metrics down and improve our ESG profile. Overall, we just are really pleased with this transaction. We think it sets up really well for Chesapeake as we move into 2022, and we think about how to continue to take advantage of our scale and deliver higher returns for shareholders in the form of cash showing up in dividends. With that, operator, I think we'll open it up for questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.
Thanks. Thanks, all. A good quarter and, I guess, congrats on the deal. My first question here is, who's running the combined company? You really didn't discuss that. Obviously, Vine has an established management team, and I know you all are in the process of searching for a CEO. Can you give us some sense of where that process is and whether or not some of the Vine management team are candidates?
Sure. Generally, the CEO search is ongoing. We've had tremendous interest in the position, of course, as would you expect. The committee is working its process. We thought it would take several months. It's on target. We expect to have answers relatively soon. Certainly, we never thought about who would run the company. We weren't trying to buy a CEO in this transaction. It's absolutely not what's happening here. We wanted to buy the company and the assets. We'll just let that process go. I think what the real question you're sort of answering is on who's the next CEO and what's going to happen is, hey, will the strategy change? Will we have differences? The answer is no, the strategy's the same. We're telling you we're going to execute on this business plan. This is the business plan we're going forward with.
Okay. Just to clarify, is the Vine management team part of the C-suite consideration?
We haven't got that far to think about it.
My follow-up question is, could you just give us a little bit of color around the inventory additions that you're getting from Vine? I think in their published presentations, they've talked somewhere around 800-900 locations that have break-even points close to $2. I know you all highlighted something on the order of 370 locations that get a 50% rate of return. I think in slide four, it indicates there may be 600, but there's a little bit of a difference. Could you give us some color on that variance?
Sure. The 370 are premium locations, and we measured that with showing, again, greater than 50% return at $2.50 gas. On slide four, I think we give the total location number. There are a lot more locations than that. It's a big asset. We're really pleased about how the acreage abuts our position. Generally, we're looking at four wells a section here. There are some places we'd probably keep it at three, and we think there's the potential in the future to down-space some areas to five, but we really haven't baked that into our analysis. That would be upside. Look, this is a big asset. The acreage gives us some opportunities to drill longer laterals, and that's really important to thinking about how the value is put together here.
A lot of locations and a lot of really premium locations at that high rate of return, low gas price.
When you said longer laterals, is some of the difference just extending laterals assumptions with Chesapeake's acreage, or is that just a comment of their length versus your length?
It's really more the latter. There are a few places where we're going to be able to extend some laterals by combining our acreage position. Chesapeake has a history of drilling more longer laterals than others. We've done a lot of it. It's a little harder. We have the confidence to do it. We also have the mapping and the seismic and the data to do it well. We can pick our locations very well. That's something where you're really bringing an expertise and a technology and a data picture to the equation here that Vine, just from a scale perspective, didn't have all of that on their own.
Understood. Thank you.
Our next question today comes from Nitin Kumar with Wells Fargo. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. I guess my first question is around capital allocation for next year. As I look at your slide nine, you had a standalone number of almost, let's call it $1 billion or so for next year. You're adding some with Vine, but it seems like you're investing in oil quite a bit just to hold the production flat. Could you comment on how you're looking at capital allocation for next year and why is it so much higher than this year?
Sure. First, I would just point out that as you think about our capital allocation year-over-year, we're still at a reinvestment rate that's well below our target. We think that's really important because we have a commitment and a discipline around how we think about deploying capital in the business, but we're absolutely going to chase return. The rate of return that's available to us in our South Texas assets today is very attractive. When you think about the fact that we came out with our budget for this year as we emerged from bankruptcy and we were wrestling with a $45-$50 longer-term oil price curve, the world is a very different place today, and the rate of return opportunity for us is very attractive, and we have production that's in decline.
There's no reason we shouldn't be drilling our absolute best locations in South Texas, bringing on a few wells in our other areas that are also great rate of return, and stemming that decline in a way that is very accretive to cash flow year-over-year. If you look at what we are ultimately going to deliver, again, we're going to have a more stable, longer live reinvestment rate relative to the cash flow that we can generate with this investment profile.
Okay. I guess the second question is, Blackstone owns, I think, 70% of Vine. You alluded to their commitment to Chesapeake stock, but is there a lockup or something formal that prevents them from selling their stock?
There is. There's a 60-day lockup that's been negotiated here. They'll be less than 10% of the fully diluted shares. Really our conversations with them have been about being a long-term shareholder. They're believers in this story. They're believers in the idea of consolidating for scale. They're believers in natural gas. This story for them offers an opportunity for enhanced returns over what they were able to accomplish, which they accomplished quite a bit as a standalone company. They've reached a point here after going public where they felt they had a chance for a better rate of return profile through the combination. We expect Blackstone to be shareholders for a while, and we welcome them as shareholders. They're eager to be shareholders in this combined company.
Got it. Thank you.
Our next question today comes from Josh Silverstein with Wolfe Research. Please go ahead.
Thanks. Morning, guys. Mike, you mentioned before on the CEO search, you had some comments there. Between the 2022 outlook that's now said, the acquisition, the dividend announcements, the forward outlook for Chesapeake seems pretty clear and you've clearly been a big part of this. I'm just wondering if you have your hat in the ring here, because you had suggested differently otherwise beforehand. Just wanted to see how you're thinking about your role here at Chesapeake.
Sure. I think of my role as the Chairman of the Board. I have not interviewed for the job of CEO. My goal here is just to help guide the company to a better place where I think we're heading.
Okay. You also said you remain pretty active in the A&D markets. You did the Vine transaction here. In the past, we've talked about the Eagle Ford being a potential divestiture candidate, that seems off the table right now with the increased activity there. Can you just give your updated thoughts on the oil portfolio and how you guys view the overall mix of the production profile? You're putting yourself against peers in the slides that are a bit more diversified. I just wanted to see how you view the overall portfolio construct now.
Sure. Look, number one, we think we have great gas asset, both in the Marcellus and the Haynesville. We're believers. Eagle Ford is interesting. It's large. It's one of our big three. We think that currently at the current prices today, it's really attractive to go drill down there, and we're going to do it. We're going to chase returns, and that will be our first and foremost goal. Do we have work to do down there? We do. We have costs, we have pipelines, we have other stuff that we have to take care of, and that area is going to have to compete for capital. Today it does. If it ever turns out to where it can't compete for capital, then we'll have to do something about it then. Right now, it sure looks good, and we want to keep going.
Okay, thanks.
Our next question today comes from Charles Meade at Johnson Rice. Please go ahead.
Good morning, Mike, Nick, and the rest of the team there. Going back, I think it was to Nitin's question on the 2022 allocation. If my understanding is right, you guys are talking about adding one to two rigs in all the assets. Mike, you were just talking about South Texas, but obviously, it seems like one rig is going to go there, but is another one maybe going to go to either the PRB or Brazos Valley, or should we just be thinking about the uptick being in your Eagle Ford?
No, you shouldn't think about it that way. We're going to go to the best return locations. Clearly, the bigger one is South Texas. That's where the activity is going to be. We're going to probably do a handful of wells in Brazos Valley in its core. We think it's the best place. We'll go from there. Clearly, the PRB is a little bit of a tail wagging the dog. We are drilling some obligation wells there this year, and it has to start competing. If it doesn't compete, it won't stay around here very long.
Got it. On the same point, you haven't been asked, but you beat on two key oil volumes. Right? You guys are talking about adding rig activity, but you've also mentioned that your base declines, your PDP declines, are turning out better. Your oil outlook for 2022 is a good bit over where I've been and where consensus is. Do you have a sense of how much of that is related to more activity you're planning, and how much of that is better base declines?
Yes. It's Sheldon . I'll take that, Charles . Really, we're seeing excellent performance in our base and in all of our oil assets. Two biggest drivers are South Texas and Brazos Valley. South Texas, really, it stems back to the decision to start to widen spacing a couple of years ago. We've seen really outperformance of those wells over the last couple of years. Also the key work by the team to look at optimization in our performance there. BV is a similar story. It's really the transition to that power of our team after we took over that asset. We've really been focused on artificial lift optimization and then accelerating our creative workover program. Both those assets have contributed a big piece of it. Powder is also ahead as well.
I think of it as really just solid performance and really focused on that program by our team.
All right. Thank you. That covers it.
Our next question today comes from [Aafis Chaudry] with [IBY Investment]. Please go ahead.
Hi, guys. Thank you guys for taking the call and or taking the question, and congrats on the deal. It seems like a win-win for everyone involved. Was just wondering how you guys are thinking about the net debt profile going forward and how you think about the Vine debt. Is that going to be brought onto the balance sheet or is that going to be taken out?
Vine has three basic pieces of debt. They have their $950 million of bonds. They have a term loan, and they have a revolving credit facility. The term loan and the revolving credit facility will go away as a result of the transaction. We'll pay those off in cash, and the bonds will stay outstanding. The bonds are due in 2029. They'll just stack into our maturity profile, and if we get an opportunity to refinance those at some point where it's attractive to do so and there's not too much friction in the transaction, we would do that.
Okay. That's all I had. Thank you, guys.
Thanks.
Our next question today comes from Nicholas Pope at Seaport. Please go ahead.
Good morning, guys.
Morning, Nick.
I was trying to reconcile the share count and make sure I have that right with this transaction.
I guess, what is the Vine share count right now, and what is the total number of new shares at that conversion rate?
Sure. The Vine share count, you have to take into consideration shares of vest as a result of the deal. It's almost 77 million shares, just a tick under. The share count pro forma the transaction is 135 million Chesapeake shares. We're issuing about 19.1 million Chesapeake shares in the transaction.
I don't cover Vine, so is that a different class of shares? I'm just seeing a 41 million number, and I'm trying to understand what I don't know. I haven't followed them before, so what's that number difference?
Sure. There are two classes of shares with Vine.
Oh.
It stems from their private equity backing in the IPO. They have two classes of shares.
Got it. Can you talk a little bit about speed of drilling, where you guys are versus where Vine is? I think y'all talked about 30 wells this year. You're running 33 rigs now. As you ramp that up, is that linear? How do you think about what, three to six rigs, what kind of well count are we talking about in the Haynesville for a combined count that's shifted?
We're still assuming 10 wells per rig per year. That's a good pace, and we believe that continues.
Got it. That answers my questions. Thank you.
Thank you, Nick.
Our next question today comes from Doug Leggate with Bank of America. Please go ahead.
Good morning, guys. Thanks for getting me on. Mike, or maybe this is for Nick. The capital guidance talks about adding activity back to the oil assets. I think Nitin touched on this earlier. With the output that stabilizes production, is that how we should think about the strategy on the oil assets going forward?
Just to think about us targeting returns, Doug. Right now, we see it pretty attractive to bring a rig plus a little bit of additional activity to South Texas. Like Mike noted, we'll take care of some obligation wells in the PRB, see how those do, and then we're going to bring on some really high rate of return wells in the BV as well. We know that those are really low risk, high rate of return targets. They make sense for us to drill in this environment, that's how we're going to chase return with our capital. We think it makes a lot of sense. By stemming the oil decline, obviously, it puts a boost in our EBITDA. Our efficiency of capital turning into cash flow in the near term is great on those assets.
Look, it's a really attractive capital allocation move for us as we think about the fact that EBITDA is growing, we think about our ideal reinvestment rate, we think about the way to maximize cash flow for shareholders. This is a better answer than not drilling those wells.
Okay. Thank you. Brad knows the sustaining capital question is coming for him, so I'll take that one offline. Two other quick ones, Nick, if I may. Vine. We did cover Vine over here. Vine had a tax recoverable agreement with its largest shareholder, as you know. What's the status of that going forward for the new company, and what does it mean for the combined company cash tax trajectory?
Sure. Great question, Doug. The tax receivable agreement that existed between Vine and Blackstone will be terminated as a result of this transaction. There's been negotiated to be no payment under that agreement at termination. The cash tax position of the combined company going forward is unchanged from where we were before. We're pressuring up against a point where we will project to pay some cash taxes as we have a lot more cash flow as prices rise. As of right now, we would still project. I think our outlook has a very modest amount of cash taxes forecast. We think that's right. We think there's still a chance we end up at zero for the year. We're watching that closely.
We're going to be right near the line, and adding Vine into the mix is effectively neutral to our view on forward cash taxes.
That sounds like a big win, Nick. Last one then from me is hedging. Obviously, you're kind of locked in for 2022, but if you're generating this much free cash flow and the balance sheet is in such good shape, and now you're thinking about the variable payout, why hedge? What is the purpose and philosophy of hedging? You're obviously not protecting necessarily a balance sheet position, and you're not protecting growth capital. Why not allow investors the headroom to what might be upside, if you like, going forward, given your lower risk overall portfolio? Just my last one.
Sure. Yeah, sure. Great question, and I love answering this question. We did put a lot of hedges on as we exited bankruptcy. It was required in the agreement. You guys have seen that we did not add any hedges this quarter because we have a pretty robust hedge profile going forward. We don't disagree with your sentiment that investors should have pretty good exposure to rising commodity prices going forward. The way we do think about it, though, is that we're going to spend a lot of money each year. If you just think about our capital profile that's here in front of you today, on a standalone business, we're just over $1 billion. With Vine, we're obviously a little higher than that.
That capital is targeting new drilling, and that new drilling has an expected rate of return that's very attractive at these levels, and we should de-risk that capital program over time. We should still have some hedge profile over time. Despite the fact that we have a great balance sheet, we won't be able to maintain our cash flow profile, our dividend profile, the attractive high level of variable dividend that we all can project at this point would be at risk if we didn't protect the cash flows that we expect to come out of our capital program. What does that really mean over time? I think what that means is that you can expect us to be around 50% hedged in a given year. If you look forward into 2022, we have pretty robust hedge profile. Vine has a good hedge position coming in.
They're heavily hedged as well. We're going to manage through that, but you should expect us to continue to think about matching a hedge program to de-risking the decision to either offset decline or have modest growth and the cash flows you expect to come from that. It all add up to somewhere around 50% in a given year.
Preference for swaps or collars, Nick?
That always depends a little bit on price, Doug. As I've been watching the market the last few weeks, some of the collars look absolutely fantastic. I love the idea of collars when they're priced effectively. As you know, sometimes the skew on those can make them really unattractive. When you can lock in a price that's at or above your break-even levels or ideally well above your break-even levels, and you can maintain some real exposure to the upside, we love that. That's a place where really our strong balance sheet gives us a lot more flexibility than it did in the past, where we might have looked at the past and said we need every penny of gas price or dollar of oil price that we can get.
The strength of the balance sheet says that you absolutely can take some risk around getting exposure to the upside and still protecting yourself to the downside with some cushion that you're comfortable accepting. Love collars, they just have to be priced effectively.
All right. Thanks for taking my questions, fellas.
Yep.
The next question today comes from Neal Dingmann at Truist Securities. Please go ahead.
Morning, guys. Just a quick follow on what Doug was asking on the hedges. Nick, what's your thought on basis hedges? While we're talking about just the basis, could you talk about just your thoughts on your various regions on how you're seeing sort of basis for the rest of the year? It looks like everything's sort of trending in line, but just would love to hear your thoughts on the hedging around that and kind of where we are.
Yeah, absolutely. Great question, Neal. Look, if you're not hedged in basis and you have a lot of production in the Northeast, then you're not hedged. We think about the percentage of gas that we want to have hedged out of that Northeast production, we should hedge its basis as well. We just manage that pretty carefully. Now, you can't hedge as far out in the future on basis, typically, without seeing some slippage in price. The timing doesn't always match. Yeah, we absolutely want to continue to proactively manage that. You also manage your transportation profile. As you know, we had a bit of transportation on the TETCO M3 line that's going to expire due to the negotiation of our bankruptcy.
We're going to have an opportunity to add back some transportation to that area here, which we can talk more about in the future. It's a modest amount, but it's going to give us a little bit of tailwind to our realized pricing. We feel good about that. We'll continue to very proactively manage how we expose ourselves to realized prices in the basin through hedging, through transportation, and through curtailment of gas when prices just don't work. We like all those dynamics. There's been a lot of noise about basis in the Northeast this summer. There's been a lot of maintenance. We've navigated all that pretty well. You can see that in our results from today. Our realized price held up pretty well. There's been a lot of intrabasin dynamics that have been interesting.
There've been times where some of the maintenance in other parts of the basin actually lifted our in-basin sales in Northeast PA, where we are. There've been other times where we had some of the same pressure that others had too. It's been a very proactive management from our team. Our team does a great job. We've got a marketing team that stays in really close contact with our production team, and they work this every day really hard to maximize the value we receive for our gas. I think they do a great job, and we expect them to continue to do it. The outlook is pretty good. As much as basis has been wide, the realized price that we're seeing in the field, especially right now this month, is out of sight. It's very strong.
You can take a wide basis to NYMEX when your realized price is elevated quite a bit, and that's what we've seen. Right now, basis looks good this quarter, and realized price is very attractive.
Great details, Nick. Maybe just one follow-on, Nick, for you or Mike. I think I see this in slide four, I want to make sure I understand. When looking at the Vine deal, that overall inventory, does a good piece of that go to your upper quartile? I guess another way to say that is, when you look at what you're going to be drilling, will a lot of that fall in the front of the line now once that deal's complete?
Yeah. Absolutely. The 370 locations that we're talking about, those premium locations absolutely push their way to the front of the curve. We have our own in that bucket too, but those wells will compete on day one, and I would say they're definitely in the top quarter.
Thanks, Mike.
Our next question today comes from Jordan Stuart of GoldenTree. Please go ahead.
Hey, guys. Thanks for taking the question. Just somewhat of a follow-up to this last question. Curious how we're thinking about the portfolio as a whole now, Northeast P.A. versus Haynesville, where you guys have obviously made this acquisition versus some of the oilier stuff? Just as we think about force ranking, how should we be thinking about that now and going forward, how that might change?
Yeah, look, we're chasing returns. In Appalachia, we have a constraint on how much we can get out, so that's your first baseline best return area. After that, you have to compete, and Haynesville gets a bunch of the capital. You can see we'll go from three to six rigs. After that, we'll look at the balance between the two, between the oil assets. I would say three, six, and then the rest oil, on rig count.
Great. Obviously, the macros improved materially enough for you guys to add activity in the oilier assets. Curious what type of pullback or what type of volatility would have to be introduced here that maybe we could see a move in the other direction down the road.
I think we showed you in the bankruptcy coming out that 45 to 50. Those oil wells didn't attract any capital. I think if you got in the long-term price of that, I think you'd have the same result.
Great. Very helpful, guys. Thank you.
Our next question today comes from Gregg Brody at Bank of America. Please go ahead.
Greg, congrats on the transaction. Just quickly, I know you've talked about investment grade before, and I'm just curious how you think this transaction potentially impacts that. I think in the past, Nick, you've said you were not particularly interested in getting a third rating. I'm curious if you're thinking a little differently about that, because this does seem to help the investment grade story.
Yeah, I think it helps the investment grade story. I think we absolutely care about our rating. I wouldn't ever want to give you any sense of that. I think one of the things I've said in the past is that we can only put forward great results and ask the agencies to rate us appropriately, and that's what we're going to continue to do. We've already spoken to the agencies a little bit about these transactions to try to get them up to speed. We'll continue to do that over the next few weeks. This is a pretty big deal for us. It adds some scale, and scale is one of the places that I think the agencies would like to see us be a little stronger. They'd like to see us be bigger. This does that, which gives the sustainability of cash flows.
There's a little bit of debt that comes with this transaction for sure, but on a pro forma basis, we're still well below 1x, and we're generating a ton of free cash flow, which is going to continue to grind net debt lower. We feel good about this, and obviously, we're going to use some cash to pay off a bit of their debt at closing. That, again, helps the total quantum of debt, and net debt will continue to grind lower over time. We feel really good about what this does for our pro forma credit profile.
Then again, one of the reasons why we care about it a lot is that if we're going to have a meaningful seat at the table in talking about long-term gas sales agreements, which we absolutely will with the quantum of gas that we'll have available for supply here, you have to have a strong credit profile, and you need to be driving towards investment grade. It's probably more of a renewed goal to get to investment grade because of the fact that we have that ability to play in a different way in long-term gas marketing. We're pretty intentional about getting there. We're going to be very focused on it.
Does that make getting a Fitch rating a little bit more important?
A Fitch rating? Maybe. We certainly have a relationship with those guys, and we've talked to them. We'll continue to think about that.
Just last one. Have you indicated to the agencies whether there'd be cross guarantees here from Chesapeake to Vine and vice versa, or is that still to be determined?
No, you should think about these bonds as basically becoming a part of the Chesapeake credit profile. It's all going to be one. It will not be held in a separate non-guarantor entity like WildHorse. This is going to be all folded in.
Great. Really appreciate the time, guys. Thanks.
Thank you.
Our next question comes from Karl Blunden with Goldman Sachs. Please go ahead.
Hi. Morning, guys. Thanks very much for the time. Just wanted to build on one question that Greg had there around the investment-grade ratings, or at least progress toward that. Scale is clearly something the agencies have rewarded, and you're doing that here. Are there other considerations, maybe specific to Expand Energy, you can talk about? The agencies sometimes will talk about companies coming out of a restructuring or needing a set management team for them to get more comfortable in moving the ratings quickly. Is there any color on those items you can discuss with us?
Yeah. Good morning, Karl. I think both of those items are important to the agencies. Time away from bankruptcy and showing a track record of delivery is important, and we now have two quarters where we've done that, so we're on our way, we believe. We expect to continue to deliver. We expect to continue to show strong results. We expect to continue to show disciplined results. I'll go back to reminding you of what Mike started the call with around the non-negotiables and the fact that this transaction meets those non-negotiables, and one of those is that we will not break the balance sheet, and we won't overpay for transactions. You can't do those things and warrant an investment-grade credit profile.
This is all aligned, and it all hangs together about how we think about what we're trying to accomplish and who we want to be as a company. Yeah, they're going to care about how long we've been out of bankruptcy and our track record since then. We feel great about that concern. They're going to want to know who the CEO is, and as Mike noted, the board expects to conclude that process in its due course, and it's moving forward. We don't think those are long-term concerns, but we know that they are points that the agencies are still thinking about.
That's helpful. I guess the one follow-up is there room for more transactions like this in the near term, or is it kind of digest this and then take a look and essentially know what the broader environment looks like?
We're focused on this transaction, and we focus on them one at a time. We don't think about the next one necessarily right away, but when you have opportunities to meet those non-negotiables, it is our job to look at them. We will continue to look. We will continue to participate in all processes in our areas of operation. Again, pretty hard to get them through the hoop because it's a pretty small hoop, and we got a pretty big ball.
Good. Thanks for the time. Good luck.
Ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Before we leave, I do have a couple things to say. Number one, I want to congratulate the Vine team. Eric Marsh and team have done a beautiful job. They're a good operator, a clean operator, and it's really a tribute to the success of that team is where we are today. They've been nothing but professional, and I will tell you, our team is impressed. Congratulations, Eric and team. I'd also like to thank Blackstone. Blackstone is a new shareholder of ours. We're happy to have them as a shareholder. It's great when you have sophisticated investors who want to be in your stock. We have them. We welcome them. I expect to have a great relationship.
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.