Q3 2019 Earnings Call

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Today's presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference over to Tyler Louis Vice President of Investor Relations. Please go ahead.

Thank you Nicole and good morning, everybody.

<unk> third quarter conference call, we haven't learned today, Nick deal, Yes, our president and CEO , Don Rush, our executive Vice President and Chief Financial Officer, and Chad Griffith, Our Chief operating officer.

Today, we will be discussing our third quarter results and we have posted an updated slide presentation to our website.

To remind everyone. She likes consolidates its results, which increased 100% the results from CNX CNX gathering LLC.

Your next midstream partners LP.

Earlier this morning, she actually midstream partners ticker, she and actually.

Issued a separate press release as a reminder, they will have an earnings call at 11 am eastern today, which will require us to an Oracle no later than 10 50 area.

The dial in number for the CNX coal is 1888349 0097.

As a reminder, any forward looking statements, we make our comments about future expectations are subject to business Russ, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick.

My Chad and then Dawn and then we'll open the call for queuing <unk>.

Let me turn the call over to your next [noise].

Lifestyle or a good morning, everyone. Thanks for joining.

I want to start by highlighting a couple of metrics and data points that we think become a heighten importance and the challenge commodity price environment that the industry is looking out today are these metrics I think they matter across all phases of the cycle, but they are especially important and significant during the more challenging portions or parts of this.

Michael.

And first I want to talk about our inventory and our base plan. So let's talk about what we designated our tier one core inventory that's shown in summarized on slide four so I'll be speaking from slide for the next minute or two CNX has one of the talk to your acreage positions across the Appalachian peers or you can see almost one.

1.2 million that Marcellus and Utica shale acreage that we control and focusing in on the core southwest, Pennsylvania Central type curve region. You can see we've got approximately 70000 net undeveloped acres and using an average lateral like 9500 feet and 750 foot spacing you need to prop.

<unk> hundred 60 acres for each Marcellus well that you want to drill and complete I think the slide says 163 acres to the exact.

You divide that 163 acres into our net controlled undeveloped acreage in the region that gives you approximately 427 locations are successful development program is averaging about 36 wells per year in this area. When you look at 2018 to 2020, so assuming they consistent go forward development program.

I have enough drilling locations to support a dozen years worth of drilling.

I remember based on the Conservative way, we show our remaining inventory any leasing we doing a future adds to our net undeveloped controlled acreage position, which in turn is going to add to our inventory position, allowing it to grow overtime as we invest lane capital.

Now another active area in our development plan is the Shirley and grow our location and area and West Virginia as of year end 2018, we have 76 locations. We expect to turn in line roughly one per year in this area, which would give us about 12 years of inventory there as well.

And if you can see on slide four due to the prolific nature of our inventory 40 wells a year actually grows our production. So just these two Marcellus areas CNX has the ability to methodically grow production for over a decade.

Now that the inventory for our decade long base plan has been reviewed I want to spend a minute on the other main areas that we had and that we're excited about these areas are going to allow us to either a add incremental drilling and production grows to the program over the next decade as gas prices warranted and or be add substantial inventories, you're starting and beyond.

I'll start with southwest Yeah, you are stacked pay strategy here has given us substantial flexibility to add activity quickly if gas prices improve or go about a capital efficient drill program. After our southwest PA Marcellus field is depleted and in the meantime, we will continue to do a couple wells a year to facilitate our blending strategy well.

Further refining the cost and reservoir characteristics.

Another area on the Nexstar I want to talk about there's SCPA, where the Utica reservoir has been repeatedly very prolific and where our Marcellus is going to be able to be the stacked pay opportunity for that area a similar to what southwest PA Utica served as the stacked pay for southwest PA Marcellus. So the bottom line is that we.

Have a robust inventory of low cost low risk high margin high you our Marcellus locations to feel the base case for the company for over a decade and the rest of our assets or strongly situated to provide us with lots of efficient optionality throughout the next decade, and a large quality inventory for the company to utilize for debt.

Gates to follow.

Let's now talk about costs and that's really I think highlighted on slide five.

So slide five shows how CNX has top tier production cash cost when you compare us to peers. Despite producing the second lowest amount of volumes on the basis, and we show cost on that slide with and without the benefit whether it's through consolidation or the cash distributions received from our midstream MLP CNX midstream if you.

Include those benefits our costs start to decline meaningfully and towards the 78 cents per Mcf. The that you see a to the left to the slot.

Of course in a commodity business, having the best assets, that's not enough. That's a good start but it's not sufficient you also need best in class cost and the only sustainable place over the long term as at the bottom end of that cost curve.

We've made great strides, but we are far from Don and we're going to continue to focus on driving these lower which is going to further strengthen our company.

Slide six talks about and summarizes the active management of one of these cost areas really an auction.

We are well our way to achieving our $30 million an expected savings.

That were above and beyond the prior 2020 guidance numbers. When you look at SGN <unk> during the third quarter, we combine functions that existed across both our upstream and midstream teams, we flattened our organization optimized workflows to help streamline decision, making and we've already realized roughly 25 million.

In an expected savings in 2021 compared to the previous guidance.

CNS is 2020 expected SGN a on a standalone basis, several 50% less than the peer average on a trailing 12 month basis and is the slide shows slide number six we don't set a target then sit back and sat with what we've achieved we're constantly looking for ways to get better and continue to optimize.

Based on a never ending changing conditions are this effort is what drove our journey since 2018 over the past couple of years, you can see that when you move left or right on that slide.

Let's talk about hedging on slide seven or the slide shows you updated hedge book compared to peers CNS is substantially hedged in 2020, and 2021 or what the strongest realizations in the basin or this is the case for 2022 as well for 2020, using our updated guidance were 94% hedged at $2.

The 97 cents, an mcf deep and for 21 were approximately 76% hedged that's based on a consensus numbers, so with even more hedged if you assume flat production.

This hedge book it was built to protect our returns it was built to protect our capital structure and it allows us to stay strong in a downturns and grow and the upturns. Our hedge book continues to be unrivaled and it's a pivotal importance and this commodity cycle and you can see that on the next slide in terms of house protecting the free.

Free cash flow, we plan on generating so let's talk about free cash flow that's on slide eight.

Despite the macro environment gas prices in NGL prices getting worse since our last update CNX improved our free cash flow projections for 2020, and we also added cash flow to 2019 as well.

Now you will see 2020 Nymex came off 15 cents since our last update along with 2019, IMAX and NGL prices coming in lower as well.

And it's going to go through the updated guidance in detail in a couple of minutes.

In General I'll tell you were able to increase our free cash flow in spite of the lower prices by doing things like reducing our costs, lowering our capital and streamlining and reducing our activity and even with the lower activity levels. We increased our 2019 production guidance and we're still projecting to grow our volumes in 2020.

Combination.

Increasing our already positive free cash flow and 2020, while still growing production that is certainly unique among the sector.

So in summary, and wrapping things up looking at slide nine or you can see that we continue to differentiate ourselves through three main advantages first our marketing strategy second our cost structure and third of course, the asset portfolio, our competitive advantages and approach there are allowing us to more effectively now.

Gate, a challenging commodity a macro environment and these advantages.

They allow us to approach a lower price commodity cycle from position of strength.

And even though gas prices got weaker this quarter CNX resources, just got stronger or these advantages and the unique philosophy that we deploy a they've continued to separate us from our peers and we're positioned very well for whatever lies ahead without now going to turn things over to Chad has got provide an update on operations.

Thanks, Nick turning to operational highlights for the quarter on Slide 11 production was 128.3 Bcf fee or 5% decrease over the prior quarter, but up nearly 8% over the same quarter from last year. This is inline with what we expected and Directionally gotta to last quarter.

We turned 24 wells online and the third quarter, while drilling 15 and completing twice.

The majority of the wells came on later in the third quarter, which will set us up for a strong expected production in the fourth quarter.

Slide 12 highlights the blending strategy that we are employing in southwest Pennsylvania.

We have several DAP Marcellus pad thing blended with dry gas entering dry gas systems and avoiding expensive processing.

As part of that strategy, we brought to southwest PA Utica pads online during the quarter.

While it's still too early to go on specifics on well performance for these recent wells. It looks like pressures are good and our blending plan is on track and generating strong rates of return even in the current commodity market.

As such we continue to focus on our core southwest PA development plan at the foundation of our steady state go forward plan.

Which will include a couple southwest PA Utica wells each year as part of our core blending strategy.

Along the way, we will continue to collect data on southwest PA, Utica, which will improve our understanding which we expect will improve results over time.

Tom will go into more details in his commentary about guys changes, but we did cut back on activity as a result, or the recent commodity price changes.

This reduced activity as long as to operate very efficiently and setting us up for a more efficient 2021 and beyond.

Beyond the scale back in activity, we are redoubling, our efforts to drive down operating costs and improve and improved capital efficiency.

Some of these efforts such as the process. We completed this quarter of combining our midstream and upstream teams will pay greater dividends over the next several quarters, while others such as our focus on optimizing our portfolio are already paying off.

For instance, better use of our produced water during the third quarter was the main driver and reducing production cash cost cash costs by five cents per mcf be where ever quarter.

Water reuse has become a popular subject lately, but we've been planning for it for several years, we've got a basin, leading wire system, consisting of pipelines, which allow us to significantly reduce the number of water trucks, we use and storage facilities, which provide the buffer between the steady production are produced water and the rapid use of water during completion.

The final piece of that wire system, and they're all however, wireline, which was completed this quarter I brought into service and provides the additional are needed for our completion work.

On the capital side, we're continually evaluating or DMC capital plan with respect to changing commodity prices and service costs and how it didn't see investment opportunities stack up against our other capital allocation alternatives.

We follow the math and the masses, let us to reduce our activity, resulting in our updated guidance, which Tom will discuss in more detail momentarily.

For the capital we do spend through DNC, we are focused on maximizing risk adjusted rates of return, while continuing to operate safe environmentally compliant manner.

Slide 13 provides some of these highlights from the third quarter.

With drilling we averaged 13 days per well and averaged almost 5900 feet of drilled lateral footage per day.

Also our rig moves averaged 2.75 days.

On the completion side, we set a record of Franklin 15 stages, and a 24 hour period and continue to see the benefits of the evolution all electric Frac Frac fleet.

In addition to pump efficiency and operational flexibility, we're seeing realized savings of $250000 per well and fuel savings by burning natural gas or diesel.

For us the process of optimizing DNC capital does not mean simply solving to allow us dollar per foot metric.

We're solving for as rates return.

That said dollar per foot isn't important metric contributes to rates return, but there are many ways in which we get further reduce or do you see foot DNC per foot number on some of those ways to create problems down the road lead to impaired rates of return on that investment opportunities.

Nevertheless, where the math and engineering supported we can deliver industry, leading dollar per foot Mac numbers. So thats on our surely 38 pad, which just turned in line in West Virginia.

Where we delivered a five well pad and all and $640 per lateral foot inclusive of capital beginning with groundbreaking through turned in line.

Just to sum it up the team continues to execute and is constantly pushing for more efficiencies and cost reduction.

Our capital efficiency continues to improve as driving our corporate strategy.

That I'll hand, it over to dawn.

Thanks, Chad and good morning, everyone.

Slide 15 shows some of our financial results for the quarter.

Consolidated adjusted EBITDAX for the quarter was $204 million or one dollar nine cents per outstanding share.

And Standalone adjusted EBITDAX plus distributions in the third quarter was $159 million or 85 cents per outstanding share.

Despite weaker gas prices compared to last year, we were able to maintain strong operating and fully burden cash margins.

Next before I get into our guidance specifics I wanted to spend a few moments discussing how we have built a flexible company that is able to adapt as conditions change around us, which you can see on slide 16.

And like we've said many times before we make decisions throughout the course of the year and a dynamic fashion.

Variables in our industry change quickly and frequently and we modify and change our approach accordingly throughout the year.

We built the company to navigate a downturn and youre seeing that plan of action now.

And just to be clear, we have not only positioned the business to do well in a downside case, we have also created a lot of flexibility.

To accelerate activity, if commodity prices and conditions improve.

We have a substantial inventory of low cost high margin locations with infrastructure in place to support quickly adding activity.

As we have shown in the past, we are willing and able to sell assets, which is another way to quickly and meaningfully participate in an upside scenario.

Now.

Let's shift to looking at our updated guidance.

2019, and 2020, starting on slide 17.

Theres lot of information on this slide so we'll go through a high level summary, first and then talk to a few of the details.

In general the commodity price has gotten worse since our last call.

And over the second half of 2019, and all of 2020, we reduced our capital guidance by approximately $80 million, we reduced our consolidated SGN, a spending guidance by approximately $35 million, we decreased our production guidance by approximately 17 bees.

But we're ultimately able to increase our see you next standalone free cash flow guidance through the end of 2020 by over $30 million by actively managing the business.

Now for a few the specifics.

For 2019 estimated production volumes are up 15 Bcf feet to 532, 540 Bcf fee, while projected capital is down approximately $17.5 million based on the midpoint.

In 2020 projected capital was down $60 million from the last update.

And due to the 2019 production acceleration coupled with the 2019 and 2020 Capex guidance reductions production volumes are expected to be down 35 Bcf fee.

Based on the midpoint of the updated 535 to 565 Bcf fee guidance.

When compared to the previous update of 570 to 595 Bcf fee.

And like Nick has already mentioned.

Based on all of our changes we were able to increase our free cash flow guidance to $146 million compared to the previous guidance of $135 million.

Despite the fact that gas prices are lower than they were at the time of our Q2 call.

Also it is important to note that these changes are not creating a onetime benefit for 2020.

The plan has consistent activity throughout the year.

And as you can see from our guidance numbers, we have not yet reduced non DNC capital.

Although we were actively manage it as the year unfolds as well.

As a matter of fact this guidance change actually makes our 20 to 21 and beyond path easier saving some locations for later, having less wells declining and 2021 and beyond.

How should we think about the free cash flow potential of CNX moving forward.

Well and a maintenance of production type program, we would expect to generate a significant amount of free cash flow each year using the current forward strip.

In fact under this scenario.

We would expect to be able to.

Generate enough free cash flow from now until the end of 2022 to pay off the majority of our outstanding 2022 notes using our own free cash flow from the business.

And remember we are using the current forward strip for our forecasts are numbers would obviously look better.

The higher than strip forward looking gas prices typically used by our peers.

Slide 18 highlight some of the additional guidance update.

One of the bigger updates here is SG anyway.

For 2020, we are reducing consolidated actually in a guidance by $25 million compared to the previous guidance update.

With 2019 coming down as well.

And as you can see on slide 19, CNX screens very well when looking at absolute question $8 on a standalone basis.

Slide 20 is an update of the production profile, we expect through next year.

As you can see it is fairly consistent throughout the year with a bit of growth coming towards the yet.

We expect to turn in line approximately 47 wells 35, and the Marcellus and 12 in the Utica.

And to be specific the breakdown of the 12 Utica Wells is followed.

One southwest PA, Utica pad, consisting of four wells, which supports our blending program.

One Monroe County, Ohio pad, consisting of five wells and once EPA Utica pad consisting of three wells.

And as we've said during our last earnings call, we will pay attention to all the variables and adjust plans core accordingly, as the year unfolds.

Slide 21 showcases how our 2020 free cash flow is protected from commodity price changes by our hedge book.

The fact that we chose to produce less in 2020.

Results and less gas sold it open prices and as such our 2020 production is now 94% hedged.

With our new plan.

Our cash flows even more protected.

The 10 cents move and 2020 gas prices only resulting in a 5 million dollar change to our Standalone adjusted EBITDAX plus distributions amount.

Like we have said previously if gas prices get better we can add activity or look to sell assets and participate in the upside when it comes.

Slide 22 shows all show some of the details on how we think about our capital structure and balance sheet.

As we've said before we look at these things Holistically and view asset quality cost position flexibility in your business with lower fixed cost and revenue and cash flow productions via hedges as well as the typical leverage ratios and liquidity metrics.

And as you can see on slides 23, and 24 or balance sheet is looking stronger and stronger versus our peer group and as challenging price environment.

CNX is leverage profile profile screens, very well compared to our peers, especially when including off balance sheet obligations, such as ft, which the slide show we have prudently managed.

The team has been harder work building a company that has the flexibility to navigate through tough commodity cycles and in the environment that we're in today and is paying off.

Our team our asset base, our strong hedge book, our low cost structure, and our philosophy has positioned us to adapt and thrive in any environment.

With that I'm going to hand, it back over to Tyler.

Thanks, Don Nicole can you. Please open the lineup for Q and I asked as Scott.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

You are using his speakerphone, please pick up the handset, but more pressing micky Thomas.

Withdraw your question. Please press Star then too.

Our first question comes from Wells, that's Patrick that Suntrust. Please go ahead.

Hey, good morning, and congrats on the the strong guy there.

Good morning, Thank you.

Does does you not a thank god knows the answer here, but that's a modestly slower 2020 plan does that change any of the kind of a theoretical.

Drop cadence and yells month.

Yes, so we haven't given any guidance on what is what drop cadence would look like.

We have founded important to not need those in our go forward plans from from the upstream for sex perspective in as well as the midstream perspective for that matter.

But obviously as a inventory last longer in different areas get get pushed back that need to build infrastructure and some of the new areas isn't as pressing at the moment so.

In general.

Figure these out as time time requires that we got we got time it both companies have the wherewithal to to do it when it when it makes sense for both.

Okay, and you guys mentioned a couple of times in the in the prepared remarks about your your ability to add rigs quickly of prices improve is there can you talk that I'd tell you think about that is that sort of IR or are you solving for or are you solving for free cash flow et cetera.

Well for us it always comes back to ready to retire a and we compare the ready to retire from incremental drilling activity to the other opportunities we have for capital allocation. So for us, it's always going to be as a matter of looking all the different variables all the different inputs and what the rates return end up being when you compare DNC capital versus whether its share buybacks that reduction or other uses.

Capital and the variables that exist at the time of the decision obviously how.

Active and accessible the debt markets are change how you run the mechanics and math on this as well as.

What the gas price change looks like is it A.H. just a quarterly change or is it a forward strip modification.

Do we have the ability to to hedge and to lock in some some of those additional cashless streams.

Okay.

Perfect and then just just one last one for me can you and I know your your midstream contracts to be protection from the vast majority if not all of it but can you talk a little bit to the recent deaths and volatility it Dom south and Im two and kind of how you think that might shape up throughout.

We ended the year and 2020.

Sure I think I think a lot of the the volatility in the local market. We have there were some some pipeline interruptions during the quarter.

Particularly getting off to the they're getting gas to the golf I think that directly led to allow the volatility of saw the local markets you're in Appalachia, we've been largely protected from that through our extension extensive bases hedging program.

And so we have largely been isolated from that when you look at sort of an all in including hedge realizations.

But.

No I think we'll all the volatility has been driven by like the uncertainty or timing of getting those interruptions corrected and one of the flows going to be and where we're going to get that stuff online and then as as different producers on market participants figure out ways to navigate around those transportation constraints.

So just sort of let it really volatile sort of Q3, a and I think as we look towards Q4 and into the winter.

I think what's happening in Appalachia is as a little bit might have a microcosm, what's happening more nationally where storage is getting full we're getting up towards the upper end of what those storage levels are we're getting past the five year average storage levels are still a lot of gas coming out of the ground <unk>.

It's it's leading towards a sort of tight winter and I think we're all sort of where we're all hoping for a cold winter.

So that that's sort of that storage balance and some of the transportation constraints caused by that pipeline our options as causal I think a lot of market volatility.

Okay very helpful. Appreciate it thank you.

Our next question comes from we have Marianne.

Key Bank. Please go ahead.

Hey, guys.

Just wanted to kind of ask a question around activity levels like deep when I look back at the update from Twoq. You. I think you guys had made a comment that said you had three rigs under contract until the end of the year 19 against today's update talked about two rigs running a was just curious kind of kind of would have.

And there do you guys were able to kind of get away from from one of those contracts and worthy costs.

Associated with that.

Sure. Thanks for the question you know what.

And some really good efficiency towards during 2019.

We are able to do more with less.

So when we look at sort of the the macro environment the gas the gas price environment and how much we were getting out of the rigs we had a sort of we didn't need that third rig the necessarily hit the targets that we already set out there.

And so so we began thinking okay, well how do we how do we restructure this or what can we do to bring sort of our activity set back in line now that we've got more efficient and so we were able to do some restructuring and we are able to sort of offload that third rig a little bit earlier than previously expected.

Really a cost neutral basis.

Okay. That's a that's helpful for sure I guess any prepared comments you talked a little more about how you guys are still going to have some production growth in 20, but it sounded like it was little bit more weighted.

Kind of later in the year is that just a bunch in you kind of having more second half Tilden 20 kind of like you sort of had in 19 is it how we should sort of think about is going to make sure I heard that right.

That's that's a good way look out and you can look at slide 20.

For a visual depiction of what sort of the production cadence will look like.

In 2020.

Okay. That's helpful and I guess any update on Utica well costs. Obviously, you guys did a good job driving those down over the last year, just want to get a sense of where that was our today and where do you think those may go into 2020.

On the capital efficiency side, we're continuing to find ways to get get better. There. We are looking at every piece of it didn't see.

Got it when we plan for those wells, what what's the most optimal decision to make on each component of that well design on that completion design on those on the production facility designs are the team really challenging the team to look at every piece of that to make sure at optimal from already return perspective, there's some of the you know we've already announced the Majorsville six.

Results prior quarter as we're very very nice with three of those four wells in the $12 million range and the fourth wells to at 15 million, but again that for the higher cost in that fourth wells really do some science work that weighed on that while.

The other the other southwest PA Utica pad, we brought on line this quarter the more Stan.

It was a little bit hiring costs, we don't.

Close an exact number on that but it was a little bit higher but what we did there we installed liners on on that well as we discussed last quarter that we had a number of Utica wells were planning on installing Flyers that that was this pad, we install those liars that drove higher costs.

Okay. That's a that's very helpful and I guess I'm, just lastly on kind of any comments you made in the press release. It sounds like just give me a little more of a focus on debt pay down versus stock buyback could you maybe talk not a little bit I think John you'd mentioned that a lot of it had to deal with existing get mark conditions, Amy's provide a little color around that.

Yeah like we've we've tried to to stay consistent with here the last several quarters around how we think and the cash flow that's generated from the business to free cash flow.

The triangle of what we do with it whether it's invested back into the business and.

And to the drill bit or bolt on land acquisitions, whether user for buybacks or whether we use it for about the balance sheet AK that reduction.

We tried to the be thoughtful and disciplined and prudent we take the long view on these nice types of items and obviously the debt markets have changed really quickly over the last over the course of the year and you really over the last the last few months even more so so.

Commonsense tells you part of big part of the NPV per share intrinsic value of the businesses the cost of capital in the in the risk associated with it so in today's environment, where their credit market said the call. It the prudent disciplined thing to do is make sure that you're a or capital structures is strong and solid in the hedge book and everything.

We've built.

Keeps it strong and solid but as you peer into the future I think everybody is learned here over the last decade, it's impossible to predict the future. So we don't try to we try to just ensure that the business survives works is healthy.

It is growing per share value over the long haul step by step along the way.

As we sit here today.

The best use of the incremental dollar.

Currently it with all the variables in place looks to managing the balance sheet.

Okay. Thank you.

Our next question comes from Holly Stewart of Scotia, Howard Weil. Please go ahead.

Good morning, gentlemen.

Maybe Nick I can start which is sort of a bigger picture question, you're still showing some clear advantages with your hedge book and lower cost structure, allowing you guys to switch gears on on capital allocation. So maybe just provide.

Your perspective on the environment for Tony Tony and how you see the dynamics playing out and then you know maybe ultimately how that makes you think about M&A.

Yes on the the first part of your question Holly I think if you look at the next well, we can drill or the next share buyback or the next dollar that we could retire all of them as Don sort of lined up and the prior question have some pretty compelling rates of return.

Tied to them using the current forward strip.

That being said he did a good job course summarizing why we look at our free cash flow debt reduction as sort of first analyst at this stage on that incremental decision now moving forward.

I think again, the math and the the process remains the same so we will continue to run the rate of return metrics and and a key point and what to do with respect to future capital allocation, especially with respect to things like drill that will be don's comment on what's going on with the price change that we're looking at is it something that well.

In across multi years that we can hedge and effectively locked the rate of return and on or is this something that's more of a seasonal change for a month or a quarter and really not much change beyond that in which case I would I would suspect that we we hold back on on additional activity.

With respect to M&A I'm sure. There's there's some compelling cases out there with respect to so what's available on valuation versus where they are they're trading that are valued at today.

I can tell you that when you start to think about the risk and frankly, what we know or don't know about those versus what we know across those three capital allocation opportunities that I just mentioned within our own portfolio. We are way more profitable staying focused on our own portfolio for the time Dan.

That makes sense. Thank you and then Don you made a comment there.

At the end that I was just trying to understand I think you said the majority of your 20, Tony to maturity, which we thought was something north of 875 million would be paid off with free cash flow do we do we get that right and then maybe can you just help us understand that comment.

Yes.

So if you look weve the way I tried to characterize it was we did give free cash flow guidance for 2020.

And we also laid out what a mob capital program all end would cost to hold that type of production level through a through several years. So back to back to the envelope. I think you can kind of get get there with those pieces, we haven't given official guidance for 21 and 22, so I don't want to.

Provide official guidance there but.

In that Matthew quickly get too.

Call it significantly more than half of the 2020 twos being able to be paid down from from cash from the business.

And then when you out into different options that we have at our disposal coupled with.

We've always sold assets in all parts of the commodity cycle, they're not always chunky, but there are asset sales going on at this company all the time from surface to right of ways to some of the smaller under the radar things that provide cash inflow crossed out across the year over year as well so.

Kind of help frame the cash flow projections, and how we think about the risk associated with the 20 twos and managing down in multiple ways. Instead at only have and one option. Our disposals is what we're trying to set up.

Okay. So just to make sure I understand it you're seeing if you went and 2020 through 2022, Adam maintenance capital program, the free cash flow generation that that would throw off.

Would cover the repurchase of the majority of that no.

Yeah like I said, we were wouldn't get into 21 and 22 guidance at this point, but with that Mark capital and the hedge book that we have in the line of sight on cash flows.

We feel we.

Good that Theres the majority of the 2020 twos could be handle with cash on the business and you know in the meantime, we still are always looking at every option to to manage our capital structure of the company. So just wanted to provide a little bit of color without getting into specific guidance yet.

Okay. That's helpful and then maybe and Cat I think you pointed to slide 20 for sort of the production cadence as we move through through the year is there any color you can provide on how that capital would be allocated is that sort of a linear program here, we follow prior year cadence.

It is if it as expected to be linear program at this point in time, Okay. Great and then just maybe one final one for me can you.

Given expected DUC count at year end, 2018, and and Tony Tony.

Yeah.

Oh Man I.

I'm, sorry, I'll address those numbers down earlier, but the reality is that when you think about working inventory from 2018 to 2020, when we look at the activity. We had planned for 2020 well between the roughly two rigs refractory ore. So we we are basically staying in pace. So so the amount of work inventory Wang 19.

If we complete that inventory some of that inventory and 2020, and we replaced that DUC inventory with drilling activity in 2020. So as we look at 2020 in the in the capital program. We've laid out for 2020 are working inventory level basically remains unchanged year over year. So us so that sets us up well going into 21 to sort of continue to plant.

Yeah and that new the exact number.

It's a few pads.

Whenever you think think of five six wells on a pads have closed on a pad I think right now there is around around three or so three to three pads at any point time, but they're less ducs for US. There just projects that are just in part of the phase to turn on line and as Chad said we're.

I can I said in my comments earlier 2020 isn't a non the anomaly. So we're basically drilling and completing a similar amount of feet. So the working in microarray will will kind of remained.

Consistent and it's really just working inventory not not so much ducs that are waiting for home. It's just part of our natural cycle got it appreciate it. Thanks.

Our next question comes from Sameer Panjwani Tudor Pickering Holt. Please go ahead.

Hey, guys. Good morning, maybe to stick on the topic of that.

Can you can you just walk us through how you think about appropriate leverage metrics in today's commodity price environment versus the two and a half time ceiling that you've previously talked about.

Yes, so again part of this probably is from from day one.

Being a little bit more articulated on on on this so this to five leverage ratio is truly a ceiling get it's not a a target it's not where we feel like the business should be at at all points of the commodity cycle. What it is just when we look at our or longer range plans and we look at the strip and you sensitized to us.

Off of it in you do scenario gaming, it's just helps you.

Have a.

Holiday consistent methodology as a warning sign that you don't want to be overhead for extended periods of time. So it's it's not a target that we have had.

It's not a target going forward as its truly just to a risk ceiling. When we look at the long term here I think as far as adjusting adjusting that ceiling.

Right now again, it's a warning ceiling not a target where we want to be at when you look at a call it more easily accessible debt capital markets and more favorable environments, you're comfortable with more debt whenever there is harder to access and higher cost that you want less debt, so where our.

Comfort Inn is where we want to be will change as times change, but definitely we want to ensure that we have a long healthy capital structure that works and downside scenarios, which is is why we talk to things.

More broadly than just leverage ratio minuted matters, which are hedge book is it matters how flexible your company is it matters, where you sit on the cost curve and what the quality your assets are so.

The leverage ratio ceiling is really just to a short hand way. We're trying to two described it to the to the general public that where there is put things in place that we definitely want to avoid but as far as where we sit totally on a capital structure. There is lots it more pieces that we look at beyond that and again as we've said with debt markets where they're at.

That logic tells you that you want to.

Changed the way you approach the data your business.

Okay. So would it be fair to say that at this point in the commodity cycle that maybe something closer to two times are less would be kind of more appropriate way to think about what you think the appropriate leverage on the businesses for now.

Yes, I mean is getting short short and it's hard to just pick one metric and say that this is it so depending on what the Ford ship says depending on where.

Our liquidity is with the you know the the go forward EBITDA of the trend until one so it's a wide range of things. So we look at we've we've historically been closer to two that we have the two and a half although with the commodity prices and some of that it's picked up little bit. So net net we do feel that more a stronger capital shop.

Offshore less that in a harder to.

Get that environment is a better plan.

Okay, Okay make sense and then on the topic of Dropdowns can you help us understand how upstream cash flows a change if all the routine midstream assets were jobs I think you've previously talked about the ballpark of $200 million are retained midstream EBITDA set all this was dropped down what upstream EBITDA also draw.

Hi, good or.

Another way to think about that.

Yes, and we haven't given a lot of this clarity since our 2018 March analyst day, So a lot of those numbers are.

From from a different point in time in a different forward commodity strip that strip macro environment across the board D. This way to think about it or the the midstream only assets.

Or one or two ways. So the ones that are already in place and have slowing production on them and their capitalized and build out it would be just you know trading upstream EBITDA for cash and the midstream company would get that EBITDA on a go forward basis. Some of our areas still have capital to be spent so one way to think about.

Got it would be there would be offsetting future EBITDA that would go down from an upstream perspective, but the capital necessary to build some of these systems in our non DNC buckets would go down on the front end as well so that kind of blend blends out and blends through then the last piece is the.

Water side of the business and.

While the water side of the businesses still.

I'd say.

Depending on what the commercial agreement would be between upstream and midstream type company in a drop scenario a lot of that costs from upstream perspective would would be capitalized since we do as Chad mentioned reuse. The vast majority of our water. So lot of that would flow into the capital Corp. part for upstream and would be.

Cash generation for midstream and we've talked historically that we do third party type.

Products and the water space as well and we've had years, where we've had $10 million or so of third party tight income generated from that from that business.

Okay, that's definitely helpful walk.

Would it be possible to quantify any of the impact from those three buckets that all right now or is that something that you're saving for later time.

It depends on how you want to structural the commercial agreement I think if you have caught a normal type over water contract you could be somewhere in the 50 to.

100 million dollar in EBITDA type range again completely dependent on what you set your commercial rates to be coupled with the level of activity that you plan on doing over the next several years. So is the order of magnitude that that's kind of could be in the neighborhood.

Okay, and then last question does on the asset level.

You guys were walking through the year southwest PA inventory. It looks like you were assuming 750 foot spacing I think some of your peer them in widening out closer to 900 foot 2000 foot spacing. So you have any plans to test wider spacing are you comfortable at the 750.

We've gone through US a series of spacing tests or this our last several years, we've tried different different off different offsets for tried different spacing.

You know and it it.

Playing time now where we are settled at 750.

It's not just something we set and we set and forget it we do continue to look at it and the contact the change in gas prices, but you know where were at where we're at and the gas price world and where we on the price while the commodity deck 750 still that sort of sweet spot number for us and one thing to note two which I think as important it depends on how you develop your field so.

If you're developing your field efficiently and you'd have the laterals be completed in an orderly manner instead of jumping in and out areas and haven't interference with legacy production that you completed years ago, It's a pretty material difference. So in situations, where we are budding up against the edge of a well.

It's been there for a long time will be further away than 750, but fortunately for us a lot of our areas are pretty clean on that on the development front. So we're getting in there and doing it right as opposed to happen that come back and fight.

Things that have already been drilled in a big reason for that as you know are held by production footprint, we didnt have to jump around and chase leases a lot of our forward thinking planning, we haven't had to keep a rig rig busy so its jumped around inefficiently. So laying it out from the front end and building the midstream the water and just the sequence in order.

Of how you develop the field makes a big difference on how you would think about this space the right spacing for the wells.

Okay, great. Thanks, guys.

Our next question comes from Joe Allman Baird.

Please go ahead.

Thank you.

First on the evolution are all electric Fracs so.

I understand that they're saving money in terms of fuel.

Is there anything negative for any downside and using those those fracs and what's the plan going forward I mean, if there if it's pretty much all positive is a plan to use it as much as possible.

That is the go forward plan, we're seeing a lot of benefits from even beyond the cost savings are the way the.

System is designed provided a lot operational flexibility with how we pump stages will how much horsepower able to deploy all kind of rate regarding downhole with provides a lot of flexibility beyond what you would get from a traditional conventional frac fleet.

And so because of those benefits. We are we are planning to use them.

As much as possible on go forward basis.

Got you no negatives in using.

I mean, it is a it is a new is newfleet and new technology. There has been a a few sort of like.

Commissioning sort of bumps in the road that Weve that we're working through.

But even with those commissioning bumps in the rubber still completing more than our sort of expected number stages a day and so it's been it's been really all positive even as we work through some of those initial swear commissioning red bumps.

Great very helpful and then back to the deck question So Don.

I think.

I heard correctly and I heard your follow up exploration. So the 2020 twos.

I think you said that you you can pay off the majority of the nodes.

With free cash flow now of course those are due in April 2022, so that would be free cash flow Universum 2019 full year 2024, your 2021 and about a quarter 2022. So are you, saying that when we some all that up that's basically greater than $450 million.

Yes, so again I'm not going to get into specific guidance numbers, but the the math I did was just through the end of 2022 and I do think.

As we talked about just cash flow from the business, there's plenty of different options and lovers via small to medium asset sales. There's the drop conversations that we've discussed there is.

The revolver, which we announced this morning, the borrowing base increased in spite of the lower commodities and all the other components rounded our borrowing base increase from two one to two three we left the commitment one but that that product is only $600 million drawn to their space on the revolver.

And there's plenty of optionality on on different call it cost of capital structures, whether or not selling assets or things that others have done.

Another project financing or components that exist out there so the key for us is maintaining.

A bunch of ways to address these situations in starting early.

2022.

You know is still in 2022, there's lots of folks that debt do before that but we want to be discipline, we want to be prudent we want to ensure that we're out in front of it in a in a manner that allows us to address it in many different ways.

And then in terms of can you just described what we're part of the upside asset.

Package would you be willing to sell.

Again, we were one of the few ERP companies I think in Appalachian Thats sold undeveloped acres, we sold pdps.

We've we've obviously everybody is done things with midstream, we have or water infrastructure, but have a ton of surface acres and stuff that are very.

Very valuable to people outside AB and in Saudi and piece. So we look at these things mathematically were trial, we try to be pretty just call. It transparent and follow the math on these types of situations and I think over the last several years, you've seen us do that in many situations.

And just in terms of the.

I think it's a smart decision to focus on the debt obviously, but.

Is that truly a rate of return decision or is that really kind of if you need to do it because it's coming due and you're going to protect the company predict the balance sheet.

I think it's a rate of return decision because it really goes to what the cost of capital ends up being in that at cost to capital effectively as our discount rate on what we think not just the the debt or the assets, but the entire company as well.

Got it and then quick one on the 2027 to trading at a pretty steep discount is that you're just not going to worry about that for now and just kind of take or the 2020 twos are you thinking about some options for them as well.

Yeah like itself, it's always good to be thinking and looking at everything them into the the conditions there are ever changing and quickly changing and very volatile. So we look across all these different buckets. I mean, obviously you want to ensure that the company in capital structure strong from liquidity from leverage from interest rate costs. So.

They're they're considered as a part of the mix, but do you want to make sure that you have the near term stuff situated properly as well.

Thank you very much.

This concludes our question and answer session I would like to turn the conference back over to Tyler Lewis for any closing remarks.

Great. Thank you I appreciate everyone, taking the time to join US here. This morning, and we look forward to speaking with you next quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.