Q1 2020 Earnings Call

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Good morning, welcome to the Cabot oil and gas Corporation first quarter 2020 earnings Conference call. All participants will be in listen only mode should be need assistance. Please signal kalkan specialists by posting a sparky followed by zero.

After today's presentation, there will be an opportunity to ask question.

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Draw. Your question. Please press Star then too.

Please note this event is being recorded.

I'll now like to turn the conference over to get antigens Dinges, Chairman President Chief Executive Officer. Please go ahead.

Good morning, Thank you for joining us today for Cabot first quarter 2020 earnings call.

Before I get into our performance for the first quarter I'd like to say that our thoughts are with those that have been affected by co bid 19.

I want to thank those individuals on the front line, especially the healthcare workers, who have been working to keep at.

All they hearing this pandemic. Additionally, I want to thank all of our employees for their tireless effort to keep our operations running efficiently. While we're navigating through truly challenging times I would never bet against the resiliency of human spirit and I do expect us to emerge from this period even stronger.

As a reminder, on this morning's call we will make forward looking statements based on our current expectations. Additionally, some of our comments will.

Reference non-GAAP financial measures forward looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in yesterdays earnings release.

During the first quarter Cabot generated positive net income of 53.9 million or 14 cents per share and 49.8 million a positive free cash flow. Despite a 49% decrease in realized prices relative to prior year period.

Lighting, the company's ability to deliver profit and free cash flow even in the most challenging of markets. We returned approximately 80% of our free cash flow to shareholders during the quarter through our dividends, which currently yields approximately 2% on an annualized base.

We remain fully committed to our dividend and based on current Nymex futures for 2020, our program for the year as expected generating net free cash flow to fully covered our dividend.

Our balance sheet remains iron clad with net debt to trailing 12 month EBITDAX ratio of <unk> 0.9 times.

Lenders group recently unanimously reaffirmed our $3.2 billion barring base under our revolving credit facility.

Aggregate bank commitments under our credit facility remains at 1.5 billion, which result in approximately 1.7 billion of liquidity at the end of the first quarter, winning polluting over 200 million of cash on the balance sheet.

We have an 87 million dollar tranche of debt maturing in July of this year, which we plan to pay off with a portion of our of our cash position.

On the operational front, our production for the first quarter was 2.363 billion cubic foot per day, which was inside our guidance range for the quarter. We play nine wells on production during the quarter all of which were turned in line.

During February.

We are currently operating too big and utilizing two completion crew.

As previously disclosed we expect sequential decline in production during the second quarter driven in large part by a lighter turn in lines schedule. During the first four and a half month of the year with only 13 wells is expected to be placed on production between the beginning of the year in mid May.

This is primarily a result long cycle times for large pads with long laterals during the first and second quarter. Additionally, our forecast assumes modest price related curtailments during the natural gas gas shoulder season, our second quarter production guidance range also.

So reflect the impact of an unplanned downtime related to remedial work on one well on a large pad that resulted in the deferral of over 230 competed stages from the first quarter, two the second quarter, which led to lower capital spending levels in the first call.

Sure.

We've updated our full year production guidance to a range of 2.35 to 2.375 billion cubic foot per day to reflect previously mentioned operational changes the midpoint of this range implies flat production levels year over year. Additionally, we have reaffirmed our capital program.

Ramp up.

575 million dollar, we do expect a significant sequential increase in production during the third quarter based on expectations of placing approximately two thirds of our wells on production between mid May and late August while our fourth quarter production is expected to be flat with the fourth.

Order levels from last year.

We used the recent rally in 2020 Nymex features to layer in additional hedges for the summer months <unk> tech against the potential for more prolonged demand destruction. This summer related to the global endeavor. However, the outlook for natural gas prices later, this year and into 22.

21 has drastically improved since our year end call in February with a 2021 Nymex future increasing by almost 50 cents to approximately $2.75 per M. M. B to use this has been driven by the expectation for significant gas supply decline.

In 2020, and 2021 from the substantial reduction and activity levels, we have seen in legacy gas producing basins like the Marcellus the Haynesville and Utica. In addition, do sizable cuts in activity, we're seeing in oil basins like the Permian Eagle Ford and mid continent, which.

Are expected to result in significant declines and associated gas production.

It is premature to disclose any formal guidance for 2021 at this point, however, I would highlight that a maintenance capital program next year would deliver a free cash flow yield over 6% and a return on capital employed of approximately 20% at the current.

Strip, all while maintaining a net labor leverage ratio below one times EBITDA.

As of today, we remain on head for 2021, as we continue to assess the natural gas market outlook for next year, while the recent increased in the for her 20.1 is extremely positive for US. We believe that the market is currently under estimating the potential undersupply of natural gas.

Market entering into 2021, providing us optimism that the forward curve for 2021 will need to move higher to incentive ties increased activity levels to address the undersupplied market for reference every 10 cents improvement in the annual Nymex.

Right and 2021 results in approximately $55 million of incremental free cash flow under a maintenance capital.

Scenario, highlighting the opportunity for significant free cash flow expansion and increased levels of capital returns to shareholders next year.

While 2020 will likely proved to be a trough year for our free cash flow and a return on capital employed due to the lower price environment. We are managing through currently resulted from an oversupplied market exiting last winter.

Our outlook for the year. However is markedly improve next year is markedly improved we plan to remain disciplined with our capital spending with an acute focus on delivering on the strategic objectives. We have laid out previously including focusing on financial returns demonstrating continued.

Cost control, maintaining our financial strength generating positive free cash flow returning capital to shareholders and increasing our proved reserve back.

Once again.

Like to stress that our thoughts or anyone who has been impacted during this difficult time, including our employees and shareholders.

And it remains extremely healthy financially and given the current outlook for natural gas markets and 2021, we believe we will emerge from this period stronger than before with that I'm happy to open it up for any questions.

We'll now begin your question answer session.

Ask your question you might press Star then one when you're Touchtone phone, if you're using speakerphone. Please pick up your handset before pressing fees.

Draw. Your question. Please press Star then too.

This time, we will pause momentarily to assemble a roster.

Our first question will come from Leo Mariani.

With Keybanc. Please go ahead.

You're on me Leo.

Yes. Please go ahead with your question and airline they'd be it.

Okay. We'll just go to the next question our question will come from Kashy Harrison what somebody energy. Please go ahead.

Hi, good morning, all in and thanks for taking my question.

You bet.

And in event and I know, you're you're I know your advertising, where you can say specifically for 2021, but let's just say you know over medium term you know pick a number of years.

The mid cycle price for gas.

Meaningfully higher from here, but just wondering how we should think about you know your medium term growth rate in a more in a higher pricing environment and how we should think about oh, the level of capital required to deliver that group.

Well, it's good question and there's a lot thinking about growth with the anticipation 2021.

Price.

Maybe getting a little bit of a tailwind.

Oh, we're looking at all scenarios that our focus is on.

Our.

Our current program in and 20.8 being as efficient as we can possibly be.

Right.

And just a commenting growth in general if you look at our industry.

And you take a step back and you look at the Carnage that's out there right now and all that we're dealing with.

You have a number of stressed balance sheet.

You have oversupplied in market, you had low commodity price in both oil and gas.

And it seems that.

You know it isn't a bad read play each did a little bit growth.

Or increase in price.

Everybody jumps in it and tries to take advantage of that increase and.

The issue for us to where we would make a decision for growth. We would we would have to feel comfortable that.

There's some fundamental changes in its sustainable.

And in the long term versus having a few months.

Oh of an increased.

And trying to do spend capital for that.

You participate for a little bit better pricing for short period of time pricing rolls off and you still had and recaptured all your excess capital you put into it.

That again has been play back over and over and over and that's why there's such stress and distress and in our market you look at the strip right. Now you can go out into 2024, and I think you get into somewhere like an average it's such a backwardated market you get into an average of two.

240 to 45 somewhere in that range.

That's not right, what we would view as a a sustainable.

Markets and the backwardation for US is concerned we had a contango market and felt comfortable about that.

We would we would participate and the the growth side of that have that story with that said our our program is it has built in through our service contract flexibility too.

And then more capital if we go and to complete a few more.

Stages and to build up into Oneq 21, if in fact, we elect to do so.

We kind of given a right now at our production level.

Our our or maintenance capital that we were at kinda today is kind of the maintenance capital we would have a rolling forward also so.

We feel comfortable where we are focusing on generating free cash flow in the financial metric is going to be our focus it has.

For years.

Year generating free cash flow in and what has been historically the a one of the depressed a market that we had in a long long time. That's a we're one of those few companies that can make that claim and and we're not going to change the way we perceive it we'd love to have that the higher.

Sustainable commodity strip or we'd love to grow into it, but we're cautious with our balance sheet and our capital exposure.

Oh, that's a that's great color Dan I'm certainly hope this rally has some legs that does this go around but all of this day [laughter] [laughter], but.

Yeah, I got I guess, then maybe maybe I'm still thinking a little bit with that general same topic I guess I was wondering if your thoughts on on capital returns to shareholders may have evolved.

You know overtime is specifically I know you in the presentation used to highlight wanting to return at least 50 per cent, but do you have a.

Do you have a bias for buybacks moving forward or do you have a buyback for maybe more of a special dividend strategy moving forward.

Yeah you.

Got the tagline, there on returning 50% or at least to shareholders and.

And even right now you know we've kind of them.

Return, what 80% or so so and in the past.

We returned more with the.

You know we bought back about 14% of our shares we've increased activity in about five times since 2017.

So we feel.

Oh, good about what we can deliver with it our program we referenced the maintenance program for 2021 as an example to illustrate.

That we're focused on on the financing metrics, but.

At least the 50% going back and if you look historically, we had delivered more back to shareholders are based operation is already.

Obviously for the most part and then maintaining that dividend.

We currently have is another important consideration bars.

You know kind of put in a growing the dividend and all so obviously, we always we don't have a real oh, a large amount of debt and certainly don't have much near term, but considerations for debt repayment is always going to fall into the mix but.

After maintaining the dividend growing the dividend is gone consideration if we saw sustainable.

Two small sustainable commodity strip and we felt comfortable that layering in a little bit more capital would give us a gross into a market that would allow us a.

Expected return of that capital before any roll off.

What would occur with the with commodity price.

Oversupplied in men under demand.

Then we would we would use some of that capital for that then we would always been interested in opportunistic buybacks yeah. It there's a disconnect.

Got it thanks for all the color there.

You bet.

Our next question from from Josh Silverstein with Wolfe. Please go ahead.

Thanks, Good morning, guys Oh, My Gosh, you are both hey, good morning, Oh, we like you are are bullish on natural gas price for next year, but wondering why philosophically just not start to layer in some hedges for her next year just to protect some of that downside, whereas you know to 75 and the curve <unk>.

Next year, you guys can be part of your free cash flow at that level. So why not just start layering in of these just an incremental amount.

Well, that's yeah, great question, Josh in and discussion point a much are hedged committee we are.

And have met.

Recently, a number of times and not only where are we focused on protecting the summer months.

Which we've done with some some hedges.

We also had a significant discussion about 20 or 21 that our board meeting yesterday, we are talking about the a the hedge program what we would.

Oh like to protect where we think the market is today and.

A considerable amount of detail and different Hutton presented a the marketing outlook to the board and and talk about where we think the market might go and.

And so.

It is a consideration Josh a week at this stage and looking ahead in what we think the market will do we're actually a very pleased that were unhedged in 2020 watt.

I think that Oh.

I think we're going to be able to.

On the couch the hedges that we play in 2021, when we do it.

As offensive hedges.

And we're looking forward to do it will continue to take consideration of where the market is currently in.

Also and despite where we think it might go.

To layer in hedges.

No I understand your your position in and again a lot of discussion around our board table about what we deliver a just even with just a maintenance program with the these are anticipated prices.

And strip prices current strip products.

Gotcha, Okay, and maybe just a follow up to that.

How should we try to think about the differential that would occur in the hotter.

Hi, Henry hub price for it for you guys.

This year. Your your guidance is around 30 to 35 spends do you think that that would hold true as we go you know up to 275, and then $3 <unk> next year. Obviously, you know the the capacity in the northeast region is probably loosened up a little bit, but any sense as to how differentials could to move relative to the this year.

Yeah, well always focused on the realization and I'll turn this to a Japanese he'll make a quick comment but.

Right now we feel good about where the dips our in our forecast, which is you outlined it.

You know 35, plus or minus a sense and and a feel pretty good about where the yes might go from here, even with a higher price, but Jeff I would like to you to make a comment on this.

Yeah, Josh I'll, just jump Hutton or more.

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Looking at that of course daily on the outlook for the Oh ice basis differentials and quite frankly, we've been I'm very pleased with the differential seem to to fall in line or expectations and the current basis differentials.

I think if anything if we see a.

Move upward into the $3 or which we are.

So for that.

We might see him a p. sense, a widening or on the differential for the total company.

But the outlook so far with a 275 trip is not too far off from the of the current differential.

Got it thanks, I know things done.

Our next question will come from Bryan singer with Goldman Sachs. Please go ahead.

Thank you and good morning.

Oh right you've highlighted your low cost structure strong balance sheet, a healthy cash flow it maintenance levels not wanting to see if you could touch a little bit on your latest thoughts on consolidation or there's a lot of dress companies out there that could open up assets become presale over the next year. If they aren't already can you give us your latest thoughts on the risk reward of gaining scale.

Yeah, when Appalachian versus diversifying versus none of the Abbas.

Yeah, you know the or M&A conversation is is ongoing as I've said in the past, Brian and you're fully aware that we have that.

Conversation that are executive session in our board at every board meeting.

The the market I think.

They'll need to consolidate it's been our position for a long time that consolidation would be healthy.

Difficult part each time, we grind on it the difficult part is the debt levels and the debt load.

Shaded.

With the Appalachian peers.

It is a significant debt load the lost.

Or some of the market cap or through all this.

Carnage that we've been going Peru has such a large percentage that compared to an equity in these companies and.

And.

It just makes say a.

Yeah, what combination if you will a difficult analysis about particularly for up to Oh, we have what we think is the dreamily good assets.

Oh, we are are cognizant of the fact of any dilution that might occur with a combination.

And if you if it comes with a.

Debt load that that we're not.

Oh, you know prepared to take.

When it comes with acreage that.

Each company has been good acreage, but each company has maybe some acreage that that would not.

A line up in our drilling schedule for you know 20 plus year [laughter]. So.

It [noise], it's difficult if a if they were quality assets that a night that we would always.

Oh look at that as we've done for years and years and years and years, but.

Also meeting.

ER, our expectations on [laughter], no what fit for our value watching for Cabot and its shareholders versus what sellers expectations might be and it's always hard to get it lined up but.

I'm not trying to danced around the question, Brian, but I think you know if I could sit down the number one reason why.

It make things so difficult is the drop quality and debt levels.

[laughter].

Great. Thank you I totally understand my follow up is with regards to the upper Marcellus you provided an update on that on your last call and I know it hasn't been all that long since then but what wonder if there's any update just on well performance and upper versus lower Marcellus.

Yeah, we are as you know we.

How about only five upper Marcellus wells scheduled and program a this year I'll let.

Phil bottleneck or make a quick comment here on the Oh, the performance of the upper but our plan.

Is going to remain ads is that will layer in.

Several upper Marcellus well wells when it when it fit our operational program on a given add in the location.

Where we might be able to lay these out.

One one tidbit of information and then I'll turn of itself is a our programming and in looking at the upper Marcellus and trying to lay out a a expansive development program a with the upper Marcellus again, very very sparsely drilled.

But looking at it in a way that would allow us to drill.

Extended laterals or even compared to our say 8000, plus or minus a lateral link today, we'd be looking to develop the and the upper Marcellus with a with longer laterals and that's part of field program.

Well I'd like for you to make a comment if he would on just kind of what we're saying in the performance of the some of the upper Marcellus well.

Yeah, Dan again this is Phil Stalnaker again, we're we're pleased that really really no change from what we laid out there at the end of last year. The the wells at <unk> for me that you know as planned as predicted after this point and as Dan said, we are looking out into the future in what is the automotive lateral links with.

The much a blank slate on the upper Marcellus and then laying that out to longer laterals and be in its economic as possible going forward. So.

Everything is going well.

Great. Thank you.

Thanks, Brian.

Our next question will come from Jeffrey Campbell, but.

Well they brothers. Please go ahead.

Good morning, good morning, congratulations on the performance Kinda talk order.

Thanks, Jeff.

You bet ER and former top markets for Cabot has increased its ability to sell its nat gas closer at home.

Do you are selling dynamic talking to Germany, moving to the better price environment that 2021.

That's a good question a jaffray and I know a.

But the sitting on the edge every seat to ER to answer that yep.

Okay. Good morning, Jeffery Yeah, right as we are as you mentioned, we have been successful over the years and moving some of our in basin.

Oh supply.

And to better markets through different outlets, particularly with Atlantic Sunrise and getting down to the DC area and.

Also up to the over in the New Jersey.

With the M. basin demand that we picked up over the last couple of your with the two power plants and some miscellaneous in basin customer, we've been able to or again exceed the a in basins supply prices the or a typical enough neck of the words.

But as we.

See better pricing and going out in the 2021 and with differentials being very close to what they are in this very poor pricing environment.

It's a it's encouraging that these are embracing the supply is a corner received a much higher realization them historically.

Okay.

That's very helpful. Thank you.

The question is a lot of the optimism for 2021 seems to be based on lower supply from glass went away I like the.

What do you think about demand for 20.1, particularly in a recovery period from Cdnineteen. Thanks.

And Ah Thanks for question, Jeffrey and I'll flip it to Jeff here in the second, but where we're looking at certainly the lower supply and feel like the.

Ah, yes, the shut in as the Frac holiday O'shea to gas.

Reduction.

The reduction in capital allocation going forward are all constructed to a reduced supply we feel.

Good about the a reduction of supply and it's going to be somewhere probably between eight to 10 Bcf a day a reduction in supply is is kind of the conventional wisdom right now and we've seen prior to prior to this Ah Ah.

Pandemic coming through and.

With the start of demand loss, we were actually seeing some pretty healthy.

Man numbers out there.

And and I'll, let Jeff like his comment on yeah outlook on both.

You know Jeffrey <unk> as you mentioned the situation we find ourselves here today as a result I'm the.

The other bars and the local demand destruction that we've seen is because.

Troubling I will say that the Oh, there are a lot of positive, though that that need to be considered and another reason. The strip is this trading the way. It is as we look at.

At the larger macro view, we are seeing industrial demand down anywhere from Bcf to one of the half Bcf a day, that's that's no secret.

But we've also seen as we enter the shoulder months little business man through auction as you normally would see it with residential commercial and <unk> and the power side.

But we do expect or the you know the shoulder month was too to leave us shortly we expect a industrial demand pick up your during Q2, but on the most positive side, we've just hit a record on exports to Mexico.

And.

And then on LNG side, Yes, there has been a few cargos delayed but as you look back this year I believe the LNG export averages are.

Very close to capacity.

<unk>.

At least in excess of eight Bcf a day.

So the resiliency of LNG and a Mexican exports and and the fact that we've been a slump with the economy, but are taking steps to get out of that long.

That's very encouraging so I think on the macro view with the.

Oh supply decline.

Barack holidays et cetera that they have described.

Possibility of eight 910 Bcf a day reduction in supply year over year from this point in time.

Paints pretty good picture for 2021.

Great I appreciate the color.

This concludes our question answer session I'd like to sort of because those back over to Dan's been Joe's for any closing remarks.

Well I appreciate that everybody I call yesterday, and no everybody's trying to get through this a slow period.

And they get a Ben I think.

Wonderful the what be able to watch our a team executed a almost flawlessly.

Through this difficult period and deficiency cabot's going to continue we're looking at a very forward to the ER period that we have I head up.

Before to the call a next quarter. Thank you.

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