Q1 2020 Earnings Call

Dead dead dead.

Monday

Dead dead dead.

Good morning, ladies and gentlemen, and thank you for standing by welcome to the Southwest energy first quarter 2020 earnings call management will open up the call for a question-and-answer session following prepared remarks in the interest of time. Please limit yourself to two questions and Riku for additional questions. This call is being recorded you require operator assistance, please press star then zero. I will now turn the call over to page pinches Southwestern Energy vice president of investor relations. You may begin.

Thank you drew good morning and welcome to Southwestern Energy first quarter earnings call joining me today our bill way president and chief executive officer Play Carol Chief Operating Officer, Juliet. Chief Financial Officer and Jason Kurtz head of marketing and transportation along with yesterday's earnings release. We also filed our 10-q, which is available in the investor relations section of our website at www.ge.com before we get started. I'd like to point out that many of the comments we make during this call are forward-looking statements about our business plan 2020 guidance and the potential impact of covid-19 pandemic on our business bank statements are often identified using words such as anticipate expect Klan projected forecast model will could should and others noted in the forward-looking statements sections of our annual and quarterly filings with the Securities and Exchange Commission, forward-looking statements inherently involve risks and uncertainties affecting outcomes. Many of these are beyond our control and only reflect our view as of today. We discuss in more detail in the risk factors. Yep.

Forward-looking statements section in our annual report in quarterly filings with the SEC. Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results on divorce May differ materially and we are under no obligation to update them when they also refer to some non-gaap cement Financial measures, which helped facilitate comparisons across. And with peers for any non-gaap measures. We use a Reconciliation to the nearest corresponding gaap measure can be found in our earnings release available on our website. I'll now turn the call over to Bill away.

Thank you page. Thank you all for joining us today. I hope everyone's safe and well as we manage through the impacts of this covid-19 crisis.

First I want to extend my profound and heartfelt. Thanks to every Southwestern Energy employee for your ongoing efforts to stay healthy and safe amid these unprecedented times or proud to be part of the critical infrastructure industry providing a central energy to our nation.

I don't want to shout.

Out to our field employees who are on the front lines every day your dedication and hard work has made an exceptional impact on our company. You've kept us running and largely responsible for the solid first-quarter results. We're going to talk about today. So thank you. I've never been more proud and more thankful to have you on the team and we very much appreciate all that you do.

It's part of our culture at Southwestern Energy to support the communities where we work and live along with the company's financial support. We've seen countless examples of our employees stepping up to extend support to charitable organizations and First Responders in a time. When our communities need it most I want to extend my further appreciation to all of our employees for your kind hearts and generosity in these extraordinary times.

In the first quarter of the team delivered results that once again were ahead of expectations as shown in our release last night play and Julian will expand on this more in a few minutes. I'd like to focus my thoughts on on the developing Market Dynamic and we're we're headed as a company Southwestern Energy has a solid foundation with a diverse set of tier-one assets that provide flexibility and ensure resiliency through rigorous Capital discipline, proactive risk-management leading operational execution ample liquidity and no looming debt maturities these proof points. Give me confidence that off road ahead may be challenging. We are a well-equipped to navigate the hurdles and deliver value for our shareholders. We're navigating uncertain and volatile times as a result industry-wide Capital program and activity have been scaled back materially leading to a reduction in forecast supply of natural gas providing support for forward prices.

Often we learn by doing the last several years of low gas prices have taught us the critical importance of resilience and all its components with these learning supplemented by our rigorous risk management philosophy and practice. We have rebuilt the company better positioning ourselves to capture opportunities in any Market including the current Dynamics facing the industry.

For approaching two decades now swing has championed natural gas as a Premiere sustainable fuel for our nation though. We rightly tout the development of our substantial and leading super-rich condensate acreage. We also have emphasized the diversity of our portfolio and because of our commitment to improving economics for our investments this optionality can add real economic value in changing mark

Natural gas is the fundamental commodity in our portfolio comprising of Approximately 80% of our current production. Whether it be from high rate high-volume natural gas Wells or from our hi my name is super rich compensate Wells this fact along with the agility and flexibility of our operations allows us to capture value from the improving fundamentals for natural gas our proactive risk-management strategy provides protection to the company's cash flow while retaining the opportunity to capture the up side that the market suggests it also Shields us from the recent decline in oil prices with one hundred percent of our expected volumes for oil protected. This year are disciplined Capital allocation strategy focuses investment on the highest value projects.

with the Improvement in natural gas

Prices we have pivoted much of our Capital program to Target. Our high rate natural gas producing Wells across our assets demonstrating the agility of our operations in the flexibility of our portfolio with wells in the rich area of West Virginia produced a high rate of natural gas by way of example in this area. We recently set a company record for an initial production rate of 170 cubic feet per day equivalent from a four. Well Pad Place to sales in the quarter the Swift action to Pivot our Capital towards natural gas was done in a short period of time and without additional costs company.

As a result of the shift the company's production profile be more heavily weighted towards natural gas than the original guidance. Our teams have been able to keep covid-19 impacts to a minimum and our total second quarter production is expected to be largely unaffected. I will discuss in more detail about the second quarter production that you know in a while

As for capital r capital guidance released in February included a 20% reduction in capital compared to last year at this time full year capital investment is expected to be around $860 a month and let me be clear. We reaffirm that our use of earmarked proceeds will not under any circumstances exceed three hundred million dollars. Let's talk about our stringent cost Focus for a moment our operational execution in our continuous energy gain efficiency gains are driving down costs improving performance and enhancing the return on our investments last year. We reduced well cost 27% this year. We are driving that down even more and expect it to be greater than 10%

Our Relentless cost reduction efforts extend to expenses as well in February. We announced forty million dollars in permanent GNA savings and I now can say that with further actions already taken. This has grown to a total of $60. Our financial strength is highlighted by our debt maturity Runway and ample liquidity.

After April barring base redetermination, we have over 1.3 billion dollars in liquidity and during the quarter we were able to repurchase $80 of senior notes at a discount.

Our advantage maturity profile means we don't have to access the capital markets at this time.

Neither covid-19 nor current pricing has diminished twins commitment to our environmental social and governance principles as we have reported before our methane. Emissions rate is among the lowest in the industry off. We are in the fifth year of our freshwater neutrality commitment and we are recognized for our transparency as well. As our responsible development methods are governance features are top-tier off half of our directors are women or come from diverse backgrounds and it's win the average pay for women is the same as it is for men.

And I mentioned earlier we strongly support the communities where we live and work. These principles are caught who we are regardless of the situation that we're facing.

For I turn it over the call over to claim Julie and I want to read it reiterate some priorities.

We have made our goals very clear to return to free cash flow neutral and to grow sustainable shareholder value. So why invest in swim?

We have Premier flexible assets with fifty three trillion cubic feet of resource potential a proven track record of delivering on our commitments through our strategic mindset and managing the business discipline Capital allocation operational excellence and addres logistics-management stringent cost control well-positioned and right size gas and liquids Transportation portfolio rigorous risk management approach ample liquidity and a leading debt maturity Runway along with recognize strong ESG culture.

And a team of people across the country that can run this business and and deliver the kind of results consistently quarter after quarter.

And we're shareholder-friendly providing the compelling investment opportunity. I'll now turn the call over to Clay to discuss our operational highlights. Thanks Bill. We have another solid quarter of operation. But as we all know the road ahead has challenges for our industry continued operational outperformance further strengthens our solid foundation. And we believe we are well-positioned to manage through the uncertainties associated with the current market environment as Bill mentioned during the covid-19 pandemic, the energy industry is deemed in the office and we are taking the necessary steps to ensure the continued safety of our people all while maintaining efficient operations during this unprecedented time and they have done this without missing a beat. I'd like to thank all of those that contribute to the continued success of our operations, especially those working in the field.

I'll start with a few highlights from the quarter.

Total production was 201 bcfe up 10% from first quarter of 2019 and at the high end of guidance. This was primarily driven by well outperformance and operational efficiencies gas production represented Approximately 80% of total production with liquids contributing 82700 barrels per day a 17% increase

and the first quarter consistent with our front end loaded plan. We averaged six Rigs and three frat groups capital investment for the quarter was $237 Million down 25% year-over-year in line with a capital reduction announced at your end as a result of the continued deficiencies and the further capture of deflationary gains. We now expect to exceed the $100 per lateral foot reduction too. Well cost and our forecasting our full year average well cost to be $715 per lateral foot off this quarter. We brought twelve Wells on line five in Northeast Appalachia and seven and Southwest Appalachia.

in Northeast

So for Wells had an average 30-day rate of 24 million cubic feet per day representing a 60% increase compared to first quarter a year ago. This increase was driven by longer barrels ongoing completion design improvements and well mix

In Southwest Appalachia, we brought a four well pad online mid-march located in our Ridge Acres. The four wheels had a combined Peak production rate of 170 million cubic feet per day a new company record that continued performance improvement in our Rich acreage is primarily driven by incorporating latest generation Drilling and completion designs and longer laterals. We are encouraged by the performance in this area and with the Improvement in the natural gas prices, we expect it to be a larger part of our Capital program going forward.

As Bill mentioned earlier we have shifted our activity Focus too high rate natural gas Wells to maximize value in the current price environment, which is further supported by the well outperformance. We're seeing across the company in the first quarter in our portfolio are high rate natural gas. Wells include dry gas wells in Pennsylvania. And Rich gas wells in West Virginia.

Greater than 80% of our capital investment in 2020 is now allocated to these high rate high-volume. Natural gas Wells while our activity plans have shifted our capital investment remains front half loaded with Q to be in Ohio Supreme Court similar to the past few years. You will see a ramp down in activity over the second half of the year.

Operational agility agility has been critical to the speed and effectiveness of this transition. Our company-owned rigs allow us to be more flexible than most and they move quickly wage, but the first added guess we'll a week after the decision was made including enigma.

We expect second quarter total production to be largely unaffected with a higher percentage of production from natural gas due to improved well performance and an increase in ethane rejection value. Although we received curtailment notices with respect to a small amount of condensate production starting in the second half of April. We have been able to largely offset this with minimal impact.

We've had a solid start to the year. And while the current environment is creating headwinds. We are confident in our ability to manage through it all now turn it over to Julian for the financial results.

Thank you clay and good morning everyone. We reported our first quarter results yesterday which included to non-cash adjustments a 488 million dollar tax valuation allowance and they offer for $8 billion ceiling test impairment as a reminder under the full cost accounting method. The calculation of the ceiling test impairment is formulated comparing the carrying value. You are evaluated oil and gas properties to the value of our reserves calculated using the average backward-looking 12-month SEC prices for all commodities.

excluding these

Gemzar adjusted net income was $56 million or ten cents per share net cash flow for the quarter was $191 Million. Ebitda was 206 million dollars in capital expenditures with 237 million dollars.

In the second quarter, we will start to see the effects of covid-19. But much of the impacts win. So far has been mitigated by the actions that have been taken and already described by billing but we currently sell the vast majority of our condensate under term agreements which has afforded us of higher degree of flow assurance and protected us from some of the recent unpredictability on a monthly contract pricing in the second quarter. We expect to sell our condensate in an average 10 to $13 per barrel discount to WTI.

Additionally one hundred percent of our twenty-twenty condensate production is hedged with a WTI floor price of around $54 per barrel when considering switching instruments including the exposure when prices are below the subfloor in our collars.

In addition to the protection provided by our oil Hedges are hedge portfolio and risk management strategy has helped mitigate some of the recent commodity price volatility in natural gas and NGL. We entered 2020 with 83% of our expected gas volumes and 50% of NGL volumes protected since that time. We have increased our NGL position with addition and propane swaps.

In the first quarter, we recognize the $93 gain on settled derivatives and the mark-to-market of our hedge book for the remainder of twenty-twenty had a fair value of $350 off at the end of the quarter natural gas prices for 20 21 have improved roughly $0.40 per mcf since we completed our budget process at the end of February and we share many of the fundamental views of more bullish natural gas or with pricing as Bill described earlier.

As part of our Dynamic three hedge program, we strategically built our portfolio to capture. The upside associated with improving prices using colors for roughly 40% gas hedges in 2020 and 90% of our gas hatches in 2021. We will continue to opportunistically add Hedges going forward.

We also had your differentials but before Hedges we expect our discount to 9x in the second quarter to be in the $75.85 range per mcf.

NGL price realizations for the second quarter expected to be in the range of 10 to 16% of WTI and we are encouraged by some of the Improvement in the forward NGL prices may have seen over the past few weeks.

Moving to the balance sheet. All leverage was 2.7 times at quarter-end and our debt maturity schedule continues to be a differentiator during the first quarter. We took advantage of the volatility E capital markets and our strong liquidity position to repurchase eighty million dollars at senior notes for $52 million dollars a 36% discount as of March 31st. We had two point one five billion of senior notes outstanding with only $210 million coming due before 2025.

Following a semi annual redetermination in April our bank group set our borrowing base at one point eight billion keeping us with strong pro forma liquidity of approximately 1.3 billion. This includes borrowings at March 31st and 322 million of letters of credit. We do not anticipate being required to provide materially mortgage of credit under any of our existing contracts.

20/20 is providing challenges throughout the world as covid-19 has disrupted many parts of our lives and our industry. We are taking proactive steps to navigate the road ahead and Page main focused on our long-term goals most importantly delivering value to our shareholders.

That concludes our prepared remarks. So Drew. Could you please open the line? For questions? Yes, sir. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press six. Once again, kindly limit yourself to two questions and you may wreak you for additional questions at this time. We will pause momentarily to assemble our roster.

The first question comes from Arun of JPMorgan, please. Go ahead. Yeah. Good morning Bill. I want to talk to get some color from you on your views on sustaining capex as we move into a 2021 and 2022. A couple of your peers or have shifted kind of to a sustaining capex mode with the hopes of you know, generating free cash flow. So I wanted to get your thoughts on that and you know, I think you should exit rate guide is somewhere between 2.4 to 2.5 bcfe a day. Wanted to get your views on what sustaining capex could look like give them a bath the lower costs that you're citing at 7:15 to foot.

Yeah maintenance Capital at today is about six hundred million dollars, you know as we look forward and we shift to a higher natural gas Capital mix We Will and and on the rising price. We will continue to adhere to our Mandate of interests within cash flow or at maintenance Capital as we build out the budget. We haven't we haven't completed the 21 plan yet, but the the discipline that we follow around town watching the market understanding the market understanding the amount of Hedges that we have we have in place at that time and and we've made some good progress already in 21 those aspects plus cash flow and economics will drive the decisions at that time.

Great, and my follow-up is just for Julian.

Doing some incoming questions on the ten q and some of the language Around the Net leverage ratio Covenant under the credit facility was wondering if you could provide some color around that time and actions you can take to remain in compliance with that Covenant sure. And and so so let me frame that up. I mean at this time, we we don't actually anticipate exceeding the Life Covenant level of four times the language in in the 10-q was really precautionary given all of the covid-19 uncertainties that the entire Market faces and and not linked to a n a single specific concern. That's win.

Clearly the leverage ratio is impacted by commodity prices and we've actually seen some strengthening in the gas and ngls over the last couple of weeks back. We you know, look out at our forecast. We do show The Leverage to increase from the current 2.7 times, but we are also showing it improving back to near three times as wage into twenty Twenty-One. We have you know, always said that free cash flow and leverage or two key pillars in our strategy That Remains the case. We do have levels available to us and adjustments that we can make within the business plan that we can continue to utilize to the benefit of these okay wage. I'm going to sneak one more in we've seen a couple of your peers, you know, go to the unsecured Market with converts. Obviously, you don't have any, you know near-term dead.

The debt maturities but how are you thinking about just Capital markets in general, you know given the the Improvement and in the equity values.

Yeah, I mean, I think you're right. Probably, you know the convert Market it seems to have opened up in the last couple of weeks and people have taken advantage of that window. You know, we long as you know, we don't have maturities that are that are looming at this point clearly doing a convert doesn't change the leverage picture. It just pushes out palm trees and and so, you know less applicable for us the the strengthening Equity price. That's that that's got to be a positive long-term for a capital Market Alternatives. Great. Thanks a lot.

The next question comes from Wells Fitzpatrick of SunTrust, please go ahead.

Hey, good morning morning given the contango. It seems like a pretty short-lived problem. But the $32 barrels a day you mention of condensate am in the queue how how much longer do you think that could flow into storage? And if those Wells actually needed to be shut-in how much Associated gas would have to go with them. So, um that situation although minimal even in the beginning has continued to improve that was a back half of April curtailment, but it ended up being less than a thousand barrels a day net on April and as we moved into may we don't have anything curtailed or shut in?

Okay, great. That's wonderful to hear and then as you talk about moving to the gas here portions of of your acreage is that is that more to the East and West Virginia or is that month and Northeastern PA or or still kind of undecided it's both of those too high rate dry gas areas consistent with our part portfolio. We wage always had that optionality. Um, we've continued to develop in the dry gas where we have high rate tier-one acreage. We have continued to lately put my development in that rich gas area in Marshall and Wetzel County and those recent Wells including the record that that both bill and I spoke of in the strip club or wells in that area where we've continued to utilize our latest generation completion designs and we're seeing really nice Improvement in the performance there in the definition of liquid.

In those West Virginia Welles is primarily in jail. So that pricing is coming back as well. So

Perfect. Perfect. Thank you so much. The next question comes from Charles Johnson rice, please. Go ahead.

Morning Bill that you and your home your whole team there. I want to pick up on some of the some of the things that that Welles just asked about tell me. Do you do you have any or have you been drilling any of your dry gas acreage down in your in your Southwest app or or or West Virginia position over the last couple of years and and what I'm really curious about is is if there is any on a if there's any kind of productivity per lateral foot uptick or down Tech because it would seem to me that they've given with current NGO prices you'd want to be as dry as possible. So, can you can you talk about the the activity creating? Yes. Certainly. I do keep in mind as we think about where we are drilling gas Wells we have gas wells in West Virginia and we have ample gas wells in Pennsylvania. So part of this chef.

Just moving from state to state or the shift is moving from, rituals to dry gas Wells. So, um economics drive those decisions so long as we prioritize, um, pivot and shift. Um, we we work on the highest value generating a project a given strip pricing. So the focus for natural gas was Pennsylvania in the first instance. And then we we had wells in progress and testing in our NGL what we call Rich gas the area the area that does not have as much, and so we we went there we have tests and and have studied are the broader part of our acreage and and like anything you focus on the very best and I'm really developed that and you continue to test the other areas. Um, and and so we've we've got some tests like and give you some details on it, but right now the with the inventory that we have in the phone number,

That we have on on highest best to genomics. We're really focused in those two current.

A development areas. Yeah. The only thing I'll add is just as we watch commodity prices. We got over a thousand dry gas Utica locations in West Virginia. Also, that would be additive in addition to all the Marcellus ones that we have.

Yeah, that's that's interesting. I hadn't thought about that. Thank you for that. And then the second question is perhaps for for Julian on the on the the senior debt buyback that guys offer debt buyback that you guys did. I'm clearly that was a good trade. You guys got it at 36% discount in and just trading for a lot, you know signal be more than that today. But but can you just give us a broader framework for how you you approach? Uh, that that decision when the opportunity presents itself and and whether whether that they use of funds is is going to matched up against your your DNC or is it is it a different bucket with a different decision process?

Yeah, and so so obviously the market did give some opportunities. You know, we're always looking Charles at what opportunities are out there as it pertains to to those BuyBacks and we had a have a strong liquidity position. And this was a chance to Chisel away at the absolute debt levels and wage and you know, thereby reduce leverage in a in a in an efficient manner, you know Capital allocation is something we consider in consider all different different places where where the capital can go to work in this particular case. I mean in a way you're you're using some of the the debt or the availability under the revolver to to take out the the the data to Discount, you know, as far as the DM.

remember when we have the goal of getting back to free cash flow there are minimum levels of activity we have to have in order to be able to accomplish that so I you know we we balance that as well got it got it thank you Julian

the next question comes from Scott handled of RBC Capital markets please go ahead yeah good morning thanks you know just a little bit more color on some of the pivot from 5 a.m. to to some of the more dry gas areas can you give a sense of you know where you see like those are our shifts on on on the Wells on the Strip bases and you're just at a high life you know obviously you pivoted to dry gas and you know at some point in time maybe there's a decision to Pivot back to to what gas but you know what kind of sustainability and in in pricing or something you know do you need to see you know to to continue to pay the back and forth so so what really drove the decision now to to move to more dry gas

Yeah.

Thank you started with we've we've always been in dry gas and gas has been a big part of all our production and we see the fundamentals evolving and a and an improving strip club that looks really good in in twenty Twenty-One. And so it was the optionality in our portfolio to allow us to to Pivot over to more of that page, uh are returns in the dry gas at a you know, these prices and as you look at 21 are pushing 20% low 20s long as we think about the the optionality as we go forward. We'll we'll continue to watch what all the prices do as we get out of the home page here where we've had some demand issues and and we'll be able to continue to utilize that optionality, you know, a kind of a way to look at it is we we don't allocate Capital by division dead.

Or by individual Wells. We we allocate Capital Auto portfolio of wells for Strang racked and stacked against each other on the economic value Generations. So you have like gas you have do you have a number of different things in that portfolio and as prices move around the positioning of those move around and the great part of it is if you had a sudden change that could that was just a noble and you wanted the shift-on-the-fly we can do that. We are we own our own rigs so we can move them as clay said we can get it done we can do that very quickly, you know, if there's any other issues at hand we can deal with those as well to capture opportunities. So it's a it's a flexible move. And and when would we move back pricing changes and it changes the economics again, then, you know we can shift around and it's not a wholesale one or the other it's always both and that's how our our splits managed.

Okay, great and and and just to clarify you said low 20% return on on dry gas some of these dryer gas opportunities. What are liquids what are liquids returns?

World Subaru

The super-rich. I mean it it all is you know, it depends on the oil price and the NGO pricing. But but if if we are in a $35 plus dollar oil price environment and a $10 in GL environment and a little over a $2 gas price environment. Then the Superbowl or push in the upper teens to 20% Also got it understood and then in in Northeast Appalachia, I mean is it is there limitations in terms of infrastructure capacity to walk drive more activity up there?

No, we we we have plenty of infrastructure. We're able to to move the product around with with all with our Marketing Group and all the relationships we have in place down to where that's not a problem at all.

Appreciate it. Thank you.

The next question comes from Newell parks of Coker and Palmer, please. Go ahead.

Morning morning when you talked about the Utica just reminding us that you had over a thousand drug applications out. There was curious. Where do you stand with lateral links in the Utica?

Lateral links in the Utica are would be able to be similar to what we're doing right now in the in the twelve eleven twelve thirteen thousand foot range on average of the regulatory environment around the Utica in West Virginia is actually more amenable to the longer laterals than the Marcellus now, we've caught up to that in the Marcellus with all the land were can be done but lateral links not an issue so that that would be considerably in excess of I guess the typical well as your building the past there, right?

Then our previous Utica Wells yes, but as you know with with our current development, we've gotten our lateral links on average to that 12000 foot lengths off the program with several much longer than that.

Sure, let me go please go ahead.

Well, I I was just getting at that it's it's kind of it would be kind of a different animal for the the economics of the Utica with those long laterals compared to you know, what we historically thought of for it off. Yeah. Good. Good point. I think yes, and then also the the progression of drilling and completion designs Etc would also benefit.

Yeah, and I want to underscore here to be sure. You know, we look at this as a portfolio. We've got ample inventory in any of these areas whether it's a gas Super Rich gas dry gas and and even Utica gas and they get developed as time goes based off of economics and and it's proneness as the economics one against the other so at even stronger pricing you get even stronger returns and the and the mix and go back and forth depending on the commodity. So this is really capturing an opportunity of a changing Market. Um, it is it is not and it's great to have the level of inventory in all different areas so we can pick and choose and so the sustainability of the program is quite good.

Great. Thanks and and just thinking, you know between lateral lengths and and upgraded completions, you know, the industry's come such a long way in efficiency in past years as we kind of go through this upswing and gas. Can you can you kind of give some context as far as where economic improved you so that say your economic that say $2.50 gas now if we were to rewind back 5 years or more money is are are your economic today comprable to maybe what you you would have gotten at say 3:25 back then or

Yes.

I don't have the exact numbers there, but clearly like we've talked about as a as a a company that the way three years ago. You were in a 350 type of model and with all the improvements we've made around well performance and lowered costs. We've been able to to create quality economics and 275 250 gas price environment. So I think that's in line with what you were asking that that just the efficiencies of the business office and the continuous Improvement have replicated similar returns, even though we're in a lower cost price environment.

Great. Thanks a lot.

The next question comes from Jane of stifel, please. Go ahead.

Good morning, and thanks for taking my questions this the first question is lettuce of credit in the earnings release. You mentioned that you posted additional 150 million in letters of credit. I'm curious. What are those related to and what triggered that?

Sure. Yeah, we did we so we we had 172 we then actually got a ratings downgrade from S&P and that triggered need under alternate transportation to post another hundred and fifty million dollars.

Okay, I got it. Now. The one thing to know is that is is essentially all of the LCS required under under our own transportation, you know, the existing contracts so that there's not there's not many more to come. Okay, that's perfect. And then if you guys can talk about the capital kittens for the remainder of the year off. Yeah, the the capital will be as similar profile that what we've seen over the last couple where the front half is where the the bulk of the the majority of the capital is with our front and back projects and then it drifts down in the third and the fourth quarter and it'll have a similar shape this year.

Hum hum the third question if I may so it sounds like based on your comment area that the condensate situation seems like under control and seems like the worst is over. Is it is it is it the appropriate interpretation? So you guys are not constraining anywhere else right now and no consumer I expected in May and June.

So we are not constraining any Wells right now, the the situation wasn't significant initially and it has gotten better since then so long, you know, there's there's quite a bit of uncertainty with covid-19 else right now, but but we're feeling good about the progression of that situation.

Okay. Got it.

Thank you so much for taking my questions.

The next question comes from Michael Hall of hiking and energy advisors, please. Go ahead. Thanks. Good morning. I appreciate the time. Just wondering if you could help bring up a little bit on on the well cost Outlook first quarter. Well costs from the release looks like we're on $900 a foot in North East and 8:25 and South West Palm, you know relative to the annual average. You're talking about 7:15. How do we get there? Like how quickly do we get down to the 7:15 level? And how do you kind of bridge the the gap between the two months? Yeah. So it's a similar profile to last year where we we beat our Target last year. The first quarter was the higher cost as we had all the ramp up the winter weather et cetera that wage increase costs in the in the first quarter. We had a few one and two well pads that aren't as efficient in the first quarter, but highly economic Wells as we move forward Ed.

You should expect that Trend to come down dramatically and we should be in the low $700 as as we move forward.

So like as we move forward meeting to Q forward, you're in the low 700s to be closed. Yes.

Great, that's awful. And then sorry sorry if I've missed this but can you quantify or have you Quantified the the the inventory that you would characterize as kind of this month higher productivity higher rate gas in I guess in both areas that the Northeast and the Southwest but I thought maybe if you could split them out and then in the southwest like how big of an uplift from a you are per foot or IP 30 per foot or you know, whatever metrics home is most reasonable how big of an uplift do you see in these higher rate areas relative to maybe what what the the standard well would have looked like otherwise wage.

Yeah, it current strip. We've talked in the last few calls that we got economic Wells $200 plus in the dry gas Northeast area and two hundred or so in the rich area of West Virginia at the current strip. When when you move to a 275 type of gas price, you've got closer to six hundred and fifty or so between those two areas. So plenty of inventory there, you know, the the production Improvement. We we talked about in the Middle East and in the script that we had a 60% Improvement when we compared quarter-over-quarter in our dry gas area in the IPS the the well I talked about in the rich. It's a, you know greater than a 60% Improvement, but it's not different than in the third quarter. I talked about a four well pad.

the ridge that was also a

Big Improvement what you'll see in the production history in the rich area that I'm speaking of we haven't been as active there when you look back a couple three years and now we have progressed the development there and it's getting all the benefits of all our latest technical understanding and and Flowback approaches. And so we're seeing dramatic production wage increases there that you know, four well pads doing a hundred seventy million a day the the pad before this one was a four-wheel pad that was doing a little over a hundred forty million cubic feet of a gallon a day. That's helpful. All right, I appreciate that. Thank you.

The next question comes from Jeffrey Campbell of two weeks brothers, please. Go ahead.

Good morning. I'll apologize in advance. I missed the first couple of minutes of the call in case I'm repeating anything but I just wanted to better understand West Virginia. Well that I'm just talking about is this new inventory relative to what gas acreage that was already being developed, you know, are you breaking in new areas and also is dry gas production economically done to port phone. Yeah. So the rich gas area is not a new area for us. We we've had that acreage we've been focused predominantly in the super-rich hi conduit for the last couple of years, but we've been progressing our development in this Rich area. And as I mentioned the last two pads we've done and that in those areas have been improved in all aspects lower-cost longer laterals greater rates, and the economics have continued to improve in those areas. Also, it's an area of increased wage.

focus in in the current environment so it's we were focused on on heavy condensate production that originally understood the other part of your question in the dry gas area we took over 200 locations even at the current strip right now that are that are above our hurdle rate economics okay thank you this Riley a lot of focus on improving dry gas pedals but we also see in jails as beneficiary of the reduced some conventional oil activity I was wondering if right now are you proactively reducing NGL production for 2020 and what is your if you have a view of what's your 20 21 view of the NGL front so I'll start with the answer and then I'll let Jason comment maybe on the go forward view but you know we're we're I agree with your assessment around in gl's and with the improving

Gas price View and the good news around that these rituals get the benefit of that improvement with the seals that are associated with the majority gas production. So so we see some improvement there and we're encouraged by it. Yeah, I would agree with what clay said, you know, based on what we're what we're seeing, you know the forecast in the clubs in an associate gas given the amount of ngls that can potentially decline as well while you still have as the global restart starts after covid-19. We should still continue to see strong, you know exports and demand as we go into 2021.

so the optionality is

Cleared for what we're what we're doing and and again as we as we plan whether it's annually quarterly monthly we look at those Trends not just a a one a one-day shot that those Trends and can adjust to to wherever the best option of an economic perspective shows up. Okay. Thank you, and if I could ask one last one more macro question building out what we were just talking about the primary backbone of the natural gas Improvement seems to be the curtailment associated that gas supply. I'm just wondering what you I know you guys are stupid model or some wondering what you think about demand the demand side of it in 2021 is deep economic recovery from cv-19 unfolds. Thank you.

So is this this is Jason. I think you know if we look at as the economy restarts, you know, we we think that you know growth the growth outlook for exports and power generation will continue to grow into you know, twenty Twenty-One wage. There could be as much as you know, two to three Bs a day of of incremental demand in in 2021, you know, there's definitely a new new plants new coal plants that are still that are still going down in the service and then as we get into yeah gas gas-fired plants, you know switch and you know Coca-Cola plant shutting down and you know, what you as you look out into the future twenty Twenty-One and Beyond wage, you know, there's there's ample export capacity out of the out of the us as well. As you know incremental pipe capacity to to Mexico is as well. So, you know, we we see an improvement for that demand back in 2021 on the gas side.

All right. Thanks for answering my questions.

Thank you.

The next question comes from Holly Stewart of Scotia Robert Howard Weil, please go ahead.

Good morning. Gentlemen page just just one one for me. And maybe this is for for Julian Julian. Just based on the new Kaepernick levels that you've outlined where you expect to exit 20 20 in terms of Leverage. And then maybe where does your comfort level fit?

Yeah, I mean Holly there's a lot up in the air right now as to where prices will be. You know, as I as I said earlier, we do expect it escalate. We've got cases where it's in the probably in the mid three times and we've got cases where it pushes up against Thursday or times. Um, but it remember it goes as we go through the year and then comes back down again as we move into 2021.

And there's a lot of different levels that can be pulled with continuing to you know, witness price changes. We're continuing to witness cost changes improvements wage these so you know, I think we we feel that it's it's it's escalating but but under control

Okay.

I guess I'm trying just trying to get and maybe this is for Bill. But just trying to get a a sense of you know, at what point would you cut capital in order to just you know, keep that Comfort level on that debt to even a covenant?

You know right now with guiding to a capital level that gives us the activity level that lets us manage our business towards free cash flow and getting back there overnight time and also controlling leverage. So the levels we've given we're comfortable with and we how do we as you would know, we intentionally run off a whole series of scenarios and sensitivities and we we run them to to force us or Force the inflection points, whatever those are the surface so we can manage them. And so there there's numerous levers and as you come to know us we will deal with with what we have to deal with to be to to deal with anything that whether it's this subject anything else time to keep our objectives intact, so stay tuned.

Thank you. And the last question will come from Bryan Singer of Goldman Sachs, please go ahead. Thank you appreciate it and good morning. I wanted to wanted to follow up on a couple of the earlier questions and the first actually goes all the way back to the beginning of the call where you were talking about maintenance capex maintenance Cash Flow versus investing within cash flow and I was thinking more about an upside case for natural gas. If it were back into the mid twos up or two or even higher next year is your message that you would invest with cash flow or stick it in maintenance cash flow or somewhere or somewhere in between.

Our message is we would invest within cash flow provided that the economics of those Investments meet our hurdles and weather and and depending on where prices are that determines in in our model and year model the Quantum of that cash flow and so positioning ourselves and this whole dialogue around, you know, pivoting to know more to natural gas on a weighted-average basis versus a combination is is really trying to anticipate strength that is already beginning to show up and there's there's consumer out there are views out there that the strength that we we're seeing in the market is only just beginning but we'll evaluate that the the the the conversation around maintenance capex vs. Cash flow. We look at the detail of that when when when you know, we get to that point but our messages invest within cash flow.

The maximum great. Thanks. And then my follow-up does go back to the leverage point.

And thinking about the levers to deliver as you were just talking to be on the purchase of dead. Can you just talk philosophically to how you prioritize do you leverage via free cash versus ebitda growth versus asset sales versus acquisition say, you know type acquisitions

Sure, that's that that that is the. It is you know, there's a lot of levels as we've said and I I think clearly we've always said maintaining the fact that the balance sheet is very important to enabling us to do everything. We want to accomplish with the asset portfolio we have and so we're very focused on that. We also recognize the importance of getting two free cash flow and being self-sustaining and living within cash flow. And those are the two pillars that we manage the business under, you know, the rest of the things that you touched on Broadway in a really kind of various levers we can pull to do that, you know, we we need to be able to get the free cash flow. We need to be able to increase ebitda down to the benefit of free cash flow and also to the benefit of Leverage. We also want to reduce our absolute levels of debt over time and and whether that's fraud,

Access free cash flow or whether that's from various Capital Market transactions that could occur, you know, those are all things we have to continually think about and then as far as I said sales, um, you know, those are opportunistic right and you look at them based upon where's the market and is that an appropriate thing to do and I'm flipping it over and going for the acquisition side of things if you can buy something that is a credit to your ebitda at a price that's attractive you would do that too. So, I mean we're looking at all these things and or consolidation and we've been we we believe this industry with all of its cost all of the resilience of or wired for being able to operate in any price environment consolidation makes sense, and we continue to evaluate opportunities in and around our our business and Beyond dead.

And we remain committed to looking at those options as well. It's a portfolio of options of portfolio of letters and we we pulled many of them there on the table.

Thank you very much.

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

Thank you all for joining us today. And I know we have hundreds of our own employees on this call as well. So thank you directly to all of you who are listening. We realize it's a tough Market out there. But we also believe in and have proof points to support that we're positioned to manage through these Market challenges and I'm delighted that we spend a good part of the question-and-answer talking about how do we capture opportunities that may be forming in our space going forward? And so that's exactly what we're set up to do. We've got an incredibly highly talented team of people who continue to innovate continue to drive cost out all the dialogue around the latest technology. It's all driven in born out of the mines and the creativity of our folks so pretty excited about that. But everyone on the call, please stay safe. Please stay healthy. It's exciting to see the country and in most in one form or another beginning to emerge from a very difficult time and begin to restart the incredible engine of this account.

And so we're we want to play our role as well. So thanks for joining us. Thanks for your questions and you

Have a great weekend. This concludes the southwestern energies first quarter 2020 earnings call you may now disconnect.

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