Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to todays two key Q1 quarterly results conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this time you will need your press star one on your telephone if you require further assistance. Please press star zero.
Like I had the conference call over to Andrew breach director of Investor Relations. Please go ahead.
Good morning. Thank you for joining today's conference call with me today are Toby Rice, President and Chief Executive Officer, and David Connie Chief Financial Officer.
The replay for today's call will be available on our website for a seven day period beginning this evening the telephone number for the replay is one 890 58367 with a confirmation code of 2066546.
In a moment Tobey is able to provide the prepared remarks with a question answer session to follow.
During his prepared remarks, Toby and David you reference certain stride that had been published in a new investor presentation, which is available on the Investor relations portion of our website.
I'd like to remind you that today's call may contain forward looking statements actual results and future events could materially differ from these forward looking statements because of factors described in today's earnings release in an at risk factor section of our form 10-K for the year ended December 31st 2019.
And in subsequent filings, we make with the FCC.
We do not undertake any duty to update any forward looking statements.
Today's call May also contain certain non-GAAP financial measures. Please refer to this morning's earning release for important disclosures regarding such measures, including reconciliations that most comparable GAAP financial measures and with that I'll turn it over to Tobey. Thanks.
Thank you Andrew and good morning, everyone.
Today, I will give a brief review of the quarter to provide an update on the business I would not pass it today to review the details of the quarter and talk about the recent actions we have taken to improve the financial standing of this business. Afterwards, we will open up the call for Q.
This management team since being elected has been unrelenting in our quest deliberate campaign promises our operational results validate the promises that we made to our shareholders improve our thesis that are well planned business combined with leading technology creates a differentiated durable and sustainable business.
The equity and debt markets have taken notice since the beginning of the year with access to capital markets twice once in January with our 1.75 billion senior note offering and again in April with our 500 million dollar convertible debt deal.
Offering strengthen our strategic flexibility do you restart near term maturities and were met with overwhelming market participation.
Additionally, we have seen significant strengthening in both our equity and debt performance supporting these strategic actions.
You can see it isn't a unique position to capitalize on the improving natural gas macro as the vast majority of our production is natural gas at less than 5% of our production is tied to deteriorating liquids in oil prices, even more so our acreage sits in the south western core of the Marcellus and as over 15 years of inventory, our financial and operational result.
Over the last several quarters have proven that our approach to developing this world class asset is working in this company is well on its way to becoming to clear operator of choice.
Going forward, we will continue to push our technological boundaries it'd be at the forefront of innovation to drive incremental efficiencies at great value for our shareholders. This commitment is reflected in our first quarter results.
Acute focused on cost reduction schedule optimization, well design and operational uptime drove our strong performance during the period.
We were able to deliver volumes well above the high end of our guidance range, but less capital and developed our Pennsylvania Marcellus asset at a well cost of $745 per lateral foot and accomplishment that is approaching our target of $730 per lateral foot faster than anticipated.
Oh operational costs are trending down you'll continue to focus on driving these down throughout the year.
You see in its employees continue to work hard to safely generate value turned to cope with 19 pandemic as exhibited by this quarter's results. Our business has been able to thrive as we seamlessly transition all of our office personnel to our remote work environment.
Success is principally a result of our digital work environment that we implemented during 100 day plan, coupled with the heart dedication teamwork of our employees.
You can see remains committed to our safety culture, we have had regular conversations with state and local officials and the safety of all of our employees and contractors have been our primary focus we've gone beyond the minimum safety standards and our response and have intensified our focus on data collection in technology Britain insight that allows us to contact rates employees and contractors partners.
So our active sites.
This insight has allowed us to contact hundreds of contractors employees. Shortly after learning a potential exposure cases and provide them with the names of all individuals to be monitored.
The greatest rich the operators like you tea is the potential for increased exposure as a result of missed contacts in response delays and our contact tracing technology is just one example of how we're looking at managing the impact of this pandemic differently to our employees in the field our contracted partners our peers in the healthcare from my responders. We thank you for your continued dedication during these times.
We are working passionately to support the communities in which we operate including recently donating $360000 to local community funds will keep doing our part to make UTI and its community as safe as possible.
The energy industry has also been impacted by deteriorating oil prices as a result of unprecedented demand destruction due to the cobot 19 pandemic.
<unk> oil prices sit at historic lows and have forced reductions to rig counts in frac crews well shut ins slashing of capital budgets and production and bankruptcies you T has not only been Brazilian but it's been effectuating positive change while other MPS are challenged.
While we are just one quarter into the year, we're trending at the high end up our production guidance in the low end of our capital and operating expense guidance, a standing that presents us with the ability to make strategic decisions on the remainder of our 2020 program as we continue to monitor the improving macro set up in 2021, what we believe theres upside swore plant.
We have maintained our previous 2020 guidance and it tends to update that guidance as well as provide more commentary on our 2021 program as we move throughout the year.
On a macro front, we continue to see weakness in demand impacting 2020 prices and expect prices to strengthen in 2021 and beyond.
For 2020 demand has declined between four to six Bcf per day, with we can power <unk> industrial and restaurant consumption. Furthermore, LNG exports are facing more and more cancellations as the arc to export gas has gone negative for the next three months.
On the supply side, we're now beginning to see the impact of declining oil and liquids prices, reducing associated gas output and building condensate and liquids inventory.
Resulting in associated gas supply being shut in.
The estimates for the supply impact range from three to eight Bcf a day and this could bounce the market fairly quickly it sets up for a strong fourth quarter 2020 in calendar year 21 and beyond.
In addition.
The last several years of declining natural gas prices have caused natural gas rigs to decline over 50% from 200 back in January to currently under 90 today.
As a result near term natural gas supply response will be very delayed until balance sheets are repair.
The challenge will be trying to balance the timing of demand recovery into anticipate the new normal for demand, we can see prices having to potential to spike in certain peak demand periods that could result in some demand destruction or fuel switching the 2014 in 2018 winter periods are somewhat test cases gas to be ration for the highest and best use we built.
The forward curve is underestimating the moving prices and this is especially noticeable in the 2020 to 20 to 23 curve.
As the largest natural gas Bruce in the country you T is doing its part with a disciplined approach to capital allocation focusing on maximizing free cash flow versus production growth. Despite a rising natural gas price environment now I'll turn it over to David County to discuss some of our financial accomplishments dig into the first quarter results.
Little more closely and then discuss our balance sheet management strategy.
Thanks, Toby before we get into the detailed quarterly results I'd like to quickly review the financing cost, which meant that we've made through the first four months of the year.
Coming into 2020, we face approximately 3.8 billion of debt maturities coming due through 2022.
Subsequently, we have refinance or pay down approximately 2.4 billion and plans to retire the remaining 1.4 billion over the next 19 months.
We thought we manage our liquidity and the door current position is more than adequate we fully expect improving going forward.
We've developed a more robust hedged process to be able to capture rising prices overtime, while at the same time de risking the volatility in our revenues.
We've accelerated the timing of work actually funds, which increased our first quarter free cash flow and helped us that aggression mice are actually tell program.
We've lowered our capex forecast for 2023 times and squeeze out more out of our DNA expenses.
And last we are reiterating our 2020 times, while many in the S&P 500 have pulled their guns.
In addition to these accomplishments. We've also had a great first quarter from an operational and financial performance perspective, the earnings release published today and the tend to that will be filed later this afternoon contain all the details, but I will review some of the highlights overall, we outperformed in many areas.
First we achieved sales volumes of 385 Bcf for the quarter, which exceeded the midpoint of our guidance range by 20 Bcf.
This outperformance was really a culmination of various efficiencies realized across the organization the larger of which was improved based production uptime.
Adjusted operating revenues were 957 million down 21% compared to the first quarter 2019, as the average realized price was 2049 cents or 67 cents below last year, while sales volumes remained relatively flat year over year.
Our first quarter 2020 production related operating costs reflected a per unit basis were $1.33 per mcf fee five cents lower than the first quarter of 2019 and below the low end or full year 2020 guidance range of $1.34 to $1.46 per Mcf fee.
Capital expenditures were 262 million or 214 million lower than the first quarter of last year and lower than our expectations as Toby mentioned, our Pennsylvania, Marcellus well costs averaged $745 per foot accelerating or path towards achieving our target well costs and driving your outperformance for the period.
Our adjusted operating cash flow for the quarter was 513 million as compared to 647 million in the first quarter 2019.
Free cash flow was 251 million as compared to 171 million in the year ago period.
Free cash flow was positively impacted by reduced capital expenditures as well as 95 million and accrued cash income taxes from the care, Zack, which accelerates our ability to claim that a refund of alternative minimum tax credits.
For the first quarter. There were also a few other items I want to point out which impacted our competitor results versus last year.
First as previously disclosed we completed the exchange of 50% equity stake in each train for gathering rate relief in conjunction with the execution of a new gas gathering agreement with E. QM and 52 million of cash proceeds as result of this transaction recorded a contract asset of 410 million.
One representing the present value the expected rate relief and a gain of 187 million.
We will amortize the contract asset over a period of approximately four years beginning NBP in service date.
This noncash amortization expense will be recorded as a part of the gathering expenses in our GAAP reporting what will be separately identified and excluded from our adjusted EBITDA and free cash flow non-GAAP metrics.
Second during the first quarter, we also reclassified certain in basin transportation expenses to gathering expense in our financial statement and disclosures and guidance. This aims to provide additional clarity into cost associated with transporting our gas outside the Appalachian Basin Theres no net change to our 2020 guides for approximately 40.
Since has been moved from the transmission to the gathering bucket.
Overall, the first quarter was another successful quarter under the new leadership.
During the second quarter 2020, we expect sales volumes of between 360 to 380 DCF fee.
Average differentials of negative 45 cents, a negative 25 cents per Mcf.
We're also expecting up tip and capital expenditures to approximately 300 million driven by increased activity better weather and more daylight.
All of which we expect to drive roughly breakeven free cash flow during the period.
I started off my prepared remarks by discussing the financial accomplishments, we've achieved thus far in 2020 and now I'd like to spend a little time talking about details related to a maturity management strategy.
I'd like to refer you to slide 15 in our analyst presentation, which clearly lays out our plan.
After applying all the proceeds from the recent convertible debt offering to the 2021 term loan we now sit with about 620 million of debt maturing in 2021.
When you take in consideration to 2020 expected free cash flow of 275 million at the midpoint.
Over 300 million of additional tax refunds and other small receivables approximately 125 million in proceeds expected from as sales in advance stages.
And the remaining each train stake, which has a current market value of approximately 200 million.
You can see we have clear line of sight in handling the 2021 maturities and adequate carryover funds to be applied against the 2022 maturities that we turn to 2022 maturity of 750 million, which I remind you isn't due until the end of 2022.
As I just mentioned we plan to have several hundred million of that paid off by the end of 2020, leaving us with significant flexibility can approach to managing that debt stack.
Improving natural gas macro and commodity set up could support our ability to pay down this debt with cash flow generation, if we choose.
We also several selective asset divestiture opportunities, we can pursue to accelerate supplement and or enhance debt retirements.
Touching on the selective asset divestitures quickly, we're taking a measured approach is selling assets. The market is still there, particularly the minerals market, what we're being very selective and delivered in our decision on whether do you continue pursuing this at this time.
We expect that by the end of 2021, we will have reduced debt by more than the original contemplated 1.5 billion, but in a more methodical way that should improve our cost of capital.
Substantial debt reduction in conjunction with improving natural gas macro should explain our pursuit back to investment grade metrics, creating a more strategic differentiation for.
You could see.
As the fundamental drivers of natural gas macro continue play out we're carefully studying the commodity market to assure you are making highly inform strategic hedging decisions.
When we created our updated hedge program in February winter weather disappointed sending the strip down about 30 cents to the two dollar 20 to $2.30 level.
We added about 300 Bcf to our 2021 hedges during the February and March time period, the latest capturing pricing between 2050 cents to $2.07.
At the heart of our strategic approach is appropriately balancing the ability to capture 2021 pricing upside while protecting the downside risk.
As you move through the year, we will look to opportunistically layer on hedges at favorable prices.
We will expect to enter 2021 with a substantial percentage over production hedged with additional hedges over the next several years.
The pace over hedging activity has slowed post the full emergence of cobot 19, and the Opex price War for a couple of reasons first as the supply demand impact of the current environment become clear, we're becoming more and more bullish on the natural gas pricing set up for 2021 and beyond.
Secondly, the broader MP group has been forced to layer on hedges to protect borrowing bases centers that are subject to redeterminations, creating pricing pressure in the market and we want to wait for this dynamic to will be.
I'd like to also remind that we have roughly 90% of EUR 2020 gas production hedged at a weighted average for place of above $2.70 per dekatherm.
Which has and will insulate us from commodity price volatility as we move through 2020.
Our current liquidity sits at $1.6 billion, which consists of 2.5 billion unsecured revolver, which is essentially undrawn.
Offset by approximately 900 million of letters of credit posted stemming from the ratings downgrades that occurred earlier this year.
Based on discussions with Counterparties and Maxim collateral exposure levels. We believe we are largely through the collateral cycle.
I want to reiterate that unlike many MPS and Appalachian peers, our revolver is unsecured and not subject to borrowing base redeterminations.
This is a strategic differentiator as it removes one the biggest variables of liquidity equation.
Although our current liquidity is nicely above our minimum liquidity needs. We continue to pursue seps to add back liquidity.
I'm encouraged by the progress we've made in removing risk improving the balance sheet setting this business up to prosper.
We have received positive feedback from the steps that we've taken and look forward to continuing to create value for all stakeholders.
I now pass the call back to Toby.
Thanks.
He is compelling.
This team has established both the track record of execution and keeping promises made to its shareholders. We will continue to find ways to lower our cost become more efficient and extract maximum value from our premier asset base.
We've made improvements from top to bottom across the organization and have created a durable and scalable business that is able to withstand external pressures are heavy exposure to natural gas will allow us to capture the bullish macro set up on the horizon and will drive strong free cash flow yield and will create ample strategic flexibility.
Our debt maturity management plan will create a viable path back to an investment grade balance sheet, which will create clear differentiation for all our stakeholders.
And lastly, UGC is committed to operating the right way within intensifying focus on our SG program before I turn the call over for QNX I'd like to thank all of our UTI employees, who have displayed the heart trust and teamwork, which are driving the evolution of this business with that I'll turn it over to the operator for today.
At this time if anybody has a question. Please press star one on your telephone keypad.
And that would be star one on your telephone.
Your first question comes from Josh Silverstein Your line is open.
Hi, Thanks, Good morning, guys you've been a.
Well, the headway and getting towards the $1.5 billion target.
Any reason why you would stop there given the growing free cash flow position and if you Didnt hit the 1.5 billion dollar target what would be prioritized after that additional reductant reduction return of capital to shareholders or even starting to play a little bit of growth spending.
Yeah. So I think our goal is you know I think you'll see by the time, we're all done will be probably between my guess is between 1.6 1.8 billion of debt retirement.
Our goal is to get our leverage down below two times. So those I think those are really key thresholds for us.
No the convert that we did.
Obviously be converted into equity as well that could be a further deleveraging event.
But I think once we get below than than that gives us a flexibility to do other coal shareholder friendly things such as dividends buybacks and other thanks.
That's helpful and then.
That's good enough did on on the asset sale filaments seemed like you guys were pushing those out a little bit just to help get some better valuations into a rising price environment, but.
As as your thought change in terms of the priorities and what you wanted to sell relative to to before is there lots of a pressing need to do the royalty transaction versus just a string of production. So any thoughts there would be would be great.
Yes, Jeff Good morning. This is Toby yeah, what our asset probe asset sales program.
I think we're going to stay we're going to continue to sort of trend the rose Bush and be willing to divest of properties that are non core to our operating footprint I think the progress we made it on a non core asset sale.
We've mentioned at $125 million to sort of representative that we have some more of those.
Oh noncore fields that would be what on the table I think some of the larger assets that we've we've.
We're holding out too.
Keep in mind. These assets are largely PDP weighted and and we think the value of these assets will just continue to appreciate in a rising commodity price environment. So far this is making sure that we maximize value creation.
Ed waiting for the macro to catch up to sort of what our where our fundamental view as.
Before we before we continue to sell those those larger assets, but like I said.
The these are this is a continued focus for us we have our core plan, we know where we want to develop.
And we've got a goal of de leveraging this business and generate free cash flow for shareholder so asset sales, what we'll continue to play a part of that.
And just the that bucket just to remind everybody is well over a billion dollar. So there's a there's a lot of firepower and there is just find the right timing.
Great. Thanks, guys.
Your next question will come from Welles Fitzpatrick from Suntrust. Your line is open.
Hey, good morning.
Good morning, good morning.
[music].
So.
It's like 390 million of tax refunds really gives you the the ability to be more selective in the divestitures and so maybe you're focusing more on on the overrides if I'm hearing it correctly, but on the other side of that equation can we get an update on the strategy vis-a-vis mineral.
Buys either to offset those overrides or for your own book that you guys have talked about in the past.
Sure I think there's a there's an opportunity set in front of us.
To purchase minerals, and and that was something that we were looking at doing to offset any any mineral sales that we did.
Even if we maybe pushed pause on on selling minerals I think that opportunity set still remains and we have a land budget that was set that you'd be able to capture those opportunities without having to.
Increase our Capex budget in 2020 so.
Purchasing minerals ahead of the drill bit as part of our strategy and its budget afford we're looking forward to executing that.
Okay makes sense I think can you talk to the the Geo or moving forward. Obviously you guys are.
Pretty gassy relative to your peers, which is great right now.
Do you see gas is a port person of production to increase I mean are you planning on I guess shifting those rigs a little bit little bit further east to maybe take advantage of Oh, the positive gas curve.
Yeah, I mean sitting at 95% production of dry gas is is probably going to stay consistent so yeah for us to be we've been.
Certainly allocating capital to dry gas so.
There are there wasn't really a big amount of what development to shift from.
So we anticipate continuing to have a 95% production that's a dry gas.
Okay Perfect and then just one one last one for me it looks like on on page 23, the gathering rates for 2024, plus one from a little bit under 50 cents a little bit over is that is that the price escalators that part of the reclassification you guys have talked about.
Talking about.
23, you said 2024, yes, yes that was part of the re thats part of the reclassification.
Okay makes sense. Thank you guys.
Welcome.
Your next question will come from.
10 greenhouse from RBC capital markets. Your line is open.
Thank you good morning, just going back to kind of February commentary around the equitrans sale target for mid year.
How about timing changed at all in light of that recent kind of share price performance there.
Any impacts to Charles projected free cash flows.
Yes.
Yes, well for US we were always looking at trying to make sure that the value. We train was was more fairly valued and it's been very volatile and I think now that.
I think.
Theres a merger between.
He trainee QM coming MDP in service date was kind of another key catalysts and I think now that you're seeing proven to natural gas fundamentals. All those things I think play very well into why you train starts this kind of move back up and.
And so I think for us, we're not going to hold onto it.
By the end of year at some point, we'll sell before then and we're just going to make sure that we maximize value.
For us.
Great. Okay, and then just on the guidance.
Mentioned this noncore asset sale in the press release does the current guidance include the impact of that asset sale and it's not kind of what maybe the production associated with that thanks.
Yes, it does it.
Very small amount of production and and so.
Well right now we're running ahead of expectations. So.
When we strip it out it will have very minimal impact to our to our guidance if anything at all.
Thank you.
Your next question comes from Holly Stewart from Scotia, Howard Your line is open.
Good morning, gentlemen.
Morning.
Morning.
Maybe just.
Couple of quick wins here first recognizing that NGL and condensate or not a huge part of your business but.
The guidance does move down for volume for for the year. So I guess, that's the first question would be what are you doing with your own portfolio right now just given pricing and then what are you seeing in the basin in terms of.
Curtailment.
Sure so yes so.
Just given our exposure liquids.
You know we're not seeing.
Any material differences the way that we operate but I think what you mentioned is.
Dynamic that's that's very important to understand is what's happening to other operators in the basin.
We have seen.
Yes people, having to shut in wells because of not being able to get rid of their condensate.
By the quantify what I, what we've seen from the amount of dry gas there will be shut in as a result of these the shut ins it'd be probably in the order of 500 to 800 million cubic feet of gas a day.
And so that's a pretty important dynamic that we'll continue to track and again these things would be favorable to the natural gas outlook that we say.
Okay, that's interesting as a big number.
And then Dave maybe different perspective on the longer term goal for for sub two times.
Leverage.
I guess just thinking about the timing there. According to your plan is.
Do you see that being feasible by the end of 20 to 22.
Well I think from an absolute debt perspective, we'll get our absolute debt down to where we want to we're better by the end of 21, so that will be things I'd say, probably in our control and then the next thing will really be the commodity price environment and so if the commodity.
It gets up closer to that three times level throughout all level, that's where that will be a nice trigger for us to get our leverage right insight into that zone and so I think.
Those are really the b the two variables Nick.
Okay, and then maybe just a housekeeping item any any impact from this Texas, Texas Eastern explosion.
Yes, so that was a.
And event that occurred a couple of days ago.
We have no major impacts as a result of that.
Just to give some background on that that incident, but 10 PM. We were notified by two PM. We had that we have to shut back some gas.
But working with our partners each train was very helpful and allowing us to get our gas back to flowing on the by two P.M. The next day, we had all of our gas schedule on the commercial team added added.
Bob markets for that Ghassan worry about put it to sale. So there will be some some differences on on the pricing that will get for that selling in basin versus.
On the telco line, but you know we're.
We expect that to be rather insignificantly were booked won't be able to quantify that now.
Okay, great. Thanks, guys you're.
You're welcome.
Your next question will come from chain, Todd said coal from Stifel. Your line is open.
Good morning, and thanks for taking my questions. The first question is on 500 million there in convert to build that that you guys. They shift NHL. Maybe you guys can talk about a better so now for doing this type of bad instead of plain vanilla senior notes.
Sure. This is Dave Khani. So if you look at the set up that that heading into doing that convert.
Our debt trade up very close to par so that created a really good dynamic from a fixed income perspective, and then the volatility of as our stock rallied very sharply creating volatility really creates a second component, but convert which is really a combination of debt.
The option and so when you put those two together it created a very very good dynamic to do a convert and so.
We hired a consultant who is.
Very skilled in that and if you notice how we executed that we were able to get a very low coupon at 1.75% and we are able to get a coal spread that it was a very differential versus our peers that didnt convert so is it helps us actually save about $20 million when you looked at kind of the costs.
Differential between other converts in what we did so it's just a really good set up for convert.
Okay, Okay got it.
Then I wanted to just give something on the high you took us. So when you guys announced the Capex got a back in March it seems like.
It should have a impact at the capital allocation to Ohio, Utica, maybe you guys.
Can talk about how you think about this asset and obviously the for sale.
Oh, VB at kind of thinking about production outlook, and maybe well costs.
Based on currently.
Sure.
Well I'll take the sort of just a high at a higher level.
Just looking at the capital efficiency of our program and how the Utica fits into that I think look with capital facility I break it down its or two categories. The capital efficiency of our of our entire program and the efficiency of our execution of specific well costs.
When we look at the capital efficiency efficiency of our entire program. It's a couple of things that are that are happening.
That allow us to lower cost I mean, first starting with capital allocation decision activity levels.
Well, we're having mentality that we're going to continue continue to stay and maintenance mode.
And so not adding any any new activity or production I think the other aspect of cap allocation comes to the types of wells that were actually developing you'll see us start to ship more activity into our Marcellus first and shift away from Ohio, Utica development that will give us the ability to execute wells, Pennsylvania, Marcellus wells it call. It 730.
What versus our Ohio, Utica, that's that's north of $1000 a foot.
Sort of you more efficient application of our dollars there.
And so I think you may see Ohio start state maintain production, but in the future that asset may decline, a little bit as we shift activity at the Pennsylvania Marcellus.
That's very helpful.
The last question, if I may on cash costs. So obviously.
John outperformance on a cash costs in wonky Atlanta, and just curious is if there were like some one off items. So if this is something that you guys can sustain through the remainder of the year.
Yes, we maintained our guidance, but I think with the I'd say, we have a bias that.
If you sit and wait and stay tuned we're going to think about what we do with the upside that we've.
Created in our in our plan.
Got it thanks a lot.
Thank you.
Your next question will come from Sameer Panjwani from Tudor Pickering Holt Your line is open.
Hey, guys. Good morning, you've done a great job getting the while costs down and it would seem of service costs have provided a somewhat of an unexpected benefit in the current environment. So as you think about heading into 2021 do you see potential line of sight to get that 730 per foot target, even lower maybe with a six handle.
Yes sure. So this this is tobey I would say 730 foot was always our target, but it was not our floor.
And so we look at some of the things that we're doing now and present day and the sustainability of that into the future. We look at the quality of our of our well execution I think there's really four parts one is operation schedule.
That's largely driven by what percentage of our development is going to be set for common development and in the future we have a rising percentage of.
Activity, that's going to be part of calm development, so thats going to strengthen and allow us lower cost from a well design perspective.
A key aspect of a with our standardize while designs, we know that we're going to be generating.
Putting the same design in the ground with some simple tweaks, but.
We expect that were really set us up to make sure that from the oilfield service side, which is which is another cost cost driver that our teams are able to procure the services they need for for a first stable schedule activity schedule.
And while it is true I think services service costs have come down.
I think that that largely as a lot of to accelerate hitting our well cost targets. The teams have been really focused on making these these this cost so we're benefiting from right now sustainable into the future and so.
We've been able to sign into long term contracts may specific that just looking at some of the biggest spend services, our frac equipment, we've been able to execute to long term.
Pricing agreements, one with us while services and other one with evolution both.
Some really great technology that allows us to really take another take our operational efficiencies. The next level and that's really leads us into the fourth aspect of cost of costs its sustainability talking about our operational efficiencies.
And with good cabos with well with the right well design. Good service contracts were really getting high quality crews and equipment.
Our operational efficiencies will continue to improve.
We showed on our slides the fact that weve.
Continued to show gains in our drilling performance.
That will continue to improve as we.
Get through our our legacy.
Wellbores that we inherited we had a lot of wells that were drilled with short topples. So you've got to spend a little bit more time drilling vertical section with our horizontal rigs.
Those will be sort of flushed through the system towards the back half of this year. So we see performance improvements on the horizontal section on the completion side of things.
Getting access to these to this new technology.
And the teams continued execution.
We should we see an opportunity for us to increase the the operational efficiency from a stages per day perspective, there as well. So I mean, all these things to say, they all come together and and.
Yes lead us to have great confidence in hitting our seventh or your foot extending that performance into the future and setting the table for for lower cost going forward.
Yeah, that's great color really appreciate that and.
And then just wanted to clarify some of your earlier comments I think you mentioned there is some optionality heading into 2021, but also focus on free cash flow charts addressing that those could be somewhat mutually exclusive so just looking for some clarity there.
Yes so.
You know you've seen some other peers talk about.
The opportunity that's in front of Appalachian producers and all natural gas versus.
Frankly.
To defer some production in 2020 and and push that production at the 2021.
At a which is much higher gas price environment that opportunity is something that we're looking at you see.
Our operational uptime that we've had has allowed us to be ahead of schedule from a production standpoint.
And that efficiency is going to give us the flexibility to be able to capture that opportunity.
You may see us shifts a little bit of production into 2021.
Yes, but but the decisions that we would make would not would not cause us to change our our guidance.
Okay. Okay. So even if you were to curtail it would still be within the guidance range, maybe towards the lower end or something.
Yes, probably more towards mid point.
Good point, the hype hi.
Okay got it thank you.
And your next question will come from Jeffrey Campbell from Tuohy Brothers. Your line is open.
Good morning.
Hi, thinking about your Ohio, Utica remarks at a high level over time as acres it costs more than 730.
Foot to produce and eventual candidate for asset sale.
Yes, I mean, I think we think about we want to make sure we're spending our dollars and the highest return assets and right now.
Combo development, Pennsylvania, Marcellus is the most efficient use of of development right now.
And so we've shifted our operation scheduled to prioritize.
The best rate of return type of projects and when we look at that the Utica sort of falls behind our Pennsylvania, Marcellus and our West Virginia Marcellus assets.
Okay, great. Thank you.
Could you add any color on the 2020 land budget I was just wondering if is there anything unique happening now because of the conditions this year versus a better macro you're like we're hoping for in 2021.
Yeah, you know our land budget was largely driven by.
A maintenance program leasehold maintenance about two thirds of $150 million budget was was was set towards.
Renewing leases.
Add another 50 million was for filling in the holes. So.
We've done some things working with our with our landowner partners to sort of spread some of those costs over time. So yes. There is an opportunity for us comment a little bit lighter on does the land budget side of things and then looking forward.
In future years 2021 going forward.
Yes, theres an opportunity for us to take the amount of of.
Dollars that we have budgeted for landed walk that down from the 150 to the something that is lower.
You know.
To I think one of your one of your point you referenced with a stronger 2021.
Look for gas.
Has that impacted lat am I reading through into thinking about competition.
And and I would just say that with such a dominant foothold and.
That he has along with just the mature aspect of this basin.
Really haven't seen a lot of competition here.
And really it in any part of the play there's only one operator that can that can give land owners of confidence to get a wellbore drilled and get royalties, which is the big price.
And land owners are definitely educated and understand that and are willing to work with you today. So.
That's sort of the dynamics of land right now.
That was a great answer I appreciate that and if I could ask one last I'm, just kind of getting off the script of a lot of questions here.
I was wondering what features of the hybrid drilling rig show on slide eight do you find superior to.
What's become kind of the standard high spec rigs that most operators are using.
Thanks.
Yes, sure I mean, I think it really just let me keep in mind lot of these rigs we burn diesel to generate power I mean were burning diesel generate electricity in that electricity powers. The rigs did these battery packs really just sort of normalize the power loads at the rig is using and doing a more efficient manner.
So that's really what's what's taking place there's just a more efficient use of energy.
Thank you.
Yes.
Thank you.
I have no further questions in queue I turn the call back over to cope with rice to for closing remarks, Sir.
I'll be happy the Ptcs directors, the management team and our and our workforce. Thank you for your support and interest to make UTI and then all of US look look forward to continuing on this momentum and working hard to deliver.
The results at our shareholders deserve thank you.
Thank you everyone for joining this book today's conference call you May now disconnect.
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