Q2 2020 CNX Resources Corp Earnings Call
The next resources second quarter 2020 earnings conference call.
All participants will be in listen only mode.
Do you need assistance, please signal carpet, especially starkey.
After today's presentation, there will be an opportunity to ask questions.
To answer your question. Please press Star then one on your touched.
Withdraw your question. Please press Star then to lease that is being recorded I would now like to turn the conference every time, we live with Vice President Investor Relations. Please go ahead.
Thank you and good morning, everybody.
<unk> second quarter conference call.
Having the right today.
President and CEO, Don Rush, or Chief financial officer, and check or our Chief operating officer.
I'll be discussing our second quarter results and we of course, an updated slide presentation to our website.
Also in conjunction with monies announced transaction CNX acquiring all the outstanding common units CNX out.
At least a pre recorded video or nickel Dawn review the investment thesis CNX and why we believe we were non replicable best in class ERP company.
I haven't had a chance to see the video please feel free to access it on the home page.
Your next Dot Com web site. That's was on your <unk> Investor Relations portion of the company website.
Sure on every one CNX consolidates its results, which includes 100% of the results from CNX CNX gathering I'll see you.
The next midstream partners LP.
Earlier this morning, CNX Midstream partners ticker CNX out issued a separate press release as a reminder, in light of the recently announced transaction.
Your next time has canceled its previously announced earnings call, which was originally scheduled for 11 am eastern today.
As a reminder, any forward looking statements, we make or comments about future expectations are subject to visit stress, which we have laid out for you in our press release today as wells on our previous Securities and Exchange Commission filings.
Again, our call today with prepared remarks by Nick followed by chat and then dawn.
On the call walk for acuity.
Let me turn the call over to you that thanks, Tyler and good morning, everybody I'm going to start with my comments on slide three of our slide deck slide three highlights the philosophy and approach of how we go about managing the company.
Intrinsic value per share that's the true north that we employ a metric that our decision, making it looks to optimize and to really do a good job of optimizing intrinsic value per share you have to do a couple of other things you have to be a sound capital allocator to be able to do that you have to be applying reality I'll say, a two assumptions to do they.
And your assumptions and the reality is that needs to be effects to them aren't too broad buckets, one or external assumptions. The most obvious example that as gas prices. So we applied the Nymex forward strip I'm, not a different or uninflated gas price, even though we may decide that price, where we're always using be forward strip on external assumptions for gas pricing and others.
Bucket of internal assumptions a good example, there would be things like capital efficiency, and making sure that our capital efficiency assumptions are basically anchored in fact in reality versus something that's more aspiration all that that we want to get too, but how did you have demonstrated in the future.
You also need to be able to build a flexible and strong balance sheet, and particularly you need to do that at the bottom parts of the cycle to really habits approach work well. So we think that we've obviously done that as well and we do all these things that CNX and that's not just what drives our decision, making but it's also what drove the seven year free cash flow plan that we laid out last.
Quarter.
The updated on Monday.
We feel CNS is non replicable the way to sum this up perhaps is across a range of items that peers in the basin can't do that we enjoy.
It appears can't copy the upstream midstream strategic combination that CNX now levers the peers can't shed liability commitments like substantial unused F. T. I did see nx is not as heavily burdened with.
The peers can't repeatedly executing a field at maintenance production levels at the low capital intensity levels that CNX brings to bear.
The peers can't decide they hedge it where our hedge book sets for the coming years and appears can't applied water infrastructure that we employed optimize activity ace and reduce costs I last but not least appears can't protect the cash flows into balance sheet to.
So you extend the weekend at lower gas prices brought on by we start the winter start to materialize going into 2021.
All this means that it's going to be tough for others to pose see an excess cash costs, certainly our cash margins, our free cash flow and of course, the opportunity that our intrinsic value per share presents to investors.
We believe the company's best in class.
When you look at those cash costs in his capital efficiencies and those cash margins largely driven by our costs and the hedge book that I mentioned in our free cash flow profile and last but not least baskin best in class. When you look our lowest risk to delivering in executing on those metrics.
Let's jump over to slide four.
Slide four it's one I think that's crucial to what we really unveiled and discussed in depth on Monday Tyler mentioned the video are the dies deep into the investment thesis for CNX across six investment reasons that are shown on slide.
That is on our website as you mentioned, it's also on our you to Twitter and Linkedin accompany accounts I encourage you to view it and follow up with a collar email to go over any areas of interest that you want to explore more in depth, we're happy to do that.
These are the six that matter and although the six are important and drive the future of the company I want to point out that they're not just aspirationally I'd be six our steepen data other quantitative so they can be track management evaluated robustly over the coming years, we try to deliver tangibly to the capital markets on those often.
Overuse, you'll hear a lot yeah rarely backup terms of transparency and following the math.
And I are driven and being a low cost producer.
If we say it we feel duty to prove it that's something that excites us and we run toward.
Now all six of the reasons of course, they work in concert one builds off the other and vice versa. Today I just want to focus on to the six one that's misunderstood and one that's not on the radar the markets, but should be.
Let's start with reason number two which is the low capital intensity. That's the one I think that's understood by many in the market now there's a lot of historical reasons from accounting rules to the rapid rate of improvement that we've enjoyed that make our low capital intensity today and in the coming years, an easy thing to mess, but this is a crucial point to the investment.
Opportunity that CNX represents and the good news is it to accurately understand how efficient we have become and will be on capital you need to look at really only three drivers. The first driver is our current and future capital efficiency on drill and complete activity, it's much lower than what our history has been so the current and future capital efficiency on drilling.
Fleet is evidenced by our finding and development costs, which is we show in the core Marcellus is about 35 cents today and dropping to 30 cents for 2020 Wanna beyond.
And the sepia Utica should be as low as not lower due to that place Donnie you ours, but GAAP rules dictate financial statements apply historical look back BDNA. It is about 68 cents per Mcf for D. and see that historical DNC DDNA metric its not accurate for current and future DNC capital efficiency, because it's a collection of Sun.
Our new midstream, it's a fraction today and in the future compared to what it was in the past few years now that build out is completed and behind us. So what was a $510 million investment in 2019, it dropped to $155 million this year and it drops to $70 million annually for the six years following.
This year $70 million annually that equates to about 13 cents nmcf.
And then the third driver of our capital efficiency for us to hold production flat at the 560 Bcf and the 2022 to 2026 time period, we need about 25 deals on average per year in our core Marcellus and or the CPA Utica fields, that's about $230 million, a drill and complete capex annually.
And that assumes no further improvement in operating efficiencies are well profiles, the Chad going to talk about in a couple of minutes.
Now if you'd like to further discuss these three drivers of our capital efficiencies again, please give us a ring or an email and we'll be glad to walk through with them in more detail as I said they are crucial to understanding I am not just the capital efficiency, but our investment thesis with CNX.
Now that the second investment reason I want to cover today is reason number five.
On slide slide four which is the low risk business model. This is one that I think isn't even on the radar of most of the capital markets. Today. So I just want to spend a minute on it theres a number of drivers of why were low risk when it comes to delivering over $3 billion of free cash flow in the coming years. The first drivers were substantially hedged for the coming year.
Yes, which is perhaps the one driver of the low risk that most of the market gets today.
Second driver is that we apply the Nymex forwards on all open volumes that we project into the future. It's a reality based plan, it's not an inflated gas price deck, which would be a hope base plan. The driver you would think is understood by the markets and I'm talking about yet everywhere. One looks these days all you see our to 75 in three.
Dollars gas price footnotes index applied on projections and it's not just industry companies doing as you see the banks the ratings agencies and a host of other stakeholders doing the same thing and what can go up can also go down we don't get the constant and consistent optimism on pricing being a given when it comes to the next years in this industry we remains Heather.
To the forward price curve when that changes will change with it.
Third driver of low risk is the seven year plan to deliver over $3 billion and free cash flow, it's effectively one frac crews setting up shop in our core fields, we don't venture beyond the core areas to deliver the plan and we don't need to ramp up to deliver on what is effectively a maintenance production plan. The inventory we enjoy in these core.
Fields extends far beyond seven year inventory, it's going to be consumed in the activity pace that we've laid out.
Fourth driver of low risk, we don't need to access any of the capital markets to execute this plan, we don't need issue that we don't need to issue equity, we don't need to do major asset sales. This is a huge de risk or in a world where npvs access to capital markets, it's becoming more and more volatile and suspect in fact, our generation of the three plus billion dollars in free cash.
Flow, if not only removes our reliance on capital markets access, it's going to allow us to reduce our exposure to the capital markets will hold substantially less debt into the coming years as we continue on the March Delevering and will likely have less shares outstanding in the coming years, if we don't close our intrinsic value per share gap.
The fifth last driver of low risk, it's the nature of our cash flows it's not just upstream MP, but it's also lower risk midstream the pro forma CNX. After the CNX and taken is a blend of an Appalachian upstream and midstream entity with midstream cash flows being lower risk and lower cost of capital enough.
Stream that means on a weighted average basis CNX is lower risk and we'll have a lower cost of capital and we will enjoy premiums and debt and equity markets versus the upstream peers over the long term.
I'm going to wrap up with slide five before we turn the Mike over to chat Griffith and with this slide tries to communicate is that investors should have confidence in our ability to execute into future because we've delivered in the past.
The most recent example that is monday's announcement of the taken over the remaining interest the CNX midstream that CNX does not currently own.
The transaction, it's a catalyst for the six investment reasons, we discussed and it bolsters each and every one of them.
The transaction is also an exemplary of value accretive M&A versus what may become a theme in the basin of desperation M&A to address looming challenges. The simplest way I can articulate the transaction is in CNX acquired about $100 million of annual free cash flow under conservative set of assumptions for about 357 million dollar.
As an equity at the sub four times multiple on true free cash flow.
For a business on top of it that we know inside now and that works hand in glove with our upstream business and besides picking up free cash flow for less than four times. We also pick up lower risk free cash flow going upstream free cash flow. So pro forma as I said earlier, our cost of capital in risk profiles declining.
And besides picking a free cash flow for under four times, it's lower risk than our upstream free cash flow. We also are now going to enjoy any upside there will be created if and when prices were CNS activity pace and or the basins activity pays increase under that scenario the $100 million a free cash flow will increase along with those metrics. So I'm very pleased that were able.
To add that last bullet to the 2020 box that you see on slide five so with that now going to turn things over to Chad Griffith is going to dive a little more in depth on some of these performance metrics. Thanks Nick.
There are two broad things that differentiate CNX from our peers, which lead to many tangible competitive advantages.
First while our peers have a jumping from one one dimensional metric to index, we continually stay committed to creating long term value per share.
The one dimensional metrics do also relate to the creation of long term value. There's only one small part of the picture and our broader analysis is lets many different decisions over the years that of compounded into a material comparative advantage over our peers.
The second difference is our team and their approach to our business, we could not be where we are today with other dedication to CNX and absolute refusal to accept conventional thinking in any aspect of our business. So do want to thank them for their tremendous contribution.
The first major category, where these two factors I made a difference is in capital efficiency and we get there by continually asking the most fundamentally basic question that all MP producers should be asking about the drilling program.
How do we generate the best value for our shareholders from our undeveloped reserves.
We're not trying to grow production for the sake the growth, we're not trying to fill RFP.
We're not trying to hit arbitrary dollar per foot metrics the cost of risk adjusted return and we're not trying to drill the longest laterals just for sake of drilling longer laterals.
We try to generate the best risk adjusted return for our shareholders by focusing on the overall long term value creation of DNC investment and by the team continually challenging conventional thinking to innovate and improve our capital efficiency.
Longer laterals are great. Examples we agree that they can lead to a more efficient capital.
But only if they do not simultaneously increase your risk profile.
So we've approached drilling longer laterals sort of like trying to get to the moon.
You don't want to get off the ground and have a problem. When you are 20 or 25000 feet underground things can get expensive fast.
So we're definitely increasing our lateral length overtime as we saw the various challenges to the longer lateral lengths create.
We've done things like adopting Qs and adapting it to the MP space Qmax as a globally recognized process for ensuring high quality products and services. It's extensively used throughout automotive health care and aerospace manufacturing to ensure the delivery of highly reliable products and services, we've adopted that philosophy in process to be MPC.
Base have begun working with our service for partners to extend that process upstream through our supply chain.
We've also refined a number of design credit criteria with our well completion designs in order to deliver a more predictable drilling completion process.
Evolutions all electric Frac fleet has also contributed to this improvement in many ways, including reduced fuel costs and significantly more flexible horsepower deployment.
These improvements have all contributed to more productive uptime and reduced downtime, which have resulted in the decreased drilling days and frac, Dave shown on slide number six.
The economic benefit of these improvements are demonstrated by recent all in capital results such as our surely 38 am one pad, which we brought online for an all in dollar per foot of $680 and our more recent ritual 99 pad right in the core right in the heart of our core slip a field.
That we brought online for $720 per foot.
It's important to note that our capital per foot numbers, we include everything except for Atlanta permanent cost.
Means we include pack construction road construction surface facilities, wellheads drilling casing, cementing completions et cetera.
So when comparing our MP dollar per foot metrics, we incurred the investment community to challenge our peers or what all is included in our cost buckets to ensure that you're comparing apples to apples across the industry space.
And we've not made these improvements and offer for capital efficiency at the cost of well productivity.
Again, we're solving for long term value creation for our shareholders. So our well designs and completion designs are focusing on maximizing risk adjust rates return.
We continually assess our our well results and tweak designs and pursuit of the best risk adjusted rates of return.
Slide seven shows one example, this and action our most recent sepia Utica well is by far our best performing performing deep Utica well trending towards four up 4.5 to five Bcf per thousand foot you are.
The net result of this effort is a continual year over year improvement and dollar per foot capital costs and improve well productivity.
We are getting nearly twice as much out of the ground for just about half the capital.
As shown on slide eight this has driven our finding and development costs from $1.20 per Mcf fee back in 2013 to an estimated 35 cents today.
And we expect those FD cost to continue improve further and averaged 30 cents per mcf fee over the 20 to 21 through 2026 forecast period.
Slide nine illustrates the following the recently announced midstream transaction, we are the lowest production cash cost in the Appalachian Basin.
Again this is a feat we've achieved by challenging assumptions and focusing on true value propositions for our shareholders.
For instance, when the industry was focused on the one dimensional metric of production growth. We're often asked how we grow without firm transportation.
For the team challenged the conventional thinking and realized we could achieve the same basis protection.
And in a much more narrowly taylor manner by adding basis hedging to our to our hedge strategy.
And later with the conventional thinking shifted to Ngls and the subsidy. They appeared to provide the upstream economics. We stayed measured in our approach concerned about a significant downstream logistical challenges and lack of effective hedging.
And as many of our peers were divesting or farming out there gathering systems, we retain control of our midstream and recently reached an agreement the buyback the remaining public interest in our midstream.
The value spread here will only widen as the core Marcellus areas have existing gathering systems with long term contractually long.
With long term contractually locked in gathering rates, which by the way, we're establishing a level to generate a return on the original midstream capital investment.
Now that those systems have been paid for by the first round a pads those gathers are ready to harvest cash as dedicated producers come back for infill wells are neighboring pads.
Our lease operating expense also benefits from our approach.
We asked ourselves why on one hand, do we paid a supply freshwater to our fracs while on the other hand, we're paying dispose of large quantities are produced water.
And once we determine the reuse of produced water is all upside we asked ourselves what the most efficient means moving that water around in order to recycle it.
Once we made that assessment, we again with against the grain.
When many of our peers for slashing capital expenses during 2018 in 2019 trying to hit calendar year and near term metrics. We focused on the long game and made a significant capital investment to bottled water management system. The now allows us to reduce our disposal water volumes by over 90%.
We've also improved our lease operating cost by finding more cost effective ways to operator stations pads and pipelines.
We believe this difference in approach the gathering processing and transportation and to our lease operating expense has created a sustainable competitive advantage for CNX.
Appears to have made large long lived firm transportation commitments or long term commitments a third party gatherers, we'll have that burden on their books for many years to calm.
And yes, there is some ability for our peers to unload some of this excess FTD under there on the third parties.
But the companies who plan to space are extremely savvy and I'm not sure why those firms will pay a premium Lola face value for firm transportation that those that's largely underwater.
Turning off our production cash cost slide 10 illustrates how we expect fully burning cash cost to improve over the next several years.
As we discussed on the call Monday, if we allocate all our free cash flow towards paying down debt and with conservative assumptions on all other line items.
Our all in fully burn cash costs fall below 90 cents over the next couple of years.
Moving on to revenue are different approach has also position CNX at a distinct advantage to its peers.
Instead of expecting are hoping for gas prices to improve we think continuously about what the various factors are the influenced price more often than not we conclude the regardless of how smart are perfect. Our micro micro economic analysis prices end up just coming down to the weather and how warm or cold each winter ends up being.
So we began programmatically hedging an artist a few years ago and now as illustrated on slide 11, we possess an industry, leading hedge book that predominantly hedges more volumes and for longer time periods than any of our peers.
I'd now like to say no matter, what industry or and if you can presell your product, India price before spending capital or operating to produce it how could you not take advantage of that.
And on Slide 12, we revisit the production timing, we've been talking about for a couple of months now.
We came out out of last winter was slightly higher than average storage inventories and a lot of associated gas coming out of the Permian.
Gas markets, we're already struggling covered 19 had a dramatic impact on the entire global economy.
Summer 2020 gas prices plummeted, but the Hughes reduction a rig activity created some real bullishness for supply reductions.
And for improved prices this coming winter and beyond.
For the first time and several years the winter summer, our widen enough to justify shifting some production from summer to winter.
Particularly if it was sync up with the flush production period from new wells.
So we shut in a handful of our newer pass and then shut in several more brand new pads over the past few months. After we got those wells flowback on cleaned up.
We also took steps to modifier hedge book to lock in the summer winter arbitrage, we cash in a number of summer 2020 hedges, resulting in a gain of $29 million and began layering on incremental winter hedges to match the change production profile, those incremental where hedges lock in the value of the shut in move for CNX, even if the actual winter prices soften over the next several months.
[music].
Currently we have just over half a bcf it Bcf a day of gas Shannon and we're planning to bring that gas back online sometime around the first in November.
The main original to certain decisions to shut these wells in one summer Nymex prices were averaging two low eight and winter was averaging two nine.
Well well August Nymex, just settle at $1.85 a while winners is still around to 85. The arm has actually widened further since the original decision to shut in.
So we're sticking to the plan to turn these wells back online in November we have that flexibility, thanks to our balance sheet health and low levels of NBC.
Again for solving for all end long term value creation for our shareholders not one dimensional metrics.
Interestingly interestingly the decline in gas production that everyone with counting on as the basis for strong prices. This winter doesnt seem to be happening.
Lower 48 gas production has remained robust storage inventories will likely be above 14 Bcf heading into winter and production is currently shut in will start coming back online.
If we don't end up with a cold winter. The Bull case for 21 is pushed into 2022 and 21 gas prices will likely come down.
Producers, hoping and praying for those stronger 21 gas prices are basically bearing the balance sheet on winter and that has a risky proposition.
Finally, slide 13 highlights our activity in the quarter. We're currently running one rig and one frac crew.
And with that I'll hand, it over to them.
Thanks, Chad and good morning, everyone.
During the second quarter, we completed a 345 million dollar opportunistic convertible notes offering it a favorable 2.25% interest rate.
The proceeds were used to pay down the 2022 notes and we will result in annual cash interest rate savings of approximately $30 million per year.
And we simultaneously entered into a call spread to minimize potential equity dilution.
The remainder of the 2022 notes are expected to be repaid using organic free cash flow generated from the business.
Slide 14 shows the projected cumulative free cash flows versus our maturity schedule.
And as you can see retiring our debt as it comes due will be easy to achieve especially considering that our near term projected free cash flows are over 90% protected due to our hedge book.
Slide 15 highlights that our 2020 guidance remains unchanged from last quarter.
One thing to note is that we started deferring volumes in May as Chad mentioned in the current expectation is to turn those wells back online November onest, assuming that scenario, we would expect production to be towards the lower end of the 2020 guidance range.
But even with those production shut ins factored in we expect our annual EBITDAX to be on the high end of our capital or through our annual EBITDAX to be on the high end of our guidance range.
And for 2020, Capex approximately 65% of the remaining projected spend should occur in Q3, resulting in a much later Q4.
As we have mentioned our production deferrals. This year help set us up nicely for 2021, where we continue to expect to produce around 550 bcf fee of volumes and $425 million of free cash flow.
To reiterate what the what we've stated previously and consistently proven through our actions, we will modify our production level up or down when we see opportunities to optimize value as gas prices fluctuate both up or down.
Slide 16 is an illustration of the long term free cash flow profile of the company along with the mass supporting the free cash flow yields we expect to generate approximately $3.3 billion and cumulative free cash flow across our seven year plan.
And have an average free cash flow yield of around 26%.
Which is remarkable by any standards.
In order for our free cash flow yield to get to at energy sector average of approximately 6.5% our share price would have to increase over $30 per share assuming the $2.30 per share of annual free cash flow generation baked into our seven year free cash flow plant.
I would like to wrap things up on slide 17, which reviews, our investment thesis CNX its lowest cost producer in Appalachia, using conservative assumptions and at the current Nymex strip.
We expect to generate over $500 million of free cash flow per year, our business plan is low risk with potential for material value creation above it.
Surprisingly, we believe are $9 stock prices significantly undervalued based on debt to equity value math and the fact that we should be valued as a free cash flow yield investment.
On top of that.
The company in gas prices have a tremendous amount of upside in future.
Our company is even more attractive when considering the flexibility we have to invest our free cash flows to create even more value beyond what is projected and our base business value proposition.
You at all this up and it supports our belief that CNX is one of the best investments and the entire public market.
As we move forward quarter by quarter year by year, we look forward to delivering on our free cash flow projections paying down our debt, creating more value and eventually not only getting our stock to point were our free cash will yield as more reasonable while creating more incremental value on top of that with that I'll hand, it back over to Tyler for any questions.
Thanks, Operator, if you can open the lineup for Q and at this time please.
Certainly we will now begin the question and answer session to ask your question you May Press Star then one of your Touchtone phone.
If you're using speakerphone, please pick up your handset footprints in the keys.
Thank you all your question. Please press Star then too.
My first question today will come from wells.
Suntrust. Please go ahead.
Hey, good morning.
Well on.
It sounds like the curtailments are going to last through through November.
If that's the case you guys have any incremental hedges that you would plan to sale if that actually comes to fruition and those volumes are held back.
Thanks for the question Wells. This is Chad so right now we're actually planned to bring those volumes on November one. So we would expect those volumes to be online for all of November and December.
But you're right that is a function of price.
We have hedged those volume so we've hedged the change in production profile in November December all the way through March and really all the way in the 21, we added some incremental hedges to match the deferred production profile.
So if there's something what happened at November prices would erode.
We have tremendous flexibility to be able to wait till December.
We can just keep keep sort of rolling that play forward cashing in the hedge value and saving as molecules for a strong price day.
So sitting here today looking into forward strip some of the prices are the plan continues to bring those bring those wells on November one.
Okay. Okay, then they make sense and then any chance you could give an update on on the economics for maybe the relative value of new wells and.
And Thats southwest PA in Marcellus versus surely pins borough I mean, it seems like the costs are coming down a little bit quicker on the surely pins growth side, but maybe I missed misreading that.
Sure the surely pens borough wells.
There are really the biggest part of our undeveloped what production today. So the the economics of those wells from remain subject to the volatility of Ngls.
We're certainly hopeful the NGL markets return.
That would enhance the economics of this really pembro wells, but but for the time being with the volatility in risk associated with Ngls and.
Throw everything is going on with the oil markets.
It's sort of cost really plans for our fall behind some our course weapons swap area.
Okay, perfect and just one last one if I could sneak it in I mean in.
In both the CNXC earnings.
Presentation from a couple days ago into day, you guys highlight the attractiveness that you would bring two two and acquire especially with the kind of a de leveraging and aspect.
Should we should we be viewing that the transaction with CNXC them at least to some extent as as a function of wanting to simplify the line for the sake of maybe being a little bit more tempting.
For others to kind of coming after you and then in the Andy market or room, I, just reading too much into that.
Well well this is Nick I think that M&A in particular.
Comes or views on M&A will take a no comment approach, but I will say that with the midstream.
Taken transaction there were a number of what I would perceive advantages are drivers of that I mentioned, the that free cash flow acquisition costs, which was very attractive that thats, a big positive when you're solving for intrinsic value per share.
The simplification and you mentioned is another one right that will lead on two other sort of cost reduction improvements and efficiency drivers, which will be great and there is as I said some significant upside. So if you're looking at free cash flow generation or leverage ratio or optionality, if and when things strengthened with the gas markets are in base.
And you're looking how that sort of rolls into the perceived value proposition of the company and M&A activity, but those are all positives of course, so just to sort of answer generally I think yes, I think it does improve our standing in that metric, but beyond that it would want to comment on eminent.
Okay fair enough. Thanks, so much.
Yes.
And our next question comes from Jeffrey Campbell with Tuohy Brothers. Please go ahead.
Good morning.
I think the list of innovation, one slide five is instructive and I'd, even add construction and the dual system gathering as another one.
With that in mind.
Investment in this EPA infrastructure to slow the Utica resource.
Completely off the table for the next seven years are there signals that could bring that effort forward to some extent.
Yes, no. This is that this is Don definitely I think it it's not it's not off the table I think how will we tried to lay out and construct tiers that we're able to bring in some volumes up in sepia unico without without sort of a positive step change in infrastructure. That's required up there and you know the the recent transaction we did in the flexibility.
That opens up for us in the future on you know in gas prices.
And increasing and you'd want to step change in actually grow some production. It's it's a great area to do that in the flexibility of bringing midstream in house now gives us the ability to to self do that function. It gives us the ability to partner with folks so to have freed omo, how hot it properly structure. It. We've we've spent all the time looking in different ways.
As to go validated didnt, it's great to have a seven year based business model that produces so much cash flow that you could have the optionality to think about when there is the right time for that and as Nick said in his opening remarks will fall the Nymex strip did not making those decisions just like we did on the sort of the infrastructure build out and.
This year we.
Build it out but we also put in a bunch of hedges to protect to protect us in case market dynamic shifted.
During during the middle and post that build out so I think we view anything incrementally in SCPA above and beyond what's in our 70 based cash flow plan. Similarly.
Okay, Thanks for that and kind of going back to this hedging and curtailing business.
Any forward Diablo.
Good point, where you think about curtailing production without hedging as a way to save hedging costs, while enhancing pricing or would that just be too risky and approach to ever take.
Yes, it did.
It is Chad Chad can weigh in on one this too big for US I mean, we like we like hedging like I said I think in any industry out there that you could lock in volumes and prices for a product and make substantial margins and returns on your capital still by locking in this prices.
Take it right don't don't get greedy, we always have more more wells to drill we got a lot of interesting opportunities of gas prices rise. So I think we're going to stick to the let's have safe predictable cash flows in returns.
Method for the company and I think when we think about shut in map and and hedging and and taken the.
Taking the risk of that shut in value proposition to suit. So you shut in volumes today betting on improved prices tomorrow, we'll you're carrying risk by waiting right, you're deferring volumes to you're deferring revenue to day in and in favour of stronger revenues Tomorrow, you can lock that risk away by by layering on hedges itself.
Just a no brainer right, so so but to your point about cost.
We have a sufficiently deep sort of counterparty pool that we're able to especially the near term hedges.
It's really not be transaction cost on on those so it's not a real expensive proposition to go head says, it's a fairly liquid market and the prices are fairly transparent, so well see acute transactional cost and putting them that risk and even the best Crystal ball kit messed up based on cold winter warm winter or if an incremental one or two bcf a day of supply.
Hi shows up and with with with that kind of Hum unpredictability, if it's a tough thing to to the spec on and we're going to stick to lock in prices that makes sense for us and Fortunately were the lowest cost producers will always have that ability to kind of hedge where where other folks higher on the cost curve.
It's more difficult decision if the cost in the margins are lot center hedging in the current port price, but for us They work and we're going to continue to chip away at hedging.
Yes, well I like that answer and it's also logically consistent with what you said earlier in the call which was that your longer.
Horizon hedging is based on a recognition that the weather remains a big deal than that or how much you try to plateau out so I like that as the line. Thank you.
Thanks.
Next question will come from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Good morning, gentlemen, maybe first looking at.
So I think it looks like the most recent southwest PA Marcellus well costs during the 720 per foot green, which is quite a bit lower than the 30. That's included in the guidance. So can you maybe give us a sense.
Where maybe first.
Indeed ended up or maybe even to Q as a comparison in what you need to see to reassess that 830 number that's included in the 2020 guide.
Thanks, all of this is Chad so.
You know the counter averages.
Our bit lumpy and they have the artifacts of like wells, we turned online at the very beginning of year end up getting lumped into that sort of calendar year average for for capital per foot.
But to your point the dollar per foot number is strongly trending down over the course of a year and really setting us up for a strong 21.
As we talked about in the prepared remarks, which on 99 came a lot of $720, but really phenomenal performance by the team. We have two additional Marcellus pad that we plan on bringing online in the balance of the year. Both of those are expected to come in.
And Thats seven hard dollar foot range between somewhere between 700 800 our foot.
So tremendous efforts by the team for bringing bringing that dollar per foot average down over the course, the year and setting us up for a strong 21 and really beyond.
Okay, superjet, any any sense, maybe where there the first half trended or even twoq.
I mean per AD Hollywood.
We can follow up on idle I don't have that I don't have that number right in front of me up got I've got to about a year, but I don't have the individual quarter or half first half the year metrics in front me.
Okay. Okay.
All of the Tyler and then.
Maybe second question.
On the Twoq capex it looks like there were fewer.
Wells drilled and completed the first quarter, but the actual NP spend essentially looks flat suits or anything like onetimers driving the twoq numbers.
No there is theres no onetime within that and that we thought a bulk of wells that are teed up already as far along with that we've got two pads right now there were in the process of drilling out.
And like basically drawn outflowing back to those will be Tils and Q3.
It's it's sort of we talked earlier in the year. It's it's a it's a fairly linear program, it's a little bit shifted towards first half of the year I think Don talked a little bit about the shape of the capital spend but there's nothing really lumpy going on it's just sort of like.
Fairly linear with a trend down did the transition from two rigs a one right. So we're running one rig run Frac crew.
It's moved one offs that that direction to Q3 will still have a little bit of a bigger proportionately you know we've said around 65% of the remaining capital will be spent in Q3 with Q4 getting to more of the steady state run rate one one rig one frac crew plan that Nick talked about.
Okay, Sorry, Dan you said, let Christian in Q3.
Q3 about 65% of the remaining capital will be spent in category.
Remaining okay that Q3 will gain heavier in Q4.
Got it that's perfect and then maybe just one clarification question on the production shut ins CAD that you mentioned I think you called for a roughly half of Bcf a day and then I guess it was June 15th update.
And that you were moving down to 300 million as of July 1st. So just wondering if there is there a change there I'm assuming it there as so when we when we initially made the shutdown decision we around 350 million today.
Following as we've talked about in the operational update NGL prices had improved marginally.
So we have brought back online some of our when production this really pens Brookfield all of it but some of it.
So that cost of the 300 million today number.
And since that time, we've had a number of wells that have been drilled out flowed back array of flow. The now we've shut back in waiting for the stronger.
Winter prices.
And and frankly, there's another one or two pads plan as well that that we're looking at doing the same thing.
So that puts us today, it's about half a bcf a day of shut in.
Okay. That's perfect. Thank you.
And our next question comes from Kashy Harrison and energy. Please go ahead.
Good morning, and thank you for taking my questions.
Sure.
So looking at looking at page eight of the slide deck.
So you highlight improved lateral adjusted well performance in 2019 relative to 2018.
And then expectation for further improvement in 2020.
And you're showing an improvement in in lot of we'll just have one performance while showing longer laterals.
And so I was just curious if you could walk us through some of the drivers of what's causing the lateral adjusted productivity to increase.
Yes, Thanks, Chad I'll take that so.
It was really a combination of two things.
The biggest driver Enbridge, there's two major drivers and the reduction of sort of dollar per foot DNC costs.
Our all in capital cost really.
Thats first and foremost the efficiency of our operations, so maximizing uptime, while while minimizing downtime and the teams laser focused on making improvements on both of those fronts and and that's being achieved throughout Q amassed a program.
In the second factor is really longer laterals as a separate prepared remarks.
Longer laterals do make a difference if you can get them done without having a bunch issues without impairing your productivity without getting stuck downhole.
These longer laterals can create a lot of challenges and I think thats why some of our peers, who made a big tried to make a big leap.
It was sort of stuff too far.
Instead of trying to make a big leap, we've been to follow equity walking it off as Weve solve these challenges of Weve as we've been able to adjust our completion designs.
As we've been able to adjust our well design in order to maintain that well productivity.
Wow, reaching the longer lateral lengths and sort of so for us it's been a methodical increase and lateral length without really increasing our risk profile for impairing well results and thats, how weve been able to achieve the improvements on a dollar per foot, while maintaining and improving our actual while results.
Gotcha Gotcha Thats helpful.
And then just for my follow up sticking on slide nine.
On the top left of the page you highlight.
BDNA Rooney.
87 cents and them looks like for the first half of this year you guys are kind of in the 95 to a buck in them.
And obviously as you highlight here the implications that we should be that.
With the lower FNB costs, you would expect that beating every to trim overtime and so I was just wondering if you could give us a sense of how to think about DDNA rate over the long term.
And how you guys are looking at Aro see ROI see just so we can get a sense of the return metrics capital employed.
Yeah, Yeah, it'll you'll see it sort of trending down across these these pieces here.
Didnt really breakout how that rolls the outside of just the DMC and the fact that are non DNC spend dropping every year to clearly will will allow it to trend towards the go forward averages as Nick likes to say as opposed to the the trailing average on on these on these metrics and and when we do look at any of the return.
On on the capital that we are employing right now we are making these incremental decisions on the next on the next pad, whether you drilled or we don't drill it. So we're looking at the information on a go forward basis to make the decision.
Gotcha do you have any sense of if slash when you might get to a double digit type roce number on a corporate basis.
I'd have to adapt to get back to you on that I mean, not well look to more on the cash flow side than you had on off pump theres going to be the meeting of what DDNA will do and Rowsey under the accounting GAAP rules and when it starts to meet or hit a confluence with sort of the here now capital allocation, which is that.
35 cents going to 30 cents FSD on drill and complete the 70 million of other capex for for land water in midstream, which is about 13 cents.
An mcf and then the.
The maintenance production activity pace, which is about the 25 till average a year that we spoke about so that to me I look at that as that's sort of the current add year by year or quarter by quarter to what our Aro CE is on our capital deployment decisions today, moving forward and at some point that DDNA rate.
Under the GAAP accounting rules will start to bleed into that that pretty compelling all in sort of per Mcf capital capital charge.
Got it Thats it for me thank you.
And our next question will come from Harry Hollow Berg with Raymond James. Please go ahead.
Good morning, I just had a quick question on the shut in.
Yes, I had mentioned that you would potentially move them out to December I, just wonder what gas price you looking forward for bringing those volumes back in and also slightly more optimistic on ghastliness and others. So just wondering if same would apply in yellow could possibly bring them back sooner in like October if gas prices.
Rebounded.
So.
So right now what will we see is that the the value proposition or the NPV of bring those wells online November Onest versus December Onest is is very close with November November onest at each and get out of the current strip. So to the extent that November would weekend relative to the rest of winter is one.
We will start considering our pushing some of that gas back.
Don't have an exact number for you because it's going to vary by well by well by pad by pad, but that's the type of analysis. We do we're looking at it on sort of a day by day, well by well basis for the molecule by molecule and determining the optimal time to turn each of those molecules online.
In order to generate the best present value for our shareholders.
On the broader macro picture.
For talked a little bit about it in the prepared remarks.
We've got some are prices that are continuing to deteriorate. There has been a bit of a rally over called the last week I think a lot of folks are scratching their head at the at the recent rally.
Storage inventories continue to Phil I phenomenal rates were at the upper end of of sort of the five year range on storage inventories. Most analysts are thinking we're going to we're going to end our winter at 14 Bcf for more in storage.
And there's a lot of shut in volumes are probably going well.
We here there are large shut in volumes that are that are sitting there ready to be turned back on line.
When you look at the data.
No.
Production data things like that production production data is rallying production production volumes are increasing over the course of summer.
I don't know if I'd actually say I was I was more optimistic about gas prices than other side I'm, a little bit worried about gas prices, particularly moving into winter and next summer, but that's why CNX, while we've hedged.
The shut in our honest why Weve added additional hedges and 21 at this at the high prices, where we're seeing in the forward strip.
We're cautiously optimistic that they hang in but we're protected if they don't.
Now for 22 and beyond I think Thats, maybe you know obviously there are a lot of rig rig reductions, there's a lot lot fewer rigs running today than that than there have historically been.
So thats setting up the that is setting up supply reduction and when that manifests itself in an improved supply demand balance it will happen as his question away, yet and if things do get better sooner, which you know that'd be great. If they did we can do yeah. We could turn the wells back online September frankly term online in October we can turn them online in a week. So it's a it's.
Ready and willing we've already kind of restructured our hedge book, so any kind of positive run up there we'd get it cash flow dollar for dollar by get turning those online sooner at higher price and we still just because of the flat profile. These for the next six months or so we still got the coverage.
In the Q4 timeframe that we still made a decision so gas prices go down the shut in decision made it made our money and we're better off because of it gas prices go up we'll put them, bringing in earlier and maybe even more money because of it. So we've set ourselves up to two when either way if gas prices go up or down which you have you have to be set up that way.
The commodity industry, because it's just too hard to to get it right every time.
Great appreciate all the kind of guy.
Well.
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