Q2 2020 Range Resources Corp Earnings Call
Welcome to the range resources second quarter 2020 earnings conference call all lines have been placed on mute to prevent any background noise.
Payments made during this conference call that if not historical facts are forward looking statements.
Such statements are subject to risks and uncertainties, which could cause actual results could differ materially but those in the forward looking statements.
The speakers remarks, there will be a question and answer period at this time I would like to turn the call over to Mr. Laith Sando, Vice President Investor Relations at range resources. Please go ahead Sir.
Thank you operator.
Morning, everyone and thank you for joining ranges second quarter earnings call.
Speakers on todays call or just Ventura Chief Executive Officer.
Mark Skokie, Chief Financial Officer.
Dennis Degner, Chief operating officer.
Well, we've had a chance to review the press release, an updated investor presentation that we posted on our website.
We also filed or 10-Q with the FCC yesterday.
It's available on our website under the investors tab or are you can access it using the Fccs Edgar system.
Please note will be referencing certain non-GAAP measures on todays call.
Press release provides reconciliations of these to the most comparable GAAP figures.
For additional information, we've posted supplemental tables on our website <unk>.
To assist in the calculation of EBITDAX cash margins and other non-GAAP measures.
With that let me turn the call over to Jeff.
Thanks, Lee and thanks, everyone for joining us on this morning's call.
We're very pleased with the progress the team made this past quarter moving the ball forward on multiple fronts and further strengthening range as a leader amongst natural gas producers.
As will detail in our upcoming sustainability report, we believe the natural gas industry has an advantage position today and for the foreseeable future as the world moves towards cleaner more efficient fuels.
And within the natural gas industry, we believe that Appalachian <unk> advantage globally, as an abundant low cost resource with leading environmental standards.
Most importantly, we believe that range, having discovered the Marcellus is best positioned within Appalachia for several reasons a walk through each of them briefly.
The first differentiator is ranges peer leading capital efficiency and maintenance capital.
Since discovering the Marcellus in 2000 and for the team has been on the leading edge well costs and performance per lateral foot and this year is no exception as evidenced by our capital spending those four in 2020. The team is doing a superb job meeting and beating this years average well cost.
I guess with recent well cost trending below $600 per foot.
These outstanding cost controls.
Paired with ranges well productivity and pure leading based declawing provides us a true maintenance capital requirement. We believe is unmatched in Appalachian.
Secondly, Pennsylvania has some of the best environmental standards in the world when it comes to natural gas production.
Importantly range has been and we'll continue to be a leader and innovator when it comes to environmental efforts.
Whether that's our 100% water recycling.
Our transparent disclosures or the industry, leading methane emission targets, but we're setting.
Making range these sustainable choice for current and future natural gas supply.
That's a world seeks to reduce emissions, we believe that range in the U.S. natural gas industry will play a critical role in reaching global emissions targets.
Lastly range has a core inventory that is class leading.
Our year end 2019 proved reserves were 18.1 Tcf. The were 21 times current annual production and included just 442 undeveloped wells were about five years worth of development.
In addition to those reserves, we have thousands of additional locations in the Marcellus that will move into proved reserves as they become a part of your five year outlook.
In addition to that more so much resource, we're holding significant future optionality in thousands of low risk you that get an upper Devonian wells that are being held by our Marcellus development.
We believe that as other producers exhaust their core Marcellus inventories and begin developing these other horizons, which are adjacent to our acreage this value will become more apparent.
More core area in southwest, Pennsylvania is the only area in the basin, where you can stack the core of all three horizons.
Understandably this multi decade multi horizon inventory does not get much attention today as the market is much more focused on the near term.
However, as core exhaustion becomes a growing reality in U.S. shale plays over time range will ultimately stand out amongst peers as a result of our industry, leading inventory of core natural gas and liquids wells.
In the meantime range continues to focus on furthering our leadership position on well costs improving unit cost to enhance margins.
Funding or capital program organically and reducing absolute debt.
Quickly highlight our recent progress against a few of these key initiatives.
First yesterday, we announced the sale of or North, Louisiana assets for 245 million with the potential for 90 million in additional proceeds depending on commodity prices.
Having sold over 1.3 billion an asset since 2018.
These divestitures short commitment to a strong balance sheet wall streamlining our activity and enhancing ranges capital efficiency.
As we focus or capital towards our highest return assets.
To that end additional asset sale processes remain underway.
Second our 430 million dollar capital budget for 2020, which was reduced by 90 million in March approximately aligns with cash flow and spending this year, despite a highly challenge commodity environment.
When including proceeds from the North Louisiana sale.
Range expects to reduce absolute debt again in 2020, marking the third consecutive year of absolute debt reduction a rare fee and the N.P. sector.
And third we continue to see considerable improvements in our unit costs with cash unit costs in the second quarter declining to $1.79 per Mcf he.
When compared to the end of 2018.
Our cash unit costs have improved by remarkable 39 cents per Mcf, they were 18% and just a year and a half.
This is primarily the result of efficiently utilizing our infrastructure and streamlining operations.
Looking ahead, we expect our cost structure to see continued improvement overtime.
Most impactful will be the continuing improvements, we see NRG PMT expense.
GP and T has become a tailwind as we're now benefiting from the significant infrastructure build out that occurred over the last 15 years.
Before I turn things over to Mark I want to reiterate ranges strategy for 2021 and beyond.
As we've discussed in the past range is committed to sustainable free cash flow.
Generating corporate level returns.
To that end, we do not have any external pressures that would cause us to grow for gross.
Looking into 2021, we see considerable improvements for the natural gas and NGL macro as a result of activity driven supply declines, particularly in shale oil basins and strengthening global demand for natural gas and Ngls.
For this reason many reputable analysts are now predicting three dollar natural gas were higher in 2021.
However, while 2021 natural gas futures have improved since or lows.
In March forward first beyond 2021 remained depressed.
This is not a market that's incentivizing any growth in range has no plans to grow and that supply to the market.
Instead range will seek to maintain current production levels and optimize cash flow similar to our capital program. This year end use excess cash flow from higher near term prices to reduce debt.
Over time as we approach our long term balance sheet targets range intends to return this free cash flow to shareholders.
In summary in the near term range is focused on what is within our control continuing to drive down costs in debt.
However, the incredible store a value embedded in our reserves and resources should not be overlooked.
Through disciplined capital allocation efficient drilling and completions in innovative marketing, we look forward to translating that resource into competitive sustainable returns for our shareholders.
Now I'll turn it over to Mark to discuss the financials.
Thanks, Jeff.
The theme of the business for the last 18 months has been cost reduction both unit costs and capital efficiency.
Debt reduction.
Extension of debt maturity profile.
And expansion of liquidity.
These trends continued during the second quarter, and we intend to keep delivering on these objectives in coming quarters.
As stated on our last call. It is not our strategy to passively wait for improved prices.
While we agree with consensus third party research projections of natural gas prices moving materially higher we continue to execute on strategies strengthening the business and enhancing margins.
So where are we today.
With the sale of Louisiana assets announced yesterday, we've taken an additional meaningful step in high grading the portfolio.
Improving corporate base decline rate.
Improving maintenance Capex.
And improving unit costs.
While generating gross proceeds of $245 million.
And an additional potential $90 million contingent on commodity prices.
All of which will be applied to debt reduction.
Pro forma for the application of these proceeds.
Since late 2018. This brings total divestiture proceeds applied to debt reduction to nearly $1.4 billion.
Improvements that range are not are only partially due to further high grading assets.
Our relentless focus on efficiency has improved a breakeven costs.
This is attributable to operational excellence driving productivity for every dollar and drilling and completion investment.
Combined with a meticulous approach to managing corporate overhead.
This is evidenced by significant achievements visible and second quarter results.
As mentioned a moment ago, we expect unit costs will further improve as a result to focusing on Appalachian.
In addition, a rigorous review of companywide staffing levels has identified areas for reduction.
That when combined with Louisiana personnel departing as a result at the sale.
We will constitute a reduction in force of more than 100 people were 17%.
When these steps are complete.
Range will have reduced head count by roughly 36% since the beginning of 2019.
Resulting in durable improvements in Gionee and lease operating costs.
These difficult, but necessary steps as part of our overall operating and corporate cost management efforts.
We have created a new leading breakeven cost in southwest Appalachian.
Breakeven meeting cash cost plus maintenance capex per unit of production.
Our strategic decisions over the last few years had been focused on reducing risk mainly de leveraging.
While maintaining and enhancing the intrinsic value of the asset base.
We believe range holds the largest portfolio of quality inventory in Appalachian.
Exposure to that inventory on a per share basis has been preserved and de risked.
That portfolio also includes the diversified set of customers and pricing points.
Paired with a consistent but data driven hedge program.
We believe steps taken thus far represent material progress in positioning range as a more resilient business.
And primed to participate in expected improvements in both natural gas and natural gas liquids pricing.
Let's focus on details of second quarter results for a moment.
As they demonstrate ranges ability to deliver on financial and operating objectives.
Ranges continued industry, leading operating efficiency delivered planned production within budgeted capital spending.
Drilling and completion capital cost incurred for the quarter was approximately $99 million.
Consistent with the plan cadence this year's annual budget.
Turning to cash unit costs.
Progress on material cost improvements continued a second quarter cash unit costs declined to $1.79 cents.
Down 14% for 29 cents year over year.
Compared to the fourth quarter of 2018, when the last of our natural gas from transportation came online.
This quarter improved by 39 cents.
This marks six consecutive quarters of declining unit costs.
Delivering on our stated commitment.
Lease operating expense decreased by five cents from the second quarter last year due to a host of items, including the sale of higher cost legacy assets and reduced workover activity.
Gathering processing transport declined 15 cents from the same quarter prior year as we actively manage the midstream portfolio.
Fully utilizing capacity from southwest, Pennsylvania.
Allowing select contracts to expire.
Negotiating releases of other capacity.
And realizing savings from lower processing costs as a result reduced NGL prices.
Relentless focus on being a lean organization generated cash DNA savings of five cents per unit year over year.
Equating to $10 million in absolute cash savings in the quarter.
Due to reduced compensation expense and overhead items.
Interest expense decreased by two cents per unit compared to the second quarter of last year on lower debt balances.
Until the second quarter is better than the low end of annual guidance for unit costs.
As described previously overtime, we expect a downward trend in cash unit cost to continue.
Driven by improvements in GP anti a certain contracts see reduce rates over time based on existing contract terms.
And others, where we have the option to release capacity at expiration or extend based on Netbacks.
In addition, we expect further improvements in DNA and interest expense.
The sale of North Louisiana further supports the trend of an improved cost structure for range given the higher LOE, we have those assets.
As compared to the Marcellus.
Associated DNA.
And interest savings due to debt reduction from the divestiture proceeds.
Turning to the balance sheet, we have maintained and improved liquidity, while managing the debt maturity profile.
One year ago range had debt maturing in 2021, and 2022 totaling $1.4 billion.
At the end of this quarter that amount has been reduced by over $770 million or 54%.
Available liquidity at quarter end was approximately $1.4 billion.
The sale of Louisiana has no immediate effect on ranges credit facility.
So when you add cash proceeds from the Louisiana sale.
Pro forma liquidity is over $1.6 billion.
This substantial liquidity well positions range relative to maturities in 2021.
$9 million and in 2022.
$595 million.
So with that as a summary of where we are today, where we leading the business tomorrow.
It remains a top priority to reduce debt.
Further de risking ranges business.
During the third quarter with receipt of proceeds from Louisiana, We will repay debt.
Contingent, Louisiana sales proceeds over the next couple of years, we'll also repay debt.
In addition, we have other asset sale process is underway or that we will consider economics and circumstances warrant.
Still looking ahead.
We've provided updated unit cost guidance in the earnings release.
Sustained cost improvements are planned with improvements visible in GP anti.
Good day.
Hello.
And interest.
Each line item benefits from high grading be asset base reduced staffing levels and continuous focus on identifying new efficiencies.
The well defined and we believe achievable objective is to sustain highly investable business that would be resilient through cycles.
Return cash flow to shareholders.
And offer compelling value not only compared to other independent producers, but across industrial sectors.
Dennis over to you.
Thanks Mark.
As we look back on the second quarter, our drilling and completion capital spending for the quarter came in at approximately $99 million with our capital spend for the first half of the year totaling 235 million or approximately 55% of our planned annual spend.
As we mentioned on our prior call.
Our activity for the year is front loaded with for drilling rigs reducing to one by mid year, along with three frac crews reducing to one over a similar time period.
Based on our current activity forecast for the second half of the year.
The remaining 45% of our capital spend is expected to be evenly spread across the third and fourth quarters, placing us at or below our budget of $430 million.
Production for the quarter closed out at 2.35 Bcf equivalent per day, and aligns with our guidance communicated earlier this year to deliver production at maintenance levels.
Contributing to our Q2 production.
21 wells were turned to sales during the quarter with approximately 70% of the lateral footage located in our dry acreage position.
This puts us firmly on track to achieve 67 turn in lines for the year, which we communicated on our prior call.
The remaining wells to sales this year should be ratable across Q3, and Q4 and in line with our activity cadence of one drilling rig and one frac crew.
Production field runtime continues to exceed our expectations as we see enhanced collaboration efforts between our production operations team and our midstream partners.
Along with strong well performance from both new and prior wells across southwest, Pennsylvania.
Similar to prior quarters.
We continued our practice of long lateral development and use of existing pads.
During the second quarter, 50% of our drilling activity was located on sites with existing production.
Thus, allowing us to capture additional operational efficiencies and cost savings primarily through the realization of surface facilities and pad sites.
Gathering and compression infrastructure.
And the use of an electric fracturing fleet.
Our ability to reutilize existing pads is a competitive advantage as several years of production history show comparable recoveries per foot when returning to existing pads.
While the aforementioned cost savings helped drive stronger project economics.
In the second quarter, we drilled wells across our dry wet and super rich acreage with an average horizontal footage drilled of approximately 13500 foot per well.
This drilling performance represents close to a 30% increase over last years average horizontal linked.
We see our long lateral development and performance is a key driver in our peer leading capital efficiency.
To add to our progress of drilling longer laterals.
Drilling team added to their record of excellent performance with another successfully drilled Marcellus wellbore that exceeded 19000 feet.
This type of repeatable drilling performance continues to be a key driver in our ability to deliver unmatched capital efficiency and well cost.
On the completion side the team completed 17 wells will the total lateral footage of just under 220000 feet.
With an average horizontal length of approximately 13000 feet per well.
Overall completion efficiency continues to improve with approximately 1100 frac stages completed for the quarter as the team increased the number of Frac stages per crew day by 17%.
Versus the same time period, a year ago.
Water operations, once again exceeded our operational and capital efficiency expectations in the second quarter.
Through increased utilization of third party produced water.
The team was able to officially utilize just under 1 million barrels of third party water. In addition to ranges produced water.
As a result, this reduced our completion costs by over $2 million for the second quarter and has reduced our overall completion costs by more than $5 million year to date.
In addition to the cost reductions captured through our water operations more than $1.5 million in savings has been captured year to date through directly sourcing sand for our completion operations.
We see creative initiatives like this delivering long term.
Durable capital efficiency gains that will keep range in a leading position as we continue to reset the bar for lowest will cost per foot in Appalachian.
Which fell below $600 per foot for the second quarter and includes drilling completions and facilities cost.
Production lease operating expense saw similar savings with the quarter closing out at 11 cents per Mcf heat.
This was driven by reductions in Workover expenses.
Cost removal associated with legacy assets no longer in the portfolio.
And lastly, our strong field runtime that was mentioned earlier.
We project, our Elo lead to be in line with our Q2 reported number as we move forward.
As we entered the year. It was key that we not only communicate the framework of our capital in production plans, but also areas of focus that underpin achieving our objectives.
As we look back on our operational successes during the first half of 2020.
We can attribute several of our achievements to our commitment to three areas.
One efficiency improvements across our operations.
Two.
Diligent cost management.
And three advancements in technology.
We've already touched briefly on efficiencies and cost savings today.
And now I'd like to discuss our dedication and use of new technology.
Technology impacts our operations and many facets both in the field and in the office.
One example that we have shared on previous calls is our use of an all electric fracturing fleets.
As long time users a dual fuel drilling rigs and frac crews the step to an electric fracturing fleet was a natural progression with multiple benefits.
During the first half of 2020 are successful utilization of this electric fracturing fleet displaced approximately 2.5 million gallons of diesel fuel.
And saved more than $1.5 million over 17 wells.
All while significantly reducing our emissions and noise levels, where we operate.
Ranges large contiguous acreage position and utilization of pads with existing production makes us advantage to this technology along with the benefits it produces.
We will continue operations with this equipment.
Further capturing these benefits and savings going forward.
On the engineering side.
Early this year, our planning team implemented a well lifecycle management in resource scheduling application.
Through this effort the hundreds of tasser across our teams, which were necessary to take a well from a concept on a map.
Two of producing well, where meltdown and digitized.
The associated software package allows us to enhance cross department collaboration.
Provides transparency and workflows.
Improves data quality.
Assists us in identifying and resolving challenges and helps us make faster and more informed decisions ensuring on time and on budget wells.
Additionally, this application has streamlined our ability to construct and evaluate scenarios to help ensure we meet and exceed our business objectives.
Upon implementation of this enhanced digital workflow and its associated processes.
We immediately identified areas for production uplift along with opportunities for scheduling optimization.
Further supporting our efforts to reduce capital this year, while maintaining our production guide.
These are real examples of technology impacting our business and providing operational production and capital spending enhancements to our 2020 plan.
Our culture is one of continuous improvement for both our operations and technical teams.
Combine this with our repeatable efficient long lateral development.
Utilization of pads with existing infrastructure.
Creative drilling complete cost reductions and we see this generating peer leading well cost and durable capital efficiency.
On the marketing front.
During the quarter range sold additional natural gas volume in Appalachian following a pipeline outage in early may affecting a portion of ranges transportation. It takes natural gas to the Gulf Coast.
The of it had a minor impact to differentials during the quarter. It was mostly offset by lower gas transportation expense.
This is a good example of the benefits related to our diverse transportation portfolio.
When unplanned events in specific markets occur the overall impact remains minimal.
Domestic U.S. natural gas production declined significantly during the quarter.
Led by associated gas shut ins and legacy basin declines in response to the price of both oil and natural gas.
Range expects recently announced activity drove reductions to weigh on us production levels in the second half of 2020, and especially into the upcoming winter season more than offsetting the return of shut in production.
All while LNG exports recover from current levels.
We believe that is sustained move higher in the forward curve for natural gas is needed to incentivize activity from dry gas basins to avoid low storage levels for next year.
As previously disclosed earrings second quarter demand for gasoline and jet fuel were directly impacted by cobot 19 related reductions in vehicle and their travel.
From a volumetric perspective rages second quarter liquid sales with unaffected as our marketing team found domestic and international outlets for our production.
The abrupt change in demand put temporary pressure on condensate pricing during the quarter.
However, the northeast condensate market has since rebounded and we began to see improvements and condensate pricing during the month of Jude.
We expect second quarter to be the Troughing condensate pricing for 2020, and see significant improvements going into the second half of the year.
Range experienced healthy NGL demand during the second quarter as a result of its strong and diverse customer basis exposure to resilient domestic and global chemical demand.
Demand for you Essentials was up an estimated 3% year over year and as a result, the call on Ngls exported from the East and Gulf Coast has remained resilient.
At the same time total us NGL supply, including import parts is estimated to have decreased 5% as refineries reduced throughput and shale production declined.
This tightening in the domestic supply demand balance led to a swift recovery NGL prices during the quarter.
Range took full advantage of the strengthening fundamentals and the resulting improvement in prices because its strategic access to domestic and international liquid markets.
As the team is typically done range was also able to capture the value of an improved ethane premium to Appalachian natural gas by recovering incremental anything during the quarter.
Mont Belvieu propane in normal butane prices increased roughly 60% from March 30, Onest to June Thirtyth.
And while international Netbacks are noteworthy where to start the year.
Premiums at Marcus Hook have remained stable at a few cents above the Mont Belvieu index.
Range increased its access to waterborne exports via Mariner East and Marcus Hook during the second quarter and expects to continued benefits from the flexibility of our transportation portfolio that allows access to multiple domestic and international liquids markets.
As we enter the second half the year and continue into 2021.
We see NGL and condensate fundamentals continuing to strengthen as supply declines due to a reduction in drilling and completions for the industry, while demand continues to recover.
This should create a very supportive environment for stronger NGL and condensate prices.
Before closing out the operations of marketing section I'd like to touch on a few highlights regarding our safety and environmental performance.
When looking at our key safety metrics year to date, we continue to see improvements compared to the same time period a year ago.
With our team's dedication to hazard identification main training our total recordable incident rate is dropped to 0.44 per unit a measurement.
And should benchmark in the top quartile for safety performance among our peer group.
In addition to this our vehicle monitoring system and trading continues to show positive results by reducing our preventable vehicle incident rate by 22% for the first six months of 2020.
Compared to the same time period in 2019.
Our environmental performance reflects similar positive results with our operations team capturing zero reportable skills in June and an overall with 50% reduction year to date versus last year.
We will have additional positive environmental and safety results to share in our upcoming corporate sustainability report that is slated for release in the next month or so.
Before handing it back over to Jeff I'd like to express our thanks to our women and men in the organization for their continued hard work and dedication while managing through a pandemic.
The second quarter results clearly reflect our operations are on track to deliver on our production and capital plans.
With peer leading drilling complete cost.
All while operating with our strongest safety and environmental performance yet.
Jeff back to you.
Operator, we are happy to take questions.
Thank you Mr. Ventura the question and answer session will now begin if you would like to ask a question. Please indicate by pressing the star key then one.
You are on the speakerphone. Please pick up your handset for asking your question. If you would like to withdraw. Your question you may be so by pressing the pound key.
Once again, please press star one to ask a question.
Our first question comes from the line of Josh Silverstein with Wolfe Research. Your line is open. Please go ahead.
Thanks, Good morning, guys just wanted to touch on the asset sales.
No I'm curious with the bullish outlook for for gas prices next next year.
Both on the screen and your internal views why not wait a little bit to sell at a higher valuation and then separately on the asset sales what else is being contemplated I know you you guys had the royalty transactions that you've executed already but are there other just straight up producing assets that you're looking to get rid of as of right now.
Yes, let me start and then more compelling warm.
Your first question why now versus waiting.
We are we are constructive prices, but I think the key thing is.
I think taking action and moving on it helps us hit our values now were constructive but.
Knows what will happen a year from those who would have predicted the things were going through now a year ago.
But if you looked at it and you know the company in the way we're positioned at this point, we've got excellent cost structure wells that are best in class elections that 600 per foot.
And maintenance capital because our base decline is lower now and well costs. We've got best in class, we think in the in Appalachian.
Maintenance capital, we're reducing debt with it. So these are things we know that are going to happen versus rolling the dice embedding on become significant unit cost improvement more it's going to go through that.
And then again post Louisiana, we have improved unit costs, better leverage better liquidity lower debt improve base decline and maintenance capital and and we think therefore looking forward improved free cash flow and yields a return to work right now to that.
Sure so to add just a couple of things and then to answer your second question as far as what else may be in line first I think Jeff touched on it really it's about the application of proceeds it's about de risking the existing massive portfolio of the Marcellus and reducing cost structure, which inherently creates incremental value.
The other piece of it is the way the deal was structured there is a contingent payment of additional proceeds of up to $90 million based on combination.
Of natural gas natural gas liquids and oil price and at current strip prices a significant portion of that is in the money right. Now so while you could attempt to time to market better we feel like the.
Immediacy of the benefits of this combined with a portion of the upside potential from this contract is very beneficial for rigs today.
As far as what else maybe in the Hopper, it's kind of what we've talked about before dialogues do continue we have options.
To look at around Lycoming.
That remains a quality asset with a low base decline rate good production, a good starter kit or bolt on for a variety of different.
Within we have discussions and then as far as looking at the overall range of options. We have in front of US just consider the depth and breadth of the portfolio looking at half a million acres.
Stacked pay acreage in southwest, Pennsylvania.
Depending on economics and opportunity and needs we have the ability to continue looking at either having a pieces of acreage or other structures to create additional value.
I think the main punch line here is not not only what we've set our targets are what we've done and what we've delivered in what we fully expect to be our third you're in a row of declining debt.
And with.
Free cash flow generating plan going forward. This puts us in very good position and Louisiana asset sale, just help us take one more step on that.
Okay. Thanks for that a comprehensive answer.
The call question would be just on the the comments on the GTT costs.
No I know you guys are producing above the minimum ourselves commitments right now.
What's the significance of of the savings like how big is the magnitude here and the view internally that you guys would need to renew the capacity or is that the renewal at a lower rate going forward as the commitments Raul.
Yes, I think there's a couple of questions. There I think Dennis and I can take that one together I'll start off with just the guide the trends costs I think if you've got the Investor Relations presentation Handy Slide 14 is a good reference what that slide shows is the trend in unit costs over time going from something near to do.
Callers to obviously.
This quarter and the second half of this year midpoint of guidance in the low to mid one sixties range and then if you look forward to the potential unit cost structure here, assuming zero growth you still see savings driving us down too.
150, low 150 range that is.
In large part as you can see in that chart.
Allowed and permitted by the GBT savings, which the declines to potentially the mid one twentys type range dollar $20 25.
As a reminder, it's a function of existing contractual terms.
And the nature of those contracts so in big round numbers, you're talking about a third processing a third gathering.
A third long haul transport long haul transport is fixed although as we've disclosed this quarter and are continuously doing the marketing thing does a great job of always trying to optimize that capacity use it sell it off negotiating mint amendments as as possible.
Third of processing, obviously, thats a function of NGL prices and will fluctuate, but that's right way risks, but the good set up for range. The gathering portion has.
The cost recovery mechanism that really for pieces of it you're entering into that phase where overtime for the next decade annually pieces that began to fall out which not only drive savings through 2024, but can continue thereafter and continue that trend downward so as far as our strategy for long haul try.
Transport I'll turn it over to Dennis.
Good morning, Josh, we we see our portfolio as.
Being very well right size with what our production plans are today and also as we think about maintenance capital moving forward.
Being an early mover in the Marcellus really allows us some advantages to layer in multiple outlets to make our portfolio diverse. Thus we touched on it during the prepared remarks, allowing us to either sell in basin moved to other markets.
Even when they are subsets that exists we're exceeding the utilization of our RFP long haul to date, we see that is being again in line with what our plans are it is some of these.
Portions of our transport start to reach exploration, we have good flexibility across those different packages to either renew extend not extend and we see this aligning well as you think about where the program can go in the next couple of years.
Jeff touched on it earlier, but with our long dated inventory we see.
Recent traction for in basin sales opportunities to materialize.
Allowing us some flexibility to then further look at again as we've always said triangular molecules to premium markets.
Thanks, guys.
Thank you and our next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Your line is open. Please go ahead.
Hi, good morning.
Good morning.
First question I wanted to ask was about the.
28.5 million that rises dedicated and reducing the same amendment since relative to the north Louisiana sale.
Just wondering if this had any effect on the total duration of that commitment.
And perhaps how long that commitment remains if you can disclose that.
Sure Jeff So.
I guess, just as a backdrop for the midstream capacity in Louisiana, a portion of that capacity used portion goes with the asset and the unused comes to range. So first of all the existing contract was bifurcated.
And the portion that was retained we have entered into amendments to that agreement that adjusted both the shape of that obligation in the linked in term of that obligation. So the final valuation work and all that will be done in the third quarter as well as estimating potential future savings incremental to those things incremental.
To the.
Size of the obligation and the turn of the obligation, but also savings potential from incremental activity. There. So that 28.5 million upfront payment was just beneficial to range and to the amendment in terms of reducing that overall obligation.
Well spent in reducing the size.
Okay right I appreciate that.
And my follow up is to ask about the $600 per foot.
As cost savings just a couple of quick ones on that one I was wondering.
To what extent the 50% of activity returning to the legacy pads.
Benefited that cost.
Yes, generally this is Dennis.
What I would tell you is that.
Kind of year any year out we've been seeing a return to pads with existing production.
Activity cadence of somewhere between the 30% to 50% range its hired some years lower and others. So there are savings there to capture they do find their way so clearly into the total cost per foot.
Really what I'd like to say, though is the three biggest drivers for us, though are really around our efficiencies we've seen through the first half the year touched on it briefly but see a 17% increase in our number of Frac stages per crew date through the through the second quarter is also consistent with positive results we saw in the.
First quarter as well so foods have done really well the teams have worked really hard to.
Make sure that were as report patients and that translates into lower cost for us. The second thing was our water recycling.
When you look you basically the savings that we touched on in the second quarter for using third party water. That's only one aspect of it the other savings we capture is efficiently, bringing source water into the field from our own operations, we've seen that cost significantly reduces.
Well so those are the two big drivers and then thirdly is further let's just say cost savings on the service side. We've seen those continue to softened slightly as companies look to strategically aligned with us for not only the balance of the years, but also as we look into 2020 different.
Well I would add to what Dennis is saying the fact that we'd have a big block position.
Really enhances what we're able to do so.
Brent.
The.
Hello, and I'll, just follow up by asking and it sounds like there's kind of big CMBS here.
Do you expect these cost reductions to remain largely sustainable even if we get that 2021, Nat gas price improvement thats been referenced today. Thanks.
Yes, absolutely we feel we feel really good about being able to maintain these and by and large because there's such a significant portion of them that are based upon what Jeff pointed out our blocky acreage position the ability to move back into existing pads, and then maintaining or further improving the efficiencies that we built upon.
Really quarter over quarter over the last several years. So we see this is really durable for us.
And hope to continue to push further below $600 per foot.
Thank you and our next question comes from the line of 'cause shy Harrison with Simmons Energy. Your line is open. Please go ahead.
Good morning, and thank you for taking my questions. Good morning.
Yeah, So maybe first off a question for Jeff.
Looking at Appalachian longer term it fields and leave it feels as if to us that the ability to earn excess corporate returns is probably going to be driven by.
Consolidation and less just last corporate overhead in general as the industry matures.
You talked a little bit in the in the opening in the prepared remarks about range, having an enviable core inventory.
You know as you know the balance sheet still need some work and so I guess I was just wondering if you could maybe give us an update on where your thought process is on consolidation and how you see range playing a role within.
Within that theme over time.
Yes, Yes, let me start and Mark and I want my comments I think.
There's there are several things one I think if you looked at range stand alone.
We do have an enviable position and we we believe and I think its demonstratable that we'd have the.
Best inventory out there with the longest life, coupled with stacked pay importantly, when you looked at our cost per foot than other people were targeting Daimler targeting range. So we've been ahead of the class in terms of drilling completion capital efficiency and therefore couple that with also best in class decline right now it was 20.
Well below 20%.
That's a fairly maintenance capital.
You're right costs are critical so we've been laser focused on reducing all unit cost. If you looked at our press release, we intentionally broke them out one by one so you can see we're making really progress in every single aspects of unit cost in like Mark said in terms of GE and I also.
It's always painful to do but significant headcount reduction.
Coupled with laser focused on all those different aspects.
Thank you know there's.
The Appalachian Basin, I would say relative to the Permian basin in other areas is relatively consolidated but with time I expected it will consolidate further.
You know people talk about theaters.
There is roughly 30 drilling rigs operated by however, many companies 20 companies or whatever but I think when you looked at that acreage you have to consider the quality lot of that it really becomes apparent.
You have tier 123 or core tier 123, however, you want to define it we put some slides in our book in Architected, our little bit different if you flip to slide nine.
We have pier one and two we won't tell you do those are pretty easy to looked at it and you can see that.
When you look at the results going from a 2017 18 and 19 deterioration and these are.
Would you would consider leading peers. So I think it's important to consider acreage quality cost structure balance sheet, a number of things. When you go forward. So I think range is well positioned but we're very open to whatever's best for our shareholders. So mark you want to add on to that.
Yes, I think you've hit on all the key topics there I I would just.
Add that where we think about.
Corporate returns that's measured in free cash flow and that with the provides cost structure.
Ranges.
Finally, there whether the second half of this year into 2021.
At current strip prices, we think the significant progress made to date in terms of absolute debt reduction.
This year being the third year in a row for absolute debt reduction to significantly de risked our inventory and reduced our cost structure combined that with the savings and Luigi M&A and other line items, and then couple that with pure leading maintenance or sustainable Capex all in we think thats.
Peer leading southwest Appalachian breakeven costs. So range, we think is poised to deliver competitive returns.
Both.
Within the sector and as you compare against other peers for very long period of done.
Okay, great and thank thank you for that color.
And then I guess as my follow up maybe maybe a question for Dennis.
You've talked a little bit about.
Cost tracking below $600 per flight.
It seems as if guidance implies while costs in the mid five hundreds I was I was wondering if you didn't maybe give us a little bit more specifics city on that sub 600 estimate that you put out there today and then just given the evolution of the portfolio evolution of base declines just wondering if you could provide a leading edge estimate on how you think about.
Maintenance capex rapidly entering 2021.
That I'll I'll go ahead and start on the cost piece and we shared some of that with the marker Jeff on the maintenance capital side as we think about cost as we go into the second half the year. We're already currently add one drilling rig in one frac crew and so the capital efficiency that we're seeing associated with our operations is very.
Much in line with what we saw through the first half of the year. So we're encouraged that will continue. This is also say capital savings drum beat for the remainder of 2020.
We're seeing our efficiencies on the completion side be is strong as we ever have certainly tried to touch on that earlier with the 17% improvement in our Frac efficiencies you said the crews have really done done well, we see the similar type performance on our drilling rig side.
Drilling performance continues to exceed our expectations and then also.
Really it's it goes across not only from the DNC side, but also to leave us heating 11 cents for the quarter.
As we think about 2021.
It's difficult right now to see service costs moving.
On a positive direction, there's there's going to be no doubt.
Further alignment I think between.
Efficient operators and service providers, who were one of the partner for for the long haul we're already seeing some of that dialogue with our current service service provider base. Good strong partners with us. So as we think about cost for 2021, we see that its durable we like what we're capturing on an efficiency standpoint, and we think.
That is we look into getting further below this assumes that 600 million dollar mark for $600 per foot Mark it's really going to rely upon building upon multiple aspects and it won't be just just service cost it won't be.
Just efficiencies it will be implementation of technology like we talked about with our planning and resource tools and off road for two seconds here. If we talk often lee about keeping our gathering system full and at a high utilization as a part of this planning process. We're also needing to accurately hydraulically model.
Our pipes and also understand we're constraints are as well as we ever have in understand the impacts of de bottlenecking. So when we think about planning it's moving from sticks on Matt something that's a lot more complex to capture those additional efficiency. So we see that translating into the next level of driving further below $600.
So if you want to put a couple of numbers that just I think the math, we lay out on slide 11, as it could model not only for range, but a tool set to compare across the industry to get up.
Pretty solid apples to apples comparison based on reported data so for range looking at our current estimated decline rate of roughly 19%.
You could back into an estimated DNC maintenance for sustainable Capex number of about 385, now, there's obviously timing applications and weather and so forth so that.
Moving from the spreadsheet into reality that would put you today at about 440 million.
But after the Louisiana sale, you're going to drop another 30 million $35 million out of that so potential sustaining capex in the loan 400 range.
Great. Thank you. Thank you for that update.
Thank you and my last question is going to come from the line of Brad Heffern with RBC capital markets. Your line is open. Please go ahead.
Yes, thanks, good morning, everyone. So.
And on hedging strategy. So obviously, you've talked about your bullishness on on the the outlook for gas and Ngls.
How do you think about the opportunities that the futures curve presents and 2021.
Oh, it anywhere between 60 and pretty dollars across the year versus your desire to.
And some of the upside.
Yes, Thats a good question. This is mark I'll start and then we can all chime in.
So range has had a pretty consistent track record for more than a decade in terms of what we do to de risk our cash flow protect the balance sheet and maintain steady operations protect shareholder value.
But there's a fair way within which we operate generally speaking by the time, we enter a calendar year, we want to be 60% to 80% hedge.
But the nature and the timing of those hedges as to when we add them is based off of data based off of our observations.
Drilling based on type curves I basin, we model based on breakeven costs by basins that we model and based on.
The demand.
Published by new facility facilities expansion.
Expansions of LNG the margins exports in Fourq. So we try to combine the supply and demand to get a sense of where we think the market is going to go and that gives us the ability to.
Exercise some flexibility in terms of the timing and the structure of the hedges that we put in place. So the primary objective is still to protect balance sheet and protect the shareholder value in the value of inventory, but we've intentionally been a little bit on the lighter end of the range of hedging for 2021.
We've also use some callers to make sure we're protecting the balance sheet, but hanging onto that upside exposure, which we believe is very likely.
Given the breakeven cost for the industry as a whole and the demand that is returning both on the natural gas and the natural gas liquids side. So we're certainly pleased to see reality setting into the forward curve, a little bit fundamentals being better reflected.
And we think that will continue to play out as producers.
Economics, and the need for cash.
It's evident to simply sustained production much less meet expected growth in the coming year, two and three so we'll continue to add hedges will continue to operate within our bandwidth.
Of historical practice, but being mindful of hanging onto some of the upside exposure with structure and timing of those hedges.
Okay got it.
And then going back to the Terryville transportation the 28.5.
I was just curious if you know are we going to see keeping something continue to flow through GPM team for those commitments and then is the 28.5.
Is that the bulk of the commitment that's been pay down or is there any sort of like NPV that you could give on on what that would be.
So the present value of the obligations will be recorded in the third quarter and then that liability will just.
Accrued off over the remaining term.
The obligations with extend for about 2029 so.
You'll just see that roll off.
The balance sheet overtime.
The 28.5 is let's call it a prepayment, but a favorable prepayment for range to reduce that amount.
In terms of giving you a dollar estimate as I mentioned, there's multiple components here the amendment to the contracts that valuation work is being nailed down in refined right now but to give you some expectation of the upper and.
What that is I'd reference the disclosure in the 10-Q that this past quarter's deficiency payment was about $18 million.
So again this isn't anything new this is a cost that's been in our gathering processing transport.
Many quarters. So this is just improved by splitting the contract.
Moving capacity with the asset and then amending retain portion over time.
Okay. Thank you.
Thank you and this does conclude our question and answer session and I would like to turn the conference back over to Mr., Jeff in terms of for any further remarks.
I just want to thank everybody for taking time to listen to our call and to ask questions. This morning. Please feel free to follow with additional questions. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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