Q2 2020 EQT Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome T. D. E. T. T Q2, 2020 quarter results conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During this session you'll need to press star, one and you're telling.
Phone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like it from the call over to your Speaker today, Andrew Burns director of Investor Relations. Thank you. Please go ahead.
Good morning, and thank you for joining today's conference call with me today are Toby Rice, President and Chief Executive Officer, and David Conte, Chief Financial Officer. The replay for today's call will be available on our website for a seven day period beginning this evening the telephone number for the replay is one 800 585.
Five athree six seven with a confirmation code of 6066685.
In a moment Toby and David will present their prepared remarks with a question and answer session to follow during these prepared remarks. They may refer to certain slide that have been published in a new investor presentation, which is available on their investor relation portion of our website I'd like to remind you that today's call may contain forward looking statements actual results in future.
For events could materially differ from these forward looking statements because of factors described in today's earnings release, and then a risk factor section of our form 10-K for the year ended December 30, Onest 2019, and and subsequent filings we make the FCC, we do not undertake any duty to update any forward looking statements today's call.
I may also contain certain non-GAAP financial measures. Please refer to this morning's earnings release for important disclosures regarding such measures, including reconciliations of the most comparable GAAP financial measures and with that I'll turn it over to Tobey. Thanks.
Thanks, Andrew and good morning, everyone today, I'm, particularly excited as we have recently eclipsed our one year anniversary out the company I plan to provide an update on the business and our strategic initiatives as well provide a brief review of the quarter, but first I would like to quickly reflect on the previous year and what it means for the future of our company we were called into service by the shareholders last July with them.
Mandate to transform the way that easy operated while at the same time addressing legacy governors on the business that will preventing EGD from realizing the full potential of its world class assets.
Today I am proud to say that you t. stand firmly on stable grounds and we're primed to take this company to the next level as we unlock the full potential of our premier assets, we've leveraged our experience with these assets to fast track operational results, we've leveraged technology and maximize the value of our human capital to retool IEC UTI into a modern digital.
Enabled organization with vision and purpose.
This was accomplished not only by doing what we said we were going to do by hitting our cost targets streamline the organization implementing our digital work environment, but also going above and beyond our promises we have significantly improved you tease financial position by creating a clear path to maturity management in absolute debt reduction enhancing our future cash margins and free cash flow through.
The renegotiation of our long term gathering contracts, coupled with substantial near term fee relief rebalancing, our hedge portfolio to protect our business against a volatile 2020 commodity landscape, while positioning for an improved forward curve.
Rationalizing our ft portfolio, which looks even more promising with the cancellation of HCP. All of these actions proved that we can be nimble and creative while at the same time, providing strategic flexibility.
These decisions were only able to be accomplished from a position of strength unique to this company UTI is truly a rate of change story being written by an aligned highly motivated me im and executed by an equally motivated workforce and network of stakeholders.
As evident in the second quarter results announced earlier today, our efforts have translated into a step change in operational performance at a faster pace than originally projected our operational improvements have come organically and not by sacrificing long term efficiencies for short term benefits as such and in alignment with our corporate mission everyday we're getting closer to.
The natural gas leader that we all hope for and achieving our mission to realize the full potential of IEC, UTI and becoming the operator of choice for all stakeholders.
Our company mission is inclusive of all stakeholders, we believe that if not just about producing great results for shareholders. It's also about how you produce those results recognizing the needs of all stakeholders emphasizes the critical role that natural gas plays and our future energy mix.
How we operate is shaped by our commitment to MSG. We believe that performance on MSG issues is a critical component for long term sustainable value creation.
Today Appalachian provides the power source for one out of every eight household in America. One out of every 60 freak UTI alone the ability of the shale revolution to meet the growing energy demand of the United States, while simultaneously, replacing coal power generation not only reduced the cost of power for Americans. It also resulted in drastic decline.
Ones and Seo to emissions.
With respect to methane emissions the primary focal area for oil and gas producers Appalachia has the lowest intensity of any basin in the United States, representing 16% of the energy supply, while generating only 4% of the methane emissions.
As we look to the future of the natural gas industry, we believe that companies like IEC UTI will lead the way aside from being purpose driven we believe we have an opportunity in front of us that is unique in the industry. Our extensive combo development inventory, coupled with the technological and human capital needed to execute on it has led to a step change in.
Operational performance with well costs declining by over 30% in just one year. The outputs of common development are not just financial but are also beneficial to emission levels water recycling rates and diesel usage among other DSG related metrics to that end, we expect to see similar favorable step changes and environmental impacts as we can.
When you to execute equities unique combo development strategy. This transitions nicely to some operational highlights that were achieved during the quarter I'd like to directly to slide 10 in the Investor presentation that we published this morning for reference we continue to push the operational technological and engineering boundaries to drive value creation and in June UTI recent.
Industry first in the basin by horizontally drilling 10566 feet or more than two miles and a 24 hour period, we continue to see improvements and efficiencies year over year, our horizontal drilling speed has increased by 63%, while our horizontal days per thousand feet drilled has decreased by 36%.
What this means freak UTI as we were able to achieve our target drilling costs with higher confidence and an accelerated pace our utilization of electric frac crews and hybrid drilling rigs exemplifies our commitment to improved operational and environmental performance as highlighted on slide 11 in our presentation. The use of next generation Frac technology has driven a.
20% improvement to both pumping time and Frac stages per crew since July of 2018, while lowering our carbon footprint by eliminating over 9 million gallons of diesel consumption.
These drilling and completion efficiencies are very encouraging, but only represent a subset of the operational efficiencies being realized across the organization, which drove a 10% decrease in our well costs quarter over quarter. During the quarter, we developed our PPA Marcellus wells at a cost of $680 per foot well below our first quarter execution.
One of $745 per foot and our target well cost of $730 per foot, while we will be patient and establishing a new well cost target our confidence is growing and we are excited about the opportunities in front of us.
Consistent well execution is driven by a strong scheduled design proven and consistent well design and efficient drilling and completion operations in the field all of which translate into sustainable and consistent cost performance. Our entire organization is acutely focused on these measures into pursuit of optimal operational execution.
Shifting gears I'd now like to provide an update on the production curtailment, we announced in May we ended the quarter with all our previously announced volume curtailments shut in earlier. This month, we began moderated approach to bring in these volumes back online and have seen no degradation to well performance as of today all curtailed production has returned to sales.
Having executed this curtailment strategy, we now have a highly informed data driven analytical understanding of how these actions impacted all aspects of our business you can say with confidence at these actions where value accretive.
Moving forward, we will continue to monitor the market and look for opportunities where economics may justify further curtailments.
On the macro front the effective cobot 19 has created near term uncertainty in the us natural gas markets already battling excess supply from a warm winter we saw about four Bcf a day if demand destruction from KOVA 19 in the industrial LNG and residential commercial markets power on the other hand was a bright spot.
Even with lower electricity usage as natural gas is taken market share away from coal we are fortunate to be protected from the short term pricing pressures through our robust hedge portfolio in 2020.
Looking forward, we believe the market will be much more supportive as the rapid decline in oil directed activity and uncertainty around future oil pricing reduces a material amount of associated gas from the market. Additionally, with Appalachian rig counts dropping from 52 to 33 and Haynesville rig counts dropping from 49% to 32 since the beginning of 2000.
20, both premier gas basins sit well below maintenance production activity levels. We anticipate that these factors combined with normal winter weather and rising industrial and LNG demand will cause gas supplies to be short heading into 2021 and as a result, we believe the natural gas strip is undervalued because of this view we.
Have been patient hedgers, leaving upside in 2021 and have reduced exposure to the Equitrans Henry hub price escalator embedded in our previously executed gas gathering agreement, which Dave will talk to in a moment.
While undervalued, we base our business plan on strip pricing rather than our more bullish internal pricing view based on the current price environment. We expect to run this business at a maintenance level for the next several years, if our upside commodity thesis plays out for 2021, all incremental free cash flow generation would be utilized to further reduce our debt profile.
Ill and enhance our leverage position.
There are a lot of great things happening any qt, we're excited about another strong quarter in and I'll now turn the call over to Dave.
Thanks, Toby and good morning, everyone before we get into the detailed quarterly results I wanted to highlight the steps that have been taken during the quarter to strengthen our financial position and balance sheet.
Ill start with our near term debt maturities and net debt position, which we detailed on slide 16 through 19 in our Investor presentation. As you remember we ended the first quarter with approximately 630 million in debt maturing through 2021 pro forma for the convertible debt offerings. During the second quarter. We retired approximately 350 million in conjunction with.
One of our 125 million dollar asset divestiture and the receipt of approximately 190 million or half of our tax refunds, we anticipate receiving in 2020.
At the end of the quarter, we've completely retired a 2021 term loan which stood at $1 billion at the start of the year.
The remaining 2021 debt maturities sits at approximately 280 million, which we plan to retire at or before the end of 2020.
Since the beginning of the year, we paid off or termed out 2.6 billion of 3.8 billion of maturities due from 2020 through 2022.
Net debt position has improved by approximately 400 million during the quarter going from 5 billion to 4.6 thing, which was augmented by the fair value treatment associated with our convertible debt offerings.
With our expected free cash flow generation and the second half of our tax refund, we see our net debt declined to 4.3 billion paying off another 300 million before year end the use of our remaining equity stake at today's value nets us closer to 4.1 billion of net debt.
Additionally, assuming 100% equity treatment of our convertible issue net debt would be reduced by a further 300 million to 3.8 billion.
One of the major beneficiary of issuing equity as having the flexibility to deem debt or equity.
As we stated in the past, we firmly believe that the best way to increase equity value and market position is to reduce debt and improve our leverage profile. We continue to target leverage of the below two times and plan to retire between 1.6 billion and 1.8 billion of debt in the aggregate by the end of year 2020.
21.
If we ultimately make decision to execute certain asset sales or debt reduction level could be meaningfully better.
During the second quarter. We were also successful in issuing approximately 100 million in surety bonds, replacing previously posted letters of credit this increases available liquidity in stages about 1% in costs.
Our current liquidity sits at 1.7 billion comprise of our 2.5 billion unsecured revolver and offset by approximately 800 million outstanding letters of credit.
As a result of successfully following a maturity and liquidity management plan Fitch has slipped our ratings outlook to positive.
Now getting into some of our second quarter results first we achieved sales volumes of 346 Bcf for the quarter with oil production curtailments remain in effect through the duration of the quarter, we exceeded the high end of our guidance by 11 Bcf fee driven by production uplift realized due to lower line pressures associated with the curtailments.
Adjusted operating revenues were 816 million down 15% compared to the second quarter 2019 results driven by a 9% lower realized price and 7% lower sales volumes.
Our second quarter 2020 production related unit operating costs were $1.42 per Mcf theme.
I remind you that the volume curtailment program increased our unit costs.
We expect production related operating costs improved throughout the remainder of 2020 as we returned production to normal levels.
Capital expenditures of 303 million were aligned with our expectations and 163 million lower than the second quarter of 2019.
Pennsylvania, Marcellus well costs of 680 per foot during the quarter set the stage for improved capital deployment moving forward.
Our adjusting operating cash flow for the quarter was 221 million, while free cash flow was negative 82 million.
This quarter, we had several items negatively impact our free cash flow for a total of approximately 90 million.
First we use the weakening forward curve this quarter to spend approximately 54 million to restructure our 2021 to 2023 hedge book to meaningfully reduce exposure to the three year Henry hub bonus payment embedded in our new gas gathering agreement with Equitrans. As a reminder, these payments have a 16 million per year limit Orca reached 180.
Million under certain price scenarios.
And second our decision to shut in production during the quarter deferred approximately $36 million into future periods.
On the strategic side, we continue to pursue path to rationalize our ft portfolio.
During the second quarter, we able to execute several small ft trade and we will realize a small premium over the remaining contract duration.
Although these transactions were small the market is open and we're excited about the opportunities available to further execute on this strategy.
One of the more meaningful rationalizations will be our ability to sell down some or all of our MDP capacity. This continues to present the biggest potential for long term cost reduction improvement, which will drive significant NPV and free cash flow enhancement.
We believe the viability of execution has been significantly improved through one the favorable Supreme Court ruling approving the crossing of the Appalachian Trail second the cancellation of the HCP pipeline project, which will send those gas users seeking supply replacement and three the favorable nationwide 12 water permit ruling which should access.
MVP construction completion.
These actions increase the value of the current MVP capacity, while also creating incremental value upside due to increased probability of MVP expansion and extension into the growing southeast demand market.
We are having discussions with multiple parties at the moment.
We continue to monitor the value of our equity stake in Equitrans and although there has been positive news related to MVP as of late we continue to believe that the equity remains undervalued. The cancellation of the HCP pipeline has increased the value of MVP on multiple measures and we believe much of that capacity will trade hands in the near term.
Further enhancing its embedded valuation.
Additionally, our high confidence in managing our future maturities allows us to be patient in our approach to monetizing. This state as such we will be systematic where their ultimate liquidation of our interest in Equitrans, which we may monetize in 2021 if necessary.
The supply demand impact of Cobot 19 continue to work its way through both domestic and global natural gas fundamentals that Toby highlighted earlier and we're closely monitoring these market drivers as we make informed decisions about forward hedging. We continue believe the forward curve is significantly underestimating the price required to incentivize ample production to fulfill future.
For demand.
We currently have approximately 40% of our expected 2021 production hedged and we'll continue to pursue a hedging strategy that balances our ability to capture 2021 pricing upside while protecting the downside risk our goal remains to be majority hedged for 2021 as well as hedging out for multiple years I'll now turn to pull back to Toby for.
In closing remarks.
Thanks, Dave It is abundantly clear that shareholders desire a new approach in shale one in which overall production growth is muted and efficiencies our amplified our approach is aligned with our shareholders and also aligned with all stakeholders, who desire a better world now and for future generations.
While our near term accomplishments continue to secure our footing as the operator of choice. We look forward to further enhancing our position at the sustainable natural gas leader as part of this we will continue to strive to have best in class history metrics and transparency, our revamped environmental social and governance report for the calendar year 2019 is set for publication.
Later this year, which will include more details on each of these long term SG strategy as well as provide insights into our ESG metrics lastly, I'd like to give a shout out to our employees for the last year they've been relentless in transforming the way we work to deliver superior results. Your hard work and dedication is the force driving transformational value creation at this.
Company and for that I. Thank you and look forward to continuing on our mission together with that I'll turn the call over to the operator for today.
Ladies and gentlemen, Paul's question. Please press star and the number one on your telephone keypad I'll pause for just a moment Paul acuity roster.
Your first question comes from higher on Jayaram from JP Morgan Chase Your line is open.
Good morning, Tobey I was wondering if you could elaborate a little bit more on the potential implications to execute key from the key cancellation. You have noted that multiple counterparties have expressed interest in the pipe I was wondering if you could talk about perhaps the prospects.
All slowed the bulk of your transportation at par or even a premium and perhaps discuss some potential timelines on this.
Sure so.
With HCP being canceled that was about 1.5 Bcf a day of capacity that was going down as the southeast market, which is.
Competing with MVP capacity organs lower gas there so not having that project online makes MVP more desirable.
I think the the customers at signed up for that project are still looking for that gas and BP is going to be a good outlook for that so those are the comp those are those the parties were having conversations with.
And as far as like the likelihood of being able to lay off capacity it could be.
Up to all of our all of our capacity I think one of the things that we're looking at that's going to frame up the size that we end up laying off is really going to be getting a better grip on the just basis realizations down in that market now. So that's obviously been up a little bit of a dynamic situation. When you. When you take off wanted have Bcf a day of supply coming into the area.
Our Williams has announced a project to deliver I think up to half a bcf a day into that area.
So were framing that up and I think thats going to that's going to ultimately dictate that the amount that we're willing to lay off I think as far as the impact to SGT. If you look at slide 20.
Where we where we show our ft portfolio, you look at the change in our and our net realization from 20 to 21.
You are seeing about almost a dime of pricing realization difference in those years I mean, that's largely due to the effect of NBP. So I mean, that's that's sort of the prize that we're looking at if we can be successful in and laying off Ravi capacity.
Lastly on timing I think some that were working on now just given the size of the catalyst for this to our company, it's a priority for us and.
We're working on this now and hopefully we'll have some updates through the end of the year.
That's helpful.
We also wanted to follow up you guys did hold a special shareholder meeting where you doubled the shares of authorized share count partly from 320 664, dnos ratified by I think 95% or shareholders, but we are getting some inquiries on on the need to do a special vote here.
It's an M&A and just broadly could discuss that move which I think was a earlier last week.
Sure so.
He has an authorized any shares since I think it was 2005.
So this is sort of allowed just gives us more flexibility we don't have any.
Uses for for these shares right now.
But the the landscape apparent in Appalachia. There are it is a buyers market. There are some opportunities on the horizon, but nothing specifically targeted for free for use of that equity.
Great and could you just discuss your broader thoughts around M&A in Appalachia I think there's what 20 management teams you mentioned mid Thirtys rigs it does feel like a.
A market that is ripe for further consolidations is wondering if you could maybe highlight your views.
Yes, I think that consolidation will be a a part of the value creation story.
For Apple for our shareholders in Appalachian I think.
Across the industry DMP industry as a whole.
That being said what would it be qt done to position ourselves.
To consolidate it largely starts with.
Having a great operating model that allows us to scale efficiently.
I think the operational results, we put out sort of represent the fact that up that our operating model is sort of in a really good place right now.
And so I think that there are opportunities here, but just as a reminder, the status quo story free freak UTI is pretty compelling.
I will continue to be disciplined in our approach with any M&A opportunity that presents itself.
Great. Thanks, a lot.
Got it.
Your next question comes from Josh Silverstein with Wolfe Research Your line is open.
Hey, Thanks, Good morning, guys just following up on the DCP This discussion.
You talked about how deal may be structured is there any cash that can come from form of potential monetization of the stake or would it most likely be related to margin improvement and highwoods liabilities transfer from this as well.
Yes, Hi, this is Dave Khani so.
We're in the middle of discussions with a bunch of already so I think we'll be very.
We'll just be very quiet on the details I'd just say our goal would be to really sell it.
So that Theres no at least no out of pocket costs for us and if we can structure, where we actually can make money. We'll we'll see if we can do that but.
Right now Theres a lot theres lots of discussion going on and we will be very quite low in the middle of negotiations.
Got it and then just to follow footfall to that it was slated to be in service about a year later than than MVP. This who the shippers actually want this for 2021 or were they more likely want to color from 22.
Yes, I think theres different parties want to for different time periods.
And but recognize the.
Yeah.
The need for gas is growing down in that southeast region overall over multi years, one entities building.
There's a bunch of gas fired generation being built down there and so as well as some of the LDC needs as well and so their needs are for for many many years. So I think.
That's the probably the biggest important thing.
Got it thanks, and then Toby just on the 2021 outlook. Thanks for the slight year over year volumes there the common there.
Lets be done on a similar 90 to 100 wells or do you need to step up activity or can actually be a little bit lower.
Yes, so activity levels in 2020 around 1.1 million horizontal feet.
To hold production flat, we're probably going to be maybe 5% to 8% lower.
Footage in 21, so, but it but it's going to be around a million horizontal feet.
Thanks for them.
Your next question comes from Wells, Patrick with Suntrust. Your line is open.
Hey, good morning.
On it.
So lump on page 14, it looks like you guys are dropping.
From from.
During four horizontal rigs to two to three is that.
Are you guys seem that does that presumably via drilling efficiencies in new drilling longer laterals, so you're getting more drilling.
Per day per rig is that is at a fair way to frame that.
Yes, I mean, you look at what our horizontal efficiencies of Don I mean, we're talking about dropping our drilling times by 30%. So dropping one horizontal rig is approximately 30%. So youre seeing just parity with our operational efficiencies timing up with the resources that we need to execute our program.
And the similar similar story with the completion crews as well.
Okay, and then and then the also the dropped to was fixating on a per foot basis.
Animal were we seem like we're a long way from LLS prices going up but do you have any breakout on that as to how much of that is pricing improvement and how much of that might be efficiency.
Yes, I'd say just looking from this quarter to the past quarter service pricing environment Hasnt changed so I mean, what you're seeing now is purely sustainable operational efficiencies in the field.
I think for US the couple of things that that as we shift from setting the bar now it's it's locking in making sure that weekend operators that this level.
In the future.
Operational efficiencies will continue to climb what you're seeing is the average we put out obviously, we're exiting at higher efficiencies that than what the average we report during the quarter.
Our schedule is getting better we're getting more and more common development overtime and also our lateral lengths are improving as well. So these are these are the really three core parts of sustainability in your in your cost performance in all of these things are our.
Give us confidence that we'll be able to perform at these levels.
On the future and then as you mentioned service cost pricing.
Yeah, I think you look at the utilization rates that that people have in the industry got dropping 70, 70% of rig activity and and completion crews certainly leaves us.
A very low utilization rate in that's obviously going up.
Via a force keeping service pricing.
Lower their AD, but somebody else things, we're doing on the service pricing side is where you think about operating efficiently using less rigs to drill the same number to footage same amount of footage metasearch certainly helpful and being able to lock in these these rigs and frac crews with longer term price contracts is another way to lock in the sustainability and or the sorry.
Pricing for sustainability, and we've done that with two out of our two up to our Frackers right now so we feel pretty good about.
Setting the table for sustainable cost performance.
Okay.
Okay.
That makes sense I mean to to really strong updates fewer rigs cheaper per foot and I guess that would.
Bring us to yell keeping.
The Capex guide slab should we see is use flowing through more in 21 is should we maybe be a little bit bias below that that current Todd.
Yes, two things one the the ability to drill drill more and then.
This year is really setting the table for 21.
So we are getting getting into some activity here in the back half of this year that will that will set up 21 favorably.
The other thing I would say that.
We have not revised our well cost estimates in our model.
And so that hasnt out of the floated the guidance so.
That's something they're working on now and we'll we'll update that with our 21 got it that we put out.
Okay. That's perfect. Thanks, so much.
Got it thanks.
Your next question comes from Bryan singer with Goldman Sachs. Your line is open.
Thank you and good morning.
Good morning.
Wanted to actually follow up on just what would have the point that you were making with regards to the capex and how that how the lower cost flows into capex. It seemed like what you're saying, it's going to get a few more wells that are going to be drilled this year for the same capital budget and I'm wondering if you could clarify what the implications are from an exit rate perspective or for 2021.
Maintenance capital to to keep production flat out your exit rate for this year.
Yes.
Brian Yes. This is David effectively means which setting ourselves up for a little bit better.
Capex number for next year.
And I think we want to keep the equipment in running the way it is running really well and so we are getting ourselves in a better shape, our goal would not be to to increase production.
Our goal would be to just take this and effectively improve our 2021.
Capex guidance, when we put it out.
Got it thanks.
Well I'll go ahead sorry.
It does that help yes. It does thank you.
And then my follow up is that a little bit more.
On a color on the decision to bring your shut in production back online.
And what to do that now at what seems to be similar prices is what we what was experienced in the second quarter or was it that you expected that the second quarter could be potentially even worse than it was.
Yes, so we Brian we.
The goal for US was to really take the extra production.
And really move it out into future periods I think.
If you remember we were running nicely head in the first quarter and so our goal is really to just take the excess production keep our production relatively flat with 2019.
And get the benefit of in future periods of shutting in production. So.
No we are very very hedged.
And so even even bring it back we're very well hedged and and not impacted from from the from bring it back having said that though you're right. The economics still look like shutting in production.
Could be worthwhile and that's something we'll look and see if we decide we want to shut in more production.
We could do that in.
So called a late.
Either summer or in the full.
Great. Thank you.
You often.
Your next question comes from Scott Hanold with RBC capital markets. Your line is open.
Thanks.
It looks like you guys had some pretty strong up production on performance this quarter, especially when taken a look at the number of wells put online can you give a little bit of color on that until I think David you had mentioned that having some production curtailed reduce the line pressure was that the majority of it or is there stuff organically, helping on or imply.
Moving on new wells coming online.
No I mean, I would say you know it's nice when your wells meet your type curve.
And so I mean, that's that's that's happening, but that's no surprise to US yes, I mean part of it was.
Having lower line pressures increase of the productivity of of wells that are still flowing.
And then again, the 98% production uptime is something that.
You know was was increased to what are what our plans, where but I think now that we're seeing consistent performance at that level from our from our field teams have been doing a really great job.
I think we'd probably move our expectations a little bit higher.
Got it Okay, and then either just as a follow up to maybe grinds line of questioning on curtailments.
Can you just give us a sense you talked about value over volume and you know with respect to where prices are I mean, how willing are you guys.
Two led production declined I mean, what's it going to take to say look it's not even.
It doesn't make sense right now to even even keep production plant.
Yeah, I think you're seeing that across the industry right now.
They just look at the rig counts that are that are drilling for gas right now in the in the two premier gas basins, I mean, they're down significantly so.
While we're fortunate enough to have large scale common development executed and really core geology that that.
Gives us confidence that our that our returns are there to continue to develop to hold production flat. That's not the case for a lot of operators across the country and Thats and production is going to decline or we think the setup.
It's going to start showing up from this reduced activity levels sort of towards the back half of this year.
And so that I mean, you're absolutely right and I think the the industry as a whole is responding to that.
Okay. So so if I can interpret that incredibly if I'm wrong mean, effectively you guys just want to sort of maintain this production base in hopes for 2021 looks pretty strong versus doing anything today that may impact on future years that does that a fair context.
Yeah, that's that's correct.
But again, we might think shut ins, we might shutting again, we will leave that option open for us if we want to do some more and then we'll update you as we do.
Understood. Thank you.
Your next question comes from making Kumar with Wells Fargo. Your line is open.
Hi, good morning, and thanks for taking my questions.
Maybe start off on the DMC cost site 680.
Dollars per foot, that's well ahead of the target that you would establish a year ago.
I guess, how sustainable are these costs here I mean, I guess, what I'm trying to get that is are these systematic improvements and if so how much more room to go or because as you mentioned earlier this underutilized.
Capacity out there are you getting some some discounts as well that are baked in there.
Yeah, I mean, I think largely the cost improvements we've seen a been.
Sustainable operational efficiencies schedule longer laterals more common development and a consistent well design that we have put in place.
So we feel pretty good about it I mean, one thing that's that's also worth highlighting.
Yes in the first and second quarter of this years, we broke out some new.
Electric Frac fleets.
One of these fleets was was new and it took us a few months of.
Of just breaking them in so I mean, the efficiencies that we saw in the field. The macro were I mean that crew was was our worst performer. When we started back in January now that crew is our best performer. That's a that's a that's a testament to the.
Quality engineers, we have here and our completions team have been able to take advantage of this new technology and develop it to the meeting the efficiency. So I mean this is one of those things were looking at you know we talk about the averages of what we reported and we're obviously ex cat exited at that at higher rates.
Thats sort of the dynamic Thats a play on the on the completions front, which is the biggest part of our spend over 60% of our spend is on completion. So.
Feel pretty good about where thats out and that's also the area of our of our business, where we have the most control over service cost inflation, because we've got the most commodity procurement setup in place for that for that segment of our business.
Great and then maybe a different tackling some of those who are questioning around M&A.
Asset sales were part of one of the levers you had indicated earlier as a means of deleveraging you made the comment it's a buyers market. So.
The urgency or the need for asset sales reduce now or does that still.
Something that you're working on.
Yes, I mean, we have a very big.
Operating footprint.
We have what we consider strategic assets or are we.
Wells and leasehold that is within our core operating footprint, where we're going to develop.
Core core combo development in core geology.
We've got other assets that don't falling within that core operating footprint that we would call those non strategic and I think that.
Rising commodity price when that thesis plays out.
It is going to sort of close that bid ask spread between buyers and buyers and he is a seller for the for those type of asset so.
We keep those processes prophecies open.
Great. Thank you.
Yes.
Your next question comes from Holly Stewart with Scotia, Howard Weil. Your line is open.
Good morning, Tom maybe just a quick follow up on the well costs and new we're starting to beat the dead horse here, but clearly it sounded like you're going to save summer that new well cost target for 2021 is at share.
That's correct.
Okay, and then maybe taking a step further just for Threeq, you and thinking about Capex for Threeq you in Fourq you can we just.
Sure I talked about the cadence there.
Yes, Hi, this is Dave I would say think about the second half very similar to the first half on average so third quarter and fourth quarter, probably not much meaningfully different. So just think about the average of the first half in the second half of which as I think around 280 million.
First quarter Okay.
Okay, Great and then Dave maybe one final one you mentioned.
You may monetize each green and 2021 is that just suggesting that you might push it from this year next year.
Yes, we have the value in our head of what we want to sell it for we think it's very much undervalued and it's improved clearly off the bottom and so.
Because we have our tax refund coming in they help us pay off and free cash flow through the 2021 notes.
Which are due in November.
Kind of Lisa each reinstate really for 22.
Retirement, and so as you know each train has about a 6% yields are 2022 nodes pay about a 3% interest rate and so for us to want to monetize each spring we want to make sure we get it at the right value and so we're not going to have the fortunate in and so if we get to tour value will sell it as we said before.
We're not long term holders.
I, just don't necessarily need to be in average for arbitrary year end number a time period to access the sell it so.
Again, if it gets or target will sell if it doesn't we can be a little more vision.
Okay. That's great. Thanks, guys.
Well.
Your next question comes from Jeffrey Campbell with Tuohy Brothers. Your line is open.
Good morning, and congratulations on the strong results.
There's a lot M&A talk in there, but on a corporate acquisitions, James contrary to you teased commitment to reduce debt.
I'm wondering are there any acreage packages that are potentially comments in the market and would this be a more likely root for acuity, if and when you chose to make a transaction.
Yeah, I would say I mean, when we look at any any type of consolidation opportunities I think the things that we're going to be looking for our AR.
Acquisition that would be deleveraging to our business and also allow us to grow our fee free cash flow per share. So I mean, that's those are sort of two boxes that we're looking to check.
Yes, there are assets out there on the market that that.
That would allow us to check those boxes.
Like I said, it's you got to get through the value discussion with with any any willing seller and to that and we'll be disciplined and making sure that we can deliver on those two metrics.
For our shareholders.
Okay. Thank you, that's there and just kind of asking a little bit higher level NBP notwithstanding.
After the HCP cancellation.
What's your view on the wholesale pipeline development.
Out of Avalanche alone Paul one had it sounds like theres going to be some demand for those in NBP volumes after the ACB cancellation, but to cancellation itself as well.
Kind of a gram a minor this things off against a little more mobile centric and your thoughts on yes, yeah, I mean, I think people, making the argument that NBP as the last major pipeline that comes out of the basin.
I think is pretty credible and I think what you will see and I think one of the things why we believe that.
He train is undervalued is that there is going to be a tremendous amount of sort of downstream pipeline opportunities that you train will have now because they've got.
They've got that pipe coming out of Appalachian.
Bob filled with sustainably produced natural gas coming from UTI, Yes. It is this heartening to see just the.
Despite the pressure that pipelines have to get to get put in service. It is the most is the safest most environmentally friendly way of transporting energy that people need.
And I think the other issue that came out pulling that going the.
Going to Apple was was surprising and.
It's even for pipelines that are in service to habitat that risk is concerning for us. So I think for ferocity due to its it in other operators and other and members of industry.
It's really important for us if you need to be vocal about the great service that we provide and how important energy is of the to the fuel mix I think.
All the conversation about ESG is great because it now allows us start telling our stories and the industry has done really amazing things.
We just haven't really talked about them. So I think over this next year, you're going to see Qt talking about lot of great things that we're doing as well as other other players in the in the energy energy.
Yes, I agree with that last point and that we'll look forward to hearing more about thank you right got it.
Your next question comes from David Deckelbaum with Cowen Your line is open.
Morning, guys. Thanks for the time.
Welcome.
Just wanted to circle up on a couple of other things just on the curtailments. This was a significant curtailment in the second quarter in response to price you talked about how obviously today the headline price.
It doesn't necessarily justify bringing those volumes back.
And there's obviously a tradeoff is if we were in a scenario in the future where you were more under Levered.
We expect to see a longer period a curtailment.
And I guess as you think about the seasonality and maximizing your business around cash flow.
Is this something that we should expect to going forward, where you would just see.
See lower periods of shut in production or higher shut ins during during shoulder seasons.
Yes, so yes. So this is Dave.
One we we really wanted to carve out the the extra production as and really push that into the future period, and so that was really emphasis and there was in our local anywhere from 50 cents to one dollar dollar 30, when we did it and so.
And and so.
So again you are right now is probably about a buck or so so we could do more of this if we want to.
No we have constraints of Nvcs, we need to think through as part of this and and we all seen a we have in goals of Paydown of surmounted debt. So we just want to think through that as well, but yeah as far as this is something we'll we'll want to do in the future probably we will continue do this win when it makes economic sense to do it.
And remember, we're very hedged we're over 90% hedged in this time period. So no at times, we will have to we want to do more this stuff we might have to unwind hedges.
I have some value.
To shut in and then we'll then we want to maybe add hedges into future periods. So there's some things we need to do to maneuver around to really take advantage of of that are.
Yes, I mean, I would just summarize and say we're going to see we're going to see the pricing volatility every year in the shoulder seasons. So these opportunities get present themselves.
And I think as we de leverage our business that gives us more flexibility to be strategic and executing the shut ins and incorporating the ability to do this into our base operating model that were but we're working on.
I appreciate the how do you can looking back how do you view your shut ins relative to the rest of the industry or your peers in Appalachian and where are you surprised at the rest of the everyone else's activity.
Well I think you're seeing other peers are shut in at while we are 1.4 Bcf a day gross gas is pretty large represents around 25% of our production base I think look at some of our other peers in the shut ins are talking about around 25% as well so.
I think that a lot of other operators are seeing the same thing, we're seeing and and making a statement that this product is undervalued at these prices and there there is conviction that prices will be higher in the future and so you're seeing operator shut in and at what I think is pretty meaningful.
Appreciate the is the last one from me.
It's been a lot of conjecture around M&A I guess, so you talked about screening for things that offer deleveraging.
Capabilities and clearly cash flow benefits. When you look at your dataset internally are there a lot of assets that are out there that you feel you could offer a significant operational uplift on or do you see it more as benefits of scale on that financial arbitrage.
I think it's across all fronts.
And this organization could take up.
Could carry more operations without having to add any head count so I mean.
DNA savings right out the gate.
There are some some acreage overlaps that would be that would allow us to drill increased the confidence and drilling longer laterals wing and greater combo isn't that I'll also.
Being able to execute development at Sixeighty, a foot versus higher cost is certainly a benefit and I think the last thing you look at as is which is unique UTI is we've set the table up with our gathering agreements.
Hello, our gathering rates, if we can steer more volumes onto our each train system. So.
That's another dynamic at play that that will will look look forward to leveraging if that opportunity comes into play.
Thanks responses guys.
Got it you will.
Your next question comes from Michael Hall with.
Hi can in energy your line is open.
Thanks, Good morning appreciate time.
I guess I wanted to follow up quickly on the CP.
And MVP dynamic.
Correct me if I'm on the believed that the tariff on the MVP side is around 77 cents is your expectation that in all floating those contracts.
Offload the full tariff.
Or do you think you'd have to offer some sort of discount.
No.
It would be our goal to offloaded at cost.
Okay.
Yes clear enough.
Appreciate that and I guess go ahead, Sir I was just I was going to say you know you customers on HCP line, there were signing up for over $1.50.
Of fees and so I mean these these costs were would have been passed through to their to their customers. I mean, these utilities so to be able to have the opportunity to pass through.
77 cents versus $1.50 is.
Ultimately better for the consumers as well so and that's one of the things that that's that's underpinning why we believe we get has done a cost.
Okay, Yes, no that makes sense I appreciate it and then I guess on them on the macro front you all seem.
Quite confident in the in the 2021 outlook.
On that you have I guess im just curious in the context of the LNG market in particular.
Obviously seen a lot of.
Cargo cancellations here recently.
What sort of confidence you have on on the LNG market in 2021, what's sort of broader economic recovery is underlying that confidence and I guess, what sort of any I'm. Just any color you can provide on that would be helpful.
Sure I.
I mean.
We're not I think it's important we're not surprised to see LNG levels in this three and half the four Bcf a day if demand right. Now. This is some that that is that we think we've taken into account with our with our pricing model.
That being said, we do feel like LNG will be restored to that 78 Bcf a day range sort of towards the end of this year.
Again that is it is dependent on on on that.
Cobot.
But.
Our pricing you does not need to have LNG at 10 Bcf a day running at full capacity at some that's more conservative and allows for this this lower period of demand destruction on LNG for for the next few months as well.
Yes, Theres a few things if you watch right now.
Washington Global gas supply in pullback in various different regions. Besides besides us no you watching.
Demand picking back up again.
And then really third which is a key piece too is that whether in the northern hemisphere was very warm last year. So you want to base everything on normal weather and between supply recovery from coded and weather gives us confidence that.
Gas exports out of the US we'll pick back up and we're not our our model is incident set at nine Hanford NVS, our models really sitting as Toby mentioned seven to eight ish.
Okay.
I appreciate it thanks guys.
Got it yes.
Your last question comes from Kashy Harrison with Simmons Energy Your line is open.
Hi, good morning, and thank you for taking my questions.
And so there's a lot of discussion on the ACB cancellation.
On that takeaway being on the on the remaining take away on MVP be more valuable.
And right now.
Right from wrong, but it feels like takeaway out of Appalachian General is probably in the maybe in the high Thirtys 37 ish versus current production of 33, and so how do you balance the near term benefits of offload and all that after the relative to the longer term risk of.
Whiting in basin.
Basis in the future should commodity prices increase in the future and producers start growing again, how do you how do you how do you think about.
The risk of in basin basis wells, yet there is a great question I mean, if they get it highlights to one of the points that we make about our ft. As it is a it is a hedge RFP as a hedge against local basis.
Blowing out but the dynamics that are set up right now is appalachians pruzan around 32 Bcf a day, we've got about call it.
35 Bcf a day of local take away of takeaway and local demand. So theres, a three bcf a day gap between.
What we're producing and what we're able to take away at an added NBP that takes that takes you up to call. It 37 Bcf a day.
So you've got a pretty big gap between.
Capacity and and sand supply in the basin I.
Thank you couple that with the fact that the basin is going to struggle to grow.
I mean, you've got all all operator, saying that they're hanging in maintenance mode. We're also seeing activity levels today, which suggests that this basin is going to decline all that is going to widen the gap.
Uptake away and then I think the last point you look at.
It's just sustaining 32 Bcf a day.
Just looking at the amount of core inventory that's remaining to sustain that I think is also going to be a headwind for a lot of peers and again this comes back DTC having.
A deep deep inventory of core combo ready projects to develop wont be much of our issue, but I think another thing that's going to be a headwind for the base to keep up.
Got it that's helpful. Thats Thats it from me. Thank you.
Got it.
There are no further questions Kevin to turn the call back over to Toby Rice, President and CEO for closing remarks. Thank you you know lot of progress made in the past year.
I think this sort of puts upended us looking backwards into parents campaign promises and now I think everything going forward I'm excited about.
Looking forward to the future and continue to build on our momentum and thank you for your time and your support.
Okay.
This concludes today's conference call you may now disconnect.
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