Q2 2020 Southwestern Energy Co Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to the southwestern Energys second quarter 2020 earnings call.
Management, well open the call for a question answer session following prepared remarks.
And the interest of time, we do actually you. Please limit yourselves to two questions and re queue for additional questions.
Today's conference call is also being recorded.
I'll now turn the call over to teach Petchem southwestern Energys, Vice President of Investor Relations you may begin.
Thank you Jamie good morning, and welcome to southwestern Energy second quarter 2020 earnings call. Joining me today, our Bellway, President and Chief Executive Officer, quite Carroll, Chief Operating Officer, Julian Bott, Chief Financial Officer, and shaking her head of marketing and transportation along with yesterday's earnings release, we also issued our 10.
Q, which is available in the Investor Relations section of our website at www dot when dot com.
Well, we get started I'd like to point out that many of the comments we make during the call are forward looking statements involve risks and uncertainties affecting outcomes. Many of these are beyond our control in our discuss in more detail in the risk factors and the forward looking statements section. We're in a record quarterly filings with the Securities and Exchange Commission, Although we believe the expectations Express.
<unk> based on reasonable assumption they are not guarantees of future performance an actual results on developments may differ materially and we're under no obligation to update them. When they also refer to non-GAAP financial measures, which helped facilitate comparisons across periods and with peers for any non-GAAP measures. We use a reconciliation to the nearest corresponding GAAP measure.
Sure can be found in our earnings release available on our website I will now turn the call over to Bellway.
Thank you page and good morning, everybody.
Thanks for joining us today first I want to take this opportunity the thank our employees for a job well done during the quarter as the country in the world faces the unprecedented challenges from Cowen 19.
Inspired by their unwavering commitment to our core values, including health safety and the care of our environment. Our teams through their laser sharp focus demonstrate a top quartile performance all while dealing with the uncertainties surrounding this help.
And so to everyone on our team I'm extremely proud of all in thank you for what you're you're doing.
The people in southwestern energy continue to build on our solid foundation supported by our diverse set of tier one assets that provide flexibility and im sure. It resiliency rigorous capital discipline, Iraq to risk management, leading operational execution.
Well liquidity I know looming senior note maturities.
The results were achieved in this quarter give me confidence that while the road ahead, maybe challenging for the industry. We're on a deliberate path to sustainable long term value creation for our shareholders.
Dr. <unk> reiterate one of our top priorities for this year, which is to complete the transition as a major Appalachian gas and liquids producer, enabling the company to invest within cash flow beginning in 2021, which is a fundamental milestone of our strategy.
As we powered through this challenging environment I'm confidently tell you today southwestern energy remains on track.
We reported second quarter operation operation results above expectations with total equivalent production largely unaffected by market conditions.
We demonstrated the company's agility and resilience by shifting our drilling and completion activities to stay one step ahead of the risks and uncertainties associated with the significant demand destruction, which began to take hold across the country.
Specifically in the quarter. Our teams took action to relocate one of our company owned rigs to a dry less gas location in Pennsylvania.
As a testament of their agility and flexibility inherent in the operations the drilling where it was moved to the location rigged up and ready to drill at approximately one week following the decision.
This type of agility is a differentiator in our industry as few operators can make this type of move without increasing cost two additional rigs began drilling in high rate high volume natural gas what patients during the quarter as well.
Our drive to top quartile performance among our peers a major plank in our business strategy was again highlighted by our broad based cost elimination with full year permanent cost savings across all expense categories now totaling $90 million. This adds to the $122 million, we reduce last year.
On the capital cost side, we announced additional well cost reductions, including a record single well cost of $505 per foot.
Of course, given this record we now have a new targets to take a map and beat going forward.
We expect to average 2020, well cost well below our original guidance and clay will talk more about that in a moment.
The second quarter. The company reported total equivalent production in line with guidance and as expected, we had lower liquids volumes offset by higher gas volumes due to changes in activity.
Moving on to full year guidance as part of yesterday's release, we issued revised guidance with an improvement in cost metrics associated with the cost reductions I mentioned earlier and reflecting the shift in activity, which will rebalance the components or production and activity.
As a result, we will have higher annual equivalent production and lower cost.
We also lowered the top end of our capital guidance range, which is now 60 to 90 15 and to be very player. We will not invest more than the cash flow generated by this company in this year supplemented by the previously announced earmarked funds from say, though.
In addition to the results of our broad based cost efforts.
Taking our balance sheet and liquidity remains a key priority.
Our liquidity position was 1.26 billion on June Thirtyth.
During the second quarter, we further strengthened our balance sheet open market purchases of senior notes have deep discount and reducing our outstanding letters of credit as well.
This strong liquidity position, coupled with our leading maturity runway remains a critical differentiator with only a small amount of senior notes due before 2025.
Now I'd like to address the proactive risk management steps, we've taken through our dynamic hedging program.
During has been a core part of our strategy. Since 2016 that is an important risk mitigant to operating in a volatile commodity environment.
Our three year Rolling hedge program utilizes various instruments to hedge our production within a pre agreed ranges dependent on market conditions across several commodities.
This year as an example, we have swaps in place for about 80% of our natural gas production.
The fundamentals for natural gas for next year or more constructive sort of layered on more collars for natural gas, which will allow upside in a higher price environment, while still providing the downside protection.
We entered this year approximately 100% hedged on our oil production and expect to benefit from those hedges throughout the year.
While delivering from a financial and operating from that perspective, we also.
Our doing our part to mitigate climate change and promote clean energy future with 80% of our production coming from natural gas.
Southwestern energy remains an industry leader in reducing greenhouse gas emissions with a 10% reduction in our overall GHG emissions intensity compared to 2018.
Achieving top world how performance among peer companies.
We are particularly focused on reducing methane emissions and we have leak detection equipment on every well and consistent with among the lowest methane emissions due to our voluntary emissions reduction effort that began several years ago.
We are finalizing the update of our annual corporate responsibility report and it will be issued in the third quarter.
Southwestern energy has managed through a lot of adversity and has built resilience around our commodity mix with balance sheet protection and operational flexibility as key components.
Our company of disciplined risk management through our hedging program financial strength with a leading maturity profile substantial operating flexibility and leading operational execution rigorous capital discipline in a rightsize transportation portfolio, along with the low cost structure.
Our strategy is to grow differentiated and sustainable shareholder value the returns driven investment and consistent operational outperformance from our leading high quality concentrated in large scale assets.
Now turn the call over to claim to provide some details from fourth quarter.
Thanks Bill.
Operationally our teams continued to focus on delivering above target outcomes through technical enhancements operational execution commercial flexibility and efficiency gains.
The result was another good quarter that included shifting investment activities to high rate high volume gas wells.
Reducing capital expense cost and continuing to protect our employees and contractors during the pandemic.
I'll start with a few highlights from the quarter.
Total production was 201 Bcf be up 8% from second quarter of 2019.
Gas production was 158 Bcf and at the high end up guidance, representing 79% of total production.
Boy when NGL production were roughly 12000 barrels per day, and 67000 barrels per day, respectively. Both slightly below the low end of original guidance, but inline with expectations as we managed activity across our portfolio to mitigate potential curtailment risk that existed.
At the time.
In the quarter, we averaged five rigs and Ford Frac crews with capital investment totaling $245 million.
We drove 30 wells completed 31 wells and brought 31 wells to sales this quarter with 11 in northeast Appalachian and 20 in southwest Appalachia.
Approximately 80% of the wells drilled this quarter were located in our dry gas northeast Appalachian and rich gas southwest Appalachian areas consistent with our shift to high rate high volume natural gas wells.
And northeast Appalachian eight wells were online for at least 30 days.
Six lower Marcellus wells with an average 30 day rate of 14.8 million cubic feet per day.
They represent a different walmex compared to the first quarter, where the majority of the wells were located in our higher initial rate Tioga area.
The additional two wells were upper Marcellus test wells and had an average 30 day rate of 8.3 million cubic feet per day.
The wells tested landing zone and completion designs in the Greens Wakefield and have performed inline with expectations.
One of the test wells was a 6000 foot lateral compared to the previous test that averaged approximately 9000.
In southwest Appalachian six rich wells had an average 30 day rate of 17.2 million cubic feet equivalent per day, and 14 Super Rich Wells had an average 30 day rate of 7.3 million cubic feet per day, including 67% liquids.
We temporarily manage the initial flow rates on the Super rich condensate wells lower than normal to mitigate the risk of potential curtailment on condensate in the basin.
Wells are now flowing normally and consistent with the type curve predicted performance.
We continue to progress our top tier well cost averaging $691 per lateral foot per wells to sales this quarter and setting a new companies single well record of $505 per foot on a 14000 foot lateral and northeast Appalachian.
As a result of continued operational efficiencies completion design optimization [laughter] and additional service cost deflation, we expect wells to sales in the second half of the year to averaged $650 per foot with the full year, averaging $690 per foot.
We remain focused on driving while cost down while optimizing well performance in order to maximize returns from our capital program.
As Bill mentioned earlier, we've continued to make progress on Shallowing base decline through our ongoing base optimization effort.
We originally guided tour base decline rate of 25% for this year.
Which represented a reduction from the 30% base decline in 2019.
We now expect the 2020 base decline to be 23% as a result of outperformance associated with the price compression project in northeast Appalachia, and artificial lift optimization and frac, yet mitigation and southwest Appalachia.
As we look ahead of the remainder of the year I'd like to highlight a few guidance updates we made this quarter.
As a result of our shift and activity we have reshaped our capital program to have a flatter profile across the first three quarters.
Before tapering off in the fourth quarter to assure that we invest within our capital plan.
Total equivalent production on the second half is unchanged with lower NGL and oil production offset by higher natural gas production all associated with the shift in activity that began in the second quarter.
The third quarter total production will be lower and fourth quarter total production will be higher along with a higher exit rate than originally guided building a strong foundation for 2021 performance.
We are updating annual per unit cost guidance across all expense categories, including lease operating expense with a new range of 90 to 94 cents per Mcf, the representing a three cents per mcf the reduction at the midpoint, which is about $25 million for the year.
This reduction is primarily driven by reduced gathering and processing fees associated with contract renegotiations and reduced salt water disposal costs.
Our teams have done a great job managing through the headwinds facing our industry and delivered a solid quarter.
Thank you to all those who helped deliver these results whether at home in the field or in the office.
Now I'll turn it over to Julian for the financial results.
Thank you play and good morning, everyone.
In the second quarter, we reported an adjusted net loss of $1 million EBITDA or the $106 million, a net cash flow of 87 million.
Excluded from these amounts.
655 million non cash impairment related to a full cost ceiling test.
Discussed on our first quarter coal pilot tests for impairments is formula driven under SCC rules, using 12 months historical pricing held flat into the future all commodities.
For the second quarter calculation, the gas price was $2.07 per Mcf.
Cove it in the associated impact to demand to put downward pressure on prices. This quarter. We report reported pre hedge realized prices of 98 cents per mcf of gas $6.43 per barrel for Ngls.
$15 and 69 per barrel oil.
On condensate pricing, we benefit benefited from a relative advantage from having strategically set up a portfolio with longer term sales agreements.
As we look forward for the rest of the we expect our full year NGL price realizations to improve to 19% to 24% W. Ti.
As a result of the improvement in ethane and propane prices, coupled with lower WT prices.
That's roughly 80% of our NGL barrel is the thing in propane. We are encouraged by the recent improvement in 2020, and 2021 strip prices for those commodities and believe the fundamentals of supportive.
For the third quarter, we expect gas differentials to be a discount to Nymex in the 75 to 85 cents range similar to third quarter of Twentytwenty night 2019, before improving in the fourth quarter.
We also expect <unk> third quarter oil price to be at a 11 to 12 dollar 50 cent about discount to WTMJ and Daniel NGL price realizations to be 20 to 25 cents W.
With challenged commodity prices across the sector. Our hedging program provided a 60 cents per mcf the uplift with 120 million in cash settlements for the quarter, bringing our year to date settlements to 213 million.
For the full year 2020, we estimate our cash settlements related to our current hedges to be approximately $400 million based on current strip prices.
As Bill explained earlier, we actively manage our hedge portfolio using a variety of instruments protect all commodities from downside risk, while also allowing the opportunity to capture upside.
We share many of the fundamental analysts bullish sentiment for natural gas prices in 2021 as reflected by our use of call as to preserve some exposure to price improvement.
Cost management is a focus not a onetime initiative for US we continue to pursue efficiencies to improve our returns has repeatedly demonstrated over the past few years.
Following the 122 million of reductions last year, how currently our expense reductions totaled $19 million of which approximately 60% is gionee.
Clay mentioned the reduced Ela, we range earlier and we have also lowered our guidance ranges for DNA taxes other than income and interest expense.
Another key focus of active management is our balance sheet, where we took actions this quarter to boost liquidity.
We reported a leverage ratio of 3.1 times with 2.1 billion of senior notes outstanding and 336 million borrowed under our 1.8 billion credit facility.
We repurchased an additional $27 million discounted senior notes, bringing our total repurchases.
To 107 million at an average 33% discount.
We also negotiated to use surety bonds as credit the shorts decreasing outstanding letters of credit by 113 million since April.
This not only enhances our liquidity, but also decreases our interest expense.
We ended the quarter with 100 and twin with 1.26 billion of Undrawn commitments under our revolving credit which positions us with ample liquidity, especially considering we only have 207 million in senior note maturities, but for 2025.
We are deliberately and consistently optimizing what is in our control both operationally and financially to position the company to deliver on all goals of free cash flow sustainable two times leverage and the delivery of long term value for shareholders.
This concludes our prepared remarks, so Jamie could you. Please open the line for questions.
Ladies and gentlemen at this fight we will begin the question and answer session to ask your question you May Press Star then one using a touched on telephone. So it's all your questions you may press aren't too.
If you are using a speaker phone, we do I see you please pick up the handset.
More pressing the numbers to ensure the best sound quality.
Once again that is star and then one to ask your question.
We'll pause momentarily to assemble the roster.
And our first question today comes from Iran. Sure Tiara from JP Morgan. Please go ahead with your question.
Yeah good morning.
Well I was wondering.
No I was wondering if you could talk a little bit about thoughts around in a 2021 I I think a goal is to get the free cash flow balance.
Next year. So I was wondering if you could help us think about perhaps sustaining capital to keep either call. It a fourth quarter.
Production, which looks to be now and that two and a half Bcf E range.
Hello, your thoughts on sustaining capital Oh are evolving, giving some of the lower well costs that you cited a today.
Yes, we haven I'll start by saying we have not.
Put together and released a 21 21 plan, but I can give you some of the major tenants around it first of all yes, our plan for 2021.
He is able to achieve a status, where we're investing only within cash flow.
And we are able to hold exit rate.
Year on year at a minimum we will invest within cash flow in 2021, and as we typically do as we progressed through the year and.
Begin to formulate that plan will set a look at the strip, but look at our hedge.
Wow.
Put the numbers together generated a level of cash flow from the strip at that time and.
The benefits of hedges and and then set of capital program from that that point.
I expect that that capital program will will have a.
A.
The balance between liquids and gas investments in West, Virginia, Pennsylvania, but will be completely determined by the pricing that is in place at that time on a multiyear strip.
The quantum of of of money that it takes to hold our production flat.
We'll continue to improve.
But.
We'll see when the time comes what that exact.
Again capital budget is all about our current.
Maintenance capital level in total for the company is about $600 million.
DNC capital and we're working to try to drive that down through all kinds of efforts both in terms of cost and in terms of either productivity improvements efficiency improvements et cetera, along with capital call and you'll see that in some of the results that we put out there.
It is our intent going forward that to too because we are returning to investing within cash flow, you'll recall that we deviated from that as we monetize pay bill and the third of our cash flow.
But the successful transition and the work that we've done over the last couple of years will enable that happen next year end beyond in terms of our of our plan.
And again.
Onto some of that and how that's distributed will be a function Oh.
Pricing, our capital budget and in our entire capital program flexes up and down with capital with the commodity prices and.
And that will continue as well.
Great. That's helpful. My next one is for clay.
Clay and one of the pure calls earlier today. This morning, there's a lot of questions on the upper Marcellus.
And your peer indicated called how the E ours, and we're trending call it 70% of kind of a lower.
Marcellus.
But I just wondered if you could give it was maybe some thoughts.
On the economics of the other lower Marcellus in terms of maybe lower didn't see costs.
And I guess the importance of the successful called delineation in terms of the you know your overall inventory position.
Sure.
So.
As we talk about consistently we're constantly working on our existing inventory to meet that resource into the approved proved reserves and.
Economically viable viable opportunities and we've done not with.
A portion of our upper Marcellus and we did the three wells last year and then we added to that with two more this year.
With the costs that are coming down.
We similarly have in a 600 dollar per satellite low 600 dollar per se what costs on these wells.
That they are above our hurdle rate the ones that we are drilling they're not as economic.
As our core lower Marcellus wells, but as we keep lowering cost and optimizing the completion designs, we're continuing to enhance those economics and so thats part of why we're continuing to.
Bring those ended the program, even though the majority of our program is the core lower Marcellus and we're continuing to be encouraged by the results.
Similar to these two that we did.
And brought on line this quarter.
Thank you.
Our next question comes from Charles Meade from Johnson Rice. Please go ahead with your question.
Good morning, Bill playing into the whole team there.
[noise] Bill I wanted to ask.
Given the given the way that the the strips look now in particularly with the but we're looking at.
Much better strip for for natural gas and 21 is it fair read that this shift that you guys have made versus where you came into 20, where you were more focused on on southwest Appalachia is it a fair read that you guys are going to be this the shift to more dry gas.
There is a more durable one.
Is it possible that you are split right now it's about 50, 50 50 as possible that it could be shipped even more in favor of northeast Appalachia.
Yeah, our our investments are.
Returns driven and so I think that right now certainly on the liquid side, but that even on the gas side, we're in unprecedented volatility period.
With all that's going on in with co bid and and the other challenges that the oil side has faced and I think it's.
We will look at that as we begin to shape. The budget for next year and that will be borne out of the strip pricing. We typically set a budget in February and we previewed before then.
But it's based off of district in that period.
For oil gas Ngls differentials like and then its influenced by our hedges.
And the hedges are only to figure out cash flow not the economics.
Hedges assure economics, but the.
I think.
You're going to be bouncing back and forth. We were 60 40 in the beginning of the Yearish. We moved to 50 50 as prices moved around it's totally driven by our view on pricing, there's the depth of the inventory the quality inventory the ability to access the inventory at all.
All of the.
Infrastructure that that entails because all there and it's and it's it's a economic.
Decision. So we are primarily primarily gas company up as you know 80% of our production. This comes from that so will either be in.
If you get really strong come out condensate in oil prices recoveries, you could be in Super rich acreage if you're in high rate high gas you have the choice between.
Hi rate high volume.
Great and gas aren't what we call our rich gas.
Our dry gas in Pennsylvania, and in economics will dictate that.
The certainty is our near certainty I'll put it is that we'll be investing in all areas. So I.
I think that that.
You will see is accessing our inventory.
Both rich lane, and our Super Rich rich and dry.
Thank you Bill that's helpful insight into your thinking and then if I could a this this maybe for you build perhaps for clay you know I looked up the way it seems to me when I look at your.
Your guidance versus what you had early particularly for wells that you you're drilling completed it seems to me that the efficiency that you guys are driving in your system up you drill more wells, but you're not placing more wells or you're not you haven't had to be shifting the number wells you're placing on it 20 add.
That makes me think that maybe 21 is going to play out a little differently. The in the past said that you guys might be.
How about a tailwind early.
In 21 is that is that a fair read on on the on how you're kind of I guess deploying your how your your reaping the gains finger efficiencies and what are what the yearend and early next year it looks like.
As our expectation and as we when we look at either whether its cost improvements while improvements productivity improvements decline rate improvements.
Every one of those is is that our focus on that is to make them sustainable and go.
Through year on year on year. So we believed that the benefits to the economics at the end of the program that had been derived this year and in previous years.
Translate into better and better position to start in 21, no I'll add like I said in the script, we're going to have a higher exit rate going into 21, which will benefit and we were going to have greater number of ducs that we updated in the guidance.
Going into 21, so so I think thats, all very consistent with your comment and just a sub no we don't.
Managed DUC inventory to Opportunistically play in the market can't guess the prices and so that's very wise.
Our DUC inventory flexes with activity and it's all about efficiency.
And optimization in that space. So I think we're in pretty good spot.
Great that's wells after thank you.
Thank you.
Your next question comes from Koshi Harrison from Simmons Energy. Please go ahead with your question.
Hi, Good morning, everyone and thank you for taking my questions.
So you know sticking with wanted to go back a little bit to the you know earlier maintenance Capex question.
We all we all love to ask.
I know you don't have an updated estimate relative to what was provided last quarter, but I was wondering if you could maybe walk us through some of the inputs that went into that number just to just to help us help us think through where those estimates maybe had it.
Specifically, you know where those maintenance estimates based on the $700 and $730 per foot with those estimates based on the 25% base declines.
Just some just some sort of metrics around that so we can you know maybe.
And then on got to be headed and moving forward.
Sure. So so we think of our maintenance capital one of this December exit to December exit and as you mentioned the.
The starting point number was based on all our budget assumptions.
We've had improvement in those assumptions we've had a.
Activity shift in the middle evolve that that needed a little bit of time for the curtailments situation to.
Resolve itself and then move into gas so there's there's moving parts and all of that.
When you think about it on a snapshot all those things to me probably leno's.
So the better part on the lower end below a 600, but then as you look at the definition, which is exit to exit we're going to have a higher exit as we come to the ended the year and so I think 600 is a good number as we keep thinking about year over year, but.
Things that we do they cause improvements directionally should be benefiting that number.
Got it got it that's good that's helpful. And then you know maybe maybe a question surrounding a capital allocation once you get your exit rate.
In the past you you you've talked about you know either spending.
Within cash flow or maintenance once you get to the end of 2020 and so so should we take that to mean that you know once you get your two and a have bees exit rate that maintenance capex is the ceiling moving forward as it pertains to capital spending while discretionary cash flow is the floor to you know depending on the pricing environment or should we.
We or should we be thinking about you know if we saw three $3 350 next year or whatever the price maybe that you would still be investing 100% of discretionary cash flow just trying to think about how you guys are or thinking about spending as a percentage as cash flow moving forward.
Yeah, I think the detailed exactly where that will land will be part of our a 21 guidance, but what I can tell you from a framework of thinking.
First of all we will invest within the cash flow it'll be get against strip pricing at the time and it'll be flex doesn't down depending on what's happening with commodity prices.
And the in and so that's the mechanics of how we'll do it if you kind of pick on one part of your question. If if we set that plan and there's some sudden surge of gas pricing and if you look at the strip Theres a little period of time, where there isn't an increase in gas pricing dependent tends to fall back on.
Oh.
No, we're not going to investing against that will take that money in and of that extra cash flow and.
Usage pay down debt or what other other.
Practice makes sense I think the the key here is we are our goal is to get to to where we are generating free cash flow. That's been a stated goal all along and so that goal remains along with our leverage ratio.
And along with.
Our.
Our mandate self imposed mandate that we will all of our capital allocation is driven by returns and so where we can make a return.
That exceeds our target will focus on that if you can't make a return.
Oh, because pricing has moved against us or whatever then we pull back and so it's a quantum of capital, but there. The the major mandate override is the returns are what drives those decisions.
That's helpful things and if I could you maybe sneak just one more in a quick modeling question for Julien.
Yeah. If you were to look at the forward strip in 2021.
Specifically for ethane and propane and looking at it for oil I was just wondering if you'd give us a ballpark of where at before at the four ships today, where you would expect those NGL realizations to come and it's just one of those more opaque markets. That's hard to pin down. So I was wondering if you'd maybe just help us on on NGL realization as.
As you look at 2021.
I'm going to let I'm going to let Jason had to go with that.
Yeah, I think you don't really with the volatility that's out there in the in the market right now with.
Crude and the relationship between crude and NGL moving around a being as volatile as what it what it has been I think as we look at 2021, we'll just have to wait till we get closer to the period when we when we build our build our budget.
And you will see see how it's shaping up there, but what I what I can tell you. It's just based on what we what we're seeing now with the new infrastructure that went in place in the in the northeast Mariner East two.
You know the volatility that we had.
Experience than in the differentials prior to part a 29 team that.
That's not that's not there anymore and so things should be.
A lot less volatile as we look out into the to the future on that the differentials on our NGL.
Okay. Thank you [noise].
Our next question comes from Holly Stewart from Scotia, Howard Weil. Please go ahead with your question.
Brian Jellison page.
Hey, Holly learning.
Maybe just the that's the first one sort of thinking about the 2020 and 2021 activity said it looks like you averaged six rigs and one Q five into Q and now I'm running about two rigs. So I guess the question would be where do you expect to exit Threeq you and the.
Here and then I have a follow up on 21.
Sure, we should exit to Q.
Thank you sorry, with about two rigs Ron and one Frac fleet consistently but there might be a second went in there in the early part.
Okay, and then and then the year clay.
I'm, sorry average for the full years Amtrust can.
The exit the year.
So if you're talking about from an activity standpoint, as we get into December a will come into the December with one Frac fleet broaden and two rigs running and then we'll want to.
Position for our new year budget in 21 and will potentially start to move in rigs into December preparing for the new year.
Okay, and I guess that those sort of my follow on would be as you think about can't positioning for that free cash flow program and 21, how does the activity said really shift as you enter.
Under the new year.
Well by the time, we get to the towards the end of the year, we will know what.
We will be pretty close to knowing what our 21 program will be.
And I.
I think as clay mentioned around the year end.
Beginning to plan and execute for the following year.
The level of activity the to proven that plan will drive the amount of activity in December that has done so that were up and running and getting after it right away in January so they are tied together.
If the program.
Is.
[music].
You know if you look at the cadence of the program front end loaded.
Loaded in the back brings greater value.
And all the reasons, while we do that.
And it will be dependent completely on the the amount.
The budget and the timing of that so same kind of thing that we traditionally.
Okay great.
Jump back in.
Thank you.
Our next question comes from Jeffrey Campbell from.
To your brothers. Please go with your question.
Good morning, everybody.
Good morning question regarding the self funding next year, just wondered if you had a leverage range and mine for 2021 or over the next couple of years, if you prefer.
Yeah. So so so as we project forward, we actually see leverage you know this year peaks up fourth quarter being our highest level and then it starts coming back down.
As we go through through next year, we've said on a longer term basis, we want to get two times that is going to take take some time.
But thats still remains an objective so.
You should see it stepping down next year.
Okay and I'm just a quick follow up is the.
Drop.
Next year or at least early on here is that basically predicated on or something more of the Dol because about a pricing.
Yes, just as you'd run you run through the the.
The economics the pricing the volumes you know and we can see we you know we can see that being three or even below.
Okay. That's helpful.
I just wanted to ask.
What you guys think about effects from the cancellation of the Atlantic Coast pipeline and.
The likely completion.
On Valley pipeline.
And listening to some other people talk about this and.
Thank you about regional supply demand, maybe regional basis, and even fund transportation. Thanks.
Yeah. So this is because Jason so I think when we think about HCP I think you know near term, we don't really expect that much of an impact up you know there theres open capacity out of the out of the basin. We think that maybe there was probably a based on where the differentials are there was.
Consensus that it could that it could potentially get canceled deal I think really longer term on on the on the basin in general it really depends on what the ultimate production levels, where they end up as well as the timing in around Mountain Valley, and then right now there's a pretty strong secondary market out there for for transportation.
Out of the the southwest Appalachian region, and then you know we're not a we're not a shipper on on MVP, but based on what were what we're hearing from.
People in the industry. It looks like it's you know sometime in that that that early early Q1 2021 could be the pitch one service date for Mountain Valley.
Okay. Thank you.
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Our next question comes from Noel Parks from Coker and Palmer. Please go ahead with your question.
Hey, good morning.
Morning.
I'm I'm the service cost front I was wondering.
You know, we've continued to see improvements and in vendor cost.
And <unk> for on the Frac side, how longer horizon are your vendor is willing to.
You know give you a current pricing levels is that something that they're willing to commit to through the ended the year or or are they willing to.
All right, even give me that pricing into a longer term contracts say into next year.
Yeah, So as you know.
We operate a full frac fleet ourselves and as we've talked about in the past it it results in a really good working relationship with the other pumping service providers that we supplement over and above the one that we have nevertheless insight.
On our part and they know what true cost Saar from our own operation and so we started and are really good spot and what are negotiated service rates are around pumping.
We've got a long term relationship with the main provider that has been very good our costs are negotiated and are with us throughout the year, we update those annually.
And so.
We feel very comfortable with their cost structure that we have there have been some reductions due to incremental deflation.
As we've moved through the year and then we will rebid all of that as we move into the started 2021, but.
No we have maintained a very low cost structure and we benefit by the fact that we also do all this ourselves.
Okay, great and to to the degree you you received inbound calls from folks Jeff just checking to see if you if you might consider adding an external crew.
Are you.
It is the pricing still kind of.
On a downward trend.
Continuing even even further from where we started the air and now little bit past midyear or are they more just looking to put no capacity to work and.
But but not willing to to be more aggressive on price than they have been so far.
Yeah, there's definitely been a reduction in that in the first half of the year, they're definitely wanting to be able to put crews to work I think theres been some some.
Documentation out there around.
Frac fleets starting to pick up as we move through the third and ended the fourth quarter to where I wouldn't numerous expect.
Significant further reductions in the back half of this year I think Dave.
Push their costs pretty low on where they sit right now.
Great. Thanks, a lot.
Our next question comes from Scott Hanold from RBC capital markets. Please go with your question.
Thanks, Good morning.
Morning.
Curious on Julie in your comments on the long term goal of two times leverage I know that's something you all of your targeted before and you are chipping away at its you know obviously taken notice some debt below par and obviously with the.
For the outlook, but big picture you know how long do you think it will take to achieve that.
That goal and and would you guys evaluate something inorganic to get there sooner.
Well so.
I think that it really depends on a number of things as you know prices I have a major impact both on our cash flow.
If we have excess cash flow and we're accomplishing all we need on the operational side then.
You can start looking at using that cash flow to also reduce the absolute level of debt.
So it is very price dependent performance dependent as to what we will do a organically and as I said, we have a good line of sight for next year at at an improving leverage ratio on from from where we will sit at the end of the but but two times is is for the long.
The time site.
As far as far as therefore would we do something from and in an inorganic nature I assume you mean.
Acquisitions or.
Some type of activity like that and we've always said that we will look at opportunities I think bills always talked about looking at opportunities. We believe that does benefit too.
Great to scale consolidation, but.
We do that with all key goals insight. So it has to be accretive to cash flow and it has to be accretive to our balance sheet and to the leverage. So yes, if there's something out there that is inorganic and it helps the cause to advancing those those two objectives.
Its in consideration.
I. Appreciate then it just maybe on on that point I mean is their stuff out there right now considering whats the volatility we've seen the first half of your in commodity prices. You are you seeing things on the.
Consolidation front improve or other things that fit the bill out there or is there still some room that needs to be tightened.
Oh I.
Weve looked across the areas, where we work and beyond and Weve. There's a lot of interesting things out there I think.
There's a number of dynamics at play.
Some of which are companies.
Involve and spending a lot of time on self help activity rather than thinking about building scale in growing greater value or taking cost out of the of the business, where the industry and so.
It's a pretty volatile time.
So some of those.
Some of those businesses are quite comp are quite involved in other activities, but theres a lot of interesting things out there and we'll continue to work that we believe in consolidation and the benefits of it.
And as we've said.
Many times and as you would expect.
I'm trying to sell something will tell everybody about it when we're trying to look at a consolidation opportunities or whatever.
Keep that teller to ourselves to the extent.
I appreciate that and I understand and clay real quickly you talked about reducing that maintenance.
Base, a a decline rates in year. There's several efforts you you spoke about but you know it you when you look at the capital that's put in in the cost put into it to make those based or you know decline reductions you have a sense of what kind of a rate of return that provides the southwestern.
So I'm trying to get a sense of like capital for that versus capital to say drill another well, yes. It's the best return opportunities that we have there are there the quicker payout.
Types of projects the compression project very good economics that we started in northeast Appalachian area and we continue on and that project was was the main driver of lowering.
The base decline that we came into the year with when we went from.
Around 30% or high Twentys to 25 this year.
And now that continues to perform well, we're getting a further benefit in our southwest Appalachia.
Assets around the artificial lift optimization.
Frac kit mitigation, those things, where our team is consistent with the focus on.
Lowering cost capital expense, it's all about optimizing the well performance and they always end up being those projects are the most economic things we can do.
Thank you.
Your next question comes from Bryan singer from Goldman Sachs. Please go ahead with your question.
Thank you and good morning.
Brian.
I wanted to go back to couple of popular topic. So the first is really talking about the leverage and Kent and free cash flow goals.
And maybe it is the benefit of not having much of the debt coming due over the next couple of years, but I just wanted to really better understand that or you are you essentially planning to stay within cash flow at strip type prices next year or does the need to bring leverage down overtime warrant.
A free cash flow focused strategy, where you would you be would it be spending less than cashless.
Yeah, I think I I think we said, Brian that we will they certainly and invest within our cash flow.
Again price dependent so we would we would love to be generating excess cash flow.
We do have a.
Certain amount of activity that you have to be able to get done in order to to sustain.
The production levels.
And and therefore sort of protect the leverage that way.
We we.
Do look to reduce our absolute debt level, if we're living within cash flow, it's not going to go up right, it's going to be flat at at worst and then we would look to reduce that you've seen us do things previously where we go out and buy bonds at a discount and that is chiseling away.
But but I think I think to get to our overall objective it will be a combination of reduction in absolute debt and.
Growth in the past club.
Let me underscore something on for the call because I am hearing this.
Maybe being defined out there a little differently than we intend my statement of investing within cash flow means we will not invest one dollar pass the cash flow that we that we generate that doesn't mean will use all the cash flow for investing.
And I think Thats the question and it's.
Entirely dependent on on commodity price based price our ability to continue drive cost out all of those things.
But it means that we will not outspend our cash flow.
Again.
Circumstances are right, well under and well invest less than our cash flow and you have the opportunity to do exactly what I'm doing.
Thank you and then my follow up is with regards to the maintenance capital and really trying to put that into contacts with the activity levels that we should expect in the capex levels. We should expect in the second half of this year. Thank you had talked earlier about the fourth quarter being a really more the seasonal low from activity perspective, Capex is normally fran.
10 loaded it would seem like the maintenance capital levels that you're projecting would be at or below where your fourth quarter would end up and maybe in Austin that a little bit but can you just kinda talk about what we should expect for how maintenance activity.
Would look like relative to what we what we will see from the company in Q4 in the second half.
Yes, as we talked about the capital will.
Come off in.
For Q were were flattish the first second and third quarter, we're going to see our highest production for the year in the fourth quarter and that's that's driven by as you know the lag in the in the capital activity, where the production shows up later, but also more so.
This year because of the shifted activities that we did in the second quarter and that a lot of that is high rate gas that that them is online for the full quarter in the fourth quarter and so we're going to see a nice uplift there as we come into 2021.
Got it and that would render the fourth quarter Capex run rate to essentially which would be allowed for this year to essentially be a fair maintenance capital 150 million or so per quarter going forward basis.
I think plus or minus that's about right.
Thank you.
And our next question is a follow up from Holly Stewart from Scotia, Howard Weil. Please go ahead with your follow up.
Yeah. Thanks for taking the question I'm, just a follow up on the well cost I know you guys renewed here you are well cost guidance lowering it any commentary on just an ultimate.
Well cost target that we could see.
Well as Bill mentioned in his script every time, we set a new record that to his new bar. So so it will continue that we will be driving towards.
Continue into being as efficient as we can be there now are our number one goal is to maximize the value from the type curve.
Coupled with the capital that we spend on them.
But we've been able our teams have done a great job through.
Efficiencies through ongoing completion optimization, we're continuing to elevate performance, but costs keep coming down so.
We will we will keep shooting for records and then keep driving that average closer to those.
Okay 500 here become.
I.
Don't sort of timeframe on that but that's directionally, what we're talking about yes.
Thank you.
And ladies and gentlemen, with that will conclude today's question and answer session I'd like to turn the conference call back over to Mr. wave for any closing remarks.
Well I'll, just simply recap the quarter. If there was that anytime that demonstrated the resiliency of our asset portfolio that demonstrated the agility in preparedness.
Of our teams in the face of challenges and the quality of execution. It's now.
But we also realized we just cross through half time the years not done. So we have more to do in the second half and we're pretty excited about some of the achievements that we will deliver as we how're into this second half period. So until then.
My sincere thanks to everybody in southwestern energy, who has contributed to all these results and greatly appreciate that and then to all of you who continue to be interested in our company to everybody stay healthy.
Be safe and enjoy the weekend and thanks for being here.
Ladies and gentlemen, with that will conclude today's conference call. We do thank you for joining you may now disconnect your lines.