Q4 2020 Southwestern Energy Co Earnings Call
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Good morning, ladies and gentlemen, and thank you for standing by welcome to the southwestern energies fourth quarter 2020 earnings call management will open up the call for a question-and-answer session following prepared remarks in the interest of time. Please limit yourself to two questions and re-enter the queue for any additional questions. This call is being recorded. I will now turn the call over to Britney re-birth Southwestern energies director of investor relations. You may begin
Thank you, Matthew. Good morning. And welcome to Southwestern Energy fourth quarter 2020 earnings call joining me today our bill way president and chief executive officer. Play Karol G. Officer Michael Hancock interim Chief Financial Officer and Jason Kurtz head of marketing and transportation before we get started. I'd like to point out that many of the comments we make during this, are forward-looking statements that involve risks and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail and the risk factors and the forward-looking statements sections of our annual report and quarterly filings with the Securities and Exchange Commission.
Although we believe the X.
Agent expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results on development May differ materially and we are under no obligation to update them. We may also refer to some non-gaap Financial measures which helped facilitate comparisons across periods and with fears for any non-gaap measures that we used a Reconciliation to the nearest corresponding gaap measure can be found in our own name is available on our website. I'll now turn over the call to go away.
Thank you, Britney and good morning everyone. We appreciate you joining our call today, and I hope that you're all safe and healthy as well. I also hope that our listeners today in Texas have recovered from the historic weather events the state last week.
Before we start I want to sincerely thank all of you in the investment Community for the outpouring of Support over the loss of our dear friend and colleague Julian.
We're so grateful for that outpouring as is his family Julian made a lasting impression our lives and the company and we will miss him greatly.
We entered 2020 with a plan that we believed with further strengthen the company's current business in support of our strategy to deliver improving value for shareholders. No one could predict the twenty-twenty would unfold how it did but our strategy business plan and Agility enabled the company to thrive during such a turbulent year the resilience and commitment of the entire swim team provided the resolved necessary to execute that plan and deliver results that would stand out in any year regardless of the unprecedented low commodity prices and Global Panthers.
This was all accomplished while achieving record safety and environmental performance. We also effectively implemented our COVID-19 management plan with protocols that shielded are people from exposure of work and shielded the company for any material business or operating impact.
We often speak about our strong performance culture and the value. It drives for shareholders twenty-twenty was filled with proof points of our culture delivering impressive results across our former Killers those being creating sustainable value progressing best-in-class execution increasing scale and protecting the company's Financial strength.
Guided by this strategy, we have deliberately repositioned the company over the past few years and we continue to deliver on that path in the fourth quarter. So I offer my sincerest thanks to both of our the people of swim who continuously step up to do more with less and consistently step forward to assure delivery on all of our commitments that we make well done to the entire team.
So let me share some of the teams many accomplishments our fourth-quarter results included production at the high end of guidance resulting in free cash flow of $55 during the course.
We continue.
The Highlight the strength of our Dynamic hedging program recording a gain of $362 for the year and $52 during the quarter including natural gas spaces Hedges that protected the money from the widening differentials in Appalachia being seen by many in the basement. We also reported improved in jail realizations a trend we expect to continue in 2021 on the operational front clay will detail later. The mini Milestones that we achieved last year including further evidence of our Relentless cost Focus one. I'd like to highlight is a single new well record of $419 for lateral foot on a nearly twenty thousand foot lateral in Northeast Appalachia, the team continues to exceed the limits of what is thought possible by most people.
In the fourth quarter we closed on the acquisition of the Montage resources delivered the expected GNA savings and immediately integrated the assets and our new colleagues into the company as planned. We moved a rape to Ohio and we have successfully drilled. Our first dry gas Utica. Well on the acquired acreage this acquisition is a testament to the company's rigorous and disciplined approach of doing the right kind of deal the right way and successfully executing on our strategy and these are both examples of our track record as approving consolidator.
As proud as we are of twins achievements in twenty-twenty. Our team is focused on the road ahead and our 2021 Guidance reinforces. The company's key objectives remaining financially disciplined baptizing free cash flow at maintenance capital investment levels reducing debt and achieving sustainable Two Times Library our 2020 performance solidified the foundation on which we will a value from these objectives in 20 21. Our plan optimize is free cash flow guidance is based on a $200.77 per mcf gas price resulting in projected free cash flow of over $275.
An increase to a $3 gas price would result in free cash flow estimates in excess of $375 million dollars and these scenarios result in a reinvestment rate between 70 and 80% off our maintenance Capital program will hold fourth-quarter production from our fourth quarter 2021 production flat with our fourth quarter twenty level including the Montage assets back to our strategy investments will be focused on the highest return projects at strip prices and given the strength of our inventory. We expect to have activity in all of our core operating areas.
Should commodity fundamentals improve further throughout the year will capture that Improvement in cash flow and further strengthen our balance sheet through additional debt reduction.
Our goal to achieve two times leverage on a sustainable basis is unchanged and we will continue to allocate free cash flow to debt reduction until we reach that goal with expectations that were approached Two Times by the end of the year.
We will continue to progress our best-in-class execution including remaining a low-cost efficient operator.
As we have done materially over the past two years. We expect to reduce well costs by an additional 10% in 2021. This includes immediate cost reductions that we expect to realize on The Enquirer, Ohio Utica acreage. Thanks to our differentiated Drilling and completion operation.
We protect Financial strength through our proactive risk-management and rolling through your hedging program which provides downside risk protection to our cash flows. We have hatched a majority of our 2021 production and strategically retain upside participation through the use of colors.
We've also protected most of the natural gas basis differentials against the risk of widening basis in the Appalachia basis.
An integral aspect of who we are as a company is embodied in our ongoing commitment to Excellence and transparency as documented in our 7th annual corporate responsibility report wage.
As we discussed before we believe that natural gas is foundational to a low-carbon future and we cease win as a leader in that effort. Our Focus has been on reducing methane intensity favoring this metric tons of benefits the areas in which we operate.
Water conservation is also a core part of our environmental and social effort in twenty-twenty. We achieved our fifth consecutive year a freshwater neutrality returning as much fresh water as they used back to the local watersheds in the communities where we work and live.
And remaining at the core of our strategy is a commitment to the right people doing the right things. Our success depends on the alignment of a fully engaged diverse and inclusive Workforce nurtured by our performance high-performing core value driven culture.
Let me now turn over to Clay for some operational updates. Thanks. Bill. Twenty-twenty has been an unprecedented year but through it all. We have maintained our disciplined approach and our mindset to deliver on all of our operational targets.
Despite the ongoing pandemic. We have successfully maintained continuous operations and achieved company record safety and environmental performance. I would like to thank the entire operation Organization for their continued commitment to delivering high end results regardless of what's happening around us.
Let me start with a few 2020 highlights.
We demonstrated best-in-class execution leveraging Innovation and Technology to maximize the value of our assets. We lowered costs reduce cycle times. I drove efficiencies displayed agility increased well productivity progressed or resource to reserves effort and enhanced returns.
On the cost for we beat our well costs Target averaging $637 per lateral foot for the second half of the year.
Has Bill.
Mentioned we also achieved a new single. Well cost record of $419 per foot on a 19700 foot lateral in North East Appalachian.
We continue to reduce our cycle times through increased operational efficiencies across drilling completions and Facilities.
We mentioned one example of completion efficiencies in the third quarter with our double zipper Frac completion, which increased completion stages per day and reduced costs this and other efficiencies allowed us to deliver Wells to sales at the high end of our guidance range while investing $899, which was at the midpoint of capital guidance. So getting more done for Less, our operational agility was exhibited
Earlier in the year when we shifted activity to high rate high volume gas wells in response to the COVID-19 demand destruction resulting in a higher percentage of gas. Our total production total reported net production for the year was 880 bcfe including a full quarter of Montage our fourth quarter production averaging a little over 3 GB per day increased well productivity and well cost reductions drove are proved developed f&d cost down for a third straight year and 25% year-over-year to $0.40 per mcf e
Reported your improved reserves were twelve tcfe, which included 1.40 CFE of positive performance revisions and 741 bcfe wage Reserve additions.
Due to historically low backward-looking SEC prices. We had a 4.40 CFE downward price revision primarily related to the liquids-rich puds wage, which today's 20-21 strip prices would fully returned to our proved Reserves.
The reported pv-10 value of 1.85 billion would increase to nearly six billion dollars, assuming the same proved reserves and using the 20 21 a strip at the beginning of the year, which was $270 per mcf. Nymex gas price and $48 per barrel WTI oil price.
With the addition of Montage our Total Resource potential has increased to fifty Seven t c f e r of our approximately 5400 future drilling locations dead over 1,150. Our economic at current strip pricing are ongoing resource to reserves effort has continued to progress inventory resource pack proved reserves in 2020 in our Northeast Appalachia area. We converted approximately 700 BCF of resource into reserves through ongoing leasing efforts the Dual Target program and upper Marcellus testing.
Nation of all these efforts led to enhanced Reserve returns in our 2020 program.
Now let's turn to our 2021 plan. Our maintenance Capital program will have an investment profile that is relatively flat in the first three quarters followed by a reduction in the fourth quarter of given the competitive strengths of each of our development areas investment in our highest return projects is expected to result in a roughly even split between South towards rich and dry gas assets. We currently have five rigs running and three completion Cruise.
In Southwest Appalachia approx, 50% of our wells to sales will be super rich with the remainder split evenly between Rich gas Wells and West Virginia home and dry gas. Utica wells in, Ohio.
Included in our NGO production guidance, we expect to have some ethane rejection in the fourth quarter based on the Strip crisis. Like we have done in Prior years. We plan to exercise the value of our effing based of our ethane based on recovery rejection economics throughout the year.
In Northeast Appalachia. Our investment will be focused in the lower Marcellus supplemented By duel Target Wells where we leverage Innovation to capture undeveloped tier-one acreage in resource in both the lower end upper Marcella's.
This plan is expected to result in total annual net production of approximately 1.1 t c f e or an average of 3 bcfe per day. The production mix is expected to be roughly 80% natural gas 16% and 4% oil.
Are Relentless cost Focus continues into twenty Twenty-One? Well costs are expected to average $600 per lateral foot at 10% reduction from 2020. We also expect to increase our average lateral link to 14,000 feet. These averages include r-ohio Utica Wells which due to their greater vertical depth are estimated at $7,025 per foot which is $100 per foot reduction from Wells previously drilled in the area.
I'm really proud of what our team accomplished in 2020 and look forward to continuing to deliver strong operational results again in 2021.
I'll turn it over to Michael for the financial results. Thanks Clayton. Good morning, everyone as mentioned earlier. We finished the year strong reporting quarterly adjusted net income of $119 thousand two hundred Seventy-Six million dollars in net cash flow $249 million when excluding one-time non-cash charges this cash flow exceeds 294 million dollars of capital investment during the fourth quarter resulted in a 55 million dollars of free cash flow.
looking back at our
Twenty-twenty financial highlights many related to our proactive balance sheet management repurchasing $107 of bonds at an average 33% discount. We also enhance our liquidity by increasing our borrowing base to $2,000 and protect our financial strength by accessing the capital markets following the Montage acquisition announcement and utilizing the five hundred million and net proceeds to call the Montage 2023 seen your notes upon clothing off. Another Financial highlight of 2020 was the realized gains from our Dynamic hedging program swims risk management strategy and disciplined practice enabled the company to deliver $362 in hedge games, including home. Seventy six million dollar hedge gain in basis hedges.
As part of our earnings release yesterday. We also provide a detailed 20-21 guidance where we will continue our financial discipline and further strengthen the balance sheet as Bill mentioned earlier. We are poised to deliver meaningful free cash flow, which we plan to put towards debt reduction in order to achieve are sustainable two times leverage objective. This is supported by our risk management strategy with the majority of our expected production volumes hedged utilizing instruments provide downside protection while providing exposure to higher prices. In fact 80% of our Hedges on natural gas provide access to this upside through the use of collars in addition. We protected over 75% of expected natural gas production against widening basis differentials. There are Transportation portfolio firm sales and basis hedges.
As we experience for ourselves with recent National Weather events increased demand and declining storage levels are providing support for improving fundamentals for both natural gas and liquids with the Improvement. The 2021 natural gas prices. We expect our price realizations to increase by nearly seventy cents per mcf before the impact of edges are twenty Twenty-One natural gas discount to 9 Max is expected to be in the $69.84 package which includes an expected 7 to 9 % gain on basis Hedges. The first quarter discount will be narrower in the 40 to 50 Cent discount range of an expected fifteen to twenty percent gain on base is Hedges, as our diverse Transportation portfolio positions us to capture premiums associated with winter weather in the fourth quarter of 2020. We reported nearly $5 per barrel Improvement gas prices compared to the prior quarter and expect the strength of NGO prices to continue in 2021. Our full-year guidance of 30 to 38% of WTI range is based on $50 per barrel w t e
The first quarter is expected to be on the higher end of that range with expected realizations reaching thirty-six to forty 2% of WTI.
Our disciplined execution of our strategy has positioned the company to capture value from this improved price environment, which combined with our stringent cost management balance sheet strength and increased scale provides momentum to deliver increase value age 21, and beyond that concludes our prepared remarks mad. If you could please open the line for questions, we will now begin the question-and-answer session to ask a question. You may press star key on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two months in the interests of time. Please limit yourself to two questions and Branch or the queue for any additional questions at this time. We will pause momentarily to assemble our roster.
Our first question will come from Neil dingers with Securities, please go ahead good details so far. I just wondered you guys hit on this a little bit. I'm just wondering if you could maybe expand a little bit on how you think about allocation towards your super rich and dry gas you you certainly have ample locations on both you kind of hinted around this just not long ago in the pub and remarks, but I'm just wondering if you could talk around that a bit more on, you know, how you view it either. Maybe just this year based on prices and then maybe on a longer-term basis. Yeah, we uh, I can I use more detail our past present and future practice is to take our inventory of wells and Force rank them on economics and stripped pricing liquids gas basis NGL and then Force rank them and the the the prior reservation for investment is is sourced from Thursday.
There's obviously a lot of levers that that you that you have to look at. But that's the root of of how we do Capital allocation here based off of of economics.
Yeah, so like we like we may go ahead and roughly even split between the dry gas and the liquids-rich and in the liquids-rich roughly half of that or the majority of that. I'm sorry is going to the Super Rich and and so like Bill mentioned in his comments the economics given where the current commodity prices are for all of them make for attractive investments in every area. And then as we move through the year should we see some change as examples in our comment wage around Covent the reaction to Covent? We we have the ability to move investment from place to place and and we do that.
Very good and then just just lastly. Could you just talk kind of when you think about maintenance Captain all it all is you're really just how you think about sort of just service and and other inflation cost sort of this year into next we're expecting a bit of deflation in our cost in both areas somewhere near six percent little more than six in Northeast little less in the southwest. And then remember that we drill a hundred percent of our own Wells with our own Rigs and then we have one practically that augments the Contracting officer practically. So we're insulated from some of that of those costs changes, but that's about what we see.
Makes sense. Thanks so much for the details guys.
Our next question will come from Bryan Singer with Goldman Sachs. Please go at
great. Thank you and good morning morning Brian. My first question is with regards to the leverage and the balance sheet. You mentioned the potential to be at two times leveraged by the end of the year and wondered what the key markers you're looking for on either a absolute or on the you know, metric itself leverage metric to boost confidence that leverage can be sustained. And at what point you would look towards consideration of incremental return of cash in in forms other than paying down dead.
hey Brian, this is
Michael hey, I appreciate the question. No, I think you hit it on the head. Right? The sustainable part is a big component of that. Obviously two times is the objective as you get down there and you look at you know forward strip pricing the business place all those things, you know will continue to drive costs out as you get to that point and and feel that you're going to be at that two times are under on a sustainable basis all those things get back on the table including returning capital of shareholders and we'll we'll take a look at that as it gets its uh closer to being achieved but that that's kind of our way of thinking right now. We just want it to be a sustainable not a blip on the radar.
Got it. Thanks. And then my follow-up is with regards to the Mr. Acquisition and a couple couple part question first as you've integrated the asset, what have you noticed of the advantages that Southwestern brings to the table versus any learnings from the expertise that at Mr. And and number two and well, you know, it may be early on does what you're seeing make you more or less willing to consider additional consolidation.
I'll hit the first part of it Brian. We we have seen opportunities that we've already started to take advantage of initially around off the the field and how we can use some of the supply chain benefits that we have to lower some of the yellow e there and a dog that has started and we've already seen some benefits as Bill mentioned. We we already drilled one of the Ohio Utica Wells worse than dead official costs on the drill inside of it using our Rigs and using the operational execution efforts that we've used on our assets and they're showing up on those also, so we're seeing some savings there when we move into the completion phase we are going to utilize the data analytics. Yep.
Which that we use on our own completions to make sure we're customizing the design unique to what is offering the best economics in an area and we expect to see more efficiencies there as we move into the completion phase and the assumptions that we use going into the acquisition are confirmed by what where we are now the the the exit and the people are fully integrated and just like, uh, before we we believe consolidation is something that makes sense. As long as you get the right deal done the right way. We think we demonstrated that so we we continue to study the market and anything more than that. We'll talk about when when if and when we do something
Thank you card. Next question will come from Noel parks with two brothers, please. Go ahead. Good morning.
Wouldn't morning, you know continue on the consolidation theme. I'm I'm just thinking of given the age of the Marcellus of play has now been around quite a while back. I are you seeing opportunities in in the Basin where maybe there's acreage that was Capital starved and I haven't really had much in the way of of current-day billing information technology applied. Just wondering if there are sort of hidden gems out there. That would just might have economists way better than with what what they have producing out there now,
Oh, I I think from experience. We have found that different companies focus on different things priorities across their portfolio. And if you're able to pick up a either a courage or a company at a great price and apply some of the things that you do in your own business and we're very confident in that wage. There's there's opportunity. You know, I I think I'll leave I'll leave it here that we we do believe in in the benefits of consolidation and scale and we're going to continue to study it would typically when we did say it though, we told the the world that we were selling Fayetteville to get the competition up which lasted through the entire time. We owned it in on this side of it. We tend to not go into radar and and and study it and and make something happen before we talk too much more about that. So I know where where we have a good idea. We've been in the basement a long time.
We understand it. So we're looking at every angle.
Great, and my other question is now that you're down the road aways was well, I guess a quarter in or so with Montage back with the back position at the integration since we've had such we're kind of in the narrow of real bullishness from a gas and and ngls as well with those uninformed up son. Do you have any thoughts on infrastructure Investments either in your prior or over on the the Montage side?
Not even any comment on the on something. I think I heard first in that. We're in the first part of integrating Montage. We are fully integrated. That's a done deal with grated. So we're solidly looking forward we're delighted we have it and we're moving on in the team is better because we have new people as well. So that's exciting. You know, I think infrastructure comes in a lot of different forms. We currently have a firm takeaway capacity out of the Appalachian Basin just a little more than a 1.7 BCF a day out of the north east and a little little short of 1.4 b c f a day out of the Southwest which is perfect for us. We are we're using all that we have. We are always working to optimize that are gathering infrastructure. Our processing infrastructure is all right size and right times and we work really Club.
with our gatherers and processors
Um, the one thing you don't want is is to have underutilized infrastructure because it's that doesn't make any money. So we're very careful about that long. If there are we've done this before if there's a line Loop or a something that that can bring greater value and it meets the same economic hurdles or better than our our our our other Investments with them. We certainly study that with that but I think we're in we're in pretty good shape. We continue again to look at it long-term. We have a full system that we continue to gain significant benefits on on a per well basis as we expand, you know, Drilling in some of the areas in in West Virginia and in Pennsylvania quite frankly and need to add on to that we can do that. It's the core part of its robust and complete and therefore the the incremental editions our birth.
quite affordable
So we tie it all together. So because it is a in our mind it's a system opportunity and we we look at it in that way.
Thanks a lot.
Our next question will come from charlesmead with Johnson rice, please go ahead.
It's up to you and your whole team there. I'm hope you guys all made it through recently. Well all that last week, but hopefully. Gladly in the rearview mirror. My question is actually about your your well resolved by area in more specifically the those West Virginia Rich gas Wells so you just look at the wage the rates across the different windows that you guys disclosed in your press release. It really looks like that that that rich gas. I think it's mostly West Virginia really stands out and so can you can you can you talk about how representative that you know that that average rate of 23023000000 a day is for you for you guys and if that's that's kind of indicative of that window being at the top of your investment stack right now.
Hey Charles, so we are very happy with the results. We're seeing in the rich gas area. We've started maybe in late nineteen applying the new completion approach and drilling techniques that that we've been using and and it's all showing up and really good performing Wells. We've got a dog we had a pad come online in that rich area in the in the fourth quarter with with really high initial rates touching forty million back that day per well and and so another example of what you are saying when you say that top of the investment stock though, we've got solid economics in all the areas a given where the commodity prices on a go-forward strip are right now are rich area with the high percentage of oil. Definitely benefits. Yep.
atomically from
Current oil prices and then obviously gas prices improving also so it it's part of the overall Capital allocation plan that we're laying out and as Bill mentioned weekend, it's just if we start to see a favor to commodity right thank you for that detailed and then perhaps just a a small question. But but related to that what are you guys seeing with the the local propane markets up there in Appalachia this kind of there's been a run on supplies across across the u.s. Here.
Yeah, this is Charles. This is Jason. Yeah, you're you're right. You know what we what we continue to see in the Northeast from a from a propane perspective is the basis continues to to tighten up up in that area. And then also, you know that area has the ability to feed kind of up towards the the Michigan area and we know what happened what happened last week whenever they were they were looking for extra propane in in Michigan. So you're right. There's definitely a stronger market for propane up there in the north east right now.
All right. Thank you. Gentlemen, thank you. All right. Next question will come from Douglas with Bank of America, please. Go ahead.
Good morning. This is John Abbott on the other line. Thank you for taking our questions. Our first question is on the Montage asset.
You did a really good job in terms of explaining your approach to allocating Capital. But with the acquisition the Montage you did receive quite a bit of liquids production month with the majority of your activities focused on your West Virginia athletes in the liquid window. How do you think about the trajectory of liquid in Ohio wage? Is there a benefit at some point to increase activity in Ohio to maintain that liquids production and I guess the follow-up question would be if you let those assets declined. Is there a point where you took? Um, it's the best thing those athletes might make sense to some point if you don't put out what capital towards them.
Yeah, so John, I'll start on the answer. They're the way that we have optimized our Capital allocation for the very first year has suspended dollars into dry gas Utica in the Montage assets a cuz of their economic benefit and be it's going to benefit the shack in Legacy assets by us gaining that incremental operational and Technical knowledge drilling those Utica Wells. So so that was a little bit of the added push down there. So when 21 the Montage asset liquids volumes will decline some but as we always talk about we rack and stack based on highest birth comics and we will we will allocate Capital to the the Montage liquids-rich assets as we continue the the development over time.
Thank you very much.
Our next question will come from Holly Stewart with Scotia Howard Weil, please go ahead Holly. Good morning. Good morning. Gentlemen, Britney home. I'll you know, I thought maybe they'll start off with just a bigger picture question. I think several of your peers have provided long-term free cash flow targets for just the business under some sort of these maintenance scenarios that we seem to be happening throughout the industry. I was wondering how you think about Southwestern's long-term organic freak actual capabilities. I great question. We don't typically release five year plans and and and historically haven't but I can tell you that you can probably see what the portfolio still do at this roughly $275 gas price this year and maintenance Capital levels for the next, you know going forward think you can kind of map out that plan change.
And map out what the free cash flow looks like but we're these price levels and with all the work that's been done on cost and on Revenue enhancement and wage optimization. Etcetera. I think we've got a we've got a very solid plan going forward.
Okay, maybe maybe one more in the weeds for for Jason or or Michael. It looks like in jail realization for the fourth quarter were certainly wage is higher than we were expecting anything to highlight there and and four q and maybe that we can kind of carry forward or look into twenty twenty-one.
Yeah, I know. That's a good question. This is Jason. I mean, I really think what happened in in four Q is you know, that was definitely a a run on on commodity prices and then as we look into 2001 and Beyond we talked about it while ago on a call that you know, we're starting to see those basis markets continue to tighten up on some of the the ngos up there. And so I think that's what sucks driving some of that along with the outright price move up at a on all of the Purity Purity Products.
Okay, okay, and then maybe just one more follow-up if I could do you you know, you mentioned the fiber Briggs and three three crews. How should we expect that to change over the course of the year?
Yeah, so it'll it'll trim similarly to the the capital profile that I talked about where the the first three quarters the capital spend will be flat ish. Um the first half of the year I would say is is close to that five and three average and then as you move into the third quarter, it will have a a slight reduction and then the fourth quarter will be a little bit more of a reduction on activity.
Okay.
Okay. Thank you guys.
Our next question will come from Kevin with Citigroup, please go ahead.
Morning, good morning. Everyone. Just a quick follow-up on n g l. You know, a $3 case obviously stronger Lucas price is generally are bringing up that free cash flow expectation. And I think it's over 90% hedged and liquids or anything else is around 60% in with you know, president Mont Belvieu above where your current swap prices are, you know, is there additional I guess need or want to layer on a just more Hedges on that side of the business or you kind of comfortable Where You Are
So this this is Jason. I think we're you know, when we look at NGO prices if you look at the curve right now, it's highly backward dated. So what we what we have done is continue to layer on a n g l Hedges and you know over the next two to three months trying to take advantage of the of the backwardation and the curve and and the prices where they are right now, I think as we look out into you know next year we know that based on the outright storage levels and the days of supply around around propane that you know, something's going to have to change to be able to get the the volume that we need in in the stores to be prepared with the next winter. So I think we'll continue to you know has a little more near-term but you know longer-term. I think we're pretty comfortable where we where we are right now given the fundamentals and really are hedging program is directly connected to to our whole risk management program. And so we have a a very clear
Strategy around ensuring that the downside in any commodity price environment that can swing radically one way or the other for the simplest of things off the downsides protected and we utilize the various tools of hedging to to enable us to capture upside especially in a volatile market like this dog collars as we said before so we're we were not going to leave the the cash flow unhedged and just play the market fundamental views. Not not too long.
Understood I appreciate the additional color.
Again, if you have a question, please press * then 1 our next question will come from our on with JPMorgan Chase, please go ahead. Yeah, good morning with JP Morgan good good morning, Bill and team. Let me start with you. I know that you reduced your cost targets. I think your previous, you know Outlet, or less than 650 afoot now. It's down to 600. Can you talk about some of the drivers of that lower-cost objective? I know you mentioned the the double zipper fracs, maybe the lot of links but maybe one and understand a little bit more about what's driving the lower cost per foot, you know Outlet.
yeah, so you hit on a
Bunch of them. I mean our lateral length continues to grow and our ability to effectively execute on those longer laterals continues. And so that's a component. We had seen some supply chain deflation in our go-forward cost. And so that's a small piece of it also and then the the innovation in the efficiencies around finding ways to do the jobs quicker where they end up costing less and looking out for every efficiency around the the whole completion and the drill inside and the facility side. We're doing prefab of facilities off-site so that way we can standardize the facilities and lower the cost there. And then when we bring them on location the Hook-Up is much shorter and much more cost effective birth.
It's really continuing on the momentum of keeping looking for ways to to bring those costs down in our team is motivated around that and they keep finding a great great and just to kind of a broader question around the Appalachian. Basin is a whole. You know, one of the things that has been brought up by some of your peers is just as an industry in talk about caught tier-one industry inventory. Pardon me exhaustion. And so I was wondering Bill maybe you could just talk about, you know from your seat as what your thoughts are on, you know, tier-one inventory what's left for the industry and and and including for southwestern. I think it's it's a a great question and I kind of look at it like this tier-one inventory declarations made years ago are suddenly change.
As as we can do more achieve more developed more and get more out of every everything we do. We've got fifty-seven trillion cubic feet of resource all around with our business just added a bunch of reserves from that through additional study additional performance lower-cost etcetera. And so I think that the the opportunity the belief that tier-one inventory is running out or or the people catch those stones on one another just out of some kind of competitiveness. We we just don't we we believe that focusing on extending the tier-one inventory. We have we talked a bit about dual Target Wells and and our Utica acreage all very primed tier-one inventories with trade-ins of cubic feet of of resource that we actively work to convert to reserve.
So we're not in a place where we're running out. We're and we're we're at
Actually in a place of of increasing and driving again driving resource to reserves and driving improvement in any of our our areas and Thursday through all the Innovation and the operating capability that we have.
Great. Thanks a lot.
This concludes our question-and-answer session. I would like to turn the conference back to Bill way for any closing remarks.
Thanks, Matt. I appreciate it and closing. I just I want to to hope that you got a flavor for the incredible Innovation commitment out performance by a team of incredible people working some very very strong Assets in Appalachia. And there's more to more to come we've set up Twenty-One to be a a very very exciting year full of anticipated Records full of of of taking the company forward. We remain focused on the operator in financial side of the business, but the core values of of looking after the environment looking after safety looking after the communities where we work and live aren't just a paragraph send a note, but they are who we are and will continue to to play about leading role going forward. So thanks for everybody for their time. Thanks for the questions and the interest in Southwestern dead.
And we look forward to catching up with you in person down the road. Have a great weekend.
This concludes the southwestern energies fourth quarter 2020 earnings golf you may now disconnect.