Q1 2021 Range Resources Corp Earnings Call
Welcome to the range resources first quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise statements made during this conference call that are not.
Historical facts are forward looking statements such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward looking statements. After the Speakers' remarks, there will be a question and answer period at this time I would now like to turn the call over to Mr. Late Sando Vice President Investor.
Relations at range resources. Please go ahead Sir.
Thank you operator.
Morning, everyone and thank you for joining range as first quarter earnings call.
Speakers on today's call are just Ventura, Chief Executive Officer, Dennis Degner, Chief operating officer, and Mark <unk> Chief Financial Officer.
Hopefully you've had a chance to review the press release and updated Investor presentation that we've posted on our website.
You'll find our 10-Q on range its website under the investors tab or you can access it using the SEC's Edgar system.
Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures.
For additional information, we've posted supplemental tables on our website to assist in the calculation of EBITDAX cash margins and other non-GAAP measures.
With that let me turn the call over to Jeff.
Thank you Lee and thanks, everyone for joining us on this morning's call.
The first quarter of 2021 solid range made continued progress towards our key strategic objectives.
Moving margins through cost controls and thoughtful marketing.
Generating free cash flow enhancing.
Liquidity and extending our maturity profile.
Operating safely and efficiently Ulf.
Ultimately positioning the company to return capital to shareholders is the most efficient natural gas and NGL producer in Appalachia.
I'll touch briefly on each of these before turning it over to Dennis and Mark to cover in more detail.
I'll start with unit costs and margin improvements range as unit costs for the quarter were right on track and ahead of our expectations with G&A.
No.
Exploration expense and production taxes coming in at the low end or guidance and expectations.
Additionally, we reported a significant gain in our marketing activities for the quarter.
As expected <unk> increased versus the prior quarter, but was more than offset by the significant improvements we saw in NGL and natural gas realizations, resulting in the vast improvements to range as margins.
In fact range is unhedged realized price for the quarter was approximately $3 20 per Mcf.
Which was 51 above the Nymex Henry hub equivalent price of $2 69.
This premium to Henry hub as a result of our diversified marketing portfolio and liquids production.
This liquids uplift improves margins and reduces range is breakeven costs when compared to producing only dry gas.
That range is pre hedge margin improved by over $1 per Mcf in the first quarter when compared to the 2020 average.
Given the improved fundamental backdrop for natural gas liquids with approximately 65% of our activity in the liquids rich window. This year range is very well positioned to continue to benefit from this dynamic.
During the quarter range was also able to benefit from improved daily prices in the natural gas market. Realizing a natural gas differential that was <unk> <unk> better than the midpoint of guidance only partially offset by higher transportation and fuel costs again benefiting margins and cash flow.
On the back of this improved pricing range generated $193 million from cash flow from operations before changes in working capital and with capital spending coming in at just $105 million for the quarter range generated solid free cash flow.
As shown on slide 14, we expect us to continue with significant growth in EBITDAX this year versus last.
When combined with absolute debt reduction this organic free cash flow generation puts us well on our way towards our longer term balance sheet targets.
Touching on the oil and capital investment of $105 million on the quarter. It is clear that the team's operational execution was superb and we continue to find ways to lower costs. Once again, leveraging our large contiguous acreage position to find ways to complete the operational plan with peer leading capital efficiency.
After delivering on operational plans below budget for the last three years range remains on track to do the same for the fourth key executive year in 2021.
The operational team safely delivered this capital efficient plan with an eye towards our long term environmental goals.
Range closed out 2020 with class, leading emissions intensity, reducing greenhouse gas emissions intensity and putting us right on track towards our 2025 goal of net zero.
As we strive for this goal it all starts with efficient operations that minimize our operating footprint and importantly generates competitive returns.
We believe range has peer leading capital efficiency and maintenance capital are key differentiators amongst peers.
As we've discussed in the past range as large blocky acreage position affords us operational and financial efficiencies on multiple fronts, including water recycling infrastructure rig mobilization and equally optimization just to name a few.
Dennis will cover a good example of how this combination of these benefits benefit range from both an ongoing development and corporate returns standpoint. In addition to strengthening our environmental efforts.
When combining our low well costs strong recoveries from shallow base decline of under 20% range is operating at a high level of capital efficiency that provides a solid foundation for generating sustainable free cash flow.
What further differentiates range is our ability to deliver this level of efficiency for an extended period of time, giving our multi decade port inventory.
For some added context on our inventory range is turning to sales approximately 60 wells. This year, but we have approximately 2000 Marcellus locations with yours that are greater than two bcf per thousand foot of lateral <unk>.
The average recovery of these wells is very similar to the wells range has turned to sales for the last several years, providing range and unmatched runaway of high quality wells thats measured in decades.
This is not the case for many of our peers, which we believe positions range as well as any upstream company to benefit from improving commodity price environment over the medium and long term.
Before turning it over to Dennis and Mark ill, just reiterate that range remains committed to sustainable free cash flow over time, we believe range will stand out amongst peers as a result of our low sustaining capital competitive cost structure marketing strategies, and importantly, our multi decade inventory life, which will be.
Increasing competitive advantage in the years to come as other operators exhaust their core inventories.
We will continue to focus on safe efficient and environmentally sound operations.
Capital allocation and generating sustainable returns to shareholders.
Importantly, these are all reflected in our updated compensation metrics that can be found in our most recent proxy statement.
We have also been summarized in our company presentation, demonstrating the alignment of our incentive programs with shareholders as we seek to continue our steady progress towards key initiatives over to you Dennis.
Thanks, Jeff.
When we communicated the operational details for our 2021 program. Our framework was built around improving both operational and capital efficiencies.
Enhancing margins all while striving to further improve our environmental and safety performance.
As we look at our first quarter results. Our operating teams are off to a strong start delivering on our objectives for the year.
Beginning with Q1 production above our communicated guidance and capital spending in line with our 2021 plant.
First quarter capital spending came in at $105 million.
Or approximately 25% of our 2021 program budget.
As we discussed on the prior call our capital spending program is front end loaded for the year.
And as a consistent approach with previous years.
As we look forward, our second quarter capital spending is expected to be approximately one third of the annual budget for the year, mainly driven by activity timing for completion and turn in lines shifting to Q2.
The reduced capital investments in the second half of 2021 are aligned with our activity cadence reducing to one drilling rig and one frac crew during the third and fourth quarters.
Our first quarter production level of 2.08 Bcf equivalent per day was a direct result of recent strong well results combined with exceptional field run time for the quarter.
Due in large part to the near flawless winter operations planning and execution by our production operations team.
Underpinning, our first quarter production, including turning to sales 16 wells spread across our dry wet and super rich acreage.
Our Q1, turning lines consistent of an average horizontal length in excess of 11500 feet and added just under 200000, producing lateral feet to range as Appalachia assets.
During the fourth quarter of last year through the first quarter of 2021.
Our activity shifted towards wells located across our Processible gas footprint.
The results of these turn in lines increased ranges average oil production to a level exceeding 8000 barrels per day in Q1.
And has increased overall liquids production in similar levels seen during the first half of 2020.
This level of wet production contribution is expected to continue through the end of this year with second quarter production projected at approximately two one bcf equivalent per day.
This will position us to achieve our 2021 maintenance target of $2, one five bcf equivalent per day.
Through additional margin enhancing liquids production, while spending $425 million or less.
Shifting to our operational highlights.
During the first quarter 15 wells were drilled across our dry wet and super rich footprint.
Four of these wells are in the top 20 lateral lengths for range as Marcellus program history, with all foreign exceeding 17800 feet.
Drilling efficiencies continued with nearly three quarters of the new wells drilled on pads with existing production coupled.
Coupled with a 5% increase in daily lateral footage drilled compared to 2020.
On the completion side 16 wells were completed during the quarter.
Overall the team completed just under 1200 frac stages, while setting a first quarter winter operations efficiency record by averaging over eight frac stages per day.
This efficiency level exceeds range as previous best first quarter in our winter operations record by 14%.
The water operations team built upon prior water recycling successes by utilizing nearly 2 million barrels of third party produced water first.
First quarter record.
And as a result reduced overall completion cost for the quarter by more than $4 5 million.
Despite cold weather conditions in heavy snowfalls the team produced some of our best operational results in our program to date.
All while keeping safety and environmental performance at the forefront.
Lease operating expense for the first quarter was consistent with our prior year's Appalachia level and remained low at nine per Mcf equivalent.
Achieving this low level is in large part due to a well coordinated proactive winter operations plan with the objective of minimizing weather related production impacts and associated costs.
These efforts generated a field run time that exceeded 99% with a weather related production impact of less than half a million cubic feet per day for the quarter of.
A remarkable achievement.
Looking at the operational successes and milestones achieved during the first quarter involves a focused continuous improvement approach and it's anchored by four key areas.
Range is water recycling program.
Long lateral development.
Utilization of existing infrastructure.
And lastly, optimize use of drilling and completions equipment.
Each of these are key drivers in delivering on our operational and capital efficiency and our integrated part of achieving our ESG or more specifically our environmental objectives.
We all can touch on the benefits each of these bring to our program ranging from a reduction in operating costs <unk>.
Efficiency gains.
Minimizing our environmental footprint and reductions in emissions.
Today, I'd like to take a moment and walk through how these four strategies are being implemented by our operations and support teams along with the positive impacts.
I'll use three of the wells that were turned to sales in the first quarter as an example.
These three wells were drilled on an existing surface location with producing wells that were originally developed and turned to sales in 2013.
The average lateral length of the original wells was just over 3000 feet per well.
In Stark contrast, the average lateral length of the new wells as nearly 16000 feet per well.
More than five times longer.
No additional earth disturbance was needed for five times, the acreage development and no additional production gathering and processing infrastructure was required to add these new wells.
To put this into perspective range has close to 250 develop pads in southwest PA.
And as of today, we've returned to 84 of these locations to drill additional wells.
Additional wells are planned for these same pad sites along with the approximate other two thirds of range as pads that we've yet to return to for added activity.
Simply put we're only scratching the surface of this opportunity.
The three new wells were completed late last year, utilizing our contracted electric fracturing fleet, which displaced 470000 gallons of diesel fuel.
This reduced our cost by approximately $300000 per well along with large reductions in associated emissions.
40% of the water used to complete these new wells was recycled water from range is producing wells along with third party water sourced from our water sharing process.
The balance of the water was pumped from our water pipeline network, which was installed nearly a decade ago.
Further reducing emissions associated with truck traffic by more than 13400 truck trips.
The average initial production of these wells exceeded 44 million cubic feet equivalent per day, including more than 9700 barrels per day of combined condensate and natural gas liquids per well.
<unk> them in the top tier of wells in our Marcellus program history.
This is just one of many examples we could share from our development during the past several years with results such as this.
These efforts have underpinned, our operational efficiency gains and give us confidence in the durability around keeping our drilling complete costs below $600 per foot.
All while achieving our environmental goals and producing best in class wells.
These benefits highlight the importance and value of having a high quality contiguous acreage position.
And forward thinking technical team.
Before moving on to marketing I would like to touch on ranges environmental and safety performance.
To further reduce production facility emissions in 2020 range transition to a quarterly leak detection program doubling the number of inspections conducted.
As a result of this increased inspection frequency and additional 7400 metric tons of Cotwo equivalent emissions was removed from our program.
Resulting in a 67% reduction for those related components.
This effort along with the continued advancements in our production facility design and utilization of an electric Frac fleet has resulted in further reduction in ranges reported emissions, reaching a new low <unk> equivalent level.
This level of performance is competitive with any natural gas play in North America and puts range in an enviable position globally.
Consistent with our environmental results range of safety performance saw similar improvements delivering an over 30% improvement in recordable incidents for the quarter, which was the best Q1 performance versus the prior five years.
Switching to marketing.
Range as NGL and condensate business benefited from a strong first quarter.
Market prices improved across the board and our advantage portfolio of contracts enabled range to capture premium pricing and a pre hedge NGL realization in Q1 that was the highest level since late 2018.
The primary driver for improved pricing across both Ngls and condensate was strong demand in a market that saw decreased supply.
Preliminary results for U S propane and butane or LPG revealed at Q1 2021 domestic demand was 13% higher year on year, while supply decreased by 4%.
Similarly condensate supply in the northeast is estimated to have decreased by 15% to 20% year on year.
As a result of these improved fundamentals the market average NGL barrel price improved significantly during the quarter.
At $24 83 per barrel range as Mont Belvieu equivalent barrel was up 38% over the prior quarter and 83% compared to the first quarter of 2020.
Propane prices led the way.
Increasing nearly 60% versus the prior quarter and 140% versus Q1 of 2020.
Additionally range as premium to our Mont Belvieu equivalent barrel increased by approximately $1 50 per barrel versus the prior quarter.
As range realized as highest premium to Mont Belvieu in company history.
Looking forward, we see propane and butane market prices continuing to post strong year on year gains as storage balances of these ngls are much tighter relative to last year.
This past winter propane posted its largest seasonal withdrawal in well over a decade, leaving into March propane stocks at a 33% deficit to last year and a 17% deficit to the five year average.
Given the strong international demand that we're seeing with new chemical capacity coming online and recovering global economies. We believe it will be challenging for propane to replenish stocks to a comfortable level by fall.
As a result, we expect propane prices to transact at levels at or above 60% of WTS crude this fall and the upcoming winter.
On the commercial side beginning April one range entered into a set of new and diverse LPG export related contracts. These contracts will add flexibility reduce cost and further enhance realized propane and butane prices continuing range as momentum of achieving strong price premiums.
Relative to the market.
Finally, we continue to optimize range as condensate sales portfolio by adding flexibility improving margins and assuring product placement.
As this year progresses and optimization continues to be a diverse set of counterparties, we expect that our condensate differentials to <unk> will continue to improve further.
Further benefiting our liquids area development plan discussed earlier in the call.
On the natural gas side cold weather during mid Q1 equated to the third coldest February when looking at the past 10 years.
And despite milder conditions in both January and March Q1 gas weighted heating degree days finished slightly above the five year average.
Through utilization of our diverse transportation portfolio Q1 resulted in a differential of 14th under Nymex, including basis hedges.
Looking ahead, we see potential for additional positive improvements for natural gas pricing.
Given that a high percentage of operators are targeting maintenance production levels. This year, coupled with year over year improvements in storage the.
The fundamentals point toward an under supply of natural gas market.
Within this constructive outlook for natural gas range is on track with its differential guidance of 30% to 40 for the year.
As we close out our operations and marketing updates the first quarter results clearly reflect our operations are off to a strong start for the year with.
But the team further building on our operational and capital efficiency performance, all while delivering on our environmental and safety objectives.
Now I'll turn it over to Mark to discuss the financials.
Thanks Dennis.
Consistent delivery on stated objectives.
That is range of fundamental strategy.
And as you heard from Jeff and Dennis something the team successfully executed during the first quarter.
Efficient operations delivering production.
Efficient drilling and completions activity with capital spending trending in line to better than budget.
And bind with margin enhancing expense management, all resulted in significant free cash flow.
Our ultimate goal is to repeat this quarter in and quarter out.
Results for the first quarter reflect the benefits of reliable operations productive wells and diversity and sales points for natural gas natural gas liquids and condensate.
Cash flow from operations before working capital was $193 million.
Compared to $105 million and capital spending.
Significant improvements in free cash flow compared to past periods were driven by a 50% improvement in pre hedged realized prices per unit of production versus the prior year period, which reached $3 20 per mcf in the first quarter.
This realized price per unit is 51.
<unk> Nymex Henry hub, driven by improved natural gas basis.
And importantly, further enhanced by a 77% increase in NGL price per barrel, which reached $26 35 pre hedge.
Realized NGL price on an Mcf per day basis equates to $4 39 per Mcf a day.
And condensate realizations equate to $8 17 per Mcf a day.
Hence the realized premium to Henry hub.
Additionally range as NGL prices exceeded our Mont Belvieu NGL barrel by $1 52.
Due to our unique portfolio of domestic and international sales contracts.
Margin enhancing focus on unit costs as a constant state of mind for range lease.
Lease operating expenses declined over 40% year over year to nine per unit on the back of consistent efficient Marcellus operations. Despite the winter weather.
And the divestiture of higher cost assets.
Cash G&A expenses declined to $28 million or <unk> 15 per unit in the first quarter.
The decline results, primarily from lower compensation costs of a leaner organization, coupled with targeted value focused spending on day.
Data services safety, environmental and other essential areas.
Cash interest expense was roughly $55 million.
Higher interest expense as a result of our most recent refinancing activity, which dramatically and positively reshaped the debt maturity profile of the company and enhance liquidity.
Gathering processing and transportation expense increased but it is important to keep in mind that this is a positive byproduct of strong NGL prices that resulted in significantly higher NGL margins.
Recall that range is processing costs are percentage of proceeds contracts such that we pay a percentage of NGL revenues as the fee.
Consequently, a fraction of the material higher prices received for Ngls is paid is higher processing cost in that quarter.
For perspective, an increase of $1 per NGL barrel equates to approximately <unk> <unk> per Mcf and cost.
This structure is unique to range in the Appalachian Basin and is a right way risk arrangement that has led to reduced costs for several quarters of lower prices and now continues to drive material margin expansion.
As a result of rising NGL prices in recent months <unk> expense in 2021 is trending towards the high end of guidance. However, this was more than offset by expected higher NGL revenue forecast is at current strip pricing relative to earlier this year.
Turning to the balance sheet range has diligently and successfully manage the debt profile.
That liability management projects reduced bond maturities through 2024 by almost $1 2 billion.
While at the same time, improving liquidity to nearly $2 billion.
During the first quarter, we issued new bonds, due 2029, and the amount of $600 million.
Which combined with the reaffirmation of our facilities $3 billion borrowing base and $2 4 billion in commitments provide substantial liquidity.
And a strong evidence of what we believe is durable asset value.
Cash flows are expected to retire debt maturities in coming years and are backstopped by ample liquidity.
During the first quarter, we called in $63 million in near term maturities of senior and senior subordinated notes.
Closing on the redemption in early April.
There has been substantial improvement in the debt markets and it's evident in the trading levels of range as bonds that both access to and cost of capital has improved.
Future debt retirement is expected to be funded primarily by organic free cash flow.
We will be cost conscious and effectively managing debt retirement, while also being mindful of any potential refinancing risk of debt maturities.
Being opportunistic and bond redemptions as prices and early redemption options become economic.
A risk adjusted basis.
Liability management over the last two years has as expected temporarily increased interest expense.
However, this avoided much higher cost forms of capital that would have diluted shareholder ownership and participation in what we see is a steadily improving natural gas and natural gas liquids business.
While we're proud of the steps taken to date.
Further improving our balance sheet remains a principal objective.
As can be seen in our recently filed proxy levered.
Our leverage metrics have been incorporated into long term compensation criteria with the target of one five times debt to EBITDA or better.
Shareholder value creation through the generation of free cash flow and it's prudent redeployment is our focus.
To be clear we believe this is an achievable goal.
Commodity prices by the end of 2022 ranges leverage is approaching target levels.
On the topic of hedges, we have a glide path or common range in which we add positions over the course of the year.
Within that path, we intentionally moved at a deliberate pace during 2020 as we added 2021 hedge positions.
We plan to follow similar principles, this year, and adding hedges for 2022 and beyond.
By that I mean, we will seek to balance the twin goals of prudently derisking cash flows while not hedging away the improved supply demand balance into backward dated price curves.
Our strategic actions over the last three years have been focused on reducing risk, while maintaining and enhancing the intrinsic value of the asset base.
We believe range holds the largest portfolio of quality inventory in Appalachia.
Exposure to that inventory on a per share basis has been preserved and enhanced by our actions.
We believe steps taken represent material progress in positioning range is a more resilient business.
And as evidenced by first quarter results.
<unk> to participate in improved market dynamics.
Jeff back to you.
Operator, we'll be happy to answer your questions.
Thank you Mr. Ventura the question and answer session will now begin.
I'd like to ask a question. Please indicate by pressing the star key been won.
You're on a speakerphone, please pick up per handset before asking your question.
I would like to withdraw your question you may do so by President <unk>.
Press Star one to ask a question Mark for questions.
Our first question will come from the line of Josh Silverstein from Wolfe Research you may begin.
Thanks, Good morning, guys you mentioned on the <unk>.
Hey, good morning, Thanks, Jeff you mentioned on the 2022 outlook getting down to two <unk> leverage or below there by the end of the year.
You mentioned that the gas price in crude oil price assumption in there can you talk about what youre thinking about from an NGL price assumption standpoint, and should we still be thinking about like the $2, one five Bcf, a day and $425 million spend.
Alright. Good morning, Josh This is mark I think the best place to references slide 14 in the deck to talk through some of the points you just made.
As we've laid out to illustrate the cash flow generating ability of the business and the follow on the deleveraging power business as it stands today. There's a chart in there as you point out gets us to or below three times leverage by the end of this year at current strip pricing.
And if you assume a 285 natural gas $60 oil price for next year, which is really just from moving the backwardation of the curve. It really is just doing a mirror of this year's curve.
You get to to your point of below two times leverage.
Type type.
Type situation. The NGL assumption is roughly $25 per barrel in other words. If you just look at NGL strip pricing for 2021 that gets you to $24 80 give or take and you're carrying that forward into next year. So in essence, we're not using an aspirational price deck here, we're just trying to mimic 'twenty two.
Looking like 2021, the assumption here in terms of capital is a flat spend at the maintenance type case. There is no further assumptions into additional efficiencies. This is carrying forward with the team is currently on track to achieve.
Okay. Thanks for the clarity there and then.
You had a $1 52 premium on your NGL price assumption for this quarter and I know you bumped up the bottom end of the range, but based on strip pricing in the current.
Portfolio that you guys have any reason to think that we wouldn't still kind of be in that 150 range going forward and then maybe.
Just as it relates to 2022 could you associate can you see that premium from grow next year.
Hey, Josh this is Alan Engberg.
Manage the liquids business for range.
Yes, so we see that premium actually staying quite strong.
As we noted in the call notes.
We've put together a series of new contracts for our export business that diversify our portfolio and the portfolio is pricing in a way that maximizes prices. So we're actually bullish going forward that our premium actually improves.
Hence the guidance that we've offered out there 50 to $2 over at the Mont Belvieu Index.
There is a lot of new demand coming on.
Both domestically as well as internationally you've got.
Organic growth in demand just from.
John.
Economies are opening back up from GDP, increasing.
We totally politico fit on a global basis, and then you've got a.
A large amount of just new capacity for consuming Ngls coming online for propane in particular, you've got about 125000 barrels per day of new PTH capacity coming on in Asia.
You've got new LPG crackers that will add about another 50000 barrels per day.
Two global demand.
For LPG.
Then in 2022.
And the question we've got even.
<unk> continues we've got about another 110000 barrels per day.
New PVH demand still coming on.
In North America, as well as in Asia, and probably about another 25 to 30000 barrels per day.
LPG demand from new steam crackers.
So all in all we're pretty bullish on the demand side and from the supply side, we still see things.
Kind of flat. This year, you might have marginal growth. Although a lot of people are still predicting that we will have a reduction in C III plus supply.
And similarly in 2022, we might have marginal growth but.
The balances that were looking at all point towards a much tighter market going forward and that will add to demand from the products or the U S and <unk>.
Given again the portfolio of contracts that I mentioned that we have as well as our access to the export docks and two some real good customers leads us to believe that.
<unk> will continue to be quite strong.
Got it thanks, Thanks, guys.
Thank you. Thank you.
Our next question comes from the line of Neil Mehta from Goldman Sachs You may begin.
Thanks, guys.
First question building on the NGL fundamental question is any incremental color you can provide on LPG demand trends in Asia, which seems to be an important part of driving that part of the barrel.
Any more details you can provide on the LPG contracts that you announced here that could enhance your LPG pricing.
Yes.
Sure Neal this is Alan again.
So in Asia I believe this year there is five new PD H units coming on line five or six one of them is in Vietnam. The rest of them were all in China.
So.
Break there so we were saying thats about 125000 barrels per day.
Incremental demand from those <unk> units.
Now there were new <unk> units added last year that we're still in the ramp up phase near the end of last year that add to what I would call the organic growth that we're seeing so there is.
Strong growth from new capacity coming on.
As well as if you look at the chemical chain.
From you go from propane, let's say in a.
International steam cracker to ethylene and propylene polyethylene and polypropylene polymers actually are in short supply globally.
And as a result, the margins throughout that chain have increased significantly which gives good upside for in feedstock prices.
But.
With economies coming back online.
There is some inventory replenishment that needs to take place as.
And as well as there is just going to be big GDP growth.
Thanks.
Most analysts are forecasting so with those two things I think the pull is going to continue to be very very strong from the existing installed base of capacity around the world as well as that new capacity that we pointed out.
On the new contracts really.
Can't say too much more about them except for oil.
We had a big contract that expired.
Recently, and it gave us the opportunity to put new contracts in place debt.
Really add to our flexibility.
And add to our capability to generate strong premiums relative to Bellevue and again that supports our view.
Having one of the highest premiums to belvieu out of any producer.
And that 15% to $2 per barrel range.
Thanks, guys and then the second question is more of a big picture one I would appreciate that your latest thoughts on industry consolidation among the gas producers do you see opportunities for range to optimize the portfolio either by selling assets or improving leverage through through acquisitions here.
Well, maybe we'll double team. This one I'll start and then turn it over to Mark.
Yes, I think generally speaking you've seen some industry consolidation on the gas side and I won't go through the transactions that occurred last year, but we don't know what they are.
A few of those werent in Appalachia, whether they were corporate or asset.
Purchases, but it was consolidation.
I think generally speaking I think youll continue to see that with time.
And then to the extent it makes sense for range.
John.
We will consider whatever is best for our shareholders, but in terms of us consolidating clearly we have a high hurdle rate and a high bar that we looked at what happens to be in basin accretive the free cash flow per share deleveraging allow us to maintain our peer leading capital efficiency on decline rates. So.
We will be extremely disciplined we're fortunate in that we have as we've said decades of the port inventories left to drill. So we can stay focused on that but if there's something that makes us a better stronger company that checks several boxes. It's something we would consider mark do you want to add to that sure sort of joining add onto that.
Taking a step back to what your rationale and your motivation is for either divestiture, where consolidation first on the divestiture side are you trying to raise capital simply to redeploy that capital into better assets in other words, your hiving off lower quality assets I would say range has done a pretty thorough job of that over the line.
Several years.
And further we've reduced debt by $1 billion.
Near term maturities zero this year $200 million next year $500 million or so of the year after that ample liquidity ample cash flow. We fully expect so then you get to not just a nice to have but you would also cover the need to have there is no need to sell assets at what today, which I would suggest is a.
A less than optimal price from what our high quality assets in the range of portfolio northeast, Pennsylvania, The Lycoming County assets, specifically is a good cash flow generating asset for us its got good potential going forward. So.
Going back to the points, we made earlier on a previous question with the deleveraging trajectory of the business again, we're not in a position where we're forced to do anything.
Can stay focused on doing what is most economic for our shareholder and per value creation.
So that takes you what's been a nice to have whats going to drive the most value to Jeff's point, there's a pretty high bar.
But we do maintain financial and operating models on assets around us that makes it that we do a deep dive into these to see what could accelerate deleveraging what could reduce.
Unit costs, what could expand margins make a bigger business overall reduce the cost of capital for the business. So as we look at that and we also consider what the potential impacts of <unk> <unk>.
Given the range of depth of inventory that is really unrivaled.
All of that is to say, it's something we monitor.
Something will continue to be certainly open to and evaluate but.
The other motivations for M&A.
<unk> frequently are to backfill your quantity of inventory, which we don't need to do to improve the quality of your inventory again range does not need to do that.
To fix the balance sheet I think we're on the right path and we'll continue to work very hard to move that forward as fast as we can.
So again those boxes are pretty well checks from Alaska, just to maximize value for shareholders again, we're open to that and we will continue to examine it but I think the punch line here is as possible. It's a high bar, but we've got a great path.
In front of us as we're currently operating.
Thanks, guys.
Thank you. Our next question comes from the line of Kashi Harrison from Simmons Energy you may begin.
Good morning, and thank you for taking my questions Jeff.
Dennis.
A quick clarification question did you say the lower capital in Q1 was mainly driven by timing shifts into Q2.
Or are you seeing some improvements in capital efficiency that could bode well for 'twenty one capex.
Yes. Good morning. Thanks for the question I would say, it's a little blend of both we continue to see further improvements in our efficiencies I'll start from that standpoint. The teams made great progress I think when you look at just the scenario that we tried to walk through.
And from a water recycling to drilling some of our longest and most efficient laterals. It's all translating into further improve costs. So we continue to see really good progress that we're proud of.
The board and further.
Staying below a $600 per foot cost structure type level.
On the other side, though we do have some some turn in lines and a small amount of activity that would have shifted into the early parts of Q2, it's just a function of bleeding over from one quarter of reporting into another.
And on top of it we tend to push some of our activity into we'll just say more favorable weather timeframe. So.
Stuff that ultimately is like road work as an example difficult to do road work in the northeast when it hits.
It's freezing temperatures outside so youll see a slight uptick for Q2, but it still will be very much aligned with our efficiencies that we've captured and also in line with we'll just say some seasonality, but really off to a really good start and look forward to seeing what we deliver for Q2.
Got it got it very helpful.
And then my second set of questions are from Mark I was just wondering how should we think about changes in working capital for 2021 and then.
For them guys like us as there is simple rule of thumb that we can think about some model changes in working capital on a go forward basis, maybe based on balance sheet amounts at year end.
Somehow from working capital would be great.
Sure happy to.
Thank the change in working capital, obviously, a draw of about $77 million in the first quarter, but it's really fairly simple when we peel. It back so let me try to break it down into.
To two pieces.
<unk> prices went up from accounts receivable went up.
The month of March as build within days after months closed and you've collected by the 25 months. So by definition higher prices youre going to have a little bit of a delay in that cash coming in the door.
To pay off net accounts receivable, so about $33 million so half of the working capital draw is simply due to higher prices. So to your question is there a rule of thumb.
Kind of have to map each company, a little bit, but if prices go up theres going to be a working capital draw and accounts receivable prices go down you're going to have that comes back in.
On the other side of the balance sheet accounts payable and accrued liabilities was in line.
Yeah.
With a net $40 million.
Drop half.
After that we've talked about that's the retained midstream liability.
So there is $20 million the other relates to some periodic annual payments. There are certain expenses you pay in a single lump sum over the course of the year, the Pennsylvania impact fee for example, or when annual employee bonuses are paid those are onetime events over the course of the year. So that's the sum total of the working capital change for Q1.
For range.
Again, you just have to look back at kind of some timing some seasonality and the changes in commodity prices as Jeff.
And how those might shape.
Shape for each company over the course of the year.
Sure.
Got it so the message here is that as we looked at Q2 through Q4.
You probably are not going to see that magnitude of a draw as you saw in Q1.
Sales.
Well, it's going to it'll reverse youll have the revenue coming in absent price is running further on us which would certainly be a welcome.
<unk>.
There may be small one off payments again annual expenses that go out but no we wouldn't expect the large law.
Large one off draws like this to be a recurring seasonal.
Seasonal it's lumpy periodically but by definition working capital turns on you.
It comes back in over time.
The point I would make is for.
The one off payments like impact fee or again employee bonuses those sorts of things those are expense and accrued over the course of the year. So as you look at our unit costs Thats already been accounted for those these are not incremental expenses to add to any sort of breakeven calculation and we've obviously talked through the retained liability and that's just the roll off of what was it.
R&D expense already accrued.
Helpful. Thank you.
Thank you.
Our next question will come from the line of Scott Hanold from RBC capital markets you may begin.
Thanks, Good morning all.
If I could maybe ask a question on the capital spending can you give us a sense of like where your well costs per foot are right now I think your guidance for the year somewhere in that $5 50 to 575 are you sort of add at that range or and can you give us a sense of where within that range you are in.
Also as part of that what are the.
Service cost trends that Youre seeing is there any kind of pressure that you are feeling at this point or is it.
Somewhat benign.
Yes, good morning, Scott I'll start with the service costs, and then maybe double back to the capital spending from a service cost perspective, we go through a really thorough annual bid process with all of our service partners a lot of them that we are using actually today, our service providers that we've been partnering with four for.
A number of years you could say in some cases.
A decade.
So part of that.
That process is providing a trajectory of what activity, we'll have in the upcoming year and allowing those service providers to secure their goods and materials.
Also resources to make sure theyre going to help us deliver on the program. So we've locked in our prices.
Very nice way, we have seen some small fluctuations most of them have been really small and not impactful to our overall cost structure steel is a good example of that I mean, clearly we're seeing some movement across the sector. When it comes to steel prices that represents around 5% approximately of our total cost and as we.
We've talked about I think in our in our prior call. We actually were able to secure casing for the first six months of the year and our tubular goods insulating us from some of those pricing increases is really nice, especially as you think about our program being front end loaded and further managing any risk around that when you couple that with the efficiency gains that.
The team continues to capture and again I'll reference. The example that we walked through in the prepared remarks.
Our ability to further improved and get to that $5 $75 50 kind of range that you referenced is truly due to a multi disciplinary approach and multiple aspects hits the water recycling, having the ability to re utilize.
Part of our buried infrastructure that has been with us for a decade.
Long with just efficient truck traffic use.
Recycled water to our sites, we're drilling our best wells from a efficiency standpoint, and are as I touched on in the prepared remarks, our Q1 Frac efficiencies reached an all time high.
We still had some cold weather and snow as everyone knows on the call. So we're continuing to see that we're on a great start again for the year to meet these numbers and beat them.
So we will keep pushing through the year, but it's a little early to say that we're going to be significantly below or provide any additional guidance at this point, but we really see good strong efficiencies and we feel at this point, we've managed through the service cost pressures pretty well.
Okay, I appreciate that and just to clarify again the.
Target range, you gave of $5 50 to 575 are you within that range right now.
I think it's fair to say that our guidance is unchanged.
Okay fair enough.
Thank you for that.
And just a high level strategic kind of question. Obviously, you discussed how natural gas is in a better position at this point in time this year as well as NGL volume or NGL supplies.
Which obviously makes you more constructive on the outlook.
Strategically how do you look at this in terms of like how range reacts I mean, obviously.
The gas producers like some oil producers are taking more of a disciplined approach, but if we are getting paid on some of those inventories heading into the winter certainly that creates a little bit of tension, obviously upside to commodity prices, but there's also a need to make sure there's ample supplies.
<unk> been a very cold weather occurred. So can you just give us a sense of how do you balance that with we're going to stay disciplined need to get that down but at the end of the day the market may need some supplies and so how do you prepare for that.
Yes.
I'll start off this is Dennis I think from a from a planning and execution standpoint, we always leave some flexibility within our plan to be able to move back to pad sites with existing infrastructure. It allows us to react when we need to I think last year is a good example of that we were able to move some of our activity in.
A way, where we continue to maximize utilization of our infrastructure.
Some of our dry gas turned in lines, a little bit more forward in the program, especially as we saw in.
<unk> of COVID-19 related.
<unk> on refining along with liquids production and allowed to push those liquids turned in lines later into the year to now be advantage to what we see in the commodity price environment. So the planning team did a really good job. There as you think forward. We are staying the course from a maintenance level program perspective, if you look at where the commodity strip is.
At this point in time, it's really not incentivizing any growth.
So from from our view and I think as Mark touched on earlier as part of the 2022 leverage discussion, it's really about staying the course from a maintenance level production standpoint.
And then seeing what truly materializes for 2022, and how that would change the various scenarios in house that we would run the capitalized.
And all.
Joint Dennis and reiterating that maintenance capital for the time being I think the underlying question or a follow on question could be well then what might motivate the company to increase its capital spending and I'll say that unless range sees a change not only in the price, but the duration of.
That price change persistent change, meaning a change in the shape of the forward curve something 345 years in duration, where you can hedge in.
To ensure the return of and return on capital for shareholders of that incremental capital spending.
And that would occur when there is a clear and persistent supply demand.
Paul on the market for Appalachia to grow production. So we're going to be very disciplined in that respect we're going to be very mindful of both in basin and broader.
Lower 48 market conditions and the fundamental returns on capital to shareholders. We certainly have the capacity we've got the inventory that we can do that but we're focused on harvesting the value of the inventory and maximizing our cash flow with our first priority in the call on cash from range being to position the balance sheet.
We've got a fair amount of flexibility there to operate this business.
Our strong free cash flow environment as we see prices this year and the current strip and you can see the scenario we've laid out for 2022 approaching our leverage targets by the end of next year. So that leads you to.
Again capital redeployment is that the drill bit further return of capital program to shareholders I think as you've got clear line of sight to your target leverage levels and persistent fleet free cash flow that return of capital in the framework range would use that becomes the topic of conversation.
Yes.
I appreciate the color. Thank you.
Scott.
And our next question will come from the line of Noel Parks from Tuohy Brothers May begin.
Thanks, Good morning.
Good morning.
So I was intrigued by.
By your last discussion so.
What we've seen with the strip and how it gets.
It's been pretty apparent.
<unk>.
Beyond the early years.
It's challenging.
I'm not thinking so much about the scenario, where you could see 345 years of strength in the strip it seems.
Pretty resistant to building and that sort of time value into it but I'm thinking more about a scenario where.
Post COVID-19 strong industrial demand.
Have a six month period or one year period, where they.
They were solidly in the threes.
And.
Even if even if the script so as a whole doesn't.
Got huge relief.
I'm curious.
With the success you've had.
In your planning group do you consider a scenario where.
You have.
A limited ramp up for a period of time, and then sort of returning down to your current.
Really fine tuned level of operations, which are a confined number of rigs.
In that scenario you just described what that means to range is just more free cash flow.
Short term objective, we will stay disciplined.
And you've got to remember the wells that are 50, plus year life and granted the NPV is mainly over the first five or 10 years, but to react to six or 12 months signals just means more frequent we won't it will just mean more free cash flow per range.
Fair enough.
And I was wondering.
Do you have any sense of any regulatory loosening, maybe on the state level.
To support.
Okay Alright.
About midstream in particular.
Nat gas as an input to.
Energy generation that is considered green.
Fuel cell hydrogen and so forth is there anything on the state from happening do you think could could indirectly benefit Appalachian producers.
Okay.
I think.
A high level Youll see some constructive things like from Senator Joe mentioned wrote a letter to the President supporting Mountain Valley and the importance of the gas industry clearly matching influential key senator and really the swing Senator at this point, so I think natura.
Natural gas being a cleaner fuel U S as in London supplier, but I think it will be an important part of the <unk>.
Energy transition.
That will occur over a long time, we're well positioned we have slides in our deck and Theres a bunch of third party work, but really when you look at emissions natural gas.
Head of the class appellations at the head of the class of natural gas.
And we are in the core about leading the way on the emissions from so I think.
I think it is being embraced again, just referencing senator mansion, but.
There's a lot of people that are supportive of.
Gas in the area of trade unions are very supportive gas.
It actually pull as well in the state it was a key.
Issue in the last presidential election in really both parties supported development of gas in Pennsylvania and in Appalachia.
Great. Thanks, a lot.
Thank you.
Yes.
We are nearing the end of today's conference we will go to David Heikkinen from.
Visors has from the last question.
Your line guys.
And thanks for taking the question.
As I think about your free cash flow is really improving and it sounds like youre offsetting inflation with efficiency. So as you head towards the $550.
Per foot range, and you maintain $400 million.
Capital.
We'll actually get more wells drilled and so I'm just trying to think through Jeff you hit on this efficiency gain that just keeps happening longer laterals that youre moving beyond the $12000 a foot.
Toggle of more cash flow that can come just from the higher level of delivery per well and then even a possibility for a slight uptick in wells with the same number of capital Okay.
This is a longer term thing because I know youre focused on the balance sheet and the $400 million stays should we think about almost like a base level of acceleration that range has blatantly with efficiency.
Well I mean, another way to look at it is back to just generate more free cash flow we could.
The scenario you described.
Sure.
As Dennis and the operational team has done a great job leading.
Lowest cost to drill and complete in the basin.
Historically, it's been getting better a little bit from every year, just means or capital efficiency were already.
Most capital efficient operating in Appalachia allowed us to stay there and I think generate more free cash.
What I would say.
And once you fix your balance sheet.
What do you do with the free cash once you get below the two times I guess.
I guess dividends come in variable dividend or do you the split a little more volumes flow.
Yes, I think Thats a good question and I'll point, you in part to the proxy the changes in executive compensation provide a decent directional sense of what the board and we as management intend to do with this business. So long term performance shares are keyed off of debt to EBITDA that's primary.
Conservative investors these days and hours of course, so thresholds being at or below two times target at or better than one five times excellent being at or better than one times.
What youll see us do is as leverage approaches that two times and you've got clear line of sight to do better than that on a sustainable basis than I think we can be crystal clear with what framework.
And the board approves as far as a return of capital so that I think in this business. It is by definition a cyclical business.
You need some sort of variable component I think the combinations of fixed dividend variable dividend and our share repurchases. Its a mix of those and I think as we again have clear line of sight to being within the target leverage ranges. That's when we'll put something more definitive out there, but the plans that have been discussed by other other.
Juicers makes sense in broad strokes would be some combination of those with some <unk>.
Guardrails, if you will on cash flow reinvestment into the business to give you a sense of.
There is no return to the 20% growth days.
If and when five year curve is above some level that incentivize us from the very low single digit growth, which we can do there is still going to be guardrails on that.
Balance sheet.
Return of capital and then sustaining Capex and then some very modest reinvestment, if and only if and when growth is clearly called upon by fundamental supply and demand in the market.
Yes.
Great.
Do you want to call it that.
Three year performance period. It looks like you guys are set up to hit you hit your one five times pretty pretty reasonably soon.
If you can get to one times net 200% payout looks pretty appealing so good luck.
Yes.
Thank you.
Thank you. This concludes today's question answer session I would like to turn the call back over to Mr. Ventura price.
Closing remarks.
I just wanted to thank everybody for taking time to listen to the call. This morning and from the people that ask questions feel free to follow up with additional questions. Thank you very much.
Thank you for your participation in today's conference you may disconnect at this time.
[music].
And in June.
Okay.