Q2 2021 Range Resources Corp Earnings Call
This conference call.
All lines have been placed on mute to prevent.
Non noise.
Statements made during this conference calls 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 like to turn the call over to Mr. Laith.
Sando, Vice President Investor Relations at range resources. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining a range of second quarter earnings call.
Speakers on today's call are Jeff 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.
We will be referencing certain slides on the call. This morning.
You'll also find our 10-Q on range as website under the investors tab or you can access it using the SEC's Edgar system.
Please note, we'll be referencing certain non.
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.
Non-GAAP and thanks, everyone for joining us on this morning's call. The second quarter of 2021 solid range make continued steady progress towards our key objectives.
Improving margins through cost controls generating free cash flow.
Operating safely and efficiently and ultimately position.
Turning the company to return capital to shareholders as 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.
Starting with unit cost and margin improvements.
The range is unit costs for the quarter were in line.
Leif our expectations.
As NGL prices strengthened during the quarter processing costs increased as expected as a result of our percentage of proceeds contracts, but this was more than offset by the improvement in natural gas liquids prices, resulting in vast improvements in range is margins in.
Line with flow.
Looking at prices range is unhedged realized price for the quarter was approximately $3.25 per Mcf.
Which was 41 above the Nymex Henry hub equivalent price of 284.
This premium to Henry hub as outstanding.
Italy, when considering seasonality in certain natural gas and NGL markets and it is a result of our liquids production and diversified marketing portfolio.
This pricing uplift from liquids reduces range is breakeven natural gas price and improves margins when compared to producing only dry gas.
Cash in fact range as cash margin of approximately $1 per Mcf for the first half of the year is roughly double where we were last year.
Given the improved fundamental backdrop for Ngls with approximately 65% of our activity in the liquids rich window. This year range is very well positioned to continue to.
A benefit.
In the second quarter range produced $177 million in cash flow with capital spending coming in at just $120 million for the quarter range generated solid free cash flow, despite seasonally weak pricing and the second quarter being the high point of capital spending for the year.
The team.
Did an outstanding job leveraging our large contiguous acreage position to complete the operational plan safely and with peer leading capital efficiency.
As blocky acreage position affords us operational advantages on multiple fronts, including water recycling infrastructure rig mobile.
<unk> long lateral development an E fleet optimization.
When combined with a dedicated and focused technical team with years of experience in the basin. This equates to class, leading well costs and capital efficiency.
And having delivered operational programs below budget for the last 3 years.
Range remains on track to do the same for the fourth consecutive year in 2021.
Taking this level of efficiency and combining them with strong recoveries, a shallow base decline of under 20% a sizable inventory and liquids optionality.
Range has what we believe is an unmatched foundation.
Generating sustainable free cash flow for the long term.
As shown on slide 15 of range as Investor presentation, we see significant free cash flow at strip pricing.
This organic free cash flow supported by thoughtful hedging through the end of this year and into 2022 puts us well on.
On our way towards meeting our balance sheet targets in the near future.
Mark will provide more detail, but at recent strip prices Leverages forecast below 2 times early next year.
The significant rate of improvement in our balance sheet is a testament to the progress we've made reducing debt and improving.
<unk> for cost structure in recent years and now reflects the free cash flow potential of the business.
We are excited about where range is today and equally excited about what the future holds natural gas and natural gas liquids will continue to play a critical role as the world moves towards cleaner more efficient fuels we.
Moving argues that producers who can most efficiently deliver these products to end markets from a cost and emissions perspective will be the most successful and.
And we believe range is well positioned within that framework. We remain ahead of schedule in achieving our absolute emissions reduction targets in our 2025 goal of net zero.
<unk> and our emissions profile is near best in class amongst producers globally.
Importantly, what further differentiate range from peers is our ability to efficiently deliver clean burning natural gas for an extended period of time, given our multi decade core inventory for.
For context.
<unk> 2.
And in 'twenty, 1 activity of approximately 60 wells is just a fraction of our 2000 Marcellus locations with EUR that are greater than 2 bcf per thousand foot of lateral.
The average recovery of these thousands of wells is very similar to the wells range has turned to sales for the last several years, providing a range.
Cash runway of high quality wells, that's measured in decades, and Thats before counting other horizons, such as the Utica point pleasant or upper Devonian.
This type of runway is not found in most natural gas producers and we believe range is positioned as well as any upstream company to generate competitive returns and free cash.
Unmet over the medium and long term.
Before turning it over to Dennis and Mark ill, just reiterate that range remains committed to disciplined capital spending.
Over time, we believe range will stand out among peers as a result of our low sustaining capital competitive cost structure liquids Optionality and.
And importantly, our multi decade core inventory life, which is an increasingly competitive advantage as other operators exhausting their core inventories.
We will continue to focus on safe efficient and environmentally sound operations prudent capital allocation and generating sustainable returns to our shareholders.
Cash flow you Dennis.
Thanks, Jeff.
As we look back on the second quarter all in capital came in at $120 million with drilling and completion spending of approximately $116 million.
Capital spend for the first half of the year totaled $226 million or approximately.
Only 53% of our annual plan.
During our first quarter call, we touched on some of our recent efficiencies driving this capital result.
And we will expand on those during the operations update today.
Looking forward consistent with our activity forecast for the second half of the year.
Over to remainder of our capital spending is expected to taper through year end in.
In line with our activity forecast previously communicated and placing us at or below our all in budget of $425 million.
Production for the quarter closed out at 2.1 bcf equivalent per day.
Our activity resulted in 25 wells being turned to sales.
With 75% of the turn in line activity landing in the back half of the quarter.
Setting us up for higher sequential production for the balance of this year.
Looking back at the quarter I'd like to point out 6 of our Marcellus wells turned to sales.
Sales on an existing pad and the heart of our wet gas acreage position.
Initial development and production on this pad occurred in 2016.
Similar to the example, we walked through during our first quarter call. We returned to this pad to add additional wells building upon our prior technical learnings.
Earnings efficiencies and cost savings.
Initial production rate for 3 of the new wells placed them at the top of our Marcellus program history.
And the pad itself is now range as top Marcellus pad to date based on average initial production per well.
And lastly.
Production from this pad was comprised of approximately 50% liquids from an average lateral length of just under 14000 feet.
And aligns with our liquids marketing results. We will cover later in this section.
Not only does this provide further evidence of the quality and sustainability of our large contiguous.
<unk> acreage position, but it also demonstrates that even after more than a decade of Marcellus development, we continue to optimize and enhanced well performance through technical and operational innovation.
Looking at some of our operational highlights the.
The drilling team operated 2 dual fuel horizontal.
During the second quarter split between our dry and Super rich acreage footprint.
Average lateral lengths for the wells drilled in Q2 was approximately 12000 feet with 5 wells exceeding 16500 feet.
Similar to updates from prior quarters, we returned to pad site.
Rigs are a significant portion of our activity in Q2.
With approximately 75% of our new wells drilled on pads with existing production.
In addition to maximizing infrastructure utilization.
The combination of longer laterals, and returning to existing pads continues to drive efficiency improvement.
<unk> and reduced drilling costs.
As an example in the first half of 2021, we've seen a 10% reduction in average drilling cost per lateral foot versus full year 2020.
Which fell below $200 per foot.
It is improvement such as this that further support our <unk>.
Year to date capital spend and ensuring that we deliver within our capital budget.
On the completion side the team completed 20 wells with a with a total lateral footage of more than 225000 feet with an average horizontal length of approximately 11300 feet per well.
Including 4 wells with lateral lengths exceeding 18000 feet per well.
These long laterals were turned to sales covering the end of Q2 and beginning of Q3.
Driving our second half of year production.
Similar to our drilling results the completions team is capturing continued efficiency.
From longer laterals and cost savings by returning to pads with existing production.
The team successfully executed over 1100 frac stages in the second quarter.
While hydraulic fracturing efficiencies in the first half of the year increased by more than 6% versus the same time period a year ago.
Gains in addition to these efficiency gains our emissions reduction strategies, where advanced by expanding the operations associated with our electric Frac fleet to include electric powered pumped down equipment.
Airline units along with other supporting equipment.
The testing of electrification of additional onsite equipment.
<unk>, coupled with our production facility design and.
And pilot program with project Canary are just a few examples underway to deliver on our broader ESG goals and our emissions target of net zero by 2025.
Water operations, once again exceeded our operational and capital efficiency expectation.
Patients in the second quarter.
Through increased utilization of third party produced water.
The team was able to efficiently utilize just under 1 million barrels of third party water. In addition to range as produced water.
And as a result completion costs were reduced by over $1.6 million for the second quarter.
The continued success of our water operations, along with the efficiencies captured by the completions team has reduced our overall water costs for the first half of the year by just under $7 million.
Or $15 per foot less than cost.
And it represents a 28% improvement in water costs versus the same.
Spectate last year.
Water savings can vary each quarter pending the location of our operations, but.
But generating these types of cost reductions has become a repeatable part of our program.
And it AIDS in our ability to deliver at or below our 2021 drilling complete cost per foot target of 5.
$570 per foot.
Strong field run time continued in the second quarter.
Like the first quarter unseasonable weather conditions threatened to hamper production with prolonged high ambient temperatures and storm events in June.
But the production and facilities teams worked diligently to keep the field.
<unk> running at a high rate with minimal impact to production or operating expenses.
With the winter behind Us lease operating expenses for the quarter closed out at 10 per Mcf equivalent and are projected to remain at a similar level for the remainder of the year.
To complement our operational results.
I'd like to provide a quick update on range of safety performance.
When looking at our key safety metrics year to date, we continue to see improvements compared to the same time period a year ago.
With our team's ongoing dedication to hazard identification and training it has been over a year since our last employee recordable incident.
Year to date this contributed to a total workforce recordable incident rate in line with last year, which.
Which was range as best safety performance in the program history and benchmarks in the top quartile for safety performance among our peer group.
Now shifting over to marketing.
Echoing the theme from our last.
Last call market prices strengthened during the quarter for both Ngls and condensate.
With Mont Belvieu propane prices ending the quarter at its highest level in almost 3 years.
Demand for both Ngls and condensate continues to increase with supply remaining stable.
As a result.
Result of these tightening fundamentals and the corresponding improvement in prices throughout the quarter.
Range as NGL price was $27.92 per barrel.
At $2 and 24% premium to Mont Belvieu.
This represents a record for the highest premium to Mont Belvieu in company history, and the highest quarterly.
NGL price in absolute terms since 2014.
A key driver for the higher premium in the quarter was the new and diverse LPG export strategy that allowed range to optimize its sales portfolio through increased flexibility in product placement and sales timing.
Due to.
The timing of range as LPG exports for the second quarter average NGL barrel was heavier than normal meaning that it included a higher propane and heavier component percentage than prior quarters.
During the second half of this year, we expect strong fundamentals to result in higher absolute prices for domestic propane and butane which should.
Compress our premiums of U S LPG exports.
Coupled with a lighter barrel from export timing and seasonality in domestic sales, we expect lower premiums to Mont belvieu, but improving overall NGL price realizations.
Range as premium NGL differential remains an expected.
Positive 50 to $2 per barrel for the full year <unk>.
<unk> the benefit of our diversified NGL portfolio and access to international markets.
On the condensate side realized price for the second quarter was $57.60.
A differential of $8.36 per.
As expected the condensate differential to Debbie ATI narrowed slightly quarter over quarter and is expected to stabilize near this level for the rest of the year.
As we previously discussed condensate values are primarily supported by continued recovery in demand for transportation fuels as business and personal travel.
<unk> around the world continues to increase to pre pandemic levels.
As we enter the second half of the year and continue into 2020 to.
The value of ranges entire liquids portfolio is strongly supported by both domestic and international fundamentals and range is uniquely positioned to maximize value.
Travel is constructive environment.
Similar to our results in view for liquids positive movement is the theme of the day for natural gas.
During our Q1 call several signs pointed towards the potential of another supplied market.
With operators administering capital and production discipline this year.
<unk> ongoing strength in LNG exports at 11 Bcf per day.
And overall storage levels running below the 5 year average.
And under supplied market has materialized.
Further impacting 2021 pricing and movement and the forward curve above $3 for 2022.
As we look at the second quarter.
<unk> range reported a Q2 natural gas differential of <unk>, 39 center, Nymex, including basis hedges.
Looking ahead, we see potential for additional positive improvements for natural gas pricing and basis with regional storage levels behind the 5 year average.
As we reached.
Year point for the 2021 program.
Our second quarter and year to date results showcase some of our best milestones to date for the program.
Looking at our environmental and safety performance opt.
Operational efficiencies cost and well results.
We will build on these operational results during the second.
The mid year, while delivering our best program yet.
I'll now turn it over to Mark to discuss the financials.
Thanks Dennis.
During first quarter comments I started by saying efficient operations delivering planned production combined with margin enhancing expense management drove free cash flow in other.
The words delivering on stated objectives, which is range as fundamental strategy and something the team successfully executed again during the second quarter.
Reliably efficient operations again delivered planned production.
Our relentless focus on expenditures that drive cash flow in addition to diversity and sales points.
The natural gas natural gas liquids and condensate resulted in cash flow from operations of $177 million before working capital compared to $120 million and capital spending.
Significant improvements in free cash flow compared to past periods.
<unk> by a 100% improvement and pre hedged realized prices per unit of production versus the prior year period.
With realized price per unit, reaching $3.25 in the second quarter.
This realized price per unit is 41 above Nymex Henry hub driven by a 1.
We delivered 18% increase in NGL price per barrel.
Which reached $27.92 pre.
Pre hedge.
Realized NGL price on an Mcf a day basis equates to $4.65.
And condensate realizations equate to $9.60.
100, CFA hence.
Hence the realized premium to Henry hub.
Additionally ranges NGL prices exceeded our Mont belvieu equivalent NGL barrel by $2.24 due.
Due to our unique portfolio of domestic and international sales contracts.
Realizing the.
Per and higher commodity prices during Q2 was possible in part due to a thoughtful approach to hedging.
We maintain our strategy of reducing risk through an active hedge program.
However, hedging too early before prices reached levels estimated is sufficient to support industry maintenance capital could have resulted in the loss.
Loss of significant revenue.
For 2022, we've continued to be balanced and risk management, so as to not hedge away improved fundamentals.
Such that at quarter end and assuming the election of outstanding Swaption range was approximately 40% hedged on natural gas at a floor of $2.80.
<unk> with a ceiling of $3 <unk>.
Ngls are typically hedged on a rolling 3 to 6 month basis, meaning.
Meaning exposure to higher NGL prices in the second half of 2021 was largely retained.
With improving hedge averages by quarter.
As an example.
Range has average swap for condensate production improves by $10 per barrel in the third quarter, while propane butane and natural gasoline averages all improved by approximately <unk> 20 per gallon versus the second quarter.
This hedge book compares very favorably to the industry, allowing range to.
And improved pricing.
Growing cash flow per share, while also accelerating deleveraging, particularly in the next several quarters.
And ultimately cash returns to shareholders.
Margin enhancing focus on unit cost is a constant state of mind at range.
Lease operating expenses remain.
Captured near historic lows at 10 cents per unit on the back of consistent efficient Marcellus operations.
Cash G&A expenses increased slightly to $31 million or <unk> 16 per unit.
The increase stems from 2 line items first roughly $1.5 million related to legal expenses that should tail off next.
Next quarter.
And second what appears to be a temporary increase in medical costs.
Absent. These 2 transitory items G&A spending was in line with the preceding quarter.
Cash interest expense was roughly $55 million flat with the preceding quarter and with reduced debt balances.
<unk> should begin to decline in coming quarters.
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 ranges from processing.
Our from percentage of proceeds contracts.
Such that we pay a percentage of NGL revenues is the fee.
Consequently, a fraction of the materially higher prices received for Ngls is paid as a higher processing cost in the quarter.
As discussed previously an increase in revenue.
<unk> cost dollar 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.
For reference since February range is forecasted NGL realizations in 2021 have increased by approximately $7 per barrel potentially resulting in an increase of approximately $250 million in pre hedge revenue.
Net of price linked processing costs.
Forecast.
<unk> 2021 pre hedge cash flow from Ngls is increased by approximately $200 million since February.
Demonstrating the significant margin expansion from rising NGL prices.
In aggregate revenue improvements stemming from diverse marketing arrangements, coupled with prudent hedging and.
<unk> expense management resulted in cash margin per unit of production expanding to <unk> 93.
Turning to the balance sheet.
As described last quarter near term maturities have been a focus such that we reduced bond maturities through 2024 by almost $1.2 billion.
While at the same time, improving liquidity to nearly $2 billion.
During the second quarter, we reduced total debt by $66 million.
Including all subordinated bonds.
Forecasted cash flows at strip pricing are expected to exceed debt maturities in coming years and are back.
Backstopped by ample liquidity.
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.
<unk> to effectively manage debt retirement, while also being mindful of the cost and benefits of potential refinancing activity.
Liability management over the last few years has as expected temporarily increased interest expense.
Over this avoided much higher cost forms of capital that allowed range to retain.
<unk> per share exposure to growing free cash flow and a substantially improved natural gas and natural gas liquid environment.
Further improving our balance sheet remains a principal objective.
At current commodity prices forecast indicate leverage in the mid 1 times area is achievable in the first half of 2022.
Tangible shareholder value accretion is first being driven by using free cash flow to reduce absolute debt.
As target leverage levels come into sight potentially as early as the first half of next year. The discussion of ranges return of capital framework becomes the logical next step and a balanced macro.
Environment.
The second quarter and year to date results are a byproduct of relentless work by the entire range team being focused on enhancing per share exposure to what we believe is the largest portfolio of quality inventory in Appalachia.
To put it concisely, we believe we are delivering on stated objectives.
We seek to continue this trend of disciplined value creation for our shareholders.
Jeff back to you.
Operator, we'll be happy to answer your questions.
Thank you Mr. Ventura net.
Question and answer session will now begin.
If you would like to ask a question please indicate by pressing the.
Snarky then 1.
If you're on a speakerphone please pick up your handset before asking your question.
If you would like to withdraw your question you may do so by pressing the pound key.
Once again, please press Star then 1 to ask a question.
<unk>. The first question comes from David Heikkinen of Pickering Energy Partners. Your line is open.
Good morning, guys Thats, a thats, a new new sound and a good 1 to me.
Good morning.
I had a quick question as you think through.
Moving next year, you get to 1.5.
These leverage and Youre hedged first question was do you have an ability to hedge any ngls for next year and then as you get down to that lower leverage do you think you continue to layer in this level of hedges or do you flex that down some other companies have talked about a lower level of hedges in 2023 and.
Beyond us as debt comes down.
Good morning, David This is mark I'll start off on that 1 I think with our target leverage levels getting.
Fairly close first half of next year that does certainly open up certain optionality in how we approach risk management.
We have structured.
The business I think taking a step back the portfolio approach to pricing on the Ngls gives us a lot of flexibility there as we've mentioned before the nature of the NGL market and the depth of the derivative market our ability to hedge around that 3 to 6 months, it's been roughly speaking the cost effective approach to not hedging.
Into what is a more backward dated.
<unk> market for Ngls, but again with the portfolio of outlets the variety of contracts and price linkages.
That gives us a lot of resilience in that pricing structure. So in particular.
<unk> ability to move product internationally.
So with that.
Could we hedge out further we certainly can we have different baskets within the physical contracts that give us latitude to do that in various ways and then at a higher level just speaking about the hedging program broadly not specific to Ngls, but as you reduce leverage you certainly have the capacity.
Wally reduce your hedging targets.
It is after all a risk management.
Exercise, it's not a profit center, it's not a training exercise.
So we are seeking to make cash flow more predictable make our operations and resilience of our capital program and the drilling cost per foot and so forth.
Steady and predictable.
A year that the underlying objective the hedging program. So overtime as leverage comes down you could begin to reduce the target hedge levels, where historically when we've entered a calendar year, we've been 60% to 80% hedged.
Hedged.
Reduce that.
Retain some exposure to what.
What.
What you perceive as a positive supply demand I think what you've seen though is while we haven't changed our current targets given the objectives of reducing risk you have seen a slightly different cadence on how we've added hedges we've done it more slowly you stepped into the hedge positions on a year forward and we've used some callers to retain exposure to.
So there is.
Some flexibility on how we've done it while still achieving our desired risk mitigation right now.
Okay, and then you talked about securing cash flows can you talk at all about cadence for activity levels in 'twenty 'twenty 2 is it similar to 2021 or more load level.
Have any.
The ups thoughts as far as how you.
Start off fast and then.
Or do you do more load level activity heading forward as well.
Well I'd say.
Next year, you'll see us at disciplined spending maintenance capital. We don't have the exact details of that yet youll hear more later in the year.
But.
We're just focused on being disciplined maintenance and working on generating free cash and improving margins.
Okay. Thanks.
Thanks, everyone.
Thank you.
Thank you. Our next question is from Josh Silverstein of Wolfe Research.
The early is now open.
Hey, Thanks. Good morning, guys just wanted to touch on a couple of things on the on the NGL side.
Can you talk you mentioned about the barrel composition changing a little bit from heavier to lighter can you talk about some of the flexibility. There and then are there any limitations to you guys selling anymore.
Your line of Ngls into this into this price environment right. Now is are you have everything contracted on a text of the mariner system as possible.
Hey, good morning, Josh This is Alan.
Yeah on the barrel composition.
We took over managing our.
The more that's.
Starting back in April.
It gives us a lot more optionality and flexibility in terms of timing.
Some of those vessels and the savings. So that's that's 1 of the levers that we have to.
And we have access to now that we really didn't have access to before.
<unk>.
Going forward in terms of.
The ability to.
Optimize and take advantage of good pricing in the marketplace.
Yes, we can still do that we've got a fair amount contracted but we do have.
A significant amount of flexibility as well.
For instance on ethane.
We could still pull out.
<unk>.
20000 barrels per day.
If the market opportunity was there we wanted to go after that so there's a lot of different things, we can do whether it's timing of sales.
Propane and butane to the export market or to the domestic market or potentially recovering more ethane.
I guess do you have the flexibility right now if you wanted if ethane prices or then I guess the ethane frac spread allowed you to could you extract that that 20000 barrels a day and put it into the market pretty easily.
I would say yes.
Gotcha.
Again, we're pretty well situated right we've got.
Access to all of the takeaway out of the northeast.
So whether it's the.
1 of the 2 pipelines are both pipelines going up to Sarnia, Ontario, whether its mariner east going to.
International markets apex going down to the U S Gulf Coast.
As well as access to opportunities within.
The northeast.
So all of that gets us net of the capability to move that thing.
Pretty much unencumbered.
The good.
Good news also those from a fundamental standpoint prices are good now, but we actually see them increasing quite a bit as we go on through the rest of the year and into next year. So.
So we're at about I think 33 cents per gallon.
As of this morning.
And.
I would say that by the end of the year.
Given current fundamentals is a good chance it will be touching on 40 per day.
So again, we're going to be.
Patient and smart about how we optimize with typically we could always sell it pretty easily 5000, a day over our existing contracts.
Yeah, Dan Thanks.
For that and then.
Just curious on M&A is as well I know you guys said, the terrible cell last year, but with price strengthening right right now in local price is stronger.
He interest or a pickup in interest in terms of any other asset packages. He may have up in up in Appalachia to divest as.
Air and bring forward those debt reduction efforts.
I guess I'd start off with what's the trajectory of the company today, what is the per share exposure to range of asset base the predictability of the.
Inventory.
On the cash flow.
And exposure to that group.
As a free cash flow per share so I think.
As you look at the motivations and the value creation of much M&A a lot of it you may have heard me.
Oversimplify emanate previously, but a lot of times, its driven by quantity of inventory quality of inventory our balance sheet improvement.
We clearly have quantity and quality of inventory and.
In a great spot for range as far as the balance sheet goes I also believe we are in very good spot approaching target levels in the first half of next year and continuing to improve thereafter with the capacity to return cash to shareholders in the not too distant future so with all.
Is that what is the motivation to do M&A clearly it would have to be.
<unk> enhancing meaning improved cash flow per share improved free cash flow per share, perhaps accelerate some of that deleveraging. There is some potential benefits from size, but size getting bigger for bigger stake isn't necessarily the primary motivator, it's all about.
Per share so it's something we certainly are.
Monitoring we keep an eye on it our goal is always to improve shareholder value.
But it's a high bar given that we have the key objectives.
As as range sits today.
A pretty good line of sight to achieve.
Alright, thanks, guys.
Thank you.
Thank you. Our next question is from Holly Stewart of Scotia Bank. Your line is now open.
Good morning, gentlemen.
Good morning.
Maybe maybe first 1 for Mark I'm, just trying to reconcile to that.
Slide 15, the $1 billion of free cash flow between 'twenty, 1 'twenty 2 at strip I was maybe hoping you could walk us through just how you're defining free cash flow internally and then and then maybe just a highlight for us that the number for the quarter.
Sure happy to do that so.
I think as you look at the updated deck 1 thing to note here is that we're just using strip pricing. So this is reflective of current market conditions whats achievable out there and bakes in our current cost guidance and our current hedge book. So this is reflective of what we believe is reality and our best estimates of 4.
Forward cash flow generation, what we're showing here in the upper right hand side of the chart I think you're focused on.
Absolute debt levels. These are principal levels and ballpark Zip code of what 2.
<unk> 2021 could look like in 2022 could look like again at current conditions hedges and everything.
Fully loaded.
So using current strip pricing for Ngls for gas and oil you get to something close to.
Our model should generate something close to and around $1 billion of free cash flow through the end of 2022, so that would get you.
Running the numbers again.
Cost guidance realized prices you can earn.
But to read EBITDA estimate.
But roughly 2.5 times or better towards the end of this year and mid mid 1 time of day area next year. So this is intended to reflect what actual cash in the door would be and its application to absolute debt reduction.
Okay, Mark I guess, what I, what I was trying to get at least just are you, including that Cary will divestiture contract payment within.
Oh within the free cash flow 1 billion dollar number or is that excluded.
It is included Okay. That's great. Thank you and.
Correct.
Moving on I'm not sure. If this is for mark or cash or Dennis but.
He has beaten your your Capex guide I think at least the last few years and youre sort of trending below that historical run rate I think now you said at 53% in the first half is there something unusual or kind of 1 time that we should be.
We are looking for and in the next couple of quarters is I think according to.
I mean, if we have this right I think you've you've killed about 70% of your your wells already in the first half of the year. So just trying to understand you know or you know.
Is there any color there or you just you know really ahead of your budget here.
Hey, good morning, Holly This is Dennis I'll start off on this 1.
We look at the year part of there's a couple of drivers I think when you look at it both capital and tie it back to a til type assessment and 1 of them is we tried to touch on it a little bit in the prepared remarks today, but we did see 25 wells get turned to sales during the second.
But a big bulk of those around 70% to 75% were later in the quarter. So what though we can count those as wells turned in line because of the completion activity was certainly wrapped up with really the bulk of the production effect is going to be seen through the second half of the year as we continue to produce those wells.
If you were to let's.
Let's just say pushed those by literally a week to 10 day some of those could actually change the numbers by instead of 70%, maybe it's more like 60% to 65%. So we're going to see some of those wells really be impactful to our production profile for the second half of the year and of course. The other thing is as we continue to really see.
Really strong.
Quarter cincy gains by the team whether it's improvements in our drilling cost per foot by another 10% through the first half of the year versus last year's average.
Water recycling, we've reached some new thresholds.
Much not only volume we've moved but the savings that we've been able to capture the team's really been creative has done a great job from the first half of the year.
Long Athene and of course lastly, we've been able to see more completion.
<unk> efficiency gains as well, 6% may sound like a smaller number compared to some of the historical results, but when you start to total that up over a program here that can be lets just say advancing our whole pad for 1 particular month of the year. So.
We like the path, we're on we're on trajectory to be at or below both our capex and our cost per foot targets, but we wouldn't anticipate maybe to hit something directly that you had asked US we don't expect a 1 time event in the second half of the year. We're on track, we expect your cadence down to 1 drilling rig and 1 frac crew.
Really like what we're seeing.
Year cost standpoint, once again.
Okay, great. Thanks, guys.
Thank you.
Thank you. Our next question is from Scott Hanold of RBC capital markets. Your line is now open.
Thank you I appreciate your time could you talk a little bit more about your thoughts around.
Moving from a return plan obviously.
You all have accelerated that leverage reduction efforts and.
What do you anticipate is going to be the discussion next year, if share price is Poland and in part of my question does relate to like where does leverage really need to get to when you guys.
Look to initiate a program are now below 2 times was sort of the general thought, but I know Theres also some long term incentive plans at <unk>.
Certainly biased number down towards 1.5 times.
Sure Scott all very fair questions around shareholder returns I guess I would start with.
The sharing our focus on this has.
<unk> begun through debt reduction do you think about enterprise value into shifting the pie chart, they're shifting the value from the debt holder side to the equity holder side, a $1 billion in debt reduction. So far we also bought back 10 million shares last year.
Very.
With low price, so very accretive for shareholders. So.
Continuing that trend of creating value and shifting more and more of that value to the equity holders side of the equation is our focus further debt reduction as we've talked about already on this call I think.
As you consider target leverage levels the way that was.
From the proxy and the way we have verbally described that in the past are substantially below 2 times, but a little bit more color provided in our proxy wars target 1.5 times. The excellent is 1 times, obviously, we will.
Strive to achieve something closer to that excellent level.
As you have a clear line of sight.
Meaning it's durable it's not just.
A transient situation of the durable condition, so pricing is resilient.
<unk> demand equation, the macro condition still remains balanced or perhaps under supplied to that theres positive skew in the pricing of our expectations of commodity prices.
Those are kind of the preconditions to I think us initiating but as we as we plan out next year with our board. This fall as we get better clarity on what.
Prices are for next year.
Thank you.
It puts us in a situation where perhaps.
Early next year, we could begin to discuss.
The framework, but stepping out of the details for a moment I think the frameworks that have been discussed broadly by the industry largely it makes sense. There is there is some modest base level dividend could be employed this is a cyclical commodity business is capital intensive so you need to have that vary.
Variable component and whether that's a variable dividend or variable share repurchases.
As a matter of economics at the time the share price.
And then as you go download the waterfall of capital allocation.
Then you've already met all of your debt reduction targets.
But that's kind of how we think about it the commodity price environment.
It has accelerated our deleveraging. So this is a discussion item that will be focused on through the remainder of this year and into early next year.
Okay. So just for me to clarify so what I'm hearing is you know obviously you know as you get below 2 times I mean, it's it's a real discussion net there's visibility of that but you you want something durable.
Ideal.
Situation is getting closer 1 budd.
Looking at you know when it's durable around 1.5 times, that's when it's probably can make more sense as it did I hear that correctly.
I think thats, a fair hypothetical I mean again its subject to us working through the budget for next year and Ultimate Board approval.
The plan to be announced.
But I think conceptually that would make sense to think about it in that fashion God and then when you look at your end.
You've obviously not.
The capital budget for 2022, but.
If you could just give just some generalities I think you said 65 per cent of the activity in liquids areas. This year.
Do you anticipate that.
A good way to look at your progression going forward or was there some mix shifts that could happen is as the market share.
Shifts as well.
Yes. Good morning, Scott. This is Dennis I do think the way you're viewing our program in 2021.
Is a very fair way of projecting out for.
2022 could look like when you start to look at our inventory we approximately have 2 thirds of it in our our wet gas acreage footprint, I'll say wet and super rich its process of oil gas and the other third is besides in our dry gas position. So as we look.
Further consider what 2022 would look like it would be moving back into pads with existing production utilizing that existing footprint as much as possible keeping infrastructure utilized at a very very high level and having a similar well mix for 2022 as we would in 2021, we tried.
Leave flexibility, though throughout the program and again moving back into pad sites allows us to let's just say move quickly when we need to but as we look out for the program year anywhere from 12 to 18 months in advance as we're thinking about the upcoming program. We also don't trend over correct. The steering of the car because we know that.
To some regard that could actually be unhealthy for whether it's efficiencies or whatever ultimate goals that we're trying to and objectives. We're trying to deliver on we like the program and it should be similar yes, and so when you look at the existing pads at it it's about the same mixes your inventory about 2 thirds 1 third.
When you look at.
Existing return.
Existing pads is that about the same mix as well as your overall inventory.
I think it can fluctuate no doubt quarter to quarter. If you look at the results we just communicated.
We drilled roughly 70.70, 70% to 75% of our wells on pads with existing production you could actually see in some other quarters that might be less.
But I think on average to consider as being somewhere between 50% to somewhere as much as 2 thirds I think is a very fair approximation on how we'll look at utilizing our existing footprint.
Thank you.
Thank you.
Thank you. Our next question is from Gail Nicholson of Stephens. Your line is now open.
Good morning, I, just wanted to follow up on the transportation obligation in northwest, Louisiana and looks like you guys reported about $28 million reduction in their obligation this quarter and I just wanted to know how should we be thinking about that in the near term impact should we still be assuming that's about a $20 million impact a quarter or is it now lower because of the obligation reduction.
Yes, good question Gail Thank you.
Some estimates of the ultimate liability were updated and the costs are coming in better than originally projected and the $28 million reduction in the NPV of that recorded liability. So over time the marketing team is always looking for ways to improve our infrastructure.
Midstream capacity that we.
Can can influence and that improvement was recorded this quarter I think for coming quarters nearest term for simplicity sake, I would model $20 million per quarter for the time being.
Okay, Great and then do you have any color on the potential contingent payment you could potentially range, Steve in the fourth and the first quarter.
2022 and regarding the sale.
Sure. So there is the capacity to receive $75 million.
Power the current reported asset values in the $30 million range.
The full amount because.
The present value is calculated based on the strip pricing, which is backward dated so as prices roll towards us based on the current supply demand equation.
Might expect and we're very optimistic that a good portion of that full $75 million could roll to us. So the way. It works is it's calculated on an annual year and we would rich.
<unk> the.
The first portion of that potentially during the first half of 'twenty 2 related to realized prices of the assets during 2021.
Great and then just 1 housekeeping question just based on the first half of 'twenty..1 lateral length is it fair to assume that in the second half of this year lateral lengths are going to average over 12000 feet.
I think it would be fair Gail to assume that our lateral length is going to be somewhere between 10000, and a little bit in excess of that.
I don't have the exact average number for the second half year in front of me, but.
Our average program year ended year out runs a little over 10000 feet.
Okay.
Thank you guys.
Thank you.
Thank you. Our next question is from Noel Parks of Tuohy Brothers. Your line is now open.
Good morning.
Good morning.
Hi, just a couple from me.
Looking at how the gas markets have been.
Behavior over the last couple.
And weeks.
We've kind of had sort of a perfect positive storm.
Covid postpones it bounce back in demand.
Hum.
From extreme heat in some of the regions that benefit GAAP.
Hey, great. Most so im just wondering kind of what your current thoughts are on where we're headed.
In terms of seasonality.
Do you think this sort of summary.
Is it going to be looking.
Looking like.
A more of a new normal going I think it's more.
Jeff.
Normal sort of fundamental.
<unk>, we see.
I think the.
Markets have been strong for the reasons that you said and then you add in.
LNG exports have been strong there from 10 up to 11 Bcf per day, we think that strengthens as we go towards the end of the year.
<unk> maybe towards the 12.
Mexican exports.
7 plus Bcf per day, so strong exports.
If you look there's a slide in the back of our deck that shows.
Electricity generation from coal almost a straight line down it's gone from 50 to now 20% of U.
Firstly generation, we think that continues to drop with and you can see on that same chart with GAAP natural gas and renewables have done and gas has taken a significant share of that market.
Storage is below the 5 year average gas as a cleaner fuel.
Producers have been disciplined to shale 3.
No model.
So I think we're setting up for.
Strong natural gas prices for this year as well as into next year.
Great.
Thinking about the service cost side now this is the first quarter in a while where.
We've heard some of the <unk>.
Service producers express a little bit of optimism about what.
What they might be able to do in terms of regaining a little pricing power. So.
Just curious in the in the event that.
Say over the next 12 months, we see inflation.
Significantly higher than in recent years or more maybe than we're all thinking.
Can you just talk a little bit about how that might.
Impact your development plan or or just.
Yeah, how you how you lay out where and when you might you might.
Drilling.
You bet I'll. This is Dennis from a service cost perspective.
Things that we do is we.
We really try and focus heavily both from an operations and technical team on a good quality rollout of <unk>.
Net annual bid process, so that we can secure for.
This.
And year, what our pricing structure will look like as much as possible part of Thats been.
A driver each year in us coming in below our capital expectations and no doubt it's influencing this year as well we've seen some small will say moves and shakes and pricing and I know a lot of you have seen them as well as areas like steel and tubular.
Tubular goods.
But that represents overall, we pre purchased a large portion of our tubular goods at the beginning of the year.
Further helping insulate us from those price fluctuations, but secondly, we also know that at the end of the day. It represents around a 5% a portion of our total D&C costs, so very very small from net.
Net standpoint, as you look forward into it so for the rest of this year, we're expecting little to no price changes at all and anything that we would see are very small in nuance in basis.
And what we would see is that our efficiency gains that we spend time talking about is not only offset it but actually taking our cost further down than what we've.
We had historically so we're encouraged about not only delivering on our well cost projections, but also on our our capital budget, but as we look at 2022 Theres a lot of question Mark still that we'll have to unfold.
And some of it is going to be activity related as we've already heard on the call. There's a lot of operators who are administered both cash.
Capital and production discipline and that will play a role into what kind of pricing structure. We will see for next year I'll point to slide 29, though in our slide deck and just remind everybody that as you look across all 3 areas. There are variations in the cost that we see across our wells, but the economics are strong across all areas and as you've heard Alan touch.
Actually implement NGL perspective, we continue to see really positive uplift both in absolute pricing in our margins as we both look at 'twenty, 1 second half of the year end 2022, So again like the path. We're on will couple all of these things together with a strong bid program again in this upcoming fall.
And operators tend to align themselves with.
Range, because we deliver on our program that we say that we're going to do and efficiencies are really really key oil that meeting some of their financial objectives. So our service partners are important and we're optimistic that we're going to stay on a healthy glide path on cost for 2022 as well.
Okay.
Great. Thanks, a lot.
Thank you. Thank you.
Thank you.
The end of today's conference, we will go to David <unk> with Cowen for our final question.
Thanks for letting me closer to out guys.
I wanted to ask as you think about 2020 to Mark you mentioned before.
Before looking at say, 1 forecasting a $1 billion of free cash.
2 youre going to be sub 2 times leverage in the first quarter.
You guys put in Burbage that range is.
Prepare to return capital to shareholders or potentially could in the near future.
You also talked about.
The cost of capital out there and potentially re signing so I guess, how do we balance all of these things when we think about 1.
Is there an absolute debt number that you think range needs to be working to near term you have some near term maturities next year and then obviously the 'twenty 6 notes are callable.
But you could.
<unk> refi those high cost notes at a very low cost of capital and keep some extra dry powder around to perhaps buy back shares.
How do you guys think about just managing towards those goals.
Yeah, a good question, it's kind of a multivariate equation as we look at how best to apply cash flow.
Could also shortly apply the cash flow so as to not have a negative carry with cash balances on the balance sheet that's non.
A phrase we have heard in a few years.
Having material cash flow balances.
Before a producing company in a while so these are the things we're thinking through to your point where bonds are trading today the.
2000, Six's early next year become callable and clearly we could refinance those at a significantly lower rate saving material interest expense and significantly reducing unit costs on the interest line item as I said during the prepared remarks. It was an expected temporary increase in cost of capital.
They're so higher coupon, but certainly much lower cost than other forms of capital that might have been dilutive to shareholders. So as as we look at 2022 and think about the most efficient way of redeeming that ideally at par or.
If early refinancing on something Thats clearly economic.
Positive savings on interest expense like redeeming. The 26, it's early it comes down to balancing what the upfront costs. What is the early redemption cost of those.
There is a call.
But it's.
It comes with price from price, but the savings are quite compelling.
So those are the things that we're balancing right now I think waiting a little bit longer makes some sense.
As we generate the cash flow, allowing maturities to roll towards us, particularly given the significant work we did reshaping the maturity profile, there's $218 million coming due next year the following year of 5.
$501 million, so again free cash flow should be able to comfortably cover those quite efficiently by paying them off at or close to par just a little bit early then it comes down to the economics of an early refi lock on the 26% for example, so not a specific answer to your question because the market moves every day, both on the commodity prices.
And the capital markets.
You are spot on in terms of the things we are looking at on the financial front and ways of reducing debt efficiently, reducing our unit costs and take advantage of.
Improved market conditions.
Yes, Thanks, Mark doesn't sound like you guys are board.
Right.
Yes.
My my follow up is.
Along similar lines.
I don't want to ask about increasing activity, but I think if you were to stand up a rig today.
And you now have a frac crew.
And add to our program going into the end of the year, especially as your capital tapers off.
It seems like it's strips that that free cash payback at the corporate level.
It is perhaps 12 months or less.
Is there a lot of this is obviously driven by NGL pricing, but I guess, how do you. How do you think about the right production or spending level as it relates to achieving free cash because.
We're entering into a commodity period, right now, where perhaps adding activity could actually create more free cash back to you and in fairly short order.
Although when we start at a high level, Mark maybe tack onto the answer but.
Use it you could have used that argument many times over the last 6 or 7 years.
That didn't work out so well for the industry. So I think the industry now is all about shale 3 point O disciplined growth.
Unfortunately, given the big blocky position and high quality inventory, we have if we just stay focused on what we're doing like like is in the pitch book and Mark said.
We can generate significant free.
Cash flow.
Over $1 billion so.
I think youll see us stay disciplined and stay focused on that and and meeting our corporate objectives and decreasing significantly both on an.
Absolute basis, as well as leverage on that.
Debt to EBITDAX basis from Mark do you want to tack on.
I would just tack on 2 things 1 range is in the enviable position of being able to grow cash flow in a maintenance capital scenario, given our declining unit costs that are contractual without our gathering contracts and other areas.
And interest expense like we just talked about there are built in.
Accretive steps.
That are available to us. So that's the first factor to remember is that growth in cash flow is available even in a maintenance capital scenario. The second piece of it is 1 of the motivations to grow actual production as we look at forward curves from hot months may be north of $4, but as you fast forward to 2023 of your sub $3. So.
As we look at the curve as it really incentivizing and telling us that we need to commit that capital long term into 80 still operated natural gas curve.
We are still reluctant to do that we think significant value can be created for our shareholders by paying down debt staying focusing.
On a maintenance model.
For the time being and for the period of time that that curve and market conditions indicate that the best value.
Thank you guys for the answers.
Thank you. Thank you.
Thank you. This concludes today's question and answer session I would like to turn the call back over to Mr. Ventura for his concluding remarks.
Yes, just wanted to thank everybody for taking time to be on our call. This morning, and please follow up with any questions you have with the IR team. Thank you.
Thank you for participating in today's conference.
You may disconnect at this time.
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