Q3 2021 Southwestern Energy Co Earnings Call
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Good morning, ladies and gentlemen, and thank you for standing by welcome to the southwestern energy call discussing its third quarter results and the acquisition of G. P. Haynesville management will open up the call for a question and answer session. Following prepared remarks in the interest of time, please limit yourself to two questions and re queue for additional.
Questions. This call is being recorded I will now turn the call over to Brittany Rayford southwestern Energy's director of Investor Relations.
Thank you Tom Good morning, and thank you for joining today's call. Joining me today are Bill way, President and Chief Executive Officer, Clay Carroll, Chief Operating Officer, Carl Giesler, Chief Financial Officer, and Jason Kurtz, Vice President of marketing and transportation.
Part of this morning's announcement, we also posted a new investor presentation to our website.
Before we get started I'd like to point out that many of the comments we make during this call are forward looking statements that involve risks and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail in the risk factors and the forward looking statements sections of our annual report and quarterly filings with the Securities and Exchange Commission and the forward looking statements section of the respective Enel.
Yeah.
Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results may differ materially we are under no obligation to update them. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers for any non-GAAP measures we use a rare.
Conciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website I will now turn the call over to Bill way.
Thank you Brittany and good morning, everyone. We really appreciate you joining us on the call today for our discussion.
We delivered another strong quarter, both financially and operationally. In addition, we financed closed and integrated the indigo acquisition, a transformative opportunity that positions us well into two premier U S natural gas basins.
Our dedicated team has worked closely and incredibly hard over the last year to execute our strategy many of whom are listening to this call.
By way of one example, we just surpassed four trillion cubic feet, a responsible natural gas production in our Pennsylvania asset.
In northeast Appalachia, which continues.
To deliver great value to the company.
So to my team on this call it across the company and congratulate you on all on all that you do on a job well done and thank you.
Our strategy is comprised of four interdependent pillars, including creating sustainable value protecting financial strength and progressing our leading operational execution.
The results delivered by our teams in these first three pillars allow us to execute the fourth pillar, capturing the tangible benefits of scale.
Our strategic intent is to beat the preferred investment vehicles for institutional investors to gain exposure to responsible natural gas development.
The acquisition of GDP announced earlier today directly supports that intent.
It also meets all the criteria of our disciplined acquisition framework as any deal must.
GDP brings large scale core haynesville assets with stacked pay haynesville and middle Bossier inventory.
The 226000 net effective acres adjacent to swings newest operations in the Haynesville.
The addition of GDP increases wins total production to $4 7 billion cubic feet a day equivalent per day.
Including one seven Bcf per day from Haynesville, making us the largest operator in the Haynesville.
He will also increased swings expected year end 2021, SEC proved reserves to approximately <unk> 21 trillion cubic feet equivalent.
The transaction adds 700 economic locations to our high quality inventory.
With the scale, adding acquisitions, well cost reductions performance enhancement and commodity price improvement. The company now has approximately 6800 economic locations across the enterprise.
Given the strength and complementary nature of our portfolio, we expect to have investment activity across all of our operating areas in 2022 as part of our maintenance capital program.
With the expanded exposure to LNG, the LNG corridor and the growing demand centers along the Gulf Coast. This acquisition will further improve the company's overall basis differentials.
And increase our margins.
The access to high value global markets will supplement our premium Appalachia outlets.
As part of our leading ESG practices, we plan to implement it responsibly sourced gas program in the Haynesville.
<unk> the clear ESG sustainability benefits, we believe that responsibly sourced gas will ultimately lead to enhanced margins and improved economics from greater access to global markets.
Yeah.
Turning to the terms of the deal the $1 $85 billion total consideration is comprised of $1 $3 billion to $5 billion in cash and approximately $525 million of <unk> stock.
The cash portion will be debt financed in the equity portion will consist of 99 million shares of <unk> stock calculated per the agreed 30 day V web.
$5 28 per share as of November 3rd.
We have a clear and appropriately derisked path to reach our revised lower debt and leverage targets announced in our press release and Carl will more fully discuss discuss this in a minute.
The purchase price implies an enterprise value to projected 22, EBITDA of two nine times, a meaningful discount to where <unk> currently trades at a discount compared to other recent natural gas consolidation transactions.
Given this attractive valuation, we expect the transaction to be immediately accretive to <unk> margins returns and key per share metrics.
Cash flow per share free cash flow per share and earnings per share all increased by approximately 15%.
Included in these accretion estimates are the already identified $25 million of synergies in 2022, we.
We expect our synergy capture to increased to $50 million per year, starting in 'twenty three.
The integration of GDP will be enhanced by our recent experience integrating integral indigo as well as with a six month transition services agreement negotiated with the seller.
We expect to close the deal by year end subject to customary closing conditions, including regulatory approvals.
Now, let me turn the call over to Clay Carroll, who will provide an update on the quarter and operational perspectives on the GP acquisition.
Thanks, Bill and good morning.
Before I get to some operational details related to the acquisition I wanted to touch on the third quarter results, where our team hit the ground running in Haynesville and continued to deliver in Appalachia.
And three two which included 30 days of Haynesville, We reported total production of 310 Bcf.
At the top end of our guidance range we.
We exited the quarter producing four bcf per day, including one Bcf per day in Haynesville.
Total production included 106000 barrels per day of Ngls, and oil, which is flat with the previous two quarters.
During <unk>, we averaged four drilling rigs in Appalachia.
And there were six rigs running in the Haynesville with two completion crews in each area.
We have now been operating the Haynesville for two months, our new employees in Houston, and Louisiana have been integrated into the business and operations have been running smoothly.
Our initial focus in Haynesville has been to leverage the operational expertise that our combined teams bring to the table.
In September we brought our first five wells online all of which were in the middle Bossier with an average initial production rate of 24 million cubic feet per day, and an average <unk> of approximately 6300 feet.
These results are indicative of the quality of our existing haynesville position.
With today's GDP acquisition announcement, we increase the scale of that high quality position.
As Bill mentioned earlier, the proximity of the GE a P acreage to our existing Haynesville position will allow for operating economies marketing synergies and contract optimization, realizing the benefit of our enhanced scale.
<unk> is currently running four rigs and one completion crew and expect to exit the year running three rigs.
We will issue formal 2022 guidance early next year and maintain our commitment to maintenance capital program with investment of approximately $1 9 billion holding production flat.
I'll close by acknowledging the continued high end performance of our technical and operating teams who are driving improved performance through efficiency gains.
Innovation and knowledge transfer.
We have established a track record of leading operational execution in Appalachia and.
And we expect to do the same in Haynesville as we move forward with our 2022 development plan.
I'll now turn it over to Carl to discuss the financial highlights.
Thank you clay.
During the quarter, we generated $105 million of free cash flow.
We expect our free cash flow to materially increase in the fourth quarter.
We ended the third quarter with $4 2 billion in total debt, reducing our leverage by 0.4 times to two two times.
Turning to todays announcement, we plan to finance the acquisition in a manner that protects our financial strength, while be minimizing equity dilution.
From a debt perspective, the deal is essentially leverage neutral with our expected year end leverage near 2.0 times.
And as Bill referenced and I will discuss further we have a clear and appropriately derisked path to materially lower total debt and leverage ratios.
From an equity perspective, the transaction should drive immediate double digit accretion across key for sure matrix.
Given our increased scale with the current commodity price outlook, we would expect approximately $2 3 billion and free cash flow over the next two years.
We intend to apply our disciplined hedging approach to the acquired production, which should go a long way to safeguarding its expected cash flow.
Using this cash for debt repayment will reduce our total debt to approximately $3 billion now.
Our leverage ratio to near 1.0 times.
Our debt would then be at the low end of our announced three point out $3 5 billion target range.
Our leverage ratio at the lower end of our newly announced 1.0 times to one five times target range.
We added the absolute that range to the updated leverage target range to provide better clarity to the market about how we are thinking about the right hand side of our balance sheet.
Importantly, as we approach our total debt and leverage targets, we would look to initiate a return of capital program.
The company's hedging strategy remains a core part of our enterprise risk management process we.
We would like to clarify the execution of some aspects of our hedging approach.
Given the company's improved financial strength going forward, we will target hedging at a level sufficient to cover the company's expected cost and capital program.
Assuming conservative pricing unhedged production.
In general with this dynamic construct our hedging levels will shift lower or higher inversely with commodity prices and directly the changes to our cost structure and capital investment.
We believe our hedging approach protects a company's financial strength.
While retaining appropriate exposure to potential commodity price upset.
This concludes our prepared remarks, please open the line for questions.
We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two as said before please limit yourself to two questions and re queue.
For additional questions.
The first question comes from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Good morning, gentlemen, and Brittany.
Good morning Holly.
Maybe first one clay I think you mentioned consolidated Capex of $1 9 billion first I guess is that right and then could you Alex laid out for us what what GDP was expected to spend this year.
So.
Definitely the $1 9 billion is the correct number.
<unk>.
We expect to have capital spend in all areas as we move into 2022.
I don't I don't have what their full year 2021 capital number was.
We know that four rigs are running right now and that's how they will exit the year, yet Holly will put out R 22 plan.
First quarter like we usually do and even the one nine is.
It's just directional at this point.
And as the maintenance capital.
Program enterprise for the enterprise.
Okay, and then maybe bill just to follow on to that point.
I believe that GDP and Williams had a JV to develop a portion of its haynesville.
And and have put out some pretty big gross growth plans associated with that how should we reconcile maybe that with our with your plans on our <unk> acreage.
Yes, I think just for clarity in.
You can check with them later, if you want to bid.
GDP.
Acreage that you're talking about is in a separate company than what we're dealing with is it's never been a part of the acreage that we acquired it's they call. It <unk> its a separate deal with Williams. So we're not privy to any of that because it's not something that.
We looked at it and that's not a change from any part of this whole acquisition.
Always been been carved out its relatively new arrangement.
Okay. Okay. That's good clarification. Thank you so much you bet.
The next question comes from Jeffrey <unk> with Tudor Pickering Holt. Please go ahead.
Good morning, Thank you for taking my questions.
First of all I just wanted to ask about the puts and takes on the pro forma headline metrics for 2022 in comparison to how youre thinking about the business pre deal I do appreciate the per share commentary on the change in free cash flow cash flow and EPS, but just since the last time I think the <unk> estimates for 2022 a run at it.
Something like 275 gas I was hoping you could just give us a sense of how some of those metrics on slide 10 for a capex free cash flow leverage were tracking again pre deal for next year at $4 gas.
Yeah, Yeah, Great question, and you pointed out yes. It does.
The metrics that are on <unk>.
Slide <unk>.
Slide 10, as you referenced our $4 gas.
And so definitely accretion on on the free cash flow side and free cash flow on all of the per share metrics.
Leverage neutral so we felt really comfortable that the deal.
Progress is our financial strength and.
Fits right in line with our strategic framework there.
Okay, well I'll just circle back on that actually I called out. The second question is on free cash flow use.
Just wanted to kind of understand the priorities as you get kind of closer to that one and a half.
Times level up at the top end of the sustainable range that you all updated you're obviously getting that closer to year end 2022.
As we move towards that timeframe should we think about free cash flow allocation as you know 100% dedicated to the balance sheet.
Just curious on how that balances your where you might be on shareholder returns and when that might start to enter the discussion as you integrate the asset base.
So you correctly.
I interpreted it started the question out, but when we achieve the <unk>.
Levels of debt and leverage that we've put out in our new press release.
We have other options until we get there we are committed to two.
To bring that debt down as Carl said in the past that is appropriately risk or de risked and unclear.
And clear once we have.
$3 to $3 5 billion of debt and one to one five times leverage and then obviously our attention shifts to appropriately to can we return how do we return capital to shareholders.
And then you opened up the aperture a bit wider and you talk about.
Dividends, you're talking about share purchases in a number of different ways that we do that and that would be our intent.
Great. Thank you.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Good morning, good morning.
Uh huh.
Unfortunately, this is a pretty busy morning. This is John Abbott on for Doug Leggate.
Good morning, Jonathan Hi.
Hi, just a couple of questions here.
So you've done two deals.
You'll provide your budget in early 2022.
I was just speaking from a high level you know given your proximity to the Gulf Coast with your Haynesville assets.
How do you how do we think about how should we think about the opportunity for potential margin expansion.
You have some FTE agreements up in Appalachia, but what is the ability to when you think about those agreements to potentially shift apply activity to the Gulf coast.
Yeah.
Yes.
The headline for every year when we do our.
Our planning and our budgeting as you well know as we take our portfolio.
Drilling opportunities.
With an end and gain being a maintenance capital type program across the.
Enterprise perspective, and we and we against strip rent economics on all of those and we force rank them.
First on economics, and then on any any other lever that one must deal with opportunity to improve our margin by moving a little more over here. Moreover, they're staying flexible because of vertical integration, where we can shift on the fly.
But we have no constraints upon us.
For example.
Insufficient transportation or extra transfer a lot of extra transportation and we have no.
Mvc's.
And we actually have quite large banks in front of those NBC, so quite well protected so we have a lot of flexibility and we will take the.
The changes in the commodities through.
To winter.
A lot of these other thoughts and ideas the rate of.
Of how we want to grow midstream gathering faster or.
You don't want to create shark fins have investments and overcapitalized in certain areas at the expense of another.
So we take a look at all of that one of the things. We know is that that the quality of the inventory.
In the last three deals we've done.
Our complimentary such that we will have some level of activity in each area.
And the result of that when you when you add it all up.
It's focused on maximizing value.
In optimizing the generation of free cash flow, while maintaining a maintenance capital level production profile.
Alright, it is sort of sticking with the marketing theme here.
So so far the Geo southern I mean do they basically have firm sales agreements do they have any FTE and then when you sort of think about it.
Indigo and then.
Geo Southern together could you talk about the the opportunities to improve marketing along the Gulf coast.
Yes. So this is Jason are managed the Mark and group that's a that's a great question you know.
When we look at when we look at GL southern they roughly have a 600000 a day of ft on three different three different pipes and then when you roll that in with the with the Indigo asset we have probably over just over two Bcf a day.
Ft.
Among among the two the two companies on a pro forma basis, but really those assets clay mentioned that earlier, they're very complementary from a marketing perspective.
Meaning that there are synergies between the pipe the downstream pipelines and the gathering system. So there is the ability to deliver into.
Multiple multiple pipelines, where we have transport from the same.
From the same same gathering systems, so there's optionality and flexibility to continue to build out that transportation and future future sales portfolio.
And so strategically.
To access greater levels of access to the important Gulf coast market, where we already have 65%.
Our volume able to reach there we have.
Right sized and right price transportation and then the Gulf coast market in the LNG market bring all kinds of opportunities to the table and we will continue to optimize those as part of those those plans, we'll talk about it that way as well.
Well I appreciate the color and thank you for taking our questions sure. Thank you.
The next question comes from Charles Meade with Johnson Rice. Please go ahead.
Good morning, Bill and clay can call in and the whole southwestern team there. Good morning, how are you.
I'm doing well thank you.
Just first question maybe for Karl are you in your prepared comments Carl you mentioned that that you want them I believe I heard you say that you want to finance.
This deal in a way that that limits equity dilution and so.
Should we interpret that as being and I recognize you may not want to negotiate with yourself in public and so feel free to put on this if there is no color you want to add but but should we interpret that as saying that there's no equity on the table for this 1.325 billion and then and then secondly.
Is there any kind of guidance you want to give us on what you know how.
How many how many tranches or what form that that that longer term financing of that of.
Of that bridge, we'll take.
Yeah.
Sure I think our press release made clear that we had committed financing to support the one three to five consideration.
So we don't anticipate issuing public equity to fund that portion of the purchase price. So I'm happy to make that clear and noticed that negotiating against ourselves.
And then no one.
I think is easily deductible.
Alright.
From our commentary with the cash flow that we expect to generate over the next two years as a company out in pit dissipated a meaningful portion of our permanent financing to be pre payable.
Got it alright.
Post 132 5 billion of debt against this asset permanently.
Right right well. Thank you for that that's where I was I was a leaner, but thank you for the clarification Carl and then if.
If I could ask a question.
About the assets and I'm I'm.
I'm wondering if maybe you guys can can help me and other people learned a little bit little bit more about this play and that you would come to this play with fresh eyes sometime over the course of 'twenty or 'twenty. One you've made you've made two deals here and as I look at the map.
The first year of the indigo was more kind of bias to the to the south and west in this deal is a little bit to the to the north and east and.
I'm wondering if you can give us a sense of how the you know the.
Relative strengths relative attractiveness of various across that position.
And with a particular no mention of how the Bossier prospectively.
Where are we kind of terminate their start to attenuate as you move north.
Yeah, I'll take that so starting with your boss your comment.
We are talking about 700 inventory locations here and it's close to a 50 50 split there is a little more haynesville, but it's close to a 50 50 split.
Across the position very similar to the indigo position that we picked up when you look at the map.
The core of.
The GBP acreage fits pretty nicely in and around the acreage that we picked up from indigo.
When you look at the map that.
Southeast part of Desoto parish in the corner of Nontraditional parish is where we've been seeing really good.
Bill well results best in the basin Gainesville land Middle Bossier.
A lot of the industry public data has also reported on.
And when you look at the color combination here indigo.
Big grouping of acreage and then this.
G O southern acreage hits on either side of that which gives us more continuity across that really prolific part of the acreage position.
When you go north a little bit.
Kind of.
Sales in our whole more in central Desoto parish, that's very high quality Haynesville Middle Bowser. It's next to the worm area that we picked up in the Indigo acquisition, which is in Louisiana, but closer to.
So the western part of Louisiana, All similar performance in depth in that area and then we're picking up a new area in the northern part of Red River parish, which is also high quality.
Performance, a mixture of Haynesville and middle Bossier and essentially all of the physician is greater than a two bcf per 1000, EUR and then when you go down towards that southeastern piece.
Both deals connect.
It's even better than the two bcf per thousand EUR.
So we really like the complementary nature of.
The southern acreage after already own in the indigo position.
Thank you for all that at a detailed question.
Thank you.
Yes.
The next question comes from Kashi Harrison with Piper Sandler. Please go ahead.
Good morning, everyone. Congratulations on the deal between GP Indigo and montage I'm sure. Your team has been extraordinarily busy over the past year and a half.
I appreciate that.
So Mike my questions are mainly financial related and maybe the strength of our strategy as well.
So I was wondering if you could provide some clarification on on just pricing and risk mitigation on this deal.
Carl I know you talked about maybe the hedging philosophies is evolving a bit but as I as we think about this deal specifically.
There is $1 $3 billion worth of debt and so I'm wondering if you actually do intend to hedge this particular deal quite aggressively just to make sure.
You don't get caught in an unfavorable position unfavorable position if the cycle turns if we don't have weather or something else goes that was unexpected.
It's a fair question I think.
What we're prepared to say we've already really said is we recognize it's a large quantum of debt.
It puts our.
Pro forma debt quite a bit higher than our target debt.
Range.
We're committed to getting that targeted debt range and we've been pretty disciplined.
Hedging strategy, that's part of our overall risk mitigation framework.
And I'll just leave it at that.
And then I think the company's cash flow generation is.
At the scale were at now is estimated to be quite robust.
All of that.
We've earmarked if you want to get really close really clear with earmarked all of that free cash flow to go to pay down debt.
Until we reach our targets.
And that discipline is is.
Affirm farmland.
Okay.
And then maybe an antibody.
Got it.
Right.
Oh no no. Please go ahead.
And then if you think about if you think about enterprise risk management and the fact that our one of the tenants of that is managing commodity price and basis risk.
We will continue to do what we are known for and that is.
Right.
Managing the risk associated with the <unk>.
Capital Outlays, we have in other.
Other costs, so, yes, there'll be hedges across our portfolio and.
And we do that on a rolling three year basis.
And that practice will continue.
And then the commodity price.
That is out there <unk>.
<unk> enables us to hedge at different levels.
Gotcha, and then maybe maybe either.
Either for Bill or Karl just just a quick clarification on.
On the definition of sustainable leverage.
So when you talk about you know getting choice specific one to one and a half time sustainable leverage.
Does that contemplate using a price beneath the strip at any given point in time or does that take you know trough cycle pricing in consideration and really where I'm going with this is you know.
It doesn't make sense to maybe go beyond.
The three to $3 5 billion just to make sure that hey, if the cycle eventually turns and we're looking at.
$2 50 gas for whatever reason.
Southwestern would be in an advantaged position to make move strategically within the down cycle.
It's great question.
Answered in a couple of ways.
Most directly when we talk about long term through the cycle sustainable leverage ratio range of one to one and a half.
That's sort of where we'd like to be to maintain an appropriate balance of financial safety and still have an appropriate cost of capital, we don't want to be over <unk> and <unk>.
So we would look to manage our business in that leverage range I E. We got well below one.
We try and.
Get back above one and if we got above one 5% decline.
Get back down into that range now so.
I would think about that because it's ongoing target despite commodity prices up down.
The other element, which is new for us to guide to is what is our target quantum of debt and with that that $3 billion to $3 5 billion was predicated on a level of debt that we are quite comfortable with the leverage in a low commodity price scenarios.
We run that depending on what ship.
This is a huge really low prices that level of debt doesn't get as you approach two times, but not much more than that and thats something that we are comfortable weathering the down cycle.
With that from a leverage perspective, that's basically how we zeroed in on that range for total quantum of debt with this new pro forma business.
It makes a ton of sense. Thank you.
Thank you.
This concludes our question and answer session I will now turn the conference back over to Bill way for any closing remarks.
Well, thank you for being here today and joining us on our call. We're very excited about the progress we've made in transforming the company.
And I hope the scale of the company show through on.
You look at our materials.
The activity that we've done around growth and scale. However is strongly supported by those other three pillars I talked about and making sure that we're protecting our balance sheet and clearly looking after our financial strength our costs.
And having the shareholder in the front of our mind all the time, so as we continue to.
Take this next step we will keep you posted and we look forward to having conversations on our next call.
Thank you for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
Okay.
Okay.
Thank you.