Q4 2021 CNX Resources Corp Earnings Call
Good morning, and welcome to the C and that's resources fourth quarter 2021 earnings Conference call.
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I would now like to turn the conference over to Tyler Lewis Vice President of Investor Relations. Please go ahead.
Thank you and good morning to everybody.
Welcome to <unk> fourth quarter conference call, we have in the room today, Nick <unk>, our president and CEO , Don Rush, our Chief Financial Officer, Chad Griffith, Our Chief operating officer, and Yummy I can't Cube, our Chief Excellence officer today.
They we will be discussing our fourth quarter results. This morning, we posted an updated slide presentation to our website.
The detailed fourth quarter earnings release data, such as quarterly E&P data financial statements and non-GAAP reconciliations are posted to our website and a document titled for Q2 021 earnings results and supplemental information are C N X resources.
As a reminder, any forward looking statements, we make or comments about future expectations are subject to business dress, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.
We'll begin our call today with prepared remarks by Nick followed by Don We will open the call up for Q&A, where Chad and Yummy will participate as well with that let me turn the call over to you Nick.
Thanks, Good morning, like a string of recent quarters. The past couple of years, we had a yet another clean easy to understand quarter and just allow me to spend a couple of minutes on a few highlights.
In the fourth quarter of 'twenty, one approximately 80% of our free cash flow was returned to shareholders and that was in the form of buybacks at very discounted prices.
And while taking advantage of bringing in shares that theres attractive free cash flow yields. We also put the remaining 20% of free cash flow to debt management, which in the fourth quarter meant really three things first we paid call premiums and fees for a positive rate of return bond deal, where we issued $400 million of 475% notes that.
They're due in 2030.
And we use those proceeds to retire $400 million of six 5% notes that were due in 2025 and.
The second thing we did is that we paid the fees to extend both of our upstream and midstream or be Els are.
To October 26, and then third and finally, we reduced our net debt in fact, we pay down I think over half a billion dollars $508 million of debt over the last eight quarters or two years.
Now all three balance sheet strengthening moves that we saw in the fourth quarter. When you couple those with the cumulative free cash flow allocation toward debt reduction that was recognized by another upgrade in our credit rating by Fitch and places us one notch below investment grade.
This year, we expect a market improvement in free cash flow generation relative to what was effectively a stellar 2021 and we issued 2022 guidance of approximately $600 million in free cash flow. That's about three bucks a share and that's assuming of course, the current share count just over 200 million shares.
The past two years are the most challenging I think that a lot of companies and industries and people see decades, it really tested and proved out C. N X as brand of a sustainable business model in action.
So what did we do we invested heavily in our people and our regional communities to set the best team possible on the field of play.
We were steady safe and compliant and our execution are that.
But the team was able to deliver and in that region, where we operated and we manufactured our free cash flow the significant free cash flow that we generated that allowed for capital allocation opportunities that went towards strengthening our balance sheet through debt reduction or a maturity extensions.
And also reducing our share count through the acquisition of our discounted shares.
So those moves they deliver impressive free cash flow per share compound growth rates and intrinsic per share value growth two things that we're absolutely focused on it.
In 2022 our path continues to be pinned optimizing intrinsic per share value by long term is and methodical execution by Derisking and of course by astute capital allocation.
So again going back to sort of the cliff notes for fourth quarter 2021 our free cash flow and free cash flow for sure. They were up net debt was reduced maturities were extended materially share count was reduced at deep discount pricing and we beat our 2021 free cash flow guidance, we're going to keep clinically following the math when allocating free cash flow a rest assured our actions are going to.
Due to match, our words and shoot for 2022 and beyond so let's hear from Don.
Thanks, Nick and good morning, everyone I'm going to start on slide three this chart highlights our steady execution and continuing commitment to our free cash flow plan. The fourth quarter of 2021 marks the eighth consecutive quarter of generating significant free cash flow with the expectation of adding four more strong quarters in 2022.
Slides four and five highlight our significant undrawn revolver capacity and extended maturity runway that provide us considerable flexibility and allocation of our free cash flow.
As you can see our focus has been on balancing shareholder returns and improving our balance sheet by reducing net debt extending our Rbis to October of 2026 and by refinancing near term debt with longer term debt at lower interest rates.
This quarter, we allocated more of our free cash flow towards share buybacks as we repurchased eight 6 million shares and then an additional one 3 million shares after the close of quarter on the debt side.
For this quarter call premiums and transaction fees associated with the two major balance sheet enhancing transactions executed late in the third quarter were cash settled early in the fourth quarter.
And the remaining free cash flow for the period reduced the modest amount of debt.
Looking at the bigger picture, though across all of 'twenty to 2020 'twenty. One we have generated approximately $860 million of free cash flow of which we used $540 million for debt management and $320 million for shareholder returns.
This shows a prudent risk adjusted blend over an extended time period and as we have previously stated we remain committed to reducing our net debt to get our leverage ratio down to one five times.
And as you can see on slide to achieving that target is not a difficult task.
As one year of our free cash flow gets us there and as a reminder, that free cash flow is mostly protected by our hedge book and peer leading cost structure due to owning our midstream systems.
These facts give us the wherewithal to do both over the next several years and while we are not giving any guidance on this topic topic. We will continue to do what we have been doing following the math and ensuring we have a low risk balance sheet in other words, we will do both materially over the next several years and will continue to follow the capital allocation mass with the.
A blend of each changing variables around us change.
Let's shift to slide six and the beginning of 2020, we put out a seven year free cash flow.
This slide highlights our outperformance against several key metrics for the first two years of that plant.
On the left side of the page you can see that we have exceeded our original production guidance by a total of 41 P. C. S E and our Capex during that same period was lower than our guidance by $67 million.
On the right side of the page you can see that our combined 'twenty 'twenty and 2021 free cash flow finished above guidance by $162 million.
Speaker 1: $162 million and approximately 23% increased. So after seeing how we handily beat 2020 and 2021 guidance and now seeing the increase in free cash flow for 2022 guidance from $500 million previously to approximately $600 million as it sits today. Let's wrap up by talking about the fundamental reset we've experienced within the company.
<unk> 23 per cent increased so after seeing how we handily beat 'twenty 2020 , one 2021 guidance and now seeing the increase in free cash flow for 2022 guidance from $500 million previously to $600 million approximately $600 million as it sits today, let's wrap up by <unk>.
Looking about the fundamental reset we've experience within the company.
Speaker 1: Basically, our operating efficiencies in the field, from drilling rates to completion sufficiencies, have improved so much in the past two years that the old way of thinking about MOP and the free cash flow that goes with it are now obsolete, and obsolete in a good way. Our efficiency step change improvements have now placed us at a 590 BCF run rate starting point in 2022, not the old.
Basically our operating of fishes in the field from drilling rigs the completion efficiencies have improved so much in the past two years that the old way of thinking about more in the free cash flow that goes with it are now obsolete and obsolete in a good way.
Our efficiency step change improvements have now placed us in a 500 knee 590 Bcf run rate starting point in 2022, not the old <unk>.
<unk> thousand 60, <unk> guidance from from from the initial and as a reminder, our 2021 production was closer to 590 number two.
And basically what has changed is the one rig one frac crew that we used to used to run a maintenance of production plan now no gross production without without adding any new crews.
Materially better than how we thought about the typical MA plan back in 2020, and as we always say, we'll follow the math.
Strive to maintain a high efficiencies.
So today you see our 'twenty two guidance on slide seven culminating in a free cash flow target of 600 million or about $3 per share at the current share count.
And looking beyond 2022, although we are not issuing new guidance today. We can tell you our old plan was based in a different world from low gas prices to a different efficiencies and it is now sort of a relevant how we're thinking about the future.
Stead think of low single digit production growth and a one rig one frac crew kind of pace.
And the free cash flow at closer to a 600 million dollar level with the opportunity to improve on that assuming gas and NGL prices remain healthy.
And of course, this boost free cash flow per share, which should see impressive growth depending on future free cash flow allocations with that I'll turn it over to Tyler for questions and operator, if you can open the lines for Q&A at this time please.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Neal Dingmann with Truest. Please go ahead.
Good morning, all.
My first question maybe for you Don just a question on hedging you guys. Now continue to have one of the better you don't just look at the balance sheet you guys have very strong obviously with it with a great free cash flow behind that so my question is is it just more into the strategy you guys continued to hedge quite a ways out could you just talk about sort of.
What what drives that is you know as I mentioned is the balance sheet now free cash flow, obviously, the tremendously improved.
And you know this is this is Nick I think our programmatic hedging approach does not change moving forward, it's really premised on being able to derisk, the topline and create a better level of certainty what the free cash flow generation and basically lock in those rate of returns.
They are quite attractive when you couple it with our cost structure. So I think you know during the different twists and turns that the commodity cycles inevitably going to take we continue to programmatically hedge on out into the future. So I think that's a safe assumption to keep that in place if you're looking to model us out into 'twenty two and beyond.
Okay and then maybe a question for you you were Chad you might want to take this again that is just you know again looking you guys.
You have.
To say Apple is an understatement our locations out there and so my question is given you all and most other all of.
The better gas players continue to have run a very disciplined strategy. So I'm, just wondering given that and given the big inventory you have do you think youre getting credit for that full inventory or.
Is there something else I, you know I don't know if I'm suggestion to monetize some of that or something like that but I'm. Just wondering you know for guys like yourselves that are running such a disciplined program, but have obviously ample inventory.
Do you think youre getting full credit for that in your in your stock price out there.
Yeah, I'll I'll, maybe approach it from a sort of three three sub answers I don't think we're getting proper credit for our free cash flow generation and the sort of the runway of it. So you know thinking through the question right I think of and break it down into three sections, one no absolutely zero inventory concerns from my perspective to continually.
Antley right operate at these rate of returns and generate the free cash flow into the far distant future two D.
The monetization effort of noncore assets and sometimes a lot of that right will be an acreage pockets that aren't three are core to what we wanted to do over the coming 10 or 20 years. That's a regular course of business. It's been in our guidance numbers for years now and there is a certain degree or extent of that in the $600 million free cash flow number that we just.
Issue today for 'twenty two so that's normal course, I think last year just to put it in perspective I want to say, we transacted over 300 individual type monetization efforts. So this is something that we've got a team to do regularly they're not all acreage positions right. They can be surface that can be different types of assets, but that will be just normal course for us and we follow the math there just like we do everywhere.
And then the third piece of this.
He is I think of sort of the company looking to the future and what we should be getting credit for what we should be focusing upon its really the free cash flow generation level, particularly free cash flow per share and then the <unk> of that and this gets into the ability to efficiently operate year in and year out decade in a decade out and generate that type of a trajectory of free cash flow in it.
Growing trajectory of free cash flow per share right, depending on our capital allocation.
That they gets warranted and properly valued in the market. So that's where our attention is that's how we think of something like our deep inventory depth and how we approach our business.
Great details thank you Derrick.
The next question is from Leo Mariani with Keybanc. Please go ahead.
Hey, guys.
Things for you. So could you maybe talk about kind of trajectory of protection here.
In 2022, it's obviously up sharply over the last few quarters and <unk> looking at the guide for the full year in 'twenty two it has volumes coming lower off of fourth quarter 'twenty one.
So do we expect kind of volumes to tick down a fair bit in the first half and then maybe stabilize what can you tell us about kind of the trajectory production.
Yeah. So just generally I'll I'll start and then maybe I'll kick it over to Chad here for a quick follow up on just the pace over the year I don't think much frankly about the quarter to quarter production variations or exit rates to me I'm looking more at the free cash flow and free cash flow generation over a longer period of time, but with respect to 2020 in 'twenty two.
'twenty one Leo I think that was a good those two years were great. Examples of how we sort of approach our decision, making within the philosophy that we embrace so 2020, we basically made conscious decisions to curtail production because we were following the math of what the forward curves in our rate of returns were telling us 'twenty 'twenty. One we made a decision to accelerate some of that production we were able to do.
So because of our efficiencies once again because of the map and what the rate of returns in the curves were telling us I expect the same in 'twenty, two and beyond what I don't know is what those curves what those metrics and assumptions are going to tell us right I don't have that crystal ball, but I do know we've got the operational flexibility with the right sort of philosophy in terms of how we make our decisions to take advantage of it.
But those things aside right that flexibility that that surge and pullback aside to optimize for free cash flow and free cash flow per share I think in terms of just overall production looking at our one frac crews sort of activity pace that Don outlined low modest production growth over time, low modest being like single digit low single digit, but nevertheless, some some material.
Level of our production growth in that in that zone beyond that I really can't say at this time, but maybe just a little comment on what we see on 22 quarters.
22 quarter to quarter.
As we currently view it based upon the one rig one frac crews schedule is roughly flat quarter over quarter, I mean, theres a little bit of variance.
Or minus one or two Bcf a quarter, it's relatively flat over the course of the year.
The next point, though in a highly volatile commodity business, such as natural gas, where we're constantly evaluating opportunities to either accelerate or our time, our production to take advantage of the price curve, obviously, the price isn't flat over the course of the calendar year.
And so you know timing of chills and timing of production to maximize the value from your assets as always in our best interest. So it's not that we will continually assess and and pivot on a real time basis, although we acknowledge that it makes us incredibly difficult to model.
And you know certainly apologize for that but at the end of day, we're solving for maximize maximize value creation and I know that does make it challenging at times for you guys, but that's at the end of the day. It that's how we truly create shareholder value, yeah, and just sort of the just a quick out to the back end of this.
Our new pads are so a lot of like the production when should we get from a new pad is phenomenal. So if it ends up coming on a month earlier months later it doesn't matter for seven years, but I can't really shed some things materially in one quarter or the other.
About.
Okay, maybe just to kind of approach it a little different way. So I mean, it looks like you guys.
Celebrated a pad from early 'twenty two into the fourth quarter of 'twenty. One so maybe just as you look at the schedule as it sits today.
Are your tail that you've got planned in in 'twenty. Two maybe you know coming on a little later in the year I'm just trying to get a sense, if maybe that acceleration of activity caused your first quarter 'twenty two activity to maybe go down a little bit here until we.
This is nikolay, we can follow up maybe on this after the call, but just generally speaking right. The way I look at it we are basically at a new base production level of about a 590 Bcf right and that when you look at this one frac crew spread activity pace over time without any sort of major disconnects and commodity curves that we would want to take.
The jobs like we did in 2020 one are you.
Should expect like I said sort of modest, but nevertheless, some level of single digit.
Production growth moving forward and in the end like all this matters in my mind, two equating to about a $600 million a year average free cash flow generation per year that that's what I'm I'm predominantly looking at yeah, and just to add in to follow up from I think commentary I made last quarter around this so if if a pad gets them online the first week of January .
Versus the last week of December it it doesn't matter sort of for the business, but it matters for which bucket you know year to date deals fall in.
You know the sort of similar this year I think you'll see it there is no. It's a consistent program. It's just going to be you know a week here or there can flip some hills from for one quarter, It's just hard for the quarter.
Okay.
Totally get that and I know you guys clearly are raising your kind of multiyear base production forecast from 560 to $5 90, as you've discussed I'm just looking at the the capital associated with that when I looked at your old plan. I think you guys had $300 million in capital you know kind of per annum over that multiyear plan and just looking at.
22, it looks like Youre around 485 kind of at the midpoint. So presumably there was some.
Higher level of Capex, youre, seeing especially given that long term plan is that 45 in 'twenty two a good number going forward after that or does that start to come down after 'twenty two what can you tell us about that.
So again going back to like the script and what we're saying in the context of 'twenty two guidance.
The old sort of multi year plan that we issued back in 2020 envisioned as he said the 300 million Capex of $5 50 production level give or take that's obsolete as Don said.
There's been a new normal that's been set within the company because of our operational efficiencies you put that's worth a one frac crew program as he said, we're starting at a 590 base production level of.
The Capex that you see guided in 'twenty. Two does include capital in the non D&C bucket for some water and pipe infrastructure that will set us up nicely for this new sort of operational efficiency level to chad's team is hit.
And when that all washes out whether it's for 22 or beyond the average sort of free cash flow generation after deducting for Capex.
That will result in is in the $600 million of your neighborhood. So I'm really not in a position now that the sort of talk about 'twenty, three capex or 'twenty four capex, but net net when you take all the cash coming in less cash out, including Capex were around $600 million bogie for free cash flow and again this year's Capex number for 'twenty two it does contemplate an incremental bump in sort of.
Water and are in midstream infrastructure credit that's right. That's right. There's two there's really two main drivers in 'twenty two capital that that's putting that twice your capital number where it is I look there's a certain component of inflation that that's that's year over year baked into the D&C capital predominantly the D&C capital and then there are some incremental activity on the on the on the non D.
He said Nick pointed to there are some some water on pipe infrastructure that that's sort of the look the water and pipe of the infrastructural projects are lumpy from a capital perspective, so that's not necessarily going to be smoothed over any long term plan and it's just the way that the timing's fallen who've got a little bit of chunk in this right now in 'twenty two on that infrastructure side.
The only thing I'll Scott on top of that just just for clarity when we put out the initial plan that you know there was a it was an average over $22 26, and we were very clear that as our as our base decline rate.
Happens and lowers in those outer years, you sort of need that capital. So the relative nature still similar so you know the point being that we will spend significantly less by the time, we're out in point 26, when we won't sort of 2022, but it'll be lumpy along the way.
Alright.
Very thorough answer and I guess could you just tell us roughly what that extra water and pipe capex here in 'twenty two.
It's there's no new stuff, it's just when it gets done like it that's not a new project. It's just we're still falls and so we were under cap basically you basically need the midstream and water to catch up to the Frac crew and drill rig so you're moving projects forward that were normally in outer years.
Yeah, No I get that I was just hoping you could maybe roughly quantify that number 22.
So so it was sort of a long term plan, we generally think I don't know call it 20% to 25% of your total capital cost is going to follow that non D&C bucket I'd say as we look into <unk> into 'twenty, two that percentage is probably closer to 30%.
The total capital so that that should give you a general magnitude of what the swing is.
Okay. That's great. Thanks, guys.
The next question is from Nissan Kumar with Wells Fargo. Please go ahead.
Hi, good morning, guys.
Maybe ill take a step back.
One thing you've been very persistent in following the buyback route.
So two questions on that one.
Almost $3 of free cash flow per share why not introduce a dividend it seems to be kind of where.
Industry is headed and then too.
We know you couldn't help but notice that a lot more money was spent on buybacks and debt management. This quarter that leaves your one one times net debt to EBITDA I'm. Just curious is this the right level of debt given your hedging given your plans that you are seeing them today or should we expect more debt reduction from here.
So a great question. This is the big capital allocation of the free cash flow issue, which we spend just an inordinate amount of time looking upon and to a certain extent obsessing on not just the management team, but also our board. So it is important right, it's front and center to sort of one of the two key components of our strategy and what.
We think makes a special.
When you look at what we are sort of faced with here when it comes to free cash flow allocation into 'twenty two.
Got to two issues here one we've got a definite desire to continue to strengthen the balance sheet and predominantly write that correlates to reducing the absolute level of debt, but that also includes in Q4 was a good example of this there's also include some opportunistic moves to either reduce our interest expense with the debt that is still in place via refis right or too.
Turned out maturities or both and we did both of those types of things in 'twenty to Q4, I'm, sorry, 'twenty one Q4 so.
So we'll continue to look for those those types of opportunities as well.
But really our primary focus at least from my perspective on the balance sheet side is to continue as we said in the past to methodically reduced the absolute amount of debt through some portion of our free cash flow allocation. We think if nothing else not only reduce interest expense right in sort of boost free cash flow into the future. It creates for more optionality to be able to take advantage of.
The huddle spaces like E&P is in like public markets are.
But then too right. The other thing we're faced with.
These are the shares that are basically offering up and we used to talk in the old days of early 'twenty, one about high teens free cash flow yields and now we're looking at 20 plus percent free cash flow yields and we said, we like high teen free cash flow yield. So we're gonna love right 20, plus percent free cash flow yields and we want to take advantage of that as well.
So right now it's to a certain extent I suppose a bit of a capital allocation Nirvana, where we've got a.
Sort of a number of really attractive opportunities and in 'twenty. Two I think the plan when it comes to the $600 million.
Is to sort of allocate that that mix between those two that I just outlined strengthened your balance sheet continues on and taken advantage of discounted shares at some pretty juicy free cash flow yields continues on with respect to dividend not adverse to dividends our board and management team understand that can be a very efficient way to get capital returns to shareholders.
But once again, we go back to that that clinical approach right now the risk adjusted rate of returns or share buybacks are so compelling.
We're dealing with respect to free cash flow generation that the dividends for the time being until something changes materially or not the most efficient way to return capital to shareholders are not the best way to create long term intrinsic per share value and I do understand to your point right. The rest of the industry is talking about doing it but like we sort of pride ourselves on taking a bit of a different approach. So until that math changes I think it's going to be.
Debt reduction and share count reduction.
Got it and maybe I would just say you know dividends are also a way to.
Make the market recognize yogurt cash flow generation it looks good on paper, but.
That could be one way.
I do have a very quick follow up for Don you talked about inflation, maybe channel still fine as well could you talk a little bit more about where you're seeing that inflation is it.
In.
Your Capex lines only is and supply is in rig rates.
Just a little color on the inflation commentary.
Yeah I'll start it off this is this is Nick and then kick it over to Chad and Don Inflate.
Inflation everybody in the country is experiencing it.
Across a whole bunch of different fronts, we're no different and that was contemplated baked into the 'twenty two guidance that we issued specifically things like capex.
With respect to 'twenty, three and beyond really don't have a view that you don't have a view on future gas prices beyond the shrapnel view on interest rates right.
Beyond where they are at now same with inflation interestingly all three are probably tighter correlated to one another.
But with respect to the specific components right that we're experiencing the most of all sort of affirmative chat, but I will conclude by saying one of the things that special I think about this concentrated footprint.
And the integrated footprint that we've got with this one sort of Frac crew array, we're able to much like our revenue side, we're able to basically contract services in a way, where we again programmatically can take a lot of the volatility of inflation off the table, but without being said I'll turn it over chat yes. Thanks Nick.
That's correct on the on the service side on the on the rig and a frac crew side, because the way that we've contracted out those services. We've been we've been somewhat isolated to so far.
Any kind of cost inflation, along those lines, where we've seen the bulk of of the inflation. So far our business has been really materials.
Particularly with respect to steel related material.
Probably probably half half of the inflation that we're that we've baked into the 22 forecast is almost entirely in either steel or tubular.
The rest of it would it be spread across multitude of materials that we use in our business. So I would say that the bulk of it's in steel and the rest of it would be sprinkled across the many other buckets of materials over rely on.
Yeah.
Great.
Care to share what percentage of inflation have you baked in.
For D&C.
Yeah. So so it's roughly call it roughly 5% to 10% year over year.
Is it similar to what we broadcast it kind of earlier in the year such that it's in that Zip code.
Awesome. Thanks, guys.
The next question is from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Good morning, gentlemen.
Good morning.
Chad.
Maybe we could start out I'm, just talking a little bit about basis.
<unk> with hopefully an anomaly in terms of this divergence that we saw between bad weekend spot any comments on you know what you guys saw during the quarter.
Yeah, Youre your basis, or a dollar was a bit wider than than expectations.
And then maybe what you're seeing so far in 'twenty, two and how you expect this to play out I know that you do have strip in your guidance, but just any kind of color you can give us on the quarter end and your thoughts around 22.
Yeah. So so a couple I guess, a couple of things to tease out there.
So the way that we look at sort of spot exposure versus first of month exposure and certainly the volatility that we see in the gas price. So that's that's something that we we assess each month as we're going into the bid week are we look at you know where where is the index at relative to what we think the weather may be for the given month, what the volatility could be in a given month.
And what our existing hedge position is for that given month and.
And we look at all those variables and we and we make a guess or we make are we either lean in our lean out of call it index versus basis or index versus daily spot price.
And so that's that's something that we're doing to manage production flows expected production flows production risk.
Like I said, our financial hedge position and what we think the weather and the volatility might be in a given month, what sort of seeing so far is you know look I think the weather's been wildly volatile I wish I had a crystal ball that predicted weather more accurately than what anyone else has we all sort of use the same weather reports.
It's it's the single biggest factor I think like you go from a December that's one of the warmest December on record to now we're in a January that's almost one of the most fridges January so that I can remember that's just going to that's going to lead to wild volatility between the only index, but spot prices as well so.
We're continuing to monitor it we you know we continue to rely heavily on our on our on our financial hedge position and we're going to continue to make those assessments on a month to month basis, yes and.
And just to add to that is to remind everybody one thing like our in basin.
Production profiles predominantly hedged.
You know 25, whats chat as mentioned in previous calls and then and then sort of to the leaning in and are laying it out on first of month index. It's on the margin it's not a we're not we're not.
Like we said, we can't predict gas prices is.
But it's more like plus or minus 10% I guess, its so anyways that's a.
Yeah, we're going to see it fluctuate we're protecting our cash flows from potential fluctuations.
Our basis hedges and tried to do our best to just squeeze out any extra little bit here or there.
Okay. That's that's helpful. Dan and then.
It looks like you did some just minimal hedge additions and in in 'twenty, three and beyond any updated thoughts.
There to provide I know, we just talked about basis, but maybe you can incorporate that into your comments.
Holly I'm, sorry, you're asking more about the hedging philosophy moving forward are more about macro view.
Yeah, well, maybe both but hedging philosophy as you look out but.
That's a longer term profile.
So Holly this is Nick I think.
Again, the hedging the programmatic hedging approach that we've used the last number of years I think that continues on a no matter what the commodity curve twists and turns will end up being so what I mean by that is if you're entering a calendar year I would expect that 80% ish of the front year production coming up will be hedged.
Also in basin right with not just the Nymex, but the in basin and in that latter ing stepping down into the second third fourth years, and we continue to methodically programmatically built that book over the course of the calendar year. So that by the time, we get to the following your once again at 80% and following sort of stair stepping down I don't see that going.
[noise] away again.
Again, it's driven by cost structure that we coupled with it.
By wanting some certainty with respect to revenues to be able to steadily and methodically manufacturer free cash flow to be able to count on it to allocated in the right ways. There's a lot of ancillary benefits. When you resolve them for long term per share value and that doesn't change much with respect to strong gas price environments versus weaker yeah, just the last nuance that on top of NEC.
We use a forward strip to make our decisions and you know you could really de risk your rate of return that you're achieving on these pads by by falling it this way.
Like to say you can't spend the capital once you spend it. So you know it's it spend it and hope we're spend it and Derisk the returns you're getting for it number one and then number two if the forward strip doesn't support it we don't do it. So it would follow the forward strip, we lock in returns and fallen out.
Yeah.
Great. Thank you Don and then maybe last question for Nick.
If you've had a lot of your peers come out and talk about M. R. S T whether its goals are achievement.
I don't think see an excess put much out so any any comments on an M. R. S. G. Specifically.
Oh look at this one.
Yeah.
One of our primary focus is when it comes to that front is it more so methane monitoring, especially the autonomous methane monitoring. So we are we're starting to work with some of this entity and we're also starting up with some of our own.
Infrastructure for for methane monitoring now some of this will come along with some certification we're looking into that as well as it relates to where the opportunity presents itself for us to actually get return on that investment what are the primary focus for the company is methane monitoring pretty much abating on methane across the field.
The only thing I'll sort of add on top of your I mean, if it makes sense to get certified we will.
Money positive.
Transaction, but as Jimmy said, we're going to do it anyway. So it's a it's a core company and a skill set that energy companies are going to need over over the next decade, and we don't want to completely outsource. It. So we don't we want to blend that we want to understand that we want to be best in class at it and then we'll flip to the cat and the marketing team with a stamp gets us more money or not.
Okay, great. Thanks, Thanks, guys.
The next question is from Michael Schiavo with Stifel. Please go ahead.
Hey, good morning, everybody it sounds like you're baked 5% to 10% inflation into your 'twenty. Two plan I was just wondering if you also.
Built in some additional efficiencies or if there's some potential upside to offset some of that inflation was still.
Further efficiency gains.
So Michael the the views when you're looking at 'twenty two a couple of thoughts. There. One is you said right inflation is and is included in things like Capex and the other assumptions be.
The new sort of normal as we're calling it with respect to operational efficiencies that is also contemplated within our R. 22 activity set and then third and finally all of this rate inflation Capex operation operational efficiencies production in my mind that all will manifest culminate in free cash flow and we're basically going for.
Our 500 millions was $600 million free cash flow level. So that's that's all good when you net out all of these different factors and metrics, yeah, and the only thing I'd add on top of neck like the demand at the team. We have at this company is absolutely phenomenal and yes, we try to be to everything. So it we're always trying to get better each and every day in every aspect of our business. So it's always it's always our goal.
To get better and we have a fantastic team that is achieving it every quarter.
Okay. So if I heard that right you you have built in some some efficiencies, but hopefully you can if history repeats yeah, we built inefficiencies and beaten does keep the date.
I'd be I'd be I'd be shocked if adding the operation team doesn't find new stuff over the next year I don't know what it is but it's not we know to date in there.
Makes sense okay.
Noticed it looked like you had $13 million of exploration expense in the fourth quarter.
A bit higher than what you've had in prior quarters. It can see what that was directed to.
So they're there.
There I mean, there was a so.
So a portion of that was related to a basically an abandonment of a well that we had drilled a number of years ago, and ultimately decided not to complete that well.
For a number of issues and so that was a big thing that was a significant part of the of the write off for the for the quarter, Yeah, and you know just like.
Chad said a number of issues.
Safety and compliance very seriously.
Some of the casing stuff wasn't the way we wanted it.
Okay. So.
Kind of a holdover from.
Prior activity several Oh, yeah, yeah, yeah.
And just one last one.
You talked about a basis and.
All of the factors that go into that one of the things as yours, but.
It looks like from everything we see that all the publics are.
Really holding the line on our capital discipline.
Any change on the private activity I know the.
M B P pipeline it looks like it's been.
Further delayed.
Any worry about that.
Appalachia, becoming constrained here.
Again with the potential.
Production coming from Privates, just wanted to get your read on how you're seeing the supply demand situation inside the Appalachia.
We watched this is Nick we watch the takeaway capacity closely MVP is a key piece of that as you stated.
Whether or not it gets built we'll watch and see obviously our plans are built looking in contemplating the current state of takeaway capacity to get the math.
Handset within basin demand set outside of basin, but what you've got right now not just within Appalachia, but nationally as you've got policy that is designed basically to not have a natural sort of investment occur to match something like the supply of natural gas to the demand centers I don't know if that last I think we're starting to see some problems.
First with respect to that type of a policy and you see those typically during the peak demand periods with periods of winter and in summer, but yeah, I think with respect to our plan and what we put forward not just for 'twenty two guidance that that view beyond it contemplates the current state of takeaway capacity and in basin.
Yeah. The only thing that is we're always obsessed with trying to derisk the business and trying to go to the cash flows of the business. So yeah. We're always looking at this very thoughtfully.
Sounds good thank you guys.
The next question is from Kashi Harrison with Piper Sandler. Please go ahead.
Good morning, everybody and thank you for taking my question.
So just one for me maybe moving beyond just the regional market.
And and really wanted to ask your thoughts on the broader U S natural gas market and how you're thinking about 2022, and 2023 I know you're not interested in the forecasting prices and your base all your capital decisions on the strip a totally got that but just curious how youre thinking about supply and demand trends over the next few years.
Yeah sort of any color there would be great.
Yeah I appreciate the question so on the supply side, you know as we as we moved into December we started.
U S supply started trending up towards basically setting all time highs.
And then as we rolled into January one we basically lost four five Bcf a day of that supply and I think I think there's a lot of folks in the market right. Now that are that are scratching their head of that and they're trying to figure out. There's a lot of thought that thats related to freeze offs and other weather related curtailments.
And there are some thoughts that maybe some folks were trying to hit counter targets and as a result reshaping some of their production strong towards the end of the end of the year.
So theres a little bit of a lot of question out there in the broad market really about where did that four bcf a day of Gasco and is it going to come back online as we come out of winter.
On the on the new supply side, you see rig rig counts continuing to trend up you see a frac crew counts continuing trend up.
Clearly the industry is responding to the price signal that it sees and I think that we will continue to see supply response as we move in through 2022 on the demand side LNG has been continuing to run strong types. The single biggest driver of sort of the growth in demand in domestic with domestic related demand as we keep those LNG terminals.
Full as you see the prices overseas, we certainly expect those LNG terminals remain full.
And there's a handful of LNG trains are expected to come online during 'twenty, three which will continue to grow the demand for that LNG export.
And also Kashi.
This is Nick I'll throw them, maybe even broader view, what's what's going on I think from a demand perspective.
The demand for natural gas nationally globally is going to have to grow so I guess that means bullish.
Bullish and the reason I say that in the long term is that.
Hey, you know renewables are going to be limited with the scale that they can be deployed wins or Pennsylvania is a great example of that today I mean zero degrees. This morning, if the wind's not blowing and the Sun isn't shining. Unfortunately, the sun doesn't often shine in Pennsylvania.
Going to need something else besides those.
Beyond the scale they can be deployed at and if you're retiring or shuttering colon nuke that basically by default lead you to natural gas. So there's a power grid demand growth story across the nation and World I think there's a transportation story.
Other at CMG or whether it's <unk> that are largely going to be powered by the grid. So from a transportation perspective, you're already seen quite a lot of movement of basically displacing of oil in the transportation network with something like natural gas over over the long haul and then youre seeing it I think with with just good old fashioned geopolitics. It never went away and you know energy secured.
As National Security Energy Security Geopolitics.
Suddenly.
Sort of jettison your supply of energy and you depend on others, who may not be sort of ideologically aligned with you.
You end up with situations like we're seeing with Ukraine in Germany, and in that home and all the costs and Inflations and security issues that go with it. So I think people are starting to wake up to the reality of energy security today, and when you look at that over the long term, there's three factors right the grid electricity side and renewables inherent sort of limitations.
Asian displacement of oil and then this whole geopolitical reality long term the demand for natural gas has to grow nationally and internationally. Okay. So thinking things through like MTT that we talked about on the prior question. It's just inevitable with the question is how much pain and painful learnings are we going to have to go through to get to that long term reality of physics and math.
And in science that might take some time, so theres going to be I think the long term story is very positive, but I think it's gonna be quite volatile figuring all this out and learning all of this in the shorter term.
Thanks, Nick and I hear you on I hear you on a lot of these these factors I guess.
One piece of my question really is we think maybe a little bit more than.
And 10 years out.
As you know.
Are you guys concerned at all that you know with the with associated gas rising.
The Haynesville Guy you know there they're starting to grow you know you're adding maybe one 2%.
Are we worried that like over a two year time period that supply might overwhelm demand and then you know.
All of a sudden prices come down.
Yeah.
I mean, yeah bought by our by our nature were always worry about any risks that can happen in a struggle really with it is it's a very you know kind of nice edge. So it only takes two or three Bcf a day of oil supply swing, which you know these new pads come on line.
Im tremendously volume. So you know you add 20 pads have any year you end up with.
The kind of the the amount of gas it can kind of really change the dynamics and then he flipped whether or not this and sort of how much that can kind of shape. It. So yeah. I mean, we're always going to be worried about these things just just because theyre. The variables are very tight on what slips good versus bad hence why we continue to derisk that.
Scenario through the way, we run our programmatic hedging program.
Sounds good thanks for the thoughts I appreciate it.
The next question is from John Abbott with Bank of America. Please go ahead.
I appreciate you taking our questions here a lot of good questions have already been asked.
Maybe just sort of like to check the box I mean, what is the what is the what are your latest thoughts on acquisitions and M&A in this current environment.
Okay.
I think John this is Nick I think that the the pursuit of those are going to continue across the industry. There's probably a number of different factors for that from privates trying to monetize their investments to the public's still largely subscribe into things like industrial scale or looking to just.
ROE under the nature of just sort of how corporations typically traditionally have behaved for us once again I think looking at it just clinically as a capital allocation option or an Avenue right. That's one of the avenues that we've got we can invest in the asset base. We have to grow we can return capital to shareholders via buybacks and dividends, we can reduce that or.
We can look at M&A when you look at that Gameboard right now M&A is a distant distant number four on our on our radar. It just does not compete.
With respect to those this prior three options that.
Did I just laid out so when you run into risk adjusted returns for US and you know factoring in all the different metrics right now not not a real attractive sort of opportunity set for M&A, but I think largely across the industry I wouldn't be shocked to see more M&A continuing.
I appreciate that and then one more in the weeds question a lot of questions have already been asked on Capex, but.
You know when you sort of look forward. How are you thinking about average lateral lengths going forward I mean, your original plan was about 12000 feet for the Marcellus It looks like the Marcellus wells this year in southwest peer about 12700 feet.
How are you thinking about cost per lateral foot for the Marcellus and Utica are going forward.
Yeah. So so as far as 22, you're right that we provide that average lateral footage and in the supplemental materials really beyond that we're not really providing any any additional specifics other than you know what Nick has already commented on PON inventory and how we got certainly plenty of inventory in locations that I don't think where we're concerned about.
The quality of the acreage or the opportunities that we have to go.
Bill lateral footage on a cost per foot basis in the Marcellus for the for 2022 I am proud to report that we averaged $620 a foot for the wells that we tilled during 2022 I think.
Starting 2021, sorry during 2021 we averaged 600 or do better than that but that's certainly the plan and as Nick said, we plan to get better next year.
This year, we plan to get better this year, yeah, just to add I mean, the all.
And the industry all of it appears like the operations teams are continually to set new records. So I think that that is they are saying that this is great for for for everybody in sort of.
Around the country on this on this front.
Thank you very much for taking our questions.
This concludes our question and answer session I would like to turn the conference back over to Tyler Lewis for any closing remarks.
Great. Thank you everyone for joining us this morning, and please feel free to reach out us anyone has any additional questions. Otherwise we look forward to speaking with everyone again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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