Q1 2022 Southwestern Energy Co Earnings Call
[music].
Good morning, ladies and gentlemen, and thank you for standing by welcome to the southwestern Energy's first quarter 2022 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero money well open up the call for.
A question and answer session following prepared remarks.
You asked a question you May press Star then one on a touchtone phone.
A quick please press Star then two in the interest of time, please limit yourself to two questions and re queue for additional questions.
Call is being recorded.
I'll now turn the call over to Brittany for southwestern and now Gs director of Investor Relations you may begin.
Thank you good morning, and welcome to the southwestern Energy first quarter 2022 earnings call.
Joining me today are bill way, President and Chief Executive Officer.
Carroll Chief operating Officer, Carl Giesler, Chief Financial Officer, Jason Kurtz head of marketing and transportation before we get started I'd like to point out that many of the comments we make during this call are forward looking statements that involve risks and uncertainties affecting outcomes.
Many of these are beyond our control and discuss in more detail in the risk factors and the forward looking statements sections of our annual report and quarterly report.
And as filed with the Securities and Exchange Commission, although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results and developments may differ materially.
Under no obligation to update them. We may also refer to some non-GAAP financial measures, which helped facilitate comparison across periods and with peers.
For any non-GAAP measures, we use a reconciliation 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.
Okay.
Thank you, Brian and good morning, everyone. We appreciate all of you joining us today.
Southwestern energy entered 2022 strategically advantaged with enhanced and increased scale in the two premier U S natural gas basins, and deepened and upgraded inventory a strengthened financial profile and a de risk business.
We are sharply focused on generating increasing free cash flow by delivering the tangible benefits from our increased scale.
And we did just that in the first quarter.
We closed on our second Haynesville acquisition at year end, making this our first quarter reporting results from our expanded and upgraded complementary haynesville and Appalachia portfolio.
With operational integration complete we delivered production at the high end of guidance, including outperformance in Haynesville.
Thanks to strong operational execution and leveraging the Companys technical excellence our annual program is on track.
As planned we relocated to swim drilling rigs to Louisiana and are seeing encouraging early efficiency gains from those two rigs.
I'm proud of how our teams have delivered while minimizing the impact to our business from inflation and avoiding supply chain shortages.
The strength of our operational performance was reflected in our strong financial results in the fourth quarter, we generated more than $300 million of free cash flow reduce debt and lowered our leverage.
Two emerging realities underscore the long term resiliency of our business. The first trend is that as recognized by the European Union and several major institutional investors. We believe natural gas is foundational to a low carbon future, providing reliable and affordable energy.
As part of our efforts to help bring about this future. We completed the certification of all of our Appalachia wells as responsibly sourced gas.
And by the end of the year, we will be producing almost 5 billion cubic feet per day of certified our S. G across both basins.
We've also made further gains in progressing continuous emissions monitoring of our well pads across the entire portfolio.
The second trend is that as recent global events have highlighted U S. Natural gas is vital for global energy security.
To help meet global supply one third of <unk> natural gas is currently being sold to LNG exporters.
Looking forward, we're differentially positioned to supply LNG facilities on a long term basis.
Our assets have unmatched proximity and accessibility to the liquefaction hub.
In addition to being Haynesville largest producers, 65% of our total production already reaches the Gulf Coast.
We also offer reliability as a supplier partner to LNG we are.
More than 20 years of Haynesville inventory with flow assurance supported by our large and long tenor firm transportation portfolio.
From a financial reliability perspective, we made progress towards the turn to investment grade as evidenced by our recent upgrade by S&P to double B plus.
Our improving financial strength is supported by the company's disciplined enterprise risk management practice.
We maintain an active basis protection program through firm sales financial basis, hedges and leveraging our advantaged transportation capacity.
In 2022, we have more than 90% of our gas protect production protected from Appalachia basis volatility.
When coupled with our connectivity and proximity to the Gulf Coast markets, we have a differentiated ability to manage basis risk realm.
Relative to our natural gas focused peers.
Given the construction constructive commodity price outlook and our improved financial strength, we expect to be able to hedge at a lower end of our established ranges outlined in our hedging policy, while protecting our capital and cost outlays.
We continue to generate a growing level of free cash flow and are prioritizing further debt reduction in the near term.
As we achieve our target leverage ratio and have a clear line of sight to our total target debt range, we would expect to be in a position to initiate a sustainable capital return program.
That program will reflect both the durability of the company's expanding free cash flow capability and our continued commitment to long term financial strength.
When is well positioned to deliver on its strategic intent to generate resilient free cash flow through responsible natural gas development. We believes when offers a differentiated opportunity to participate in value creation from the structurally constructive near and long term outlook for the U S natural gas in general and for <unk>.
LNG export demand specifically.
I'll now turn the call over to clay to talk about our operations achievements.
Thanks, Bill and good morning.
In our first full quarter operating our combined haynesville assets, along with our Appalachia portfolio. The team once again delivered strong results.
We successfully ramped up activities to start the year invest.
Invested capital in place wells to sales on track with our guidance and operationally integrated the assets acquired from GDP.
We continue to see encouraging well performance and operational execution gains in the Haynesville.
And are now beginning to complete wells that are fully executed by swim.
In Appalachia, we are also on track delivering consistent well and operations performance.
Yeah.
Turning to a few highlights we delivered production of 425 Bcf.
Four seven Bcf per day, which consisted of approximately $4 two bcf per day of natural gas and 91000 barrels per day of liquids production was at the high end of our guidance range due to outperformance in all areas, but in particular the haynesville.
We continue to see strong initial production rates from our new Haynesville wells and our marketing team has done a great job of optimizing our midstream capacity and staying ahead of our development plan.
In addition, two of our swim our owned and operated drilling rigs running in the Haynesville have already delivered operational efficiencies.
Underscoring the advantage of our vertical integration strategy.
In Appalachia, we got off to a good start we were able to manage through seasonal weather with no material production impact and brought an additional six wells to sales in the last week of March that were originally planned for early in the second quarter.
First quarter capital investment was $544 million in line with the Frontloaded development plan that we laid out at the beginning of the year.
We averaged 16 drilling rigs and six frac crews consistent with the cadence of our full year plan.
We placed 32 wells to sales, including 21 in the Haynesville with an average lateral length of more than 8200 feet.
In Appalachia, we placed 11 wells to sales with lateral lengths, averaging 12600 feet.
As we progress through the year, our Appalachia lateral lengths are expected to increase to an average of more than 14000 feet for the year.
During the quarter of 26 of the 32 wells placed to sales were on dry gas acreage for.
For the second quarter, we anticipate activity and capital investment to be roughly flat with the first quarter with an increase in wells to sales from our liquids rich acreage in West Virginia.
As a result, we expect our liquids volumes to increase relative to the first quarter with oil volumes approaching fourth quarter 2021 levels.
On the cost side, we are seeing continued inflationary pressure.
Primarily across casing and tubular.
Fuel fracture stimulation and last mile logistics.
The team has done an excellent job of offsetting some of these inflationary pressures with operational efficiencies.
Additionally, our sweat one drilling rigs and Frac crews provide further installation.
As a result of our procurement strategy and long standing working relationships with key service providers.
We have not encountered any material issues related to obtaining goods and services in any of our operating areas.
And all of our rigs and services are fully contracted for our 2022 development plan.
Consistent with our strategic sourcing approach, we are proactively working on securing services for our 2023 program.
On the ESG front as Bill mentioned, we completed the responsibly sourced gas well certifications on all of our Appalachia production during the quarter.
Our Haynesville certification is on track and expected to be complete by the end of the year.
We believe rigorous certification and pad level continuous emissions monitoring our differentiators and will help us sufficiently target further emission reductions.
With that I'll turn the call over to Carl for the financial update.
Thank you clay and good morning.
Company generated $317 million of free cash flow, which supplemented by seasonal working capital changes resulted in a $508 million reduction in debt, including the redemption of our 2022 notes off.
Our leverage ratio Accordingly, improved 0.3 turns to one seven times.
Earlier, this month, our bank group, which knows as well.
Elevated our strengthened financial position with our amended credit facility.
We increased our borrowing base to $3 5 billion, while maintaining our $2.0 billion elected commitment level and extending the facility's maturity in 2027.
Most importantly, we added fall away covenant and pricing grid provisions that allow our credit facility each transitioned fully to unsecured.
And achieving investment grade status.
Turning to investment grade is important to us strategically.
Strategically it is a key component of the responsibility element of our strategic intent to generate resilient free cash flow from responsible natural gas development.
Financially.
<unk>, our cost of and expands our access to capital.
Commercially and operationally, we believe investment grade complements our asset positioning inventory depth flow assurance RFG other structural advantages in capturing LNG supply opportunities.
This concludes our prepared remarks, operator, please open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Dan Your question has been at Justin you would like to withdraw your question. Please press Star then two again, please limit yourself to two questions and re queue for additional questions. At this time, we will pause momentarily to assemble lavazza.
The first question comes from Charles Meade with Johnson Rice. Please go ahead.
Good morning, Bill to you and your whole team there good.
Good morning, Charles how are you doing well thank you.
This is this is for you or perhaps for clay I'm wondering.
First of all congratulations with with the outperformance of the Haynesville. That's what I wanted to ask about is if you could perhaps decompose that that outperformance in the quarter.
I imagine you know to the typical.
Dimensions, our Oh, well performance and.
And schedule.
Bringing things online on time, but I'm wondering if perhaps there is also a an element of de risking.
First is your acquisition case.
Now that you guys put some put some risk on it before you actually had your hands on it and now that that's coming off.
Sure Charles.
We definitely had a lot of focus.
Pre closing and then as we took over both the indigo in the GE assets too.
Integrate operationally and to get all the learnings and be on track and then begin to look for ways that we could improve on the operational efficiencies and we feel really good about the start that we've had there. It was it's been a big active program 11 rigs.
<unk> three.
<unk> three frac fleets.
And the team has done a great job of.
Doing all the planning execution, and then whatever adjustments hub have been needed.
I think that where that outperformance is coming from is in line with what we've talked about we're seeing <unk>.
Proved.
Initial production performance last quarter, we talked about the average of the wells coming to sales was about $26 million a day IP.
And the wells that came to sales this quarter or close to 34 million a day.
Initial production rates.
We're beginning to we're on track with the base assumptions around timing and.
<unk> costs, but we're beginning to see execution improvements that are shortening cycle times that.
It's early but we feel like is going to bode well as we continue to move through the rest of the year to start to see some of those operational synergies in the Haynesville again like the track record we've had in Appalachia.
Got it that's great detail. Thank you.
And maybe just one short follow up the so youre turning lines in <unk> two thirds for more of the Haynesville.
Is that is that the the trend going forward because it sounds like <unk> or is that more of a just kind of a natural oscillation in that it's going to be more I'm, just gonna be swing more back towards Marcellus in the back half of the year.
Consistent with our plan just the natural movement quarter to quarter as we guided we were going to be about 55% capital in Haynesville 45 in Marcellus remember that with Haynesville, we inherited ongoing drilling programs and rig contracts both on indigo.
And on <unk>. So it was more of a steady state.
Activity profile moving through the end of the fourth quarter into the first quarter, whereas on our swim legacy assets, we had been normal reduction of activity in the fourth quarter and then the ramp back up in the first quarter. So thats part of why you see the plus or minus 60 40 capital split in <unk>.
You won but that will level out in line with our guidance as we move through the year and we laid out we're roughly 50 545 is how it should come out in a lot of that again as previously contracted work overall enterprises running at maintenance capital.
And we were fortunate to have complementary inventory across our entire operations. So we can you'll see some increases in liquids rich gas drilling.
Throughout this next period and it's just how the schedule works out.
More than than some kind of a directional thing and it's because of the complementary nature of what we have the team has also done a terrific job on controlling costs.
A lot of the inflation.
Concerns that are out there, yes, we're seeing it too but a lot of it is being.
Covered by improved efficiencies in our are terrific.
Team that does our strategic sourcing.
Making sure that we get those costs locked in our vertical integration also sets sets a benchmark because we know exactly what it's supposed to cost.
And we can have conversations with our vendors.
From a position of fact that.
We have super spec rigs, we know how much they cost every day and what parts and pieces they need and so that certainly helps that but that I think I'll underscore here and then move on but I'll underscore here that we have created a.
A new blended haynesville team that is just doing an extraordinary job all together working on the mission of the company, which is to bring about the value that we expect or better from bringing terrific assets from indigo Geo southern together with swimming into LNG or southern.
Heritage people into one unified team.
Thank you Bill and clay.
For that how did you kept plenty plenty more questions, but ill follow with somebody else and thanks a lot.
Yeah.
The next question comes from Ireland, Jairam with JP Morgan. Please go ahead.
Morning, Arun yes.
Hey, good morning team.
Bill I wanted to see if you and your team could discuss.
Yeah.
See you at southwest and look to take advantage of the growing amount of LNG capacity, that's being constructed along the Gulf coast.
You mentioned today I think I heard you say a third of your gas is being sold directly to those facilities. So I just wanted to see if you could give us a sense of.
What kind of opportunities are with you today youre not quite investment grade, but you know what changes if you do become investment grade.
And then how does our S G kind of play with within this broader strategy.
Yes, let me Jason is going to chime in here with a lot of depth of experience in this space.
With some opening comments into this certainly when you think about global LNG, we believe that our proximity.
Connectivity and inventory depth.
And our and our commitment to enabling those.
Projects to happen by entering into agreements going forward the financial strength of the company.
And the fact that we are we already moved volume to LNG.
Really sets us apart.
You're right a billion and a half.
The day of the LNG already.
Happens are we're already moving that.
Today, it's a very reliable source of gas backstopped by significant reserves and very large inventory.
Financially strong company that doesn't have to rely on others to get the gas from one place to another.
Have the capacity in place we've had it for quite some time now.
We're adding to it so that that builds that reliability.
As well.
We're having conversations with current and future key LNG players and continuously looking at.
Value enhancing opportunities on a risk adjusted basis, and that's very important we'll talk about that segment too.
To enter into additional agreements down the line.
There the LNG.
Let me have Jason talk to you a little bit about some of the details around that and then I'll come back.
Yes, so just following up on what Bill said.
Right now, we're selling about a b and a half a day to a combination of LNG.
<unk> short long term contracts.
We're basically selling LNG to ever every export facility that's in the Gulf Coast of Louisiana and in Texas, We continue to watch everything given the transportation portfolio that we that we have.
700000, a day coming out of the Appalachia gets into this greater area and then when you think about Haynesville. It has a whole lot of Interconnectivity just to the Gulf coast itself as well as we have.
About one Bcf a day on on leap that grows to about one three in the future. We have capacity capacity on Midcoast 200000, a day and about 200000, a day on Acadian. So all of this all of this volume gets into this this greater Gulf Coast area.
Sure.
There's a lot of different numbers out there, but there's probably potential demand of five to 10 Bcf a day looking to make a D and we have the ability to deliver into to that whole the whole greater area. So when you think about just.
All of this new demand showing up in this Gulf Coast area and we have to also think about it.
Not only LNG, it's the powered power that's going to come along with the LNG. It's the industrial that could potentially come to that greater Gulf coast area because of the U S does have the lowest price of gas right now between on a global global pricing basis. So you could see more industrial manufacturing just move back to this area, but it.
It's going to it's going to play out to where theres going to be a lot of competition for gas in this in this general area and Theres not a lot of new capacity, that's going to be built out of out of other other basins to be able to get in this area. So we feel like we're in a in a key strategic position to be able to take advantage of these premium priced markets.
So Jason is in regular dialogue as I've said before with current and future LNG players, we're going to evaluate potential opportunities on a risk adjusted basis.
Just the same way, we do when we enter a new market with our with our gas that's a domestic consumer.
And we will look at the opportunities and the risks that we need to manage to do that we will continue the dialogue and narrow down.
Facilities that.
That fit the <unk>.
End of agreements that we are interested in pursuing.
And and then we want to be an enabler and that theres going to be a very big call on demand natural gas for this ramp up in LNG and we think we're positioned quite.
Quite well and advantageously too.
Two to work in that space our ISG.
And the various forms that that comes in from.
Which company you chose we chose to work with a group that we believe is the most rigorous and most comprehensive.
And we include not only.
Certification, but monitoring and we have a very clear path to get to the place where all of our well pads in our entire portfolio are will be monitored. Therefore, we can react to even faster than we already do.
To address that.
Our ISG is strategically important to us for a number of reasons.
Today, we we like anybody who is not currently IAG, if you want to get into certain long haul deals.
For transport or do you want to get into certain international.
Projects, if you're not if you're not investment grade you've got to put up letters of credit.
It's an <unk>.
Money invested so that you can play the other way to play without having to do that is to achieve investment grade and we believe that we're on a very clear path to get there and by the work that Karl and his team have done with our banks, we believe that our banks unanimously are in a position where they recognize the financial strength and the progress we're making.
Toward all of the criteria that would result in us achieving that.
That level, we know we have to be.
We know that we need to continue to sustainably do what we're doing and that's our plan.
Okay and my follow up build the industry is facing a couple of takeaway challenges in the Permian as well as Appalachia.
I wanted to get your team's thoughts on the Haynesville production now is ramping close to 13 five Bcf a day.
In that basin can you talk about swett swings.
Takeaway capacity any thoughts on potential risk to basis differentials and what you. What is your view on kind of takeaway capacity out of that basin, just given the growing amount of production that we're seeing.
One of our criteria, whether it's acquisition or whether it is drilling wells is that it must the gas if thats, what youre drilling four must be able to get to the market of your choosing and it needs to get to be able to get there on a sustainable basis, otherwise detract value and that doesn't make any sense to us. So as you think about the framework that we.
Use whether it's the one we used to move into that greater haynesville area or the one we continue to invest a clear unmistakable criteria is we must have adequate transport.
And the option to get more.
So at the right time, so we're not stranding investment either in unused transport and build a portfolio of.
Reliable assured delivery to the to the markets we want to serve so Jason can talk to you a lot about about.
What that looks like our are our greater haynesville.
Business is.
We have transport, we're growing into into additional transport, we added 300 million a day on late recently and put that out our Appalachia basin.
Production is.
That's right at 90, some odd percent hedged.
Against basis volatility, we have all of the transport and none of the.
Unused transport that we need to be able to move that gas to the markets, we want them to get to.
And complement our haynesville position, but the fact that out of our total production, which includes both areas 65% of our gas can get to the Gulf Coast, where we believe the markets are growing so we're not constrained.
On on long haul or gathering or processing or fractionation or any pieces and parts. There is our teams do a really good job of partnering side by side with these important strategic suppliers to help them understand what we're doing and why and when and get the.
The ability to opt into segments and opt into capacity as we need it they seem to talk about.
The haynesville and what's happening in them.
In the transport and the Bbq please.
Sure Yeah, what I would what I would add is that when you think about just that greater that greater area youre definitely seeing basis move around in different different areas different locations. You are seeing some improvement in some areas youre seeing a little bit of a widening in other areas I think we kind of expected this to happen and so we've hedged.
On a nymex basis, a little over two Bcf a day of our gross gas coming out of the out of the Haynesville and what were what were the thought the thought behind what what's going to happen in that general area is Gulf run is under is under construction. It's a one six Bcf a day pipeline and <unk>.
Should go in service sometime in late Q2 early 2023, so what is going to take.
Be able to move that volume from the northern into the southern end of the of the basin as well as Transcanada has another project, Louisiana Xpress.
Should have went in service in I think February of 'twenty, two it's been delayed a little bit they are saying that would be between may and September . So that's another 400000, a day that cheniere has contracted too.
By gas straight into their facility. So I think you're just going to see as production moves up basis moves around.
Also basis is moving because we just have an outright higher nymex price. So fuel cost you more to be able to move from one location to another but over time, it's just going to be volatile as the.
The area of builds out down there in that general area.
Great. Thanks, a lot.
Okay.
The next question comes from Scott Hanold with RBC capital markets. Please go ahead.
Yes. Thanks.
Hey, Bill if I, if I could be a little bit more direct on one of the questions. When you think about like long term value optionality on LNG with southwestern.
Consider investing in some of the future.
LNG facilities to get capacity or better pricing long term or do you see your role more as the supply you're getting.
A stronger value for your molecule because it's in the LNG corridor. So are you looking to access a way to access global markets versus just more of a premium price and in the domestic market.
Yes, I think at this point given the position that we're in and given the many advantages in all of those pieces I think you've got to keep your eyes open and you got to keep your.
Your options open.
The goal.
I believe has got to be to enable.
These facilities to be built in.
<unk> been enables access to premium markets.
Beyond the U S and so our role in helping enable those to happen.
Certainly it will be as a gasifier at I mean, that's what we do for living.
Certainly also needs to be studied to see again and this is really important a risk adjusted basis.
Are there any other parts of this.
You changed that makes sense to us.
We know that we know are our.
Core part of our business, we know what we're really good at and if we can add value to that that we need to think about that but right now I would say we're just.
We are exploring optionality.
And that with your question and everything is kind of on the table at the moment.
Understood appreciate that and then clay you had mentioned that you all have a obviously you your costs locked in for a good part of this year and you're already looking into next year could you give us a sense I know with maybe a couple of things here one.
WNS is a vertically integrated so you know youre, a little bit more advantaged than others can you remind us how much in this market right. Now you think that helps and number two as you start looking at.
Walking in services from providers for 2023, like what kind of cost inflection or are you sensing is in there.
Yeah.
Yes, when you think about the vertical integration when we model it with our current activity level with <unk>.
All of the seven.
Rigs that we own that are run and then our Frac fleet in.
<unk> ability to to split that into two in Appalachia.
On a gross basis.
Amount is anywhere $35 million to $40 million of savings versus <unk>.
Utilizing third party for the plan duration that we have in 2022. So it's a nice benefit that comes from that and then from a 2023 standpoint, we're on the same path that we have been on.
Choose to.
Proactively engaged service providers well before the start of a new year and prioritize the major spend categories first and began all of those discussions and that has served us well both from a supply of the goods and services and then also from.
Getting.
Cost that potentially are <unk>.
Better than maybe what the average is seen and we're on that path for 2023, right now commodity prices being where they are at.
Inflation, where it's at right now I expect 2023 will be inflationary also.
But don't don't have a number for you.
Today.
I appreciate that thank you.
Yeah.
Thanks Scott.
Comes from Doug Leggate with Bank of America. Please go ahead.
Hey, Doug.
Good morning, everybody has how's everybody doing good well thank you.
Thanks for taking my question Bill.
So I guess I've got two related questions.
I would love to hear your view on the macro first of all and I'm not talking about the short term.
Gas prices are currently but.
If we really believe this long term LNG expansion story, obviously, it's maybe two or three years.
One could make a case that the linkage between international and U S gas prices after 20 years, let's be honest.
It's potentially putting us in an up cycle for U S gas for an extended period. So it looks I'd love your perspective on that Bill first of all they might believe my second unrelated question is let's assume that not too long.
Preview you here, but let's assume that that might well be the case.
How does that then sit with your hedging strategy does.
The one thing that suite to be fully candid with you that that's kind of holding us back for.
For a more constructive view is that you've kind of hedged away a lot of the upside is your balance sheet is moving to investment grade as you pointed out as you've diversified the portfolio arguably improve the underlying business. So what is the need to hedge into this macro environment as my follow up thanks.
Sure.
So yes go ahead. This is Jason I'll talk about kind of from a longer term gas macro perspective.
Our thoughts around that bill or Carl May have some comments on the.
The hedging the hedging part of Europe part of your question, but I think that based on everything that we.
We're seeing in the market.
When you look out when you look out longer longer term, obviously there is a.
Producer discipline, there is consolidation in front of us and when we look at our look at just the overall the overall market with what's trying to go on on a global on a global basis, a lot of a lot of things are changing right now but.
Even before the events between.
Russia and Ukraine happened.
With what's going on in that market. There was a growing demand for LNG in the Asian market. So when we look out on a on a longer term basis. It sure looks like to us with the resource that we have here in the in the U S that we're in for a longer upcycle.
Assuming that all of the facilities can get built over the next three years to three to four three to four years out there in the future.
I don't want of course, the point here, but when you look at the forward curve do you think the move up we've seen towards core plus dollar was this transitory or do you see that as an indication.
Isn't that the market is looking beyond the short term LNG bottlenecks.
Just curious in your opinion.
Yeah, I think in our opinion, we see that as the market looking towards.
What is it going to take two.
To incentivize production out in the future to be able to meet demand here in the U S. Obviously, we've seen you know the other piece of the forward curve. That's out there that you have to think take into consideration is just the inability to build infrastructure pipeline capacity out of some of the.
Some of the basins to where to the growing to the growing Gulf coast demand I think that's a that's a signal that is also out there as well as what type of infrastructure can get built here in here in the U S to be able to get to where this demand is.
Alright, so build beyond the dynamics of the hedging requirements of the recent deal for.
Why hedge.
Yes. Thank you.
I'm glad you pointed out the economics.
The deals that we've done those are important and part of our hedging strategy as you look forward.
In our view assuming the current construct.
Price for gas is there our progress on debt reduction company's financial strength.
I would anticipate that future hedging levels well.
We will continue to moderate to the low end of the company's range.
We do continue to believe that a certain level of hedging.
Is the responsible thing to do from an enterprise risk management perspective.
The market conditions are different.
Acquisitions are complete and now we will.
Continue to move ahead, but have the opportunity as the scale and the strength of the company.
Early demonstrates we can move ahead at a at a different.
The level of hedging and our our quite frankly, our hedging practice or policy has the breath.
To move those numbers materially and that's what we expect.
Alright, I appreciate the answers guys. Thank you.
The next question comes from among tell me with Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my questions. Good morning.
Great to hear them operational momentum that youre seeing in the Haynesville and the benefit that you're seeing from.
Vertical integration.
Talked a little bit about cost inflation pressures from tubular.
Fuel equipment, and logistics and I just wanted to.
Give you a sense if youre seeing any regional differences between the Haynesville and Appalachia when it comes to this cost trends are you seeing some similar cost trends in both basins.
So really there is not.
A.
Sustained difference.
And what we're seeing between Appalachia and Haynesville.
We've got service providers in some of our major spend categories that are in both areas.
There are some pieces of the service chain that.
Is in some ways priced and everything equal to Haynesville, so that that is kind of creating a.
The same amount of inflationary pressures.
Both areas.
There is some localized fly.
Flare ups that can occur with trucking and with some last mile logistics, but in general there's not a big difference for us.
Great.
And the size and scale of the company allows us to look at and negotiate nationally for a number of these goods and services and so.
One of the benefits of scale is being played out right now.
That's really helpful. Thank you.
And then I just.
Just a follow up I wanted to get your latest thoughts around the near term macro forecasts.
You talked about the long term macro.
But from a near term perspective, any areas, which you are concerned about and how we're thinking about risk management from that perspective.
Yes. This is Jason I think when we think about when we think about shorter shorter term from a from a macro perspective, obviously youre going to see continued strong global global gas demand and all of the LNG facilities are going to run a rod should run at a high utilization rate coming out of the U S.
One other thing that we're seeing in the macro short term its just.
A really strong amount of power burn I mean, a lot of it is due just to all the domestic coal retirements that have happened. They continue they continue to happen so.
And then when you think about coal the price of coal because it can be it can be exported to the price of coal is it.
Tied to global pricing, so that's allowing the near term macro to be able to to rise.
Yeah.
From a pricing perspective, we continue to see producer producer discipline on on whats happening on the production the production side and then again like we talked about I think just the lack of new pipelines out of producing basins and just the increased difficulty in the permitting process makes it a little a little tough I think the.
From a from a risk perspective, if we see.
Very mild whether that occurs or some type of major LNG outages I think thats. The thats the downside to the potential near term near term macro or some type of a surprising and production growth in the back half of the year, but that seems.
Hard to see where that would come from right now.
Got it that's really helpful. Thank you.
Thank you.
Okay.
The next question comes from Neal Dingmann with Melissa.
Mr. <unk>. Please go ahead.
Our first question is on capital return I don't know if you guys. Maybe just maybe broadly could talk about this specifically how do you all think about the initial payout level. Once you reach your target.
Leverage range, which I think youll hit around kind of later this year and then how would that payout change as leverage goes even lower.
Yes, I think what we've talked about before on return of capital as our framework clearly prioritizes debt repayment in the near term.
And we expect to as you said reach that leverage ratio by this.
In this year.
And then as we gain clearer line of sight on on.
Reaching our three 5% to $3 billion debt target.
We expect to be in a position to initiate a return of capital program studying that we're looking at different options, we're looking at scope and scale.
And as we are.
Move forward here in the near term, we will continue to refine that and then.
Consistent with the framework I just described we would be in a position to move on that.
That's great color.
I was just going to add.
Part and parcel, it's really got to be credible and sustainable.
So any return of capital program will be a holistic capital allocation discussion and communication. So how we do it.
In a manner thats concurrent with continuing to hit our absolute debt target in a manner that can grow with continuing to progress towards investment grade.
Broader.
Water discussion internally be broader.
Use of capital strategy than just pure return of capital.
Great. Thanks, Thanks, Carl and then my second question, probably for Bill for you or clay on the Olaf has inflation really specific could you all speak to how you all continue to do a good job of mitigating potential logistical delays for operators like yourselves that are running several rigs I mean, I know people have cost cost inflation I get that.
My concern is more about any potential delays and you guys continue to do a nice job I've not seen that if you can just talk to it on that one of our core.
Operational strategies.
Especially in an environment, where services are costs are can be challenged as you want to be the operator of choice for them.
Supplier, what does that mean does that mean paying the highest price it means hyper efficiency.
Very effective joint planning very effective.
Joint work and communication on ensuring that if anything changes there's risks in there there's opportunities in there that you're working together.
To make sure that they have is at little to no dead downtime.
Our.
Non revenue bearing work or time that they have to have to.
Deal with and that draws.
Suppliers.
Yeah.
Service providers to US second thing is around relationships, our relationships with our key suppliers.
Especially the strategic ones.
Beyond even just inflation.
All the way through our goods and services all the way through to.
Our gathering and processing of those type of agreements is to have.
Strategic relationship.
Aviary in mind, where we really are working together to create value for both of us and and in doing so again you become somebody that.
The U S deals of the World are magnificent company that they want to work with us and we have a <unk>.
Strong position with them <unk> got some detail on our.
Kind of a more local level.
We've got our logistics team.
We're coordinating daily.
With sand providers water haulers the trucking.
<unk> with all of those.
Capitalizing on logistics around where there's real time infrastructure challenges.
It would be road closures, how we navigated through the weather situation, but and then there is <unk>.
Frequent forecasting and planning conversations that are occurring.
Down to the local levels do not have those bottlenecks turn into material issues for us.
Great details thanks, guys.
Yeah.
Next question comes from Noel Parks with <unk>.
Please go ahead.
Yeah.
Hi, good morning.
Just a couple of things I was.
Recalling that you had spoken not too long ago about in the southwestern Haynesville.
That I believe some longer laterals were in the plan I just wondered if you could.
Update on that.
Certainly so.
I think we guided somewhere around.
Close to 9000 foot as our average lateral link for the for the year in the Haynesville and I think our fourth quarter average was much less than that our <unk> number grew too.
Around 8200 feet as we keep progressing our learnings and the different well locations in the field, we expect that to continue to grow.
Our longest completed lateral right now that hasnt wasn't part of <unk> with over 10000 feet and then we've got drilled lateral that we haven't completed yet that's over 13000 feet. So we think the average will grow as we planned it we think that that.
Part of the efficiency gains that we are going to be able to realize.
In the Haynesville relative to what the average lateral lengths where with what the prior operators.
We're on track with our progress there.
And lateral links at.
At the long end in the Haynesville are controlled by.
Regulatory rules of the state.
All of these ultra long laterals that were able to.
Drill in Pennsylvania for example.
Combined with the fact that these wells are deeper.
The length is.
Limited so.
But we will find a way to to drill right up to the limit. The other piece of this is we're very methodical about this.
Learning organization. So we don't slingshot from a short lateral to a long lateral in and see if it works out.
Sure.
We take steps and we methodically work through those at the end of the day you arrived at the same place, but you've got a better assured.
Tom.
And we.
A lot of the talent and procedures, we use in Appalachia.
<unk> are being transferred and learn.
And a lot of the great things that they already do in Haynesville learned back to us as well.
Sure.
Great.
I wanted to talk a little bit about the.
The price environment.
Just trying to expand my imagination, a little bit if say, we get to a place where it looks like we're going to have sustained strong prices say $5 plus.
Longer term.
And and enough.
The capital and regulatory issues get resolved so that.
Infrastructure issues abate considerably.
If those are both in place what sort of the next decision point that comes for for the company after that.
Thinking about I don't know.
<unk> increased.
Rig ownership or I don't know upgrading of equipment or or maybe in Appalachia.
Our development of additional horizon.
Yes, I think there is.
Our plan is actually include a number of those things, but let me underscore right now where we're in maintenance capital mode.
And we take a look at we are constantly looking at efficiency or different horizons are different pieces of the inventory to.
To drive other efficiency.
Returns.
Improvement in any of those things.
Well look at growth opportunities as well that add value to that to the shareholder LNG is probably going to be in.
That said.
Of options Haynesville.
Got significantly fewer infrastructure constraints than other areas and we have no infrastructure constraints anywhere we work. So it gives us quite a canvas.
To paint on so.
I think.
When you look at our overall inventory the great thing about it is it's complementary across the piece. So we can move about.
Whether its Ohio, Pennsylvania, and West Virginia, Haynesville, we can move about the portfolio and.
Identify those further and value enhancing.
Opportunities then shift on the fly to capture.
Capture them.
Great. Thanks, a lot.
This concludes our question and answer session I would like to turn the conference back over to Bill Lee for any closing remarks.
Well I want to thank everybody for your time. This morning, great questions. We really appreciate it.
Our growing free cash flow capability is underpinned by the fact that we have leading scale in the two premier U S gas basins in the country.
As we said in the call deep tier one inventory unmatched proximity and accessibility to the Gulf coast, especially in the high demand and LNG markets.
A strengthening for our financial profile.
And given the changes in our industry and the strong commodity outlook, we believe that.
Our shareholder value proposition has never been more compelling and so we look forward to continuing to deliver.
The teams did a terrific job in the quarter, but they do it over and over so they continuously doing this and we look forward to continuing to have conversations throughout the rest of 'twenty two on what we're up to so have a great weekend and thanks for joining and thanks for the questions.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.