Q3 2022 Southwestern Energy Co Earnings Call
Yeah.
Good morning, ladies and gentlemen, thank you for standing by.
To southwestern Energy's third quarter 2022 earnings call.
Management will open the call for a question and answer session following prepared remarks.
Interest of time, please limit yourself to two questions and re queue for additional questions.
This call is being recorded.
Now I'll turn the call over to Brittany Rayford southwestern Energy's director of Investor Relations you may begin.
Thank you Chad good morning, and welcome to southwestern Energy's third quarter 2022 earnings call. Joining me today are Bill way, President and Chief Executive Officer, Clay Carroll, Chief operating Officer, and Carl Giesler, Chief Financial Officer.
Before we get started I'd like to point out that many of the comments we make during this call are forward looking statements that involve risks and uncertainties affecting outcomes.
Many of these are beyond our control and are discussed in more detail in the risk factors and forward looking statements sections of our annual report and quarterly reports 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 and we are under no obligation to update them.
We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers for any non-GAAP measures. We use a 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.
Thank you Britney and good morning, everyone southwestern Energy's strategic intent is to generate resilient free cash flow from responsible natural gas development of our leading positions in two premier U S natural gas basins.
In the third quarter. The company continued to generate free cash flow, which was used to reduce debt and achieve our target leverage range.
We also complemented that reduction with $80 million of share repurchases, bringing our year to date total to approximately 10% of the authorized amount.
Prioritizing debt reduction as we progress toward our $3 5 billion to 3 billion dollar target debt range benefits shareholders by expanding our opportunity set including LNG, reducing the volatility of our stock enhancing the resilience of our free cash flow through the cycle and supporting our expected return to investment grade.
With the current commodity price outlook, and our improved balance sheet.
That allows us to moderate our hedging levels to provide shareholders greater commodity price exposure, while maintaining disciplined enterprise risk management.
We expect our lower hedge profile will generate increasing free cash flow even in this backward aided commodity price environment.
As our hedge position moderates, we anticipate our financial results key financial metrics and enterprise value will more clearly reflect the underlying value of our business as evidenced by our pretax PV 10 reserve value of more than $30 billion at recent strip.
We believe our integrated upstream marketing and transportation approach to developing our more than 15 years of core inventory is yet. Another example of capturing the tangible benefits of scale and in this case our increased scale.
We are well positioned to benefit from the structurally supported long term Gulf coast natural gas demand growth are well timed haynesville acquisition positioned us as the largest haynesville producer, giving us scaled production and reserves near the LNG corridor and other growing gas demand centers, along the Gulf Coast.
Today, So end markets up to five Bcf per day of gross gas production from Appalachia, and Haynesville of which 65% is transported to the LNG corridor and Gulf Coast.
This large scale dual basin supply to the Gulf Coast has enabled us to become one of the largest suppliers of natural gas to the LNG sector today.
With $1 5 billion cubic feet of sales under Henry hub based agreements. We are assessing further LNG gas supply opportunities to capture advantaged pricing on a risk adjusted approach is to consistent it needs to be consistent with the inheriting inherently greater price volatility from global gas exposure.
Based on this we plan to target international pricing exposure for up to 500 million cubic feet per day or up to 10% of our overall daily gross gas production.
Given the importance of flow assurance and marketing gas Optionality, we secured additional capacity on future takeaway projects to the Gulf Coast.
This quarter, we added capacity on momentum as upcoming N G. III project and further expanded our lease capacity.
Both projects are expected to be fully serviced by 2024.
We believe that with our focus on natural gas growing access to the global LNG markets and long term track record of both low cost and low emissions operations. The company is well positioned to help reliably meet domestic and global energy needs and support the foundational role of natural gas and a lower carbon future.
To help realize that future we are proud to announce the company's long term ghd emission reduction goal of a 50% decrease by 2035, which is consistent with a path to net zero by 2050.
We expect 70% of our forecasted reductions to be achieved through direct operational abatements.
This goal aligns with our ESG approach of creating sustainable value through.
Through meaningful impactful actions in the communities, where we work and live.
This longer term GHT emission reduction goals supplements, our existing programs, including being the first and only E&P company.
Returned more fresh water back to the environment, then we can see them in our business.
Shortly we will release, our ninth annual corporate responsibility report, which we'll detail. How we are building on our legacy of responsible development and commitment to ESG as a core value.
With an increasingly.
With an increasing and resilient free cash flow generation profile, a strong balance sheet near investment grade credit ratings and advantaged access to the LNG corridor and other growing demand centers. We believe southwestern energy offers a compelling value and differentiated rate of change investment opportunity in a structurally constructive long term natural gas.
Outlet I'd like to turn the.
Call over to clay for some operational updates.
Thanks, Bill and good morning.
We delivered another solid quarter with production near the high end of guidance and the development program on track across both Appalachian Haynesville.
For the quarter, we had net production of 443 Bcf.
Or four eight Bcf per day, including $4 two Bcf per day of natural gas.
97000 barrels per day of liquids.
Our integrated upstream marketing and transportation approach has ensured we have ample firm capacity from wellhead to sales point to move our production to markets of choice and mitigate the impacts of periodic midstream downtime events.
Overall, we placed 31 wells to sales during the quarter and Appalachia, We placed 14 wells to sales with an average lateral length of approximately 15600 feet.
Our Super Rich area in West, Virginia accounted for eight of those wells and our Marcellus and Utica dry gas acreage.
Sylvain and Ohio accounted for the remaining Appalachia turn in lines.
In the fourth quarter based on our Super rich activity and the timing of completions, we anticipate holding oil volumes flat.
In Haynesville the team placed 17 wells to sales with 15 in the Haynesville and two in the middle Bossier with an average lateral length of approximately 9300 feet.
This quarter marks one year since we entered the Haynesville and we've been encouraged by the results and learnings to date.
We successfully extended lateral lengths on average to approximately 9000 feet from less than 7000 feet in 2021 reduced cycle times and implemented more efficient completion designs.
This slide despite inflationary pressure on well cost production performance and well economics continue to exceed expectations.
The team has done a good job of hitting the ground running on this new asset and delivering in a challenging industry operating environment.
In the quarter all the wells that went to sales were fully planned drilled and completed by schwinn.
We now have clearer line of sight for go forward operational efficiencies.
Technical improvement opportunities as we incorporate learnings from the past year.
We expect to further compress cycle times and over time decreased well costs as the inflationary environment Abates.
This year has demonstrated swims capability of large scale asset integration and delivery and we have strong momentum heading into 2023.
Additionally, all of our Haynesville wells are now certified as our S. G.
Making us fully certified across the enterprise.
Looking to the fourth quarter.
Our activity will moderate consistent with our planned development program and we expect our full year 2022 capital investment will be near the top end of our guidance range.
Sector inflationary pressures and a type services market will continue into next year.
We are well on our way to securing the necessary goods and services to deliver our 2023 program and based on our contracting work to date, we anticipate 2023 inflation in the 15% to 20% range consistent with industry estimates.
We are actively working through ways to partially offset offset this inflationary pressure, including operational efficiencies strategic sourcing and capturing further benefits from our vertical integration assets.
Now I will turn the call over to Karl to provide a financial update.
Okay.
Thank you clay and good morning.
Third quarter, we generated approximately $220 million of free cash flow.
Together with working capital reversals. This has allowed us to both reduce debt and more than $225 million and execute another $80 million in share buybacks.
We are now within our one five to 1.0 times long term target leverage range with quarter end to leverage at one four times.
We will continue to progress towards our target debt range three five to 3.01 billion.
With recent pricing volatility, we expect to achieve the top end of our target debt range in late 2023 early 2024.
Future prices will dictate the pace and progress on our authorized repurchase program.
Fitch upgraded swing double B plus this quarter and we are now consensus rated one notch below investment grade by all three agencies.
As we achieve our target capital structure.
We expect our future free cash flow allocation options will expand enabling the consideration of additional shareholder capital returns.
These and other reasons, we believe <unk> is well positioned to drive economic returns and shareholder value in the structurally supportive long term natural gas environment.
Please open the line for questions.
Thank you very much.
At this time, we will begin our question and answer session.
Ask a question you May press Star then one on your telephone keypad.
You can choose to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will be from Doug Leggate with Bank of America. Please go ahead.
Thanks, Good morning, everybody.
So I wonder if I could I could start off with a question on the takeaway at the year, particularly agreements that you have.
Bill as I recollect, the acquisitions were predicated on ensuring that you had adequate takeaway.
So can you walk us through the new ones. So what the incremental takeaway means is this up on a different allocation of.
Where you expect your weighted basis to move or no.
Higher destination realizations I'm, just trying to understand what the implications.
The implications of that and then I've got a follow up please.
Sure as you well know good morning, Doug as you well know.
We take a very integrated approach to A&P and marketing and transportation and do so whether were in acquisition mode or whether we're drilling wells in a particular part of the of the basin and so.
As you look at the when we did the acquisition and completed it we had all of the transportation and a capacity that.
We required to be able to move the gas that.
We were we were attempting to move.
And that.
That was a condition precedent of doing all of those deals, but as you move forward in time, we continuously optimize our marketing and our transportation. If we can if we find an opportunity to add a bit of transportation and lay off some somewhere else will.
We will do that if we look find a new marketplace that we can become very interested in.
And we wanted to pursue that we can add Ed transportation. So net we're in a maintenance capital mode. We are this capacity reinforces our long term flow assurance and our access to the markets that it serves we're not signaling a growth in.
In production at our growth in drilling beyond maintenance capital.
Through our plan and we found the opportunity to optimize further.
And one other comment I'll make about optimization, when we build transport capacity.
Not a one and done.
If we're going to take on 300 million a day doesn't necessarily come in one and 300 million a day count.
We'd like to layered in we'd like to build optionality. So that we can.
Really optimize the economics of the program.
Bill forgive me for a follow up on this but does this put you in a position where you can market excess capacity because obviously.
A number of your peers don't have the same luxury the Youtube probably takeaway in place.
Yeah, obviously that opportunity.
Is present, but we don't we don't acquire transportation to then turnaround and resell it.
We acquired transportation.
To optimize our plan maximizes value, we have solid transportation capacity related off temporarily.
Others in the past and it's more of a an outcome when you're when you're finished doing your planning than an object a core objective.
We can make aluminum side, we do that we also buy gas and move gas through our through any part of our transport where there's available.
Capacity and make it a little margin there as well.
It's all about it thank you.
My follow up hopefully a quick one for Carl is.
Carl obviously, there's upward pressure on Capex I think we're all aware of what's happening there but last quarter.
You talked about the free cash flow capacity of strip strip has come down pretty meaningfully since then I'm wondering if you share any update on how you see it stripped today with capex pressures on any changes in cash taxes. For example, what you see your free cash flow outlook in 2003 at this point.
Doug. Thank you for the question, obviously with continued inflation and at least the near term softening in commodity prices, we expect our cash flow to come in lower than the levels that we had discussed in August .
That said, we believe we still have a line of sight actually pretty clear line of sight to achieving our debt targets all while continuing to progress our repurchase program next year.
On the slide deck. Thanks Carl.
Thank you.
Thank you and the next question will come from Charles Meade from Johnson Rice. Please go ahead.
Yes, good morning, Bill and clay and Karl to the rest of the team there.
Right.
Bill I wanted to ask about about your trajectory going into 'twenty, three and more specific to you guys had a nice beat in <unk>, but it makes the.
It may spread a little bit steeper decline.
Going into <unk>, you, even though you guys are.
<unk> on track and in the larger sense, but that decline we're seeing in <unk> is what are the implications that are going to carryover into 'twenty three.
From them, yes.
Yes, Charles I'll start.
It's all consistent with what we talked about in the second quarter were.
When we elevated the capital guidance due to inflation. It was so that we could keep activity levels on track with our originally planned activity levels and that fourth quarter activity sets us up for 2023 to start the year off in the right way.
We all know the timing of completions.
Clearly in a quarterly impact on production levels and so what we're doing in the fourth quarter is going to be the production that comes online in 2023 and the beginning and then we will have.
Similar somewhat front end loaded program as we come into 2023, so we shouldnt have a similar profile to that production as we move into 2023.
Got it that's helpful detail.
And then and then perhaps the follow up you referenced the.
The efficiency gains do you expect to see in the Haynesville now that you guys have put a couple of quarters under your belt. There can you give us a sense of of the.
Yes, the kind of the <unk>.
Qualitative and quantitative what what what is the scale of these of the efficiencies. You think you can you have line of sight on and where are they coming.
Yes, it's a continuation of the conversations that we've been touching on as we started operating in the Haynesville.
We're clearly.
Got a year of learnings that is helping us as we forecast 2023, we've had completion design improvements that have helped with the well performance.
These wells when we brought them online we've seen cycle time improvements as the program has moved through the year that we feel like as we get into 2023 will be more consistent across the program.
We've done facility modifications to help us.
<unk> production levels and.
Reduce the impact of downtime as we move through the year or so.
We thank all of the key categories around efficiency improvement that we focus on are setup for us to continue to make progress as we move into 2023, and especially with the one year of learnings behind us.
Got it that's helpful. Thank you Scott.
Yep.
Yeah.
And the next question will come from Scott Hanold with RBC. Please go ahead.
Hey, Scott.
Hey, How're you doing.
Can I ask on as you look into 2023 and beyond and.
I would say first and foremost you all did a really good job of generating a lot of free cash flow in <unk>.
You would not only reduce steadfast, but also did you.
Had a pretty strong share buyback.
Quarter as well as you kind of look into next year and sort of the point, Doug made about having the lower strip prices out there how do you think about stock buybacks.
Balance between that and that debt reduction target because it looks like you bought back at about $7 40 in third quarter. Obviously your stock is now below $7. So it seems like it's a good opportunity to really lean into buybacks here.
Yes.
Scott Great question.
The realities are our approach really has not changed our priority.
It remains to reduce debt, we believe that has various benefits not only for debt for equity reduce volunteer volatility and other benefits that said as we progress towards our debt objectives, we will continue to.
Repurchase shares and we believe that with what we think is significant.
A significant disconnect between our share price and net asset value.
Opportunity for those buybacks should be accretive.
For a while certainly warrant Q3, and future commodity prices and our corresponding cash flow dictate the pace of our progress in that front.
Yeah.
Got it thanks, and as my follow up kind of going back to the contract you did adding 500 today and on the LNG corridor can you give us a sense of what are some of the pricing dynamics you all will get out of that how does that differ from just.
Selling it.
In in market and.
How are those discussions going with also those counterparties on negotiating what kind of price uplift or exposure to international markets.
Right now how is that how those conversations go on.
So the added capacity gives us better.
Net backs versus parallel.
For example.
And so we took the opportunity to get get the capacity now there is nothing wrong with parallel either it's quite strong, but this gives us a bit of an added advantage on.
On LNG.
Let me, let me comment that today, we move a billion and a half of gas to the LNG sector and multiple agreements are.
Sure.
Our strategy is move forward to have us pursue take.
Take one five Bcf per day and make it two Bcf a day and all of that.
Have a bcf a day would be focused on the LNG market.
And specifically international pricing.
Where we believe that there is an opportunity for us to understand it better and potentially access higher margins, we will do so with a risk based.
Approach to that.
We're in conversations with all of the appropriate LNG.
Ah projects that.
You know that we can reach and that dialogue will continue I would expect that.
We're quite a ways away from.
Having an agreement in place or.
Even deciding to go pursue that and given the risk nature of the global gas market and the volatility that's there but.
But let me be real player.
The half a Bcf a day I mentioned is our target is up to that we're not we're not at a point right now where we want to go any further than a half a bcf a day, which is still a robust.
Our pursuit, but again global gas volatility and all of the learning and discussions that need to go on we're going to take a measured approach to that.
Are the counterparty is a little bit more open to providing you access to those markets and say they might have been two.
Three months ago, when international prices were a lot more robust or is it kind of or are they kind of looking at more of a balanced approach to it as well, yes, I think you need to you need to think about them in terms of to <unk> existing LNG.
Borders.
Less likely to probably let anyone into new agreements that relate to existing.
Marketing opportunities, there's always exceptions, and there's always opportunities, but in the main I would go there the new entrants to the game are more interested in looking for ways to create some kind of an enabling events whether it's.
Very healthy in basin.
Producer, that's got the financial strength and the reserves to backup and agreement.
And negotiate something going forward that has increased pricing or as you've seen in some of the some of the.
Press, where somebody comes in and builds a pipeline to the facility to enable that to happen or something like that and there's all kinds of options in that space, but in the main we're having some good discussions with those.
<unk>.
Next.
The next wave to come on.
But even with that it takes time to work through all of the nuances that are about international marketing of gas.
Got it thanks, Bill that's exactly I was looking for okay.
And our next question is from Paul <unk> with Citi. Please go ahead.
Hi, Good morning, all thank you for taking my call.
Just hoping to kind of circle back a bit on the.
<unk> productivity and efficiency gains.
Noted that you've moving from 7000 until call it 9000 foot laterals.
Has there been any.
Surprises as far as location I know you guys are to the point where you.
Kind of poke holes in the entire basin is there any areas that you're more enthused about the others or is everything kind of coming up roses.
Well I would say that.
Is performing.
Cros.
The position as we had.
We had expected when we did our original evaluation and in a lot of ways EBIT, even better performance than what we had expected.
The southeast part of the play in Desoto.
In Red River parish in the <unk> fault zone is where we've had the best performance.
We.
Figured that that would be the case based on the <unk>.
Greater reservoir pressure and deliverability and EUR is that those wells have and we've continued to see that throughout the development but.
Across the play.
Our acreage position.
The performance has been where we thought I think that the proof points of that are how we deliver.
<unk> delivered the program over the year all the.
Drill wells turn in lines all the activities are on track with our program and then we're getting the performance that we expected if not a little bit more and in this service environment I think thats, a big positive and it points to the quality of the integration of the asset.
That occurred.
And then the execution that the team has delivered.
Okay.
Okay I understood. Thank you and just one quick follow up on that how does how do those well results play into your approach of splitting.
Turning to capital expenditures between Appalachian Haynesville.
I know you've talked more about like 50, 545 previously does that still hold or is there.
Any leakage one way or the other.
This is bill.
When we prepare our budget for a given year, we take all of the opportunities that we have across the enterprise.
And effectively rack and stack them by economic return.
You have the.
These large haynesville wells, we have wells in Appalachia with high volumes of gas as well, we have wells with a natural gas liquids and condensate.
We put them all down.
Economically we then pick a slate of wells to be drilled and then optimize around that so we're not over capital and capitalizing midstream in place or were not under utilizing.
Utilizing capacity somewhere and so it's.
Kind of a choreographed approach too late.
Or laying out an inventory of wells certainly.
<unk>.
Right now we're at $55 45, it will probably be somewhere in the same neighborhood.
Given the strength of the economics across the enterprise and the fact that we really are advantaged in that we have complementary investment opportunities in every part of our business.
Could it change probably could but it will be in the decimal points versus some wholesale changes at this point.
Understood. Thanks for the clarity.
The next question will be from Nick Pope from Seaport. Please go ahead.
Good morning, everyone.
Good morning.
I was hoping to get.
You guys could provide a little more clarity on operating costs kind of looking at full year guidance you guys are trending.
Well below kind of where that full year unit guidance is on an operating cost.
So trying to make sure I kind of understand if that's you guys just.
Operating.
I had a schedule or if fourth quarter, we should expect some kind of uptick in operating costs or is there anything unusual going on there.
Yes, I would say that from a.
The inflationary standpoint, we have seen the impact on the expense side as well as the capital side.
In the Dominion categories.
Water disposal and water hauling.
Compression.
But our team is very focused on how we can offset some of those costs.
And.
Provide some efficiencies that don't take us have us takes the full brunt of those but we have seen increases in as we move in to the fourth quarter.
I don't see.
Big change.
So what we've seen year to date.
Yes, I'd agree with that and I'll tell you why don't have Britney reach out.
And look at.
With that he can give you some further color.
Got it I appreciate that.
On the.
Kind of back to that efficiency question I know, we're all theres been several questions on it so far.
If you look at the Haynesville kind of it seems like the lateral links last two quarters of kind of.
And in a similar ballpark 93 9400 foot.
Sure.
You'll feel like you are reaching kind of like the optimal link. There is there is there are limitations on geometry, or do you think you might you might push that further I guess, where do you think you are on kind of being able to push the limits on kind of how big wells, you're putting down there sure. So like we talked about this first year model learning.
Has occurred as it relates to lateral lengths, we're going to be very methodical about it just like we did in Appalachia.
<unk>.
Each area of the field has some some specifics that maybe limit how long. We can go we want to make sure that we stay efficient and the program and so that's a potential lever it's not the same opportunity like we had in Appalachia.
To go 15000 feet laterals, there given the geometry theres some fault in there in that market as fault zone. So I think around the 9000 foot right now is.
Where we're finding some optimized efficiency and we will continue to take a very methodical approach to that going forward and by way of a further example, we can do 24000 foot laterals in Pennsylvania.
All of our wells arent 24000, or optimize so that's one data point. The other data point is in Louisiana, you are restricted to 15000 foot laterals.
And most part and so we're not going to put all of our wells bumping up against that limit.
All at once as Clay said, we will take our time learn.
And then advanced that average forward.
Got it that is very helpful. I appreciate it.
Thank you.
The next question is from Neal Dingmann with choice Securities. Please go ahead.
Good morning, all thanks for the time Collyn easy one first could you just talk to obviously balance sheet than it does.
They quickly improving Keith talked about here the team is not for hedging going forward.
Yes, thanks for the question.
Yes.
Strengthening balance sheet as Bill described.
What we believe is a structurally strong long term outlook, particularly for natural gas.
We anticipate being able to.
Lower our hedge levels, certainly below where they've been for 'twenty, two and 'twenty three going forward that that said.
Hedging does remain a core part of our enterprise risk management.
So while we'll moderate will continue to protect our financial strength.
Glad to hear that and then just follow up on Bill maybe for you and team on M&A.
I'm just more curious is are you guys did two outstanding deals a bit ago.
Are there still a number of deals floating around in the haynesville into.
Yes.
Would you entertain any deals as long as they sort of satisfy the criteria that you've had in the past.
So thanks for that.
And I'll make a comment I want to make one more comment on the hedging before I get to that we've actually where we have these three rolling periods than we used to be in the first year of 58%. We've lowered the low end by 10 percentage points on the first rolling period, and a second rolling period, so and.
And we had already done the third so.
Again stronger financial strength capability accompany that keeping enterprise risk management and in line on the strategy around M&A certainly capturing the tangible benefits of scale is what we're all about not just growing to be bigger and so.
Heard on this call you'll hear at sea in our book.
Understand as well.
Those benefits are coming and Optionality.
Later.
Capability to expand our marketing.
Areas, where we haven't been before but.
We're going to continue to look at M&A opportunities that show up and let me define what that means we believe it's important for us to understand what's going on in our basins and where we choose to be.
That doesn't mean, we're able to buy everything it's just we need to understand that and occasionally opportunities come come up for for us to look at but if you look at.
Our recent deals you look at the importance of the corporate objectives that we continue to talk about around repaying debt returning capital to shareholders.
And meeting the criteria of our of our framework worked for acquisitions, which has become.
More challenging given the assets that we purchased and given the improvement that we've made in our asset base.
I think our priority right now is.
Paying down debt and returning capital to shareholders.
Again, we look at some things.
And we evaluate them, but we.
We're sticking to that focus of continuously improving the strength of the company.
Thank you and the next question will come from <unk> powdery with Goldman Sachs. Please go ahead.
Hi, Good morning, <unk> Goldman Sachs <unk>.
Hope you can hear me okay.
My first question is on inflation, you talked about 15% to 20% inflation next year at.
Are you seeing any signs of any regional bias location in terms of how much information you see between Appalachia and Haynesville.
Yes, so as we went through 2022.
We realized.
Higher inflation in the Haynesville, then in Appalachia and as we've.
Started our contracting process for 2023.
That trend is considering is.
As continuing maybe moderating a little bit, but haynesville, a little higher than Appalachia.
We've used the same approach that we used in 2022 around.
Contracting the major spend categories early well in advance of the coming year and that served us well in 2022.
Especially from a quality of the goods and services, where Ian Haynesville in in Appalachia. We were we did not have any of the execution issues that some of the operators have seen around supply chain and around timely getting all their goods and services done so.
That's the approach we're using as we move into 'twenty three.
So thank you.
And then from a next question.
I Wonder if you talk about.
Okay, creating how long is it.
Questions going.
Let's take agencies on the path to investment grade.
$2 5 billion.
That number is that the bogey, which then looking Florida.
<unk> been given the macro environment or the competitive with probably a higher number.
Great question. Thank you for it.
A couple of comments to answer your question directly.
Our target debt range of $3 5 billion to $3 billion is exactly that our target debt range.
While the agencies expect us to progress and ultimately meet that that is not a requirement that they said we need to meet to achieve investment grade. So we're inferring from that that we could potentially become investment grade before achieving that level of debt.
Wanted to make that clear I guess, our second point.
We believe that from both the financial risk profile in a business risk profile, we are already either at or at least very close to investment grade and so that leads to my third point re.
Really just.
A matter of time.
A for us to continue delivering on what we've said, we do with the agencies and the market more broadly.
Two four rather be I guess for the agencies.
To make the decisions when they do because it's ultimately their decision to make.
We'll go into quite a bit of detail.
The opportunity to meet him as well.
I think the Carl's right its not an absolute number but the credibility of our path to get there is what are.
Our banking App and we talk a lot about that with share a lot of detail on that path.
We have built incredible path.
Wholesale change and that changes the game and they are very clear about that.
But right now the confidence that they have shared with us around the pathway that we're pursuing.
It gives us the confidence.
Of our dialogue.
And belief.
Okay. Thank you. Thank you for your article.
The next question will be from Sue Bosch Chandra from the benchmark. Please go ahead.
Thanks Bill question for you on maybe maybe not now perhaps longer term.
Any interest in sort of getting involved in some of these other sustainable type things that whether it's carbon sequestration or hydrogen.
You guys have been certainly when it comes to sustainable development have been I think pretty early so curious what you think there.
Yes, I think that we will continue to evaluate some of those options and carbon sequestration is one of them that we do.
We're thinking about.
We've been in a leading position for a long time doing whether it's water or air and as you think about about water and air and you think about opportunities to make a difference that are backed up by real changes to the business or backed up by.
Reductions that are our actual in nature versus.
More indirect we take that approach and we will study.
Those.
And if it makes sense to us, we'll dig into them a bit more of it sequestration is one that we are looking at along with obviously continuous improvement and the achievements and metrics that we have.
<unk> three <unk> deal that we talked about in the press release has a cc U S component tied to it.
It is in the early stages, but was part of our attraction to that deal.
Exactly.
Okay interesting.
I guess when you say attraction that deal that is where southwestern plays an active role in the sequestration aspect.
<unk>.
So we're partnering with them and were improving.
The emissions from a reduction of <unk> that that happens in that Haynesville basin area.
Okay got it thanks.
And just a follow up.
I think you'd mentioned that you're well on your way something like that towards securing your 2020 through services.
Can you give a context of like how much of that has sort of price visibility how much of that is still going to be floating through the course of next year.
Sure.
That is all the traditional service company contracting components to it with.
Some have quarterly openers some have.
Twice, a year openers and drilling rigs for example are typically fixed for either a six month contract or a 12 month contract.
We're dealing with a lot of the same service providers, we've worked within the past so we're not.
Breaking new ground as we continue to work together.
<unk> the.
The company to get the best cost we can in this environment, but also the quality of services and continuing to update the way we are.
The structure of those agreements.
<unk> provides the best opportunity for the company as we go forward and that's well underway.
And I think one other aspect of it that up but on the table as car.
Continuity of talent and being able to count on them very capable people to execute the plans. We have seven of the rigs that we use we will use in 2003 and two of the Frac fleets. We used in 'twenty three are staffed by southwestern energy employees as we own that equipment in that business.
And their capability their.
Our capabilities are incredible and they stand very strongly with them.
Hey.
Contractor counterparts, but they are also a high degree of continuity and the fact that they are part of our team.
And direct employees and we're thrilled to have them and they are.
That risk.
And then moves off the table and we can focus on other aspects of the risk profile.
Okay. Thank you gentlemen.
Okay.
Thank you and the next question is from Noel Parks from Tuohy Brothers. Please go ahead.
Hi, good morning.
Good morning.
Okay.
Talking about your company owned rigs and.
I'm thinking of some of the things I've seen from the the rig companies as far as their.
Their own risk reward and caution.
I was wondering if we're in a long term.
Say $5 or better gas world and maybe we've hit the peak of the growth and inflation.
Would you consider.
Another company owned rig.
And I'm thinking in terms of the long timeframe.
For lead time for a newbuild.
So is that something that would be.
Would be on the table for you Ethan.
I think you've got to look at that kind of an opportunity in a couple of different ways, one capital allocation priorities paying down debt returning.
Returning.
Our cash flow to shareholders.
Our two priorities in the use of cash second thing is being able to operate at maintenance capital to keep the business in a place where it doesn't.
Roll backwards, you got to keep the investment opportunities consistent on our plan and then the other part is just studying the environment and understanding the utilization rates and just.
How certain are we that.
That baseload needs to increase as Youll note, we don't have.
Seven frac fleets and seven rigs, we have fewer frac fleets, partly for utilization Bartlett availability.
From third parties and having that mix. So we can learn.
I would say that that has to go into that discussion.
And right now we're <unk>.
Based on the great teams, we have in the.
The capital allocation strategy that we put out in the market.
Great and fair enough.
Im just wondering if you've touched on this already but.
Thinking about your hedging strategy and <unk>.
Obviously with less debt.
As less less pressure to locking in cash flows.
As you look ahead to next year 2023 and 2024.
Is there a point where you think.
It's likely.
Might need to turn back more towards thinking in terms of downside protection.
It certainly seems that the Nat gas fundamentals globally are kind of on a one way right up until.
Im thinking when you get beyond the next year.
Is it time to start thinking about.
Some caution there or do.
Do you think erring on the side of leaving the upside exposure.
So while outweighs the need for downside protection.
Thank you for the question. So let me let me start by saying, we have not left managing the downside risk.
We're able to moderate our hedges in the current environment, but do understand that on balance as part of our enterprise risk management practice hedging is a major piece of that and we will.
We remain in that place, where we're going to be watching from the defensive perspective.
And defensive protection perspective.
What's happening.
When you strengthen this company strengthened balance sheet stronger all of that in the market stronger you get to have a bit more optionality.
Great.
Right.
Minimums remain I think the key point is that we've got a lot of capital a lot of costs, just like everybody else does and one of the priorities for us.
To protect that and get your money back at least and so.
The hedging ranges that we are hedging.
Targets that we set take that into account and take take into account the forward gas strip or liquid stripped depending on what youre doing.
And making sure that they get and strip pricing, we are managing that risk, we have the opportunity to use swaps and collars and other things.
You can give yourself a bit more upside exposure.
And as we've already said are our hedges.
We're hedged our upper limit in the current year is 80%, we don't need to be at that place.
But given the strip, but as that moves around we move around with it.
And monitor those and link them together.
So I think.
I know that we have.
A lot of investors, who want to be certain that we're not walking away from from that defensive risk management side.
Integral to our enterprise risk management.
We are not.
Great. Thanks, a lot.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Bill way for any closing remarks.
Well. Thank you all for joining us on the call. Thank you very much for the questions any further clarification on our plans.
Please reach out to us, especially our IR team, they're very happy to talk and with that have a great weekend go Astros and we'll talk to you soon.
Thank you Sir this concludes southwestern Energy's third quarter 2022 earnings call you may now disconnect.
[music].
Yes.
[music].