Q4 2022 Southwestern Energy Co Earnings Call
Okay.
Good morning, ladies and gentlemen, and thank you for standing by.
Welcome to the southwestern Energy's fourth quarter 2022 earnings call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by Seattle Management will open the call for a question and answer session followed following prepared remarks, and the interest of time, please limit yourself to two questions and thank you for additional questions.
Is being recorded.
I'll now turn the call, which reflect southwestern Energy's director of Investor Relations you may begin.
Thank you good morning, and welcome to southwestern Energy's fourth quarter 2022 earnings call. Joining me today are Bill way, 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 involve risks and uncertainties affecting outcomes.
Many of these are beyond our control and are discussed in more detail in the risk factors and the forward looking statement section of our annual report and quarterly reports 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.
Results or 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. Thanks for joining US. This morning, 2022 was a defining year for southwestern energy as we continued executing on our strategy and delivering strong results both financially and operationally.
We prioritize debt repayment, reducing debt by over $1 billion in lowering leverage to one three times.
We complimented that reduction was $125 million of share repurchases during the year.
We successfully integrated the transformative acquisitions, we completed in the second half of 2021, which expanded our asset base into haynesville to complement our high quality Appalachia position.
We expect that our large scale integration and development expertise will enable us to drive further operational efficiencies just as we continue to do in Appalachia we.
We believe that these acquisitions extend the longevity and improve the resilience of our business with deep and high quality inventory scale cost economy, economics and expanded optionality.
Most importantly, we now have more direct access to the growing Gulf coast market, including the LNG corridor, where we are already the largest supplier of natural gas to LNG exporters at one five Bcf per day.
We are strategically positioned to supply increasing energy demands and capitalize on longer term natural gas fundamentals as well.
Over the last decade U S. Natural gas storage capacity has remained flat while U S natural gas supply and demand has more than doubled.
The relative contraction in this balancing mechanism for the natural gas market means that smaller changes in relative supply and demand can drive quicker and more significant changes in pricing.
Over the last few months natural gas prices have fallen materially due at least in part to unseasonably warm weather reducing demand below.
Hello, greater gas supply.
Similar to the sharp run up in natural gas prices during the hot summer of 'twenty. Two we believe the recent pullback also reflect structurally increased volatility in the natural gas market.
This volatility highlights why hedging remains core and our enterprise risk management practice.
With our improved financial strength, we expect to hedge more moderately going forward in line with our framework.
Given the current market and then.
The current market and in the near term, we've taken proactive steps to moderate planned activity and associated full year capital by reducing the drilling program by two rigs on average versus 2022.
This is expected to result in a 2% to 3% production decline at the midpoint of guidance with.
With our planned 2023 activity levels at recent strip prices, we expect to fund our capital program through net cash flow and preserve the companys productive scale to deliver resilient free cash flow longer term.
We have additional flexibility and optionality, including through our vertical integration business to adjust activity rather quickly.
He further adjustment will incorporate a multi year outlook for commodity prices and ultimately rests on what we believe will best progress our longer term business and financial objectives.
Consistent with our capital allocation strategy prioritizing debt reduction.
We plan to direct free cash flow generated this year to debt repayment.
Returning capital to shareholders remains a core it remains core to our long term shareholder value proposition as we approach our targeted debt range, the three and a half to $3 billion.
Longer term structurally constructive natural gas supply and demand dynamics should remain as energy security and global de Carbonization drive continued strong.
Natural gas power burn and LNG export growth.
Beyond Freeport facilities eminent returned to service and additional six Bcf per day of U S. LNG export capacity is under construction with venture anticipated service dates as soon as late 2024.
So it is well positioned to differentially benefit from these developments with our proximity to the U S Gulf Coast and direct access to the growing LNG corridor through our firm transportation portfolio, enabling delivery of natural gas from across our business.
We believe the actions we have taken over the past few years have better positioned swim to navigate the current commodity price volatility and grow the long term value proposition for our shareholders. Let me now turn the call over to clay for an operational update.
You Bill and good morning in 2022, the team successfully integrated the haynesville assets from a cultural and performance standpoint.
And we delivered on the combined business plan objectives of the company.
This is consistent with our established track record track record in Appalachia, we.
We are carrying that momentum forward into 2023 and expect to drive further execution and performance improvements.
During the fourth quarter, we produced 427 Bcf.
<unk> approximately 100000 barrels per day of liquids.
We proactively mitigated the effect of the December winter weather, and unplanned midstream downtime safely and with minimal impacts to production.
We placed 28 wells to sales during the quarter. This includes 15 in Appalachia with average lateral lengths of over 16000 feet and well costs of approximately $850 per foot.
And 13 in Haynesville with average lateral lengths of just over 9000 feet and well costs of approximately $1925 per foot.
During the quarter, we invested 537 million of capital, bringing our full year capital spend to $2 $2 billion consistent with the guidance.
For the full year, we produced one seven <unk> or four seven Bcf per day.
Prized of 88% natural gas and 12% liquids, which was above the midpoint of our updated guidance issued in August and above the top end of our original guidance issued in February .
The production outperformance was driven by strong well results and operational execution across the portfolio that resulted in more producing days during the year from accelerated turn in lines.
And our first year in the Haynesville, we hit the ground running delivering results above expectations and achieving some early operational wins.
Most importantly, we delivered based on leading well performance as evidenced by early time production data published by third parties confirming the strength of our stacked haynesville and middle Bossier position.
We also improved upon the prior operators drilling cycle times by approximately 10%, while extending lateral lengths to nearly 9000 feet.
On the commercial side, we executed several key agreements that reinforced long term flow assurance and optionality across gathering treating and long haul transport.
These agreements bolstered our LNG access with an additional combined 800 million cubic feet per day of transportation on the leap and momentum N G. III pipelines that come online by the end of 2024.
The value of our assets is evident with year end proved reserves of 21 six tcf.
And the associated pretax PV 10 of $46 $4 billion using SEC pricing.
This included two four tcf of extensions and discoveries and one one tcf of positive performance revisions.
Which more than offset production and changes in the five year development plan.
We continue to believe that the quality of our reserves and underlying inventory is a differentiator for the company.
Updated for the current commodity price environment, using five year strip prices at year end 2022, the pretax PV 10 of our reserves was $26 billion.
Turning to 2023 as Bill mentioned, our 2.2 to $2 $5 billion capital program reflects our proactive moderation of activity that is expected to result in a 2% to 3% decline in production.
For the year, we expect to average 10 to 11 rigs, which is two less rigs than 2022.
This will include seven to eight rigs in Haynesville and three in Appalachia.
We also intend to run two to three frac fleets in Haynesville and one to two in Appalachia.
With our portfolio Optionality and the continued strength of liquids pricing, we shifted more activity into our liquids rich acreage with approximately eight more wells placed to sales than last year.
This is expected to grow oil volumes throughout 2023 to an average of 15% to 16000 barrels per day.
The team remains highly focused on offsetting inflationary cost impacts by leveraging our strategic supply chain efforts.
And delivering further operating and development efficiencies.
We are targeting further drilling and completion cycle time improvements as well as ongoing completion design and flow back optimization.
We are proud of the results the team delivered in 2022 and look forward to continuing to deliver in 2023.
Now I'll turn the call over to Carl.
Thank you clay.
In 2022, the company generated approximately $850 million of free cash flow that supplemented with working capital inflows helped to repay more than $1 billion of debt, but also returning $125 million to shareholders.
We ended the year with debt of $4 4 billion and beverage one three times down from 2.0 times at the beginning of the year.
At the end of December we retired a term loan b using our revolver and cash on hand.
Our credit facility remains the only unsecured component in our capital structure and recall that in April of last year, we amended that facility transition to unsecured.
One achieving investment grade.
We also recently issued a redemption notice for 2027 notes, which we intend to call at the end of this month.
We expect to use cash on hand to fund the majority of that redemption.
So these higher coupon notes, which will further strengthen the balance sheet and result in increased free cash flow.
Reducing debt two to three 5% to 3.0 billion target range remains a priority.
A strong balance sheet is foundational to a holistic approach to enterprise risk management additions.
Additionally, lower that makes our business more resilient through commodity price cycles.
Earlier this month.
<unk> improved our outlook to positive and we remain one notch below investment grade at all three agencies.
We believe our ratings trajectory reflects the strategic steps, we have undertaken over the past few years, which have positioned us to better navigate the current commodity price volatility.
We have greater scale, a lower inflation adjusted enterprise cost structure.
Deeper and higher quality core inventory as well as a stronger balance sheet.
With that please open the call to questions.
Okay.
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 youre using a speakerphone. Please pick up your handset before pressing the keys.
But any time your question has been at this than you would like to withdraw your question. Please press Star then two.
Again in the interest of time, please limit yourself to two questions and he queue for additional questions.
At this time, we will pause momentarily to assemble our roster.
The first question comes from.
Charles Meade with Johnson Rice. Please go ahead.
Good morning, Bill are playing call ends up.
The whole rest of the southwestern team there.
Okay.
Hum.
This is the first one for you.
I wanted to ask about the pace of.
The activity and how did you get a drop those rigs over the course of your book.
Yeah, maybe a better way to approach. It is up you know looking at the.
Looking at the <unk> guide.
I'm a little.
I can't quite understand why the <unk> Guy can get from for Q1 is below the overall 23 guide because it you know.
Would imply to your body is going to grow over the course of the yourself.
What would you you think is the right way to explaining whether it's from activity or weather or whether it's some perhaps some of the specific dynamics going on in <unk> can you can you help us feeling that picture for us.
Certainly.
Traditionally.
Our production profiles as we move.
From the end of the year to the first quarter of the year, we typically have.
The the lowest production quarter or a drop there and that's tied to.
The little bit of front end loading that we have and then some backed off activity as you go into Q4, and then we start the year up with the full activity for the new year and Theres a little dip there and then there are some strong recovery.
Additionally, when we when we think about Q4 of 2022 and 2022 in general.
We outperformed on production due to the efficiency gains and we had accelerated turn in lines and we continue to live within the updated guidance. So there wasn't.
Tolerated turn in lines at the end of the year in Q4 to bolster Q1.
So so that shape not a surprise to us and kind of consistent with the typical profiles that we have the pace then as we move into 2023 is similar to past activity levels, a little bit higher in the first two.
Quarters than the back too, but getting closer to some level loading there as we're moving forward and we look at the 2023 program.
Got it so the.
The rig drops.
Are going to be more.
I guess more weighted to the back half of the year, if I understand you right cool.
Well it will start showing up where we've got a couple that happened in late March and then there is there is one that will occur in the second quarter and then and then the run rate will be lower in the second half of the year.
Got it. Thank you and then and then if I could ask one more follow up on the on the financial thought that perhaps recall.
Can you give us the.
You guys have made a lot of progress towards towards investment grade.
I think a lot of equity investors not to segue to the rating agencies aren't important but a lot of it is when investors look at them as kind of a lagging indicator. So that ends up being leading indicators, but can you give us a rough.
The pressure on.
What exceeding.
That's a great with how that's going to change the opportunity set for for southwestern particularly.
There has been any shifts.
On.
But the posture of LNG.
<unk>.
Yeah happy to the benefits following a few buckets most directly is finance.
Financial.
Yeah, obviously lower your cost of debt.
Even more important at least where I sit we expand our access to capital is just a much bigger market investment grade compared to non investment grade.
That could be important when you most need it.
Secondarily you touched upon it is commercial we think being investment grade will be a differentiator as people look to engage with producers and long term LNG contracts. It just shows durability from the right hand side of the balance sheet and then the third point, which I don't want to underscore.
Understate is really from a.
Our market perspective.
As you well know the market is becoming increasingly generalist.
It is.
They look where to invest marginal dollar in the gas sector, we believe that being investment grade will.
It will help distinguish us in a positive way from our peers.
That's helpful commentary, Thank you Paul.
You bet.
The next question comes from Aman Chowdhry with Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my questions.
When you wanted to do.
You highlighted a focus on conserving our balance sheet.
Growth profile it sounds like it's more back half weighted.
I guess the question is like at what price would you look to further cut completions, if we do see a need it in gas prices in the back half.
And on that vein, what flexibility do you have with your non operated rigs and crews to respond to those changes in gas basis.
Sure. So so as we as we think about the.
Hit the non op side of it first that's mainly in Haynesville.
We we expect to see a drop off in the non op activity as we move forward in line with our view that there will be moderated drilling program in the haynesville across all.
Hi.
I think you might have muted yourself by mistake.
Some of you there.
Like all of our capital allocation decisions they have to compete in the rack and stack and we'll make.
The corresponding or the appropriate choice around whether we participate and how we would.
Participate going forward, if we did.
Just on the economics of those wells.
I think on your first question on where we would maybe delay frac activity.
<unk> with we've got some good optionality in that space, because we own two of our own frac fleets.
Secondly, we are we.
We will steadily be watching where commodity prices are at both.
In the current month and end the year and what we think from a fundamental perspective to be able to make those decisions and we will have those scenarios mapped out if needed.
Couple of points to add to that.
We don't build DUC inventories to try to anticipate the market pricing.
Only build DUC inventory for operational efficiency to drive improved performance and on the on the overall plan.
We intend to invest within cash flow.
And in doing so if there's adjustments that need to be made to the program that we certainly are on top of that and would make them.
To be able to achieve that objective.
Got it that's helpful I lost true up.
And in the early part of your response, but I think I follow you would that you are seeing some rig drops from the non operated side.
And you will take a call in terms of if you do see.
The non op activity will choose to partner you have the option to participate in them or not.
Which can allow you to conserve capital.
You've got you've got that right perfect. Okay.
Then I guess on the Haynesville, specifically I mean.
Mid <unk>.
With the integration process is successful and <unk>.
You had it done or do you have.
You have operated these assets what are you are now how what are the learnings, which you have gleaned from that.
Net assets year to date to date and then how are you thinking about.
What are the opportunities to further improve the capital efficiency of that asset.
Yes, so we've definitely had.
Good learnings as we've gone through the full year I think the team has done.
A really good job.
And to see improved well performance and staying on track on that program throughout the year with service challenges and being a new asset.
Some of the learnings all around.
When there are when there is some nonproductive time.
The appropriate most efficient way to get back on track and that.
<unk> causes you to not have as many.
Days' worth of delay and that cuts cost.
We made progress on cycle time improvement on the drilling side and on the completion side and we think that there is further improvement opportunities there as.
As we move forward.
<unk> time trip time.
Some things were doing on our completion designs.
We are chain.
Changing the proppant loading in the step up in the proppant. So that we are more effectively putting the full job away and not having any.
Screen outs and half to go clean that out with coil, which again also adds time and by eliminating all of those we continue to shrink the cycle times there.
As broader learnings that are that are more around the whole development program around how we split the facilities together and enhance the facility designs. So that we can capture the full range of the production potential that each well brain.
And if we're seeing a well outperform that we've got the capability to benefit from that with our facility design.
And then additionally, the hydraulic modeling that we do across all of the midstream providers to make sure that when we bring new wells on we get the full benefit and we're not backing off other older wells when we bring those on so so those are a few examples.
And I'll just add one other one as you well know we have.
Seven high spec drilling rigs and more importantly, 17, so people to run them and the transition in the Haynesville the learning that happened the ability for our teams to complete our drill wells at as well as the contracted rigs that we have in the fleet gives us a lot more flexibility.
<unk> gives us negotiating.
Might and it enables us to work to try to drive cost out.
And performance and so I think it's a broad broader benefit that we anticipated happening.
The teams delivered.
Great helpful. Thank you.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Oh, Hey, guys. Thanks for having me on.
Bill I know you don't have cliffs, there anymore, but I would love to get your thoughts on the gas market generally speaks to I guess to your thoughts around that.
And the price risk management, you talked about earlier, but I wanted to.
My question like this.
We have a little bit above normal storage currently we.
We have a forward curve, which is 50% higher.
And we lost over 400 Bcf of exports from Freeport.
I'll say again, we've only just got slightly above storage do you think the dynamics of this gas market have shifted and if so.
Why continue to do swaps rather than colors on your E. R M.
I think the market dynamics have shifted you have <unk>.
Much greater structural volatility in the markets than we've had previously.
And that impacts both how we hedge how much we hedge.
And hedging.
<unk> remain part of our enterprise risk management and there are a number of factors when we.
Consider hedges from a framework, whether it's the cost we're trying to protect the fundamentals of the commodities.
The economic thresholds were trying to reach.
Our other objectives that we're trying to meet we used a variety of tools it depends on what time of year it depends on.
On shorter term market dynamics.
We.
We want to lock in the protection that we believe we need.
In certain markets in certain circumstances, but we also want to provide the opportunity to gain a bit of the upside by putting on a measured a number of colors and then the whole processes dynamic meaning that we will.
We've converted callers to swaps, where we see the need to do that.
And we meet from a risk perspective on these every week.
To look to shape, where it's appropriate.
Cost effective.
Shape.
The tools, we have because we believe that some of our part of our investor value proposition is is giving some of that are providing that access to two.
Higher pricing when should higher pricing, but we've recently done.
<unk> done a number of things around our our hedging the company is in a much stronger position from a balance sheet.
Sheet perspective, and the ability to pull back from high high hedging numbers.
Net debt at the time. They were they were implemented has had a lot more to do with our our transformational growth.
Our concern of particular concern in the market.
Defensive hedging and.
And perceived risk to the enterprise are major drivers for for how we tend to handle this.
This volatility.
I appreciate the salons are still thank you for that I guess my follow up is.
I mean, I think we're kind of on the same page in terms of perspective volume given the forward curve for the market does not yet seem ready to believe that.
Which brings me to the best use of cash and I guess my question is since the last quarter.
We have now I guess up four 5% return on cash.
You have a capital structure, which is 45% net debt.
But you still have a share buyback program. So it isn't building cash up faster way to accelerate market recognition of equity value at the enterprise value is going to be helped stop because it seems to be currently.
Versus buybacks I mean.
Yes.
Okay Doug.
Look it's a fair fair question and yes at least in the near term as Bill.
Noted, we intend to direct.
Our free cash flow to repaying debt this year with $4 4 billion of debt. We have some road to hoe to get to our target range of three $5 billion to $3 billion.
And then as we approach that target range.
I'm sure we will evaluate both.
Returning capital we do believe our stock is undervalued relative to here value net equity value of our enterprise.
But I think we'll also consider building cash as well and as you know it's not really.
Sort of a false choice there is an option there where you can do both and.
And we think lower debt, including net debt.
Has the benefit of lowering the volatility of our stock which has benefits.
To all parts of our capital structure, including the equity of lowering our overall cost of capital.
So those.
Durations would be very front and center.
As we progress our capital allocation strategy.
Well, you're preaching to the converted Karl thanks, so much for the answer.
The next question comes from Adam and Diana.
J P. Morgan. Please go ahead.
Yeah. Thank you Bill I had a just a broader question on how you're approaching activity levels I think the market was happy to see.
Your plans too.
Dave a couple of rigs off the program.
Yet you're going to you are going to be completing 25. This year I was just thinking about you know.
Why not potentially save the ducks till 2024, when the strip's like 360.
And.
You know if the strip holds in 2024 would you plan to bring those rigs back.
So Arun I'll make.
You hit on the first part of that.
As you know on quite a few of those ducks they represent a shift into the liquids rich portion.
The Appalachia, which is tied to a stronger view of liquids pricing and thats going to show up in.
Greater value greater liquids volumes in the equivalent volumes of those are less so that's part of the decline in the gas price.
<unk>.
When we look at the quality of our Haynesville inventory and the view that.
This is a relatively short term downturn in the cycle times with bringing those haynesville wells online.
With where prices are at right now we believe that sets us up nicely going into 2024, where we think there is a more constructive market.
And if we look at it.
Overall capital program, we're very conscious of the fact that.
The market dynamics are structurally has changed we're very conscious of the fact that we would like to fund our capital program with cash net cash flow and we're very conscious of the fact that as you think about our capital allocation strategy.
Testing and maintenance capital versus even growing.
Knowing that when prices were high was the lead off of that.
To generate the cash flow and free cash flow.
Following investing within cash or excuse me maintenance capital it was paying down debt and being very deliberate about taking the $1 billion off like we did in 2002 and more in the future.
And then.
Setting ourselves up so that at one point when we get clear line of sight on the debt.
And to do some some additional return of capital to shareholders. If we go forward in time and the prices Spike will go right back to where we expect to go right back to where we were which is and we'll evaluate this from all different dimensions, and economics and returns but.
It would we would go back to a maintenance capital type program and if we did that then some of the the contracted rates.
One form or another.
Rejoined the fleet and to support that effort.
Great that all of that all of that suppose supposes that.
The current dynamic.
Our pricing and supply demand balance in all of those timing on ramping of LNG and all of those things materialized exactly like everybody wants it to which probably often never happened. So we'll watch it.
And we'll continue to keep the productive capacity of the company to deliver.
Sustainable and resilient free cash flow going forward, along with paying down debt along with return of capital as.
As we move forward.
Great certainly a dynamic environment.
My follow up is if we look at your guide.
We're using midpoint you guys are going to complete about 8% more footage.
This year versus last.
The midpoint of your natural gas production is down call it three 6% or so.
I think 143 tells us so clay where would you peg.
From an activity perspective, where you'd be at a sustaining level and.
Okay.
And capex to support cut sustaining.
Level of production.
That's one.
Yes, I think a lot of that has to do with how quickly we can get the cost structure back in line with the current <unk>.
Rice environment.
We had <unk>.
15% to 20% inflation in 2022.
It was a $2 $2 billion program to deliver the $4 seven Bcf equivalent a day of net production. We've got modeled at the midpoint of our guidance another 10% to 15% of inflation coming in and so.
I think that we are getting more efficient as evidenced by the.
Lower average rig program that we have built in and where the midpoint of the guidance puts us on production, but I think as.
And a $3 gas price environment, a lot of capital we believe needs to.
The cost needs to come way down and on the LOE side that that would lower that annual capital number.
But it's kind of a wide range of where that how quickly that inflation goes away.
And is that a haynesville more specific comment versus Appalachia clay.
So, yes, and what we saw in 2022, so and Haynesville starts with higher capital.
As we see.
See things moving into 2023, we don't see as big of a delta through our supply chain work between Appalachia and Haynesville from an inflation standpoint.
Super helpful. Thanks, a lot guys.
Thank you.
The next question comes from Neal Dingmann with Chewy Securities. Please go ahead.
Good morning, all thanks for the time.
My first question is on really what I'd call rig plan your rig client sensitivity, specifically wondering how do you all think about more likely this just the pure Appalachian versus haynesville activity adjustments when modifying your plan for gas prices I guess, what I'm asking is that one of your peers had recently put out a slide suggesting historically most of the rig decline.
Our gas goes down it's been in the Haynesville. So I guess, even maybe asked another way how do you just think about margins in your haynesville versus Appalachian It yes.
I would call sort of notably higher notably the low gas prices.
Yes, I think kind of the direction that we have made.
<unk> made some adjustment with the liquids rich program is indicative of what you are talking about and the resilience of those assets in this price environment, but.
We try to make sure were pretty clear.
Average core haynesville versus.
Some of our acreage in the southeast part of Haynesville.
We have much lower breakeven there than the average across the whole core of the play and I commented on that in the script where.
We've got higher three month June six months, Jim performance when you look at.
Not only our comments, but the public data and there was a corresponding higher EUR.
On that so that's why our rack and stack is still a solid mix across our portfolio, but with a lean towards picking up more liquids in the program, which is what we did.
And we have the ability to.
To move quite go ahead bill.
The comments that probably makes we can.
They can materialize and we can begin getting results very quickly.
No I think that's that's important to understand I think you do have that in the haynesville.
Then maybe just second question maybe for you just on Oss and placed are specifically very recently I'm. Just wondering what have you seen in cost of given the reduction in rigs and other services by you all and others have you seen anything more recent.
As far as the Oss cost just anything you can share there. Thank you.
Yes, I can I can start with we are really proactive in that space.
It's early.
To start seeing tangible movement, there, we believe that it needs to happen and.
As we move further through the fourth quarter I mean, the first quarter I am sorry and into some of the open eight openers that relate to some of the different services, we will get a better feel for that we already know in other companies' earnings calls and what we know from privates.
Conversation about rigs in the Haynesville starting to come down.
I made a comment earlier, we're going to have to going down in March and then more in the in the second quarter. So I think that they should go hand in hand, and we're going to stay really active in that space using all the tools we have from a.
Procurement standpoint.
Sounds good thanks Glenn.
The next question comes from Jeffrey language, John with Tudor Pickering Holt. Please go ahead.
Good morning, everyone. I appreciate you all taking my questions.
Good morning.
My first one is on the 2020 budget just on the moving pieces behind that as we think about the low and high end of the range. There I know you spoke to this a little bit earlier.
I don't know I mean, you, obviously got a range there on well count for the year by region, but I'd be curious, how youre thinking about well costs by asset there.
Appreciate your commentary earlier, saying, it's a bit early to talk about improvements in green shoots on the inflation side, but if you could speak to what the guidance contemplates as far as well cost ranges for the Haynesville in Appalachian and how that compares to what you're seeing today to be helpful.
Sure. So so it kind of starts with the fourth quarter results that I talked about in my script.
Well cost in both of those areas, where we were in the mid eight hundreds in Appalachia.
In 1900, and 25 in Haynesville and our thought there is that fourth quarter activity represented the bulk of the inflation that we had seen in 2022 and our.
Kind of our target is to do all we can do to hold closer to those costs, but that would indicate that we're seeing some inflation reduction so I think our range.
In those areas is anywhere from an 852 at $9 50 in Appalachia.
And like we've talked about a lot in Haynesville, where you drill matters on your well costs and it also matters for the well performance and we have deeper wells with higher bottom hole pressure, which increases while cost, but those wells are the best performing wells in the basin. So our range is.
A little bit different than some of the shallower.
Older part of the core Haynesville asset, but I would say that ranges anywhere from that $19 25 to a little over 2100, but we're working on efficiency improvements and inflation improvements.
Perfect I appreciate that color. That's helpful. And then just a quick follow up on hedge coverage, maybe you're referencing.
The added protection for 2024, just wanted to get a reminder, on where you could see that coverage moved to as a as a percent of production.
And if we should think about.
That converging towards what we see on the 2023 hedge book today or the balance sheet tempers your appetite for getting to that level as you kind of striking that further.
Yes, it's a.
Good question, when we think about.
24 particular, there are two factors that I would say predominate are thinking about level.
One is you noted in the prepared remarks is priority.
During free cash flow to lower debt.
That obviously would suggest that we will look for opportunities to lock in revenues that we think will lead to free cash flow and further that goal.
Another factor.
Again noted by Bill in the prepared remarks is increased structural volatility that we're seeing in the gas market.
Long story short, we believe that that higher volatility increases risk.
At some point a higher hedge levels, we entered 2022.
Largely due to the high leverage we had during the pandemic as well as 2021 acquisitions that we funded with about $2 4 billion of debt with reasonably high hedge levels to 80 plus percent for 'twenty, two and then 60 plus percent between three and then as you saw Cal 'twenty two 'twenty Cal 'twenty three rise last year that crew.
Right.
Significant unrealized loss for us with our hedge counterparties.
And effectively created some limits on their willingness to have exposure to us and now as we're seeing.
The current gas environment, the opportunity cost of not being able to participate and locking in those higher prices last year as much as we would've liked.
Quite high so in addition to the stronger balance sheet. This increased volatility I think will.
Net net caused us to temper our hedge levels.
Got it I appreciate the detail thanks.
The next question comes from Paul Diamond with Citi. Please go ahead.
Thank you Ryan good morning, all thanks for taking my call.
Just wanted to quickly touch on China, you had longer term thoughts on the LNG takeaway or LNG capacity currently spending about $1. Five you just wanted to see if that was.
How the conversations were going around any potential increase to captured that.
Bob do you expect to see.
Further demand Poland late 'twenty four 'twenty five.
And we have a portfolio of contracts with a number of.
The LNG providers that range in.
In price and tenor and quantity.
All of that and to build sort of a.
Broad.
And.
Concentration of risk management.
Picture that lets us kind of add and subtract.
Alright.
On a much broader much broader opportunity set.
Today, we're at one 5 billion a day.
Again various.
Lengths of contracts.
We've been looking internally at target somewhere near two Bcf a day.
Given our total of five.
<unk>.
As we've analyzed that economically strategically that makes some sense.
The other thing that we've talked about is access to the international market going to be particularly careful with that to understand what that actually means and how you protect whatever you think youre going to get from enhanced margins or low cost liquefaction turning to high cost liquefaction shipping political.
<unk> fiscal all of the different things you would look at.
Want to take on that potentially higher.
Priced commodity and I used the word potentially a lot of time seems over the last 18 months is quite high.
And then there has been periods of time extended periods of time when it hasnt.
So we'll continue to study that.
Our basin proximity are.
Already contracted firm transportation gives us all kinds of.
Advantages, but it also mitigates some of the risk associated with entering into those agreements and we've talked to a number of players we've sort of worked to screen or the ideas on how we might want to work with.
And we're having some conversations in that in that space as we speak so while we've kind of telegraphed as.
You get a certain commodity price.
Opportunity set.
With a Henry hub based agreement you have a different set of opportunities and risks that come with a higher <unk>.
Higher priced contract that with a lot of additional <unk>.
Risks that we want to understand and we'll put those together and.
It had more to say about that going forward certainly investment grade certainly all the other things that we've talked about on this call and in the premium right.
Great.
Reading materials.
Certainly bode well for how we position the company and we just want to go into its mark.
Understood. Thank you for the clarity and just a quick follow up you guys have talked about.
Wanted to spend within cash flows, but given the structure of volatility is that more should we be thinking that more on like a 12 rolling month basis or is that or do you guys view that more as quarter to quarter I guess the question is.
We talked a bit around that Mike my comments are around an annual basis.
We certainly manage that much tighter.
And in this particular.
Macro environment is even more even tighter I can assure you so.
But yes, we'll manage that on an annual basis.
And as well as the long term.
We move forward.
Thank you for your question.
Our next question comes from Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning.
Good morning.
So I <unk>.
Wanted to.
Touch on the topic of your in house.
Drilling and Frac fleets.
Uh huh.
In so many different parts of the cycle there the advantages of those are pretty clear and I was just wondering.
Kind of playing Devil's advocate thinking about maintenance thinking about.
The supply chain and just.
Keeping rig parts in.
And inventory and sort of the cost and challenge that.
Is there anything in this regard.
Low cost.
Low price gas environment in the event it does improve persistence.
That could cause you to shift resources or to favor shifting a little bit more towards incremental vendor rig instead.
Instead of <unk>.
Concentrate on your own fleet.
Maybe never say never but we feel really good about what benefit our vertical integration brings.
So the company and when you when you looked at day rates.
Different cost for pressure pumping and rig rates.
We've got some inflation installation that comes from that by owning our own the performance of those.
It has worked well hand in hand, with the third party providers that we use where the learnings passed between between both <unk> and <unk>.
We're able to get the Max benefit where both the third party performance has improved and our own and when you think about utilization, which I think is the biggest part of that discussion with our increased scale from the acquisitions that we've done we have a nice mix.
Seven company owned drilling rigs and two company owned Frac fleets.
As part of a total program.
It is.
Pretty materially bigger than that to where it gives us the optionality in a low price environment. If we're cutting back to drop the third parties and then continue to have the base activity done by our company owned equipment and a couple of other comments on top of that we benchmark. This biz.
And it has to earn its own return.
So clay and his team.
Assure us that when they go through all of that just as if it were its own little company.
S that it delivers.
On the commitments that it makes.
We have consistent teams on these rigs so we know who is coming they happen to be employees, which is great.
And so they are rewarded the way the company has rewarded.
And they.
Their capability to learn and deliver equal or better performance has been consistent in this process.
They are only allowed to work for swim.
And I experienced when you have a vertical integration business like this and you allow it to go often and worked for somebody else.
It's easy to lose the plot on the on where their home basis.
When you take when you take those and along with clays.
And the rigor that we put in terms of making sure. This is the right thing for us to be doing.
I think I'm.
I'm very confident that we're in a better shape.
A better spot.
Great Thanks and.
No.
Discussing with.
Another high gas.
Gas producer earlier in the earnings season.
The topic came up.
Okay.
It's it's a bullish topic, so maybe sort of help offset this.
Near term softness we have maybe in sentiment.
That with LNG coming on that there are going to be these big step functions upwards.
Of demand.
LNG.
Coming on.
<unk> 24, but I guess in 2025 26, especially.
I was just wondering about your thoughts.
The industry's ability.
Sort of.
Hopefully the funds would be working in concert to really be able to supply the production capacity in aggregate, there's going to be needed.
To meet those those big steps up.
Gordon and demand.
So this productive capacity of our industry is.
Is quite powerful and.
Robust in general.
And so the ability for this industry.
To respond has been there, but I'll leave that.
With pullbacks and investment.
Challenges on infrastructure.
Challenges on.
Getting gas from from one place to another around major cities. All of this can be built on the Gulf coast.
So.
Goes quite far.
Yeah.
Anyway.
I think there are risk to that.
So when you.
And then not everybody can growth.
Not everybody has the.
Capability.
Haynesville can help but.
Appalachia without infrastructure getting approved.
Ability for for that basin to grow and if LNG grows to the upper end of the scale youre going to need Haynesville Appalachia.
The Permian supply it.
Thank you.
There is some there is some risk to that.
At the same time just to give you a balanced view.
Building all of this at one time.
Probably means that some come on.
Exactly at the time that they said they are coming on.
10, a M on Tuesday.
Sure.
The rest of it is it can becomes challenge you've got to have skilled workers that I have.
Capability.
To get it all built and so we take both.
We take a broad view of that.
Fortunately for us.
65% of our guests can get to the LNG corridor.
Fortunately, our reserves are deep and broad and we have approximately two that that growth in any firm transportation capacity that we need we already have.
Contracted so that when it's built it's ours and theirs.
We've set up to be one of the major <unk>.
Flyers going forward.
Yeah.
Yes, I'll leave it at that.
Okay.
Great. Thanks, a lot.
Thank you.
Okay.
The next question comes from Craig.
Bank of America. Please go ahead.
Good morning, guys I know, we're at the end of the call just to just a question.
On the fourth quarter.
You had a nice working capital benefit there can you talk about whether you expect that to continue this year.
And does that potential source of cash.
Yes, good question.
We have that benefit in the first quarter and then into the fourth quarters.
The second and third being being more of an outflow and we would expect that same dynamic to continue through this year.
Great and then just one more here as you've you've alluded to.
Focus on investment grade and Youre going to pay down debt, how do you think about buying.
Buying back stock this year, considering what's happening with your stock price.
And is.
Is it.
How do you prioritize that over over buybacks.
Yes. Another good question, we have been consistent not only on this call but.
Really over much of the last year, even since we announced buyback authorization back in June the prioritization.
Repaying debt.
B being Paramount this year at least with the current commodity price outlook.
We expect our free cash flow to reduce debt.
And while we agree stock price today is a lot less and we believe it's inherently worth.
Do you believe that paying down debt has a lot of benefits.
Benefits for again, all parts of the capital structure.
Lower volatility, which has benefits for equity and lower cost of capital and candidly you directly.
Transitioning your enterprise value from debt to equity when you do that as well so more of a asset values put back within that should.
Yes at least theoretically practically should practically too.
We've seen this beneficial to your equity value. So this year I anticipate us again, using free cash flow as bill said to repay debt and as we approach that target with greater confidence both in terms of time and also commodity price outlook.
We can we can do both as we've shown in the past and we'd expect to do so.
You are speaking the language of the rating agencies like to here. So thanks for the update.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Bill way for any closing remarks.
I want to thank you all for your questions I think they are a terrific great discussion and thank you for your interest in the southwestern energy and we look forward to.
Putting together in another quarter and sharing with.
Some additional achievements that we've made in the meantime have a great weekend and thanks again for joining us.
Yeah.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may all now disconnect.
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