Q2 2023 Range Resources Corporation Earnings Call
The scheduled infrastructure maintenance and upgrade projects were completed on or ahead of schedule, providing uplift for the quarter versus our prior guide.
Supporting our production profile, we turned to sales 11 wells located across our dry wet and Super rich acreage with the bulk of these wells on pads with existing production, creating some of our most capital efficient operations.
Turn in lines for the year are expected to peak in Q3 with turning lines weighted towards the back half of the quarter in conjunction with the commissioning of additional wet gas compression.
This should drive sequential growth of approximately 30 to 50 million cubic feet a day in the third quarter and aligns with our production plan for the year.
While generating an end of year production level of approximately $2 two bcf equivalent per day.
And to reiterate an earlier message we see this production profile as a complementary setup as commodity prices improve after the shoulder months and into the winter.
Looking at operations the drilling team continued to improve efficiencies and set new program records during the second quarter.
24 wells were drilled in our southwest, Pennsylvania, dry and wet acreage positions, while returning to pads with existing production for the majority of our activity.
The average drilled lateral length. During Q2 was approximately 12400 feet or a 5% increase versus the 2022 average.
As part of Q2. The team also added four wells with lateral lengths exceeding 2600 feet.
These represent the longest laterals drilled in the programs history with the longest measuring just under 22000 feet.
In addition to drilling our longest laterals. The team also showed great efficiencies with 24 hour periods in excess of 6000 feet.
As a result, our average daily lateral footage drilled exceeded 4700 feet per day in Q2 reps.
Representing a 42% increase versus the 2022 full year average.
This was driven by rig equipment changes that could benefit future development programs.
Completions also improved efficiencies and set new program records as the team averaged over 10 stages per day throughout the quarter.
Including a 24 hour record of 17 stages.
As a result, the first half of the year averaged nine three frac stages per day, representing a 13% increase versus the 2022 full year average.
Supporting this accomplishment was the utilization of our improved completion surface equipment configuration enhanced logistics and the benefit of returning to existing pads.
On our previous call, we mentioned a pad that was being completed during the first quarter and was projected to be one of ranges most overall efficient pads.
This particular operation consisted of four wells located in our wet acreage and was completed and turned to sales during the second quarter.
On this pad operations were able to capture two of our top fastest days drilling in the lateral and the highest overall completion efficiency for a wet area of completion.
With the water and logistics teams setting new records for water handling by eliminating unnecessary wait time.
Overall, the pad cycle time from spud to first sales was just over 180 days for 65000 lateral feet of combined wellbore.
More than a 50% improvement versus a similar area pad developed in 2021.
This ongoing improvement is a byproduct of the use of new technology and the hard work from our operational groups in Pennsylvania.
I congratulate the team on this accomplishment and know that they will continue to look for ways to further support our peer leading capital efficiency.
Turning to supply chain.
In the last few months rig count started reflecting signs of decline in the basin as activity decreased under the current commodity environment.
Range has also observe some softening in other Oss categories as we work through Q3 and deploy our annual bid process. We will continue to follow the market and pursue savings opportunities.
As we look towards 2024 and beyond we expect range to remain at the low end of the capital cost curve.
On the NGL macro we believe the historically low prices we saw in the second quarter are set to improve later this year.
LPG exports out of the U S have been robust as the three month Rolling average reached a new record exceeding 2 million barrels a day in April .
Connecting U S LPG supply with recovering petrochemical demand and increasing <unk> capacity in China.
This growth in exports, coupled with moderating supply growth out of the U S is expected to bring storage levels back into balance later this year.
Looking at ethane prices are off their lows and fundamentals remain supportive as the U S has set records for both domestic and export demand with year to date 2023, averaging $2 5 million barrels a day.
<unk> 62000 barrels a day higher than this time last year.
For range are uniquely positioned NGL portfolio positions us well to capture opportunities both international and domestic and supports our 2023 NGL guidance range of $1 per barrel discount to $1 per barrel premium relative to the Mont Belvieu index.
This liquids Optionality is a positive contributor to ranges resilience through cycles as was the case this quarter.
On the natural gas front, we are encouraged by continued gas power generation strength. This summer.
When paired with minimal dry gas production growth expected from the Haynesville and Permian over the next several quarters, we see the domestic natural gas market gradually rebalancing later this year before further strengthening with increased LNG exports next year and beyond.
Okay.
As we have discussed on prior calls range of successes are rooted in our culture focused on safety and the environment.
During the quarter range completed the Miu certification process and received an a grade with third party audit covering our southwest PA assets.
Ranges Eldar inspection program, which increased in frequency to eight times per year at the end of 2022.
And source level production facility design detection and mitigation practices were recognized by the audit and helped us maintain whether the industry's lowest emissions intensities.
For safety, we observed further improvements in our safety performance in the field in Q2 with zero Osha incidents for the quarter.
You can find more details on these accomplishments and others in our corporate sustainability report that was released last week.
As we cleared the mid year point and focus on the second half of 2023 and beyond our.
Our program is on track.
After drilling over 500, Marcellus wells the team continues to advance our overall efficiencies.
Levering on repeatable well performance across our large contiguous inventory and marketing our production to diverse outlets providing enhanced margins.
As I mentioned on the prior call the resilience of <unk> business is being demonstrated in today's challenging price environment. As we are still delivering on stated objectives and generating free cash flow for 2023.
I'll now turn it over to Mark to discuss the financials.
Thanks Dennis.
The second quarter was successful operationally and financially with solid execution across the business.
Cash flow totaled $187 million funding.
Funding capital expenditures and the quarterly dividend, while maintaining balance sheet strength and the trajectory to our target capital structure. Despite what we expect our near cyclical lows and commodity prices.
2023 commodity prices have obviously been softer than last year.
And are below the level that can sustain industry production levels.
Fortunately range is equipped with one of the lowest full cycle breakeven costs in the business.
The benefit of going through a period of low prices is the visibility into the economic durability of assets across the E&P space.
Given the economic resilience of ranges portfolio.
Our goals and expected planned for 2023 are consistent with last year despite different prices.
We'll develop high quality assets generate free cash flow.
<unk> capital to investors.
Strengthen our business and enhance our position to participate in continued demand growth through our low cost long life inventory.
This is in Stark contrast to higher cost shorter life assets, where operators are seeking ways to reduce outspend in many cases by allowing production to decline.
Taking a closer look at range of second quarter results.
Cash flow of $187 million was driven by strong production levels, achieving pre hedge realizations of $2 47 per Mcf.
This realized unit prices 37 above Nymex Henry hub.
We're seeing the benefit of ranges diverse sales outlets for natural gas.
And the pricing uplift from natural gas liquids and condensate.
During the second quarter ranges realized NGL price was $21 51 per barrel or $3 58 on an <unk> basis.
Register portfolio of transportation capacity and customer contracts supported differentials such that the total per unit price received by range remains a strong premium to Henry hub natural gas.
In addition.
<unk> approach to hedging provided an improvement to per unit realizations of 41.
We're hedged realized price of $2 88 per Mcf.
Hedged cash margin per unit of production with a resilient 97.
Benefiting from our persistent focus on efficiency and the price linked to nature of certain costs.
Total cash unit costs improved by 32 cents versus second quarter last year.
The change from prior year, primarily relates to savings and processing and power costs.
Which are related to NGL and natural gas prices with variations in other line items relating to labor cost inflation or the timing of planned workover projects.
Cash interest expense declined by $9 million for the quarter compared to Q2 last year on reduced debt balances equating to <unk> <unk> per Mcf and savings.
These improvements more than offset slightly higher LOE.
As we wrapped up planned annual Workover projects early in Q2.
Looking quickly at gathering processing and transportation costs.
We have improved our annual guidance for that line item by approximately five <unk> at the midpoint.
As mentioned on previous calls processing costs tend to move about one per Mcf.
For every $1 per barrel move in our realized NGL price.
For context since the start of the year NGL strip prices for 2023 are lower by about $4 per barrel and that is being reflected in our improved <unk> guidance, showing the right way risk and the natural hedge that our processing contract provides.
Ranges financial hedging program supported realized prices for the second quarter with approximately $90 million and Nymex related gains.
Looking forward range is natural gas is approximately 50% hedged for the balance of 2023 with an average $3 42 floor.
Providing further support to ranges free cash flow profile.
For 2024, we've hedged approximately 50% of natural gas at an average floor price of $3 70.
Using a combination of $4 swaps.
And colors, retaining upside to roughly $5 50.
During the quarter, we initiated a modest 2025 hedge position on natural gas at an average price of $4 12.
The objective of this program is essentially to cover fixed costs at attractive levels.
Enabling consistent free cash flow generation wildly.
While maintaining exposure to a market poised, we expect to positively respond to new LNG facilities coming online alongside rising power demand with the current backdrop of reduced industry drilling activity.
Turning to the balance sheet at the end of Q2, we held cash balances of $162 million.
With the change from last quarter, primarily deployed to repurchase bonds due in 2025 at a modest discount to par totaling $62 million in principle.
We will continue to manage our cash balance to retain flexibility for efficient working capital management bond redemption and share repurchases.
This cash balance combined with future free cash flow and $1 2 billion available on our undrawn revolving credit facility, providing ample liquidity to efficiently operate our business and take advantage of opportunities the market may present.
We've been focused on a target capital structure for several years.
And as of quarter end, we have reduced debt net of cash by roughly $2 5 billion.
Since it peaked in 2018.
This places us very close to entering our target range of one to one 5 billion net debt.
With current leverage of 0.9 times debt to EBITDAX and close proximity to our balance sheet targets. We believe the company is in great shape to continue value creation on a stable financial base throughout business cycles.
Successful second quarter results combined with a positive industry backdrop for range going forward support our confidence in the return of capital program discussed on previous calls.
We believe a stable reliable fixed cash dividend is appropriate at this time in this market while remaining opportunistic in our share repurchases with capacity available totaling $1 1 billion.
Alongside our primary objective of reaching target debt levels.
We will remain flexible and adapt to market conditions.
Project returns and prudent reinvestment.
Reindeer story for a long time has been about innovation translated into two reality through dedicated teamwork.
Hard work focus and swift, but precise adjustments to our business plan without varying from our core objectives for demonstrating the value of ranges portfolio and business.
This focus and dedication will continue as ranges business is strong and is primed for impending demand growth domestically and internationally for natural gas and natural gas liquids.
With a strong financial foundation, and the largest portfolio of quality inventory in Appalachia.
Paired with transportation to delivery points across key U S and international markets. We seek to continue this trend of disciplined value creation for our shareholders.
Dennis back to you.
Thanks Mark.
Before moving to Q&A I'll reiterate a message we've shared previously.
As the world continues to move towards cleaner more efficient fuels.
Natural gas and Ngls will be the affordable reliable and abundant supply that helps power our everyday lives, while also helping billions of others improve their standard of living.
We believe Appalachian natural gas and natural gas liquids are positioned to meet that future demand.
And within Appalachia range will be among those leading the way on capital efficiency emissions intensity and transparency.
Range has de risked a large inventory of high quality wells across our half a million net acreage position in Appalachia and.
And translate that into a business capable of generating free cash flow through commodity cycles.
We are in the best position in the company's history.
And I look forward to our next many calls together as we continue to demonstrate our dedication to safe efficient operations and consistently generating sustainable and competitive returns for shareholders.
That will open the line for questions.
Thank you Mr Gardner.
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And one moment for our first question.
Our first question comes from the line of Bernard Dawn's with Charles Your line is open. Please go ahead.
Hey, Good morning, guys. Just wanted to talk about the turn in line disclosure versus the percentage of Capex. So far this year I'm, assuming there is something in there about how much capital you have may be put towards.
Wells that are ready to be turned to mine ore completions, but that aren't captured in your in your turn in line schedule. So just maybe you could address the.
The lower percentage of turn in lines, so far versus the higher capex.
Yes, good morning, and thanks for the question as you look at the first half of the year, we started off with a couple of drilling rigs and then bolted on a third horizontal rig as we started to get towards the back half of Q1. So when you look at Q2 from a drilling activity perspective, it really became our high.
As drilling activity and then on the completion side, we kept our base Frac crew operating through the balance of the first half of the year and it will remain with us.
Through all of this year's program, but we picked up the spot Frac crew in the last weeks of Q2 as well and when you think about the the completion versus drilling percentages of spend it starts to clearly changed the capital.
That activity cadence starts to change the capital profile at that 0.1 of our turn in lines from that drilling activity that are getting kicked out are going to then see first sales and production start to come together in Q3, especially more weighted to the back half of the quarter.
I think approximately a third of our turn in lines are in Q3 and that Youre going to see the majority of those actually be in the last weeks of the quarter. So that's from an activity cadence standpoint, how it will shake out for the balance of the year and then what you see.
The Q4, it'll be actually a tail off not too dissimilar to what you saw in Q1 and Q2.
Great and then the follow up is kind of on that point if.
If you do have a a very light maybe end of the year, maybe the last month and a half or so program.
We're looking at a pretty attractive script.
Maybe <unk> of next year is is there some discussion going on internally on whether or not you might want to pull some of that capital from 'twenty four to 'twenty three if if the commodity environment password.
Yeah. Good question I think those are questions. We always have internally to make sure that we're optimizing not only this year's program, but we're thinking about what's best as we start to look forward as well.
Got a history of demonstrating of being at or below our communicated capital guidance.
But one of the reasons why we added some of our capital flexibility. This year for some of the inventory that was at $30 million that we communicated as part of our annual plan was to allow for that kind of optionality maintenance is really below the 615 level, which is the upper end of our guide, but having that flexibility to be at the upper.
To that capital guide allows us to consider what's the proper setup for 2024.
What does it look like to maintain activity or a particular rig that maybe youre going to retain for that last month or month and a half. So it's all part of optimizing that and have your portion of your program is setting up for 2024. So we will absolutely have those conversations internally there'll be necessary, both not only this year, but in future years to come.
That's great. Thanks, guys.
Thank you.
Thank you and one moment for our next question.
Our next question comes from the line of online chatter with Goldman Sachs <unk> Company. Your line is open. Please go ahead.
Hi, good morning, and thank you for taking my questions.
Thank you.
My first question was on cost deflation any color you can provide on leading edge <unk> and service costs.
Implication.
Lower cost heading into quickly.
Yes, good morning <unk>.
Somewhat build upon I think the the response that we shared at the prior earnings call and I'll start off by saying, it's still a little bit early to to frame what that will look like for 2020 for encouraging thing is is we're clearly seeing some rigs come out of the mix. If you look at where we were at the end of it.
The end of December in 2022 versus where we were a total rig count last week I think we've got around 110 rigs approximately that have come out of the mix. The Haynesville is now down to $45 46 range of course, Youre seeing Appalachia at a similar level also.
The other rigs coming out of other basins that so activity over the last 24 months during different pricing environments. All of that started to manifest itself into some conversations around rig availability what that will look like for 2024, we've seen some early signs of relief on areas like tubular goods, where <unk> seen not only rig.
Activity influenced that but also just the supply catching up with what was the demand in the past and also inputs as a part of that supply chain start to normalize and then of course, we're starting to see some availability and I'll just say some relief when it comes to some of this supporting equipment as a part of our day to day on operations.
As we get ready to go into the bid process. This fall we fully expect to have a lot better way of framing what this could look like for 2024, but I would say all in all we are encouraged by some of the relief that we're seeing.
But we also know I will say this there will be certain equipment like maybe the E fleets on the Frac side, maybe some of your higher end specification equipment for long laterals like we talked about in our prepared remarks today.
Would expect that equipment to remain in pretty high demand and though there could be and we would expect to see some relief on pricing from a service perspective come along with that.
That's part of what's still needs to materialize and of course, we're also seeing weaken a week out some additional adjustment of the total U S rig count last thing I would say is wherever things shake out from a service perspective, we really expect to be on the leading edge of what that capital efficiency looks like coupled with our service cost.
We've talked about it in prior one on one meetings and on these calls, but when you look at slide seven and were ranges cost per Mcf for that molecule replacement on a decline basis. Each year, we take our low base decline you factor in our efficiencies some of which we set new records on and talked about today it puts us in a position.
Even at today's pricing to be at 76.
<unk> per Mcf replacement versus our peer average of $1. So however, it shakes out we really see that still being on the leading edge.
Based upon our team's results and also with our contiguous position that we have that we're developing.
Gotcha, that's that's very.
Comprehensive thank you.
My next question was on hedging.
You're now 50% hedged for next year.
I'd say 70 slower this is in line with the past commentary are plummeting.
Cost and capital commitments.
Given our bullish outlook for our 2025, how would you thinking about hedging portfolio do you plan to hedge more.
Good question and the capital commitments are you happy with.
But no look when be lessened exposure that you have right now.
Hi, good morning, among I'll start this one off I think you've touched on the same the philosophy behind our hedging program and that is largely an essentially to cover the fixed costs.
And maintain exposure to a strong market, obviously with LNG facilities being.
Commissioned over the next year and two we expect a significant re rating in the commodity price one of the best places to be.
As a corporation is in a position where you don't have to do something.
Having paid off $2 5 billion in that range is in a position where hedging is not necessarily something we have to do is certainly not to levels that are extremely high like the 70 to 80 plus percent levels, you might've seen five or 10 years ago across the industry and it ramps specifically, so where we sit today, we've got just a tiny bit.
To do on the balance sheet before we enter our target net debt level.
So as you look at the 23 hedge position at approximately 50% of gas and you look at 2024, we've got just a little bit as I said a progress of work left to do you also have the construction of the in service timing into 2024 of the new facilities and that re rating.
Demand, making its way into the forward curve. So as you look into 2025, it's a modest foundation, we think that that current position is sufficient to cover fixed costs.
So as I started we're in a position where we don't have to do anything we like the hedge book, where it is we think that meets our our risk management objectives and to turn it around that means while we are actually encouraged by the way 2024 is setup, where 50% hedged over 50% of unhedged and for 2025, we have a good.
Foundation, but we're 80% unhedged and we'll be responsive to market developments between now and then we'll monitor the cadence of construction and service and demand and what the forward market may offer us.
Having said all that again, we'd like to book, where it stands it covers our basic philosophical objectives.
It makes it a lot of sense. Thank you.
Thank you.
Thank you and one moment for our next question.
Our next question comes from the line of Leo Mariani with Ross.
Your line is open. Please go ahead.
Yes, thanks, guys.
I was hoping maybe you could just talk a little about sort of capital allocation here, obviously, you decided to buy back some bonds in the open market at a discount which always seems to be a good use of <unk>.
Proceeds, but as a result, we didn't really see anything on the on the share buyback side and maybe you could just kind of give us a little color in terms of how youre kind of thinking about using that free cash flow.
The balance of the year end and how you kind of decide between debt Paydown and buybacks.
Sure. Good morning, Leo I think where I would start with our waterfall of capital allocation really is all based on the assets. When you are talking about an asset base. That's got 30 years of drilling.
Activity production 50, plus year type.
Horizon Youre trying to make sure that you have a financial foundation of a company that will comfortably navigate through cycles and capitalize on opportunities that are presented to it.
As I said, the best place to be in a corporate perspective is to not have to do something so where we are today as we've made great progress on the balance sheet, but that does remain a priority as we've talked about before funding our key objectives, one maintenance capital to debt reduction three shareholder returns be it the dividend or the share buyback in <unk>.
<unk>.
Growth when appropriate so where we sit today, obviously commodity prices are lower and by definition cash flows a little bit lower as we sit and look at the performance of the various securities and where the prices are on being able to pull in bonds.
The use of our free cash flow this year to reduce debt and enhance equity owners value through that path seems the most prudent.
Now having said all of that one of the keys to our capital allocation plan and a return of capital program is the opportunistic element. The reason, it's not purely formulaic as the market moves interest rates, obviously are moving around commodity prices are moving around and we want to be able to allocate capital in a nimble and prudent fashion. So.
That is certainly the priority, but that waterfall and capital allocate <unk> as I said before is not mutually exclusive if we were to see a big pullback in the market. For example, recession fears obviously are being chatted about what happens to them.
Our economy more broadly if theres a broad.
Broad based pullback in the equity markets range has $1 1 billion available under our current program and we believe that the balance sheet strength would certainly give us the opportunity to step in and buy back shares. If we were to see any sort of retracement.
For the time being we are comfortable with that methodology that approach to that is the priority, but we clearly will make use of the share repurchase program just as we have for the last two years.
Okay. Thanks, and then just as.
A quick follow up obviously range has sort of been in maintenance mode on production.
For quite a few years now obviously you guys talked about the upside expected.
On both gas and NGL markets as we get into 'twenty, four and even more so in 'twenty five on gas and what's kind of the latest thinking in terms of that sort of maintenance mode. On production is that something you think is likely to continue in 'twenty four and maybe its 25, where perhaps there can be.
It's slightly different decision on that.
Higher LNG exports and potentially MVP coming on in 'twenty, four and just any color around that would be appreciated.
You bet.
As we think about 2020 for I think a good a good starting point is to always think about maintenance for our for our program.
That's about 60% to 65 wells kind of year end of year al to hold are our assets flat and our current infrastructure utilized but as we start to look forward. I mean, there is there are several reasons to have a positive outlook and some of them we've touched on either through Q&A or through prepared remarks today and in prior calls.
LNG clearly being one of them we're still.
Optimistic that MVP reaches a place where it's commissioned.
All of that starts to have a positive outlook, but the other part is inventory exhaustion and I think as you start to look more and more around not only appalachia, but other basins you are starting to see that conversation get elevated along with degrading well performance year over year. We think that all is positive when you think how it aligns back with ranges long runway.
Inventory and our ability to potentially grow in the future, but growth is going to really come back to a point of what the both the basin fundamentals point to and also the macro so we'll be patient we'll look at what the best program is for 24 and beyond but the way to think about it today is to consider a program to start.
Our base of maintenance.
Thank you.
Thanks Leo.
Thank you and one moment for our next question.
Our next question comes from the line of Roger read with Ws asked your line is open. Please go ahead.
Yes, good morning, Roger read Wells Fargo, sorry, just typed in WNS on the registration page.
Thanks for having us guys.
Couple of the questions I don't want to repeat so I'm going to I'm going to come at this a little differently on your capital efficiencies you talked about cutting spud to first production to 180 days, obviously pretty impressive as we think about your outlook for latter part of 'twenty.
More than 25, which I don't think we have any disagreement with.
As you increase activity what things can you do now.
Best practices are learnings have you put in place that are going to allow you to maintain capital efficiency as rig counts go back up as spending goes back up in the space and presumably you would want to add production as well.
Yes, good morning, Roger I think there's maybe a couple of ways of of bifurcated. This conversation and I think one is how we kind of view are our efficiencies in our service costs versus overall capital efficiency.
And if anything demonstrates the team's ability to continue to deliver on on leading efficiencies I think our Q2 results have clearly demonstrated that.
For the group to be able to basically have a 13% increase in completion frac stages per day in the first half of the year versus the full year average of last year. Some of the drilling footage accomplishments all ended around prior producing activity returning to pad sites with production.
As an old supervisor once told me success begets success and the teams continue to build upon that momentum. So we would expect to see further progress.
Regression in our efficiencies and 24% and $25 again, we continue to move back to those pad sites. So thats one area, where the quiver I think the second one is as we continue to root out nonproductive time, when you move back to these pad sites you have the ability to look for ways to more efficiently manage your logistics, whether it's the water recycling program that we have and not only that.
Cost savings measures that that brings to the table, but also just overall the efficiency enhancements it really becomes a force multiplier. So we see areas of improvement there as well, but I'll say this lastly, our loan lateral development always plays a role in this with US now having drilled our longest laterals this past quarter exceeding 20000 feet where.
Cited to see those wells come online here in the in the quarters ahead and monitor those results and we think those play a significant part of the capital efficiency will no doubt fluctuate as we start to have conversations about.
Is it some low level of growth in the future what kind of inventory gets added as a part of that but from a cost per foot basis, we would expect to still be on the leading edge of how that how those numbers are manifested and how we basically execute the programs going forward.
Okay appreciate that.
Other question I had.
First the best way for you answered actually our best opportunity for you to answer we have seen quite a resurgence in I guess, you could say some commodity prices in general, but particularly ethane here over the last.
Call. It four to six weeks I was just you gave a fairly positive outlook for what's going on on the NGL front. So I was just curious if there's anything you've seen in that to explain some of the strength.
And the pricing recovery.
Yeah. Thanks, Roger This is Alan Engberg, I manage our liquids marketing business.
Give it a shot give you some background on would be what.
It's been behind some of the recent strength that we've seen in ethane.
I think I would start by saying ethane fundamentals have been pretty tight for a while now.
We've mentioned it in prior calls, but the day supply hit.
Five year lows last year, and we've been hugging those five year lows all through this year as well.
So when the market is tight like that there's really not a lot of cushion.
To manage changes are tightening, let's say in the supply demand fundamentals.
And really that's what we've seen.
In June and so far in July so the drivers of that.
List about five different ones, but.
First one I'll list actually as a cost driver.
We've got someone asked earlier about inflation.
Ppi's.
Reflecting about a 13% increase in pipeline costs come into effect. This year, so that effectively raises the floor for ethane recovery for the industry.
And.
That led to probably more ethane rejection. So we had less supply we believe during the month of June .
At the same time, we had tremendous amount of heat as we're all aware of.
That again led to let's say some of the further out basins.
More.
More of an incentive to reject ethane and to sell the gas locally added to that the heat also affects fractionation efficiencies.
As you can imagine ethane is the lightest molecule it needs. The most cooling so it's the it's the one that gets affected the most when it comes to fractionation efficiencies in the heat and there you lose call it 5% to 8% of efficiency.
The other thing that has become.
I guess more to.
Come more to the forefront is that fractionation capacity overall in the U S. Gulf is actually kind of tight.
We saw it back in 2018, and ethane ran up to <unk>.
For a short while back then I think it was third quarter of 2018.
But.
Ethane fractionation capacity in the Gulf are just plain tight and as a result of that what we believe is happening and it's hard to really quantify it because it doesn't get reported but we believe that the ethane inventory that you see reported by the EIA. The fraction of that that is unprocessed that's what.
Called Y grade has actually increased relative to the fraction of that that is processed or what we call a purity ethane molecule.
So again, the ethane inventory is a mix of processed on process and even stuff that we call EP mix, but we believe that due to fractionation capacity tightness, there's just been less purity ethane available as a result of that when we got into <unk>.
Eight June early July the <unk>.
<unk> of ethylene maintenance season demand increased.
For the reasons I already talked about supply decreased and the ethane price spiked.
Now going forward, what we see is continued tightness in the market actually looks good but I'm not sure. We will see prices continue like in the <unk> and the reason for that is we do have some relief coming in fractionation capacity in the second half of the year.
Two the major midstream companies in the U S Gulf coast to reach adding fractionated or about 150000 barrels per day each.
Nevertheless, we do see ethane inventories on a day supply basis, continuing near the lows.
Because.
Operating rates have increased new demand.
<unk> has come on.
The market will continue to be this year and next year.
Okay.
I appreciate the detailed answer thank you I'll turn it back.
Thank you and one moment for our next question.
Our next question comes from the line of Michael shallow with Stephens. Your line is open. Please go ahead.
Yes. Thank you good morning, guys.
This gave a lot of detail on Oss costs, I guess based on what Youre seeing right now is it fair to frame. It that you would expect to see some savings on rig day rates and ancillary costs, but not really on.
Frac crews and can you talk about the cost of that spot Frac crew that you added versus your contracted rates and maybe how the efficiency compared as well.
You bet good morning, Michael.
The spot crew that we brought on recently, what I would say is more in line with kind of current.
Pricing structures. So it it has some advantages that came with it very efficient we're really happy with the results that we've seen.
First pad has been completed and it was actually in line with what we were seeing with our base Frac crew that will have for the bulk of the year, So and a lot of ways I think you've shown the repeatable nature of not only the procedures that the teams put in place.
But also the efficiencies that and a lot of cases several service providers have also elevated their respective performance through just routine operations maintenance et cetera, but pricing for the spot crew was very much in line with what we would expect for obviously occurred equipment thats been available that we were able to get spot pricing for.
That crew will dated Frac another pad site for us here in the back half of the quarter and then get released and then we'll be back to our base Frac crews for the remainder of the year.
Okay. So if I heard you right there.
You are seeing some improvement.
The improvement in prices, even on the completion side as well.
There are some small signs of relief.
But again I will say I'll paraphrase. This is small only because that was a spot crew utilization versus being able to leverage that pricing into a full year of we'll call. It day to day out activity for 12 months. So no. It was small I would say it's it was it was difficult to quantify in a bigger picture.
Okay.
Understood. Thank you and.
You mentioned your new sustainability report I, just want to see what needs to happen for you to get to net zero scope, one and two by 2025 and can you say, how much will be through offsets versus actual abatement in.
Maybe any targets beyond the 25 goal that youre thinking about.
Yes, as we start to think about the next couple of years, we've got a keen focus on how we can continue to directly reduce our emissions from our operations sufficiently economically and I will just say responsibly.
Really executed the rest of our programs, whether it's drilling and completing a well producing a bad site, we're reducing our emissions at the same culture same approach.
Regardless of what the topic may be so we've got a still a keen focus on further reductions in that regard. We're looking at ways that we can look at reducing emissions associated with combustion of fuel on our particular operations as you can imagine it's small small incremental bolt ons, but it could be as is.
Little is switching over to electrified power plants on location for for life and ancillary power versus traditional.
Diesel or gasoline fuel type equipment, coupled with our fleet of course on the fracking side.
<unk> offsets will play a role and it is something that we communicated for the first time in this sustainability report to start outlining rages approach. What we don't want to do is really I will just say, we want to breach the gap effectively with those carbon offsets with good quality offsets, but remain at the same time keenly focused on her.
We can directly economically and efficiently reduce our emissions off pad.
Great. Thanks for the detail.
Thank you.
Thank you and one moment for our next question.
Our next question comes from the line of Paul Diamond with Citi. Your line is open. Please go ahead.
Hi, Good morning, guys. Thanks for taking my call just a quick one talking about you had mentioned a specific pattern what acreage that.
It really helps you out with your highest the highest overall efficiency.
How should we think about the extrapolation of those techniques and that level of efficiency more to some of the drier acreage should we think about that.
One for one on trend or is there some variation there.
Yeah.
Yes, good morning, Paul and thanks for asking that question.
At this point I would say, it's not something that we see.
<unk> that we can translate across the entire basin, but we will progress in that direction meeting staging areas get redefined trucking routes for hauling water. All of this is I will just say a progression that can occur quarter over quarter that translates into those improved efficiencies over the course of time do we see this being the new <unk>.
<unk> that turns into a repeatable metric, we do and that's part of us communicating it today.
But do we see this being the new standard for 2024, we may not be quite there yet because we also recognize there is diversity and I will just say ingress and egress across the field and how we're drilling from a perspective of lateral lengths. There is some variability as you can see.
Our average program for the past several years has been kind of 10% to 12000 feet and average lateral length, but we will have those moments, where we will have 20000 to 18000 foot type laterals, depending upon where we're developing assets. So we see this is translatable to the dry gas and Super rich areas. It will take some time as we take these I will just say more.
More recent learnings and translate that into future development program execution.
Understood. Thanks for the clarity.
One quick kind of more macro follow up.
You guys talked a bit about soon.
<unk>.
Nationwide activity, reducing with the current strength.
24 and beyond curve.
What at what point do you see that activity.
Is it.
Pricing needs to be materially higher or is it.
You are expecting more just.
Kind of a run rate flattening through 'twenty four.
I think as you think about 24 today I mean, I think we're going to have to see a little bit more from let's just say development of the LNG infrastructure again, I'll kind of start off with base maintenance for US is the is.
Is the starting point, but as you start to think about 'twenty four LNG infrastructure, that's coming online all signs point to it being on time, and I think which is clearly encouraging but to get to the other side of.
Inventory levels that we're going to have at the end of injection season, seeing what kind of winter that we have we see this being as more of a constructive outlook as you start to get into the bulk of 2024. So thats. One I think you start to see as has the flexibility of the program to then assess what level of activity best aligns with both those based on fundamentals and.
The macro and then setting us up for 2025.
Understood. Thanks for your time.
Thanks, Paul.
Thank you and one moment our next question.
Our next question comes from the line of Jacob Roberts with Tpa <unk> Co. Your line is open. Please go ahead.
Good morning.
We are.
Just curious on the <unk> guide looking at where Q2 came in kind of the expected prices I believe on slide 34 in Q3 Q4, it looks like that guide has the ability.
Had even lower.
I'm just curious on the assumption has been baked in there.
Yes. This is mark I'll lead off on that I mean, <unk> got six months down and the experience of NGL prices to date and gas prices to date other things that are going into in there or your electricity costs that are behind compression and other things. So as we look at the forward curves for.
Each of the products that respective processing transportation cost.
Those estimated power costs in the latter half of this year and heading into winter you.
Likely and hopefully see some higher prices, we would expect once we're outside the injection season, then there is a little more understanding of what this winter may look like so.
The answer to your question is practice can go either direction that therefore, the <unk> number can go either direction. So it's just a great feature of that contract by designed to be right way risk and give us good exposure to improving prices.
Or installation when we see lower prices.
Great. Thank you and then my follow up would be.
Just in terms of the DUC do you guys have in the system right now are those going to be.
More of a feature in Q3 and Q4.
Then perhaps.
Any more details on the on the cadence activity within the fourth quarter would be helpful. Thank you.
You bet. Thanks, Jacob from our Q3, and Q4 perspective, I know, we tried to briefly touch on this a moment ago, but to expand on it will have the the one spot crude that's going to complete another pad site for us plus our base crew and then of course the turn in lines are going to quickly follow so in the back half of Q3, we will see our.
Bulk of our Q3 turned in lines start to.
Reach for sales and then you'll see also in the early part of Q4 Youll see some of that turn in lines from the Q2 and Q3 activity start to.
Start to manifest themselves into production that back half of the year production into Q3, we touched on it briefly but should be around 30% to $50 million a day up from where we were on average for Q2, but we should be on average in Q4, two two bcf equivalent per day. So the ramp will be a little more significant and we like the shape of that curve.
Curve as you start to see that activity cadence turning to turn in lines in sales volumes that more aligned with where the curve as we see it today is on commodity prices. So we think it align with a much better output as we start to think about back half of the year cash flows and set up for 2024.
Thank you appreciate the time.
Thank you.
Thank you.
We are nearing the end of the conference and we will go to Doug Leggate with Bank of America for our final question.
Thank you everybody.
To sell stone hit Star one more than once so thanks for the thanks for getting me on currently and moved to the back of the queue, but anyway.
This is your first call as CEO I wanted to ask you about one of the slides in your deck.
Your share performance on the markets obvious lack of confidence in the forward curve that you've spent a lot of time talking about and I'm wondering if there are specific right to slide six.
Youre basically, saying you've got a 30% to 50 year.
Drilling inventory to hold production flat between two and $3 gas.
Obviously your stock is materially undervalued, if you believe the strip.
So my question is.
Why not monetize some of that and bring forward.
Some of that volume to take advantage of the weakness in your stock price and I'm just asking the question as you are and you and the CEO what can you do to drive market recognition of its volume.
Nearly senior stock.
Yes. Thanks for the question, Doug I think I think when I started to think about that that value proposition that youre raising as we start to look forward, we see inventory exhaustion, playing a real role in the conversation as you start to get through 25, 26 and beyond Youre seeing it in research pieces today.
From analysts who are looking at and even internal work that we've done as well restart to see degradation in well performance of some of these other basis, we see that as being constructive long term for range and that runway of inventory that we have is we have the ability to continue to repeat performance. When you look at slide six and how the inventory that we have has been.
It's got a really low cost breakeven and we're not just targeting the lower end of that sector. Today, we're drilling in and around all of those respective bids that you see on that on that graphical profile. So we think that bodes well for US. We also want to maintain control in our development program going forward moving back to these pad sites.
With existing production plays a significant part of our story, our efficiencies, our low cost environment, and our capital efficiency and so maintaining control in that environment would be very important for us as well. So as we start to think about what the future looks like we think that there will be a greater appreciation for.
Sure Ray.
Asia share value will have that ability to return that value to shareholders either through expansion of the dividend in the future additional share repurchases are either further debt reduction based upon the ability to throw off free cash flow through these cycles in the future while maybe some of the other either peers or other basins have a difficult time doing so.
Okay, So youre not what youre happy with the portfolio as it stands today is the bottom line.
Absolutely.
Okay. All right my follow up is maybe for Mark and Mark I apologize, it's a hedging questions I know someone asked this earlier, but just looking at 2025 and your comments about the curve.
Which I think is becoming consensus should we anticipate any additional hedges or are you happy with where.
The hedge book sits now is this a new normal in terms of proportion volumes.
Hey, good morning, Doug. So we are happy with where the position is and I'm not going to lock us into a specific number and codify that that 20% to 25% assuming a maintenance program is these specific right answer because the market moves. So I think between now and then what we will do it.
Is monitor the progress for the construction and expected in service dates of LNG liquefaction facilities and other demand be it in basin demand of which there are some pretty substantial incremental pieces coming online in Pennsylvania, Ohio, Indiana Midway.
Midwest type in basin demand be it power or more industrial.
Extra transport, where we can move gas out of the basin maintenance is clearly our baseline but growth will be appropriate and we will be able to accelerate the value of our deep inventory at the right moment, so all of that and the timing of that will play back into what our hedge profile looks like so that 25 book has a nice foundation.
It's enough for the way we see.
The cards being laid out the way, we expect them to be laid out over the next year or so.
But it does present optionality, if we see significant prices that <unk>.
Changes changes that we like and you can derisk small portion of that that may support.
<unk> expanded share holder returns.
May support accelerated deleveraging.
Those are great outcomes, but at the end of the day, we don't have to add anymore and we like with this book is as of today.
I'm sure we will have the growth discussion some of the time, but thanks. So much guys. I appreciate you taking my questions.
Thanks, Doug.
Thank you.
This concludes the question and answer session I would like to turn the call back over to Mr. Degner for his closing remarks.
Yes. Thank you for everyone for joining us on the call. This morning, and talking through our Q2 results. We look forward to the next call coming up in for Q3. If you have any questions don't hesitate to follow up with our Investor Relations team. Thank you.
Thank you for your participation in today's conference you may now disconnect.
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