Q2 2019 Earnings Call
Good morning, and welcome to the C.N.X. resources second quarter 2019 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
Please note this event is being recorded.
I would now like to turn the conference over to Tyler Tyler Lewis <unk>, Vice President of Investor Relations. Please go ahead.
Thank you and good morning to everybody.
Welcome to see an exit second quarter conference call.
Today, we'll be discussing our second quarter results, we posted an updated slide presentation to our website.
To remind everyone. She likes consolidates its results, which includes a 100% of the results from CNX CNX gathering LLC and she next midstream partners LP.
Earlier this morning, CNX midstream partners ticker she Nx EM.
Issued a separate press release and as a reminder, they will have an earnings call at 11 am eastern today, which will require us to end our call. No later than 10 50 am.
The dial in number for the CNX I'm call is 18349 009 shop.
As a reminder, any forward looking statements, we make or comments about future expectations are subject to business risks, which weve laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.
We will begin our call today with prepared remarks by Nick followed by Tim and then Don and then we'll open the call up for Q and I were chapel Hill participate as well with that let me turn the call over to you Nick.
Good morning, everybody Tim's going to go into some of the operational details from the quarter in a minute many of which were excited about and don's going to discuss the financial details as usual I would use that include our updated 2019 as well as our 2020 guidance.
Before I turn it over to those two I'd like to focus a couple of brief remarks on how CNX is different and why this is important, especially given the challenging commodity price environment that we're all dealing with out there.
I'm going to start on slide three which helps I think highlight.
Three main drivers of differentiation for CNNX relative to the peer group.
First one maybe the most important in some ways is our marketing strategy.
Which includes our hedge book and it also includes our minimal firm transportation strategy.
Ft in some ways at least as I look at is more debt like the data itself. So we seriously contemplate any commitments that cheetah can have unforeseeable at the time and major negative consequences into the future.
Second Big differentiator is our cost structure and this is of course a commodity business.
And that cost structure is also supported by our blending strategy, which we believe is going to result in strong cash margins.
And then the last or third differentiator is the asset portfolio.
That includes the approximately hundred thousand core southwest PA Marcellus acres that includes over the million total acres of our footprint or the large stacked pay inventory and includes our midstream control and finally it also includes a robust water system, that's going to benefit us for years to come.
Now these advantages they've helped us execute a consistent strategy and philosophy, which is built around generating risk adjusted returns to grow or any per share while at the same time, we're making sure that we retain a healthy balance sheet.
We follow the math and everything we do and if you take a look at slide number four.
Our 2019, and 2020 program, which we will talk about shortly.
Hey drive several capital allocation opportunities.
We often get questions on whether we can grow EBITDAX or whether we can reduce leverage or whether we can reduce share count for us. However, we don't view these opportunities in isolation and I think the results speak for themselves because of our attention to generating risk adjusted returns we've been successful in growing EBITDAX and reducing leverage and in reducing our shares outstanding and we expect more of the same when we look into the future.
And when you're solving for optimizing intrinsic value on a per share basis, and this becomes a really powerful dynamic in any part of the commodity cycle, including this one as well.
Now I, just mentioned and speaking of that focus on per share metrics and our share basis.
I just want to spend a minute on slide number five.
The best long term illustration of our philosophy is that we have refused to issue equity during the past five years. Unlike all of the Appalachian peers, and we've also reduced share count by 19% since the start of our buyback program.
Now these two things together are they duly over the past half decade, I think are testament to the value that we place on growing the companys NPV per share and ultimately working to protect the equity for US there are shareholders.
And we think that the value we place on capital allocation and ultimately the denominator is a significant differentiator compared to the peers and you can see it CNX reduced again, our shares outstanding by 19% over the past year and a half, whereas peers on average increased share count by over 50% over the past five years, resulting in all of them, having higher outstanding share. Since then as of the end of the second quarter.
Well jump over now to go to slide six.
Slide I think really illustrates the value of our midstream company CNS midstream.
We've shown a similar slide in the past what we think it's important to highlight this company and what it means the CNX just start CNX midstream has reached an inflection point and is entering the next phase of its lifecycle.
CNX end has been focused on a large capital build out in 2019 and the end of that is rapidly approaching so what does that mean it means that CNS midstream will start to generate free cash flow starting in our first quarter 2020, and we think they can generate between $120 million to $140 million of free cash flow next year.
This provides optionality for CNS midstream and subsequently CNX now what shape that takes ultimately is to be determined we're working on it but having options. That's obviously a good thing.
Turning to the value of CNS midstream, we think there's two main pieces of value to CNS, which are of course first the 21.7 million LP units. The CNX zones, and then second the general partner value.
Which in the example on the slide is shown at over $800 million, which brings the total value to just over 1.1 billion.
We think that the GP value is often overlooked despite CNS as expected receipt of roughly $75 million give or take from our distribution rights in 2020.
Slide seven this slide highlights some additional areas, where we believe CNS is differentiated versus our peers.
For 2020 in particular, we're one of the most hedge producers with 86% of our gas volumes hedged, including Nymex hedges at $2.94 an mcf.
Our basis hedges. They also ensure that we are fully protected unlike peers on hedges with smaller volumes and our hedge program. When you couple that with our industry, leading cost and helps drive risk adjusted returns and our ability to generate free cash flow at the current strip price environment.
And just to be clear and just to make that point when I say current strip price environment, that's nymex around $2.55 a million beat you in 2020. So if you believe gas prices are going to be higher than obviously, we would expect to generate even more free cash flow. Ultimately, we think that some of these advantages are going to become more apparent as the industry tries to navigate what's a weaker commodity price environment looking out into the into the future.
Now we have a number of metrics listed on that slide that we think are important individually and CNX ticks every one of those boxes. We think these peer leading advantages are going to become more impactful over time.
And overtime and moving forward, our focus remains on operational execution and frankly controlling the elements that are within our control. We built a solid plan for 2020 it takes into account the challenging macro.
This plan and the guidance that don's going to discuss shortly illustrate many of the capital efficiency and cost improvements that we've realized over the past couple of years.
But despite this success is I want to emphasize that we are going to continue to strive for more and our expectation is we're going to accrue more of those efficiencies.
Which brings me really full circle.
In conclusion, we're taking a step back and just looking over how far we've come and where we're heading.
Mid 2019, indeed, it has a sitting at an inflection point and I think sometimes that gets lost with all the noise around commodity price and capital markets upheaval that's out there.
But think about the confluence of developments and how they culminate in a very strong position for CNX. So think about how we programmatically hedge to lock in returns and use the forward price deck to run IR math when it was popular to do the opposite end use imaginary higher price decks. Our approach one from an unpopular once a winning one when you look at the price curve today.
Think about how we didnt want to amp up our risk.
By taking on the massive ft that commitments and chase basis differentials that might evaporate the moment of new pipe was commissioned.
That helped create a strong balance sheet that we enjoy today.
I think about how we invested precious capital and water in midstream infrastructure to lower our cost and capital intensity not just further but for longer that build out is nearly completed which now benefits us by widening our protective mode of low cost and high margin also yielding lower capital spend in these non DNC areas moving forward.
And think about how we paid as much attention to the denominator when optimizing intrinsic value per share as we do the numerator. That's how we were able to retire 19% of our company at discount prices to our internal NPV per share view and we now enjoy a year on year per share growth in EBITDAX and more importantly, NPV itself.
And then finally I think about how we invested in technology through electric Frac spreads and real time operating control rooms, being first movers and best in breed in these areas that compress cycle times and capital intensity that turn puts us in a position to generate free cash flow in 2020, while significantly growing production.
So for sure. These times are challenging when you look at the price that but our philosophy of optimizing NPV per share our focus on capital allocation and our tactical moves that I, just just walk through a combination a company that's built to thrive in times just like these.
Okay, Tim, let's let's discuss our operations.
All right. Thanks, Nick.
Turning to the operational highlights for the quarter on slide nine production was 134 and a half bcf fee for an increase of 1% over the prior quarter.
We turned four wells in line in the second quarter, all in southwest PA, Marcellus well, we drilled 30 wells and completed nine.
The quarter benefited from continued strong production out of our first quarter turn in lines also in southwest PA Marcellus, helping to drive the 43% increase in Marcellus volumes compared to last year.
MPS Standalone capital expenditures declined 5% year over year to $226 million.
Production cash costs increased seven cents over the first quarter due to higher gathering transportation and processing costs as expected.
On slide 10, you can see that CNX Standalone NP has the second lowest cash production cost in the basin over the past four quarters at one dollar nine per Mcf.
On a consolidated basis, which nets out payments to the midstream MLP production cash costs are just 78 cents per mcf.
It is important to note CNX is the second smallest producer in terms of average daily volumes and then we would expect unit cost the benefit from both increased scale in greater mix of Unico Utica volumes, which had cash costs of just 47 cents per mcf fee in the second quarter.
As commodity prices look to remain soft for the foreseeable future. We expect this cost advantage in conjunction with the hedge book to become even more important.
The hedge book, which Nick discussed plays into our minimal ft strategy illustrated on slide 11.
We predominantly employ a nymex hedge coupled with a basis hedge to lock in realizations rather than expensive long term F G, which is effectively debt.
On this slide you can see how we have we now have a fraction of the commitments our peers have and perhaps most importantly, many of these large commitments are not generating a margin to justify their costs, despite being take or pay contracts.
Let's shift to some of the recent developments and data, giving us confidence in the program we've laid out.
We've got a lot of questions on the Utica, specifically on getting costs lower.
Slide 12 highlights some of the new data that we received this quarter on the four well Majorsville six southwest PA Utica pad, which as you can see has beat our capex targets with an average of about $12 million per well on an approximately 6500 foot average lateral length.
We're very proud of these results more importantly, we believe that this is repeatable based on the drilling performance and completion cycle times, we achieved.
Slide 13 highlights the blending strategy that we're employing.
We have some several damp gas pads being blended with dry gas and entering dry gas systems and bypassing expensive processing.
With the coming turn in line of three southwest PA Utica pads over the next few quarters, we expect to see a growing impact in the near term.
And as a reminder, it only takes one utica well to blend three to four damp Marcellus wells.
On slide 14, as an example of how the southwest PA Marcellus program continues to fire on all cylinders with our Rich Hill 71 pad.
Where we set of Pennsylvania state record by drilling the longest lateral at 19609 feet.
With the six well pad, having an average lateral length of nearly 16000 feet.
That brings our estimated DNC capital expenditures on the pad to roughly $800 per foot.
While we don't expect laterals to consistently be in the 20000 foot range, we will take advantage when the formation and geography dictate.
Now turning to slide 15, we have some details in our on our new integrated real time Operation Center, we're talk.
They are talk is the brain of our organization were various functional teams collaborate on everything from Geo steering wells, the monitoring production and maintenance to marketing gas.
So just to sum it up we're excited to be putting into action all the initiatives we've been talking about over the past few years and look forward to updating you on their outcomes over the next several quarters with that I'll hand, it over to Don.
Thanks, Tim and good morning, everyone.
I will start on slide 16, where some of the financial results for the quarter.
Consolidated adjusted EBITDAX for the quarter was $222 million or one dollar and 18 cents per outstanding share.
And Standalone EBITDAX plus distributions in the second quarter was $175 million or 93 cents per outstanding share.
As you can see we were able to grow EBITDAX per share year over year, despite substantially substantially weaker gas prices this quarter versus last.
On Slide 17, you can see our EBITDAX per share growth going back to the beginning of 2017 and also in the quarter, we bought back 8.8 million shares.
Slide 20 shows our guidance.
We are currently on track with our capital program for the year and are still expecting our 2019 capital to come in the previously announced annual range with the second quarter coming in as planned.
For the remainder of the year capital will peak in the third quarter and come off meaningfully in the fourth.
We are forecasting annual production under this plan to be improved.
And as such we are raising our 2019 guidance to an improved range of 510 to 530 Bcf.
A 15 Bcf the midpoint to midpoint increase with the same capital spend.
As for EBITDAX, we have seen gas prices in liquids prices come down since last quarter's update and as a result forecast of 2019 EBITDAX is lower.
Quite the higher volumes.
It's important to note that our updated EBITDAX guidance assume strip pricing as of July eight.
And as we have said many times now we make our decisions and model our disclosures using the forward strip at the time.
For 2020, we are reducing our annual capital expenditures by over 30%.
And our production volumes are still expected to grow at roughly 10% based on the midpoint of our 570 to 595 Bcf range for 2020.
This guidance highlights our capital efficiency and for reference the guidance is 10% below street expectations on capital and 5% higher on production.
Based on the midpoint of the ranges.
Our 2020 development plan assumes that we will turn in line approximately 50 wells, which includes approximately a dozen Utica wells.
Also on a consolidated basis CNX Midstreams capital was down substantially following the large capital build out completed this year.
Lastly, based on the 2020 development plan, we expect 2021 production to be generally flat year over year, while allowing us to generate free cash flow at current forward strip prices.
Slide 21 highlights sensitivities to different commodity prices for next year.
And as you can see we expect to grow production and generate significant protected free cash flow in 2020 based on the current strip pricing.
The slide shows even with a further drop in prices, we will still generate significant free cash flow in 2020.
We also tried to generally show the impressive free cash flow generation generating potential of our company at eight to 85, Nymex type pricing going forward.
So to summarize we're very protected from a near term low commodity cycle and we have the cost structure.
And assets to produce significant free cash flow and a normal or high gas price environment.
Slide 22 is an update of our production cadence.
As you can see on the slide we expect a decline in volumes in the third quarter of 2019.
Followed by an increase in the fourth quarter.
In 2020, we expect consistent quarterly volume growth throughout the year by turning in line approximately 12 wells each quarter.
The right hand side of the chart is important because we have touched on many times CNX has differentiated itself with a top tier hedge book.
For 2020, we currently have approximately 86% of our volumes hedged based on the midpoint.
And this hedge book is a competitive advantage for us.
And allows us the ability to ensure we generate returns on the capital we're spending this year.
And it gives us confidence in our future cash flows and capital structure going forward.
Slide 23 is just a reminder, that we expect to receive an additional $110 million and tax refunds by the end of 2019.
And expect to receive an additional $51 million in both 2020 and 2021.
Slide 24 provides some of the revenue and cost line items.
As it relates to our updated guidance.
In 2020, we expect total production cash cost to improve mainly driven by transportation gathering and compression.
However in addition to this on slide 25, you can see that we have several processes underway to help drive all of our costs lower.
We expect these efforts to positively enhance our spend.
And we will update guidance as they unfold.
These items are consistently been worked on and improved on by our teams.
The main drivers on these efforts will be combining certain teams across upstream and midstream capturing efficiencies through our integrated real time operation Center, having more efficient capital operations and active contractor management to name just a few.
These efforts reflect our commitment to reduce cost in this low price environment and generally follow our commitment for continuous improvement in any pricing environment.
Technology efficiencies and our desire to be a flat nimble organization will allow us to further lower cost, which will widen our protective mote and a downturn.
And increase our execution and an upturn.
With that I'm going to hand, it back over to Tim.
All right I wanted to make one last comment and that is to say, yes. Thanks to the board to Nick and of course, all of our employees. It's been a great run since I arrived back here in Pittsburgh in January of 2014, when we had really just begun our transformation from a large multi segment conglomerate to a best in class pure play natural gas CMP.
That transformation is complete and we've we've achieved much in the last five and a half years.
Positioning this company is one of the strongest lowest cost operators in the basin.
With that I felt today was the appropriate time to announce announced that I will be retiring from CNX at the end of the year in the Chad Griffin will be taken over as COO.
Chat is a logical choice to succeed me, having been president of CNX midstream since September of 2018, overseeing all aspects of our midstream business during that time.
I wanted to make this announcement today, so that we have appropriate time to ensure a smooth transition.
I intend to stay on board for the remainder of the year and do everything I can to help chat as he transitions into this new role overseeing both upstream and midstream operations.
I have every confidence that Chad is the right person to take CNX into the future.
And I'll look forward to working with him over the next few months.
To help make that happen with that I will turn it back to Nick for a few closing comments.
And I just want to thank Tim he's been.
Valued member of course of our leadership team through one of the most consequential periods of time in our history, we've got a long history.
He and I were talking the other day, if you look over the course of his tenure.
We've taken production cash cost cash cost from about $2.16, an mcf to $1.18. That's that's a 45% reduction.
Production on the other side of things went from 172 Bcf.
And you compare that to last year's production. It was north of 500 Bcf Thats, an increase of almost 200%.
And then beyond those things you know these other drivers of rate of returns and intrinsic value per share the EU our cycle times countless operational metrics have improved markedly over the past five years because of tims leadership.
And I think most importantly in our team believes most importantly.
The safety and compliance footprint. The 10 leaves is second to none in the basin and it really embodies the continuous improvement and excellence and we talk about.
Thats a testament to his leadership and that is a heck of a legacy to leave behind.
And on behalf of the board and the team I want to thank Tim on the call for all his contributions to the company and we look forward to the collaboration that he's going to bring with with the rest of the team in the coming months.
As we work to build on his accomplishments that we just talked about and take us to the next level and rest assured if you're our ownership on the call and listening we're going to squeeze every last ounce effort inside out to Tim in the coming months as we finished 2019 strong and set up for what I think is going to be an impressive 2020.
Operator, if you can open the call for Q and at this time please.
Sure.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question will come from Sameer Panjwani with Tudor Pickering Holt. Please go ahead.
Hey, guys good morning.
Maybe to start off on the midstream side of things with CNX seven selecting a free cash flow. How you think about dropdowns in 2020 and can you help frame the retained midstream EBITDA at CNX and maybe also the debt capacity at the MLP and then finally with the heavy buildout of midstream assets, both internally and ATSI and XM nearing completion, how do you think about the strategic value of midstream ownership going forward.
Catastrophe or this is this a check griffith.
We have a couple of thoughts on how midstream fits into the bigger picture here at CNX.
I think I think first and foremost.
We we don't need to do any drops and indeed, our company's base plan to hit hit any of the guidance that we provided at both companies are performing very very strong very healthy healthy companies without conducting any any kind of dropdown transaction. So we don't need to do any drops to to sort of hit our targets and exception I think you already hit the midstream business is really hitting an inflection point towards the end of this year, where we're transitioning into our free cash flow.
Free cash flow generation mode, which is going to continue to improve the balance sheet and generate cash on a go forward basis that really provides a lot of optionality at the midstream business to do do a lot of exciting things with.
I sort of unfortunately on the third point.
For the MLP market is what it is.
And we are continuing to monitor that MLP environment and sort of monitoring that on a go forward basis, so sort of where the equity values are with MLP market is makes it a little bit challenging to use use that that currency to do transactions with nevertheless, the balance sheet capacity and the optionality there.
It gives us some options to sort of nibble around the edges on some of these things.
But but certainly none of that is that our any of our base case forecast or guidance as far as Rick retained EBITDA.
There is a small amount of retained EBITDA up from the midstream business, though the upstream level. It's on the order of magnitude, it's less than $10 million, let's say, it's it's really maybe five $6 million of that so thats for the.
Hi, This is Don Thats for the what's in the Devco structure currently flowing there is still build outs to happened both at the Devco three area, which we've talked to could be a significant EBITDA generator once that occurs and there is the water business.
In the Virginia, Cardinal States assets that have.
Currently producing cash flows that are more mature assets that could be looked at to be dropped to at some point in the future.
Okay and on those two last asset the water system and the gathering system.
I guess any kind of ballpark estimate for what that.
EBITDA could look like heading into 2020.
So a lot of a lot of that obviously depends on the commercial arrangement that you have put in place between CNX and CNX midstream we have highlighted in the past Cardinal states opportunity between where it is transitioning from the tico into Transco zone, five and the flows that's going through there to be a.
10 to 25 million dollar type of EBITDA opportunity.
There and the water business.
Obviously on the commercial arrangements would dictate what the ultimate would be we've looked at historically at the analyst day, we walk through what potential.
General rates would point that to be and that was the at the time closer to $50 million growing as the volumes grow overtime.
Okay. Okay. That's helpful.
That's a pretty good overview of part of the sum of the parts opportunity at CNX I think one other piece that gets overlooked sometimes is your fee acreage position, if I recall correctly CNX as one of the highest interide positions in the basin I wanted to get your thoughts on potentially monetizing some of those that take advantage of higher return opportunities such as buybacks.
Yes, so we have sold a lot of acreage and businesses. If you look historically at CNXC has previously predecessor console energy. So we've done a lot in that arena or over our history here and we know how to get M&A transactions done when you look at do an overriding royalty sales the balance you have to watch and what we talked through on the call today, one of our strategic advantages. We believe is our cost structure, so, adding adding cost to our future drilling locations really.
While it may help in the near term it can really hurt your does your cost structure and your competitive advantage in the long term.
That being said, we do look at transactions and as Nick has mentioned we follow the math. So it's a balancing act is what we do and choose not to the good news is as Chad mentioned.
We don't have to do anything we don't need to do any of these to fix our balance sheet or to to help us out to fund our business. So we're able to opportunistically look and if the math makes sense, we'll pursue it but those those pieces that add cost tier structure, we were picky on.
Okay. Okay. That's helpful and if I can just squeeze one last question here is on the 2020 outlook Im just trying to understand the capital allocation rationale that results in production beyond the hedge book seems like given current strip any excess volumes will generate marginal cash flow. So just would appreciate your thoughts there.
Yes, you know as as we talked about we use the forward strip to make our decision, making and as we've learned here over the past six months or six years. The four ships very volatile. So we keep a close eye on it hence why we do continue to maintain a very healthy hedge book to ensure that we're making returns on capital we do spend.
We think right now these these these pads generate adequate returns, but we're all ultimately always watch it and we do have flexibility built into our go forward business model and 19, and especially obviously in 20 since we're coming out pretty early with our initial viewpoint on 20 to dial that back or dial that up as.
Conditions warrant as you're looking at the next couple of months the weather patterns will really influence pretty majorly on how gas prices change and we have a flexible enough plan in front of us to to to morph to fit what's best in that environment.
Okay, that's really helpful and thanks for that and congrats on the retirement.
Thank you.
The next question comes from Welles Fitzpatrick with Suntrust. Please go ahead.
Hey, good morning, and Echo the congrats on the retirement.
Thank you.
So look and I know this is this is probably getting way ahead, but but looking at the 21 kind of soft guidance.
Should we basically be thinking about that as as the way that CNN CNX exists and the current strip environment and the kind of 225 to 275 environment that you guys are essentially stay flat flattish and become a free cash flow machine going going forward is that how you all are looking at it internally.
We've tried to stay very consistent in our views and our thoughts and really focusing on risk adjusted returns and creating an 80 per share.
Over the long haul intrinsic value per share now to do that you need to produce to make cash flow and you do have to have a healthy balance sheet. So as were looking forward into the into the forward strip and where the price deck sets. A 275 gas price environment is very different than the 225 gas price environment. So we're trying to build a company in a machine that can that can work and low prices and be ready to accelerate and take advantage of higher prices and as we've done in the past if we do see.
The ability and the opportunity to catch at higher price higher pricing.
And grow that Thats, something we will consider ultimately as we've done in the past, we'll we'll look to do the same thing which is hedge the gas first to ensure that you are going to have the cash flow growth and the return on the capital that you are spending before you spend it.
And if the gas prices stay lower for longer we're in a good strong position to stay at a.
A minimal level and keep a healthy balance sheet and just look to make that next incremental investment based off of the conditions that exist in 2021, I think the big catch phrase for 2021.
Really optionality.
If you think about what we're doing we're not trying to solve at the end of the day for free cash flow or or.
Production growth or things like that like Don said follow the math you follow the returns any wine optionality, whether its balance sheet, whether its cash flows or whether its asset portfolio.
Once the optionality to be able to pivot as you get closer to 21 across those three big opportunities of drill bit capital investment share count reduction and debt reduction and when you look at 2021 based on what we're expecting to perform and pose for the balance of 19 and going into 20.
We should have a substantial level of optionality to be able to pivot optimize no matter what gas prices do others to 225 or the.
285 World that we're faced with and 21.
Okay, no that that makes total sense and I guess I guess, then the the kind of fundamental or the non fundamental.
Driver that might impact could be a share count rally because presumably the opportunity costs than putting it back in the ground Wood would go down is that a is that a fair enough interpretation.
Yes thats the.
Three like I said are like you mentioned, there's there's where the shares are trading at versus what we think the implied NPV per share. The company is based on the forward strip.
There is what those returns are on the drillbit.
Based on all the metrics on the performance side, the operations as well as the gas price strip.
And then the last piece of that is what is leverage ratio doing based on cash flows because of commodity prices.
And where that all plays out depends on all three of those factors.
So going into 21, we should have a substantial level of capacity flexibility optionality to pivot across those three and wait one more than the other based on what the math tells us.
Okay, No thats perfect and then just one more if I could drill in a little bit.
On on the well costs on Majorsville, obviously, that's that's come down a whole heck of a lot can you talk about presumably most of thats efficiencies.
Can you talk about the repeatability of that and and also within that question.
Kind of the difference between 60 and success and what was causing those deltas and cost there.
Well I think the yes, it's repeatable we have.
Ill just efficiencies doing what we've been talking about with the Utica for the last several quarters, we've talked about the challenges.
Drilling through the vertical section the salt section and some of those other formations world, we have to get through to set our.
Our deep intermediate string.
That's where a lot of the challenges lie.
The.
The well that had a little slightly higher costs, we had a few day delay there with some some drilling issues, but nothing major that we didnt overcome but.
When you look at the overall costs there we've been talking about this target 12, and 12 to 12 and $5 million for the last year and a half or so and.
We have mentioned before we saw a clear path to this number and we think it is very repeatable.
While results will stand up as well, we think and.
So we're excited about what the Utica.
Brings to the table for us and the results of that will generate.
Yes, that's great. Thank you. Thanks, so much and congrats on the good update guidance.
The next question comes from Kevin Maccurdy with Heikkinen Energy Advisors. Please go ahead.
Hey, good morning, guys.
How does the depth of the deep Utica change as you go east to West and southwest PA and is there any deferred and the difficulty of drilling those wells.
There is we've talked about the deep Utica in Pennsylvania. It is much different than the Marcellus it's much more compartmentalized.
It varies from area to area and not just from southwest PA, but even within southwest PA there are different compartments.
Geo hazards in some areas are much more challenging.
And that is where I really think we have been able to differentiate ourselves and achieved these numbers that weve got laid out here, we've talked about the use of seismic placed laterals properly to avoid geo hazards and.
We're in the process of doing that and I think you'll see more results like this as we move forward.
Okay. Thank you for that and then I think earlier you said 12, you two Utica wells in 2020.
What does the locational breakdown of that are they all in southwest PA.
Yes, they are not all in the slip a Utica, we have a pad in Monroe County, as well, which are included in those numbers.
Okay. That's helpful. Thanks, guys.
The next question will be from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Good morning, gentlemen.
Correct.
May maybe just.
Yes, a few questions on on Tony Tony you referenced some cost savings can you just maybe talk through.
What you are seeing there doing there or is it just a per unit.
Given the growth or.
It will and then maybe reference what you're thinking Oh, no on the service cost assumptions within that plan.
Yes, so we.
We see both I mean Ali with obviously with the growth that helps on the scalability as Tim mentioned earlier, our cost structure looks looks great amongst peers, but even better whenever you realize that theres room to improve just on scalability.
And then second on an absolute dollar standpoint, I mean, we are driving for more efficient.
Use of our real time operating center.
And.
Adequate vendor management, obviously the forward gas strip.
Provides challenges, but also provides potential opportunities whenever you're look into the service providers.
Okay and then.
Matt maybe down it might be too in the lease for the call for this but just thinking about.
The outlined growth assumptions for Tony Tony heavy ran sensitivities on the free cash flow number. If you were to sort of do a flat exit to exit production from 19 to 20 versus the 12% annualized growth.
Yes, we do we do keep a pretty close eye and balancing really we've talked about it.
Over time sort of a minimum level of activity you want to do to have a healthy efficient running business and that meets our CNX midstream commitments. It utilizes the service contracts that we have in place and keeps a nice strong healthy balance on our on our on our water. So there is some ability to potentially dial back potentially as as gas prices unfolding over here over the next few months I do think.
Weather.
Finishing up the end of summer and likewise the first.
Call. It October November as your head again.
Set the realities of how gas will unfold in 2020, and if if it has one way, we'll we'll try to lean back even more than we have and if it had the other we have optionality to do even more in 2020, if if it warranted.
Okay. So maybe Nick then yes just.
Speaking about the high level discussions that you had with the board on the growth in this commodity tape.
Yeah is there some I guess color you can provide around that and going with the higher growth rate.
In 2020 versus maybe starting at a lower level of commodities respond popping up.
Yes, the the growth rate as a result.
Sure we don't much of it beyond.
Just the result, it that spits out at the end of something else that we're solving for and related discussions across the management team and the board has been across three big opportunities right now a significantly discounted share price.
Some pretty compelling rate of returns because of our performance metrics and cost structure on the drill bit and the ability and desire of markets to see a stronger well maintain healthy balance sheet.
So that's the balance across those three when we run our math on rate of return and risk adjusted returns. It leads to some of the results one of which was the production growth you're referencing the other one being the free cash flow.
In 20, and what we do is we monitor those and recalibrate those and recalculate those constantly as the forwards change and frankly as some of our internal data comment I'd like to DNC costs on a Utica that Tim had mentioned.
And we optimize that on a running ongoing basis. So.
When we get to the Q3 call.
If commodity prices change significantly we'll update what if any changes we've seen with respect to the the balance in 19, and 20 program, whether its capital free cash flow and share count and balance sheet and all those things wrapped into one.
Okay. That's helpful.
And then.
Maybe.
Maybe for Don.
You referenced the 800 per foot on the longer lateral pad do you have a target for Marcellus well costs for 2018, you could share.
Well I think the August Tim I think.
No the targeted around $815 politically.
You know in a lot of that is lateral length dependent and.
But we're.
We've seen those costs, we've achieved that they're not aspirationally thats built into the plan and we still are look for ways to continually improve that and one additional comment on I wanted to make but I think it was welles' question on Majorsville six the I believe was yep well that had the higher costs that was also a pilot hole, we did a little bit of science work on it and Thats, where some of the additional cost.
And when you do look at our cost per foot. It's important to note too that we do include flowback and we do kind of look at it is everything and $8 per foot type place. So Tim laid out the targets, we laid out on the efficiency paces efficiency push to to reduce spend across all the buckets. So.
Feel good we've already kind of got there and we're looking for ways to improve.
Okay. That's helpful. And then maybe one final one if I could.
Yes, Tim any any update to share on the status of the Chabad.
We're continuing to move through that we still plan to complete the three remaining wells.
No that won't have an impact on 19, but.
We'll.
They will get completed we're just.
Keeping that somewhat flexible so we can work make sure we worked through all the appropriate issues with the regulatory agencies and all parties involved.
Okay, great. Thanks, guys.
The next question comes from Joe Allman of Baird. Please go ahead.
Thank you and good morning, everybody, Hey, Tim Congratulations on your retirement and Chad Congratulations to you as well and my question is for Tim So Tim what further operational improvements do you look forward to as you fill out your tenure, there CNX and as you kind of watch.
The company from a distance after you retire and Chad I'd love to get your insights as well.
Well I think when you look at.
What we highlighted our majorsville six on the Utica that it really.
Ill.
Really kind of stand up everything we've said about the Utica in the last couple of years, we have been a front runner in the Utica and will continue to be but I think it shows that the numbers and that we've been putting out there and on the Utica and what we expect of it is coming true.
Theres always room to continually improve we'll look to improve those drilling efficiencies now that we've seen the $12 million Mark I don't think it's unreasonable to think that we can get down in that $10 million to $11 million mark per well.
Obviously some of that depends on lateral length, and then Theres always room, we continually look for ways to optimize our completion efficiency, it's not just about getting the cost down but it's also about.
Improving well results and maximizing that you are per 1000 foot.
And this is Chad Im just super excited to get this opportunity and I've been working with these guys for years at this point so.
Really weren't looking for to work with his team further intense put together a heck of a team downstairs, they've got a lot of talent really looking forward to working more closely with those guys and it really bringing bringing two to that team I think what what we've been able to bring in the midstream team over the last nine months 12 months is really just focused on making sure that every dollar we spend is earning a return that is creating value for our shareholders and just just really continue to drive that focus on costs and have every dollar matters.
That's helpful and Tim.
You commented on the Utica of any kind of comments on.
Further improvements in the Marcellus.
Well I think the Marcellus we saw with our NGL 71, what we did there $800.
Using our real time operational center, there's ways, we can gain efficiencies there.
Through Geo steering through.
Management of our completions from that country Operation Center.
Theres always room for improvement and I think a lot of times we.
People think that you're going to hit a wall on improvements, but technologies change processes change equipment changes and whether it's fluid systems bits drilling rigs Frac crews you know you look at what we're doing with evolution that is a perfect example, the all electric Frac fleet and the efficiencies we're gaining from that we'll continue to find ways.
To utilize new technology processes and make things better.
Great very helpful. Thank you guys.
Our next question comes from Jane Sanco with Stifel. Please go ahead.
Good morning, My first question is on West Virginia.
How do you think about divestment genius production and activity levels going forward.
And also could you maybe discuss ft, and well commitments investor GGR and how they feed into the integrated 2020 one program.
Sure. This is Chad there's two questions are actually related.
As we think about west, Virginia, particularly actually pence per area sort of the cadence that we're thinking about down there as it is roughly roughly a patti year give or take and that and that schedule is sculpted to meet the drilling the minimum volume commitment associated with Cdx midstream.
And so those are all sort of linked.
And we're doing that in a way that fits really optimizing that drill program to for the benefit of those CNX in CX midstream.
So it seems like if you commitments is not something that tied the program right.
Well that that's correct, because we see an x. notes.
Sure Im sure you are aware, we have a very very low we are relatively small FP book relative to our peers RFP layers are all predominately filled.
And so it's really like the incremental drilling decision is not driven by a need to fill ft.
And this is the same case in Ohio, Utica, you basically said well volumes in basin and.
It seems like yeah.
You don't have any well commitments in Ohio, Utica dry, but still planning to complete one.
One pad the year right.
So as far as the Ohio program goes we've got a few wells and the plan for this year.
I think incremental opportunities on a go forward basis or go up a little bit more of a case by case decision none of those decisions will be driven by well commitments. Our ft commitments. It's really just optimistic if the rate of return justifies the investment in other wells in that area.
Okay and my final question is on basis differentials that I saw that you guys.
Yes, I think it was gladly wide basis differentials next year.
I think it's due to high in basin sales Ah I just wanted to go to that though maybe you see some other developments that would explain that.
We do because of our low ft book, we don't rely on expensive long haul FTD move our gas to other basins.
With way. That's resulted is there's a lot of our peers, who have that long haul export capacity a lot of that's underwater at this point. So we've been able to avoid that burden from our from our cost structure, but that does result in a lot of our gas being sold in basin.
So in order to offset the risk of the volatility that local physical realized price we've been able to make sure. We match, our our sales with a with a matching basis hedge to take the so at the matching financial basis hedges that takes the risk of the physical sales that product before a basis guidance. It's just a strip it.
Correct July so it's our proportionate mix on the sales points, which we show in the appendix.
Using the strip from July to calculate the basis. So no views just the strip.
Okay. Okay and then the last question if I could.
In the press release, you mentioned that.
Transportation and gathering line is slightly higher due to higher expenses to CNX them isn't related to gathering fees is it just like an annual escalation of the annual or the gathering fees or what is it.
Predominantly that that bump was caused because the <unk> of the of the handful of pads that we turned in line in the first two quarter of the year are there sort of a disproportionate number roughly half of those were wet wells and we'll let me rephrase that what one of the pads is a wet pad one of the path was a damp Pat.
And that damn pad.
It was wet enough and based on the relative NGL and gas prices, we elected to pick back after processing Asa sort of net on net we took to pass the processing.
Out of the out of the handful pass we turned online first half the year audits disproportionately high for us and so it just was a temporary sort of swing where our GP into went up slightly for the for the first half the year.
Got it. Thank you so much for taking my question.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Tyler Lewis for any closing remarks.
Great. Thank you. We appreciate everyone, taking the time to join US today and I look forward to speaking with you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.