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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. And welcome the CNX Resources Fourth Quarter 2017 Results Conference Call. As a reminder today's call is being recorded.
I would now like to turn the conference over to the Vice President of Investor Relations. Tyler Lewis. Please go ahead.
Thank you and good morning everybody. Welcome to CNX Resources' fourth quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Don Rush, our Executive Vice President and Chief Financial Officer and Tim Dugan, our Chief Operating Officer. Today, we will be discussing our fourth quarter results, and we have posted an updated slide presentation to our website.
As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks which we have laid out for you on our press release today, as well as on our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Don, and then Tim and then we will open the call for Q&A.
A couple of housekeeping item. Similar to last quarter, you will notice on Slide 3 of our slide presentation, as well as in this morning's press releases, a description of the post-spin company names and stock trading symbols along with the recent Midstream acquisition. Again, a summary of these changes are laid out in detail on Slide 3 of the fourth quarter slide presentation, which is accessible on the Investor Relations portion of the Company's website.
Also CNX's financial results for the fourth quarter reflect provisional amounts related to the December 2017 enactment of the Tax Cuts and Jobs Act. These provisional estimates are based on CNX's initial analysis and current interpretation of the legislation. Given the complexity of the legislation, anticipated guidance for the U.S. treasury and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Boards, these estimates maybe adjusted to our 2018.
As a result, despite our historical practice disclosing full financial statements as part of our earnings release. We have only provided the income statement in conjunction with the fourth quarter and full-year 2017 results. CNX continues to evaluate the impacts of the company's balance sheet and cash flow statements and expects to revise an update with its 10-K filing, which the Company anticipate to file on February 7.
Also CNX and CNXM plan to host a Joint Analyst and Investor Day on Tuesday March 13, located at the CNX headquarters in Pittsburgh, Pennsylvania. The Analyst and Investor Day which is expected to last approximately four hours will feature presentations from members of CNX and CNXM's senior leadership team followed by a question-and-answer-session. We plan to distribute additional details in the coming weeks.
Lastly, CNX will be participating in the upcoming Scotia Howard Will Energy Conference from March 26 to 28 and we look forward to seeing everyone in the New Orleans.
With that, let me turn the call over to you, Nick.
Thank you Tyler and good morning everybody. Fourth quarter marks a watershed period in the history of our company as we completed the separation of our gas and former coal businesses. This final separation was many years into making it really goes back to around 2005 when we established our E&P business as a separate business unit with the standalone management team which at the time was CNX Gas.
We drilled our first Marcellus shale well in Southwest PA around 2008 taking advantage of our fee acreage position and in 2010 we acquired the many resources Appalachian E&P assets, which really catapulted the CNX into a major player in unconventional gas in the Appalachian basin. In that transaction, we valued the deal really on the basis of the Marcellus shale we also received between 450,000 and 500,000 of Utica shale on top of it which has become very important looking forward.
So much has changed since then, we have been hard at work. In addition to divesting 150 plus years of accumulated coal assets and the associated legacy liabilities, we also have reset our E&P operations to focus exclusively on driving capital efficiency and begin best-in-class E&P operators.
We have introduced big data and reservoir modeling into our planning and operations coupled with our non-op participation in third-party wells resulting from our large acreage position, we think we have an unmatched data set in the Utica Shale. This has made the deep Pennsylvania dry Utica a reality for CNX.
If you look at the fourth quarter, we announced preliminary results for two additional Utica wells, the Aikens 5J and 5M. Those are offset wells to our premier Gaut well. These Aikens wells are performing in-line to slightly better than the Gaut. That says a lot. And over the past 47 days, combined, accumulatively produced 2.43 Bcfe.
Our operations team reduced drilling complete cost by almost 50% when you compare them to the initial Gaut well, and assuming the same type curve of the Gaut, these Aikens wells are highly economic. These deep dry Utica wells are incredible to say the least. They have only furthered our excitement of not only dry Utica development, but even more importantly stacked pay development.
Our recent 2018 CapEx budget release of $790 million to $880 million of which $275 million to $300 million is associated with non-D&C capital, that helps illustrate the point that we are positioning the company for future stacked pay development and we have more to say about that on our Analyst Day in March that Tyler just referenced.
So in addition to completing the spin-off of our former coal business, and shortly following the close of the fourth quarter, we completed another transformational transaction, when we acquired Noble Energy’s 50% interest in the GP of CNX Midstream, which is formally known as coal Midstream.
I’m not going to discuss the details of the acquisition since CNX Midstream covered many of the specifics on the transaction call it earlier in the month, but needless to say, the transaction’s incredibly important to CNX since it gives us 100% operational and strategic control of those Midstream assets.
As a result, it becomes much easier to provide transparency through long-term plans for both CNX shareholders and CNXM unit holders, of which CNX is a major one since we continue to own 21.7 million common LP units.
In addition to the control aspect I just mentioned, with the amended gas gathering agreement, we have been able to create a long-term solution together dry Utica volume since Southwest Pennsylvania and Northern West Virginia, which again make stacked pay development a reality.
The new ownership structure is also going to facilitate drop-down transactions for the benefit of both CNX and CNX Midstream, and the value proposition to CNX Midstream to CNX is substantial, and in my opinion has been misunderstood and overlooked externally for years now due impart to accounting complexities, but even more so due to the entity being a part of joint venture that had misaligned partners.
The accounting complexities have been resolved and the changes to CNXM’s management team and Board of Directors illustrate CNX’s intent to better align the strategic initiatives of CNX and CNX Midstream to unlock the growth potential for both of those companies.
The completion of the spin and the recent acquisition of the GP of Midstream, they significantly simplified our Company, so that we can now more clearly highlight our premier E&P and Midstream assets. We are focused on a future, which is execution driven and not transaction driven. It’s a future in which we now are in the fortuitous position to go on offence.
So when we talk about offence, what does that look like exactly. I would say more of what we have been talking about now for a number of quarters. However, what was previously discussed as a vision is now turned into a reality. We continue to focus and being best-in-class capital allocators with E&P and midstream opportunities set that's the foundation of our companies.
And management’s job revolves around where to most appropriately deploy capital and there are three main areas that we have to choose from. First, we can back into the drill bit to go towards additional activity. Second, we can repurchase shares or third, we can repurchase debt. Now we have invested in all three of these areas, some more than others over the past 12 months.
And over the course of the fourth quarter, we have repurchased $103 million of CNX shares out of the $450 million authorization that we have. We're going to continue to evaluate buying back shares and based on our decision on rates return when compared to our internal NAV per share view. When we compare buyback opportunity for the other alternatives, again, based off of rate of returns.
Needless to say, we continue to see a robust opportunity to further reduce our share count in 2018 and beyond or not exceeding our 2.5 times net leverage ratio target. Our conviction to do this is driven by our internal plan, and that conviction in large part is driven by our hedging program, which we believe, sets us apart from our peers because it de-risks our revenue by hedging both NYMEX and basis. This locked-in revenue helps strive our EBITDA targets and obviously, it gives us greater line-of-sight to things like leverage levels.
I'd like to take a minute, if I could to talk a little bit and highlight the importance and impacts of the recent tax reform law passed by congress. I want to start with the impacts on CNX Resources, which are meaningfully positive. Due to the corporate rate adjustments, we booked a $269 million credit during the quarter. In addition, we expect to realize a significant benefit from the repeal of the corporate AMT in 2019 and monetization of the AMT credits could be substantial, so we're very pleased with the outcome out of the reform bill.
We also see a possible reduction in our cash tax rate moving forward, which would also of course be beneficial to both our ownership and our stakeholders. Now, we're evaluating our options and consistent with our capital allocation philosophy when it comes to how we can most respectively reinvest our tax savings back into the company, into the region and our employees.
No matter, which path we choose, it bodes very well for our company, for our employees, the region of the Appalachia that we operate and live in, and the overall U.S. economy. That’s because we now have more resources to put the work across that spectrum.
We're able to invest more capital for development, which requires more employments and stimulates the local economies where we operate. We can pay our employees’ base more, especially when we have performance targets, which is exactly what we're able to do in this past week based on our 2017 free cash flow incentive plans. Taxes played a role in that.
Our regional GDP is boosted by both of these drivers when you start to aggregate what we're doing across the entire industry with all of our peers cumulatively. And we can now pay down more debt making our balance sheet even strong for sustained growth that's what we did as well in late 2017 and we will likely be doing in 2018.
Tax reform again plays a part in this and as a company's financial position has strengthened through this and other measures, we see the ripple effect in many areas. For example, when CNX is able to reinvest these funds instead of sending them off to DC, it helps boost the return on assets for pension funds that are prudent enough to invest in us, which then helps retirees all across the country, who depend on those funds to ensure they're going to continue to receive their hard-earned checks.
Quite simply everyone wins when companies like CNX are able to invest our own money and our assets, employees, and regions, where we operate. Tax reform has been a win for CNX and it's a win for all stakeholders across a very wide spectrum. This new year truly marks the beginning for our company. Although we have worked hard to get to where we are today, there’s still a lot of work to be done.
It obviously can't get done unless we have the talent to do it. And as such I'd like to summarize and conclude my remarks by taking the opportunity to thank our employees, who have distinguished themselves the workforce that is second to none. I have been here over 25 years with the company. And I can say with confidence that the team we have today embodies a new level of talent, commitment, and hard work. I'm proud to see them all to embrace our new corporate values that are including responsibility, ownership and excellence.
So thank you for all that you have done by working tirelessly to complete a number of really transformational transactions and at the same time, continue to produce extraordinary operating results in a safe and environmentally compliant manner. And thanks in advance for all that you’ll continue to do as we now focus on generating superior rates of return and development of our unequaled asset base, again, always in a safe and environmentally compliant manner. Future is extremely bright.
And with that now, I’m going to turn it over to our Chief Financial Officer, Don Rush.
Thank you, Nick, and good morning everyone. Since we have already discussed the CONE deal, I would like to take this time to spend a moment to recap our other major transaction, the coal spin-off that we completed in the fourth quarter.
To remind everyone, we pursued the spinoff for a number of reasons. But ultimately, we believe that the market was under-appreciating our assets and its former structure. So consistent with our NAV-per-share-driven philosophy, we worked hard to address it and the results speak for themselves as you can see on slide 6.
As of last week’s close in aggregate over the first two months, shares have increased by almost 20% compared to our Appalachian gas peers, who are flat over the same time period. Basically, we have created two world-class companies with great balance sheets and bright futures. And in doing so, we drove by value creation for our shareholders.
The transaction was a success and we are really executed to have this strategic milestone behind us. So we can start our next chapter and begin to operate as a pure play E&P Company and we see plenty of opportunity to continue to grow the NAV per share of the company moving forward.
Let’s discuss the quarterly results starting on slide 7. We had adjusted net income from continuing operations of $222 million or $0.98 per diluted share and adjusted EBITDA from continuing operations of approximately $173 million for the quarter. And we finished the year with EBITDA from continuing operations of $476 million.
However, I think it is important to point out that if you were to simply annualize our Q4 EBITDA number; you would have an EBITDA run rate of over $690 million annually. I really think this helps to visualize the rapid quarter-to-quarter EBITDA growth; we have been talking about for some time now. Also in the fourth quarter, we had capital expenditures of $233 million, driven by a ramp in drilling and completions activity, which we will allow our growth trajectory to continue into 2018.
Slide 8, highlights our hedging activity through 2022. Now I know Nick mentioned our hedging program, but I would like to briefly expand upon his remarks. Our hedging program gives us the conviction to achieve our plan and protects us from NYMEX standpoint and an in-basin price risk.
This strategy is different and we take pride in that. We have layered in, almost one-for-one a basis hedge, coupled with our NYMEX hedge. This strategy protects us from in-basin price issues without us needing to take out a lot of expensive, long-term take-or-pay FT.
In the fourth quarter, we added 279 and 209 Bcf of NYMEX and basis hedges respectively. For 2018, approximately 70% of our total production volumes are fully covered. This means that 374.9 Bcf in 2019 are not exposed to further basis differentials or NYMEX swings. So we truly have a fully locked-in average realized price of $2.76 per Mcf on those volumes.
We are still bullish on natural gas and we will continue to benefit by effectively dollar cost averaging our hedges overtime. This program is the cornerstone of our capital allocation strategy and gives us the ability to thrive in any environment, achieve our leverage targets confidently and consequently benefit for any spared capacity on our balance sheet through additional activity, acquisitions or more share repurchases.
Before turning it over to Tim, I would like to hit on some updated 2018 guidance. Starting on Slide 9, you can see our adjusted 2018 EBITDA remains consistent with what we announced in our capital budget release earlier in the month. Adjusted EBITDA for the year is expected to be between $845 million and $895 million. This includes approximately $60 million to $90 million of EBITDA attributable to CNX for our ownership in CNXM.
For OpEx, you could see that our total cash production and gathering cost are expected to come down by almost $0.20 per Mcfe in 2018. This is mostly driven from an expected reduction to the transportation, gathering and compression line item. We started to see this trend in the fourth quarter, and we expect it to continue throughout 2018. It is mainly driven by lower cost, dry Utica volumes in our Monroe County, Ohio area, making up a larger percentage of our production mix.
Also off note, our SG&A cost are expected to go up on an absolute dollar basis compared to 2017. This increase is being driven by reallocation for how this expense is calculated. Previously, corporate employees were partially allocated to E&P, coal and other segments like Baltimore Terminal.
Following the spin, obviously many of the corporate employees are now allocated 100% to E&P, which is driving a modest increase in SG&A due to the reallocation. Other operating expenses are expected to be between $70 million to $75 million driven by decline in idle rig fees.
As for leverage, our target is to be at 2.5 times net debt-to-EBITDA in 2018 and at the end of 2017, we have a net debt position of approximately $1.7 billion. If you annualize the fourth quarter 2017 EBITDA, like I did earlier, we are just under the 2.5 times target and assuming full-year 2018 EBITDA guidance, we are materially under it.
Lastly, as Nick mentioned, we received a tax benefit this quarter from the recently passed tax reform legislation. For modeling purposes, we expect our effective cash tax rate from continuing operations to be between 27% to 28% for 2018. However, we project that we will not pay cash taxes for a number of years given some of the tax attributes that we retain from the recent spin-off transaction.
With that, I will hand it over to Tim.
Thanks, Don and good morning everyone. Before I turn to the slides, I'd like to take a minute to reiterate some of the previous points on the importance of the CNX Midstream Transaction and what is means from an operational perspective.
Now that the upstream and midstream entities have complete alignment from a management and development standpoint, the two companies can work in tandem to drive efficient production and EBITDA growth. The biggest change resulting from the transaction is the fact that a key portion of CNX's Utica acreage is now dedicated to the MLP, which greatly simplifies and accelerates our shift to stacked pay developments.
The now single sponsored CNX Midstream is positioned to build out the infrastructure necessary to simultaneously gather Marcellus and Utica volumes in Southwest PA, which will help drive growing rates for return for CNX Resources. We expect to share some of the details about the stacked pay process and how we planned to implement it over the near term at our upcoming Analyst Day.
Now turning to Slide 11. Let's look at our operational results for the quarter. Total sales volumes in the quarter were 119 Bcfe, up 17% quarter-over-quarter. The majority of this increase was driven by 68% increase in Utica volumes as production benefited from new wells in the Monroe County, Ohio in the early days of Aikens production of in the CPA deep drive Utica. Total production cost declined primarily due to the increased mix of lower cost Monroe county dry Utica volumes, which benefit from a favorable gathering rate.
In full-year 2017. We experienced modest service costs inflation particularly in profit and pressure pumping services. For 2018, we currently have two frac crews under contract with an option on a third crew. And we don't anticipate meaningful service cost increases beyond what we saw in 2017.
In fact, in the third quarter of 2018, drilling rates of 50% of our fleet are expected to drop by 10% due to the expiration of some legacy contract rates. Generally, we're seeing the costs are now leveling out following the run up caused by the return to development in 2017.
On Slide 12, our 2017 activity is laid out alongside our plans for 2018. In Q4, 2017 we turned in-line 15 total wells. Four in the Marcellus, 10 in the Utica and one Upper Devonian. Those 10 wells included eight Monroe county and two Aikens wells. For the full-year 2017 we drilled a total of 30 wells and turned in-line 56 with the little more than half of those TILs coming from the Marcellus.
We ended the quarter with three rigs running in Southwest PA, but since then we moved one back to Monroe county, we anticipate adding a fourth rig in the middle of this year. Those four rigs will spend the majority of the year in Southwest PA but will also split some time in Monroe county and the deep drive Utica. In total we expect to drill 75 wells in 2018 turn in-line 59 wells, and of those 59 TILs 46 will be in the Marcellus.
In Slide 13, demonstrates, why we're excited about the activities that we have lined up for the rest of the year. as seen on the top of that slide, our new Morris wells in Southwest PA continue to outperform the legacy tight curves by more than 75% on an EUR per 1000 foot basis. These results are driven by increased lateral lengths, higher profit loadings and a series of completion optimization techniques based on our experience within the region and a wealth of data and modeling inputs.
While we're excited about the prospects for this year in the Southwest PA Marcellus as a standalone asset, the economics changed substantially with the longer term addition of stacked pay development. To that end, all pads constructed in the region are done with stacked pay in mind. And with complete control of the Midstream MLP, our plans for dual formation development have been accelerated and we're building it into our near term development strategy.
Slide 14 is an update on the Aikens' 5J and 5M deep dry Utica wells located in Westmoreland County PA. These wells are offset to the Gaut well. And are feeling very exciting early results. The 5J was completed with the similar design to the Gaut in order to help prove up the asset and ensure repeatable results and techniques, and the results are in-line with what we expected.
The 5M completion design is testing higher proppant loading and a model-driven proppant selection. Early indications are that the 5M is on track to be the second best well in the basin up to this point.
Both wells are performing above our previously stated 3.5 Bcf per 1,000 foot EUR type curve with cumulative production in the first 47 days of 2.4 Bcf. This is based on a flowing pressure of £8,672 and average production rate of 24 million cubic feet per day, which we expect to hold flat for approximately 18 months.
Given our capital cost of about $15 million per well on approximately 7,000 foot laterals, we believe that we have proven the commercial viability of the deep Utica by producing after-tax rates of return of about 50%. We plan to continue drilling the deep Utica with 4 TDs and 2 TILs planned in 2018.
We are currently working on a well in Indiana County, PA, called the Marchand, and expect to turn it in-line sometime this summer. Our ongoing modeling work and growing dataset give us confidence in these future wells in the near-term future of the play.
Today, we reaffirmed our full 2018 production guidance of 520 to 550 Bcfe. And the chart on Slide 15 showed broadly how we plan to get there. In early December, we reached a new record production rate of 1.44 Bcfe per day and finished the month with an average exit rate of 1.39 Bcfe per day.
The increased pace in late 2017 set the stage for our expected 31% production growth for the full-year of 2018. And as I mentioned previously, we expect to turn in-line 59 wells this year with the D&C capital budget of $515 million to $580 million that we announced earlier this month.
We have planned to spend about 65% of results capital in the Marcellus. The chart shows that despite the growing contribution of the new Utica wells, the Marcellus continues to drive the majority of the growth through the end of 2018.
And with that, I will turn it back over to Tyler.
Thanks, Tim. Operator, if you can open the line up for Q&A at this time please.
[Operator Instructions]. We do have something from the line of Joe Allman with Baird. Please go ahead.
Thank you. Good morning everybody.
Good morning, Joe Allman.
So this one’s for Nick or Don. Nick, you mentioned the monetization of the AMT credit refund. At this point, what’s your estimate of the size of that refund?
At this point Joe, we are not ready to put forth a quantitative estimate of that, other than we do expect the monetization window to open up when we get to some time and sort of the early 2019 time period. But we have more color on that at the March Investor Analyst Day as the timing as well as perhaps at least a band or an estimate of magnitude.
Okay, great. That’s helpful. And this next one is for Tim. I guess there’s two questions on the Utica. So number one is what are the options for getting those wells cheaper? I know that these Aikens wells are a lot cheaper than the prior, but how much can you reduce the cost going forward. And then second, when you’re doing a managed drawdown and the choke management, have you run a bunch of iterations to see the impact on NPV at various production rates?
We have done a lot of modeling through our rate transient analysis to understand the impact of different drawdown rates on the dry Utica and have used the modeling results really to optimize that. And then I'm sorry what is the part of your question, Joe?
That $15 million well cost, what are the options for getting that lower, and what might be some estimates of rail or how you can get that?
We still hold the target of $12 million to $12.5 million for the dry Utica wells and so the larger our dataset gets the more we understand the specifics area-by-area. We still think there are some savings that we can capture on the drilling side to be more efficient in drilling and get our drilling cycle times down and we're working through some of those opportunities. And on the completion side, we did a little bit of testing with the Aikens wells and we will continue to do some optimization and modeling as we work our way through the next handful Utica wells, but completion optimization will also be a part of that. The Aikens was the first pad where we drilled two Utica wells one after the other. As we move into the end of the year, you'll start to see more and more of the pad drilling, and that's really where we will capture the largest benefit and getting our costs down.
Got it. And just a follow-up to that one on the choke management, are you going forward, you're going to be tweaking that or do you think you're pretty settled on the drawdown that you're working on right now.
Well I think, as I said we're understanding the differences area-by-area. So what we do in say Westmoreland County with the Aikens and Gaut wells, maybe different from what we do in Southwest PA slightly as far as the drawdown rates and the rates that we hold to pressure drawdown. So, we will continue to tweak it as the information and data dictates. But right now, we're pretty comfortable with where we are.
Okay, very helpful. Thank you very much guys.
Thank you. And next, we will go to the line of Holly Stewart with Scotia Howard Weil. Please go ahead.
Good morning, gentlemen.
Good morning.
Maybe just a quick one for Tim on the development plan for 2018 and just thinking about it versus 2017, it looks like you're moving back pretty significantly to Southwest PA, les West Virginia wells, less Monroe County wells. So can you talk about that process and then how you think that trend will ultimately impact the gathering cost? Maybe that's back half of the year, if it does.
Well, we continue to let economics drive our decisions. When you look back at 2017, when we came out of a late 2016 and 2017, and came out of the shutdown. Monroe County was - really provided us with the highest rate of returns, so we really focused on that early in 2017 and then we have moved back more into the Marcellus.
But we do have some Monroe County drilling planned for 2018, but it is limited. So we're moving more back into the Marcellus and with the results we have seen in Greene Hill and Morris. We continue to follow the economics and rates of return.
So you'll see about 55% of the capital deployed this year for a drilling and completion in the Marcellus. And really we just finished our first pad that we since coming off the shutdown that we actually drilled and completed started to finish that where we weren't going back to a pad, where we had top holes drilled or we had some level of work already done.
So I think that gives us a lot of confidence moving into the Marcellus. We have done that so much and we have got the cost down there. It gives us a lot of confidence in the 2018 plan and it's also an area, where gathering costs are really pretty well set. So we understand what those are going to be.
So 2018 has really down to execution, continuing to execute on our dry Utica plants to delineating, we are actually moving to development by continue in the growth mode with the Marcellus.
Okay, maybe one for Don. Don can you kind of help us with the quarterly cadence for production for 2018?
Yes. So, I didn’t quite hear the quarterly cadence of production. Yes, so you can kind of see it on the Slide 14 towards not exactly like its unfolded in 2017, this year is sort of more kind of gradual production growth throughout the year, all be it being offset by some of the year-to-year declines that you are sort of send overcome that, so a lots smoother as far as till the production timing although it is a bit lumpy.
Yes I think with adding the third rig in December and then a another rig coming on later this year, you will see a more even spread in 2018 of our turn in-lines, so you will see a more gradual increase throughout the year, where as in 2017. We had talked about being very heavily weighted towards the end of the year, that’s where we were, we ran an additional frac crew in the fourth quarter, but I think in 2018, it will be more evenly spread.
Okay great and then maybe just one final for me. On your I call it your pie chart on Slide 18 of your end market exposure. Do you have and Nexus built into that or is that a 2019 event?
I think that’s showing up in the year, Holly.
In 2019, okay. Thanks Tyler.
Thank you. And next we will go to the line of Jeffrey Campbell with Tuohy Brothers. Please go ahead.
Good morning and first I want to congratulate on the lean and mean slides, they seem to reflect the more focused company you have constructed very nice. On Slide 12, you mentioned that all the Morris Pads are being developed for stacked pay, so just wondering if you could kind of give us a little overview which is zones you have in-line to exploit in what order and over what time horizon?
We talk about stacked pay is primarily Marcellus and Utica, there will be maybe some Upper Devonian mixed in there on occasion, but we are talking Marcellus and Utica and there is a strategy behind that that allows us to take advantage of some blending of dry Utica gas with damp Marcellus gas to keep our gathering and processing costs at a minimal level. So to avoid some processing on the damp Marcellus gas. So the Utica wells are strategically scheduled in there to be able to blend with the damp Marcellus gas.
Okay, thank you. We have had some discussion about the after tax while return on the Aikens wells which are quite impressive and they are certainly strong enough to support single zone development and I was just wondering, as you are continuing to explore some of these later counties, do you have hopes to be able to co-mingle on the Marcellus and Utica and other areas beside Southwest PA and could you just give us a little color on what you are thinking there?
Yes we do, I think everywhere we look at dry Utica, we are looking at the potential for stacked pays gets back to having that infrastructure in place and the impact it has on a rate returns, up in Westmoreland and Indiana County on the Marcellus wells that we have drilled in the past, you coupled that the stacked pay with the advancements we have made in completions and we see the EURs on the Marcellus wells increasing and then the rates of returns increasing in two parts, one because of the enhanced completions and the other because of the stacked pays and the infrastructure that’s already in place when we return.
Yes. I think the improving Marcellus is also a point well taken. Last question for me on the slide that was discussing the Aikens wells. So the Aikens 5M, Slide 13 said that you used higher loadings and also ceramic proppant. And it looks like that well outranked the Aikens 5J based on saying it’s the second-best well. You can correct me if I’m wrong on that. So is your read so far that the ceramic proppant is paying for itself with production outperformance and are you planning any more ceramic tests in 2018?
I think we are believers of the ceramic proppant in the deep Utica. We think it’s necessary and we think the results show that. The 5J was an unbounded well, so we increased the proppant loading there as a test to understand the impacts of that. But we are firm believers in ceramic and we will continue to use it going forward. That being said, we talk about optimization, homing in on the exact percentage that we need. We may see some adjustments there, but I think you will continue to see ceramic proppant being used.
Okay, great. Thank you.
[Operator Instructions]. We do have something from the line of James Spicer with Wells Fargo. Please go ahead.
Yes, hi guys. I’m hoping you can provide a little bit more detail on the plan to get the year-end leverage down to your 2.5 times target, particularly in the context of the share purchase program and then related question just wondering what your thoughts are and taking advantage of the strength in the market to address your bonds, which become callable in the next few months?
Sure. Looking at the first part of that question. For us, it has always been the last number of years about NAV per share and really wanting to be the best-in-class capital allocators. When you look at everything from our incentive plans to our decision making, they’re all built off of that by design. And we want our team to be able to think and act as owners.
So free cash flow of course, that’s a critically important metric within that overall context. But like a lot of other things that drive rates of return and NAV per share in the end, it’s only a tool to drive optimizing the valuation of the company. And we want to use that to along with our balance sheet in 2018 to do just that.
So if you start with sort of just the 2018 plan and what we disclose today, you can see, I think, you can get a feel for what the allocation options are going to be. And I will take, in particular, the capital expenditure budget that we have released and the EBITDA guidance that we issued today.
So you look at the M&A activity with Midstream, with the GP in any types of drops or things like that in the future, just put those all off to the side to keep it simple. And if you look at organic free cash flow from 2018 from a D&C perspective, we don’t think that’s the right way we are looking at, I know a lot in the industry want to look at just D&C capital and organic free cash flow. We are significantly positive in that metric.
When you include all CapEx and so now, it goes to the 275 million to 300 million of land, midstream and water. In addition to the D&C, we come in slightly negative for the year on a 100 million to 150 million depending on which end of the band you assume. And then if you assume some modest, I want to emphasize, modest level of asset sales. We are likely to secure in 2018, because again, it’s just part and parcel of what we do, on a total free cash flow basis, we should be, call it neutral.
So to take that free cash build and then you shipped over to the balance sheet capacity, that's where I think our capital allocation philosophy comes into play. We said today, everyone has 2.5 times leverage ratio and you couple that with our programmatic hedge book, we think 2.5 leverage ratio with our hedge book, really creates an ironclad balance sheet and 2.5 times should not be a heavy lift when you look at our guidance.
I think Don went into this in some detail. But if you look at the last quarter annualized, we're already there. When you look at Q1 and there is ramp in production in the EBITDA that we correspond to the guidance, we're going to be replacing strong EBITDA quarters to have the stronger EBITDA quarters replacing the weaker ones. And of course, if you look at it on a going forward 2018 basis, we're well under that as Don said.
So hedge book coupled with that view of execution and our ability to execute, really gives us confidence in our leverage ratio, and it’s that spread between 2.5 times target, and where we're actually at this is going to be available throughout the year. And that's what we want to take advantage of by potentially retiring shares at very high IRRs compared to our NAV per share views.
So I think the expectation should be in 2018. We continue to march on with our $450 million repurchasing program. And we look at this, we monitor, manage it regularly daily if the capital allocation decision that's what we are all about. So it's something that that we have got the wherewithal and flexibility to apply, and we planned on doing that through 2018.
Yes. Just add to that for a minute on the debt side of the fence, the first part of your equation. I mean we're well of aware the debt market and how attractive sort of some of the opportunities out there that exist today. The good thing as we said here we have the ability to have a bunch of different corrections with that.
We have currency to retire bonds as we see it. We have the ability to take advantage of these certain things, but I mean our majorities are further out in the future. So there is no need for anything today, but eyes wide open on the opportunity that's out there. And like anything we do will explore the best way to get it done.
Okay. I appreciate that. Thanks a lot guys.
Thank you. And we have no further questions in queue. And ladies and gentlemen, this conference will be available replay after today 12:30 through February 6 midnight. You may access the AT&T Teleconference Replay System at anytime by dialing 1-800-475-6701 and entering the access code 443105. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with access code 443105. And I will hand it back to the Mr. DeIuliis.
Great. Thank you everyone for joining. We look forward to speaking with you next quarter. Thank you.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.