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Greetings and welcome to the EQT Corporation Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce Pat Kane, Chief Investor Relations Officer for EQT. Please go ahead, Pat.
Thanks, Kevin. Good morning, everyone and thank you for participating in EQT’s conference call. With me today are Steve Schlotterbeck, President and Chief Executive Officer; Rob McNally, Senior Vice President and Chief Financial Officer; David Schlosser, Senior Vice President and President of Exploration and Production; Jerry Ashcroft, Senior Vice President and President of Midstream; and in addition to the normal group, Blue Jenkins, who is our Chief Commercial Officer. Blue is responsible for marketing our produced natural gas and managing our pipeline takeaway portfolio. Blue has joined EQT in September of 2012 from BP and has more than 18 years of industry experience.
The replay for today’s call will be available for a 7-day period beginning at approximately 1:30 Eastern Time today. The telephone number for the replay is 201-612-7415. The confirmation code is 13650786. The call will also be replayed for 7 days on our website.
To remind you, the results of EQT Midstream Partners, ticker EQM; EQGP; RMP are consolidated into EQT’s results. Earlier this morning, there is a separate joint press release issued by EQM and EQGP. EQM and EQGP will have a joint earnings conference call today at 11:30, which requires us to the last question on this call at 11:20. The dial-in number for that call if you are interested is 201-689-7817. In a moment, Rob, Dave and Steve present their prepared remarks. Following these remarks, Steve, Rob, Dave, Jerry and Blue will all be available to answer your questions.
I would like to remind you that today’s call may contain forward-looking statements. You can find factors that could cause the company’s actual results to differ materially from these forward-looking statements listed in today’s press release and under Risk Factors in EQT’s Form 10-K for year ended December 31, 2016 which will be filed with the SEC later today. Today’s call may also contain certain non-GAAP financial measures. Please refer to this morning’s press release for important disclosures regarding such measures, including the reconciliations to the most comparable GAAP financial measures.
And now, I would like to turn over the call to Rob McNally.
Thanks, Pat and good morning everybody. As you read in the press release this morning EQT announced 2017 adjusted income of $1.47 per diluted share compared to a $0.33 loss in 2016. In the fourth quarter, EQT recorded a deferred tax benefit of $1.2 billion to revalue existing net tax liabilities to the lower 21% tax rate, which is excluded from adjusted EPS. A year-over-year mark-to-market swing of $639 million and other items that affect comparability are detailed in this morning’s press release and are also excluded from adjusted EPS.
Adjusted operating cash flow attributable to EQT was $1.2 billion in 2017 compared to $833 million in 2016. The increase in both earnings and cash flow were primarily due to an increase in commodity prices and sales volume. As a reminder, EQT Midstream Partners, Rice Midstream Partners and EQT GP Holdings results are consolidated in EQT Corporation’s results. EQT recorded $350 million of net income attributable to non-controlling interest in 2017, including $99 million in the fourth quarter.
There were several highlights in 2017. Including the acquisition of Rice Energy, the receipt of the FERC certificate for Mountain Valley Pipeline, production volume growth of 17%, average realized price improvement of 23% and the successful $3 million debt issuance with part of the proceeds used to refinance Rice debt, saving EQT approximately $45 million in interest expense in 2018.
Now, taking a look at the fourth quarter which included Rice starting on the November 13, fourth quarter 2017 adjusted EPS was $0.76 per diluted share compared to $0.25 in the fourth quarter of 2016. Adjusted operating cash flow attributable to EQT was $416 million in the fourth quarter compared to $332 million for the fourth quarter of 2016. Fourth quarter production sales volumes were 48% higher than the fourth quarter of 2016, while commodity prices were 4% higher than the fourth quarter of 2016.
Moving on to the results by business segment, it is important to note at this time that following the Rice merger, EQT now reports through five business segments: EQT Production, EQM Gathering, EQM Transmission, RMP Gathering and RMP Water. More details about these business segments can be found in our 10-K which we expect to file later today. So starting with the production results, I will keep my comments on production volumes light as David is going to go into the details a bit in his comments. For the year EQT Production achieved production sales volumes of 887.5 Bcfe, a 17% increase over 2016. Average realized price was $3.04 per Mcfe for 2017, which was $0.57 or 23% higher than last year. Full year adjusted operating revenues at EQT Production were $2.7 billion, a 44% improvement year-over-year, primarily attributable to increased production and improved prices. Total operating expenses were $2.5 billion or 19% higher year-over-year primarily due to increased volume growth. More details about full year operating expenses can be found in our press release and our 10-K filing.
Now on to quarterly results, as mentioned sales were 48% higher than the fourth quarter of 2016. The majority of this increase is related to the acquisition of Rice producing wells after closing the deal on November 13. The fourth quarter 2017 average realized price was $3.04 per Mcfe, a 4% increase compared to the fourth quarter of last year. Adjusted operating revenue for the production company totaled $896 million for the fourth quarter and $318 million higher than the fourth quarter of 2016. Operating expenses were $781 million, $204 million higher than the fourth quarter of 2016, which is consistent with increased volume growth and expenses associated with recent acquisitions.
Now moving on to midstream results, full year 2017 operating income for EQM Gathering was $334 million, up $45 million year-over-year primarily due to increased gathering volumes partially offset by increased operating expenses. Operating revenues were $455 million for the year, up $57 million over 2016. Total operating expenses for the year were $121 million, up $13 million over 2016. EQM Gathering’s fourth quarter operating income was $91 million, $20 million higher than the fourth quarter of 2016. Fourth quarter operating revenues were $124 million a $23 million increase over the fourth quarter of 2016 while operating expenses were $33 million, a $3 million increase over the fourth quarter of 2016.
EQM Transmission’s full year 2017 operating income was $247 million, up $9 million year-over-year. Total operating revenues were $380 million, $42 million higher than the 2016, while operating expenses for the year were $132 million, $22 million higher than in 2016, excluding the $10 million non-cash charge to depreciation and amortization expense. Fourth quarter income was $58 million, down $6 million from the fourth quarter of 2016. Operating revenues were $101 million for the quarter, a $6 million increase over the fourth quarter of 2016, while operating expenses were $43 million, $1 million increase over the fourth quarter of 2016, again excluding the $10 million non-cash charge to depreciation and amortization expense.
Now shifting gears to RMP Gathering and RMP Water results. The results included in our press release and 10-K filing of the period of November 13, 2017 through December 31, 2017. RMP gathering reported an operating income of $21.8 million, while RMP Water reported an operating income of $4.1 million.
Lastly, I would like to discuss our cash flow and liquidity position. As of December 31, 2017, EQT had $1.3 billion of borrowing and a $159 million of letters of credit outstanding under our $2.5 billion credit facility. We closed the year with about $134 million of cash in the balance sheet, excluding EQM and RMP. We currently forecast $2.65 billion to $2.75 billion of adjusted operating cash flow for 2018 at EQT, which includes approximately $325 million to $375 million from EQT’s interest in EQGP and RMP. This represents an increase of $300 million from our December forecast. The change is primarily due to the impact of the new tax laws. In December, we expected cash taxes of about $70 million. We now expect a cash refund of about $200 million. This forecast assumes a Nymex price of $2.77 in an average differential of negative $0.27. With our forecasted adjusted operating cash flow, we expect to fully fund our forecasted 2018 capital expenditure plan, which is about $2.4 billion.
So with that, I will turn the call over to David.
Thanks, Rob and good morning everyone. I would like to start by providing some color around the 2017 sales volume and our guidance for 2018. Immediately after close of the Rice transaction, we began operating the combined assets as the single entity utilizing our resources to optimize overall development plan regardless of their legacy. We entered 2017 with pro forma sales volume of 1,317 Bcfe, which was consistent with the guidance we provided on the pro forma company. In December, our first full month as an integrated entity we averaged approximately 4 Bcfe per day also in line with our expectations despite taking some operational challenges on the extreme cold snap late in the month.
Based on current line scheduled for the year, we expect the quarterly volume profile for 2018 to look like this. Q1 will average approximately 4 Bcfe per day consistent with our first quarter guidance of 350 to 360 Bcfe. We then expect to see sequential quarterly increases in Q2, Q3 and Q4. We are reiterating our full year volume guidance of 1,520 to 1,560 Bcfe, which will result in volume growth of 17% over pro forma 2017.
I would now like to provide an update on our overall Rice integration efforts. Rice employed an outstanding team of oil and gas professionals and EQT retained more than 150 of them for our upstream operations. This influx of talent has brought fresh ideas and perspectives to help refine processes and implement new technical approached. We have hit the ground running with our increased lateral lengths and in 2018, our Pennsylvania, Marcellus spuds are expected to average over 13,600 feet. This is 1,000 foot longer than what we announced in December and as a direct result of collaboration between land professionals from both companies. In fact, 60% of our Marcellus wells in Pennsylvania will be comprised of wells that share legacy EQT and Rice acreage.
On the operational technical front, we are combining best practices and have already captured value. For example, Rice had a significant frac sand sourcing and logistics effort, which we leverage to improve efficiency – pricing and efficiency across our factories. On the drilling side, we have set new footage records by combining the data, experience and practices of both companies, more specifically related to rotary steerable systems and drill pipe rotation. And finally, we have seen promising results from early testing of new concepts. We are on the landing point of our Marcellus laterals. So far, I am extremely pleased with the progress we have made during just 3 short months and I look forward to continue to blend best practices, promote innovation and deliver best-in-class economic returns. We will keep you updated during the year on the progress of these initiatives.
Now, let’s move on to year end reserves. EQT’s year end 2017 proved reserves increased 59% to 21.4 Tcfe versus year end 2016. Obviously, the Rice acquisition in November and several smaller acquisitions throughout the year had significant impact on our reserve growth adding 6.3 Tcfe in proved reserves. EQT’s drilling effort added an additional 2.2 Tcfe to the proved total through extensions and other additions. As you would expect, development costs continued to improve as we lengthened laterals. Our 2017 Marcellus program had a development cost of $0.60 per net Mcfe, a 17% decrease when compared to the 2016 figure of $0.72 per net Mcfe.
Excluding acquisitions, we replaced 245% of our 2017 production and when we include the impact of acquisitions, our replacement percentage increases to 974%. We have stressed the traffic and capital economic synergies of the Rice acquisition and our PUD reserves reflect the impact of these synergies. As you know, the SEC limits PUD reserve to those reserves we expect to develop in the next 5 years. Rice acquisition allowed us to reprioritize our 5-year development plan in order to focus on developing longer, more economic laterals first. Many shorter locations were removed from the plan, but remain economic and we expect to develop those locations outside of the 5-year – required 5-year window. Finally driven by acquisitions and pricing, probable and possible reserves have also increased significantly with probable reserves up 40.3 Tcfe and possible reserves up 4.9 Tcfe. The Marcellus account for 80% of those increases.
With that I will turn the call over to Steve.
Thank you, David. Good morning everyone. On last earnings call for the third quarter 2017 was just a few weeks before the shareholder vote to approve the Rice transaction. With this being our first call since completing the acquisition, I want to thank our shareholders for their support and reiterate the commitments that we made to you. We committed to establishing a Board committee to evaluate options for addressing sum of the parts discount and to announce a plan by the end of the first quarter of 2018. The committee’s work is ahead of schedule and we will announce a plan by the end of February. And we intend to implement the plan on an accelerated basis. We committed to adding two new independent Directors to the Board with midstream experience and to include these new Directors on the committee tasked with the sum of the parts review.
On November 13 we added Tom Karam and Norm Szydlowski to the Board. Both of whom have extensive midstream experience, are active Board members and on the committee reviewing the sum of the parts. We committed to moving the Director nomination deadline to after the sum of the parts decision announcement. We will move the 2018 nomination window to follow the sum of the parts decision and announce specific dates by the end of February. And we have removed volume growth as a metric from future compensation plans and have replaced it with return on capital and operating and development cost metrics. Finally, we are committed to delivering on our synergy targets established for the Rice acquisition. As you read in our December capital budget news release, we have hit the ground running and have started capturing the various synergies related to the transaction.
As David said, we currently expect to average 13,600 foot laterals in Southwestern Pennsylvania Marcellus acreage, which is 1,600 feet or 13% longer than we anticipated when the deal was first announced. This places us ahead of schedule for achieving our capital synergies. In addition, I am pleased to say that our G&A savings began on day one. Our integration team had a detailed staffing plan and we are able to retain many talented Rice employees while still achieving our staffing targets. As we continue blending the best of two cultures, we are confident that the exchange of ideas will result in continuous improvements to our programs and practices.
Finally, I strongly believe that the current share price does not reflect the tremendous value we have created and we will continue to create going forward. We have built an E&P business that can grow production in estimated 15% per year utilizing funds within cash flow. The E&P business has an industry leading cost structure and controls over 680,000 core acres in the premier gas basin in North America. We have also built a premier midstream business that continues to deliver tremendous capital efficient growth. Our midstream business has a solid balance of long FERC regulated pipelines and the network of gathering assets, sitting at top the lowest cost natural gas reserves in the U.S. The financial leverage metrics at both our E&P and midstream businesses are extremely well, amongst the best in the industry in each case.
Over the past 10 years, we have created tremendous value to the growth of both of these businesses. However, this value has not been reflected in EQT share price. Our plan to address the discount will be designed to deliver this value to shareholders and to create the opportunity for value creation at EQT into the future. To reiterate, the committee is ahead of schedule and I expect to announce our plan by the end of February and we will implement the plan on the accelerated basis.
With that I will turn it over to Pat for Q&A.
Thank you, Steve. Kevin, please open the call for questions.
Certainly sir, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Holly Stewart from Scotia Howard Weil. Your line is now live.
Good morning gentlemen.
Good morning Holly.
Maybe just quickly on the announced acceleration maybe what’s driven the faster timeline?
Well, I think it’s hard to predict how much work will be involved and the committee has been working very diligently and has been able to evaluate the various options and come to conclusions a little faster than we predicted, which I think is good. So still little more work to do, but we are zeroing in and very comfortable saying that we expect to be done by the end of February rather than the end of March.
Great. And should we expect a conference call with that announcement?
Yes, I think there will be a conference call for sure.
Okay, great. And then maybe Steve just on Ohio, now that you have had a little bit of time at least to kind of see that asset base first hand, any comments at this point on the position there?
Holly, this is David. I will answer that. I mean I think we had a little time, but it has been real time, I mean we are going to drill the 45 gross wells that we have talked about in December. And I think 2018 to be a year that we really formally understanding of the asset and then figure out how we are going to move forward. So that’s really what I will get to say I guess.
Okay. And then just one final one for me, maybe since we have got blue on the call this time, just your thoughts around your exposure to the Southeast market seeing in the deck you have got it looks like up any premium to NYMEX, I wouldn’t share if that’s just strip forecast or you are locking that in or planning to lock in that in some how?
Yes. Hi Holly, it’s a combination of both as we look forward to the supply demand in that area and we look a course of the premiums that exist across part of that region. What you see is in netted back results of transactions that we have in place as well as the combination of the balance of the forward strip. So it’s a bit above.
Okay, great. Thanks guys.
Thanks.
Thank you. Our next question today is coming from Drew Venker from Morgan Stanley. Your line is now live. Mr. Venker, perhaps your phone is on mute.
Good morning, everyone. I was just hoping you could speak to any, I think for the progress made on MVP in the last outstanding products there if you were required to get to that as to proceed?
MVP, up-tick.
Yes. So on the MVP, we basically put it in a – instead of a bundle, we were went with 10 different notices to proceed. We have put in all 10 as of this morning. We have gotten eight of those. That’s allowed us to do both West Virginia and Virginia work. We started the construction process last week. And before that we were able to get work to kick us off two weeks ago with their help. So we feel really confident about the pipeline schedule and we feel really confident about our December 31, 2018 startup day.
Okay. Thanks for that guys.
Thanks.
Thank you. Our next question today is coming from Michael Hall from Heikkinen Energy Advisors. Please proceed with your question.
Thanks. Good morning. I guess, as it relates to the clinical accelerated implementation of the some of the parts plan, can you provide any context as to how we should think about that timeline?
I cannot, all I can say is we will provide more details when we get to the announcement. All I really intend to convey at this point is we are committed to taking care of the sum of the parts discount as quickly as possible. So we see no reason to delay. Once we announce the plan, we can talk more details about the timeline.
Okay. Is it reasonable to expect that it’s something that could be done by year end?
I can’t comment on that at this time.
Fair enough, understood, I guess on the topic of returns and system the compensation metrics, I was wondering if you have got to look at the upstream only business, return on capital employed, how that looks in ‘18 and what you think a reasonable target for that might be in 2020?
I don’t have those figures at my fingertips, Michael, so, but we could – you want to get with Pat that after the call, we could probably get that to you.
Okay. That’s something you might be willing to target formally with – in the context of the some of the parts plan as you guys announced that, is that in your mind or is that?
I would rather hold off on anything related to some of the parts plan until we announce it and then I think that would be an appropriate question that I could answer that.
Alright. I will try something on my guess.
Maybe you rephrase it.
How about just cash tax benefits from the tax policy change, 2018 is provided pretty clearly, but just make sure we are thinking about the full impact of that through 2020 or 2021, how much total cash benefit were you getting from that?
Yes, I mean, I think we have studied in the release that it’s somewhere in the neighborhood of $400 million that we think should be refunded over the over the 2-year period.
Okay, great. I will leave it at that. Thanks for the time guys.
Okay. Thanks, Michael.
Thank you.
Thank you. Our next question today is coming from Sameer Panjwani from Tudor, Pickering, Holt. Your line is now live.
Hey, guys. Good morning.
Good morning, Sameer.
As you look at the weakness in the equity over the past few weeks and I think you guys have previously highlighted line of sight to over $1 billion of proceeds from the dropdowns that retains midstream assets from the Rice acquisition and then kind of layering in the $300 million of free cash flow, it sounds like you are going to generate this year given the tax benefits, how do you guys think about share repurchases in the near-term?
Yes, I think that’s probably a better topic to discuss after we get through some of the parts announcement. I don’t think there is really any color that we can give you right now that will make sense without that context.
Okay, thanks. And then I guess second question so it seems like your peers have started to bifurcate on their school of thought a little bit on growth versus takeaway capacity. We have seen some of them provide some long-term guidance on growth beyond what their contracted capacity is and others who are more closely matching the two. You guys obviously have a line of sight to Mountain Valley in the expansion potential there and our model, what kind of gives you a growth runway through 2020. So, few questions kind of come out of that, so first once you fill your pipeline capacity, how do you think about incremental growth? And then secondarily what’s your appetite for contracting additional Greenfield takeaway capacity? And then last one how much running room do you think there is based on why via Brownfield expansions are by adding compression?
I will take the first part of that, Sameer regarding growth. I think we feel pretty comfortable with our takeaway position a bit beyond 2020, so probably into 2022 or ‘23 before we think serious consideration needs to be given to particularly Greenfield takeaway projects, but beyond 2023 for sure that’s going to be a big part of the focus. Obviously we have to start thinking about that years before that day, but I think at this point, we feel like we have got a little time to get the Rice integrations on, get to some of the parts plan behind us, assess the situation and then take a hard look at what is the next wave of takeaway capacity out of the basin, but again I think from our perspective, we are good for a few work beyond your 2020 date. Blue, do you want to add any color to that?
Yes, happy to add a couple of thoughts. I agree with Steve’s comments. A couple of things that I might suggest that touched on your other questions, you would ask how much incremental might be available. When we look across the basin, from pipes that are in the ground are going in the ground, we would suggest there are probably 3 to 4 Bcf a day that could be incremental takeaway with capacity or small looping project given the slate of pipes that have gone in or are going in. You also mentioned you talked about Greenfield, I think Steve touched on that, I think the next wave of Greenfield presents a unique set of challenges from both the regulatory environment as well as the cost environment, but what is out there that we are actively doing is we are putting a portfolio in place with long-term markets to ensure that, that gas moves as well as we are picking up pieces in the open market of available capacity actively from current capacity holders who don’t have as much clarity as you get out into the future. So, we are doing all of those things.
Okay, that’s very helpful. Thank you.
Thank you. Your next question today is coming from Vikram Bagri from Citi. Please proceed with your question.
Hey, good morning, guys. I apologize if I missed that. I was wondering if you should expect changes in corporate governance at sponsored entities as well, if ROIC bid total shareholder return and other metrics linked to midstream performance will be included in the comp structure. Is that part of the review as well?
Yes, I think again that’s a question that will be better answered in the context of the some of the parts announcement, but what Steve was talking about including return metrics in the comp packages, it was really focused on the upstream business.
Okay, okay, understood. And I understand there are a number of possible outcomes from the ongoing strategic review, but it is sort of reasonable to assume that EQT’s interest in midstream entity should probably get reduced over time. Does that change your hedging strategy at EQT in anyway? Would you look to hedge more or longer term instead of hedging less and there will be of any change in your hedging strategy going forward?
Well, Vikram, this is Steve. I think I am not going to answer in relation to potential outcome of the some of the parts, but I think regardless of that we are rethinking our hedging strategy given this shift to a business model, where we expect to live within cash flow and trying to take some volatility out of the business. So, we are looking at how should we hedge on the commodity side and also starting some discussions with our key suppliers about new ways to contract for the services we need that can potentially provide a cost hedge as well, so trying to find ways to lock in margin a little better than we have been able to in the past.
Understood. And then just one last one for me, it looks like the new Hammerhead Pipeline project runs parallel to Sunrise Pipeline or traverses the same path. I believe Sunrise volumes must have been lower due to EVC coming online, is it possible to reverse that pipeline and if Hammerhead – once you build Hammerhead, what happens to Sunrise after the contracts expire on that pipeline?
Sure. I mean, the Hammerhead Pipeline as we have talked about is kind of that Q3 timeframe in 2020 and so it won’t be able to use Hammerhead to move Pennsylvania volumes into West Virginia to really feed Mountain Valley Pipeline. Sunrise Pipeline basically gives us optionality in the Appalachian Basin you will also see other projects. We have got an organic backlog. Working with Blue and his team, we always are looking at how do we take volumes whether it’s north, east, west or south to the best markets. So you will see both of those pipelines fully utilized.
Okay, understood. Thank you. That’s all I had.
Thank you. Our next question today is coming from Scott Hanold from RBC Capital Markets. Your line is now live.
Thanks. Hey, just a question on some operational stuff. There were some indications I guess in the prepared comments about seeing better results and defining new landing zones on the horizontal laterals. Can you give a little color on what sort of occurred that occurred to see that improvement or exactly what’s going on there?
Yes, so a little color, I mean first, this is David, what occurred exactly was we had always thought would happen, I hope it happened as we get the two technical groups together and discussing how they have approached their development and we have approached ours. We came up with this concept or we took this concept and considered even further. And it’s very early in the process. We are very encouraged by the early results. But generally, it is staggering the Marcellus landing point across the pad and we are feeling that it’s increasing our frac efficiency and basically cutting more of the rock. There are subtle changes. It’s early in the process and we’ll keep you posted during the year, but just a handful of wells right now that we are looking at.
Okay. And was this the initiative that was brought forward by the Rice I guess employees or is this something that you all saw and kind of further confirmed with obviously some of the data or process that they have gone through?
So, it was brought forward by Rice employees and then getting our engineers working with theirs and seeing the data that they were looking at prompted us to continue testing it. So, it was definitely not a Rice idea.
Yes. Are there any other initiatives in light of this that has been brought forward that you are looking at or is this kind of one of the bigger ones?
It’s one of the bigger ones as far as affecting reserves right now. I mean, the other things I mentioned in the call, Rice, the drilling parameters of increasing our RPMs on our rotary steerable systems that was really bought forward by Rice. We had data that didn’t look as positive when we got to see their data and discuss what the nuances of it with them we decided to try and then our first well we increased ROP by 8%. So, I mean, that was another Rice idea that we have brought forward and implemented on our own assets.
And Scott, I would say and the ideas actually go both ways, so there are some techniques that EQT was previously doing that we can apply now to the Rice acreage and yield benefits as well. So, it’s as we expected. Both groups have tested different things and tried different techniques that we have different databases of results and we are going to yield value from having both of those databases available to technical folks to evaluate.
Okay, understood. And then my last question on some of the parts decision and just curious if you could just broadly provide a comment on this. I mean, would this also encompass a strategy on the upstream business long-term, for example, how you plan to grow like what’s the appropriate growth rates and what’s the appropriate amount of shareholder returns be it buybacks and/or dividends, is that expected to be part of this discussion by the end of February?
I think I’d rather not comment on that at this time Scott. Just, you are going to have to wait a few more weeks.
Okay, appreciate it. Thank you.
Thank you. Our next question today is coming from Brian Singer from Goldman Sachs. Please proceed with your question.
Thank you. Good morning.
Brian, good morning.
Can you give us a little bit more color on the synergies plan and implementing the synergies from the right transaction over the course of over 2018, just the areas of focus and potential benefits here now relative to where you expect to be at the end of the year?
Yes. So Brian, so we announced two primary synergies as that drove the deal one on the G&A side, we are at or little bit ahead of the plan that is delivered on that synergy. So, I think the annual savings is going to be a bit better than we anticipated.
Yes. What we have said was we expected about $100 million of annual G&A savings, overhead savings and we think that number is going to be more like $110 million or maybe a little bit more than that for 2018.
And on the capital savings, the model assumed 12,000 foot laterals in the acquisition area and we now expect to average 13,600 feet. So, that’s a pretty dramatic acceleration of those synergies and I don’t have the PV benefit of that difference with me, but it’s…
It’s several hundred million dollars higher.
Got it. Okay, thank you. And then on the Marcellus, you mentioned and we talked about it before the acreage acquisitions that are more on an ongoing basis and I think the number was about $740 million last year, excluding the Rice deal. Can you just talk about how we should think about acreage acquisitions over the course of 2018 and what that would add and just the market in general right now?
This is David again. I think it’s really consistent with the number we have already put out there. We expect around $150 million per year needed to acquire these small pieces of acreage to continue to lengthen laterals and fill in some blank spots. And so that’s what I would expect for 2018.
Okay. So $150 million is the need, but that should also be our expectation for you to actually do, I suppose it’s something big….
Yes, I would think so.
Great, thank you.
Thank you. Our next question is coming from Arun Jayaram from JPMorgan. Please proceed with your question.
Good morning. I guess just 8 trading days until the big decision. My question really regards to the upgrade to your 2018 operating cash flow guidance is about $300 million, I assume that’s primarily taxes, but I was wondering if you could go through that, Rob?
Yes, it is primarily taxes. In December the – prior to the tax legislation change, we expected to pay about $70 million of cash taxes in 2018. Now we actually expect to get a refund of about $200 million, so that’s $270 million of the $300 million. There are some other odds and ends which is really more around realized price and differential that makes up the balance. And I guess I should note that the – that $200 million that refund we expect to get, we won’t actually receive that cash in 2018. That will be on the 2018 tax filings, we wont’ receive until 2019.
Got it. And just my follow-up question, Steve if you think about kind of the integration of the technical teams, you have obviously highlighted some recent benefits of that, what are some future things that you can you think about in terms of the ability to harness more synergies and improvements in terms of well productivities as you put the teams together?
Well, specifically regarding well productivity, that’s always hard to project if we knew the answers we will be doing it. But I think we really only begun to scratch the surface of having the technical teams working together and really working the data from both sides. And it is as we expected, it makes sense that each company tested different techniques. Some work, some don’t, but the data from all of those tests is very valuable. And then you can combine it with another set of tax, it can really yield some insight. So I am very optimistic that we will continue to find some opportunities as a result of the integration of the two teams that improve recoveries from the wells. And I think another area of focus for us over the next year or so and it is also driven by the consolidated nature of the operation now is around logistics. So we have a lot of rigs running. We have a lot of frac crews. We will produce a lot of gas. And with a lot of people in a small area and finding ways to make those logistics as efficient as possible, I think also will deliver some value and that will be on the operating cost side, not on the productivity side, the well productivity.
And just my final question, you guys are getting a pretty nice sizable tax refund over the next couple of years and Steve how do you think about prioritizing kind of free cash flow generation, could you contemplate a buyback irrespective of what’s going on with the strategic options that you are evaluating today and how does a potential buyback fit into your longer term plans?
Yes. This is Rob and I think as we move forward and we are generating free cash flow, that returning cash to shareholders, whether that’s in the form of dividends or buybacks will certainly be a topic that we spend a fair amount of time on. And I suspect that there will be a combination of the both alternatives as we move forward.
Great. Thanks a lot.
Thank you. We have reached end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.
Thank you, Kevin and thank you all for participating.
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your presentation today.