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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Range Resources, Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risk and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speakers’ remarks there will be a question-and-answer period.
At this time, I would like to turn the call over to Mr. Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir.
Thank you, operator. Good morning everyone and thank you for joining Range’s second quarter earnings call. The speakers on today’s call are Jeff Ventura, Chief Executive Officer; Mark Scucchi, Chief Financial Officer and Dennis Degner, Chief Operating Officer.
Hopefully you’ve had a chance to review the press release and updated investor presentation that we’ve posted on our website. We also filed our 10-Q with the SEC yesterday. It’s available on our website under the Investors tab or you can access it using the SEC’s EDGAR system.
Please note, we’ll be referencing certain non-GAAP measures on today’s call. Our press release provides reconciliations of these to the most comparable GAAP figures. For additional information, we’ve posted supplemental tables on the website to assist in the calculation of EBITDAX, cash margins and other non-GAAP measures.
With that, let me turn the call over to Jeff.
Thanks Laith and thanks everyone for joining us on this morning's call. We are very pleased with the progress the team made this past quarter, moving the ball forward on multiple fronts and further strengthening Range as a leader amongst natural gas producers. As we’ll detail in our upcoming sustainability report, we believe the natural gas industry has an advantage position today and for the foreseeable future, as the world moves towards cleaner, more efficient fuels.
And within the natural gas industry, we believe that Appalachia is advantaged globally as an abundant, low cost resource with leading environmental standards. Most importantly, we believe that Range having discovered the Marcellus is best positioned within Appalachia for several reasons. I’ll walk through each of them briefly.
The first differentiator is Range’s peer leading capital efficiency and maintenance capital. Since discovering the Marcellus in 2004, the team has been on the leading edge of well costs and performance per lateral foot and this year is no exception. As evidenced by our capital spending thus far in 2020, the team is doing a superb job meeting and beating this year's average well cost targets with recent well costs trending below $600 per foot.
These outstanding cost controls paired with Range’s well productivity and peer leading base decline provides us a true maintenance capital requirement that we believe is unmatched in Appalachia.
Secondly, Pennsylvania has some of the best environmental standards in the world when it comes to natural gas production. Importantly, Range has been and will continue to be a leader and innovator when it comes to environmental efforts. Whether that's our 100% water recycling, our transparent disclosures or the industry leading methane emission targets that we’re setting, making Range the sustainable choice for current and future natural gas supply. As the world seeks to reduce emissions, we believe that Range in the U.S. Natural Gas Industry will play a critical role in reaching global emissions targets.
Lastly, Range has a core inventory that is class leading. Our year-end 2019 proved reserves were 18.1 Bcfe or 21 x current annual productions and included just 442 undeveloped wells or about five years’ worth of development.
In addition to those reserves, we have thousands of additional locations in the Marcellus that will move into proved reserves as they become a part of our five year outlook. In addition to that Marcellus resource, we are holding significant future optionality in thousands of low risk Utica and Upper Devonian wells that are being held by our Marcellus development.
We believe that as other producers exhaust their core Marcellus inventories and begin developing these other horizons which are adjacent to our acreage, this value will become more apparent. Our core area in Southwest Pennsylvania is the only area in the basin where you can stack the core of all three horizons.
Understandably, this multi decade, multi horizon inventory does not get much attention today as the market is much more focused on the near term. However, as core exhaustion becomes a growing reality in U.S. Shale plays over time, Range will ultimately stand out among its peers as a result of our industry leading inventory of core natural gas and liquids wells.
In the meantime Range continues to focus on furthering our leadership position on well cost, improving unit cost to enhance margins, funding our capital program organically and reducing absolute debt.
I’ll quickly highlight our recent progress against a few of these key initiatives. First, yesterday we announced the sale of our North Louisiana assets for $245 million with the potential for $90 million in additional proceeds depending on commodity prices.
Having sold over $1.3 billion in assets since 2018, these divestitures show our commitment to a strong balance sheet, while streamlining our activity and enhancing Range’s capital efficiency, as we focus our capital towards our highest return assets. To that end, additional asset sale processes remain under way.
Second, our $430 million capital budget for 2020 which was reduced by $90 million in March approximately aligns with cash flow and spending this year despite a highly challenged commodity environment. When including proceeds from the North Louisiana sale, Range expects to reduce absolute debt again in 2020, marking the third consecutive year of absolute debt reduction, a rare feat in the E&P sector.
And third, we continue to see considerable improvements in our unit costs with cash unit costs in the second quarter declining to $1.79 per mcfe. When compared to the end of 2018, our cash unit costs have improved by a remarkable $0.39 per mcfe or 18% in just a year and a half. This is primarily the result of efficiently utilizing our infrastructure and streamlining operations.
Looking ahead, we expect our cost structure to see continued improvement over time. Most impactful will be the continuing improvements we see in our GP&T expense. GP&T has become a tailwind as we are now benefiting from the significant infrastructure build out that occurred over the last 15 years.
Before I turn things over to Mark, I want to reiterate Range’s strategy for 2021 and beyond. As we’ve discussed in the past, Range is committed to sustainable free cash flow, generating corporate level returns. To that end, we do not have any external pressures that would cause us to grow for growth sake.
Looking into 2021, we see considerable improvements for the natural gas and NGL macro as a result of activity driven supply declines, particularly in shale oil basins and strengthening global demand for natural gas and NGLs. For this reason, many reputable analysts are now predicting $3 natural gas or higher in 2021.
However, while 2021 natural gas futures have improved since our lows, in March forward curves beyond 2021 remain depressed. This is not a market that's incentivizing any growth and Range has no plans to grow and that's the plight of the market. Instead Range will seek to maintain current production levels and optimize cash flow similar to our capital program this year and use excess cash flow from higher near term prices to reduce debt. Over time as we approach our long term balance sheet target, Range intends to return this free cash flow to shareholders.
In summary, in the near term Range is focused on what is within our control, continuing to drive down costs and debt. However, the incredible store of value embedded in our reserves and resource should not be overlooked. Through disciplined capital allocation, efficient drilling and completions and innovative marketing, we look forward to translating that resource into competitive sustainable returns for our shareholders.
I'll now turn it over to Mark to discuss the financials.
Thanks Jeff. The theme of the business for the last 18 months has been cost reduction, both unit cost and capital efficiency, debt reduction, extension of debt maturity profile and expansion of liquidity. These trends continue during the second quarter and we intend to keep delivering on these objectives in coming quarters.
As stated on our last call, it is not our strategy to passively wait for improved prices. While we agree with consensus third party research projections of natural gas prices moving materially higher, we continue to execute on strategies strengthening the business and enhancing margins.
So, where are we today? With the sale of Louisiana Assets announced yesterday, we've taken an additional meaningful step in high grading the portfolio, improving corporate base decline rate, improving maintenance CapEx and improving unit costs, while generating gross proceeds of $245 million and an additional potential $90 million contingent on commodity prices, all of which will be applied to debt reduction. Pro forma for the application of these proceeds, since late 2018 this brings total divestiture proceeds applied to debt reduction to nearly $1.4 billion.
Improvements at Range are only partially due to further high grading assets. Our relentless focus on efficiency is improved to breakeven costs. This is attributable to operational excellence, driving productivity for every dollar in drilling and completion investment, combined with a meticulous approach to managing corporate overhead. This is evidenced by significant achievements visible in the second quarter results.
As mentioned a moment ago, we expect unit costs will further improve as a result of focusing on Appalachia. In addition, a rigorous review of companywide staffing levels has identified areas for reduction, that when combined with Louisiana personnel departing as a result of the sale, will constitute a reduction in force of more than 100 people or 17%. When these steps are complete, Range will have reduced headcount by roughly 36% since the beginning of 2019, resulting in durable improvements in G&A and lease operating costs.
These difficult, but necessary steps as part of our overall operating and corporate cost management efforts, it created a new leading break even cost in Southwest Appalachia. Breakeven meaning cash costs plus maintenance CapEx per unit of production.
Our strategic decisions over the last few years have been focused on reducing risk, mainly deleveraging, while maintaining and enhancing the intrinsic value of the asset base. We believe Range holds the largest portfolio of quality inventory in Appalachia. Exposure to that inventory on a per share basis has been preserved and de-risked.
That portfolio also includes the diversified set of customers and pricing points paired with a consistent, but data driven hedge program. We believe steps taken thus far represent material progress in positioning Range as a more resilient business and primed to participate in expected improvements in both, natural gas and natural gas liquids pricing.
Let’s focus on details of second quarter results for a moment. As they demonstrate, Range’s ability to deliver on financial and operating objectives. Range has continued industry leading operating efficiency, delivered plant production within budgeted capital spending. Drilling and completion, capital costs incurred for the quarter was approximately $99 million, consistent with the planned cadence of this year's annual budget.
Turning to cash unit costs, progress on material cost improvements continued as second quarter cash unit costs declined to $1.79, down 14% or $0.29 year-over-year. Compared to the fourth quarter of 2018, when the last of our natural gas firm transportation came online, this quarter improved by 39%. This marked six consecutive quarters of declining unit costs, delivering on our stated commitment.
Lease operating expense decreased by $0.05 from the second quarter last year, due to a host of items including the sale of higher cost legacy assets and reduced work-over activity. Gathering processing transport declined $0.15 from the same quarter prior year, as we actively manage the midstream portfolio, fully utilizing capacity from Southwest Pennsylvania, allowing select contracts to expire, negotiating releases of other capacity, and realizing savings from lower processing costs as a result of reduced NGL prices.
Relentless focus on being a lean organization generated cash G&A savings of $0.05 per unit year-over-year equating to $10 million in absolute cash savings in the quarter, due to reduced compensation expense and overhead items. Interest expense decreased by $0.02 per unit compared to the second quarter of last year on lower debt balances.
In total, the second quarter is better than the low end of annual guidance for unit costs. As described repeatedly, over time we expect a downward trend in cash unit costs to continue, driven by improvements in GP&T as certain contracts see reduced rates over time based on existing contract terms and others where we have the option to release capacity at expiration or extend based on the FX.
In addition, we expect further improvement in G&A and interest expense. The sale of North Louisiana further supports the trend of an improved cost structure for Range, given the higher LOE of those assets as compared to the Marcellus, associated G&A and interest savings due to debt reduction from the divestiture proceeds.
Turning to the balance sheet, we have maintained and improved liquidity while managing the debt maturity profile. One year ago Range had debt maturing in 2021 and 2022 totaling $1.4 billion. As of the end of this quarter, that amount has been reduced by over $770 million or 54%.
Available liquidity at quarter end was approximately $1.4 billion. The sale of Louisiana has no immediate effect on Ranger’s credit facility. So when you add cash proceeds from the Louisiana sale, pro forma liquidity is over $1.6 billion. This substantial liquidity, well positions Range relative to maturities in 2021 of $59 million and in 2022 of $595 million.
So with that as a summary of where we are today, where are we leading the business tomorrow? It remains a top priority to reduce debt, further de-risking Range’s business. During the third quarter, with receipt of proceeds from Louisiana we will repay debt. Contingent Louisiana sales proceeds over the next couple of years will also repay debt. In addition, we have other assets sale processes under way or that we will consider as economics and circumstances warrant.
Still looking ahead, we've provided updated unit cost guidance in the earnings release. Sustained cost improvements are planned with improvements visible in GP&T, G&A, LOE and interest. Each line item benefits from high grading the asset base, reduced staffing levels and continuous focus on identifying new efficiencies.
The well-defined and we believe achievable objective is to sustain a highly investable business that would be resilient through cycles, return cash flow to shareholders and offer compelling value not only compared to other independent producers, but across industrial sectors.
Dennis, over to you.
Thanks Mark. As we look back on the second quarter, our drilling and completion capital spending for the quarter came in at approximately $99 million, while our capital spend for the first half of the year totaling $235 million or approximately 55% of our planed annual spend. As we mentioned on our prior call, our activity for the year is front-loaded, with four drilling rigs reducing to one by mid-year, along with three frac crews reducing to one over a similar time period.
Based on our current activity forecasts for the second half of the year, the remaining 45% of our capital spend is expected to be evenly spread across the third and fourth quarters, placing us at or below our budget of $430 million. Production for the quarter closed out at 2.35 Bcf equivalent per day and aligns with our guidance communicated earlier this year to deliver production at maintenance levels.
Contributing to our Q2 production, 21 wells returned to sales during the quarter with approximately 70% of the lateral footage located in our dry acreage position. This puts us firmly on track to achieve 67 turned in line for the year, which we communicated on our prior call. The remaining wells to sales this year should be ratable across Q3 and Q4 and in line with our activity cadence of one drilling rig and one frac rig.
Production field runtime continues to exceed our expectations as we see enhanced collaboration efforts between our production operations team and our midstream partners. Along with strong well performance from both new and prior wells across Southwest Pennsylvania.
Similar to prior quarters, we’ve continued our practice of long lateral development and use of existing pads. During the second quarter 50% of our drilling activity was located on sites with existing production. Thus allowing us to capture additional operational efficiencies and cost savings, primarily through the realization of service facilities and pad sites, gathering and compression infrastructure and the use of an electric fracturing fleet.
Our ability to reutilize existing pads is a competitive advantage as several years of production history show compare recoveries per foot when returning to existing pads, while the aforementioned cost savings helped drive stronger project economics.
In the second quarter we drilled wells across our dry, wet and super rich acreage, with an average horizontal footage drilled of approximately 13,500 foot per well. This drilling performance represents close to a 30% increase over last year's average horizontally. We see our long lateral development and performance as a key driver in our peer leading capital efficiency. To add to our progress of drilling long laterals, the drilling team added to their record of excellent performance with another successfully drilled Marcellus well bore that exceeded 19,000 feet. This type of repeatable drilling performance continues to be a key driver in our ability to deliver unmatched capital efficiency and well cost.
On the completion side, the team completed 17 wells, with a total lateral footage of just under 220,000 feet with an average horizontal length of approximately 13,000 feet per well. Overall completion efficiency continues to improve, with approximately 1100 frac stages completed for the quarter, as the team increased the number of frac stages per crew day by 17%, versus the same time period a year ago.
Water operations once again exceeded our operational and capital efficiency expectations in the second quarter through increased utilization of third party produced water. The team was able to efficiently utilize just under 1 million barrels of third party water in addition to Range’s produced water. As a result, this reduced our completion costs by over $2 million for the second quarter and has reduced our overall completion costs by more than $5 million year-to-date.
In addition to the cost reductions captured through our water operations, more than $1.5 million in savings has been captured year-to-date through directly sourcing sand for our completion operations. We see creative initiatives like this delivering long term, durable capital efficiency gains that will keep Range in a leading position as we continue to reset the bar for lowest well cost per foot in Appalachia, which fell below $600 per foot for the second quarter and includes drilling, completions and facilities cost.
Production lease operating expense saw similar savings with the quarter closing out at $0.11 per mcfe. This was driven by reductions in workover expenses. Cost removal associated with legacy asset is no longer in the portfolio and lastly our strong field runtime that was mentioned earlier. We project our LOE to be in line with our Q2 reported number as we move forward.
As we entered the year, it was key that we not only communicate the framework of our capital and production plans, but also areas of focus that would underpin achieving our objectives. As we look back on our operational successes during the first half of 2020, we can attribute several of our achievements to our commitment to three areas, one efficiency improvements across our operations; two, diligent cost management; and three, advancements in technology.
We've already touched briefly on efficiencies and cost savings today, and now I'd like to discuss our dedication and use of new technology. Technology impacts our operations in many facets, both in the field and in the office. One example that we had shared on previous calls is our use of an all-electric fracturing fleet. As long time users of dual fuel drilling rigs and frac crews, the step to an electric fracturing fleet was a natural progression with multiple benefits.
During the first half of 2020 our successful utilization of this electric fracturing fleet displaced approximately 2.5 million gallons of diesel fuel and saved more than $1.5 million over 17 wells, all while significantly reducing our emissions and noise levels where we operate.
Range’s large contiguous acreage position and utilization of pads with existing production makes us advantage to this technology, along with the benefits it produces. We will continue operations with this equipment, further capturing these benefits and savings going forward.
On the engineering side, earlier this year our planning team implemented a well lifecycle management and resource scheduling application. Through this effort the hundreds of tests across our teams which were necessary to take a well from a concept on a map to a producing well, were mapped down and digitized. The associated software package allows us to enhance cross department collaboration, provides transparency and work flows, improves data quality, assists us in identifying and resolving challenges and helps us make faster and more informed decisions ensuring on-time and on-budget wells.
Additionally, this application has streamlined our ability to construct and evaluate scenarios to help ensure we meet and exceed our business objectives. Upon implementation of this enhanced digital workflow and its associated processes, we immediately identified areas for production up lift along with opportunities for scheduling optimization, further supporting our efforts to reduce capital this year, while maintaining our production guide. These are real examples of technology impacting our business and providing operational, production and capital spending enhancements to our 2020 plan.
Our culture is one of continuous improvement for both our operations and technical teams. Combine this with our repeatable, efficient long lateral development, utilization of pads with existing infrastructure, creative drill and complete cost reductions and we see this generating peer leading well cost and durable capital efficiency.
On the marketing front, during the quarter Range sold additional natural gas volume in Appalachia, following a pipeline outage in early May affecting a portion of Range’s transportation that takes natural gas to the Gulf Coast. The event had a minor impact to differentials during the quarter and it was mostly offset by lower gas transportation expense. This is a good example of the benefits related to our diverse transportation portfolio. When unplanned events since pacific markets occur, the overall impact remains minimal.
Domestic U.S. Natural Gas production declined significantly during the quarter, led by associated gas shut-ins and legacy basin declines in response to the price of both oil and natural gas. Range expects recently announced activity reductions to weigh on U.S. production levels in the second half of 2020 and especially into the upcoming winter season, more than offsetting the return of shut-in production, all while LNG exports recover from current levels. We believe that a sustained move higher in the forward curve for natural gas is needed to incentivize activity from dry gas basins to avoid low storage levels for next year.
As previously disclosed, entering second quarter demand for gasoline and jet fuel were directly impacted by COVID-19 related reductions in vehicle and air travel. From the volumetric perspective Range’s second quarter liquid sales went unaffected as our marketing team found domestic and international outlets for our production.
The abrupt change in demand put temporary pressure on condensate pricing during the quarter. However, the northeast condensate market has since rebounded and we began to see improvements in condensate pricing during the month of June. We expect second quarter to be the trough in condensate pricing for 2020 and see significant improvements going into the second half of the year.
Range experienced healthy NGL demand during the second quarter as a result of its strong and diverse customer basis exposure to resilient domestic and global chemical demand. Demand for U.S. NGLs was up an estimated 3% year-over-year and as a result, the call on NGL's exported from the east and Gulf coast has remained resilient. At the same time, total U.S. NGL supply including imports is estimated to have decreased 5% as refineries reduced throughput and shale production declined. This tightening in the domestic supply demand balance led to a swift recovery in NGL prices during the quarter.
Range took full advantage of these strengthening fundamentals and the resulting improvement in prices via its strategic access to domestic and international liquid markets. As the team is typically done, Range was also able to capture the value of an improved ethane premium to Appalachian Natural Gas by recovering incremental ethane during the quarter.
Mont Belvieu propane and normal butane prices increased roughly 60% from March 31 to June 30, and while international netbacks are not where they were to start the year, premiums at Marcus Hook have remained stable at a few cents above the Mont Belvieu index.
Range increased its access to waterborne exports via Mariner East and Marcus Hook during the second quarter and expects to continue benefits from the flexibility of our transportation portfolio that allows access to multiple domestic and international liquids markets.
As we enter the second half of the year and continue into 2021, we see NGL and condensate fundamentals continuing to strengthen as supply declines due to a reduction in drilling and completions for the industry, while demand continues to recover. This should create a very supportive environment for stronger NGL and condensate prices.
Before closing out the operations and marketing section, I’d like to touch on a few highlights regarding our safety and environmental performance.
When looking at our key safety metrics year-to-date, we continue to see improvements compared to the same time period a year ago. With our team's dedication to hazard identification and training, our total recordable incident rate has dropped to 0.44 per unit of measurement and should benchmark in the top quartile for safety performance among our peer group.
In addition to this, our vehicle monitoring system and trading continues to show positive results by reducing our preventable vehicle incident rate by 22% for the first six months of 2020, compared to the same time period in 2019.
Our environmental performance reflects similar positive results, with our operations team capturing zero reportable spills in June and an overall 50% reduction year-to-date versus last year. We will have additional positive environmental and safety results to share in our upcoming corporate sustainability report that is slated for release in the next month or so.
Before handing it back over to Jeff, I'd like to express our thanks to our women and men in the organization for their continued hard work and dedication while managing through a pandemic. The second quarter results clearly reflect our operations are on track to deliver on our production and capital plans, with peer leading drilling complete costs, all while operating with our strongest safety and environmental performance yet.
Jeff, back to you.
Operator, we are happy to take questions.
Thank you Mr. Ventura. [Operator Instructions]. Our first question comes from the line of Josh Silverstein with Wolfe Research. Your line is open, please go ahead.
Thanks. Good morning guys. Just want to touch on the asset sales. I’m curious with the bullish outlook for gas prices next year, both on the screen and your internal views. Why not wait a little bit to sell at a higher valuation and then separately on the asset sales, what else is being contemplated? I know you guys had the royalty transactions that you've executed already, but are there other just straight up producing assets that you’re looking to get rid of as of right now.
Let me start and then Mark can pile on. To your first question, why now versus waiting? We are constructive prices, but I think the key thing is I think taking action and moving on. It helps us hit our values now. We're constructive, but you know who knows what'll happen you know a year from now. Who would have predicted the things we’re going through now a year ago?
But if you look at it, you know the company and the way we are positioned at this point, you know we’ve got excellent cost structure, wells that are best-in-class, 600 per foot, you know our maintenance capital, because our basic decline is lower now and with the well cost we’ve got best-in-class. We think in Appalachia and maintenance capital we're reducing debt with it. So these are things we know they're going to happen versus you know rolling the dice and betting on to come.
Significant unit cost improvement and Mark’s going to go through that, and then you know again post-Louisiana we have improved unit cost, better leverage, better liquidity, lower debt, improved basic decline and maintenance capital and we think therefore looking forward improves free cash flow and yields, a return of yields. Mark, why don’t you add to that?
Sure, so to add just a couple of things and then to answer your second question as far as what else may be in line? First, I think Jeff touched on it really, it's about the application of proceeds. It’s about de-risking the existing massive portfolio of the Marcellus and reducing costs structure, which inherently creates incremental value.
I think the other piece of it is the way the deal was structured. There is a contingent payment of additional proceeds of up to $90 million based on a combination of natural gas, natural gas liquids and oil price and at current prices a significant portion of that is in the money right now. So while you could attempt to time the market better, we feel like the immediacy of the benefits of this, combined with a portion of the upside potential from this contract is very beneficial for Range today.
As far as what else may be in the hopper, it's kind of what we've talked about before. Dialogues due continue, we have options to look at around Lycoming. That remains a quality asset with a low base decline rate, good production, a good starter kit or bolt on for a variety of different buyers with whom we have discussions.
And then as far as looking at the overall range of options we have in front of us, just consider the depth and breadth of the portfolio, looking at 0.5 million acres with stacked pay acreage in Southwest Pennsylvania. Depending on economics and opportunity and needs, we have the ability to continue looking at either have enough pieces of acreage or other structures to create additional value.
I think the main punch line here is not only what we’ve – our separate targets are, but what we’ve done and what we've delivered and what we fully expect to be our third year in a row of declining debt and with free cash flow generating plan going forward, this puts us in very good position and the Louisiana Asset sale just helped us take one more step on a that path.
Thanks for that comprehensive answer. The follow-up question would be just on the comments on the GP&T costs. I know you guys are producing above the minimal Marcellus commitments right now. You know what's the significance of the savings? Like how big is the magnitude here and is the view internally that you guys would need to renew the capacity or is that you renew it at a lower rate going forward as the commitments roll off.
Yes, I think there is a couple of questions there. I think Dennis and I can take that one together. I'll start off with just the guide and the trends cost. I think if you got the Investor Relations presentation handy, slide 14 is a good reference.
What that slide shows is the trend in unit costs over time going from something near $2 to obviously this quarter, in the second half of this year, mid-point of guidance in the low to mid 160’s range and then if you look forward to the potential unit cost structure here, assuming zero growth, you still see savings driving us down to the $150, low $150 range. That is in large part as you can see in the cart, allowed and permitted by the GP&T savings which see declines to potentially the mid-$1.20s type of range, $1.20, $1.25.
As a reminder, it’s a function of the existing contractual terms and the nature of those contracts. So in big round numbers you're talking about a third processing, a third gathering and a third long haul transport. The long haul transport is fixed. Although as we’ve disclosed this quarter and are continuously doing and Mark and the gang does a great job of always trying to optimize that capacity. Use it, sell it off, negotiating amendments as possible.
The third processing, obviously that's a function of NGL prices and what fluctuates, but that's right away risk, that’s a good set up for Range.
The gathering portion has a cost recovery mechanism that really the pieces of it, you're entering into that phase where over time for the next decade, annually pieces of that begin to fall out, which not only drives savings through 2024, but can continue thereafter and continue that trend downward. So as far as strategy for long haul transports, I’ll turn that over to Dennis.
Yeah, good morning Josh. We see our portfolio as being very well right sized with what our production plans are today and also as we think about making us capital moving forward. Being an early mover in the Marcellus really allowed us some advantages to layer in multiple outlets to make our portfolio diverse. Thus you know we touched on it during the prepared remarks, allowing us to you know either sell in the basin and move to other markets, even when their subsets had exist.
We're exceeding the utilization of our FT long haul to-date. We see that as being again, in-line with what our plans are and as some of these portions of our transport start to reach exploration, we have good flexibility across those different packages to either renew, extend, not extend and we see this aligning well as you think about where the program could go in the next couple of years.
Jeff touched on it earlier, but with our long dated inventory we see decent traction for in-basin sales opportunities to materialize, allowing us some flexibility to then further look at again as we've always said, try and get our molecules to premium markets.
Okay, thanks guys.
Thank you, and our next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Your line is open. Please go ahead.
Good morning.
Good morning.
The first question I wanted to ask was about the $28.5 million, the loans that’s dedicating to do some missing commitments that’s welded to the North Louisiana sale. I was just wondering if this had any effect on the total duration of that commitment and perhaps how long that commitment remains, if you can disclose that.
Sure Jeff. So I guess just as a backdrop for the midstream capacity in Louisiana, a portion of that capacity, a used portion goes with the asset and the unused comes to Range. So first of all the existing contract was bifurcated and the portion that was retained, we have entered into amendment to that agreement, that is just of the shape of that obligation and the length and turn of that obligation.
So the final valuation work and all of that will be done in the third quarter, as well as estimating potential future savings incremental to those things, incremental to the sign of the obligation and the turn of the obligation, but also savings potential from incremental activity there.
So that $28.5 million upfront payment was just beneficial to Range and to the amendment in terms of reducing that overall obligation. They were dollars well spent in reducing the size of the market.
Okay, right, yeah I appreciate that. And my follow-up is to ask about the $600 per foot average cost savings, just a couple of quick ones on that one. I was wondering to what extent the 50% of activity returning to the legacy pads benefited that cost.
Yeah Jeffrey, this is Dennis. What I would tell you is that kind of year-in and year-out we’ve been seeing a return to pads with existing production activity cadence of somewhere between the 30% to 50% range. Its higher and some years lower than others. So there are savings there to capture. They do find their way go clearly into the total cost per foot.
Really what I'd like to say though is the three biggest drivers for us though are really around our efficiencies we've seen through the first half of the year. I touched on it briefly, but seeing a 17% increase in our number of frac stages for crew day through the second quarter is also consists with the positive results we saw in the first quarter as well. So the crew has done really well, the teams have worked really hard to make sure that we're as or more efficient, and that translates into lower costs for us.
The second thing was our water recycling. When you look at basically the savings that we touched on in the second quarter for using third party water, that's only one aspect of it. The other savings we capture is efficiently bringing source water into the field from our own operations, and we've seen that cost significantly reduce as well.
So those are the two big drivers and then thirdly its further, let's just say cost savings on the server side. We've seen those continue to soften slightly as companies look to strategically align with us for not only the balance of the year, but also as we look into 2021.
I would just add to what Dennis is saying, the fact that we have a big blocky position, you know for us it really enhances what we’re able to do, so it’s that footprint is key.
I'll just follow-up by asking and it sounds like there's going to be somebody else here. Do you expect these cost reductions to remain largely sustainable, even if we get that 2021 Nat gas price improvement that’s been referenced today? Thanks.
Yeah, absolutely. We feel really good about being able to maintain these and by and large because there's such a significant portion of them that are based upon what Jeff pointed out, our blockey acreage positions, that building to move back into existing pads and then maintaining or further improving the efficiencies that we built upon you know really quarter-over-quarter over the last several years. So we see this as really durable for us and hope to continue to push further below $600 per foot.
Thank you. And our next question comes from the line of Kashy Harrison with Simmons Energy. Your line is open, please go ahead.
Good morning and thank you for taking my questions.
Good morning.
Yeah, so maybe first off a question for Jeff. You know looking at Appalachia longer term, it feels as if to us that the ability to earn excess corporate returns is probably going to be driven by you know consolidation and you know just less corporate overhead in general as the industry matures.
You know you talked a little bit in the opening, in the prepared remarks about Range having an enviable core inventory of debt, but as you know the balance sheet still needs some work and so I guess I was just wondering if you could maybe give us an update on you know where your thought process is on consolidation and how do you see Range playing a role within that theme over time.
Yeah, let me start and Mark can follow-on to my comments. You know I think that there are several things. One, I think if you look at Range standalone, we do have an enviable position and if we believe and I think it's demonstrable that we have the best inventory out there with the longest life, that’s where we’re stacked.
Importantly when you look at our cost per foot that other people are targeting in the targeting range, so we've been at the head of the class in terms of growing completing capital efficiency and therefore couple that with also best-in-class decline rate now was forming now below 20%. It gives us a peer-leading maintenance capital.
You're right, costs are critical, so we've been laser focused on reducing all unit costs. If you look at our press release, we intentionally broke them out one-by-one. So you can see we're making really progress in every single aspects of unit cost and like Mark said, in terms of G&A also. So it's painful to do, but significant headcount reduction coupled with laser focus on all those different aspects.
So I think you know there's the Appalachian basin I would say relative to the Permian basin and other areas is relatively consolidated, but with time I expect it'll consolidate further. You know people talk about there’s roughly 30 drilling rigs operated by you know however many companies, you know 20 companies or whatever, but I think when you look at that acreage you only have to consider the quality. A lot of that, you know it really becomes apparent that you have tier 1, 2, 3 or core tier 1, 2, 3, however you want to define it.
We put some are slides in our deck that are a little bit different. If you flip to slide nine, we have tier one and two and we won’t tell you who those are, though it’s pretty early to look at it and you can see that when you look at the results going from 2017 to ‘18 and ‘19 deterioration, and these were what you would consider leading peers. So I think it’s important to consider acreage quality, cost structure, balance sheet, a number of things when you go forward. So I think Range is well positioned, but we're very open to whatever's best for our shareholders. So Mark, do you want to add on to that.
Yeah, I think you've hit on all the key topic there. I would just add that you know the way we think about corporate returns is best measured in free cash flow and that with the revised cost structure, that Range’s clearly there, whether its second half of this year into 2021.
At current prices we think the significant progress made to-date in terms of absolute debt reduction, this year being the third year in a row for absolute debt reduction is significantly de-risked our inventory and reduced our cost structure. Combine that with the savings on LOE, G&A and other line items and then couple that with peer leading maintenance or sustainable CapEx. All in, we think that’s a peer leading southwest Appalachia break even cost. So Range we think is poised to deliver competitive returns, both within the sector and as you compare against other peers for a very long period of time.
Great, and thank you for that color. And I guess as my follow up, maybe a question for Dennis. You know you talked a little bit about cost tracking below $600 per foot. It seems as if guidance implies well cost in the mid-500’s. I was wondering if you could maybe give us a little bit more specificity on that sub-600 estimate that you put out there today and then, just you know given the evolution of the portfolio, evolution of base decline, just you know wondering if you could provide a leading edge estimate on how you think about maintenance CapEx for Appalachia entering 2021.
I'll go ahead and start on the cost piece and make sure some of that with Mark of Jeff on the maintenance capital side. You know as we think about cost as we go into the second half the year, we're already currently at one drilling rig and one frac rig, and so the capital efficiency that we're seeing associated with our operations is very much aligned with what we saw through the first half of the year. So we're encouraged that we'll continue this – I’ll just say capital savings drum beat for the remainder of 2020.
We're seeing our efficiencies on the completion side be the strong as we ever have. I certainly tried to touch on that earlier with the 17% improvement in our frac efficiencies. Like I said, the crews have really done well.
We see the similar type performance on our drilling rig site. Or drilling performance continues to exceed our expectations and then also you know really it goes across not only from the DNC side, but also to LOE, because hitting $0.11 for the quarter.
As we think about you know 2021, it's difficult right now to see service costs moving in a positive direction. There's going to be no doubt further alignment I think between I’d efficient operators and service providers who were wanted or partnered for the long haul. We’re already seeing some of that dialogue with our current service provider based, good strong partners with us.
So as we think about costs for 2021, we see that it's durable. We like what we're capturing on efficiency standpoint and we think that as we look into getting farther below, let’s just say that $600 million mark or $600 per foot mark, it's really going to rely upon building upon multiple aspects and it won't be just, just service cost, it won't be just efficiencies, it will be implementation of technology like we talked about with our planning and resource tools and I’ll off road for two seconds here.
If we talk openly about keeping our gathering system full and at high utilization, as a part of this planning process we're also needing to accurately hydraulically model our pipes and also understand where our constraints are as well as we ever have, and understand the impacts of the debottlenecking. So when we think about planning, its moving from sticks on a map, to something that's a lot more complex to capture those additional efficiency. So we see that translating into the next level of driving further below $600.
So if you want to put a couple of numbers to that, just I think the math that we lay out on slide 11 is a good model, not only for Range, but a tool set to compare across the industry to get a pretty solid apples-to-apples comparison based on reported data.
So far Range looking at our current estimated decline rate of roughly 19%, you know you could back into an estimated D&C Maintenance or sustainable CapEx number of about 385. Now there's obviously timing applications in weather and so forth. So that moving from the spreadsheet into reality, that would put you today at about $440 million. But after the Louisiana sale, you're going to drop another $30 million, $35 million out of that, so potential sustaining CapEx in the low 400 range.
Great! Thank you, thank you for that update.
Thank you. And our last question is going to come from the line of Brad Heffern with RBC Capital Markets. Your line is open, please go ahead.
Yeah thanks. Good morning everyone. So a question on hedging strategy. So obviously you've talked about you know your bullishness on the outlook for gas and NGLs. How do you think about the opportunity that the futures curve presents in 2021, you know anywhere between $2.60 and $3 across the year versus your desire to retain some of the upside.
Yeah, that's a good question. This is Mark, I’ll start and we can all chime me. So Range has had a pretty consistent track record for more than a decade in terms of what we do to de-risk our cash flow, protect the balance sheet and maintain steady operations, protect shareholder value.
But there's a fairway within which we operate. Generally speaking, by the time we enter a calendar year, we want to 68% or 80% hedged. Thus the nature and the timing of those hedges as to when we add them is based off of data, based off of our observations, drilling based on the tight curves by basins, as we model based on breakeven costs, by basins that we model and based on projected demand as published by new facilities expansion, expansions to the LNG, the margins export and so forth.
So we try to combine the supply and demand to give a sense of where we think the market is going to go, and that gives us the ability to exercise some flexibility in terms of the timing and the structure of the hedges that we put in place. So the primary objective is still to protect balance sheet, protect the shareholder value and the value of the inventory. But we've intentionally been a little bit on the lighter end of the range of hedging for 2021.
We've also used some callers to make sure we're protecting the balance sheet, but hanging on the upside exposure, which we believe is very likely, given the breakeven costs for the industry as a whole and the demand that’s returning, both on the natural gas and the natural gas liquids side.
So we're certainly pleased seeing reality setting in to the forward curve a little bit, the fundamentals being better reflected and we think that will continue to play out as producers, economics and the need for cash is evident to simply sustain production, much less meet the expected growth in the coming year two and three.
So we'll continue to add hedges, we’ll continue to operate within our bandwidth of historical practice, but being mindful of hanging on to some of the upside exposure with structure and timing of those hedges.
Okay, got it. And then going back to the Terryville transportation, the $28.5 million, I was just curious if are we going to see GP – something continue to flow through GP&T for those commitments. And then is the $28.5 million, you know is that the bulk of the commitment that's been paid down or is there any sort of like NPV that you could give on what that would be.
So the present value of the obligations will be recorded in the third quarter, and then that liability will just accrete off the remaining term. The obligations would extend for about 2029. So you'll just see that roll-off the balance sheet over time.
The $28.5 million is, let’s call it a prepayment, but a favorable prepayment for Range to reduce that amount. In terms of giving you a dollar estimate, as I mentioned there’s multiple component here, the amendment to the contract. So that valuation work is being nailed down and refined right now, but just to give you some expectation of the upper end of what that is, I've referenced the disclosure in the 10Q, but this past quarter's deficiency payment was about $18 million.
So again, this isn't anything new. This is a cost that’s been in our gathering and processing transport from many quarters. So this has just improved by splitting the contract, moving capacity with the asset and then amending the retained portion over time.
Okay, thank you.
Thank you, and that does conclude our question-and-answer session, and I would like to turn the conference back over to Mr. Jeff Ventura for any further remarks.
I just want to thank everybody for taking time to listen to our call and ask questions this morning, and please feel free to follow-up with additional questions. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day!