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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 Fourth Quarter 2021 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 risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speaker 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 year-end 2021 Earnings Call. The speakers on today's call are Jeff Ventura, Chief Executive Officer; Dennis Degner, Chief Operating Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we posted on our website. We may reference certain slides on the call this morning. You'll also find our 10-K on Range's 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 our 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. Range continued its steady progress on key objectives this past year. In 2021, we enhanced margins through thoughtful marketing, hedging and a focus on cost, further strengthened our balance sheet with free cash flow and completed our 2021 drilling program safely, efficiently and under budget and advanced our peer-leading capital intensity with the lowest capital spending per Mcfe in Appalachia. Today, Range is well positioned to return capital directly to shareholders in a meaningful way and we are building on and accelerating the shareholder-friendly initiatives over the last couple of years by establishing a base dividend and a new $0.5 billion buyback program, which was recently announced by the Range Board. Range's dividend, which we expect to begin in the second half of this year, reflects our continued commitment to disciplined capital spending and balance sheet strength as we intend for the dividend to be sustainable through the cycles. At the same time, our sizable buyback program provides us the opportunity to take advantage of a market that is very focused on the near term and ignoring the underlying value of the massive resource that we have. When considering the various potential uses for Range's free cash flow, share repurchases are very attractive with the compelling durable free cash flow yield and underlying reserves and resource potential trading at a significant discount. Range's base dividend and share repurchases are supported by the targeted hedge program we've implemented. Importantly, you'll note that Range's hedge program migrated to using a mix of collars and swaps back in 2020, which has allowed us to capture more of the improvement in natural gas prices than most peers, while simultaneously supporting our key objectives of balance sheet strength and capital returns. Looking forward, as free cash flow reduces absolute debt further, we have added flexibility in the timing, structure and the amount of hedging required to support our capital plans. Switching gears and looking back at 2021, Range benefited from the steady improvements in commodity prices throughout the year. Our industry is 1 where businesses can continuously be mark-to-market based on futures prices even though it's been well documented at the future strip is a poor predictor of prices. As an example, Range entered 2021 with most estimates of free cash flow around $250 million and we finished the year generating more than double that number. This not only speaks to bullish market conditions, but the hedging decisions Range made in 2020 and early 2021 that allowed us to capture a good portion of the price movement. Range finished the year with record cash flow in the most recent quarter, led by the highest realizations since 2014. I believe our mix of production and delivery of NGLs into the international markets provides Range an underappreciated advantage in terms of pricing. For context, if we look at pricing for 2021 NGLs, they averaged over $30 per barrel. And based on recent strip pricing, 2022 is even higher, approaching $36 per barrel or $6 per Mcf equivalent. This advantaged liquids production provided Range of greater than a 25% premium per Mcf equivalent versus Henry Hub versus our overall production base in 2021, a distinct advantage over other natural gas producers. Our ability to sell purity NGL products into the international markets paired with strong NGL fundamentals helps support Range's strong free cash flow and margins and at recent strip pricing, our premium to NYMEX natural gas is expected to be even greater in 2022. Looking at the balance sheet quickly. We continued the trend of lower debt balances, now having reduced net debt by approximately $1.5 billion since mid-2018. Free cash flow accelerates this trend in 2022 potentially driving leverage below 1x by the end of this year at strip pricing. For context, at strip pricing, we expect our debt balance at the end of this year to be approximately half of what it was just 1 year ago providing durable improvements to full-cycle margins and positioning us with added flexibility in capital allocation, hedging and continued returns to shareholders. Operationally, the team continues to innovate and reduce normalized well costs. As a result of efficient operations, coordinated planning and a laser focus on capital discipline, the team was able to deliver the 2021 operational plan for $11 million less than our original budget. This is the fourth consecutive year Range has achieved these types of savings spending less than budgeted, which is a reflection of our disciplined capital spending and cost leadership. Range has been a leader in well cost per foot amongst Appalachian peers since discovering the Marcellus. As Dennis will discuss, the operational plan that we've laid out for 2022 shows a continuation of efficient operations with average all-in well costs of approximately $625 per lateral foot, which is the best amongst natural gas peers. Range's class-leading D&C cost, coupled with our shallow base decline in our [blocked key] core inventory, all come together to support a very low and sustainable maintenance capital. Range's base decline is below 20%, allowing for maintenance D&C capital in the mid-$400 million range. This low capital intensity that is unmatched amongst E&P companies provides us a solid foundation for generating significant free cash flow and returns to shareholders. Importantly, this maintenance capital figure is sustainable for a couple of important reasons. First, the lateral footage Range is drilling, completing and turning to sales this year is very similar to what was accomplished in the last few years, leaving us well positioned to continue into 2023 and beyond with peer-leading capital efficiencies. And second, Range has a core inventory of wells measured in decades, which provides us a long runway of consistent, repeatable results and efficient capital deployment. These positive differentiators on sustaining capital bear out in reported results. Taking a simple look at relative efficiency using actual D&C capital spend per unit of production, Range has consistently led all Appalachian producers for the last several years, and we expect similar results going forward. As our peers continue to exhaust their core inventories in the years ahead, Range will remain well positioned with decades of top-tier wells to drill. A portion of the value of our inventory can be found in our year-end reserve report. At year-end 2021 strip pricing, the PV-10 of Range's proved reserves was $12.7 billion. For context, after backing out year-end net debt balances, this PV-10 equates to approximately $40 per share or approximately twice our current share price. But as many of you know, the SEC definition of proved reserves only allows for about 5 years of development and beyond this 5-year window, Range has thousands of additional core Marcellus wells not included. Simply put, we do not believe this significant resource value is currently reflected in Range's share price presenting Range with the opportunity to create meaningful long-term per share value for equity holders through our buyback program. Before turning it over to Mark and Dennis, I'll just say that I truly believe that Range is in the best position in the company's history. As the world continues to move towards cleaner, more efficient fuels, Natural gas and NGLs will be the affordable, reliable and the abundant supply that helped to power our everyday lives while also helping billions of others improve their standard of living and reducing their reliance on coal, biomass and other more carbon-intensive fuels. We believe Appalachian natural gas and natural gas liquids are well positioned to meet that current and future demand. And within Appalachia, Range will be among those leading the charge on emissions intensity, capital efficiency and transparency, which are all core to generating sustainable long-term value for shareholders. Range has derisked a massive inventory of high-quality wells in the Marcellus in decades and translated that into a business capable of generating free cash flow through the cycles. Underpinning this business is a low sustaining capital requirement that Range enjoys, reflected in our peer-leading D&C spending per Mcfe. At the same time, Range's balance sheet is in the best shape in the company's history with rapid improvements coming over the next few quarters. With significantly lower debt will be even more resilient whenever we see the next downturn. That said, with favorable fundamentals for natural gas and NGL liquids today and for the foreseeable future, Range is well positioned to generate healthy returns on and returns of capital to shareholders. I'll now ask Dennis to cover operations.
Thanks, Jeff. Drilling and completion activity for the fourth quarter went as expected, with expenditures for Q4 totaling $83.7 million. In addition to our D&C capital spend, $8.6 million was directed towards leasehold retention, gathering systems and other corporate items to round out the quarter. This resulted in a total capital spend in 2021 of $414 million or approximately $11 million below our original guidance of $425 million set at the beginning of the year. Coming in below budget was achieved while executing the full 2021 program and even pulling an additional pad into late December that wasn't originally planned for in 2021. This was achieved through the continued focus on innovative operational efficiencies that translated into capital savings allowing us to do more, all while spending less capital. I'll spend time in the operations sector and covering these highlights in more detail in just a moment. As we look forward into 2022, our capital budget has been set at $460 million to $480 million. This capital range consists of approximately 93% allocated towards drilling and completions-related activity with the remaining balance directed to leasing and support functions. Consistent with the past several years, activity and associated capital spending will be front-loaded in the first half of the year with more than 60% of the capital spend coming throughout the first and second quarters. The program will consist of 3 horizontal rigs and 2 frac crews to start the year, tapering off to 1 horizontal rig and 1 frac crew by year-end. A small year-over-year capital increase was factored into 2022 with the majority of the increase related to inflationary impacts on service and material cost. Despite the inflationary cost increases, Range’s strategic long-term fixed pricing agreements on certain services, coupled with a collaborative approach with our vendors and suppliers has limited our exposure to these price increases in 2022. The capital plan outlined for 2022 is projected to generate a production range of 2.12 to 2.16 Bcf equivalent per day. This equates to a capital spend of $0.60 per Mcfe, which is the lowest capital spending per Mcfe amongst peers. The 2022 production guidance incorporates planned third-party downstream maintenance that impacts Range's first half of 2022 production by approximately 40 million cubic feet equivalent per day and weather-related downtime in February that impacted the first quarter by approximately 35 million equivalent per day. And lastly, our activity cadence will result in a quarterly production profile similar to the past couple of years of maintenance with second half of the year production above first half setting us up well for 2023. Production for the fourth quarter averaged 2.2 Bcf equivalent per day, resulting in an annual average daily production of approximately 2.13 Bcf equivalent per day for the year. And ahead of the production guidance provided on the previous earnings call in October as we were ahead of schedule on some late fourth quarter turn-in lines. The 2022 development program will consist of 63 new wells being completed and turned to sales. Approximately 56% of the lateral footage turned to sales this year will be located in the wet and super-rich acreage position, with the remainder in our dry gas footprint, including 9 wells being completed and turned to sales in Northeast Pennsylvania. Consistent with the past couple of years, our average horizontal length for wells drilled and turned to sales during the year will be over 11,000 feet per well. And similarly, more than 50% of the wells being developed are an existing pad sites. You've heard us touch on this before. But being repeatable is key to being successful and our long lateral drilling and returning to existing well pads are key components in our peer-leading D&C cost per foot and maintenance capital costs per Mcfe. A review of our 2021 operational highlights begins with drilling operations. The team operated 2 dual-fuel horizontal rigs throughout most of the year, which drilled 60 wells at an average lateral length of over 10,000 feet per well with 9 of the wells having lateral lengths in excess of 17,000 feet. Four of the 9 wells fell within the top 15 lateral links drilled in Range's Marcellus program history. Strong operational performance was driven by a 10% improvement in daily drilled lateral footage and fuel savings from the substitution of 600,000 gallons of diesel with natural gas for our dual-fuel horizontal rigs. This allowed Range to maintain a drilling cost per lateral foot at the $200 per foot level, showing repeatable performance from the prior year. On the completion side, the team completed over 3,650 frac stages in 2021, which is consistent with the number of stages completed in 2020. While year-over-year activity levels were consistent, the team continued to improve efficiencies during 2021 including setting a record for frac stages per day on a yearly basis. To provide color around this, frac stages per day increased by nearly 18% in the fourth quarter, and 13% overall in 2021. Driving the improvements in Q4, the team introduced new surface equipment and procedures that increased overall completion efficiencies and saving Range capital. As an example, in the fourth quarter, a pad completed utilizing these procedures averaged 10.3 frac stages per day for the entire pad versus the average of 7 stages per day under the historical procedures. While the results are early, we're excited to see how these new procedures impact operational efficiencies in 2022 and beyond. The use of both an electric frac fleet and dual-fuel frac fleet continue to limit diesel consumption in our completions operations during 2021 and substituted it with clean burning natural gas is our main fuel. In total, we substituted over 4 million gallons of diesel fuel with a net cost savings of $7.8 million in 2021. Range's large contiguous acreage position allows us to take full advantage of this technology. And in 2022, the team will continue to utilize this type of equipment for our operations. The diesel substituted in both the drilling and completions operations is significant in not only reducing operating fuel costs and improving capital efficiency, but also in reducing emissions from our operations and getting us closer to our long-term emissions target of net zero in 2025. In 2021, a continued focus on efficient sourcing and transporting of water resulting in increased operational efficiencies during the year. New records were set for water truck to location, total reuse water utilized and the percentage of reuse water used at each completion stage. In 2021, Range's utilization of third-party water increased by 15% for the year, the recycled water accounting for over 60% of all water utilized in operations exceeding the prior year's mark. The savings associated with our water reuse program exceeded $13 million in 2021 while recycling approximately 150% of Range's produced water volume, further reducing supply needs for regional freshwater sources. And to round out with production operations, lease operating expense in the fourth quarter finished at less than $0.09 per Mcfe with an all-in lease operating expense at year-end of less than $0.10. Weather covering drilling completions, water ore production, these results clearly demonstrate the durable, repeatable nature of our program and the commitment from our teams. Shifting to marketing. NGL prices have entered 2022 on a strong note, belied by supportive fundamentals. Record exports combined with strong domestic demand drove the Mont Belvieu price to multiyear highs in October and November. We expect near-term demand increases to support ethane pricing at an increasingly attractive premium relative to natural gas. Range will benefit from this as an increasing percentage of ethane sales are tied to Mont Belvieu pricing in 2022 relative to recent years. Similarly, tight domestic and international fundamentals for LPG markets are expected to support healthy propane and butane price realizations throughout 2022 and into 2023. And on the gas side, positive pricing movement continued during the quarter, with Q4 NYMEX averaging over $5.80 per MMBtu. More recently, January proved to be one of the coldest in the past 10 years, bringing storage levels below the 5-year average. These strong fundamentals for both natural gas and natural gas liquids coupled with Range's efficient and repeatable capital program are expected to generate a strong free cash flow profile and accelerate Range's financial objectives that Mark will touch on in just a moment. Recently, an announcement was made highlighting the combination of our marketing, operational and ESG efforts by selling responsibly sourced gas from Range's assets. We continue to explore the various certification pathways, ensuring our future steps aligned with our external stakeholders, commercial partners and our company culture. The RSG market is continuing to mature and evolve, but we believe Range's assets and ESG performance position us well to capitalize on this growing demand as it emerges. As we wrap up our operations and marketing update today, I'd like to congratulate our team for the 2021 accomplishments we've touched on today and their dedication to our continued improvements. Thanks for your hard work and commitment. We all look forward to the exciting things we'll achieve in the year ahead. I'll now turn it over to Mark to discuss the financials.
Thanks, Dennis. While the word is overused, transformational is how I would describe 2021 for Range. Our stated mission has been to realize the value of Range's world-class and scale asset base. And to pair that asset, with a world-class balance sheet to reduce risk, reduce the cost of capital and make the financial foundation of this company fit for purpose to consistently deliver that value to shareholders over a multi-decade inventory life. So what is a world-class balance sheet for Range? We've been focused on absolute debt reduction for several years. And as of year-end 2021, we have reduced debt net of cash by approximately $1.5 billion since mid-2018. We believe that a prudent and competitive debt level for the company going forward will be in the $1 billion to $1.5 billion area, which is achievable at strip pricing in 2023. This range of debt balances is consistent with the debt to EBITDAX targets described in last year's proxy. That target level of debt, we believe, provides a financial foundation that will enable Range to be both resilient and opportunistic through commodity price cycles. As noted on prior calls, clear line of sight to target debt levels, enables the next conversation around a return of capital framework. A return of capital framework is not a standalone commitment. It is an integral part of our capital allocation strategy. We've been firm in describing our waterfall for use of cash flow. First, maintenance CapEx in order to utilize infrastructure and maximize margin; second, debt reduction towards target debt levels; third, return of capital to shareholders; and fourth, growth CapEx when appropriate. It's important to note that this hierarchy entails flexibility to allocate based on highest overall returns to the company and its shareholders. With Range's leading full-cycle costs, margins are strong, generating significant free cash flow that will initially be primarily directed towards debt reduction. As the balance sheet approaches target levels, we have the ability to adjust the mix and use of free cash flow. With the significant debt reduction progress made to date, combined with strong expected cash flow in 2022 and 2023 and a supportive hedge book that mitigates price risk, while retaining attractive exposure to higher commodity prices, Range expects to reinstate its quarterly dividend in mid-2022 at $0.08 per share or $0.32 annually, which currently equates to a yield of approximately 1.5%. This dividend is a twofold commitment. First, it's a commitment to durable tangible shareholder returns from business earnings. And second, it's a commitment to maintain a balance sheet that can sustain shareholder returns through price cycles or perhaps greater importance is an expanded share repurchase program now with aggregate capacity of $500 million or roughly 10% of Range's market cap. We believe this is a powerful tool to take advantage of what we see as an attractive investment opportunity given the significant gap between the value of Range's inventory and production versus current share price. With year-end PV-10 at strip pricing of $12.7 billion, which equates to roughly $40 per share net of debt, we believe share repurchases are a compelling investment. This comparison to PV-10 value ignores the significant incremental value of inventory beyond SEC proved reserves. We will remain flexible and adapt to market conditions, project returns and prudent reinvestment with this expanded repurchase program, providing additional scale to a compelling option for use of free cash flow. Turning back to the balance sheet improvements that provide us confidence to announce this returns framework, Range ended 2021 with net debt of approximately $2.7 billion, a decrease of $379 million from the prior year. In early 2022, we used cash on hand combined with lower cost financing to reduce debt and reduce future interest costs by more than $40 million annually. Cash flow in 2022 should materially exceed modest upcoming maturities while maintaining an essentially undrawn revolving credit facility. Debt reduction and cash accumulated during the fourth quarter was a result of cash flow from operations of $424 million before working capital compared to $92 million in capital spending, resulting in free cash flow of approximately $332 million. Significant improvements in free cash flow compared to past periods were driven by a 137% improvement in pre-hedge realized prices per unit of production versus the prior year period, with realized price per unit reaching $5.71 in the fourth quarter, increasing pre-hedge realizations for full year 2021 to an average of $4.16 per Mcfe. This realized unit price in 2021 is $0.28 above NYMEX Henry Hub, driven by a 102% increase in NGL price per barrel year-over-year, reaching $36.26 pre-hedge in the fourth quarter. This realized NGL price on an Mcfe basis equates to over $6. As Henry Hub natural gas prices rose during 2021, Range's diversified portfolio of transportation capacity and customer contracts, supported differentials such that the total per unit price received by Range remains a premium to Henry Hub. Hedging results and strategy for the industry have understandably been a focus as we assess near-term opportunity costs, while also looking to future strategy and retained participation in improved prices. As Jeff pointed out, Range made the decision in 2020 to pivot towards collars for our 2021 natural gas hedge book relative to what was historically a swap heavy program. Near term, our strategy of reducing risk through hedging remains but continues to evolve with Range's financial profile and changing market supply-demand dynamics. For 2022, we seek to deliver top-tier returns on capital employed, generate free cash flow directed to absolute debt reduction and shareholder returns and to be balanced in risk management so as to not hedge away improved industry fundamentals. When prices are attractive, such that we can protect returns that exceed most other industries, we may elect to hedge a portion of production to support the commitments towards free cash flow, balance sheet strength and prudent returns of capital. The NGL hedging program seeks to manage volatility typically on a rolling 3- to 6-month basis such that when aggregated with natural gas hedging, cash flow and returns are more predictable, while at the same time, meaningful percentage of total revenue continues to participate in global structural improvements and supply and demand. As a result, Range's hedge book compares very favorably to peers, allowing Range to capture improved pricing, growing cash flow per share. Continuing on the topic of cash flow per share, Range's production mix and diverse sales points combined with contractual unit cost improvement, set the business up to grow cash flow per share even in a maintenance capital scenario and before taking into account the potential impact of a declining share count. Cash margins per unit of production expanded by $1.55 or 278% compared to fourth quarter last year. Lease operating expenses remain near all-time lows at $0.09 per unit. Recurring cash G&A expense was approximately $31 million or $0.15 per unit, roughly in line with preceding quarter and fourth quarter last year. Cash interest expense was in line with preceding quarter. However, the refinancing transaction executed in January reduces annualized interest expense by greater than $40 million or $0.16 in cash flow per share. Further significant interest savings should follow as we retire additional debt in coming quarters. As we have frequently described, Range's gas processing costs is linked to NGL prices such that gathering, processing and transportation expense increased during the quarter and resulted in significantly higher NGL margins. To illustrate, an increase in revenue of $1 per NGL barrel equates to approximately $0.01 per Mcfe and increased processing costs. To the best of our knowledge, this structure is unique to Range in the Appalachian Basin. For reference, when comparing to 2020, NGL prices in 2021 increased by over $15 per barrel and at strip pricing, they are even higher in 2022. Additionally, rising commodity prices have improved the value of a contingent derivative asset such that the 2021 installment was maximized at $29.5 million while realizing the maximum potential balance of $46 million over the next 2 years, becomes more likely based on power prices. Hard work, focused and swift but precise adjustments to our business plan without veering from our core objectives for demonstrating the value of Range's portfolio and business, patience and diligence allowed returns of capital to come in the form of debt reduction and share repurchases. Now expanded returns of capital are planned as we work to narrow the gap between share price and intrinsic value of per share exposure to what we believe is the largest portfolio of quality inventory in Appalachia. We seek to continue this trend of disciplined value creation for our shareholders. Jeff, back to you.
Operator, we'll be happy to answer questions.
[Operator Instructions]. Our first question comes from Scott Hanold with RBC Capital Markets.
Yes. The capital return program to investors, could you give a little color on, as you look at the buyback at this point, certainly, very attractive based on your current stock price. But like how -- I guess, how aggressive are you going to get on that buyback right now as you look at doing that along with debt reduction? And then if you can couple in with that, just a little bit of a view on how you think about any kind of structure around the cash returns back to shareholders going forward as well?
Mark, do you want to lay out our plan and strategy for us?
Absolutely. So I guess I'll start off with the fact that for Range, this is really just 1 more step in a continuous process. If we rewind to think about the last 4 years, we've mentioned a couple of times during the scripted portion that this is the fourth year in a row for debt reduction. So as we think about what that is, it's a return of capital to the equity, it's a shifting of the value from debt holders and enterprise value to the equity holders. So even rewinding to late 2019, early 2020, we repurchased 10 million shares clearly a very highly value accretive level. So we see the announcement today as a byproduct of where the balance sheet stands having confidence in where we're heading. And the fact that we have clear line of sight, a phrase we've used for a number of quarters into achieving the leverage target. So the other comment I would make is, this is not a binary decision as it relates to capital allocation. It's not an-all or nothing decision. So 100% of free cash flow does not have to go to debt reduction to achieve our targets in the near and medium term. The converse of that is 100% doesn't have to go to a return of capital program to make it a highly competitive program. So with all that, just to help frame describe what we've announced today, if the entire program is used in a 12-month period, you're talking 50-plus percent of free cash flow as strip prices would suggest today. If only half the repurchase program were used, that's still north of 1/3 of free cash flow. Neither of those are guidance numbers. Those are just bookends an example, illustrations of how this program competes with peers. But I think the important thing to note is this is a continuous process. We've announced this next stage. I think the next realization or point to focus on is what we point out on Slide 14 is the excess free cash flow over and above achieving our debt targets and the current program, the current return of capital program. So if you're producing, just ballpark it for ease of math, $1 billion of free cash flow a year on average for the next couple of years, clearly, you could take debt all the way down to zero by 2024. As I mentioned a few moments ago, during the scripted portion, we think $1 billion to $1.5 billion is a prudent level. So clearly, that creates optionality, excess free cash flow for us to allocate to different investments, reinvestments in the business, be it another step in the return of capital program and so on. So in the nearest term, I'd say the program and use of cash flow will be tilted somewhat towards debt reduction. But that said, this program can and will be used and is available to us as the blackout period ends.
Got it. Okay. Okay. So if I'm understanding that right, I mean, obviously, there's going to be sort of that next phase of the shareholder return discussion, and that's obviously post getting to $1 billion to $1.5 billion. Is that right?
We're not announcing anything that formulaic. This is fluid will adapt to commodity prices or will adapt what accelerated deleveraging may look like, macro events that may or not influence the stock price. So that's why it's not hardcoded and that quite that structural just yet, but it will evolve and be continuous and continue to grow over time.
Got it. Okay. And my second question is on your activity plans, you're going to be drilling roughly 9 wells in Northeast Appalachia. Can you just give us a sense of the decision to move up there versus maybe something down -- a little bit increased focus in Southwest App that you may have a bit higher return?
You bet. Scott, this is Dennis. We've always really enjoyed and like that area of our portfolio. And so the rock quality is good. We feel like in the past from a well performance standpoint is competitive with other assets that we have in Southwest PA. As you know, in looking back over the course of time, though, differentials in that area of pre-maintenance level type program certainly presented some different economics though. As you look at where we're at today, it's very competitive with what we're doing in Southwest PA. And so consistent with how we've been efficient and optimized our program in Washington County by returning to pads with existing production, utilizing existing infrastructure it was right for the opportunity for us to move up their drill a couple of pad sites, utilize a gathering system that had plenty of room in it for us to take advantage of and also some pad sites up there. So we see it as very competitive and something we're excited to basically add to our portfolio this year.
Our next question comes from Michael Scialla with Stifel.
Mark, you just pointed that Slide 14, which shows that you could generate free cash flow equal to 70% of your market cap through 2024. I just wanted to understand some of the assumptions that are built in to that forecast. In particular, what kind of inflation are you assuming beyond '22? Any guidance you can give there on cash taxes and differentials that are built into that forecast as well?
Sure. So it's based on roughly strip pricing as laid out for each of those years, '22, '23 and '24. Costs are held basically flat with ‘22. So it does reflect the current inflation that we're seeing. I would point out that from a pricing perspective, given the backwardation in the curves, particularly NGLs, but gas as well. We think this is somewhat conservative. It does reflect cash taxes at the state level, which there are modest cash taxes as reflected in the 2021 financials. You can use, and we will use our NOLs in Pennsylvania to continue to manage and reduce those taxes effectively, but you can't shield 100%. So I think very low single digit, like 1% type effective pretax income level. On the federal income tax level, we have $2.9 billion in NOLs. So that should shield pretax income for a number of years, I would expect that to be well beyond the time frame of these assumptions. So the other assumptions in here are items that are contractually baked in. So as I mentioned, the capital costs are what we're seeing right now for 2022, but we do have declining gathering costs, again contractual where over the next 4, 5 years, by 2025, really, you see greater than $50 million in annual savings, again, just like contractual cost savings. By 2030, it's $100 million in cash savings. Interest expense also declines. We've already executed transactions this year that will save more than $40 million per year in interest. By the end of the year, when we take out the 2022s and in 2023s, you aggregate all of this and look at 2023, interest expense can and should be down by roughly $100 million. So all that is to say this reflects conservative market pricing, combined with contractual savings, there's no assumptions or speculation on trend and pricing beyond that.
Great. And then, Dennis, you talked about new completion procedures, improving efficiencies on frac stages per day. Anything more you can say about that? What changes you've made and how confident you are that those efficiency gains are sustainable?
You bet, Michael. Some of the changes we've made is really to our surface layout with our equipment configuration at the wellhead as well, reducing the amount of time that we have between standing of 1 frac stage in the beginning of the next one. So just to put some color around that, when you start trying to shave, let's just say, 5, 10 and 15 minutes in that type of interval, and you do it over 3,650 frac stages, that translates into almost pulling an entire 5- to 6-well pad site into a given program year. So that's the procedures where we're finding and utilizing some different equipment that allows us to be more efficient on location.
Our next question comes from Subhasish Chandra with Benchmark.
So when I think about all these efficiencies you're achieving today, they only get better look towards, say, the back half of this decade certainly, GP&T, some of those derivative contingent obligations and, of course, the balance sheet. This might be a bit of a stretch, but is there any reason that Range couldn't look like they are today with the inventory that you have 100% with the assets that you have a few years from now when you're incrementally gaining hundreds of millions more in OpEx efficiencies? Or is there a reason perhaps to be opportunistic perhaps and look for other pastures.
Let me start, and Dennis and Mark can chime in. But I think you pointed out one of the real advantages we have is our inventory. We believe and feel really confident that we have the largest core inventory in Appalachia, coupled with most capital-efficient team. And given that inventory and the fact that we can continue to do the same thing, but those advantages that are built into the contracts that Mark previously mentioned that are shown on some of the slides point out with time, there's actually improvements to it. So it puts us in a great position of just keeping our head down and executing and generating significant free cash flow, returning free cash flow to investors and be able to do that for a long time. So we'll stay extremely disciplined doing that. And we've talked in the past only if there's something that makes that plan better, which is an extremely high bar, would we do anything different. But Mark, do you want to add to that or Dennis?
Yes. I think the business, as it looks today, Subhas, as you pointed out, could look very similar even after 5, 6, 7, 10 years of activity given the depth of the inventory, combined with these contractual cost savings. Take this excess cash flow, reducing share count, even a maintenance production level produces greater cash flow per share. And by buying back shares, you're still maintaining exposure to that resource potential for locations on a per share basis. So there is still a growth element to the story. Growth in production, perhaps at some point when the market clearly calls for it, the growth in cash flow, growth in value per share is really what we think is so powerful and compelling with the Range story. I think we've touched on all the details behind it. But I think the announcement today really shows we and the Board are putting the company's money towards that effort.
All right. Excellent. And then just on the tax question. So is it NOLs at the federal level of around $3 billion? And I guess not much of a tax shield at the state level. Is that the idea?
So there are intervals of both. So at the federal level, there is about $2.9 billion. And then in Pennsylvania, there's another $861 million in NOLs. In Pennsylvania, you cannot offset 100% of your income, you can offset a large percentage of it in a given year, but not 100%, hence the very low effective tax rate.
Our next question comes from Josh Silverstein with Wolfe Research.
You mentioned kind of no growth in the outlook or growth per share. I am curious how you think about growth with this pipeline cancellations environment that we're in right now, like what happens for Range if we are in an environment where there are no other projects available to export or whether it's nat gas or ethane or propane out of Appalachia?
Again, let me start out and then maybe Dennis can chime in on this one. But I think the advantages that Range has is -- again, going back to that core inventory. So we think if you look around the basin and really look around the country, you can see evidence of limited cores. It's not distributed evenly. One of the lessons we have is having a large core. So as others exhaust core inventory, there we can basically take market share or take that space into the system. So that's an advantage we have. But I think you're seeing, if you look into Europe and kind of look and bring some of that home to the United States. Natural gas, I think, is going to play a key role to help with the energy transition. It's abundant fuel large fuel. The United States has a lot of it, and it's 24/7. So I think ultimately, there's a need for gas and those expansions will occur, although I agree with the issues with certain pipelines in the meantime. So to the extent those remain for a while, we can take market share as others exhaust core. But I think you ultimately see projects get completed, whether it's new LNG export facility in the Philadelphia ultimately, that will help with U.S. geopolitical and help with trade balance coupled with, I think, ultimately, although Mountain Valley has been challenged. I think it gets completed and shell cracker should start up this year. So Dennis, do you want to add to that or a comment?
You bet. I'll jump on as well, Jeff here. I think just as a reminder, I'll just take a step back and just reflect on the fact that 80% of our gas gets out of basin when you look at our transportation portfolio. It’s something we put in place a number of years ago in preparation for the cycles, as Mark was touching on earlier in the call. The remaining 20% is really there in basin, but we see opportunities. When you look at averaging out for seasonality and also coupled with local demand, there's about another Bcf almost maybe 2 in ability to basically have additional production to flow into. Again, that's going to be on a seasonal impacted basis throughout the year. I think when you look at where we've been for the past couple of years, you see good discipline for maintenance level programs the past 2, and now you're seeing that materialize for a third year. And somewhere along this pathway, we feel like there's going to be a conversation that starts to further evolve around inventory exhaustion. And you're starting to see that in some of the other parts of the basin. And I think that puts us in a -- as we talked about earlier from a long runway of inventory, it places us in a good position to be able to produce into that capacity into that space in the event we want to consider some different profile other than maintenance in the years ahead. So we really like it. When you think about the impact of LNG and also Mexican exports, it's hard to imagine, but just literally 24 months ago, we were running more like 3 Bcf a day and today we're at 13. In the next couple of years, you'll see that next wave of LNG start to, again, get commissioned further providing to some support there. So anyway, we think we're in a great position when you think about our inventory and where the program is today.
And then just going back to the comments on the buyback, the PV-10. You've had this chart on the PV-10 of the asset base being well over the share price for the, I don't know, the last 5 years or so. Talk about the buyback that you take advantage of that. I want to flip that around and think about offloading some noncore assets with in order to take advantage of the stronger commodity price environment to help accelerate that buyback.
Yes, that's a good question. And I think what you've seen us do is prune the asset base over the last several years to divest and reallocate capital. So we have divested legacy assets lower rates of return, higher costs, less inventory. We focused the inventory today to a point where it's a block out position that facilitates very efficient development, makes water handling more efficient and some of the recycling efforts possible where if you have multiple blocks or a broken part position, it's simply not as efficient and as possible. So at this stage, part of the benefit of the existing gathering system, existing water handling and development plans is the blocked-up nature of the position. So if you were to divest it, would you actually capture the value of that remaining inventory, would you achieve and create value for the position or redeploy that capital somewhere else that is really accretive. I think at this point, we like the position as it stands. We like the development and the infrastructure that we have for production today and for the development horizon going forward. And clearly, there's no driving force to divest of an asset for balance sheet or other motivations.
Our next question comes from Doug Leggate with Bank of America.
So Mark, I'm going to challenge you a little bit on the buyback announcement. I know you touched on it earlier, but my kind of question is really framed around credit ratings, a high cost of -- weighted average cost of debt that you still have and the opportunity that gives you on the buyback. So think of it as a high discount rate on your free cash flow. How do you think about -- I guess the simple question is, why did you only announce $500 million? I know that sounds a little bit silly perhaps given that you're still paying down debt. But if your free cash flow capacity is that significant, what else are you planning to do with the free cash flow? Is there a bigger debt paydown? And what are the discussions of the credit agencies looked like around your announcement?
So discussions with the credit rating agencies, we make sure to keep them apprised of our plans. There's a regular and good dialogue there. They will operate within their evolving credit standards over time. But clearly, credit risk as perceived as we perceive it, as we evaluate it as investors on the equity side and on the fixed income side as well as the banks evaluate it is really how we're trying to manage that risk. Stepping back to the overall cost. I think as you look at our -- I mean it's a hypothetical example, but you could take net debt to 0 by the end of 2024. I'm not sure that's the most efficient returns from a per share basis. So why did we only announce 500 million? This is, as I mentioned earlier, just 1 more step. It's not that we only announce 500 million, it's just that we announced 500 million today. Clearly, we could use that in short order and expand it. I mean a couple of years ago, when prices -- commodity prices were much lower, we announced a $100 million program. We bought back [10 million] shares. So I think, Doug, the way I'd position it is this is a blend of continuing to pay down debt while deploying cash and buying back the shares. It's just not formulaic just yet.
Okay. I'm sorry, Mark, my follow-up is going to be on this as well. So what I'm really getting at is that if you think about your decades of inventory, sustainable free cash flow, the discount rate on that is pretty elevated. So you've got a terrific opportunity to buy back your stock before the balance sheet is completely rightsized. So I guess my question is, although you've announced 500 million today, what would you think the pacing of that looks like? In other words, would it be reasonable to expect that you would reload that on a fairly regular basis over the next couple of years if the strip holds pretty much as we see today?
I would expect that we would reload it periodically. And as far as just our overall cost of capital, I think you've seen that tremendously improved just, for example, the refinancing in January, where we took out taking debt down further. So I think you've seen multiple upgrades in the rating agencies, so implied lower cost of capital as rains improved. And I would certainly expect those credit ratings to continue to keep pace with the reductions in debt and improved credit profile going forward.
For what it's worth, I think you're laying out a perfect example of how to exploit that dislocation in value and the growth free cash model is obviously paying dividends. So pardon the pun.
We are nearing the end of today's conference. We will go to Matt Portillo with TPH for our final question.
Just a quick 1 on the common dividend. Great to see that reinstated in the back half of this year. Just curious how we should think about the framework for further progress on growth for the dividend itself and how you think about it in terms of sustainability moving forward? Obviously, that's an important component of your strategy here.
Yes, it's a good question. I think, as I mentioned earlier, I view that as a twofold commitment. It's a cash commitment to return capital. So making the returns from this industry real and put it in investors' pockets. It's something that had been questioned for some time, given the 100% or greater than 100% reinvestment rate of the industry historically. That said, Range is not valued based on its dividend yield. There's clearly a massive disconnect in our opinion, between what the underlying intrinsic value is. So I think a competitive dividend level, a modest dividend level that in line with both peers, but more importantly, in line with the S&P 500 or other indices makes certain investors able to consider given that there is a cash return. I think the growth in that is possible over time. But today, given the value of the shares, our focus would be on that share repurchase program.
Perfect. And then just -- I know you touched a bit on that in the prepared remarks, but curious on kind of the hedging philosophy. Good to see that you guys have locked in some of the commodity curve here in 2023 with natural gas, but just kind of thinking through the moving pieces on a fundamental basis. Should we expect further progress on additional hedging as we step into next year? Or how are you guys thinking about your hedge book at this point as it relates to the forward curve?
We think about it, it's risk reward as we've always done with the balance sheet as more levered. By definition, we needed to higher -- to cover a higher percentage of our revenue, which was the historic range of 60% to 80% of natural gas is hedged into a given calendar year. Having cut debt in half by the end of this year, our ability to be more opportunistic is enhanced. We are simply motivated by being able to protect the balance sheet to fund a steady capital program and support the returns of capital. So what that has meant even over the last couple of years is an evolution on how we execute the program. We've been more patient. We've been a little bit slower to add hedges. We did fewer swaps. We added in collars because we felt like the fundamentals and the data indicated that the SKU was to the upside, there was more upside on the table than the strip was indicating. I think that logic still holds as we look forward to the gas strip. It's particularly the case within NGLs, given how backwardated those prices typically are. So as you look at where we stand today, natural gas 422 is about 2/3 hedged. But keep in mind the contribution of revenue from NGLs and condensate. So we're roughly maybe 50% of revenue is hedged. 2023, the prices reach attractive levels, but we use collars to hang on to what we think is still upside. So it's only about 30%, call of revenue hedged today, approximately assuming a maintenance program. So I think you'll see us be both opportunistic but manage risk, again, to enable a steady cadence to capital programs, protect the balance sheet and support returns of capital, while the returns are being just about every other industry out there.
Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Ventura for his concluding remarks.
Yes. I just want to thank everybody for participating on our call this morning, and feel free to follow up with the IR team if you have additional questions. Thank you.
Thank you for your participation in today's conference. You may disconnect at this time.