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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Southwestern Energy First Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] This call is being recorded.
I will now turn the call over to Brittany Raiford, Southwestern Energy's Director of Investor Relations. You may begin.
Thank you. Good morning and welcome to Southwestern Energy's first quarter and 2022 earnings call. Joining me today are Bill Way, President and Chief Executive Officer; Clay Carrell, Chief Operating Officer; Carl Giesler, Chief Financial Officer; and Jason Kurtz, Head of Marketing and Transportation.
Before we get started, I'd like to point out that many of the comments we make during this call are forward-looking statements that involve risks and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail in the risk factors and forward-looking statements sections of our annual report and quarterly reports as filed with the Securities and Exchange Commission.
Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results and developments may differ materially, and we are under no obligation to update them.
We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measures we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website.
I will now turn over the call to Bill Way.
Thank you, Brittany and good morning everyone. We appreciate all of you joining us today. Southwestern Energy entered 2022 strategically advantaged with enhanced and increased scale in the two premier US natural gas basins, a deepened and upgraded inventory, a strengthened financial profile, and a de-risked business.
We are sharply focused on generating increasing free cash flow by delivering the tangible benefits from our increased scale and we did just that in the first quarter. We closed on our second Haynesville acquisition at year end, making this our first quarter of reporting results from our expanded and upgraded complementary Haynesville and Appalachia portfolio. With operational integration complete, we delivered production at the high end of guidance including outperformance in Haynesville.
Thanks to strong operational execution and leveraging the company's technical excellence, our annual program is on track. As planned we relocated two SWN-owned drilling rigs to Louisiana and are seeing encouraging early efficiency gains from those two rigs.
I'm proud of how our teams have delivered while minimizing the impacts to our business from inflation and avoiding supply chain shortages. The strength of our operational performance was reflected in our strong financial results. In the first quarter, we generated more than $300 million of free cash flow, reduced debt, and lowered our leverage.
Two emerging realities underscore the long-term resiliency of our business. The first trend is that as recognized by the European Union and several major institutional investors, we believe natural gas is foundational to a low-carbon future providing reliable and affordable energy.
As part of our efforts to help bring about this future, we completed the certification of all of our Appalachia wells as responsibly sourced gas. And by the end of the year, we will be producing almost 5 billion cubic feet per day of certified RSG across both basins. We've also made further gains in progressing continuous emissions monitoring of our well pads across the entire portfolio.
The second trend is that as recent global events have highlighted US natural gas is vital for global energy security. To help meet global supply one-third of SWN's natural gas is currently being sold to LNG exporters. Looking forward we're differentially positioned to supply LNG facilities on a long-term basis. Our assets have unmatched proximity and accessibility to the liquefaction hub. In addition to being Haynesville's largest producer 65% of our total production, already reaches the Gulf Coast.
We also offer reliability as a supply partner to LNG. We have more than 20 years of Haynesville inventory with flow assurance supported by our large and long tenor-firm transportation portfolio. From a financial reliability perspective, we made progress toward the return to investment grade as evidenced by our recent upgrade by S&P to BB+.
Our improving financial strength is supported by the company's disciplined enterprise risk management practice. We maintain an active basis protection program through firm sales financial basis hedges and leveraging our advanced transportation capacity. In 2022, we have more than 90% of our gas production protected from Appalachia basis volatility. When coupled with our connectivity and proximity to the Gulf Coast markets, we have a differentiated ability to manage basis risk relative to our natural gas-focused peers.
Given the constructive commodity price outlook and our improved financial strength we expect to be able to hedge at a lower end of our established ranges outlined in our hedging policy, while protecting our capital and cost outlays. We continue to generate a growing level of free cash flow and are prioritizing further debt reduction in the near term.
As we achieve our target leverage ratio and have a clear line of sight to our total target debt range, we would expect to be in a position to initiate a sustainable capital return program. That program will reflect both the durability of the company's expanding free cash flow capability and our continued commitment to long-term financial strength. SWN is well positioned to deliver on its strategic intent to generate resilient free cash flow through responsible natural gas development.
We believe SWN offers a differentiated opportunity to participate in value creation from the structurally constructive near and long-term outlook for the US natural gas in general and for US LNG export demand specifically. I'll now turn the call over to Clay to talk about our operations achievements.
Thanks Bill and good morning. In our first full quarter operating our combined Haynesville assets along with our Appalachia portfolio, the team once again delivered strong results. We successfully ramped up activities to start the year, invest in capital and place wells to sales on track with our guidance and operationally integrated the assets acquired from GEP. We continue to see encouraging well performance and operational execution gains in the Haynesville and are now beginning to complete wells that are fully executed by SWN. In Appalachia we are also on track delivering consistent well and operations performance.
Turning to a few highlights. We delivered production of 425 Bcfe or 4.7 Bcfe per day which consisted of approximately 4.2 Bcf per day of natural gas and 91,000 barrels a day of liquids. Production was at the high end of our guidance range due to outperformance in all areas but in particular the Haynesville. We continue to see strong initial production rates from our new Haynesville wells and our marketing team has done a great job of optimizing our midstream capacity and staying ahead of our development plan.
In addition, two of our SWN-owned and operated drilling rigs running in the Haynesville have already delivered operational efficiencies, underscoring the advantage of our vertical integration strategy. In Appalachia we got off to a good start. We were able to manage through seasonal weather with no material production impact and brought an additional six wells to sales in the last week of March that were originally planned for early in the second quarter.
First quarter capital investment was $544 million in line with the front-loaded development plan that we laid out at the beginning of the year. We averaged 16 drilling rigs and six frac crews consistent with the cadence of our full year plan. We placed 32 wells to sales, including 21 in the Haynesville with an average lateral length of more than 8200 feet. In Appalachia, we placed 11 wells to sales with lateral lengths averaging 12600 feet.
As we progress through the year our Appalachia lateral lengths are expected to increase to an average of more than 14,000 feet for the year. During the quarter 26 of the 32 wells placed to sales were on dry gas acreage. For the second quarter, we anticipate activity and capital investment to be roughly flat with the first quarter with an increase in wells to sales from our liquids rich acreage in West Virginia. As a result we expect our liquids volumes to increase relative to the first quarter with oil volumes approaching fourth quarter 2021 levels.
On the cost side, we are seeing continued inflationary pressure primarily across casing and tubulars, fuel, fracture stimulation and last-mile logistics. The team has done an excellent job of offsetting some of these inflationary pressures with operational efficiencies. Additionally our SWN-owned drilling rigs and frac crew provide further insulation.
As a result of our procurement strategy and long-standing working relationships with key service providers, we have not encountered any material issues related to obtaining goods and services in any of our operating areas. And all of our rigs and services are fully contracted for our 2022 development plan. Consistent with our strategic sourcing approach, we are proactively working on securing services for our 2023 program.
On the ESG front as Bill mentioned, we completed the responsibly sourced gas well certifications on all of our Appalachia production during the quarter. Our Haynesville certification is on track and expected to be complete by the end of the year. We believe rigorous certification and pad level continuous emissions monitoring are differentiators and will help us efficiently target further emission reductions.
With that, I'll turn the call over to Carl for the financial update.
Thank you Clay and good morning. The company generated $317 million of free cash flow, which supplemented by seasonal working capital changes resulted in a $508 million reduction in debt including the redemption of our 2022 notes at fall. Our leverage ratio accordingly improved to 0.3 turns to 1.7 times.
Earlier this month our bank group, which knows us well validated our strengthened financial position with our amended credit facility. We increased our borrowing base to $3.5 billion while maintaining our $2.0 billion elected commitment level and extending the facility's maturity to 2027. Most importantly, we added fallaway covenants and pricing group provisions that allow our credit facility to transition fully to unsecured upon achieving investment-grade stats.
Returning to investment grade, which is important to us. Strategically it is a key component of the responsibility element of our strategic intent to generate resilient free cash flow from responsible natural gas development. Financially it lowers our cost of and expands our access to capital. Commercially and operationally, we believe investment grade complements our asset positioning, inventory debt, flow assurance, RSG and other structural advantages in capturing LNG supply opportunities.
This concludes our prepared remarks. Operator, please open the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Charles Meade with Johnson Rice. Please go ahead.
Good morning Bill to you and your whole team there.
Good morning Charles. How are you?
I’m doing well. Thank you. This is for you or perhaps for Clay. I'm wondering – first, congratulations with the outperformance of the Haynesville. That's what I wanted to ask about is if you could perhaps decompose that outperformance in the quarter. I imagine two of the typical dimensions are well performance and schedule bringing things online on time. But I'm wondering if perhaps there's also an element of derisking versus your acquisition case as -- that you guys put some risk on it before you actually had your hands on it now that that's coming off.
Sure. Charles, we definitely had a lot of focus pre-closing. And then as we took over both the Indigo and the GEP assets to integrate operationally and to get all the learnings and be on track and then begin to look for ways that we could improve on the operational efficiencies. And we feel really good about the start that we've had there. It was -- it's been a big active program, 11 rigs running, three frac fleets. And the team has done a great job of doing all the planning, execution and then whatever adjustments have been needed.
I think that where that outperformance is coming from is in line with what we've talked about. We're seeing improved initial production performance. Last quarter we talked about the average of the wells coming to sales was about 26 million a day IP. And the wells that came to sales this quarter are close to 34 million a day initial production rates.
We're beginning to – we're on track with the base assumptions around timing and costs. But we're beginning to see execution improvements that are shortening cycle times that – it's early but we feel like it's going to bode well as we continue to move through the rest of the year to start to see some of those operational synergies in the Haynesville again like the track record we've had in Appalachia.
Got it. That's great detail Clay. Thank you. And then maybe just one short follow-up. The – so your turn in lines in 1Q, two-thirds of more to Haynesville. Is that the trend going forward? It kind of sounds like it were. Or is that more of a just kind of a natural oscillation and that it's going to be more – it's going to be swing more back towards Marcellus in the back half of the year?
All consistent with our plan just the natural movement quarter-to-quarter. As we guided, we're going to be about 55% capital in Haynesville, 45% in Marcellus. Remember that with Haynesville, we inherited ongoing drilling programs and rig contracts both on Indigo and on GEP. So it was more of a steady-state activity profile moving through the end of the fourth quarter into the first quarter whereas on our SWN legacy assets we had the normal reduction of activity in the fourth quarter and then the ramp back up in the first quarter. So that's part of why you see the plus or minus 60-40 capital split in Q1 but that will level out in line with our guidance as we move through the year.
And we laid out we're roughly 55%-45% is how it should come out. And a lot of that again is previously contracted work. Overall the enterprise is running a maintenance capital and then significantly we're fortunate to have complementary inventory across our entire operations so we can – you'll see some increases in liquids-rich gas drilling throughout this next period and it's just how the schedule works out more than some kind of a directional thing. And it's because of the complementary nature of what we have.
The team has also done a terrific job on controlling costs. A lot of the inflation concerns that are out there yes, we're seeing it too. But a lot of it is being covered by improved efficiencies and our terrific team that does our strategic sourcing, making sure that we get those costs locked in.
Our vertical integration also sets a benchmark because we know exactly what it's supposed to cost and we can have conversations with vendors from a position of fact that we have super-spec rigs. We know how much they cost every day and then what parts and pieces they need. And so that certainly helps that. But that I think I'll underscore here and then move on but I'll underscore here that we have created a new blended Haynesville team that is just doing an extraordinary job all together working on the mission of the company which is to bring about the value that we expect or better from bringing terrific assets from Indigo GeoSouthern, together with SWN and Indigo and GeoSouthern heritage people into one unified team.
Thank you, Bill and Clay, for that added detail. Plenty more questions but they’ll fall to somebody else. Thanks a lot.
The next question comes from Arun Jayaram with JPMorgan. Please, go ahead.
Good morning, Arun.
Yes. Good morning, team. Bill, I wanted to see if you and your team could discuss, how you, at Southwestern, look to take advantage the growing amount of LNG capacity that's being constructed along the Gulf Coast. You mentioned today, I think, I heard you say, a-third of your gas is being sold directly to those facilities.
So I just wanted to see, if you could give us a sense of what kind of opportunities are with you today. You're not quite investment grade, but what changes if you do become investment grade? And then how does RSG kind of play within this broader strategy?
Yes. Let me -- Jason is going to chime in here with a lot of depth of experience in this space, but I'll put some opening comments into this. Certainly, when you think about global LNG, we believe that our proximity, connectivity and inventory depth and our commitment to enabling those projects to happen by entering into agreements going forward.
The financial strengths of the company and the fact that we are -- we already moved volume to LNG really sets us apart. And you're right 1.5 billion a day of LNG already happens. We're already moving that today.
It's a very reliable source of gas, backstopped by significant reserves and very large inventory and a financially strong company that doesn't have to rely on others to get the gas from one place to another. We have the capacity in place. We've had it for quite some time now. And we're in fact adding to it, so that that builds that reliability as well.
We're having conversations with current and future key LNG players and continuously looking at value-enhancing opportunities, on a risk-adjusted basis, and that's very important, we'll talk about that in a second, to enter into additional agreements down the line. There, the LNG -- I'll have -- let me have Jason talk to you a little bit about some of that -- the details around that and then I'll come back.
Yes. So just following up on what Bill said, right now we're selling about 1.5 billion a day to a combination of LNG facilities short long-term contracts. We're basically selling LNG to every export facility that's in the Gulf Coast of Louisiana and Texas.
We continue to watch everything, given the transportation portfolios that we have. About $700,000 a day coming out of Appalachia gets into this greater area. And when you think about Haynesville, it has a whole lot of interconnectivity just to the Gulf Coast itself, as well as, we have about 1 Bcf a day on LEAP that grows to about 1.3 in the future.
We have capacity on Mid-coast 200,000 a day about 200,000 a day on Acadian. So all this volume gets into this greater Gulf Coast area where -- there's a lot of different numbers out there, but there's probably potential demand of 5 to 10 Bcf a day looking to make a FID. And we have the ability to deliver into that the whole greater area.
So when you think about just, all of this new demand showing up in this Gulf Coast area and we have to also think about it's not only LNG, it's the power that's going to come along with the LNG it's the industrial that could potentially come to that greater Gulf Coast area because of the US does have the lowest price gas right now between -- on a global pricing basis. So, you could see more industrial manufacturing just move back to this area. But it's going to play out to where there's going to be a lot of competition for gas in this general area. And there's not a lot of new capacity that's going to be built out of other basins to be able to get in this area. So, we feel like we're in a key strategic position to be able to take advantage of these premium-priced markets.
So, Jason is in regular dialogue as I said before with current and future LNG players. We're going to evaluate potential opportunities on a risk-adjusted basis, just the same way we do when we enter a new market with our gas that's a domestic consumer. And we'll look at the opportunities and the risks that we need to manage to do that.
We'll continue the dialogue and narrow down facilities that fit the kind of agreements that we are interested in pursuing. And then we want to be an enabler in that. There's going to be a very big call on demand of natural gas for this ramp-up in LNG and we think we're positioned quite well and advantageously to work in that space.
RSG and the various forms that that comes in from which company you chose we chose to work with the group that we believe is the most rigorous, the most comprehensive. And we include not only certification, but monitoring and we have a very clear path to get to the place where all of our well pads in our entire portfolio are -- will be monitored. Therefore, we can react even faster than we already do to address that.
RSG is strategically important to us and for a number of reasons. But today, we like anybody, who's not currently IG if you want to get into certain long-haul deals for transport or you want to get into certain international projects, if you're not investment-grade, you've got to put up letters of credit. So, it's a money invested so that you can play.
The other way to play without having to do that is to achieve investment-grade and we believe that we're on a very clear path to get there. And by the work that Carl and his team have done with our banks, we believe that our banks unanimously are in the position where they recognize the financial strength and the progress we're making toward all of the criteria that would result in us achieving that level. We know that we have to be patient. We know that we need to continue to sustainably do what we're doing and that's our plan.
And my follow-up, Bill the industry is facing a couple of takeaway challenges in the Permian as well as Appalachia. I wanted to get your team's thoughts on the Haynesville. Production now is ramping close to 13.5 Bcf a day in that basin. Can you talk about SWN's takeaway capacity? Any thoughts on potential risk-to-basis differentials? And what is your view on kind of takeaway based capacity on that basin just given the growing amount of production that we're seeing?
One of our criteria whether it's an acquisition or whether it is a drilling of wells is that it must -- the gas, if that's what you're drilling for, must be able to get to the market that you're choosing and it needs to be able to get there on a sustainable basis, otherwise you track value and that doesn't make any sense to us.
So as you think about the framework that we use, whether it's the one we use to move into the Greater Haynesville area or when we continue to invest a clear unmistakable criteria is, we must have adequate transport and the option to get more so -- at the right time, so we're not stranding investments either in unused transport and build a portfolio of reliable assured delivery to the markets we want to serve. So, Jason can talk to you a lot about what that looks like.
Our Greater Haynesville business is, we have transport. We're growing into additional transport. We added 300 million a day on late -- recently and put that out. Our Appalachia Basin production is -- it's right at 90-some-odd percent hedged against basis volatility. We have all of the transport and none of the unused transports that we need to be able to move that gas to the markets we wanted to get to and complement our Haynesville position by the fact that out of our total production which includes both areas 65% of our gas can get to the Gulf Coast where we believe the markets are growing.
So we're not constrained on long-haul or gathering or processing or fractionation or any pieces and parts there is. Our teams do a really good job of partnering side-by-side with these important strategic suppliers to help them understand, what we're doing and why and when and get the ability to opt into segments and opt into capacity as we need it. Jason, you want to talk about the Hainesville and what's happening in the transport and the fire picture please?
Yes. Sure. Yes. What I would add is that, when you think about just that greater area you're definitely seeing basis move around in different areas different locations seeing some improvement in some areas, you're seeing a little bit of a widening in other areas. I think we kind of expected this to happen. And so, we've hedged about on a NYMEX basis a little over two Bcf a day of our gross gas coming out of the Haynesville.
And what we're -- the thought behind what's going to happen in that general area is, Gulf Run is under construction. It's a 1.6 Bcf a day pipeline and it should go in service sometime in late Q2 early 2023. So it's going to take -- be able to move that volume from the northern end to the southern end of the basin, as well as TransCanada has another project Louisiana Express that should went and service and I think February of 2022, its been late a little bit. They're saying that would be between May and September. So that's another 400,000 a day that SWN has contracted to buy gas straight into their facility.
So I think you're just going to see as production moves up basis moves around. Also basis is moving because you just have an outright higher NYMEX price. So, fuel cost should more to be able to move from one location to another. But overtime it's just going to be volatile as the area built out down there in that general area.
Great. Thanks a lot.
Our next question is from Scott Hanold from RBC Capital Markets. Please go ahead.
Yes, thanks. Hey Bill. If I could be a little bit more direct on one of the questions. When you think about like long-term value optionality on LNG with South Western consider investing in some of the future LNG facilities to get capacity or better pricing long term, or do you see your role more as a supplier getting a stronger value for your molecule because it's in the LNG corridor? So are you looking to access or a way to access global markets versus just more of a premium price in the domestic market?
Yeah. I think at this point given the position that we're in and given the many advantages in all of those pieces, I think you've got to keep your eyes open and you got to keep your options open. The goal I believe is got to be to enable these facilities to be built, and which then enables access to premium markets beyond the US. And so our role in helping enable those to happen certainly will be as a gas supplier. I mean that's what we do for a living.
But it certainly also needs to be studied to see -- again and this is really important a risk-adjusted basis are there any other parts of this value chain that makes sense to us? We know our core part of our business. We know what we're really good at. And if we can add value to that then we need to think about that. But right now I would say we're just -- we're exploring optionality in that -- with your question and everything is kind of on the table at the moment.
Understood. Appreciate that. And then Clay you had mentioned that you all have -- obviously, your costs locked in for a good part of this year and you're already looking into next year. Could you give us a sense -- I know with maybe a couple of things here. One [Indiscernible] is vertically integrated, so you're a little bit more advantaged than others. Can you remind us how much in this market right now you think that helps? And number two, as you start looking at locking in services from providers for 2023 like what, kind of, cost inflection are you sensing is in there?
Yeah. When you think about the vertical integration when we model it with our current activity level with all of the seven rigs that we own that are running and then our frac fleet and some ability to split that into two in Appalachia on a gross basis that dollar amount is anywhere $35 million to $40 million of savings versus utilizing third party for the planned duration that we have in 2022. So it's a nice benefit that comes from that.
And then from a 2023 standpoint, we're on the same path that we have been on, which is to proactively engage service providers well before the start of a new year and prioritize the major spend categories first and begin all those discussions. And that has served us well both from a supply of the goods and services and then also from getting cost that potentially are better than maybe what the average has seen. And we're on that path for 2023 right now. Commodity prices being where they're at, inflation where it's at right now, I expect 2023 will be inflationary also but don't have a number for you today.
Appreciate that. Thank you.
Thanks Scott.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Hi, Doug.
Good morning, everybody. How is everybody doing?
Good, well. Thank you.
Thanks for taking my question, Bill. So I guess I've got two related questions. I'd love to hear your view on the macro first of all. And I'm not talking about the short-term where gas prices are currently. But if we really believe this long-term LNG expansion story obviously is maybe two or three years out, one could make a case that the linkage between international and US gas prices after 20 years let's be honest is potentially putting us in an up-cycle for US gas for an extended period.
So I'd love your perspective on that Bill first of all. And my second and related question is let's assume that – not to preview you here but let's assume that that might well be the case, how does that then sit with your hedging strategy? The one thing that Bill to be fully candid with you that is kind of holding us back for a more constructive view is that you've kind of hedged away a lot of the upside as your balance sheet is moving to investment grade as you pointed out as you've diversified the portfolio and arguably improve the underlying business. So what is the need to hedge into this macro environment is my follow-up. Thanks.
Sure. So yes go ahead.
This is Jason. I'll talk about kind of from a longer-term gas macro perspective. Our thoughts around that. Bill or Carl may have some comments on the hedging part of your part of your question. But I think that based on everything that we're seeing in the market when you look out longer-term obviously there's producer discipline there's consolidation in front of us. And when we look at just the overall market with what's driving going on – on a global basis, a lot of things are changing right now. But even before the events between Russia and Ukraine happened with what's going on in that market there was a growing demand for LNG in the Asian market. So when we look out on a longer-term basis it sure looks like to us with the resource that we have here in the US that we're in for a longer up-cycle assuming that all of the facilities can get built over the next three to four years out there in the future.
I don't want to force the point here but when you look at the forward curve do you think the move up we've seen towards $4-plus is transitory, or do you see that as an indication and the market is looking beyond the short-term LNG bottlenecks. I'm just curious in your opinion.
Yes. I think in our opinion we see that as the market looking towards what it's going to take to incentivize production out in the future to be able to meet demand here in the US Obviously we've seen the other piece of the forward curve that's out there that you have to take into consideration is just the and ability to build infrastructure pipeline capacity out of some of the basins to where – to the growing Gulf Coast demand. I think that's a signal that's also out there as well as what type of infrastructure can get built here in the US to be able to get to where this demand is.
Right. So Bill beyond the dynamics of the hedging requirements of the recent deal flow why hedge?
Yes I think you're -- I'm glad you pointed out the economics of the deals that we've done. Those are important and part of our hedging strategy, as you look forward. In our view assuming the constructive price for gas is there, our progress on debt reduction, company's financial strength, I would anticipate that future hedging levels will continue to moderate to the low end of the company's range.
We do continue to believe that a certain level of hedging is the responsible thing to do from an enterprise risk management perspective. The market conditions are different. The acquisitions are complete.
And now we will continue to move ahead, but have the opportunity as scale and the strength of the company clearly demonstrates, we can move ahead at a different level of hedging. And our -- quite frankly, our hedging practice, our policy has the breadth in it to move those numbers materially and that's what we're expecting to do.
All right. Appreciate the answers, guys. Thank you.
The next question comes from Umang Choudhary with Goldman Sachs. Please, go ahead.
Hi. Good morning and thank you for taking my questions.
Good morning.
Great to hear the operational momentum which you're seeing in the Haynesville and the benefit, which you're seeing from vertical integration. You talked a little bit about cost inflation pressures from tubulars, fuel equipment and logistics.
I just wanted to get your sense, if you're seeing any regional differences between the Haynesville and Appalachia when it comes to those cost trends, or are you seeing some similar cost trends in both basins?
So, really, there's not a sustained difference in what we're seeing between Appalachia and Haynesville. We've got service providers in some of our major spend categories that are in both areas. There are some pieces of the service chain that is, in some ways, pricing everything equal to Haynesville.
So that is kind of creating about the same amount of inflationary pressures in both areas. There's some localized flare-ups that can occur with trucking and with some last mile logistics. But, in general, there's not a big difference for us.
Great. Thank you.
The size and scale of the company allows us to look at and negotiate nationally for a number of these goods and services. And so, one of the benefits of scale is being played out right now.
That's really helpful. Thank you. And then, just as a follow-up, I wanted to get your latest thoughts around the near-term macro for gas. You talked about the long-term macro. But from a near-term perspective, any areas which you are concerned about and how you're thinking about risk management from that perspective?
Yes. This is Jason. I think, when we think about shorter term from a macro perspective Obviously, you're going to see continued strong global gas demand. And all the LNG facilities are going to run, should run at a high utilization rate coming out of the US.
One other thing that we're seeing in the macro short term is just, a really strong amount of power burn. I mean a lot of it is due just to, all the domestic coal retirements that have happened. They continue to happen. So -- and then when you think about coal, the price of coal because it can be exported to -- the price of coal is at kind of tied to global pricing. So, that's allowing the near-term macro to be able to rise.
And from a pricing perspective, we continue to see producer discipline on what's happening on the production side. And then again like we talked about I think just the lack of new pipelines out of producing basins and just the increased difficulty in the permitting process makes it a little tough.
I think the -- from a risk perspective, if we see a very mild weather that occurs or some type of major LNG outages, I think that's the downside to the potential near-term macro or some type of a surprise in production growth in the back half of the year. But that seems hard to see where that would come from right now.
Got it. That’s really helpful. Thank you.
Thank you.
The next question comes from Neal Dingmann with Truist Securities. Please go ahead.
First question is on capital return. I don't know if you guys maybe -- just maybe broadly could talk about this specifically. How do you all think about the initial payout level once you reach your target leverage range which I think you'll hit around kind of later this year? And then how would that payout change as leverage goes even lower?
Yes, I think what we've talked about before our return of capital is our framework clearly prioritizes debt repayment in the near-term. And we expect to as you said reach that leverage ratio by this -- in this year. And then as we gain clear line of sight on reaching our $3.5 billion to $3 billion debt target, we expect to be in a position to initiate a return of capital program. We're studying that. We're looking at different options. We're looking at scope and scale. And as we move forward here in near term we'll continue to refine that. And then consistent with the framework I described we would be in a position to move on that.
Go ahead Carl.
I was just going to add part and parcel it's really going to be credible and sustainable. And so any return to capital program will be a holistic capital allocation discussion and communication. So, how we would do it in a manner that's congruent we're continuing to hit our absolute debt target in a manner that's congruent with continuing to progress towards investment-grade. So, it's a broader discussion internally and be a broader use of capital strategy than just pure return on capital.
Thanks Carl.
Great add. Thanks Carl. And then my second question probably for Bill for you or Clay on OFS inflation. Really specifically could you all speak to how you'll continue to do a good job of mitigating the potential logistical delays for operators like yourselves that are running several rigs? I mean I know people have cost inflation I get that. My concern is more about any potential delays and you guys continue to do a nice job of not seeing that if you can just talk about on that?
One of our core operational strategies especially in an environment where services or costs are -- can be challenged is you want to be the operator of choice for a supplier. What does that mean? It doesn't mean to play in the highest price. It means hyper efficiency, very effective joint planning, very effective joint work and communication on ensuring that if anything changes, there's risks in there, there's opportunities in there to be working together to make sure that they have a little to no debt downtime or non-revenue-bearing work or time that they have to deal with and that draws suppliers and service providers to us.
Second thing is around relationships. Our relationships with our key suppliers, especially the strategic ones beyond even just inflation. But its all the way through our goods and services all the way through to our gathering and processing and those type of agreements is to have strategic relationship behaviors in mind, where we really are working together to create value for both of us. And in doing so, again you become somebody that the US deals of the world or magnificent company they want to work with us and we have a strong position with them. Clay's got some details.
Yes, just on a kind of a more local level, we've got a logistics team and we're coordinating daily with sand providers, water haulers, the trucking that's involved with all of those and capitalizing on logistics around where there's real-time infrastructure challenges, whether it be road closures, how we navigated through the weather situation. But -- and then there's frequent forecasting and planning conversations that are occurring down to the local levels to not have those bottlenecks turn into material issues for us.
Great details. Thanks guys.
The next question comes from Noel Parks with Tuohy. Please go ahead.
Hi, good morning. Just a couple of things. I was -- recalling that you had spoken not too long ago about in the Southwestern Haynesville that, I believe some longer laterals were in the plan, I just wondered if you could update on that.
Certainly. So, I think we've guided somewhere around close to 9,000 foot as our average lateral length for the year in the Haynesville. And I think our fourth quarter average was much less than that. Our 1Q number grew to around 8200 feet. As we keep progressing our learnings and the different well locations in the field, we expect that to continue to grow our longest completed lateral right now that hasn't -- one part of 1Q is over 10,000 feet. And then we've got a drilled lateral that we haven't completed yet that's over 13000 feet.
So, we think the average will grow as we planned it. We think that that's part of the efficiency gains that we are going to be able to realize in the Haynesville relative to what the average lateral lengths were with the prior operators. And we're on track with our progress there.
And lateral lengths at the long end in Haynesville are controlled by regulatory rules of the state. So, all the ultra-long laterals that we're able to drill in Pennsylvania for example combined with the fact that these wells are deeper, the length is limited. So -- but we'll find a way to drill right up to the limit.
The other piece of this is we're very methodical about this in a learning organization. So we don't slingshot from a short lateral to a long lateral and see if it works out. We take steps and we methodically work through those. At the end of the day, you arrive at the same place but you've got a better assured outcome. And we -- a lot of the talents and procedures we use in Appalachia are being transferred and learned and a lot of the great things that they already do at Haynesville are being learned back to us as well. So it all works.
Great. And I want to talk a little bit about the price environment. Just trying to expand my imagination a little bit, if say we get to a place where it looks like we're going to have sustained strong prices say $5 plus longer term and enough capital and regulatory issues get resolved so that infrastructure issues abate considerably, if those are both in place what's sort of the next decision point that comes for the company after that thinking about, I don't know increased rig ownership or I don't know upgrading of equipment or maybe an Appalachia development of additional horizon?
Yeah. I think there's -- our plans actually include a number of those things. Let me underscore right now we're in maintenance capital mode and we take a look at -- we're constantly looking at efficiency or different horizons or different pieces of the inventory to drive either efficiency returns improvement in any of those things.
We'll look at growth opportunities as well that add value to the shareholders. LNG is probably going to be in that set of options. Haynesville got significantly fewer infrastructure constraints than other areas and we have no infrastructure constraints anywhere we work. So it gives us quite a canvas to paint on. So I think when you look at our overall inventory the great thing about it is it's complementary across the piece. So we can move about -- whether it's Ohio, Pennsylvania, West Virginia, Haynesville, we can move about the portfolio and identify those further value-enhancing opportunities and then shift on the fly to capture them.
Great. Thanks a lot.
This concludes the question-and-answer session. I would like to turn the conference back over to Bill Way for any closing remarks.
Well, I want to thank everybody for your time this morning. Great questions. We really appreciate it. Our growing free cash flow capability is underpinned by the fact that we have leading scale in the two premier US gas basins in the country. As we said in the call, deep Tier 1 inventory, unmatched proximity and accessibility to the Gulf Coast especially in the high demand and LNG markets, a strengthening financial profile and given the changes in our industry and the strong commodity outlook we believe that our shareholder value proposition has never been more compelling. And so, we look forward to continuing to deliver.
The team did a terrific job in the quarter, but they do it over and over, so they're continuously doing this. And we look forward to continuing to have conversations throughout the rest of 2022 on what we're up to. So have a great weekend. Thanks for joining and thanks for the questions.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.