Southwestern Energy Company

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Southwestern Energy Fourth Quarter 2021 Earnings Call. Management will open up the call for a question and answer session following the prepared remarks. In the interest of time, please limit yourself to two questions and re-queue for additional questions. This call is being recorded. I will now turn the call over to Brittany Rayford, Southwestern Energy's Director of Investor Relations. You may begin.

Thank you, Andrea. Good morning, and welcome to Southwestern Energy's fourth quarter of 2021 earnings and 2022 guidance call. Joining me today are Bill Way, President and Chief Executive Officer, Clay Carroll, 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 risk and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail in the risk factors and forward-looking statement 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. And I'll turn over the call to Bill Way.

Thank you, Brittany, and good morning, everyone. We really appreciate you joining us on our call today. Our strategic intent is to generate resilient and growing free cash flow from responsible natural gas development. 2021 was clearly transformative for Southwestern Energy, and we did just that and more. We further improved our financial strength and generated material free cash flow that we expect to grow meaningfully in 22 and beyond. We delivered results above expectations for both the fourth quarter and the full year 2021. We achieved record reserves and reserve value, generated almost $550 million of free cash flow during the year, and improved nearly every operating and financial metric, all while differentially progressing our RSG and other ESG initiatives. These results and more generally our deliberate actions taken over the past few years to strengthen our operations, upgrade our inventory, improve our cost structure, and bolster our financial position laid the foundation for our strategic entry into the Haynesville. The move into the Haynesville strengthened the company's position as a leading independent natural gas producer, now with core positions in both premier U.S. natural gas basins. More important than just that, we are capturing the tangible benefits of our increased scale, which makes Southwestern Energy a more compelling shareholder value proposition. Specifically, we deepened our high-quality inventory and opportunity set, realized greater operating economies, expanded our optionality and market reach through direct access to LNG and global sales points, and lowered the overall risk profile of SWIN. All of this speaks to sustainable value for the shareholder through the commodity cycle. Our strategic entry into Haynesville was well-timed. Since announcing our first Haynesville transaction back in June, gas fundamentals have strengthened materially, improving the economic value of the transactions. As mentioned previously, the most immediate example of Haynesville adding economic value for our shareholders is our year-end 2021 company reserves that are at a record 21 trillion cubic feet equivalent. These reserves have an SEC pre-tax PV10 value of more than $22 billion, greater than two times our current enterprise value. These reserves and PV10 value reflect the quality and depth of our dual basin inventory and the company's ability to generate resilient free cash flow for years to come. They also reflect a balance of high margin, low basis dry gas production in Haynesville and high-margin, low-decline basis-protected dry gas and liquids-rich production in Appalachia, providing market and hydrocarbon diversification and optionality that clearly differentiates Swinn from its peers. Our increased level of free cash flow generation capacity from our expanded scale has further solidified the company's financial position. As Carl will detail shortly, we ended the year at two times leverage and expect to achieve a leverage ratio within our target range of 1.5 to 1.0 during 2022 as we apply our increasing free cash flow to debt retirement towards our target debt range. We have a disciplined capital allocation framework that currently prioritizes debt repayment to ensure that we protect our financial strength through the cycle. As we begin to approach our leverage ratio this year, and have a clear line of sight and deliberate path to our target total debt range, based on commodity prices and our projected free cash flow, we expect to be in a position where we could initiate a capital return program. We believe the return of capital is a fundamental part of the company's overall economic return for shareholders. We used the Haynesville acquisition to lower our cost of debt, increase our liquidity, and extend our maturity runway. Recognizing the company's increased scale and improved business and financial profile, S&P has upgraded the company twice in the past six months. Most recently, in January, to BB+. We believe that we are on the path to returning to investment grade. I'd like to comment further on SWIN's ongoing commitment to responsibly sourced gas. We made further progress implementing our comprehensive RSG program throughout our Appalachia operations, launching a similar program throughout our Haynesville operations. Our more rigorous, company-wide, well-leveled certification and pad-level monitoring differentiates our RSG efforts from those of our peers. By the end of 2022, we will have certified over 5 BCF per day of gross RSG production across both of our basins. Additionally, in 21, we progressed methane reduction projects and other ESG projects, including replacing all of the fresh water that we used in our operations, and we detailed other ESG initiatives in our eighth annual corporate responsibility report. Our strategy, our execution of that strategy, and our people have transformed Southwestern Energy, significantly advancing our strategic intent to generate resilient free cash flow from responsible natural gas development and increasing the value realization opportunities for our shareholders. 2022 will be focused on delivery of that value and more. It will be a year of catalysts as we execute operationally and financially to drive expanded free cash flow, margins, and economic returns supported by strong commodity fundamentals. The market fundamentals for natural gas should provide support for our expected free cash growth. Consolidation investor-driven producer discipline should continue to support the commodity market as well. At the same time, persistent power demand and stronger LNG and Mexico export demand are also expected to continue. We believe that natural gas is foundational in a low-carbon future, and the company should differentially benefit from both U.S. and export natural gas demand, given that more than 75% of natural gas demand growth through 2025 is expected to occur in the Gulf Coast region where approximately 65% of our natural gas is sold. On the liquid side, we see solid structural support for NGLs and oil through increasing post-pandemic demand, historically low storage levels, and moderated supply growth. While the positive macro outlook is accelerating our free cash flow generation, we are delivering growing value from the execution of our strategy to capture the tangible benefits of scale. I'll now turn the call over to Clay to provide more operational detail on our 2021 results and our 2022 outlook.

Thank you, Bill, and good morning. The team finished strong operationally in 2021, setting the stage to deliver increasing value across our core natural gas and natural gas liquids assets in 2022. I'll start with some highlights from 2021. During the fourth quarter, our first full quarter operating the Hainesville assets acquired from Indigo, we produced 385 BCFE above the high end of guidance with capital investment of $292 million as planned. We were active across the portfolio, placing 21 wells to sales, including 11 in Appalachia and 10 in the Hainesville. Within Appalachia, We placed to sales five West Virginia liquids ridge, three Ohio Utica dry gas, and three Pennsylvania dry gas wells with an average lateral length of over 17,000 feet. In Haynesville, we are off to a good start, quickly integrating our teams and the acquired assets and delivering above-planned results since commencing operations in September. Wells placed to sales in the fourth quarter included seven middle bosier, and three Haynesville wells averaging 6,900 feet in lateral length with well costs of approximately $1,600 per foot. The initial production rates from these wells exceeded 26 million cubic feet a day and continue to strengthen. We are already optimizing flowback and completion techniques to maximize the return on our capital investment. The encouraging data on these early wells confirms the Tier 1 reservoir quality underlying our core Haynesville acreage position. Now that we have assumed operations, we see an opportunity to improve on the overall operational execution by leveraging our full field development expertise, including relocating two high spec southwestern drilling rigs to the region. During full year 2021, our production was 1.24 TCFE above the high end of our updated guidance and comprised of approximately 82% natural gas, 15% NGLs, and 3% condensate. We invested below the midpoint of guidance, a testament to the team continuing to identify ways to more efficiently deliver results with less capital in an increasingly challenged cost environment. We experienced some inflationary pressures towards year end, but finished strong. delivering full-year Appalachia well costs of approximately $630 per foot. As we progressed our operations in the Haynesville, we believe we will grow additional value over time as we optimize that business similar to how we increased well productivity and lowered well cost in Appalachia. As Bill mentioned earlier, we achieved company record approved reserves of 21.1 TCFE and $22.4 billion of SEC PV10 value. Beyond the over 600 approved undeveloped locations included in these reserves, we have approximately 6,000 additional inventory locations that are economic at current strip pricing. Of our total economic inventory locations, we have more than 15 years of high-graded core drilling inventory at our current activity levels. For 2022, we are reaffirming production guidance of 4.7 BCFE per day with a maintenance capital program. This program includes capital investment of $1.9 to $2 billion, including $215 to $230 million of capitalized interest and expense. It also includes high single-digit inflation as our vertical integration and scale have partially mitigated broader sector inflationary pressure. We expect to average 12 to 13 rigs with five to six completion crews across our total asset base with eight to nine rigs and three to four crews in the Haynesville. Consistent with prior years, this maintenance capital program will be slightly front-end loaded with similar investment in both the first and second quarters. The program has activity across all of our operating areas with roughly 55% of the drilling and completion investment in the Haynesville bringing 70 to 75 wells to sales, with the remainder in Appalachia bringing 60 to 65 wells to sales. Looking forward, we anticipate our maintenance capital requirements will reduce as our base decline shallows and as we delivered continued operational efficiency improvements across the business. We are focused on capturing the tangible benefits of scale and have already seen some early wins in the Haynesville, including operational execution improvements, commercial renegotiations, and securing future capacity on the LEAP pipeline to the LNG corridor. As Bill mentioned earlier, we progressed several important ESG initiatives in 2021. We began implementing plans to certify and continuously monitor over five BCF per day of gross operated production as responsibly sourced gas across all of our operations. We plan to complete the well certification process in Appalachia by March and in Haynesville by year end. We also reduced the total company methane intensity by almost 20%. Included in this reduction On the assets acquired from Modtage, we drove a 24% reduction in just one year by applying the company's emissions improvement practices. Our 2022 plan includes $15 to $20 million of ESG investment, including continued efforts to further reduce our emissions and replace water used in our operations. We look forward to delivering in 2022. and will do so by leveraging our large-scale asset development expertise, operational execution, data analytics, strategic sourcing, and vertical integration across our dual-basin portfolio. I'll now turn the call over to Carl to provide a 2021 financial review and future outlook.

Thank you, Clay. Good morning. As Bill appropriately noted at the outset, 2021 was transformative for Southwestern Energy, financially as well as operationally. The full year, and particularly the fourth quarter, accelerated the company's free cash flow generation. 341 million of free cash flow in the last three months brought our full year total to 547 million. We expect free cash flow to grow materially. In 2021, we also continued to improve our financial strength. We ended the year with a leverage ratio of two times, a notable year-over-year 1.5-turn improvement. As we move through 2022, we expect that leverage ratio to move down into the upper end of our target leverage ratio range of 1.5 to 1 times. Excluding the debt incurred to fund our acquisitions, we reduced our debt by more than $400 million in 2021. Beyond lowering our leverage ratio and reducing debt, we extended the weighted average maturity of our senior notes to more than seven years and reduced our long-term borrowing costs by more than a percentage point. We also increased the company's liquidity and broadened its access to capital markets by successfully securing the first oil and gas institutional term loan in the last five years. Our greater financial strength has been reflected in our credit ratings. S&P upgraded the company twice in the past six months, most recently this past January to BB+. And we believe that our improved business and financial profile will warrant a return to investment grade. Upgrade would bring financial benefits, such as a lower cost of funds and more liquidity. Investment grade would also bring tangible operational and strategic benefits, most notably in giving us a more capital-efficient access to pursue potential agreements in the global LNG market. Hedging remains a core part of our enterprise risk management strategy. The hedge position in yesterday's earnings release includes a hedging of 80 percent of the production for the next three years of the assets acquired from GEP. That hedging was purposeful in order to safeguard our ability to repay in part the debt incurred for that transaction. Going forward, assuming the current constructive commodity price outlook, and as we progress our debt reduction, we would anticipate that our future hedging levels will moderate within the company's established framework. Nonetheless, we remain purposeful in setting hedge levels, ensuring we protect our financial strength by recovering our cash costs and capital outlays and achieving other strategic and financial objectives. In 2022, we plan to allocate our expected free cash flow of approximately $825 to $925 million to debt repayment to help ensure a solid long-term financial foundation through the cycle. As Bill noted, though, as we approach and have a clear line of sight to achieving our target leverage ratio and total debt ranges, we will finalize our plan to implement a return capital program. Stepping back, we believe Southwestern represents a compelling investment opportunity in that our market capitalization under-represents the inherent value of our enterprise. As Bill recognized, our SEC pre-tax PV10 has more than doubled our current enterprise value and adjusted for net debt more than three times our market value. We believe our inventory depth and quality and our free cash flow durability are underappreciated and warrant a valuation more in line with our peers in the broader market. We believe the market will better recognize our value as we deliver in 2022. That concludes our prepared remarks. Andrea, could you please open the line for questions? Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, in the interest of time, please limit yourself to two questions and re-queue for additional questions. At this time, we will pause momentarily to assemble our roster.

And our first question will come from Charles Mead of Johnson and Rice.

Please go ahead.

Good morning, Charles. Good morning, Bill. It's you and Clay and Carl and then the whole team there. Bill, I wanted to ask one question about your liquids production in 22. That was the one thing that caught me a little bit off base in that it looks like you guys saw a decline in 4Q that's going to carry into 22. And I'm wondering, is that just as simple as you guys de-emphasizing your kind of Southwest Appalachia and Ohio assets in the 22 program, or is there something else going on there?

Charles, I got this. It's definitely not de-emphasizing. I mean, it's really continuing to optimize around the economics. We've in past years had more of our capital in West Virginia going to the condensate-rich than the liquids-rich. The liquids-rich economics have continued to improve with the rising gas and NGL prices to where now they are very comparable economically. So the 2022 program has more of a 50-50 mix between those two programs, so a little less of the condensate-rich wells going to sales, but it's all driven by enhanced economics. What we used to call rich and super rich. That's right. And then for Q4, it's really just a timing of completions. We brought five super rich wells on in the fourth quarter, but they came online December 28th. So we really had, we were front end loaded on activities slightly, and then we had less wells come online in the second half, and the last five were in the last couple days of the year.

Got it. That is helpful detail, Clay. I appreciate that. And then, Clay, also maybe going back to some of your prepared comments, saying that the Hainesville is ahead of plan in some of the IP rates. Should we interpret that as the driver for your natural gas beat on the quarter is really the Indigo assets? And maybe as a part of that question, you commented that those – I guess the 10 wells you brought on down there came on with IPs of $26 million a day, and you mentioned that they continued to strengthen. Does that mean that the rate is inclining over time, or does that mean that the rate got stronger as you went from number one to number 10 across those 10 wells? I know that's a lot of questions.

That's okay. So first, for Q4, the gas beat was across the portfolio, just really quality gas. production performance across all the assets, including outperforming in the Haynesville in Q4. And then the comment around the well performance in the Haynesville, really high rates that points to the quality of the inventory that we have there. And the comment about seeing some further improvement is we're using all of our technical subsurface data to make sure that we have the optimal drawdown and and the right uh pressure maintenance on these wells when we initially flow them back and so what we're seeing is with the higher pressure that we're able to see greater rates in the in the greater uh commodity price environment that we're having right now without any Degradation to EURs are well performance, and that's allowing the rates to continue to incline as we move forward.

Thank you, Clay, for that detail.

Yep.

Thanks, Charles.

The next question comes from Neil Dinkman of Truist Securities. Please go ahead.

Morning, guys, and congrats to the quarter. My question is just on, I guess, scale, maybe, Clay, for you, and obviously with a lot of deals, successful deals I'd say and now post this could you talk about seems like you've got opportunities kind of I guess my question is twofold first just on larger scale development might we see that and what kind of upside could we see that potentially not even in the numbers yet and then just maybe talk about the integration seems like things are even going a bit even ahead of schedule if you could talk there certainly so on the on the upside we we

We had a well cost for those wells we bought online in the fourth quarter in Hainesville of $1,600 a foot. The majority of those wells were drilled by previous operators and we finished some of those out. There's opportunity in that cost structure for us to use the same playbook we've used in Appalachia around efficient operational execution that will reduce cycle times and lower those costs. And so that is one of the big opportunities in front of us there is to use that execution performance and see that improvement as we move through the Hainesville. Additionally, there's commercial opportunities where we have been able to work with our gatherers in the area and find ways to negotiate, renegotiate improvements in broad parts of the commercial side of the business, get some increased capacity that will benefit us in the future. Those are some of the key areas where I think the upside exists and we're going to focus on it as we now move into 2022 and fully operating both of those assets.

And when you think about larger scale development as well, We have some common, actually a number of common suppliers or service providers being Williams in both places, DTM in both places, some of the drilling and stimulation companies in both places. I think another aspect of operating at a bigger scale is we now have landed two of our SWIN-owned rigs into the Hainesville and setting rigs side by side with Hainesville with our contractor partners tends to generate a lot of friendly competition to drive performance. We saw it in Appalachian, and we expect to see it here.

On your integration comment, did you have something further you wanted to add there?

It just seems like you are running ahead. I'm just wondering from sort of timing that you had put out, Clay, on when to have sort of everything under that same umbrella and You know, meaning sort of the pad design, all the things that the others had versus what you all are comfortable with. Are you already there or is there still upside yet that you'll be getting there in the coming quarters?

We're gaining on it. You know, we've had Indigo for five or so months and then we closed on GEP right at the end of the year. So clearly not there yet, but we are making good progress. We're gaining good insight on the integration front. from the technical understanding that the folks that work for GEP and Indigo that came to work for us are sharing and adding to our understanding of the area. And then we're combining that with some of the things we've done in Appalachia, which is resulting in a really good product. And I think as we go through the year, we'll see further gains.

Got it. Great details. Carl, I don't want to leave you out. I'm just wondering with the bigger size, are there more now opportunities you see proactively to, I would say, around the hedging where you can lock things in on a proactive basis, either blocking a better floor? Just want to go forward now that you have much more critical size on the financial side.

Well, Neil, I don't expect our approach to hedging is really going to change. We're going to continue to protect our financial space. strength within our well-proven framework. And, you know, I think at this point, given the outlook that we have both for commodities and for our free cash flow, we're in a pretty good spot.

No, I would agree. I would agree.

How we view A, our hedging, but more importantly, how we manage our overall enterprise risks.

And we look at hedging, both commodity and basis, and any other form of hedging, as kind of Carl implied, as a key part of our overall enterprise risk management practice, which is quite robust.

Perfect. Thanks, guys. Thank you.

The next question comes from Scott Hanold of RBC Capital Markets. Please go ahead.

Thanks. Good morning, all. I was wondering if you could talk about how you look at investment in the Hainesville versus Appalachia on a go-forward basis. Do you tend to want to balance that out a little bit for strategic reasons, or is there a reason to lean one way versus the other going forward? There are certain things that trigger different decisions.

Right. As you imply, and it's certainly true, There are a number of levers that are involved, knobs we turn, as we say, in the model when you're looking at overall investment. So headline, maintenance capital across the enterprise. Then a capital program that is prioritized by returns, economic returns, in a rack and stack almost type model, all of the Appalachian businesses and the Haynesville one bucket. We then take that sort of, beginning point and we look at okay and the good news is our our inventory across everywhere we operate as competitive economics with one another so we are operating in every place that we all in the Hainesville areas where they traditionally operated in all of ours where we traditionally operated and we have the economics to support that then comes sort of the adjustments to that you don't want to surge into one area for a short period of time require your midstream gather to build all these large infrastructure that costs a lot of money and then move from there to somewhere else and in effect over capitalize from a midstream perspective an area. You want to kind of keep some balance to that. Certainly as we've been into the Haynesville and see all the opportunities plus adding to our position in the Gulf Coast market region, we see a little bit higher investment into the Haynesville. a little bit, not materially less across the other parts of the business. The result is kind of an overall flat profile, but we will bias it and move around as economics dictate. The other piece of this is that we operate and own a number of drilling rigs in our portfolio. We have flexibility and freedom to move about. Charles talks about volumes up or down or, you know, however In a lot of cases, that is because we shifted our activities because we're able to. There's an opportunity we're trying to capture in a particular area that might be short-lived or back during the COVID days when condensate became an issue, we shifted over to natural gas, a bit more volume in there so that we could not have any issues with the ailments. All of that flexibility we build in and then that's where we're at. And I think the root of all this is that quality of acreage and the quality of acquisitions that we make against our framework sets it up such that this very thing would occur and that you have very strong competitive accretive assets when you're joining these together and they complement one another. And that just means incredible flexibility and optionality for how we invest.

Yeah, thanks for that. And my follow-up is on the shareholder return. And you all are accelerating quite a bit quickly down the path of getting to your target range. And what, you know, and I know it's probably a lot of discussions that have to happen before you, you know, kind of fine tune the exact mechanism and payout ratios and, you know, things like that. But could you frame for us, you know, what are your priorities or what are your overriding strategy when you think about shareholder returns without being overly specific at this point?

Yeah, we've kind of talked about it a little bit in both mine and Carl's area, and I'll just maintain that, repeat that conversation. We've got a very disciplined capital allocation framework, and as we said when we began the growth for M&A, that capital allocation framework currently prioritizes debt repayment. We focus on our leverage ratio, which you are correct, it will approach the top end of our of our leverage ratio range. It's expected to be there later this year. But certainly, we're wanting to prioritize debt repayment to ensure and protect our financial strength through the cycle. No sense in having a major commodity cycle move for some unknown reason and putting the company in any less position than we are today. As we approach later this year, that leverage ratio that we've put out there, and we have a clear sight because we've operated a bit more in the current environment we're in, which is highly supportive from a commodity perspective. But we have a clear sight and a deliberate path around our total debt range. And based on those commodity prices and free cash flow, we think that we could be in a position to initiate capital returns. When we think about capital returns, there's obviously all kinds of ideas in that space. There's dividends, there's buybacks. As we do with every one of these kinds of decisions, we put all of this in our model. We think through the economic returns for shareholders. We think about how we maintain the level of risk or the safeness, if you will, of owning us. and we look at our commitments to maintain our strong balance sheet, get our debt down that was a result of the acquisitions that we made and made well, and then keep all of that sustainable. So as we get into, we're not really ready to go into, well, we might have half of this and a third of that and whatever, but no, because it's how we think. All of those options will be on the table. and whether they stay on the table after we evaluate or whatever, it'll come down to that.

Scott, just to build on a little bit, and again, without getting into details, I do think it's helpful to think about a few of the objectives. Bill hit on the main one, what creates value for a shareholder? So we are closely watching what our peers are doing and how the market reacts to the return of capital programs. The other thing that is well known is we issued a lot of stock for the two acquisitions this last year, have some unnatural holders, quote unquote, that provide an overhang. That element will be a factor that goes into consideration. And then we've also been very forthright in prioritizing getting to investment grade for both financial and operational reasons. And the impact on our credit ratings of how we return capital will also be a factor in that. And we'll have more to say on that as we get closer to doing it.

Appreciate all that, Collar. Thanks. Good.

The next question comes from John Abbott of Bank of America. Please go ahead.

Hey, good morning, guys. Thank you for taking our questions. First question is really on learnings from the acquisitions. I mean, when you sit back and you've acquired Indigo, You've acquired Geo Southern. When you look at those, you know, you have Geo Southern recently in-house. When you look at Geo Southern versus Indigo, were there any differences on how the Hainesville assets were being operated within those two companies, and does that provide opportunities going forward?

Definitely. So the learnings we got from both of those organizations highlighted some things that one was doing that the other wasn't. and vice versa, and we've been able to work through those and make decisions around we're going to keep doing it this way or that way or kind of meet in the middle where we think it's the best outcome. So there has definitely been that, and that was part of our intent with the integration was to gain all that learning and understood that the learnings wouldn't be the same from both companies.

And I think that as you step back as well, and I'll say we believe we knew this, but it's nice to get reinforced into learning as well. When we approach M&A, we approach it from a disciplined strategic framework on how we evaluate, how we expect the performance of the acquisition to work, the timing of that, the shareholder benefit, the benefits of scale, and how to capture them. We're creative in nature, so one to the next to the next. And so we set the bar quite high because we've bought well and have transacted well, and we've transacted into a market that has a lot of fundamental strength behind it. And so a bit of your question will change a little. It reinforces to us, and it's great to see that come out. is the rigor in which we approach M&A.

Very, very helpful. And I just want to go back to the return of capital question. I mean, you gave a very thoughtful answer here previously, but Carl, maybe this question is for you. When you sort of think about the future return of capital, how do you think about that in relation to the credit rating? I mean, it sounds like you're looking to get back here to investment grade. How do you think about the return of capital in relation to your credit rating?

John, I think there are two factors that the agencies will care about. One is the overall quantum. To the extent you use free cash flow to return capital to shareholders, you can't use it to pay down debt. And one of the ways that we will manage that is we'll be very transparent with the agencies in how we believe that despite whatever return of capital program we put in place, we have a very clear executable path to land our debt in that target range, given commodity prices and our projected cash flow. So we can't get them comfortable with that. We will adjust the quantum that we return. The second element that I was alluding to, and we just need to get feedback, spoke to us from the agencies, is how they would view different types of return of capital. Some are seen as more ongoing commitments akin to interest expense. Other types of return of capital are seen as more flexible. And their preference and judgment on how a different type of return of capital might accelerate or delay our return to an investment grade will be a pretty important factor in how we think about exactly what the components of that return return on capital plan look like? Hopefully that addresses your question.

That was very helpful, Carl, and thank you for taking our questions. Yeah, thank you.

The next question comes from Noel Parks of Tui Brothers. Please go ahead.

Hi, good morning. Good morning. Just a couple things I wanted to ask about. actually sort of a housekeeping one. You talked about your certification and that you're looking to have five BCF a day certified by the end of the year, and you said that that was gross. So could you translate that roughly to what that would be for net production to Southwestern?

Yeah, about 4.1 BCF a day net production. And I'll make a point here. The environment and certifying and monitoring and then correcting actions, if some should occur, doesn't care about gross or net. And so when we talk about 5-BCF, just for the record, it really is about the full well stream, and we're responsible for it all. And so that's how we take that.

Great, thanks. About inflation, of course, because you control your own rigs, you certainly have more control than a lot of other operators do on the drilling side. But is it safe to say that the inflation that you felt or anticipate is going to wind up being more on the drilling side, pipe and so forth, those materials, as opposed to the completion side? And if it is at all lopsided that way, I wonder if that had any implications for how you might think about duck inventory in the current price environment, especially if we wind up seeing more volatility and maybe a weaker period ahead.

Yeah, so Noel, as we were coming into the year, the main categories of inflation were around steel, tubulars, casing, Um, diesel fuel and then labor as we've moved into 2022, the new one that is coming on strong is around, uh, frac services and profit. And, and so, as you mentioned, we have some insulation there because of our own frack fleet. And then on the drilling side, there is. the day rate that we are seeing inflation there also as we've come into the year. And with us having seven of our own rigs, then we get to mute that a little bit also. As it relates to your ducks comment, we feel like with the vertical integration assets that we have, that we've got a nice balance of insured supply and the things we've done in our supply chain group that we're more still focused on how we can most efficiently get our wells drilled and completed and what is the right amount of ducts to have so that that can occur and and that that's really what our focus is there okay okay uh great thanks a lot yeah

This concludes our question and answer session.

I would like to turn the conference back over to Bill Way for any closing remarks.

Thank you. And thank you for all for being on the call. You know, when I think about why we would invest, why somebody should invest in Swin, I've got a couple of points. First, as I think it's been very clear in this call, we've transformed the company through strategic execution. We're capturing the tangible benefits of scale. We have greater financial strength through the cycle than we've had. And we have portfolio optionality with deep high-return inventory and now enhanced market access to the growing demand centers, diversifying risk. A key point for me is responsible natural gas defines SWIN. It's what we do. It's not a special project. It's who we are and what we do. And we've got a compelling valuation providing a great and attractive investment opportunity. I want to thank everyone on the call for joining us. We believe that we're excited about delivering the value in 2022 and want you all to have a great weekend. I'll turn it back to the moderator. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.