Southwestern Energy Company

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Southwestern Energy's first quarter 2022 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. Managers will open up the call for a question and answer session following prepared remarks. To ask a question, you may press star, then one on a touchstone phone. To withdraw your question, please press star, then two. In the interest of time, please limit yourself to two questions and read 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. Good morning and welcome to Southwestern Energy's first quarter 2022 earnings 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 risks and uncertainties affecting outcomes. Many of these are beyond our control and discussed in more detail in the risk factors and the forward-looking statement sections of our annual report and quarterly reports, and 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 on development 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 the call over to Bill Way.

Thank you, Brittany. 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 U.S. 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 complimentary 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 Swin-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, U.S. natural gas is vital for global energy security. To help meet global supply, one-third of SWIN'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 Hainesville'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 Hainesville inventory with flow assurance supported by our large and long-tenor firm transportation portfolio. From a financial reliability perspective, we've made progress toward the return turn 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 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. Tune is well positioned to deliver on its strategic intent to generate resilient free cash flow through responsible natural gas development. We believe SWIN offers a differentiated opportunity to participate in value creation from the structurally constructive near and long-term outlook of the U.S. natural gas in general and for U.S. LNG export demand specifically. I'll now turn the call over to Clay to talk about our operations achievement.

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, invested capital and placed 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 SWIN. 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 per 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 SWIN-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 frack crews, consistent with the cadence of our full-year plan. We placed 32 wells to sales, including 21 in Mahanesville with an average lateral length of more than 8,200 feet. In Appalachia, we placed 11 wells to sales with lateral lengths averaging 12,600 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 SWEN-owned drilling rigs and frac crew provide further insulation. As a result of our procurement strategy, and longstanding 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 redemption of our 2022 notes at fall. A leverage ratio accordingly improved 0.3 terms 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 elective 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 status. Returning to investment grade 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 are asset positioning, inventory depth, 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.

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. If at any time your questions have been addressed and you would like to withdraw your question, please press star then two. Again, please limit yourself to two questions and read queue for additional questions.

At this time, we will pause momentarily to assemble our roster. The first question comes from Charles Meade with Johnson Rice. Please go ahead.

Morning, Bill. You and your whole team there. Morning, Charles. How are you? I'm doing well, thank you. Bill, this is for you or perhaps for Clay. I'm wondering, first off, congratulations with the outperformance of Haynesville. That's what I want to ask about is if you could perhaps decompose that outperformance in the quarter. I imagine two of the typical things dimensions are well performance and schedule, bringing things online on time. But I'm wondering if perhaps there's also an element of de-risking versus your acquisition case that you guys put some risk on it before you actually had your hands on it and now 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'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. 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, Clyde. Thank you. And then maybe just one short follow-up. So you're turning lines in one queue, two-thirds of them are to Haynesville. Is that the trend going forward? It kind of sounds like it. Or is that more of just kind of a natural oscillation and that it's going to be more, it's going to be swinging more back towards Marcellus in the back half of the year?

So all consistent with our plan, just the natural movement quarter to quarter. As we guided, we're going to be about 55% capital move 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 SWIN 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'll level out in line with our guidance as we move through the year.

And we laid out roughly 55-45 is how it should come out. And a lot of that, again, is previously contracted work. Overall, the enterprise is running at maintenance capital And we're fortunate to have complimentary inventory across our entire operation. So 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 complimentary nature of what we have. The team's also done a terrific job on controlling costs. A lot of the inflation concerns that are out there, yeah, 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, you know, we have super spec rigs, we know how much they cost every day, we know what parts and pieces they need, and so that certainly helps that. I think I'll underscore here and then move on, but I'll underscore here that we have created a new blended Hainesville 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 Geo Southern together with SWIN and Indigo and Geo Southern 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 J.P.

Morgan. Please go ahead.

Good morning, team. Bill, I wanted to see if you and your team could discuss how you at Southwestern look to take advantage of 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, you know, what changes if you do become investment grade? And then how does RSG kind of play within this, you know, broader strategy?

Yeah, Jason's 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 strength of the company, and the fact that we already moved volume to LNG really sets us apart. And you're right, a billion and a half day of LNG already happens, or 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 capacities 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. The LNG... Let me have Jason talk to you a little bit about some of the details around that, and then I'll come back.

Yeah, so just following up on what Bill said, right now we're selling about a B and a half 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 in 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. When you think about Haynesville, it has a whole lot of interconnectivity just to the Gulf Coast itself, as well as we have about a BCF a day on LEAP that grows to about 1.3 in the future. We have capacity. past beyond mid-coast, 200,000 a day, and 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 FID. And we have the ability to deliver into that 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 the U.S. does have the lowest price of gas right now 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 industries 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 price markets.

So Jason's 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. And the various forms that that comes in from which company you chose, we chose to work with a 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 will be monitored. Therefore, we can react even faster than we already do. to address that. RSG is strategically important to us 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. It's 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 a position where they recognize the financial strength and the progress we're making toward all of the criteria that would result in us achieving We know 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 SWIN's takeaway capacity? Any thoughts on potential risk to basis differentials? And what is your view on kind of takeaway capacity out of 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 the gas, if that's what you're drilling for, must be able to get to the market of your choosing and it needs to be able to get there on a sustainable basis. Otherwise, you trap 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 the one we continue to invest, a clear, unmistakable criteria is we must have adequate transport and the option to get more at the right time so we're not stranding investment 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 Hainesville 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 Appalachian Basin production is right at 90 some odd percent hedged against basis volatility. We have all of the transport and none of the unused transport that we need to be able to move that gas to the markets we want it to get to and compliment our Hainesville 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-in to segments and opt-in to capacity as we need it. Jason, you want to talk about the Hainesville and what's happening in the transport in the prior picture, please?

Yeah, sure. Yeah, what I would add is that when you think about just that greater area, you're definitely seeing bases move around in different areas, different locations. You're 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, you know, we, we've had just about on a nine X basis, a little over two BCF a day of our gross gas coming out of the, uh, out of the Hainesville. And what we're, what we're, you know, the, the thought, the thought behind what, what's going to happen in that general area is, you know, Gulf run is under a, 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, uh, you know, be able to move that volume from the northern end to the southern end of the basin, as well as, you know, TransCanada has another project, Louisiana Express, that should have went in service in, I think, February of 22. It's been delayed a little bit. They're saying that would be between May and September, so that's another $400,000 a day that Chenier has contracted to buy gas straight into their facility. So I think you're just going to see, you know, as production moves up, Basis moves around. Also, basis is moving because you just have an outright higher NYMEX price, so fuel costs you more to be able to move from one location to another. But over time, it's just going to be volatile as the area builds out down there in that general area.

Great. Thanks a lot.

The next question comes from Scott Hannell with RBC Capital Markets.

Please go ahead.

that yeah thanks um you know hey bill if i if i could be a little bit more direct on on one of the questions when when you think about like long-term you know value optionality on lng would southwestern you know consider investing in some of the future um you know lng facilities to get capacity or better pricing long term or do you see your role more as a supplier getting you know a stronger value for your molecule because it's in the lng corridor So are you looking to access 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've got to keep your options open. The goal, I believe, has got to be to enable these facilities to be built. which then enables access to premium markets beyond the U.S. 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 make 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 exploring optionality with your question, and everything's kind of on the table at the moment.

Understood. Appreciate that. And then, you know, Clay, you had mentioned that you all have a you know, 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, SWN is a, you know, vertically integrated. So, you know, 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, you know, 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 frack fleet and some ability to split that into two in Appalachia, on a gross basis, that dollar amount is anywhere $35 to $40 million of savings versus utilizing third party for the plan 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 costs that potentially are better than maybe what the average is seeing. 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 talk comes from Doug Legate with Bank of America.

Please go ahead.

Hi, Doug.

Good morning, everybody. How's everybody doing? 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, you know, where gas prices are currently, but if we really believe this long-term LNG expansion story, obviously it's maybe two or three years out, one could make a case that the linkage between between international and U.S. gas prices after 20 years, let's be honest, is potentially putting us in an upcycle for U.S. 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? Because the one thing that... 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 improved the underlying business. So what is the need to hedge into this macro environment is my follow-up. Thanks.

Sure.

Yeah, Doug, 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 question. But I think that based on everything that we're seeing in the market, when you look out longer term, obviously there's a you know, producer discipline, there's consolidation in front of us. And, you know, when we look at just the overall market with what's trying to go on on a global basis, a lot of things are changing right now. But, you know, even before, you know, the events between Russia and Ukraine happened with what's going on in that market, you know, there was a growing demand for, you know, 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 U.S. that we're in for a longer upcycle, 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 a point here, but when you look at the forward curve, do you think the move up we've seen towards four plus dollars as transit rate, or do you see that as an indication that the market is looking beyond the short-term LNG bottlenecks? I'm just curious in your opinion.

Yeah, 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 U.S. Obviously, we've seen You know, the other piece of the forward curve that's out there that you have to take into consideration is just the inability to build infrastructure, pipeline capacity out of some of the basins 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 U.S. 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?

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 current constructive price for gas is there, our progress on debt reduction, companies' 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 quite frankly, our hedging practice or policy has the breadth in it to move those numbers materially, and that's what we expect to do.

All right. I appreciate the answers, guys. Thank you.

The next question comes from Umang Chowdhury 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 Hainesville 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 Hainesville 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, that, is kind of creating about the same amount of inflationary pressures in both areas. There are 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 – 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 I just 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 are you thinking about risk management from that perspective?

Yeah, this is Jason. I think, you know, when we think about shorter term from a macro perspective, obviously you're going to see, you know, 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 U.S. You know, one other thing that we're seeing in the macro short term is just, you know, a really strong amount of power burn. A lot of it is due just to all the domestic coal retirements that have happened. They continue to happen. Then when you think about coal, the price of coal, because it can be exported, the price of coal is tied to global pricing, so that's allowing the near-term macro to be able to rise. From a pricing perspective, you know, 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, you know, from a risk perspective, if we see, you know, 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 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 Neil Bingman with True security. Please go ahead.

First question is on capital return. I don't know if you guys maybe just 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 later this year, and then how would that payout change as leverage goes even lower?

Yeah, I think what we've talked about before on 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 in this year. And then as we gain clearer line of sight on reaching our $3.5 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 the 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.

I was just going to add, part and parcel, it's really got 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 with 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 would be a broader use of capital strategy than just pure return of capital.

Thanks, Carl. Great add. Thanks, Carl. And my second question, probably for Bill, for you or Clay, on OFS inflation and Really specifically, could you all speak to how you all continue to do a good job of mitigating 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 could just talk about that.

One of our core operational strategies especially in an environment where services or costs can be challenged, is you want to be the operator of choice for a supplier. What does that mean? It doesn't mean paying 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 that you're working together to... 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 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, you know, the U.S. fields of the world are magnificent company that they want to work with us and we have a strong position with them. Clay's got some details.

Just on 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. Capitalizing on logistics around where there's real-time infrastructure challenges, whether it be road closures, how we navigated through the weather situation. 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.

This next question comes from Noel Parks with T. Please go ahead.

Hi. Good morning.

Just a couple things. I was recalling that you had spoken not too long ago about in the southwestern Hainesville that I believe some longer laterals were in the plan. I just wondered if you could Update on that.

Certainly. So, you know, I think we 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, you know, around 8,200 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 wasn't part of one queue is over 10,000 feet. And then we've got a drilled lateral that we haven't completed yet that's over 13,000 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 links were with the prior operators. We're on track with our progress there.

Lateral links at the long end in the Haynesville are controlled by regulatory rules of the state. 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. 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 a lot of the talents and procedures we use at Appalachia are being transferred and learned. And a lot of the great things that they already do in Hainesville are being learned back to us as well. So it all works.

Great. And I want to talk a little bit about the... 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 step? 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 Apple H development of additional Verizon?

Yeah, I think there's, you know, our plans actually include a number of those things with But 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, any of those things. We'll look at growth opportunities as well that add value to the shareholder. LMG is probably going to be in that that set of options. Hainesville 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 complimentary across the piece. So we can move about whether it's Ohio, Pennsylvania, West Virginia, Painesville, we can move about the portfolio and identify those further and 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 Wade 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 U.S. gas basins in the country. As we said in the call, deep tier one 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 teams did a terrific job in the quarter, but they do it over and over, so they continuously are doing this. And we look forward to continuing to have conversations throughout the rest of 22 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 in our disconnect.