EXCO Resources Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: EXCO Resources, (XCO)

EXCO Resources (NYSE:XCO)

Q1 2013 Earnings Call

May 01, 2013 10:00 am ET

Executives

Douglas H. Miller - Chairman, Chief Executive Officer, Chairman of EXCO Holdings and Chief Executive Officer of EXCO Holdings

J. Douglas Ramsey - Treasurer and Vice President of Finance

Mark F. Mulhern - Chief Financial Officer, Director, Chairman of Audit Committee and Member of Compensation Committee

Harold L. Hickey - President and Chief Operating Officer

Harold Jameson - Vice President and General Manager of East Texas/North Louisiana Joint Venture area

Analysts

Will Green - Stephens Inc., Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division

Howard Henick

Brad Heffern - RBC Capital Markets, LLC, Research Division

David Neuhauser

Operator

Good morning. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the EXCO Resources, Inc. First Quarter Earnings Release. [Operator Instructions] Please note this call is being recorded today, May 1, 2013. I'd now like to hand the call over to Mr. Doug Miller, Chairman and CEO. Please go ahead.

Douglas H. Miller

Thank you, Jay. Before we get started, I'm going to have Ramsey read our disclaimers. They keep getting longer, Ramsey. Will you shorten them down a little?

J. Douglas Ramsey

I'll try. Thanks, Doug. I would like to remind everyone that you can go to www.excoresources.com and click on the Presentations link in the Investor Relations section at the bottom of our homepage to access today's presentation slides.

The statements that may be made on this conference call regarding future financial and operating plans, projections, structure, results, business strategies, market prices and derivative activities or other plans, forecasts and statements that are not historical facts are forward-looking statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on a variety of assumptions that may change depending on future events, which are difficult to predict. Actual results may differ materially from those in the forward-looking statements. We caution you not to place undue, if any, reliance on such statements. Please refer to Pages 17 and 18 of the slide presentation for the complete text regarding our forward-looking statements, as well as the cautionary information set forth in our most recent Form 10-K, Form 10-Q and other SEC filings, which are available on our website at www.excoresources.com.

In addition, the slide presentation contains information including reconciliations regarding certain non-GAAP financial numbers, which will be discussed on today's call.

Doug?

Douglas H. Miller

Thanks. Good morning, everybody. This is Doug Miller. And here with me, we have 15 people, some of which will talk, all of which will be available for questions. We do have our new CFO in here today, so he's going to have to take a little heat, Mark Mulhern. He started at April 1, and we have determined that he is good luck on gas prices. So if we'd come in and rub his head every morning, gas goes up. So that's what we've been doing. So everybody in the gas business should be proud of that.

With that, one of the things that we have noted and has been a problem for companies like us, gas, is we've been writing down or writing off our proved and developed with gas price, and it looks like we're getting near the end of that because second quarter of last year, which is included in this full year, was averaged $2.15. So gas is going to have to go down a lot for us to have any more write-downs. So we're losing at $2.15 for the next quarter, and hopefully, we'll be gaining a 4-plus. So again, that's the good news.

Current operations, let's go to Slide 3 if everybody has their [ph] slides. We have significantly reduced our development drilling program. We have 3 rigs running in the Haynesville, which we are continuing and we'll continue for the rest of the year. We have one in the Marcellus. Our people have done a super job winding that and keeping the costs down. Actually, we've had major improvements over the last 12 months in both areas.

Hedging, between us and the Harbinger partnership, we have hedged -- I think we're hedged at $4.17 for the rest of this year about 65% of our gas. So we've pretty much locked in our cash flow for the year. We do have some upside, but it's only with 35% of it.

We continue to evaluate what's happened here recently as the front has gone up. I think people are blaming that on cold weather, but I believe, actually, it was a very normal winter. And what we really saw was a significant rig count drop, and we're starting to see some actual demand away from weather coming in. And so I think we finished the year at 1.7 Tcf in storage versus 2.5. So I think the next 6 weeks will be pretty interesting. If we don't get storage build up, we may have some problems with some of the guys with their short gas.

Transactions, we have -- we completed our deal with Harbinger, which is a conventional partnership in a quarter down, 3 quarters it's hedged. And it has availability. We've completed our first acquisition in there. I think John were working on about 20 deals for that. So quite a few conventional assets on the market. Again, we're working closely with the Harbinger Group. And hopefully, we'll be doing several transactions this year.

We continue -- let me see here. Let's go over to Slide 4. We're going to continue to manage our capital spending within cash flow. Our guys have done a great job of that. It's been a challenge here over the last 1.5 years because the cash flow -- the gas prices came down so fast, but we're well within it. Everything is modeled and ready to go, and I think everybody is doing a spectacular job there.

I think what we're really going to be focused on here for the near term is maintaining that -- maintaining the capital budget where it is. And we have a significant acquisition and development -- I mean, acquisition and divestiture group working probably, at times, as many as 40 or 50 people are working. I'd say we're probably looking at 30 or 40 deals, a huge deal flow out there right now. Actually, the main 2 areas of focus will be the Haynesville and the Marcellus, but we have started looking at 2 other deals -- 2 other areas, which will include the Eagle Ford and West Texas. We've operated out there before, so hopefully, we can do some -- we're looking at a lot of them in both areas, but it's still challenging. A lot of people think that you can buy them at big discounts, where there's a very fluid market for oil and gas properties. You will see us probably not by acreage only. If they don't come with production, we're probably not going to have an interest.

Again, and then we're looking at another area. I'm not going to tell you what it is right now, but it is another area of interest with deals for sale, and we're just trying to learn. And we've had a lot of meetings. We'll keep you posted on that.

Again, we're going to be managing the balance sheet. I think I'm going to get 47 questions about TGGT, and I will say this, that we have -- it's been a challenge because we have a partner on that, so we have to make sure we're in lockstep on how we're handling the process. We are in lockstep with them. We have Morgan Stanley and Goldman Sachs working on it. And we've had a second round of bidding, and the bankers are reviewing those and in discussions with that. So hopefully, here over the next 30 to 60 days, we'll have a mutual agreement between us and BG on exactly how we're going to do that.

And in the balance sheet, we're going to continue to do that. That's Mark's job. And so with that, I'm going to turn it over to him, and he'll tell you how we're going to manage the balance sheet.

Mark F. Mulhern

Great. Thank you, Doug, and good morning. I'm just going to review the financial highlights for the quarter on the slide deck, Slides 6 through 10.

So if you'll turn to Slide 6, the first quarter numbers reflect the closing of the Harbinger partnership, which closed in mid-February. You see our direct operating costs are down 30% per Mcfe for the -- from the first quarter of 2012, and general administrative costs are down approximately 13%. I think this is a reflection of strong cost management by the company in reaction to the lower natural gas price environment.

Adjusted EBITDA for the quarter was approximately $96 million. It exceeded our guidance and reflects lower levels of capital expenditures.

The income statement for the first quarter of 2013 reflects approximately $187 million of gain on the sale of the conventional assets through the Harbinger partnership.

The GAAP income statement shows a significant improvement in net income from Q1 of last year due to a large ceiling test write-down that occurred in 2012. So when you exclude the gain on sale from the 2013 net income and exclude the ceiling test write-downs from 2012, you get an apples-to-apples comparison. Adjusted first quarter earnings per share in 2013 were $0.13 versus $0.03 in 2012.

Turning to Slide 7, it summarizes the progress that Doug referred to with respect to liquidity. So proceeds from the Harbinger partnership were used to reduce borrowing on our revolver to under $500 million at quarter-end. And as you can see on this slide, EXCO's borrowing base was reduced to $900 million, but the partnership established an initial borrowing base of $470 million.

We have a bank meeting this Friday, May 3, and continue to have an excellent bank group that's very supportive of the company.

On Slide 8, just touching on the hedging for a minute, it summarizes our current hedge position and reflects the swaps put in place in Q1 for both EXCO and the partnership. As Doug said, we're approximately 65% hedged for the remainder of 2013 at $4.17. The partnership also hedged in accordance with the revolver requirements of its credit agreement. So this is an area we monitor closely, and we'll look for further opportunities to further layer on hedges for 2014 and '15.

The next couple slides are on guidance. So on Slide 9, I know there's a lot of numbers on this slide, but really, we tried to highlight the important numbers at the bottom of the page, which basically shows the adjusted EBITDA of approximately $96 million exceeded guidance by 16%, again, mainly due to cost control, solid production and pricing for the first quarter. I also want to highlight that while CapEx was lower in Q1 than the guidance, a significant portion of this is due to timing of projects, and we are not adjusting our full year capital expenditures.

Slide 10 is our guidance for the rest of 2013, so these numbers reflect EXCO's 25.5% interest in the Harbinger partnership and the addition of our interest in the BG conventional assets that were added to the partnership in March of 2013. So gas prices and our production estimates for 2013 have been updated.

So we're projecting a full year adjusted EBITDA of $341 million. Yes, that assumes no meaningful acquisitions between now and the end of the year. And due to the continued strong operating results at TGGT and additional expense reduction, we've also increased adjusted EBITDA guidance at TGGT by around $6 million or so.

So with that, I'm going to turn it over to Hal Hickey, our President and Chief Operating Officer, to cover the remainder of the slide deck. Hal?

Harold L. Hickey

Thanks, Mark. The first quarter of 2013 was a very, very strong quarter from an operational standpoint, and I really want to thank our teams and compliment them for their outstanding efforts during the quarter.

As you see on Slide 12, which provides an overview of our operations, we're continuing our manufacturing program in DeSoto Parish, Louisiana, where we're still seeing strong, strong results. In Marcellus, while we do have a limited appraisal and development program focused in northeast and central PA, we have seen some of our most outstanding well results to date.

In the -- regards to the Harbinger partnership, we kicked it off after we closed it in February. We're seeing, in part, positive results from that partnership. We're drilling Canyon Sand well out in West Texas with 1 rig. And we'll probably drill 36 to 38 wells out there this year.

TGGT, as Mark noted, had an outstanding quarter, as driven by strong volumes and significant reductions in OpEx as we consolidated some treating and released some rail equipment.

On this slide, you can see a summary of our overall rig count across our operating areas. I think Doug mentioned that we have 3 rigs in the Haynesville, 1 in Appalachia, and I guess there's 1 in Permian. The one in Permian is drilling on behalf of the EXCO/HGI Partnership. Now outside of the partnership, EXCO does own some deep rights, including some acreage we acquired in the last quarter of 2012, which is, respectively, Wolfcamp and Cline. And we're taking a look and we're doing some drilling out there later this year.

Going over to Slide 13, it highlights some of our Haynesville and Bossier results. And the strong performance in the Haynesville continues. We have about 400 operated wells flowing to sales. We have about 180 OBO horizontal shale wells flowing to sales. And we've achieved a recent milestone there. Early this year, we actually reached the gross operated production total of 1 trillion cubic feet of natural gas. That's a huge achievement. Only been on for about 4 or 4.5 years, so this has been a phenomenal, phenomenal piece of work for us.

We continue to see improvement in our well costs. Dips down some 20% from the fourth quarter of 2011 on our current average well cost. And our core DeSoto area is about $7.8 million to $8 million. Savings have resulted from continuing improvement on our drilling days, optimizing completion designs, improving our efficiencies.

And now for '13, we're focused on the development of the core Holly area in North Louisiana. We're continuing to manufacture on 80-acre spacing and flow our wells through our restricted shales [ph] program. We're producing about 1.1 Bcf per day of current gross operated production, and we'll stick with the 3 rigs for the rest of '13 if our current plans stay in place.

Slide 14, we detailed some of our operational highlights from Appalachia. 51 in those are gross production from the Marcellus shale is up over 200 million days for the first time for us. And net production, now net volume to EXCO, is about 48 million a day. We continue to see some improved development well costs, driven primarily by drilling efficiencies. And we were spending about $4.5 million on drilling in early 2012 and of late, and this is in our infill development wells. Some of that cost has come down to about $2.5 million, and that's for drilling only.

The significant well results we referred to earlier that have occurred in central and northeast Marcellus shale areas, we realized the average 24 are IPs of about 9 million a day on wells completed at the end of '12. In '13, we plan to run one rig. As I've said, we're going to have a limited program here, and we're going to focus on some appraisal wells and some development wells that our big efforts are going to be preparing for development in '14 and beyond.

During the first quarter, in coordination with our partner, BG Group, we did begin consolidating our Appalachia asset team into Dallas. And this consolidation is going to result in future cost savings. But more importantly, it's going to enhance the collaboration and leverage of our technical capabilities across our whole portfolio. So we hope to learn from what's been done in Appalachia down here. We hope that, as it's down here, we're going to expand some of our learnings from the Haynesville across through the Appalachia team. So we're very excited about that transition down here.

Moving on to Slide 15, this is taking a closer look at what we have in the Harbinger/EXCO partnership. We closed the partnership in the middle of February this year. We hold about 24.5% in the partnership, and we do operate. Harbinger holds 75.5%. In March, the partnership did acquire some additional working interest in some conventional wells which we already operated. That acquisition came from a BG Group. You can see on this slide we got 2 core operating areas in the partnership, and we have high working interest in these assets that, in effect, comprised this partnership as well, along with long-life reserves. And particularly, in these areas, we have high BTU liquids-rich gas both in the Permian and in North Louisiana and East Texas.

We're implementing some rig completion projects, particularly in North Louisiana. East Texas/North Louisiana does have some significant number of drilling locations. These aren't economic at current natural gas prices. But if prices pick up, and we think they will, then we'll start implementing some drilling here on these very predictable projects that really can yield some good results for us.

Partnership has a strong growth strategy. I think Doug and Mark discussed that earlier. And our teams are looking for opportunities here to grow through acquisitions. And the business development team is very focused on that activity.

Moving on to Slide 16, we'll focus on TGGT for a second. Like Doug said, in conjunction with BG we're evaluating potential sale of the TGGT system, but I will note that this is a very strong business. Our EBITDA in the first quarter exceeded forecast by about $4.5 million or $5 million. We actually realized about $37 million of adjusted EBITDA for the quarter. We've cut expenses. We've increased efficiencies in our capital costs. And so it's been a really, really strong performer for us. But like I said, we'll see what happens with the transaction activity and go from there.

With that, I'll turn the call back over to Mr. Miller for closing remarks facilitation of the question-and-answer session.

Douglas H. Miller

Okay. I think all in all, we have -- in my mind, in my 35 years, we have our best team, and I hope -- I think this is the trough we've been in. I think they responded -- we responded as a company like we should have with lower price and lower EBITDA successfully. But I'm saying this, I don't think there's anybody around here who like playing defense all the time. So we've had a pretty good sizable company meeting and ordered new tennis shoes for everybody. So I think everybody is excited that we've got everything stabilized, and it's now time to play offense. So we don't have anything to announce today, but I would expect Jacobi's group to be quite active, and we are going to be very supportive of that. And so for the time being, I think our emphasis is going to be on acquisitions, strategic acquisitions, very disciplined acquisitions. So again, I think our defensive days are over. Stay tuned.

With that, we are going to open it up for questions. Jay?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Will Green with Stephens.

Will Green - Stephens Inc., Research Division

I wonder if you guys can expand on the Haynesville completion costs. You guys have done a great job there, lowering those. I know Hal mentioned a number of things. What's been the most recent, I guess, cost control and how much further do you have to go or how much further is there to go, if any? And I guess, just expand on that, if you could.

Douglas H. Miller

Yes, I hear you, and we're going to have to whisper it because I don't want anybody to know what we're doing. Harold -- I think what I'm seeing, they changed a couple completion techniques, but I think the main one is drilling days that really gone down. And Harold, why don't you expand on that.

Harold Jameson

First of all, the drilling days, we'll continue to improve on our drilling number of days. You can see on the slide what our drilling days over time looks like. We'll continue to improve. Our most recent wells have been 34 days, spud to rig release. The other big factor is just the overall frac conditions. The market is -- market changes. Market conditions and the frac design changes. We'd continue to optimize our completions, as Hal mentioned earlier. That includes just more efficient overall cycle time on each one of the stages at our frac design. And then these market conditions on the frac.

Douglas H. Miller

That's been, I think, a little bit slowing down and looking back in just cost control. But the thing that I'm shocked about, quite frankly, is the drilling days. That is having the right rig, the right crews and doing things exactly right and monitoring that thing. That's -- I would've bet a lot of money we couldn't get it down below 30 because when we started, we're at least 45- to 60-days wells. And so I would've said 45 is a dream. But 27, which I saw one on Monday, was unbelievable. Now I don't think -- and I said that when it was 45, I don't think there's room, but maybe there's a 25-day deal in our future. But I don't think there's any way at 20.

Will Green - Stephens Inc., Research Division

Are you guys changing anything on the profit side? I know you mentioned different completion techniques. Are you going to change in the actual profit you're using or the amounts at all?

Harold Jameson

We are. I mean, there's a quiet evolution on the mixture of our profit. I mean, we started out in the very beginning with all intermediate Street profit. We changed that blend or that combination over time. And again, we continue to make changes. We have pumps, recently, we have pumps from all Ottawa jobs, all White Sands [ph]. We've made those changes. We've been monitoring those. We have several test cases in the ground, where we're collecting quite a few -- quite a bit of data now over time. And we'll continue to test that as well. That's another big comp of it. But we are -- I mean, over the -- since the very beginning of the play at current, we made changes to the crop allocation or distribution.

Douglas H. Miller

And I think the other thing that's going on is there's 4 or 5 operators out there that we've shared data with. And so if they're using one way and we're doing another. We shared some [ph] best practices. I've never seen anything like it, with the Chesapeakes, the Encanas, the EOGs and Petrohawks. When they were here we were sharing. And they were in here or we were in one of their offices almost every month. So that's something that was unprecedented sharing that data, so we could get there earlier. I'd say cutting costs for everybody happened years ahead of time because of that sharing.

Will Green - Stephens Inc., Research Division

Got you. The other one I wanted to hit on was consolidation of the Marcellus operations into Dallas. Is that fully complete? And I know you mentioned you're kind of scaling back the appraisal program. Once that is fully integrated into Dallas, would you guys be ramping that back up? Or how should we think about the Marcellus operations as a result of that?

Mark F. Mulhern

I think that, to answer your first question, the consolidation, by and large, is complete. The asset team is here and it's functioning. We still have a couple of people that we need to move down. That said, we're going to slow down the Marcellus development this year. We're going to focus on understanding the data, understanding the rock in the different areas that we have, and our big focus is going to be preparing for '14. What we're going to do is we're going to collaborate across our technical teams and make sure that we are giving this thing the best chance of success going forward. We're very optimistic about what the future holds for certain areas in the Marcellus. As I've noted, we've seen some of our best results today. But similar to what we've done in the Haynesville, we want to make sure that we've given the right look at what our costs are up there and the right look at what our development plan should be with the assets we have and our understanding of it.

Douglas H. Miller

I think, to elaborate on that, we've had the land move in here, we've had focus meetings with the geologists and everything. And so we're trying to find focus areas, where we might be able to make some acquisitions or add to our land. And so those meetings are occurring because I've been involved in them and they've been very productive. So I'd say right now, 1 rig, use 1 rig for the rest of this year. And then, depending on -- we probably have areas right now where we could put 3 or 4 rigs together, but it's all HBP and we're not in a hurry. And so I'd rather increase our positions in areas that we think are A areas, and we're getting to that.

Operator

The next question comes from Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Following up on the Marcellus. You did see this nice improvement in your IPs. Can you just add more color on what drove that and then, particularly, how widespread the stronger IPs are over your acreage position?

Douglas H. Miller

So can you do it, Hal?

Harold L. Hickey

Well, we found some good [indiscernible] up here, and we're happy about the rock. And I really think that's been the main driver, it's finding some good areas where we are comfortable with implementing a little bit of a development program. As far as the costs go, we're continuing to take a look at that and make sure we understand it. We've got some 150,000, 160,000 acres that are prospective for the Marcellus up there, and we're just taking a hard look at what our opportunities present. And we are taking a look at how we complete these wells. We're taking a look at some longer laterals. We're taking a look at some modifications to the completion design. So the future's bright. But that said, we want to make sure we're doing the right things with the areas that we have.

Douglas H. Miller

I think, Brian, I think we wasted some time over the last couple of years focusing on detail. That was part of the reason to consolidate down here. So guys, we're very successful over in the Haynesville to participate easier. Instead of flying to Pittsburgh, they're in the next floor. So I think getting everybody communicating is going to add. It's a big area. There are people having a lot of success up there. And we're marching towards being one of those guys having a lot of success. And there are deals available and we are looking at several of them.

Brian Singer - Goldman Sachs Group Inc., Research Division

Got it. So is it your view, then, that the improvement that you've seen recently can extend more widely over your acreage? Or is it just concentrated in a specific but very sweet portion of [indiscernible]?

Douglas H. Miller

No, no, no. I think we're going to have 4 or 5 areas with this type of results or better. And I think we've identified them and I think we're going to be increasing our positions in each one of them. It's not just one area, I mean, it's probably more broadly across our acreage than we thought 6 months ago.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And then, when you think about what EXCO would look like 1 year or 1.5 years from now, should we expect 4 equally sized core areas in the Eagle Ford, West Texas, Haynesville and Marcellus? Or something -- some combination different from that? And I guess, have you considered the capital needed for these acquisitions? How are you thinking about using equity?

Douglas H. Miller

Yes, the answer is I would still emphasize Haynesville. I don't think we're going to get bigger in those 2 areas. West Texas is a big area and there's -- we've bid on 4 or 5 deals ranging from $300 million to close to $1 billion out there and have been unsuccessful. We're looking. If you buy the right one, there's positive drilling economics there, so you would tend to be drilling for oil more than you would for gas because we'll see some 50% type rates of return there. Same thing in parts of the Eagle Ford. But our main focus is still going to be gas. Our main focus is still going to be Haynesville, where there are very few deals; and Marcellus, where there are some deals. And -- but we're going to be focused -- I'd say 3/4 -- if I could be perfect, we'd be 3/4 gas, 1/4 oil.

Operator

The next question comes from Amir Arif with Stifel.

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division

I understand you don't -- you still want to live within cash flow and you'd rather do acquisitions. But just curious, with your reduced well costs, where do you see your breakeven economics for drilling in your core Haynesville and in Northeast Marcellus?

Douglas H. Miller

Well, I'm going to throw a number out here, Harold. I think, at $7.8 million in the core, we're looking at -- that's the amount. What we call breakeven and what you call breakeven, we have to define. We're looking for a 20% rate of return when we drill a well. And so in the core Haynesville, it's somewhere between $3.50 and $4 an Mcf. In the -- I'm pretty sure in those recent wells that are coming in at $8 million or $9 million, is going to be the same type economics that we can get across where we think they are. But I would say, broadly, across most of the Haynesville and -- the marshes run 21 different decline curves there. We see areas that have a 20% rate of return at $3.50 and we see areas that takes $8 gas. I mean, that's how broad it is. So cost is one thing but the type of rock varies across, and the Haynesville is tiny compared to the Marcellus. So we're going to see the same things up there and we'll learn. Way more faults up in the Marcellus. It goes from gas to gas and liquids across, depths are totally different. So it is going to take a lot more technology and technique, and we're going to get there. But there are clearly AAA areas up in the Marcellus and B areas. I think $3.50 to $4 would be what we're shooting for. And I'd love to have -- where it takes $0.50 or whatever it is, but we don't have much of that.

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And so Doug, if you can just elaborate on why your preference is to just add inventory instead of, at these levels, I think your -- given the returns you're talking about in some of your core areas and adding some activity?

Douglas H. Miller

Well, I think there's a number and drilling within cash flow is something that you underline and we underline that. So even though there are 25% rates of return, there's no hurry. I don't think gas is going to be a $4 commodity for very long, because everybody's figuring out. You can't drill wells at $4 and make any money. The inventory that you're talking about, we're looking at buying, producing assets also. And as we buy those, depending on how we finance them, that will increase our cash flow and give us the ability to drill more. But we're not in a hurry to drill. I would say, we're looking at a gassy area up in the Marcellus, 9 times out of 10, with gas prices where they are, we can buy producing properties cheaper than we can drill for them. That's the main decision.

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and just the final question on, TGGT. I mean, in our models, but I think on a corporate basis, you're trading at 10x EBITDA. Given that the throughput is not growing in TGGT, just curious whether you're looking at that asset sale in terms of the increased liquidity it gives you and how you trade that off against the impact it would have on a pro forma EBITDA valuation, if you were to sell it?

Douglas H. Miller

Well, that's -- you're right in the middle of our debate. There is a number that we should -- we're not looking for liquidity. What we're looking for, is it the right time to sell that. Liquidity comes with it. If we're getting a fair price within the right partner, because we're going to continue to be partners because we have so much gas tied to, we're going to entertain the sale, and so will BG. If we get a business too cheap, we'll keep it. But I think you're going to see bids that are going to be acceptable and we're in negotiations with 3 or 4 parties right now. But we're not absolutely looking for liquidity, but absolutely, it would add liquidity.

Operator

[Operator Instructions] Our next question comes from Howard Henick with Scurlydog Capital.

Howard Henick

A couple of quick question. On your current hedge position, a lot of things that are not swaps, they're calls. Now you're treating those as a hedge, but what would happen if gas prices went down a lot? Unless calls are different in the gas world, that only gives me obligated to sell it in a rally, it doesn't really help you much on the downside. What am I missing?

Douglas H. Miller

No, you're not. I mean, we did some things a year or so ago. We sold some calls, took the premiums and increased our swaps with it, and we thought it was smart at the time we got them, but we'll never do that again. But you're absolutely right. We're hedged if it goes up and we're not hedged if it goes down, but we've taken that premium and increased the value of the swaps.

Howard Henick

So how hedged are you? You said you're 65% hedged this year. How hedged are you to a risk of gas prices declining, not that I'm expecting that to happen, but I'd like to know the answer.

Douglas H. Miller

That's the 65%.

Howard Henick

Oh, 65% is not including the calls, then?

Douglas H. Miller

Right.

Howard Henick

Okay, Okay. So the calls are in addition to that?

Douglas H. Miller

Right. If it goes up, we're 80% hedged. If it goes down, we're 65% hedged.

Howard Henick

Next question on -- about TGGT. I'm still -- following up on the last guy, like, you've been trying to sell it off and on for over a year, at least over a year since I've been talking here about it. And additionally, I thought your motivation was to basically raise cash so you can go out and invest in other assets. And in response to the other call, you said, basically, now you just want to get a price that works, it's a fair price. So I'm confused as to, like, what is really -- how do you look at the TGGT partnership as an asset, from the point of view of the company? And what's the goal to get rid of it to do what? I mean, because originally, the thought was, "Let's get rid of it. Let's lower our -- free up some more capital to go invest in deals," because we think that's a higher ROE. But now I think you're backing away from that. So maybe, I'm missing something but maybe I'm confused. So help me there.

Douglas H. Miller

Well, it sounds like you're confused. Initially, we thought about selling it to raise cash. There's no question about that. And we had several offers, but we weren't quite aligned with BG, because quite a few of the offers wanted us to stay as a partner and help manage it. They were from an infrastructure type of bonds. We couldn't get our arms around that with BG. So after about 6 months of having those discussions, we and BG decided that we would co-sell it together. They hired an investment banker, we hired an investment banker and that process has been ongoing. In the meantime, we've done several -- we've done the Harbinger deal, so the need for cash has waned, and we've also improved efficiencies to where I think there's at least a debate at the board level here, because it's such a great asset, kicking off cash flow, and our capital's behind this. This year, we're probably going to have $100 million of free cash after CapEx. So it becomes a slightly different asset because we are -- our big capital exposure is behind us. So it's at least a debate, and you're right. And I think you're not the only one confused because it's an asset that if we get the right price for, can we reinvest the capital? Yes. But if we don't get the right -- it could be a public MLP tomorrow and not be a small cap. So if we were distributing $75 million to $100 million of cash flow. We got a lot of board members who'd like to buy some of those units.

Howard Henick

Okay, so what -- given all that, what do you think the odds are that it gets sold? Is it -- or have you decided to retain it? And that's my last question.

Douglas H. Miller

Boy, now you're ringing the bell. I'd say, I don't know. I'm sorry. I'd say right now we have 4 offers that we're talking to. We've had discussions with BG. We're totally aligned with BG now. And depending on how these next 30 to 60 days go, I'll be happy to tell you. Sorry.

Operator

[Operator Instructions] The next question comes from Brad Heffern with RBC Capital Markets.

Brad Heffern - RBC Capital Markets, LLC, Research Division

I was wondering if you could just take a quick run-through with sort of what your average completion is these days in the Marcellus, lateral link, frac stages and what sort of completed costs are there?

Harold L. Hickey

I'll walk you through that. Our current -- if you look at the most recent wells we've completed, our lateral link is typically averaged to about around 4,200 feet. And within that 4,200 feet of lateral, we'll typically be 14 or 15 frac stages. The completions in the Marcellus are currently, a predominantly a slick water design. And as far as profit, it's mostly an ROE-type profit that we use up there. We've got a couple wells coming out of the [indiscernible] that are going to have longer laterals. We've got one that we've just recently completed or actually just drilled in case. It's over a 6,000-foot lateral and then, we've got another one that's drilling that's going to be closer to that as well. So that's part of the increased lateral link that we're assessing up there currently.

Douglas H. Miller

How about cost? He asked about it.

Harold L. Hickey

Current costs on the shorter laterals, with the 4,200-foot, 14 to 15 stages, all in, on the completion side, we're at about $3.5 million. That's in addition to the stimulation cost. That's everything on the completion cost to add [indiscernible].

Douglas H. Miller

What's the total well count?

Harold L. Hickey

On our most recent development wells, we're in the low 6s.

Brad Heffern - RBC Capital Markets, LLC, Research Division

Okay, great. And I was wondering if you could sort of give me some vague indication about those 4 to 5 core areas you were discussing earlier. What's the approximate acreage number on that?

Douglas H. Miller

Well, we've probably got gross 50,000 acres across that, and we want to expand that. It's going to be a challenge, but I'm not going to tell you where they are, because we will create some competition.

Operator

The next question comes from David Neuhauser with Livermore Partners.

David Neuhauser

My question really centers around, like you said, with the TGGT asset that I know has been on the market for a while, and now you're kind of rethinking of selling or not. And my view is that, like I said, there's good free cash flow coming from the company. What are you looking to do at this point with any excess cash? I mean, are you looking to maybe boost the dividend again, pay down debt? Or are you looking at areas like in the Marcellus, as you've described, like where you could potentially acquire or producing assets at a pretty reasonable value. Are there any assets on that front that you're looking at?

Douglas H. Miller

We are looking, but I'd say right now, on the free cash flow at the pipeline, all we're doing is paying down debt. We've paid down $5 million last week, as I recall, so it's just reducing debt. Second question, we're looking at those assets up in the Marcellus. We don't need to sell anything to do that. We have availability, and I'd say, John's group, we've bid on a couple recently and we have 3 or 4 more -- they're not big packages, $50 million to $200 million, but they all have production with them and they're all in our neighborhood. So they would be adds in the right areas. We're not looking to just add acreage to add acreage, because we're going to be very focused in 4 or 5 areas up there. And if it's out of those areas -- and we see a lot more out of those areas than we do see in the area.

David Neuhauser

All right, cool. And what about, like, rig utilization rates at this point? I mean, do you see them kind of -- where do you see them at this point? I guess, what kind of activities are you seeing?

Douglas H. Miller

Well, for us, we have 5 rigs right now. But I continue to see gas rates coming down. What I didn't realize that was going on was our $100 billion land rush and how many rigs it would take to hold those. And a lot of companies out there had to run mach 1 because a lot of those were 5 and 7 years. But I'd say, as that comes to completion, guys are going to have decisions to make. Are they going to keep drilling gas wells in marginal areas just because they held the lease? Or are they going to move that rig to oil? And so far, the last 12 to 18 months, they've been moving rigs to the oil properties, because there were good rates of return. And I don't know, I'd say, I've been asked this question 100 times, the price when we bring more rigs in, and I'd say, it's going to take north of 5 and I have a feeling, in most companies, it's going to take north of 5.

David Neuhauser

All right. But now we're seeing -- remember you talked a couple of quarters ago, how you're describing how oil looks high and gas is low, and you're looking a little to get more oily at that point, but you said things can change. Here we are 6, 7 months later, and guess what? Things have changed, and now even today, we see [indiscernible] tar and we see gas still holding a strong bit above 4, at least, in the front lines. Is that changing, sort of, the profile of where you're looking at investing in your assets at this point?

Douglas H. Miller

Not really. And now you see the challenge of running a company with volatile commodities. We have 1,000 people around here. We're working -- we're still looking in 2 oil areas. We understand the math, and we still think there's upside, we're still looking in the gas areas. I think if we could make the right acquisitions in the Haynesville or the Marcellus, and it was gas, if we took on leverage, we would hedge it. And we would consider developing it, but I think we'd all sit around and make sure we're well within our cash flow. This isn't a marathon.

David Neuhauser

And my last question is...

Douglas H. Miller

[indiscernible]

David Neuhauser

My last question was, again, you mentioned you've been spinning out things like TGGT and potential MLP. I mean, are there things you're looking at in that regard to sort of extract further value and help the valuation of the company at this point?

Douglas H. Miller

Well, I think the challenge with TGGT is if we get a price, we have advisors that are in here all the time. If at some price we sell it and if we can make the right contract with whoever the operator is that we can get along with and hook up -- because we have -- still have a lot of drilling over there. That's one thing. And the second one is what do we get if we go public, if we did an MLP. That's a different discussion, and a different problem. Yet, sitting here, running a second public company, I'm having a hard time doing it with one. I mean, it's just out there, yet Chesapeake did it. And access is a big animal right now. And that isn't the reason we would do it. We would hope that there is a public MLP out there that is in our neighborhood, that is a good operator that we could team up with.

David Neuhauser

Okay, and just lastly, and I know it's probably out there and you've heard this again for a while. But given sort of the shareholder makeup you guys have, you guys have very strong deep-pocketed shareholders and the board as well, it has tremendous experience. And then, of course, there's you at the helm. So when you look at that and all the moves you're making, leading out the organization. And again, gas has gone up and you're reducing cost. I mean, if the equity stays on this range, essentially, for a period of time, I mean, are we essentially going to look at the company and just -- we don't see this go private at some point again if things aren't getting the value that shareholders want?

Douglas H. Miller

Well, I'm 2 out of 3 I'm going private, but the last one was brutal. I would say no discussion today of going private, but I think you honed in on something. We have a significant strong board. We have a -- that has fairly deep pockets, who gives us access to capital that a lot of companies don't have. And I can -- if gas price is here and we're able to make some acquisitions, I would bet that a lot of those guys would add to their position. I mean, I can kind of tell you where 70% of the stock is with 10 people right now. So I'm not -- we're not totally private, but we're heading in that direction.

Operator

[Operator Instructions] We have no further questions at this time. I'll turn the call back over to Mr. Miller.

Douglas H. Miller

Okay. Thanks, everybody, for coming. You gave us some easy questions today. Brian, you got to do better than that. Again, I think we're in a trough, expect some action out of us, because we're coming out and we're working on deals. And so expect to hear from us in the near future. Thanks, everybody, for being up.

Operator

This concludes today's conference call. You may now disconnect.

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