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Cabot Oil & Gas Corporation (NYSE:COG)

Q1 2014 Earnings Conference Call

April 24, 2014 9:30 am ET

Executives

Dan Dinges – Chairman, President, Chief Executive Officer

Scott Schroeder – Executive Vice President, Chief Financial Officer, Treasurer

Jeffrey Hutton – Senior Vice President, Marketing

Analysts

Pearce Hammond – Simmons & Co.

Brian Singer – Goldman Sachs

Charles Meade – Johnson Rice

Joe Allman – JP Morgan

Doug Leggate – Bank of America Merrill Lynch

Gil Yang – Discern

Subash Chandra – Jefferies

Jeffrey Campbell – Tuohy Brothers Investments

Bob Brackett – Sanford Bernstein

Jack Aydin – Keybanc Capital Markets

David Beard – Iberia

Matt Portillo – Tudor Pickering Holt

Wayne Cooperman – Cobalt Capital

Operator

Good morning and welcome to the Cabot Oil & Gas Corporation First Quarter 2014 Earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded.

I would now like to turn the conference over to Dan Dinges, Chairman, President and CEO. Please go ahead, sir.

Dan Dinges

Thank you, Emily, and good morning to all. Appreciate you joining us for this call. I do have several of the Cabot executive team members with me today. Before we start, let me say the standard boilerplate language on the forward-looking statements included in the press release does apply to my comments today.

To begin, I’d like to first touch on a few of the financial and operating highlights from the first quarter that were outlined in this morning’s press release, and those are that production during the first quarter averaged 1,332 million cubic foot per day, an increase of 34% over the first quarter of 2013. As we guided on the year-end call in February, this volume is relatively flat to our fourth quarter production levels, which was primarily a result of compressor station downtime in the Marcellus due to the severe weather we had, and the number of wells we had scheduled to turn in line. When adjusting for our mid-cont and West Texas asset sales in the fourth quarter of last year, we grew the daily production by a few percentage sequentially.

Discretionary cash flow for the quarter was approximately $320 million, an increase of 36% compared to the first quarter of ’13 and a 12% increase over the fourth quarter. Net income excluding select items was approximately $110 million, an increase of over 100% compared to the first quarter of ’13 and a 47% increase over the fourth quarter. These record-setting metrics were further enhanced on a per-share basis due to our reduction in shares outstanding resulting from our repurchase of 4.8 million shares in the fourth quarter of last year.

Of significant note, and I do think worth repeating, during the first week of this month we reached a milestone in the field of 1Bcf of cumulative gross production for these assets, which is particularly impressive given we began flowing production from our first Marcellus well less than six years ago and we have never operated more than six rigs or produced from more than 290 horizontal wells in the play during this time – certainly a milestone that recognizes the productivity of these unique assets. There’s not going to be many assets out there that can boast those numbers.

Operationally, we do continue to demonstrate best-in-class execution across both our areas we’re allocating capital, and that’s in the Marcellus and Eagle Ford program. In the Marcellus, we averaged slightly over 1.2Bcf per day of net production during the first quarter in spite of the previously mentioned midstream challenges during the quarter, including a slow-down in infrastructure build-out affecting our ability to connect new wells. As a result, we turned in line only eight wells during the quarter, which included a three-well pad that was turned in line at the end of the quarter which is producing over 50 million cubic foot per day.

As discussed on the year-end call, our production growth for 2014 is weighted more to the second half of the year; however, we do expect higher sequential growth in the second quarter versus the flattish production profile we had discussed on the year-end call. The second quarter has started off stronger with Cabot averaging approximately 1.48Bcf per day of gross production in the Marcellus, an increase of about 5% over the first quarter average. We plan to place approximately 15 wells on production during the second quarter, all of which will commence in either May or June.

Moving to the Eagle Ford, we also have good news to report in that area. We completed our first six-well pad at the beginning of this month and have been very impressed with the results. The six wells had an average completed lateral link of about 6,700 feet and were completed with an average of 25 stages. The wells achieved an average peak 24-hour IP rate of 1,045 Boe per day per well with an 89% oil cut. As a result of the continued drilling and completion efficiencies associated with our pad drilling efforts, we realized approximately $600,000 of cost savings per well.

As a result of the improvements our team has made both on the production side as well as the cost side, we have decided to add a third rig beginning in the third quarter. The implied returns on our recent wells exceed 60% at $90, which we believe warrants the additional capital allocation. A typical well in the Eagle Ford has an EUR of approximately 500,000 Boe with a completed well cost of less than $7 million, based on approximately a 7,000 foot completed lateral. While still early, the wells that we had just announced in the six-well pad are outperforming this type curve. The addition of a third rig is accretive to our company’s net asset value and will add high-margin growth to our production profile; however, since the additional rig will be focused on multi-pads and we’ll be bringing it in in the third quarter, it is expected to have minimal impact on 2014 production but should have meaningful add to our estimated oil production volumes in 2015. We recently added about 4,000 net acres to our Eagle Ford position through our organic leasing efforts, and we will continue to actively lease in the area.

Now let me move to pricing. It’s a mainstay now on our Cabot teleconference. In the press release, we mentioned and indicated the Marcellus differential of $0.60 to $0.65 for January and February, and those levels held for the remainder of the first quarter. As we anticipated and which had been outlined in our recent investor presentations, the spread widened in April as certain winter contracts rolled off. For the month of April, we have seen realized prices in the Marcellus before the impact of hedges of about $0.75 to $0.80 below the NYMEX. Much of that was driven by winder first of month index prices on Tennessee and lighty (ph); however, the daily cash price for those pipes have improved during April compared to the last six months. We believe the stronger cash price can be possibly attributed to the increased demand from storage refill, which in turn may be the reason we are seeing bids for term gas become more attractive. It’s still early in the injection season, so we will continue to monitor this dynamic as we move into the summer months. For any additional information on pricing points and our firm capacity and firm sales, please see our current investor presentation on our website.

I would also be remiss if I failed to mention how the pricing dynamic should improve once Constitution pipeline is in service and we are able to deliver 500 million per day of our production to premium markets via the Iroquois system that will head both north and south, and into the Tennessee 200 line which will move to Boston. This outlook continues to improve with the Atlantic Sunrise project scheduled for the second half of ’17. You may recall this new pipeline will deliver 850 million cubic foot per day of our previously sold gas to multiple new markets, including new pricing locations.

On the Constitution update, we continue to see additional progress as we work towards final approval. You will recall that FERC issued a very favorable draft environment impact statement back on February 12. A public comment period deadline was also established for April 7, and despite several parties’ requests for extensions, none were authorized by FERC. The FERC has established June 13 as the date for its planned issuance of the final environment impact statement for the project. The subsequent 90-day federal authorization decision deadline is set for September 11 with the final FERC order as early as mid-October of this year.

In conjunction with the FERC process, Constitution filed for its New York DEC permit back in August of 2013. Constitution continues to fulfill its obligation to answer the data request by the New York DEC as they process the application and work towards the issue of a final permit.

On the financial side and subsequent to the quarter-end, our lenders under the credit facility approved an increase in the company’s borrowing base from $2.3 billion to $3.1 billion as part of an annual redetermination process. While commitments currently remain unchanged at $1.4 billion, the increase allows for increased flexibility for share repurchases which will continue as an opportunistic decision based on relative valuations between the market and the internal view on intrinsic value. We have not to date this year made any share repurchases.

The guidance as it relates to our capital guidance, we have increased our capital program slightly to accommodate the third rig in the Eagle Ford to $1.375 billion to $1.475 billion. We also have tightened our production guidance range for the year to 530 to 585 Bcfe, and that does translate and still implies a 35% production growth at midpoint. We remain confident that we will be able to continue to grow our volumes throughout the year and into next year.

In the Marcellus, we are currently producing about 1.5Bcf per day of gross volumes. Last month, we added 70 million per day of additional Millennium capacity, and we will add an incremental 150 million per day of additional firm capacity on Millennium in September. In addition to those volumes, we will be connecting our infrastructure directly to the largest LDC in the area beginning in the fourth quarter, which will allow for an additional 200 million cubic foot per day of new capacity. Based on this incremental capacity and addition to what we know about expansion projects like the Tennessee Rose Lake project, which will add about 250 million per day to the system, the recently announced open season on Millennium for about 120 million per day and the opportunity to increase our market share on three major pipes in the area, we do remain confident that we can continue to grow our Marcellus production levels in ’14 and beyond. Concurrently, we will be growing our high margin oil production in the Eagle Ford also.

As a result of our confidence, we are providing initial 2015 production guidance of 20 to 30%. This guidance is predicated on an average of 2Bcf of daily gross Marcellus volumes through ’15, a level we are very comfortable with and which may ultimately prove to be conservative. Additionally, this program would generate free cash flow in 2015 even if you do assume an all-in natural gas price realization of 350 and an oil price realization of $90.

As for ’16, assuming a Constitution in-service date of late ’15 or early ’16, we expect another year of top tier growth for Cabot as we begin delivering 500 million cubic foot a day to new markets. In addition to the incremental volumes on Constitution, we will also be adding 125 million per day of new long-term firm sales associated with Transco’s southeast expansion project and 50 million cubic foot per day of new capacity on Columbia’s east side expansion, all of which are expected to be in service during the fourth quarter of next year.

In summary, while we’ve been very clear that 2014 and 2015 will be somewhat challenged as it relates to the pricing dynamics in the Marcellus, we are more confident than ever that the quality of our assets and the long-term value proposition for shareholders is very strong. Even with these near term challenges, we will still provide top tier production and reserve growth while spending within cash flow – again, not many companies can make that statement. With over 20 years of inventory remaining in the best natural gas assets in the U.S., a sizeable portfolio of new firm becoming available to us over the next couple of years, and an improving position in the Eagle Ford, we believe the future of Cabot is as bright as it’s ever been.

Emily, with that, I’ll be able to answer any questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question comes from Pearce Hammond of Simmons & Company. Please go ahead.

Pearce Hammond – Simmons & Co.

Good morning. Dan, can you walk us through kind of the puts and takes that you go through when considering whether to enter into a long-term takeaway agreement out of the Marcellus? For example, kind of weighing the cost of a new greenfield pipeline and the optical advantage now for investors as seeing firm takeaway capacity versus, say, locking the company into a disadvantageous pricing arrangement longer term, especially if there might be excess takeaway capacity out of the Marcellus later in the decade.

Dan Dinges

Well, I’ll let Jeff kind of cover some of that, Pearce.

Jeffrey Hutton

Okay Pearce, as we’ve talked before, our valuation and whether to enter into long-term firm sales versus long-term transport contracts versus participating in a pipeline for new takeaway – I mean, all those factors are evaluated with each decision. I think early on, we made a lot of good decisions on our long-term sales contracts, got way ahead of the game because the pricing was very favorable. I think in the last six months or so, we have slowed down considerably on entering into anything long-term that’s a price disadvantage, as you called it.

As you know, we opted for a new pipeline expansion coming out of Susquehanna County, thus the new 30 (indiscernible) that will go down to the DC area and on to Cove Point, and as it worked out for us, from a netback perspective that was a very, very favorable deal, so each deal stands on its own merits.

The new transport we picked up on Millennium does a lot of good things for us, gets us to places that previously we had been unable to move our gas towards at higher pricing points. So each case is different, but for the most part it’s evaluated along with all of our other options.

Pearce Hammond – Simmons & Co.

Thank you for that. My follow-up is Dan, do you see any new horizontal potential on any of your legacy West Virginia acreage that traditionally was targeting the Devonian Shale or the Big Lime with the brea formations, and then how much acreage do you have there?

Dan Dinges

Well in West Virginia, we have still approximately a million acres in West Virginia, and that’s held by production we had previously in some of those shallow zones, Pearce, before we started developing the Marcellus. We had drilled several horizontal wells, and that opportunity still remains in West Virginia.

We have an evaluation process ongoing with our assets in West Virginia. We had recently permitted a well in the West Virginia area and we will continue to look at enhancement opportunities on that acreage. So to answer your question just succinctly, yes, we do think there are opportunities to drill horizontal wells in some of the areas in West Virginia.

Pearce Hammond – Simmons & Co.

Thank you very much.

Dan Dinges

Thank you, Pearce.

Operator

Our next question is from Brian Singer of Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Thank you, good morning. You talked to a number of the opportunities outside of Constitution where you’re adding capacity, having signed some midstream agreements – the Tennessee Rose Lake, the open season on Millennium, and then the increase in market shares on three major pipes among them. Can you provide a little bit more color on what the expected realized pricing is and transport costs associated with those non-Constitution related opportunities, and how widespread do you see additional opportunity from here?

Dan Dinges

I’ll let Jeff make the overall comment, Brian, but I will say that our price points are tied to different indices and those indices are variable, if you will, out there on what the future realizations are going to be. But I’ll let Jeff answer.

Jeffrey Hutton

Okay, Brian. To begin with, the comment that we made in the speech on Rose Lake was just another example of how there’s new capacity opening up on Tennessee that allows for additional volumes to flow on that particular pipeline, so we didn’t participate as a shipper but we are selling gas to people who will participate as a shipper.

Number two, I guess, is the other ancillary contracts that we have picked up in order to move gas from one basin to another. The pricing points all vary, transport costs all vary. For us, it’s all about netback – it’s about assumptions that we make on the pricing locations and how that works to our best interest in getting the highest price for product.

So each case is different. The Millennium capacity is fairly cheap as existing capacity. As you know, expansion capacity up there in new pipe is generally in the $0.50 to $0.60 range, but new pipe gets you a big advantage as another straw out of Susquehanna County. So we look at all those factors when making those decisions.

Brian Singer – Goldman Sachs

This is probably a follow-up for Jeff – as you look at future opportunities for signing midstream agreements, are you—where do you see those opportunities regionally? Do you see them and are you more—do you see more opportunities to stick within the northeast and get it to the markets that Constitution is tapping into, like New England, or do you see more opportunities emerging to go to the Gulf Coast and the southeast or Midwest? It’s really more a question on are there still incremental opportunities in the northeast, or are you really being forced to look more at the Gulf Coast?

Jeffrey Hutton

No, I think there are still additional opportunities in the northeast. As you know and if you look at our slide on the routes that Cabot Gas can reach and the markets that it can reach, we intend to be very, very active in Canada, at Waddington – it’s in the far north part of the eastern part of the United States. We expect to supply a lot of gas into the Boston area, and then coming south New York, Jersey, Connecticut – all those areas. Mid-Atlantic, the DC area, we’ve been very active down in the Carolinas into the Piedmont market, very active. That’s a huge market – that’s a third of the country’s population, and we think we can reach out to all those areas.

And you know, of course, we do have backhaul transport that takes us back in the Appalachian area into the Columbia pricing locations, so that’s a lot of market. We think we have access—better access than most producers in northeast PA. Geographically, we’re situated very well. I think the southwest PA producers have opportunity in the Gulf Coast. We have not ruled out, though, and are talking with markets in the Gulf Coast about transportation paths and how our Marcellus gas can fit in with their plans.

Brian Singer – Goldman Sachs

Thanks. And Dan, a very quick last question – can you comment on share repurchase?

Dan Dinges

For share repurchase, we have not been in the market yet, Brian. We have—as we’ve mentioned, we’ve evaluated the noise in this very short period of time from our last conference call. We’ve been active in preparing a rather lengthy internal look at the future on all of our projects, opportunities and sensitivities, on accelerated projects, on price point sensitivities, on the macro market. We’ve spent a great deal of internal time focused on that. We have our board meeting coming up. It’s our intent to have some of this played out at our board meeting. But in the meantime, looking at the market and looking at the swings in the market, as I’d said earlier, the volatility is going to dissipate a little bit before we get into the market, but it is my expectation still that we will be in the market at some point.

Brian Singer – Goldman Sachs

Thank you.

Operator

Our next question is from Charles Meade of Johnson Rice. Please go ahead.

Charles Meade – Johnson Rice

Good morning gentlemen, and thanks for taking my questions. Dan, I was wondering if we could go back a bit to some of your prepared remarks, your comments about the assumptions you were making for the 2015 growth. I believe I heard you say that the 20 to 30% growth rate is predicated on 2Bcf gross a day in ’15. When I look at your growth, it seems that you probably hit that in 1Q ’15 or maybe 2Q ’15. Is that a fair guess, or are you thinking that you’re going to be 2Bcf flat?

Dan Dinges

Well no, that’s a fair guess; and again, it’s an early guidance. We typically put our guidance out later in the year. We’ve had enough questions and concern attached with what our confidence level is in our growth profile. We wanted to get it out there, and as I mentioned in my comments, Charles, that we are entirely comfortable at this level of growth. If you just look at our exit rate that we anticipate in ’14 and you carry that forward into ’15, you can get within that fairway of 20 to 30% growth in ’15, and that’s why I added to the comments that it may prove to be conservative at that level.

Charles Meade – Johnson Rice

Right, right. And also as you noted, you’d have free cash even at a 350 realized, and I think with all the—maybe another cut at Brian Singer’s question, you’ve talked a bit about what your posture is – and this may be too far down the road – but you’ve talked a bit about what your posture is right now. But as you go into a year from now or even nine months from now when Constitution—you know, the pipe’s in the ground and you get more confidence about what your ’16 growth is going to look like, that’s where you’re really going to have—

Dan Dinges

Some opportunities.

Charles Meade – Johnson Rice

Yeah, yeah. So is that the time frame when you think that when you’re doing all this internal work right now, is it really the time to pounce is going to be about 12 months from now?

Dan Dinges

Well we—and the reason for the extended look and being more granular at our extended look was to stack up all of the opportunities that we had in front of us and that we have in front of us, and to look at the planning that we want to do right now in moving forward to, one, be able to have the right staffing; two, to be able to plan for the right services and personnel to be able to assure program execution to be able to achieve those levels. We know the assets can deliver; we’re entirely comfortable with our asset pool and the results of our wells and our consistency of cost in drilling wells, but we do want to put together the whole program in a—let’s say a more detailed fashion than we have in the past. We’re excited about when we stack up all these opportunities and it looks at the new markets that we’re going to be able to access and making some of the assumptions that you do on price points that we’re getting to with our new gas, it’s a robust program.

Charles Meade – Johnson Rice

Thanks for those added comments, Dan.

Dan Dinges

Thanks Charles.

Operator

Our next question is from Joe Allman of JP Morgan. Please go ahead.

Joe Allman – JP Morgan

Thank you, good morning everybody. So Dan, are you expecting in 2015 that you will have quarterly growth through 2015, or you’re not expecting it at this point? And if that is your expectation, give us what gives you the confidence in terms of aren’t the pipes full? You know, how can you actually move the gas?

Dan Dinges

Well, I think you’ve seen each—and I’ll pitch it to Jeff after I make a comment, but I think you’ve seen in just about each quarterly conference call, we come out and announce some type of capacity additions that we’ve added to the plan. We think we’ll be able to continue to do that.

In regard to just keeping the production flat and what it is quarterly, right now, Joe, our expectation is 2Bcf and whether we go from a 1.8, 1.9Bcf a day to a 2.1Bcf a day to the end of the year, I’m comfortable at saying the average is going to be 2Bcf-plus, and how it rolls through the year is going to be sequential growth but I don’t have it that granular at this time.

And Jeff, you want to make—

Jeffrey Hutton

Yes. Joe, this is Jeff. I think two parts to your question – one, if I understood correctly, shorter term versus longer term. In shorter term, we tried to lay out in the speech that we have picked up additional capacity that was existing capacity on Millennium – 70,000 last month and an incremental 150 coming up. We laid out a plan that actually connects our infrastructure in Pennsylvania to the state’s largest utility up there, and we have already entered into sales agreements with them. There’s additional capacity coming up on all the pipes that we operate on, so shorter term when I say next 18 months, we’re not in the same camp as what you refer to as aren’t all the pipes full. We are not in that camp.

Longer term is definitely Constitution, a big 30-inch pipe that is going to take us to two new markets—or three new markets, two new interstates, and the central Penn part of Atlantic Sunrise, and those big 30-inch pipes are coming out of operating area so we feel real good about Years 3, 4 and 5 from now that we’ll be able to grow.

Joe Allman – JP Morgan

Have you guys put in some cushion for any shut-ins or any downtime? I think last year, you had some shut-ins.

Dan Dinges

Yeah, we typically always risk our production profile, as we do with our EURs and as we also put in a little bit of contingency in our AFEs.

Joe Allman – JP Morgan

Got you. Hey Scott, also—I mean, a separate question, this might be for Scott. The DD&A showed a nice drop from the fourth quarter to the first quarter on a Mcfe basis. What should we read from that nice drop in DD&A?

Scott Schroeder

Well, that’s the year-end true-up, Joe, from all the final year-end reserve reports and when our property accountants go through and repopulate the database, and that’s the rate going forward now; and that’s why we also adjusted the top end of the guidance down.

Joe Allman – JP Morgan

Okay great, very helpful. Thank you.

Operator

Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.

Doug Leggate – Bank of America Merrill Lynch

Thanks. I was wondering if I could change topics just a wee bit, Dan, onto the Eagle Ford. Obviously you’re adding a rig there now, but I’m just curious as to how you’re seeing the backlog, the location count, and ultimately how more aggressive do you think you can be over time in terms of acreage opportunities and ultimately continuing to shift the balance of your spending towards that area. And I’ve got a quick follow-up on the Marcellus, please.

Dan Dinges

Okay, Doug. Yeah, again, as you saw the numbers and as we reported, they’re good numbers. They are meeting or exceeding our expectations to continue to allocate capital. We feel comfortable allocating the third rig. We feel comfortable being able to acquire additional acreage to bolt on. Our location count in the Eagle Ford is probably 500, 600 locations or so, and that certainly includes our Presidio area also. So once we get our arms around this third rig, I think it’s intuitive to think that we would also look at an expanded program and possibly to a fourth rig also in the Eagle Ford, particularly as we continue to acquire acreage.

Doug Leggate – Bank of America Merrill Lynch

So how should we think about the priority for allocating cash, thinking Marcellus, Eagle Ford and buybacks, if you could deal with those three in some kind of order, and maybe acreage acquisitions added in there as well.

Dan Dinges

Well, on the capital allocation to the Marcellus, we have put together a six-rig program and basically a two-rig or two-crew completion pumping services, and we’re rolling that forward with that program. So from a bottoms-up build, that gives us a pretty good handle in our cost consistency there, it gives us a good handle on the amount of capital necessary to allocate to achieve that program. When you look at the Eagle Ford and we go to a three-well program, that’s a fairly easy number to get to also on what we’d be allocating. From a priority standpoint, our operations program is where we’re going to be allocating a program as opposed to a share buyback. But when you look at going to a split, we’ll probably be, again, 65% plus or minus to the Marcellus in ‘14 as a year-end guesstimate, and the rest will be allocated to the Eagle Ford and some of the other projects that we have on the slate that are more exploratory in nature.

Going into our ’15 program, again, we haven’t put the capital allocation out there right yet, but going into the ’15 program I would think that our capital allocation would go into a 55% plus or minus, 60% plus or minus in the Marcellus and the remainder going towards the Eagle Ford and the additional exploratory projects or exploitation projects that we’re working on.

Doug Leggate – Bank of America Merrill Lynch

I don’t suppose that you’d like to elaborate on any of those additional projects at this point, Dan?

Dan Dinges

Nice try, Doug.

Doug Leggate – Bank of America Merrill Lynch

Okay, thanks guys. Appreciate it.

Operator

Our next question is from Gil Yang of Discern. Please go ahead.

Gil Yang – Discern

Good morning. I was just wondering in terms of the visibility for capacity additions to get to that 2Bcf, how far along are you in negotiations or what’s the visibility on those specific projects? Do you have them in mind, they’re on a checklist, or is it more advanced than that or less advanced than that in terms of your targeting for those incremental adds?

Jeffrey Hutton

Sure, Gil. I think for the most part we’re close, and we’ll take a few pieces of capacity we’re working with other shippers on to—you know, just to make sure in getting to that comfort zone that we have exactly what we need. Going forward, it looks very favorable. We’re not concerned about not flowing that amount of gas.

Gil Yang – Discern

Great, okay. And then a second question on the Eagle Ford – the counties that the six-well pad was on and—can you comment on that? Those are some of the best wells you’ve drilled, at least on a test basis. Would you assign that to the pad drilling and pad fracking, or is there something different going on in either the geology or the completion design that’s helping?

Dan Dinges

Yeah, the majority of our acreage is in Frio County. We have the extended lateral—as far as a pad, one, it was the largest number of wells we’ve drilled from one pad on average for wells located in close proximity. It is certainly the longest laterals that we have used. The density or spacing of the frack stages came down a little bit also from our average of our prior wells, and in fact we will probably have a little bit further reduction in our frack stage spacing as we roll forward to evaluate the efficiency gains that we might be able to derive from that.

Gil Yang – Discern

What was the stage spacing that you—I think I can figure it out, because you use 25 stages, so that’s—

Dan Dinges

Yeah, so it’s a little over 250.

Gil Yang – Discern

And what was it prior to that?

Dan Dinges

We were probably closer to 275 to 300.

Gil Yang – Discern

Okay, great. Thank you very much, Dan.

Operator

Our next question is from Subash Chandra of Jefferies. Please go ahead.

Subash Chandra – Jefferies

Thanks, good morning. I was trying to understand the size of the term market that was in your initial discussion that might be reflecting storage refill demand, and how predictable that term market might be, how it fits into your growth profile, if at all.

Jeffrey Hutton

This is Jeff again. I think the comment we made about the storage refill was just to indicate how strong daily cash prices have been up in the northeast part of the Marcellus. Comparatively speaking, cash has been very strong for the last month or so, and we’re expecting the cash market to stay strong throughout the storage refill period. That has led to an improvement in the term market, being the summer market, maybe the one-year market, maybe going out the next couple years for basis differentials in finite term contracts. As little as six weeks, eight weeks ago, the summer on certain price was trading $1.75 under NYMEX, for example. Today, that’s probably $1 under NYMEX, so there has been strength in the marketplace for the term business aspect, and it looks like it’s going to continue.

Subash Chandra – Jefferies

I guess to put it another way, the spot market/interruptibles, how big is that, and how can you take advantage of that on a sort of ongoing basis – for instance, these cash sales, can you grow above and beyond the firm? I think everyone looks at the presentation, they see the firm, and they just sort of expect that you can’t produce a single molecule over on top of that. There was a company yesterday whose strategy is not to tie up firm because they believe—they're in a different part of the play, but they believe that the Marcellus will be over-infrastructured within 18 months. They don’t want to lock up that way.

So how do we sort of get that confidence that there is that—you know, a cash market or some sort of interruptible market beyond the firm on Page 5 of your presentation?

Jeffrey Hutton

Okay, a couple points on that. I think there is a chance that infrastructure could be over-built in 18 months or two years – I would agree with that in both southwest PA and northeast PA. We have taken an approach where we have tied up certain volumes of our gas – and this is, again, on the website presentation – certain volumes of our gas into long-term contracts, and those long-term contracts, those customers are using their firm transport, their firm takeaway to take that gas to their city gates.

The second approach was to purchase firm transport, and again those numbers are available to you on the presentation. Those volumes are—we control, and we move those molecules to certain locations for better pricing, of course. And then the third aspect of our marketing approach has been to enter into spot sales – those are typically 30-day sales, summer sales April through October, winter period sales November through March, (indiscernible) gas cash sales. And I don’t think we’re unlike a lot of producers – we have a portfolio of options, and that’s our approach to marketing each month.

The producer that you mentioned, or I’ve heard that producers are—or some producers say simply, we will produce our gas to the amount of firm we own. We’ve taken a little different approach to that. We’re looking at all aspects of the market opportunities that are sitting there in front of us, and I think for the most part, we have a little advantage in that we’re delivering gas to three major interstate pipelines. We’re not married to one, and the infrastructure that we’ve designed gives us flexibility to move gas between those pipelines based on pricing and pipeline pressures. And with the addition of Constitution, it’s going to take us, of course, to Interstates No. 4 and 5 and then Atlantic Sunrise to Interstate 6 and 7. So having seven interstate markets and again attached to one of the largest utilities, or the largest utility in the state, gives us a lot more options and opportunities.

Subash Chandra – Jefferies

Okay. If I could ask one last question on the matter, and I’ll promise to jump off, so the three paths there—you know, long-term contracts to those with firm, purchase your own firm, and spot, is there a way to quantify perhaps on an annual basis how big that spot market is for you specifically, or for the sector?

Jeffrey Hutton

That would be difficult, and I’ll explain why. I think the buyers of gas, both industrials and utilities, they’re all different. They all take different approaches and they all have different buying habits, purchasing habits. When you throw in the mix of power plants, then it really gets confusing as to who’s using what capacity on what day to get to what market. For the most part, we have very consistent day sales. We know—we have markets that count on us for gas, and I think other producers take the same approach; but to quantify who is using what on what day during what period of time during the year would be difficult.

Subash Chandra – Jefferies

Okay, understood. Thank you very much.

Operator

Our next question comes from Jeffrey Campbell of Tuohy Brothers Investments. Please go ahead.

Jeffrey Campbell – Tuohy Brothers Investments

Good morning. Dan, it appears it’s taking at least three months to get a new rig running in the Eagle Ford. Is that based on internal capital logistics or is that based on rig availability?

Dan Dinges

No, it’s based on us just getting the locations in order, the permits squared, and our services all lined up, but it’s not because of rig availability.

Jeffrey Campbell – Tuohy Brothers Investments

Okay. And kind of thinking forward on that locations point, with the addition of the third rig, is the strategy to execute the longer lateral, closer spacing method throughout the aerial extent of your acreage, or are you concentrating on a core area?

Dan Dinges

No, our wells are fairly scattered throughout our area, so the intent is to continue to try to capture the efficiencies by multi-pad, longer laterals, frack stage density. We think that we’re gaining—making progress on that, and that will be throughout our acreage.

Jeffrey Campbell – Tuohy Brothers Investments

Okay. Yeah, that was what I wanted to hear. My last question is assuming you’ve reached free cash flow in 2015, will you seek to maintain free cash flow going forward from that point?

Dan Dinges

Well, I think by virtue of our growth expectations, I definitely think that we will.

Jeffrey Campbell – Tuohy Brothers Investments

Okay, great. Thanks very much.

Operator

Our next question is from Bob Brackett of Bernstein. Please go ahead.

Bob Brackett – Sanford Bernstein

Hi, good morning. A quick question about Marcellus inventory. Can you give us an idea of how many wells you have drilled uncompleted, how many wells completed waiting tie-in, and maybe even if you didn’t have midstream constraints, what your flows could look like?

Dan Dinges

Okay. On the well side, we have about 22 wells that are waiting on pipeline. We have five wells that we are currently completing, and we have 24 wells that are waiting on completion. So we have a pretty good backlog right now; and again, we knew that we would be building up quite a backlog at this period of time, and from this point forward we’re going to be moving through those and working those numbers down.

Bob Brackett – Sanford Bernstein

And what could your system run if there wasn’t a midstream constraint?

Dan Dinges

I don’t know. We have—I can’t think of a day when I look at my daily drilling report, I can’t think of a day that we have not seen a compressor down or a dehy down, or something like that. That’s just the nature of the beast, and there’s just a lot of moving parts and a large gathering infrastructure system like that. So it’d be rate speculation, but I’m sure it would be—you know, we’ve hit over 1.5Bcf. I think the record was 1.538 or something close to that. I’m sure if we had things just humming along and we had the compressors tuned up the way we want them, we’d be well over 1.6Bcf a day.

Bob Brackett – Sanford Bernstein

Thank you.

Operator

Our next question is from Jack Aydin of Keybanc Capital Markets. Please go ahead.

Jack Aydin – Keybanc Capital Markets

Hey Dan, hi group. How are you guys?

Dan Dinges

Good.

Jack Aydin – Keybanc Capital Markets

How many frack stages do you have waiting? And then I’m looking—you know, you’re going to drill about 155 to 170 wells, and lots of those coming maybe in the second half of the year. So I run the numbers in a way, your 2015 guidance granted has some upside, but it looks like quite conservative maybe. Could you—

Dan Dinges

Yeah. Well, we have—again, we have—as I mentioned, the number of wells that we are either completing, waiting on pipeline, or waiting on completion, it’s 51 wells and that’s probably over 1,400 stages, Jack, right now that we have in the queue. So the good news is that we’ve been able to continue our production profile, we’ve been able to sequentially grow, though slightly. We’ve been able to sequentially grow our production from last quarter, and we did it with only bringing on—with eight wells that we brought on for the quarter. We’re going to double the amount of wells that we bring on in the second quarter, and we will continue to increase the number of wells that we plan on bringing on in the third quarter and fourth quarter from what we realized in the first and second quarter.

So we are going to go into ’15 in very good shape as far as what we think our production profile will be, and what we plan on still having remaining in inventory. We are in good shape. I feel very good about it, and because of our efficiencies that we’ve been able to gain with the drill time and continue doing good along those lines, that’s why we made the decision to only have six rigs versus having to increase the number of rigs there.

Jack Aydin – Keybanc Capital Markets

Second question – you have the permit in West Virginia in Wood County. What are you really looking for there? Are you looking for the Point Pleasant in that test, potential test, or what other things you feel that you have there?

Dan Dinges

Oh, bottom line Jack, we’re looking for oil and gas. We are extending a look at the play south where the drilling has been, and we think our fairway is in the volatile window and we think that we have an opportunity there. So yes, that is the section—one of the sections that we’re looking at.

Jack Aydin – Keybanc Capital Markets

Thank you.

Operator

Our next question is from David Beard of Iberia. Please go ahead.

David Beard – Iberia

Hi, good morning gentlemen.

Dan Dinges

Good morning. How are you doing, David?

David Beard – Iberia

Good, good. Could you give us a sense in your 2015 production guidance what your assumptions are for transportation, or maybe just in general what you’re thinking about the differentials as we roll through next year?

Dan Dinges

Well, the differentials are a hard number to get. We think that the differential is going to be somewhat similar to what we’re experiencing today. On our production guidance, we’ve had some discussion on the capacity that we now maintain firm, transportation, firm sales and the additional capacity that we expect to add to our inventory. As Jeff mentioned, to get to the 2Bcf level, it’s probably 100 million, 150 million of additional work or capacity or sales that we would realize in addition to our firm that would get us to the 2Bcf mark.

David Beard – Iberia

All right, great. Thank you.

Operator

Our next question is from Matt Portillo of TPH. Please go ahead.

Matt Portillo – Tudor Pickering Holt

Good morning guys. Just a quick question – wanted to clarify, I heard a lot of great detail on the kind of capacity you guys have signed up or are looking to sign up. Could you just put that into context relative to the presentation you guys had out a couple months ago where you laid out kind of your 2015 firm capacity at, I think, about 1.1Bcf a day. Could you just give us some color of how much that’s changed on a relative basis, and where we sit at the moment?

Jeffrey Hutton

Sure, Matt. This is Jeff. It definitely has improved on the—the numbers have improved somewhat from that presentation. I wouldn’t say they’ve improved a great deal. We have a lot of deals that we’re working on that we’re close to racking up. We have some opportunities that we know that are out there that we’re close to racking up. Probably the biggest number add to the slide is our new capacity into the utility there in northeast PA, and now that will be added to that chart at some point.

Matt Portillo – Tudor Pickering Holt

Great. And then as we think about kind of your 2015 guidance, could you give us some rough color on how you guys think about—I know you’ve laid out lighty and Zone 4 previously, and it’s about 45% or so of your ’14 production in terms of exposure there. How does that look kind of currently in 2015, just from a rough estimate perspective?

Dan Dinges

I haven’t broken that out. We can get back to you on that on an exact percentage, but we’re going to be growing the production so that number will probably increase slightly. I’ll have to get back, and I’m sure you’ll see it, Matt, in one of our future presentations once we get more granular on our ’15 guidance.

Matt Portillo – Tudor Pickering Holt

Perfect. And then just last question for me – was hoping that you could talk a little bit about the organic leasing opportunity you see today within the Eagle Ford, and then any appetite in regards to M&A in the basin. Thank you.

Dan Dinges

Okay, Matt. Organic leasing – it is what it is. We continue to talk to owners of the unleased acreage out there, and we think there’s an opportunity to pick up additional acreage. As far as M&A activity in the basin, I think there are some opportunities to pick up some small professionals that own acreage out there, and if the opportunity arises we’d look at it. Some of the pricing that we’ve seen in the M&A side of the business has been fairly robust, and we think the capital efficiency of our organic approach is more prudent for us at this stage.

Matt Portillo – Tudor Pickering Holt

Thank you very much.

Operator

Our next question is from Wayne Cooperman of Cobalt Capital. Please go ahead.

Wayne Cooperman – Cobalt Capital

I’m sure that this has been asked 100 ways, but I’m just wondering—you know, people are really worried about pricing. I wonder what price do you see where you cut back production and just wait until you get better pricing with better takeaway? I don’t know if I’m phrasing that question in a way that I can get an answer.

Dan Dinges

Well Wayne, it is hard to pick a price that you say that you’re going to just shut in production, particularly with the yield that we get from a fairly low price point. But—so I’m not going to state just a price that we’re going to shut in, but if the market looks like it’s behaving in a way that it would be prudent for us to shut in gas today and sell it near term, then we look at that. But we don’t have any plans right now to shut in any large volumes of gas with the market that we see out in front of us.

Wayne Cooperman – Cobalt Capital

Let me just try to rephrase that a little bit differently, then. We all know the gas is there – I mean, you have the best rock in the country, probably, and you’ve got a takeaway capacity right now that’s going to get alleviated, and therefore the differentials that you’re seeing now should dissipate over time. Isn’t there—don’t you earn more money by producing less gas now, selling at a low price, and just producing more gas in two years? I mean, you’re going to get much closer to Henry hub.

Dan Dinges

Well, I think there is an equation you can run, Wayne, that would get you to that point; but at this stage, again, our realization was 374 for this last quarter, and we are delivering a good return. We’re putting that capital to use that’s delivering, again, a return profile, for example adding the third rig in the Eagle Ford, that is generating a nice return with those invested dollars. But I do understand your question and certainly it’s an equation that we can run; for example, if we were getting close to flipping the switch on Constitution and it was just a significant blowout and somebody wanted us to move gas for a buck, we’re not going to move it for a buck. We’ll wait to open the capacity of Constitution and start selling our gas into a different market that would not be realizing those prices.

So I understand your question and there’s merit to it, it’s just right now—

Wayne Cooperman – Cobalt Capital

And is there some—is there some price-limiting factor to how low a price can go in your market, or you’re kind of—I mean, there’s really nothing to stop it from trading at a dollar or two in a bad part of the market.

Dan Dinges

Well, I think if you look at all of the producers out there, we’re not the only one selling into these markets. When you look at the amount of gas that’s going into Tennessee or going into lighty, there’s gasses from a lot of different price points, not just up in the box up in northeast PA but there’s other gas flowing into those pipes to saturate the market. So I think there is a price out there that the industry would say, we’re just not going to move our gas for that. It’s more valuable than that and we’re just not going to move it. So there is that price point. What it is exactly, $1 or $1.50, I don’t know where it might be - $2? But there is certainly a price point that I think a number of producers would say, we’re just not going to move our gas at that price.

Wayne Cooperman – Cobalt Capital

All right, thanks a lot. I’m sure everybody has got the same basic question.

Dan Dinges

Yeah. Thank you, Wayne.

Operator

Our next question is a follow-up from Joe Allman of JP Morgan. Please go ahead.

Joe Allman – JP Morgan

Yeah, thanks again. So just Dan, in thinking about your ability to take on some extra capacity, if there is extra capacity in the system, why are the differentials around negative $0.70? I’m just trying to get my head around that.

Dan Dinges

I try to get my head around it also, and one of the things that we’re looking at, and I’ll pitch this to Jeff that digs deeper than I, but when you look at some of the differentials and you see how the indices are established, you have really very few contracts that are capturing volumes out there that are setting the index and what supposedly two parties, a buyer and seller, are willing to move gas for. I question the differentials and particularly the number of contracts that are steering a large volume of gas, and we’re looking into the transparency of all of the transactions, though right now being able to have access to a buyer and a seller, from my understanding at this stage of my look, is that those are confidential parties. But I’m looking at it to try to understand it a little bit more in detail also.

Jeffrey Hutton

Yeah Joe, I think the improvement we’ve seen in pricing has a couple factors that have influenced it. One has been the winter. There is good price realization going on in the cash market, as we mentioned before. I think the demand and the actual people who burn the gas, at some point they come into the equation. Yes, there is excess capacity up there, but just how much more incremental demand is there at certain parts of the year? So I would—I realize that we expected improvement in the differentials when we had a good winter, and they did improve. They didn’t improve all the way up to a flat Henry hub-type number. I think we’re struggling to understand completely the dynamics of that.

One of the approaches for us has been to make sure that not only do we have firm transport but the firm sales, and particularly our last deal with Cove Point and Washington Gas to make sure that we actually had someone that burns the gas. I mean, having an 850 million a day, 15, 20-year contract for people that do burn it was very important to us. So yeah, I agree with you. I don’t understand exactly the dynamics that would cause a $0.70 differential at this point, but it has been a big improvement over the last 60 days.

Joe Allman – JP Morgan

So how much of the incremental capacity that you expect to take over the next several months, how much of that is actually new capacity and how much of it is you actually just taking someone else’s capacity? So for example, that 150 million a day from Millennium in September, that’s new capacity?

Jeffrey Hutton

No, that was existing capacity, just hadn’t been sold yet, or—excuse me, just hadn’t been bought yet, and we bought it. The utility sales are new, incremental to us. I think there is existing capacity and there is pipe, and the way we work the system and the way the system works is the capacity that we pick up could be one-year in duration, two years, five years in duration. It could be 15 years with evergreen provisions. It could come from someone who bought it and it’s just red ink to them, or it could be expansion capacity. There’s a lot of deals and transactions made in the secondary capacity release market, and we continually work that. We do take capacity in short-term releases as well when they net us back our prices.

So again, there’s a lot of capacity in those pipes. Sometimes it takes you to places you don’t want to go. Sometimes it doesn’t start where you want it to start. So for all the producers in the Marcellus as a whole, there’s a constant jockeying around of positions on capacities to make sure that gas flows every day and netbacks are as high as they can be.

Joe Allman – JP Morgan

So is the only new capacity that you mention of all the different agreements that you’re entering into, is the only new one the 120 million a day open season that’s Millennium’s having?

Jeffrey Hutton

Okay, so that capacity—you say it’s new. It’s new the marketplace; it’s existing in the pipe. I mean, it’s confusing terms. We’re out there. We’ve put a bid in to take some of that capacity. We didn’t want it all because some of it doesn’t do us any good. And likewise when Transco went out last month with 200,000 a day of capacity for a shorter term – I think it was a nine-month term – we took part of that capacity. It’s an ongoing process, and I think all the pipes use their resources to try to increase their throughput. They’re constantly looking at ways to add capacity to the system, and as contracts get taken, it actually opens up—it could open up space for paths to move in different directions. So it’s something that all producers and shippers and markets face on a day-to-day basis.

Joe Allman – JP Morgan

Got you, okay. Very helpful, thank you.

Operator

This concludes our question and answer session. I’d like to turn the conference back over to Mr. Dinges for any closing remarks.

Dan Dinges

Well, I appreciate everybody’s interest. Obviously the conversations regarding the movement of gas and our ability to grow is on everybody’s mind. I can assure you we’re confident that we will be able to deliver within our guidance point; otherwise, we would not put those guidance points out. But when you look at what we have to be able to deliver in the future, we’re going to, I think, comfortably deliver top tier production growth, not only in the next few years but moving out. We’ll also have reserve growth that will be very robust. We’ll do it in a free cash flow environment, and that gives us certainly confidence that we’re going to be able to continue to enhance shareholder value on out into the future, and it certainly should give the shareholders confidence that the asset package we have will be able to deliver that value.

So again, thanks for the questions and we will see you next quarter. Thank you, Emily.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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