CONE Midstream Partners' (CNNX) CEO John Lewis on Q4 2015 Results - Earnings Call Transcript

| About: CONE Midstream (CNNX)

CONE Midstream Partners LP (NYSE:CNNX)

Q4 2015 Earnings Conference Call

February 17, 2016 13:00 ET

Executives

Steve Milbourne - Investor Relations

John Lewis - Chairman and Chief Executive Officer

Joe Fink - Chief Operating Officer

Dave Khani - Chief Financial Officer

Analysts

John Edwards - Credit Suisse

Matt Niblack - HITE Hedge

T.J. Schultz - RBC Capital

Operator

Hello and welcome to the CONE Midstream Partners’ Fourth Quarter Financial and Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Milbourne. Please go ahead.

Steve Milbourne

Welcome to CONE Midstream Partners’ fourth quarter 2015 financial and operating results conference call and webcast. Thanks for joining us this afternoon. We appreciate your participation and your interest in CONE Midstream.

John Lewis, Chairman and CEO; Joe Fink, Chief Operating Officer; and Dave Khani, Chief Financial Officer will begin today’s call with some brief comments on the quarter and the 2016 we announced this morning. We will then open the phone lines for questions. A short presentation that we will refer to during the call is posted on our website. Those slides are available in the Events and Presentations feature box on our homepage, conemidstreampartners.com.

Before I turn the call over to John, I need to give our normal cautionary reminders. First, during the course of our remarks and in our answers to questions, we may make some forward-looking statements and refer to non-GAAP measures. Our forward-looking statements or comments about future expectations are subject to a variety of business risks, which are delineated in our 10-K, 10-Qs and other recent filings with the SEC. Reconciliations of non-GAAP to GAAP measures maybe found in this morning’s press release. Second, our financial statements report the consolidated financial and operational measures for all the entities we control. CONE gathering is the convention we use to refer to those total or consolidated operating and financial measures for the three development companies, in which CONE Midstream Partners holds controlling ownership interests.

Today’s discussion will primarily focus on the results attributable to CONE Midstream after the allocation of the respective non-controlling interests held by our sponsors. We also may refer to these CONE Midstream net results for performance measures as those of CNNX or the partnership.

Let’s get started now with John’s comments on the quarter. John?

John Lewis

Thanks, Steve. Good afternoon, everyone and thanks for joining with us. CNNX reported another great quarter this morning and I hope you have had an opportunity to read our news release. Our 4Q 2015 results mark our fifth full quarter as a publicly traded company. During each of these quarters, CNNX has posted strong and steadily growing operating and financial results. Despite a challenging environment, CONE Midstream has consistently delivered on its promises. We have beat our first year IPO financial projections until the full year 2015 both adjusted EBITDA and distributable cash flow slightly exceeded the top end of our latest guidance.

Continued volume growth and cost control drove our strong fourth quarter results. Compared with the fourth quarter of 2014, throughput volumes increased by 39%, net income attributable to CNNX was up by 47%, our adjusted EBITDA was up by 51% and our distributable cash flow also grew by 51%. Joe and his team continue to have outstanding results in asset optimization and cost control. Our fourth quarter unit operating expenses, net of power, were essentially flat with 3Q despite cold weather operations. And over the full year 2015, these cost reduction efforts resulted in net savings to CNNX of approximately $3.4 million.

On February 12, we have paid a regular cash distribution with respect to the fourth quarter of $0.2362 per unit. This represents a 3.6% sequential increase over the third quarter and equates to an annual growth rate of just over 15%. Cash distribution coverage on an as declared basis was a very robust 1.5x for the quarter. Dave will have more to say about some of the numbers in details, but I would like to take a moment here and share my perspective on CONE Midstream’s performance and our outlook for 2016. Our base 2016 plan is driven by connecting a portion of the sponsors’ inventory of drilled, but uncompleted wells and also completed wells waiting on connection.

Slide 8 in the presentation details this inventory by development company and the currently planned 2016 turn-in lines. Our full year guidance which was part of this morning’s new release is based on the most recent 2016 production forecast and well connection plans from our sponsors. Based on the range midpoints we are projecting, adjusted 2016 EBITDA growth of approximately 23% and distributable cash flow year-over-year growth of about 19%. I would also like to point out that at the guidance range midpoints we modestly exceed our IPO financial projections for 2016.

The graphs on Slide 7 show our actual and projected growth by year. While we don’t provide formal guidance numbers on throughput volumes, I can say that our operating guidance numbers for 2016 are based on expectations for organic year-over-year volume growth in the mid 20% range. Two items drawing high levels of investor scrutiny in the current MLP market are distribution coverage and balance sheet strength. These are both areas of strength for CNNX. We have delivered strong and consistent growth in 2015, while maintaining our robust balance sheet. We materially improved our distribution coverage as we progressed through 2015 exiting the year with coverage at 1.59x as I previously mentioned. We have a simple, strong and healthy balance sheet, which Dave will expound upon in this discussion. We feel very good about our performance track record, our current position and our business outlook for 2016. In our discussions with investors, sustainability is another concept that’s getting a lot of attention. Sustainability is not a concern for CNNX either in respect to funding the 2016 capital needs or for growing our cash distribution throughout the year.

Slide 10 in the presentation shows how our modest 2016 capital needs can be fully met through internal funding while still maintaining the capability for 15% distribution growth. As we have indicated on previous calls, we understand our credibility rests on delivering what we promise and our practice is to give guidance we believe is solidly achievable. Our 10-K delineates the many downside risks that might potentially interfere with the results we expect, but there are number of things that could potentially boost our results as well. These include better than forecast well performance. And improved well productivity has been driving upward revisions to the well type curves. The sponsor’s actual production has typically exceeded the JDC production forecast and operating plans on which CONE Midstream budget is built.

Potential de-bottlenecking opportunities, we have had great success on adding here in 2015 and Joe will have more to say about this in a minute, benefits and continuation of our cost containment and operations optimization efforts, asset dropdowns or acquisitions and third-party business. Slides 12 and 13 in the presentation give some insight in our approaches to pursuing these opportunities. Additional activity in the Utica or resumption of drilling in the Marcellus could also add value.

Slides 17 through 19 of the presentation shows information from CONSOL’s January 29 earnings call presentation, that gives a good indication of the Utica potential in our gathering area. Looking ahead at cash distribution growth, our projection of distributable cash flow for 2016 gives us confidence in our ability to maintain our current rate of growth as we balanced the objectives of both growth and sustainability over the long-term, we expect to take our normal conservative position. The CNNX board’s cash distribution decisions are framed by the primary objective of maximizing long-term value and total returns for the unit holders. Distribution amounts are determined on a quarter-by-quarter basis with a view that whatever level is set is sustainable over the long-term. The board may choose to either boost or temper distribution growth as they weigh various factors.

Operator

One moment please. Speaker line is disconnected. Just a moment. I think your line has been reconnected.

Steve Milbourne

Alright.

John Lewis

This is John sorry about that. We lost power here, but we – I was just concluding that the Board may choose to either boost or temper distribution growth as they weigh various factors.

And with that I will conclude my prepared remarks with a word about dropdowns. The CONE Midstream structure was developed to deliver long-term growth. We have often referred to dropdowns as one of the growth levers available when organic growth slows. And dropdowns continue to be an element of our long-term growth plans. With our consistent string of organically driven strong quarterly results, dropdowns have remained in the background. Our segment reporting has allowed investors to see the values and opportunities developing there and dropdowns remain an available growth lever. I would reiterate that all transactions between CNNX and the sponsors have negotiated market based deals. There were no pre-arranged pricing agreements and no puts and no calls.

I would like to now turn the call over to Joe Fink, our Chief Operating Officer for an update on CONE operations. Joe?

Joe Fink

Thanks John. I would like to start publicly recognizing our operating team and our contract workforce for their outstanding performance in 2015. Last year was a busy one for CONE. In all we installed 64 miles of pipeline and 21,000 horsepower of compression, increases of approximately 36% and 30% respectively. While we may not talk about it frequently with our investors, safety is our number one value and operational focus, something that takes priority over everything else and permits every aspect of our daily operations. Despite a very busy year, I am pleased to report that our 2015 recordable entry rate dropped almost a quarter. And like last year the severity of these incidents remain low. Although our blended incident rate is about half the industry average, our safety goal is absolutely zero.

This afternoon I would like to recap the major projects that were completed in 2015 and their impact. I will also review a few key projects slated for this year. The bulk of our activity in 2015 was focused on our DevCo 1 and DevCo 3 development areas in Greene, Washington and Allegany Counties in Pennsylvania and Taylor, Doddridge and Marshall Counties in West Virginia. In DevCo 1 or anchor systems the main theme was expansion, both to facilitate production from wells that were drilled and already on line, but capacity constrained and to accommodate new wells anticipated to constitute a material part of our throughput growth in 2016.

We have spoken previously about our Nineveh field de-bottlenecking project and its operational impact. Slide 15 is the map of this project. The first phase of this project included the installation of a new 100 million cubic feet a day transmission line tap and associated facilities near the heart of the area that was most constrained. From its mid-August in service through year end, volume did a new tap totaled just under 11 Bcf or an average throughput of approximately 80 million cubic feet a day.

Next, we completed the first two sections of our North Nineveh loop line and associated compression which open up an addition 60 million cubic feet of capacity. These projects along with a number of other system improvements have increased our overall takeaway in Southwest PA region to approximately 600 million cubic feet per day. We anticipate full utilization of the added capacity as 17 new Marcellus laterals are turned in line and the GH9 Utica well ramps up this quarter. Last year we also expanded our Majorsville station facility adding 100 million cubic feet a day of compression capacity. That added capacity is expected to be fully utilized with the connection of two new wells in the [indiscernible] region of the Majorsville field.

Looking at the 2016, we expect the first flows in our airport gathering system as well as additional throughput in our Southwest PA region both from new pads and additional de-bottlenecking and efficiency efforts. The final phase of the Nineveh loop line is anticipated to be on line in the third quarter with the goal to continue to drop field pressures. Even with last year’s efforts there are still roughly 100 wells on our system with an average of 1000 pounds of line pressure indicating significant constraint potential. We also continued to evaluate and analyze more potential de-bottlenecking opportunities. This year we will be working on a project that will allow us to transfer gas between our Majorsville and McQuay gathering systems. This project is intended to help us optimize utilization and provide wet, dry operating flexibility between the two facilities.

We also made great progress on our DevCo 3 ACAA gathering system last year. This 13 mile system connects our sponsors airport development in Allegany county to MarkWest for processing. At year end 2015, we were 90% complete on that system and we expect our first turn in lines to occur mid-year. DevCo 3 also had its first West Virginia Utica well come on line in our Moundsville gathering system. This well is initially being testing along side of our Marcellus production. However, in anticipation of larger development CONE is constructing a parallel gathering system to facilitating future Utica development in the Moundsville area. John has already noted our progress in driving down operating costs and we will continue our efforts throughout 2016. We have set that focus on system optimization, reaps the benefits of cost optimization.

Another operations priority item we don’t frequently speak about with investors is operational availability. This is something that matters a great deal to our shippers both current and perspective and to CONE’s bottom line. Slide 5 demonstrates that we average 99% availability during 2015. It’s an important area we think very positively differentiates CONE Midstream.

I will now turn the call over to Dave Khani for his commentary on the financials and our capital expenses. Dave?

Dave Khani

Thanks Joe. Good afternoon everyone. As John indicated we are extremely pleased with our very strong operating and financial results in the fourth quarter. This afternoon I would like to draw your attention to our highly differentiated sustainable status versus the other MLPs out there, some key modeling items and the current valuation. The CONE model was built with conservative modeling assumption and tremendous flexibility. I believe our sustainability is something that is truly differentiated from others today. Let’s focus on two items in particular.

We have very low leverage especially versus our peers. We have a very strong balance sheet at the end of the year with the debt to EBITDA of 0.9 times. Second, our distribution coverage ratio was amongst the best out there. As shown in Slide 9 there are very few if any other MLPs that can match CONE’s balance sheet in just recent coverage. Third, as we highlighted in our Slide 10 noted earlier, we can essentially find our 2016 maintenance and growth capital from our internally generated cash. So our low debt levels can be maintained either while growing our distributions and we project our leverage ratio to decline in 2016. This means we do not need to access the capital markets this year to fund our expected capital expenditures, any potential third party opportunities or even a dropdown. Last, we are very early into our IDR splits which enable us to grow distributions easier than more seasoned MLPs.

As we are located in the right area too, Slide 21 demonstrates one view of the relative strength of the Marcellus and Utica versus other North America gas plays. We believe the Appalachian Basin will be the last man standing and the first one drilling to resume. One question we hear consistently is how sustainable is this growth into 2017 given the sponsors lack of drilling activity currently, is an important question which the answer rests on the productivity and decline rates of their existing connected wells. The projected large inventory of DUCs and wells waiting connected – connections remaining at the end of ’16 as well as the proven track record of our de-bottlenecking projects that Joe and his team have completed. The bottom line is fewer and fewer wells were needed to grow production. For example, this year we are projecting turning in line only 51 wells which is down six wells from our last internal 2016 projection a few months ago and 90 wells from last year 2015. I want to also expand on one – on the significance of one of Joe’s statements with approximately 100 wells operating on our systems at an average 100 PSI of line pressure. The sponsor’s actual well declines are less than what would be suggested by their type curves.

Now, let’s turn to the potential impacts of Dry Utica. The sponsors have talked about breakeven Utica economics at $2 realized natural gas. Because of our infrastructure overlay, this exploitation of the STACK play potentially and dramatically reduces the future CNNX capital requirements as compared to the additional Marcellus Greenfield expansions. So, we believe the dry Utica impact to be – to drive sustainability in a very material manner. It will deliver on something we highlighted on our IPO roadshow, the expectation to drive down capital intensity over time while maintaining throughput growth.

Let’s look at the capital and volume trends. Slide 7 puts in a perspective, for 2014 pro forma CNNX capital totaled $97 million, 2015 $119 million and 2016 is expected to be only $32 million at the midpoint. Throughput over the corresponding period is projected to grow 75%, while capital is projected to decline by about 70%. So, with the improving wells and stack pays, we have a real C change in the basic G&P model of rising pace of well connects and rising capital to generate throughput growth.

For 2016, our initial capital expenditure guidance of $30 million to $35 million includes approximately $11 million of maintenance capital. This spending level represents our base plan and we see potential opportunities to increase growth spending for items such as new de-bottlenecking projects, third-party and new business contracts and/or any sponsor production activity. John highlighted several areas of upside. I want to comment further on third-party opportunities. Business development is one area where CONE did not spend enough time at its start. We have since dedicated a significant amount of our personnel time to this effort, including adding Steve [indiscernible] to head our Business Development with the full time focus on going after the third-party business. Stay tuned.

John also talked about dropdowns and the value created there. I would like to add some dimension to that. And as you can see on Slide 14, the annualized value of 4Q ‘15 adjusted EBITDA retained by the sponsors is in excess of $60 million. This retained EBITDA is 60% higher than a year ago and the $60 million equates to a 60% increase of CNNX’s existing EBITDA. This potentially gives us the ability to expand out our distribution growth even further into the future. So, while the current environment presents challenges to the whole energy complex, CONE is materially differentiated in several ways. We have a long-term organic growth. We have a strong balance sheet, outstanding distribution coverage, low future capital intensity, third-party opportunities and dropdowns.

So, now let’s tie all this up into the current valuation. Now, I know the investment community is paid to making independent valuations, where we wanted to point out the valuation versus the value proposition we just presented. Slide 16 offers some of that view. Our current enterprise value is roughly $600 million or 7.5 times multiple on 2015 EBITDA. Using the 4Q run rate for the midpoint of our guidance, it equates about six times. These multiples are certainly low by MLP historical metrics and definitely low versus our peers.

So, operator, we are now ready to open for questions and we would like you to give the instructions to go into the queue.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question is from John Edwards of Credit Suisse.

John Edwards

Yes, good morning everybody and congrats on a real nice quarter. Just one of the things, how many questions you get about from investors on perhaps the financial strength of your sponsors is impacting their perception of what CONE Midstream can do, because you guys have delivered on everything you promised and then some and yet people are really not buying into the CONE Midstream story? So, I have to assume its concerns about your sponsor that is keeping people away. Maybe you could comment on that?

Steve Milbourne

Yes. John, this is Steve Milbourne. I do get a fair number of questions about that, particularly with respect to CONSOL. I know that an oft-asked question is that CONSOL bonds seem to be trading below par, but I think that that’s a reflection of both yield and it’s not just uncertainty on the principal. So clearly, I think the market perception is out there. I think people need to probably look more closely at the sponsors. And I would say particularly at CONSOL, go back and listen to their call, they are – I think they are a lot stronger than perhaps what the market perception maybe. So, it clearly is an overhang and it maybe one possible explanation for our current valuation.

John Lewis

So, John, this is John Lewis. And let me just say at the end of the day, we can control what we can control. And we have great support from both our sponsors and any questions on the sponsors’ financials, I think is best left up to the sponsors, but I appreciate your comments. We are doing – we can control, we can control and we have done a good job of that. That’s all we can focus on.

John Edwards

Is there any concern on your part that somehow you feel like the sponsors how do we put this to me may raid the cooking jar so to speak?

John Lewis

I guess John, I don’t know what’s – I will be blunt, I just don’t know what you mean by raid the cooking jar, what does that mean?

John Edwards

Well, what it means is they are the general partner, they can do pretty much what they want with respect to limited partners and that’s not just you that goes across the board with most MLPs. And so a lot of times we will see – and we have seen it not just with you, but with others where the MLP affiliates particularly where their sponsors are E&P related. There has been a slump in valuations. And I think the perception is that perhaps ownership stakes maybe sold in terms of – to raise capital on behalf of the sponsors or stakes or there maybe some sort of cash flow diversion, those kind of – and I get it, it’s GP question, but I mean just from your perspective, do you have concerns in that regard?

John Lewis

No, I have no concerns, but both sponsors have communicated to me on numerous times face to face with the highest levels of the executives, really how important CONE is to them, because learning how to work with MLPs and the value. But even more importantly I think is to overarch on your question is the culture of both of our sponsors are such that I don’t think that they would take advantage of other people. I don’t think that’s the way either company wants to operate. I am from a Noble background. I guarantee you that about Noble, I am sure they will do the same about CONSOL. So, I actually have no concerns about raiding the cooking jar in anyway. Now, will the sponsors, will they make decisions that are in the best interest of the sponsors? Yes, they very well may, but I have no concerns about anything that could look weird so to speak. I don’t know, Dave comments?

Dave Khani

Yes, let me just add, I think if there was a worry about raiding the cookie jar here, we have been getting a lot of questions about doing a dropdown and do we dropdown early? If there was a worry about needing capital or cash, we would – probably would have done a dropdown already if that was any indication we have been taking our time, we don’t need a dropdown. And I think even CONSOL on their call basically said they don’t need a dropdown. So, I think both companies are run for the long-term. CONSOL is a 151-year-old company and it’s seen many cycles. So, I think there is very little worry at all.

John Lewis

And John, I will just answer and take that one step further and remind people that both of the sponsors own one-third of the common units. And I don’t think that either of the sponsors feel that we are really getting fair market recognition for the value of the equity that’s out there. So there clearly – they don’t have any incentive to – if you are thinking about it, don’t bring units on the market at this point in time. Clearly, if – I think, it just doesn’t make any sense to think about either sponsor as trying to take advantage of common unitholders.

John Edwards

Okay, that’s very helpful. And then you made a comment about possibly tempering the distribution growth, I am just wondering on that regard given your ability to fund your projects internally, you have less than one turn of debt on the balance sheet why not just keep growing it?

John Lewis

Right. And as we have stated we have the – John, this John Lewis again. We have the capability to grow at 15%, but we just always have to point out our Board does make – it is the Board decision and it’s made every quarter. And we just feel like we are closing our risk and it’s important to tell people that our Board can make decisions. This is a changing time. This is a challenging environment and as various factors our Board will have to weigh as we grow through time.

Dave Khani

And John the big picture is we are in the enviable position about deciding what’s the right rate at which to grow distributions when many other MLPs are getting the question will you even be able to sustain current distribution levels.

John Edwards

Yes, exactly. That was exactly what I was getting at?

Dave Khani

I think when we do a distribution we look out over certain time period and we want to make sure that whatever we are doing is already sustainable. We hit on the sustainability comment for a reason it’s not just about the operations and everything, it’s – and we continue to give you consistent growth.

John Edwards

Well, you are clearly in a position to continue delivering consistent growth below one times leverage and nearly 1.6 times coverage to be sure, it’s an enviable position?

John Lewis

Thank you. We are pleased to be there and it’s a lot of hard work especially by Joe and his operations team have gotten us here, so.

John Edwards

So as far as you also alluded to in your slide deck where you have – you are dropping the capital spending, but you still expect volumes to grow quite significantly owing to I think you said efficiencies out in the field and you are not concerned as far as either sponsor or third party drilling plans as far as your ability to continue to grow the volumes, is this – if you could expand or add any commentary in that regard that will be helpful?

John Lewis

Yes. I believe our guidance on that was for 2016 that we see organically we can grow with the planned 51 turn in lines that will have from wells from our sponsors this year. And obviously should we get third party volumes which we are in some discussions on that that all just helps. And in fact if we look at’17, we feel very good about our ability for maintaining our growth trajectory of distributions just organically without anything else and still staying above for the full year above one coverage ratio. So that’s ’17 – in the ’17 the long way out and ’18 is the long way out. So then we start – we haven’t guidance there because this is a very changing time and we will see what happens.

John Edwards

So as far as your customers are concerned and your sponsors you believe that there is going to be – the ability to continue to grow these volumes even though perhaps capital spending plans are being curtailed by both of them and others?

Dave Khani

Yes. I think the measure of dollars and wells are all changing pretty materially because if you look at the number of wells that we put on line last year, we put on 90 wells last year. We are putting on 51 wells, it’s about 60% and we are going to be growing volumes in the mid-20s, right. So and that’s really without materially impact of the dry Utica which could in theory be three times a normal Marcellus well and so with very low decline rates in the first year. So that along with the line pressure in the 100 wells that Joe talked about the DUCs and everything, yes there you don’t need a lot of capital at the sponsor level and you probably don’t need a lot of capital at the CONE level. I think the whole equation it’s a big C-change and one of the reasons why gas is sitting in the $2 to $3 range is because productivity is driving. We are right in the middle of all that productivity change.

John Lewis

And John let me just say one other thing, I always want to be completely transparent so when we talk about volume growth into 2017 what I was referring to is distribution growth. Volume growth may or may not match distribution as we go through times, because we are blessed with quite a coverage ratio that we had right now. And also Joe and his group continued to cut with other leverage precise volume. Operating costs continue to be a focus where we supply more and more savings. So a lot of ways for us to meet our distribution growth targets.

John Edwards

Okay. And I am just as far as the actual volumetric growth flows into your system, you are expecting continue to generate growth as far as visibility you have got visibility well in this 2017 at this point, correct?

John Lewis

Well, let me just say this. We typically do not give volume guidance and the reason why there is a lot of things can change very rapidly. So we feel we have enough levers that no matter what the volume does within reason for 2017 we still have capability to continue on our growth trajectory if we chose to.

Dave Khani

Yes. And CONSOL in particular has talked about the dry Utica wells that have been put on line, the potential for what they produce. There is seven of them right now and the question is what does that look like six months out and does CONSOL start to bring rigs back in the second half of ’16 and so we want to be very careful about talking about what the volume could look like because there is a whole range of outcomes.

John Edwards

Okay. Thank you very much. That’s really helpful.

Dave Khani

You bet.

John Lewis

Thanks John.

Operator

Your next question is from Jeremy Tonet at JPMorgan.

Unidentified Analyst

Hi, this is Neil on for Jeremy. So I know you don’t typically give volume guidance, but can you kind of walk through the 4Q’16 versus 4Q’15 volume and EBITDA assumptions that are built into that guidance range?

John Lewis

No, I think we have not given quarterly – we don’t give quarterly information until it’s actual and so I think we will stay away from that for now.

Unidentified Analyst

Okay. And – but just to confirm that guidance it doesn’t include any changes in CNNX’ OpCo interest in 2016, right?

John Lewis

No, there is no dropdown or any third party or any other thing. It’s just pure organic.

Unidentified Analyst

Okay. And so I guess given the potential for a small dropdown maybe a 5% slice of anchor what factors would maybe drive a decision there and how do you think about multiples on flat or maybe declining assets if you don’t drill any well in ’16?

Dave Khani

If we were to do a dropdown I think what we have said in the past was we would do a dropdown to help support an hour a year. I think in the past we have said we would have to support ’17. I think what we just gave you an indication is ’17 looks fairly good from ability to pay that 50% growth rate if we so chose to. So if we do a drop it will be purely for a catalyst for the stock and giving longer visibility on distribution growth.

John Lewis

So Neil this is John, I mean I would try to be just consistent with everybody I talked to on this. And my view point on dropdowns is I don’t wait to until I have to have a DUC need to do a dropdown. I would rather do it early enough that the investors can have visibility even though you can look at the retained earnings right now by our sponsors and see that there is huge potential there, it’s much more meaningful I think to investors when it’s actually part of the MLP and dropdown. So I don’t want to wait until I need that dropdown to do that dropdown. So and there is also nothing that precludes us from a doing dropdown tomorrow. I don’t have any problem especially in this environment with very high coverage ratios. I think that’s not a bad problem to have right now at all. So it’s something our Board looks at and again as far as your question on multiples, I wouldn’t speak to that because it’s a discussion, it’s a market based decision that’s made between our outside director joint conflict committee and the sponsors I would eventually what those multiples might be.

Unidentified Analyst

Yes. It would market based multiples you wouldn’t know until sort of it happens.

John Lewis

Those change over time sometimes so.

Unidentified Analyst

Got it. And I guess so on the compelling unique opportunity given I guess where it sits near your transmission line connect is it – so is it largely existing pipes being reused or is some high pressure Utica volume is going to maybe knock off Marcellus volumes on these [indiscernible]?

Joe Fink

So, this is Joe Fink, to-date it’s been in the vicinity of the main takeaway outlooks to our gathering system. So we are selecting areas where there is space and proximity is close. The prolific pressures that you see really delay the need for compression. So we want to definitely to bypass that cost and it would be as efficient as possible.

John Lewis

As far as basically brining on Utica and knocking off Marcellus, the Marcellus volumes for the joint venture have Tier 1 priority. The Utica I think we call it sole proprietor of gas and it’s a secondary priority. And the goal is not to ever let – the goal is to move all the gas we can and not let one knock off the other.

Dave Khani

Right. Should be supplemental and the whole goal would be to do it so that it minimize capital. The nice part about it is that the production base is mostly dry and so you have an existing dry gathering system and you have a predominantly dry Utica system, Utica production underneath it, so there is not a lot of need for dramatic capital to produce it.

Unidentified Analyst

Got it. That’s helpful. Thank you.

Operator

[Operator Instructions] And our next question is from Andy Gupta at HITE Hedge.

Matt Niblack

Hi. This is actually Matt Niblack from HITE. Congratulations on another strong quarter. So, in terms of the acreage that you have, what’s your sense of how the DUCs are expected to start the year and end the year as you put this incremental production online or put another way, how are you drawing down the DUC inventory on your property?

John Lewis

So, I think if you look at – in one of the slides we have the total inventory and I think we are completing – we are bringing online less than half of the DUCs are the wells that have been completed, but aren’t brought online yet. So, if we are bringing on 51 this year and that will leave an inventory of 71 remaining for 2017 and beyond. The wells are predominantly brought on this year are going to be in DevCo 1, which is good for the MLP, because we own 75% ownership of the MLP. So, that’s a good news story for us. And Joe I think – I believe Joe said, there is quite a few wells that are coming on here in the first half of the year and that’s why the volume impact is so high for us here in 2016.

Joe Fink

Yes, Matt, that’s Slide 8. Slide 8 has the inventory.

Dave Khani

Yes. The only thing I would just add is as we monitor the decline rates and as we monitor the productivity of the wells that are being connected to the system, the number of DUCs could change and I pointed out that few months ago, we expected 57 wells to be connected and now it’s 51. So, we might – we keep seeing this trend with this possibility that we keep pushing some of them into ‘17 to keep the growth rate where it is. So, there is – it’s a moving target.

Matt Niblack

Right. Now you said you are expecting to put a lot online in the first half specifically. And so when you talk about this growth rate, that’s full year ‘16 over full year ‘15, correct?

John Lewis

Correct.

Dave Khani

Correct.

Matt Niblack

So if we think of where you are now, what you reported in terms of volumes in Q4 versus where you expect to exit the year, what does that growth rate look like?

John Lewis

Well, I think again, Matt, this comes under the comment that Dave made before that we typically don’t give guidance on a quarter by quarter basis. In fact, we typically don’t give guidance on volume at all and our volume throughput at all. And so I don’t think we are going to start at this point in time, but….

Steve Milbourne

Yes, the other thing I would just say is if we were to given you that number a year ago, we would have started with a 30% growth rate and to give you CONSOL’s number and ended up at 39%. And so they are moving targets. The first quarter as well as the fourth quarter are all going to be subject to the well performance, so…

Matt Niblack

I understand.

Steve Milbourne

Yes, the other thing that we see is there were often changes in the schedule and the turn-in lines and whether a well comes on in December or gets pushed back to January can often have a material effect on an individual quarter.

John Lewis

Especially when we are doing anywhere from 5 to 10 well pads.

Matt Niblack

Right, right. And then last question, so you mentioned that CONSOL would consider bringing wells online. You didn’t mention Noble. Is there – I know when the MLP first came out that there were certain deals and conditions around which one could produce and the other could pass and all of this kind of thing. Do you get the sense that between the sponsors that if CONSOL wants to come back and Noble doesn’t that, that is something that within the partnership that, that is going to – within the partnership that they have separately, their JV, that, that’s something that is likely to work or is that something that’s going to cause tension and make that relationship difficult and potentially that will flow through to CNNX?

John Lewis

Yes. So, this is John again. First, I would say the sponsors are completely in line at this point on the plans for 2016. But as prices and conditions change, should CONSOL decide they want to bring in rigs. Noble has some obligations to join on that. But if not, there is also what’s called a non-consent provision, where Noble can – either party has the right to come and drill wells, the other party can’t stop them. So, either parties can come in and drill wells. It just depends on whether the other party joins in or not.

Matt Niblack

Okay.

Steve Milbourne

And this is Steve Milbourne. I just expand that by saying that we talked about Utica potential and we highlighted in the presentation some of what CONSOL is saying. And exploitation of that Utica potential gives CONSOL some additional flexibility and investment options outside of the JV as well, but do have a material impact on us. So, I think there is some flexibility there in the CONSOL production plans independent of the JV.

Matt Niblack

Understood. Thank you.

John Lewis

Thanks, Andy and good day.

Operator

Our next question is from T.J. Schultz at RBC Capital.

T.J. Schultz

Great, thanks. Just one thing, if you could just expand a little bit more specifically on what you were doing to attract third-party and what the expectations are for that to add into 2016 or 2017? It sounds like it’s not in guidance, but your commentary sounded a bit more optimistic, so just looking for anything more there? Thanks.

Dave Khani

Yes, so zeroing our guidance right now, zeroing our commentary we talked about 2017, I think what we want to make sure everybody understands is we are putting a lot more focus on it. We are spending a lot more time on it. I think we gave you two slides in there just so you actually think about it. There is effectively singles, doubles and homeruns that we are thinking about. Obviously, there is probably a lot more singles in this kind of environment. The homeruns are a lot harder to come by, but we are spending a lot of time thinking about it. I think from a location standpoint, our strength is right here. Joe and his team are great operators and I think operational excellence is one thing that’s going to attract third-party business. This low commodity price environment, everybody is scrambling to drop capital and try to lower capital intensity throughput like we have been doing. And so, if you could see that map, it shows kind of spots in and around our system where we think there is opportunities for us. So, those are the low hanging fruit. We are out there banging the drum and we will see what it brings. I think that’s the best we will probably give you right now and we just want to raise the rhetoric right now to show you that. It’s part of our strategy.

T.J. Schultz

Okay, thank you.

Dave Khani

You are welcome.

Operator

At this time, I show no further questions. So, this concludes our question-and-answer session. I would like to turn the conference back over to Steve Milbourne for closing remarks.

Steve Milbourne

Thanks, everyone for joining us and we look forward to talking to you again next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!