Cabot Oil & Gas (COG) Dan O. Dinges on Q1 2016 Results - Earnings Call Transcript

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Cabot Oil & Gas Corp. (NYSE:COG)

Q1 2016 Earnings Call

April 29, 2016 9:30 am ET

Executives

Dan O. Dinges - Chairman, President & Chief Executive Officer

Jeffrey W. Hutton - Senior Vice President-Marketing

Steven W. Lindeman - Vice President-Engineering & Technology

Scott C. Schroeder - Executive Vice President and Chief Financial Officer

Analysts

John H. Abbott - Bank of America Merrill Lynch

Charles A. Meade - Johnson Rice & Co. LLC

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

Phillip J. Jungwirth - BMO Capital Markets (United States)

Pearce Hammond - Piper Jaffray & Co. (Broker)

Michael A. Glick - JPMorgan Securities LLC

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Brian Singer - Goldman Sachs & Co.

Operator

Good day, and welcome to the Cabot Oil & Gas Corporation first quarter 2016 earnings conference call and webcast. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO, and President. Please go ahead, sir.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Thank you, Rocco, and good morning. Thank you for joining us today for Cabot's first quarter 2016 earnings call. With me today are the members of Cabot's executive management team. And before we get started, let me say that the standard boilerplate regarding forward-looking statements including in this morning's press release do apply to my comments today.

As an opening comment, I think it's impressive that during the worst quarter our industry has faced in many years, Cabot's first quarter results highlight our ability to deliver growth without burdening the balance sheet, even in this low commodity price environment. Cabot grew daily equivalent production by 7% sequentially compared to the fourth quarter of 2015, while funding all investing activities with a combination of operating cash flow and proceeds from a non-core asset sale.

At today's strip prices, we do anticipate that the company will be able to deliver a cash flow neutral to cash flow positive program each quarter this year, as price realizations continue to improve and capital spending continues to trend downward over the next few quarters. Despite a significant improvement in our natural gas differentials during the quarter, which improved from a minus $0.75 in the fourth quarter of 2015 to a minus $0.60 during the first quarter of 2016, the company experienced its lowest price realizations in many years. The lower realizations were the result of an average NYMEX settlement price of $2.09 per MMBTU during the first quarter, which was the lowest average NYMEX price we have witnessed since the first quarter of 1999.

While lower prices have certainly had an impact on industry-wide margins and cash flows, including Cabot, the good news is that the outlook for natural gas price continues to improve, as the country is beginning to experience a decline in dry gas productions stemming from a significant reduction in drilling and completion activities, and an improvement in natural gas demand driven by increased power generation and exports.

While the improvements in differentials had a meaningful impact on our results for the quarter, our ability to continue to lower our cost structure has also helped the bottom line. Cash costs, including G&A and interest expense, during the quarter were $1.18 per Mcfe, compared to $1.26 per Mcfe during the fourth quarter of 2015. In addition to our reduction in unit costs, we also reduced our capital spending relative to the fourth quarter of 2015, highlighting our commitment to financial discipline.

As mentioned, and as you are all aware, one of our core tenets is our commitment to maintaining our balance sheet strength. We took a major step during the quarter to ensure that strength by issuing approximately $1 billion of equity in late February, with a portion of the proceeds used to pay off the outstanding borrowing on our revolving credit facility. Subsequent to the offering, the company is extremely well positioned to weather the current environment and remain opportunistic, with liquidity of approximately $2.2 billion and a net debt to EBITDAX ratio of only 1.6 times at quarter end. Additionally, subsequent to the quarter end, Cabot's bank group unanimously approved a borrowing base of $3.2 billion.

Moving into the region in the Marcellus, we continue to operate one drilling rig and one frac crew working daylight hours only. During the quarter, we drilled 7 wells and completed 12 wells. Our primary focus is on enhancing operating efficiencies resulting in further cost reductions. The success of these efforts was evident in the first quarter with drilling and completion cost savings of approximately 14% compared to the fourth quarter of 2015. On average, usable lateral length for the seven wells drilled during the first quarter of 2016 was over 7,400 feet, which exceeded our previous best quarter average by over 1,000 feet. Even with the longer laterals, we were able to maintain average drilling days flat relative to the fourth quarter of 2015 at 12 days from spud to TD.

On the production front, we averaged over 1.6 Bcf per day in net production for the quarter while reducing direct field operating costs to $0.03 per Mcf. We exited the first quarter with 54 wells waiting on completion, which does not include the 4 wells we are currently completing. In addition, we have over 60 drilling permits approved and ready to go in the Marcellus.

As we evaluate our plans for future operating activities in the Marcellus, it is important to understand the supply outlook for our operating area in the Northeast Pennsylvania. While there has been a lot of focus, recently, on the expectations for meaningful supply declines across North America, which we do fully subscribe to, and believe, will impact us positively, we're already seeing that dynamic play itself out in our operating area. For example, in the six-county area we define as Northeast Pennsylvania, there was about 8.4 Bcf per day of production in February compared to about 7.6 Bcf per day in April based on our estimates. Not surprisingly, these lower production levels have positively impacted the local basis, with Leidy and Tennessee differentials for the month of April coming in at their lowest levels since mid 2013. We expect that trend to continue in May, resulting in our second quarter differential guidance range of $0.50 to $0.55 below NYMEX, a $0.05 to $0.10 improvement relative to the first quarter, and a $0.35 to $0.40 improvement compared to the second quarter of 2015.

While curtailments are certainly driving some portion of this production decline, we believe that curtailments in Northeast Pennsylvania were not as substantial in April, since the cash price in the day market has been about $0.20 to $0.30 better than in February and March. Our reservoir team has spent a lot of time scrubbing the state data for over 4,000 wells in Northeast PA in an attempt to better understand the anticipated production declines in our area, as well as to assess the level of drilled, uncompleted wells.

Our engineers built production curves for all of the producing wells in the six-county area. Additionally, assumptions were made for non-producing wells as to whether we thought a well was temporarily not producing for reasons like curtailments, and would ultimately be placed back on production when prices were higher, or if the well would never be placed back on production due to poor performance, or a significant period of inactivity.

Ultimately, we found that even when assuming all shut-in production comes back online after the summer, we could still see a 25% decline from year end 2015 to year end 2016. Question then becomes, is there enough operating activity occurring currently to fill that void, or will the area see exit to exit production declines, resulting in a positive outlook for pricing next winter? Our best estimate is, at this point, is that approximately 120 wells will be completed in our area this year, and modeling suggests that that is simply not enough activity to backfill the declining production we see. This is very positive for Cabot.

Our engineers' study also revealed an estimate of drilled uncompleted wells that is significantly less than the 800 plus or minus wells, you hear reported by some of the third party sources. Only three rigs are currently operating in our area, and I do not expect that DUC inventory will grow. In fact, it will be shrinking throughout the year, which is positive as we think about 2017 and beyond. While there will always be some inventory of drilled, uncompleted wells, I'd remind everyone that the most capital intensive portion of drilling and completing a well is the completion side. Accordingly, I suspect it will take higher prices, healthier balance sheets and cheaper access to capital before we see a meaningful uptick in completion activity in our area.

In the Eagle Ford, the drilling rig release was released in early February. The drill team has turned its focus to the completions required to maintain lease obligations. During the first quarter, our team in South Texas completed and placed on production nine wells with an average completion lateral length of 7,760 feet. During the quarter, Cabot also completed its longest Eagle Ford well to-date with 46 stages and a lateral length of 11,200 plus feet. Capital efficiency and cost savings continue to be the primary focus with our Eagle Ford completions costs down by approximately 30% compared to the same quarter in 2015.

At the current strip, our plans for the remainder of the year are focused solely on maintaining all of our leasehold obligations through 2016, and not increasing our operating activity above these minimum levels. However, our anticipated backlog of 15 drilled uncompleted wells at year end 2016 does allow for flexibility.

Right now everyone is aware of the recent New York DEC decision to deny water quality certificate permit last week pertaining to Constitution Pipeline. Today, we are not going to dwell on the specifics of the denial notice, and unfortunately we cannot expand on the legal strategy going forward other than to refer you to our April 25 Constitution press release, which clearly refutes the allegations of the New York DEC. Because of this, we do want to remind you of our total commitment to the project, and we remain confident we will ultimately prevail. Because of New York's denial, we have pushed back the service date for Constitution to the second half of 2018. Moreover, we do want to reiterate that, although this additional capacity is important to our long term plans, we have successfully continued our efforts to access new markets.

Previously, we announced several new projects that collectively add approximately 450,000 MMBTU per day of new long term sales and transportation capacity to new market areas. Additionally, we have been very active with two additional projects that, again, solidify our long term growth profile and improve our infrastructure situation. We will be providing updates and details on these transactions in the weeks to come.

Regarding Atlantic Sunrise, the project continues to move forward on all fronts, particularly on land, regulatory and permitting side of the project. Our expectations are to receive the draft environmental impact statement soon and, per the FERC scheduling notice in March, the final EIS is scheduled for October. Cabot now anticipates contributing $30 million to $35 million to its equity investments in these pipeline projects in 2016, down from the original guidance of $80 million to $150 million.

In regard to the remainder of 2016, we have guided with curtailed volumes for our second and third quarters. Additionally, we are in the process of updating our plan for 2017 and beyond in light of the recent news regarding Constitution and the addition of several other projects we are working on. However, I will comment that similar to our plan for 2016, Cabot will be able to economically grow our natural gas production in 2017. While we have a range of outcomes for 2017 at this point, the ultimate level of growth will be the direct result of our underlying expectations for price realizations during the year. We also anticipate a further acceleration of our growth rate in 2018 in anticipation of the timely in-service of the various infrastructure projects I referred to earlier. These projects will add approximately 1.3 Bcf per day of new firm transportation capacity and long term sales in 2018, and this figure does not include any Constitution capacity.

In summary, our strong financial position, the lowering of our cost structure, reduced level of industry activity, improving natural gas differentials, and strong portfolio of future take away opportunities outside of New York, position us well for the future. And Rocco, with that I'd be more than happy to answer any questions.

Question-and-Answer Session

Operator

Yes, sir. Thank you. We will now begin the question-and-answer session. Our first question comes from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.

John H. Abbott - Bank of America Merrill Lynch

Good morning. This is John Abbott calling in for Doug Leggate. I apologize. He's on another call. Just two very quick questions. First, with regards to Northeast PA, what sort of rig activity do you think we would have to see up in that area to stem declines? And then second, looks like you sold some assets in East Texas. Are there other opportunities for portfolio clean-up? And also, why don't you think we've seen more consolidation among the gas names in the current environment? Thank you.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Okay, John, first in the Northeast PA, our study, I've given you some of the details of our study. We have an ongoing evaluation and plan on keeping this as a dynamic project to evaluate the production profile. And the coincidence between drilling and completions will dictate the level of activity necessary to show that production and maintain production at the level it is today. Certainly, we feel that three rigs and the number of frac crews up there is not the level of activity that we'll maintain. We anticipate a fairly meaningful decline in production.

In regard to the East Texas sale, we do have some additional properties in East Texas that we maintain. This was not all of our East Texas assets. And we do not have those on the market at this period of time, but certainly have additional assets that not only in East Texas but along the Gulf Coast that would be part of our portfolio. And what was the – I'm sorry, what was...?

John H. Abbott - Bank of America Merrill Lynch

Consolidation amongst the gas players.

Dan O. Dinges - Chairman, President & Chief Executive Officer

The consolidation amongst the gas players, I think, is a result of the commodity price sitting at the first quarter, or at historic – not historic lows, but lows as I mentioned in my opening comments all the way back to the first quarter of 1999. Consolidation in a very, very, very low market like that is difficult at best with some parties as we've seen having stresses in different components of their business, balance sheet, or possibly not having a portfolio that would look good in a slow commodity price environment. So consolidation in this environment makes it difficult. I would think that if you have continued support in the commodity price and you can see a more normal vision out there on the strip, then you might see a little bit more activity.

John H. Abbott - Bank of America Merrill Lynch

I appreciate it. Thank you.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Thank you, John.

Operator

And our next question comes from Charles Mead of Johnson Rice. Please go ahead.

Charles A. Meade - Johnson Rice & Co. LLC

Good morning, Dan, and to the rest of your team there.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Hey, Charles.

Charles A. Meade - Johnson Rice & Co. LLC

I wanted to ask if you could maybe share a little bit more – I guess you gave us a lot of detail on your Northeast supply, but maybe you could share a little bit more on the conclusions or what it suggests to you. And specifically you guys guided to a tighter natural gas realization in Q2, but do you see that continuing into the back half of 2016? I think I picked up on that from your comments. And does that even tighten enough that it raises questions about the economics of new take away out of there if bases got that tight?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, I think on the supply side my reference to 25% or even 30% depending on looking at our models decline that's occurring is it's a real number on the baseline decline. And the level of activity with three rigs and less than a handful of pumping units up there I think it is apparent and I think we are seeing a meaningful decline, and I think that's being reflected in the differentials that you're referring to, and that our guidance is based on our expectations, our supply study we've done up there. Our expectations are that the supply side will continue to diminish, that you'll have narrowing differentials, and I think that will certainly bode well for realizations.

NYMEX is going to do what it does, but certainly the northeast has been one of the most punitive areas for differentials. And I think now that – with the supply side and lack of activity, it is now coming in, in more parity with other areas of the country. I would expect that when you look at the parties that are up in the northeast that have positions, I don't think the Northeast PA is going to be an area that they're going to run up to and commence a program any time near term. So I do expect to see continued narrowing of the differentials, and I think it's a positive for Cabot.

Charles A. Meade - Johnson Rice & Co. LLC

Got it, thank you, Dan. And on Constitution, I need to respect the boundaries you put about what you want to talk about and what you don't, but if I could just kind of explore a little bit where those boundaries are, it seems like you are regarding this as a delay, a delay, but that, in your mind, or in Cabot's posture, this project is still going to get done. Is that the right read that we should take from your comments?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Yes, it's exactly right. We have looked at New York's own projections. Their 2030 projections have Constitution or additional gas as a part of their energy source. They anticipate that in 2030, that natural gas is going to represent about 50% of New York's fuel source, and the natural gas has to get up there and meet that demand in some way. The fact that the Constitution Pipeline and others are fully subscribed projects represent the demand that's necessary up there, and it's for the public need. And so when you look at what the future holds, the grants that New York has given to some of the southern tier counties in New York for taps into Constitution Pipeline for the use of natural gas in areas that are stranded and do not have the use of natural gas, I think it is obvious that the public need and the majority would benefit from Constitution being a fuel source for energy in New York.

When you look out ahead and you look at a desire to have renewables, we all know that we are a company and an industry that endorses renewables as part of the energy mix. We'll continue to endorse renewables as part of the energy mix. But we also think it's prudent to be realistic about scalability, timing, and to take in consideration the costs associated with renewables in this environment, and the general public and the consumer, and what it will cost if, in fact, there's not access to natural gas as the clean fuel that it is.

Keep in mind that a lot of the benefits from the CO2 reductions that we see today are a direct result of natural gas being a fuel source, and it's not a hard equation to – and it's not a difficult set of facts to understand. Though they, at times, are not represented in a lot of the media print.

Charles A. Meade - Johnson Rice & Co. LLC

Right. Right. Thanks for that, Dan. And just one clarification. The 1.3 Bcf in new take away that you mentioned in your comments, that's in addition to Atlantic Sunrise?

Unknown Speaker

It includes.

Dan O. Dinges - Chairman, President & Chief Executive Officer

No, not in addition to Atlantic Sunrise. It's in addition to Constitution.

Charles A. Meade - Johnson Rice & Co. LLC

Okay, got it. Thank you.

Unknown Speaker

That includes Atlantic Sunrise.

Operator

And our next question comes from Bob Brackett of Bernstein Research. Please go ahead.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

I had a quick question at a strategic level. If you think about your portfolio, are you currently happy with your portfolio? Does it need any additional changes?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, we love the assets, Bob. I think it's well documented that the footprint of our Marcellus assets, though challenged on getting infrastructures to this specific area, as illustrated by Constitution, we still think the future is going to allow some of the best assets in North America as far as natural gas is concerned to yield great dividends for Cabot shareholders. Would we like to have assets that would be out of a footprint that is narrow scoped like where we are in Northeast PA and not have the infrastructure overhang that we discuss every quarter and every conference we go to? That would be nice, and I would enjoy that. But I'm not going to compromise or dilute the best assets in North America.

Bob Alan Brackett - Sanford C. Bernstein & Co. LLC

Great. Understood. Thank you.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Yeah.

Operator

And our next question comes from Phillip Jungwirth of BMO. Please go ahead.

Phillip J. Jungwirth - BMO Capital Markets (United States)

Hey, good morning.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Hi, Phillip.

Phillip J. Jungwirth - BMO Capital Markets (United States)

On the two additional projects you mentioned were in the works, how long term are these? Meaning when is the earliest they could contribute to incremental demand for Cabot Gas? And can you talk about what indices these would be tied to or whether it could be fixed pricing?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Phillip I'm going to turn that over to Jeff Hutton.

Jeffrey W. Hutton - Senior Vice President-Marketing

Yeah, Phillip, I really wish this call was a few weeks away so we could talk in detail about these two projects. One has to do with bridge capacity. That capacity that can start as early as next spring. And the duration of that is up in the air at this point. We can make it three years or out five years to 10 years. The second project has to do with – it's a demand project with an end user. It's a large scale and it's in the 10-year to 15-year timeframe. And it would start, also, probably late 2018.

Phillip J. Jungwirth - BMO Capital Markets (United States)

Great. And then, how much ability does Cabot have to sell more gas into the local market at the right price if local gas prices were to, say, rise to $2.00 an Mcf in 2017 level where returns to Cabot are very strong? Are you able to increase volumes at the expense of price or are you physically just unable to sell more gas than you're already producing above that feed?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, when you look at the study that we're doing up there, Phillip, and you take in consideration the supply side diminishing somewhat for Cabot to be able to pick up incremental space in the pipes, I think Jeff is very confident that we would be able to do that. There's also been conversation about firm capacity that with the low commodity price, the stressed balance sheets and capacity commitments that have been committed to, that there would be opportunities in different areas to maybe move additional gas.

Phillip J. Jungwirth - BMO Capital Markets (United States)

Great. Thanks.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Thank you.

Operator

And our next question comes from Pearce Hammond of Simmons Piper Jaffray. Please go ahead.

Pearce Hammond - Piper Jaffray & Co. (Broker)

Good morning, guys.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Hey, Pearce.

Pearce Hammond - Piper Jaffray & Co. (Broker)

Dan, appreciate your prepared remarks. It was very helpful, especially on the gas macro. The NYMEX future strip agrees with you as gas for 2017's roughly $3.00, so what does Cabot look like at $3.00? You're on a run rig right now in Northeast PA. How many could you run? And then, if you push the growth accelerator in a higher price environment, how long does it take you to get a response given the evisceration with what's happened on the service side as far as people, specifically?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, on the response side first, Pearce, you're aware, and most others are also, that the maintenance capital and capital intensity of what's necessary to propel acceleration in Cabot's production profile is quite low. It does not take a lot of rigs and does not take many frac crews to be able to ramp our production with the quality of rock that we have.

In 2017, as an example, it would only be a – throw out a number, $250 million or so – to just kind of keep our production flat at $3.00; and if we wanted to just do that, at $3.00 we would be generating a significant level of free cash flow. And the ramp-up or taking advantage of the opportunity at higher price, it's part of our planning process right now and we're looking at the strip price. We're planning on the infrastructures projects that we referred to, and we will be building a program that allows us to ramp up production, not only in 2017, but I would say on our first pass, second pass sensitivities on 2018 – quite significantly in 2018.

Pearce Hammond - Piper Jaffray & Co. (Broker)

Excellent. And then, my follow-up – and I know this is a hard question to answer, but just curious if you could provide what curtailments are right now for Cabot in Northeast PA.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Now, I'm not going to get into specifics of exactly what it is, but consistent with what we did this last year, we have a measured amount of curtailments in our volumes. And when you look at the December or so rate of 8.4 Bcf per day and rolling forward now to the 7.6 Bcf per day, there might be some curtailed volumes in that number, but I think it's safe to say that everybody is working off – by the lack of activity, everybody is working off their level of curtailed volumes and getting close to a baseline production.

Pearce Hammond - Piper Jaffray & Co. (Broker)

Great. Well, thank you very much, Dan.

Dan O. Dinges - Chairman, President & Chief Executive Officer

All right, Pearce. Thank you.

Operator

And our next question comes from Michael Glick of JPMorgan. Please go ahead.

Michael A. Glick - JPMorgan Securities LLC

Good morning.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Hey, Michael.

Michael A. Glick - JPMorgan Securities LLC

You all continue to make improvements on the efficiency side in the Marcellus. Could you maybe provide some color there in terms of the drivers? Then, on the other side in terms of productivity, is there anything you're testing that can drive that higher?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, one, as you can imagine with the scrutiny on one rig and a frac crew in daylight hours, we are able to allocate a lot of man hours towards a limited level of activity. I'll let Steve Lindeman discuss some of the ideas that we're implementing on not only the Marcellus but maybe some of the ideas that we have coming through on our Eagle Ford operation also.

Steven W. Lindeman - Vice President-Engineering & Technology

Michael, in both areas, what we're working to do is stretch out the length of our lateral. As we put in the quarterly results, we drilled or completed about a 1,000 foot longer lateral, and that doesn't really – in terms of the drilling costs, that's a very efficient portion of the operations. We can drill another 1,000 feet in a very, very short period of time, and that equally just offsets the amount of extra casing. So that's a very, very efficient portion of the operation.

We are still seeing a little bit of softening in some of the service prices, so we've been able to take advantage of that. In the south we again have been working to complete the longest possible laterals we can and using technology like dissolvable frac plugs and so forth – all of that to reduce the mill out time or the amount of time with coiled tubing rigs that we have on location to drive our average costs down. So those are some of the things that we're working on.

On the LOE side, we're really looking hard at what our water disposal costs are, and in both areas, we work very hard to drop those numbers throughout the year and especially quarter over quarter. And same thing on the chemical side, in the Northeast we've reduced some methanol use as we had a milder winter, and in the south again working on our chemical efficiencies.

Michael A. Glick - JPMorgan Securities LLC

Got it. And then -

Steven W. Lindeman - Vice President-Engineering & Technology

Sorry, go ahead.

Michael A. Glick - JPMorgan Securities LLC

You can go ahead.

Steven W. Lindeman - Vice President-Engineering & Technology

The other thing I was going to mention is in the south, we also are putting in quite a bit of electric infrastructure, quite – right now we've got over 50% of our wells on either utility power or on microgrid, which is significant cost savings from generation.

Michael A. Glick - JPMorgan Securities LLC

Got it. And then I'll try one on the infrastructure side. So I mean generally, northeast, we've seen varying degrees of localizability with the new pipeline projects, and that's obviously impacting the timing or status of proposed projects. And then you balance that at the federal level, where FERC has been moving forward with projects that are in the interest of the public. So my question is do you see strategic importance in having the course clarify what the role of the state is in the pipeline regulatory process?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, just from kind of a macro comment, Michael, I think with the ramp-up in the activists that are against hydrocarbons, and their attack has now – narrowing down to infrastructure, and I think there is the sense that if we stop infrastructure, or we fulfill our "leave it in the ground," comment. I think from both a state and federal perspective, I think it is prudent to evaluate the process, look at where the impedance are coming from, look at, again, the overall value of a fuel source, and determine what process is prudent to move forward to represent the majority, that at times might not have a voice. So I do think that we are in an area that would – is important that we do get clarity and we do understand the roles that are necessary to facilitate the greater public need versus a more specific agenda.

Michael A. Glick - JPMorgan Securities LLC

Appreciate that. Thank you.

Operator

And our next question comes from David Deckelbaum of KeyBanc. Please go ahead.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Good morning, Dan, Scott, and Jeff. Thanks for taking my questions.

Dan O. Dinges - Chairman, President & Chief Executive Officer

You bet.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

I just wanted to expand on a few of the other questions you have been asked today. First, starting with the commentary around your internal team looked at, I guess, 25% year-over-year decline in Northeast Pennsylvania, absent, I guess, a working down of backlog and perhaps some curtailments. But if you couple that with your comments about others in your area not necessarily using their capacity, have you already started conversations with your neighbors about perhaps picking up some capacity in 2017 that you could trade them for perhaps longer down the road or pick up now that they don't intend on using? And if so, how receptive are those conversations right now?

Dan O. Dinges - Chairman, President & Chief Executive Officer

David, I'll let Jeff comment, but I know that certainly there has been firm capacity out there that has been discussed, probably even before we've had such punitive pricing and balance sheet stress. But I'll let Jeff comment.

Jeffrey W. Hutton - Senior Vice President-Marketing

David, we started these conversations probably six months to nine months ago, not only with our neighbors in Northeast PA, but really in the entire Marcellus Utica Basin. It even gets a little further than that, as some of the legacy contracts are also not being used. In other words capacity from the Gulf Coast. It even gets deeper when you start looking at the future commitments on projects and the unused capacity that could be available there as well.

So we've been slow dancing (40:15) this a little bit only because we think that the timing is getting better. Each month that passes, we're seeing better opportunities. And so we're going to step into a little bit of additional capacity here, and maybe not for the duration that some of that you'll read about in the new projects. But there's definitely an improvement in the secondary capacity market. And I just think it keeps getting better.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Got it. And I suppose those agreements would be something that you'd probably want to hammer out before the end of the year?

Jeffrey W. Hutton - Senior Vice President-Marketing

Sure. Yes.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Yeah. Okay. And then my next question just on the balance sheet and free cash, your updated CapEx today, I think, obviously makes sense not having the pipeline commitments, and looks like you'd be generating free cash this year and conceptually free cash in 2017. For now, does the free cash just get used for balance sheet purposes before you have better visibility on take away projects? And I guess sort of dovetailing on Bob's question earlier about the portfolio, with excess free cash, do you start looking up at beefing up other areas outside of the Marcellus that are in your portfolio?

Scott C. Schroeder - Executive Vice President and Chief Financial Officer

David, this is Scott. In response to your first question, the answer is yes. We would just use it for just to kind of, for lack of a better word, weather the storm and see just the ebb and flow. We are modeling it similar to that, with the free cash flow this year and next year. At least in several of the plans that Dan referenced in his prepared remarks. But you're spot on. As Dan answered that question, we are looking at our portfolio. And looking at, we still believe from a RoC perspective, we got the best RoC on the natural gas side of the equation in what we have in the Marcellus. And if we can beef up a position with high quality assets, we would be willing to use that free cash flow and some of the cash we have on the balance sheet to explore those ideas, too.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

That's helpful, Scott. Thank you. And then, the last one for me, I guess, without having you guys cite a specific number on curtailed volumes, could you give us a sense of perhaps percentage wise how much those curtailments that you have internally have declined from the peak of where it was last year?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Where our internal curtailed volumes were at the time that we had maximum curtailment? Is that kind of the -

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Yeah. Relative to current -

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, I think you could look at it, David, just like you would look at the baseline decline.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Okay.

Dan O. Dinges - Chairman, President & Chief Executive Officer

You kind of look at where curtailed volumes were. Even though you weren't producing at that point in time, you bring the baseline decline. It's all proportionate to those curtailed volumes.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

Okay. That's a good starting point. Thanks, Dan.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Uh-huh.

David A. Deckelbaum - KeyBanc Capital Markets, Inc.

That's all.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Thank you.

Operator

And our next question comes from Marshall Carver of Heikkinen Energy Advisors. Please go ahead.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Can't hear you, Marshall.

Operator

Marshall, your line is open, sir.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Sorry, most of my questions were answered, but a quick question regarding the East Texas assets that were sold, was that legacy Haynesville or was that something else? And was there any acreage associated with the sale, like a very good price given the amount of reserves contained, and was there any production, too?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Yeah, the production was kind of in the mid teens, and it was more the Cotton Valley assets and not the Haynesville.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Okay. Thank you. And the third party shut-ins in the Eagle Ford, how much did that impact the quarter? And is there any impact into second quarter, or has that all been resolved?

Steven W. Lindeman - Vice President-Engineering & Technology

That was about three quarters of a Bcf, just those alone for us in the south region.

Unknown Speaker

It was done in the – when did it...

Steven W. Lindeman - Vice President-Engineering & Technology

It was down most of – or half or so of the first quarter, and it's back online about April 20 or so.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Okay, thank you.

Operator

And our next question comes from Brian Singer of Goldman Sachs. Please go ahead.

Brian Singer - Goldman Sachs & Co.

Thank you. Good morning.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Hey, Brian.

Brian Singer - Goldman Sachs & Co.

You mentioned on the transportation side you were working on or were close to signing some new projects, some of which are demand driven. Certainly, not surprising that the demand is there, but what gives you confidence that they won't face some of the similar issues that we're seeing, or is it just because those projects take gas to a different direction, different point?

Dan O. Dinges - Chairman, President & Chief Executive Officer

I think it's – I agree with some of what I read out there right now that the midstream space is being challenged by an effort to basically keep hydrocarbons in the ground, point-blank. I do agree with it being more difficult, and the activists trying to stop progress on the midstream. I think in certain areas of the country, it will be more pronounced than others, and geographically it seems to be up in the east right now where it's a little bit more populated; it seems to have more intensity and more emotion attached to it. But, again, I'll go back to what we referred to last quarter, and you look at the footprint necessary to get a certain level of energy to a demand source.

Natural gas has one of the smallest footprints that there are out there. If you make an equivalence to renewables and what it takes to deliver equivalent production, what's being discounted and not discussed is the footprint necessary to be able to deliver renewables and the equivalent production level. So all those things are part of it, but I think geographically it's going to be more difficult in other areas to lay the infrastructure. But I do think that the process is being considered by the administrators in a way differently than it has been in the past. And I think it's clear that there's not scalable opportunities for renewables to take the place of what hydrocarbons, and natural gas in particular, will deliver as far as demand is concerned; so just a difficult time right now

I do feel, though, that with the projects that we have in place, I think the mitigation discussions that we'll have going forward to mitigate in an objective way will also come into play. I think we do that, but we're going to be better at that aspect of it. We're certainly sensitive to all the needs out there, and we'll continue to move forward with what we think are projects for the majority's need.

Brian Singer - Goldman Sachs & Co.

That's great. And kind of tying that back into some of the efficiency questions on the upstream side that you answered questions on earlier, I think you made a reference to some chemical type efficiencies. I just wondered whether, given some of the concerns out there, rightly or wrongly, with regards to water and chemicals in the water, et cetera, do you see – have tested or are testing any technologies that would significantly improve what some would call green footprint in terms of reductions in chemical intensity? And do you think that that has a place in the Marcellus?

Dan O. Dinges - Chairman, President & Chief Executive Officer

Well, first off, let's back up to the premise that is the reason for the question. One is what is the level of contamination of any water in the first place? That question has been evaluated in a lot of different ways, water well tests, and it's a significant amount of dollars and significant database that represents to us that the water has not been contaminated by the operations.

On the chemical side, drilling side, we have a closed loop system. We have, also, through the frac side – we have a closed loop system on the frac side that lets us accept what we put into the formation.

So we're confident that our operation using best available technology is mitigating any concern about water. Do I think that there are other areas that maybe has volumes of produced water, and those volumes of produced water then going through a process different than today and continuing to look at produced water and how you dispose of produced water? I think there's probably ongoing research that will continue to look at that and try to improve in an area that's very good right now, but would try to improve on any produced water disposals.

Brian Singer - Goldman Sachs & Co.

Yeah, thank you. My question was actually more towards these, could the best available technologies become even greater, could there be any kind of further improvement there? But thank you.

Dan O. Dinges - Chairman, President & Chief Executive Officer

Thank you, Brian.

Operator

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Dinges and the rest of the management team for any closing remarks.

Dan O. Dinges - Chairman, President & Chief Executive Officer

All right. I appreciate it, Rocco. And I appreciate everybody's interest in Cabot, and I look forward to report next quarter. Thank you.

Operator

Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a great day.

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