Expand Energy - Q2 2023

Transcript

Operator (participant)

Good morning. Welcome to the Chesapeake Energy Second Quarter 2023 Conference Call. All participants will be in 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 touch-tone phone. To withdraw your question, please press Star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Ayres. Please go ahead.

Chris Ayres (VP of Investor Relations and Special Projects)

Thank you, Marlise. Good morning, everyone, and thank you for joining our call today to discuss Chesapeake's Second Quarter 2023 Financial and Operating Results. Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections, and future performance, and the assumptions underlying such statements.

Please note there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including factors identified and discussed in our press release yesterday and other SEC filings. Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place any undue reliance on such statements. We may also refer to certain non-GAAP financial measures, which help facilitate comparisons across periods with peers.

For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure and can be found on our website. With me today on the call are Nick Dell'Osso, Mohit Singh, and Josh Viets. Nick will give a brief overview of our results, and then we will open up the teleconference to Q&A. With that, thank you again, and now turn the teleconference over to Nick.

Domenic J. Dell’Osso Jr. (President and CEO)

Morning, everyone. Thank you for joining our call. I'll give a quick highlight of some recent accomplishments, and then we'll jump to Q&A. We had an outstanding operating results this quarter. We continued to execute on our strategy and deliver sustainable value to shareholders through cycles. Our performance at the field level remains strong, and I'm pleased that our team continues to find innovative ways to enhance our basin-leading operating performance. We often get asked if the industry has rung all of the efficiency opportunities out of the equation. We've highlighted some things today that I think show we have several innings to go.

To start, we've rapidly improved our drilling operations this year behind a combination of data analytics, machine learning, the high grading of our rig fleet, and equipment. These advancements allowed us to drill 3 of the 5 fastest Marcellus wells in our history during the second quarter. This included a team best 10,000-foot lateral, which reached a total depth of 17,000 feet in under 8 days. We saw equally strong results on the completion side as well. We deployed new equipment and technologies to yield recent company records in both the Marcellus and Haynesville, leading to a greater than 20% increase in efficiencies relative to previous zipper frac operations.

In addition to our strong drilling and completion performance, the team continues to push the boundary of our development strategy. Our hybrid well design in the Marcellus combines stranded lower Marcellus acreage with the creative upper Marcellus footage into a single extended wellbore, eliminating the need for multiple vertical sections and reducing surface impact. The design yields a much more efficient capital spend and greater than $3 million incremental NPV per well.

I'm also pleased to see extended laterals in the upper Marcellus deliver similar per well productivity to the prolific lower, while decreasing our drilling cost per foot. Overall, across our entire Marcellus program, our average lateral length in the basin has increased by 70% over the last five years. Moving to the Haynesville, our effort to optimize our acreage position through acreage trades and growth leasing has converted nearly 10,500-foot lateral locations to 10,000 feet, resulting in an incremental NPV uplift of between $3 million-$6 million per location.

Combination of all of our leasing efforts has increased our working interest on near-term projects by approximately 4%. Our ongoing effort to debottleneck our midstream systems in the Haynesville is also paying dividends through lower line pressures and higher production. We have recognized a 70% increase to offload capacity over the last year through expansions and additional offloads. As we continue to optimize our operations in the Haynesville, we're also importantly progressing with our path to be LNG ready.

Our recent agreement with Lake Charles for liquefaction advances our previously announced agreement with Gunvor to deliver gas for LNG on a JKM-linked price exposure. In addition to the impactful innovations, I'm really pleased we can lean on our financial strength this year and allocate capital in a prudent and value-oriented way for shareholders, given the low prices in the current market. This flexibility is a competitive advantage and enables us to focus on smarter decisions for value creation through cycles.

In today's market, that means voluntarily reducing activity levels and deferring TILs and production into periods of stronger pricing. While our second quarter production reached the high end of our quarterly guidance at approximately 3.7 Bcf/d. Our second half 2023 activity will be approximately one-third lower than our first half, as measured by rigs, spuds, completions, and CapEx. As we reduce our spend on development activities, we continue to buy back shares and have increased our base dividend.

In addition to our return program, we are using our strong position to strategically lease acreage. Year-to-date, we have added approximately 10,000 acres in our Marcellus and Haynesville footprint at an average cost of $2,400 per acre, and expect more opportunities to add valuable acreage in the second half of the year, focused on improving and adding to our inventory length. We're doing all of this as we continue on our path to reaching an investment-grade credit rating. Today, our net debt to total cap is about 10%, and we received 2 recent upgrades from our credit rating agencies.

We expect that our balance sheet will be further strengthened through the completion of our Eagle Ford exit, which continues to progress. Our capital allocation strategy prioritizes shareholder returns and has resulted in more than $500 million being returned to shareholders so far this year, while gas prices have fallen significantly. Our approach includes a stable and growing base dividend, which has returned $150 million year-to-date, and which we raised 4.5% this quarter. Our pro-cyclical variable dividend, which has returned $185 million year-to-date, and our countercyclical buyback program, which has returned $185 million in share repurchases, including $125 million during the second quarter.

We remain the only large cap gas company consistently paying a dividend and repurchasing shares in today's market. Turning our attention to the rest of the year, our approach will not waver. The underlying strength of our company allows us to remain patient and prudent, and that's exactly what we will be. We'll continue to make decisions focused on long-term value, which means we will execute on our strategic pillars, maintain our capital discipline, and further adjust activity levels should conditions warrant. Lastly, we'll remain steadfast in our commitment to maximizing value for shareholders. We're pleased to address your questions. Operator, if you'll open the line.

Operator (participant)

Thank you very much. We will now begin the Q&A session. To ask a question, you may press Star, then one on your touchtone phone, and if you are using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Umang Choudhary from Goldman Sachs. Please, Umang, go ahead.

Umang Choudhary (VP)

Good morning, thank you for taking my questions.

Domenic J. Dell’Osso Jr. (President and CEO)

Good morning, Umang.

Umang Choudhary (VP)

Good morning. My first question is really a two-prong question. First, would love your thoughts around the gas macro. Two, you have talked about countercyclical repurchase, risk management through hedging, and also maintaining the optionality of a fortress balance sheet, given the volatility of the underlying commodity. How does the macro influence your thoughts around the cadence of share repurchase and the extent of hedging?

Domenic J. Dell’Osso Jr. (President and CEO)

Sure. Those are great questions. I'll start. First, from a macro perspective, you know, the supply-demand has been pretty challenged this year. We've seen the industry respond, we think, pretty well, through cutting activity. We cut activity, we announced cuts to activity early in the year. Those cuts are really showing up now. We deferred TILs even earlier than the activity cuts showed up, so that pulled some gas, off or smoothed it out, in the year, we think that's been helpful. We certainly think it's been helpful to our own cash flow profile.

We'll continue to make those kinds of decisions as we approach '24. We think that the market is poised for a recovery from a supply-demand perspective, as we have cuts to activity levels, and we have growing demand in the form of LNG capacity coming online. What we're not great at doing, of course, individually or as an industry, is predicting the exact timing of that. We'll let the market show us. We don't expect to be way out in front of a move like that, and we'll look for some really tangible signs that things are improving before we bring activity back. That's really what I'm getting to when I talk about leaning on our financial strength to make those kinds of decisions.

I think they're prudent and smart decisions. I think you have to have a lot of financial strength to be able to ride through cycles and continue to make prudent decisions without leaning in too hard at times when there's great uncertainty. We just don't have to do that. We feel good about that. From a hedging perspective, you know, we've approached hedging with a very methodical view around how to add hedges looking out on a rolling eight-quarter basis. We're gonna continue to do exactly that. That has served us well. It offers a really nice offset to our cash flows this year.

One of the things that you'll see, of course, is that we have a pretty sizable hedge gain through the rest of the year. That really helps to offset how we think about these changes in activity levels and allow us to smooth them out in a way that reduces the friction cost of those changes in activity. One of the other things I'd point out is that you've seen our differentials really get challenged this year, and it's been pretty tough, particularly in the Northeast.

We have a lot of basis hedges as well. It's not just index hedging, it's basis hedges, and those basis hedges are serving us well as an offset to those differentials. They show up in our realized hedging and lines on the income statement, but there are basis hedges embedded in there in addition to the NYMEX. Lastly, how we think about the buyback cadence. Certainly, the macro plays a role in that. We announced our buyback, the increase to our buyback, I guess, about a year ago, and we're progressing really well with that.

We have $725 million remaining. We have quite a lot of cash, and we expect to continue to progress against that buyback. We're gonna look for opportunities to accelerate that buyback into the second half of the year, and ultimately, we'll finish it when the conditions warrant. We feel really good about having the flexibility to deploy that cash prudently and carry out our buyback program as, as we think maximizes value for shareholders over time.

Umang Choudhary (VP)

Very helpful response. Thank you so much, Nick. If I can add one more, a lot of interesting things on the operation side of the equation. On slide 9, you've talked about the hybrid well design in Appalachia, combining the lower Marcellus and upper Marcellus in the well- in a single wellbore. Would love your thoughts around the design, your confidence in execution, and how much of the program is it today, and what do you expect going forward?

Josh Viets (EVP and COO)

Yeah, good, good morning, Umang. So to date, we've executed 4 of these. I would say our confidence in our ability to execute is, is, is quite high. You know, I think we've proven through the years as a company, our ability to really be innovative, with, you know, complex well designs. The hybrid well design is an example of that. In South Texas, you know, we've done U-turn wells, we've done W-shaped wells. You know, I think our, our, our technical and operational teams have really proven that we have the ability to be innovative and, and capture and create incremental value from, you know, these, these assets that we own.

We will execute about 5 more of these as we work through the back half of this year. As we've stated, we have around 50 yet to execute in the program. You know, we're constantly, you know, kind of critiquing our acreage position, the remaining inventory, and looking at all opportunities to enhance value from, you know, from the assets. We're pretty excited about, you know, what we've done, and we're highly confident in our ability to execute the hybrid well design that we presented to you here today.

Domenic J. Dell’Osso Jr. (President and CEO)

Umang, if I could just add to that, I mean, if you think about what we talked about, both there with the hybrid well design as well as the leasing and trading program in the Haynesville, it's all around finding more opportunities for longer wells. We know that longer laterals add value to a development program, and as you look back at some of the early developed areas of the play, there's all kinds of acreage that's stranded in there with short laterals remaining.

This is a way for us to go back and add life to some of the really great central core acreage across these plays by adding in longer lateral opportunities that otherwise would have been shorter laterals. This is a, you know, a really great development for us, something that we'll continue to think about ways to bring some of these smaller lateral opportunities back to the front of the development program by creating opportunities to drill an ultimately long lateral well.

Umang Choudhary (VP)

Great. Makes a lot of sense. Thank you so much.

Operator (participant)

Our next question comes from Josh Silverstein from UBS. Josh, please go ahead.

Josh Silverstein (Managing Director)

Yeah, thanks. Good morning, guys. Nick, you, you mentioned the remaining Eagle Ford package is, is still ongoing with, with the sale process. Just give an update there. Is this something that you're just waiting for, you know, a higher natural gas price environment to execute on? Then as we're thinking about shareholder return opportunities here, you know, with the balance sheet where it is right now, if this is divested, do all those proceeds go towards the towards the buyback then? Thanks.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah. Hey, Josh. We've talked all along about how, you know, we're leaning with incremental return programs from the sale towards buybacks. I think you can expect that that's how we will talk about it once we're complete with that transaction. You know, it is an ongoing process. It's been an interesting process in that we continue to have multiple parties seeking to get to the finish line here. It's been a challenging year to sell assets. The financing markets have, you know, not been super strong, I think we're making good progress and hope to get something done. It's front of mind for us, obviously.

Josh Silverstein (Managing Director)

Thanks. Then in the Haynesville, you come from, from 7 rigs to 5 rigs. Can you talk about how you're, you're managing the declines with the lower rig count and what kind of optionality or flexibility you're leaving in for, for 2024 if, you know, prices don't, you know, stay around the $3.50 level? Thanks.

Josh Viets (EVP and COO)

Yeah. This is Josh. You know, we're right in the middle of, you know, dropping rigs. In fact, we'll go from 6 to 5 rigs this week. You know, we are being very thoughtful about, you know, our productive capacity. You know, we think it's important to maintain that just simply to avoid any inefficiencies that will be created as we, you know, attempt to, you know, rebound into a more constructive commodity price environment. We do think flexibility absolutely matters. I think that's what we're going to maintain as we, you know, get into the end of this year. You know, previously, when we presented our 5-year outlook, we had presented a case that indicated a 6th rig coming back in January.

You know, I would just say that's, that's something that we'll continue to monitor. Really, I think we're going to allow, you know, the market to signal that, you know, gas supply is, is needed. We, we don't really feel any pressure to get out and front, you know, front-run that. We're, we're happy for the market conditions to improve and really pull, pull, pull us back into it. You know, we think the key for us today is just being patient, being flexible, which is ultimately what our assets and our strong balance sheet, you know, really affords us to do.

Domenic J. Dell’Osso Jr. (President and CEO)

Great. Thanks, guys.

Operator (participant)

We have a question now from Doug Leggate from Bank of America. Doug, please go ahead.

Doug Leggate (Managing Director and Senior Research Analyst)

Thank you. Good morning, everyone. Nick or Josh, I don't know which one of you wants to take this, but I have a slightly different micro question. One, one of the pushbacks we get on our sort of new dynamics of U.S. gas markets is the DUC overhang in the Haynesville. When we look at the data, whether it be, you know, Rystad, Enverus, EIA, whatever, there seems to be a very big difference between what the industry seems to think and what we're hearing from the company. I wonder if you could tell us what your DUC backlog looks like, and maybe contrast it with what you're seeing the agencies are reporting your DUC backlog looks like.

Josh Viets (EVP and COO)

Yeah. Good morning, Doug. This is Josh. You know, we would, we would agree there is a lot of noise in, in the public data on DUCs. It's a relatively complex metric, you know, to track accurately. I think we would, you know, generally align in that this metric is most commonly overstated. Of course, the implication for that is, it would indicate that, if, if you were to believe the current numbers of something over 700 in the Haynesville, that there's a supply overhang that could potentially, you know, impact any, any type of recovery.

I think there's, you know, several reasons, you know, for that- you know, which, you know, maybe fall into non-core zones being included in that, which really can't contribute. You have, maybe mismatches on, you know, how many units of production a rig or a frac crew is creating. And then also, you just have a case of, you know, abandoned wells that simply don't get, you know, taken out of that, that will, due to maybe mechanical reasons, will never be completed. So, you know, I think the best data we have is really just looking at our own data set.

If we were to extract from public sources, you know, what they see our DUC inventory in the Haynesville being, it would put us at 45. What we see is the majority of these, roughly two-thirds, are actually sitting on pads that we're actively drilling. And so therefore, they're not considered, you know, true DUCs in any sense of the word. That leaves us with about 15, what we would consider to be true DUCs. If you consider about 3 wells per pad, that leaves you with about 5 pads.

You know, if you're running 2 frac crews, that would put you into a pretty normal working inventory. Again, the implication of this is, you know, you have roughly, you know, maybe two-thirds overstated. Ultimately, where that would maybe put the Haynesville is probably something closer to 150 to 200 DUCs, as opposed to the 700 that's stated in other public sources. Again, that's just using our internal data to kind of back into maybe where the industry sits as a whole.

Doug Leggate (Managing Director and Senior Research Analyst)

That's a really helpful color, Josh. Thank you. That's kind of where I was going with that, but I wanted to just sense check it, so thank you for that. My, my follow-up is, hopefully a simple question. My understanding is you're largely done with activity now in the Eagle Ford. To the extent you can, looking at your cadence of your capital, which I realize is a little under where you would normally be, it looks to us that your sustaining capital has come down quite a bit. For the portfolio go forward, ex-Eagle Ford, what would you say that, current, you know, capital outlook and maintenance capital outlook looks, you know, for maybe '24 and beyond, as long as we get there? Thanks.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah. Hey, Doug. I'll start with this, and Josh may have something to add. You know, the way we think about sustaining capital is really about, you know, what development profile it takes to maintain production. That really hasn't changed for us in both the Marcellus and the Haynesville. It's around 5 rigs in the Marcellus and around 6 rigs in the Haynesville. Obviously, at different times, you can either slow that down or accelerate that by either adding or subtracting a frac crew. There's a, you know, a ratio of rigs to frac crews that, you know, equate to an exact maintenance level there. Right now we're a little below that, and that's by design.

So as we go into next year and we see the clear signals of the market recovery, and we see the market looking for more supply, then we'll go back to that level and, you know, always maintain the ability to increase above that for true growth, should the market need the volumes. You know, when you think about modeling us, think about 5 rigs in the Marcellus, 6 rigs in the Haynesville. That's gonna get you a pretty good maintenance capital level for us.

Doug Leggate (Managing Director and Senior Research Analyst)

Got it. Thanks, Nick. I appreciate the answers.

Operator (participant)

Our next question comes from Matthew Portillo from TPH. Matt, please go ahead.

Matthew Portillo (Partner and Head of Research)

Good morning, all. Maybe just to start off with a question for Josh. On the Haynesville, looks like the asset's been outperforming expectations year to date. I know you talked a bit about some of the infrastructure expansion that has occurred. Could you just talk about some of the operational tailwinds you've seen at the field level, and do you expect additional gains going forward?

Josh Viets (EVP and COO)

Yeah. Good morning, Matt. You know, we, we have seen very strong performance out of our Haynesville asset through the first half of the year, and it is largely related to infrastructure. I would just, you know, maybe first comment as far as new wells, you know, everything there looks relatively in line with expectations, and so the outperformance is largely coming from the base, and a large part of that is from our 2022 TILs. One of the things we worked very hard at last year was introducing interconnects between adjacent gathering systems.

What that has allowed us to do is, you know, anytime we see a pressure response, as in a midstream upset, potentially adding pressure into a system, that's alarming our operations center, and then we quickly have the ability to work with our marketing teams to redirect flow. What that translates to is, is less downtime associated with midstream outages, and that's ultimately what's allowed us to outproduce relative to our own forecast. Really, it's just simply demonstrating the, the, the strength of our underlying asset there in the Haynesville.

Matthew Portillo (Partner and Head of Research)

Great. Then a follow-up question. I know you guys have been quite active on the LNG front. You're making some great progress there. Just curious how those negotiations have evolved and maybe how potentially reaching investment-grade going forward could potentially improve your position on the LNG side of things?

Mohit Singh (EVP and CFO)

Yeah, Matt, good morning. This is Mohit. I'll take that. We are very pleased with where we stand today. If you recall, in March, we announced our heads of agreement with Gunvor. That was going to be the buyer of the LNG. Since then, we've been working jointly with Gunvor to high-grade the facilities that we would liquefy through. The methodology we use to high-grade has five different dimensions. One is accessibility, which means, do we have a way of transporting our gas from the field to that LNG facility?

The second one would be the pricing, of course, which is how much liquefaction fees do we have to pay. The third, which was important to us, was also the accounting treatment, whether it gets treated as derivative versus not. We've made a ton of progress on that front as well. The fourth one would be just the credit requirements, which, which you referenced us not being investment-grade, but we, we have come up with some creative ways of circumventing that, which feels very good.

Last but not the least, is the picking a facility that will get to FID. That gets to, you know, what is the probability of them declaring FID on a timeline that works for us. Based on, based on using the, that methodology, we have high-graded to a few facilities, and you recently saw we signed the heads of agreement with Energy Transfer on the Lake Charles facility. Pretty excited.

There's three parties involved now, us being a willing seller, Gunvor being the willing buyer there, and then taking it through Lake Charles. That's not to say that's the end state. We have previously signaled to you we want to get 15%-20% of our production linked to LNG. This is a step towards that, and you should clearly see us announcing similar deals in the future. There's a lot of conversations going on, and we're very, very proud of the efforts that the team has put in and the progress that we have made.

Matthew Portillo (Partner and Head of Research)

Thank you.

Operator (participant)

Our next question comes from Zach Parham, from JPMorgan. Zach, please go ahead.

Zach Parham (VP)

Hey, guys. Thanks for, for taking my question. I guess just first on cash taxes, I know there were some moving pieces with the numbers this quarter, but the updated cash tax guidance indicates that $0-$50 million of cash tax payments for the year, and that includes the taxes associated with the Eagle Ford sale. Can you just clarify what your expectation is for cash tax payments in the second half of the year?

Mohit Singh (EVP and CFO)

Yeah, Zach, good morning. This is Mohit. As you referenced, our guidance for the full year still remains 0-50. That is unchanged. What has changed also, as you pointed out, is that includes our base business and also the divestitures. The way you should think about it is the cash outflow net to us, again, stays between $0-$50 million.

Zach Parham (VP)

Just to clarify, is that for the second half or for the full year?

Mohit Singh (EVP and CFO)

No, that's for the full year. That's for the full year.

Zach Parham (VP)

Okay, thanks. Then just one follow-up. In the slide deck, you provided some pretty granular detail on cost deflation, highlighting total deflation of 5%-7%. Can you talk about any differences in deflation you're seeing by operating area? Are you seeing a little more deflation in the Haynesville versus the Marcellus, just given the level of activity declines there?

Josh Viets (EVP and COO)

Yeah. Good morning, Zach. This is Josh. Just like we saw some differential level of inflation in the Haynesville relative to the Marcellus, I think we would expect to see the deflation behave, you know, somewhat similarly. I think that's gonna be somewhat dependent upon, though, the service and also the contractual terms at which we're working under.

That really, you know, just gonna depend on, we have something under long-term contract in the Marcellus- whereas, you know, we have, you know, contracting flexibility in the Haynesville today. I think long term, I think you would expect to see probably a little bit more deflation, in the Haynesville. I think the timing of it is going to be more dependent upon your contract situation than it is so much, what's occurring in the fundamentals of each basin.

Zach Parham (VP)

Got it. Thanks for the color, guys.

Operator (participant)

Our next question comes from Bert Donnes from Truist. Bert, please go ahead.

Bertrand William Donnes III (Financial Analyst)

Hey, good morning, guys. Just want to follow up on the LNG question. Can you maybe talk about what, what's the next step for Chesapeake? Are you, are you more focused on locking in your, your existing volumes with liquefaction, or, you know, are you more focused on finding additional volumes, and then you'll just kind of backfill liquefaction after the fact? Maybe you, you could, you know, pull the curtain back a little bit and describe the, the power dynamic in some of these negotiations. You know, is, is Energy Transfer pitting you guys against each other, or is, or are these agreements so far out that everybody's, you know, going into these negotiations very comfortably?

Mohit Singh (EVP and CFO)

Yeah. Good morning, Bert. This is Mohit. I'll, I'll take that. The strategy on the LNG side remains unchanged for us. When we initially announced it, the plan was to get diversification of our production, and the way we view LNG is just another sales point for us. So when we say 15%-20% of our production should be linked to some sort of an LNG index, the intent is to just look at the overall portfolio, and we view that 15%-20% as just another sales point, similar to, say, a TETCO M3 or, you know, any sales CGML in, in, in the Haynesville.

Now, we do go in eyes wide open, that there'll be periods of time where that diversification will be in the money. There'll be periods of time when it'll be out of the money. We are looking at a long-term duration, 15+ years of duration on these contracts. The expectation is that we reduce the overall risk in the portfolio and the risk for the returns, which underpins our returns back to the shareholders by doing this diversification. That's the, the, the broad strategy behind this, and that remains unchanged.

The second part of your question about the power dynamics in these conversations, the LNG universe is a pretty tight-knit group. We have been working, making inroads for the past year and a half at least. What I would say is, once we did announce our first heads of agreement in, in March, that suddenly created a lot of interest in Chesapeake Energy was doing, and the number of inbounds that we have received since then has been great.

Working together with Gunvor, we have high-graded, as I said, some of the facilities that we want to go through. It's pretty competitive space, and us announcing our heads of agreement suddenly increased visibility. We were very excited to see that increased traction that we were getting. As we referenced earlier, that led to the heads of agreement that we have signed with Lake Charles, and we think more of these- you should expect us to be announcing some more of these.

Bertrand William Donnes III (Financial Analyst)

That's, that's great. Thanks. Then shifting gears, I think you kind of touched on it earlier, but on the, on the buyback front, you know, you guys obviously have a large cash balance, and so, you know, some investors are probably pushing for you to use, you know, a significant amount of that to, to do buybacks now. Could you maybe talk about how you guys have your internal formula for that?

You know, do you just want to do a certain percentage of your, your float? Is it opportunistic based on, you know, market drivers, or are you reserving some amount of cash for optionality in the markets? Just your buybacks aren't linked to your free cash flow, so I just wanted to get a little more color on how you decide when to enter the market.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah. Hey, this is Nick. You know, all those things are relevant to us. We certainly think about how we're valued in any point in time, and that drives how we think about doing repurchases. We think about a consistent approach of wanting to make sure that we, you know, we've said before, we're not just going to warehouse cash, so we want to be delivering cash back to shareholders. We definitely think about the macro environment and think about, you know, what, what we expect to come about. There's been a lot of uncertainty this year. There's been a lot of volatility in gas. We don't think that volatility is over.

We've been active with our buyback program and, and like the fact that even with that uncertainty, we've been active, and we're positioned to continue to be active. You know, we'll, we'll look for opportunities to do more, but we're going to be pretty prudent about it, and we're going to approach the second half of the year, looking for the right times to deploy cash through the buyback in a way that we think is good for shareholders in the long term.

We do think about having some cash on the balance sheet. We think that's a, a nice thing to maintain when you can, and right now we have that flexibility. We don't have a specific number that we talk about with investors, but we, we certainly think that holding a cash balance is a good thing. We have a lot right now, and we'll continue to deploy it and, you know, we'll see how the market unfolds for us. I would expect us to continue to be quite active, and like I said before, we'll look for opportunities to do more.

Bertrand William Donnes III (Financial Analyst)

I appreciate it. Thanks, Nick.

Operator (participant)

We have a question now from Paul Diamond from Citigroup. Please, Paul, go ahead.

Paul Diamond (Equity Research Analyst)

Hi, good morning, all. Thanks for taking my call. Just a quick question on slide nine, talking about the hybrid well, you guys highlighted in the Marcellus. Does that, you guys view over the long term, is that tech, will that transfer down to Haynesville as well, split between Haynesville and Bossier?

Josh Viets (EVP and COO)

Yeah. Good morning, Paul. This is Josh. You know, I think we're constantly gonna be looking for opportunities to replicate technology and, and operational practices in other basins. You know, there, there's unique differences between the, the Marcellus and the Haynesville that probably make that a little bit more challenging. You know, distances, true vertical, you know, depth, differences between the two formations is one, general rock characteristics, you know, that require certain mud types, you know, is another. So I would never say never, Paul, 'cause our, our teams are capable of doing some, you know, pretty phenomenal things, you know- but, but today I would say that looks like a, a pretty tough feat to accomplish.

Paul Diamond (Equity Research Analyst)

Understood. Thanks. Then, just a quick follow-up as well. On slide seven, you guys gave a bit of breakdown on your expectations around, coming deflationary environment. I was wondering if you could give a bit more color on, you know, those that you see going down, OCTG, rigs, pressure pumping, standard logistics. Is there any one or few that stand out, more than the others, or are they all kind of like right in that mid-single-digit range?

Josh Viets (EVP and COO)

Yeah, Paul, I'll take that again. Right now, I think the one that is, is probably easiest for us to see and really think about how impactful it could be is on the OCTG side. There's just a general surplus of inventory. Imports are high. U.S. mill capacity has been healthy over the last year, and that's created a little bit of surplus. Really, it's not about, I think the magnitude. I think we think that it's gonna be quite material as far as savings go, but it's just timing. And we have inventories of pipe that we had bought out in advance. We need to work through that.

You know, as we get into the fourth quarter, you know, we start realizing the benefits of that. I think the others, you know, I'd maybe just describe as, you know, being a little bit more sticky. It's gonna be, you know, dependent upon, you know, really where we see rig counts going, not just in the gas basins, but, you know, you know, some, you know, place like the Haynesville is gonna be impacted by, you know, activity in, in the Permian. I think right now, I think we, we feel pretty good about, you know, seeing, you know, softening in the pressure pumping side.

I think, you know, with, with oil commodities, you know, being relatively modestly priced today, you know, diesel prices are low, which really helps support lower logistical cost on, on sand. You know, rigs, rigs are typically under longer term contracts. In order to realize that, you really have to, you know, have managed your contracting situation to be in a position to go renegotiate and, and bring in rigs at lower rates. I think the market conditions are, are primed for that.

I think, you know, the pace, the magnitude, you know, really is still up in the air. You know, the work that we've done to date, you know, has taken us to the spot of where we see that roughly 5%, 5%-7% reduction from Q1 of this year to a well that we drill in Q1 of, of next year. We think that's a pretty good down the road level. And it is also gonna-- just wanted to point out, that will exclude any efficiency improvements or changes to lateraling. You know, potentially some upside that, on that as well as we head into, 2024.

Paul Diamond (Equity Research Analyst)

Understood. Thanks for the clarity and your time.

Operator (participant)

Our next question is coming from Scott Hanold, from RBC Capital. Scott, please go ahead.

Scott Hanold (Managing Director anad Equity research Analyst)

Hey, Nick. It sounded like you all are, you know, optimistic but somewhat cautious on the gas macro outlook. Obviously that, you know, is... You know, when you look into 2024 and your activity pace, it, you know, leads you to kinda hold off some decisions at this point in time. What specifically are you looking for to get, you know, more, I guess, more constructive where you'd, you know, look to add back those, you know, rigs next year? Is it, is it just the price? Is it your amount of hedging? Is it, is it where storage is at on a relative basis? If you can give us just a sense of, you know, what specific trigger points are there that you're really focused on.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah, Scott, great question. We're focused on the fundamentals. We're focused on certainly where storage ends this fall, what that positions the market to look like as we come through winter and out of winter into the spring, what production is doing relative to that storage level. All of those things, of course, factor in. The big wild card that we always face this time of year is what will winter be? No one knows. Early predictions of weather usually are, are highly inaccurate, so we, we don't put much stock in those. We'll watch and see what happens with winter demand.

You know, the longer term trends for demand for gas are very strong. We're continuing to see power gen for gas perform well on a weather-adjusted basis. We're seeing domestic demand for gas hold up quite nicely, despite the predictions of recession and, and economic pullback in the country. We watch for those things to hold. Are they holding? Then, of course, very importantly, on the demand side, we'll pay attention to the timing of the LNG facilities.

That growth and demand will be very impactful, but also very chunky. If there are changes to those schedules, that will impact us. You know, pretty good about what we're reading on those projects. We don't have any better information than anybody else has on those projects. I think the market is gaining confidence in the timeline of those projects, and we would therefore share in that same view. You know, we'll allow, again, the fundamentals of the market to show us that the market actually needs supply, before we lean out really far in front of that.

Scott Hanold (Managing Director anad Equity research Analyst)

Okay. Okay, it definitely sounds more of like a, a very real-time kind of monitoring situation. you know, certainly appreciate that. again-

Domenic J. Dell’Osso Jr. (President and CEO)

The last thing I would point to there, though, Scott, if you don't mind me adding, is that, you know, we're talking about right now, we're at 4 rigs in the Marcellus and 5 in the Haynesville. We're really talking about being 1 rig in each play below what we've indicated as our maintenance. The amount of change that it would take for us to change the trajectory of our production is not much, and that's by design.

We have wanted to pull back capital so that we can allocate our capital in a really prudent manner in a soft market, but we also don't want to be in a place where there's tremendous friction costs of a pivot. That's why you hedge, and we think all of that is working for us. So when we decide that we're ready to, you know, respond to the market, when the market shows us it's time to respond, it's not going to take a heroic move on our part.

Scott Hanold (Managing Director anad Equity research Analyst)

Okay.

Josh Viets (EVP and COO)

Scott, if I may add on, on the hedging, this is Mohit. We've added about 174 Bcf of hedges since our last disclosure. When you look at our hedge book, we feel very, very good about the downside protection that it offers and, and the width of the collars, fairly wide. It retains the upside, while kind of protect While at the same time, protects us from the downside. If the bearish scenario plays out, then we feel very good about the, the floors that we have through the collars. At the same time, if the bullish scenario plays out, then we are retaining quite a bit of the upside through the wide collars.

Scott Hanold (Managing Director anad Equity research Analyst)

Okay, got it. My follow-up question is a little bit about on M&A and obviously, the strategic, I guess, tactical bolt-ons you all are doing. You know, just big picture, like, you know, what, what is your appetite on, you know, M&A? Is there, is there attractive things out there? I mean, you, you talk about, you know, financing being an issue with, you know, some of the counterparties on the Eagle Ford side, but, you know, with your, your quantum of cash balance, does that provide you the opportunity to be a little bit more countercyclical with M&A right now? Is there, is there things out there that are attractive?Just give a sense of, of the scale of, of some of those bolt-ons that we could see moving forward.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah. We're always paying really close attention to what's available. There are things that are attractive, you know, attractive at what price? You have to have a motivated seller or a seller that's willing to transact. You know, we stay in contact with a lot of people about a lot of things. We've been quiet now for several months on the acquisition side. I think that tells you that the things that we've been interested in, there's probably a bid-ask spread there, or at least uncertainty on the part of sellers as to what their strategic direction may be. There's always an appetite. If there's good available acreage at a reasonable price, we, we always want to add. We'll be patient. You've seen us be patient now for a while.

We don't feel in a rush to do anything, you know, we'll, we'll watch and see what comes our way. We do have plenty of financial strength to do something, should we decide to. I appreciate you raising that point because that is a part of financial flexibility that we think is really important to maintain. If there are good, attractive assets to buy, at a time when others maybe are not able to be as aggressive, that's a, a real strategic advantage. We try to hold on to that, you know, we can wait for those things to come to us.

Scott Hanold (Managing Director anad Equity research Analyst)

Thank you.

Operator (participant)

Our next question comes from Roger Read, from Wells Fargo. Roger, please go ahead.

Roger Read (Senior Energy Analyst)

Thanks. Good morning. I guess I'd like to follow up on maybe a couple of the last questions here in terms of your service contracts, your willingness to, I guess, be proactive or reactive in terms of committing to get up to the maintenance level of drilling, and then maybe something beyond that as the macro gets more favorable, you know, latter part of '24 into '25. As you think about whether it's, you know, rigs or materials or the pressure pumping side, just how does the market look there? How does your current contract status compare to maybe an ideal contract status as we look over the next, say, 12 to 18 months?

Josh Viets (EVP and COO)

Yeah. Good morning, Roger. This is Josh. As far as contracts go, you know, when we look at our rigs, roughly half of our rig fleet, so of the nine that'll be in service, you know, kind of as of the end of this week, roughly half of those will come up for renewal by the end of the year. We, you know, we, we have some flexibility with that to, you know, potentially take advantage of softer markets. I would actually say on the frac side, it, it turns out that it, it's, it's pretty similar to that, where roughly, you know, half of the, half of the fleet is on, you know, shorter-term contracts, and, and we have one that's on a longer-term contract, but, will come up at the end of the year.

We, we think we're actually pretty well positioned to be able to, you know, action, you know, some contractual adjustments that will ultimately lead to, you know, lower, lower cost. That's really by design. We, we think, you know, maintaining flexibility across, you know, contract tenors is always going to work to our advantage and, and provide us the flexibility that we think is, is important for our business.

Roger Read (Senior Energy Analyst)

Then willingness or, I mean, I guess earlier, I think you answered the question, which is: You'll wait for the market to show you it needs more production rather than trying to anticipate. Just wanted to clarify if I understood that comment correctly?

Josh Viets (EVP and COO)

Yeah. Yeah, Roger, Josh, again, here. That is absolutely true. As Nick was commenting earlier, as far as the macro, you know, we want to see this, you know, the, the, the 2024 shape up a little bit more. We just don't feel the need to aggressively start adding activity back until there are very clear market signals that the gas is in fact needed. You know, it's fairly dynamic, but we think, you know, again, flexibility matters, and we think the strength of the company really affords us that flexibility.

Roger Read (Senior Energy Analyst)

Okay. Then my follow-up question on cash taxes. I understand the guidance for this year, Mohit, this is probably for you, but as we think about a better gas price environment going forward, is there any sort of, you know, linear expectation between where prices are and how we should think about cash tax obligations?

Mohit Singh (EVP and CFO)

Yeah, Roger, this is Mohit. Yes, certainly when you think of our tax outlay for this year, there's a couple of components. One is how much we would pay on the divestitures. That one is pretty well settled because we know the numbers. To your other point, the unknown would be what are the prices, what, what are gas prices doing and how, how much of a tax leakage the business the base business is generating? That's a little bit of an unknown.

When you think of the refund that we have received in, in 2Q from IRS, that, that was linked to us overpaying last year just because the prices last year, if you remember, they were strengthening, and then when they started weakening, we had overpaid based on the estimates that we had initially. The volatility will remain. Unfortunately, that is an unknown as to what prices would do. Our guidance, as I said, just to reiterate, is on an all-in basis, including the divestitures and the base business. Our guidance for now still remains between the $0 to $50 of a net cash outflow, adding up all, all different components. Probably that's the best guidance we can give you at this point.

Roger Read (Senior Energy Analyst)

Okay. Thank you.

Operator (participant)

At this time, we'll take our last question from Subash Chandra. Please, Subash from Benchmark. Forgive me. Subash, go ahead.

Subash Chandra (Equity Research Analyst)

Great. Yeah, thank you. Nick, I think, you talked about, you know, equity stakes and liquefaction as being a separate effort and, and maybe, something that's not imminent. A two-part question there, I guess, on the LNG. First is if you have any updated thoughts on those opportunities. The other part on the, on the LNG is: If you had to handicap, you know, projects that get FID this year, you know, how many do you think? Obviously, I, I assume Lake Charles makes that list.

Domenic J. Dell’Osso Jr. (President and CEO)

Hey, Subash. So on equity stakes in projects, you know, we've said that we would consider that if the right deal came along. You know, we've talked to a handful of the projects about that. Not sure that that will ever make sense for us. If it does, great. You know, we've done— we've not been afraid to invest in infrastructure lately. We've done our Momentum project, and that has proven to be, you know, so far, very successful for us. So, you know, things like that, that could be similar, where it's a relatively modest amount of dollars compared to our capital program, and give you exposure to a great rate of return because you're de-risking a project.

You know, we could think about that, but, we're not in a place where I would tell you to necessarily expect that coming. You know, open to it, but not necessarily anticipating it right now. On the point about, you know, what gets FID'd, we've got a slide in our deck where we try to show, you know, the tracking of what projects are out there. There's a lot of projects that have been FID that are under construction, and we think there are a handful of others that are gonna get there.

We continue to think about what that really means to the LNG market broadly. You know, a lot of the estimates about demand for LNG internationally are that we need all of this and more. I think as long as that continues to be the case and those estimates hold up around the demand for gas internationally growing, you're gonna see projects continue to get FID. The U.S. has a tremendous volume of gas resources, and we should connect those gas resources to markets where they're needed.

It's, you know, an advantage to the economy broadly. From an export perspective, it's an advantage to the economies that are importing a lower cost and lower carbon fuel. It's an advantage to consumers to have a more reliable, lower carbon fuel. I think there's plenty of momentum for more LNG. I think it will continue, and I think we're well-positioned to participate in that value chain.

Subash Chandra (Equity Research Analyst)

Great. Thanks. My follow-up is on the Haynesville and sort of, you know, industry activity. I think you guys were spot on, you know, in calling for the rig drops, even though they were slow to start. If I recall, I think your view was that most of those rig drops would happen by the, by the third quarter, so just about now, give or take, and then it would slow down, if not stop. Just wanted your thoughts on, you know, if that's still the case, you know, and what replacement rigs are required to hold production flat?

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah. We, we have made all those changes now. You're seeing that, that activity fall to the levels that we predicted right now. You know, one of the things that we did early this year to smooth out the effects of that or to get some sooner effects of that, is we did defer some TILs, and we've had some reduced production, particularly in the Marcellus. You're seeing that show up in our numbers, where otherwise you might see stronger production.

Had the demand been there for gas, we're in a position where we can pull back on production and defer TILs, in a way that makes a lot of sense, given the market conditions, and then allow for a activity drop to take place in what is a more thoughtful cycle of, of, decision making. In other words, you don't have to run out and shut down a rig in the middle of a pad that it's drilling.

You finish what you're doing, you work through, the plans that you have in front of you that where you've already started spending money, and then you can make a better decision to reduce friction costs of changes in activity levels. Seeing that play out for us this year, we're really happy with how that's gone. You know, modest changes to activity have a pretty big impact on how we think about what we're doing from a production standpoint. That's good.

We like to have that lever to pull, and, and we've been able to pull it. We, we feel really good about how that's gone for us. Then, like I said before, we're currently at 4 rigs in the Marcellus and 5 in the Haynesville. That's one short of maintenance for both of those plays. As we see the market recover, you'll see us add back a rig in both of those. We always would have the option to go towards growth should the market need that. You know, right now we're just focused on doing what we're doing until the market shows us what supply is really required.

Subash Chandra (Equity Research Analyst)

Yeah. Oh, sorry, Nick. To clarify, I was wondering about industry-level activity.

Domenic J. Dell’Osso Jr. (President and CEO)

Oh.

Subash Chandra (Equity Research Analyst)

Yeah, yeah. If you think that, you know, industry, Haynesville production will kind of mirror what you're experiencing, and if truly that DUC count is a fraction of what's publicly stated, if maybe some of the views that, you know, Haynesville will, will hold firm, are overstated as well.

Domenic J. Dell’Osso Jr. (President and CEO)

Yeah, we think that the Haynesville has reduced to an activity level now that is maintenance or below. You know, when we think about that DUC count, Josh walked through a really good analysis of how we think about the cadence of rig count and cycle times and what happens. One of the things that has happened this year, of course, is with reduced rig activity, but also reduced completions, you are seeing the cycle times of wells expand a bit, and that's underlying all the moving numbers that he walked through of the ratio of rigs we're running to wells in process, to wells that are truly waiting on completion.

You can affect that in the short term with adding additional completion crews, but, you know, the market for completions has been relatively tight. You are starting to see some completion crews now go to the sidelines and stay there. You know, the market for completions has been tight. I think, I think the Haynesville is in a place now of activity levels that are at maintenance or maybe below maintenance. That has a lag effect, so you're gonna still see production showing up from the activity of the last six to nine months for a bit. We do think that the industry has made the right decisions around supply in the Haynesville, and we should wait for it to show up.

Subash Chandra (Equity Research Analyst)

Thanks so much.

Operator (participant)

This concludes our Q&A session. I would like to turn the conference back over to Nick Dell'Osso for any closing remarks.

Domenic J. Dell’Osso Jr. (President and CEO)

Well, thank you all for the time this morning. We feel really good about where we sit in this year. It's been a year of certainly reduced gas prices, but strong performance for our company. We are proud of that performance, proud of the way that we continue to return value to shareholders, and really pleased with the setup we have for the future. Thanks again for your time, and we're always available for questions offline after this call, and look forward to seeing you guys out on the road. Thanks.

Operator (participant)

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