CNX Resources Corporation
Q1 2020 Earnings Call Transcript

Published: 27 Apr 2020

[Operator:]

Good day and welcome to CNX Resources First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please, go ahead, sir.

[Tyler Lewis:]

Thank you and good morning to everybody. Welcome to CNX’s first quarter conference call. We have on the call today, Nick DeIuliis, our President and CEO; Don Rush, our Executive Vice President and Chief Financial Officer; and Chad Griffith, our Executive Vice President and Chief Operating Officer.Today, we will be discussing our first quarter results and we have posted an updated slide presentation to our website. To remind everyone, CNX consolidates its results, which includes 100% of the results from CNX, CNX Gathering LLC, and CNX Midstream Partners LP. Earlier this morning, CNX Midstream Partners, ticker CNXM, issued a separate press release and as a reminder, they will have an earnings call at 11

[Nick DeIuliis:]

Thanks, Tyler. Good morning, everyone. Thank you for joining us. Hope that your families and institutions are doing well managing the virus and all the challenges that come with it. And speaking of the virus as we sit here at the end of April it’s hard not to think back to where we were at the end of January on our last quarterly call and consider just how much the world has changed in 3 short months. We have learned a lot, confirmed a lot that we already believed about our team, our company and our industry during this time. The way in which our team has responded to these unprecedented times, I think it’s nothing short of remarkable. They are resilient, creative, they are driven. Our frontline field team welcomed the monikers of essential and life sustaining and they never missed a beat. They keep producing and flowing the natural gas that our society and economy relies on in times like these. Similarly, our corporate team transitioned seamlessly to the remote work scenario and they continue to provide top notch support to the operations team. I am tremendously proud of how we have taken our game to another level and answered the call on behalf of our fellow citizens during this time. And I want to take just a few minutes at the outset, to thank our team and also say a word of thanks to all the other essential employees and businesses out there, who are on the frontlines doing their best to keep us all safe and healthy through the crisis. So, thank you.We start going through some of the key highlights. I am going to refer to the slide deck. I am going to start with Slide 4 in the deck that we posted this morning. I think Slide 4 highlights important points that much of the additional items we are going to discuss will flow from. Those points on Slide 4 they are simple, but they are crucial. CNX is about optimizing the long-term NAV per share and the single biggest financial tool that we have at our disposal. To do that is to generate free cash flow across our companies on a consolidated basis and then we placed that cash flow that we generate in the right places at the right times. So we do those three things

[Chad Griffith:]

Okay. Thanks Nick. I am going to start on the 2020 plan update section. Slide 11 highlights that following the end of the first quarter we completed our spring re-determination of the revolving credit facility at $1.9 million, with bank commitments at the same level. The reduction from the prior $2.1 billion commitment was driven by the Cardinal States project financing and the Q1 hedge monetization of $55 million that Nick discussed during his remarks.The RBL was favorably predetermined at this level despite lower bank price decks and the two transactions maintaining plenty of liquidity for the company. As we work through the final days of the re-determination, the oil and gas space was being hit simultaneously by two generational shocks

[Don Rush:]

Thanks, Chad and good morning, everyone. I would like to start by giving an update on our near-term maturity management plan. As you heard from Nick and Chad earlier and as you can see on Slide 19, we have made a tremendous amount of progress in just one quarter. In Q1 alone, we generated $300 million to use towards the 2022 bonds and we expect to generate another $200 million in 2020 to effectively reduce our near-term maturity by over $500 million within this calendar year. And as mentioned previously, we have already bought back approximately 10% of our outstanding ‘22 bonds this year.Slide 20 shows how much our E&P net debt position changes by year end 2020. And as you can see, the remaining $350 million of near-term maturities can easily be managed using free cash flow that is expected to be generated by CNX protected by our hedge book prior to their maturity date. Looking forward, our liquidity – looking forward to 2020, our liquidity remains strong and our next bond maturity isn’t until 2027 once the 2022 bonds are behind us. Those facts, coupled with our significant expected consolidated free cash flow generation capability, really are anticipated to set the company up with an ironclad balance sheet and significant free cash flow allocation optionality going forward.Slide 21 shows E&P debt and E&P leverage ratios improving in 2020 and we expect both to continue to improve materially with cash flow generated from the business as we move forward using the current NYMEX gas trip. This is a unique place to be in the E&P space. Slide 22 highlights that the debt markets are starting to recognize our balance sheet strength. As you can see on the slide, our 2022 bonds are trading very well indicating that the market anticipates we could easily address them.Starting on Slide 24, I will begin discussing our 7-year outlook and the excitement of our go-forward business plan. And it is important to note that this plan is dependable since it is based on the forward gas prices as they exist today and on CapEx costs that we are already achieving, anchoring the numbers in reality and leaving plenty of upside as we move forward. While before I get into the numbers, I want to explain the rationale of the 7-year plan and really break it down into two pieces as you can see on Slide 24. We have said for a while now that our hedge book not only protects us from downturns, but it also acts as a bridge and provides us the wherewithal to reposition the business for a lower-for-longer commodity strip, but that’s what the future would hold.With the benefit of hindsight, that plan was clearly very effective. The $700 million of consolidated free cash flow generated across 2020 and 2021, backstopped by our hedge book, coupled with our cost structure, prior infrastructure investments, project financing, our midstream control and our team has set us up to thrive in the near-term and sets us up to thrive and produce significant free cash flow in years 2022 and beyond in the current lower than $2.50 gas strip that is out there today. None of our peers can make that claim we are 1 of 1 in that regard. Chad has already laid out 2020. So I want to spend time on 2021.As you can see on Slide 25, slide – 2021 is setting up extremely well and the moves we are making in 2020 are making it that much better. There is a lot of optimism out there on 2021 gas prices and I can tell you that if it ends up being reality, we can easily increase our volumes to 600 Bcfe that year and produce more than the $400 million of consolidated free cash flow that we show. And unique to us if 2021 gas prices are not higher, we can have a more conservative production profile and still produce the $400 million of free cash flow that we have laid out and get ready for any price movement in 2022. Now that the business has matured into our current production profile, we will always maintain the ability to produce significant free cash flow and an up-gas price cycle or down-gas price cycle. That type of optionality will serve us well going forward.Now, looking out the 2022 and beyond, our business really becomes a very simple story. As you can begin to see on Slides 26 and 27, our capital intensity and cost structure dropped, we don’t have any FTE or other fixed cost obligations to grow into. We don’t have large debt burdens to tackle and we don’t have expiring acres of inventory issues dictating our development pace. Basically, we methodically harvest our core areas at a pace of around 25 wells a year on average and produced significant free cash flow under the strip.And as you can see on Slide 28, we averaged $500 million a year with this plan. And I am going to say it again as it’s worth repeating, these projections are based on the go forward gas forwards as they exist today. And as the slide shows, if gas prices get back to $2.75 to $3 range, the free cash flow numbers will grow even larger. And we do feel that over the long-term, $3 gas prices make more sense than $2.40 gas prices do. Most companies in the E&P space are struggling to create business models that are free cash flow neutral at the current strip. Cash flow neutral under the strip is not a business strategy. It’s more smoke and mirrors, which is why the debt, equity and private equity markets are skittish to say the least about our industry. They have been burned too many times in the past. Our goal of opening to breakeven, refinance debt and then continuing to breakeven is not a strategy. If you are only running to pay leaseholders, GP&T companies, service companies and pay debtholders’ interest you have already lost, which is why we feel that over the long-term if E&P companies are forced to use their own money to fund their own cash needs, prices will rise to support that.In conclusion, I would like to expand on some points that Nick touched on earlier today. CNX’s go-forward business plan is unique and is very difficult to try and replicate. Our journey to get where we are, was long, methodical and against the grain. We are proud of that, what we have accomplished and how we accomplished it, but we are not done and the best is yet to come. While all of our peers are trying to survive a $2.50 type NYMEX gas price strip, CNX planned for it and now is built to excel in it. And the reasons we are, are due to the attributes you will find on Slide 30. Simply put, to be successful, you need high NRI Tier 1 acres, you need a best-in-class cost structure, you need a strong balance sheet and a nimble business model with low fixed cost that can adapt at changing commodity prices, you need well thought out and capitalized infrastructure, you need to control your own midstream destiny, you need substantial revenue prediction, and you need a forward thinking proactive team from top to bottom, which CNX has. These attributes are what allow us to have a rock solid foundation case that generates substantial free cash flow even in the low parts of the commodity cycle.And while we look good at the current strip, we will look even better in a higher gas price environment with even more free cash flow generation and a world class inventory position to accelerate development and production when the time is right. Our large inventory of Tier 1 Southwest PA Marcellus acreage and our phenomenal CPA Utica acreage will allow us to capture any upside for a long time to come. These characteristics are what allow us to have the 7-year plan that we do. And in our mind, it is the only way you can be a successful E&P company over the long haul. All of this was built through years and years of hard work and it ensures we are by far the best positioned to be the leader in this space and for years to come. And I am personally looking forward to a future where capital markets remain picky and where the private equity energy model is becoming extinct, a world where our peers in the E&P space can only spend money that their business generates – that their businesses generate is world in which CNX will dominate in.Slide 27 translates our annual free cash flow projections for 2021 and to a free cash flow yield. As you can see, it is by far the best free cash flow yield among our Appalachian peer group and the best free cash flow yield in the mid-cap E&P space period. And remember, the 2021 cash flow yield shown here is protected by our best-in-class hedge books. Going forward in 2022 and beyond, our free cash flow yield climbs even higher into the mid-20% range at our current share price. Bottom line, when you couple our free cash flow yield with our strong balance sheet, it makes for a truly exceptional investment in any industry let alone relative to our peers. And remember, CNX’s guidance is based off of the current NYMEX gas strip.The takeaway box on Slide 38 sums it up perfectly. CNX is by far the best combination of a downside protected company with an enormous amount of upside. And from a relative investment standpoint, it is hard to find a better opportunity right now in any industry.With that, I will turn it back over to Tyler.

[Tyler Lewis:]

Great. Operator, if you could open the line up please, for Q&A at this time?

[Operator:]

[Operator Instructions] Our first question today will come from Welles Fitzpatrick of SunTrust. Please go ahead with your question.

[Welles Fitzpatrick:]

Hey, good morning and thanks for the – lot of aggressively worded prepared remarks. It’s a good guide. It’s a multiyear guide. On Page 25, you guys talked obviously to accelerating, is that more a function of gas prices or is it a function of sort of the opportunity costs whether that be your bond prices or other items getting less attractive?

[Don Rush:]

Yes. This is Don. I appreciate it, Welles. I think it’s a combination of both. As you roll forward, you would assume that bond yields and those sorts of things would be better, right, if gas prices are better. So right now, we are thinking along the lines of really do the dispatch incremental crews to kind of accelerate some production. So that’s very well within our control to do. As Chad laid out, predicting the future right now is as hard and as cloudy as ever and the volatility of what it could be on the high side or the low side is pretty meaningful. So as we sit here today, we are kind of a wait and see mode. We have the ability to quickly to move up or down depending on how the really summer shapes out and I think as we sit here in September or October, we will have a pretty clear indication of how the winter in 2021 is going to play out. And if it’s on the bullish side of the thesis which will be great, we have a really great opportunity to take advantage of that. And if it doesn’t turn out to be that world, we have the ability to still produce the significant amount of free cash flow and sort of save some of that production and just stay steady state for longer.

[Welles Fitzpatrick:]

Okay. And then on the production profile you talked about on 13 and potential to choke back some wells in Shirley-Pennsboro, am I correct in assuming that if there are any sort of midstream or processing penalties related to that, it will be relatively de minimis?

[Chad Griffith:]

Well, there are some well commitments and volume commitments in that area they are factored into the guidance numbers that we provided we certainly we are trying to work with those service providers to find ways to modify those where we both benefit sort of find win, win solutions there but there are minimal volume commitments in the Shirley-Pennsboro area. So those are out there they are not huge but they are out there.

[Don Rush:]

And you can see in the appendix where we go through some of other operating expenses there is slight uptick in that and like Chad said it is factored into the all-in economics of these decisions and still including those from a just truly free cash in your term free cash flow stand point over the next couple of years it is a more clear decision to go ahead and wait on some of this production, again as the strip exists today if conditions change or processing things change then maybe we change but right now using the four numbers it makes just logical rational sense it is difficult to I guess swing upstream and force some of this production and products in the places right now that aren’t great prices so if we have the ability in the capital structure to wait a little bit it is a prudent choice.

[Welles Fitzpatrick:]

Okay perfect. That makes sense. Thank you for that.

[Operator:]

Our next question comes from Sameer Panjwani of TPH. Please go ahead with your question.

[Sameer Panjwani:]

Good morning guys. So when do you think about the longer term free cash flow and debt profile, the cumulative 2022 through 2026 free cash flow is expected to be above the cumulative outstanding debt after the 2022 maturity so should we think about CNX transitioning to a no debt business or is there a change in your thought on leverage and what this transition would it fair to see or to think about CNX transitioning to more of a cash distribution models over time?

[Don Rush:]

So this is Don. So I will answer that question in a couple of parts. So one I think again talked a little bit about our hedge books historically be not only just return protection and near term cash flow and leverage protection that really was a bridge to allow us to reposition the business and talked about being able to do that for a little gas price environment but also it think it was important and I don’t think quite understood historically that it allowed us to change our capital structure over those course of this couple of years and I think it is pretty well known and apparent that the goal posts were healthy balance sheet and these spaces changed. So looking forward to where we need to position the business we do think over ‘20 and ‘21 it allows us to get into call it a more optimal capital structure where our debt would sit there today. So for 2022 going forward we will obviously position the business and place the free cash flow in the best buckets that we should at the time sitting here today it is hard to know which part of the puzzle that would the free cash flow that we generate would go into I think the best way to think about it is working with what we have done historically we have used free cash flow to pay down debt we have used free cash flow to grow production we used free cash flow for infrastructure land acquisitions we have used free cash flow to return capital to share holders so the capital allocation from what we are comfortable taken our cash flow and putting it into the place to mix the most sense at that time and to somewhat up it’s we recognized the balance sheet and leverage ratio metrics for healthy companies have changed like I mentioned that is a good term good thing for us and to the long term health of the industry and we will be ready and have substantial amount of cash flow to invest in 2022 and beyond and we will stay true to our philosophies and follow the math on where it goes at that time.

[Sameer Panjwani:]

That is really helpful. And I am sorry if I have missed in the prepared remarks but did you quantify what the leverage profile would look like as you talked about the shift in goalposts here?

[Don Rush:]

Yes. So, we talked trying to figure out what slide it is I am sorry I don’t – Slide 21 we have our leverage ratio going down to ‘21 at the end of the year and sort of dropping below that in ‘21and clearly with the free cash flow generating profile, I mean, if so necessary like you mentioned we could pay off all of our debt or if something more of a, call it, 1x or 1.5x is a right goalpost or again maybe by 2022 and you have different capital markets at that time to be more conducive to call it healthier gas prices and being more selective on who they get money to, then maybe that’s something that you can be in, so somewhere in that range, I think is where we are heading and where we exactly land is hard to tell. It’s pretty clear for us over the 2021 what the optimal kind of use of incremental dollars are as we get beyond that point, it’s hard to know when you know, but we will react accordingly to the metrics and variables as they exist once again into that, call it back half of ‘21 and into 2022 timeframe.

[Sameer Panjwani:]

Okay, okay, got it. And then as you layout the maintenance program for that longer term period, how should we think about the trajectory of the base decline over time and also the run-rate of non-D&C spending?

[Don Rush:]

Yes, we lay it out a little bit on Slide 27 on sort of the non-D&C spending. So, we have talked a lot about the last couple of years and tried to be as thorough as we could explaining that some of the upfront investments that we are making in our water systems, in our land positions, in our infrastructure systems are really going to call it allow us a step change in cost and capital efficiency going forward and I think you are starting to see that now than we have given even more transparency and new clarity going forward. So, step change meaningfully in non-D&C across consolidating both upstream and midstream going forward. And like you mentioned the longer you stay in a maintenance of a production type profile be the I guess the lower your base decline gets over time. So we quoted to mid-30s that will drop into around 20s and then start to head into the mid-teens as you move along the curve towards the later part of the plans we laid out.

[Sameer Panjwani:]

Got it. Thank you.

[Operator:]

Our next question comes from Jane Trotsenko of Stifel. Please go ahead with your question.

[Jane Trotsenko:]

Good morning and thanks for taking my questions. My first question is on the second quarter, I just wanted to get a little more inside how this quarter is going, is looking like maybe in terms of production and I looked at slide, I think, 13, if you could also comment on CapEx and completion?

[Chad Griffith:]

Sure. So, for the current quarter Q2 that we are currently in, in the production profile, we do not currently have any wells shut in today due to economic reasons, right. So that is something we are still assessing. We are looking at commodity prices everyday and we are looking at the exact right way to optimize that. But as I mentioned in my prepared remarks, we do assume that we will be curtailing a certain amount of our wet production probably beginning in May and lasting in a minimum, call it 2 to 3 months. So we will be deferring that production into later end of the year to take advantage of that much higher prices that are available then and generating more cash flow and increasing the present value of those wells. If gas prices continue to steep – if the curve continues to steepen that’s where we start looking at deferring more of that production later in the year to even further increase the rates of return in the present value of those wells.

[Don Rush:]

And from a capital standpoint, it’s fairly consistent as you roll through the rest of the year, so the Q1 number is sort of set. And as you think about Q2 and Q4, the difference between our guidance in Q1 is fairly consistent across the year.

[Jane Trotsenko:]

That’s perfect. And it seems to me like you guys are not completing any wells in 2Q right?

[Chad Griffith:]

Well, we will continue to have – we have a frac crew running consistently over the course of the period. That’s pretty steady state where the real opportunity is if gas prices really do run, we do have an opportunity bringing the spot crew and that’s where sort of some of the upper range in production opportunity comes in 2021.

[Don Rush:]

And call it the production management optimization that we are looking at is really after wells competed and flushed out on sort of the water kind of flow-back like cycle, saving some of that upfront when you go into later. So we are not changing really the capital program meaningfully. We are keeping a smooth operating system to Nick’s earlier comments that we take seriously the essential part of the ecosystem of the business the gas production is. So we are keeping things rolling. We are just trying to be thoughtful around the production flow management all these wells and trying to maximize margins and cash flows and timing the better part of the wells and saving some of that for later pending pricing stays how it is shaped today.

[Jane Trotsenko:]

Okay got it. My follow up more like on the medium term may be you guys can talk about the well mix so like let’s say you guys are going to complete 25% of Utica wells and 75% of Marcellus wells like over the medium term and how does West Virginia development is envisioned in this plan?

[Chad Griffith:]

The details that we have laid out in the slide deck really is limited to 2020 where we have 34 wells we plan to turn online for the year and 12 Utica wells we plan to turn online for the year. Really beyond that, the mix is really still to be determined as we look at what the right mix between sort of wet gas and dry gas and where do we want to be in really so as far as giving the details of what that alignment looks like over the long term it is really still to be determined we are going to follow the math we are going to look at what the best rates of return are we are going to look at the best areas for development and that is where we are going to focus our D&C investment.

[Don Rush:]

And if you go back we have talked a bit around this a little bit Southwest PA Utica need for funding so the one pad that we did this year that is basically done and just one more that we would do into the next year to help for blend beyond that there is a bulk is just in the Southwest PA Marcellus. So the commentary the 22 to the 27 plan we highlighted that that's really just Southwest PA Marcellus with a little of our CPA Utica in there no need for blending in Southwest PA Utica in to that plan that is really just upside of Southwest PA Utica that point or call it inventory extension at the end of life of the Marcellus over a decade from now In near term, we talked on the last call that the Utica that we show on the TIL mix on Slide 13,we do – we are doing another pad in Ohio in our drive Utica over in Ohio and rest is really into the Marcellus Southwest PA with a little bit of Shirley-Penns volumes. But as Chad said, some of that is getting shifted to the back half of this year and to next year so bulk of it Southwest PA Marcellus bulk of it dry gas but we have a lot of flexibility to add to the program in some of these other areas if gas prices warrant it.

[Jane Trotsenko:]

The last question if I may looking at Slide 25, what Henry Hub price would you guys need for CNX to accelerate production 10% in 2022?

[Don Rush:]

Yes. We are not going to get into an exact price. So I mean there is obviously five months there is a long term forward strip that is what we can hedge there is how the NGL’S are reacting or not reacting and I think one of the questions earlier, there's also the other capital allocation opportunities that exist at the time, so not really a set stone type exact gas price that we make these decisions on. But if – there is this thesis out there that gas was $4 so clearly $4 so it pretty attractive opportunity to push more money into D&C sooner to get more production sooner. So just generally, we're able to do it if it makes sense and hopefully we are developing a track record of being pretty – pretty follow the math on doing what’s appropriate.

[Jane Trotsenko:]

Thank you so much.

[Operator:]

Our next question comes from Holly Stewart of Scotia Howard Weil. Please go ahead with your question.

[Holly Stewart:]

Good morning gentlemen. May I first just starting off with the follow up to Jane’s question, can you quantify that the 2 to 3 months of assumed production shut-ins?

[Chad Griffith:]

Are you speaking as far as like production per day?

[Holly Stewart:]

Volumes?

[Chad Griffith:]

Volumes. It is really going to be a function of exactly how the NGLs and condensate play out as I said we are looking primarily at Shirley-Pennsboro for this. immediate production deferral which is one of our wet fields and certainly subject to and NGL condensate prices I don’t know if you guys have been paying that close attention to what is happening there I am sure you have been but NGLs and condensate have really been being up lately there is a lot of with the demand destruction associated with the virus fuel backing up in the storage refinery runs being cut. Now a lot of these NGLs and condensate feed directly into that refinery process, and so the stuff is backing up storage is filling up it is really getting hard to flow NGLs and if you can flow them, the prices are really rock-bottom. So fortunately for CNX, it’s not a big part of our production portfolio and to the – even to the extent that it is, we are able to blend a lot of the wet gas that we have. Shirley-Pennsboro, unfortunately, one of those places sits on an island. And so for us it’s sort of one of those things that it’s an example to us would it be like be, like an all-in wet gas producer. It’s a really tough place to be right now.

[Don Rush:]

Yes. And you can see on Slide 13 how it looks a little bit on call it the hatched red part of the graph. So for May, you can kind of high ball it, it’s around like a 300 a day type of a production change, if you want to do that.

[Holly Stewart:]

Okay, that’s helpful, Don. And there, is there a thought on just NGL or condensate price where you bring that back, just trying to get a sense for how long and you talk about 2 to 3 months, but if prices remain low then you – I am assuming usually that volume shut in?

[Don Rush:]

Yes, that’s why we tried to again just be thoughtful, transparent and follow the math on the way we have laid out guidance. I can tell you right now the next several months are more impossible to predict in the next several months of any timeframe that I have obviously spent working at the company. So instead of trying to predict what the next several months are going to hold, we just wanted to make sure folks were going to have transparent information on what it looks like. If things stay not so good, we will save it for later, if things come back, we go ahead and add it back to the equation and net-net, the business is still strong, the capital structure is still strong and leverage ratios are still strong and any near-term issues for both CNX or CNXM really just sets up better, longer term fundamentals for the long-term portfolios of the businesses. A couple of months, whenever you are solving for long-term intrinsic value per share doesn’t matter as much as making sure that cash flow is maximized.

[Holly Stewart:]

Yes. Okay, that’s perfect. And then maybe just a little color on ‘21, so looks like your 46 TILs in 2020 still planned and then that long-term 7-year guide is 25 in the plan. So can you just give us some color maybe on that for ‘21? And then is that still a 1.5 rig program and a 1 crew program or how should we think about that plan as it’s reshaped here?

[Don Rush:]

Yes. No, I’d say – I guess it would be a generic answer but it’s in the middle. So I think it depends on whether we want to try to get into the higher end that 600 Bcfe we highlighted if gas prices are good. I think it will be closer to, if you will count it, that we have had in 2020. And likewise if gas prices are muted or were just slightly growing, I mean you are going to be, I think we highlighted previously a 30-well year type program kind of grows just a little bit. So that’s the kind of the way to think about it. So, that’s a general approach. And Chad, I mean you can talk to – it doesn’t take much to do either one of those. It’s just really adding a frac crew.

[Chad Griffith:]

That’s right. Depend – we are going to keep close eye on commodity markets on gas prices. We have got – we have got a little bit of a DUC inventory, I think was really sort of healthy level DUCs, but prices run that enables us to bring in a spot crew and complete a number of wells and get them online very quickly to take advantage of those strong aspects.

[Holly Stewart:]

Okay, okay. And then maybe one question on just that longer term guide, it looks like the fully burdened cash costs that are on Slide 27 are $1.04, what is the primary driver for that reduction? I mean if you look at the first quarter of this year, it looks like a pretty big swing down.

[Chad Griffith:]

Over the long-term, we begin to rollout of some of our legacy FTE contracts. There is a number of those that date from really, all the way some of them date all the way back to the Dominion acquisition if you guys can remember that. Some of those were higher cost. And so as those begin to roll off that overall GP&T portion of that – of operating costs begin to decline and so that’s really a big driver of that decreasing operating expense over time.

[Don Rush:]

And you will see too just in the interest expense that’s flowing through the business as we de-lever and we have kind of avoid taking out some of the more expensive near-term debt products that folks have had to lean to refi with. So pushing through, call it, just more efficient operation, Chad and team, we are obviously focused on long-term conversations today, but they have made a tremendous amount of progress in just day-to-day management of the company and the remote operation capacity that we have here. And like we talked, the capitalized water systems that we built to really help that cost side of it as well and net-net, the GP&T line item has always been efficient for us. So, it’s chunky in a couple of areas that are just allowing the business to be in a much lower kind of steady state cost structure going forward.

[Holly Stewart:]

Okay, helpful. Thanks guys.

[Operator:]

This will conclude our question-and-answer session. The conference has now concluded. Thank you everybody very much for attending today’s presentation. You may now disconnect.