Cabot Oil & Gas Corporation
Q3 2020 Earnings Call Transcript

Published: 30 Oct 2020

[Operator:]

Good morning. Welcome to the Cabot Oil & Gas Corporation Third Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I’d like to turn the conference over to Dan Dinges, Chairman, President and CEO. Please go ahead.

[Dan Dinges:]

Thank you, Kay and good morning. Thank you for joining us today for Cabot’s third quarter 2020 earnings call. As a reminder, on this call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers, as well as reconciliations to the most directly comparable GAAP financial measures were provided in yesterday’s earning release.

[Scott Schroeder:]

3.1.

[Dan Dinges:]

Scott just corrected me, 3.1 tons of CO2 equivalent per 1,000 barrels of oil equivalent. This significantly lower than the production weighted average intensity of 15 tons of CO2 equivalent per 1,000 barrels of oil equivalent for U.S. onshore assets, as reported by interest based on the 2018 publicly available data. We currently evaluate new opportunities and continuously do this for emissions reductions to ensure that Cabot is among the most efficient and lowest emitting domestic producers. We also believe our elimination of flaring in the Marcellus, which began in 2014, and our strong performance in water management, including recycled 100% of our water recovered in our Marcellus drilling, completion and production operations, which began in 2011 will continue to make us financially and environmentally superior as pressures for lower carbon and water conserving economies – economic intensify.

[Operator:]

We will now begin the question-and-answer session. Our first question is from Leo Mariani from KeyBanc. Go ahead.

[Leo Mariani:]

Hey, guys. Just a quick question here on the gas markets. To your point, we've seen NYMEX futures prices strengthened materially over the last month, which is certainly quite encouraging. I guess, at the same time, we've seen quite a bit of weakness in physical markets in Appalachia. And I guess a lot of the other kind of key gas-producing regions around the U.S. So it definitely looks like there might be bit of a disconnect in terms of what we're kind of seeing in futures versus physical? Just kind of wanted to get you all's opinion in terms of what you think might be driving some of that? And do you think those prices need to start to converge as we get deeper into the winter here?

[Dan Dinges:]

Yeah. Thanks, Leo. And yeah, I'll turn this to Jeff in a second here, but we have seen the shoulder months, September and October being difficult. Typically difficult at that time of year, but the storage levels exasperated that perception for a while. But we did see on week-over-week injections in a comparative sense, be less than – certainly less than last year, and majority of them less than the five-year average. And I think that is moving into now – to your point about convergence, I think that's moving into now the market converging rapidly, as we've seen towards the latter part of October, an increase in the physical space. I'll let Jeff make a comment also.

[Jeff Hutton:]

Yes, sir. Good morning. Dan hit the nail on the head with storage number primarily in the East. The East typically builds up, of course, their storage levels. But this year, they were build quite early. And so, with some really mild shoulder months, we did see our basis differentials widen out a bit in contrast to what NYMEX has done.

[Leo Mariani:]

Okay. And just to follow-up on that. Clearly, to your point, we're starting to see physical prices improve a little bit. Would you guys expect that those physical prices continue to rise this winter? But is there also a risk that maybe we see some downward pressure on those NYMEX prices for kind of prices to meet a little bit more in the middle?

[Jeff Hutton:]

Well, again, I think we're early into the winter weather season, and it's encouraging. We had snow today in Boston. That's always a good thing in October. But it's going to be somewhat of a weather play. We've worked really hard to insulate ourselves from just being a weather play. We've got a lot of physical fixed-price contracts in place with high floors. We have, as Dan mentioned, started our hedging program. But NYMEX is a result of demand decline and demand is a function of weather in a lot of cases. But we've – again, we're prepared for that. And I think the increase in NYMEX over the last five months and including a big increase in 2020 too over the last five months is a real encouraging factor.

[Dan Dinges:]

I'll also add that, where the prices are right now and you look at the – just the fundamentals that are out in front of us, that you do have an undersupplied market going into this winter with an undersupplied market. If you do have a colder winter than expected, it's going to certainly move the price up. But I think also equally as important, if you have a normal winter or even a warmer winter with the undersupplied market, I do think there is a higher floor that's been placed under the market-based on these fundamentals. And particularly where we have seen a very strong rebound in the LNG going from back in, what, March, April, 3 B's, a day export to recently 9 and pushing 10 Bcf day export in LNG in the last couple of days.

[Leo Mariani:]

Very helpful color for sure, guys. I was hoping you could maybe just touch base on the returns of capital. Clearly, to your point, Dan, there should be significant excess free cash flow in 2021. You kind of talked about a number of different options, variable dividends, special dividend, buybacks clearly, to your point, clearly, market conditions at the time in terms of where the stock isn't more gases, we'll determine a lot of that. But can you maybe provide a little bit more color in terms of how you kind of think about those different options for next year and kind of what sort of the key things you're looking for to choose one versus the other?

[Dan Dinges:]

Well, as I mentioned, our first commitment is to our stated dividend, we also are going to take care of our $188 million maturity, that's important. You look at our history. And in the last five years, we have returned a significant level of capital to our shareholders over $1 billion. We've had a five times. We have increased our dividend, and we have also brought back in about 14% of our outstanding shares by repurchases. But to prioritization, as I mentioned, dividend, maturities, but it has been our of intent to deliver a minimum of 50% of our free cash flow back to shareholders. We'll continue to do that. We referenced earlier, a special dividend consideration, variable dividend proposition that some have outlined and made it a little bit more formulaic. We have not gotten to that stage yet. But if you look at our history as an example of our – what this management group considers and the Board, we have given back a lot of our free cash flow over and above the 50%.

[Leo Mariani:]

Okay. Thanks for the color.

[Dan Dinges:]

Thank you.

[Operator:]

Our next question is from Charles Meade from Johnson Rice. Go ahead.

[Charles Meade:]

Good morning, Dan, to you and your whole team there.

[Dan Dinges:]

Hey, how are you doing, Charles?

[Charles Meade:]

Well, I am doing very well. That’s kind of you’ve asked. Thank you. Dan, we – the outlook for price is really, really interesting. And of course, we've got some rosy possibilities out there, but we'll have to wait and see. What I'm curious about is what levers you may have or may have set aside on your 2021 plan? And as I look at your capital guide, with just a $10 million window that looks like to me, that the message is, even if we do see a higher price spike, you guys aren't going to change your plan at all? And I guess my question is, is that the right read to take from your CapEx plan? And the follow-up being, are there other levers you could pull perhaps something like increased compression if you happen to see really strong spot prices for a couple of months?

[Dan Dinges:]

It's a good question and we referenced in my comments that we're not going to grow for the sake of growth. And that there is a point that capital efficiency would make sense to allocate. But really, the way we see the market right now, Charles, and even at a slightly higher price point than where it is right now, we think that the capital program that we've laid out in the range of $530 million to $540 million is the appropriate program, we think, a maintenance program is appropriate at this stage. You have to look at right now the early winter season, you have to look at there is still a couple of hundred Bcf over comparison between this year's storage levels and the five-year average and last year's storage levels. We are moving into an undersupplied market. We have uncertainty with winter out in front of us. So, I think that from our perspective and looking at what's prudent for the health of Cabot and this industry that we are better served to stick with a maintenance capital program, and that's what we're going to do.

[Charles Meade:]

Got it. Okay. And then the follow-up on the Upper Marcellus. Just to dig in and see if there's any other maybe detail you guys give, it's you talked -- or you talked about in your press release and you spoke about it. Could you clarify, are all -- are each of those wells individually above that 2.7 type curve? And -- or is it the average of those being above the type curve? And what are you learning with what you're seeing in the variation between those Upper Marcellus wells?

[Dan Dinges:]

Yes. We had -- those wells we referenced are wells drilled off three different pads and distinctly different areas of the field and obviously, with an average of greater than 2.7, there's variability between the wells. And what we're seeing in my comments I made. And what we're trying to do with our capital allocation right now with complete of the zone, we have a thick per cell barrier between the upper and the lower. We gather data on any effects of offset wells that we've drilled and each of these wells were drilled near previous drilled and producing lower Marcellus wells, again, clear evidence of the distinct nature of the Upper Marcellus. But we are learning from our frac recipes and the landing position that we have been looking at in various different sections and a tweak frac recipe on various different landing sections to determine, do we see differences in the results. So it's an early game, and we're just gathering data like every operator has done when they go into a new shale play. The Upper is a new shale play with the 60 or so wells that we've drilled in it. We're learning continuously as we go. We're not carrying the -- we learned from our lower Marcellus and what we do there. But we also know the Upper is a distinctive reservoir to the Lower. So we're going to be well educated as we roll into our full development at the end of this decade will be well educated and ready to roll forward with greater than 2,000 foot laterals and an enhanced return profile for our Upper Marcellus wells.

[Charles Meade:]

Thank you for that. I will call again.

[Operator:]

Our next question is from Arun Jayaram from JPMorgan. Go ahead.

[Arun Jayaram:]

Good morning. Arun Jayaram from JPMorgan. You've talked about the backwardation in the curve, currently not incentivizing you to grow. And it's clear that generating free cash flow is your main priority. But the question is, at what price level would you need to see longer-term in terms of the strip for you to pivot to, call it, some moderate level of growth?

[Dan Dinges:]

Yes. Higher than where it is. We have – you look at the backwardation and reference to 2022. It is -- has increased. Jeff referenced, I think, $275 million plus or minus is where 2022 is right now. The current strip is north of $3 for '21. We are going to be able to generate with the market what we see today in front of us. We've layered in some good floors to protect a very good program for 2021. That's going to deliver significant free cash flow greater than we've seen this year. Full coverage, we feel on our dividend and debt maturities and also incremental free cash flow above that. We think we're going to be able to see that. We're looking, again, with anticipation on the winter and what it does to the markets. We have for example, gas available for the non-New York market up there in New York. That non-New York market up there last year, as a reminder, averaged about as a $1.70 premium market to NYMEX in the first quarter of '19 that also just as a footnote on what that does to an annualized differential out there and certainly, compresses the differential that we see in the in-basin area. So to answer you specifically, I'm just going to focus on and my preference is to focus on right now, what I think is better for Cabot Oil and Gas is better to focus on our commitment to a maintenance capital program at this time. We think that is important for the industry, and we think that our commitment and conviction to that at this position in time is proven position to take.

[Arun Jayaram:]

Great. And Dan, just my follow-up, you got the light year expansion coming on next year. Can you talk about any views on how this could impact basis differential and transport costs in 2021 and beyond?

[Dan Dinges:]

Yes, it's a good question, and I appreciate it. I'm going to hand the baton to Jeff.

[Jeff Hutton:]

Good morning. Yeah, Leidy South is a reinforce project. Not only for Cabot for others in the basin. And essentially, in the Northeast area of the country, this is greater than 0.5 Bcf a day, it's $580,000 a day of new takeaway, super majority of that gas will be existing gas. It's coming off the Leidy system and maybe a little bit off of Tennessee, for example. So for Cabot's position, $250,000 a day down to the Mid-Atlantic marketplace is – will improve price realizations. There's no doubt about that. We're also in a unique position that the Atlantic Coast pipeline was canceled. We felt like there was a little bit of gas supply from that project that was going to compete with us. And since that's no longer there that's another good indicator for capital realizations. Overall, though, I think the basis differentials in Northeast Pennsylvania for all the pipes will improve significantly, just like the start-up of Atlantic Sunrise project. So we're encouraged that there is, in fact, a good possibility that there will be some early service available to the shippers on that project. We're hopeful that, that could be as early as this winter. More to come on that, but it's definitely an improvement to get another major takeaway project in place.

[Arun Jayaram:]

Great. Thanks for your color.

[Dan Dinges:]

Thanks, Arun.

[Operator:]

Our next question is from Brian Singer from Goldman Sachs. Go ahead.

[Brian Singer:]

Thank you, good morning.

[Dan Dinges:]

Hi, Brian.

[Brian Singer:]

I wanted to follow-up on Arun's first question. You had talked, I think, in your opening comments about the forward curve for 2022 being below the $3 plus that you're kind of seeing for 2021. And I wondered if you could just talk philosophically on how you think about what that price point is where you would move away from maintenance mode? Is it based on where peer supply cost is? Do you -- is it based on a higher cost of capital relative to what would have been used in the past to try to drive supply cost, or is there a clawback in return of capital to shareholders above and beyond your debt paydown target given that this year was a pause for understandable reasons. Just some philosophy on how you're -- how you would make that decision?

[Dan Dinges:]

Well, I really look at the -- start with the macro environment, Brian. The macro environment has been oversupplied. And that oversupply has made it extremely difficult and challenging for our industry. You can look at the balance sheets across the space, both natural gas and oil producers' balance sheets has a level of stress that is going to be sticky. And when you look at the ability to delever in a market that is such a challenged and maybe oversupplied market in light of this pandemic, it is not in our best interest from a capital management standpoint to stress the -- our balance sheet and we think at this period of time, with the prices we see out there, that if we are going to see higher pricing, a return of that capital to our shareholders in the form of the dividend, in the form of special or variable dividend also, again, taking care of our $188 million debt maturity, is the most prudent use of capital. If there is a disconnect in valuation, to your point and part of your question, if there is a disconnect in valuation about what we think is a value of Cabot stock. It is not as high priority as a dividend to us, but we have bought back shares in the past, and that's certainly not off the table in the future.

[Brian Singer:]

Got it. Thanks. And then my follow-up is, can you provide any update on litigation with the state of Pennsylvania?

[Dan Dinges:]

Yeah. To comment on that is risky. And I can say this that we have just ongoing discussions on the litigation. And we felt like that there is progress being made.

[Brian Singer:]

Great. Thank you

[Operator:]

Our next question is from David Deckelbaum from Cowen. Go ahead.

[David Deckelbaum:]

Good morning, guys. Thanks for taking my questions.

[Scott Schroeder:]

Hello, Dave?

[Dan Dinges:]

Can you hear us Dave?

[David Deckelbaum:]

Yes. Can you hear me?

[Dan Dinges:]

Yes. Now I can, yes.

[David Deckelbaum:]

Sorry about that. Good morning, guys. Thanks for the time. Dan, just a lot about your philosophy going forward. I guess I have just two questions. You talked about the 2022 curve, the backwardation there. I guess, longer term of ranking beyond 2022, if we're in the range where you're getting somewhere, including the betas in the realm of $240, $250 of realized gas. If we're thinking 2023 and beyond, is Cabot a product oriented company in addition to income, or do you still think that this is to compensate contracts for a very long-term maintenance plan with the upside in the commodity just to return in the form of free cash?

[Dan Dinges:]

Yeah. And you are breaking up a little bit, David, but I think it indicated that at a $240, $250 million realized, how do we reflect and beyond 2022? How do we reflect on growth versus maintenance. Don't take my statements today, as we are going to maintain in a maintenance program forever. We understand the value of growth. We understand what growth can do for us. And at the right opportunity. And when we see the right macro outlay out in front of us. And if we can feel confident about the macro environment, that growth can be and will be in our future. But right now, today, we are laser-focused on the maintenance program, but I would be surprised if in the future, as the macro market continues to improve that we don't consider growth.

[David Deckelbaum:]

Appreciate that. And my follow-up to that, the base is coming through clearly is -- I guess, the Appalachian market now being very seasonally driven, weather is obviously a very determinant factor. This past year, they were a lot of and storage and is filling up faster than expected. This year, you’ve shown some production in September or October. As you go into next year, are you looking at optimizing around free cash? Is there any consideration to sort of weighting your completions to be more seasonally advantaged, dying away from shoulder periods where you would have even extremeness in , or is it something that's keeping steady throughout the year and just getting things at the well, if need be?

[Dan Dinges:]

Yes. We have a very low capital intensity program. We only had and had two rigs, three rigs running for 2020. We've had two frac crews, now one frac crew, working up there. And to measure the cadence and be able to time it just exactly right, is difficult because we don't have many pad sites. And if you look at our gathering system, even though we have a great header system and we have flexibility within the gathering system. We do manage when and the timing we bring on the gas through the field in order to have the most efficiency of newly produced gas having the maximum positive effect without increasing any area of our header system pressures to where it might reduce older wells that are on the system. So it's a lot of moving parts we do take that in consideration what you're asking about, David. We do take that in consideration. And we have also brought wells on at a lower cadence and in anticipation of a better price point looking ahead, if that opportunity is available to us. And we'll continue to do that in the future.

[David Deckelbaum:]

I appreciate that. If I could just ask one more quick one. One of your peers recently paid PDP 17 for an asset, primarily looking at it as a source of sort of inexpensive free cash, considering that, that's something that you're squarely focused on now on returning capital. Is Cabot out there in the market looking at, in other words, just cheap sources of free cash in the basin that you'd be able to potentially optimize and use some of your currency?

[Dan Dinges:]

We're always interested in a value proposition. The idea of free cash and one of the luxuries that Cabot does have, is we generate free cash. We have extremely strong balance sheet. And we feel good about our organic operation being able to generate free cash. The value proposition of buying assets on a PDP basis, which, I think any asset today, if it moves, it's probably going to be on a PDP basis. If it fits in our wheelhouse, we'd consider it. But there’s -- and I'll add that every deal that we're aware of anywhere out there, Cabot's internal team does a high level scrub on it. And we do also an internal evaluation on, can we have incremental accretive value-added to Cabot shareholders on every deal out there. Every single deal that we know about out there, David, we do that. So to your point, would we do it on basin asset? Sure. We look at it, because we do that as part of our DNA.

[David Deckelbaum:]

Thanks, Dan. Appreciate the time.

[Dan Dinges:]

Yes. You bet.

[Operator:]

Our next question is from Kashy Harrison from Simmons Energy. Go ahead.

[Kashy Harrison:]

Good morning, all, and thank you for taking the question. So just one for me. Are there any other large takeaway projects in Appalachia other than Leidy South, MVP and then the MVP expansion that have a reasonable potential of getting through the finish line. And if not, does that mean that for all intents and purposes, Appalachian production really only has maybe another 10-ish percent growth, maybe about another 3-ish Bcf of growth -- Bcf a day of growth moving forward.

[Dan Dinges:]

Yes. Kashy, I appreciate the question, and I'll make a color statement, then pass it to Jeff. But the Leidy South is the near-term project. There's other projects on the book that Jeff can cover. But in addition, we also have a business development group that is in search of in-basin demand projects that would require incremental infrastructure, but it would not be in the form of the long haul pipes. Those conversations have been had in the past. Certainly, the pandemic has slowed down some conversations and getting together. Just by the sheer nature of what's going on in a lot of places. But it is our expectation that we will see in Northeast PA incremental in-basin demand projects that would create demand off of our tailgate of our gathering system. Similar to -- though we don't -- I’m not including another power plant in the -- in my expectation. But we have the Lackawanna and Moxie power plants that are classic examples of in-basin demand projects that don't require long-haul pipe. I'll let Jeff talk about some of the ideas in the future.

[Jeff Hutton:]

Yes, Kashy, just to pick up on your specifics about the entire Appalachian, Marcellus basin in terms of takeaway and the basin demand. Northeast PA, as Dan alluded to, is a focal point for us on in-basin. We've actually taken advantage of this COVID situation and surprisingly been able to participate and muster up with a lot of trade associations. We've been doing a lot of webcast with manufacturers associations and industrial groups that are been very beneficial, and that was kind of a nuance in this day and age for us. We are participating in a lot of site selections and site selections including everything from power, water, rail, highway, workforce, permitting, tax, et cetera. So not only are we hard and fast in that area, but other producers throughout the Marcellus. So it's hard to judge what a growth rate could be in entire Marcellus when you have in-basin demand projects throughout West Virginia, PA and Southwest PA, Ohio. And just, for example, West Virginia is getting a couple of gas-fired power plants next year that are replacing coal. So it's growth all over on the in-basin side, throughout the Marcellus. In terms of pipeline, if you look at Leidy -- excuse me, Leidy South, Mountain Valley, we get 2 Bcf per day there. We are firmly where the PennEast is going to be built. Their phase one in Pennsylvania will be -- should receive FERC certificates any day now. If it gets here, quickly, we'll see it in service late next year, if it's delayed another couple of months. That will add to the construction time there. So PennEast is important. One other connecting device was recently approved for construction. Adelphia, that's been in the news. So we have a new delivery point, not only to the proposed PennEast delivery points on Columbia and Texas Eastern. Philadelphia will serve new markets in the Philadelphia area. So I'm a firm believer, there's going to be a number of niche projects going forward to meet the needs of the producer community throughout the Marcellus. And so, I hesitate to confirm or deny of a particular growth rate for all the Marcellus, but there's a lot of stuff going on, in this instance, it's actually pretty exciting.

[Kashy Harrison:]

Got it. That’s super helpful. Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Dinges for closing remarks.

[Dan Dinges:]

Thank you, Kate, and I appreciate everybody's good questions and attention to Cabot business. 2020, as we mentioned, was an extremely difficult year on a commodity price point. I think we illustrated that even in this lowest price point in 25 years that we can still deliver free cash flow and maintain a great balance sheet and our operation. This is -- it's been a while since we've been able to look ahead and anticipate as optimistically as we are, the forward strip. I think the street also is looking at it optimistically with the number of questions that we received today on growth. But we feel great about the position. We feel like the challenge of the commodity is going to have maybe going forward, a different floor underneath it. I think, which will also reinforce Cabot's ability in a cyclical market to be able to still deliver what we've been able to deliver for the last five years. And that's free cash flow, strong balance sheet and return of capital to our shareholders. So with that, I, again, appreciate it. Look forward to our year-end 2020 call in February, and stay safe through this difficult time. Thank you very much.

[Operator:]

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