Cabot Oil & Gas Corporation
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Good morning and welcome to the Cabot Oil & Gas Corporation Fourth Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO, and President. Please sir, go ahead.

[Dan Dinges:]

Okay. Thank you very much Gary and good morning and thank you all for joining Cabot's fourth quarter year-end earnings call. I do have members of the executive group with me today and also the forward-looking statements included in the morning's press release do apply to my comments. As you did see in the morning's press release 2014 marked another successful year for Cabot Oil & Gas as we generated top tier growth in production, reserves, earnings, cash flow despite continued price challenges in the Marcellus coupled with a deteriorating oil price environment during the second half of the year. Going over a couple of the bullet points, Cabot generated record production volumes of 532 Bcfe and increased 29% over '13 levels and an increase of 32% when adjusting from the sale of the Mid-Continent West Texas assets in 2013 this included record liquids production that increased 55% year-over-year when adjusting for the 2013 asset sales. Net income excluding select item for the year was $405 million or $0.97 per share an increase of 36% over '13 and operating cash flows for the year was 1.2 billion, an increase of 21% year-over-year. This growth in earnings and cash flow was driven primarily by our strong production growth combined with a 16% year-over-year decrease in unit cost. The Company did take a non-cash after-tax charge in the fourth quarter of approximately 487 million related to the impairment of certain non-core properties primarily in East Texas due to the significant decline in commodity prices and the decision not to pursue further activity in these legacy operating areas at this point in time. As a reminder, these assets were the focus of the Company prior our development of the Marcellus and Eagle Ford and have not seen any meaningful levels of drilling activity since 2010 so there was no impact to the Company's reserve report. I would also like to highlight that during the year we purchased 4.3 million shares of our common stock and added approximately 40,000 net acres in our Eagle Ford position. All while we maintained a strong balance sheet with conservative leverage metrics and over 1.3 billion of available borrowing capacity on our current facility at year-end. On our proved reserves in addition to these strong operational and financial performance during the year, we also generated significant growth in the year-end proved reserves which increased 36% to over 7.4 Tcfe that is all source finding and development cost for the year was $0.71 per Mcfe, this is particularly impressive yielding at over 43% of our 2014 capital was allocated to our oil properties in the Eagle Ford that by nature are more capital intensive excluding the purchase of reserves in place associated with our Eagle Ford acquisition last year the total company finding and development cost was $0.65 per Mcfe. In the Marcellus, our all sources finding and development cost was $0.43 per Mcf highlighting the capital efficiency of our wells in the Northeast PA, obviously one of the components is that our wells in this area do deliver very strong EURs. The Cabot's average EUR for the 2014 program on proved developed wells was over 18 Bcf up from the 16.9 Bcf for our '13 program. As a result of our continued performance improvements, we have also increased our reserve bookings on PUD locations in the Marcellus from an EUR of 10 Bcf to 11 Bcf per well. Our proved developed percentage increased from 59% in '13 61% in '14 highlighting our fairly conservative philosophy regarding our reserve bookings. For example, we booked a modest 0.7 offset PUD locations for each of our proved developed wells in the Marcellus at year-end. Our year-end reserves were 96% natural gas down from the 97% in '13 which was driven by 100% increase in our liquids reserve base. Approximately 89% of our proved reserves are located in the Marcellus Shale. I would also like to highlight that the Pennsylvania Department of Environmental Protection that released the production data for the second half 2014 this week and once again Cabot dominated the list with the top 16 wells in the state. Let's move to our '15 program, while our '14 operational and financial performance are in the rearview mirror, the results do highlight Cabot's ability to deliver strong results in a challenged price environment, however we are immune to the market conditions the entire industry is currently facing. On our third quarter earnings call in October of last year I laid out the Company's initial 2015 program which was predicated on realized natural gas price and oil prices of $2.80 and $88 respectively. As you all are aware the operating environment the industry is facing has changed drastically since our call less than four months ago, while much of the focus over the last few months has been on the declining oil price, we have also experienced a fairly meaningful decline in the natural gas prices including the regional index prices in Appalachia. No different than what we are seeing in the major U.S. oil basins Cabot and its peers have done an excellent job of finding an abundant supply of resources in the Marcellus and as a result supply demand balance is currently at a synch. Until we see the rebalancing of the market which reduced activity with the reduced activity which I think is currently underway, I believe the industry will continue to see pricing pressures on both oil and gas. As you will recall in the fourth quarter of last year we saw a significant increase in natural gas supply on the three major pipes in our area which included a 15% sequential increase in Cabot's volume in anticipation of winter however, winter demand did not materialize as we all would have expected and as a result we have seen the local indices in January and February sat at levels significantly lower than our initial forecast. In response to this lower commodity price environment, we have adjusted our 2015 program with a focus protecting the balance sheet and maximizing our return on investment by still managing our growth profile. Despite the change in our absolute levels of activity in 2015, our strategy remains unchanged. A focus on aligning our capital spending to be primarily funded by operating cash flows, focus our drilling efforts on maintaining our acreage position and optimizing operating efficiencies and the retention of our high quality employee base. This strategy has positioned us favorably leading into this commodity cycle and we believe this strategy will allow us to exit this cycle extremely well positioned. Company updated capital budget for 2015 as $900 million which is 42% decrease compared to our initial budget. Approximately 80% of the program will be directed towards drilling and completion activity with 60% allocated to the Marcellus and 40% allocated to the Eagle Ford. In the Marcellus, we are currently operating five rigs with plans to decrease to three rigs by the end of the second quarter based on this level of activity we expect to drill approximately 70 net wells and place 65 to 70 wells on production during the year. Giving the backlog of wells we carried into 2015 and our anticipated level of activity during the year, we expect to exit the year with approximately 45 wells in the queue for 2016. Despite drilling longer laterals in '15, we expect well cost to average between 6 million and 6.5 million as a result of operating efficiencies and the service cost reduction that we have received to-date. However as we're all aware this is a dynamic market and our expectation is that if commodity prices remain depressed for a sustained period of time, and the level of activity industry wide continues to decline, we will likely see a further reduction in cost in the Eagle Ford we are currently operating three rigs with plans to decrease to one rig by the end of the second quarter given where our oil prices are currently our focus is solely on lease maintenance and meeting all drilling obligations. Based on our planned rig count for the year, we expect to drill approximately 45 net wells and place 40 to 45 wells on production during the year. Again giving our backlog of wells that we carried into '15 our anticipated level of activity during the year, we expect to exit '15 with approximately 20 wells queued up ready for our 2016. Similar to the Marcellus we expect well cost for the year to average between $6 million and $6.5 million with an opportunity for further cost reductions as we move through the year. We remain excited about what we have seen so far in our 90,000 acre net position which is all contiguous however in light of the current price environment we believe that prudent decision is to maintain all of the acreage and wait until a sustained recovery in prices before we start accelerating activities in the future. Based on this updated operating program, we have adjusted our production guidance range for the year to 10% to 18% which includes 50% to 60% growth in liquids production. This guidance range assumes a modest level of curtailments in the Marcellus in anticipation of maintenance in high line pressures at certain points during the year. Additionally, we have also included a wage of price related curtailments in this guidance to account for those periods where price simply does not meet our threshold. Obviously the natural question would be how much and what price we would take these actions for competitive reasons we will not disclose specifics but I will say that our production profile for the year assumes higher volumes in the first quarter with a reduction in the second quarter and third quarters and increasing again in the fourth quarter. The realized commodity price is used in this updated budget to make our $900 million program or $0.45 per Mcf $2.45 for natural gas and $55 per barrel for oil. This includes the impact of our natural gas hedges which covers about 28% of our natural gas volumes at the midpoint of our updated guidance range. Also for the full year approximately 50% of our gas sales are priced at three major indices in Northeast PA which is Tennessee, Leidy and Millennium. Under these assumptions our operating program would result in a very small level of outspend allowing us to maintain the same financial strength we demonstrated prior to this down-cycle, while still providing double-digit growth and generating returns. Some of you may find or may have questions about 2016 given our reduced level of activity for this first year, first let me say that our internal model shows continued growth in 2016 with the level of growth dependent upon factors that will certainly be understand better as 2015 progresses. However, one key factor, we have the commodity price environment evolve throughout 2015, we do anticipate similar operational and supply reductions by other operators in Northeast PA in a reaction to the current prices and our expectation is that this will ultimately result in a rationalization of this supply and demand dynamics in our area. Given an expectation for tapering of supply growth coupled with new takeaway capacities in the Northeast that's Leidy Southeast expansion and the Tico East side expansion that's coming online in the second half of the year, we will remain flexible with our program if the market warrants us to make changes. Given the productivity and the low capital intensity of our wells in the Marcellus, we are well positioned to adjust our operations in short order. As a reminder, we grew to our current production levels by never operating more than six rigs in the Marcellus and given the anticipated backlog of 65 wells companywide at year-end 2015 we do have plenty of optionality to accelerate completions in the second half of the year as we see fit. As I mentioned earlier, our plan is to maintain our high quality employee base and we believe that positions us very well in the event of a quick recovery. Another key factor that will drive '16 growth and enhance program returns will be the anticipated in-service of constitution pipeline which is currently planned for the second half of 2016. Cabot has 500 million a day capacity on this pipeline so the timing of when this pipeline comes online will obviously have an impact on 2016 production levels. As a quick update on constitution there were a few significant accomplishments at the end of last year that they're repeating as you are aware and on December 2, 2014 the FERC issued a certificate of public convenience and necessity of proving the constitution pipeline. In addition, on December 24th the New York DEC issued a formal notice of complete application regarding the final permits necessary from New York. We are currently awaiting the conclusion at the New York state public comment period which is schedule to end on February 27, 2015. Moving forward we are hopeful to receive our final permits from New York during the second quarter and immediately file for the implementation and construction plan with the FERC with construction beginning this summer. So in summary I've covered many topics we are well position to adapt and succeed in this price environment. I thinks it's clear our asset base and our disciplined focus lends itself to a allowing us to generate returns at these price levels that maybe many other operators will not or may not experience. And despite the current market conditions we remain committed to delivering our long-term shareholder value and certainly maintaining a strong balance sheet. Gary with those comments I'll turn it back over to you to queue up some questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Doug Leggate with Bank of America Merrill Lynch. Please go ahead.

[Doug Leggate:]

Dan a couple of things if I may, first of all on constitution just to be clear, so what is the precise hold up now Dan on moving forward with construction outside of what I guess it rightly issues in New York is still the bottom-line. But in terms of all the other preparation can you actually start now or are you still waiting can you not probably start until everything is lined up. I'm just trying to understand what the bottlenecks might be?

[Dan Dinges:]

Yes great question and a question that is obviously on a lot of people's mind I'll make a brief comment and turn it over to Jeff for any specific color. But we have submitted all the permits we submitted our original permits back in August of ’13. There has been significant dialogue between Williams the operator of the pipeline not only the FERC but also the New York DEC. The protocol and moving through this process is that the DEC has made the determination as I mention on the 24th of December that we have fulfilled our obligation to give them all of the information they need to deem the project complete. With that so there comes a public comment period and that public comment period we are end at this period of time and it ends at the end of this months. Subsequent to that the expectation is with no new issues that would have that not come up over the last couple of years that the New York DEC will grant a final permit and then that would allow us to make the application to FERC to begin construction.

[Jeff Hutton:]

Yes Doug just to add a few points to that the application process in New York and Pennsylvania for that matter and of course we're finished in Pennsylvania it has been pretty much what we expected it has taken a little bit longer than we expected. But the process is what it is and by getting the notice of complete application it does signal that the New York DEC have all the information they need to issue the final permit and the process we are in now is standard and operating procedure where public comments are welcome based on the action that New York DEC took. In terms of getting construction started Williams will file an implementation plan with FERC probably next month and in the implementation plan we will include permits from all the agencies involved including the ones that FERC issued and it will be complemented with the final permit from New York once that is issued. When FERC gets that final determination they'll issue a notice to proceed with construction and at that point construction can begin. So it's a lot of moving pieces but it really cannot dig dirt until all the pieces are in place.

[Doug Leggate:]

Just two quick follow-ups I guess on some numbers if I may first can you quantify the curtailments that you'd assumed in your JV’s of current year and finally any scale of anticipated cost reduction from this point forward and over and above what you've already achieved in terms of service cost? And I will leave it there.

[Dan Dinges:]

On the curtailment we will not be exactly specific. But I can say that it -- in fact all of the available production would move we would certainly approach where the lower end of our previous guidance and in regard to cost again we have seen the cost roll off no different than the other operators that had made a release and we anticipate they'll also as you continue to see service or programs lay down rigs, there is going to be a natural tendency to continue to keep equipment and people teed up and busy for the service sector. And we could see additional service cost reductions throughout the year.

[Doug Leggate:]

And Dan some folks are talking about sort of 20.5% Q4-over-Q4 is that scale reasonable for you or would you pass them up?

[Dan Dinges:]

No I think that's reasonable.

[Operator:]

The next question comes from David Deckelbaum with KeyBanc. Please go ahead.

[David Deckelbaum:]

On the -- I just wanted to follow-up on the EURs that were booked this year, obviously very encouraging data on the PDPs of 18 Bcf versus 16.9 last year. Would you distribute all of that to just longer laterals?

[Dan Dinges:]

We're fortunate to have our VP of Marcellus region in here Phil Stalnaker we had our Board meetings yesterday and Phil's group does a number of things up there that we try to tweak and gain additional efficiencies and Phil why don't you just talk about capital efficiency things that you have done and what we're looking at.

[Phil Stalnaker:]

On the completion side of course one thing we'll continue to look at is the optimum spacing between frac intervals and testing from the 200 feet down to the lateral of 50 foot spacing. Again we're looking at optimizing our landing 0.2. So again we're continuing to tweak the formula and look for ways to improve.

[David Deckelbaum:]

And do you have the data at all for the Eagle Ford, didn't know if I missed that, I just hope on what the Eagle Ford was booked at this year?

[Dan Dinges:]

We have also Steve Lindeman who is coordinating our south region effort Steve why don’t you add some more comments.

[Steve Lindeman:]

Yes for the Eagle Ford we’re still in line in the range that we talked about before about 500,000 barrels for roughly 7,000 foot lateral wells.

[David Deckelbaum:]

So in all the incremental improvements that are being made now weren't factored into last year's reserve report yet at least in the Eagle Ford?

[Dan Dinges:]

That's correct.

[David Deckelbaum:]

The only other one I had was, just on the well cost reduction that you're seeing so far. What percentage of that is just your own optimization versus third-party service declines?

[Dan Dinges:]

Well we had specific numbers on the third-party service declines. As you have seen it through the again the relations that have occurred to-date out there that rig cost coming down and pumping services coming down are the major components, the operational efficiencies are, it is kind of an ongoing effort in our program and we continue to try to those things that would allow us to create more efficiencies either by enhancements to the amount of production or EURs we can recognize or tweaking the components of a completion for the most part or landing points that will allow us to gain time and/or frac efficiencies with either spicing considerations or the amount of profit pumped. Those common things that we all look at, so I don’t have a specific breakdown between the components of service cost reductions and operational efficiencies. The majority of that has occurred most recently has been from the service side.

[David Deckelbaum:]

Last one if I might, just wanted to get with the updated guidance now looking at spends fairly close to cash flow and preserve that balance sheet. Are you starting to see opportunities in and around your core areas to expand your positions from some other folks that are maybe a little bit more stretched?

[Dan Dinges:]

In these environments where commodity price fall off so rapidly, typically there is a law between the time when that fall off occurs and the M&A activity. And I think we're in that period right now, the expectation by those that have assets and that might have some stress points, are they're going to hold as long as they possibly can in hoped of a quick bounce off the bottom. But I can say from a strategic standpoint we do look at this period of time as an opportunity and if we see the bolt-on as you are referring to fit what our long-term plan is, because we're balancing this market for the long-term and not just the short-term. We'll take advantage of it and our balance sheet certainly allows that at the end of the year as we have mentioned we had $1.3 billion of available capacity to utilize, so we're in good shape to take advantage of what opportunities come along.

[Operator:]

The next question comes from Brian Singer with Goldman Sachs. Please go ahead.

[Brian Singer:]

Dan you have generally in the past spoken to building a backlog of wells in anticipation of constitution coming online. How much of your CapEx reduction here is a function of greater flexibility given the lack of clarity on the constitution set of time so has there been any strategic change in which you’d plan to fully supply constitution with wells yet to come online versus wells contributing to the oversupply today of the local market?

[Dan Dinges:]

Well we had reacted with our capital program today based on commodity price. We've looked at the differentials and we all realize the loss of $45-$50 on a per barrel and we have reacted with a reduction in our activity i.e., capital that translated into the number of wells drilled and completed just purely based on that commodity price assumptions and maintaining our cash flow neutral program and looking at constitution and looking at as I've mentioned the queue that we had built up of 40-45 wells that we'll have at the end of 2015. We are going to be in good shape to be able to build our volumes into the expected commissioning date of '15. We continue to see efficiencies as we've reported from our '13 program to our '14 program. We expect continued efficiency gains in our '15 program which I think is going to translate into maybe higher IPs and higher EURs which would allow for a more rapid increase in the amount of deliverability leading up to constitution. I think again a point to illustrate is the fact that and in one of the premier gas fields in the entire world in an area that's growing probably faster than any other place that I'm aware of in the world is a Six County area in Pennsylvania and in all of the Marcellus Cabot had the top 16 wells in the entire field. So I think that speaks volumes on our ability to be able to grow into additional 500 million a day that is our volumes on constitution in a fairly quick order. And I might add without a whole lot of capital intensity.

[Brian Singer:]

And then separately you built up your Eagle Ford commensurate with your growth in the Marcellus over the last few years. Is the down cycle in both oil and natural gas prices provide an opportunity to materially shift your exposure to around these areas or are you committed to the balance currently in the portfolio?

[Dan Dinges:]

Are you talking about like the 60-40 balance we have in the Eagle Ford and the Marcellus?

[Brian Singer:]

Exactly or if you think about the production percentages or the resource percentages, do you see an opportunity for larger scale M&A here to move around your core areas and the weighting of your core areas these new core areas or should we expect when we come out of it that you'll have a similar weighting for the Eagle Ford, Marcellus and nothing else?

[Dan Dinges:]

And that's a good question also because again a lot of opportunity occurs to those that have a strong balance sheet and optionality in a down market and we're certainly one of those companies. We don’t have anything on the books Brian but again to think about our long-term runway and to position us to take advantage of a uptick in the oil market for example I think it is prudent for us to look at what type of area we might want to be in the long-term and how we might want to position and how we create that position. But again as it being a singular focus or a strong need at this particular period of time, it is not that but certainly it's I view that we kick around and we look at and we build data base on to be able to understand the markets out there in the longer-term. So if we move around the balance of commodity i.e. more oil versus our 96% gas versus 4% oil, it would be a long-term view and we'll take advantage of it. And I think we could do something in the future.

[Operator:]

The next question comes from Jeffrey Campbell with Tuohy Brothers Investment Research. Please go ahead.

[Jeffrey Campbell:]

To start out I just want to be clear once you finally break dirt what's the time range for finishing the constitution based on experience?

[Dan Dinges:]

Construction is going to be a rather short-term project but -- and Jeff can fill you out on the number of crews that we have the pipelines on the ground there and the things that have been lined up from the construction standpoint.

[Jeffrey Hutton:]

Okay Jeffery actually the -- of course the pipe is on location and the construction bids have gone out and we have contractors waiting on the notice to proceed everything is set up and staged and ready to go waiting on the final permits. That said there are a few operating windows that have to be considered such as stream crossings and tree clearing and that sort of thing but basically regardless of when you start and if you adhere to all the windows of constructions you're talking about less than a year to get everything in place, tested and operating.

[Jeffrey Campbell:]

Dan based on prior guidance it looks like you have reduced your 2015 wells to drill by a greater percentage in the Marcellus than in the Eagle Ford. And can you add a color on that and the reason why I'm asking is because you've recently said that Marcellus returns to $2 per million BTU’s are better than the Eagle Ford returns of $70 a barrel. So some thought some color might be useful.

[Dan Dinges:]

We want to have some new acreage that we acquired in the Eagle Ford and that new acreage we acquired in the Eagle Ford had near-term lease explorations that required drilling activity. And so our balance of capital with bringing it down to kind of cash flow level just dictate it based on the acreage capture in the Eagle Ford how much activity we are going to have in that particular area and in regard to where that places our activity in the Marcellus we have ample supply to sell into the market. That would give us a growth profile greater than what we have represented in our guidance. However every incremental amount of gas that we would produce in the Marcellus goes into the indices that are the most challenged right now. So to grow into that with additional drilling even though we are yet recognizing very good returns it's still blows down to the balancing act between our cash flow and the amount of activity that’s necessary for a maintenance program. So that’s the balance that we see short-term being our '15 program.

[Jeffrey Campbell:]

So if I could sneak one last quick one in. You said previously that you intended to target investment grade leverage metrics in 2015. And I'm wondering if you're revised CapEx is guided by this goal and does it remain a primary balance sheet metric during maybe future commodity volatility in 2015?

[Dan Dinges:]

Yes I'll pass that to Scott.

[Scott Schroeder:]

Jeffrey yes that’s still a goal again Dan hit on the key points of why we did what we did related to the capital. But we've had a strategy our capital modeling both in good times and in bad that we want to be right on top of or very near the anticipated cash flow and as a result of that we have build a company that is very close to investment grade clearly from a debt-to-EBITA perspective that has been kind of test those kind of limits in terms of investment grade metrics. Simply because of the underlying cash flow but the overall leverage won't change as we alluded to in our opening comments.

[Operator:]

The next question comes from Bob Brackett with Bernstein. Please go ahead.

[Bob Brackett:]

Yes a quick one and a follow-up. The quick one is what's the best daily rate that your Marcellus operations have achieved?

[Dan Dinges:]

Well we had recently we had a 42 million almost 43 million a day type of well.

[Bob Brackett:]

I mean for the whole operation.

[Dan Dinges:]

We have been over 2 Bcf a day in between 2.1 Bcf a day.

[Bob Brackett:]

The other one is a bit more strategic we're spending a lot of time thinking and wondering about constitution. That’s 2016 what's the 2017 and beyond strategy for getting your volumes to market and what are you doing now to make sure there aren’t delays like we've seen with constitution?

[Dan Dinges:]

Now we have a significant runway out in front of us. That is already in and moving forward not only is the constitution teed up for the middle of ’16 and a 0.5 Bcf a day. I’ll let Jeff go into the order of additional projects we have and he might also just touch on what we have at the end of this year too.

[Jeffrey Hutton:]

Sure I'll try to keep it fairly larger number. So we have a number of projects at 20,000 a day here and 25,000 a day there they do add up. But probably in the near-term we have Colombia East expansion that’s coming on later in '15 and Cabot has a 50,000 a day position there Leidy Southeast project comes on December '15 and we have some additional long-term market associated with that. Probably the -- I might mention one other Pen East project coming along in October of ’17, we have 100,000 a day position on that, and that will connect and take gas off Leidy system. But the big project is the 850 million a day coming on in September 2017 that is the Williams project is known as Atlantic Sunrise and that's a new 40 inch pipe connected in the heart of our production area. And as we mentioned late last year the capacity there kind of 850,000 a day 100% of those volumes are committed for sales, we announced the co-point say in the time of long-term sale of 350,000 a day for 20 years and we announced the 0.5 Bcf a day sale to Washington Gas Light for 500,000 a day. So that is certainly going to take us into 2017 with a good program and a good plan and try to working on the next projects.

[Operator:]

That next question comes from Drew Venker with Morgan Stanley. Please go ahead.

[Drew Venker:]

Dan before you spoke about the volumes in the Marcellus sticking down in 2Q and 3Q, just curious if you can provide color, if that's managing to expectations of demand there, if there is something else going on there?

[Dan Dinges:]

No two things, looking at just the system as a whole depending on what type of inflection we get with the supply side and the propensity of gas being curtailed, if in fact the indices fall off or stay too low. I think selling into a lot cost market or a low value market is going to be rationalized a little bit. But what occurs during the deriving shoulder months would be some pressure up on the pipelines and during that period of time it can back gas off the market even though there has been a number of projects to compress and to mitigate the line pressures in the past, so that is one component to the lower volumes that I have alluded to in the second and third quarter. The other is just putting a soft spot in our guidance for low gas prices, if we see low gas prices we're just not going to give our gas away and we would take gas off the market. So that's the reason, nothing operational except for the midstream part of the operation to give us that well.

[Drew Venker:]

And just a follow-up on that, potentially weak pricing in the middle of the year, it's my understanding that in Leidy there is somewhat limited power gen demand especially in the summer. But we've heard some expectations that that will expand over the next couple of years. Can you guys provide any color there or any thoughts as to potential quantitative impact?

[Dan Dinges:]

Yes, Jeff?

[Jeff Hutton:]

Yes Drew there are certainly as you are aware there is an announcement about Panda just this week on new power generation at Central PA. There is also several facilities planned in and off the Leidy system and we're actively in negotiations for those facilities and they're good loads for base loads kind of power gen, and it is something producers love. So it's a little premature I guess to say that how far we have come but we're certainly in negotiations.

[Drew Venker:]

And Jeff give us a sense of what the volume impact would be in 2015 in terms of demand?

[Jeff Hutton:]

Yes, overall…

[Drew Venker:]

In 2015.

[Jeff Hutton:]

So overall these plants are in that 300 million a day plus range. It's up to the power generator, if he is going to split and load between different parties and so forth, or is he wants to deal with one party just how things and scenarios that happened at cove point where you have half the LNG buyer wanting to go to one supplier and the other went with was three to four. So it’s kind of yet to be seen but we're in a great position to serve a couple of these plants and we're in a great position to serve all their needs.

[Operator:]

The next question comes from Subash Chandra with Guggenheim. Please go ahead.

[Subash Chandra:]

Is there an update on percent of sales in 2015 into Leidy and for the last one I saw was sort of mid to late '14 around 20%.

[Dan Dinges:]

Well I know that, as I have mentioned in my comments that though the three indices we have between approximately 50% that is moving into those three indices, Leidy, Tennessee and Millennium, I don't have a breakout in front of me on what's going into the Leidy.

[Subash Chandra:]

And then on the reserve increase you talked about wells being better 18 Bs and 16.9 is there an average Bcf per lateral foot for 1,000 lateral feet that you can boil it down to?

[Dan Dinges:]

Well we have and in the past we've indicated the approximately 3.6 to 4 Bcf per 1,000 foot of lateral and that's kind of a range that that we feel comfortable with.

[Subash Chandra:]

So we're still in that range going from '17 to '18 I suppose?

[Dan Dinges:]

Yes.

[Subash Chandra:]

And then I guess for the PDP wells you've talked about the offset locations the number of PDP wells is 360 or so in the Marcellus the right number to be using?

[Dan Dinges:]

I think it's actually 380-385 something like that.

[Subash Chandra:]

380-385 okay that's the gross?

[Dan Dinges:]

Yes.

[Subash Chandra:]

And that will be high as well okay got it. And then service cost I guess what we've heard from other operators in Appalachia is that unlike some of the oil producing basins there wasn’t really excess margins service companies who're generating last year so the view is that given 2015 dynamics they don’t have that much room to give to where the types of cost deflation we're seeing from the oil basins of 20%-25% expected Q4-to-Q4 may not be realized so I think you did say that 25% is possible, but what would you say about that context provided by other Appalachian operators?

[Dan Dinges:]

Well I would just make a statement about our own experience and the each service provider can be a little bit unique on what their ultimate goal is some would prefer to capture margin and some would prefer to keep their equipment and their personnel busy and they would sacrifice margin. So our operation is a very consolidated acreage position. We have a very efficient operation from the standpoint of the service providers and I'll talk about frac crews just as being the highest percentage of any one completed well besides the rigs but we move from one location to the other and everything is set up ready to go so they keep their equipment and personnel running 24x7 I think very efficient. And I think that is attractive to them, but you look at the reduction that we've referenced already and we go from say $7 million well to $6 million to $6.5 million well we're already seeing those incremental reductions in service cost and again whatever the rest of the market does is and what service cost realizations they see it's going to be all unique and individual but we are seeing service cost reductions.

[Subash Chandra:]

And a final one for me thanks so much. The final one is your transportation cost I guess $0.70 or so from 65 or so in '14 if you look forward to 2016 what do you think that could look like?

[Dan Dinges:]

Well it's probably going to be close to the same a lot of that's dependent on if the transport cost end up with our customers or not.

[Subash Chandra:]

Could you repeat that I'm sorry?

[Dan Dinges:]

So the additional transport cost will be realized by constitution Atlantic Sunrise if those rates are shown up in the revenue by higher gas prices to offset the transport cost.

[Subash Chandra:]

But I guess you would have a separate line item for transport and the revenue line will show up separately?

[Dan Dinges:]

Yes. Yes it will.

[Subash Chandra:]

So if you were to just strip out the transport cost of constitution it came on as expected in '16 could you hazard a guess what that line?

[Dan Dinges:]

Yes well we anticipate in '16 is having a similar range of transportation cost as our current guidance.

[Operator:]

The next question comes from Joe Allman with JPMorgan. Please go ahead.

[Joe Allman:]

To start in terms of dropping the rigs activity are you terminating rig contracts early to reduce the rig count and could you just talk about the process involved in dropping the rigs any cost you're incurring and did you explore other options including drilling wells and deferring the completions?

[Dan Dinges:]

Yes I'll let Steve why don’t you go at that.

[Steve Lindeman:]

Yes Joe in the South region the first rig that we released had a very short-term contract on it so we were within that term. We are still negotiating the terms of that release with our other contractor whether we add time on so forth and that’s what we're working on right now.

[Joe Allman:]

Could you talk about other options that you've explore or exploring in terms of including drilling wells that defer in completions as EOG announced yesterday?

[Scott Schroeder:]

Yes as Dan stated in his comments will edge the year with about 20 Eagle Ford wells in inventory, and so that’s completion activity that we have scheduled for the later part of the year that we're going defer into '16.

[Joe Allman:]

And could we just review again the trajectory of production for the year. So are you expecting production to be up in the first quarter? Sounds like if maybe down the second and down in third and then is it going be a fairly meaningful ramp in the fourth quarter and you expect fourth quarter to be kind of a flattish with 4Q '14. Could you just help us with that and break it up North versus South if you could.

[Dan Dinges:]

Well I think you summed it up on what our expectations is through the year than we've given that 50% to 60% expected growth in the liquids for the year. Liquids production or the production profile in the South region is going to be more consistent than the production profile that we guided and put into our program in the North region, we have more flexibility on swing volumes in the North region and the Marcellus area then we do in the South region. So I guess that level summary Joe we would kind of maintain and grow a little bit of our production year-over-year in the South region and in the North region higher first quarter just like you grow through the year. The second quarter, third quarter down and then increasing again in the fourth quarter.

[Joe Allman:]

And then lastly just a quick one. So for constitution just to be clear are there not any other permits that you need including Army Corps of Engineers, just to be clear on that.

[Dan Dinges:]

I'll pass that to Jeff.

[Jeff Hutton:]

Yes the Army Corps of Engineers permit is included within the New York permits as well.

[Operator:]

The next question comes from Holly Stewart with Howard Weil. Please go ahead.

[Holly Stewart:]

Just maybe a couple of quick follow ups, Jeff appreciate all the detail on the different pipes. Could you just maybe sum up '15 to '17 for both FT and FS for us?

[Jeff Hutton:]

I'm sorry, I didn’t quite catch the question.

[Holly Stewart:]

Just the overall firm sales and firm's transportation total. What's the detail on the different pipes? Could you just give us your overall position?

[Jeff Hutton:]

I think our current sales is -- we have a lot, we currently have and some we have later this year and certainly in 2016 and '17. I don’t have -- all added up your query I'm sorry.

[Holly Stewart:]

We'll follow back up. And then maybe the Dan or Scott just kind of back to the capital allocation. Should we expect anything on the share repo in 2015?

[Dan Dinges:]

We don’t have that as a budget item. You're going have to see a different price point in both of oil and gas for us to make that consideration, both commodities are fairly low and number of companies are struggling even to make a program that they can maintain some level of growth and also fund. So it's not in the cards right now and the only way it's going to get into consideration would be having a difference in the price points from today.

[Holly Stewart:]

And then one final one just on upper Marcellus anything in the 70 net wells and then were there any changes to your booking there?

[Dan Dinges:]

So our focus right now is to complete in the deeper section first. And then we will have a long-term plan that would move up the whole as we continue drilling off the field.

[Operator:]

The next question comes from Marshall Carver with Heikkinen Energy Advisors. Please go ahead.

[Marshall Carver:]

A question on the seasonality of production is there any reason that pattern wouldn’t persist in future years like '16 and '17 maybe wouldn’t be quite as dramatic. But is there any reason to pick that wouldn’t happen again with line purchase, et cetera.

[Dan Dinges:]

Yes possibly a couple of reasons. One would be that we're restricted right now and reason why we have punitive differentials is because the volumes of gas moving into the three pipes up there. In the future we would expect the pipes that Jeff has been talking about that are on the drawing board and moving forward and have expected commissioning dates, with those pipes and allowing additional gas to get out that particular area and also those three pipes in particular is going to allow certainly different dynamics going forward than we're experiencing today. I can't predict exactly what the impact is going to be on supply side or the demand side, let's say at the end of 2017. But I can say that we're going to have a significant level of additional volumes of our gas that would be sinking and priced in different markets than we're experiencing today. So operationally Marshall we could still have operational floor waters and pressures on pipes based on the amount of volume we're including but I think the opportunity to -- the flexibility that additional price is going to afford us and the future is going to be fairly significant.

[Marshall Carver:]

So with constitution coming on in the second half of next year maybe you could give some seasonality between Q1 and Q2 but you wouldn't expect this once constitution comes online.

[Dan Dinges:]

Yes, and I would say you would probably see since there is not the volumes of gas that have access to the aircore system, I would say that you would probably on those particular volumes I would think that you probably would not see as much of the seasonality effect on that pipe and as we experienced today on the pipes Tennessee, the Leidy and the Millennium with the volumes of gas that was trying to force their way on those pipes today.

[Marshall Carver:]

And one more question, do you have expected lateral links for the Marcellus completions or the Marcellus wells that will be going online this year versus last year and also the expected number of stages in '15.

[Dan Dinges:]

Don't have the granular nature of the stages but will be over 5,000 foot on our lateral links.

[Operator:]

Your next question comes from Matt Portillo with Tudor, Pickering, Holt. Please go ahead.

[Matt Portillo:]

Just two quick questions from me. On constitution I wanted to clarify to hopefully get a little bit more color on how you're thinking about those volumes in 2016 and beyond. Is the plan to potentially shift some of your existing production away from Leidy and Tennessee into that pipe and therefore improved margin or are you planning on completing new wells to grow production into 2016.

[Dan Dinges:]

Both are really good questions. The indices in the price received and the three pipe areas that all of the operators are exposed to right now up in that six county area, there is going to be somewhat of a determining factor on whether or not we release the amount of gas that is on those three pipes by just a flat sale transfer of 0.5 Bcf actually it would be 650 million a day because Southwest is part of that constitution pipeline being 650 million a day capacity or would it be an incremental volumes of that we flow into the pipe. And that decision Matt is going to be a combination of price point and the ability to diverse the amount of gas that is flowing into those three pipes with some of the new pipes that are coming online, Leidy Southeast the impact on those three pipes, the TETCO expansion and some of the other smaller projects that Jeff mentioned. So I can say this though but from a planning standpoint we're going to be prepared to have incremental volumes going into the constitution pipeline, but we're also going to remain focused on the best returns and price rationalization what the market has not done that for us.

[Matt Portillo:]

And then my second follow up as you talk about previously your Eagle Ford assets continue to improve in terms of the breakeven economics given the enhanced completions you put into place. Could you provide some color as to how you are thinking about potential reaccelerating that program in the out years and potentially what commodity price you need to see at this point given service costs to that risk factor in that market.

[Dan Dinges:]

Well again our balanced focus Matt has been on let's look at the amount of cash flow we're generating and the amount of cash flow we generate is going to kind of dictate what we do with our capital program. So it would go hand in hand, we have a higher price point, better cash flow will level into a consideration for adding rigs whether it'd be in the Marcellus or the Eagle Ford. It is our objective though in the Eagle Ford to maintain all the acreage we have out there. We like what we're seeing, we like what the group is doing now and we like the returns that we can get, but at 50 bucks we're not impressed with the returns at 50 bucks. At 60 bucks 65 bucks certainly it has a return profile that starts getting attractive again.

[Operator:]

The next question comes from Robert Christensen with Imperial Capital. Please go ahead.

[Robert Christensen:]

First question is how do you balance between debt pay down and share buyback, what are things we should think of in that decision?

[Dan Dinges:]

I'd say good financial question and I have a financial expert sitting right across the table in front of me.

[Scott Schroeder:]

Bob its Scott Schroeder as Dan alluded to based on Holly's question in terms of the repurchase clearly for 2015 the question you pose isn’t on the table in line of how far we have to ratchet back our capital program and we're still not quite exact equal with cash flow, but at the end of the day when we're balancing that decision in different times we're looking at the disconnect between the underlying value we see in the shares and what the market at any one moment is giving for our shares in the marketplace. We've seen those disconnects over the last couple of years and that's why between probably between '13 and '14 we've brought in just under 10 million shares on that kind of dynamic.

[Robert Christensen:]

In terms of the termination of a couple of the rigs, I guess we haven’t seen the expense related to whatever negotiations that you're having with the rig provider, is that in front of us some termination type expense?

[Scott Schroeder:]

Yes we balled it up in our capital program number it's in the $900 million number.

[Robert Christensen:]

And my final question is, could you just put a little more color out there on this concept of gas by wire if you will off of Leidy and Panda and other projects? What's the timeframe of some of these potential projects and volumes? And the economics I guess versus selling gas directly on a pipeline to somebody I think? Does it sound interesting?

[Scott Schroeder:]

So Bob some of the projects that are being proposed is actually in excess of 20, I have on my desk that we're interested in some more than others, some that we have very good access to some that maybe more difficult to get to and I'm talking about transportation path. But there's a lot of projects planned in the Mid Atlantic states and in Pennsylvania. There's been a push to in conjunction with the ISO in that area to build some power generation and feed it with local supply. But we're looking at projects that are closed back Susquehanna County or have direct routes pipeline routes that we can reach these projects. I think the some of the plans we did mention the Panda project they probably have four or five other projects that are well on the way in terms of finding locations and permitting the financing and so forth. But most of these guys they get their power deal done first in other words access to the rig and then they come to gas suppliers and they have their wish list and we have our wish list and we try to work through those and come to terms. There's a group of power generators of the aircore system that we're working with as well and there are some off the Tennessee system and there are some off the Leidy system. This is one of the process that goes on probably next five years to 10 years even just a lot of opportunity for power generation with natural gas with coal retirements and with coal switching and oil switching. So it's a piece of a demand puzzle and it's very active and very dynamic and we're situated in Northeast corner we're probably the closest supply to the market there is and so we're comfortable with these kind of markets. And we'll probably be announcing if we are very successful in the next year or two on some of these projects.

[Operator:]

The next question comes from Eric Otto with CLSA Americas. Please go ahead.

[Eric Otto:]

Just a quick follow up on the DEC, can you give us a little bit of color behind your thinking about the permit approval in 2Q just sort of thinking about the fact that the DEC has never had to reveal linear pipeline project in this magnitude, the time it took them to issue notice of completing application and attendance at the three our public hearings?

[Jeff Hutton:]

Well I think at some point Williams I think they had their call yesterday they had I think they had some questions on this as well. The way we understand process and getting feedback from Williams on the progress, I'm not sure I agree with what you said about the magnitude of the project versus what DEC assumed in the past, there is lots of major pipelines through the state of New York of gas pipeline, lots of power, lots water lines and so on so forth. This is a relative simple 124 mile pipeline through old New York, it's got its environment challenge as all pipelines do. I think New York the EC is being very careful and thorough examination of the route and issues and listening to the concerns of surface owners and are doing that what they should be doing. And at the end of day we have to get a permit that let us pipeline be build in a timeframe that we've illustrated so far.

[Eric Otto:]

I guess just hypothetically if this led to 3Q. How does that impact construction in the end services day would it move it out significantly?

[Jeff Hutton:]

No I think I mentioned earlier it's going to be a year of construction plus or minus a month or so depending on when the permits actually come out. And when the notice to proceed is granted by FERC just given the windows during the construction period.

[Operator:]

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

[Dan Dinges:]

Right appreciate everybody's interest in Cabot. I think we've been able to demonstrate a good '14 program. We have queued down '15 program but our expectation is that we will end the year in a very good order. And we look forward to our next conference call. Thank you Gary.

[Operator:]

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