CNX Resources Corp (CNX) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's first-quarter 2016 earnings conference call. As a reminder, today's call is being recorded.

I would now like to turn the conference call over to the Vice President of Investor Relations, Mr. Tyler Lewis. Please go ahead.

Thanks, John, and good morning to everybody. Welcome to CONSOL Energy's first-quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Dave Khani, our Chief Financial Officer; and Tim Dugan, our Chief Operating Officer of our E&P division.

Today we will be discussing our first-quarter results, and we have posted slides to our website. As a reminder, any forward-looking statements we make, or comments about future expectations, are subject to business risks which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick, followed by Dave and then Tim. But, before I turn it over to Nick, I would like to quickly go over some housekeeping items regarding some changes that we have made this quarter.

To start, we have posted two slide decks to our investor relations portion of our website. The first presentation is a smaller earnings call slide deck which is meant to tie into our prepared remarks this morning. The second slide deck is our broader Company presentation, which has more slides and information beyond the scope of what we might be covering on this call.

Also, CONSOL has moved to provide more disclosure in the EBITDA reconciliation table which is found in today's press release. We are now providing an EBITDA and reconciliation from the quarter across the E&P division, coal division, other segment, and total Company. The other segment represents expenses from various other corporate activities that are not allocated to the E&P or coal divisions. These items would include things such as pension expense, bank fees, interest expense, and income taxes.

Also starting this quarter, CONSOL Energy has made certain adjustments to the financial statements to reflect the sale of the Buchanan mine which is now reflected under discontinued operations.

In addition, CONSOL Energy has also made the following reclassifications to the income statement. We have removed the direct administrative and selling expense line item from both the E&P and coal division segments. For E&P, that expense is now being reallocated across the lease operating expense and general and administrative expense line items. For the coal division, direct administrative and selling is now being reallocated across the operating and other cost and general and administrative expense line items.

Also for the E&P division, production royalty interest, which was previously shown on a gross basis, is now being netted together and deducted from the transportation, gathering, and compression expense line item. These accounting changes reflect more common industry practices to better help analyze the Company.

To reflect these changes, CONSOL has recast historic income statements that can be found on the CONSOL Energy website where -- through following the link provided in the press release this morning.

Finally, starting this quarter, CONSOL has changed its coal division guidance methodology. Nick will provide more color on the reasoning behind these changes, but it is important to note that we have moved towards now providing CONSOL Energy's pro rata coal division adjusted EBITDA guidance for full-year 2016. This guidance is meant to provide more transparency by reconciling the adjusted EBITDA guidance that our subsidiary, CNX Coal Resources LP, provides to our pro rata total coal division.

With that, let me turn the call over to you, Nick.

Thanks, Tyler, and good morning, everybody. I want to start things off by briefly talking through some of the changes that we've implemented this quarter, when you look at our corporate structure and how we intend to communicate information moving forward.

So specifically, the organizational changes are a result of the recent sale of the Buchanan mine, which we view as a watershed event in terms of the separation of our businesses and the acceleration of our evolution to a pure play E&P. As a result, CONSOL has undertaken a number of reorganization initiatives which we initially highlighted in our press release back on, I believe, April 7 of this year. In that release, we talked about our subsidiary, CNX Coal Resources, or CNXC, undertaking more of the responsibilities associated with the Pennsylvania coal complex to include managing all kinds of different aspects of the corporate functions -- from human resources to land, marketing, external communications, and other administrative, commercial-type functions -- as it relates to the Pennsylvania coal mine operations.

Now, we have tailored CONSOL's earnings press release accordingly and have shifted towards adopting full-year 2016 coal division EBITDA guidance, and that is going to be built off of the EBITDA guidance that CNXC provides. So, since CONSOL is now an E&P Company with essentially one remaining coal complex, which CNXC operates, an E&P division now comprises over 70% -- I think around 71% of CONSOL's adjusted EBITDA as of this quarter, we feel that the shift is a natural next step.

We also believe that providing coal division EBITDA guidance is the best means to be the most transparent. We of course are going to answer questions that relate to CONSOL's business; however, we do not intend to discuss the Pennsylvania operations like we have in the past. And again, it is our intent to allow the operators of that complex, CNXC, which is not responsible for all aspects of the business, to discuss those operations in more detail, which they did in part yesterday at close of market on their first-quarter earnings release and call.

Shifting now to some of the highlights from the quarter: we remain focused, and really the key word probably with focus is tenaciously; so, tenaciously focused on our strategy over the past couple of months, and during the first quarter. Specifically, we generated free cash flow of $449 million, which included $35 million in organic free cash flow, which we are defining as cash flow from operations, less CapEx.

In addition to generating organic free cash flow, as mentioned earlier, CONSOL sold our premier metallurgical Buchanan coal mine for $460 million. That equates to somewhere between an 18 and 23 multiple premium when you look at expected 2016 EBITDA contribution from Buchanan of around $20 million to $25 million. So we are obviously very happy with the transaction. It helps accomplish many important goals, including bringing forward substantial value while providing upside to capture potential increases in met pricing over the next five years through the earnout provision, which we provided some detail on.

Also, the sale of Buchanan brings CONSOL one step closer to completing our pure play strategy, as all of the Company's remaining met assets were included in the sales transaction. So, any way you cut it, this is a huge one for CONSOL. However, it is also a win for the buyer, who is going to benefit from this premier mine becoming a flagship operation while they inherit Buchanan's industry-leading workforce. So we wish them all the best.

And also during the quarter, our $2 billion borrowing base that was reaffirmed by our lenders; we announced also three new nominations to our Board of Directors. So, a lot of accomplishments and a lot of change through our evolution as we are rapidly moving towards a pure play E&P.

I would like to wrap up the remarks by reiterating CONSOL's continued focus, which is controlling the areas that remain within our control. The commodity environment remains challenging, although many indications are starting to point towards a recovery. That said, we will continue to focus on the elements of the business that we can control. And those are things like safety, environmental compliance, unit costs, capital discipline, capital efficiencies, and also gas hedging.

So, we have not let off the pedal in any one of these areas. It has been quite the opposite. Our safety record speaks for itself. Our environmental compliance record is industry-leading. You can see that by our corporate responsibility reports; and many of the environmental initiatives that we undertake are beyond industry or regulatory requirements. We believe these initiatives set us apart and truly distinguish us from our peers.

The quarter also highlighted another stellar performance when you look at E&P unit cash costs of $1.33 per Mcf. These total cash unit costs are already below the low end of our 2016 guidance. We are starting to see the dry Utica shale play into the mix and help further lower costs. And we expect the exciting play to become a much bigger part of our future development program.

Now, as for our gas hedging program, we have layered in a substantial amount of hedges in the out years. By layering in these hedges, we are able to lock in our revenue and margins and protect potential downside risk in order to support our free cash flow plan. Now, being a low-cost E&P producer, that has enabled CONSOL to layer on these additional hedges, continuing to put the Company in a position of strength. Not only do we have reduced downside risk by layering in hedges, but we also benefit from potential upside natural gas pricing through multiple areas of exposure.

And when you think of those multiple areas of exposure, they include things like open volumes beyond what is hedged. They include any potential incremental production growth that we target. They are also going to include thermal coal pricing exposure as natural gas prices rise. And there are also potential additive benefits, such as recouping our outstanding carry within our Marcellus JV, as well as seeing increased asset valuations and demand for those assets in our monetization efforts.

So the bottom line is that we protected our downside while positioning the Company to benefit from potential upside when it [comps].

By focusing on the areas that are within our control, we are able to become more decisive in order to drive results. And, similar to what we discussed last quarter, we continue to benefit from a position of strength, but we don't need to sell assets.

However, it's important to understand our monetization program still remains part of the business. And we have been proven in the past that we are willing and ready to pull the trigger on selling assets if it means that it's going to be accretive to our NAV per share. Similar to how we have treated the most recent asset sales announced over the past six months -- which, by the way, have equated to around $550 million of cash proceeds -- we do not intend to provide guidance on any potential asset sale. So it is more of a stay tuned and see how things unfold.

Last, let's provide just a little color as to what we see in the future as a result of the organizational changes we've made, and because of the strategic moves we've been able to execute. Now, while macro challenges certainly remain, our overall corporate strategies gained significant momentum. The team is very excited about what lies ahead. With over 1 million net acres between the Marcellus and Utica, CONSOL is an Appalachian-focused E&P Company with what we believe is the largest acreage footprint in the lowest-cost basin in the United States.

Our intent is pretty straightforward: we want to be the low-cost producer in the lowest-cost basin in the United States. And if you are in the commodity business like we are, that is as good as it gets.

With the remarkable operational efficiencies we continue to achieve, and with the superior acreage position we hold, there is no ceiling on our potential. We also have a vehicle in CNXC, which operates the best thermal coal mine in the world, one that continues to not only survive, but thrive in the midst of the rest of the industry literally crumbling around it. CONSOL Energy is poised to break out, and break out in a big way.

With that, I am going to turn things over to Dave Khani.

Thanks, Nick, and good morning, everyone. My comments will tie to several slides within the updated slide deck which was posted to our IR site, under presentation to analysts. As highlighted in our press release this morning, and indicated on slide 3, CONSOL reported first-quarter 2016 GAAP net loss of $98 million.

However, there were several adjustments totaling $82 million in the quarter. First, we had a mark-to-market loss on our unrealized hedges of $29 million, tying to the recent rise in natural gas prices. Our positive hedge book now stands at $222 million at the end of the quarter. Second, we had loss on asset sales, including Buchanan, of $46 million; and, third, we had some severance expense.

After normalizing for this, and looking at continuing operations, we posted a modest loss of $16 million or $0.07 per, share and adjusted EBITDA of $176 million. This is slightly better than consensus, and was driven primarily from our E&P division, which more than offset lower coal margins at CNXC.

With the sharp rise in E&P -- I'm sorry; with the sharp reduction in E&P, coal, and corporate costs, as well as lower capital intensity, we have positioned the Company to be able to weather a very low commodity price environment. US heating degree days were 8% below normal for the first quarter of 2016, but our region was about 70% below normal, causing spot commodity prices to decline to their lowest point since 2003.

If you at slide 4, more importantly we have generated positive free cash flow of $449 million, including $35 million of organic free cash flow, which we define as net cash provided by continuing operations, less capital expenditures and net investment in equity affiliates. Over the next nine months we expect to continue to generate organic free cash flow based on our strong hedge book, rising production, front-end-loaded CapEx, and using the forward curve on our open volumes.

If you look at all three of our areas -- E&P, CONE and CNX Coal Resources -- each will generate free cash flow in 2016.

Now let me also point out that our CONE Midstream Partners, which will report earnings on [May 5], just declared a 15% distribution increase and is starting to hit the second IDR split with this increase. Within CONSOL's financials, CONE is accounted for under the equity method of accounting, and is becoming a bigger and significant cash flow contributor to CONSOL.

Now, let's look at our met sale on slide 5. As Nick highlighted, and as stated in our press release, CONSOL sold the Buchanan mine for $460 million deal value. This included $425 million in cash, of which $403 million was received at the closing, with $22 million of cash being held in a two-year escrow account. Also, CONSOL will receive a $23 million net accounts receivable/payables following the close of this transaction, and the buyer assumed also $12 million of associated legacy liabilities. Nick will also mention the upside in commodity prices, if met prices rise.

Last night, CNX Coal Resources reported their first quarter's earnings release. We will refer you to listen to the replay and to hear their commentary, and to follow up with Mitesh Thakkar for PA complex questions.

Now looking at slide 6, the E&P division finished the quarter with a record production of 97.5 Bcfe, or average daily volumes of 1.07 Bcf per day. As Tim will discuss in detail, we remain excited about our initial seven dry Utica shale wells. We are already seeing a very positive production impact and cost impact from these wells. This bodes very well for future development.

Now on the cost side, we had another strong quarter, with total all-in and cash costs of $2.41 and $1.33 per Mcfe, respectively, relatively flat sequentially and the low end of the guidance range, as Nick mentioned. As we continue our benchmark analysis, our performance is starting to eclipse our peers. Last quarter, we had lower unit costs compared to two of our largest Appalachian peers while only producing about two-thirds of their volumes.

So, let's look at slide 7 for some history. We have driven down cash operating costs and PUD conversion costs over 40%, from about $3.50 per Mcfe in 2013 to about $2 per Mcfe expected in 2016; all this while raising liquids percentage from 2% to 12%. As a result, our recycle ratio has improved meaningfully over the last 24 months.

So, how do we get better from here? There are two areas we can meaningfully shift this number down. First, initial indications are that the dry unit can drive down costs; and second is the new processes from our vendor procurement for both E&P and coal. We recently hired a new head of supply chain. And while we have been getting support from our vendor community, we have implemented a zero-based budgeting mentality across our vendors.

This means more standardization, better bundling, expand into non-traditional vendor sources, and approved project specs and scopes to drive down project expenses. We have just started this, and we are beginning to see some meaningful improvements in some of our major spend areas. Tim will also get into some of the more specifics on unit costs.

We move over to slide 9. In the quarter, our average realized sales price was $2.73 per Mcfe, which included negative [base of] impact, BTU uplift, and the benefits from our hedge position. We have increased our hedge position throughout the quarter, and are now about 70% hedged in 2016 across our total E&P production, as well as adding in another 190 Bcf wedge for 2017 to 2019.

Last quarter, we stated that as we drove down our unit costs, we would begin to layer on some duration onto our hedges. While this does create more surety on our margins, this also protects our borrowing base and our liquidity, which are obviously very important. While protecting cash flows, we are also positioned to capture the rising market through the open positions, rising basis, our netback contracts, and our carry position with our JV partner, all which Nick mentioned before.

We are watching natural gas and liquids pricing improving as supply appears to have peaked in first-quarter 2016, as we head now into the weak period of spring. Our 2016 NYMEX and basis hedges position us to weather this near-term volatility if prices remain weak over the next several months.

In our E&P division guidance on slide 17, we state that our 2016 basis is expected to be between $0.35 and $0.40 negative. Just as a reminder that this range is our guidance across our total portfolio, including hedges. For our 2016 open volumes of about 114 b's, we expect the basis differential to be around $0.55.

Now, let's look at liquidity and balance sheet. On slide 8, we highlight several key items: first, that our bank group reaffirmed our $2 billion credit facility; second, we paid down about $100 million on our borrowing base before our met sales; third, our liquidity increased to about $1.3 billion; fourth, in our trailing 12-month pro forma bank leverage remains relatively flat at 3.7 times.

As you know, our long-term goal remains unchanged for our leverage ratio to be between 2 and 3 times. So we still have a lot of work to do to improve upon this ratio as we filter through this year's lower commodity prices.

On the capital front, our E&P 2016 capital range remains unchanged from last quarter at $205 million to $325 million. However, we have pushed off two pads with stronger-than-expected well productivity so we can come in -- we could come in light at the low end of the range. Our low end assumes no drilling for this year. CONSOL expects to make this decision regarding new drilling activity over the next couple of months.

The decision to restart drilling is based on our NAV per share focus and is a combined -- combination of many factors: our desire to improve liquidity and leverage, deplete our large DUC inventory, and evaluating returns versus our cost of capital. Let's talk about our cost of capital next.

With declining prices and rising cost of capital, we decided to [draw up] all rig activity, mid-last year. We knew that we needed to see improvements both to generate a positive rate of return of our cost of capital. Our cost of capital peaked at about 15%. And our fully loaded Marcellus turns, using full field economics, dropped below this level using the strip back then.

With the improvement in liquidity, cost improvements in capital intensity, our cost of capital has now declined to about 11%. Tim will talk about our rates of return specific to our hard graded areas in the Marcellus. We still have a strong focus to generate free cash flow, including whittling down our inventory of drilled uncompleted and drilled completed wells.

However, we now see a positive gap between our cost of capital and rates of return, particularly in our dry Utica; thus, setting the stage for us to add rig activity back at some point in the future. Stay tuned.

So, in summary, CONSOL continues to execute its organic free cash flow plan. Free cash flow generation is the main metric that drives our decision-making that underpins our NAV per share focus. It is a primary metric that management is compensated off of, and ties to maintaining strong liquidity while avoiding destructive capital market activities. Our confidence in our base free cash flow plan, strong liquidity, and no maturities in the next several years enables us to maintain our costs and avoid the need to sell assets or tap the capital markets.

With that, I will pass it over to Tim.

Thanks, Dave, and good morning, everyone. In the first quarter, CONSOL continued to build on the positive momentum in our E&P operations. With strong operational execution driving production growth, while low operating costs support the E&P division's ability to generate free cash flow in 2016, despite the adverse commodity price environment.

E&P production grew to 97.5 billion cubic feet of natural gas equivalent, a 36% increase over the same period last year, and a 2% improvement from the fourth quarter. The growth was driven by continued strong production performance from our Southwest PA Marcellus wells, continued production contributions from midstream debottlenecking, turn-in-lines that occurred late in the fourth quarter, and an additional 25 Marcellus and 10 Utica wells that were turned-in-line in the first quarter.

Operating costs on a per Mcf basis also improved 22% in the quarter, compared to the same period last year, and held relatively flat sequentially. Costs would have improved further sequentially, but due to reduced completion activity, some of the water handling costs previously being capitalized are now being expensed, which increased our OpEx by $0.02 per Mcf. Also, there are some unusual items, such as wellhead maintenance costs and true-ups of [Jivs] of one of our JV partners.

There was also a $0.02 per Mcf sequential increase in severance costs, which was expected since the Company benefited from a refund for a prior year's payment that hit last quarter.

Transportation, gathering, and processing expenses went down by $0.03 per Mcf, primarily due to lower gas processing costs related to the dry gas volumes comprising a greater portion of our production mix, especially those from the dry Utica wells, which do not require any gas processing.

With continued refinement of drilling and completion techniques, as well as improvements in line pressures from additional debottlenecking activity, well performance in CONSOL's operated Southwest PA Marcellus has continued to improve and exceed expectations. EURs in the Green Hill area of Greene County, Pennsylvania, are now estimated to be between 2.8 and 3.0 Bcf per 1,000 foot of lateral, up from 2.1 to 2.3 Bcf just two years ago.

Following the success in Green Hill, we will apply those same techniques to future development to drive improvements in other areas in the Southwest PA Marcellus, such as our Morris and Nineveh operating areas in Greene County. Without some costs, our high EUR Marcellus prospects in Southwest PA should have rates of return in the mid-20% range at today's low gas prices of $1.50 realized price.

With continually improving well performance, and our top 100 wells experiencing line pressures in excess of 1,000 psi, production decline rates are less than anticipated, which has resulted in fewer wells needing to be turned-in-line to meet our production goals. CONSOL pushed nine horizontal completions and two horizontal turn-in-lines out of our 2016 plan. As a result, assuming our base case plan of no drilling activity in 2016, we expect our inventory of both drilled uncompleted and drilled completed wells entering 2017 to be 73 Marcellus and six Utica shale wells, for a total of 79 horizontal wells.

As of March 31, CONSOL and its partners are planning to complete six additional Marcellus wells and two additional Utica wells for the remainder of 2016; as well as turn-in-line 25 Marcellus and five Utica wells.

While there will still be some activity throughout the year, the vast majority of the completion and turn-in-line activity will continue to be front-end-weighted in the first half of 2016. Moderating that influence is the debottlenecking activity from which we continue to see a strong production response and will remain relatively stable throughout the year. Improved type curves, reduced D&C and operating costs, lower the threshold to restart drilling and/or the cost to hold production flat.

CONSOL is also benefiting from prior capital investments with our current inventory of 109 gross drilled completed and drilled uncompleted wells. Our DUC inventory lowers our near-term D&C costs. And our in-place dry gas infrastructure, along with our diversified FT book, provide repeatable cost savings for our stacked pay development and the Utica.

The improvements we've made in wells results, drilling, completion and operating costs all serve to lower the capital required to maintain and grow our production going forward. Today, we estimate our maintenance capital required to maintain 1 Bcf per day of production to be $250 million to $300 million on a recurring basis; even lower for the next few years, if you were to include the prior Sun Capital investment.

Notably, this estimate does not fully reflect the impact of the dry Utica, which has the potential to further lower maintenance capital levels due to its lower recovery cost and extended stabilized production period. Based on the initial results we have seen, the dry Utica could further lower maintenance capital requirements with its higher recoveries per well, lowering the amount of wells needed to maintain or grow production, and initial production volumes staying flat for the first 9 to 12 months before declining.

The Gaut 4I well in Westmoreland County, Pennsylvania, continues to outperform expectations with cumulative production of 2.8 Bcf through the end of the first quarter at a casing pressure of 6,758 psi. The continued strong performance of the Gaut may warrant a significant increase in EUR in the near future. The GH9 well, located in Greene County, Pennsylvania, has a lateral length of 6,141 feet and was completed with 30 frac stages. The well was turned-in-line in January, and initial results are encouraging.

It still has -- it is still relatively early in the full evaluation of this well, due in part to the greater geologic complexity in Southwest PA. We will continue gathering more data on the optimal drilling and completion methodologies, which should further lower costs and enhance EURs going forward.

Over in Ohio, CONSOL's Switz 6 pad, located in Monroe County, has produced nearly 5.7 Bcf through the end of the first quarter, from four Utica wells, with the best-performing well accounting for approximately 1.8 Bcf of that production.

In Marshall County, West Virginia, the Moundsville 6H well operated by our JV partner has shown strong results, with a 24-hour IP of 39.1 million cubic feet per day at 7,126 psi casing pressure, and cumulative production of 2.5 Bcf over 130 days. This well has a completed lateral length of 9,394 feet with 200-foot stage spacing.

While these results in the dry Utica are extremely encouraging, it is still early in the play's development. CONSOL continues to evaluate the managed pressure drawdown methodology to determine the optimal rate of drawdown. With initial data indicating optimal pressure, drawdown rates will vary by area.

Furthermore, optimal proppant type and mix is still being evaluated, with varying crushing thresholds being weighted against different pressure regimes across the play, as well as cost. In addition, ideal spacing between wellbores is an ongoing evaluation. While we have seen success at our initial 1,000 to 1,100 foot spacing, reservoir evaluation indicates that Utica wells are capable of draining a larger aerial extent, which may lead to longer laterals with wider spacing.

That said, we are already seeing a positive impact on our operating results from the dry Utica program. The seven dry Utica wells turned-in-line to date contributed approximately 6.5 Bcf of net production in the first quarter, which accounts for 7% of our overall production. Although the dry Utica is a small percentage of the total production, with their low operating cost the dry Utica wells lowered the Company's first-quarter total operating expense by approximately $0.06 per Mcf. So, as Utica volumes grow, we expect a positive impact on production and operating expenses to increase.

And with that, I would like to turn it back to Tyler.

Thanks Tim. This concludes our prepared remarks.

John, if you could please open the line up for questions at this time.

(Operator Instructions). Holly Stewart, Scotia Howard Weil.

First question -- Dave, you were talking pretty fast -- just to clarify on the volume guidance, you said potentially the lower end of the guidance range, if you stayed at the low end of CapEx, meaning no new rig activity, correct?

No. What I said was, we pushed off basically two pads, and so our capital could come at the lower end. We did not change our production guidance.

Okay. Okay, thank you for the clarification. And then there was mention either within the slide deck or the press release on improvement in take away infrastructure. I was just wondering if you could give some more color there, and maybe help us understand what is the latest on the NEXUS project.

Well, we look at the takeaway infrastructure as a whole, we look at the projects coming in the next couple of years. There is a total of about 22.5 Bcf worth of projects out there. And we have gone through all those and risked them down, based on timing, probability, cancellations, et cetera. And if you risk that down to about 50%, that takes you down to about 11.5 Bcf of capacity that will be coming off onto the next couple of years, most of that coming on late 2017, 2018 time frame. We expect to see about a 6.3 Bcf increase in supply across the basin over that period, so that leaves about a 5 Bcf surplus in capacity.

But currently, with the 3 to 6 Bcf a day of oversupply, we think that will balance out. That really does not take into consideration any demand growth or constraint improvement projects that may take place over that time. So, we think that the market is going to remain stressed, given the current supply situation through into 2017. And then as pipeline projects come on, we think we will start to see some relief. But it really kind of falls in line with our current hedging strategy.

And NEXUS -- we believe the NEXUS project is moving forward. We feel very good about it.

Okay, great, gentlemen. Thank you.

Neal Dingmann, SunTrust.

Just more about -- I know no plans yet for the drilling rigs yet, at least at this time. But just you guys' thoughts, Tim, for you or Nick for the guys, you have obviously had great success up by that Gaut well, for that one Utica well you popped up there -- your thoughts about maybe potentially more drilling some Utica up there, as well as if you could just talk about maybe some other areas for the Utica in general.

Well, I think with the results we are seeing, and they continue to improve up there, so that is an area that we are certainly excited about and would expect there certainly will be some more activity up there. When we look at rigs returning, obviously in the Utica, we are looking at Monroe County and then the area up around the Gaut. There is some additional complexity down in Southwest PA that we are still working through. We have collected a lot of data there. We are just as excited about Southwest PA, down in Greene County. But with the geology being a little less complex than the Gaut area and Monroe County, those would be the areas that we would return to first.

On the -- so that is the where. And the question about when really goes back to our philosophy of wanting to grow NAV per share and being good capital allocators of the operating cash flow of the Company. So when you look at the drivers and you start doing the math behind those decisions, we are looking at the rate of returns in the NAV of the where that Tim just laid out of dry Utica. And a lot of the drivers of that has gotten better.

So NYMEX forwards are up. We talked about basis, and how we view basis shrinking over the next year to 18 months. Our capital intensity, as Tim and Dave talked about, that is declining. Unit costs are dropping. And dry Utica, geologically, looks better and better.

So, the drivers of that are putting us in a position where the math of rate of return and NAV is looking better for the when decision. We've also got the benefit of time, right now. Our cycle time is being reduced to the extent that they have the -- that Tim's team has been able to achieve, really gives us the luxury of seeing what the forwards do, what the data from places like the Gaut, Monroe County, Ohio, come out with extended data periods. And we think we don't have to make a decision on another rig or increased activity set to impact 2017 production until another 3 to 6 months.

So we want to take the benefit of that time that we have afforded ourselves because of the compressed cycle times, and get a little more accuracy and certainty on some of these drivers of rate of returns and NAV.

Great detail, Nick. And then just last one, I am just curious: I saw in the press release you guys talked about these test and these plugless completion. Tim, just anything you can say about either that or some other efficiencies, but potentially continue to improve the performance of the pricing (technical difficulty).

Well, I think we've got -- we've done a lot of work off-line since we have drilled these first couple of wells, looking at what other operators have done. And we think that we are very confident, and the potential is there to get the cost down quickly (technical difficulty) down below that $20 million mark very quickly. And we expect, in the next couple wells, we will be in the sub-$15 million range.

A lot of it -- and when you talk about where we go next, going back to the Gaut with it being a little less complex, that lends itself to getting our costs down quicker as well. So we have gone back and really done a review of each of the seven wells that have been drilled, and where we can improve and what we can do. Everything from bit selection to fluid systems, how we are completing them -- I think all that just falls in line, and is going to help us bring our costs down pretty quickly.

Great, thanks for all the details, guys.

Lucas Pipes, FBR.

Good job again. Quick question, just on 2017: obviously there are still a lot of variables that go into production next year. But I wondered if you could give us a flavor, kind of what range we could be looking at, depending on the decision to -- if you decide to drill later this year -- what is the potential range of outcomes, when it comes to 2017 production? Maybe just some parameters for us to think about. Thank you.

Yes, so we won't give you a percentage range, but I will just tell you the parameters. We are still sitting with a large amount of DUCs. A majority of them are wet. So a function will be -- what does wet pricing look like relative to dry? Nick mentioned that in the next few months we will have a determination of do we actually bring rig activity back in the second half of this year. We have debottlenecking projects, and we have a lot of constrained production. Tim mentioned there is over 100 wells with a lot of constrained production, and so do we have debottlenecking projects as well. So the range of outcomes is really going to be a function of all those things, and with the near-term probably being -- do we bring a rig back sooner than later?

Got it, thank you. And then good job on the Buchanan sale, and thank you also for the additional detail from that this morning. Now when it comes to future asset sales, do you have processes running right now? And if so, any specific asset package that you would highlight that you are maybe more active in right now? And maybe also even timing, in terms of where you could maybe see more activity.

Yes, Lucas, we actually always have asset sale processes going on. It is just part of our normal course of business, as we mentioned before. Just to put it in context, we have 30 processes going on. We completed about six of them, including with the Buchanan met sale.

So, yes, we do have processes going on. We will not comment on any specifics because, as you know, Lucas, sometimes we pull the trigger and sometimes we don't. And even the ones that we don't, sometimes we learn from the process and we bring it back out at some point in the future, so --.

Great. Well, good luck with everything, and I will jump back in the queue. Thank you.

Jeffrey Campbell, Tuohy Brothers.

Congratulations on the quarter. First question I wanted to ask was regarding CONSOL's strategy to transition to an independent E&P Company. Does that ultimately -- will you continue to hold on to CNXC LP units as a fully independent E&P?

Over time, our strategy looks at CNXC as a vehicle where the remaining 80% interest that we have in the Pennsylvania mining complex will ultimately reside. When that happens, how that happens, what happens with our LP units over time -- those are all subject to the individual conditions as things unfold.

So, ultimately, long-term, I think the way to think about it is 98% of the Bailey complex of the Pennsylvania mining operations ends up at CNXC. What happens to the GP at 2% -- again, to be determined. But the work to get from where we are at now to that endpoint is all going to be subjected to what we see with windows opening and all the variables that drive those.

Yes, and I will just say the float will probably get bigger; at a minimum, probably our percentage ownership will come down, just as you naturally drop in the assets and they need some sort of financing over time. But as far as us selling LP units right now, we have no determination that we would sell anything today.

Thanks, that was very helpful. I was just wondering if you could elaborate a little bit on the plugless completions that you cited as significantly reducing well completion times. And also, do you have any other experiments ongoing, like maybe diversion fluids or other tech that is interesting to know about?

The plugless completions we have tested, and we think that is probably the next big step in the reduction of our operational cycle times. A typical well, now, when you look at a six-well pad, we spend 30-plus days drilling plugs on those six wells, and running tubing. With the plugless completions, we -- it's basically just -- it is a combination of our hybrid cleanouts that we have done, so we are running in and making a clean out run with our production tubing. We pump the bit off in the bottom and we hang our tubing off, so it's essentially a day to a day-and-a-half per well. So we are saving several days per well. So we think that that has a lot of potential.

And then we've also tested diversion fluids. We just did a well here recently where we tested plugless completions using diversion fluids to avoid plugs at all. And that certainly helps with the volume of fluid you pump and minimizing flush volumes, and making sure you don't over flush each stage. So, we are -- we are looking at other technologies. But the plugless completions are probably one of the biggest things we are looking at now that is going to be a real savings from a time standpoint and cost.

Thanks for the color. I appreciate it.

(Operator Instructions). Michael Dudas, Sterne Agee.

The first question is maybe for Nick or Tim. I appreciate your discussion about firm transportation capacity in the outlook there. What about ethane crackers and other opportunities to utilize some of that capacity? Is there anything you are seeing in the market that could give you a little bit more positive thinking that we get some plants [now to mix] in that 6 to 12 months?

Up in this region, the topic of an ethane cracker -- and if it is going to be built, when it is going to be built, where it is going to be built -- it has been all the rage over the past probably three to four years. It has been that long, actually.

I know.

So we have always known that that's sort of the last, and in some ways most meaningful leg of the demand story of natural gas in the Marcellus and Utica where you start to see that manufacturing renaissance where the demand centers for natural gas are built, now, right on top of the fields themselves. So it's very important, but recognizing it's longer-term.

When you look at when this talk started, and the potential for this began and where we are at today, I think there's a couple of big questions that were looming four years ago that have been definitively answered. One was just the geological question of -- can we extract ethane in significant quantities on a reliable basis, a low-cost basis, to justify the expenditure investment for a cracker facility itself?

I think the industry has resoundingly answered that question in the affirmative, which gives, I think, more confidence and de-risks a big investment decision for the entity that would build and own the cracker facility.

Then, the next question comes down to just the timing of the decision itself. When you look at the supply projections that we see within those reasonable bands of different sets of assumptions, our view is that one- to two-cracker facilities are justified within this region. Now, where they are -- are they in Western Pennsylvania or Eastern Ohio or Northern West Virginia? When did they get actual construction started, and up and running? Those are the things that require a crystal ball much more accurate than ours.

But the stories there, the story has gotten better because of the uncertainty around supply and surety of ethane being addressed. And now it is just a question of committing to those one to two projects. (multiple speakers)

There's -- there are four big crackers coming online next year down in the Gulf Coast, so we are starting to see the buildout actually occur.

That is correct, Dave, and there should be more to come, going forward. My second question would be -- with the terrific job you've done on your costs and in your business, I am sure vendors have been supportive of that, in a sense that there has been probably pretty good discussions relative to your pricing and such. How does that look today? And if things worked out with many of your variables to bring rigs on and to get more aggressive on the drilling and the volume and such, do you think the capital -- will there be much capital cost leakage on the way up, do you think, given where the market is right now, and what you are talking to with your vendors?

I think there's two parts of our cost reduction. There's the organic reductions. And then there are certainly some that were driven or aided by current market conditions, and that certainly helped get our vendor costs down. But the vendor -- the drops in vendor costs are not all tied to current market. A lot of it is tied to the work our supply chain group has done in working with vendors, finding better ways to do things, and make our cost structure more efficient.

So, we think we will be able to maintain most of the cost savings that we have. Certainly there will be some movement upwards when the industry -- when commodity prices move back up. But we think the impact of that will be relatively small, compared to the overall cost savings we've been able to identify and take advantage of.

When you look at all the inroads we've made on efficiencies and costs -- whether it is E&P team, corporate team, what the CNXC group has done over the Pennsylvania mining complex side -- the majority of those gains and efficiencies are things that fundamentally have been a result of changes in the way we approach our business. And those are the types of things that our view is, we grab onto and hold onto no matter what the commodity does. They stick. They stay with you.

So, that is a big area of attention that we are thinking through in giving that. Even though you are in a depressed commodity trough in the market right now, we realize that that is going to change. And when it changes, the biggest part of this story is we hold onto all those gains that we just secured. And we don't lose them, as has often been the case in the cycles of the commodities that we produce and operate within.

No doubt the numbers are shoring that up in your favor, definitely, Nick. I appreciate your comments. Thank you.

That will conclude the question-and-answer session.

I will turn it back to the Company for any closing remarks.

Thanks, John, and thank you everyone for joining us this morning. We appreciate your interest in CONSOL Energy, and look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.