CNX Resources Corp (CNX) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy's second-quarter 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, Tyler Lewis.

Thanks, Nick, and good morning to everybody. Welcome to CONSOL Energy's second-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. Today we will be discussing our second-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. With that, let me turn the call over to you, Nick.

Thanks, Tyler. Good morning, everybody. I want to start the call off by briefly discussing some of the high-level accomplishments of the quarter before we turn it over to Dave Khani and Tim Dugan, who will provide more of the details.

As we laid out in the morning's earnings release, CONSOL posted another quarter of organic free cash flow from continuing operations of $46 million, and that's an increase from the last quarter. Now, last year we started talking about our 18-month free cash flow plan; and as we sit here today, we're ahead of that plan.

Our goal has remained unchanged, however. We continue to focus on growing our NAV per share, and we're going to do it through continuing to increase productivity and efficiencies, through our cost-cutting initiatives, asset sales, through modest production growth, and by capturing the upside from what's looking like a more normalized commodity.

As we continue with those efforts to complete the split of our E&P and Coal businesses, our free cash flow plan is going to help get our balance sheet to a point where we can ultimately be successful in completing that goal. We often get asked when the separation could happen; and although we can provide a definitive answer to the question, much of that timing will depend on what the commodity does.

However, it's important to note that under CONSOL's current steady state, our balance sheet and leverage ratio are self-fulfilling, self-correcting, self adjusting, whichever term you'd want to use there. With our low cost structure and the current commodity prices, the Company is positioned to organically delever over time in order to support a separation.

So if we execute further asset sales, that accelerates the timeline; but in the end, it doesn't change our game plan of focusing on what we can control.

We've also seen an influx of operators issuing equity within the E&P space, particularly this year. We believe that we're one of the few E&P companies who haven't done that.

Now why is that? Well, we take a long-term view towards creating sustainable shareholder value, and this goes hand-in-hand with delevering the Company through reducing costs, by improving well productivity, and selling assets at values which are accretive to our NAV per share. So issuing equity remains low on our list as we evaluate options to increase that NAV per share.

We can never say that we would never issue equity, since we are a public company and we've got an obligation to evaluate all options. However, at this point in time we've got little appetite to pursue that route.

Instead, we look at organic levers like the reduction of costs, while also benefiting from a comprehensive monetization program. And speaking of the monetization program, there's a balance there that we're walking.

On one hand, we've got a track record of selling over $1.3 billion of assets over the past two years. And on the other hand, we manage our business based on conservative asset sale expectations, since ultimately we don't need to sell assets. So that being said, we've got ongoing asset sale processes across the board that are in progress which are part of our normal course of business.

Now on the asset sale front, most recently, following the close of the quarter, we executed a definitive purchase and sale agreement for the sale of the Miller Creek and Fola operations. This deal was not only NAV accretive, and not only consistent with our core strategy, and not only another step in improving our balance sheet, but most importantly and above all else, this deal marks a definitive exit from Central Appalachian coal and surface mining, which significantly derisks our business moving forward.

Now despite paying some cash to the buyer in order for them to post collateral for these assets, CONSOL received consideration from the buyer by the assumption of over $100 million -- $103 million to be exact -- of mine closing and reclamation liabilities. So significant risk is now dealt with, and CONSOL energy is an E&P company with only one remaining nonoperated coal complex in its portfolio, which is, of course, the Bailey complex operated by our friends at CNXC.

Congratulations to our team for another significant accomplishment in what's been a really unrelentingly challenging coal environment. Since 2012, we've divested approximately $5 billion in coal assets, which has helped accelerate our transformation into an E&P company. That sale of Miller Creek and Fola was another big piece of the coal divestiture puzzle.

Now shifting to the commodity markets and CNXC, we're seeing commodity markets normalize as capital has been rationed, which helps set the stage for CONSOL's commitment to support CNXC's common unitholders. In consultation with CNXC, CONSOL was supportive of CNXC eliminating the $6 million second-quarter subordinated distribution payment. And for reasons that Dave Khani will discuss in further detail in a couple of minutes, CONSOL believes this action is going to accelerate its ability to drop the remaining 80% of the Pennsylvania coal operations into CNXC, which will further advance CONSOL's broader strategy of separating the coal and gas businesses and becoming a pure-play E&P company.

Despite the commodity environment seeing a nice tick up in prices, our team is still focused on controlling what we can control. Our unit costs as an example, and an important example, are steadily improving quarter over quarter; and over the past two years specifically our E&P unit cash costs have improved by over 30%. These cost performance accomplishments in part have helped us exceed our free cash flow plans.

And in addition to unit cost improvements, CONSOL continues to illustrate further capital efficiency and well performance improvements. Those things are highlighted by reducing our 2016 E&P capital down to the $190 million to $205 million range while taking up 2016 E&P production guidance to the 380 to 385 Bcf range, which was an increase from the original target of 378 Bcf from last quarter. So you're seeing the best of both worlds there, with reduced capital intensity coupled with increased production guidance.

Lastly, we made the decision to add back two horizontal rigs in the second half of 2016. Now Tim Dugan is going to discuss more of the details after Dave Khani; I want to provide a look at the filter that we used to make the decision.

As we generate free cash flow, we look forward to the best way to allocate that capital. Our main options are to put it back into the drillbit; to buy back our debt, which still continues to trade at a discount, albeit at a lower discount; acquire tuck-in acreage that falls within our development plans; and of course once our balance sheet reaches a point where we're more comfortable, we could potentially buy back stock. We run our analyses based on how we can grow our NAV per share the best, while understanding the variables and risks surrounding each of those decisions.

The decision to add two rigs while only spending $25 million of additional capital in 2016, that's going to help improve our NAV per share in our 2017 outlook. The management team, I'll remind everybody, is compensated on free cash flow generation as well as total shareholder return; so the most recent decision to add back activity, it highlights the balance that we take when evaluating things like free cash flow and overall NAV per share, total shareholder return. But the decision to add back that activity is ultimately in the end always focused on growing NAV per share.

Now before I turn it over to Dave, I just wanted to wrap up with looking at something from the perspective as we sit here at the midway point of 2016, and just take a look and examine how we arrived at where we're at today. So if you look back to the first quarter, we posted impressive cost control and capital discipline results, and we accomplished a major asset sale. That effectively positioned the Company to get through the worst of the market downturn.

Now in the second quarter, while the market remained challenging, we demonstrated that the cost improvements and the capital discipline results are sustainable long-term, which is further strengthening the Company and getting us to a place where we now pivoted from defensive mode to offensive mode. And going on the offensive is exactly what we intend to do.

So through prudent decisions around capital allocation, the strong efforts on cost reductions and production efficiencies, a disciplined management team, and the strength of our asset base, we're positioned to capture significant upside as the market continues to improve in the second half of 2016 and as we get into 2017. With that, I'm going to pass things over now to Dave Khani.

Thanks, Nick, and good morning, everyone. As highlighted in our press release this morning and indicated on slide 3, CONSOL reported a second-quarter GAAP net loss of $470 million. However, there are several noncash after-tax adjustments totaling $431 million in the quarter, including on a pretax basis the following: unrealized loss on our mark-to-market hedge book of $280 million; and an impairment charge of $356 million on our Miller Creek/Fola properties as we announced the sale of those assets and expect these transactions to close in the third quarter of 2016, and we will likely recognize another $44 million in the third quarter. After adjusting for these items, CONSOL posted a net loss from continuing operations of $49 million or negative $0.21 per share, and adjusted EBITDA from continuing operations of $136 million.

More importantly, we continue down the path to being one of the most efficient E&P companies, with growth in free cash flow. We raised our 2016 E&P volumes to 15% to 17% and this quarter generated free cash flow of $66 million and, to date, $516 million. We also saw total capital expenditures decrease to $38 million in the quarter, which is a 50% reduction from the first quarter and reflects improving productivity.

With the sale pending of Miller Creek and Fola, we've posted about $5.1 billion of coal deal asset value over 23 transaction since 2012. Looking forward, we anticipate posting more E&P sale transactions now that commodity prices are rising and the market appetite for these types of transactions are improving. Stay tuned.

Now looking over the E&P side, as stated in slide 5, the E&P Division finished the quarter production with 99.3 Bcfe, or average daily volumes of 1.1 Bcfe per day. We also had about 4.3 Bcfe of mechanical issues and production management impacting the quarter.

On the cost side we had another strong quarter with total all-in and cash costs of $2.27 and $1.23 per Mcfe, respectively, a year-over-year cash cost decline of $0.35 per Mcfe and below the lower end of our guidance. The cash cost in our Marcellus, Utica, CBM, and conventional segments all came down in the quarter. We are driving nominal cost out, drilling better wells, and quickly increasing our mix towards more lower-cost Utica production.

Our Marcellus cash costs declined to $1.27 Mcfe in the quarter, and Utica to $0.83 per Mcfe, with Utica now representing about 25% of volumes. As a result, we reduced our 2016 cash cost guidance by about 6% to $1.28 per Mcfe.

Now let's talk about prices and hedges. In the quarter, our average realized sales price was $2.50 per Mcfe, which includes a negative basis impact, BTU uplift, and the benefits from our hedge position. At year end, we stated that as we drove down our costs we would begin to hedge out longer, and have begun to do so over the last two quarters.

If you look at slide 11, we have added about 120 Bcf of NYMEX hedges and 170 Bcf of basis hedges from 2017 to 2020 through our program hedge process. I want to point out that we have prioritized hedging at our higher-risk basis markets for 2017 to 2020, and we will begin to add hedges in our better markets going forward.

This should raise our overall base hedge price for 2017 to 2020 as we implement it. While this creates more certainty on our margins, this also protects the borrowing base and liquidity, which are obviously very important. As of last week, our hedge book was about $36 million underwater.

While we've been adding program hedges, we remain bullish on the commodities and still nicely positioned to capitalize on them. First, a quick natural gas outlook.

As we predicted in our third-quarter 2015 call, natural gas supply for 2016 is declining. US and Appalachian gas production has peaked in mid-February. Combining the decline in supply with normal summer and winter demand, we expect inventories to end injection season at more normal levels.

We anticipate the dry DUCs being burned off by early next year, putting supply pressures on 2017 as well. As a result, the near-term natural gas price jumped; however, the forward curve has moved up very modestly, being impacted by the illiquidity out on the curve producing hedging impact and speculation of drop in rig activity.

So while protecting our cash flows, we are also positioned to capture rising markets through our open positions, rising basis, our net-back power contracts, our carry position with our JV partner, and through asset sales. Looking at the forward curves, our hedge book, and our operating cost structure, we anticipate E&P margins will rise in the second half of this year and in 2017 versus the first half of 2016.

Now let's talk about coal. CNXC reported on its second-quarter earnings last night. And as you probably heard, CNXC maintained its EBITDA guidance for the year, but also eliminated its second-quarter subordinated distribution payment.

In consultation with CNXC, CONSOL was supportive of CNXC eliminating the $6 million second-quarter subordinated distribution payment, as CONSOL believes that the action will improve the coverage ratio on the common units, relieving any risk of common unit distribution cut, will improve the yield for the common units, and therefore will help accelerate CONSOL's ability to drop the remaining 80% of PA complex into CNXC. As the coal markets continue to improve in light of stronger weather, rising natural gas prices, and falling coal supply, eliminating the second-quarter subordinated distribution will help CONSOL advance its broader strategy of splitting the coal and gas businesses and becoming a more pure-play E&P company.

So let's talk about restructuring and cost savings. We've spent the last three years restructuring CONSOL into becoming more of a pure-play company through refinancing $5 billion of debt, effectuating the asset sales, creating the MLP structure, and hiring the right personnel. During this period, we implemented a zero-based budgeting approach, which resulted in reducing annual expenses by approximately $200 million a year.

In addition, we reduced the servicing costs for our healthcare and pension liabilities by several hundred million dollars per annum. as a result, we reduced the OPEB and pension liabilities on our balance sheet by more than $3 billion. I remind you all of these items to emphasize the rate of change that has and will continue to occur to improve our NAV per share.

Let's talk about capital. As you can see, we reduced our capital spending forecast by about 25% while adding back activity and raising production guidance. Our PUD conversion costs in our plan are expected to average about $0.48 per Mcfe, second lowest of the major Appalachian peers, and this comes without a significant impact from the dry Utica.

If you take a step back and analyze how we think about capital allocation, we've moved CNXC to a maintenance capital mode in the first-quarter 2014; we've built out a large majority of our midstream capital by 2015; we've built out the largest Appalachian land drilling opportunity sets by 2014; and we've reduced now the E&P capital intensity by about 60% in 2016. Combine this with one of the lowest basin declines at 15%, we have significantly reduced the total maintenance and growth capital and positioned each of our major entities to generate free cash flow.

Now let's talk about liquidity and balance sheet. On slide 12, over the past 12 months CONSOL has paid down approximately $650 million of debt, almost doubled our liquidity to $1.3 billion, and maintained our trailing 12-month pro forma bank leverage at 3.6 times.

As highlighted by Nick, we have been one of the few companies that did not issue equity to strengthen our balance sheet. We believe we can accomplish this the old-fashioned way, by cutting costs, selling assets, growing production, reducing capital intensity, and capturing the normalization of commodity prices. In doing so, we preserve the value for our shareholders.

Now let's talk about valuation and some catalysts. With the nice rebound on our stock price since year-end 2015, we still have many catalysts and drivers to drive our increased performance.

First, further cost-cutting and efficiencies that will reduce our unit costs even further. For example, the dry Utica cash costs are meaningfully lower than our current cash costs of $1.23 per Mcfe.

Second, we will capitalize on our large asset base either through production or asset sales. We are agnostic in how to monetize our asset base and will do whatever generates the highest NAV per share.

Third is improving commodity prices across all our products. Fourth, rising values for our MLP entities -- CONE at midstream and CNX Coal Resources -- which, on average, have risen above 100% off the lows in the first quarter. This translates to as much as a 1 multiple reduction on our EV to multiples using 2016 consensus.

And last, maintaining better capital discipline than our peers. Hopefully we are developing a reputation for improved capital allocation and discipline. We were one of the first to drop all of our rigs last year, and we are not rushing to ramp up capital with the rising prices. We believe this will translate into higher rates of return, better free cash flow, and lower cost of capital.

So in summary, we've had another solid quarter and our team executed nicely in this market. We're now starting to come off the bottom of the market; but importantly we're able to improve liquidity while -- even while prices were low.

We are now focused on improving our leverage ratio and accelerating the separation of our E&P and Coal business. With that I'll turn it over to Tim.

Thanks, Dave, and good morning, everyone. I'd like to start off with a brief market update. In general, fundamentals across the board are improving, specifically when you look at our region. We believe that the three key drivers -- pipeline takeaway capacity, weather, and rig counts -- all paint a positive picture.

For new regional pipeline export capacity, we expect to see roughly 1.2 Bcf a day completed by the end of this year and up to 10 Bcf a day by the end of 2018, with other projects continuing to come online after that. The summer weather has been strong, which is slowing the inventory build, and the rig counts have remained below the level needed to maintain flat production not only in our region but across the US.

All of these items have driven the 2017 NYMEX significantly higher than it was at the time of our last call. And this in part helped to solidify our decision to bring back rigs and resume drilling activities, which I'll touch on shortly.

On the liquids side, NGL realizations have improved and are continuing to improve thanks to incremental infrastructure, strong export volumes, and leveling supply. Mariner East 1 has improved and will continue to improve our ethane realizations, and we expect Mariner East 2 to provide further enhancement to propane and butane pricing.

Also worth noting is the near-record propane exports we are currently seeing of 650,000 barrels per day.

With respect to FT utilization, we're aggressively pursuing segmentation strategies with our FT to either use the same FT multiple times to our own advantage, or monetize downstream segments. In the second quarter, we generated $2.3 million from FT releases.

Now let's shift to our operations. Throughout the quarter, we've continued to observe strong performance. Our two most recently turned in line Marcellus pads continue to outperform type curves.

The 12-well GH46 pad in Greene County, Pennsylvania, has cumulatively produced 10.5 Bcf in the first 90 days of production. This outperformance in the Marcellus has led to increasing our type curves in our prolific Green Hill field in Southwest PA from 2.7 Bcf per 1,000 feet to 3 to 3.5 Bcf per 1,000 foot of lateral.

Now the Utica. As depicted on slide 11, our Gaut 4HI well in Westmoreland County, PA, is maintaining rates and pressures and we expect it to hit line pressure in February of 2017. This well continues to impress, as do our four wells located in Monroe County, Ohio.

Our GH9 deep dry Utica well in Greene County, Pennsylvania, hasn't been quite as strong as the Gaut, although its performance has been in line with other operators who have dry Utica wells in this area. So despite being in the early stages, CONSOL's confidence continues to grow for prospective dry Utica development as we accumulate more production data on the six operated wells and 22 non-operated wells where we participate.

These data points have translated into our new ranking analysis, which incorporates the metric of A square root of k, as a normalized measure of a well's strength. Slide 12 highlights how we rank and how this data helps us establish a more bullish view than most in the industry.

Our continuing dry Utica analysis and continued Marcellus outperformance in part, and in addition to the backdrop of commodity prices normalizing, have led to the decision to add back drilling activity in the second half of the year. We intend to run a two-rig program throughout the second half of the year and drill eight wells in Monroe County, Ohio, and two Marcellus Shale wells in Southwest Pennsylvania. These wells will be completed in the first half of 2017 and turned in line predominantly in the second half of the year.

We rank development opportunities by area and make decisions on future capital allocations by evaluating rates of return, infrastructure, and end markets. We also consider our dry gas to wet gas balance, as well as the balance between joint venture and CONSOL's 100% owned and operated wells. There is not to necessarily a hard split or percentage that we try to maintain, but we do prefer diversification between markets while maintaining a watchful hand on the production throttle.

Our most recent decision is supported by expected rates of return of approximately 60% in Monroe County, Ohio. These returns assume: a $9.8 million well cost for a 9,700 foot lateral; $1.75 realized price; and 2.8 Bcf per 1,000 foot of lateral. Our previous estimates were based on $10 million well costs assuming a 7,000-foot lateral. For the Marcellus Shale and our most prolific area of Green Hill, we expect to see rates of return of approximately 55%, assuming: a $7.1 million well cost for a 9,500-foot lateral; $1.75 realized price; and 3 Bcf per 1,000 foot of lateral.

So, when we look at Monroe County or the area that we call Switz, these are 100% owned and operated CONSOL pads that are rig ready in a proven area that directly offsets our Switz 6 pad that's already producing.

Three of the offset wells on the Switz 6 pad are averaging greater than 15 million cubic foot a day after nine months of production. This is an area that we're excited about, and there is available takeaway and market flexibility.

In addition to the new wells, we also benefit by exiting 2016 with a robust inventory of 91 gross Marcellus and Utica Shale wells that are drilled but uncompleted. So when you look at our diversified portfolio that helps support all of the great things that are happening in the E&P operations, we've got a lot to be excited about. The future looks bright, and we look forward to providing future operational updates.

Operator, if you could please open the line for questions.

(Operator Instructions) Neal Dingmann, SunTrust.

Morning, guys. Say, Nick, maybe for you or Tim, just in the press release you mention -- and I know you gave some details on the 10 wells that you anticipate for the rest of the year, the eight in Monroe and the two Marcellus. Beyond this, do you see additional wells continuing in these high-return areas?

I guess I'm particularly curious if you would maybe drill some follow-up wells up near the Gaut.

Well, Neal, when we put this rig plan together, as we do, we base everything not just on rate of return, but we look at end markets, takeaway capacity, land position, commitments, a lot of different factors. And that's how we came up with the list of 10 wells that we're going to drill here in the second half, and we'll continue with that process as we move into in 2017.

But I would expect that you will see additional wells drilled up around the Gaut.

Then, Tim, does that plan that you say -- again, I think that makes sense on returns. Does that factor in next year on drilling versus completing those 91 DUCs that -- looking at that same plan?

It does. We take the same approach to the DUCs as we do new wells. We get asked quite often -- we've got this inventory of wet DUCs: How do you look at those compared to continuing to drill dry gas wells? And we put the DUCs through the same process that we go through. We prioritize are opportunities, and it's based on risk, rate of return.

And right now, Monroe County, some of our dry gas DUCs have risen to the top of the list.

Then, Tim, just one last follow-up on that. On the Utica, once you see some of these starting to hit the natural line pressure, what type of decline do you anticipate on those? Is that just a typical gas fall at that point?

Yes, we've got -- I don't have the decline parameters in front of me here, but we have put a decline on there based on what we've seen, what our modeling has shown us. We've done some pretty extensive modeling of our earth modeling, our completions modeling, and our rate transient analysis that have given us a decline. But I don't have that number in front of me right now.

Okay. Then just lastly for either Nick or Dave. How do you all see -- Dave, you mentioned about not paying down particular -- not particularly using equity as one of the higher items on the list. How do you all see about paying down the $466 million on the credit facility or buying back any of those outstanding bonds? I know they've had a nice rally, so I'm just wondering how you think about, when you and Nick think of some of the possibilities, how those rank now that you have paid that credit facility down and the bonds have had a nice rally.

Yes, so we'll make a decision about when we generate free cash flow, and we will generate free cash flow in the second half this year organically, and then hopefully also with some asset sales, so we'll decide how we want to use that cash essentially, whether we pay down our revolver or buy back debt. So it will be NAV driven.

We'll also make sure we're prepared for looking out at the next redetermination and make sure we're prepared for that as well. But again, we're going to generate free cash flow.

Got it. Thanks for the details, guys.

Holly Stewart, Howard Weil.

Good morning, gentlemen. A couple quick questions, just trying to get a sense for thoughts around 2017. I think as we look at the budget there is probably no real reason to think that the coal spending goes up next year. Looks like D&C capital will actually rise just given the new rig activity and all the DUCs that are out there. So just trying to get a base assumption around spending for next year.

Yes. I think one is we have three entities that are generating free cash flow. So you should start off and understand that.

So when we were to raise any of our D&C capital, it will be in the light of probably making sure that we stay within cash flow overall, excluding any asset sales. But we obviously have to make a determination of how much DUCs we're going to bring on next year versus how many brand-new wells. So it will be a calculus we'll go through.

And we have two JV partners we need to go through as well as go through our Board.

Okay. Then maybe just a couple follow-ups on the guide. It looks like your basis for the quarter was good and the first half has been pretty good. So you expanded the base differential guidance.

Is there anything you're expecting in terms of weakness in the back half of the year? Is this just a conservative assumption for the rest of 2016?

I think we anticipate basis getting a little bit wider in the third quarter, but then getting narrower in the fourth quarter. That's basically our internal forecast, using the basis hedges that we have in place as well as our opening position.

Okay. Then one final one if I could, just on the MLP market; it seems to be settling down here. Thoughts around a drop in maybe the back half of the year as we move into in 2017, whether that's on the midstream side or the coal side of things?

Yes, so for the midstream side, CONE has talked about very publicly that if they do a drop it would be to really help for 2015 distributions. So now that the MLP has jumped up into a more normalized yield, that's always a possibility; and again, it would be for 2018.

On the CNXC side, again it will probably be a function of watching the coal markets and how they improve and how the capital markets will be open for a drop on the CNXC side.

Great. Thanks, guys.

Lucas Pipes, FBR & Company.

Hey, good morning, everybody, and congrats on the continued capital improvements. That's great.

I wanted to follow up on the asset sale side, David. If I recall correctly, you mentioned earlier in the call that you continue to look at opportunities. You don't feel like there is a need to do something.

But when you think about the processes that you currently have running, what magnitude, what ballpark are you looking at? And what area specifically do you think there is interest?

Well, if you've noticed, we've executed very heavily on the coal side the last several years and with some modest E&P layered in there. I think looking forward, as the natural gas and liquids markets have improved here and you see some transactions occur, it looks like the appetite has picked up more on the E&P side. So you'll probably see more E&P going forward -- and particularly we don't have that much coal left to sell.

But as far as magnitude is concerned, I think it will be very opportunistic. Again, Nick talked about we do not need to sell anything. We obviously want to get our leverage down into the 3 times or lower, and so we have a little bit of work to do.

It won't all come through asset sales. It will come through a whole variety of things. So again we'll put enough irons in the fire to get what we want to get done.

That's helpful, thank you. Then you highlighted cost cuts as another lever, and you've done a great job both on the coal and on the E&P side.

What do you think is going to take it to the next leg down, so to say, on the cost side? Specifically in E&P, what are you looking at? What's going to get these costs even lower?

Well, probably a big piece of that is the dry Utica with these high-volume wells, getting our drilling costs down to the ranges that we've talked about: down below $10 million in Monroe County, and down in the $12 million to $15 million range in the deep dry Utica and Southwest PA. Getting our -- that will continue our drive for capital efficiency.

And then on the operating side, LOE, the dry Utica volume certainly will help drive down our operating costs and add to the overall blend and help reduce our costs, as we've seen in the last couple quarters as we bring on more and more dry Utica. So I think that will continue.

Great. Well, thank you very much.

Jeffrey Campbell, Tuohy Brothers.

Good morning. First question was with regard to the A square root of k stuff. I just want to make sure that -- you said it gives you confidence above the industry view. I just want to be clear.

Does this formula and application mean that you believe that the ultimate EUR of the Utica is greater than current industry assumptions?

Well, I think it talks about our confidence in the Utica, and it gives us a much more accurate approach to evaluating what we see in the Utica. We're looking -- that's evaluating -- it's normalizing for lateral length, completion techniques, well spacing; so it really normalizes all those parameters and gives you a more accurate view. As opposed to comparing IPs, which really vary from operator to operator, and procedures can vary. So we think the A square root of k just gives a more accurate view of the Utica.

Now when we talk about EURs, we think there is still a potential for upside there. When we look at the Gaut, it continues to impress us with the way it's holding up from a pressure and rate standpoint. We're seeing the same thing in Monroe County. So we think there is potential for additional upside on EURs.

Okay. So if I understood what you were saying, you're saying that it gives you more confidence in the prospectivity of the Utica as a whole, as opposed to maybe just an EUR uplift or whatever.

We've got a lot of confidence in the Marcellus. And I think, as I said in my statements, we take a more bullish view on the Utica than most other operators because of the dataset that we have and our acreage position.

So we're still -- we still think the Marcellus provides tremendous opportunity. It's still a large part of our production base. It's over 50%.

We see the Utica growing. But we're -- both will be part of our growth moving forward.

Okay, thank you. I appreciate that. Service providers have been fairly resolute in saying that their prices have to rise to support any resumption of E&P growth. I'm just wondering, first, do you see any evidence of that yet in the impending two rigs that you're going to add? And what's your forward view on that going into 2017?

Well, I think there is -- when we look at our cost savings, we -- in general about two-thirds have been organic and about a third of it has been as a result of current market conditions. And certainly when activity increases, we may see some increase in service costs. But our job is to do everything we can to keep those costs down.

So that will be an ongoing process. But we haven't hit bottom on our organic cost reductions, so there may be some offset there if we do see some increases in service costs. But we'll continue to fight that battle and work to get our costs down further.

And to be fair, if the prices are going up, that should suggest that commodity prices are going up as well. So it doesn't necessarily have to be a negative on a margin basis, correct?

Correct, yes.

Okay, and I'd like to ask one last question if I may. You mentioned in the press release Marcus Hook and how it's had a salutary effect on NGL pricing. I just wonder; do you have any other irons in the fire to try to improve your NGL pricing aside from Marcus Hook? Or is it pretty much tied to the growth of that facility?

Well, we're constantly working with our NGL partners to find ways to optimize our liquids portfolio, and we've been able to improve our differentials year-over-year and have positioned ourselves to take advantage of storage and export opportunities as the market searches for equilibrium. From a market perspective, we believe that propane netbacks in particular will continue to improve on the tailwinds of expanding infrastructure, such as Mariner East 2, and the potential for increased regional demand.

That said, we're not just waiting on the market to correct itself. We're entering into deals on a portion of our production to layer in price and delivery diversification, and we'll continue to evaluate these opportunities going forward.

Okay, great. Thanks; I appreciate it.

Biju Perincheril, Susquehanna.

Hi, good morning. Nick, if I could go back onto 2017 plans, can you give us some color on how you are thinking about whether it's going to be a free cash flow model again next year; or are you looking at spending closer to cash flow and debt reduction via asset sales?

The filter that we'll use is the same filter and process we use to assess the two-rig activity that was just announced. So back to the rate of returns and the impact on NAV per share versus other uses. As Dave said to an earlier question, there's a big push and desire, I think, from the Company perspective to stay within cash flows for a given period of time. We think that creates a lot of optionality and opportunity beyond just drillbit decisions, and we want to be in a position to take advantage of that.

And the other thing to consider and contemplate in this is that when we're putting together the 2017 development plans, our capital budgets, our cash flow budgets, we've got all these other levers or places to go to get certain production growth levels, whether they are the DUCs in the wet area that we talked about, whether it's an incremental rig activity for new wells, as Tim said, or some other variance between the Utica and the Marcellus. There's different levers to pull there and mixes to look at to try to optimize.

Understood. Then in the Green Hill area, can you talk about some of the improvements that you've instituted there? And where are you in taking those improvements and applying it rest of the acreage?

Well, we've -- continuously working on improving our completion techniques, reducing our cycle times, optimizing our drilling. And it's really not field-specific. In the Marcellus salt, we look at all Southwestern PA and really push our learnings across the board.

But I think we've seen some good quality rock there that has certainly helped us. But when you put all these other learnings that we've gained over the last two or three years into play there, we are seeing really good rates of return. We're seeing great EURs, and it's an area of great opportunity for us.

Then lastly, is there an update to the maintenance CapEx number that you gave on the last quarter?

I think the maintenance capital, I think we said it was in the $250 million to $300 million range, and that still holds pretty true, which puts us in the $0.65 to $0.75 ZIP Code.

Thank you.

James Spicer, Wells Fargo.

Hi, good morning. Just a follow-up question on the balance sheet and the improvement goals here. You've talked about potentially targeting leverage of 3 times or lower. Just wondering if there are other metrics that you look at, at the same time, whether it's debt-to-cap, revolver utilization, anything like that, and what -- the time frame you're targeting to achieve your goals.

Yes, our target would be to try to get there by the end of 2017 if not earlier. And we look at liquidity, and we'll look at other metrics depending upon the moment in time.

If it's in more of the down cycle, there are going to be more defensive metrics that we'll look at. So liquidity is another one we look at.

What are your objectives in terms of liquidity? Just maintaining a minimum amount at a certain level?

Yes, we have an internal number that we always look at, and it factors in all the risks, our open positions, and the revenue shifts, any operational glitches that we have to cover here, and then what we get covered by insurance. So we look at it on a -- how much liquidity do we need to make sure we run our businesses through all parts of the cycle.

Okay, great. Then, secondly, just on your DUC inventory, I think you said you're at about 91 today. Just based on your plan for this year, where do you expect to be at the end of the year?

We'll be at 91. That's for the end of the year.

Oh, that's end of the year?

Yes, that includes the 10 wells that will be drilled with this two-rig program. So we'll close the year out at about 91.

And where are you today then?

We're roughly high 70s, 77, 78.

Okay. All right, thank you.

Thank you, Mr. Lewis. At this time I'll turn the conference back over to you.

Okay, great. Thank you, everyone, for joining us. Appreciate your interest in CONSOL Energy. Look forward to speaking with you next quarter.

Nick, if you could please remind the audience regarding the replay instructions.

Thank you. Today's call was recorded and is available for replay beginning at 12:30 today and running through August 2 until midnight. You may access the playback system by dialing 1-800-475-6701 and entering the access code of 375022. International callers may use 320-365-3844. (Operator Instructions)

With that, that does conclude our conference for today. We thank you for your participation. You may now disconnect.