Coterra Energy Inc (CTRA) 2020 Q1 法說會逐字稿

Good morning, and welcome to the Cabot Oil & Gas Corporation First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I'd now like to turn the conference over to Dan Dinges, Chairman, President, Chief Executive Officer. Please go ahead.

Good morning. Thank you for joining us today for Cabot's First Quarter 2020 Earnings Call. Before I get into our performance for the first quarter, I'd like to say that our thoughts are with those who have been affected by COVID-19. I want to thank those individuals on the front lines, especially the health care workers, who have been working to keep us all safe during this pandemic. Additionally, I want to thank all of our employees for their tireless efforts to keep our operations running efficiently. While we are navigating through truly challenging times, I would never bet against the resiliency of the human spirit, and I do expect us to emerge from this period even stronger.

As a reminder, on this morning's call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in yesterday's earnings release.

During the first quarter, Cabot generated positive net income of $53.9 million or $0.14 per share and $49.8 million of positive free cash flow despite a 49% decrease in realized prices relative to the prior year period, highlighting the company's ability to deliver profit and free cash flow even in the most challenging of markets.

We returned approximately 80% of our free cash flow to shareholders during the quarter through our dividend, which currently yields approximately 2% on an annualized basis. We remain fully committed to our dividend, and based on current NYMEX futures for 2020, our program for the year is expected to generate enough free cash flow to fully cover our dividend. Our balance sheet remains ironclad, with net debt-to-trailing 12 months EBITDAX ratio of 0.9x.

Our lenders group recently unanimously reaffirmed our $3.2 billion borrowing base under our revolving credit facility. Aggregate bank commitments under our credit facility remain at $1.5 billion, which results in approximately $1.7 billion of liquidity at the end of the first quarter when including over $200 million of cash on the balance sheet. We have an $87 million tranche of debt maturing in July of this year, which we plan to pay off with a portion of our cash position.

On the operational front, our production for the first quarter was 2.363 billion cubic foot per day, which was inside our guidance range for the quarter. We placed 9 wells on production during the quarter, all of which were turned in line during February. We are currently operating 2 rigs and utilizing 2 completion crews.

As previously disclosed, we expect sequential decline in production during the second quarter, driven in large part by a lighter turn-in-line schedule during the first 4.5 months of the year, with only 13 wells expected to be placed on production between the beginning of the year and mid-May. This is primarily a result of long cycle times for large pads with long laterals during the first and second quarter. Additionally, our forecast assumes modest price-related curtailments during the natural gas shoulder season.

Our second quarter production guidance range also reflects the impact of an unplanned downtime related to remedial work on 1 well on a large pad that resulted in the deferral of over 230 completed stages from the first quarter to the second quarter, which led to lower capital spending levels in the first quarter.

We have updated our full-year production guidance to a range of 2.35 to 2.375 billion cubic foot per day to reflect the previously mentioned operational changes. The midpoint of this range implies flat production levels year-over-year.

Additionally, we have reaffirmed our capital program of $575 million. We do expect a significant sequential increase in production during the third quarter, based on expectations of placing approximately 2/3 of our wells on production, between mid-May and late August, while our fourth quarter production is expected to be flat with the fourth quarter levels from last year.

We used the recent rally in 2020 NYMEX futures to layer in additional hedges for the summer months to protect against the potential for more prolonged demand disruption this summer related to the global pandemic. However, the outlook for natural gas prices, later this year and into 2021 has drastically improved since our year-end call in February, with a 2021 NYMEX future increasing by almost $0.50 to approximately $2.75 per MMBtu. This has been driven by the expectation for significant gas supply declines in 2020 and 2021 from the substantial reduction in activity levels we have seen in legacy gas-producing basins like the Marcellus, the Haynesville and Utica, in addition to sizable cuts in activity we are seeing in oil basins like the Permian, Eagle Ford and Mid-Continent, which are expected to result in significant declines in associated gas production.

It is premature to disclose any formal guidance for 2021 at this point. However, I would highlight that a maintenance capital program next year would deliver a free cash flow yield over 6% and a return on capital employed of approximately 20% at the current strip, all while maintaining a net leverage ratio below 1x EBITDA.

As of today, we remain unhedged for 2021, as we continue to assess the natural gas market outlook for next year. While the recent increase in the forward curve for 2021 is extremely positive for us, we believe that the market is currently underestimating a potential undersupply of natural gas markets entering into 2021, providing us optimism that the forward curve for 2021 will need to move higher to incentivize increased activity levels to address the undersupplied market. For reference, every $0.10 improvement in the annual NYMEX price in 2021 results in an approximately $55 million of incremental free cash flow under a maintenance capital scenario, highlighting the opportunity for significant free cash flow expansion and increased levels of capital returned to shareholders next year.

While 2020 will likely prove to be a trough year for our free cash flow and our return on capital employed due to the lower price environment, we are managing through, currently, resulted from an oversupply market exiting last winter, our outlook for the year, however, is markedly -- next year is markedly improved. We plan to remain disciplined with our capital spending with an acute focus on delivering on the strategic objectives we have laid out, previously, including focusing on financial returns, demonstrating continued cost control, maintaining our financial strength, generating positive free cash flow, returning capital to shareholders and increasing our proved reserve base.

I would once again like to stress that our thoughts are with anyone who has been impacted during this difficult time, including our employees and shareholders. Cabot remains extremely healthy, financially. And given the current outlook for natural gas market in 2021, we believe we will emerge from this period stronger than before.

With that, I'm happy to open it up for any questions.

(Operator Instructions)

Our first question will come from Leo Mariani with KeyBanc.

You're on mute, Leo.

Okay. We will just go to the next question. Our question will come from Kashy Harrison with Simmons Energy.

Dan, in the event, and I know you're -- I know you're [advertising] what you can face basically 2021, but let's just say over a medium term, pick a number of years, the mid-cycle price for gas moves meaningfully higher from here. I'm just wondering how we should think about your medium-term growth rate in a more -- in a higher-pricing environment and how we should think about the level of capital required to deliver that growth.

Well, it's a good question, and there's a lot thinking about growth with the anticipation of 2021 price may be getting a little bit of a tailwind. We're looking at all scenarios. But our focus is on our current program in 2020, being as efficient as we can possibly be.

And just a comment on growth in general. If you look at our industry and you take a step back and you look at the carnage that's out there right now and all that we're dealing with, you have a number of stressed balance sheets, you have oversupplied end markets, you have low commodity price in both oil and gas. And it seems that this is a bad replay. Each time you get a little bit of growth or increase in price, everybody jumps in and tries to take advantage of that increase. And the issue for us is, before we would make a decision for growth, we would have to feel comfortable that there's some fundamental changes, and it's sustainable in the long term versus having a few months of an increase and trying to spend capital for that. You participate for a little bit better pricing for a short period of time, pricing rolls off and you still hadn't recaptured all your excess capital you put into it. That, again, has been played back over and over and over. And that's why there's such stress and distress in our market.

You look at the strip right now, you can go out into 2024, and I think you'd get into somewhere like an average -- it's such a backward-dated market, you'd get into an average of $2.40, $2.45, somewhere in that range. That's not what we would view as a sustainable market. And the backwardation for us gives us concern now. If we had a contango market, I felt comfortable about that. And we would participate in the growth side of that story.

With that said, our program is -- has built in, through our service contracts, flexibility to dispense more capital if we chose and to complete a few more stages and to build up into 2021, if, in fact, we elect to do so. We've kind of given right now at our production level our maintenance capital that we're at kind of today is kind of the maintenance capital we would have rolling forward also. So we feel comfortable where we are, our focus being on generating free cash flow. And the financial metrics is going to be our focus. It has for years. This is our fifth year of generating free cash flow in what has been historically, the -- one of the depressed markets that we had in a long, long time. And we're one of the few companies that can make that claim. And we're not going to change the way we perceive it. We'd love to have the higher sustainable commodity strip. We'd love to grow into it. But we're cautious with our balance sheet and our capital exposure.

That's great color, Dan. Certainly hope this rally has some legs as this go around.

All of us do.

But I guess then maybe still sticking a little bit with that general same topic. I guess, I was wondering, if the thoughts on capital returns to shareholders may have evolved over time. Specifically, I know you -- in the presentation, you still highlight wanting to return at least 50%. But do you have a bias for buybacks moving forward? Or do you have a buyback for maybe more of a special dividend strategy moving forward?

Yes. And you got the tagline there on returning 50% at least to shareholders. And even right now, we've kind of returned, what, 80% or so. So -- and in the past, we've returned more with the -- we bought back about 14% of our shares. We've increased our dividend about 5x since 2017. So we feel good about what we can deliver with our program. We referenced the maintenance program for 2021 as an example to illustrate that we're focused on the financing metrics. But at least the 50% going back. And if you look historically, we have delivered more back to shareholders.

Our base operation is priority, obviously, for the most part. And then maintaining that dividend that we currently have is another important consideration for us. Kind of put in growing the dividend and also, obviously, we always -- we don't have a real -- a large amount of debt and certainly don't have much near term, but considerations for debt repayment is always going to fall into the mix. But after maintaining the dividend, growing the dividend is a strong consideration. If we saw a sustainable commodity strip and we felt comfortable that layering in a little bit more capital would give us growth into a market that would allow an expected return of that capital before any roll-off would occur with commodity price, i.e., oversupplied and underdemand, then we would use some of that capital for that. And we've always been interested in opportunistic buybacks, if there is a disconnect.

Our next question will come from Joshua Silverstein with Wolfe.

We like you are bullish on natural gas price for next year. But wondering about why philosophically just not start to layer in some hedges for next year just to protect some of the downside, where it's $2.75 in the curve. Next year, you guys can get plenty of free cash flow at that level. So why not just start layering in at least just an incremental amount?

Well, yes, great question, Josh, and a discussion point much, our hedge committee. We are and have met recently a number of times. And not only were we focused on protecting the summer months, which we've done with some hedges, we also had a significant discussion about 2021 at our Board meeting yesterday. We talked about the hedge program, what we would like to protect, where we think the market is today in a considerable amount of detail. And Jeff Hutton presented the marketing outlook to the Board and talked about where we think the market might go. And so it is a consideration, Josh. We, at this stage, and looking ahead and what we think the market will do, we're actually very pleased that we're unhedged in 2021. I think that -- I think, we're going to be able to couch the hedges that we placed in 2021 when we do it as offensive hedges. And we're looking forward to do it. We'll continue to take consideration of where the market is currently and also anticipate where we think it might go to layer in hedges. So I understand your position. And again, a lot of discussion around our Board table about what we deliver, just even with just a maintenance program with these anticipated prices and strip prices, current strip prices.

Got you. Okay. And maybe just a follow-up to that. How should we try to think about the differential that would occur in a higher Henry Hub price for you guys? This year, your guidance is around $0.30 to $0.35. Do you think that, that would hold true as we go up to $2.75 and $3 next year? Obviously, the capacity in the Northeast region has probably loosened up a little bit. So -- and any sense as to how differentials can move relative to this year?

Yes. Always focused on the realizations, and I'll turn this to Jeff and let him make a quick comment. But right now, we feel good about where the -- our dips are in our forecast, which is, you outlined it, $0.35 plus or minus. And feel pretty good about where the dips might go from here even with a higher price. But Jeff, I would like for you to make a comment on this.

Yes. Josh, this is Jeff Hutton. We're looking at that, of course, daily on the outlook for the [ice] basis differentials. And quite frankly, we've been very pleased with the differentials seen to fall in line with our expectations and the current basis differentials. I think if anything, if we see a move upward into the $3 area, which we are hopeful for that, then you might see a few cents widening on the differential for the total company. But the outlook so far with -- at the $2.75 strip is not too far off from the current differential.

Our next question will come from Brian Singer with Goldman Sachs.

You've highlighted your low-cost structure, strong balance sheet, a healthy cash flow at maintenance levels. I wanted to see if you could touch a little bit on your latest thoughts on consolidation. There's a lot of stressed companies out there that could open up assets, like can come for sale over the next year if they aren't already. Can you give us your latest thoughts on the risk/reward of gaining scale in Appalachia versus diversifying versus none of the above?

Yes. The M&A conversation is ongoing. As I've said in the past, Brian, and you're totally aware that we have that conversation at our executive session in our Board -- at every Board meeting. The market, I think, still needs to consolidate. It's been our position for a long time that consolidation would be healthy. The difficult part -- each time we grind on it, the difficult part is the debt levels and the debt load associated with the Appalachia peers. It is a significant debt load. The loss of some of the market caps through all this carnage that we've been going through has such a large percentage of debt compared to an equity in these companies. And it just makes a combination, if you will, a difficult analysis, particularly for us. It's -- we have, what we think is extremely good asset. We are cognizant of the fact of any dilution that might occur with a combination. And if you -- if it comes with a debt load that we're not prepared to take and it comes with acreage that -- each company has some good acreage, but each company has maybe some acreage that would not line up in our drilling schedule for 20-plus years. So it's difficult. If there were quality assets that made sense, we would always look at that as we've done for years and years and years and years, but also meeting our expectations on what fits for a valuation for Cabot and its shareholders versus what sellers expectations might be. It's always hard to get it lined up. But I'm not trying to dance around the question, Brian. But I think if I could put down the #1 reason why it makes things so difficult, it's the drop quality and debt levels.

Great. I totally understand. My follow-up is with regards to the Upper Marcellus. You provided an update on that on your last call, and I know it hasn't been all that long since then. But wonder if there's any update just on well performance and Upper versus Lower Marcellus?

Yes. We -- as you know, we have only 5 Upper Marcellus wells scheduled in the program this year. I'll let Phil Stalnaker make a quick comment here on the performance of the Upper. But our plan is going to remain as is, that we'll layer in several Upper Marcellus wells when it fits our operational program on a given pad in the locations where we might be able to lay these out.

One tidbit of information, and then I'll turn it over to Phil, is our programming and looking at the Upper Marcellus and trying to lay out a expansive development program with the Upper Marcellus, again, they're very partially drilled, but looking at it in a way that would allow us to drill extended laterals even compared to our, say, 8,000-plus or minus lateral length today, we'd be looking to develop the -- in the Upper Marcellus with longer laterals, and that's part of Phil's program. Phil, I'd like for you to make a comment, if you would, on just kind of what we're seeing in the performance of some of the Upper Marcellus wells.

Yes, Dan, again -- this is Phil Stalnaker. Again, we're pleased that really, no change from what we laid out there at the end of last year. The wells have been performing as planned, as predicted, up to this point. And as Dan said, we are looking out into the future in what is the optimal lateral length with pretty much a blank slate on the Upper Marcellus and then laying that out to longer laterals and being as economic as possible going forward. So everything is going well.

Our next question will come from Jeffrey Campbell with Tuohy Brothers.

Congratulations on the performance in a tough quarter. In former trough markets, Cabot has increased its ability to sell its nat gas closer to home. Do your selling dynamics look any different? Is it moving to the better price environment in 2021?

That's a good question, Jeffrey. And I know Jeff Hutton is sitting on the edge of his seat to answer that. Jeff?

Okay. Yes, as we -- as you mentioned, we have been successful over the years in moving some of our in-basin supply into better markets through different outlets, particularly with Atlantic Sunrise and getting down to the D.C. area and also up to the -- over into New Jersey. With the in-basin demand that we've picked up over the last couple of years with the 2 power plants and some miscellaneous in-basin customers, we've been able to, again, exceed the in-basin supply prices that are typical in that neck of the woods. But as we see better pricing and going out into 2021 and with differentials being very close to what they are in this very poor pricing environment, it's encouraging to see that our in-basin supply is one that receive a much higher realization than historically.

Okay. Got it. That's very helpful. My other question is a lot of the optimism for 2021 seems to be based on lower supply from collapsing oil activity. What do you think about demand for 2021, particularly in a recovery period from CV19?

Yes. And thanks for the question, Jeffrey. And I'll flip it to Jeff here in a second, but we're looking at certainly the lower supply and feel like the shut-ins, the frac holidays, the associated gas reduction, the reduction in capital allocation going forward are all constructive to reduce supply. We feel good about the reduction in supply, and it's going to be somewhere -- probably between 8 to 10 Bcf a day reduction in supply is kind of the conventional wisdom right now. And we've seen prior to this pandemic coming through and with the start of demand loss, we were actually seeing some pretty healthy demand numbers out there. And I'll let Jeff make his comments on the outlook on both.

Yes. Jeffrey, as you mentioned, the situation we find ourselves here today, as a result of the virus and the local demand destruction that we've seen, is troubling. I will say that the -- there are a lot of positives, though, that need to be considered and another reason the strip is trading the way it is. As we look at the larger macro view, we are seeing industrial demand down anywhere from 1 Bcf to 1.5 Bcf a day. That's no secret. But we've also seen, as we enter the shoulder months, little bit of demand destruction, as you normally would see it with residential, commercial and the power side. But we do expect the shoulder month was to leave us shortly. We expect the industrial demand to pick up here during Q2.

But on the most positive side, we've just hit a record on exports to Mexico. And then on the LNG side, yes, there has been a few cargoes delayed. But as you look back this year, I believe the LNG export averages are very close to capacity, maybe at least in excess of 8 Bcf a day. So the resiliency of LNG and Mexican exports and the fact that we've been in a slump with the economy but are taking steps to get out of that slump is very encouraging. So I think on the macro view, with the supply decline, frac holidays, et cetera, that Dan described and a possibility of a 8, 9, 10 Bcf a day reduction in supply year-over-year from this point in time, paints a pretty good picture for 2021.

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

Well, I appreciate everybody calling in today. And I know everybody is trying to get through this slow period. I think it's been wonderful to be able to watch our team execute almost flawlessly through this difficult period. And the efficiency of Cabot is going to continue, and we're looking very forward to the period that we have ahead of us. So look forward to the call next quarter. Thank you.

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