Diversified Energy Co (DEC) 2017 Q4 法說會逐字稿

Appreciate everyone's time today. As you guys know, we released our earnings this morning in the market. And so, we'll spend a little bit of time today -- really I just wanted to spend some time, talk to kind of what 2017, the year that we had, some of the things, the noteworthy things that we were able to accomplish.

Also talk a little bit about the first quarter and some of the things that has occurred since the year end. We'll spend some time on the detailed financial review, which Eric will go over, and then we'll sum it up and let you guys ask some questions. So, we'll just go ahead and get started.

So, just in case you didn't know, I am Rusty Hutson, CEO; Eric Williams, our CFO; and Brad Gray, which some of you may have not met until now, but he's our Chief Operating Officer and Finance Director.

2017 was a transformational year for us, if you haven't already heard that from me. We've done, since the IPO which was in February -- when I was here, a lot of you guys heard the story then. I went through a list of what we said we would accomplish if we would complete the IPO. I feel like 2017 pretty much proves that we did exactly what we said we would do.

We've done accretive acquisitions, three of them come in 2017; a couple smaller ones that you see on the screen here. But the big one, obviously, is this one here, Titan, which was in June, an $84 million transaction. All of them have been accretive and we'll talk about that in our numbers.

We strengthened our balance sheet, which is what we said we would do. We've raised -- in 2017 we raised about $85 million. Obviously, we came back in January and raised $189 million. So, it's been a really good year from being able to raise equity, but we've also lowered our leverage and our leverage ratios.

Our LOE -- and you really have to look at our year in terms of the second half of 2017, because that's when the Titan transaction came on board. But our LOE per barrel of oil equivalency in the second half was down substantially, and we'll talk more about that.

Margins in the second half of the year, 40% EBITDA margins, very strong. And then really the just of our business and what we really spend a lot of time talking about is the dividend. You can see that the final dividend for 2016, which was $0.01 -- slightly under $0.02. 2017 final dividend is $3.45. And the full year, $5.44, represents about a 6% or higher dividend yield for 2017.

And just as if 2017 wasn't transformational enough, we go to first quarter 2018 and we really exceed all of everything we did in 2017. Two large transactions, which you guys are very familiar with, the asset purchase from CNX, which was $85 million, and then the Alliance Petroleum transaction. Both of those closed in the month of March. We raised $189 million of equity back in January of highly oversubscribed equity raise at ADP.

Our balance sheet right now, we're at about a 1.2 times net debt to EBITDA. So, we're sitting in a very good position from the standpoint of having dry powder as we look at other acquisitions, about $110 million actually.

The big thing was this -- one of the things that we heard all through 2017 was that people would like to see the cost of our debt lower. On the back end of the strong equity raise that we did in January, we were able to refinance that debt at a much lower rate. So, we went from just slightly under 10% down to 4.5%. So, a substantial decrease in the cost of our funding, and with a very strong group of syndicated banks led by KeyBank. And so, we have $110 million of availability still on that credit facility that we can draw on at any time.

The gist of our business stayed the same. We're on shore, low operating risk, low political risk, low operating cost which is driving our high margins. Our CapEx is minimal to keep the wells in production and to drive the production we have today. And it's mature production, that's what we like. We like 3% to 5% decline rates, we like production that we can hedge and know what the production is going to be, and really to lock-in those cash flows for the dividend.

And over here on the right of the slide you can kind of see where we've gone from the year end until March in terms of -- this here makes us the largest producer on AIM right now. So, slightly under -- or right at 28,000 -- I guess 28,100 barrels per oil equivalency per day. PDP reserves since year-end have increased by over 400 million or right at 400 million. So, you can see, a lot of -- not only was 2017 very transformational, but 2018 -- the first quarter of 2018 has really been, too.

The business model, same as it's been since we were here and did the IPO when we did the raise in June, and then when we did the raise in January. We're targeting PDP acquisitions, we're paying a cash flow multiple for those assets. We're not paying for undeveloped. We're targeting mature production that gives us predictability in those cash flows. Once we own them we look to maximize production and minimize cost. We do that in a multitude of ways. We'll talk about some of those today.

We have a high undeveloped inventory that we can draw on at any time when we feel like the acquisitions are drying up, or when gas prices or oil prices are at a level that we feel like is economic to do so. And at the end of the day, we're doing all that to do one thing and that's create shareholder value.

We -- and I've said this over and over again, and I keep saying it because I want it to resonate at some point with everybody. We don't run this business on drilling, going out looking for oil wells off the coast of Africa or the Mediterranean. We're here about doing one thing and that's creating shareholder value through the dividend, through equity appreciation, through production. Everything we do is based on a financial decision.

We are not -- it's not about engineering, it's not about seismic, it's not about -- the whole business is run for this right here, strong free cash flow generation, which will then progress to this dividend policy down here below, because we're all about creating shareholder value.

We delivered on our IPO objectives. Talked about this already, but we've done $286 million worth of acquisitions since the IPO. We've increased our net daily production from 3,000 barrels of oil equivalency per day to 28,000. Our 1P reserves, which is PDP only, has increased by 5 times. Our held by production acreage is now sitting at 4 million acres. We've increased our unit operating cost from 959 to 704. The 704, Eric, represents a point in time, is that right, or is that an average?

That includes (multiple speakers).

That's the average for the year (multiple speakers). Yes, okay. And then the dividends that we've talked about, $13.6 million for the full year, and then the share price since admission is up about 31%. So, all delivering exactly on what we said we would do.

This just kind of gives you some pictures of what we've just talked about, but you can see here it's hard to believe that we were at 3,000 barrels when we did the IPO and now we're sitting here at 28.1. A huge increase there. Obviously the acreage position has went up with that.

Our EBITDA margin is sitting at 40% through the -- this is pro forma -- with CNX and Alliance, if they were in for the whole quarter. So, even though we haven't owned them for the whole first quarter, we pro forma them so you can kind of get a feel for where that would have been with those acquisitions in the portfolio.

And then you can see our dividend here. Insiders still -- between the Board and management still learn a substantial amount of shares. And this here is really what I wanted to highlight on this slide. We have spent a lot of time in the last year really developing a platform that we feel like we needed to grow the business further.

Obviously we added Eric, which we've been able to overcome that. We've added a Vice President of Finance, also a new Controller, which came from a large publicly traded company in the US that Eric was from, Callon Petroleum.

And then through some of the acquisitions -- we've been able to pick up some very talented individuals through these acquisitions, the Alliance acquisition, Dora who is an absolute godsend, very operational minded and is really helping us to transition the CNX acquisition over to our platform. And then some of these others that are what I would consider to be operational people in the field that are absolutely making a big difference for the company.

As I said earlier, we've transformed our capital structure. That was one of the things that analysts, institutions, everybody was wanting us to do from the beginning. What we did in 2017 was an absolute necessity. We were able to close on the Titan transaction with a -- what I would consider to be a unit tranche type product, which was a higher-yielding debt.

But coming off the back end of that equity raise we did in January, the balance sheet was in a place where we could -- and you can see here, the differences between the prior facility and the current facility in terms of the facility size, the borrowing base. Obviously the interest spread, we went from a LIBOR plus 8.25 to a new product, depending on the outstanding balances of LIBOR plus 2.25 to 3.25. So, a substantial reduction there.

This is a huge, huge plus. This is on the unutilized amount. We went from 300 basis points to 44 basis points in the new facility and then the maturity -- obviously a five-year maturity on this one versus a June 2020 maturity on the old one. Everything else, covenants, that kind of thing, are all pretty much in line with the way that the old facility was. But you can see that it has definitely transformed the business and added substantial cash flows to the business that we can then roll back into the dividend.

Real quickly, because I know a lot of you have are these updates on these acquisitions, but we closed both of these acquisitions in March. So, from April forward we'll have the full benefit of these acquisitions in our numbers. They obviously increased our production substantially, up 175% really from year-end, I guess, is what we're saying there.

You can see that as you add these acquisitions, a very tight geographical area now of where all of our assets are located and producing. Its estimated annual life remaining on -- or estimated average life of these wells is, again, 50 years plus. That goes back to the type of assets that we operate, the low decline, long life assets.

We have significant PUD opportunity in this acreage. Again, we have not quantified it, but as we do so -- I mean, with 4 million acres there's a lot of running room there, and we will continue to evaluate that and get a value on that at some point. And really where we're at now it it's all about execution of those transactions, making sure that we integrate them properly.

What I would tell you up to this point is it has been very seamless. The Alliance Petroleum deal has been business as usual. We took that business, took the keys, kept all their administrative employees because we felt like that was an opportunity for us to have a platform for growth. So, we were able to take on the CNX assets without any additions to G&A and we'll talk about how that's impacting those numbers on a going forward basis.

So, I'll turn it over to Eric and let him give you guys an op -- financial and operations overview and then I'll come back and sum it up.

And I'll move through this quickly just because I think we've hit the high points and I want to leave time for Q&A moving forward. So, slide 10, just putting together really a snapshot of year-over-year. This doesn't include the step change that we've been talking about as we moved into the first quarter on a much -- and large basis.

But if you quickly go down that change column, everything that should be up, all the positives are up, and the things that should be down like expenses are down. So, very, very positive.

Moving to the visuals on 11, and we put this in order starting with reserves, moved to production, it drives revenue and expenses and then ultimately earnings and generates the balance sheet. So, we'll progress in that order. Reserves is a great story, Rusty touched on it, but ended 2016 with 28 million barrels equivalent.

Ended 2017 with 55 million, which represented an 18.5 time reserve replacement, which I think is a phenomenal year. But when you progress into the first quarter, and we added another 119 million barrels of oil equivalent, we end at 173 [million], which represents an 185 times reserve replacement for the year. So, pretty significant.

From time to time we'll get the question around concentration risk. So, we wanted to illustrate that, no pun intended, we are quite diverse with respect to spreading the risk across a very large portfolio of wells. If you looked at our top 100 wells, they do represent 12% of the overall PV10 value with the top well being less or just over 0.5%.

Now what's driving that is that -- as we talked about earlier, we started to roll up some unconventional wells in these acquisitions as well, and that's something that we see as a future wave of opportunity for us as some of the more mature E&P operators are looking to divest of the same profile, the mature flat production that just doesn't contribute meaningfully to their overall profile, allow them to monetize it, put it back into the drill bit.

But to us, bringing significant reserves in a single wellbore that operates at a much lower unit cost. It's fewer wells to visit. So, we'd love to see that unconventional piece of our portfolio continue to grow and we think market dynamics will allow that to happen. But even if you rolled up the top 500 wells you're still out about 23%. So, certainly very spread -- and you saw the map earlier, that we're spread across a very big region.

We are 98% natural gas, so we think we're an option on the commodity. We're rolling these assets up, these acquisitions up at between $2 and $2.25 an MCF. So, obviously as natural gas prices rise, while we're hedged for the next two to three years, certainly a longer-term option on gas. In many cases peoples' E&P portfolios are very weighted towards oil, so we think we represent a nice counterbalance to some of that concentration risk on the oil commodity.

Moving to production, again, you'll see a theme throughout the deck, which is just significant change year-over-year. Producing around 1 million barrels in the aggregate in 2016, 2.4 million in 2017, and at 28,000 barrels a day that equates to over 10 million barrels of oil equivalent in 2018. So, a meaningful step change, 860% increase year-over-year.

What is, I think, sometimes lost in this business, because we're not in a traditional development mode, is just the very low CapEx that's required to run this business and support this kind of production. In 2016 it was $1 million; in 2017 it was $2 million, which averages out to right around $0.80 per BOE equivalent. That's going to drop as we go into 2018 with APC and CNX. And the reason for that meaningful step change, 70% reduction, is that the bulk of that spend is spent on fleet vehicles that the employees use to visit those wells.

APC and CNX both have a model where the employees own their own vehicles. And so, that will just be captured in LOE with those assets. And so, you won't see a big step change in CapEx. So, very, very low ongoing investment to maintain that production. Most of our spend is just captured in LOE.

So, moving on to revenue and expenses, revenue -- oil and gas revenue was $39 million. If you bring in hedge revenue and other revenue it's closer to $41 million, a little over $41 million, approaching $42 million. So, in the first quarter that would essentially be a full year of 2017 revenue, which is pretty impressive. So, you can see that -- again, that step change.

Realized prices, that's on a very low relative realized price. So, we operate this business very efficiently even in a low commodity price environment. And when we talk about expenses, that ultimately feeds those margins, which meaningful step change up from 2016 where you had about a 19% all-in margin. That's including G&A, production taxes, gathering and transportation, and controllable LOE. So, inclusive of all those you're at 40%. That's a byproduct of doing all we can to really drive that unit controllable cost lower.

So, year-over-year the controllable LOE components, so this excludes gathering and transportation and production taxes, dropped from just under $10 to $6.50, so a 32% reduction. And then G&A, you see a nice step change down as we do leverage more of a fixed cost structure across a very large growing asset base to just down to just over $1.40 per BOE equivalent in the first quarter.

Now that translates obviously into earnings. Ended the year at $17.5 million of EBITDA, which in the first quarter, again, almost replicated that entirely approaching $16 million from the fourth quarter to first quarter 2018 and about a 140% increase.

Now keep in mind, again, these pro forma results for 2018 represent if we had had CNX and APC from January 1, but it also just represents those -- their standalone results as reported to us, plus our actual results. So, this doesn't yet reflect some of the synergies that we would expect to bring to the table when we begin to operate these with our cost structure.

And even -- we talked about how supportive the equity markets were, but we've said that each deal we do we want to be accretive on a per share basis. And so, even with significant increase in shares outstanding from the first to the fourth quarter, you still see that EBITDA per share up 25%.

Now Rusty talked about resetting our cost of debt was really important to us, and having the significant headroom in our facilities to do additional deals using leverage that will be very accretive to cash flow and then to the per-share payouts over time. And we'll talk about that at the very end, what the credit facility with this existing borrowing base. But as we grow that PDP reserve base with acquisitions it's a $500 million facility, so we'll have additional headroom there to do even more without the need to bring in additional equity dilution.

And then we talked about the dividends. All of that earning power paying out on the dividend, 73% increase from the midyear dividend to the year-end dividend. So, we came to market saying we wanted to give back. The cash flow generation of the business, 40% of free cash flow, and we've demonstrated that.

So, moving to the balance sheet. Really the biggest things to illustrate here, obviously properties and equity are up dramatically. But it's the two corners that really tell the story about what's going to propel us forward as we continue to build on what we think is a unique opportunity to roll upgraded assets in the market. And that's that our leverage profile, again, being fortunate enough to come to market have the support to acquire APC and CNX with equity alone has allowed us to take an 8.6 times multiple leverage down to just 1.2 times.

Now we believe in running the business at between 2.5 and stretching, depending on the market dynamics, because we're always naturally delivering, but 3 times. So, we've got significant room that we can take on leverage without pushing through our comfort zone. And so, we're well-positioned with just $72 million [to ours] of net debt today, and total liquidity of about $126 million inclusive of cash plus the undrawn piece of our credit facility. So, we're definitely on our front foot as we look at acquisition opportunities.

Moving to 16, this is just a quick snapshot of capitalization. I think the most important thing, as Rusty talked about earlier, too, is no near-term maturities. This facility will go with us out until the first quarter of 2023. It's not to say that if we saw an opportunity in the high-yield markets to bolt on some debt with longer duration and fix that rate we would.

But we don't have to be pushed to do so. We can be very opportunistic as to how we manage our cost of capital moving forward. And are very, very pleased with a strong syndicate led by KeyBank did take our borrowing cost down significantly.

So, just puts us in a position to be on our front foot as we certainly see ample opportunity in the region. And it can't be said enough that when sellers of assets see this kind of balance sheet, access to the capital markets, access to the debt markets, they know that we're a serious bidder. And so, we can demonstrate the ability to close on a transaction when others there may be significantly more execution risk.

And even in the APC and CNX transaction, we know from one of the sellers they could've gotten a higher price in the aggregate for those assets, but it would have necessitated them working with multiple buyers and breaking the asset package up and dealing with multiple PSAs and multiple closings, multiple execution risk. Coming to Diversified they could sell the entire portfolio to one company. And so, we see that -- again, this is a real competitive advantage in the opportunity to roll up assets.

Obviously we have a very active and robust risk management program. We say over and over that we want to be consistent and predictable. And part of that is eliminating price risk in the market. And so, we've got a very large hedge portfolio. This is the snapshot of natural gas. If you went to the appendix, we have not only the details behind this to give you a bit more of quarter-by-quarter breakdown in the contract type, but we also give you oil in the appendix.

But essentially this is just saying that if you looked all in, and you can see we use a mix of physical and financial contracts. Physicals tend to go out about a year with purchasers and then trail off. So, we use financial contracts to go out further into the future. All in, it's about a 45/55 split with the weighting being toward the physical contracts on a volumetric basis that results in an all-in price around [235] when you take into consideration the fixed contracts and then the NYNEX hedges, financial hedges with the basis edges.

So, certainly gives very consistent cash flows that will allow us to pay that consistent dividend. And you may recall that we've gone from a semiannual dividend payment to now transitioning in 2018 to a quarterly dividend payment. To, again, just drive home that this is a very cash generative business and we want to return that cash in a regular way to our shareholders that have been very supportive to us.

Thank you, Eric. So, we'll just finish up on a couple slides here. The long-term growth outlook of the business is very, very strong. We -- obviously as Eric was talking about from the standpoint of dry powder, we have about $112 million of liquidity that we could draw down on at any point in time. It's already supported by the existing reserves. That would represent somewhere between $25 million to $30 million of acquired EBITDA.

We have an uncommitted amount on our facility of $300 million, which, if that was made available to us through reserves, we would have another $75 million. So, between what we have on -- available to us today, and also with what's available to us in addition to the $200 million -- the additional $300 million, we could add almost $100 million or right at $100 million of EBITDA to the business without any further equity dilution. Anything over that amount obviously would take additional equity raises to make it happen.

You can see from 2014 to 2017 to 2018 how concentrated the asset base has become, which has really facilitated the driving down of our LOE per barrel of oil. And as we look to the future, you can see that we've, to some degree, expanded our Appalachian basin preview so that you can get an understanding that it's just not this area that we're looking at, but there's other areas in here that we may be interested in also.

Dividends, which has been very important to our investor base, you can see in 2016 the dividends, and then how the full year 2017 at that 6% rate -- then in the second half of 2018 how we're shifting. You can get our declarations and [ex div] payout dates here, and then our estimates of those payouts. And I think if you look at this it will come back to -- what is it in terms of yield based on today's price, same, 5.5, 6%?

$5 million, 6%.

Yes, so you can see. This has been very popular with our institutions going to -- because I don't think a lot of companies here -- maybe some of the large like the BPs and such. But for the most part, going to a quarterly dividend payout is not something that's been done a lot.

So, conclusion. I say this with a lot of sincerity -- I really feel like to some degree we're still being a little bit undervalued. I feel like when we came to market the things that we said we would do, we've more than delivered on all those. The business is extremely strong. The cash flows of the business are very robust.

We did an analysis last week, with the counterparts in the US from Stifel, and looking at peers in our group from the US. And when you look at us in terms of where we're priced on an EBITDA to enterprise value, we're still way undervalued compared to those. And some of these companies that they're comparing us to are not even really what I would consider to be real great companies, but we're still being undervalued in terms of that.

We're still a very -- in my opinion, a unique investment opportunity versus the other companies on AIM and then really in London, period, in terms of the E&P. It's a proven model. Like I said before, we've been out there since 2001. We've done everything that we said we would do at the IPO. We're disciplined, we look to acquire assets. We build it in a very concentrated area in the Appalachian basin. We're building that platform for long-term growth.

We're financially strong. The balance sheet is very, very strong right now. Strong EBITDA generation, 40% plus margins, and doing what we said we would do from the dividend perspective. And for a company our size to be paying the kind of dividend that we're paying I feel is very, very -- should be a very positive sign and should help us to be valued higher than where we're at today. That's the end of the presentation. I'll open it up for Q&A for any of us sitting here. Go for it.

It's Robin from Stifel. So, I guess my question is around the new portfolios that you've acquired. I was just wondering if you could tell us what you've learned about those assets over the last few months. And perhaps just as simple as top surprise, top -- or positive and negative. If you could give some color on that that would be great.

Yes, no, I think that's great. I'm going to let Brad answer that question. And the reason being is Brad is our Chief Operating Officer, and he has spent a lot of time in the details on both of these acquisitions so far. I've spent some time, but I'm going to let him elaborate because I think he's got some pretty good positive things that we've seen.

Well, when you see the numbers, the portfolios are very similar in size. The operating characteristics were slightly different from a company standpoint. We had CNX that was very much third-party operators with very little management oversight from CNX. Conventional portfolio of CNX was a -- they produced about 1.5 BCF a day. This is -- what we acquired on the conventional side was about 53 a day. So, it was very much and undermanaged asset. That's a huge opportunity for us.

Our field operations management team loves the CNX assets. They see significant upside in improving production just by spending time with the contractors with the assets. As Eric mentioned earlier, the amount of CapEx for these type of assets are low dollar, a significant workover on these type of assets would be anywhere from $6,000 to $10,000. And we've got tremendous opportunities to improve production there. So, that's on the CNX side by really spending time, focus, energy on the contractors and attention to the assets.

On the APC side, as Rusty said, we took the keys to the house or we bought a fully furnished house. We have an excellent management team, very focused there, and so we feel like that business is running well.

As it relates to the concentrated footprint, one of the things that we see every day is we've got duplicative compression, we've got pipeline systems next to each other. We have people, [wind chill] time, running across each other with our different workforces. Those are all upside opportunities for us that we will begin to capitalize on here in the near future. So, our management team is very excited about having access to all of these assets. Is that helpful?

One thing I would tell you also, Robin, is that when we were evaluating these two transactions, if you just looked at them on paper -- and Brad will attest to this -- you would say, man, this Alliance deal -- I told Brad, I said the CNX deal is the one that's going to be the biggest payoff for us, because I knew from the standpoint of CNX and their operations this thing was not being paid attention to. They were not giving it any time, they were cutting back their expenditures and the money they were spending on those assets. So, I knew it was going to be a big opportunity.

One small example, I was talking to Bob Cayton who is the head of our operations in the Appalachian basin. He said that -- there's a coalbed methane field that we picked up from CNX. He said as he -- they went out there and they were evaluating what was going on, they were spending almost $30 a barrel to dispose of water.

Now that's in comparison to probably $8, $9 a barrel all-in cost of what we spend to dispose of water when we have it. So, a huge -- and it was just because they were picking the water up, hauling it to one spot, storing it. Then they were having it picked up and hauled to another spot, storing it and then moving it to the disposal. Those are the kind of things -- the low hanging fruit that are going to be all over the place.

Thank you. Just a follow-up if I may. You talked about production upside. Are you ready to quantify that yet?

I wouldn't say that we could just put our finger on it. But I would tell you that, especially with the CNX, we do expect to see -- it will be meaningful, it will be meaningful. I can't quantify it. We've only owned them for 30 days or less, so -- but as we move throughout the year we'll be able to start showing some examples of that.

One of the things that we did pick up from our workforce with CNX is we did take their production supervisors, which are very seasoned Appalachian operators, they know the assets very well. And they told us straight up that in many respects their hands were tied in working with CNX. And so, they know -- they have lists of opportunities. And so, we're in the process now of prioritizing those and executing.

And I would just add one of the concerns that sometimes we'll get or questions that sort of couch and the concern is bedding down the assets. You're growing very rapidly, but I think what's not always appreciated is that we're retaining the field level workforce that's operating these assets on the day to day.

So, it's business as usual for those assets and the management of those assets. The upside is just as we step in, and we can do it on a measured basis, look to leverage our synergies and capitalize on some of the opportunities, but do that without running the risk of changing the overall production profile and operating profile of what we just acquired. So, it gives us time to step in and do it in a meaningful and measured way.

Hi. Dan from Arden. I just wanted to ask a little bit on the overarching strategy. I remember sort of originally all the portfolios of assets you were looking at, I think, were all entirely conventional, whereas now we're saying that you're looking at conventional and some unconventional stuff as well once it's on decline.

And I was wondering just what -- why has there been a bit of a change in focus there. Is it to do with the amount of conventional stuff you see on the market now, and is it less than it was before? Or if you could just talk a little bit about that, that would be really good. Thanks.

I think -- just to clarify a little bit, I think I said from the time that we listed that I felt that the unconventional was an opportunity that we would see three to five years down the road. So, it was never that we wouldn't see the opportunity, I just felt that it was a longer-term opportunity.

What I would tell you is that some of that has moved into the two- to three-year opportunity. Really from our perspective conventional, unconventional, it doesn't really matter. It's the type of asset that it is -- mature, low decline, long life, predictable.

On the conventional side we're still seeing a lot of assets. And so, I don't think it has anything to do with what we have a preference of. I think it just has to do with the fact that some of these Marsalis Shale companies have just made a decision that some of these mature assets are better off being monetized so that they can put more money back into the drill bit.

So, I don't think it has anything to do with our preference, it just really has to do with the companies that are selling assets. But we see plenty of conventional opportunities still in the market.

And these wells exist right within the same geographic footprint that our conventional wells do. So, we're driving right by them on a daily basis anyway. So, to loop them into the route doesn't change the dynamic of the way we run our business.

And (inaudible) you guys running kind of conventional older wells versus conventional? Does it make any difference to how you guys run them or anything like that? Do you need different skill sets or anything or is it pretty much the same?

No, because I would tell you that once the unconventional wells hit that terminal decline, that low decline rate, their characteristics are pretty much like a conventional well. They're very low risk. Most of the risk and most of the complexities of those wells are from the time that they're drilled through that big decline. And then once they level out the pressure is off the wells and the production just flattens out. The risk and the operational mechanics of the wells are pretty -- just like our conventional wells.

And additionally, the operational expense required on the unconventional typically is lower. They're newer production, they were developed with more efficient technologies or tools to monitor the wells. And so, we're getting the benefit of that and not paying for it, which will manifest itself into a lower cost.

Stephane, GMP FirstEnergy. I'd like to come back to the question around differentiation and particularly with yields. More and more companies or E&Ps are following the model of the dividend. This morning Seplat announced that they reached dividends at 5%, 6% yields basic, that is in Sweden pay 6%, 7% basis plus. So, as our price moves up I expect more and more companies to follow that trend.

So, on that context, the first question is how would you differentiate? And second, related to that, once we factor into the new low cost of debt the reduced costs, operational costs once the assets are integrated, and assuming no change in gas price next year and no share price, where would you see the yield standing at on a normalized -- basically [normal] based on the current assets?

Let me start off by saying all these companies that are coming out now saying they're going to pay dividends is because they're not -- they've been getting beat up. There's no doubt about it. I know in the US -- I can't answer for those companies, but I know in the US there is an emphasis now on cash generative businesses that are returning capital to their shareholders. The drill and build model has really started to lose favor in the US.

Now I can't speak to it as much in the companies that you're talking about. So, I believe that a lot of these companies are doing it out of necessity. Now the key will be, and I'm sure that both of those companies are E&P -- they're more exploration most likely. They're probably having to drill to keep their production levels at level. So, it will be key to see are they able to do that and maintain that dividend. So, we'll see how that goes.

But I think that from ours, I don't know how we can differentiate ourselves from those companies in terms of the dividend. We're going to be very progressive as we've said we would, 40% free cash flows, we're going to pay the dividend. As we grow that cash outlay we're going to continue to progress the dividend up. I think in terms of the -- and I think this is your last question, but in terms of the dividend for next year, are you talking about 2018 or 2019?

2019.

2019.

That's all the one-off costs of the acquisition and (inaudible) really can filter through the numbers on a constant basis.

I think in 2019 it would be a -- all things being equal, you would see the $20 million to $25 million type payouts, dollars. And I guess that would equate to at today's prices -- well, we're at about a $370 million market cap, so what is that in terms of dividends? 6%, 7%?

6%.

Yes, so --.

And I'd say the proof will be in time. I can't speak to the names you mentioned either. I would say the industry has a very short memory. And when things get better companies are notorious to go and let shareholders -- and promising we can do better through the drill bit than we can buy returning this to you in the dividend. Once given it can be hard to take back, but the industry has not been very good at returning cash to shareholders outside the integrated. So, we'll see. This may have been Brad.

You may have seen the article in the Wall Street Journal a few weeks ago that compared ConocoPhillips versus Exxon and a couple of the other majors. Conoco's business model is very similar to what you're referring to where they have intentionally returned funds to shareholders via buybacks or dividends. And it was comparing their stock performance versus the others who were more development oriented. And Conoco's stock performance far outpaced the others. It's a good article. We're doing that on a much smaller scale, but there are some similarities.

Where I would be interested to see is how long they can do it, because they have to -- once you're on the exploration, what I call it the old gerbil wheel, you know how the gerbil just sits there and spins. Once you're on that wheel you've got to keep drilling to keep your production levels, because you've got significant declines in those first few years on a lot of those new wells.

That's why a lot of these US companies that are in the shale business struggle with dividends, because they know they have to drill like crazy every year. And so, it takes a huge amount of CapEx to keep that going, so it makes it very difficult to pay out cash dividends. Some of them are doing it just small amounts, but a 6% to 7% dividend yield, it will be interesting to see how long they can keep that up, if they are having to drill to keep their production levels.

The company that Eric came from, correct me if I'm wrong on the numbers, but I believe their EBITDA is similar to ours? Their capital plan -- capital spend plans for next year, $500 million, so --.

It's difficult. When you talk about cash flow neutrality as a three year goal as opposed to generating positive cash flow today, it is difficult to pay dividends. I sat down with investors who said, even if it's a fraction of a penny, just pay something so that you can appeal to yield funds. So, there is some financial maneuvering to try to just grow that investor base. But that's why, at least in some of the smaller E&Ps, I just don't know how sustainable it will be if you're truly in development mode.

Tim from (inaudible). I'd like to add just a specific quick question on margins. On page 13, you've got strong margins in that chart on the top right. Q1 38; Q2 39; Q3 43, 41; and then 40 in Q1 2018. I was just wondering what sort of increase in margin do you expect going forward once you've fully integrated the cost synergies from the CNX and Alliance acquisitions?

What's your price assumption?

Assuming the price remains fixed.

Tim, I would say that the first quarter being -- this was a pro forma utilizing the numbers that were reported by both groups. So, this takes into no consideration what we would do with the assets going forward. So, 40% -- but I've said all along that margins of 40% to 45% is what we're targeting. I feel like we can inch up from here to the 42%, 43% range.

But it is harder because, keep in mind, that stack (inaudible) has gathering and transportation and production taxes, both of which we have very little -- production taxes no control over, but gathering and transportation very little. So, when your controllable LOE is $6, approaching $6 on a BOE, it does make that margin, outside of price, difficult. But I think it's a remarkable margin at (multiple speakers).

Yes, because right here, this is the key to that question, Tim. This is a pretty -- from a controllable LOE this is a pretty low number for the kind of assets that we operate. How much more can we get this down? I think there's more room here, I really do. But when it comes to margins, 40% to 45%, most likely in that 41%, 42% range is probably where I would be very, very happy.

And as a follow-on to that and, Robin, somewhat going back to your question earlier, the economies of scale opportunities that are coming our way now with a much larger -- we're the largest conventional operator in the Appalachian basin. And so, the number of phone calls and email inquiries that I get about requesting meetings from suppliers, vendors.

In fact, I sat down with a pretty significant vendor for us last week who came to the table without even asking and offered a 20% price reduction on their services just to get all of our business. That's material and we feel like there's opportunities for more of that.

Thomas Martin from Numis. I haven't seen you present before, so excuse if this is a basic question. But I want to just understand -- perhaps you've answered it a little bit there, but the business is driven by acquisitions, clearly. It's fantastically profitable. And other parts of the US oil space, as you alluded to, have got their challenges and some of the things they set out to achieve are more difficult to achieve than perhaps people thought.

So, I guess I'm thinking is there going to be more -- is there more competition yet for acquisitions of the types of assets that you're going for? I'm kind of puzzled as to why there wouldn't be because you're demonstrating that you can make good money and pay what investors want to pay. And what's the -- it feels like it's a relatively straightforward from a technical point of view business. If it's not, please correct me.

But it seems like it's focusing on operational side, logistics perhaps more than anything complex in the subsurface or well workovers and repairs. So what's the competitive advantage? Is it the scale that you've got that's the main competitive advantage, or is there something else in there that allows you to do what other people can't just start up and do?

Yes, both great questions. In terms of the competition what I would tell you is that a couple things we have going for us. Number one, where we operate. So, Appalachia is one of the oldest producing regions in the country. Conventional Appalachia is the oldest producing region in the country in terms of the type of wells. The large companies left those assets a long time ago. They moved on to the shale, they moved on to other areas of the US like Texas, Oklahoma, those places. So, you don't get that large-company competition which would make it very difficult.

Then you move down to what I would consider to be regional players and private equity backed companies. As you know, private equity needs big purchase prices to make a dent in what they need to put their capital to work. So, those companies, those private equity backed companies have kind of dwindled down. The regionals -- and this is our second advantage -- capital availability. They don't have capital availability.

We have, over the last year, been able to get a very low cost debt credit facility and then we also have the equity markets, which have been very, very advantageous for us. Most of these companies that we compete with for these assets are pretty much debt driven type companies, and that's just not available to them.

So, the smaller deals you may see some competition for. When I say smaller, $5 million, $10 million transactions. But when you get to the size transactions like we closed in the first quarter, the competition becomes very thin, which gives us a very advantageous environment to work in. We're buying these assets at very cheap multiples compared to the other regions of the US.

Most areas of the US, they're not only paying for cash flows, they're paying for undeveloped opportunity also. We're paying for cash flows and getting undeveloped for free. We're not paying a dime for that. So, that's pretty impressive for the dynamics of the US for us to be able to do that.

So, I think from a competition standpoint it's very minimal. We're seeing a little bit here and there, but for the most part we are setting the market. When it comes to what these assets are being acquired at in the region, we're setting the market on purchase price. The second part of that a question, did you --?

Well, what I would complement that to say is why are other companies not stepping in to do this, and it's because you have to be built top rate (inaudible) production efficiently. When you look at $6.33, $6.25 controllable LOE, that's what a Permian based company is reporting today. But that's on a 75% to 80% corporate decline rate. So, the true absolute spend that's behind those numbers that doesn't scale necessarily with the operation, the fixed component gets out of hand very, very quickly if they're not continuing to produce.

And that's very true of G&A as well. When you've got geologists and engineers and petrophysicists on the payroll. And so, they can't -- you talk about it's a very profitable business, but that's only true if you've got a cost structure that allows you to extract a profit at relatively low commodity prices. And so, I think our competitive advantage is just the way that we've built a model around a low-cost commodity.

Yes, this is based on a flat line production profile. These shale players are doing it with this, that big steep production profile with new wells. So, the minute they quit drilling and it flattens out you know where operating costs go pretty quickly. But the competition has been relatively light, which has given us a big advantage. And having the ability to access capital is probably the biggest advantage.

To add to that, access to capital, step one. Step two is to execute and close the transaction. When a seller wants to sell these conventional assets or these mature production, they want to sell it and they want to sell it with somebody that can close and that's what we've been able to prove.

And the third is, if you recall, a lot of these sellers are retaining the deep rights. And so, they're dependent upon us to maintain the production of the shallow wells in order to hold those [deep] prices -- they have the optionality to come back in and develop it at a future time. So, they want an operator they can trust to maintain that production so they don't lose their leases.

So, while -- to Rusty's point, you may have some competition for some smaller packages selling to mom-and-pop type operations, sometimes larger companies aren't interested in that just because they don't -- they get less assurance that that production is going to be maintained and they're going to get good reporting, because we do have an obligation to report back to them well data.

Did I answer your second question?

Yes, I think that's -- yes, I think that's (inaudible). I guess just to absolutely clarify, there's nothing complex on the operational side (multiple speakers) or on subsurface or the tech model -- the technical side?

This is a very low risk type asset base. I've said this before -- and I don't know if Eric likes me saying this a lot. But I've told institutions before, we're kind of boring and we like it that way. We don't have those kind of risks that you see that a lot of these larger companies have in terms of wellheads and high pressured fittings and all the other things that go along with that.

I mean, we have some of that on our on conventional stuff, but it's just minimal risk. And that goes back to our low CapEx. It doesn't take a lot of CapEx to maintain these wells at the production levels they're at, just simply because they're pretty simple assets.

And if there are technicalities in the business, we're very fortunate with our workforce. It's a highly seasoned workforce that has grown up with these assets. And so, there's really nothing that our guys have not seen that could come from the operations, which is very helpful.

Is there anything -- I think there's a chart in there that shows -- well, I guess it starts with realized prices. Is there anything going on in differentials within your realized prices that's material, either through the acquisitions or something has changed over time?

No, what I would tell you is that when I first started in 2001, the Appalachian region used to get a premium to Henry Hub prices. It wasn't anything to see a $0.67, $0.70 premium to Henry Hub. Well, that's obviously flipped substantially in the last five or six years simply because of the shale plays that exist in the East.

On the slide that shows -- this slide here. So, what that has required us to do is, from a financial hedge perspective we're doing swaps mostly right now or in the past we've done mostly swaps. So, we're locking in not only NYMEX or Henry Hub, but then we're also hedging the basis differentials. And so, this is our average basis differentials that we have hedged across the portfolio for this period of time. Those typically run somewhere between $0.40 and $0.60.

Some of the summer months it blows up and goes to $1.10, which obviously having these hedged is a good thing. And then in our fixed contracts, we typically fix those net of basis. So, this already has the basis differentials factored into it. So, managing the business has changed a lot since when I first started simply because of the way that the basis differentials have flipped over to negative.

What I would tell you is that if you look at the forward curve as it relates to these basis differentials, there is some squeezing going on as you move out. And a lot of that is because of the LNG export facilities, a lot of the new power generation is all -- or electricity is from natural gas. And a lot of pipelines that are moving the gas out of that region to other areas of the country that need it, which then results in those basis differentials being squeezed more.

Sorry, another quick one. You mentioned I think a 50-year well life somewhere in the discussion. Is that something that's actually embedded in your reserves -- proven reserves, PDP reserves? I mean, is it assuming that those wells will produce for 50 years to get to that number?

Absolutely. I've got wells today, and I think, Tim, when they came over to do a site visit before the IPO, we've got wells that are drilled in the 1940s that are still producing natural gas today. We actually have one that was drilled in 1895 that's still producing natural gas today. Tim touched it. He wanted just to be able to see it and touch it. But it's just the basin, it's not anything special with the wells. It's just a very long life production in those formations.

But yes, the third-party reserve engineer report has those wells going out that far.

Final final one. You've got a lot of wells, obviously, that you're producing from today. I'm not as familiar with the basin. Is there a sort of broad number of population of wells which you're hunting within on your acquisitions to sort of get my head around how much you've locked up and what the available population is?

Yes. we haven't even -- well, maybe manage my words. We have not scratched the surface in the opportunities. We've done a lot of acquisitions; there's still a lot out there. There are some significant opportunities out there. And not only on the conventional side, but significant opportunity in the unconventional, which is our next phase of rollup in that area.

Because as we move away from conventional into unconventional, those unconventional wells are just sitting around all of our existing production the way it is today. So, it just gives us another opportunity to kind of -- the next step up to grow the business. But I would say in terms of percentage of wells and production, we're probably less than 40% of the basin. So, there still a significant amount of (multiple speakers).

And that's just the conventional piece.

Yes, that's just on conventional. I'm not even talking about unconventional. Unconventional is unlimited.

And I think it's important, too, to understand we're not in a well hoarding mode either. I think as you get larger you have the opportunity to high-grade your own portfolio. And so, there's always opportunities, smaller operations when it makes sense, and we did that, frankly, even with Titan in a bit of a different sense, but we acquired wells in New York.

We didn't want to be in New York, so we immediately sold those off. And so, as we do grow the portfolio, particularly as we step into some additional unconventional production, there may be opportunities where we say, hey, here's a pocket of wells that just doesn't make sense for us to operate. And so, we look to divest some of those. I think you'll see us in an optimization mode in a bit of a different sense as we continue to get larger.

Anything else? Quiet group. Monday morning. All right, thank you, guys. Appreciate it.