Diversified Energy Co (DEC) 2018 Q4 法說會逐字稿

Good morning, guys. Appreciate you all showing up this morning. As you guys know, we've announced earnings since market opened this morning. And we're going to walk through, real quickly, some highlights from 2018, talk about some of the things that we're doing on a going-forward basis from a operational perspective. Brad will talk a little bit about that, Eric will run through the numbers, and then I'll come back in and talk about outlook for 2019. So we got several slides to get through.

2018, obviously, we've been over here multiple times in the last 12 months, but a very transformational year for us. We did 4 acquisitions, spent nearly $2 billion -- $1 billion on those acquisitions, and really transformed the business in a matter of 12 months.

Strong cash flow. We've talked about this all the time, but that's essentially what we've build this model off of. It's about cash flow, it's less about exploration and it's more about the driving cash flows and driving margins of the business. We'll talk more about that.

Finished the year at a very strong point, as it relates to our leverage ratios about 1.8x. We added a Southern midstream asset this year through the EQT transaction that is really enhancing the margins of the business and our realized pricing, as it relates to natural gas.

Smarter well management. We're going to talk a lot about that. Brad will talk a lot about that today. But really, we've spent a lot of time on the processes in the field and how we manage these wells and how we increase production and how we become more efficient the way we operate those. You'll see that -- we ended the year around 70,000 barrels of oil equivalency per day, but that was flat with the middle of the year. A lot of that relates to the fact that we were able to bring wells back on production, clean wells up, fix pipelines, all those things that really have arrested the decline rate to the degree that we saw flat from midyear to the end of the year, which is significant.

For the year, we were 5x year-over-year, 41,000 barrels of oil equivalency per day. As I said, we ended the year at 70,000. All of these things, our LOE, for example, the metrics around are -- the way we operate the business, down -- the controllable aspect, which means the things that we can control, down from $7.02 to $4.83 and even all at a consolidated basis when you add gathering and transportation and production taxes, still down over $1 year-over-year.

Margins increased substantially from 38% to 56%, EBITDA margins. We'll talk about how that was achieved. And real important for us is the dividend and that's up from $0.054 in 2017 to $0.112 this year. And then we announced an additional dividend for the fourth quarter this morning of $0.034. So everything is going in the right direction from that perspective.

The credit facility was increased up to $1.5 billion. It seems like an eternity ago that we refinanced the bridge financing credit facility that we had, which was a higher rate facility from around 10% down to this existing facility, which now is around 4.8%, close to 5%. We have $725 million of availability. And probably, as of the end of February, around $250 million -- $255 million of liquidity on that.

2019, we're entering the year with 70,000 barrels a day. Obviously, one of the largest producers in Appalachia. And really, what makes this -- we're talking about being top 15 gas producer in Appalachia. Almost everyone in front of us is a Marcellus producer. And so, Shale is really the -- is the only ones that are in front of us. We are by far the largest conventional player or mature producer in the region.

Our declines. We talked about keeping our declines under 5%. We obviously saw 0% decline from midyear to the end of the year, which is going to help us tremendously as we start 2019 off. And really, the focus, as we've talked about all the time, is keeping those margins, keeping our LOE in check, increasing our realized pricing and revenues as much as possible and really driving that margin, which ends up being the driver for our dividend policy.

Strong outlook for next year. We're still looking on a lot of acquisitions. The balance sheet's in a very good position right now, very low leverage. I've talked about this a lot, but we don't -- we're never going to risk the balance sheet for the sake of growth. We'll continue to monitor that and make sure that that's our strong point. Obviously, still, we have over 7.8 million acres now of held by production acreage for an organic platform when that becomes our focus.

We stay true to our commitment. The one thing that I do pride ourselves in, we came here 2 years -- little over 2 years -- well, I guess, it's right at 2 years now, since we IPO-ed the company. And we listed our objectives and they haven't changed. We've done exactly what we said we would do. We've kept our focus on discipline, as it is relates to the balance sheet. Everything we do, we monitor on a per share basis, cash flow per share, dividends per share, LOE on a metric basis, we're monitoring all those things to make sure that the business is going in the right direction. And you could see there's been a significant increase over the last year. We stand true to over the kind of assets that we acquire and that we operate. We don't really have a preference as to whether it's unconventional or conventional, it just happens to be conventional. It's been the majority of what we've acquired so far. But it has to be long life; it has to be low decline; it has to be in that, what I would consider to be a terminal decline rate where it's very predictable.

We've increased our realized pricing. We have some slides back here that show how that's been achieved. But this midstream assets, I can't stress the importance of adding that asset to our revenue stream. We never risk the balance sheet. We talked about a 2 to 2.5x debt ratio, really and truly I monitor and manage that right at the 2x level. That's kind of we're I'm comfortable at the present time. And then we have this big unrealized opportunity that's sitting out there of 7-point million -- 7.8 million acres of undrilled acreage.

We'll spend a lot of time here: 4 acquisitions. You can see what we spent, what it added to the business. But we added 61,000 of our 70,000 barrels of oil equivalency in 2018, which I think is just really remarkable.

We've increased our production. Daily production was 600%. PDP reserves, both of these really relate to the credit facility and our availability there and a big increase in our Core acreage.

These are the metrics that we pay a lot of attention to. The realized pricing, you can see on a per barrel of oil equivalency. This is the increase from '17 -- fourth quarter '17 to the fourth quarter '18. Almost 25% increase in realized pricing, lower unit costs. So our cash cost as a -- on a per barrel of oil equivalency from $10.74 down to $8.55. And this is an all-in cost, as it relates to LOE. Operating cash flow per share, which is an extremely important number for us. From $0.06 to $0.23 in the full year '18. And then, obviously, the dividend that we talked about earlier going from $0.05 to $0.112. So we've increased -- doubled that in a year's time. So all these things are moving, obviously, in the right direction for us.

I'm going to turn it over to Brad now to walk through some operational slides. And then we'll go through some of the financials.

I'm going to stay over here so that I don't stand in front of you. Well, 2018 is, as we all know is, a significant growth for us. And there's an opportunity set with natural gas. Prior to the acquisitions in 2018, we were really focused on 2 of the 5 opportunities that we see is in natural gas business: one is optimize production; two is reducing cost with efficiencies. But with the assets that we acquired in 2018, we really had the opportunity to unlock other margin enhancements and those are controlling the value chain, as Rusty indicated, how pleased we're all with our midstream assets. Also, we were able to sell gas into diversified markets with the different pipeline systems that we sell into. And the last opportunity was to enhance our margins through liquids production. In our Southern Appalachian assets that we do have a very high BTU rich gas and with the partnerships that we have in the basin -- in the Southern Appalachian basin, we're able to significantly raise those margins.

So we did learn a lot. And let's dig into each one of those on an individual basis here.

So optimizing production. As I said, and as Rusty has always had in his business model, is to take neglected assets and to optimize their production. And so we've continued to do that along with the new assets we've acquired. We continue to focus on this on a daily basis. What you have here in front of you is a snapshot of a certain group of assets. And you can see from when we acquired the assets in the box and where the assets were trending from a production standpoint and where they ended up the year. You can see the spike there. What that does is, not only does that produce cash for us in actual production sold volumes, it also increases the reserve value. And so those 2 trend lines there, the bottom line was the trend prior to the optimization. The top line is the trend on the our reserves or the reserve value post optimization. And we have these opportunities throughout our entire portfolio. Every day, we talk about it with our operations team. Our priorities are: number one, safety; number two, production; three, efficiency; and then the fourth is, we want to enjoy what we're doing.

Second, as it relates to what we've always focused on is reducing cost and driving that efficiency. The example that we've presented here relates to the combination of the APC and the CNX assets, let me forward that, with APC and CNX. And with the overlap of assets, the workforce, the compression, contractors, vendor scale, we were able to, in this example, reduce annual cost approximately $2.2 million. That's with water hauling, that's with compression and that's with sitting down with our vendors and contractors that we had and just telling them that we needed to lower cost. And because of our scale, we were able to achieve that.

So how are we doing all of that? Well, we're doing it with focus on our people, our process and our systems. And we talk about these aspects in our business throughout what we do. But definitely, when you're managing a large workforce that hits the wells every day, we have to have trained people, we have to have great processes and we got to have systems to make sure we're measuring what we do. And so as a result of acquiring the assets, both in the northern and southern -- Northern and Southern Appalachian basins, we have retained significant skill and experience level with our workforce. That's really helped make our integration of these assets go very, very well.

We have tremendous amount of experience. I'll talk a little bit more about that on the next slide.

Second is just the process. And as we've accumulated the talent, experience level from our -- from these employees that we've acquired, we can now scale that knowledge base across our entire assets. So whether we are -- where we've got strong midstream experience in our Southern Appalachian basin, when we have a midstream project up in the north, we have the people on our team we need to call. And it goes in all the different types of wells that we manage, we have people on our team that know how to operate all different types. And so that's been -- that cross-training opportunity is really significant.

And then third is systems, and we'll talk about this, or Rusty or Eric will talk about in our outlook. We've invested a lot in our systems and we'll continue to invest a lot in our systems. We are a big data company. We produce a tremendous amount of data. And having that data is one thing, but applying the knowledge from those systems is another. And so we're investing a lot in our measurement, our tools in the field as well as just being efficient from a mobile workforce.

Next slide is just to kind of give you a picture into the scale of what we've acquired. So right after we did our Titan acquisition in June of '17, we had about 120 employees. And then, since that time period, we've added close to 800 or so employees. And that just shows you the amount of skill and expertise that we have. And in our management ranks, 25-plus years of experience operating these assets. And again, that's been a big part of our success of integrating.

Next part of the value chain is controlling the value chain, the midstream assets that we've talked about. So this slide just shows you, by having those midstream assets under our ownership, the margin uplift that we achieve. So the box there on the page here shows this is what -- the $0.77 would indicate what we would pay transportation cost by not owning those. So we're saving that. We've $0.30 roughly on what we're incurring in our cost. So we're getting an uplift there. Additionally, we allow third parties to transport on our midstream system and that produces a revenue uplift. And then lastly, we have opportunities for integration savings. So for instance, with the Core and EQT transaction, we were able to reroute some, of course, gas production into our liquids processing plant, which gave us an immediate uplift with additional liquids production. And so by controlling that, it produces the opportunity to obtain that value.

We talked about market diversification from the ability to sell gas. With our footprint and with the new markets that we're -- we've entered into, we have numerous outlets, and I would point -- I'm going to be a little bit more specific on this slide because it is very significant as to what our scale in the acquisitions have allowed us to do in 2018. You can see under the 2017 volumes, the percentage of the different pipelines that we sell into. You can also see the basis differential that is attached to each one of those pipeline systems.

Well, prior to '18, 40% of our volumes were sold on Dom South, which had an average of about a $0.50 differential. Now, we are -- with the acquisitions from 2018, we have 43% on TCO, which is a $0.23 differential. Additionally, TGP is also in that $0.20 differential. And so we're moving a lot of gas and getting a higher realized price. Also if you see the East Tennessee pipeline system, that is a pipeline system that runs to the Southeast United States. We were at 0%, we're at 5%, and we're very interested in eyeing additional opportunities to get into East Tennessee. And you can see why when you see a plus differential there. And so that's a great opportunity for us and we think we'll be able to achieve some of that in 2019.

From a liquids production standpoint, I think you guys understand this. This is the higher BTU gases produced and then to process that through the Langley processing facility. It really enhances our margin.

Lastly, we'll talk about asset retirement, plugging and abandonment. And what we've done, just the way we've executed our acquisition strategy, we're executing our strategy as it relates to asset retirement. We set out to establish agreements -- formal agreements with the states in which we operate and we've done that with 3 states and we have one more to go. We're very comfortable with the agreements that we have in place. We have strong relationships in the states that we operate, and we've been able to establish agreements with them that create a very manageable opportunity -- a very manageable agreement, both from an execution standpoint, but also from a cash flow standpoint. So we're roughly in that 100 wells a year as to what we think we'll be plugging. And that's very manageable.

We've aligned some assets. Internally, we put some resource behind this. And we have a high level of confidence that we'll be able to execute within the agreements.

So with that, Let me turn it over to Mr. Williams.

All right. Thanks, Brad. All right. So what does it all mean when we translate this into the numbers? So follow-up on '18, I had a slide very similar to this last year and I said then and I'll say it again, this is really a slide that's designed to be studying, not really spoken to. But just from the standpoint of what we're presenting you, you obviously have year-over-year to give comparative results. But perhaps more importantly, we wanted to include fourth quarter of '17 to fourth quarter of '18. And if you followed our progress, you'll recall that the last transaction that we did in 2018 was the Core Appalachia acquisition that was effective in October. So the fourth quarter of '18 really represented the full performance of the large footprint. And so by taking that and comparing it to the fourth quarter, you can truly see, as Rusty said in his opening comments, the transformational nature. So anything you would hope to see up, whether it'd be realized price or whether it'd be EBITDA, not just in the aggregate, because you'd expect that with the kind of growth we had, but on a per share basis, you'll see up. And the things you expect to see down and given the scale that these acquisitions have allowed us to achieve in the basin from LOE to total operating expenses and G&A are all down. So certainly very positive outcome, all translating into higher dividends.

So 19 is a slide that takes a bit of time to perhaps digest when you first look. But really, this encapsules everything that Diversified's about. We talk extensively about cash flow. We say that we are really a financially modeled company that just happens to be underpinned by oil and gas assets, but we look for cash generative assets that we can step into, that are stable low decline and produce cash flow not for the sake of producing it, but to ultimately return to shareholders. And frankly, that's the lesson, if you look back over the past 5 years or so, the industry as a whole is finally beginning to get. If you think about the quadrants that we've laid out here and to quickly describe the activities, you've got across the x axis, free cash flow yield, which is taking your operating cash flows less CapEx and divided that by market cap, to say how much of the cash that you're ultimately generating is available to either return to shareholders or grow the business. And then, your other axis is operating cash flow per share growth year-over-year. So who's ultimately growing that cash flow on a per share basis.

Defined, you've got value destruction in the lower left-hand corner, where you're both outspending cash flow and you have declining overall free cash flow. And where everybody hopes to be in the upper right-hand corner, value creation. So you're both free cash flow positive and you're generating growth.

Most of the industry has typically spent time in the upper left-hand, where they're outspending cash flow year-on-year. They're on the proverbial treadmill, trying to generate growth. But they're outspending cash flow to do that and promising that at some point in the future, they will have positive returns for shareholders.

Given the last 5 years and the lower for longer commodity price that the industry has been working through, you've seen the industry beginning to talk about fiscal discipline, return on equity, return on cash. And so you are seeing those bubbles migrate. And so what we've presented is, you've got 3 different groups. You've got Diversified, of course, but then you've got Appalachian focus peer groups that are represented by the orange dots. You've got U.S. yield focus, so you would certainly expect to see those generating positive cash flow and positive growth because they are basically royalty place, represented in green. And then, you have some international peers in the purple. And when you put this all together, Diversified shows extremely well, not only have we grown cash flow per share, as Rusty showed earlier, nearly 4x, from $0.06 last year to $0.23. But simultaneously, we're significantly yielding, when you put that amount of cash flow over our market cap, which means that we have significant cash flow to both reinvest into the business through growth after returning significant cash flow to shareholders. So we hope this reveals what makes Diversified different in the marketplace.

Moving on to dividends on Slide 20. We talk a lot about this. This is why we exist. And so we're proud of the fact that the dividend is up more than 2x on a year-over-year basis. And this is basically pulling in the declared dividends into the years in which they were declared. So inclusive of the fourth quarter dividend, we'll be at over $0.11 versus just over $0.05 in 2017. And you can see the progressive nature of that dividend, as we've done deals and certainly, we've used equity because we'll never risk the balance sheet for the sake of growth. But even with the equity infusion that we've brought with each deal, you see a progressive dividend per share going from $0.017 to $0.028 to $0.033, and then even increasing the dividend on the back end of a very strong year in the fourth quarter, taking that to $0.034. Ultimately, yielding just around 9%. And we certainly hope that as we continue to tell the story, demonstrate that this platform that we've built will work for the long term that, that the equity performance would respond in turn and pull that dividend yield down to where think it ultimately should be.

So moving on to production. We talked about year-over-year growth and you'd expect that when you do 4 acquisitions. But what was important to us was to focus on the composition of that revenue stream that ultimately drives higher realized prices. And so we've tried to illustrate that here showing that, sure, you took 10,000 barrels a day to 70,000 barrels per day, but focusing on that liquids component and ultimately how we're able to monetize that liquid component was extremely important to us. So you can see that represented in the green on the doughnuts, which doesn't necessarily looks like it's significantly outsized until you look at the volumes associated with those percents. Taking 940 barrels of oil equivalency per day up to just under -- or just right at 9,500. So while we grew overall production, 600%, you had a 10x increase in liquids production. So you certainly see our focus this year has been on growing the liquids component of the business. And while we had a small piece of NGL's last year, what we lacked was the midstream component that allowed us to ultimately take that liquids to a processing facility and realize the true value of the liquid. So certainly a transformational nature in the production stream.

Moving now into reserves -- so -- I mean, into revenues. So as we monetize that, what does it mean? Well, again, in the aggregate, you would expect to see growth, but I think it's extremely telling to see that if you took the first 9 months of last year, we generated $150 million of revenue. If you take the fourth quarter by itself, where we full -- we saw the full impact of both EQT and Core coming to bear, we nearly matched that at $140 million. But importantly, what does that mean on a realized price basis? Realized prices went from $17.41 to $19.38 year-over-year, but if we further dissect that, and let's take the fourth quarter, because we said that the fourth quarter is where you had the full, in large, company performing with those midstream assets intact over a 2017 number where we did not have that. And so realized price in the fourth quarter went from $17.14 to $21.71, which, great, if that ultimately was a function of a change in commodity price. Anybody could deliver that. But when you look closer, only 1/3 of the overall improvement on realized price was a result of the underlying change in natural gas prices and the basis differential narrowing. You saw earlier that Dom South was around $0.53 per MMBtu or per MBtu. Today -- last year that was $0.80. So even including that $0.30 improvement in the price strip, only 1/3 of the value came from that. So 2/3 of our improvement realized prices came from structural and, what we believe, are sustainable improvements in the underlying composition of our revenues.

Liquids, we talked about. Not only do we have the liquids, but we now have the ability to process those liquids. So you see a $0.51 uplift there, the BTU, so even after processing, that gas stream still comes out with a high BTU factor, which we're able to monetize at a premium. So you see another $0.51 uplift from that. Brad talked about the midstream asset we have and the ability to move other people's gas on that system. That revenue at its current levels, and we certainly hope to grow that over time, adds another incremental $0.80 to realized price. And then lastly, the ability on that midstream asset to move our gas to better markets, whether it be to reduce the differential that we're paying, whether it be to achieve a higher sales price, different sales [price] or whether it'd be the move off of one system that has higher rates of volume loss to a system that has lower rates of volume loss, all ultimately resulted in a $1.28 uplift. So of the 400 -- $4.50 improvement, $3.10 came from true changes in the underlying composition of our revenues. So certainly very proud of that.

Shifting to expenses. Brad said, this is a game where we're very, very focused on the margins. We've added tremendous talent to the organization that have great ideas and they deploy those ideas every day. And we've given them the benefit of scale to further leverage that talent across, so that we're able to use our purchasing power and just the economies of having wells in a tighter geological footprint to bring cost down and you'd see that in a big way. If we start on the right-hand side of the screen where we'd look at year-over-year, we took overall expenses down. So all-in cash expenses down 20% and that's including bringing in the full cost of that midstream asset that I talked about. Because you'll notice that purple bar for $0.89, we didn't have last time. What's nice about that is that, that's an asset that will allow us, [I think, continuing to well back in 2010 was at.] We can move all those into our volumes with no additional cost to us. Simultaneously, we can continue to grow that third-party revenue stream.

So a very, very powerful overall expenses (inaudible) LOE, so the upstream operating expenses went from $8.71 to $6.32, down 30%.

Shifting across and looking at, again, the fourth quarter year-over-year, you see, importantly, cash margins up 90% from just under $7 to over $13 and that was again not only as a result of dropping those operating expenses down 30%, but that change in realized price. So all comes together to drive significant cash flow to [achieve]

that dividend we talked about.

Shifting quickly to reserves. I think this is the platform for the future. And we try to always remind a key differentiator. It's one thing to have reserve replacement and you can see, we added 425 million barrels of oil equivalency after producing just 15 million. So over 28x reserve replacement, which is incredibly powerful. But what's -- what we can't lose sight of is that these are PDP reserves, so there's no incremental capital outside of the little bit of maintenance CapEx every year that's necessary to generate the cash flows associated with these reserves. So these are currently producing with no additional capital outlay to develop the assets. So certainly provides a very, very strong foundation for future growth. From a PV10% perspective, we took $260 million at the end of last year, on the back of the acquisitions, over $1.6 billion. And when you think about the fact that all in, we paid under $1 billion for the assets, including the midstream, which isn't necessarily reflected here, I think you can see why we've created significant value for shareholders.

Shifting to our balance sheet and sort of the liquidity. So how are we positioned for the future? Extremely strong. Rusty talked about, it does feel like an eternity ago that we began in 2018 with a piece of mezzanine financing that we put in at the time of the IPO that was 10% term loan. So it lacked the ability to pay down and draw back, as you needed. It was much less flexible and much more expensive. And in January of last year, we engaged with KeyBank and began the process to put in place a revolver and in March, got that done and it was $0.5 billion facility with $200 million available to borrow. Did the EQT acquisition and, quickly, 3 months later, upsized that facility to $1 billion, with $600 million of availability. And then, in December, we, after the Core transaction, went back and upsized that yet again from $1 billion to $1.5 billion with $725 million available. On the back of that, that all means, if you look at where we stand today, we have $270 million of availability on that revolver of low-cost financing, right around 5% as Rusty said. But what we don't want to lose sight of is, again, putting all that cash flow to work in between opportunities to grow, to delever the business and avoid interest expense. And I think it's rather remarkable to show, if you remember we put a trading update out in December that had, as of October, when we had just under $525 million outstanding on that revolver. Over the next 5 months, we've paid down $70 million and that's inclusive of paying the last dividend of $50 million out to shareholders. So that today, we sit at 1.8x. So demonstrating this cash flow model yield results.

So I'll round out talking about hedging. We, obviously focus on what we have to return to shareholders and we're willing to give up some upside in order to always protect the downside. We've got a cost structure that's very predictable. So we're able to go out and comfortably hedge into the horizon and feel good about where we will come out from a margin perspective. We want to lock those margins in. But you'll see, we have transitioned as we've come out of 2018 and given ourselves a little bit more flexibility from the standpoint of how we hedge the back end of our production. So if we look at in 2 trenches, we used to talk about being 75% PDP hedged on a rolling 36-month period or 12 quarters. What we found was, that was making us -- that was putting us in a position to basically hedge into illiquid markets, inefficient markets during summer months, which wasn't yielding the type of hedge price that we ultimately believe we could still achieve if he waited for a more liquid in a more advantageous time to hedge later in the same year because we're firmly committed to protecting the cash flows. It's not a shift in our preference to take on market risk, it's really just to making sure that we hedge most efficiently. So in the back half, where markets tend to be a little less liquid, we're taking that firm hedging beyond the 50% of PDP. So we're still very committed to having a significant portion of that PDP production hedged, but we have the -- we're going to use the discretion to hedge between that 51% and 90%. So we believe that will ultimately allow us to achieve a higher rolling hedge price again over that same 36-month period.

As a reminder, from a composition perspective, we use a mixture of physical and fixed with a preference to [fixed] in transacting directly with the buyer and getting a higher all-in realized, but when we do financials, when that physical market is not there, we'll use often a mix or a non-mix and basis hedge to essentially lock in 100% of those cash flows, and then using very straightforward structures puts, collars and swaps. So nothing exotic.

And with that, I'll let Rusty talk about the future.

Thanks, Eric. So 2019, real quickly, because I want to leave room for a few questions at the end. We have a significant opportunity in front of us. As Brad was talking about these, what we call our Smart Well Management process, I really get excited about this because I really feel like what we've seen in the second half of 2018 can really be duplicated as we move throughout 2019. And what I mean by that is, if we can hold our decline rates steady to flat for the first half of 2019 per se, it has a significant impact on our cash flows, it has a significant impact on our reserves and really filters out through the rest of our 2019. So this is a big opportunity for us, as we -- as Brad was saying earlier. A lot of different projects on -- I'm not going to get into all of those, but a lot of it what I would consider to be organic projects, where the operational people are going to have a lot of activity.

Acquisition-wise, we can continue to see a very robust pipeline. The market is very ripe for acquisitions. The thing it puts us in such a good position is, is the acquisitions, there's a lot of acquisition opportunities. There's very few buyers that have capital right now. Private equity is really going through what I would consider to be a metamorphosis. They're having -- they're struggling raising new money. Because they have all this pipeline of older companies that are in their portfolios, they're underperforming. And so they're trying to figure out ways to unload, to figure out how they're going to get rid of these underperforming assets or companies to be able to raise money. So you got -- those opportunities exist in the market. We see opportunities both on the conventional side, but also on the unconventional side. I've said this a few times, and I really feel like 2019 is going to be the year where we probably crack the egg and start to look at mature producing unconventional assets that have a much higher production profile, but they still fit the mature, long life, low decline profile of the assets that we'd like to operate. So there's a lot of activity here.

I'm extremely excited. Everything we do, I've talked about this over and over, because I feel like it needs to be mentioned every time we talk to institutions and analysts. But, guys, we're operating the business from a cash flow return on equity perspective. I know that we talked about this earlier that the industry is shifting that way, I just think they've been paying attention to us at some point, not really, but I'm just saying that. But the ROE is becoming imperative. If you're going to raise money and if you're going to grow your business, you better be able to show return on equity first. And that's what starting to really take effect in the U.S. We're seeing companies that have been publicly traded for a long time become penny stocks in a relatively short period of time because they're not showing a return. And so, this is where we put all of our attention every day, looking at return on equity and keeping the balance sheet strong because I feel like both of those are imperative to being able to grow the business.

Our capital allocation framework. We're going to pay the dividends, we've talked about that. We're going to keep our leverage around that 2x, no more than 2x leverage ratio. We're going to invest in projects that enhance the free cash flow per share. We're going to strategically acquire properties that we feel like give us great shareholder returns and then also add to that dividend per share. And then, we're going to continue to use our free cash flow when there is no acquisitions to continue to retire the debt and to create dry powder for the next transformative acquisition.

A couple or the 3 things that we're going to do this year. Number one, we're focusing our attention on a few system modernizations. We're going through an ERP conversion in 2019, where we consolidate all of our assets onto one accounting system, which is going to be a big project. We've got a few data systems, where we're kind of consolidating our data accumulation in the field for production and other things, metrics that we can manage the business from. We're definitely looking to expand our board composition with at least one additional board member from a financial -- what do we call them? Financial...

Financial expert.

There you go. Kind of like Eric. Financial expert to be added to the board. And then the other thing that we're going to do is look to evaluate moving to a premium listing at some point in 2019. So these are all things that we've got going on in 2019.

So with that, I will let you ask any questions that you may have.

It's Robin Haworth from Stifel. A couple of questions, if I may. So just on differentials, if some of your Appalachia peers are moderating their spend and possibly grow -- some of the growth rates in the region might be a little bit less than we've anticipated, so you could see more [Appalachian] pipelines. I mean, differentials have come in over the last 18 to 24 months. Do you see that continuing over the next 12 months? And then just on drilling, you have previously talked in the past about beginning to drill. I think there's less emphasis on that in this morning's presentation. So does drilling -- still a feature in your plans?

Yes. Well, on the differential question, I do think, if you look at all of our, I call them peers, they're really not peers from the standpoint of the asset profiles, but other operators in Appalachia, the EQTs, Anteros, Range Resources, all of them have pretty much moderated down their capital spends for 2019, which I think is important. And I think there's a variety of reasons for that. I think the main reason is, is that the capital availability. And -- which goes back into our acquisition strategy, which I mentioned earlier. But there's no doubt that that's going to result in lower gas volumes and lower growth rates and production in the region, which will have -- it could have an impact on the differentials. We've seen those differentials squeeze quite a bit in 2018. And so I'd say that as you look at -- a lot of it is going to depend on the type of differential. Dom South, absolutely, it'll have an impact on that. TCO, probably not as much because it's already down and it probably doesn't have as much of the Marcellus gas being produced into it as the Dom South basis does. So I think that it's going to definitely have some positive impacts, if the production growth is moderated.

As it relates to the drilling, we don't talk a lot about it, but we are drilling some wells this year, in 2019. Nothing significant. A few horizontal oil wells in lower West Virginia, Kentucky area, in areas where we've had our process or companies that have owned -- that we've acquired the assets from have had some success. So we're dipping our toes into that and so as those results come back to us, that will help us to evaluate. We're going to drill some wells as we move forward, okay? But it's not going -- as long as these acquisitions are in the market the way they are and the returns that we're seeing from that perspective, it's not going to be the driver of our growth going forward in the near term, okay?

It's Ashley Kelty, Cantor. A couple of things. First, I've noticed that you've avoided talking about any sort of guidance on production or [counter] spend. Just wondering if you could maybe give us some indications on that? And the other question I had is, in order to protect that dividend, are we going to look for sort of modest growth through production optimization you talked about or is purely going to be through further acquisitions and potential [valuation] to holders from that?

Yes. So on the first question, as it relates to the guidance, what I would say there is, is that I'm assuming that you're talking about guidance, as it relates to production. Is that right? Yes, so production-wise, we -- I would say, we were flat from midyear to the end of the year. In our internal models, we have a decline rate that we are assuming. But I really feel like that the field management processes will moderate that significantly. But it's really hard to say. But when we've got a significant amount of wells that we haven't even cleaned up, worked on at this point, pipelines that we need to repair that -- the predecessors have some line marks on. So until we fix those, it's really hard to say and give guidance on that. But I do think that there's some opportunities there. As it relates to the dividend, that will play into that to some degree and will help to keep that dividend in place that's there today. We will see dividend increases related to the acquisitions. What I will tell you is, all of our acquisition are evaluated on an accretion basis. So we -- you won't ever see us do an acquisition that won't have an accretive value to it as it relates to a dividend per share. We're looking at acquisitions today that could have significant double-digit accretive value to the dividends. So we'll never do an acquisition that's going to have a negative impact on our per share or dividend per share economics, okay?

It's Al Stanton, RBC. Just a couple of questions. First of all, on -- now that you've got a larger portfolio, how is Brad and the rest of the team prioritizing which areas they go to? Are there areas where you increased your liquid production per se rather than treating them all equally? And then with respect to acquisitions, are we going to have to zoom out a little bit further in this map, geographically, are you looking at other areas?

Yes. So on your first question, so when we do these acquisitions, in our due diligence process, typically, because we're bringing all those employees over with us for the most part, operationally, we're able to pretty quickly identify things that they know of that are out there that can be done to improve production, be more efficient in the operations of the assets. And so we'll evaluate those and we'll put -- we typically have a list of the highest payback projects down to the lower payback projects and what is going to cost to do those. And so Brad and his team, the operational team, will put a lot of time and emphasis on that. And we've -- for example, the Core transaction, we talk about this quite a bit, but the first thing we did was moved gas from one of their midstream assets over to the EQT asset and get that gas stream in behind Langley, which is our NGL processing facility and had an immediate impact on NGL volumes and revenues associated with that. That's a high-impact project. And it's easy to do and is quick. You're going to do those first because those are the ones that have had the quickest impact and the most impact to revenue. So we have an internal list of what those projects are and then that's what we're focused on in order of what most bang for your buck. On the acquisition side, I've said this a lot, everybody just thinks automatically that we were an Appalachian-based-only company and that has been the case up to this point, but it's more about the profile of the asset than it is just geography. So if we can find assets that may be in a different basin that fit the profile of the long life, low decline, predictable cash flows, easily hedged, all those things, we'll look at it, we'll evaluate it, but it has to be scalable. So we're not going to do a one-off acquisition for -- I'm just using this as an example, in Oklahoma, where we don't have the ability to scale it up the way we have Appalachia. So those things that has to fit those profiles and those attributes for us to consider it, but we feel like we have a tremendous amount of opportunities still right where we're at. And we're evaluating a lot of activity there.

And geographically, is it just the U.S. or does that include Canada as well?

No, we're U.S. based.

[James Michael] from Macquarie. Just on the increased liquids mix that you highlighted on one of the slides there, just wondering if that's something that you'll be targeting increasing through further acquisitions? Or if there's a liquids percentage in the portfolio that you think is optimal?

I don't know if there is a percentage that's optimal, but it is absolutely high priority for us to -- any internal processes or projects that we have today where we can get gas into that NGL stream and being able to recognize NGL revenue, it's -- we're on top of it. From an acquisition standpoint, and I don't know if I can find this map, let me see if I can find it here real quick, here we go. So this -- this is kind of -- but down in this area, what I -- this is what I consider to be Southern Appalachia. We have a significant amount of midstream assets down here now with the Core acquisition and the EQT acquisitions prior to that. We have a very, very, very good opportunity to, I won't say 100% corner this market, as it relates to gathering and transportation of natural gas production, but to get pretty darn close. There's a few assets that we've looked at and we're evaluating, which could give us the ability for most gas production in this region to -- if it's produced, it's touching one of our pipelines, which is a significant opportunity for us because only from -- not only from a gathering and transportation perspective and being able to charge fees on that, but if we can get it over to Langley, it's even bigger. So yes, we -- that's always -- guys, we are constantly monitoring every opportunity in this region we can, both from an upstream and from a midstream perspective to increase our bottom line. And so we are always monitoring everything. There's a lot of pipelines here, a lot of these are Marcellus. We're not as interested in that. What we're really interested in is the ones where we produce gas into or can produce gas into, that's going to have an effect on our revenue stream.

Colin Smith from Panmure Gordon. Just following up on the earlier question, just on your Slide 19, 2 things, could you just tell us what CapEx is embedded in that -- in your dots in the upper right-hand chart? And you, obviously, have yourself showing as strongly cash flow positive, but that's without any further acquisitions. I mean, I presume the intention still is to be doing acquisitions through the course of this year given what you've said. And you also talked a lot about returns, I think, fully referencing return on equity more than return on capital. I just wonder if you feel it might be appropriate to put a formal returns measure into your targeting?

Yes, yes. Well, I think the answer is, to that last question, yes.

Yes. Well, to your question on the CapEx, so the axis that had free cash flow, 2019, that's based on consensus estimates. So our -- I think, consensus for us is around $20 million net next year. So it generally is about 10%. Although our EBITDA, I think the midpoint of EBITDA is just around $250 million. So it gives you a sense. About 10% of EBITDA would be considered CapEx, which is maintenance CapEx to maintain the -- and most of that's midstream with a portion of that being upstream.

Yes. And as it relates to your question about the acquisitions, we would absolutely see 2019 being a year where there will be acquisitions adding to the free cash flow of the business. I think that was your question. We -- everything we do has to hit our return thresholds.

It's where you have -- should have a formal return on equity?

Oh, yes. In fact, we've talked about that as far as putting it -- it's been such a hard moving target with the acquisitions, the way that they have come in to be able to put that calculation in there. But we will. I think that's something that we want to make sure it's in there going forward, yes.

Anybody else? Tim, you're awfully quiet today. Thank you, guys. Appreciate you all showing up today.