Diversified Energy Co (DEC) 2020 Q2 法說會逐字稿

Hello and welcome to the Diversified Gas & Oil Interim 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, CEO, Rusty Hutson. Please go ahead, sir.

Good morning. Thank you all for coming this morning to listen to our first half results. Just want to start out. We'll flip through the pages and I'll try to make note of the pages that we're on so that you can flip along with us, but I'm really starting here on Page 3.

Just want to talk a little bit about this first half of 2020, really a challenging environment, as you all know, in terms of the E&P sector. A lot of stuff going on. I mean we had the pandemic, obviously, that started in March. We had negative oil prices that happened during the first half of the year. A lot of the stress in the industry overall, especially here in the U.S., we've seen a significant amount of distress.

One thing that I would say, though, is, is that through all of that, Diversified has performed very, very well and really has proven to me that we've insulated the company from volatility. We've done that through hedging, we've done that through a very low expense base, and we'll talk about that as we go through the presentation today. But we're very, very pleased with the first half and the way that it's turned out for us in terms of our operational successes, the financial successes that we've had for the first half of the year. And obviously, that was kind of supported with the dividend increase that we also announced this morning for the second quarter.

You can see here the EBITDA margins in one of the lowest commodity price cycles that we've seen in a while in terms of natural gas and oil and the NGLs for that matter. We still, through our very robust hedging program, which again is one of the main factors that I've talked about since day 1, since we took the company public back in 2017, is that we're going to hedge our production and we're going to protect our downside, and that's exactly what we've done. We've seen a 55% EBITDA margin in the first half, again very low cash OpEx and G&A costs. We've dropped another $0.01 since the year-end -- or the quarter end of March 31 down to $1.17 per Mcf equivalency. That's extremely low for an operating E&P company. The hedge program was very, very effective, about $2.69 floor. So the margins are very, very stable.

Free cash flow yield -- and these are the 4 things that I'm going to talk about from here on out in terms of quarter after quarter, half year results, year-end results because I think these are the 4 things that matter in the E&P sector right now. 32% free cash flow yield. Now that tells me that we've been able to maintain a very stable production profile. We continue to see our conventional assets produced at a very stable 70 -- approximately 70,000 BOE per day. We talked about that now for 8 straight quarters. That says a lot to our operational personnel and their ability to maintain the production, effectively manage the wells through our Smarter Well Management program. And you're going to hear more about that in our operational section here in a little bit.

We are now, obviously, on the main board since May, and we're the third largest overall production company, E&P company on the London Stock Exchange in terms of production. One of the largest conventional producers in Appalachia.

32% free cash flow yield tells me a couple of things. Number one, we're generating a lot of cash. That also tells me our price -- share price is too cheap. So those 2 things effectively result in a very, very high free cash flow yield right now. Shareholder focus. The dividend yield, again, going back to the price, the share price, 12% dividend yield right now with the increase that we just announced, but it's very protected. One of the things that we've said from day 1 is that the dividend is nonnegotiable. It continues to be nonnegotiable, and we'll continue to take it up as cash flows continue to increase. We have a 40% free cash flow yield -- dividend payout. We've continued to raise it since day 1. So since February '17, we've had multiple -- 6 consecutive increases to the dividend over that period of time.

And then we've always talked about how we will not risk the balance sheet for the sake of growth, and we continue to manage our debt profile very well. We're going to be disciplined in our growth and prudent in our capital allocations. Our financial leverage ratio at 2.2x. 70% of our debt -- of our overall debt now is in fully amortizing structures. Which, as I've said over and over again, if you're going to lever to grow the business, you do have to pay it back. I know the E&P sector has kind of forgotten that, but we believe you pay it back. And so 70% of that is amortizing on principal and interest payments, fixed coupon and then obviously, we have the revolver that we continue to maintain our liquidity on it.

So flipping over to Page 4, just a few highlights on the first half. A lot of you know a lot of these things that we've done. But production continues to be stable. We talked about the 70,000 BOE per day on the conventional. We had 109,000 that we exited the first half -- 109,000 BOE per day which is the largest we've ever had. The interim dividend increased from $0.035 to $0.0375. It was payable in December. Again, a 7% increase over that first quarter dividend. We obviously completed the uplift to the premium board in May. We had $235 million worth of upstream and midstream asset acquisitions. The integration is ongoing and will be completed on time.

We also completed 2 fully amortizing debt financings in the first half of the year, one in April, which was another ABS tranche which was -- had a -- the largest investor in it was TIAA-CREF. And then we did another $160 million financing for the acquisitions in May, which was fully funded by Munich Re. So we now have over $360 million worth of financings directly with Munich Re.

First half EBITDA, 146 million. Talk about the cash margins, 55% EBITDA cash margins. Our costs continued to come down. We've got that down to a level that I feel very comfortable with, the $1.17 range. We may be able to move it down further depending on the assets that we acquire or the continued improvement in some of the efficiencies in the field. But I feel like we're in a very good place there.

Free cash flow yield of 32%, which is amazing, and we'll show you some slides that kind of compare to others in the industry there. We have a strong liquidity position, $220 million. A borrowing base reaffirmed at $425 million for the first half of the year. And really, an uninterrupted operation from the pandemic overall as we've been classified as a business that needs to be -- continue, obviously, in power generation. And we've seen very little to any interruptions at all from that. All that to say, we've done all of this in the midst of some very challenging times when others have not been able to do much of anything. So it says a lot about the overall business and the core operations that we have.

And then flipping over to Page 5, we talked about this pretty much every time. I like to drive it home every time that we have one of these calls, because I want people to understand that the business model does not change. We're not kind of swaying in the wind, changing every time you turn around like a lot of our E&P sector peers. We're -- we've stayed true to our mission and what we feel is the right way to operate an E&P company. Disciplined growth and then focused execution on that as you grow and then the value creation. And we've hedged to limit the downside risk. We generated strong free cash flow. We paid dividends and we safeguarded the balance sheet. I believe when you do those 4 things, that you've set yourself up for success and we continue to do these things at a very high level.

So with that, I'm going to turn it over and we're going to walk through some operations slides, and then we'll turn it over to Brad Gray, our Chief Operating Officer.

Thank you, Rusty. I'll be starting out on Page 7. As Rusty indicated, it was a very challenging operating environment. Very pleased with the efforts of our team. The teamwork exhibit the diligence of all of our employees to work together through a challenging period, and we're pleased with the results that their efforts are providing.

We'll start with production. You can see the headline there is that we did exceed 100,000 BOE per day and exited June at 109,000. The components that make up that production, we start with our steady foundation of our legacy assets continuing to be around that 70,000 BOE per day for the eighth quarter. Our second daily operating priority is production. Every unit counts, and we are constantly evaluating enhancement opportunities and I think the results from these assets are proving that to be a good strategy.

From our unconventional assets, which are the former HG and former EdgeMarc wells, these wells are performing as predicted, and so we're pleased with the performance of those wells. But in addition to the production performance of these wells, we've really been able to focus on some operating cost improvements with these unconventional assets, really just with some simple value-added investments, and that's also helping enhance our margins.

In the recent acquisitions, we completed the EQT and Carbon. Those are performing well in the first month of production, actually exceeded our underwriting assumptions. And so we were able to quickly integrate and onboard the employees that came over from carbon. We restructured the teams, their focus, and implemented our daily priorities in their daily work. So from an overall, record production, again exiting January at 109,000, as you can see in the bottom left-hand corner of Page 7, we do show the value generated by our Smarter Well Management compared to the engineered declines or the predicted declines of the wells. And over this period of time that we refer to, approximately $42 million of incremental margin and value to the company. This -- the strategy and investment thesis that Rusty developed many years ago, it's providing the opportunity to achieve these results. But our focus on operational excellence is what is causing it to be delivered.

We'll flip over to Page 8, and we'll talk about the value of our vertical midstream strategy, which really is made up of 3 components. The first component is flow assurance. This allows us to control the production to the markets that we want to sell our products to. Second is our vertical midstream strategy, provides us with pricing optionality. This allows us to move gas to better priced markets. And we are constantly evaluating these options and opportunities that we have. And then third is, is we do have a third-party revenue from third-party producers from these midstream assets as well. And so that's really the foundation of our vertical midstream strategy.

I do want to provide an example of the scale of our assets, the options that we have with this vertical integration and the experience and capabilities of our team. Working with our finance team, we saw that the netbacks on our NGLs were declining in the first quarter. And so we made a decision to route as much gas as we could away from our processing plant, our NGL processing plant, in order to increase our net cash from the sale of the gas. And so as opposed to -- we took about 25% of the gas that was flowing into our NGL processing plant, moved it directly to a residual sales outlet, and that produced a value uplift of approximately $300,000 that we achieved here in the first half of the year. So that's just an example of how our vertical midstream strategy aligned with the skill and capabilities of our team to drive value and enhance margins.

Moving on to Page 9, we've had tremendous focus on our ESG efforts. And as discussed in our Chairman's report this morning, our focus on all elements of ESG continues to be comprehensive. Our business model and our operating strategies are 100% aligned with our formal ESG efforts. And so we'll highlight a few of those here this morning.

From an environmental standpoint, we're constantly engaging with the states that we operate in, and we were pleased to assist, not only financially, but also in the crafting of the new regulation to work with the state of West Virginia that has provided them additional funding for their orphaned well programs, but also lowered our tax expense. And so that was a big success for the state of West Virginia and we were pleased to be a part of that.

From a methane leak detection perspective, we have acquired some new equipment, purchased some new equipment to help us be more successful in looking for leaks to reducing emissions, and we're really excited about that program that we're implementing.

From a social perspective, we continue to be very engaged with our employees. We've recently rolled out a college tuition reimbursement program to help our employees gain new skills. We're very pleased to report that from a COVID perspective that we incurred 0 layoffs or 0 salary reductions. And in fact, we were able to increase some salaries of our field operations during this period. And from an employee health and wellness perspective, also in the first half of the year, we onboarded 125 employees from our Carbon acquisition, and then we also onboarded 63 former third-party contractors and converted them to full-time employees. And then we're able to bring them on with enhanced benefits, improved benefits, 3 of which we pay 100% of the cost for, and that's our life insurance, group life, our short-term and long-term disabilities, as well as paying for a significant portion of the medical insurance.

Finally, from a governance perspective, on the risk management front we're highlighting this morning, safety continues to be our #1 daily priority. We've rolled out to our field employees what we call our Safe Passages program, which is an incentive program to reward them for accident-free activity. We have installed GPS devices on our fleet, and that's primarily for a safety focus. And then from a process safety management standpoint for the facilities that we operate, we're continually looking to improve and enhance our practices there.

And then lastly, as we've discussed over the last several months, we've significantly enhanced many of our overall governance practices around ethics Board interaction as well as formally implementing some Executive Director stock ownership programs.

Moving on to Page 10, just to give you a quick update on our 2 acquisitions that we completed in the first half of the year. Our teams continue to plan for and execute successful integrations of our acquisitions. And an important part of this -- of having a successful integration is the execution of the acquisition assumptions that we did during our evaluation period, and we're pleased to report on 2 of those this morning. Number one, we were -- in the Carbon acquisition, we were able to achieve a 25% payroll reduction by integrating that workforce into our existing scale in the state of West Virginia, and we were able to achieve that on day 1 of onboarding those employees.

Second, we have a significant franchise in the state of West Virginia. If you look on the map that's in the presentation on one of Rusty's earlier slides, you can see a tremendous scale of operation in the state of West Virginia. So we had our largest -- we had a relationship with a contractor, providing well tender and compression services, which was our largest contractor relationship. And we chose to convert those employees from contractors over to company-owned employees. And so what that provided to us was, number one, it simplified our operations in West Virginia. It provided for consistent workforce practices, and we were able to achieve approximately $600,000 in annual savings.

From a midstream perspective, as mentioned earlier, we're constantly evaluating opportunities to increase cash margins. And the way that we can do that from a midstream perspective is look for higher-priced markets to sell our gas into. Prior to the acquisition of Carbon, we had already identified the opportunity to redirect about 24 million a day of gas production from the Dominion market into the East Tennessee market. With the Carbon acquisition, we believe that we've got a minimum of an incremental 20 million a day opportunity to move gas into that higher-priced market, and we're working on that as we speak.

Moving on to Page 11, not only do we want to validate the assumptions that we make in our acquisitions, but we are always looking to improve those acquisition economics with new opportunities. And so you can see the headline on Page 11 here is the application of Smarter Asset Management. That's a slide that's an important shift away from our Smarter Well Management. We're not only focused on enhancing opportunities around wells and upstream performance, but also around all of our assets.

And so we're providing 3 examples here where we were able to get the assets under our management and then be able to achieve some tangible margin enhancement programs. Number one, from a water disposal cost perspective, this really aligns with our -- one of our other daily priorities of efficiency, every dollar counts. We were able to significantly lower our cost of disposal from the water produced by the EQT wells that we acquired. And so we were pleased with that. And not only did we lower the cost, but we were also able to lower emission by having a shorter drop time.

Second item here is rightsizing of compression. Again, with our scale, we have a lot of opportunities to consolidate pipes compression, and we were able to actually do that here. On this example, we were able to remove about $115,000 of annual lease expense. But the bonus on this one was not only reduce the expense but we were also able to increase our gas flow by getting the compression right sized.

Last, on the 13 upside wells, as we've described from our EQT acquisition, we are continuing to evaluate those. We believe there's some great opportunities to bring those online here in the second half of the year, and we plan to do so. But not only on those 13 wells, but we -- just this past week, we were able to achieve a 200% increase in 1 of the pipes that we acquired from EQT simply by changing the lift equipment on the wells, but also just removing salt that had been built up in the wells from the former operator, and so we were pleased with that result.

And then moving on to Page 12, these are just some further examples of some tangible margin enhancement projects that our teams have been able to execute. And I think the key word here on this page is continuous. There are continuous opportunities to maximize production and minimize cost. And we've provided several examples here. I will highlight one, the second one on that line loss repair. So soon after we acquired the Equitrans pipelines back in the -- like the last half of the year, we were able to walk -- complete our foot patrols and evaluate the integrity of the pipeline. We found a significant leak from the former operator and we're able to improve that for a very low cost. So the aggregation of the field success, it translates operational efficiency to long-term financial results, and I would add in strong margins.

And then finally, the bottom bullet point there around stewardships of assets, our business model and our daily activities benefit the environment and our communities with the projects and operations that we do on a daily basis.

So with that, I'll turn it over to Mr. Williams.

Thanks, Brad, and thanks again, everybody, for joining this morning or this afternoon in your time.

I will start off on Page 14 of the slides, just with a quick recap of some of the things that Rusty mentioned earlier. Very pleased to report $146 million of adjusted EBITDA which is a 3% increase sequentially over the second half of last year, and an 11% increase over the same period in 2019. That did include net income of $18 million and then net operating loss of $31 million which included a noncash mark-to-market charge of $110 million related to our long-term derivative portfolio that we'll speak to a little bit later on. Of course, that mark-to-market charge is largely offset by a tax benefit that we received from operating wells that produced less than 9 Mcfe per day. You'll recall earlier that Brad mentioned that we were pleased to report that we had not a single layoff nor a salary reduction during the COVID pandemic. And it really goes to the Federal Government, during periods of low prices, incents operators like us to continue to maintain job creation and continue to pay our production in local taxes to manage these wells. And so we received a sizable and very nice federal tax benefit for that, that you've seen in our results.

On 14, the key takeaway is you'd expect a differentiated model to yield a differentiated result, and I think when you look at these 2 funnels, that speaks for itself. Free cash flow yield and dividend yield, as Rusty talked about, what we've done is we've looked across the landscape of 67 E&Ps within the United States. And if we start with free cash flow yield on the left-hand side of the page, you'll see that there are essentially 10 Appalachian producers within the universe. And out of all of those, only 42% across the universe had a positive free cash flow to even speak of.

If you further distill that down, then just 20 -- just 11% of that total -- or 3 Appalachian names fall under that category. And diversified dividend -- our free cash flow yield of 32% is more than twice of its nearest rival and 10x that of the other E&P that has a positive free cash flow yield. As Rusty said, that's a factor of certainly our robust hedging program and the share price that we hope to continue to see improve.

Dividend yield is very similar story. 67 companies start the universe. Less than half of that even pay a dividend on a regular basis. And you can cut that in half again to those who have sustained their dividend through the downturn. And of that, just 2 Appalachia companies of which diversified as one. And across the entirety of the United States, our dividend yield is the highest at over 10%. You can see the history of that, of our dividends, as well. We constantly talk about the sustainability of the dividend and building a company both through robust hedging to protect cash flows. And efficient operation to minimize costs to drive strong margins to make sure that the cash is there to pay our dividend. And you've seen a 2.7x increase since 2017 when we went public and at just $0.054 a share, and annualizing our most recent dividend of $0.0375 at $0.15 per share.

Turning to 15, we'll look a little bit more closely at some of the underlying financial results, and we'll start with revenue. You can obviously see that as production has increased, so too has revenue. And even during the second period, the first half of 2020, with record low natural gas prices coming in at just an average of $1.83, revenue continued to be very strong, thanks to the cash settlements from our commodity derivative program at $268 million. Unhedged, we recognize $1.78, $1.78 per Mcfe, so right in line with the Henry Hub price. And that's because the basis differential that we pay is largely offset from the value uplift from our liquids-rich gas.

On a hedge basis, we were just under $2.60 -- $2.60 at $2.58. But more importantly is to look out across the horizon, certainly, we use derivatives to protect cash flow during periods of commodity price volatility, which we've certainly seen with falling prices, but thanks to a rebalancing of the commodity markets, you're seeing that the forward curve is certainly looking very encouraging. And we showed the curve at 2 points in time on this graph for a couple of reasons. One is to demonstrate that there continues to be increased optimism in the outlook for natural gas that you can see that green line is the most recent strip. But just underneath that was the strip, just a couple of months back in April, when you'll recall that we did the asset-backed securitization, the second tranche that was anchored by TIAA-CREF and Nuveen asset management, which involved a 12-year hedging program. And then shortly after that, in May, we did another 10-year hedging program that underpinned our term loan. And you can see that the price has moved meaningfully up. And that speaks a little bit to the mark-to-market on the derivatives that we spoke about. But ultimately, will continue to allow us to deliver strong margins as we move forward.

Turning to 16, we'll look at the cost side of the equation because it's not just about managing top line, it's also about running a very efficient business. And you can see, I think, really a remarkable trajectory in the underlying costs associated with the business. And that's a by-product of all the efficiencies that Brad spoke to that they relentlessly focus on driving every day, but it's also centered around the optimization of the portfolio from the composition that we have talked about. We have a very strong base of conventional low-decline assets that we partnered with some newer unconventional assets that also share low declines, but also give a very different type of cost structure that allows us to maintain a very, very low base or controllable LOE. So we -- you'll recall, we tend to focus on that brightest orange section of the cost stack that we refer to as base LOE, and that's all the costs that we directly control. It's the salaries and wages and all the benefits associated with our employees, the costs associated with all of the well maintenance including Smarter Well maintenance that goes into running the assets. And you see a 34% reduction year-over-year and even a 15% reduction since just year-end. So when you combine that with the revenues and hedging proceeds that we talked about earlier, you see, we actually had the highest margins across this period at 55%. And despite record low natural gas prices being at just $1.83, I think we really stand-alone at reporting nearly a 34% margin, even on an unhedged basis, which speaks to just the quality and the operation, the very low-cost structure. All-in $7.05, that includes $1.34 for G&A, $1.41 for our owned midstream system and $1.35 for third-party transportation that we pay.

We talked a lot, and Brad did a great job of summarizing, that we look at this as an integrated model. So we don't really differentiate between the upstream and the midstream. We're not trying to build a separate midstream system but we look for midstream assets that we produce into that provide all the benefits that Brad went through: flow control, price optimization, et cetera.

But one of the ways that we can quantify the value that midstream produces is that those midstream assets do come with third-party revenues and presently run over $30 million a year of third party revenue. So if you were to unitize that revenue, you get to $0.75 per BOE and that compares to $2.76 of total transportation expense. If you add up the $1.41 for G&C and the $1.35 for G&T, you're $2.76. So if you were to subtract off the -- what we really think of as the contribution towards managing that asset, you're left with just $2.01 of transportation costs, which equates to just under $0.35 per Mcfe. So certainly, if you look at third-party rates, that's nearly half of what third-party rates and moving gas in the basin can be. So certainly, very, very margin accretive to an asset. And then you partner it with very low decline production, as we've talked about, which gives you a very stable cost structure across which we can then very confidently hedge long term.

Turning to 17, it's just the distillation of those 2 concepts. It's really to drive home, converting from a Mcfe base -- or a BOE basis to an Mcfe basis. You see that dramatic drop in unit costs, very strong margin across the period. And then again, just to look at how we have seen a period of historically low natural gas prices, the outlook is remarkably positive. Looking at average price this year of just $1.89 per Mcfe of gas and then looking out across 2021 at nearly $1 increase at $2.74. So a very, very positive outlook from a pricing perspective.

Page 18 is a bit of a different presentation of the way that we put our derivative portfolio forward for your review. And you'll see that we focus on the top section of the page, mostly on natural gas. You recall that 91% of what we produce is dry natural gas with just 8% NGL and just 1% of crude oil. So our focus is while we look at all 3 commodities, and we're certainly opportunistic on how we hedge, our focus is very much focused on natural gas. And you'll see that we use very simple swaps as our primary means of protecting the downside. We have a few collars that you can see in the orange. But importantly, you can see that we're hedged at over 80% this year and next year at prices of $2.69 and $2.62. And even over the longer horizon, you see 2022 to 2024, and this portfolio goes all the way out past 2030 that provides protection north of $2.40. And you may recall a slide that we've been during the past. It's in the appendix on Page 30 in this presentation, but we show what our margins are, cash margins, adjusted EBITDA margins at various price points. And at $2.50 gas, our margins are 53%. So you can see even at that $2.42 downside protection going out beyond this year, we're able to generate very robust margins. And when you combine that with that positive pricing outlook that we spoke about, we'll continue to opportunistically layer on additional protection so that '22, '23, '24 will begin to look a lot like '20 and '21 from a coverage basis.

And the bottom part of the slide is really designed to help you understand. I talked about a large noncash mark-to-market valuation adjustment of $110 million for the period. And we provided the context or the composition of that. If you went back to our year-end financial statements last -- for 2019, you would have seen a net asset position of our portfolio of $61.8 million. As we produced much of that cash flow during the first quarter, that asset declined to $54.1 million.

And during the second quarter, we had a lot of activity. Not only did we continue to harvest that additional cash flow. You'll recall that we had over $83 million of net commodity derivative settlements during the period and enhanced cash flow, but we also implemented 2 very long-hedging programs that I've talked about that underpinned our financing. The 12-year program associated with ABS 2 and a 10-year program associated with term loan. Those very long-life programs, not only get a very stable and predictable outlook to the cash flow for the company, but they do have a significant time value component to the counterparty. And so while we had a negative mark putting our hedging program into a liability position, in the second quarter -- at the end of the second quarter, half year at $40.4 million, if you were to look at the sum of value, i.e., compare that hedge prices to the current strip that we presented earlier, you've actually settled to the positive $31 million. So you see that negative -- or the option value is what's ultimately resulting in that liability.

At the end of the day, if your hedges are in a liability position, it means that you're ultimately realizing more across every unit that you sell. So certainly a very good thing for us. But hopefully, that helps to still the move in the commodity -- or in the derivative portfolio.

Page 19 is just a recap of our capital structure. As Rusty said, we spent a lot of time working on this. If you were to get back just 1 year ago, 100% of our debt set on the revolving credit facility. And we knew that you never want to put a long-life long-duration asset against short term financing, particularly, short-term financing like a credit card can be pulled away without notice. And so we very prudently had been looking for the right solution. But for us, it needed to be a cost effective solution. If you were to look at the ordinary playbook across the sector in the United States, you'd see the most high-yield as a way of terming out a debt. But high-yield, ultimately, was too high a coupon, we felt, for the type of assets and risk profile that the company had. So we ultimately created a new financing that was much lower cost and provide the duration but also amortizes.

As Rusty said, we believe in the line of sight to debt repayments. And so today, inclusive of ABS 2 that we completed in April of this year and the term loan that we did with Munich Re that underpinned the financing of the most recent acquisitions, 70% of our debt stack now sits in amortizing structures. And what we illustrate across the bottom left-hand side of the page is the scheduled amortization of those instruments over time. And you can see, by 2030, we have repaid 100% of those financings. And during that period, in addition to funding the dividend in accordance with our stated free cash -- 40% of free cash flow, you can see that there's ample cash to ultimately pay down the revolver as well. These are illustrative numbers, but you can see that the RBL pays down within that same period of time. So that, ultimately, in 2030, we're debt free.

Speaking of leverage and looking at net debt to adjusted EBITDA, our credit facility allows us to go as high as 3.75x. But we've stated our commitment to stay south of 2.5x. We've never exceeded that. Much of our period has been below 2x. Today, inclusive of the growth we delivered in the first half of this year, we sit at just 2.2x. And given this line of sight to the amortization that we talked about, we certainly have a path to be sub 2x very, very soon and all-in costs, as I said, at under 5% at just 4.7%.

I'll wrap it up on 20. Rusty mentioned, we had a very successful redetermination process on our revolving credit facility underwritten by 17 banks led by KeyBank. Certainly, we'd like to thank that group for their support throughout a very turbulent time. They've had their hands full managing many within their portfolio, but we were pleased to not be a company that ultimately required a whole lot of time to get through. We made it through the redetermination process very seamlessly with a full reaffirmation of our borrowing base of 425 million, which only 2 other E&Ps in Appalachia could say. And we also made it through without any price degradation, i.e., paying a higher rate or having to accept less favorable terms. And you see that other companies certainly did accept higher rates as a result as well. All but 3 are paying more for their RBL to stay as they were before.

And I think that speaks to the underlying quality of the assets. We obviously have spent a lot of time putting together a portfolio we're proud of with a long line flow decline. So each of those banks look through that portfolio and felt very comfortable reextending our borrowing base, leaves us over $220 million of liquidity to be very opportunistic as we look out across the rest of the year.

And with that, I will turn it back over to Rusty for final comments before Q&A.

Thank you, Eric. So just real quickly and we'll finish the call. Just really talking about the rest of 2020. We're -- as you all know and as we know very, very well that you're only as good as the next reporting period. And so we're already heavily focused on the second half of 2020. Very comfortable with the consensus estimates and those things that are out there for the rest of the year.

Some things that we're focused on, integration. We obviously have 2 acquisitions that we closed in May. We continued the operational team, our finance team are heavily focused on the seamless integration of both of those acquisitions and really just more looking at to extract additional value out of them. We knew that those would have some opportunities that we probably didn't even pick up on in the due diligence process, and I'm sure we'll be able to extract those as we move forward.

We'll continue to monitor the commodity price environment. It's improving. I'm very, very -- I think we're going to be opportunistic in taking advantage of an improving commodity price cycle. I think we're going to see, especially 2021, we'll continue to firm up and to look pretty attractive in terms of being able to take advantage of some of the additional hedging there.

Discipline. We'll continue to maintain our discipline. There's obviously a lot of distress in the market, a lot of opportunities out there. We're very opportunistic there also. We look at things constantly. But we want to make sure we're doing the right things and using our liquidity for the best acquisitions and opportunities that we can find. We'll continue to work on sourcing some additional capital opportunities in terms of potential JV partners and deals that would be very attractive, not only to -- being able to close on deals, but attractive to our existing shareholders. So we're focused on that.

Our smarter asset management program will continue to be a highlight of our second half of the year as the operations team really focused and really take advantage of the things that we know are out there in the field to create value. And then big for us, as we've now moved up to the main board, we feel like as we head into September that the opportunity to hit some of these index funds will be there, FTSE 250, potentially, if the market cap continues to hold. And then if the possible, we're going to hit the marketing campaign here in the U.S. extensively in the second half of the year, do some roadshows with U.S. investors, continue to market to targeted groups in the U.K. and Europe. It's very challenging, but we'd would have to do it on the phone or Zoom calls, pretty much, right now, but we're making the best of it.

We feel like that we have a great story that should resonate with a lot of people. You look at Page 23, you see the things that we talked about earlier. This is our -- these 4 things, this is what we focus on daily. Everything we do and every decision we make revolves around these 4 things. And so you're going to see more of the same for us in the second half. We're very, very comfortable with the business and how it operates. But as I tell the management team all the time, I want them to be uncomfortable. I want them to feel like we're always rising up to the challenges on a daily basis, making sure that everything we're blocking and tackling, it's a football terminology here, doing the right things to keep the business in a very good place so that we can take advantage. We want to be one of the last men standing. We want to be the one that everybody looks to and says, hey, there's a company that does it right. They're keeping their selves strong, taking advantage of good opportunities, continuing to focus on the shareholders, which we have done since day 1. And so we feel like that we're putting ourselves in a position to do that.

And so with that, I'll turn it over to the moderator and open it up for some questions.

(Operator Instructions) Our first question today is coming from Alex Smith from Investec.

Just a quick one on production, in particular. And I guess you've got 8 consecutive quarters of 0 net decline, already very impressive. How long do you think the Smarter Well Management program can extend? And do you see any of this -- any sign of this changing anytime soon? Or do you think this could be held for another year? 18 months? 2 years or even longer?

And then secondly, just a quick question on M&A. Just an overview of what the market is like and what you're seeing at the moment. And maybe just an appetite for diversified and more deals. I guess you're now one of the largest producers in the basin, especially with regards to mature conventional production. So just a scope of what are the opportunities out there. Is it limited in terms of conventional? And are we more likely to see unconventional asset packages like the last few deals, if this is the case?

Yes. Well, yes, real quickly on the operations side, and I'll let Brad chime in, but we -- it's 8 quarters now. So that's a long time we've maintained the production profile. It's the lot of production that just doesn't have a lot of decline. And so we're able to marginalize it continually through additional projects, swapping, cleaning wells up, putting wells back in production. So I can't tell you how long it's going to continue to do that. I can tell you that we take it quarter-to-quarter, 6 months to 6 months, year-to-year. And we're extremely pleased every quarter when we look back at the production. It fluctuates up and down a little bit, but it's always pretty stable, which underpins the business. I mean you can add anything there?

Well, I think 2 words there. One is stable. It is stable. Our team knows the assets well. They know how to produce the wells and they know where the opportunities are. And also, as mentioned earlier, the term continuous. That is a reality in our business. And so we do have continuous opportunities to just continue to make that production stable and relatively flat. So we're optimistic and we're pleased with what we've been able to do, but we're also optimistic on our ability to continue to maximize that production.

And then the second part of your question regarding the outlook and the acquisition opportunities and such. It's very active right now. A lot of people putting assets out there. I think there's a couple of different pockets to that. There's people that are distressed, and that takes a little longer, typically because a lot of those are filings, bankruptcy filings and such. Then you have the people that are just trying to raise cash for -- to pay down debt or to create liquidity. And so we're always on the speed dial of everybody who pretty much is selling. Some of those are marketed, some of them are not in terms of a full marketing process.

We are seeing a little bit of everything. We're seeing conventional, we're seeing unconventional. I think that people underestimate the unconventional opportunity because they think, well, it's not the same as the conventional portfolio. But we love the unconventional assets, and we see those as a big opportunity going forward. We've seen that the overall production on those wells, when operated properly, also is marginalized. The declines are marginalized versus what the engineers -- the engineering reports would show. We love the fact that the cost to operate our -- the majority of those on the unconventional wells are variable. So as the production rolls off, the expenses roll off with them.

And so -- and then the other thing we love about it, is it sits right -- all these assets sit right in the middle of our existing operations. So it entails very little to no expense to add when you bring production on. So we see that as being an opportunity within the basin. We also see strategic type conventional opportunities. But there's no doubt that we'll continue to monitor the environment. We -- the 2 things that I will say is number one, we will be opportunistic and we will not overpay for anything. We will not risk the balance sheet, as I've told you over and over again, just for the sake of growth. But I think there will be opportunities to grow without doing that. And so that's the way I see it right now.

Our next question today is coming from Robin Haworth from Stifel.

A couple if I may. From the wells that you acquired with EQT that aren't in production yet, I was just wondering if you could give us a time line of -- and that weren't part of your valuation. If you could just give us a time line for either completing the studies or getting those wells into first production, it would be great to see what those might be capable of.

And the second one on realizations. Realizations looked pretty good in the first half, a lot better than what I was expecting. I was wondering if you could talk about how dynamic you can be on that. So like, is it -- how much of your production can you move from one market to the next on a weekly or monthly basis in order to capture the highest realizations? I'm just thinking about how I should be modeling the average basis differential that you're going to be seeing over the next period of time and how that might be changing from the 0.3, 0.4 of $1 that I've been historically modeling.

Well, I'm going to let Brad answer the first question. But what I would say just before letting him answer is that those uncompleted -- the wells that were out of production that we bought, we definitely have a plan. Brad can give more details around it. We did push the plan over the last few months simply because gas prices just didn't really rule us enough to want to put new production on. We would have preferred to wait until prices come up. And obviously, that's happening now and so we'll put a heavier emphasis on it as we move throughout the second half of the year.

Yes, so Robin, of those wells, there's several categories that those wells fit into as it relates to bringing them back to production. Some are relatively straightforward, some involve more time and investment. For instance, the construction of a pipeline to connect to sales outlets. And those obviously take longer. And so as Rusty mentioned, we're making sure that the investment meets our return criteria. So -- but we do have opportunities here in the second half of the year to get some gas flowing and would anticipate that we'd be able to do that where we already have pipeline connections. And we're just working with pipeline companies related to the gas quality or the water content and the gas and things of that nature. So I would anticipate the second half of the year here, probably earlier in the fourth quarter, to get some gas flowing.

But what I would also mention to you, as I briefly spoke of earlier, there's existing production from those wells that we acquired from EQT that we're also getting production improvements on. And just this past week, we took a pad that was producing roughly 500 to 600 a day, and we've taken it up to 1,500 a day as of the end of last week, and we would anticipate that we could get over 2,000 for that. And so that opportunity in and of itself cost us very little. And -- but it was from the same package. So we're constantly looking to enhance the acquisition assets that we achieve. And so bringing those -- some of those wells online here in the fourth quarter, we think we'll be able to do. But it's also not stopping us from the wells that are already in production to enhance those.

On the basis of that question, and I'll let Eric chime in, but we've got multiple markets that we that we produced into. But the majority of our gas production really flows into 2 or 3 different types of bases. The big opportunity for us in the East Tennessee market, and I get lots of questions a lot about the Atlantic Coast pipeline, the one that was abandoned here recently, selfishly. I was -- it did hurt my feelings that they abandoned it because at the end of the day, it was going to produce gas into the market where we get such a good basis dip right now which is East Tennessee that it probably would have marginalized that basis dip that we get.

However, it would have been great to have that pipeline, just overall for the industry because, obviously, pipelines mean gas production going to new markets. But East Tennessee's our big opportunity. We're working on several projects as we speak to get as much gas as possible move to that market. We're not ready to tell you what those numbers are yet, but there will be a substantial pickup in the amount of gas production that moves to that market. And that's really where the biggest base diff opportunities exist for us. I would say in the interim, the basis differentials that you're using in your models are probably pretty accurate, and I would continue to use those until we give you some further updates.

Yes. And just to complement the comment that both of them made, just to say that it really is -- we focus on small victories adding up to big wins. And so -- and we move quickly. We have an expansive midstream system that gives us the opportunity to move gas to better markets. And it doesn't necessarily come with big slugs that move the needle sizably in 1 move. But as Brad gave the illustration, we saw natural gas price -- natural gas liquids price weakening. And so we said hey, we can realize more if we redirect that gas and sell it for the high BTU content elsewhere, and so we did. And that added $300,000 to the month. And we look at our pipeline all the time. It adds up to -- if you look at our portfolio today, and there's always a need to recalibrate as we acquire the different type of production. But you'll recall that I mentioned the Henry Hub price for the period averaged $1.83. Our realizations before the derivatives was $1.78. So you're really looking anywhere from, say, a $0.05 to $0.10 off of Henry Hub. It's probably a place to start because the basis differentials that Rusty spoke to are largely offset by our liquids-rich gas, the BTU factor as it's known. And so we can take a closer look and help you refine your model, but I agree with Rusty, I think you're largely going to be there based on what you've got.

The next question today is coming from Simon Scholes from First Berlin.

Yes. I've got a couple. Just on recurring admin expense. I mean, the last couple of quarters, it's been stable between $11 million and $12 million. I'm assuming you didn't make any further acquisitions in the near term. Would you expect it to stay stable around that level?

And then on Slide 16, you're reminding us that certain cost elements, production taxes, gathering and transportation and gathering and compression can be highly variable. Are there any special factors that could govern these costs over the next couple of quarters that you'd like to point out to us?

Yes, thanks, Simon, I appreciate the question. On the G&A side, I would expect that number to be stable. We obviously made some significant investments in the business as we stepped into the premium listing on the main market. Governance-related, we've deepened the bench to not only better support the organization as we now have it, I mentioned a large organization. But to position the company to continue to be very successful and to capitalize on the opportunities that we see ahead. I think that we can continue to grow without sizable changes there.

Obviously, if we did something transformative, we'd revisit that, but we could easily take down, given the investments we've made in technology, better systems, better -- and streamlined processes under those systems to do equivalent bolt-ons without any sizable change there. So very positive outlook on that. And then I appreciate your question on 16 with respect to the highly variable because it gives me opportunity to clarify that. By variable, we don't mean that the underlying rate that we're charged is variable. So that number is not going to move around on us in a way that we don't anticipate or can't manage. What we intended that to signal was, as Rusty said, as we acquire larger packages of unconventional production, the most significant piece of that cost or that lease operating expense is the transportation cost. And so as the units of production decline, so too the costs associated with it go away. And so that just allows us to maintain a very compelling and competitive cost structure because as the production declines for those assets, the costs go with them. It wasn't intended to suggest that the underlying rates are associated with those changes.

Okay. On tax, I think you said -- I mean okay, tax, I knew relatively small part of cost. But I think on tax, you said that as production, as realized unhedged prices go up, tax are likely to rise as well.

Yes. So on the tax front, 2 different types of taxes. So one is the production tax that you see as part of our cost structure, part of our lease operating expense. That is taken to the local jurisdictions in which we produce, and that is a variable tax based on commodity price. And so if prices are low, the production tax is a bit lower. If prices rebound, you'll see that price -- or the taxes go up as well, but in tandem and in relatively on the same basis.

The other tax was -- that I referred to was what they call as the marginal well tax credit, and it's a federal credit that's given for periods of time when natural gas prices are low. And it's generally, when gas prices are below, I believe it's $2.50, it could be a little bit higher than that. Obviously, we're well under that this year at $1.83. But the $70 million of tax credit that we earned or that we recognized this year were the tax credits related to last year's activity in last year's price. And so that is a tax credit the Federal Government gives in order to incent you to continue to operate and produce the wells like we own in these regions because they're the economic lifeblood of the local communities in which we operate and they don't want larger companies shutting in production and, therefore, losing those jobs and the local production taxes. So 2 different types of taxes. And if that wasn't clear, just come back at me.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you all for showing up today and listening to our first half year results. Again, you all can call in at any time and get any other questions you have answered through our Investor Relations desk. And we look forward to catching up with you guys soon. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines this time, and have a wonderful day. We thank you for your participation today.