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Edited Transcript of COG.N earnings conference call or presentation 30-Oct-20 1:30pm GMT

·36-min read

Q3 2020 Cabot Oil & Gas Corp Earnings Call Houston Oct 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Cabot Oil & Gas Corp earnings conference call or presentation Friday, October 30, 2020 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dan O. Dinges Cabot Oil & Gas Corporation - Chairman, President & CEO * Jeffrey W. Hutton Cabot Oil & Gas Corporation - SVP of Marketing * Scott C. Schroeder Cabot Oil & Gas Corporation - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Arun Jayaram JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst * Brian Arthur Singer Goldman Sachs Group, Inc., Research Division - MD & Senior Equity Research Analyst * Charles Arthur Meade Johnson Rice & Company, L.L.C., Research Division - Analyst * David Adam Deckelbaum Cowen and Company, LLC, Research Division - MD & Senior Analyst * Kashy Oladipo Harrison Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P * Leo Paul Mariani KeyBanc Capital Markets Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. Welcome to Cabot Oil and Gas Corporation's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the call over to Dan Dinges, Chairman, President and CEO. Please go ahead. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [2] -------------------------------------------------------------------------------- Thank you, Kate, and good morning. Thank you for joining us today for Cabot's Third Quarter 2020 Earnings Call. As a reminder, on this call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in yesterday's earnings release. 2020 has proven to be a challenging year on many fronts across the global market. I hope each of you and your families have remained safe and healthy through this unprecedented time. The natural gas industry specifically has had its fair share of challenges driven by the lowest NYMEX price on record in the last 25 years. However, the strategic actions we have undertaken since we first began leasing in the Marcellus Shale in 2006, which includes numerous divestitures of higher cost assets with proceeds utilized to maintain a healthy financial position, have positioned our company for continued success even in the very lows of a natural gas price cycle. While we are certainly not immune to lower natural gas prices, our low-cost structure, strong balance sheet and disciplined capital allocation strategy allow us to continue to generate corporate returns and free cash flow even in this current price environment. The good news is that we already experiencing significant tailwinds for the natural gas supply and demand outlook, driven by large declines in natural gas supplies across the U.S., coupled with an improving demand outlook heading into the winter heating season. As a result, since our early March, we have seen over a 35% increase in the NYMEX futures for 2022 to the current levels that are above $3, which would result in a material expansion of net income, free cash flow and return on capital employed next year. While we're extremely proud of our team's ability to successfully manage our operations during the ongoing pandemic while generating positive free cash flow in this low price environment, we believe better days lie ahead for Cabot in the 2021 and beyond. For the third quarter, specifically, we generated adjusted net income of $37.3 million or $0.09 per share and delivered a free cash flow breakeven program, despite a 26% decline in realized natural gas prices relative to the prior year comparable period. Our production for the quarter was approximately 2.4 Bcf per day, which was inside our guidance range despite price curtailment during the last 13 days of the quarter that were not included in our original guidance. Our unit cost for the quarter improved relative to the prior year period, and we continue to look for opportunities to improve on our peer-leading cost structure even in a flat price -- flat production environment. On the operational front, in yesterday's release, we provided the initial results of our 5 Upper Marcellus tests this year, which have been producing for an average of 140 days. Based on the curve fit to date, these wells are tracking above the average EUR of 2.7 Bcf per 1,000 lateral feet that we reported at year-end for our 2018 and 2019 Upper Marcellus wells. We believe these results continue to demonstrate the productivity of this distinct economic interval across our 173,000 net acre position in the core of the dry gas window in Northeast PA. As a reminder, we plan to allocate a modest amount of capital to the Upper Marcellus annually as we continue to refine our well design and lateral placement across this interval with the intent of moving to full development of our Upper Marcellus inventory at the tail end of this decade. We also continue to evaluate the optimal lateral length across our asset at -- and at this point, we expect to develop the Upper Marcellus at an average lateral length greater than 10,000 feet, which would provide significant well cost savings, further improving our economics of our Upper Marcellus inventory. Despite the questions we continue to receive on this high-quality reservoir, we have over 60 Upper Marcellus wells that, on average, have been producing for over 5 years, which continue to reinforce our confidence in the opportunity that awaits us when we move to the full development of this section. In yesterday's press release, we also reaffirmed our fourth quarter production guidance range, which includes the impact of previously announced price-related curtailments as well as our full year production and capital guidance. While our current year expectation for differentials in 2020 is slightly wider than originally anticipated, which is primarily due to wider local basis in September and October, resulting from weaker shoulder season demand and the east storage levels nearing capacity, however, we are still on track to generate positive free cash flow and far exceed our return of capital target of at least 50% of our free cash flow for the fifth consecutive year. Despite reducing absolute debt earlier this year through the repayment of our maturity in July, we have seen a moderate increase in our leverage ratio due to lower EBITDAX resulting from the low price environment. However, we still ended the quarter with a healthy debt-to-EBITDAX ratio of 1.5x and expect a significant deleveraging in 2021 through a combination of higher EBITDAX resulting from improved price realizations and lower absolute debt levels as we plan to utilize a portion of our expected free cash flow next year to retire our 2021 debt maturities. We also initiated a preliminary guidance for 2021. This maintenance capital program is expected to hold production levels roughly flat year-over-year at 2.35 Bcf per day from a capital program of $530 million to $540 million, representing a 7% reduction in capital spending year-over-year. The reduction in capital is driven by a combination of operating efficiency gains, resulting from the utilization of leading-edge technology across our operations and lower anticipated service costs. Our program for next year would generally -- would generate a sizable expansion in free cash flow year-over-year, allowing us to not only cover our base dividend and retire $188 million of maturing debt, but to also opportunistically return incremental levels of capital to our shareholders. We remain committed to returning a minimum of 50% of our free cash flow to shareholders annually, which we have far exceeded over the last 5 years and will continue to evaluate the prioritization of incremental capital return between growing the base dividend, special/variable dividends and opportunistic share repurchases. It is our belief that depending on where we sit in the commodity price cycle, certain capital allocation options offer more value creation than others. And that maintaining financial flexibility is paramount, especially in a cyclical industry like ours. We are often asked what price level we would consider investing in growth again. While we have never believed in growth for the sake of growth, we do believe there are certain price environments that warrant disciplined investments in the expansion of operating cash flow, especially as the lowest cost producer. However, with the current natural gas futures in 2022 and beyond in backwardation, and well below the $3-plus environment we are anticipating in 2021, we do not believe this is the appropriate time to consider growing our production base. We do have new takeaway capacity coming on the Leidy South Expansion Project, for which a partial path in service was recently requested for as early as this December. This project will provide us additional access to premium markets in the mid-Atlantic. So if natural gas prices continue to rise in the out years, we have new outlets to support incremental value-enhancing growth. However, as we previously stated, our capital allocation priorities for next year are focused on maintaining our current production level, funding our current dividend, retiring our 2021 debt maturities and opportunistically returning incremental free cash flow to shareholders. In order to ensure that we are able to deliver on these strategic objectives for 2021, we have begun layering in hedges by opportunistically locking in downside protection while maintaining some level of market price exposure if natural gas prices continue to move higher. Specifically, we have primarily targeted costless collars approach with a weighted average floor that generates a compelling return on capital employed and a level of free cash flow, while still providing the potential for upside to the ceiling if prices remain higher. Currently, we have approximately 23% of our volumes hedged through financial contracts and an additional 16% of our volumes protected through floors in our physical sales next year. We will continue to use market rallies to opportunistically add to our hedge position and improve on our current floors and ceilings. Lastly, I'm pleased to announce that yesterday, we posted our inaugural SASB sustainability report to our website. At Cabot, we strive not only to be a leading independent producer of natural gas, but to also be a leader in safe, responsible operations and to minimize the impact of our operations on our employees, our community and the environment. Our success is developing a -- our success in developing abundant unconventional supplies of natural gas helps to support the goal of reducing total greenhouse gas emissions while achieving energy independence in the U.S. Cabot's legacy of corporate responsibility places high-value in operating with respect and care for people, property and the environment. We believe this commitment, along with our operational success, will continue to create strong value for our shareholders and other stakeholders in our communities. We are proud to report that our greenhouse gas emissions intensity for 2019 was 1.3 tons of carbon... -------------------------------------------------------------------------------- Scott C. Schroeder, Cabot Oil & Gas Corporation - Executive VP & CFO [3] -------------------------------------------------------------------------------- 3.1. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [4] -------------------------------------------------------------------------------- Oh, Scott just corrected me, 3.1 tons of CO2 equivalent per 1,000 barrels of oil equivalent. This -- significantly lower than the production weighted average intensity of 15 tons of CO2 equivalent per 1,000 barrels of oil equivalent for U.S. onshore assets, as reported by Enverus based on the 2018 publicly available data. We currently evaluate new opportunities and continuously do this for emissions reductions to ensure that Cabot is among the most efficient and lowest emitting domestic producers. We also believe our elimination of flaring in the Marcellus, which began in 2014, and our strong performance in water management, including recycled 100% of our water recovered in our Marcellus drilling, completion and production operations, which began in 2011, will continue to make us financially and environmentally superior as pressures for lower carbon and water conserving economies -- economics intensify. Hope you will each take a good look at our SASB report. We're extremely proud of how we measure up against peers and the desires of the investment community on all the metrics included in our report. In summary, Cabot's track record of disciplined capital allocation focused on generating improving corporate returns and increasing return of capital to shareholders, which is underpinned by strong free cash flow generation and an ironclad balance sheet as well as our continued focus on corporate responsibility and demonstrates our history of safe, responsible operations that support the goal of reducing total greenhouse emissions, does position us favorably, not only today, but for decades to come as it is our belief that natural gas will continue to play a significant role in the domestic energy supply going forward. And with that, Kate, I will begin to answer any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Leo Mariani from KeyBanc. -------------------------------------------------------------------------------- Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- Just a quick question here on the gas markets. To your point, we've seen NYMEX futures prices strengthened materially over the last month, which is certainly quite encouraging. I guess at the same time, we've seen quite a bit of weakness in physical markets in Appalachia. And I guess a lot of the other kind of key gas-producing regions around the U.S. So it definitely looks like there might be bit of a disconnect in terms of what we're kind of seeing in futures versus physical. Just kind of wanted to get you all's opinion in terms of what you think might be driving some of that? And do you think those prices need to start to converge as we get deeper into the winter here? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Yes. Thanks, Leo. And yes, I'll turn this to Jeff in a second here, but we have seen the shoulder months, September and October, being difficult. Typically difficult at that time of year, but the storage levels exasperated that perception. For a while, But we did see on week-over-week, injections in a comparative sense be less than -- certainly less than last year, and majority of them less than the 5-year average. And I think that is moving into now -- to your point about convergence, I think that's moving into now the market cconverging rapidly as we've seen towards the latter part of October, an increase in the physical space. I'll let Jeff make a comment also. -------------------------------------------------------------------------------- Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [4] -------------------------------------------------------------------------------- Yes. Dan hit the nail on the head with the storage number primarily in the East. The East typically builds up, of course, their storage levels. But this year, they were built quite early. And so with some really mild shoulder months, we did see our basis differentials widen out a bit in contrast to what NYMEX has done. And I think when you look at NYMEX and what's driving it, you see an exit rate on U.S. dry gas production, close to 5 Bcf a day, less than the previous year. Obviously, that's helping NYMEX. You also see the capital discipline in the marketplace today, particularly among the gas guys. That helps NYMEX, of course. So we're encouraged in a normal winter, and we're prepared for that to -- for these basis differentials to return to somewhat more normal level. -------------------------------------------------------------------------------- Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [5] -------------------------------------------------------------------------------- Okay. And just to follow-up on that. Clearly, to your point, we're starting to see physical prices improve a little bit. Would you guys expect that those physical prices continue to rise this winter? But is there also a risk that maybe we see some downward pressure on those NYMEX prices for kind of prices to meet a little bit more in the middle? -------------------------------------------------------------------------------- Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [6] -------------------------------------------------------------------------------- Well, again, I think we're early into the winter weather season, and it's encouraging. We had snow today in Boston. That's always a good thing in October. But it's going to be somewhat of a weather play. We've worked really hard to insulate ourselves from just being a weather play. We've got a lot of physical fixed-price contracts in place with high floors. We have, as Dan mentioned, started our hedging program. But NYMEX is a result of demand that's declined and demand as a function of weather in a lot of cases. But we've -- again, we're prepared for that. And I think the increase in NYMEX over the last 5 months and including a big increase in 2022 over the last 5 months is a real encouraging factor. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [7] -------------------------------------------------------------------------------- I'll also add that where the prices are right now and you look at the -- just the fundamentals that are out in front of us that you do have an undersupplied market going into this winter. With an undersupplied market, if you do have a colder winter than expected, it's going to certainly move the price up. But I think also equally as important, if you have a normal winter or even a warmer winter with the undersupplied market, I do think there is a higher floor that's been placed under the market based on these fundamentals. And particularly, where we have seen a very strong rebound in the LNG going from back in, what, March, April, 3 B's a day export to recently 9 and pushing 10 Bcf a day export in LNG in the last couple of days. -------------------------------------------------------------------------------- Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [8] -------------------------------------------------------------------------------- Very helpful color for sure, guys. I was hoping you could maybe just touch base on the returns of capital. Clearly, to your point, Dan, there should be significant excess free cash flow in 2021. You kind of talked about a number of different options, variable dividends, special dividend, buybacks. Clearly, to your point, clearly, market conditions at the time in terms of where the stock is and where gas is will determine a lot of that. But can you maybe provide a little bit more color in terms of how you kind of think about those different options for next year? And kind of what sort of the key things you're looking for to choose one versus the other? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [9] -------------------------------------------------------------------------------- Well, as I mentioned, our first commitment is to our stated dividend. We also are going to take care of our $188 million maturity, that's important. You look at our history, and in the last 5 years, we have returned a significant level of capital to our shareholders, over $1 billion. We've had a 5x. We have increased our dividend, and we have also brought back in about 14% of our outstanding shares by repurchases. But to prioritization, as I mentioned, dividend, maturities, but it has been our intent to deliver a minimum of 50% of our free cash flow back to shareholders. We'll continue to do that. We referenced -- I referenced earlier, a special dividend consideration, variable dividend proposition that some have outlined and made it a little bit more formulaic. We have not gotten to that stage yet. But if you look at our history as an example of our -- what this management group considers and the Board, we have given back a lot of our free cash flow over and above the 50%. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question is from Charles Meade from Johnson Rice. -------------------------------------------------------------------------------- Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [11] -------------------------------------------------------------------------------- Dan, we -- the outlook for price is really, really interesting. Of course, we've got some rosy possibilities out there, but we'll have to wait and see. What I'm curious about is what levers you may have or may have set aside on your '21 plan? And as I look at your capital guide, with just a $10 million window, that looks like to me that the message is even if we do see a higher price spike, you guys aren't going to change your plan at all. And I guess my question is, is that the right read to take from your CapEx plan? And the follow-up being, are there other levers you could pull perhaps something like increased compression if you happen to see really strong spot prices for a couple of months? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [12] -------------------------------------------------------------------------------- It's a good question, and we referenced in my comments that we're not going to grow for the sake of growth. And that there is a point that capital efficiency would make sense to allocate. But really, the way we see the market right now, Charles, and even at a slightly higher price point than where it is right now, we think that the capital program that we've laid out in the range of $530 million to $540 million is the appropriate program. We think a maintenance program is appropriate at this stage. You have to look at -- right now, the early winter season, you have to look at there is still a couple of hundred Bcf over comparison between this year's storage levels and the 5-year average and last year's storage levels. We are moving into an undersupplied market. We have uncertainty with winter out in front of us. So I think that from our perspective, and looking at what's prudent for the health of Cabot and this industry that we are better served to stick with a maintenance capital program, and that's what we're going to do. -------------------------------------------------------------------------------- Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [13] -------------------------------------------------------------------------------- Got it. Okay. And then the follow-up on the Upper Marcellus. Just to dig in and see if there's any other maybe detail you guys would give. It's you talked -- or you talked about in your press release and you spoke about it. Could you clarify, is -- are all -- are each of those wells individually above that 2.7 type curve? And -- or is it the average of those being above the type curve? And what are you learning with what you're seeing in the variation between those Upper Marcellus wells? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Yes. We had -- those wells we referenced are wells drilled off 3 different pads and distinctly different areas of the field. And obviously, with an average of greater than 2.7, there's variability between the wells. And what we're seeing, in my comments I made, and what we're trying to do with our capital allocation right now with complete confidence in the distinctive nature of the zone, we have a thick per cell barrier between the upper and the lower. We gather data on any effects of offset wells that we've drilled. And each of these wells were drilled near previous drilled and producing Lower Marcellus wells. And we saw no effects on the Lower Marcellus wells, again, clear evidence of the distinct nature of the Upper Marcellus. But we are learning from our frac recipes and the landing position that we have been looking at in various different sections and a tweak of a frac recipe on various different landing sections to determine do we see differences in the results. So it's an early game, and we're just gathering data like every operator has done when they go into a new shale play. The Upper is a new shale play with the 60 or so wells that we've drilled in it. We're learning continuously as we go. We're not carrying the -- we learned from our Lower Marcellus and what we do there. But we also know the Upper is a distinctive reservoir to the Lower. So we're going to be well educated as we roll into our full development. At the end of this decade, we'll be well educated and ready to roll forward with greater than 10,000 foot laterals and an enhanced return profile for our Upper Marcellus wells. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question is from Arun Jayaram from JPMorgan. -------------------------------------------------------------------------------- Arun Jayaram, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [16] -------------------------------------------------------------------------------- Arun Jayaram from JPMorgan. Dan, you've talked about the backwardation in the curve, currently not incentivizing you to grow. And it's clear that generating free cash flow is your main priority. But the question is, at what price level would you need to see longer-term in terms of the strip for you to pivot to, call it, some moderate level of growth? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [17] -------------------------------------------------------------------------------- Yes. Higher than where it is. We have -- you look at the backwardation and reference to 2022, it is -- has increased. Jeff referenced, I think, [2 75] plus or minus is where 2022 is right now. The current strip is north of $3 for '21. We are going to be able to generate -- with the market, what we see today in front of us, we've layered in some good floors to protect a very good program for 2021. That's going to deliver significant free cash flow greater than we've seen this year. Full coverage, we feel on our dividend and debt maturities and also incremental free cash flow above that. We think we're going to be able to see that. We're looking, again, with anticipation on the winter and what it does to the markets. We have for example, gas available for the non-New York market up there in New York. That non-New York market up there last year, as a reminder, averaged about as a $1.70 premium market to NYMEX in the first quarter of '19. That also just as a footnote on what that does to an annualized differential out there. And certainly, compresses the differential that we see in the in-basin area. So to answer you specifically, I'm just going to focus on and my preference is to focus on right now, what I think is better for Cabot Oil & Gas is better to focus on our commitment to a maintenance capital program at this time. We think that is important for the industry, and we think that our commitment and conviction to that at this point in time is the prudent position to take. -------------------------------------------------------------------------------- Arun Jayaram, JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst [18] -------------------------------------------------------------------------------- Great. And Dan, just my follow-up, you got the Leidy expansion coming on next year. Can you talk about any views on how this could impact basis differential and transport costs in '21 and beyond? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [19] -------------------------------------------------------------------------------- Yes, it's a good question, and I appreciate it. I'm going to hand the baton to Jeff. -------------------------------------------------------------------------------- Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [20] -------------------------------------------------------------------------------- Yes, Leidy South is a [reinforce] project. Not only for Cabot, for others in the basin. And essentially, in the Northeast area of the country, this is greater than 0.5 Bcf a day, it's [580,000] a day of new takeaway, super majority of that gas will be existing gas. It's coming off the Leidy system and maybe a little bit off of Tennessee, for example. For Cabot's position, [250,000] a day down to the Mid-Atlantic marketplace is -- will improve price realizations. There's no doubt about that. We're also in a unique position that the Atlantic Coast pipeline was canceled. We felt like there was a little bit of gas supply from that project that was going to compete with us. And since that's no longer there, that's another good indicator for capital realizations. Overall, though, I think the basis differentials in Northeast Pennsylvania for all the pipes will improve significantly, just like the start-up of Atlantic Sunrise project. So we're encouraged that there is, in fact, a good possibility that there will be some early service available to the shippers on that project. We're hopeful that, that could be as early as this winter. More to come on that, but it's definitely an improvement to get another major takeaway project in place. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is from Brian Singer from Goldman Sachs. -------------------------------------------------------------------------------- Brian Arthur Singer, Goldman Sachs Group, Inc., Research Division - MD & Senior Equity Research Analyst [22] -------------------------------------------------------------------------------- Wanted to follow-up on Arun's first question. You had talked, I think, in your opening comments about the forward curve for '22 being below the $3-plus that you're kind of seeing for '21. And I wondered if you could just talk philosophically on how you think about what that price point is where you would move away from maintenance mode? Is it based on where peer supply cost is? Do you -- is it based on a higher cost of capital relative to what would have been used in the past to try to drive supply cost? Or is there a clawback in return of capital to shareholders above and beyond your debt paydown target given that this year was a pause for understandable reasons. Just some philosophy on how you're -- how you would make that decision. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [23] -------------------------------------------------------------------------------- Well, I really look at the -- I'll start with the macro environment, Brian. The macro environment has been oversupplied. And that oversupply has made it extremely difficult and challenging for our industry. You can look at the balance sheets across the space, both natural gas and oil producers' balance sheets has a level of stress that is going to be sticky. And when you look at the ability to delever in a market that is such a challenged and maybe oversupplied market in light of this pandemic, it is not in our best interest from a capital management standpoint to stress the -- our balance sheet and we think at this period of time, with the prices we see out there, that if we are going to see higher pricing, a return of that capital to our shareholders in the form of a dividend, in the form of special or variable dividend also, again, taking care of our $188 million debt maturity, is the most prudent use of capital. If there is a disconnect in valuation -- to your point and part of your question, if there is a disconnect in valuation about what we think is a value of Cabot stock, it is not as high a priority as a dividend to us. But we have bought back shares in the past, and that's certainly not off the table in the future. -------------------------------------------------------------------------------- Brian Arthur Singer, Goldman Sachs Group, Inc., Research Division - MD & Senior Equity Research Analyst [24] -------------------------------------------------------------------------------- Got it. And then my follow-up is, can you provide any update on litigation with the state of Pennsylvania? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [25] -------------------------------------------------------------------------------- Yes. To comment on that is risky. And I can say this that we have just ongoing discussions on the litigation. And we felt like that there is progress being made. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Our next question is from David Deckelbaum from Cowen. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [27] -------------------------------------------------------------------------------- Yes. Can you hear me, Dave? -------------------------------------------------------------------------------- David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [28] -------------------------------------------------------------------------------- Yes. Can you hear me? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [29] -------------------------------------------------------------------------------- Yes. Now I can, yes. -------------------------------------------------------------------------------- David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [30] -------------------------------------------------------------------------------- Sorry about that. Dan, [just a lot about] your philosophy going forward. I guess I have just 2 questions. You talked about the '22 curve, the backwardation there. I guess, longer term of ranking beyond '22, if we're in the range where you're getting somewhere, including the betas in the realm of [2 40, 2 50] of realized gas, does -- if we're thinking 2023 and beyond, is Cabot a product-oriented company in addition to income? Or do you still think that this is to compensate contracts for a very long-term maintenance plan with the upside in the commodity just to return in the form of free cash? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [31] -------------------------------------------------------------------------------- Yes. And you are breaking up a little bit, David, but I think it indicated that at a [2 40, 2 50] realized, how do we reflect -- and beyond 2022, how do we reflect on growth versus maintenance. Don't take my statements today as we are going to maintain in a maintenance program forever. We are -- we understand the value of growth. We understand what growth can do for us. And at the right opportunity. And when we see the right macro outlay out in front of us. And if we can feel confident about the macro environment, that growth can be and will be in our future. But right now, today, we are laser-focused on the maintenance program, but I would be surprised if in the future, as the macro market continues to improve that we don't consider growth. -------------------------------------------------------------------------------- David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [32] -------------------------------------------------------------------------------- I appreciate that. And my follow-up to that base coming through clearly is I guess the Appalachian market now being very seasonally driven, weather is obviously a very determining factor. This past year, there were a lot of (inaudible) improvement and storage and it's been filling up faster than expected. This year, you have shown some production in September and October. As you go into next year, are you looking at optimizing around free cash, is there any consideration to sort of weighting your completions to be more seasonally advantaged dying away from shoulder periods where you would have even extremeness] in your (inaudible)? Or is it something that's (inaudible) with keeping (inaudible) steady throughout the year and just adjusting things at the well if need be? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [33] -------------------------------------------------------------------------------- Yes. We have a very low capital intensity program. We only have and had 2 rigs, 3 rigs running for 2020. We've had 2 frac crews, now 1 frac crew, working up there. And to measure the cadence and to be able to time it just exactly right is difficult because we don't have many pad sites. And if you look at our gathering system, even though we have a great header system and we have flexibility within the gathering system, we do manage when and the timing we bring on the gas through the field in order to have the most efficiency of newly produced gas having the maximum positive effect without increasing any area of our header system pressures to where it might reduce older wells that are on the system. So it's a lot of moving parts. We do take that in consideration, what you're asking about, David. We do take that in consideration. And we have also brought wells on at a lower cadence and in anticipation of a better price point looking ahead if that opportunity is available to us. And we'll continue to do that in the future. -------------------------------------------------------------------------------- David Adam Deckelbaum, Cowen and Company, LLC, Research Division - MD & Senior Analyst [34] -------------------------------------------------------------------------------- I appreciate that. If I could just ask one more quick one. One of your peers recently paid PDP [17] for an asset, primarily looking at it as a source of sort of inexpensive free cash. Considering that, that's something that you're squarely focused on now on returning capital, is Cabot out there in the market looking at, in other words, just cheap sources of free cash in the basin that you'd be able to potentially optimize and use some of your currency? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [35] -------------------------------------------------------------------------------- We're always interested in a value proposition. The idea of free cash and one of the luxuries that Cabot does have is we generate free cash. We have extremely strong balance sheet. And we feel good about our organic operation being able to generate free cash. The value proposition of buying assets on a PDP basis, which I think any asset today, if it moves, it's probably going to be on a PDP basis. If it fits in our wheelhouse, we'd consider it. But there's -- and I'll add that every deal that we have -- that we're aware of anywhere out there, Cabot's internal team does a high level scrub on it. And we do also an internal evaluation on can we have incremental accretive value added to Cabot shareholders on every deal out there? Every single deal that we know about out there. David, we do that. So to your point, would we do it on basin asset? Sure. We look at it because we do that as part of our DNA. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question is from Kashy Harrison from Simmons Energy. -------------------------------------------------------------------------------- Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [37] -------------------------------------------------------------------------------- So just one for me. Are there any other large takeaway projects in Appalachia other than Leidy South, MVP and then the MVP expansion that have a reasonable potential of getting through the finish line. And if not, does that mean that for all intents and purposes, Appalachian production really only has maybe another 10-ish percent growth, maybe about another 3-ish Bcf of growth -- Bcf a day of growth moving forward? -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [38] -------------------------------------------------------------------------------- Yes. Kashy, so I appreciate the question. And I'll make a color statement, then pass it to Jeff. But the Leidy South is the near-term project. There's other projects on the book that Jeff can cover. But in addition, we also have a business development group that is in search of in-basin demand projects that would require incremental infrastructure, but it would not be in the form of the long haul pipes. Those conversations have been had in the past. Certainly, the pandemic has slowed down some conversations and getting together just by the sheer nature of what's going on in a lot of places. But it is our expectation that we will see in Northeast PA incremental in-basin demand projects that would create demand off of our tailgate of our gathering system. Similar to, though we don't -- I'm not including another power plant in the -- in my expectation. But we have the Lackawanna and Moxie power plants that are classic examples of in-basin demand projects that don't require long-haul pipe. I'll let Jeff talk about some of the ideas in the future. -------------------------------------------------------------------------------- Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [39] -------------------------------------------------------------------------------- Kashy, just to pick up on your specifics about the entire Appalachian, Marcellus basin in terms of takeaway and the basin demand. Northeast PA, as Dan alluded to, is a focal point for us on in-basin. We've actually taken advantage of this COVID situation and surprisingly, have been able to participate and muster up with a lot of trade associations. We've been doing a lot of webcast with manufacturers associations and industrial groups that are -- have been very beneficial, and that was kind of a nuance in this day and age for us. We are participating in a lot of site selection, site selections include everything from power, water, rail, highway, workforce, permitting, tax, et cetera. So not only are we hard and fast in that area, but other producers throughout the Marcellus. So it's hard to judge what a growth rate could be in our Marcellus when you have in-basin demand projects throughout West Virginia, PA and Southwest PA, Ohio and just, for example, West Virginia is getting a couple of gas-fired power plants next year that are replacing coal. So it's growth all over on the in-basin side, throughout the Marcellus. In terms of pipeline, if you look at Leidy South, Mountain Valley to get 2 Bcf per day there. We are firm believers that PennEast is going to be built. Their Phase I in Pennsylvania will be -- should receive FERC certificates any day now. If it gets here, quickly, we'll see it in service late next year. If it's delayed another couple of months, that will add to the construction time there. So PennEast is important. One of their connecting pipes was recently approved for construction, Adelphia. That's been in the news. So we have a new delivery point not only to the proposed PennEast delivery points on Colombia and Texas Eastern, Philadelphia will serve new markets in the Philadelphia area. So I'm a firm believer, there's going to be a number of niche projects going forward to to meet the needs of the producer community throughout the Marcellus. And so I hesitate to confirm or deny of a particular growth rate for all of Marcellus, but there's a lot of stuff going on, and it's actually pretty exciting. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Dan Dinges from -- for closing remarks. -------------------------------------------------------------------------------- Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [41] -------------------------------------------------------------------------------- Thank you, Kate, and I appreciate everybody's good questions and attention to Cabot business. 2020, as we mentioned, was an extremely difficult year on a commodity price point. I think we illustrated that even in this lowest price point in 25 years that we can still deliver free cash flow and maintain a great balance sheet and our operation. This is -- it's been a while since we've been able to look ahead and anticipate as optimistically as we are, the forward strip. I think the [Street] also is looking at it optimistically with the number of questions that we received today on growth. But we feel great about the position. We feel like the challenge of the commodity is going to have, maybe going forward, a different floor underneath it. I think, which will also reinforce Cabot's ability in a cyclical market to be able to still deliver what we've been able to deliver for the last 5 years. And that's a free cash flow, strong balance sheet and return of capital to our shareholders. So with that, I, again, appreciate it. Look forward to our year-end '20 call in February, and stay safe through this difficult time. Thank you very much. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.