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Edited Transcript of COG earnings conference call or presentation 26-Apr-19 1:30pm GMT

Q1 2019 Cabot Oil & Gas Corp Earnings Call

Houston Apr 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Cabot Oil & Gas Corp earnings conference call or presentation Friday, April 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* 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 - Senior Analyst

* Holly Meredith Barrett Stewart

Scotia Howard Weil, Research Division - Analyst

* Jeffrey Leon Campbell

Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services

* 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

* Michael Anthony Hall

Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst

* Michael Dugan Kelly

Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research

* Yevgeniya E. Trotsenko

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Cabot Oil & Gas Corporation First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO and President. Please go ahead, sir.

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [2]

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Thank you, Rocco, and good morning to all. Thank you for joining us today for Cabot's First Quarter of 2019 Earnings Call.

With me are several members of the executive team.

I would first like to remind everyone that on this morning's call we will make forward-looking statements based on our current expectations.

Additionally, some of our comments with reference non-GAAP financial measures, forward-looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures are provided in this morning's earnings release.

Cabot's shareholders have enjoyed a solid start to 2019. During the first quarter, we delivered record levels of operating cash flow, free cash flow, adjusted net income and production underpinned by the continued success from our operations in the Marcellus and our unwavering commitment to disciplined capital allocation and cost control. The first quarter net income was $263 million or $0.62 per share and adjusted net income, excluding selected items, was $3 million -- $308 million or $0.73 per share. This represents a 161% increase in adjusted earnings per share relative to the prior year comparable quarter.

Free cash flow for the first quarter was $308 million, which was approximately 3.5x the amount from the prior year comparable quarter and greater than our free cash flow generated for the full year in 2018.

For the trail -- trailing 12 months, we generated a return on average capital employed of 20.4% compared to 8.3% for the trailing 12 months as of the end of the prior comparable quarter, representing an increase of over 1,200 basis points.

This ROCE of over 20% exceeds the current ROCE for the S&P 500, highlighting Cabot's competitive positioning relative to the broader equity markets.

Our success for the quarter was driven by higher production levels, improved realized prices and lower operating expenses.

Production for the quarter of 2.28 billion cubic foot per day was above the high-end of our guidance range and represented an increase of 21% relative to the prior year comparable quarter.

Natural gas price realizations were $3.35 per Mcf, an increase of 37% when compared to the first quarter of 2018.

Our price realizations, before hedges, were $0.06 below NYMEX, which was our best corporate-wide differential since the second quarter of 2013.

Operating expenses decreased to $1.48 per Mcf, a 6% improvement relative to the prior year comparable quarter, primarily driven by lower direct operating expenses, DD&A and interest expense.

Given our strong free cash flow generation during the quarter, we ended the period with over $300 million of cash on the balance sheet and a net debt to EBITDAX ratio of 0.6x, highlighting significant financial flexibility on continued return of capital to shareholders throughout the year.

On the return of capital front, we announced a 29% increase in our dividend to $0.36 per share on an annualized basis, representing a 1.4% yield.

This is our fourth dividend increase in the last 24 months. We expect to continue to increase our dividend methodically with an intent to grow our dividend over time to a yield that is competitive with the broader market.

Our free cash flow generation over the coming years will certainly be able to support this dividend growth, even under significantly lower natural gas assumptions, should the lower prices occur.

We remain fully committed to returning a minimum of 50% of our free cash flow to shareholders this year through dividends and opportunistic share repurchases. Given it is still early in the calendar year and we have been in blackout period for the majority of the first 4 months of the year, we have not executed on any material share repurchases year-to-date. However, we fully expect to continue to reduce our shares outstanding throughout the year and have significant financial flexibility to be much more active on that front, especially, if we see a continued weakening in natural gas prices that have negatively impacted our share price.

Moving on to our operations for the quarter. Our Marcellus production increased 25% compared to the prior year comparable quarter. During the quarter, we placed 13 wells on production, all of which were in March, including 7 of the 13 wells that were turned in line the last week of the month.

We expect to place an additional 18 wells on production during the second quarter, resulting in a production guidance range for the quarter of 2.3 to 2.35 Bcf per day or a 2% sequential increase relative to the first quarter at the midpoint of our guidance range.

On the pricing front, we have experienced some weakness in the natural gas forward curve as weather-related demand has dissipated in April, which is expected during the spring shoulder season.

However, we believe there may be upside to the current price levels driven by weather-related demand this summer that would also coincide with the potential increases in exports to Mexico and continued strength in the demand for feed gas from LNG export facilities.

Lastly, on the production front, we are expecting a slowing of growth in the Northeast and Haynesville, which we should be supportive for prices from a supply standpoint.

The current strip, including actual NYMEX settlement through April, implies a $2.75 average price for the year, which is directly in line with our budgeted price.

Based on these prices, we expect to generate over $50 million of hedging revenue for the last 3 quarters of the year through a combination of hedges and fixed-price deals. We have approximately 46% of our volumes locked in from second quarter to fourth quarter, providing some mitigation of potential downside price risk.

For the full year, we have reaffirmed our 2019 capital budget of $800 million and our production growth guidance of 20% or 27% on a debt adjusted per share basis. At our $2.75 NYMEX budget price for the year, we now expect to deliver adjusted earnings per share growth of 45% to 55%; return on capital employed of 22% to 23%; and free cash flow of $600 million to $650 million, implying a 6% free cash flow yield at the midpoint of the range.

In closing, I'm proud to report one of the best quarters in Cabot's history, which is a direct result of continued operational excellence in the field, which has driven improved capital efficiency year after year, a marketing strategy that has allowed us to access new markets and significantly improve our differentials without increasing or gathering in transportation costs. A continued commitment to cost controls including divesting higher-cost properties and maintaining low overhead cost and interest expense, the latter of which is supported by one of the strongest balance sheets in the industry. And lastly, as I've stated many times before, we truly feel it's paramount to our entire strategic plan, disciplined capital allocation focused on delivering strong returns on and of capital and a competitive growth in the per share metrics. Rocco, with that, more than happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Leo Mariani of KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [2]

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Just a quick question on your second quarter production growth, looks like you're bringing on more wells in 2Q versus 1Q. Additionally a lot of the 1Q wells kind of came on late in the quarter. I guess, given that I would've thought maybe the growth would be a little bit higher in 2Q. Are you seeing a lot of those 2Q well tie-ins also come on late? Just any color you have around that would be helpful.

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [3]

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Well, we'll have a number of those wells that are scheduled for May. And that's kind of the middle May, so that's pushed out towards the latter part of the quarter. The -- as we bring on these wells, and we bring them on systematically, we don't bring on flush production out of the -- as we unload the wells. So even though we bring them in, say, the middle of the quarter or the latter part of the quarter, we'll still bring them on, and we'll see the majority of that increase probably towards the third quarter.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [4]

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Okay. Very helpful color for sure. Any further update in terms of the Upper Marcellus well performance now that you've had a couple of more months to kind of view those wells?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [5]

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No, it'd be the -- it'd be a similar comment that I've made previously. We have not seen anything to deter our expectations that the production curve -- the decline curve if you will, would be above what we have out there currently as our 2.9 EUR for the Upper Marcellus, that is holding true with the early time production curve. And quite frankly, we do expect that. But as prudency would necessitate, we're going to get more production before we make a firm statement on that, but we're pleased with what we're seeing, and we're continuing to drill representative wells in that section throughout this year.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [6]

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All right, very helpful. I guess just lastly on your stock buyback, obviously a little bit less robust this quarter, it sounds like just on your comments, it was really just due to the blackouts that you guys had and some other restrictions there. Clearly more of a focus on maybe kind of ramping the dividend, I guess to kind of get to that S&P competitive yield that you're sort of talking about. Do you think that's something that can kind of happen by the end of the year? Is that kind of a realistic expectation when you talked about some of the measured dividend growth?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [7]

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Yes. You know we look at it in whole, when you think about our buybacks, we had the first quarter and coming in at the first quarter as we're all aware had strong pricing in December and into the early part of the first quarter, a lot of noise. You had some early warming in the -- and coming into the shoulder month and also during the blackout period. We thought it was prudent to just let all that settle in. We were focused on the dividend increase. We had a discussion with our Board that this is directionally where we want to go. So felt comfortable with our position on buybacks for the first quarter and laying out this dividend increase. And as we go through the year, we'll continue to have Board discussions on how we want to allocate our capital in the form of dividend increases and buybacks, but our comment and our objective of giving back a minimum 50% of our free cash flow is, I feel, certainly is going to occur before year-end.

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Operator [8]

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And our next question today comes from Mike Kelly of Seaport Global.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [9]

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Dan, industry consolidation has obviously been the hot topic in the space right now, and this has been a lead question. But if I look at Cabot, you guys are really kind of a 1 commodity -- really just a 1-County levered operator. And I'd love your thoughts on adding diversification to the portfolio, and just kind of get your general take on what Cabot's role, if any, is likely to be in kind of a period of increased consolidation?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [10]

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Yes, thanks, Mike. It's going to be -- I think you'll continue to hear a lot of the chatter and expectations on the M&A side. When we look at our asset, and where -- how we're located, to your point of a single commodity, single basin, single regulator environment, it's 2-edged sword. We're there, but we're there with the, what I think is, probably the best natural gas assets in North America. I think our numbers and financials do reflect that.

So looking at what we can deliver with just those assets, manage the risk profile of it being single commodity or same jurisdiction. We're comfortable with that, we're comfortable with how we've been able to manage it, and we're comfortable with working through both the regulatory environment and the commodity price expectations that we can still deliver financial results. And when you look at long-term and assess from a Board level, strategic level, Cabot has always made decisions that are, I think, beneficial to shareholders to deliver the maximum value. And any strategic decision we would make would also take that in consideration. If it's good for the shareholder, my job 1, 2 and 3 is to deliver value to the shareholder. And if it's good for the shareholder, my job is to evaluate it. So if it's strategic, it's strategic. If it's doing what we're doing and that's organic growth, delivering value through dividend, increases and buybacks and organic growth with a very clean balance sheet. I think we have one of the best-looking companies on a macro level and delivery to shareholders that you can find out there with a high degree and level of consistency on delivery. So we're happy with the current we have, and again, if there's significant value enhancement in any other direction then I'm paid to look at it.

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Michael Dugan Kelly, Seaport Global Securities LLC, Research Division - MD and Head of Exploration & Production Research [11]

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Great. Appreciate the color. Shifting gears a little bit, Q1 the differential, it's great to see that narrow fairly significantly. Just wanted your thoughts on how you see that differential trending throughout the rest of 2019, and maybe even color on the differential as you head into 2020 and beyond?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [12]

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Yes, thanks, Mike. And I'll let Jeff handle that.

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Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [13]

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Mike. Yes, the differentials were what we expected in Q1 after Atlantic Sunrise ramped up and the 11 basin demand projects came on, so we certainly enjoyed the good Q1. Looking out at Q2 and more short term maybe the balance of the year, our bases has widened a little bit, we did expect a little more volatility in the shoulder months, and we're seeing it right now. I think the same volatility applies in the NYMEX world as well, so we do expect some ups and downs. The -- looking out beyond that, it's still encouraging, they're way better and way tighter than what we experienced in 2016, '17 and '18. So we're pleased with the trend, and I think the -- it's here to stay. And quite frankly, as we drill more in-basin demand projects and others do as well, I only see the production not necessarily decline, but certainly the growth moderate. Our expectations are we're here to stay with these type differentials.

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Operator [14]

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And our next question today comes from Charles Meade of Johnson Rice.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [15]

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I wondered if you can give us a little bit more insider detail. It make sense to me on your blackout periods. It makes sense that with year-end reporting that a lot of the -- probably part of the years going to blackout. What's it look like fore -- I guess, 2Q, the fore part of 2Q for you?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [16]

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On the -- as far as blackout's concerned?

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [17]

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Right.

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [18]

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Well we have a consistent parameters leading up into our year-end numbers and our quarterly release and as we give -- gather the numbers. We provide notice to all of the, as you put it, insider personnel including the Board, a bandwidth that's conservative early, and we allow for a few days for dissemination of the data post release to -- in the blackout. So second quarter is going to be open next week sometime. And we'll be free to do what we want to do at that period of time.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [19]

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Got it. So I guess where I'm going is the majority of this 3-month window is going to be up in 2Q, which is different from 1Q and that's the message you were trying to give us?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [20]

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Yes, yes, exactly.

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Charles Arthur Meade, Johnson Rice & Company, L.L.C., Research Division - Analyst [21]

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Got it. Got it. A then second question, you -- and this Dan, this go back to you -- your comment you may made -- you made in your prepared comments about what you're seeing, what your expectations are from Marcellus for kind of play-wide growth and ditto in the Haynesville. So it seems from my point of view that most operators up in the Marcellus are, I guess, holding rank in the sense that they're -- we're not seeing a breakout in activity and people going back to outspending, but could you confirm if you're -- what you're seeing if that's similar? And maybe elaborate on how you expect that to progress for the year?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [22]

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Yes. We have -- our group up there monitors the equipment activity, rigs, frac rigs, and did a -- we get a fairly good feel for, and particularly, in the 6-county area that we focus in, a fairly good level of expectation, the number of the completions that would be coming on. And so our comments are with the benefit of that information. And we certainly feel comfortable and agree with your comment that there is some rationalization going on by the industry, and I think that is prudent, and I think it will continue. Particularly, when you look at the shoulder months that we see. You've seen a fairly good and quick falloff because of the early weather conditions, and that -- and it certainly has bearing on capital allocation and intensity of capital allocated. You also come into this period of the season with maintenance that affects production profiles and forecast, which certainly affects our second quarter numbers a little bit also. So I know we're just -- we think there will be that rationalization and some of the equipment count indicates that also.

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Operator [23]

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And our next question today comes from Brian Singer with Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [24]

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Can you or Jeff just give us the latest update on the midstream chalkboard? Any local demand projects or pipelines out of the region that are moving earlier, later, added or subtracted from the schedule?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [25]

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Yes. I'll turn that to Jeff.

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Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [26]

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Brian, I guess 2 areas on in-basin demand. Obviously, it's the key on our radar. We were out there looking very, very hard in a number of different things. Nothing to announce today of course, but I would add that we're also being very, maybe, selective in our approach. We want to find the right project, the right scale of timing. We also want to find the right project for the community, and there's just a lot of factors going into it, but we are looking around, we have a lot of leads on a lot of the prospects, I'll kind of leave it at that.

But I might add, others are going at this as well. And in the 6-county area up there, I think there's been something like 1.4 Bcf of in-basin demand added in the last 1.5 years. Of course, a lot of that was power growth. And we're continuing to get calls about additional projects up there, but on the power side. But we'll see how those play out.

In terms of infrastructure, I'll just talk about Leidy South to begin with. Publicly you all will see a filing notice at FERC, probably in June on the project, where we completed prefiling, completed open houses to the projects moving along and see nothing at this point to move us away from a November 2021 in-service on the project.

Talk a little bit about PennEast. I think publicly that they have said that they'll submit their DEP permit to New Jersey sometime in June. I think they also have said administratively, they are complete in Pennsylvania, so that's good. So we'll see how the DEP and their 401 is treated, once it's submitted. Obviously, it can be anywhere from 6 months to a year. And I believe they've stated, they'll start constructions as soon as they get that -- the final permit. That's about it on the project side at this point.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [27]

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Great. And my follow-up, Dan, as the dividend increase is certainly notable here. What are the key areas of focus for you, management and the Board as you try to go through the year and figure out how much more relative to the 50% minimum you would expect to return cash to shareholders? What do you see as the potential range? And then the key other areas of competition for cash?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [28]

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Well, the biggest competition for cash is Scott. He wants to maybe keep that -- payoff all that debt. But kidding aside, we evaluate the different process that can be employed in dividend management. There are -- and buybacks. There are some that say go ahead and get it -- ratchet it up to the level that you would want it to be. And from a council standpoint or third-party perspective, it seems to be a 2% yield on dividend, seems to be the floor when it comes to evaluating the broader market. And on the buybacks, there is the back and forth between opportunistic and just putting in a consistent program of buybacks, and what is the most effective process to employee in doing that. So -- and we have that discussion at our Board at this point in time. And again, it -- we've had free cash flow the last 3 years. We are now moving into a clear picture with just the Marcellus as our asset.

Our predictability with again, was just last October with commissioning of Atlantic Sunrise, the certainty of the commodity space and where we think the landing point's going to be, the differences in differential in the Northeast area. We wanted to measure out and with that comfort and a clear path for a -- over a decade of being able to deliver free cash flow.

I just think, and the Board thinks, at this point in time, though it may be conservative, that representing delivery of 50% of our cash flow in broad terms including dividends and share buybacks is a messaging to The Street that we're going to do it, but we also say that we will get back possibly more than that. And we're comfortable right now taking a gradual step-up in the dividend increase, and we're comfortable right now just having a opportunistic messaging on buybacks. Could that change in the future? Sure it could. We talk about it every Board meeting. A little bit long-winded Brian, don't know if that answers your specifically but we do consider all aspects of how we get back capital.

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Operator [29]

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And our next question today comes from Holly Stewart with Scotia Howard Weil.

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Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [30]

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Dan, maybe the first one just -- I know you've provided your kind of key forecasted financial metrics at different pricing. But any updated thoughts around your activity levels, should strip move substantially below this kind of $2.75 level and obviously recognizing differentials are substantially better than they have been when we were at, sort of, similarly depressed NYMEX prices?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [31]

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Yes. We have bandwidth of $2.50 to $3. And if it moves substantially below our bandwidth as an average for the year and any point during the year, we're not going to have a knee-jerk reaction to our capital allocation. We'll continue to look at the macro and make some projections on where we think the strip is going to go.

But you need to keep in mind that we deliver significant amount of earning and return to the shareholders even below our $2.50 low end that we've used for 2019. I understand the metrics, and I understand the cost, and I understand the return from our peer group out there. And I know that if Cabot gets stressed in any particular way, I think there's going to be a self-correcting mechanism because Cabot can make money below $2, but I'm fairly confident with my knowledge that there's not going to be a lot of money made below $2. And I think it's going to have an impact on the macro environment.

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Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [32]

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Yes. Understood. And then maybe just one for Jeff on Atlantic Sunrise. I mean, Jeff, I know we've talked about your equity investment there. And you previously mentioned looking to see that final project kind of move forward on Atlantic Sunrise. So maybe any updated thoughts on your divesting of that equity investment?

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Scott C. Schroeder, Cabot Oil & Gas Corporation - Executive VP & CFO [33]

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I'll leave it -- this is Scott. As we said when we invested both the -- in Constitution and Atlantic Sunrise, our motivation was to have a seat at the table as part of the decision-making process. And that served us well. Obviously with one very positive result, one still yet to be determined. But long term for the company, it's -- they're not going to be either pipeline or going to be part of our assets going forward. Look, we continue to kind of monitor the marketplace, and when we feel it's right, we'll explore the opportunity to sell that asset. So right now more to come, we're just kind of assessing that at this time.

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Operator [34]

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And the next question today comes from Jeffrey Campbell of Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [35]

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Congratulations on the strong quarter. My first question was just it looked like that the first quarter '19 free cash generation was greater than what had been expected just looking at the nat gas price relationships that you've got on Slide 10. I was wondering if it was that extra boost from the very narrow differentials that you enjoyed in the quarter or was this something else?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [36]

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It was a combination of both. It exceeded our realized price expectations, and we did see the significant narrowing in the differential. It was a combo.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [37]

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Okay. And another kind of higher-level question. When Cabot asked about M&A or exploration, it seems like the assumption is always that it would be about oil and be in other basins. I was just wondering if you ever look for other dry gas opportunities within Appalachia. And I realize you're low on Marcellus acreages clearly at best, but there are some other dry gas areas in Northeast, PA that are starting to show dramatic improvement, so I wondered if that's something you keep an eye on.

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [38]

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No. We monitor all the activity up there, and we do keep an eye on it. And from a decision standpoint and how we monitor or consider capital allocation or strategic opportunity. We look at what the financial returns would be if any investment we've made agnostic quite frankly to the commodity. If we feel like we can deliver significantly more of the same then if it comes through natural gas asset or oil asset, we're indifferent. The benefit, if you do get out of basins, it mitigates the single commodity. If you do also get out of basin, it would probably be an oil consideration also, which also is not only the commodity differential, but it is also out of the jurisdictional confines of PA. So we look at both but 1, 2 and 3 is what deliveries of the financial metrics would occur if we did anything.

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Operator [39]

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And the next question today comes from Michael Hall with Heikkinen Energy Advisors.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [40]

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Solid quarter. Just curious maybe if you could talk a little bit about hedging philosophy and just kind of how you guys are thinking about that as you keep progressing forward on the payout strategy and the path you've laid out? How are you guys thinking about hedging and how might that evolve over time?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [41]

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Well we went into the 2019 with virtually no hedges. And you -- we ramped up as we have currently and where we stand, we felt like that was an inflection point. The market responded to some of the weather that we had, and we took advantage of some of that. Obviously, prefer offensive hedges prior to the defensive hedges. We will be opportunistic, and we will lock in what deliverables that we have promised, if in fact the market would provide that to us. The runway on some of the hedge is somewhat limited by just the depth of it. You can go out there a good ways, but it's not necessarily always at the price point that we would like to see. So if there is not a lot of depth then we're -- it limits our participation, but if we do see numbers that we appreciate and it helps where we think the macro market will go and it improves our line in that regard, then we're -- we continue to layer in that opportunity to mitigate.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [42]

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Okay. That makes sense. I mean is there a kind of minimum level of hedge that you guys are targeting over time? And do you kind of bias towards hedging on the differentials versus at NYMEX? Or any additional thoughts on that?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [43]

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Well we look at it every way, Michael, on how we might place those hedges. And where we think the opportunities would come. And certainly, now with the -- a little bit different index points that we reached today, then we have that added flexibility. There's no minimum position that we'd try to get to if the market is low, and we haven't achieved a level of hedging on our books, we're not going to -- because we set a minimum, we're not going to try to achieve a minimum. If in fact though, back to my point, if it looks like that we can improve our [life] from our forecast and the market would give that to us, then we're going to be active in the hedge market. And it -- and the same holds true, we -- really have no minimum that we'd like to get to, and we have no maximum that we would be prepared to get to also. If we see an opportunity to lock in the majority of our volumes under hedge, we would do that.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [44]

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That make sense. And then I was also curious just on the operational side. As you kind of look at the asset quarter-to-quarter across the year, how do you think about downtime relative to like what -- maybe like maximum potential productive capacity of the completed wells that would look like? And what's that kind of running on average as you think about things like offset well shut-ins? You mentioned maintenance on pipelines, thinking along those lines. How should we think about kind of downtime assumptions as we build things out?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [45]

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Well we build into our forecast a percentage of downtime and as a roundabout number, say 10%, and that downtime though does include some of the known maintenance scheduling that Jeff provides through the pipelines that will be incurred and dates are set for preventive maintenance and picking operations or whatever the case might be. So we incorporate that into our sales forecast. If that answers your question.

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Michael Anthony Hall, Heikkinen Energy Advisors, LLC - Partner and Senior Exploration & Production Research Analyst [46]

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Yes, that does. And I'm assuming that also things like offset well shut-ins. I mean, if it's 10% overall, how much is like known scheduled maintenance versus just kind of a buffer for potential operational deltas? That makes sense?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [47]

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Yes, we have -- our historical look of the offsets and -- in effects on offset wells are the time it -- that we might shut-in an offset well during a fracking operation, we take that in consideration.

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Operator [48]

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And our next question today comes from David Deckelbaum of Cowen.

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David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [49]

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Just a -- maybe a little bit more than minutiae but in prior plans, you did allow for some well cost inflation over time. How do you see that progressing now through the balance of this year going into next year? And I guess as you think about your footage costs on just even benefiting even from longer laterals, how long do you see that progressing for, and where you could keep that footage cost sort of flattish here?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [50]

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Yes. We just pay between now and the end of the year, a relatively flat service cost. Majority of our costs, as we mentioned before, David, are tied up in annual contracts, while in both the biggest component rigs and completion -- and pumping services. So we expect fairly flattish cost. We continue to try to increase our lateral links based on the geology, geography out there, and we'll continue to do that. We kind of like the zip code we're at from an efficiency standpoint and -- but we do continue to try to squeeze out everything we can if it feels -- if the guys up there in the North region feel like that their process and all the different, not only the operational progress that we've made in the past and the learning we've had in the past, but any new ideas that they have out there, which we do and are trying several right now that's not ready for prime time. We'll implement, and hopefully we can continue to gain the efficiencies that we've been successful in doing in the past.

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David Adam Deckelbaum, Cowen and Company, LLC, Research Division - Senior Analyst [51]

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Appreciate that. And you guys sort of reaffirms the differential guidance for the year. Do you still sort of see that or use that as your base case going into 2020? Or as you look at some of the in-basin demand projects or other efforts to kind of reduce some of the -- or relieve some of the impact around Leidy, how do you see that differential shaping up for your at the corporate level going into '20?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [52]

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Yes. We have given our guidance and feel like going into '20, we're going to be in a similar area at least with our expectations today and similarly. And it ties back to Jeff's comment about some of the conversations that we have and are having on in-basin demand projects. It also ties-in to what we think others are having in in-basin demand projects and the overall macro position on equipment and what we anticipate will be strong rationalization by the operators up in that neck of the woods. We do anticipate the differentials to stay in the same range that we are today.

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Operator [53]

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And our next question today comes from Kashy Harrison of Simmons Energy.

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Kashy Oladipo Harrison, Simmons & Company International, Research Division - VP and Senior Research Analyst of E&P [54]

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Just a one quick one for me. Dan, earlier you highlighted your expectation for slowdown in both Pennsylvania and the Haynesville. And you talked about what gives you confidence that Appalachia is slowing down. But I was just wondering if you could share some more color on what gives you confidence that the Haynesville might be slowing down as well?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [55]

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Well the -- when you look at it at approximately 10.5-or-so -- 10 Bcf a day at this point in time. And in PA, we look at the level of equipment activity out there. And in the Haynesville area, as you're well aware that the majority of the operators there right now are private operators and activity driven through the private sector. And I think the idea of continue allocation and particularly if you get a soft spot into the strip, and you get reduction in the natural gas price as we're seeing right now; it would be my bet, and our bet, that from a private operator allocation perspective, that a continued ongoing contribution at the levels that they had seen going into the end of '18 and ramping up with several objectives in mind, whether it would be to increase production because of anticipation of higher commodity price or increasing production with the idea of IPOs opening up. I think that was an activity driver and could still be an activity driver. But in that combination, I do think there is a likelihood that there will be a little bit less activity as we move forward at the levels that it's at right now.

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Operator [56]

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And our next question today comes from Jane Trotsenko of Stifel.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [57]

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I have a question for Jeff. Atlantic Sunrise is obviously running full. I'm curious how much backup as it is do you see available on Millennium and Tennessee pipelines?

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Jeffrey W. Hutton, Cabot Oil & Gas Corporation - SVP of Marketing [58]

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Okay. Well it obviously -- it varies quite a bit and -- but it -- at a -- from a high level, we added the in-basin demand kind of offsetting in kind of production growth over the last couple of years in Northeast PA. And you take a look at some of the Southwest PA volumes that are now headed out on Rover and Nexus and some of the Columbian express projects and other new projects. You need to take a look at Sunrise and the 1.7 Bcf that was probably removed, the majority from Transco and from Tennessee and a little of that from Millennium. And then look at some of the new demand that Millennium added in the new competitive power venture -- power plant in New York. And it all adds up to spare capacity on the interstates. Putting a definitive number on is difficult because we believe there is spare capacity in these pipes before anything I just mentioned. So it is a moving number but 2, 3 Bcf a day of spare capacity is not out of the ball park.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [59]

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That's exceptionally helpful. I'm curious how much appetite does Cabot have to grow production in basin, given the numbers that you have just mentioned?

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Scott C. Schroeder, Cabot Oil & Gas Corporation - Executive VP & CFO [60]

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Well we'll all looking at each other who's going to answer this. But, Jane, I think one of the things that when you look back even 6 months ago right at the time of Atlantic Sunrise coming on and you picked up on the fact that a lot of capacity was vacated to fill that obligation and rightfully so for better price points. We -- Cabot did in February come out with a little bit lower of a guidance both on the capital side and on the production side because our motivation is simply not -- and the market's motivation is not to chase growth, it's more of a moderated growth. Obviously, in 2019, Cabot has outsized growth just because of the timing of that fill of the new projects, but a more moderate growth profile going into the future is what's -- is Cabot's plan at this point in time. We will defend market shares, we've said before, if we see the industry starting to backfill those in any great way. But right now as an earlier question indicated, everybody's kind of sitting, has a very disciplined growth planned in front of them, either to hold certain volumes flat and grow other places. There is no macro push or push from the peers for us to change our growth profile in any way at this point in time. And it reinforces our discipline and our capital allocation at this point.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [61]

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This is very good answer so. The reason why I'm asking is we obviously have backwardation in the forward curve pricing, right? And then we have production growth that's -- needs -- that needs to your offset that backwardation and forward curve pricing. Very often what we see is that the earnings trajectory is a kind of flattish as a result of this backwardation and forward curve pricing. I'm just curious if you guys are thinking in terms of growing earnings trajectory over the following years? Or maybe just keeping production moderate than offsetting the backwardation and the forward curve pricing?

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [62]

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Well, we plan on an, as Scott said, we plan on having a measured growth on an organic basis. We plan on augmenting growth on a per share basis with our return of capital to shareholders. And from a program perspective and confidence level of what we deliver, we feel like that, that measured growth and a capital allocation program that allows for one that particular growth and the amount of cash flow generation to that yield perspective, which is in 2019, we anticipated around 6%. We think that is a good landing point at this stage. And with the additional give back to shareholders, we think that we will be able to attract incremental dollars from outside of a traditional energy investor and compete with the broader market. So from a design standpoint, without having issues with our -- and uncertainty attached to our program, keep in mind, we're doing this with 3 rigs and 2 frac crews, so the complications of a operation is very, very low and our results are very consistent. So we feel good about that. How we manage this financial side is along the lines that we've discussed. And we'll continue to be able to do that, again, into the next decade.

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Operator [63]

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And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Dinges for any final remarks.

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Dan O. Dinges, Cabot Oil & Gas Corporation - Chairman, President & CEO [64]

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Thank you, Rocco, and thank you for your interest in Cabot this morning. And as a closing comment, the good news, assuming you like discipline in capital allocation, earnings and production growth, free cash flow, share buybacks, increased dividends, if you like all of that the good news is that you can expect more of the same from Cabot in the future. So thanks again. We look forward to visit next quarter.

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Operator [65]

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And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.