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Edited Transcript of ECR earnings conference call or presentation 8-May-19 2:00pm GMT

Q1 2019 Montage Resources Corp Earnings Call

State College May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Montage Resources Corp earnings conference call or presentation Wednesday, May 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas A. Kris

Montage Resources Corporation - VP of IR

* John K. Reinhart

Montage Resources Corporation - President, CEO & Director

* Matthew H. Rucker

Montage Resources Corporation - EVP of Resource Planning & Development

* Michael L. Hodges

Montage Resources Corporation - Executive VP & CFO

* Oleg E. Tolmachev

Montage Resources Corporation - Executive VP & COO

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Conference Call Participants

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* 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

* Ronald Eugene Mills

Johnson Rice & Company, L.L.C., Research Division - Analyst

* Stark H. Remeny

RBC Capital Markets, LLC, Research Division - Senior Associate

* 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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Greetings, and welcome to the Montage Resources First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Douglas Kris, Vice President of Investor Relations. Mr. Kris, you may now begin

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Douglas A. Kris, Montage Resources Corporation - VP of IR [2]

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Good morning, and thank you for joining us for the Montage Resources First Quarter 2019 Earnings Conference Call. With me today are John Reinhart, President and Chief Executive Officer; Michael Hodges, Executive Vice President and Chief Financial Officer; Oleg Tolmachev, Executive Vice President and Chief Operating Officer; and Matthew Rucker, Executive Vice President, Planning and Development.

If you have not received a copy of last night's press release regarding our first quarter 2019 financial and operating results, you can find a copy of it on our website at www.montageresources.com.

Today's discussion will highlight the company's operational and financial outperformance in the first quarter. As a reminder, Montage's first quarter 2019 consolidated results includes 2 months of results from Eclipse Resources and 1 full month of consolidated earnings of the combined company to account for the merger with Blue Ridge Mountain Resources that closed on February 28, 2019, forming Montage Resources.

Before we start our comments, I would like to point out our disclosures regarding cautionary statements in our press release and remind you that during this call, Montage management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Montage Resources and are subject to a number of risks and uncertainties, many of which are beyond Montage Resources' control. Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. Information concerning these risk factors can also be found in the company's filings with the SEC.

In addition, during this call, we do make reference to certain non-GAAP financial measures. Reconciliation to applicable GAAP measures can be found in our earnings release. We expect to file our 10-Q later this week, which would be accessible through our website or the SEC's EDGAR system.

I will now turn the call over to John Reinhart, our President and CEO.

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [3]

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Thank you, Doug, and thank you to everyone for listening to our call today. I'm pleased to provide highlights today on the company's outperformance in our first consolidated quarter, which includes production exceeding guidance, operating cost lower than guidance, outpacing our planned cycle time expectations and capital spending in line with expectations, all of which facilities positive revisions to our 2019 full year guidance.

The combined organization is realizing the synergies of bringing together 2 great operational teams, and the guidance revisions primarily reflect the operational efficiencies realized today. We remain highly focused on continuing to lower cost, accelerate production, and enhance asset level in corporate returns, all while protecting the company's strong balance sheet and liquidity position.

Before moving into my prepared comments on the highlights for the quarter, I would like to provide some brief commentary around the current stock valuation and what we believe is a disconnect from a more appropriate valuation of Montage based on the fundamentals of the company. Based upon Monday's enterprise value, Montage enterprise value is trading at a discount to our combined year-end 2018 PDP PV10 valuation that is approximately $995 million. On an enterprise value to EBITDAX metrics, we trade around a 40% discount to our Appalachian peers and our small-cap E&P peers, despite having one of the lowest leverage ratios among both peer groups, at 1.6x net debt to pro forma LTM EBITDA as of the end of the first quarter 2019. While we fully recognize that the natural gas macro environment has been challenging and investors' sentiment regarding natural gas has been weak, we believe that Montage's current valuation possesses substantial upside, especially in light of our strong results and operational execution capabilities.

We believe this current landscape provides a significant opportunity for those willing to recognize the potential for multiple expansion and who remain focused on the long-term prospects of the company focused on creating shareholder value. While we cannot control the price action in the stock market, we can control our continued execution focus by delivering on a plan that generates disciplined growth and protects the balance sheet.

With the support from everyone across the organization, we have successfully integrated and shifted our strategy to put into practice our Focus Five principles, emphasizing enhanced cycle times, development optimization and operational and corporate efficiencies. This strategic shift has resulted in significant progress in a short period of time and is exceeding expectations. This company has some of the best and brightest in the Appalachian Basin, and empowering these professionals to make decisions to drive change has had an immediate and noticeable impact. We're extremely excited about the future of the company and our ability to execute the plan we have set. I'm highly confident that we have the right framework to achieve our strategic vision.

Shifting to the first quarter highlights, our average daily production was approximately 408 million cubic feet equivalent per day, which beat the top end of our quarterly guidance range of 395 million cubic feet equivalent per day. Production costs during the quarter were $1.41 per million cubic feet equivalent per day, which beats the low end of our quarterly guidance range of $1.55 per million cubic feet equivalent.

The company's total pre-hedged revenue was $141 million for the quarter, which was a 28% increase over 2018, which reflects the ongoing strategic decision to focus activity on our substantial inventory of liquids-rich acreage. Liquids production accounted for approximately 38% of our revenue attributable to production for the first quarter 2019.

These results contributed to the company delivering an adjusted EBITDAX of $68.9 million for the quarter. Due to the execution outperformance regarding well results, costs and cycle times, the company communicated revised full year guidance along with second quarter 2019 guidance in our press release last night. These numbers reflect the outstanding pace and cadence of the execution team's successes, with cost and cycle time improvements through the second quarter of 2019. The company remains on pace with expected capital expenditures and we'll remain very vigilant regarding capital run rate delivering superior results at or below our initial 2019 capital guidance range of $375 million to $400 million. While increasing our full year production guidance to 520 million cubic feet per day to 540 million cubic feet per day or approximately 4%.

We continue to execute upon our 2-rig capital plan, and during the first quarter of 2019, the company drilled 10 wells, which were predominantly focused in the liquids area of our acreage. Included in these numbers were 4 Marcellus wells that were drilled on existing Utica pads, which will further improve our cost results. The focus on accelerated highly economic liquids-rich Marcellus wells in Ohio highlights the development advantage of a core stack pay area in Ohio, which we believe will provide a valuation uplift once the quality of these assets are fully appreciated.

On the completion side, we completed 9 wells, which included 5 Utica Dry Gas and 4 Utica Condensate wells in the quarter. The completion costs and cycle times are currently running at or below our internal estimates. The execution team has been able to perform at a high level of efficiency by meaningfully reducing downtime between stages that facilitated an average of 9 stages pump per day, and pumping approximately 2.4 million pounds of sand per day per frac crew, which is a 20% improvement in pumping efficiency relative to the fourth quarter of 2018. When combining the completion efficiencies with the timing optimization of facilities buildouts, a significant improvement in turn-in-line timing and quicker cash flow generation is realized. The company continues to work to improve efficiencies, while service costs remain relatively flat in the Appalachian Basin today.

During the first quarter, we turned to sales 3 gross dry gas Utica wells, 2 of which were wells that are a part of the joint venture with Sequel Energy. Additionally, early in the quarter, the former Blue Ridge Mountain Resources operations team turned to sales the 4-well Woodchopper pad in the Utica Condensate type curve area, and those wells are tracking approximately 10% better than our forecast. This pad lies on the border of Washington County and Noble County, Ohio, and further expands our core liquids acreage to the south, adding approximately 65 undeveloped locations to the Utica Condensate window, which expands the total to approximately 185 locations and further provides condensate diversification across our asset base that is a differentiator for Montage Resources.

The company remains focused on accretive strategic options regarding accelerating inventory value as well as inorganic opportunities. As discussed previously, we remain very excited about the Northeast PA Flat Castle area, and are currently evaluating options with potential counterparties for assessment of value-enhancing options regarding this high-quality inventory. We will provide an update to this process as we progress these assessments as well as other relevant activity on this front. Again, it has been a great quarter for the company, and we look forward to continued great results as we deliver on our 2019 plan.

With that, I'll turn the call over to Michael.

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [4]

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Thanks, John. During the first quarter, the company continued to achieve strong results in almost every area of the business. Adjusted revenue for the first quarter was approximately $129 million, and adjusted EBITDAX was approximately $69 million. Both of which were above the previous year's quarterly results. As Doug mentioned earlier, the results for the first quarter only included 1 month of impact of the merger with Blue Ridge Mountain Resources, and results for both revenues and EBITDAX would have been approximately 25% to 35% higher when assuming a full quarter of combined results.

During the first quarter, our all-in realized price was $3.59 per Mcfe before the impact of cash-settled derivatives and firm transportation. Our natural gas price differential before transportation expense was negative $0.14 per Mcf compared to the average daily Henry Hub-settled price during the quarter, which was better than guidance and analyst consensus expectations. This favorable differential was driven by the continued strength for in-basin pricing as well as our ability to sell gas into underutilized firm transportation assets owned by others, at prices which were at a substantial premium to in-basin benchmarks. This strategic advantage, which we believe is a differentiator for Montage compared to its peers going forward, is something we will look to further leverage as we consider all the options available to us to achieve the highest possible realization. As the company has brought wells online and marketed production has continued to grow, we have quickly grown marketed production well beyond our firm transportation under contract, and we are selling incremental production in-basin at very tight differentials, resulting in these outstanding netbacks.

Our per unit cash production cost for the first quarter were $1.41 per Mcfe, which included $0.41 per Mcfe in firm transportation expense. As we've begun to utilize the ability to realize NGL pricing in our Mariner East 2 contract this quarter, we've seen additional cash flow from this new sales outlet. During the quarter, we added approximately $1 million in incremental cash flows from our Mariner East 2 contract above what we had been receiving selling under our previously contracted price. Please keep in mind that based on -- upon our review of the final agreements for our Mariner East 2 volume, we are netting certain downstream expenses incurred by third parties against the gross sales price of our NGLs, resulting in an offsetting amount of lower cash production cost and lower NGL price realizations in prior guidance.

On the liquids side, we realized a $21.67 per barrel NGL price, equating to approximately 40% of WTI. Our Mariner 2 -- East 2 pricing, which I mentioned previously, coupled with the production sales volumes that are sold at strong Mont Belvieu prices and without ethane recoveries should allow us to continue to realize better overall NGL margins.

Given the recent market dynamics and the slight decoupling between oil and NGL prices, along with the reclassification of the Mariner East 2 costs, noted previously, we have lowered our NGL guidance as a percent of WTI for the full year. However, we believe Montage remains advantaged from a cash margin perspective due to our ability to reject a significant portion of our ethane, our access to Mariner East 2 pricing and the diversity of our NGL sales program.

Our realized oil price for the first quarter of $48.09 per barrel implies a negative $6.73 differential to WTI, which is inclusive of all transportation expenses. As our activity continues in the Utica Condensate portion of our acreage, which provides us with peer-leading margins and significantly differentiates us from other Appalachian peers, we believe we are uniquely positioned amongst our peers to benefit from the recent strength in WTI prices.

For the first quarter, our $103.9 million of capital expenditures consisted predominantly of $99 million in drilling and completion capital and about $5 million in land capital. The capital spending for the quarter reflects our focus on controlling costs and assuring our dollars are spent where they will return value to the business as quickly and as efficiently as possible as evidenced by the 95% allocation of capital in this quarter to the drill bit. The trajectory of these drilling and completion capital costs, as it relates to our full year 2019 capital budget, will be weighted slightly to the front half of the year as we expect approximately 55% to 65% of the capital expenditures for the year to occur during the first 2 quarters of 2019.

Turning to the balance sheet. Our strong operating performance and EBITDAX allowed us to end the first quarter of 2019 at a debt to pro forma LTM EBITDAX of 1.6x, and with almost $297 million of liquidity after the newly announced borrowing base increase of 7% to $400 million, more than sufficient to fund our development plan for the foreseeable future.

During the quarter, we took advantage of the strength in oil prices to add to both our 2019 and 2020 hedge position, while continuing to act opportunistically to our natural gas hedges, which currently stand at approximately 66% of 2019 projected production. Keep in mind that approximately 35% to 40% of our 2019 revenues are expected to come from liquids production. And as we expect to continue to increase our leverage through NGLs and condensate in the future, we will remain opportunistic with our hedging strategy to take advantage of pricing momentum similar to what we have seen recently with crude oil prices.

As we consider our current liquidity position and our capital plan, we are comfortable that Montage remains well positioned to fund its drilling program with cash flow from operations and our revolver, while generating an attractive level of production and cash flow growth. This revolver will provide the base funding for the company's combined 2019 growth and as we continue to target becoming cash flow neutral by the end of the year. We expect to end 2019 with a leverage ratio of approximately 2x and be well positioned with many financial options as we look to 2020 and beyond.

On that note, John will wrap up the prepared remarks.

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [5]

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Thank you, Michael. As we continue the process of integration, we will continue to expect to see the effects of increased scale playing out in real time. There are a number of synergies from the combined company and asset base that we believe can be further realized and we remain extremely flexible from an operational, financial and commitment perspective.

Overall, I remain thoroughly impressed with this team and their push to enhance the value of our asset base in our company. Our strong first quarter performance demonstrates our focus on enhancing operations and positions Montage for increased efficiency, cash flow neutrality and shareholder value creation. We are proud of the progress we have made and we're only just getting started. We thank everyone for joining us on the call today. This concludes our prepared remarks. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(technical difficulty)

Caller Jane Trotsenko, please go ahead with your question.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [2]

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My first question is on natural gas price realization. So they have been very impressive in 1Q '19. I'm curious if you guys can provide some color on the released pipeline capacity and this availability, and how you guys can take advantage of it? And if you -- looking for the -- if you can still continue taking advantage of this released capacity and if that cannot offset the wider in-basin differentials that we have seen recently. Sorry, it's like too many questions in one, but basically trying to understand how in-basin differentials are going to look like.

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [3]

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Yes, Jane, this Michael. I think it's a great question. I appreciate you asking it. So I think, as you look out into the last part of the year, you've seen a little bit of widening in the basis differentials for maybe where they started the year. I think our opportunity, of course, is to take advantage of the position that we put ourselves in with the flexibility that we have. So we've continued to see other guys coming to us looking for molecules to fill the capacity that they've taken on, and so we've had good success both in the quarter we just reported, but also as we've started out here into the second quarter with the ability to continue to optimize our gas.

So I think, you know, kind of long term our view of the pipeline situation in the Northeast continues to be that it will remain a little bit oversupplied. We think that we'll continue to have the opportunity to optimize the gas, and so we're hopeful that as we go out into the second half of the year, we'll continue to see the realizations that we put forth to be kind of at the low end of what we're guiding towards. We don't forecast the success on that optimization process, but the company certainly had good success with that over the past, call it, 12 or 18 months. So we feel pretty good about where we can go going forward.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [4]

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That's really helpful. My second question is on the reclassification of the Mariner East 2 transportation expense. Could you explain why exactly you had to change the way you account for the transportation expense? And if it applies only to Mariner East 2 costs and not to other NGL transportation charges?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [5]

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Yes. Now this is a good question as well. I think each of these contracts, of course, is a little bit different. The contract that we have that allows us to move volumes on Mariner East 2 had some subtleties to it, and it's also actually changed a couple of times over the years. And so this the first quarter that we've actually flowed volumes on Mariner East 2. The price that we receive is actually a net price and the way that the title transfer occurs and some of the other subtleties that are in that contract, the accounting dictates that we should record that as a reduction to our revenue. Certainly, the impact to the bottom line is the same, whether it's a cash operating cost or a revenue deduction. And so you know, as we dug in and finalized that with our accounting shop, we came to the conclusion that the right way to do it was to net it against the NGL revenue. And again, that's on a case-by-case basis, it doesn't change anything we've done in the past, and it certainly doesn't mean that the contracts we look at in the future necessarily will have to be treated the same way, but that's where we came out on this one.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [6]

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Okay. Okay, got it. And my final question is around water cost savings. If you guys can provide some color around water infrastructure and the recycling of produced water and how it helps to lower the well costs?

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Oleg E. Tolmachev, Montage Resources Corporation - Executive VP & COO [7]

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Jane, I can take this. So we do have significant savings on the water side. Basically, whenever we have active frac crews operating, which pretty much is almost all the time, all the producing flow back water is taken and recycled as part of our frac fluids. And so we actually have a very minimal saltwater disposal costs and we're continuing down the same path. We also have a very synergistic infrastructure between legacy Eclipse and legacy Blue Ridge Mountain Resources. And so we're able to leverage this water infrastructure through very efficient supply system for our fracs.

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Operator [8]

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Our next question will be coming from the line of Jeffrey Campbell with Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [9]

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Congratulations on the strong quarter. I wanted to ask about your nat gas margins. Just wondering, is the local Appalachian market still providing your best margins? And which are the markets are you prioritizing for volumes in 2019?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [10]

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Yes. Jeff, this is Michael, I'll take that one. I think even with a little bit of the widening in the basis differentials, if you think about the fact that we can get into those at little and no cost, those are actually still the best netbacks in our portfolio. We've got a variety of different options where we move our gas. I think that's something we talked about in our Analyst Day at quite some length, but we like the diversity that we had and we certainly think that there's other markets that, over time, become more favorable or widen out a little bit. But I think as we sit here today and at least for the foreseeable future, we feel really good about the in-basin pricing dynamic combined with the optimization that I talked about a little bit earlier. So I think from our perspective, as we look out into the future and I'm not sure if this is where you're necessarily going, but I think we're pretty comfortable with the firm transportation portfolio that we have and allowing the incremental production, at least for the time being, to flow into those local markets and realize some of the best netbacks in our portfolio.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [11]

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That was what I was interested in. It looked like that the first quarter '19 liquids cut was higher than the full year '19 guidance. If I got that right, I was just wondering was this due to well performance or just or more wet wells completions front-end loaded for 2019.

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Matthew H. Rucker, Montage Resources Corporation - EVP of Resource Planning & Development [12]

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Yes. This is Matt. So really it was around well performance. The cadence on well count in the quarter and wet versus dry really didn't change for us. We had certainly the Woodchopper pad that came online that was more liquids heavy as well as just outperformance on the PDP as we were seeing some shallower base declines on both the condensate yields and even improved NGL yields across the board for our processing agreement. So really good outperformance by the wells, and we continue to ramp up our wet gas volumes over the second half of the year.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [13]

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Okay. That's pretty positive. Last thing I want to ask is when we spoke in New York, Oleg mentioned that he thought that about 20% of historical Marcellus completions might not be taking fluid and he described some in-house analysis tools to improve the results. And I was just wondering if field testing of this potential completion enhancement has begun yet?

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Oleg E. Tolmachev, Montage Resources Corporation - Executive VP & COO [14]

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So it has begun. So we are using those synthetic MSU logs for engineered completions or engineered perforations. We began using them in all of our Marcellus pads and the Utica pad. So all of the pads in progress that will be going to sales end of Q2 will be based on engineering firm designs and that technologies we've developed.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [15]

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Okay, great. That seems like a little bit more comprehensive use than Faster than I thought it would be. You must be seeing some positive results from the effort?

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Oleg E. Tolmachev, Montage Resources Corporation - Executive VP & COO [16]

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Yes, I mean, really the results that we will see from these wells, it will probably take 8 to 9 months to fully sink in, but we are very upbeat about the first 2 Marcellus wells that we have put to sales in January of last year that are really driving the confidence behind our Marcellus type curve and development program. So we are really hopeful that this technology continues to play out for us in the future.

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Operator [17]

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The next question is coming from the line of Ron Mills with Johnson Rice.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [18]

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Just a question, maybe a follow-up on that last one in terms of the shift to liquids. Any appreciable shift versus your Analyst Day in terms of whether it's over the remainder of the year or preliminary thoughts of 2020 of kind of your split of liquids drilling especially given the early Woodchopper success and kind of seemingly adding almost 50% to your condensate inventory in that area?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [19]

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Ron, this is John. I'll answer that, and then Matt can chime in if he has anything else to add. With regards to any 2019 allocations toward liquids, generally speaking, there's been a slight shift to a little bit more liquids as we've taken some dry gas and shifted the schedule around. But generally speaking, by and large, it's about the same allocation on a year basis. I think what we're seeing is some acceleration of some of these condensate wells and certainly you're going to see in the second half of the year about 80% of the wells that we turn-in-line are going to be liquids. So, if you kind of look at 2Q guidance versus full year, you'll see that gas percentage goes down quite significantly as we bring on all these oil wells in second half of the year. So, no real change of significance from the allocation perspective. Greater than 50% kind of towards liquids this year from the Analyst Day. What I'll do is make a comment on 2020.

We're very focused right now on iterations throughout the second half of the year and into 2020. While we're not prepared to come out publicly with what that might look like, what I can tell you is just looking at the forward strips and looking at the economics, we certainly favor increased liquids exposure. We are very fortunate as a company to have half of our inventory in the liquids window. So we're going to be placing more emphasis on allocation towards that higher-revenue-generating type well mix as we go into 2020. And towards the end of the year, we'll certainly share more of the specifics on what that allocation might look like.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [20]

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Okay, great. And you mentioned both at the Analyst Day and again today on Flat Castle. Can you just provide a little bit maybe more clarity in terms of what kind of discussions you're having in terms of presumably it's to potentially pull value forward on Flat Castle given that more of your focus is going to be more down in your Utica properties more in Ohio. Is that a fair representation?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [21]

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Yes, Ron. This is John, I'll answer that one. I think that you can -- it is a fair representation, but what I'll caveat that is, we've seen the well performance of this Painter 2 continue to progressively exceed our expectations. It's now the returns are developing out there where it's starting to get into the capital allocation type exposure mix. So when we think about dry gas and liquids, we're certainly leaning toward liquids these days. But as far as dry gas goes, it's becoming -- to become competitive with the Monroe County acreage. So if you think about the discussions we're having with these counter-parties you're absolutely right. It's about accelerating value, accelerating development or other ways or other monetization options that, jointly through discussions, there could be -- where there could be a win-win. So it kind of runs the gamut of full circuit kind of divestiture, but quite frankly, we feel like in today's market we might not get the realized value of it. So we're leaning more toward the discussions about partnering up with somebody that would offset our capital, but start proving up and putting reserves on the books for this highly accretive and quite frankly highly economic area up in Flat Castle. So hopefully that answers your question on what we're looking for.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [22]

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It does. And then last on CapEx, when you talked about kind of 55% or 60% of your capital in the first half of the year, that implies obviously, a relative slowdown in the second. It sounds like you spend a lot of time thinking about 2020. Is that spending level still going to be at the level where you end up entering 2020 given completion cadence on a -- with a -- with kind of a full head of operational steam and are you still expecting kind of free cash flow by year-end to continue through next year?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [23]

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Yes, Ron. This is John again, I'll take that. I think you're spot on with the sensitivities that we look at with regards to activity level and cadence. What we want to do is make sure that we are performing and executing throughout the end of the third quarter into the fourth quarter to continue our production growth. We are certainly going to have a growth in 2020. It's going to be a disciplined growth as we talked about. And if you kind of take the cadence that we've talked about being at or below our capital budget, but actually exceeding on our production basis for full year and exceeding on our production costs, we feel like this puts us in a great position from a cash flow generation perspective in the second half of the year, especially in the fourth quarter and moving into 2020.

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Operator [24]

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(Operator Instructions) The next question is from the line of Stark Remeny with RBC Capital Markets.

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Stark H. Remeny, RBC Capital Markets, LLC, Research Division - Senior Associate [25]

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My apologies, guys. I think I was on mute, but congrats on a solid quarter, and thanks for taking my questions. As a follow-up to the prior caller, I was just hoping you could maybe give a little more detail around completion cadence for the rest of the year. It seems like, based on the guidance, it's obviously very -- growth is very second half weighted. So should we be thinking about most of your turn-in-lines flowing through to the back half? Or what's your expectation around that?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [26]

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Yes, it's a great question. This is John. If you think about the cadence, I would view the full year in that -- on a gross basis at 33 to 36 number as far as turned to sales. And if you think about we're more kind of end of Q2, beginning of Q3 timed on these things. So if you think about that 2Q and Q3, we're really looking at approximately 25 of those. So it's a substantial amount of that range is going to be in that Q2, Q3 time period and the fourth quarter kind of tails in just because when you run a 2-rig cycle you have just the ebbs and flow of when pads frac and then they're turned in line. So the cadence would certainly be Q2 heavy on frac and, quite frankly, Q3 starts to tail down and turn-in-lines really ramp up in Q2 and Q3 associated with that activity level. If that answers your question, so it's kind of the middle of the year is when you can expect that turn-in-line bulk of costs and then that's why you're seeing the completions more front-loaded into Q2.

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Stark H. Remeny, RBC Capital Markets, LLC, Research Division - Senior Associate [27]

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That's perfect. And then just one follow-up on A&D activity. I appreciate all the color on Flat Castle developments, but I think you guys had kind of mentioned plans for a possible non-core assets sales and it looks like there may be some discontinued ops on the income statement. I guess any color on that? And then thoughts on outlook for sales for the rest of the year?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [28]

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Yes, I mean, this is John. I'll speak high level as we're in a very fortunate position to have 27 years of inventory of really high-quality assets. And as we kind of look at the company as a management team, we're very focused on accelerating values for the benefit of the company and the shareholders. So although we didn't really specify any kind of discussions that are going on from an asset sale divestiture kind of standpoint. What I'll tell you is, it shouldn't be a surprise to everybody that the market is a little bit tough with regards to undeveloped acreage these days, but we are very focused on identifying opportunities whereby we had acreage that won't be developed in the next 5 to 6 years that might be brought forward by somebody else's capital plan. So we stay open to those as we get in balance, we assess them, and we will do and take actions that are accretive to the company especially if it enhances value for carried inventory that we receive little or no value for. So as those things progress and we get something material to share, we'll be sure to share that with the market on future calls.

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Operator [29]

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The next question is coming from the line of 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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Just maybe 2 quick ones. First, you noted in the release that you're on track to push well cost below that kind of $870 per foot target. Can you give us a sense of where things are today?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [31]

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Yes, this is John. I think it's pretty early with regards to kind of pegging a number on that what that might look like for the end of the year. But as we look at our execution throughout the first quarter and, quite frankly, the quarter-to-date, what we're seeing are substantial efficiencies on the completion side, the drilling side efficiencies have come down. So as far as well costs, the drillers are actually at or below on recent capital spend per well, and the completion crews have been down about 10% to 15% versus Q4 costs year-to-date. So whenever you couple those 2 things together, we feel like, on a per well basis, that $870 weighted average per foot of lateral capital cost. We feel very positive about hitting that and we certainly feel very positive there's some room to even take that substantially lower. [We're going] to be able to provide little bit more color on where that's looking like it's going to land in the next quarter as we get approximately half of our operations under our belt for the full year, but we feel very positive about the current trends that we're seeing.

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

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That's great. And then maybe just one more. I've noted in my Analyst Day notes that you talked about a deep well, deep Utica well in Tyler County, just have any that you drilled last year. Any update on that well to provide?

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Matthew H. Rucker, Montage Resources Corporation - EVP of Resource Planning & Development [33]

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Yes, Holly, this is Matt. I'll take that. The well continues to produce above our expectations. Actually it has hit the flat period plateau decline at this point, which was about a month past our expectations. Still tracking along our type curve that we assess to the Monroe County on a 2.2 Bcf per 1,000-foot basis, and we continue to monitor that as we have more data on the decline now. So we're still very impressed by the well results there and the team continues to look at future development opportunities that might exist in West Virginia.

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Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [34]

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Do you have the AFE on that well?

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Matthew H. Rucker, Montage Resources Corporation - EVP of Resource Planning & Development [35]

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Yes -- no, I don't have that in front of me for now. But our type curve expectations would be very in line with the Monroe on a development-plan basis of about that $950 per foot.

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Operator [36]

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We've reached the end of the question-and-answer session. I will now turn the call over to John Reinhart for his closing remarks.

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [37]

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Well, thanks, everybody for joining us for the call this morning. We've had a great quarter and we appreciate your attention and questions and certainly look forward to visiting with you about the continued success of the company in second quarter. Have a great day.

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Operator [38]

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Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.