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Edited Transcript of ECR earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q2 2019 Montage Resources Corp Earnings Call

State College Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Montage Resources Corp earnings conference call or presentation Wednesday, August 7, 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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* Andrew Ginsburg

R.W. Pressprich & Co. - Associate Director

* Duncan Scott McIntosh

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

* Irene Oiyin Haas

Imperial Capital, LLC, Research Division - MD & Senior Research 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 Montage Resources Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Douglas Kris, Vice President of Investor Relations. Thank you. You may 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 Second 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, Resources, Planning and Development. If you have not received a copy of last night's press release regarding our second 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 second quarter.

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 regarding these 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 will 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 very pleased to provide highlights today on the company's continued outperformance in the second quarter of 2019, which includes production exceeding guidance, operating costs lower than guidance, outpacing our cycle time expectations and capital spending lower than expectations, all of which facilitate positive revisions to our 2019 full year guidance. The combined organization is realizing the synergies of bringing together 2 great commercial and operational teams. And the guidance revisions primarily reflect the operational efficiencies realized year-to-date associated with the shift in development strategy aimed at improving cash flows and maximizing the value of the company's high-quality assets. We continue to lower cost, accelerate production and enhance asset level and corporate returns, all while protecting the company's strong balance sheet and liquidity position. Our focus remains on consistently delivering results that balance cash flow generation with disciplined growth, all to improve the underlying fundamental value of the company.

Highlighting the second quarter of 2019 results, the company's average daily production was approximately 535 million cubic feet equivalent per day, which beat the top end of our quarterly guidance range of 515 million cubic feet equivalent per day by approximately 4%. The company has realized an approximate 30% increase in the midyear PV-10 value of its proved developed producing reserves to approximately $1 billion when compared to the pro forma year-end 2018 reserves based upon strip pricing. This substantial increase in reserve value is attributed to continued production outperformance, accelerated well turned to sales as well as outstanding well results.

During the quarter, the company renegotiated an advantageous processing contract with one of our midstream providers for the Marcellus development in Ohio. Given the company's focus on increasing liquids production and focus on Ohio Marcellus development, this will provide a significant benefit during the second half of 2019 as liquids production volumes are expected to grow by 40% to 45% relative to the first half of 2019. The revised midstream contract allows for a significant improvement in wet gas processing rates, possesses no minimum volume commitments and provides full ethane rejection, which will further improve the overall rates of return and value of our attractive Marcellus acreage. The company continues to focus on identifying and renegotiating commercial agreements where merger synergy realizations may be achieved via enhanced margins. Due to the outperformance from our well results and superior operational execution resulting in reduced well cost and cycle times, the company communicated revised full year guidance, along with initial third quarter 2019 guidance in our press release last night. In addition, as we have previously announced, given the operational outperformance year-to-date and current commodity price environment, we made the strategic decision to reduce activity levels, and roll the efficiency and service cost improvements realized year-to-date into lower full year 2019 capital spending rather than further acceleration of production.

Regarding the capital allocation of the 2019 program, the company continues to optimize spending to the drill bit, with approximately 95% of the spin focused on drilling and completions development activity. The minimal amount of land capital moving forward reflects the high percentage of acreage currently held by production for the company, and we expect this trend to continue in the foreseeable future. These numbers also reflect the outstanding pace and cadence of the execution team's success with cost and cycle time improvements through the second quarter of 2019 as well as incorporating continued service cost reductions, given the general slowdown of activity in the Appalachian Basin. The company continues to be on pace with expected capital expenditures and will remain very vigilant regarding our capital run rate to deliver superior results at or below our revised 2019 capital guidance range of $345 million to $370 million while delivering on the revised guidance of increased production and lower production costs.

During the second quarter of 2019, the company drilled 12 gross, 10.2 net wells, which included 7 Ohio Marcellus wells and 5 Utica dry gas wells. The 7 Marcellus wells utilized existing Utica pads and infrastructure, which further improve costs and well economics. The focus on accelerating highly economic liquids-rich Marcellus wells in Ohio highlights the development advantage of a core stacked pay area in Ohio, which we believe will provide a valuation uplift once the quality of the assets are fully appreciated.

On the completions side, the company completed 15 gross and 13 net wells, which included 8 Ohio Marcellus wells, 3 Utica dry gas wells and 4 Utica condensate wells in the quarter. The completions cost 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 per day during the quarter. When combining the top-tier completion efficiencies and service cost reductions, a significant improvement to turn-in-line timing and accelerated cash flow generation is realized. The company continues to focus on further efficiency gains and decreasing service costs to positively affect cash margins.

During the second quarter, the company turned to sales 16 gross, 11.4 net wells, which included 8 Utica dry gas wells, 4 Utica condensate wells and 4 Ohio Marcellus wells. As well, due to the efficiency gains of the operation teams, the majority of these wells came online earlier than planned, averaging approximately 15 days ahead of our internal schedule. The company remains focused on accretive strategic options regarding accelerating inventory value. The company is very excited about the northeast PA Flat Castle area, where the performance of the recent Painter 2H well continues to exceed expectations. The current projected EUR is estimated at approximately 2.4 Bcf per 1,000 feet, which is up 20% from initial expectations and is maintaining a longer flat period and shallower production climb than expected. Discussions continue with multiple counterparties, but accretive transactions are challenging given the current valuation environment for undeveloped acreage. We continue to evaluate options for value acceleration of this attractive high-quality inventory. Again, it has been an outstanding quarter for the company, and we look forward to continue 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 second quarter, the company continued to achieve strong financial results in every area of the business. Our top line revenue for the quarter was up by approximately 50% and our adjusted revenue for the second quarter was also up by 45% to approximately $146 million, despite commodity prices that were down across all 3 streams when compared to the second quarter of 2018. Adjusted EBITDAX was approximately $71 million for the second quarter of 2019, up 3% sequentially and up 39% over the same period in 2018. Said another way, the business continues to generate strong revenue growth and deliver increasing EBITDAX, even in the face of headwinds from commodity prices. During the second quarter, our all-in realized price was $2.94 per Mcfe before the impact of cash-settled derivatives and firm transportation. This favorable all-in pricing was driven by a significant percentage of our production coming from the liquids areas of our acreage, with condensate alone generating approximately 20% of Montage's total revenue. The condensate portion of our acreage continues to differentiate Montage from other Appalachian peers, leading to one of the highest all-in realized prices in the basin and providing top-tier cash operating margins when compared to our much larger in-basin peers. For in-basin pricing, our ability to sell gas into underutilized firm transportation agreements held by others at prices which were at a premium to in-basin benchmarks has continued to enhance our realized natural gas price during the quarter. This strategic advantage, which we believe is another differentiator of Montage and contributes to our outstanding cash margins, is something we will look to further leverage as activities slow in the basin, and we consider all the options available to us to achieve the highest possible realizations. As a reminder, we have quickly grown marketed production well beyond our firm transportation under contract, and we are selling incremental production in-basin at a premium.

In summary, we believe we have the combination of our low gas price differentials, which were only $0.23 during the quarter and declining firm transportation expense to lead to some of the best all-in natural gas netbacks in the Appalachian Basin. And as these netbacks should continue to improve as we add incremental production sold into local markets that are accretive to our corporate netbacks moving forward. The per unit cash production costs for the second quarter were $1.35 per Mcfe, which included approximately $0.37 per Mcfe in firm transportation expense, down 10% sequentially as our business continues to scale up. Montage's cash operating costs are amongst some of the best in the basin on a comparative basis, despite those other producers having a significantly larger production base to spread fixed costs across. As we continue to exploit the operational efficiencies of the merger and grow our production base, our cash production cost should continue to trend lower.

On the liquids side, we realized an $18.77 per barrel NGL price, equating to 31% of WTI. Our Mariner 2 East pricing, coupled with the production sales volumes that are sold at Mont Belvieu prices and without ethane recoveries, should allow us to continue to realize better overall NGL economics than many of our peers. Given the recent market dynamics and the continued decoupling between oil and NGL prices, we have lowered our NGL guidance range as a percentage 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, which was further expanded with the recent improvement to the Marcellus Ohio processing economics that John described previously. Our realized oil price during the quarter was $52.14 per barrel, implying a negative $7.74 per barrel differential to WTI, which is inclusive of all transportation expenses. Our activity continues in the Utica condensate and Ohio Marcellus portions of our acreage, and this exposure to oil prices supports our peer-leading margins and significantly differentiates us from our other Appalachian peers, as we believe we are uniquely positioned to benefit from any potential strength in WTI prices. As a percentage of total revenue, Montage's revenue from condensate is more than twice that of its closest Appalachian peer and more than 4x the average of the peer group, which helps deliver the premium cash margins mentioned on this call. For the second quarter, our $115 million of capital expenditures consisted predominantly of drilling and completion capital and the $3.4 million in land-related capital during the quarter. As we noted on the last call, the trajectory of the drilling and completion capital cost as it relates to our full year 2019 capital budget was weighted to the front half of the year, with approximately 60% of the capital expenditures for the year expected to occur during the first 2 quarters. Through June 30, our capital expenditures were only approximately 57% of our total capital budget, and we are well positioned to remain within our updated capital expenditure guidance for the remainder of the year.

Turning to the balance sheet. Our strong operating performance and EBITDAX growth allowed us to end the second quarter of 2019 at a debt to pro forma EBITDAX of 1.7x and with $252.7 million of liquidity, more than sufficient to fund our development plan for the foreseeable future. We look forward to updating the market on our fall, bank redetermine in the next few months, as we have had significant reserve growth in the first half of the year, which should lead to a positive outcome for that process. As John noted, our PDP reserve value at midyear is up significantly from where it was during our spring redetermination as a result of our production growth and cost efficiencies in the first half of the year.

Finally, during the second quarter, we took advantage of some short-term market strength in the oil prices to add to our 2020 hedge positions, while continuing to act opportunistically with respect to natural gas hedges, which currently stand at approximately 65% of our 2019 projected production. Keep in mind that approximately 40% of our 2019 revenues are expected to come from liquids production. We expect to continue to increase our leverage to NGLs and condensate in the future, and we will remain opportunistic with our hedging strategy to take advantage of pricing momentum and utilize a variety of hedging structures to further enhance our hedge book. As we consider our current and forecasted liquidity position and our capital plans, we are extremely 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 has provided the base funding for the company's combined growth in 2019, and we are now shifting toward a plan that should generally balance cash flows with capital spending and interest during the second half of the year. We expect to end 2019 with a leverage ratio of approximately 2x, and we will be 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. Overall, we remain thoroughly impressed with the team and their push to enhance the value of our asset base and our company. Our strong second quarter performance demonstrates our focus on enhancing operations and positions Montage for increased efficiency, cash flow generation and shareholder value creation. Based upon Monday's closing price, Montage's enterprise value is trading at a substantial discount to midyear PDP PV10 valuation of again approximately $1 billion. On an enterprise value to EBITDAX metrics, we traded approximately 50% discount to our Appalachian peers and 60% discount to our small-cap E&P peers despite having one of the lowest leverage ratios among both of the groups at 1.7x net debt to pro forma LTM EBITDA as of the end of the second quarter 2019. While we fully recognize that the natural gas macro environment has been challenging and investor sentiment regarding natural gas and NGLs has been weak, we believe that Montage's current valuation possesses substantial upside, especially in light of our strong results and operational execution capabilities. I'm highly confident that we have the right framework to achieve our strategic vision. We thank everyone for joining us 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) Our first question comes from Irene Haas with Imperial Capital.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [2]

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Okay. My question is on the midstream. With a bigger entity and a higher production base, you've been able to renegotiate your processing and transportation -- really processing contract. And I was wondering when would that kind of impact your guidance because I didn't see any specific guidance towards that? And second question is, you mentioned earlier that activity in the basin is slowing down. Can you maybe give us some tangible observation in that comment?

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

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Yes, Irene. This is Michael. So on your first question, I would tell you that our guidance that we released last night with the lower operating cost for the year is inclusive of the reductions that we'll see on the processing side. So we were able to capture some savings actually on our existing volumes that, that midstream provider processes for us as well as dedicate some new acreage to them. And so we've taken that into account as we put out the guidance last night. And we are working on some additional commercial agreements with some of our other midstream providers. We hope to have some news out later in the year related to some of those agreements and potential synergies and cost improvements that we might be able to realize on some of those.

So that -- to answer your question on the processing side, I would say, on the activity levels in the basin, certainly, as you've seen some of the other producers come out with earnings here in the last few days, I think you've seen a few of our peers cut rig activity. I think we were one of the first to move on that front. And I do think that our expectation as we move into 2020, you'll see guys come out with budgets that are a lot less active than what they've been in 2019. Certainly, some of the activity in 2019 is already baked, whether it's with hedge books or just with contracts that people have in place. But without naming names, I think you've seen a number of the guys come out with rig cuts here just in the last week or so.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [4]

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That ought to be kind of positive in terms of tightening up the supply?

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

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Yes, I think we're optimistic as we look at 2020. Certainly, the strip has been under pressure. And we think that depending on the activity level of us and some of our peers in the basin that we could see the supply side of the equation come in a little bit. And then certainly, as you look out with demand, kind of where it is and where it could be next year, that side has been actually relatively strong recently. So if we can get some help from the others in the basin that are a little more responsible like we are with our activity level, then hopefully, we can see some better prices for 2020.

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Operator [6]

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Our next question is from Andrew Ginsburg with R.W. Pressprich.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [7]

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I just wanted to get an understanding with the market dynamics. So you're talking about pricing potentially buoying with some of the activity cuts in the Marcellus. One thing I'm trying to get a grasp on is -- so we have a lot of people drilling in the Permian right now, right? And a byproduct of people drilling in the Permian for oil is a lot of gas being released at the same time, which is -- hello?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [8]

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We're here.

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [9]

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Yes. We're here.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [10]

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Hello?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [11]

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We're here.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [12]

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Sorry about that. Were you guys able to hear the first half of my question?

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Douglas A. Kris, Montage Resources Corporation - VP of IR [13]

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Yes, I believe, Andrew. You were talking basically -- referencing the associated gas that's being produced out of the Permian. And I'm assuming -- wondering what effects that has on the Appalachian gas macro.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [14]

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Right. And kind of how -- so it doesn't seem like people are going to be cutting back activity in the Permian anytime soon, which is going to continue to weigh on gas prices, right? So just from your team's perspective, how are you guys approaching that dynamic? And even if we're out competing with some of the peers in the Marcellus, how do we brace more in general for some of the competition from maybe some of the other basins?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [15]

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Yes, this is Michael. I'll take maybe the first part of that. John can certainly jump in. I think to your point, there's a significant amount of gas that the market believes is coming from the Permian here, as those projects to move the gas out of the basin come on. I think one of them's scheduled to come on later this year, another significant one next year. I think from our perspective, I think the market's well aware of that. So I think you could argue that some of that's priced into the strip currently. I do think as we think about gas prices, you have to keep in mind we tried to emphasize this in some of our prepared remarks that we're increasing our exposure on the condensate side and on the NGL side, both. So I think that our -- yes, I'll call it, strategic move in order to remain flexible with some of those headwinds that maybe there for gas prices is to make sure that we're using our diversity and our acreage position to the best of our ability. And so that for us means the second half of this year continuing to produce more NGLs and condensate.

And as we start to think about 2020, certainly looking out into this -- to the commodity price environment and making decisions to allocate capital appropriately based on the returns and if prices for gas are weak as we get into the latter part of the year, and we think 2020 is not something that the gas market is real supportive of, then we'll continue to focus more on the liquids side of our business.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [16]

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Right. That makes sense. And I guess to what kind of plays into that is the supply commitments you guys have been renegotiating or the transport commitments and as well as the ethane rejection, so that kind of plays into that whole strategy that you're talking about. Is that correct?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [17]

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Yes. And I think you brought up a good point there. I think you used the word commitment. I think one of the things that Montage is positioned well with is that our commitments are very light. And I mentioned on the call, we're out producing by a significant margin all of our firm transportation. We have low [MGC] commitments on any of our processing agreements that we've got out there. So we have the flexibility when we see prices not behaving the way we would like, to drop activity. You saw that from us about a month ago. And I think as we move out into 2020, again, we'll continue to kind of observe the commodity market and allocate capital accordingly. But we're not pressured to drill gas wells if the economics don't make sense. We don't have commitments that force us to do that.

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Operator [18]

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Our next question comes from Stark Remeny with RBC Capital Markets.

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Stark H. Remeny, RBC Capital Markets, LLC, Research Division - Senior Associate [19]

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Congrats on the solid quarter. I guess just following up on 2020. So assuming the gas strip does hold, how are you thinking about activity levels in 2020? Is there a scenario where you just push more activity towards condensate development? Could you see more of a maintenance mode? Or is there a scenario where you see production declining throughout the year?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [20]

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I appreciate it. And thank you very much. Listen, I think we're going to be putting out our guidance in late Q4, Q1 for 2020. But we thought it would be helpful more along the lines of your question to give the market a little bit of insight on how we're thinking about 2020. So we're going to continue to monitor commodity prices over the next couple of quarters and continue our optimization and what that might look like for 2020. Fundamentally, though, as you look at it, that it's a great thing to have a high-quality drill-ready inventory of condensate, NGLs and high-quality gas. And that's what we possess. So -- and to be able to toggle between those is actually very easy. In the second half of this year, for instance, our turn-in-lines are going to be heavily weighted towards condensate as we noted in our prepared remarks. To the tune of about 70% of these TILs are going to be condensate, and that's Marcellus and Utica. So I think as we look to 2020, having that inventory in our toolbox to be able to use, it's really about taking a look at the company and really balancing disciplined growth as well as cash flows that the company can generate considering the well mix that we have available to us, all while being extremely sensitive to the balance sheet and liquidity as well as certainly leverage ratios.

So if you want to step back and think about how we're viewing 2020 again towards the end of the year, we'll be coming out with more concrete plans. But it's really just a function of what commodity prices are doing towards the end of the year, it will drive our condensate or dry gas kind of tilt for 2020. But I can tell you, right now, the way we view the world, it's -- unless there's a pretty substantial move in gas, we're going to be shifting and continuing to shift pretty heavily into condensate and liquids throughout next year, while still maintaining some gas drilling as far as minimal commitment over 2020. So hopefully, that answers your question.

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Stark H. Remeny, RBC Capital Markets, LLC, Research Division - Senior Associate [21]

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Yes. Yes. Excellent. And then a follow-up. I noticed in the slides, you have a new pad result for the Herrick, the 4-well Marcellus pad. Can you guys talk a little bit about how performance has trended? And then any specific reasons that the condensate yields were up so much? And any changes to well design? And then what were the cost savings for the multi-well pad versus the parent?

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Matthew H. Rucker, Montage Resources Corporation - EVP of Resource Planning & Development [22]

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Yes. Stark, this is Matt Rucker. I'll touch a little bit on the well performance and if Oleg wants to chime in on the cost reductions there. We did see -- we're basically right at type curve. So the [equivalent] IP rate of 10.8 million equivalent a day, 3 stream. Very excited about the results. The first real 4-well pad development at the [planned] spacing, so very encouraging to see that we're reaching the type curve potential there. We did see higher-than-expected condensate yield of 90 barrel a million. Really that's just the functionality of these wells were drilled to the northwest. And so as you continue to move west and northwest, those condensate yields will change subtly. So we're seeing a little bit of that impact as we drill these wells a little bit further to the northwest. So overall, compared to the initial wells, a little bit higher on the yield. Saw a little bit lower on the gas IP, which was expected. And then, overall, we're seeing those meet the type curve IP expectations. So really excited that our pad development seems to be [proving] up the type curve as we move into Ohio and further just bolsters our plans to continue to develop in this area.

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Oleg E. Tolmachev, Montage Resources Corporation - Executive VP & COO [23]

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This is Oleg, and I will touch on some of the cost savings that we're seeing. And it's really not just the Herrick pad but really across the board. And it really comes from 2 components. A, we are able to drill and complete those wells a lot faster than ever before. Some of those Marcellus wells were drilled in 9 days spud to TD. We have some [pretty long] dry gas Utica wells drilled in 12 days, which is incredible. On the completion side, we are averaging about 9 stages per day. But in some occasion -- on some occasions up to 12 stages per day. And if you compare that to our peers, that's probably double the pace. And all that is -- all that means that we are squeezing our cycle time. And because there's burn rate associated with every day, that gets reduced a lot. We were able to -- as the second component of our cost reduction. So we're able to get very favorable frac pricing commitments for 2019 and 2020. And frankly, we're seeing frac prices that are not -- that we haven't seen since 2016, and a lot of it is due by the fact that we can create so much revenue through the efficiency for our frac providers that they're extending us very, very favorable pricing. So all that is driving down our cost, again, on the efficiency front, which is fairly sustainable, but also service costs, and we expect to continue seeing that through 2020.

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Operator [24]

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Our next question comes from Dillon McIntosh with Johnson Rice & Company.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [25]

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It's actually Dun. But congrats on the quarter, another really strong start since the merger. It looks like everything is really moving on. You've kind of addressed this. But with the strip where it is, it looks like -- it kind of sounds like activity will focus more in the liquids window and with the 40% to 45% upwards in the second half. What can -- kind of ballpark rate of change look like next year, should you continue to kind of focus on that Marcellus, Ohio?

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

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Yes. I think -- this is John. I think if you think about 2020, we certainly will continue our focus on that highly economic carry into Marcellus. And remember, these wells are being drilled on existing infrastructure, existing pads. So it really kind of amplifies the economics and the returns of these wells. If you think about the total liquids mix, again, that we're looking at, we're sensitizing around that 50% to 55% is kind of where we're looking at now with regards to liquids. But again, depending on what gas prices do after the shoulder months are finished and what condensate does over the next few months, we can easily toggle between dry gas and condensate in Marcellus, simply because we have drill-ready inventory that the teams continue to work. So the flexibility is there, but I'd say now we're certainly going to be continuing to focus on building out our drill-ready condensate inventory for the near future.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [27]

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Okay. Great. And then you touched on it a little bit. With the improving cycle times and shorter laterals, smaller pads, looking back at some of the Eclipse mega pads, are you able to go in and utilize some of those existing pads as well, even drilling shorter laterals where you have some of those longer 20,000-foot existing laterals?

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Oleg E. Tolmachev, Montage Resources Corporation - Executive VP & COO [28]

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Yes. This is Oleg. Absolutely. So whenever we were laying out the initial field development plan, we purposely design those pads such that the rig can come back the second and sometimes third time without taking the existing wells off production. So by way of example, all of our Marcellus drilling currently is taking place on the existing Utica pads where we're flowing very significant dry gas volumes. And those wells do not get shut in as we drill and complete and flow back Marcellus wells. So absolutely, we have a lot of -- already invested infrastructure cost, which makes wells both on dry gas in the Marcellus side going forward even more economical and resistant to commodity pricing.

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Operator [29]

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(Operator Instructions) Our next question is from Jane Trotsenko with Stifel.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [30]

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I have a question on the midstream situation for Ohio Marcellus wells. So I remember in the past Ohio Marcellus wells have been kind of limited by midstream constraints. And I'm curious how the situation has changed recently?

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

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Yes, Jane, this is John. I think what you would be referring to would be the gathering infrastructure that we have out there. And what's really changed is the infrastructure continues to be built out and instead of, like the first pad for Eclipse, which was about a year ago, had to be blended into a dry line. Now we actually have some wet gathering infrastructure build-out to the area. And quite frankly, before we would ever drill that, we would require that, just simply because waiting on pipeline wouldn't be a really good return on our capital. So that's what's changed. We have some wet infrastructure in the area that allows us to gather our gas and take it to our preferred processing where we get the best netbacks in the area.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [32]

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So just to confirm, gathering should not be a problem going forward for Ohio Marcellus wells, right?

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [33]

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Yes. We specifically plan to ensure that we are not impacted by any potential gathering delays. That's a very important part of our preparation planning for our operations.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [34]

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Okay. Got it. My second question. Given your ethane commentary on the ethane prices, should we maybe expect a change in NGL barrel composition going forward?

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [35]

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Yes, this is Michael. I'll take that. I think as we continue to develop our Ohio Marcellus and our comments this morning around the contract that we're able to negotiate there and the rejection of ethane we'll see. I think that the potential is there that you could see us a little bit more C3+ weighted and a little bit less C2. I think the guidance that we put out for this year contemplates the development that we already have in the queue. And so I don't think you'll see anything necessarily manifest for 2019. But as we go out into 2020 and start to allocate the development plan for 2020, as John pointed out, and depending on how many of the wells are in which area, you may see a little bit of a shift towards less ethane recovery and more C3+.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [36]

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Got it. And the last question if I could. I'm looking at Slide 6, where you have PV-10 disclosure. And in the press release, you comment about the 30% improvement in PV-10 value for PDP reserves. I guess just to confirm, the new PDP value is $1.2 billion, and then total midyear PV-10 value is $2 billion now, right, on the combined basis? Maybe you can provide some color.

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [37]

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Yes. And so I think the difference there, Jane, that you're seeing on that slide and some of our prepared remarks this morning is the slide is based on SEC pricing. We wanted to give the market a true representation based on the strip. And so the comments this morning around the $1 billion of PDP PV10 is based on the June 30 strip price. And so we felt like that was the more appropriate marker. But we wanted to also be able to provide information in the corporate presentation that was comparative to some other numbers we had put out.

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Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [38]

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So should I be looking at that PDP value that you have on Slide 6 of $1.2 billion or in the press release you referred to something else? I just want to make sure I compare apples-to-apples.

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Michael L. Hodges, Montage Resources Corporation - Executive VP & CFO [39]

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Well, I would say that the $1 billion that we mentioned in our comments this morning was strip PDP PV10. The $1.2 billion that you see on the slide is SEC pricing. So certainly, I don't know what the purposes of what you're trying to compare to are. But depending on what those are, I would adjust the number I use accordingly.

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Operator [40]

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We have reached the end of our question-and-answer session. I'd like to turn the floor back over to John Reinhart, CEO, for closing comments.

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John K. Reinhart, Montage Resources Corporation - President, CEO & Director [41]

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Yes. Thank you. We're very pleased with the outstanding quarter that we have had. And certainly, the teams continue to progress on efficiencies, and we look forward to our third quarter call and talking about the results that time. Thank you for participating on the call today, and have a great day.

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Operator [42]

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