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Southwestern Energy (SWN) Earnings Report: Q1 2016 Conference Call Transcript

Company. Michael Hancock (Investor Relations): Thank you, Rob. Good morning. Thank all of you for joining us today. With me today are Bill Way, our President and Chief Executive Officer; Craig Owen our Chief Financial Officer; Randy Curry our Senior Vice President of Midstream; and Paul Geiger our Senior Vice President of our Southwest Appalachia division. If you've not received a copy of last night's press release regarding our first quarter 2016 financial and operating results, you can find a copy on our website at, SWN.com. Also, I would like to point out that many of the comments during this teleconference are forward looking statements that involve risks and uncertainties affecting outcomes. Many of which are beyond our control and are discussed in more detail in the risk factors in the forward looking statements section of our annual and quarterly filings with the securities and exchange commission. Although, we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance. And actual results or developments may differ materially. I will now turn the call over to Bill Way, to discuss our recent activity results. Bill Way (President & CEO): Good morning everyone. Before we get started, parts of the greater Houston area, which is our home here at Southwestern Energy


is the progress being made on the strategic initiatives we previously discussed that will set us up for differentiating value adding growth when commodity prices do recover. Just a few months into the year we are well on our way to delivering on that plan as we promised. I appreciate you all have keen interest in the options being considered, whether that is in maintaining our already strong liquidity position, managing our balance sheet or our asset sales efforts. Please allow us to continue to work on these. As I've commented to you before and have committed to you before, at the appropriate time we will talk in detail about the actions we have already taken to strengthen the balance sheet. Be assured we make good progress in our resolve to complete this work is clear as recently demonstrated by the tangible steps we took in the first quarter to maximize each of the available options to address strengthening the balance sheet and again we will discuss the pertinent options as we complete them throughout the year.

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Another key contributor to our confidence surrounding the Company is associated with our ability to drive cost out of the system since we last spoke. Consistent with our historical approach of driving down cost in less than two months since our call we have identified an additional $40 million of 2016 cost savings. This is in addition to the $200 million previously disclosed because we continue to look for ways to expand this number. Paul will discuss some of the main contributors to the savings to date in a few moments, but each area in the Company has found ways to enhance there margins in the first quarter of 2016. Finally I am confident that with our vertical integration we stand ready to respond as commodity prices support additional investment activity. Owning our own rig fleet and completion equipment and having terrific teams to manage them will allow us the ability to bring wells to sales very quickly as market conditions warrant. Now let me turn over to Craig to discuss some of our financial highlights and he will be followed by Paul who will discuss some of our operational highlights for the first quarter. Craig Owen (CFO): Thanks Bill. Good morning everyone. As Bill mentioned we had a strong quarter exceeding the guidance we released in February and are making progress on each of the strategic initiatives we outlined at that time. One of the key focus items was to strengthen our balance sheet. In the first quarter, we maintain our emphasis on liquidity by adjusting our activity level with cash flow. Our net cash flow was $147 million, while our capital investments were $122 million in the quarter. This demonstrates our differentiating capital discipline. We also enhanced our liquidity with the decision to pay our April preferred dividend in common shares. Preserving $27 million in cash. We used our strong liquidity position to temporarily borrow $1.55 billion at the end of the quarter to maximize our secured and subsidiary debt capacity. This entire amount was paid back in full on April 1. We appreciate that there are many questions and heightened interest regarding our plans if any to utilize this secured and subsidiary debt capacity to address our debt maturities.


However and as Bill mentioned will not be addressing further details or specifics on what we are considering possible terms, status of discussions or anything else on the topic today. Another component of strengthening the balance sheet includes potential asset sales. As the press release noted last night our asset sales process is continuing.

As bid to recede we will make a decision on which asset sales make the most sense to move forward with as an option to address our debt levels. We will update you more on these decisions, as these decisions are finalized. In an effort to further protect the balance sheet in this challenging commodity price environment, were also able to add commodity hedges in the first quarter. We now have hedges for a 107 BCF or approximately 20% of our estimated 2016 remaining production utilizing a combination of swaps inputs at an average price of $2.43. Approximately 100 BCF of this amount covers April through October production when we see commodity prices remain challenged, most challenged as storage levels are worked back towards normal ranges. We will continue to monitor market conditions and look for opportunities to add to our hedge portfolio. I will now turn it over to Paul to discuss a few of the first quarter operating highlights. Paul Geiger (SVP, Southwest Appalachia Division): Thanks Craig and good morning everyone. I'll briefly run through some of our first quarter activities for our E&P and midstream businesses. We completed 9 wells and brought 12 wells to sales. We expect to place an additional 11 wells to sales in the second quarter. As Bill mentioned earlier, one of our key focus areas during the first three months of 2016 has been an aggressive pursuit of margin enhancements. This emphasis has been placed on both the revenue side and cost side of the margin. On the revenue side we exceeded the top end of our production guidance by 2 BCFE as a result of our production enhancement efforts in the first quarter. This was the result of a number of initiatives including the increased production from compression and gathering system optimization projects. Also, across the company strong well performance resulted in shallower declines of our base production than previously estimated. In Southwest Appalachia we placed seven wells to sales in 2015 with lateral length over 10,000 feet. The declines on these wells continue to outperform offset wells in the area and we're learning a lot from the performance at these wells that will be applied in future drilling to enhance value. Another example of outperformance is the Alice Edge pad, which was brought online in November 2015. This pad is currently producing 85 million cubic feet equivalent per day from nine wells after almost five months of production. In addition to production improvements we have realized over $15 million of operating expense savings in the first quarter to a review of operational practices, vendor usage in contract terms. This savings is in addition to the more than $35 million in annual savings associated with the gathering contract changes that were finalized early in the first quarter. With this focus on cost reductions our E&P cash cost which include LOE, G&A and taxes other than income taxes decreased to $1.15 per MCFE for the first quarter of 2016 as compared to $1.20 per MCFE in the first quarter of 2015. In the first quarter we were able to reduce our water handling costs through reduced contractual rates with our vendors and by finding more efficient routes to move water. And midstream we are finding ways to further optimize our compressor fleet to align with production level changes. In the first quarter we realized $4 million in savings primarily through equipment and maintenance optimization. As a result of these and other efforts we have identified over $40 million in expected annual savings for 2016. The Company's differentiating firm transportation and sales portfolio once again provided tangible benefits. For the first quarter of 2016 our Appalachian firm transportation and sales portfolio added over $30 million in value compared to selling produced volumes into local production area indices. In addition to the pricing benefits we received from our own natural gas, we were able to utilize some of the unused capacity within our firm transportation portfolio to generate additional margin. Our Appalachian transportation and sales portfolio will continue to be an asset that we leverage as we move forward. As a reminder, in the Northeast Appalachia we're built an outstanding firm transportation portfolio that allows us to move our gas to multiple markets with volume and term flexibility. Another way we are working to create value-plus in today's environment, is by focusing on increasing our learnings from historical drilling and completion techniques and results.


For example, our teams are re-drilling wells on paper to identify improvement opportunities and fine-tune their geologic models to further increase the efficiency of future drilling activities. With these learnings the Company expects to further optimize our well economics and to add to shareholder value.

That concludes today's prepared comments so we will now turn it back to the operator who will explain the procedure for asking questions. QUESTIONS & ANSWERS Operator: (Operator Instructions) Neal Dingmann with SunTrust. Neal Dingmann (Analyst - SunTrust Robinson Humphrey):

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Good morning, guys. In the next quarter considering the environment out there, Bill, just a couple questions -- first on the 10,000 foot. It sounds like listening (inaudible) that the economics are really improving on those. I'm looking at the slide that breaks out the number of locations. How do you all think about -- I guess two questions around the 10,000 footers-- is that the direction you are headed to do much more of those, and if so how should we think about locations if that is going to be the protocol? Bill Way (President & CEO): Good morning, thank you for the question. I think, initially we were looking at these 10,000 and we have some actually that are up to 12,000 foot in length. We have successfully been able to drill and complete them and bring them online, we want to do some operating and flow testing and get some production history under our belt to make sure that from a stage contribution perspective, as well as a overall well perspective that our theory that it makes sense to do those longer laterals is in fact true. Once we get a little production history behind us then we can know. We have done economics back and forth to make sure that we are comparing apples to apples in wells. Our models are all built on 7500-foot lateral links so there's an opportunity to improve efficiency and capital efficiency in that program should these actually be the length that we choose. Neal Dingmann (Analyst - SunTrust Robinson Humphrey): One last one if I could obviously you have got a great location status out there now, after the acquisition and everything that you guys have. What's your thoughts looking at West Virginia, thinking about drilling some Utica there, is it just more waiting on take away> Or I guess maybe a better way to say that is your thoughts, when you start to ramp up the drilling plan and again that is just it, not or when thoughts about getting after Marcellus versus Utica. Bill Way (President & CEO): I will let Paul talk a little bit about it in a second, but for a couple of factors out on the table. One, when we first went into West Virginia our initial plans were to drill Utica wells beginning in 2018 and begin to ramp that program at that time. You'll know that we have drilled a Utica well in a portion of our acreage. We have not completed it yet. And as we have ranked capital projects this year and prioritized them, we are keeping that one in mind on when we actually complete it. We have some additional Utica wells planned for other portions of our acreage that are set in the queue and I think a lot of it really depends on where gas prices go, where liquids prices go and the balance between wet and dry Marcellus and Utica. And then we operate as a portfolio, so then you go look up in the Northeast of Pennsylvania and the dry gas Marcellus area as well. To early to tell in specific drilling schedule, but we have advanced the process from 2018 to sooner, just of a general basis because we have already made that one well test. The other thing we're excited about is that we have, for the area where we would put down the next Utica well series when we get to that point, we have a dry gas solution in hand which would enable us to have that optionally to go in any of the particular areas we want to drill. Paul Geiger (SVP, Southwest Appalachia Division): I think, this is Paul, I think that covers it. When you look at our position the offset industry activity continues to prove that up as an extremely viable position. In some premium acreage within the Utica. As we go forward into hard investment opportunities from a drill and complete standpoint, with the direction of living within cash flow, certainly wet Marcellus and Utica are in that area and are both on the table and are premium within our portfolio. And we'll let, as we go through pricing at the time and specifically NGL pricing at the time, make that determination at where our best returns can be had between the wet Marcellus drilling or the dry Marcellus or the dry Utica within that area.


Makes sense. Thanks guys. Operator: Michael Rowe with Tudor Pickering Holt. Michael Rowe (Analyst - Tudor Pickering Holt): Good morning. Thanks. Just a quick question on hedging. You've taken some initial steps to lock in basis at various sales points the rest of 2016. I was wondering if you could talk to the practicality of layering on additional basis hedges in Appalachia to potentially protect a significant amount of your production heading into 2017? Just thinking about them protecting against implications of potential pipeline build out delays. Thanks. Randy Curry (Analyst - Southwestern Energy Company, SVP, Midstream):

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Michael this is Randy Curry. Thanks for the question. A little color and context on the basis positions that we have put on. Those have been as a result of some physical sales and physical basis positions. We do remain confident in our outlook of an improving basis position out there. Particularly in 2016 you look at some of the recent contraction in the M2 basis, as little as, November of last year that was -- the May contract was trading at about $1.15 back and you look at it today and we are at about in the $0.60 to $0.70 back range. There are some opportunities representing themselves out there that we think are significant improvements over the past and we will continue to evaluate those. Michael Rowe (Analyst - Tudor Pickering Holt): Thanks. For my final question, and you all accrued $122 million of capital spending in the first quarter but the cash spending from the cash flow statement was $196 million. So I was just wondering as the year progresses should we expect that gap between cash and accrual CapEx to shrink? Or how should we be modeling that? Craig Owen (CFO): Michael this is Craig, thank you for the question. I think in general certainly we will have timing impacts of swings on what it does to a GAAP cash flow statement but in general you will see us at our underneath cash flow levels to the extent we are thinking about strip right now. As our plan we laid out in February we will invest within cash flow not add to the balance sheet, so all that is dictated on what price is and we will continue to evaluate that as we move forward through the rest of the year. Michael Rowe (Analyst - Tudor Pickering Holt): Great. Thank you. Operator: Charles Meade with Johnson Rice. Charles Meade (Analyst - Johnson Rice): Good Morning, Bill and to the rest of your team there. If I could go back to one of the earlier questions but maybe from a slightly different angle. Can you, we're looking at the natural gas strip to the back half of 2016, I am showing is $2.55, call it. Can you give us an idea which of your operators meets that [1.3 PVI] hurdle at $2.55? And I know you look at the 2017 strip as well, but could you give us an idea where you clear that hurdle and perhaps a ranking of what is at the top right now? Bill Way (President & CEO): I think first of all it's a multi year view the you take our well economics of it is $2.55 today that is a data point. That same $2.55 today heads towards $3.00 in 2017 and 2018 or beyond. And since wells are paid out over more than one year. Based on what I have just said all of our areas with the exception of Fayetteville are economic and it gets back to a question of investing within cash flow and as we see that cash flow be assured then we can increase that investment. I think we have talked about before, if you look at the highest capital efficient wells that we have and I am using averages here, so we have had some stellar wells in Fayetteville that have exceeded our expectations even this year but on average, my highest capital efficient areas will be the Northeast and it will depend really on the fact that we now have NGLs as a part of this. As you look at NGL pricing and gas pricing, basically West Virginia and Pennsylvania both would be in the top of that priority list. The other thing that we would do is look at our DUC inventory and we've got somewhere less than 100 of those or excuse me, just over 100 of those, that we would put in the front of the line because they bring cash flow back so quickly because they were already drilled. As you are looking at prioritization.


That makes sense. If we could drill in, drill down a bit on some of the compression or gathering optimization you have done. That looks like a big win for you guys in the quarter and I am curious, was that all from one specific area or can you tell us was that mostly Fayetteville, mostly Northwest or Northeast Appalachia, is there any break down there? Bill Way (President & CEO): The highest impact area or benefit area would have come from Northeast Pennsylvania in Susquehanna in Bradford counties and it's part of our ongoing agreement with our gatherers as we move through time to get that work completed. It was a big win for us absolutely. The other opportunity was in Southwest Appalachia with Williams and then we are continuously looking in the Fayetteville at optimizing our compression fleet. We had quite a bit of compression in Fayetteville crossed a very large gathering system but optimizing that and looking at any kind of constraints. Your specific question around where the biggest benefit was came from our Northeast operations which is around compression would be up there. In addition, I will just point out we talked about this before, our re-negotiations with Williams and our great new deal we have with them contributes to that as well. Charles Meade (Analyst - Johnson Rice): Thanks for that detail, Bill.

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Bill Way (President & CEO): Sure. Operator: Subash Chandra with Guggenheim Partners. Subash Chandra (Analyst - Guggenheim Partners): Good Morning. Is it fair to say that you have to deal with the 2018 maturities in any gas price environment, there is a view towards more drilling. Bill Way (President & CEO): I think how I would characterize this and again I am not going to go into a lot of detail on the details of what we are doing, but one of the things that I believe strongly in, is you cultivate options to manage your business and manage through any kind of -- if you are connected to commodity price environment you manage through that. Cultivating those options, then you look at when do you need to do things? I have 2018 maturities from a calendar year perspective it is two years away. From a priority perspective of managing and being proactive around it. I want to work on that and it is a priority of ours to do that. The more proactive you can be, the more options you get to retain and the more you get to use. That is really the underlying strategy of it and we are not in a place where we have to go do one thing or another and that is why we are continuing to work a portfolio of options but have come out very clearly that it is a priority, we are focused on it and we're going to manage that. Subash Chandra (Analyst - Guggenheim Partners): My second question is I think you implied that you are benefiting from the capacity release market. Any sort of sense on what pricing there is, any generalities up there, what you can slip a firm for? Randy Curry (Analyst - Southwestern Energy Company, SVP, Midstream): Yes, Subash, this is Randy again. Without getting into a lot of specifics our Northeast portfolio as Paul alluded to earlier, is made up of a multiple transportation agreements to really multiple markets down to the Gulf, to the Northeast, across to the Midwest with varying transport rates and commitments. In the first quarter we did release about 80,000 a day, that allowed us to generate some significant value over and above the inherent demand charges. We can talk some more specifics but generally speaking about 80,000 to 90,000 a day is what we put together as a package in multiple agreements out of the area. Bill Way (President & CEO): Just a couple of comments around it. There is a lot of challenges out there in the capacity world and some people have more than they need, some people have less than the need, and our Northeast Appalachia takeaway's a great example where our portfolio of transport is really an asset to us. I wouldn't even call it a liability. What do I mean by that? You have seen our investor pack, we have got, we actually lay out the reservation charges and the rates that we pay. We have the volumes, I've got 1.3 billion a day of firm capacity out of there and as you move through a very short period of time we have the opportunity even today to release some of this. We have the opportunity to, it is made up of so many tranches of capacity that we can release if we want to, we can hold onto it if we want to, we can move gas through it if we want to. It is great optionality and it doesn't hold us hostage or handcuffed to having to drill wells or do things that are not economic when you have so much flexibility around this.


. Brian Singer (Analyst - Goldman Sachs): Thank you. Good morning. First question is on production, with the productions surprising a bit to the upside versus your guidance and really ahead of really starting to see the impact of zero rigs, has your view of your natural decline rate changed particularly in the Fayetteville? Or do you view this beat more as timing or initial well productivity?

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Craig Owen (CFO): I think there are a couple of things at play here and we are early into the year. The teams did such a terrific job last year of placing wells, drilling wells. We have had such significant advancement in our understanding of how to place them, sand loading, all of the things we have always talked about, so it set us up well here. And in addition to that our guys up and working tirelessly debottlenecking, looking at how we are flowing them, a number of aspects that Paul already talked about. We are optimistic in what we are seeing and it backs up some of the statements that we have made of fact that our wells are actually, at least from a performance standpoint we bring them online, doing much better. It is not manipulated flow, it is how they flow and how we optimize that flow. I think it is probably early to tell whether we have got the number pegged exactly right on percentages and we are going to continue to watch that and I will be very transparent with you when we get a feel for that. When you are not adding a ton of wells in a year it is a different flow dynamic. As we watch this, if we need to change it we will tell you. I just say, I just need a little bit more time to look at it. Brian Singer (Analyst - Goldman Sachs): My second question is with regards to the deleveraging effort, I know you do not want to be too specific on some of the individual items you are pursuing, but I guess how should we think about where you want to get your net debt to EBITDA assuming -- if we are going to assume $3 gas with what you may already have, that you don't want to be specific on, can you talk to where you think that leverage would be if that were on board to close? And then where equity issuance stands and the need to achieve your objectives? Craig Owen (CFO): Brian it is Craig. I think we have got a whole industry and we're not immune to it. We've got such a long ways to go to get to certain debt to EBITDA or leverage target from a leverage ratio or anything else. As we indicated in February, we're going to continue to work on the 18 maturities, maintain liquidity and deleveraging. Certainly in a $3 world or whatever the strip gives us, we look to improve that significantly from where we are, but I don't think we are ready to state a specific target that we are driving towards in any time frame. Bill Way (President & CEO): My view on equity, I'm a publicly traded company, so all options and I have talked a little bit about this before and even out on the road, we have got to cultivate all options and obviously we have talked about asset sales and all of these different things, but equity is an option. It is an option for any publicly traded company. So we analyze it in the same way we analyze the other items that we are working on and as we work through. I believe that as we move through this whole process and again we are very deliberate and focused on doing it is made up of a number of pieces. As we pull it together, we will talk about it but your specific question is it on the table, sure it is because I'm a publicly traded company. Brian Singer (Analyst - Goldman Sachs): Great. Thank you for the color.


Holly Stewart with Scotia Howard Weil. Holly Stewart (Analyst - Scotia Howard Weil): Good morning gentlemen. Two quick ones. First on the April election of the preferred shares, how should we think about that cash maybe cash preservation I guess going forward? Craig Owen (CFO): Holly , this is Craig. Are you talking about future elections on those dividends? Holly Stewart (Analyst - Scotia Howard Weil):

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Yes, exactly. Craig Owen (CFO): Our Board and -- management team will make recommendations to the Board every quarter throughout, so we will just have to watch for those each quarter. But certainly why we did April was to preserve cash in the world we are in, that was more critical and more important to us at that time. Bill Way (President & CEO): It was built into the agreement, the plan when we started, so to something we have always looked at. Holly Stewart (Analyst - Scotia Howard Weil): So in the agreement you can continue to do that? Craig Owen (CFO): That is correct. Holly Stewart (Analyst - Scotia Howard Weil): Respect the ongoing asset sales process, is there any update on the JV opportunities with the exploratory projects you could give us? Craig Owen (CFO): I will say that as we've worked through that we have had some interest in a couple of areas. We don't have a specific offer on the table at the moment but there continues to be some interest in a couple of different places and I will let that process play out. We have actually looked -- even on pieces of this whether we want to move it into an asset disposition mode -- because when you talk to these different people they have said I might JV with you but I would rather buy it. So we will watch that over the next little while. Holly Stewart (Analyst - Scotia Howard Weil): Great. Thanks guys. Operator: Our next question is from the line of, Doug Leggate, BoA Merrill Lynch. John Abbott (Analyst - BoA Merrill Lynch): This is John Abbott calling in on behalf of Doug Leggate. I want to go back to, I have two questions on your drilling location slide, your presentation, I just want to go back to that. First for your locations at $3 Henry Hub could you provide an update as far as returns for the Fayetteville, Northeast Appalachia, Southwest Appalachia? And then second could you provide a little bit more color on the breakout of locations to Southwest Appalachia between rich gas and more lean gas opportunities? Craig Owen (CFO): John this is Craig. I will just briefly on the locations and returns. Certainly we look at that and as we think about economic locations, as you know our hurdle rate in terms of PVI so 1.3 PVI at a minimum at $3 and that is what will translate into those locations levels. Obviously as you move up that PVI increases, generally 1.3 for a shale well is the high teens on a return perspective so we haven't broken out further on higher prices than what those PVIs turn into. Or returns rather. John Abbott (Analyst - BoA Merrill Lynch): Can you provide a little color in terms of the breakout of locations for Southwest Appalachia between more rich gas and dry gas opportunities? Paul Geiger (SVP, Southwest Appalachia Division): 50 In the Marcellus probably have of those are wet Marcellus, half are dry Marcellus. If I look at the balance between wet, between Marcellus and Utica about half the locations are Utica and half the locations are Marcellus. So I guess backing up the math a little, you look at the total, half of them are Utica, one-quarter of them are wet, one-quarter of them are dry Marcellus. John Abbott (Analyst - BoA Merrill Lynch): I appreciate the color. Thank you. Operator: Bob Christensen Bob Christensen (Analyst - Drexel Hamilton): Good morning. Could you talk a little bit more about the ability of Fayetteville gas to move to Gulf Coast markets? Historically these largely moved to the north as I understand it and the opportunities would seem to be pretty robust over the next 24 months to petrochemical plants and LNG facilities. Bill Way (President & CEO): I will let Randy talk to about it and maybe put a little color on this but Fayetteville gas has largely moved to the Gulf coast and Southeast all of its time and we've got significant capacity available to us and it is actually well positioned. I will let Randy talk a little bit about it.


Bob, I would just add that Bill commented on some of the optimism we have got in the signposts that are looking at some increasing demand and a lot of that demand is manifesting itself in the Gulf Coast. And as Bill stated our Fayetteville transport portfolio is largely oriented to the Gulf and where most of our disposition has always and we expect it to be in the future as well. Bob Christensen (Analyst - Drexel Hamilton): Very good. Thank you. Operator: Our next question comes from the line of Jeffrey Campbell Jeffrey Campbell (Analyst - Tuohy Brothers): My first question was slide 13 mentions company-owned assets could ramp up quickly as prices recover, slide 18 shows to $2.35 nat gas is the 2016 guidance benchmark. And today you suggested some optimism for future prices. My questions are what price range for what duration is likely required for an increase in investment, and once the investment decision has been made how quickly can a productive effect become evident? Bill Way (President & CEO): For every $0.25 in gas price movement there is $185 million of cash flow that that generates. When I look at drilling and completing and obviously do some DUCs before you do some of the other things. You have got a rig in West Virginia is about $100 million, a rig in Northeast Pennsylvania's probably about $180 million and so for every $0.25 you can begin putting, if we chose to do that, put one to two rigs on. And if you look at strip going in -- let's say we based our budget off $2.35 and you got a $0.50 improvement, you could put two or three rigs back to work if that is what we chose to do and be within cash flow. Certainly doing DUCs first and that would have an impact on decline rates in the year and going forward. Jeffrey Campbell (Analyst - Tuohy Brothers): Thank you. That's helpful. Referring to the longer lateral commentary this morning, I just want to make sure I understood this. Do the longer laterals potentially promise to provide flatter initial declines than the type curves you provide in the appendix of the current company presentation? Paul Geiger (SVP, Southwest Appalachia Division): Jeffrey this is Paul Geiger. We believe so. It has to do some of the conservative -- conservativism you've seen in the production in the rest of that. As we -- certainly it's the most economic thing to do on paper from a fixed and variable cost and benefit standpoint is to push those laterals out as long as you think you can get incremental economic returns. So that is on paper. What we have demonstrated a few of those operationally and been able to get out and not only drill but complete those and drill those out, bring them onto production, so we are watching those from a decline standpoint. There is some, there was some industry concern about are you able to effectively produce the tail end of that lateral, we believe we are through various combination of things including dissolvable plugs, flow through plugs, things like that. We think we're getting good contribution there. But as you recall from our earlier comments regarding overall productive strategy, the ability to have tight landing zone control, the ability to have increased sand on completions and the ability to have managed draw down were big factors we believe to outperformance from a well standpoint. The longer laterals we believe, we are able to produce those at a managed rate and get improved EURs but then also in our liquids rich Marcellus areas also increased liquids recovery versus offset shorter laterals or wells was higher draw down. As we do see those continue to outperform curve, yes sir that potentially has impact on our forward projections for those well type curves. Jeffrey Campbell (Analyst - Tuohy Brothers): Thanks very much for the thorough answer. Operator: James Spicer with Wells Fargo


Just along the same lines there, you at least relative to EBITDA minus CapEx, you were free cash flow positive during the quarter. What is your cash flow outlook for the remainder of the year at strip prices? Do you expect to continue to be free cash flow positive and if so, what does that mean in terms of organic deleveraging versus some of the more proactive alternatives you are evaluating? Bill Way (President & CEO): We're going to watch that obviously. If we can put money back to work and we agree that is something we need to do and we talk with our Board about it then that is an option for sure. I want to take a look at where gas prices go, the important piece of it is whatever decision we make with that we are ready to implement it. One of the benefits of having the vertical integration that we have -- we talked a little bit about that before -- and retaining the DNA for both our drilling company and our completion company inside the business, we can get back to work very quickly. James Spicer (Analyst - Wells Fargo Securities): Thank you.

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Operator: Our next question comes from the line of David Heikkinen, Heikkinen Energy Advisors. Marshall Carver (Analyst - Heikkinen): This is Marshall Carver with Heikkinen Energy. Regarding the comment on the longer laterals and improved type curves, are those potentially outperforming the type curves on a per lateral foot basis? Or is it more just that they are longer laterals and so naturally they are better than a 7500 foot lateral? Bill Way (President & CEO): Paul will talk a little bit of detail about this but let me just tell you that we're going to look at it on a per lateral foot basis. We're going to make sure that the decision to drill a longer lateral versus two shorts is a straight up economic comparison, in that economics as EUR, flow rates, all of that, and investment. So we analyze that very specifically. We actually have some benchmarks internally that we use to say that a 12,000 foot lateral has to perform at this level greater than two [6000s] for it to make sense. That is the analysis we are doing but making it up on length is not something we would do. Paul Geiger (SVP, Southwest Appalachia Division): That is correct, Marshall. This is Paul. Regarding those longer laterals we have got a few of those so we are early in the testing stage but to your question specifically, yes, on an EUR per foot basis, at this point we have got 10% to 25% improvement versus offset so we are encouraged about that. Marshall Carver (Analyst - Heikkinen): How are the costs trending per lateral foot? Paul Geiger (SVP, Southwest Appalachia Division): Interesting question, this is Paul again. We are zero right now, no drilling in the area. Bill Way (President & CEO): [The trend that we had] going for us we had rigs in play is we went from an early entry into West Virginia and trying to find our way to pacesetter. And what I mean by that is, best in class or at the top of the class performance on a cost per lateral foot and we did that with some extraordinary drilling performance out of our company owned drilling teams and our rigs, placing these laterals 100%, or nearly 100%, in zone which helped boost the performance. So it has driven costs down considerably. Paul Geiger (SVP, Southwest Appalachia Division): This is Paul. Where we left off in the drilling program like Bill had mentioned, we expected in the early time of West Virginia acquisition a year ago to move ourselves to top quartile drilling complete performance on a dollars per foot basis over a couple of years. We did that by mid-year last year and as we left off at the end of the 2015 program we are driving those below $1000 a foot. That we consider to be very cost competitive in the Marcellus. We do not have enough data points to give hard numbers in the Utica, you can see some of those in our expectations and they are consistent with what the industry calls a development cost of a Utica well. Marshall Carver (Analyst - Heikkinen): Thank you for that commentary. Thank you.


Operator:

Ladies and gentlemen we have reached the end of our allotted time for questions. I would like to turn the floor back over to Mr. Way for closing comments. Bill Way (President & CEO): Thank you for much and thanks for the questions and the dialogue. We look forward to answering any that did not get answered when we see you in person. As you heard we are driving forward on the plans we shared with you earlier in the year and we have delivered strong results in a short period of time and I think the release we put out yesterday bears that out. And as I said previously, I really believe that credibility comes from consistent delivering on the commitments that we have made and I can tell you that we have got a firm resolve to build on that credibility and lay out plans, execute them, share those results with you and be as transparent as we can about that. We have no doubt that the strategic initiatives that we are pursuing this year and going forward are setting us up to generate significant value for our shareholders going forward and whether it is the quality of the assets, the steps were taking to strengthen the balance sheet, the improving macro indicators, the reasons to be excited about Southwest Energy as an investment I think our strong and very apparent and getting even stronger as we move forward through 2016. We are not hunkered down. We are powering and driving through these commodity price environments. The results show it when every member of our team is out trying to drive margin improvements and are focused on getting more out of the assets that we have. And we are excited about the future that we have in front of us. And are looking forward to talking with you again about these accomplishments as we continue to generate them. Until then we want to thank you for being here with us today and I hope you have a great weekend. Thanks a lot. Operator: This concludes today's teleconference All rights reserved (c) 2014 TheStreet, Inc. Please feel free to quote up to 200 words per transcript. Any quote should be accompanied by "Provided by TheStreet" and a link to the complete transcript and www.thestreet.com. Any other use or method of distribution is strictly prohibited. THE INFORMATION CONTAINED IN EACH WRITTEN OR AUDIO TRANSCRIPT (the "TRANSCRIPT") IS A REPRODUCTION OF A PARTICULAR COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION. THE TRANSCRIPTS ARE PROVIDED "AS IS" AND "AS AVAILABLE" AND THESTREET IS NOT RESPONSIBLE IN ANY WAY NOR DOES IT MAKE ANY REPRESENTATION OR WARRANTY REGARDING THE ACCURACY OR COMPLETENESS OF THE TRANSCRIPTS AS PRODUCED, NOR THE SUBSTANCE OF A PARTICULAR COMPANY'S INFORMATION. THE TRANSCRIPTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THESTREET IS NOT PROVIDING ANY INVESTMENT ADVICE OR ENDORSING ANY PARTICULAR COMPANY.