Range Resources Corp Q1 FY2021 Earnings Call

Welcome to the Range Resources First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speakers' remarks, there will be a question-and-answer period. At this time, I would now like to turn the call over to Mr. Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining Range's first quarter earnings call. The speakers on today's call are Jeff Ventura, Chief Executive Officer; Dennis Degner, Chief Operating Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we've posted on our website. You will find our 10-K on Range's website under the Investor's tab or you can access it using the SEC's EDGAR system. Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures. For additional information, we've posted supplemental tables on our website to assist in the calculation of EBITDAX, cash margins, and other non-GAAP measures. With that, let me turn the call over to Jeff.

Thanks, Laith, and thanks everyone for joining us on this morning's call. The first quarter of 2021 saw Range make continued progress towards our key strategic objectives: improving margins through cost controls and thoughtful marketing, generating free cash flow, enhancing liquidity, and extending our maturity profile, operating safely and efficiently, and ultimately positioning the company to return capital to shareholders as the most efficient natural gas and NGL producer in Appalachia. I'll touch briefly on each of these before turning it over to Dennis and Mark to cover in more detail. I'll start with unit cost and margin improvements. Range's unit cost for the quarter was right on track and ahead of our expectations with G&A, LOE, exploration expenses, and production taxes coming in at the low end of our guidance and expectations. Additionally, we reported a significant gain in our marketing activity for the quarter. As expected, GP&T increased versus the prior quarter, but was more than offset by the significant improvements we saw in NGL and natural gas realizations, resulting in vast improvements to Range's margins. In fact, Range's unhedged realized price for the quarter was approximately $3.20 per Mcfe, which was $0.51 above the NYMEX equivalent price of $2.69. This premium to Henry Hub is a result of our diversified marketing portfolio and liquids production. This liquids uplift improves margins and reduces Range's breakeven cost when compared to producing only dry gas. In fact, Range's pre-hedged margin improved by over $1 per Mcfe in the first quarter when compared to the 2020 average. Given the improved fundamental backdrop for natural gas liquids, with approximately 65% of our activity in the liquids-rich window this year, Range is very well positioned to continue to benefit from this dynamic. During the quarter, Range was also able to benefit from improved daily prices in the natural gas market, realizing a natural gas differential that was $0.08 better than the midpoint of guidance, only partially offset by higher transportation fuel costs again benefiting margins and cash flow. On the back of this improved pricing, Range generated $193 million in cash flow from operations before changes in working capital, and with capital spending coming in at just $105 million for the quarter, Range generated solid free cash flow. As shown on Slide 14, we expect this to continue with significant growth in EBITDAX this year versus last. When combined with absolute debt reduction, this organic free cash flow generation puts us well on our way towards our longer-term balance sheet targets. Touching on the all-in capital investment of $105 million for the quarter, it's clear that the team's operational execution was superb and we continue to find ways to lower costs, once again leveraging our large contiguous acreage position to find ways to complete the operational plan with peer-leading capital efficiency. After delivering on operational plans below budget for the last three years, Range remains on track to do the same for the fourth consecutive year in 2021. The operational team safely delivered this capital efficient plan with an eye towards our long-term environmental goals. Range closed out 2020 with class-leading emissions intensity, reducing greenhouse gas emission intensity and putting us right on track towards our 2025 goal of net zero. As we strive for this goal, it all starts with efficient operations that minimize our operating footprint and importantly generate competitive returns. We believe Range's peer-leading capital efficiency and maintenance capital are key differentiators amongst peers. As was discussed in the past, Range's large blocky acreage position affords us operational and financial efficiencies on multiple fronts including water recycling, infrastructure, rig mobilization, and uniquely optimization just to name a few. Dennis will cover a good example of how this combination and these benefits strengthen Range from both an ongoing development and corporate return standpoint while also enhancing our environmental efforts. When combining our low well costs, strong recoveries, and shallow-based declines of under 20%, Range is operating at a high level of capital efficiency that provides us a solid foundation for generating sustainable free cash flow. What further differentiates Range is our ability to deliver this level of efficiency for an extended period of time given our multi-decade core inventory. For some added context on our inventory, Range is turning to sales approximately 60 wells this year, but we have approximately 2,000 Marcellus locations with EURs that are greater than 2 Bcfe per 1,000 foot lateral. The average recovery of these wells is very similar to the wells Range has turned to sales for the last several years, providing Range an unmatched runway of high-quality wells that's measured in decades. This is not the case for many of our peers, which we believe positions Range well compared to any upstream company to benefit from the improving commodity price environment over the medium and long term. Before turning over to Dennis and Mark, I'll just reiterate that Range remains committed to sustainable free cash flow. Overtime, we believe Range will stand out among peers as a result of our low sustaining capital, competitive cost structure, marketing strategies, and importantly our multi-decade core inventory life, which will increase our competitive advantage in the years to come as other operators exhaust their core inventories. We will continue to focus on safe, efficient, and environmentally sound operations, prudent capital allocation, and generating sustainable returns to shareholders. Importantly, these are all reflected in our updated compensation metrics that can be found in our most recent proxy statement. They've also been summarized in our company presentation demonstrating the alignment of our incentive programs with shareholders as we seek to continue our steady progress towards key initiatives. Over to you, Dennis.

Thanks, Jeff. When we communicated the operational details for our 2021 program, our framework was built around improving both operational and capital efficiencies, enhancing margins all whilst driving to further improve our environmental and safety performance. As we look at our first quarter results, our operating teams are off to a strong start delivering on our objectives for the year, beginning with Q1 production above our communicated guidance and capital spending in line with our 2021 plans. First quarter capital spending came in at $105 million, or approximately 25% of our 2021 program budget. As we discussed on the prior call, our capital spending program is front-loaded for the year and reflects a consistent approach from previous years. As we look forward, our second quarter capital spending is expected to be approximately one-third of the annual budget for the year, mainly driven by timing for completions and turns shifting to Q2. The reduced capital investment in the second half of 2021 aligns with our activity cadence, reducing to one drilling rig and one frac crew during the third and fourth quarters. Our first quarter production level of 2.08 Bcfe equivalent per day was a direct result of recent strong well results combined with exceptional field runtime for the quarter, due in large part to the near flawless winter operations planning and execution by our production operations team. Underpinning our first quarter production was the turning to sales of 16 wells spread across our dry, wet, and super-rich acreage. Our Q1 turn-in-lines consisted of an average horizontal length in excess of 11,500 feet and added just under 200,000 producing lateral feet to Range's Appalachia assets. During the fourth quarter of last year through the first quarter of 2021, our activity shifted towards wells located across our processable gas footprint. The result of these turn-in-lines increased Range's average oil production to a level exceeding 8,000 barrels per day in Q1 and has increased overall liquids production to a similar level seen during the first half of 2020. This level of wet production contribution is expected to continue through the end of this year with second quarter production projected at approximately 2.1 Bcfe equivalent per day. This will position us to achieve our 2021 maintenance target of 2.15 Bcfe equivalent per day while spending $425 million or less. Shifting to our operational highlights, during the first quarter, 15 wells were drilled across our dry, wet, and super-rich footprint. Four of these wells were in the top 20 lateral links for Range's Marcellus program history, with all four exceeding 17,800 feet. Drilling efficiencies continued, with nearly three quarters of new wells drilled on pads with existing production, coupled with a 5% increase in daily lateral footage drilled compared to 2020. On the completion side, 16 wells were completed during the quarter. Overall, the team completed just under 1,200 frac stages while setting a first quarter winter operations efficiency record by averaging over eight frac stages per day. This efficiency level exceeds Range's previous best first quarter winter operations record by 14%. The water operations team built upon prior water recycling successes by utilizing nearly 2 million barrels of third-party produced water, a first quarter record, and as a result, reduced overall completion costs for the quarter by more than $4.5 million. Despite cold weather conditions and heavy snowfalls, the team produced some of our best operational results in our program to date, all while keeping safety and environmental performance at the forefront. These operating expenses for the first quarter were consistent with our prior year's Appalachia level and remained low at $0.09 per Mcfe equivalent. Achieving this LOE level is largely due to a well-coordinated proactive winter operational plan with the objective of minimizing weather-related production impacts and associated costs. These efforts generated a field runtime that exceeded 99% with a weather-related production impact of less than half a million cubic feet per day for the quarter, a remarkable achievement. Looking at the operational successes and milestones achieved during the first quarter involves a focused continuous improvement approach and is anchored by four key areas: Range's water recycling program, long lateral development, utilization of existing infrastructure, and lastly, optimized use of drilling and completions equipment. Each of these are key drivers in delivering on our operational and capital efficiency and are integrated into achieving our ESG or more specifically, our environmental objectives. We often touch on the benefits each of these brings to our program, ranging from a reduction in operating costs, efficiency gains, minimizing our environmental footprint, and reductions in emissions. Today, I'd like to take a moment and walk through how these four strategies are being implemented by our operations and support teams along with the positive impacts. I'll use three of the wells that returned to sales in the first quarter as an example. These three wells were drilled on an existing surplus location with producing wells that were originally developed and turned to sales in 2013. The average lateral length of the original wells was just over 3,000 feet per well. In stark contrast, the average lateral length of the new wells is nearly 16,000 feet per well—more than five times longer. No additional earth disturbance was needed for five times the acreage development and no additional production gathering and processing infrastructure was required to add these new wells. To put this into perspective, Range has close to 250 developed pads in Southwest PA and as of today, we returned to 84 of these locations to drill additional wells. Additional wells are planned for these same pad sites along with the approximate other two-thirds of Range's pads that we've yet to return to for added activity. Simply put, we're only scratching the surface of this opportunity. The three new wells were completed late last year utilizing our contracted electric fracturing fleet which displaced 470,000 gallons of diesel fuel. This reduced our cost by approximately $300,000 per well along with large reductions in associated emissions. 40% of the water used to complete these new wells was recycled water from Range's producing well along with third-party water sourced from our water sharing process. The balance of the water was pumped from our water pipeline network, which was installed nearly a decade ago, further reducing emissions associated with truck traffic by more than 13,400 truck trips. The average initial production of these wells exceeded 44 million cubic feet equivalent per day, including more than 9,700 barrels per day of combined condensate and natural gas liquids per well, placing them at the top tier wells in our Marcellus program history. This is just one of many examples we could share from our development during the past several years with results such as this. These efforts have underpinned our operational efficiency gains and give us confidence in the durability around keeping our drill and complete costs below $600 per foot, all while achieving our environmental goals and producing best-in-class wells. These benefits highlight the importance and value of having a high-quality, contiguous acreage position and forward-thinking technical team. Before moving onto marketing, I'd like to touch on Range's environmental and safety performance. To further reduce production facility emissions in 2020, Range transitioned to a quarterly leak detection program, doubling the number of inspections conducted. As a result of this increased inspection frequency, an additional 7,400 metric tons of CO2 equivalent emissions were removed from our program, resulting in a 67% reduction for those related components. This effort, along with the continued advancements in our production facility design and utilization of an electric frac fleet, has resulted in further reductions with Range's reported emissions reaching a new low CO2 equivalent level. This level of performance is competitive with any natural gas play in North America that puts Range in an enviable position globally. Consistent with our environmental results, Range's safety performance saw similar improvements, delivering a 30% improvement in recordable incidents for the quarter which was the best Q1 performance versus the prior five years. Switching to marketing, Range's NGL and condensate business benefitted from a strong first quarter. Market prices improved across the board, and our advantage portfolio of contracts enabled Range to capture premium pricing and a pre-hedged NGL realization in Q1 that was the highest level since late 2018. The primary driver for improved pricing across both NGLs and condensate was strong demand and a market that saw decreased supply. Preliminary results for US propane and butane or LPG revealed that Q1 2021 domestic demand was 13% higher year-on-year while supply decreased by 4%. Similarly, condensate supply in the Northeast is estimated to decrease by 15% to 20% year-on-year. As a result of these improved fundamentals, the market average NGL barrel price improved significantly during the quarter to $24.83 per barrel. Range's Mont Belvieu equivalent was up 38% over the prior quarter and 83% compared to the first quarter of 2020. Propane prices led the way increasing nearly 60% versus the prior quarter and 140% versus Q1 of 2020. Additionally, Range's premium to Mont Belvieu equivalent barrel increased by approximately $1.50 per barrel versus the prior quarter. We realized this as the highest premium to Mont Belvieu in company history. Looking forward, we see propane and butane market prices continuing to post strong year-on-year gains as storage balances of these NGLs are much tighter relative to last year. This past winter, propane posted its largest seasonal withdrawal in well over a decade leading into March, with propane stocks at a 33% deficit to last year and a 17% deficit to the five-year average. Given the strong international demand that we're seeing, with new chemical capacity coming online and recovering global economies, we believe it will be challenging for propane to replenish US stocks to a comfortable level by fall. As a result, we expect propane prices to transact at levels at or above 60% of WTI crude this fall and the upcoming winter. On the commercial side, beginning April 1, Range entered into a set of new and diverse LPG export-related contracts. These contracts will add flexibility, reduce costs, and further enhance realized propane and butane prices, continuing Range's momentum of achieving strong price premiums relative to the market. Finally, we continue to optimize Range's condensate sales portfolio by adding flexibility, improving margins, and ensuring product placement. As this year progresses and optimization continues via a diverse set of counterparties, we expect that our condensate differentials to WTI will continue to improve, further benefitting our liquids area of development plan discussed earlier in the call. On the natural gas side, cold weather during mid-Q1 equated to the third coldest February looking at the past 10 years. Despite milder conditions in both January and March, Q1 gas weighted heating degree days finished slightly above the five-year average. Through the utilization of our diverse transportation portfolio, Q1 resulted in a differential of $0.14 under Nymex included basis hedging. Looking ahead, we see potential for additional positive improvements for natural gas pricing. Given that a high percentage of operators are targeting maintenance production levels this year, coupled with year-over-year improvements in storage, the fundamentals point toward an undersupplied natural gas market. Within this constructive outlook for natural gas, Range is on track with its differential guidance of $0.30 to $0.40 for the year. As we close out our operations and marketing updates, the first quarter results clearly reflect that our operations are off to a strong start for the year. With the team building further on our operational and capital efficiency performance all while delivering on our environmental and safety objectives. I'll now turn it over to Mark to discuss the financials.

Thanks, Dennis. Consistent delivery on stated objectives is Range's fundamental strategy; and as you heard from Jeff and Dennis, it is something the team successfully executed during the first quarter. Efficient operations delivering production, efficient drilling and completions activity with capital spending trending in line or better than the budget, combined with margin-enhancing expense management, all resulted in significant free cash flow. Our ultimate goal is to repeat this quarter in and quarter out. Results for the first quarter reflect the benefits of reliable operations, productive wells, and diversity in sales points for natural gas, natural gas liquids, and condensate. Cash flow from operations before working capital was $193 million, compared to $105 million in capital spending. Significant improvements in free cash flow compared to past periods were driven by a 50% improvement in pre-hedge realized prices per unit in production versus the prior year period, which reached $3.20 per Mcfe in the first quarter. This realized price per unit is $0.51 above Nymex-Henry Hub, driven by improved natural gas basis and importantly further enhanced by a 77% increase in NGL price per barrel, which reached $26.35 pre-hedged. Realized NGL price on an Mcfe basis equates to $4.39 per Mcfe while condensate realizations equate to $8.17 per Mcfe, hence the realized premium to Henry Hub. Additionally, Range's NGL prices exceeded Mont Belvieu NGL barrel by $1.52 due to our unique portfolio of domestic and international sales contracts. Margin enhancement focused on unit cost is a constant state of mind for Range. Lease operating expenses declined over 40% year-over-year to $0.09 per unit on the back of consistent, efficient Marcellus operation despite the winter weather and the divestiture of higher-cost assets. Cash general and administrative expenses declined to $28 million or $0.15 per unit in the first quarter. The decline results primarily from lower compensation costs of a leaner organization coupled with targeted value-focused spending on IT, data services, safety, environmental, and other essential areas. Cash interest expense was roughly $55 million. Higher interest expense is a result of our most recent refinancing activity, which dramatically and positively reshaped the debt maturity profile of the company and enhanced liquidity. Gathering, processing, and transportation expense increased, but it's important to keep in mind that this is a positive byproduct of strong NGL prices that resulted in significantly higher NGL margins. Recall that Range's processing cost is a percentage of proceeds contracts such that we pay a percentage of NGL revenues as the fee. Consequently, a fraction of the materially higher prices received for NGLs is paid as higher processing costs in that quarter. For perspective, an increase of $1 per NGL barrel equates to approximately $0.01 per Mcfe in cost. This structure is unique to Range in the Appalachian Basin and is a risk-sharing arrangement that has led to reduced costs for several quarters and lower prices, while now continuing to drive material margin expansion. As a result of rising NGL prices in recent months, GP&T expense in 2021 is trending towards the high end of guidance. However, this is more than offset by expected higher NGL revenue forecasted at current strip pricing relative to earlier this year. Turning to the balance sheet, Range has diligently and successfully managed the debt profile such that liability management projects reduced bond maturities through 2024 by almost $1.2 billion while at the same time improving liquidity to nearly $2 billion. During the first quarter, we issued new bonds due 2029 in the amount of $600 million which, combined with the reaffirmation of our facilities, $3 billion borrowing base and $2.4 billion in commitments, provides substantial liquidity and strong evidence of what we believe is durable asset value. Cash flows are expected to retire debt maturities in the coming years and are backstopped by ample liquidity. During the first quarter, we called in $63 million in near-term maturities of senior and senior subordinated notes, closing on the redemption in early April. There has been substantial improvement in the debt markets and it's evident in the trading levels of Range's bonds that both access to and cost of capital has improved. Further debt retirement is expected to be funded primarily by organic free cash flow. We will be cost-conscious and effectively manage debt retirement while also being mindful of any potential refinancing risk of debt maturities. Being opportunistic in bond redemptions as prices in early redemption options become economic on a risk-adjusted basis. Liability management over the last two years has, as expected, temporarily increased interest expense; however, this has avoided much higher-cost forms of capital that would have diluted shareholder ownership and participation in what we see as a steadily improving natural gas and natural gas liquids business. While we're proud of the steps taken today, further improving the balance sheet remains a principal objective. As can be seen in the recently filed proxy, leverage metrics have been incorporated into long-term compensation criteria with a target of 1.5 times debt to EBITDA or better. Shareholder value creation through the generation of free cash flow and its prudent redeployment is our focus. To be clear, we believe this is an achievable goal at current commodity prices by the end of 2022. Range's leverage is approaching target levels. On the topic of hedging, we have a glide path for common Range in which we add positions over the course of the year. Within that path, we intentionally moved at a deliberate pace during 2020 as we added 2021 hedge positions. We plan to follow similar principles this year in adding hedges for 2022 and beyond. By that, I mean, we will seek to balance the twin goals of prudently de-risking cash flows while not hedging away the improved supply-demand balance into backdated price curves. Our strategic actions over the last three years have been focused on reducing risk while maintaining and enhancing the intrinsic value of the asset base. We believe Range holds the largest portfolio of quality inventory in Appalachia. Exposure to that inventory on a per-share basis has been preserved and enhanced by our actions. We believe that the steps taken represent a material progress in positioning Range as a more resilient business, as evidenced by first quarter results primed to participate in improved market dynamics. Jeff, back to you.

Operator, we'll be happy to answer questions.

Our first question will come from Josh Silverstein from Wolfe Research. You may begin.

You mentioned on the 2022 outlook getting down to 2x leverage or below there by the end of the year. You mentioned the gas price and crude oil price assumption in there. Can you talk about what you're thinking about from an NGL price assumption standpoint? Should we still be thinking about like the 2.15 Bcfe a day and $425 million spend?

Josh, this is Mark. I think the best place to reference is Slide 14 in the deck. I'll talk through some of the points you just made. As we've laid out to illustrate the cash flow generating ability of the business and follow-on the deleveraging power of the business that stands today. There's a chart in there, as you point out, it gets us 2 or below 3 times leverage by the end of this year at current strip pricing. If you assume $2.85 natural gas and a $60 oil price for next year, which is really just mirroring this year's curve, you get a trigger point below 2 times leverage. The NGL assumption is roughly $25 per barrel; in other words, if you just look at NGL strip pricing for 2021, that gets you to $24.80 give or take, and you're carrying that forward into next year. So in essence, we're not using an aspirational price deck here. We're just trying to mimic what 2022 looks like.

Thanks for the clarity there. You had a $1.52 premium on your NGL price assumption for this quarter and I know you bumped up at the bottom end of the range. Through some strip pricing and the current portfolio you guys have, any reason to think that we wouldn't still be in that $1.50 range going forward and then maybe, just as it relates to 2022. Can you see that premium grow next year?

Josh, this is Alan Engberg, I manage the Liquids business for Range. Yes, we see that premium actually staying quite strong. As we noted in the call notes, we've put together a series of new contracts for our export business that diversify our portfolio and the portfolio that's pricing in a way that maximizes prices. So we're actually bullish going forward that our premium actually improves, hence the guidance that we've offered out there at $0.50 to $2 over Mont Belvieu win backs. There's a lot of new demand coming on both domestically as well as internationally. You've got organic growth in demand just from economies opening back up and GDP increasing as we slowly pull out of COVID on a global basis, and then you've got a large amount of just new capacity for consuming NGLs coming online. For propane in particular, you've got about 125,000 barrels per day of PDH capacity coming on in Asia. Plus you've got new LPG crackers that'll add about another 50,000 barrels per day to global demand for LPG. And then in 2022, as you're asking the question, we've got even—there's the build-out continues. We've got about another 110,000 barrels per day of new PDH demand still coming on, that's in North America as well as in Asia and probably about another 25,000 or 30,000 per day of LPG demand from new steam crackers. So all in all, we're pretty bullish on the demand side, and from the supply side, we still see things kind of flat this year. You might have marginal growth, although a lot of people are still predicting that we'll have a reduction in C3 plus supply. And similarly, in 2022 we might have marginal growth. But the balances that we're looking at all point towards a much tighter market going forward, and that will add to the demand for the products of US and given again the portfolio of contracts that I mentioned that we have, as well as our access to the export docks and to some real good customers leads us to believe that our premium will continue to be quite strong.

Got it, thanks Alan. Thanks guys.

Our next question will come from the line of Neil Mehta from Goldman Sachs. You may begin.

My first question building on the NGL fundamental question. Is there any incremental color you can provide on LPG demand trends in Asia, which seems to be an important part of driving that part of the barrel? And any details you can provide on the LPG contracts that you announced that enhance your LPG pricing?

Neil, this is Alan again. So in Asia, I believe this year there are five new PDH units coming on, five or six. One of them is in Vietnam, while the rest are all in China. Right there we're saying it's about 125,000 barrels per day of incremental demand from those PDH units. Now, there were new PDH units added last year that are still in the ramp-up phase near the end of last year that add to it what I would call the organic growth that we're seeing. So there's strong growth from new capacity coming on as well as if you look at the chemical chain from propane, let's say in an international steam cracker to ethylene, propane to polyethylene, and polypropylene. The polymers actually are in short supply globally and as a result, the margins throughout that chain have increased significantly, which provides good upside for feedstock prices. But with economies coming back online, there's some inventory replenishment that needs to take place as well as there will be big GDP growth that most analysts are forecasting. So with those two things, I think the pull is going to continue to be very, very strong from this new installed base capacity around the world, as well as that new capacity that we pointed out. On the new contracts, I really can't say too much more about them except for—we had a big contract that expired recently, which gave us the opportunity to put new contracts in place that really add to our flexibility and capability to generate strong premiums relative to Belvieu and again, that supports our view of having one of the highest premiums to Belvieu out of any producer in that $0.50 to $2 per barrel range.

Thanks guys, and then second question is more of a big picture one. I would appreciate your latest thoughts on industry consolidation among the gas producers. Do you see opportunities for Range to optimize the portfolio either by selling assets or improving leverage through acquisitions?

Well, I might be able to double-team this one. I'll start and then turn it over to Mark. I think generally speaking, you've seen some industry consolidation on the gas side and I won't go through the transactions that occurred last year, but we all know what they are. A few of those were in Appalachia, whether they were corporate or asset purchases. But it was consolidation. I think generally speaking, you'll continue to see that over time, and to the extent it makes sense for Range, we'll consider whatever is best for our shareholders. But in terms of us consolidating, we have a high hurdle rate and a high bar that we look at. It would have to be in basin, accretive to free cash flow per share, deleveraging, allowing us to maintain our peer-leading capital efficiency and decline rate. So we'll be extremely disciplined. We're fortunate in that we have, as we've said, decades of core inventory left to be drilled. So we can stay focused on that. But if there's something that makes us a better, stronger company that checks several boxes, it's something we would consider.

Sure. To join in, to add on to that. I guess taking a step back to what your rationale and your motivation is for either divestiture or consolidation. First, on the divestiture side, are you trying to raise capital simply to redeploy that capital into better assets? In other words, are you hiving off lower quality assets? I would say, Range has done a pretty thorough job of that over the last several years. Furthermore, we've reduced debt by $1 billion. Near-term maturities are zero this year, $207 million next year, $500 million or so the year after that. Ample liquidity, ample cash flow. We fully expect to continue that trajectory. So then you get to not—it's nice to have. But you also covered the need to have. There's no need to sell assets that today would, I suggest, be at less than optimal price from what our high-quality asset in Range's portfolio. Northeast Pennsylvania, the Lycoming County assets specifically are good cash flow-generating assets for us and have good potential going forward. So going back to the points we made earlier on a previous question regarding the deleveraging trajectory of the business again, we’re not in a position where we're forced to do anything. We can stay focused on doing what is most economic for shareholder value creation. So it takes you to what's going to drive the most value? To Jeff's point, it's a high bar, but we do maintain financial and operating models on assets around us. It may sit that. We do deep dives into these to see what could accelerate deleveraging, what could reduce unit cost, what could expand margin, and make a bigger business overall reducing the cost of capital for the business. So as we look at that, we also consider the potential impacts to NAV, given Range's depth of inventory that's really unrivaled. All that is to say, it's something we monitor and something we'll continue to be certainly open to and evaluate. But the other motivations for M&A frequently are to backfill your quantity of inventory which we don't need to improve the quality of your inventory. Again, Range does not need to do that. To fix the balance sheet, I think we're on the right path, and we'll continue to move very hard to move that forward as fast as we can. So again, those boxes are pretty well checked. The last is just to maximize value for shareholders. Again, we're open to that and we'll continue to examine it. But I think the punchline here is, it's possible, it's a high bar, but we've got a great path in front of us as we are currently operating.

Dennis, quick clarification question. Did you say the lower capital in Q1 was mainly driven by timing shifts due to Q2 or are you seeing some improvements in capital efficiency that could bode well for 2021 CapEx?

Yes, good morning. Thanks for the question. I would say it's a little blend of both. We continue to see further improvements in our efficiencies. I'll start from that standpoint. The team's made great progress. I think when you look at just the scenario that we tried to walk through from water recycling to drilling some of our longest and most efficient laterals, it's all translating into further improved costs. So we continue to see really good progress that we're proud of across the board and further staying below the $600 per foot cost structure type level. On the other side though, we do have some turns in lines and a small amount of activity that would have shifted into the early parts of Q2. It's just a function of leading over from one quarter of reporting into another and on top of it. We tend to push some of our activity into lower favorable weather timeframes. So stuff that ultimately, it's like roadwork as an example. It's difficult to do roadwork in the Northeast when it's freezing temperatures outside. So you'll see a slight uptick for Q2, but it will still be very much aligned with the efficiencies that we captured and also in line with just some seasonality. But really off to a good start and look forward to seeing what we deliver for Q2.

Got it. Very helpful. And then my second set of questions are for Mark. I was just wondering, how should we think about changes in working capital for 2021? And for dumb guys like us, is there a simple rule of thumb that we can think about to model the changes in working capital on a go-forward basis, maybe based on balance sheet amounts to year-end? Just some help in working capital would be great.

Sure, happy to. I think the change in working capital obviously resulted in about $77 million in the first quarter. But it's really fairly simple when we peel it back. So let me try to break it down into two pieces. First, prices went up, so accounts receivable lined up; the month of March is billed within days after the month closes and you collect by the 25th of the month, so by definition higher prices. You're going to have a little bit of delay in the cash coming in the door to pay off that accounts receivable. So that $33 million, so half of the working capital draw is simply due to higher prices. So to your question, is there a rule of thumb? You'll kind of have to match each company a little bit, but if prices go up, it's going to be a working capital draw, and if prices go down, you're going to have that come back again. On the other side of the balance sheet, accounts payable and accrued liabilities showed a net $40 million drop. Half of that we talked about is retained midstream liability so there's your $27 million. The other relates to some periodic annual payment. There are certain expenses you pay in a single one sum over the course of the year, like the Pennsylvania impact fee for example or when annual employee bonuses are paid. Those are one-time events over the year. So that's the sum total of the working capital change for Q1 for Range. Again, you just have to look back at kind of some timing, some seasonality, and then changes in commodity prices as to how those might shape for each company over the course of the year.

Got it. So the message here is that, as we look at Q2 through Q4, you're probably lacking the speed—the magnitude of withdrawals you saw in Q1. Is that fair?

I mean, it will reverse. You have the revenue coming in, absent prices running further on us, which would certainly be a welcome occurrence. There may be small one-off payments again annual expenses will go out. But no, we wouldn't expect the large one-off draws like this to be recurring. It's seasonal. It's lumpy periodically. By definition, working capital turns on you and comes back in overtime. One other point I would make is that for the one-off payments like impact fee or annual bonuses, those sorts of things—those are expenses incurred over the course of the year. So as you look at our unit cost, that's already been accounted for. These are not incremental expenses to add to any sort of breakeven calculation, and we've obviously talked through the retained liability and that's just the withdrawal of what was already expenses, already accrued.

Helpful. Thank you.

Our next question will come from the line of Scott Hanold from RBC Capital Markets. You may begin.

I could maybe ask a question on the capital spending. Can you give us a sense of like where your well cost before dollar right now? I think your guidance for the year is somewhere in that $550 to $575. Are you sort of at that range and can you give us a sense of where within that range you're? Also as part of that, what are the service cost trends that you're seeing? Is there any kind of pressure that you're feeling at this point or is it somewhat benign?

Good morning, Scott. I'll start with the service cost, and then maybe double back to the capital spending. From a service cost perspective, we go through a really thorough annual bid process with all of our service partners. A lot of them that we are using actually today have been partnered with us for many years, you could say in some cases in excess of a decade. And so part of that process is providing a trajectory of what activity we will have in the upcoming year while allowing those service providers to secure their goods of materials and resources to help us deliver on the program. So we've locked in our prices in a very nice way. We have seen some small fluctuations, most of them have been really small and not impactful to our overall cost structure. Steel is a good example of that. I mean clearly, we're seeing some movement across the sector regarding steel prices. It represents around 5% approximately of our total costs, and as we've talked about, I think in our prior call, we actually were able to secure casing for the first six months of the year in our tubular goods insulating us from some of those pricing increases. It's really nice especially as you think about our program being front-loaded and helps manage any risk around that. When you couple that with the efficiency gains as the team continues to capture, and again, I'll refer to the example we walked through in the prepared remarks, our Q1 frac efficiencies reached an all-time high despite the cold weather and snow. We are continuing to see that we're off to a great start again for the year to meet these numbers and beat them. So we'll keep pushing through the year. But it's a little early to say that we're going to be significantly below or providing additional guidance at this point.

Okay, I appreciate it. And just to clarify again, the target range you provided of $550 to $575, are you within that range right now?

I think it's fair to say that our guidance is unchanged.

Okay, fair enough, and thank you for that. And just a high-level strategic question. Obviously, you discussed how natural gas is in a better position at this point in time, this year as well as NGL supplies which makes it more constructive on the outlook. Strategically, how do you look at this in terms of how Range reacts? I mean obviously gas producers like some oil producers have taken a more disciplined approach. But if we're getting tight on some of those inventories, heading into the winter, certainly that creates a little bit of tension. Obviously, the upside to commodity prices. But there's also a need to make sure there's ample supplies in the event of very cold weather occurring. Can you just give us a sense of how you balance that with—we're going to stay disciplined? We need to get debt down. But at the end of the day, the market may need some supplies and how do you prepare for that?

I'll start off. This is Dennis. I think from a planning and execution standpoint, we always leave some flexibility within our plan to be able to move back to pad sites with existing infrastructure. It allows us to react when we need to. I think last year is a good example of that. We were able to move some of our activity in a way where we continue to maximize utilization of our infrastructure, pull some of our dry gas, turns in lines a little bit more forward in the progress, especially as we saw impacts from COVID-related scenarios on refining along with liquids production. It allowed us to push those liquids turn-in lines later into the year to be advantageous to what we see in the commodity price environment. So the planning team did a really good job there. As you think forward, we're staying the course from a maintenance-level program perspective. If you look at where the commodity strip is at this point in time, it's really not incentivizing any growth. So from our view, I think as Mark touched on earlier as part of the 2022 leverage discussion. It's really about staying the course from a maintenance-level production standpoint and then seeing what truly materializes for 2022 and how that would change the various scenarios in-house that we would run to capitalize.

And I'll join Dennis reiterating that maintenance capital for the time being. I think the underlying question and a follow-on question could be what might motivate the company to increase the capital spending? And I'll say that unless Range sees a change not only in the price but the duration of that price change, a persistent change meaning a change on the shape of a forward curve—something three, four, five years of duration where you can hedge to ensure the return on capital for shareholders of that incremental capital spending—and that would occur when there is a clear and persistent supply-demand call on the market for Appalachia to grow production. So we're going to be very disciplined in that respect. We're going to be very mindful of both in-basin and broader lower 48 market conditions and the fundamental returns on capital to shareholders. We certainly have the capacity, we've got the inventory, we can do that. But to focus on harvesting the value of the inventory and maximizing the cash flow with the first priority and the call on cash to Range being to position balance sheet. So we've got a fair amount of flexibility there to operate this business in a strong free cash flow environment as we see prices this year in the current strip. You can see the scenario we've laid out for 2022, approaching our leverage targets by the end of the year. So that leads you to again capital redeployment. Is that a drill bit or is it a return of capital program for shareholders? I think as you've got clear line of sight to your target leverage levels and persistent free cash flow, that return of capital and the framework Range would use would become the topic of conversation.

Appreciate the color. Thank you.

And our next question will come from the line of Noel Parks from Tuohy Brothers. You may begin.

So I was intrigued by your last discussion. It always seems that the strip and how—it's been pretty apparent that the liquidity beyond the early years is challenging. I mean, I'm not thinking so much about a scenario where you could see three, four, five years of strength in the strip; it seems pretty resistant to building in that sort of time value into it. But I'm thinking more about a scenario where say post-COVID strong industrial demand, you have a six-month period or a one-year period where say we're solidly in the threes, and even if the strip as a whole doesn't make that huge leap. I'm curious, what's the success you've had in your planning group? Do you consider a scenario where you have a limited ramp up for a period of time and then sort of returning down to your currently fine-tuned level of operation with just a confined number of rigs?

I think in that scenario you just described what that means to Range is, it's just more free cash flow. That's a short-term objective. We'll stay disciplined. You got to remember the wells have 50 plus year life, and granted the MPV it's mainly over the first five or 10 years. But to react to six to 12 months signals just means more free cash flow to Range.

Fair enough. I was wondering, do you have any sense of any regulatory loosening maybe on the state level to support - I'm thinking about midstream in particular, input to energy generation that is considered creating fuel cells, hydrogen, and so forth? Is there anything on the state front happening you think you could indirectly benefit half way to producers?

I think at a high level, you think some constructive things like from Senator Joe Manchin wrote a letter to the President supporting Mountain Valley and the importance of the gas industry. Clearly, Manchin is an influential Senator and really the swing Senator at this point. So I think natural gas being a cleaner fuel, the US has an abundant supply of it. But I think it will be an important part of the energy transition, and I think that will curve over the long time. We're well-positioned; we have slides in our deck and there's a bunch of third-party work that really, when you look at emissions, natural gas it's ahead of the class—Appalachian gas is ahead of the class of natural gas, and we're in the core of that, leading the way on the emissions front. So I think it is being embraced, again just referencing Senator Manchin. But there are a lot of people that are supportive of gas in the area; trade unions are very supportive of gas, and it actually polls well in the state. It was a key issue in the last Presidential Election and really both parties supported the development of gas in Pennsylvania and Appalachia.

Thank you. We're nearing the end of today's conference. We'll go to David Heikkinen from Heikkinen Advisors as our last question. Your line is open.

As I think about your free cash flow really improving, it sounds like you're offsetting inflation with efficiency. So as you head towards the $550 per foot range and you maintained $400 million of capital, you'll actually get more wells drilled, and so I'm just trying to think through, Jeff, you hit on the sufficiency gains that just keep happening; the longer laterals that you're moving beyond the $12,000 a foot? There's like this toggle of more cash flow that can come just from the higher level of delivery per well and then even a profitability for a slight uptick in wells with the same number of capital? This is a longer-term thing because I know you're focused on the balance sheet and the $400 million phase. Should we think about almost like a base level of acceleration that Range has latently with efficiency?

Well, I mean another way to look at it is back to just generates more free cash flow. In the scenario you described for, as Dennis and the operational teams are doing a great job leading the lowest cost drill in the basin and really historically it's been getting better, a little bit better over a year. It just means for capital efficiency. We're already the most capital efficient operator in Appalachia, and we want to stay there. We need to generate more free cash flow, that's what I would say.

And once you pay down more balance sheet. Yes, what do you do with the free cash flow once you get below the two times? I guess dividends come in, variable dividends, or do you just let a little more volume flow?

Yes, I think that's a good question, and I'll point you in part to the proxy. The changes in executive compensation provide a decent directional sense of what the board and we as management intend to do with this business. So long-term performance shares are key to off debt to EBITDA—that’s a primary concern of investors these days and now, of course. So the threshold being at or below two times targets at or better than 1.5 times, with excellent being at better than 1 times. So what you'll see us do is as leverage approaches that two times and you've got clear line of sight to do better than that on a sustained basis, then I think we can be clear with what framework the board approves as far as return of capital. So that I think in this business is, by definition, a cyclical business. You need some sort of variable component. I think the combinations of fixed dividends, variable dividends, and/or share repurchases, it’s a mix of those. And I think as we again have clear line of sight to being at target leverage levels, that’s when we’ll put something more definitive out there. But the plans that have been discussed by other producers make sense in broad strokes. It would be some combination of those with some guardrails if you will on cash flow reinvestment into business to give you the sense of - there’s no return to the 20% growth days. If and when the five-year curve is above some level that incentivizes some very low single-digit growth, which we can, then there’s still going to be guardrails on that—the balance sheet first, return of capital, then sustaining CapEx, and then some very modest reinvestment if and only if and when growth is clearly called upon as fundamental supply and demand in the market.

Your three-year performance period looks like you guys have set up to hit here 1.5 times pretty reasonably so. If you can get to one times, that 200% payout looks pretty appealing. So good luck.

Thank you.

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