Range Resources Corp Q2 FY2022 Earnings Call

Welcome to the Range Resources Second Quarter 2022 Earnings Conference Call. 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. At this time, I'd like to turn the call over to 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 second 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. We may reference certain of those slides on the call this morning. You'll also find our latest 10-Q on Range's website under the Investors 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. Before discussing the second quarter results, I wanted to spend a few minutes on the broader global energy picture and how we see Appalachia and Range within that framework. As we sit here today in the middle of a global energy crisis, we see a world that desperately needs access to ethical, safe, reliable, and abundant fuel sources. Europe's challenges are a stark reminder that evolving energy policy will need to be thoughtful, prioritizing security, affordability, availability, and environmental responsibility. Within that framework, we believe Appalachia is well suited to play a key role in meeting the world's needs. And from that perspective, it's an exciting time for U.S. natural gas producers. Energy policy will need to be rooted in market realities. If infrastructure projects, namely pipelines and LNG terminals are not prioritized and given a reasonable regulatory review, then I believe it's simply impossible to meet the growing global demand for reliable, safe, and affordable fuels. Unwarranted delays in permitting, adverse policy decisions, and a global push for various renewable initiatives have resulted in underinvestment in oil and gas infrastructure over the last few years. This has stifled domestic supply growth, leading to inflated global energy costs. The current situation will not change unless there's support for the necessary infrastructure that would allow for increased supply, plain and simple. I believe the industry, like Range, is ready, willing, and able to assist in providing the much-needed growth in supply of clean-burning American natural gas to replace coal and also replace supplies of gas from less reliable countries. As it relates to the broader energy transition, I don't believe it's an either/or decision between renewables and natural gas; rather, it will require an all-of-the-above approach to keep costs and inflation in check and to have energy security. Oil and gas production is inextricably linked to nearly everything in our lives: food production, medicine, transportation, shelter, manufacturing, heating, and cooling, to name a few. As a result, inflated energy costs from a lack of infrastructure becomes an onerous, regressive tax on individuals and families struggling to afford food and shelter. As we look for reliable, safe, and affordable energy, we believe Appalachian natural gas and Range, in particular, are well suited to meet the call due to our current cost structure and environmental performance. We believe Appalachian natural gas is essential for the U.S. to sustainably produce enough natural gas at affordable prices. However, infrastructure approvals and investment are needed before it's possible to meaningfully increase Appalachian supply. Additional infrastructure requires permitting at the federal level, and that process has been incredibly slow or impossible in recent years. Given that our national leaders are looking for supply from other countries, they clearly understand the importance and need for more oil and natural gas globally as we try to fight inflation and provide energy security. Unfortunately, domestic supplies are being stymied by shortsighted energy policy along with permitting delays and cancellations of prior approvals. We really need to ask ourselves as a country if we'd rather have additional energy supply from other countries or would we rather source it from right here in America, where we have the highest environmental and safety standards in the world, offer good paying jobs, and provide significant tax revenue at the local, state, and federal levels. Specific to Appalachia, we also have the lowest finding cost and emissions intensity of any oil or natural gas field in the world. As Appalachian shale production grew from virtually nothing just 15 years ago to now producing over one-third of the nation's natural gas supplies, it allowed the U.S. to lead the world in lowering CO2 emissions primarily from the substitution of natural gas for coal in power generation, as natural gas has a 60% lower carbon footprint than coal. The Marcellus and Utica Shales in Appalachia are now the largest producing natural gas field in the world, making the U.S. the largest natural gas producing country. This has also resulted in significantly lower natural gas prices in the U.S. compared to Europe and Asia. No doubt, Americans are experiencing increased energy costs, but nowhere near the levels being experienced in Europe and the rest of the world. Currently, U.S. natural gas pricing is about 75% lower than prices abroad, making U.S. manufacturing more competitive, helping to keep U.S. utility bills lower than other countries, positively contributing to the U.S. trade balance while generating tax revenues for governments and providing energy security for our country. Despite these meaningful contributions, we believe that much more can and should be done in the years ahead to support the increased use of American natural gas, both in our country and around the world. We remain confident that we'll see many more opportunities over time for Appalachian natural gas. So where does that leave Range today? We believe that we are positioned for success in whatever infrastructure scenario we find ourselves in this year, next year, and for the foreseeable future. As the most capital-efficient operator in the largest natural gas field in the world, we believe we sit on the low end of the global cost curve for natural gas. Importantly, Range and other Appalachian producers have advantaged emissions intensity profiles given the prolific nature of the Marcellus, robust environmental standards, and a focus on operational efficiencies being applied daily. Looking longer term, we see Range as being differentiated amongst producers due to our operational expertise, vast multi-decade core inventory, and our access to natural gas and NGL markets outside of Appalachia. The financial and operational results in the most recent quarter reflect those advantages as we made steady progress on our key objectives for 2022, completing our drilling program safely, within budget, and with peer-leading capital efficiency, enhancing margins through thoughtful marketing and a focus on costs, bolstering our balance sheet with further absolute debt reduction, and returning capital to shareholders. Operationally, Range successfully delivered on our second quarter development plans with production coming in slightly better than expected in the first half of 2022. Capital spending of $244 million, or approximately 52% of the full-year budget, puts us on track within our full-year guidance. Dennis and Mark will provide some additional details on the quarter in a minute, but the team has done an outstanding job of operating safely and controlling costs. Looking at margins, starting with pricing, thoughtful marketing and deliveries to multiple end markets resulted in strong prices for the first half of the year and have allowed us to improve our corporate natural gas differential despite meaningfully higher Henry Hub index prices. Range's natural gas liquids production also received a premium to the Mont Belvieu equivalent price, coming in at over $42 per barrel or greater than $7 per Mcfe. Overall, Range received $718 per Mcfe in the second quarter for its aggregate production. As a result, we realized the highest quarterly cash flow per share and free cash flow in company history. This free cash flow is being directed towards the absolute debt reduction and capital returns we announced in February, including a base dividend to begin later this year and a $500 million share repurchase program. Continued strength in commodity prices has further derisked our absolute debt targets, allowing us to repurchase shares at a steep discount to what we believe is the underlying value of the business. This is particularly the case as long-term natural gas has re-rated from sub-$3 to over $4 per MMBtu as the call for U.S. natural gas becomes more evident globally. This re-rating of long-term prices is particularly beneficial to companies like Range with multi-decade core inventory life, though we don't believe it's recognized in the current equity market, which seems overly fixated on near-term trading multiples rather than the true underlying asset value. We have discussed our long-term balance sheet target of $1 billion to $1.5 billion in absolute debt. We expect we can achieve this financial objective early next year while stripping pricing and simultaneously funding the base dividend and share repurchases. We believe the share buyback program continues to represent a compelling investment of our capital as we still trade at a substantial discount to the underlying value of the reserves in our resource base under what we believe are conservative mid-cycle pricing assumptions and development plans. While we run various scenarios in assessing company valuation, we can point to the range as SEC proved reserve valuation at year-end 2021 as a proxy for the value of a portion of our inventory. At recent strip pricing, net value was well north of $60 per share, and as many of you are aware, the SEC definition of proved reserves only allows for five years of development. Beyond this five-year window, Range has thousands of additional core Marcellus wells. Beyond that, we have what many consider to be core Utica and Upper Devonian, as well. Simply put, we do not believe the significant resource value is currently reflected in Range's share price, presenting us the opportunity to create meaningful, long-term per-share value for equity holders through our buyback program. Before turning it over to Mark and Dennis, I'll reiterate something I've mentioned on our past calls and remains true today, which is I truly believe Range is in the best position in the company's history. As the world moves towards cleaner, more efficient fuels, natural gas and NGLs will continue to be the reliable, abundant, and affordable supply that helps power our everyday lives while also helping billions of others improve their standard of living while reducing the reliance on coal and other more carbon-intensive fuels. We believe Appalachian natural gas and natural gas liquids are well positioned to meet this current and future demand. And within Appalachia, we expect Range to be a leader in emissions intensity, capital efficiency, and transparency, which are all core to generating sustainable long-term value for our shareholders. Range has derisked a massive inventory of high-quality wells in the Marcellus measured in decades and translated that into a business capable of generating free cash flow through the cycles. Underpinning this business is the low sustaining capital requirement that Range enjoys, reflected in our peer-leading D&C spending per Mcfe, which allows us to weather service cost inflation better than others while also supporting healthy margins. At the same time, Range's balance sheet is in the best shape in company history with rapid improvements continuing in the coming months. With significantly lower absolute debt, Range will be even more resilient whenever we see the next cycle. And with favorable fundamentals for natural gas and natural gas liquids, Range is well positioned to generate healthy returns on and returns of capital to shareholders. I'll ask Dennis to cover operations.

Thanks, Jeff. As we look back on the second quarter, all-in capital came in at $127 million with drilling and completion spending of approximately $119 million or 94% of total capital for the quarter. Capital spending for the first half of the year totaled $244 million, or approximately 52% of our annual plan. As we mentioned on our call earlier this year, our operational cadence is front-loaded, resulting in a higher number of wells turned to sales in the second half of the year. We exited the second quarter with two horizontal rigs and two frac crews and are on track with our operational program that we outlined earlier this year. This tapered approach results in production growth in the third quarter and additional growth in the fourth quarter, putting us on firm footing to deliver on our annual capital spending and production guidance. During the second quarter, we turned to sales 16 wells in our dry and wet acreage positions. Similar to our approach discussed on previous calls, 14 of the 16 wells turned to sales were located on pads with existing production. One of these wells resulted from a third return trip to that given pad where we saw initial development in 2011, followed by a second phase of development in 2018 and with the third phase occurring this year. The three new wells on this pad are producing over 1,000 barrels per day of condensate in addition to the gas and NGL contribution we see from our wet area. This pad now has 12 producing wells with capacity for additional well development in the future. This pad exemplifies the benefits of our large contiguous acreage position and the durable, repeatable, and capital-efficient nature of our development program for decades to come. Second quarter production came in at 2.074 Bcf equivalent per day, slightly ahead of our communicated guidance during our prior call. Strong field run time during the quarter, which has become a cornerstone of our operations, helped to offset downtime from scheduled infrastructure maintenance and upgrade projects. Additionally, our liquids marketing team was able to work through potential turnaround impacts with our downstream petrochemical customers to maintain overall NGL product placement. Twenty-one wells were drilled in our dry and wet acreage position during the quarter while returning to pads with existing production on four of the six pad sites. Of the 21 wells drilled, 16 were in Southwest Pennsylvania, with the other five in Northeast PA. The average horizontal length for the first half of 2022 averaged over 11,000 feet, or a 5% increase compared to the prior year. Underpinning the year-to-date average, Range drilled four wells with horizontal lengths exceeding 18,000 feet. These wells are just another example of our repeatable, capital-efficient long lateral development and places them among the longest laterals in Range's program history. For completions, the team completed 11 wells during the second quarter. Of the 11 wells completed, four had horizontal lengths exceeding 18,000 feet but two of them exceeded 19,000 feet. Overall, the team completed just under 600 stages during the quarter while operating the majority of Q2 with a single frac crew. An additional crew was secured in the latter part of the second quarter to start completions for wells in Northeast Pennsylvania that are expected to come online later this year. In previous calls, we've reported on the efficiency gains the team has realized along with various records being set. Today, we're pleased to report a continuation of this theme. For the second quarter, fracturing efficiencies averaged nine stages per day, which is a new company record for quarterly completion efficiencies. Along with setting a record for average stages per day in a quarter, the team also set a new standard for pad completion efficiency. This past quarter, a four-well pad in Range's dry gas acreage area completed with an overall pad efficiency of 11.3 stages per day, which is a 5% increase over the previous mark that was set just last quarter. Similar to our message on the prior two calls, these efficiency gains are a result of advancing our service equipment design and completion procedures through remote valving technology and quick connect wellhead equipment, reducing time between fracs and resulting in a more capital-efficient operation. Along with increased efficiencies, the team continues to find areas to capture incremental cost savings each quarter. For example, fueling our contracted electric fracturing fleet with Range's clean-burning natural gas, the team has been able to save capital dollars by displacing diesel fuel for various operations. Through the end of the second quarter, our overall year-to-date fuel savings are estimated to exceed $4 million. With the utilization of the electric frac fleet and dual fuel drilling equipment, we look forward to sharing updates on similar savings across Q3 and Q4. As we've come to expect, water operations continue to build upon their prior successes in the second quarter with the team moving over 10.5 million barrels of water in support of our activities during the first half of the year. As mentioned on previous calls, the team also recycles water from third-party producers to support our water recycling effort. In Q2, this part of our program accepted just under 1.2 million barrels of third-party recycled water, which translates to a savings of over $3 million to our operations. These savings combined with the totals from Q1 amount to over $6 million in savings through the first half of the year. These numbers mirror our trajectory in 2021. As we continue through the second half of the year, we look to meet or beat last year's savings realized. The boots on the ground in the field along with our dedicated 24-hour logistics department and software tools lead the way on this effort and the continued savings to our capital program. Lease operating expense for the second quarter finished at $0.10 per Mcf equivalent, placing us on track for our 2022 plan. During the second quarter, our production operations team shifted their attention from winter operations to warmer weather, working with our midstream providers to ensure heat-related issues are mitigated and keeping the field running at high rates. Compressor cooler maintenance, upgrades, and thinking operations were the focus and played a key role in our quarterly operational success. We often provide updates on our new wells and their execution. But internally, the base production receives the same level of attention, day in and day out. The production engineering and operations teams completed tubing installations on 47 wells year-to-date. Normally, our tubing program is spread across the program year. However, due to scheduling optimization during planned maintenance and downtime, the team was able to complete all of this work in just under two months, supporting production and minimizing downtime. The team also installed 18 capillary streams in the second quarter, which were redeployments from other producing wells. These streams were redeployed at a savings of 85% versus the original installation and increased production in tube well applications while also extending the time for when tubing will eventually be needed in case well applications. Lastly, we installed pad compression on an older pad in our dry gas acreage during Q2, testing the impacts of reduced line pressures. The pilot test has been online since May with approximately 20% higher flow rates with the reduction in field pressure. These types of results will help support future decisions on optimizing recoveries and project economics. Shifting over to marketing, Mont Belvieu ethane prices continued to rise during the second quarter, averaging $0.585 per gallon, which is the highest quarter average in over a decade. This price performance was driven by strong underlying domestic demand resulting from new ethane cracker startups in late 2021 and the first half of 2022, in addition to some export growth. Combined with Range's diversified LPG marketing strategy, this drove Range's NGL price for the quarter to $42.63 per barrel, which is a premium relative to Mont Belvieu and Range's highest quarterly NGL realization in 10 years. Looking ahead, we expect continued ethane demand growth in the second half of 2022 due to new cracker demand from Shell's Southwest PA facility and from increased exports supported by the recent launch of several new carriers. We expect this increase in demand will continue to support ethane prices into 2023 and beyond. Range remains well positioned to supply both domestic and international markets through our flexible transportation portfolio and liquids-rich Marcellus acreage position. As we enter the second half of the year, industrial activity in Asia is expected to strengthen, following seasonal maintenance turnarounds and COVID-related lockdowns that reduced petrochemical operating rates in the second quarter. This, coupled with above-average European demand, should support global LPG consumption through the third quarter, keeping propane and butane stocks near the low end of historical ranges as the winter buying season begins. Low stocks, strong international demand, and limited global NGL supply growth in 2022 should combine to support both domestic and international NGL prices into 2023. For our natural gas marketing efforts in Q2, Range reported a natural gas differential of $0.29 below NYMEX, including basis hedging, with Range's realized natural gas price closing out at $6.90 per Mcf. Underpinning this result was stable production levels across Appalachia, Mexican exports reaching 6.7 Bcf per day, and exports from LNG at 12 Bcf per day prior to the Freeport interruption. With Freeport projected to return to full service, along with reaching capacity at Sabine Pass in Q4, LNG exports are projected to reach 14 Bcf per day as the winter season begins, providing a constructive outlook for Q4 and 2023. Before turning it over to Mark, I'd like to briefly touch on our environmental and safety performance. Year-to-date, our thorough leak detection program has resulted in an additional 8% reduction in leaks detected per component inspected versus last year, further reducing emissions and ensuring our facilities are operating as designed. Looking back at last year and with the reported numbers finalized for water recycling, Range recycled approximately 147% of our produced water, a level we've achieved for the fourth consecutive year. Range's greenhouse gas emissions equated to approximately 0.26 CO2 equivalent per MMcf equivalent, a level within 10% of the prior year. This places Range at the low end of a mission intensity on a global basis and places us on track with our stated emission targets. And lastly, for safety, we continue to see communication, training, and hazard identification pay dividends with no Range employee or contractor OSHA incidents during the second quarter and only one employee incident in over two years. We look forward to sharing more details on these as well as other accomplishments in our upcoming corporate sustainability report slated for release in the dates ahead. As we turn our focus to the second half of the year, we look to build upon our year-to-date results and continue to improve our operational and capital efficiencies while delivering our operational and financial objectives. I'll now turn it over to Mark to discuss the financials.

Thanks, Dennis. Second quarter financial results mark a company high in quarterly net income. The Range team collectively delivered on all fronts with operational results exceeding guidance, driving strong financial results that were directly translated into shareholder value through debt reduction and share repurchases. The second quarter shows what Range can deliver to investors and customers quarter after quarter for decades to come. The principal themes are operational excellence, developing an unrivaled asset in terms of quality and duration paired with a strong financial foundation and strategy that delivers value to shareholders. As we've described before, it's our mission to realize the value of Range's world-class, world-scale asset base, paired with a balance sheet fit for purpose to consistently deliver value to shareholders over a multi-decade inventory life. It was, again, a busy quarter with substantial progress across much of the business. Cash flow before working capital reached $519 million, which funded net debt reduction of approximately $105 million, share repurchases of $117 million, after capital expenditures of $127 million and capital of $179 million. As a reminder, as commodity prices go up, revenue and corresponding receivables rise as well. The majority of our receivables are collected in the following month, so virtually all of the working capital increase shown in second quarter financial results will be collected in July. It's simply a matter of timing. Absolute debt reduction and growing earnings drove leverage down to a company low of 1.2x debt to EBITDAX and rapidly heading lower while growing returns of capital through both share repurchases and expected cash dividends as net debt continues to decline towards our absolute target range of $1 billion to $1.5 billion. Cash flow allocable to returns of capital continues to grow. In other words, we've already begun buying back shares, which we expect to do at an increasing pace as debt declines paired with re-initiation of cash dividends. Through today, cumulative share repurchases have deployed over $165 million, or roughly 33% of the current plan. As we approach 50% utilization, it will be timely to reevaluate and expand as approved by the Board. This type of reevaluation is part of a repetitive, continuous process responsive to prevailing commodity prices, stock price, and investment opportunities for Range. Taking a closer look at second quarter results, cash flow of $519 million was driven by better than guided production levels, achieving strong pre-hedge realized prices of $7.18 per Mcfe compared to $3.25 in the second quarter last year. Strong realized pricing was driven by improved natural gas, natural gas liquids, and condensate pricing. Range's diversified portfolio of transportation capacity and customer contracts, supported differentials, and in conjunction with pricing uplift from our liquids production fully offset basis differentials to realize the price equal to Henry Hub. Hedged cash margins per unit of production expanded to $2.79, up 200% compared to second quarter last year. Range's margins benefited from higher prices resulting from careful hedging and continued focus on cost and efficiency. The change in total cash unit costs in the second quarter compared to the prior year primarily relates to processing costs, which are linked to NGL prices, with minor variations and other line items related to higher commodity prices or inflation. However, with rising production in the second half of the year, GP&T expense per Mcfe is expected to decline, putting us on track for the full year GP&T guidance provided. As planned, interest expense savings from debt reduction have already reduced quarterly costs by over $15 million. We expect further debt reduction to expand annualized savings such that in 2023, annualized interest savings can add greater than $100 million to cash flow compared to last year. Successful second quarter results, combined with a positive view of opportunities for Range going forward, further support our confidence in the return of capital program. As Jeff mentioned, we continue to believe the repurchase program is an attractive investment opportunity given the significant gap between the value of Range's inventory and production versus current share price. We'll remain flexible and adapt to market conditions, project returns, and prudent reinvestment with our repurchase program providing a compelling option for use of free cash flow to acquire greater per share exposure to our own multi-decade inventory and production at a very attractive price. Taking a step back from Range's results and looking at profitability of some natural gas producers this quarter, I believe it's important to put in perspective what this means in the context of an inflationary environment. Range and the industry have been, for many years, stewards of investor capital and bringing fully online the productive capabilities of the Marcellus Shale. It was a dozen years commissioning what is now the largest natural gas producing field in the world. However, large-scale projects typically require patience before returns, real tangible returns are realized. Range and peers to varying degrees are reaching sustainable cash flow generation returnable to pension plans, 401(k)s, and retirees who hold our stock. At the same time, Range provides a reliable, clean energy source to customers across the U.S. and globally, a supply that is cheaper for customers here in the U.S. than most of the world. So what does this mean? Range is profitable and benefits the U.S. economy and environment, all at the same time. Range stands ready to continue developing its unrivaled asset as infrastructure expansions become available to better serve customers here at home and abroad, all in a fiscally and environmentally responsible manner. Hard work, focus, and swift but precise adjustments to our business plan without varying from our core objectives are demonstrating the value of Range's portfolio and business. Patience and diligence allowed early returns of capital to come in the form of debt reduction and now accelerating share repurchases. Share repurchases remain a compelling investment of capital given the substantial gap between the current share price and intrinsic per share value of the largest portfolio of quality inventory in Appalachia. We seek to continue this trend of disciplined value creation for our shareholders. Jeff, back to you.

Operator, we'll be happy to take questions.

Our first question comes from Scott Hanold with RBC Capital Markets.

I was wondering if you could elaborate on the shareholder return plan. You utilized the buyback pretty aggressively in the second quarter. Can you just give us a sense of what your thoughts are regarding the plan going forward, along with debt reduction? How do you see those two working in concert especially at current valuations? And also, as you look forward, does it make sense at some point with your visibility to those debt returns in sight over the next, say, 12 months? Does it make sense to start thinking about a more formulaic-type shareholder return plan like your E&P peers do?

Sure. Scott, this is Mark. I'll start off the answer. So as we've laid out for some time, we have the priority, the waterfall for allocation of capital: the maintenance capital, debt reduction, shareholder returns, and growth at the appropriate time when market conditions make that the prudent reinvestment of free cash flow. With that, we provided a debt target, as you well know, absolute debt in the $1 billion to $1.5 billion area. As we are quickly heading towards that, what we have done is execute both the return of capital and debt reduction in parallel. The way I would think about that is like a reset. As you get closer to your debt target, your risk profile has gone down. Your financial strength is up. So you can increase the capital that can be put towards the return of capital, and you’re reducing how much has to go to debt reduction. Where we stand today at quarter end, we were about $2.3 billion, just shy of $2.4 billion in net debt, 1.2x levered, again the company best. By the end of this year or very early next year, we're anticipating to be within that 1.5:1 absolute debt level. So ratably, you can increase the share repurchases. Like we've talked about before, we fully intend to reinitiate the dividend here in the second half of the year. What that means is just to refer you to Slide 13, where we give some calculations, some free cash flow numbers. We're estimating in aggregate about $1.5 billion free cash flow this year, $1.3 billion in '23, $1.2 billion in '24. That slope is just based on the backwardation and the pricing curves. We're just using strip pricing to do that. It means there's a significant amount of free cash flow that's unallocated. What this does is it gives us tremendous flexibility as we hit debt targets early next year; two, prudently reinvest capital. At the moment, as we repeatedly highlight the gap between current share price and what we think the intrinsic value of the shares would dictate, a prudent reinvestment would be share repurchases. We haven't provided a hard and fast formulaic approach because we think the flexibility has allowed us to better execute both debt reduction and the share repurchase program. There are days when the market is very strong and Range stock may be outperforming that perhaps your execution is better if you're a little bit lighter on those days. There are other opportunities when we have market pullbacks that Range is getting a better return on its dollars. We're getting more shares by being a bit more active, again, when there's a macro pullback in the market. That flexibility by being a little bit less formulaic has achieved a better result for Range in terms of shares in the average price. As we go forward, is that the way it will remain? We will continue to evaluate whether a more formulaic approach is prudent, and whether that formulaic approach helps investors value our shares, does it improve the value. But stepping back to 100,000 feet, what is our job as management? It's allocation of capital. Is it the best return to buy back a share? Is it the best return to invest in some facilities that drive production and reserves and reduce unit costs? Is it drilling an extra well? That's ultimately the decision. It's a broad reinvestment of cash flow decision that underlies our daily responsibilities.

I appreciate that. As a follow-up, I think we are beginning to see inflationary pressures intensify throughout the year. What are your thoughts on the potential for inflation as we look ahead to 2023? I know it's somewhat early, but could you share your views on the trajectory of maintenance capital expenditures? How do you expect the base spending plan to evolve next year in light of inflation? Additionally, I understand that this year you're drilling a percentage of your wells on existing pads. Will you maintain a similar level of activity next year, or is there any reason to adjust your strategy?

Yes, Scott, this is Dennis. I'll tackle this one. As we start to – we talked on this – touched on this a little bit on the Q1 call. We have seen inflationary changes in our cost structure like a lot of other folks between areas such as labor, steel, and fuel. We've worked diligently, and the team has done a great job in trying to mitigate those impacts as much as possible. Areas like prepurchasing our tubular goods, I know we did some of that to end off last year and also securing some throughout the year to ensure that not only we make sure that we have the supply but also at a price below where we thought the market has been heading. The other part is working closely with our service providers. We've had long-term relationships with many of our service providers. If you look at just the average timeframe with our top active service providers, it's well over a decade. So building upon those relationships, looking to strategically make sure that we're efficient together because we know that efficiencies, as we touched on in the prepared remarks today, are going to help drive not only our returns but also theirs. Lastly, we’ve done things like trying to secure pricing as much as possible on other areas like, say, the rigs that we utilize in the field, but also in areas like with our completion equipment. As we consider next year's program, the reality is we're going to have a much better response. I think your question as we go through our annual bid process in the fall, we can lay out what our activity program is going to consist of, which we're clearly in the throes of evaluating but it's not out of the realm of expectation for us to consider something in the 10% to 15% impact range for 2023. Again, we'll know a lot more as we get into the fall and have a much clearer answer for us as we get into the end of the year for 2023. But I'll also say this: as you look at our cost structure, our low base decline and you look at our class-leading D&C per foot structure that we've maintained over the past, not just this year but the past several years, it's really a natural hedge against inflationary effects that Range would see versus our peer groups or in other basins. We've had this in the slide deck for a few cycles. We see $0.60 per Mcfe just for that replacement molecule, whereas other basins may see more 3x that type of number. So we feel that provides a natural hedge and protects where we're headed in the event of whatever inflationary effects come our way.

Yes, I appreciate that. Quickly, what percentage of wells do you think you'll drill on existing pads next year? I mean just ballpark, is it going to be about the same as next year? Or is there any reason to shift one way or the other?

Yes, Scott, that's – I think year in and year out, we tend to range somewhere between 30% to 50%. I would expect us to be in that same category. As we touched on today, we've got a pad site we returned to for the third time now. Consistently, we're returning to pad sites to add additional wells. We have a long runway of being able to do that. We're going to continue to factor that in as much as possible. We know that some of our most efficient operations yield a high level of repeatability from a well performance standpoint. It also keeps the gathering system fully utilized, which helps with our unit costs.

Our next question comes from Michael Scialla with Stifel.

I wanted to ask about the philosophy on pullbacks – excuse me, on share buybacks. One of the pushbacks on that is that companies tend to do that when the revenues are high in the case of oil and gas companies when commodity prices are high, then they don't have the cash to do it when revenues lower, commodities lower. So I realize you see a large gap between the stock price and the intrinsic value of the company, we see it as well. But any thoughts on building up the cash balance at all with commodity prices where they are now?

Sure. As we evaluate the capital structure overall, I think the risk profile and the financial risk you're really referring to are why we laid out absolute debt targets of $1 billion to $1.5 billion. Those targets were established along with our Board of Directors, setting those targets alongside management, and they are in the proxy. So it's not just the leverage ratios; it's absolute numbers in a strong cycle. Clearly, prices are attractive today. You would think you could continue to push towards the lower end of that leverage target. So that gives you greater flexibility as that number is rapidly approaching us to be able to execute share repurchases. And to your point, that large gap between current share price and the intrinsic value we're quoting is just proved reserves. We think we're using a pretty conservative yardstick there, at least conversationally, to validate, to gut check the prudent allocation of capital back to share repurchases. So we think so far, average price repurchasing is around $28. We've put back about $165 million if intrinsic value proves strip pricing is greater than $60. We think that's a tremendous value, and it's creating permanent value as you're reducing the number of share count hopefully in perpetuity and growing cash flow per share and exposure to our inventory on a per share basis. I think that gives us great confidence in continuing what we've been doing, which is announced the first year repurchase program at the end of 2019, executing it in 2020. We bought back 10 million shares. We've accelerated the program this year. As I mentioned earlier, as we approach 50% utilization, I think that’s a timeline to take a fresh look at it and ensure it remains prudent reinvestment and subject to more approval, getting an appropriate resize or increase in that program.

Okay. And Jeff, I appreciate the comments on view Appalachia gas being well suited to play a very important role in future in the energy transition. Along those lines, anything that you're seeing at the local, state, or federal level that has you more or less encouraged about future export capacity out of the basin?

Yes. There's talk in Pennsylvania legislation about an LNG project in Pennsylvania on the East Coast. So again, the largest producing gas field in the world, coupled with the lowest emissions, with the big demand for U.S. natural gas globally, given the conflict in Europe, coupled with the desire to lift the quality of life globally. So it’s well positioned to do that. It would clearly be supported, I think, with the trade unions and holds popular in the state. And we've got the longest core inventory within the Appalachian Basin. The Appalachian Basin is deploying the cost curve globally. With Range being at the low end of the cost curve, with the best emissions within the basin and the desire to do that, I think we will see growth in takeaway infrastructure ultimately come from the basin. We're well positioned to build that one when it's available.

Our next question comes from Doug Leggate with Bank of America.

Jeff, I have a question about your hedging strategy as absolute debt decreases. I'm also interested in your thoughts on the recent volatility in spot prices. It appears that with full U.S. LNG utilization, there is now significant gas-on-gas competition with higher levels of storage for the first time in a while. Could you share your insights on that? While it's a broader question, I'm also curious how it influences your approach to hedging moving forward, especially since your hedge exposure is set to decrease significantly in 2024.

Let me start and then I'll pass it to Mark. We are seeing strong demand for U.S. LNG, particularly in power generation, where the expected gas to coal switching is not happening right now. We have a slide that illustrates this, along with robust industrial demand. Overall, the signs for demand are positive. On a high level, our balance sheet is nearing our targets; we're looking at being less than 1x leveraged by the end of this year, with net debt at a desirable level. It could even get close to zero by the end of 2023. This situation gives us considerable flexibility in our hedging strategy. Now, I'll turn it over to Mark for some more specific comments.

Yes, the key point is the relationship between financial risk, debt levels, and our hedging strategy. The need for a more defensive approach to hedge and protect the balance sheet has diminished. Currently, we are choosing to hedge merely to cover essential cash flow and mitigate some fixed costs of the business. With stronger prices, we may also decide to hedge a portion of larger returns, which means our business can generate returns that are competitive with other industrial firms. This is particularly evident when comparing the valuations of exploration and production companies, including Range, to other sectors. What this implies is that we have adapted our hedging approach. We are retaining more upside potential while accepting opportunity costs when selling options at higher price levels. We believe this strategy provides a favorable risk-reward balance as we seek to secure protection for our fixed costs. In terms of the percentages hedged, we can afford to take a lesser hedging position. While hedging remains a component of our strategy, it will be at a notably lower rate moving forward. For example, in 2022, we hedged about 70% of our gas production, but that decreased to around 50% in the fourth quarter. Over the course of 2022, we were approximately 50% hedged as a percentage of revenue. Looking ahead to 2023, we're around 50% hedged in volume for gas, but only about 35% hedged in terms of revenue, and just 15% hedged in 2024. We have considerable flexibility, and these lower figures are likely to persist. Our primary focus is on covering fixed costs, with a strategic approach to taking some larger returns off the table, albeit at significantly lower hedge percentages than Range has historically executed.

Just to be clear, so swaps are off the table on a go-forward basis? Is that a good read of what you can interpret your comments?

I wouldn't say they're off the table. No. I would say we're going to adapt to how we see the market. If there's a positive skew to the market or you're getting more value from the call option, then perhaps putting the value of a collar is better than a swap. It depends on what fundamental supply-demand situation is and what's being priced into the derivatives market. So I wouldn't say they're off the table, but at present, we are favoring collars.

Okay. So my follow-up question is really just a quick one on inflation. You guys have got a relatively stable level of activity. Obviously, you're in a basin that's not seeing the same level of competition as, for example, in the Permian. I'm just curious, as you look into 2023 and maybe longer-term to the extent you can, how protected or benign do you expect your capital to be from inflationary pressures? To put it in context, we're hearing some of your peers talking about 20%, 30% year-over-year increases in 2023. I'm just curious how you would frame that range for yourselves, I guess.

You bet, Doug. This is Dennis. I'll take a step back to some comments earlier through their prepared remarks. As we start thinking about 2023, we're going to have, I think, a much better handle on what that's going to look like as we get into the fall annual bid process that we go through. It's a strong component of what we do. Our service providers appreciate that we deliver on the program that we put in front of them. So their bid process with us has a lot of validity, and we know that their returns are tied to our efficiencies in a big way. As we look at it right now, we're estimating somewhere between 10% to 15% inflationary effect for 2023. But again, once we start to see changes in steel prices, and if you look at diesel fuel as it ties to oil, you can argue that maybe you're starting to see some upper limits of where that fuel could go at this point in time. Some categories, as you would expect, we've seen small movements in 2022, maybe low single digits. There are some categories we've seen maybe 30% on a service unit cost basis. When you couple that with our efficiencies, as mentioned in the prepared remarks, the team continues to do a great job being creative with our tools that we use in our logistics room and also the folks on the execution side in general. We’ve had another $6 million in savings year-to-date. That helps offset some of what we're most likely going to experience for 2023. If it is 10% to 15%, we also know that when you start tying this back to a per Mcfe basis in that $0.60 mark, we know that we have a natural hedge against these inflationary impacts versus what we're seeing in other peers and also in other basins.

Our next question comes from Neal Dingmann with Truist.

Interesting comments you made earlier on production. I think specifically, I'm wondering, you mentioned the increased second-half sales and the fourth quarter growth, which was nice to hear given the front-end load. I'm just wondering if you anticipate a bit of growth continuing through the end of the year and right into next year. Would you think maybe a little bit more growth next year than what you had this year? Or is that just more of a timing sort of issue towards the end of this year?

Let me be clear: if you look at where we are this year and where we've been, our focus has been and is on maintenance capital. You've seen that typical profile for the last few years; it's pretty similar. But I think if and when we grow, most likely it will be low single digits. Later this year, we'll be looking at our plan for next year, as usual, and probably communicate that early next year. The good news is, given our long-life core inventory, we're well positioned to take advantage when that opportunity for growth comes up. Importantly, when you look at us, even in a maintenance capital case, we can grow cash flow per share.

Yes. I think the profile you're talking about is seasonal, I would say, or program-based levels of activity. Again, it's a question of when Range chooses to grow. But for the time being, for all the infrastructure-related reasons that Jeff highlighted earlier, a growth program may be a little bit off. For Range, I think a very important point to take away from it is the maintenance capital does not mean a no-growth story in terms of cash flow and cash flow per share. Range is very much a growth in cash flow and cash flow per share, and not just because we're buying back shares. It's because of the built-in reduction in gathering costs; as we've laid out in the investor relations materials, that will reduce gathering costs by $25 million next year, and that will ramp to well over $100 million by the end of the decade. We commented earlier that in 2023, relative to '21, you're reducing interest expense by $100 million. We continue to hold production and grind down costs elsewhere in various other line items. Again, we have the ability to grow cash flow and cash flow per share, and we're deploying capital to buy back shares that further accelerates that growth in per-share cash flows. It's just a question of when and how that growth manifests itself.

Great add, Mark. I really like the details. Just as a follow-up, could you talk about how active you are looking at bolt-ons? Would you consider anything more on just primary unit acreage given the material depth of inventory that you already have?

You were kind of breaking up on the end. But I think the question was on M&A. One of the things we've pointed out, and we really believe, is we've got the longest core inventory in Appalachia. Given our core inventory, we've been pretty clear in terms of our path forward: we'll be staying focused on what we're doing. It would have to be something that's extremely accretive on all measures. Again, even against our share repurchase where we see a significant disconnect there.

We are nearing the end of today's conference. We'll go to Neil Mehta of Goldman Sachs for the final question.

I appreciate the insightful macro commentary. I'd like your thoughts on propane prices, which, as indicated on Slide 37, have decreased somewhat. Do you believe this is just a temporary disruption, or should we reconsider our views on normalized prices? Additionally, regarding the gas market, the current environment is exceptionally strong. How has this influenced your outlook for mid-cycle natural gas, and how do you think the market should adjust its perception of normalized prices as we move through 2022 and begin to focus on what the gas sector should be forecasting for the long term?

Neil, this is Alan Engberg. I manage our liquids business, so I'll tackle the first part there on the propane prices. We were really tight on stocks through the winter. As we got into spring, seasonally, that's kind of like shoulder months with natural gas, so things typically weaken a bit. In the backdrop, crude was really, really strong. Propane as a percent of crude on Slide 37 did come in a little bit. Some of that is due to high maintenance levels in the spring months as well as the lockdowns in China due to COVID in Beijing and Shanghai. The last item that really affected price was overall naphtha prices in Europe. Naphtha competes with propane internationally as a feedstock in ethylene crackers, and naphtha Napa was long in Europe. The naphtha crack or the spread relative to Brent was at historic lows during the second quarter. All that pushed propane a little lower than where it otherwise would have gone relative to crude. Looking forward, though, we still see all kinds of new demand coming online. In fact, we've got roughly 600,000–call it 700,000 barrels per day of new LPG-related demand internationally coming online over the next two years. That's 25% of the current global waterborne market. Add to that 2% residential/commercial demand internationally, and you get close to around 1 million barrels of new demand coming online over the next two years. Internationally, they might contribute about 300,000 barrels per day of supply growth to that. The latest July EIA short-term energy outlook has us only contributing about 300,000 barrels per day of new supply in the next two years. The macro looks like the market is going to be really, really tight, and we would expect then that propane prices relative to crude will go back to more like what we saw over the past year, in the 60% to 70% range.

Yes. I would just add on the gas side that, again, we talked about it: we think natural gas is critical fuel. The world is moving towards cleaner, more efficient fuels. U.S. gas, particularly Appalachian gas, is on the low end of the cost curve even globally or towards the low end of the cleanest natural gas produced. So it’s in a great position. U.S. gas really is the only commodity in the U.S. that doesn't trade like a global commodity, but it’s been moving up as that demand is there. With time, you'll see international prices come down while U.S. prices may come up some. So, I think gas is going to be a great place to be.

Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Ventura for his closing remarks.

I just want to thank everybody for taking time to visit with us this morning. Please follow up with our IR team with any additional questions that you may have.

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