Range Resources Corp Q3 FY2022 Earnings Call

Welcome to the Range Resources Third Quarter 2022 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 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 third 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 will 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. Range delivered a successful third quarter and realized record free cash flow and cash flow per share, both the highest in the company's history. We're returning this free cash flow to shareholders through various means. Last week, the Range Board authorized a significant $1 billion increase to the company's share repurchase program. In September, we paid $0.08 per share in quarterly dividends, and we're rapidly approaching our long-term debt targets, which we expect to hit early next year at current strip pricing while simultaneously funding the base dividend and additional share repurchases. Year-to-date, Range has invested over $300 million in share repurchases or approximately 4.5% of shares outstanding, acquiring our own production and reserves at what we believe are very attractive and accretive levels. As of today, Range has approximately 242 million shares outstanding and $1.2 billion of availability on our updated share repurchase program. The buyback program represents a compelling investment of our capital as we trade at a substantial discount to the underlying value of our reserves and resource base. While we run various NAV scenarios and assess company valuation, we can point to Range's proved reserve valuation that's well north of $60 per share as a proxy for the value of a portion of our inventory. As many of you are aware, the SEC definition of proved reserves only allows for 5 years of development. Beyond this 5-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 reflected in Range's share price, presenting the opportunity to create meaningful long-term per share value for equity holders through our buyback program. Before covering the quarterly results, I want to spend a couple of minutes on the global energy picture and how we see Appalachia and Range within that framework. As we continue to witness a global energy crisis, it's apparent that the world desperately needs access to abundant, safe, reliable, and ethical fuel sources. Families in Europe are facing real challenges that may not be solved this winter, and that remains a stark reminder that evolving energy policy will need to be thoughtful, prioritizing security, affordability, availability, and reliability. Similarly, regions in the United States are not insulated from these challenges, as large population centers on the East Coast in New England could face limited supplies this winter due to a lack of pipeline infrastructure. As the U.S. and the world looks for reliable, safe, and affordable long-term energy solutions, we believe Appalachian natural gas and particularly Range is well-suited to meet the call due to our inventory depth, competitive full-cycle cost structure, and environmental performance. When considering the expected increase in demand for U.S. natural gas in the coming years, we believe that increased Appalachian supplies will be critical. But for that to happen in a meaningful way, additional infrastructure, namely pipelines and LNG offtake, is necessary. Permitting delays and cancellations of critical infrastructure projects have obviously been a challenge, resulting in inflated energy costs in the U.S. and abroad. However, in the long run, we believe that common-sense policy and economics will win the day and allow this great resource to provide life-sustaining fuel to the people who need it. We shouldn't forget or overlook the fact that the United States has led 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. This was largely led by the growth of the Marcellus and Utica Shales in Appalachia which grew from nothing about a dozen years ago to what is now the largest producing natural gas field in the world, making the U.S. the largest producing country in the world. This reduced American energy costs significantly when compared to Europe and Asia. No doubt, Americans are experiencing increased energy costs today, 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 government and providing energy security for our country. Despite these meaningful contributions, we believe that much more can and should be done to support the continued and increased use of American natural gas, both in our country and abroad. With some of the lowest finding costs and emissions intensity of any natural gas field in the world, Appalachian natural gas is the long-term answer. Within that energy picture, we see Range being differentiated among producers given our operational expertise, vast multi-decade core inventory, and our access to a diverse set of natural gas and NGL markets, both domestic and international. The financial and operational results in the first nine months of this year reflect many of these advantages as we made steady progress on our key objectives for 2022. Completing our drilling program safely with peer-leading capital efficiency, enhancing margins through thoughtful marketing and a focus on cost, bolstering our balance sheet with absolute debt reduction, and returning capital to shareholders. Looking at the quarter, Range successfully delivered on our third quarter development plans, and capital spending remains on track with the high end of our original full-year guidance of $460 million to $480 million for completing the 2022 operational plan. Dennis will provide some additional details on the quarter in a minute, but the team has done an outstanding job operating safely and efficiently while controlling costs. Looking at margins, starting with pricing. Range's portfolio of multiple end markets resulted in strong natural gas prices for the first nine months of the year and have allowed us to once again improve our corporate natural gas differential despite meaningfully higher Henry Hub index prices. Range's natural gas liquids production also had strong pricing of over $35 barrel, up 4% from last year's third quarter. Overall, Range received $7.31 per Mcfe in the third quarter for its aggregate production. As a result, we realized free cash flow and cash flow per share that was the highest in company history. Before turning it over to Mark and Dennis, I'll reiterate something I've mentioned on 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 continues to move 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 providing the opportunity to help 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 help meet that current and future demand. And within Appalachia, we expect Range to be a leader in capital efficiency, emissions intensity, and transparency, which are all core to generating sustainable long-term value for shareholders. I'll now ask Dennis to cover operations.

Thanks, Jeff. Third quarter capital came in at $138 million, with drilling and completion spending totaling approximately $134 million. Capital spending for the first three quarters of the year totaled $382 million or approximately 80% of our annual plan. As communicated last quarter, we expect to complete our 2022 activity plan in line with the upper end of our original capital guidance of approximately $480 million. Production for the third quarter came in at 2.13 Bcf equivalent per day, adding an average of approximately 60 million cubic feet per day versus the prior quarter. Unplanned third-party midstream maintenance that impacted the third and fourth quarter will place us at the low end of our annual guidance range of 2.12 Bcf to 2.16 Bcf per day for the year. Despite these maintenance impacts, production is currently running approximately 2.2 Bcf equivalent per day. Looking at some of our operational highlights. We turned to sales 18 new wells during the third quarter. Twelve of these wells are located in our dry and wet acreage positions in Southwest Pennsylvania, with six wells located in our Northeast PA footprint. As has become a hallmark of our operation, approximately half of the wells are located on pads with existing production, supporting Range's cost-efficient development plans. Turning to drilling, we are now running one horizontal rig, which drilled seven wells during Q3. For completions, the team completed 22 wells during the third quarter across Southwest and Northeast Pennsylvania. Completion efficiencies averaged 7.8 frac stages per day while executing just under 1,000 stages during the quarter. This is the largest number of frac stages pumped in a quarter for Range since the second quarter of 2021 and represents approximately 30% of our fracturing activity for this year. The water operations and logistics group continued to build on Range's ongoing water recycling effort with strategic partnerships with other producers and third-party treating facilities. These efforts yielded water savings of over $4.2 million during Q3, which is nearly a 40% increase over the last quarter. When combining these numbers with the successes of the first half of 2022, the team has saved over $10 million and are projected to exceed $12 million in water cost savings that were achieved last year. These are durable, repeatable cost savings that support our peer-leading capital efficiency and overall financial results that Mark will touch on in just a moment. Lease operating expense came in at $0.11 per Mcfe for the third quarter, which is consistent with Q2. With warm weather in our rearview mirror and cooler temperatures starting to emerge in Appalachia, the team is turning its focus to field optimization for our winter operations. Before moving to marketing, I wanted to touch briefly on service cost. During the third quarter, we continued to observe increased pricing pressure for steel, sand, electricity, and labor, along with strong competition for equipment such as drilling rigs, frac crews, and trucking. We anticipate service pricing and resource availability is beginning to stabilize near current levels as we finish our 2022 program and continue setting up for 2023. The proactive and collaborative approach that we take with our service partners, along with continued operational efficiencies, has allowed us to mitigate significant impacts to the 2022 capital program. As we complete this year's planned activity at the upper end of our capital guide as mentioned previously. As we look into 2023, we have launched our annual request for services process earlier than prior years, allowing our service partners to secure equipment, labor, and materials for next year. We will have a better indication of the service cost changes for 2023 once the RFP process is complete. However, given where current markers are for items such as drilling rig day rates, tubular goods, and labor, it is reasonable to anticipate a service cost increase of approximately 20% year-over-year. But like all years, in the months ahead, we will be working to actively identify areas to further advance our efficiencies, and we expect that Range will again deliver a peer-leading capital-efficient program in 2023. In fact, Range has very low capital intensity. As a result of our peer-leading well cost and low base decline, we are a differentiator when considering the service cost increases being seen across the industry. For instance, if you assume a 20% increase in our capital costs over the high end of our 2022 guidance, that equates to $0.75 per Mcfe for all-in capital for 2023 or a $0.13 increase to our full-cycle cost structure over 2022. We expect this will be at the very low end among the E&P group, particularly when considering that we are starting from a 2022 capital budget that has not been increased this year. Shifting over to marketing. Range reported a natural gas differential of $0.38 below NYMEX in the third quarter, including basis hedging, with Range's realized natural gas pricing closing out at $7.81 per Mcf. Given the strong performance year-to-date, Range is improving its expected 2022 natural gas differential to $0.30 to $0.35 below NYMEX. Looking at NGLs, Range's pre-hedge NGL price for Q3 was $35.30 per barrel, an increase of $1.25 versus the prior year's quarter and approximately $1.53 below the Mont Belvieu weighted equivalent. The primary driver of Range's discount to Mont Belvieu was the spread between European naphtha and Mont Belvieu ethane, which narrowed considerably during the quarter. The company expects a slight improvement to its fourth quarter differential and further improvement into 2023 based on forward commodity pricing. Looking at propane fundamentals, global petrochemical margins have been under pressure, causing U.S. LPG prices to settle at less than 50% of WTI. However, looking forward, we see reasons for optimism that include the following: new demand in areas such as LPG fueling and spiking of LNG, increased demand from Europe to replace Russian supplies. Port delays are improving, container rates falling, and excess polyethylene inventory being consumed. In combination, we believe these positive changes set the stage for petrochemical margins to recover, which should lift U.S. propane prices back in line with historical trading levels, which we expect to be 60% of WTI or greater. Range remains well positioned to supply domestic and international markets. Range's ability to export NGLs via the Marcus Hook terminal provides us the most efficient route into European, Mediterranean, and West African markets. We expect this access to export markets, combined with our in-house marketing capabilities, to be a long-term positive differentiator for Range. Before handing over to Mark, I'd like to briefly touch on our environmental and safety performance. During the remaining months of this year and going forward, we are upgrading our EDGAR process by doubling the inspection frequency to eight times per year. Further striving to reduce emissions while ensuring our production facilities are operating as efficiently as possible. And for safety, ongoing dialogue between our service partners and operations teams resulted in further reductions in worksite incidents versus last year, placing us closely in line with the best performance in company history. We look forward to sharing our environmental and safety results for the year on our first call in 2023. With just under three months remaining in this year's program, we remain focused on delivering our operational and financial objectives this year, while setting us up well for the year ahead. I will now turn it over to Mark to discuss the financials.

Thanks, Dennis. Third quarter financial results continued to deliver against Range’s stated goals at an accelerating pace. The Range team delivered on all fronts with operational results meeting guidance, driving strong financial results that were directly translated into shareholder value through continued debt reduction and growing returns of capital. Third quarter progress on balance sheet objectives while accelerating shareholder returns demonstrate the immense progress made in positioning the business so that Range can consistently deliver tangible returns over the long term. Our mission is to deliver the value of Range's world-class, world-scale asset base to shareholders, underpinned by a balance sheet fit for purpose to consistently drive the business over a multi-decade inventory life. Third quarter cash flow reached $550 million, which funded net debt reduction through the accumulation of $157 million in cash, share repurchases of $176 million, and payment of a quarterly cash dividend totaling approximately $20 million after capital expenditures of $138 million. Net debt is quickly moving toward target levels, combined with growing earnings, driving leverage down to a company low of 1 times debt to EBITDA. Current cash balances and expected fourth quarter cash flow are planned to redeem notes callable in December totaling $529 million. As net debt continues to decline toward our absolute target range of $1 billion to $1.5 billion, cash flow that can be allocated to shareholder returns continues to grow. To that point, this year, we have invested a total of $326 million in repurchasing Range shares, or 65% of the previously authorized amount. Given year-to-date net debt reduction better than $500 million and the pace of further planned debt reduction driven by strong forecasted cash flow, as well as what we believe is a significant disconnect in Range's asset value compared to stock price, Range's Board has approved a $1 billion increase in the share repurchase plan, bringing total available repurchase capacity to nearly $1.2 billion. The cadence of repurchases is framed by our target net debt levels of $1 billion to $1.5 billion and our belief based on current commodity prices that we should enter that range early next year and could reach or potentially surpass the low end of the range by year-end 2023. Our priority remains achieving a balance sheet designed to weather commodity price fluctuations. Fortunately, Range's strong margins, peer-leading capital efficiency, and low base decline rate result in cash flows capable of supporting both debt redemption and returns of capital. Taking a closer look at third quarter results, cash flow of $550 million was driven by strong pre-hedge realized prices of $7.31 per Mcfe compared to $4.32 in the third quarter last year. Realized pricing was led by improved natural gas prices, further supported by natural gas liquids and condensate pricing. Range's diversified portfolio of transportation capacity and customer contracts largely mitigates in-basin pricing risk, given that approximately 80% of natural gas production is delivered to out-of-basin markets on firm transportation. And similarly, virtually all natural gas liquids are sold out of basin. Hedged cash margins per unit of production expanded to $2.84, up almost 100% compared to third quarter last year. Range's margins benefited from higher prices resulting from thoughtful hedging and continued focus on cost and efficiency. The increase in total cash unit costs in the third quarter compared to the prior year primarily relates to gathering, processing, and transportation costs, which have links to higher NGL prices as well as electricity and fuel costs, while reductions in other line items such as G&A and interest expense partially offset the processing cost increases. Planned debt reduction and previously executed timely refinancings should expand annualized savings, such that in 2023 annualized interest savings can add greater than $100 million to cash flow compared to last year. Our confidence in the return of capital program is bolstered by a successful year-to-date execution of the 2022 plan combined with the tremendous opportunities provided by our deep high-quality asset base. 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 will 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. While this has been said before, I believe it bears repeating. 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 spent many years as stewards of investor capital, and bringing fully online the productive capabilities of the Marcellus Shale has taken over a decade to accomplish. Now Range and peers to varying degrees are reaching sustainable cash flow generation returnable to investors, including pension plans, 401(k)s, and retirees to hold our stock. At the same time, Range provides a reliable clean energy source to customers across the U.S. and globally. The 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. At this moment in time, when the world's need for clean, reliable, and affordable energy is more apparent than ever, Range stands ready to continue developing its unrivaled asset 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 demonstrate the value of Range's portfolio and business. For several years now, Range has been returning value to shareholders, first in the form of debt reduction and now expanded share repurchases and a cash dividend. Share repurchases remain a compelling investment of capital given the substantial gap between 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 answer questions.

And today's first question will come from Scott Hanold with RBC Capital Markets. Please go ahead.

I wanted to explore the outlook for 2023 a bit more. If I'm interpreting your comments correctly, it seems that a capital expenditure budget in the range of $550 million to $575 million makes sense. Also, regarding the production trajectory, you're averaging about 2.2 Bcf a day, which indicates a growth rate of 3% to 4%. Is this a fair assessment for next year? Alternatively, do you foresee a flatter production curve? What are your thoughts on both the production outlook for next year and the capital range I mentioned?

Scott, this is Dennis. I'll start with the production side. Over the past few years, we've managed to maintain our production levels year-over-year through our maintenance programs. We tend to front-load our programs, so it's not unusual for us to experience variations in production throughout the year based on when we initiate drilling and completion activities. We anticipate that Q3 and Q4 will show increases compared to the first half of the year, as we have mentioned in previous calls due to our turn-in-line cadence. For instance, thirty percent of our fracturing activity occurred in Q3, which will contribute to higher production in Q4 at the 2.2% level. We expect to maintain a similar production profile for 2023, likely in the range of 2.12 to 2.16, which we will clarify in future calls as we finalize our budget and plans for next year. From a capital perspective, we have already launched the RFP process earlier than in previous years to give our service partners more time to secure labor and equipment for next year's program. The positive aspect is that since we are focused on maintenance this year and likely a similar approach next year, the emphasis is primarily on maintaining our existing equipment. We have already secured frac crews and drilling rigs for next year, and our focus is now on acquiring supporting equipment to ensure our maintenance program is in place. The RFP process should conclude in the coming weeks, and we'll have more clarity on service costs. It’s important to note that we view costs in two ways: on the service side and how they correlate with our overall capital efficiency. Our water and operations teams are actively seeking efficiencies to offset any increases in service costs, which supports our strong capital efficiency and cost structure. This year, the incremental cost to replace each molecule was about $0.60 per Mcfe. Even if we see a 20% increase, resulting in a $0.13 rise to around $0.75, we still expect to outperform several peers and position ourselves competitively compared to other basins like Haynesville. Regardless of sector trends, we are confident in our efficiencies, strong relationships with service partners, and our ability to maintain a leading capital-efficient program.

And I'll just tack on to what Dennis said. You take that cost, but then you have to couple it with the fact that we have the lowest base decline of any peer, which those two things together then lead to class-leading capital efficiency and then put that together with the largest Tier 1 inventory, and we think we're in a good place.

And you all completed I think half a dozen wells in Northeast PA. Can you talk about what you saw from those wells? And how do those compete versus what you're doing in Southwest Appalachia? Is that something where it makes sense to continue a modest development program into next year?

Yes, Scott, it's early, but so far, we are pleased with the performance of those wells. Based on Range's historical development in that area, we have a high level of confidence in the type curves we've developed there, similar to what we see in Southwest Pennsylvania. The wells we've drilled and completed have only been online for a few months, so it's still early in the cleanup phase, but they are meeting our expectations. We are continuing to assess how future activity in Northeast Pennsylvania could fit into our development programs. We are impressed with the rock quality and the results we are observing. However, we are still determining the specifics of future activity in that area. The economics are competitive, which is encouraging for us as we evaluate our dry gas inventory in the southwest part of the state; these economics are favorably aligned with our overall program. We're still working on this, but we expect to find ways to incorporate our most capital-efficient wells into the program on a year-over-year basis.

Could you remind me what the EURs that you generally use up there what the type curves look like?

Yes. It's fair to, Scott, to look at those wells at being somewhere in kind of like a 2 to 2.5 Bcf per 1,000 range. Clearly, there are portions of the field that exceed that level as well. But that's a fair way to look at it. And again, if you look at some of the materials that we have in our slide deck, you can see why those economics can compete.

That will come from the line of Doug Leggate with Bank of America. Please go ahead.

I wonder if I could go to Slide 12 and just ask you particularly the 2025 outlook. I know it's a long way off, but I'm trying to understand where you are on cash taxes currently and whether you fully loaded this latest guidance for your expectations for capital inflation that you discussed and the transition to full cash tax, just want to understand if they're fully embedded in these numbers?

Doug, it's Mark. Happy to take that question. So as a backdrop, the background information to your question is really where we're starting from in terms of net operating loss that we can use to help deferred taxes and minimize near-term cash tax payments. Range has roughly $2.9 billion in federal NOLs, so that largely will take care of taxable income for this year and will provide a substantial offset for 2023 as well. We have to dig into the details just a bit to understand the timing of cash tax payments. The NOLs come in two vintages. The first bucket, if you will, of roughly $1.2 billion allows you to offset up to 100% of your taxable income at the federal level. The remaining, the balance of $1.7 billion or so, you can use to offset up to 80% of your taxable income at the federal level. So what that means is, again, federal tax is largely offset for 2022. For 2023, they will be largely mitigated, but some cash taxes at the full level will begin, and after 2023 you have effectively or very nearly fully utilize those NOLs. So as you head into 2024 and thereafter, to your question, yes, there will be cash taxes we fully expect. That's a happy byproduct of strong profitability of the company. And yes, those estimates are baked into these numbers we reflected here on Page 12.

My follow-up is kind of, I guess, it's like a quasi-takeaway question. But I'm going to ask it like this, our understanding is that some of your smaller, let's say, private peers don't have the same inventory depth or longevity that you guys do, and we're starting to see some larger space opening up in some of the pipes. I wonder if you could confirm if that's what you're seeing regionally? And if so, if that plays into whether a range would look to fill or be able to fill some of that space in the context of your flat production or maintenance capital comments earlier. I'll leave it there.

Yes, Doug, this is Dennis. I'll take that question. Our marketing team in PA is always looking at the most creative ways to move our gas production on a regular basis. We monitor the pipes. We understand what's flowing on them pretty well. And I would say at this point, it's not unlikely to see some of that infrastructure as we go forward, be underutilized because of core exhaustion capital allocation, maybe for some companies that have gone to other basins as you look at some of the M&A transactions that have occurred over the past 12 to 24 months. But when you look at the way our core position is put together, it really allows us to be ready and able to take advantage of whether it's processing capacity that goes underutilized. We monitor that as well or being able to take advantage of natural gas or NGL capacity that comes available on different portions of the infrastructure. So is there some capacity? I would say, yearwise, as we look over the past year, there's been points on an annualized basis across the year between local demand and capacity somewhere around approximately 1 Bcf of capacity. So there is room to put some gas in the system there. But there are times of the year, which you can imagine it is tighter than others.

So does that change meaningfully Range's ex-growth sustaining capital guidance that you've obviously spoken to for some time?

So I'll start first and my means if Jeff or Mark want to jump in, please do. But I think as we think about 2023, we still lead toward a maintenance level type program, stay in the course and again, seeing stay dedicated to our financial objectives that we have. But again, as we start to look at 2024 and beyond, and you start to see core exhaustion limits in inventory and the quality of the inventory potentially for peers in the basin, we think that really tees up the opportunity for a different outlook in the event that we want to consider some kind of low growth profile. Again, we're a ways from that. We like a maintenance level type program for 2023, we feel like we're poised and ready with our long runway of inventory and our ability and history to execute in the basin. With over 1,200 producing wells, we feel like we really understand Appalachia well, and we're set up on the first cut of the fairway to be able to step in and actually add some additional production when the basin economics and also fundamentals call for it.

And that will come from the line of Jake Roberts with Tudor, Pickering, Holt. Please go ahead.

Just curious if we could dig into Q4 a little bit, some of the moving pieces there. I know you guys are messaging high end of the full year guide. Just curious what's going on there for the similar turn in line quarter-over-quarter for a bit less money. And then also as part of that, is the current rig running going to be with you for the remainder of the year into 2023? And is that part of what's been secured for 2023?

Yes. This is Dennis. As we assess our activities for Q4, we currently have one frac crew and one drilling rig operational. In Q3, we operated two frac crews, with the second crew primarily focused on our Northeast PA operations that we mentioned earlier. Additionally, a second rig was released early in Q3, around the late Q2 timeframe. When considering our capital allocation moving from Q3 to Q4, our cost distribution is approximately 70-30 between the frac crew and the drilling rig. As we wrap up Q4, this lower activity pace means that this single frac crew and drilling rig will extend into 2023. We expect to have the frac crew and the drilling rig for the entirety of 2023. Typically, we start our programs with a heavier load, so it’s reasonable to anticipate an increase in drilling activity in Q1 to appropriately plan our 2023 program. The turn-in-lines in Q4 will reflect the impact of the 1,000 frac stages we completed in Q3. While it will be somewhat reduced, it will still be a result of that effort.

And then 2024, I can see roughly 30% hedged. And I know you guys have spoken about as that comes out of the system. You don't need to have such a strong hedge profile as you perhaps much did. Is 30% a good range to be thinking about in that timeframe once that does hit those target levels? Or should we expect some incremental adds there as we progress through 2023?

Jake, it's Mark. I'll start off responding to that question. So I think that's a good starting place as we look a year or two out, really our fundamental strategy and the purpose of hedging hasn't changed over the years. It's really a risk management exercise. Years ago, given the date of maturity of the business capturing the inventory drilling to hold, drilling to prove up the inventory, a higher hedge percentage was required to protect the balance sheet, protect cash flow, protect the capital program necessary to capture this inventory. Today, given dramatically reduced debt balance, extremely low leverage, the lowest in the company's history, we are looking conceptually to essentially cover a good portion of the fixed costs in the business to help mitigate the downside risk while still participating in a strong market, a market that has re-rated and continues to be rate both in terms of natural gas and natural gas liquids. So as you look ahead to 2024, that roughly 30% hedged on the natural gas side. That equates to about 25% of revenue. That's a good level to cover the vast majority of fixed costs. But there may be some minor fluctuations above that. If you can generate extremely strong rates of return far beyond any other industrial sector, we might consider a bit more as well. But fundamentally, it's a risk management exercise designed to cover the fixed costs.

That will come from the line of Noel Parks with Tuohy Brothers Investment Research. Please go ahead.

I was wondering, thinking about the infrastructure situation. I was wondering, we, of course, know the federal opposition to pipeline growth has been pretty long standing now. I was wondering if there are any signs of reduced state or local opposition to pipelines? Or even if you could even see any signs of less opposition to LNG infrastructure going forward?

Yes, this is Jeff. I want to highlight that the natural gas industry is well-received in the state, which is evident from the election cycles, including the current and past midterms. Candidates from both sides demonstrate support for the natural gas sector because it resonates positively with the public. The trade unions in the state are also in favor of this industry, which significantly contributes to the state's economy through taxes and job creation. Regarding LNG, there is a meeting scheduled for later this week in Philadelphia, where a group of legislators will discuss LNG and its potential in the southeastern region of the state for export. Given the energy demands in Europe, this area is strategically positioned for transportation, which would not only make economic sense but also create numerous job opportunities. Additionally, there are ample brownfield sites available in that region. Overall, I view this situation positively.

I was wondering if anything as far as the adjacent states that aren't producers, I'm just thinking with what we might see with energy costs in New England and the Northeast this winter, whether there might be some reading of the writing on the wall as far as the need for more infrastructure.

Yes. I mean you've heard, not that evolving it, but you hear in the New York gubernatorial race, the Republican candidate said that if he gets elected, that's one of the things that he's going to do is promote the natural gas industry for New York in the pipeline. Clearly, it would be a plus. New England's getting LNG imported was from Russia, Algeria, different places at a significantly higher price. I think earlier this year, if I remember exactly, don't quote me, but I think in January and February, they paid about $30 per 1,000 cubic feet or per MMBtu, whereas you could have bought it from Pennsylvania to Marcellus for a significantly lesser price. So that would be the common-sense solution. And then importantly, too, from an environmental perspective, not only is it lower cost, but from an environmental perspective, the Appalachian Basin has the lowest emissions of any basin really on the globe. And within Appalachia, Range is basically the head of the class. So it's more cost-effective, and environmentally, it's better. Clearly, it's more environmentally effective to move that by pipeline than it is to move it by ship from Asia to Northeast U.S. when the U.S. has such an abundant resource in natural gas. So it is the answer. But short-term and long-term answer, I think, for the country. And take that one step further, even in terms of manufacturing now, it's the U.S. is going to have a tremendous advantage from a feedstock point of view or an energy cost point of view. When you look at the price of natural gas in the U.S. versus Europe or Asia, it literally trades for plus or minus 70% less in the U.S., 75% less than it is in Europe or Asia. So that's an advantage from a manufacturing point of view as well as from a consumer point of view.

Right. And I did want to take a minute to think about a longer-term, more optimistic scenario for gas. And thinking about with your current level of reactivity, could you just refresh my memory, what Range’s peak Appalachian rig count has been in the past? And I guess I'm thinking about a scenario in which maybe a multi-basin player decided to divest out of Appalachia. With your current overhead how much bigger an activity slate do you envision you could support?

Well, it's a great question. It's a bit of an apples-and-oranges question. If you go back to the peak number of rigs that we ran, in the past when we were delineating drilling this developing might have been 10 to 12 rigs or maybe a tick higher. But back in that time, the lateral length of those wells was extremely small. So Range discovered the play, kicked it off. The early laterals were plus or minus 3,000 feet, where today, our average wells are 11, 12 and the longest are 18 to 19. So a lot's changed, and the team has gotten better and more efficient year after year after year from a variety of things, not just longer laterals, I won't go into all those. But I think we have a great team operation. I think we know the state well. We know the marketing. We know how to move natural gas and NGLs in the basin. So there may be opportunities with time to do more. The good news is we have a great inventory, and we're in good shape. So we don't need to do anything. We can continue to execute the plan, but to the extent there's something that makes sense for us to do, we'll be open to it. And ultimately, if there's capacity and it's the right time to grow, we'd also consider that. We have the inventory to do that.

We will go to Umang Chaudhry with Goldman Sachs for our final question.

My question is about NGLs. I would like your insights on the near-term outlook for NGL, particularly with propane and ethane, considering the current weakness in chemical demand. Can you share your perspective on what factors might lead to a more optimistic view regarding demand? Additionally, how are you approaching the hedging of the NGL molecule?

Yes. This is Dennis. I'm going to kind of open up here and then pitch over to Alan to provide some additional color. But as you look back on Q3 and where we've been from a pricing perspective, we had some unique things clearly take place. You look at ongoing lockdowns from a coding perspective, certainly providing an impact to really petrochemical facilities and their run rates. And so the reduction of what we've seen over the past quarter has been certainly unique. When you look at what's going on from an increase in naphtha inventories also that's been going on abroad. That's also been impactful to Range’s pricing given that we've got some of our contracts that have an exposure to European naphtha. It's been a diverse portion of our portfolio, but something that also has created a lot of benefit to us over time. And as you look kind of in the go-forward part, really, we kind of see Q3 as being the low point from a guide perspective, and we see opportunity for that to further improve, thus in the updated guide that we've provided. When you look at days of disposition, you touched on propane as an example. We continue to remain at very low levels, below the 5-year average. We don't really see that changing as you get into 2023. When you look at exports, they've continued to also remain incredibly strong over the course of time. And certainly, you've got to think that there's going to be a point where COVID lockdowns are going to improve in some of the foreign countries that clearly we're all reading about these days and seeing those impacts. And I think we're seeing early signs of that. Of course, last thing, winter is ahead, right? And so we know that demand is going to look differently for a significant portion of the NGL barrel as we start to get into our winter demand season as well. When you look into 2023, the last thing we see further optimism around is when you just think about the realized price that we could capture associated with strip pricing and getting that much closer to a Mont Belvieu outlook. And so from that, a lot of optimism for us, and I'm going to turn it over to Alan to let him add some additional color.

Actually, I'll just jump in on the hedging side. Among your questions is a good one around the hedging of NGLs. First, that NGL derivative market is somewhat more limited. Historically, we use kind of a 3- to 6-month rolling forward type of window that we will layer on hedges. That said, we're constructive for all the reasons that Dennis just laid out. So we've been somewhat more limited on the hedges. But as you step back and look at where our delivery points are and how our NGL business is constructed, Range is running a global book of business here. We deliver NGLs, ethane, and other NGL components of the barrel down to the Gulf Coast to Canada and export out of market. So we export ethane, propane, butane to a variety of different price points. We have the ability in the underlying contracts linked to natural gas prices and/or international propane indices or other commodity indices as prudent for our own book of business and for our customers. So through the diversity of our delivery points and the pricing points, combined with some modest hedging, we manage that risk. But all the fundamental reasons Dennis laid out, we're constructive about the NGL market, ethane, propane, and the other units going forward.

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

I just want to thank everybody for taking the time to join us on this morning's call, and feel free to follow up with any additional questions that you may have. Thank you.

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