Range Resources Corp Q2 FY2024 Earnings Call

Welcome to the Range Resources Second Quarter 2024 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. After the speaker's 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 Second Quarter 2024 Earnings Call. The speakers on today's call are Dennis Degner, Chief Executive 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 slides on the call this morning. You can also find our 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. We've also posted supplemental tables on our website that include realized pricing details by product, along with calculations of EBITDAX, cash margins, and other non-GAAP measures. With that, let me turn the call over to Dennis.

Thanks, Laith, and thanks to all of you for joining the call today. Range's Second Quarter plan was executed successfully and consistent with our strategy for the year, which remains unchanged, operating safely while driving continued operational improvements, generating free cash flow with a peer-leading capital efficiency and prudent allocation of that free cash flow balancing returns of capital to shareholders with further debt reduction and the long-term development of our world-class asset base. I believe our second quarter results reflect the ongoing advancement of these objectives and demonstrate the resilience of Range's business through cycles. Our operational and financial updates highlight Range's high quality, low breakeven inventory and liquids optionality, which drove another successful quarter while generating free cash flow. Our low capital intensity continues to be on display in quarters like Q2 and is the result of Range's class-leading drilling and completion costs, shallow base decline, large blocky core inventory, and talented team. These key attributes result in a required reinvestment rate that is among the best in the industry, providing Range a solid foundation for consistently generating significant free cash flow and returns to shareholders while positioning Range to help meet future energy demand through our diverse transportation portfolio. Bolstering Range's profitability and durability is our liquids contribution. As seen in the Second Quarter results, liquids revenue provided an uplift to natural gas prices, with NGL price realizations providing a substantial premium relative to Henry Hub natural gas. When we roll all of that together, our liquids revenue uplift, our low capital intensity, along with a thoughtful rightsized hedging program, you get a unique story, generating the lowest breakeven among natural gas producers and the most resilient organic free cash flow as evidenced by our second quarter results and 2024 projections. Importantly, with our vast inventory of derisked high-quality Marcellus wells, we have the ability to compound our per share growth in free cash flow for decades to come. As we look back on the second quarter, all-in capital came in at $175 million, with a total capital for the first half of the year totaling $345 million. Capital spend for the quarter reflected our base level of activity along with a spot rig and frac crew we had in early 2024. For the remainder of the year, we will be running 2 dedicated horizontal rigs and a single base frac crew, which will generate our planned $30 million to $45 million of in-process well inventory, very similar to what Range did last year. Also consistent with prior years, we will see capital spending decrease across the second half of the year, while production is set to modestly increase aligning with expected improvements in natural gas prices heading into 2025. Production for the second quarter came in at 2.15 Bcf equivalent per day, driven by continued strong well performance from long laterals and ongoing optimization of gathering systems that enhance performance. Range's second quarter liquids were approximately 30% of production, slightly lower versus Q1 as a result of a propane cargo that was delayed into early July. Liquids production is back up to 32% today, near recent highs, reflecting our increased focus on liquids-rich activity in the first half of the year. We turned to sale of 17 wells across our wet and super-rich acreage, but 7 of these wells on pads with existing production. As we've discussed for years, returning to existing pads is a durable, repeatable part of our program. Returning to pads allows us to minimize our operating surface footprint and reutilize existing infrastructure while also supporting efficient, nimble operations. Combined, this results in a normalized well cost per foot for Range that is differentiated versus peers. Year-to-date, well performance and production has also been strong, aided by gathering system optimization efforts that have included compression expansions in Southwest PA. These types of expansions are a normal course of business as the team continually works to optimize field level performance and support production from our long lateral development. Production for the second half of the year is expected to be approximately 2.2 Bcf equivalent per day, placing us near the high end of our previously communicated production guidance. Turning to operations, drilling activity during the quarter added 10 laterals with an average horizontal length of just over 14,300 feet per well, with several over 15,000 feet. We have now drilled nearly 90 wells in the program's history with lateral lengths greater than 15,000 feet. For completions, the team continued to successfully operate with the new build electric frac fleet that was onboarded at the start of the year. We saw continued strong performance from the equipment and personnel across 3 different pads in the second quarter. Frac efficiencies finished at just over 9 stages per day while completing approximately 800 stages for the quarter, showcasing the consistent repeatable nature of our program and placing us on track for the activity plans we've communicated for the year. Supporting our frac efficiencies is Range's water sharing program, which contributed approximately $1 million in cost savings above levels a year ago. Looking forward, we believe we will see similar savings from third-party water utilization given our blocky acreage position and existing water infrastructure. Cash lease operating expenses finished the quarter better than anticipated at $0.11 per Mcfe shaped by strong well performance from optimized gathering and efficient water logistics. As we look forward to the second half of the year, we project a similar level of expense performance, and are therefore improving our previous guidance for lease operating expenses down to $0.11 to $0.13 per Mcfe. Turning to marketing and starting with NGLs. Range's flexible transportation portfolio continued to access premium export markets during Q2. As one of the only U.S. producers with access to international LPG upside, we generated another fantastic quarter in terms of Range NGL price realizations. Looking at the NGL macro, international propane demand continues to grow. Chinese propane imports reached an all-time high in the second quarter as they continue to add PDH capacity to consume more propane. At the same time, limited growth in non-U.S. propane supply has led to tightened international fundamentals and an improved arbitrage for U.S. exporters. Range's flexible marketing and transportation portfolio allowed us to take advantage of this international opportunity, exporting the vast majority of propane produced during the second quarter. Simultaneously, Range demonstrated its ability to optimize sales by pivoting butane volume into the domestic market to maximize margins. As a result, Range NGLs received $24.35 per barrel in the second quarter, a $1.26 per barrel premium to the Mont Belvieu equivalent. Looking ahead to the balance of 2024 and into early 2025, we expect domestic stock tightening to combine with export demand to support absolute and relative NGL pricing and we expect Range's NGL price realizations will remain a positive differentiator. On the natural gas side, Range's pricing relative to NYMEX was right in line with our expectation as we sold the vast majority of our gas into the Midwest and Gulf Coast regions. On the macro front, we have seen U.S. natural gas production declining year-over-year, driven by maintenance or lower activity levels from the industry, alongside durable demand for natural gas that can be observed in areas such as LNG exports and increased gas power generation. So we believe the fundamentals continue to be in place for improving natural gas pricing going forward. Before handing it over to Mark, I wanted to quickly touch on our most recent corporate sustainability report that was published last week. This report continues to showcase the company's resilience as a safe low-cost natural gas producer with an enviable emissions profile. Range had a great year for safety with 0 employee incidents for the year. Range also continued its strong environmental performance, driving a 67% reduction in methane emissions intensity over the past 5 years, reaching just under 0.2% and more than 90% below the EPA's methane fee threshold. We look forward to discussing these and other results during future meetings. So where does that leave us as we're more than halfway through 2024? As stated, we remain constructive on the outlook for natural gas and NGLs, but importantly, even in the presence of relatively high natural gas storage levels and the current commodity backdrop, the resilience of Range's business is on full display. Our ability to generate free cash flow through the cycles is underpinned by our large, contiguous, high-quality acreage position, operational efficiencies, NGL uplift, diverse marketing portfolio, and talented team. We believe the future of natural gas and NGLs remains strong and we believe Range is positioned well to generate substantial value for shareholders in the years ahead. I'll now turn it over to Mark to discuss the financials.

Thanks, Dennis. With the first half of 2024 behind us, Range is making steady progress, executing a disciplined investment program prudent for this year and forward-thinking for next year. Range's most fundamental objective is to safely and consistently generate cash flow for its stakeholders. Our program for 2024 was designed to successfully navigate fluctuating commodity prices while continuing to generate free cash flow, pay dividends, buy back shares, and repurchase debt. While investing in the long-term development of our high-quality assets. As mentioned during our last call, Range has an efficient plan to maintain steady production this year with the flexibility to adapt to near-term commodity prices and resulting economics while also positioning our long-term business for eventual growth as demand increases from domestic and international customers. As incremental demand materializes in-basin, near-basin, and further downstream, Range has the cost structure, inventory, and infrastructure to remain a reliable long-term energy supplier. Results of the second quarter continue to highlight the business strength generated by Range's production mix and transportation portfolio. The realized price per unit of production before NYMEX hedging was $0.51 above NYMEX Henry Hub prices is a byproduct of our diversified mix and production and sales outlooks. Including hedges, Range realized $3.10 per Mcfe or $1.22 above NYMEX Henry Hub prices. Resilient pricing yielded second-quarter cash margins per unit of production of $1.22, a healthy 37% margin, resulting in cash flow before working capital of approximately $237 million. Cash flow for the quarter was allocated to $175 million in capital investments, the repurchase of $48 million in senior notes, along with roughly $19 million in dividends and $20 million in common shares repurchased. Cash margins were generated by diverse sales and a rightsized hedging program, but also by continued deliberate focus on unit costs. During the second quarter, total cash unit costs were $1.88, down $0.07 from the first quarter, decreases in interest expense and G&A are a byproduct of reduced debt and thoughtful spending. Gathering, processing, and transport for the second quarter declined $0.05 from last quarter and is a function of prevailing commodity prices and timing of NGL cargos. Second-quarter NGL market prices declined, reducing processing costs, and with lower natural gas prices, we also experienced lower fuel and electricity costs, all right-way risk contract elements that maintain margins. Range's NGL sales benefit from direct access to international markets out of the East Coast. One cargo loading occurred in the first days of July. As such, the volumes to be loaded were inventory at quarter end with the GP&T costs and revenues being recognized in July, which should bring third-quarter GP&T back towards the midpoint of guidance. Right after safety and sound environmental practices, capital allocation is among the most important corporate responsibilities. As you can see during the second quarter, we continue to carefully balance funding of prudent investments in the business with returns of capital, while maintaining financial strength. Prudent investment to us is responsive to both the near-term realities of commodity prices while also investing in the future to be prepared for the approaching growth in natural gas demand. With low full-cycle costs, Range has been able to generate free cash flow while investing in modest inventory to enable efficient growth when the market calls for it. At the same time, we prioritize financial strength so that we can make opportunistic decisions. That financial strength enables Range to execute what has been a very efficient share repurchase program. It's a program we have greater flexibility to execute as we remain within our target debt levels. Looking at the balance sheet briefly, the notes due 2025 mature in less than 1 year. Those notes are easily covered by cash on hand, cash to be generated in coming quarters, and an undrawn revolving credit facility. Suffice it to say that we believe there is ample liquidity to efficiently retire this debt as the maturity date approaches. With the ratings upgrade from S&P this quarter and a positive outlook for Moody's, we believe the strength of Range's business is being recognized. One significant element of our financial strategy that provides a stabilizing effect to better enable efficient funding and investments is our thoughtfully constructed and carefully executed hedging program. We believe added predictability from appropriately sized hedging provides exposure to improve long-term natural gas market dynamics while also increasing confidence in near-term forecasted cash flow. A stable financial foundation enables better planned, more consistent, efficient operations while protecting the balance sheet and can also create opportunities for reinvestment and shareholder returns. Range's hedging philosophy has produced successful results that have served the company well, and we expect will continue to do so in the future. Presently Range has approximately 55% of the second half of 2024 natural gas hedged with an average floor price of $3.70. And in 2025, approximately 35% hedged with an average floor price of $3.90, providing Range a stable base to consistently generate free cash flow through market cycles. Financial results rely on safe, efficient operations and the Range team executed another successful quarter, delivering planned production on budget. As a reminder, the plan we announced for 2024 differs slightly from most others in the industry. Our capital efficiency, low full-cycle cost, paired with the advantaged marketing of our production generates meaningful margin at current commodity prices, meaning Range has options on how we redeploy capital into the drill bit, infrastructure like water facilities that can provide durable cost reductions or low-cost lateral extending inventory enhancing land, among other attractive alternatives. When comparing capital efficiency on a per unit of production basis or any similar metric, a year of depleting inventory can enhance optics in the short run for some. We believe lasting efficiency, particularly in the face of expected growing demand, provides Range shareholders greater leverage to improving markets. Range's business plan continues to be executed on what we believe is the largest per share exposure to core Appalachia inventory, paired with the transport and sales portfolio delivering production across the U.S. and internationally, all underpinned by a strong financial foundation. We have the team, assets, and balance sheet to succeed through price cycles, and we believe the Range business can and will continue to deliver significant value to investors. Dennis, back to you.

Thanks, Mark. The first half of the year results for Range reflect a consistent theme communicated in past quarters. Execution of another maintenance-plus operational program as planned, consistent advancement in our overall efficiencies, generating free cash flow and prudent allocation of that cash flow, balancing returns of capital, further balance sheet improvements, and the optimal development of our world-class asset base. You've heard us state this before, but we continue to believe the results communicated today showcase that Range's business is in the best place in company history, having derisked a high-quality inventory measured in decades and translated that into a business capable of generating free cash flow through these types of cycles. With that, let's open up the line for questions.

The first question is from Roger Read of Wells Fargo.

Congratulations on the quarter. Mark, I'd like to come back on some stuff you were saying there at the very end. Some of the opportunities you listed to, let's call it, enhanced margins, improved returns, et cetera. If we were to think about those in terms of magnitude of what they can do for you, but also sort of the timeline of achievability, how would that list of opportunities shake out?

Yes. It's a good question, and it's a broad question just because of the breadth of opportunity Range has ahead of it. I think Dennis and I both have touched on various ways in which we can continue to drive down our cash unit cost structure as well as the capital efficiency. You've seen the team be very efficient on direct operating costs, LOE continued mindful execution out in the field. Water handling is a topic we consistently discussed, which touches on both improvements in LOE and our capital efficiency. So that's a day-to-day exercise by the team in the field, but it's also some modest capital investments. As you know, that was part of our capital allocation process for this year. Something we hadn't done in any size or consequence for roughly a decade. That blocked-up nature of our acreage position is really a lot of efficient handling and use of that infrastructure and expanding that this year became timely, and with what we expect to be about a 1-year or better payback on that investment, it should pay back many years into the future. As you work your way down, the cost structure, I think, GP&T being a larger line item, it's clearly an area of focus. That's a focus for cost, but I think more importantly, it's about margins. It's about maintaining and enhancing that portfolio of sales outlets we have. So today, it's a great outlet moving 80% of our gas out of the basin. But over time, we think that Range will continue to have the opportunity to sell its molecules into strong end markets, be it today with our existing production profile or when the market calls for it, and there's incremental production. We think that we will have the ability to move those molecules to strong end markets as well, be it natural gas or natural gas liquids. And then on the capital front, again, the common topics that come to mind are extending lateral lengths, which again, you've seen us allocate a little bit of capital to the land to be able to do that as well as just efficiently running crews this year, running 2 rigs and 1 frac crew, for example, is all it takes a Range to execute this program this year, the steady efficient maintenance program and potentially running those for a full 12 months to generate very modest growth into next year, given the inventory that we've built up over the last few years. So all those factors together plan to not just one specific area of improvement, but whittling down across the cost structure and the capital efficiency.

I appreciate that clarification. Regarding your question about the hedging strategy for 2025, given that you are 35% there, do you envision this being sporadic? Is there a particular price point you would be more at ease with? Considering the macroeconomic outlook for 2025 and an improved supply-demand balance nationwide, are you inclined to take a more patient approach toward hedging? What are your thoughts on this?

Yes, I'll start with we feel very good about where the 2025 book stands today. Just backing up to the philosophy, we're running an enterprise, a going concern, 30-plus years of drilling inventory. So this is about managing risk in the business prudently while not hedging away the upside in the cash flow. So to that end, the philosophy is to try to cover the fixed cost to maintain steady operations, picking up and dropping crews and things is extremely inefficient and costly. So having more stable predictability of that cash flow, we think, adds a lot of value. So with that in mind, how do you shape 2025? Well, we feel like the book was designed to do that at the prices we were able to lock in. It's also shaped based on the fundamentals as we see them unfolding over the next 12 and 18 months. LNG in service is clearly a focus in the headlines. Some facilities are early and some facilities may be delayed. So as we see those opportunities becoming reality late this year and early next year, the incremental positions that were added are really front-end loaded the first half of 2025, and they're in the form of collars, so that we can provide some downside protection while retaining positive exposure to improved gas prices in the first half of the year. So that's really how we think about next year.

Our next question comes from Michael Scialla of Stephens.

Dennis and Mark, you both mentioned you see the improving natural gas fundamentals moving forward and your '24 production guidance is moving to the high end of the Range. If that doesn't play out, just curious what changed to your plans, you're contemplating? Or do you feel like with the natural gas liquids revenues that you're really not the company that would need to adjust your plans, be it curtailing production or delaying any more turn-in lines?

Michael, I'll start by reiterating our approach for this year's program. We're operating at a lean, foundational activity level for 2024, which we view as a baseline approach for the business moving forward. This includes two flat rigs plus one base frac crew, generating between $30 million to $45 million of in-process inventory this year, similar to last year. As we consider 2025, we aimed to create flexibility and strong options. By establishing it this way, we can reshape our production profile using some of that inventory. We recognize that this will also impact 2026 and beyond. If we experience further delays in LNG facilities or other issues that could affect commodities, we may adjust how we utilize that inventory. Regarding our capital program this year, with a budget of $620 million to $670 million, there will be some one-time, unique capital investments, particularly in water infrastructure, which are infrequent. This outlines our program well while allowing us to adjust our inventory according to commodity trends. I believe there are many reasons to feel optimistic about 2025, especially given strong demand indicators, including the significant power burn increase contributing to natural gas consumption year-to-date. We think we have the right inventory and a lean program set up to adjust production in 2025 based on market conditions.

Appreciate that. Just want to get your thoughts on kind of political front with the federal judge blocking the pause on LNG facilities and bringing the court to return the Chevron doctrine. Does that make you any more optimistic on the regulatory environment? Anything specific you might think could be done within Appalachia that would improve maybe take away capacity or anything along those lines?

When considering demand factors, I'd like to reference my earlier comments. Evaluating the various elements influencing demand moving forward, we’ve noted in smaller meetings that the political landscape seems to lead us to similar conclusions, albeit via different routes, no matter the administration's actions. If we aim to further strengthen the grid and electrify operations in the Lower 48, while also addressing data centers and AI, we will need to recognize the increasingly important role of natural gas in providing low-cost, reliable power generation. This brings us to the crucial topic of permit reform. Recently, it's been encouraging to see the announcement from Senator Manchin and Barrasso regarding advancements in permit reform language. We view this as a positive indication. Additionally, there are others, both in Washington and locally, like Range, who recognize the genuine need for us to expand our role. Our inventory supports this capability, particularly with our assets feeding gas into the PJM market, which supplies around 65 million people. We have a bright outlook, but it will require substantial support through permit reform.

Our next question comes from Doug Leggate of Wolfe Research.

So I guess, Mark, my first question might be for you or whoever wants to take this, it's relating to takeaway capacity. Our understanding is that both some of the publics and the privates are not renewing term takeaway or fixed takeaway, as things kind of roll around for renewal and I'm wondering how that opportunity sits for a company like yourself, given your inventory depth and why you think that might be the case? In other words, why those folks are not taking the takeaway. Any kind of magnitude you can offer on timing would be really helpful. And I've got a follow-up, please.

Doug, that's an important question because the common understanding, which is correct, is that the pipeline primarily comes from Appalachia. We are concentrating on what Range can access and eventually utilize. Currently, we have a solid portfolio, but we believe there are numerous opportunities for Range to maximize existing capacity in the basin even before considering potential Brownfield expansions or new pipelines. Specifically, some capacities are underutilized, or firms have not signed up for long-term transport, leading to shorter-term use. Other companies may have booked capacity under firm contracts but have since redirected or re-marketed those contracts. Therefore, the pipeline capacity is available, and the focus shifts to market share. This raises the question of who can leverage that capacity in the coming years to support long-term commitments. This presents a clear growth opportunity for Range at the right time. It's not only about the capacity Range can manage but also the capacity our end customers possess. We can market to customers across the Lower 48, including utilities and marketers. While we don’t hold capacity on the MVP, several capacity holders are existing customers through other channels, allowing us to broaden those relationships. Emphasizing the growing needs from industrialization and increased power demand in the Lower 48, there will be a need for expansions in both electricity distribution and pipeline infrastructure. Thus, Brownfield expansion or new pipelines may be necessary in the future. Locally, the demand within and near the basin for power and industrial purposes presents a substantial opportunity, especially as one-third of our gas is directed to the Midwest, where there is significant industrial development. This is a remarkable opportunity underscored by the inventory and longevity of Range's strategy.

Mark, forgive me for asking for a quick clarification. This is not my second question, but can you offer any kind of magnitude and timing is a very quick, here's the number, here's the timing, how it impacts Range.

I think perhaps it's a little bit early as we get a little closer to 2025 and think about and refine what that capital budget may look like. As we've said, growth is an option. It's a question of when, not if. So coordinating infrastructure, be it gathering, processing, compression, and longer-term transport layered in with the marketing to the end customers and those relationships is all part of the process.

Okay. My follow-up is really a balance sheet debt question. You've obviously done a tremendous job rightsizing the balance sheet. But I think the one certainty that we can see with the forward curve and the demand-supply situation for gas is significantly higher volatility, which means breakeven and balance sheet capital structure becomes a big part of your equity volatility. So my question is, you have a couple of fairly sizable bond maturities over the next 3 to 5 years. Will you refinance those? Or will you pay them down? How do you see the right capital structure in an extraordinarily volatile environment for Range?

Well, I'll start with the target debt range is net debt of $1 billion to $1.5 billion, which we are within, giving us a lot of options, both in returns of capital and further deleveraging. So we certainly plan to stay within that and optimize the balance sheet to your point, it reduces the cost of capital, hopefully brings out some of the risking, if you will and brings out some of the volatility. So to that point, the '25, as I mentioned during the opening comments, we've got ample liquidity to take care of those. We have the revolver, lots of cash on the balance sheet and cash flow to be generated in the coming quarters. Further deleveraging is likely. We'll balance that with returns of capital. And capital markets are open as well. So there's clearly options there as we roll forward through the next few quarters. There is a step down in the call price on the 2029, the 8.25% notes early next year. So that presents a possible time to consider after that passes of what a refinancing might look like. So at the highest level, I'll say, fortunately, we have a lot of good options ahead of us to optimize the balance sheet further deleverage while also achieving our return of capital objectives.

Our next question comes from Jake Roberts of TPH & Company.

I would like to get more details on the TIL cadence for the second quarter, noting that the current mix is at 32%. I'm curious if the liquids weighting will increase that number in Q3, and what the outlook might be for Q4 regarding the dry well line, especially to ensure we exceed 30% for the year.

If I take a step back, we're currently seeing about 50% of our turn-in-lines sent to the sales line this year. Since we are in Q2, this period will significantly influence the modest production increase expected between Q3 and Q4, reflecting trends from previous years. The turn-in-lines have been entirely focused on the wet side, and we anticipate that Q3 will maintain a similar contribution from liquids in the latter half of the year, comparable to the first half. As for the dry gas TILs, we're still evaluating those. The performance of the gathering system, enhanced by optimization efforts over the past 6 to 9 months, is showing promising results, allowing us to consider how long into the year we want to pursue those dry gas TILs. Ultimately, with this flexibility, the evolving liquids turn-in-line cadence, and a low base decline rate, we foresee a consistent contribution from liquids for the remainder of the year.

Okay. For my second question, you mentioned earlier some flexibility as we look at 2025, especially regarding natural gas pricing. I'm curious if the anticipated tightness in LPG export capacity in 2025 is part of that discussion and how we should consider that aspect of the program. Additionally, I would like your insights on the possibility of export capacity utilization remaining close to 100% after the additional capacity comes online in late 2025 and 2026.

Yes, I believe the export utilization has been quite positive for the past year or more. You are correct that it has been consistently in the high 80% range, nearly reaching 90% on a monthly basis out of the Gulf. This offers us a distinct advantage, and we have mentioned this several times. Our capability to transport our products to the water and specifically to Philadelphia from the Northeast has proven to set us apart. Looking ahead, we anticipate occasional congestion in the Gulf, and as this situation continues, our value in comparison to Mont Belvieu will become more apparent. Therefore, the export capacity in 2025 and beyond is expected to increase. When considering the demand and the accompanying supply from other regions in the South, we expect our comparative value against Mont Belvieu to remain strong as we continue to transport our products to the Northeast.

Our next question comes from Scott Hanold of RBC.

Just out of curiosity, you all talk about obviously delivering your maintenance kind of plus activity level and building a little bit of a optional DUC backlog. Can you give some color around when you look at that, are you doing it more for gas C-type wells? Or is there really an opportunity also, given your constructive liquids outlook to build that more as a liquids-oriented backlog that gives you some better pricing optionality?

Yes, Scott. The best way to understand our inventory is that it will reflect our ongoing program activity year after year. It will naturally lean more towards the liquids-rich side of our asset base, typically around 65% to 70% on the liquid side. The remaining 30% will be more on the dry side. As we build inventory moving forward, it will primarily focus on the liquid side. This is influenced by how we shape our program and where our inventory lies, along with our infrastructure capacity. We do maintain some flexibility in our inventory decisions based on market conditions. Our ability to return to existing production pads is a significant advantage for us, enhancing our agility to respond to market dynamics. Therefore, the balance and mix of our inventory will be similar to our overall program but will emphasize the liquid side.

When considering executing potential growth, should I focus on improving dry gas prices as well as the availability of NGL export capacity? Is it a balance between those factors?

I think it's in all of the above. And clearly, when you look at the realization uplift that comes with our NGL contribution, inherently, we're going to lean toward over the course of time, just like you're seeing in the balance of this year, I would expect to see a small improvement in our liquids contribution just over the course of time. So it could be a small number, but it's going to be inherently because of the way our inventory is laid out, I would expect to see that to be a small improving percentage factor over the course of time. And going into that is our ability to get to the water. Again, what we see that's going on with the global markets and our ability to take advantage of that revenue uplift and how it impacts our free cash flow.

Yes, it's a fair question, and we've shied away from giving a purely formulaic approach to it because commodity prices change, cost of the field may change, demands may change, and that growth is a question again of when. So first and foremost, our job is to have safe, efficient operations and provide energy, natural gas, and natural gas liquids to our customers and sell this profitably. So that's the first thing. Underpinning that is the strong balance sheet, which we're there within our target range. So from here forward, we like the optionality of leaning in one direction or another. So I'll just leave it as the balance sheet is within the target and continues to get stronger, we can kind of turn that restate up or down on the returns of capital as we see appropriate to provide the greatest returns, the strongest driver of free cash flow and cash flow per share over time. So I can't give you a specific number. We prefer the flexibility in executing the programs. But suffice it to say that our behavior will not be that dissimilar from what you've seen from us over the last few years. One year, we bought back $400 million in shares. Commodity prices came in, and we became a little bit more conservative. So we're just responsive to cash flow, prices, and changes in relative value. But again, I'll just leave it with the punchline of as we stay within and move further into our target debt range, we've got greater flexibility.

Our next question comes from Neil Mehta of Goldman Sachs.

I had a couple of questions on NGL macro, but also your price realization. So the first question on Slide 35, your price calculation. You guys have done a great job realizing above the equivalent Mont Belvieu barrel, just be your perspective on how do you continue to get towards the top end of the $0.75 to $1.50? What are the headwinds? What are the tailwinds? And what are you doing to get the best netback?

Neil, this is Alan Engberg. I managed a marketing program at Range, and I'll address your question. It's not particularly complex. A key part of our strategy is the diversity in our portfolio, which helps us avoid overexposure to Mont Belvieu. We have focused more on international markets for ethane, propane, and butane, where we see robust growth. Looking ahead, the macroeconomic environment for international markets remains strong, especially for ethane demand from Asia and Europe. Ethane use in ethylene steam crackers is increasing, as those relying on feedstocks other than ethane are at a disadvantage, prompting a shift to ethane. This trend fuels continued growth in ethane demand. For our contracts priced internationally, we anticipate favorable realizations compared to domestic benchmarks due to this demand growth. Similarly, on LPG, you might have heard about ongoing PDH growth, particularly in Asia, which continues to advance. Despite operating at relatively low capacity internationally, which some might see negatively, I consider it a positive as slowing capacity growth leads to a tighter market, resulting in increased capacity utilization. Thus, we foresee sustained demand growth for LPG internationally over the coming years. We are currently well-positioned in that market, which has benefited Range relative to domestic market indices. Looking to the future, we are pleased that 80% of our LPG portfolio is ready for the export market, and we have a flexible portfolio that allows us to adjust based on market conditions and seasonality between domestic and export markets.

Yes. That kind of builds into the follow-up, which is Slide 24. We share your constructive NGL view, but we get a lot of pushback on the propane side, particularly on China, given the challenge of the economy out there. So I'd love your perspective real-time of what you're seeing on the ground in Asia from a demand perspective? And can propane perform in the face of what seems to be a soft Eastern demand picture?

I agree that the current economic situation in China is not great, but the market is still huge. Demand growth remains strong. In fact, during the second quarter, we set a new record for exports to China, with 843,000 barrels per day of propane imports. That's significant. Operating rates for the PDH units have actually increased, reaching a mid-70% utilization rate during the second quarter, even amid a sluggish economy. We believe that if the economy improves and the government takes steps to stimulate it, those utilization rates will keep rising along with demand. Additionally, international supply of LPG has been fairly stable, with OPEC exports down 8% year-on-year in the second quarter, which highlights that the U.S. is a key supplier for that demand. Overall, the demand outlook from our perspective remains quite robust.

Our next question comes from Arun Jayaram of JPMorgan.

I wanted to ask about your thoughts regarding 2025. You mentioned this earlier in the call. Going into 2024, you had around $30 million in capital that you used to build some well inventory. This year, that figure is approximately $45 million, giving you about $75 million in well inventory. Considering the current macroeconomic conditions, are you planning to shift to a maintenance capital expenditure approach and provide a lower capital expenditure number for 2025, or with the strip around $340 million, are you considering growth given your attractive returns at those gas prices?

Yes. As we consider the 2025 program, we want to establish flexible options that allow us to adjust our production profile for 2025 or maintain a maintenance-plus level until late 2025 or into 2026. For instance, if this year we run a program that lacks flexibility while depleting our inventory, it creates challenges as we respond to market improvements, whether in early or mid-2025, or leading into 2026. We appreciate the in-process inventory we've built up, as it offers us the flexibility to either use it effectively or maintain our production levels. Additionally, depending on our rig and frac crew program, we can decide whether to grow from that standpoint. Our lean frac crew program creates slightly more inventory than what the single crew consumes. When we consider the impact of this, it could reshape our production for the first half of the year. Historically, our maintenance program has shown a pattern where the latter half of the year sees a gradual increase, followed by a dip in the first half of the next year until we ramp up our activities. We believe we can reshape this and adapt our approach to meet growing market demand. While it's too early to define the specifics, we appreciate having various options available and the opportunity to use our inventory to maintain a capital-efficient program.

Got it. And just my follow-up, Dennis, I was wondering if you could highlight where you think your leading-edge D&C cost per foot are in Appalachia, maybe relative to your initial guide, and you highlighted averaging 9 stages per day, which is a very, very efficient kind of frontier there. And maybe comment on some of the efficiency gains you're seeing from the zoos fleet? And how much do you see is there to go on the drilling versus the completion efficiency side of the equation?

Yes, a really good question. When we look at our drilling performance, the drilling team has done a fantastic job. Last year, we saw a little over a 40% improvement in our drilling efficiencies through basically utilization of some upgrades on our super-spec drilling rigs, there were some testing that we did last year. There's always a, we'll just say, an ongoing testing type nature to the program, very KPI-driven and looking back on performance. And so that's translated into ongoing efficiency that we're seeing this year as well. So very consistent from year to year. The frac side on completions, the team continues to see improvements when we return to pads with existing production. I think we touched on it a few months ago. But ultimately, when we return to a pad with existing production we see that it could be as much as a 30% improvement in efficiencies. You route out nonproductive time, you look for ways to more efficiently manage ingress, egress, etc. And it all translates into the numbers that you're seeing. So the zoos fleet has really performed well for us. And I would say, it's as good or better than where we've been in the past few years. So hard to imagine, but in 2010, when I joined the organization, industry standard was around 3 stages a day for a 24-hour frac crew. And here we are doing 3 times that amount and it's just unbelievable. So hats off to everybody on the service side plus our team there in South Point. I think when you translate that into the cost per foot side, Arun, what you get is something that with current cost, you're probably seeing somewhere in the $800 to $900 per foot range. We have seen some deflation that's helped along with the efficiencies that start to materialize. But on a very limited basis, as you would imagine.

We're nearing the end of today's conference. We will go to Paul Diamond from Citi for a final question.

Just a quick one, kind of piggybacking a bit on the deflationary expectations into the tail end of this year and into 2025. Just wondering if you could put a few numbers around how you're seeing the market really playing out?

Yes, Paul. When I consider where we are observing deflation, it seems different from historical patterns where an increase in commodity prices would correspond with higher service costs and vice versa. For instance, in the case of our electric fleets, their utilization is at full capacity across the Lower 48, and many contracts are long-term. This means there is limited exposure to significant deflation. However, it provides some protection against price increases in 2025 and 2026, particularly if activity levels shift. We see similar scenarios with our drilling rig contracts. When there is relief in oil prices, we anticipate potential decreases in costs for diesel fuel, frac sand, and other consumables. Individually, these items may not seem impactful, but together, they can yield significant savings. It's still early to quantify these effects, but we expect the deflationary benefits to be part of our planning process as we prepare our request for proposals this fall, which will affect our drilling and completions costs for next year.

Understood. And just one more quick follow-up. You talked about your water sharing program and kind of it being a bit more of a longer-term opportunity set. Just wondering if you could put some numbers around that. I mean, how big do you see that opportunity set over in the medium and the longer term.

The water sharing program has been a significant success, beginning with our team's innovative outreach to other producers several years ago to utilize their produced water in our operations. Overall, we believe this approach benefits everyone involved. Over the past few years, we have consistently recycled around 140% to 150% of our annual produced water volumes, incorporating both our own water and additional supplies from nearby producers. When considering water costs, this has resulted in potential annual savings of approximately $10 million, allowing us to access low-cost water. This also supports our commitment to environmental stewardship, as highlighted in our corporate social responsibility reports. The investments we are making in our water infrastructure this year are aimed at enhancing long-term efficiency and maintaining low water costs. We believe that this strategy will enable us to continue realizing these cost savings for decades to come, especially given our development opportunities and inventory.

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

I'd just like to thank everyone for joining us on the call, as always, in the healthy Q&A. If you have any follow-up questions, don't hesitate to reach out to our Investor Relations team, and we'll see you on the next call in October. Thank you.

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