Good morning, and welcome to the Cabot Oil and Gas Corporation First Quarter 2014 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dan Dinges, Chairman, President and CEO.
Please go ahead, sir.
Thank you, Emily, and good morning to all. I appreciate you joining us for this call. I do have several of the Cabot executive team members with me today. Before we start, let me say the standard boilerplate language on the forward looking statements included in the press release does apply to my comments today. To begin, I'd like to first touch on a few of the financial and operating highlights from the Q1 that were outlined in this morning's press release.
And those are the production during the Q1 averaged 1332,000,000 cubic foot per day, an increase of 34% over the Q1 of 2013. As we guided on the year end call in February, this volume is relatively flat to our 4th quarter production levels, which was primarily a result of compressor station downtime in the Marcellus due to the severe weather we had and the number of wells we had scheduled to turn in line. When adjusting for our Mid Continent West Texas asset sales in the Q4 of last year, we grew the daily production by a few percentage sequentially. Discretionary cash flow for the quarter was approximately $320,000,000 an increase of 36% compared to the Q1 of 'thirteen and a 12% increase over the 4th quarter. Net income excluding select items was approximately $110,000,000 an increase of over 100% compared to the Q1 of 'thirteen and a 47% increase over the 4th quarter.
These record setting metrics were further enhanced on a per share basis due to our reduction in shares outstanding resulting from our repurchase of 4,800,000 shares in the Q4 of last year. Of significant note and I do think worth repeating, during the 1st week of this month, we reached a milestone in the field of 1 TCF of cumulative gross production for these assets, which is particularly impressive given we began flowing production from our first Marcellus well less than 6 years ago and we have never operated more than 6 rigs or produced from more than 290 horizontal wells in the play during this time. Certainly, a milestone that recognizes the productivity of these unique assets. It's not going to be many assets out there that can boast those numbers. Operationally, we do continue to demonstrate best in class execution across both our areas we're allocating capital, and that's in the Marcellus and Eagle Ford program.
In the Marcellus, we averaged slightly over 1.2 Bcf per day of net production during the Q1 in spite of the previously mentioned midstream challenges during the quarter, including a slowdown in infrastructure build out affecting our ability to connect new wells. As a result, we turned in line only 8 wells during the quarter, which included a 3 well pad that was turned in line at the end of the quarter, which is producing over 50,000,000 cubic foot per day. As discussed on the year end call, our production growth for 2014 is weighted more to the second half of the year. However, we do expect higher sequential growth in the second quarter versus the flattish production profile we had discussed on the year end call. The 2nd quarter has started off stronger with Cabot averaging off stronger with Cabot averaging approximately 1.48 Bcf per day of gross production in the Marcellus, an increase of about 5% over the Q1 average.
We plan to place approximately 15 wells on production during the Q2, all of which will commence in either May or June. Moving to the Eagle Ford, we also have good news to report in that area. We completed our first six well pad at the beginning of this month and have been very impressed with the results. The 6 wells had an average completed lateral length of about 6,700 feet and were completed with an average of 25 stages. The wells achieved an average peak 24 hour IP rate of 10.45 BOE per day per well with an 89% oil cut.
As a result of the continued drilling and completion efficiencies associated with our pad drilling efforts, we realized approximately $600,000 of cost savings per well. As a result of the improvements our team has made both on the production Q3. The implied returns on our recent wells exceed 60% at $90 which we believe warrants the additional capital allocation. A typical well in the Eagle Ford has an EUR of approximately 500,000 BOE with a completed well cost of less than $7,000,000 based on approximately a 7,000 foot completed lateral. While still early, the wells that we had just announced in the 6 well pad are outperforming this type curve.
The addition of a third rig is accretive to our company's net asset value and will add high margin growth to our production profile. However, since the additional rig will be focused on multi pads and we'll be bringing it in, in the Q3, It is expected to have minimal impact on 2014 production, but should have meaningful add to our estimated oil production volumes in 2015. We recently added about 4,000 net acres to our Eagle Ford position through our organic leasing efforts and we will continue to actively lease in the area. Now let me move to pricing. It's a mainstay now on our Cabot teleconference.
In the press release, we mentioned and indicated the Marcellus differential of $0.60 to $0.65 for January February and those levels held for the remainder of the Q1. As we anticipated, which had been outlined in our recent investor presentations, the spread widened in April as certain winter contracts rolled off. For the month of April, we have seen realized prices in the Marcellus before the impact of hedges of about $0.75 to $0.80 below the NYMEX. Much of that was driven by wider 1st month index prices on Tennessee and Leidy. However, the daily cash price for those pipes have improved during April compared to the last 6 months.
We believe a stronger cash price can be possibly attributed to the increased demand from storage refill, which in turn may be the reason we're seeing bids for term gas become more attractive. Still early in the injection season, so we will continue to monitor this dynamic as we move into the summer months. For any additional information on pricing points and our firm capacity and firm sales, please see our current investor presentation on our website. I would also be remiss if I fail to mention how the pricing dynamic should improve once Constitution Pipeline is in service and we are able to deliver $500,000,000 per day of our production to premium markets via the Iroquois system, which will head both north and south and into the Tennessee 200 line, which will move to Boston. This outlook continues to improve with the Atlantic Sunrise project scheduled for the second half of twenty seventeen.
You may recall this new pipeline will deliver 850,000,000 cubic foot per day of our previously sold gas to multiple new markets, including new pricing locations. On the Constitution update, we continue to see additional progress as we work towards final approval. You will recall that FERC issued a very favorable draft environmental impact statement back on February 12th. A public comment period deadline was also established for April 7th. And despite several parties' requests for extensions, none were authorized by FERC.
The FERC has established June 13 as the date for its planned issuance of the final environmental impact statement for the project. The subsequent 90 day federal authorization decision deadline is set for September 11th with the final FERC order as early as mid October of this year. In conjunction with the FERC process, Constitution filed for its New York DEC permit back in August of 2013. Constitution continues to fulfill its to fulfill its obligation to answer the data request by the New York DEC as they process the application and work towards the issue of a final permit. On the financial side and subsequent to the quarter end, our lenders under the credit facility approved an increase in the company's borrowing base from $2,300,000,000 to $3,100,000,000 as part of an annual redetermination process.
While commitments currently remain unchanged at 1,400,000,000 dollars The increase allows for increased flexibility for share repurchases, which will continue as an opportunistic decision based on relative valuations between the market and the internal view on intrinsic value. We have not to date this year made any share repurchases. The guidance, as it relates to our capital guidance, we have increased our capital program slightly to accommodate the 3rd rig in the Eagle Ford to $1,375,000,000 to 1.475 translate and still implies a 35% production growth at midpoint. We remain confident that we will be able to continue to grow our volumes throughout the year and into next year. In the Marcellus, we are currently producing about 1.5 Bcf per day of gross volumes.
Last month, we added $70,000,000 per day of additional Millennium capacity and we will add an incremental $150,000,000 per day of additional firm capacity on Millennium in September. In addition to those volumes, we will be connecting our infrastructure directly to the largest LDC in the area beginning in the Q4, which will allow for an additional 200,000,000 cubic foot per day of new capacity. Based on this incremental in addition to what we know about expansion projects like the Tennessee Rose Lake project, which will add about $250,000,000 per day to the system, the recently announced open season on Millennium for about $120,000,000 per day and the opportunity to increase our market shares on 3 major pipes in the area, we do remain confident that we can continue to grow our Marcellus production levels in 2014 and beyond. And currently, we will be growing our high margin oil production in the Eagle Ford also. As a result of our confidence, we are providing initial 2015 production guidance of 20% to 30%.
This guidance is predicated on an average 2 Bcf of daily gross Marcellus volumes through 15, a level we are very comfortable with and which may ultimately prove to be conservative. Additionally, this program would generate free cash flow in 20 15 even if you do assume an all in natural gas price realization of $3.50 and an oil price realization of $90 As for 2016, assuming a constitution in service date of late 2015 or early 2016, we expect another year of top tier growth for Cabot as we begin delivering 500,000,000 cubic foot a day to new markets. In addition to the incremental volumes on Constitution, we will also be adding $125,000,000 per day of new long term firm sales associated with Transco's Southeast Expansion Project and 50,000,000 cubic foot per day of new capacity on Columbia's Eastside expansion, all of which are expected to be in service during the Q4 of next year. In summary, while we've been very clear that 2014 2015 will be somewhat challenged as it relates to the pricing dynamics in the Marcellus. We are more confident than ever that the quality of our assets and the long term value proposition for shareholders is very strong.
Even with these near term challenges, we will still provide top tier production and reserve growth while spending within cash flow. Again, not many companies can make that statement. With over 20 years of inventory remaining in the best natural gas assets in the U. S, a sizable portfolio of new firm becoming available to us over the next couple of years and improving position in the Eagle Ford, we believe the future of Cabot is as bright as it's ever been. Emily, with that, I'll be able to answer any questions.
Thank you. We will now begin the question and answer session. Our first question comes from Pierce Hammond of Simmons and Company. Please go ahead.
Good morning.
Hi, Pierce.
Dan, can you walk us through kind of the puts and takes that you go through when considering whether to enter into a long term takeaway agreement out of the Marcellus? For example, kind of weighing the cost of a new greenfield pipeline and the optical advantage now for investors is seeing firm takeaway capacity versus say locking the company into a disadvantageous pricing arrangement longer term, especially if there might be excess takeaway capacity out of the Marcellus later in the decade?
Well, I'll let Jeff kind of cover some of that, Pierce.
Okay, Pierce. As we've talked before, our evaluation of whether to enter into long term firm sales versus long term transport contracts versus participating in a pipeline for new takeaway. I mean, all those factors are evaluated with each decision. I think early on, we made a lot of good decisions on our long term sales contracts, got way ahead of the game because the pricing was very favorable. I think in the last 6 months or so, we have slowed down considerably on entering into anything long term that's a price disadvantage as you called it.
As you know, we opted for the new pipeline expansion coming out of Susquehanna County. That's the new 30 inches that will go down to the DC area and on the Cove Point. And as it worked out for us from a netback perspective, that was a very, very favorable deal. And so each deal stands on its own merits. The new transport we picked up on Millennium does a lot of good things for us, gets us to places that previously we have been unable to move our gas towards higher pricing points.
And so each case is different, but for the most part, it's evaluated along with all of our other options.
And then thank you for that. And then my follow-up is, Dan, do you see any new horizontal potential on any of your legacy West Virginia acreage that traditionally was targeting the Devonian Shale or the Big Line or the Berea formations? And then how much acreage do you have there?
Well, in West Virginia, we have still approximately 1,000,000 acres in West Virginia and that's held by production. We had previously in some of those shallow zones, Pierce, before we started developing in Marcellus, we had drilled several horizontal wells and that opportunity still remains in West Virginia. We have an evaluation process ongoing with our assets in West Virginia. We had recently permitted a well in the West Virginia area, and we'll continue to look at enhancement opportunities on that acreage. So to answer your question just succinctly, yes, we do think there are opportunities to drill horizontal wells in some of the areas in West Virginia.
Thank you very much.
Thank you, Pierce.
Our next question is from Brian Singer of Goldman Sachs. Please go ahead.
Thank you. Good morning.
Hey, Brian.
You talked to a number of the opportunities outside of Constitution that where you're adding capacity having signed some midstream agreements, the Tennessee Rose Lake, the open season of Millennium, and then the increase in market shares on 3 major pipes among them. Can you provide a little bit more color on what the expected realized pricing is in transport costs associated with those non constitution related opportunities? And how widespread do you see additional opportunities from here?
I'll let Jeff make the overall comment, Brian. But I will say that our price points are tied to different indices and those indices are variable, if you will, out there on what the future realizations are going to be. But I'll let Jeff answer.
Okay, Brian. To begin with, the comment that we made in the speech on Rose Lake was just another example of how there's new capacity opening up on Tennessee that allows for additional volumes to flow on that particular pipeline. So we didn't participate as a shipper, but we are selling gas to people who will participate as a shipper. Number 2, I guess, is the other ancillary contracts that we have picked up in order to move gas from one basin to another. The pricing points all vary.
Transport costs all vary. For us, it's all about netback. It's about assumptions that we make on the pricing locations and how that works to our best interest in getting the highest price for product. So each case is different. The Millennium capacity is fairly cheap.
It's existing capacity. As you know, expansion capacity if there are new pipe is generally in the $0.50 to $0.60 range. But new pipe gets you a big advantage as another straw out of the Susquehanna County. And so we look at all those factors from making those decisions.
As you look at and this is probably a follow-up for Jeff, as you look at future opportunities for signing midstream agreements, are you where do you see those opportunities regionally? Do you see them and are you more do you see more opportunities to stick within the Northeast and get it to the markets the Constitution is tapping into like New England? Or do you see more opportunities emerging to go to the Gulf Coast in the Southeast or Midwest? And it's really more a question on are there still incremental opportunities in the Northeast? And or are you really being forced to look more at the Gulf Coast?
No, I think there's still additional opportunities in the Northeast. As you know, if you look at our slide on the routes that Cabot Gas can reach and the markets that it can reach, we intend to be very, very active in Canada at Waddington. It's in the far north, part of the eastern part of the United States. We expect to supply a lot of gas into the Boston area and then coming south, New York, Jersey, Connecticut, all those areas. Mid Atlantic, the DC area, we've been very active.
Down in the Carolinas into the Piedmont market, very active. That's a huge market. That's a third of the country's population, and we think we can reach out to all those areas. And of course, we do have backhaul transport that takes us back in the Appalachian area into the Columbia pricing locations. So that's a lot of market.
We think we have access, better access than most producers in Northeast PA. Geographically, we're situated very well. I think the Southwest PA producers have opportunity in the Gulf Coast. We have not ruled out though and are talking with markets in the Gulf Coast about transportation paths and how our Marcellus gas can fit in with their plans.
Thanks. And Dan very quick last question. Can you comment on share repurchase?
Share repurchase, we have not been in the market yet, Brian. We have, as we've mentioned, we evaluated the noise in this very short period of time from our last conference call. We've been active in preparing a rather lengthy internal look at the future on all of our projects, opportunities and sensitivities on accelerated projects, on price point sensitivities, on the macro market, but we've spent a great deal of internal time focused on that. We have our Board meeting coming up. It's our intent to have some of this played out at our Board meeting.
But in the meantime, looking at the market and looking at the swings in the market, as I'd said earlier, that the volatility is going to dissipate a little bit before we get into the market, but it is my expectation still that we will be in the market at some point.
Thank you.
Our next question is from Charles Meade of Johnson Rice. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. Dan, I was wondering if we could go back a bit to some of the your prepared remarks and your comments about the assumptions you were making for the 2015 growth. And I believe I heard you say that 20% to 30% growth rate is predicated on 2 Bcf gross a day in 20 2015. And when I look at your growth, it seems like you're that you probably hit that in like 1Q 2015 or maybe 2Q 2015.
Is that a fair guess? Or are you thinking that you're going to be 2 Bcf flat?
Well, no, that's a fair guess. And again, it's an early guidance. We typically put our guidance out later in the year. We've had enough questions and concern attached with what our confidence level is in our growth profile. We wanted to get it out there.
And as I mentioned in my comments, Charles, that we are entirely comfortable at this level of growth. If you just look at our exit rate that we anticipate in 'fourteen and you carry that forward into fairway of 20% to 30% growth in 'fifteen. And then, fairway of 20% to 30% growth in 2015. And that's why I added to the comments that it may prove to be conservative at that level.
Right, right. And then and also as you noted, you'd have free cash even at $350,000,000 realized. And I think with all the maybe another cut at Brian Singer's question, you've talked a bit about what your posture is and this may be too far down the road, but you've talked a bit about what your posture is right now. But as you go into issue a year from now or even 9 months from now when Constitution, the pipes in the ground and you get more confidence what your 2016 growth is going to look like, that's where you're really going to have Opportunities. Yes.
And so is that the timeframe when you think that when you're doing all this internal work right now, is it really the time to pounce is going to be about 12 months from now?
Well, we and the reason for the extended look and being more granular at our extended look was to stack up all of the opportunities that we had in front of us and that we have in front of us and to look at the planning that we want to do right now and moving forward to 1, be able to have the right staffing 2, to be able to plan for the right services and personnel to be able to assure program execution to be able to achieve those levels. We know the assets can deliver them. We're entirely comfortable with our asset pool and the results of our wells and our consistency of cost in drilling wells. But we do want to put together past. And we're excited about when we stack up all these opportunities and it looks at the new markets that we're going to be able to access and making some of the assumptions that you do on price points that we're getting to with our new gas, it's a robust program.
Thanks for those added comments, Dan.
Thanks, Charles.
Our next question is from Joe Ullman of JPMorgan. Please go ahead.
Yes. Thank you. Good morning, everybody. So Dan, are you expecting in 2015 that you will have quarterly growth through 2015? Or are you not expecting it at this point?
And if that is your expectation, just give us the what gives you the confidence in terms of aren't the pipes full? How can you actually move the gas?
Well, I think you've seen each and I'll pitch it to Jeff on after I make a comment, but I think you've seen in each just about each quarterly conference call, we come out and announce some type of capacity additions that we've added to the plan and we think we'll be able to continue to do that. In regard to just keeping the production flat and what it is quarterly, right now, Joe, it's our expectation is 2 Bcf and whether we go from a 1.8, 1.9 Bcf a day to 2.1 Bcf a day to the end of the year, I'm comfortable at saying the average is going to be 2 Bcf plus and through the how it rolls through the year is going to be sequential growth, but I don't have it that granular at this time.
And Jeff, you want to make
Yes, Joe. This is Jeff. I think 2 parts to your question. 1, if I understood it correctly, shorter term versus longer term. In shorter term, we tried to lay out in the speech that we have picked up additional capacity that was existing capacity on Millennium, 70,000 last month and incremental 150,000 coming We laid out a plan that actually connects our infrastructure in Pennsylvania to the state's largest utility up there, and we have already entered into sales agreements with them.
There's additional capacity coming up on all the pipes that we operate on. And so shorter term, when I say next 18 months, we're not in the same camp as what you referred to as aren't all the pipes full. We are not in that camp. Longer term is most definitely a constitution, a big 30 inches pipe that's going to take us to 2 new markets or 3 new markets, 2 new interstates and Central Penn, part of Atlantic Sunrise, another big 30 inches pipe coming out of our operating area. So we feel real good about years 3, 45 from now that we'll be able to grow.
Have you guys put in some cushion for any shut ins or any downtime? I think last year you had some shut ins.
Yes. We typically always risk our production profile as we do with our EURs and as we also put in a little bit of contingency in our AFEs.
Got you. Hey, Scott, also it's I mean, separate questions might be for Scott. The DD and A showed a nice drop from the 4th quarter to the 1st quarter on an Mcfe basis. What should we read from that nice drop in DD and A? Well, that's the year end true up, Joe, from all the final year end reserve report and when our property accountants go through and repopulate the database and that's the rate going forward now.
And that's why we also adjusted the top end of the guidance down. Okay, great. Very helpful. Thank you.
Thanks, Joe.
Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.
Thanks, Salazar. I wonder if I could change topics just a wee bit down onto the Eagle Ford. Obviously, you're adding a rig there now, but I'm just curious as to how you're seeing the backlog, the location count? And ultimately, how more aggressive do you think you can be over time in terms of acreage opportunities and ultimately continuing to shift the balance of your spending towards that area? And I've got a quick follow-up on the Marcellus, please.
Okay, Doug. Yes, again, as you saw the numbers as we reported, they're good numbers. They are meeting or exceeding our expectations to continue to allocate capital. We feel comfortable allocating the 3rd rig. We feel comfortable being able to acquire additional acreage to bolt on.
Our location account in the Eagle Ford is probably 500, 600 locations or so and that certainly includes our Presidio area also. So once we get our arms around this 3rd rig, I think it's intuitive to think that we would also look at an expanded program and possibly to a 4th rig also in the Eagle Ford, particularly as we continue to acquire acreage.
So how should we think about the priority for allocating cash? I mean thinking Marcellus, Eagle Ford and buybacks, if you put those 3 in some kind of order, maybe acreage acquisitions added in there as well?
Well, on the capital allocation to the Marcellus, we have put together a 6 rig program and basically a 2 rig or 2 crew completion pumping services. And we're rolling that forward with that program. So from a bottoms up build that gives us a pretty good handle and our cost consistency there, it gives us a good handle on the amount of capital necessary to allocate to achieve that program. When you look at the Eagle Ford and we go to a 3 well program, that's a fairly easy number to get to also on what we'd be allocating. And from a priority standpoint, our operations program is where we're going to be allocating our program as opposed to a share buyback.
But when you look at going to a split, we'll probably be again 65% plus or minus to the Marcellus in 2014 as a year end guesstimate and the rest will be allocated to the Eagle Ford and some of the other projects that we have on the slate that are more exploratory in nature. Going into our 15 program, again, we haven't put the capital allocation out there right yet. But going into the 2015 program, I would think that our capital allocation would go into a 55 percent plus or minus 60% plus or minus percent in the Marcellus and the remainder going towards the Eagle Ford and the additional exploratory projects or exploitation projects that we're working on.
I don't suppose you'd like to elaborate on any of those additional projects at this point, Dan?
Nice try, Doug.
Okay. Thanks, guys. Appreciate it.
Appreciate it.
Our next question is from Bill Yang of Cern. Please go ahead.
Good morning. I was just wondering in terms of the visibility for capacity additions to get to that 2 Bcf, is now how far along are you in negotiations? Or what's the visibility on those specific projects? Do you have them in mind? They're on checklist?
Or is it more advanced than that or less advanced than that in terms of you're targeting for those incremental adds?
Sure, Gil. I think for the most part, we're close. And we'll take a few pieces of capacity we're working with other shippers on to just to make sure and get in that comfort zone that we have exactly what we need.
But going
forward, it looks very favorable. We're not concerned about not flowing that amount of gas.
Great. Okay. And then second question on the Eagle Ford. The counties that the 6 well pad was on and can you comment on that? And what is those are some of the best wells you've drilled at least on a test basis.
Would you assign that to the pad drilling and pad fracking? Or is there something different going on in the either the geology or the completion design? That's helpful.
Yes. We're in majority of our acreage is in Fria County. We have the extended lateral as far as a pad, 1, it was the largest number of wells we drilled from 1 pad on average for wells located in close proximity. It is certainly the longest laterals that we have used. And the density or spacing of the frac stages came down a little bit also from our average of our prior wells.
And in fact, we will probably have a little bit further reduction in our frac stage spacing as we roll forward to evaluate the efficiency gains that we might be able to drive from that.
What was the stage spacing that you I guess I
can figure out because you used 25 stages. So that's the
way Yes.
It's a little over 250.
And what was it prior to that?
We were probably closer $275,000,000 to $300,000,000
Okay. Great. Thank you very much, Dan.
Thanks, Bill.
Our next question is from Subash Chandra of Jefferies. Please go ahead.
Yeah. Thanks. Good morning. I was trying to understand the size of the term market that was in your initial discussion that might be reflecting storage refill demand and how predictable that term market might be, how it fits into your quote profile, if at all?
Yes. This is Jeff again. I think the comment we made about the storage refill was just to indicate how strong daily cash prices have been up in the northeast part of the Marcellus. Comparably speaking, cash has been very strong for the last month or so, and we're expecting the cash market to stay strong throughout the storage refill period. And that has led to an improvement in the term market being the summer market, maybe the 1 year market, maybe going out in the next couple of years for basis differentials in signing of term contracts.
As little as 6 weeks, 8 weeks ago, the summer on certain price was trading $1.75 under NYMEX, for example. Today, that's probably $1 under NYMEX. So there has been strength in the marketplace for the term business aspect and it looks like it's going to continue.
Well, I guess put it another way, the spot marketinterruptibles, how big is that? And how can you take advantage of that on a sort of ongoing basis, for instance, these cash sales, can you grow above and beyond the firm? For instance, I think everyone looks at the presentation, they see the firm and they just sort of expect that you can't produce a single molecule over on top of that. There was a company yesterday whose strategy is not to tie up firm because they believe they're in a different part of the play, but they believe that the Marcellus will be over infrastructured within 18 months. They don't want to lock up that way.
So how do we sort of get that confidence that there is that a cash market or some sort of interrupted market beyond the firm on Page 5 of your presentation?
Okay. A couple of points on that. I think the there is a chance that infrastructure could be overbuilt in 18 months or 2 years. I would agree with that in both Southwest PA and Northeast PA. We have taken a approach where we have tied up certain volumes of our gas and this is again on the website presentation, certain volumes of our gas into long term contracts and those long term contracts, those customers are using their firm transport, their firm takeaway to take that gas to their city gates.
The second approach was to purchase firm transport. And again, those numbers are available to you on the presentation. Those volumes are we control and we move those molecules to certain locations for better pricing, of course. And then the third aspect of our marketing approach has been to enter in the spot sales. Those are typically 30 day sales, summer sales April through October, winter period sales November through March, day gas, cash sales.
And I don't think we're unlike a lot of producers. We have a portfolio of options and that's our approach to marketing each month. The producer that you mentioned or I've heard that producers or some producers say simply we will produce our gas the amount of firm we own. We've taken a little different approach to that. We're looking at all aspects of the market opportunities that are sitting there in front of us.
And I think for the most part, we have a little advantage in that we're delivering gas to 3 major interstate pipelines. We're not married to 1. And the infrastructure that we've designed, it gives us flexibility to move gas between those pipelines based on pricing and pipeline pressures. And with the addition of Constitution, it's going to take us, of course, to Interstates number 45 and then Atlantic Sunrise to Interstate 6 and 7. So having 7 interstate markets and again attached to 1 of the largest utilities or the largest utility in the state gives us a lot more options and opportunities.
Okay. If I could ask one last question on the matter and I'll promise to jump off. So the 3 paths there long term to contracts to those with firm purchase your own firm and spot. Is there a way to quantify perhaps on annual basis how big that spot market is for you specifically or for the sector?
That would be difficult and I'll explain why. I think the buyers of gas, both industrials and utilities, they're all different. They all take different approaches and all have different buying habits, purchasing habits. And when you throw in the mix of power plants, then it really gets confusing as to who's using what capacity on what day to get to what market. For the most part, we have very consistent day sales.
We know we have markets that count on us for gas. And I think other producers take the same approach, but to try to quantify who's using what on what day during what period of time during the year would be difficult.
Okay, understood. Thank you very much.
Thank you.
Our next question is from Jeffrey Campbell of Tuohy Brothers Investments. Please go ahead.
Good morning.
Good morning.
Dan, it appears it's taking at least 3 months to get a new rig running in the Eagle Ford. Is that based on internal Cabot Logistics or is that based on rig availability?
No, that's based on us just getting the locations in order, the permits squared and our services all lined out. Okay. But it's not because of rig availability.
Okay. And kind of going thinking forward on that locations point, with the addition of the 3rd rig, is the strategy to execute the longer lateral closer spacing method throughout the aerial extent of your acreage? Or are you concentrating in a core area?
No, it's our wells are fairly scattered throughout our area. So the intent is to continue to try to capture the efficiencies by multi pad, longer laterals, fracs page density. And we think that we're gaining making progress on that.
Okay. And my last question
And that will be throughout our acreage.
Okay. Yes, that was what I wanted to hear. My last question is assuming you reach free cash flow in 2015, will you seek to maintain free cash flow going forward from that point?
Well, I think by virtue of our growth expectations, I definitely think that we will.
Okay, great. Thanks very much.
Thank you.
Our next question is from Bob Brackett of Bernstein. Please go ahead.
Hi, good morning. A quick question about Marcellus inventory. Can you give us an idea of how many wells you have drilled uncompleted? How many wells completed waiting tie in? And maybe even if you didn't have midstream constraints, what your flows could look like?
Okay. On the well side, we have about 22 wells that are waiting on pipeline. We have 5 wells that we are currently completing and we have 24 wells that are waiting on completion. So we have a pretty good backlog right now. And again, we knew that we would be building up quite a backlog at this period of time.
And we are from this point forward, we're moving going to be moving through those and working those numbers down.
And what could your system run if there wasn't a midstream constraint?
I don't know. We have I can't think of a day when I look at my daily drilling report, I can't think of a day that we have not seen a compressor down or a dehigh down or something like that. And that's just the nature of the beast and just a lot of moving parts and a large gathering infrastructure system like that. So it'd be right speculation, but I'm sure it would be we've hit over 1.5 Bcf. I think the record wood was at 1.538 or something close to that.
I'm sure we'd be if we had things just humming along and we had the compressors tuned up the way we want them, we'd be well over 1.6 Bcf a day. Thank you.
Thank you.
Our next question is from Jack Aden of KeyBanc Capital Markets. Please go ahead.
Hey, Dan. Hi, Gop. How are you guys? Good. Good.
Okay. I mean, how many frac stages do you have waiting? And then I'm looking you're going to drill about 155 to 100 and 70 wells and lots of those coming maybe in the second half of the year. So if you if I run the numbers in a way, your 2015 guidance granted has some upside, but it looks like quite conservative maybe. Could you
Yes. Well, we have again, we have, as I mentioned, the number of wells that we are either completing, waiting on the pipeline or waiting on completion. It's 51 wells and that's probably over 1400 stages, Jack, right now that we have in the queue. So the good news is that we've been able to continue our production profile. We've been able to sequentially grow, though slightly, we've been able to sequentially grow our production from last quarter and we did it with only bringing on with 8 wells that we brought on for the quarter.
We're going to double the amount of wells that we bring on in the second quarter and we will continue to increase the number of wells that we plan on bringing on in the 3rd quarter and 4th quarter from what we realized in the 1st and second quarter. So we are going to go into 15 in very good shape as far as what we think our production profile will be and what we plan on still having remaining in inventory. We are in good shape. I feel very good about it. And because of our efficiencies that we've been able to gain with the drill time and continue to doing good along those lines.
That's why we made the decision to only have 6 rigs versus having to increase the number of rigs there.
Second question, you have a permit in West Virginia and Wood County. What you're really looking for there? And are you looking for the Point Pleasant in that test potential test or what other things you see that you have there?
Bottom line, Jack, we're looking for oil and gas. I
know. Okay.
We are extending a look at the play south of where the drilling has been. And we think our fairway is in the volatile window, and we think that we have an opportunity there. So yes, that is the section one of the sections that we're looking at.
Thank you.
Thank you, Jack.
Our next question is from David Beard of Bria. Please go ahead.
Hi. Good morning, gentlemen. Good morning. How are you doing David? Good, good.
Could you give us a sense in your 2015 production guidance what your assumptions are for transportation or maybe just in general what you're thinking about the differentials as we roll through next year? Well, the differentials are a hard number to get. We think that the differential is going to be somewhat similar to what we're experiencing today. On our production guidance, we've had some discussion on the capacity that we now maintain firm transportation firm sales and the additional capacity that we expect to add to our inventory. As Jeff mentioned, to get to the 2 Bcf level, it's probably $100,000,000 $150,000,000 of additional work or capacity or sales that we would realize in addition to our firm that would get us to the 2 Bcf mark.
All right, great. Thank you. Thank you.
And our next question is from Matt Portillo of TPH. Please go ahead.
Good morning, guys.
Hey, Matt.
Just a quick question. I wanted to clarify, heard a lot of great detail on kind of incremental capacity you guys have signed up or looking to sign up. Could you just put that into context relative to the presentation you guys had out a couple of months ago where you laid out kind of your 2015 firm capacity, had to think about 1.1 Bcf a day. Could you just give us some color of how much that's changed on a relative basis and where we sit at the moment?
Sure, Matt. This is Jeff. It definitely has improved on the the numbers have improved somewhat on the format presentation. I wouldn't say they've improved a great deal. We have a lot of deals that we're working on that we're close to wrapping up.
We have some opportunities that we know that's out there that we're close to wrapping up. The probably the biggest number I add to the slide is our new capacity into the utility there in Northeast PA, and that will be additive to that chart at some point.
Great. And then as we think about kind
of your 2015 guidance, could you give us some rough color on how you guys think about I know you've laid out Leidy in Zone 4 previously and it's about 45 or so percent of your 14 production in terms of exposure there. How does that look kind of currently in 2015 just from a rough estimate perspective?
I hadn't broken that out. We can get back to you on that on an exact percentage, but we're going to be growing the production. And so that number will probably increase slightly, but I'll have to get back and I'm sure you'll see it, Matt, in one of our future presentations. Once we get more granular on our 2015 guidance.
Perfect. And then just last question for me. I was hoping that you could talk a little bit about the organic leasing opportunity you see today within the Eagle Ford and then any appetite in regards to M and A in the basin? Thank you.
Okay, Matt. Organic leasing, it is what it is. We continue to talk to owners of the unleased acreage out there and we think there's an opportunity to pick up additional acreage. And as far as M and A activity in the basin, I think there are some opportunities to pick up some small professionals that own acreage out there. And if the opportunity rises, we'd look at it.
Some of the pricing that we've seen in the M and A side of the business has been fairly robust and we think the capital efficiency of our organic approach is more prudent for us at this stage.
Thank you very much.
Thank you.
Our next question is from Wayne Cooperman of Cobalt Capital. Please go ahead.
Hey, I'm sure that this has been asked in a 100 ways. But I'm just wondering people are really worried about pricing. I wonder what price do you have to do you see where you cut back production and just wait until you get better pricing with better takeaway? I don't know if I'm phrasing that question in a way that I can get an answer.
Well, Wayne, it is hard to pick a price that you say that you're going to just shut in production, particularly with the yield that we get from a fairly low price point. But so I'm not going to state just a price that we're going to shut in. But if the market looks like it's behaving in a way that it would be prudent for us to shut in gas today and sell it near term, then we look at that. But we don't have any plans right now to shut in any large volumes of gas with the market that we see out in front of
us. Ken, let me just try to rephrase that a little bit differently then. We all know the gas is there. I mean, you have the best rock in the country probably and you've got to take away capacity right now that's going to get alleviated. And therefore, the differentials that you're seeing now should dissipate over time.
What isn't there don't you earn more money by producing less gas now selling at a low price and just producing more gas in 2 years when you're going to get much closer to Henry Hub?
Well, I think there is equation you can run, Wayne, that would get you to that point. But at this stage, again, our realization was 374 and for this last quarter and we are delivering a good return. We're putting that capital to use that's delivering again a return profile. For example, adding the 3rd rig in the Eagle Ford that is generating a nice return with those invested dollars.
Right.
But I do understand your question and certainly it's an equation that we can run. For example, if we were getting close to flipping the switch on Constitution and there was just a significant blowout and somebody wanted us to move a gas for a buck. We're not going to move it for a buck. We'll wait to open the capacity of Constitution and start selling our gas into a different market that would not be realizing those prices. So I understand your question and there's merit to it.
And then
is there some
just is there some like limiting factor to how low a price can go in your market? Or are you kind of I mean, there's really nothing to stop it from trading at $1 or $2 in a bad part of the market?
Well, I think if you look at all of the producers up there, we're not the only one selling into these markets. When you look at the amount of gas that's going into Tennessee or going into Leidy, there's gases from a lot of different price points, not just up in the box up in Northeast PA, but there's other gas flowing into those pipes to saturate the market. So I think there is a price out there that industry would say that we're just not going to move our gas for that. It's more valuable than that. We're just not going to move it.
So there is that price point. What it is exactly $1 or $1.50 I don't know where it might be $2 but there's certainly a price point. I think a number of producers would say we're just not going to move our gas at that price.
All right. Thanks a lot. I mean, I'm sure everybody's got the same basic question.
Yes. Thank you, Wayne.
And our next question is a follow-up from Joe Ullman of JPMorgan. Please go ahead.
Yes. Thanks again. So just Dan thinking about your ability to take on some extra capacity, If there's extra capacity in the system, why are the differentials around a negative $0.70 I'm just trying to get my head around that.
Well, and I try to get my head around it also. And what's one of the things that we're looking at is when you and I'll pitch this to Jeff that digs deeper than I, but when you look at some of the differentials and you see how the indices are established, you have really a very few contracts that are capturing volumes out there that are setting the index and what a what supposedly 2 parties, a buyer and a seller willing to move gas far. I question the differentials and particularly the number of contracts that are steering a large volume of gas and we're looking into the transparency of all of the transactions. So right now being able to have access to a buyer and a seller from my understanding at this stage of my look is that those are confidential parties. But I'm looking at it to try to understand it a little bit more in detail also.
Yes, Joe. I think the improvement we've seen in pricing has a couple of factors that have influenced it. One has been the winter. There's good price realizations going on in the cash market as we mentioned before. I think the demand and the actual people who burn the gas at some point, they come into the equation.
Yes, there's excess capacity up there, but is there just how much more incremental demand is there certain parts of the year. So I would I realize that we expected improvement in the differentials when we had a good winter and they did improve. They didn't improve all the way up to a flat Henry Hub type number. And I think we're struggling to understand completely the dynamics of that. One of the approaches for us has been to make sure that not only do we have firm transport, but the firm sales and particularly our last deal with Cove Point and Washington Gas to make sure that we actually have someone that burns the gas And having an $850,000,000 a day, 15, 20 year contract for people that do burn it was very important to us.
So, yes, I agree with you. I don't understand exactly the dynamics that would cause a 70% differential at this point, but it has been a big improvement over the last 60 days.
So how much of the incremental capacity that you expect to take over the next several months, how much of that is actually new capacity? And how much of it is you actually just taking someone else's capacity? So for example that 150,000,000 a day from Millennium in September, like is that that's new capacity?
No, that was existing capacity. It just hadn't been sold yet or excuse me, it just hadn't been bought yet and we bought it. The UGI or excuse me, the utility sales are new incremental to us. I think there is existing capacity in every pipe and the way we work the system and the way the system works is the path that we pick up could be 1 year duration, 2 years, 5 years in duration, could be 15 years with evergreen provisions. It could come from someone who bought it and it's just red ink to them or it could be expansion capacity.
There's a lot of deals and transactions made in the secondary capacity release market and we continually work that and we do take capacity in short term releases as well when they net us back higher prices. And so there's again a lot of capacity in those pipes. Sometimes it takes you to places you don't want to go. Sometimes it doesn't start where you want it to start. So for all the producers in the Marcellus as a whole, there's a constant jockeying around of positions on capacities backs are as high as they can be.
So is the only new capacity that you mentioned of all the different agreements that you're entering into, is the only new one the 120,000,000 a day open season that Millennium is having?
That's the 200. Okay. So that capacity, when you say it's new, it's new in the marketplace, it's existing in the pipe. I mean, it's confusing terms. We're out there.
We've put a bid in to take some of that capacity. We didn't want it all because some of it doesn't do us any good. So and likewise, when Transco went out last month with 200,000 a day of capacity for a shorter term, I think it was a 9 month term. We took part of that capacity. It's an ongoing process and I think all the pipes are using their resources to try to increase their throughput.
They're constantly looking at ways to add capacity to the system. And as contracts get taken, it actually opens up could open up space for Got you.
Okay, very helpful. Thank you. And
this
Got you. Okay, very helpful. Thank you.
And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Dingus for any closing remarks.
Well, no, I appreciate everybody's interest. Obviously, the movement of gas and our ability to grow is on everybody's mind. I can assure you we're confident that we would be able to deliver within our guidance points. Otherwise, we would not put those early guidance points out. But when you look at what we have to be able to deliver in the future.
We're going to comfortably deliver top tier production growth, not only in the next few years, but moving out. We'll also have reserve growth that will be very robust. We'll do it in a free cash flow environment and that gives us certainly confidence that we're going to be able to continue to enhance shareholder value on out into the future and it certainly should give the shareholders confidence that the asset package we have will be able to deliver that value. So again, thanks for the questions and we will see you next quarter. Thank you, Emily.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.