Good morning, and welcome to the Cabot Oil and Gas Second Quarter 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 conference is being recorded. I would now like to turn the conference over to Dan Dinges.
Please go ahead.
Thank you, Emily. I appreciate everybody joining us this morning for this Q2 conference call. With me today is Scott Schroeder Jeff Hutton, our VP of Marketing Steve Lindeman, our VP of Engineering Technology Matt Reed handles our South region and Todd Liebel, VP, Land and Business Development. Before I start, as usual, the boilerplate standard language that we have as forward looking statements included in the press release do apply to my comments today. At this time, we have many things to cover and I'm going to expand on the press releases that were issued last night.
I'll briefly cover the financials. In the Q2, we'll update the 12 guidance including a capital discussion as well as a preliminary review of our 2013 plan and the recent successes that we had with the drill bit and I'll follow that with a discussion of our operations. Before I go into the details on these topics, I'd like to start with just a brief list of the highlights that we've seen in this last quarter. Cabot grew production 40% over the comparable quarter last year, including 37% growth in natural gas and a 96% growth in liquids. 2nd quarter production was up 5% quarter over quarter and this is even after the impact of unscheduled maintenance and the delays we've talked about as attached to our Marcellus gathering lines.
We have brought online a 2 well pad that together the wells have produced 2 Bcf in 39 days and they are still producing right at 59000000, 60000000 cubic foot a day. The initial down space test in our Buckhorn area in the Eagle Ford and the Zipper fracs which were the first we'd tried out there have proven to be successful along with our down space initiatives in the Marcellus. Also the cash proceeds and the increase in capital, the cash proceeds from our JV fully fund drilling in 2 new plays, the PureSol and the Utica, and we have only very minimal production forecast due to the nature of these two areas. We've also had acreage acquisition in several new areas. All of this is going to enhance the 2013 production growth expectations.
Now let me roll into the financial results. The company reported clean earnings of approximately 10,000,000 dollars or $0.05 per share. That was driven by our significant production increases that more than offset weaker natural gas prices. Cash flow from operations and discretionary cash flow for the 2nd quarter were $159,000,000 142,000,000 dollars respectively. The Marcellus continues to be the driving force behind our production growth, while the Eagle Ford and Marminton continue to add significant liquids production to our profile as illustrated by our 96% increase.
When you adjust for the 2.8 Bcf of production from the Q2 of 2011 that was associated with last year's Rocky Mountain sale, our equivalent production growth for the quarter was 49% greater than last year's Q2. Guidance, we continue to reaffirm equivalent production growth for 2012 of 35% to 50% and liquids production growth of 55% to 65%. We updated the full year cost guidance by decreasing DD and A and taxes other than income on a per share per unit basis to reflect our updated views for the remainder of the year. We also provided 3rd quarter guidance for absolute G and A and exploration expenses. In the Q2, G and A increased primarily due to higher pension expense as a result of the termination of our qualified pension plan that was completed in the Q2 of 2012.
Additionally, which was not normalized and included in the Q2 G and A figure are an assessment from the Office of Natural Resources revenue for certain matters in the Rocky Mountains, which we are currently disputing. It was also increased in legal fees associated with preparation for the Ferrantino lawsuit in PA. However, in regard to that case, Cabot has reached verbal settlement agreement with 32 out of 36 households. Negotiations will continue with the remaining households. The aggregate value of the settlements are not a material item with respect to Cabot's financial statements.
Resolution of this litigation will have a very positive impact G and A going forward due to the reduction in cost of defense. Combination of these items had a $0.03 per share impact to the quarter. Exploration expenses also increased during the quarter due to the expensing of our initial Brown Dense exploratory well in Arkansas. Now let's move to some of the discussion on our 2012 plans as a result of the recent joint venture with Osaka. And we're very pleased to have Osaka as a partner in our Pearsall area.
We have restructured our operational plans for the remainder of 2012. We plan to keep 4 rigs running in the Marcellus for the remainder of the year instead of dropping down to 3 rigs. We also plan to run 2 rigs in the Marminton due to the improved results that we have seen out there and one rig in the Eagle Ford for a total of 9 operated rigs companywide by year end. Plus we will have some other non operated efforts, for example, in the Utica and Marminton. The additional drilling activity will primarily be funded through the upfront cash proceeds and future drilling carry from the JV.
At the same time, our lease acquisition efforts have doubled from $45,000,000 to 90,000,000 in acquisitions of acreage in existing areas, filling in some holes and new plays. In a couple of new areas, we have accumulated over 25,000 acres in each of a couple of areas. All of these operational changes will have limited impact on 20 12 production, but will certainly enhance our production expectations for 2013. In 2013, this is a little bit early for us to put some numbers out there, but we thought we would with the additional capital that we have placed in front of you that would affect our 13 plans. We expect to grow production by minimum of 30% to 50% with a capital program between $900,000,000 $1,000,000,000 The planned program will again target being cash flow neutral at today's strip pricing.
Clearly, these are wide parameters. We'll try to refine these numbers as we approach next year. We've had some questions in regard to hedging. The company added 17 new hedges since our Q1 call in April, of which 16 are related to 2013. The company has 32 contracts for 2012 production, excluding the 5 basis only hedges, 27 are for gas at 5.22, dollars 4 oil contracts at $99.30 and an additional oil contract at 1 $105 Approximately 40%, the midpoint of our production guidance for 2012 is currently hedged.
We also have now 23 contracts for 2013, 20 for gas, which are collars and 3 swaps for oil. We continue to monitor the natural gas market due to the recent strength to consider additional hedging. You can find our hedging on our website. Now let's move into the operations in the North region. We continue to have outstanding results in the Marcellus and Susquehanna County.
Since the end of the Q1, we have brought online 5 wells with IPs exceeding 20,000,000 per day. At the top of the list is a 2 well pad that has been online only 39 days. We got very few days in the Q2. They've been online for 39 days and has produced over 2 Bcf and is currently producing, as I mentioned, between 59,000,000 60,000,000 cubic foot per day. Also, we have continued to collect data on our 500 foot spaced lateral initiative that we're using to determine optimal spacing out in Marcellus.
If you recall, we completed 2 500 foot laterally spaced wells located between 2 existing wells that had cumulatively produced 10 Bcf already. The upper Marcellus infill well IP ed for 8,000,000 cubic foot per day and the lower Marcellus infill well IP for 16,000,000 cubic foot per day. Both wells production was constrained slightly and both wells were completed with 15 stage fracs. The results of these wells are exceeding our expected EORs based on the early production data and our expected EURs were the 7.5 Bcf and 11 Bcf respectively. Also last quarter, we announced a 5 well pad that was a 7 mile step out to the east from any previous production.
These wells continue to perform very well and equally as good as the central portion of our acreage. The five well pad has produced over 6.5 Bs in about 3.5 months and is producing over 55,000,000 cubic foot per day at this time. Additionally, we have flow tested 2 wells at 2 different sites located approximately 4 miles to the Northeast and a similar distance to the East Northeast from the Zick pad site. That's the 5 well pad site I just mentioned. These wells tested at similar rates as the Zick pad wells.
We're currently waiting on gathering lines to be hooked up to these new wells that we just tested. Again, all these wells continue to derisk our acreage in Susquehanna County. We're very comfortable with our acreage position. In addition, we have just completed shooting a 50 Square Mile 3 d seismic survey on the eastern portion of our acreage. With the addition of this data, which will be processed by the Q4, we have 3 d seismic coverage over approximately 95% of our acreage in Susquehanna County.
On the operations side, we are currently operating 5 drilling rigs in the Marcellus and we plan to go down to 4 rigs in August. Through the first half of this year, we have completed 520 stages and we currently have 368 stages that have been completed and waiting to turn in line or they're currently cleaning up or we're currently completing. And additionally, we have 374 stages drilled and waiting to be completed. In regard to the infrastructure comments, we continue to make progress despite minor regulatory and governmental slowdowns on pipeline permits. Specifically, the backlog on obtaining pipeline permits has been the cause of the delays that we've talked about and it certainly affected our 2nd quarter production.
I've read this morning that Corbett has made some comments in regard to setting up some expand permit approval expectations for the PADEP. We're gaining ground in regard to all of this and do not expect the slowdown to affect our 20 12 guidance or our maximum takeaway of approximately 1.5 Bcf per day by the end of the year. We have, with the help of Williams, accelerated our permit applications for 2013 and our 2014 program and at this time do not expect any delays. Brief comment on the Constitution pipeline. Just a note that the joint venture constitution pipeline with Transco where we have a 25% interest.
The initial pre filing at FERC was completed as well as all stakeholder notifications. We are currently in the community outreach phase with everything going as planned and continues on schedule for March 2015 start up. Another comment on pricing. We continue to receive comments on pricing in the Northeast and the update regarding pricing is that everybody is aware that the weak commodity prices our entire industry has seen and experienced lately has certainly we've seen it up in the Marcellus. All producers have experienced some discounting to the historic Appalachia Price Index.
However, with the flexibility of our Springville line to Transco and the laser system to Millennium, our discount to traditional Appalachia pricing is only around $0.03 to $0.05 We expect the trend to continue in this range. However, again, due to all the questions we get regarding our Marcellus pricing in general, we want to reiterate again that daily spot pricing, which can drop significantly below daily NYMEX pricing during the month, is not applicable to Cabot. As for the overall macro gas outlook, we're certainly encouraged and enthusiastic that the commodities market has recently turned and improved and has some strong fundamentals behind it with some increased demand and the storage numbers certainly are heading in the right direction. Brief comment on the Utica, the company's Utica test with Range Resources. Cabot and Range are fifty-fifty in this effort.
It's drilling ahead in the Northwest Pennsylvania. The future releases that we would make we will be following the operator's lead. Brief comment also in regard to water extractions up there. There has been some drought conditions in Pennsylvania. And I just wanted to fill everybody in on where Cabot is in this particular effort.
By the end of July, we have and do anticipate having to have completed 60% of our planned fracking program with the possibility of drought conditions up there. Cabot has firm ability to complete at least 2 thirds of the remaining planned completions for 2012 with the existing capacity and that's in the event that drought conditions would continue unabated. However, we are securing access to additional sites as we speak, which will more than make up for our water requirements. Lastly, as a backup, Cabot Engineering is adding additional storage capacity at its major withdrawal sites. Again, we do not expect to have any problems with fracking.
Moving to the South region and I'll start off with the comments in the Eagle Ford. We have drilled 33 wells with 2 wells currently drilling in our Eagle Ford plug. The average IP has continued to increase. In regard to the 400 foot down spacing project, we are drilling our 2nd set of wells designed to test the down space concept again at about 400 foot apart. These wells will also utilize the zipper frac that we did on our first couple of wells.
We plan to zipper frac our new down space test in early August. During the Q2, our oil pipeline that connects the majority of our Eagle Ford oil wells was connected and it was connected and put into service. This allows our crude to be delivered to a central storage facility and dramatically reduce the truck hauling fees plus reduce our truck traffic. During July, we connected our storage facilities to an existing crude pipeline that will further reduce our trucking costs plus add price upside by marketing our production at the Gulf Coast refineries in lieu of at the lease. In the PureSOLE, our first well is drilling with the second well scheduled to spud sometime in late August.
Plans are to drill at least 5 Pearsall wells in 2012 with success that number would triple in 2013. Moving up to the Marmaton in the panhandle of Oklahoma and Texas. Last night's press release highlighted that Marmonton continues to produce excellent results. The program has grown to about 20 operated wells planned in 12 plus participation with a non operator in several more wells as a non operator in several more wells. Our team is doing an excellent job picking the locations and drilling these wells, which is why a portion of the proceeds from our recent joint venture are being allocated to this area.
Additionally, we wanted to move into the southern area of our acreage, the Panhandle of Texas to look at and evaluate that acreage. Our average IP for the last 5 operated wells is over 1100 barrels of oil plus associated gas with our drilling costs between $2,900,000 $3,400,000 What this quarter highlights is our drilling activity besides remaining highly economic in this price environment continues to be very robust. When the infrastructure permits up in the Marcellus catches up with our productive capacity up there, we will certainly see our volumes to expand and we have already seen that as we have brought on additional wells in July. Additionally, once again extracted dollars from our assets in a value creating way that opens many doors. We're going to keep the one well in the Marcellus.
We've added the well in the Marminton. And certainly, we have new Utica and new PureSol drilling. This is a continued consistent application of what we've done in the past as part of our strategy. With that, Emily, I'll be more than happy to answer any of the questions.
And our first question will come from Pierce Hammond of Simmons. Please go ahead.
Good morning.
Hi, Curtis.
I know it's early and I appreciate the look at the 13 guidance, but was curious for that 13 capital guidance, what is the rig forecast by region behind that guidance?
We're going to be in 5 or 6 rigs in the Marmaton and we're going to I mean, excuse me, in the Marcellus And we're going to have a couple of rigs in the Eagle Ford and we'll probably have 3 rigs in the Curacao and we'll have the 2 rigs in the Marminton.
Perfect. And then in the new guidance slide you state that
the Yes. Let me just also mention there might be 1 or 2 more wells drilled in areas that we'll talk about once we get better definition of those.
Okay. Thank you, Dan. And then in the new guidance slide, you state that the new 2012 CapEx guidance is 775 $1,000,000 to $825,000,000 and that's net of proceeds from asset sales in the Pure Salt JV. What is the CapEx if you include the proceeds from the PureCell JV in any asset sales? Should we just add the $125,000,000 from the PureCell JV on top of that?
Yes, Pierce. That's exactly right. So it'd be $900,000,000 to $950,000,000 Thank you.
Yes. Thank you.
Our next question comes from Rajeev Peranterra of Jefferies. Please go ahead.
Hi, good morning. A couple of questions. First, looking at the 13 guidance, can you is there any contribution or how much contribution have you baked in from Utica and PureSol in those numbers?
In the 13 guidance? Yes. We're not breaking out the 2013 guidance. We have a significant risk profile attached. In fact, we have 0 production contributing from the Utica in our forecast for 12.
And we have a very minimal amount forecast right now because of exploratory nature and the pure sol. So until we see the well results, drilling results, we're not forecasting that production.
Okay. And then you mentioned the drought conditions in Pennsylvania and some of the worst there if conditions don't improve. Is any of that also baked into the 2013 guidance? Or are you assuming the conditions don't conditions do improve?
Well, I can't predict the weather, but I can say currently there is even since they had the restrictions, the restrictions have been lifted in our withdrawal sites And we will start sometime today withdrawing water again up there as a normal course of business. So you're going to have these you're going to have the periods where you have some flow restrictions. It's dependent upon certainly rain, but we also are enhancing our storage capacity to allow us to frac through any extended drought periods. So to answer your question more succinctly, we have not forecast in our 'thirteen guidance any risk profile attached to obtaining water for fracking. Okay.
We're comfortable with what we're building out in form of frac tanks, in the form of additional take points and in the form of accumulation areas to keep our frac crews busy.
Got it. And you mentioned the additional storage. Can you tell us what your current capacity is and how much you are adding?
Our current capacity will allow us to frac at least 2 stages per day and that is just as what we hold on the ground right now. That does not include where we are currently securing additional sites for take points and it does not include any type of impoundments. So I would say we have plus or minus 500 frac stages frac tanks excuse me frac tanks available for fracking.
Got it. Okay. So 5 plus or minus 500 available today and can you say how many you're adding?
Well, once we have it's not going to be where we're adding the frac tanks, it's going to be where we're adding additional capacity to existing sites and a couple of additional new sites for water withdrawal and the engineering of impoundment.
Got it. And one more question related to this. I think you only had 2 or 3 locations that was impacted by the restrictions. How many withdrawal locations you have in Susquehanna?
We have I'll let Steve, Selena, answer that.
Yes. There were 2
that were impacted. We have 5 total. Okay. Okay. I have I'll jump back in the queue for more.
Thank you.
Thank you.
Our next question comes from Brian Singer of Goldman Sachs. Please go ahead.
Thanks. Good morning.
Hi, Brian.
Can you
talk to what you're seeing or expecting in terms of IP per stage from your Marcellus wells now versus what's historically been I think about 1,000,000 cubic feet a day per stage I believe? And to what degree that your wells in the Marcellus that are currently online are being restrained, if all, because of midstream constraints versus what you would want them to to optimally produce?
Well, we have the for example, the 2 wells that we just announced on a per stage basis, these couple of new wells are they're obviously very, very good wells and they are above our average IP. We continue to see a fairly trying to extend our laterals and we're trying to add additional stages, but we do continuously are negated from as long a laterals as we'd like to drill out there on a consistent basis by virtue of the Pennsylvania not having any pooling provisions available to us. So in regard to our EURs and what we anticipate in the future, we'll look at that at year end and make that kind of determination once we get to the end to look at what the average stages for our 2012 program has been.
Are your existing wells that are producing in the Marcellus, are they producing at the levels that you would optimally want them to produce? Or are they being restrained by midstream?
We have seen a little of restraints because some of the production we have capacity production capacity we and
some
downtime we've seen on and some downtime we've seen on various compressions. So that does affect our production profile. If you look at and you cobble together the unexpected downtime and some of the issues we've seen out there, which we are we along with Williams continue to work through, it has affected probably year to date somewhere north of 5 Bcf of production.
Got it. And that's essentially incremental production from here that might not be included in the 3 68 stages that are behind pipe or completing?
Yes. We're risking some of that production that's behind pipe or waiting on pipeline when it comes on. And we also put an element of risk in on the wells we drill with the anticipated number of stages that we have forecast. And we do that in case we lose a plug in the hole. We have mechanical issues periodically out there that we can't get to the end of the say the toe of the well, back to the toe of the well.
And instead of wasting the time right now, we'll bring on a well and then we'll clean out at a later date once production gets worked down.
That's great. And lastly, just going back to the water constraint topic, you mentioned some downside scenario where you would face greater constraints. Do the plant infrastructure additions that you see coming give you the ability to bring on the 3 68 stages that have already been completed or are completing? And I guess on the earlier question, just to make sure we understood, what does your water storage give you in terms of how many incremental wells or stages you could frac overall?
Well, I'll let Steve answer the latter part of that. But in regard to the 374 stages that we have waiting on completion, we feel very comfortable that we're going to be able to get all those stages fracked. Right. And just in terms of our storage, what we're looking to do is to double our storage capacity at the withdrawal sites. So we'll have a significant amount of surplus of fluid available to us.
Okay. Thank you.
Thank you, Brian.
Our next question comes from Jack Idan of KeyBanc. Please go ahead.
Good morning, guys. Hey, Jack. What is your production today from Marcellus?
Let's see. I think it is it varies every day, but it's plus or minus 650.
Okay. The second question, the lateral on those 2 wells, the 8,000,000 dollars IP and the 16,000,000, what was the lateral on those wells in each? They were both 15 stage frac wells. Okay. And how much what is the cost?
What was the cost running on those wells?
The cost was right at $6,000,000
Okay. Now of this you had about 368 stages completed waiting and about 374 to be drilled completed. How many of those you think you might include do this year?
We think we'll do all of the 300 and well, we'll turn in line all of the 368 stages and we will track all of the 370 stages. All those are part of our expected stages that will turn in line. And FAR 12, we're estimating that we would be plus or minus 1100
stages total. Okay. Now with your takeaway capacity or takeaway about coming about 1 point 5 Bs by year end, some operators are reducing activities in the Marcella. Do you think you will have some access to additional away capacity this year and next year because of other operators' decision to cut in the to reduce activities in the
play? Well, we're going to still see I'm going to turn that over to Jeff in a second, but we're going still see as we continue to build the infrastructure out, we're going to still see areas that we are infrastructure constrained just by nature of where the drilling and completing is going to be. We'll be able to bring some on, but we might not be able to bring them on at full volumes. And I'll let Jeff make a comment also.
Jack, you're exactly right to a certain degree that the reduction in activity is going to open up some capacity on the pipelines. So I think the bigger factor that we're experiencing right now is with Cabot taking more gas additional gas down to Transco and companies like Talisman moving a lot of the production off the Tennessee lineup to Empire. And you've got other producers range and there's probably 6 or 7 other producers that are moving gas in different directions because of recent pipeline completions and in service this fall, that's what's really relieving the pressure and capacity constraints on Tennessee 300 line right now.
Dan, one more question, you might not answer it. But when you're going to talk about the new venture, if you add it in couple of places 25,000 acres or so and you're spending money, when you might when we might know where you are being active?
Well, Jack, I'd be disappointed if you didn't ask a question that I couldn't answer. We have one of the areas I think we will have data on this year that we will probably discuss. And another area, maybe both those areas we would discuss, but it's not a guarantee.
Is it gazzy, oily play? Yes. That doesn't okay. Okay. Now final questions.
Do you do a mid year reserve report or you don't?
No, we do not do a mid year reserve report. Steve Lineman is one who shepherds that and
he will start working on that probably November, October time period to be prepared for year end numbers. Just based on the result of those wells, the EURs and everything, I mean, it looks like 7.5%, 11%. Could you guess how high we could go in the EUR by year end?
Well, we're again, our data base on the lower Marcellus is certainly adequate and we're comfortable with the numbers that we have even all the way down to like Brian's question on IP and booking per stage. But in regard to the Upper Marcellus, our data set is limited in the Upper Marcellus and we'll continue to be cautious on our bookings in the Upper Marcellus until we see further data. But the data that we have seen, we're very
comfortable with. Thanks a lot. Okay. Thank you, Jack.
Next question comes from Michael Hall of Robert W. Baird. Please go ahead.
Thanks. Good morning.
Hi, Michael.
Just wanted to, I guess, dive into the 2012 CapEx increment a little with a little more granularity. On that increase, can you kind of outline what the specific drivers of it were? It seems like some of it's clearly leasing, but just wondering if you could walk through some of the moving pieces there?
Well, on the 2 new wells that we're adding in the Fearsall JV. We're adding also a rig in the Marminton and that is a rig that we placed into the in the Panhandle of Texas that we're currently drilling. We have the Utica well that we're drilling with Range and Range is also permitting a second well up there in the Utica, which we've included in our numbers. And we have a with the success up in the Marminton, our operator, where we're non operator, they continue to have a fairly robust program up there. So those are the primary areas that we're allocating the additional capital.
And we're keeping the 1 rig in the Marcellus that either way that was not going to affect our production. It was just going to be reducing our cash if we went down to 3 rigs, but we're going to keep a rig running from August to the end of the year that we had originally had planned on setting on the sidelines till January.
Okay, great. That's helpful. And then I guess on the outlook for 2013, maybe could you just provide a little bit of a roadmap around the infrastructure? And given that like you said, we continue to have kind of pockets of tightness. How should we think about that for 'thirteen relative to 'twelve?
Are the majority of those expected to be, let's say, debottlenecked by midyear? Just some additional color there?
Okay. Yes. Jeff lives and breathes 20 fourseven, so I'll let him answer that.
Okay. Michael, obviously, this is a process and it doesn't stop at quarters and year ends. And we have permitted pipes out through 2014 2015 to try to design an infrastructure system out there that not only is safe and dependable, but also gives us flexibility and also increases our capacities to all the pipelines. So it is work in progress. We do have some major compressor stations going to be completed early in or early in the mid year 'thirteen.
It's going to help us out quite a bit. Again, adding additional units to make sure that we have some backups, spare capacity. That's obviously the goal. We also want to concentrate on lowering the fuel pressure throughout the system. And so as we grow the infrastructure, we will concentrate on trying to obtain ideal conditions and our wells have a better opportunity to produce at 100% than they are currently.
Okay. Would there be any sort of, let's say, lumpiness that you would highlight as we look at 'thirteen on maybe a quarterly basis?
So my expectation, Michael, as we've relayed to you that 13, we expect things to be getting smoother in regard to what we can comfortably expect versus what we'll actually realize. The permits for our 13 program have been and all our location discussions with Williams has gone very well. Williams has submitted permits for the 2013 program and we're 95% complete with that permit application for our 13 program. We'll have a little bit more spread and a little bit more capacity in not only existing areas, but we'll have some also some additional area so that we'll be able to move our gas through the existing pipe. So expectation is it's not going to be lumpy.
It would just be in the beginning of the year, we might hedge our bet a little bit like we have been this year. And the example would be a good example would be just the couple of wells that we brought on that were granted very, very good wells. But if we would have brought the 2 wells that are each cumed over a Bcf, if we would have brought those on a month earlier, as anticipated along with some of the other wells that we brought on in July, it would have made a lot of difference in just what people look at as our 2nd quarter numbers. So like Jeff said, it's not a quarter to quarter game with us right now. It's just a fluid dynamic process that we are getting ahead of and we're at the tail end of coordinating the passing the baton from Cabot to Williams on getting all these gathering lines in sync with where we have drilling rigs.
Okay, great. That all makes sense. Appreciate the color. Just a couple more. As you look to the end of 'twelve, would you care to put any sort of exit rate assumption out there?
And then kind of what do you feel like the backlog in terms of uncompleted and or waiting on something, let's say, looks like as you head into 'thirteen into Marcellus?
We're still going to stick with our just our pretty wide range guidance right now on the exit rate. Certainly, as you can see with the number of stages that we have already completed waiting to be turned in line and the activity that we have ongoing, it's certainly safe to say that we're going to have a robust exit volume, but we're not prepared to lay it out there.
Okay. And then in terms of backlog, I mean relative to the current backlog waiting on pipeline intercompletion, you think it will be pretty similar as
you head into 'thirteen or do you expect to work that down materially? Well, I would expect with us keeping that as we've mentioned before, we were going to get down to 3 rigs and going into January, we were still going to have a backlog of stages that rolled into 'thirteen. Now keeping that rig, our backlog is going to increase and I would think that backlog will probably be between 3.50 and 4 100 stages.
Okay. And then I guess just two more housekeeping ones on my end. Well costs, let's say per area assumed within in the 2013 outlook. Would you care to provide those? Give us the rig counts, just curious what you're seeing on well cost by area?
Well, we're in the 6 $1,000,000 plus or minus range in the Marcellus. We're in the as we mentioned the $2,400,000 or $2,900,000 to $3,400,000 in the Marminton. We're in the $6,500,000 to $7,200,000 in the Eagle Ford. The PureSO wells are going to be right now because we're going to have some evaluation process going on. We're going to be 9 point 5 to 10, 10.2 somewhere in that regard.
The Utica well, somebody helped me with the Utica well, it's going to be 7.5 to 8 something of that nature. And that has science attached to it also with us coring and things like that.
Okay. And then on the 2 wells that have cammed over Bcf each, what would be the cume during the roughly 39 day or whatever call it 30 day period on your 11 Bcf type well?
Less than that. I gathered that. Yes, I'm sorry, Michael. I don't have that number handy with me right now. Fair enough.
Our next question comes from Matt Portillo of Tudor, Pickering and Holt. Please go ahead.
Hi, Matt.
Just a quick question to clarify on the CapEx side. I'm just working through the implied run rate into the back half of the year. And to get to the midpoint of the guidance range, I'm seeing something around $250,000,000 to $275,000,000 per quarter. If I was to annualize that number to 20 13 and then looking at the rig count allocation that you guys have, it put me something probably above the $1,000,000,000 in CapEx guidance. Could you help just provide, I guess, any color around that and maybe what you may be spending incremental capital on in the next two quarters that may not be there in 2013?
Matt, this is Scott Schroeder. One of the things that Dan highlighted as part of the capital increase is a doubling of the lease act. And the lease act run rate for 'twelve is higher than the run rate has been, so that would contribute part of it. Again, what it's all going to boil down to for 2013 is what we think the underlying commodity prices are for both commodities. We've given you a kind of a wide production range, but if you kind of look at the midpoint of that, what's your cash flow, we're going
to target the cash flow.
And if it ends up cash flow ends up being a little above $1,000,000,000 we'll probably be a little above $1,000,000,000 if it's below, we'll be below.
Great. And just on that leasing side, is there a rough number you guys could provide us on the leasing for the full year?
For $13,000,000 I would say it's probably back to the $50,000,000 or less range for next year.
Okay, great. And then just I wanted to clarify on the July production number, I think you said roughly $650,000,000 a day. Is that a gross number? That's a gross Marcellus number. And how does that compare to June?
That's probably about $30,000,000 a day to $35,000,000 to $40,000,000 a day higher than the June average actually than the Q2 average. 2nd quarter average is right around 6.15 gross for Marcellus.
Okay, great. And then just the final question for me. I just wanted to clarify on the production guidance for 2012. You are baking in some risked volumes given the issues around the drought or you're not baking anything at this point?
No. We're the risk volumes that we bake in, 1, we have not included anything in the Utica. 2, we have very, very little production attached to our Pearsall right now. And we feel fully comfortable that with the our plan in place and the securing additional sites, we feel fully comfortable about getting our production volumes with the not only what we've already done, the wells we've already completed waiting on infrastructure, but also the amount of capacity we have to frac between now and the end of the year. Even if you had some drought conditions, we feel fully comfortable about being able matching our guidance.
And we have not put added any risk profile to that because of those comments.
Okay. Great. Thanks guys.
Thank you.
Our next question comes from Charles Meade of Johnson Rice. Please go ahead.
Good morning gentlemen. Let's see a couple quick questions. First on the Marmaton, those look like at least the one you guys talking about is really encouraging. And I'm curious, what do you guys have a view on what drives the divergence between wells that are really good and wells that are not as good? And do you think what are you doing to advance the ability to figure that out pre drill?
Well, the biggest factor geologically is the extent of fracturing in and around the wellbore. And that is contributing to the differential in the delta. We are doing some things out there. Example, we're going to be drilling our 1st operated stand up 6 40, which will have longer laterals and more stages and certainly we think the possibility of intersecting additional fractures. But that's the overriding royalty why you have a more delta in this particular area that you might in the other areas.
And I'll let Matt make a brief comment attached to what he's seeing out there also. I think also
with our logging program that we have now, we're better able to identify our fracture systems and also a real key to our completions now are packer placements. We identify fracture swarms and are able to place our packers in more ideal position and better place our frackers.
So you're just interpreting an open hole log on the whole horizontal section and deciding kind of deciding where your frac is going to be closely more closely spaced or something?
Yes, that's part of it. And also we've done some things to better isolate the individual stages between during the frac. And also I think we've been able to identify some better areas where these individual fracture swarms and areas are.
Got it. And then one follow-up question, Dan. Thanks for addressing that pricing issue in the Marcellus head on. But as far as
what we should look to,
am I right in thinking that it's really the Dominion base swap
that we should be paying attention to for your for the pricing you're going to realize up there?
I'll let Jeff fill that.
No, not necessarily. The man it's kind of a weird situation. The manions index and Columbia Gas Transmission Index both very traditional Appalachian type indexes. When we first got started up there, pretty much a lot of people traded off that Columbia index. That's no longer very applicable.
And so a lot of people turn to Dominion, but mostly people have turned to just plain old NYMEX type pricing. And so on the physical side, we have 2. And so but when you take our existing term business and you look at the 3 different pipes that we're on, all 3 pipes trade different indexes. So what we've tried to do is just put them all in a bucket and kind of throw out it on a weighted average basis that we're pretty darn close to last day NYMEX.
Okay. Got it. Thank you very much, Jen.
Thank you.
Our next question comes from Joseph Stewart of Citi. Please go ahead.
Good morning, everybody. Thank you.
Hi, Joe.
A follow-up question on the Marmatin there. So you're mentioning that the results are largely driven by the naturally occurring fractures. How many drilling locations have you currently identified there?
Well, I'm going to let Matt feel that. And again, that was part of the reason why we added the extra rig in there is to identify larger swath of our acreage. And so the assumptions you roll into that if you had all of it available, Matt, I'll let you feel that.
As you look at these individual fracture swarms and look at our position, I think we're as Dan said, we're down in Texas now starting to look at a new area and also looking at some other areas as well. But I would say locations are going to vary somewhere between 405 100 gross locations.
Okay. So are those locations which appear to have the naturally occurring fractures?
D. Hall:] Well, as we say, we're investigating and looking at new areas down in Texas and some other areas in Oklahoma. But in the areas that we're in now, yes, they would have the natural occurring fractures. That's correct.
Got it. And Joe, just to comment on that, we have a lot of again, because of our leasing, we have a lot of vertical wells and areas that have shown fractures in the past, but we have not done extensive nobody has done extensive horizontal drilling in some of these new areas to determine the full extent of the fracturing.
Got it.
Okay. Thank
you. So that would be the risk profile you would assess against it.
Got it. Okay. And then I apologize if I missed this, but given the 1.5 Bs per day that you're expecting to have by year end And then also just kind of looking at your Q2 volumes, if you held Q2 flat, you'd basically be at the low end of your guidance for the year. So should we maybe expect kind of an updated range or maybe even an increased range on the guidance by Q3 or would you prefer to just kind of wait and maybe just hit the high end or beat
it? Well, we've had discussion about our guidance and the width of the guidance that we have 35% to 50 percent and we realize a fairly large truck can drive through that. But we felt that right now staying consistent, not have a whole lot of moving parts in our guidance and just to continue to work through the delays that we've seen in the gathering lines. We thought that's prudent and if we are successful in topping out our guidance then that's great, but we certainly feel very comfortable that we're going to be within guidance.
Sure. Yes, certainly looks that way.
Okay. Thanks a lot guys. Thank you.
Our next question comes from Bob Brackett of Bernstein. Please go ahead.
Hi. Can you talk about what you learned from the Brown Dense well and what it cost you to learn that?
The cost was the acreage cost of the 13,000 plus acres and the cost of the drilling, which we wrote off as our dry hole cost, which is around $10,000,000 And right now, we're still again have learned that it's productive, continued capital being spent in the area by different operators and making an effort to determine how to make it economic up there and compete with the other plays that companies have to allocate capital on. So we're not again because we write off the well, we're not saying we're condemning the play.
And do you think
the poor results, I guess, implied in the write off, are they the result of a completion? Or do you think it's the geology or some combination?
Well, I think it's the early stage of going into a virgin area to drill a well when you have decisions on where you're going to place the well in the zone and what type of fracs you're going to place on it, how you're going to space those fracs. And the well we drill exploratory again in nature, we only had 10 stages applied to that. And it's gathering information that's going on not only in the brown dense, continuing gathering information information in the Tuscaloosa Marine Shale. We did the same thing as we gathered information in every other play, the Eagle Ford. We're doing that now in the Pearsall.
We did that in the Marcellus and it's just a very early entry. Some plays, some areas, the key to success is very obvious and upfront. In other place, the key to success takes a whole lot more study and evaluation and technology to get there. Great. Thanks.
The next question comes from Robert Christiansen of Buckingham Research Group. Please go ahead.
Great quarter on ops report. On the ops report, my one question relates to the Eagle Ford. You say it's very early results in your down spacing program. When will we see more down spacing? And when will we start to establish that the down spacing is working or not working on a very broad area of your acreage?
When will we know some of that?
Yes. That's a good question, Robert. And with obviously, we all need
to be
cautious without a big sample pool. But with that said, we are we have drilled 2 additional wells that are spaced 400 feet apart and we have Matt's group has scheduled the frac to occur in the middle of August. So we will do that and get another data point. But from the information we've seen on the 2 wells as we mentioned the 30 day average is greater. In fact, one of the wells has been on about 110 days and one of the wells is still producing at 400 or so barrels a day.
So that is pretty good data that says that a couple of things. 1, that the spacing was not a big issue and 2, that the zipper frac, we think, which was these were the first two wells we did the zipper frac, we think it probably had a positive effect overall on the proximity of each track that we did and the results that we're seeing.
But my point is, I guess, how many more down spacing tests will you run this year and next year? When will we start to be able to put a big circle around this and saying it's broad in nature, the success of down spacing as opposed to in a sort of select area?
Yes. Well, we can extrapolate a little bit now by the other wells we've drilled and the geology we've seen and consistency in the geology that we've seen in the other areas we've drilled. So we can extrapolate a little bit, but to specifically have a full blown development program out there right now, we're not implementing a full blown development program out there right now until we continue to see how the wells perform, all the wells perform long term. But again in 'thirteen, I would expect towards the end of 'thirteen that we would have a couple of more pad sites that would give us additional data points in additional areas that would continue to enhance our evaluation.
So perhaps by 'fourteen, we could rule it in on a broad based basis
or not? I mean,
we just need more time, I
understand. No, I think that's very realistic.
Okay.
Thank you very much.
Thank you, Robert.
The next question is a follow-up from Madhu Parantara of Jefferies. Please go ahead.
Yes, thanks. Going back to the discussion on price realization, the gas that you're flowing on the Tennessee line, is that subject to the TGP Zone 4 pricing or are you getting some other index on that?
The answer is no. It is not. We do not sell off that index.
Okay. And if you want to flow additional gas on Tennessee today, would that then be subject to zone from pricing or?
No, it would not.
Okay. And then the Springbald expansion, is that still on target for August completion?
Yes. Springville has a couple of phases to it,
and there are some units being commissioned as we speak. And so don't have an exact date, but certainly here in the next short term. And
so that next phase coming on, how much capacity would that add?
The next compressor will add approximately 100,000 a day of capacity. And then the second phase of that will add approximately 200,000 a day of capacity.
Okay. And do you have timing for that $200,000,000 a day?
We expect that kind of early Q4.
Got it. And then lastly, the 2 wells that you highlighted that produced over Bcf a day, What was the lateral length and stages on that and also the cost?
Let me grab that. The costs were I think let me see what was the Steve what do you have as the The rest 17 stages. Both of them were 17 stages. So the cost was probably about 6 point 5, something like that.
Yes, great. And those were in the central area?
Yes. Perfect.
Great. Thanks. That's all I had.
Thank you.
Our next question is a follow-up from Michael Hall of Robert W. Baird. Please go ahead.
Yes. Just one quick one on more of the macro environment. Just curious if you had any sense industry backlog as it relates to kind of wells waiting on completion and or pipeline in Northeastern PA? No.
I know Michael, I don't have exact numbers or any better intelligence than some of what we all read out there. I know there's some wells that are drilled waiting on capacity build out and that capacity build out is down the road. But I do not have an exact count on the number of wells.
Fair enough. I figured it's worth asking. Thanks.
Thank you.
Our next question is from John Seltzer of Barriah Capital Partners. Please go ahead.
Yes. Good morning. The early results in the Upper Marcellus look good, but the lower is obviously still better. Kind of how do you see that playing out once you're going to do enough that you've increased your knowledge and the certainty of that and then continue to drill the lower? How does that look going into 2013?
Well,
the drilling we're doing right now is predominantly in the lower. We plan on continuing drilling predominantly in the lower. As we continue to gather data points, which we will drill some additional data points between now and through our 13 program in the Upper Marcellus, the plan would be to gather information, have the confidence and then once we get to a more intense pad drilling that we would augment some of that drilling with the reduced spacing that we implemented in this particular area similar to that pattern.
All right. Got it. So I guess the lower recoveries you would more than make up in the synergies of drilling from the pads?
Absolutely. We expect to have increased synergies in our pad drilling process. We just we're just not doing that right now.
Good. Thanks, Dan.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Dinges for any closing remarks.
Okay. Appreciate it, Emily, and thanks for the attention for this quarter. As you can see, the program that we've laid out will continue to fall within what we think is a fairly robust production guidance process. There was comments in regard to our reserve bookings. And at the end of the year, once we do that, we think we are also going to have a very robust reserve recognition at the end of the year.
That's going to translate into I think a top tier finding cost and certainly a very nice portfolio on the books by the end of the year. Stay tuned. We have more to come and look forward to visiting with you all through the Q3. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.