Good morning, and welcome to the Cabot Oil and Gas Corporation Third Quarter 2017 Earnings Conference Call. All participants will be in listen only mode. 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.
Thank you, Drew, and good morning to all. Thank you for joining us today for Cabot's Q3 2017 earnings call. With me today are the members of the Cabot's executive team that are usually here. Before we get started, I'd like to highlight that on this call, we will make forward looking statements based on current expectations. Also some of our comments may refer to non GAAP financial measures, forward looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures are provided in this morning's earnings release.
For the Q3, Cabot demonstrated its continued focus on disciplined capital allocation by generating positive free cash flow for the 6th consecutive quarter, while delivering 12% equivalent production growth. Operating cash flow increased by 79% year over year driven by our production growth coupled with a 60% increase in cash margins. While natural gas price realizations increased 16% year over year, it should come as no surprise that the 3rd quarter realizations were weaker sequentially due to lower NYMEX price and wider differentials. The widening of differentials in the 3rd quarter has been seen in Appalachia over the last few years and highlights the need for the long anticipated in service of new long haul infrastructure and in basin demand projects. Our expectation is that our price realizations will only improve moving forward given the in service of numerous infrastructure projects over the next few quarters.
Year to date, we have generated approximately $125,000,000 of free cash flow and received over $30,000,000 of proceeds from non core asset sales, which have allowed us to return almost $125,000,000 of capital to shareholders year to date via dividend and share repurchases and to reduce our net debt position further improving our strong balance sheet. As it relates to share repurchases, while we did not buy back shares during the Q3, I would highlight that we will remain optimistic on this front and take advantage of disconnects in the market like the recent 9% sell off we experienced during our recent trading blackout period, which did begin after the end of Q3. In this morning's release, we reaffirmed our capital guidance and tightened our production guidance range for the year, while leaving the midpoint unchanged where we ended up in the production where we end up in the production guidance range will ultimately be dependent on in basin pricing during the Q4 as Cabot has recently been electing curtail a small portion of its production when pricing is value destructive. As we have reiterated many times before, while production is a byproduct of our capital allocation to high return projects, we are not chasing top line production growth for the sake of it and have absolutely no problem holding back volumes if the prices do not warrant moving additional gas at certain times.
However, I'm not overly concerned about the recent price dynamics given that over the last few years we have seen some of the widest differentials during the month of October, which has subsequently been followed by a significant improvement in basis. As most of you are aware, Atlantic Sunrise received its final notice to proceed during the quarter with pipeline and compression station construction beginning in September. This is a milestone we've been waiting for since our first announcement and our involvement in the project back in February 2014 and represents a key inflection point for the Northeast Pennsylvania natural gas market and for Cabot. We continue to target a mid-twenty 18 in service of this project which we will be selling approximately 1 Bcf of new of gas to new markets. Tennessee Gas Pipeline recently reaffirmed that its O'Ran project is ahead of schedule and is anticipated to be in service as early as December 17.
Additionally, the 2 power plant projects that we are sold suppliers to Moxie Freedom and Lackawanna Energy Center are currently under construction and on schedule for their early September excuse me, summer 2018 in service. As it relates to Constitution Pipeline, the partners of this project recently submitted a petition for a declaratory order with the FERC demonstrating that the New York DEC exceeded its statutory timeframe to grant or deny the Section 401 certification for the project. The Clean Water Act specifies that if a state agency fails or refuses to act on a request for certification under Section 401 within a reasonable period of time, the certification requirement shall be waived. It is our belief that the New York DEC clearly failed to act on Constitution's application for a Section 401 Water Quality Certification within a reasonable period of time. If the FERC grants Constitution's petition, Constitution will promptly seek a Clean Water Act Section 404 permit from the U.
S. Army Corps of Engineers. We continue to believe this is a project that New York needs to achieve its energy goal, which will require a mix of resources including natural gas in order to keep rates low and supply reliable for power generation for the state. In line with state energy goals, Constitution will lower emissions by enabling customers switch from heating oil to cleaner burning natural gas. In line with our conservative forecast, we currently exclude the benefit of our capacity on Constitution from our 5 year plan.
However, I certainly would not count this project out. In this morning's release, we initiated our official 2018 daily production growth guidance ranging with a range of 15% to 20%, which implies a 17% to 22% pro form a for West Virginia divestiture. This production growth is based on capital budget range of $1,025,000,000 to $1,150,000,000 consisting of $750,000,000 to $850,000,000 in the Marcellus $125,000,000 to $150,000,000 in the Eagle Ford dollars 75,000,000 in our exploration plays and $75,000,000 for pipeline investments in Atlantic Sunrise and other corporate capital expenditures. We plan to operate 3 rigs and utilize 2 completion crews in the Marcellus Shell during 2018. Our pace of completion activity will ultimately dictate where we land within the Marcellus capital range and will be dependent upon market conditions during the year.
While we could certainly grow faster than our current guidance, our focus is on maximizing margins, returns and free cash flow and we firmly believe the flexibility in this current plan allows us to make the most prudent capital allocation decisions throughout the year in response to market dynamics. Capital range for the Marcellus in 2018 will position CapEx for Marcellus production growth of 27% to 33% in 2019. Based on current market indications for natural gas prices, we expect our natural gas price realizations to average 0.45 dollars to $0.50 below NYMEX for the full year of 2018, a significant improvement over 2017 levels. In the Eagle Ford, we plan to operate 1 rig for the full year and utilize 1 completion crew for a portion of the year. Our plan allows for us to maintain all core acreage, provide for single digit growth in oil production and generates positive free cash flow at the current strip.
Our capital range for the Eagle Ford will depend on our outlook for oil price with a focus on generating free cash flow from this asset as opposed to growth for the sake of growth. We plan to spend $75,000,000 during the first half of twenty eighteen continuing to test our 2 new exploratory areas to better understand if they have the attributes we are looking for in order to compete for our capital internally. We would like to be in a position by mid-twenty 18 or sooner to make a decision on whether we move forward with continued activity on these areas based on our results from the first half of the year. As we have stated before, if we do ultimately have success in these areas, we will look to divest assets to fund any near term deficit spends in these areas that would need to occur before the assets become self funding and free cash flow positive similar to what we did in the Marcellus years ago. And for example, on the cash flow raise while fairly small in nature, we are currently marketing our remaining Haynesville properties as we continue to high grade our portfolio.
Based on current strip prices, our 2018 program would deliver the following highlights double digit corporate wide returns, positive free cash flow of over $200,000,000 at midpoint of the capital budget range, a deleveraging of the balance sheet to below one times debt to EBITDAX, production growth of 15% to 20% and positions the company for significant growth in free cash flow and production in 2019 2020 as we highlighted in the 3 year Marcellus outlook we included in this morning's release. Further on our 3 year outlook, the Marcellus is expected to deliver a 3 year Marcellus production CAGR of 20 plus percent and a 3 year Marcellus discretionary cash flow CAGR of 25 plus percent assuming current strip prices. Based on this plan, Cabot's Marcellus asset would generate approximately $2,500,000,000 of cumulative pre tax free cash flow from 2018 to 2020, while averaging between $750,000,000 to $850,000,000 of annual Marcellus capital expenditures over this period. This program only assumes we have the benefit of the infrastructure that is currently under construction including Atlantic Sunrise and the other 2 power plant projects that we have mentioned. Obviously, any incremental capacity on long term sales could provide additional upside.
Given its level of free cash flow generation, we expect our debt adjusted per share growth metric to look even better than our absolute growth numbers. I would also highlight that based on our internal estimates as well as consensus estimates for 20 19, this plan would generate a best in class free cash flow yield compared to the rest of the E and P companies in the S and P 500. While it's premature at this point to outline a specific plan for allocation of free cash flow, we fully expect to return an increasing amount of capital to shareholders via dividend growth and share repurchases as well as evaluate the potential reduction of debt as near term maturities come due. Our longer term capital allocation to assets outside of the Marcellus will ultimately be dependent on our outlook for oil prices and the outcome of our ongoing exploration testing. However, as I mentioned earlier, we are focused on delivering a self funded program in the Eagle Ford and funding any initial deficit spends in our exploration areas with asset sales.
In summary, we have a 3 year plan that provides double digit returns focused per share growth while generating significant free cash flow at the current strip and delivers double digit corporate wide returns that stand out not only among energy companies, but also across the broad market, which certainly makes Cabot an attractive investment regardless of anybody's view on the energy space. Drew, with that, I'll be happy to answer any questions.
We will now begin the question and answer session. The first question comes from Bob Morris of Citi. Please go ahead.
Thank you. And nice quarter, Dan. My first question is when you talk about the curtailments on an uneconomic basis, what netback price becomes uneconomic? Is it $2.50 $2 or how do you think about that? And how much could you curtail everything that is hitting that price?
Well, we have an economic price that covers our cost of capital close to $1 But we have seen in some of the gas we move in the daily market, which is not a large percentage of our gas, but we move gas in the daily market and that's some of the gas that we remove and we saw gas that was below $1 on the realizations over several weekends and periods of time that were low demand periods and that is the gas volumes that we would like to not move.
Okay. That's good. And my second question, it's a lot of $2,500,000,000 is a lot of free cash flow. You've got options between you can buy back up to 20% of your stock, you could pay a meaningful or S and P type dividend on the shares. How do you think about those two options in reallocating or returning that capital to shareholder?
And obviously, the share buybacks depend on the stock price, but close to current levels, how do you think about the options between share buybacks and dividend increase?
Well, we recently, as you're aware, increased our dividend 150%. We also bought back a nice tranche of shares in the Q2. We do have an authorization still on the shelf to buy back shares. When you compare those 2, we will, I think, look at both of them as an avenue to give back money to shareholders. We on the dividend, we are moving towards a much more certainty attached to our free cash flow generation.
Now that we have the approval of infrastructure going in the ground. With that infrastructure in the ground and gas moving through additional outlets and also seeing the bases compress in the and on the 3 pipes that we currently sell into, we're going to have a significant level of confidence of an ongoing continuous improvement in the realizations. And with that, that gives us a little bit more confidence on just the dividend side of our give back. In the meantime, however, though we have had, as you're aware, dollars 500,000,000 or so of cash on our balance sheet and we have continued to rationalize our portfolio and we looked at the buybacks with some of that cash. So to say a little bit more succinctly, once we get the infrastructure in place, we know we're going to be generating a significant level of free cash and with that we'll then make decisions to between the share buybacks and the dividends and look at that as prudently as we can.
Either way it's an enviable position to be in. Congratulations. Thanks.
Thanks, Bob.
The next question comes from Michael Glick of JPMorgan. Please go ahead. Hey, guys. Not to be
a dead horse here, but just have one question really on the stock buyback. I mean, on our model, which appears to be in the right zip code based on the outlook you provided, you're trading at a 7% or actually probably 6% free cash flow yield after today's recent move. I mean, there seem to be few similar opportunities when we think about the broader non E and P, of course, market. Just in that context, how do you think about buybacks?
Well,
and I'd like to hear your comment also, Michael. We look at that as a unique position for an E and P company, free cash flow yield of not only that, but we think we can increase that free cash flow yield. If you compare that free cash flow yield to other industries out there and you look at our multiples, I would like to see what the Street thinks the value is of an E and P company that does deliver that type of yield. And if we get the reaction from The Street and they value that free cash flow yield in a way that we think merits the valuation per share of Cabot stock then buying back shares is not going to be as big of interest to us because we're going to see it in stock price appreciation. But to date, even though we think that is very visible on that yield and improving as we go forward.
I haven't seen the comparison of the Street giving us the credit in our current share price.
Got you. Thank you for those comments.
Thanks, Michael. The next question comes from David Deckelbaum of KeyBanc. Please go ahead. Good
morning, Dan and everyone. Thanks for taking my questions.
You bet.
Just looking at the program, it's a great multiyear outlook. It looks like approximately that you'll be filling the capacity so far that you've identified by about the Q4 of 2019. 1, am I thinking about that correctly? And then 2, I guess, as we think about filling visible capacity right now, you talked about being opportunistic. Do you view the communication today around free cash as sort of the $1,000,000,000 cumulative through the next 3 years as kind of the floor that you'd like to deliver to the market?
And how do you square that with once you start filling capacity and you witness potential improvements in local basis, how do you sort of blend the desire to deliver that free cash while also weighing potentially accelerating beyond the plan you laid out now?
Yes. I'll just make a comment then I'll turn it over to Scott and let him make a comment also. But on the capacity side, we are entirely comfortable with the production growth that we've indicated. It is our plan as we've discussed in the past David to certainly fill the new infrastructure with some of the existing gas that we're producing today and also have incremental volumes that go into filling the Atlantic Sunrise and those 2 power plants. We do expect the uplift that you've referenced existing pipes.
However, if in fact the area rationalization by other operators out there would move into the space and try to backfill where Cabot has moved gas off of those 3 pipes and on to new markets, if there's backfilling and rationalization by or the lack of rationalization by other operators out there then Cabot is not going to give up a great deal of its market share. We will be there and us being the lowest cost producer up there, we will certainly protect our market share. I'll turn comment over to Scott also.
David, the thing I would add is on your first comment. As we laid out in the text and in the press release, we have kind of a dual track going on for the Marcellus program based on market conditions. You are factually correct in one of those scenarios that we could fill that new capacity by the end of the decade, end of December kind of 2019. The other bookend on that is kind of the end of December 2020. That's kind of the bookend timeframe that we're looking at in this plan that we laid out with the cash flow and things like that.
Thanks, Scott. And then
I guess looking at the
program right now, you have Eagle Ford volume growing with a pretty minimal amount of capital. It sounds like you've seen some improvements there on the operational side, maybe on the completion side as well. How do you view that asset now as a source of funds versus a development opportunity? And I guess thinking about the life cycle of that asset, are we closer to perhaps pruning that now and looking at it as a source of funds? Or is that something that's year delay?
Well, we've always looked at the Eagle Ford as a good alternative to allocating some of our capital. And we continue to improve our efficiencies and our completion results out there in the field. When you look at though the impact of the Eagle Ford on Cabot as far as it being a use of proceeds. We don't look at that as a large use of proceeds with our plan of allocating the capital to the Marcellus, also with our plan of giving money back to the shareholder. And we do anticipate that with success in our 2 exploratory areas that the Eagle Ford is that fits into our capital allocation today.
But if it does not rank within our hierarchy of where we'd like to allocate capital in the future then the Eagle Ford as we have said in the past is an asset that we would look at to help fund our new ventures.
Thanks for color Dan, Scott and everyone. Appreciate it.
Thanks, David.
The next question comes from Charles Meade of Johnson Rice. Please go ahead.
Good morning, Dan, to you and your whole team there.
Hi, Charles. How are you?
I'm doing well. Thank you. I wanted to shift gears perhaps to the short term and just touch on that. I know you spoke earlier about what's going on with local basis and about how it's not uncommon in 3Q and we certainly see that with historical results that 3Q is the widest basis. But can you talk a bit about what dynamics you're seeing this year that may be different from years past and do that with an eye of what we should expect for November December?
Miller:] Okay. I will just make a brief comment, turn it over to Jeff to comment on the market. What we've seen has been fairly consistent with what we've seen, certainly the timing of the disconnect. And we roll into this period of time and what we've seen in the past certainly affects, Jeff, mitigation of some of the impact by us selling volumes through October on the summer months. So, Jeff, would you like to fill in some of the plans?
Yes. Charles, there's a lot of similarities between this summer and last summer in terms of mild summers and low demand, storage being at pretty much the same levels and a lot of gas on the market. I think one unique characteristic this year is probably more pipeline maintenance than we've seen in years past or at least it seems to me they've been lasting longer and going later into the year. So that's probably the only unique thing. If you look back this time last year or quarter over quarter, really there's only been about $0.06 difference in basis differential between the two quarters.
So that's pretty consistent. I would say on the cash side, where we've seen some very low prices in October as we get to the end of the injection season, We've actually had a pretty good year in the cash market year over year. Year to date, I think cash is averaging about $2 This time last year, same term, I think cash was around $1.45 for the year. So we've seen some improvements and a lot of that came from last winter of course, but there's really not a lot of factors fundamental wise that have changed.
That's helpful. Thank you, Jeff. And then just one quick follow-up if I could, Dan. The Haynesville package that you mentioned, can you give us an idea of the scale of that whether in maybe proceeds you're looking for or acreage, current production that sort of thing?
Well, we have less than 10,000 acres out there. We have HPP, most of the properties well, all of it's APP, we have a minimal since we haven't allocated capital out there for an extended period of time, we have about $3,000,000 a day is all we'd be taking off from us. So it's just one of those areas that similar to West Virginia, we liked portions of the asset in the West Virginia, a low decline asset was nice to have, but it wasn't that impactful to us. And the same with this set of assets that we're not allocating capital to it. There's been some really good improvements made on completions out in the Haynesville.
But as far as our footprint out there and what it would mean to Cabot in our program, it's not that impactful. So we think that would be an asset that would be in the hands of those that might be out there. And so we're prepared to transact and we'll see what we get.
Thanks for the detail, Ben.
Thanks, Charles.
The next question comes from Drew Venker of Morgan Stanley. Please go ahead.
Hi, good morning, everyone.
Hello, Drew.
Hi, Dan. I was hoping you could talk a little bit more about the exploration plays and if you have success there, how you think about that in terms of funding? You said in your prepared remarks that they would be outspending cash flow at the asset level. But how do you think about that at the corporate level? Would you still be generating free cash flow?
Or any more color you can provide on how you guys would progress with that program would be helpful.
On the free cash flow, we do expect to generate with the funding of our operation effort. We do expect to generate free cash flow at the corporate level. When you look at our effort out there right now, we do have a drilling rig active on one of the areas and we'll be moving to having a drilling rig on the other area. Characteristic of what we've done in the past on exploration plays, we're not going to comment on results at this point in time. Information that we have seen, we're encouraged to continue to move forward with collecting data and evaluating the area.
And we have our fingers crossed and we're cautiously optimistic that we'll be able to demonstrate that the areas that we are focused in will compete for incremental capital and we do fully intend to fund it and still at the corporate level be able to generate free cash flow.
Okay. Thanks for that Dan. And could you just remind us how much of the acreage in your exploration areas is held? And how much activity you think you would need to run if you wanted to hold on an acreage?
Yes. We have $75,000,000 allocated for the exploration area in 2018. We have just a portion of our 2017 2017 budget remaining that we had allocated and announced previously at the beginning of this year, That portion that we had identified at the beginning of this year was $125,000,000 We've spent the majority of that $125,000,000 We do expect to stay within that budget between now year end. And as I said in 2018, we have $75,000,000 that we've allocated to the two areas. We have significant amount of acreage that we think would be impactful on Cabot if we have success.
Is an EBIT held at this point then? Is it held? Yes. Is an EBIT held?
Under lease terms.
Okay. Thanks,
Dan. The next question comes from Holly Stewart of Scotia Howard Weil. Please go ahead.
Good morning, gentlemen.
Hello, Holly.
Dan, you touched on both the your thoughts on the Eagle Ford and then kind of the Haynesville. I'm curious if you could remind us of your ownership percentage in Atlantic Sunrise and maybe thoughts around what to do with that asset since we have shovels in the ground at this point?
Yes. I'll let Jeff cover that infrastructure.
Yes. So Holli, Atlantic Sunrise is the name of the project, okay? It's actually an extension of Transco's pipeline system. So from a project perspective, in other words, the new greenfield pipeline, our equity investment there was approximately $150,000,000
Okay. And Jeff, any comments on keeping that in the portfolio?
Yes. Absolutely, right now, we're keeping the equity investment in the project, but that's always a discussion item here at Cabot. J.
Rice:] Collie, one of the things that we the decision we made in having an equity piece to start with is we wanted to be involved and be able to have a good understanding and seat at the table as we go through the permitting process, regulatory process and a full understanding of any implications we have with delays, how we might be able to navigate the heightened enthusiasm by the activists to stop infrastructure. We just wanted to understand that process a little bit better. And so that was the reason we're in the investment. It obviously is an offset to our investment with our ability to secure some of the transportation charge back to us as an equity owner. But as it being as far as it being a holding that we feel like that we need to have forever, we're not compelled for that.
It goes back to our decision about use of proceeds and what we might do at any particular time with those proceeds if we wanted to monetize.
Sure. Sure. It'd be an asset. There'd be a lot of pipeline companies who'd like to have. And then maybe just one for Scott with the call it $500,000,000 of cash on the balance sheet.
You got the maturity coming up in 2018. Any thoughts on how to proceed with that?
Right now, Holli, we're looking at all options. Obviously, we could refinance it. We do believe we're real close to being kind of BBB, BBB plus in the marketplace. We're not rated at this point in time. So we're internally having that discussion.
But in mind with the $500,000,000 the maturity is $300,000,000 we can always simply just pay it off because we still have a completely undrawn $1,800,000,000 revolver. So it doesn't hurt any of our efforts either way we go.
Yes. Great. Thanks guys. Thanks,
Great. Thanks guys. Thanks, Oliver. The next question comes from Jeffrey Campbell of Tuohy Brothers.
Please go ahead. Good morning. Hi, Jeffrey.
We've had a lot of big picture questions, so I'm
going to ask
a couple of more narrow ones. In the last quarter press release, you guys said that the 4th gen well completions were exceeding 4.4 Bcf per 1,000 foot lateral. In this press release, you said that the additional wells are supporting 4.4 Bcf of 1,000 feet lateral. It sounds a little bit more equivocal. I just wondered if I'm parsing the language too finally.
No. When we look at our production curves and we look at the modeling and the curve fits, Jeffrey, we like to see a longer term on the curve fits and all we're saying with our statement is that everything we're seeing right now is consistent with our expectations. And if we do have improvements over and above that 4.4 fit curve fit, we'll do what we've done in the past and that is recognize that after we have more data and in a longer term on the wells to be able to continue to support that. There was also a reference in one of the write ups about our Gen IV and Gen V and I'll take this time if I could Jeffrey to just reference that our Gen V that we're trying to tweak out there is we have full expectations that we will equal and maybe hopefully exceed our production of 4.4 Bs per 1,000 foot of lateral with our Gen 5 and our comment was designed to indicate that we think we can maybe achieve that by our tweaking of the completion technique, but also maybe save a little bit of capital by how we're tweaking the completion technique without a compromise whatsoever to the production expectation that we have for Gen 5.
Now, well, you just proved that amongst your other many talents that you're psychic because that was exactly the next question I was going to ask because what was the color on that. So basically what you're saying just if I can paraphrase it is that the 5th gen stuff that you're working on now should not show any degradation in production, but you're hoping to be able to cut some costs and therefore improve the returns?
Exactly right.
Perfect. Thank you. Appreciate the color.
Thank you, Jeff.
The next question comes from Brian Singer of Goldman Sachs. Please go ahead.
Thank you. Good morning.
Hello,
Brian. To follow-up on the topic of the 5th generation wells, can you add a little bit more color on what you're doing on completion tweaks to lower the costs? And then on a more bigger picture basis on the comment that 5th generation is more or at least so far is more about cost reduction in terms of its the drivers of efficiency gains than necessarily greater EURs per 1,000 feet. Do you think we're in the later innings of productivity gains in terms of well productivity in Marcellus?
Yes. Good questions. One last comment. We've been asked that probably so starting 3 or 4 years ago and we continue to make we as an industry continue to make strides to deliver improved results from our completions. So we're going to continue to be able to try to improve our completions.
And in that regard, we in fact have a couple of beta tests going on right now for our Gen 6 completions. So, stand by on the results of that. When you look at the difference between Gen 4 and Gen 5, one of the changes we made is the Gen 4 has got tighter on the stage spacing. In Gen 5, we went wider back wider again on the stage facing, but we have improved or increased the clusters in the Gen 5 from the 4. Additionally, the fluid pumped in the Gen 4 is a little bit less than the fluid pumped in the Gen 5 to move the volumes that we are moving in the Gen 5.
We are staying consistent with the amount of profit per foot. But by widening the distance between stages, we are reducing the number of stages that we will have to pump and the drill out time that we'll have on getting the well ready for completion.
So that's some of the
tweaks without the details. That's some of the tweaks that we have between Gen IV and Gen V.
Great. Thank you. And then to follow-up back to the free cash flow you're planning for the next 3 years. Can you talk a little bit about the range and risk around cash taxes? I think that $2,500,000,000 was a pre tax number.
And
then what your expectations are for the transportation unit transportation costs and what we should expect to see when Atlantic Sunrise comes up?
Okay. And I'll turn it over to Scott first, Brent.
Brian, I'll handle the cash taxes and Jeff will handle the transportation. But cash taxes in our guidance for 2018, we're looking at about a 15% cash tax burden deferring $85,000,000 that goes to 35% cash taxes, 65% deferred in 2019 and roughly fifty-fifty in 2020. If you take that based on that number, you're looking at about $400,000,000 $400,000,000 to $500,000,000 in actual cash taxes in our plan based on our assumptions. So the $2,500,000,000 would still have close to a 2 handle on it taking you still have some corporate G and A and some financing costs to factor into that because we don't allocate that out, but you still have a very robust 3 year free cash flow model.
Great. Thanks. On the transportation side?
Yes. Brian, on the transportation, we've talked about this in the past. The capacity that we're taking on before Sunrise will be released to our customers. And with that, we'll see a revenue reduction instead of an expense increase. So we're basically maintaining a flat transportation cost profile through this period.
Thank you. The next question comes from Michael Hall of Heikkinen Energy Advisors. Please go ahead. Hey, thanks. I just want to follow on a little bit on the free cash flow.
At the corporate level, kind of trying to make sure we're calibrating right. What would you say the drag is on free cash flow for other items outside of exploration at the corporate level for things like overhead and you already hit
taxes, but Michael, the easiest way to use is just look at the guidance for G and A and financing costs. And it holds us flat throughout
the quarter?
It holds us flat because we are not people heavy in this organization.
Sure.
Okay. And then when do
you think you might be willing to announce some sort of a formalized plan around what the path towards redistributing more of the cash to shareholders would be. Is that something by midyear, next year you think you could be willing to do? Or what's the thought process on that currently?
Yes. I would think that would be a reasonable expectation, Michael, that as we get some clarity on a couple of our new initiatives that we have moving forward and then get our arms around how we would allocate cash to those areas And also if in fact we have a monetization in the mix, we would also have clarity on value created from that. So I would think that would be a reasonable expectation.
Okay. Perfect. Appreciate
it. Thanks guys.
Thanks Michael.
The next question comes from Paul Grigel of Macquarie. Please go ahead.
Hi, good morning. You noted in today's release the double digit corporate returns into 2018 and you've noted in recent presentations the increased focus on ROCE as a metric for using or for evaluating the business. Is there thoughts on making that more of an explicit goal for management given the rather unique position you are in relative to peers?
Well, I'll let Scott answer that for a second. For a specific goal for management, we have always had financial goals as part of management's effort to achieve. So and I think you can see by the results and the decision we make on how we allocate capital, how we handle our growth profile versus value creation and getting margins and returns as being our primary focus versus growth. Paul, we've always had return on capital employed as our metric that management looks at. I'll let Scott make a comment.
Yes. So the short answer is yes. It is becoming a focus as Dan said, it has been a focus. We have not worn it on our sleeves. As we watch this industry and been around this industry, Dan's been through 6 cycles.
I've been through 5 as have many in this table. We've watched this. Obviously, the returns focus is gaining more momentum now as it should and we fully embrace that. The key thing now in terms of we know how we calculate it internally. We just don't want to make we want to make sure there's no unintended consequences if you roll out specifics because as you know we are this industry is a master of kind of single well economics and kind of cherry picking.
And that's not Cabot's culture. That's not Cabot's philosophy. So while it is very in the forefront and was even a topic of conversation this past earlier this week in our boardroom and will continue to be as it has been in the past, It is trying to thread that needle on how best to communicate it.
Okay. Understand on that. And then I guess as a follow-up, given the plan you guys have laid out, what are the latest thoughts? And Scott, it's probably a few on using hedges either basis or versus NYMEX moving forward into 2018 and beyond?
I'll make a comment then I'll let Scott or Jeff lay in. Paul, we like hedges as part of mitigation and at a level of consistency to our program. When we've had the lack of infrastructure in the basin has made it difficult to get any length to hedges because it's been so punitive again by the lack of transparency on infrastructure. It's been very punitive for us to be able to layer on hedges without upfront conceding to a very large differential. So with that, it would be our expectation that with infrastructure and now more clarity and a balancing of the market and not so much heavy weighted gas on gas competition in the 3 pipes that we currently produce into, we would expect that market to become more available to us in a range that we would find acceptable.
Yes, Paul. And I'll just add a
couple of thoughts.
One of the things that Atlantic Sunrise does for us is move our gas from a supplier into a market area. And the market area we're hitting with this gas is more stable, less volatile, also of course more hedgeable. So you may see us step into the hedge market when opportunity allows us to take care of some of the volumes that are moving out of the supply area as we get the projects done.
Okay. That's good color. Thanks so much.
Thanks, Paul.
The next question comes from Biju Perincheril of Susquehanna. Please go ahead. Thanks. Good morning. Dan, I was just wondering on the Gen 5 completions in the Marcellus, if you could give us an idea of the magnitude of sayings you're targeting?
And also, is this something the approach you're taking here something that's transferable to the Eagle Ford?
We are of course gathering as we continue to get more completions with the Gen 5. We're hoping to get around and we have seen plus or minus 10% on the savings side with the Gen 5 and I think that would be a reasonable expectation going forward. And what we do in the Eagle Ford and Marcellus, I have both the guys at the table with me and Phil Staunacker and Steve Lindeman that are responsible for the operations in our 2 respective areas and they've been working with each other for, I don't know, 50 years, I think. But they communicate well on what their teams are doing to enhance efficiencies. So we do have cross pollination and data transfer to each group.
Right. I mean, I'm sure you guys are having those conversations on how to apply this. I was wondering from those conversations, do you think Eagle Ford from a geologic perspective, this could be a transoral technology?
Well, we have our own it's hard to answer that specifically. If you're asking that is the exact changes and exact spacing going from a Gen IV in the Marcellus to a Gen V in the Marcellus, is that going to transfer to the Eagle Ford? And is the fluid pump in a Gen IV Marcellus to a Gen V Marcellus? Is that the exact fluid that we pump going to transfer to the Eagle Ford? The answer to that is no.
But the concept of being able to save money with the spacing changes in the Marcellus and the transfer of fluid pumped and the more clusters per stage by having a little wider spacing, We do take all of that in consideration in the tweaking that's going on in the Eagle Ford.
Got it. That's helpful. And just to confirm the potential savings from Gen5, none of those numbers are incorporated into the 2018 2019 guidance you provided, right?
We wanted to we want to get the we want to see the results before we do a lot of that incorporation.
Got it. Thanks. Yes. You bet. This concludes our question and answer session.
I would like to turn the conference back over to Dan Dinges for any closing remarks.
Well, thank you, Drew, and thank you all for the questions. I do firmly believe that Cabot is one of the most well positioned company and somewhat unique in that we are already generating free cash flow positive results and our portfolio returns I think places us at the top of the class. So appreciate the interest and we look forward to our call after the end of the year. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.