Good morning, and welcome to the Cabot Oil & Gas second quarter 2017 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note today's 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, Rocco, and thank you all for joining this morning for Cabot's second quarter 2017 earnings call. I have Cabot's executive management team with me for the call this morning. Before we get started, I would first like to highlight that on this morning's call, we will make forward-looking statements based on current expectations. Also, some of our comments may reference non-GAAP financial measures. Forward-looking statements and other disclaimers, as well as reconciliations to the most directly comparable GAAP measures, are provided in this morning's earnings release. For the second quarter, Cabot delivered another successful report card highlighted by 14% year-over-year production growth while generating positive free cash flow for the fifth consecutive quarter. Our production growth for the quarter was driven by a 15% increase in net Marcellus volumes year-over-year. This production-
Pardon the interruption, ladies and gentlemen. It appears we've lost the audio from the speaker's location. We will work to reconnect that. In the meantime, we're going to put some music into the call. Thank you. Thank you for your patience, everybody. This is the operator. We have rejoined the speaker location. Mr. Dinges, the floor is yours, sir. Pardon me, it looks like we are having some difficulty with their location. Please stand by. I'm sorry to interrupt you, everybody. This is the conference operator. I've joined Mr. Dinges' line back to the call. The floor is yours, sir.
The floor is mine. I'm not sure where I left the floor.
You disconnect right after the forward-looking statement, sir.
Okay. All right. We can retool. Would you check and see if we paid the phone bill, please? For the second quarter, Cabot delivered another successful report card, highlighted by 14% year-over-year production growth while generating positive free cash flow for the fifth consecutive quarter. Our production growth for the quarter was driven by a 15% increase in net Marcellus volumes year-over-year. This production growth, coupled with an increase in Marcellus cash margins of almost [one percentage point] , were the primary drivers for our strong cash flow growth year-over-year. Our year-to-date results further highlight what our high-quality asset base is capable of delivering, including the generation of $123 million of positive free cash flow, despite realizations of an average price of about $2.50 for natural gas and $45 for oil.
This positive free cash flow is net of the capital we utilized during the first half of the year to invest in growing our year-to-date production volumes by 10% year-over-year, to contribute to our equity ownership interest in the Atlantic Sunrise and Constitution Pipeline projects, and to fund our grassroots leasing efforts in our two exploratory ventures, all of which provide us with optionality to create value for our shareholders. Of the $123 million of positive free cash flow, we have returned $100 million to the shareholders year-to-date via dividends and share repurchases. As a reminder, during the second quarter, we increased our dividend by 150% and repurchased three million shares at an average share price of $22.41.
As I've reiterated over the past few quarters, we are committed to returning cash to shareholders while generating double-digit returns-focused growth for the foreseeable future, and I believe our actions during the quarter demonstrate that commitment. We will continue to focus on increasing our return of capital to shareholders as we gain more conviction in the timing of our new infrastructure and power plant projects and our resultant ability to execute on our robust growth plans over the coming year. I would highlight that when I mention robust growth in the future, I am referring not only to production growth, but also growth in free cash flow. While many of our industry peers are highlighting the ability to generate double-digit production growth within cash flow a few years from now at commodity price assumptions that are higher than the current strip, we are already delivering on this plan today.
Our balance sheet continues to improve as we exited the second quarter with a net debt to trailing 12-month EBITDAX ratio of 1.1 times, which is in line with our long-term target as we continue to manage our business around maintaining an investment grade-like balance sheet. We continue to maintain over $500 million of cash on hand and have approximately $1.7 billion of available commitments under our credit facility. This liquidity allows us flexibility in the volatile environment as we assess all opportunities to create value for our shareholders and manage risk. In this morning's release, we also reaffirmed our production growth, unit cost, and capital guidance for the year. Despite a small sequential decline implied by our third quarter guidance due primarily to mechanical issues at a third-party compressor that will likely continue until late August, we are very confident of being able to achieve our full-year production targets.
To illustrate this point, if you were to hold the midpoint of our third quarter guidance flat in the fourth quarter, we would hit the midpoint of our 8%-12% full-year production guidance range. However, our current intent is to grow our volumes sequentially in the fourth quarter based on our price expectations. Additionally, we are still targeting a 15%-25% of returns-focused growth in 2018, which will ultimately be dependent on the timing of infrastructure projects throughout the year. Moving on to our operations for the quarter in the Marcellus. Our volumes for the second quarter were essentially flat to our first quarter volumes, which was in line with our expectations and guidance. We brought online only six wells as we had planned to do. Our Marcellus price expectations and realizations remained strong during the second quarter, increasing approximately 50% year-over-year.
While we are forecasting a slight widening of basis during the third quarter based on the current strip, we anticipate that fourth quarter differentials will revert back to levels similar to the first quarter of this year before significantly improving in the first quarter of 2018. This anticipated improvement is driven by the potential for approximately six Bcf per day of new takeaway capacity to be placed in service throughout the basin between now and the end of the first quarter. On the well productivity front, we continue to see positive momentum driven by the results of our Gen 4 wells. Year to date, we have placed 26 Gen 4 wells on production, and the average production per lateral foot continues to outperform our 4.4 industry-leading Bcf per 1,000 feet type curve.
We recently implemented a pilot program to test a new completion design that is focused on reducing our overall completion cost, highlighting our ongoing effort to identify new efficiency gains and to mitigate potential well cost inflation in the future. In the Eagle Ford, we grew our daily oil production by 9% sequentially during the quarter, despite a few operational delays, most of it which were outside our control. Additionally, as we highlighted in the press release, our long lateral wells are taking a little longer to clean up and reach peak production levels, which has caused us to adjust our timing of the estimated production profiles for these wells.
The overall estimated recoveries from these wells on a per lateral foot basis has not changed, given that our longer lateral wells ultimately catch up to the type curve within a few months of production and have demonstrated a shallower decline. On the cost front, we realized another 9% decrease in our Eagle Ford drilling cost per foot relative to the first quarter, driven by faster drill times, for which the cost savings have helped us offset the incremental completion cost associated with the higher density completions. We have obviously experienced a weakening in the outlook for oil prices since our first quarter call, which puts pressure on all oil projects, including returns in our Eagle Ford, despite continued improvements in our operating efficiencies.
Our current plan is to continue to execute on our program for the remainder of the year, given that most of the capital we are allocating in Eagle Ford during the second half of the year is committed to or related to leasehold maintenance obligations. As we begin formulating our plans for 2018, I want to reiterate that we plan to remain disciplined with our capital allocation. We evaluated all of our opportunities, and we continue to evaluate all our opportunities to create value for shareholders in a sub-$50 oil price environment. Allocating any incremental capital to the Eagle Ford above what is needed to hold production flat and to maintain leasehold likely falls behind our superior returns in the Marcellus acceleration program and returning cash to shareholders in the pecking order. Infrastructure, Atlantic Sunrise remains on schedule for a potential construction start date beginning this quarter.
As most of you are aware, we filed our final PADEP and U.S. Army Corps of Engineers permit application back in late May. We are now planning to receive both of these permits by late August, which would likely result in a mid to late September construction start. I also want to highlight that the Chapter 102 and 105 permits from Pennsylvania and the U.S. Army Corps of Engineers' 404 permits are unrelated and will not necessarily be issued in any particular order. Based on the expectation of a 10-month construction period, the expectation remains for the pipeline to be in full service by mid 2018. We feel very confident in the timing of our remaining projects, given that the TGP Orion is now expected to be placed in service in December, which is significantly ahead of the original schedule.
While our two power plant projects, Moxie Freedom and the Lackawanna Energy Center, are currently under construction and on schedule. A short update on Constitution, as there has been a few interesting Constitution-related data points regarding similar projects that have also been denied permits or delayed by the New York DEC. We continue to await the outcome from Constitution Appeal in the Second Circuit Court, which will likely see some movement during the third quarter. In the meantime, Constitution Operator continues to assess various legal strategies in addition to our ongoing appeal. Williams has recently been vocal regarding their ongoing dialogue with the current administration surrounding our options on this project. We will continue to monitor this process, but we feel more optimistic about this project and becoming online in the next few years than we did, say, a year ago. Brief comment on the exploration front.
The exploration effort is on schedule with our program. We have amassed a similar level of net acreage as our Eagle Ford footprint in one of our prospects, which is located in Texas. We have also secured a significant amount of acreage on our second prospect. The plan is to drill and evaluate the prospects with five wells between now and the end of the year. Additionally, we plan to remain within our budget of $125 million for all of this effort. This effort does not deter in any way our laser focus on generating our superior returns from our Marcellus operation.
In summary, based on our increasing confidence in the timing of the infrastructure build-out in Appalachia, coupled with our deep inventory of high-return drilling locations, we believe that we can execute on a program that will provide double-digit returns focus production growth while generating free cash flow, further strengthen our balance sheet and liquidity position, improve our unit costs and margins, drive further improvements in capital efficiency, delivers an improving return on capital employed, and returns an increasing amount of cash to shareholders, all while assuming commodity prices that are no higher than today's strip. There are not many companies that can support a bullet point list similar to this. With that, Rocco, I'll be happy to answer any questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using the speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Charles Meade of Johnson Rice. Please go ahead.
Good morning, Dan.
Hey, Charles.
I wanted to ask about your share buybacks. I think I understand what you're trying to indicate about the confidence in your cash flows from the midstream deals. I wonder, can you elaborate more on what are the other pieces of your thought process as you're going to evaluate future stock buybacks?
Yeah. I'll let Scott. Scott loves handling all the money and make these money calls.
Thanks, Charles. When you look back on our history, even the last 10 years, we've been in and out of the market at various points based on our level of cash and things like that. At the end of the day, it is an opportunistic buyback. We've had authorization for a long period of time. Our authorization now is down to about seven million shares when it was split adjusted. That means we've bought in about 13 million shares in our history in the last 10 years. It is simply the fact that when we internally see a disconnect with what we know what's going on versus the marketplace, and we have no delusions, we understand the market is efficient, but at times there is those disconnects, and we saw that in the second quarter.
We want to send a message, we're using some of that free cash flow rather than just let it sit on our balance sheet to buy in the shares. Again, right now, we made a very economic decision with $22.41 versus the $25 we're trading at now. We'll continue to be opportunistic, and I don't want to leave the impression that it's got to get back to $22 before we will be active in the market. When we see weakness, we'll be opportunistic.
Charles, I might add also, as we progress in our plan and we get the infrastructure approval that we anticipate, we start ramping our program into filling those lines and incremental production. We see the compression that we expect in the Marcellus of the differential up there. Our realizations improve. We're going to be generating a significant amount of cash. That also will be a strong influence and a dictator of how we allocate cash back to shareholders.
Thanks, Dan and Scott. That's helpful insight in your thinking. Dan, I wanted to ask my second question about these Gen 4 completions, and I liked the update that you gave us. I think it's on slide 10 of your new presentation. I wonder if you can guide our interpretation a bit of that. When I look at it, I see that those two lines are separating in the early days, then they kind of seem like they're becoming more parallel on that tune versus time. To me, I'm thinking maybe this Gen 4 has outperformance in the early days, then kind of settles in to similar to your past completions. Is that the right way to look at it?
Well, I agree that it's maybe running a parallel course, which, in my opinion, is actually good. We see that it does go past the 4.4 Bcf type curve on the slide that you're referring to. Running parallel and above that 4.4 Bcf line is what we are seeing and what we're pleased with. As you travel out, if it continues running parallel, it's obvious that we would be capturing maybe greater than the 4.4 Bcf per 1,000 foot of lateral.
Got it. Thank you for that, Dan.
Yeah.
Our next question today comes from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.
Good morning. This is John. Nope, this is not Doug. This is John Abbott calling in on behalf of Doug.
Hey, John.
How are you doing? Just couple of quick questions on our side. First, how are you thinking about your ramp into Atlantic Sunrise? Are you thinking about growing aggressively into that or taking lines potentially that are constrained elsewhere and moving it over?
Yeah.
Second, with regards to the Pennsylvania permit, what benchmark should we be looking there in order to see that get finished? I mean, you're expecting it here shortly, but what else needs to be done?
Okay. I'll return. I'll give the second part of that to Jeff. On the Atlantic Sunrise growth, we've kind of been clear on the ramp is not going to be instantaneously incremental. We are going to ship volumes out of basin where we've had punitive differentials. We think with that shift that we should see, as we expect, a narrowing of that differential in basin, which would affect positively the gas that we do continue to produce in basin. We will continue to grow the volumes incrementally into the new capacity that Sunrise affords us. It won't be instantaneous, but we certainly are planning our 2018 program, as we are preparing to present to our board in October, an increased capital program for 2018 that would allow us to grow our production in the 15%-25% range as we have outlined.
Appreciate that. With regards to the Pennsylvania permit, what's left there for that to be done?
Okay, John. We have two outstanding permits. They're commonly known as the Section 102 and Section 105 permits. You're probably aware that the Pennsylvania DEP went out for public comments back in May on these two permits. That was closed late June. There were several thousand comments submitted, and quite frankly, a lot of them were positive. Right now, the DEP is sorting through those comments, preparing answers, and finalizing last-minute data requests from questions that may have come up during that comment period. We're expecting, going forward, that these permits are just getting the final touches put to them, so to speak, and they'll be out the door here mid to late August.
I appreciate it. Thank you.
Thanks, John.
Our next question comes from Brian Singer of Goldman Sachs. Please go ahead.
Thank you. Good morning.
Hey, Brian.
Dan, in the past, you've indicated interest in maintaining some level of diversification in the portfolio, even if modest, with the Eagle Ford representing that place in the portfolio today. With the focus understandably on returning cash to shareholders even ahead of Eagle Ford drilling, are you now more comfortable with the asset base being even more levered to Northeast PA? If so, are there changes that are increasing your long-term confidence in growth from the region beyond the couple of pipelines and power plants that you've spoken about today?
Well, as we get closer to the realization that we will be able to start construction on infrastructure and move significant volumes, not only in the pipelines up there, but I think there's other projects that would be supportive of the differentials and realizations and improve the realizations that we've seen in the past. As we go through that process and we get shovels in the ground, absolutely we're incrementally more comfortable about not only our growth horizon but also our ability to return even more free cash to our coffer by virtue of the growth and improved differentials. There's still a look at the two exploration programs that we feel like if successful, could return significant value for our shareholders, and we're going to vet those through the data gathering process that I outlined.
With the going out and looking out in the Northeast and looking at the power plant projects, looking at the Atlantic Sunrise, yes, we have anticipation of Constitution also securing the approval later, whether it's 2019 or 2020. We think that could be an incremental gain. We do know that there is committed to firm capacity in the infrastructure up there that might not be filled by those holders of that firm that also provides an avenue for future growth up there also. Between now and 2020, compared to where Cabot has been on the last three years, just trying to battle the regulators and the anti-group trying to stop pipelines from being installed, I am extremely optimistic about the near term for Cabot. Our concern about diversity or growth mitigates each day as we get closer to these infrastructure approvals.
That's helpful. A small follow-up on exploration, and I think in your comments you mentioned one of the two projects was in Texas. I think last quarter you said that at least one of the projects was seeking oil. Is that still the case? Can you give any color on the second project, and when on either one there'll be more color that you can share from a well performance perspective?
Yeah. Yes, with these two prospects, they are tied to a diversity, if you will, in the commodity mix. Yes, oil is the focus, and as we gather additional information through between now and the end of the year, we would only be speculating in what we anticipate. We do continue to do our due diligence and looking at the data that we have in hand, looking at the reprocess seismic that we continue to work and continue to gather more data, and some of it being subsurface data from the past in each of these prospect areas. The data we gather continues to reinforce our concepts on both of these prospects. From timing, Brian, on when we might have something solid, I really think it would be after the first of the year.
Ideally, what I would love to see would be four or so wells in each prospect area tested, some flow back period, and with those tests and flow back period, we could give you cost examples, we could give you return profiles, we could even look at the quality of a fluid mix to talk a little bit more in depth about what it's going to take on the surface side of the business and the infrastructure side, and give assurances that we've mitigated risk on program execution from logistics. That's when I would feel great about talking about it. I'm sure we'll be asked about it, and maybe we'll process out a little bit of information along the way, but that's overall in a summary fashion, how I look at releasing data on exploratory projects.
Thanks. Are there any wells that are down today, or is it just the five that are going to be drilled between now and the end of the year?
The only wells that are down today are wells that had been drilled subsequent to us getting into the area. That was typically wells drilled years and years and years ago.
Thank you.
Yeah.
Our next question comes from Robert Morris with Citi. Please go ahead.
Hello, Bob. You must be on mute.
Hello, Mr. Morris? Okay. Well, we will go to the next question, which is from Jeffrey Campbell of Tuohy Brothers. Please go ahead.
Good morning.
Morning, Jeffrey.
I think my first question's probably a Jeff one. Recently, it looks like New Jersey's trying to imitate New York with the recent PennEast permit denial. I was just wondering if Jeff could give me his take on whether or not he thinks this is particularly significant at this point in the development of PennEast.
Yeah.
Sure, Jeffrey. We as a shipper on that project, we do communicate quite a bit with the operator and the other partners. The New Jersey denial was not unexpected. They realized that there was additional data that was necessary and required, and quite frankly, they were moving toward that end when we lost the pro forma]. As you know, PennEast is still pending a certificate. In this lull, I guess, what I understand is they've moved more towards a complete application at this point, and it will get a second look.
Okay, great. Thank you. I just want to make sure I wasn't confused. Did you say that you're going to drill 5 total exploratory wells second half, or is there going to be 5 in each one of these 2 exploratory areas that you've referred to?
Yeah. 2 different things. 1, we're going to plan within our $125 million budget to drill 5 exploratory wells in the second half. My comment on having 5 wells in each prospect was just an example that says that ideally I would like to have, before we make full disclosure, full release, I would like to have that level of detail to be able to lay out and give the shareholder the confidence that we have really vetted these projects, as opposed to coming out with just a little bit of information that would be maybe somewhat more speculative or not having any type of term to a test except for in 1 area or 2 areas or something like that. I'd like to be able to see a little bit more information before we would make any release.
I understand entirely, though, as we get pushed to release information, that we'll do our best to accommodate those requests without giving away too much information and without speculating too much.
Okay. With that color that you just provided in mind, I'm just wondering, the five wells you're going to drill, are you going to do some preliminary exploration in both of the plays, or are you concentrating the five wells in one of them at this time?
No, we right now have four wells in one area. The four wells that we have in the one area is the area that we had less subsurface control points to be able to mature our concept. We're gathering additional data there. One well in this other area, we had and have more subsurface information, and we have more information to mature our concept up front in that area. The drilling of the well would assist us in proof of concept on some of our ideas.
Okay. Well, that's very helpful. Thank you. I appreciate it.
Yeah.
Our next question today comes from Holly Stewart of Scotiabank. Please go ahead.
Good morning, gentlemen.
Hey, Holly.
Maybe first one for Scott, just on uses of capital. Just how are you thinking about balancing the buyback versus the 2018 maturity?
I think it's definitely not with our financial position in either/or. As you know, we have a fully undrawn revolver of $1.7 billion. Worst case scenario, if we saw an opportunity to use a disproportionate share of the free cash plus what's on our balance sheet, being opportunistic, buying in shares, we would follow through on that opportunity and not worry about that we need to hold some of that in reserve for the 2018 maturity. The 2018 maturity does go current, so you'll see it as current. Actually, this month, most of it does. You'll see it in current in the third quarter 10-Q. As many of you know, Cabot is unrated by design over the years. One of the things we're going to explore is a refinancing strategy on that, where we actually go to the public markets and get some indications from the agencies.
We haven't been hurt by not being rated. At the same time, the size of the company we are and where we're at in our life cycle, it's probably time to explore that option. That will also be taking place over the next probably six to eight to 10 months.
Okay. Help me with that. If you are not considered investment grade, don't you have to post LCs for the pipes?
No, because we have a longstanding track record, and we are investment grade in the private placement market, and we've worked through all those hurdles over the years.
Okay, great. Maybe one just for Jeff on Constitution, given what we've seen with Millennium and Northern Access here as of late. Any insights into the appeal or maybe how you're thinking about the future paths to take going forward?
Sure, Holly. Of course, not just with Millennium and also with National Fuel, I hesitate to use the words the plot thickens, it may be appropriate. In regarding Constitution and our appeal, we're on that tail end of the time period where we expected the Second Circuit to give us a ruling. That's getting close. It is a complicated case, it may not be right around the corner, but our expectations are that we'll see something out of the courts fairly soon. I think the bottom line on the Millennium case was cutting back authority levels to the FERC is obviously a very good thing, and we'll see how that plays out. It probably has a shorter duration to play out in the next few months, as we see what the DEC actually does with that permit application here soon.
National Fuel, of course, has such a similar set of facts that we have with Constitution, and their plight with a short pipeline and being a New York-based company and the job creations and all the good things that that new pipeline does is, again, very similar to Constitution, and we expect some clarity on just how we're going to be able to operate in New York.
Great. Thanks, guys.
Thanks, Holly.
Our next question comes from Drew Venker of Morgan Stanley. Please go ahead.
Morning, everyone.
Hey, Drew.
Hi, Dan. I was hoping you'd speak to how this exploration program might play into your decisions around plans to accelerate return of cash to shareholders and how you envision the timing, because obviously results are difficult to predict, as you had noted, and you might want to engage in a lot more testing before making a call to go to development mode, or you might be disappointed and decide to cool down the program. Maybe you can just speak to that.
Yeah. I could make a short answer or a long answer. I'll try to get it in between, our idea is to always improve our lie and to improve our capital efficiency. We believe that the best areas to allocate capital are in core areas. I would define core areas as like our Marcellus. There probably are several other maybe very core areas in the oil areas that would allow capital be allocated, returns that would generate not only growth, but also free cash. Our objective is to try to improve our lie over any areas, like our Eagle Ford, that it's a good asset, certainly returning even at these lower threshold commodity prices, our weighted average cost of capital. I don't believe a company survives on just drilling areas that have a return profile based on the weighted cost of capital.
Our objective would be to improve our lie and be able to do it in a way that would return not only significant returns-focused growth, but also free cash, which would in fact allow us to generate more free cash to give back to shareholders. That's our objective. If we were on your fail case or uncertain case, if we were to not be able to get to a core asset profile with our exploration program, though we saw that our infrastructure projects were taking off in the Marcellus, we decided to go in that direction solely as an ongoing project, which by the way, is a high-class problem to have with those assets.
If we made that decision, I am confident with the subsurface data we have, with the concept design we've created, that there is going to be incremental value in these assets, in these two projects. If in fact they were not core type projects for us, I'd still think that with the dollars invested, entry level at a very low cost, that we would be able to generate significant returns for the shareholder if in fact we decided to monetize those assets.
Okay. That's all very helpful color, Dan. Just on the timing of when you think you would be able to make a call or would like to make a call, is that in the next 12 months, or is it end of 2018 or potentially beyond that before you decide this really does look like a core play or it doesn't?
Yeah. Drew, I would be surprised if it goes beyond 12 months, that we would not be able to rationalize with a fairly high degree of confidence where in our return profile expectations that these two projects would fall.
Okay. Let's envision that you did not have as much success as you wanted. Is that when you'd try to accelerate that cash return to shareholders? Let's say in 12 months or something like that?
Well, we would make a decision at that time, similar as we make decisions today with the facts and the information in front of us.
Okay. That's all very helpful color, Dan. Thank you.
Thanks, Drew.
Our next question comes from David Deckelbaum of KeyBanc. Please go ahead.
Good morning, Dan. Thanks for taking everyone's questions today.
Yeah, David.
Could you elaborate a little bit more on the pilot program that you have in the Eagle Ford to reduce well costs? Is that a function that you've tried some enhanced completions there, and you're looking at some tweaks on just optimizing that cost down, that perhaps you maybe used a bit too much services on these wells? Or how are you guys thinking about balancing that, and what's that pilot program really looking at?
Yeah. Good question, David. I'll let Steven Richman field that question.
David, throughout the year, we've done a number of things. As we released, we've been working to drive our drilling costs by drilling longer laterals. In this quarter, we completed lateral lengths up to 12,000 feet. In addition to longer laterals, we've been doing some cluster spacing testing, some diverter testing, and those are the kind of results that we're digesting right now. We've also upped our sand volume, which is one of the things of late that have increased completion costs. As we get more production data in on this population of wells, we're going to look at what combination or how we can optimize that to increase the return, whether we decrease sand, whether we adjust our clusters or look at what lateral lengths we might go to.
Maintaining our commitment and not losing any of the optionality that we would have in the future, certainly in the event that we do get improvements in the commodity price, that either way, whether we decide to allocate additional capital to it or if we decide to monetize, in either case, we want to maintain and keep all of our optionality. The pinch point is what kind of lease requirements that we need to complete to maintain that full leasehold position. When you look at our entire program, we're running dual tracks here. We're looking at our return profile with every dollar we spend, and I understand the angst with shareholders on why you're allocating money to a project that is not returning the superior returns that maybe our Marcellus would.
Again, there's a lot of capital in the industry being allocated that don't return what the Marcellus does. I think, though, that when we move forward with our exploratory projects, we do increase our optionality with infrastructure build out. It gives us the ability to be a little bit more aggressive, if you will, in the decisions we make on where we want to allocate, how we want to allocate, what we want to monetize, and do we have some other options to maybe create additional new venture projects that meet a threshold definition, as we would say, as a core asset for us. We're really running some dual tracks right now, and still trying to maintain our acreage position in the Eagle Ford, and the team has done a great job that has allowed us to, again, continue to get the returns we want.
Everybody is wanting to have a program that would generate greater returns than the cost of capital.
Understood. Good luck with all the permits this summer. Thanks, Dan.
Yeah. Thanks, David.
Today's next question comes from Michael Kelly of Seaport Global. Please go ahead.
Thanks. Good morning. Was hoping to just probe a little bit more into this, really the hurdle rate or threshold rate you're going to judge these new venture plays against, and if you could give us a ballpark project return that really will improve your lie or generate growth and free cash flow. I know you've laid out the Eagle Ford is 45% project return at $50, and Marcellus is 120% at two. I would imagine it's somewhere in between there, but what's your ballpark rule of thumb, or what's acceptable for you?
Yeah. Mike, I'm not going to get down that granular. We have described exactly what you just laid out, that we're looking to improve our lie. We're looking to be able to find projects that would enhance the shareholders' value. We think that from a Eagle Ford position type asset, I don't consider that level of return as core. I do define our Marcellus that you laid out as core, and we're just trying to, again, improve our efficiency and look at a project that would allow us to do what I've said in the past, and that's be able to grow the asset and generate free cash. You're going to be in a good return zip code if you're able to accomplish that.
Okay, great. Fair enough. Just a follow up from me, just wondering if I'm making the right read here, if read between the lines that the share repurchase is really a sign that your confidence in receiving the final permits at Atlantic Sunrise has really only increased over the last quarter, and it remains pretty high?
Well, it's two things. One, that we had the available cash. It came out of the third quarter of 2016, fourth quarter of 2016, and then the first quarter of 2017. We saw how significantly the differentials narrowed, and we saw under a more normal condition, what our project would generate in free cash with realizations in the range that we realized for the first half of this year. A combination of, again, seeing good realizations that we hadn't seen in maybe three years come to fruition, but also, to your point, getting closer to the approval process and narrowing down on the commissioning of these infrastructures. Both of those gave us the confidence to not only increase our dividend by 150%, but also to do the share repurchases that we've made.
Scott's point was made about, we have a reauthorization still of seven million shares, and we're going to be opportunistic, but we also feel very confident of our future generation of free cash, and that is instrumental in our decisions to move forward with share repurchases.
Okay. Great, guys. Appreciate it.
Thanks, Mike.
Our next question today comes from Paul Grigel of Macquarie. Please go ahead.
Hi. Good morning. Just one last follow-up on the shareholder-friendly activities. With the high levels of expected free cash flow, if you don't deem the exploration program as a large use of capital, would the shareholder-friendly activities be all in the form of buybacks, a special dividend, regular dividend increase? Trying to understand where the thought process is moving forward on that one.
Well, we have two of the three we've already implemented, those two, one, increased dividend, and two, the buybacks. Special dividends, you could look at special dividends. What we like to see, we like to see every shareholder in our stock, and we like to see every shareholder hold our stock for a period of time and enjoy the ride up. By having a consistent dividend yield and increasing maybe dividend policy and also buybacks, I think would be the higher priority focuses than trying to suggest that we would be issuing special dividends.
Fair enough. On the operational front, could you provide any additional color on the compressor downtime into 3Q, location or risks that it may extend into September? Tangentially to that, any comments on either service cost inflation or availability within the Marcellus that you're seeing?
Okay. I'll let Jeff take care of the compressor comment first.
Sure, Paul. We got notified by DTE, who owns and operates the Bluestone Pipeline, which cuts through the core of Susquehanna County in our area. We were making deliveries from a station there, and they had done an inspection on a compressor station that actually pumps gas in the Millennium Pipeline on the north end of their system. Long story short, they noticed some vibration damage to the engines. They immediately shut it down, removed the engines, checked out the foundation, and decided that, in this particular case, the best idea going forward was simply lease four new engines, rebuild the station as quickly as possible, and get back online. The current in-service dates we're getting now are August 23rd give or take a few days. We think we'll be back in business around September 1st.
Do you have any follow-up on that?
Oh, I'm sorry. No, that's good on that one. Just on the service costs and availability. Any issues there?
No. In the Marcellus right now, it's basically been fairly flat, Paul, on the service cost side.
Thanks, guys. Appreciate the time.
Thank you.
Our next question comes from Karl Chalabala of Stifel. Please go ahead.
Morning, gentlemen. I just have one question. I was curious if you could, because Cove Point has been commissioned and looks to be taking some feed gas here. You guys obviously are a big supplier of that gas to Sumitomo. Are you going to be able to get physical down or through some other backhaul arrangement before Sunrise comes online and capture any margin there, or will that gas be coming from somewhere else?
Jeff can handle that one, too.
Karl. Thanks for the question. We talk about this quite a bit in preparing for a good little while now, since we've known that Sunrise was going to be slightly delayed, and on what is the best path on getting Susquehanna County gas down to the Cove Point pipeline. We currently own existing capacity to get some of that gas down to the Cove Point pipeline. We're contracting with a few others that have paths leaving Susquehanna County to get additional volumes down to Cove Point. We have some other options with capacity holders that have valid paths in our gathering system that run past the Cove Point pipeline. We're working out the arrangements with those as we speak. We're looking at this from a variety of angles. For example, we're still not entirely sure when Cove Point will be up and running.
We're taking on the best case that they'll be up in January, which fits us rather nicely. I don't think we'll have any problem contracting for various paths and cobble together enough transportation options to get our gas down to the pipeline.
Thanks for that, Jeff. Can you remind me please, the agreement on price for that, would that be a NYMEX light deduct on the FT cost?
Yeah. Reaching way back to when we press released the deal, we let everyone know that it was a Henry Hub-based price that had other opportunity associated with it. Due to the confidentiality with Sumitomo, we've hesitated and not disclosed any particulars about the pricing.
Got it. Okay. Thank you, gentlemen.
Thanks, Karl.
Our next question comes from Robert Morris with Citi. Please go ahead.
Thanks. I think you called me earlier, Dan. I had to step away, so apologize if you did call me earlier. Just looking at the Gen 4 completions, which you pointed out are outperforming the 4.4 Bcf per 1,000 foot type curve. I recall that in going to Gen 4 from Gen 3, it was a combination of enhanced cluster spacing, some higher sand loading, some tweaks to the pumping system there. If you look at the economics of that in the higher cost to put in a higher sand, in particular in the tighter cluster spacing, how much of an uplift are you seeing in the actual economics, given that higher cost for what is that higher type curve?
As far as the 4.4 increase over the Gen 3, or even looking at now our current type curve, I'm going to do a swag here, and I'll probably get slapped back, but I think it's about 10%-15% is the uplift I think we're seeing.
I guess similarly in the Eagle Ford, I know you didn't put out the type curves because it's taken longer for the longer laterals to clean up. There you've gone from 1,600 pounds per foot to 2,000 pounds per foot. Similarly, is that providing enhanced economics, and do you then go to even higher sand loadings, or what are you seeing as far as optimizing the sand loading in the Eagle Ford?
We've had a little bit of discussion, Bob, on the additional loading, cluster spacing that Steve went over, and looking at our flow back periods with the longer laterals, more water pump to carry the extra load, and more clusters. We're looking at the tweaks, and as Steve mentioned, if you have more water around near wellbore, more loading, you push back some of the volumes back until they work their way back to the wellbore. Initially, it certainly with the rate it comes back, does affect the rate of return. We're at early stage of trying to evaluate just exactly what is going to be the best recipe to get the most return out of this project without compromise of EUR and cost.
It's still early, and it's work in progress and all the data gathering and database that we're building, trying to build our big data platform, as others are. We are going to be looking at it and utilizing the data to make decisions in the future.
Just lastly, real quick, back to the Gen 5 completion. Is that strictly just reducing costs, or does Gen 5 in the Marcellus also entail some greater sand loading or even tighter cluster spacing?
Well, it's just different. Yes, we are trying to do a little bit of both. We're trying to see what cost can be taken out by a different completion, and we're trying to make a determination, does it also affect initial rates and EURs on the completions? Too early time to speculate where we are with that.
Okay, great. Thank you, Dan.
Thanks, Bob.
Today's final question comes from Marshall Carver of Heikkinen Energy Advisors. Please go ahead.
Yes, just trying to connect the dots here. Your comments that you're looking for core rates of return with your exploration program similar to the Marcellus, that just seems like almost an impossibly high hurdle. If it doesn't compete, would you expect to sell it and therefore you probably would sell it because it's hard to find anything that could possibly compete? Or am I thinking about that wrong? It just seems like 100% rates of return. It's a really tough bar to clear.
Yeah. Marshall, I don't put the core definition as only what our return is in the Marcellus. There are some areas out there that I think have core, what I would define as core returns, that might not be the returns of the Marcellus, but their returns, if that was where you were strictly focused, would allow for, even though less returns than the Marcellus, would still allow for growth and return of free cash. That is somewhere in between, which I have not defined, between our Eagle Ford and our Marcellus. There is a swath in between there, obviously on the upper end, that says, "Yeah, these would be core projects." You're right in your assessment.
How you define a core and looking at the number of companies that are able to spend the money, drill the wells, complete them, put them in the pipeline, grow double digits, and generate free cash and give free cash back to shareholders. There's not many that fall in that definition, but that definition is, I think, somewhat below what our Marcellus return is, but it is a very high bar to get to. That's what we're trying to do. We recognize that if you go, just like the comments we've made on the Eagle Ford, some would say that, "Why are you spending any money in the Eagle Ford? Go spend it all in the Marcellus because you're diluting your return profile." We get the math. The difference is that that has not deterred from anything we've done in the Marcellus. We've been handicapped without infrastructure up there.
We think we're getting close to that. We don't think anything we're doing in these two projects to try to determine, can we find a really good another return project to get to some of our capital allocation? It will not impact $1 that we plan to allocate to our Marcellus and our anticipation of filling all incrementally the infrastructure volumes that we're going to grow to in the Marcellus. To the point that maybe another question referred to, how do we balance giving back to shareholders as opposed to investing into oil or gas well? We've decided to give some back to shareholders right now because we don't have a place that is going to allow us to meet our benchmark of growing and generating free cash after you do the full cycle return profile of our projects.
If we get to the point that we would hope to get, I might add that in our initial economics that we run to make the first decisions to spend capital to look for those type of ideas, we certainly have economics and a development plan in scope, though speculative, that would do what I'm talking about. That is invest, have a development program, get to the point of growth where free cash, the program is supporting on its own cash generation and also generating free cash for other optionality. As we have suggested and as we have done, that is to give back to shareholders.
Thank you. This concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Okay. Thank you, Rocco. I think with the questions that have been asked and the answers provided, you can see that we remain focused on returns. We are going to continue to focus on returns. With the right projects where we allocate capital, we think we're going to be able to achieve exactly what we've been able to achieve in this second quarter. Thanks for your interest, and I look forward to a discussion again on the third quarter call.
Thank you, sir. Today's conference has now concluded, we thank you all for attending today's presentation. You may now disconnect your lines, have a wonderful day.