Edited Transcript of ECR earnings conference call or presentation 8-May-20 2:00pm GMT

State College May 8, 2020 (Thomson StreetEvents) — Edited Transcript of Montage Resources Corp earnings conference call or presentation Friday, May 8, 2020 at 2:00:00pm GMT

* Douglas A. Kris

* John K. Reinhart

* Matthew H. Rucker

* Michael L. Hodges

* Oleg E. Tolmachev

Greetings, and welcome to the Montage Resources First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your speaker, Douglas Kris. Thank you. Mr. Kris, you may begin.

Douglas A. Kris, Montage Resources Corporation – VP of IR [2]

Thank you. And good morning, and thank you for joining us for the Montage Resources First Quarter 2020 Earnings Conference Call. With me today are John Reinhart, President and CEO; Michael Hodges, Executive Vice President and CFO; Oleg Tolmachev, Executive Vice President and COO; and Matthew Rucker, Executive Vice President, Resource Planning and Development.

If you have not received a copy of last night’s press release regarding our first quarter 2020 financial and operating results, you can find a copy on our website at montageresources.com.

Today’s discussion will highlight the company’s operational and financial performance in the quarter. Before we start our comments, I would like to point out our disclosures regarding cautionary statements in our press release, and remind you that during this call, Montage management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Montage Resources and are subject to a number of risks and uncertainties, many of which are beyond Montage Resources’ control. Actual outcomes and results could materially differ from what is expressed, implied or forecasted in such statements. Information concerning these risk factors can also be found in the company’s filings with the SEC.

In addition, during this call, we do make reference to certain non-GAAP financial measures. Reconciliation to applicable GAAP measures can be found in our earnings release. We expect to file our 10-Q later today, which will be accessible through our website or the SEC’s EDGAR system.

I will now turn the call over to John Reinhart, our President and CEO.

John K. Reinhart, Montage Resources Corporation – President, CEO & Director [3]

Thank you, Doug, and thank you to everyone for listening to our call.

Before I address the first quarter results, I want to touch briefly on the steps we have taken in response to the COVID-19 pandemic to protect the health and safety of our employees and our service providers as well as the efforts we have taken to provide for the continuity of our business.

The company’s operations continue to run safely and smoothly in the field while adhering to our own stepped-up screening and distancing procedures that were put in place on our fieldwork sites. We greatly appreciate the leadership within our field operations as well as the cooperation of our numerous contractors in ensuring compliance with the additional safety protocols that have been enacted. In our corporate office, employees have been working remotely in accordance with the policies of local regulatory authorities as well as company-wide restrictions on all nonessential business travel. We remain committed in taking the necessary steps to protect the safety and health of our employees, contractors and stakeholders.

Montage is well positioned to navigate through the challenges of the current commodity market and broader industry conditions. The balance sheet has remained a top financial priority for us, and in this economic environment, that remains a key focus. Over the last year, we have continuously focused on reducing our cost structure, keeping our financial leverage low and maintaining capital discipline. As a result, we are navigating this challenging operating environment with ample liquidity of approximately $328 million as of the end of the first quarter.

We are managing the business with a focus on free cash flow generation, and believe the improving natural gas macro will further allow the company to create significant shareholder value. With the multiyear runway of ample liquidity, no debt maturities for over 3 years, development plan flexibility and efficient execution capabilities, our priority will be to deploy free cash flow from organic cash flow generation and noncore asset sales towards debt reduction rather than an acceleration of activity with the deleveraging process further enhancing the equity valuation.

We continue to demonstrate the highly commercial mindset of the management team on the company’s operations with a strategy that prioritizes capital efficiency, cost reductions, balance sheet protection and a focus on cash flows. You will recall, in 2019, we announced the renegotiation of one of our legacy processing agreements that provided for an immediate reduction in processing fees, along with the continuation of our ability to fully reject ethane in exchange for the dedication of our Ohio Marcellus acreage.

During the first quarter of 2020, Montage announced the successful renegotiation of our existing gas gathering agreements that will provide incremental value to our business starting this year and will continue for years to come. As part of this agreement, Montage received an immediate reduction in gathering fees in its Utica Dry in Ohio Marcellus areas that is expected to generate approximately $200 million of undiscounted gross cost savings over the life of the contract.

In addition, the new agreement eliminates any potential obligation for Montage to incur future capital costs for gathering pipeline or related facilities construction, allowing us to focus our spending on developing our prolific oil and gas reserves rather than on capital-intensive midstream assets. We are very pleased to remain partnered with our legacy gas gathering provider to ensure operational continuity and consistency as they commit to provide future gathering infrastructure to our Ohio and West Virginia, Marcellus and Utica development in the months and years ahead.

Over the past year, Montage has delivered on its targeted production within the context of a significantly lower capital spend and lower operating cost structure, all while achieving or exceeding our respective guidance metrics and analyst consensus estimates.

The current operating environment reinforces the importance of being a low-cost producer with high-quality assets, maintaining a top-performing execution team and possessing limited contractual commitments. Our expectation going forward is for continued success as we pursue additional operational efficiencies, commercial contract renegotiations and service cost reductions that will be incremental to the gains realized to date.

During the first quarter of 2020, the company’s average daily production was approximately 611 million cubic feet equivalent per day, which was 3% above the midpoint of our guidance range and above the analyst consensus expectation. This production mix was approximately 80% natural gas and 20% liquids. We anticipate the production mix shifting more meaningfully to dry gas over the next several quarters with our strategic shift towards activity and capital spending in the dry gas Utica area, allowing us to capture upside from the improving natural gas pricing outlook.

Production costs for the quarter were $1.28 per Mcfe, which was better than the midpoint of our guidance range for the quarter and analyst consensus expectations. We continue to work with our service providers in leveraging our volumes and remaining activity in order to further drive operating expenses lower in 2020.

The company’s total revenue was approximately $133 million for the first quarter, and we were able to deliver an adjusted EBITDAX of approximately $62.7 million for the quarter, which slightly outpaced analyst consensus expectations. In addition, during the first quarter, our cash operating margin came in at 44% or $1.13 per Mcfe, approximately 17% better than the reported peer average of many of our significantly larger producing Appalachian peers, which I believe is a substantial accomplishment for the company of our size.

During the first quarter of 2020, the company drilled 4 gross Utica dry gas wells and completed 4 gross Marcellus wells, all within our Monroe County stacked pay area. The execution team has been able to perform at a high level of efficiency while completing an average of approximately 10.5 stages pump per day during the first quarter. Also during the quarter, we turned to sales 3 gross wells, all of which were Utica dry gas wells in Ohio.

As we continue to focus our 2020 plan on Utica dry gas activity to capture the dramatically improving natural gas macro, we are extremely pleased by the strong operational results achieved that impact our development efficiencies.

The team continues to drive our spud-to-sales cycle times lower, which are now approximated at 130 days in our 2020 plan. This represents a 10% improvement over the impressive 2019 corporate results. As a reminder, the 2018 cycle times achieved were 220 days spud-to-sales with the current 2020 estimates realizing a 90-day improvement relative to the pre-merger execution history of the company.

While our near-term focus is on converting our Utica dry gas resources, we continue to be encouraged by the well results in our Ohio Marcellus development area, which are producing condensate yields above our type curve expectations. These liquids-rich Marcellus wells highlight the development advantage of our core stacked pay area in West Virginia and Ohio. In addition, our Flat Castle area in Pennsylvania, which encompasses approximately 95 undeveloped dry gas locations, continues to see production results from our Painter 2H well that is trending at or above a highly economic 2.4 Bcfe per 1,000 foot of EUR. This dry gas inventory in Northeast PA is beginning to compete for capital as we look forward into 2021 development.

Looking now at our revised 2020 plan. We have lowered the company’s expected 2020 full year capital spend by an additional 10% since our latest downward revision in the quarter to a range of between $130 million to $150 million, following the further optimization of development activity and additional cost efficiencies realized during the first quarter. This marks our second leg down in capital spending year-to-date and is now 30% below the initial plan laid out in early February and is 62% below our capital expenditures in 2019.

The drilling and completion capital will be allocated approximately 80% to 85% to the Utica dry gas area in 2020 and is 65% weighted to the first half of this year. This forecasted spend incorporates additional well cost savings that equate to an $853 per foot of cost in our Utica dry gas area, and $665 per foot in our Marcellus area and represents a savings of approximately 10% compared to our 2019 prior plan.

Similar to Montage’s actions in the first quarter of being an early mover in reducing capital expenditures and refocusing on natural gas given the lower commodity price environment and improving gas macro outlook, the company will continue to dynamically optimize the development of our high-quality asset base in order to maximize the fundamental value of our company while preserving balance sheet health and full year 2020 cash flow generation.

Due to the recent downturn in oil price movement and demand destruction from the COVID-19 pandemic, in April, the company shut-in low-margin production in its liquids-rich producing area. These shut-ins primarily impacted the Utica condensate production. In early May, the company subsequently began increasing its condensate production with the improvement of oil prices and cash margins. And expect some level of marginal shut-ins to continue as industry conditions and cash margins improve, which dictate the resuming of production from the remaining effective wells. Based upon current oil prices, the company expects the curtail production to have a negligible, if any, negative impact on its second quarter cash flows. Given the expected increase in oil demand this summer, it is likely that the remaining deferred production will be brought back online over the next month or 2.

The company is adjusting its full year 2020 production guidance to 555 million to 575 million cubic feet a day from the previous 570 million to 590 million cubic feet a day, approximately 3% lower based upon the midpoint of this guidance. This adjustment accounts for the prudent second quarter cash flow preservation production deferments while retaining the flush production from these curtail wells for production late in the second quarter or early in the third quarter in a much improved pricing environment.

In summary, the first quarter has been another very solid quarter for Montage. The team has been very responsive early in the second quarter in preserving value of our high-quality production base, and continues to optimize the development plan geared towards full year cash flow generation, balance sheet protection and liquidity position. We remain in a relatively strong position to navigate the changes in the macroeconomic and industry environment, and is situated well to realize value uplift in the improving gas pricing outlook.

With that, I’ll turn the call over to Michael.

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Michael L. Hodges, Montage Resources Corporation – Executive VP & CFO [4]

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Thanks, John. During the first quarter, the company continued to achieve strong results in almost every area of the business.

Adjusted revenue for the first quarter was approximately $142 million and adjusted EBITDAX was approximately $63 million. Both of which have allowed Montage to solidify its financial strength despite a weakening commodity price environment. Given adjusted EBITDAX for the quarter outpaced the capital expenditures by more than $10 million, despite a significantly front-loaded CapEx program for 2020, you can see that Montage is well positioned to deliver on its stated plans for free cash flow generation in 2020.

During the first quarter, our all-in realized price was $2.56 per Mcfe, including the impact of cash-settled derivatives and excluding firm transportation. I would remind you that only 60% of our gross marketed gas volumes are committed to long-haul firm transportation agreements. And that we have a diverse sales portfolio that accesses multiple markets along the Gulf Coast, in the Midwest and other premium locations with these agreements. Said another way, we are mitigating basis risk while maximizing flexibility through our combination of low commitment levels and the variety of our sales locations, a unique combination amongst most of our peers in the Appalachian basin.

We are continuing to reap the benefits of our unique ability to sell commitment-free natural gas into underutilized firm transportation assets owned by others at prices which were at a premium to in-basin benchmarks. Uncommitted volumes have underappreciated value as they provide solutions to challenges others are facing. We remain open to a variety of ways to capture this latent value as the industry production levels trend lower in the near future.

On the liquids side, we realized a $15.23 per barrel NGL price, equating to 33% of WTI, excluding cash-settled derivatives. Our production sales volumes at Mont Belvieu prices and without ethane recoveries should allow us to continue to realize better overall NGL economics going forward. And we are looking forward to the opportunity to sell our recovered ethane at gas pricing in the near future once the Shell cracker comes online. Given we currently receive little or no value for any recovered ethane once transportation and fractionation costs are considered, the value uplift provided by this agreement in 2021 will be immediately accretive to our EBITDAX with no capital requirements or take-or-pay obligations to Montage.

Our realized oil price during the first quarter of $39.64 per barrel implies a negative $6.53 differential to WTI, which is inclusive of all transportation expenses, but excludes the cash-settled derivatives. This differential was significantly better than our guidance and analyst consensus expectations, simply as a function of the timing of sales volumes during the first quarter being weighted towards the early portion of the quarter at a higher price level as compared to the straight average of the monthly index prices for the quarter.

Going forward, we expect our oil price differentials for the remaining 9 months of 2020 to be largely consistent with our historical differentials and average between $7.50 and $8.50 per barrel. Our full year oil differential guidance range is lower than our forward quarterly outlook as a function of the lower average of the strip price for the remainder of the year as compared to Montage’s oil revenue and production being heavily weighted to the first quarter.

As John mentioned earlier, the company has curtailed low margin production in Q2 that lies in our Utica condensate area, which we forecasted as having little or no impact on our upcoming quarterly cash flows at current strip prices. As the oil market dynamics improve, these wells will continue to return to production and realize value in excess of what would have been realized in the current pricing environment. In other words, we believe we are protecting and ultimately enhancing 2020 cash flows with this proactive decision to curtail this low margin production.

For the first quarter, our $52.4 million of capital expenditures, which was better than analyst consensus expectations, consisted predominantly of $50.3 million in drilling and completion capital and $2.1 million in land and other capital. Our first quarter capital expenditures, which went almost entirely to the drill bit, were approximately 37% of our expected full year capital expenditures. And we expect our second quarter capital spending will be about 2/3 of the amount of our first quarter spending before the CapEx cadence slows considerably in the second half of 2020.

With respect to our current hedge position, we are pleased that we have hedged approximately 66% of our 2020 natural gas production at prices well above the current strip price. While we are encouraged by signs of improving macro trends for natural gas supply, and we believe that better days are ahead, we remain committed to a disciplined approach to hedging our cash flows, and we will look to add to our 2021 and 2022 positions in the months ahead. You will notice we have added significantly to our 2021 gas hedging position since our last update with our structure substantially weighted towards collars to capture pricing upside, as we will continue to act opportunistically to layer in hedge position in a disciplined fashion going forward. As a reminder, we have approximately 61% of our oil production hedged in 2020 at an average floor price of $57.13 per barrel.

Finally, and perhaps most importantly on the financial side of our business, we have recently concluded our spring borrowing base redetermination, and we are very pleased with the outcome from our lending group, which resulted in a fully committed borrowing base of $475 million. Despite the significantly lower bank price decks that resulted in a more than 12% average reduction of our Appalachian peers borrowing base levels, this commitment from our bank group reinforces the strength of our assets and the underlying value of the expected future cash flows from our proved reserves. We continue to maintain more than $300 million of liquidity and a leverage ratio of 2.1x, which we believe positions Montage as best-in-class amongst mid-cap gas companies from a financial perspective.

In addition, earlier in April, our credit rating was reaffirmed by Moody’s despite the decline in commodity prices. This is a stark contrast from nearly all of our Appalachian peers who have seen their credit grade ratings downgraded at least once and often multiple times over the last 12 months.

To summarize. With the investment community beginning to recognize the improving gas macro for later this year and in 2021, we believe Montage is well positioned to provide for significant share price appreciation. I’m not aware of another company of similar size in the upstream space that can balance cash flows at current strip prices and modestly grow production while boasting a leverage profile of approximately 2x and immediately available liquidity of more than 35% of its enterprise value. Said another way, I believe Montage is a unique value opportunity that provides both tremendous upside through its assets and execution while delivering downside protection through its low leverage profile and ample liquidity.

On that note, John will wrap up the prepared remarks.

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John K. Reinhart, Montage Resources Corporation – President, CEO & Director [5]

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Thank you, Michael. Overall, we remain thoroughly impressed with the Montage team, and their push to enhance the value of our asset base and our company as we distinguish ourselves through operational and financial execution. Our strong performance demonstrates our focus on capital efficiency and positions Montage for shareholder value creation into the future.

We thank everyone for joining us today. This concludes our prepared remarks. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brad Heffern with RBC Capital Markets.

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Bradley Barrett Heffern, RBC Capital Markets, Research Division – Analyst [2]

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A question on the turn-in-line cadence. Can you just talk through what that looks like for the rest of the year? And it sounded like, in the prepared comments, that all the 1Q turn-in-lines were dry gas. Where are the remaining Marcellus turn-in-lines concentrated?

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Matthew H. Rucker, Montage Resources Corporation – EVP of Resource Planning & Development [3]

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Yes. Brad, this is Matt. So we did turn in line 3 dry gas wells in the first quarter. Our cadence from there, we have 7 turn-in-lines here in the second quarter, and that’s a mix between our Marcellus and our dry gas as well. And then kind of wrapping up the year, into late 3Q, we have another 4 well dry gas pad that will be turned in line. So that kind of wraps up the TIL cadence for the year.

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Bradley Barrett Heffern, RBC Capital Markets, Research Division – Analyst [4]

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Okay. Great. And then there was a reference to noncore asset sales in the prepared comments. But then you also talked about how the Flat Castle asset is starting to compete for capital more. So can you talk about how you view that at this point? And then maybe what you see falling into the noncore bucket?

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John K. Reinhart, Montage Resources Corporation – President, CEO & Director [5]

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Yes. No. Thanks for the question, Brad. This is John. What I’ll tell you is, similar to our approach to this since the merger and even just for some of us prior to that, this team always looks for commercial opportunities to accelerate value, whether it’s assets that’s not on the current near-term drill schedule or other assets, considering like midstream infrastructure or, for instance, the Flat Castle, in particular, is a chunky block.

So as we look forward to 2021 in the gas macro environment, much improved from a pricing perspective. We’re looking certainly towards Flat Castle as being a potential area for us to employ capital in the dry gas area. Also, along with that, our position hasn’t changed. We feel like that given the current pace of development in this price environment, accelerating value with some partial sell-downs and some kind of a traditional partnership up there makes a lot of sense. So what I’d tell you is that we are consistently looking for opportunities to look at noncore assets or assets that aren’t near-term and extract some value from it, which includes the Flat Castle, which also, by the way, to your point, we’re looking to throw in the mix for 2020 development capital. So hopefully, that answers your question on how we look at that.

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Operator [6]

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Our next question comes from Dun McIntosh with Johnson Rice.

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Austin Joseph Aucoin, Johnson Rice & Company, L.L.C., Research Division – Assistant [7]

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This is actually Dun’s associate, Austin on the call. Just want to say congrats on the quarter. My first question is, regarding all the downstream gathering/marketing agreements, what’s the impact on cash production costs over the year? And could you all see further reductions on that front?

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Michael L. Hodges, Montage Resources Corporation – Executive VP & CFO [8]

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Yes. This is Michael. I’ll take a shot at that and then certainly John can jump in. I think the agreement that we announced in the first quarter is certainly a win for us. I think as you look out with our guidance for 2020, we’re still in that $1.25 to $1.35 range. I think for this quarter, we’re about $1.28. I think as we move out, there’s some opportunity for us to bias ourselves a little bit lower there. I think if you look back at last year, 2019, we started the year, I think our operating cost guidance was all the way up at $1.60.

So we made a number of improvements there, whether it’s been on commercial agreements or with the execution of the team out in the field. And I think as we go out this year, we’ll continue to see some ways to improve, in addition to just those commercial agreements that you mentioned. So there are still some other midstream marketing kind of agreements that we’re working. So hopefully, we’ll have some success with those later in the year as well. But at least for now, I would say we’re comfortable with where the guidance is, and hopefully, we’ll be able to push towards the lower end of those numbers.

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Austin Joseph Aucoin, Johnson Rice & Company, L.L.C., Research Division – Assistant [9]

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And my follow-up is, on the Utica condensate shut-ins, at what point would you all consider bringing those volumes back on?

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John K. Reinhart, Montage Resources Corporation – President, CEO & Director [10]

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No. I appreciate the question. This is John. I’ll kind of give you a high-level perspective there. We had initially shut-in these — the bulk of the volumes in that April time frame that were impacted by prices that went down in those low teens area on condensate. As a reminder to everybody, our oil prices are based off WTI minus a fixed differential. So we’re really following the differential and — being set, as well as the WTI price. As we kind of progress through April and into May, we saw the index actually improve. And subsequently, we have been adding back volumes as pricing dictates. You can think about this bucket in the Utica condensate area as a wide range of maturity and productivity from a well perspective, so the margins vary slightly. But we have added significant production since the initial shut-in back. We anticipate production basically to be back fully online considering the current prices in the next month, 1.5 months. So you can view that kind of mid-20s is, generally speaking, where these become economic and positive margins.

I’ll just finally comment on the fact that we’re very pleased that we have the flexibility to be able to make very prudent economic decisions with regards to these producing assets. Meaning that we don’t have a lot of MVCs or FTEs or other triggers that really makes us — or forces us to produce, that whenever oil prices tank, considering NGL prices and gas prices right now, and became lower negative margin, we immediately went to preserve cash flow, and that’s what this team does.

So not only are we, to Michael’s comments in the script, preserving our cash flow loss or leakage in Q2, actually, whenever you run the iterations on the models and look out into flush production in Q3 and Q4, we’re actually improving our cash flows for the full year.

So very prudent actions by the team. Production is beginning to ramp up already since the low. And we’ll continue to ramp on production as that oil price kind of settles in that mid-20s to high 20s range. So hopefully, that answers your follow-up question.

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Operator [11]

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Our next question comes from Jane Trotsenko with Stifel.

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William Peter Howell, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [12]

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This is William filling in for Jane. My question is, how should we think about second quarter production mix given that production is going to be down a little bit? And is that going to be different from full year production mix? And then what about condensate basis differentials?

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Michael L. Hodges, Montage Resources Corporation – Executive VP & CFO [13]

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Yes. I think second quarter production mix is likely to be largely similar. This is Michael. But I think to Matt’s comments earlier, we’ve got — we had some dry gas production come on in the first quarter that will bleed over here into the second quarter and be pretty flush. So — and then we’ve got a couple more pads, as Matt mentioned, that are really a blend of the two. So I think that kind of mixture that you see came up in the first quarter is probably similar. I think as we move later in the year into 2020 and then also out into 2021, that starts to trend a little bit gassier. And as far as kind of the shut-ins go, I mean, certainly, the condensate is impacted by that. I think I mentioned in the prepared comments, the first quarter will be our largest quarter from a condensate production perspective. And really, that was the case just based on the production mix from 2019. And so we go out in the year, the condensate numbers are a little bit less. And certainly, the value that we receive for condensate in the first quarter looks like it will be some of the best value that we’ll see for the rest of the year. So hopefully, that answers your question.

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William Peter Howell, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [14]

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Great. And then could you please provide some color on CapEx cadence for the remainder of the year? And are there still CapEx savings to be realized?

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Michael L. Hodges, Montage Resources Corporation – Executive VP & CFO [15]

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Yes. I’ll take the first part of that question, and then either John or Oleg can jump in on the second part. So on the cadence side, we certainly spent what we think is the majority of our — kind of the largest quarter, I would call it here, in the third quarter, about 37% of our CapEx for the year, we think we spent here in the first quarter. So I mentioned in the prepared remarks, but I think second quarter will still be a little bit higher than, say, third and fourth quarter will be. So without getting too specific, I think you’ll see the number nob down a little bit in the second quarter and then further slow as we get into the third and the fourth quarter. But the cadence will certainly be front half weighted, I think about 65% has been our general guidance for the front half of the year. I don’t know John or Oleg you, want to comment on that.

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Oleg E. Tolmachev, Montage Resources Corporation – Executive VP & COO [16]

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Yes. Sure. This is Oleg. As we look at continuing throughout the year, we are continuing to squeeze our cycle time, which translates into a lower CapEx spend on a per-well basis. And frankly, acceleration of production as well. And we’re continuing to see reduction in service costs across the board, anything from drilling services to completion services. So probably dictated by overall drop in activity nationwide. So we’re very hopeful that we will see continued service cost reductions and CapEx reductions even beyond what we’ve communicated.

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Operator [17]

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Our next question comes from Irene Haas with Imperial Capital.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division – MD & Senior Research Analyst [18]

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Could you maybe give us a little color on these intermittent shut-ins? Like some of the mechanics of it. And how do you do it? It seems like you can bring it back pretty quickly without much damage to the reservoir. And then also, sort of on your liquids condensate, are they in-basin end users? Or do you have other destinations? That’s my — These are my questions.

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John K. Reinhart, Montage Resources Corporation – President, CEO & Director [19]

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Irene, thanks for the question. I’ll address your first question and then Michael can hit on your second. With regards to the mechanics of these shut-ins, the teams can do this very quickly. And I guess to more directly and pointedly answer your question, there’s no degradation to the overall volume reserves in the ground. For us, this reservoir — these are fairly new developed wells still. There’s sufficient pressure to kick off these wells. So for us, it’s more or less as simple as going out, prioritizing economically what you want to curtail. You shut-in those volumes, and then as pricing dictates, the guys go back in and literally open the valves up and nominate the gas and the oil and start flowing again. So consequently, the actual mechanics of it is pretty simple. We are very, again, focused on the economics of it. And there is a bit of flush production to think about. Whenever you bring these wells back online, you have the capability with the pent-up pressure to produce a little bit more upfront, and it falls back on its natural decline.

We look forward and we will continue to take advantage of this flush production in a much improved pricing environment as we moved into May and into June and July. So hopefully, that answer your questions about how simple it is to kind of go out and toggle these things on and off. It truly is as simple as kind of turning some valves. Michael?

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Michael L. Hodges, Montage Resources Corporation – Executive VP & CFO [20]

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Yes. I think on the condensate question, Irene, I think it’s a good question. For Montage, our condensate contracts, I think John may have mentioned earlier, they’re really, I would call them, midterm, kind of 6-months to 12-months type contracts, they’re all fixed differentials to WTI. So as far as in-basin differentials widening out, that really hasn’t had an impact on us. You’ll notice that from our first quarter results. As far as where the end users go, I mean we have 2 main counterparties. They’re very large, kind of well-known counterparties that we sell to. They take it from that point and move it downstream. So we really don’t have any additional counterparty risk. I do think, as far as in the basin goes, there’s been some of our peers that have seen the in-basins widen out. I think if you have any issues with your providers taking your barrels, there are other options, storage options, in other markets that you can take the barrels to. But you’re going to see much higher differentials when you do that.

So far, anyway, the economic decision for Montage has been to curtail and not pay those additional costs. Those can be $3, $4, $5 to take advantage of some storage opportunities. But that’s certainly punitive when you’re looking at a pretty low WTI price anyway. So we’re aware of those others. I think for us, it makes sense given our low commitment levels with our lack of FTE commitments and MVCs to just make the most prudent financial decision and preserve the cash flow. For later in the year when it actually, to John’s point earlier, is incremental to our total year cash flow.

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Operator [21]

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(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

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John K. Reinhart, Montage Resources Corporation – President, CEO & Director [22]

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Well, thank you, everybody. We appreciate your participation on the call today and listening to our first quarter results. We look forward to sharing with your our second quarter results and our efforts in an upcoming call. So have a great day and appreciate your time.

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Operator [23]

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Ladies and gentlemen, this concludes today’s telecast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.

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