Welcome to the Range Resources Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. [Operator Instructions]. At this time, I'd like to turn the call over to Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining Range's second quarter earnings call. The speakers on today's call are Jeff Ventura, Chief Executive Officer; Dennis Degner, Chief Operating Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we've posted on our website. We may reference certain of those slides on the call this morning. You'll also find our latest 10-Q on Range's web under the Investors tab or you can access it using the SEC's EDGAR system. Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures. For additional information, we've posted supplemental tables on our website to assist in the calculation of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Jeff.

Thanks, Laith, and thanks, everyone, for joining us on this morning's call. Before discussing the second quarter results, I wanted to spend a few minutes on the broader global energy picture and how we see Appalachia and Range within that framework. As we sit here today in the middle of a global energy crisis, we see a world that desperately needs access to ethical, safe, reliable and abundant fuel source. Europe's challenges are a stark reminder that evolving energy policy will need to be thoughtful, prioritizing security, affordability, availability and environmental responsibility. Within that framework, we believe Appalachia is well suited to play a key role in meeting the world's needs. And from that perspective, it's an exciting time for U.S. natural gas producers. Energy policy will need to be rooted in market realities. If infrastructure projects, namely pipelines and LNG terminals are not prioritized and given a reasonable regulatory review, then I believe it's simply impossible to meet the growing global demand for reliable, safe and affordable fuels. Unwarranted delays in permitting, adverse policy decisions and a global push for various renewable initiatives have resulted in underinvestment in oil and gas infrastructure over the last few years. This has stifled domestic supply growth, leading to inflated global energy costs. The current situation will not change unless there's support for the necessary infrastructure that would allow for increased supply, plain and simple. I believe the industry, like Range is ready, willing and able to assist in providing the much-needed growth in supply of clean-burning American natural gas to replace coal and also replace supplies of gas from less reliable hospital countries. As it relates to the broader energy transition, I don't believe it's an either/or decision between renewables and natural gas, rather will require an all of the above approach…

Thanks, Jeff. As we look back on the second quarter, all-in capital came in at $127 million with drilling and completion spending of approximately $119 million or 94% of total capital for the quarter. Capital spending for the first half of the year totaled $244 million or approximately 52% of our annual plan. As we mentioned on our call earlier this year, our operational cadence is front loaded, resulting in a higher number of wells turned to sales in the second half of the year. We exited the second quarter with 2 horizontal rigs and 2 frac crews and are on track with our operational program that we outlined earlier this year. This tapered approach results in production growth in the third quarter and additional growth in the fourth quarter, putting us on firm footing to deliver on our annual capital spending and production guidance. During the second quarter, we turned to sales 16 wells in our dry and wet acreage positions. Similar to our approach discussed on previous calls, 14 of the 16 wells turned to sales were located on pads with existing production. One of these wells was a result of a third return trip to that given pad where we saw initial development in 2011, followed by a second phase of development in 2018 and with the third phase occurring this year. The three new wells on this pad are producing over 1,000 barrels per day of condensate in addition to the gas and NGL contribution we see from our wet area. This pad now has 12 producing wells with capacity for additional well development in the future. This pad exemplifies the benefits of our large contiguous acreage position and the durable, repeatable and capital-efficient nature of our development program for decades to come. Second quarter production…

Thanks, Dennis. Second quarter financial results mark a company high in quarterly net income. The Range team collectively delivered on all fronts with operational results exceeding guidance, driving strong financial results that were directly translated into shareholder value through debt reduction and share repurchases. The second quarter seems or what Range can deliver to investors and customers quarter after quarter for decades to come. The principal themes are operational excellence, developing an unrivaled asset in terms of quality and duration paired with a strong financial foundation and strategy that delivers value to shareholders. As we've described before, it's our mission to realize the value of Range's world-class, world-scale asset base, paired with a balance sheet fit for purpose to consistently deliver value to shareholders over a multi-decade inventory life. It was again a busy quarter with substantial progress across much of the business. Cash flow before working capital reached $519 million, which funded net debt reduction of approximately $105 million, share repurchases of $117 million, after capital expenditures of $127 million and capital of $179 million. As a reminder, as commodity prices go up, revenue and corresponding receivables rise as well. The majority of our receivables are collected in the following month. So virtually all of the working capital increase shown in second quarter financial results will be collected in July. It's simply a matter of timing. Absolute debt reduction and growing earnings drove leverage down to a company low of 1.2x debt to EBITDAX and rapidly heading lower while growing returns of capital through both share repurchases and expected cash dividends as net debt continues to decline towards our absolute target range of $1 billion to $1.5 billion. Cash flow allocable to returns of capital continues to grow. In other words, we've already begun buying back shares, which we…

Operator, we'll be happy to take questions.

[Operator Instructions]. Our first question comes from Scott Hanold with RBC Capital Markets.

I was wondering if I was wondering if you all could elaborate on the shareholder return plan. You utilize the buyback pretty aggressively in the second quarter. Can you just give us a sense that going forward, what are your thoughts regarding the plan along with debt reduction? How do you see those two work in concert especially at current valuations? And also, as you look forward, does it make sense at some point with your visibility to those debt returns in sight over the next, say, 12 months? Does it make sense to start thinking about like having more of a formulaic-type shareholder return plan like if you would, I guess, E&P peers do?

Sure. Scott, this is Mark. I'll start off the answer. So as we've laid out for some time, we have the priority, the waterfall for allocation of capital, the maintenance capital and debt reduction, shareholder returns and growth at the appropriate time when market conditions make that the prudent reinvestment of free cash flow. So with that, we provided a debt target, as you well know, absolute debt in the $1 billion to $1.5 billion area. As we are quickly heading towards that, what we have done is execute both the return of capital and the debt reduction in parallel. And the way I would think about that is like a reset. As you get closer to your debt target, your risk profile has gone down. Your financial strength is up. So you can increase the capital that can be put towards the return of capital and you're reducing how much has to go to debt reduction. So where we stand today at quarter end, we were about $2.3 billion, just shy of $2.4 billion in net debt, 1.2x levered, again the company best. By the end of this year or very early next year, we're falling within -- we anticipate to be within the range, that 1.5:1 absolute debt level. So ratably, you can increase the share repurchases. And like we've talked about before, we fully intend to reinitiate the dividend here in the second half of the year. So what that means is just to refer you to Slide 13, where we give some calculations, some free cash flow numbers. we're estimating in aggregate, about $1.5 billion free cash flow this year, $1.3 billion in '23, $1.2 million in '24. And that slope is just based on the backwardation and the pricing curves. We're just using strip pricing…

I appreciate that. And as a follow-up, I think you start to see the inflationary pressures really build through the year. What is your thoughts on leading edge kind of inflation thinking about into 2023? I know it's a bit early, but can you give us your thoughts on a maintenance CapEx trajectory? Like how do you see the base spending plan moving into next year with inflation? And if you also get the benefit, I think this year, you're drilling -- percent of your on existing pads. Do you still have about the same level into next year?

Yes, Scott, this is Dennis. I'll tackle this one. As we start to -- we talked on this -- touched on this a little bit on the Q1 call. And we have seen inflationary changes in our cost structure like a lot of other folks between areas such as like labor, steel and fuel. We've worked really diligently and the team has done a great job in trying to mitigate those impacts as much as possible. And with areas like prepurchasing our tubular goods, I know we did some of that to end off last year and also securing some throughout the year to make sure that not only making sure that we have the supply, but it was also at a price below where we thought the market is -- has been heading. The other part is working with our service providers pretty closely. We've had long-term relationships with a number of our service providers. If you look at just the average time frame with our top active service providers, it's well over a decade. So building upon those relationships, looking to strategically make sure that we're efficient together because we know that efficiencies like we touched on in the prepared remarks today are going to help drive not only our returns but also theirs as well. And then lastly, we've done things like trying to secure pricing as much as possible on other areas like, say, the rigs that we utilize in the field but also in areas like with our completion equipment. As we start to think about next year's program, the reality is we're going to have a much better response. I think your question as we go through our annual bid process in the fall and we start to align that with what our program looks like, we can lay out what our activity program is going to consist of, which we're clearly in the throes of evaluating but it's not out of the realm of expectation, I think, for us to consider something in the 10% to 15% impact range for 2023. But again, we'll know a lot more as we get into the fall and have a much higher clarity answer for us as we get into the end of the year for 2023. But I'll also say this, as you look at our cost structure, our low base decline and you look at our class-leading D&C per foot structure that we've had over the past, not just this year but the past several years, it's really a natural hedge against inflationary effects that Range would see versus our peer groups or in other basins. So we've had this in the slide deck now for a few cycles. But we see $0.60 per Mcfe just for that replacement molecule, whereas other basins may see more 3x that type number. So we feel like that provides a natural hedge and protects where we're headed in the event of whatever inflationary effects come our way.

Yes, I appreciate that. Quickly, what percentage of wells do you think you'll drill on existing pads next year? I mean just ballpark, is it going to be about the same as next year? Or is there any reason to shift one way or the other?

Yes. Scott, that's -- I think year in and year out, we tend to range somewhere between, say, 30% to 50%. I would expect us to be in that same category. As we touched on today, we've got a pad site we returned to for the third time now. And consistently, we're returning to pad sites to add additional wells. So we've got a long runway of being able to do that. We're going to continue to factor that in as much as possible. We know that some of our most efficient operations, we have a high level of repeatability from a well performance standpoint. And it also keeps the gathering system fully utilized, which helps with our unit cost.

Our next question comes from Michael Scialla with Stifel.

I wanted to ask on the philosophy on pullbacks -- excuse me, on share buybacks. One of the pushbacks on that is that companies tend to do that when the revenues are high in the case of oil and gas companies when commodity prices are high, then they don't have the cash to do it when revenues lower, commodities lower. So I realize you see a large gap between the stock price and the intrinsic value of the company, we see it as well. I think everybody does. But any thoughts on building up the cash balance at all with commodity prices where they are now?

Sure. So as we evaluate the capital structure overall, I think the risk profile and the financial risk you're really referring to there is why we laid out absolute debt targets of $1 million to $1.5 million, why those have been targets established along with our Board of Directors, setting those targets alongside management and they're in the proxy. So it's not just the leverage ratios, it's absolute numbers in a strong cycle. Clearly, prices are attractive today. You would think you could continue to push towards the lower end of that leverage target. So that gives you greater flexibility as that number is rapidly approaching us to be able to execute share repurchases. And to your point, that large gap between current share price and the intrinsic value and the intrinsic value number we're quoting is just proved reserves. So we think we're using a pretty conservative yardstick there, at least conversationally, to validate, to gut check the prudent allocation of capital back to share repurchases. So we think so far, average price repurchasing is around $28. We've put about $165 million back in if intrinsic value prove strip pricing is greater than $60. We think that's a tremendous value, and it's creating permanent value and that you're reducing the number of share count hopefully in perpetuity and growing cash flow per share and exposure to our inventory on a per share basis. So I think that gives us great confidence in continuing to do what we've been doing, which is announced the first year repurchase program at the end of 2019, executing it in 2020. We bought back 10 million shares. We've really accelerated the program this year. And I think, as I mentioned earlier, as we approach 50% utilization, I think that's time line to take a fresh look at it, make sure it remains prudent reinvestment and subject to more approval, get an appropriate resize or increase in that program.

Okay. And Jeff, I appreciate the comments on view Appalachia gas being well suited to play a very important role in future in the energy transition. I guess along those lines, anything that you're seeing at the local state or federal level that has you more or less encouraged about future export capacity out of the basin?

Yes. There's talk in Pennsylvania legislation about an LNG project in Pennsylvania on the East Coast. So again, largest producing gas field in the world, coupled with lowest emissions with the big demand for U.S. natural gas globally, given the conflict in Europe, coupled with the desire to lift quality of life globally. So it's well positioned to do that. It would be -- clearly would be supported, I think, with the trade unions holds popular in the state. And we've got the longest core inventory and within the Appalachian Basin. The other thing, the Appalachian Basin is deploying the cost curve globally. So with Range being at the low end of the cost curve, best emissions within basin and the desire to do that, it's -- I think you will see growth in takeaway infrastructure ultimately come from the basin. And we're well positioned to build that one when it's available.

Our next question comes from Doug Leggate with Bank of America.

Jeff, I wonder if I could -- my question is really on hedging strategy as absolute debt drops, but I wonder if I could use that also to kind of segue on your views on recent spot price volatility. It kind of seems to us that a full U.S. LNG utilization, we've now got almost gas-on-gas competition with storage for at a higher level for the first time in quite a while. And I'm just wondering if you could offer a comment on that. I guess that's a macro question but also how it plays into how you think about hedging going forward? Obviously, your hedge exposure rolls off pretty hard in 2024 at this point.

Let me start and I'll flip it probably to Mark after that. Yes, you're seeing strong demand for U.S. LNG, power generation, where you used to have the gas to coal switching not occurring right now. And we believe we have a slide in there that shows that and then coupled with strong industrial demand. So the demand signs are good. And then at a high level, as our balance sheet hits the -- or approaches the targets, and again, we'll be looking at less than 1x levered by the end of this year, net debt within the level that we want. And theoretically, it could even approach 0 by year-end 2023. So that gives us a lot more flexibility in how we hedge and our ability to head. So let me turn it over to Mark for some more specific comments.

Yes, I think that's the most important point there is the interplay between the financial risk, the debt level and how we need to hedge versus how we choose to hedge. So the need to hedge in a more defensive fashion to protect balance sheet has passed. So where we stand today is choosing to hedge to cover a base level of cash flow, choosing to hedge to mitigate some of -- basically the fixed costs of the business. We may elect with strong prices to hedging a portion of outsized returns. And by outsized returns, I mean our business is able to generate returns competitive or more competitive just about any other industrial type of business out there today. Certainly, when you look at the valuations of E&Ps and Range in particular relative to other industries. So with that, what does it mean? You can look at where we stand today. We've changed how we hedge -- we had more dollars to retain more upside. You're paying for the floors with some opportunity costs on the top of the collar, the call you're effectively selling. But we think that's a good risk reward to effectively purchase insurance protection around your fixed cost component. As you look at the percentages hedged, again, we can hedge significantly less. We think hedging still plays a part of our program going forward but at a significantly lower rate. If you look at the percentages today, for 2022, you could even look over the course of the year. Gas was hedged about 70%, but that tails off even in the fourth quarter closer to like 50%. As a percentage of revenue for '22, we were about 50% hedged. Looking forward to '23, gas is around 50% hedged volumetrically. But in terms of revenue, you're about 35% hedged next year and you're only about 15% hedged in 2024. So again, we have significant flexibility. Those numbers will likely remain lower. The thought process behind it is fixed costs largely with some, I would position it as opportunistic business decision to perhaps take a bit of outsized returns off the table and lock those in, but again, much lower percentages than you've seen Range execute historically.

Just to be clear, so swaps are off the table on a go-forward basis? Is that a good read of what you can interpret your comments?

I wouldn't say they're off the table. No. I would say we're going to adapt to how we see the market. If there's a positive skew to the market or you're getting more value from the call option, then perhaps to put the value of a collar is better than a swap. So it depends on what fundamental supply-demand situation is and it depends on what's being priced into the derivatives market. So I wouldn't say they're off the table. But I would say, at present, we are favoring colors.

Okay. So I guess my follow-up question is really just a quick one on inflation. You guys have got a relatively stable level of activity. And obviously, you're in a basin that's not seeing the same level of competition as for example in Permian. So I'm just curious, as you look into 2023 and maybe longer term to the extent you can, how protected or benign do you expect your capital to be to inflationary pressures? And to put it in context, we're hearing some of your peers talking about 20%, 30% year-over-year increases in 2023. I'm just curious how you would frame that range for yourselves, I guess.

You bet, Doug. This is Dennis. I'll kind of maybe take a step back to some comments earlier kind of through their prepared remarks. But ultimately, as we start thinking about 2023, we're going to really have, I think, a much better handle on what that's going to look like as we get into the fall annual bid process that we go through. And it's really a strong component of what we do. Our service providers, I think we would like to think that they have come to appreciate that we deliver on the program that we put in front of them. So their bid process -- the bid process we do together has a lot of validity. We know that their returns are going to be tied to our efficiencies as in a big way so were ours. As we look at it right now, we're estimating somewhere between 10% to 15% inflationary effect for 2023. But again, once we start to see what happens through the balance of the year, an example that we start to see some changes in steel price. If you look at diesel fuel as it ties to oil, you can make the argument that maybe you're starting to see some upper limits of where that fuel could go at this point in time. So there are some categories, as you would expect, we've seen small movements in 2022, maybe low single digits. And then there are some categories we've seen maybe 30% on a service unit cost basis. But then when you couple that with our efficiencies and some of those we touched on today like our water efficiencies as an example. The team continues to do a great job being creative there with our teams, our tools that we use in our logistics room and also the folks on the execution side in general. We've had another $6 million in savings year-to-date. We know that, that helps offset some of what we're most likely going to experience for 2023. So again, I'll kind of close out by saying this. Whatever -- if it is 10% to 15%, we also know that when you start to tie this back to a per Mcfe basis in that $0.60 mark, we know that we have a natural hedge against these inflationary impacts versus what we're seeing in other peers and also in other basins.

Our next question comes from Neal Dingmann with Truist.

Interesting comments you had earlier on production. I think specifically, I'm wondering, you all mentioned the increased second half sales and the fourth quarter growth, which was nice to hear given the front-end load. And so I'm just wondering with that, again, I'm not asking for '23 guide. But you anticipate a bit of growth continuing sound like through the end of the year and right into next year. And I guess what I'm trying to continue to add is just would you think about maybe a little bit more growth next year than what you had this year and all? Or again, is that just more of a timing sort of towards the end of this year?

Let me just be clear, if you look at where we are this year and where we've been, our focus has been and is maintenance capital. And you see that typical profile like you're seeing this year. You've seen the last few years. It's pretty similar. But I think if and when we grow, most likely it will be low single digits. Later this year, we'll be looking at our plan for next year. As usual, we'll probably communicate that early next year. But the good news is given our long-life core inventory, we're well positioned to take advantage when that opportunity for growth comes up. And I think the other thing, importantly, when you look at us, even in a maintenance capital case, we can grow cash flow per share. Mark, do you want to expand on that a little bit?

Yes. I think the profile you're talking about is really seasonal, I would say, or program-based levels of activity. And again, it's a question of when Range chooses to grow. But I think for the time being, for all the infrastructure-related reasons that Jeff highlighted earlier, a growth program may be a little bit off. But for Range, I think a very important point to take away from it is the maintenance capital does not mean a no growth story in terms of cash flow and cash flow per share. Range is very much a growth in cash flow and cash flow per share and not just because we're buying back shares, it's because of the built-in reduction in gathering costs as we've laid out in the Investor Relations materials that next year reduce gathering costs by $25 million, and that ramps to well over $100 million by the end of the decade. As we commented earlier, in 2023 relative to '21, you're reducing interest expense by $100 million. We continue to hold production and grind down costs elsewhere and various other line items. Again, we have the ability to grow cash flow and cash flow per share. And then again, we're deploying capital to buy back shares further accelerating that growth in per share cash flows. So I think it's just a question of when and how that growth manifests itself.

Great add, Mark. I really like the details. And then just a follow-up on my second on M&A. Can you talk about how active you are looking at bolt-ons? And maybe separately, would you consider anything more on just primary unit acreage in light of -- given obviously the material depth of inventory that you already have?

You were kind of breaking up on the end. But I think the question was on M&A. And one of the things we've pointed out and we really believe is we've got the longest core inventory in Appalachia so given our core inventory, we've been pretty clear in terms of our path forward we'll be staying focused on what we're doing. It would have to be something that's extremely accretive on all measures. And again, and we even against our share repurchase where we see a big disconnect there.

We are nearing the end of today's conference. We'll go to Neil Mehta of Goldman Sachs for final question.

I appreciate all the great macro color. I want your perspective on propane prices which, as you show on Slide 37, have come off a little bit. And how do you think about whether this is sort of temporary disruption? Or is there a change in sort of the way we should be thinking about normalized? And then the other question was on the gas macro. Unbelievably strong environment right now. How has that affected your view of mid-cycle for natural gas? And how should -- do you think the market should be repricing normalize as we get through 2022 and really focus on what the gas equity should be discounting over the long term?

Neil, this is Alan Engberg. I manage our liquids business. So I'll tackle the first part there on the propane prices. So we were really tight on stocks through the winter. And then as we got into spring, seasonally, that's kind of like shoulder months with natural gas. So things typically weaken a bit. In the backdrop, crude was really, really strong. So propane as a percent of crude on Slide 37 really did come in a little bit. Some of that also is due to just high maintenance levels in the spring months as well as the lockdowns in China due to COVID in Beijing and Shanghai. And then finally, the last item that really affected price was overall naphtha prices in Europe. So naphtha competes with propane internationally as a feedstock in ethylene crackers. And naphtha Napa was long in Europe. In fact, the naphtha crack or the spread relative to Brent was at historic lows during the second quarter. So all that kind of pushed propane a little lower than what it otherwise would have gone to relative to crude. Looking forward though, we still see all kinds of new demand coming online. In fact, we've got roughly 600,000 -- call it 700,000 barrels per day of new LPG-related demand internationally coming online over the next 2 years. That's 25% of the current global waterborne market. Add on to that, if you just put in 2% res/com demand internationally, you get close to like 1 million barrels of new demand coming online over the next 2 years. Internationally, they might contribute maybe 300,000 barrels per day of supply growth to that. And then the latest July EIA short-term energy outlook has us only contributing about 300,000 barrels per day of new supply over the next 2 years. So the macro actually looks like the market is going to be really, really tight. And we would expect then that propane prices relative to crude will go back to more like what we saw over the past year, 60% to 70% range.

Yes. And then I would just add on the gas side, again, we talked about -- we think natural gas is critical fuel. The world is moving towards cleaner, more efficient fuels. You look at U.S. gas or particularly Appalachian gas is on the low end of the cost curve even globally or towards the low end of the cost curve. And Appalachian gas is at the low end of sort of the cleanest natural gas produced. So it's in a great position. U.S. gas really is the only commodity in the U.S. that doesn't trade like a global commodity but it's been moving up as that demand is there. So I think with time, you'll see international prices come down some and U.S. prices may come up some. So I think gas is going to be a great place to be.

Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Ventura for his closing remarks.

I just want to thank everybody for taking time to visit with us this morning. Please follow up with our IR team with any additional questions that you may have.

Thank you for your participation in today's conference. You may disconnect at this time.