Coterra Energy Inc

NYSE:CTRA

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone and welcome to the Cabot Oil & Gas Corporation First Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions]. And please note that today's event is being recorded. And I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO and President. Please go ahead, sir.

[Dan Dinges, Chairman, President & CEO]

Thank you, William, and good morning. Thank you for joining us today for Cabot's First Quarter 2018 Earnings Call. As usual, I have with me several members of Cabot's executive management team, and I would first like to emphasize 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 of the most directly comparable GAAP financial measures are provided in this morning's earnings release.

On the first quarter, Cabot generated adjusted net income of $129 million or $0.28 per share, an increase of 46% relative to the prior year comparable quarter. Daily net equivalent production for the quarter was 1.88 Bcf per day, which exceeded the high end of our guidance range and represented a sequential increase from the fourth quarter despite the loss of volumes associated with the closing of the Eagle Ford Shale divestiture at the end of February.

We also extended our streak of consecutive positive free cash flow quarters to 8 by generating $89 million of free cash flow. Our strong free cash flow for the quarter was a result of a 17% sequential increase in discretionary cash flow and lower-than-anticipated capital expenditures.

Our unit cost continued to improve as we posted a 21% decline in cost relative to the prior year comparable quarter, which highlights the impact of our recent divestitures' hat on the company's overall cost structure in addition to our efficiency gains. On a Marcellus standalone basis, we saw a 4% reduction in cash cost relative to the prior year comparable quarter, and we anticipate further improvements in our cost structure, driven by economies of scale, resulting from our planned increase in operating activity and production over the coming years.

Lastly, our corporate level returns improved once again quarter-over-quarter, highlighting our ongoing increasing profitability. As we stated on the year-end call, we plan to be opportunistic with our share repurchase program. Our decline in share price since the beginning of the year, driven in our opinion, by negative sentiment around the natural gas outlook represented an opportunity for us to accelerate our share repurchase activity.

Ironically, the NYMEX strip for '19 and '20 are only about 1% to 2% lower than they were at year end, and are roughly in line with the base case price assumptions in our 3-year plan, yet our stock price is down 18% year-to-date. As a result, we were fairly active in the market subsequent to our year end call. Year-to-date, we have allocated $245 million in capital to repurchase approximately 10 million shares, and we'll remain opportunistic throughout the year, given our significant financial flexibility, including over $925 million of cash on hand at the end of the first quarter pro forma for the April share repurchase activity.

As it relates to our broader plans around long-term capital allocation, we plan to continue to reinvest in organic growth in the Marcellus, as we have highlighted in our 3-year plan, while also providing sustained dividend growth and opportunistically buying back stock when we see a disconnect between the market value and our view of Cabot's intrinsic value. Above all, we plan to maintain an ironclad balance sheet with ample liquidity, allowing for financial flexibility through all commodity cycles.

Now moving on to our operating plan. We delivered another strong performance in the Marcellus. During the first quarter, volume's up 3% sequentially despite not bringing on any new wells as we communicated on our year-end call. For the second quarter, we anticipate placing 20 wells on production, of which 16 wells have already been turned to sales. We have slightly tempered our outlook for sequential growth into the second quarter due to anticipated downtime for construction work that is being completed on Transco in order to connect our gathering system to the Atlantic Sunrise project. However, we expect significant growth in the second half of the year as we place an additional 60 wells on production to facilitate our ramp up in volumes as our new infrastructure projects are placed in service. Our conviction and our plan for the year was reiterated in this morning's release as we reaffirmed our 2018 daily production guidance range of 10% to 15%, and our capital budget guidance of $950 million.

Now let's move on to pricing and our infrastructure comments. Marcellus differentials for the first quarter came in slightly outside our guidance range, driven primarily by wider differentials in February. However, they still represented an improvement of $0.19 per Mcf relative to the prior year comparable quarter. We are forecasting a sequential widening of differentials for the second quarter due to the shoulder season, and we have also slightly widened our full year guidance range by a few cents to reflect current strip prices. Even with this small change to differential assumptions, we still anticipate generating over $180 million of positive free cash flow for the year.

As it relates to our ongoing infrastructure build out, we can begin by highlighting the progress from earlier this year on Moxie Freedom power generation facility. Moxie Freedom began taking test gas in early February, while making final preparations for full commissioning. Our expectation is that Moxie Freedom will be fully in service on June 1, and this 165 million cubic foot per day of new in-basin demand project will be a great long-term customer for Cabot.

Regarding the Lackawanna Energy Center, we also recently began burning test gas for their first generation train at that location. Train 1 is expected to be fully operational on June 1, adding an additional $80 million per day to Cabot sale portfolio. As a reminder, Train 2 and 3 remain on schedule for October 1 and December 1, respectively. When all 3 trains are online in December, the total nameplate capacity of this project will be 240 million cubic foot per day, for which Cabot is the sole provider.

Now moving onto Atlantic Sunrise. This project continues to make significant progress with regard to all aspects of the construction. Collectively between the pipeline, compressor stations and meter stations, the project is greater than 50% complete. Even though adverse April weather conditions, the construction crew have found ways to safely lay pipe and complete electrical and instrumentation work at the stations. We're very pleased with the current status. We remain encouraged that a mid '18 in-service is attainable. As most of you are aware, we recently added an incremental 50 million cubic foot per day of sales on this project, increasing our market share to over 1 Bcf per day. Cumulatively, these 3 projects will drive a significant improvement in differentials, going forward, resulting from access to premium markets post Atlantic Sunrise in-service and exposure to seasonally higher power prices once the Moxie Freedom and Lackawanna Energy Center plants are up and running.

I'm sure everyone is aware that Dominion Energy announced on April 9 that their Cove Point LNG export facility has reached commercial operation status. Therefore, Cabot has received a notification that our 20-year supply agreement with Pacific Summit Energy, a wholly-owned subsidiary of Sumitomo Corporation, is now in effect. As we await in-service for Atlantic Sunrise, we are fulfilling our obligation through a combination of various transportation paths for Cabot's gas, combined with some third-party purchases. These arrangements are an ideal short-term solution. But we are looking forward to sourcing 100% of the contracted volumes from our world-class assets in Susquehanna County when Atlantic Sunrise is operational.

Lastly, on the infrastructure front, we have had a lot of discussion with investors lately regarding our opportunity to continue to deliver organic growth from our high return Marcellus asset above the 3.75 Bcf of gross production we highlight currently. While we are not at a point where we will discuss specific opportunities, I can assure you that we are very confident in growing our production base above these levels, and continue to work with our midstream provider to build out the gathering system to facilitate production volumes above the 3.75 level.

In summary, we continue to believe our combination of growth in discretionary cash flow, free cash flow, production and reserve per debt adjusted share growth, improving returns on capital employed and increasing returns of capital to shareholders is unrivaled in the independent E&P space.

Despite recent headwinds in the form of negative sentiment around the outlook of natural gas, we have just as much conviction today in our ability to deliver on our top tier financial metrics from our 3-year plan as we did when we rolled the plan out last October. As we mentioned, over the last year, we took numerous steps to high-grade our company's asset base and further enhance our cost structure. These strategic moves have positioned us as the low-cost natural gas producer in the United States, and should allow for continued success throughout all of the natural gas cycles. Additionally, our year-to-date execution on share repurchase program highlights our commitment to returning capital to shareholders, and should provide some insight into how we view our current market value versus our view of Cabot's intrinsic value. We look forward to impending growth production during the coming quarters and we will again see the in-service of infrastructure projects that we have been waiting on for years, and especially excited about delivering significant positive free cash flow during the unprecedented ramp up in our volumes.

With that, William, I'll be happy to answer any questions.

[Operator]

[Operator Instructions]. And our first questioner today will be Charles Meade with Johnson Rice.

[Charles Meade, Johnson Rice & Company]

If I could ask, Dan, I appreciate all the detail you already went into about the moving pieces on your 2Q guide. That was an obvious question. Thanks for addressing that in your prepared comments. I'm wondering if you could perhaps add a little bit more detail on the startup of these 2 power plants and what it means for them to be taking test gas here at the end of April. I get that we have the June 1 start dates for both of those. But what would May look like? And is that -- and what could have looked like and what's implicit in your guidance about your expectations for gas you sell in May there?

[Dan Dinges, Chairman, President & CEO]

Yes, that's a good question, Charles. And Jeff has been staying plugged in on the each step along the way, and is familiar with what's necessary to commission on the affected days. I'll let him fill in the blanks.

[Jeffrey Hutton, SVP, Marketing]

Good morning, Charles. Yes, the pet gas and the commissioning process takes several months. The good news is pipelines are in place and operational, so that we're able to deliver the gas. Initially, Moxie is probably a little ahead of Lackawanna at this point. And we see days where test gas is 10,000 a day, and then there's a day of no test gas, and then maybe there's a weekend where it's 100,000 a day and so on and so forth. So we really get into the engineers at the locations of testing the different components and testing the trains and testing the actual production of megawatts. So it is a longer process for the commissioning of those facilities. I think, in both cases, two generation facilities also have contracts through the PJM process that start June 1. So it's not unusual to have early commissioning or early test gas use, but we won't see full demand until their power generation contracts start around June 1.

[Charles Meade, Johnson Rice & Company]

Got it. Thank you for that detail. And then, Dan, if I could ask about your exploration efforts. I'm guessing there's not going to be a whole lot to say or you would have already offered some comments. But is there any kind of update on your thought or your process that you can share?

[Dan Dinges, Chairman, President & CEO]

You're right, purposely just left exploration comments on the side. But briefly, I'll restate where we are that we do continue to make progress on gathering the data on both projects. Our objective has been clear that we're trying -- securing up data points to be able to give some very good color in our third quarter call. And as we've also mentioned, that both projects are designed to evaluate all prospects. So with that, we'll leave the exploration comments for the third quarter.

[Operator]

And our next questioner today will be Bob Morris with Citi.

[Robert Morris, Citigroup]

Any comment or color, additional color, on the upper Marcellus? I know you didn't tie in any wells in Q1 and I didn't know if any of the 16 wells tied-in in Q2 were in the Upper Marcellus. I know you're now planning to do Gen-5 completions on the Upper Marcellus in the second half of the year. But last quarter, you gave us some initial -- UR estimates seem to be encouraged about the outlook for the Upper Marcellus. So I didn't know if there's any incremental comment or data from -- if any of those 16 wells brought online this quarter were from the Upper Marcellus.

[Dan Dinges, Chairman, President & CEO]

Yes. Several of the wells in the Upper Marcellus that we brought on, about 16 wells are in the Upper Marcellus. To date, don't have much color to provide, other than we -- everything we've seen so far has met our expectations, but very early time in our production curve fit. But yes, some of the 16 wells were in the Upper Marcellus.

[Robert Morris, Citigroup]

Okay. So we look forward to those results maybe next quarter. Second question is just now that you're doing the polythene gas to the 2 power plants, in all the moving parts in the U.S. natural gas market, is that something we may see more of in the future? And I know some of your peers have actually started talking about perhaps doing deals to sell gas directly to power plants and utilities. Is that -- how does this market look for that? Is that something you might do more of, going forward?

[Dan Dinges, Chairman, President & CEO]

Yes, Bob. I'm going to pass that to Jeff.

[Jeffrey Hutton, SVP, Marketing]

Okay, Bob. Yes, we've talked about this in the past. We are having ongoing program and discussions with power generators and developers throughout the Northeast part of the country. As we've talked about these two facilities located directly off our gathering system, so to speak. We're at home runs in terms of avoiding long-term firm transportation cost and obligations. We've looked at several other facilities in that region. We feel like that in the PJM vicinity, the power plant development is -- maybe hasn't peaked yet, but is getting mature on the development. So we're talking to 1 or 2 others about long-term gas supplies. But I think the market is getting close to being mature enough to where I doubt we see any additional facilities in that neck of the woods. But I do want to add though, not only are these 2 coming on, there was a facility came on last spring, and there's 2 others that Cabot is not serving that's coming on and that's again a 6-county area in Northeast Pennsylvania. So it's good overall, probably close to 1 Bcf a day of demand in Northeast PA from power generation.

[Operator]

And our next questioner today will be Brian Singer with Goldman Sachs.

[Brian Singer, Goldman Sachs Group]

Your CapEx for the quarter was about $167 million on an annualized basis. That was well below the full year budget of $950 million. Obviously, there's some start-ups here gearing for here, going forward, and there weren't wells brought online in the first quarter. But can you add some color around the CapEx trajectory, going forward, and whether this represents any sign that there is greater efficiency relative to the budget that you put out?

[Dan Dinges, Chairman, President & CEO]

Yes. Matt is here also, so he can fill in the blanks there, Brian.

[Matthew Kerin, VP & Treasurer]

Yes, Brian. So you're right. Some of the reduction in capital for the quarter was timing driven. So we anticipate somewhat of a step-up in capital in Q2, not only driven by a higher completion cadence, but also the remaining capital commitments associated with the Atlantic Sunrise project that we have contributions for, and then I think you'll see it normalize a bit more in Q3 and Q4. We're so comfortable with that full year guide. You're right, we are seeing some efficiency gains. And so whether or not those could impact it later in the year, we'll see.

[Brian Singer, Goldman Sachs Group]

Got it. And then my follow-up is with regards to the share repurchase. I appreciate the color on what's been bought back so far. Do you have a sense of should we -- or should we expect that you continue at the same pace that you've done over here in the first 4 months?

[Dan Dinges, Chairman, President & CEO]

Well, Brian, yes. As I think I mentioned at the last conference call, our board was fairly clear on the approval of a repurchase program that the intent is -- particularly with our balance sheet strength, that if we do see that disconnect and intrinsic value that we'll be active in the market. We think this is a time that with the infrastructure projects, the ramp-up in production that Cabot is going to have, the ability to deliver significant free cash, and with that, we think we ought to get the confidence of investors that recognize that, yes, in fact, we are going to be able to generate the free cash. The negative sentiment around the natural gas macro environment, I think, has pushed us down to a level that I don't think is going to be sustainable in Cabot share price. So if, in fact, we continue to see this disconnect, our intent is to be fully active in our repurchase.

[Operator]

And the next question or two will be Drew Venker with Morgan Stanley.

[Andrew Venker, Morgan Stanley]

Dan, just something you've talked about once Atlantic Sunrise starts up, and just remind us how quickly you can fill that new capacity and whether or not that's new volumes or redirecting existing volumes?

[Dan Dinges, Chairman, President & CEO]

Our plan is, initially, as it's commissioned again just several months from now, we're going to be doing a little bit of both. We're going to redirect existing volumes out of the -- and off of the three in-basin pipelines into Atlantic Sunrise, and would fulfill that volume with both currently producing gas and the incremental gas that we're going to be building up into with our second and third quarter completion well we plan on turning inline. We will continue, as we demonstrated in our guidance, that our ramp-up in production is going to be back half, obviously, with new infrastructure, back-half weighted. And that growth will obviously come from new production and maybe some incremental volumes that move because we -- in certain areas, we haven't moved all the gas on the existing wells. So we anticipate a fairly good ramp-up into Atlantic Sunrise. And as we move into '19, we've kind of given a little bit of book ends on year-end exit volumes. But as we get into '19, we'll continue to ramp-up into additional incremental volumes.

[Andrew Venker, Morgan Stanley]

Thanks for the color, Dan. And just to clarify, so do you think you'd likely have your full capacity utilized on Atlantic Sunrise by the end of this year?

[Dan Dinges, Chairman, President & CEO]

We will move all of -- we will fill the capacity of Atlantic Sunrise by the end of the year. Some of that volume that we fill is going to be our current producing gas that we off-take from the 3 in-basin pipes. And Jeff wants to add a little color.

[Jeffrey Hutton, SVP, Marketing]

Drew, so the way we've got it planned out, and this a little bit of a moving target. But when Atlantic Sunrise is fully in-service and commissioned, we'll take title to the 850,000 a day of firm transportation capacity at that point, and we will immediately fill the pipe. And our obligation is with Sumitomo and with Washington Gas Light on day one of the commissioning. At that -- and back to your question, there will be a combination of flowing gas coming off some of the in-basin pipes, combined with the equity gas that we continue to develop between now and that in-service date. So just to kind of recap and make sure we're clear on this, Atlantic Sunrise will be full with Cabot equity gas on day one, but it will be a combination of existing gas with -- 850,000, excuse me, plus the additional capacity that we picked up in the interim.

[Andrew Venker, Morgan Stanley]

Okay. That's all very clear. I appreciate the clarification, Jeff. And just one follow-up on differentials overall, if you guys have things changing quite a bit between now and next year. The differentials have widened quite a lot across a lot of the U.S. and would be interested to hear your take on whether that has any meaningful impact on what you would expect for differentials between now and 2019?

[Dan Dinges, Chairman, President & CEO]

We're -- Drew, we're comfortable with the guidance and forecast that we've given on differentials. Just to the point of how Atlantic Sunrise is going to build some of the issues that we've had for now for several years has been a direct result of too much gas coming out of the 6-county area in Northeast PA and not having any other outlets. Atlantic Sunrise provides, and quite frankly, these in-basin power plants, provide a very good outlet to enhance the differentials out there. So our guidance that we've provided, we are comfortable with. And I think you will see a -- continuing to see a narrowing of the differentials.

[Operator]

And the next question or two will be David Deckelbaum with KeyBanc.

[David Deckelbaum, KeyBanc Capital Markets]

Dan, I know in your prepared remarks you talked about the sort of peak. I bet you guys guide to right now of 3.5 Bcf a day gross out of the Marcellus. You talked that you can't really get into specifics right now on upside to that. But I guess are these things that you're actively working on now, is there a timeline that you could put around that as to when we might have visibility if these -- if additional capacity is going to be out there?

[Dan Dinges, Chairman, President & CEO]

Okay. First, you mentioned 3.5. We're actually 3.75 is kind of work we have as capacity on the projects at this stage. And yes, we are actively working on those specific projects as addition to the 3.75. We're not going to give any specifics. I will let Jeff give a little bit of color and make sure he doesn't get too specific with what we are working on.

[Jeffrey Hutton, SVP, Marketing]

David, I'm the last one to get too specific on projects that are up-and-coming. But we are out and about on a daily basis looking at projects, particularly the in-basin opportunities, where we can bring some local demand back into the picture and burn gas there in Susquehanna County and avoid some of the interstate pipeline wuss. At the same time, though, we're looking at a number of smaller scale projects and niche projects that will collectively add capacity that moves us up into the right on that 3.7 number. We would likely have more clarity on -- and announcements on smaller projects in 2019. But there's, as you can imagine, a very competitive landscape out there, and we're keeping a lot of the stuff close to the vest right now.

[David Deckelbaum, KeyBanc Capital Markets]

I appreciate that, Jeff. I guess just as a brief follow-up to that, you've had some smaller projects like the gasification of some of the local towns. Outside of selling gas to power generators, how large is sort of like the addressable market for towns that could be gasified and receive gas directly from Cabot, and how competitive is that right now?

[Jeffrey Hutton, SVP, Marketing]

Yes. So it is an opportunity. And as we go through the process of identifying in which we have some of the communities that can use natural gas, as you're probably aware, we operate in a rural area in Northeast Pennsylvania. So the larger communities that are south of us, like the Scranton and so forth, do have natural gas supply. So it is a smaller scale opportunity. But there are still a lot of opportunities as our pipelines stretch throughout the counties up there. I think there's probably more opportunities in the compressed natural gas area in the peaking services for power gen. There are some -- we've identified a number of large industrial sites that have water, power, rail maybe or -- and highway access that we're talking with various types of industries to relocate there. So I think, all in all, we're on the right track to build it and they will come kind of approach. But it's still early in some of those projects and negotiations.

[Operator]

And our next questioner today will be Leo Mariani with Nat Alliance Securities.

[Leo Mariani, National Alliance Securities]

Again, I was just wondering, I know you guys didn't bring on any incremental wells during the quarter. But do you just have a general update on some of the Gen-5 well performance versus wells that may be brought on in the last couple of quarters?

[Dan Dinges, Chairman, President & CEO]

Well, there is no concern with any of the production curves that we've seen with our Gen-5. We're comfortable with the information we provided so far, and our expectations are being met with the flow volumes that we see. Again, you have to keep in mind that to be too specific way early in a production -- in a curve fit is problematic and not as accurate of information as it would be if you'd have 1 year, 1.5 years or so of production. We bring our wells on slow up there. And so to be able to look at the curve fit out months and months is the appropriate way of evaluating it. But so far, we see no issues.

[Leo Mariani, National Alliance Securities]

All right, that makes sense for sure. And I guess, can you maybe talk a little bit about sort of where the current well costs are there in the Marcellus? And kind of whether or not you're seeing any cost pressures that might move those around? And obviously, there may be some efficiency gains as well. Can you just kind of talk about the cost dynamics you're seeing up there in Appalachia?

[Dan Dinges, Chairman, President & CEO]

Yes. We're completing these wells, plus or minus $1,000 a foot, lateral foot, and that's kind of the ZIP Code we're in right now.

[Leo Mariani, National Alliance Securities]

All right. That's helpful. And I guess, how does that translate into sort of overall well cost as you all sort of look at that? And have you seen it changing [indiscernible]

[Dan Dinges, Chairman, President & CEO]

I'll say, as an example, our average is around 8,000 foot lateral, a little bit more for our 18 wells, and our well cost is about $8 million.

[Operator]

And our next question or two will be Jeffrey Campbell with Tuohy Brothers.

[Jeffrey Campbell, Tuohy Brothers Investment Research]

Dan, the first thing I was wondering is have you -- you said it, and I'm sorry I missed it. But have you discussed any current plans for the proceeds from the Eagle Ford divestiture? And I ask because the debt EBITDAX already looks really low.

[Dan Dinges, Chairman, President & CEO]

Yes. Right now, we have not had any specific design for the Eagle Ford. It's all in our balance sheet cash in the bank. Excuse me, Jeffrey. We have spent up to $240-plus million on share repurchases. As I referenced earlier, our plan and intent is if our share price stays in a spot where we think the value is lower than our intrinsic value, we will continue to be in the market. So you could say that the use of some of those proceeds, even though we had $0.5 billion of cash in the bank already, you could say that we're focused on this -- at the current time where the share price is, we're focused on a share repurchase program with authorization, having approximately 20 million shares remaining.

[Jeffrey Campbell, Tuohy Brothers Investment Research]

Okay. My next one's a little different, but I mentioned it in your thoughts here. I realized it's not indicative of a 3-year plan. Nevertheless, the first quarter '18 free cash generation was remarkable. And it seems like some kind of potential lens, and to Cabot's cash generation power, if you ever decide to dial back on production growth, I'm just curious what your thoughts are with regard to that cash generation in the quarter?

[Dan Dinges, Chairman, President & CEO]

Well, we do have a very strong cash flow machine. And we are ramping up to our volumes that we've addressed with the commissioning of these power plants in Atlantic Sunrise. It's our intent to stay prudent with our balance sheet. We're in pristine shape right now, and some might argue on a net basis certainly under leveraged. But one of the areas that we've discussed internally is how you manage the dividend policy, the dividend policy we've stated, and we've increased 150% last year, 20% this year already. We wanted to get to the commissioning of these infrastructure projects when we did additional dividend policy consideration. We did not want to find ourselves having to make a compromise on dividends because there's a slight loss of credibility when you have to peel back and rollback dividends if you do get into a low commodity price strip. So I would say that would be one area that our board will revisit consideration for our excess cash. And in the meantime, we think we have a substantial opportunity in front of us to bring back in shares. We will continue, though, to stay prudent with the excess cash and not do anything that would be out of character.

[Jeffrey Campbell, Tuohy Brothers Investment Research]

No, that's a great answer. And I think you kind of [indiscernible] my thoughts, which is that this just look like, if it was a practice around it, having to be defensive. It looked really impressive. Congratulations on the quarter.

[Dan Dinges, Chairman, President & CEO]

Thank you, Jeffrey. Yes, thank you very much.

[Operator]

[Operator Instructions]. And our next questioner today will be Michael Hall with Heikkinen.

[Michael Hall, Heikkinen Energy Advisors]

I guess, as a bit of a follow-up to that last line of questioning, the exploration program wasn't really mentioned in the use of proceeds and/or, meaning, use of excess cash flow. How do you think about that in a success case? Say, how many years or how much funding are you willing to kind of push towards moving an exploration program into development mode? How does that process look in your eyes? How quickly do you push it to something that's sustainable on its own? Just any commentary on that will be helpful.

[Dan Dinges, Chairman, President & CEO]

Yes, I'll restate again what I've said in the past. Any investment we make has to have a return that we think is somewhat competitive with our Marcellus. We anticipate staying with our current strategy of delivering growth, both on production and reserve growth on debt-adjusted share basis. We're intent on delivering a return, increasing return on our capital employed. We like the idea of our yield model on increasing our yield on our free cash flow, and we're going to be focused on that also. So any project or allocation of capital is going to have a component that within a reasonable period of time, and as I've stated in the past, a reasonable period of time, would be a couple of years or so, that we would be able to identify assets that would deliver that type of return and also be able to fit within our overall strategy, and again, a reasonable period of time of delivering on all of those objectives.

[Michael Hall, Heikkinen Energy Advisors]

Okay, that's consistent, helpful. And I guess can you just remind us, what's the -- how much allocation to the Upper Marcellus is there within the 3-year outlook? And yes...

[Jeffrey Hutton, SVP, Marketing]

Just nominal.

[Michael Hall, Heikkinen Energy Advisors]

Nominal? Okay.

[Dan Dinges, Chairman, President & CEO]

Yes, very, very -- yes, right now from a -- we'll continue to drill in various different areas and in various different circumstances Upper Marcellus wells. But the percentage of allocation compared to the lower in the next -- in our 3-year plan is very low.

[Operator]

And we have no further questions at this time. So this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Dan Dinges for any closing remarks.

[Dan Dinges, Chairman, President & CEO]

Thank you, William and thank you, all, for joining the conference call today. As you seen, we've been able to deliver on our solid program, cash flow, the growth, the return on the available cash, we'll continue to deliver on that program. Second quarter, we adjusted our volumes a little bit to get tie-ins in there. But we certainly have volumes that -- with 16 new wells and going up to a few more than that. We'll bring on another pad shortly. We will have more than adequate volumes to start filling up the Atlantic Sunrise, following its commissioning. So we're in good shape. Please join us for our next quarter's conference call, and we look forward to the visit. Thank you.

[Operator]

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.