Chesapeake Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Chesapeake Energy Corporation Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Ayers, VP of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining our call to discuss Chesapeake's Q2 2024 financial and operating results. Hopefully, you've had a chance to review our press release and the updated investor presentation we posted to our website yesterday. During this morning's call, we will be making forward looking statements, which consist of statements that cannot be confirmed by reference to existing information, statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note there are a number of factors that will cause actual results to differ materially from our forward looking statements, including factors identified and discussed in our press release yesterday and in other SEC filings.

Speaker 1

Please also recognize that except as required by applicable law, we undertake no duty to update any forward looking statements and you should not place undue reliance on such statements. We may also refer to some non GAAP measures, which will help facilitate comparisons across periods and with peers. For any non GAAP measure, we use a reconciliation to the nearest GAAP measure, which can be found on our website. With me on the call today are Nick D'Alaso, Mohit Singh and Josh Viet. Nick will give a brief overview of our results, and then we'll open up the teleconference to Q and A.

Speaker 1

So with that, thank you again and now turn the time over to Nick.

Speaker 2

Good morning and thank you for joining us today. We are pleased with our quarterly results, which further demonstrate that our strategy designed to provide the greatest level of flexibility to manage unpredictable market conditions is working. And we are achieving meaningful improvements in capital efficiency and reductions in operating costs, which we believe will be durable when prices recover. Today, we are primarily focused on 3 key elements of our business. 1st, reducing costs and improving breakevens.

Speaker 2

We have recognized a 50% improvement in Marcellus drilling performance since 2022. We have achieved this by steadily increasing our feet drilled per day over the last 2 years by approximately 50% as well as by growing the average lateral length of our wells by nearly 3,000 feet in the Q2. The increase in drilling pace, lateral length and deflation all combined to recognize a 20% decrease in drilling costs over the last 2 years. In the Haynesville, efforts to lower production expense continue to pay dividends as evident by a 25% decrease in saltwater disposal cost per barrel since the Q3 of last year. This improvement is due to the team optimizing routes, increasing utilization of owned assets, strategic partnerships with vendors and deflation.

Speaker 2

Combined, these operational improvements allowed us to lower our full year capital and production expense guidance by $50,000,000 and approximately 8% respectively. Lowering breakeven cost is critical to delivering sustainable value to our shareholders and ensuring the market remains well supplied with affordable natural gas. We expect the majority of savings recognized will be durable through cycles, which will only continue to improve the strength and competitiveness of our Marcellus and positions. 2nd, maintaining production flexibility to match market conditions. Through the first half of the year, we have deferred 46 TILLs and built 29 DUCs.

Speaker 2

By year end, we expect to have up to 1 BCF a day of productive capacity available to meet demand when conditions warrant. In addition to the deferral of TILs and completions, we proactively curtailed volumes during the weaker spring shoulder pricing months and are prepared to do so again as necessary in the fall. We will be disciplined in activating the deferred capacity with market conditions dictating the pace and timing of our approach. We are confident this strategy will provide a distinct competitive advantage when natural gas demand recovers given the inherent flexibility it provides and the speed and limited capital needed to bring volumes to market. Finally, we are focused on our pending merger with Southwestern and our confidence in our ability to deliver the planned synergies is only growing.

Speaker 2

We are using the extended time between signing and closing to focus on our integration planning efforts and on delivering the synergies identified at the announcement of the merger, which we expect to close in the back half of the year. I have been extremely impressed with the openness and creativity of both organizations as we seek to establish a business that has more talent, better assets and greater overall strength than either could have achieved as a stand alone company. We look forward to seeing what we can achieve together once the deal closes and we can fully unlock the power of our 2 organizations for the benefit of consumers and our shareholders. Our long term outlook for natural gas, the affordable, reliable lower carbon energy the world needs, remains strong, and we are working diligently to ensure our pro form a merge with Southwestern is poised to meet consumer demand at the most efficient price. I look forward to continuing to update you on our progress as we move through the year.

Speaker 2

We're now pleased to answer your questions. Operator, if you'd like to assemble the queue.

Operator

We will now begin the question and answer session. Our first question will come from Bert Donahue with Truist. You may now go ahead.

Speaker 3

Hey, good morning team.

Speaker 2

Good morning, Bert.

Speaker 3

Good morning. On the deferred activity, I just wanted to maybe clarify the strategy when you bring on the production. Does the price move qualify as improving market dynamics or does it need to be tangible supply demand? And then how do you think about rock bottom production levels? I'm assuming at one point you kind of hang up your coat and go, listen, we've done our part.

Speaker 3

Is that 4Q 2024 guidance kind of where you'd level out at or would you let it go below that? Thanks.

Speaker 2

Yes, those are both great questions. Look on the price signal, we see price as nothing but a signal. And we do pay a lot more attention to the underlying supply and demand than we do just price. Price is in fact a signal, so we will pay attention to that as well. But in terms of bringing on the deferred activity, we want to see the underlying fundamentals improve.

Speaker 2

As far as the bottom level of production, we could see things fall to. I guess, we see the market improving. While we aren't great at predicting the exact day or quarter it will improve, the overall dynamics that are setting up for us are pretty positive. So we're not too worried about that. I don't think we'll face that decision.

Speaker 2

We're going to continue to be prudent with how we manage our volumes and our capital program. And we are happy to be building the docs and D TILs that we are now because it gives us a lot of operational flexibility. And at some point, you would just slow down building those TILs and DUCs by reducing your capital if it capital if it continued into a much, much longer period of time. So we'll continue to monitor that. That would

Speaker 4

be how we would think about this.

Speaker 2

But right now, we're pretty comfortable with where we are, doing what we're doing.

Speaker 3

Makes sense. And then for the second one, I'm going to try to help you out here and get the words data center in your transcript a few more times. There's been some developments since last quarter with a lot of people talking about behind the meter deals. Do you think this is going to become maybe a catalyst driven story where you announce an LNG contract or you announce a data center contract? Or is it just way too early in the cycle for you guys to start thinking about that?

Speaker 2

I don't know if it's too early for us to start thinking about it. We're talking to all of the people you would imagine we talk to on a regular basis, whether they be tech companies or utilities. And we're pretty excited about the fact that the market is doing a better job of recognizing that electricity demand is growing. And we think that's been an underappreciated and underforecasted element of the economy for quite some time. And when you really start to burrow into electricity demand growing, you need to figure out where it's going to come from.

Speaker 2

And natural gas is an obvious answer that is going to be a fuel of choice. There's some things to consider here about how this will all work together. You need to bring together starting with the technology providers, the users of data, back to generation. And so there's 3 elements that have to come together. All three of those elements are, I would say, actively discussing a lot of solutions right now.

Speaker 2

Not all the answers are perfectly clear. We're all going to have to work together to work through what are challenges around geography, what are challenges around regulatory environment because every single all three of those pieces need infrastructure. And it's going to be a not super easy thing to accomplish, but one that the world is going to demand and therefore we are going to be ready to fulfill. So I think it's a really exciting opportunity for our company. We're just as focused on that as we are on the LNG opportunities, which we think are probably a little nearer term.

Speaker 2

But yes, I think there's potential catalyst in all of it. But I think the more important point isn't just a singular contract or catalyst that could be created with an announcement. It's the overall trend and what it means for the supply and demand fundamentals of our business.

Speaker 3

That makes great sense. Thanks.

Operator

Our next question will come from Doug Leggate with Wolfe Research. You may now go ahead.

Speaker 4

Hey, guys. Thanks for having me on. Nick, I know the FTC process, as you have observed many times, is still rambling on. But I'm just wondering if you could opine on the extent of which you've been able to really dig deep on the full potential, whether it be drilling efficiency, days to drill, the fact that Suttleson was running obviously very high fluid loadings, all that good stuff. What is your thinking on the $400,000,000 at this point in terms of risk to that number?

Speaker 2

Well, the longer period of time of integration, I think, helps us feel confident that we're derisking that number every day. We feel really good about achieving that number. There are a lot of opportunities when you bring together 2 organizations of this size. And we've achieved, we think, over the last many months of working on this integration, a true best of both mentality by the teams that are working on integration. We're looking really hard at everything from the IT systems that each company uses to the processes that each company follows to the philosophies of things like fluid loading in a well.

Speaker 2

And we are trying to optimize a plan for NewCo going forward that really brings together the best of what both companies can do. And we believe that there is that synergy number is well within our reach. We expect to deliver on that for sure, and then we expect to keep working beyond that point. So we're excited about what all that represents. We think obviously, you'd love to announce the deal and close it immediately thereafter.

Speaker 2

And so we wouldn't have wished for this delay, but we're absolutely making the best of this time.

Speaker 4

Okay. So maybe a quick part B to that. Would you expect on closing to give an update on the synergies or no?

Speaker 2

I think we'll give an update on how we think about achieving them and timing for sure.

Speaker 4

Okay. All right. My follow-up and I know you missed me on the last earnings call, so I'm going to try this one.

Speaker 2

We did and welcome back.

Speaker 4

Yes. Thank you. Your variable dividend that you announced in the Q1 was paid out of your balance sheet this quarter. You're inheriting a lot of debt, assuming this deal closes. Can you give us some thought as to whether where you're going to prioritize the allocation of free cash flows that assuming the forward curve plays out in the context of dealing with your combined balance sheet versus transitory, dare I say, cash distribution that really has no impact on your valuation?

Speaker 2

Yes. We are absolutely Yes. We are absolutely considering all of that, Doug. And we like our return framework. We're going to continue to think constructively about that return framework.

Speaker 2

But clearly, pro form a company will incorporate into that return framework a reduction in debt. And so we're going to work through that. And once we close, we can talk more about how that's going to play out. But the company needs to have less debt than it will day 1 when we close. And so we'll take that into consideration.

Speaker 2

Mohit probably has some things to add here.

Speaker 5

Yes, Doug. It's good to hear your voice again. Just to add to what Nick said, when you take a step back from it, we are extremely proud of the $3,500,000,000 that we have returned to our shareholders since 2021. And obviously as you identified it, variable dividend is one of the components of it. We've done buybacks.

Speaker 5

We've done the base dividend in addition to that. We do recognize we will have more leverage once the transaction closes. It's a little bit too early for us to talk about what the plans would be post closing. We will share some more of the details around all of that, but the commitment from our side to shareholder returns remains unwavering. And at the right time, we'll share some more details around that.

Speaker 4

All right, guys. I'll keep pushing on this. Thank you.

Operator

Our next question will come from Neil Mehta with Goldman Sachs. You may now go ahead.

Speaker 6

Yes. Good morning, Nick and team. Maybe you could spend some time talking about some of the deflationary trends that seeing. I think you called out a 10% deflation number. And as you think about the efficiency gains and the lower cost structure, has anything changed around that 350 mid cycle view that Nick You

Operator

know,

Speaker 7

If you look back maybe into the Q4 of last year, we have seen a continual softening of service pricing. And of course, that's largely just driven by the pretty significant reduction we've seen around a 40% reduction in gas rigs between Appalachia and Haynesville. And so we've been trying to take advantage of that. I would say in the Haynesville, we've probably seen in the high single digits type of deflation. The Marcellus is going to be a couple ticks above that around 10%.

Speaker 7

I will say though that we're incredibly thoughtful about we think about our service partners. We really value strong safety cultures, vendors that are going to be focused on driving performance. And so we're always going to be a little bit careful about just taking on the next lowest cost provider. We just don't think long term that makes an awful lot of sense. But I think as we look ahead, I think to the back half of this year in 2025, I would say we are anticipating a little bit more weakness as we exit this year in some specific services.

Speaker 7

And then I would expect that pricing starts to moderate

Speaker 6

LNG story. On the LNG story. It's clearly, we've got a big ramp ahead, call it 10, 14Bs depending on how you look at it. We've seen some volatility around Freeport and push out of things like Golden Pass. So just love your perspective on the multiyear outlook for the U.

Speaker 6

S. LNG ramp and how does Chesapeake fit into it?

Speaker 2

Yes. We're still really excited about the multiyear ramp in front of us on LNG. The world remains short energy. And U. S.

Speaker 2

LNG is going to be a big part of solving that shortage. And we're well positioned to deliver gas into that market and see the value of our gas increase as a result of how we deliver into that market at the same time recognizing that we'll be a very important source of supply for growing domestic demand for natural gas. There's a lot of gas resource in the United States. We own a lot of it today. The pro form a company will own more of it than anyone.

Speaker 2

And so we're very excited about what all of this represents. We think the opportunities are significant. You've seen a lot of headlines just recently with Woodside investing in Tellurian or buying Tellurian and giving some new momentum to that project, the Driftwood project there just south of our asset in the Haynesville. LNG is moving and moving, we think, pretty constructively. There been a little bit of delays in some of the projects that are coming on here in the near term.

Speaker 2

But those projects are moving by months, not by years or decades. And so we're fine with all of that. This is a very long term dynamic that's playing out in front of us that we're extremely well positioned for.

Speaker 6

Okay. Thank you, sir.

Operator

Our next question will come from Zach Parham with JPMorgan. You may now go ahead.

Speaker 8

Good morning. During 2Q, you had some price related curtailments and you've recently indicated that those curtailments have largely been brought back online. Nick, you mentioned in the prepared remarks that you were prepared to curtail again if prices were weak in the fall. Can you just detail what you would need to see from maybe a local pricing perspective to start curtailing some volumes in both the Marcellus and Haynesville?

Speaker 2

Yes, Zach. Hey, good question. We'll stay away from giving you an exact price on that. You can certainly look back and see the prices in the spring and see that they got pretty low. And so if there's a repeat of some very low prices like that, then we would curtail more volumes.

Speaker 2

One thing that's important to note in our projections is that we don't consider curtailment for price reasons in our projections of any significant magnitude. We sort of have a historical pattern of shoulder season reductions in volumes that's pretty modest. That would be in there, but nothing beyond our historical pattern. So there are significant price curtailments that would reduce our production in the second half of the year, which we're totally prepared and willing and ready to do if the market ends up showing it to us, showing us that it's necessary. Yes.

Speaker 7

Zach, this is Josh. I'll just maybe add on to that a little bit. Obviously, the market is incredibly dynamic. And so our teams do a phenomenal job of monitoring market conditions. And between our marketing and operations teams, we really look at these almost day to day as decision points on whether or not gas is needed into the market.

Speaker 7

I think the other thing I would just point out, of course, we're very focused on executing our deferred Till strategy. And as we look at our volume decline from Q2 of this year through the Q4, we're anticipating a 17% decline. That equates to a little over 0.5 Bcf a day of capacity the demand capacity coming offline from our operated production. And so we're absolutely committed to helping restore productive capacity when these market conditions improve.

Speaker 8

Thanks. I appreciate that color. My follow-up just on your operational plans, you're running a bit ahead of schedule on your deferred turning lines and and docks that you're going to build this year. And you took down CapEx by $50,000,000 this quarter. If you continue to run ahead of schedule, is there room for CapEx to move incrementally lower?

Speaker 8

Or would you just enter 2025 with a few more deferrals than you'd originally planned?

Speaker 7

Yes, Zach. At this point in time, I think we're committed to the activity levels that we've exited the Q2 at. And so right now we're running around 4 rigs in the Haynesville and 3 rigs in the Marcellus. I think for us at this point, it's really about just monitoring the setup for 2020 5 before we would decide to adjust activity levels any further. And so at this point in time, we're kind of happy to carry these 6 to 7 incremental wells as DUCs into 2025.

Speaker 8

Thanks, Josh.

Operator

Our next question will come from Charles Meade with Johnson Rice. You may now go ahead.

Speaker 9

Good morning, Nick, to you and the team there.

Speaker 2

Hey, Charles.

Speaker 9

I want to pick up on that question of the PDP decline. It's an interesting natural experiment at least from where we sit and that we get to observe this close to a PDP decline from you guys quarter over quarter. But I'm curious, what if anything have you guys learned from looking at it on the inside and maybe about the performance of your asset base, managing it and perhaps optimizing your midstream as you're going through this decline?

Speaker 2

Yes, Charles, great question. I think the PDP decline this year is a really interesting thing to look at and try to understand. As we have looked at our own assets, we have seen our PDP decline outperform slightly relative to what our modeling would suggest. But I think the market has a hard time seeing exactly how that P2P decline is working given that we had curtailments in the spring, which made that decline look more significant or steeper, then we brought those curtailments back on this summer, which has flattened everything back out. And then you see that underlying decline pick up again as you go from Q3 to Q4.

Speaker 2

You can see that on that slide in our presentation. So I think it's hard for the market to see the underlying decline as clearly as we may be able to see it with our own internal data. There is no doubt that when you reduce activity in the field, your base performs a little bit better. You have less downtime from offset activity. You have gathering systems that flow and function a little bit better with hydraulics.

Speaker 2

You do a better job of maneuvering logistics around the field to keep water tanks empty and everything just stay the uptime is just better. So we definitely see that through the year. That's relatively modest. It's encouraging. We like it.

Speaker 2

It's efficient. But it's relatively modest. And what we are interested in is the fact that that underlying decline is still moving lower. And when we look at the forecasts that are out there from a bunch of different macro analysts, we're not sure that that's fully incorporated at this point.

Speaker 9

Got it. That is great color, Nick. Thank you for that. And then I want to try a question on 2025. And I recognize that none of us know how 2025 is going to look, but I'm really interested in maybe putting some bounds on what it might look like.

Speaker 9

And as I look at your volumes on a standalone basis, you're looking at about 2.5 Bs a day in 4Q and you say you're going to have a Bcf a day of capacity. Does that mean that you're going to be that at the upper end, you could be as high as again on a standalone basis 3.5Bs a day in 2025 or is that a possibility?

Speaker 2

Yes. I would say a

Speaker 7

lot of that just depends on the timing at which we activate the TILs is ultimately going to drive that. I mean, I think our goal as we start to activate these TILs is to get back to our sustaining level of production, which what we've communicated in the past is around 3.2 Bcf a day as a standalone company. And so though we would have the ability to potentially accelerate that Bcf a day and activate the TILs a little bit quicker, We want to be thoughtful about how we reintroduce those markets and it's ultimately that pace that is going to dictate the ultimate production level that we achieve.

Speaker 9

That is helpful. Thank you, Josh.

Operator

Our next question will come from Betty Jiang with Barclays. You may now go ahead.

Speaker 10

Good morning. Thank you for taking my question. I wanted to ask about actually Haynesville, a bit macro question. I guess given the production decline that we have seen year to date and then we have seen some recent improvement as some of the curtail volumes coming back. We'd love to get your thoughts on how you think about volumes in Haynesville.

Speaker 10

Will we see plateau production or could we see more decline from here? And then also whether that's how that's impacting in basin pricing? Clearly, you are seeing better pricing year to date. Is that could that continue to improve?

Speaker 2

Yes. Hey, Betty, I'll start. Josh may add something here. Pricing is a little bit better today than we saw in the spring. Those curtailed volumes have come back on.

Speaker 2

And so you've seen that flat now the Haynesville production overall for our asset. If you look at the slide in our presentation that we posted last night, you can see that we do expect declines to then come back as you go from Q3 to Q4. So if you think about what's happening here, we began reducing activity during the Q1, but then we also curtailed volumes that same time. So the initial slope of the decline that we saw was quite steep. Now that we've brought that curtailment back on, it has plateaued or flattened out for a period of time until the effect of that curtailment is all on and the underlying decline picks back up and takes over and brings volumes lower again, which again you can see Q3 to Q4.

Speaker 2

So we do see that that decline continues at near the current underlying market conditions when we consider where total supply is, we look at where total demand is, we look at where storage is, we don't anticipate at this point turning in line any material number of wells in the second half of the year in the Haynesville. So we do expect that decline to continue. If prices were to weaken materially, we would curtail volumes again. We've mentioned that now on the call already. So just to reiterate, our projections do not assume any material amount of curtailment through the fall, but we're totally prepared to do that and that would change the shape of that decline again if we were to do it.

Speaker 2

But what I think is important to note is if you look at Q1 of this year to Q4 of this year, there is an underlying decline. The slope of that gets adjusted with the effect of curtailment. And you can see that in Q2 and Q3, but that underlying decline is pretty real going from the beginning of the year to the end of the year.

Speaker 10

Okay. And a follow-up just on the operational efficiencies that you're seeing in Haynesville. Clearly, CapEx in Haynesville has been coming a bit lower than expected. Outside of saltwater disposal savings that you mentioned in the slides, is there anything else perhaps on the drilling and completion side where that's continued to lower that's helping your CapEx that could be sustainable going forward?

Speaker 7

Yes, Betty, we continue to look at new technologies and improving operational practices to drive those costs lower. In the last 6 months or so, we've implemented insulated drill pipe in the Haynesville to help us manage temperatures a little bit better, using chillers to help reduce temperatures of drilling mud, optimizing the hole sizing, which we've seen some benefits here late. And so we continue to find new opportunities to improve our operations and we're really starting to see those results show up. So we really think that provides some winds. In addition to that, as we're exiting 'twenty four into 'twenty five, looking at opportunities to change the way at which we source sand and the Haynesville, which we think will also provide an additional tailwind as we head into next year.

Speaker 10

Got it. Thanks.

Operator

Our next question will come from Josh Silverstein with UBS. You may now go

Speaker 11

ahead. Thanks. Good morning, guys. Nick, within the flexibility you have to

Speaker 9

bring back the BCF day of capacity,

Speaker 11

what's the additional flexibility you have between the Marcellus and Haynesville? I'm just wondering if Appalachia basis remains weak in next year, can you bring back the Haynesville volumes first and then sit on that Blitzer volumes? If you can provide a little bit more detail there that would be great.

Speaker 7

Yes, Josh. I would just say that we absolutely remain flexible on which area we would choose to bring back first. We look at these decisions really independent of one another. So it's really just about monitoring local market conditions and then our operations and engineering teams working together to plan out as efficiently as we can to activate these tills when the market says that the gas is needed. So yes, we're going to be flexible and we could very well be bringing on one basin ahead of another.

Speaker 3

Great. And then

Speaker 4

just wanted to see if

Speaker 11

we can get an update on the momentum project, the investment kind of updated timeline and then anticipated benefits when complete as well? Thanks.

Speaker 5

Yes. Hey, Josh, good morning. This is Mohit. So we are very pleased that the litigation that was between Energy Transfer and Momentum has been settled. So extremely happy with that outcome.

Speaker 5

And the project is now back on track and we expect that to go in service towards end of 2025. So we're expecting in service date in Q4, 2025. From a project delivery point of view, the contractors are being reengaged and all the materials that they had stored in the yards, they have kind of gone back and checked the integrity of it, which all looks good. So the plan here as we've guided for the rest of this year in terms of capital calls, we're saying $50,000,000 to $100,000,000 of remaining capital calls that will be made on the project. So everything is back on track from that point of view.

Speaker 5

The second part of your question around what this means for us. So the original thesis why we got into this project was to connect our production to the emerging demand source in the Gulf Coast. So that thesis remains intact and now that we'll have $700,000,000 a day of production that we can bring from Haynesville down to Gilles gives us increased flexibility and optionality because if you look at the overall flow map, we currently have capacity on Tiger and Gulf Run, which allows us to go due east to Perryville and now we will

Speaker 4

have this optionality to take it down to Gilles, which

Speaker 5

in the future when

Speaker 11

Great. Thanks Mohit.

Operator

Our next question will come from Phillips Johnston with Capital One. You may now go ahead.

Speaker 8

Hey, guys. Thanks. Just a quick one for me. It looks like you've turned on close to 25 wells in the Upper Marcellus over the last 4 quarters or so. Just wanted to get a sense as to how those wells are performing relative to the lower Marcellus?

Speaker 8

Thanks.

Speaker 7

Yes, Philip. I think we've documented in the past and it pretty well shows itself in the public data sources that the upper Marcellus is not going to be as productive as the lower Marcellus core that we've been so focused on developing really for the last decade or so. And so we expect that trend to really continue. But our teams continue to find opportunities to improve the overall economics of the Upper Marcellus. And that's what we remain focused on is generating better returns.

Speaker 7

And so we do that through extending our lateral lengths, which you see that in the deck today. Just year over year, we're going to end up being about 11% higher on lateral link relative to last year. And that's really coming as a result of more wells being drilled the upper and specifically using these hybrid wellbore designs, which we've talked about in the past to build extend laterals and create better returns than we could with just standalone Upper Marcellus well.

Speaker 8

Sounds good. Thank you.

Operator

Our next and final question will come from Paul Diamond with Citi. You may now go ahead.

Speaker 12

Hi, good morning. Thanks for taking my call. Just a quick one on Slide 5, talk about 25% decrease in SWD cost per barrel. Just want to get an understanding of, I guess, how many years should we think of that trend if that $20,000,000 investment per annum continues?

Speaker 7

Yes. So we continue to look for opportunities to invest in our water disposal system. Today, we have around 30,000 barrels a day of disposal capacity for the 4 sites that we operate, and that also includes about 60 miles of gathering systems. So over the last couple of years, we've been investing in and around $15,000,000 a year. We would expect we'll continue to look for opportunities to do that.

Speaker 7

And that's one of the reasons we're so excited about the Southwestern transaction is because it allows us to better utilize that system. Today, we run the system at about a 65% to 70% utilization rate. And oftentimes, these gathering lines run right by some of the southwestern sites. So we're going to continue to look for opportunities to exploit that system and help to preserve these types of disposal rates that we've showed you all today.

Speaker 12

Got it. And just one quick follow-up. You talked about a 20% decrease in well costs in Marcellus, but then targeting $800,000,000 for the full year 'twenty four. Can you talk about kind of how you see the second half of the year playing out? Should we think about that as kind of run rate around $800,000,000 or more going up and down?

Speaker 12

Or how should we think about the trajectory and cadence?

Speaker 7

Yes, Paul. I mean, so from the slide you would have noted just under 17,000 feet of average lateral length in the Q2, and that will be the peak for the quarter. And that's why you see that corresponding number there of the cost per foot around $7.40 to $7.50 a foot. So we do anticipate averaging around 800 dollars And really what that $800 per foot is tied to is an average lateral length around 14,500 feet. And so again, it will fluctuate quarter to quarter just based upon how the teams are attempting to optimize the drill schedule throughout the course of the year.

Speaker 12

Understood. Appreciate the clarity. Thanks for your time.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Nick Dell'Osso for any closing remarks.

Speaker 2

Thanks very much. Appreciate everybody's time today. We're really looking forward to the second half of the year. There's a lot of catalysts in front of us. Obviously, the closing of our merger, which we anticipate in the second half of the year, as well as we look forward to the point in time at which the natural gas market begins to improve.

Speaker 2

We're going to be really well positioned for that. We look forward to updating you all on our progress as we move throughout the year. And we will be available through our Investor Relations group if you have any follow-up questions to today. Thanks very much.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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