Cabot Oil & Gas Q2 2021 Earnings Call Transcript

Presentation

[Operator]

Good morning and welcome to the Cabot Oil & Gas Corporation Second Quarter 2021 Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]

I'd now like to turn the conference over to Dan Dinges, Chairman, President, and Chief Executive Officer. Please go ahead.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thank you, Philippe, and good morning. Thank you for joining us today for Cabot's second quarter of 2021 earnings call. As a reminder, on today's call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers, as well as reconciliations to the most directly comparable GAAP financial measures were provided in this morning's earnings release.

Our results for the second quarter 2021 reinforced the positive them from our first quarter results with a significant increase in realized prices, year-over-year driving exponential growth in our financial metrics. Adjusted net income for the quarter was $105 million or $0.26 per share which represents over a five-fold increase in adjusted earnings per share relative to the prior year period, driven primarily by 35% increase in our realized natural gas prices. During the quarter, we also delivered positive free cash flow of $64 million, our 18th quarter of positive free cash flow over the last 21 quarters resulting in a $127 million improvement in free cash flow relative to the second quarter of 2020.

During the second quarter we returned over two-thirds of our free cash flow to shareholders through our base quarterly dividend as we continue to emphasize our strategic focus on returning a majority of our free cash flow to shareholders. We continued to improve on our industry-leading cost structure during the quarter as demonstrated by 2% year-over-year improvement of all-in operating expenses to $1.41 per Mcfe, excluding a $6.2 million of expenses during the second quarter related to the pending merge with Cimarex Energy, our unit cost improved by 4% relative to prior year period.

Production for the second quarter of 2021 was 1% below our guidance range due to longer than anticipated maintenance-related midstream downtime, primarily resulting from one of our third-party providers compression station and operational delays during the quarter that pushed the timing of certain wells gone on production later in the second quarter and into the first part of the third quarter. Our production volumes this third quarter to-date had averaged approximately 2.3 Bcf per day, a 4% increase relative to our second quarter production levels. We incurred $166 million in capital expenditure during the second quarter, a 5% reduction relative to the prior year period.

Our capital for the quarter was in line with our prior guidance for higher activity levels in the second and third quarters, which are expected to result in a sequential production growth during the second half of this year, primarily during the fourth quarter in anticipation of higher realized natural gas prices and the in service of the Leidy South expansion project. We also drilled five more net wells and completed a 121 more stages than originally planned during the second quarter, highlighting continued efficiency gains in our operations. Our balance sheet remains as strong as ever with less than $900 million of net debt as of quarter end resulting in a net leverage ratio of less than one times trailing 12 month EBITDA. We expect to continue to reduce our absolute debt levels during the third quarter through the repayment of a $100 million tranche of debt maturing in September. On the pricing front, our basis for natural gas prices entering this year has continued to materialize resulting in significant year-over-year gains in natural gas prices across North America.

Through July 2021, NYMEX prices have risen 61%, compared to the same timeframe in 2020, while Leidy prices have increased by 42% over the same period despite transitory pipeline maintenance and additives that resulted in wider reach in our basis differentials during the second quarter of 2021. We have recently witnessed forward prices and cash prices across Appalachia's sales locations beginning to compress and trend back to their historic pricing relationships. We have updated our full year differential guidance of $0.50 to $0.55 to $0.70 to $0.75, primarily as a result of the impact of higher anticipated NYMEX prices relative to our fixed price sales agreement and to a lesser extent wider regional basis differentials. Our prior differential guidance from our first quarter earnings release in the late April was based on a $2.75 NYMEX for the year while our updated guidance is based on an average NYMEX price of approximately $3.35 implied by actual year-to-date and the future curve for the balance of the year. At the midpoint of our updated guidance range, our pre-hedged natural price realizations are now expected to be 18% higher than our prior guidance from late April and 60% higher than our actual 2020 price realizations.

Third quarter 2021 differentials are expected to widen relative to the second quarter with a tightening expected in the fourth quarter. We are extremely encouraged by natural gas prices for the balance of the year with the current NYMEX futures are averaging over $4 despite wider differentials in the northeast during the second quarter, we are optimistic about a strong improvement in local pricing in the second half of the year driven by our expectations for continued strength in regional gas demand, flat production profiles across the Appalachian Basin and a significant reduction in each storage levels which are currently 17% below 2020 levels and 8% below five year average.

Of equal importance, we are very optimistic on the impact of the Leidy South expansion project that is projected to be placed in service during the fourth quarter of 2021 and will deliver 580 million cubic foot per day of Northeast Pennsylvania production volumes to the mid-Atlantic market area, while further improving Cabot's realized pricing. Additionally, the PennEast and Regional East access expansion projects are projected to be in service between 2022 and 2024, which will move even more supply out of the basin and into growing demand markets. As we work forward to 2022, we are extremely encouraged by the improvement in the TAL 2022 NYMEX futures to approximately $3.50 or 34% increase since the beginning of the year.

We are currently unhedged in 2022 providing significant exposure to a strong natural gas price environment that supports an improving cash flow profile. In this morning's release, we reaffirmed our full year standalone 2021 plan to deliver an average net production rate of 2.35 Bcf per day from a capital program of $530 million to $540 million.

Our capital guide range for the year remain unchanged despite the increase in our expected net well drill -- net wells drilled from 80 to 85 resulting from our continued drilling efficiencies. We also provided our third quarter 2021 production guidance range of 2.275 Bcf to 2.325 Bcf per day. The third quarter guidance range implies sequential production growth of 4% relative to the second quarter at the midpoint, while we anticipate approximately 10% of sequential production growth from the third quarter into the fourth quarter coinciding with higher natural gas prices and the in service of the Leidy South expansion project.

Third quarter capital expenditures are expected to decrease slightly relative to second quarter with a greater sequential decline anticipated in the fourth quarter driven by lower activity levels as we enter the winter season. Operationally, we continue to execute our program in line with guidance, while financially, our outlook for 2021 is much stronger as a result of higher expected realized prices. Based on the current strip, our standalone free cash flow for the second half of the year is expected to be approximately two times of first half free cash flow, excluding the impact of merger-related expenses.

I also want to provide a brief update on our pending merge with Cimarex, as we are excited to share about the compelling, strategic and financial benefits of our merge and we continue to make progress towards closing the fourth quarter of 2021. As I noted, when announced the transaction, at the end of May, we carefully studied the long-term benefits of expanding geographically beyond the Marcellus Shale and adding more scale and balance to operations.

The pending merge will accelerate our strategy and create an industry-leading operator with geographic and commodity diversity, scale, financial strength to thrive in today's market and over the long-term across the commodity price cycles. With the addition of Cimarex oil assets in the Permian and Anadarko Basins to our natural gas assets in the Marcellus Shale, we will be a more resilient company with scale and strong positions in the premier oil and gas basins in the United States. Together, we will have top quality assets and the lowest cost of supply profile relative to our upstream peers, which will facilitate free cash flow generation, shareholder value creation and an accelerated return of capital to shareholders. With our increased footprint, we will have complementary oil exposure with low cost, high margin assets and we will be positioned to capture opportunities from both near-term oil demand and long-term natural gas transition to fuel demand.

Compared to Cabot's standalone, the combined business will be able to return substantially more capital to shareholders, especially in light of the improvement in natural gas prices and to a lesser extent oil prices since the deal was announced in late May. This best-in-class capital profile return will be driven by a high quality portfolio that delivers significant free cash flow through cycles, a very low cost of supply through consolidation of Cabot and Cimarex's top-tier teams and assets and a reduced cost of capital due to increased scale, a strong balance sheet and increased liquidity.

In short, combining the Cimarex with Cimarex will create a clearly differentiated energy company with a strong financial foundation and the right assets exposure and capital allocation flexibility to deliver peer-leading capital returns, while maintaining a strong balance sheet. As a stronger, more resilient company, we will be well positioned to generate substantial free cash flow through commodity cycles facilitate best-in-class capital returns and deliver enhanced shareholder value.

I would like to acknowledge the incredible work and dedication of our employees. I believe we have the best employees in the world and I've been inspired by the commitment over the last year. To our Cabot employees, you have my deepest appreciation.

Looking ahead, we remain on track to close the transaction in the fourth quarter of 2021, shortly after receiving shareholder approval. We look forward to continuing to engage with our shareholders in the weeks ahead regarding the benefits of the pending merge. This transaction builds on and accelerates the strategy we have been executing and I hope you will share our excitement and enthusiasm for the future. Together, with Cimarex, we intend to deliver, superior, long-term value creation for our shareholders and other stakeholders.

And Philips, with that, I'll be more happy to answer any questions.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of Leo Mariani with KeyBanc. Your line is open.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Hi guys. I was hoping you could talk a little bit to the mechanics of the 10% production increase in the fourth quarter. It seems like a really big jump here. Just trying to get a sense of whether or not maybe there have been some volumes held back here in 3Q or 2Q just on the wider dips. Just trying to get a sense mechanically if you are just opening up the wells a little bit more or maybe a lot of its timing of turning lines. But just kind of help us get to that 10%?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. We appreciate the question. With the cadence that the North Group has set up and built strong acreage here with us this morning. But with the cadence that has been set up for our 2021 program, which was done certainly a while back, the timing of just when we bring on those locations is what enhances that fourth quarter production growth. And keep in mind, by design somewhat to be able to take advantage of the anticipated fourth quarter increase in the pricing, but it was also designed in anticipation of the Leidy South coming online and commissioning. So, by design, but keep in mind when we have just so few pads that we bring on during the year, we are -- and you had seen it in the past how if you delay three or four or five days bringing on a big pad, it can either enhance your production on any given quarter or slightly reduce your production on any given quarter, but it is a very, very narrow period of time that that's disruptive one way or the other. But this fourth quarter increase was somewhat by design on the cadence us accelerating our capital this year upfront and kind of dissipating a little bit towards the back end into the winter months.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Okay. That's helpful. And maybe just a follow-up on your expectations there. So, can you just update us on kind of when do you think that the Leidy South expansion comes on? Is that going to be earlier in the fourth quarter? Maybe a little bit better and can you talk a little bit to the benefit that you are expecting in terms of local pricing around that? And then, lastly did you mention you are still on hedge for 2022 despite the ability to hedge it, I guess, the $3.50 right now. So maybe just provide any thoughts around that.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Very good. I will just mention first the hedge kind of out of the way. I will let Jeff weigh in also on the Leidy South. But we are looking at the market. We are looking at the macro environment. We keep a close eye on the storage. As we mentioned, storage levels up in the east are drawn down significantly from last year and below the five year average. That's all constructive to a 2022 pricing. So we are keeping a close eye on that. Do I think we'll have some hedge volumes in 2022 at some point? Yes, I do. And our hedge committee meets on a fairly regular basis to have that discussion. But we've been bullish for the reasons we are all aware, where natural gas prices have been going. We are also aware that the capital constraints that is being demonstrated by industry is constructive to the macroenvironment. And we look forward to that continuing certainly for Cabot. The fact, Leidy South, Jeff, I am going to let you talk about and what you expect as you do it.

[Jeffrey Hutton, Senior Vice President of Marketing at Cabot Oil & Gas]

Okay. Well, thank you, Leo. Leidy South, as you know was -- has been on the drawing mode for a number of years and for Cabot, it's an incremental 250,000 a day of the in-basin area. And for Seneca, leadership around the project is 330,000 a day from Western -- Northeast PA. For Cabot, the expansion involved a couple of new compressor stations and some expansion of existing stations. Those projects are early much complete, a little bit happy begun and some we are just seeing there. We are going through to frac that up. But you anticipate a full service on December 1. However, there could be rough volumes available prior to that, the likely timing of outcome time during August. For the rest of the project, that includes the pipe replacement which are on schedule. We do have our monthly upgrades with Williams and Transco and everything is on schedule. So, incremental for Cabot and it does move further volume out of in-basin pricing down to the Mid-Atlantic area. The most part we've already secured markets. We have some opportunities and some auctions here that we are going to wait and see on.

So, we will pick up primarily the difference between the Mid-Atlantic prices and in-basin pricing. Although our expectations with basin pricing will materially improve with the low eastern storage levels and other fundamentals.

[Leo Mariani, Analyst at KeyBanc Capital Markets]

Okay. Thanks, guys.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thank you, Leo

[Operator]

Your next question comes from the line of Arun Jayaram with JPMorgan Chase. Your line is open.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Yes. Good morning. Maybe a follow-up to Leo's question kind of Leidy South. Dan, can you give us maybe your thoughts on how this influenced your views on differentials in 2022 when you get that expansion? And also just wondering if you can maybe remind us of the transport cost on that pipe?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. I'll just make a telecommentary Arun, and I'll let Jeff follow-up. But my view of the differentials is, it's going to be very constructive. We realized the reason for this and having higher differentials is just the gas-on-gas competition and exacerbated by too much production to little takeaway. Half Bcf -- greater than a half a Bcf a day into the markets in the basin and essentially just light out of our neck of the wood is going to be constructive. And we feel very good about it. And I think we'll see improvements and you are already seeing out there some improvements from today as you move up. So, we were constructive and look forward to the other in my commentary. We look forward to the other pipelines into -- in the 2020 to 2022 to 2024 period also to be constructive for the differentials up in the northeast.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Great. And just my follow-up, Dan, we are getting a, call it a near-term kind of price signal on natural gas, but the back end of the curve still kind of remains below $3. Obviously, it's maybe a different decision with the Cimarex merger. But I just want to get your thoughts on what type of price signal would you need to think about adding a little bit of growth to the market is obviously the prices today well above your hurdle rate getting an adequate kind of rate of return.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. We have a program that's lined out and we've as we discussed in the past as couldn't close the maintenance a very low growth. And right now our plan is to stick with that. You can look at a -- you can look at the impacts on differentials and you can look at your program and it makes sense for us to deliver into a market that is well tuned on supply and demand versus one that's oversupplied. We think that makes more sense. We think it is of more value to the shareholders not moving as much gas of your inventory, your asset base for a better price point than moving more gas out of your inventory for a less price point. So we are pleased with what we are -- how we are programming going forward. The increased price is not going to be the driver we look at the dips, the realizations and more importantly, we look at the takeaway that's coming and then measuring its effects on the dips going forward.

And I'll let Jeff make a comment also.

[Jeffrey Hutton, Senior Vice President of Marketing at Cabot Oil & Gas]

Yes. So, to your first question. I would not argue that the fundamentals have driven the or at least the differentials to a point where in total months and with other factors. There has been a little bit disappointing this year. As I spoke earlier about the pipe replacement on the system for the Leidy South expansion, that was a huge issue in May of this year did not affect Cabot operationally than in the basin we saw. Differentials drop from about $0.80 down to $1.80 not really for any good reasons, but the markets did not anticipate the duration of the pipeline pricing of Transco. All that said, back to your original question, the rate is $0.50 per Mmbtu for Cabot on our end to get out of the basin down to the Mid-Atlantic market. That compares to $0.65 rate that we currently have on the Atlantic Cimarex project which was the -- of course the original foundation pipeline.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Great. Thanks for your color and congrats to your team for not hedging. That makes to be a good call I think.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thanks, Arun.

[Operator]

Your next question comes from the line of Josh Silverstein with Wolfe Research. Your line is open.

[Josh Silverstein, Analyst at Wolfe Research]

Yes, thanks. Good morning, guys. Just wanted to talk about the stock pricing and the forward curve. Your stock is down 12% over the past year, while the 2022 curve is now up about 35% over that time period. We are not trying to get aggressive given that that dislocation that you've had that's out there right now, buyback your stock. How to really take advantage of this environment as it seems like that's probably the only way to get this to close right now, given some of the uncertainty around those transactions. So, just curious around that.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. Josh, I'll let Scott to respond to that, but we still have all the arrows in our quiver and we are also certainly being disappointed with where our stock range is. But I'll let Scott handle that.

[Scott Schroeder, Executive Vice President & Chief Financial Officer at Cabot Oil & Gas]

Yes. Josh, I think it's a very good point and I think under normal circumstances and what I mean by normal circumstances will be Cabot standalone. That would be higher on the discussion list, particularly it would have been this week and our Board room and our Board Meeting, especially with mass modeling looking at the fact that we are going to double the free cash flow generation in the second part of the year. Our standalone commitment to return 50% in cash still plenty of availability to make that. What changes that dynamic is the announcement of the merger, but also all the things that we've laid out in anticipation of the closing of the merger, the special dividend and those aspects. We want to make sure and manage our capital in this transitionary period, so that when we come out together by the end of the year, before the quarter close by the time we report at the end of the year, we still have locked down on the balance sheet. This, as Dan said, will be still be an arrow in the quiver. We have had a couple of shareholders talk to us about this in investor calls more recently.

As you know, when we look back at us, it has been part of our dynamic and will continue to be part of the dynamic going forward. As you know in the announcement I am still in this same share in the combined organization. So, appreciate the question. Not the right time at this moment. But past all the noise with the merger and I think it's definitely on the table for a big discussion.

[Josh Silverstein, Analyst at Wolfe Research]

Thanks a lot. Yes, and I agree and I think it could be higher with that uncertainty of the transaction there. And then, just on the free cash flow estimate that you've outlined for between now and 2024, the $5.7 billion, can you just talk about some of the assumptions behind that? How much comes from the Cimarex asset base versus your asset base? Or what are the assumptions around that? Are you, call it, basically in a maintenance mode in Northeast PA? Just any sort of assumptions around that will be helpful.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Well, Josh, higher free cash flow as we mentioned in the second half of the year is going to be, say, double our first half of the year. And just looking at what our capital program allocation is, and looking at what we anticipate the realizations are going to be. And it's -- and I know your models out there are starting to pick up on that also. We still have a -- certainly a significant unhedged volume and rolling into 2022, looking at forward curve on the 2022 free cash flow which from our internal models is significantly better than we had guided looking at it earlier in this year. So, but, right now, our cash flow is designed on our expectations. The design on the macro and our capital program that we've given guidance for.

[Josh Silverstein, Analyst at Wolfe Research]

Alright. Thanks, guys.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thanks, Josh.

[Operator]

Your next question comes from the line of Doug Leggate with Bank of America. Your line is open.

[Doug Leggate, Analyst at Bank of America]

Thanks. I appreciate you are doing on the call this morning. Dan, two questions. [Indecipherable] on takeaway capacity. You kind of laid out over and then post the merger, but you've laid that enough you have given strongly I guess. You've laid out the takeaway capacity expansion you expect over the next couple of years. Does that move Cabot back to expansion mode from the standalone assets? And that's -- what would you see as your --

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Doug, let me interrupt you one second if I could. Your phone and I am talking to Phil, your phone is cutting in and out and I am having a very difficult time receiving your question.

[Doug Leggate, Analyst at Bank of America]

Alright. I'll pick up the phone is that any better, Dan?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. Let's try that.

[Doug Leggate, Analyst at Bank of America]

Okay. I'll try with my headset it's obviously putting up today. Sorry about that. So, my question is on takeaway capacity, what does it means for Cabot's longer term plateau production level? Where do you think you can get to albeit with -- you are obviously not going to be in the shale longer term and a lot of value is already, but what do you think the ultimate takeaway production capacity to be for Cabot longer term? That would be the simple part of the question.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

The ultimate production?

[Doug Leggate, Analyst at Bank of America]

Yes. With the line of sight you have on takeaway capacity today, where do you think you can get to over the next couple of years?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Well, I am not going to speculate out that far. We have a enhancing takeaway capacity in the basin. But by the Leidy South and the PennEast and the Regional Access, so we are pleased to see additional takeaways there that we have a long, long runway of premier locations in front of us. We've managed our program right now to glide on a maintenance capital in light of the macro. And so, right now, the shareholders like to see a significant amount of free cash flow. They also like to see a strong balance sheet. We are able to deliver both of those, but I would only be speculating as far as maybe the timing of those lines when they would be commissioned and what the macro market is way out in front of us to answer that. I can say this. If you are just wanting drill wells and drill them for a long time and bring in the equipment and frac crews to be able to get them done to increase production, it could increase significantly from where it is today and I mean, significantly. But I am not going speculate on the amount where it might go in the next couple of years.

[Doug Leggate, Analyst at Bank of America]

And Matt has done a pretty good job explaining how you guys kind of led to charge on capital discipline during your ten year time. So I'll congratulate you on that. My second question if I may is, really on the merger. And again, for Cabot, this has clearly achieved a lot of things. The S4 is now. We cannot see what happened. But I am just curious to the extent that you can share from the discussions you had with your shareholders, are you at all concerned about the pushback from Cimarex shareholders that are going to own a much gassier company and as the selling company did not going to process. Are you concerned that that could get in the way of this closing? I am just curious looking your pushback to them.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Well, I am kind of constrained somewhat on the details of the merge. But I will say this, that we are combining these companies for the reasons that I outlined in my comments. It's going to be a much stronger company, more resilient company and positioned to drive the significant free cash flow across the cycles. We are seeing cycles right now where natural gas is having its another day in the sun and it's enhancing the cash flow of Cabot and I think it's a benefit to both Cabot and in a combined world, it would be a benefit. So, long-term, and you look at the natural gas as a dynamic energy product of the future, I don't know how you cannot embrace a combination that creates the resiliency and the type of company that we are going to have going forward with an extremely strong balance sheet and with a disciplined objective of delivering significant free cash flow back to shareholders. I don't know how any shareholder could not be excited about the future of this combination.

[Doug Leggate, Analyst at Bank of America]

Yes, I think the issue is lack of industrial overlap. Dan, as I am sure you know, because all of the above could have been achieved with a lot more synergies I think is the issue. But I appreciate your comments and thanks so much for the answer.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thank you.

[Operator]

Your next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Yes. Good morning, team. Just wanted to follow-up on -- has been following the announcement, then at the acquisition, you talked about a variable dividend and you put out a reasonable peak of the estimate of what you think is special or a dividend could be. Can you talk about as you look at the forward curve into 2022? Give us an estimate of what you think that variable dividend could look like next year?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes, I will say this. I think, the variable dividend is going to look very good and particularly compared to the way it looked at the beginning of this year. However, I'll let Scott give you some color off of.

[Scott Schroeder, Executive Vice President & Chief Financial Officer at Cabot Oil & Gas]

Yes. Hi, Neil. Thanks, Neil. Remember the variable dividend or we called it supplemental was to return 50% of the free cash flow in cash back to shareholders. And that is memorialized going forward in the new company. So, obviously, in the new company, going forward with the broader base, the broader commodity mix, obviously the higher realizations on the oil side, it's going to be fairly robust in terms of not only what's part of the variable, the increase in the base dividend to the $0.50 level. It's also been a pre-announced for the transaction. So, again, as we got to come together, put the models together, put combined guidance out for the new year, but I think it's safe to say that remember the key point in that message was a minimum of 50% of free cash flow is being returned in cash.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Okay, great. And then, the follow-up is just on the Henry hub gas market here. As you think about overall gas flat prices, if we do have a cold winter, you can start to really design some real upside scenarios. Can you talk about what you ultimately think creates a feeling on natural gas in that scenario? Historically, we thought about gas to coal substitution as the balancing item, but with it as much coal-fired capacity having been shut as it has that that mechanism right now be as pronounced. But you also have the potential for Canadian gas flow for example or shutting down the LNG org. So, how do you think about, what is the mechanism that on the natural gas side that can offset a potential demand impact due to a very cold winter?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. Thanks, Neil and I will turn that to Jeff, our gas expert.

[Jeffrey Hutton, Senior Vice President of Marketing at Cabot Oil & Gas]

Yes, Neil, that's an intriguing question, because we have -- we thought about that here too. The impact of the demand across the country currently was record exports into Mexico and obviously a very robust LNG export market that is perhaps consistent day in and day out. You got a few hiccups here and there with the evolving maintenance and things like that. But just over the last couple of years we are watching the demand increase. Even in the Pacific Northwest you mentioned the Canadian imports that's been interesting to watch as we see agro products out there and the positioning is done more exports from Canada has in that direction and then to the upper Midwest. That's actually influenced the source levels in the upper Midwest. I think they are -- well, somewhere well over a 100 Bcf well this time last year, same as the east coast levels. So your question about how can it go is a good question. And our many units supports -- we think about that or -- about that. And so, fundamentally we are set up for a good year. A year of capital employed and yes, a good winter spot for the country this year. It impacts the system and there will be price increases. We are prepared [indecipherable] our customers. The source levels will not get to where they were this time last year as well an impact.

So, how, I think that go is relative taking again the New York market, the Boston market, the Chicago market and other areas that do lack the amount of storage that we had last year. So, we are expecting later. I don't know if there is a cap of necessarily for, $4, $5, $6, we've seen $8 in the New York market in the past. So, I think it's all on the table at this point.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Thanks, guys.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thanks you, Neil.

[Operator]

Your next question comes from the line of David Heikkinen with Pickering Energy Partners. Your line is open.

[David Heikkinen, Analyst at Pickering Energy Partners]

Yes. Good morning, all and thanks for taking the question. I wanted to make sure that I am thinking about one of the synergies of the merger correctly. So, for standalone Cabot, we had your cash taxes increasing over time just given where you were and now, particularly, with the increasing commodity prices, just wanted to get some of your thoughts on deferred tax percentage. But then once you are merged, you get the benefit of the Cimarex NOLs and if you could talk a little bit about how cash taxes change in the Cabot standalone and then the new company, that just be helpful to kind of quantify that benefit to you?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

No. I have both Matt and Scott here and we have all kinds of modeling run on all of that getting into the details, David, we can do once we get the -- all the shareholder approval. But --

[David Heikkinen, Analyst at Pickering Energy Partners]

Maybe what would your cash taxes have been just standalone would be helpful and then talk about with those merge?

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Yes. Okay. Thanks, David.

[Matt Kerin, Vice President of Finance & Treasurer at Cabot Oil & Gas]

Hey, David. It's Matt. Yes we are currently 30% deferred this year 70% current and that could be maybe even with the environment that we are looking at today. As we all go to 2022 and beyond, if we were a standalone and we'd be looking that number at our deferred and so we are taking down a little bit. But in the 350 environment, although that's 20%, 25% next year it's something on a new on the 350, but the double then maybe very sensitive to the movement in pricing and obviously what we are going to look at that we certainly will be able to take advantage of our IT.

[David Heikkinen, Analyst at Pickering Energy Partners]

Yes. That's moving commodity is makes us feel even better for you all as you get that benefit. So I was just trying to quantify. That's helpful. Thank you.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thanks, David.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Dan Dinges for closing remarks.

[Dan Dinges, Chairman, President & Chief Executive Officer at Cabot Oil & Gas]

Thank you, Philippe, and thank you all for tuning in. We look forward to the future for Cabot, its shareholders and we are extremely excited about the combination with Cimarex, the quality of people they have. The asset quality they have. It's a bright, bright opportunity for the future for both shareholder groups. And we are certainly committed to be able to deliver all that we've represented to deliver if not more, once we obtain the shareholder approval and get closed in the early fourth quarter.

So, thanks again for your interest. And we look forward to the next meeting we have. Thank you very much.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Dan Dinges, Chairman, President & Chief Executive Officer
• Jeffrey Hutton, Senior Vice President of Marketing
• Scott Schroeder, Executive Vice President & Chief Financial Officer
• Matt Kerin, Vice President of Finance & Treasurer

Analysts

• Leo Mariani, KeyBanc Capital Markets
• Arun Jayaram, JPMorgan Chase & Co.
• Josh Silverstein, Wolfe Research
• Doug Leggate, Bank of America Co.
• Neil Mehta, The Goldman Sachs Group, Inc.
• David Heikkinen, Pickering Energy Partners