Jul 23, 2015
Executives
Patrick J. Kane - Chief Investor Relations Officer Philip P.
Conti - Director, Senior Vice President and Chief Financial Officer Steven T. Schlotterbeck - Executive VP, President-Exploration & Production David L.
Porges - Chairman, President & Chief Executive Officer
Analysts
Phillip J. Jungwirth - BMO Capital Markets (United States) Scott Hanold - RBC Capital Markets LLC Holly Barrett Stewart - Scotia Howard Weil Michael Anthony Hall - Heikkinen Energy Advisors Neal D.
Dingmann - Suntrust Robinson Humphrey, Inc. Sameer Uplenchwar - GMP Securities LP Drew E.
Venker - Morgan Stanley & Co. LLC Daniel D.
Guffey - Stifel, Nicolaus & Co., Inc.
Operator
Please stand by. We're about to begin.
Good day and welcome to the EQT Corporation Second Quarter 2015 Earnings Conference Call. Today's call is being recorded.
After today's presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Patrick Kane.
Please go ahead.
Patrick J. Kane - Chief Investor Relations Officer
Thanks, Kyle. Good morning, everyone, and thank you for participating in EQT Corporation's conference call.
With me today are Dave Porges, President and Chief Executive Officer; Phil Conti, Senior Vice President and Chief Financial Officer; Randy Crawford, Senior Vice President and President of Midstream and Commercial; and Steve Schlotterbeck, Executive Vice President and President of Exploration and Production. This call will be replayed for a seven-day period beginning at approximately 1:30 p.m.
The telephone number for the replay is 719-457-0820. The confirmation code is 9281362.
The call will also be available on our website for seven days. To remind you, the results of EQT Midstream Partners, ticker EQM and EQT GP Holdings, ticker EQGP are consolidated in EQT's results.
Earlier this morning, there was a separate joint press release issued by EQM and EQGP. The partnership's conference call at 11:30 – there was a conference call at 11:30 today for the partnerships, which require that we take the last question at 11:20 today.
The dial-in number for that call is 913-312-9034 with a confirmation code of 7812066. Later today, we will be updating our analyst presentation on our website to reflect a 5% reduction in cost per well since April, 16% year-to-date.
We also updated our base case lateral lengths to better reflect the actual drilling program and made other minor updates. Under news releases, we updated our guidance metrics for 2015, including a modest reduction of our CapEx of approximately $100 million.
In just a moment, Phil will summarize EQT's results; next Steve will have a brief topical update and finally Dave will provide a review of EQGP's IPO including valuation implications. Following the prepared remarks, Dave, Phil, Randy, and Steve will be available to answer your questions.
I'd like to remind you that today's call may contain forward-looking statements. You can find factors that could cause the company's actual results to differ materially from these forward-looking statements listed in today's press release and under risk factors in EQT's Form 10-K for the year-ended December 31, 2014 as updated by any subsequent Form 10-Qs, which are on file with the SEC and available on our website.
Today's call may also contain certain non-GAAP financial measures. Please refer to this morning's press release for important disclosures regarding such measures including reconciliations to the most comparable GAAP financial measure.
I'd now like to turn the call over to Phil Conti.
Philip P. Conti - Director, Senior Vice President and Chief Financial Officer
Thanks, Pat, and good morning everyone. As you read in the press release this morning, EQT announced second quarter 2015 adjusted earnings per diluted share of $0.01, which represents a $0.60 per share decrease from adjusted EPS in the second quarter of 2014.
Adjusted operating cash flow attributable to EQT also decreased by $202.3 million to $80.7 million for the quarter. Results in the quarter were significantly negatively impacted by lower commodity prices, which I will address in a minute.
There were two fairly significant non-cash items that partially offset each other in the adjusted earnings this quarter. First, we recorded non-cash losses on hedges of $25.9 million during the quarter.
The second item was a positive $35.7 million benefit based on IRS guidance on the regulatory ratemaking treatment of a like kind exchange associated with the utility sale, which had the effect of favorably distorting the reported effective tax rate for the second quarter. This tax benefit will reverse either over the life of the assets or upon a taxable disposition such as a future dropdown.
Excluding this tax benefit, our year-to-date effective tax rate was 10.5%, which is still abnormally low due to an increase in our earnings attributable to the non-controlling unitholders of EQM and EQGP, which are not tax affected as well as negative production operating income as a result of lower commodity prices. As Pat mentioned, EQT Midstream Partners and EQT GP Holdings results are consolidated in EQT Corps result.
And EQT recorded $58.2 million of net income attributable to non-controlling interests or $0.38 per diluted share in the second quarter 2015. Other than that, the second quarter was fairly straightforward and I will keep my remarks rather brief.
Starting with EQT Production, the story here continues to be growth in sales of produced natural gas, although that growth was overshadowed this period by lower commodity prices. Production sales volume in the recently completed quarter was 34% higher than the second quarter 2014.
Despite that volume growth, we recorded a $66.9 million operating loss in the quarter at production, including the non-cash losses on hedges of $25.9 million that I just mentioned and that compared to operating income of $113.7 million last year, excluding the $31 million gain on the asset exchange in the second quarter of 2014. So again, the significantly lower average realized price more than offset the volume growth.
Operating revenues were $269.5 million excluding the non-cash loss, $113.5 million lower than last year's second quarter. The realized price at EQT production was $1.41 per Mcf equivalent, compared to $3 per Mcf equivalent last year.
And you'll find detailed components of the price differences in the tables in this morning's release. Total operating expenses at EQT Production were $310.5 million, or $50.7 million higher quarter-over-quarter.
DD&A was $37.1 million higher. Transportation and processing expenses were about $11 million higher.
And LOE, excluding production taxes, were about $3 million higher, all consistent with the volume growth. Exploration expense including $9.4 million of non-cash lease impairments was $4 million higher quarter-over-quarter.
Moving on to the Midstream business, operating income here was $108.2 million, up 22% over the second quarter of 2014. This is consistent with the growth of gathered volumes and increased capacity-based transmission revenue.
Gathering net operating revenues increased by 35% to $122.9 million as gathering volumes increased by 35%. Transmission net revenues increased 19% to $61.1 million, as additional firm capacity was added over the past year, mostly in the fourth quarter of 2014.
Storage, marketing and other net operating revenues were down $4.3 million in the quarter. Total operating expenses at Midstream were $81.2 million or $10.6 million higher as a result of our continuing growth.
On a per unit basis, however, G&C expense was down 19% as a result of volumes growing faster than expenses. Just a brief note on liquidity; EQT had about $2 billion in cash on hand at quarter end, excluding the cash on hand at EQM and EQGP as well as full availability under EQT's $1.5 billion credit facility.
So we do remain in a great liquidity position to accomplish our goals for the foreseeable future. Our current estimate of 2015 EQT operating cash flow is still $900 million, adjusted to exclude the non-controlling interest portion of EQM and EQGP's cash flow.
And with that, I'll turn the call over to Steve Schlotterbeck.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Thank you, Phil. Today I'll give you an update on the two topics of interest to investors over the past few months, upstream M&A and our deep Utica well.
On the upstream M&A front, we've not seen many deals getting done. It seems that sellers have not changed their value expectations to reflect a natural gas strip that is significantly lower than a year ago.
We continue to believe that there is significant value creation opportunity by consolidating core Marcellus positions into larger more contiguous blocks. This would not only add to our core Marcellus development inventory, but more importantly, it would increase the economic value of our existing leasehold by taking advantage of the significant economies of scale of larger multi-well pads and longer laterals.
We also believe that attractive M&A opportunities may present themselves as the effects of the low price environment become more pronounced for companies that entered this cycle with insufficient liquidity. However, we will be patient to ensure that any M&A activity we pursue will create additional value for our shareholders.
Moving on to our dry gas Utica well. Last week we successfully completed the fracking of this well.
The frac was an 18 stage job in a 3,221 foot lateral that utilized ceramic proppant. We were able to successfully place 100% of the planned proppant while maintaining our desired pumping rates.
Last night we concluded a 24 hour deliverability test to sales of this well. During this test, the well averaged 72.9 million cubic feet per day with an average flowing casing pressure of 8,641 psi.
This equates to a 24 hour IP per 1,000 foot of lateral of 22.6 million cubic feet per day. To the best of our knowledge, this is the highest reported IP of any Utica well to-date and the per-foot rate is more than double the previous high.
As you might expect, we're very pleased with the results of this well. I want to make note of the fact that we were able to flow this well directly into the sales pipeline without shutting in production from our other wells.
This was possible primarily because of the integrated nature of our Upstream and Midstream businesses. Our Midstream group was able to reconfigure the gathering system to allow this capacity to be available, which likely would not have been possible on a third-party system.
Our current plan is to produce this well to choke controlled rate of approximately 24 million cubic feet per day to manage the stress on the proppant and to monitor the pressure decline so we can begin to get an understanding of the decline profile and EUR potential of this well. Currently the well is producing 26 million cubic feet per day and approximately 2,000 barrels of frac water per day with flowing casing pressure of 9,555 psi.
In fact, the flowing pressure is currently climbing as the well continues to clean up. In addition, we plan to spud another deep Utica test in Wetzel County, West Virginia, in the third quarter of this year.
Following that test, we will evaluate our next steps, where we expect to quickly begin focusing on lowering the cost of drilling and completing these wells. Our current estimate is that wells in this area can be drilled at a total cost of approximately $12.5 million for a 5,400 foot lateral, but it will take us several more wells to get fully up the learning curve.
Finally, I'd like to take a moment to congratulate all the EQT folks involved in this success. As you've heard me say before, this well was the most technically challenging well we've ever drilled and completed.
Our outstanding team was up to the challenge and has delivered a truly phenomenal well while continuing to maintain a safe and environmentally responsible operation. I'll now turn the call over to Dave Porges for his comments.
David L. Porges - Chairman, President & Chief Executive Officer
Thank you, Steve. I'm going to mainly discuss topics related to EQGP.
But before doing so, want to convey my congratulations to Steve and his team for the recently completed Utica well. They provided me with daily updates that focused on the issues that we're created by the tremendous reservoir pressures we encountered, but also made clear their excitement about the possibilities and clearly that excitement was more than justified.
Great job. Now, on to EQT GP Holdings LP, or EQGP, which completed its initial public offering of 26.5 million units priced at $27 per unit in mid-May.
To remind you of our motivation to take the GP public, we were seeking more midstream value transparency for EQT investors. EQT Corporation owns 90% of EQGP, a value of about $7.6 billion or about $50 per EQT share.
This is a pre-tax value and the tax basis is low. Assuming a 15% cash tax obligation, our stake in EQGP is worth about $6.5 billion.
We also still have about $800 million of midstream assets that have yet to be dropped for a total midstream value of $7.3 million. EQT's market cap is $11.1 billion that was based on last night's close, implying a value of EQT production of $3.8 billion.
Using consensus 2016 cash flow estimates of $995 million, EQT production is being valued at less than four times cash flow, less than half the multiple of our Marcellus peers. So either we are not getting full value on our stock for our Midstream business or our Production business, or a combination of both.
We will focus on our IR effort toward highlighting the value of our company and still anticipate that the transparency provided from a publicly traded GP should start showing up in EQT's stock price. While the valuation discount creates tension, we think having the two businesses together continues to create significant value for both Midstream and Production, as evidenced by the relative outperformance of EQT and EQM stocks.
The MLP has provided a significant source of capital to fund development of our Marcellus and Utica acreage. Those volumes are flowing through the Midstream pipes, generating earnings growth at Midstream.
Furthermore, matching the deductions generated from the capital investments at Production minimizes the cash tax hit from the dropdowns of Midstream assets to EQM. More important strategically is that the combined companies also make projects such as the Ohio Valley Connector and the Mountain Valley Pipeline more viable.
This is because the Midstream starts with a significant anchor shipper in the form of EQT Production, and EQT Production gets optimally located pipeline projects. However, we recognize that over time, as EQT Production's growth rate slows and EQM's third-party growth accelerates, the synergies of having the two units together is reduced and the uplift in market value of a separation could exceed the value creation from the synergies.
We are frequently asked about the tax consequences of monetizing our EQGP stake. So I will summarize the tax impact of a few scenarios we get asked about.
In the event of future sales of EQGP units by EQT, up to about $1 billion per year, we would be able to use our current year drilling deductions to offset the gain on the sale of units. We would still expect to incur alternative minimum tax obligation of between 10% and 15%.
Given our cash balance and planned plan dropdown in the first half of next year, it is unlikely that we would need to access this source of capital for some time, but did want to respond to inquiries about that hypothetical situation. Given the strong M&A market in the Midstream space, we also get asked what would happen in a hypothetical situation in which we sell the entire EQGP stake.
As you likely inferred from my comments on ratable sales, a sale of the entire stake would result in a large gain that would overwhelm our drilling deductions. In that case, the proceeds and excess of the available deductions would be subject to a tax greater than 15%, but well less than the 35% federal tax rate because of carry backs.
This would be the worst case from a tax leakage perspective, though the premium that would be required to make that a viable scenario would offset some or even most of the tax leakage. Clearly in that scenario, we would look for a more tax efficient transaction and would also need to find a way to get that value to EQT shareholders rather than just leave that much cash on the balance sheet.
Finally, a tax efficient separation of Midstream from Production is an alternative. If done properly, a separation would not trigger a tax obligation and to answer questions we have received on that scenario, we continue to do a lot of work to ensure that we would not inadvertently endanger a tax efficient separation.
So my purpose in this discussion of EQGP was to discuss value transparency and also answer questions related to tax issues. The Utica results also point toward the need to consider Midstream implications of a potential further shift of the North American natural gas supply mix toward the core Marcellus Utica play.
As Steve alluded to, coordination between Upstream and Midstream is even more important, if these large Utica wells become a norm. In addition, even, or perhaps especially in a low price environment, an environment largely created by Marcellus Utica productivity, the organic opportunity for Midstream investment in this region grows.
We will continue to focus on gathering and header projects with EQM's announcement this morning of another large investment for Range Resources being the latest example. We will also continue to look for the occasional complementary takeaway project, such as OVC and MVP.
We are not convinced that these growth prospects are fully reflected in the unit prices of EQM or EQGP, yet the growth prospects for both EQM and EQGP look even greater in the wake of our enormous Utica well and the great results our neighbors have also been getting in their early Utica wells. The Utica is not exactly a positive for longer term natural gas prices, but it is very much a positive for those of us with core Utica positions and those of us with Midstream assets in this region.
We will sort through these Midstream implications in the coming months and share our thoughts with you in future calls. In conclusion, EQT is committed to increasing the value of our vast resource by intelligently accelerating the monetization of our reserves and other opportunities.
We have a very strong balance sheet which will allow us to continue to be focused on doing what we can to increase the value of your shares. We look forward to continuing to execute on our commitment to our shareholders and appreciate your continued support.
And with that, I'll turn the call back over to Pat Kane.
Patrick J. Kane - Chief Investor Relations Officer
Thank you, Dave. This concludes the comments portion of the call.
Kyle, can we please open the call for questions?
Operator
Thank you. And we'll take our next question from Philip Jungwirth from BMO.
Phillip J. Jungwirth - BMO Capital Markets (United States)
Hi. Good morning.
Can you expand upon the reduction in the 2015 capital budget by $100 million? Is that all E&P that can be attributed to incremental cost deflation because it looks like you spent roughly 60% of the $1.7 billion budget which would imply a second half quarterly run rate of $350 million or so?
Or if you're lowering that budget to $1.6 billion, a run rate of about $300 million per quarter.
Philip P. Conti - Director, Senior Vice President and Chief Financial Officer
No, Phil about $25 million to $30 million of that is the E&P, because the – some, not all the well cost will see the reduction for the full year. The rest is our Midstream projects that are basically slipping into next year on the gathering side.
Phillip J. Jungwirth - BMO Capital Markets (United States)
Okay, great. And then with the success in the Utica, I mean, EQT is still spending quite a bit of money in the Upper Devonian, which you guys show as a lower return zone.
I think 22% of the spuds this year are going to the Upper Devonian. Is there a nat gas price where you would rethink that co-development with the Marcellus?
And then also, how would that compete for capital given the success in Utica?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Phil, This is Steve. I think we've already reassessed our Upper Devonian areas based on the lower gas prices, so we'll continue to do that.
There are certain areas at the current prices that make sense. And I think relative to the Utica, while this is clearly a phenomenal well, we need to get up the learning curve and get our cost down and get some decline history of this well, so we truly understand what the economics are.
I would say the initial data far exceeds our expectation. So I think that's a very positive sign for the economics of the Utica, but we're going to need to drill a few more wells and understand the type curve a lot better before we make any major shifts to our development plan.
Phillip J. Jungwirth - BMO Capital Markets (United States)
Okay, great. And then, my last question, you highlighted the implied some of the parts multiple for the MP business being roughly half what the publicly traded pure play comps are trading at.
In your view what would you attribute this discount to more? Is that the market view that peers have higher returns, greater inventory depth or is it simply a conglomerate discount that won't be unlocked unless there's a full split of the Upstream from Midstream?
David L. Porges - Chairman, President & Chief Executive Officer
On my basic view, this is Dave, I'll let Pat answer too though, an inadequate investor relations effort.
Patrick J. Kane - Chief Investor Relations Officer
I would agree with that.
David L. Porges - Chairman, President & Chief Executive Officer
But Pat, do you – I haven't actually studied why that would be so I'm happy to...
Patrick J. Kane - Chief Investor Relations Officer
It's very hard to know. If you start with the Midstream value, the Upstream looks cheap.
If you start with an Upstream value then the Midstream looks cheap. So it seems to be the conglomerate issue.
Phillip J. Jungwirth - BMO Capital Markets (United States)
Great. Thanks, guys.
Operator
We'll take our next question from Scott Hanold with RBC Capital Markets.
Scott Hanold - RBC Capital Markets LLC
Hey. Thanks, guys.
Steve, that, obviously dry gas Utica well came out at a pretty robust rate and it sounds like you guys are trying to manage it around 26 million cubic feet a day and I know it's really early. But based on what you've seen from some of the other wells and what you all know from this one, I guess in the short timeframe that you've had it online, what is your expectation in terms of that mid-20 million cubic feet a day rate?
How long could that stay flat and implications on when an EUR, just an early-day EUR could look like?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
I think, Scott, we literally finished the deliverability test last night and the results were quite a bit in excess of our expectation, so I think it's a little premature for us to be predicting EURs and even the length of time at the current rate. We're going to need to study it a little while before we have any reasonable sense of that, but I think given the 24 hours we've seen, it's a very strong well and the pressures seem to be holding up very well.
So, in fact it's still cleaning up, so like I mentioned in my comments, the pressure's actually still inclining a bit as the water production declines. So it hasn't even really fully cleaned up yet for us to get a good clean data set.
So I think you're going to have to wait a little while for those kinds of predictions.
Scott Hanold - RBC Capital Markets LLC
Okay. Can I ask a question on what – when you look at some of the other dry gas Utica wells that have been drilled and what had been your general expectation?
You said it exceeded expectation, but what was your sense of what EURs can be based on the dozen or so wells that have been drilled with some history in the basin?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Well, again, I don't know that I want to comment on EURs of competitors' wells. I think you can refer to what they thought.
What I will say is, we had set up to flow this well at 60 million cubic feet a day and to be honest I thought that was a bit insane. I didn't expect that from this short lateral.
We had some extra units out there in case of mechanical problems and once we saw what this well was capable of, those backups became primary units. So that we could go above the 60 million cubic feet a day and frankly we were struggling to hold this well back at those rates.
So it definitely was – we were expecting a good result, setting up for 60 million cubic feet a day and then the see these rates with even higher pressures than we expected, which means lower drawdown, so we didn't have to pull on this well very hard at all to get those rates. That makes us have to go back and reassess what's better about this, what's better about the reservoir than we expected.
Do we have the right gas in place numbers or is there more gas in place. So it's premature really to comment on any of that given less than two days of production data on one well.
Scott Hanold - RBC Capital Markets LLC
In the Wetzel County well that you all will be drilling, what is the relative depth to that compared to what this one was at? Is it (26:30)
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
It's similar.
Scott Hanold - RBC Capital Markets LLC
It's a similar depth.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
It's similar. It's in that 13,000 foot to 14,000 foot range.
Scott Hanold - RBC Capital Markets LLC
Okay. Okay.
And I guess my next line of questioning is, you had a lot of frac stages I guess that weren't online at the end of this quarter. Could you give us a general discussion on why that number was so high at the end of the quarter and what we should expect in the coming I guess quarter or two?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Sure. Same answer I give every call.
That's completely driven by timing of multi-well pads and long laterals with lots of stages. What I will tell you that I really haven't provided on future calls is we expect an increase as the year goes on in number of stages we're turning in line per quarter with the fourth quarter of this year being the highest for the year, which will drive production results in early 2016, but it's strictly driven by the timing of rig moves on big pads.
Scott Hanold - RBC Capital Markets LLC
Okay. And just so I understand that right, so like if there was a multi-well pad there, you're going to complete a certain amount of those wells, but that pad may not be timed correctly to get it online by the end of the quarter, but it would be, for example, in early July, and so those would come online a little bit later.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Exactly. Yeah.
Scott Hanold - RBC Capital Markets LLC
Okay. Understood.
Thanks a lot guys.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
You bet.
Operator
We'll take our next question from Holly Stuart from Howard Weil.
Holly Barrett Stewart - Scotia Howard Weil
Good morning, gentlemen.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Morning.
Holly Barrett Stewart - Scotia Howard Weil
So, Dave, I appreciate the comments on the valuation discrepancy. It sounds like as you get Pat working harder, this discrepancy will erode over time.
David L. Porges - Chairman, President & Chief Executive Officer
He said it was the sell side that had to step up, just so you know.
Holly Barrett Stewart - Scotia Howard Weil
You guys have certainly not been ones to sit on your hands. So I guess I'll leave that discussion there.
Maybe bigger picture on 2016 thoughts, maybe just kind of thinking similar commodity levels, commodity price levels, how does your activity change maybe from this year to next year?
David L. Porges - Chairman, President & Chief Executive Officer
We'll have to take a look at that in the normal course of events. We do try to be influenced more, given the lags of the wells, by the longer-term strip, something that will match when the gas is actually getting sold.
And of course one of the things that's going on in the basin right now is that supply is outstripping for the time being takeaway capacity. But a number of projects, our projects, I mean EQM projects as well as other midstream companies' projects are coming online over the course of the next couple of years.
And that at least will help with that. But clearly we will have to relook at activity level and where we allocate resources.
As Steve mentioned, it's very early with the Utica to figure out what the implications are, but if we keep getting these kinds of results and our peers keep getting these kinds of results, then I do think we have to assume that that's going to shift the supply demand balance again, which will mean that some places probably don't make sense to develop. It will probably mean that the Marcellus Utica though, in future would make up an even higher percentage of the overall mix and we'd have to take that into account, the overall country.
The North America's supply mix and we'll have to take that into account also. So clearly, we have to be working all of that in ahead of coming up with a budget for 2016.
Holly Barrett Stewart - Scotia Howard Weil
Okay. Perfect.
And then maybe Dave, just one other kind of bigger picture question on the cash. I look back through notes from, I guess, the end of the year and you kind of said financial stress makes you want to keep more cash on the balance sheet and come out stronger on the other side.
Assuming things haven't changed in that line of thinking, but any color there would be helpful.
David L. Porges - Chairman, President & Chief Executive Officer
That's exactly right. Still, wearing the fired retardant pants so that it doesn't burn a hole in our pockets.
But, look, as Steve mentioned, if there's opportunities, especially on the Upstream side to enhance our current acreage position, then that's great. We want to be prepared to take advantage of that.
But this is one of those times where I'm, geez, after the last three months, I think just for the whole sector we'd probably say no one would feel bad about having the liquidity position that we've got. And if anything, I think we feel better about it and I'm guessing we will get fewer questions about what we're going to do with all that cash because of this environment.
That it just means that we're able to make decisions that we think are the right economic decisions for our shareholders rather than being overly influenced by near-term liquidity matters.
Holly Barrett Stewart - Scotia Howard Weil
Yep. Perfect.
And then just maybe one final minutia question. On the NGL realizations, I'm assuming no change to the barrel there.
We're still rejecting ethane?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yes.
David L. Porges - Chairman, President & Chief Executive Officer
Oh, yeah.
Holly Barrett Stewart - Scotia Howard Weil
Okay.
David L. Porges - Chairman, President & Chief Executive Officer
You know, for years, our view, or at least my view has been getting heat value for ethane is, on a netback basis, not a bad deal versus the alternative. And I got to tell you, nothing's happened in 2015 that would have changed my mind on that.
Holly Barrett Stewart - Scotia Howard Weil
Yep. Okay.
Great. Thanks, guys.
Operator
We'll take our next question from Michael Hall from Heikkinen Energy Advisors.
Michael Anthony Hall - Heikkinen Energy Advisors
Thanks. Good morning.
Just wanted to come at I guess the Utica question on maybe a little bit different way as it relates to competitiveness within the inventory. What sort of EUR level, given a $12.5 million development cost, would compete with the Marcellus in your thinking?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Again, I'm going to pass on answering that question because it's not just – it's not based on EURs, it's based on the decline profile of the well and with 24 hours of data, we just don't know. So, it's going to take some time.
Michael Anthony Hall - Heikkinen Energy Advisors
Fair enough. Worth a shot.
I guess somewhat similar to some of the questions I think that have been asked. But I don't think it's been asked.
Are you all curtailing any material amounts of production? You have a lot of wells come on in the quarter, but gas production was relatively flat.
Just appears you're curtaining much in the way...
David L. Porges - Chairman, President & Chief Executive Officer
No operational issues, but...
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah, nothing, nothing in beyond that is just a normal day-to-day operations that's, that's likely due to the fact and a lot of those stages came on late in the quarter and just didn't have time to contribute.
Michael Anthony Hall - Heikkinen Energy Advisors
Yeah, that would make sense for the third quarter guidance. Okay, and then, I guess, the netback to EQT production after working through the fixed, more fixed type Midstream costs has fallen quite a bit quarter-on-quarter and obviously year-on-year even more so.
How sensitive is the second half program to prices given the fixed cost nature of some of the cost structure?
David L. Porges - Chairman, President & Chief Executive Officer
Yeah. There was a second half of the program isn't really sensitive to near term spot prices.
Michael Anthony Hall - Heikkinen Energy Advisors
Okay.
David L. Porges - Chairman, President & Chief Executive Officer
We always, again, evaluate based on what the strip is going to be, because there's nothing we will do in the second half that would result in revenues in 2015. Really at this point probably there's nothing we do going forward that's going to result in much in the way of revenues before the second half of 2016, just because of the lags involved.
So that's really more what we follow, is what's happening. And we do recognize the strip has declined.
But the other issues on the seasonality with basis has been probably a bigger deal and that's going to be – so we do time some of these activities to when takeaway projects are going to be coming online.
Michael Anthony Hall - Heikkinen Energy Advisors
Yeah, I guess that's what I was getting at, was more the strip level and if the strip falls more materially...
David L. Porges - Chairman, President & Chief Executive Officer
Yeah, you could always, absolutely always re-access what the economics look like, absolutely.
Michael Anthony Hall - Heikkinen Energy Advisors
Okay. And then as I think about the G&P, the EQT Midstream cost as well as the G&P to third parties, how should we, just from a high level modeling standpoint, think about those on a per-unit basis, call it over the next 18 months?
Are there any general pressures one way or the other that we ought to keep in mind?
Philip P. Conti - Director, Senior Vice President and Chief Financial Officer
Yeah, they're pretty – been pretty steady. They move a little bit, Michael.
Later today we'll put out updated guidance for the rest of 2015 and you'll see that the second quarter numbers are consistent with that.
Michael Anthony Hall - Heikkinen Energy Advisors
Okay. Sounds great.
Appreciate it. Thanks, guys.
David L. Porges - Chairman, President & Chief Executive Officer
Thank you.
Operator
We'll take our next question from Neal Dingmann with SunTrust.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
Morning, guys. Say, great well.
Say, Steve, I'm just wondering on the 400, I think on the slide it shows that 400,000 potential dry gas Utica acres. What's your thought as far as fully delineating that or will you just sort of stick to this, call it – I don't want to call a core yet, because you don't really know yet where the core is, but we stick to a concentrated area.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah, I think our plan will be to drill the Wetzel County, West Virginia well later this year, and that, we believe both our current well and that well geologically should be very similar, so we think that. And we think between those two wells and the acreage that they will delineate, we will have delineated plenty given what these wells will produce.
And then we'll likely, rather than focus on delineating the extent of the play, we'll be focused more on cost reductions and efficiencies on the drilling and completion side and probably let our competitors do a little more of defining the limits of the play. So I think you'll see most of our drilling concentrated in that southwestern PA, northern West Virginia corridor where we think we have some really excellent Utica rock.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
Steve, with just the two wells (37:54) on the slide deck, I think in your last update you mentioned maybe about five or so dry Utica wells this year. The plan just for the two this year now?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah. I think there's a chance we will spud a third late in the year.
We'll have to see on timing. I think our plan is since – the real economic key at this point appears to not be the reservoir.
It appears to be the cost to drill and complete. So we don't want to go too fast so that we have the opportunity to learn lessons from each well we drill.
So for the meantime, we'll probably be drilling one well sequentially rather than doubling up rigs and so that we can get full benefit from what we learn on each well. So a well in the third quarter depending on timing of that we may – around the end of the year would probably be another well.
Maybe it'll be late this year or early next year. And then depending on how we progress up that learning curve and what the economics look like and the decline curves look like, that's when we'll know when it's time to accelerate or really what the plan is.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
It was just first one, or just this latest one. I shouldn't say first, was 100% ceramic used on it?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Well, we used some 100 mesh sand in the first part of each stage, but for all of the large size proppant, was 100% ceramic.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
Okay. And then you think you'll be able to, on the same pad, do Marcellus and Utica?
And maybe probably too early to ask about stacked laterals, but just will you be able to put them on the same pad do you think?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah. That's our intent.
Yeah, this well is on a existing Marcellus pad.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
Okay. Okay.
And then just last overall question maybe for Dave, just ,now you continue to have this massive Midstream obviously value that you were talking about there. Does that encourage you to maybe increase the speed at which you do some dropdowns or really that doesn't change your thought process today about how quickly you continue to drop some of the those things down?
Again, you certainly have a phenomenally large position and even now with EQM with the news out this morning, new pipe there, are lot of things going on over there as well, just your thoughts on the size and maybe the speed of the dropdowns.
David L. Porges - Chairman, President & Chief Executive Officer
Yeah. I think we've kind of moved a little bit past where it's mainly a dropdown story.
I see EQM as being more of an organic growth story and I agree with you, the agreement to build out that system for that – pretty sizable system for Range Resources is a good example of that. And that is happening all at the EQM level.
We haven't updated our guidance or even our thought process yet about whether we've got one more or a couple of more drops and we've alluded to how much value, cash flow, et cetera we have remaining at EQT and we do continue to invest a little bit at the EQT level in some of that. But generally speaking, you should be thinking about this as being organic growth at EQM and incidentally, I'll volunteer that, from an economics perspective, since we are into the high splits, it winds up being most value accretive all the way around to focus on organic projects, rather than, say, acquisitions or things like that.
And that includes with the dropdown. So we will drop what remains, but the focus at EQM is to create value through pursuing these organic opportunities and again, that's, as you're seeing, we're going to – we're trying to grow our market share.
That's what that Range Resources deal shows, to provide services to other producers. And I think the Utica's going to open up even more opportunities for EQM.
Neal D. Dingmann - Suntrust Robinson Humphrey, Inc.
That's – I'd agree with you. Thanks guys.
David L. Porges - Chairman, President & Chief Executive Officer
Thank you.
Operator
We will take our next question from Sameer Uplenchwar with GMP Securities.
Sameer Uplenchwar - GMP Securities LP
Good morning, gentlemen. My question relates to service costs and operating efficiencies.
Since the start of 2015, you've already seen like 16%. That's what I think Pat said on the call, 16% deflation in cost and that is, I'm guessing, is both high grading of the fleet and labor, and also drilling core acreage.
I'm just trying to figure out on a long-term basis, how much of this do you think is sustainable where you can hold onto some of these lower costs and hold onto the labor and the fleets.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Well, I think actually that 16% is driven strictly by renegotiated service contracts, so there's no drilling efficiencies or any other factors in that 16%. Any of those factors would be over and above that.
I think the reality of service cost reductions is they're not very sticky. If gas prices ramp back up, which I'm not expecting any time soon, but if they would, I think we'd likely be faced with service cost increases.
So they tend to move with gas prices and operating levels.
Sameer Uplenchwar - GMP Securities LP
Got it. Thanks.
And on the cash side of the equation, I know you have answered all the questions pretty well. What I'm trying to understand is, you want to hold onto that cash as a dry powder safety net, but how long do you want to do that?
At what point in time do you decide that we could do a buyback, we could do a dividend growth or something along those lines if the bid-ask spreads continues to remain wide?
David L. Porges - Chairman, President & Chief Executive Officer
Yeah. We continue to – we reassess that I'd say periodically.
So that'll also factor in with drop schedules and the capital budget and things like that as we look later in the year. So the next time we take a real serious look at that, and this is really kind of starting now, is that they'll run up to the capital budget, the annual plan and capital budget for the coming year.
So that'll cause a pretty deep dive on some of those things.
Sameer Uplenchwar - GMP Securities LP
Got it. Thank you.
Operator
We'll take our next question from Drew Venker from Morgan Stanley.
Drew E. Venker - Morgan Stanley & Co. LLC
Good morning, everyone. I was hoping you could give us a little more color on the Utica well cost for that first well.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah, Drew. It was – we don't have the final numbers yet, but it's going to be right around $30 million and if you recall we had some pretty significant issues dealing with the extremely high reservoir pressure.
So it was pretty expensive.
Drew E. Venker - Morgan Stanley & Co. LLC
Right. So you cited this $12.5 million target.
What are the primary cost items that you're trying to reduce? Is this just rig time, with the rig outside or completion time?
Anything else that's a big component?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
A lot of all of that. So the rig time was long, the completion time was long.
There's lots of opportunity for improvement, which is why there's such a big gap between the cost of this first well and what we think these should be able to be drilled for. So like anything new, there's a learning curve.
I think we'll be able to get up it pretty quick. Just I would expect our next well would be substantially less expensive than this first well.
But it's probably going to take several wells for us to approach that $12.5 million number.
Drew E. Venker - Morgan Stanley & Co. LLC
Okay. And then you said you probably will split another two or three wells this year?
Did I have that right?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
No. One more I'd say for sure and the possibility of a third very late in the year.
It might hit this year, might hit next year.
Drew E. Venker - Morgan Stanley & Co. LLC
Okay. Would you think we'd have results from that Wetzel County well this year?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Oh, no. I doubt it.
Drew E. Venker - Morgan Stanley & Co. LLC
You doubt it? Okay.
And then so the plan for drilling in 2016 is really predicated on results from your next couple wells. Is that fair?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Yeah, probably as much predicated on how this current well performs. So we'll be watching it for the next few months.
That'll start to give us a first read on decline rates in EURs. At this point, all we really know is the productivity of the well, or the deliverability, which again was exceptionally high, but we need to see how it holds up to really understand the economics and what this really means.
Drew E. Venker - Morgan Stanley & Co. LLC
Okay.
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
But it's a good place to start.
Drew E. Venker - Morgan Stanley & Co. LLC
Yeah, that was a very impressive well. And then I was thinking about the spending plan for next year.
I know it's too early for guidance probably (46:47), but have you guys run some sensitivities on what kind of spending you think would be reasonable if the strip proves to be about right for next year, or any (46:56) you could throw out?
David L. Porges - Chairman, President & Chief Executive Officer
We actually look at that as we get into the autumn. So this is the time of the year we're probably least likely to do that type of back of the envelope sensitivity, because we're into the normal run up to our typical process and we will – you'll be doing that in some depth as we move into through third quarter into the beginning of the fourth quarter.
Drew E. Venker - Morgan Stanley & Co. LLC
Okay. And Dave, as you mentioned potentially splitting, or at least hypothetically splitting the production segment for the Midstream segment.
Is this something you're looking at doing in the near-term future? Because I think we probably hear a lot of the same frustration that your investors communicate to you, that they really see a lot of value in both pieces and they don't feel like it's fairly reflected in the stock price.
David L. Porges - Chairman, President & Chief Executive Officer
I'd just say that we are always focused and I think, over the course of the time that I've been here, this company has prided itself, and I think it's reasonably so, on being focused on creating shareholder value. So, I just leave it at that, that we just want to figure out the best way to create shareholder value over time.
Drew E. Venker - Morgan Stanley & Co. LLC
Okay. Fair enough, Dave.
Thank you.
David L. Porges - Chairman, President & Chief Executive Officer
Thanks.
Operator
And we will take our final question from Daniel Guffey with Stifel.
Daniel D. Guffey - Stifel, Nicolaus & Co., Inc.
Hi, guys. On your second Wetzel County, or on your first Wetzel County well, second Utica well, first was around 3,200 feet on the lateral.
What's the length of your second well? And do you have an AFE on that yet?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
I don't know. Well, we don't have an AFE on it yet.
I don't know the projected lateral length. I'm sure we will try to drill it longer than the 3,100 feet or 3,200 feet, but I don't know the exact length.
Daniel D. Guffey - Stifel, Nicolaus & Co., Inc.
Okay. And then, you made a comment after drilling the Wetzel County well, you'll have plenty of acreage that's the de-risked.
Care to throw an initial estimate on how much you think will be delineated after that second well?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
Well, maybe not that, but I will say that this first well gives us a high level of geologic and deliverability certainly around at least 50,000 acres. So there's 50,000 acres we think looks identical to this without getting too far away from this.
We think Wetzel County looks similar, but that's getting pretty distant and is not included in that number. But that gives you sort of an estimate of, I'd say our certainty level has gone way up on at least 50,000 acres, just with this first well.
Daniel D. Guffey - Stifel, Nicolaus & Co., Inc.
Okay. Great.
And then final one from me, 16% decline in cost since year end and you gave some detail in terms of those potentially not being sticky, but I'm curious as we head into the second half this year, how much capacity do you think you have for further cost reductions?
Steven T. Schlotterbeck - Executive VP, President-Exploration & Production
That's always hard to project. In April, I think when we announced our first set of cost reductions, we had gone through all of our suppliers and gotten what we thought we could at the time, but continued to work at it and now have announced another 5%.
I don't know if there's another 5% or not, but I can tell you we're going to continue to keep working at it. So a lot depends on what happens in the market, what gas prices do, what activity levels do, but we're going to keep trying to squeeze a little bit more.
Daniel D. Guffey - Stifel, Nicolaus & Co., Inc.
Fantastic. Thanks for all the color, guys.
Operator
I would now like to turn the call back over to Pat Kane for any additional or closing remarks.
Patrick J. Kane - Chief Investor Relations Officer
Thank you, and thank you everybody for participating.
Operator
And this does conclude today's conference call. Thank you all for your participation.
You may now disconnect.