Feb 26, 2016
Executives
William J. Way - President and Chief Executive Officer Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer Paul W.
Geiger - Senior VP-Southwest Appalachia Division
Analysts
Kalei S. Akamine - Bank of America Merrill Lynch Michael J.
Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.
Charles A. Meade - Johnson Rice & Co.
LLC Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Scott Hanold - RBC Capital Markets LLC David W. Kistler - Simmons & Company International Timothy A.
Rezvan - CRT Capital Group LLC
Operator
Greetings and welcome to the Southwestern Energy Company Fourth Quarter 2015 Earnings Teleconference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. In the interest of time, please limit yourself to two questions, and afterward you may feel free to re-queue for any additional questions.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Way, President and Chief Executive Officer for Southwestern Energy Company.
William J. Way - President and Chief Executive Officer
Thank you, operator. Good morning and thank all of you for joining us today.
With me today, I've got Craig Owen, our Chief Financial Officer; Jeff Sherrick, Executive Vice President of Exploration and Business Development; Paul Geiger, Senior Vice President of our Southwest Appalachia asset; and Michael Hancock, our Director of Investor Relations. If you've not received a copy of last night's two press releases regarding our fourth quarter 2015 financial and operating results, along with our 2016 initiatives and plan, you can find a copy of those on our website at swn.com.
I'd also like to point out that many of the comments during this teleconference are forward-looking statements that involve risks and uncertainties affecting outcomes, many of which are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements section of our annual and quarterly filings with the Securities and Exchange Commission. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially.
Now let's begin. In the four years that I've had the privilege of being part of this great company, our teams have accomplished a great deal.
Southwestern Energy clearly has premier assets, disciplined capital investment, a low-cost operating model, a highly talented workforce, and a strategy built upon our formula and inspired by our core values. I truly believe in the opportunities we have in front of us and the future success of our company.
And although I know the company well, after moving into my current role last month, I thought it's important to take a stock and take a fresh look. And having done that, I'm confident that our strategy is an enduring one.
And today, I want to share with you several priorities as we move forward. I believe that credibility is derived from consistently delivering on commitments made.
And as such, wisely investing the cash flow from our underlying assets, which is a core part of the SWN formula, will drive our decisions on investment activity when prices are high and when they are not. The industry is facing tremendous challenges, especially related to commodity prices.
Inspired by our formula, we've taken clear and decisive actions to respond to these near-term challenges and strengthen the bridge to value-adding growth in the future. To achieve this, we are focused on building on our strong liquidity, to further strengthen the balance sheet, to invest within cash flow, driving further operating efficiencies, enhancing margins, and optimizing the portfolio.
Starting first with liquidity, Southwestern Energy's liquidity position is strong with $1.9 billion of undrawn capacity on our $2 billion unsecured revolver at the end of 2015. The drawing on that liquidity to invest in wells that have marginal economics in today's price environment does not make sense to us.
We will continue to watch prices as we get further into the year and we can adjust accordingly. Craig will go into more detail of our liquidity and our financials in just a few moments.
Another foundational aspect of our company is that future cash flows generated from our currently producing wells and our midstream assets more than exceeds our total debt obligations for the company due to our large high quality asset base and cash flows from midstream. Strengthening the balance sheet is a key priority for us in 2016.
We do not plan to add to debt and are actively pursuing a number of options to reduce our debt levels. Additionally, we have previously disclosed we have taken decisive steps, including idling our company-owned drilling rigs and frac fleets as we are committed to invest within cash flow based on strip pricing in 2016.
We are reviewing options for potential asset sales and as we make tangible progress and have decisions in this area, we will share them with you. We're driving further operating efficiency.
We have taken further steps to improve our margin by removing costs resulting from reduced activity and lowering our ongoing cost structure. As a result of this decreased activity, in January, we announced a workforce reduction with deep personal regret that impacted 40% of our SWN team.
When we look at commodity prices in our current plans, there just wasn't enough activity to support that size of employee base. Also announced yesterday, we have recently finalized a new agreement that reduces the gathering, transportation, and processing rates in our Southwest Appalachia acreage.
This provides two major benefits for us. First, it significantly lowers the gathering rates of our existing production in this important growth asset.
And second, it provides a highly competitive dry gas gathering solution for the core of our West Virginia acreage, creating an additional optionality to allocate capital to wet gas or dry gas locations including our Utica potential as commodity prices dictate. These two actions alone have reduced our ongoing annual cost structure by more than $200 million.
On the top line, we are unlocking additional value from existing wells through a series of changes we are making to drilling, completions and operating practices. The results are encouraging, and our teams are working across the company to unlock additional value.
Let me turn to Craig for a moment to discuss some of our financial highlights, followed by Paul Geiger, who will discuss some of our operational highlights in the exciting first year of our ownership of our Southwest Appalachia asset.
Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer
Thanks, Bill, and good morning, everyone. As Bill mentioned, Southwestern and the industry are facing challenges in this commodity price environment.
While these challenges are substantial and require action, we have a significant amount of liquidity, with our $2 billion unsecured revolver that does not mature until late 2018. Southwestern and much of the industry have also experienced recent credit rating downgrades by the rating agencies and expanding credit metrics as a result of this environment.
We are working to address these issues on a number of fronts. However, these actions and metrics have had no impact on our unsecured revolver or other debt instruments, other than a minimal increase in our expected 2016 cash interest cost at our year-end 2015 debt balances.
And assuming those year-end 2015 debt balances, total cash interest cost across all of our debt instruments will increase as a result of these downgrades by about $30 million on an annual basis beginning in 2017, and will begin declining again in 2018. Our substantial liquidity position and active balance sheet management differentiates Southwestern from others and, when combined with our strong portfolio of assets, positions Southwestern well for a strong future.
Additionally, and to emphasize a point that Bill made, these existing assets provide a substantial cash flow stream that, at current commodity price forecast, not only services our debt, but pays it off over time. From a capital investment perspective, in 2015, we began exhibiting our flexibility and modified our activities to align with the current environment as we move throughout the year.
Importantly, we adjusted our capital investments down to $1.8 billion. This is a reduction of 30% from our original capital guidance of $2.6 billion at the beginning of the year, and $50 million below our most recent public guidance.
With this reduction, we are still able to deliver record production volumes of 976 Bcfe, a 27% increase over 2014, 9% of which was organic growth. And this growth reflects our significant operating achievements across the portfolio, despite the depressed commodity price environment.
I will now turn it over to Paul to discuss our first year of operations in our Southwest Appalachia business.
Paul W. Geiger - Senior VP-Southwest Appalachia Division
Thank you, Craig, and good morning, everyone. Our first year of operations with the assets in Southwest Appalachia was an outstanding one from an operational perspective.
We efficiently integrated the Southwest Appalachia asset into SWN during 2015. We leveraged the many learnings and successes from our entry into Northeast Appalachia in Pennsylvania, and once again demonstrated our ability to ramp quickly and produce impressive operating results in a short period of time.
Our Southwest Appalachia asset has exceeded our expectations in every operational aspect as compared to our acquisition model. The teams hit the ground running, delivering top quartile drilling and completion efficiencies a full two years ahead of expectations.
Not only cost-efficient, this high-quality execution resulted in an over 94% success rate of placing the drilled laterals, some as long as 12,000 feet, within our targeted 12-foot-thick interval of the Marcellus. This exceptional performance, combined with much higher sand concentration in our completions, resulted in well performance that ranges from 30% to 100% better than the wells drilled by the previous operator on the same pad.
One outstanding pad development of this program is our Alice Edge pad in the central Panhandle. We were able to drill and complete four additional wells on this pad, placing 98% of the 43,000 feet of drilled lateral in our 12-foot target within the Marcellus interval.
Initial production from the nine total wells on this pad was over 100 million cubic feet equivalent per day, over half of which was liquids. In total, this initial year of drilling ramped production from these assets by over 65%, demonstrating the potential of this position.
These factors have also increased our expectations of our core Panhandle acreage by over 50% on a per-acre basis as compared to our acquisition. Over 200,000 of our 425,000 acres are in this core of the core for Marcellus and Utica development, over 60% of which is held by production, and over 80% of which has no obligations until 2018 or later.
We accomplished a lot in our first year with this asset, and we are not standing still. We are working to identify additional ways to improve returns as we continue development of this premium acreage position within a world-class producing basin.
Across the company, 2015 included record drilling results, record well performance, material well cost savings, and terrific results from our base production enhancement efforts. This performance has allowed us to build an even stronger base as we begin 2016.
I'll now turn it back over to Bill for additional comments on 2016.
William J. Way - President and Chief Executive Officer
Thanks, Paul. As we close the books on 2015, I want to turn forward and look at 2016.
And as I mentioned earlier, our strategy will be one that focuses on rigorous financial discipline and unlocking additional value. With our commitment to investing within cash flow, we issued guidance yesterday afternoon, as you know, that included a minimal amount of new activity.
We are committed to investing only in projects that meet or exceed our 1.3 PVI hurdle. And, in this environment, that can return their cash flow from an investment in this year.
We are prepared for a prolonged low price environment, but we remain equipped with the flexibility and liquidity to ramp activity quickly when prices improve. With this planned activity, production is expected to decline.
And while this is different from our typical E&P operational plan, we're in very different times from a commodity price perspective, and we believe this is the prudent path to take for now. Having said this, as prices recover, we have the ability to ramp up and increase activity quickly and capture the value that is associated with those improved prices.
We have the core D&A in each area of our operation that will allow us to pivot from our current activity level to value adding growth as market fundamentals normalize. So I want to stop here with my remarks so we can get back to the operator, who will explain the procedure for asking questions.
Operator
Thank you. We'll now be conducting the question-and-answer session.
Thank you. Our first question comes from the line of Doug Leggate with Bank of America.
Please go ahead with your question.
Kalei S. Akamine - Bank of America Merrill Lynch
Hey, guys. This is actually Kalei Akamine on for Doug.
Good morning.
William J. Way - President and Chief Executive Officer
Good morning.
Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer
Good morning, Kalei.
Kalei S. Akamine - Bank of America Merrill Lynch
So a couple of questions from me. Clearly, with no activity this year, NPV is being pushed out.
How does this change the priority for asset sales? Can you talk to the depth of the asset market there?
And is there now an argument that SWN should pursue other alternatives perhaps even in outright sale of the company?
William J. Way - President and Chief Executive Officer
Let me talk first about asset sales and this is part of – has been and is part of our overall plan. We're continuing to work on our joint venture with our exploration projects.
We've had a number of different inquiries. I think we had originally planned on a large portfolio, and what we're seeing is interest in individual pieces of that.
So we continue to work on that. We're looking at other candidates for sale including some of our other new venture portfolio assets.
And obviously, market conditions affect the choices on the assets that we will look at. But first, we want to identify opportunities to pull value forward, and that would be a priority of ours.
And what I want to do is really discuss those when we complete them and we have a plan going forward that's more specific rather than speculating on the numbers. Your comment around selling the company, I mean, that's – I'll just say, we believe that the strategy we have is enduring, we believe that we're positioned with a very strong liquidity position and a very strong reserve base.
We can manage and handle our debt in this environment, and we are working right now on different opportunities to reduce that debt. And so, looking to sell a company is not a priority that we're working on it.
Kalei S. Akamine - Bank of America Merrill Lynch
Got you. Thanks.
And then I have a follow-up. So, year-over-year, the decline is pretty large.
I think 4Q it's about 25%. Can you talk about scenarios for 2017, 2018?
Can you talk about perhaps CapEx, the whole production flat at exit levels and CapEx needed to grow and perhaps what you believe best case scenario is in terms of returning to activity? Do you need gas around $3 or how are you thinking about it?
William J. Way - President and Chief Executive Officer
Yeah. We just put out our guidance on 2016 and while we can remain flexible and we have the ability to ramp up very quickly, there's a lot of conditions that can change between now and then.
The simple fact that our production is declining from a company as large as ours is itself a market signal. I think when I look at 2017 and 2018, we've got various scenarios on how we might progress and I want to see first how the rest of this year, at least the early part of this year plays out.
Now if you look at our current portfolio, every $0.25 movement in gas adds $200 million in cash flow to our bottom line. And with our mandate to invest within cash flow, as we see prices improve, one of the opportunities for us is to get back into and restart our drilling and completions.
We would certainly prioritize our work to wells that are currently drilled but not completed, and then prioritize across the company in terms of the highest PVI projects and how that exactly would work. I think what we want to do is let 2016 play out a little longer.
I've carefully used the words, idled my rigs. I didn't shut them down and take them away and get rid of them.
We have the capability to restart fairly quickly. If you look at where we would invest, certainly, the economics in the Northeast tend to be the strongest economics we have and as we have demonstrated just by our well performance over the last couple of years, it takes far fewer rigs to drill and complete wells that have growing production than our original plan.
So, the number of rigs, the number of wells, all of that, we're continuing to work and we'll talk more about that as we move forward.
Kalei S. Akamine - Bank of America Merrill Lynch
Thanks, guys. I appreciate it.
I'll leave it there.
Operator
Our next question is from the line of Michael Rowe with TPH. Please go ahead with your question.
Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.
Good morning. Thanks.
I was just wondering a little bit, first question on the discretionary capital. It's obviously quite low as you highlighted.
But, I guess, curious to see if you had considered other potential uses of capital besides blowing down DUCs, including potentially buying back your bonds. Can you please just talk about the thought process on doing that?
Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer
Hey, Michael. This is Craig Owen.
Certainly, as Bill mentioned earlier, we've got a lot of options. Our balance sheet, our liquidity position probably – give us a number of options that we could look at and we look at all of them.
As we think about improving – going forward improving the balance sheet, certainly we're aware of where our debt trade and potential there, but we're going to look to maintaining a strong liquidity. We're going to look to maintaining a strong balance sheet and trying to address options that are most valuable today.
And certainly as we look to drill or we look to complete, or we look for maybe financial options, we'll consider all of those as we move through.
Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.
Understood. Okay.
And then just one quick question on the asset side of things. And clearly, you're very excited about what you're seeing in Southwest Appalachia, both from a drilling performance perspective as well as well results.
So I guess given what you've seen in the 35 or so wells placed on production last year, at what point do you all think it makes sense to update the market on type curves and drilling economics out of those assets?
William J. Way - President and Chief Executive Officer
Yeah. I think as we get a bit more flow history, we've got some information in some of our released information, but as we get some additional flow history in time, we will put that out.
And next week, we'll issue our sort of monthly update IR book. And there'll be some information in there that will be very helpful, and we're happy to talk about it once we do that.
Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.
Great. Thank you.
William J. Way - President and Chief Executive Officer
But it'll have plenty of detail in it for you.
Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.
Perfect. Thanks.
Operator
Thank you. Our next question is from the line of Chris (sic) [Charles] Meade with Johnson Rice.
Please go ahead with your questions.
Charles A. Meade - Johnson Rice & Co. LLC
I think that's me, Charles Meade.
William J. Way - President and Chief Executive Officer
Hey, Charles.
Charles A. Meade - Johnson Rice & Co. LLC
Good morning, guys. I wanted to ask about – Bill, I think you touched on some of this already, but I wonder if I can get you to elaborate on your approach to the DUCs and as it fits with your 1.3 PVI hurdle.
It would seem to me that – I recognize -- are you guys there? Hello?
Paul W. Geiger - Senior VP-Southwest Appalachia Division
We're here.
Charles A. Meade - Johnson Rice & Co. LLC
Okay. I'll start.
William J. Way - President and Chief Executive Officer
(21:43) for a while.
Charles A. Meade - Johnson Rice & Co. LLC
It would seem to me that – I know most of the money is spent on completions with these wells, but it seemed to me that with the drilling already done that you'd have a lot more of those DUCs that would meet your 1.3 PVI hurdle. And I'm wondering, are you limited on – with just working down the 20 to 30 DUCs this year, is that more a limitation on the PVI, or is it more a limitation on the overall cash flow?
And are you biased to doing those DUCs in the back half of the year?
William J. Way - President and Chief Executive Officer
What we will do – we're looking at it from two perspectives, and you got both of them. It's not only the PVI, and related to PVI, we prioritize those highest PVI across the company.
That's how we allocate capital. Certainly, those that we would do this year, that can return their cash flow or greater in this year, are up in the Q as well.
And then, investing within cash flow. So the economics for the portfolio of projects that we have are quite high.
The invest with cash flow circuit breaker, which we've imposed, is that piece as well. We've already done some of them, as we started the year, so the benefit of that production can roll in, but we'll keep monitoring that.
And as we go forward, again, should we see a change in price, and should we elect to put that money to work in either drilling or completions or any other kind of project, we'll allocate them based off of that criteria.
Charles A. Meade - Johnson Rice & Co. LLC
Got it. And this – I'm following up on another comment you made earlier, but you talked about your wells in the Northeast, I wondered if you could drill it down a bit on that, because it was a really helpful table that you guys put in your press release, but it looked to me like your best capital efficiency would actually be in Southwest Appalachia, and maybe that's part of what you meant by the Northeast.
But I recognize it's not just about volumes, it's about revenue. And so I wondered, is that the right conclusion, that Southwest Appalachia is where you'd put that money to work?
And am I right that this is about – I know there's a lot of assumptions, but about a year's worth of DUCs that you have?
William J. Way - President and Chief Executive Officer
We have about 100 DUCs in our total inventory. And to be really clear, DUCs that we have in inventory typically are only the DUCs that are required to keep the sort of machine running efficiently.
We don't drill wells and hold them and then hope for prices to recover someday in the future. That's not part of our DNA.
When I mentioned Northeast, I was referring to the entire Northeast, apologies for that. That's both Northeast and Southwest.
And as you look at either of those areas, you dissect further down and into the individual acreage, or the individual areas of those acreage, you've also got the wet versus dry dynamic in Southwest Appalachia. And so, again, we don't look at averages across different plays.
We go project by project, well by well, whatever it happens to be, and prioritize them that way.
Charles A. Meade - Johnson Rice & Co. LLC
Bill, thank you. That's helpful clarification.
Operator
Thank you. Our next question comes from the line of Jeffrey Campbell with Tuohy Brothers.
Please go ahead with your questions.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Good morning.
William J. Way - President and Chief Executive Officer
Morning.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Just to clarify that last bit on the DUCs, is your current plan to have any remaining DUCs as you roll into 2016?
William J. Way - President and Chief Executive Officer
As we roll into 2016?
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
I mean, in 2017, excuse me, the year-end 2016, will there be any DUCs remaining in the inventory?
William J. Way - President and Chief Executive Officer
Yeah, and that will be, again, totally dependent on price as it relates to cash flow, as it relates to choices around whether we – when we were to complete those.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Okay, understood.
William J. Way - President and Chief Executive Officer
But we have about 100, and it's not a pace thing, it's not a – it has completely to do with investing within cash flow.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Okay. So the plan remains fluid?
William J. Way - President and Chief Executive Officer
Yes, it does. And as you watch the year progress, again, certainly if prices move up, that option becomes one that we would certainly evaluate.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Okay. I wanted to ask kind of a higher level question and that was, what's your current view regarding approvals of the pending Appalachia pipeline projects?
The environmental lobby seems to be making some inroads, for example, the stalling of Constitution in New York and the U.S. Forest Service's recent rejection of the Atlantic Coast Pipeline.
So I was just wondering – I'm sure you watch it closely. Just kind of wondering what your view is.
William J. Way - President and Chief Executive Officer
Yeah. I think that, when you look at the northeast part of Pennsylvania, so that portion, we have run into challenges, probably more related to the various different states than in general environmentalists, I mean, we're an environmentalist.
We work very hard to work in the areas where we operate and lived with and minimizing our footprint. But I think the Constitution Pipeline is really caught up in some issues related to the State of New York more than just in general, because I think the State of Pennsylvania is ready to move on that.
We have a portion of that pipeline in our portfolio. We've always planned it to be – our earliest plan two or three years ago was for it to come on the end of this year.
So we've basically managed around it, so that we're pretty flexible. At the end of the day, will it get done?
I think if the people of New York want to capitalize on the great value that natural gas brings to heating, I think they will speak up and that project will move ahead. When you look at the Southwest Appalachia area, it's a bit of different dynamic it seems.
It's a much more liquid market. There's a lot more opportunities and a lot more projects moving into the area, and they seem to be moving at pace.
I mean, we've got to listen to the various stakeholders, we've got to work together with the stakeholders. But from what we understand, those projects are moving along from the perspective of getting approvals and getting all those.
But certainly, the market, as it unfolds going forward and pricing will also help dictate the pace of those. But you've got projects that are proposed that span the next five or four years, and they all seem to, at this point, be lining up to be exactly where we need them to be.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Okay. That's very helpful color.
And if I could ask one last one real quick, I thought I heard you say earlier in the call that there's some new approaches to D&C that are significant, and I just wondered if you could add some color on that.
William J. Way - President and Chief Executive Officer
Yeah. When you look at, and then Paul could speak to this more when we get into – if we have any discussion about Southwest Appalachia, but we've taken a very, very hard look at how we drill wells.
In fact, we spent a lot of time re-drilling wells on paper to see how what we thought was going to happen happened and what we can do to change. The technology and the tools that are able to enable us to steer wells much closer to the drill bit than we ever have before that oftentimes are used offshore, technology has enabled those tools to be readily available for us in a lower cost environment onshore in shale.
And so we've got the ability to steer and we've got the ability to see where we want to steer, so lateral placement becomes so much more important. And as Paul said earlier, we can actually steer, and one of the 12,000-foot laterals I believe we actually stayed in the 12-foot zone for 100% of the time with the tools that we have.
If you can stay in that zone and you can get that lateral drilled, then the completion techniques that we're using, especially around sand loading to improve the near wellbore quality of the frac, become significant. And the third thing, and Paul mentioned this as well around the content of liquids to gas on these pads is just like the old days of Haynesville but for different reasons, managing the drawdown on these reservoirs significantly improves or affects the outcome of the liquid content that is coming out of these wells.
And so, those techniques plus some of the work that we've done across the company in other areas around timing of beginning to flow wells in terms of debottlenecking the infrastructure that is both down-hole and on the surface have really impacted the performance across our company. And we continue to share those techniques in each of the areas.
We made a lot of these major strives when we moved into Pennsylvania about five years ago, six years ago. And the effects were significant.
When we took that team and moved them over to West Virginia and that team replicated those terrific results in there.
Jeff L. Campbell - Tuohy Brothers Investment Research, Inc.
Thanks very much. I appreciate it.
Operator
Our next question comes from the line of Scott Hanold with RBC Capital Markets. Please proceed with your question.
Scott Hanold - RBC Capital Markets LLC
Thanks. Good morning, guys.
I was wondering if you could discuss – I know in the past you all have provided some pretty good context in terms of what the inventory of locations looks like in each of the area at different gas prices. So, like at $2.50, how much do you have in inventory in Appalachia, say, versus, the Fayetteville Shale that meet that threshold?
William J. Way - President and Chief Executive Officer
Let me just say that we've got the specific inventory numbers coming out in the IR book (32:13) next week. And, so I will get you those numbers.
But what I can say is that at $3, we still have a couple thousand of wells in inventory that meet our hurdle and that we can certainly go drill and as the price comes off that, you have a full slate of wells that you can drill across the company, and it gets back to that management and cash flow circuit breaker that we've imposed on ourselves to make sure that we're not going past that. Obviously, the Fayetteville Shale is more sensitive to gas prices as you go through.
So, you can have, at $3.50, you can have 5,000 well locations and at current prices today, that number drop significantly. In fact, we don't have economic wells to drill (33.09) what is now the third-lowest March strip since we began tracking all of this.
So, you do have – there's a lot of swing there. When you move to the Northeast, certainly in Northeast Pennsylvania it's less sensitive, but you still see a change, drop off if you've got 1,300 wells or so in the inventory.
When prices get down, that number may drop down by half. Southwest Appalachia has two different kind of aspects to it.
One is we have dry gas; we have wet gas, and the dry gas is even further subdivided into Marcellus and Utica. So, as we work through the economics and certainly in a big deal is this gathering deal that we just finished with Williams, which expanded the pie for both of us and is a win-win for both of us, and is enabling the economic threshold of a big chunk of that acreage to improve.
So you've got that dynamic as well. We finished our first Utica well.
And when we – as far as drilling goes, we don't need to – our plan to complete it at this time because it's actually not in an area where a pipeline is built yet. So, our rigorous attention to margin is certainly there.
But we know that that area is far less sensitive to some of these changes in gas price and the inventory remains. So we've always been a low cost operator.
We will drive even further to get our structural cost to change and bring it down along with these techniques that we've been talking about on improving the revenue side, in other words, the performance side of these wells, and I think we'll continue to move ourselves along those curves as well.
Scott Hanold - RBC Capital Markets LLC
Okay. I appreciate that color, and definitely we'll look forward to that update.
And as my follow-up question, you did briefly mention that Utica well and that's certainly something I wanted to focus a little bit on. I guess your comment was, we're not going to complete it at this point, but the area appears to be less sensitive on gas prices.
What in your opinion is your plan at this point with the dry gas Utica? Because it feels like it's an area you could monetize or, in fact, develop as your most economic asset if it works out.
But without any infrastructure there, what's it going to take to get that within the program?
William J. Way - President and Chief Executive Officer
One thing that we've got going for us very strongly is that, our Utica expands a good portion of our acreage. And as I've mentioned in my opening comments, the northern part of our acreage is where we've also captured a gathering solution with Williams to gather that gas.
And so as we begin the process of looking at how we want to lay that out now that we have that agreement in place, you can build that infrastructure out fairly quickly, again driven by economics, driven by priority, but you can build that infrastructure out pretty quickly and then begin to look. Our next few wells in the area of the Utica were planned in the north, and that was because the dry gas infrastructure is present around us and we can move them in.
If you take a look at the wells that are being drilled and completed all around us, those wells are proving up our position. And we're delighted with the success that our colleagues in the industry are having, and it just reinforces the quality of the acreage that we have.
And as soon as we can – in the priority of investing with the cash flow and where they fit in the priority stack, we'll begin going down that path. I would remind everyone that when we did the acquisition, our plans were to begin the process of drilling the Utica in 2018, and so the well that we drilled this last year advanced that by two years.
And, we still see a lot of opportunities in that area. It's just – it's a matter of prioritization at this point.
And just to make some further clarity on the completion of the well that we did drill, we were going to put that into a wet gas system. It was a test in that part of our area and we wanted to do that.
We worked out arrangements to be able to do that, but obviously, when you're putting a dry gas well into a wet gas system, you needed to take an impairment on economics. And so, we'll just wait to complete that well, we'll go – if and when we get into the Utica, we'll go North.
Scott Hanold - RBC Capital Markets LLC
Okay. If I could just clarify then, so at this point, as far as Utica North, it sounds like the plans are to let offset operators at this point in time, I guess, help prove the position up for you and then, at some point, it may fall within the plan.
Is that what I'm hearing?
William J. Way - President and Chief Executive Officer
The first part of that, obviously, any information we can learn from around us, we will take. And then, as we put together our portfolio of wells, and the division has already done this, we still see these wells as being very strong candidates, but we will stack up the next portfolio of projects, again, PVI, economics, and then take the best of the best.
Scott Hanold - RBC Capital Markets LLC
Thank you.
William J. Way - President and Chief Executive Officer
And I just don't – we don't have that right now. That was not in our plan for this year, at this point.
Operator
Our next question comes from the line of Dave Kistler with Simmons. Please go ahead with your question.
David W. Kistler - Simmons & Company International
Good morning, guys.
William J. Way - President and Chief Executive Officer
Hey.
David W. Kistler - Simmons & Company International
I apologize if I missed this when you were talking about potential divestiture candidates. And in the past, you guys have been very reticent to think about monetizing it.
But can you give us kind of your latest thoughts around Boardwalk Pipeline, with production volumes in the Fayetteville no longer growing, actually declining. How do we think about that as a potential item for monetization and re-deployment of capital?
William J. Way - President and Chief Executive Officer
Yeah. For clarity, we don't own Boardwalk Pipeline, so we're not going to sell it.
But the – if your question is referring to our midstream business in Arkansas, everything – I just tell you right up front, and I don't want you to over read this, but we cultivate options and we cultivate them all, so that we take objective looks at everything we're doing. Our focus on asset divestitures right now is on continuing to work on our joint venture, work with our exploration projects, and looking at some of those new venture projects as an opportunity to monetize them, and any other sort of asset that really doesn't have current year cash flow.
I mean, the entire midstream business in Arkansas is a significant contributor to our cash flow. We're focused on our cash flow at the moment, and we see very strong value in having that in our company.
And so, right now, we're focused on trying to bring future value forward, and that's where our priority will lie. And really, kind of my style is, I want you all to know we're looking at these things and we're looking at them hard, but I'd rather talk to you about deals we have in hand or decisions we have made, rather than to speculate on what we might or might not do.
But certainly, our midstream business, as we've discussed before, is important to us. And at this point, it's not high on my list of things to think about.
David W. Kistler - Simmons & Company International
Great. I appreciate that.
And then, just one last one relative to kind of abating production declines. You did a great job.
We're very thankful for what you guys laid out in terms of capital and what that can do from a production standpoint. How quickly do you think you can bring rigs back to work, and are there any concerns, as you bring those back to work, that there could be service deliverability issues to kind of be able to abate production declines?
William J. Way - President and Chief Executive Officer
Let me let Paul take a crack at that, and then we'll discuss further.
Paul W. Geiger - Senior VP-Southwest Appalachia Division
Yeah, Dave. This is Paul Geiger.
We've got – we've assessed that, and we maintain the readiness to do that from a technical aspect in the company. And so we've got the ability, within our technical ranks, to stand five, six rigs up from a back office perspective.
From a forward perspective, we see that, as Bill mentioned, we do own those rigs and we do own a couple of the completion spreads, and so we see that as a 30-day to 60-day type opportunity for us, given the right signal. We've got the ability to pull those folks from the field and, from an outside service standpoint, we do see that, although there's been significant reduction in the standby supply services, that those do still exist in our core operating areas.
William J. Way - President and Chief Executive Officer
We've had a couple of examples where we recently were doing some completions up in the Northeast and the crews had to come from South Dakota or somewhere, so they're much farther away. So commuting time to get them there is – and ramp-up time is a little bit longer, but we also – if we were going into a resumption of activity mode, we would bring our own frac crews in.
And certainly, you got to be efficient here as you do this just to manage it in the cost that we incur.
David W. Kistler - Simmons & Company International
Yeah. I appreciate that.
But just quickly, the equipment, one of the concerns, I guess, right now with outside operators is some of the equipment is deteriorating, are there salvaging pieces to service other pieces of equipment, and your equipment is basically good, ready to go. And there isn't an – that other than secured crews, there wouldn't be an issue in your mind in terms of any sort of operability?
William J. Way - President and Chief Executive Officer
In our core asset areas, we don't have an issue at all. And we maintain discussions and dialogues with our chosen third-party suppliers.
And I'm confident that that's not an issue for us. We have some of the best rigs that are running, and we have a couple of frac fleets to go with that.
So those are maintained in a ready mode. We're not cannibalizing them, taking them apart and all that.
And as was mentioned earlier, we have kept the core DNA in the company that has the relationships, has the contacts. And if and when or as when we need to bring those back on, we can do that fairly quickly.
David W. Kistler - Simmons & Company International
Great.
William J. Way - President and Chief Executive Officer
I think 30 to 60 days is very doable.
David W. Kistler - Simmons & Company International
That is fantastic detail. I appreciate it, guys.
Thank you.
Operator
Our next question comes from the line of Tim Rezvan with Sterne Agee. Please proceed with your question.
Timothy A. Rezvan - CRT Capital Group LLC
Hi. Good morning, folks.
Thank you for taking my question. First question I had, in conjunction with the rating agency downgrades, I know there's increased letters of credit that you have to post.
I was wondering if you could update on where that stands in regards to your overall liquidity.
Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer
Hey, Tim. This is Craig.
We do have some potential requirements to post letters of credit. That's an option that our counterparties have.
And to-date, we've got about $150 million of either letters of credit in place or request for letters of credit. And in kind of a worst-case scenario, the maximum amount of letters of credit is maybe another $150 million or so on top of that.
So we're still – we have plenty of liquidity, if we get to that maximum, but right now, as we said, about $150 million or so.
Timothy A. Rezvan - CRT Capital Group LLC
Okay. I appreciate that.
And then the guidance you gave for the year is based on a $2.35 gas price. Bid-week pricing has come in about $0.25 below that for 1Q.
Is there thoughts that you can flex that down further if we're kind of in a perpetual sub-$2 world? Just kind of curious on thoughts on how to be responsive, I guess, to potential deteriorations in gas further.
Robert Craig Owen - Senior Vice President, Chief Financial Officer and Treasurer
Yeah. Tim, we kind of put $2.35 out there.
It's just kind of a point to – you can pivot off of on that $0.25 delta. So, certainly, to some extent, we can reduce below that.
We've broken out our capital into two lines kind of on purpose on the discretionary piece, and then the capitalized interest and expense. We can't really change that.
We can flex a little bit on the discretionary and we'll continue to do so. As we mentioned earlier, there's no rigs running.
We've got opportunities on our DUC inventory that we'll continue to manage. But we're working on margins, we're working on balance sheet all the way around, to see what we can do to adjust the cash flow to the environment that we're in.
Timothy A. Rezvan - CRT Capital Group LLC
Okay. Thank you for those responses.
Operator
Thank you. Ladies and gentlemen, we have reached the end of our allotted time for questions.
I would like to turn the floor back over to Mr. Way for closing comments.
William J. Way - President and Chief Executive Officer
Thank you all for participating today. In closing our call, I want you to know I'm very confident that the actions we're implementing, really to support our strategy, will allow us to drive through these times, created by this commodity price position that we're in.
We're going to optimize the business and continue to drive for every dollar we can in that area, and then really position ourselves to return to value adding growth when the environment improves. Before we kind of conclude, I want to emphasize the passion we have to deliver on these strategic priorities and to win in this environment.
It's really beyond – it's unwavering, that is probably the best way I can put that. I firmly believe that our strong liquidity position, our premier portfolio of assets, investing within cash flow is a mandate that we've imposed on ourselves, our capital discipline of investing only in projects that exceed our 1.3 PVI hurdle, our aggressive drive on margin improvement, and really probably the most important part, our team of extraordinary people across the company, will really enable us to execute the plan and allow us to forge ahead in these times and also create additional long-term value for our shareholders.
In my experience, times like these, challenging times, are often when the industry delivers the brightest ideas to take us to the next level. And I can tell you, we plan to be a big part of that future, and a big part of unlocking ideas and value from our curiosity and learning here at Southwestern.
So, I want to thank you for joining the call. I look forward to meeting with you, meeting the new faces that are on the call, and thank those that had been on the call previously for being here.
And you all have a great weekend.
Operator
Thank you. Today's call has concluded.
Thank you for your participation. You may now disconnect your lines at this time.