Feb 25, 2022
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Southwestern Energy Fourth Quarter 2021 Earnings Call.
[Operator Instructions] This call is being recorded. I will now turn the call over to Brittany Raiford, Southwestern Energy's Director of Investor Relations.
You may begin.
Brittany Raiford
Thank you, Andrea. Good morning, and welcome to Southwestern Energy's Fourth Quarter 2021 Earnings and 2022 Guidance Call.
Joining me today are Bill Way, President and Chief Executive Officer; Clay Carrell, Chief Operating Officer; Carl Giesler, Chief Financial Officer; and Jason Kurtz, Head of Marketing and Transportation. Before we get started, I'd like to point out that many of the comments we make during this call are forward-looking statements that involve risks and uncertainties affecting outcomes.
Many of these are beyond our control and are discussed in more detail in the risk factors and forward-looking statements sections of our annual report and quarterly reports as filed 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 and developments may differ materially, and we are under no obligation to update them.
We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measures we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website.
I'll now turn over the call to Bill Way.
Bill Way
Thank you, Brittany, and good morning, everyone. We really appreciate you joining us on our call today.
Our strategic intent is to generate resilient and growing free cash flow from responsible natural gas development. 2021 was clearly transformative for Southwestern Energy, and we did just that and more.
We further improved our financial strength and generated material free cash flow, and we expect to grow meaningfully in '22 and beyond. We delivered results above expectations for both the fourth quarter and the full year 2021.
We achieved record reserves and reserve value, generated almost $550 million of free cash flow during the year and improved nearly every operating and financial metric, all while differentially progressing our RSG and other ESG initiatives. These results in more generally, are deliberate actions taken over the past few years to strengthen our operations, upgrade our inventory, improve our cost structure and bolster our financial position, lay the foundation for our strategic entry into the Haynesville.
The move into the Haynesville strengthened the company's position as a leading independent natural gas producer now with core positions in both premier U.S. natural gas basins.
More important than just that, we are capturing the tangible benefits of our increased scale, which makes Southwestern Energy a more compelling shareholder value proposition. Specifically, we deepened our high-quality inventory and opportunity set, realized greater operating economies, expanded our optionality and market reach through direct access to LNG and global sales points and lowered the overall risk profile of SWN.
All of this speaks to sustainable value for the shareholder through the commodity cycle. Our strategic entry into Haynesville was well-timed.
Since announcing our first Haynesville transaction back in June, gas fundamentals have strengthened materially, improving the economic value of the transactions. As mentioned previously, the most immediate example of Haynesville adding economic value for our shareholders is our year-end 2021 company reserves that are at a record 21 trillion cubic feet equivalent.
These reserves have an SEC pretax PV10 value of more than $22 billion, greater than 2x our current enterprise value. These reserves and PV10 value reflect the quality and depth of our dual basin inventory and the company's ability to generate resilient free cash flow for years to come.
They also reflect a balance of high-margin, low basis dry gas production in Haynesville and high-margin low decline basis protected dry gas and liquids-rich production in Appalachia providing market and hydrocarbon diversification and optionality that clearly differentiates SWN from its peers. Our increased level of free cash flow generation capacity from our expanded scale has further solidified the company's financial position.
As Carl will detail shortly, we ended the year at 2x leverage and expect to achieve a leverage ratio within our target range of 1.5 to 1.0 during 2022 as we apply our increasing free cash flow to debt retirement towards our target debt range. We have a disciplined capital allocation framework that currently prioritizes debt repayment to ensure that we protect our financial strength through the cycle.
As we begin to approach our leverage ratio this year, and have a clear line of sight and deliberate path to our target total debt range based on commodity prices and our projected free cash flow, we expect to be in a position where we could initiate a capital return program. We believe the return of capital is a fundamental part of the company's overall economic return for shareholders.
We used the Haynesville acquisition to lower our cost of debt, increase our liquidity and extend our maturity runway, recognizing the company's increased scale and improved business and financial profile. S&P has upgraded the company twice in the past 6 months, most recently, in January to BB+.
We believe that we are on the path to returning to investment grade. I'd like to comment further on SWN's ongoing commitment to responsibly sourced gas.
We made further progress implementing our comprehensive RSG program throughout our Appalachia operations, launching a similar program throughout our Haynesville operations. Our more rigorous company-wide, well-level certification and pad level monitoring differentiates our RSG efforts from those of our peers.
By the end of 2022, we will have certified over 5 Bcf per day of gross RSG production across both of our basins. Additionally, in '21, we progressed methane reduction projects and other ESG projects, including replacing all of the freshwater that we used in our operations, and we detailed other ESG initiatives in our 8th annual corporate responsibility report.
Our strategy, our execution of that strategy and our people have transformed Southwestern Energy, significantly advancing our strategic intent to generate resilient free cash flow from responsible natural gas development and increasing the value realization opportunities for our shareholders. 2022 will be focused on delivery of that value and more.
It will be a year of catalysts as we execute operationally and financially to drive expanded free cash flow, margins and economic returns supported by strong commodity fundamentals. The market fundamentals for natural gas should provide support for our expected free cash growth.
Consolidation and investor-driven producer discipline should continue to support the commodity market as well. At the same time, persistent power demand and stronger LNG and Mexico export demand are also expected to continue.
We believe that natural gas is foundational in a low-carbon future, and the company should differentially benefit from both U.S. and export natural gas demand, given that more than 75% of natural gas demand growth through 2025 is expected to occur in the Gulf Coast region, where approximately 65% of our natural gas is sold.
On the liquid side, we see solid structural support for NGLs and oil through increasing post-pandemic demand, historically low storage levels and moderated supply growth. While the positive macro outlook is accelerating our free cash flow generation, we are delivering growing value from the execution of our strategy to capture the tangible benefits of scale.
I'll now turn the call over to Clay to provide more operational detail on our 2021 results and our 2022 outlook.
Clay Carrell
Thank you, Bill, and good morning. The team finished strong operationally in 2021, setting the stage to deliver increasing value across our core natural gas and natural gas liquids assets in 2022.
I'll start with some highlights from 2021. During the fourth quarter, our first full quarter operating the Haynesville assets acquired from Indigo, we produced 385 Bcfe above the high end of guidance with capital investment of $292 million as planned.
We were active across the portfolio, placing 21 wells to sales including 11 in Appalachia and 10 in the Haynesville. Within Appalachia, we placed to sales 5 West Virginia liquids-rich, 3 Ohio Utica dry gas and 3 Pennsylvania dry gas wells with an average lateral length of over 17,000 feet.
In Haynesville, we are off to a good start, quickly integrating our teams and the acquired assets and delivering above-plan results since commencing operations in September. Wells placed to sales in the fourth quarter included 7 Middle Bossier and 3 Haynesville wells averaging 6,900 feet in lateral length with well costs of approximately $1,600 per foot.
The initial production rates from these wells exceeded 26 million cubic feet a day and continue to strengthen. We are already optimizing flowback in completion techniques to maximize the return on our capital investment.
The encouraging data on these early wells confirms the Tier 1 reservoir quality underlying our core Haynesville acreage position. Now that we have resumed operations, we see an opportunity to improve on the overall operational execution by leveraging our full field development expertise, including relocating 2 high-spec Southwestern drilling rigs to the region.
During full year 2021, our production was 1.24 Tcfe above the high end of our updated guidance and comprised of approximately 82% natural gas, 15% NGLs and 3% compensate. We invested below the midpoint of guidance, a testament to the team continuing to identify ways to more efficiently deliver results with less capital in an increasingly challenged cost environment.
We experienced some inflationary pressures towards year-end, but finished strong, delivering full year Appalachia well costs of approximately $630 per foot. As we progressed our operations in the Haynesville, we believe we will grow additional value over time as we optimize that business similar to how we increased well productivity and lowered well cost in Appalachia.
As Bill mentioned earlier, we achieved company record proved reserves of 21.1 Tcfe and #22.4 billion of SEC PV-10 value. Beyond the over 600 proved undeveloped locations included in these reserves, we have approximately 6,000 additional inventory locations that are economic at current strip pricing.
Of our total economic inventory locations, we have more than 15 years of high-graded core drilling inventory at our current activity levels. For 2022, we are reaffirming production guidance of 4.7 Bcfe per day with a maintenance capital program.
This program includes capital investment of $1.9 billion to $2 billion, including $215 million to $230 million of capitalized interest and expense. It also includes high single-digit inflation as our vertical integration and scale have partially mitigated broader sector inflationary pressure.
We expect to average 12 to 13 rigs with 5 to 6 completion crews across our total asset base with 8 to 9 rigs and 3 to 4 crews in the Haynesville. Consistent with prior years, this maintenance capital program will be slightly front-end loaded with similar investment in both the first and second quarters.
The program has activity across all of our operating areas with roughly 55% of the drilling and completion investment in the Haynesville, bringing 70 to 75 wells to sales, with the remainder in Appalachia bringing 60 to 65 wells to sales. Looking forward, we anticipate our maintenance capital requirements will reduce as our base decline shallows and as we deliver continued operational efficiency improvements across the business.
We are focused on capturing the tangible benefits of scale and have already seen some early wins in the Haynesville, including operational execution improvements, commercial renegotiations and securing future capacity on the LEAP pipeline to the LNG corridor. As Bill mentioned earlier, we progressed several important ESG initiatives in 2021.
We began implementing plans to certify and continuously monitor over 5 Bcf per day of gross operated production as responsibly sourced gas across all of our operations. We plan to complete the well certification process in Appalachia by March and in Haynesville by year-end.
We also reduced the total company methane intensity by almost 20%. Included in this reduction on the assets acquired from Montage, we drove a 24% reduction in just 1 year by applying the company's emissions improvement practices.
Our 2022 plan includes $15 million to $20 million of ESG investment, including continued efforts to further reduce our emissions and replace water used in our operations. We look forward to delivering in 2022, and we'll do so by leveraging our large-scale asset development expertise, operational execution, data analytics, strategic sourcing, and vertical integration across our dual basin portfolio.
I'll now turn the call over to Karl to provide our 2021 financial review and future outlook.
Carl Giesler
Thank you, Clay. Good morning.
As Bill appropriately noted at the outset, 2021 was transformative, Southwestern Energy, financially as well as operationally. The full year and particularly in the fourth quarter accelerated the company's free cash flow generation, a $341 million of free cash flow in the last 3 months brought our full year total to $547 million.
We expect free cash flow to grow materially. In 2021, we also continued to improve our financial strength.
We ended the year with a leverage ratio of 2x, a notable year-over-year 1.5x improvement. As we move through 2022, we expect that leverage ratio to move down into the upper end of our target leverage ratio range of 1.5 to 1x.
Excluding the debt incurred to fund our acquisitions, we reduced our debt by more than $400 million in 2021. Beyond lowering our leverage ratio and reducing debt, we extended the weighted average maturity of our senior notes to more than 7 years and reduced our long-term borrowing cost by more than a percentage point.
We also increased the company's liquidity and broadened its access to capital markets by successfully securing the first oil and gas institutional term loan in the last 5 years. Our greater financial strength has been reflected in our credit ratings.
S&P upgraded the company twice in the past 6 months, most recently this past January to BB+. We believe that our improved business and financial profile will warrant a return to investment grade.
Upgrading to bring financial benefits such as lower cost of funds and more liquidity. Investment grade would also bring tangible operational and strategic benefits, and most notably in giving us a more capital-efficient access to pursue potential agreements in the global LNG market.
Hedging remains a core part of our enterprise risk management strategy. The hedge position in yesterday's earnings release includes a hedging of 80% of the production for the next 3 years of the assets acquired from GDP.
That hedging was purposeful in order to safeguard our ability to repay in part the debt incurred for that transaction. Going forward, assuming the current constructive commodity price outlook and as we progress our debt reduction, we would anticipate that our future hedging levels will moderate within the company's established framework.
Nonetheless, we remain purposeful in setting hedge levels, ensuring we protect our financial strength by recovering our cash cost and capital outlays and achieving other strategic and financial objectives. In 2022, we plan to allocate our expected free cash flow of approximately $825 million to $925 million to debt repayment to help ensure a solid long-term financial foundation through the cycle.
As Bill noted though, as we approach and have a clear line of sight to achieving our target leverage ratio and total debt ranges, we will finalize our plan to implement a return to capital program. Stepping back, we believe Southwestern represents a compelling investment opportunity and that our market capitalization underrepresents the inherent value of our enterprise.
As Bill recognized, our SEC pretax PV-10 is more than double our current enterprise value and adjusted for net debt more than 3x our market value. We believe our inventory depth and quality and our free cash flow durability are underappreciated and warrant a valuation more in line with our peers in the broader market.
We believe the market will better recognize our value as we deliver in 2022. That concludes our prepared remarks.
Andrea, could you please open the line for questions? Thank you.
Operator
[Operator Instructions] Our first question will come from Charles Meade of Johnson Rice.
Charles Meade
Bill, I wanted to ask one question about your liquids production in '22. That was the one thing that caught me a little bit off base in that -- it looks like the -- you guys saw a decline in 4Q that's going to carry into '22.
And I'm wondering, is that just as simple as you guys deemphasizing your kind of Southwest Appalachia and Ohio assets in the '22 program? Or is there something else going on there?
Clay Carrell
Charles, I got this. It's definitely not deemphasizing.
I mean it's really continuing to optimize around the economics. We've, in past years, had more of our capital in West Virginia going to the condensate rich than the liquids rich.
The liquid-rich economics have continued to improve with the rising gas and NGL prices to where now they are very comparable economically. So the 2022 program has more of a 50-50 mix between those 2 programs.
So a little less of the condensate-rich wells go into sales, but it's all driven by enhanced economics.
Bill Way
What we used to call rich and super-rich.
Clay Carrell
That's right. And then for Q4, it's really just a timing of completions.
We brought 5 super-rich wells on in the fourth quarter, but they came online December 28. So we really had -- we were front-end loaded on activity slightly and then we had less wells come online in the second half and the last 5 were in the last couple of days of the year.
Charles Meade
Got it. That is helpful detail, Clay.
I appreciate that. And then also maybe going back to some of your prepared comments saying that the Haynesville is ahead of plan in some of the IP rates.
Should we interpret that as the driver for your natural gas beat on the quarter is really the Indigo assets? And maybe as a part of that question, you commented that those -- I guess, the 10 wells you brought on down there came on with the IPs of 26 million a day.
And you mentioned that they continued to strengthen. Does that mean that the rate is inclining over time?
Or is that -- does that mean that the rate got stronger as you went from #1 to #10 across those 10 wells? I know that's a lot of questions.
Clay Carrell
That's okay. So first, for Q4, the gas beat was across the portfolio, just really quality production performance across all the assets, including outperforming in the Haynesville in Q4.
And then the comment around the well performance in the Haynesville really high rates that points to the quality of the inventory that we have there. And the comment about seeing some further improvement is -- we're using all of our technical self-service data to make sure that we have the optimal draw down and the right pressure maintenance on these wells when we initially flow them back.
And so what we're seeing is with the higher pressure that we're able to see greater rates in the greater commodity price environment that we're having right now without any degradation to EURs or well performance and that's allowing the rates to continue to incline as we move forward.
Operator
The next question comes from Neal Dingmann of Truist Securities.
Neal Dingmann
Congrats. My question is just on, I guess, scale, maybe Clay for you.
Obviously, with a lot of deals, successful deals, I'd say. And now post this, could you talk about it seems like you've got opportunities kind of -- I guess my question is twofold.
First, just on larger-scale development, might we see that? And what kind of upside could we see that potentially not even in the numbers yet?
And then just maybe talk about the integration, it seems like things are even going a bit even ahead of schedule, if you could talk there.
Clay Carrell
Certainly. So on the upside, we had well costs for those wells we brought online in the fourth quarter in Haynesville was $1,600 a foot.
The majority of those wells were drilled by previous operators and we finished some of those out. There's opportunity in that cost structure for us to use the same playbook we've used in Appalachia around efficient operational execution that will reduce cycle times and lower those costs.
And so that is one of the big opportunities in front of us there is to use that execution performance and see that improvement as we move through the Haynesville. Additionally, there's commercial opportunities where we have been able to work with our gatherers in the area and find ways to negotiate -- renegotiate improvements in broad parts of the commercial side of the business, get some increased capacity that will benefit us in the future.
Those are some of the key areas where I think the upside exists, and we're going to focus on it as we now move into 2022 and fully operate in both of those assets.
Bill Way
And when you think about larger scale development as well, we have some common -- actually, a number of common suppliers or service providers being, Williams in both places, DTM in both places, some of the drilling and stimulation companies in both places. I think another aspect of operating at a bigger scale as we now have landed 2 of our SWN-owned rigs into the Haynesville and setting rigs side by side with our contractor partners tends to generate a lot of friendly competition to drive performance, saw it in Appalachia and we expect to see it here.
Clay Carrell
On your integration comment, did you have something further you wanted to add there?
Neal Dingmann
It just seems like you are running ahead. I'm just wondering from sort of timing that you had put out, Clay, on when to have sort of everything under that same umbrella and meaning sort of the pad design, all the things that the others had versus what you all are comfortable with, are you already there or is there still upside that you'll be getting there here in the coming quarters?
Clay Carrell
We're gaining on it. We've had Indigo for 5-or-so months, and then we closed on GEP right at the end of the year.
So clearly not there yet, but we are making good progress. We're gaining good insight on the integration front from the technical understanding that the folks that work for GEP and Indigo that came to work for us are sharing and adding to our understanding of the area.
And then we're combining that with some of the things we've done in Appalachia, which is resulting in a really good product. And I think as we go through the year, we'll see further gains.
Neal Dingmann
Got it. That's great detail.
And then Carl, I don't want to leave you out. I'm just wondering with a bigger size.
Are there more now opportunities you see proactively to I would say, around the hedging, where you can walk things in on a proactive basis, either blocking a better floor, just on a go forward now that you have much more critical size on the financial side.
Carl Giesler
Well, Neal, I don't expect our approach to hedging is really going to change. We're going to continue to protect our financial strength within our well-proven framework.
And I think at this point, given the outlook that we have, both for commodities and for our free cash flow, we're in a pretty good spot.
Neal Dingmann
No, I would agree. I would agree.
Carl Giesler
How we view: a, our hedging, but more importantly, how we manage our overall enterprise risks.
Bill Way
And we look at hedging both commodity and basis and any other form of hedging as kind of Carl implied, as a key part of our overall enterprise risk management practice, which is quite robust.
Operator
The next question comes from Scott Hanold of RBC Capital Markets.
Scott Hanold
Just wondering if you could talk about like how you look at investment in the Haynesville versus Appalachia like on a go-forward basis? Do you tend to want to balance that out a little bit for strategic reasons or is there a reason to lean 1 way versus the other going forward?
There are certain things that trigger different decisions.
Bill Way
Right. As you imply, and it's certainly true, there are a number of levers that are involved now as we turn as we say, in the model when you're looking at overall investments.
So headline maintenance capital across the enterprise, then a capital program that is prioritized by returns, economic returns in a rack-and-stack almost type model, all of the Appalachia businesses and Haynesville 1 bucket. We then take that sort of beginning point, and we look at -- okay.
And the good news is our inventory across everywhere we operate has competitive economics with one another. So we are operating in every place that we all in -- the Haynesville areas where they've traditionally operated in all of our areas where we traditionally operated, and we have the economics to support that.
Then comes sort of the adjustments to that. You don't want to surge into 1 area for a short period of time, require your midstream together to build all these large infrastructure that costs a lot of money and then move from there to somewhere else and in effect over capitalize from a midstream perspective, an area.
You want to kind of keep some balance to that. Certainly, as we've been into the Haynesville and see all the opportunities plus adding to our position in the Gulf Coast market region, we see a little bit higher investment into the Haynesville, a little bit -- not materially less across the other parts of the business.
The result is an overall flat profile. But, we will bias it and move around those as economics dictate.
The other piece of this is that we operate and own a number of drilling rigs in our portfolio. We have flexibility and freedom to move about.
Charles talks about volumes up or down or whatever, those are a lot -- in a lot of cases, that is because we shifted our activities because we're able to. There's an opportunity we're trying to capture in a particular area that might be short-lived or back when we were the COVID days when condensate became an issue, we shifted it over to natural gas, a bit more volume in there so that we could not have any issues with [curtailment], all of that flexibility we build in and then -- that's where we're at.
And I think the root of all this is that the quality of acreage and the quality of acquisitions that we make against our framework sets it up such that this very thing would occur and that you have very strong competitive accretive assets when you're joining these together and they complement one another. And that just means incredible flexibility and optionality for how we invest.
Scott Hanold
And my follow-up is on the shareholder return. And you all are accelerating quite a bit quickly down the path of getting to your target range.
And -- what -- and I know it's probably a lot of discussions that have to happen before you kind of fine-tune the exact mechanism and payout ratios and things like that. But could you frame for us what are your priorities?
Or what are your overriding strategy when you think about shareholder returns without being overly specific at this point?
Bill Way
Yes. We've kind of talked about it a little bit in both mine and Carl's area, and I'll just maintain that -- repeat that conversation.
We've got a very disciplined capital allocation framework. And as we said, when we began the growth for M&A, that capital allocation framework currently prioritizes debt repayment.
We focus on our leverage ratio, which you are correct, it will approach the top end of our leverage ratio range. It's expected to be there later this year.
But certainly, we're wanting to prioritize debt repayment to ensure and protect our financial strength through the cycle. No sense in having a major commodity cycle move for some unknown reason and putting the company in any less position than we are today.
So -- as we approach later this year, that leverage ratio that we've put out there, and we have a clear site because we've operated a bit more in the current environment we're in, which is highly supportive from a commodity perspective. But we have a clear side and a deliberate path around our total debt range.
And based on those commodity prices and free cash flow, we think that we could be in a position to initiate capital return. When we think about capital returns, there's obviously all kinds of ideas in that space.
There's dividends, there's buybacks. As we do with every 1 of these kinds of decisions, we put all of this in our model, we think through the economic returns for shareholders, we think about how we maintain the level of risk or the safeness, if you will, of our -- of owning us.
And we look at our commitments to maintain a strong balance sheet, get our debt down, that was a result of the acquisitions that we made and made well, and then keep all of that sustainable. So as we get into -- I'm not -- we're not really ready to go into when we might have half of this and a 1/3 of that whoever.
But no, because it's how we think all of those options will be on the table. And whether they stay on the table after we add value or whatever, it will come down to that.
Carl Giesler
Scott, just [Indiscernible] a little bit. And again, without getting into details, I do think it's helpful to think about a few of the objectives.
Bill hit on the main one. what creates value for our shareholders.
So we are closely watching what our peers are doing and how the market reacts to the return on capital programs. The other thing that is well known as we took -- issued a lot of stock for the 2 acquisitions this last year, have some unnatural holders that, “provide an overhang”.
That element will be a factor that goes into consideration. And then we've also been very forthright in prioritizing, getting to investment grade for both financial and operational reasons.
And the impact on our credit ratings and how we return capital will also be a factor in that. And we'll have more to say on that as we get close to doing it.
Operator
The next question comes from John Abbott of Bank of America.
John Abbott
First question is really on learnings from the acquisitions. I mean when you sit back and you've acquired Indigo, you acquired GeoSouthern, when you look at those -- you have GeoSouthern recently in-house.
When you look at GeoSouthern versus Indigo, are there any differences on how the Haynesville assets were being operated within those 2 companies? And does that provide opportunities going forward?
Clay Carrell
Definitely. So the learnings we got from both of those organizations, highlighted some things that 1 was doing that the other wasn't and vice versa.
And we've been able to work through those and make decisions around we're going to keep doing it this way or that way or kind of meet in the middle where we think it's the best outcome. So there has definitely been that, and that was part of, our intent with the integration was to gain all that learning and understood that the learnings wouldn't be the same from both companies.
Bill Way
And I think that as you step back as well, and we -- I would say we knew this, but it's nice to get reinforced in learning as well. When we approach M&A, we approach it from a disciplined strategic framework on how we evaluate, how we expect the performance of the acquisition to work the timing of that, the shareholder benefit, the benefits of scale and how to capture them.
We’re accretive in nature, so one to the next to the next. And so we set the bar quite high because we bought well and are transacted well and we've transacted into a market that is -- have kind of a lot of fundamental strength behind it.
And so a bit of your question will change a little bit. It reinforces to us and it's great to see that come out is that the rigor in which we approach M&A.
John Abbott
Very, very helpful. And I just want to go back to the return to capital question.
I mean you gave a very thoughtful answer here previously, but Carl, maybe this question is for you. When you sort of think about the future return of capital, how do you think about that in relation to the credit rating?
I mean it sounds like you're looking to get back here to investment grade. How do you think about the return of capital in relation to your credit rating?
Clay Carrell
John, there are 2 factors that the agencies will care about. One is the overall quantum, the extent to use free cash flow to return capital to shareholders, you can't use it to pay down debt.
One of the ways that we will manage that is we'll be very transparent with agencies and how we believe that despite whatever return of capital program we put in place, we have a very clear executable path to land our debt into that target range, given commodity prices and our projected cash flow. So we can't get them comfortable with that, we will adjust the quantum that we return.
The second element that I was alluding to and we just need to get feedback, spoke to us from agencies is how they would view different types of return on capital. Some are seeing as more ongoing commitments in interest expense, other types of return on capital seems more flexible.
And their preference and judgment on how a different type of return of capital might accelerate or delay our return to investment grade would be a pretty important factor in how we think about exactly what the components of that return of capital plan look like. Hopefully that addresses your question.
Operator
The next question comes from Noel Parks of Tuohy Brothers.
Noel Parks
A couple of things I wanted to ask about. Actually, sort of a housekeeping one, you talked about your certification and that you're looking to have 5 Bcf a day certified to the end of the year, and you said that, that was gross.
So could you translate that roughly to the -- what that would be for net production to 5 Bcf?
Clay Carrell
Yes, about 4.1 Bcf a day that production.
Bill Way
And I'll make a point here. the environment and the -- and certifying and monitoring and then correcting actions if some should occur, it doesn't care about gross or net.
And so -- when we talk about 5 Bcf, just for the record, it really is about the full well stream, and we're responsible for it all. And so that's how we take them.
Noel Parks
Okay. Great.
And about inflation, of course, because you control your own rigs, you certainly have more control than a lot of other operators do on the drilling side. But is it safe to say that the inflation that you felt or anticipate is going to wind up being more on the drilling side, pipe and so far those materials as opposed to the completion side.
And if it is at all lopsided that way, I wonder if that had any implications for how you might think about DUC inventory in the current price environment, especially if we wind up seeing more volatility and maybe a weaker period ahead.
Clay Carrell
Yes. So Noel, as we were coming into the year, the main categories of inflation were around steel, tubulars casing, diesel fuel, and then labor.
As we've moved into 2022, the new one that is coming on strong is around frac services and proppant. And so as you mentioned, we have some insulation there because of our own frac fleet.
And then on the drilling side, there is the day rate that we are seeing inflation there also as we come into the year -- and with us having 7 of our own rigs, then we get to mute that a little bit also. As it relates to your DUCs comment, we feel like with the vertical integration assets that we have that we've got a nice balance of insured supply and the things we've done in our supply chain group that we're more still focused on how we can most efficiently get our wells drilled and completed and what is the right amount of DUCs to have so that, that can occur.
And that's really what our focus is there.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Bill Way for any closing remarks.
Bill Way
Thank you, and thank you all for being on the call. When I think about why we would invest -- why somebody should invest in SWN, I've got a couple of points: First, as I think it's been very clear in this call, we've transformed the company through strategic execution.
We're capturing the tangible benefits of scale. We have greater financial strength through the cycle than we've had.
And we have portfolio optionality with deep high-return inventory and now enhanced market access to the growing demand centers diversifying risk. A key point for me is responsible natural gas define SWN.
It's what we do. It's not a special project.
It's who we are and what we do and we've got a compelling valuation providing a great and attractive investment opportunity. So I want to thank everyone on the call for joining us.
We believe that we're excited about delivering the value in 2022. We want you all to have a great weekend.
I'll turn it back to the moderator. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.