EXE - NASDAQ

Good day and welcome to the Expand Energy 2024 Fourth Quarter and Full Year Teleconference. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Ayers, Vice President of Investor Relations and Special Projects. Please go ahead.

Thank you, Lisa. Good morning, everyone, and thank you for joining our call today to discuss Expand’s 2024 fourth quarter and full year financial and operating results. Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections, and future performance, and the assumption underlying such statements. Please also note there are a number of factors that will cause actual results to materially differ from our forward-looking statement, including the factors identified and discussed in our press release yesterday and in other SEC filings. Please also recognize that except as required by law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP measures which help facilitate comparisons across periods and with peers. For any non-GAAP measure, there is a reconciliation on our website. With me today on the call are Nick Dell'Osso, Mohit Singh, Josh Viets and Dan Turco our new EVP of Marketing & Commercial. Nick will give a brief overview of our results, and then we will open up the teleconference to Q&A. So, with that, thank you again and turn the teleconference over to Nick.

Good morning and thank you for joining our call today. The world's need for energy continues to grow with our attractive market connected portfolio, resilient financial foundation and peer leading returns. Expand Energy was created specifically to better respond to this growing demand and yield stronger returns for shareholders in times of volatility. Our productive capacity strategy uniquely positions us to not simply react, but to capitalize on the dynamic market we see today. As our 2025 capital and operating plan demonstrates, this is exactly what we are doing. Benefiting from a powerful combination of premium rock returns and runway across our portfolio, access to advantaged markets and some of the most capital efficient operations in the industry, we've enhanced our outlook for 2025. We continue to benefit from the tailwind of our 2024 productive capacity strategy and now expect to produce approximately 7.1 Bcf per day for a capital investment of approximately $2.7 billion. As market fundamentals continue to improve the outlook for natural gas, we are electing to invest an incremental $300 million to build approximately 300 million cubic feet per day of additional productive capacity. This will allow us to efficiently deliver 7.5 Bcf per day in 2026 should market conditions warrant. We believe this level of production optimizes free cash flow at mid-cycle prices. Since we won't pull the trigger on this incremental capacity until mid-year, we have time to watch the market and we'll have the flexibility to adjust as necessary. Successful integration has further strengthened our outlook. We continue to capture significant capital and operating efficiencies, rapidly accelerating the achievement of our annual synergies. We now expect to achieve approximately $400 million of our annual synergy target in 2025 and to capture the entire $500 million target by year end 2026. I am especially encouraged to see the 20% plus improvement we are delivering in our Haynesville drilling performance. In the fourth quarter alone, we cut nearly nine days and $1.5 million in cost per well from Southwestern's legacy drilling performance. The definition of synergy success is clear, achieving capital and operating efficiencies that result in spending less while producing more, which is exactly what we're doing. Our Resilient Financial foundation and Peer-leading returns program are two areas which also further differentiate our company. At today's prices, we expect to end 2025 with less than $4.5 billion in net debt. Our Debut $750 million investment grade issuance set a record spread for an energy rising star at 132 basis points over 10-year treasuries and cleared all near term maturities through 2029. Our Enhanced Capital Return framework is designed to efficiently return cash to shareholders and reduce net debt. After paying our $2.30 per share dividend, we expect to allocate $500 million to debt reduction in 2025. Given our strong free cash flow outlook, we expect to have additional cash available to allocate to a combination of variable dividend share repurchases and the balance sheet. Turning to our marketing program, we see great opportunity to capitalize on our position as the nation's largest natural gas producer. There is greater than 11 Bcf per day of LNG capacity under construction and the domestic power market continues to grow in support of data centers and rising consumer demand. We have the assets, balance sheet and capital efficient operations to help meet this new demand. I'm pleased to welcome Dan Turco to our team to lead this effort. Dan has extensive experience creating value for marketing and trading programs and will help us realize the benefit of our advantaged position. The marketing program has already seen the value of our combined portfolio. Our team worked extremely hard from the date of close to fully integrate our marketing and transportation portfolio by January 1st of this year, allowing us to optimize the flow of volumes across pipes, increasing value for our gas and reducing costs. Looking forward to 2026 once the NG3 pipe is online, approximately 75% of our marketed volumes are expected to reach strategic markets including 2.5 Bcf per day directly to the growing LNG corridor. Expand's powerful combination of an attractive connected portfolio, a peer leading returns program and resilient financial foundation is distinct among natural gas producers. Today's market provides a unique opportunity for our company and we look forward to expanding opportunity for our shareholders in the year ahead. Operator will now take questions.

Thank you. [Operator Instructions] Our first question will come from the line of Matt Portillo of TPH. Your line is open.

Good morning Nick and team.

Hey Matt.

Just a quick question. Slide 9 Very helpful. Laying out your thoughts on maximizing free cash flow at mid-cycle pricing. Just curious maybe if you could speak to that slide. And specifically if we're in kind of a $3.50 to $4 world, should we be thinking about kind of your productive capacity once you get to the 7.5 Bcf a in 2026 to hold around 7.5 [ph]? Or do you think you could continue to see growth from that point forward?

Yes, I'm really glad you asked about this slide to start off with, Matt. This is an important way for us to communicate how we think about our capital allocation for this year and over time. We all talk a lot about the right way to set up our business. And we thought this slide did a good job of laying out our thought process. We believe that it starts with a view of the macro. And so we'll continue to have a view of the fundamentals and let that underpin how we think about allocating our capital. And for us, that means that we're going to always have a rolling forward 2-3 year assessment of where the market is and what that means for mid-cycle prices. And you're right to point out that right now, we're pegging that at $3.50 to $4 per Mcf, Henry Hub. And so the table below simply lays out a look at the heat map is designed around cash flow generation, free cash flow and looking at various levels of production relative to various levels of price, where is your business optimized? It's pretty easy for any of us to think about in a stronger market, growing volumes. That always feels good. But there's certainly an optimal level of production for a business given the underlying macro. And I think this helps to highlight how we view that there can be levels of production that are too high for a given price and there can be levels of production that are too low. And so at $3.50 to $4, you can see that we sit in a pretty good place at 7.5 Bcf a day. What we also like about this slide is that we're giving you some parameters around which we would have to underwrite a longer-term view of the macro in order to raise that level of targeted production. And I say targeted and we say mid-cycle and all of those things because there's plenty of volatility that could show up in the short term that would continue to cause us to do things like we did in 2024, curtail volumes, curtail activity. There might be times where you want to accelerate capacity that's otherwise on the sideline, given a short-term event. But when we think about mid-cycle activity, we think about this level of production relative to this price that we're underwriting. So right now, $3.50 to $4, 7.5 Bcf a day of production. I think it's pretty interesting to note that from an overall market standpoint, we are underwriting a level of price that is below where the 2025 and 2026 strip is today. We do that with the recognition that, one, we don't mind being just a bit on the conservative side and underwriting price. Two, we do think a lot about how this will evolve over time. And we know that when prices as they are today are above the marginal break evens of the industry supply will ultimately show up and compete. And that competing supply, as we go out into 2027, 2028, 2029 is increasingly going to be not just domestic supply, but international supply. We've talked for a while about how in the second half of this decade, there will be more LNG capacity that comes online around the world that will compete directly with U.S. Gulf Coast capacity. And so we think it's appropriate to take this multiyear view of the market. And again, we see $3.50 to $4 is a pretty reasonable price to underwrite. So all of that informs how we think about our business today, it thinks about -- what helps us to think about what the optimal level of production and CapEx is that then drives the optimal level of cash flow. I would also just point out that we're giving you a lot of information on this slide, including the right-hand column of the matrix, which tells you the amount of maintenance capital that would be required for each of these levels of production. Obviously, there's a lot of assumptions embedded into a chart like this. And those assumptions would have to be revisited over time. We're using our current assumptions of well cost. We're using our current assumptions of well productivity. Our team is pretty focused on improving our capital efficiency around both halves of that equation every day. And so we'll continue to refresh our thoughts around this. But we think this is a pretty good framework.

Perfect. And then maybe just a follow-up. You mentioned LNG. I was just curious if you can maybe touch on your updated thoughts on the marketing strategy? I know it's a diversification for you all. And there's obviously some puts and takes and views on global incremental supply versus demand over the next few years. So just curious, how you guys are thinking about the LNG market and your strategy moving forward?

Yes. Another great question. So again, we're excited about what's happening with the incremental LNG export capacity on the Gulf Coast and how we're positioned relative to that. We think we are uniquely positioned to that, one, just given the scale of production that we have proximate to those assets in the Haynesville, but then also, we have a really nice transportation portfolio that allows us to move 2.5 Bcf a day by the end of this year to Gillis. We moved another 2 Bcf a day over towards Perryville, which then can flow south towards the Eastern facilities like Plaquemines. And we have a lot of connectivity to these projects. We have a great relationship with a lot of the liquefiers themselves as well as the off takers, and we have regular communication with all of them about what their needs are and how we should think about being prepared to supply gas. So we really like our position. As you know, we have announced on supply agreement going through the Delfin facility. And we think there's more that we can do around LNG in the future. But I would say we're really focused on ensuring that as we take on any incremental LNG projects, we're thinking hard about how we can do a couple of things. One, ensure that it provides a diversified revenue source for us, connecting us to markets that we wouldn't otherwise be connected to that have diverse and different characteristics than Henry Hub. We think that's important. And then exposing us to revenue opportunities that, again, help to generate higher levels of cash flow through cycles for our business. I think as we think about our business today, we are in the Haynesville, which is a really important geographic diversity for us, being proximate to markets and being able to grow. And we need to show higher revenue to prove out the value of that geographic diversification.

Thank you.

Thank you. One moment for the next question. And our next question will be coming from the line of Doug Leggate of Wolfe Research. Your line is open.

Hi, good morning everyone. Thanks for taking my questions. Nick, I've got two, if I may. I guess the synergy number, we're all kind of watching that evolve a little quicker than you had originally planned. But if I go back to when you announced the deal back in January of last year, you put a kind of a 2-year time line on building a marketing business, and you obviously made a very high profile higher here recently. So I just wondered if you could give us a quick refresh on what you think the timing looks like now to achieve what you think is possible and maybe quantify what that number looks like, again, 2.5 Bcf a year, more or less. What's the -- is that $0.10 number? Is that $0.20 number? What's the ambition? Because obviously, I don't think that's in a lot of people's numbers at this point. That's my first one. I've got a quick follow-up, please.

Yes. Thanks, Doug. We're really excited about what is in front of us from a marketing perspective. And you're right, we have made a really important hire for our team. And we're looking forward to building out our business in a way that takes better advantage of the scale of production that we have as well as the transportation portfolio we have today. Traditionally, both Chesapeake and Southwestern marketed gas in a relatively close to wellhead fashion. We do have a lot of transportation, but we are, for the most part, selling gas to the nearest purchaser at the terminus of that transportation, whether that's off the gathering system or if it's further downstream. And we haven't engaged in a lot of optimization, which generally, larger companies do. We think there's quite a bit of value in the domestic optimization of how we sell our gas. And we're looking forward to building out the processes and the capabilities to do that. We know how to do it. We have the talent to do it. We need to build systems processes and certainly need to build a risk framework to ensure that we do it properly. But in doing that, we think we can add pretty meaningful value to our business and increase our netbacks to our equity production, certainly by a few pennies on that domestic optimization alone. And then the longer-term value opportunity is, of course, around new commercial relationships that could be more interesting. And those could be in the form of power deals, industrial deals, LNG deals, long-term buyers of gas that seek certainty of supply and potentially seek some certainty of cost. And we think there's quite a bit of opportunity in a market that looks like it will increasingly have challenges of getting the right amount of gas to the right markets at the right time. And we think we're well positioned to help solve those challenges.

So just to be clear, is that a $400 million annual business? Or is that stretching the -- I do know the number you said in terms of marketing model. I'm thinking $0.15.

I think we're going to hold off on giving you an exact number today, Doug. We're going to continue to build out this business plan. We're going to hold off on giving the exact number today, but we think it's certainly meaningful. And we're pretty excited about what's in front of us.

Got it. So my follow-up is you've kind of certainly slipped into the presentation, 20 years plus of inventory. And I think you used to have the Southwestern, the Chesapeake standalone saying, we've got a 15-year backlog. I think -- when you think about -- we're telling you, you can hold this at $3 billion of capital, 7.5 Bcf a day. It seems you're making life pretty simple for everybody to kind of lay out what the value proposition is. My question is, what commingling Bossier, Haynesville Upper, Lower Marcellus, what's extending the inventory? What is the relative economics look like of the portfolio today versus what you were seeing before? And because I was obviously an impression that Bossier and Haynesville had very different returns, but now they're both part of the story. So if you could help us understand that a little bit, if that 20 years is an apples-for-apples comparison that would be great.

Yes. Look, it's essentially the productive life of -- around the assets that we generate today. So yes, Bossier is in there, Upper Marcellus is in there. And we continue to derisk all aspects of those plays that have less producing wells than maybe the more traditional Haynesville zone or the Lower Marcellus zone. Our team has done some really, really good work over the last couple of years to add value to all of those locations. And every time we add value to those locations, more of those locations can turn green, so to speak, in our inventory counts and in our skyline charts. One of the things that's happening here, though, is that as we brought these two companies together, we think that we are ultimately going to be most efficient and most effective and leaning on the capital efficiency of our business. We'll run less rigs than each company was running on a stand-alone basis. And so the life extends, the number of years of development extends partially just because of that. But we're definitely very focused on continuing to turn more and more sticks within our acreage green, which allows us to add more adjacent acreage around our plays.

Thanks a lot for the answers.

Thank you. One moment for the next question. And our next question will be coming from the line of Scott Hanold of RBC. Your line is open.

Yes, hey thanks, good morning. Let's stick on that same topic, if we could. And specifically with the Upper Marcellus and Bossier, can you talk about how -- what percentage of that is in the activity over the next couple of years? And just give us a sense of the relative economics of those zones comparatively. And are you seeing the ability to kind of what things are you seeing that can maybe improve those economics and you get closer to sort of the Haynesville/Lower Marcellus?

Yes, good morning Scott, this is Josh. First on the split, we do provide a slide in the deck on Slide 35 that provides the breakdown for the number of TILs. But you'll notice in the Haynesville, we are going to be slightly heavier weighted towards the Haynesville wells. So it's probably closer to 60% to 65%. And in the Northeast with the Upper and Lower, it's probably closer to maybe 45% lower and the rest will be Upper. And so on the comparative economics, one of the things I would just say, and I'll maybe start with the Haynesville specifically, both reservoirs offer tremendous potential from a return standpoint. And we like the productivity that we see in each. The Bossier tends to be just a little bit more expensive on the completion side, but also recognize it's shallower. So drilling costs are a little bit less. We find productivity to be fantastic across both, I would say, somewhat equitable. The Upper and the Lower, we've talked about for some time, the fact that we do see lower productivity on a per foot basis in the Upper. But the ways we find to enhance the economics of that, which is really the ultimate goal, is by extending lateral lengths. And because it's less developed, we have opportunities to drill longer laterals, which we've been doing year-over-year. We've also really been investing in analytics and looking opportunities to enhance the way at which we complete these wells. And so the combination, the longer laterals, the enhanced completion designs, we've talked about hybrid wells in the past as another mechanism at which we could really boost up the profitability of the upper wells where we combine, let's say, a 10,000-foot section of upper with 5,000 feet of lower reservoir. That all helps to normalize our returns across the Marcellus play.

Appreciate the context, thanks. And as my follow-up, just talking about the productive capacity increase that you have planned into 2026. And -- to me, it was interesting on -- I guess you're calling up productive capacity versus "just regular growth." So that does -- correct me if I'm wrong, tell -- indicates to us that there's some optionality if the market is not there. But can you give us some sense of, as you get into the back half of 2025 -- obviously, it's a very sensitive time coming into the winter every year with the gas market. If you start building this productive capacity in these wells to bring on -- and let's say, the winter doesn't pan out. What happens in 2026 now that you've already spent those $300 million of extra capital? What do you do?

Sorry, my mute didn't come off. I'm going to start over. Yes, we're really pleased with the flexibility we exhibited in our business in 2024, and we think it would set up really similarly. So we're going to build this productive capacity coming into the end of this year, it will be ready to be turned in line in 2026. And if the market is not there, then it would we would likely have a response to that that would be some combination of either holding back the turn-in lines or curtailing volumes to alleviate pressure on the market. But I would back up even further than that. And let's say that we see that as we come through this year, the macro conditions change in some unforeseen way and the market doesn't look as strong in 2026 or 2027, then we'll change our capital allocation as well. We've proven, I think, several times over, the flexibility we have there and the willingness to try and be responsive and in front of market conditions to be efficient with our capital relative to where we are in the cycle. So we maintain a ton of flexibility in our business. And this is what we think is the right planning step for today, and we're very prepared for both increasing capital or decreasing capital as conditions warrant.

Thank you for that.

Thank you. One moment for the next question. And our next question will be coming from the line of Devin McDermott of Morgan Stanley. Your line is open.

Hey good morning. Thanks for taking my questions. So I wanted to dive in first on the 2025 activity in a little bit more detail, I definitely agree with the constructive outlook for gas prices this year. Looking back about a month ago, we were flirting with $2 on Henry Hub. So I was wondering if you could talk a bit more about the decision process to pull forward the deferred TILs and then also give a little bit more color on the cadence of that productive capacity throughout this year. I know you have the 1Q guide and the full year number, but how are you thinking about the volume trajectory as we move through 2025 for the business?

Yes. Good questions, Devin. So we're again, I want to go back to talking about how we think about the macro and thinking about a 2 to 3-year look of underwriting a price range here, and we've landed at $3.50 to $4. There's a lot that goes into that. And ultimately, you're thinking about the trajectory of supply and demand and all of the features of the market that will impact supply and demand over the next couple of years. And so on the supply side, you're certainly thinking about how many rigs are running, how many wells are being completed, the productivity of those wells, how many pipes are coming online, including from associated gas areas like the Permian and building out a pretty good view of what the supply to the market looks like. On the demand side, we're going to pay a lot of attention to the trends of power generation, and what fuels power generation growth is relying on trends of industrial demand. And then certainly, what we see now as the big driver is the increase in LNG export capacity, which requires a view not just of what that -- of the aggregate capacity, but also a view of the likely utilization of that capacity which, again, we've talked about initially, we think is going to be very, very high, and then over the next few years, would potentially begin to run at less than 100% capacity as more and more comes online. So all of that informs this longer-term view. One of the things that you do pay attention to as a part of all of this analysis is where storage is. So we've had this constructive view on the longer term. And then as we got through this winter, you see that it's been very cold, of course, and storage has drawn down a good bit, which just accelerates the timing at which the market is seeking incremental supply so that storage doesn't run too low. I think the multiyear look hasn't really changed much for us, and all that's changed is that the starting point at which the market is looking for more supply has come to us a little bit sooner as a result of their being a cold winter. We think it's really important to maintain this view that is multiyear, multi-season so that we don't end up chasing a near-term event of price in the market. And then again, to make sure we have the flexibility in our business to continue to review those assumptions over time. I'll ask Josh to comment just on the trajectory of production this year and going into next, because we gave a lot of thought about that as we have the flexibility with our deferred TIL strategy.

Yes. Devin, we absolutely started to see some strengthening fundamentals as we were exiting the year. And so we did start to bring online some of the deferred TILs at the back end of December. In fact, across the fourth quarter, we brought on about 40 wells, and roughly 25 of those were technically deferred TILs. And what you have to just remember in this is what we've been able to accomplish with just -- let's just say, those 25 wells, those wells could have come online in a $2 gas price environment. But instead, we were able to bring them on into a very strong environment with roughly $4 gas. So we feel really good about that decision. Then as we come into the first quarter, and again, fundamentals remain strong. We talked about weather. We've seen relatively strong LNG feed gas pools as well, which, again, we think is helping to tighten storage. And so across the first quarter, we're anticipating bringing on roughly 90 wells into the markets. And just to give you a little bit of perspective on what that means from a trajectory standpoint, of course, we've guided to a 675 number for Q1. But we expect to grow from the end of December, where our production was just over 6.4 Bcf a day. We expect to exit March around 7 Bcf a day. And so when you talk about kind of short cycle market response to production, that's really what we've created here. And so with the deployment of our deferred TILs, which we expect to be extinguished effectively by the first half of this year, we expect to be kind of up on plane between, say, 7 and 7.1 Bcf a day heading into the second quarter. And we'd expect to maintain that type of production as we exit the year, which then, of course, positions us to be able to benefit from the productive capacity that will now build on this up cycle as we look to exit 2025.

Got it. That's really helpful. And my follow-up is on that productive capacity. Slide 8 has the building blocks of capital and also some breakdown of where that incremental $300 million of spending would go. And I think it's notable that it's actually split across Appalachia and the Haynesville, you have some going to each of your core assets. So I was wondering if you could just talk a bit more about how you think about allocating growth capital across the different assets in your portfolio? And maybe as part of that, if you could just address the takeaway situation in Northeast Pennsylvania and how much room there actually is to boost volumes there?

Yes. So we think about allocating capital across these assets, just as you alluded to in your question. Our ability to grow is primarily in the Haynesville. In Appalachia, the capital that's coming in there is really in recognition of what the existing capacity is and bringing production up to those capacity levels. We know where we've been able to produce successfully in the past, and we're not going to attempt to go beyond that. So the growth capital that you really see is more about the Haynesville. I just want to remind everybody that we do sit right adjacent to the LNG growth corridor and have 2.5 Bcf a day by the end of this year of capacity to deliver to Gillis. So as you think about where that LNG gas is going to come from, it's going to primarily be sourced from Gillis. We have the LEAP pipeline and the NG3 pipeline and in aggregate, that's 2.5 Bcf a day that gets delivered right to the source of growing demand. And so the incremental volumes that we really think about here as we increase our volume profile into 2026 are focused on meeting that growing demand. This is not delivering volumes into a static environment.

Makes sense. Thanks so much.

Thank you. One moment for the next question. And our next question will be coming from the line of Neil Mehta of GS. Your line is open.

Hi, it's Neil Mehta here. Can you hear me okay?

Yes, sir.

All right, Nick. I just wanted to spend some time just talking about return of capital and capital allocation and those 3 tranches that you outlined in the deck and your objective here in 2025 as you transition from delevering to focusing potentially on shrinking your share count too?

Sure. We're pretty happy with the cash flow profile that's in front of us for the next couple of years. One, we've prioritized that pay down. And you can see that really clearly in that waterfall. We've put in place a $500 million debt pay down goal for the year. That's on top of the fact that we retired the outstanding revolving credit facility that was Southwestern's at the close. We've paid down $389 million of bonds that were maturing in January. And then we've done another refinancing, of course, with our first investment-grade issuance that allowed us to push out some maturities. So we have a really good runway in front of us to retire debt and a lot of cash flow to do it. So that $500 million out of our free cash flow will flow towards debt paydown as well as we have a little bit of incremental proceeds from the Eagle Ford sales that will come to us in deferred proceeds in 2025, that will go towards debt paydown as well. So we're taking a pretty good swipe at the balance sheet. We're going to end the year with less than $4.5 billion of net debt based on the recent strip. So we feel pretty good about that. That will obviously be well under one times EBITDA with prices around where they are. I would also remind you that that $500 million is a target that we'll set each year. So next year, we will have another debt paydown target. And what we've attempted to do with this framework is allow for a good balance of ensuring that our balance sheet stays very, very strong. It's, as you know, with the history of our company and the way we've been able to bring assets into the portfolio that have been very accretive to our overall returns profile, we believe you need to have a very strong balance sheet to do that. So we're going to continue to have a really strong balance sheet. You need a strong balance sheet to allocate your capital efficiency and maintain the flexibility to allow production to decrease and increase as we've done over the last year. And that balance sheet strength is such an important part of how we think about our competitive position in the market that it will stay front of mind for us and be protected. And then beyond that, though, we're going to generate a lot of excess free cash flow. And we think that that needs to be returned to shareholders in a pretty significant proportion. So that remaining tranche then, we have the flexibility to return to shareholders, 75% of it either in the form of buybacks or variable dividends. We will use that flexibility to be thoughtful about the most efficient way to do that for shareholders. Over the last couple of years, you've seen us use both. And I wouldn't be surprised if we continue to use both.

Yes. Nick, and that kind of brings us to the follow-up, which is you guys have done a great job of hedging the wedge or taking advantage of the constructive forward gas curve. Can you just talk about how you're thinking about the hedging strategy on a go forward? Does hedge the wedge still makes sense? Or have you gotten to an optimal level at this point? And just how you're thinking about that part of risk management?

Yes. Our hedging strategy, we feel like has worked really well for us. We had a really nice offset to the low prices last year that supported our cash flow. And despite the fact that gas average for the year about $2.26, we ended the year with a nearly neutral free cash flow position that's really largely supported by our hedges. In 2025, as prices have run quite a bit, are hedge losses are a fraction of what that gain was last year. And that's a function of the fact that we've hedged, we think, on a rolling basis that has really made sense so that we have exposure to the right prices in the market that we're setting the appropriate floors. And we've been able to use a fair amount of collars as we approached the start of 2025. We like the approach. We like having roughly 50% to 60% of the first year hedged and then less in the second year and continuing to lag into those hedges over time. We also would acknowledge that in recent weeks, as prices have been a lot stronger, we're not afraid to shift for near-term prices more towards swaps. You're elevating the floor of your locked-in price, and you're also willing to move to the higher end of your ranges of targeted levels of hedges. We see prices in 2025 that, like I noted a few minutes ago, are well above the marginal break evens in the industry. And when you see that, you want to hedge more, and you want to go ahead and lock in those prices. So that's what we'll continue to do.

Thanks, Nick.

Thank you. One moment for the next question, please. And our next question will be coming from the line of John Freeman of Raymond James. Your line is open.

Good morning, thanks. The first question I had is -- just following up on an earlier question. Josh, when you were kind of going over the accelerated pull forward on the deferred TILs, just to sort of level set kind of the model since I know that the plan is that, as you said, all the TILs basically get exhausted first half of the year, and I believe the plan assumes about 85% of the DUCs get bottom line this year as well. Where did the deferred TILs and the DUCs stand at year-end?

Yes. So because we started bringing on wells in the back end of the quarter, which was about 25 that's deferred TILs, that left us with about 55 to 60 deferred TILs at year-end and between 50 and 60 DUCs at year-end. And just one comment I would make on the DUCs is that we have assumed a somewhat ratable activation of the DUCs across the year. And of course, there's a capital amount that comes along with that. One of the things we really like about the plan is just to retain flexibility that we have. And we have this option to actually accelerate the completion of the DUCs that creates more flexibility in the year from a production standpoint while holding capital flat. And so though we'll have activated over all of our deferred TILs. We still feel like we've retained flexibility with the DUCs throughout the calendar year.

That's great. And my follow-up, when looking at that Slide 9, it would appear that going from kind of 7.5 Bs a day to call it, 8 plus Bs a day, it looks like just trying to back into what you've got for the CapEx, that it doesn't look like there's like a material kind of increase that's needed on infrastructure spend. It looks like you'll can handle that without any big step change on that front. Is that the right read on that?

Yes, that is the right read. What you need to remember is just where both companies were operating prior to deal announcement at the end of 2023. And so we have adequate offtake, the infrastructure, both in the field and with the transport is capable. And so effectively with what we're doing right now, we're restoring volumes. And then the productive capacity that we'll build will essentially continue down a path to get us to a spot where we're just more fully utilizing the infrastructure that we have access to.

Got it. Thank you.

Thank you. One moment for the next question. And our next question will be coming from the line of Paul Diamond of Citi. Your line is open. Paul, your line is open.

Apologies, the line cut out there for a second. Good morning, thanks for taking the call. I just wanted to talk about Slide 15. You guys talked about having made some good progress on the -- good progress on the drilling activity. I just wonder if require -- if there was there any opportunity there or the timing of such? Like I guess, how much meat is left on the bone there?

Yes. We still feel like there's plenty of room to drive improvements. And this is -- this slide on Slide 15, of course, is focused on the Haynesville. And I just -- I would say that we've been incredibly pleased with the progress that the team has made through our diligence process with the transaction. We had pretty clear understanding of what the gap was in terms of days. And we utilized the time of our integration planning really to break that down into wealth segments. And we've used that time, obviously, effectively to allow us to realize more than a 20% improvement in our footage per day and 20% improvement in cost just in the first quarter. And so to your question, we're going to continue to improve on this. And talking to the teams, we know there's additional opportunities. I'm seeing that even just flowing into the first quarter. So we feel really good about the trajectory that we're on. And then the thing that I would also just mention, again, we've focused this in on the Haynesville for this discussion. But we just drilled a 5.5-mile lateral up in West Virginia, and we did so with a single bit run in just over 5 days. And that type of progress that we see in an asset, that clearly has an opportunity to kind of lend itself into the other areas that ultimately translates into incremental synergies. So we definitely think there's meat on the bone and really, really excited about what we have in front of us.

Understood. And just 1 quick follow-up. Thinking about the rig adds in second half. How should we think about the timing and cadence? Or is that purely reactive? Or is there a plan for July 1 and then October 1? Just kind of how to think about the timing there?

Yes, Paul, I'll lay that out for you. The rig adds are premised across the second half of the year. What we're looking at right now is that we'd add a couple of rigs in the third quarter. Those would be destined for the Haynesville and Northeast App. And then in the fourth quarter, we would expect to add a rig in Southwest App and then the ninth rig in the Haynesville.

Understood. Appreciate the clarity. I'll leave it there.

Thank you. One moment for the next question. And the next question will be coming from the line of Charles Meade of Johnson Rice. Your line is open.

Good morning, Nick, to you and Josh and the rest of the Expand team there.

Hey Charles.

Nick, I wanted to ask a question about Page 10. Really, this graph on the left side of the page. And my first reaction when I see this is, it reminds me of my son's high school trigonometry homework. It makes me think maybe whoever came up with this slide is looking at something similar recently. But I think what this is -- this is the -- this is trying to describe the dynamics around the baseline kind of scenario that you're outlining on Page 9. And if that's the right interpretation, I look at this, and I think the message that you're trying to send is that you will be increasing CapEx when you're under producing, presumably when prices are low and that you'll be kind of maximizing CapEx and starting to draw down when prices are higher. But I wonder if you could guide our interpretation of that -- this dynamic that you've laid out here?

Yes. You're talking about our attempt to be countercyclical. And generally, I would agree with you. I would say that it's not going to be quite as simple as you just described. But generally, this is a look at how we would attempt to be responsive to market conditions in a way that is faster than the cycles of capital will typically allow you to be in this industry. If we go put capital to work in this industry today, it takes us a couple of years to bring production online and then earn a return on that production. From the point of what you make the decision until the time at which you have the return of capital in the bank from that decision, it's a couple of years. So what you really want is a business that's much more flexible in a market that has conditions to change much faster than that cycle of capital. And this is really meant to describe how we would achieve that. We are very willing to allow production to fall in the near term. And then as you bring production back to move above a targeted midpoint when prices are there to support that. And so what you should think about is you accelerate and decelerate capital if you want to move that middle dash line. But you move above and below that dash line based on the near-term conditions in the market.

That is helpful, Nick. That adds to my understanding. And then one other thing, Nick, as a follow-up. Twice now, I think you've mentioned marginal breakeven for the industry. Can you share what you think that is and where Expand sits vis-a-vis the industry on that marginal breakeven?

Sure. I mean, I think we can all calculate like a specific number in a supply model on what marginal breakeven is. Of course, everybody is going to look at it a little bit differently. So we think that number is -- I'm going to just call it loosely in the mid-3s. And so we think we sit probably on the lower end of that as a business because we have a huge amount of inventory at very, very low cost in the Marcellus, and then we have lower-cost inventory in the Haynesville than some of our peers, lower cost because we still have a lot of development in the core of the Haynesville and also because we have the best capital efficiency in the Haynesville, and we have a slide in the deck that details that. So we think we sit in a really attractive position relative to the industry's marginal breakeven. And that's super important because if you're going to be a company that responds to supply and demand signals, you really need to know where you sit. And if you're at the tail end of that marginal breakeven, you shouldn't be the first company to respond, but I don't think that's where we are. We are most proximate to the growing demand. And in that area of proximity, we have the most capital-efficient assets. And so we really like our competitive position.

Thanks, Nick.

Thanks, Charles.

Thank you. One moment for the next question, please. And our next question will be coming from the line of

Thanks for taking my questions. First, Josh, you mentioned some meat on the bone left on driving D&C costs lower. Have you built any of those incremental D&C declines into the CapEx budget? I mean, you've been consistently coming in at the low end or below on CapEx over the last several quarters. So just trying to get a sense on if that trend could be set to continue?

Yes. So what I would say is that for the $400 million of synergy, that does account for additional improvements. But I do believe and I have an expectation that we continue to find opportunities to enhance efficiencies through the year. And if realized, will create upside to the capital needed to execute our 2025 program.

That's helpful color. And then just wanted to follow up on a couple of the earlier questions. So you currently talked about anchoring to that 7.5 Bcf a day level in 2026, which -- in the slide in the deck, that's based on a mid-cycle price of $3.50. The strips above that level over the next couple of years, do you see any scenarios where you would move production higher from that 7.5 Bcf a day level in 2026? Just trying to get a sense of how flexible you could be there, both going higher and lower?

You certainly could go higher,

Thanks, Nick. That makes a lot of sense.

Thank you. And our last question will be coming from the line of Bert Donnes of Truist. Your line is open.

Hey good morning guys, thanks. On potential data center agreements, maybe what are your thoughts on how involved you need to be in the project? I guess where on the spectrum do you fall if maybe all the way on 1 side is you need to be a part of the upfront spend or maybe all the way on the other side where you just provide the gas and get a fixed price or a premium? And do you think there's room for a consortium of names to provide the gas supply? Or should it be more siloed with each producer having kind of their own individual agreement?

Those are good questions, Bert. I don't think they're completely known yet. We're open to all commercial structures associated with the creation and support of long-term demand for our industry. What we like about those projects is that they do represent long-term structural demand, really sticky, not weather-driven, short-term events. So we're open to supporting that in a number of different ways, but we are also very cognizant of our cost of capital and what would be efficient for our shareholders for us to invest. So I don't know that we need to invest capital in the infrastructure. But under the right economic scenarios, would we? Sure. We do definitely focus on what it means from a bottom line standpoint for the gas that we sell and the opportunity that we have to create a total return on our activities. As to whether or not we can do supply agreements like that on our own or you need a consortium, given our scale of supply, investment-grade balance sheet, our ability to deliver gas to a number of different places, we're -- we think it's perfect -- we're perfectly capable of doing things like that on our own, maybe even uniquely so. And at the same time, if there's a series of plants or a series of customers that want to have gas for multiple locations or want some diversity of supply, we can work with others on that as well. But we do think we're well situated to be a sole supplier for certain projects.

Got you. Very clear. And then just shifting gears a little bit. You outlined most of the potential growth in the productive capacity scenario would come from the Haynesville, but I assume maybe some growth happens in Appalachia at higher prices? And a few of your peers outlined growth plans in Appalachia that I think assume in-basin demand is going to materialize. But could you maybe talk about if you're seeing availability of transportation pickups? I mean, is -- are there roll-offs of other operators that aren't growing? Or just maybe how you think about if there is Appalachian growth, where do those incremental volumes head? Thanks.

Another good question, Bert. I think there's a little bit of all of that, not maybe in huge size. So there's always a little bit of roll-off from others as the basins mature. When that happens, we're really well positioned, should we want it to take advantage. There's definitely some in-basin demand growth. And like I said, we're in the middle of a lot of those conversations to try to help encourage that. There's discussion of new infrastructure, and you've seen some of that in the press lately, and we're going to pay really close attention to that. And if those projects make sense, we'll be a part of that as well. The assets that we have in Appalachia, particularly our Northeast Pennsylvania position, is the most economic gas in the United States. And any opportunity that we have to deliver more of that into a constructive market with durable demand, you should expect we will seek and achieve. So those things are hard to make happen or they would have happened several times over, but there's probably a better opportunity to see those things happen today than there has been in quite a long time.

Thanks, Nick.

Thank you. And that does conclude today's Q&A session. I would like to turn the call over to Nick for closing remarks. Please go ahead.

Thanks, everybody, for joining the call today. We're really excited about what 2025 and 2026 has in store for us. The market has been volatile, and we are better prepared for that volatility, we think, than just about anybody else out there. We look forward to using that preparation and flexibility in our business to create incremental and attractive return for shareholders. We'll all be on the road quite a bit over the next few weeks. And so probably see several of you out on the conference circuit and look forward to engaging with everybody. Talk to you soon. Thanks.