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Southwestern Energy Co (NYSE:SWN)
Q3 2020 Earnings Call
Oct 30, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Southwestern Energy's Third Quarter 2020 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 -- Director of Investor Relations

Thank you, Gary. Good morning and welcome to Southwestern Energy's Third Quarter 2020 Earnings Call. Joining me today are Bill Way, President and Chief Executive Officer; Clay Carrell, Chief Operating Officer; Julian Bott, Chief Financial Officer; and Jason Kurtz, Head of Marketing & Transportation. Along with yesterday's earnings release, we also filed our 10-Q, which is available in the Investor Relations section of our website at www.swn.com. 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 the Forward-Looking Statement sections of our annual report 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 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 will now turn the call over to Bill Way.

Bill Way -- President And Chief Executive Officer

Thank you, Brittany. Good morning, everyone. We appreciate that you've joined our call today, and I hope that all of you are safe and well, especially in this pandemic. The third quarter was incredibly eventful for our team, and we very effectively managed the many challenges present from this pandemic with limited impact to our company or our people while announcing an acquisition and completing two capital market transactions. Surrounded by volatility in the energy space, as usual, our team steadfastly delivered above target results, meeting or exceeding all consensus metrics. I want to turn for a moment to all of our employees across the country who are listening to this call and say thank you for your incredible dedication and commitment to our mission. I truly appreciate all that you do, and I'm very proud of you. Over the past few years, we've executed a deliberate repositioning of our company, reducing debt by nearly $2 billion, decreasing our expense cost structure by over $200 million, reducing well costs by 40%, strategically mitigating risk through hedging and investing in our high-quality Appalachia acreage to return the company to generating meaningful free cash flow. We now expect to generate $300 million in free cash flow in 2021 at current strip prices.

Once again, we have delivered. In the third quarter, we announced the acquisition of Montage Resources, further solidifying our position as a top Appalachia producer, increasing scale, enhancing returns and positioning for greater free cash flow. We have been consistent in our message that the industry needs to consolidate to benefit shareholders, and we are pleased to have played an early role in this necessary trend. We approached this transaction with the same discipline that we exercise in all of our investment decisions, an at-market transaction with tangible synergies, which will be delivered at closing, while maintaining our balance sheet strength. Adding scale to the existing assets enables us to leverage operational expertise, optimize commercial contracts, broaden and deepen our inventory base and enhance margins and returns and free cash flow, all in a rising gas market. The integration process is on track and advancing as planned, in anticipation of closing following the Montage Resources' shareholder vote scheduled for November 12. Having successfully repositioned the company, our two stated goals of free cash flow generation and a sustainable 2 times leverage ratio are expected to be delivered in 2021. We expect to release formal 2021 guidance early next year. And based on current strip prices I've said before, our free cash flow estimate is approximately $300 million.

We have no plans to invest above-maintenance capital next year, holding production levels flat exit-to-exit from Q4 '20 to Q4 '21. We expect to use free cash flow for debt reduction. And to be clear, should seasonal prices improve further, we will not increase our activity level above maintenance levels. The third quarter included more examples of above-target results as we once again delivered ahead of plan. Clay and Julian will detail that in just a few minutes. We further progressed our leading operational execution and efficiencies, setting numerous operational records. We fortified the balance sheet and maintained our maturity runway by accessing the capital markets. And we delivered on further cost reductions we announced in the second quarter.

Let me speak briefly about a core part of our strategy to continue our ESG leadership, accountability and transparency. During the third quarter, we released our 7th Annual Corporate Responsibility Report, which highlights the results of our dedication to achieving sustainable returns for our shareholders and responsible energy development through a relentless focus on health and safety, practicing good environmental stewardship and being a good neighbor and active member of the communities where we work and live. It's not just something that we say or talk about, it's something we believe in and practice every day. So let me provide a few proof points supporting these beliefs and practices. SWN is a recognized leader in environmental stewardship, including a focus on reducing greenhouse gas emissions. SWN and our Appalachia gas peers are playing a vital role in providing clean-burning, low-carbon natural gas to our country and the world, which is helping to drive reduced greenhouse gas emissions. SWN was one of the first companies in our industry to commit to a science-based methane leak loss rate target, and we have consistently outperformed that aggressive goal. In 2019, we reported the lowest greenhouse gas intensity among AXPC peers in the annual EHS Survey, and our methane intensity is 85% lower than the target rate for ONE Future.

Another environmental and social focus is water, which is an important resource in our drilling and completion operations and for the public. Through a comprehensive approach to water usage optimization, water recycling and water conservation projects, we are delivering tangible benefits to the environment and the communities where we work and live. For the past four years, we have returned as much or more freshwater than we have consumed back to the watersheds in the communities where we operate. Another important pillar in our ESG strategy is to nurture and support a culture where fully engaged and committed people can thrive. And you can see from our results quarter after quarter after quarter, they're thriving. This is foundational in everything we do. Developing our human capital and growing and maintaining an inclusive and diverse workforce is vital to our success. Before I turn it over to Clay, I want to share our optimism about the future of the natural gas industry and SWN as a leader in that space. We believe that natural gas is foundational to a low-carbon future. The benefits of natural gas and improving global emissions performance, the increased global reach of clean-burning natural gas through LNG and the strengthening supply and demand balance all provide support -- supportive outlook for natural gas fundamentals. Pairing these fundamentals with our culture of innovation at Southwestern Energy, we are poised to deliver differentiated and sustainable shareholder value.

I'd like to turn the call over to Clay now for some operating highlights.

Clay Carrell -- Executive Vice President & Chief Operating Officer

Thanks, Bill. Once again, this quarter, our operational teams achieved high-end performance. Breaking company records, driving additional value and increasing capital efficiency, our asset and operating teams continued to work safely and stay focused on the delivery of our operating and financial objectives. I'll start with a few highlights from the quarter. Total production was 221 Bcfe, above the midpoint of guidance and up 9% from both third quarter of 2019 and the second quarter of this year. Gas production was 173 Bcf, representing 78% of total production. Oil and NGL production was approximately 14,000 barrels per day and 73,000 barrels per day, respectively. During the quarter, we averaged three rigs and three frac crews with capital investment totaling $223 million. Our full year capital investment will not exceed the top end of our capital guidance range of $915 million, including capital requirements related to Montage following the close of the transaction.

This quarter, we drilled 16 wells, completed 25 wells and brought 30 wells to sales with 18 in Northeast Appalachia and 12 in Southwest Appalachia. In Southwest Appalachia, the wells were split evenly between the high-rate, high-volume rich gas area and the super-rich condensate area. Well performance and 30-day rates for both areas are consistent with expectations, and we continue to deliver well cost reductions through operational efficiencies, extended laterals and optimized completion designs. In the third quarter, we averaged $664 per lateral foot for all wells to sales. This included a new company single well record of $491 per lateral foot on a 13,000 foot lateral in Pennsylvania. We expect to beat our target of $650 per lateral foot for the second half of the year. Innovation and technology are core to continuing improvements in our operational performance. Our SWN rigs and frac fleet remain a differentiator as we continue to leverage and expand our operational and technical expertise. On a 7-well pad in Southwest Appalachia, our SWN frac crew tested an ultra-efficient fracture stimulation approach that simultaneously executes two independent zipper fracs on the same pad with one crew. Utilizing this approach, we set company records, completing 22 stages in a single day and averaging 15 stages per day for the full pad, resulting in greater than $400,000 per well savings. Another example of our innovation is in Northeast Appalachia where we have been able to extract incremental value from our long-life, high-quality asset by drilling dual-target wells that include a lateral that starts in the Upper Marcellus interval before dipping down into the Lower Marcellus.

This process, which requires precise drilling techniques, subsurface control, strategic leasing and land efforts, has allowed us to improve well recoveries by capturing additional Tier one resource in a single well through multiple intervals. We continue to drive innovation, which is core to our high-performance culture, to challenge the operational and technical norms and maximize the value of our assets. We look forward to finishing the year strong while carrying our operational momentum into 2021. We're also excited to close the Montage transaction and get our SWN rig and crew up and running on the new assets.

I'll now turn it over to Julian for the financial results.

Julian Bott -- Executive Vice President & Chief Financial Officer

Thank you, Clay, and good morning, everyone. In the third quarter, we reported adjusted net income of $47 million, EBITDA of $154 million and net cash flow of $135 million when excluding onetime noncash charges. The quarter was in line with the updated guidance, reflecting a change in production mix due to our shift to high-rate, high-volume natural gas wells back in April. At the same time, we captured the savings across all expense categories that we announced last quarter as a result of our ongoing concerted cost management efforts. We continue to benefit from our disciplined hedging strategy with $97 million in cash settlements in the quarter, bringing our total for the year to $310 million. We're taking advantage of the strong run-up in gas prices for 2021 and have been layering in substantial protection.

We now have over 75% of our expected 2021 gas production hedged with collars being the prominent instrument. $20 million of hedging gains this quarter were related to our basis hedges that largely offset the weaker differentials witnessed in the region during the third quarter due to high storage levels, lower seasonal demand and maintenance outages. Through our transportation portfolio, contracting strategy and basis hedges, we were over 90% hedged on basis in the third quarter. We're forecasting fourth quarter realizations in the $0.80 to $0.90 range per Mcf discount to NYMEX. This will be partially mitigated by our expected $0.15 to $0.20 gain from financial basis hedges. As usual, we expect basis should improve later in the fourth quarter and throughout quarter one of 2021. NGL prices this quarter improved 62% compared to the second quarter of this year. We expect continued strengthening of NGL prices as we move through the rest of the year with fourth quarter expected realizations in the 28% to 34% of WTI, consistent with assumptions in our full year guidance.

A highlight of the quarter was the announced at-market acquisition of Montage, and we were pleased with the execution of the associated capital markets transactions. While we are excited about the deal synergies and efficiency opportunities driving our increased free cash flow estimates, it was equally important for us to maintain our balance sheet strength and leading maturity runway. Although the capital markets have been challenged and volatile for E&P companies this year, we successfully accessed both the equity and debt markets with approximately $500 million in total net proceeds, which will be utilized to refinance the Montage 2023 notes upon closing of the acquisition, keeping our favorable maturity runway intact. Until closing, the proceeds have been used to pay down our revolver, and we ended the quarter with no borrowings, a cash balance of $95 million and total debt outstanding of $2.5 billion. Subsequent to the quarter, we announced that our borrowing base has been reaffirmed at $1.8 billion with bank commitments to increase to $2 billion at the closing of the Montage transaction. With current bank price decks, our reserves off a strong coverage well above the elected commitment level. We appreciate our continuing bank relationships and their demonstrated confidence in and support of the deliberate path we are on.

Our quarter-end leverage ratio was 3.2 times. And as we have previously discussed, we expect debt-to-EBITDA to decrease throughout 2021. With the accretive acquisition, cost reductions, operational efficiencies and improved commodity prices, we expect to achieve our goal of 2 times by the end of next year based on current strip prices. As Bill mentioned earlier, we have successfully delivered on several key initiatives, and we look forward to meaningful free cash flow generation and further debt reduction. With the actions we have taken and the progress we have made, we are well positioned for the future.

That concludes our prepared remarks. So Gary, could you please open the line for questions?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Charles Meade with Johnson Rice.

Charles Arthur Meade -- Johnson Rice & Company -- Analyst

Good morning Bill, you and your whole team there. Bill, I appreciate you guys have directly, both in the press release and in your earlier comments, given that line that you guys are going to hold the line on 2021 spending. And I think that's a -- I think that will be welcome in the market. But I'm just curious if there are other aspects of flexibility you guys have in your plans for '21 -- 2021 that you might be able to exercise if you -- if we do see more strength in the curve. Is it added compression? Is it -- are there different transportation agreements? Are there any other things that you guys might be able to do in response to higher pricing?

Bill Way -- President And Chief Executive Officer

Yes. Thanks for the question. I think it's very interesting and actually terrific that we're in a place where we're looking at higher pricing into next year, and we're very excited about that. The duration of that higher pricing, where that goes is a key factor in thinking about whether you invest further or you continue to pay down debt. And we're going to be responsible, as we said, to do exactly what we said. We've got a lot of examples throughout the business of optimization, whether it's driving lower well cost, you heard about the kind of incredible example of two simultaneous zipper fracs at the same time on the same pad with one team. Our lowering of well costs, our optimization of commercial agreements, a number of those kind of aspects all helping to drive our maintenance capital level down and drive the efficiency of our capital continuing to rise. So we have a lot of levers at our disposal. And the teams -- most of them are listening on this call, but the teams are constantly finding ways to innovate past what we thought was even possible to excel. So I would tell you that commercially, operationally, financially, there's a number of different opportunities. Even getting Montage integrated and enabling our SWN-owned drilling and completions teams access to those and integrating the Montage team that we've met and quite like into the company, there's lots of those levers that we'll pull. We've made changes and optimization around decline rates already. That will continue. Clay could talk for days about all the things that have been done in the drilling side, completion side. And then we've got quite a commercial -- and we've demonstrated this. We've got quite a commercial team working on optimizing agreements, integrating even the Montage production with our transportation, that sort of thing. So there is a lot of upside there. I think the other thing that is important as well is the -- in our work around hedging and assuring that we remain disciplined and deliberate in our hedging program, which is a 36-month program, and optimizing the use of swaps collars for the given market that we're in. So while we are very well protected on the downside, we have access to the upside, and that gives us further flexibility. But let me be clear that we don't have any intent to invest dollars that would take us beyond maintenance capital and any excess cash flow that comes from seasonal price changes, at least at this point, would go to pay down debt. And that's the right thing to do and so that's what we would do.

Charles Arthur Meade -- Johnson Rice & Company -- Analyst

Got it. Thank you for that, Bill. I mean naturally, I have a lot of question around the Montage integration, but I'm going to leave those for someone else and then just take a rifle shot at a comment that Clay made in the prepared comments. Clay, can you go back over and give us a little more color on what's going on with those dual-target wells between the Upper and Lower Marcellus in Northeast PA? I guess I'm -- I have a little confusion right now about what that does for you, but I'm sure you could clear that up for me, if you just give any comments.

Clay Carrell -- Executive Vice President & Chief Operating Officer

Sure. Yes. We included it as another example of the innovation and technology that our teams are using to just keep getting the most value we can out of our assets. And so it's an example of the capability of our rigs and our crews and our technical teams where there's areas in our fields in Bradford and Susquehanna County where there's non drained quality Lower Marcellus acreage that has not been accessed yet that we're able to access via an S-shaped lateral where we start up -- start off in the Upper Marcellus where we are generating good economics, testing and completing in that interval, but then dipping down into the Lower Marcellus to go pick up that part of the acreage that has not been drained and do it on a long lateral that benefits from all the efficiencies of the long laterals so that our economics benefit from it. And the team has done a great job of acreage trades, leasing, et cetera, to bring those opportunities to light, and they're just adding to the economic development of our fields.

Charles Arthur Meade -- Johnson Rice & Company -- Analyst

Got it. And Clay, just a quick follow-up. So if I understand, this is a segment of the Lower Marcellus that is maybe stranded in the sense that it will only support like a 1,000- or 2,000-foot lateral, but you can tack it on to the end of otherwise an Upper Marcellus well and then access it. Is that the right understanding?

Clay Carrell -- Executive Vice President & Chief Operating Officer

Generally, you got it exactly right. Short laterals turn into longer laterals by a combination of Upper and Lower, and then you get the full economic benefit of that.

Charles Arthur Meade -- Johnson Rice & Company -- Analyst

Got it. Thank you.

Operator

The next question is from Arun Jayaram with JPMorgan.

Arun Jayaram -- JPMorgan Chase & -- Analyst

Good morning, Bill. Bill, my first question is just kind of on the macro picture. You've been clear that you're going to be investing on a sustaining capex kind of mode in 2021 post the merger. I guess a bigger-picture question we get from investors is what gas price would Appalachia operators need in order to incentivize some growth over the long term?

Bill Way -- President And Chief Executive Officer

Yes. I think that largely, and if you think about spikes in gas versus breadth of a strip over multiple periods of time, in our view, seasonal surges, six months, a quarter, even a year, is a sort of a defined point in time. And if the rest of the strip isn't coming up with it, it's all about economics of wells and best use of capital and/or cash flow from the company. And so we've been pretty clear that a seasonal surge, you don't invest in that because wells are three years, four years economics, and you want to have -- and we don't use hedges. So when you look at it like that, it doesn't make sense to go further. If you step back from it and say, OK, well, we -- you have a sustained period of higher pricing, multiple years of higher pricing, that probably means that there's been something in the supply demand mix that has caused that shift and that it's -- and it's sustainable. And then if you can hedge it and assure yourself that those revenues and cash flows, then you have to reevaluate that. But that is a situation that isn't represented today in the curves and something -- scenarios that we analyze. But right now, with what we can see in front of us and where we sit today, we -- free cash flow generation is important to us. Investing at maintenance capital is what makes sense to us so that we don't have decline in the company and paying down debt in -- at least at this point, paying down debt is the other lever that we optimize around.

Arun Jayaram -- JPMorgan Chase & -- Analyst

Great. Great. Bill, it also seems one of the headlines in your update was the $300 million of free cash flow, which you did raise I think from $100 million pro forma for Montage. Can you give us maybe some of the key assumptions around that? Obviously, production will be on a sustaining capex mode, so we can get that. But what are the assumptions around capital, some of your differential assumptions to underpin that, call it, that $300 million number that you put in the press release?

Julian Bott -- Executive Vice President & Chief Financial Officer

Yes. This is Julian. Actually, the -- so the $300 million is really consistent with the way we were looking at the business back when we announced the Montage transaction and talked about that $100 million. We've obviously seen the biggest factor improvement in prices. So I think when we had done it and put the first announcement out, it was in the $270 million. Now it's obviously close to $300 million. So big run-up in price has certainly helped. And we keep building our hedge position to get certainty around that as well. When we think about moving forward, we haven't yet outlined the activity levels, but we've obviously now said what we expect roughly to spend in the way of a maintenance capital number. And we continue to project forward the cost realizations that we have been able to already accomplish. And that includes the $30 million of synergies that we saw in the Montage transaction, which we're now very confident will be realized at closing essentially. So firming up of progression of costs, but not a large stretch in future cost savings, just what we have already realized is giving us that confidence.

Arun Jayaram -- JPMorgan Chase & -- Analyst

And is that capital, Julian, in the $850 million to kind of $900 million range? Is that a good starting point?

Julian Bott -- Executive Vice President & Chief Financial Officer

Yes. I think that's probably about right. I mean $700 million to $750 million is the number on a D&C basis, and then you've got CI&E.

Arun Jayaram -- JPMorgan Chase & -- Analyst

Great. Thanks a lot.

Operator

The next question is from Neal Dingmann with Truist Securities.

Neal David Dingmann -- Truist Securities, Inc. -- Analyst

Good morning, guys. My first question, just you mentioned on some of these well designs. I guess my question now is, how do you all think about what you would term an optimal well design today, maybe size, scale, et cetera, versus how you even thought about it a year or two ago?

Clay Carrell -- Executive Vice President & Chief Operating Officer

My thought would be that it keeps evolving. We keep putting completion and drilling designs in place that are building on the knowledge that we keep gaining every time we're bringing wells on and we keep trying to optimize the overall economics of the well. Obviously, our lateral lengths are increasing. So we're going to average a little over 12,000-foot laterals for the program in 2020, and that was 10,000-foot laterals in 2019. The completion designs, like I said, we use data analytics, and we keep evolving what the right mix of stage spacing, cluster spacing, proppant loading, fluid rates is in certain areas to optimize well performance. So as we go forward, it's going to be to methodically and smartly keep extending the lateral lengths on the wells as a result of the economic benefit that comes from that, and then continuing to fine-tune and optimize in the different areas of our development where we can keep increasing the returns on the capital program.

Bill Way -- President And Chief Executive Officer

So it's a great tension between a manufacturing mindset, drive every cost, drive every revenue, and the appropriate tension of we're now going to be drilling in Utica with Montage and Upper and Lower and liquids-rich and not liquids-rich and dry gas. And so the customization with the manufacturing mindset, we believe, drives better economics even going forward, and you'll see some improvements across the piece in well cost and well design.

Operator

Our next question comes from Holly Stewart with Scotia Howard Weil.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Good morning. Maybe first one for you, Bill. Just as you've kind of moved through this due diligence process with Montage and the assets, have you learned anything that maybe you didn't realize sort of early in the process that would add additional value sort of post close?

Bill Way -- President And Chief Executive Officer

Well, I think we did -- the teams did a great job of diligence along the way and, of course, the analysis. I think the ability to get and deliver a no premium at-market transaction and really fine-tune that action with how we invest everything that we do is certainly -- was played out in all of that. We've learned they have some terrific people that are going to come join SWN, and we're very excited about that. I think we knew this, but we also get a new learning lab to learn about Utica because they've been drilling in Utica. And so our people are very excited about bringing this together, building on our culture and continuous learning. So we will -- it's an ongoing learning process. I think that we have some -- a lot of optimism around additional commercial and marketing optimization or drilling and completion optimization. Looking at their base production, their decline rate is higher than ours. So how do we bring that -- how do we learn from one another and get that down that the -- with the increased scale, strategic sourcing and procurement opportunities there? So we're -- it will be an ongoing learning process. It's a great question, rooted in a 1-team approach with our new colleagues, and we're pretty excited about getting this thing closed.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Great. Thank you. And then maybe just my follow-up on the cost reductions. I know you've talked about midstream costs in the past as something you would kind of continue to pursue to drive down costs. Maybe how are those conversations going? I think one of your partners is DTE, and they've announced plans to spin out their midstream. I didn't know if there was anything to think through in terms of that.

Bill Way -- President And Chief Executive Officer

We're in the middle of a lot of these discussions. So I'll respect the privacy of that until we get done. But if you think about it, our -- as you look at all of our agreements, the performance of our teams and the reservoirs and the amount of gas that we produced through time has been very strong and ahead of what we anticipated in any respect. So rather than being in a position of carrying a bunch of -- or paying out a bunch of MVCs, we've actually been building a lot of credit and a lot of goodwill with our gatherers in particular because we've overproduced versus what they thought that they were going to get. So there's always opportunity there. There's additional dedications. There's -- just thinking about how the contracts are structured and making them -- making adjustments necessary. So they work for both companies. These are long-term strategic relationships. And so building on those is critical. We've completed some of the negotiations, and some of that's gotten to the bottom line, and they'll continue through the next several months. And then, of course, again, as we bring Montage in and apply its production to some of our medium-haul and long-haul commitments, there's opportunities there. We have the same thing going on, on the liquid side as we take more and more control of our own liquids and market them and then look for commercial arrangements around some of the infrastructure we have tied to that.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Yes. Appreciate that.

Operator

The next question is from Harry Halbach with Raymond James.

Harry Robert Halbach -- Raymond James & Associates -- Analyst

Hi. Thanks for taking my questions. You all had mentioned that Montage space declines a little bit higher than yours. How are you all thinking about a consolidated base decline upon close? And how is that changing after a year in maintenance level next year?

Clay Carrell -- Executive Vice President & Chief Operating Officer

Yes. So their base decline is in the 35% to 40% range coupled with our low to mid-20s. And so when you combine all that, we think we're going to be mid to upper 20s initially. And then we're going to be focused on utilizing similar techniques that we have used on our assets to shallow that base decline.

Bill Way -- President And Chief Executive Officer

So our plans that we -- in our plans we announced, we will have activity in our two divisional areas plus Montage. Their wells compete in our capital allocation plans that we have. It's all about economics. And so we've already integrated -- from a planning perspective, integrated what we know about that into our programs. So our maintenance capital number and the maintenance capital planning that's going on with that already includes what we believe to be from all of our due diligence, all of those details.

So it won't -- from here, it won't -- it shouldn't change unless it gets better. Because as we learn more and more about it, we've taken the company's decline rate down significantly with field optimizations and a number of things that we've done around productivity. All of that learning just simply sweeps over to the assets that will run together in -- when this thing closes, and we expect to get some additional benefit out of that. And we'll talk more about that when we do that.

Harry Robert Halbach -- Raymond James & Associates -- Analyst

Great. Thanks. And then you all had mentioned that you expect to hit your 2 times leverage target next year under strip. And I guess I'm just wondering what sort of leverage are you looking at before potentially returning cash to shareholders. And what is the best way in your opinion to do that, whether it be repurchases or dividends?

Julian Bott -- Executive Vice President & Chief Financial Officer

Yes. I think we've been very focused on getting back to sustainable 2 times. We've said that for several years now, and we've accelerated getting there in light of the announcements we've made regarding price improvement and then the cash flow improvement. So we want to get there and we want to sustain it. So first of all, 2 times sustainable. And then when we do get there, we will consider return of capital to shareholders much in the way that we always have, which is look at what makes the most sense for long-term value creation for shareholders and stack up the options and see which one is most favorable. But I think, as Bill has said, free cash flow and then the balance sheet 2 times leverage is the goal. And we do think we can get there. We're not there yet. So we haven't had to tackle the next question is, what do you do when you get there?

Bill Way -- President And Chief Executive Officer

And if you think back to the sale of Fayetteville, this team has the demonstrated discipline to look at that objectively, walk rough the various uses of cash flow and, as we did then, distribute some to shareholders, pay down some debt and invest in the company to be sustainable. And we've arrived at that moment now, which is quite exciting.

Harry Robert Halbach -- Raymond James & Associates -- Analyst

Alright. Appreciate the comment. Thanks.

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 -- President And Chief Executive Officer

Well, thanks again for all the questions and discussions. And as I think you can tell, we believe the company is well positioned as a leader in responsibly produced energy, namely natural gas. And as we've discussed, there's a lot to be excited about the future of Southwestern Energy. So thanks again for your time on the call and have a great weekend and we look forward to the next call. Take care.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Brittany Raiford -- Director of Investor Relations

Bill Way -- President And Chief Executive Officer

Clay Carrell -- Executive Vice President & Chief Operating Officer

Julian Bott -- Executive Vice President & Chief Financial Officer

Charles Arthur Meade -- Johnson Rice & Company -- Analyst

Arun Jayaram -- JPMorgan Chase & -- Analyst

Neal David Dingmann -- Truist Securities, Inc. -- Analyst

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Harry Robert Halbach -- Raymond James & Associates -- Analyst

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