Southwestern Energy Co (SWN) Q4 2020 Earnings Call Transcript

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Southwestern Energy Co (SWN)
Q4 2020 Earnings Call
Feb 26, 2021, 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 Fourth Quarter 2020 Earnings Call. Management will open up the call for a question-and-answer session following prepared remarks. [Operator Instructions]

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, Matthew. Good morning, and welcome to Southwestern Energy's fourth quarter 2020 earnings call. Joining me today are Bill Way, President and Chief Executive Officer; Clay Carrell, Chief Operating Officer; Michael Hancock, Interim 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 the Forward-Looking Statements 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'll now turn over the call to Bill Way.

Bill Way -- President and Chief Executive Officer

Thank you, Brittany, and good morning, everyone. We appreciate you joining our call today, and I hope that you're all safe and healthy as well. I also hope that our listeners today in Texas have recovered from the historic weather events that gripped the state last week. Before we start, I want to sincerely thank all of you in the investment community for the outpouring of support over the loss of our dear friend and colleague, Julian Bott. We're so grateful for that outpouring as is his family. Julian made a lasting impression on our lives and the Company, and we will miss him greatly.

We entered 2020 with a plan that we believed would further strengthen the Company's current business in support of our strategy to deliver improving value for shareholders. No one could have predicted that 2020 would unfold how it did, but our strategy, business plan and agility enabled the Company to thrive during such a turbulent year. The resilience and commitment of the entire SWN team provided the resolve necessary to execute that plan and deliver results that would stand out in any year, regardless of the unprecedented low commodity prices and global pandemic. This was all accomplished, while achieving record safety and environmental performance. We also effectively implemented our COVID-19 management plan with protocols that shielded our people from exposure at work and shielded the Company for any material business or operating impact.

We often speak about our strong performance culture and the value it drives for shareholders. 2020 was filled with proof points of our culture, delivering impressive results across our four strategic pillars. Those being creating sustainable value, progressing best-in-class execution, increasing scale, and protecting the Company's financial strength. Guided by this strategy, we have deliberately repositioned the Company over the past few years, and we continued to deliver on that path in the fourth quarter. So, I offer my sincerest thanks to all of our -- the people of SWN who continuously step up to do more with less and consistently step forward to assure delivery on all of our commitments that we make. Well done to the entire team.

So let me share some of the team's many accomplishments. Our fourth quarter results included production at the high end of guidance, resulting in free cash flow of $55 million during the quarter. We continue to highlight the strength of our dynamic hedging program, recording a gain of $362 million for the year and $52 million during the quarter, including natural gas basis hedges that protected the Company from the widening differentials in Appalachia being seen by many in the basin. We also reported improved NGL realizations, a trend we expect to continue in 2021.

On the operational front, Clay will detail later the many milestones that we achieved last year, including further evidence of our relentless cost focus. One I'd like to highlight is a single new well record of $419 per lateral foot on a nearly 20,000-foot lateral in Northeast Appalachia. The team continues to exceed the limits of what is thought possible by most people.

In the fourth quarter, we closed on the acquisition of Montage Resources, delivered the expected G&A savings and immediately integrated the assets and our new colleagues into the Company. As planned, we moved a rig to Ohio, and we have successfully drilled our first dry gas Utica well on the acquired acreage. This acquisition is a testament to the Company's rigorous and disciplined approach of doing the right kind of deal the right way and successfully executing on our strategy. And these are both examples of our track record as a proven consolidator.

As proud as we are of SWN's achievements in 2020, our team is focused on the road ahead. And our 2021 guidance reinforces the Company's key objectives: remaining financially disciplined, optimizing free cash flow at maintenance capital investment levels, reducing debt, and achieving sustainable 2 times leverage.

Our 2020 performance solidified the foundation on which we will deliver value from these objectives in 2021. Our plan optimizes free cash flow, guidance is based on a $2.77 per Mcf NYMEX gas price, resulting in projected free cash flow of over $275 million and increase to a $3 gas price would result in free cash flow estimates in excess of $375 million. And these scenarios result in a reinvestment rate between 70% and 80%. Our maintenance capital program will hold fourth quarter production from -- fourth quarter 2021 production flat with our fourth quarter '20 level, including the Montage assets.

True to our strategy, investments will be focused on the highest-return projects at strip prices. And given the strength of our inventory, we expect to have activity in all of our core operating areas. Should commodity fundamentals improve further throughout the year, we will capture that improvement in cash flow and further strengthen our balance sheet through additional debt reduction. Our goal to achieve 2 times leverage on a sustainable basis is unchanged, and we will continue to allocate free cash flow to debt reduction until we reach that goal, with expectations that will approach 2 times by the end of the year.

We will continue to progress our best-in-class execution, including remaining a low-cost efficient operator. As we have done materially over the past two years, we expect to reduce well costs by an additional 10% in 2021. This includes immediate cost reductions that we expect to realize on the acquired Ohio Utica acreage thanks to our differentiated drilling and completion operations.

We protect financial strength through our proactive risk management and rolling three-year hedging program, which provides downside risk protection to our cash flows. We have hedged a majority of our 2021 production and strategically retained upside participation through the use of collars. We've also protected most of the natural gas basis differentials against the risk of widening basis in the Appalachia Basin.

An integral aspect of who we are as a company is embodied in our ongoing commitment to ESG excellence and transparency, as documented in our seventh annual corporate responsibility report. As we discussed before, we believe that natural gas is foundational to a low-carbon future, and we see SWN as a leader in that effort. Our focus has been on reducing methane intensity, favoring this metric because it benefits the areas in which we operate. Water conservation is also a core part of our environmental and social effort. In 2020, we achieved our fifth consecutive year of fresh water neutrality, returning as much fresh water as we use back to the local watersheds in the communities where we work and live.

And remaining at the core of our strategy is a commitment to the right people doing the right things. Our success depends on the alignment of a fully engaged, diverse and inclusive workforce nurtured by our performance -- our high-performing core value-driven culture.

Let me now turn over to Clay for some operational updates.

Clay Carrell -- Executive Vice President and Chief Operating Officer

Thanks, Bill. 2020 has been an unprecedented year. But through it all, we have maintained our disciplined approach and outperformance mindset to deliver on all of our operational targets. Despite the ongoing pandemic, we have successfully maintained continuous operations and achieved Company record safety and environmental performance. I would like to thank the entire operations organization for their continued commitment to delivering high-end results regardless of what's happening around us.

Let me start with a few 2020 highlights. We demonstrated best-in-class execution, leveraging innovation and technology to maximize the value of our assets. We lowered costs, reduced cycle times, drove efficiencies, displayed agility, increased well productivity, progressed our resource to reserves effort and enhanced returns. On the cost front, we beat our well cost target, averaging $637 per lateral foot for the second half of the year. As Bill mentioned, we also achieved a new single well cost record of $419 per foot on 19,700-foot lateral in Northeast Appalachia.

We continue to reduce our cycle times through increased operational efficiencies across drilling, completions and facilities. We mentioned one example of completion efficiencies in the third quarter with our double zipper frac completion, which increased completion stages per day and reduced costs. This and other efficiencies allowed us to deliver wells to sales at the high end of our guidance range, while investing $899 million, which was at the midpoint of our capital guidance. So getting more done for less.

Our operational agility was exhibited earlier in the year when we shifted activity to high rate, high volume gas wells in response to the COVID-related demand destruction resulted in a higher percentage of gas in our total production. Total reported net production for the year was 880 Bcfe. Including a full quarter of Montage, our fourth quarter production averaged a little over 3 Bcfe per day. Increased well productivity and well cost reductions drove our proved developed F&D costs down for a third straight year and 25% year-over-year to $0.40 per Mcfe.

Reported year-end proved reserves were 12 Tcfe, which included 1.4 Tcfe of positive performance revisions and 741 Bcfe of reserve additions. Due to historically low backward-looking SEC prices, we had a 4.4 Tcfe downward price revision, primarily related to the liquids-rich PUDs, which at today's 2021 strip prices would fully return to our proved reserves. The reported PV-10 value of $1.85 billion would increase to nearly $6 billion, assuming the same proved reserves and using the 2021 strip at the beginning of the year, which was $2.70 [Phonetic] per Mcf NYMEX gas price and $48 per barrel WTI oil price.

With the addition of Montage, our total resource potential has increased to 57 Tcfe. Of approximately 5,400 future drilling locations, over 1,150 are economic at current strip pricing. Our ongoing resource to reserves effort has continued to progress inventory resource into proved reserves. In 2020, in our Northeast Appalachia area, we converted approximately 700 Bcf of resource into reserves through ongoing leasing efforts, the dual target program and upper Marcellus testing. The combination of all these efforts led to enhanced returns in our 2020 program.

Now let's turn to our 2021 plan. Our maintenance capital program will have an investment profile that is relatively flat in the first three quarters followed by a reduction in the fourth quarter. Given the competitive strength of each of our development areas, investment in our highest-return projects is expected to result in a roughly even split between liquids-rich and dry gas assets. We currently have five rigs running and three completion crews.

In Southwest Appalachia, approximately 50% of our wells to sales will be super-rich, with the remainder split evenly between rich gas wells in West Virginia and dry gas Utica wells in Ohio. Included in our NGL production guidance, we expect to have some ethane rejection in the fourth quarter based on the strip prices. Like we have done in prior years, we plan to maximize the value of our ethane base -- of our ethane based on recovery rejection economics throughout the year.

In Northeast Appalachia, our investment will be focused in the lower Marcellus, supplemented by dual target wells, where we leverage innovation to capture undeveloped Tier 1 acreage and resource in both the lower and upper Marcellus. This plan is expected to result in total annual net production of approximately 1.1 Tcfe for an average of 3 Bcfe per day. The production mix is expected to be roughly 80% natural gas, 16% NGLs, and 4% oil.

Our relentless cost focus continues into 2021. Well costs are expected to average $600 per lateral foot, a 10% reduction from 2020. We also expect to increase our average lateral link to 14,000 feet. These averages include our Ohio Utica wells, which due to their greater vertical depth, are estimated at $725 per foot, which is a $100 per foot reduction from wells previously drilled in the area.

I'm really proud of what our team accomplished in 2020, and look forward to continuing to deliver strong operational results again in 2021.

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

Michael Hancock -- Interim Chief Financial Officer

Thanks, Clay, and good morning, everyone. As mentioned earlier, we finished the year strong, reporting quarterly adjusted net income of $119 million, EBITDA of $276 million and net cash flow of $249 million when excluding one-time non-cash charges. This cash flow exceeds the $194 million of capital investment during the fourth quarter, resulting in a $55 million of free cash flow.

Looking back at our 2020 financial highlights, many related to our proactive balance sheet management, repurchasing $107 million of bonds at an average 33% discount. We also enhanced our liquidity by increasing our borrowing base to $2 billion and protected our financial strength by accessing the capital markets following the Montage acquisition announcement and utilizing the $500 million in net proceeds to call the Montage 2023 senior notes upon closing.

Another financial highlight of 2020 was the realized gains from our dynamic hedging program. SWN's risk management strategy and disciplined practice enabled the Company to deliver $362 million in hedge gains, including a $76 million hedge gain in basis hedges.

As part of our earnings release yesterday, we also provided detailed 2021 guidance, where we will continue our financial discipline and further strengthen the balance sheet. As Bill mentioned earlier, we are poised to deliver meaningful free cash flow, which we plan to put toward debt reduction in order to achieve our sustainable 2 times leverage objective. This is supported by our risk management strategy with the majority of our expected production volumes hedged, utilizing instruments that provide downside protection, while providing exposure to higher prices. In fact, 80% of our hedges on natural gas provide access to this upside through the use of collars.

In addition, we protected over 75% of our expected natural gas production against widening basis differentials through our transportation portfolio, firm sales and basis hedges. As we experience for ourselves with recent national weather events, increased demand and declining stores levels are providing support for improving fundamentals for both natural gas and liquids.

With the improvement in the 2021 natural gas strip prices, we expect our price realizations to increase by nearly $0.70 per Mcf before the impact of hedges. Our 2021 natural gas discount to NYMEX is expected to be in the $0.69 to $0.84 range, which includes an expected $0.07 to $0.09 gain on basis hedges. The first quarter discount will be narrower in the $0.40 to $0.50 discount range, net of an expected $0.15 to $0.20 gain on basis hedges, as our diverse transportation portfolio positions us to capture premiums associated with winter weather.

In the fourth quarter of 2020, we reported nearly $5 per barrel improvement in NGL prices compared to the prior quarter, and expect the strength of NGL prices to continue in 2021. Our full year guidance of 30% to 38% of WTI range is based on $50 per barrel WTI. The first quarter is expected to be on the higher end of that range, with expected realizations reaching 36% to 42% of WTI.

Our disciplined execution of our strategy has positioned the Company to capture value from this improved price environment, which combined with our stringent cost management, balance sheet strength and increased scale, provides momentum to deliver increased value in 2021 and beyond.

That concludes our prepared remarks. Matt, if you could, please open the lines for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, guys, and good details so far. I just wanted to -- you guys hit on this a little bit. I'm just wondering if you can maybe expand a little bit on how you think about allocation toward your super-rich and dry gas, you certainly have ample locations on both. You kind of hinted around this just not long ago in the prepared remarks, but I'm just wondered if you could talk around that a bit more on how you view it either -- maybe just this year based on prices and then maybe on a longer-term basis?

Bill Way -- President and Chief Executive Officer

Yeah. We -- Clayton can give you some more detail. Our past, present and future practice is to take our inventory of wells and force rank them on economics and strip pricing liquids gas basis, NGL and then force rank them. And the prioritization for investment is sourced from that. There's obviously a lot of levers that you -- that you have to look at, but that's the root of how we do capital allocation here based on the economics.

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah. So, like we mentioned, we've had a rough...

Neal Dingmann -- Truist Securities -- Analyst

Go ahead.

Clay Carrell -- Executive Vice President and Chief Operating Officer

Sorry, roughly even split between the dry gas and the liquids-rich. And in the liquids-rich, roughly half of that -- or the majority of that, I'm sorry, is going to the super rich. And so, like Bill mentioned in his comments, the economics given where the current commodity prices are for all of them make for attractive investments in every area.

Bill Way -- President and Chief Executive Officer

And then as we move through the year, should we see some change as exampled in our comments around COVID -- reaction to COVID, we have the ability to move investment from place to place and we do that.

Neal Dingmann -- Truist Securities -- Analyst

Very good. And then, just lastly, could you just talk kind of when you think about maintenance cap in all this year, really just how you think about sort of just service and other inflation cost sort of this year into next?

Bill Way -- President and Chief Executive Officer

We're expecting a bit of deflation in our cost in both areas somewhere near 6%, a little more than 6% in Northeast, a little less in the Southwest. And then remember that we drill 100% of our own wells with our own rigs, and then we have one frac fleet that augments the contracting frac fleet. So, we're insulated from some of that -- those cost changes, but that's not what we're seeing.

Neal Dingmann -- Truist Securities -- Analyst

Makes sense. Thanks so much for the details, guys.

Operator

Our next question will come from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you, and good morning.

Bill Way -- President and Chief Executive Officer

Good morning, Brian.

Brian Singer -- Goldman Sachs -- Analyst

My first question is with regards to the leverage in the balance sheet. You mentioned the potential to be at 2 times leverage by the end of the year. And I wondered what the key markers you're looking for on either a absolute or on the metric itself -- leverage metric to have confidence that leverage can be sustained. And at what point you would look toward consideration of incremental return of cash in forms other than paying down debt?

Michael Hancock -- Interim Chief Financial Officer

Hey, Brian, this is Michael. Hey. Appreciate the question. No, I think you hit it on its head, right. The sustainable part is a big component of that. Obviously, 2 times is the objective. As you get down there and you look at forward strip pricing, the business plan, all those things, we will to continue drive cost out. As you get to that point and feel that you're going to be at that 2 times or under on a sustainable basis, all those things get back on the table, including returning capital to shareholders. And we'll take a look at that as it gets closer to being achieved, but that's kind of our way of thinking right now. We just want it to be a sustainable, not a blip on the radar.

Brian Singer -- Goldman Sachs -- Analyst

Got it. Thanks. And then, my follow-up is with regards to the MR acquisition, and a couple part question. First, as you've integrated the assets, what have you noticed of the advantages that Southwestern brings to the table versus any learnings from the expertise at MR? And Number 2, and well, may be early on, does what you're seeing make you more or less willing to consider additional consolidation?

Michael Hancock -- Interim Chief Financial Officer

So, I'll hit the first part of it, Brian. We've -- we have seen opportunities that we've already started to take advantage of initially around the field LOE and how we can use some of the supply chain benefits that we have to lower some of the LOE there. And that has started and we've already seen some benefits. As Bill mentioned, we already drilled one of the Ohio Utica wells. We're seeing beneficial costs on the drilling side of it using our rigs and using the operational execution efforts that we've used on our assets and they're showing up on those also. So, we're seeing some savings there.

When we move into the completion phase, we are going to utilize the data analytics approach that we use on our own completions to make sure we're customized on the design unique to what is offering the best economics in an area, and we expect to see more efficiencies there as we move into the completion phase.

Bill Way -- President and Chief Executive Officer

And the assumptions that we use going into the acquisition are confirmed by what where we are now. The asset and the people are fully integrated. And just like before, we believe consolidation is something that makes sense as long as you get the right deal and done the right way. We think we demonstrated that. And so, we continue to study the market. And anything more than that, we'll talk about when -- if and when we do so.

Brian Singer -- Goldman Sachs -- Analyst

Thank you.

Bill Way -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Our next question will come from Noel Parks with Tuohy Brothers. Please go ahead.

Noel Parks -- Tuohy Brothers -- Analyst

Good morning.

Bill Way -- President and Chief Executive Officer

Good morning.

Michael Hancock -- Interim Chief Financial Officer

Good morning.

Noel Parks -- Tuohy Brothers -- Analyst

Continuing on the consolidation theme, I'm just thinking of given the age of the Marcellus, the play has now been around quite a while, are you seeing opportunities in the basin where maybe there's the acreage that was capital starved and hasn't really had much in the way of current day of drilling and completion technology applied? So, I'm just wondering if there are sort of hidden agendas out there that just might have economics way better than what they are producing out there now.

Bill Way -- President and Chief Executive Officer

I think from experience, we have found that different companies focus on different things, priorities across their portfolio. And if you're able to pick up either acreage or a company at a great price and apply some of the things that you do in your own business and we're very confident in that that there's opportunity. I think I'll leave it here that we do believe in the benefits of consolidation and scale, and we're going to continue to study it.

We don't typically -- when we did say that we told the world that we were selling [Indecipherable] to get the competition up which lasted through the entire time we owned it. On this side of it, we tend to go under the radar and study it and make something happen before we talk too much more about that. So I know we're -- we have a good idea. We've been in the basin a long time. We understand it. So, we're looking at in every angle.

Noel Parks -- Tuohy Brothers -- Analyst

Great. And my other question is now that you're down the road a ways with well, I guess, we're at [Phonetic] quarter end or so with Montage acquisition and the integration. Since we've had such kind of in an era of real bullishness for nat gas and NGLs as well, with those having firmed up, do you have any revised thoughts on infrastructure investments either in your prior portfolio or over on the Montage side?

Bill Way -- President and Chief Executive Officer

Yeah. I think maybe comment on something I think I heard first that we're in the first part of integrating Montage, we are fully integrated. That's a done deal. It's integrated. So, we're solidly looking forward. We're delighted we have it, and we're moving on and the team is better because we have new people as well. So, that's exciting.

I think infrastructure comes in a lot of different forms. We currently have a firm takeaway capacity out of the Appalachia basin just a little more than 1.7 Bcf a day out of the Northeast and little -- little short of 1.4 Bcf a day out of the Southwest, which is perfect for us. We are -- we're using all that we have, and we are always working to optimize that. Our gathering infrastructure, our processing infrastructure is all right sized and right timed. And we work really closely with our gatherers and processors.

The one thing you don't want is to have underutilized infrastructure because if -- that doesn't make any money. So, we're very careful about that. If there are -- and we've done this before. If there is a line loop or something that can bring greater value and it meets the same economic hurdles or better than our other investments, we certainly study that and look at that. But I think we're in pretty good shape. We continue to again to look at it long term.

We have a water system that we continue to gain significant benefits on a per well basis, as we expand drilling in some of the areas in West Virginia and in Pennsylvania quite frankly and need to add onto that, we can do that. It's -- the core part of it's [Phonetic] robust and complete. And therefore, the incremental additions are quite affordable. So, we tie it all together so -- because it is in our mind. It's a system opportunity, and we look at it in that way.

Noel Parks -- Tuohy Brothers -- Analyst

Thanks a lot.

Bill Way -- President and Chief Executive Officer

You bet.

Operator

Our next question will come from Charles Meade with Johnson Rice. Please go ahead.

Bill Way -- President and Chief Executive Officer

Hi, Charles.

Charles Meade -- Johnson Rice -- Analyst

Good morning to you and your whole team there. I hope you guys all made it through reasonably well, all that -- that debacle last week, but hopefully, that's gladly in the rearview mirror. My question is actually about your well results by area and more specifically the -- those West Virginia rich gas wells. And you just look at the rates across the different windows that you guys disclosed in your press release, it really looks like that rich gas, I think it's mostly West Virginia really stands out. And so, can you talk about how representative that average rate at $23 million a day is for you guys? And if that's kind of indicative of that window being at the top of your investment stack right now?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Hi, Charles. So, we are very happy with the results we're seeing in the rich gas area. We've started maybe in late '19, applying the new completion approach and drilling techniques that we've been using. And it's all showing up in really good performing wells. We've got a -- we had a pad come online in that rich area in the fourth quarter with really high initial rates touching $40 million a day per well.

And so, another example of what you are saying. When you say the top of the investment stack though, we've got solid economics in all the areas, given where the commodity prices on a go-forward strip are right now. Our rich area with the high percentage of oil definitely benefits economically from current oil prices and then obviously gas prices improving also. So, it is part of the overall capital allocation plan that we're laying out. And as Bill mentioned, we can adjust if we start to see a favorite commodity.

Charles Meade -- Johnson Rice -- Analyst

Right. Thank you for that detail, Clay. And then perhaps just a small question. But related to that, what are you guys seen with the local propane markets up there in Appalachia? There's kind of -- there's kind of been a run on supplies across the U.S. here?

Jason Kurtz -- Vice President of Marketing and Transportation

Yeah, Charles. This is Jason. Yeah, you're right. What we continue to see in the Northeast from a propane perspective is the basis continues to tighten up in that area and then also that area has the ability to feed kind of up toward the Michigan area and we know what happened -- what happened last week whenever they were looking for extra propane in Michigan. So, you're right. There's definitely a stronger market for propane up there in the northeast right now.

Charles Meade -- Johnson Rice -- Analyst

All right. Thank you, gentlemen.

Jason Kurtz -- Vice President of Marketing and Transportation

Thank you.

Operator

Our next question will come from Doug Leggate with Bank of America. Please go ahead.

John Abbott -- Bank of America -- Analyst

Good morning. This is John Abbott. It's actually John. Doug's on the other line. Thank you for taking our questions. Our first question is on the Montage assets. You did a really good job in terms of explaining your approach to allocating capital. But with the acquisition from Montage, you did receive quite a bit of liquids production. With the majority of your activity focused on your West Virginia assets in the liquids window, how do you think about the trajectory of liquids in Ohio? Is there a benefit at some point to increase activity in Ohio to maintain that liquids production? And I guess the follow-up question will be if you let those assets decline, is there a point where you divesting those assets might make sense at some point, if you don't put out so much capital toward them?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah. So John, I'll start on the answer there. The way that we have optimized our capital allocation for the very first year has us spending dollars in the dry gas Utica and the Montage assets A, because of their economic benefit; and B, it's going to benefit the SWN legacy assets by us gaining that incremental operational and technical knowledge drilling those Utica wells. So that was a little bit of the added push there. So in '21, the Montage asset liquids volumes will decline some. But as we always talk about, we rack and stack based on highest economics and we will -- we will allocate capital to the Montage liquids-rich assets as we continue the development over time.

John Abbott -- Bank of America -- Analyst

Thank you very much.

Operator

Our next question will come from Holly Stewart with Scotia Howard Weil. Please go ahead.

Bill Way -- President and Chief Executive Officer

Hi, Holly.

Holly Stewart -- Scotia Howard Weil -- Analyst

Good morning, gentlemen, Brittany.

Brittany Raiford -- Director of Investor Relations

Good morning, Holly.

Holly Stewart -- Scotia Howard Weil -- Analyst

I thought maybe -- Bill, I'd start off with just a bigger picture question. I think several of your peers have provided long-term free cash flow targets for just the business under sort of these maintenance scenarios that we seem to be happening throughout the industry. I was wondering how you think about Southwestern's long-term organic free cash flow capabilities?

Bill Way -- President and Chief Executive Officer

Yeah. Great question. We don't typically release five-year plans and historically haven't. But I can tell you that you can probably see what the portfolio will do at this roughly $2.75 [Phonetic] NYMEX gas price this year and maintenance capital levels for the next -- going forward. I think you can kind of map out that plan and map out what the free cash flow looks like. But we are -- at these price levels and with all the work that's been done on cost and on revenue enhancement and optimization etc., I think we've got a very solid plan going forward.

Holly Stewart -- Scotia Howard Weil -- Analyst

Okay. And maybe one more in the weeds for Jason or Michael. It look like NGL realizations for the fourth quarter were certainly much higher than we were expecting. Anything to highlight there in 4Q and maybe that we can kind of carry forward or look into 2021?

Jason Kurtz -- Vice President of Marketing and Transportation

Yeah, Holly, no, that's a good question. This is Jason. I mean I really think what happened in 4Q is there was definitely a run on commodity prices. And then, as we look into 2021 and beyond, we talked about it a while ago on the call that we're starting to see those basis markets continue to tighten up on some of the NGLs up there. And so, I think that's what's driving some of that along with the outright price move up at on all of the purity products.

Holly Stewart -- Scotia Howard Weil -- Analyst

And then maybe just one more follow-up if I could. Clay, do you -- you mentioned the five rigs and three crews. How should we expect that to trend over the course of the year?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah. So, it'll trend similarly to the capital profile that I talked about where the first three quarters, the capital spend will be flattish. The first half of the year, I would say, is close to that five and three average. And as you move into the third quarter, it will have a slight reduction. And then the fourth quarter will be a little bit more of a reduction on activity.

Holly Stewart -- Scotia Howard Weil -- Analyst

Okay. Thank you, guys.

Bill Way -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Kevin Cunane with Citigroup. Please go ahead.

Bill Way -- President and Chief Executive Officer

Good morning, Kevin.

Kevin Cunane -- Citigroup -- Analyst

Hi. Good morning, everyone. Just a quick follow-up on NGLs. Your $3 case obviously stronger liquids prices generally are bringing up that free cash flow expectation. And I think I contemplate it's over 90% hedged and on liquids or NGLs, it's around 60%. And with present Mont Belvieu above where your current swap prices are. Is there additional, I guess, need or want to layer on more hedges on the NGL side of the business, or you kind of comfortable where you are?

Jason Kurtz -- Vice President of Marketing and Transportation

So -- this is Jason. I think when we look at NGL prices, if you look at the curve right now, it's highly backwardated. So what we have done is continue to layer on NGL hedges in over the next two to three months trying to take advantage of the backwardation in the curve and the prices where they are right now. I think as we look out into next year, we know that based on the outright storage levels and the days of supply around propane that something's going to have to change to be able to get the volume that we need in storage to be prepared for next winter. So, I think we'll continue to hedge a little more near-term, but longer term, I think we're pretty comfortable where we are right now, given the fundamentals.

Bill Way -- President and Chief Executive Officer

And really our hedging program is directly connected to our whole risk management program. And so, we have a very clear strategy around ensuring that the downside in any commodity price environment that can swing radically one way or the other for the simplest of things. The downside is protected, and we utilize the various tools of hedging to enable us to capture upside, especially in a volatile market like this through these collars as we said before. So, we will not going to leave the cash flow unhedged and just play the market fundamental view, it's not who we are.

Kevin Cunane -- Citigroup -- Analyst

Understood. I appreciate the additional color.

Bill Way -- President and Chief Executive Officer

You bet.

Operator

[Operator Instructions] Our next question will come from our Arun Jayaram with JPMorgan Chase. Please go ahead.

Arun Jayaram -- JPMorgan Chase -- Analyst

Yeah. Good morning. Arun Jayaram with JPMorgan.

Bill Way -- President and Chief Executive Officer

Good morning, Arun.

Arun Jayaram -- JPMorgan Chase -- Analyst

Good morning, Bill and team. Clay, let me start with you. I know that you reduced your cost targets. I think your previous outlook comments were less than $650 a foot, now it's down to $600 a foot. Can you talk about some of the drivers of that lower cost objective? I know you mentioned the double zipper fracs, maybe the lateral lengths, but maybe wanted to understand a little bit more about what's driving the lower cost per foot outlook?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah. So you hit on a bunch of them. I mean our lateral length continues to grow and our ability to effectively execute on those longer laterals continues. And so, that's a component. We have seen some supply chain deflation in our go-forward costs. And so, that's a small piece of it also. And then the innovation and the efficiencies around finding ways to do the jobs quicker, where they end up costing less and looking for every efficiency around the whole completion and the drilling side and the facility side, we're doing pre-fab of facilities offsite, so that we can standardize the facilities and lower the cost there. And then, when we bring them on location, the hookup is much shorter and much more cost effective. But it's really continuing on the momentum of keep and looking for ways to bring those costs down and our team is motivated around that and they keep finding them.

Arun Jayaram -- JPMorgan Chase -- Analyst

Great. And just kind of a broader question around the Appalachia basin as a whole. One of the things that has been brought up by some of your peers is just as the industry, you can talk about call it Tier 1 industry -- inventory, pardon me, exhaustion. And so, I was wondering, Bill, maybe you could just talk about from your seat is what your thoughts are on Tier 1 inventory, what's left for the industry and including for Southwestern?

Bill Way -- President and Chief Executive Officer

Yeah. I think it's a great question and I kind of look at it like this. Tier 1 inventory declarations made years ago are suddenly changed as we can do more, achieve more, develop more and get more out of everything we do. We've got 57 trillion cubic feet of resource all around our business. We've just added a bunch of reserves from that through additional study, additional performance, lower cost etc.

And so, I think that the opportunity -- the belief that Tier 1 inventories running out or people casting those stones on one another just out of some kind of competitiveness, we just don't -- we believe that focusing on extending the Tier 1 inventory we have. We talk a bit about dual target wells and our Utica acreage, all very prime Tier 1 inventories with trillions of cubic feet of resource that we actively work to convert to reserves. So, we're not in a place where we're running out and we're actually in a place of increasing and driving -- again driving resource to reserves and driving improvement in any of our areas and through all the innovation and operating capability that we have.

Arun Jayaram -- JPMorgan Chase -- Analyst

Great. Thanks a lot.

Operator

This concludes our question-and-answer session. I would like to turn the conference back to Bill Way for any closing remarks.

Bill Way -- President and Chief Executive Officer

Thanks, Matt. I appreciate it. In closing, I just -- I want to hope that you got a flavor for the incredible innovation commitment outperformance by a team of incredible people working some very, very strong assets in Appalachia and there's more to more to come. We've setup 2021 to be a very, very exciting year, full of anticipated records, full of taking the Company forward. We remain focused on the operating and financial side of the business, but the core values of looking after the environment, looking after safety, looking after the communities we work and live aren't just paragraphs in a note, but they are who are and we will continue to play that leading role going forward.

So, thanks everybody for their time. Thanks for the questions and the interest in Southwestern, and we look forward to catching up with you in person down the road. Have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Brittany Raiford -- Director of Investor Relations

Bill Way -- President and Chief Executive Officer

Clay Carrell -- Executive Vice President and Chief Operating Officer

Michael Hancock -- Interim Chief Financial Officer

Jason Kurtz -- Vice President of Marketing and Transportation

Neal Dingmann -- Truist Securities -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

Noel Parks -- Tuohy Brothers -- Analyst

Charles Meade -- Johnson Rice -- Analyst

John Abbott -- Bank of America -- Analyst

Holly Stewart -- Scotia Howard Weil -- Analyst

Kevin Cunane -- Citigroup -- Analyst

Arun Jayaram -- JPMorgan Chase -- Analyst

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