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Southwestern Energy Company (NYSE:SWN)
Q2 2021 Earnings Call
Jul 30, 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 Southwestern Energy's Second Quarter 2021 Earnings Call. [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, Keith. Good morning and welcome to Southwestern Energy's second quarter 2021 earnings call. Joining me today are Bill Way, President and Chief Executive Officer; Clay Carrell, Chief Operating Officer; Carl Giesler, Chief Financial Officer; Michael Hancock, Vice President, Finance and Treasurer; 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.

Our quarterly reports and our definitive proxy statements for the special meeting regarding the Indigo transactions all are filed with the Securities and Exchange Commission. Although, we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results on 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 measures 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 to everyone. We appreciate you joining us today and I hope that you're all safe and well. I'm delighted that so many of our employees have been able to join the call this morning as well. My thanks go out to each of you for all that you do for the Company each and everyday.

Before we get started, I'd like to welcome Carl Giesler to Southwestern Energy as our Executive Vice President and Chief Financial Officer. His strategic perspective and disciplined approach really complement our existing strategy and our management team. I would also like to thank Michael Hancock and the entire finance and accounting organization for your exceptional work especially over the last six months as we worked to fill the CFO role left behind by the loss of Julian Bott. I look forward to working with both of these talented leaders as we continue to execute our strategy to enhance sustainable value for our shareholders.

Southwestern Energy's returns driven strategy focuses on creating sustainable value protecting financial strength, consistently delivering leading operational and financial results and pursuing opportunities to capture the benefits of increasing scale. At the core of our strategy and value proposition is a commitment to the right people doing the right things. Our success depends on the alignment and commitment of a fully engaged diverse and inclusive workforce nurtured by our high performing innovative and value-driven culture.

In the second quarter, we took additional steps to deliver further value enhancements from our strategy and action. The highlight of the quarter was the announced acquisition of Indigo Natural Resources. The integration planning process is going well and ahead of schedule. The shareholder vote is set for August 27 and we expect to close shortly thereafter. This transaction expands the scope and scale of our Company by combining core positions across the country's two premier natural gas basins and accelerates the delivery of key financial and strategic objectives.

Because of Indigo's low-cost structure and strong balance sheet, we expect to see immediate accretion to key financial metrics, including improvement in corporate returns and increase in free cash flow and the accelerated delivery of our deleveraging goal later this year. Indigo furthers our sustainable value creation strategy by expanding our overall opportunity set and moderating risks to our business. The expansion in the Haynesville adds Tier-1 dry gas inventory locations that complement our existing Appalachia inventory. These locations are adjacent to premium gas markets including LNG and other growing demand centers.

Notably, the firm sales agreements and fixed basis differentials will expand the Company's margins and dampen its overall basis volatility. SWN is well positioned to capture the many tangible benefits of scale that this transaction brings including cost economies, expanded inventory and further capital allocation optionality. The benefits improve the sustainability of our free cash flow generation, particularly as commodity prices continue to improve. We are on track to deliver the promised synergies at closing and furthermore we see the potential for additional value enhancements once the transaction closes from operational and commercial improvements, a strengthened credit self [Phonetic] profile and a lower cost of capital.

We are proven integrators and I'm confident that our new combined Haynesville team will find ways to deliver additional value from our newly integrated business. SWN's commitment to sustainability goes beyond the economics of a scale-enhancing transaction like Indigo, it is the ultimate objective of our ESG strategy as well. Responsibly sourced gas is one of our key initiatives. This quarter, we implemented a basinwide program to certify and continuously monitor all of our Appalachia Basin unconventional wells through an agreement with Project Canary. We have a long history with the firm as we've been marketing responsibly sourced gas for several years to end users in the Eastern United States.

We specifically selected a certification provider that utilizes a rigorous and comprehensive process. The basinwide well certification process and site monitoring has begun and we have already installed continuous monitors at several operating sites across our Pennsylvania acreage enabling our operating teams to immediately address potential emissions should they occur.

Southwestern is a leading natural gas producer that is well positioned for a low-carbon future. We have a unique combination of a strong balance sheet, large scale Tier-1 operated assets, proven execution and ESG performance providing the means to deliver sustainable value creation. We continue to believe disciplined consolidation and the benefits of scale are core to our strategy for driving shareholder value. We remain committed to holding capital investment at maintenance capital levels and disciplined in our risk management strategy including hedging. Over the next few quarters, we will further refine our capital allocation strategy including additional debt reduction and the potential return of capital to shareholders.

Now, I'd like to turn the call over to Clay to discuss the quarter's operational results.

Clay Carrell -- Executive Vice President and Chief Operating Officer

Thanks, Bill and good morning. Operationally, 2Q was another active quarter and our teams continue to deliver results within our guidance ranges while ensuring the continued protection of our people and our operations from the ongoing challenges presented by COVID-19. Our 2021 plan is on track and we look forward to operating in the Haynesville.

I'll start with some highlights from the quarter. Total production was 276 Bcfe or 3 Bcfe per day. This included 2.4 Bcf per day of gas representing 79% of total production and approximately 104,000 barrels per day of oil and NGLs flat to the first quarter and consistent with our maintenance capital program.

During the quarter, we averaged five drilling rigs, two in Pennsylvania, two in West Virginia and one in Ohio with two frac crews. As planned, we invested $259 million of capital in the quarter and expect Q3 to trend lower with a further decrease in Q4. The shaping of our maintenance capital investment in 2021 is consistent with our well-established approach of front-end loading and tapering in the second half of the year. We brought 31 wells to sales in the quarter, drilled 23 and completed 19. Costs on wells to sales were in line with the first quarter at $626 per foot with an average lateral length of approximately 14,000 feet. While we are starting to see some inflationary impacts mainly related to diesel, steel and labor, due to our vertical integration proactive procurement strategy and operational efficiency gains, we continue to expect low-single-digit deflation in 2021.

In Southwest Appalachia, we brought online our first Ohio Utica dry gas pad and achieved our $100 per foot cost reduction goal with an average well cost of $728 per foot. This three well pad had an average lateral length of approximately 13,700 feet and an average 30-day rate of 25 million cubic feet per day, all performing in line with expectations.

In Northeast Appalachia, we continue to drive operational efficiencies to reduce costs and enhance the capital program returns. We placed 11 wells to sales in the quarter with an average well cost of $531 per foot at an average lateral length of approximately 11,600 feet. These wells had an average 30-day rate of 14 million cubic feet per day. As Bill mentioned, we are excited to join with our newest colleagues from Indigo and hit the ground running in the Haynesville. We are currently doing our operational technical and HSE planning and we'll have a great operating team in place that represents a combination of employees from both Indigo and SWN. Initially, we will be focused on incorporating current Haynesville best practices and then look to combine that knowledge with our own operational expertise.

I'll now turn it over to Carl to discuss the financial highlights.

Carl Giesler -- Executive Vice President and Chief Financial Officer

Thank you, Clay and good morning, everyone. I'm excited to join the team and help build on the momentum SWN has generated through its base business and acquisition progress. As Bill mentioned earlier, this quarter, the Company accelerated delivery on its financial goals. It generated free cash flow for the third consecutive quarter. We're on track with the 2021 plan to generate meaningful annual free cash flow, expecting free cash flow generation to accelerate in the second half of this year.

Once the transaction closes, we will provide updated guidance to account for the addition of Indigo. The solid quarterly financial results further improved our leverage ratio by almost half turn to 2.6 times. Liquidity remains in good shape with just under $570 million in borrowings and $1.2 billion of capacity on a credit facility. With the accretive acquisition of Indigo and current robust commodity price outlook, we expect to achieve our two-time sustainable leverage goal by late 2021. The key part of achieving this financial strength has been SWNs commodity and basis hedging strategy, which is directly linked with Company's enterprise risk management strategy.

The Company incorporates balance sheet strength leverage, commodity and basis fundamentals and the benefits to the Company's financial strength resulting from acquisitions among other aspects in determining the level and instruments hedging that will be employed. As a result of our basis hedging strategy, the Company maintained its full year guidance despite widening basis in Appalachia. As we integrate Indigo and update our capital allocation strategy in the coming months, we continue to ensure that our commodity and risk management strategy and practice remains aligned with the Company's risk profile in our long-term value creation objectives.

That concludes our prepared remarks. Keith, if you don't mind, please open the line for questions.

Questions and Answers:

Operator

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Charles Meade with Johnson Rice.

Charles Meade -- Johnson Rice -- Analyst

Good morning, Bill to you and Clay and welcome to Carl.

Bill Way -- President and Chief Executive Officer

Good Morning.

Charles Meade -- Johnson Rice -- Analyst

Bill, I want to go back to a theme [Phonetic], I think I've explored with you before, but a couple of years ago when you guys were, it had to do with capital allocation with respect to hedges. And so, a couple years ago, you guys had some in-the-money hedges and kind of explored whether you guys were ranking and selecting your projects based on the strip, or your hedge pricing and your answer then when you had in-the-money hedges was now what we -- the hedges are the hedges and we evaluate on the strip.

And I'm curious if we look now where you guys have '22 where the strip is above, where you guys have hedged, it's symmetrical on the other side as well, in other words, are you going to rank and select based on the strip of call it 343 [Phonetic] gas, even though you're hedged something closer to the high-twos?

Bill Way -- President and Chief Executive Officer

Yeah. Thanks, Charles for the question. Our practice of using strip pricing to determine capital allocation remains. I think the choice of yes or no, I think it's a bit broader than that. Yes, we will -- we allocate against strip. In addition, we're going to take a look at, OK, what does the hedge book look like, where are we actually going to land on pricing and that will be blended into our thinking as we look at the projects and allocation of the economics. Yeah, that's right, one stop.

Charles Meade -- Johnson Rice -- Analyst

Okay. So, would it be a fair inference that the Company's overall cash flows as affected by hedges is going to set up -- sets the capital budget, but with inside that budget, the ranking is really more strip is that the...

Bill Way -- President and Chief Executive Officer

Yeah, the capital budget will be maintenance capital budget and so, however, all that plays out to get there we're going to be holding production flat year-end '21 to year-end '22. So, get that on there and then yes, as we look at the mix of projects and where we invest, first clue is we'll probably invest across all of the places where we operate, because we've got complementary projects across multiple parts of our business. And then second, yeah, we run a sensitivity at least and look at OK what strip look like, what do the project economics look like with hedges in place and then make decisions based on that.

Charles Meade -- Johnson Rice -- Analyst

Got it. And then a quick follow-up. Picking up on that thread, those three Ohio Utica wells come out [Phonetic] to $25 million a day, that looks like a pretty attractive rate, but you hit your well cost target there. But where would those slot in differently, would those slot in like the top quartile or top half of your projects for next year?

Bill Way -- President and Chief Executive Officer

I think the key issue there is, you've got to look at gas and liquids prices, you've got to look at basis, you've got to look at all of the dynamics that are at play, well cost etc. And we typically do that as we move into the latter part of the year in anticipation of our budget release in February and so we'll run those. We have -- we already look at the business on a two-year basis anyway, but we'll run those more specifically as we get closer to the capital budget.

Charles Meade -- Johnson Rice -- Analyst

Thank you, Bill.

Bill Way -- President and Chief Executive Officer

But, comment on the other comments you made $25 million was as expected, they're economics, and again I think when you look across our portfolio at the opportunities we have for investing, they are very complementary from an economic perspective one to the other, and where there is an opportunity to look at that mix as we get in closer to the budget I think you'll see that we will largely be investing in each part of our business because of the quality of investments we have to play with.

Charles Meade -- Johnson Rice -- Analyst

Got it. Thanks for the added detail.

Bill Way -- President and Chief Executive Officer

Sure.

Operator

Thank you. And the next question comes from Holly Stewart with Scotia Howard Weil.

Holly Stewart -- Scotia Howard Weil -- Analyst

Good morning, gentlemen, Brittany.

Clay Carrell -- Executive Vice President and Chief Operating Officer

Good morning, Holly.

Brittany Raiford -- Director of Investor Relations

Good morning.

Holly Stewart -- Scotia Howard Weil -- Analyst

Welcome, Carl.

Carl Giesler -- Executive Vice President and Chief Financial Officer

Thank you.

Holly Stewart -- Scotia Howard Weil -- Analyst

Maybe, Clay. Can I start off with you just on a due diligence question, I know that's probably been ongoing over the last few months, but maybe just bigger picture what have you seen so far with the Indigo asset base that maybe you were not aware of, kind of coming in two months ago?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah, we're pleased with what we see as we've been doing all the diligence across all the different categories. We've always been very excited about the inventory opportunity. Operationally, they've done a good job. One of the things that was probably something we were pleased to see was all the way down into thinking about some of the ESG components and the methane intensity, which was in line with what SWN legacy has been so that was another positive of the overall diligence that we've been doing on the asset.

Bill Way -- President and Chief Executive Officer

And, we've met some incredibly strong and talented people who will be joining our team as well. So, the business looks like it's performing at or above what we thought.

Holly Stewart -- Scotia Howard Weil -- Analyst

Okay, great. Good color and then maybe Bill, just kind of bigger picture. The Southwest area has kind of been your growth driver for a while now while you've been more in toward that maintenance activity mode in Northeast PA. So, with the closing of the Indigo deal, does this cause you to kind of revisit the Northeast PA asset base may be meaning, is this the right mix of assets going forward.

Bill Way -- President and Chief Executive Officer

Yeah. Our view on asset mix and the scale of each of those assets are we've got core assets in Pennsylvania, Ohio, West Virginia and soon to be Louisiana. They all fit into the strategy and all fit into the plan. Enhancements are being made across the piece, and not just associated with price but well performance capability, well cost yields, you name it and so as we take the pricing and other assumptions into account and build our '22 and beyond plans, we see a place for investment in all of those areas.

Holly Stewart -- Scotia Howard Weil -- Analyst

Okay, great. Thank you, guys.

Bill Way -- President and Chief Executive Officer

Sure.

Operator

Thank you. And the next question comes from Neal Dingmann with Truist Securities.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, all and congrats, Carl. My first question kind of maybe tie both the two couple of questions had in early together with sort of the hedge strategies you have now, I'm, just want to kind of look at hedge strategy and shareholder return going forward, does that give you the confidence that I guess sort of two questions around that shareholder return, one that you will reach that kind of shareholder, or I should say leverage goal at a certain period and once you hit that is that when you all decide kind of what is the best course for shareholder return at that point?

Bill Way -- President and Chief Executive Officer

If you're referring to capital allocation strategy and return of capital to shareholders, as we work through and then fully integrate the Indigo asset and get it closed we'll take another look at our capital allocation strategy mindful of a number of key aspects of that discussion around fundamentals outlook, equity performance, strategic opportunities, bonds and all of a number of those things, and all of those that decision criteria will be put on maximizing sustainable value for the shareholders, and does that mean return of capital to shareholders of course we have to look at that.

Does it mean in its multiple forms, does that mean further investments, that will probably be a piece. If you go back to when we sold Fayetteville, it's kind of a proof point we stepped back from the whole thing, looked at where we were as a company and where we're headed allocated some of those proceeds to further debt reduction, and debt reduction is obviously a part of this equation, return of capital which we did to shareholders and then further investment. So, it's imperative for us to look at that on a balanced basis linked to all of those things I talked about.

Neal Dingmann -- Truist Securities -- Analyst

Very well said. And, then just a follow-up on Indigo. Just, can you remind me, I forget the mallet just [Phonetic] that you assumed as far as FT and the hedges and how you sort of blended that, I am sure that's part of the integration, but how you'll blend that into sort of the current portfolio?

Bill Way -- President and Chief Executive Officer

Yeah, I think what I need to do is we need to close Indigo and then we can put together our pro forma, any of the data that we're able to put out so far is in the proxy that we've issued, but I'm advised that we've got to wait till closing to kind of lay all that out and then we will.

Neal Dingmann -- Truist Securities -- Analyst

Understood. Look forward to all that I think it will go great. Thanks, guys.

Bill Way -- President and Chief Executive Officer

No problem. Thank you.

Operator

Thank you. And the next question comes from Umang Choudhary with Goldman Sachs.

Umang Choudhary -- Goldman Sachs -- Analyst

Hi, good morning and thank you for taking my questions.

Bill Way -- President and Chief Executive Officer

Good morning.

Umang Choudhary -- Goldman Sachs -- Analyst

I can -- I wanted to follow up on the question around activity levels and hedging as you meet your two turn sustainable leverage target by late 2021 what is a the -- do you see or do you expect to kind of hedge less going forward, because your balance sheet have been the right place and then also on the activity levels if you look at the outlook for NGL, natural gas and basis here, is there any kind of tilt toward drilling more liquids area within Southwest PA versus dry gas area, and then how does the Haynesville kind of factored in there?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Well, I think, first of all, our hedging strategy is directly linked to our enterprise risk management strategy and so as we look across the forward 36 months, which is our kind of our rolling program we take into account the various enterprise opportunities, whether that's balance sheet strength, our cash flow or debt targets or any of those and enterprise risks which are commodity and basis for sure and any other risks that are there.

Certainly, the scale of adding an Indigo to the corporation and bringing all that together is another variable factor that we look at. We have quite a bit of flexibility in our programs and we use that whether that's tenor of hedging or whether that's in each of the 36-month or the four quarter period using collars or swaps or whatever. So, we will always maintain the linkage and continue to do so between our program, all of those macro factors in the Company and our financial state.

And, so as we build out our program and our long-range plan and we look at our capital whether it's return on capital or investing capital or other uses, and we look at the overall state of the Company in terms of leverage balance sheet strength all of that, that will certainly as it does today inform how we shape the hedging profile over that rolling period going forward.

And, one must understand that as you go further and further out at this 10 seconds [Phonetic] because of just how far out you go, is that rolling concept means that less hedge further out more hedged today and we continue to balance that as well as the use of tools. So, it's all incorporated. It's quite a comprehensive view and a strategic view at the same time and I think I'm very comfortable with how we work that.

Bill Way -- President and Chief Executive Officer

The other piece about the dry gas and liquids split. We're very happy with the improvement in all the commodity prices and the 2021 program is roughly a 50-50 split between dry gas and liquids. The dry gas is both Northeast and Ohio dry gas that we touched on a little bit earlier, and so that mix has somewhat been a consistent mix for us as we've moved forward and sometimes we'll opportunistically make some adjustments there, but we're close to that 50-50 split as we think about 2021.

Clay Carrell -- Executive Vice President and Chief Operating Officer

And a standout example of just managing all of this together is our basis hedging position where the teams have done a great job in protecting the Company from very strongly widening basis in the Appalachia Basin, and so we attack that challenge by basis hedging, which means we don't have to change our guidance on basis for the year. And, then you combine that with the combination between SWN and Indigo and the natural benefits of a blend of Gulf Coast basis and Appalachia basis you get the economic advantages and you get the de-risking of that particular aspects and it all goes together.

Umang Choudhary -- Goldman Sachs -- Analyst

So, that's really helpful. Thank you so much. If I can squeeze one more in. With respect to cost inflation pressures, you talked about seeing higher cost inflation pressures from diesel, labor and steel, but you also talked about efficiency gains and expect cost to go down, as you look toward next year or more like based on your conversations with service providers, specifically in the Haynesville where you compete with some of the services from oily basins, what do you expect cost tends to be there?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah, as you mentioned our procurement strategy that we've been using through the years has protected us well. The fact that we own our drilling rigs has been a key protection item for us from inflation and we do still expect the low-to-mid single digit deflation in 2021. We are seeing some signs there. It's pretty early for 2022. Right now, we do expect to see some continued inflation pressure as we move into 2022. An early preliminary look is maybe a low single-digit inflationary view, but we're still working on that and we're going to use our same procurement strategies and benefit from the broader scale that will have on the other side of Indigo.

Carl Giesler -- Executive Vice President and Chief Financial Officer

And while there may be as you put it, competitive pricing pressures from the Permian, we've been very successful in using the fact that we are vertically integrated that we do have rigs that will bring to bear, we do have a frac fleet and a number of other items that will bring to bear in helping maintain and contain cost increases. So, I think as Clay said, we're in a solid position. There is a bit of pressure but we'll manage through that.

Umang Choudhary -- Goldman Sachs -- Analyst

All right. Thank you so much.

Operator

Thank you. And the next question comes from Scott Hanold with RBC.

Bill Way -- President and Chief Executive Officer

Hi, Scott.

Scott Hanold -- RBC Capital Markets -- Analyst

Good morning. How you all doing? My first question is when you step back and think about how you define sustainable leverage ratios? And obviously when it's a starting point of getting there to get your shareholder returns, but how do you think about the mid cycle gas price with respect to that. And, can you give us a sense of where that fits into it and if you've got a view on where that might land?

Bill Way -- President and Chief Executive Officer

When we think about leverage, I think we looked at it predominantly and what we expected to be with the multi-year strip as opposed to an arbitrary mid cycle, and we say sustainable leverage just under at or under 2 times. We're trying to balance having a cost-efficient capital structure but yet still maintaining a margin of safety to use that term from a financial perspective.

Clay Carrell -- Executive Vice President and Chief Operating Officer

And, on and on putting like today of course with elevated prices, we've been running or looking at a $2.75 to $3 range in sort of a mid-cycle price look and there's today positive pressure on that, but we want to be sure that we're not taking it a transient increase and putting it into strategic decision, so we will run both.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it, OK. So, there is a little bit of -- it's a little bit dynamic, but it sounds like you've got a frame view there. Okay. And, my follow-up question is, it's a couple of things. First, just to clarify, Clay, you mentioned the capex trends are down and then down again in the fourth quarter, just to confirm that obviously doesn't have any impact from Indigo, so it wouldn't be surprising to see that a little bit more sequentially flat when that comes online, does that makes sense?

Clay Carrell -- Executive Vice President and Chief Operating Officer

Yeah. As, we indicated when we close Indigo, we'll put out a new guide that will include the capital associated with the ongoing capital program on those assets that will then be additive to the tapered off design that we have in the third and the fourth quarter.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah, OK. And, then the other point I was going to ask is on the NGL market. It looks like your guidance for NGL prices remained fairly strong and the realizations are very robust, especially for the quarter. I know obviously pricing is very solid right now but can you give us a little bit more insight into what you all are seeing real time on the NGL market?

Jason Kurtz -- Vice President of Marketing and Transportation

Yeah, Scott. This is Jason. So, I think if we think about the NGL markets, think about propane first. There's probably several factors that are driving propane, just the limited propane supply due to oil related capex reductions and then just definitely increased plastics demand and exports to Asia. I think that the other thing that's driving propane hires just the exports probably roughly 1.2 million barrels per day on average. And this is just due to increasing global demand and the additional export facilities out of the Gulf Coast. And then the other big thing on propane from a pricing perspective is just that inventory for propane is at the low end of the five-year range, will likely enter winter pretty tight unless something changes here. So, it's just as the market continues to grow, there is even less days of supply potentially available this winter, which is another factor that's putting pressure on prices.

When we think about ethane, there's probably several factors, natural gas acts as a floor to floor [Phonetic] for ethane from a pricing perspective. So, obviously natural gas prices are higher. You've got increased exports as well, and then also the other thing from an ethane perspective is just the return and stable ethane cracker facilities in the Gulf Coast. The crackers just are running around 1.8 million barrels per day, which is probably up couple 100,000 barrels per day from what they've been over the past couple of years. So, there's just a lot of strong demand for those products out there.

Scott Hanold -- RBC Capital Markets -- Analyst

Appreciate the color. Thank you so much.

Operator

Thank you and the next question comes from Jeoffrey Lambujon with Tudor, Pickering, Holt.

Jeoffrey Lambujon -- Tudor, Pickering, Holt -- Analyst

Good morning, thanks for taking my questions. First, just wanted to ask on the Utica well cost reductions, if there's anything more to add there on the moving pieces and what the near-term running room [Phonetic] could be and also how applicable it might be across your position?

Bill Way -- President and Chief Executive Officer

Yeah, I think the more at bats we get under our belt there, we're going to continue to look for efficiency gains, just like we've done on the SWN legacy assets. We were very pleased with seeing that $100 a foot reduction on the very first three-well pad and there is some good learnings there. Some of the things that we thought we were going to benefit from right off the bat, we did, and we think there is still room for cycle time improvements in the different sections of the whole and we'll continue to look at ways to continue to optimize the completion design as we move through time, but all consistent with the way we've been doing our well costs across the Company.

Jeoffrey Lambujon -- Tudor, Pickering, Holt -- Analyst

Great. And then just shifting gears a little bit. My second one is a follow-up to one of the questions earlier on return of capital, and I know you mentioned this a bit in the prepared remarks and then expanded on it earlier in the Q&A, but just wanted to revisit that specifically in isolation that there is a way to maybe speak to the different options that you might have, that you might be more inclined to pursue as you kind of refine your thoughts on that?

Carl Giesler -- Executive Vice President and Chief Financial Officer

I think several factors come into play. I think it's no secret, the core -- our primary focus of our strategy is to continue building scale and we will continue to try to be active in M&A to do that. And, so with that variable, that could obviously impact how we use free cash flow. I think another bookmark if you want and how we think about our allocation of capital is you heard Bill say we're committed to maintenance capital at least at the enterprise level. I think that will be the case going forward as we bring Indigo into the fold.

And, so once you take those two things the side, I think it becomes a function of how comfortable we are whether with mid cycle price, strip prices or whatnot of being able to make on a sustainable basis as we said many times, keeping that leverage at around 2 times. And then after that, view the most expedient way to potentially return capital to shareholders. So, I think that's how we're framing that discussion.

Jeoffrey Lambujon -- Tudor, Pickering, Holt -- Analyst

All right. Thank you.

Operator

Thank you. And the next question comes from John Abbott with Bank of America.

Bill Way -- President and Chief Executive Officer

Good morning.

John Abbott -- Bank of America -- Analyst

Good morning and thank you for taking our questions here. Just wanted to ask a question here on the Ohio Utica. I mean, just given the strength in liquids pricing that we're seeing here for NGLs and also for oil what would you have to see in orders to bring in activity into the liquids window of the Ohio Utica and what does the sort of the decline rate look like in that with that asset?

Bill Way -- President and Chief Executive Officer

Yeah, I think the initial focus that we had as a company, when we were looking to monetize was we recognized a high-quality dry gas Utica and the high quality rich Marcellus on that acreage position. One of the things that helped us lean toward starting in the dry gas window was the added benefit that was going to have for us around the SWN legacy existing Utica inventory, and the ability to get the wells drilled with our rigs and with our team and get that knowledge improve that we can bring the cost down and then that was going to help us as we think through the resource to reserves effort on the existing Utica.

So, that was the main reason for the Utica dry gas initially. We will definitely be incorporating over time the liquids rich Marcellus assets there, but like I commented in the beginning all the commodities have seen nice improvement, and we've got strong economics across all the different play types in our areas, and so it will be part of the go-forward plans. But, we're like and what we're seeing right now in the Utica, and hopefully can continue to improve that performance.

John Abbott -- Bank of America -- Analyst

Appreciate that answer and you've already answered this in part from your explanation there. But, when you think about the Indigo assets bringing those in, how do you, I mean you've talked about in the past of possibly looking at that Flat Castle. How does that sort of opportunity rank you at this point in time if you bring it if you need to go assets?

Bill Way -- President and Chief Executive Officer

Yeah. Indigo who has way more focus with the high quality proven inventory that already exists there and an active program that will be ongoing when we take over to closing. We like the opportunity, the upside opportunity tied to Flat Castle and we're doing a lot of the subsurface technical work on that right now. But, clearly the proven aspect of what's going on in the Haynesville with the Indigo inventory is our main focus between those two.

Clay Carrell -- Executive Vice President and Chief Operating Officer

And economics like always will drive all of those decisions and as we build that plan out if we can communicate a bit more about that.

John Abbott -- Bank of America -- Analyst

Hey, thank you very much for taking our questions.

Bill Way -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from Noel Parks with Tuohy Brothers.

Noel Parks -- Tuohy Brothers -- Analyst

Good morning.

Bill Way -- President and Chief Executive Officer

How are you?

Noel Parks -- Tuohy Brothers -- Analyst

Just a couple of things. I wanted to head back to the Utica. So, 30-day IPs of $25 million a day across the three wells, is there a choke management on those?

Bill Way -- President and Chief Executive Officer

Yeah. We're making sure we're doing the right flowback to maximize the economics of the well and the performance of the well and there's a flat portion in those Utica well profiles for exact reason that you mentioned to make sure that we're watching the drawdown and that you produce those in an optimal way. So, we're in a flat portion of the wells right now.

Noel Parks -- Tuohy Brothers -- Analyst

Great. And then just as a follow-up on that, if you done I'll ask something else too. If you carried a -- give some insight into what the 24-hour peak rate was on that because the a 30-day $25 million a day rate is pretty impressive. But, my main other thing was, just curious what was the most sort of recently drilled offsets to where you are up there. I was just trying to get a feel for whether it's been a lot of activity or sort of how neglected the area has been by other operators.

Bill Way -- President and Chief Executive Officer

Yeah, the highest rate we saw was upper 20s in the area, but the intention all along was to bring them to a level and then they would be at a flat production profile, which is why that average of $25 million. When you look at that public data, the data we have from offset operators and then in particular Montage because Montage is who the most active operator was in the area before we took over immediately adjacent and on these assets. The well performance was probably on average closer to around $20 million a day in that flat portion, maybe $21 million a day and so we've continued to utilize our practices as we've brought these assets in and we were comfortable with our sub-surface understanding in reservoir engineering and that's why we'll produce in those at about $25 million of it.

Noel Parks -- Tuohy Brothers -- Analyst

Great, thanks a lot.

Operator

Thank you. And as that does conclude the question-and-answer session, I would like to return the floor to Bill Way for any closing comments.

Bill Way -- President and Chief Executive Officer

Thank you all for your questions and the dialog. We really appreciate it, and we also thank you for joining us on the call today. Your interest in the Company and your support as we progress our strategy bring Indigo into the fold and then take a much stronger Company forward really is exciting time for us. So, with that, I'll tell you have a great weekend. Take care. We look forward to sharing more about SWN as we close Indigo and certainly on the next conference call. Thanks, again.

Operator

[Operator Closing Remarks]

Duration: 44 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

Carl Giesler -- Executive Vice President and Chief Financial Officer

Jason Kurtz -- Vice President of Marketing and Transportation

Charles Meade -- Johnson Rice -- Analyst

Holly Stewart -- Scotia Howard Weil -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Umang Choudhary -- Goldman Sachs -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Jeoffrey Lambujon -- Tudor, Pickering, Holt -- Analyst

John Abbott -- Bank of America -- Analyst

Noel Parks -- Tuohy Brothers -- Analyst

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