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Cabot Oil & Gas Corp (COG) Q4 2018 Earnings Conference Call Transcript

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Cabot Oil & Gas Corp (NYSE: COG)

Q4 2018 Earnings Conference Call

Feb. 22, 2019 , 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Cabot Oil & Gas Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Dan Dinges. Chairman, President and CEO. Please go ahead.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thank you, Allison, and good morning. Thank you for joining us today for Cabot's Fourth Quarter 2018 Earnings Call. With me today are several executive members of team Cabot. I would first like to emphasize that on this morning's call, we will make forward-looking statements based on current expectations. Also some of our comments may reference non-GAAP financial measures. Forward-looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures are provided in this morning's earnings release.

As some of you may recall this time last year, we laid out a strategy for 2018, that was focused on first delivering growth in production and reserves per debt adjusted share, while generating positive free cash flow. Secondly, generating and improving return on capital employed, that exceeds our cost of capital. Third, increasing our return of capital to shareholders through dividends and share repurchases, and fourth, maintaining a strong balance sheet to maximize financial flexibility.

Very happy to report that we have successfully delivered on all the strategies that we had laid out for 2018. For the year, we delivered growth in production and reserves per debt adjusted share of 12% and 25%, respectively. Most importantly, the company generated $297 million of free cash flow, a 92% increase relative to prior year. I would highlight that this is the third consecutive year of positive free cash flow generation during a period in which the company generated and adjusted earnings per share CAGR in excess of 100%. The company generated a 15.9% return on capital employed for the year, far exceeding our weighted average cost of capital and representing an improvement relative to prior year of 860 basis points. This 15.9% return on capital compares favorably to the average S&P 500 return on capital highlighting that there is a company in the E&P sector that can in fact deliver returns that are competitive across the broad equity market.

Additionally, we exceeded our initial expectations by returning over a $1 billion of capital to shareholders including increasing our quarterly dividend twice and repurchasing over 38 million shares in 2018. This represented over a 9% shareholder yield to equity holders. Also we have now reduced our shares outstanding by over 9%, since restarting our share repurchase program in 2017.

Lastly, we demonstrated our continued commitment to maintain strong balance sheet by reducing debt levels by approximately $300 million resulting in a year-end debt-to-EBITDAX ratio of one-time. When considering the combination of cash dividends, stock repurchases and debt reduction, the company delivered a total stakeholder yield of over 12% for the year. In addition to these highlights, we delivered growth in adjusted earnings per share by 125%. Our results for the year, demonstrate that despite the negative sentiment around the energy sector and specifically as it relates to natural gas base, Cabot is generating a compelling combination of growth, free cash flow, return on capital, return of capital while maintaining investment grade balance sheet. As it relates specifically to the fourth quarter of 2018, the company generated net income of $275 million or $0.64 per share and adjusted net income of $236 million or $0.55 per share.

Cabot's cash from operating activity in the fourth quarter was $316 million, while discretionary cash flow in the fourth quarter was $493 million. Cabot also delivered $241 million of free cash flow during the fourth quarter of 2018, exceeding our previous expectation of $200 million. All these improvements relative to the fourth quarter of '17 were driven by higher production, stronger natural gas price realizations and a significant improvement in our cost structure. In fact, 2018 represented the company's lowest unit cost in history. One specific operating expense I want to highlight is the exploratory dry hole cost we incurred in the fourth quarter resulting from unsuccessful drilling results in our second exploratory area. As a result, we do not expect to allocate any incremental capital to exploration at this time.

Let's move onto reserve discussion, Cabo t report ed year-end proved reserves of 11.6 trillion cubic foot equivalent, an increase of 19% over year-end 2017, despite the divestiture of our Eagle Ford property in 2018. Cabot's total company all source finding and development costs were $0.30 per Mcfe, while our Marcellus-only all-sources finding and development costs were $0.26 per Mcf. These results reaffirm our acreage positions Susquehanna County has the lowest cost natural gas asset in North America. As many of you are aware, we tested a sample of Upper Marcellus wells during 2018 with our Generation 5 completion design to further demonstrate the resource potential of this distinctive incremental reservoir. Based on the production history today, the Gen 5 Upper Marcellus wells placed on production during 2018 have outperformed the average EUR per thousand lateral feet of 2.9 from our earlier generation, Upper Marcellus completions.

To answer several questions regarding the Upper Marcellus, these results reconfirm our previous Upper Marcellus well results demonstrated, which is -- while the Upper Marcellus reservoir had its own distinctive characteristics relative to lower Marcellus, it remains one of the most economic reservoirs in North America. Our plan is to continue to drill and complete a small sample of Upper Marcellus wells each year to build a larger population of Gen 5 Upper Marcellus wells. Once again, these results, coupled with our previous Upper Marcellus completions have extensive production history, reconfirming our conviction on the distinct nature of this reservoir and reinforce our views on the multi-decade inventory life remaining from this world-class asset.

Move to the marketing and pricing update, much of they are success for the fourth quarter and full year was driven by the long-awaited addition of new takeaway capacity in the basin, demand projects that have been work -- we've been working on for years. Cabot's realized natural gas prices before hedges improved by 50% relative to the prior year comparable quarter, driven by a combination of higher NYMEX prices and a significant improvement in differentials, which came in at $0.42 below NYMEX, our lowest level since the fourth quarter of 2013, given the exposure we now have to highly seasonal markets in the Mid-Atlantic, we expect our first quarter 2019 price realizations to be flat to or even a slight premium to NYMEX.

For the full year, we still expect our weighted average differential before the impact of hedges to be $0.30. On the hedging front, we utilized the short-lived winter rally to layer in NYMEX and basis hedges, which we posted on our website this morning. We anticipate these hedges will generate over $55 million of additional revenue this year based on the current forward curve. We will continue to be opportunistic and layering in hedges during the market rallies in order to protect our anticipated free cash flow for the year.

Now I'll provide commentary for 2019. For the full year, we updated our 2019 capital budget to $800 million, resulting in production growth of 20% or 27% on a debt adjusted per share basis. Our decision to target the lower end of our preliminary capital guidance range is the direct result of current market conditions, feedback from shareholders and the broader investment community and our continued strategic focus on returns and free cash flow over top line production growth. We believe that we have an industry leader -- and we have been an industry leader and deemphasizing growth for the sake of it and prioritizing return of and on capital, while maximizing free cash flow. Our updated program for the year reaffirms our commitment to this philosophy and echoes our commentary from the third quarter earnings call , last October. We've certainly heard data points from the Appalachian peers that imply more rational approach to capital allocation in 2019 and Cabot fully supports the rationalization of capital to bring stability to the market.

With that said, we have actually witnessed a slight increase in a rig count in the Marcellus, Utica and Haynesville, since our last -- call last October. Meanwhile, despite early winter related rally, the NYMEX strip remains in backwardation. While we are cautiously optimistic on the supply demand outlook for the next 24 months, due in large part to significant demand growth in material base declines across the US, we believe it is prudent for us to plan more conservatively and utilize an incremental free cash flow resulting from higher prices for additional returns of capital to shareholders as opposed to funding additional outsized production growth.

As a result, we are using a $2.75 NYMEX assumption for budgeting purposes in 2019, which is below the current strip of approximately $2.90 when taking in consideration account and account for actual NYMEX settlements for January and February. Under this more conservative price assumption, we expect to generate between $600 million and $650 million of free cash flow, implying a 6% free cash flow yield. I would highlight this differ slightly from the $650 million to $700 million of expected free cash flow that we discussed on the third quarter call, which was based on a higher NYMEX assumption of $2.85 instead of the $2.75 we are using.

As we highlighted on our third quarter call, we plan to return at least 50% of this free cash flow to shareholders, annually through the combination of growing dividend and share repurchase, resulting in a minimum total shareholder yield of 3%. At $2.75 NYMEX, our 2019 program is expected to deliver between 40% and 55% growth in adjusted earnings per share and between a 21% and 23% return on capital employed. Even under a $2.50 NYMEX assumption, which some of the sales side of our program will deliver between $475 million and $525 million of free cash flow, which implies a 5% free cash flow yield at the midpoint. Also between 20% and 35% growth in adjusted earnings per share and a return on capital employed between 19% and 21%.

We believe these metrics are very compelling relative to the broader equity market, especially at these trough commodity price assumptions. I think it's also important to highlight that we are going to generate this type of free cash flow while continuing to reinvest in the disciplined growth of our assets via drill bit. We will -- we have been numerous -- we have seen numerous 2019 budgets released across the sector that implies significant reduction in capital spending year-over-year in order to target free cash flow neutrality. However for some, the limited capital investment, there could be a day of reckoning in 2020. In contrast, assuming price realizations are flat to 2019. Our program for 2020 is designed first and foremost to deliver an improving return on capital employed and to generate strong free cash flow for the fifth consecutive year from a capital program that is lower than 2019, all while maintaining a pristine balance sheet.

We expect to continue to deliver growth in cash flow and earnings per share in 2020, driven by disciplined capital allocation resulting in measured production growth. Additionally, the continued reduction in our shares outstanding resulting from our buyback program should further accrete per share metrics. Our decision to be more disciplined with our capital allocation for the year and deliver more measured growth, we'll only do so much to help balance the market. We believe it is important to send a message to investors, both energy specialists and generalist like that there is a company in the industry that is committed to disciplined capital allocation and has the assets that can generate a compelling combination of returns and growth in per share financial metrics, even under much lower natural gas price assumptions and a reduced capital program.

In summary, I believe our strategic effort have continued to create incremental value for our shareholders as we have transformed Cabot into the lowest cost producer in industry with the lowest headcount and capital intensity, the highest capital efficiency and ultimately resulting in return on capital employed free cash flow and per share growth metrics that are not only industry-leading, but also extremely competitive when compared to all other sectors across the S&P 500.

So with that Allison, I'd be more than happy to open it up to questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question today will come from Brian Singer of Goldman Sachs. Please go ahead.

Brian Singer -- Goldman Sachs & Co. -- Analyst

Thank you. Good morning.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Good morning, Brian.

Brian Singer -- Goldman Sachs & Co. -- Analyst

You've been very upfront on the return of capital to shareholders committing to at least 50% of free cash flow. How do you think about the at least or the plus in that as it relates to 2019 cash balances seem to have kind of come down here at the end of the year. Maybe you could also comment on what you see as the right sustainable cash balance as you think about trying to manage the plus in the 50% plus of returning free cash flow to shareholders?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Yes, by design, we brought our cash balance down, felt comfortable with the infrastructure, buildout Atlantic Sunrise, the commissioning with those two power plants that -- with that and our ability to grow into deliveries on those infrastructures that our cash flow was not a -- not just an assumption, but it was a reality. And so we felt comfortable not only drawing down that cash balance, but repaying the $300 million of debt and increasing the dividend twice this last year and with the $1 billion of buyback. Right now with the free cash flow generation that we anticipate in '19, we've kind of layered in a base assumption brand at the $2.75 and the plus would come, if in fact, we realize the $2.90 which the strips its at today if we realize the $2.90 then -- or something above that and then we're going to do what we've done in the past and that is to deliver some of the funds back to the shareholder. We'll make a decision whether it's in the form of dividend or buyback, but it's not our intent with our confidence level of the cash flow we generate, it's not our intent to leave a lot of cash on the balance sheet.

Brian Singer -- Goldman Sachs & Co. -- Analyst

Great, thanks. And then my follow-up is on the midstream front. I don't know if you were or Jeff are teed up for just the latest and greatest update on the various timing of projects and anything that's new that's coming onto the chalk board, but that would be great if that's a possibility?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Yes. I'll flip it over to Brian -- I mean to Jeff, Brian.

Jeffrey W. Hutton -- Senior Vice President, Marketing

Good morning, Brian. Yes, I think on the midstream it's relatively quiet as we await some additional ruling with the PennEast. I could tell you if there are some new projects that have been laid out in front of us over the last few months that we're interested in. I don't think a lot of this has reached out into the public domain yet, but still a lot of movement on midstream projects. Additionally, I think even -- maybe more importantly is the additional, in basin, demand project that we're viewing. There's quite a bit of activity, not just in Susquehanna County, but in that Northeast quarter of Pennsylvania with additional projects that are being developed to keep gas in the basin. And that's been exciting to watch as well.

Brian Singer -- Goldman Sachs & Co. -- Analyst

Can I ask on the new projects, are you talking about those to move gas to the New Jersey, New York markets, to the Southeast markets, or dare I ask, to the Northeast markets?

Jeffrey W. Hutton -- Senior Vice President, Marketing

Yes. So I think, a couple of them will do both, and the -- I don't think anyone has given up on building pipe out of Pennsylvania and into either Jersey or New York. And additionally, moving gas back down into the South, but I think looking at the pipelines, as we'll be talking about those in the next few months.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Yes. Brian, yes, I'd like to add also on that point that not only would gas move out of basin, like Jeff is referring to, there are also a number of in basin projects, that he alluded to that we continue to work on that we think would not have it on the long haul pipes but we'd have it from the tailgate of our gathering system. And we think that is meaningful to simply from the standpoint how it assists in balancing the basis of there. I would also like to point out to take this time with some of my colleagues here want me to maybe not expand on questions. But I would point out that in the New York Post today, there was interesting article on Cuomo and the results of his crusade against natural gas and the beginning of some of the issues that New York is experiencing out there. Experiencing the farm where it is starting to hurt small businesses, it's starting to hurt the development of new housing. I think it's clear that businesses are going to be turning away from New York. And with all of this, including the largest utility in New York, representing that they will no longer except applications for natural gas hookups and that's kind of end, beginning in March 15. I think these are all the early signs of -- that a policy that is creating significant calamity in New York and I think it will continue to have companies evacuate from doing business there.

Brian Singer -- Goldman Sachs & Co. -- Analyst

Thank you.

Operator

Our next question will come from Jeffrey Campbell of Tuohy Brothers. Please go ahead. Mr. Campbell, your line is open.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Let's move on.

Operator

Thank you. The next question will come from Michael Hall of Heikkinen Energy. Please go ahead.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Yes. Just curious, I guess, on -- as I was looking at your 1Q guidance, it seems pretty clear you guys aren't leaning into the winter market, let's say. Is that a view on the market stability to take the volumes or is it more a function of just a strict adherence to your approach on capital discipline?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

We're -- have our scheduled program. We have the time completion, Michael. When we get our pads -- all the drilling completion done on a particular pads. And at various times of the year, just sequentially, they come on at various different times and it gets a little bit lumpy. And so there is no particular master design on where we are in the first quarter.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Okay. And do you have any sort of curtail volumes that you could theoretically open up for opportunistic accessing of the market? And I guess if you'd like me better way to put, are you kind of running full house any given period?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

No. We're producing what we can. The curtail, if you will, volumes would be volumes that are adjacent -- that are wells that are adjacent to completing pads. We do shut in our existing production on some of the surrounding patch, surrounding wells while completions are going on to help avoid frac hits and things like that. So -- but as far as having a block of curtail volumes, we do not have that, and I don't anticipate anybody in the industry has that.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Okay, great. That's helpful. And then last for me, just on the Upper Marcellus, I'm just curious, just exactly how much do you think you will allocate in the 2019 program on the Upper Marcellus? And are there any changes in completion design associated with (Multiple Speakers)?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

We have a handful of wells that we'll drill and whether 10, 15 -- that's kind of in the key right now. I don't have the exact count in front of me, Michael, on the status of the drilling completion of the ones that we have scheduled for '19, but we had a -- just a good sample pool of Upper Marcellus completions.

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Great. I appreciate it . And congrats on the execution guys.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thank you.

Operator

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

Charles Meade -- Johnson Rice & Co. -- Analyst

Good morning, Dan to you and your team there.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thank you, Charles.

Charles Meade -- Johnson Rice & Co. -- Analyst

I wanted to pick up. You touched on this a bit in your earlier question, but I wanted to explore a little bit more. When I look at the -- you guys have a slideshow on how the basis has improved up in the Northeast. And when I look at that, it looks to me that you're delivering volumes -- you moved all these volumes on the Atlantic Sunrise, but delivering volumes into the local market, looks -- it certainly looks more attractive than it has for most of the last few years. And so -- but in my read on what you guys are doing is you guys are electing not to do that, because you're keeping your CapEx low, and it look like you guys are -- or you've committed to doing more cash return to shareholders. So can you talk about how you went through that decision? I know some of you look at it all the time, but how was the evaluation of delivering incremental volumes into the local market look to you right now?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Well -- and I'll flip to Jeff to make commentary on the basis. But one quick comment is, with Atlantic Sunrise coming on, we knew we were going to transfer those volumes out of basin, with a couple of long-term contracts that we were fulfilling and price points out of the basin that were better than in basin pricing. So we're doing that. The question about backfilling. We saw contemporaneous with the commissioning of Atlantic Sunrise and these power plants. We saw a fairly drastic narrowing of the differential. And with that -- that improved -- not only did we have an improvement by the gas that we moved on the new infrastructures and to the power plants, but that dramatic improvement in the basis also enhanced every other molecule that we were still selling into the basin. So with that uplift and the rest of our gas, we feel comfortable that maintaining that volumes we're producing and having just a measured growth by our capital allocation and allocating back some of our free cash, and buying back shares, and having a per share metric component to growth, we think that fits what we're trying to accomplish on improving realizations throughout not only the basin, but also where we're moving gas outside of the basin.

Jeffrey W. Hutton -- Senior Vice President, Marketing

Yes, good morning, Charles. Without getting too far into reads (ph) on this, in Atlantic Sunrise, the reaction in the marketplace was pretty much what we expected. Of course, Cabot did redirect a large amount of volume from other pipes to fill Atlantic Sunrise. On the other hand, the other half, I guess of Atlantic Sunrise, those volumes were being delivered into the lighting (ph) system directly. And so what we saw was a large amount of gas leaving the lighting system as well as Cabot gas leaving the lighting system, but then that influence in the lighting basis felt back into the other pipelines as well. And then along at the same time, we have a number of in basin projects, not just Cabot related, but other producer-related projects. So it was somewhat of a perfect storm in a very good way, this fall for the pricing and the basis in Northeast PA.

Charles Meade -- Johnson Rice & Co. -- Analyst

Got it. Thanks for that added color on that. You guys -- and then, if I could also ask Dan, back on the Upper Marcellus, what would you guys need to see in terms of well productivity or whatever the metric -- development metric is for you. What would you need to see from those Upper Marcellus leases before you decided to perhaps codevelop those with Lower Marcellus locations and save on the surface and bulb cost and things of that nature?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Well, I'll make a couple of comments. First, I'll make a comment regarding our comfort level since we received a number of -- not a number, but a couple of questions regarding our Upper Marcellus and how do you know it's distinctive. And I won't just give one example. We have a number of examples that we could give to you, but I'll give you one example that most people are not going to have any problems understanding how we have the conviction we do. We laid two at this recently, we laid two Upper Marcellus wells in a area that we had prior completions on our -- in the Lower Marcellus. And in this specific example I'll give you, we had two Lower Marcellus wells that had been producing for an extended period of time. We put two Upper Marcellus wells 400 feet -- and get that context, 400 feet from two Lower Marcellus wells that produced a long time. And we completed those two Upper Marcellus wells that were 400 feet from these two Lower Marcellus wells. It just so happen to be the two lower Marcellus wells that we chose to do this experiment on have each exhumed over 20 Bcf. Okay. So we laid two Upper Marcellus wells, 400 feet from two wells that exhumed each 20 Bcf. Those Upper Marcellus wells came on normally, as you might expect, the early time production from those Upper Marcellus wells have actually did a curve. And again I'm going to caution the comment here on a curve fit with very little data, but those two Upper Marcellus wells came on fitting a curve of 3.3 Bcf per 1,000 and 3.7 Bcf per 1,000. I'm not saying that that's what we're going to go to. So don't take it and I hope nobody comes and ask about what about the 3.3, 3.7 Bcf, type 1,000 EUR, that might be a poster Charles from this point forward. I'm just giving you an example of our confidence level, if there's any place we would have seen some issues, it would've been where we had produced over 40 Bcf, 400 something feet away from a couple of Upper Marcellus. So that's soapbox commentary in that. What was the rest of your question? Scott has been raising his hand so.

Scott C. Schroeder -- Executive Vice President and Chief Financial Officer

Charles, I think back to the -- at what point would you go to taking a word out of the West Texas, the Encana playbook, the cube kind of concept. The other thing that plays into that is what is the takeaway capacity in that part of our field at this point in time? What we wouldn't want to do is do all of the lowers and the uppers and then be constrained because we wouldn't be able to get that gas to market. And in addition to be most efficient to do the lowers than the uppers and come back into the uppers later and Dan's example right now highlights that there is no degradation when we came back. That's still the primary focus of how we're going to do it. The really only downside is the mold cost you mentioned because we're building the pads where we can come back on them, and all that kind of stuff. So there's not a lot of lost efficiency. What we don't want to do is instruct William's to put a huge pipe out there that will never be filled again after the initial production. That's just not efficient from that side of the equation. So that's kind of the dynamic. We will do some science test, like Dan highlighted earlier, where we'll do -- we got 10 or 15 that we think -- I think that's the latest number in the '19 program. We did nine in the '18 program. We'll continue to do a few handfuls of these as part of the science project going forward. But in terms of full develop of the full pad outside of maybe one or two for science purposes, it still most efficient to do what we're doing.

Charles Meade -- Johnson Rice & Co. -- Analyst

That's helpful, Scott. And thank you, Dan and Jeff for your comments as well.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thanks, Charles.

Operator

The next question will come from Mike Kelly of Seaport Global. Please go ahead.

Mike Kelly -- Seaport Global Securities -- Analyst

Hey guys. Good morning. Just wanted to check in with you guys on the Constitution Pipeline. RBN had an article out this week that at least expressd some sort of hope and revival of that project. And just wanted to get your perspective on that and your thoughts? Thanks.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Well, we have -- have maintained our efforts to get some movement in Constitution. The DC Circuit Court of Appeals had a ruling -- favorable ruling in a similar case -- the fact pattern case that was favorable to Constitution's fact pattern and the focus is -- there's still consideration out there, I guess, and sense on may be what might happen next. And we think the ruling in the DC Court of Appeals is again favorable if you then take the fact pattern that we have in Constitution. And that has to do with the waiver consideration. So we hope will have maybe at some point of time and another time to have this addressed and we continue to work on that.

Mike Kelly -- Seaport Global Securities -- Analyst

Okay. Any expense of timing on that? I don't know what the next step is for us to look for?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

We have -- with all the uncertainty, I'll be speculating, Mike. But I would think that -- I would hope that sometime in the first half of '19, that we would have some additional consideration from the courts, from FERC or something that might opine on this.

Mike Kelly -- Seaport Global Securities -- Analyst

Got it. Thanks, guys.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question will come from Leo Mariani of KeyBanc. Please go ahead.

Leo Mariani -- Keybanc Capital Markets -- Analyst

Hey guys. Don't want to harp too much here on the Upper Marcellus, but I know you guys think you guys had nine wells that you get to work on in 2018 not ready at this point kind of come out with anymore defined EUR estimates. But in curiosity, I mean how much production history do you think you need to see on some of those wells to give you guys a better sense of what the Upper Marcellus EURs look like? And what -- how old are some of the kind of wells that you frac in 2018? Just trying to get a sense of how much history you have now and how much do you think you need to give us a little better handle on it?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

We need a year, year and a half and the '18 wells are -- none of them are year old yet.

Leo Mariani -- Keybanc Capital Markets -- Analyst

Okay. That's helpful. And I guess, just turning to the exploration side. I guess obviously, you guys kind of abandoned your most recent effort here of late. I just wanted to get a sense, I mean, is there a continued appetite for Cabot to kind of look at other plays either this year or next to try to continue to sort of build the company? Just want to get a sense of your thoughts on looking other plays? Obviously, you've got a tremendously higher rate of return opportunity right now, which is a pretty high bar. So how should we think about that going forward?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Yes, right now, we have no interest in allocating any additional capital to exploration. And so, you know, the answer today is, that's where we stand.

Leo Mariani -- Keybanc Capital Markets -- Analyst

All right. Thank you.

Operator

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

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Hi, thanks, good morning, Dan, and thanks for all the information this morning. I'm just wondering if you could give us an update on your exploration ambitions beyond obviously the news today. What's next? Are you going to stick with the Marcellus on a go-forward basis?

Dan O. Dinges -- Chairman, President & Chief Executive Officer

You might've been -- might not have heard the answer previous call, but we're not going to allocate anymore capital to exploration at this time and that's kind of where we are.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Okay, sorry, I did miss, I apologize. My follow-up is really just a quick one, I guess, because we haven't really asked your opinion on the gas market for quite some time. And obviously, after the first quarter, the fourth quarter strength that we saw, I think some folks are of the view that the idea of just-in-time production was probably not the right model going forward and we are, in fact, going to have a more resilient outlook. I'm just wondering if you can give us your prognosis on how you see things playing out over your plan period? And I will leave it there. Thanks.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Couple of moving parts in that and that's -- that can be a long-winded response, but a couple of moving parts in the way I look at it is, one, I think it is imperative that our industry rationalize the market in a way that is prudent for all shareholders. And I think there is signs that rationalization is taking place, even though from October to current, there seems to be more rigs working today than they were back in October. We did see, and December and January, a little bit of reduction in at least up in the Appalachian area, flattening or reduction in production up in that area. So that would be helpful. But in looking at the demand side of the equation, I'm optimistic that there is going to be another 3 Bcf or 4 Bcf a day going offshore by commissioning of the LNG facilities. We're seeing incremental demand that is needed up in New York and up in the Boston area. When utilities now in Boston are talking about not taking application for new natural gas hookups, that means that demand is increasing and there is a need for additional natural gas up there. So I'm encouraged by incremental demand up there in that particular area. And I also think it's proven from your side of the equation, Doug, that if in fact, there is reward on value and there is expectation that value would be returned to shareholders in the form of buybacks, o f dividends and that's meaningful, then that is going to help assist with the market as opposed to some that keep focus on growth at the -- at our cost. And so I think all of this is part of the forward-look on natural gas, but I also think that natural gas plays a role on any of the renewable footprint out there, natural gas better be part of the equation. Otherwise, the responsiveness to the -- and security of a delivery of energy is going to be challenged.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Dan, you guys have done an outstanding job in a tough gas state. So congratulations on that. And I really do appreciate your perspective. Thank you.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thanks, Doug.

Operator

The next question will come from Jane Trotsenko of Stifel. Please go ahead.

Jane Trotsenko -- Stifel Nicolaus -- Analyst

Good morning. Dan, could you please expand on what drove the 19% year-over-year increase in crude reserves in 2018? It looks like the increase in results is well above the three-year average run rate. And I was just curious if it's due to the outperformance of the existing wells. So is it like the recent well results have been particularly strong or something else that would explain that? Thanks.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

And I'll -- Steve Lindeman is in here, and he is responsible for our reserve bookings, and I'll let him cover that. Thanks for the question.

Steven W. Lindeman -- Senior Vice President, South Region and Engineering

So part of what drove -- what drove most of our revision this year was drilling longer laterals than we had modeled in our '17 reserve report, we -- as time has progressed, we -- our lateral length, our average pipe was about 5,500 feet. Our -- wells that we drilled were in the 8,000 foot range.

Jane Trotsenko -- Stifel Nicolaus -- Analyst

Okay. Got it. Got it. And then my second question is for Jeff. Jeff, could you please expand a little bit on fixed price sales that have gone for 16% of the sales mix in '19? Is it something that we should expect to take place in 2020 plus as well? And how do you think the pricing for those volumes will evolve over time?

Jeffrey W. Hutton -- Senior Vice President, Marketing

I'll grab the table real quick. Thank you, Matt. You're asking about the change on -- in 2019 on the NYMEX portion?

Jane Trotsenko -- Stifel Nicolaus -- Analyst

Yes. So you have fixed price sales. It seems to me that those are term sales, but I'm not sure if those are term sales that you are all over may be on the quarterly or an annual basis. And I'm just curious how that portion will evolve over time in terms of volumes and pricing?

Jeffrey W. Hutton -- Senior Vice President, Marketing

Okay. Well on the fixed-price person, that's of course is a combination of some of our contracts that have fixed price floors in them. And so going forward, that piece of that fixed price 16% will remain static. However, another part of the fixed-price is just from opportunities we've seen in the marketplace. So I'll expect that to continue to be dynamic if we have opportunities to convert some NYMEX or some index-based pricing to fixed-price, we will take advantage of that. So that one is more of a moving target that we can't really elaborate on going forward in 2021 or '22.

Jane Trotsenko -- Stifel Nicolaus -- Analyst

I see. And in terms of pricing, how are those volumes priced? Is it -- should we think about them in terms of comparable pricing to '19 or -- can you comment on that as well?

Jeffrey W. Hutton -- Senior Vice President, Marketing

No, that's dealt into the overall -- how we calculate the overall basis differential to NYMEX, looking forward. So it moves around.

Jane Trotsenko -- Stifel Nicolaus -- Analyst

Okay, I understand. Thanks.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Thank you.

Jeffrey W. Hutton -- Senior Vice President, Marketing

Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Dinges for any closing remarks.

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Just briefly, I appreciate everybody's interest in Cabot. I think it is interesting and I reflect on the release we've made and looking at our -- not only our press release, but the comments in this morning's report, it's interesting to have an E&P company make a report that does not talk about how much a particular pad has come on or what a zone has done, what a yield is on the well, but talk strictly about what type of financial performance we can deliver to the shareholders. And I think, that is certainly what we're hearing is the shareholders are very interested in value and value creation and I hope it is getting a little bit of agnostic that because just because we do it with natural gas, does not mean that we have a flawed company. So with that, Allison, I appreciate the interest and we'll conclude the call.

Operator

And thank you, sir. The conference has now concluded. And we thank everyone for attending today's presentation. You may now disconnect your lines.

Duration: 50 minutes

Call participants:

Dan O. Dinges -- Chairman, President & Chief Executive Officer

Brian Singer -- Goldman Sachs & Co. -- Analyst

Jeffrey W. Hutton -- Senior Vice President, Marketing

Michael Hall -- Heikkinen Energy Advisors -- Analyst

Charles Meade -- Johnson Rice & Co. -- Analyst

Scott C. Schroeder -- Executive Vice President and Chief Financial Officer

Mike Kelly -- Seaport Global Securities -- Analyst

Leo Mariani -- Keybanc Capital Markets -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Jane Trotsenko -- Stifel Nicolaus -- Analyst

Steven W. Lindeman -- Senior Vice President, South Region and Engineering

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