Growing production 43% year/year in 2Q2016, Rice Energy Inc. is positioning itself to capture improved pricing heading into next year, management told analysts during a call last week to discuss the Appalachian operator’s quarterly results.

Second quarter production averaged 758 MMcfe/d, which also represented a 16% sequential increase over the first quarter. Production was 100% weighted to gas, 88% operated and 68% from the Marcellus Shale.

Meanwhile, the Canonsburg, PA-based exploration and production (E&P) company saw lower lease operating expenses (LOE) and well costs in its core operating areas in the Marcellus and Utica shales.

CEO Daniel Rice said the recent count of 34 active rigs in Appalachia shows a region operating “substantially below” the 50-55 rigs needed to maintain current Northeast production of over 20 Bcf/d.

“Furthermore, there’s approximately 10-15 Bcf/d of new Appalachian takeaway capacity expected to come online in the next 24 months that will have to be sourced with local supply,” he said. “Although there’s some debate around the timing of certain projects, we do expect the vast majority of the contracted projects to be placed into service, which will significantly improve local pricing.

“These items have been the crux of our thesis of strengthening gas prices, and we’ve been positioning Rice for a while now to benefit the most as this thesis continues to play out.”

Management said they expect 3Q2016 to be flat with the second quarter, with an uptick in production again in 4Q2016.

Daniel Rice said the company has “already done a ton of work” to position itself for a ramp-up next year, with the E&P “pre-funding a lot of 2017 production growth by spending a lot on drilling and completion [D&C] activities in 2016.”

D&C activity in the Marcellus continued to come in ahead of schedule and under budget during the quarter, and Rice Energy now plans to add $20 million to its land budget for 2016 to pursue organic growth opportunities, management said.

Rice Energy’s Marcellus D&C budget has been lowered from $285 million to $235 million while increasing the number of wells drilled in 2016. Those funds will be used to further develop the Utica, increasing investment in the play from $175 million to $240 million for the year to take advantage of currently favorable service pricing, management said.

The company’s total 2016 capital expenditures (capex) budget has been increased from $640 to $660 million.

Well costs in Rice Energy’s Marcellus Shale assets in Southwest Pennsylvania averaged $700/lateral foot, a 24% sequential decrease thanks to shorter cycle times, lower service costs and longer laterals. The E&P drilled 11 gross Marcellus wells in the quarter, with an average lateral length of 11,000 feet and 18-day drill times. Rice Energy completed six gross wells in the quarter with an average lateral length of 6,000 feet.

In the Utica, well costs decreased 17% sequentially to $1,150/lateral foot. The E&P drilled four gross wells in 2Q2016 with an average lateral length of 9,000 feet and an average 24-day drill time. The company completed nine gross wells in the quarter with an average lateral length of 9,000 feet.

COO Toby Rice acknowledged that the E&P is “benefiting from lower service costs just like everybody else, but really the story on the Marcellus is the lateral lengths this quarter. We averaged 11,000-foot lateral lengths compared to our yearly average, which I think is around 7,200 feet.” He also noted faster drilling speeds in the play, with a horizontal rig now able to drill 50 wells per year, compared with around 30 wells per year in 2015.

LOE for the quarter declined to 13 cents/Mcfe, compared with 23 cents/Mcfe in the year-ago period.

Realized prices after hedging for the quarter averaged $2.75/Mcf, compared with $2.81/Mcf in the year-ago quarter. Operating revenues, including hedging gains, totaled $223.4 million, compared with $427.4 million in the year-ago period.

On the midstream side, affiliate Rice Midstream Holdings LLC averaged 658,000 Dth/d in gathered volumes, a 184% increase over the year-ago quarter and a 45% sequential increase. Compression volumes averaged 461,000 Dth/d, a 27% sequential increase.

Affiliate Rice Midstream Partners LP saw gathered volumes for the quarter average 934,000 Dth/d, 43% above 2Q2015 volumes and a 12% sequential increase. Compression volumes totaled 564,000 Dth/d, an 872% year/year and 271% sequential increase resulting from new compression capacity brought online during the quarter.

Rice Energy reported a quarterly net loss of $139 million (minus $1.07/share), compared with a net loss of $64 million (minus 51 cents/share) in the year-ago quarter.

Stay up to date on 2Q16 earnings and projections for the remainder of the year with NGI’s Earnings Call and Coverage sheet.