Consol Energy Inc. said Tuesday it has decided to revive its drilling program next month, when it will add back two horizontal rigs in the Marcellus and Utica shales in a move it said is underscored by improving market fundamentals and more than a year of intense cost-cutting.

The company idled its drilling program last summer in one effort to weather the commodities downturn (see Shale Daily, July 29, 2015). Its rigs will return to drill eight Utica wells in Monroe County, OH, in a part of the play that the company has favored during the price collapse for the lower cost dry natural gas there (see Shale Daily, April 7). Consol also has plans to drill two Marcellus wells in Washington County, PA this year.

“We are driving nominal costs out, drilling better wells and quickly increasing our mix towards more lower cost Utica production,” CFO David Khani told financial analysts on Tuesday during a conference call to discuss the company’s second quarter results.

Consol pushed down its 2Q2016 exploration and production (E&P) unit costs by 18% compared to the year-ago period; reported net cash from operating activities of $95 million during the quarter, versus the $66 million it reported at the same time last year, and paid down $390 million of debt. The balance sheet, combined with the forecasted drop in U.S. natural gas production, hot summer weather and what management believes will be more favorable storage injections at the end of the season, led management to bring back rigs.

“Fundamentals across the board are improving, specifically when you look at our region. We believe that the three key drivers: pipeline takeaway capacity, weather and rig counts all paint a positive picture,” said COO Tim Dugan. “The summer weather is strong, which is slowing the inventory build and the rig counts have remained below the level needed to maintain flat production — not only in our region — but across the U.S. All of these items have driven the 2017 [New York Mercantile Exchange] price significantly higher than it was at the time of our last call and this, in part, helped us solidify our decision to bring back rigs and resume drilling activities.”

Consol produced 99.3 Bcfe in the second quarter, up slightly from 1Q2016 production of 97.5 Bcfe and up 32% from the same time last year, when the company produced 75.5 Bcfe. The Marcellus accounted for 53.1 Bcfe during the quarter, while Utica volumes continued to increase to 23.3 Bcfe, up from 10.7 Bcfe in 2Q2015. The Utica now accounts for about 25% of the company’s volumes as it looks to focus more heavily on the play, where more prolific wells are likely to drive its growth in the future, management said.

A revived drilling program and aggressive cost-cutting measures have pushed up the company’s full-year guidance to 380-385 Bcfe from 378 Bcfe, while the capital expenditures budget has declined to $190-205 million from a high-end of $325 million announced in January (see Shale Daily, Jan. 6). Consol was the second Appalachian-focused E&P to report this earnings season. Southwestern Energy Co. said last week that its production beat the high end of its guidance at lower costs, which has it planning to add five rigs, mostly in Appalachia, by the end of the third quarter (see Shale Daily, July 22).

(Stay up to date on 2Q2016 earnings and projections for the remainder of the year with NGI‘s Earnings Call and Coverage sheet.)

Last year, Consol set forth an 18-month plan to generate more free cash flow through production efficiencies, cost-cutting initiatives, asset sales and production growth. Its efforts to shift away from coal production and transform into a pure-play natural gas producer have also aided the balance sheet. The company has sold $5 billion in coal assets since 2012.

At the end of the second quarter, Consol entered a purchase and sale agreement to divest its Mill Creek and Fola mines, which were classified as discontinued operations for the period and recorded as a $356 million impairment. But the sale marks the company’s exit from central Appalachia coal and surface mining.

“So, significant risk is now dealt with, and Consol Energy is now an E&P company with only one remaining non-operated [coal] complex in its portfolio,” said CEO Nicholas Deluliis.

The company started completion operations on a six-well pad in Greene County, PA, during the second quarter as it continues to work off its drilled but uncompleted (DUC) inventory. The company also turned inline 16 Marcellus wells in Pennsylvania during the period. It anticipates exiting the year with 91 DUCs, most of which are located in wet areas. The wells it drills in the second half of this year with the new rigs, Dugan said, would be completed in early 2017 and turned to sales late in the year.

Consol still struggled with low prices during the second quarter, realizing an average of $2.50/Mcfe, which was down from $2.68/Mcfe in 2Q2015 and down from $2.73/Mcfe in 1Q2016. But as its balance sheet improves and its operational outlook grows more favorable, the company has started layering on more hedges. This year’s Nymex and basis position increased to 263.6 Bcf at an average price of $3.04/Mcf.

While natural gas liquids only comprised 11% of its volumes during the quarter, Consol started recovering ethane in April for delivery on Sunoco Logistics Partners LPs Mariner East pipeline to the Marcus Hook Industrial Complex for export. Management said those sales, and other efforts, are expected to improve NGL netbacks.

Revenue fell to $285.8 million in the second quarter, compared to $545.6 million in the year-ago period. The company reported a net loss of $470 million (minus $2.05/share), compared to a net loss of $603 million (minus $2.64/share) in 2Q2015.