EQT Corporation

Ladies and gentlemen, greetings and welcome to the EQT Corporation fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the program, please push star zero on your telephone keypad. As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Blake McLean, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning, and thank you for joining today's conference call. With me today are Rob McNally, President and Chief Executive Officer, Jimmy Sue Smith, Senior Vice President and Chief Financial Officer, Aaron Senefani, Executive Vice President of Production, and Blue Jenkins, Executive Vice President, Commercial, Business Development, IT, and Safety. The replay for today's call will be available for a seven-day period beginning this evening. The telephone number for the replay is 201-612-7415 with a confirmation code of 1367-4487. The call will also be replayed for seven days on our website. In a moment, Rob, Jimmy, Sue, and Aaron will present their prepared remarks. Following these remarks, Rob, Jimmy, Sue, Aaron, and Blue will be available to answer your questions. I'd also like to remind you that today's call may contain forward-looking statements. Actual results and future events may differ, possibly materially, from these forward-looking statements due to a variety of factors, including those described in today's press release and under risk factors in our Form 10-K for the year ended December 31, 2017, and our Form 10-K for the year ended December 31, 2018, to be filed with the SEC later today, as updated by any subsequent Form 10-Qs and other reports we file with the SEC. Today's call may also contain certain non-GAAP financial measures. Please refer to this morning's press release for important disclosures regarding such measures, including, when able, reconciliations to the most comparable GAAP financial measures. I'd now like to turn the call over to Rob. Thank you, Blake.

Good morning, everyone. The last several months have been a very exciting time at EQT. Post separation, the new management team, with support from everyone across the organization, has successfully shifted our direction to focus on development, optimization, and efficiencies. This strategic shift has resulted in significant progress in a short period of time and is exceeding my expectations. This company is full of some of the best and brightest minds in the industry, and empowering these people to make real decisions and drive change has had an immediate and noticeable impact. We're excited about the future of the company and our ability to execute on the plan that we've set forth. I'm highly confident that we have the right overall execution framework set in motion to achieve our strategic vision. Now, I'd like to reiterate some of the progress that we made in late 2018. On the operational side, we completed 2018 with full year sales volumes of 1,488 BCFE and fourth quarter sales volumes of 394 BCFE, above prior guidance and approximately 5% over the third quarter. Additionally, fourth quarter capital expenditures were in line with guidance. Most importantly, we generated approximately $134 million of adjusted free cash flow, a significant increase above the $100 million that we guided to in our call last month. These results demonstrate that we are successfully executing our plan to enhance efficiencies and deliver sustainable free cash flow. As a premier peer-play upstream company with a world-class asset base, EQT has begun a new chapter. We have a clear and compelling action plan and are taking meaningful and decisive steps to strengthen EQT's financial and operational results. We are committed to driving down costs and operating more efficiently, and our entire organization is moving forward with a sense of urgency. Over the course of 2019, we will continue to look for even more opportunities to unlock the tremendous potential of EQT's assets. I am more confident than ever that EQT will deliver sustainable free cash flow to shareholders in 2019 and for many years to come. Last month, we outlined our path to generate mid-single-digit year-over-year production growth combined with meaningful adjusted free cash flow in 2019 and over the next five years, a total of $2.7 billion, with upside expected from our ongoing target 10% initiatives. we are turning EQT into a free cash flow generation machine. Our confidence is driven by our unique and differentiated position built on three key pillars. First, EQT has built a world-class asset base positioned squarely in the core of the Appalachian Basin with 680,000 core net acres in the Marcellus and 15 to 20 years of drilling inventory. Second, we are taking the right steps to operate more efficiently and lower costs. On our January call, we announced immediate cost saving actions that are expected to reduce annual cash costs by approximately $100 million. We also discussed further cost savings to be realized in 2020 and beyond, our target 10% initiative. We have line of sight on many of these opportunities and will report on our progress throughout the year. That said, I am pleased to announce that we have already identified and have recently begun to implement approximately 50 million of additional cost savings. These cost savings have been incorporated into our 2019 and five-year forecast, which increases our total projected five-year adjusted free cash flow from 2.7 billion to 2.9 billion. We will discuss these savings in more detail later. but our progress is further evidence of this management team's commitment to both execute and improve this plan. The third pillar is our financial strength. EQT has an investment-grade balance sheet, and the company's stake in Equitrans Midstream, worth approximately $1 billion at current valuation, provides optionality to further strengthen the balance sheet. That stake, combined with our free cash flow generation, gives us the ability to reduce leverage to our target of 1.5 to 2 times net debt to adjusted EBITDA, while at the same time returning capital to shareholders. As a reminder, our projected five-year adjusted free cash flow of $2.9 billion, before realizing the full impact of the target 10% initiative, represents greater than half of our market cap at today's valuation. As we announced last month, our search for a Chief Operating Officer is ongoing and a short list of highly qualified external candidates has been identified. We remain on track to announce an appointment of the COO during the first quarter of 2019. Before we discuss the fourth quarter and full year results, I would like to briefly address the most recent public claims made by the Rice Brothers. I will start by saying that the focus of this management team is on running this business in the most efficient manner possible, executing on the rigorous bottoms-up and detailed plan that we laid out and working to continuously improve that plan. We fully expect to deliver on our objectives, and we will provide the details necessary to effectively evaluate our performance. As previously noted, we believe the RICE claims are based on flawed assumptions, selective data, and tell an incomplete and misleading story. I don't intend to address every point here, but I will make some high-level observations and point out a few areas where their claims are not supported by the facts. First, the claim that rice wells consistently outperform EQT wells is simply not accurate, and the analysis omits important information. There are reservoir quality differences across Washington and Greene counties. By examining the wells and the rice analysis, an overlay of the EQT, rice, or any other heat map generated by public data would show that a greater percentage of the rice wells sit in the Tier 1 Southwest core, and those wells would be expected to have higher EURs. In addition, approximately 30% of EQT's wells in the data set were impacted by offset upper Devonian wells. This co-development typically drives 10% to 15% underperformance relative to Marcellus wells without those offsets. When comparing wells that fall within the same heat mapped region and ignoring wells impacted by co-development, there is no difference between EQT wells and rice wells. In fact, the directly comparable EQT wells perform marginally better than those drilled by Rice. As a reminder, we have stopped upper Devonian co-development, so those wells are not representative of go-forward well results. With the support of our talented technical team, we have taken a measured and thoughtful approach to analyzing the data we acquired from Rice. One observation about the 2017 Rice wells was the testing of a new frac design that utilize tighter cluster spacing. We closely monitored the results of those wells and did some additional testing in 2018, and have since implemented this tighter cluster spacing as our standard frac design. This demonstrates two things. First, we've been open-minded about adopting best practices. And second, when we talk about frac design, we also understand that sand, water, stage spacing, and cluster spacing matter. I will make one final point on frac design. We have performed rigorous analysis on our extensive repository of well data, production results, and reservoir quality intelligence. That data, combined with our sophisticated reservoir modeling technology, has led us to target 1,000-foot lateral spacing in conjunction with larger frac jobs. We firmly believe that this is the optimal way to both maximize returns and minimize dollars per MCFE. Second, the claim that Rice Energy operated this same set of assets is false. To clarify, development footprint is not synonymous with operating area. That assumption ignores the complexity of managing an extensive inventory of producing wells, substantial water handling and logistics, and the maintenance of leases across the portfolio. To put this in perspective, consider the fact that EQT's assets today compared to the legacy Rice assets include three times the leasehold position, eight times the number of counties with producing wells, five times the total producing Marcellus, Upper Devonian, and Utica wells, and five times the daily produced water volumes. Remember, all of this produced water must be moved to either disposal or an active frac, and distance matters from both a cost and logistical complexity perspective. To reiterate, this is not the same asset base and the cost and complexities associated with operating these assets cannot be ignored. Third, members of this leadership team were and are major advocates of retaining and employing the key technology and senior technical resources acquired in the RICE transaction. Digital and data tools continue to increase in importance in this industry and the role of these tools will continue to expand at EQT in 2019. We retained RICE systems that were differentiated and could improve our own processes, but effectively using such tools is not as simple as splitting a switch. Digital and data tools sit on top of the existing systems that run the day-to-day operations, and they must be integrated with those systems to add real value. As a smaller team building from the ground up, RICE had the advantage of choosing the day-to-day systems and defining the business process alongside the technology. As a larger company with a well-established technology ecosystem, the only prudent course of action was to pursue a measured phased implementation. That process focused on integrating RICE's digital and data tools with our existing systems without introducing major disruptions or operational risks. This takes time and resources, but let me assure you, the most relevant and compelling technologies are far from dormant at EQT. I would also like to point out that EQT has been on a data-driven digital transformation over the past several years, both before and during the integration with RICE. EQT is evolving, along with most other sizable EMP franchises, to be a more robust user of technology and data. Evidence of this lies in our build-out of centralized real-time operations center, our expanding use of cloud-based data services to support real-time analytics, and our successful integration of certain legacy RICE tools. The last point that I will address is regarding our well cost. As we stated in our January presentation, we do not agree that the RICE well cost projections are achievable or appropriately reflect EQT's 2019 operating environment. We are believers in leveraging the power of technology to streamline operations, improve scheduling and planning, and promote internal communication. EQT has made great strides in this area over the past several years, and it will be a critical component of our efforts to increase efficiency going forward. But these efforts simply don't offset a 20 to 25% price increase in services from the cyclical lows of early 2017 to today. The rice cost curve, as presented in their public materials, is based on pre-inflation well cost results and a much smaller and more geographically concentrated produced water portfolio. And it's simply not a relevant comparison to the EQT 2019 operating plan. Service cost inflation was real and felt by everyone in the basin. If you adjust the rice $735 per foot cost claim up by 20% for inflation, you see a significant erosion of their claims savings. In addition, consider the fact that EQT's producing water footprint covers six times the linear mileage running from Tioga County, Pennsylvania to Ritchie County, West Virginia. The comparable rice-producing water footprint covered two adjacent Pennsylvania counties. Put simply, this asset base produces more water across a larger geographic footprint. That produced water must travel a greater distance to active fracks, resulting in higher trucking and water costs. I will also point out that we view dollar per foot as an imperfect metric. Accounting treatment of certain well costs varies widely among operators, as does lateral spacing and frack design. In our January presentation, we showed that dollar per foot increases as spacing increases, but these cost increases are more than offset by the enhanced returns and lower cost per MCFE. Remember, we make money by selling gas, not by selling feet. In our January presentation, we also showed the significant impact that these accounting differences can have on cost per foot. EQT capitalizes items that other operators expense, like flow back, certain land and construction costs, and the cost of moving impaired water to a drilling site for use in fracking. These differences significantly impact the comparability of our cost per foot and is one reason why we have meaningfully lowered LOE per unit compared to our peers. These are real cash costs that are not showing up in the peers dollar per foot metric. And just to be clear, EQT's peer-leading LOE per unit is not just a matter of scale. Our 2017 LOE adjusted for the cost of operating our Huron assets was $0.07, far less than $0.13 per unit for rice during the comparable period. I'll conclude by reiterating that we welcome and look forward to continuing discussions directly with our shareholders regarding this matter, and we will be diligent and thoughtful in our analysis. This organization and this leadership team will continue to be laser focused on executing the rigorous, bottoms-up, and detailed plan that we laid out. And we will be working hard to make that plan even better throughout this year. The good news is that the presentation and accounting differences will all be washed out at the bottom line, which is free cash flow. We remain focused on achieving lower costs and higher returns with a cash-driven mindset. We have a compelling plan in place and a commitment to continuously improve. This free cash flow machine is ramping up and we're excited about 2019 and beyond. I will now turn the call over to Jimmy C. Smith to discuss our financial performance.