7/25/2019

speaker
Operator
Conference Call Operator

Greetings, and welcome to EQT Corporation's Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kyle Durham, please go ahead, sir.

speaker
Kyle Durham
Conference Host

Good morning, and thank you for joining today's conference call. With me today are John McCartney, Chairman of EQT, Toby Rice, President and Chief Executive Officer, Derek Rice, member of our Evolution Committee, Jimmy Sue Smith, Chief Financial Officer, Blue Jenkins, Executive Vice President, Commercial Business Development and Safety, and Gary Gould, Chief Operating Officer. 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 136-850-70. The replay will be available for seven days on our website. In a moment, John, Toby, Jimmy, Sue, and I will present our prepared remarks. Following these remarks, we will take your questions. EQT published a new investor presentation this morning, and we will refer to certain slides during our prepared remarks. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events may differ, possibly materially, from those 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, 2018. as updated by our subsequent Form 10Qs, which will also be on file with the SEC and available on our website. 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 reconciliations to the most comparable GAAP financial measures. With that, I'd like to turn the call over to John.

speaker
John McCartney
Chairman of EQT

Thank you, Kyle, and good morning, everyone. On behalf of the board, I'd like to thank shareholders for entrusting us with the task of overseeing EQT's transformation into a world-class energy company. The shareholder vote was an overwhelming vote of confidence for the new direction at EQT, and I'm honored to serve as chairman of what I believe is one of the most capable, diverse, and dedicated set of directors in the energy space. With more than 80% of the votes supporting the RICE team nominees, shareholders have clearly expressed their desire for EQT to become a leading-edge, data-driven, transparent, and socially responsible energy company. COBE's transformation plan offers significant value to shareholders, and the Board is united in supporting and providing accountability for its executions. Beginning immediately following the shareholders meeting, we've had several meetings and updates at the board and committee levels to facilitate a smooth transition into a new era for EQT. In the near term, we will continue these efforts by collaborating with the evolution committee and designing a compensation plan that best aligns our stated goals of lowering well costs, improving capital efficiency, driving sustainable free cash flow per share and enhancing total shareholder return with an emphasis towards absolute return. Finally, once we've made meaningful progress on the 100-day plan, we intend to engage with shareholders on a more proactive basis to enhance open communications, accountability, and transparency at the board level. With that, I'll turn the call over to Toby Rice, your newly appointed president and CEO.

speaker
Toby Rice
President and Chief Executive Officer

Thanks, John, and thanks to everyone for joining us today. I'm humbled to have this opportunity to lead and transform EQT into a modern, digitally-enabled E&P company that will create significant value for shareholders. Leading the largest gas producer in the U.S. comes with an inherent responsibility to do what's best for our employees and contractors, our landowners, our shareholders, and the environment without compromise. I expect the turnaround that we are executing will lift the company to new heights as it relates to our overall corporate citizenship. Before I continue, I would like to take a moment to recognize and thank our employees. EQT has undergone a lot of change in recent years, but I am impressed with our employees' enthusiasm and dedication to the company. Their openness to our new plan is encouraging, and their participation will be one of the most important factors in our near and long-term success. Getting back to my remarks. My team and I got to work immediately following the annual meeting and have made great progress in assessing the business. We've had some quick wins along the way, but I want to focus my remarks on sharing my vision for EQT. Let's first start with a snapshot of where EQT is today. EQT is the largest gas producer in the U.S., with 660,000 core acres in southwestern PA and northern West Virginia and 64,000 core acres in southeastern Ohio. We believe EQT has the deepest inventory of economic locations in the basin, and with the right leadership and approach, we can deliver superior shareholder returns in any commodity price environment. Unfortunately, EQT has not yet realized the potential of its asset base. Throughout the proxy contest, we communicated to our fellow shareholders that we believed EQT's legacy performance was the result of poor project planning due to underutilized technology and a disconnected organization. In our first 72 hours on the job, we were able to confirm our diagnosis was accurate. The employees are working tirelessly to improve current operations, but the organization has limited visibility on future development projects. Planning in Appalachia is extremely difficult and perhaps more difficult than anywhere else in the lower 48. Our plan is specifically designed to leverage technology to connect the entire organization to improve development planning. A well-designed development schedule planned 36 months in the future is the key to consistent operational execution that will drive lower well costs and more free cash flow. Before I talk through the details of our plan, let's look at an example that shows the importance of planning. Please turn to slide five of the presentation we posted this morning. What we are looking at here are two sets of pads developed by EQT in 2019. The pads on the left represent a poorly planned development run. and on the right, a well-thought-out development run. The example gives us the opportunity to isolate the impact of planning on efficiency and cost, since the same drilling team developed both projects in the same service cost environment. The development run on the left is clearly not an efficient setup. The new wells were squeezed onto pads with multiple existing producing wells. Our drilling team was forced to use complex well geometries to avoid wellbore collisions, The fractured rock down hole caused mud losses while drilling, and the poorly planned wellhead layouts required time consuming rig maneuvers between wells. These factors led to inefficient and costly operations. Add in the fact that these wells had an average lateral length of less than 8,000 feet, and the result was a drilling cost of $325 per foot, which is 80% higher than our targeted costs. Further, because these new wells were offsetting producing wells, Approximately 30 million cubic feet of gas per day had to be shut in for an extended period of time, which contributed to EQT's legacy curtailment issue. And finally, because of parent-child relationships, these newly drilled wells are expected to underperform our type curve by 10 to 15% once they are brought online. We just hit on many of EQT's legacy issues. Elevated costs, curtailments, and wells that underperform type curves. all explained by a poorly designed development project. So what happens when this team is given a properly designed development project? On the right side of the page, we're looking at 12 wells developed simultaneously from two adjacent pads. This development was initially designed by Rice Energy back in 2017 as part of what we call combo development. This project is currently being drilled by EQT today by the same team that executed the development run on the left. Through the first six wells, EQT has drilled at a rate of 1,500 feet per day, a 50% improvement versus the previous pad. Drilling costs are trending to around $200 per foot, a 40% reduction in cost versus our prior example. I'll pause here to make this clear. When EQT's operational teams are given properly designed development projects, they are nearly at our targeted well cost goals, which for drilling are $190 per foot. With some additional leadership, improved engineering practices, and the right pad layout, these cost goals are well within reach. Rounding out this development run, because we planned these wells so far in advance, curtailment issues are minimized, and we expect all 12 wells to perform at or above tight curve once turned online. This example is focused on drilling, but we are seeing the same thing on completions. When our completion teams are given poor projects at the last minute, their efficiencies are half of what they are on properly planned projects. You may ask, why would EQT develop the pad on the left? The answer is simple. EQT did not have a better location to send the rig and the teams were given orders and incentivized to hit production targets. Unfortunately, less than 50% of EQT's future schedule is currently set up for efficient development as illustrated on the right. This is why we are here. Our jobs as leaders of this organization, to align the workforce to march towards these large-scale development projects so our operational teams can execute our vision and path to well costs of 735 dollars per foot ends when 80 percent of our development looks like what you see on the right this is what we're simply calling the end state the end state is where all planning tasks are completed at least 12 months before spud giving our execution teams the opportunity to succeed every time they step onto a pad to drill and complete a standardized well design for the lowest possible cost on budget, on schedule, and for maximum value. To give you a sense of how achievable this is, by the end of our time at Rice Energy, we had definitive and detailed development planning three to five years into the future. Combo development represented more than 80% of our planned activity. That type of visibility becomes very powerful for decision-making, particularly around capital allocation. Planning further out in time also provides for better oilfield service contracts, lower well costs, greater leverage for commercial arrangements, ample freshwater pipe to the site for completion operations, and sufficient midstream and downstream capacity for new production. This is how we get well costs to $735 per foot and hit type curve for each and every pad. I realize this sounds simple. It is not. That said, it is our job as leaders of this company to take complicated tasks, such as master planning, and simplify them for our employees to execute. Our first step towards the end state was the creation of our evolution committee. This committee is comprised of EQT's executive team, as well as Danny Rice, Derek Rice, and Kyle Durham. The committee will serve as the primary liaison to the board with respect to the execution of the 100-day plan. Under the oversight of the Evolution Committee, we are going to transform EQT to our planned end state in three key areas. First, we're going to restructure the organization to be function-based. Employees will have clear roles and priorities that facilitate efficient project planning and execution. Over the last 130 years, EQT's org structure has morphed into more than 50 departments that has led to a lack of accountability. We'll reorganize the business into 16 departments with roles that better match the lifecycle of a well. Second, we're going to bring new technology to this organization to foster the level of interdepartmental collaboration and real-time decision-making that the end state requires. The company currently operates in a very siloed manner. Data and workflows are trapped in emails, and each department is acting on predetermined department goals, even when the goals of the organization may demand adjustments. The solution here is to implement a digital work environment that has been customized to run an Appalachian E&P business. This platform, which we used at Rice Energy with great success, will break down silos and bring transparency to data and workflows to enable more value-driven decisions. Third, we have high-graded leadership where needed to execute our vision. I'm happy to report that we have hired all eight evolution leaders mentioned during the campaign. On the operational side, we've added a VP of operational planning to oversee proper planning and coordination of future development, a VP of asset performance to oversee management of the optimal well design for each of our operating areas, a VP of drilling and a VP of completions to ensure well designs are consistently executed. On the technology side, we've added a chief information officer and a VP of digital technology to oversee the build-out of our key digital solutions and change the way we work. On the organizational side, we've added a chief human resources officer to create a world-class culture and a director of evolution to ensure the transformation remains in compliance with established audit, governance, and risk controls. These eight leaders previously worked together in this same end state at Rice Energy and are currently marching on the 100-day plan we outlined. And finally, will achieve the end state by properly aligning, valuing, and supporting our people. EQT's employees are motivated and hardworking, but they have not been allowed to reach their full potential. In addition to the benefits of the operational, technological, and organizational changes I discussed earlier, we are to challenge our employees with proper goals, recognize them in real time, and align them through incentives. This will allow them to see how they contribute to the company's mission achieving the end state and making EQT a better business for all of its stakeholders. I'm committed to making EQT the best place to work in Pittsburgh, and these steps will get us there. Stepping back, how long will it take before EQT is executing at well costs of $735 a foot? As we've laid out in slide 10, we expect a gradual improvement in well costs as best practices are implemented and inefficient development is removed from the schedule. Master planning takes time, but we expect our schedule to be predominantly combo development runs by mid-2020, which will lead to a step change in well costs to $735 per foot around that time. With that, I'd like to turn the call over to Jimmy Hsu to share our second quarter results.

speaker
Jimmy Hsu
Chief Financial Officer

Thanks, Toby, and good morning, everyone. This morning, EQT reported second quarter 2019 net income of $126 million, or 49 cents per share. and adjusted net income from continuing operations of $22 million or $0.09 per share, compared to $34 million or $0.13 per share in the second quarter of 2018. For the quarter, we achieved 370 BCFE of sales volume, in line with expectations and at the high end of our guidance range of 355 to 375 BCFE. Excluding sales volumes related to the 2018 divestitures, Sales volumes of natural gas, oil, and NGLs increased 8% over prior year. Second quarter 2019 adjusted operating revenues were approximately $958 million, down 6% compared to the prior year as a result of weaker pricing, partly offset by the higher sales volume. Average realized sales price for the quarter was $2.59 for MCFE, 22 cents below the average price in the second quarter of 2018. The decrease in average realized price was primarily due to a decrease in higher price liquid sales and BTU uplift as a result of the 2018 divestitures and lower NYMEX net of cash settled derivatives. Total operating revenues for the quarter were approximately $1.3 billion, up roughly $360 million as the second quarter of 2019 included $408 million of gains on derivatives not designated as hedges compared to a $54 million loss last year. This reflects the increase in the fair market value of our NIMAC swaps and options due to declines in forward prices during the quarter. Now moving on to operating expenses. Second quarter operating expenses were down approximately 5% as $118 million impairment charge recorded in the second quarter of 2018 and lower production expenses in 2019 as a result of the 2018 divestitures. More than offset increases in SG&A, proxy costs, and lease impairments in the period. The increase in SD&A was the result of royalty and litigation reserves of $38 million recorded during the quarter. The lease impairments primarily relate to acreage exploration, mostly outside of our current development plan. At the unit cost level, second quarter 2019 total cash unit costs were two cents higher than the second quarter of 2018. Of note, EQT's transmission cost per unit was $0.54 per MCFE, which was $0.02 higher than the second quarter of 2018 and $0.03 above the high end of our guidance range. This increase was primarily due to higher unreleased Tennessee gas pipeline capacity. As a reminder, we have unused capacity on this pipeline in northern Pennsylvania. We typically either release this capacity to others or, depending on market conditions, purchase gas to sell off the pipeline. When released, the cost of this capacity is netted against the released revenue in net marketing services. When we move gas on the pipeline, our gas or third party gas, the cost is reported in transmission expense. We have increased our guidance range for transmission costs for the year to reflect our current expectation for the use of this capacity in 2019. As noted above, SG&A was impacted by royalty and litigation reserves this quarter. Adjusting for these items SG&A was 13 cents per MCFE, which is within our annual guidance range. Now moving to cash flow items. Second quarter adjusted operating cash flow was $386 million compared to $529 million in 2018. As noted in our press release, second quarter adjusted operating cash flow and adjusted free cash flow include the impact of approximately $38 million of royalty and litigation reserves and 22 million of proxy, transaction, and reorganization-related expenses. Excluding these two items, operating cash flow would have been 445 million, and adjusted free cash flow would have been a negative 21 million, which is slightly better than the favorable end of the range that we provided in June. Our second quarter capital expenditures of 466 million were better than internal expectations for the quarter, primarily due to continued efficiency gains. Looking forward, we are guiding the third quarter volumes of 365 to 385 BCFE at an average differential of negative 55 cents to negative 35 cents. And we reiterate our full year capital expenditure guidance of 1.825 to 1.925 billion. From a timing perspective, we expect 3Q CapEx to be slightly higher than fourth quarter. With respect to free cash flow, We have updated our annual guidance for the strip price as of June 30th. At these prices, we anticipate adjusted free cash flow of 25 to 125 million for the year, with negative cash flow in the third quarter being offset by positive cash flow in the fourth quarter. Lastly, I will briefly discuss our cash flow and liquidity position. On May 31st, EQT entered into a $1 billion term loan agreement and used the proceeds to repay $700 million in senior notes that matured on June 1st, and to repay outstanding credit facility borrowings. We ended the quarter with no funds drawn on our $2.5 billion revolver and approximately $30 million in cash. This leaves our net debt at approximately $4.97 billion. At this level, our net debt to trailing 12-month adjusted EBITDA leverage is at 2.1 times, when reduced for the value of our investment in Equitrans Midstream using quarter-end pricing is 1.7 times. With that, I will pass the call to Kyle.

speaker
Kyle Durham
Conference Host

Thanks, Jimmy. Sue, I've had a chance to get to know many of our investors over the last few months. I'm currently a member of the Evolution Committee, and I'm working alongside the team to execute certain finance, corporate development, and investor relations initiatives, as well as helping form our general capital allocation strategy. To help set expectations, I would like to lay out our guidance plan for the next few months. Jimmy Hsu walked through some of the changes to 2019 guidance, but we are suspending our outlook in 2020 and beyond as we develop a revised plan. We expect to come back to the street with longer-term guidance in the next 60 to 90 days, but I will spend a few minutes providing some directional color on where we expect things to shake out. We will be taking a different approach to capital allocation than many of our peers. In today's commodity price environment, there's a high bar to allocate capital to the drill bit, especially given the opportunity to improve our leverage profile and buy back stock at 10-year lows. We believe EQT trades at a significant discount to its intrinsic value, and while we recognize many EMPs share this trait today, net asset value will always be an anchor for us to make the right capital allocation decisions. Fortunately for shareholders, EQT also has the potential to generate substantial near-term free cash flow per share, even at current strip pricing, and that will be our focus going forward. As Toby mentioned in his comments, EQT's legacy capital inefficiency was a function of poor development planning. Our near-term strategy will be to remove high-cost development from the schedule and focus our land, permitting, and planning teams to transform that development into a combo development run that we can drill in 12 to 24 months. This disciplined approach to development has several benefits. First, the capital efficiency of our program improves because we are only deploying development dollars when we know we can execute highly economic projects. Second, we generate more near-term free cash flow that can be used to repay debt and buy back stock. Third, we put less near-term supply on a soft gas market. And lastly, we give our midstream service provider a chance to catch its breath and provide water and gathering services at the lowest cost possible. greatly improving their capital efficiency and free cash flow. The ultimate level of our development capital spend will be determined by the number of economic projects we have to drill, measured against the opportunity to buy back shares and achieve our leverage targets. Production growth, if any, will be an output of that decision, not a target. We will be driven by growing free cash flow per share, which we believe is the key to driving shareholder value. In making these near-term decisions, we have maximum flexibility as all of EQT's RIG contracts roll off by the end of the year and we have minimal long-term commitments to other services. We will use that flexibility to design the most efficient program possible with services procured in a soft service cost environment. Stepping back, over the last three months, the forward gas strip has weakened, bringing significant pressure to the balance sheets of both public and private gas levered EMPs There are approximately 75 rigs running in Appalachia today and 50 in the Hainesville. We believe the vast majority of these rigs are sub-economic at strip pricing. The equity and gas markets are sending a clear message to operators to cut growth to maintenance levels, and some will need to go further than that. While we have started to see a pullback in activity, more is needed to balance the market. We believe the marginal cost of supply is well above strip, and the market will work itself out over the long term. That said, all of our efforts are geared towards transforming EQT into the lowest cost operator in the basin to weather what could be a challenging 2020 and position the business for long-term success when prices normalize. Turning to the balance sheet, in general, our policy will be to target forward leverage of less than two times net debt to EBITDA at the lower of strip gas prices or $2.50. Free cash flow and any potential divestiture proceeds will be used to achieve this leverage profile, and any additional cash flow will largely be returned to shareholders via stock buybacks. We are committed to the investment-grade rating and believe access to low-cost financing will be a strategic advantage over the next several years. We believe this policy will allow us to maintain investment-grade metrics, and we look forward to engaging with the agencies over the coming months after we have finalized our long-term development plan. One lever we can pull to manage debt is a retained interest in Equitrans, which is worth approximately $900 million as of today. While we are evaluating a divestiture, it is not part of our immediate plans. Any potential exit will be done responsibly, and we have several options at our disposal. For now, we are benefiting from the 10% dividend yield and see several positive catalysts for Equitrans as we transform EQT. First, while there may be a reduction in our volume forecast in the near to medium term, We expect that our ability to hand Equitrans a fully-baked schedule that plans combo development 12 to 36 months in advance will greatly reduce their capital needs and boost free cash flow. We saw this happen in 2017 at Rice Midstream Partners following Rice Energy's upstream transformation, and we expect it to happen for Equitrans as early as 2020. Second, we are working together to simplify our services contracts. While we all recognize the gathering fees are on the high end of market, our strategy allows for other levers to be pulled that will be a win-win for both parties, including increasing utilization of freshwater systems and the construction of produced water disposal systems. These opportunities should lower our overall cost mix while providing incremental revenue sources for Equitrans. We have already engaged with Ecotrans management and both sides are thrilled to start working together to develop this world-class resource and deliver gas to market at the lowest cost possible. Regarding asset sales, we're in the process of reviewing all of EQT's assets and remain open to divesting acreage or production if it fits within our capital allocation framework of maximizing free cash flow per share and NAV. To summarize, we are taking a differentiated approach to capital allocation We are in the process of rationalizing EQT's development schedule, and we will come back to the street with revised long-term outlook that reflects the potential of this world-class asset, while also respecting the current commodity price environment. With that, I'd like to open up the call for Q&A. Operator?

speaker
Operator
Conference Call Operator

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today is from Holly Stewart of Scotia Howard and Wheel. Please go ahead.

speaker
Holly Stewart
Analyst at Scotia Howard and Wheel

Good morning, gentlemen. Jimmy Hsu. Maybe just first touch on a few of the midstream things. And, Kyle, I think you hit on certainly a couple of them. There seems to be some sentiment out there in the marketplace today around your commitment to MVP. So I was just hoping maybe you could sort of clear the waters a little bit there.

speaker
Blue Jenkins
Executive Vice President, Commercial Business Development and Safety

Holly, this is Blue. I'll take that one. So a couple of things on MVP. One, we're confident that it will get built, and we are utilizing the most recent, most likely scenario used by E-Train, which is mid-2020. In terms of the conversation of can we walk away, would we get out, there isn't a reasonable scenario in which we would walk away from that project without a massive penalty, and so that's just not how we look at it. That's just not a reasonable outcome.

speaker
Holly Stewart
Analyst at Scotia Howard and Wheel

Okay. That was what we thought, but just wanted to – To clear that up, Kyle, you mentioned thoughts around the E-Train shares. Maybe you could just provide a little bit of color. I know there's some timing issues with that equity being public and the forms that have to be filed if you decided to divest of that before a year. So, just maybe provide a little bit of color on that process.

speaker
Kyle Durham
Conference Host

Yeah, no. We're really focused on the business for now. I think clearly that's a divestiture candidate for us over the longer term, but it's not part of the immediate plan. We're not going to guide to any timing expectations around when that might happen.

speaker
Holly Stewart
Analyst at Scotia Howard and Wheel

Okay. That's great. And then maybe just one last one for me. It looked like Moody's recently moved you down to your outlook down from stable to negative Can we just talk – there seems to be several maturities coming up in the next few years, so Toby, just wanted to kind of get your thoughts on how those maturities are addressed and sort of general outlook on the leverage profile.

speaker
Kyle Durham
Conference Host

Sure. Yeah, this is Kyle. I'll take that one. Yeah, the leverage target's, again, going to be below two times. And when we say that, we include our gas price assumption for that, which to us is the lower of strip and $2.50. And I think that positions us very well from an investment grade rating metrics perspective. In terms of the maturities, certainly they're on our radar. It's not something we're ignoring right now, but want to sort of improve the cost structure of the business before assessing that. But it's certainly on our radar.

speaker
Holly Stewart
Analyst at Scotia Howard and Wheel

All right.

speaker
Operator
Conference Call Operator

Thanks, guys. The next question is from Brian Singer of Goldman Sachs. Please go ahead.

speaker
Brian Singer
Analyst at Goldman Sachs

Thank you. Good morning. In your opening remarks, you mentioned you see the benefits of your plan maximized when you're planning 36 months in the future, and I think you said when you complete the planning 12 months ahead of SPUD. In slide 10, your expectation seems that we'll see the greatest step change in value creation over the course of the second half of 2020. Can you just add more color for what drives that step change in 2020 and then how lower commodity prices and lower activity could, if at all, impact the scale you're trying to achieve.

speaker
Toby Rice
President and Chief Executive Officer

Brian, this is Toby. When looking at our $735 per foot cost target, I think it's important to understand there's really four main drivers behind us achieving that level. The first being operational efficiencies that we're able to achieve in the field. How fast can we drill? How many stages per day can we complete? feel very confident after looking at the teams that we're going to be able to achieve the operational efficiencies needed to hit that 735 a foot the second thing we look at is the procurement and you know the oil field cert we have some we have flexibility uh with our oil field service contracts in place right now um so we have uh we feel pretty good about our ability to to acquire the right services at the right cost to achieve our cost targets the third is comes to well design And we are deploying our proven well design. We feel really confident in the cost to execute and the type curve that we will receive. And then the fourth thing we look at is our schedule. And this is really where we're going to be doing a lot of the heavy lifting and is to get a schedule that allows for combo development, starting with multiple wells per pad, meeting a minimum horizontal well length. And that's really where the focus is going to be. I'd say, you know, the benefits you're going to get when you get the combo development are going to be largely driven on the logistics front, uh, and also on bulk materials, uh, procurement.

speaker
Kyle Durham
Conference Host

Yeah. And, and just to, just to jump in Ryan, I think with respect to timing, you know, the biggest impediment to setting up combo development, right. Is, is on the land and permitting side. And so that that's where we'll be focusing our resources. And those realistically take about 12 months to set up. And so that's why you see that step change in well cost on that graphic on slide 10. And so once those are set up and they start hitting the schedule, you'll really see the benefits and start to see $7.35 a foot.

speaker
Brian Singer
Analyst at Goldman Sachs

Got it. And do the benefits change if you're running at a lower activity level in response to the lower commodity prices or you think the same per year? foot benefits can be achieved kind of regardless of regardless of activity yeah we think we're going to be operating at a level of activity that allows us to achieve the economies of scale necessary to reach the 735 a foot great thanks and then just one follow-up on the midstream discussion earlier you highlighted within the existing contracts some opportunities that could potentially come up where you could restructure and add biz and add new business Can you just give us just a little bit more of a sense of what that could mean, either from a cost perspective or free cash flow perspective?

speaker
Kyle Durham
Conference Host

Yeah, sure. This is Kyle. Don't want to give any specific guidance with respect to rates reductions or anything like that. But, you know, the new business for Equitrans that could be is expanding the utilization of the freshwater systems. They're actually, you know, largely built by Rice Midstream Partners a few years ago. And then obviously the water disposal options, getting trucks off the road, allowing Equitrans to build a system to move water. Those are the incremental revenue sources that we think would offset any potential rate reduction on the midstream gathering side. Thank you.

speaker
Operator
Conference Call Operator

The next question is from Maroon Drum of JP Morgan. Please go ahead.

speaker
spk11

Yeah, good morning. Toby, Kyle, the Rice team had identified, call it $500 million of free cash flow uplift relative to EQT's prior plan when implemented. I was wondering if you could maybe help us walk through the $500 million that you previously cited between the D&C cost savings and other initiatives, just trying to better understand how you get to that number.

speaker
Toby Rice
President and Chief Executive Officer

Yeah, sure. So, you know, the $500 million we talked about in the campaign, it was a couple things that were driving us getting to $500 million. First being an assumed activity level, and that activity level would assume that we were growing at 5%. And the second being, you know, the cost difference between executing well costs at $1,100 a foot or compared to our $735 per foot target. So, You know, some things have changed. Obviously, we are resetting expectations and coming up with an amount of activity that is based on economic projects to develop. So what we're really focused on and want to be comparing ourselves against going forward in the future is going to be how close we are to our $7.35 per foot cost target because that's irrespective of activity levels.

speaker
spk11

Fair enough. And just to follow up, you guys expressed a strong commitment to the MVP pipeline. But just better trying to understand, if the project is delayed, call it past mid-next year, is there any recourse for EQT in terms of the tolling agreements or the fees on that, just given that the project is delayed? beyond its original timeline?

speaker
Blue Jenkins
Executive Vice President, Commercial Business Development and Safety

Yeah, so this is Blue Arun. So the short answer is no. What we have is a contract that caps our rate based on time and based on cost. And that's where we sit. So if it happens to slide, let's say it's Q4 instead of Q2, so it wouldn't change anything. We have plans in place to manage should that be the case and are prepared for that. But No, the contract is fairly set at this point, and we still expect, as I mentioned, that it will be completed, and we don't have any financial incentive to walk away from that.

speaker
spk11

Great. Thanks a lot.

speaker
Operator
Conference Call Operator

The next question is from David DeKalbom of Cowan & Company. Please go ahead.

speaker
David DeKalbom
Analyst at Cowan & Company

Thanks, guys. It's David from Cowan. Just congrats coming back into the public fold, guys. I did want to ask, you commented earlier, I think, I know that the 2020 vision and beyond is suspended for the time being. You said, I think, about half of the development programs moving forward right now are not set up optimally. I know like in slide five where you highlighted a sort of ideal or endgame pad versus something that was recently drilled. You know, that wasn't necessarily just not SimOps. It was also shorter laterals or perhaps the project that wouldn't be drilled. I guess what percentage of projects that exist right now would you just not drill that are on the current schedule?

speaker
Derek Rice
Member of the Evolution Committee

Yeah, David, this is Derek. So we're currently going through the schedule and assessing good projects versus bad projects. And obviously the bad projects, we would like to pull those from the schedule. I don't think it makes sense. drilling $1100 per foot type wells at this gas price environment. So before pulling those off of the schedule, we're running those through the traps. Whenever you make any change to the schedule, there is a ripple effect. Where do you send that rig if it's not going to the proposed site? And so I think over the next, call it 30 to 60 days, we'll have a better assessment of what exactly we can pull off the schedule. You know, in an ideal situation, we pull those poor development projects off the schedule, replace them with correct projects that are planned appropriately. Whether or not we can do that, again, that's just going to be part of the assessment. So from within the first two weeks, we've identified some inefficiencies in the program, and now we're just going to evaluate whether or not we can pull those through.

speaker
Toby Rice
President and Chief Executive Officer

Yeah, and I would just make one point. I mean, you know, we've identified these projects, and these are projects that can be improved, and our job is to align the workforce and focus our resources to make these projects more economic. Lengthen the laterals, add wells per pad, see if we can turn them into combos. So, you know, we're not just taking stuff off the schedule. We are focusing resources to make them, you know, end state-like.

speaker
David DeKalbom
Analyst at Cowan & Company

Sure. I mean, but given that, can you affect those changes, you know, by the first half of next year in that drilling program? Or is this more a second half of 20 program and you might just be willing to kind of eat lesser economics in the beginning of next year?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, I think we're going to have a better understanding on timing, you know, if we get a little bit more time here. I mean, it's been 10 days. I think we've done a good job in identifying some of the issues, and now it's what's our confidence in being able to align the schedule to meet our minimum development criteria. Yeah. And that's something we'll report back to you guys when we have better clarity on that in the future.

speaker
David DeKalbom
Analyst at Cowan & Company

I appreciate that. I think, Kyle, I think you remarked that the most difficult impediment to the future plan is sort of around land and permitting, and it can kind of take 12 months to set that up. I guess what else needs to be done on the midstream side and just in terms of facilities to be able to turn in that many wells in these locations? I know you talked about the water opportunity that's out there. I guess logistically, what needs to happen on the midstream side so you can execute this plan?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, I would say, this is Toby, there's a couple things outside of land and permitting. The other long lead time items, as you identified, is gathering takeaway and having access to fresh water and have that be piped to locations. So, I mean, we're going through an analysis right now, understanding the gathering systems and the capacity forecasts combined with our schedule to make sure that everything is synced up so we don't have, we can minimize any curtailment issues. And the same thing with a good schedule, we understand when we're going to be fracking, we can pair that up with water needs and make sure that the midstream team can service our water needs when we need to complete. So this is the type of work, in addition to this, there's another 40 constraints that we are maneuvering into an optimum schedule. And this is the work that we're doing, and we'll be looking forward to updating people when we have a more complete picture of what the development schedule will look like in the future.

speaker
David DeKalbom
Analyst at Cowan & Company

All right, fair enough. Thank you, guys. Best of luck.

speaker
Toby Rice
President and Chief Executive Officer

Thanks.

speaker
Operator
Conference Call Operator

The next question is from Michael Hall of Heineken Energy Advisors. Please go ahead.

speaker
Michael Hall
Analyst at Heineken Energy Advisors

Good morning, and yeah, welcome back to the public fold. Yeah, I just, I guess I wanted to talk through a couple of the slides. On slide five, I was just thinking as you walk through that, obviously there's some risk maybe that the legacy activity will kind of cannibalize the opportunity to move forward in a more, in that kind of properly planned development case. How confident are you in the and the kind of ability to move forward with that properly planned case and, you know, fully achieve that end state goal, you know, how much more work do you think remains to be done in terms of understanding the potential impacts of legacy development on the ability to optimize things going forward?

speaker
Toby Rice
President and Chief Executive Officer

This is Toby real quick, then I'll pass it over to Derek. I would say the thing that we're excited about is the fact that, you know, You know, we have such a large inventory of undeveloped leasehold. You know, if you look at where we're going to be focusing our development in southern green, you know, there's not a lot of producing wells we have to dance around. So our inventory is pretty virgin. And so, but it does take work to get that leasehold ready to develop. And that's where we're going to be focusing our teams. Any other color you want to add on that, Derek?

speaker
Derek Rice
Member of the Evolution Committee

Yeah, I mean, just one thing. I mean, just looking at the asset base, and this is what gets us comfortable saying we're going to get there, is because the issues that we're seeing with EQT today, to be frank, this is what we dealt with at Rice Energy in 2014 and 2015 when we had the same vision. It's we know what end state we'd like to get to. What are the steps needed to get there? It's essentially the same asset base, primarily in Greene County and Washington County. A lot of the sites that we plan to develop going forward are rice energy sites. So we have a clear picture of what we need to do to get there, and we've done it before, and we think we can get there again.

speaker
Michael Hall
Analyst at Heineken Energy Advisors

All right. Makes sense. Sorry, go ahead.

speaker
Kyle Durham
Conference Host

No, that was it.

speaker
Michael Hall
Analyst at Heineken Energy Advisors

Okay. Yeah, in that context, I guess, you know, I can't help but look at West Virginia and think that there's quite a bit of potential for optimizing that land. position and potentially helping build out that inventory into something more ready for optimal development. What's the kind of game plan on that, timelines and thought process as to when that will kind of compete internally, if you will?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, this is Toby. Yeah, so we are working to develop West Virginia and make that drill ready. And we have the resources, so we're going to start preparing that right now. You know, the game plan is we've got a couple years while we're focusing our development in, you know, Green and Washington counties to get West Virginia ready. Obviously, it's a little bit more challenging in West Virginia just because terrain is a little bit more difficult, makes site selection a little bit harder. And, you know, putting together a contiguous leasehold position is something that's important. And with the fractured lease position in West Virginia, makes it a little bit more challenging. But I will say, you know, that the EQT team does have some trades currently going on. So we are focused on, you know, building a contiguous leasehold position that will support combo development.

speaker
Michael Hall
Analyst at Heineken Energy Advisors

Okay. Makes sense. And last one of mine is just if you had any sort of estimate yet for what you would think about as a kind of break-even situation gas price in the context of driving corporate-level free cash flow going forward?

speaker
Kyle Durham
Conference Host

Yep. No, let us get back to you in 60 to 90 days, and we'll be able to better run some sensitivity so you can kind of see free cash flow at different price decks.

speaker
Michael Hall
Analyst at Heineken Energy Advisors

All right. Thanks very much, guys. Welcome back.

speaker
Operator
Conference Call Operator

Thanks. The next question is from Josh Silverstein of Wolf Research. Please go ahead.

speaker
Josh Silverstein
Analyst at Wolf Research

Yeah, thanks. Good morning, guys. Just following up on some of the questions before, there definitely seems to be a much bigger emphasis on free cash flow generation and overgrowth. Are you guys willing to go to maintenance mode or even decline as you're implementing the strategy into next year?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, Josh, this is Toby. I mean, I would say that the driver of activity levels is going to be, you know, the setup on economic projects that we have to develop. So, I mean, that's really where it all starts. I mean, when you think about it, I mean, just bringing this business back to fundamentals and making investments in good projects and the production growth targets or the production targets that we set are going to be the outcome of, you know, fundamentally sound investment decisions on the drill bit.

speaker
Josh Silverstein
Analyst at Wolf Research

Gotcha. I mean, can, I guess, once implemented, assuming we're in a 250 environment, can EQT be sub two times levered, grow 5% and generate a significant amount of free cash flow?

speaker
Kyle Durham
Conference Host

At 250? Yeah, I mean, Josh, I think it's realistic. But again, at 250, it's not really where we're going to be growing production volumes into that type of environment. So that's not really the scenario we're talking about. But we'll get back to you after we spent some time with the development schedule to really forecast this out and give you the granularity you need.

speaker
Josh Silverstein
Analyst at Wolf Research

Gotcha, okay. I mean, as the biggest gas producer out there, certainly setting tone around 250 would help there. And then just to understand, you talked about this massive penalty potentially for getting out of the MVP pipeline. Can you put some context around that? Is it 100 million? Is it 500 million? What is massive in terms of getting out of MVP?

speaker
Blue Jenkins
Executive Vice President, Commercial Business Development and Safety

Yeah, this is Blue. The short answer is we're not going to walk from the project. I think that's probably the short answer.

speaker
Josh Silverstein
Analyst at Wolf Research

Fair enough.

speaker
Operator
Conference Call Operator

The next question is from Jeffrey Campbell of 2E Brothers. Please go ahead.

speaker
Jeffrey Campbell
Analyst at 2E Brothers

Good morning. My first question was going back to slide five, but just looking at something else there. It says that greater than 80% of the remaining inventory can look like the good pad that you illustrated. I was just wondering, is it reasonable to assume that some of that other less than 20% could either be sold or impaired?

speaker
Derek Rice
Member of the Evolution Committee

Yeah, this is Derek. So the majority of that sort of poorly planned development that remains. It's largely within EQT's producing well footprint. So very similar to what you're seeing on the left there. Not exactly something that anybody wants to buy. The way that we look at it is that's stuff that we'd like to develop in the year 2030 plus. So as much as we can push that back, the better. Yeah.

speaker
Toby Rice
President and Chief Executive Officer

the development is not set up for economic development today, but I mean, gas prices change. That's where that stuff can, can, can make economic sense, but we're going to be disciplined to develop that when it, when it does make sense.

speaker
Jeffrey Campbell
Analyst at 2E Brothers

Okay. And I guess there could also be a decision between, I mean, cause you can always sell producing reserves, but then if you sell them, then it might raise your corporate decline rates. So there might be a reason to want to keep them just as part of a good base decline. I mean, is that reasonable as well?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, that's correct.

speaker
Jeffrey Campbell
Analyst at 2E Brothers

Okay. And I was wondering, I thought this was really interesting in your earlier remarks. I was wondering how much time do you think is going to be required to digitize AUQT along the lines of the former Rice Energy? Because it sounds like it's not just a software shift, but it's actually a different way of working that's enhanced by technology.

speaker
Toby Rice
President and Chief Executive Officer

Yeah, I think when you think about a digital transformation, it's sort of what we're going through. I mean, it's not just bringing technology to an organization. It's bringing a cultural change as well. You think about what we're going to be doing here with technology. It's going to bring massive transparency to the business. People need to be comfortable with that type of transparency. And, you know, what's exciting about that is once we have that transparency, then we're going to start having the opportunity to start collaborating more And when people start collaborating, we're going to start having some more ideas, and innovation is going to start bubbling up. And, you know, if we can focus that innovation on the things that matter, the bottlenecks and the opportunities within our business, then we can start generating value for shareholders, and that's evolution. And so it all starts with technology, but it's really going to change the culture here at EQT, and we're excited about that opportunity going forward.

speaker
Jeffrey Campbell
Analyst at 2E Brothers

Okay. And last question was, this is kind of structural, I guess. You mentioned that the Evolution Committee is the main liaison to the Board of Directors. I was just wondering, how does the Evolution Committee interface with operational leaders to facilitate the changes that you've enumerated?

speaker
Toby Rice
President and Chief Executive Officer

Sure. So it's a transparent plan that we're executing. You know, part of our, when we talk about transforming EQT into a modern company, what modern means to us is coming up with a good strategy and leveraging technology to execute. So the strategy in this case is our 100-day plan, and the technology that we're implementing is in our digital work environment, and that will be available for all the employees to see the tasks that we're doing to take us one step, to take us closer to an evolved state. We have, you know, the EQT executives are on this evolution committee. We have a feedback channel set up. for employees to speak up and tell us, you know, what do they want to change, what do they want to keep the same. And these employees are speaking up. We've got over 400 responses to this survey. So, you know, we are currently assessing the feedback and implementing that into our task list that we're doing. So everybody here is going to be engaged.

speaker
Jeffrey Campbell
Analyst at 2E Brothers

Okay, great. Thanks. I appreciate the color and best of luck. Thanks.

speaker
Operator
Conference Call Operator

The next question is from Jane of Stifel. Please go ahead.

speaker
Jane
Analyst at Stifel

Good morning. I have a question regarding ducts and how they fit into the current, let's say, future development plan. I see that there are over 200 ducts in Marsalis, and I'm just curious, how do they compete versus, let's say, drilling new wells using this combo development?

speaker
Toby Rice
President and Chief Executive Officer

jane this is toby um so i think i think the way that we wrote that is just the way that we've categorized the 209 is is wells that have been drilled in some some form of fashion i think 92 of those are actually drilled to total depth so that was would be what we would call a true duck okay

speaker
Jane
Analyst at Stifel

So the other way of saying is that you guys plan to complete the existing 96 ducts, right? And I would say that we should expect 10% lower EOR just because they have been done using the old approach, right?

speaker
Toby Rice
President and Chief Executive Officer

No, I wouldn't say that we would change the production that we said we're going to receive from these wells. I mean, we've reaffirmed our production guidance for this year.

speaker
Jane
Analyst at Stifel

Okay, okay. And then the remaining over 100 docs, those are just kind of top hole, I guess?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, that's correct.

speaker
Jane
Analyst at Stifel

Okay, got it. And then I have a question for Jimmy Hsu regarding this term loan agreement. If you guys can kind of explain the logic for entering into this agreement for $1 billion.

speaker
Jimmy Hsu
Chief Financial Officer

And the term loan agreement? Yeah. We've been pretty clear that the proceeds from the ETRN stake would be used to reduce our leverage, but that we were going to be disciplined about when we did that sale. We had a $700 million maturity coming up on our revolver, and the term loan was available at rates lower than our – I'm sorry, the $700 maturity was long-term bonds.

speaker
Jimmy Hsu
Chief Financial Officer

We could have put it on the revolver, but the term loan was available, and the interest rates on the term loan are lower than those on our current revolver.

speaker
Jane
Analyst at Stifel

Okay, got it. The last question, if I could, regarding the production mix going forward, is it going to remain roughly the same in terms of southwest Pennsylvania, Ohio, and West Virginia completions?

speaker
Kyle Durham
Conference Host

Yeah, this is Kyle. I think it'll be similar for the rest of the year. As we've outlined, I think it's possible as we go through this review that we have a little more activity focused in Washington and Greene County and Pennsylvania and a little less in West Virginia as we're putting that land position together to set it up for combo development. So it's possible in 2020 and maybe 2021 you see a little more in Pennsylvania than West Virginia than in 2019.

speaker
Jane
Analyst at Stifel

Thanks a lot, guys.

speaker
Operator
Conference Call Operator

The next question is from Drew Venker of Morgan Stanley. Please go ahead.

speaker
Drew Venker
Analyst at Morgan Stanley

Hi, guys. I just wanted to follow up on a question earlier about CapEx. I think you had said that 3Q CapEx you expect to be a bit higher than 2Q, but did I also hear you right in saying that you'll likely be slowing down D&C spending in the near term?

speaker
Jimmy Hsu
Chief Financial Officer

No, I think we – well, we've reaffirmed our CapEx guidance for the year. I think what I said was if you take what we spent here today, you look at the midpoint of the guidance, And if you want to try to get the cadence of that third quarter, fourth quarter, third quarter will be higher than the fourth quarter.

speaker
Drew Venker
Analyst at Morgan Stanley

Okay. And I guess this one for Toby is on the land spending, as you guys are spending more time there and on permitting, do you think the lower land spending rate, at least per year, is still a realistic goal from the $200 million a year or so that EQT had been running at?

speaker
Toby Rice
President and Chief Executive Officer

Yeah. So, I mean, I think, you know, the way we look at land, you know, we've got a large asset base. And one of the things that we're going to bring to this organization is focus. And that operation schedule that we put out is going to allow our land teams to focus their resources on preparing for that operation schedule. So this is part of the, you know, understanding what are the land spend that we need. is going to be something that we're focusing our assessment on right now and have better color for you in the future when we get through that assessment.

speaker
Drew Venker
Analyst at Morgan Stanley

Hey, thanks for that, Toby. One on the midstream contracts as well. Do you expect to start negotiations to amend and extend those, I think particularly gathering contracts? It sounds like you guys already had some conversations with the folks at EQM.

speaker
Kyle Durham
Conference Host

Yeah, no, we're just continuing the discussions that had started earlier this year. And so, yeah, we're excited about working with them and excited about handing them, you know, a fully baked development schedule to make their lives easier. So we'll keep the group updated on how things go.

speaker
Drew Venker
Analyst at Morgan Stanley

Okay, thanks. One last one. Could you just tell us a bit about the happiness campaign?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, you know, the whole point here is, you know, we want to do two things. We want to create great results for shareholders, and we want to create a great working environment for our employees. And I believe that those two things go together. And part of us creating a great work environment for our employees is having a happy workforce. And we believe the keys behind driving happy employees is creating employees that are productive, employees that are challenged, recognized, and have fun at work. Fortunately, our plan, everything that we talk about focusing and aligning our employees on the things that matter, that fits largely into making our employees more productive. Challenging, I think we're asking employees to hit some goals that I think would be optimistic from where they're at today, but as we've shown, they have the capability of doing it, so we're gonna be challenging the employees And then the digital work environment, the transparency that's going to bring is also going to allow us as leaders and managers of this business to recognize the performance of the employees. And then the last part, having fun at work, you know, really what we're going to be focusing on there is winning. And winning is setting goals and hitting goals. And that's going to be the fun that we have is by doing those things. So that's that in a nutshell.

speaker
Drew Venker
Analyst at Morgan Stanley

I like the idea. Thanks, Toby.

speaker
Operator
Conference Call Operator

The next question is from Wells Fitzpatrick of SunTrust. Please go ahead.

speaker
Wells Fitzpatrick
Analyst at SunTrust

Hey, good morning. Thanks for all the detail on getting costs down via efficiencies and midstream, but can you talk a little bit more to how much wood there is to chop on the drilling and completion contracts? And is it fair to assume that those legacy contracts generally roll off in 2020?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, this is Toby. So the drilling contracts, the horizontal rigs are rolling off by the end of this year. The frack crews we have are currently rolling month to month with our frack suppliers. So we're looking to continue relationships we have and also making sure that we're acquiring services at the cost that we need to hit our targets. We are after seeing that we're we're one of the things i was pleased to see is that we have the flexibility um and don't see procurement as a impediment to us reaching our 735 cost per foot goal okay perfect and then um just one follow-up uh on the gna side i guess it's fair to assume it'll be a little bit choppy through year end as you're bringing in new people and whatnot

speaker
Wells Fitzpatrick
Analyst at SunTrust

Do you expect that to stabilize pretty early in 2020 or even later this year?

speaker
Toby Rice
President and Chief Executive Officer

Yeah, we're planning to continue to go through our assessments of the departments right now, but, you know, we know what we're looking for, and we would expect that to be through that, you know, through 19 for sure.

speaker
Wells Fitzpatrick
Analyst at SunTrust

Perfect. That's all I have. Congrats on getting back at it.

speaker
Operator
Conference Call Operator

The next question is from Samer Tajwani of Tudor Pickering and Holt. Please go ahead.

speaker
Samer Tajwani
Analyst at Tudor Pickering and Holt

Good morning. First off on CapEx, I wanted to see if it's possible to realize some of the savings in 2019 as you try to high grade the program, or are we just too far along for that to be meaningful at this point?

speaker
Derek Rice
Member of the Evolution Committee

Yeah, so this is Derek. So, I mean, I'll be honest, in the first two weeks, Our primary focus has been to stabilize the business. We've largely been in listen-only mode. I will say there have been a couple things we've come across that we felt as though we needed to change in the near term. One thing on the completion design front, when we walked in the door, there were 30 different completion designs. We look at all the data with the teams, and we came to the conclusion that reducing that to one design, one proven design, was efficient. What that allows us to do is not only predict the performance of our wells going forward, but it also gives our completions team the ability to procure the appropriate amount of materials on a go-forward basis. On the drilling front, we briefly looked at their drilling parameters. We noticed there were some self-imposed limitations. A little bit technical, I won't go into it. We lifted those limitations and saw immediate gains in drilling performance. To put some color on that, the previous single-day 24-hour rate in the second quarter was 6,600 feet in a 24-hour period. And just last week, this drilling team surpassed 7,800 feet in a 24-hour period. So, again, largely a listen-only mode for the first two weeks, but we think that as we get more hands-on going forward, we will start seeing more efficiency gains and continued operational improvement.

speaker
Samer Tajwani
Analyst at Tudor Pickering and Holt

Okay, okay, that's good to hear. And then next, you know, there was a question earlier about the potential to kind of move to a maintenance program next year. I know, you know, you guys haven't decided on anything yet, but, you know, would it be too early to ask you what a maintenance budget would look like next year, you know, kind of given that transition period where you're still going to be realizing some of the savings and, you know, how you expect a maintenance budget to look longer term once you're fully at that $735 per foot?

speaker
Kyle Durham
Conference Host

Yeah, no, let us Sorry to punt, but we're going to have to get back to you on that after we go through our assessment.

speaker
Samer Tajwani
Analyst at Tudor Pickering and Holt

Yeah, yeah, no worries. And then I guess the last question, you know, you talked a little bit about potential non-core asset sales. Wanted to see, you know, if you had any interest in following, you know, one of your peers who, you know, just monetized some NRI. You know, I think historically EQT has had a fairly high NRI. So just, you know, what are your thoughts on potentially taking advantage of of the valuation spread between those assets and the equity today.

speaker
Kyle Durham
Conference Host

Yeah, this is Kyle. That's really not something we're evaluating currently.

speaker
Operator
Conference Call Operator

Okay, thanks. The next question is from Betty Zhang of Credit Suisse. Please go ahead.

speaker
Betty Zhang
Analyst at Credit Suisse

Good morning. Can you talk about the levers you have to reduce leverage, leveraging the near term to get to sub two times? If E-trend stake is not in the immediate plan, are non-core asset sales being prioritized as tools to deliver? Maybe just get some color on what you guys consider to be non-core.

speaker
Kyle Durham
Conference Host

Yeah. No, I mean, like we said, everything's sort of on the table. Obviously, selling for just PDP-PB10 is a tough way to deliver, and there aren't a ton of buyers who want to buy non-core assets for more than that. So, Asset sales are a difficult way to de-lever. I think what we're looking at is de-levering organically. And we do that by lowering well cost and rationalizing the development plan. So that's kind of our path towards two times or less.

speaker
Betty Zhang
Analyst at Credit Suisse

Got it. And just to clarify, what's your view on balancing between debt reduction and share buyback? Is the goal to get to two times leverage first before you do buyback?

speaker
Kyle Durham
Conference Host

Yeah, that's correct, Betty.

speaker
Betty Zhang
Analyst at Credit Suisse

Got it. Okay. And last thing, with the potentially lower volumes on less activity, do you see reduced production constraints? That was last estimated at roughly 10% of the current production.

speaker
Kyle Durham
Conference Host

Yeah. That could be a result, right? We know the prior team characterized about 10% of the production base is curtailed. After assessing that, that's not really the way we're going to talk about it going forward. But, yeah, any potential curtailments would be alleviated by a reduced capital spend and less production volumes.

speaker
Betty Zhang
Analyst at Credit Suisse

Right. Thank you.

speaker
Operator
Conference Call Operator

That concludes the question and answer period. I'll turn the call back over to Toby Rice for closing remarks.

speaker
Toby Rice
President and Chief Executive Officer

Thanks, everyone, for joining us. We appreciate your support in this campaign, and we are looking forward to continuing the work we've laid out and excited about sharing our progress with you in the future. Thank you.

speaker
Operator
Conference Call Operator

This concludes today's conference. You may now disconnect your lines. Thank you for your participation. Thank you.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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