EQT Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the EQT Corporation Q3 2019 Quarterly Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Andrew Brees, Director of Investor Relations. Thank you. Please go ahead, sir.

Good morning, and thank you for joining today's conference call. With me today are Toby Rice, President and Chief Executive Officer, Kyle Durham, Interim Chief Financial Officer, and Blue Jenkins, Executive Vice President and Chief Commercial Officer. The replay for today's call will be available on our website for a seven-day period beginning this evening. The telephone number for the replay is 1-800-585-8367 with a confirmation code of 667-8269. In a moment, Toby and Kyle will present our prepared remarks. Following these remarks, we'll take your questions. EQT published a new investor presentation this morning, which is available on the investor relation portion of the website, 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 could materially differ from these forward-looking statements because of factors described in today's earnings release and the risk factors section of our Form 10-K for the year ended December 31, 2018, our subsequent Forms 10-Q, and other filings we make from time to time with the SEC. We do not undertake any duty to update any forward-looking statement. Today's call may also contain certain non-GAAP financial measures. Please refer to this morning's earning release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby.

Good morning, and thank you for joining us. I'm excited to share the progress we've made in a short period of time and what we believe we can accomplish moving forward. I'll provide an update on the 100-day plan and our preliminary 2020 outlook. I will also provide a brief update on our negotiation with Equitrans to amend our gathering agreements before turning the call over to Kyle to discuss third quarter results, our initiatives to improve leverage and liquidity, and some quick thoughts on the gas macro. As a reminder, the goal for our 100-day plan was to kickstart our evolution and deliver the foundational elements needed for us to achieve the cost-saving targets that we discussed in our campaign. October 18th marked Day 100, and I am pleased to share with you that we have successfully executed on our plan. Slide six of our presentation lays out some of the key milestones we achieved, starting with the organization. Following the annual meeting in July, we quickly added key leaders needed to complement the existing EQT team. These leaders have a proven track record of operating EQT's assets to generate base and leading operational performance, and they're off to a great start. Over a dozen new leaders are offering fresh perspectives and best practices towards achieving our goals. In September, we simplified our organizational structure. migrating from 58 to 15 departments, and concurrently streamlined the workforce by reducing headcount by approximately 25 percent. These changes enabled greater communication, accountability, and have led to a much more nimble, proactive organization. We expect to save approximately $65 million of gross general and administrative costs in 2020, consisting of $35 million reduction in SG&A expense and a $30 million reduction in capitalized overhead. As it relates to our technological initiatives, we have made significant progress. The workforce has fully embraced our digital work environment with participation in our platform increasing 700% since the annual meeting. Silos are being knocked down and interdepartmental collaboration and transparency are accelerating. We prioritize the 90 most critical workflows needed for our modern technology driven business and have successfully revived them within our digital work environment. These workflows empower our employees, allow management to monitor the business, spotlight inefficiencies, and optimize our planning efforts to maximize shareholder value. We're currently working through the remaining 300 workflows and expect to have those turned online in the coming months. Lastly, as it relates to our operational initiatives, we have successfully laid the tracks for large-scale combo development by establishing a stable master operations schedule. As a reminder, Combo development consists of properly spaced large scale projects to develop 10 to 25 wells for multiple pads simultaneously. This is the key to delivering consistently low well costs while maximizing the potential of our undeveloped acreage position. In 2020, we expect roughly 50% of our wells turned in line and 80% of well spud to be set for combo development. We've also had some quick wins in the field. On slide seven, we are highlighting the step change in drilling efficiency in the third quarter. Marcellus drilling speeds are up 50% relative to the second quarter, and Utica drilling speeds have increased 20%. This is the result of an experienced team offering fresh perspectives in leveraging technology in the field. Additionally, all of our wells are being completed using the proven well design and choke management program that led to basin leading well productivity at Rice Energy. As a result, We expect EQT's base decline rate to decrease from 32% to 24% as measured by the decline of our expected PDP base from December 2019 to December 2020. This decrease in base decline will result in less future capital required to achieve certain volume targets. To summarize, the 100-day plan has been a massive success in kick-starting our evolution. We are on track to deliver on the well-cost savings we promised during the campaign and and we are doing it faster than we thought, which sets EQT up for success in 2020 and beyond. The formal 2020 budget will be approved by the Board in December, but we are excited to share our preliminary outlook. Our capital allocation philosophy has not changed. We plan to deliver EQT to below two times net debt to adjusted EBITDA, and in this gas price environment, we plan to get there by reducing absolute debt through free cash flow generation and asset monetizations, rather than outspending cash flow to grow EBITDA. Further, as we discussed on the 2Q call, we evaluated EQT's existing development plan and removed inefficient development and replaced it with large-scale combo development projects to ensure all capital allocated to the drill bit generates attractive cash-on-cash returns. This philosophy of maximizing capital efficiency while generating free cash flow was the primary driver of our 2020 budget. We plan to spend between $1.3 to $1.4 billion of CapEx to execute a disciplined development program that will result in sales volumes roughly flat to expected 2019 levels. At strip pricing as of 9.30, or an average 2020 NYMEX price of $2.42, we expect to generate $1.65 to $1.75 billion of adjusted EBITDA and $200 to $300 million of adjusted free cash flow in 2020. Turning to slide 10, Our CAPEX budget is broken down into four main areas. At the midpoint of guidance, we plan to spend just over $1 billion of reserve development capital, $150 million of land, $85 million of other CAPEX, and $55 million of capitalized overhead. We further break down our reserve development budget by our three operating areas, Pennsylvania Marcellus, West Virginia Marcellus, and Ohio Utica. We plan to operate two to three top hole rigs, three to four horizontal rigs, and three to four frac crews. Approximately 65% of our capital will be deployed to Pennsylvania, 19% to Ohio, and the remaining 16% to West Virginia. It's worth noting these horizontal rig counts are half the number of rigs EQT used in 2019, largely due to efficiency gains realized during the implementation of our 100-day plan. In our Marcellus operations, we expect full-year 2020 well costs to be approximately $745 per foot NPA, and $900 per foot in West Virginia. And we expect over 90% of our 2020 well spud will be at 1,000-foot spacing. On slide 11, you'll see a breakdown of our development plan by operating area. I'd like to call out the increasing lateral lengths in all three operating areas, which will contribute to lower well costs per foot. I'd like to highlight West Virginia in particular. EQT's average lateral length for wells turned in line in 2019 is 4,600 feet. but is expected to increase to 8,900 feet in 2020 and jump to 12,500 feet in 2021. This is driving West Virginia well costs down faster and lower than we originally expected. As we look at our long-term master operation schedule, West Virginia will become a much larger focus area in the coming years. Our $150 million land budget consists of approximately $100 million allocated to leasehold maintenance, and $50 million allocated to infill leasing in units on EQT's near-term development schedule. This is approximately $50 million or 25% lower than the 2019 land budget. Our other CAPEX budget of $85 million consists of $55 million of asset maintenance and $30 million of capitalized interest. The asset maintenance bucket represents spend related to site compliance, well tubing installations, road repairs, and other general maintenance projects. This capex is generally unrelated to current development and is therefore not shown in our reserve development category and is excluded from our well cost calculations on a dollar per foot basis. Lastly, we have budgeted approximately $55 million of capitalized overhead, which is $30 million or 35% lower than 2019. These costs consist primarily of employees and overhead that can be allocated directly to our development projects. Slide 12 puts our budget into context. We believe we are on track for a 25% decrease across a large portion of EQT's controllable costs as compared to legacy 2019 costs. On the left, we are showing Pennsylvania well costs per foot. Well costs are expected to decline to $745 per foot on average for 2020 and will trend down lower over the course of the year with second half 2020 well costs expected to be $730 per foot. This represents a 25% decrease from the legacy management team's well cost estimates. 3Q well costs stand at approximately $850 per foot, which shows good progress. 4Q well costs aren't expected to show much improvement as we work through some of the inefficiencies of the prior schedule. However, this is all baked into our 2019 CAPEX guidance. In the middle, we are showing gross G&A, which is SG&A expense plus capitalized overhead. This is expected to be down $65 million from 2019 or 25%. On the right, we are showing land and other CAPEX, which we expect to be down $70 million from 2019 or another 25% reduction. All told, execution of this maintenance development program under our new cost regime is generating an incremental $400 million of savings per year. To the extent EQT resumes production growth in the future, these savings would grow accordingly. Turning to slide 14, this is purely illustrative but highlights what we expect 2021 and 2022 CapEx would be if we wanted to maintain 2020 production volumes. We expect CapEx would decrease to approximately $1.15 billion in 21 and drop to $925 million in 22, a 30% decrease from 2020 spending levels. Ultimately, our long-term activity levels and free cash flow profile will be dictated based on gas prices, but will also be influenced by the outcome of our negotiations with Equitrans, our primary midstream service provider, to lower our gathering and transportation costs. Achieving meaningful fee relief is the next step in lowering EQT's cost structure. EQT's goal in this negotiation is straightforward. Simplify the structure and reduce gathering fees to enable EQT the ability to grow volumes through Equitrans systems and generate free cash flow in a lower gas price environment. Over the last couple of weeks, we have made good progress with the Ecratrans team towards a solution that we believe would be a win-win for both parties. In exchange for gathering fee relief, the timing of fee relief will likely be tied to the in-service date of Mountain Valley Pipeline, a project that, including other related projects, is expected to add over $300 million of EBITDA for Ecratrans upon going in service. Second, EQT can offer an extension of the contract term and a substantial increase in the minimum volume commitments to provide long-term cash flow certainty for Equitrans shareholders. Lastly, EQT can dedicate the remainder of its undedicated West Virginia acreage position to Equitrans. As we have highlighted before, West Virginia will become a larger part of EQT's story going forward. Our recent success in extending laterals, executing acreage swaps, and lowering well costs show this area is competing for capital. I'm encouraged by the progress we have made, and both sides are working diligently to have an agreement in place in the next few months. With that, I'll turn it over to Kyle.