EQT Corporation

ladies and gentlemen hello and welcome to the eqt first 2021 results and transformative transaction with ultra resources my name is maxine and i'll be coordinating the call today if you would like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad i will now hand you over to your host andrew breeze director investor relations to begin and you please go ahead when you're ready

Good morning and thank you for joining today's call. With me today are Toby Rice, President and Chief Executive Officer, and David Connie, Chief Financial Officer. A replay for today's call will be available on our website for a seven-day period beginning this evening. In a moment, Toby and David will present their prepared remarks and then we'll open up the line for a question and answer session. On our website, we posted an updated investor presentation along with a separate presentation further detailing a transaction we announced this morning. We refer to certain slides from both presentations during today's call. I'd like to remind you that today's call may also contain forward-looking statements. Actual results on future events could materially differ from these forward-looking statements because of the factors described in our first quarter 2021 earnings release, our investor presentation, transaction press release, and presentation released this morning in the risk factor section of our 2020 Form 10-K and in subsequent filings we make with the SEC. We do not undertake any duty to update forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to our first quarter 2021 earnings release and our most recent investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. And with that, I'll turn the call over to Toby.

Thanks, Andrew, and good morning, everyone. Today marks another major milestone for EQT, as this morning we announced the acquisition of Altar Resources' premium East Pennsylvania Marcellus assets. But before I get into the transformational elements of the transaction, I wanted to provide a roadmap for today's call. First, we will start by reviewing the key highlights and why we are so excited about this transaction. Then I will pass the call to Dave to go over our first quarter results, positive guidance revisions, and provide color on the other business and strategic matters. And then we'll finish up with some closing remarks and take your questions. As announced last night, EQT's base business continues to deliver value to shareholders. During the quarter, we operated our Pennsylvania Marcellus at $45 per foot, delivered free cash flow of nearly $260 million, announced a decrease to our full-year capital expenditure guidance of $75 million, and we are increasing our 2021 free cash flow guidance by 14%. now planning to generate $575 to $675 million in free cash flow during 2021. The alter transaction will only improve this. Now jumping right into the deal. A reminder, our mission is to realize the full potential of EQT and become the operator of choice for all stakeholders. We have implemented our digitally enabled modern operating model, which allows us to maximize value creation from our existing assets, and also unlock the ability to seamlessly scale our platform and accelerate value capture through consolidation. We have been vocal throughout our transformational journey over the past 18 months about our outlook on consolidation, and today's announcement is another step in our pursuit of maximizing value creation for all stakeholders. The financial accretion to our shareholders, immediate strengthening of our credit profile, and the strategic rationale for the ALTA transaction are very compelling. This acquisition accelerates all of our financial and strategic objectives by adding high margin core Northeastern Marcellus assets to the portfolio, which are highlighted on slide two of the ALTA acquisition presentation we posted earlier this morning. This asset offers a substantial PDP base of one BCF per day of high margin net production, generating a robust annual free cash flow profile of $300 to $400 million at strip. We captured the asset at a highly attractive valuation, and 18% leveraged free cash flow yield will drive 15% accretion to free cash flow per share, all while resetting our leverage profile at a level meaningfully below our two-times target, with year-end 2020 leverage projected to be 1.7 times net debt to ETH. Importantly, this deal accelerates both our timeline to reach investment-grade metrics and our timeline to deliver on shareholder return initiatives, which we will formally communicate in the coming months. Lastly, the embedded low-cost structure on these assets driven by prolific well productivity and integrated midstream ownership structure and impact of favorable mineral ownership are projected to decrease EQT's pro forma free cash flow break-even price by approximately $0.10 and reduce our maintenance capital intensity by 10%. Slide 3 shows a great visual and puts things into perspective, just how impactful this acquisition will be on our corporate free cash flow breakevens and nominal free cash flow generation. On a pro forma basis, we expect to generate approximately $1 billion in free cash flow in 2022, with cumulative free cash flow of $5.5 billion through 2026, while our corporate breakevens approach $2 by 2026. When adding this core Northeast asset to our existing Southwest assets, the pro forma company is clearly positioned as the premier Appalachia operator of choice. To further highlight how this asset strengthens EQT's position, let's turn to slide four to look at some preliminary full year 2022 pro forma impacts. At closing, we expect EQT's pro forma net production to be approximately 5.6 BCFE per day, adding the benefits of scale to our business. The ALTA assets carry a basin-leading total operating cost structure of 45 cents per MCFE and will reduce EQT's total operating cost structure by 20 cents to a level of approximately $1.25 per MCFE, which drives pro forma adjusted EBITDA of approximately $2.5 billion. Maintenance capital intensity will improve by 10%, with the pro forma entity only requiring reinvestment of approximately 55% of our operating cash flow to run a highly efficient maintenance program. And lastly, the pro forma company is projected to deliver $1 billion of free cash flow in 2022. These methods are compelling and exhibit the accretive nature of this transaction to our stakeholders. It's also important to mention that we underwrote this transaction using very conservative assumptions. providing meaningful upside potential as these assets are fully integrated into our modern operating model. Operationally, we risked the PDP volumes, tight curves, and inventory, only ascribing value to roughly 30% of the total potential lateral footage. All child wells were removed for the future development plans, and we did not attribute any value to upper Marcellus locations. Financially, we expect this transaction to accelerate our return to investment grade ratings, which will result in significant interest savings, improved cost of capital, and better access to capital. And on the ESG front, we believe that integrating these assets into our ESG platform will unlock incremental value as end user demand grows for responsibly produced low emission natural gas. Turning to slide five, I'll now briefly review the key components of the transaction and asset highlights. The total purchase price for these assets is $2.925 billion, consisting of $1 billion in cash and $1.925 billion in EQT common stock. We expect to fund the cash components of the transaction through one or more opportunistic debt capital market transactions, but in the interim, we have obtained $1 billion in committed financing. We also have access to over $1.4 billion in liquidity on our unsecured revolver. Stock consideration includes 105.3 million shares, representing approximately $1.925 billion in value based on the 30-day BWAP as of market close on May 4th. The effective date of the transaction is January 1st, 2021, and all post-effective date purchase price adjustments and other closing adjustments will be netted against the equity component of the consideration, resulting in a reduced number of shares issued at closing. Our current estimate is that the total stock consideration will be reduced by approximately 11 million shares at closing. The transaction has been unanimously approved by our board of directors and is subject to an approval by our shareholders, as well as customary closing conditions. We expect to close the transaction during the third quarter, at which time EQT shares will be issued to ALTA's diversified ownership group. No single ALTA shareholder will receive more than 5% of EQT's pro forma outstanding stock at closing. The ALTA assets combine core rock, low royalty burden, beneficial mineral ownership, and an integrated gathering system to provide superior returns and free cash flow generation. Upstream assets include approximately one BCF per day of net production with roughly 50% in the majority of the non-operated production being operated by Chesapeake. A solid hedge book covers approximately 35% of expected production through 2022 and will be novated to EQT at closing. Additionally, the asset comes with an in-the-money firm transportation book currently valued at $235 million, providing access to premium Northeast markets. In terms of acreage, this asset is comprised of 300,000 net Marcellus acres with over 97% held by production and to carry a very attractive 14% average royalty burden. As further highlighted on slide seven, the ALTA assets provide exposure to most of the remaining lower Marcellus inventory in the Northeast Marcellus core. The non-operated assets operated by Chesapeake are squarely in the most productive rock in the region, while the integrated business model of the operated assets deliver superior returns. Midstream assets include an integrated 300-mile owned and operated midstream system with interstate pipeline connectivity, driving basin-leading total operating costs and providing operational flexibility. Also included is 100 miles of an integrated freshwater pipeline including 14 water storage impoundments with over 255 million gallons of storage to support optimal asset development. Additional details on this attractive consolidation opportunity can be found on slides six through 10. We are poised to execute on this transaction and apply our operational successes in the Northeast Core. On slide 11, we lay out our high level execution plan. We plan to execute a one rig maintenance program on the operated ALTA assets along with our non-op participation, which in total will require approximately 225,000 horizontal feet of development per year and can be seamlessly integrated into our master operations schedule. Like we do in the southwestern part of the play, we will deploy our differentiated combo development strategy and apply our leading edge drilling and completion techniques. We believe approximately 80% of future operations are set for combo development. On the non-operated assets, the collaborative governance structure will allow us to work alongside our non-op partners to apply best practices. In addition to the substantial due diligence performed on the asset and our intended retention of ALTA's key personnel, EQT's current head of drilling and head of production has historical operating experience with these assets, which all provide incremental asset intelligence and execution confidence. Having just completed the full integration of the acquired Chevron assets, we are primed to apply that proven framework on the ALTA assets, which we described further on slide 12. Our integration playbook contains more than 800 clearly defined tasks that provide a comprehensive and transparent roadmap for all operational system and administrative integration initiatives. We expect the deal to close during the third quarter and to have full operational system assimilation and streamlining completed by the end of the year. To wrap things up on slide 15, we reiterate the compelling attributes of this transformative transaction. Our approach to conservatively underwrite the deal provides significant upside to this attractive valuation for core assets. The optimized financing structure and robust free cash flow profile are expected to accelerate deleveraging and shareholder return initiatives. And the integrated midstream ownership provides superior economics and a creative inventory. We're excited about the trajectory of our business, and incremental benefits the ALTA assets will have on our portfolio. And we look forward to discussing this transaction in more detail during the question and answer session. I'll now turn the call over to Dave. Thanks, Toby, and good morning. I'd like to briefly touch on our first quarter results before moving to some strategic topics. Sales volumes for the first quarter were 415 BCFE, in line with our guidance range. Our adjusted operating rate quarter were $1.1 billion, and our total per unit operating costs were $1.31 per MCFE, which is $0.04 below the midpoint of our annual guidance range. Our first quarter 21 capital expenditures came in at $238 million, or well below the bottom end of our $280 to $305 million guidance. Approximately half of the improvement was driven by the operational efficiencies as we hit $635 per foot, about $40 per foot below our forecast. Our adjusted operating cash flow was $495 million, resulting in positive free cash flow of $259 million. I'd now like to discuss some favorable adjustments to our 2021 guidance, but want to make clear that these projections do not include any of the accreted financial impacts expected from the pending ALTA transaction. We expect to provide updated guidance post-closing in the third quarter. As a result of the first quarter 2021 capital expenditure outperformance, in addition to other favorable operational impacts expected to be realized through the remainder of the year, we have reduced our full year 2021 capital expenditure guidance by $75 million. We now expect total 2021 capital expenditures of $1.025 to $1.125 billion. In addition, we have increased our full year 2021 free cash to $575 to $675 million. We are keeping our six-year cumulative free cash flow estimate of $3.5 billion with an upward bias. Add on ALTA, and this number increases by approximately $2 billion. We expect to improve upon this with time. Additionally, on April 1st, we exercised our preferential purchase right to acquire the Marcellus assets from Reliance Marcellus LLC for approximately $69 million. which was triggered by Reliance's sale to Northern Oil and Gas. This adds approximately 15 BCFE to our full-year 2021 production, which now tilts slightly north of our midpoint within our guidance range of 1.620 to 1,700 BCFE. Now moving on to some thoughts on macro and regional gas fundamentals. We have provided a couple of new slides in our earnings deck. First, slide 14 shows the net impact from storm Erie and why we saw the decline in natural gas prices that followed. And second, slide 16, that shows the differential emissions intensity by basin. For storm Ori, Texas experienced an extreme cold weather event in February that disabled a significant portion of the state's energy infrastructure. While this may have seen the net positive for natural gas, the impact was actually a net negative by at least 20 BCFE, due to the four BCF per day of lost petrochemical and other industrial demand that extended into April. We also lost natural gas demand from warmer than normal weather in March, and as a result of both of these events, was the main culprit to declining natural gas prices. Now, as both industrial demand and weather have recovered, as well as strong exports, we can see why we are experiencing a sharp upward improvement in natural gas prices to the $3 per mcfe level. we took advantage of these moves to reposition some hedges. In addition, we expect to see material gas-fired power market gains this year from over 5 gigawatts of coal retirement in 2020 alone, shortages of coal supply domestically heading for stronger export markets, and beginning to see meaningful nuclear retirements happening. As a result, we believe the forward curve is undervalued. Last slide, 16 displays emissions by basin. This slide highlights Appalachia's low emission profile, of which EQT sits near the low end due to our installed technology and electric equipment utilization. We provide a simple construct to compare the cost on an MCFE basis between basins using a generic $30 per ton equivalent carbon price. As you can see, the cost to Appalachia is very low at one quarter of the Permian Basin. Over time, this will get factored into everyone's cost structure. and why we get excited about our responsibly sourced gas. Over time, we believe this will add value to our purchase of Alta. In April, we extended our $2.5 billion unsecured revolving credit facility by one year to July 31, 2023. The main commercial terms of the credit agreement remain essentially unchanged, which demonstrates the bank's strong comfort in our financial positioning and glide path back to an investment... rating as well as our strong ESG profile. In an environment where E&P access to capital is shrinking and is expected to continue to shrink as much as 25% over the next two to three years, our ability to execute this extension on these terms substantiates our differentiated access to capital. This is made possible by our continued business execution, focus on ESG, and accretive strategic actions. Shifting gears Our efforts to sell down our MVP capacity and rationalize our firm transportation portfolio continues to be productive. Discussions with counterparties are progressing nicely to offload incremental MVP capacity during 2021. In addition, our sophisticated commercial team is relentlessly scanning the regional landscape to identify opportunities that capitalize on our existing FP portfolio and adding diversity to our delivery points and enhance realizations. We believe margin-enhancing opportunities exist within our existing portfolio and only expand with the ALTA portfolio. Now, during the first quarter, NGL prices rose sharply, mainly due to an increase in U.S. exports. We took advantage of the sharp rise in NGL pricing to lock in significant number of hedges to our portfolio. We're now approximately 62 percent hedge for the balance of 2021 and have increased the floor price of our overall liquids portfolio hedges by 26 cents per gallon. We also took advantage to reposition some of our 2021 hedges, removing some of the $2.75 ceilings as prices came down and added approximately 4% back as prices rose to the $3 per amp CF level for the balance of 2021. We also took advantage of adding 7% to calendar year 2022 as prices rallied and now sit at 42%. Last thing I want to hit on is the key transaction points to provide some good context for everyone. If you look at our existing asset base and what we have done to lower our capital intensity, we will need approximately 55% of our operating cash flows to sustain production over the next three years. When you look at the alpha asset, it will only need 35% over the same period, which lowers our overall pro forma capital intensity to about 55%. Based on the backward-rated price curve, which we believe is undervalued, we anticipate the pro forma asset base will generate enough cash flow to extinguish all of our debt by mid-2027. This asset base is very differential and truly beneficial for both debt and equity investors. As we achieve investment-grade metrics, we will look to provide insight into our fourth quarter release on how we plan on using free cash flow to effectuate shareholder-friendly actions. I now turn it over back to Toby for closing. Thanks, Dave. I'll wrap things up today with some brief ESG-related comments. I will keep the comments light as we intend to discuss our broader ESG initiatives in greater detail alongside the publication of our 2020 ESG report in the coming months. In the first quarter, I was honored to join the bipartisan Policy Center's American Energy Innovation Council. I look forward to working with the BPC and other members of the council to advocate for the role of natural gas achieve a clean energy economy through the reduction of greenhouse gas emissions. On the same topic, during the quarter we announced a partnership with Equitable Origin and MIQ to obtain certification on approximately 4 BCF a day of gas produced from over 200 of our well pads. This certification project is in addition to the certification project we announced in January with Project Canary, further building upon our growing portfolio of certified gas. We've received multiple inquiries from customers and end users since making these announcements, which demonstrate that there is growing demand for certified gas, and we believe Appalachia is best positioned to capitalize on this differentiated product. Lastly, as the country's largest producer of natural gas and one of the lowest emissions-intensive operators, we are in support of sound policies around regulation of methane that support natural gas's role in a low-carbon future. Our public support of reinstating the federal methane rule drives home our dedication to developing natural gas to the highest of environmental standards. And we are in alignment with the actions taken by the U S Senate last week to reverse the rollback of these methane regulations. In closing, we are a values driven organization that continues to perform for our stakeholders. Our modern operating model is solidifying our position as the operator of choice and a clear ESG leader. Over the last 18 months, This team has transformed EQT, establishing a clear path to realizing the full potential of our premier assets, which is a test case for the value we plan to realize from the ALTA assets as we integrate them into our portfolio. We appreciate your continued support, and with that, I would like to turn the call back over to the operator for Q&A.