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spk01
Hello everybody and welcome to the EQT second quarter 2021 quarterly results conference call. My name is Sam and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one in your telephone keypad. I will now hand you over to your host, Andrew Breeze, Director of Investor Relations. To begin, Andrew, please go ahead.
spk05
Good morning, and thank you, everyone, for joining today's conference 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, then we'll open up the line for a question and answer session. On our website, we've posted an updated investor presentation, and we may reference certain slides during today's discussions. I'd like to remind you that today's call may also contain forward-looking statements. Actual results and future events could materially differ from those forward-looking statements because of factors described in our second quarter 2021 earnings release, our investor presentation, and 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 non-GAAP financial measures. Please refer to our second quarter earnings release and our most recent investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. Thank you, and with that, I'll turn it over to Toby.
spk07
Thanks, Andrew, and good morning, everyone. Before we recap the quarter, I would like to touch on the recently completed ALTA acquisition, which was overwhelmingly approved by our shareholders. The creative benefits of this acquisition are compelling. It bolsters our free cash flow per share trajectory, meaningfully reduces our leverage profile, adds substantial high-margin inventory, and accelerates our timeline to both reach investment-grade metrics and deliver on our shareholder return initiatives. Now stepping back to the details of the deal and the integration process. We closed the deal on July 21st for an adjusted aggregate purchase price at closing of $1 billion in cash and approximately 98.8 million shares being issued directly to Alta's equity holders. As a reminder, no Alta equity holder received more than 5% of our common stock in the transaction. The key assets acquired include 300,000 net Marcellus acres, largely held by production, approximately one BCF a day of high-margin net production, approximately 300 miles of midstream gathering systems, 100-mile freshwater system, and an attractive FT portfolio to premium demand markets. On the ALTA assets, we expect to utilize one operated rig and frack group, and in combination with our non-operated development activity, we will execute a maintenance program on the assets going forward. For the remainder of 2021, we expect the ALTA assets to increase total sales volumes by 155 to 175 BCFE, contribute approximately $300 to $325 million to adjusted EBITDA, require capital expenditures of between $100 to $125 million, and finally add approximately $150 to $170 million in free cash flow. On the integration front, our proven framework is designed to provide high confidence, transparency, speed, and best practice identification as we fully integrate the Alta assets into our portfolio. Of the over 800 integration actions that were identified, approximately 25% of these actions have already been completed. We expect to complete the full operational integration by the end of the year. The efforts of our EQT crew, including our newly added ALTA and team members, as well as those serving on a transition basis, are instrumental in this effort, and I want to take a moment to thank them all for their hard work to date. The ALTA acquisition represents another step forward in our pursuit of sustainable value creation. In 2022, under maintenance program and at current strip pricing, our preliminary expectations are to generate total sales volumes of approximately 2 TCFE, adjusted EBITDA of approximately $2.9 billion, realizing a 10% improvement in capital intensity requiring total capital expenditures of approximately $1.3 billion, and free cash flow generation of approximately $1.4 billion. Additionally, our revised long-term free cash flow projection through 2026 at current script pricing now sits well above $7 billion, or nearly $19 per share. As a result, the ALTA deal both accelerates and enhances our ability to achieve investment-grade metrics and provide meaningful returns to our shareholders. The optimized financing structure and robust free cash flow profile accelerated our deleveraging strategy and established the necessary platform for sustainable shareholder returns. We are currently working through our thought process and mechanics, but our focus remains simple, maintaining our leadership in the sustainable shale era. We plan to roll out the detailed components of our shareholder return framework in conjunction with our fourth quarter earnings. Before passing the call over to Dave, I want to highlight our multilevel strategy on sustainable value creation in the long term, which we believe will best position EQT to excel in a low-carbon future. We've entered a new era of sustainable shale that values free cash flow generation, balance sheet strength, emissions reduction, and returning capital to shareholders. Our three-pronged strategy to evolve, capture credo consolidation, and explore new ventures sets us up on a clear, easy-to-understand glide path that our stakeholders can not only get behind, but benefit from in this lower-carbon future. Referencing slide 13 in our investor presentation and starting with our evolved strategy, the goal is to realize the full potential of our assets, It should not be new to our stakeholders who have been following us since July 2019, realizing the full potential of our assets with the mandate set by the shareholders who voted us in and why this management team is here today. Executing this element of our strategy maximizes free cash flow generation, lowers our cost structure, and strengthens our balance sheet. Second is our consolidation strategy. Our proven modern operating model has supported our ability to create meaningful value in ESG accretion. We have seen the strategy work to date, with recent acquisitions checking all the boxes for accretion and strategic acceleration. Consolidation allows us to leverage our skill set and execution approach on a larger set of assets while also maximizing emission reduction efforts. This component of our strategy drives accretion to NAV per share, free cash flow per share, and ESG performance. Consolidation naturally leads to scale, which feeds into our third corporate strategy, new ventures. As the largest producer of natural gas in the U.S., we are able to forge new paths and open new markets to achieve sustainable growth. This affords us the ability to explore meaningful opportunities that smaller peers cannot, all while staying firmly tethered to our return of capital objectives. As previously announced, our board has approved an initial budget of $75 million to explore new venture opportunities. This seed capital allows us to initiate several pilot programs over the next few years in the pursuit of profitably lowering scope three emissions. We have a clear set of guiding principles, which we will embrace and believe can be capitalized upon in this changing environment. More detail regarding this strategy can be found via our 2020 ESG report and the corresponding ESG conference call recording and presentation, which are available on our website. I'll now pass the call over to Dave to discuss our second quarter results third quarter guidance and update on hedging and some thoughts on the macro landscape. Then I'll wrap it up at the end by covering some updates on our ESG initiatives. Thanks, Toby, and good morning, everyone. I'd like to briefly touch on our second quarter results before moving on to some other strategic updates. Sales lines for the second quarter were 421 BCFE, in line with our guidance range. our adjusted operating revenues for the quarter were $997 million, and our total per unit operating costs were $1.33 per MCFP. During the second quarter of 2021, NYMEX prices for the second half of 2021, full year 22, and 2023 rose by $0.86, $0.53, and $0.27, respectively. Although this price movement is positive for EQT and aligns with our bullish gas sentiment, The rapid increase in forward pricing resulted in a $1.3 billion loss on the mark-to-market of our forward derivative position. This non-cash accounting treatment has no impact on our financial positioning, business operations, and or free cash flow projections that Toby just provided. Our second quarter capital expenditures were $246 million, approximately $20 million below the bottom end of our guidance range. This was primarily driven by operational timing and efforts to optimize the relationship between capital deployment, production delivery, and maximizing free cash flow. Our PA Marcellus low-cost performance continues to meet or exceed expectations, with year-to-date costs averaging below our 675 per foot target. We are executing our West Virginia operations as planned and have high confidence in our ability to deliver well costs at or below our 775 per foot West Virginia target. During July, we placed in service a 15-mile section of our West Virginia mixed-use water system ahead of our schedule and under budget. This system is expected to further enhance development efficiencies, reduce environmental impacts, and improve lease operating expenses moving forward. To wrap up our second quarter financial results, we delivered adjusted operating cash flow of $397 million, ultimately resulting in a positive free cash flow of $155 million. The closing of our altered transaction brings accreted financial implications across the spectrum. As such, we have updated our full year 2021 guidance while also providing detailed third quarter guidance to add more color on the pro forma production cadence and step change in our operating cost structure resulting from the acquisition. These details can be found in the earnings release filed yesterday. Specific to the third quarter 2021 at the midpoint, we expect a step up in total sales volumes to be approximately 485 BCFE and a drop in total operating costs to approximately $1.26 per MCFE. Now I'll move on to a brief update on our hedging activity. As we all witnessed, NYMEX prices have risen sharply the last several months, recovering from Storm 30 and benefiting from strong gas demand. As 2022 NYMEX prices rallied, we layered on slightly more than 30% to our total hedges between our base and altered transaction hedges. We assumed hedges in the altered transactions. ALTA was hedged at approximately 50% for the balance of 2021 and 25% for 2022. In order to ensure our transaction returns, we added an additional 30% to the balance of 2021, 55% to 2022, and 50% in 2023. During the recent run-up, we have been adding collars with an average floor of approximately $3.05 and a ceiling of $3.35. to raise our overall 2022 hedge position to just over 70% with a floor price of approximately $2.80. With our open position and collars, we will participate in the upside while providing the appropriate level of protection to achieve our strategic goals. To be more specific, our 2022 hedge position will keep our leverage closer to 1.5 times, enable us to retire debt, institute shareholder-friendly actions, and allow us to be more flexible in how we hedge in 2023 and beyond. We've also been active in hedging various basis points and mitigated exposure to fluctuations in Appalachian Basin pricing, as experienced in the second quarter with the TECO outage. Currently, our exposure to local pricing sits at approximately 15% for the remainder of 2021, while we hold nearly no exposure to local pricing for calendar year 2022, assuming a mid-year MVP start date. Full details of our current hedge position can be found in our earnings rules. So our hedging efforts have solidified our balance sheet, positioned us to achieve investment-grade metrics, lock in attractive pre-cash flow profile and accretion from our consolidation, and protect our portfolio from near-term pricing risks. Now, the fundamental setup for natural gas began with producers running at maintenance of capital mode, setting up for a strong 2Q recovery in industrial demand post-storm URI. The front-month NYMEX contract rallied from $2.64 to $3.65 per MCF during the quarter, driven initially by the TETCO outage, followed by a much warmer-than-normal weather in June that saw natural gas supply being rationed between domestic and export demand. The TECO outage starved the Gulf Coast of approximately $650 million a day, while the warmer weather in June increased gas power demand by about 3 BCF per day. The TECO outage also added pricing pressure for in-basin gas. Up till the outage, TECO M2 basis was averaging $0.62 for April and May while the outage occurred. Cash basis fell sub-a-dollar. However, even with the outage, strong cooling demand and less gas to coal switching in the region help support cash basis, pulling it back to the mid-60s before the end of the quarter. Looking forward, we expect 2021 and 2022 forward natural gas price curve to remain very sensitive to weather. We see significant upside to the 2023 and 2025 curve from rising exports, increasing power demand from accelerating coal and modest nuclear retirement. And on top of this bullish long-term gas view, we see opportunities for further pricing differentiation within the sector as the response resource gas market matures. The demand for differentiated products exists. We're seeing it in our conversations with end users, both domestic and international buyers, who are looking for ways to reduce their carbon footprint. We've already entered into a couple of RSC contracts at premium pricing. We see the opportunity for premium suits expand as we optimize the RSC framework through the standardization of technology adoption and improved transparency. I'll now pass the call over to Toby to wrap things up. Thanks, Dave. As the RSC topic highlights, we see growing opportunities to connect value creation with ESG accretion. Our comprehensive ESG report published in June provides a detailed review of how we approach sustainable value creation. And a key area for us is differentiation. So, before we close, I'd like to highlight the emissions targets that we announced in June, which we believe are truly differentiating in the industry. First, we established targets to achieve net zero scope one and scope two GHG emissions by or before 2025. This is an important commitment and one that we have high confidence in meeting or exceeding. Second, we plan to reduce our production segment scope one GHG emissions intensity by 70% to a level below 160 metric tons CO2 per BCFE by or before 2025. And finally, We plan to reduce our production segment scope one methane emissions intensity by 65%, below 0.02% by or before 2025. These targets are meaningful first steps, and we will continue to push ourselves as we aim to be the operator of choice for all of our stakeholders. We are a values-driven organization that operates with vision and purpose. And to conclude today's call, I'd like to point you to slide five of our investor presentations. which highlights our unique investment opportunity to our shareholders. In short, we are a differentiated energy investment opportunity. Starting with scale, we are the largest producer of natural gas in the United States. This is important not only because we are responsible for providing the U.S. and other countries globally with low-cost, low-emission natural gas, but because when done correctly, scale affords us the chance to operate more efficiently. Second, we have a robust free cash flow profile, most notably driven by contractually locked-in declining gathering rates with Ecotrans, improved maintenance capital intensity, and a shallowing base production decline. Aside from upward price movements, upsides to our $7-plus billion free cash flow projections through 2026 will come through the release of certain MVP capacity, credit rating upgrades, premiums for RSG Gas, participation in new ventures, and continued operational efficiencies. Next, we have a peer-leading credit profile with a clear path to regain our investment grade rating. As shown on slide eight, you'll see that our five-year notes trade nearly 150 basis points better than comparable peers, while only 50 to 75 basis points wide of investment grade producers. On the left-hand side of the slide, you'll see the impact of the strategic actions taken, which has significantly reduced our leverage profile, which is expected to fall by nearly one turn from year-end 2021 to year-end 2022. Additionally, we have an evolved modern operating model in peer-leading inventory. As peers continue to drill up their remaining core inventory, we have minimal info risks comparatively and have decades of core, long-lateral combo development inventories. And finally, we believe that Appalachian natural gas will play a critical role in replacing baseload electricity generation as coal plants and retirements accelerate, providing a tailwind for our business as the world becomes more electrified. And further, low-emissions natural gas produced here in the United States is a critical tool to mitigate energy poverty and improve human flourishing on a global scale, all while positively influencing climate, enhancing the long-term tailwinds for this business. We look forward to continuing to execute on our strategy, demonstrating ESG leadership, and being a champion for the commodity. Thank you for your interest and support. I'd now like to open the call for questions. Operator, will you prompt for questions, please?
spk01
My apologies, I was muted locally. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted locally. First question comes from Nitin Kumar from Wells Fargo. Nitin, your line is now open. Please proceed with your question.
spk02
Hi. Good morning, gentlemen, and thanks for taking my question. I guess I'll start first with hedging, which is, I think, a little bit on everybody's mind. David, you talked about the benefits of hedging a little bit, but if you could give us a little bit more insight, there was almost a doubling up of your swaps at prices that are still quite a bit below strip. I know you mentioned some floating rate hedges, but that increase wasn't as much. So could you talk a little bit about why did you choose to hedge at the levels you did and the instruments that you used to do that?
spk07
Yeah, this is Toby. So I can walk through the hedging and our thought process behind it. So you'll see we've added approximately 650 VCF of swaps. And if you take the ALTA volumes that we inherited, that was about 150 BCF. So you've got about 500 BCF that we're really thinking through what's the best way to get our hedges and meet our strategic goals that allow us to strengthen our balance sheet, reach our leverage targets, and be able to start returning capital to shareholders. We have a view that we take when we make these decisions, and our view was closer to $3. I think when you look at the swaps that we did for that period, it was closer to $3. which is in line with our view, but the question is, you know, why not callers? The use of swaps really solidifies the free cash flow from those hedges, which has the effect of improving our floor. Very helpful with the rating agencies to underwrite the free cash flow that we have to assist in us regaining our investment-grade balance sheet. The next question is, you know, well, why not just do puts? And we looked at that. And at that price, you know, at around $3 NYMEX, to put a put in place, the premium would be anywhere from $0.25 to $0.45. So to put a put in place and give exposure to upside, you know, you're really taking a view that gas prices will be, you know, $3.35 and $3.40. That was not in line with our view at the time. We did not account for, you know, the weather events there. But that was the thought process behind the decision that we made on the hedging.
spk02
Great. That's really helpful, Toby. And I guess the follow-up, and you alluded to this, and you prepared more for this now, shareholder cash return. So I know you said full quarter 21 earnings, but any early thoughts on the form of that? You know, are you leaning towards dividends, variable dividends, buybacks? You know, there are different ways. And I just want to also, part B would be, you know, you talk about consolidation and scale. How compatible are your goals to be a consolidator with meaningful cash return, if you can address that as well?
spk07
Yeah, so we're going to take a balanced and flexible approach with our capital allocation or return of capital strategy. And I'm looking forward to putting that out in the fourth quarter. You know, as far as, you know, consolidation and how we think about allocating capital there and performing um you know tackling any consolidation opportunities we see within our footprint i think you know one thing that's very clear is you look at our track record we've always been uh very disciplined uh in our consolidation efforts i think the track record we've laid with with chevron and alta support that and um it's even more important for us to be even more disciplined and only do deals that are going to be really creative on a nap for sharing free cash flow per share basis um you know the deleveraging nature obviously is helpful But we're sitting with a really good place with our balance sheet right now. So I think, you know, when we have the ability now to start returning capital to shareholders, it just enhances the importance of continuing to be disciplined on the consolidation front. Yeah, and I'll just add that, you know, we have 1.4 billion of free cash flow next year. We'll figure out what percentage, but we have the ability to do a big percentage of return of shareholders next year.
spk02
Thanks, David.
spk01
Our next question comes from Josh Silverstein from Wolf Research. Josh, your line is now open. Please go ahead.
spk06
Yeah, thanks. Good morning, guys. I was going to go right on the same topic as well. You mentioned the $1.4 billion of free cash flow. I imagine you probably want to pay the 570 of maturities for next year as well. But what are the limiting factors to how much you could return? Do you want to make your balance sheet one and a half times levered, and then we can kind of think about the return profile from there? Or is there some other limiting factor to what you guys may be able to return back to us?
spk07
Yeah, so we'll be able to retire the 22 debt this year. So I think you can look at the free cash flow next year really about how much incremental debt do we want to retire and how much shareholder-friendly we want to do. And I think we'll set a specific target, but we don't need to get to any specific target in any one year. We can do a glide path.
spk06
Got it. Okay. And then just as far as the longer-term strategy that you guys outlined in there, it's pretty clear, or at least it's outlined in here, that there's no plans for growth going forward. I just wanted to see if that was the case and you guys are just going to be holding maintenance volumes roughly flat for the next, you know, three or four years or so.
spk07
Yeah, consistent with what we've seen in the past. And, you know, when we get the question, what would it take for ETT to grow? You know, we've consistently said it would require a strip that's, you know, got some length to it, probably two to three years out at a gas price that's north of $3. And that situation is still there today. And even if we did see the opportunity, if that opportunity presented itself, it would still be very modest, you know, zero low to single digit growth, less than 5%. And for us, that's really just taking the throttle or taking the brakes off the operations team to run a little bit. So it wouldn't be... You know, it would be a very natural, you know, couple percent increase. You know, I think it's an interesting, you know, situation that a lot of people in industry are looking at right now. And, you know, while you do see, you know, short-term price signal, which is encouraging, and, you know, people can look in adding activity levels to maybe get a on an incremental small amount of dollars. And I think that people, you know, know how that plays out, you know, when you chase shorter-term price signals. And I think you compare that versus, you know, the long-term value opportunity is getting our assets valued at a gas price that's, you know, north of $3. You know, when you compare the short-term gains you can get from accelerated activity or compared to the alternative value you know, we'll choose the alternative. And we think that, you know, we've been encouraged to see others in industry remain disciplined because I think they recognize the error that we're in and what's the best way to return capital to shareholders and also maximize the value creation of our assets.
spk01
Thank you. Our next question comes from Neil Dingman from Truist Security. Lewis, Neil, your line is now open. Please go ahead.
spk03
Neil, are you there?
spk07
Sorry about that, guys. First question, Toby, for you. Just on the massive footprint you have, What's your thought? I know you have not a ton of areas, but the thought about maybe pivoting a little bit, given what's going on with NGLs, and are there some pads that you could tie in either this year or early next year and have a bit more NGL focus? Yeah, Neil, I think you hit it up front. It's from a percentage basis. We're not really going to be able to move the needle just given our scale and the dry gas side of things, but The Chevron asset that we have does give us an opportunity to steer some activity to the wet side of our program. Okay. Go ahead, Dave. Okay. No, I was going to say it's probably more for next year than this. Okay. And then just, Toby, on M&A, still on opportunities, you know, you're – Yes, your strategy on M&A has been a bit different than others we've seen in the past. I mean, given that huge sort of, as you said, acreage now that you control, will that continue to be part of you? You kind of alluded to this earlier, but other than just sort of continuing to acquire this, would the plan be continued to not only acquire but continue to have M&A? You know, just kind of a slow, steady, you know, meaning that, you know, I kind of look at the Chevron deal, look at the Ulta deal. Certainly didn't add any rigs there. Could you just talk about not only potentially doing more M&A, but your thought about, you know, when you would acquire something as a thought just to continue very much on the maintenance on anything you would do? Yeah, Neil, I mean, our strategy coming in here was to fix EQP, solidify the balance sheet, and, you know, grow free cash flow per share. In the past, you know, consolidation was a great tool for us to grow free cash flow per share and also be leveraged in business to get our balance sheet to where it's at today. You know, but now we're in a position where, again, You know, with the balance sheet where it's at and now having the ability to start beginning returning capital to shareholders, we now have another way that we can, you know, increase our free cash flow per share through doing share buybacks. So we're certainly going to weigh this new tool that we have in the mix and finding out the best way that we can, you know, grow our free cash flow per share. I agree. And if I could take one last one in, Toby, for you or Dave, do you think on the hedges that folks are not, it seems like with the reaction today, was it the ALTA hedges rolling off? It just feels like some investors are not fully understanding the hedge program. Maybe, Dave, if you could just expand on that one last time. I know you talked about the sort of collars you have in there, but I'm still getting a lot of questions on that. I just don't think people fully understand between what you put on and what the ALTA has rolling off. Right. So we basically inherited, we'll call it between 7% and 10% of our hedges that Alta had in place. They were at a hedge price, I'm going to average between 21 and 22, about 260. We then added a call to Alta Hedges to protect the returns of that transaction of about another, we'll call it 6%. We added hedges at about 350 in 2021 and 280 in 2022. And then we added an incremental wedge of hedges between 21 and 22 that Toby talked about that had a $3 number on it. and there was a piece of that which there were collars so so the alta pieces um were the protection of for the transaction and the inherited piece and the incremental piece that we added um uh to go towards our price view was that three dollar piece uh of which uh a portion of it's in collars if that helps very helpful very helpful thank you guys you're awesome
spk01
Our next question comes from David Dekelbaum from Cohen. David, your line is now open. Please go ahead.
spk06
David, are you there?
spk01
I think David may have just withdrawn his question, so we'll go with Holly Stewart. Holly, your line is now open. Please go ahead.
spk00
Good morning, gentlemen. Maybe, Dave, I'll start with you just thinking about the acquisition integration and how that impacts the investment grade rating. I presume that you are in close contact with the rating agencies and you're getting very close. So maybe my first question on that is just what are your thoughts on just how the timing has changed there? And then maybe the second question around that is, how do you incorporate this sort of return of capital strategy into that conversation?
spk07
Yeah, so I would say there's probably two events that impacted the timing. One has been the acquisition and And we got the upgrades just the other day. So now we're sitting at one notch away. So the acquisition probably helped accelerate the transition back to investment grade by, let's call it maybe six months or so. So the second event is really the commodity price move and how it's moved and up. And I think now the rating agencies are kind of digging through what should the commodity price be. And so that will obviously have a big impact on timing as well. So I think we can think about investment grade as probably a 2022 event, whether it's the beginning or the middle.
spk00
And then the second part on return of capital and how the rating agencies are thinking about that.
spk07
Yeah, so, you know, the agencies would like us to continue to pay down debt. I think that's important. I think so we'll integrate that into our return on capital strategy. I think now with the fact that we have a multi-year view, we'll call it of well over a billion dollars a year of free cash flow. approaching a billion and a half, we can create a strategy that retires debt over time and as well as provide shareholder returns. And we can accomplish both, you know, having investment grade, having a strong balance sheet, and then also returning cash to shareholders.
spk00
Okay, great. And then, Toby, I know in your prepared remarks within the release you mentioned the no real cost acceleration in the second quarter. I mean, what are y'all seeing, I guess, here currently in terms of inflation? And then as you think about kind of the 22 element, how do you see that playing out?
spk07
Yeah, so we spent a lot of time with the teams thinking about, you know, service costs and making sure that we've got the most accurate view baked into our well costs that obviously makes up our capex forecast for the future. Where we're seeing inflation is on things like steel, obviously things like diesel. We've done, you know, one of the benefits of running a, you know, large-scale dependable program is that we can, you know, leverage our procurement team to, you know, acquire the materials we need in advance. So that's been a very helpful tool for us. The other thing we've seen is just, you know, not reducing our reliance on things like diesel. I mean, the move to electric fire frack equipment, in addition to the ESG benefits, it takes us away from being large diesel consumers. You know, that's over 25 million gallons of diesel that we've not needed to consume as a result of that. So Operational efficiencies play into reducing service cost inflation as well. So all of these numbers are sort of baked into what our costs are, but I do see that our costs will continue to stay at the level that we're at today, and then we've got the benefit of the teams continuing to ground the operational efficiencies, high-grade the schedule with longer laterals, and those two things will, you know, historically they've been a lot to beat, even in the face of service cost increases, and I expect that to continue in the future.
spk00
That's great. Thank you, guys. You're welcome.
spk01
Our next question comes from Aaron Jaram from JPMorgan Chase. Aaron, your line is now open. Please go ahead.
spk07
Yeah, good morning. I wanted to first talk about your outlook for basis differentials. I know you're assuming a mid-year 2022 startup date for MVP. So first, I was wondering to see if you could talk about what basis differential is embedded in your 2022 guide. for the $1.4 billion of free cash flow, and how do you expect basis differentials to move in a post-MVP world? Yeah, so basis differentials are narrowing by about 20 cents year over year from 2021 to 2022. And so we see nice improvement, and we locked in a big chunk of that. And when MVP comes online, you know, we're assuming, I'll call it a very conservative view of what the end point where MVP drops gas off. And we're also assuming not a benefit in base, not a material benefit in base. And so there'll probably be some movement there that'll probably help make those numbers get better, but we're not assuming that. Got it. So it sounds like, Dave, you're assuming about a 20 cent year-over-year improvement in basis relative to 2021 actuals. Is that fair? Right. Okay, fair. Great. Toby, I was wondering if you could maybe elaborate on how the market for responsibly sourced gas is kind of developing. You talked about maybe a couple of marketing agreements where you're getting some premium pricing. So I was wondering if you could maybe elaborate that and maybe touch upon some of the new venture investments that you planned to make and maybe a timeline for that $75 million. Yeah, so first on the market for RSG, it starts with demand. A lot of customers have reached out to us about this product. There's a lot of interest there. So that's very encouraging. Two is, what is that market going to translate to in price? And I'd say in the single digits right now. But the real part that we're looking for is to really establish the certification framework That really will help solidify exactly the product that people are buying. And what that will allow us to do is quantify the emissions reduction you're getting by getting really low-intensity, responsibly certified gas. You know, that will help define the price for our customers, and I think that that will lend itself, if you're going to apply some type of carbon pricing to that, to a more constructive price and a more realistic premium that's actually based on data. So, you know, we've joined the OGMP 2.0. That is specifically designed to help assist in creating that framework and also, you know, the technology that we use to do the on-site monitoring will be part of it. As far as our new venture is concerned, one of the things that we're doing there that will facilitate our RSG efforts is by investing in our ESG initiative, which one of them is the $20 million to replace our pneumatic devices. That's going to cut our emissions in half, and that's going to take what is already a peer-leading emissions intensity rating and only make that better, which will have the impact of allowing us to get more credit for the quality of the gas that we produce to customers. And so that's sort of the holistic view on RHD and what we're doing to position ourselves to benefit from and promote that market. Great. Thanks a lot.
spk01
Thank you. Our next question comes from John Abbott from Bank of America. John, your line is now open. Please go ahead.
spk07
Good morning, and thank you for taking our questions. Our first question is for you, David. You did a good job explaining the working capital draw during the quarter is mainly non-cash. Just thinking to 4Q, how should we think about the trajectory of working capital? Yeah, so, you know, the issues with working capital really are tied to the margins for our hedges. And as you think about... As time rolls, those margins go away. As our credit improves, those margins go away. And then if prices go up, those margins can increase on what's left. So those are the moving targets to think about. I think just know that I'll call it by the end of the year, all that margin effectively will go away. And so you can think about this from a trend standpoint over the next six months. that margin will go away because effectively the biggest part of that margin impact is really tied to 2021 hedges. All right. And for the second question, it's on the topic of NDLs and also on hedging, which have already been discussed. But if not, NDLs don't really sort of really move the needle for you that much, but you don't provide a lot of disclosure on your NDL hedging positions. And we do have an uplift in the NGO curve in the second half of the year. So can you just sort of discuss, you know, relatively speaking, maybe while you may give specifics on contracts, but the amount of percentage of hedging on NGLs and whether or not you continue to hedge into 2022 on NGLs? Yeah, so we're 75% hedged on 2021. We're 0% hedged on 2022. A portion of those hedges that we have in place for our NGLs are tied to our Chevron acquisition. Just like we did with Alta, we added hedges in place, but we added only 2021 hedges. We didn't add 22 or 23. So we have virtually wide open for 22 and 23 for NGL. Again, it's about 5% of our production. It's probably about, I'll call 6% or 7% of our revenues. If I could possibly sneak in one more, I mean, just given the upward move and the gas trip, David, what are your latest thoughts about when you might pay cash taxes? It'll be several years before we pay cash taxes. And, again, that will be a function we have planned. $1.4 billion of NOLs. And so that really will be a function of what commodity prices do. But right now, we'll call several years out before we pay cash taxes. Thank you very much for taking our questions. You're welcome.
spk01
Our next question comes from David Heikkinen from Pickering Energy Partners. David, your line is now open. Please go ahead.
spk03
Good morning, everybody. Just thinking about your ALTA deal, appreciate you providing the splits on the hedges for that so we can roll it into our look back economics. Can you talk about how much of the increase in differential guidance was tied to the ALTA assets or was it not? Or do they just have similar differentials to the rest of the portfolio?
spk07
No, David, it has, they're about 15 cents wider than our base and basin differentials. And so we did add a piece of that. And so, and I would say about half was from the acquisition and half of it was from wider differentials that occurred within the basin because of, probably because of tech go being down.
spk03
No, it's purely in our own look backs on what you paid and what we thought. That's helpful just to dial that in a little bit. So we'll put the cost of hedges in and a little wider differential kind of into the purchase price adjustment. That's awesome. That's helpful. Okay, great.
spk01
Our next question comes from David Dekelborn from Karen. David, your line is now open. Please go ahead.
spk04
Thanks, guys. Can you hear me? Yeah. Hello? Yeah, all right, perfect. Sorry about that before. Just curious on two things. One is on the Alta deal, you know, the incremental CapEx that you guided to today for 2021, I know, I think, one, I just wanted to revisit that longer-term outlook of just running one rig line on those assets, and two, Is that capable higher than the original deal thoughts? Are you accelerating any of the ducks that you acquired with that, or should we think of this as apples to apples with the original purchase guidance?
spk07
It's in line with what we put out for the original deal guidance. remind you, you know, the alt to transaction to run that asset in maintenance mode is going to require around a couple hundred thousand horizontal feet per year, declining to around 150,000 horizontal feet, you know, longer term. And we apply the well cost that we used to underwrite that deal to Transite to a CapEx.
spk04
Thanks, Toby. And then just my only second question here is just Obviously, just heading into some of the issues that you all are experiencing right now with basis, several of your peers as well, with Tetco. Last year, things were much more dire because the cash prices were much lower, but I would presume that we're not in the situation where we're looking at managing near-term production in terms of curtailments or shut-ins or moving volumes off of M2 or M3, at least through the end of summer.
spk07
Yeah, so, David, you know, if you looked at what happened last year, you had lack of winter, you had high storage, you had a little bit of COVID impact, and then you had, we'll call it one and a half BCF per day or more of pipe outages. And so you had, as you headed into September, October, oh, and then you also had about two BCF per day of shut-ins that came online in October. So you had high storage, you had the pipes out, and then you had producers come back online, all hitting in, we'll call them that October, November time period. And so that created the recipe for basis widening really sharply. You look this year, and storage inside the basin is about 150 bees less year over year. We'll call it normal 900, 950 as you start the winter here. So we're in a much better storage position. There's really a lot less pulse shut-in of production going on, so you're running kind of more at full capacity. And you do have the TECO outage, which was about 650, so we'll call it about – half to about a third of what was out at times. So I think the setup is in a much better position if you have normal weather into the winter where you probably will not see any producers shut in the September, October time period. So I think it's a much probably different setup.
spk04
Yeah, indeed. Just wanted to confirm that. Thanks, David. You're welcome.
spk01
Our next question comes from Noel Park from Tuhi Brothers Investment Research. Noel, your line is now open. Please proceed with your question.
spk07
Hi, good morning.
spk01
Good morning.
spk02
I was wondering, now a couple of questions.
spk07
ALTA is closed and you're a couple months even more familiar with it.
spk02
Brendan, did you have any updated thoughts on in-basing gas opportunities now with your sort of combined portfolio?
spk07
Well, I think that the opportunities were known even before, you know, we picked up the ALTA program. transaction. So I wouldn't say our view has changed on any new opportunities coming on the horizon. But I think one thing that has changed is our balance sheet has really strengthened. And the discipline that we had, the reason to do any M&A or consolidation to improve the leverage situation here at EGP, I think is less of a desire there. So it really comes back to to focus on, you know, what's the best way for us to grow our free cash flow per share and also grow in our NAF per share as well, which, you know, we have the ability to do that, you know, ourselves with our return on capital strategy that's now been, you know, that we've accelerated our ability to get to that point. So our mentality on M&A is still going to be something that we look at. It's part of our jobs to make sure that we're looking at every opportunity, but, you know, that discipline is only strengthened. Gotcha. Thanks. And, you know, we had on the call today a lot of good discussion about gas markets and, you know, what we might see going forward.
spk02
You know, the volatility we've seen last few months has all been on the upside.
spk07
So I guess I'm not quite sure how to frame this, but on your price view, And we talked about, of course, the backwardation of the curve, the expense of trying to lay inputs as far as the premiums being high. And when you look at the curve going into 2023, it's back into the twos. Do you sort of think that the The market is assuming that there is going to be sort of a delayed but significant rebound in rig count so that supply is going to ease considerably. Or do you think there's a sense that there's some sort of plateau ahead out there on the demand side? I'm just wondering, as you talk about future scenarios, what you would think is more likely. Yeah, I think for a strip to be under $3, I think you have to take a view that people are going to break discipline and start adding production. This period of pricing right here is going to be really important to watch because it's easier to stay disciplined than a $2.70 strip. It's another proposition when you're looking at a $3 strip. But like I said before, I mean, these are short-term pricing. And, you know, I think people understand how that's going to end up and, you know, realize that the real value opportunities for us to bring some sustainability to gas supply and ultimately lead to a more sustainable price. And over the long term, that will create more value. So I think these next, you know, six months will be important to watch and I think help show the discipline that this industry has. And I think after that you'll start to see the strip reflect what we think is a more constructive gas price long term.
spk02
Great. Thanks a lot.
spk01
You're welcome. There are no further questions on the line. I would now like to hand back to Toby Rice for any closing remarks.
spk07
yeah thanks everybody for for participating today you know i think just stepping back and realizing the situation that we've been in that we're in today you know the gas markets uh are very strong and uh i think i think you know we realize that gas gas isn't a two dollar commodity it's more like a three dollar commodity and while it does present some headwinds with our with our hedge book you know the fact is EQT is a stronger company today, and we've got a really bright future. We've got a really robust free cash flow profile and a really strong balance sheet, and that's going to give us the tools needed to correct any market imbalances in the short term and reward our shareholders for their patience. And we're really excited to continue to deliver on that strategy. Thank you.
spk01
This concludes today's call. Thank you for joining. You may now disconnect your line.
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