EQT Corporation

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.

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.

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?