EQT Corporation

Good morning, welcome to today's EQT Q4 quarterly results 2022 Outlook conference call. My name is Candice and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, please press start followed by one on your telephone keypad. I would now like to pass the conference over to our host, Andrew Brees, Director of Investor Relations.

Good morning, and thank you for joining our fourth quarter and year-end 2021 conference call. With me today are Toby Rice, President and Chief Executive Officer, and David Connie, Chief Financial 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 1-866- 813-9403 with a confirmation code of 523-084. In a moment, Toby and Dave will present the prepared remarks and the question and answer session to follow. An updated investor presentation has been posted to the investor relation portion of our website, and we will reference certain slides during today's discussion. 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 these forward-looking statements because of factors described in yesterday's earnings release, in our investor presentation, in the risk factor section of our Form 10-K, and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to our most recent earnings release and investor's presentation 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.

Thank you, Andrew, and good morning, everyone. 2021 has been another transformative year for EQT, and I am excited today to reflect on the year, discuss our fourth quarter results, and reveal our 2022 financial and operational outlook. But before I do that, I would like to take a step back and talk about the investment opportunity that EQT presents. The value opportunity for EQT has never been stronger than it is today. In two years, this team has righted the ship and set EQT on a trajectory that will allow us to benefit from and support the growing importance of natural gas in today's energy ecosystem. At January 31st strip pricing and including the free cash flow generated in 2021, EQT is projected to generate free cash flow through 2026 in excess of $10 billion, representing 125% of our current market cap. Further, our 2022 free cash flow yield is roughly 20%, and despite backward-dated strict pricing, grows to 30% in 2023 as our hedges roll off. The value opportunity goes beyond the near term. EQT is a differentiated long-term natural gas investment opportunity. When compared to the other natural gas peers, we believe EQT has the longest runway of high-quality, contiguous inventory of any operator and any gas play. In our most recent investor presentation, we have updated our inventory position. And as of year end, we have approximately 1,800 net mapped out locations in our core inventory position, representing nearly 22 million lateral feet of drilling. That line of sight on our operations is differentiated from any pier, and with a roughly 100 well turn in line program, represents more than 15 years of inventory in a maintenance production scenario. This translates to a long runway of production and sustainable free cash flow generation. When it comes to increasing value for our shareholders, I'd like to now highlight several drivers to increase our free cash flow picture. First is a stronger balance sheet that we expect to be upgraded to investment grade as early as the first half of this year. Investment grade status unlocks multiple benefits, such as improved costs and access to capital, as well as the ability to sign long-term domestic and international sales contracts. Second, building on the past two years of work and our stronger financial position today, We have begun implementing an updated hedging strategy that provides downside protection while leaving large upside exposure to higher natural gas prices and what we continue to believe is a structurally bullish backdrop for the commodity. Third, we have contractually declining gathering rates that fall by around 18 cents from current levels over the coming years and provide additional free cash flow growth even without production growth. Fourth, our operational excellence has translated into strong efficiency improvements, which has allowed us to ramp our methodical well-designed testing program, which I will expand on in a moment. Lastly, our corporate base decline rates continue to shallow, with our current 12-month base decline equal to approximately 30% and declining to the low 20s, resulting in less activity and capital required to maintain production and further inflating our business from future inflationary pressures. In addition to these drivers that will improve the sustainability of our business, we recognize that we can generate further value through the improvement of our price realizations. First, our hedge program now provides us with the ability to capture rising prices. For every 10 cent increase in unhedged realized price above our corporate breakeven of less than $2.30 per million BPU, we get an incremental $200 million of free cash flow, or 50 cents of free cash flow per share. Second, on our expansive RSC footprint, of which we've already certified approximately four BCF a day. We have signed 10 deals encompassing roughly 1.2 TCFE in total for around $60 million in premiums to date. We expect the value of RG will improve further as the market develops and as the cost of carbon increases. Lastly, we are attracting interest from several energy parties across the whole value chain to gain exposure to international prices. While these catalysts provide an exciting future for EQT, we have not lost sight on the value of our core business and the way in which we operate is a key differentiator for EQT and provides meaningful, sustained value creation opportunities. When we campaigned to join EQT, we introduced combo development, which is large-scale simultaneous development of multiple adjacent wells and pads. Combo development requires coordinated efforts to create the long-term schedule and requires a large continuous asset base unconstrained by legacy parent well depletion, as we see in other plays. In these two plus years, these efforts are bearing their fruit. The real results of our efforts are evidence in our improving EURs, decreasing costs, and limited inflationary pressures. We are now developing 20 to 30 wells sequentially from adjacent pads with three to 400,000 lateral feet per combo on average. This modern approach to shale development leverages EQT scale to drive down costs, maximize long-term asset value, and minimize future well interference to drive multi-year consistent results. On slide 15 of our investor presentation, we show you what combo development looks like. And through our long-term 2026 guidance window, we expect that greater than 80% of our activity to be combo development, which means sustained capital efficiency and repeatable free cash flow. Another contributing factor to our consistent results is our approach to well design. Since joining EQT, we've streamlined the number of well designs, allowing us to better forecast the performance of our wells and minimize variability. With the operations humming, we began weaving in small-scale science pilots starting in 2020. These dollars were small in the past couple of years, and now with our scale, consistent development, along with the findings from our small-scale piloting, We have confidence in beginning to phase in a next generation well design in 2022 that is geared towards driving further improvements in well productivity, drilling economics, leading to long-term free cashflow and value creation as we apply these learnings across our long runway of core inventory. Given the standard timeframe between spud to turn in line and our planned phase deployment, we expect to have preliminary results by the end of 22 and full visibility by late 2023. The investment is roughly $50 million in 2022, which translates to approximately $90 per foot on our Southwest Pennsylvania Marcellus well cost, which we believe will be more than offset by the expected production enhancements. To understand the potential impact, next-generation well design could materially increase our five-year free cash flow forecast by more than $300 million. And with full implementation, could offer multiples of that when applied across our entire inventory. We expect this next generation well design will also afford us the ability to maintain production volumes with fewer wells, increasing the capital efficiency of our operations, while also extending our core inventory runway even longer. This is a great segue into what to expect from EQT in 2022. The story here is simple. We want a disciplined maintenance program to produce approximately two TCFE annually Implement a hedging philosophy that provides downside protection while providing substantial upside participation. Generate free cash flow that we can reward our shareholders with and improve our balance sheet in pursuit of leverage of one to one and a half times. Slide 13 in our investor presentation highlights the continued momentum of our 2022 program with maintenance production of approximately five and a half BCFE per day and capital expenditures of $1.3 to $1.45 billion. We expect to generate $3.1 to $3.3 billion of adjusted EBITDA and $1.4 to $1.75 billion of free cash flow. As mentioned before, this represents a roughly 20% free cash flow yield in 2022. Our 2022 capital program assumes a dollar per foot cost for Southwest PA Marcellus Wells of approximately $760 per foot compared to our full year 2021 average of $690 per foot. This is not inclusive of our investment in our NextGen well-designed program, but does reflect expected inflation of $70 per foot, or about 10%. However, we recognize that dollar per foot is not a fully representative picture of our capital allocation decisions, which is why we also look at our program through the lens of CapEx efficiency, or the total capital spent for the net sales volumes delivered. Slide 18 for the details of this concept. Our CapEx efficiency is inclusive of all capital costs, beyond reservoir development, a nuance that dollar per foot ignores. Further, because we are investing in our next generation well design that is expected to deliver higher per well production, capital efficiency on a per volume metric provides a better illustration of the value being created from the capital invested. In the same vein of capital allocation, I'd like to provide you with our current view on M&A. Despite the pickup in M&A over the past nine months, We have chosen to remain disciplined as we have observed a widening divergence between the value of public equities and where assets have traded. The timing of the two significant transactions that we have already integrated could not have been better. Since closing our asset acquisition from Chevron, our team has reduced operating expenses by over 30%. And with the increase in strip pricing, we believe the value of those assets has more than doubled since closing. Similarly, the integration of Alta is now complete. and our operations teams are already driving cost improvements in the field as evidenced by a 15% decrease in drilling costs on the first wells we took over despite inflationary pressures. As a reminder, the ALTA assets included over 250 core net locations and more than 600 total net lower Marcellus locations across 300,000 net acres, and also included substantial midstream infrastructure and mineral ownership. Recent transactions imply a value of ALTA of more than double what we paid only six months ago. As a large shareholder myself, my excitement for EQT has never been greater, and the value proposition never more compelling. And as of December 2021, we now have the ability to capitalize on this opportunity through the use of our $1 billion share repurchase program. Since that announcement, we have not waited to begin repurchasing shares. In roughly one month, we repurchased $50 million of our shares, representing 2.5 million shares outstanding. While it's prudent to be methodical in our repurchasing efforts, we recognize the rare opportunity available to us today to buy stock in a nearly investment-grade company with a 30% 2023 free cash flow yield at strip on top of some of the best natural gas assets in the country. We look forward to updating the market on our progress. I'd now like to pass it to Dave to discuss hedging strategy, our balance sheet, liquidity, and year-end reserve results.