EQT Corporation

Welcome to the EQT Q3 2022 quarterly results conference call. My name is Harry, and I'll be coordinating your call today. If you would like to ask a question during the Q&A, you can do so by pressing star 1 on your telephone keypad. I'd now like to hand over to Cameron Horowitz, Managing Director of Investor Relations and Strategy, to begin. Cameron, please go ahead when you're ready.

Good morning, and thank you for joining our third quarter 2022 earnings results conference call. With me today are Toby Wright, President and Chief Executive Officer, and David Connie, Chief Financial Officer. The replay for today's call will be available on our website beginning this evening. In a moment, Toby and Dave will present their prepared remarks with a question and answer session to follow. An updated investor presentation has been posted to the investor relations 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 contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements. Because of the factors described in yesterday's earnings release, in our investor presentation, in the risk factors section of our 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-yet financial measures. Please refer to our most recent earnings release and investor 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.

Thanks, Cam, and good morning, everyone. The energy macro landscape remains volatile as the world continues to grapple with a structural undersupply of natural gas. Thanks to American source LNG, Europe has done a commendable job refilling its storage over the past few months. But those thinking that the singular goal is making it through winter fail to understand the scale of the problem at hand. Any doubt that the European energy crisis is going to be multi-year in duration ended a few weeks ago with the sabotage of the Nord Stream pipelines. Domestically, natural gas production has increased as of late, which is helping to ensure the US has the energy it needs to meet demand this winter. That said, electricity prices in many parts of the country remain extremely elevated. highlighting the continued challenges we face connecting natural gas supply with demand due to a lack of pipeline infrastructure. As many of you know, since unveiling our Unleash USLNG campaign in March, we have been on a relentless mission to educate policymakers on the driving factors limiting US producers' ability to meet the critical energy needs of consumers, both domestically and abroad. The social pain caused by crippling energy prices around the world is unacceptable to us at EQT. The US has the recoverable resources necessary to single-handedly double the global energy market, providing both energy security and meaningful decarbonization through the replacement of foreign coal. While recent setbacks around permanent reform have been unfortunate, we continue to believe the US public's overwhelming desire for additional natural gas production and infrastructure will be heard. To help ensure that this is the case, we recently spearheaded the launch of a new coalition Partnership to Address Global Emissions, or PAGE, coalition. PAGE brings together responsible energy producers, leading climate advocates and labor groups to advocate for the infrastructure that is critically required to increase production and exports of US natural gas to lower global emissions, reduce inflation, and provide energy security to America and our allies. PAGE provides another avenue for EQT to help progress truly sustainable energy solutions that are required to have a meaningful impact on lowering global emissions while simultaneously providing a tool to end the global energy crisis that is bringing unnecessary pain to consumers around the world. Turning to the third quarter, it was an active one at EQT as we announced the bolt-on acquisition of Tug Hill and XCL Midstream. As highlighted in our conference call last month, This deal checks all of the boxes of our guiding M&A principles, has significant industrial logic given direct offset to our existing leaseholds in West Virginia, and brings over 11 years of core inventory that immediately competes for capital inside EQT's portfolio. The acquisition drives accretion on free cash flow per share, NAV per share, lowers our cost structure, and de-risks our business, all while maintaining our investment-grade balance sheet. The acquisition implies we are paying a sub-$3 per million BTU long-term natural gas price, underscoring the attractive risk-adjusted return profile for our shareholders. Given the low-cost nature of Tug Hill's assets, we expect our corporate NYMEX free cash flow breakeven to drop from approximately $2.30 to $2.15 per million BTU on a pro forma basis, which adds further resiliency to our free cash flow profile through all parts of the commodity cycle. As a reminder, we did not bake in any synergies when underwriting this deal, but we highlighted $80 million of per annum potential and additional subsequent work by our teams to suggest the opportunity for further upside largely due to greater confidence in water system integration benefits. We continue to expect the transaction to close in the fourth quarter of this year and look forward to providing pro forma guidance after closing. Concurrent with the Tug Hill acquisition announcement, we raised our year-end 2023 debt reduction target by $1.5 billion to $4 billion and doubled our stock buyback authorization to $2 billion. We've made material progress toward our debt reduction goals with $830 million of debt retired year-to-date. On the buyback front, while securities laws prohibited us from repurchasing stock for a significant amount of the quarter due to the Tug Hill transaction, we have been active post-deal announcements repurchasing 3.6 million shares for approximately $150 million since mid-September. Recall we repurchased roughly 10 million shares in Q1 at an average price of around $23 per share and effectively retired 5.7 million shares through our convertible note repurchases in Q2 at an implied share price of $37 per share. Combined with our activity over the past few weeks, we have now reduced our fully diluted share count by more than 19 million shares this year at a weighted average price of $31 per share. Looking ahead, we still have approximately $1.6 billion remaining on our buyback authorization, providing significant dry powder to repurchase our shares and an extremely attractive valuation. We will also look to redeploy cash savings from retiring debt repurchasing shares, and our realization of Tug Hill synergies into additional base dividend growth moving forward. Also in the third quarter, we announced a collaboration with the state of West Virginia, Battelle GTI Energy, and Allegheny Science and Technology to form the Appalachian Regional Clean Hydrogen Hub, or ARCH2. Appalachia is ideally suited to lead the charge in clean hydrogen production in the United States, give an abundant low-cost, low-emissions natural gas, interconnected infrastructure and storage, existing transportation networks, and proximity to major end-use markets. The ARCH2 team is comprised of entities with operations across the Appalachian region spanning the hydrogen value chain, as well as technology organizations, consultants, academic institutions, community organizations, and NGOs that will provide commercial and technical leadership for the development and build out of the hub. Coalition plans to apply for the DOE's regional clean hydrogen hub funding opportunity, which seeks to provide $8 billion in federal funding to accelerate the deployment of U.S. hydrogen technologies and contribute to decarbonizing multiple sectors while enabling regional and community benefits. We plan to submit our concept paper to the DOE this winter and our full application by next spring. with final DOE hub selection expected in the fall of 2023. During preparation of the concept paper and full application, EQT and the rest of the ARCH2 coalition will design the hydrogen hub and develop projects that span the hydrogen value chain from production through transportation and storage all the way to end use. For the funding opportunity announcement issued by the Department of Energy in September, the winning hub teams will be awarded between $500 million and $1 billion. which can help subsidize all the projects included in the application. In terms of EQT capital commitments, we do not anticipate incurring any significant spending related to ARCH2 until the latter part of this decade. The ARCH2 announcement comes at an ideal time as the world is demanding cheaper, more reliable, and cleaner energy. And we believe the use of EQT's extremely low emissions natural gas to create clean hydrogen can act as a strategic foundation for America's transition toward decarbonization. Our participation in ARCH2 is just one of many pillars across our broader new venture strategy, which is designed to uniquely position EQT in forging new paths and opening new markets as we progress into a lower carbon future. Turning to operations, as shown in slide 11 of our investor deck, our shift to combo development in 2019 as new management took over EQT has resulted in multi-year well productivity improvements. our 18-month lateral normalized recoveries are up almost 45% since 2019, which is greater than two times the productivity increase experienced across broader Appalachia over the same period. This outperformance has been largely driven by the implementation of our evolved well design and mitigation of parent-child effects through large-scale combo development. While our underlying well productivity has been strong, multiple third party and logistical constraints this year have led to almost 30% less wells turned in line versus our original plan, pushing activity into 2023. These third-party constraints along with water restrictions due to drought conditions in parts of the basin negatively impacted our 2022 production by more than 150 BCFE or 7% compared with our original volume expectations. Strong well productivity and great work by EQT's team to optimize field operations have helped to buffer the impact and clawed back almost 50 BCFE of this volume impact. The net effect is our full year 2022 production is trending to the low end of our prior guidance range, while our full year 2022 CAPEX is also trending toward the lower end of our prior outlook. While third party challenges have been disappointing this year, They also underscore the opportunity we have in front of us to integrate the Tughill and XCL assets to maintain greater control over infrastructure build-out, facilitating more pipeline connectivity and enable additional operational flexibility across our asset base moving forward. Shifting to market dynamics, we were very pleased to see EQT added to the S&P 500 earlier this month. We view inclusion in this index as another testament to our premier asset base, success of our modern digitally enabled operating model and the overall sustainability of our business. I want to thank all of our employees for their hard work evolving EQT into a world-class organization that competes with the top companies across all segments of the economy. I'll wrap up by saying that despite EQT stock performing reasonably well on a year-to-date basis, we believe the market has not remotely begun to reflect the intrinsic value of our business or relative quality versus peers. We are at a unique point in time as the North American natural gas market is in the process of an unprecedented structural shift as it is de-bottlenecked through LNG and the world is increasingly recognizing the role natural gas will play in providing affordable, reliable, low carbon energy for decades to come. EQT is among the best positioned companies in the world to benefit from the secular trend underpinned by our capital efficient asset base, unrivaled depth and quality of inventory, and declining midstream fees. We believe these characteristics combine to create a superior value proposition for investors and will ultimately be reflected in our share performance as these factors are converted into durable free cash flow that we can compound over time. I'll now turn the call over to Dave.