This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: 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.
spk10: 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.
spk12: 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.
spk02: Thanks, Toby, and good morning, everyone. I'll briefly summarize our third quarter results before discussing our balance sheet, hedging, and guidance updates. Sales volumes for the third quarter were 488 BCFE, which was modestly below the midpoint of our guidance range. As Toby mentioned, third party and logistical constraints put a governor on our activity during the quarter, limiting our tills to just 16 versus our guidance range of 22 to 32. Our adjusted revenues for the quarter were $1.7 billion, or $3.41 per MCFE, and our total per unit operating costs were $1.42. As a result, our operating margin was $1.99, about 90 cents or 85% higher than last year. Capital expenditures were $349 million below the low end of our guidance range, largely due to lower than expected completion activities. Adjusted operating cash flow was $940 million, and free cash flow was $591 million, bringing our total year-to-date free cash flow to approximately $1.7 billion. Our free cash flow also reflected a basis differential of $1.02 per MCFE, wider than our guidance of $0.80 to $0.90 per MCFE, due to wider local differentials and an unplanned outage on the Nexus systems. Our capital efficiency for the quarter came in at 72 cents per MCFE, which was a 4% sequential quarterly improvement resulting from lower capital spending. On slide 26, we highlight our capital efficiency has averaged 70 cents per MCFE on a year to date basis, which is 35% below the gas peer group average, despite the third party issues impacting the timing of our production this year. Turning to the balance sheet, at the end of the third quarter, Our trailing 12-month net leverage stood at 1.3 times, down 0.3 turns from the prior quarter. To fund the Tug Hill and XEL acquisition, we raised $2.25 billion of debt, which is leverage neutral to our existing profile. This is comprised of raising $1 billion of senior notes and $1.25 billion of term loans, with strong support from both our banks and our institutional investors. Despite a challenging credit environment, we priced our two tranches of senior notes at 175 to 200 basis points spread to respective treasuries with further tightening in the secondary market. This enabled us to lower funding costs and implement efficient repayment terms. We see the successful debt financing as another testament to the underlying credit quality of our business and value the support we receive from our banks and bondholders. As highlighted with the deal announcement, we raised our year-end 23 debt reduction target from $2.5 billion to $4 billion, which will take our gross pro forma debt down to approximately $3.5 billion. With our debt trading below par due to the Fed raising rates, we have even more principal purchasing power. Once we achieve our absolute debt target, we will have a bulletproof balance sheet with leverage of 1 to 1.5 times using a conservative $2.75 per MMB2 NYMEX gas price. We've already executed $830 million of debt reduction goal this year and expect to make material additional progress over the coming quarters, giving the robust projected free cash flow generation. Looking at liquidity, we ended the quarter with approximately $2.6 billion comprised of an essentially undrawn credit facility and $88 million of cash. Two positive liquidity items to point out. First, we replaced approximately $180 million of letters of credit with surety bonds during the quarter. And second, we received $196 million from Equicram's midstream subsequent to quarter end as we exercised our option to receive cash in lieu of a portion of near-term fee relief. Now moving over to hedging. As mentioned on our Tug Hill acquisition call, we added to our legacy hedge book in the third quarter, taking our hedge vines from 50% to 60% next year through the purchase of deferred premium puts with an average strike price of $4.65 per MLB2. We've also executed on the majority of our plan to hedge 60% of Tug Hill's production next year through the combination of deferred premium puts and collars, with an average floor price of $5.53 per MMB2 and an average ceiling of $10.80 per MMB2. On a pro forma basis, we have approximately 60% of our 2023 production hedge with floors at an average strike price of $3.30 and approximately 45% covered with ceilings at an average strike price of $5.65 per MMB2. We remain unhedged for 2024, and we'll be looking for opportunities to begin building out our hedge position. Turning to guidance, as Toby mentioned, a third party and logistical constraints have reduced our planned 2022 tills by approximately 30% versus our original outlook. Strong underlying well performance and seal optimization have mitigated the impact to 2022 sales volumes. which are now expected to be 1925 to 1975 BCFE or roughly in line with the lower end of our prior guidance range. We are also lowering our full-year capital expenditure guidance to $1.4 to $1.475 billion, excluding acquisitions to reflect the lower till count. While we're in the midst of the budgeting process for 2023, our supply chain contracting strategy puts us in a strong access and cost position given our multi-year sand and frack crew contracts. We plan to give more fulsome details once we provide 2023 guidance, but we expect EQT to experience inflationary impacts that are at the lower end of broader industry ranges for next year. Given our structurally superior hedge position next year, We expect our 2023 free cash flow to expand by approximately 90% year over year at recent strip pricing prior to the effect of Tug Hill. And after factoring in cash taxes, providing differentiated free cash flow per share growth to our shareholders. I'll now turn the call back over to Toby for some concluding remarks.
spk12: Thanks, Dave. To conclude today's prepared remarks, I want to reiterate a few key points. One, the pending Tughill and XCL acquisition underscores our disciplined M&A strategy, adding low risk bolt-on assets to our business with clear industrial logic, a compelling valuation, material cost structure accretion, and the opportunity to capture meaningful synergies. Two, we have returned approximately $1.5 billion of capital to shareholders this year, including almost $600 million of share repurchases and convertible note retirements at an average price of $31 per share, And our updated capital returns framework on the back of the Tug Hill deal provides material room for additional shareholder returns moving forward. Three, our move to common development has driven significant well productivity gains since we took over EQT in 2019. And this tailwind, along with our team's optimization efforts, has allowed us to ameliorate the impact of third party constraints this year. Four, the ARCH2 Hydrogen Hub collaboration has the potential to lay the foundation for the next leg of decarbonization efforts at EQT, taking advantage of differentiated access to vast, low-cost, low-emissions natural gas in Appalachia. And finally, we were honored to join the S&P 500 earlier this month and see our inclusion in the index representing another significant milestone on EQT's journey to becoming the operator of choice for all stakeholders. I'd now like to open the call to questions.
spk01: If you would like to ask a question, please dial star, follow the one on your telephone keypad now. And our first question of the day is from the line of Arun Jayaram of JPMorgan Chase. Arun, your line is now open.
spk08: Good morning, Toby. One of the early themes from earnings has been some of the midstream issues that we've seen in the Appalachian Basin. You guys talked about it, you know, range and intero as well. So I was wondering if you could maybe describe what you're seeing in terms of on the ground, in terms of the general constraints, and maybe specific to EQT, when do you anticipate to get resolution on some of the issues that did affect your till count this year?
spk12: Yeah, good morning, Arun. So one thing I think that's worth noting is the waterline issues have been resolved. The pipelines have been fixed. And so those issues are behind us. Um, some of the supply chain issues that we face with some other third party vendors, I think those issues will be, will be nagging at us. Uh, but we're doing everything we can to build in more flexibility to our program. Um, I'd say all of these impacts together, um, largely are behind us. And I think we should be back on pace by mid 23 with that two TCF a day, uh, run rate production base.
spk08: Got it. Got it. Um, So you've highlighted 150 Bs prior to some of the optimization work where you clawed back 50. If the buy-side consensus has been around on a standalone basis, call it two TCFE of production next year, do you think that you can get to a range similar to that just given you are likely going to have some I don't know if they're ducks, but you may have some tailwind from some of those wells that are in progress. But just general thoughts on output next year as maybe some of those constraints get better.
spk12: Yeah, Arun, I think the answer there will be dependent on how much we can beat the baseline operational efficiencies that we have baked into our program. And then also looking for other optimization efforts within the system that's in front of us that would be additive to what our base plan is. So I think, I mean, the punchline is, you know, the team has shown the ability to claw back, and we're still fighting for every minute and every MCF. And, you know, I think there could be an opportunity for us to get there, but it'll be dependent on those actions.
spk08: All right, fair enough. Thanks, Toby. Thanks.
spk01: And our next question comes from the line of Umang Chowdhury of Goldman Sachs. Umang, your line is now open.
spk05: Hi, thank you. Good morning. I just wanted to follow up on the question from Arun. I understand that you are working through your budget and that you have fewer tills this year. Given that tills is probably going to have an impact to your first half 2023 production, I would love your preliminary thoughts on 2023 activities. Should we expect your activity levels to go back for the legacy asset to keep it flat to around 90 to 100 wells per year or would it be higher next year as you try to grow production sequentially exit to exit this next year?
spk02: Yeah, so yeah, I'd say the activity set should be fairly normal for a normal year. It's just the timing of when the wells will come online. So the bucket of wells that got pushed out in 22 have about a five month lag time of putting them online due to the water issues that we had. And so that's why we'll get back to sort of that 500 million plus run rate by mid year. But the activity set overall should be a call standard fairly normal per year.
spk05: Got it, that's really helpful. And then my second question was really on the on the LNG strategy. Any update and any update on the discussions which you're having with the LNG customers as it comes to diversifying your hub exposure to international markets?
spk12: Yeah, conversations are still progressing across the LNG value chain from LNG developers, marketers, and buyers. You know, I'd say the... desire for bringing more LNG to this world has continued to strengthen and we're having some pretty good conversations, but we'll come back when we have anything that materializes into something material.
spk01: Got it. Thank you. You're welcome. Thank you. Our next question is from the line of Neil Dingman of Truist. Neil, your line is now open if you would like to proceed.
spk04: Morning, Toby. If I could just circle back on the infrastructure. I was just trying to get a sense. Toby, you talked about maybe just the degree of the curtailment between the different issues. I know you mentioned the water has already been rectified. Just trying to find, I guess, number one, what other issues were involved. And then secondly, you know, with obviously the XCL midstream coming on, how much will that and some other things you all have done help to sort of the situation going forward?
spk12: Yeah, so outside of the water line issues that have been repaired, you know, getting access to some equipment, there's been some longer lead times. That's sort of the supply chain we talk about. You know, then with all of this, we've got backup plans, and our flexibility to execute on those backup plans has been challenged because of some weather, and we experienced some drought conditions that wouldn't allow us to get fracks at the operational efficiency that we needed. And so that's sort of the X factor that is driving sort of the weather impacts that we laid out on that chart.
spk04: Got it. Okay. And then just to follow up, could you talk, I'm looking at that slide, I forget which one it is, that shows what four rigs are running. You know, when you look now at the Northeast PA, Ohio Utica, Southwest PA, and West Virginia, Marcellus, Is there any one or two theories from a returns that stand out or are they just one of these days if you were to rank those, how do you think about the four or are they all sort of equally return basis these days in the ballpark?
spk12: Yeah, Neil, I'd say with the best returns coming from Southwest Pennsylvania, the work that we've done to reduce costs in West Virginia have made those more competitive from a returns perspective and then I'd also say over in the Utica, some of the science work that we've done, primarily, you know, widening spacing, you know, no surprises shown, you know, increased recoveries per foot makes those returns more attractive. So our ultimate goal is to sort of, you know, get to a place where we can improve the economics across all inventory. We're seeing that right now. And so I think as we drive our schedule forward, it's really going to be dependent on the surface factors, number of wells, lateral lengths, combo development. And so that's sort of what drives the schedule on the makeup up. I would say one of the things we do look at is we have a board that shows the returns across every single project. And, you know, we are driving to drill our best acreage and Our best wells first, and over 80% of our schedule is factoring on the projects that are in the top quartile of our inventory base.
spk04: Now, the improved ops is obvious from the previous owners. Thanks, Toby.
spk01: Thanks. Thank you. And our next question is from the line of David Deckelbaum. David, your line will be open now if you would like to proceed with your question.
spk09: Thank you. Good morning, everyone. Thanks for your time, Toby. Good morning. I know you've discussed a lot about this, but maybe if you could revisit just the original plan in 22 versus 23, and trying to get a sense of some of the moving parts. Obviously, the 30% fewer tills this year, but is there any capital benefit from any wells that would be in process that would benefit 2023?
spk12: Well, the benefit of moving wells back in 23, I mean, I guess to argue maybe you're trying some of the service cost environment. We do hope that service costs will abate a little bit. The fact would be one of the only benefits right now. We'd like to have these volumes today. The current price is back where we're pushing for that to be possible.
spk02: The other thing is, if you notice in slide 11, one of the abilities to pull things back was the optimism. So that was cycle time improvement that we were able to keep out. That cycle time improvement will carry forward with our welds. So we'll get some of that benefit, I guess, inefficiently.
spk09: And then I guess just to follow up on that, I guess as we think about 23, I suppose if you're thinking about like a balanced program between sort of core Western Pennsylvania versus West Virginia and Northeast PA, I guess should we see that kind of percentage of completions moving back to what we would have seen on sort of a geographic blend 21, 22, X, maybe the additions with Tug Hill, or I guess would that activity be kind of shifted away from northeast PA back into that western region?
spk04: Yeah, I think our mix that we do is good baseline to start with going forward.
spk12: I would say one of the other things that will help with Tug Hill coming on board is this will just increase our flexibility to be able to make up for
spk09: If I could just speak, in any way, the delay that you saw in 22, did that delay your program understanding around this enhanced completion design that you all had talked about earlier in the year?
spk12: Yeah, we were hoping to get better insight and clarity on Fast forward with our science, these delays and some of the chills has happened on some of our science projects. So, yeah, insight has probably been pushed back, I'd say, four to six months on the science as well.
spk11: Thanks for the update, guys.
spk01: Thank you. And our next question is from the line of Scott Hanold of RBC Capital Markets. Scott, your line is now open.
spk13: Yeah, thanks. Um, you know, I'm going to have a couple of questions and I think you might've answered part of it in, you know, that last set of answers, but it sounded like there was some choppiness in his line that was hard to hear. But just, just to clarify, it sounds like Tug Hill, you don't anticipate any of these, you know, midstream issues to impact, um, you know, Tug Hill, once you get that, uh, is, is, you know, part of, um, you know, as part of, uh, EQT and, uh, You know, also as part of that, can you give us a sense of how much of the, you know, relative well-outperformance, underlying well-outperformance, you know, benefited EQT over the last, say, quarter or so?
spk12: Sure. I think one thing that's very helpful with the telehealth assets is the fact that we will control and operate the midstream. That's going to give us much more operational control and the ability to mitigate any issues. As far as production uplift is concerned, that's been the majority of the productivity gains has been well-performance and also increasing, keeping, I'd say, peer-leading production uptime. Some of the other benefits that have come out of this in these efforts to enhance our ability to produce and meet schedule, there have been some best practices identified that will be incorporated and allow us to accelerate some volumes and shorten the cycle times on our base development plans going forward into the future. So there is a bright side of dealing with students.
spk13: Got it. And then my follow-up is on the shareholder return plan. Obviously, you guys had previously talked about doubling the buyback pace, and you've got a know pretty good authorization out there you know 1.6 billion dollars and i think that goes through 2023 um along with the debt reduction it is is the goal here to you know really kind of eat through that that authorization given your free cash flow profile you know over the next year so should we expect you you trying to uh utilize that uh as aggressively as possible and you know with the buybacks if you can clarify exactly how much was done in the third quarter too
spk12: Yeah, so, I mean, I think given where the stock's trading today and the fact that we can buy back our debt at pretty attractive levels, we're going to be aggressive towards, you know, fulfilling the authorizations that we have in front of us on both aspects of that. Connie, do you have the numbers specifically on 3Q?
spk02: I think the number was close to probably $75 million, I think. We've done $150 million since. But I think he's asking just for 3Q versus 4Q. So I think it's about roughly half was done in the third quarter, maybe a little bit more, and then a touch was done in the fourth quarter. And obviously we'll do more in the fourth quarter.
spk13: Appreciate that. Thank you.
spk01: Our next question is from the line of John Abbott of Bank of America. John, your line is now open.
spk03: Hey, good morning, and thank you for taking my questions. Toby, I want to go back to a question that Neil had asked a little bit earlier about XEL midstream optimization. And what I'm trying to understand is, yes, I understand this is going to allow you to optimize your program on the water side, but what is the ability on that extent? on your existing asset base, you do have dedication. So is it really on the Tug Hill assets? Are there other assets that you already have that you couldn't optimize on? How does that kind of work?
spk12: Yeah, on the water side, pretty tremendous opportunity. As you guys know, we've been building out our water network in West Virginia to connect that water network to the Tug Hill assets. It's a very short jump to put some water infrastructure in place to connect those two systems. This is going to allow us to manage produced water pretty much across the western half of West Virginia. The benefits on the completion side and surety on water delivery, the benefits on recycling, the benefits on just the logistics of handling produced water are very clear and a big part of the synergies that we're counting on. So outside of the water, on the gathering side of things, being able to connect the tug-heel system to some points we have in Ohio. That will streamline some of our gathering systems, and that will lead to some synergies as well. So the good thing with midstream, I think the synergies that you can identify are typically pretty low risk. And so it's nice to see that we've got a complementary asset base that we can translate into synergies.
spk03: Thank you. That's very, very helpful. And then for the second question, it's going to be on the new venture. I mean, you discussed hydrogen here and you are exploring other opportunities. What is the willingness to spend, what is your appetite to spend more on the new venture fund at this point in time?
spk12: Yeah, that's a great question. I think, you know, slide seven, we put a chart out there that I think really frames up how we think about this. You know, when we think about New Ventures, this is to help the energy transition that is taking place in the world. And the way that we look at energy transition is really in two parts. Number one, what can the United States do to continue to reduce emissions within its borders? But the most important question is, what can the United States do to reduce emissions outside of our borders? UnleashUSNG fits in the category of what the United States can do to lower emissions outside of our borders. That is the biggest green initiative on the planet. When we do that, we are going to be creating a surplus of natural gas in the United States. While slated for exports, it's going to create a number of opportunities where we can use natural gas to decarbonize the United States and ultimately move from gas to lower to zero carbon energy sources like hydrogen, like carbon capture. And so while those concepts right now i think are a little bit unsure on what the profitability of those look like we will invest modestly in in those um i'd say more zero carbon technologies this is going to allow us to achieve our higher purpose of you know lowering emissions in the united states but before we would put any dollars significant dollars there we need to understand the profitability of those so Really, the dollars that we're doing inside the U.S. borders are really driven by pilots to get an understanding of what the returns will look like, and then we can bring it back to our capital allocation framework and see if this is the best use of our dollars. But we're definitely going to be leading on framing up what the type of returns perspective look like, specifically around hydrogen and to have this coalition, this ARCH2 hub, is really going to position EQT to be very efficient with our time and dollars. Appreciate it, and thank you for taking our questions.
spk01: You got it. Our next question comes from the line of Noel Parks of 2E Brothers. Noel, your line is now open.
spk07: Hi, good morning. Morning. Morning. A couple things. I wondered, and probably you've touched on this already, with Tug Hill, now that you're a couple of months down the road since the announcement, could you just talk about sort of where they stood as far as their joint and completion procedures and also any insight you have on sort of what they had done themselves on sort of parent-child mitigation practices?
spk12: Yeah, I think the Tug Hill team has done a really good job with that asset base. So I think it's going to be, you know, really confident we're going to be able to at least replicate the success they've put out there. I also am optimistic and thinking that, you know, our drilling and completions teams will be able to showcase operational efficiency gains like what we've done in the ALTA assets. And that's simply a function of having access to the best technology, the best crews. That certainly is going to give us some tailwinds in doing that. What was the second part of that question, Bud?
spk07: Oh, just about parent-child communication.
spk12: Yeah, as far as the development approach with the Tug Hill team, and this is one of the things we look at when we're looking at acquisitions is – is this asset going to be suitable for large-scale common development and Tug Hill assets are because the Tug Hill team was intelligent and adopting full pad development. So there's not a lot of child wells that we have to move around. They fully developed their pads, which is a great development program that sets us up for common development.
spk07: Great. And just turning to the hydrogen project, I'm just wondering, do you have any thoughts at this point as far as what maybe the technology evaluation process might be as far as hydrogen generation? I'm mindful, of course, that you have the relationship you struck with Bloom Energy. And so, you know, their fuel cell technologies being just one example. So at this stage, do you have any thoughts on what direction you might go, whether you're going to be looking at casting a wide net of technologies to look at or you have a pretty good idea of what sort of paths you'd like to head down?
spk12: Yeah, I think the most exciting technology is technology that produces hydrogen and a solid form of carbon. And so we'll be testing some of that technology, but, you know, just standard technology that we know to make hydrogen today to compare that with carbon capture, we can generate hydrogen, you know, sub dollar 50 per kilogram. Right now we look at hydrogen, the issues are really two issues before getting, you know, big adoption of hydrogen. The first one is the cost for hydrogen. While we can make this stuff pretty cheaply, When you throw in the cost for transportation and the actual infrastructure it takes to move hydrogen, you're looking at around $20 per million BTU. Why would the world choose that energy when they can buy natural gas for a price that's significantly less than that? But what's really amazing is to think about when we unleash US LNG, we will be creating an opportunity to rebuild energy. you know, 50 BCF a day of new infrastructure in this country. And when we build that infrastructure, we can build it hydrogen ready. And that means Unleash US LNG can underwrite a significant portion that is necessary to achieve the hydrogen economy of the future in this country. And if we can do that, then the feasibility of hydrogen becomes that much more attainable. and something that is a really nice benefit of unleashing U.S. energy, lowering emissions around the world, is going to help us lower emissions within our borders. The second aspect of hydrogen that needs work is creating demand for this stuff. And so this is really the chicken and the egg. People haven't used hydrogen because people aren't making it, and people aren't making it because people aren't using it. This hub with having this group of hydrogen producers and hydrogen consumers working together is going to allow us to get past that chicken and the egg issue. And I think it's going to be a really great example of the collaboration necessary to make these exciting zero carbon solutions a reality.
spk02: More to come.
spk12: Great. Great. Thanks a lot.
spk11: You got it.
spk01: Our next question is from the line of Daniel Longo from Bank of America. Daniel, the line is now open.
spk06: Hey, guys. Thanks for taking my question. I just want to make sure that I have the debt reduction well understood. So you guys have done $830 million to date. Next year, between the term loan, the convertibles, and the three no-call one, that gets you up to about $3 billion of debt reduction. Is the plan for the other billion to just come from... buybacks in the secondary market or tender offer, or is there some, uh, debt repayment that I'm missing in that calculation?
spk02: Yeah. So, so no, between the term loans and the coal notes that that's about a little over 2 billion. Um, um, uh, and, and we'll just figure out how we get the remaining piece, whether it's open market tender, whatever. Well, we'll get to our targets. Um, as you, as you know, um, uh, There's not a lot of friction in this environment as the Fed is raising rates, and our principal values keep coming down as a result of it. So we'll be able to achieve our targets, I think, fairly efficiently.
spk06: Yep. And in terms of if natural gas prices, say we have a warm winter and they're a lot lower than what STRIP is, would you dial back on the share buybacks to protect the debt repayment or would it be a mix of the two and you just wouldn't get to a $4 billion reduction by the end of 23? How are you thinking of which is more important for cashflow? Which is the first use for cashflow?
spk02: Yeah. Yeah. I would say, you know, you know, we have, you know, cushion here because e-train because of principal values have come down and our debt. So I just say, you know, we'll, if, if, you know, If for some reason we have to make that choice, that's going to be more of a game-time decision. Gotcha. That's right.
spk12: Thank you very much. We'll take a balanced approach to that and look at the value of our stock and look at the debt and where it's trading and make the best decision. Yeah.
spk02: I mean, the other thing to also think about is we have so much free cash flow, even beyond 23, that we have to think about how we use that as well.
spk06: Oh, yeah, it's not a question of you getting there. It's just if you get there by year end 23. But gotcha. Sounds good. Thank you.
spk01: Thanks. As a reminder, to ask a question, please dial star followed by one on your telephone keypad now. And our next question is from the line of Kevin McCurdy of Pickering Partners. Kevin, your line is now open.
spk14: Hey, good morning, guys. I think all the questions on the delayed turning lines have been answered. So shifting gears a little bit. We noticed in the financials there was a more positive impact from Laurel Midstream than we anticipated. Can you talk about the financial impact of that heading forward and maybe any strategic plans for that asset?
spk02: Yeah, so as you know, we own 35% of that system. And what happens is we get a rebate effectively from the, that doesn't hit our unit costs. It comes in as other basically. And that's just the function of as prices go up, our unit costs go up in that system. But then we get a rebate in this other area. And so that's how it works. So effectively, the unit costs are really netted down. Right now, we don't have any plans to sell it. I mean, every once in a while, we get approached by outside buyers. Right now, as you can imagine, we've made two acquisitions subsequent to Chevron, and they both had midstream. And so just know that midstream helps us control operations and lower our costs. And so the desire to sell midstream is probably low on our list.
spk14: Great. And so the impact of Laurel Midstream, I think it was around $25 million this quarter. Is that a good run rate heading forward, or was that driven just by the higher commodity prices that we saw in 3Q?
spk02: By the higher commodity prices. So our unit costs go up tied to M2, and then we get the 35% rebate effectively through our ownership. So you've got to look at M2. That'll be determined. Okay. Thank you for my question.
spk01: You're welcome. Thank you. Our next question comes from the line of Paul Diamond of City. Paul, your line is now open.
spk11: Good morning, Alan. Thank you for taking my call. Just a quick one. Wanted to circle back on the budgeting process for 2023. I know you guys noted that you expect to be on kind of the lower end, the broader industry range. But that broader industry range has been a bit of a moving target. Can you give a bit of clarity on kind of where you guys see that going into that budgeting process and into next year?
spk02: Yeah, I think the industry range is between 10 and 20 percent inflation. So we should probably be at the lower end. And it is a moving target a little bit because obviously. We don't have everything 100% locked up, and so we do have spot exposure to some commodities and things. But if you look at steel, pricing has come down. You look at some of the commodities that have come down. I think inflation in some of the equipment looks like it's slowing down. So I think we feel good about what we have contracted and kind of what the outlook for the open stuff is. It should put us in a position. as you know we invested in our sand infrastructure that reduced the the last mile to last mile delivery you see we invested in the water system which you can see how critical that is um and when we hook that into the tug system so we can we'll continue to uh reduce um the inflationary impacts and obviously we'll see what the new well design looks like for we'll call the second half of 23 into into 24.
spk11: Understood. Thanks. And actually just drilling down a bit deeper on that, is there any particular area you guys have seen through the budgeting process and your conversations thus far that, you know, what's the area you're least comfortable with? Any area that's given you particular concerns or anything you've noted?
spk12: Yeah, I'd say a big focus for us has been the areas that we've seen the most dramatic increase in cost to date, which has been on the steel side of things.
spk11: So we're continuing to focus on that. Understood. Thanks for your time. Thanks.
spk01: And we have no further questions. It would be my pleasure to hand back to Toby Rice for any closing remarks.
spk12: Thanks, everybody, for joining us on this quarterly call. You know, the world is certainly more volatile, but one thing that is consistent is our asset performance continues to show improvements. Our cost structure continues to decline. We have a free cash flow profile that's going to allow us to essentially retire our market cap and achieve our long-term leveraged targets in the near term. And we've got a good track record doing some really smart deals on the consolidation front that's driven accretion and value creation for shareholders. And with our Unleash US LNG campaign and the strengthening desire for cheap, reliable, clean energy that is going to be American-made natural gas, That is going to present a pretty exciting and compelling opportunity for sustainable growth for our shareholders, and we're really excited about the future, and we'll talk to you guys next quarter. Thank you.
spk01: This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Disclaimer