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spk01: Good morning or good afternoon all and welcome to the EQT Q1 results conference call. My name is Adam and I'll be your operator for today. If you'd like to ask a question at the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor over to Cameron Horwitz, Managing Director of IR and Strategy. Cameron, ready when you are.
spk03: Good morning and thank you for joining our first quarter 2023 results 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 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 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 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. While the current natural gas macro environment has created some headwinds for U.S. natural gas producers at large, the price pullback is reinforcing EQT's competence in our corporate strategy and illuminating several facets of differentiation relative to our peers. A key pillar of distinction has been EQT's M&A strategy, where we have taken a disciplined approach to acquisitions specifically focused on assets that lower our cost structure. The current gas price environment underscores the benefits of this strategy, with enhanced free cash flow durability through the bottom parts of the commodity cycle, allowing for accretive capital allocation decisions, resiliency in corporate returns, and greater consistency and operational cadence. Our pending Tug Hill acquisition further builds on this M&A strategy, as it is expected to drive an additional 15-cent decline in our corporate free cash flow break-even price, providing even greater resiliency to our business moving forward. Another area where EQT is differentiating itself is through our evolved hedging strategy. While we no longer have financial needs requiring hedging given material improvements in our balance sheet, we have evolved into opportunistic hedgers predominantly using wide callers to de-risk free cash flow at the bottom part of the cycle while maintaining material upside exposure to natural gas prices. This strategy is paying off in real time as EQT is among the best hedge books of any natural gas peer in 2023. with 62% of our production covered via floors with an average strike price of $3.38 per MMBTU. In conjunction with our M&A and cost reduction efforts, our hedge book is a key factor driving our full year 2023 corporate NYMEX free cash flow breakeven down to less than $1.65 per MMBTU. A third pillar of EQT strategy driving distinction among peers is our opportunistic capital returns approach. When we rolled out our return framework in late 2021, we did so under the premise that we would look to maximize returns to shareholders via our capital allocation decisions, which requires a tactical and thoughtful approach to both debt repayment and equity repurchases. With more than a year under our belt of returning capital to shareholders, we believe our underlying approach and execution is generating superior results which is exemplified by the fact that we have achieved the best return on our equity buybacks among our peer group and retired a material amount of debt at discounts to par as interest rates have risen. A fourth element of differentiation comes on the environmental front, as EQT has taken material steps forward in achieving our peer leading goal of net zero scope one and two greenhouse gas emissions from production operations by 2025. We highlighted the material benefits of completing our pneumatic device replacement initiative a year ahead of schedule with our fourth quarter results. And we are building upon this momentum with recent announcements of strategic partnerships directed at advancing the development of low carbon intensity natural gas products and generating verifiable carbon offsets. In short, we believe the key tenants of our corporate operating philosophy are laying the foundation for differentiated and sustainable long-term value creation for EQT, and you can expect continued execution upon our proven strategy going forward. Now turning to first quarter results, 2023 got off to a very strong start across the board at EQT. As shown on slide seven of our investor presentation, we replicated the solid efficiency gains we achieved late last year in the first quarter with frac crew pumping hours up 35% year over year as the third party infrastructure constraints that slowed our operational pace in 2022 moved firmly into the rear view. These efficiency gains facilitated our first quarter production coming in 2% above the midpoint of guidance, while our capex came in 7% below the midpoint of our expectations. Our advantage firm transportation portfolio allowed us to achieve an average differential of 16 cents above NYMEX. While operating expenses came in 2% below the midpoint of our guidance on lower than expected LOE, production taxes, and GNA. Combined, these factors drove free cash flow of $774 million during the first quarter, which is EQT's highest quarterly free cash flow and significantly de-risks our free cash flow generation for the year. I want to personally thank all members of our crew for their hard work in facilitating this execution as we have made significant strides toward our goal of achieving peak performance this year. On the capital returns front, We repurchased nearly 6 million shares or $200 million of stock during the first quarter at an average price of less than $34 per share. We also retired $210 million of debt principal during the quarter at an average cost of 96% of par. Even with these significant returns to shareholders, we exited the quarter with greater than $2.1 billion of cash on hand, up from $1.5 billion at year-end 2022. Our net debt at the end of the first quarter was approximately $3.3 billion, compared with the $4.2 billion at the end of 2022. Our net debt to trailing EBITDA currently stands at 0.9 times, underscoring the tremendous balance sheet progress we have achieved over the past several years. In terms of full-year guidance, we are reiterating our $1.7 to $1.9 billion capital budget, which excludes our pending Tug Hill acquisitions. As a reminder, our 2023 budget includes $100 plus million of non-recurring capital associated with third-party constraints that shifted roughly 30 tills into 2023 and assumes 10% to 15% of year-over-year oilfield service cost inflation. As it relates to the latter, we are seeing a notable trend of flattening out in oilfield service costs as industry activity moderates, and we believe the stage is set for some degree of softening in the second half of the year. which if manifested, would provide upside to our current outlook. Our 2023 production guidance is unchanged at 1900 to 2000 BCFE, and we are operationally on track to get back to 500 BCFE per quarter of run rate production by the middle of this year. That said, as we mentioned last quarter, the lower end of our guidance range contemplates scenarios where we slow our production cadence for the year should natural gas prices continue to deteriorate. and we have the flexibility to make game time decisions on our cadence as the year progresses. On slide 32 of our investor presentation, we've provided an updated range of 2023 adjusted EBITDA, operated cash flow, and free cash flow outlooks at various natural gas prices for the remainder of the year. At recent strip pricing and factoring in first quarter actuals, we forecast 2023 adjusted EBITDA of approximately $2.9 billion and free cash flow of roughly $1 billion this year, implying a 9% free cash flow yield at the bottom part of the commodity cycle. As shown on slide five of our presentation, our free cash flow generation has significant durability and duration, with our internal forecast projecting cumulative free cash flow from 2023 to 2027 of greater than $12 billion at strip pricing and excluding the benefit of Tug Hill. This equates to more than 105% of our current market capitalization and greater than 80% of enterprise value, underscoring the significant value proposition embedded in EQT shares, even after the recent decline in strip pricing. Our free cash flow outlook gives us tremendous confidence in being able to achieve our absolute debt target of $3.5 billion pro forma for the Tughill acquisition, while also being able to continue to opportunistically retiring our stock via our $2 billion share repurchase authorization. Turning to our environmental initiatives, we announced multiple key projects over the past few weeks. First, we entered into a strategic partnership with Context Labs to advance the development of verified low carbon intensity natural gas products and carbon offsets. Through tracking, reporting, and verification of critical emissions data, this strategic partnership will support us in achieving our industry-leading emissions reduction targets. With a focus on emissions quantification, operational analysis, and the certification of natural gas production, we plan to work with Context Labs to scale emissions mitigation across the full energy value chain. Context Labs will provide an enterprise-wide deployment across EQT's asset footprint with the goal of achieving full digital integration of our carbon intensity data. The resulting creation of certified low carbon intensity products will add another dimension to EQT's already robust and digitally enabled organization. We view the emissions profile of our natural gas as a strategic asset for our shareholders, and this partnership will further aid in illuminating the relative value of our product and ensure EQT's molecules remain among the most coveted in the world. Additionally, we announced EQT's first nature-based carbon offset initiative earlier this month. We partnered with the Wheeling Park Commission, a public park in West Virginia, Terralytic, a soil analytics company, and Climate Smart Environmental Consulting to implement forest management projects with the goal of generating carbon offsets in our own backyard. These projects will span more than a thousand acres of forest land and we will utilize TerraLytics soil probe technology to ensure the quantification of offsets is accurate and transparent. EQT has been an industry leader in reducing operational emissions, and our natural gas already has some of the lowest greenhouse gas intensity in the world. Nature-based projects like this, which are supported by cutting-edge technology that ensures accuracy and transparency, will offset our remaining emissions and be a key enabling factor for EQT to become the first energy company in the world of meaningful scale to achieve verifiable net zero scope one and two greenhouse gas emissions. As it relates to the pending Tughill acquisition, we have been constructively working with the FTC and believe we are on track to close the acquisition around mid-year. Due to the relative value structure of the deal with a meaningful equity component, and the interim free cash flow since the deal's effective date of July 1st, 2022, we expect the price paid at closing to be roughly $2.3 billion of cash and approximately 48 million shares, which at a $33 per share price equates to a closing value of roughly $3.9 billion. We note this deal structure contrasts with other recent transactions in the industry which were cash heavy and thus more levered to commodity prices. This consideration mix along with Tug Hill's cost structure have served as a hedge for EQT as gas prices have fallen as evidenced by the deal accretion more than doubling since announcement, all while leverage has stayed in check. In summary, our strong first quarter results underscored that the third party infrastructure challenges we faced last year are in the rear view and EQT is back to peak performance. We generated our highest quarterly free cash flow repurchased a material amount of equity and debt, and exited the quarter with an improved leverage position and over $2.1 billion of cash on hand. While the current natural gas macro environment does present challenges, it also illuminates the relative advantages of EQT's corporate strategy underpinned by large-scale combo development, a disciplined M&A focus on low-cost assets, a risk-adjusted hedging strategy, and opportunistic capital returns. This unique corporate profile has laid the foundation for significant value creation through all parts of the commodity cycle, and we look forward to building on our successful track record of execution on behalf of all of our stakeholders.
spk08: I'll now turn the call over to Dave. Thanks, Toby, and good morning, everyone. I'll briefly summarize our first quarter results before discussing our balance sheet, the macro landscape, hedging, 2023 guidance, and use of our free cash flow. Sales volumes for the first quarter were 459 BCFE, or 2% above the midpoint of our guidance range. Our per-unit adjusted operating revenues were $4.11 per MCFE, and our total per-unit operating costs were $1.34, resulting in an operating margin of $2.70 per MCFE. Capital expenditures excluding non-controlling interest were $464 million, or 7% below the midpoint of our guidance range, as operational efficiencies exceeded expectations. Adjusted operating cash flow and free cash flow were $1.24 billion and $774 million, respectively. We also had a $426 million working capital tailwind during the quarter, largely driven by declining accounts receivable from decreasing prices, with a further tailwind expected in Q2 and Q3. Our capital efficiency for the quarter came in at $1.01 per MCFE, which was approximately 10% better than what was implied by the midpoint of our guidance ranges, driven by outperformance on both production and capital spending. Note that as we complete the excess TILs that were shifted from last year, our second half capital efficiency should improve by double digits relative to the first half. Turning to the balance sheet, a strong credit profile and ample liquidity remain a core tenant underpinning our operating philosophy and will provide a differentiated value opportunities for equity moving forward. Our balance sheet position continued improving with trailing 12 month net leverage exiting the quarter at 0.9 times down from 1.2 times last quarter and 1.9 times a year ago. We exited the first quarter with 3.3 billion of net debt and 2.1 billion of cash on hand inclusive of the $1 billion in proceeds from our notes offering. This week, we extended our $1.25 billion term loan to the end of 2023, which aligns with the timing of the amended purchase agreement and provides timing flexibility. The bank term loan, along with our cash balance, gives us the flexibility and confidence to fund the cash portion of the Tug Hill deal independent of any bond proceeds that we raised last fall. As Toby mentioned, we continue to actively progress our debt retirement initiatives. We retired $210 million of senior notes principal in the first quarter, primarily via open market purchases at an average price of 96% of par. Since unveiling our capital returns framework, we have retired more than $1.1 billion of debt principal, which has eliminated nearly $40 million of annual interest expense. Our commitment to a bulletproof balance sheet is being recognized by the credit rating agencies. S&P and Fitch reaffirmed our investment grade credit ratings over the past several weeks with stable outlooks at both agencies, even as natural gas prices have temporarily receded. As we further execute our objective of achieving $3.5 billion of gross debt pro forma for the pending Tug Hill acquisition, we believe additional credit rating upgrades are possible. I'd like to also briefly highlight slide 10 of our investor presentation. which shows our track record of materially growing our asset base while lowering our net debt. At year end 19, our net debt was 5.3 billion, approved reserves were 17.5 TCFE, and our production, net production was 4.1 BCFE per day. Fast forward to 2022, we increased approved reserves to 25 TCFE and our production to 5.3 BCFE per day through the Chevron and Alt acquisitions and organic reserve growth, all while decreasing our net debt to $3.3 billion through the end of the first quarter. Said another way, we have grown our asset base by 30 to 40 percent while simultaneously lowering our net debt by a comparable percentage over three years, and our plan for additional debt reduction post-closing the Tug Hill acquisition should more acutely highlight this track record. Turning to a few brief thoughts on the gas macro landscape. The combination of warm winter weather and the Freeport outage left roughly 400 BCF of excess natural gas in storage this winter. The market is in process of rationing this excess gas with the balancing items likely to be split between low production and increased gas fired power demand. On the former, declines in gas-directed activity has accelerated as of late, with pricing falling well below many producer break-evens across the U.S., And we believe additional gas-directed activity declines in the coming months to moderate the pace of storage injections by roughly 200 BCF. As it relates to power generation, over 7,000 megawatts of US coal generation is set to be retired in 2023, and we are seeing gas take further share from coal in the power stack to the tune of roughly 2 BCF per day this year. With the average cost of coal rising materially in 2022, The coal to natural gas switching floor has increased by 50% or more, and we believe this is a structural shift given the massive underinvestment in coal capacity. There are several avenues of upside potential that could drive additional market tightening above our current base case expectation, including higher sustained LNG exports, greater industrial demand, and reduced imports from Canada given a tight Canadian storage market. expect continued volatility in natural gas prices as gas and coal activity moderates and storage overall is an inadequate buffer relative to peak demand moving to hedging our 2023 hedge book underscores our evolved hedging hedging philosophy that seeks to provide investors with the best risk adjusted exposure to natural gas prices we have 62 percent of our 2023 production covered with floors at an average weighted price of $3.38 per MMB2, which provides significant cash flow protection in downside pricing scenarios while maintaining upside exposure. We also have 10% of our 24 volumes hedged at a weighted average floor price of $4.20 per MMB2 and a weighted average ceiling of $5.40 per MMB2. Given our expectation of improving natural gas macro fundamentals as the year progresses, we will opportunistically look to add to our 2024 hedge position at the appropriate time. As it relates to basis, we are seeing a material benefit from our expanded firm transportation portfolio, which was reflected in our first quarter differential coming in at a 16 cent premium to NYMEX as we captured favorable pricing spreads during the quarter. We continue to expect additional opportunities to expand our FT position as other Appalachian operators release existing firm transportation capacity. As it relates to MVP, slide 8 of our investor presentation illustrates the project's impact on EQT's cumulative free cash flow. While the benefit of MVP is interrelated with the spread between NYMEX and local Appalachian prices, the current future strip suggests Mbp has an immaterial impact on our cumulative free cash flow as higher price realizations are largely offset by higher transportation expense. That said, we continue to be staunch supporters of MVP as a project is necessary to ensure energy security for the southeastern region of the United States, while achieving its carbon reduction goals via the phase out of coal fired generation. We were encouraged to see Energy Secretary Granholm's show of support for MVP and broader energy infrastructure this week, with notable comments on how these projects will deliver dependable energy to Americans while supporting the reliability of the electric grid. For reference, our model assumes MVP starts up in the second half of 2024, and we will adjust assumptions if needed. Importantly, gathering rates contractually begin declining in 2025, independent of MVP success, providing a further tailwind to free cash flow as margins widen by 15 cents from current levels, adding approximately $300 million of annual pre-tax free cash flow by 2028. Turning to guidance, we are reading our 2023 production outlook of 1.9 to 2 TCFE. This range provides significant flexibility to respond to evolving macro conditions with a low end of production guidance of potential outcome of moderating activity should natural gas prices continue to decline. We are currently running two operating horizontal rigs and thus not contemplating reducing rig activity, but we have flexibility around our completion cadence as well as our choke management program. We are also reiterating our 2023 capital budget of 1.7 to 1.9 billion, excluding the pending Tug Hill acquisition, which embeds 10 to 15% year over year oil field service inflation. As it relates to leading edge inflation trends, we are experiencing a flattening out of steel costs and starting to see long haul logistics prices softening. We believe this is a signaling of some degree of price relief on local logistics such as sand and water hauling and could enable further completion efficiencies. While still too early to predict with precision, we believe this backdrop could set up for some degree of net price relief for EQT by the fall and upside potential to our free cash flow outlook later in 2023 and into 2024. As a reminder, 100-plus million of our budget is associated with turning in line wells that slip from 2022 into 2023 due to third-party constraints and thus is not anticipated to carry forward into future periods. This dynamic, along with the shallowing of our base PDP decline, is anticipated to drive 5% to 10% improvement in our capital efficiency in 2024 and beyond, independent of any oil field service cost relief. Our per unit operating expense range is 2% per MCFE lower at the midpoint, driven by lower production taxes and G&A. We're also lowering the range of our average differential forecast for the year to negative 35 cents to negative 60 cents per MCFE, driven by narrowing local basis and the benefits from our firm transportation portfolio. On slide 32 of our investor deck, we provide adjusted EBITDA operating cash flow, and free cash flow outlooks at various natural gas prices for the remainder of 2023. At recent strip pricing, 2023 adjusted EBITDA is expected to be approximately $2.9 billion, and 2023 free cash flow is anticipated to be roughly $1 billion, implying a free cash flow yield of 9% at the bottom part of the cycle. As it relates to cash taxes, we continue to expect our remaining federal NOLs to offset the bulk of our 2023 taxes. Our 2024 cash tax rate would be approximately 5 to 7% of operating income or $120 to $170 million at current strip pricing, increasing to the low 20% range in 2025 and beyond, which is fully captured in our cumulative free cash flow outlook. Turning to capital allocation. We repurchased almost 6 million shares during the first quarter and have retired a total of more than 20 million shares under a buyback authorization at an average price of roughly $30 per share. Our buyback strategy is opportunistic in nature as we seek to maximize the return generated for investors, and we are pleased with our execution to date as we have generated the best buyback return among the gas peer group. We've also retired $210 million of debt principal during the quarter, an average price of 96% of par, taking our total debt principal retired to $1.1 billion since initiating our capital return framework. This focus on debt retirement has driven our net leverage down a full turn over the past year, highlighting our commitment to a bulletproof balance sheet. Looking ahead, our cash position affords us tremendous flexibility as it relates to financing the cash portion of the pending Tung Hill acquisition. As we work constructively with the FTC and approach deal closing, we plan to maintain cash on hand to effectively pre-fund a portion of our expected debt pay down post-deal close. We will also look for opportunities to buy back additional stock post-deal close, especially in light of the value accretion and the cost structure improvements that Tug Hill and XEL assets will bring to EQT. As Toby mentioned, we see greater than $12 billion of cumulative free cash flow from 2023 through 2027 at today's lower strip, even before factoring the benefits of the pending Tug Hill acquisition, leaving us with plenty of firepower to fully achieve and exceed our debt retirement goal and our equity buyback authorization.
spk12: now turn the call back over to toby for some concluding remarks thanks dave to conclude today's prepared remarks i want to reiterate a few key points one first quarter results were robust across the board at eqt underscored by strong operational efficiencies lower than expected capital spending and higher price realizations from our advantage firm transportation portfolio two the solid performance facilitated 774 million dollars of free cash flow, underscoring our cash generation potential even in a lower natural gas price environment. Three, we built upon our track record of thoughtful opportunistic capital returns during the quarter with nearly $550 million of returns via share repurchases, debt retirement, and our base dividend. Four, our commitment to a bulletproof balance sheet is evident as net debt declined by roughly $900 million during the quarter and we exited Q1 with over $2.1 billion of cash on hand. And finally, the current natural gas macro environment is giving us even greater confidence in our differentiated corporate strategy underpinned by efficient, large-scale common development, a disciplined M&A focus on low-cost assets, a risk-adjusted hedging strategy, and opportunistic capital returns. I'd now like to open the call to questions.
spk01: reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask a question, please ensure your headset is fully plugged in and unmuted locally. That's star followed by one to ask a question today. And our first question comes from Aaron from JP Morgan. Aaron, your line is open. Please go ahead.
spk07: Yeah, good morning. My first question regards the differential guide. You guys reduced your full-year differential guide relative to the fourth Q press release by about 15 cents per MCFE, which obviously is nearly a $300 million tailwind to cash flow. So I was wondering if you could talk about what actions you've taken to support the lower or the narrower differentials, we did see that you have a little bit more takeaway to the Midwest and Gulf Coast. And maybe help us think about how much of that lower differential is related to the FT versus maybe some basis hedges that you've set up. And what is the potential impact beyond this year as we think about longer-term differentials for EQT?
spk08: Yeah, so it's a great, great question, Arun. So, you know, we've added about 500 BCF, I'm sorry, 500 million a day of FT capacity over the last 18 months, mostly to the Midwest and some to the Gulf Coast. These are definitely higher value regions that give us exposure to improve the realization. So, and we continue to expect to add more this year and make that better. So that was definitely a piece of it. The other piece of it was our hedging strategy and how we hedge certain areas and leave certain areas open. M3 was a very strong region for us this quarter. As the nuclear facility in New York went offline, we're seeing higher and higher values up in that M3 area as winter shows up. So winter is a very positive M3 area. And then, like, the third piece is as natural gas NYMEX prices come down, our local basis narrows as, you know, the correlation is about 80% to 85%. So NYMEX goes up, our basis widens, NYMEX comes down, our basis narrows. So those are the three impacts of which I'd say the first two are probably long-lasting and will improve, keep doing it. And the last one is going to be obviously subject to what NYMEX prices do.
spk07: Great. And my follow-up is for Toby. Toby, it's been just a little bit over a year. I think you announced your Unleash LNG initiative at Sarah Week last year. But I was wondering if you could maybe talk about some of the wins you think you've had, maybe some of the things that haven't developed as quickly as you'd like. I mean, we do note that we do have now 10 BCF a day or so of projects which have been FID'd, so there is going to be a lot more demand for, you know, feed gas for LNG. But I wonder if you could give us a sense, you know, after a year, some of your thoughts on just the overall initiative.
spk12: Yeah, Arun, let's look at where people's heads are at around the world when they're thinking about energy. I think there's a couple classes where people's heads are at. You know, we've got some people that still have their heads in the sand, thinking that just focusing on the United States and fixing emissions here is going to somehow solve the global emissions issue that they're concerned about. They need to pick their head up. We've got other people that have their heads in the clouds and thinking that some of these solutions that are being proposed defy physics and are only addressing one part of the energy ecosystem. And they may be a little bit too optimistic. What we need is people to have a level head talking about deploying proven, scalable, truly sustainable solutions like Unleash USLNG that will have the biggest impact on lowering global emissions, that will have the biggest impact on providing more energy security to the world. Now, I'm excited about where the world has moved. We've moved away from a world that is a sum of the above approach towards energy, you know, only solar, only wind. We've seen that strategy play out in Europe and the world has taken notice that that may not be the best solution and it may not be capable solution. So the world has moved back towards a more realistic, a more practical approach in all of the above approach towards energy. That's where Unleash US LNG sits. But if we want to meet the environmental ambitions and the timeline needed to get there, if we want to accelerate pulling the 3 billion people around the world that live in energy poverty, if we want to protect the 60% of Americans who live paycheck to paycheck, we need to move from an all of the above approach to energy to a best of the above approach towards energy. And while the world certainly, I think, isn't capable right now on determining what is the best source of energy, One of the things that we're excited about over the last year is we've been successful in defining the criteria at which energy will be graded upon. And those criteria are cheap, reliable, and clean. And one of the, that seems to be universally accepted as the three main criteria. And we're seeing actions with the administration, Secretary Granholm supporting pipelines, supporting MVP, And in the closing paragraph of her letter says that energy needs to be affordable, reliable and clean. So we are very excited about the progress we've made. There's still a lot of work left to do. I think permit reform is inevitable. Our energy ecosystem is maxed out. Pipelines are full. Refineries are running at maximum capacity. And without that extra flexibility, we are at risk of a major event to throw us back into another energy crisis. That event can be weather. We see utilities in New England writing letters to the president saying that they're concerned if they experience a cold winter, how they will deal with that. It could be a cyber event. We saw what happened with Colonial Pipeline. It could be another geopolitical event. It's not, in my opinion, it's not if one of these events happens, it's when. And we need to build up our industrial energy capacity so that we can deal with these events when they take place. And that's one of the reasons why we believe permanent reform is inevitable. I think people understand where we're at and what we need to do, and we're excited about helping lead the conversation going forward.
spk07: Thanks, Toby. Thanks, Arun.
spk01: The next question comes from Iman Chowdhury from Goldman Sachs. Iman, your line is open. Please go ahead.
spk11: Hi, good morning, and thank you for taking my questions. My first question was on the outlook. I mean, I appreciate your thoughts around the natural gas macro outlook. I was wondering if you can give any color in terms of what levels would it look to adjust your completion activity and any color you can provide on your choke management plans?
spk12: So we'll continue to measure The current commodity price, I think the default plan for EQT is to continue a steady pace operationally, even given what we see in the commodity outlook. We have the luxury of keeping a steadier plan because of the fact that we are the low-cost operator. And so we'll be able to capture some of the efficiencies that come along with that steady activity plan. As far as production is concerned, you know, if we see local prices get below the cost it takes for us to produce, then you're going to see us curtail volumes. So, you know, that will be a game-time decision, and we'll watch how the setup continues to evolve and operate our business accordingly.
spk08: Yeah, and I just add, you know, due to the water line issue last year, you know, our production is not, you know, is below maintenance level normally by, we'll call it two to three percent already. So, We've actually contributed, I would say, our share of a little bit of the reduction in gas to help balance the market as well.
spk11: Gotcha. That makes sense. And then I guess more of a longer-term question. As you highlighted in slide 29, we are probably going to be in a volatile gas price environment going forward, given we have not built up our gas storage capacity here in the U.S., even as demand has grown. Would love to revisit your thoughts around
spk08: around the optimal long-term leverage and also on your hedging levels acknowledging that you know obviously a free cash flow break even is low and it's probably going to even reduce going forward yeah it's a great question because you're right with with lack of coal-fired generation as baseload with some nuclear coming offline and then you know replacing it with gas and and renewables you're going to have more and more volatility going forward. And so as a producer, how do you handle that? One, you have to have a very, very strong balance sheet. So having investment grade, having one-time leverage, maybe over time we'll build up cash as well. So our net leverage might even be low that one times. The second is you have to have the low-cost structure, right? So if you notice, we've taken our cost structure down from what we'll call 285 to 290 to down into the 220s over time. So very important to be a low-cost producer in a commodity business. And then third is we're using our hedging strategy with collars. If we do something on the LNG front, we'll do stuff with collars. So we'll try to manage that volatility. And so I think that's the three ways we'll do it. And I'd say the fourth way is probably also to have Very low to no emissions because that means the end market demand will stay very strong for your product on a relative basis. That's very helpful. Thank you. You're welcome.
spk01: The next question comes from John Abbott from Bank of America. John, your line is open. Please go ahead.
spk00: Hey, good morning, and thank you for taking our questions. Apologies for the sirens in the background here. It sounds like something's going on. Our first question is related again to the Tug Hill and XL Midstream acquisition. It looks like you're still suggesting those are going to close around mid-year. You know, it sounds at that time we'll have potentially some sort of update to guidance. Just sort of thinking about that, could you remind us what is included in the 80-plus million of synergies that you had initially suggested? And at this point in time, where do you see potential upside? versus that?
spk12: Sure. So the $80 million in synergies that we identified primarily came from some midstream synergies connecting our buildings and pipelines that would connect our asset base from Ohio, West Virginia, and Pennsylvania. Another synergy that's fairly large is connecting our water systems. So there'll be a synergy there. I'd say all these things, when we look at the synergies, we try to be really practical in outlining what those are. Those would be additive to the accretion numbers that we put out. And given the fact that these are largely infrastructure related, they're typically lower risk in nature. Some of the upsides that we look at, we have a track record of improving operations on the assets that we ultimately inherit. Our drilling team is a really great example. Look at the drilling performance that we, the uplift we've seen in performance on the alt acquisition. We do think there is an opportunity for us to repeat that. We've got a very strong drilling team. So those will be some of the upsides to that. And when we look at the $80 million of synergies, you know, how does that compare to the 15 cents that the Tug Hill transaction will impact by lowering our free cash flow break evens? These $80 million would be an additional $0.04 on top of that $0.15. Just shows you the impact of adding this asset under our belt. It would be very impactful in lowering our costs.
spk00: So just to be clear, does combo development factor into those synergies?
spk12: Combo development does factor into the synergies. The dual development also will take place. I'd say the only other logistical impact that will present itself is the frack activity that's taking place on the Tug Hill assets will become another location for our water team to use for recycling. And water recycling is a big needle mover on efficiency gains. Our water recycling rates have gone from 80% to over 90%. And we're going to continue to focus on increasing our water recycle rates and the Tug Hill assets will give us a little bit more flexibility on how to achieve that.
spk00: Appreciate it. And then I want to go back to Arun's earlier question on differentials. So, Dave, it sounds, as you said, you've added about $500 million of FT over the last 18 months. How do you describe... the opportunity set sort of going forward to improve on realizations going forward at this point? I mean, what is, how do you think about available FT coming up? What is the opportunity set there for you to improve on realizations at this point?
spk08: Yeah, so I would just say there are, you know, there are other producers in the basin that are letting FT go. And so as that comes available, we'll pick it off. I don't want to get too specific because obviously we want to execute on first and then we'll we'll talk about it but there i just say there's there are pieces out there over time that we will pick up and and um and continue to grow uh that number and and i just say you know as as producers have less and less inventory in the basin those opportunities just grow all right thank you very much for taking our questions you're welcome
spk01: The next question comes from David Deckelbaum from Cowan. David, your line is open. Please go ahead.
spk05: Thanks, Toby and David and team. Thanks for taking my questions today. You're welcome. Perhaps I just want to go back on a couple points that you had already made, but if you could provide any color of what your expectation is in terms of crews and rigs perhaps leaving Appalachia, if you give us a sense of magnitude and timing when we might expect to see some incremental softening around the service side as you think about getting into the back half of 23 here?
spk12: Sure. Just to level set what we've seen, we've seen a 10% reduction in rigs that were focused on gas. It's about 17 rigs have come off. We expect that trend to continue down. And we're also looking at some of the commentary. The big focus really needs to be on the completion activity. And, you know, from the earnings with Halliburton next year, Liberty, they are signaling that they're seeing a mobilization of frack crews moving away from gas towards oil. So that will be something else that we're looking at throughout the course of the year, in addition to the rig reductions.
spk08: Yeah. And I just say, yeah, I'd say, you know, logistics items like sand, hauling, steel, those are things that we're looking at. probably in the second half of the year to probably soften. But we obviously didn't put that into our numbers because we need to see it happen before we would make that move.
spk05: You brought up, I think, you know, if there are some ongoing headwinds here before we get to a lot of the LNG egress that comes on in 24 and obviously the coal retirements looking for some displaced gas there. How do you think about managing a, like, short-term curtailment profile? And you highlight at a corporate level now your free cash break-evens this year are $1.65 with the benefit of the hedge book. Do you think about curtailing things at a corporate level or is this still calculated at a field level on sort of an individual area or pad basis?
spk08: Yeah, we look at it at a field level. You know, we look at it both, but we – and – You know, we could tell things, you know, I'd say in moments of time, we don't really talk about it much. So, there might be a weekend here, a weekend there. But when we want to do more like a broader, larger, then we'll look at, you know, we'll look at the overall rates of return. We'll look at the forward curve and make a decision about, can we create value by moving gas, you know, into the future as opposed to keeping it producing today. You know we've shut in production in 2020 a couple times, but we also shut in production in 21 that we didn't really talk much about. Those are shorter term in nature. So we'll do it both field and corporate.
spk05: I appreciate that, David. If I could just ask a little bit more on just Umang's question earlier around the hedge book. The curve for 24 is kind of sitting in and around the area where you guys had hedged out for 23. You don't have much hedge volumes in 24 now. How do you think about that dynamic, just given the fact that your realizations could look pretty attractive if you hedged out 24 at this point? Is that more a sort of a commentary or reflection on your confidence in hitting deleveraging goals this year and requiring less of a hedge profile next year? Or is that more of taking this wait and see into what ultimately might be a volatile spike for the 24 curve?
spk08: Well, when we hedge and we use collars, we like to see skew when we do that. And so the best times to add collars is when you have an upward movement in gas. If we wanted to do swaps, which we could do and lock in some of this and protect some of the 2024 picture. But what we're also seeing is we're seeing activity slowing in the gas side. We're seeing activity starting to slow on the coal side. And we're heading into the summer months here, which is a catalyst. And we're also seeing some incremental LNG come on in the first quarter of next year with Golden Path. So I think the worries about storage levels getting to 4 TCF or 4.1 TCF, one, we don't think it's going to get there. I think you're going to see it come in short of that. then the second is you know if you think about storage even at 4 tcf that's that's basically 30 days of cover which if you understand the commodity business i know you do you really need 60 days to really provide any buffer in a peak demand period so we see if you get normal winter um you could see spike in gas um and you really need about 400 bcf of incremental storage in 2024 to be able to support that incremental LNG that's coming online in 2024. So I think we're seeing a very positive setup here. The big negative could be if summer doesn't show up and winter doesn't show up. And that's why we like to hedge is to manage those risks. So we're going to try to figure out the right time to jump in and add those hedges and try to de-risk it. But we see a lot of moving ports, both positive and negative, and trying to make sure that we get from a timing perspective and how we hedge right.
spk05: Thanks for the additional color, David. Appreciate it, guys.
spk08: You're welcome.
spk01: The next question comes from Bertrand Dons from Trivist. Bertrand, your line is open. Please go ahead.
spk09: Good morning, guys. You touched on this briefly, but could you talk about your current volumes that are able to get down to the Gulf Coast? I see the 28% you have on slide 20, but I wasn't sure if some of that was financial exposure and maybe not actual volumes. And then maybe how you're thinking about your options to increase takeaway specifically to the Gulf Coast. Are you looking to do something similar to that 200 you picked up last year, or are there Are you comfortable with your mix, or are you looking at M&A or midstream partnerships?
spk08: Yeah, so the volumes down to the Gulf, that's all physical. That's not financial. we are looking to add more over time and there is more pieces that will come up over time. It's very episodic as you can imagine. So, you know, we will look to continue to grow the FT position to do all the higher valued areas, including the Gulf. And, and, um, and, um, I think it's, uh, important to note that, you know, as you see a lot of volume growth down in that area, you know, it's, it's important to have, you know, uh, Hedging will play more of a role in the Gulf Coast as Hainesville tries to grow and Permian tries to grow. So you need to have Gulf Coast and hedging as a strategy now. And once you get tied up into the LNG market, then that will actually alleviate some of the need to hedge bases down there too. So there's a lot of things that you need to do to manage the complexity down there.
spk09: Gotcha. Very helpful. Maybe could you talk about the allocation of free cash flow in future periods? You know, if we see a significant call on gas prices from LNG demand, do buybacks compete with acceleration? Do you look at them independently or do you compare them on kind of an IRR level? Or is it maybe you guys have an internal NAV on your company and if your shares trade below or above, that's how you decide what activity level to do?
spk08: Well, right now, until we have LNG off the East Coast, we're going to be running in a maintenance of capital perspective. So right now, the buybacks are competing probably more with our debt retirement and maybe a little bit on the margin with dividend. If we were to get access to East Coast LNG and be able to grow, which we're talking, we'll call it several years into the future, then it'll be a rate of return exercise, and we'll have a view of what we think our NAV at a, we'll call a mid-cycle price, and then we'll compare it against the value we can get to lock in that growth with LNG pricing.
spk09: Gotcha. Thanks, guys. Great. Thank you.
spk01: The next question comes from Harry Mateer from Barclays. Harry, your line is open. Please go ahead.
spk04: Thanks. Good morning. You know, circling back to Tug Hill, the bonds you issued last year had some SMR conditions in them linked to a deal closing by June 30th. And I appreciate you still think you're on track to close by mid-year, but clearly it's going to be a little bit closer to that date than you originally envisioned. So Dave, maybe you can talk a bit about how you're thinking through those mechanics and what your contingency is if closing slips past June.
spk08: Yeah. So I think if you listen to the comments we made, we purposely made the comment that we're sitting with a lot of cash and we have the term loan extension that we just did. We effectively don't need any of the bonds if we cross over into past June 30th.
spk04: Got it. Okay. And then my follow-up there is just, I mean, given the strong start to free cash this year, would your Would your preference actually be to have even more short-term prepayable bank debt in the financing mix than you originally envisioned just to provide even more short-term debt reduction runway?
spk08: We'll think about that. That's more of a, I'll call it a maturity management exercise. So that's something we'll think about as we get closer to mid-year. Okay.
spk04: Thanks very much.
spk01: Welcome. The next question is from Paul Diamond from Citi. Paul, please go ahead. Your line's open.
spk10: Thank you. Good morning, all. Thanks for taking my call. Just a quick circle back. And given the, you know, kind of looking beyond 2023 and given structural takeaway constraints, how do you guys think about, you know, opportunities for in-basin growth, whether that's through industrial or other means?
spk08: Are you talking about the demand growth or are you talking about us growing production? I demand demand growth in Beijing. Yeah. So you will have coal retirements as part of that. As you know, the shell crackers come on as well. And and I would say, you know, probably in the neighborhood of one to maybe two BCF per day over the next several years is probably a good sort of ballpark number.
spk10: Understood, thanks. And just kind of a more 30,000-foot question. As you look kind of beyond Tug Hill and the M&A front, should we think about your guys' potential use of any cash flow in a longer term, still focusing on costs, or will any of those goals kind of shift, whether it's inventory or film production, or how do you guys think about that kind of beyond Tug Hill and 24 and beyond?
spk12: On an M&A basis, our strategy will stay the same. Obviously, a commitment to making sure the financial accretion is there. But the differentiating aspect is looking for opportunities that will lower our cost structure. And the new dynamic is really the competition is competing with the value from buying back our own stock. So, I mean, that ultimately is going to be the The thing that changes, given where our stock trades, but we're going to stay committed with this strategy that we've laid out. I think it's created a lot of value, and we'll stay disciplined.
spk10: Understood. Thanks for your time. Yeah, thank you.
spk01: The next question comes from Noel Parks from Tohee Brothers. Noel, your line is open. Please go ahead.
spk12: Hi, good morning. Good morning. Good morning.
spk06: I just wanted to talk a bit about when we're thinking about expansion of nat gas into industrial uses, microgrid uses, and so forth, I sort of have in mind your project with Bloom Energy that has been underway for a while now. In a lot of these type of projects, installations, what becomes evident pretty quickly is the whole sort of grid integration type of issues that can come up, especially when you're looking to sort of resiliency type issues. And I was just wondering, in the sort of EMS management, energy management system, software technology market. I'm hearing more and more about that being a focus as people look at projects. I just wondered, is that something that you could potentially see yourself making an investment in, sort of the software, energy integration software? Is that something you could picture yourself doing under the EQT umbrella?
spk12: For us, we are very big supporters of Electrify the World. Doing that is going to present a lot of challenges that you mentioned. The resiliency of the grids, are they capable of handling extra load, presents some serious problems. You look and see what happened with California where they are going to ban ICE engines and then a week later tell their citizens to not plug in their electric vehicles at night to charge them. These are going to present some challenges big changes, but they're also going to present some big opportunities. One of the investments that we've made on our new ventures front has been an investment in a company that is going to address the behind the grid power generation. A company called Watt Fuel Cells is creating basically a fuel cell that runs off natural gas and generates power for the size of a microwave to power your house. These are the type of solutions that are going to strengthen our grid. But it's going to be the decentralized, smaller-scale opportunities that will exist at price points that retail consumers can get into. So that's sort of what we're looking at, and that falls into our promoting natural gas demand while supporting the electrification theme that's taking place.
spk06: Great. Thanks. Not something I'd heard of before, so it's interesting. Thanks. And just taking another stab at sort of the macro picture, if we look at sort of this incredibly volatile year we've had sort of spurred off by Russia, Ukraine, and then sort of the downward move we saw on weather, do you think that we are, I mean, the thought for a long time was that LNG and that export demand, if anything, might sort of contain volatility. a bit, but I'm wondering if maybe the reality is that we're going to see from geopolitical pressures and, you know, seasonal variances, is it conceivable you think that we're headed towards maybe a permanent level of this sort of volatility? I mean, I looked back over the past year, there's maybe only one or two months that haven't seen something like a $2 swing intra-month on pricing. Yeah, I guess I'm just interested in your thoughts on is this the new normal we're going to get used to, or do you look at the past year as being more an aberration that will indeed get smoothed out by LNG?
spk12: Yeah, so we're in a world where natural gas is becoming a global commodity, and what happens in the world will influence prices here in America. So that could introduce more volatility, but we have the opportunity to reduce the volatility and provide more stable, lower prices for Americans and also for the world. Our ability to export natural gas, our potential here in this country is 60 BCF a day is what we think we have the production potential to bring that amount of energy into the world, put it on the water, and provide energy security for the world. That amount of energy is equivalent to 10 million barrels a day. It's equivalent to adding a Saudi Arabia of clean energy to the world stage. That's going to be a decarbonizing force. And exports means surplus, and surplus means less volatility. Storage levels will stay fuller, and the commodities, I think, ultimately will be underpinned in the economics to the people participating in LNG. you know, will be set with long-term contracts. So, you know, the certainty on pricing and the economics of the investments that we're making will be shored up. So, we think it's a tremendous opportunity. The world will be volatility. We do not need to accept it. We can respond in America. And energy producers like EQT are the key to reducing the volatility.
spk08: Yeah. And I'll just say, We need more storage capacity, and we need more pipelines to be able to do it, because if you keep taking coal-fired generation, which is baseload offline, and don't replace it with the ability to add more baseload kind of fuel, you're going to increase volatility.
spk06: Right. Great. Thanks a lot. You got it. Yep.
spk01: The next question comes from Josh Silverstein from UBS. Josh, your line is open. Please go ahead.
spk02: Great. Thanks for the morning. Thanks for seeing me in here. You guys mentioned some flexibility in the program for this year, obviously, depending on price. Can you just elaborate a little bit more what that might mean? Would you reduce rigs? Would you just build up ducts for next year? Thoughts on any shut-ins? Just curious what you guys would think about as far as flexing activity.
spk12: Josh, the simple way to think about it is EQT is going to continue building our production capacity. Whether we deliver that production capacity into the market will be, and at what levels, will be determined by the price that we're receiving for the product. So that means rigs are going to continue to roll, roll forward with the development plans. Same thing with frack crews, but whether we put the production into the market will be something that we determine at the time where those, where that decision would be made.
spk08: Yeah. I mean, we're not running 15 rigs or running two. Put it in perspective. So we don't have a lot of, you know, cutting 50% of our rigs would be, you know, more damaging for us. You know, we can manage the production other ways if we have to.
spk02: Gotcha. Yeah. And you guys had rolled some 2022 capital into 2021. into this year as well, so I wasn't sure. And then just another question on free cash flow allocation. You know, you extended the thoughts on debt reduction and buyback out, obviously because of the delay in closing the Tug Hill transaction. But, you know, relative to your targets, you know, you have about $2.9 billion left in debt reduction, $1.4 billion left in the buyback. So kind of a two-to-one ratio there. How do you think about the allocation of one you know, hit those targets and obviously depending on the deal, but just as far as how you're thinking about wanting to tackle both of those.
spk08: Yeah. So, you know, we are, you know, we're actually further along on the debt buyback because the amount of free cash flow that we did generate. And so I think we could see ourselves, you know, getting to a target, you know, somewhere around mid-year next year. that gives us flexibility to buy back stock as well in that, in that. So, um, you know, I'd say the one is probably still a good ratio. And then once we hit our debt targets, um, we could then effectively change that ratio being much more equity if we want to it, assuming we were going to be opportunistic. Right. But we have, we'll have a lot of flexibility. And then just beyond that, you think about it, we really only allocated about a third of our free cash flow. So you think about that as a longer term, you know, how do we deploy that capital? And again, that'll be the next guy sitting in my seat's role to figure out how to allocate capital properly.
spk12: Thanks, guys. And Dave, that next guy is going to be leveraging, you know, the capital allocation frameworks that you put in place, the modern hedging strategy put in place. So there'll be a lot of continuity in the strategic decisions that are made in this organization.
spk01: This concludes today's Q&A session, so I'll hand back to the management team for concluding remarks.
spk12: Thanks for joining our call today. Thanks for joining the call today. We are in a world that is struggling with energy security. It's been compromised, and the ambitions to lower global emissions has never been stronger. Fortunately, EQT is a company that provides energy security to Americans and the world. and has the capability of significantly lowering global emissions by using our natural gas to replace coal. So we're excited about the opportunities set in front of us, and we will keep our heads down executing on our business. Thank you.
spk01: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
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