EQT Corporation

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.

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.

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.