EQT Corporation

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the EQT Q3 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Cameron Horowitz, Director of Investor Relations and Strategy. Please go ahead.

Good morning, and thank you for joining our third quarter 2023 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer, and Jeremy Knope, Chief Financial Officer. In a moment, Toby and Jeremy 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. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and feature events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release. In our investor presentation, 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 any forward-looking statements. Today's call also contains 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. The third quarter saw a multitude of positive highlights and record-breaking performance at EQT, including closing the strategic acquisition of Tug Hill and XCL Midstream in late August. As shown on slide five of our investor deck, with roughly 60 days under our belts post-closing, we currently have 74% of total integration milestones actions completed. To put this in context, this is a record pace for EQT and the most efficient integration yet, despite significantly greater deal complexity relative to Alta and Chevron. The successive improvement in our integration pace is reflective of leveraging lessons learned from previous transactions to refine our integration playbook, which is unique to EQT's proprietary digital platform and is a repeatable process that we have honed with each successful acquisition. I want to take a moment to send a huge shout out to the EQT crew for all the hard work that has facilitated the incredible integration efficiency achieved over the past two months. Alongside efficiently integrating the Tug Hill and XCL midstream assets, the teams have identified multiple areas of potential operational improvements that we did not contemplate when underwriting the acquisition. We broadly see these opportunities falling into two buckets comprised of well-designed and operational efficiencies. As it relates to operational efficiencies, I want to first talk about third quarter performance for standalone EQT and then provide some stats on what the teams have already achieved on the Tug Hill assets. As shown on slide 7 of our investor deck, after posting stellar second quarter operational performance, both our drilling and completions again set new internal and world records in 3Q. Recall last quarter, we highlighted EQT's world record of drilling over 18,200 feet in 48 hours on the same run. This record lasted a mere 60 days as our team bested that effort by drilling 18,264 feet in 48 hours on our Denver 5H well in August. On the completions front, our teams are firing on all cylinders with third quarter pumping hours per crew averaging north of 400 hours, which is an all-time high pace for EQT. This includes besting our prior record for monthly pumping hours twice during the quarter, with two crews each achieving north of 500 pumping hours in a month. To put this into context, The theoretical maximum pumping hours in a month for a single frack crew is roughly 600 hours after accounting for minimum maintenance time, so our teams are knocking on the doorstep of perfection. This performance reflects our strategy of aggressively attacking all facets of the supply chain to eliminate as many bottlenecks as possible for our completions team, and our Q3 execution underscores the dividends accruing from these efforts. Turning back to Tug Hill, as shown on slide six of our investor deck, our teams are wasting no time unleashing EQT's industry-leading operational prowess as we've taken over the assets. To put some numbers around this, in just 60 days since taking over operations, our completion team has already increased the amount of stages completed per day by 35% relative to legacy Tug Hill development, and we see room for additional upside as our teams optimize water handling and sand logistics across the asset base. On the drilling front, since taking over operations, our team has already improved horizontal drilling speeds by 50% relative to legacy tug hill performance and driven down horizontal drilling costs per foot by more than 40%. As we high-grade equipment and fully implement EQC best practices, we expect further efficiency gains that will allow us to drop drilling activity on tugs acreage from two rigs to one by the end of the year, all while still drilling the same amount of lateral footage year over year in 2024. Our teams also plan to methodically test various EQT well-designed changes on the Tug Hill assets, including cluster spacing, clusters per stage, prop and loading, prop and type, and casing weight, to name a few. While it's still early to quantify the full impact of efficiency gains and operational synergies on the Tug Hill assets, we preliminarily see the potential for up to $150 per foot of well-cost savings associated with these efforts. The potential impact from optimizing well-designed parameters and improving operational efficiencies represents value creation upside on top of the $80 million of synergy value potential we announced with the deal. As a reminder, the original synergies we discussed were only driven by water system integration, firm transport optimization, and land spend efficiencies, which should accrue over the next several years. Looking ahead to 2024, while we are still in the process of fine-tuning our pro forma operation schedule, we preliminarily expect to run three horizontal rigs and three to four frac crews in total next year, which is a level of activity that maintains production at approximately 2.3 TCFE per annum. At current strip pricing of approximately $3.40 per million BTU next year, we preliminarily see roughly $1.7 billion of pro forma free cash flow in 2024, and cumulative free cash flow of approximately $14 billion from 2024 to 2028. As shown on slide 11 of our investor deck, this equates to cumulative free cash flow of approximately 60% of our enterprise value, which is the highest not only among our gas peers, but also the broader upstream energy sector. We believe this outlook underscores the tremendous absolute and relative value proposition of EQT shares even after strong relative stock performance over the past several years. Shifting gears to slide eight of our investor presentation, we are excited to announce that we have signed two 10-year firm sales agreements with investment-grade utilities covering all 1.2 BCF per day of our capacity on MVP that will commence concurrent with the completion of downstream expansion projects in 2027. Recall, we had previously entered into an AMA for 525 million cubic feet per day of our MVP capacity, which we have restructured into an 800 million cubic feet per day firm sales arrangement with the same counterparty and entered into an additional 400 million cubic feet per day firm sale with a separate counterparty. These are two of the largest long-term physical supply deals ever executed in the North American natural gas market. and we believe signal the buyer's confidence in EQT's unique ability to deliver reliable, clean, and affordable natural gas supply to millions of customers in the southeastern part of the United States. These agreements also highlight how EQT's scale and depth of inventory are catalyzing the expansion opportunities downstream of MVP, which will bring gas further into the southeast demand centers where it is critically needed to replace coal-fired power generation and meet the region's climate goals. To put the environmental benefits into perspective, assuming EQT's natural gas displaces coal-fired power generation, the combined impact of these supply agreements would result in approximately 40 million tons per annum of emissions reductions, which is equivalent to taking more than 8 million gasoline-powered vehicles off the road every year. On top of the environmental benefits, these deals should create a win-win economic impact providing cash flow uplift for EQT while concurrently dampening natural gas price volatility for consumers in the Southeast region. Recall our capacity on MVP will initially receive pricing at Station 165, but as downstream projects and these new firm sales arrangements commence, EQT's capacity will be de-bottlenecked and our pricing exposure will shift to a blend of premium demand areas, including Henry Hub and Transco Zones 4 and 5 South. To put the impact of this in context, we see these firm sales arrangements and associated downstream de-bottlenecking projects increasing our annual free cash flow by more than $300 million beginning in 2028. At the same time, the de-bottlenecking of EQT supply further into the southeast should dampen natural gas price volatility for consumers in the region, improve grid reliability, and materially reduce the risk of service interruptions. In our view, these agreements represent clear and tangible examples of EQT's ability to generate differentiated shareholder value out of each molecule while simultaneously fostering better outcomes for American consumers by leveraging our unique platform consisting of peer leading scale, a strong investment grade balance sheet, low cost structure, deep high quality inventory, and advantaged environmental attributes. Turning to LNG, Last month, we announced a heads of agreement for liquefaction services from Commonwealth LNG facility in Cameron Parish, Louisiana, to produce 1 million tons per annum of LNG under a 15-year tolling agreement. This comes on the heel of a prior HOA with Lake Charles LNG, and upon completion of definitive agreements, we'll take our total committed LNG tolling capacity to 2 million tons per annum, or roughly 270 million cubic feet of gas per day. The Commonwealth Agreement is a continuation of our LNG strategy we described on our last call, which entails diversifying a portion of the 1.2 BCF per day we deliver to the Gulf Coast via firm pipeline capacity into international markets. As a reminder, EQT is pursuing a differentiated and more integrated approach to international exposure through tolling arrangements, which we believe provide the best combination of upside exposure with downside risk mitigation. Our strategy gives us direct connectivity to end uses of our gas globally, allows for end market structuring flexibility, and superior downside protection. We are currently pursuing signing SPAs with prospective international buyers, as well as additional opportunities to increase our tolling exposures. Our scale, low-cost structure, peer-leading core inventory depth, and environmental attributes uniquely position us to compete and win in the global energy arena, and we believe the international market will increasingly covet EQT's molecules as a long-duration, secure supply source that can drive meaningful emissions reductions via cold displacement. Similar to the precedent we are setting in the U.S. Southeast market with our newly announced firm sales agreements directly with utilities. Shifting to slide 16 of our investor deck, we recently announced a first-of-its-kind public-private partnership with the state of West Virginia to identify and implement forest management practices across the state. Facilitated by the state's Department of Commerce, Division of Forestry, and Division of Natural Resources, the partnership brings together EQT's transparent, data-driven approach to emissions reduction, and West Virginia's commitment to the conservation, development, and protection of its renowned forest lands to advance Appalachia's position as a premier world partner in decarbonization. We plan to deploy advanced soil probe technology from our partners at Terralytics, which allow for real-time soil measurement to ensure the quantification of carbon reduction is accurate and transparent. We will also leverage our strategic partnership with Context Labs to provide full digital integration and accountability of our carbon reduction efforts. Operational efficacy of these projects will be assured and audited by West Virginia University's Natural Resources Analysis Center, a multidisciplinary research and teaching facility. We believe the processes being deployed in our partnership with West Virginia will create one of the highest quality, most verifiable nature-based carbon sequestration projects anywhere around the globe. The output of this effort will 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 GHG emissions. Turning to slide 17 of our investor presentation, we were excited to see the Appalachia Regional Clean Hydrogen Hub, or ARCH2, recently selected as one of seven hydrogen hubs in the country to receive DOE funding to accelerate the deployment of U.S. hydrogen technologies and contribute to decarbonizing multiple sectors of the economy. As a reminder, ARCH2 was a collaboration initiated by EQT, the State of West Virginia, Battelle GTI Energy, and Allegheny Science and Technology. The broader ARCH2 team is comprised of multiple 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. The DOE has allocated up to $925 million to ARCH2, noting the hub will leverage the region's ample access to low-cost, low-emissions natural gas to produce clean hydrogen and permanently sequester CO2. Along with the decarbonization impact, ARCH2 is anticipated to facilitate various community benefits, including the potential to create more than 21,000 high-paying jobs. The DOE selection of ARCH2 deeply reinforces the critical role natural gas, particularly Appalachian natural gas, will play in our nation's transition to a lower carbon energy future, and EQT is uniquely positioned to be at the forefront of this process. In terms of EQT's participation, we are in the early stages of formulating a high-level development plan with rigorous assessment of project economics to better understand value creation potential, and we expect minimal capital requirements over the next couple of years. Over the medium term, EQT will have significant optionality to evaluate and participate in projects within the ARCH2 hub, all while retaining complete flexibility as it relates to our level of exposure. Outside of our direct participation, we expect ARCH2 will also have second-order effects of driving greater in-basin demand for EQT's low-emissions natural gas and could present opportunities for us to leverage our subsurface expertise and 1.9 million net acreage position for CO2 sequestration. While still very early in the evolution of ARCH2, we believe EQT's participation in the hub, along with various other pillars of our new venture strategy, are planting the seeds that have the potential to catalyze the transformation of natural gas into the holy grail of cheap, reliable, and zero-carbon energy. I'll now turn the call over to Jeremy.