EQT Corporation

Ladies and gentlemen, thank you for standing by and welcome to this EQT Corporation Q4 2019 Quarterly Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker. Andrew Brees, Director of Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining today's conference call. With me today are Toby Rice, President and Chief Executive Officer, David Connie, Chief Financial Officer, and Kyle Durham, former Interim Chief Financial Officer. The replay for today's call will be available on our website for a seven-day period beginning this evening. The telephone number for the replay is 1-800- 585-8367 with a confirmation code of 718-5478. In a moment, Toby and David will present their prepared remarks with a question and answer session to follow. During these prepared remarks, Toby and David will reference certain slides that have been published in a new investor presentation, which is available on the investor relations portion of our website. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could differ materially from these forward-looking statements because of factors described in today's earnings release and in the risk factors section on our Form 10-K for the year ended December 31, 2019. 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 this morning's earnings release for important disclosures regarding such measures. including reconciliations of the most comparable GAAP financial measures. And with that, I'll turn it over to Toby.

Good morning. Today I will discuss the execution of certain strategic initiatives, provide an update on our evolution, and discuss our 2020 plans. I will then pass the call to Dave Connie to discuss our balance sheet, liquidity, and the philosophy that he brings as our newly appointed CFO. Since our election in July, in only six months, we have taken decisive tactical steps to overhaul the strategy and execution at this company. We've removed over $400 million or 25% of annualized controllable costs across the business from the office to the oil field. And today we've released a 2020 CapEx budget that is $150 million less than our guidance in October. This reflects $50 million that was removed as a result of our base production volume enhancement initiatives, which we announced in January, as well as an additional $100 million resulting from the continued optimization of the operation schedule. We continue to find new ways to reduce our costs and create value for our shareholders. EQT has peer-leading G&A and LOE costs, marching towards the lowest well costs, and our recent focus has been on reducing our gathering and transportation costs. We are pleased to announce that we will be strengthening our partnership with EQM through the successful renegotiation of our gathering contracts, which is a big step towards our goals. At a high level, this deal provides EQT with meaningful fee relief in the short term and favorable rates for the long term. This resulting rate structure represents a significant reduction from the legacy rate structure today. In exchange for lower rates, EQT will provide EQM with long-term contract extensions, an increase in our minimum volume commitments, and a dedication of essentially all of our undedicated acreage. Realizing the true potential of our partnership rests on EQT's ability to efficiently deliver combo development projects to EQM's highly strategic gathering systems. Now, to detail the components of the EQM agreement, I will direct you to slides 7 and 8 in our analyst presentation. The deal combines nearly all of the legacy Pennsylvania and West Virginia EQM agreements into one global gathering agreement, extending to 2035. This affords EQT the operational flexibility to execute combo development across our entire operational footprint. The reduced gathering rate goes into effect upon the in-service of Mountain Valley Pipeline, which we have assumed to be January 1, 2021. Over the first three-year period, we expect to receive approximately $535 million in fee relief, inclusive of the impact of our E-Train Equity Exchange, which I'll discuss in a moment, with nearly half of the relief coming in 2021. This significantly enhances our EBITDA and leverage outlook, which is critical in navigating through this challenging commodity price environment. By 2024, and through the duration of the agreement, EQT will receive long-term gathering rates that are 35% lower than 2020 levels, solidifying our peer-leading cost structure and providing long-term rate visibility. Effective today, the minimum volume commitment increases from 2.2 BCF a day to 3 BCF a day, and upon the in-service of MVP, builds to 4 BCF a day by 2023. Additionally, we have dedicated over 100,000 acres in West Virginia to EQM. EQM has also agreed to defer approximately $250 million in current credit assurance requirements that were triggered as a result of our recent credit downgrades, providing EQT with additional liquidity and flexibility. We also executed an exchange transaction with Equitrans, under which we will exchange half of our equity stake in Equitrans for $52 million in cash plus incremental fee relief. This is a strategic use of our stake as the EBITDA impact of the embedded fee relief is meaningfully more accretive to leverage than if we were to monetize the stake and apply proceeds directly to debt reduction. That said, we are still focused on absolute debt reduction. Ultimately, this mutually beneficial agreement will provide EQT with the ability to grow modestly and generate free cash flow in a 250 gas environment if desired. Both EQT and Equitrans emerge stronger, a true win-win. While the Gathering Agreement was one large strategic step in the right direction, there is still more work to be done as we turn EQT into a sustainable and durable business. The philosophy behind our plan is simple. Be the low-cost operator, strengthen the balance sheet, and maximize shareholder value through prudent capital allocation. To do this, there are three main objectives that our team is focused on delivering in 2020. First, we aim to execute our asset monetization plan by mid-year 2020. Second, we plan to meet or exceed our 2020 adjusted free cash flow guidance of $200 to $300 million. And third, we will continue to optimize the business by removing incremental costs, enhancing operational efficiencies, and pushing the boundaries on technological innovation. All cash proceeds, free cash flow generation, efficiency gains realized, and incremental cost reduction will accrue to deliver the business. On the asset monetization front, we continue to feel confident in our ability to execute our plan. The aggregate potential value of these opportunities, in addition to the free cash flow generation, is greater than our $1.5 billion target despite weaker pricing. The debt refinancing we executed in January provides us with better footing as we no longer face maturities in the back half of the year. We'll be prudent making certain EQT receives fair value for these assets that is in line with the intrinsic value benefiting all stakeholders. Management presentations are ongoing and the processes are progressing as planned. We have seen solid interest for both the minerals and E&P assets and will continue to keep the market updated as things progress. Our remaining equity stake in Equitrans as of 2025 is valued at approximately $230 million. We continue to expect that we will be out of this position by mid-year as we are not long-term holders of this stock. While the asset monetizations are of high importance for the near-term balance sheet management, The best way that we can offset a lower commodity price is to continue to lower our break-even costs. At the heart of EQT's cost reduction effort is our ability to execute combo development runs, leading to the most efficient capital deployment. In the fourth quarter, our PA Marcellus well costs averaged $800 per foot. This is down nearly 20% as compared to legacy costs and down 6% quarter over quarter. Slide 9 highlights drilling efficiencies that we have seen across all operations since our election in July. Top hole drilling days have been reduced by 28%. Horizontal drilling speeds have improved by 38%. This leads to a 16% reduction in total drilling days per well. These material improvements translate into real savings and give us confidence in our ability to achieve our $730 per foot well cost target in the PA Marcellus by the second half of 2020. In addition to driving down well costs, there are many other ways we can reduce costs and improve margins. On the GNA side, We have built processes and technology that reduce our dependency on contractors. For LOE costs, we continue to optimize our water logistics, aiming to increase our recycled water usage and production uptime. We continue to strategically optimize our firm transportation portfolio to improve our cost structure. And lastly, both hedging and our interest expense are places that we can strategically manage, which Dave will touch on in a moment. The gathering agreement with Ecotrans allows better insight into our future cost structure. With that constraint removed, the largest drivers of our future development decisions will be the macro environment, the outcome of the game board of strategic initiatives we have in process, and corporate returns. We are watching the natural gas fundamentals very closely and see its trend for improving prices. We are seeing rig counts decline, productivity trends materially slowing, duct inventory being drawn down, and core inventory and key shale plays being drilled up. Gas production has declined in several basins off its November 2019 peak, as producers have recognized that fully loaded returns are the right measure. Our view on the commodity outlook is positive. However, we will continue to study and analyze the market as we determine the optimal activity levels for our development. Until a market recovery is sustainably reflected in the fundamentals, the most prudent strategy that we can take is to follow a maintenance production cadence. With that, I will pass the call over to our newly appointed CFO,