Q4 2019 Earnings Call
For standing by and welcome to Eat Qt Corporation, Q4, 2019 quarterly results conference call.
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Now I'd like to hand, the conference over to your speaker.
And drew Brees director of Investor Relations. Sir Please go ahead.
Good morning. Thank you for joining todays conference call with me today are Toby Rice, President and Chief Executive Officer, David Connie Chief Financial Officer, and killed or 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.
Telephone number for the replay is one 805 eat five feet 367, with a confirmation code of 7185478 in a moment Toby and able to present their prepared remarks with a question and answer session to follow during these prepared remarks, Toby and David your reference certain slide that had 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 statement.
Actual results on future events could differ materially from these forward looking statements because of factors described in today's earnings release and risk factor section our form 10-K for the year ended December 31st 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 earning 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 though.
Good morning today, I will discuss the execution of certain strategic initiatives provide an update on our evolution and discuss our 2020 plants well then pass the call to Dave Khani to discuss our balance sheet liquidity in the philosophy that he brings a newly appointed CFO.
Our election in July and only six month, we've taken decisive tactical steps overhaul the strategy and execution at this company, we've removed over $400 million or 25% of annualize controllable costs across the business from the opposite oilfield and today, we released the 2020 Capex budget that is $150 million less than our guidance in October.
We're just relax $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 hundred million dollars, 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.
Did you see as peer leading GNS whenever we call marching towards the lower well cost in our recent focus has been on reducing our gathering and transportation costs.
We're pleased to announce that 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 you could see 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, you T. will provide SQM with long term contract extensions an increase in our minimum volume commitments and the dedication of essentially all of our on dedicated acreage.
Realizing the true potential of our partnership rests on DQ team's ability to efficiently deliver combo development projects to EQM is highly strategic gathering systems now the detailed a components of the EQM agreement I'll direct you to slide seven and eight 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 you could see the operational flexibility to execute common development across our entire operational footprint.
Reduced gathering rate goes into effect upon the in service of Mountain Valley pipeline, which we have assumed to be January 1st 2021.
Over the first three year period, we expect to receive approximately $535 million in FY really inclusive of the impact of our each train equity exchange, which I'll discuss in a moment with nearly half of the belief coming in 2021.
This significantly enhances our EBITDA and leverage outlook, which is critical in navigating through this challenging commodity price environment.
2024, and through the duration of the agreement you T. 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.
Affected today, the minimum volume commitment increases from 2.2 Bcf a day to three Bcf a day and upon the in service of NBP builds to four Bcf a day by 2023. Additionally, we have dedicated over 100000 acres in West Virginia EQM.
QM has also agreed to defer approximately $250 million in current credit insurance requirements that were triggered as a result of our recent credit downgrades, providing you could see with additional liquidity and flexibility.
We also executed and 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 stage 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're still focused on absolute debt reduction.
Ultimately this mutually beneficial agreement will provide security with the ability to grow modestly and generate free cash flow in a 250 gas environment, if desired both UTI and equitrans emerged stronger a true win win.
Well the gathering agreement was one large strategic step into right direction, there's still more work to be done as we current UTI 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 midyear, 2022nd we plan to meet or exceed our 2020 adjusted free cash flow guidance of $200 million 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.
Yeah.
All cash proceeds free cash flow generation efficiency gains realized an incremental cost reduction will accrue to delever 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 faced maturities in the back half of the year.
We will be prudent, making certain NTT receives fair value for these assets that is inline 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 ERP assets and we'll continue to keep the market updated as things progress.
Our remaining equity stake in Equitrans as up to 25 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 the stock.
While the asset monetizations or 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 breakeven costs.
At the heart of VCTS cost reduction effort is our ability to execute combo development Ron's, leading to the most efficient capital deployment.
In the fourth quarter, our P.A., Marcellus well costs averaged $800 per foot.
This is down nearly 20% as compared to legacy costs and down 6% quarter over quarter.
Slide nine highlights drilling efficiencies that we have seen across all operations since our election in July top hole drilling days have been reduced by 20%.
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 and the PPA 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 DNA side, we have built processes and technology that reduce our dependency on contractors.
For a week 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 Equitrans allows better insight into our future cost structure with that constraint remove the largest drivers of our future development decisions will be the macro environment. The outcome of the game board of strategic initiatives, we haven't process and corporate returns.
We are watching the natural gas fundamentals very closely and see a trend for improving prices, we're seeing rig counts declined productivity trends materially slowing DUC inventory being drawn down and core inventory in key shale plays being drilled up gas production has declined at several basins office 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 it market recovery 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 David County.
Thank you Tobey I am excited to have joined this team that has demonstrated past success in building a company from scratch and has already made significant progress and extracting value added this business.
This is a familiar territory for me I've been through extensive corporate transformations and cost cutting initiatives before.
Look forward to continuing their progress and we'll leave no stone unturned to find incremental cost savings to drive sustainability.
Today I plan to address a quick snapshot of fourth quarter results.
Yearend reserves liquidity, our balance sheet focus and hedging.
Overall during the fourth quarter, we outperformed in many of our key metrics, including adjusted free cash flow in the fourth quarter. We achieved sales volumes of 373 Bcf fee, which came in at the high end of our guidance range, but 5% below last year adjusted operating revenues were 947 million down 23% compared to fourth quarter two.
2018, as realized prices were $2.54 or approximately 60 cents per mcf fee below last year.
We intend to implement a more thorough hedging program that will minimize this volatility, which I'll talk to in a little bit.
Total operating expenses for the quarter increased $658 million compared to the fourth quarter 2018, primarily due to increase impairments on long life assets of 775 million in the fourth quarter of 2019.
The 1.6 billion in noncash impairments recorded in the fourth quarter of 2019 were primarily related to the press natural gas prices and changes in our development strategy, including the contemplated divesture of certain of our non strategic assets.
At the unit cost level fourth quarter 2019, total unit costs were 16 cents lower than the fourth quarter 2018.
Primarily driven by an increase in litigation expenses in the fourth quarter 2018, we paid approximately 100 million in the fourth quarter of 2019 to settle various legal matters, which we had accrued at the end of the third quarter using the majority of the free cash flow we generated during the fourth quarter.
Our Capex was 355 million or 203 million lower than the fourth quarter of last year and inline with our expectations.
This reflects both reduced activity and significantly improved field deficiencies.
As toby's highlighted we are using all efficiencies to generate free cash flow instead of increasing production.
We reduced our 2020 Capex budget twice already by a total of 150 million and we'll look for additional opportunities to reduce the budget.
Our adjusted operating cash flow for the quarter was 503 million as compared to 693 million in the fourth quarter of 2018, and adjusted free cash flow of 148 million with at the high end of our guidance range of 100 150 million.
For the full year. There are few items that I want to point to that impacted our comparative results from 2019 to 2018.
In 2018, we divested our Permian and her on assets as wells completed the separation of our midstream business. Excluding the sales volumes related to these divestitures in the prior year gathering and transmission expense per Mcf fee were 55, and 50 cents in 2019 in 2018, respectively.
Adjusted operating cash flow for the full year 2019 of 1.8 billion exceeded our prior guidance and adjusted free cash flow for the full year 2019 of $60 million was at the high end over guidance range. Both were negatively impacted by two items, which under FCC rules and not be adjusted out a pro forma operating and free cash flow.
Including 117 million, a proxy transaction and reorganization costs and 82 million of SDMA costs tied to litigation expenses.
Now onto our year end 2019 reserves.
We have approximately 17.5 tcf fee of total natural gas natural gas liquids and oil proved reserves. This represents a decrease of approximately 4.3 tcf fee.
Given by negative revisions in the undeveloped reserve category.
Slide 14 of our analyst presentation details, how our shift to combo development has impacted our proved undeveloped reserves.
Although combo development yields lower well costs improve returns on invested capital and enhance well performance. There are certain booking rules that resulted in downward revisions to our yearend 2019 reserves as more wells are now being classified as probable at year end 2019.
This gets translated into lower plug conversion costs going forward down five cents to 52 cents per Mcf fee.
The map on the left helps to visualize the shift in strategy. The Blue combo development runs are in areas with more white space for version rock, whereas the green legacy wells are closer to producing offset wells. Thus the combo development runs have fewer neighboring producing wells needed for the proved undeveloped classification.
A planned combo development wells are located in high quality core acreage.
Where we have a high confidence in well performance and where we intend to focus our future development.
As we drill in these areas, we expect to convert these probable reserves to proven reserves, but in a more return driven way.
We're more focused on free cash flow generation and returns on invested capital the maximizing pud bookings.
Overall, the fourth quarter was another successful quarter under the new leadership and the actions in the second half of 2019 have shape, a strong 2020 operational forecast that said I'd like to discuss the several recent items that have impacted our business.
As commodity prices have declined this has put pressure on ratings balance sheet and liquidity, we faced the wall maturities, which we are addressing through the recent refinancing our goal is to March back towards regaining our investment grade metrics and we believe that we will achieve this through the EQM transaction.
Asset Monetizations and a modest recovery in natural gas prices.
Our team's focus to make this this is truly sustainable with that in mind three initiatives, we are pursuing in the near term.
First retiring 30% over debt and drive our net leverage at or below two times.
Focusing on lowering up breakevens, including our interest expense is important.
Second a strong focus on access the capital, which ties to our economics of our business and a more differentiated focus on SG matters.
And third adding a strong hedge process. We are students of the commodity and our hedge book will be an important part of risk management program.
Let's look at our slide 19 that provides a maturity schedule. The January 1.75 billion refinancing helped to address our 2020 maturity and part of our 2021 maturities as well strengthen our position in negotiating our asset monetization.
Monetizations and free cash flow will help retire the remaining and part of our 21 and 22 maturities respectively.
Once all are completed we'll have structured our debt towers with proper spacing between them, enabling easier refinancing going forward.
On February 14th we renegotiated a tender offer for 400 million over 2021 notes as of December 30, Onest 2019, our trailing 12 months net leverage stands at 2.6 times and our overall cost of debt capital has risen from 3.6% to 4.9%.
Our E QM indication debt repayment and continue focus on efficiencies will help us navigate the decline in 2020 commodity price.
While we're focused on improving our net leverage ratios, we've been successful and maintaining a strong liquidity position.
Look at Slide 20 as of February 25, 2020, our liquidity stands at 1.9 billion, reflecting our actions to mitigate collateral calls from our recent downgrades.
We are essentially through most of the impact and do not expect much change from here.
Theres always potential for some additional collateral calls, but we have much more offsetting liquidity options. So quarter from now we could easily show higher liquidity.
Now we've been very active in working on our hedge strategy and received board approval to begin implementing an updated hedge program. Our hedge trashy goes out for four years includes both Nymex and basis hedges and we use our large ft portfolio help differentiate where and how we hedge.
Our goal is to protect the balance sheet, while focusing on hedging at levels that generate free cash flow.
We will mostly used plain vanilla tools, including swaps and collars and execute a program attic and active hedge process.
Presently we are 87% hedged for 2020 and stand at 26% for 2021, assuming flat production.
Since the adoption of our revised hedging strategy, we've added to our basis has positioned for 2021. We're excited to get this process started as we expect opportunities will arise as natural gas prices increase over time off the current bottom.
I'll now turn the call back to Toby.
Thanks, David I'm very proud of the hard work and results at this team has delivered in such a short period of time. Despite external challenges. We continue to have constructive dialogue with all of our stakeholders. As we said you tee up to be a sustainable and durable MP business the direction of the gas production declines combined with the call on gas from increased LNG demand instead.
US up for a compelling gas price that is not currently reflected in the forward curve. While we are optimistic about the future gas price, we recognize the need to run this business in a sustained low gas price environment, we're fully committed to withstanding commodity lows by aggressively pursuing our cost reductions improving efficiencies in executing upon our asset sales to improve our balance sheet.
With that I would like to open the call up for questions.
And as a reminder to ask a question press star one on your telephone keypad.
Again that star one to ask a question enter and then for yourself from Lucky you May press.
Pound key.
Our first question comes from Aaron Jayaram with JP Morgan.
Yes, good morning.
The first question I have is wondering Toby if you could help reconcile.
The rate release that you guys have identified over the next three years.
You've highlighted 270 million.
230 million and 35, starting from 2021.
The question I'm getting from the Buyside is up can you reconcile this relative to what he QM put in their slides of 125 million 140 million and 35 million in their deck slide five.
Sure. So the 535 million, there's there's two components there theres, what I would consider base fee relief of about $300 million.
And then there's the ex the fee relief that we get from the exchange of our each train stake, which would make up the remainder of $235 million.
And so that's that's how it sort of broken out.
Got it got it.
That's helpful.
Second question is I wanted to see if you could maybe give us a little bit more color, what you're saying in the asset sales market I think you reiterating.
Your expectation to deliver 1.5 billion of asset sales by mid year.
So I'm wondering if maybe you could give some insights and on the Ohio Utica process as well as though the minerals process thats underway.
Sure. So so I'd ask you to flip to slide 18, and I think this sort of shows all of our initiatives and the progress of those that we've made to date.
No we're certainly.
Some good progress so far with.
With the free cash flow been able to generate and the monetization of our of our each train say.
I'm, sorry that we get with B. reily I'm as far as minerals in Ohio, and Ohio MP assets go.
We see strong interest in those assets were in the process right now.
Collecting feedback from from potential parties there.
I'd say that.
The thing that that gives us confidence the fact that what commodity prices have come down a little bit the one thing that space that hasn't changes the assets are still core.
And so that gives us some confidence.
The thing is we've got now with our refinancing.
Yes.
We've been able to do it gives us some more time and I think that time can be used in negotiation to maybe be a little bit more flexible in some terms for is any value gaps that we we perceive so.
All to say, we're able to be a little bit more creative in the deals that we do and that's sort of what gives us confidence we'll be able to reach our goals.
Great. Thanks, a lot.
Welcome.
And your next question comes from John Silverstein with Wolfe Research.
Hey, Good morning goes couple of questions for you.
I was wondering on the on the debt reduction target you have one and a half billion in new started to put in there.
The Fourq, you 19 or free cash flow and then some some of the rate relief.
From that you train deal I just wanted to look at at the other way do you want to get your net debt down to 3.5 billion or is it still going to be somewhere kind of around that four range. After all this.
No I think we'd like to get it down to three and a half billion, we'd like to get our debt are leveraged down to two times are under so so we're looking at both absolute.
Debt reductions as well as as the leverage metric.
Got it and then in the deep the October update that you guys gave US you had 2021 capex down $200 million versus 2020 is the $150 million that you have it have now reduced your 2020 capex by relative to the October update is that incremental to 22.
21 or is that an acceleration.
Because I'm just wondering if if.
Based on the 235 outlook for natural gas if no. This is this and the the rate relief, let would allow you to maintain volumes flat next year and still generally positive free cash flow.
Yes, Josh this is Toby so just to put some more color on the $150 million.
That we've we've reduced from our 2020 budget since October guidance.
50 million. It was was due to operational efficiencies that we outlined in one of our slides that's just optimizing our our base production.
That allows us to get more production from the existing assets, we have which allows us to spend less capital on new activity to to replace those volumes and then $100 million.
And we announced that in January $100 million.
It is really just.
Optimization of our schedule, we've taken out some of the slack in our schedule as a result, just getting better confidence in hitting our deadlines and the other the other piece, which I think is probably more meaningful is just a little bit of shifting of activity.
And capital allocation with the are you train renegotiation, we're able to move some of our activity from West Virginia into Pennsylvania, Marcellus execute some combos.
And that obviously is a lower cost while type rest of develop so that's also a portion of the reduction and now.
When we talk about schedule optimization.
Got it so you still think a budget next year for one one at this point is okay does the whole volume slot.
I just wanted there or is it actually a little bit lower than them.
Yes, no Josh I think we're looking forward to provide more color.
Everyone on what our 21 2021 plans are going to look like I would say that we are with our E train renegotiation affords us an opportunity to sort of retool our schedule understand the well types or we're going to that we're going to put on the schedule, which will result in the and the capex that we'll be able to report back to you guys.
Yes, and with a goal of so.
Well with every year as of the lease future cash flow neutral to free cash flow positive.
Great. Thanks.
And our next question comes from the line of Bryan singer with Goldman Sachs.
Thank you good morning.
You talked in your prepared comments on what some of the drivers of the movements and proved undeveloped reserves in bookings or can you talk a little bit about any changes and how you booked proved developed reserves and how the wells and well performance and you are from the 2019 program compared.
And what your expectations are for Twentytwenty.
Yes, as Toby on our on our PDP.
We actually we improved.
That has risen and that was partly due to just.
Just better performance some of the wells.
So.
The revisions we had really were.
On the on the pod side I think that was the store that we want to make sure people understood. We're still we're still developing in what we consider to be core areas that will be where performance will be consistent with the performance we have with with our existing pdps. This just from just the the rules, we're not able to book those as pods.
And the other thing I would say is the the this is a good example of of our commitment to.
Capital efficiency, and making the best choices for where we spend our dollars.
The.
Letting the capital efficiency drive, where we spent or dollars not.
Not not trying to just book reserves.
Great. Thanks, and then my follow up is the on slide on slide eight.
You talked about getting to post twentytwenty three peer leading gathering rates can you talk about where that was coming from where that well where those rates were prior to the.
Renegotiation.
So we talked sort of high level, what our rate structure was dropped 60 cents is sort of what our legacy what are other legacy gathering costs were.
And we were saying that.
Market rates were somewhere in that.
35% to 40% range.
And so that's.
I think thats, where we've been able to achieve with this negotiation with the train as we're able to get.
Some near term fee relief that accelerates the step down into those long term.
Market rates that we're pretty excited about setting us up for the future low cost aspect of our gathering in this business.
And in many cases within Appalachian were probably below.
I'd say market rates than when we get down it yeah.
Got it thank you Matt Thanks very much.
Your next question is from Michael Hall, with Heikkinen Energy.
Thanks, Good morning, I appreciate the time.
I got a couple of I guess little bit of follow ups on some of the prior questions but.
I guess first.
On the gathering rate that you show for 2023 steps up a bit.
SMIC at play there is that just kind of feathering in some of the old legacy contracts and then second.
The big step down in 2024 20 through 2035 does that.
It all contingent on.
On any.
I guess.
Production thresholds.
Is it assuming your.
Yes, good clearance of the Nvcs how does that.
Play through in that that forward guide.
Sure. So on your first question.
I think we looked at sort of the the short term.
The fee relief, there, we're going to get.
Instead of using that as sort of like on a normal separate overtime, we were able to ship that to the earlier years, which.
2021 is really important for our business.
So that was more of a negotiated point.
On the 20 to 24 to 2035 is really not contingent on us growing volumes I think one thing that is important for us to note and gives us a lot of competence. In this deal is when you when you think about mbcs.
We have the coverage to meet those nbcs today and that was something that we're thoughtful about paring that up with our operation schedule with our inventory, making sure that weekend.
Deliver the volumes to get these rates and meet our ibcs overtime.
Okay, the inter and intra interesting dynamic here, though.
As we've set this business up if there was an opportunity to grow.
This over run rate concept, we'd be able to deliver those those molecules and gathering rates at and over run rate, which is significantly lower than what the blended rate were shown here on this page. Okay. Yes that was kind of a follow up ahead, so yes, but that green bar is not assuming any substantial over run rates.
No.
Okay.
And then I guess, maybe can you just frame your.
Perspective around MVP in service timing and.
Yes, I kind of how you're thinking about the potential risks around that.
You got comfortable with the Jan one.
Yeah, I mean, I think that each train will certainly provide some more color on their call today on that but I think.
Yes.
We look at.
We've been consistent my thanks to 2021, I think some of the fact of the pipe is 90% complete I think is definitely positive.
I think it's a little bit of a unique situation compared to HCP.
The the so we're just heard last week.
Would would give people indications that the Supreme Court will overall the fourth circuit.
It would that happening that would be a direct read through towards resolving one of mbps one of the issues. That's that's keeping MVP from from crossing the drill and getting in service. So yeah. I think that this this this pipe is going to get built and we're pegging.
Gen 21 is our best guess.
Okay.
Appreciate it thanks guys.
And your next question comes from Willis Fitzpatrick with Suntrust.
Hi, good morning.
Morning.
Obviously, the revolver is in good shape.
You talk to your thoughts about the potential impact of of that 600 million a day MP sale, what that might due to the revolver and and also would you sell any any hedges in conjunction with that divestiture.
Yes, so I'm just to understand we do not have a reserve base revolver.
And so a very different we don't have semiannual did redeterminations and so.
We are good through let's call it.
End of July of 2022, so thats a time period, we'd have to go refinance so.
And so any asset sale would have no impact on on the revolver today.
It's really about our ability to generate free cash flow retired the rest of the 20 ones and try to retire the rest of 22, so thats really with the goal is.
And the second part of your question just impact on our on our hedging I mean, we're sitting with at 87% has right now obviously, we sold hold that asset it would improve our percentage hedged.
Yeah, and whether we sell to hedge or not I think that will that's probably a decision that we would make depending on each independent asset sale that we go through.
Okay, perfect makes sense and then for the follow up you guys updated Pennsylvania cost per foot, obviously looking looking strong could we get to update on on West Virginia.
Yes, it's where the drilling the drill operational efficiencies you're seeing.
Yes, I was one part of driving our cost improvements I mean, that's you're seeing that and.
Both Pennsylvania and West Virginia.
To be honest, there hasn't been a tremendous amount of activity in west Virginia.
So really it's looking at what we're doing in Pennsylvania, as a read through to West, Virginia, I will say that.
Being able to shift more activity into Pennsylvania in 2020 that allow that affords us more time in west Virginia to.
Install the necessary water infrastructure that will lower our cost on the completion front. So that will certainly helps maintain to ensure that west Virginia can be on par with Pennsylvania Marcellus.
Perfect. Thanks, so much.
[music].
And our next our final question comes from Holly Stewart with Scotia, Howard Weil.
Good morning, gentlemen.
A lot to digest here.
The two companies so.
I thought maybe I would just.
Sure dumb it down here, but you know looking at that.
I guess eyeballing that bar chart on slide eight.
It looks like your long term rate would go down to be till at your kind of talking about as market rates of roughly 40 cents.
And then if you hit above those MVC levels that rate would fall to roughly 30 cents is at the right way to think about this over the long term.
Probably probably somewhere in the high Thirtys square, where I think we checkout.
Over the long term.
Yes, okay.
Okay.
And then Dave you mentioned several times like revised hedging strategy I know you all are pretty fully hedged for this year can you just sort of talk through.
What you're doing differently from a revised hedging strategy perspective.
Yes. So one is duration, we've talked about four years, we didnt have a four year hedge strategy.
We we will probably enter.
Into.
The next year at a much higher hedge position.
I'll call somewhere in the same vicinity as as a as we started this year.
And and then third is will be more thoughtful on how we add basis hedges.
So we have more.
Visibility on on really.
That differential.
I will use our ft.
Portfolio really to help us with that as well because it gives us I think a lot of flexibility to can choose which of those locations, we want to do and and what we're trying to isolate so I think those are really the three major things.
Okay.
That's helpful and then they just one final one for me I mean, given the magnitude of then VP. This is probably one of the last major greenfield projects at least it feels like right now we go into service in the northeast is there an appetite to sort of monetize any of that firm transportation.
With that project either maybe both speaking from your standpoint, as well is that demand pull side up there.
Yes, I'd say that optimizing our ft portfolio is is I think.
One one initiative that we're going through that would lower our cost structure.
So yes, certainly that would NBP would be included in that I think when we look sort of high level at the basin.
About 33 Bcf a day being produced in Appalachian.
We've got about 35 Bcf, a day of local takeaway and demand.
And then you then you couple.
MVP and ACB would add about another three Bcf a day on top of that.
So I mean, there's there's pretty decent pipe capacity in the basin right now.
And that when you when you think about that and realize that there is only about 49 rigs running in the basin.
Thank you could see Appalachian start to decline, that's only going to widen the gap and and.
You know allow us to sell more of our gas in basin.
They tune Holly.
Yeah, Let me I would just follow up on that he Toby is the as you think about all that's going on with producers in the basin and.
Yes, let's just say we have to enter some sort of.
Bankruptcy from perspective from some other producers.
Some of those ft contracts there to be thrown out how do you think about in basin basis.
Responding to that.
Well the pipes going to be there already if the question is what the rates will be that's that's a that's another equation I guess it produces go and sort of rig contracts, but if the pipes built already.
And you know.
Produces go into bankruptcy that you know the ability to spend capital.
It gets harder and so they'll probably they'll probably be less for even less production and so there bill pipes will be less filled and and so local basis might be better.
So that's probably what would happen.
I look at that Holly I think that Theres.
When you look at one of the benefits with Equitrans, they've got such as such the expansive gathering system coverage across a lot of interconnects. So as that capacity frees up in those pipes. It gives our commercial team.
More optionality to optimize our R.R.
Our production where.
The sales access to markets that we sell them. So I see that could be up could be a net positive.
Great Great color guys.
And our next question comes from Sameer Panjwani with Tudor Pickering Holt.
Hey, guys just a couple of follow up questions on the hedging commentary I think you just mentioned that the goal is to have the 2021 profile hedge book.
Kevin a similar position the 2020 as you can I get to the end of this year and so I guess I just wanted to kind of reconfirmed that you guys feel comfortable hedging at the current 2021 strip to kind of bolster that position.
Yes, it will be I'd, just say, we're going to be a combination of programmatic and as well as an active hedge process and.
And so we will not.
It's a it's a process. It takes a lot of time to do so it's I think about it in some cases dollar cost averaging think about it as being very tactical in certain areas, where we can actually hedge at prices we like.
We're not going to force and lock in the bottom here, we're going to lock in I call the commodity as it rallies up over time and for example, we we did some basis hedges recently that effectively give us a 250 nymex kind of floor and so we're able to do certain things in different locations to be able to take advantage of what the market gives us at.
Moments in time, but Samir I mean high level.
Our activity levels that returns that were generating on our operations on understanding about what we need to do just to.
Take care of our balance sheet.
Yes, Dan coupled with with our macro perspective on.
Yes, but to hold the are on track.
Were where weaving together to generate the right hedging strategy I think the progress we've made over the past six months have given us a really good handle on what the operations the activity levels.
The balance it looks like now it's really just.
Figured out what our view is on the macro.
And.
How much we need that.
Okay got it that definitely helps clarify that I.
I guess the second question as it relates to kind of hedge book in activity as you can I referenced.
You guys mentioned earlier, you have about 87% hedged right now and if you sold some assets that would help the percentage but.
If we kind of what I, what if scenarios out there maybe you don't get any assets sales Don would you think about kind of pulling back on the production for this year to better match.
The hedge book versus the production profile, given where prices are today or do we need to think about it from a longer term perspective, as you think about the leverage profile as well.
We we will always optimize so and so.
Activity can move in and around one year to the other but we're we're going to we're going to make sure. We do everything on a pure return and economic basis, and we obviously have to take in consideration levered metrics and ability to generate free cash flow and paying down debt. So this is a multitude of things that go into it.
Okay, and I guess kind of within that I mean would you guys consider curtailing production without necessarily kind of impairing maybe into 2021 profile from an activity standpoint, or anything, but just trying to be a little bit.
More accommodative other price on that your volumes.
Yeah, I mean, we could because if the commodity basically is not a you know doesn't give us the return that we want absolutely.
Okay. Thank you.
And with bad I will turn the program back over to Toby Rice.
Thanks, everybody for that for your time today, you know just stepping back just looking.
Over the past six months, we've made some very big strides on the transformation in evolution to be Qt, starting with the organization bringing in.
A dedicated team of leaders to complement the existing staff here.
We've aligned the operations with our scheduling evolve all design. We've now with this you train negotiation, we've aligned our infrastructure.
To our strategy.
All of this is going to allow us to be better capital allocators create more value for our shareholders.
In closing I'd, just like to thank the train team and all the work they've done I know that you'd see team work. We're excited about the partnership and excited about delivering on the results that our shareholders deserve so with that thank you. Thanks, everybody have a good day.
Thank you again for joining US today. This does conclude today's conference call you may now disconnect.
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