Q3 2020 EQT Corp Earnings Call
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Hello.
Todd.
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Ladies and gentlemen, thank you for standing by and welcome to the Q.
Well that's me when you look only results conference call at this time all participants are in.
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I would now like to upon the conference over to you for people to be Andrew breed director of Investor Relations. Thank you. Please go ahead Sir.
Good morning, and thank you for joining today's conference call with me today are Toby Rice, President and Chief Executive Officer, and David Carney Chief Financial Officer.
The replay for todays call will be available on our website for a seven day period beginning this evening the telephone number for the replay is one 805 eat five athree six seven with a confirmation code of 89712 to six and.
In a moment, Toby and able to present it prepared remarks with a question and answer session to follow an updated investor presentation is available on the Investor Relations portion of our web site, which we may reference certain slides during this discussion.
I'd like to remind you that today's call may also contain forward looking statements actual results future events could materially different for these forward looking statements because of the factors described in today's earnings release and in the risk factors section of our form 10-K for the year end December 31, 2019 and in subsequent filings, we make with the SEC.
We do not undertake any duty to update any forward looking statements today's.
Today's call May also contain certain non-GAAP financial measures. Please refer to this morning's earnings release and our most recent investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures and with that I'll turn it over to Toby.
Thanks, Andrew and good morning, everyone. Today, I look forward to providing an update on the business and how we progress with our strategic initiatives, but first I'd like to jump right into the positive results of the third quarter.
The momentum that we experienced during the transformational first year of managing this company has continued in the third quarter, which was another impressive quarter, both operationally and financially we delivered sales volumes of 366 Bcf fee, which was inline with our original guidance range. Despite 15 Bcf that we strategically curtailed at the beginning of September.
And through the remainder of the quarter on the well cost front, we continued to realize improvements in operational performance delivering well cost of $660 per foot on our Pennsylvania Marcellus asset CIRCOR.
Third quarter, well costs were $20 per foot lower than last quarter, 10% lower than target and 22% lower than just one year ago. This continued progression gives us increasing confidence and makes our future development plan that much more compelling as we continue to find ways to increase performance and enhance results we.
We continue to do more with less and that is apparent in our third quarter capex spend of $248 million, which is $227 million below the same period last year and $55 million below last quarter. The efficiencies that we continue to see in both drilling and completions substantiate the capex improvements with less than 20%.
The year to date cost improvements being attributable to service cost deflation.
These are truly sustainable cost reductions on.
On the drilling side, we've seen roughly 20% improvement in horizontal drilling speeds quarter over quarter, and roughly 60% year over year, which was accomplished through the continued application of best practices executed by the same crews guided by a stable operation schedule.
On the completion side, our electric Frac fleets are really hitting their stride improving pumping hours in stages per month by approximately 15% respectively quarter over quarter. In addition.
In addition to our electric Frac fleets accomplishments. Our teams have continued to find ways to streamline our operations. These efforts include automating processes that were previously manual employing new technologies to increase the reliability efficiency and safety of our operations.
Utilizing centralized operating systems, taking data that was one silo and fragmented and turning into easily accessible and usable data to drive better decision, making and improve performance puts us.
Put simply we are leaving no stone unturned to find ways to improve the performance of this business. The continued outperformance has resulted in positive revisions to certain full year 2020 guidance at the midpoint, including an increase to production of 15 Bcf fee and a decrease in capital expenditures of $50 million. This represents the fourth time, we have reduced our two.
2020 capital guidance for a total of $275 million or 20% of the original budget, all while delivering more volumes, even considering strategic curtailments.
After accounting for a slight widening in expected differentials. This will drive an expected improvement of $25 million and free cash flow as we continue our financial and operational transformation. We do so with a heightened focus on our commitment to corporate responsibility and transparency. We recently launched our revamped SG report focused on our evolution as a.
Company enhanced leadership directives, our operational strategy and the implementation of our mission vision and values all aimed at becoming the operator of choice for all stakeholders in the clear SSG leader in the natural gas industry.
Before I get into highlights of the report it's important to spend a little time on the criticality of natural gas to the energy mix of the future you will see on slide 24 of our Investor presentation. You can tease operations have the second lowest emissions intensity of nearly 40 survey domestic and global S&P companies during the period, our peers and Appalachian perfect.
At similar levels looking.
Looking specifically at gas producers you will see on slide 25 that of the top 10 us natural gas producers Appalachian players produced approximately 60% more gas with 70% lower emissions intensity.
What excites me about this data is the differentiation of natural gas and in particular Appalachian natural gas the reliability availability and cost benefits of natural gas are unquestionable and we think as people start to look at the data there will be a decoupling of natural gas from other fossil fuels as it pertains to environmental and socio economic Bennett.
Thats.
Turning to our SSG report you will see that we have provided a detailed framework on how we think about our business and how all the pieces are aligned to execute on a cohesive operational corporate in DSG strategy, our impacts on the side of things are principally an output of operating in an informed supported and purpose driven manner.
In our report we highlight among other things the significant environmental benefits of our combo development strategy, how integrating TSG into our digital work environment improves data collection analysis and reporting.
Our commitment to operating safely while utilizing the highest standards to protect and mitigate impacts in the environment and.
Investments made in our local communities, including over $29 million and contributions in the form of infrastructure improvements brands scholarships and sponsorships and steps we are taking to reduce greenhouse gas emissions, which have decreased 23% compared to 2018 our end.
I encourage you to review our report, which can be found on our Investor Relations website.
Shifting gears I would like to talk about the compelling macro natural gas setup. There are several main points that drive our multiyear bullish thesis.
In the near term supply and demand will continue to tighten as weather demand overcomes the storage overhang core acreage within the gassy regions are continuing to be drilled up leaving tier two and tier three inventory that can only be economically drilled at materially higher strip and lastly, total us rig counts in completion crews have fallen by approximately 65% since the beginning of the year.
Okay, and Appalachian there need to be about 30% more rates to keep production flat and in the haynesville that number's about 15% more rigs.
In the medium term within the industry. There was approximately a $115 billion of debt due from now until 2023, which has forced producers to focus on corporate returns and fixing their balance sheets, rather than growing production and the long term. We believe there will be a sustainable and long term global call on us natural gas, we anticipate that.
Long term use demand will increase driven by coal and nuclear retirements, partially offset by renewable builds and long term global demand will increase driven by economic development in the developing countries there.
The favorable macro dynamics as well as continued execution of our operational and financial strategies optimally positioned GTT to capitalize on this set up and outperform peers. The forward curve for 21 has moved up into the $3 level in the 20 to curve is now in the low to Seventys.
The all important indicators this will not cause you to add growth in 2021 as the curve is still too low and backward dated.
We are focused on running an efficient business plan aimed at increasing NAV per share driven by efficiency gains and not growth we believe.
We believe that one of the most important drivers of value creation for our shareholders is getting our asset valued at a long term price deck that is closer to $3 as opposed to 250 and looking at the strip. There is clearly a need for more discipline from BTT and all other operators to achieve this.
I'd now like to pass the call over to Dave to further discuss some of our financial and strategic highlights.
Thanks, Toby first I'd like to start by briefly providing some color on the production curtailment that we implemented during the quarter.
Talent was initiated on September Onest and remains shut in for the entire month Weve.
We began a phased approach to bringing these volumes back online at the beginning of October and oil production has returned to sales the driver for the curtailment program was a material price arbitrage between September and winter 2020 pricing and beyond as.
As we continue outperform operationally, we're able to defer those extra volumes to be monetized in a much more attractive future price environment.
Additionally, we hedged this production to lock in favorable pricing and the attractive economics, which provides a triple digit IR and.
In all the impact of the curtailment was 15 Bcf that came out of our third quarter. While we are still able to deliver volumes near the midpoint of our guidance range going forward. We will continue to use curtailment strategically to capture incremental value when the opportunity presents itself.
This deglaze nicely into the hedging activity that we recently completed during the third quarter. We did 2021 scripts for increased volatility, but ultimately moved higher currently sitting just above $3 as prices were rising we were opportunistically, adding 2021 hedges during the period to lock in value and protect downside risks.
With two key goals in mind first the ability to pay off our remaining $900 million of 2021, and 2022 debt with free cash flow and our train the equity stake and.
And secondly, locking investment grade metrics with this.
With this hedge position and a strong 2021 and rising 2022 strip, we believe Weve achieved these key milestone goals.
As the largest producer of natural gas our hedge program in a broad sense is set to provide downside protection, while capturing the upside while it would be better to capture 100% upside from rising prices. It is prudent for us to take the risk away from associated with a warmer than normal winter longer lasting impacts from coated and higher than.
Expected oil prices.
While initiating forward hedges, we take a surgical approach aimed at targeting the higher risk seasonal periods, resulting in more risk protection in the volatile summer months, while leaving more upside in the winter months to be hedged over time.
Since June Thirtyth, we have added approximately 350 million Deco therms of 2021 swaps at 2090 cents.
At a $155 million of 2021 collars with a $2.75 heckathorn floor and at $3.15 Deco Therms ceiling.
As a result, we now have approximately 72% of our 2021 expected production hedged assuming maintenance level production up from the 40% at the end of the second quarter.
During the quarter, we also experienced some regional price volatility and widening of local basis.
Our strong fundamental team saw this coming back in May and as a result, we put on a robust basis hedge position for the fall of 2020 for Dominion, South and Tetco Mtwo at a spread of approximately negative 90 cents to Henry hub.
Ultimately differentials to allow to over negative dollar 55, and we were insulated from much of that exposure although.
Although heavily protected the significant basis wanting during the period did push our third quarter differentials towards the weaker end of guidance coming in at a negative 48 cents per Mcf.
This takes me to a quick overview of our third quarter financial results.
As mentioned before we're able to be within our guidance range for both sales volumes and average differentials at 366 Bcf fee and a negative 48 cents per Mcf, respectively. Our adjusted operating revenues for the quarter were $853 million and our total operating costs per unit were $1.44 per Mcf.
Operating cost per Mcf fee were negatively impacted during the third quarter by the strategic volume Curtailments. In addition for the third quarter of 2020, adjusted EPS Gionee per Mcf fee increased as compared to the same period in 2019 due to the higher incentive compensation expense, resulting from changes in the value of our away.
George which exceeded the favorable impact of our personnel costs from reductions in workforce as Tobi mentioned earlier, we came in below our internal expectations on the cap rate on capital expenditures at $248 million due to continue operational outperformance.
Our adjusted operating cash flow for the quarter was $295 million, which led to a positive free cash flow of approximately $47 million.
Shifting gears I'd like to update everyone on the progress we have made on the debt front in July we received at $202 million tax refund, including interest that we used to repurchase approximately $102 million of our four and seven eight senior notes due in 2021.
As of September Thirtyth, our net debt was $4.7 billion, which is roughly 100 million higher than the second quarter.
This increase was driven by roughly $245 million of borrowings on our revolver for margin deposits associated with the over the counter derivatives and exchange traded gas contracts. These.
These deposits are reported as a current asset in our balance sheet.
Importantly, these margin posting requirements change with commodity price movements and with respect to the over the counter derivatives, our credit ratings Accordingly, our margin deposits will significantly decrease with just a one rating increase which we are aggressively pursuing naturally improve with rising gas natural gas prices.
We view this as a more of a temporary liquidity item rather than a matter of truly impacting our leverage when adjusting for these margin postings, our net debt decreased quarter over quarter by approximately $145 million to approximately $4.47 billion, implying a 2.81 net debt to adjusting last 12 months EBITDA leverage ratio.
To add one more aside to our liquidity position, we have seen increased bank competition to participate in our credit facility, which we view as a testament to our financial strength and commitment to our responsible capital allocation.
Further enhancing our debt reduction plan is another $40 million in tax refunds, we expect to receive in the fourth quarter related to the successful appeal over certain prior year federal taxes paid.
Additionally, we were forecasting 85 to 135 million of free cash flow in the fourth quarter, the new tax refund fourth quarter free cash flow remaining eritreans stake and a material level of 2021 free cash flow give us high confidence in our ability to achieve our $3.5 billion to $3.7 billion total debt goal by.
Year end 2021.
This plus and improving strip all begs the question about our current credit ratings, our recent discussions with the rating agencies were positive.
We believe we currently sit with investment grade metrics using the forward curve, which provides us incentive to lock those prices and through hedging.
We will continue to pay down debt and hedge more over time as those are two important things we need to do to reach investment grade.
We firmly believe the macro factors to Toby discussed along with our continued execution lay the groundwork for positive rating actions over the next 12 to 18 months.
To further support this thesis I'd like to point you to slide 19 in our Investor presentation, which shows entities debt trading performance against various investment and non investment grade indices.
As you can see our debt trade in line with investment grade peers signaling investors also think of equity as an investment grade company.
I'd like to conclude on any remarks by today by touching on a plan to rationalize our firm transportation portfolio.
Constructive conversations continue to take place regarding offloading, some or all of our MVP capacity.
We do not believe that striking deal is dependent upon MDP being in service and feel that the viability of executing a transaction continues to improve.
This is a very important financial catalyst for the company, one of which will drive material improvement to margins of free cash flow our team.
Our team is very focused on this opportunity and we continue to strive to have something in place at the end of the year.
Now I'll turn it over to Toby to wrap things up.
Thanks, Dave EG team is uniquely positioned to demonstrate the true value of the natural gas can and will bring to the future energy mix of this country. As we continue this transformational journey to realize the full potential of Utica Premier shale assets, our focus will not only be on the financial and operational results, we deliver what on how we.
To achieve those results our strategic approach is centered around the culture, we create the technology, we utilize the people executing the plan and the ultimate impact we have on the environment and communities in which we operate all of these elements create a cohesive operational corporate and MSG focus strategy being executed with vision and purpose.
These foundational elements that we've put in place guide our daily processes, and we will be what separates us from our peers, creating a clear natural gas leader and operator of choice to all stakeholders and ensuring sustainable long term value creation I'd like to thank all our employees for their continued hard work and dedication and everyone in attendance today for their continued into.
Yes in support of the Qt and with that I will turn the call over to the operator for today.
As a reminder to ask a question given the depressed from one on your telephone.
Finally, Troy Please press the pound all Hush puppies.
Please stand by while we compile to Q and he will.
Your first question comes from Josh Silverstein of Wolfe Research. Your line is open.
Thanks, Good morning, guys.
Just continuing the thought that David had there on MVP.
Right now it certainly makes sense for you guys to get rid of the whole position given the current basis differentials.
Potentially being that the last pipes out of the basin in the Marcellus, but we have applied pull on that is there any thought as to keeping some of the capacity there was an old.
Get rid of it all at this point.
Yes, Hi, this is Dave Josh.
We are studying that.
And I think just one thing to be careful about I know basis really blew out a little bit wider than normal, but let's remember that we had a warmer than normal winter and then we were sitting with coded and so I think we had a little bit unusual circumstances, but I think.
We're studying that we're trying to decide whether we want to keep some of that and just record rent.
Also remind we can we can probably will so replicate that to some degree with the sales agreement as opposed to owning all the pipe to so there's there's multiple things were thinking through here.
That's it thanks for that and then on the M&A side to two things here you get bookings continue to reference.
Sales as part of the debt reduction strategies and then if any thoughts there and then obviously you guys have been.
We are going to be in discussions with the chevron assets or.
While we may not be able to share much. There is any detail you can provide around the production base or the acreage footprint that would be helpful.
Sure Josh on the on the nonstrategic asset sales, we've been pretty consistent on messaging there I mean, the biggest gap for US was the bid ask spread largely driven by.
Commodity priced use.
Used to value the assets. So we've said as the strip materialize materializes to our view, which is sort of.
Sort of closer to where we're at today.
That bid ask spread close on those nonstrategic assets. So we'll continue to evaluate any any potential offers on those as they come in.
Then on the M&A front, yet, we're not going to speak about specific deals, but I continue to believe that.
Anything we would ever look at would would would have to be a good strategic fit at the right value and and accretive on a free cash flow per share and on that basis.
Businesses.
Your next question comes from Inrone around JP Morgan team. Your line is open.
Yes, Tobey Dave.
Wondered if we could start maybe with an update on the hammerhead system and if you exercise your option to purchase the system. I think is the agreement called for a 12% discount and maybe just give us some thoughts that aware.
You stand with the train on this on this dispute.
Yes.
One I think we're not going to comment much on I think.
We might put some comment out in our 10-Q at the end of the as the date today. So you can take a look at it but I think we are going to be very.
More silent on this and just know that or.
Our goal is always to work with our partner each train and I'd.
I think we've had.
The disputes in the past and we'll come to some sort of resolution in the future. So.
I, just take sort of stay tuned.
Fair enough.
And just my follow up would be I was wondering if you could maybe help us unpack the free cash flow guide a little bit I know, there's some moving pieces between call it organic free cash flow generation and the notable tax proceeds but can you help us unpack how much of that 325 free cash flow is kind of from the organic.
Base business versus versus taxes.
Sure. So if you use 325 is the mid point here.
There is about roughly 100 million of tax refund baked in there. So so so take it down to 225 of organic and just to remind everybody we shutting abouts.
65 bps for this year roughly and so.
And so that would have been another $65 million of probably are more of free cash flow.
And and then we were going to get about we'll call it.
$450 million of tax refunds on top of that so that will give you a sense of the total.
Free cash flow plus tax refunds that we were able to use to pay down debt.
If I could sneak one more in David you mentioned the kit collateral postings. This quarter. If you did get a one notch upgrade could you just maybe help us think about the magnitude or the improved liquidity to get some of that.
Yes, I would say, it's probably about two thirds of the of improvement.
Of that number.
And so there's some moving parts in there no.
We post collateral with this different banks different banks have different credit levels and in some of the banks have unlimited credit levels. So so we move things around a little bit and then we also use the exchanges and so but the rough number you should think about it about two thirds.
Thats helpful. Thanks, a lot gents.
Youre welcome.
Your next question comes from close signals of RBC capital market. Your line is open.
Yes. Thanks. Appreciate your also your comments on on MVP and the status of those negotiations, but can you can you just for me I guess dumb it down little bit what are the key discussion points between you and the Counterparties right now.
And what what really is I guess holding it up from from getting some some.
Some some kind of a decision I know these.
You are very complex negotiations, but if you can help me out and understand what are some of the kind of back and forth points.
Yes, I'd just say, it's hard to say, we want to get we won't get into a lot of things because we are in negotiations, but I'll. Just say we have we are negotiating with like a four five parties right now.
And just to understand this is a long term contract so everybody wants to make sure they understand their needs and so and in some cases some of the parties will part of HCP.
That was kind of in some.
In some cases, a shock onto the system. So this just understanding.
Again, what their long term needs are so I think it's.
No.
Multiple parties multiple views and long term contract and so it just takes some time and then I think the last pieces. We just want to make sure we understand from our standpoint, if we want to keep adding and.
So it just all that plays into the timing.
Okay, and you still think below year end 20 is still a good time for but think of where you have some.
Yes.
Okay and my follow up is just theres been a flurry of consolidation in the space and obviously you gave your high level comments on asset.
Asset sales in the market, but.
Toby maybe if you can give us just a view of where you think like the Appalachian gas market goes from here in terms of consolidation I mean, you've seen some from a lot of the Oilier players you think something similarly dad is going to happen with the gas players and how quickly could that evolves.
Sure I think investors certainly have an appetite for.
For for companies that can operate at a larger scale not just simply for the sake of scale, but because there is real value to be created I think you look at what we've done any qt taken advantage of our scale.
Yes, there is real value that we're creating whether that means we get more reps.
On the wells that we that we execute which gives us more opportunities to improve operational performance.
Being able to have access to to really cutting edge technology like our electric Frac fleets that you can only put in if you have a stable operation schedule.
The benefits of scale, you get from having a larger.
The large operating footprint and a large gathering system that you train provides us which gives us access to a lot more markets and then also from on the balance sheet side of things, having an investment grade.
Credit credit rating is something thats going to be a differentiated as well. So I mean, I think investors are right and having the desire for larger scale companies and companies like acuity.
That can take advantage of that scale and create value for shareholders. I think is going to be a theme that that that should be look for.
Thank you.
Your next question comes from will lead to a lot of Scotia Howard Weil. Your line is open.
Thank you good morning, gentlemen.
Maybe just a couple quick follow ups to the previous question.
Yes cash is question on NBP, Dave can you remind us what your letter of credit posting are for that project.
Yes, Holly we don't break it out by pipeline I, just we have basically 800 million of letters of credit.
In place and again, we don't we don't give it.
Give it by project.
Would it come down materially if you optimize that whole.
Yeah.
It would come down yes.
I guess it depends on what you define as material.
I think more and more and more importantly, as our crew.
As our credit ratings improve it will.
It will come down and I think thats, probably the bigger I'd call the bigger driver between the two.
Okay. Okay. That's helpful.
And then maybe a follow up to some of the M&A type of question can you highlighted in your prepared remark how Appalachian accept on any equity perspective, do you think that this ultimately start moving through the mindset of.
Producers.
As we kind of look at the oil M&A market here.
I mean, I think that DSG.
Good just be another barrier to some.
Some of the smaller scale companies.
Certainly on the private side, it's been it's just another.
Thing and feature that you need to you need to bolt on to your business certainly LTC with the the number of employees and specialists that we have to focus and improve.
Improve the performance across all industry metrics is a benefit you get from from a large organization and scale. So I think larger companies or have the resources needed.
Needed to dedicate to improving the performance on DSD performance, we think is going to be a differentiator and.
Something that investors care about and we certainly believe.
The benefits of the strong CSG performance is going to be a key to long term value creation for shareholders.
Okay, Great and then maybe one final one for me.
It is now come in I think below your well cost target two quarters in a row and.
Obviously, you're you're now your full year average is well below that can you just talked about sort of the year, we are well cost trends and then any potential update to those targets that you see coming.
Sure I think just looking at slides nine through 12 sort of tell the story.
Where we're at right now is we.
We continue to produce results that actually drive.
Drive value by lowering our well costs.
We started gotten past the fix the business phase that you see in the large large.
It's sort of towards the earlier when we got in now what you're starting to see is the innovative approach that we have at EDC you today. So.
You see that that's driving the operational efficiencies Weve made some pretty big strides in.
Still on the drilling side and on the completion side and really what's driving that is really highlighted on slide 12, which is just the continued application of new technology, and and leveraging that technology to drive operational efficiencies, which drive well costs.
On top of that I'd say, we've been able to to take it to lock in some of the service pricing that we have about 50% of our services are locked in of our spend is locked in.
To provide some some are sustained.
Sustainability and the like.
Well cost performance that we've been able to demonstrate so we'll see how much more we can innovate and continue to drive the performance and I'm encouraged.
To have an organization that has as the ability to evolve and innovate.
Great. Thanks.
Thank you.
Your next question comes from Mark total channel from Morgan Stanley. Your line is open.
Hey, guys. Thanks.
Thanks for taking the question.
Good morning.
Just want to build on Holly's question thinking about sustaining capital and 2021.
I think it was a year ago, you gave a $1.15 billion kind of preliminary number.
Just curious any early thoughts on spending or sort of how much of the savings that you realize or sort of built into that that prior target.
So I would just say that we continue to walk down our 2020 Capex ads.
Planning for 2021, Capex numbers, and we're going to continue a maintenance program and we're going to we would say that probably start with what we are at with 2020 for our maintenance Capex is going to be a good starting point for 2021.
Okay, and then just to follow up on that the.
So 80% of the cost savings are sustainable can you just comment on that that we're meeting piece sort of what scenarios would that come back into the cost structure.
How long do you have a service costs locked up for.
Once you start there'll be no certainty as far as the sustainability I mean, the operation schedule that we have the lateral length that we're putting out there the percentage of combo as those things are all increasing so that's.
So that's going to that certainly is very sustainable that's really what steps the operational teams up to to really drive operational efficiencies, which drives cost.
So that that's one good well design, we're going to continue with the with the evolved while designs that we've been putting in place here. So I don't see any changes there. So we have a good idea of what these wells would it take what it takes to actually execute these wells the well design that we have.
And.
The other thing I'd say is from the sustainability part from a service price perspective, meaning Theres My comments on the fact that we've got over 50% of our spend is locked in with service cost. So.
And those are the bigger needle moving items like Frac like Frac fleets things that are more sensitive to moving if if you have a rise in activity levels, which again, it's it will work pretty anemic levels from a from an activity level standpoint, with under 300 rigs running in the country.
We don't anticipate service pricing to fit to rise materially.
Because we don't expect activity rise materially so we feel like we're in a really good position from a cost perspective to make these sustainable.
Great. Thanks, so much guys.
Got it.
Your next question comes from Brian singer of Goldman Sachs. Your line is open.
Thank you good morning.
I wanted to follow up on the last question, there, but really a bit more from a production activity perspective, you mention you want to see more long term price expectations at $3 or so versus 52.
To increase activity or have more confidence in doing that is the implication then we should assume you'd be producing around fourth quarter type level 320, 21 at the maintenance capital and then if gas prices are longer dated futures and three that's when we would expect more of a ramp up in activity.
Yes, I would say we look at.
Well for US maintenance Capex is the production levels that we're looking at probably on a yearly bcf level as opposed to what our core quarterly production level would be so I mean, just peg that at the 14 80 to 5100 Bcf for the year.
Yes, with maybe some shut ins occasionally in there if we want to take advantage of arbitrage, yes, and as far as to answer your question on when we would think about growth.
We're going to stay consistent with messaging with prior messaging, which is there is a couple of things we want to see first number one is we want to get our balance sheet and our leverage targets, which we're well on track to doing that by buying at 21.
I think the other thing we look at is you need to have a sustainable strip that thats, probably more than just the next 12 months out.
And so we'll be surveying the landscape when we get to that when we get to that point.
And then maybe the third part is Brian I think growth for us is probably zero to 5%. So it's not going to be like the old days of 2030%. So it will be very modest growth if we do grow.
Great. Thank you and then my follow up then goes back to the topic of M&A and on the last call you talked about that you need to have confidence in M&A free cash flow per share accretion and you mentioned that again here. Today. You also mentioned that you need any M&A to continue to de leveraging the business and I realize that you can't touch specifically, but I wondered if you could characterize.
The market broadly on what.
On whether those opportunities are available or available to achieve both is that both those goals as well as I think you also mentioned an 80 per share earlier in the call.
Yes, sure. So I mean, we've said historically is it's it's a buyer's market, we think that thats still the market that we're in so it all comes down to that hit in those those metrics that we talked about is getting assets at the at the right price. So I mean thats the.
That's what I think is going to be an ultimate determination on on being able to achieve those type of metrics.
And I guess, we get the question on that as to the you said the use of equity and I guess, when we were doing it would seem like if the goal is to contribute to de leveraging that that that would be a part.
And can you comment or maybe philosophically about that.
Yes. So this is Dave so.
One thing to just think about is.
Of probably a few weeks ago. When we were at a conference we mentioned to everybody that our balance sheet.
Back in a few weeks ago when the curve was actually lower we could see ourselves already get cut a two times leverage or less.
And so I think.
From a from a from a.
The ability to need equity effectively to fund an acquisition to de lever I think this the fact that the strip is risen up a lot.
Has really put ourselves already in our co investment grade metrics, that's kind of why we talked about so I think if we do ever do M&A I think the need for equity has significantly dropped and.
It doesn't mean, we wouldn't do it but I have to say that you know I think theres views out there that were written that we'd have to do a lot more equity, but I think again to toby's point.
If we buy it right number one that's the first point and.
And then the fact that we're already sitting in investment grade metrics puts us in another good spot where equity is really less lead needed.
Thank you.
Youre welcome.
Your next question comes from leaking Kumar of Wells Fargo. Your line is open.
Okay. So thank you for taking my question.
I'll start with you've talked a little bit above the long term growth and I think you mentioned do 5%.
Can you use is another leg to the investment case today, it's the cash account strategy.
How are you thinking about it what are the gating factors for you to start returning some of this excess cash flow to shareholders.
Yes, so hitting our leverage targets by it by 21, I think is going to give us the ability to make that decision. So that we can be returning capital to shareholders as early as 2021 I think that.
All things being equal.
When it's it's on our balance sheet is has gotten to a place where we'd like it.
Growth or return capital shareholders were most likely going to be returning capital to shareholders.
Got it.
Let my follow up is actually on slide 15, you kind of alluded to this.
The industry and even the Appalachian teams.
Seems to be under investing in supply.
I want to particularly type bonds or what do you see it allow you right now because.
I think your comment there is that you are not incentivized and industries are incentivized to.
Provide a supply response.
Does that mean that.
And then just kind of curious what are you seeing around board people, just being very very reticent to bring back activity.
Yes, I think I think that you see you just look back at the history here and anytime we see a price signal industry is increased rates and grown production.
On any production growth you get is offset by a decline in commodity price. So you're you're not really making any progress I think industry gets that right now I think the fact that our.
Operators are looking to to organically de leveraged their their balance sheet by reducing absolute debt as opposed to.
The increase in EBITDA is one of the things that sort of keeping up.
Keeping people disciplined on on the on the go.
On the growth and I think the other thing is if you look at the strip and while 21 is certainly come up which is great to see.
You look further out and we I think you'd look at that strip and 22, and 23 and realize that theres still an opportunity for for commodity prices to come up to a level that before anybody or think about adding more activity.
Great. Thank you.
And then I just jump in you can say that dumb.
Do you want to use return on capital employed as a long term return metric for investors that want to come back and really invest in this space.
The industry really needs 350 gas over the next five years to really generate that return on capital employed.
That's what I was looking.
Your next question comes from Jeffrey Campbell of ceiling, you broaden your line open.
Good morning.
My first question is on M&A.
Probably since you've said the fact that much.
Our license significant force of Appalachian kilowatt Acreages rolling up.
What would what will be the benefit of having more scale with a lot of attractive results.
Sure I think it comes down to just through the points I made earlier about the benefits of upscale.
So I mean being able to leverage technology at scale.
It's certainly going to be some that that would help.
Being able to leverage lower well costs across a larger asset base is another one.
And with the leverage a larger more robust gathering network access to more markets.
In the third and then and then also being able to take advantage of our best great balance sheet.
Would be that would be the other as well and I'd say strategically just having a little bit more control over supply.
With a disciplined approach I think is another thing that helps stabilize the commodity.
Like we said in our on our in our script scripted remarks.
The thing Thats going to increase the value of the biggest impact to the value for our shareholders are going to begin our asset value that at a price attired closer to $3 in 250 and more.
More discipline in the industry is certainly going to be a key towards towards achieving that.
Well, thanks for that and following on your last point regarding file.
Our net debt by saying.
Desired.
We have a higher commodity.
With all the oil price do you think is required.
Over the next couple of years to keep.
To keep taking volumes of associated natural gas out of the market.
Which in turn would allow us to waikiki better control setting.
I would say $50.
Okay perfect. Thank you.
Okay.
There are no further questions at this time I'll turn the call over to Toby Rice for closing remarks.
Thanks, everybody for your time today, we spent a lot of time over the past year talking about the results that that this organization has been able to produce.
But I would urge everybody to take a minute and go to our CSR report at ESG diabetes Dot Com I think it's a great example of how we don't just care about the results, we put up but how we how we generate those results.
And I'm proud of the the great work the team has done a pull in their report and hope everybody can check it out. So thanks, everybody. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Thanks.
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