Q4 2020 EQT Corp Earnings Call
Yes.
Got it.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the EQT Q for quarterly results conference call on them at all.
At this time all participants 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 one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to Mr. Andrew Breese. 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 Khani, 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 one 805 eight psi eight $3 67 with a confirmation code of five one day for 72.
In a moment Toby and David will present their prepared remarks with a question and answer session to follow and updated investor presentation has been posted to the investor relation portion of our website and we will refer to certain slides during today's discussion I would like to remind you that today's call may contain forward looking statements actual results and future events could materially differ.
From these forward statements because of factors described in today's earnings release, and our Investor presentation, and the risk factors section on our form 10-K and in subsequent filings we make with the SEC, we do not undertake any duty to update any forward looking statements. Today's call may also contain certain non-GAAP financial measures. Please.
For today's earnings release, and our most recent investor presentation for important disclosures regarding such measures, including reconciliations for the most comparable GAAP financial measures and with that I'll turn the call over to Tobi.
Thanks, Andrew and good morning, everyone. Today, I will briefly touch on some of the key items, we executed on in 2020 that reshaped the trajectory of this business why natural gas and EQT in particular presents a compelling investment thesis, we review our operational and financial plans for 2021 and provide a free cash flow forecast of our base plan.
Our team has been pushing hard to bring our vision into reality, while 2020 brought many accomplishments there were a handful of critical actions that have set us up for long term sustainable success.
First we entered 2020 staring down $3 5 billion of debt maturities due through 'twenty two.
We now sit with roughly 600 million, which can easily be managed with expected free cash flow and we are on a glide path to sub two times leverage.
Second we drastically reduced our cost structure, we did this by slashing well costs by over $250 per foot, increasing our production uptime from 85% to 98% and renegotiating our gathering contracts with macro trends all tolls on hedged free cash flow breakeven, which is the Henry hub price needed to generate on.
Is it a free cash flow under a maintenance production plan decrease from our legacy cost of over $2 80 in 2019.
For $2 40, and 2021 and is expected to decline to approximately $2 15 by 2026 much progress has been made in a year and we're looking forward to continuing this trend in the future.
Lastly, we demonstrated the impact that our modern operating model can have to rapidly evolving our business and enhancing operational financial and cultural performance, while securing sustainability with respect to ESG. We continue to believe that there is a symbiotic relationship between these goals and we have established an ESG committee focused on implementing company wide initiatives.
To drive continuous improvement across all facets of our business.
Like many companies across the globe, we have navigated a challenging and unprecedented year.
Along the way we were aligned with our mission to be the operator of choice for all stakeholders on.
On slide three we highlight key elements of our mission, we strive to be the securities on investors want to on the operator that service providers want to work for the employer that employees want to work with the lessee that landowners want at least two and the industry partner that our local communities embrace.
Our core values of trust heart teamwork and evolution Guide US along this path and remind us that it's not just about what we do but how we do it we hold the fundamental belief that success is driven by our people and we strive to produce a team that is completely aligned with what we do and how we do it I am proud to announce that EQT was recently recognized as a.
Top workplace in the U S demonstrating a clear linkage between cultural and operational excellence.
As we sit here today EQT presents a compelling investment story, which we have highlighted on slide six.
710000 core net Marcellus acres, and well over 15 years of low risk core Marcellus inventory on hand, EQT as dominant asset position is primed to deliver long term value to stakeholders.
80% of our inventory set up for combo development, which provides high confidence and predictability and well performance avoids parent child interference and will lead to sustainable free cash flow generation.
This will increasingly be a differentiator for EQT relative to its peers.
We have proven that we are disciplined capital allocators, and our 2021 plan demonstrates our commitment to a maintenance program under this maintenance mindset, we expect our base business to generate approximately $3 5 billion in cumulative free cash flow through 2026 at strip pricing. This base plan offers material upside.
<unk> and our track record of delivering speaks for itself on.
Talk of this due to our tremendous scale every nymex increase of 10 cents above current strip pricing generates an incremental $170 million of free cash flow.
And importantly, given the structure of our gathering agreements on the continued improvement in our operating efficiency. We expect 2026 free cash flow to be approximately 800 for 900 million for.
55% higher than 2021, despite a 4% lower natural gas price.
Our current free cash flow on balance sheet projections and highlight the achievements over the last year significantly accelerating our ability to execute on shareholder friendly actions, while also achieving investment grade metrics.
Lastly, we believe that access to energy is the most important factor driving unit progress. We're proud of the work that we do to make low carbon energy accessible to all and we believe that natural gas will play a key role in meeting the growing demand for reliable low cost energy, helping reduce cotwo emissions globally and serving as a long term low.
Low carbon base load fuel source, which is attracting new long term investors.
Yes.
Further supporting the favorable outlook for EQT on the improvements we continue to see on the natural gas macro trends.
Both dry gas and associated gas producers have demonstrated strong conviction for maintenance volume production.
Record cold temperatures in the eastern Hemisphere have buoyed global LNG markets, which should drive a more robust 2021 U S. LNG export market as there is growing sentiment that summer LNG demand will soon surpass expectations.
Coal production and deliverability issues have further increase on already robust GAAP power generation market and industrial demand specifically chemical output has started its recovery for pre COVID-19 levels and should continue to climb as the economy improves.
We believe that the most efficient wide, reaching an environmentally responsible way to satisfy the growing global demand for energy is by utilizing natural gas natural gas producing significantly less cotwo compared to oil and coal in the Appalachia basin. In particular is one of the lowest emitting shale plays in the United States.
That EQT our goal is to be a differentiated producer of a differentiated commodity our ESG program will differentiate our business and every aspect of our corporate strategy is underpinned by sustainable ESG goals. This program is more on embodiment of our interest in drive a reactionary response I'll remind you that in our first year of leadership.
We transitioned to exclusively electric frac crews have utilized hybrid drilling rigs and now using electric pneumatics on all new sites for.
Are there more our board recognizes the importance of alignment and has established a greenhouse gas emissions intensity target.
Target reduction of 4% in 2021 alone.
Today EQT is one of the lowest greenhouse gas emission intensity scores relative to our U S E&P operators.
<unk> also has one of the lowest methane emission intensities, but this is just the beginning we plan to release, our 2020 ESG report this summer at which point, we intend to publish net zero emissions and other targets until then we continue to evaluate ways in which we can provide more timely transparent and meaningful ESG performance disclosures to our stakeholders.
Yeah.
In early 2020, we established a cross functional ESG Committee, which include both executive management participation and board oversight the day.
Some of the initiatives that the committee is focused on include developing a proprietary ESG technology to bring transparency of our program to every member of our team.
Evaluating the most effective use of our resources to improve our emissions performance, which drove our pneumatic valves installation program in 2021.
And working toward towards obtaining responsible GAAP certifications, leading to our announced partnership with project Canary in early 2021.
This focus is integral and not only making sure we set the right targets, but that we capture and report the most relevant information we are confident that our vision and actions will make EQT at clear ESG leader.
This is a great segue into our 2021 operational and financial plans our strategy remains unchanged execute on maintenance program enhanced margins growth free cash flow and Delever. The business I would point you to slide nine and 10 for an overview of our 2021 program. We plan to spend one one to $1 $2 billion of cash.
<unk> expenditures to deliver net production volume of 16, 2% to 1700 Bcf a day.
At $1 31, 'twenty, one pricing, we expect to generate $1 85 to $1 95 billion and adjusted EBITDA and $500 million to $600 million in free cash flow.
On slide 10, we further break out our capital program, we plan to spend between $800 million to $850 million on reserve development, we plan to direct more activity towards our expansive west Virginia assets from 'twenty, one, resulting in capital allocation of approximately 65% for Pennsylvania 30 per cent for West, Virginia, and 5% for Ohio.
Further details, including expected well count on lateral lengths can be found on slide 11.
We also plan to spend $125 million to $140 million on land related projects.
Up of approximately $85 million on leasehold maintenance 50 million on infill leasing in mineral purchases.
Plan to spend $85 million to $100 million on other capex, which is largely comprised of our asset maintenance projects and capitalized interest.
Due to the capital program in 2021, we plan to construct a 45 mile mixed use water system in West, Virginia, which will serve as the backbone for optimizing West Virginia development and is a key element in reducing well cost in the future we plan to spend between $45 million to $55 million from 2021, and the system is expected to serve as its first.
Pad in the third quarter of this year further details regarding this water infrastructure project can be found on slide 12.
When normalizing for the water system.
Due to the 2021 program year over year capital expenditures are essentially flat while production is expected to be approximately 160 Bcf a day or 11% higher due primarily to the Chevron acquisition.
Going forward and assuming maintenance level production.
We expect capital efficiency to trend favorably with total capital expenditures dropping by $50 million to $100 million per year over the next several years our expectations for 2021 are high and I'll now pass it to day, Tony to discuss some of the other financial aspects of the business.
Thanks, Toby and good morning, everyone before I jump into the details I'd like to provide some reflection on 2020.
So let me discuss some of the key highlights of our 2020 accomplishments relating to our cost cutting and balance sheet enhancing actions, which enabled us to go from playing defense to going on the offensive.
But behind the scenes there were significant time investment to digitize our processes to focus our teams on improving planning accuracy forecasting and real time analysis.
Although our head count has come down since the 2019 on.
Productivity has materially improved and we have seamlessly integrated the chevron on assets as a result, the team has done an outstanding job. This past year and we expect this to continue into 2021.
I'd like to provide details regarding our year end reserves at year end 2020, we reported $19 eight tcf fee and total proved reserves up 13% year over year and up 5% after normalizing for the reserves associated with the Chevron on acquisition.
Despite a reduction of over $1 per Mcf, and our 2020 and realized pricing used for our gas reserves prescribed by the SEC rules. The increase in reserves demonstrates the resilience of our premier asset base, our cost reduction effort and our very efficient combo development strategy.
As further described in the 10-K that we will file later today, our standardized measure of discounted free future net cash flows was approximately $3 4 billion, which was calculated using historic SEC pricing of $1 38 per Mcf with oil.
Well aware of the commodity price challenges the industry faced in 2020, which are not reflected of the go forward price projections using the five year strip price as of year end 2020.
$2 <unk> per Mcf.
This increases our standardized measure of discounted future net cash flows.
$5 6 billion to $9 billion.
Although not a perfect gauge of value since gas prices are undervalued. It is much more reflective of the value of our booked proved reserves.
I'd like to also note that only 279 puds booked nearly 17% of our remaining core inventory and we have an extensive runway of value accretive inventory.
As we execute our combo development strategy, which significantly increases the band of EUR outcomes in well performance. The application. These improving Eur's will drive reserve enhancements as a result, we saw strong improvement in EUR performance for 2020 versus prior years.
I'd like to now discuss our hedge philosophy and positioning as we head into 2021 during.
During the fourth quarter of 2020, we continued executing our hedging strategy to protect against downside commodity risk opportunistically layering on incremental 2021 hedges.
As of today, we have Nymex hedges on approximately 85% of our expected 2021 gas production in conjunction with hedges on approximately 50% of our in basin basis exposure.
We are students of the commodity and understand the importance on getting the direction and timing is correct as possible.
Accordingly, we are big believers in hedging and added a significant amount of gas hedges this past year.
While we've focused a lot of our attention on natural gas, we are able to take advantage of the nearly 15% Cal 2021 run up in NGL prices that occurred in January locking in hedges on approximately 55% of our expected 2021 NGL production on.
Although NGL only represents about five percentage of our 2021 production base.
Expect to produce approximately 33000 barrels a day, which is meaningful to revenues and free cash flow.
We see 2022 is a real opportunity prices are starting to react to the cold weather strong LNG demand and improving economic outlook. We currently sits with 35% hedge position in 2022 for our dry gas production and we'll be patient and methodical as we build the print that.
Throughout the year.
In addition to hedging we are working on to augment our risk mitigation strategy by increasing our direct sales exposure and we are currently pursuing opportunities with both natural gas and LNG end market purchases.
Now I'd like to discuss the volatile regional pricing expense in the back half for 2020, and what we're expecting for 2021 and beyond.
Slide 19.
In our presentation that takes some of the dynamics that contributed to this volatility as you aware local basis blow out during fourth quarter breaking below $2 at various points in October and November.
This sharp decline in basis was driven by a combination of full on north east storage unusually high pipeline outages large shut ins coming back online and is significantly warmer than normal start to winter.
These factors have normalized basis has come down significantly.
With the absence of Appalachian pipeline outage in 2021, we expect local pricing to improve as operators, we have to be prepared for this volatility to hedging and other activities, but also be cognizant that these irregularities caused bias or basis for the unusually wide and be cautious not to over.
Correct.
Although we have a fulsome basis hedge position in place during the fourth quarter of 2020, we did feel some of the pricing weakness with average differentials coming in at a negative 66 per Mcf <unk> wider guidance range and inclusive of our 13th.
NCS gain realized on a basis swaps.
Looking ahead, we expect to realized 2021 average price differential of negative for you to negative <unk> 60.
Which is slightly wider than our full year 2020 on realized differential of negative <unk> 42.
The wider differentials are primarily driven by an incremental 2021 expected production associated with the acquired Chevron volumes.
Offset by the benefit of our contracted ft capacity coming back online in January.
Looking forward there are some positive Dan demand drivers on the horizon over the next few years, including accelerated coal retirements driven by increased regulations such as Reggie.
And the startup of the ethylene shell cracker plant from 2020 to among other things.
Annualized spread between local demand and takeaway capacity compared to supply is approximately three bcf per day, which is anticipated to grow by another one bcf per day due to in basin demand.
The benefit and timing of the two Bcf per day, MVP capacity as net incremental creating either even greater spread and we remind everyone that the south east needs the gas to help decarbonize and grow their local economies.
This takes me to a quick overview of our fourth quarter financial results.
Sales volumes were 401 Bcf a day.
Slightly above the high end of our guidance range.
This included approximately 12 Bcf related to the assets acquired and the Chevron on acquisition offset by some small sporadic shut ins executed during the period.
Our adjusted operating revenues for the quarter were 922 million on our total per unit operating costs were $1 30 per Mcf.
<unk> <unk> improvement from last quarter and below the low end of our annual guidance range.
For capital expenditures were $266 million inline with expectations in balance and.
In aggregate our performance drove adjusted operating cash flow for the quarter of $370 million and positive free cash flow of approximately $109 million.
For the full year 2020 sales volumes were for 298 Bcf a day roughly flat with a $50 per <unk> produced in 2019, despite the impact of approximately 46 Bcf of strategic volume curtailments during the 2023.
Adjusted operating revenues for $3 55 billion with total operating cost per unit or $1 36 per <unk>.
Capital expenditures were $1 8 billion, an impressive $694 million reduction compared to 2019.
For the adjusted operating cash flow coming in on $1 4 billion, we generated positive free cash flow for the year of $325 million.
Turning to the first quarter of 2021 expectations, we expect production volumes to come in at 405 for 425 Bcf a day.
Based on the January 31, 2021 market pricing combined with our basis hedge in a fixed price sales positions, we expect average differentials of negative 25% to 35.
On the operating cost side of the business, we expect relatively uniform quarterly performance with total 2021 per unit operating costs landing in the $1 29 to $1 41 per Mcf per day range. We also expect quarterly capital expenditures to be generally consistent journey to 2021 period and expect first quarter.
<unk> capital expenditures of approximately $280 million to $305 million.
I also wanted to provide a brief update on our debt targets post the chevron asset acquisition.
We plan to utilize the free cash flow to retire the remaining debt maturities through 2022 by the end of 2021 at which point, we expect our long term debt to be between three eight and $3 9 billion.
This should put us at or near the two times leverage target.
We will continue to pay down additional debt in 2022 until we are constantly churning below two times leverage.
With the recent ratings improvement, we reduced our annual interest expense by $10 million raised our credit to hedge by nearly $350 million and trend the small amount of Lcs.
Goal is to get back to investment grade and the recent credit upgrades from Moody's and S&P leaves us two notches away at all three agencies.
With respect to MVP, we are continually working with several companies to sell down incremental MVP capacity.
While the delayed in service date pushback on anticipated timing of Offloading, our targeted amount.
<unk> able to sell down approximately 125 million a day of capacity.
We are currently assuming MVP will be operational at the beginning of 2022.
But our carefully watching as progress unfolds with ACP cancellation earlier MVP is well positioned for this market demand as we execute additional capacity releases, we will provide updates accordingly.
And with that I'll turn it back over to Toby to wrap things up.
Thanks, Dave.
<unk> was a critical inflection point for this company and it was essential that 15 performed at a very high level to stabilize the business and secure its longevity, which is exactly what we did we exceeded our financial and operational plans positioning the company for the long term by strengthening our balance sheet and evolve the organization with the implementation of our modern operating.
Model.
<unk> create value in any environment.
The evolution of our digital platform will bring even greater governance efficiency and sustainability to our operational and financial performance as we move into 2021.
As we continue this transformational journey, our commitment to the environment and the communities in which we operate will be at the heart of everything we do we have the team in place we have the strategy defined and we have the cultural alignment established to take EQT for the next level from here.
Excited about the trajectory of this company and the value we plan to deliver to all of our stakeholders. We appreciate everyone's interest and support along the way and with that I'll turn it over to the operator for Q&A.
As a reminder to ask a question you will need to press star one on your telephone.
Your question. Please standby, while we compile the Q&A roster.
And your first question is from Arun <unk> with Jpmorgan.
Yes, Tobey I was wondering if you could start maybe with.
The higher net.
<unk> of capital towards the West Virginia, I was wondering if maybe you could go through how the economics stack up relative to Washington, and Greene County, as we did note that it looks like you will be developing in West Virginia.
Longer laterals.
With some of the spuds being in the 50000 foot, but wondering if you could maybe go through.
What kind of recoveries do you anticipate per thousand foot and just how the relative economics of the stack up.
Sure. Thanks Arun.
So the West Virginia, Marcellus economics are going to be fairly similar to Pennsylvania, you can see on that slide where we show the lateral lengths for we're spotting price.
For a big factor on that I think the other thing from a timing perspective.
Having the ability to get this water infrastructure is also going to help from a cost perspective as well.
So.
I think when you step back and you look at the debt.
The assets that we have about 40% of our leasehold with our core leasehold is in West Virginia. So it makes sense for us to start shifting some of our development.
For that area.
Makes sense.
On.
And then just a follow up David on your comments on.
For a partial sell down some of your MVP.
Capacity did I hear that you sold down 125.
That's great. Peter said is about 10% of your capacity or so.
Alright.
Okay.
Talk about.
What kind of impact we should anticipate on a go forward from that and.
Sounds like the but the timing.
Pushback, a little bit it may take a little bit more time, but youre loading some progress in terms of that strategic objective.
Yes, I would say, we're still very confident that we'll get.
More done I think we have multiple conversations going on.
And.
So you think about what we said is the impact to the cost structure.
<unk> is about a dime on.
On the 100% so.
10% would represent a better.
Any impact across the whole cost structure. So some progress. So I'd just say stay tuned we'll give you more progress as we execute tomorrow.
Great. Thanks, a lot.
Youre welcome.
Your next question is from Josh Silverstein with Wolfe Research.
Yeah. Thanks, Good morning, guys. Thanks for the comments on.
On the <unk>.
Just a couple of questions here.
Just curious if you are anticipating.
What kind of seasonal water depths in the middle of the year, because it seems like youre kind of guiding towards something wider and for the full year relative to the first quarter. So I just wanted to note that was kind of the seasonal just there.
And then I'm curious too if if.
The recent spikes that we've seen income the spot pricing has been.
Really really into that as well if there's any benefit that you guys have received from the local pricing going on up to $4 and $5 recently.
Yes. So one is the recent pop in pricing is not in our forecast.
Because we did our forecast as.
As of January 31, so as the weather was more recently on that so.
Yes, and so our forecast of differentials as factoring in the seasonality of the spring and the fall and on where you normally see wider differentials a little bit more wider in the fall than you do in the spring.
It'll be variance you see what eastern storage looks like at the end of this winter here and and where coal deliverability.
Well as there is a lot of the coal companies.
Issues R R.
Our very apparent.
And the other thing to think about.
Because of our ft portfolio, there's been a lot of uphold volatility in different locations and so having having multiple pipes for multiple reasons and especially now that <unk>.
Big slug of its back on line gives us a call from.
Oil and Optionality to create great value moving gas in and around for those regions.
Got it.
Have you guys actually have been able to sell some gas recently at some of these very very high prices.
Around the different regions.
Yes.
Got it thanks for that and then just a question on M&A.
You guys announced the Chevron acquisition and then subsequent to that we've now seen the other portion of that get acquired as well.
Clearly you guys one of the bigger operated portion, but I'm curious why not take them both sides of the transaction here on lift that might not have been an option for you guys six months ago.
Yes, Josh we participated in that process.
We bid conservatively and obviously didn't win.
I think the the move in commodity prices recently.
Will be helpful in getting us to take down the road for that we do have on that portion of the assets.
Got it thanks for that.
Yes.
Your next question is from Neal Dingmann with <unk> Securities.
Good morning.
My first question for you David just wondering your free cash flow just continues to do better and better each quarter continue to be very impressed with that.
My question with shareholder returns.
They will discuss.
Is it you want to get I know, you've talked about wanting to get the debt down to certain level, but you certainly have.
Hell of a lot of Optionality to provide shareholder return as quickly as you'd like so maybe just talk about that a little bit.
Sure Neal I'd say everything we're doing here at EQT is to accelerate the return of capital to shareholders.
So our goal is to get our leverage sub two times before we can start.
Thinking about that I think the other thing that's important to keep in mind is it.
As our cost structure continues to lower naturally through.
Over time with the lower gathering rates.
And then also for some of the other capital efficiency, we're going to be seeing in the operating program. It's just going to give us more flexibility to share.
To accelerate our ability to start returning capital to shareholders.
Total.
We agree with that and then one just follow up total.
Now moving over to the West Virginia Marcellus.
That just is there some delineation there or is it just you think there's appetite that you cannot.
Lower cost or maybe just talk about as you.
Turned there a little bit more.
Yeah sure from a reservoir perspective, if you look at the heat map, we put on slide seven shows that the geology is similar in West, Virginia, and Pennsylvania. So we feel really good about the reservoir performance side of things I think what's really important in west Virginia to be.
As economic as our Pennsylvania, Marcellus is just more critical to leverage combo development.
In West, Virginia, due to terrain and roads civil civil costs going to be a little bit higher and.
Combo development is just going to be much more important this combo development one of the things that does is it lets just spread out those several cost lower those on a dollar per foot and also really streamlined logistics. So that helps alleviate any of logistics issues you have with with with local road. So we've been patient we've always been excited about the rest of the assets that we've been.
Patient to make sure that we can set the table for <unk> development and the.
The sales.
For layout, we have on slide 11 shows.
The development that we're doing out there the wells on responding or are going to be set for 15000 foot laterals long laterals combo development is going to be a key to generating great returns on West Virginia.
Great. Thanks, guys, great free cash flow.
Yes. Thank you thanks Neal.
As a reminder, ladies and gentlemen that is star one if you would like to ask a question at this time. Your next question is from Brian singer with Goldman Sachs.
Thank you good morning.
I wanted to follow up on the West Virginia discussion from Neil on the Rune <unk>.
You mentioned on slide 11 that youre, well cost assumptions on our $775 per foot for West, Virginia, and I wondered if that is where costs are now or if that would be costs well costs with the benefit of the drastic reduction that youre planning, if you could kind of quantify where costs have been coming from and where you.
Those costs to get to you once water infrastructure and the other measures that you are planning.
Our online.
Sure. So the 775 is what we plan on doing this year.
The investments, we're making on water infrastructure will certainly help us get to that number and then for first year, but I would say that the target is to get that number closer to 735.
As we get the full benefit of the water restructure the civil spend that we're doing right now to set the table. So there is room for that number to come down but right. Now 775 is a good place where we feel comfortable we can we can deliver but there is certainly upside.
Those numbers.
Got it and does that kind of a fair expectation that you would have for 2022 or just bringing on the on the infrastructure take a longer period to achieve.
Yes. It may it may tick down another 5% so call it 20 to $25 a foot.
From 'twenty two.
Great. Thank you and then my follow up is with regards to.
Leverage the leverage targets.
And.
I wondered if you can.
Talk both about any asset sales, including.
Minority stake.
<unk>.
Or it day.
And then b.
Mentioned that sub two times is where you would think about returning capital to shareholders and I Wonder if that is the main if not only use of cash that you would expect once you've gone below two times or if there is consideration to investing back in that.
In some more activity in the natural gas around newer Ngls for scale.
Yes so.
To get to pay down the remainder of our debt, which is a very small amount.
Very good I think this was a $10 million left in 2021.
There's about 550 roughly in 2022 on the maturity, we will basically use free cash flow, we don't need asset sales.
And if and if need be.
We will probably sell E train stake in 2021, as well, but we don't necessarily need that to pay down our maturities.
And so we still have the optionality of selling the I'll call that bucket of assets, probably north well north of $1 billion free want too.
Take a bazooka.
The bigger piece of our debt.
Yes, and as far as capital allocation once we get that sub two times leverage I mean, the focus is certainly right now returning capital to shareholders I think.
We're still.
On the mentality of that.
For us to see any growth.
You're probably going to see a script that we think is more reflective of a fair price for gas, which is probably closer to $3. Then what strip is showing right now is as a reminder.
Theres based plan that we put out is based off the strip where gas prices are $2 55.
So we think that there is material.
Increase.
Outside.
On the commodity is right now.
So we probably need to see a higher strip in EBIT.
Production production growth for being low single digits.
Thank you very much.
Youre welcome.
Your next question is from John Abbott with Bank of America.
Good morning, Thank you for taking my questions.
First question is on the trajectory of Capex. It sounds like just going back with the commentary it sounds like Capex could go down over the next several years.
You gave that free cash flow outlook through 2026, roughly around $3 5 billion.
When you think about long term spending.
Is it out on the possibility that you might be down in the for in the realm of possibility it could be done on the 800 and $900 million range by around that time.
Yes, that's correct.
Just as disappointed just couple of things I, just want to make sure everybody understands about our cost structure the gathering rate.
Reductions that we're going to see those are already baked that's going to happen.
And then from a capex side of things.
The natural challenge of our PDP decline, our corporate decline is going to decrease.
From the upper Twenty's today to the low to mid twenties.
Years from now and all of that is going to allow us to spend $50 million to $100 million less capex year over year.
For lower our Capex numbers for the for the eight eight.
The $900 million that you mentioned.
Alright, and then my second question is on the gas gathering agreement.
So it's my understanding if MPT is still not on line by.
By the beginning of 2022.
You have the optionality for a $200 million cash payments.
Sure.
Should we assume that you would take that payment should we assume that you would take that payment or is there. Some reason that you would not on payments.
Yes, I think we'll just we'll play it by year there as well.
Look and see what the odds of MVP timing is that to make that decision I think.
Sure.
We.
It either comes in the form of taking cash and repay debt for lowering our cost structure, which comes in as EBITDA. So we will just have the thing through the calculus for them.
Thank you very much on a great quarter.
Thank you.
Your next question is from Noel Parks with Tuohy brothers.
Good morning.
Good morning.
I was interested to hear about.
The plans for investment in the water handling system and I apologize if you touched on this before.
But.
If I understood right part of it is for.
Got it impact of the <unk>.
<unk> acquired from for Chevron.
And I was wondering sort of looking back a couple years ago, when the new management team came on board.
Jeff were.
Kind of on that could do lift of.
Of efficiency measures that you had in mind.
One is water handling.
On the back burner, and Thats, just kind of risen as we observe other other.
As you can see that off the list or was this something that is done.
Jeff from.
Last year, our recent periods due from more of a need to invest in.
Yeah, Great question I'd say, we came in here a couple of years ago.
The focus really was on improving the capital efficiency of the.
The organization.
Part of that for us is going to be lowering our well cost in one of the big things that we have.
Big drivers behind that is going to be leveraging infrastructure to do that whether thats existing east grand infrastructure or.
New water infrastructure to support our development of West Virginia.
I think anytime we spend any dollar we look at the returns that we're going to we're going to generate and this water infrastructure. I think is we're really excited about the returns we can get.
On the cost savings, we will see from this would be from water infrastructure will be around $130 a foot.
It will cost us around $60 a foot to install it so it's a net $70 per foot gain.
One thing to point out there that those economics are based assuming this water on is only going to schedule that.
Wells that are already on our schedule.
Apart from $1 8 million horizontal feet.
The fact that we have such a large amount of undeveloped inventory thats not on the schedule.
We're going to be able to enjoy the benefit of this water infrastructure.
For years to come so we're pretty excited about.
Opportunity, but this water and I think just naturally from from an operating perspective.
We certainly have the skills and experience in working with water and I think that.
Water for structure is probably one of those asset classes that really.
It makes a lot of sense being owned and operated by the operator, just because of the.
High price points with logistics as it relates to servicing the completions.
Okay.
Great. Thanks, a lot.
Got it.
Your next question is from Holly Stewart with Scotia, Howard Weil.
Hello, gentlemen, good morning.
Good morning.
A lot going on on obviously right now on the on the macro front with supply and demand as we sit here in Houston without power.
And then he can I turn on.
Macro working with this polar event just curious how your macro assumptions have changed and then Dave I know you have initial perspective on the coal market. So and that obviously plays in natural gas prices continue to rise here. So.
Any sort of new new updates that you guys could give us on just how your macro landscape is evolving here.
Hello. This is Toby I think at a very high level, the extreme weather events that were experiencing and.
And the impact that it had on millions of Americans across the country I think.
It really really is a good time for everybody to step back in and re.
Reassess how critical infrastructure and energy is.
For people to live our lives on enable modern society.
And I think when you when that when the smoke clears and people do on the Postmortems on exactly what we could have done better.
I think that the balanced approach is going to be we need to think about not just.
Uh huh.
What sort of a certain sector of the infrastructure, but all infrastructure. There's certainly more work we need to do with.
With natural gas infrastructure.
When we talk about some of the differentials we have seen across different parts of the country.
One way to alleviate that his team is to put in more natural gas infrastructure projects like MVP are critical.
Connecting these markets and making sure that that we can continue to supply that growing demand. So I think this is an important reminder, on how important energy to our to our everyday lives and the things that we can do better.
Yes, I guess.
The pack a little bit on that just the I would say, obviously storage levels are going to draw down a little bit faster than people probably anticipate.
And.
And so I guess, the no probably puts more upward pressure on COVID-19 and the other periods to get back there.
And on the coal side, if you look at oil production.
Coal production is down about 20% and rails.
And the producers it's not a it's a big ship to turn in a quick amount of time. So the question is will there be deliverability.
Utility stockpiles are actually not that high.
As you would expect and so the question is as you head into maintenance season than the summer season.
We anticipated.
Gas to coal switching.
To be somewhat meaningful and that that'll be a big question Mark because.
The stockpiles for deliverability, and I'll call. It an export market Thats has been meaningfully higher than the domestic market. So it creates the incentive to ship what you have out of the out of the U S as opposed to keep it in.
Yep Yep.
Yes. Thank you for that maybe can we just.
Other high level question on on the M&A market, which we saw on Appalachia heat up a little bit in.
In 2020, and there's obviously a push I think from.
From companies to be bigger and have more scale.
How do you envision this playing out maybe it doesn't need to be 2021, but certainly over the next several years he has got.
I would say a decent amount of rigs and a lot of different enhance a lot of different hands in the Appalachian basin for any comments on just them.
Strategic view of the overall M&A landscape.
Yes, I think that it's.
It's similar to what we saw in 2020 I mean, the reality is we're still looking at a strip that's on the $2 50 to $2 60 range, so low commodity prices and the need for scale.
Is going to be critical I mean, I think that's going to be the next step for the show efficiency in this industry.
I say it a lot a lot of companies EQT has not not unique in the fact that we've we've made a significant.
Significant improvement.
On pulling a lot of costs out of our business.
A lot of a lot of guys, who have done that but when you step back and you realize it that in Appalachia, We've got 30 teams running around 30 rigs.
You may have very efficient companies, but when you look at that it's it could be more efficient in that.
The other thing is having multiple operators, it's you've got a lot of service providers that are running at call it 50% utilization.
And then you've got multiple interest multiple gathering infrastructures as well that are better or maybe not being optimized and running at full utilization. So I think consolidation naturally will help get the.
Allow operators to take full advantage of their talent on our service routers to take full advantage of their equipment and allow the infrastructure <unk> full utilization of their systems. All of this is going to deliver.
Healthier system and greater returns for our for our shareholders.
Yeah.
Alright, Thank you gentlemen.
Welcome.
Your next question is from.
<unk> Harrison with Simons NRG.
Good morning, all and thank you for taking my question.
So first one from me Toby I was wondering if you could talk a little bit more about project Canary.
Maybe discuss the objectives of the project and how you think about the potential long term implications for this project towards your business and maybe towards other gas companies in the future.
Sure at a very high level at EQT.
We are driven to be a leader in the responsible production and consumption of natural gas so.
ESG efforts that we're doing are really going to highlight the responsible production aspect of that of that.
Mission that we have and so the.
<unk> project, which is the responsible gas certification is it really just going to highlight that we are producing our gas on a responsible way.
And so this project is it is going to basically in sales putting out sensors on a couple of pads.
To measure the methane levels to get it on accurate third party assessment that data is going to be processed by another third party of the Colorado.
University, and then with that we'll be able to really show how responsibly produce our gases and we'll look for opportunities to scale that.
Across the world across the plant so when we look at the cost of this.
This could be a few cents increased.
To get our GAAP certified but I.
I think that the.
<unk> could be there from our utilities to know that they are.
<unk> are differentiated commodity from EQT that staff this is rich.
Responsibly produced.
Yes, and I think if you think about what what happened with some LNG trade that didnt occur because of the emissions footprint.
There is going to be on hold at a global search for really low emissions in Appalachia fits.
Amongst the lowest emissions.
Non just the U S, but probably as well globally.
What was the.
The data with the chart, we put on slide 14 really shows.
How there is a different level of performance across operators across the country and across the world.
And I think for us to be able to say this is what our performance looks like.
It shows that there is a differentiation between the.
The gas so we're producing our purion Appalachia, specifically EQT.
What what other sources of gas path from a from an admissions perspective.
And so you think at some point there will be from maybe some premium associated with responsibly produced gas is what.
What im hearing.
Yes, there could be and I gave the commentary on the cost for us to do this responsible certification just given us.
Got it. Thanks, Thanks, guys for the color there.
And then maybe just building on the questions.
West Virginia.
It looks like.
Water infrastructure is maybe being built towards the western part of the acreage position and so I'm just curious.
Is the plan for primarily target the wet gas acreage in West Virginia during 2021.
Or or is it going to be more dry gas focused in west Virginia.
Our West Virginia development is going to be about 25% liquids, 75% dry gas.
The water infrastructure that we're putting really is driven by where we need it.
Keep in mind.
Chevron assets, we picked and Marshall, which would be picked up in Marshall, which or theres going to be for liquids.
<unk> of our production they already have a water we already have a pretty robust water system. There. So we're really focusing our attention on areas that that are sort of blank canvas.
Got it got it and if I could sneak one more in.
Just wanted to check if the capital allocation split between PAA and West Virginia as a good proxy for the foreseeable future or.
Over the next X years, moving like five years, or so or if you expect to maybe transition to more of an equal split between PAA on West Virginia.
And I'll leave it there thank you.
Great Yes.
Long term development is probably going to be 65% per day Marcellus. So that's still going to be the majority of our of our capex, but we do want to get moving on starting to bring some of the benefits that we have.
Developing share I'll do that on West Virginia.
Thank you.
Okay.
Your next question is from Scott Hanold with RBC.
Thanks.
I just have one quick question for you all historically.
Historically EQT has been.
Leader on on looking at things like using CMG and vehicles and such.
Are those still initiatives I know you all are always looking to kind of be a leader is this still at a high level to you all and is this something where you have been in conversations with people on the administration or maybe go down that path to demonstrate that as an option for guests going forward too.
Yes, I think Thats a great question.
No doubt, there's a lot of new opportunities I think that are being presented as people start thinking about the energy transition.
My view on this is I think that.
Companies like EQT are uniquely positioned to take advantage of those opportunities.
Whether it's the fact that we've got billions of dollars of assets already in the ground finding new ways to take advantage of our products whether that is.
Using using.
Cheap Appalachian gas as a feedstock to power manufacturing are converted into another another product that's.
For more desirable higher price, that's one option but.
But I think when we step back and we look at energy transition in general.
I think it's important for people to understand that.
Shale has.
For people in shale.
Particularly for people here at the management team here at EQT.
We've been through an energy transition before I mean, this is not the first time.
The energy transition that was I think really impactful was the transition from conventional reservoirs to developing shale and theres been some guys that have been very successful in navigating that path and capturing the opportunities that have made tremendous amount of dollars for their shareholders and also made a really positive impact on all stakeholders I certainly feel like we're one of them.
Those groups of people.
And so that type of skill set that type of experience is going to be really important as we look at other opportunities in front of us on the energy transition space.
<unk> said.
EQT is going to continue to focus on executing our base plan and we're really excited about the opportunities to improve our core business and we will be opportunistic looking at other ways to extend extend the platform.
Okay.
Okay, great. Thanks understood.
Your next question is from Mark Carlucci with Morgan Stanley.
Hey, guys. Thanks for taking the question.
Okay.
Tony you mentioned the importance of getting MVP online just curious what's your view of <unk>.
Supply versus takeaway is day in a couple of years if in fact that pipe did not enter service.
<unk>.
And what that can mean for basis differentials, especially in the shoulder months and how that would impact your strategy if at all.
Yes, so we we say that local takeaway on demand and demand is about 35 Bcf a day. We've got about 30, we've got about 32 Bcf per day of production. So you can look at that and say <unk> got <unk> got cushion.
I think you look at what we put out on slide 19.
And really the.
Having some pipelines have any outages really really creates a lot of volatility in this market and so having extra outlets.
It is going to be Super Super constructive for the long term local base fare and it's.
Pretty critical project for <unk>.
For this basin and for other areas of the United States like the South East I want to Decarbonize their grid with low.
Low carbon natural gas.
Yeah, but don't don't forget there is in based on demand growth as well.
There are nine coal plants within Pennsylvania alone.
That probably will be at risk of going offline in the next few years and then the shell cracker gas powered generation.
For example, Theres a gas fired generation plant coming online in our backyard that we will sell directly to the spring so theres going to be internal demand inside the basin and then.
And then hopefully MVP does come on line.
Got it thanks guys.
Youre welcome.
And there are no further questions at this time I will now turn the call back over to Mr. Toby Rice for closing remarks.
Thanks, everybody for your time on this call today, and we will keep working hard to keep the gas flowing and creating greater results for our shareholders and all stakeholders. Thank you.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
[music].