Q1 2021 EQT Corp Earnings Call
Call back over to the operator for Q&A.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one and attaching keypad now if you do change your mind. Please press star followed by two percentage.
<unk>. Your question. Please ensure your line is on muted.
Our first question comes from Josh Silverstein from Wolfe Research. Your line is now eight came on.
Thanks, Good morning, guys.
Just wanted to highlight on this.
The transaction.
The transaction feels like you guys are buying a lot of free cash flow year.
But I just wonder how you guys are able to extract any more synergies here from running a one rig program and are you planning on deploying more capital to the northeast assets to be able to get more out of this though.
And any thoughts on that would be helpful.
Yes, Josh I think.
Our core development philosophy is developing our highest rate of return projects first.
So I mean, there could be a shift in more activity. So some of these really compelling returns that we're getting with the <unk> asset.
But that's a synergy that would be that we didn't account for and that would be upside to the story.
And then in addition to that from an operational perspective, I think you've seen the track record of what this crew has done by continually drive drive cost down and increase production uptime I do anticipate that to continue on this asset but.
Again that would be considered upside to our plan.
Got it and then so be it.
You mentioned in here that this has established a foothold in northeast and you continue to want to be the operator of choice.
Does that mean, there's more consolidation opportunities appear and then maybe just a follow on to that like why northeast P. A versus the haynesville or another gas based on that might diversify your away from some of the potential midstream bottlenecks.
Yes from a consolidation perspective, I don't think anything really changes here I mean, we've we sort of take everything on a on a deal by deal basis, certainly the focus is going to be realizing the full value from the all the assets and that's going to be our focus.
We've also said you know we've been pretty we felt the Standalone story for EQT was compelling.
That's even more true now.
On the.
Pro forma organization and something we're really excited about.
About.
Where consolidation happens I think you just look at the risk nature of it.
Basis risk is something that is not a new risk we have controls in place to manage basis.
Getting more exposure within based on to something that we're going to be able to manage.
And I think it's we look at the asset and this all the asset is really unique it's it's derisked.
Alan's of wells drilled in the area.
It's high margin with the midstream asset and the mineral structure. So.
Low risk high margin business spinning out a ton of free cash flow driving really strong accretion on free cash flow per share and allowing us to deleverage the business.
I think it's really compelling and that's what that's what will attract this is the most attractive opportunities for our first their share.
Stakeholders.
Great. Thanks, Vince.
Thank you Evan.
On the next question comes from John <unk> from Bank of America. Your line is now open.
Hey, good morning.
Good morning, Tobey just to the extent to me to the extent that you can can you just provide a little bit more background on the history of the deal.
Initially a direct negotiation I mean, how did it come about to the extent that you can discuss.
Yes. This is a process.
Say, it probably started with the chevron.
Acquisition, I think that was sort of a signal people that consolidation was an opportunity to create value.
And so people saw the consolidation was happening in <unk>.
So that's something that was a process that was.
Probably started about six months ago.
On that we've been engaged with.
Yes, I think this is a market this was a marketed process.
By a bank with up with others involved in and so this was a book holder I'll call it up on <unk>.
Marketed transaction.
I appreciate that and then the second question is just on this inventory with Walter resources, you've risked at 30% you've given us.
The impact of free cash flow to 2026, how long do you think you can maintain production up there.
<unk> assets post 2026, and free cash flow and we look forward to looking at a 10 year inventory of 15 year inventory, what do we sort of looking at a net region.
Yes, we think we have enough inventory for more than 10 years I think when you look at the amount of horizontal footage. It takes for us oil production flat, we put that out is around 225000 feet. So.
Youre looking at about two and a half $2 2 million horizontal feet.
Is what you need to keep this production this production flat for a period of 10 years when you do the math.
That would translate to about 55000 acres so.
The 300000 acres here.
We feel very confident in the inventory that this asset provides.
Thank you very much.
Oh.
And our next question comes from Erin JM from J P. Morgan Your line is now open.
Okay.
Good morning.
Toby some of the initial buy side questions is just the.
The potential risk in eqt's basis risk, particularly given some of the delays on MVP I was wondering if you could maybe give us a little bit more details on what the company is doing to mitigate that risk.
How much of the Bcf.
Is sold locally versus other markets and what are you using in your acquisition economics around basis differentials for.
This one bcf on a relative to Nymex.
Hi, Arun this is Dave I'll take that question, so first and foremost.
They have on approximately 400 million a day of the of the Bcf per day of oil.
Ft capacity that gives us about a 2008 <unk> uplift over and based on pricing. So that's the starting point.
We will also use our <unk>.
Ft portfolio to optimize that a little bit higher.
Second this has about we'll call it 35% to 40% hedge.
Hedges in place, we will supplement that as well and so I think we will we will have taken that I'll take a lot of that.
Basis risk out of the equation.
Fair enough and what type of basis differentials did you used a day when the economics relative to Nymex.
Yes, so just this.
This has caused about on.
And based on the in basin pricing about a nickel to <unk>.
Wider than our initial without that F. P piece that we have so I'd just say.
It provides a little bit wider than what we have.
Yes.
Just to put some color we talked about.
Breakeven as being around 10 cents lower than where we're at today.
And the operating cost is 20 <unk>.
Difference there is largely going to be due to the treatment and basis right.
Right right lower operating costs again, it got it.
And just as my follow up would be you know obviously.
A decent.
In our non op position with Chesapeake could you give us a sense of how much.
The production is up versus not.
Non up.
It's about 50 50, 50 50 operated non operated.
Okay fair enough. Thanks, a lot gents.
Yeah, and just the other thing to know we actually marketing the gas. So we control the gas that comes out of that.
Uh huh.
On our position.
Okay. Thanks, a lot.
The oil.
Yeah.
Our next question comes from Holly Stewart from Scotia, Howard Weil. Your line is now 18.
Good morning, gentlemen.
Maybe a quick follow up to that range question on just the portfolio mix I see the changes in.
And the pro forma on slide 10.
Dave that N V P goes into survey.
Mid year, and maybe asked another way at mid year 'twenty, two and maybe asked another way is N V P.
And that new pro forma assumptions.
We have MVP and on as one 122.
We didn't move it yet because the news literally just came out and so we didn't really pivoted, yet so that will shift a little bit of a pro forma.
Okay.
Okay, but MVP is assumption okay.
Maybe Toby just I E on that.
I'm only going on.
Remember like slide it is now maybe slide seven kind of then.
The economics of each of the areas, but at a high level. How are you thinking about the operated versus non operating positions. I mean, there are some clear players.
In that northeast P a region.
The operating staff makes sense for and then obviously some.
Clear players at the non op position. So just trying to think about your pro forma portfolio and how you're seeing those two different areas.
Sure. So so on slide eight we put a map that highlights.
The geology, there so you've got the core northeast, Pennsylvania dry gas that's the area, that's largely non op with Chesapeake and so whats really great about this asset is a lot of people.
Really weren't aware of this as this asset is like the type of rock that cabot's drilling I mean, it is the same as very similar geology.
What is different though is the undeveloped potential.
When you look at the amount of development.
Development, that's taken place in that core you will see that on our non operated assets are.
We're running room for development potential and so that would translate to being able to deliver the rate of returns that we put on slide seven.
And then when you compare those stores.
Those returns are really driven by you know really great geology.
I think when you look at the operated assets from Alta.
The returns are or even better than what youre, saying that on.
In that northeastern core and thats, because the impact of having.
Integrated midstream assets and really favorable mineral ownership that lowers our debt lowers our royalty burdens and that really drives the economics.
Okay. That's helpful and maybe my my final just on.
The midstream acquired any new acquired can midstream through the Chevron deal if I remember right now again with this transaction. So how are you thinking about that midstream businesses as part of EQT portfolio going forward.
So we think that it's all about the margins at midstream as a strategic.
Element to improving our margin. So we feel like it's an asset that we're going to keep on hold onto it.
Yeah.
Okay.
100% on holiday, where the share.
On pieces really only 30% owned on.
I'll call little different strategic nature right.
That's helpful. Thanks, Dave.
Okay.
Our next question comes from.
And just on that she likes to charities. Your line is now eight P M.
Good morning, guys.
Moving just noticed more on health.
Thats natural wood.
No.
Hum.
Maintenance capital has to do that.
Improved year to date.
Maybe what you see.
Or what how this will help improve it.
Now would you would you mind repeating that Corp, yes, it was a little muffled Neil.
Oh, sorry, sorry, my questions on maintenance capital.
We'll continue if you could just speak to sort of legacy how that continues to improve and then secondly, obviously by adding more scale with Alta I assume that overall the metrics will continue to improve on that could you speak on both sides of that maintenance capital.
Sure. So on the the EQT assets, our maintenance Capex is going to come down.
Goodbye.
Operational improvement.
And just the natural shadowing of our PDP base decline.
This requires us to drill less wells over time.
Phil volumes to maintain production on the all of the asset.
The biggest driver why there maintenance capex levels.
So efficient it is.
Largely due to the fact that their margins are so high and so you'll have.
You'll you'll still have the improvement in the maintenance.
Maintenance Capex will improve over time on the asset sort of on par with where we're at with EQT, but.
It's just going to have a much more a much bigger effect to make us more capital efficient because of the midstream and high mineral interest.
Great and then follow up just again for you or Dave just.
He talked about how the progress is working towards investment grade and how the altra deal might influences.
Yes. This is Dave so moving to.
On the agencies a lot I mean, I would just say the only one right now that is put out something Fitch has upgraded us and we anticipate the other two agencies coming out at some point with comments so stay tuned in.
This we believe is very accretive.
On a credit standpoint.
Hey, Greg I would think that would happen thanks guys.
Yeah, and we didn't and we didn't put that any potential upgrades or improvements in interest rates or untoward into our forecast so that'll be I'll call it upside.
Thanks, Dave.
Okay.
Our next question comes from Scott Hanold from RBC capital markets. Your line is now open.
Thanks.
Just curious on on this acquisition, obviously, you talked a little bit about the history, but unit at a high level I would assume that there was a bit of competition for this bid clearly you've got Chesapeake as an operator of probably some of the more core stuff and in Cabot, obviously, the next door neighbor.
When you look at you know the process of looking at this and making bids I mean, you guys. Chevron you guys were the obvious buyer of that given your your operating presence in Youll P probably.
Is that did you mentioned sub PV 10 P. D. P can you give us some color on like what it took to get this one across the line how much what do you value. The PDP at what do you value the midstream it and how much was allocated to.
The upside inventory.
Yeah on the process.
I think we're going to be focused on buying attractive assets and we know that there is there's always going to be other bidders on that and I think what's important for us is to always maintain a sense of discipline.
We want to do deals that are accretive to our program and we're willing to pay a price that will still drive pretty pretty healthy accretion I think.
Even in a competitive process. If you look at the results here.
We ended up with we're still buying an asset with an 18% free cash flow yield that you could look at that and say that that's a significant discount to the free cash flow year that we trade at which is around 12.
We feel it in and the accretion is very straightforward.
Increasing our short term free cash flow by 'twenty free cash flow per share by 20% long term free cash flow per share accretion of over 15%.
And just the deleveraging aspect of this.
Uh huh.
This asset taking our leverage down long term by half a turn on short term taken it down <unk>.
All of this stuff brings us closer to our strategy of which we've been vocal about accelerated return of capital to shareholders.
<unk>.
I think when you pair that up with our conservative underwriting approach, we feel really good about what's to come with this deal.
Yeah, and I'd, just say any chevron.
Just a little addition, there chevron.
Here are two acres.
And so we paid really PDP every day.
When we got the lips for free.
And if they didn't come with which we really we went up we wouldn't pay much for that acreage because we wanted to put that in drill that with our existing acreage. This we did pay for undeveloped acreage, but the quality of such <unk>.
Better income compares in some cases better than what we have and so its very accretive I would say towards our inventory overall, so that's the difference.
<unk> and.
And then I.
I'd, just say to Toby's point we.
We do we need 65% maintenance capital in the let's call. It over the next three years to keep our production flat.
Will be 35%, so it's going to generate 65 per cent free cash flow that's true.
I'd say, just just think about the relative difference between our portfolio and their portfolio.
And any color on sort of the PDP value in the midstream value.
Associated with it.
Yes, so the midstream value is probably in.
Generating we'll call it about 50 ish million dollars on EBITDA. So you can put on multiple on that of whatever eight times.
Something like that.
And we probably paid well call it probably close to.
The PV 10, overall, and then you've got to strip out the <unk>.
The midstream value.
Okay. Okay and then my follow up question is going back to obviously, the operator or a good portion of his Chesapeake and it seems like there is agreed.
Agreements in place quarter for that partnership to work what is your understanding of their goal on that acreage because obviously that's going to be you know in part dictating some of the.
The ability to drive sort of maintenance and some of the cash flow out of this asset.
As far as pace.
The 225000 horizontal feet that we're looking to maintain production.
Whether thats, 50% Chesapeake operated or Fitzgerald.
First on alpha or a touch higher chesapeake or a little bit lower also.
Yeah.
We will be able to work through the the pace.
I think the bigger issue is just going to be making sure that.
We get on point with development plans well design.
To me is the most important thing that we have taken a super conservative stance on.
Child Wells.
And one of the things that we're excited about as Youre seeing that the changes that Chesapeake has done on their development style. You look historically out here, it's been a lot of what I would consider shorter lateral sub 6000 foot laterals. When you look at some of the other projects that Chesapeake is doing now on the laterals are going to be.
12010 thousand plus foot.
Feet.
That's going to create a more.
Efficient program.
And again that that would be considered upside to what we underwrote and <unk>.
Certainly the the there's probably going to be some more inventory up there as well.
Because we were pretty conservative on the Chile side of things.
Okay, Okay, and the point I was getting too you are running you mentioned, it's 50 50 production on.
Pretty versus non operated one rig kind of keeps you know.
Relative to let's say call. It your operating have flat should then we assume it takes two operated rigs by Chesapeake to keep the non on flat I mean does that sort of a good high level way to look at it.
Yeah, I'd say, probably two to four at a high level our working interest in this non op is around 30% working interest.
Got it all three rigs mucker hands like the one rig.
Yes.
Okay. Thanks.
Okay.
Our next question comes from now net cash from Goldman Sachs. Your line is now open.
Okay. Thanks team.
You guys said Youre getting closer here, David asked me, Greg Youre not in a position to have a conversation about returning capital to shareholders.
So tobey and then.
And Dave maybe you could talk about when do you think you'll be in a position to provide an update around capital allocation and any early thoughts on on a favorite strategy, whether it's buying back stock or.
Potentially even thinking about a variable dividend.
Yeah. This is toby per.
Dave's comments on that and the question that's something that will.
We'll provide color on the framework towards the end of this year.
And as far as that framework I don't think we're going to try and reinvent the wheel I think looking at putting on something a dependable return on capital in the form of a base dividend and then leaving room for.
More opportunistic.
Return on capital opportunities.
Variable dividend or share buybacks.
That's probably going to be.
<unk>.
What the plan looks like we've seen a lot of these plans that have been put out by peers.
I don't think we're going to do on.
Anything too exotic it's going to be pretty straightforward and we'll survey our shareholders will get their opinions as well.
Great guys and then the follow up is it just more of a technical question, which is yes.
When the deal closes it looks like the shares will be distributed to all the shareholders and so is there any lockup associated with that.
Walk through the mechanics of that because it's not gonna be distributed on one large block and they'll go to disparate individuals right.
Yeah. So there is a lock up it's a six month period lock up there is a couple of opportunities for within that six month period to be able to sell down we will manage the process. So it'll be a very managed.
Process. So the OLED all the details will come out in the.
Filing shortly.
Alright. Thanks.
You're welcome.
Our next question comes from David <unk> from Cowen. Your line is now open.
Good morning, guys. Thanks for taking my questions.
On them.
Tobey I wanted to ask you just with the success of this deal you guys are pro forma I guess, almost about 7% of U S daily gas supply now.
Talked about this deal.
About the motivations on lowering your free cash breakeven.
You talked about just the assets in many cases.
When David was speaking about in many cases, the assets being better than some of the legacy EQT stuff.
Should we think about going forward or are there going to be more opportunities for you or is this kind of like a fire to optimize your portfolio a bit more down on some areas that would be otherwise.
<unk> net breakeven price or should we be thinking about that there was actually a lot more benefits to having a scale of this size that.
Actually improves over time, if you guys are able to fold in some more deals.
Yes, I think we're going to do transactions that are accretive.
On our on on.
On a from a leverage perspective on a free cash flow per share, but sterling assets for us.
I think the bar is a little bit higher just because it's it's some of the assets that are we'd be looking to sell that we consider nonstrategic.
Have a high PDP component so the price to get paid for that.
Net deleveraging transaction is a little bit higher.
From a from a scale perspective, we've got pretty big scale. So.
We have the ability to shape the portfolio and continue to optimize it and still benefit from from.
The commercial opportunities that present themselves that I do believe are really starting to become apparent in unit to EQT that you get from managing such a large production based on pro forma this transaction, we're going to have over we're going to be marketing over six bcf of gas a day and I think one of the things that I'm really excited about is leveraging the commercial.
Team that we've built out here, giving them another another giving them access to other regions. So that we can do more more optimization across on the commercial front.
I appreciate the clarity on that.
Just my follow up is essentially on on Mountain Valley, you guys talked about before you haven't moved the timeline on your assumptions, but I guess based on the July start up.
You guys are not incorporating sort of a.
Net fee payment that would be due that you guys are at your call option in the beginning of 'twenty, two next year and that $1 billion on a pro forma free cash.
Yeah. So so I'd just say we didn't if you look on actually the over the six year period.
On the movement of MVP out six months is actually a net positive.
We didn't count that into our six year free cash flow and so just know that when we do that that six year free cash flow number will go up.
Should we expect.
One on one of these.
The penalty payments to comment on the beginning of the year is that something that you guys would be calling now.
No I think I think the one thing that I think people talk about that we have as a as an option is if N V. P doesn't come on line by the end of 2022.
We have the option to take cash and reverse.
Of credit we have against our gathering rates on that.
That's something we'll make a decision some point in 2022 and right now.
Goal would be to keep it in as a credit relief, we get more value from a leverage standpoint than not.
I think thats, Richard Deutsch of anything else.
You're welcome thank you.
As a reminder to ask a question. Please press star followed by one less day. Thank you.
Now on.
Our next question comes from no Pax on <unk> partners. Your line is now open.
Good morning.
Good morning, good morning.
I was wondering could you talk a little bit about.
On the ALDA properties operated what the Capex piece has been like recently.
Then sort of Underinvested in recent quarters and years.
And can you also talk a little bit about what their completion methods have been like.
What you do you think you might change pioneer on experience.
Yes, so the altra team has been running about a rig out here.
They've got about we Havent Mark here is about six docs, it's actually probably closer to a dozen.
So we'll be able to we'll be able to pick up operations. There I'd say historically I think what's really interesting when you look at the altar asset is really what this team has done day.
Bought these assets from Anadarko was the original operator.
And they pretty much did what we did here at EQT and Thats you know apply.
Really solid completion designs really solid development.
While design standards and showed a pretty significant improvement in the EUR performance.
So we think that the benefits that we're going to showcase is continuing on the success that they've they've laid down, but then adding into benefits of combo development streamlining logistics streamlining of the procurement.
And I think that will be allow us to drive cost a little bit a little bit better than where they're at today, but you know.
There is a great team I think it's just we have a benefit of having.
On a bit larger scale and we can do some some.
We can do some things and leverage that.
Yeah.
Great. Thanks.
<unk> been growing they've been growing the production will be flat I guess is a key thing.
That's it.
Alright, great. Thanks.
And the other thing is among the many considerations that.
But you to go for the deal can you.
Talk a little bit about how the ESG patients or opportunities weighed on your decision to expand the footprint to the to the east.
Separate from the Standalone economics.
A different thing Youre thinking there.
Yes, certainly ESG is actually one of the things that we look at when we're looking at.
We're looking at opportunities.
One thing that's really great about the Alt asset, it's 100% dry gas, which is going to give us the benefits of position us.
To continue to put out a really low emissions intensity score. So that's really important some of the things that were that are underway, which we're really excited about talking about and our.
ESG report, that's coming out in a couple of months.
Passenger with some of the ESG initiatives, replacing pneumatics.
Doing that we'll be looking to apply those opportunities on the Alt assets just like we're doing at EQT one of the great things about ESG is a lot of the stuff. We're talking about is what we do at the surface and what that means is that stuff translates whether it's things that we do well in southwestern Pennsylvania going to translate to the surface in northeastern Pennsylvania, So well.
Excited about the opportunity to improve on the ESG front as well.
Great. Thanks, a lot for me.
Okay.
That was on a final question, so I'll hand, it back on EBT Toby Rice for closing remarks.
Thanks, everybody. We're certainly really excited about this opportunity and we'll continue to work hard to deliver value for our stakeholders. Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
[music].