Q2 2021 EQT Corp Earnings Call
And the group of brands, along with the higher revenue.
Many of the carriers.
And.
Good morning.
Please go ahead of time.
[music].
Hello, everybody and welcome to the EQT second quarter 2021 quarterly results conference call My name of Salmon and I'll be coordinating your call today, if you would like to ask the question. During the presentation. You may do so by pressing star followed by 1 of them the identify and keep that I will now hand, you over to you of host Andrew Breese director of Investor Relations to begin.
Please go ahead.
Good morning, and thank you everyone for joining today's conference call with me today are Toby Rice, President and Chief Executive Officer, and David Khani, Chief Financial Officer.
A replay for today's call will be available on our website for a 7 day period beginning this evening.
And a moment Toby and David.
David will present the prepared remarks, then we'll open up the line for a question and answer session on our website. We have posted an updated investor presentation, and we may reference certain slides during today's discussion.
I'd like to remind you of today's call May also contain forward looking statements actual results and future events could materially differ from those forward looking.
Statements because of factors described in our second quarter 2021 earnings release, our Investor presentation, and the risk factors section of our 2020 form 10-K, and and subsequent filings we make with the SEC, we do not undertake any duty to update forward looking statements today's call may also contain non-GAAP.
Financial measures. Please refer to our second quarter earnings release, and our most recent investor presentation for important disclosures regarding such measures, including reconciliations of the most comparable GAAP financial measure.
And with that I'll turn it over to Toby.
Thanks, Andrew and good morning, everyone before we recap the quarter I would.
Touch on the recently completed the Alpha acquisition, which was overwhelmingly approved by our shareholders. The.
Accretive benefits of the acquisition of Capella and bolsters, our free cash flow per share trajectory meaningfully reduces our leverage profile and substantial high margin inventory and accelerates our timelines of both reach investment grade metrics and deliver.
Oliver on our shareholder return initiatives now stepping back of the details of the deal and the integration process.
And closed the deal on July 21 for and adjusted aggregate purchase price at closing of 1 billion and cash and approximately $98.8 million shares being issued directly to all of those equity holders as a reminder, more all the equity holder.
Likely more of a 5% of our common stock and the transaction with the App.
The acquired and pool, we haven't filed the net Marcellus acres largely held by production approximately 1 Bcf a day of high margin net production of approximately 300 miles of midstream gathering systems of 100 miles freshwater system and and the chocolate ft portfolio of premium.
Premium demand markets on the all of the assets, we expect to utilize 1 operated rig and Frac crew and the combination with our non operated development activity, we will execute and maintenance program on the assets going forward for the remainder of 2021, and we expect the altra asset to increase total sales volumes by 155 to 175.
The Cfe and <unk>.
Approximately $300 million to $325 million and to adjusted EBITDA.
Required capital expenditures of between $100 million to $125 million, and finally add approximately of $150 million to $170 million and free cash flow.
On the integration front, our proven framework is designed.
Provide high confidence transparency speed and best practice identification as we fully integrate the off the assets each of our portfolio.
Of the over 800 integration actions that were identified approximately 25% of these actions have already been completed we expect to complete the full operational integration by the end of the year the efforts of our EQT.
True, including our newly added Alta and team members as well as those serving on the transition basis are instrumental in this effort and I want to take a moment to thank them all for their hard work to date.
The acquisition represents another step forward and our pursuit of sustainable value creation.
And 2022 of our maintenance program and at current strip pricing.
Preliminary.
The expectations are to generate total sales volumes of approximately 2 <unk> and.
Adjusted EBITDA of approximately $2.9 billion.
Realizing a 10% improvement and capital intensity required of total capital expenditures of approximately $1.3 billion.
And free cash flow generation of approximately $1.
$1 billion and.
Additionally, our revised long term free cash flow projections through 2026 at current strip pricing now sits well above $7 billion or Neil and $19 per share.
As a result of the altra deal, both accelerates and enhances our ability to achieve investment grade metrics and provide meaningful.
For our shareholders the.
Optimizing financing structure and robust free cash flow profile and accelerated our deleveraging strategy and establish the necessary platform for sustainable shareholder returns. We are currently working through our thought process and mechanics, but our focus remains simple and maintaining our leadership and the sustainable shale era.
And we.
Return rollout of the detailed components of our shareholder return framework in conjunction with our fourth quarter earnings.
Before passing the call over to Dave I want to highlight our multilevel strategy on sustainable value creation, and the long term, which we believe will best position, the EQT to excel and our low carbon future.
And we've added a new era of sustainable shale that value.
The plan free cash flow generation balance sheet strength emissions reduction and returning capital to shareholders of.
Our 3 pronged strategy to evolve capture accretive consolidation and explore and debentures and sets us up on a clear easy to understand glide path that our stakeholders can not only get behind and the benefit from and the slower carbon future.
And slide 13, and our Investor presentation, and starting with our evolved strategy. The goal is to realize the full potential of our assets. This should not be due to our stakeholders who have been following us since July 2019, realizing the full potential of our assets with the mandates that by the shareholders, who voted of thin and why this management team is here today executing this element of our strategy.
<unk> maximizes free cash flow generation lowered our cost structure and strengthened our balance sheet.
Second is our consolidation strategy our proven modern operating model has supported our ability to create meaningful value and ESG accretion we have seen the strategy work. The date with recent acquisitions checking all the boxes for accretion and strategic.
The acceleration consolidation allows us to leverage our skill set and execution of approach on a larger set of assets. While also maximizing emission reduction efforts. This component of our strategy drive the accretion to NAV per share free cash flow per share and ESG performance consolidation natural lease the scale, which feeds into our third corporate strategy.
Interest at the largest producer of natural gas and the U S. We were able to force new path and open new markets to achieve sustainable growth and <unk>.
And for just the ability for explore meaningful opportunities at smaller peers cannot all while staying firmly tethered to a return of capital objectives as previously announced our board has approved the initial budget.
<unk> of $75 million.
The explore new venture opportunities the.
The seed capital allows us to initiate several pilot programs over the next few years and the pursuit of profitably and lowering scope 3 emissions.
We have a clear set of guiding principles, which we will embrace and believes can be capitalized upon and this changing environment more detail regarding.
And this strategy can be found via our 2020, ESG report and the corresponding ESC conference call reported and presentation, which are available on our website.
I'll now pass the call over the day to discuss the second quarter results third quarter guidance and update on hedging and some thoughts on the macro landscape and I'll wrap it up at the end by companies from updates.
Based on our ESG initiatives.
Thanks, Toby and good morning, everyone I'd like to briefly touch on our second quarter results before moving on to some other strategic updates.
Sales volume for the second quarter for 421 of the Cfe in line with our guidance range, our adjusted operating revenues for the quarter were 9.
And the $7 million and our total per unit operating costs were $1.33 per Mcf.
During the second quarter 2021, Nymex prices for the second half of 2021 full year 'twenty, 2 and 2023 rose by 86.
And 53 and 2007, respectively.
Although this price moving is positive for EQT and aligns with our bullish gas sentiment the rapid increase and for pricing resulted in $1.3 billion loss on the mark to market of our forward derivative position.
This noncash accounting treatment has no impact on our financial positioning.
Business operations and or free cash.
Actual projections that Toby just provided our second quarter capital expenditures were $246 million approximately $20 million below the bottom end of our guidance range. This was primarily driven by operational timing and efforts to optimize the relationship between capital deployment production delivery and maximizing free cash flow.
Our Marcellus low cost performance continues to meet or exceed expectations with year to date cost averaging below our 675 per foot target. We are executing our west Virginia operations as planned and have high confidence and our ability to deliver well cost at for below our 775 per foot West Virginia target.
During July we placed and serviced a 50 mile section of our West Virginia and mixed use water system ahead of our schedule and under budget.
This system is expected to further enhance development efficiencies reduce environmental impact and improve the lease operating expenses moving forward to.
To wrap up our second quarter financial result.
We delivered adjusted operating cash flow of $397 million ultimately, resulting in a positive free cash flow of $155 million. The closing of our all of our transaction and brings accretive financial implications across the spectrum as such we have updated our full year 2021 guidance, while also providing.
Detailed third quarter guidance to add more color on the pro forma production cadence and step change and our operating cost structure, resulting from the acquisition.
These details can be found in the earnings release filed yesterday.
Specific to the third quarter 2021 at the midpoint, we expect a step up and total.
Cause volumes to be approximately 485 of the cfe and the drop in total operating costs to approximately $1.26 per Mcf a day now.
And now I'll move on to a brief update on our hedging activity.
As we all witnessed Nymex prices have risen sharply last several months of recovering from storm <unk>.
And benefiting from strong gas demand.
As 2020 to Nymex prices rally, we layered on slightly more than 30% of our total hedges between our base and all of the transaction hedges we.
We assumed hedges and the ultra transaction oil.
<unk> was hedged at approximately 50% for the balance of 2021 and 25% for 2000.
<unk> 22 in order to ensure our transaction returns we added an additional 30% for the balance of 2021, 55% to 2022% and 50% and 2023 during the recent run up we have been and collars with an average for of approximately $305 and a ceiling of $3.
35.
And to raise our overall 2022 hedged position to just over 70% with a floor price of approximately $2.80.
With our open position and callers, we will participate in the upside while for binding the appropriate level of protection to achieve our strategic goals to be more specific.
Our 2022 hedge position will keep our leverage closer to 1.5 times the name of enough to retire debt Institute shareholder friendly actions and allow us to be more flexible and how we hedge and 2023 and beyond and we've also been active and hedging various phases and mitigated exposure to flush.
Fluctuations and Appalachian basin pricing as experienced in the second quarter with the <unk> outage.
Currently our exposure to local pricing sits at approximately 15% for the remainder of 2021, while we hold nearly no exposure to local pricing for calendar year 2022, assuming a midyear MVP start.
The full details of our current hedge position can be found in our earnings release. So our hedging efforts have solidified our balance sheet positioned us the achieved investment grade metrics locked and attractive free cash flow profile and accretion from our consolidation and protect our portfolio for near term pricing risk.
Now the fundamental setup for natural gas began with producers running and maintenance of capital mode setting up for a strong <unk> recovery of industrial demand postpone or of the frontline Nymex contract rallied from $2.60 for the.
And the $3.65 per Mcf.
During the quarter driven initially by the <unk> outage.
<unk>, followed by a much warmer than normal weather and June that sort of natural gas supply being rash and between domestic and export demand the.
And the technical outage star of the Gulf Coast of approximately $650 million of day, while the warmer weather and June increased gas power demand by about 3 Bcf per day.
The <unk> outage also added.
The pricing pressure for in basin gas up till the outage petco and 2 basis with averaging 62 for April and May while the outage occurred cash.
Cash basis fell sub $1.
However, even with the outage strong cooling demand and less gas the coal switching and the region helped support cash basis.
Basis pulling it back to the mid $60 before the end of the quarter.
Looking forward, we expect 2021 and 2022 forward natural gas price curve to remain very sensitive to whether we see significant upsides for the 2023 and 2025 curve from rising exports increasing power.
And from accelerating coal and modest nuclear retirements and on top of this bullish long term gas view, we see opportunities for further pricing differentiation within the sector of the response resource gas market matures the demand for differentiated products exist, where C. In our conversations with end users.
Both domestic and international buyers, who are looking for ways to reduce the carbon footprint.
We've already entered into a couple of RSC contracts at premium pricing, we see the opportunity for premiums to expand as we optimize the RFC framework through the standardization of technology adoption and improve the transparency.
I'll now pass the call over to Toby to wrap things up.
Thanks, Dave.
The RSV chocolate highlights, we see growing opportunities to connect value creation with ESG accretion for <unk>.
And so of ESG report published in June and provides a detailed review of of how we approach the payable value creation and a key area for.
Differentiation.
So before we close I'd like to highlight the emission targets that we announced in June.
Which we believe of truly differentiating and the industry.
First we established a target to achieve net zero scope, 1 and scope 2 ghd emissions by or before 2025. This is an important commitment and 1 that we have high confidence.
For us of being or exceed it.
Second we plan to reduce our production segments scope on the <unk> emissions intensity by 70% to a level below 160 metric tons of Cotwo per Bcf the fire before 2025 and finally.
We plan to reduce our production segment scope, 1 and methane emissions intensity.
And by 65%.
The below 0.0% to 2% by the before 2025 of these targets of meaningful first steps and we will continue to push ourselves as we aim to be the operator of choice for all of our stakeholders.
We are a values driven organization that operates with vision and purpose and the conclude today's call I'd like to point.
The slide 5 of our Investor presentation, which highlights our unique investment opportunity to our shareholders and short we are of differentiated energy investment opportunity.
Starting with scale.
We are the largest producer of natural gas and United States. This is important not only because we are responsible for providing the U S and other countries globally with low cost low.
And natural gas, but because of when done correctly scale affords us the chance to operate more efficiently second we have of.
Above free cash flow profile, most notably driven by contractually locked in decline and gathering rates with macro trends improve maintenance capital intensity and the shallow base production decline.
Low emission upward price movements upsize to our 7 plus $1 billion free cash flow projections through 2026 will come through the release of certain MVP capacity credit rating upgrades premiums for RFG gas participation and new ventures and continued operational efficiencies.
Next we have of peer leading.
The credit profile with a clear path to regain our investment grade rating as shown on slide 8 and Youll see that our 5 year notes trade nearly 150 basis points better than comparable peers, while the only 50% to 75 basis points wide of the investment grade producers.
On the left hand side of the slide you'll see the impact of the strategic.
<unk> actions taken which has significantly reduced our leverage profile, which is expected to fall by nearly 1 turn from year end 2021 to year end 2022.
Additionally, we haven't of fall modern operating model and peer leading inventory of peers continue to drill up the remaining core inventory we have minimal.
And so risks comparatively and of decades of core long lateral combo development inventory and finally, we believe the Appalachian natural gas will play a critical role and replacing Baseload electricity generation as coal plant retirements accelerate providing a tailwind for our business as the world becomes more of electrified.
And further low emissions natural gas produced here in the United States is of critical tool to mitigate energy poverty and improve human flourishing on a global scale, all while positively influenced and climate enhancing the long term tailwind for this business, we look forward to continuing to execute on our strategy demonstrating ESG leadership.
And being a champion for the commodity. Thank you for your interest and support I would now like to open the call for questions.
Okay.
Chip.
Alright.
Okay.
Operator, we prompt for questions. Please.
My apologies I was muted likely if you'd like to ask a question of pace for stuff on about 1 and your telephone keypad now if you change your mind. Please press star followed by 2 and prepare to ask a question. Please ensure your line is on the issued locally.
First question comes from MS. Janet came out from Wells Fargo.
Nathan Your line is now open. Please proceed with your question.
Hi, good morning, gentlemen, and thanks for taking my question.
I guess I'll start first with the hedging which is I think of little bit on everybody's mind, David you talked about the benefits of hedging a little bit but you know.
If you could give us a little bit of wind side, there was almost a doubling of of your swaps.
And at prices that are still quite a bit below strip I know you mentioned some floating rate hedges the debt increase wasn't as much. So could you talk a little bit about why did you choose to hedge at the levels you did and the instrument that you used to do that.
And this is Toby.
And I can walk through of the hedging and our thought process behind it. So you'll see we've added approximately 650 bcf of swaps.
And if you take the the Alta volumes that we inherited that was about 150 Bcf. So you got about 500 Bcf.
And we really thinking through what's the best way to.
And our hedges and meet our strategic goals of that allow us to strength our balance sheet.
And <unk>.
Leverage targets and be able to start returning capital to shareholders.
We have a view that we take.
When we when we make these decisions and.
And our view was closer to $3 I think when you look at the.
The swaps that we did for.
And for that for that period is closer to 3.
The line with our view, but the question is why not callers the use of swaps really solidifies the free cash flow from those from those hedges, which has the effect of improving our floor.
Very helpful with the rating agencies to underwrite the free cash flow that we have to assist and regaining our investment grade balance sheet and the next question is why not just do puts.
And we looked at that and at that price of around $3 Nymex to put it put in place the premium would be anywhere from 20.
45.
To put of put in place and give the exposure to upside.
You're really taking a view of that gas prices will be $3.35, and $3.40.
That was not in line with our view at the time, we did not account for the.
And the weather events there.
But that was the thought process behind.
The decisions that we made on the hedging.
Great that's really helpful Tony and.
Of the falloff and you allude.
Added to this in your prepared remarks, and there is no <unk>.
Shareholder cash return. So I know you said fourth quarter of 'twenty, 1 earnings, but any early thoughts on the form of that.
5 of them.
Are you leaning towards dividends and variable dividends and buybacks.
The weighted average.
And I just want to also the would be you've talked about consolidation and scale how come.
Comparable and goals to be a consolidator.
Meaningful cash return.
Thank you.
And that as well.
Yes, so we're going to take a balanced and flexible approach with our capital allocation for a return of capital strategy.
And I'm looking forward to putting that out and the fourth quarter.
As far as consolidation and how we think about.
How do we think about allocate.
Can you talk to any capital there and performing.
Tackling any consolidation opportunities, we see within our footprint I think 1 thing that's very clear if you look at our track record we've always been.
Disciplined.
And our consolidation efforts.
The track record, we've led with Chevron and Alta support that and.
<unk>.
And it's even more important for us of even more disciplined and only do deals that are going to be really accretive on an NAV per share and free cash flow per share basis.
The deleveraging nature of obviously is helpful.
But we're sitting with a really good place with our balance sheet right now so.
I think when we have the ability now to start returning capital to share.
And just enhances the importance of continued to be disciplined on the consolidation front.
And I would just add that obviously and has.
Yes, we have $1.4 billion of free cash flow next year, we'll figure out what percentage but.
The ability to do a big percentage of returned to shareholders next year.
Thanks, David.
Sure.
Yes.
Our next question comes from Josh Silverstein from Wolfe Research. Your line is now open. Please go ahead.
Yes. Thanks, Good morning, guys I was going to go right on.
And the same topic as well you mentioned the $1.4 billion of free cash flow.
And I imagine you probably want to pay the 570 <unk> of <unk>.
Charities for for next year as well.
But what's the other limiting what are the limiting factor as to how much you could return.
Do you want it and make your your balance sheet, 1.5 times levered.
And then we can kind of think about the return profile for from there or is there. Some other limiting factor to what you guys maybe for the return back to us.
Yes, so so we'll be able to retire the 22 that this year. So I think you can look at the free cash flow next year really about.
The incremental debt do we want to retire and how much how much shareholder friendly.
And we want to do and I think we will set a specific target, but we don't need to get to any specific target and any 1 year, what we can do a glide path.
The comment.
And then.
And just as far as the the longer term strategy that you guys outlined and there it's pretty clear or at least <unk> and hear that there is no plans for growth going forward I just wanted to see if that was the case and you guys are just going to be holding maintenance volumes roughly flat for the next 3 or 4 years or so.
Yes, consistent with what we've seen in the past and when we get the question what would it take for EQT EQT to grow.
We've consistently said it would require a strip that's got some like 2 of probably 2 to 3 years out of it of gas price is north of $3.
And that situation.
They are today.
And even if we did see the opportunity if that opportunity presented itself and would still be very modest.
Zero low to single visit growth of less than 5%.
And for Us and that's really just taken the throttle or taking the brakes off the operations needed to run a little bits of it wouldn't be.
It would be a very natural.
And there's still a sudden increase.
I think I think is of an interesting situation that that a lot of people and and if youre looking at right now and while you do see short term price signal, which is encouraging and.
People can look and adding activity levels to maybe get a little bit better return on our.
The incremental <unk>.
The amount of dollars and I think that people know how that plays out.
When you Chase shorter term price signals and I think you compare that versus.
The long term value opportunity is getting our assets valued at a net.
Net of gas price.
North of $3.
A couple of and when you compare the short term gains you can get for an accelerated activity or compared to the the alternative.
And we'll choose the alternative and we think that we have.
<unk> been encouraged with the others and industry remain disciplined because I think they recognize.
The era of that were and what's the best way to return or to return capital to shareholders and also maximize.
Value creation of of our assets.
Okay.
Thank you.
Our next question comes from Neal Dingmann from true Security Lewis.
Your line is now of <unk>. Please go ahead.
Neither of us.
Okay.
Neely there.
Sorry about that guys.
The first question just on the massive footprint you have.
What's your thought I know you have got plenty of areas.
But the thought about maybe pivoting a little bit given what's going on with Ngls and.
Some pause and you could tie and either this year and early next year and a bit more NGL focused.
Yes, Neil I think you hit it upfront.
The from a percentage basis.
We're not really going to be able to move the needle just given our scale and the dry gas side of things, but the.
The Chevron assets that we have does gives us an opportunity to steer.
Are there some activity to the to the west side of our of our program.
Okay.
Jim.
For next year.
Go ahead, Dave.
Okay, and just say, it's probably more for next year then.
Okay.
And then just tobey on M&A.
And it's still an opportunity you are.
Yes.
And then he has been a bit different.
And then obviously, we've seen in the past and May give us given the.
Huge sort of as you said the acreage now that you control.
Will that continue to be part of you kind of alluded to this earlier, but other than just sort of continuing to acquire this.
Would the plan and be continue to not only acquire but continue to have.
Part of the kind of a slow steady.
Meaning that and kind of look at the Chevron and deal with it the altra deal.
And certainly didn't add any rigs there could you just talk about not only potentially doing more M&A, but you thought about.
And you would acquire.
I mean is the thought just the continue very much on the maintenance on anything you would do.
Yes, Neil I mean, our strategy to come in and here was the fixed EQT solidify the balance sheet and.
Grow free cash flow of per share and.
The past consolidation was a great tool for us to grow free cash flow.
Per share and also of deleverage the business to get our balance sheet to where it's at today.
But now we are in a position where.
With the balance sheet, where it's at and now having the ability to start beginning of returning capital to shareholders. We now have another way that we can increase our free cash flow per share.
Some of the.
And share buybacks. So we're certainly going to to the way this new tool that we have and the mix and finding out the best way that we can.
Grow our free cash flow per share.
And if I can sneak 1 last 1 and the until week for you or David can you just take on the hedges that folks are now and it seems.
The reaction today was it the ultra hedges rolling off of it just feels like some investors are not fully understand and the hedge program and maybe Dave If you could just expand on that 1 last time I know you've talked about the debt.
Sort of color as you have in there, but I am still get a lot of questions. All of that I, just don't think people and fully understandable between what you put on and what the Ulta has rolling off.
And when rates.
And we basically inherited.
We'll call it between 7 and 10% of our hedges that holds the had in place they were and our hedge price I'm going to average between 21 and 22 about $2.60.
We.
We then added all.
All of the hedges.
And to protect the returns of that transaction of about another <unk>, 6%.
We added hedges at about $3, 50, and 2021 and $2.80 and 2022.
And then we added an incremental wedge of hedges.
Between 'twenty, 1 'twenty 2 the Tobey.
So we talked about that had a.
$3 number on it and there was a piece of that which the callers. So so the all the pieces.
For the protection of for the transaction and the inherited piece and the incremental piece that we added.
To go towards.
The price view was that $3 piece of which a portion of its and callers if that helps.
Very helpful very helpful. Thanks, guys.
Youre welcome.
Our next question comes from David <unk> from Cowen and David.
David Your line is now open. Please go ahead.
David are you there.
I think David may of tissue and withdrawn his question so will value.
Holly sure Ali Yolanda and Allison. Please go ahead.
Good morning, gentlemen.
And maybe maybe Dave I'll I'll start with you just thinking about the the acquisition integration and how that impacts the the investment grade rating I presume that you are in close contact with the rating agencies.
And you're getting very close so maybe my first.
And John that is yes.
What are your thoughts on and just how the timing has changed there and then maybe the second question around that.
How do you incorporate the sort of return of capital strategy and of that conversation.
Yes, so I would say the.
There's probably 2 events that impacted the timing 1 has been the acquisition and and.
We got the upgrades just the.
The other day. So now we're sitting at 1 notch away. So the acquisition probably helped accelerate.
The the transition back to investment grade by let's call.
Call It maybe 6 months or so so the second event is really the commodity price move and how it's moving and up and I think now the rating agencies are kind of thinking through what should the commodity price B and C.
So that will obviously have the big impact on timing as well. So I think we can think about.
And grade is probably a 2022 events.
Whether it's the beginning of our for the middle.
And then the second part on return of capital and and how the rating agencies are thinking about that.
Yes, so the.
The agents.
Invested like us to continue to pay down debt I think thats important I think so we will integrate.
That into a return on capital strategy.
Think now with the fact that we have of multiyear view, we'll pull it of well over $1 billion of year of free cash flow.
Approaching 1 billion and a half.
<unk>, we can create a strategy that retires that over time and as well as provide shareholder returns and we can accomplish both.
Having investment grade, having a strong balance sheet and then also returning cash to shareholders.
Okay, Great and then Toby I know and your.
<unk> prepared remarks within the release, you mentioned no real cost acceleration and in the second quarter. I mean, what are you all seeing I guess here currently in terms of in terms of inflation and then.
As you think about kind of the 22 element.
Do you see that playing out.
Yes.
Spent a lot of time of the teams thinking about service costs and making sure that we've got the most accurate view.
Baked into our well costs that obviously makes a R. R.
Capex forecast for the future.
Where we're seeing inflation as we've done things like steel.
Obviously things like diesel.
We've done.
Sure.
1 of the benefits of running of.
Large scale dependable program is that we can leverage our procurement team.
Acquired the materials, we need and advance so that's been a very helpful tool for us.
The other thing we've seen.
And there's just not.
Reducing our reliance on the on things like diesel I mean, the move to electrify, our frac equipment and the disc.
And the ESG benefits it takes us away from being largely of diesel consumers. That's over 25 million gallons of diesel that we have not needed to consume as the as a result of that so.
Yeah.
Operational efficiencies play into.
Reducing and service.
Service cost inflation as well.
So all of these numbers are sort of baked into what our costs are but I do see that our costs will continue to stay at the levels that we're at today and then we've got the benefit of of the teams continue with the ground the operational efficiencies high grade the schedule of longer laterals and and those 2 things.
Will the.
Historically, they've been allowed us to be even in the face of service cost increases and I expect that to continue and the future.
That's great. Thank you guys.
Youre welcome.
Our next question comes from Aaron <unk> from JP Morgan Chase.
Your line is now open. Please go ahead.
Yes, good morning, I wanted to first and talk about your outlook for basis differentials and I know, you're assuming and mid year 2022 startup date for MVP. So first I just wanted to see if you could talk about what basis.
<unk> will for ensure is embedded in your 2022 guide for the $1.4 billion of free cash flow and how do you expect basis differentials to move and a post <unk> world.
Yeah. So.
So we basis differentials are narrowing.
Narrowing by about.
<unk> yeah.
Year over year from <unk>.
From 2021% to 2022.
And so we see nice improvement and we locked in a big chunk of that and so.
And when MVP comes online.
Where we're assuming I'll call of very conservative view of what.
The and more and point where.
Where MVP drops gas off and we're also assuming.
Not a benefit.
And based non of material benefit and basin, so there'll probably be some movement there that will.
Probably help.
And.
And make that those numbers get better, but we're not assuming net.
That helps got it got it so it sounds like day, you're assuming about a 20.
The year over year improvement and basis relative to 2021 of actuals of that fair.
Great.
Okay great.
Great. So I was wondering if you could maybe elaborate on how the market for responsibly sourced gas is kind of developing and you talked about maybe a couple of marketing agreements, where you're getting some premium pricing. So I'm wondering if you could maybe elaborate that and maybe touch upon some of the the new.
New venture and.
Investments that you plan to make and.
And maybe the timeline for that $75 million.
Yes, so first on the <unk>.
The market for RFG it starts with demand.
A lot of customers have reached out to us about this product is theres a lot of interest there. So that's.
Encouraging.
Joe is what and what does that market is going to translate to and price and.
And I would say.
The single digits right now but.
The real part that we're looking for.
And is to really establish the certification framework that really will help.
Selim.
And if I exactly the products that people are buying and what that will allow us to do is quantify the emissions reduction youre getting by getting.
Really low and low intensity.
Our response and certify gas.
That will help define the price for for our customers and I think that that will lend itself.
The varying and apply some type of carbon pricing for that.
A more constructive price.
And a more realistic premium that's actually based on data. So we've joined the <unk> to point out that is.
Specifically designed to help assist and creating that framework and also the technology that we use.
If you guys do the onsite monitoring.
And I will be part of it.
And as far as our new ventures is concerned 1 of the things that we're doing there that will facilitate our RSC efforts is by investing in and our ESG initiative, which 1 of them is the $20 million to replace our pneumatic devices and thats going to cut our emissions in half.
So and thats going to take or what is already of peer leading emissions intensity rating and only make that better which will have the impact of of allowing us to get more credit for the quality of the gas that we produce the customers.
And so that's sort of the holistic view on RSV and what we're doing the position ourselves to benefit from and promote that market.
Great. Thanks, a lot.
Thank you.
Our next question comes from John Abbott from Bank of America. John Your line is now open. Please go ahead.
Good morning, and thank you for taking our question.
Our first question is for you David.
And did a good job of explaining the working capital strength draws during the quarter, it's mainly noncash.
Just sticking to for Q, how should we think about the trajectory of working capital.
So.
The the issues with working capital really are tied to the margins for.
For our hedges and as you think about.
As time Rolls there of those margins go away as a credit.
Improves those margins go away and then if prices go up those margins and increase on whats left so those of the moving targets to think about I think.
Just know that I'll call it by the end of the year.
All of that margin effectively will go away.
And so you can think about just from a trend standpoint over the next 6 months.
The margin will go away because effectively the the biggest part of that margin impact is really tied to 2020.
Interest.
Alright and for the second question, it's on the topic of Ngls and all sorts of hedging which have already been discussed but.
It's not always the Ngl's don't really sort of really move the needle for you that much but you don't provide a lot of disclosure.
And your NGL hedging.
The 1 hand, and we do have an uplift and the NGL curve towards the in the second half of the year.
So can you just sort of discuss relatively speaking the enough of navy, while you make it give specifics on contracts, but the amount of percentage of hedging on Ngls and whether or not you continue to hedge into 2.
Physician and 22 on Ngls.
Yeah. So we're 75% hedged on 2021 were zero percent hedged on 2022 of portion of those hedges that we have in place for our Ngls are tied to our Chevron acquisition, just like we did with although we ended.
The hedges in place.
But we added only 2021 hedges, we didn't add 22 or 23. So we have virtually wide open for 'twenty, 2 and 23 for NGL.
Again, it's about 5% of our production is probably about 6 or 7% of our revenue.
And if I could possibly sneak in 1 more I mean, just given the upward move in the gas strip what of David what are your latest thoughts about when you might pay cash taxes.
It'll be several years before we paid cash taxes and again.
That is will.
It will be of function we have.
The 1.4 billion of Nols.
And and so that really will be a function of what commodity prices do but right now we have closed several years out before we pay cash.
Taxes.
Thank you very much for taking our questions.
Youre welcome.
Our next question comes from David Heikkinen from pick for an energy partners. David. Your line is now open. Please go ahead.
Good morning, everybody sort of thing.
And about your Altra deal I appreciate you providing the splits on the hedges for that so we can roll it into our look back of economics can you talk about how.
Of the increase and differential guidance was tied to the altar assets or was it not.
Or do they just have similar differentials for the rest of the portfolio.
No David It has and there are about 15 cents wider than are different than our base and basin differentials and and so we.
And.
A piece of that.
And so.
And I would say about about half was was from.
The acquisition and half of it was from wider differentials that occurred within the basin because of the problem.
Probably because of the <unk> being down.
Yes.
It's purely and our own look backs on what you paid and what we thought and that's helpful for us to dial that in a little bit. So we'll put the cost of images and and a little wider differential.
And of the purchase price adjustment.
Awesome that's helpful.
Okay great.
Our next question comes from.
And David that coupon from Cowen and David Your line is now open. Please go ahead.
Okay.
Thanks, guys can you hear me.
Yes.
Hello, and alright, perfect, sorry, sorry about that before.
Just curious on 2 things 1 is on the Altra deal.
The incremental Capex that you guided to today for 2021.
No I think 1 and I just wanted to revisit that longer term outlook of just running 1 rig line on those assets and to is that capable of higher than the original.
And.
Deal thoughts are you accelerating in the of the Ducks that you acquired with that or should we think of this as apples to apples with the original purchase guidance.
It's in line with what we put out.
For the original guidance.
Just the just the <unk>.
To remind you.
Both the transaction and run that asset of maintenance mode is going to require around a couple of hundred thousand horizontal feet per year, the declining to around 150000 horizontal feet longer term.
And.
We applaud the well cost of at least underwrite that the other translate to of Capex.
Thanks to the.
And then just the.
Finally, the second question here is just obviously just heading into some of the issues that you all of our experience right now what's the basis several of your peers as well with petco.
The last year things were much more dire because the cash prices for much lower but.
I would presume that we're not and the situation and where were looking at.
Sort of managing near term production in terms of curtailments or shut ins are moving volumes off of them 2 or 3 at least through the end of summer.
Yeah.
Yes, so the David.
If you looked at what happened last year you had.
Lack of winter you had.
Hi, storage, you had a little bit of a COVID-19 impact and so and then you had we'll call. It 1.5 bcf per day or more of pipe outages.
And so you had as you headed into.
September October and then you also had about 2 bcf per.
Per day of shut ins that came online in October. So you had high storage you had the pipes out and then you had.
Producers come back online all heating and we'll pull and then October November time period, and so that created the recipe for basis widening really sharply you look this year.
<unk> and storage inside the base and is about 150 vs last year over year.
On the call it normal $909.50, as you start the the the winter here. So we're much better storage position produced.
Really a lot less of pulse shut in of production going on so you are running.
And of more at full capacity and.
And you do have the teco outage, which was about $6.50, So we'll call it about half to about a third of what was out of time. So I think the setup is and a much better position.
If you have normal weather into the winter and where you probably will not see.
And he producers shut in and the September October time period, So I think it's a much probably different setup.
And just wanted to confirm that the thanks David.
And welcome.
Our next question come from no PA from 2.
Running brothers investment research.
Your line is now open the please proceed with your question.
Hi, good morning.
Good morning.
I was wondering.
Now a couple.
The Alta.
Of course.
And your.
A couple of months, even more familiar with it.
I was wondering did you have any updated thoughts on.
In basin gas opportunities now with your sort of combined portfolio.
Well I think the the the opportunity.
<unk>.
We're known even before we picked up the alpha.
Transaction, so I wouldn't say our view has changed on any new opportunities coming on the horizon.
And I think 1 thing that has changed is our balance sheet has really strengthened and the.
And the discipline that we had the the reason to.
Yeah.
Any any M&A for consolidation to improve the leverage situation here at EQT I think is less of a desire there. So it really comes back.
And the focus on.
What's the best way for us to grow our free cash flow per share.
And also the growing our NAV per share as.
And do we have the ability to do that.
Ourselves with our return of capital strategy, that's now been.
We would accelerate.
Accelerated and our ability to get to that point.
So some of our mentality on M&A is still going to be something that we look at par.
Part of our job is to make sure of that we're looking at every opportunity, but that discipline is only is only.
While which kind of.
Gotcha. Thanks.
And.
We had on the call day of lot of the discussion about.
Gas markets and and.
What we might see going forward.
The volatility we've seen.
Only strength few months has all been on the upside so I.
I guess and I'm quite sure how the.
Frame this but.
And your price for you and we talked about of course, the back of the backwardation of the curve.
The the expense of <unk>.
Trying to.
The way and put.
As far as the opinions being high and.
And do you when you look at the curve going into 2023 of its back into the twos.
Do you sort of think.
I think that the the <unk>.
Market is assuming that there is going to be sort of a.
For me, but a significant rebound in the rig count so that.
Applied is going to ease considerably or do you think there is a sense that there's some sort of plateau of had out there and the demand side.
1 thing.
And as you talk.
About future scenarios.
Delayed, which you think is more likely.
Yes, I think for script to be under $103. I think you have to take if you take the view that people are going to break discipline and start adding production.
This period of pricing right here is going to be really important to watch because you've got.
It's easier to stay disciplined.
The 270 strip.
It's another it's another proposition when youre looking at of $3 strip, but like I said before and these are these are short term short term pricing and I think people understand what and how thats going to end up and.
And realized that the real value opportunities for us to bring some sustainability.
For.
For the gas supply and ultimately to a more sustainable price and over the long term net that will create more value. So.
I think the next 6 months will be important important to watch and the kind of think help.
So the dispute the discipline of this industry has and I think after that and you'll start to see the district of reflect.
And then I can think of as a more constructive gas price long term.
Great. Thanks, a lot.
Both of them.
And a nice the other question is from the line I would now like to hand back to type of Ross for any closing remarks.
Yes, thanks, everybody for participating today, I think just stepping back and realizing the situation that we have been and that we're in today the.
The gas markets.
Our very strong.
And I think I think.
We realized that the GAAP gases and the $2 of commodity it's more like a $3 of commodity and while it does.
Presents a headwind headwinds with our with our hedge book the factors.
EQT as a stronger company today, and we've got a really bright future. We've got a really robust free cash flow profile and a really strong balance sheet and thats going to give us the tools needed to correct any market imbalances and the short term and reward our shareholders.
For the patients and we're really excited to continue to deliver on that strategy. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.