Q3 2021 EQT Corp Earnings Call
Sources with both comments, having to ration energy and hopes of maintaining sufficient supply to make it through the winter while defenders of these policies may claim that these events are isolated and transitory. We believe they are chronic symptoms due to a structural underinvestment in traditional energy resources.
And unfortunately, but yet predictably, we are seeing the adverse environmental ramifications of this as just a couple of weeks ago, China has announced that is rethinking the pace of its energy transition and ramping up coal production.
This is not the way to address climate change as one of the largest exporters of natural gas the United States needs to recognize the role it plays not only in the solution, but also the problem.
The solution is American shale.
We are fortunate to be one of the few countries in the world that has an abundance of energy resources and more so an abundance of the lowest cost lowest emissions energy resources that is exportable, namely Appalachian natural gas.
During the shale boom technological breakthroughs investor support and the innovation and efforts of American natural gas workers translated American shale into low cost reliable clean power, replacing high emissions call and laying the foundation for solar and wind to play a supporting role with the results being.
The U S, leading industrialized countries and emissions reductions.
This model is replicable on a global stage, but only if the United States takes on a leadership role for example, if we work to replace only China's Newbuild coal power plants with natural gas, we would eliminate approximately 370 million tonnes of cotwo equivalent per year.
That number is roughly equivalent to the emissions reduction impact of the entire U S renewable sector.
Which leads to the problem the problem is that the United States and advocate for policies of elimination.
To understand the key role that American shale plays in the global energy ecosystem, the United States represents about a quarter of global natural gas supply Appalachia alone represents almost 10% what that means is that global demand has looked all around the world and it's that we need almost 110th of our natural gas coming from <unk>.
Correlation.
<unk> <unk>.
We've canceled multiple pipelines in the last several years LNG facilities have stalled capital has been pulled out of the system. All the while demand has grown and now we're seeing the results U S natural gas and more specifically Appalachian natural gas has the opportunity to provide affordable reliable clean energy to the world, but to do that.
We need support in building more infrastructure, a failure to support pipeline and export infrastructure would effectively advocate the leadership role that the United States is poised to play in addressing global climate change to countries that likely do not have the resources or political desire to do so.
Now to talk more about the gas macro specifically and how it is impacting our business.
There are a number of bullish trend for the global natural gas market that we believe underpin our long term structural change of the curve.
First severe underinvestment in supply across all hydrocarbons and associated infrastructure over the past few years has contributed to our global scarcity of accessible traditional energy sources.
Solar and wind have reached enough scale and global power markets that they are intermittent is driving structural volatility driving demand for reliable energy sources like natural gas to stabilize the grid.
Third environmental pressures and governmental regulations on infrastructure have limited the ability for energy to go where it is needed most creating market inefficiencies and restricting investments across the space limiting the ability of producers to react to supply demand imbalances and fourth.
Can you focus on low cost reliable and clean energy sources as increase the prominence of the role of coal to gas switching as one of the most impactful actionable and speedy opportunities for significant progress in reducing global emissions.
These are the main reasons that global natural gas prices rose over $20 per deca term during the quarter.
With the back end of the futures curve, having also revenue nearly a dollar in the past six months Theyre also why we see structural change in the curve sticking while we have been vocal about our bullish view of natural gas prices for some time the speed of the current price escalation came sooner than we anticipated or.
Our reasons for hedging 2022 production at the levels, we did while continuing to keep 2023 exposure opened is simple we believe that regaining our investment grade rating and reducing absolute debt levels best positioned EQT shareholders to fully capture these thematic long term tailwind in the commodity.
As you look across the energy sector. It is clear that traditional energy companies are being valued at a steep discount. We believe this was principally a result of views on a long term sustainability of traditional energy sources impacting terminal value. We believe that markets have overshot in this regard, especially as it pertains to natural gas.
And that events like the current global energy crisis in particular as to how they are contributing to a step backwards in our efforts to address climate change will make this readily apparent to policymakers and investors alike, and we believe that at that time, there will be a re rating within the sector principally concentrated on companies like ours that are differentiated.
And their sustainability, both financially and on an ESG basis.
Now I would like to give an update on our free cash flow projections, the structural shift in the commodity curve along with some hedge repositioning in 2021, and 2022 have had a positive material impact on our free cash flow projections and.
In 2021, we are now expecting to deliver approximately $950 million and free cash flow generation in 2022, our preliminary estimates are $1 9 billion with.
With 65% of our gas hedged as our hedges roll off in 2023, we see free cash flow generation potential growing even further to approximately $2 6 billion.
Equating to an approximate 30% free cash flow yield for a company that expects to be investment grade highlighting how robust the free cash flow generation is from our business.
In addition to the shifting commodity market, we have several other factors driving improved free cash flow generation, including our contracted gathering rate declines more efficient land capital spending shallower base declines and FTE optimization, which we have just announced as such we are updating our 2021 through 2026.
Motive free cash flow projection over $10 billion.
A 40% increase since our July estimate and materially above our current market cap.
This extensive free cash flow generation provides us with the ability to return substantial capital to shareholders, while simultaneously enhancing our balance sheet and as previously mentioned, we think there is still running them.
Further this structural gas price improvement has solidified our execution of shareholder friendly actions in 2022, which we intend to formally announce before the end of 2021, while we are acutely aware of the investor appetite for return of capital one of the key considerations as we finalize our plans as leverage management.
However, we want to be clear that attaining investment grade or a certain leverage target is not a precondition to initiating shareholder returns with our hedge position and strong free cash flow. We can accomplish both debt reduction and shareholder returns as we create our debt retirement cloud glide path.
This business is capable of returning tremendous amount of capital to shareholders, while maintaining optimal leverage bottom line is we are projected to have approximately $5 6 billion in available cash through 2023, and if 100% of that cash was allocated to shareholder returns, we would still be left with leverage of sub one five times.
There was some very compelling stats and we look forward to executing on this robust capital allocation strategy in the very near term I will now turn the call over to Dave.
Thanks, Toby and good morning, everyone I'll briefly cover our third quarter results before moving on to some strategic and financial updates sales volumes for the second quarter were 495 Bcf at the high end of our guidance range. Our adjusted operating revenues for the quarter were $1 $1 6 billion and our.
Total per unit operating costs were $1 25 per Mcf.
During the third quarter of 2021, we incurred several one time items totaling approximately $116 million, which impacted our financial results and free cash flow generation.
First we purchased approximately $67 million of winter calls and swaption to reposition our hedge book to provide upside exposure to rising fourth quarter 'twenty, one and all of 2022 prices, which I will discuss in more detail in a moment.
Second we incurred transaction related costs, mostly from Alta of approximately $39 million.
And finally, we incurred approximately $20 million to purchase seismic data covering the area associated with the oil assets, which hit exploration expense.
Our third quarter capital expenditures were 297 million in line with guidance.
Adjusted operating cash flow was $396 million and free cash flow was $99 million.
Rising commodity prices and actions taken to unwind fourth quarter hedge ceilings have resulted in an increase to our fourth quarter free cash flow expectations of approximately $200 million.
Detailed guidance can be found in the earnings release filed yesterday, but at the midpoint, we expect fourth quarter sales volumes to be 525 Bcf.
Total operating costs of $1 25 per Mcf.
Capital expenditures of $325 million and free cash flow generation of $435 million.
Turning to some more strategic items I'd like to discuss the actions taken during the third quarter to optimize our firm transportation portfolio.
First we successfully sold down 525 million a day of MVP capacity, which when combined with the 125 million a day previously sold down amount to approximately 50% of our original capacity.
In terms of governed by an asset management agreement pursuant to which EQT will deliver and sell certified responsibly sourced gas to an investment grade entity for a six year period EQ.
EQT will manage the capacity and retain access to the premium southeast markets. While the third party entity will be responsible for all financial obligations related to the capacity.
This transaction meaningfully reduces our firm transportation costs.
Going forward, we believe that retaining our remaining 640 million a day of MVP capacity provide appropriate diversity to our transportation portfolio.
We do not intend to sell down any additional capacity at this time.
During the quarter. We were also successful in securing 205 million a day of Rockies Express capacity with access to the premium Midwest and Rockies markets.
As part of the agreement the parties agreed to significantly discounted reservation rates during the first three and a half years of the contract, which result in material uplift to price realizations and margins during that period.
In the aggregate we expect these arrangements are lower our go forward firm transportation costs by approximately <unk> <unk> per Mcf.
While simultaneously improving realized pricing.
Additionally, we are currently working on several smaller firm transportation optimization deals, which if executed are expected to further enhance margins and price realizations.
Furthermore, our RSV program is ramping up the six year $525 million a day contract. We believe represents the largest RFG transaction done in the marketplace and highlights the accelerating end market demand for low methane intensive natural gas.
I'll now move on to some hedging activity initiated during the quarter, which effectively unlock upside exposure to rising prices.
Since the end of the second quarter, we have seen the Henry hub contract price appreciate backed by modestly tightening U S fundamentals rising volatility.
Couple that with energy shortages occurring around the world. We believe the U S could see extreme price events. This winter by early August we have revised our hedge positioning to one that participates in more upside while still locking in the necessary cash flows for progressing back to investment grade.
In essence, we removed approximately 28% and 13% of caps our ceilings. So the balance of 2021, and all of 2022 and lowered our floor percentages by 11% and 9% respectively.
We were able to do this by purchasing a significant number of winter call options at very attractive prices and strike levels that are currently in the money. These call options maintain our downside protection capitalize on rising volatility and open our portfolio to increase realizations.
In addition to our winter call options. We also purchase swaps in 2022 by taking advantage of the backwardation in the market to purchase swaps at points on the curve, we felt to be undervalued.
This is expected to allow us to capture stronger pricing in 2022, well. After we are through the winter. These actions resulted in a one time cost of approximately $57 million in the third quarter and approximately $18 million in the fourth quarter with a current market value sitting at well over three times the execution.
Yes.
For our 2023 hedge book, which sits at under 15%, we expect to hedge with a more balanced and opportunistic approach as we have reduced debt.
And achieved our investment grade metrics in 2022.
At a high level, we envision a lower hedge percentage utilizing structures that enable upside participation to capture our anticipated long term appreciation of natural gas prices and increased volatility.
Last we remain relatively unhedged on our liquids volumes for 2022, and 2023 at less than 15%, which represents about 5% of our volumes and 7% of revenues.
Moving on to a quick update of leverage and liquidity.
Pro forma the full year impact of Malta, and the removal of margin postings. Our year end 2021 leverage sits at one eight times and is expected to decline two nine times by year end 2022, and zero leverage by year end 2023 without the impact of shareholder returns.
If you add all our free cash flow through 2023, plus the $700 million in current cash margin posting we're looking at five 6 billion in cash available for shareholder returns and leverage management.
So we have the ability to retire substantial debt achieve optimal leverage and provide robust returns to our shareholders.
Stay tuned for a more formal framework before year end.
As of September 30, our liquidity was $1 2 billion, which included approximately <unk> 7 billion in credit facility borrowings largely related to margin balances tied to our hedge portfolio.
As of October 20 <unk>.
Our margin balance sits at approximately $2 4 billion and our liquidity will end October at around $1 $5 billion with respect to margin postings, we've been able to manage these nicely by working with our hedge counterparties. Many of which are also it's in our revolver.
We continue to make progress on lowering our letters of credit postings under the credit facility, which dropped approximately $1 billion during the third quarter $2 6 billion and it declined another $1 billion through October 20 <unk>.
From mid 2020, we have effectively cut our letters of credit and half from approximately $8 billion to an anticipated 4 billion by year end 2021.
And as a final reminder, on liquidity virtually all margin postings and letters of credit go away. When we achieve investment grade rating. We are one notch away from IAG with all three agencies and when combined with the structural gas macro tailwind in eqt's robust free cash flow profile, we believe it's only a match.
At a time until we regain our investment grade rating.
I'll now turn the call back to Toby for some final remarks.
Thanks, Dave to conclude today's prepared remarks, I am very excited about the catalysts on the horizon, which I expect to shine a spotlight on the inherent value of our business and the value proposition for investors. These include one the compelling and structural positive momentum driving the gas macro backdrop, setting up robust and sustained free cash flow generation.
To the announcement of the shareholder return framework that is right around the corner.
<unk> an investment grade rating that is on the horizon further driving increased free cash flow generation and improved liquidity and lastly, our modern approach and ESG leadership will continue to drive sustained long term value creation for all of our stakeholders and the sustainable shale era with that I'll open the call up for questions.
Thank you.
We'd like to ask a question. Please press star followed by Ron Thank you Pat.
To withdraw your question. Please press star followed by Tim when preparing to ask your questions. Please ensure that your phone is on mute you'd like to me.
Our first question today comes from Aaron <unk> of Jpmorgan. Please.
Please go ahead your line is open.
Yes, good morning <unk>.
I was wondering if you could outline.
You highlighted your expectations for free cash flow generation between now and 2026.
Are you prioritize that.
Uses of free cash flow between.
Buybacks potential shareholder returns through dividends or further A&D activity.
Yes.
Sure. Thanks, Scott Thanks Rune.
Yes, so how we're thinking about the capital allocation, we're certainly looking forward to getting into more details before the end of the year.
But I'd say the priority is going to be on on buybacks and dividends less so on M&A, obviously thats going to be.
It depends on where our stock is trading the value we see on the consolidation framework, but right now where we're sitting.
The priority will be to to be on buybacks I do think dividends.
It will be a part of the program.
Thank having a base dividend is sort of going to be the ticket to play in sustainable shale era. So you will see something that.
Is modest but meaningful.
And looking forward to.
All of that in more detail by the end of the year.
Great Great and just my follow up is just on the firm transportation opt.
Optimization.
You guys highlighted.
The impacts of selling down.
Call it a half a bcf a day on an MVP and I just wanted to go through a little bit of the math because you talked about.
A 5% improvement in your firm transportation cost structure on our model that would represent about 120 $550 million per annum.
And savings we had previously thought tobey that there would be a drag on your realizations as you sell that caused a bit of a higher mix.
The local market and away from maybe a premium southeast market, but in the press release, you mentioned that you think that this would actually improve your realized pricing I was wondering if you could give us a little.
The magnitude and how does the RFG.
Fit into that.
Yes, hi, so this is Dave so so we have a a.
Sales agreement with the buyer, who is and so we will make on top of the on top of the cost of shipping the pipe of taking the pipe.
We have a fee on top of that that we that.
That includes both the cost of the gas as well as the RFP. So theres, a we'll call. It a premium that's on top of the cost of the pipe.
And David could you give us maybe a sense of the magnitude or just think about what this could mean in terms of the cash flow for the company.
It's it's very meaningful I think we can.
It's a confidential contract so we can't disclose it but it is very meaningful.
And again, it's embedded in our embedded in our forecast that we gave for for 'twenty, two and really.
Really the full impact of <unk> 23 and beyond.
Great. Thanks, a lot.
Sure.
Thank you Erin our next question today comes from Matt Robinson of.
<unk> Securities. Please go ahead your line is open.
Good morning, all.
Tobey I'm just wondering have you guys done a great job of.
Doing some repositioning of hedges unlock not only fourth quarter, but 'twenty two free incremental free cash I'm just wondering is there.
In today's environment more that you can do on that for you a day, but from.
From here from either one of you all.
On a go forward or did you pull up most of what you get out of that.
Yes, so if you noticed.
We repositioned.
Hedges earlier in 'twenty, one when <unk> hit and so we had.
And figured out that when gas had dropped down to we'll call. It 240.
We were able to reposition so yes, we will consistently reposition our portfolio, we will take advantage of the volatility so we're not done yet.
Okay, and then just one last one you mentioned on the liquids I'm. Just wondering is there any thoughts about regionally shifting so that you can bring out even more liquids I don't know early there.
Let's say $2 22, thank you.
Yes, Neal our programs pretty baked I'd say for the next six to nine months, but we do.
Look at our schedule every quarter every month.
Prior to us put the best rate of return projects on schedule and see if we can put those is closer to the front of the line as possible.
Obviously the move in liquids.
<unk> increased the economics of our liquids rich wells and certainly the acquisition from Chevron.
That is an inventory of those opportunities and the team is looking to prioritize.
Those type of projects and bring those sooner up in the schedule.
But I don't anticipate any change in the next six to nine months of what we're putting out.
Got it thanks Tobey.
Yeah.
Thank you. Our next question today comes from <unk> <unk> of Goldman Sachs. Please go ahead. Your line is open.
Great. Thank you and good morning, Matt.
My first question was around Odyssey certification can you walk us through where you are on the certification from the third party auditor and what needs to happen to get the request certification to supply the gas toward the investment grade counterparty.
Yes, so so we have to serve.
<unk>. So we have a project scenario when we have <unk>.
So am I Q.
Were both done on that.
So we have effectively we'll call it up to four Bcf per day of certificates and so.
We have I'll call. It had now three contracts, one, which obviously was a very large one.
And we're working on several others.
Okay.
Great. Thank you and then you have lots of completed two attractive transactions over the last two or so maybe if you can provide your latest thoughts on consolidation in the basin.
Okay.
Sure.
So yes the two.
Deals that we did chevron and altra I think that proved to be very accretive one of the driving factors. There as we I think did a pretty conservative underwriting.
And I have to pay for.
Inventory.
And we did those transactions.
260 270 strip.
Obviously, where the strip has moved this is going to show that those the values of those assets.
<unk> considerably.
Today looking at where the market is.
I think from a consolidation standpoint.
But not going to be our best way to create sustainable value at these prices. So we've essentially put our consolidation efforts on pause.
And we will continue to be disciplined as always look for the best ways to create sustainable value creation for our shareholders and we think.
The opportunities that this company has.
I was just looking at the value disparity in our stock and now that we have had some tools to start correcting that that will be where consolidation, we focus will be on potentially buying back our stock.
Great. Thank you.
Thank you Mike.
Our next question comes from John <unk> of Bank of America. John. Please go ahead. Your line is open.
Hey, Thank you for taking our questions.
First question Tobey its for you.
<unk> had alter in house for quite a bit now have there been any positive surprises.
Yes, there's been some positive improvements I wouldnt say theres been surprises.
We've identified some best practices.
The way that also was doing compressor maintenance I think was the best practice and will tuck in.
We're early on taken over operations, but.
In very short order the drilling team has showed their strengths.
First pad, we started developing and I think it was it was a 99 well pad.
Two wells were already drilled the drilling team is already.
Almost essentially double the drilling speeds on those locations.
They did that through reevaluating landing zones.
Tweaking the tweak in the fluid design switching out the directional tools from rotors, there from direct conventional mud motors to directionally to rotary <unk>.
And we've seen greater penetration to take off I mean, it's pretty much what the drilling team has done on when they took over here at EQT. So that's been a big improvement and the impact of cost there.
I'd say historical costs on ultra from from the drilling side was around call. It 240 to $150 on the horizontal portion.
<unk> per foot.
The new drilling techniques and the performance has taken drilling costs down to around 140 $150 a foot so.
Big positive improvement, there, but not surprised.
That the team is executing.
That is very helpful. And then the second question David David. This is for you it's on the MVP deal.
So that deal is six years.
Are there extensions possible could that deal and then after that six year horizon.
How do the FTE costs sort of change on on a unit basis.
So the first part of your question yes.
Both parties have.
Sure.
Option here to be able to extend this out.
So we will have that discussion we'll call it as we get closer to year end six so.
And we get the opportunity to restrike the.
I'm, a fee as well and so.
So that would be good for us.
And then.
<unk>.
Just know that.
That pipe.
Call. It sits in the upper 70 range.
Range.
And that effectively should we be about the same level.
Pipes that overtime.
Ask for higher rates, so, but right as of now we would anticipate it to be about that high 70 right.
I appreciate it thank you for taking our questions that helps perfectly thank you.
You're welcome.
Thank you John Our next question comes from Josh Silverstein of Wolfe Research. Please go ahead. Your line is open.
Yeah. Thanks, Good morning, guys just on the forward outlook and free cash flow.
Is it a maintenance outlook, that's underpinning this and let's say, it's time for EQT to grow based on where the prices are where does the incremental production go is it all into the local market or given the ft that you have you'll be able to send it into the <unk>.
Whether the Rockies now, Oregon to the southeast.
Josh our free cash flow forecast is underpinned by a maintenance program, we are not contemplating growth.
Yes.
And if we did if we did by the way you hit it right.
Theres less gas going forward in basin because of those two pipes that come that are on or and what we get so in theory.
It would probably stay in the local market, but but.
Going forward that number is a much smaller percentage.
Got it okay. Thanks for that.
And then you did say and so that big 30% free cash flow yield in 2023.
Right now it certainly feels like Thats, an eternity away is there any is there any way for you guys to take advantage of that free cash flow yield now or do you really just have to wait for these hedges to start rolling off.
I know you mentioned you may want to put in some colors or some other hedges for 2023.
Just feels like the stock hasn't moved in six months at all because of the current hedge book. So is there anything that you guys can do to try to take advantage of that now.
Yes, so just think about the <unk>.
Fourth quarter, we're going to have 400, roughly $50 million of free cash flow, we're going to have.
We will call a significant portion of the margin posting going away as incremental cash okay. Right now, we're calling that 300 million based upon October 22nd so.
And.
We obviously also have our E train stock that's another we'll call. It $2 50. So there is a $1 billion sitting right there recall.
Circled before we even touch 2022.
Hi.
Okay.
Does that answer your question. Thank you Josh.
Yes, we've moved on.
Ladies and I'm, just going to be one to the next question then.
Our next question today comes from David Gober.
Obama of Cowen David. Please go ahead. Your line is now open.
Thanks, Toby and David and team for taking my questions.
So first off I wanted to just ask you remarks earlier, there will be about.
Kind of reworking some of the hedge book, especially going into <unk>.
Winter and some of the risk around price spikes.
With some seasonality there.
We did talk about like a base program, obviously doesn't grow but is there anything that would happen on the production side and the field level that you guys could be prepared to do whether it's.
Opening chokes further to take advantage of seasonal swings in pricing.
Yes operationally.
We do execute a managed choke program for all new wells that we.
Turn in line. So we are naturally choking back our wells for the first six months to nine months.
So that is an opportunity that lets us.
Lever, we can pull to.
<unk> increased gas supply and take advantage of.
Near term price volatility we have turned some of those some of those wells open.
To get some grab some extra production in the short term.
And then as far as like our hedge book is concerned.
The prior question that was asked earlier is there anything else we can do there.
The repositioning of our hedge book that we have done.
Is it really been focused on sort of the short term, which we think we have a much better read on how the macro will play out.
And so we'll continue to assess the environment as we get closer towards as we get through this winter through 2022, we'll always be looking at.
Optimizing our hedge book to match, what we think is going on in the market.
Sure.
The second one for me Josh alluded to this earlier just a drag on the stock with the hedge book.
I think if theres also some perceive negativity around the letter of credit postings in the margin postings, which obviously go away with an investment grade rating.
You talk about this as being near term.
I guess can you give us a sense of how frequently you think that you are being assessed by the rating agencies and maybe a calendar.
When do you think youre going to get into next.
Look at the state of the business.
Yes, so just to understand one.
Every month that rolls off.
Our margin posting comes down so most of it goes away really we'll call it over the next.
Four five months, just naturally through and so.
So they really become much less of an issue.
And October 22nd we've set.
Margin posting was $400 million. So so it's some it's really less of a drag it's actually going to be more of a tailwind.
So, let's just start off with that and then second we do speak to the ratings. He is on a fairly regular basis and we think.
As we initiate our debt retirement.
We will have the ability to be we'll call investment grade metrics sitting probably somewhere in the first quarter or second quarter of next year.
I appreciate that if I can just loving the housekeeping one real quick just so I can contextualize all of the moving pieces of the E train gathering agreement.
The firm capacity agreements on the other side it looks like all in if we think about gathering transmission and processing.
Sort of a $1 five on an <unk> basis for this year that next year at that level should be.
Roughly flat at the corporate level.
Is that fair.
Yes, that's fair.
Thank you guys.
Thanks.
Thank you David Our next question comes from David Heikkinen of Pickering Energy Partners. David. Please go ahead. Your line is open.
Good morning, and thanks for the time just on the operating side the $240 a foot down to $1 50 on Alta sparked a question of what what are your expectations for completed well cost per foot kind of for the remainder of the year and then into next year.
Inflation expectations.
As well.
Sure at a very high level.
Our southwest PA Marcellus wells, we still are expecting to come in in that 6% to 675% to 680 range.
At a corporate level I think our ultimate goal is to get all of the wells that we do.
To average around $700 a foot.
That's taken into account the West, Virginia, Marcellus, which is planned at 780 $775 a foot and the northeast, Pennsylvania assets with Alta wishing to be closer to 750 a foot.
We're going to we're going to see probably the biggest gains from a performance perspective on west, Virginia, and the northeastern side of things.
Set us up to be in a position to deliver well costs around $700 a foot that.
That is taken into account some inflation, we are seeing single digit inflations on.
Focused on things like.
Steel diesel and labor.
Steel has probably the one that we.
We think could could correct itself in the near term so were being very selective in what we procure on that front.
Diesel we've sort of insulated ourselves from the.
The impact of the rise in diesel costs and Thats, primarily due to the move to electrified frac fleets.
Eliminated up well over 25 million gallons of diesel consumption per year from our program.
And then last one is labor and.
And I think this is every industry is struggling struggling with shortage of labor.
One thing I would say.
Is that.
One of our biggest moats that EQT has against service cost inflation.
Is the efficiency of our base operations. It is important for EQT to drill.
To have really great operating efficiencies.
Manav horizontal feet, we drilled the amount of.
I mean, we <unk>.
Ebay because those operational efficiencies are translating to efficiencies with our service providers.
And it allows us to.
<unk>.
Be more efficient and combat inflation going forward. So while we are planning for some I think we've set up set the company up to still have an opportunity.
Continue to drive down our costs.
Okay, and then just on the modeling detail side would it be possible to either walk through where your fourth quarter hedges or take it offline and we can just kind of make sure we dial things in right with the changes you all made.
So we can make sure we get our remarks correct.
Sure so in.
In the fourth quarter, we have a floor level of about 74%, we have a ceiling level of about 70%. So.
Taking those caps.
And off.
Really opened up.
The ceiling.
November December time period, now where gas prices rallying.
A rallying here, we're actually at 60% ceiling.
And that's about a 70% 72% floor. That's the same spot we're sitting in the first quarter. So we really have opened up the winter and then for 2022, we're sitting at about 64% floor and about 72% ceiling.
Okay. That's helpful.
Thanks.
Thank you David.
Our next question comes from Scott Hanold of RBC capital markets.
Please go ahead your line is open.
Yeah. Thanks, good morning Tobey.
Toby you had mentioned.
M&A doesn't seem to be.
It's something that it's as attractive right now and could you just talk big picture about your strategic positioning.
Focused in Appalachia, I know a lot of some of your peers have been moving down towards the Haynesville. Another I think a couple potential sizable opportunities in the Haynesville right now, but like can you talk strategically about being in Appalachia versus thinking about the haynesville in accessing the global gas market.
Yeah.
I think it's a great question, we get that question a lot.
Youre getting exposure to LNG I think is important.
But when you look at our portfolio a lot of people don't recognize that EQT, we have exposure to the Gulf Coast. We've got over one two Bcf a day of ft down to the Gulf, which is.
Almost largest almost the largest position of any producer down there in the Haynesville. So we've got a significant amount amount of exposure down there.
So really.
That strategic boxes sort of check and it just comes back.
We're going to be the most.
Accretive opportunities for us to look at and I think you've got about you got to understand what we have here in Appalachia is really special you've got.
Very low maintenance capex requirements up here.
<unk> got really great F&B really super low F&D costs.
And it's a little bit of a different story down there in the haynesville with higher well cost higher declines.
And we just got a sort of balance that but strategically we've got the the FTE down there to access to the international markets and that's something that the teams are really really working on optimizing some more there as well.
Okay understood and I think this one for David here in on hedging you, obviously talked about being a little bit more I guess deliberate a pragmatic going forward on the hedging could you give us a little bit more color on that in and just talk to how your reduced leverage position and also youre lowering breakeven point going.
Forward kind of forms and shapes your view of what are the right points in structures to utilize.
Yes, so just if you step back and the way we hedged before.
We had a we call it a defensive part of our hedge which.
Locked in.
A leverage ceiling and locked in certain amount of free cash flow and was very purposeful because we had a maturity wall that we had to pay off including the loophole now the last bit of it which is a $600 million of 2022 notes.
And then we had we'll call their offensive piece, where.
We would try to grab our price view.
And be more offensive in that nature.
And then the other piece I would just say is whenever we did acquisitions, we layered on hedges to make sure that we locked in that free cash flow and the economics of what we did.
So going forward if we're not.
We don't do any acquisitions, we're just going to really look at the defensive piece.
Now the percentage that we need to hedge as our as our leverage comes down.
Fact that we don't have it won't have any we'll call purposes.
That we really have to take out.
We will be able to hedge and it will pull a much lower level from a defensive position there and then for the offensive side, we're going to sit and decide at what percentage, we want to hedge up to but we can also change I'll call. It the tools in which we use we can use more colors, we can use more puts to be able to.
So not just.
Put a ceiling in place, but just put a floor in place. So those are the things that we're working on we have a little bit of time to do because we are really thinking about this is really more for how do we layer on hedges for 2023.
And just strategically look at can you.
As you think about those those forward hedges in 2023 and beyond.
Maybe looking at it as a relative percentage of production being hedged is that a good way to look at it or is it if you put in Florida as it becomes a little bit I guess.
A little bit different kind of conversation.
Yes, it's always about a percentage of of our production, but we are trying to solve for our leverage ratio.
And in some cases, a free cash flow number.
And so that that percentage because a defensive nature will drop meaningfully. So for example in the past that number we're sitting I'll call between 40, and 60% the last two or three years because of our leverage and the amount of debt that we need to pay down that number is going to drop very meaningfully now.
Because of our leverage and the fact that we will solve the maturity wall.
But I'd just say as far as the types of instruments, we use.
Swaps were largely used in the past I think to get our floors I think the floor as you'll see going forward are going to come more from <unk>, whether we just purchased those outright or or use those as part of a costless collar right.
The end of the day, it's going to be.
It's going to be a more balanced approach I think in the past it's been more focused on getting that prioritizing the floor.
Now with the balance is going to be.
Sure we have a floor, but also recognizing the upside because we do believe volatility will continue and we have a balance sheet that will allow us to take a more balanced approach and that's what we're going to deliver.
I appreciate the color thanks, guys.
Welcome.
Thank you Scott. Our next question comes from Kashi Harrison of Piper Sandler Kashi. Please go ahead. Your line is open.
Good morning, everyone and thank you for taking the questions.
Toby really enjoy it.
The macro discussion earlier in the call I was wondering if you could provide us with some just current thoughts on how many new LNG projects, you think might be.
Maybe over the next several quarters.
And then I know the global market the global gas market is obviously extremely short right now.
But it does seem like a wave of projects is coming from U S. Qatar, Russia, maybe Mozambique, if it becomes a little bit safer there.
No.
Is it is it possible that we could go from an under supplied.
Global market to an oversupplied global market.
Over the next over here.
Yes, great question.
I think in the short term the projects that are in queue, we'll see LNG export capacity go to around 17 Bcf a day over the next few years.
But I think the bigger question is really going to be how much more natural gas does the world does the world need.
Obviously significantly more I think.
When international companies are looking at countries are looking at where theyre going to source their gas theres three countries.
<unk>, Russia or the United States.
And this is a major opportunity for this country to lead in being.
Being the provider of natural gas because the emissions from natural gas producer in Appalachia is 110th of that.
In Russia, and I think the world hopefully is starting to get a clearer picture on what the future of energy looks like.
And we think that energy is going to be has the fallen criteria. Its the cheapest most reliable.
And the cleanest form of energy and when you look at energy through that lens natural gas is the clear.
Leader and.
So we'd like to see we'd like to see natural gas play a leading role in our energy future.
When you look at what's going on in the World Today, and you look at what's happening at Europe and Asia.
It's usually a focus there, but there is other issues happening all around the world as it relates to having a lack of clean reliable low cost energy. We started looking at some data and there is a country.
That has experienced over 19000 blackouts.
Because they don't have enough access to reliable low cost clean energy 19000 that that country has experienced a blackout every four hours and this is over the last 10 years that country of the United States and people are surprised to hear that and.
We also need to think about the amount of natural gas that needs to be deployed here domestically. It's a clear sign that if there's issues with the reliability of our grid, we obviously see the reliability.
Issues around the world.
So much more of that natural gas can do and I think with a comprehensive energy policy that prioritizes.
Natural gas is the leading energy LNG choice.
American shale will be there to supply that energy, we've done it to bring energy independent to the country will.
It will be here to provide energy security for the world.
But we need to see comprehensive policy that supports infrastructure LNG exports in Latin American shale be unleashed through the great work that it can do and meet the energy needs that the world demands.
Okay.
That's great color Tobey.
And then my follow up and maybe sort of just answered this but.
Let's say FTE is not an issue.
What what multi year, let's call it five year average.
Price index price would you need to see before you would even consider transitioning from may.
Maintenance to growth.
Yes.
Yes.
Think you look at the strip, we have right now and it's certainly backward dated.
But the returns today would justify more investments, but that's not it's not the only factor that we're looking at.
To generate sustainable value creation, we need more than just short term price signals.
We need to see that that we've got long term demand for our product and Thats why infrastructure is important that's why public.
Public policy is important.
I think youre going to need to see those things.
To prioritize operators to pick back up and deliver the energy that this world So clearly needs.
Got it thank you.
Youre welcome.
Thank you Cassie and now final question today comes from Noel Parks of Tuohy Brothers. Please go ahead. Your line is open.
Hey, good morning.
Good morning.
Just had a question I apologize if you touched on this already but.
And I realize its kind of early but.
Given the Alpha acquisition and of course, much better SEC price this year than we had last year.
Is there anything that's.
Clear and obvious.
<unk> point.
It might not be obvious to us.
As far as what reserves Glenn look like at the at the end of the year.
Thinking about.
In addition to alter.
The maybe the SEC capex horizon sort of changing as you evaluate the blended inventory.
Yeah, Hi, So this is Dave so if you think about it we're running maintenance so the activity level is not.
Five year.
<unk> are not going to change materially from where they were.
Lac last year on the base, we have we'll call it the incremental auto reserves, which I think we talked about mid year and that's around the acquisition.
The only real change I would say materially we'll be a little bit of sales tied to the tied to the change in the commodity price and so.
And Thats really yet so I would imagine.
And the reserves changing materially.
Because of that I think if we were ramping up activity on either a base or the <unk> acquisition. Then you then you could see us probably book more <unk>.
Proved reserves, but that's not going to be the case.
Yes.
Great. Thanks for the clarification.
<unk>.
And I guess.
And I know you touched on quite a few a few macro topics but.
Yeah.
We are kind of again rounding the bend of the year.
Have any any sense.
Maybe just talking about U S demand.
About.
All of the demand uncertainty we've had whether there is.
Uh huh.
As the market worrying too much or is there too much volatility because of.
Covid specific I guess the price change specific Parker.
Observe demand uncertainty.
Because it.
It's always tempting to.
Look at the strip and think about our current patterns.
And try to extrapolate into a new normal and then at times, it's important to sort of step back and say, we're coming off of an extraordinary couple of years.
Not really you can't really extrapolate into quite going through 2023 based on on what we know.
Seen during this rally.
Yes, good question I mean.
I think there is an over there has been an overreaction.
But not as it relates to the need and grabs for natural gas that is clearly justified.
And that's due to the significant under investment that we've seen in traditional energy.
Over the past five years the over exaggerate over exaggeration, I think that a lot of people are seeing right now is as it relates to sort of the environment and climate change.
And some of the reasons why we've seen.
Some of these extreme situations play out in Europe.
Because people have.
Prioritize the green aspects of energy over and sacrificed low cost reliable.
For that and I think at the end of the day, we need to.
Take a realistic practical approach balanced approach towards the energy that we utilize and it's got to be low cost, it's got to be reliable and it has to be clean.
And I think that a effective policy is going to be one that prioritizes natural gas, which is obviously the.
The best at meeting all three of those criteria.
Great. Thanks, a lot.
Got it.
Thank you know this brings it to the end of today's Q&A session I will now hand, the cool <unk> for any closing remarks.
Thanks, everybody is certainly exciting times and energy and we look forward to capturing even more opportunities and creating more value for our stakeholders. Thank you to everybody in the crew for all the hard work this quarter.
Really really excited about the future ahead. Thanks.
Yeah.
Okay.
Thank you everyone for joining the call today you may now disconnect your lines.
Okay.
Okay.