Q3 2022 EQT Corp Earnings Call
Regional clean hydrogen hub for arch to apply.
Appalachia is ideally suited to lead the charge in clean hydrogen production in the United States.
Given our abundant low cost low emissions natural gas interconnected infrastructure and storage existing transportation networks and proximity to major end use markets. The arch to team is comprised of entities with operations across the Appalachian region.
Ending the hydrogen value chain as well as technology organizations consultants academic institutions community organizations, and Ngos that will provide a commercial and technical leadership for the development and build out of the hub totaled.
Coalition plans to apply for the.
Regional clean hydrogen hub funding opportunity, which seeks to provide $8 billion in federal funding to accelerate the deployment of use hydrogen technologies and contribute to decarbonize, the multiple sectors, while enabling regional and community benefits.
We plan to submit our concept paper to the Doe This winter and our full application by next spring with final dose hub selection is expected in the fall of 2023.
During preparation of the concept paper and full application EQT in the rest of the arch to coalition will design, the hydrogen hub and develop projects that spanned the hydrogen value chain from production through transportation and storage all the way to end use.
Are the funding opportunity announcement issued by the department of energy in September the winning hub teams will be awarded between $500 million and $1 billion.
Which can help subsidize all the projects included in the application in terms of EQT capital commitments, we do not anticipate incurring any significant spending related to arch to until the latter part of this decade the.
Arch to announcement comes in an ideal time as the world is demanding cheaper more reliable and cleaner energy and we believe the use of eqt's extremely low emissions natural gas to create clean hydrogen can act as a strategic foundation for America's transition towards decarbonization.
Our participation in arch to is just one of many pillars across our broader debenture strategy, which is designed to uniquely position EQT and forging new paths and opening new markets as we progress into a lower carbon future.
Turning to operations as shown in slide 11 of our Investor deck, our ship to combo development in 2019, as new management took over EQT as resulted in multi year well productivity improvements.
Our 18 month lateral normalized recoveries are up almost 45% since 2019, which is greater than two times the productivity increase experienced across broader appalachia over the same period.
This outperformance has been largely driven by the implementation of our evolves well design and mitigation of parent child effects through large scale combo development.
While our underlying well productivity has been strong multiple third party and logistical constraints. This year have led to almost 30% less wells turned in line versus our original plan pushing activity into 2023.
These third party constraints, along with water restrictions due to drought conditions in parts of the basin negatively impacted our 2022 production by more than 150 Bcf or.
Four 7% compared with our original volume expectations.
Strong well productivity and great work by Eqt's team to optimize field operations have helped to buffer the impact and clawed back almost 50 Bcf of this volume impact. The net effect is our full year 2022 production is trending to the low end of our prior guidance range, while our full year 2022 capex.
Is also trending toward the lower end of our prior outlook.
While third party challenges have been disappointing this year. They also underscore the opportunity we have in front of us to integrate the <unk> and <unk> assets to maintain greater control over infrastructure buildout, facilitating more pipeline connectivity and enable additional operational flexibility across our asset base moving forward.
Shifting to market dynamics, we were very pleased to see EQT added to the S&P 500 earlier this month.
We view inclusion in this index is another testament to our Premier asset base success of our modern digitally enabled operating model and the overall sustainability of our business I want to thank all of our employees for their hard work evolving EQT into a world class organization that competes with the top companies across all segments of the economy.
I'll wrap up by saying that despite EQT stock performing reasonably well on a year to date basis. We believe the market has not remotely begun to reflect the intrinsic value of our business or relative quality versus peers. We are at a unique point in time as the North American natural gas market is in the process of an unprecedented.
A structural shift.
Is debottleneck through LNG in the world is increasingly recognizing the role of natural gas will play in providing affordable reliable low carbon energy for decades to come.
EQT is among the best positioned companies in the world to benefit from the secular trend underpinned by our capital efficient asset base unrivalled depth and quality of inventory and declining midstream fees. We believe these characteristics combine to create a superior value proposition for investors and will ultimately be reflected in our share performance.
<unk> as these factors are converted into durable free cash flow that we can compound over time I will now turn the call over to Dave.
Thanks, Toby and good morning, everyone.
I'll briefly summarize our third quarter results before discussing our balance sheet hedging and guidance updates sales.
Sales volumes for the third quarter were 488 Bcf.
<unk> was modestly below the midpoint of our guidance range.
As Toby mentioned third party and logistical constraints put a governor on our activity during the quarter limiting our tills to just 16 versus our guidance range of 22% to 32.
Our adjusted revenues for the quarter were $1 7 billion or $3 41 per Mcf and our total per unit operating costs were $1 42.
As a result, our operating margin was $1 99 about 90 or 85% higher than last year.
Capital expenditures were $349 million below the low end of our guidance range largely due to lower than expected completion activity.
Adjusted operating cash flow was $940 million and free cash flow was $591 million, bringing our total year to date free cash flow to approximately $1 7 billion.
Our free cash flow also reflected a basis differential of $1 two prompts jeffy.
Wider than our guidance of 80 to 90 per Mcf due to wider local differentials and an unplanned outage on the Nexus system.
Our capital efficiency for the quarter came in at <unk> 72 per Mcf, which was a 4% sequential quarterly improvement, resulting from lower capital spending.
On slide 26, we highlight our capital efficiency has averaged 70 per mcf fee on a year to date basis, which is 35% below the gas peer group average despite the third party issues impacting the timing of our production this year.
Turning to the balance sheet at.
At the end of the third quarter, our trailing 12 month net leverage stood at one three times down <unk> three turns from the prior quarter.
To fund the tug Hill, and <unk> acquisition, we raised $2 $2 5 billion of debt, which.
Which is leverage neutral to our existing profile.
This is comprised of raising $1 billion of senior notes and $1 <unk> 5 billion of term loans with strong support from both the banks and our institutional investors.
Despite a challenging credit environment, we priced our two tranches of senior notes at 175 to 200 basis points spreads to respected treasuries with further tightening in the secondary market.
This enabled us to lower funding cost and implement efficient repayment terms we.
We see the successful debt financing is another testament to the underlying credit quality of our business and value. The support we received from our banks and bondholders.
As highlighted with the deal announcement, we raised our year end 'twenty three debt reduction target from $2 5 billion to $4 billion, which will take our gross pro forma debt down to approximately $3 5 billion.
With our debt trading below par due to the fed raising rates, we have even more principal purchasing power.
Once we achieve our absolute debt target, we will have a bulletproof balance sheet with leverage of one to one five times using a conservative $2 75 per M of Btu Nymex gas price.
We have already executed $830 million of debt reduction goal this year and expect to make material additional progress over the coming quarters, given the robust projected free cash flow generation.
Looking at liquidity, we ended the quarter with approximately $2 6 billion comprised of an essentially undrawn credit facility and $88 million of cash.
Two positive liquidity items to point out first we replaced approximately $180 million of letters of credit with surety bonds during the quarter and second we received $196 million from equity plans midstream subsequent to quarter end as we exercised our option to receive cash in lieu of a portion of near term fee relief.
Now moving over to hedging.
As mentioned on our Tokyo acquisition call, we added to our legacy hedge book in the third quarter, taking our hedge volumes from 50% to 60% next year through the purchase of deferred premium puts with an average strike price of $4 65 per <unk>.
We've also executed on the majority of our planned hedged 60% of <unk> production next year through the combination of deferred premium puts and collars.
With an average floor price of $5 53 per M of Btu and the average ceiling of $10 80 per <unk>.
On a pro forma basis, we have approximately 60% of our 2023 production hedged with floors at an average strike price of $3 30.
And approximately 45% covered with ceilings at an average strike price of $5 65 per <unk>.
We remain unhedged for 2024, and we will be looking for opportunities to begin building out our hedge position.
Turning to guidance as Tobi mentioned, a third party and logistical constraints have reduced our planned 2022 tills by approximately 30% versus our original outlook.
Strong underlying well performance and field optimization have mitigated the impact to 2022 sales volumes, which are now expected to be $19 25 to $19 75 Bcf.
We're roughly in line with the lower end of our prior guidance range.
We are also lowering our full year capital expenditure guidance to one four to $1 75 billion, excluding acquisitions to reflect the lower til count.
While we are in the midst of the budgeting process for 2023, our supply chain contracting strategy puts us in a strong access and cost position given our multiyear sand and Frac crew contracts, we plan to give more fulsome details. Once you provide 2023 guidance, but we expect EQT to experience inflationary impact.
That was the lower end of broader industry ranges for next year.
Given our structurally superior hedge position next year, we expect our 2023 free cash flow to expand by approximately 90% year over year at recent strip pricing.
Here to the effect of tug Hill, and after factoring in cash taxes, providing differentiated free cash flow per share growth to our shareholders.
I'll now turn the call back over to Toby for some concluding remarks.
Thanks, Dave the conclude today's prepared remarks, I want to reiterate a few key points.
One the pending <unk> acquisition underscores our disciplined M&A strategy, adding low risk bolt on assets to our business with clear industrial logic, a compelling valuation material cost structure accretion and the opportunity to capture meaningful synergies to we have returned approximately $1 5 billion of capital to shareholders.
This year, including almost $600 million.
Share repurchases and convertible note retirements at an average price of $31 per share and our updated capital returns framework on the back of the tug Youll deal provides material room for additional shareholder returns moving forward.
Three our move to combo development has driven significant well productivity gains since we took over EQT in 2019, and this tailwind along with our team's optimization efforts has allowed us to ameliorate the impact of third party constraints this year.
The arch to hydrogen hub collaboration has the potential to lay the foundation for the next leg of decarbonization efforts at EQT, taking advantage of differentiated access to vast low cost low emissions natural gas in Appalachia and finally, we were honored to join the S&P 500 earlier this month and see our inclusion in.
The index, representing another significant milestone on Eqt's journey to becoming the operator of choice for all stakeholders I would now like to open the call to questions.
If you'd like to ask a question. Please to all staff for the one on your telephone keypad now and our first question today is from the line of Arun Jairam of Jpmorgan Chase Arun. Your line is now open.
Good morning, Tobey one of the early things from from earnings has been some of the <unk>.
Midstream issues that we've seen in the Appalachia basin.
Guys talked about it in a range and antero as well. So I was wondering if you could maybe describe what you're seeing in terms of on the ground in terms of the general constraints and maybe specific to EQT. When do you anticipate to get resolution on some of the issues that did affect or til count this year.
Yes, good morning Arun.
So one thing I think that's worth noting is the water line issues have been resolved the pipelines have been have been.
Fixed and so those issues are behind us.
Some of the supply chain issues that we faced with some other third party vendors I think.
Those issues will be will be nagging at us, but we're doing everything we can to build in more flexibility to our program.
I'd say all of these impacts together.
Largely are behind us and I think we should be back on pace by mid 'twenty three would that two tcf a day run rate production base.
Got it got it.
So you highlighted 150 bps prior to some of the optimization work, where you're clubbed back 50.
If if the buy side consensus has been around on a stand alone basis.
Two tcf of production next year do you think that you can.
Get a range similar to that just given you.
You are likely going to have some I don't know if their ducks you may have some tailwind from some of those wells that are in progress, but just general thoughts on output next year.
As big as some of those constraints get better.
Yes, I think the answer there will be dependent on.
How how much we can beat the baseline operational efficiencies that we have baked into our program.
Also looking for other optimization efforts within the system. That's in front of us that would be additive to what our base plan is so I think.
The punch line is the team has shown the ability to claw back and were still fighting for forever.
And every Mcf and.
We think there could be an opportunity for us to get there, but it will be dependent on those actions.
Okay fair enough. Thanks Debbie.
Thanks.
And our next question comes from that.
Chowdhry of Goldman Sachs. Among your line is now open.
Hi, Thank you good morning.
I just wanted to follow up on the question from.
I understand that Youre looking for your budget and then you've got fewer days this year.
How does that.
Given that this is probably going to have an impact to your first half for any of your production.
Love your preliminary thoughts on frequency activity should we expect activity levels to go back for the legacy asset.
To keep it flat to around 90 to 100 miles per euro or would it be higher next year as you as you try to grow production sequentially exit rate next year.
Yes, Ron so yeah, I'd say the activities that should be fairly normal for a normal year.
It's just the timing of when the wells will come online so.
The bucket of wells that got pushed out in 'twenty two.
Have about a five month lag time, putting them online due to the water issues that we had and so.
That's why we'll get back to sort of that $500 million plus run rate.
By mid year.
But the activity set overall should be okay.
Old standards standards fairly normal for a year.
Got it that's really helpful.
Then my second question was really on the on the.
On the LNG strategy.
Any update.
Any.
On the discussions that youre, having with the LNG customers.
As it comes to.
Diversifying you have exposure to international markets.
Yes conversations are still progressing across the LNG value train from LNG developers marketers and buyers.
Bob.
I'd say the the.
Desire for bringing more LNG into this world has continued to strengthen and we're having some pretty good conversations but will come back.
When we have anything that materializes into something material.
Got it thank you.
You're welcome.
Thank you. Our next question is from the line of Neal Dingmann of Truest. Neil Your line is now open if you would like to proceed.
Hey, good morning, Toby if I can just circle back on the infrastructure I was just trying to get a sense. So can you talk about maybe just the degree of the curtailment between the different issues. I know you mentioned the water. It's already been rectified just trying to find I guess number one what other issues were involved and then secondly with.
Obviously, the Xel midstream coming on how much will that and some other things you all have done helped to sort of the situation going forward.
Yes, so outside of the water line issues that have been repaired.
Getting access to some equipment theres been some longer lead times that sort of the supply chain should we talk about.
With all of this we've got backup plans and.
Our flexibility to execute on those backup plans has been challenged because of some weather and we experienced some drought conditions.
That wouldn't allow us to get Fracs at AD.
The operational efficiency that we needed.
And so that's sort of the X factor that as is.
Driving sort of the weather impacts that we laid out on that that chart.
Got it Okay, and then just a follow up could you talk a look at that slide I forget, which one is it shows with four rigs are running.
When you look now at the northeast, Ohio, Utica Southwest West Virginia Marcellus.
Is there any one or two there is that from a returns a standout or are they just wondering these days have you had to rank those.
Think about the four all day, all sort of equally return basis. These days in the ballpark.
Yes, Neal I'd say.
With the.
The best returns coming from southwest, Pennsylvania, the work that we've done to reduce costs and west Virginia have made those more competitive from a returns perspective, and then I'd also say over in the Utica Some of the science work that we've done.
Primarily widening spacing no surprise as shown increased recoveries per foot makes those returns more attractive so.
Our ultimate goal is to sort of.
Get to a place where we can improve the economics across all inventory, we're seeing that right now and so I think as we as we drive our schedule.
It's really going to be dependent on the surface factors number of wells lateral lengths combo development and.
So thats sort of what drives the schedule and the makeup I would say one of the things we do look at it.
A board that shows the returns across every single project and we are.
Driving to drill our best acreage in.
Our best Wells first in over 80% of our schedule is factoring on the projects that are in the top quartile of our inventory base.
The improved ops is obvious from the previous owners. Thanks Tobey.
Thanks.
Thank you and our next question is from the line of David <unk>.
David Your line will be opened now if you would like to proceed with your question.
Thank you good morning, everyone and thanks for listening facility.
Good morning.
Discussed a lot about this but maybe if we could revisit just the original plan in 'twenty two versus 23 Im trying to get a sense of some of the moving parts.
Obviously, the 30% fewer sales this year.
Is there any capital benefit from any wells that would be in process that we passed the 2023.
Both the benefit of moving wells back in <unk>, I guess argue maybe you or.
Rank some of the service cost environment, we do hope that.
Service cost will.
We will abate a little bit.
But that could be one of the benefits right now we'd like to have this volume today.
Current pricing for it.
We're pushing.
Yes.
We have let's say the other thing is.
Notice on the slide 11.
Abilities hosting back with.
Awesome.
That was cycle time improvements that we're able to eat out.
Paul.
The fact.
<unk>.
Cycle time improvement will carry forward with thoughtful with our wells or so.
So we will get some of that.
And that's it.
And they told us.
Forward.
Okay.
Okay.
I guess just to follow up on that I guess as we think about 23.
I suppose if youre thinking about like a balanced program between sort of core western Pennsylvania versus West Virginia in northeast PA.
I guess should we should we see that kind of percentage of completions moving back to what we would've seen on.
Sort of a geographic lens in 'twenty, one 'twenty two ex any additions with tug Hill.
I guess with that activity.
Shifted away from from northeast Ta back into Western region.
Yes, I think our mix.
It was a good baseline to start.
With a forward I would say one of the other things that will help with <unk> coming on board. This will just increase our flexibility to be able to make up for four <unk>.
Operator.
Okay.
Hum.
Yes.
Sure.
Okay, and then if I could.
One just.
And any way to delay that you saw in 'twenty, two and that delay your program understanding around sort of this enhanced completion design.
So you all have talked about kind of earlier in the year.
Yes, we were.
We're hoping to get better insight and clarity on.
Fast forward with our science.
These delays some of the tools has happened on some of our science projects.
So yes insight has probably been pushed back I'd say four to six months on the science as well.
Thanks for the uptake.
Okay.
Yes.
Thank you and our next question is from the line of Scott Hanold of RBC capital markets.
And is now open.
Yes. Thanks.
A couple of questions and I think you might have answered part of it.
That last set of answers, but it sounded like there was some choppiness in his line that was hard to hear but just to clarify it sounds like tug Hill, you don't anticipate any of these midstream issues to impact.
Doug you want to get that as part of.
As part of EQT and.
Also as part of that can you can you give us a sense of how much of the realm.
Our relative well outperformance underlying well performance.
Benefited EQT over the last say quarter or so.
Sure I think one thing that is very helpful. With the Tokyo assets is the fact that we will control control and operate the midstream thats going to give us much more operational control and the ability to mitigate.
Any issues.
As far as as far as production uplift is concerned.
I mean thats been the majority of the of the productivity gains has been well performance and also increasing keeping I'd say pure leading production uptime.
Some of the other benefits that have come out of this in these efforts to enhance our ability to produce and reschedule.
There have been some best practices identified that will be incorporated and <unk>.
Allow us to accelerate some volumes and shorten the cycle times.
<unk> R. R based development plans going forward into the future. So there is a bright side of the house.
But dealing with Jeff.
Yes.
Got it and then Mike.
Follow up is on the shareholder return plan. Obviously, you guys have had previously talked about doubling the buyback pace and <unk> got a.
Pretty good authorization out there $1 6 billion and I think that goes through 2023.
Along with the debt reduction is the goal here to really kind of eat through that authorization given your free cash flow profile over the next year. So should we expect you trying to utilize that as aggressively as possible and with the buybacks. If you can clarify exactly how much was done in the third quarter or two.
Yes, so I mean, I think given where the stocks trading today and the fact that our we can buyback our debt at pretty attractive levels.
Going to be aggressive towards fulfilling the authorization that we have in front of us on bolt on both aspects of that.
You have the numbers specifically on <unk>.
I think the number was close to it.
Probably $75 million I think.
We've done a 150 million.
Let's conclude number so but I think he is asking just for <unk> versus <unk>. So I think it's about roughly half was done in the third quarter.
Maybe a little bit more and then a.
Touch was done in the fourth quarter and obviously, we will probably do we'll obviously do more in the fourth quarter.
Depreciation.
Right. Thank you.
You're welcome.
Our next question is from the line of John <unk> of Bank of America. John Your line is now open.
Hey, good morning, and thank you for taking my questions.
Toby I want to go to back to a question that Neil had asked a little bit earlier about <unk> midstream optimization.
And what I'm trying to understand is yes, I understand this is going to allowed you optimize your program on the water side, but what is the ability to that extent on your existing asset base. You do have dedication. So is it really on the Tokyo assets.
Are there other assets that you already have that you couldnt optimize on how does that kind of work.
Yeah.
Yes on the water side pretty tremendous opportunity.
As you guys know we've been building out our water network in West Virginia.
To connect that water network to the <unk> assets, it's a very short jumped to put some water infrastructure in place to connect those two systems. This is going to allow us to manage produce water pretty much across the north west.
The western half of West Virginia.
The benefits on the completion side and surety on water delivery the benefits on recycling the benefits on not just the logistics of handling produced water.
Very clear and a big part of the synergies that we're counting on so outside of the water.
Having the on the gathering side of things being able to connect the Tom Hale system to some some of.
Some points, we have in Ohio.
That will streamline some of our gathering systems.
And that will lead to some synergies as well so the good thing with midstream I think the synergies that you're going to identify are typically pretty pretty low risk and so it's nice to see that we've got a complementary asset base that we can we can translate into synergies.
Thank you that's very very helpful. And then for the second question is going to be on the new ventures. I mean, you discussed hydrogen here and you are exploring other.
Opportunities.
What is the willingness to spend what is your appetite to spend more on the new venture fund at this point in time.
Yes, that's a great question I think slide seven we've put a chart up there that I think really frames up how we think about this when we think about new ventures. This is to help the energy transition that is taking place in the world and the way that we look at energy transition is really in two parts number one.
What can the United States due to continue to reduce emissions within its borders but the most important question is what can the United States due to reduce emissions outside of our borders unleashed U S. LNG.
<unk> fits in the category of what the United States can do to lower emissions outside of our borders that is the biggest green initiative on the planet.
When we do that we're going to be creating a surplus of natural gas in the United States, while slated for exports.
It's going to create a number of opportunities where we can use natural gas to decarbonize, the United States and ultimately move from gas to lowered a zero carbon energy sources like hydrogen like carbon capture.
And so.
While those concepts right now I think are a little bit unsure on what the profitability of those look like.
We will invest modestly in those.
I would say more zero carbon technologies. This is going to allow us to achieve our higher purpose of lowering emissions in the United States, but.
Before we would put any dollars significant dollars there we need to understand the profitability of those so.
The dollars that we're doing inside the U S borders are really driven by pilot.
Pilots to get an understanding of what the returns look like and that we can bring it back to our capital allocation framework and see if this is the best use of our dollars, but we're definitely going to be leading on framing up what the type of returns perspective look like so presumably around hydrogen and to have this this.
This coalition this arch to hub.
It's really going to position EQT to be very efficient with our time and dollars.
Appreciate it thank you for taking our questions.
Got it.
Our next question comes from the line of Noel Parks with Tuohy Brothers. Your line is now open.
Hi, good morning.
Good morning, good morning.
Couple of things I Wonder if.
You've touched on this already with tug Hill now that you're a couple of months down the road since the announcement could you just talk about sort of where they stood as far as our drilling and completion procedures.
And.
Also.
Any.
Insight you have on sort of what they have done themselves on sort of parent child mitigation practices.
Yes, I think the tug tug Youll team has done a really good job with that asset base.
So I think it is going to be.
Really comp, we're going to be able to at least replicate the success that they've put out there I also I'm optimistic in thinking that.
Our drilling and completions teams will be able to show showcase operational efficiency gains like what we've done in the Alta.
Assets in.
And that's simply a function of having access to the best technology. The best crews that certainly is going to give us some tailwind.
And doing that.
What was the second part of that question Budd.
Oh, well just about parent child.
Yes sure.
Well.
As far as the development approach with the Tokyo team and this is one of the things we look at when we're looking at acquisitions is.
Yes.
Are we is this asset going to be suitable for <unk>.
Large scale combo development and telco assets are because the tug youll team was intelligent and adopting.
Full pad development, so theres not a lot of child wells that we have to move around they fully developed there.
Pads, which is a great <unk>.
Development program that sets us up for combo development.
Great.
And just turning to the.
Hydrogen hub project.
I'm just wondering do you have any thoughts at this point as far as what maybe the technology.
<unk> process might be.
Yes.
As hydrogen generation.
Mindful of quite a fit.
Have the relationship you struck with Bloom energy.
And.
So.
Their fuel cell technology is being just one example, so.
At this stage do you have any any thoughts on what direction, Michael whether youre casting a wide net of technologies to look at or you have a pretty good idea of what sort of asset you'd like to head count.
Yes, I think the most exciting technology as technology that produces hydrogen and a solid form of carbon.
And so we'll be testing some of that technology, but just.
Standard technology that we know to make hydrogen today, if you compare that with carbon capture.
We can generate hydrogen sub $1 50.
Per kilogram.
Right now we look at hydrogen that the issues are really two issues before getting.
Big adoption of hydrogen the first one is the cost for hydrogen while we can make this stuff pretty cheaply when you throw in the cost for transportation and the actual infrastructure. It takes to move hydrogen youre looking at around $20 per million Btu.
Why would the world choose that energy when they can buy natural gas for a price it's significantly less than that.
But what's really amazing is to think about when we unleash U S LNG will be creating an opportunity to rebuild.
<unk> 50 Bcf a day of new infrastructure in this country and when we build that infrastructure, we can build it hydrogen ready.
And that means on lease U S. LNG can underwrite a significant portion that is necessary to achieve the hydrogen economy of the future in this country and if we can do that then.
The feasibility of hydrogen becomes that much more attainable.
And it's something that where is it really nice benefit on leasing U S. LNG lowering emissions around the world is going to help us lower emissions within our borders the second aspect of hydrogen that needs work is.
Creating demand for this stuff and so this is really the chicken and the AG people haven't used hydrogen because it's not.
It's not people aren't making it and people are making because people aren't using it.
Hub with having these this group of hydrogen producers and hydrogen consumers working together is going to allow us to.
Get passed that chicken and the egg issue and I think it's going to be a really great example of the collaboration necessary to make these exciting zero carbon solutions a reality.
More to come.
Great. Thanks, a lot.
Got it.
Our next.
One is from the line of Daniel <unk> from Bank of America. Daniel Your line is now open.
Hey, guys. Thanks for taking my question.
I just wanted to make sure that I.
The debt reduction.
Well understood. So you guys have done 800 $830 million to date.
And next year between the term loan.
The convertibles and the three new I'll call. One that gets you up to about $3 billion of debt reduction is the plan for the other billion to just come from.
Buybacks in the secondary market or tender offer or is there some debt repayment that I'm missing in that calculation.
Yes, so so no between the term loans and the call will notes that's about little over $2 billion.
And well just figure out how we get the remaining piece, whether it's open market tend or whatever.
We'll get to our targets.
As you as you know.
Theres not a lot of friction in this environment as the fed is raising rates and.
Our principal values keep coming down as a result of it so we'll be able to achieve our targets I think fairly efficiently.
Yes.
In terms of.
If natural gas prices that we have a warm winter and there are a lot lower than what strip is would you dial back on the share buybacks to protect the debt repayment or would it be a mix of the two and you just wouldn't get to $4 billion reduction by the end of 'twenty. Three how are you thinking of whats more important free cash flow.
Which is the first use for it yes.
Yes, I would say.
We have Cushing here because E train because our principal values have come down.
So I have to say.
Well it's.
If for some reason we have to make that choice.
That's going to be more of a game time decision.
Got you that's right.
Got it.
We'll take a balanced approach to that.
Look at the value of our stock and look at look at the debt and where it's trading and make the best decision. Yes, I mean, the other thing to also think about is we have so much free cash flow even beyond 'twenty three.
We have to think about how we how we use that as well.
Yes, I had a question that you got in there just if you could get there by year end 'twenty three.
Got you sounds good thank you.
Thanks.
As a reminder to ask a question. Please das thoughtful about one on your telephone keypad now.
Our next question is from the line of Kevin Mccarthy of Pickering Partners. Kevin Your line is now open.
Hey, good morning, guys I think all the questions and the delay of turn in lines have been answered so shifting gears a little bit.
Noticed in the financials, there was a more positive impact from Laurel midstream than we anticipated.
Can you talk about the financial impact of that heading forward and maybe any strategic plans for that asset.
Yes, so as you know we own 35% of that system.
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And what happens is we get a rebate effectively from the.
That doesn't hit our unit cost it comes in as other basically and.
And Thats just the function of <unk>.
As prices go up our unit costs.
Go up in that system, but then we get a rebate in this other area and so that's how it works.
So effectively the unit costs are really netted down.
Right now we don't have any plans to sell it I mean every once in a while we get approached.
Bye bye outside buyers, but.
Right now as you can imagine we've made two acquisitions.
Subsequent to to Chevron and they both had midstream.
And so just know that midstream helps us control operations and lower our cost and so.
The desire to sell midstream is probably low on our list.
Great and so the impact of oral midstream I think it was around $25 million. This quarter is that a good run rate heading forward or was that driven just by the higher commodity prices that we saw in <unk>.
By the higher commodity prices.
So our unit costs go up tight time, too and then and then we get the 35% rebate effectively through.
Through our ownership.
So you got to look at <unk> that that will be.
Terminal.
Okay. Thank you for my question.
Youre welcome.
Thank you. Our next question comes from the line of pool comment of Citigroup. Your line is now open.
Good morning, Thank you for taking my call.
Quick one wanted to circle back on the budgeting process for 2023, I know you guys noted that you expected to be lower and the broader industry range, but that broader industry range have been a bit of a moving target but.
But a little bit of clarity on kind of where you guys see that going into that budgeting process that into next year.
Yes, I think the industry range is somewhere between 10 and 20% inflation. So we should probably be at the lower end.
And it is a moving target a little bit because obviously.
We don't have everything 100% locked up and so we do have spot exposure, so some commodities and things so.
But if you look at steel pricing has come down and you look at some of the commodities have come down.
I think inflation in some of the equipment.
It looks like it's slowing down so I think.
We feel good about what we have contracted and kind of what the what the outlook for the open stuff as it should put us in a position as you know we invested in our sand infrastructure that reduce the last mile to last mile delivery you see we invested in the water system, which you can see how.
That is.
And when we took that into the tug system. So we can we will continue to.
Reduce the inflationary impacts and then obviously, we will see what the new well design looks like for the second half of 'twenty into.
Into 'twenty four.
Okay.
Understood, Thanks, and actually just drilling down a bit deeper on that is there any particular area.
You have seen through the budgeting process, new conversations thus far that.
What areas are we comfortable with any area, that's giving you a particular or particular concerns are.
Anything you've noted.
Yes, it's a big focus for US has been the areas that we've seen the most dramatic increase in cost to date, which has been on the steel side of things.
We continue to focus on that.
Understood. Thanks for your time.
Thanks.
And we have no further questions that'd be my pleasure to hand back to Toby rice for any closing remarks.
Thanks, everybody for joining us on this quarterly call.
World is certainly more volatile, but one thing that is consistent is our asset performance continues to show improvements our cost structure continues to decline we have a free cash flow profile is going to allow us to essentially retire our market cap and achieve our long term leverage targets in the near term.
And we've got a good track record doing some really smart consolidated deals on the consolidation front, that's driven accretion and value creation for shareholders.
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With our on lease U S LNG campaign, and the strengthening desire for cheap reliable clean energy that is going to be American made natural gas.
<unk> presents a pretty exciting and compelling opportunity for sustainable growth for our shareholders.
And we're really excited about the future.
We will talk to you guys next quarter. Thank you.
Yes.
This concludes today's conference call. Thank you all for joining you may now disconnect your lines.
Okay.
Okay.