Q4 2022 EQT Corp Earnings Call
Sure.
Good morning, and thank you for attending today's EQT Q4 of 2022 quarterly results Conference call. My name is Jason and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference over to our host Cameron Horowitz, managing director of Investor Relations and strategy.
You may begin.
Good morning, and thank you for joining our fourth quarter and year end 2022 results conference call with me today are Toby Rice, President and Chief Executive Officer, and David Khani, Chief Financial Officer. The replay for today's call will be available on our website beginning this evening.
In a moment Toby and David will present their prepared remarks with a question and answer session to follow and updated investor presentation has been posted to the Investor relations portion of our website and we will reference certain slides during today's discussion I'd like to remind you that today's call may contain forward looking statements actual results and future events could materially differ.
From these forward looking statements because of the factors described in yesterday's earnings release, and our Investor presentation, and the risk factors section of our Form 10-K and in subsequent filings we make with the SEC, we do not undertake any duty to update forward looking statements. Today's call may also contain certain non-GAAP financial measures.
Please refer to our most recent earnings release and Investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures with that I'll turn the call over to Tobi.
Thanks, Cam and good morning, everyone two.
<unk> thousand two proved to be a year marked by tremendous geopolitical and natural gas price volatility that said through the ups and downs EQT never took its eye off the ball in our relentless drive towards improving efficiency lowering our cost structure, reducing our emissions intensity and generating meaningful value for our shareholders I am extremely proud of the positive milestones.
We achieved last year and wants to briefly reflect on our accomplishments on the financial side of our business, we generated almost $2 billion of free cash flow achieved investment grade credit ratings.
Stock was added to the S&P 500 index and we executed our capital return strategy with one $7 billion of shareholder returns via debt retirement, our base dividend and share repurchases.
On the operations front, despite a challenging oilfield service and infrastructure environment and successfully implemented sand hauling flowback initiatives that will structurally improve cycle times achieved meaningful completion efficiency gains in the latter part of the year that have continued into early 2023.
Eclipsed the basin record for drill out performance by a factor of almost two times and reduce top hole drilling costs on our northeast Appalachia position by 30% leveraging lessons learned from southwest Appalachia on the M&A front, we announced the accretive acquisition of <unk>, and <unk> midstream, which checks all the boxes of our guiding M&A principles.
Including accretion on free cash flow and NAV per share while strengthening the free cash flow durability of our business through a material reduction in our cost structure and improve operational control through midstream integration.
As it relates to the positive social impacts of our business EQT paid out over one $8 billion in royalties last year to roughly 39000 mineral owners in nearly every state in the country. Our organization also made almost $5 million in childhood donations last year and our employees volunteered over.
13000 hours during 2022.
Building on our leadership among decarbonization efforts, we completed our pneumatic device replacement initiative a full year ahead of schedule received the gold standard rating from the oil and gas methane partnership or <unk> spearheaded the launch of the partnership to address global emissions and the Appalachian methane initiative, and we announced the collaboration.
To form the Appalachian regional clean hydrogen hub or arch to.
Our 2022 achievements represent yet another positive step of the journey, we've been on and taking over the helm with EQT in 2019 over this period. Our team has improved asset productivity strengthened our balance sheet evolved our hedging strategy and added to our successful M&A track record, creating a durable free cash flow focused business model that will.
Thrive in all natural gas price scenarios. These efforts will inevitably show through in 2023 and beyond.
<unk> EQT to create differentiated through cycle value for all of our stakeholders.
As previously mentioned 2020 to Mark a significant milestone on our path to net zero emissions as we eliminated 100% of our nearly 9000 natural gas powered nomadic devices from our production operations. The impact of this effort is substantial as it reduced our methane emissions by 70% compared to 2021 levels.
And lowered our annual carbon footprint by roughly 305000 metric tons of Cotwo, Evelyn which is equivalent to taking over 66000 passenger vehicles off the road.
The coordinated effort covering 3000 wells and nearly 550 pad site is another testament to eqt's ability to efficiently engineer and execute projects at scale. Our team completed this effort a full year ahead of schedule at a cost of $28 million. This equates to a carbon abatement cost of just $6.
Per ton highlighting our position at the lowest end of the carbon abatement cost curve globally.
Except for execution of our nomadic device replacement program materially Derisked, our path to net zero by 2025 at which point EQT will be the first energy company in the world of meaningful scale to achieve net zero THC ambitions on our scope one and two basis, we view the emissions profile of natural gas as a strategic asked.
For our shareholders, ensuring that eqt's molecule will remain among the most coveted in the world for decades to come.
In addition to our individual emissions reduction success. We also recently spearheaded the launch of the Appalachian methane initiative or Ams to further enhance methane monitoring throughout the Appalachian basin.
<unk> will promote greater efficiency in the identification and remedy a potential fugitive methane emissions to a coordinated satellite and aerial surveys with monitoring results through transparent publicly available report it.
This basin wide sector agnostic approach to methane monitoring will not only allow accountability for methane emissions from all the matters. We believe it will eliminate any doubt that Appalachian natural gas is the cleanest form of traditional energy in the world.
Turning to our reserve report.
Taking the reins of EQT in 2019, our team implemented multiple initiatives aimed at creating consistent predictable well performance and systematically minimizing parent child impacts via large scale combo development. These initiatives have laid the foundation for our teams to generate a solid track record of forecasting accuracy with well performance projections.
Regular within 2% accuracy.
This consistency is reflected in our 2022 reserve report as our proved reserves were up modestly year over year to more than 25 Tcf.
Included in this number is more than 350 Bcf of positive performance revisions underscoring the strong productivity trends, we have achieved over the past several years and our long term repeat ability from our deep core inventory. We also note the core lower Marcellus formation accounts for 99% of our proved undeveloped reserves.
Meaning we have essentially no future bookings associated with secondary targets.
As the year end 2022, SEC Nymex price deck of $6 36 per million Btu. Our after tax proved reserve value was $40 1 billion.
Which equates to $100 per share after subtracting our current net debt as shown on slide six of our Investor presentation. After tax proved reserve value ranges from $14 billion at $3 50 gas to $41 billion at $6, 50, gas, which equates to $28 to $101 per share after.
Deducting net debt, we believe this underscores the extremely favorable risk reward setup for EQT stock as our crude reserves ascribe value to just 300 net locations or roughly 15% of our risked inventory of greater than 1800, CT remaining locations.
Looking to 2023, we are setting our capital budget of one 7% to $1 9 billion. This year, excluding our pending <unk> acquisition. This contemplates turning in line a 110 to 150 net wells, which is up from 74% in 2022 as third party constraints shifted roughly 30 pills.
Into 2023.
Is there a development accounts for approximately 82% of our 2023 spending forecast land and Lee is 7% other including facilities midstream and capitalized items comprises 11%.
Our budget assumes 10% to 15% of year over year oilfield service inflation includes a 100 plus million dollars.
For kills that have shifted from 2022 into 2023, approximately $50 million for new well design science $40 million for midstream and roughly $15 million for new ventures.
123 production guidance is one nine to two tcf.
Which is consistent with our prior commentary of getting back to the 500 Bcf per quarter of run rate production by the middle of this year, we've seen solid completion efficiency trends in Q4 and throughout January giving us confidence in our operational execution early in the year that said the low end of our guidance range contemplates the scenario.
Will we slow our production cadence for the year should natural gas prices continue to deteriorate.
At the midpoint of our guidance ranges are implied all in 2023 capital efficiency equates to approximately <unk> 90 per Mcf.
Given the catch up capital associated with sales shifting from 2022 into 2023 will be nonrecurring on a go forward basis, we expect our capital efficiency to improve by 5% to 10% in 2024 and beyond as our til count normalizes and Capex declines to run rate levels.
On slide 31 of our Investor presentation, we provided a range of 2023, adjusted EBITDA operating cash flow and free cash flow outlooks at various natural gas prices. We project adjusted EBITDA will range from roughly $2 9 billion at $3 gas to $3 9 billion at $4 gas and free cash flow.
From roughly $900 million to $2 billion.
At a similar price range, implying a free cash flow yield range of 8% to 17%.
Recall, our hedge book provides significant downside cash flow protection. This year as we have 62% of our 2023 production hedged with a weighted average floor price of approximately $3 37.
Per million Btu.
As highlighted on slide 10 of our presentation EQT offers the most compelling risk adjusted exposure to natural gas with the highest 2023 free cash flow generation among the gassy peers across all reasonable commodity price scenarios with the reductions in our corporate cost structure and are well positioned hedge book <unk>.
<unk> free cash flow breakeven price in 2023 is approximately $1 65 per million Btu, which is roughly 40% below the peer average and among the lowest of all natural gas producers in the country. I'd also note. This number assumes no impact from the low cost tug Hill, and <unk> midstream assets, which is expected to.
Further lower our breakeven thresholds.
Even with the recent decline in near term natural gas pricing, our cumulative free cash flow generation from 2022% to 2027% at strip is forecasted at greater than $12 billion, excluding tug Hill, which equates to approximately 110% of our current market capitalization and underscores the significant value proposition.
Embedded in EQT shares.
The resiliency of our free cash flow generation positions us to generate value counter cyclically for our shareholders and we will continue to opportunistically do so via our share repurchase and debt repayment programs. We are capitalizing on the current environment as we have repurchased nearly 6 million shares or $200 million of stock since the beginning of the year at an average.
Price of less than $34 per share.
Since initiating our buyback program in late 2021, we have retired $20 4 million shares at an average price of approximately $30 per share along with the $5 7 million shares. We retired via convertible note repurchases, we have reduced our fully diluted shares outstanding by more than 6% and a little over a year.
Along with the equity repurchases. We have also retired an incremental $283 million of debt principal since our last update at an average cost of 95% apart.
This takes our total debt retirement to more than $1 1 billion since the beginning of 2022 and underscores our commitment to a bulletproof balance sheet.
Looking ahead, our game plan for shareholder returns remains consistent as we will methodically progress towards our goal of achieving one to one five times leverage at a conservative $2 75 gas price and we will opportunistically lean into equity repurchases to maximize returns for shareholders. As we mentioned previously we project greater than 12.
A free cash flow through 2027 at current strip do we have material firepower for shareholder returns above and beyond our current equity and debt repurchase authorizations.
As it relates to the pending <unk> acquisition. We are currently in the process of responding to the FTC's second request and remain committed to closing the acquisition.
Recall as we highlighted with the announcement the deal structure in Tokyo as low cost assets generate greater free cash flow per share accretion for EQT shareholders at lower natural gas prices.
Our latest analysis shows the Tokyo deal is more than 10% free cash flow per share accretive and 24% in 2025 before factoring in synergies compared with approximately 5% at the time of announcement.
Demonstrating the importance of Eqt's focus on acquiring the lowest cost most durable free cash flow through well structured transactions. We also note with the renegotiation of the purchase agreement late last year, Doug Hill layered on hedges covering roughly half of its 2023 gas volumes with floors at $5 per million Btu the bet.
<unk> of which will flow through to EQT via the purchase price adjustment at closing we plan to update the market with more details around timing of closing the transaction as we approach mid year, and we'll provide full pro forma guidance upon closing.
To sum up I am extremely proud of our 2022 accomplishments as we made significant progress in our pursuit to become the lowest cost most reliable and cleanest energy producer in the world, our operational and financial and acquisition efforts over the past several years have deliberately sculpted our business such that it can thrive through the ups and downs of all.
Parts of the commodity price cycle, notwithstanding the recent natural gas price pullback, we have never been as bullish on the future of natural gas and the value proposition of EQT as we are today and we will continue our relentless efforts to crystallize that value for our stakeholders.
Before turning the call over to Dave.
As you may have seen earlier this week, we announced date will be transitioning out of EQT later this year.
It has been an integral part of our team since 2020, and we are grateful for his contributions to our company gave came into EQT at a pivotal time in our clear objectives to help us turnaround EQT and he delivered we successfully positioned the company with a promising future through many efforts include designing and executing a debt repayment strategy improving there.
Credit ratings and facilitating our capital allocation plans, Dave tackle these projects with heart and urgency and his leadership contributed to our company moving from a challenging balance sheet position back to investment grade in record time, we not only achieved this goal, but did so with professionalism and thoughtfulness I'm immensely thankful for him as a <unk>.
Colleague and a friend and I am excited to see him move on to the next phase of his life now.
Now I'll turn the call over to you guys.
Thanks, Tobey it has been an honor having spent the last three years working with you and the EQT team I've.
I've been amazed at how much. This organization has accomplished in such a short period of time and I am grateful to have been part of that evolution.
EQT is truly a unique company with a world class asset base and exceptional culture, a proven development model and a strong balance sheet.
I am proud to have left my Mark on this company and will be leading ETP on the trajectory that will create shareholder value for years to come.
As mentioned in the announcement this week I will stay fully engaged EQT for the next several months as they help facilitate a smooth transition and I look forward to seeing many of you at upcoming investor and bets.
Now turning to results I will briefly summarize our fourth quarter and full year numbers before discussing our balance sheet hedging and 2023 guidance.
Sales volumes for the fourth quarter over 459 Bcf.
Roughly in line with the midpoint of our guidance range, despite weather related impact of approximately 10 Bcf.
Our adjusted operating revenues for the quarter were $1 32 billion or $2 87 per Mcf and our total per unit operating costs were $1 39, resulting in an operating margin of $1 48 per Mcf.
Capital expenditures, excluding noncontrolling interests were $396 million in the fourth quarter.
Lately below the midpoint of our guidance range.
2022 capital expenditures came in at 143 billion, excluding acquisitions in line with the midpoint of our one four to $1 $4 75 billion guidance range.
Fourth quarter, adjusted operating cash flow was $622 million.
And free cash flow was $226 million, which takes our total 2022 free cash flow generation through approximately $1 94 billion.
We also saw a $442 million working capital tailwind during the quarter, which was driven by receipt of our cash election option from E train.
Declining accounts receivables from decreasing prices and.
And lower margin requirements.
Our capital efficiency for the quarter came in at <unk> 86 per Mcf up from 72 per Mcf in the third quarter driven by lower production.
It was expected due to third party infrastructure limitations earlier in the year that negatively impacted our 2022 pill count.
For the full year 2022, our capital efficiency averaged approximately 74 cents per Mcf, which is roughly 30% below the gas peer group average. Despite the just noted third party issues impacting production last year.
Turning over to the balance sheet, a core tenet to our company's operating philosophy is to have a strong credit profile and ample liquidity. We believe this will create differentiated value opportunities for <unk> moving forward.
Paul we saw several positive balance sheet milestones last year, including achieving investment grade credit ratings.
Our balance sheet improvement to continue in the fourth quarter with trailing 12 month net leverage exiting the year at one two times down from two three times a year ago.
We exited 2022 with $4 2 billion of net debt.
And one $4 6 billion of cash on hand inclusive of the $1 billion in proceeds from the notes offering in the fourth quarter that will be used to help fund the cash portion of our pending <unk> acquisition.
As Toby mentioned, we continue to actively progress towards our debt retirement initiatives. We've retired an incremental $283 million of senior notes principal <unk>.
Last update via open market purchases at an average price of 95 Central Park.
Since unveiling our capital return framework, we have now retired more than $1 1 billion of debt principle, which is eliminated nearly $40 million of annual interest expense.
Moving to hedging.
Our 2023 hedge book underscores our evolving hedge philosophy that seeks to provide investors with the best risk adjusted exposure to natural gas prices. We currently have 62% of our 2023 gas production covered with Ford and average weighted price of $3 37 per <unk>.
Provides significant cash flow protection and downside pricing scenarios, while maintaining upside exposure.
Since our last update we have also added to our 2024 hedge position with 10% of our 24 volumes now hedged at a weighted average floor price of $4 20 per MB, two and a weighted average ceiling of $5 <unk> parameter btu.
As it relates to basis, we have nearly 90% of our 2023 Appalachian production covered via basis hedges, providing significant protection against any potential material widening of differentials.
Over the medium to long term, we see reasons for structural optimism as it relates to local basis, most notably driven by incremental power demand growth in PJM and coal fired power retirements.
We have also benefited from expanding firm transportation portfolio as we've been able to ship gas further west and capture associated favor pricing dynamics recall, we have added incremental 300 million a day to our ft portfolio last year, including 200 million to the Gulf coast and $100 million to the Midwest.
Looking ahead, we expect additional opportunities to expand our ft position as our peer leading inventory depth allows us to capitalize on the trend we've seen other appalachian operators, releasing existing firm transportation capacity.
For 2023, our market mix is expected to be roughly 37% local 28% Gulf coast, 20% Midwest and 15%.
No, we now model and NTP startup in the second half of 2024, which at the midpoint, we will take our local basin.
Closure to approximately 30%.
As a reminder, our gathering rates contractually begin declining in 2025 independent of Mpc's success, providing a further tailwind to free cash flow as our margin one.
Turning to guidance, we expect 2023 production volumes to range from $1 90 to two Ts with the midpoint roughly flat compared with 2022.
As we bring online the incremental sales that were delayed last year, we expect sequential growth in the second quarter and production, achieving our 500 Bcf E quarterly maintenance run rate by mid year.
Note that we contemplate a variety of scenarios in our 2023 planning with the low end of our production guidance tied to the potential of moderating activity should natural gas prices continue to decline.
We are setting a 2023 capital budget of one 7% to $1 9 billion, excluding the pending <unk> acquisition.
Our budget Embeds, 10% to 15% year over year oil service inflation.
With our supply chain contracting strategy, providing strong access and cost position.
We will likely decline of gas directed drilling activity. This year, we see the opportunity for some price relief in the second half of 2023.
This has not been factored into our outlook.
As Toby mentioned 100 plus million dollars of our budget is associated with turning in line wells that slipped from 2022 into 2023 due to third party constraints and thus are not anticipated to carry forward into future periods.
This dynamic along with the shallow of our base PDP decline is anticipated to drive 5% to 10% improvement in our capital efficiency in 2024 and beyond.
On slide 31 of our Investor deck, we provided adjusted EBITDA operating cash flow and free cash flow outlooks for 2023 at various Nymex natural gas prices.
Aided by installation from our hedge book and material cost improvements, we have achieved over the past several years, our projected 2023 free cash flow ranges from approximately $900 million at $3 gas the $2 billion at $4 gas acquiring a free cash flow yield 8% to 17%.
As it relates to cash taxes, we had roughly $1 billion of federal Nols.
As of the end of 2022 and at current strip pricing. We expect these nols offset the bulk of our 2023 cash taxes.
Our 2020 for cash tax rate would be approximately 7% to 9% of operating income of 150 to 200 million at current strip pricing increase.
Increasing to the low 20% range in 2025, and beyond which is fully captured in our cumulative free cash flow outlook.
Turning to capital allocation, we have now retired over 20 million shares of our buyback authorization at an average price of $30 per share recall that we even eliminated additional $5 7 million shares via a convertible note repurchases last year. So in total we've lowered our fully diluted share count by more than 6% since the beginning of <unk>.
<unk> 2022.
We still have significant firepower to retire shares with $1 4 billion remaining under our current $2 billion authorization.
As mentioned previously we've also made significant progress toward debt retirement with $1 1 billion of debt principal retired since initiating our capital return framework.
We continue to target absolute debt of $3 5 billion pro forma for the <unk> acquisition, which will further bulletproof our balance sheet by taking our debt to EBITDA to one to one five times, assuming a $2 75 Nymex gas price.
Looking ahead, our low cost structure and hedge book provides differentiated downside protection for 2023 free cash flow, which we will allocate towards our base dividend further debt retirement and opportunistic equity buybacks.
With an anticipated greater than 12.
Free cash flow from 2022 through 2027, we have plenty of firepower to achieve and exceed our debt retirement goal equity buyback authorizations.
I'll conclude by highlighting slide 11 of our investor deck, which underscores the economic impact of the cost structure improvements of EQT has achieved over the past several years from 2019 to 2021, we generate an average <unk> of negative 8% at an average realized natural gas price of approximately.
<unk> $2 50 per M a btu.
Lucifer of hedging.
Over this period, we have reduced annual costs by roughly 700 million with spring loads, a corporate return profile it into an improving natural gas price environment.
This was exemplified in 2022 as our RMC jumped to a roughly 17% with just a 50% improvement in realized natural gas prices at $3 per <unk>.
At current strip pricing, our Aro CE should improve over the coming years, highlighting the sustainability of our operating model and the value creation potential of our business.
I'll now turn the call back to Toby for some concluding remarks.
Thanks, Dave to conclude today's prepared remarks, I want to reiterate a few points.
One through our relentless cost reduction efforts bounce hedging strategy and execution on accretive M&A opportunities, we have purposefully positioned EQT to thrive in all natural gas price scenarios.
EQT is on track to become the first energy producer of meaningful scale to achieve net zero scope, one and two GHT emissions and we believe the market is only scratching the surface of recognizing the strategic value of the ambitious profile of our natural gas.
Our 2022 Reserve report underscores the consistency of our combo development strategy positive well performance trends and the tremendous value inherent in our proved reserve base with significant upside based on our peer leading inventory depth.
Fourth our opportunistic capital return strategy has positioned us well to capitalize on temporary gas price weakness ahead of a structurally bullish natural gas outlook over the coming decades, and lastly, EQT offers among the best risk adjusted exposure to natural gas prices and as one of the lowest 2023 free cash flow breakeven Nymex.
Prices of all U S natural gas producers, which underscores the sustainability of our business through all parts of the commodity cycle.
I would like to open the call to questions.
If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove a question. Please press star followed by two again to ask a question. It is star one.
Our first question is from among Choudhury with Goldman Sachs. Your line is now open.
Hi, good morning, and.
Thank you for taking my questions first Dave. Thank you for everything and wish you. The best as you begin the next chapter for life and hope to stay in touch and also look forward to engaging with you in the next quarter.
I guess the first question.
Giving you a low free cash flow breakeven this year and you have some options. So how would you think about cash flow location opportunities between share repurchase and debt reduction.
Yes, great question.
So I think youll see us continue our approach towards our capital allocation plans, what you've seen in the past has been a prioritization of debt paydown.
Shift asset value into the hands of our equity holders.
And then Youll see us continue to be opportunistic with the buybacks.
And obviously the fixed dividend that we put in place.
Variable and will be a story that will continue to look to grow that over time.
Yeah, and I'd just add to that.
We hit our debt targets, you could see the percentage of our free cash flow increasing towards equity.
That's awesome. Thank you.
Would love your latest thoughts on the natural gas outlook.
What are you expecting from a supply response, how youre thinking the market is shaping up and then how does it change the way you approach your strategy on hedging and then any update on the any thoughts around M&A to the extent you can execute you can.
Prosecuted given the given what's going on with that.
Yes so.
<unk> volatility has tripled since 2000 early 2021, and so we think that's going to continue.
And so our hedging strategy are hedged to <unk> strategy really.
Encapsulates that volatility so everybody has to remember volatility moves in both directions and so that's why we put out.
The risk adjusted upside.
And the way we structure, our hedges with Lloyd callers.
As far as gas right now gas is right now is oversupplied and we kind of anticipated that and why we put as much of a hedge in place and got a little more aggressive midyear.
We obviously see the higher cost producers starting to cut back on activity, it's going to take a little while to get there Youre also seeing coal hubs.
Our burn coming down and absorbing some of this as well we will see some industrial demand pick back up as the chemical industry as Destocking and that'll start to pick up and absorb some of the ethane thats in the system as well as <unk>.
And as well as increasing some of the power demand as well so.
It's going to probably set the stage, where it's going to take some time to get through this year to get to that balanced market, but I think.
If we anticipate producers reacting the way we do it we should get to kind of a more balanced market and set the stage for a better 2024.
And specifically with regards to our strategy I think daves comments on our hedging strategy is designed.
To give us the downside protection, while also giving us great exposure to commodity prices.
So you'll see us continue to execute that approach as it relates to our activity levels, what youre seeing with US. This year is putting a plan in place that will get our production capacity back to 500 Bcf per quarter run rate.
We feel like that's prudent to get that capacity back, but that will give us the ability to respond in more real time, if we continue to see gas prices decline or or we'll be happy to have that production capacity if gas prices move back to.
So our view of where we think prices will be in the future. So.
On an M&A basis, we're going to continue Youll see no change on the approach there.
One of the key characteristics of our M&A approach Hasnt just been on making sure we see the financial accretion on deals with cash flow per share now for sure, but the other factor, which is really showing up is our commitment to buying low cost high quality assets.
And in a low cost low price environment. Today, you are seeing the benefits of that.
So we'll continue to reinforce that element of our M&A strategy.
Great. Thank you.
Youre welcome.
Our next question comes from Sam Margolin with Wolfe Research. Your line is now open.
Good morning, Thanks for taking the question.
Good morning, I wanted to ask about the.
The remark on slide 12 about.
Looking at new well designs, and maybe just talk a little bit about.
Like some specific outcomes youre going for.
With this approach whether whether it's like a PDP extension type of outcome or if it's too.
Managed declines or what exactly is going on with that with that comment. Thank you.
Yes, I mean, the ultimate ultimate approach in any of the science work. We do is improve the economics of the projects that we're developing.
The science that we're doing is going to have the effect of lowering our F&B through increasing the performance on an EUR per foot basis.
But that does come with some associated increase in costs. So.
For us to make a full determination on the economics that we receive with this well design, we really need to.
Continued through the monitoring period of the signs that we have on the ground right now and also we'll pair that up with service cost inflation expectations and make a decision inside date for that is towards the middle part of this year. So we'll come back to you with an update as we get this information.
Thanks, and then just as a follow up you just mentioned with respect to inflation.
And you mentioned you thought that the current market would drive some activity levels lower and I Wonder if you could just characterize.
A little more your outlook here. If it's just you think that sort of unit cost in the service side are nearing a plateau or if maybe the activity levels, we're still overheated that.
We could actually see services kind of give back some price right now just because.
Just because of the severity of the market conditions.
Yes, it's been a it's been a hot market the last six months specifically.
But I think with the pullback in commodity prices, we do anticipate to see some activity reductions youre already seeing it from what we consider the marginal producer here in the U S. In the Haynesville.
So I think in the next over the next few weeks, we'll have a better view on activity levels and how they're how they are coming down and ultimately that should should translate to lower service costs in the future and we'll be monitoring that closely.
Great. Thank you so much.
You got it.
Our next question is from David <unk>.
Deco Baum with Cowen Your line is now.
Thanks, Toby and David and Congrats David Best of luck in the next chapter.
I was hoping to just ask when you thought about 2023 planning you, obviously envision a large ramp in the back half of the year, which.
As opposed to just a function of the timing of pills like a little bit of color on how youre thinking about the risks around that ramp.
But also just curious.
How the closing timing of tug hill sort of informed.
What youre doing this year on sort of legacy EQT recorded EQT.
There might have been incremental activity.
It would have otherwise maybe been allocated towards West Virginia.
As it relates to our.
Hitting our production capacity targets by Q3.
The thing we're really looking at is completion efficiencies and really stages per day foot footage completed per day.
One of the slides we showed how we've gotten back to sort of historical performance levels. There. So we'll be watching that and that will really be the guiding factor on on the pace of reaching that target.
As it relates to the activity levels relative to <unk> acquisitions.
We were always planning on running this activity level and.
And we Werent planning on changing our activities with the <unk> transaction in 'twenty three that was probably going to be something that would be incorporated in 'twenty four or so.
We're executing as we planned and we will adjust when when that deal gets closed.
I appreciate that.
Is the expectation that everything youre seeing that.
This worth of closed let's say in the end of the year is 800 million a day still the right production level and I assume if it's not there would be a purchase price adjustment.
Well, yes so.
The purchase price was set at midyear last year, and so any change in free cash flow effectively will lower the price.
Each each month that will.
That this takes the close so so if they change if they decided to change activity.
In response to this marketplace than whatever impacts to free cash flow that will benefit to us, but we don't know that theyre changing activity. We do know that they did add hedges at $5 with half of our gas production to lock in.
Good portion of their free cash flow so.
And our expectation right now is that this will close mid year.
Thanks, David.
Quick one just to confirm the only difference between your 165 corporate level breakeven this year and $2 30 view just for EQT only longer term run through I guess the next several years is just the benefit of the hedges and 23 right.
Correct, yes.
We're just trying to show that we stand a much lower gas price before we.
Don't generate free cash flow.
I appreciate it guys. Thank you.
Great. Thanks.
Our next question comes from Neal Dingmann with <unk>. Your line is now open.
Good morning, guys first Dave Thanks for all the time has definitely been a great help and.
My first question's on costs, specifically whats your comfort level with when you see inflation in other potential incremental pressures. This year and just really wondering how sensitive is that to your D&C plan. You mentioned, how you would potentially would change D&C based on what gas prices, but I'm just wondering how does that relate to what youre thinking on costs as well.
Yes, when you look at the sensitivity that you've got to look at is what percentage of services, we have locked in and what exposure do we have to the spot market.
<unk>.
Looking at the Big picture items from rigs and Frac crews those are locked in we have about 100 Frac days.
<unk>.
Would show up in the back half of this year that we're looking to procure so theres a little bit of exposure to spot, but we're planning for it.
We've got some time to see how the market shakes out before that.
On steel, which is another big item for us.
We're pretty good from a procurement perspective through.
The first half of this year.
And we think that the steel market is hopefully theyre showing some signs of loosening there on price. So I feel like we're positioned there too.
To procure the rest hopefully a better better service price environment for steel and then as far as sand and sand and water is concerned those are largely locked in and feel good one thing I'd say about sand it's important to note.
Because that's something that has really been bonkers and other parts of the country.
Appalachia large part of the sand that we procure is not.
Is that a different market than what people are seeing in in basin sand in the Permian motto sand that we're getting is coming from Wisconsin, Northern White, So it's a little bit its not hasnt been as exposed as much service price inflation as other places in the country. So.
That's sort of how we.
We see the service cost sensitivities and feel like we're in a good position and can be flexible and hopefully take advantage of better service cost environment in the second half of this year.
Yeah definitely it seems like you're the Appalachian guys arent better price or better area there.
Just maybe lastly, just on housekeeping I'm, just wondering you mentioned about the $50 million adjustment per months color on the purchase price for the adjusted to include <unk> and tug Hill I'm. Just wondering is that included in the tug youll hedges or is that incremental.
The $50 million is that what you just said.
Yes, you mentioned about.
Is there.
With that you mentioned that $50 million per month regarding the purchase price adjustment I'm. Just wondering is that included the tug youll hedges or is that incremental.
Well, so I think.
I think in the first six months of <unk>.
Last year, so last year.
We basically believe there was probably generate about 300 $350 million of excess free cash flow that would lower the purchase price roughly half of it goes to cash half of it goes to reducing the share count and so.
With their hedges.
Alright.
The free cash flow still trends along that same pace you might have we'll call somewhere in that same vicinity in the second half of the year. So you could maybe talk about 600 plus of.
The purchase price adjustments that will help lower that that purchase price. So.
The hedges will just solidify that.
Okay. That's what I was getting that okay that makes sense. Thank you.
Thanks Neil.
The next question comes from Roger read with Wells Fargo. Your line is now open.
Yes. Thank you and good morning, just one quick question probably for you Toby just on.
As you think about gas prices do you think in the end, it's more about the absolute decline risk in gas prices or do you think it's going to be more about duration.
Alicia say something below the average break evens out there.
Ultimately forces activity and production lower and then maybe creates a little headroom for you on service costs by the latter part of this year.
Yes, I think Theres a couple of things that are happening from an activity level as.
As these mature basins.
The shale plays continue to mature.
Amount of activity levels will lower over time.
That should have an impact on lowering service costs.
But also the.
The other thing Thats, taking place is the break evens in the United States is rising as operators are moving to tier two geology.
Both in geography, and also in the zones that they are completing that will have the impact of increasing the marginal breakeven price of gas that will help solidify.
Modify price or the other.
The thing I'd say is as far as duration is concerned I mean the.
One thing that we're seeing is the call for cheap reliable clean energy.
And if we learned one thing in 2022, looking what looking what happened in Ukraine and Russia.
<unk> learned there is energy security matters and without energy security you cannot transition Europe has gone backwards on their emissions targets because of a lack of energy security and the most important takeaway from all of this is where did Europe turn for energy security they turned to natural gas and so we think.
At the call for this for this product is only going to strengthen over time.
Because natural gas is the key to providing energy security to Americans in the world.
Yeah.
Thank you for that.
Our next question is from John Abbott with Bank of America. Your line is now open.
Good morning, Tobey and Dave and Dave Thanks for all of that the entire bank of America team wants to Echo best for your best wishes on your next chapter.
Our first question is going to be on the.
<unk> and <unk> midstream acquisitions.
And so when you look at so the guidance that you provided back in September of last year, and when you sort of think about these acquisitions potentially closing.
In the middle of this year.
First is the midstream spend that you laid out in September still on track with <unk>.
And then second how does does your.
Current thoughts on the potential impact of the breakeven include updated thoughts on inflation heading into this year.
So you take the second I'll take diverse Okay go ahead.
So as far as what was the second part of the question Dave.
Inflation into a breakeven yeah. So I mean, the key thing with with tug Yale and the reason why those assets at such a low low breakeven cost.
<unk> was really due to the fact, they on their midstream and also the liquids.
<unk> percentage of their of their of their program that they are running there. So yes, they're going to be hit with inflation like every other operator.
We'll recast what that looks like from a capex perspective, the one thing I'd say is.
These are pretty high quality assets so the.
The activity levels needed to maintain production.
We'll mitigate some of the service cost inflation effects, but hopefully by the time, we take over we've seen a little bit more balanced come from service costs.
And then our break evens incorporate.
You look at our long term breakeven. So we give you that does incorporate.
Some inflation embedded in there so that does.
And then as far as the midstream projects are concerned.
Some of those projects, we were working on together be free pre.
<unk>.
This M&A.
And some of those projects, we will absolutely continue through as far as the rest I think we'd have to wait and see until.
Discloses to get an update from from Todd on that.
I appreciate it and then our second question is sort of on the natural gas macro despite.
Despite spot weakness the forward curve is about 50% above year ago levels with Boa storage, albeit after losing Freeport exports. What do you think is going on.
I mean, yeah.
You have basically an oversupplied market.
Heading into 'twenty three.
And I'll call very modest oversupply in 'twenty four and then you have literally had Cree port and weather not show up knocking on the front end of the curve down.
Cause the modest oversupply to.
To increase and so it's basically sending a signal to the producers start to cut production because pricing is forcing your activity offline. So and it's also going to send demand up.
So it's going to create a.
Our reaction to try to get to that balanced market, which youre going to see from a combination of supply coming off or supply growth slowing, which you'll probably end up being about a b a day of impact you will also see about an incremental b plus of demand being forced back into the system between.
<unk> power from coal going away in the stack and then also industrial demand coming online. So those will be things that will balance the market.
And if it doesn't happen sooner it will happen it will take longer that means that the.
The <unk> 23 curve will come down some.
And that will cause.
Quicker reaction later reaction so it'll get there and that's that's what the pricing single always does.
I appreciate it thank you for taking our questions.
Okay.
Our next question comes from Noel Parks with Thule Brothers.
No.
Hi, good morning.
Good morning, good morning.
Just a few things.
I'm wondering in the reserves did you experience any upward revisions on type curves.
Either either just from general efficiency or.
Anything you would be able to see firm.
You are.
Youre redesign.
Yes, so the type curve revisions resulted in an increase of about 350 Bcf.
Sort of what we're referring to when he said performance revisions.
So we have seen an increase.
<unk>.
Didn't bake in anything on the science work that we're doing it's just too early to the fact that yes, you need to have more historical information for for Netherlands tool to be comfortable with us booking any uplift in type person thats, probably more of a we'll call it 24 and beyond kind of benefit and I hope that.
Investors look at this with a theme that youre starting to see around this industry, where well performance is sort of it's creating across industry.
To be assure to see that our high quality assets are translating to dependable performance that youre seeing.
Positive improvements in the well results that we're putting out I think is should be very reassuring for investors.
Great.
And.
I just wanted to at this point.
Looking ahead to services.
Of course.
Totally curious about what the service response is going to be if we do see activity continuing to head down, but just sort of as a reference point when is your next.
Inefficient.
Renegotiation.
Either on the rig side or the Frac side.
Yes, so rigs we're good through the end of the year with the Frac crews.
Two two out of the three frac crews or or.
Or.
Our sorry, we have to.
Two out of the refractory is locked up we've got.
A track that will be joining sort of middle part of this year that were currently under negotiation for right now so I would say probably that's the biggest risk.
Big resource we have that we're working on.
And as I mentioned steel is the other big factor, which will cover the first half of this year.
And we will continue to work through that to procure for the second half.
Okay, Great and just one more.
Thinking about the <unk> acquisition.
Once that closes.
Give us a rough sense of maybe.
How many quarters of sort of deal related onetime impact we might have on G&A and when.
G&A might get back to more of a steady state on a on a unit basis after the close.
Sure. So so right now we're dealing with extra G&A tied to the FTC and Poland Unclosed process. So if we were to effectively close by mid year.
I would say probably the last of what we would.
Deal with us.
Most likely all hitting at the end of the second quarter it could sum it in the third quarter.
But I would just say that's probably your.
But from what we know right now.
Okay, great. Thanks, a lot.
Youre welcome.
Our next question is from Paul Diamond Citi. Your line is now open.
Perfect. Thank you and good morning all.
Just a quick question for you on 2020 guidance the numbers give you some optionality around it.
Some growth versus some.
Some reduction I just wanted to kind of get you guys spent on its strategy and should we be thinking about that linearly with pricing or does it more.
Or is this kind of a bogey more of the high side and then it will step change if pricing drops below a certain level.
Yes, so it'll be a combination of pricing and duration.
And thinking about.
When we when we spend money and start to produce its not going to all come out in one quarter its going to be over probably a two to three year period that matters from a.
Returns perspective, so we'll look at we'll look it up.
At the forward curve and we will look at the drop and we will try to anticipate what we think the impacts will be.
So we will model out and so it will be a game time decision, we're not going to make a decision today, but it's going to be price and duration that will that will drive it.
Okay understood and just one quick follow up as we kind of move to a more.
The long term supportive fundamentals of $24 25.
There have been any shift in kind of your priorities for southeast or southwest PAA versus the north east versus West, Virginia or is that still kind of stuck with peer is still pretty much the.
Kind of a front runner as far as priorities go.
Yes, I mean, our schedule.
Is designed to develop the best rate of returns sooner.
Sooner so that mix is sort of set and what you see here.
For this year is probably going to continue into the future.
So thats sort of how we can have our schedule laid out and also the surface impacts on where we can do combos longer lateral lengths more wells per combo is another factor that could move.
To factor into the schedule.
Okay.
Understood. Thanks for your help and congratulations Dave.
Alright, thank you.
There are no further questions. So I'll pass the call back over to the management team for closing remarks.
Thanks, everybody for your time today.
Certainly a lot of volatility in these environments I think it's a really good time for people to look at the differentiation that exists within the energy space and I think the work that we've done at EQT really is.
This is showing up here even in a downside scenario, we built a business that still is going to generate.
Double digit free cash flow yields and with our low cost structure will be able to thrive and look to a very promising future for natural gas and EQT. So we will continue to work and our employees here at EQT youre going to be really focused on delivering peak performance in 2023.
Thanks for your time.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.