Q1 2023 EQT Corp Earnings Call
We do so by pressing star followed by one on your telephone keypad I will now hand, the floor to Cameron Horowitz, managing director of IR and strategy Cameron ready when you are.
Good morning, and thank you for joining our first quarter 2023 results conference call with me today are Toby Rice, President and Chief Executive Officer, and David Khani, Chief Financial Officer, a replay for today's call will be available on our website beginning this evening.
A moment Toby and David will present their prepared remarks with a question 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 any 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. While the current natural gas macro environment has created some headwinds for U S. Natural gas producers at large the price pullback is reinforcing eqt's competence and our corporate strategy and illuminating several facets of differentiation relative to our peers.
A key pillar of distinction has been Eqt's M&A strategy, where we have taken a disciplined approach to acquisitions, specifically focused on assets that lower our cost structure. The current gas price environment underscores the benefits of this strategy with enhanced free cash flow durability through the bottom parts of the commodity cycle, allowing for accretive capital allocation decisions.
Resiliency and corporate returns and greater consistency and operational cadence.
Our pending <unk> acquisition further builds on this M&A strategy as it is expected to drive an additional 15% decline in our corporate free cash flow breakeven price, providing even greater resiliency to our business moving forward.
Another area, where EQT is differentiating itself is through our evolved hedging strategy, while we no longer have financial needs requiring hedging given material improvements in our balance sheet, we have evolved into opportunistic hedgers predominantly using wide collars to derisk free cash flow at the bottom part of the cycle, while maintaining material upside exposure toward natural.
Gas prices. This strategy is paying off in real time as EQT is among the best hedge books of any natural gas peer in 2023 with 62% of our production covered via floors with an average strike price of $3 38 per.
Mmm Btu.
In conjunction with our M&A and cost reduction efforts, our hedge book is a key factor driving our full year 2023, corporate Nymex free cash flow breakeven down to less than a $1 65 per <unk>.
A third pillar of Eqt's strategy driving distinction among peers is our opportunistic capital returns approach.
When we rolled out our return framework in late 2021, we did sell under the premise that we would look to maximize returns to shareholders via our capital allocation decisions, which requires a tactical and thoughtful approach to both debt repayment and equity repurchases.
With more than a year under our belt of returning capital to shareholders. We believe our underlying approach and execution is generating superior results, which is exemplified by the fact that we have achieved the best return on our equity buybacks among our peer group and retired a material amount of debt at discounts to par as interest rates have risen.
The fourth element of differentiation comes on the environmental front as EQT has taken material steps forward in achieving our peer leading goal of net zero scope, one and two greenhouse gas emissions from production operations by 2025, we highlighted the material benefits of completing our pneumatic device replacement initiatives a year ahead of schedule with our fourth quarter was.
<unk>.
And we are building upon this momentum with recent announcements of strategic partnerships directed at advancing the development of low carbon intensity natural gas products and generating verifiable carbon offsets in short we believe the key tenants of our corporate operating philosophy are laying the foundation for differentiated and sustainable long term value.
The Asian for EQT and you can expect continued execution upon our proven strategy going forward now.
Now turning to first quarter results 2023 got off to a very strong start across the board at EQT as shown on slide seven of our Investor presentation. We replicated the solid efficiency gains we achieved late last year in the first quarter with Frac crew pumping hours up 35% year over year as the third party infrastructure.
<unk> strengths that slowed our operational pace in 2020 to move firmly into the rearview. These efficiency gains facilitated our first quarter production coming in 2% above the midpoint of guidance, while our capex came in 7% below the midpoint of our expectations, our advantaged firm transportation portfolio allowed.
To achieve an average differential of <unk> 16 above Nymex, while operating expenses came in 2% below the midpoint of our guidance on lower than expected LOE production taxes and G&A combined.
Combined these factors drove free cash flow of $774 million during.
During the first quarter, which is eqt's highest quarterly free cash flow and significantly de risks our free cash flow generation for the year.
I want to personally thank all members of our crew for their hard work in facilitating this execution as we have made significant strides toward our goal of achieving peak performance. This year.
On the capital returns front.
We repurchased nearly 6 million shares or $200 million of stock during the first quarter at an average price of less than $34 per share. We also retired $210 million of debt principal during the quarter at an average cost of 96% of par.
Even with the significant returns to shareholders, we exited the quarter with greater than $2 1 billion of cash on hand up from $1 5 billion at year end 2022, our net debt at the end of the first quarter was approximately $3 3 billion.
Compared with the $4 2 billion at the end of 2022, our net debt to trailing EBITDA. Currently stands at 0.9 times underscoring the tremendous balance sheet progress we have achieved over the past several years.
In terms of full year guidance, we are reiterating our one 7% to $1 9 billion capital budget, which excludes our pending <unk> acquisition.
As a reminder, our 2023 budget includes a 100 plus million dollars of nonrecurring capital associated with third party constraints that shifted roughly 30 tails into 2023 and assumes 10% to 15% of year over year oilfield service cost inflation as it relates to the ladder. We are seeing a notable trend of flattening out in <unk>.
Oil field service cost as industry activity moderates and we believe the stage is set for some degree of softening in the second half of the year, which if manifested will provide upside to our current outlook. Our 2023 production guidance is unchanged at 9500 to 2000 Bcf fee and we are operationally.
On track to get back to 500 Bcf per quarter of run rate production by the middle of this year.
That said as we mentioned last quarter, the lower end of our guidance range contemplates scenarios, where we slow our production cadence for the year should natural gas prices continue to deteriorate and we have the flexibility to make game time decisions on our cadence as the year progresses on slide 32 of our Investor presentation, we've provided in <unk>.
Updated range of 2023, adjusted EBITDA operating cash flow and free cash flow outlooks at various natural gas prices for the remainder of the year at.
At recent strip pricing and factoring in first quarter actuals, we forecast 2023, adjusted EBITDA of approximately $2 9 billion and.
And free cash flow of roughly $1 billion. This year, implying a 9% free cash flow yield at the bottom part of the commodity cycle as shown on slide five of our presentation. Our free cash flow generation has significant durability and duration with our internal forecast projected cumulative free cash flow from 2012.
3% to 2027% of greater than $12 billion at strip pricing and excluding the benefit of tug Hill. This equates to more than 105% of our current market capitalization and greater than 80% of enterprise value underscoring the significant value proposition embedded in EQT shares even after.
The recent decline in strip pricing our.
Our free cash flow outlook gives us tremendous confidence in being able to achieve our absolute debt target of $3 5 billion pro forma for the <unk> acquisition, while also being able to continue to opportunistically retiring our stock via our $2 billion share repurchase authorization.
Turning to our environmental initiatives, we announced multiple key projects over the past few weeks first we entered into a strategic partnership with context labs to advance the development of verified low carbon intensity natural gas products and carbon offsets through tracking reporting and verification of critical emissions data.
This strategic partnership will support us in achieving our industry, leading emissions reduction targets.
With a focus on emissions quantification operational analysis and the certification of natural gas production, we plan to work with context labs to scale emissions mitigation across the full energy value chain context labs will provide an enterprise wide deployment across eqt's asset footprint with the goal of achieving full digital.
Integration of our carbon intensity data.
The resulting creation of certified low carbon intensity products will add another dimension to eqt's already robust and digitally enabled organization.
We view the emissions profile of our natural gas as a strategic asset for our shareholders and this partnership will further aid in illuminating the relative value of our products and ensure eqt's molecules remain among the most coveted in the world. Additionally.
Additionally, we announced Eqt's first nature based carbon offset initiatives earlier. This month, we partnered with the Wheeling Park Commission, our public Park in West, Virginia, Paralytic, a soil analytics company and climate Smart environmental consulting to implement forest management projects with the goal of generating carbon offsets.
In our own backyard. These projects will spend more than 1000 acres of forest land and we will utilize paralytics soil probe technology to ensure the quantification of offsets is accurate and transparent.
EQT has been an industry leader in reducing operational emissions in our natural gas already has some of the lowest greenhouse gas intensity in the world.
<unk> based projects like this which are supported by cutting edge technology that ensures accuracy and transparency will offset our remaining emissions and be a key enabling factor for EQT to become the first energy company in the world of meaningful scale to achieve verifiable net zero scope, one and two greenhouse gas.
<unk> emissions.
As it relates to the pending tug Hill acquisition, we have been constructively working with the FTC and believe we are on track to close the acquisition around mid year due to the relative value structure of the deal with a meaningful equity component and the interim free cash flow since the deals effective date of July one 2020.
Two we expect the price paid at closing to be roughly $2 3 billion of cash and approximately 48 million shares which added $33 per share price equates to a closing value of roughly $3 9 billion.
We note. This deal structure contrast, with other recent transactions in the industry, which we're a cash heavy and thus more levered to commodity prices. This consideration mix along with tug hills cost structure have served as a hedge for EQT as gas prices have fallen as evidenced by the deal accretion more than doubling since announcement.
All while leverage has stayed in check.
In summary, our strong first quarter results underscore that the third party infrastructure challenges. We faced last year are in the rearview and EQT is back to peak performance, we generated our highest quarterly free cash flow repurchased a material amount of equity and debt and exited the quarter with an improved leverage position and over two.
$1 billion of cash on hand, while the current natural gas macro environment does present challenges. It also illuminate the relative advantages of Eqt's corporate strategy underpinned by large scale combo development, a disciplined M&A focus on low cost assets are risk adjusted hedging strategy and opportunistic.
Capital returns this unique corporate profile has laid the foundation for significant value creation through all parts of the commodity cycle and we look forward to building on our successful track record of execution on behalf of all of our stakeholders I will now turn the call over to Dave.
Thanks, Toby and good morning, everyone.
Briefly summarize our first quarter results before discussing our balance sheet the macro landscape hedging.
2023 guidance and use of our free cash flow.
Sales volumes for the first quarter 459 Bcf.
Or 2% above the midpoint of our guidance range.
Per unit adjusted operating revenues were $4 11 per Mcf.
And our total per unit operating costs were $1 34, resulting in an operating margin of $2 77 per Mcf.
Capital expenditures, excluding noncontrolling interest were $464 million or 7% below the midpoint of our guidance range as operational efficiencies exceeded expectations.
Adjusted operating cash flow and free cash flow were 124 billion and $774 million respectively.
We also had a $426 million working capital tailwind during the quarter largely driven by declining accounts receivable from decreasing prices with a further tailwind expected in Q2 and Q3.
Our capital efficiency for the quarter came in at $1, one per <unk>, which is approximately 10% better than what was implied by the midpoint of our guidance ranges driven by outperformance on both production and capital spending.
Note that as we complete the exit hills that were shifted from last year, our second half capital efficiency should improve by double digits relative to the first half.
Turning to the balance sheet, a strong credit profile and ample liquidity remain a core tenant underpinning our operating philosophy, and we will provide a differentiated value opportunities for EQT moving forward.
Our balance sheet position continued improving with trailing 12 month net leverage exiting the quarter at <unk> nine times down from one two times last quarter and one nine times a year ago.
We exited the first quarter with $3 3 billion of net debt and $2 1 billion of cash on hand inclusive of the $1 billion in proceeds from our notes offering.
This week, we extended our $1 $2 5 billion term loan to end of to the end of 2023.
Which aligns with the timing of the amended purchase agreement and provides timing flexibility.
The bank term loan along with our cash balance gives us the flexibility and confidence to fund the cash portion of the tug Hill deal independent of any bond proceeds that we raised last fall.
As Toby mentioned, we continue actively progressed our debt retirement initiatives. We retired $210 million of senior notes principal in the first quarter, primarily via open market purchases at an average price of 96% of par.
Since unveiling our capital return framework, we have retired more than $1 1 billion of debt principle, which is eliminated nearly $40 million of annual interest expense.
Our commitment to a bullet proof balance sheet is being recognized by the credit rating agencies.
<unk> Fitch reaffirmed our investment grade credit ratings over the past several weeks with stable outlooks at both agencies, even as natural gas prices have temporarily receded.
As we further execute our objective of achieving $3 5 billion of gross debt pro forma for the pending <unk> acquisition, we believe additional credit rating upgrades are possible.
I'd like to also briefly highlight slide 10 of our Investor presentation, which shows our track record of materially growing our asset base, while lowering our net debt.
At year end 19, our net debt was $5 3 billion. Our proved reserves were $17 five tcf.
In our production net production was $4 one bcf per day.
Fast forward to 2022, we increased our proved reserves to 'twenty five tcf.
In our production to five three Bcf per day through the Chevron and all the acquisitions and organic reserve growth.
All while decreasing our net debt to $3 3 billion through the end of the first quarter.
Said another way, we have grown our asset base by 30% to 40% while simultaneously lowering our net debt by a comparable percentage over the three years and our plans for additional debt reduction post closing the <unk> acquisition should more acutely highlight this track record.
Turning to a few brief thoughts on the gas macro landscape.
The combination of warm winter weather and the Freeport outage left roughly 400 Bcf of excess natural gas in storage. This winter.
The market is in process of rationing this excess gas with a balancing items likely to be split between low production and increased gas fired power demand.
On the former get declines in gas directed activity has accelerated as of late.
With pricing falling well below many producer break evens across the U S and we believe additional gas directed activity declines in the coming months to moderate the pace of storage injections by roughly 200 Bcf.
As it relates to power generation over 7000 megawatts of U S. Coal generation is set to be retired in 2023, and we are seeing gas take further share from coal and the power stack to the tune of roughly two Bcf per day. This year with the average cost of coal rising materially in 2022, the coal to natural gas switching floor.
<unk> increased by 50% or more and we believe this is a structural shift given the massive underinvestment in coal capacity.
There are several avenues of upside potential that could drive additional market tightening above our current base case expectation, including higher sustained LNG exports.
Greater industrial demand and reduced imports from Canada, given a tight Canadian storage market, we expect.
Continued volatility in natural gas prices as gas and coal activity moderate and storage overall as an inadequate buffer relative to peak demand.
Moving to hedging our 2023 hedge book underscores our evolve hedging hedging philosophy that seek to provide investors with the best risk adjusted exposure to natural gas prices.
We have 62% of our 2023 production covered with floors at an average weighted price of $3 38 per <unk>.
Which provides significant cash flow protection and downside pricing scenarios, while maintaining upside exposure.
We also have 10% of our 24 volumes hedged at a weighted average floor price of $4 20 per M of Btu and a weighted average ceiling of $5 40 per <unk>.
Given our expectation of improving natural gas macro fundamentals as the year progresses, we will opportunistically look to add to our 2024 hedge position at the appropriate time.
As it relates to basis, we are seeing a material benefit from our expanded firm transportation portfolio, which was reflected in our first quarter differential coming in at a 16% premium to Nymex as we captured favorable pricing spreads during the quarter.
We continue to expect additional opportunities to expand our ft position as other Appalachian operators release existing firm transportation capacity.
As it relates to MVP slide eight of our Investor presentation illustrates the project impact on Eqt's cumulative free cash flow.
While the benefit of MVP is interrelated with the spread between Nymex and local Appalachian prices. The current future strip suggests MVP has an immaterial impact on our cumulative free cash flow at higher price realizations are largely offset by higher transportation expense.
That said, we continue to be staunch supporters of MVP as the project is necessary to ensure energy security for the southeastern region of the United States, while achieving its carbon reduction goals via the phase out of coal fired generation.
We were encouraged to see energy Secretary Grant homes show of support for MVP and broader energy infrastructure. This week with notable comments on how these projects will deliver dependable energy to Americas, while supporting the reliability of the electric grid.
For reference our model assumes MVP starts up in the second half of 2024, and we will adjust assumptions if needed.
Importantly, gathering rates contractually begin declining in 2025 independent of MVP success, providing a further tailwind to free cash flow as margins widened by 15th from current levels.
Adding approximately $300 million of annual pre tax free cash flow by 2028.
Sure.
Turning to guidance, we are reading, our 2023 production outlook of one 9% to two tcf.
This range provides significant flexibility to respond to evolving macro conditions with the low end of production of our production guidance.
The potential outcome of moderating activity should natural gas prices continue to decline.
We are currently running two operating horizontal rigs and thus not contemplating reducing rig activity.
We have flexibly around our completion cadence as well as our choke management program.
We are also reiterating our 2023 capital budget of one 7% to $1 9 billion, excluding the pending tug Hill acquisition, which embeds, 10% to 15% year over year oilfield service inflation.
As it relates to leading edge inflation trends, we are experiencing a flattening out of steel cost and starting to see long haul logistics prices softening.
We believe this is a signaling of some degree of price relief on local logistics, such as sand and water hauling and could enable further completion efficiencies.
While still too early to predict with precision. We believe this backdrop could set up for some degree of net price relief by for EQT by the fall and upside potential to our free cash flow outlook later in 2023 and into 2024.
As a reminder, 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 is not anticipated to carry forward into future periods.
This dynamic along with the Shallowest of our base PDP decline is anticipated to drive 5% to 10% improvement in our capital efficiency in 2024 and beyond independent of any oil field service cost relief.
Our per unit operating expense range is 2% per Mcf lower at the midpoint driven by lower production taxes and G&A. We're also lowering the range over average differential forecast for the year to negative 35 to negative <unk> 60 per Mcf.
Driven by narrowing local basis and the benefits from our firm transportation portfolio.
On slide 32 of our Investor deck, we provide adjusted EBITDA operating cash flow and free cash flow outlooks at various natural gas prices for the remainder of 2023.
At recent strip pricing 2023, adjusted EBITDA is expected to be approximately $2 9 billion and 2023 free cash flow is anticipated to be roughly 1 billion, implying a free cash flow yield of 9% at the bottom part of the cycle.
As it relates to cash taxes, we continue to expect our remaining federal Nols to offset the bulk of our 2023 taxes. Our 2020 for cash tax rate would be approximately 5% to 7% of operating income or $120 million to $170 million at current strip pricing increasing to the low 20% range in <unk>.
2025, and beyond which is fully captured in our cumulative free cash flow outlook.
Turning to capital allocation, we repurchased almost 6 million shares during the first quarter and have retired a total of more than 20 million shares under our buyback authorization at an average price of roughly $30 per share.
Our buyback strategy is opportunistic in nature as we seek to maximize the return generated for investors and we are pleased with our execution to date as we have generated the best buy back return among U S peer group.
We have also retired $210 million of debt principal during the quarter and average price of 96% of par taking our total debt principal retired to $1 1 billion since initiating our capital return framework.
This focus on debt retirement has driven our net leverage down a full turn over the past year, highlighting our commitment to a bulletproof balance sheet.
Looking ahead, our cash position affords us tremendous flexibility as it relates to financing the cash portion of the pending <unk> acquisition as we work constructively with the FTC and approach deal closing, we plan to maintain cash on hand to effectively pre fund a portion of our expected debt Paydown post deal close.
We will also look for opportunities to buy back additional stock post deal close, especially in light of the value accretion and the cost structure improvements that tug Hill and Xel assets will bring to EQT.
As Toby mentioned, we see greater than $12 billion of cumulative free cash flow from 2023 through 2027 at todays lower strip, even before factoring in the benefits of the pending Tokyo acquisition, leaving us with plenty of firepower to fully achieve and exceed our debt retirement goal and our equity buyback authorization.
I'll now turn the call back over to Toby for some concluding remarks. Thanks.
Thanks, Dave to conclude today's prepared remarks, I want to reiterate a few key points.
One first quarter results were robust across the board at EQT underscored by strong operational efficiencies lower than expected capital spending and higher price realizations from our advantage firm transportation portfolio to the solid performance facilitated $774 million of free cash.
Low underscoring our cash generation potential even in a lower natural gas price environment.
Three.
We built upon our track record of thoughtful opportunistic capital returns during the quarter with nearly $550 million of returns via share repurchases debt retirement, and our base dividend.
For our commitment to a bullet proof balance sheet is evident as net debt declined by roughly $900 million during the quarter and we exited Q1 with over $2 $1 billion of.
Cash on hand, and finally, the current natural gas macro environment is giving us even greater confidence in our differentiated corporate strategy underpinned by efficient large scale combo development, a disciplined M&A focus on low cost assets are risk adjusted hedging strategy and opportunistic capital returns.
Now like to open the call to questions.
As a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now from the parents asked a question. Please ensure your headsets to Lee of putting in a muted Luckily stoffel up I wanted to ask a question today.
And our first question comes from Aaron <unk> from JP Morgan. Your line is open. Please go ahead.
Yes. Good morning, My first question regards the differential guide.
You guys reduced your full year differential guide relative to the to the fourth Q press release by about 15 cents.
Per Mcf, which obviously is nearly $300 million tailwind to cash flow. So I was wondering if you could talk about what <unk>.
Actions you've taken.
To support the lower or the narrower differentials that we did see that you have a little bit more.
Takeaway to the Midwest and Gulf Coast.
Can you help us think about how much of that.
Lower differential is related to the FTE versus maybe some basis hedges that you've set up and what is the potential impact beyond.
This year as we think about longer term differentials for EQT.
Yes, so it's a great great question Arun So we've added about 500 Bcf.
I'm, sorry, 500 million a day of ft capacity over the last 18 months.
That mostly to the Midwest and some to the Gulf Coast. These are definitely higher value regions that give us exposure to.
Improve the.
Realizations so.
And we continue to expect to add more this year and make that better. So that was definitely a piece of it the other piece of it was.
Was our hedging strategy and how we hedge certain areas and leave certain areas open and three was a very strong region for us this quarter.
As as nuclear facility in New York, one offline, we're seeing higher and higher values up in that <unk> area as.
Winter shows up so winter is a very positive and three area.
And then the third piece is as natural gas Nymex prices come down our local basis narrows as the.
The correlation is about 80% to 85%. So Nymex goes up our basis widens name has come down a basis narrow. So those are the three impacts of which I'd say the first two we'll probably long lasting and will improve keep doing it and the last one is going to be obviously subject to what not.
Prices do.
Great and my follow up is for Tobey Tobey.
It's been just a little bit over a year I think you announced your unleash LNG initiative at Cerro week last year, but I was wondering if you could maybe talk about.
Some of the wins do you think you have maybe some of the things that haven't developed as quickly as you'd like I mean, we do note that.
We do have now 10 Bcf a day or so of projects.
Which have been <unk>. So there is going to be a lot more demand for.
Feed gas for LNG, but I wonder if you can give us a sense after a year some of your thoughts on just the overall initiatives.
Yes.
Yes, Arun, let's let's look at where People's heads are at around the world when Theyre thinking about energy I think there is a couple of classes where people sets her at.
We've got some people that still have their heads in the sand thinking.
Thinking that.
Focusing on the United States and fixing emissions here is going to somehow solve the global emissions issue that they're concerned about they need to pick their head up we've got other people that have their heads in the clouds and thinking that.
Some of these solutions that are being proposed.
Physics and are only addressing one part of the energy ecosystem.
And there may be a little bit too optimistic what we need is people to have a level head.
Talking about deploying proven scalable truly sustainable solutions like unleash U S. LNG that will have the biggest impact on lowering global emissions that will have the biggest impact on providing more energy security to the world now I'm excited about where the world has moved we've moved away from a world.
That is a sum of the above approach towards energy only solar only wind we have seen that strategy play out in Europe and the world has taken notice.
That may not be the best solution and it may not be capable solution.
So the world has moved back towards a more realistic a more practical approach in all of the above approach towards energy, that's where unleash U S. LNG sips, but if we want to meet the environmental ambitions and the timeline needed to get there if we want to accelerate pulling the 3 billion.
And people around the world that live in energy poverty, if we want to protect the 60% of Americans, who live paycheck to paycheck, we need to move from an all of the above approach to energy to our best of the above approach towards energy and while the world certainly.
I think it is.
Isn't capable right now on determining what is the best source of energy one of the things that we're excited about over the last year is we've been successful in defining the criteria at which energy will be graded upon and those criteria are cheap reliable and claim and clean.
And one of the seems to be universally accepted as the three main criteria and we're seeing actions with the administration Secretary Granholm supporting pipelines supporting MVP and in the closing paragraph offer letter says that energy needs to be affordable reliable and clean so.
We are very excited about the progress. We've made there is still a lot of work left to do I think permit reform is inevitable. Our energy ecosystem is maxed out pipelines are full refineries are running at maximum capacity.
And without that extra flexibility, we are at risk of a major event to throw us back into another energy crisis that event can be whether we see utilities in new England, writing letters to the president, saying that theyre concerned if they experienced a mild.
Cold winter, how they will deal with that it could be a cyber event, we saw what happened with colonial pipeline it could be another geopolitical events.
In my opinion it is.
If one of these events happens, it's when and we need to build up our industrial energy capacity. So that we can deal with these events when they take place and.
So that's one of the reasons why we believe <unk> reform is inevitable I think people understand where we're at and what we need to do and we're excited about helping lead the conversation going forward.
Thanks Tobey.
Thanks, Ron.
The next question comes from Matt <unk> from Goldman Sachs. Your line is open. Please go ahead.
Hi, good morning, and thank you for taking my questions.
My first question was on the.
New plants on the outlook.
Touching on the natural gas macro outlook I was wondering if you can give any color in terms of like what level would it look to adjust your completion activity and any color you can provide on your choke management plans.
So we will continue to measure.
The current commodity price I think default plan for EQT is to continue a steady pace operationally, even given what we see in the the commodity outlook.
We have the luxury of keeping a steadier and steadier plan because of the fact that we are the low cost operator.
And so we will be able to capture some of the efficiencies that come along with.
With that steady activity plan as far as production is concerned.
If we see local prices get below the cost it takes for us to produce then youre going to see is curtailed volumes.
So that will be a game time decision and we'll watch we'll watch how the setup continues to evolve and operate our business accordingly.
And I'll just add.
Due to the water line issue last year. Our production is not is not as below maintenance level normally by we'll call it 2% to 3% already so we've actually contributed I would say are our share a little bit of the of the reduction in gas to help balance the market.
As well.
Got you that makes sense.
And then I guess motor for the longer term question as you highlighted in slide 29, we are probably going to be enough gas price environment going forward.
Given you have not baked a gas shortage capacity here in the U S. Even as demand has grown.
Would love to revisit your thoughts around.
On the optimal long term leverage.
And also on your hedging levels acknowledging that obviously the free cash flow breakeven is low and it's probably going to even reduce going forward.
Yes, it's a great question because you're right.
With with lack of coal fired generation is baseload.
With some nuclear coming offline and then.
Replacing it with gas and renewables youre going to have more and more volatility going forward and so as a producer how do you handle that one you have to have very very strong balance sheet. So having investment grade having one times leverage maybe over time, we will build up cash as well so our net leverage might even below that.
At one times. The second is you have to have.
You have to have the low cost structure right. So if you notice we've taken our cost structure down from we'll call. It $2 85 to 290 down into the 200 <unk> right over time, so very important to be a low cost producer in a commodity business and then third is we are using our hedging strategy with with.
Collars.
If we do something on the LNG front, we will do suffer with collars. So we'll try to manage that volatility and so I think that's the three ways, we'll do it and I would say the fourth way is probably also to have very low to no emissions because that means the end market demand. We will stay very strong for your product on a relative basis.
Okay.
Okay.
That's very helpful. Thank you.
Youre welcome.
The next question comes from John <unk> from Bank of America. John Your line is open. Please go ahead.
Hey, good morning, and thank you for taking our questions apologies for the sirens in the background here it sounds like something is going on.
Our first question is related again to the <unk> sale midstream acquisition.
It looks like there is still suggesting those are at a close around mid year.
It sounds at that time, we'll have potentially some sort of update the guidance.
Just sort of thinking about that could you remind us what is included in the 80 plus million of synergies that you had initially as suggested.
And at this point in time, where do you see potential upside versus that.
Sure so the $80 million in synergies that we identified.
Primarily came from.
Some midstream synergies connecting or building some pipelines that connect our asset base from Ohio, West, Virginia and Pennsylvania.
Other synergy that's fairly large is connecting our water systems.
So there'll be a synergy there.
I'd say all of these things when we look at the synergies we tried to be really practical and outlining what those are those will be additive to the accretion numbers that we put out and given the.
The fact that these are largely infrastructure related theyre typically lower risk in nature. Some of the upsides that we look at we have a track record of improving our operations on the assets that that we ultimately inherit our drilling team has a really great example, look at the drilling performance that we the uplift we've seen in <unk>.
<unk> on the <unk> acquisition, we do think there is an opportunity for us to repeat that we've got a very strong drilling team. So.
Those will be some of the upside to that and when we look at the $80 million of synergies how does that compare to the 15th.
That the <unk> transaction will.
Impacted by lowering our free cash flow breakeven these $80 million would be an additional <unk> on top of that 15, just shows you the impact of adding this asset under our belt.
Very impactful and lowering our costs.
So just to be clear does combo development factor into the synergies.
Combo development does factor into the synergies.
The dual development also will take place I'd say the only other logistical.
Impact that will will present itself as the frac activity, that's taking place on the telco assets will become another location for our water team to use for recycling.
And water recycling is a big needle mover on efficiency gains our water recycling team as our water recycling rates have gone from 80% to over 90% and we're going to continue to focus on increasing our water recycle rates in the <unk>.
Assets will give us a little bit more flexibility on how to how to achieve that.
Appreciate it and then wanted to go back to our rooms earlier question on differentials.
So Dave it sounds like as you said, you're at about $500 million of FTE over the last 18 months.
Could you describe the opportunity set sort of going forward to improve on realizations going forward at this point I mean, what is how do you think about available ft coming up what is the opportunity set there.
To improve our realizations at this point.
Yes, so I would just say there are there are other producers in the basin that are letting ft go.
And so as that comes available, we'll I'll kick it off.
I don't want to get too specific because obviously, we want to execute on first and then we'll talk about it but I would just say there is there are pieces out there over time that we will pick up.
And and continue to grow.
That number and I would just say.
As as producers have less and less inventory in the basin those opportunities to grow.
Alright, Thank you very much for taking our questions.
Youre welcome.
The next question comes from David <unk> from Cowen David Your line is open. Please go ahead.
Thanks, Toby and David and team Thanks for taking my questions today.
Youre welcome perhaps I just wanted to go back on a couple of points that you had already made but if you could provide any color on what your expectation is in terms of crews and rigs, perhaps leaving Appalachia.
Can you give us a sense of magnitude and timing when we might expect to see.
Some incremental softening around the service side as you think about getting into the back half of 'twenty three here.
Sure just just to level set what we've seen we've seen a 10% reduction in rigs that were focused on gas.
It's about 17 rigs have come off.
We expect that that trend to continue down.
And we're also looking at some of the commentary the big focus really needs to be on the completion activity and from the earnings with Halliburton next year Liberty. They are signaling that they're seeing a mobilization of frac crews moving away from gas towards oil so that will be something else that we're looking at throughout.
The course of the year in addition to the rig reductions.
Yes, and I would just say that.
Okay.
I would say.
Logistics items like sand hauling.
Steel those are things that we're looking at probably in the second half of the year, So probably soften and.
But we obviously didnt put that into our numbers, because we need to see it happen before.
Make that move.
You brought up I think if there are some ongoing headwinds here before we get to a lot of the LNG egress that comes on in 'twenty, four and obviously the <unk>.
Coal retirements looking for some displaced guest there.
How do you think about managing short.
Short term curtailment profile and you highlight at a corporate level now your free cash breakeven. This year are above 65 with the benefit of the hedge book.
Do you think about curtailing things at a corporate level earlier is just still calculated at a field level sort of an individual area or pad basis.
Yes, we look at it at a field level.
We look at it both but.
<unk>.
We could tell things.
I'd say in moments in time, we don't really talk about it much so there might be a weekend here, we can there, but when we want to do more of a broader larger then we'll look at we'll look at the overall rates of return will look at the forward curve and.
And make a decision about all we can we create value by moving gas into the future as opposed to keeping it and keeping it producing today so.
You know we've shut in production in 2020 couple of times, but we also shut in production in 'twenty, one that we didnt really talk much about those are shorter term in nature. So we will do it both field and corporate.
I appreciate that David if I could just ask a little bit more on just amongst question earlier around the hedge book.
24 is kind of sitting in and around the area, where you guys had hedged out for 'twenty. Three you don't have much hedge volumes in 24 now.
How do you think about that dynamic just given the fact that your realizations could look pretty attractive. If you hedged 24 at this point is that more a sort of a commentary a reflection on your confidence in hitting deleveraging goals this year and requiring less of a hedge profile next year or is it more of taking this wait and see.
What ultimately might be a volatile spike for for the 2004 curve.
Well, when we hedge and we use we use collars okay. We we.
We like to see SKU.
When we do that and so the best times to add colors is when you have an upward movement in gas.
If we wanted to do swaps, which we could do in.
And lock in some of this and protect some of the 2024 picture, but what we're also seeing is we're seeing activity slowing in the gas side, we're seeing activity starting to slow on the coal side and we're heading into the summer months here, which is a catalyst and we're also seeing some incremental.
<unk>.
LNG come on in the first quarter of next year with Golden pass So I think.
The worries about.
George levels getting to four Tcf of $4. One Tcf one we don't think it's going to get there I think youre going to see it come in short of that and then the second is if you think about storage even at four Tcf.
That's basically 30 days of cover which if you understand the commodity business. I know you do you really need 60 days to really provide any buffer and a peak demand periods. So we see if we get normal winter.
You could see spiking gas.
And you really need about 400 bcf of incremental storage in.
In 2024 to be able to support that incremental LNG, that's coming online in 'twenty four so I think we're seeing a very positive set up here in the big negative could be a summer doesn't show up and where does it show up and Thats why we like the hedge is that manage those risks. So we're going to try to figure out the right time to jump in and add those hedges and <unk>.
To derisk it.
But we see a lot of moving parts, both positive or negative and trying to make sure that we get from a timing perspective, and how we hedged.
Right.
Thanks for additional color David I appreciate it guys.
You're welcome.
The next question comes from Bertrand <unk> from <unk>.
Your line is open. Please go ahead.
Good morning, guys.
Touched on this briefly but could you talk about your current volumes that we're able to get down to the Gulf Coast I see the 28% you have on slide 20.
But I wasn't sure if some of that was financial exposure and maybe not actual volumes and then maybe how youre thinking about your options to increase takeaway specifically to the Gulf coast.
Are you looking to do something similar to that 200, you picked up last year or are there are you comfortable with your mix or are you looking at M&A or midstream partnerships.
Yes, so the.
Volume is down to the Gulf Thats, all physical that's not financial.
So.
And we are looking to add more over time and there is more pieces that will come up over time.
It's very episodic as you can imagine so we will look to continue to grow the ft position to do all the higher valued areas, including the golf and.
And I think it's <unk>.
Important to note that as you see a lot of volume growth down in that area.
It's important to have.
Hedging will play more of a role in the Gulf Coast as Haynesville tries to grow and Permian trials of growth. So you need to have Gulf coast and hedging is.
As a strategy now.
Once you get tied up into the LNG market.
Then that will actually alleviate some of the need to hedge basis down there too. So theres a lot of things that you need to do to manage the complexity down there.
Gotcha very helpful and then.
Maybe you could you talk about the allocation of free cash flow in future periods. If we see a significant call on on gas prices from LNG demand.
Do do buybacks compete with acceleration do you look at them independently or do you compare them on kind of an IRR level or is it maybe you guys have an internal in AB on your company and if your if your shares trade below or above that's how you decide what activity level to do.
Well right now until we have a call.
LNG off the east coast were going to be running in a maintenance capital perspective. So right now the buybacks are competing probably more with our debt retirement, and maybe a little bit on the margin with dividend.
If we were to get access to east coast, LNG, and and be able to grow which we're talking well called several years into the future than it will be it'll be a rate of return exercise and we will have a view of what we think our NAV.
We'll call it mid cycle price and then we'll compare it against.
The value, we can get to lock in that growth with LNG pricing.
Got you.
Okay.
Great. Thank you.
The next question comes from Harry Mateer from Barclays. Your line is open. Please go ahead.
Yes.
Thanks, Good morning.
Circling back to tug Hill, the bonds issued last year had some SLR conditions in them linked to a deal closing by June 30th.
I appreciate you still think youre on track to close by mid year, but clearly it's going to be a little bit closer to that date than you originally envisioned.
So Dave maybe you can talk a bit about how you're thinking through those mechanics, and what your contingency as closings slipped last June .
Yes, so I think if you listen to the comments, we made we purposely made the comment that we're sitting with a lot of cash and we have the term loan extension that we just did.
We effectively don't need any of the bonds, if we crossover into past June 30.
Got it Okay and then my follow up there is just given the strong start to free cash flow. This year, which are which are preference actually be to have even more short term pre payable bank debt and the financing mix.
Than you originally envisioned just to provide even more short term debt reduction or online.
We'll think about that that's more of a I'll call it.
Maturity management exercise. So that's something we'll think about as we get closer to mid.
Mid year.
Okay. Thanks.
Thanks very much.
Welcome.
The next question is from Paul Diamond from Citi. Please go ahead your line's open.
Thank you and good morning, all thanks for taking my call.
Just a quick circle back and given the kind of looking beyond 2023, given structural takeaway constraints.
Do you guys think about opportunities for in basin growth, whether that's through industrial or other means.
Yeah.
You're talking about the demand growth are you talking about us growing production.
Demand growth in basin.
Yes so.
You will have coal retirements as part of that.
As you know the shell crackers come on as well.
And.
And I would say.
Probably in the neighborhood of one to maybe two Bcf per day over the next several years is probably a good sort of ballpark.
Number.
Understood. Thanks, and just kind of a more 30000 foot question as you look kind of beyond plug here on the M&A front should we think about your guys' potential use of any cash flow with a longer term still focusing on costs or will any of those.
Any of those.
Gold kind of shift whether it's inventory or slowing production year. How do you guys think about that kind of be on Tokyo in 'twenty four and beyond.
On an M&A basis, our strategy will stay the same obviously, our commitment to making sure that the financial accretion is there, but the differentiating aspect is looking for opportunities that will lower our cost structure.
And the new dynamic.
Is really.
The competition is competing with.
The value from buying back our own stock. So I mean that ultimately is going to be the.
The thing that changes that given where our stock trades, but we're going to stay committed with this this up.
<unk> that we've laid out.
Great a lot of value and we'll stay disciplined.
Understood. Thanks for your time.
Thank you.
Okay.
The next question comes from Noel Parks from Tuohy Brothers. Your line is open. Please go ahead.
Hi, good morning.
Good morning, good morning.
I just wanted to.
Talk a bit about.
When we're thinking about the expansion of.
Nat gas into.
Industrial uses micro grid uses and so forth.
Have in mind your.
Your project with <unk>.
Bloom energy that.
It's been underway for a while now.
Hi.
And a lot of these.
Of.
Installations.
What.
It becomes evident pretty quickly is the whole sort of grid integration type of issues that can come up.
Especially when you are looking to sort of.
Resiliency type.
Type issues and.
I was just wondering.
In the sort of MFS management energy management system <unk>.
Software technology market I'm hearing more and more about about that being a focus as people look at projects I'm. Just wondering is that something that you could.
Potentially see yourself, making an investment in service software entry integration software.
Is that something that you can pick yourself doing under the EQT umbrella.
For us we do a very big supporters of electrify the world.
Doing that is going to present a lot of challenges that you mentioned.
The resiliency of the grids are they capable of handling extra load.
Presents some serious problems.
Thank you look at and see what happened with California, where they are.
Are going are going to ban.
Ice engines, and then a week later.
Tell their citizens to not plug in their electric vehicles, a night to charge them.
Presenting some big change.
So they are asking to present, some big opportunities one of the investments that we've made on our new ventures front has been an investment in a company that is going to address the behind the grid.
Power generation company called what fuel cells.
Is creating a base.
Basically a fuel cell that runs off natural gas and generate power for.
The size of a microwave can power. Your house. These are the type of solutions that are going to strengthen our grid.
But it's going to be the decentralized smaller smaller scale opportunities that will exist then.
Sure.
At price points that.
Retail consumers can get into so that's sort of where we're looking at and that falls into our promoting natural gas demand.
While supporting the electrification payments taking place.
Great. Thanks.
Not something <unk> heard it before so it's interesting.
And just.
Taking another stab at sort of the macro picture, if we look at sort of this.
Incredibly volatile year, we've had sort of spurred off by Russia, Ukraine, and then sort of the.
Downward move we saw on weather.
Yes.
Do you think that.
Our.
The thought for a long time was that LNG and that export demand if anything might sort of contain volatility a bit but I'm wondering if.
It may be.
<unk> is that we're going to see from geopolitical pressures.
Seasonal variances.
Is it conceivable that you think that we're headed towards maybe a permanent level of this sort of volatility.
I looked back over the past year, Theres, maybe only one or two months that havent seen something like that $2 swing intra month on pricing so.
I guess I was just interested in your thoughts on it.
Is this the new normal we're going to get used to or do you look at the past year has been more than an aberration that will get that will indeed get smoothed out by LNG.
Yes, so we're in a world where natural gas is becoming a global commodity and what happens in the world will influence prices here in America. So.
That could introduce more volatility, but we have the opportunity to reduce the volatility and provide more stable lower prices.
For Americans and also for the World.
Our ability to export natural gas our potential is here in this countries 60 Bcf a day is what we think we have the production potential.
To put that amount to bring that amount of energy into the world put it on the water and provide energy security for the world.
That amount of energy is is equivalent to 10 million barrels a day.
It's equivalent to adding a Saudi Arabia of clean energy to the world stage, that's going to be a decarbonising force and exports need surplus and surplus means less volatility stores levels will stay.
Fuller and the.
The commodities I think ultimately will be underpinned and the economics to the people participating in LNG.
We will be will be set with long term contracts. So.
Sure.
The certainty on pricing and the economics of the of the investments that we're making will be will be shored up. So we think it's a tremendous opportunity the world will be volatility, we do not need to accept that we can respond in America and energy producers like EQT are the key to reducing the volatility.
Yeah, and I'd, just say, we need more storage capacity and we need more pipelines to be able to do it because you've taken coal fired generation, which is base load offline.
And don't replace it with the ability to add more.
Baseload kind of fuel.
Youre going to increased volatility.
Right.
Thanks, a lot.
You got it.
The next question comes from Josh Silverstein from UBS. Your line is open. Please go ahead.
Great. Thanks, Good morning, Thanks for sneaking me in here.
As mentioned some flexibility in the program.
For this year, obviously, depending on price.
Elaborate a little bit more what that might mean would you reduce rigs would you just buildup dux for next year thoughts and any shut ins.
Just curious.
What will you guys would think about as far as flexing activity.
Yes.
Just the simple way to think about it as EQT is going to continue building our production capacity.
Whether we deliver that production capacity into the market.
B and at what levels will be determined by the price that were receiving for the product. So that means rigs are going to continue rigs are going to continue to roll.
Roll forward the development plans same thing with Frac crews, but.
Whether we put the production into the into the market will be something that we determined at the time.
Where those where that decision we've made.
Yes, I mean, we're not running 15 rigs are running too.
Put into perspective.
So we don't have a lot of it.
Cutting 50% of our rigs would be.
More damaging to us we can manage the production in other ways, if we add to it.
Gotcha.
You guys had enrolled some 2022 capital into this year as well so I wasn't sure.
And then just.
Another question on free cash flow allocation Europe , you extended the thoughts on debt reduction and buyback out obviously because of the delay in closing the Tokyo transaction, but at a relative to your targets you have about $2 $9 billion left in debt reduction of $1 4 billion left in the buyback.
So kind of a two to one ratio there how do you think about the allocation of wanted to hit to hit those targets.
Mostly dependent on the deal, but just as far as how youre thinking about the wanted to tackle both of those.
Yes. So we are we're actually further along on the debt buyback because the amount of free cash flow, we did generate and so I think.
We could see ourselves getting to target.
Somewhere around midyear next year.
That gives us flexibility to buy back stock as well.
So.
I'd say Q1 is probably still a good ratio and then once we hit our debt targets.
We can then.
Effectively change that ratio much more equity if you want to.
<unk>.
We're going to be opportunistic right, but we have we will have a lot of flexibility and then just beyond that you would think about it we really only allocated about a third of our free cash flow.
So you think about that as a longer term.
How do we how do we deploy that capital again that'll be it.
Thanks, guys sitting in my seat role to figure out how to allocate capital properly.
Thanks, guys and David on that Scott is.
Going to be leveraging the capital allocation framework and you put in place the moderate hedging strategy put in place. So there'll be a lot of continuity and the strategic decisions that are made in this organization.
Okay.
This conjunction with good utilization so complex of the management team.
Remarks.
Thanks for joining our call today.
Thanks for joining the call today, we are in a world that is struggling with energy security, it's been compromised and the ambitions to look to lower global emissions has never been stronger Fortunately EQT as a company that provides energy security to Americans in the world and has the capability of significantly lower in global emissions.
By using our natural gas to replace coal. So we're excited about the opportunity set in front of us and we will keep our heads down executing on our business.
Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.