Q2 2023 EQT Corp Earnings Call
Thank you for standing by at this time I would like to welcome everyone to be EQT Q2, 'twenty twenty-three results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time.
Simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Cameron Horowitz managing director Investor Relations and strategy you May begin your conference.
Good morning, and thank you for joining our second quarter 2023 results Conference call with me today are Toby Rice, President and Chief Executive Officer, Jeremy <unk> newly appointed Chief Financial Officer, and David Khani, outgoing Chief Financial Officer.
The team 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 a replay for today's call will be available on our website beginning this evening.
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 factors described in yesterday's earnings release, and our Investor presentation. 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.
<unk> 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 before speaking to the second quarter results I want to say, thank you again to Dave for being a great colleague and friend over the past three years your knowledge and experience during a unique time in Eqt's history combined with a thoughtful approach in heart made you a favorite of all who had the pleasure of working alongside you I want to thank you for your tremendous.
<unk> contributions to EQT and we're excited to see your continued success into the next phase of your life.
I also want to introduce Jeremy <unk>, who has taken the reins from Dave as our new Chief Financial Officer, Jeremy joined EQT in 2021, as the EVP of corporate development and has extensive experience in strategic decision, making investment management capital allocation M&A and transaction execution from his time at EQT.
In previous roles at Blackstone, and as an investment banker, Jeremy strategic value oriented mindset and deep understanding of our business and still great confidence that he will continue to drive value creation strengthen our balance sheet and ensure the realization of our long term vision.
His exceptional leadership skills and unwavering focus on value creation make him the ideal candidate to steer EQT toward continued success.
<unk> proven track record and dedication to leading purpose driven teams make him an invaluable asset to our executive group and we look forward to the meaningful impact and contributions he will undoubtedly make in his new role.
Now turning to Q2 results our operations teams built upon the momentum we achieved in the first quarter with notable execution on both drilling and completions as shown on slide six of our Investor presentation. Our drilling team recently set an EQT record by drilling 12318 feet in 24 hours.
On our <unk> eight H well in Greene County, and followed this up setting a new world record by drilling 18200 feet and 48 hours on the same run.
This is not just one off execution. However, as we recently ran a benchmarking exercise that shows EQT is consistently achieving best in class drilling results. Specifically, we found that Eqt's recent southwest Appalachia wells were drilled at a rate of penetration greater than 60% faster than peers, which.
Is that even with materially longer laterals, our average spud to TD days are 20% less than nearby operators the.
To further put this point in context, one horizontal EQT rig can drill roughly 300000 more lateral feet per year relative to our peer average which is why we can maintain greater than five bcf per day of net production running just two to three horizontal rigs a few.
Contributing factors to this performance include diligent and landing zone targeting best in class Geo steering and innovative use of rotary <unk> tools, it's all about people planning the right equipment and execution.
Turning to completions slide seven shows our team replicated the solid efficiency gains achieved in Q1 with first half 2023, frac crews pumping hours up roughly 20% year over year and in line with peak levels experienced in early 2021.
Not to be outdone by our drilling performance, our completions group debt two records of their own in Q2.
Our team completed and drove out 20818 feet of lateral on our Michael for H, well, which at nearly four miles is one of the longest completed laterals in the history of U S shale development and an internal EQT record our completions team also beat our previously set World Records during the.
By drilling out 262, Frac plugs with a single roller cone bit which was 90% above the prior peer record.
I want to give a big shout out to both our drilling and completions teams with the excellent performance and continuing to push the envelope when it comes to achieving peak performance. This step.
Heller execution allowed us to achieve the midpoint of second quarter production guidance, even in the face of lower than expected liquids volumes from downtime at the shell ethane cracker and fewer than expected non operated pills, which negatively impacted our production by a combined 12 Bcf a relative to our forecast after a challenging 2020.
Two environment, where operations performance was plagued by third party issues. Our teams have resumed peak execution driving best in class performance.
The highlight of the quarter was low which came in at just eight per Mcf and averaged seven per Mcf in the first half of the year, a contributing factor to Eqt's peer leading LOE is our ability to efficiently handle water, which speaks to the benefits from the west Virginia water system that we've invested capital into building over the past.
For years as a reminder, our west Virginia water system. Currently comprises 28 miles of installed water pipe and 250000 barrels of water storage alongside the low benefits our percentage of produced water recycled continues to climb as we target 90% this year up from roughly 70%.
In 2020.
Our West Virginia water system is an example of our ability to invest capital into projects that have strong risk adjusted rates of return and add structural resiliency into our free cash flow generation.
Specifically, we have invested $80 million into our west Virginia water system to date and have realized a $20 million of associated annualized cost savings implying this investment is generating a highly attractive 25% free cash flow yield. We are currently finalizing plans for similar projects that will facilitate water connectivity between our western.
And Pennsylvania assets, which should provide further resiliency and LOE reduction opportunities moving forward.
Lastly, we retired $800 million of incremental debt during the second quarter, taking another material step forward towards achieving our balance sheet objectives.
We have now retired a total of $1 $9 billion of debt since initiating our shareholder return framework in late 2021, which has driven a meaningful reduction in our leverage and was a key enabler of achieving our investment grade credit ratings moving forward, we will continue to prioritize debt paydown until achieving our leverage targets as of <unk>.
<unk> balance sheet ensures that EQT and maximize value creation through all parts of the commodity cycle and provide investors the best risk adjusted exposure to natural gas.
Turning to LNG as highlighted in our press release, we recently signed an HOA with Lake Charles LNG to supply 1 million ton per annum or 135 million cubic feet per day.
Under a 15 year tolling agreement.
Deal aligns with our strategy of allocating a portion of the one two bcf per day, we have covered via F T to the Gulf.
Two international markets and gives us the flexibility to sell our gas directly to end users globally. We have spent the last year and a half studying the nuances of LNG export opportunities and believe the strategy. We are pursuing provides the best combination of upside exposure with downside risk mitigation.
Relative to the netback structures that are commonly being signed EQT is pursuing a more integrated approach with direct connectivity to end users of our gas. This strategy allows us to creatively structured deals with downside price protection obtain visibility into global downstream markets and interact with a wide array of potential customers.
We plan to pursue signing one or more sba's with prospective international buyers and have additional opportunities to increase our tolling exposure.
We will remain measured in our approach as we ensure the best risk adjusted outcomes for EQT.
As America's largest natural gas producer, we have played a critical role in providing energy security to the United States, while driving significant emissions reductions vehicle displacement or scale peer leading inventory depth and environmental attributes uniquely position us to facilitate these objectives, both domestically and abroad and we are.
Excited to begin unleashing eqt's reliable low emissions natural gas on the global stage.
Turning to our recently released ESG report, we received multiple accolades highlighting our ESG leadership over the past year and.
<unk> made continued material progress toward our goal of net zero scope, one and scope two emissions by 2025. Some of these accolades include being just one of 14 upstream companies globally to achieve the Un's <unk> two point out gold standard receiving an a grade rating from <unk>.
For our peer leading methane intensity, increasing our MSCI rating to double a reflecting our ESG risk mitigation actions and being named one of the top workplaces in the U S. <unk> for the third consecutive year.
Looking specifically at emissions, our 2022 scope, one and two production segment Ghd emissions totaled just 433000 metric tons, which was 20% lower year over year and 50% below 2018 levels prior to new management, taking over at EQT.
It's worth noting that the bulk of our nomadic device replacement was completed in the second half of 2022. So 2023 emissions should see a further benefit from this initiative. We expect the completion of our pneumatics replacement to further lower our methane intensity from 0.038% in 2020 to near <unk>.
Our 2025 target of 0.02% this year.
Which is 90% below the one future 2025 target and makes EQT one of the lowest methane intensity upstream producers on the planet.
Between increasing operational efficiencies and replacing our pneumatics, we've now reduced our absolute emissions to essentially as lowest possible under current technologies from here. We are preparing multiple nature based projects to generate our own carbon offsets that will leverage cutting edge soil probe technology to ensure the quantification of these.
<unk> is accurate and transparent.
These projects will help 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 emissions.
Turning to slide nine of our Investor presentation, we commend the house and Senate for passing the fiscal responsibility Act, which included the approval of the Mountain Valley pipeline and begins to address critical permitting reform components.
We see the completion of MVP is imperative to addressing increasingly unaffordable and insufficient electricity in the southeastern United States, while simultaneously, allowing the region to achieve its climate goals. Its inclusion in this bill shows that permanent reform is not a political bargaining chip, but instead a node.
<unk> recognized by a bi partisan government acting for the good of all Americans, while the recent stay from the fourth circuit Court creates some timing uncertainty, we still expect MVP to enter service by the first half of 2024.
As it relates to EQT are capacity on MVP has limited impact to our free cash flow in the near term assuming current futures strip pricing that said the pipeline brings much needed breathing room to Appalachian infrastructure and should lower high line pressures in certain parts of the field that can in turn lessen the risk of system outages.
Moving forward <unk>.
Longer term the completion of MVP should catalyze multiple southern expansion projects that would bring gas further into the southeast demand centers, where it is critically needed to replace coal fired power generation and meet the region's climate goals.
We believe this will in turn drive better price realizations and materially enhance the value that <unk> brings to EQT over the coming years, while simultaneously lowering energy prices for consumers in the southeast.
I'll conclude with a few comments on our pending <unk> acquisition, while the transaction has taken modestly longer than we anticipate it to close we continue to work constructively with the FTC and expect we will complete the transaction in Q3, as a reminder, <unk> and <unk> midstream bring low risk high quality assets offsetting our exist.
<unk> acreage that should drive an additional 15% decline in our corporate free cash flow breakeven price, providing even greater resiliency to our business moving forward I will now turn the call over to Dave.
Thanks, Tobey, it's bittersweet to be on my final conference call after three and a half amazing years at EQT and over 30 years on Wall Street and in the corporate World.
Honored to have less my Mark on this company and I feel a deep sense of pride in all that we've accomplished in a relatively short period of time.
Since I joined in January of 2020, the stock is essentially quadrupled.
We regain investment grade credit status and.
EQT was added to the S&P 500 index.
Even with this EQT is truly a unique organization on a trajectory that I believe will create tremendous value for years to come which is why I'm excited to remain a long term shareholder in this company.
I'm also thrilled to see Jeremy appointed as <unk> next CFO .
<unk> has exceptional execution capabilities firsthand and I'm extremely confident he is the right person for the job.
Jeremy and I have worked closely together on many aspects of the business, including financial policy capital allocation and hedging.
Which will ensure strategic continuity and a smooth transition of the role.
With that I'd like to say one final banking to all our stakeholders for your support.
And I'll now turn the call over to Jeremy.
Thanks, Dave and good morning, everyone.
I'm extremely excited and grateful to take the reins from Dave as Eqt's next Chief Financial Officer.
Since joining the company in 2021 I've been continually impressed by the depth and quality of Eqt's assets, the company's world class execution capabilities, and the heart Trust and teamwork that flows among our employees.
I believe these attributes materially differentiate EQT in today's energy landscape and set the stage for us to drive meaningful value creation for our shareholders.
Our high level financial strategy will remain consistent with the execution you've come to expect from us over the past several years with a focus on ensuring we always maintain a bullet proof balance sheet continued.
Execution of our value oriented shareholder return framework and thoughtfully investing capital in ways that structurally improve our business.
I am excited to make them, even more impactful contribution to the organization and look forward to engaging in even more dialogue with our shareholders in my new role.
Turning to second quarter results sales volumes were 471 Bcf.
In line with the midpoint of our guidance range, It's Toby highlighted our drilling and completions team saw extremely strong field level execution during the quarter, which allowed us to offset the negative impact of downtime at shell ethane cracker and lower non operated killed.
Proceeded with a broader slowdown in gas directed activity, which combined reduced quarterly net production by 12 Bcf fee relative to our forecast.
Note that we have applied a greater risking to our ethane production forecast going forward to better account for continued operational issues at the Cracker is shell works to bring it fully online.
Our per unit adjusted operating revenues were $2 11.
For <unk> and our total per unit operating costs were towards the low end of our guidance range at $1 37.
Resulting in an operating margin of $75 per Mcf.
Capital expenditures, excluding Noncontrolling interest were $470 million in line with the midpoint of our guidance range.
Adjusted operating cash flow and free cash flow was $341 million and negative $129 million respectively.
We also saw a $96 million working capital benefit driven by declining accounts receivable and lower margin postings, which offset much of the total cash impact from negative free cash flow during the quarter.
Turning to the balance sheet, a strong credit profile and ample liquidity remain core to our operating philosophy, and we will provide access to differentiated value creation opportunities for EQT shareholders moving forward.
Our balance sheet remains very strong with trailing 12 month net leverage exiting the quarter at $1 one time.
Down from one six times a year ago.
We exited the second quarter with $3 5 billion of net debt and $1 2 billion of cash on hand.
As shown on slide 12 of our Investor deck. We further built upon our track record of debt retirement with $800 million of incremental debt retired during the second quarter.
This was comprised of the $300 million tender offer for our six and one 8% 2025 senior notes and the full redemption of our five and five 8% 2025 senior notes.
Since rolling out our shareholder return framework in 2021, we've now retired over one 9 billion of total debt, which is eliminated nearly $90 million of annual interest expense.
Despite the challenging natural gas macro environment. This year, we expect our leverage to remain well in check as we forecast exiting 2023 with a net debt to EBITDA ratio of one three times at current strip, excluding the pending <unk> acquisition.
At the end of the quarter liquidity stood at $4 9 billion comprised of $1 2 billion of cash $2 5 billion of availability under our credit facility and the 125 billion term loan that we have in place for the pending Tokyo acquisition.
Moving to hedging.
Second quarter results highlighted a beneficial position of our 2023 hedge book as we realized $237 million of cash Nymex hedge gains for the quarter inclusive of deferred put premiums.
A recent strip, we expect full year Nymex cash hedge gains of approximately $440 million net of deferred premiums.
Looking into 2024, we opportunistically added to our hedge position to de risk a portion of our expected free cash flow and debt repayment goals. We currently have 30% of our 2024 production hedge with <unk>.
A weighted average floor price of $3 64.
For Nm, Btu, and a weighted average ceiling of $4 14 per btu.
Note, our hedge position is strategically tilted towards the first half of 2024, where we see the most potential downside risks should normal winter weather again not materialize by.
By protecting near term free cash flow and prioritizing our debt repayment goals, we are intentionally creating flexibility to maintain maximum upside price exposure in late 2020 for 2025 and beyond when the natural gas market looks increasingly tight and we believe pricing is asymmetrically skewed to the upside.
While at the same time mitigating downside risk.
As it relates to basis Appalachian differentials have widened for the balance of 2023.
Driven by elevated eastern storage levels, a byproduct of the warm prior winter.
The current into future strip implies more than $1 50 per annum btu differential to Nymex. This fall, which is that price level below cash costs for many producers EQ.
EQT is well positioned here however, as we have roughly 90% of balanced 2023 local volumes covered with basis hedges.
Solidly in the money relative to current strip.
On MVP, we model up first half of 2024 and service date. So acknowledged there can be some risks to the timetable based on the recent activity from the fourth circuit Court.
When MVP does come online higher transmission expense associated with our capacity should be largely offset by a combination of the immediate material step down in our gathering rates and better price realizations, resulting in a negligible impact to eqt's free cash flow in the near term.
However, as Tobi mentioned, we see significant opportunity to move production further into the southeast U S overtime as expansion projects are completed.
This will occur at a time and Gulf coast volume supply in the area shifts more towards satisfying LNG export demand, which will likely contribute to better price realizations into value for our MVP capacity over time.
Turning to the natural gas macro landscape fundamentals are largely playing out as we expected.
As discussed on our last earnings call, we anticipated additional gas directed activity cut.
Given prices fell well below many producers breakeven across the U S.
Activity reductions have played out with 35 gas rigs laid down across the U S. In the second quarter 'twenty two of which were in the high cost Haynesville play and nearly 40% fall from the peak in a very short amount of time.
We expect incremental gastric drops for the rest of 2023, albeit at a much slower pace relative to the last few months.
The large year to date reduction in drilling activity should moderate supply from current levels and help support prices for the balance of 2023 and as we head into 2024.
We also note over 45% oil directed rigs were laid down during the second quarter and oil activity is now roughly 15% below highs.
Late last year.
Further declines in oil directed activity will likely result in associated gas growth underperforming relative to consensus blending additional structural support to natural gas prices in 2024 and 2025.
Another area of significant market support has come from strong gas fired power demand.
Spot natural gas prices and materially weaker than expected wind generation drove approximately three bcf a day of higher natural gas power generation during the second quarter.
Specifically wind generation underperformed expectations by a staggering 20 million megawatt hours.
Most of the shortfall was net by natural gas generation, demonstrating the need and the value of reliable generation to compensate for inherent volatility of renewables.
LNG performance during the quarter remained strong as Europe , and China lifted U S cargoes to refill storage and meet demand from our record breaking heat realized in May and June .
Some of this strength was offset by major maintenance at Sabine pass in June but this has since been completed.
Going ahead, we anticipate six Bcf a day of incremental nameplate LNG capacity online by year end 2025, which should create a significant tailwind for natural gas fundamentals over the next several years.
Turning to oilfield service pricing the rate of change in inflationary pressure has slowed meaningfully over the past several months and we're starting to see leading indicators of potential softening in certain areas.
Recent indications suggest steel casing prices have declined 15% to 20% relative to the recent peak and we should start to see the benefit of this beginning in late Q3, as we deplete our current inventory.
For reference deal associated with casing and wellhead makes up around 10% of our total well costs.
In terms of drilling and completions. We are currently running two horizontal rigs and two to three frac spreads.
Given our focus on consistent execution of our combo development strategy, we lock in the bulk of our rigs and frac spread under long term contracts.
This strategy has paid dividends for us over the past several years as our rates have been consistently below the spot market and the quantity needed is much lower than peers due to our higher efficiencies.
We do see the opportunity for some modest downward pressure on big ticket items as our contracts roll off we're exploring ways to improve our efficiencies that could translate into incremental downward pressure on well cost.
While still too early to predict with precision we preliminarily see the potential for our total well cost to decline by up to 5% year over year in 2024.
Turning to guidance, we are reiterating our 2023 production outlook of 1900 to 2000 Bcf.
Our 2023 capital budget of $1 seven to $1 9 billion, excluding the pending <unk> acquisition and our per unit operating expense and differential ranges.
On slide 33 of our Investor deck, we provide adjusted EBITDA operating cash flow and free cash flow outlook at various natural gas prices for the remainder of 2023.
At recent strip pricing 2023, adjusted EBITDA is expected to be approximately $2 8 billion in 2023 free cash flow is anticipated to be roughly $900 million prior to the impact of our pending acquisition.
As it relates to capital allocation, we are pleased with the execution of our shareholder return framework to date, and we'll continue with our opportunistic all of the above construct moving forward.
As a reminder, since initiating our framework in late 2021, we have retired more than one $9 billion of debt repurchased more than $600 million of stock contain annual base dividend of <unk> 60 per share, which we grew 20% last year relative to our initial dividend.
As it relates to our buyback execution, we believe our opportunistic strategy is generating superior results as our current share price suggests we have generated a weighted average return of <unk>.
31% for our shareholders versus a negative 5% on average for the peer group.
Looking ahead and consistent with our track record investors should expect we will maintain a bias towards debt repayment until we achieve our target of one times leverage at $2 75 per in and Btu natural gas prices.
Which will ensure a bullet proof balance sheet through all parts of the commodity cycle.
This will in turn minimize the downside, while allowing us to limit the need to distinctively hedge and cap, what we expect to be unpredictable asymmetric price movements to the upside in the years ahead.
We will also continue to rigorously assess investment opportunities with strong risk adjusted returns that improve the quality of our business, while compounding cash flow, which is a foundation of sustainable shareholder value creation in any business.
Similar to our West Virginia water system that Toby highlighted earlier.
Our buyback remains a key tool for opportunistic execution at points in the cycle, where we see favorable risk reward potential for generating returns well in excess of our weighted average cost of capital.
And finally sustainable long term base dividend growth will remain a key pillar of our shareholder return strategy moving forward.
I'll close by highlighting slide three of our Investor presentation, which I think elegantly summarizes the value proposition at EQT.
We believe our modern data driven operating model significant scale peer leading inventory quality and depth.
<unk> leadership and low investment grade cost of capital make EQT one of the most compelling investment opportunities in the market today.
However, despite these characteristics and strong relative stock performance recently EQT trades at the highest five year cumulative free cash flow yield as a percentage of enterprise value amongst the gas peers.
Meaning we could buyback more of our enterprise value with organically generated free cash flow at strip pricing.
Interestingly and as illustrated on the left side of slide 11.
Thanks to our relentless focus on achieving the lowest free cash flow breakeven.
At our current stock price EQT shares simultaneously provide among the least downside and a long term $3 gas price scenario.
And the most upside and a $5 gas price scenario again when measured by the next five years of cumulative free cash flow relative to enterprise value.
Whether investors fully appreciate this or not.
Is this cash flow was realized that should drive our equity value higher by definition and we believe this will propel further share price outperformance.
This signals to us the market is only scratching the surface of appreciating EQT strategically advantaged position and high quality assets and I look forward to helping identify and capture significant value for shareholders in my new role moving forward.
Now turn the call back over to Toby for some concluding remarks.
Thanks, Jeremy to conclude today's prepared remarks, I want to reiterate a few key points number one eqt's operational execution has been on point in 2023, with our drilling and completion teams setting multiple internal and World Records during the quarter number two we continue to successfully implement our value oriented.
Capital returns framework with an incremental $800 billion of.
Of debt retired in Q2, taking our cumulative debt retirement to more than one 9 billion.
Late 2021.
Number three our recent HOA for tolling capacity at Lake Charles represents an initial step in progressing our LNG strategy, which seeks to diversify a portion of our production into international markets and achieve the best combination of upside exposure with downside risk mitigation.
And four we strategically added to our 2024 hedge position, which ensures the accelerated achievement of our debt retirement goals, while simultaneously providing shareholders maximum upside exposure to gas prices in late 2020 for 2025 and beyond and lastly number five our 2022 ESG report under <unk>.
<unk>, our peer leading environmental performance with a 20% year over year decline in Eqt's production segment scope, one and two greenhouse gas emissions movie is yet another step closer towards the realization of our ambitious 2025 net zero emissions goal I'd now like to open the call to questions.
To ask a question. Please press star one please limit yourself to one question and one follow up first.
First question is from Umana Chowdhry of Goldman Sachs. Please go ahead. Your line is open.
Thank you and best of luck, Dave and hope to stay in touch.
My first question was around your plans around improving your free cash flow breakeven.
Wanted to get your thoughts on capital efficiency improvement heading into 'twenty 'twenty four given you recently, given you highlighted a drilling and completion efficiency gains and a 5% reduction from deflation also if theres any update on the Nextgen ready design, which you talked about early in the yard.
Sure. So a couple of things that will take place in 'twenty, four we will see a little bit lower activity levels compared to <unk> 23, and that's as a result of just the catch up activity that we added in 'twenty three so that will that will be helpful.
On the operational efficiency side of things.
It's great to see.
The progress that the teams have made there, but really the focus is going to be on service costs.
Inflation reductions that we see so we're being conservative with that low single digits, but we'll update that as the teams continue to procure bids.
And obviously that.
Stepping back bigger picture, we've got tug Hill, which will lower our cost structure and then also as a reminder.
We say it every quarter.
Stepped down or gathering rates will be will be impactful as well so.
Pretty unique in the sense that EQT has some pretty big items that will lower our cost structure going forward I think thats definitely unique and worth pointing out as it relates to the Mark three.
Science campaign that we run we.
We have completed all of the operational execution of that and we are currently in monitoring mode for the impact there.
We have taken some best practices and incorporated that into our well design program and with the monitoring that we have done we have tightened up the controls in our assessment to take these different parameters and make sure that we are applying the best fortunate market conditions.
So it's been some proximate implemented greater awareness on the knobs that we're turning.
And we'll continue to monitor that as we mentioned in the past biggest focus for us determining factor is really going to be where the service cost environment shakes out. So we'll keep everybody updated on that front.
So that's very helpful. Thank you.
Question was on LNG strategy, you've obviously taken the first step towards executing our strategy by signing the HOA agreement with Lake Charles.
Any update on what the end customers are looking for any color on the price exposure, which they're willing to take and their willingness to sign Carlo contracts.
Yes, so at a very high level, what customers are looking for they're looking for energy security and.
While <unk> seen customers around the world.
Build out the infrastructure to receive LNG.
But you've seen customers acquire supply.
That infrastructure, but as long as the supply is tied to index pricing, it's hard to see that energy security.
Which only comes with cost controls and guardrails on pricing. So this is something that we thought was incredibly important we thought it was unique and with this tolling structure that we've put in place. We now have the flexibility to give that energy security to our customers with fixed price collared.
Floors, and ceilings type price controls on the LNG and energy that they are buying so.
We think there'll be tremendous interest and now that we have this tolling capacity, we can really dial up the conversations ultimately leading to a sales and purchase agreement with some of these customers.
Okay. Thank you.
Your next question is from Devin Mcdermott of Morgan Stanley . Please go ahead. Your line is open.
Hey, good morning, Thanks for taking my question and Dave Congrats again on the retirement.
So.
My first one.
Just on Tokyo, and Tobey I'm not sure how much more you can say, but I was wondering if you could.
Talk a little bit about just the high level dialogue with the FTC. The reason for the slight delay here and what gives you confidence in the ability to close this deal here in <unk>.
While conversations have been constructive with the FTC over the past 12 months I would say.
But I think we said that by the middle of this year we'd have.
We would have better insight on where the steel stands and I can tell you today that we have confidence that we will reach resolution with them within the next 30 days.
Okay.
Great.
And then separately on MVP.
That disclosure on it being roughly cash flow neutral.
Helpful. But I was wondering if you could elaborate a bit on some of the moving pieces. There I know you've taken some cash payments upfront for the scheduled rate relief that comes along with that pipe entering service, what's the net remaining rate relief and how should we think about the impact of that piece over the next few years.
Yes, there is a couple of pieces to that.
So when that pipeline comes online and you think about the associated capacity that supports it like hammerhead youll see our rates step up on the transportation side, but at the same time that triggers a gathering rate reduction and will access.
More premium markets and so net net as we've talked about before that should really net the impact out.
I think as you look through the end of the decade and you look at some of the expansion projects that are in play that Williams and others are talking about right now our expectation is that that market. We delivered two through MVP at station 165 will start to trend to trade more like that Transco zone five market. So if you look at what Cal 25 looks like.
And the basis markets today.
Station 165 trades about 40 since back.
In that zone, five market trades at about $1 premium to Nymex and so it's going to be it's going to be an evolution of that market as those downstream projects are built out, but that's what we're looking forward to it.
Early in the years ahead, and I think that capacity the value of it will increase each year that goes by.
Great. Thank you.
Your next question is from Bertrand <unk> of choice for please go ahead. Your line is open.
Hey, Good morning, guys. Just one of your peers have taken the approach that LNG exports will be about 15% to 20% of U S volume. So they want to keep their contribution in that range I just wanted to see if that matched kind of your internal strategy or does the <unk>.
Tolling agreement that you have maybe let you pivot more easily and so you maybe you could go above that percentage.
The way we've talked about this historically is having that one two bcf a day.
Supply into that Gulf coast market today.
We will use a portion of that to to.
To sell into international markets, but we haven't necessarily set any sort of guidance range. Like you described around it I think we will be opportunistic depending on the facility depending on what the market provides us.
Long term I think we'd like to increase capacity to the extent it makes sense, but within.
Proper risk adjusted framework.
Got you and then.
My follow up on the same topic is this kind of two smaller point does.
Does your ability to increase your capacity to the Gulf coast have any impact on maybe the pace of additional LNG deal and then the second part of that is just with a 15 year term on your side did you want to match the end user's agreements to that duration or do you maybe want to do five years here and there.
Add up to that 15 years, thanks, guys.
Yeah on the structure with the sales and purchase agreement, we would like to see parity with what we're doing on the tolling side.
And I would say just whats going to govern the pace for us given the fact that we have ample exposure to the Gulf coast in LNG.
So it's really going to be covered by the customers and if we can execute attractive.
Color type pricing that locks in some pretty favorable returns for us.
Then I think we'll look at continuing the pace and doing more. So these are the conversations that we're going to be we're going to be having over the next 12 months that we have already begun.
And that will that will come back and determined pace and we'll update that you guys along the way.
Sounds good I appreciate it.
Your next question is from Arun <unk> of Jpmorgan Chase. Please go ahead. Your line is open.
Yeah. Good morning, Toby I wanted to get a follow up on your comments on.
Your expectation that you could close.
The deal with tug Hill in next 30 days I mean, do you contemplate any changes to the original agreement.
And so it's one of the senses. If you close in 30 days do you expect that to be consistent with the original terms sign with Tokyo.
Yes, we expect to be closing within 30 days and one of the guiding principles for us as we've gone through this process is to make sure that we preserve the economics of the deal that we signed up and I feel like we're going to be able to deliver that.
And then also preserve the strategic flexibility.
Going forward so.
It's been a long process, but we see the light end of the tunnel and we're going to achieve our original goals.
Great.
My follow up Toby you started the call talking about a lot of efficiency gains on the <unk>.
Drilling and completion side, obviously, you're up about three program.
Which is underway.
Excluding any kind of impacts from from service cost tailwind.
Next year, how should we thinking about capital efficiency of next year's program just given some of the.
The benefits of efficiency gains that you highlighted this morning.
Yes, Arun slide 22 for us really puts the spotlight on capex efficiency over time, and we do anticipate there to be a tick down on our capex intensity.
And I think looking longer term when you get the benefits of tug Hill, you get the benefits of the lower gathering rates.
Overall, corporate breakeven will continue to trend lower.
Great and I also want to pass on my regards to the Dave Good luck in retirement with great working with you all these years.
Thank you.
Your next question is from John Abbott of Bank of America. Please go ahead. Your line is open.
Hey, Thank you very much for taking our questions and the Bofa team wishes you also best of luck in your next adventures.
Tobey as I just told.
Toby first question, it's really.
On West, Virginia, you mentioned other opportunities here.
So like improvements like water infrastructure between West Virginia.
Hey.
Could you characterize.
A number of opportunities that we're talking about too.
How do you see potential cost was the $80 million that you've spent the previous evening and there has been some sort of cost inflation.
And just how quickly would you want to.
Go after these types of opportunities that we're looking at 2024 do you want to see some deflation how should we think about that.
Well I think what's special about West Virginia.
Is the terrain and logistics become very important and so.
To solve it.
Logistics constraints investing in infrastructure is the solution and so you've seen the.
The benefit from the water infrastructure investment that we've done in West Virginia that will continue and we've identified a synergy with the tug Hill acquisition to combine the tug Hill water system with our system that not only is going to expand our produced water network, but also freshwater delivery.
So we're excited about continuing with the progress on the water side and then we're also looking at San infrastructure and really just getting some trans loads closer to the to the to the well locations that should hopefully.
Not just alleviate bottlenecks, but also set the completions teams up to continue to knocking it out of the park and removing sand has been a bottleneck.
That will be.
A constraint on them.
Just given their enhanced operating efficiencies that <unk> been demonstrating down there.
John I think just to add to that from more of a financial perspective too. If you look at that water system. We built out we spent about $80 million doing that and today, that's generating savings of about $20 million a year, so think about that as like a 25% free cash flow yield.
And that's something that it's not like a well the declines it's durable it's got longevity to it. The next 10 to 15 years some of the other projects. We've looked at recently one of which we highlighted when we announced that Tony Hill acquisition.
What was additional pipeline connectivity throughout the basin, we're seeing similar sorts of returns on those projects that had kind of a mid 20% free cash flow yield.
The more projects like that we can find to reinvest capital into.
<unk>.
The more value, we think we can create both through reinvesting in compounding, but also just improving the base quality of the business. So it's something we're focused on we've got the operational teams looking around trying to find more opportunities to reinvest cash flow like that but I mean those are two examples just to make it a little more tangible.
I appreciate it and the second question is on MVP.
Assuming it comes online maybe you can maybe debates and can't necessarily grow into them all at once.
But when you sort of think about that capacity coming on.
What are your thoughts about EQT growing into some of that capacity over time, which you want to maintain market share. How do you think about do you want to just stay flat how do you think about that capacity.
Yes, certainly out of the gate until some of the downstream expansion projects are completed that really create more of that demand pool at that delivered market. We just plan to reallocate volumes that are currently being sold in basin to that MVP capacity.
Okay.
The basin sits today and I think 2023 is a good example, where in basin storage is about 100 Bcf a day above.
Not for the 100 Bcf above normal theres not a lot of headroom, we think MVP coming online will take some of that that froth out of.
Storage and balance the market a little bit more if a if additional infrastructure is built we would love the opportunity to grow into it but where we sit today, it's hard to see that being in the next one to two years.
Appreciate it thank you very much for taking our questions.
Your next question is from Scott Hanold of RBC capital markets. Please go ahead. Your line is open.
Yes. Thanks.
Toby you, obviously have some competence and seem to tug Hill.
And it sounds.
With a lot of the.
Economics and kind of.
Non negotiable that you wanted can you talk about more specifically, though.
Your view on further consolidation within the base and beyond that because I know that was a strategy a.
A few years ago to generate more shareholder value do you see any limitations based on your conversations with the FTC.
Much beyond the Doug he'll deal.
Scott at this time I think we just like to stay focused on getting the deal done with the FTC and we'll we'll look forward to updating you guys on path forward. After we get through this.
Okay, I understand and then on the LNG tolling agreement.
You indicated some of the things that the.
The buyers were interested in getting.
Can you just give a high level view on the way that you're structuring the agreements like where do you see as certain terms of the.
<unk> of reaching those international markets, what kind of bands that you're looking at relative to what you could get in the U S and does that also mitigate the need for you all too.
Hedge those volumes when you when you do have some some coloring on the pricing.
Yeah. So let me answer it this way.
Getting these deals in place is a multi step process finding the HOA is the first step in that.
We look forward to the next steps it comes down to getting a binding agreement in place based on those HOA terms and then following up on that without sales and purchase agreement a collar structure is what comes into play as part of that sales and purchase agreement. So it's a little premature to give too much clarity around that at the time, but but youre right that that is still our intention.
Thank you.
Your next question is from Michael Gallo of Stephens. Please go ahead. Your line is open.
Yes, Thank you and congratulations to both David and Jeremy Jeremy you talked about the 24 hedges you added during the quarter that were weighted to the first half.
Just to take some risk off the table, but wanted to see how you guys are viewing the market in the second half 'twenty four 'twenty five, but I guess it sounds like you.
Would stay lightly hedged there given the incremental LNG capacity is that fair.
Yeah. So there's a couple of dynamics at play and when we look at the market going forward, we try to get a sense for what it is hard to predict price exactly we try to get a sense for where the SKU is so when you look at where storage is today heading into this winter in the first half of 2024, we feel like there is pretty equal upside downside SKU and so that's why you see.
Lean a little bit more into swaps, even though it's something we're generally trying to deemphasize in the past.
Unless we see strong call SKU in the options market, it's hard to feel good about leaning into those.
But really near term because of that we would like to derisk, our debt repayment goals and so as we get towards the back half of 'twenty four and into 2025, where that upside is just so much more asymmetrically skewed, but is not yet reflected in the options market or in the future strip.
We want to remain patient there and hedging more near term allows us to do that.
So look it doesn't mean, we're not going to hedge 2025 at some point, but we think where the market sits today, it's far off from where really it should be.
And you know as you think about how the market might trade as you get into 2024, I think I think most market participants and analysts see that Cal 'twenty five 'twenty six market is getting especially tight as you see that demand ramp for at least a ramp in nameplate capacity of LNG, but the market. Obviously trade. The season ahead, and so I think as you get towards next summer.
The market starts looking at winter $2004 25.
And a lot of that demand ramp unless you have a step change.
Really increase in production at the same time I think the market will look increasingly tight and that will probably start getting reflected next summer and probably a much more asymmetric way.
And so I think we're trying to be patient at this point in time and not be in a position, where we need to really definitively hedge.
And takeaway that upside, which is what I think a lot of our investors are looking for in the market today.
That makes sense. Thank you.
Wanted to ask on if Tokyo does close within the next 30 days is it fair to assume that your second half activity that you've laid out on your legacy properties doesn't change and it looks like I think they are running two rigs right. Now would you expect to just maintain those two rigs into the end of the year.
Yes operational cadence for EQT assets will remain the same.
Our plan with tug assets to continue to maintain activity levels.
I think the high grade opportunities, we'll probably start seeing those hit the schedule, maybe 12 months.
It just takes some time for us to put those set those wheels in motion.
But pretty much in summary, similar plans for the first 12 months and then you could start seeing us.
Optimize the asset base.
Thank you guys.
Your next question is from Josh Silverstein of UBS. Please go ahead. Your line is open.
Yeah. Thanks, Good morning, guys, congrats to Dave as well just on the.
The LNG front I know you were starting to sign some contracts here longer term do you think this leads to a potential stake in an LNG facility.
Can I have the.
The kind of vertical chain so to speak there.
Yes, Josh we've always looked at.
Investing in LNG facilities.
Does the world need EQT to do that right now it seems like there are these projects getting going what the world needs as EQT supply. So we're participating in that front.
So are our price here is really getting exposure to international markets.
If we can do anything on the east coast that would give us exposure to sustainable growth opportunities, that's the real value for us.
So we're not looking to make investments in LNG, but there are there could be opportunities where from a risk mitigation perspective, it could make sense for us to make.
A small investment in LNG facility, but that's sort of how we're viewing it right now.
Yes, I was just wondering if there is an investment to be made maybe it pushes through the lake Charles facility, a little bit faster. So it wasn't a differing from that angle.
No I think just when we looked at several facilities early on we Werent sure. If we needed to make an equity investment to get international pricing and after a lot of.
Discussions we found that we really don't need to do that.
Okay. That's helpful and then.
Jeremy you mentioned.
The free cash flow over the next five years and the ability to start returning capital to shareholders.
You don't have a formal strategy in place right now the share buybacks have gone up and down based on where the commodity prices has been once the <unk> transaction is closed do you foresee you kind of getting towards.
Got it.
A formal 50% kind of split between balance sheet reduction and shareholder returns do you want to hit a certain debt level before you kind of commit to that so im curious how youre thinking about the shareholder return profile going forward.
Yes, so youre right fit really well this deal has been pending our focus has been to be opportunistic tactically, but really really accumulate cash ahead of closing.
So until until closing happens I think you can expect.
To continue doing the same thing after the acquisition closes I think you'll you should really expect until we meet our debt our debt targets to really pursue the same strategy, which is weighted towards debt repayment and then tactically when we see dislocations in the market lean into that lean into that buyback but.
I think the concept of a formulaic programmatic buyback is just a long term strategy is something you'll see us probably shy away from at least near term.
I think we like to be more tactical in how we approach that especially in an industry that is inherently always cyclical both from a macro standpoint, and even a weather driven standpoint, we think there'll be continued opportunities to create outsized value for patient just like we've done to date.
Great. Thanks, guys.
Your next question is from Paul Diamond of Citi. Please go ahead. Your line is open.
Thank you good morning, all and thanks for taking my call just a quick one talking about.
The completion efficiency is up 20% year on year and you also had some pretty strong drilling performance as of late.
Substantially kind of like breaking yourselves away from peers.
I guess the first part of the question is how much more on the bone do you see there is that something we should think of as like step change in the future or more incremental and also as far as like others catch you use that.
We will keep running in place.
GAAP you think you can really maintain.
Yes, the goal for us is to <unk>.
Raise the bar These records show.
What could happen and the potential we have in the Gulf for the operating teams is to is to move that average performance up to peak performance.
So that's the that's the game that we're playing and we're removing any bottlenecks to achieving that peak performance along the way.
Our attitude is that is that peers have the ability to keep up with us and.
This is the fire that keeps us continuing to evolve and look for ways.
To continue raising the bar.
So we're incredibly proud of where we're at but we're always looking to get better and that's really I would say the one of the defining characteristics of our culture is just our ability and the drive to.
Evolve our business.
Understood Thanks for clarity.
Okay.
Okay.
Your next question is from Jeffrey <unk> of TBH. Please go ahead. Your line is open.
Good morning, everyone and congrats to both chairman and Dave I. Appreciate you all taking my questions. My first one is just a follow up to the water infrastructure commentary that you mentioned I think that was part of the synergies that you highlighted with the deal, but just wanted to get a sense for if any of the savings here from these opportunities will be incremental to that 15% breakeven improvement that Charles highlighted in the past.
<unk>.
Yes, so that 15 since we.
We talked about associated with the deal that's all pre synergies just kind of as a rule of thumb. We don't we don't like to include synergies and you start based guidance. So I think when we announced tug Hill, we were talking about $80 million a year of total synergies.
We haven't been able to refine that just due to some gun jumping laws around.
Just this FTC process, but.
That's all incremental upside to the guidance, we've given that 15 and even that rate of return that we talked about on that existing West, Virginia, West Virginia water system, we already built.
Okay, Great and then maybe going back to MVP and potential infrastructure downstream I imagine DNA in particular on that slide will be relatively important from a pricing standpoint, but it'd be great to get any thoughts you can share just on the projects that you showed there how youre thinking about the potential impacts to your marketing a regional mix as those get developed.
Yes, we see most of those projects as more of a demand pull back rather than supply push.
So we don't anticipate needing to take out contracted capacity, but those are important for just the long term long term development of that station 165 market.
Hi, Joe.
Your next question is from Noel Parks of Tuohy Brothers. Please go ahead. Your line is open.
Yeah.
Hi, good morning.
I just wanted to.
Go back to the project and swapping out the pneumatic and I just wonder could you give a sense as to what sort of the scale of that that overall cost one.
Back.
It's about $28 million and when you think about it normalize on a dollar per ton, it's less than $10 per ton to achieve.
Emissions reductions.
Great.
<unk>.
I guess, just one thing and I apologize. If this has been touched on already but with the FTC review.
Is the fact that in the Tokyo transaction Youre also doing the infrastructure purchase is.
Is that a factor that has made.
Maybe the overall review process.
Go on a little longer or is it sort of unrelated.
I don't think theres any elements that are unique here that stand out I think this is just part of the process to review the deal and concept I mean, I'd just remind everybody when the FTC issued their second request to US. It was back in November and I think if you just remember what the gas market was like there was a lot of concerns over natural gas.
Gas what was happening with Europe and peak fear on gas shortages. So I think Debra you took the opportunity to take a closer look and thats the process that we're going through in <unk>.
We are happy that we're in a place where we're confident in getting this and close within the next 30 days.
Great. Thanks, a lot.
Question is from John Daniel Daniel Energy Partners. Please go ahead. Your line is open.
Hey, guys. Thank you for including me and Dave Congrats to get Board give me a call.
Toby you noted some of the drivers of the improved drilling performance, but how much of that.
Improvement is due to an internal process versus third party technology from one of the service providers.
Well I think on the internal side I mean look at the look at the setup, we are delivering to the operations teams I mean large scale long lateral combo development certainly sets the teams up to knock it out of the park and.
That definitely would be considered an internal.
Improved thing that we do that is going to be hard to replicate with other asset basis, but you've got to go out there and you got to execute and the teams are doing that.
We have very close relationships with our service providers.
I think on this this run here theres been a lot of.
Improvements on pit design that.
That the teams have worked with our service providers. So.
Really close relationship and our success is really.
Based on the success of our partnerships and we've got some great partners partners on the drilling front.
And across the operational spectrum, so I'd say, probably half of it is internal and the other half is the great working relationship we have with our service providers.
Thank you and then the second one for me as well.
When you look at this the drilling success and assuming a portion of it can be copied into other basins and just seeing the efficiencies that you've achieved I mean do you when you look at.
Analysts such as myself are we fooling ourselves when we prophecy of rising rig count in future years, or we can see these efficiencies render data.
Yes, I mean, when I step back and you look at the.
We've gone we've got sort of gotten past the step change in operational efficiencies.
More of a slow grind.
Yes. It is.
The factors that are ultimately going to be defining the success of the operation.
We sort of pushed past just what specifically were doing onsite at that operation and its really external factors that are really influencing things like do we have long do we have.
Do we have long laterals ready to drill what's the land situation look like.
And on the completion side, what's the logistics on water and sand.
So it's as much as the system that we're creating as it is the actual individual performance.
I think I think industry has already made the move to recognize that long laterals are the key and how far that they have quality of inventory I think is going to be defining characteristics on their efficiency going forward.
Fair enough, but would you reported it seems like a step change better to me, so maybe I haven't been paying attention, but that's pretty impressive.
So.
Frankly to me on the call.
There are no further questions at this time I will now turn the call over to Toby Rice for closing remarks.
Thanks, everybody for your time today, we look forward to continuing our strategy to make the energy we produce cheaper more reliable and cleaner and we'll look forward to up to keeping you updated on our progress. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
Okay.