EQT Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 14 speakers on the call.

Operator

You for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the EQT Q3 2023 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.

Operator

Thank you. I would now like to turn the call over to Cameron Horowitz, Director of Investor Relations and Strategy. Please go ahead.

Speaker 1

Good morning, and thank you for joining our Q3 2023 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer and Jeremy Canope, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question and answer session to follow. An 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 of today's call will be available on our website beginning this evening.

Speaker 1

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 factors described in yesterday's earnings release, and our investor presentation, the Risk Factors section of our Form 10 ks and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward looking statements. Today's call also contains 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.

Speaker 1

With that, I'll turn the call over to Toby. Thanks, Cam, and good morning, everyone.

Speaker 2

The Q3 saw a multitude of positive highlights and record breaking performance at EQT, including closing the strategic acquisition of Tug Hill and XCL Midstream in late August. As shown on Slide 5 of our investor deck, With roughly 60 days under our belt post closing, we currently have 74% of total integration milestones actions completed. Put this in context, this is a record pace for EQT and the most efficient integration yet despite significantly greater deal complexity relative to Ulta and Chevron. The success of improvement in our integration pace is reflective of leveraging lessons learned from previous transactions to refine our integration playbook, which is unique to EQT's proprietary digital platform and is a repeatable process that we have honed with each successful acquisition. I want to take a moment to send a huge shout out to the EQT crew for all the hard work that has facilitated the incredible integration efficiency achieved over the past 2 months.

Speaker 2

Alongside efficiently integrating the Tug Hill and XCL Midstream assets, the teams have identified multiple areas of potential operational improvements that we did not contemplate when underwriting the acquisition. We broadly see these opportunities falling into 2 buckets comprised of well designed and operational efficiencies. As it relates to operational efficiencies, I want to first talk about 3rd quarter performance for standalone EQT and then provide and provide some stats on what the teams have already achieved on the Tug Hill assets. As shown on Slide 7 of our investor deck, After posting stellar second quarter operational performance, both our drilling and completions again set new internal and world records in 3Q. Recall last quarter, we highlighted EQT's world record of drilling over 18,200 feet in 48 hours on the same run.

Speaker 2

This record lasted a mere 60 days as our team bested that effort by drilling 18,264 feet in 48 hours on our Denver 5.8 well in August. On the completions front, our teams are firing on all cylinders with 3rd quarter pumping hours per crew averaging north of 400 hours, which is an all time high pace for EQT. This includes besting our prior record for monthly pumping hours twice during the quarter with 2 crews each achieving north of 500 pumping hours in a month. To put this into context, the theoretical maximum pumping hours in a month for a single frac crew is roughly 600 hours after accounting for minimum maintenance time. So our teams are knocking on the doorstep of perfection.

Speaker 2

This performance reflects our strategy of aggressively attacking all facets of the supply chain to eliminate as many bottlenecks as possible for our completions team and our Q3 execution underscores the dividends accruing from these efforts. Turning back to Tug Hill, As shown on Slide 6 of our investor deck, our teams are wasting no time unleashing EQT's industry leading operational prowess as we've taken over the assets. To put some numbers around this, in just 60 days since taking over operations, our completions team has already increased the amount of stages completed per day by 35% relative to Legacy Tug Hill development and we see room for additional upside as our teams optimize water handling and Sand Logistics across the asset base. On the drilling front, since taking over operations, our team has already improved horizontal drilling speeds by 50% relative to legacy Tug Hill performance and driven down horizontal drilling costs per foot by more than 40%. As we high grade equipment and fully implement EQT best practices, we expect further efficiency gains that will allow us to drop drilling activity on TUGS acreage from 2 rigs to 1 by the end of the year, all while still drilling the same amount of lateral footage year over year in 2024.

Speaker 2

Our teams also plan to methodically test various EQT well design changes on the Tug Hill assets, including cluster spacing, clusters per stage, prop and loading, prop and type and Casingway to name a few. While it's still early to quantify the full impact of efficiency gains and operational synergies on the Tug Hill assets, We preliminarily see the potential for up to $150 per foot of well cost savings associated with these efforts. The potential impact from optimizing well designed parameters and improving operational efficiencies represents value creation upside on top of the $80,000,000 of synergy value potential we announced with the deal. As a reminder, the original synergies we discussed were only driven by water system integration, firm transport optimization and land spend efficiencies, which should accrue over the next several years. Looking ahead to 2024, While we are still in the process of fine tuning our pro form a operation schedule, we preliminarily expect to run 3 horizontal rigs and 3 to 4 frac crews in total next year, which is a level of activity that maintains production at approximately 2.3 Tcfe per annum.

Speaker 2

At current strip pricing of approximately $3.40 per 1,000,000 BTU next year, We preliminarily see roughly $1,700,000,000 of pro form a free cash flow in 2024 and cumulative free cash flow of approximately $14,000,000,000 from 2024 to 2028. As shown on Slide 11 of our investor deck, This equates to cumulative free cash flow of approximately 60% of our enterprise value, which is the highest not only among our gas peers, but also the broader upstream energy sector. We believe this outlook underscores the tremendous absolute and relative value proposition of EQT shares even after strong relative stock performance over the past several years. Shifting gears to Slide 8 of our investor presentation, we are excited to announce that we have signed 2 10 year firm sales agreements with investment grade utilities covering all 1.2 Bcf per day of our capacity on MVP that will commence concurrent with the completion of downstream expansion projects in 2027. Recall, we had previously entered into an AMA for 525,000,000 cubic feet per day of our MVP capacity, which we have restructured into an 800,000,000 cubic feet per day firm sales arrangement with the same counterparty and enter into an additional 400,000,000 cubic feet per day firm sale with a separate counterparty.

Speaker 2

These are 2 of the largest long term physical supply deals ever executed in the North American natural gas market and we believe signal the buyer's confidence in EQT's unique ability to deliver reliable, clean and affordable natural gas supply to millions of customers in the southeastern part of the United States. These agreements also highlight how EQT's scale and depth of inventory are catalyzing the expansion opportunities downstream of MVP, which will 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. To put the environmental benefits into perspective, assuming EQT's natural gas displaces coal fired power generation, the combined impact of these supply agreements would result in approximately 40,000,000 tons per annum of emissions reductions, which equivalent to taking more than 8,000,000 gasoline powered vehicles off the road every year. On top of the environmental benefits, These deals should create a win win economic impact providing cash flow uplift for EQT while concurrently dampening natural Gas price volatility for consumers in the Southeast region. Recall our capacity on MVP will initially receive pricing at Station 165, But as downstream projects and these new firm sales arrangements commence, EQT's capacity will be debottlenecked and our pricing exposure will shift to a blend of premium demand areas including Henry Hub and Transco Zones 45 South.

Speaker 2

To put the impact of this in context, we see these firm sales arrangements and associated downstream debottlenecking projects increasing our annual free cash flow by more than $300,000,000 beginning in 2028. At the same time, the debottlenecking of EQT supply further into the Southeast should dampen natural gas price volatility for consumers in the region, improve grid reliability and materially reduce the risk of service interruptions. In our view, These agreements represent clear and tangible examples of EQT's ability to generate differentiated shareholder value out of each molecule, while simultaneously fostering better outcomes for American consumers by leveraging our unique platform consisting of pure leading scale, a strong investment grade balance sheet, low cost structure, deep high quality inventory and advantaged environmental attributes. Turning to LNG. Last month, we announced the heads of agreement for liquefaction services from Commonwealth LNG's facility in Cameron Parish, Louisiana to produce 1,000,000 tons per annum of LNG under a 15 year tolling agreement.

Speaker 2

This comes on the heel of a prior HOA with Lake Charles LNG and upon completion of definitive agreements will take our total committed LNG tolling capacity to 2,000,000 tons per annum or roughly 270,000,000 cubic feet of gas per day. The Commonwealth agreement is a continuation of our LNG strategy we described on our last call, which entails diversifying a portion of the 1.2 Bcf per day we delivered to the Gulf Coast via firm pipeline capacity into international markets. As a reminder, EQT is pursuing a differentiated and more integrated approach to international exposure through tolling arrangements, which we believe provide the best combination of upside exposure with downside risk mitigation. Our strategy gives us direct connectivity to end users of our gas globally, allows for end market restructuring flexibility and superior downside protection. We are currently pursuing signing SBAs with prospective international buyers as well as additional opportunities to increase our tolling exposure.

Speaker 2

Our scale, low cost structure, peer leading core inventory depth and environmental attributes uniquely position us to compete and win in the global energy arena, and we believe the international market will increasingly covet EQT's molecules as a long duration secure supply source that can drive meaningful emissions reductions via pole displacement, similar to the precedent we are setting in the U. S. Southeast market with our newly announced firm sales agreements directly with utilities. Shifting to Slide 16 of our investor deck, We recently announced a first of its kind public private partnership with the State of West Virginia to identify and implement Forest Management Practices across the state. Facilitated by the state's Department of Commerce, Division of Forestry and Division of Natural Resources, The partnership brings together EQT's transparent, data driven approach to emissions reduction and West Virginia's commitment to the conservation, development and protection of its renowned forest lands to advance Appalachia's position as a premier world partner in de carbonization.

Speaker 2

We plan to deploy advanced soil probe technology from our partners at Teralytics, which allow for real time soil measurement to ensure the quantification of carbon reduction is accurate and transparent. We will also leverage our strategic partnership with Contec Labs to provide full digital integration and accountability of our carbon reduction effort. Operational efficacy of these projects will be assured and audited by West Virginia's University's Natural Resources Analysis Center, a multidisciplinary research and teaching facility. We believe the processes being deployed in our partnership with West Virginia will create one of the highest quality, most verifiable nature based carbon sequestration project anywhere around the globe. The output of this effort will be a key enabling factor for EQT to become the 1st energy company in the world of meaningful scale to achieve verifiable net 0 Scope 1 and 2 GHG emissions.

Speaker 2

Turning to Slide 17 of our investor presentation, we were excited to see the Appalachia Regional Clean Hydrogen Hub or ARCH2 recently selected as 1 of 7 Hydrogen Hubs in the country to receive DOE funding to accelerate the deployment of U. S. Hydrogen Technologies and contribute to decarbonizing multiple sectors of the economy. As a reminder, Arch2 is a collaboration initiated by EQT, the State of West Virginia, Battelle, GTI Energy and Allegheny Science and Technology. The broader Arch2 team is comprised of multiple entities with operations across the Appalachian region, spanning the hydrogen value chain as well as technology organizations, consultants, academic institutions, community organizations and NGOs that will provide commercial and technical leadership for the development and build out of the hub.

Speaker 2

The DOE has allocated up to 9 $25,000,000 to Arch2, noting the hub will leverage the region's ample access to low cost, low emissions natural gas to produce clean hydrogen and permanently sequester CO2. Along with the decarbonization impact, Arch 2 is anticipated to facilitate various community benefits, including the potential to create more than 21,000 high paying jobs. The DOE selection of Arch 2 deeply reinforces the critical role natural gas, particularly Appalachian Natural Gas, will play in our nation's transition to a lower carbon energy future and EQT is uniquely positioned to be at the forefront of this process. In terms of EQT's participation, we are in the early stages of formulating a high level development plan with rigorous assessment of project economics to better understand value creation potential and we expect minimal capital requirements over the next couple of years. Over the medium term, EQT will have significant optionality to evaluate and participate in projects within the Arch2 hub, all while retaining complete flexibility as it relates to our level of exposure.

Speaker 2

Outside of our direct participation, we expect Arch 2 will also have second order effects of driving greater in basin demand for EQT's low emissions natural gas and could present opportunities for us to leverage our subsurface expertise and 1,900,000 net acreage position for CO2 sequestration. While still very early in the evolution of Arch2, we believe EQT's participation in the hub, along with various other pillars of our new venture strategy, are planting the seeds that have the potential to catalyze the transformation of natural gas into the Holy Grail of cheap, reliable and 0 carbon energy. I'll now turn the call over to Jeremy.

Speaker 3

Thanks, Toby, and good morning, everyone. I'll start by briefly summarizing our Q3 results, which as a reminder include 39 days of contribution from the Tug Hill and XCL assets. Sales volumes in the Q3 were 5.23 Bcfe comprised of 491 Bcf of natural gas and 5,200,000 barrels of liquids. We note 3rd quarter production volumes included roughly 5 Bcfe of curtailment principally in response to weak local demand and approximately 8 Bcfe associated with lower than expected non operated turn in lines and curtailments. On a per unit basis, adjusted operating revenues were $2.28 per Mcfe and our total per unit operating costs were 1.29 down from $1.37 in the 2nd quarter, reflecting the accretion benefit from a partial quarter contribution of Tug Hill's low cost assets and lower than expected LOE due to increased produced water recycling.

Speaker 3

Capital expenditures excluding non controlling interest for $445,000,000 including standalone EQT CapEx of approximately $400,000,000 which was at the low end of our guidance range reflecting the continued operational efficiency gains Toby mentioned previously. Adjusted operating cash flow and free cash flow were $443,000,000 and negative $2,000,000 respectively. It's worth noting, however, Free cash flow was negatively impacted by $28,000,000 of non recurring expenses from the Tug Hill transaction, without which We would have generated positive free cash flow during the quarter. Looking ahead to the Q4, we provided guidance on Slide 33, which reflects a full quarter of contribution from Tug Hill and XCL Midstream acquisitions. It's worth highlighting that the mid point of our GP and T guidance range of $1 per Mcfe is roughly $0.10 lower than our standalone GP and T in the 2nd quarter, which underscores the cost structure accretion from the low breakeven Tug Hill and XCL assets.

Speaker 3

I'd also note our 4th quarter production outlook embeds expectations of curtailments in the first half of the quarter, given elevated Eastern storage and seasonal demand weakness. While we're still early in the budgeting process and working through the optimization of our development schedule for 2024, we preliminarily expect to run 3 rigs and 3 to 4 frac crews next year, which should allow us to maintain pro form a production at approximately 2.3 Tcfe. We anticipate free cash flow of roughly $1,700,000,000 next year at recent strip pricing of approximately $3.40 per MMBtu, which equates to a 2024 free cash flow yield of 10%. On a cumulative basis, we project nearly $14,000,000,000 of free cash flow from 2024 to 2028, which is roughly 60% of our enterprise value and 80% of equity market capitalization. This means at our current valuation, investors have the opportunity to buy the premier natural gas company in North America with the most scale, the deepest and highest quality inventory and among the lowest cost structures and the best credit rating at a material discount to peers.

Speaker 3

Turning to the balance sheet. Recall we funded the cash consideration of the Tug Hill and XCL acquisition upon closed in August with $1,000,000,000 of cash on hand and $1,250,000,000 of term loan borrowings. We exited the Q3 with $5,900,000,000 of total debt, including $400,000,000 related to equity light convertible notes, which equates to an LTM leverage of 2.1 times. Though we note this figure includes the full impact of financing the Tug Hill and XCL acquisitions with just 39 days of EBITDA contribution. For reference, excluding Tug Hill and XCL impacts, We estimate LTM net debt to EBITDA would have been approximately 1.25 times at the end of the third quarter.

Speaker 3

Despite rising treasury yields, EQT's credit spreads have tightened, highlighting our strong credit profile. Recall we were upgraded to PAA3 by Moody's shortly after we closed the Tug Hill acquisition. So we are now investment grade across all three credit rating agencies. I will also note that EQT has the lowest 5 year bond yields among natural gas weighted peers, 100 basis points below the average, which also reflects the strength of our credit quality and unwavering commitment to low leverage and our differentiated Scale, Inventory Quality and Low Cost Structure. As it relates to capital allocation, we remain pleased with the execution of our shareholder return framework to date and will continue with our opportunistic all the above strategy with our North Star being the countercyclical long term compounding of cash flow.

Speaker 3

Consistent with our track record, we will maintain a strong bias towards debt repayment over the coming quarters, at least until we achieve our one time leverage target at $2.75 per MMBtu natural gas pricing, which will provide a fortress balance sheet through all parts of the commodity cycle. This will in turn minimize downside risk to our enterprise, while allowing us to limit the need to defensively hedge and cap what we anticipate being unpredictable asymmetric price movements to the upside in the years ahead. We also continue to rigorously assess new investment opportunities with strong risk adjusted returns that improve the quality of our business, similar to our West Virginia water system we highlighted last quarter. With the XCL Midstream team now part of EQT, we are actively exploring opportunities to deploy capital into differentiated infrastructure investments that can debottleneck our upstream production, allow us to durably compound cash flow at very attractive rates of return with minimal risk while simultaneously improving our operational efficiency. Our share buyback program also 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.

Speaker 3

Recall at our current share price, we have generated an approximate 40% return for shareholders on the roughly $600,000,000 of share repurchases we have executed to date, which is the highest amongst our peer group and we still have approximately $1,400,000,000 remaining under our existing authorization. And finally, sustainable long term based dividend growth is a key pillar of our shareholder return strategy. And to this end, We recently raised our dividend by 5% to $0.63 per share on an annualized basis. Since initiating our dividend in late 2021, we have now created by more than 25% cumulatively over that period, which underscores our confidence in the sustainability of our business and a corporate free cash flow breakeven price that is amongst the lowest in North America. As we eliminate structural costs from the business through actions such as debt repayment, share repurchases and synergy capture.

Speaker 3

We expect to continue growing our base dividend over time without putting upward pressure on our corporate cost structure. Turning to the macro environment, we see several factors lending support the natural gas market in 2024 and beyond. First, strong gas fired power generation, resilient LNG export demand and lower than expected production this summer reduced expected storage overhang that many were forecasting back in the spring by over 300 Bcf. 2nd, while we do expect some incremental supply from associated gas connection with new Permian pipeline capacity commencing in the 4th quarter. We see Lower forty eight volumes exiting this year flat to slightly down compared to Q3 of 2023.

Speaker 3

And we see further declines in the first half of twenty twenty four as the impact from a 25% plus drop in gas rigs since March begins to set in, especially in the high decline Haynesville play where the rig count remains well below maintenance levels. 3rd, the progress demonstrated commissioning the Golden Pass and Plaquemines LNG facilities has been encouraging and will create structural tailwinds allowing LNG demand to reach a record 15 Bcf per day even before the facilities are fully operational. 4th, we expect natural gas power generation to continue taking away share from coal as the investment case for coal weakens further with the market increasingly turning to cleaner burning natural gas. We expect coal production dropped by over 20% year over year in 20 24 as the effect of the recent wave of coal retirements takes hold. And the tightening coal market will further support the natural gas fundamentals in the power sector moving forward, where total gas equivalent demand for coal still stands at 14 Bcf per day in the United States alone.

Speaker 3

Moving to hedging, we tactically added to our hedge position during the quarter to further de risk a portion of our expected free cash flow and debt repayment goals. We now have greater than 40% of our Q1 through Q3 twenty twenty four production hedged inclusive of Tug Hill's volumes. With a weighted average score price of approximately $3.60 per MMBtu and a weighted average ceiling of $4.10 per MMBtu. Note our hedge position remains strategically tilted towards the first half of twenty twenty four, where we see the most potential downside risk should normal weather again not materialize. While protecting near term cash flow and prioritizing our debt repayment goals, we are intentionally creating the flexibility to maintain maximum upside price exposure in late 2024, 2025 and beyond.

Speaker 3

The natural gas market looks increasingly tight and we see the potential for pricing to move asymmetrically higher. As it relates to basis, Appalachian differentials have been relatively wide of late, driven by elevated eastern storage levels, a byproduct of the warm prior winter. Our strong basis hedge position paid dividends this quarter, boosting our corporate wide realized natural gas price by $0.12 per MMBtu. We have roughly 80% of expected 4th quarter local volumes covered with basis hedges that are in the money relative to the current strip, though we remain in an advantaged position near term. Over the medium to long term, we see several factors that could lend structural support to Appalachian Basis, including the commencement of MVP and additional coal fired power retirements in the PJM market, creating incremental demand upward of 4 Bcf per day.

Speaker 3

As it relates to MVP timing, we're encouraged by the recent Equitrans and FEMSA consent order and continue to model the Q1 of 2024 in service date. With the outlook for MVP increasingly derisked, expansion projects to move production further into the Southeast U. S. Are progressing. As Toby highlighted, EQT's scale, quality and depth of inventory, low cost structure and investment grade balance sheet uniquely position us to help facilitate these expansion projects.

Speaker 3

This dynamic is underscored by the 1.2 Bcf per day of long term firm sales agreements that we recently signed with investment grade utilities in the Southeast region. These deals create a win win outcome as they underpin the debottlenecking of downstream markets and directly link EQT's volumes to a market price at a meaningful premium to Henry Hub, while simultaneously providing utility customers with surety of low cost natural gas supply for decades to come. Upon commencement, we see these agreements and the associated debottlenecking projects improving our 2028 corporate wide differentials by $0.18 for NCS, which in turn should drive more than $300,000,000 of annualized free cash flow uplift in 20 28 and beyond. These deals provide EQT long term supply growth optionality that is paired with sustainable utility demand dynamics, which could drive an even greater uplift to long term free cash flow over time. Importantly, these contracts and debottlenecking occur around the same time our gathering rates with Equitrans complete the contractual step down from $0.80 today to $0.30 per Mcf in 20.28, further accelerating the decline in our free cash flow breakeven price and supercharging the free cash flow growth at a time when we expect other gas plays like the Haynesville to be approaching inventory depletion, thus driving up the marginal cost of natural gas.

Speaker 3

Quite simply, the difference between a higher marginal cost of natural gas experienced by peers compared to EQT's declining cost structure to uniquely accrue to EQT shareholders in the form of free cash flow growth and value creation. These firm sales agreements represent examples of the various differentiated opportunities we are seeing arise from EQT's gravity and momentum as the clear operator of choice for the highest quality long duration inventory in the North American natural gas market. And we believe these opportunities will ultimately allow us to continue to create differentiated shareholder value relative to peers in the years ahead. Importantly, these types of opportunities are not simply due to scale, What underpinned by EQT's world class assets coupled with a culture and teams, they are relentless in their pursuit of excellence as the operator of choice and driven to maximize value for shareholders. I'll close by highlighting Slide 12 of our investor presentation, which illustrates an internal analysis of the natural gas price required to generate sufficient free cash flow such that a gas producer generates a simple 10% turn on current respective enterprise value, what we view to be the most basic tenant of shareholder value creation.

Speaker 3

We believe the days of wellhead IRR is driving activity levels amongst U. S. Gas producers are in the rearview mirror as this behavior led to the destruction of 100 of 1,000,000,000 of dollars of capital in the last decade. Put very simply, wellhead IRRs on D and C CapEx are unrelated to corporate returns and cost of capital. Instead, we see the marginal cost of U.

Speaker 3

S. Natural gas supply holding to a fully burdened corporate cost curve that requires a sufficient return on corporate capital or enterprise value, not just a return on field level CapEx. I want to highlight a few observations from this slide. First, the marginal molecule of U. S.

Speaker 3

Gas supply is coming from the Haynesville, requiring a natural gas price of approximately $3.50 per MMBtu to even begin generating cash flow in maintenance mode, meaning below this price no shareholder value is being created and inventory optionality is being depleted. On the other hand, EQT is at the low end of the cost of supply curve, which translates to structurally more durable through the cycle free cash flow generation and returns for our shareholders and also Lesne to defensively hedge away gas price upside. Further, we see the price required to generate corporate return for Haynesville Producers already at north of $4 per MMBtu based on current market valuations. On the other hand EQT shares are pricing in a level embedding a mid-three exposure to natural gas prices and in a superior risk adjusted manner due to EQT's lower cost of supply. As previously noted, our contractual gathering rate improvements, unrivaled depth of repeatable low cost inventory and new firm sales agreements will drive EQT's cost of supply even lower over the next 5 years, in contrast to the rest of the industry, which will likely see upward pressure over this period as peer producers move toward lower quality inventory.

Speaker 3

As a result, we believe EQT is uniquely positioned to capture a disproportionate amount of natural gas price upside relative to peers in the years ahead. I'll now turn the call back over to Toby for some concluding remarks.

Speaker 2

Thanks, Jeremy. To conclude today's prepared remarks, I want to reiterate a few key points. Number 1, the momentum and gravity at EQT right now is unrivaled And I have never felt anything like it in my career. We are executing at record levels, signing historic physical supply deals that simultaneously maximize the value of each molecule and provide pure supply to end customers while cutting emissions and executing on a vision to create the preeminent low cost producer of natural gas on the global stage. 2nd, integration of the Tug Hill and XCL assets is blazing ahead at record pace, which speaks to the power of our proprietary digital platform and continued refinements of our integration playbook.

Speaker 2

3rd, After a stellar second quarter, our drilling and completions teams yet again set new internal and world records in Q3. 4th, the superior operational execution is facilitating additional value creation potential on the Tug Hill assets. With EQT's team already improving drilling and completion efficiency by 40% in just 60 days of operating the assets, driving the potential for $150 per foot of well cost savings. 5th, the firm sales agreements we announced associated with our MVP capacity are materially accretive to our long term free cash flow outlook and shareholder value and highlight the differentiated opportunities arising from EQT's peer leading scale, low cost structure, inventory depth and environmental attributes And finally, 6th, our first of its kind public private forest management partnership with the state of West Virginia should create one of the highest quality, most verifiable nature based carbon sequestration projects and should help facilitate EQT becoming the 1st energy company in the world of meaningful scale to achieve net zero emissions. And with that, I'd now like to open the call to questions.

Speaker 4

Thank you.

Operator

Your first question comes from the line of Yumeng Choudhary with Goldman Sachs. Please go ahead.

Speaker 5

Hi, good morning. Thank you for taking my questions. The firm sales contract on the Mountain Valley Pipeline is notable given it improves the company's long term supply cost positioning, which I assume is not completely reflected on Slide number 12. So a couple of questions here. Like how does this deal come together?

Speaker 5

Is there potential for similar opportunities in the future? And also if you can help investors get a better sense of the risk in achieving the free cash flow uplift of more than $300,000,000

Speaker 2

Hi, Yumang. This is Toby. Let me just put some broader color on what's happening in the United States, and then I'll kick it over to Jeremy for more of the details. Over the last 10 years, we've seen natural gas demand grow about 50% in this country. During that period of time, The pipeline capacity that's been built has only grown about 25%.

Speaker 2

And so, it shows the drive from a need for more pipeline infrastructure that would lead to opportunities like this going forward. Jeremy, you want to cover some of the more detailed points about this transaction, how it came together?

Speaker 3

Yes, absolutely. So this is something we've been working on for several months, And it's part of just our ongoing commercial strategy to really find opportunities like this. If you want to think about it at a high level, we're effectively taking 1.2 Bcf a day of volume that's currently being sold in the local M2 market. And instead through these transactions, the net effect is selling that at about a NYMEX minus $0.40 type differential when you take into account the premium in market pricing we're getting and the cost to transport it there on MVP. That gets you to that call it $0.15 to $0.20 of all in company wide differential improvement in 2028 beyond.

Speaker 3

And that's what gets that $300,000,000 just in total of annual cash flow uplift.

Speaker 5

Great. And is there any further opportunities of such nature, which you foresee in the future? And also if you can help us quantify the risk around that free cash flow uplift of $300,000,000 Do you see Any scenarios where that $300,000,000 will not come through for EQT?

Speaker 3

Yes. Good question. We think the risk is relatively low because the contracts, while structured in different tranches, In many ways, we're actually linked to NYMEX pricing and Gulf Coast pricing. And so any change in NYMEX or just from the pull on the LNG market in that export Gulf Coast region should really benefit these contracts and the way they're priced directly. In terms of further uplift, Look, we hope this is really the first of a lot of contracts like this.

Speaker 3

We still have plenty of volume at our scale that we can use to try to pair into deals like this. And really, if you think about the way we're approaching our LNG strategy through the tolling structure, what we'd really like to do is try to replicate the essence of what we're doing here, really on the global stage, taking molecules that are sold domestically and pairing them up with contracts like this and selling them abroad. So we really hope across the business this is the first of many deals like this. But they take time to do, but again, it's I think it's evidence we're building the business for the long run, Doing deals like this that even if there might be some sort of near term cost, I mean, you think about a deal like these firm sales deals, There might be near term, a little bit of downside to cash flow, but think about it. The AMA that we restructured here It's maybe a couple of $100,000,000 in the next year or 2 of hit, but that's really made up by 10x that over the life of these contracts.

Speaker 3

So it's really restructuring something for kind of a 10 to 1 investment return is really how we look at it as we're really trying to build long term value.

Speaker 5

That's very helpful. Thank you.

Operator

Thank you. Your next question comes from the line of Jon Abbott with Bank of America. Please go ahead.

Speaker 4

Good morning and thank you for taking our questions. Tobey, there's been a lot of press speculation recently about further industry consolidation, even between gassy companies. How do you think about industry consolidation from here and how do you see EQT's potential role in that?

Speaker 2

Well, my view hasn't changed. We think consolidation is a tool when used correctly to create a lot of value for shareholders. I think you look at the track record that we've established over the past few years, we've done really smart deals and we've created a lot of value. Look at the Tug Hill acquisition, we are focused on lowering our cost structure. Those assets have lowered our cost structure by about $0.15 pre synergies.

Speaker 2

So the operational efficiencies that we're demonstrating now will be additive on top of that, improved our long life inventory and also making the energy cleaner. Tug Hill ran a pretty clean program, but now these assets are going to be incorporated into our net zero goal. So we'll make the energy Produce cleaner as well. So I think every opportunity has to be looked at a standalone basis, but for us the guiding light is always What can we do to lower our cost structure, make us a better business, produce more reliable and cleaner energy. And we'll be disciplined and continue to wait until we see anything that looks attractive to us.

Speaker 2

Appreciate that. And then for our follow-up to us.

Speaker 4

Appreciate that. And then for our follow-up question, now appreciate the free cash flow guidance that you sort of provided right there. But when you think about spending, I mean, you haven't put out your budget, but when you think about long term true long term maintenance CapEx Without taking into account potential debottlenecking opportunities, how do you think of that at this point in time from a spend perspective to hold maybe 2.3 Tcfe

Speaker 3

flat. Yes, let me take that one. So let's use next year as a proxy. So we expect while we're still working through the budget, we expect a low $2,000,000,000 type all in CapEx number. But we'll provide more color at a later date on this, but it's really important to note that the CapEx required to just maintain our base business is Really quite a bit below that.

Speaker 3

Really what we're trying to do right now is find new opportunities to reinvest into low risk, strong return opportunity. So things like the West Virginia water system that we invested in talked about last quarter, Good example of that, we're looking at a couple of other infrastructure projects through our XCL platform now to debottleneck volumes, to realize better pricing. We're also seeing opportunities really on the land front, which we think are unique to Appalachia, opportunities where we effectively Can acquire new locations for about $1,000,000 per location and these are locations worth $5,000,000 to $10,000,000 when drilled. So We have a pretty active program replacing about 80% of our lateral footage developed each year, which sort of perpetually extends our inventory. So on a rate of return basis, we see those as pellet 5 to 1, 10 to 1 type investments.

Speaker 3

And so as we see those come up, we'll continue to allocate CapEx towards that. But really that long term just maintenance CapEx number for the base business is probably closer to right about $2,000,000,000 And we don't see that changing materially in the really 5 year forecast at least.

Speaker 4

Very, very helpful. Thank you for taking our questions.

Operator

Thank you. Your next question comes from the line of Arun Jayaram with JPMorgan. Please go ahead.

Speaker 6

Yes, good morning. Toby, the crown jewel of the Tug Hill deal was the XCL Midstream System. I want to get your thoughts on value creation opportunities from integrating the midstream further in In terms of internal and third party opportunities, obviously, it is going to help your cost structures you highlighted as well.

Speaker 2

Yes, Arun, we're excited about the potential for this asset base and the leadership team we picked up to create value in this area. But I'd say, as we're looking for more investment opportunities that will generate the Pretty attractive low risk returns that we're looking for. We're going to continue to just keep pushing the ball along and capturing those synergies that we That Clarington Connector is something that's top of mind for us, looking to accelerate any water debottlenecking. One thing that's really important to just highlight is a lot of the completion efficiency gains have come from debottlenecking water. So that will be continue to be a big focus there on that front.

Speaker 2

And hopefully these investments in water infrastructure will give us an opportunity to continually come back and talk about the cost savings both on an LOE front and completion side of things. From a 3rd party business opportunity, this team is definitely capable and with our systems that we have, We're able to provide those opportunities to others where it makes sense. But one of the things with a Really large contiguous acreage position is 3rd party opportunities are limited, but if they do pop up, we've got our eyes out for them and we'll be taking advantage of those.

Speaker 6

Great. Just maybe a follow-up on the 2024 outlook, where you've highlighted 1,700,000,000 of free cash flow potential. It sounds like CapEx will be in the low $2,000,000,000 range. Can you

Speaker 3

give us a sense

Speaker 6

on your thoughts on differentials for next year?

Speaker 3

Yes. I'd say on a kind of what's embedded in that is on an all in company basis like a $0.55 to $0.60 kind of all in differential. I mean, we're seeing quite a bit of movement right now, but that's probably the appropriate range if you're trying to tie numbers out.

Speaker 6

Great. Thanks a lot.

Operator

Thank you. Your next question comes from the line of Nitin Kumar with Mizuho. Please go ahead.

Speaker 7

Hi, good morning guys and thanks for taking my questions. I kind of want to start on this new firm sales contract. I think Josh, Jeremy, you mentioned that there's an impact of about $100,000,000 to $200,000,000 near term. Could you help us bridge the gap of what Is driving that? I understand that the longer term benefit comes from better pricing.

Speaker 7

What's the restructuring of the AMA costing you?

Speaker 3

Yes. So that AMA originally, if you remember, was $525,000,000 a day. And so the cost of MVP during this, call it, 2 to 3 year period until these expansion projects are built out, effectively what that's saying is that's It's probably $125,000,000 to $150,000,000 a year of near term free cash flow that we opted to give up. So call it $300,000,000 maybe in total. And if you use some high level math and say the total annual free cash flow we gain when these projects come online is about 300,000,000 It's like a 10% free cash flow yield is about $3,000,000,000 So we kind of see it as again $3,000,000,000 over $300,000,000 is about a 10 to 1.

Speaker 3

So again, we think about it more from an investment perspective. It's a near term investment for a pretty material long term value uplift.

Speaker 7

Got it. That makes sense. And then just maybe a Quick question around service costs. You mentioned that low $2,000,000,000 type of CapEx number for next year. If you could maybe help us peel the onion a little bit around assumptions around deflation.

Speaker 7

You talked about pretty material capital savings from operating efficiencies on Doug Hill, dollars 150 per foot. How much of that is baked in or what are your thoughts on the service cost environment right now?

Speaker 2

So at a very high level, we're expecting I'd say single digit service cost deflation, biggest driver there is on the steel where we'll see a 20% reduction in steel costs. I'd say the bigger opportunity for us to lower our costs is going to come from continued operational excellence in the field. One of the examples that's sort of underpinning our budget This upcoming year is assuming a 400 hour per month frac pace. And as we've seen with the teams, 500 hours is possible. So we're working to shore up what we can do to make the 500 number more of the average, not just the high watermark.

Speaker 2

And those will translate to probably more significant cost savings than what we're seeing on the service side.

Speaker 7

Thanks guys.

Operator

Thank you. Your next question comes from the line of David Deckelbaum with TD Cowen. Please go ahead.

Speaker 8

Hey, guys. Thanks for the questions. I wanted to ask just that you provided the 2024 outlook. I assume that at this point, sounds like that's the original budget of the 1.7 base for EQT and then 300 plus or so for Tug Hill. So It doesn't seem like you're incorporating any of the benefits that you're seeing so far of improvements, especially in the Tug Hill side.

Speaker 3

Well, I would say again that the important caveat to that is, from a true maintenance perspective from our business, if you don't count infrastructure spend some of the opportunistic land spend, and maybe a couple of other small items we have in there. I think that actual maintenance CapEx number would come in very much at the low end. So we're guiding more towards total CapEx, including some of that growth opportunistic capital. That makes sense. So that I think should bridge the numbers that you're talking to.

Speaker 8

Well, maybe like if you could expand on that Because I think that's helpful. As we think about improvements into the business from an efficiency standpoint into 2025, Could you sort of quantify some of like the maybe front loaded opportunistic investments around infrastructure and lands that would be in 2024? Is that extend through 2025, 2020 6. Is this a multiyear integration and investment process or is this more of an upfront 2024 situation? Okay.

Speaker 3

I think it's just opportunistic. It's based on when we see opportunities come about. And obviously they have to meet our pretty stringent criteria to justify investment. But again, if we're looking at the opportunity to pick up some additional land in the 1 to 2 years ahead of the drill bit and make 5 to 1, 10 to 1 on that investment. We're going to do that every time.

Speaker 3

If we see the opportunity to invest in long term infrastructure and get a 20%, 25% cash flow yield on that with virtually no risk. We're going to do that. And so look, I think next year it could be in the $100,000,000 to $200,000,000 range of that additional growth capital. And I think what's true maintenance, if you want to think about that, is probably much closer to that $2,000,000,000 number.

Speaker 8

Appreciate it. If I could sneak in the housekeeping one. Is there a meaningful shift in your deferred tax assumptions for next year cash tax as a percentage of overall burden.

Speaker 3

No, we don't see any material taxes paid in 2024. And then I think as you get into 2025, at least for trip us today. We're maybe looking at closer to like a 15% tax rate and then by the time you get to 2026, we're a full cash taxpayer, Kind of a low 20% cash tax rate.

Speaker 8

Appreciate all

Speaker 4

the help.

Speaker 8

Thank you, guys.

Operator

Thank you. Your next question comes from the line of Michael Scialla with Stephens. Please go ahead.

Speaker 9

Good morning, everybody. I wanted

Operator

to see if you can talk about the potential

Speaker 9

For the $150 per foot of savings with the operational efficiencies that you're applying to the Tug Hill assets, what needs to happen for that to become reality. And I guess where are those relative costs based on wells completed there so far?

Speaker 2

Well, the cost savings that we had, the $150,000,000 about half of that is operational efficiency, the other half is well designed. So For that to materialize, we need to continue executing in the field and putting up some big numbers on drilling speeds and completion pace, Obviously doing it as safely as possible to accomplish that. The other thing I'd say on the well design side of things, that's probably going to take a little bit more time to materialize because we will take a more methodical pace on the science. We don't just run out and make all the changes at once. So there'll be some monitoring time observed there.

Speaker 2

But when you step back and think about these type of operational synergies that we'll achieve, That $150 a foot could translate to about $50,000,000 of total spend, which would translate to about, call it $0.02 to $0.03 lower on our cost structure on top of the previously planned $0.15 So I hope That adds some more color to your question.

Speaker 9

That's helpful. Thank you. I wanted to ask about the Your agreements on with the LNG, in terms of Any comments there on the discussions you're having with potential end users of LNG? And would any agreement there be contingent on converting your HOAs to binding agreements sort of what's the process that needs to play out there?

Speaker 3

Yes, great question. There's actually been a lot of interest, a lot of parties reaching out to us about this. So we've been really encouraged by that to date. In terms of sequencing, we do need to get those long term agreements signed on the supply side, before signing the ultimate SPA, but it's really a parallel process. And so we are working through that.

Speaker 3

In terms of Timing, it's probably 6 to 12 months out before kind of the whole package of those is done. But look, we've been really encouraged by the progress to date.

Speaker 9

Thank you, guys.

Operator

Thank you. Your next question comes from the line of Kevin McCurdy with Pickering Energy Partners. Please go ahead.

Speaker 10

Hey, good morning. The firm sales contracts you locked in starting in 2027 are very impressive. With those margins derisked, do you have any plans to grow into the volumes? And is that baked into your 2024 to 2020 free cash flow outlook.

Speaker 3

We certainly have the option to. We just got these deals signed a couple of weeks ago, so we've not made any long term plan adjustments, but that is an exciting option that's really paired with this from a value creation standpoint and something that we will evaluate in time if the price environment merits that level of activity.

Speaker 10

Got you. So it's not baked into that outlook at this time, the 60% free cash flow at BV.

Speaker 3

That's right.

Speaker 10

Great. And then, you mentioned the $0.55 off NYMEX for 2024, I just wanted to get a little bit more clarity on whether that included basis hedges and any BTU uplift?

Speaker 3

Yes, that's right. It's all in.

Speaker 11

Great. Thank you.

Operator

Thank you. Your next question comes from the line of Jean Ann Salisbury with Bernstein. Please go ahead.

Speaker 3

Hi, good morning. I just On the 2MPA of HOAs, do you have an ideal share of portfolio linked to global gas prices? And what kind of your That underpins that ideal share if

Speaker 12

you do.

Speaker 2

Yes, I think if you step back and said, and looked at

Speaker 9

this purely from a market diversification perspective, somewhere

Speaker 2

around 10% exposed to perspective, somewhere around 10% exposed to international markets feels balanced. But this will ultimately depend on what type of netbacks that we're able to achieve by connecting to that market and that will sort of Turn the knob on where we sit with that. But right now as it stands, there's 2,000,000 tons per annum for us is us putting our toes in the water. I mean, it's a significant amount of volume to gas and provide a ton of energy security for customers around the world, but it's less than 5% of our total volume. So, we're going to take a measured approach in accessing this market.

Speaker 3

Great. That's all for me. Thanks.

Operator

Thank you. Your next question comes from the line of Paul Diamond with Citi. Please go ahead.

Speaker 13

Good morning. Thanks for taking my call. Just a Quick one, you guys talked about the kind of that theoretical max of 500 days versus the average of about 400 currently. Just I wanted to see if you guys could put a little bit of clarity around, I guess, how you see bridging that gap? Like how close can you get to the 600 and over what timeframe?

Speaker 2

Yes. So, the theoretical max is around 600 hours per month and we set plans for 400 and hope to Repeat the 500 hours per month. Listen, the biggest thing is going to be the logistical support for these frac operations. And that's all about getting as much water and sand to location as possible. We've spent a lot of time on the sand side.

Speaker 2

There could be some infrastructure investment opportunities On that pace to bring Transload facilities closer to the actual frac sites, those opportunities are relatively small, dollars 8,000,000 to $10,000,000 upfront costs, but they can pay dividends over time. And then obviously, we understand that the benefits and economics behind water infrastructure. One of the biggest benefits with EQT and one of the benefits of our having a deep inventory in this area We're going to be able to make these investments because we have so much inventory that's going to benefit from these investments. And that certainly is a key differentiator to think about when you think about these opportunities present within EQT versus others.

Speaker 13

Understood. Thank you. And just one quick follow-up. You guys talked about the incorporation of MVP and co retirements Reducing about 4 Bcf of incremental demand out of Appalachia. Just wanted to see if you could get a bit of clarity around the timing of that.

Speaker 13

Is that over the 1 year, 5 years is how do you see that kind of developing?

Speaker 3

Yes. So I mean half of that is obviously MVP at 2 Bcf a day. And the rest of it, we kind of look at it over the next 5 years, kind of chipping away. It's not obviously an annual growth number, but We see over that timeframe that demand showing up kind of through those different changes in the market.

Speaker 13

Understood. That's all for me. Thanks for your time.

Operator

Thank you. Your next question comes from the line of Noelle Parks with Tuohy Brothers. Please go ahead.

Speaker 12

Hi, good morning.

Speaker 2

Good morning.

Speaker 12

One question I had was, as you have put together some of these longer term forecasts and projections. And when you bake in the infrastructure piece, Yes, some of the trends look really compelling. As you look at different pricing scenarios, do you picture And this, of course, would be a high class problem. Do you picture a gas price high enough where a plausible fear kind of gets reintroduced of the industry over drilling again. And I mean, I don't know, is that sustained $6 $7 or something like that?

Speaker 2

Yes, I mean, I think our biggest thing that is going to be the biggest driving force maybe on How people think about the dollars they spent towards drilling is really getting away from the half cycle wellhead returns and looking more at a holistic cost of returns and gas price needed to actually not just generate free cash flow and cover your cost of supply, but Actually create, deliver value to back towards shareholders. And that right now scenario is showing us that Even with current strip, is below the price level needed to generate the cost of returns that investors are demanding right now. So If you look at it from that perspective, I think you'd be a little bit more cautious over activity levels. But We think that what's happened in this industry over the past few years in the sustainable shale era is Operators I think are being much more holistic when they're making their investment decisions and that's going to lead to better a more durable industry that's better to serve customers over the long term and also keep investors Happy and satisfied with the returns that they're making.

Speaker 3

Yes. I'd say another interesting caveat to that that's really important to remember. I think a lot of people like to talk in terms of averages when talking Talking about future gas prices or commodity prices. In our view, I think what's going to change a bit in the character of the gas market going forward is, In a world where there's less coal to switch to, you have renewable intermittency, you have your days of demand cover dwindling for gas, You're going to see a lot more volatility. And so instead of a clear price signal, so to speak, of $5 or $6 as you suggested, which would give you confidence to drill and grow.

Speaker 3

I think you might see a year where gas is really high and another year where gas is really low. That will average out to an attractive price in the middle, But it does create a lot of volatility. And I think from a planning perspective for companies that are just pure upstream producers, it creates a lot more pause before saying, We want to go invest an extra $1,000,000,000 in drilling in a given year. And I think that if you want to look at a case study of that, you can see what happened in the past 12 months where That really seemed to be all the rage in 2022. Prices were high single digits and all it took were a couple of Events and prices fell as low as $2 Now you're seeing the Haynesville start to really decline.

Speaker 3

I think when you look ahead, I think that's an important differentiation, but I think the net effect is you're going to see some air gaps emerge of oversupply and undersupply. And that really underpins our focus on cost structure because we don't want to be one of those producers that has to decline and has to ramp back up. We'd love to be able to really produce durable cash flow in return for investors through the cycle. And again, if you're worried about prices when you're falling to $2 like we Saw this year and you have to hedge that, but then you miss prices going back up materially higher. Over the long run, you're not going to generate nearly as much value.

Speaker 3

So Again, that outlook is really informing how we scope the business, whether it's through just organic cost cutting, so our hedging strategy, our balance sheet, how we think about future M and A. But that characteristic, I think, is an important caveat. It will be a lot different in the next 5 years compared to the prior 5 years.

Speaker 12

Great. Thanks a lot for bringing the volatility angle into it. And I also wanted to touch on the issue of coal replacement. And I was just wondering, are you as you see utilities doing their longer term planning. Do you see any signs of the impact from some of the advanced technology out there, for example, for gas turbines, greater efficiency, lower emissions and so forth.

Speaker 5

Is that in the equation as you see some

Speaker 12

of these coal replacements on the horizon?

Speaker 2

Well, I think what you are seeing is Energy security coming back into the headlines in the American grid. And when you look at all a lot of the power generation capacity that's been added Over the last 5 years, a lot of it has come from intermittent, albeit lower carbon energy solutions like wind and solar and people are now stepping back and saying, do we have the reliability that we need? And you see this across all ISOs across the country where your peak demand number is coming very close to your reliable electricity generation. While you may have coverage from intermittent sources above that, You realize that when that peak demand hits and you're pushing the you're redlining your reliable electricity power generation, You're on your knees praying for the wind to blow and the sun to shine. And I think people are looking at this now and looking for more energy

Speaker 12

Great. Thanks a lot.

Operator

Thank you. Your final question comes from the line of Bert Dones with Chruwis. Please go ahead.

Speaker 11

Hey, thanks guys. Toby, I think you brought this up a few times, the idea of downside protection. When it comes to hedging and even your LNG strategy that I think provides us floor. It seems like you're more careful in protecting the downside risk versus some of your peers. Maybe that backs off a little bit once you hit your leverage target.

Speaker 11

But do you think this is just the nature of you guys being the biggest guy in the room? Or are you looking longer term? Or Or maybe you just frankly have a different investor base that are asking different things of you, but just any thoughts there?

Speaker 2

Well, I think it's just prudent as As an investor to think about protecting against the downside while also providing exposure to what we think is going to be a really exciting natural gas market. So I think one thing that's going to be the alternative is and we can play that with by hedging and caring about floors and also caring about the ceilings we're putting in our business. We can do that with some of the supply deals we structured, delivering floors that cover our cost of capital allow us to generate the returns that our investors are demanding, while also providing ceilings that prevent customers from experiencing price blowouts. And at the end of the day, the integrated energy producer like EQT that has control over the cost to pull the gas out of the ground, The contracts move it through the pipelines and get it through the tailpipe of our new facility. We can offer pricing that It ensures us to be able to generate our returns, but also gives the world what it really needs, which is guardrails on pricing.

Speaker 2

And that will give them the energy security that ultimately is so desperately needed right now. So again, we think customers that are looking to play the spot market. With this volatility, it's going to get pretty exciting. And I think we can take away some of the volatility And still generates pretty great returns and create some really great win win scenarios for customers.

Speaker 3

Yes. And let me add to that, Bert. I mean, look, I think we've moved from a world in the last Couple of years, we're playing defense, and very programmatically hedging to a position being fully back to investment grade now with the low cost structure, one of the lowest amongst peers, where we can much more opportunistically say where do we see risk on the curve, where do we see opportunity. And again, that's why we keep trying to reemphasize how we're taking a more tactical approach to hedging at the moment. So again, we've increasingly leaned into more hedges in the next 12, really 9 to 12 months because weather biggest driver is winter during that time period.

Speaker 3

So whether that is a warm winter, a cold winter, a normal winter, Prices could be up $0.50 to $1 or down $0.50 to $1 We don't see it materially moving probably beyond that, but that changes a lot as you get later into 2024 and into 2025 where relative to where the strip is right now and the other fundamental factors playing into it, the declines in production We expect to see start to really materialize in the Haynesville, in particular, combined with the LNG, The pickup in LNG demand, which by the end of 2025, we're modeling it about a 5 Bcf a day increase. We have another probably Bcf a day increase on top of that in the form of exports to Mexico and other structural demand from things like industrial. That market looks increasingly tight with a backdrop of low DUC inventory and actually underinvestment. And so When we see opportunities like that emerge, we want to provide investors exposure to that. But look, at the end of the day, if I were to say You don't have a dynamic like that at play.

Speaker 3

I think our focus in hedging will be protecting just the fixed cost structure of the business, and taking out some of the volatility associated with that. And again, in a world of high volatility, as I explained a few minutes ago, that we'd expect to see in the future, It will be really great years and also some years that could be pretty tough like we saw earlier this year. And so we'd like to really take that volatility out. And if you think about the essence of what a lot of investors, high quality investors in particular are looking for in energy right now, it's durable cash flow and yield and it's price exposure, Right. And so what we're trying to do through our hedging program is really try to scope that exposure for those investors and provide that long term runway where they can have that in the next 5 to 10 years.

Speaker 3

We're not trying to run a business that is just the highest volatility option on gas price. We're trying to run it like a real business.

Speaker 4

Those are a lot of

Speaker 11

great points. Thanks guys. And then maybe shifting gears a little bit, it looks like you're drilling slightly shorter laterals in 4Q versus 3Q, But you're still completing or turning in line maybe some longer laterals. So could you talk if there's a strategy shift there or if that's just a quarterly blip and you're still targeting longer laterals.

Speaker 2

Yes, we're still targeting longer laterals. There will be variances quarter to quarter and that sort of what you may be seeing here. But the strategy has not changed. The strategy to continue to leverage common development and unlock the scale of our asset base It's still being top of mind and applied every day.

Speaker 11

That's perfect. Thanks, guys.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Toby Rice for closing remarks.

Speaker 2

Thanks, Eric. This quarter marks another quarter where we've demonstrated some pretty meaningful steps to make the energy we produce at EQT cheaper, more reliable and cleaner for the world and also create value for shareholders. What was really great to see this quarter is really talking about how the differentiating aspects of our business, our low cost structure, our scale, Our deep inventory and environmental attributes are actually creating value and creating opportunities for our business that we are Optimistic will present some really attractive investment opportunities for us in the future and we look forward to keeping you guys updated along the way.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Key Takeaways

  • Record‐pace integration of Tug Hill and XCL Midstream assets—74% of integration milestones completed in just 60 days, marking EQT’s most efficient deal execution to date via its proprietary digital playbook.
  • Q3 drilling and completion set new internal and world records—drilled 18,264 feet in 48 hours and logged an all-time high of 400+ pumping hours per frac crew, nearing the theoretical 600-hour monthly maximum.
  • Early operational synergies at Tug Hill driving cost savings—35% increase in stages per day, 50% faster drilling speeds and 40% lower drilling costs per foot, with potential for up to $150 per foot of additional well cost reductions.
  • Robust free cash flow outlook—at ~$3.40/MMBtu strip pricing EQT expects ~$1.7 billion of pro forma FCF in 2024 and ~$14 billion cumulatively from 2024–28, representing ~60% of its enterprise value.
  • SIGNED TWO 10-YEAR 1.2 Bcf/d firm sales agreements on MVP—among the largest North American gas deals, expected to add >$300 million of annual cash flow from 2028 and cut ~40 million tons of CO₂ per year by displacing coal.
A.I. generated. May contain errors.
Earnings Conference Call
EQT Q3 2023
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