EQT Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 14, 2024

Key Takeaways

  • Achieved record operational metrics in 2023—including a 15% increase in monthly pumping hours and multiple drilling world records—while improving EHS intensity by 22%, surpassing safety targets.
  • Generated nearly $880 million of free cash flow, retired over $1.1 billion of debt and raised the base dividend by 5%, demonstrating resilience at the low end of the North American gas cost curve.
  • Closed and integrated the Tug Hill and XCL Midstream acquisitions, cutting Marcellus drilling costs to $200/ft (55% below prior levels) and exceeding the initial $150/ft savings target plus $80 million of infrastructure synergies.
  • Set 2024 guidance at 2.2–2.3 Tcfe of production with $1.95–2.05 billion of maintenance capex plus $200–300 million for midstream, water and land projects expected to deliver >25% free cash flow yields, and forecasted nearly $9 billion of FCF over five years at $3.40 gas.
  • Advanced its LNG strategy by signing 2.5 mtpa of tolling HOAs (≈5% of 2023 production) and launched a pioneering West Virginia forestry carbon sequestration partnership to support net-zero Scope 1 and 2 emissions goals.
AI Generated. May Contain Errors.
Earnings Conference Call
EQT Q4 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone To the EQT 4th Quarter 2023 Quarterly Results Conference Call. All lines have been placed on mute to prevent any background noise. I would now like to turn the conference over to Cameron Horitz, Managing Director of Investor Relations and Strategy. Please go ahead.

Speaker 1

Good morning, and thank you for joining our Q4 year end 2023 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer and Jeremy Knope, 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 the factors described in yesterday's earnings release, in our investor presentation, the Risk Factors section of our Form 10 ks 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.

Speaker 2

Thanks, Cam, and good morning, everyone. Coming into 2023, I sat down with our leadership team and we set our overarching corporate mission and goal for the year With two simple words, peak performance. I wanted our 4th year since the takeover of EQT to be our best one yet And the crew certainly came through in delivering on that mission. I want to take a few moments to briefly reflect on the incredible accomplishments from this organization we achieved over the course of 2023. On the operations front, we set multiple drilling world records and achieved our highest completion efficiency pace ever with 2023 monthly pumping hours per crew up more than 15% year over year.

Speaker 2

Importantly, this incredible operational pace came amid a 22% improvement in our 2023 EHS intensity, which was even better than our 15% target and underscores our unwavering commitment to safety at EQT. On the financial front, despite a challenging natural gas price environment, EQT generated nearly $880,000,000 of free cash flow in 2023, retired north of $1,100,000,000 of debt and raised our base dividend by 5%. This financial performance is a clear demonstration of our advantage position at the low end of the North American natural gas cost curve and highlights that EQT is poised to thrive regardless of where we are in the commodity cycle. On the M and A front, We closed on the strategic acquisition of Tug Hill and XCL Midstream and integrated the assets at a record pace. Our team has wasted no time driving material operational performance improvement on the assets with the latest EQT operated Marcellus drilling costs coming in more than $200 per foot or nearly 55% lower than Tug Hill operated wells.

Speaker 2

This recent performance suggests the potential for even more upside than the $150 per foot of well cost savings we discussed last quarter, which as a reminder is additive to $80,000,000 of largely infrastructure related synergies we originally announced with the deal. On the marketing front, EQT's low cost, peer leading inventory depth and environmental attributes enabled us to sign the largest long term physical supply deals ever executed in the North American natural gas market with some of the country's leading utilities. With much stronger than expected power generation growth in many regions of the United States and natural gas providing the ideal low carbon A valuable complement to renewable generation, we expect gas fired power demand will surprise to the upside over the coming decade and EQT's unique ability to meet this demand should result in additional margin capture opportunities moving forward. We also made material progress on our differentiated LNG strategy, leveraging our significant Gulf Coast firm transportation capacity to sign HOAs covering 2,500,000 tons per annum Of LNG tolling capacity, we're roughly 5% of our total natural gas production. Our more integrated approach to LNG exposure compared with peers gives us direct connectivity to end users of our gas globally and we have seen strong interest from prospective international buyers.

Speaker 2

While there has been some noise around LNG permitting of late, the outcome of COP28 demonstrates the world has spoken, deeming natural gas as critical in facilitating the energy transition while ensuring energy security. It is abundantly clear that nations around the world currently powered by coal desperately want and need greater access to natural gas and ultimately political posturing will reconcile with this reality if we as a society are truly intent on achieving global climate goals. On the ESG front, we announced a first of its kind public private Forestry partnership with the state of West Virginia, which will create one of the highest quality, most verifiable nature based carbon sequestration projects anywhere around the globe. We have already seen solid momentum on this project to date and we are incrementally confident in EQT's ability to become the 1st energy company of meaningful scale in the world to achieve net 0 Scope 1 and 2 emissions. This impressive list of achievements is a showcase of what is possible when you combine a world class asset with an industry leading digitally enabled team underpinned by a culture of excellence and teamwork.

Speaker 2

Turning to our reserve report, EQT's 2023 proved reserves totaled 27.6 Tcfe, which was up 2.6 Tcfe relative to 2022, largely driven by additions from the Tug Hill acquisition. Importantly, even with the SEC price deck dropping from over $6 per 1,000,000 BTU at year end 2022 To $2.64 at year end 2023 EQT's proved reserves prior to the impact of Tug Hill were slightly higher year over year, underscoring the economic resiliency of our world class low cost Appalachian reserve base. Within our proved Undeveloped reserve category of roughly 8 Tcfe, we have just 417 gross locations booked or roughly 3 years of development, representing only 10% of our de risked inventory of nearly 4,000 gross locations. It's also worth highlighting that we estimate an additional 2 Tcfe of reserves not captured in our bookings associated with our non operated position in Northeast Pennsylvania as we book limited PUDs on this asset given we only have timing visibility out 3 to 6 months. Additionally, we've taken a conservative stance limited reserve bookings for Tug Hill's go forward Utica inventory in West Virginia, which should be a source of reserve upside over time.

Speaker 2

Using the year end 2023 second price deck of just $2.64 per 1,000,000 BTU, the PV-ten of our proved reserves is approximately $12,000,000,000 Assuming recent strip pricing, this value jumps to almost $23,000,000,000 and again, this describes credit to just 3 years or 10% of our remaining inventory. I'd also note our reserve valuation is calculated prior to the impact of our firm transportation portfolio to the value accruing to EQT for marketing arrangements Like the MVP firm sales contracts we announced last quarter are incremental to these PV-ten values. We see the consistency and economic resiliency reflected in our reserve report as an important channel check for investors that highlights EQT has among the highest quality, lowest cost natural gas asset base anywhere in the world. Looking to 2024, we are initiating 2024 production guidance of 2,200 Bcfe to 2,300 Bcfe, which includes some flexibility to curtail volumes should natural gas prices remain weak. Our program contemplates running 2 to 3 rigs, 3 to 4 frac crews and turning in line 110 to 140 net wells.

Speaker 2

As shown on Slide 6 of our investor deck, this activity level juxtaposed against our large production base underscores the incredible capital efficiency and quality of our assets as EQT is generating the most gross operated production per rig of any natural gas operator in the United States by a wide margin. Looking at our spending profile, we are setting a 2024 maintenance capital budget of $1,950,000,000 to $2,050,000,000 including maintenance, land and infrastructure spending. We have also tactically allocated $200,000,000 to $300,000,000 for strategic growth projects across water infrastructure, gas gathering and land that are opportunistic in nature and highly symbiotic with our upstream operations. Jeremy will give more details later on, But these projects generate the best risk adjusted returns in our portfolio, de risk our upstream execution, allow us to replenish inventory at extremely attractive costs and facilitate the compounding of capital for shareholder value creation. At the midpoint of our maintenance capital and production guidance ranges, Our implied 2024 maintenance capital efficiency equates to $0.89 per Mcfe and our unhedged maintenance NYMEX free cash flow breakeven is $2.50 to $2.60 per 1,000,000 BTU.

Speaker 2

With contractual gathering rate reductions, the shallowing of our base decline, Improving basis from the firm sales arrangements we announced last quarter and reductions in interest expense, our all in NYMEX free cash flow breakeven price should be in a glide path down towards $2.30 per 1,000,000 BTU over the next several years. We believe this economic profile is in a class of its own relative to the rest of the industry, where we expect to see upward pressure on cost structure over this period associated with operators shifting to lower quality inventory in both the Haynesville and parts of Appalachia. This differentiation is highlighted by the fact that we project EQT QT will generate cumulative free cash flow of almost $9,000,000,000 over the next 5 years at a natural gas strip That average is approximately $3.40 per 1,000,000 BTU over this period. This gas price is roughly equivalent to the fully loaded Corporate marginal cost of supply in the U. S.

Speaker 2

Required to simply breakeven from a free cash flow perspective, let alone to generate returns for shareholders. Said another way, higher cost natural gas producers will at best generate no shareholder value at the current strip over the next 5 years, while EQT is set to generate more than 40% of our enterprise value and free cash flow over the same timeframe. This stark contrast underscores why cost structure is our North Star at EQT and why we strive not to be the biggest, but to be the highest quality, most resilient company that can generate durable free cash flow, both in up cycles and in down cycles. This is the essence of sustainability and value creation in a commodity business. And we believe our shareholders are uniquely positioned to reap the rewards of EQT's unrivaled combination of scale, peer leading low cost inventory depth and best in class emissions profile.

Speaker 2

I'll now turn the call over to Jeremy.

Speaker 3

Thanks, Toby, and good morning, everyone. I'll start by summarizing our Q4 results, which highlight our operational momentum as we closed out the year. Sales volumes of 564 Bcfe was toward the high end of our guidance range, reflecting continued best in class execution from our drilling and completion teams along with strong well performance. Our per unit adjusted operating revenues were $2.75 per Mcfe and our total per unit operating costs were $1.27 per Mcfe, which were at the low end of our guidance range driven by lower than expected LOE and G and A expenses. It's worth noting that we outperformed LOE expectations every quarter in 2023 with total absolute LOE coming in $40,000,000 below our internal forecasts, driven largely by more efficient water handling facilitated by the investments we've made in water infrastructure.

Speaker 3

Capital expenditures were $539,000,000 which were in the lower half of our guidance range, reflecting the operational efficiency gains Toby mentioned previously. Turning to the balance sheet. Last month, we completed several transactions that eliminated debt, reduced interest expense, simplified our balance sheet and established an important 10 year pricing reference point, which is the longest dated bond outstanding of our natural gas peers and underscores the market's confidence in our inventory duration. First, we retired all outstanding convertible senior notes due in 2026, which eliminated more than $400,000,000 of absolute debt. Recall, our fully diluted share count already included the shares associated with our convertible notes.

Speaker 3

We simultaneously liquidated the capped call that we had purchased in conjunction with the issuance of the convertible notes for cash proceeds of $93,000,000 For a form a convertible note retirement, our total debt outstanding is currently $5,500,000,000 which equates to 1.6 times leverage when annualizing 4th quarter adjusted EBITDA. Following the convertible note settlement, we executed a highly successful $750,000,000 10 year bond offering last month, the proceeds of which we used to pay off 60% of the term loan that we borrowed in conjunction with the closing of the Tug Hill and XCL Midstream acquisitions. We saw extremely strong demand from the credit market With a peak order book of almost $6,000,000,000 and the bonds pricing at a tight 1.65% spread to comparable U. S. Treasury rates, which is similar to credit spreads of many of the highest quality large cap companies in the broader energy sector.

Speaker 3

In conjunction with the bond offering, We also extended the maturity of our remaining term loan from mid-twenty 25 to mid-twenty 26, providing ample flexibility for maturity management moving forward. In terms of capital allocation, we will continue to prioritize debt pay down until we achieve our $3,500,000,000 gross debt target. Our capital allocation philosophy is underpinned by an unwavering focus on establishing a fortress balance sheet, countercyclical and opportunistic share repurchases and a steadily growing base dividend. This long term focused value investing framework has received resounding support from our increasingly high quality shareholder base and we will continue to allocate capital in accordance with this first principles framework. Looking ahead to 2024, we are setting an annual production guidance range of 2,200 Bcfe to 2,300 Bcfe, which is underpinned by a fully loaded maintenance capital program of 1.95 to $2,050,000,000 Additionally, we are investing $200,000,000 to $300,000,000 into several strategic growth projects in the form of midstream and water infrastructure and infill land capture this year.

Speaker 3

These opportunistic investments are significantly value enhancing, I want to take a moment to highlight the merits of each of these. The acquisition of XCL Midstream last year created a full service midstream platform within EQT. And through this platform, we are already sourcing proprietary opportunities that generate strong risk adjusted returns and robust free cash flow yields, even superior to those of our core Marcellus wells, while at the same time de risking our upstream operations. As shown on Slide 10, we are investing in 3 midstream growth projects this year, comprised of the Clarington Connector, The Oak Gate Pipeline and the Pacific Coast Compression Project. The combined capital associated with these projects is approximately $115,000,000 And once fully operational, these projects should generate aggregate annual free cash flow of nearly $50,000,000 in the form of superior price realizations.

Speaker 3

This implies these investments will generate an aggregate free cash flow yield of nearly 40%, which is extremely attractive given the absence of price risk and the annuity like cash flow profile over a 20 year asset life. We forecast a total return on investment of roughly 8 times And the aggregate net present value of these projects is estimated at $250,000,000 implying value creation for shareholders equivalent to roughly $0.60 per share. Despite only having this midstream business for just 6 months, these initial projects provide a glimpse into the long term opportunity we see for this new business line. Reinvestment opportunities of this quality only come about because of the symbiotic relationship between our midstream and upstream teams working in alignment together. We believe this approach to growing shareholder value is differentiated among peers, especially in a $2 gas world and intend to cultivate this platform so that it becomes an even more impactful driver of shareholder value creation over time.

Speaker 3

Within our reserve development CapEx, we've also allocated $80,000,000 to expand our existing water infrastructure assets in West Virginia. As shown on Slide 12 of our investor deck, we expect 2024 investments into our water infrastructure to drive annual savings of $20,000,000 implying a 25 percent free cash flow yield on our invested capital. Our EQT owned water system has materially increased the amount of water that we can recycle, which is having a tangible impact on our cost structure as demonstrated by our LOE coming in below forecast every quarter last year, translating to $40,000,000 more free cash flow than originally forecasted. Turning to land, we have roughly $100,000,000 allocated Opportunistic infill leasehold growth in mineral acquisitions this year. As shown on Slide 13 of our investor presentation, Opportunistic leasehold additions organically replenished 65% of the acreage that we developed over just the past year, which is a pace of replenishment that can materially expand our years of inventory when aggregated over time.

Speaker 3

We believe this ability to organically backfill developed inventory is a unique feature among U. S. Shale plays that largely exists only within Southwest Appalachia due to the land configuration and historic development activity. We are seeing notable opportunities to add to our acreage position at To put into context the value creation potential of deploying leasehold capital, we highlight a very tangible example on Slide 13 of our investor presentation. In 2022, we infill leased acreage and increased our working interest by 18% in our Pol Cat North development located in Greene County, which we brought online last year.

Speaker 3

The incremental interest we added in this project through organic leasing is projected to generate a 90% plus Free cash flow yield in year 1 alone and nearly 55% annual free cash flow yield over the 1st 5 years and a return on invested capital of roughly 7 times at strip pricing. This example highlights why we see these tactical land expenditures as an extremely attractive reinvestment of capital, while simultaneously extending inventory duration, which can in turn help facilitate additional strategic initiatives such as signing long term supply agreements. A key point I want to leave you with on these growth projects is whether it's land capital, Infrastructure investments, our acquisition strategy, long term agreements with utilities or our base upstream business. We are incredibly intentional about aligning these decisions to ensure they symbiotically work together to enhance each other and collectively result in optimal risk adjusted compounding of shareholder capital in the decades ahead. In essence, this is the definition of terminal value And through building a successful track record of these decisions, we expect this to be reflected in our stock price.

Speaker 3

Lastly, I want to quickly touch on our cost structure guidance given the moving pieces with the imminent startup of MVP. We are guiding full year transmission expense to $0.42 to $0.44 per Mcfe, which is up approximately $0.10 year over year driven by the cost associated with MVP. This is partly offset by an accompanying contractual step down in our gathering rates, which we forecast to be in the $0.52 to $0.54 range for 2024, down from roughly $0.65 in 2023. Within our 2024 corporate differential guidance of $0.50 to $0.70 We conservatively assume EQT flows only a portion of our MVP capacity due to downstream limitations at Station 165. In the winter months, we should be able to flow at higher rates on MVP and realize a greater premium on downstream pricing.

Speaker 3

Thus the cash flow uplift associated with MVP will be seasonal in nature until downstream expansion projects come online. It's also worth highlighting that we have roughly 500 MMcf per day of our Station 165 pricing exposure hedged Through financial instruments and firm physical sales through 2025, which provides downside protection should there be any further price pressure of MVP over the next few years. With nearly 2.5 Bcf per day of upcoming project expansions at Station 165 and significant demand pull from the Southeast region, our ability to flow volumes on MVP and associated realized pricing should progressively improve over the coming years, Culminating in the commencement of our firm sales contracts in 2027, they're projected to improve our corporate wide differential by $0.15 to 0.20 dollars driving a $300,000,000 plus uplift in annual free cash flow generation. Turning to Slide 11 of our investor presentation, we announced the proposed acquisition of an additional 34% ownership in the EQT operated Sealy and Warrensville gathering systems in Northeast Pennsylvania for $205,000,000 in cash, And we currently expect the transaction to close in late Q1 or early Q2. EQT currently owns 50% of this gathering system, So our pro form a ownership will increase to 84% based on terms agreed to in the purchase agreement, subject to the potential exercise of certain preferential purchase rights.

Speaker 3

Recall, this gathering system was part of the Alta acquisition we completed in 2021, which has been a significant source of value creation for EQT. The purchase price implies we are acquiring these assets for a double digit free cash flow yield, underscoring how this deal allows us to reinvest capital into durable, Long lived infrastructure at an attractive rate of return with near 0 execution risk given we operate both the system and the upstream development underpinning the assets. Consistent with our broader strategy to reinvest capital into assets that improve our corporate cost structure, our greater ownership in the system will immediately lower our overall free cash breakeven price by more than $0.01 per Mcfe upon close. We are currently looking at ways we can shift even more development activity onto this system over the coming years, which could drive additional upside to the transaction. Moving to hedging, we tactically added end of our 2024 hedge position earlier this year, leaning into the price spike that occurred ahead of the winter storm in January.

Speaker 3

We have now greater than 50% of our Q1 2024 production volumes hedged with a weighted average floor price of $3.87 per MMBtu, which has derisked a significant portion of our free cash flow outlook for the year. We have nearly 50% of our 2nd quarter production hedged with a weighted average floor of $3.39 per MMBtu and roughly 40% of our Q3 production covered at a weighted average floor price of $3.42 MMBtu. Additionally, we've recently added some 2024 winter hedges, taking our 4th quarter hedge coverage up to more than 20% with a weighted average floor price of $3.47 per MMBtu. Turning to Appalachian Basis, Differentials were relatively wide during the Q4, driven by an elevated eastern storage level and rising production associated with multiple operators completing wells that deferred from earlier in the year. Our strong basis hedge position again paid dividends this quarter, boosting our corporate wide realized natural gas price by $0.08 per MMBtu.

Speaker 3

As it relates to the increase in Appalachian supply, After peaking at just under 37 Bcf per day in December, production in the basin has fallen by roughly 1.5 Bcf per day We anticipate further declines in the Appalachian supply through the 2nd quarter. On the local demand side, it's noteworthy PJM recently doubled its 15 year annualized load growth forecast from 0.8% to 1.6%. This equates to nearly 7 gigawatts of additional power demand by 2027 and more than 10 gigawatts by 2,030, which if satisfied by natural gas would translate to nearly 2 Bcf per day of additional local demand by the end of the decade. This trend of increasing local demand, juxtaposed against relatively flat basin supply and the commencement of MVP, should provide a structural tailwind for local pricing over the coming years, which we do not believe is currently priced into the basis futures market. As it relates to Lower forty eight supply, it's worth highlighting that a prominent data vendor revised its year to date supply estimates downward by 1 to 2 Bcf per day this week.

Speaker 3

We had suspected certain data sources were overstating production And this down order revision validated the market is not as oversupplied as many previously thought. Assuming production simply stays flat At the current revised level and weather is normal through the injection season, end of summer gas storage would be roughly in line with the 5 year average level. I'll close by sharing a few philosophical thoughts on what we believe it takes to not only survive, but to thrive as a natural gas producer in a macro backdrop that we expect will be characterized by unpredictable volatility for the foreseeable future. The real long term winners in this business will not be the biggest At the low end of the cost curve, a low cost structure is the only competitive advantage one can have in a commodity driven business, which is why it is our North Star and drives nearly all of our strategic decision making. While we are believers that future natural gas prices will be higher On average, we do not believe that prices will be stable at this $4 to $5 level like the prevailing consensus view.

Speaker 3

And building a business around this assumption of average prices is likely to end poorly. Until we return to a world where we can build necessary domestic structure, we believe we're more likely to see prices either around the $2 level they are today to force high cost producers to curtail production and activity We're materially higher to curtail demand as pricing becomes the only variable left to balance natural gas inventories. Said another way, we believe in increasingly fat tailed distribution of outcomes. That is a critical distinction We're already seeing the manifestation of this dynamic with prompt month pricing at this moment. However, EQT is at the low end of the cost curve We'll be moving even farther down the cost curve over the next 5 years due to our contractual gathering rate reductions in long term MVP firm sales agreements.

Speaker 3

This outcome is by design as our philosophy toward creating value in a cyclical volatile commodity business has underpinned every one of our strategic decisions over the past several years. The culmination of these decisions has created a unique opportunity for investors to deploy capital into the preeminent natural gas platform is positioned to generate pure leading shareholder value through all parts of the commodity cycle over the long term. And with that, we'll open the call to questions.

Operator

Our first question will come from the line of Arun Jayaram with JPMorgan. Please go ahead.

Speaker 4

Yes. Good morning, team. I wanted to see on Slide 9, you highlight your views on maintenance CapEx and strategic growth CapEx and you compare it from 2024 relative to 2025 to 'twenty eight outlook. Jeremy, I was wondering if you could maybe help us think about the trajectory of that spend. How does 2025 look versus 'twenty eight?

Speaker 4

And maybe just some thoughts on midstream CapEx under this outlook because that was a clear focus of today some of the strategic midstream investments that EQT is making?

Speaker 3

Yes, absolutely. So we've assumed in our go forward forecast in our 5 year outlook about 150,000,000 per year, which is kind of a loose bucket we've assigned. I wouldn't say it's entirely Fine through that forecast, but that's our broad assumption, which is what's reflected on that slide. There's a little bit of carryover on the Clarington Connector project into 2025, but I would say that expectation for spending is within that bucket. I mean, look, I think these sort of spending projects, it's not something that necessarily will be recurring.

Speaker 3

But if look, if we see great opportunities that make our business better, Sometimes it costs a little bit of money to invest and actually capture that price and that value. That's what you're seeing us do in 2024. There'll be years where we probably don't spend any of that capital and other years where we spend a little bit more.

Speaker 4

That's helpful. Second question, give us some thoughts on the glide path on the $2,000,000,000 deleveraging target. There have been some recent press reports on EQT potentially looking at selling your non op piece in Northeast PA, I don't know if this is a great environment to be selling assets, but I was wondering if you could comment on maybe some inorganic opportunities to delever call it in a big bang type of approach?

Speaker 3

Yes. Look, obviously with the volatile commodity price environment even a month ago, The outlook when the strip was at $3 is different than where the strip is today, closer to 2.40. So it's in many ways, organically, it will depend on just where the strip settles. We continue to be really bullish. The next 6 to 9 months might be a little bit bumpy, but I think we continue to have the view and I think you're starting it from some of the earnings guidance already coming out this quarter.

Speaker 3

Really a curtailment activity today is just going to really amplify the upside, I think, as we get into next year. So we remain well positioned to capture that, I think, as much as really anybody. In terms of inorganic ways to delever, I mean, look, we for the right price, we're a seller of anything, Right. I mean, our focus and our North Star is really just creating shareholder value if there's an opportunity to do that. Certainly, I think when we started thinking about rationalizing the portfolio in Q4, we're looking at a 3.50% strip.

Speaker 3

So the Process for executing on that might be maybe a little bit delayed, but I would say, there's a renewed interest really across the market in non operated assets, Really from international players who have interest in having exposure to US gas. And I think we've seen a little bit of this but don't want to actually have U. S. Operations. So, you know, we really, started exploring that because of inbounds we got.

Speaker 3

And I think a lot of those buyers were a little less price sensitive than some of the buyers domestically. So look, we, anything we do, it Certainly not is not defensive. It would be opportunistic. And I'd say we've seen some really good interest on the asset. I think it values that Certainly do not reflect strip pricing.

Speaker 3

So, we'll remain opportunistic, but it's something that could happen near term. It could happen a year from now. But it's just part of our continued effort to not necessarily just chase scale, but really chase quality and what creates the most value. Great. I'll turn it back.

Speaker 3

Thanks.

Operator

Your next question comes from the line of Sam Margolin with Wolfe Research. Please go ahead.

Speaker 5

Hey, good morning, everybody. Thanks for taking the question. Thanks for the detail on your activity plans for 2024. As always, that's a recurring slide. My question is, the ranges of the number of wells that you drill and complete and turn to sales are the same range, but they're not necessarily aligned on either end.

Speaker 5

And so when you think about how you execute within those ranges, do they move together on a one to one basis? Or is there a scenario where you drill 120 wells, you complete 120 wells and you turn 120 wells in line And you have no change in sort of like your DUC backlog or your deferred TILs?

Speaker 2

Yes. So to provide some more color on the numbers we put out there, I mean, there is a mix of wells that are and not all the numbers are the same for what we spud to what we horizontally drill, complete and what we ultimately turn in line. When we put those numbers out, when we have to pick a number, it's typically the Till. And so there will be a little bit of a range there to account for some flexibility. If we see a more compelling opportunity in 2025, we could pause on some of the Till activity.

Speaker 5

Okay. That makes sense. And then, I mean, this is sort of a follow-up to those ranges. They're designed, I guess, To correspond to a number of different market outcomes, I mean, what's the market condition where you might materially change those ranges and bring down activity below where you've been running. Obviously, as you can imagine, that's an inbound question I think all of us get from investors.

Speaker 5

Thanks.

Speaker 3

Yes, Sameh. It's something that I think we like every one of our peers is probably thinking about every day right now. I mean, you look at the prompt price in the 160s. The market is asking for not only production curtailments, but also activity reductions. And look, if you look at our even our production guidance that we gave in that bond in mid January.

Speaker 3

You'll notice we've reduced that range by about 50 BCFE. I would characterize that as a response To the price environment we're in and wanting to make sure there's flexibility so EQT can respond and make sure that If price gives a signal for lower activity and in lower production, we stand ready to respond.

Speaker 5

Understood. Thank you so much.

Operator

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

Speaker 6

Hey, good morning and thank you for taking our questions. Good morning. Our first question is really on your 5 year cumulative free cash flow outlook. You mentioned $9,000,000,000 And that's lower than it's you gave in the 3rd quarter. Obviously, that's part of lower commodity prices.

Speaker 6

But when you think about those two outlooks, Has there anything really changed on the cost side in terms of assumptions and anything particularly moved when you look at those two projections?

Speaker 3

No, John. There have been no changes. I don't think of any material consequence aside from pricing.

Speaker 6

All right. And then the other question here is really related to your long term gas differential. Where do you think your differential sort of if you sort of look at pricing, where do you think it is from 2027? And then Jeremy, you sort of went out there and you suggested that in basin demand should improve over time and that's not reflected in current differentials, where do you think that could potentially move?

Speaker 3

Yes. So if you look at just the EQT forecast, the midpoint of our range is that $0.60 level for differentials for this next year. If you look at where we end up in 2028 with the expansion projects in line and just at current strip pricing, Our realized differential will be about $0.50 So our differential on average drops about $0.10 from where we sit today to really the back end of that 5 year guidance range. I mean, look, when you think about the in basin demand dynamics, I think what we've highlighted could add Potentially up to 2 Bs a day of demand in basin, some of that might be taken by renewables, so call it 1 to 2 Bs net to gas. And The MVP downstream expansion projects come online too.

Speaker 3

I mean, that's going to fully utilize MVP. And I'd actually think From conversations we're having, there's probably likelihood MVP gets expanded by another half B a day. At EQT, we're staying ready to really be a supplier of that, support that project. I think there's ample demand in that southeast market with data center build outs really underpinned by the AI revolution right now And population growth in that area that's really pulling on gas for just absolute power demand increases in addition to coal retirement. So it's power, I think, in our view, as you look towards the end of this decade is increasingly becoming, I think, as Bullish of a thematic tailwind is really LNG and will probably really take the torch from LNG in the coming years.

Speaker 3

So I think that dynamic really when you couple all those dynamics and themes together and I think you really see a really healthy backdrop for Appalachia. And I think certainly as you see some operators start to run thin on inventory in the basin, I think it provides opportunity for companies like EQT to not only capture better in basin pricing, but actually really grow our own production into that and take a bigger share of the pie. So that's really our expectation over the next couple of years. We stand ready to respond to it, but we see it really more as a tailwind than a headwind.

Speaker 6

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

Operator

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

Speaker 7

Good morning, guys. Thanks for taking my questions.

Speaker 6

I was hoping just to dig in a

Speaker 7

little bit more on just Arun's Question, I think you will highlight the lower implied maintenance CapEx going into 'twenty five and beyond. I guess if we think about that delta of, I guess, dollars $100,000,000 $200,000,000 next year. Is most of that just coming from continued synergies on the Tug Hill assets? Is it lower base Klein, is it implied cost savings? Is it less infrastructure spend?

Speaker 7

Or is it sort of all of the above? Or what's driving the bulk of that?

Speaker 2

Yes, I would say it would be all of the above. Teams are looking across all angles of the business looking for ways to shave pennies off the program.

Speaker 7

And then maybe just to talk a little bit about just the LOE side or production cost side. Think you've highlighted in the deck, especially on Slide 12, the benefits of the water system. The guidance obviously this year, I guess now inclusive of the Tug Hill deal and some other moving parts, your LOE is moving higher. Are you including The expected benefits from the water system investments in your 2024 guidance Around LOE or is that something that would be additional upside?

Speaker 3

You're talking about the savings of $40,000,000 that we referred to in the prepared remarks or what you are referring to?

Speaker 7

Yes, the $40,000,000 and I guess like the completion of the systems in 2024?

Speaker 3

Yes. So those investments, I mean, you don't get An instant response the same year. I mean, the time it takes to build those systems, you usually see that. That savings show up in the following year and the years after that. So like the water system investments, the additional 80,000,000 we're spending this year in interconnecting really the Chevron water systems, what we've built out, the Tug Hill systems.

Speaker 3

I mean, that's really going to pay dividends for us not only in completion cost over the coming years just through lower water cost and water recycling, but also through LOE. I expect more of that to show up in 2025 and beyond, where you start seeing that move the needle.

Speaker 7

Appreciate the color.

Operator

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

Speaker 8

Hey, good morning. I had a couple of questions in the liquids production and pricing. The first question is, it looked like ethane production was lower than guidance for 4Q, while pricing for the other NGLs was higher than what we expected. Can you give some more detail on those two items and maybe remind us how your heavier NGLs are priced?

Speaker 3

Yeah. Look, I would say on the ethane side, it really just comes down to what's going on with the shell cracker, both in terms of Q4 actuals and also the outlook for 2024. So that's really going to be the main driver of that. I think in the guidance we gave, assume that our underlying assumption there is influenced by our expectation that that cracker plant is not fully online really for another year. But that's something that I think, We and our peers around us in Southwest Appalachia are having a haircut a little bit just due to continued startup delays on that facility.

Speaker 8

And how are your heavier NGLs priced?

Speaker 3

Really just based on index and basin. I wouldn't say there's anything that's really changing as it relates to those dynamics.

Speaker 8

Great. And looking at the forward guidance, It looks like liquids excluding ethane declines from 4Q volumes and then again from the 1Q volumes. What's driving the decrease for the heavier liquids?

Speaker 3

Yes. I would simply chalk it up to We have some pretty lumpy pads in the way we develop. It really just comes down to some of the liquids rich pads that we acquired from TUG and and how that alternates with some of the more of the Utica pads that get turned online or other Marcellus, just dry Marcellus activity. So it's it's kind of normal course lumpiness. But I wouldn't expect any sort of long term trend or change from what you've seen recently.

Speaker 8

Great. I appreciate the details. Thank you.

Operator

Your next question comes from the line of Adi Modak with Goldman Sachs. Please go ahead.

Speaker 9

Hi, good morning team. Thank you for taking the questions. You talked about the capital allocation priorities this year, highlighted debt pay down as the focus. Maybe help us understand the thought process around how your view of the macro environment factors into that decision matrix between the different pieces and how we could

Speaker 3

Yes, for sure. It actually is really driven by the macro in many ways. I think at a high level, I mean, look, I think we're as bullish as anybody as it relates to the gas macro outlook as you get to kind of mid-twenty 5 into 2026. So really what we have to weigh on our end is if we did if we reallocated those dollars instead of to debt pay down to something like a buyback and Accelerating that right now. It would probably in turn cause us to want to go hedge more and protect the balance sheet in case you just had a bunch of macro factors not go according to plan in that time period.

Speaker 3

So when it comes to opportunity costs for us, it's really just a simple question of What's the upside to the dollars buying the stock versus the upside, leaving that more unhedged? And I think with the asymmetric expectation we have to where pricing could go, Certainly by the end of 2025, as you get into 2026, that dwarfs any sort of return we can get just by buying back stock right now. And For us, the question is what ultimately is going to create the most shareholder value. And so really we'd rather be patient on the hedging front, and use our dollars near term to just to de risk the balance sheet. So really by doing that, we think that actually gives investors more upside and exposure to gas prices.

Speaker 3

And if for some reason things don't work out on our expectations on the macro, it on the macro, it provides more downside at the same time. So that's why we've allocated and plan to allocate the way I already explained.

Speaker 9

Got it. Thank you for that. And then you mentioned the low cost structure as an advantage. You mentioned a couple of drivers there as well, but I was wondering if you provide some more color on those pieces and what drives it down for over the next few years?

Speaker 3

Yes. I mean it's a Couple of kind of key things and it's really contractual. So I mean our gathering rates, I mean you've seen our guidance with MVP coming online, the impact On just the full year, is those rates stepping down at the same time MVP goes into service? Those further step down as we've talked about before into 2026, 27 really hit a bottom in 2028. And so really those rates are an Equitrans contract that last year were about $0.80 for just the gathering rate, hit a bottom of $0.30 by the time you get to 20.28.

Speaker 3

On a blended basis, I mean, they don't gather all of our production. So on a blended basis, it's a little more muted. You don't see that full $0.50 drop, but that is a contractual step down that is part of our longer term forecast. And again, just a tailwind to us, Even if you have flat pricing and everything else in the environment doesn't improve. And then the other piece of that too is we talked about last quarter of these supply deals that we signed downstream MVP.

Speaker 3

And so that's going to also improve our realizations, our realized pricing by $0.15 to $0.20 which over our production base is that kind of rounded $300,000,000 free cash flow. So it's really the combination of the 2. There's some offsetting factors in there, But around like compression adds and you have a tailwind as you pay down debt, your interest expense falls as well. But By the time you get to 2028, we see that breakeven cost structure about $2.30 down about $0.30 from where we sit right now. So it's a continued tailwind.

Speaker 3

And look, as we've talked about, I think, over and over again, I think that is really unique EQT. I think where you are in the shale revolution right now, a lot of that core inventory is depleted or rapidly getting depleted, expect a lot of cost structures to be rising over that period. So it's really unique differentiating characteristic of EQT and it's really just further like share price upside, free cash flow upside relative to what you get anywhere else.

Speaker 9

Thank you. I'll appreciate that. I'll turn it over.

Operator

Your next question comes from the line of Scott Hanold with RBC Capital Markets. Please go ahead.

Speaker 10

Yes. Hey, you all kind of indicate that Your breakeven point this year is around $220,000,000 And how do you think about that with the gas macro? If gas price to do say continue to trend on the direction they are related to weather whatnot. I mean, would you guys be willing to make changes to make sure that you guys generate positive free cash flow like so the bottom line question is like when you start getting around $220,000,000 threshold, would you be willing to cut a little bit more to kind of preserve free cash flow rather than burn some cash?

Speaker 2

Yes, Scott. I think there's 2 factors that we think about that would cause us to curtail. One is preserving the ability to not lose money. And so that certainly would look for us to curtail. And the other one is we're looking in 2025 where you see a dollar higher pricing and that is even That's going to be further incentive for us to pinch back and deliver those molecules into a higher price market.

Speaker 2

So, yes, it's something that we're watching and thinking a lot about.

Speaker 3

Yes, Scott, I'd just underpin too. I mean, you have to remember, I mean, certainly for a business like EQT where we're drilling 15, 20 wells a pad, The CapEx we spend this year has no real impact on our production this year. It really has an impact on production next year. And so when we're thinking about that, that sort of rate of return And you save yourself $100,000,000 this year, what's the impact on free cash flow next year? Certainly with where pricing even is today after pulling back and I think our Expectation is probably significantly higher than the strip today.

Speaker 3

It's it's really hard for us to justify that, especially just given the financial position we're in, the amount of liquidity we have in our credit ratings, we're just not under the same pressure that most of our peers are. So, you know, that that allows us to be a little stickier and plan for the long term and not be as reactive. But look, we, you know, as we said before, our production guidance gives us flexibility to reduce as needed. But reducing CapEx activity this year is not, I mean, it'd be window dressing this year, the expense of next year and that's just not how we run the business.

Speaker 10

Yes. And Toby, I appreciate the fact that obviously looking at the forward curve, we do all see obviously that improvement. But One could argue, if we step back several months ago, I mean, certainly 2024 looked significantly better than it is right now. So like As you step back and think about the macro, like what do you think the big risks are that this gas price trend remains what we've been seeing outside of obviously weather, but More on, I guess, the political front and everything else that's out there. And then how do you react as a company if this into 2025?

Speaker 2

Yes, it's a great question. Listen, I think on the political front, I mean, I think political force can override market forces for so long. And our job is to align with the market is to make sure the energy we produce is the cheapest, most reliable, cleanest form of energy that's out there. And I think eventually the demand for this product is going to overweigh. I think the political short term gains that people are think that they're helping by doing this.

Speaker 2

So I mean long term we feel even more optimistic about the large role natural gas will play in the commodity mix going forward. But yes, I mean in the short term, we need to be sensitive to the market that we're in. Activity reduction is going to be a big thing. I mean, a key part of our thinking is we positioned our business to be a low cost operator in the U. S.

Speaker 2

I mean our breakevens are significantly lower than what we think is the marginal cost of production. And we're going to see if those marginal producers reduce activities. We've already seen That starts to happen, but that's something we're going to be monitoring and then it's eventually we will have a normal winter, But even without that, with just normal weather, we should be balanced coming into 2025.

Speaker 11

Yes.

Speaker 3

Yes. Scott, I think it's really With all the bearish narratives out there, I think it's really important to remember that with these data revisions that came out of GenScape a week or so ago, I mean, Production levels were not at 107 pushing this bearish narrative. Production levels today are like 104.5. And so if you look at where we're at today with normal weather, the market's actually balanced. And so the extra, call it, 275 Bcf that's in storage right now is really just result of, again, a really warm El Nino winter.

Speaker 3

If we had just had normal weather, the market would be balanced right now. So I think this sort of overarching view of the market is So out of balance, production is way too high, LNG is delayed. I think when you step back and kind of cut through the noise, it's really not the case, which is I think why we're being a little more patient and disciplined here. And as it relates to a lot of the LNG headlines and some of the politics playing into that. I mean, there's really no impact through at least the end of 2026.

Speaker 3

So as we look at the market today, we don't really see any change in the LNG build out Time line, I mean, we expect in Q3, Q4, those facilities start to come online. And, and again, I think that the work the market needs do is just to clean up that that excess overhang and storage coming out of winter. But but the market's really not that far out of balance. I mean, it's a difference of a a 1 to 2% kind of change in your fundamental model and it can flip back to you quite pretty quick too. So I think you're running a long term business, you just have to keep that in focus.

Speaker 3

We're really Not that far out of whack on the fundamentals.

Speaker 10

Yes. No, I appreciate that. And Toby, we all appreciate your obviously your insights into political side. So just kind of curious if I can extend the question, like what are some of the major pushbacks you're getting when Go to Washington and try to fight for kind of the gas companies. What is the main pushback and how do you address it?

Speaker 2

Yes. I mean, it's really just asking people to step back and see. It seems like we're in violent disagreement violent agreement here on What we want from our energy system in the future like Republican, Democrat, everybody wants more affordable energy. Everybody wants more reliable energy. Everybody wants cleaner energy and I think the work that we're doing is highlighting, I mean, I'd say the biggest difference that we're doing, the hump that we need to get people over is to understand that natural gas is a cleaner form of energy.

Speaker 2

And the good news is we don't have to play with theories. We don't have to rely On literature, we have case studies at big scale that show that natural gas is a decarbonizing force, whether that's simply putting The spotlight on America and showcasing why we are the number one leader in lowering emissions in the world, it's because of natural gas. And also, I'd say the other narrative we need to address is the fact that some people think that America is the largest producer of oil and gas. The regulations or pipeline blockages can't be that bad. But I think the simple response to that position Yes, we might be the largest producer of oil and gas in the country.

Speaker 2

We are the largest exporter of LNG in the world. But the question that needs to be asked is, Is that enough? We've got rampant inflation, wars in Ukraine, global emissions still skyrocketing, Energy poverty is growing. Energy security is crippled. Clearly, the United States needs to do a whole heck of a lot more Because the world can only contain so much chaos before it starts spilling over and impacting Americans.

Speaker 2

So The world's security is our security and these are simple points that we can make. It is a little bit of a different perspective that people haven't Thought too much about, you laid that common sense approach underneath the framework from climate leaders around the world that recently gathered at COP and came out with a very simple punch list of what needs to happen. Transition fuels are going to be necessary to meet the climate ambitions that we have. That's a fancy word for natural gas is going to play a role. Carbon capture is going to be a part of those solutions.

Speaker 2

And then I think that Also the recognition that, solar and wind as great as they can be, they're not the complete solution and you need a heavyweight solution and that is natural gas to meet the goal. So we've got cover from the environmental front, but it's really just getting this common sense message out And that's where we spend a lot of time working the megaphone.

Speaker 10

Appreciate that.

Operator

Your next question comes from the line of Josh Silverstein with UBS. Please go ahead.

Speaker 12

Yes, thanks. Good morning, guys. You mentioned previously that you think we're in an environment where Natural gas could be $2 or it could be $4 How do you operate in that environment? Does your production stay relatively Flat through all this? Do you build DUCs when we're at 2?

Speaker 12

Do you release them when we're at 4? Are you kind of thinking about your development plans going forward in that kind of framework? Thanks.

Speaker 2

Yes. I'd say at a very high level, I mean, keys to success is to have a low cost structure so that we can weather the storm. And that also is going to position us to be opportunistic to play some of the volatility. And I'll let Jeremy expand on that a little bit. But Operationally, one of the things that we have looked to build into our business is the ability to bring some surge capacity.

Speaker 2

So understand Whether that's choke management and pinching volumes back so we can respond to higher price environments or some cases just Holding back some tills and building some ducts, I think having a flexible program is going to be something that's needed, but That's going to be more around the edges. Having a low cost structure is going to allow us to run consistent programs and be responsive, but not be completely whipsawed by the commodity price.

Speaker 3

Yeah. I mean, I think one of the key things to remember as you think about how to actually manage a business in that environment comes down to like how do you see that distribution of outcomes? And so remember our cost structure being, call it mid-2s now headed towards low-2s. If We think about like what's the worst that's happened in the last couple of years, which was 2020 and you had gas settle at about $1.99, so call it $2 In an environment like that, even if we at EQT weren't hedged and we have like a 2:30 breakeven, our free cash flow outflow would be in the I don't know, dollars 5 to $700,000,000 range. So it's a lot and you can certainly hedge to protect that.

Speaker 3

But imagine being a producer in that environment and your breakeven is $3 and you're at scale, I mean, you would have multiple 1,000,000,000 of dollars of cash outflows. You just can't survive for more than a year of that because your liquidity gets strained. So for us, I think one of the things we have realized at scale is that one of the risks that is created is if you pair scale with a really volatile environment and your cost structure is too high, even if your balance sheet is clean, can put yourself in a pretty precarious position pretty quick. So that's why we sort of, that's why we focus so much on driving that cost structure down because For us, if our downsides call it $0.50 and that's pretty low, but if the upside is you have a year settling at $6, $7, $8 I mean you're talking about $10,000,000,000 type of cash flow to our business. So we want to be in a position where we don't have to hedge and inherently having a low cost structure is like a structural hedge.

Speaker 3

And I think that really is what positions us to again, not only just kind of survive and cruise through those down periods, but not have to defensively hedge so much of your production That you really miss out on the prize. And the prize is that sort of asymmetric upside. So again, I think at a high level, you might some people might say, well, it's a little dilutive just focus on cost structure so much near term, I think that's easy to see if you run a static model at like $3.50, $4 gas. What that doesn't capture though is the element of volatility. And if you talk to any of the producers, any of our peers, I think the theme of volatility is well understood.

Speaker 3

I think EQT is unique in how we position ourselves to again be structurally defensive towards that for long term investors and then provide the best risk adjusted upside to that theme and capture that every 3 to 4 years when that sort of windfall period shows up. And again, I mean, think about it. We had a little bit, you know, you had a warm winter this year. You have an extra 275 b's in storage. Could have gone the other way and and we will have winners that go the other way.

Speaker 3

You could have pricing at $5 just as quickly as you have pricing at a buck 50. And that amount of cash flow at our scale is just an absolutely tremendous amount of value. So we're trying to position ourselves to be able to capture it and not Again, like the last couple of years where we lost so much on hedging, continue to give that upside up. So that that's again why why we just sort of We focus on running the business the way we do.

Speaker 12

Got it. Thanks. My last question was just on hedges. You mentioned a lot in there, but it looks like you didn't add anything for 2025. I definitely get the constructive outlook that you guys have.

Speaker 12

But clearly, there's those factor of weather, which you have mentioned as well that we just don't know how that will play out. Why not at least look to add in something for 2025 at this point just to have

Speaker 2

a base level in there?

Speaker 12

It looks like you added something for second half or Q4 for this year, below where the strip is next year.

Speaker 8

So

Speaker 12

any thoughts on that would be great. Thanks.

Speaker 3

Yeah. So I think we think about hedging going forward just with our balance sheet and credit ratings where we are. I think you'll see us start to hedge at a level that effectively drops our I mean, Look, if you think about what hedging does in a low price environment, it effectively synthetically drops your breakeven price. And so if our breakeven price, call it, is headed towards $2.30 we might long term hedge between like 20% 30%. And so if you do get that $2 a year on average, that's kind of your free cash flow breakeven point on a hedged basis.

Speaker 3

We're kind of towards that with our hedging in 2024 right that's that 2 20 level that we talked about. I think, look, we don't plan to go into 2025 totally unhedged. I think we're just willing to be patient. And I think some of the bearish narrative in positioning in the commodity markets has really pushed pricing really below where it probably needs to be. So look, we don't need to hedge defensively right now.

Speaker 3

I think we want to be opportunistic and we just think there's so much asymmetric call skew It should show up in that market in 2025. I think we're willing to be patient on that. But I mean, look, we will take off risk at the right point in time, but we're going to continue to be patient on that. Great. Thanks guys.

Operator

Our last question will come from the line of Paul Diamond with Citi. Please go ahead.

Speaker 11

Good morning. Thanks for taking my call. Just wanted to touch base real quickly on so you talked about LOE and some of the Savings haven't been driven by water handling. I guess, my question is how much more, I guess, meat on the bone you think there is there? How much further do you think can drive it lower?

Speaker 2

Yes, I'd say that we had a big step change. I think you look in the water recycling rate, that's a big driver on a large portion of our LOE. Obviously, water is the biggest portion. So the goal for us is to stay in that 95% plus range on water recycling. I think the other benefits to the water system will come through just more efficient logistics to service our completions team and allow to give these guys the space to continue to run hard and continue to capture the operational efficiencies they're seeing there.

Speaker 11

Understood. And then just kind of one final quick one. As the prompt market sits right now in the curve, how should we think about kind of the operational cadence through the year with that 140 or 110 to 140 Should we think about that as pretty steady throughout the year or more back half loaded? Or how should we think about it as the market sits down?

Speaker 3

Yes. Look, I'd call it pretty steady throughout the year. I mean, when you're running the size of spreads we are and the size of Logistics operations, and it's not something you start to stop quickly or easily. The bar is pretty high for that. I think the range we give is just based on some shifts in timing that can happen.

Speaker 3

I think in terms of the macro environment, I mean, look, The quickest thing that's going to balance the market is not having operators in Appalachia, which have a pretty shallow base decline cutting activity and are drilling big pads that are hard to slow down. I mean that's base load supply as we think about it. When we think about really the production that needs to come out of the market, the this way to balance the market, it's taking Haynesville activity even further downward. They're drilling 2 to 3 wells at a time on

Speaker 8

the pads, becoming more and more infill wells and you have a

Speaker 3

50% to 60% base decline. More and more infill wells and you have a 50% to 60% base decline. A cut in that activity would balance the market a lot faster. And that's also the marginal producer today and will continue to be in the future. So we expect that's really where the volatility of production and variances in production cadence will show up, and will continue to show up, I think, in the backdrop of volatility that we've talked about.

Operator

I'll now hand the call back to Toby Rice for any closing remarks.

Speaker 2

Thank you everybody for your time. We are looking forward to executing for you in 2024. Thanks a lot.

Operator

That does conclude today's meeting. We thank you all for joining and you may now disconnect.

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