The EQT Q2 2023 Results Conference Call began with the operator welcoming everyone and placing all lines on mute. Cameron Horwitz, Managing Director of Investor Relations and Strategy, then introduced the team and outlined the details of the call. Toby Rice thanked Dave for his work over the past three years and then proceeded to discuss the second quarter results.

EQT recently announced the hiring of Jeremy Knop as their new Chief Financial Officer. Knop has extensive experience in strategic decision-making, investment management, capital allocation, M&A and transaction execution. He is expected to drive value creation, strengthen the balance sheet and ensure the realization of long-term vision. Additionally, EQT recently set a world record by drilling 18,200 feet in 48 hours. They are consistently achieving best-in-class drilling results.

EQT achieved impressive performance in their drilling and completion operations in the second quarter of 2023. They drilled wells at a rate of penetration 60% faster than peers and completed 20,818 feet of lateral on the Michael 4H well, which is one of the longest in the history of U.S. shale development. Additionally, they set a world record by drilling out 262 frac plugs with a single roller cone bit, which was 90% above the prior peer record. These accomplishments are attributed to diligent landing zone targeting, best-in-class geo-steering, and innovative use of rotary steerable tools, as well as the hard work of their drilling and completion teams.

In the second quarter of 2022, EQT achieved midpoint of production guidance despite lower-than-expected liquids volumes and fewer TILs. LOE was low at $0.08 per Mcfe and EQT is targeting 90% recycled produced water this year. EQT has invested $80 million into their West Virginia water system and have realized $20 million of associated annualized cost savings. Lastly, they retired $800 million of incremental debt during the second quarter.

EQT has retired $1.9 billion of debt since 2021 and will continue to prioritize debt paydown. The company has signed an HOA with Lake Charles LNG to supply 1 million-ton per annum or 135 million cubic feet per day under a 15-year tolling agreement. EQT is pursuing a more integrated approach with direct connectivity to end users of their gas, allowing them to structure deals with downside price protection and obtain visibility into global downstream markets. As the largest natural gas producer in the US, EQT has played a critical role in providing energy security and driving emissions reductions.

EQT has achieved multiple ESG accolades over the past year, including a UN OGMP 2.0 gold standard and an A grade from MIQ. Their GHG emissions in 2022 were 20% lower year-over-year and 50% below 2018 levels. They are also replacing their pneumatics to further reduce their methane intensity to near their 2025 target of 0.02%. They are also preparing multiple nature-based projects to generate their own carbon offsets.

The Fiscal Responsibility Act has passed in Congress, which includes the approval of the Mountain Valley Pipeline. This pipeline is important to providing affordable and sufficient electricity in the Southeastern United States and helping the region reach its climate goals. The completion of MVP will also bring gas further into the Southeast, replacing coal-fired power generation and lowering energy prices for consumers. The pending Tug Hill acquisition is also mentioned.

Toby explains that the transaction is taking longer to close than anticipated, but they are working constructively with the FTC and expect to complete it in Q3. He goes on to explain that the new assets will drive a $0.15 decline in their corporate free cash flow breakeven price, providing more resiliency. Dave then remarks on his time at EQT and how the stock has quadrupled since he joined. He is confident that Jeremy Knop, EQT's next CFO, is the right person for the job and will ensure strategic continuity. Jeremy expresses his excitement for the role and thanks all stakeholders for their support.

In the second quarter of 2020, EQT reported sales volumes of 471 Bcfe, in line with their guidance range. Their operating revenues were $2.11 per Mcfe and their total per unit operating costs were $1.37, resulting in an operating margin of $0.75 per Mcfe. Capital expenditures, excluding non-controlling interests, were $470 million, also in line with their guidance range. Adjusted operating cash flow and free cash flow were $341 million and negative $129 million, respectively. The company attributes its success to world-class execution capabilities, trust, teamwork, and a focus on maintaining a bulletproof balance sheet. Moving forward, the company will continue to focus on creating value for shareholders and engaging in dialogue with them.

EQT saw a working capital benefit of $96 million due to declining accounts receivable and lower margin postings, and exited the second quarter with $3.5 billion of net debt and $1.2 billion of cash on hand. The company has retired $1.9 billion of debt since 2021, eliminating nearly $90 million of annual interest expense. Liquidity stood at $4.9 billion at the end of the quarter, and the company realized $237 million of cash NYMEX hedge gains for the quarter, net of deferred put premiums. It is expected to realize $440 million of cash hedge gains for the year.

EQT has strategically hedged 30% of their 2024 production with a weighted average floor price of $3.64 and a weighted average ceiling of $4.14 per MMBtu. They have also hedged 90% of their 2023 local volumes with basis hedges that are in the money. Additionally, their gathering rate should be offset by their capacity and better price realizations when MVP comes online, resulting in a negligible impact to their free cash flow. They also have the potential to move production further into the Southeast U.S. over time.

The natural gas macro landscape is playing out as expected, with activity cuts in gas- and oil-directed rigs resulting in supply moderation and price support. Additionally, strong gas-fired power demand and lower spot natural gas prices have driven up natural gas power generation by 3 Bcf a day. This, along with a 20 million-megawatt hour shortfall in wind generation, has demonstrated the need for reliable generation to compensate for the volatility of renewables. Lastly, LNG performance during the quarter remained strong as Europe and China imported U.S. LNG.

In June, there was major maintenance at Sabine Pass, but it has since been completed. By the end of 2025, 6 Bcf per day of incremental nameplate LNG capacity is expected to have a positive effect on natural gas fundamentals. Prices for steel casing and wellheads have decreased 15-20%, and this should be reflected in late Q3. Two horizontal rigs and two to three frac spreads are currently being used, and long-term contracts have enabled lower rates. There is potential for a 5% decrease in total well costs by 2024, and the company is reiterating its 2023 production outlook of 1,900 to 2,000 Bcfe.

The company has a capital budget of $1.7-1.9 billion for 2023 and has made progress in its shareholder return framework, retiring $1.9 billion of debt, repurchasing $600 million of stock and paying an annual base dividend of $0.60 per share. At current strip pricing, adjusted EBITDA is expected to be $2.8 billion and free cash flow $900 million. The company plans to prioritize debt repayment until they reach a 1x leverage ratio at $2.75 per MMBtu natural gas prices, in order to minimize downside risk while allowing them to benefit from potential price increases in the future.

EQT believes that its modern data-driven operating model, scale, inventory quality, ESG leadership, and low investment-grade cost of capital make it one of the most attractive investment opportunities in the market. It also has the highest five-year cumulative free cash flow yield as a percentage of enterprise value amongst gas peers, meaning it could buy back more of its enterprise value with organically generated free cash flow. Additionally, EQT has the least downside in a long-term $3 gas price scenario and the most upside in a $5 gas price scenario when measured by the next five years of cumulative free cash flow relative to enterprise value. EQT believes this will drive its equity value higher and propel further share price outperformance.

Jeremy Rice, the new CEO of EQT, has highlighted the company's successful operational execution and value-oriented capital returns framework in 2023. EQT has retired $1.9 billion in debt since late 2021, and has taken an initial step in progressing its LNG strategy to diversify production into international markets. EQT has also strategically added to its 2024 hedge position to ensure the accelerated achievement of its debt retirement goals while providing shareholders maximum upside exposure to gas prices. Lastly, EQT's 2022 ESG report shows a 20% year-over-year decline in Scope 1 and 2 greenhouse gas emissions, moving the company closer to its 2025 net zero emissions goal. Toby Rice then opened the call to questions.

Toby Rice discussed EQT's plans for 2024, which include lower activity levels due to catch-up activity from 2023, operational efficiency gains, service cost inflation reductions, and the impact of Tug Hill and step down in gathering rates. Rice also talked about the MACH3 science campaign, which has been completed and the best practices from it have been incorporated into the well design program, with tighter controls in assessment to ensure the best for market conditions.

Toby Rice explains that customers are looking for energy security, which can only be provided with cost controls and guardrails on pricing. Rice believes that the tolling structure they have put in place will give customers the flexibility to have fixed price collared floors and ceilings type price controls on the LNG and energy they are buying, leading to sales and purchase agreements.

Toby Rice has had constructive conversations with the FTC over the past 12 months and is confident the deal will be resolved in the next 30 days. Jeremy Knop discussed the impact of the MVP pipeline, which will result in a net rate reduction due to increased access to premium markets. He also expects the Station 165 market to trade more like the Transco Zone 5 market, which trades at a $1 premium to NYMEX.

Jeremy Knop states that they have not set a guidance range for the amount of LNG they will export, but they will be opportunistic and increase capacity if it makes sense. Toby Rice adds that they would like to have parity between the sales and purchase agreement and the tolling agreement, with a 15 year term on both.

Toby Rice expects to close a deal with Tug Hill within the next 30 days, preserving the original terms and economics of the agreement. He also discussed the efficiency gains made on the drilling and completion side, and the MACH3 program which is underway. These gains will lead to improved capital efficiency for next year's program.

Toby Rice and Arun Jayaram discuss the importance of CapEx efficiency and the benefits of the Tug Hill acquisition. Rice also talks about the opportunities for improvement in West Virginia, such as investing in water infrastructure, which has already seen benefits. He also mentions the synergy between the Tug Hill water system and their own system, which will expand their produced water network and freshwater delivery.

Jeremy Knop and John Abbott discuss the financial benefits of investing in water systems and pipeline connectivity, which offer returns of 25-20% respectively. Toby Rice then explains that EQT plans to reallocate volumes currently being sold in the basin to the MVP capacity in order to maintain market share until downstream expansion projects are completed.

Toby Rice and Jeremy Knop discussed the possibility of further consolidation within the basin beyond the Tug Hill deal, but they stated they would like to stay focused on getting the deal done with the FTC first. They also discussed the tolling agreement for LNG, which includes benefits of reaching international markets and mitigating the need to hedge volumes.

In order to protect against winter risk in the first half of 2024, the company has leaned more into swaps, while remaining patient in the back half of 2024 and 2025 as the upside is asymmetrically skewed. They are trying to derisk their debt repayment goals by hedging more near-term.

Toby Rice from EQT explains that they are waiting to hedge 2025 at some point, but they think the market is far off from where it should be. As the market gets closer to 2024 and 2025, he expects it to become increasingly tight. He believes that the company should be patient and not defensively hedge, as investors are looking for upside. EQT plans to maintain their operational cadence and activity levels, and they may start seeing high-grade opportunities 12 months from now.

Josh Silverstein and Toby Rice discuss the possibility of investing in an LNG facility to gain exposure to international markets. Jeremy mentions the ability to start returning capital to shareholders once the Tug Hill transaction is closed, but there is no formal strategy in place yet regarding the split between balance sheet reduction and shareholder returns.

Toby Rice of the company addressed a question about completion efficiency and drilling performance, noting that the goal is to raise the bar and maintain the gap between themselves and their peers. He also noted that the company has been accumulating cash ahead of closing and will focus on debt repayment until they meet their targets. After that, they will tactically use buybacks when they see dislocations in the market.

Jeremy Knop explains that the $0.15 improvement to the guidance they previously provided does not include any synergies from the Tug Hill deal. The company is expecting $80 million of total synergies from the deal, which is additional to the $0.15 improvement. Knop also mentions the rate of return on the existing West Virginia water system they built as an example of potential infrastructure downstream of the MVP.

Toby Rice and Jeremy Knop discussed the potential impacts of developing certain projects on the station 165 market. Jeoffrey Lambujon asked for any thoughts on the projects and their potential impacts. Noel Parks asked about the scale and cost of swapping out the pneumatics, to which Toby Rice responded that it was about $28 million and less than $10 per ton to achieve the emissions reductions. Lastly, Noel Parks asked if the fact that the Tug Hill transaction also included an infrastructure purchase had made the overall review process longer, to which Toby Rice responded that it was just part of the process and there were no unique elements that stood out.

Toby Rice explained that the improved drilling performance is due to a combination of internal processes and close relationships with service providers. He stated that half of the success is internal and the other half is due to the great working relationship with partners. John Daniel asked if analysts were fooling themselves when they proposed a rising rig count in future years given the efficiencies achieved.

Toby Rice reported a step change in operational efficiencies that has moved the industry past individual performance and towards external factors such as long laterals and logistics on water and sand. He believes that the quality of inventory is going to be a defining characteristic of efficiency going forward. John Daniel commented that the reported results were impressive. Toby concluded the call by expressing his commitment to making energy production cheaper, more reliable and cleaner.

This summary was generated with AI and may contain some inaccuracies.