EQT Corporation — 2024 Q1

This is Ati on for Neil. Guys, I'd be curious on the nonoperated asset sales in the pipeline, how are you thinking about the portion that's remaining? How the conversations are going with potential buyers? And what should we expect in terms of the structure of those deals? Should it be similar to what you've announced? Or is it going to be a little bit more cash oriented?

Yes. So we're continuing to have some really constructive conversations there and have a lot of great momentum. And I think what we're seeing is the announcement of the deal with Equinor a couple of weeks ago is actually really catalyzing those to move forward even more swiftly. So we have a ton of confidence in getting that done and a lot of great dialogue that's ongoing.

Got it. Appreciate that. And then as you think about the supply/demand macro for natural gas in the U.S. right now, you did mention that you will extend the cuts. How are you seeing the response -- the production response that you're seeing from the latest numbers? Is that -- is there an element of sufficiency there? Do you think there's additional cuts required? And how should we think about your philosophy as you think of bringing the cadence back online?

Yes. We think that you're going to continue to see cuts and discipline from other operators. But I think a lot of eyeballs are focused on what's going to happen with some weather with a normal summer, that could bring the -- that could tighten up some of the storage overhang we have. And then also these low gas prices are going to encourage more power demand. So I mean, we think there's a couple of catalysts here. But in the meantime, until those hit, I think you could continue to see more patience from operators.

Yes. At a high level, when you think about the macro outlook, you added about 400 Bcf a day into storage in excess from the winter weather, then another 200 on top of that from production being higher than we all forecasted. So you have an overhang of about 600 Bcf that has to get worked out by, call it, October. And that will happen -- the market mechanism forces that to happen both through curtailments to limitations in supply but also increases in demand from coal to gas switching. And as Toby said, certainly constructive summer weather can give that a boost as well. But look, I think to maintain that market rebalance through the summer, you probably maintain low prices. It probably can't rise all that much. But once you get through that October period, you see the inflection of LNG demand really start to pick up. We think that market starts to change pretty swiftly.

Yes, Arun. So look, I'd start with going back to those physical gas sales deals that we announced in Q3, Q4 last year. And if you look at the way that was structured, we tranche that out across those markets. And so those were sold in tranches ranging from M2 plus $1.15, all the way up to Henry Hub plus $0.50, right? So we gave you guys the blended pricing for how that impacts the company. But to us, that sort of keyed us off to a lot of the demand and the tailwinds that are really coming that the utilities are seeing. And effectively, the premium being paid is to lock in reliability of supply. And so I think that's a good proxy for where that market moves in time. And if you think about what's happening between just electrification of everything, now adding data centers into that and think about the way the Transco pipeline, where it supplies gaps across the country, you're going to see the LNG facilities pull gas south on that pipeline and create an even bigger deficit in that Southeast market.

Yes, we were certainly encouraged to hear Governor Shapiro's comments about natural gas, both on increasing potential for power demand, but also in his comments about the LNG pause and advising President Biden that this LNG pause is a bad idea. I think Governor Shapiro understands that the people of Pennsylvania understand that natural gas is the economic engine that's powering the economy here in Pennsylvania and understands that natural gas is the key to decarbonizing, not only our own grids in the U.S., which Pennsylvania is the poster child for how impactful you can be lowering emissions when you replace coal with gas, but also understanding how we can do that on the world stage.

Are you talking about from the sale or which you're talking about specifically?

Yes. So net to the non-op interest, what's baked in there is about 10 to 15 Bs and the rest of it is operated deferrals that we -- are direct impact of our decisions.

Yes. So I think what's unique about MVP is that it is a -- it's a pipe where EQT owns 60% of the capacity today. And we are the only producer shipper on that pipe. So there's no other producers who actually can access that market through MVP. The other 40% are held by utilities on the other end. And so I think we are very uniquely positioned in that sense. The expansion will be part of a FERC open season. So who ends up with that capacity just under that regulated process. But it's certainly something that we think we are positioned to benefit from either way. I mean there's value to be created through the expansion. There's value to be added for the utilities by supplying them new gas in that end market. I mean we're all aligned and wanting to have that happen. Even if we are not the ones to take the capacity out, not win that auction, I think we benefit either way, we get to sell more gas where producers collectively in Appalachia get to sell more gas to the utilities on the other end of that pipe. So it's -- no matter how you look at it, I think, a big net benefit to EQT.

Yes. At a high level, we think about it as cash cost plus F&D costs. We do want to recover the sunk cost of drilling the well. So that's why we think about it like that. So I mean you -- I mean it depends on the area, but call it around $1.50 in basin.

I mean, look, we'll always do what's best to create long-term value. So look, we're always watching the market. There's always events that happen that we will change our decisions if the facts change. So it depends. But what we've mapped out right now is our current expectation.

Yes. So we have a tremendous amount of optionality, first of all. If you think about -- I mean, look, I think if you back in, first of all, the non-op asset sales side, the $1.1 billion value level that we called out for what we did with Equinor, if you gross that up, that implies about $2.75 billion to that whole package, right? So if the rest of it is a cash sale, you end up with, call it, $2 billion to $2.5 billion of cash coming in the door from that side, right? That's already, call it, 2/3 of the $3.5 billion asset sale target we talked about a month or 2 ago when we announced the Equitrans deal. So we don't have to really divest a lot or many assets on the Equitrans side if we don't want to. So again, it gives us a lot of optionality.

Yes. As Jeremy mentioned, I mean, we have a ton of optionality and that means we're going to continue to be really value focused on these things. So while there's certainly -- there's a lot of interest here, which gives us a lot of confidence in completing this plan. I think you look at the Equinor transaction, we're going to be getting some pretty good values for these assets.

Yes. If you step back and think about the time line, the rating agency guided us towards, it's, call it, 12 to 18 months post-closing. We have guided closing to be probably a Q4 event. So we think about it as like we need to get through the deleveraging plan by the end of 2025, right? I think most of us expect the market for gas in 2025 to be a lot more robust than it is today, so because we're taking an opportunistic approach. We have good momentum right now. I feel very good that we get things done near term at very attractive values. But if we -- if something happens, and we decide, hey, let's be a little more patient, wait 6 months, wait 9 months, there's no issue doing that to make sure we maximize value.

Yes. I think stepping back at a very high level, just from a market diversification perspective, we sort of soft circled around 10% of our volumes being exposed to international pricing, feels about right. And depending on the discussions with end buyers, we could toggle that number up or down. Where we're at right now, we've got about 10% of our numbers here. But keep in mind, these agreements are nonbinding, and there's some work to do to get the terms that allow us to achieve our objectives. So we have that level here, but maybe not all of those agreements will make it to the finish line, but we've got a lot of optionality, give us the ability to make sure we get the terms that we need.

Yes, it's certainly another dynamic that we're putting into consideration. And when we step back and we look at the opportunity, servicing the emerging market of LNG, we have capacity to do that with our existing pipes. But one of the great things about data center demand is Appalachia has proximity to that. And so when we talk about advocating for LNG, this is more of a tide is going to raise all ships and be constructive for long-term demand of natural gas demand in the U.S. But when it comes to data centers, our view is really how can we get more direct exposure to that rising demand. And so we positioned the company extremely favorably to be able to make sure that we can get differentiated access to this new opportunity set. Things like positioning with MVP is great, showing the willingness to be first mover on doing large transformative gas supply deals that deliver reliable clean energy to customers. We're fielding calls on that front. And so we're really taking a much more targeted approach and leveraging our operation and commercial footprint to capture these opportunities in front of us.

Yes. I think it's really important to remember, if you step back and think about these LNG deals. I mean, they are very long-term agreements. And if you just look at the time when the U.S. became an exporter of LNG from 2015 to 2020, that arb was actually negative, right? So we expect over the long-term LNG to be a very positive catalyst, can add a lot of value. But if you sign up for too much LNG and that arb is negative for a couple of years, it's like a very, very expensive pipeline contract, right? You can get yourself into trouble with that. You saw that happen in the past decade. And so we think about it from -- you learn from the past. This is -- it's not the same as pipeline, but it is similar. So we are taking a very prudent approach to it. And when we step back and compare and contrast LNG versus data center demand, I think what's happening in the data centers will create a lot more like structural baseload demand not subject to is the arb open, is the arb closed for different periods of time. And that sort of stability is something that we really try to focus on in our business as we build it for the long term. So we'll have exposure to both, right? So in certain periods, one will be better than the other. But I think that growing data center demand theme on the doorstep of our asset base is something that has really surprised us. And the more we study it, the more excited we get.

Yes. Part for the course, we pulled and refiled with the FTC and the sustained operating procedure. So we've continued to work alongside the FTC and provide updates along the way. We're really encouraged about the opportunity to talk to the FCC about how this transaction makes Americas natural gas Champion EQT, a lower-cost energy provider, delivering more reliable energy and also helping customers acquire cleaner energy sources. So a lot of great things for us to talk about with the FTC, and we're excited about the process.

Yes. I think there's a new dynamic that's really taking center stage here. Everybody understands the energy that they acquired. They want it affordable. They want it reliable. They want it clean. And certainly, with data centers liability is at the top of the list. But the other dynamic at play is going to be speed. And there's only one energy source that has shown the proof of track record of being able to meet any sort of demand from America and that is natural gas. Speed matters. And at a very high level, there's a couple of things that's going to allow natural gas to service this new demand quickly. Number one is leveraging existing power infrastructure, understanding that natural gas power plants are only running on average around a 60% utilization factor. There's an opportunity to leverage that underutilized capacity, and that could increase natural gas demand in the near short term.

I think it's super important to remember here, too, in terms of like in consumers reaching out wanting to buy gas, like if there is a first-mover advantage in this, like we already have it, right? We already sold 1.2 Bcf a day on a 10-year basis to the 2 biggest utilities in this region, right? And so when you think about where all the demand for data centers is right now in the country, today, you have about 20 gigawatts of demand. 13 of that is in the Southeast market, right? So a tremendous amount. So when these utilities reach out and they say, we need long-term reliable gas from a stable producer like EQT is the first name on the list. That is why we are the only ones who have already done a deal like this and done it at a scale that I think dwarfs what most people could do because we're the preferred supplier of gas. And you have to have a lot of characteristics in your business to be able to be that preferred supplier, part of it is scale, part of it is depth of inventory, it's credit ratings. It's having a really creative team that can work with utilities in buyers of gas to structure deals like this.

Yes. I think the Freeport outage is just an example of the uncertainties that exist in any market, natural gas not excluded. And the Ukraine war, who saw that happening and the positive catalyst that created on our market. I think how do we deal with these types of uncertainties. One is understand that these uncertainties will exist. And part of the way we handle that and position the business is to take a steady measured approach when we're thinking about accessing new markets. I think we certainly are the first ones to get excited. But when it comes to translating that to action, we are very strategic and very methodical on the steps that we're taking to do that.

Noel, think about how much LNG export capacity is being built just in Calcasieu Pass as an example, right? I mean that dwarfs just Freeport alone. So say there's a hurricane or a barge sinks, I mean, come up with any scenario, say that is shut in even for a month, the amount of volume that backs up in U.S. storage from just one event like that can be pretty tremendous.

Yes. Specifically on RSG and making investments there, we think, producing clean energy and having the transparency backed up with certificates to prove that, it's going to be normal operating procedure going forward. But if your question is about power generation and partnering with power-generating companies like Bloom Energy, there's really 2 different worlds that are going to be servicing this data set, this power demand. One is going to be on the grid. And if you want to use that, get in line. You've got long queues that you need to work through to get interconnected to the grid. But this other world, which is one of the ones we're being a little bit more direct with our partnerships to bring solutions to market is behind the grid power generation solutions. That's where we can leverage our operational footprint, our existing assets, the pipelines and develop behind the grid energy solutions for customers. We think that could offer a much faster pathway to meeting their energy demands. And as I mentioned before, speed matters. And I think behind the grid solutions will be ways that we can flex some of those partnerships.

Yes. So I guess, first of all, on the cost walk, I don't anticipate much of a change from the non-op sales. They are high-quality assets, but it's not going to move the needle all that much. I think there's other variables in the mix that will have a more outsized impact of that in terms of like you capturing synergies, other projects we're investing in around the asset footprint. So I wouldn't -- I think that's still a pretty good directional walk as to where we expect that to end up.

Yes. And then as far as the third-party opportunity set, yes, we look at that as a way to reduce our cost structure. Listen, we're rolling up our sleeves and understanding what the opportunity set looks like there. Like what we did when we came in here with EQT, we wanted to realize the full potential of EQT's assets. It's the same playbook being -- in mentality being applied to the E-Train assets. And one of the ways that we can realize the full potential of those assets is increasing the utilization of those midstream assets. And one of the ways that we can do that is with our own volumes, but also there's going to be opportunities where there's opportunities for us to increase utilization using third-party volumes. So that's something that we're mapping out. The leadership at EQT, that's going to be running these assets, has a track record of maximizing the utilization of our pipe systems. Just a reminder, at Rice Energy producing 2 Bcf a day gross, our midstream team was gathering almost 3 Bcf a day. So this is a part of the DNA, and it's aligned with our core strategy of lowering our cost structure.

No, Josh, it's consistent with what we talked about before. I mean step one is deleveraging. So we need to protect the balance sheet first and foremost. By the time we get through that, we hit our targets by the end of 2025. I think you see the post 2025 hedge strategy look very different. But look, the next 12 to 18 months is all about the balance sheet, bulletproofing that plan. But in 2026 and beyond, I think you're going to see us have differentiated upside to higher gas prices in volatility.