Expand Energy Corporation — 2024 Q1

Yes, Nitin, this is Josh. Yes, we had a really good quarter to start off the year. We ended up around 16% under our guide for capital. About half of that is just purely related to timing and a lot of the timing was on the non-D&C side. And so just as we're getting some of our leasing ramped up and infrastructure projects ongoing, that will just occur later in the year.

Yes, it's a good question, Nitin and we -- for years, we've been a little puzzled by the forecast that have had power generation -- or demand for power flat in the U.S. And we know that over the last several summers, we've seen pretty real increase in power demand and particularly natural gas-fired power demand. We do think the utilities have struggled to voice the need for incremental generation capacity given a number of the challenges that they have within their own stakeholder base, and I think it's changed. And so we're really encouraged to hear the market talk about the growing demand for power.

Yes. Good question, Bert. No, we're still actively engaged in a number of different LNG discussions. As you know, those discussions take a lot of time. As far as whether the data center concept would slow us down, no, it wouldn't necessarily slow us down. Competition is great, and we do think there will be competition for supply. So we'll pay attention to that. But we're moving forward with our strategies, and we think we'll have ample gas to supply all of the markets that where there will be demand. And frankly, look forward to there being some competition around that. But we're not changing anything.

Yes. I think at this point, you'd have to say any time you're going to talk about what's next in your strategy, you go back and talk about the things that we think are important, which are being able to supply these markets with the most efficient molecule is possible to meet growing demands for energy. That means having a really low cost structure, that means having a really deep inventory that means having great execution. We're going to continue to stay focused on all of those things, first and foremost. We did feel like the merger with Southwestern allowed us to advance on those fronts and have real synergies, real industrial logic that helps to improve our ability to meet those goals over time.

Yes, I'll start this and then I'll pass it over to Josh. So as we think about what we are trying to accomplish this year, remember we talked about doing a lot of activity deferrals. And those activity deferrals are focused on the fact that the market is pretty clearly oversupplied, and we don't want to bring on wells in an environment where the initial production of these wells, the significant part of the return comes to market in an oversupplied market and receives a lower than breakeven price. So we've had the activity deferral schedule in front of us, but recognize that, that activity deferral results in decline that occurs over a period of time.

Yes. Zach, this is Josh. I mean it is customary that we would see demand weakness in certain markets in the shoulder seasons. And so as we issue the 2.7 Bcf a day guide back in February, we had accounted for those volumes in there. But really to Nick's point, kind of how do you then set up the production curve to best mimic what the market needs. That's effectively what we've done to where you model in and execute on curtailments in the Q2. And then you allow those volumes to flow back in over the next subsequent quarters in the second half of the year.

Yes. Great question, Zach. I would say actually to see production get below 100 as quickly as we did, is maybe a little bit surprising to us. We weren't expecting that, but what we've also seen at the same time is that demand fell off pretty quickly. So starting with the supply side. we think curtailments took a bigger role. It wasn't just activity deferrals. So people didn't wait for a decline similar to what I just described within our own decision-making process. But -- so volumes came off probably a little faster than we would have thought through the year. However, what we also saw at the same time is that there were a lot of LNG capacity that was off-line through March and April and we probably had 2 to 3 Bcf a day off through a good portion of March and April that represented pretty weak demand. And you're seeing a lot of that demand come back now.

Look, I mean, we've been engaged with the FTC. Obviously, we're in the second request phase of this process. It will take some time, as you would expect to reply. We're eager to work with the FTC and get all their questions answered, we feel good about the underlying merits of the transaction and look forward to getting through this process and getting it closed. But really hard to predict exactly how long that will take. And so that's why we gave a forecast of just second half of the year.

Yes. Charles, thanks for the question. As far as the DUCs go, I would say, there's really not anything different that we do. This is a pretty common practice. The wellbore is in a state that it could sit there for an extended period of time. So I would say that's just pretty typical run-of-the-mill business. With the deferred TILs, we do have to be a little bit more thoughtful about how we manage those in terms of our wellbore preparation and preservation, primarily from a corrosion standpoint. But probably most importantly, we do have to stay on top of them. And specifically, it's around just monitoring the pressure.

Shutting pressure. Yes, that's correct.

Yes, Josh, we are managing production to the level of around the 2.7 Bcf a day. So again, just to reaffirm that the guide is unchanged at this point. We did have some overproduction in the first quarter of the year. Some of that was attributed to a non-operated accounting adjustment that rolled through into the quarter. So that did push those volumes just a little bit higher. But we are still on track. Even as we talked earlier about the curtailment, which is pulling down the Q2 number, but that $400 million that we take out of Q2 starts to settle in into the Q3 and Q4 numbers. So in effect, we are flattening the back half of the production curve.

Josh, let me just reiterate on that point. I mean I think it's really important as you think about that question, it's really important to note that there's a forecast from -- with 8 months left to go in the year. And we've been pretty clear that we're going to stay really focused on the economics of our underlying business and do what makes sense. So if market conditions don't play out the way we expect them to, we'll adjust whether that means producing more or producing less. I think the setup feels pretty good today, but we have a lot of flexibility in how we respond.

Sure. So first of all, let's talk about what's going to trigger this for us. We get asked a lot about what price are you going to bring volumes back online? And of course, that's an easy way to think about it in an easy way to model it, but it's not the right way for us to make that decision. When we think about price, we think about it as an indicator of what's going on in the underlying market, but the trajectory of what's going on in the underlying market matters a lot more to us than what the price is at the moment. And so we will continue to monitor the current production levels and the trajectory of that production, the storage levels, the activity levels across each of the basins and think hard about what we really believe the market needs before we make any changes.

Yes, Neil, this is Mohit. Thanks for that question. You referenced the hedge the wedge program that's been our way that we have been hedging over the last several years. The way we philosophically think about it is you have $1 billion, $1.5 billion capital program. So you're investing dollars into the ground, you want some certainty on when you start getting the production back. So that's -- think of that as 9, 12 months after making kind of the initial investment decision when you're spotting the well. And you just fundamentally don't know what prices would be at that point. So you want to lock in some of that returns that -- on the investments that you're making, which are fairly substantial, right? When you look at the market cap of the company versus that kind of a capital program, you might be investing 10% to 15% of your market cap into the ground.

Yes. Neil, it's a great question, and it's something we think about a lot. As we think about LNG growth. I mean the market is clearly eager to have more LNG supplies. There's a number of different projects out there that are eager to accept in the growth in LNG, but it's also pretty obvious that at some point, there will be oversupply and that market will have volatility in the same way that the domestic markets do, and we're prepared for that and understand that.

And Neil, this is Mohit. The only thing I would add to that is we are signing up 20-year LNG transactions, and we're going in eyes wide open that there will be periods of time when that transaction will be out of the money. So it's a diversification and connecting us to the eventual end users, as Nick was describing. That's the strategic mandate for us. And -- but again, being fully aware that there will be periods of time when we'll be out of the money.

Yes. So really, what that ties back to is just the underlying activity cadence of our drilling rigs and frac crews, where today, we're running 8 rigs and 2 frac crews. And so we do anticipate that we'll drop 1 additional rig in the Marcellus middle of the year. But by and large, you should expect those in deferred TILs and DUCs to build in a linear fashion through the course of the year.

Well, I mean, I think it all depends on what's going on. If you have some sort of short-term spike in demand that we don't think will be sustained, then we have curtailed volumes, we can bring to market to help meet that demand. If you think that there is more of a step change in demand and volumes are needed in a longer-term fashion, then you start to bring some of those deferred wells online.

Yes. That's really just due to local market conditions. We were seeing pricing there that we just really start to question whether or not it makes sense to continue to flow gas into those markets. And so we selectively look at the well sets and what margins are for each well, recognizing that chemical usage, water production will impact wells margin. And so we just think that pricing that we're seeing in the second quarter, it simply doesn't make sense to flow the full allotment of volume there.

Yes, it should be about the same. I mean there's a lot of considerations that go into how we bring the production back, I mean, outside of just the macro conditions that Nick spoke to earlier. But it's really just around logistical planning. And so we have to be thoughtful about where gas gets introduced and when to manage the gas gathering systems and things like water hauling. But really, I wouldn't say one area is advantaged or disadvantaged more than the other.

Well, thank you all for your time this morning. We really look forward to progressing through this year, working on planning for the integration of our merger and delivering on what we expect to be improving gas market conditions as we approach 2025. As always, if you have any other follow-up questions, please reach out to our outstanding IR team. They will be ready to take your calls, and we look forward to seeing you guys down the road. Thanks.