Ladies and gentlemen, thank you for standing by, and welcome to the EQP Third Quarter 2020 Quarterly Results Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Andrew Brid, Director of Investor Relations. Thank you. Please go ahead, sir.
Good morning, and thank you for joining today's conference call. With me today are Toby Rice, President and Chief Executive Officer and David Kani, Chief Financial Officer. The replay for today's call will be available on our website for a 7 day period beginning this evening. The telephone number for the replay is 1-eight hundred 585-eight thousand three hundred and sixty seven with a confirmation code of 8,9,712,226. In a moment, Toby and David will present their prepared remarks with a question and answer session to follow.
An updated investor presentation is available on the Investor Relations portion of our website, which we may reference certain slides during this discussion. I'd like to remind you that today's call may also contain forward looking statements. Actual results, future events could materially differ from these forward looking statements because of the factors described in today's earnings release and in the Risk Factors section of our Form 10 ks for the year end December 31, 2019, and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward looking statements. Today's call may also contain certain non GAAP financial measures.
Please refer to this morning's earnings release and our most recent investor presentation for important disclosure regarding such measures, including reconciliations of the most comparable GAAP financial measures. And with that, I'll turn it over to Toby. Andrew, and
good morning, everyone. Today, I look forward to providing an update on the business and how we've progressed with our strategic initiatives. But first, I'd like to jump right into the positive results of the Q3. The momentum that we experienced during the transformational 1st year of managing this company has continued in the Q3, which was another impressive quarter both operationally and financially. We delivered sales volumes of 366 Bcfe, which was in line with our original guidance range despite 15 Bcfe that we strategically curtailed at the beginning of September and through the remainder of the quarter.
On the well cost front, we continue to realize improvements in operational performance, delivering well costs of $6.60 per foot on our Pennsylvania Marcellus asset. 3rd quarter well costs were $20 per foot lower than last quarter, 10% lower than target and 22% lower than just 1 year ago. This continued progression gives us increasing confidence and makes our future development plan that much more compelling as we continue to find ways to increase performance and enhance results. We continue to do more with less and that is apparent in our Q3 CapEx spend of $248,000,000 which is $227,000,000 below the same period last year $55,000,000 below last quarter. The efficiencies that we continue to see in both drilling and completions substantiate the CapEx improvements.
With less than 20% of the year to date cost improvements being attributable to service cost deflation, these are truly sustainable cost reductions. On the drilling side, we've seen roughly 20% improvement in horizontal drilling speeds quarter over quarter and roughly 60% year over year, which was accomplished through the continued application of best practices executed by the same crews guided by a stable operation schedule. On the completion side, our electric frac fleets are really hitting their stride, improving pumping hours and stages per month by approximately 15%, respectively, quarter over quarter. In addition to our electric flat fleet accomplishments, our teams have continued to find ways to streamline our operations. These efforts include automating processes that were previously manual, employing new technologies to increase the reliability, efficiency and safety of our operations, utilizing centralized operating systems, taking data that was once silent and fragmented and turning it into easily accessible and usable data to drive better decision making and improve performance.
Put simply, we are leaving no stone unturned to find ways to improve the performance of this business. The continued outperformance has resulted in positive revisions to certain full year 2020 guidance at the midpoint, including an increase to production of 15 Bcfe and a decrease in capital expenditures of $50,000,000 This represents the 4th time we have reduced our 2020 capital guidance for a total of $275,000,000 or 20 percent of the original budget, all while delivering more volumes even considering strategic curtailments. After accounting for a slight widening in expected differentials, this will drive an expected improvement of $25,000,000 in free cash flow. As we continue our financial and operational transformation, we do so with a heightened focus on our commitment to corporate responsibility and transparency. We recently launched our revamped ESG report focused on our evolution as a company, enhanced leadership directives, our operational strategy and the implementation of our mission, vision and values, all aimed at becoming the operator of choice for all stakeholders and the clear ESG leader in the natural gas industry.
Before I get into highlights of the report, it's important to spend a little time on the criticality of natural of nearly of nearly 40 surveyed domestic and global E and P companies during the period. Our peers in Appalachia perform at similar levels. Looking specifically at gas producers, you'll see on Slide 25 that of the top 10 U. S. Natural gas producers, Appalachian players produce approximately 60% more gas with 70% lower emissions intensity.
What excites me about this data is the differentiation of natural gas and in particular Appalachian natural gas. The reliability, availability and cost benefits of natural gas are unquestionable. And we think as people start to look at the data, there will be a decoupling of natural gas from other fossil fuels as it pertains to environmental and socioeconomic benefits. Turning to our ESG report, you will see that we have provided a detailed framework on how we think about our business and how all the pieces are aligned to execute on a cohesive operational corporate and ESG strategy. Our impacts on the ESG side of things are principally an output of operating in an informed, supported and purpose driven manner.
In our report, we highlight among other things, the significant environmental benefits of our combo development strategy, how integrating ESG into our digital work environment improves data collection, analysis and reporting, our commitment to operating safely while utilizing the highest standards to protect and mitigate impacts in the environment investments made in our local communities, including over $29,000,000 in contributions in the form of infrastructure improvements, grants, scholarships and sponsorships, and steps we are taking to reduce greenhouse gas emissions, which have decreased 23% compared to 2018. I encourage you to review our report, which can be found on our Investor Relations website. Shifting gears, I would like to talk about the compelling macro natural gas setup. There are several main points that drive our multiyear bullish thesis. In the near term, supply and demand will continue to tighten as weather demand overcomes the storage overhang.
Core acres within the gassy regions are continuing to be drilled up leaving Tier 2 and Tier 3 inventory that can only be economically drilled at materially higher strip. And lastly, total U. S. Rig counts and completion crews have fallen by approximately 65% since the beginning of the year. In Appalachia, there would need to be about 30% more rigs to keep production flat and in the Haynesville, that number is about 15% more rigs.
In the medium term, within the industry, there is approximately $115,000,000,000 of debt due from now 2023, which has forced producers to focus on corporate returns and fixing their balance sheets rather than growing production. In the long term, we believe there will be a sustainable and long term global call on U. S. Natural gas. We anticipate that long term U.
S. Demand will increase driven by coal and nuclear retirements, partially offset by renewable builds and long term global demand will increase driven by economic development in the developing countries. The favorable macro dynamics as well as continued execution of our operational and financial strategies optimally positions EQT to capitalize on the setup and outperform peers. The forward curve for 'twenty one has moved up into the $3 level and the 'twenty two curve is now in the low $2.70 s. Although important indicators, this will not cause EQT to add growth in 2021 as the curve is still too low and backwardated.
We are focused on running an efficient business plan aimed at increasing NAV per share driven by efficiency gains and not growth. We believe that one of the most important drivers of value creation for our shareholders is getting our assets valued at a long term price deck that
is closer to $3 as opposed to $2.50 And looking at the strip, there is clearly a need for more discipline from EQT and all other operators to achieve this. I'd now like to pass the call over to Dave to further discuss some of our financial and strategic highlights. Thanks, Toby. First, I'd like to start by briefly providing some color on the production curtailment that we implemented during the quarter. The curtailment was initiated on September 1 and remained shut in for the entire month.
We began a phased approach of bringing these volumes back online at the beginning of October and oil production has returned to sales. The driver for the curtailment program was a material price arbitrage between September and winter 2020 pricing and beyond. As we continue to outperform operationally, we're able to defer those extra volumes to be monetized in a much more attractive future price environment. Additionally, we hedged this production to lock in favorable pricing and the attractive economics, which provides a triple digit IRR. In all, the impact of the curtailment was 15 Bcf that came out of our 3rd quarter, while we are still able to deliver volumes near the midpoint of our guidance range.
Going forward, we will continue to use curtailments strategically to capture incremental value when the opportunity presents itself. This segues nicely into the hedging activity that we recently completed. During the Q3, the 2021 strip store increased volatility, but ultimately moved higher currently sitting just above $3 As prices were rising, we were opportunistically adding 2021 hedges during the period to lock in value and protect downside risk with 2 key goals in mind. 1st, the ability to pay off our remaining $900,000,000 of 2021 2022 debt with free cash flow and our E Train equity stake and secondly, lock in investment grade metrics. With this hedge position and a strong 21 and rising 2022 strip, we believe we've achieved these key milestone goals.
As the largest producer of natural gas, our hedge program in a broad sense is set to provide downside protection while capturing the upside. While it would be better to capture 100% upside from rising prices, it is prudent for us to take the risk away from associated with a warmer than normal winter, longer lasting impacts from COVID and higher than expected oil prices. While initiating forward hedges, we take a surgical approach aimed at targeting the higher risk seasonal periods, resulting in more risk protection in the volatile summer months, while leaving more upside in the winter months to be hedged over time. Since June 30, we have added approximately 350,000,000 dekatherms of 2021 swaps at $2.90 and 155,000,000 of 2021 collars with a $2.75 dekatherm floor and a $3.15 dekatherm ceiling. As a result, we now have approximately 72% of our 2021 expected production hedge, assuming maintenance level production, up from the 40% at the end of the second quarter.
During the quarter, we also experienced some regional price volatility and winding of local basis. Our strong fundamental team saw this coming back in May, and as a result, we put on a robust basis hedge position for the fall of 2020 for Dominion South and Tecco M2 at a spread of approximately negative $0.90 to Henry Hub. Ultimately, differentials blew out to over negative 1.55 dollars and we were insulated for much of that exposure. Although heavily protected, the significant basis winding during the period did push our 3rd quarter differentials towards the weaker end of guidance coming in at a negative $0.48 per Mcf. This takes me to a quick overview of our 3rd quarter financial results.
As mentioned before, we're able to be within our guidance range for both sales volumes and average differentials at 3.66 Bcfe and a negative $0.48 per Mcf respectively. Our adjusted operating revenues for the quarter were 853,000,000 dollars and our total operating costs per unit were $1.44 per Mcfe. Operating costs per Mcfe were negatively impacted during the Q3 by the strategic volume curtailments. In addition, for the Q3 of 2020, adjusted SG and A per Mcfe increased as compared to the same period in 2019 due to the higher incentive compensation expense resulting from changes in the value of our awards, which exceeded the favorable impact of our personnel costs from reduction in workforce. As Toby mentioned earlier, we came in below our internal expectations on capital expenditures at $248,000,000 due to continued operational outperformance.
Our adjusted operating cash flow for the quarter was $295,000,000 led to a positive free cash flow of approximately $47,000,000 Shifting gears, I'd like to update everyone on the progress we have made on the debt front. In July, we received a $202,000,000 tax refund, including interest that we used to repurchase approximately $102,000,000 of our 4.7.8 senior notes due in 2021. As of September 30, our net debt was $4,700,000,000 which is roughly $100,000,000 higher than the 2nd quarter. This increase was driven by roughly $245,000,000 of borrowings on our revolver for margin deposits associated with the over the counter derivatives and exchange traded gas contracts. These deposits are reported as a current asset in our balance sheet.
Importantly, these margin requirements change with commodity price movements and with respect to the over the counter derivatives, our credit ratings. Accordingly, our margin deposits will significantly decrease with just the one rating increase, which we are aggressively pursuing and naturally improve with rising natural gas prices. We view this as a more of a temporary liquidity item rather than a matter of truly impacting our leverage. When adjusting for these margin postings, our net debt decreased quarter over quarter by approximately $145,000,000 to approximately $4,470,000,000 implying a 2.81 net debt to adjusting last 12 months EBITDA leverage ratio. To add one more aside to our liquidity position, we have seen increased bank competition to participate in our credit facility, which we view as a testament to our financial strength and a commitment to our responsible capital allocation.
Further enhancing our debt reduction plan is another $48,000,000 in tax refunds we expect to receive in the 4th quarter related to the successful appeal of a certain prior year federal taxes paid. Additionally, we remaining E Train stake and a material level of 2021 free cash flow remaining e train stake and a material level of 2021 free cash flow give us high confidence in our ability to achieve our $3,500,000,000 to $3,700,000,000 total debt goal by year end 2021. This plus an improving strip all begs the question about our current credit ratings. Our recent discussions with the rating agencies were positive. We believe we currently sit with investment grade metrics using the forward curve, which provides us incentive to lock those prices in through hedging.
We will continue to pay down debt and hedge more over time, as those are 2 important things we need to do to reach our investment grade. We firmly believe the macro factors that Toby discussed along with our continued execution lay the groundwork for positive rating actions over the next 12 to 18 months. To further support thesis, I'd like to point you to Slide 19 in our investment presentation, which shows EQT's debt trading performance against various investment and non investment grade indices. As you can see, our debt trade is in line with investment grade peers, signaling investors also think of EQT as an investment grade company. I'd like to conclude our annual remarks by today by touching on a plan to rationalize our firm transportation portfolio.
Constructive conversations continue to take place regarding offloading some or all of our MVP capacity. We do not believe that striking deal is dependent upon MVP being in service and feel that the viability of executing a transaction continues to improve. This is a very important financial catalyst for the company, one of which will drive material improvements in margins and free cash flow. Our team is very focused on this opportunity and we continue to strive to have something in place at the end of the year. Now I'll turn it over to Toby to wrap things up.
Thanks, Dave. EQT is uniquely positioned to demonstrate the true value that natural gas can and will bring to the future energy mix of this country. As we continue this transformational journey to realize the full potential of EQT's premier shale assets, our focus will not only be on the financial and operational results we deliver, but on how we achieve those results. Our strategic approach is centered around the culture we create, the technology we utilize, the people executing the plan and the ultimate impact we have on the environment and communities in which we operate. All of these elements create a cohesive operational corporate and ESG focused strategy being executed with vision and purpose.
These foundational elements that we have put in place guide our daily processes and will be what separates EQT from our peers, creating a clear natural gas leader and operator of choice to all stakeholders and ensuring sustainable long term value creation. I'd like to thank all our employees for their continued hard work and dedication and everyone in attendance today for their continued interest and support of EQT. And with that, I'll turn the call over to the operator for Q and
A.
Your first question comes from Josh Silverstein of Wolfe Research. Your line is open.
Thanks. Good morning, guys. Just continuing the thoughts that David had there on MVP. Right now, it certainly makes sense for you guys to get rid of the whole position given the current basis differentials. But with this potentially being the last pipe out of the basin and the Marcellus likely having a supply pull on it.
Is there any thought as to keeping some of the capacity there or is it still kind of trying to get rid of it all at this point?
Yes. Hi, this is Dave, Josh. Yes, we're studying that. And I think just one thing to be careful about, I know basis really blew out a little bit wider than normal. But let's remember that we had a warmer than normal winter and then we were sitting with COVID.
And so I think we had a little bit unusual circumstances. But I think we're studying that. We're trying to decide whether we want to keep some of that. And just also remind, we can probably also replicate that to some degree with the sales agreement as opposed to owning all the pipe too. So there's multiple things we're thinking through here.
Got you. Thanks for that. And then on the M and A side, two things here. You guys still continue to reference asset sales as part of the debt reduction strategy. So then just any thoughts there?
Then obviously, you guys have been rumored to be in discussions with the Chevron asset, but we might not be able to share much there. If there's any detail you can provide around the production base or the acreage footprint, that would be helpful.
Sure, Josh. On the nonstrategic asset sales, we've been pretty consistent on messaging there. I mean, the biggest gap for us was the bid ask spread, largely driven by commodity price used to value the assets. So we've said as the strip materializes to our view, which is sort of closer to where we're at today, that bid ask spread closes on those non strategic assets. So we'll continue to evaluate any potential offers on those as they come in.
And then on the M and A front, yes, we're not going to speak about specific deals, but continue to believe that anything we would ever at would have to be a good strategic fit at the right value and accretive on a free cash flow per share and NAV basis.
Your next question comes from Eran Jayaram of JPMorgan Chase.
Tobey, Dave, I was wondering if we could start maybe with an update on the Hammerhead system and if you've exercised your option to purchase the system. I think the agreement called for a 12% discount. And maybe just give us some thoughts on where you stand with E Train on this dispute.
Yes. 1, I think we're not going to comment much on I think we might put some comment out in our 10 Q at the end of the day today, so you can take
a look at it.
But I think we're going to be very more silent on this and just know that our goal is always to work with our partner E Train. And I think we've had disputes in the past and we'll come to some sort of resolution in the future. So I'd just say sort of stay tuned.
Yes, fair enough. Just my follow-up would be, I was wondering if you could maybe help us un pack the free cash flow guide a little bit. I know there's some moving pieces between, call it, organic free cash flow generation and the notable tax proceeds. But can you help us unpack how much of that 325 free cash flow is kind of from the organic base business versus taxes?
Sure. So if you use $325,000,000 as the midpoint here, there's about roughly $100,000,000 of tax refund baked in there. So take it down to 225 of organic and just remind everybody, we shut in about 65Bs for this year, roughly. And so that would have been another $65,000,000 probably or more of free cash flow. And then we are going to get about, we will call it, $450,000,000 of tax refunds on top of that.
So that'll give you a sense of the total free cash flow plus tax refunds that we're able to use to pay down debt.
Okay. If I could sneak one more in, David, you mentioned the collateral postings this quarter. If you did get a 1 notch upgrade, could you maybe help us think about the magnitude or the improvement in liquidity you get from that?
Yes. I would say it's probably about 2 thirds of improvement of that number. And so there's some moving parts in there. We post collateral with different banks. Different banks have different credit levels and some of the banks have unlimited credit levels.
So we move things around a little bit and then we also use the exchanges. And so but the rough number you should think about is about 2 thirds.
Your next question comes from Scott Hinode of RBC Capital Markets. Your line is
open. Yes, thanks. I appreciate your also your comments on MVP and the status of those negotiations. But can you just, for me, I guess, dumb it down a little bit. What are the key discussion points between you and the counterparties right now?
And what really is, I guess, holding it up from getting some kind of a decision? I know these are very complex negotiations, but if you can help me out and understand what are some of the kind of back and forth points?
Yes. I'd just say it's hard to we won't get into a lot of things because we are in the negotiations. But I'll just say we have we're negotiating with like 4 or 5 parties right now. And just to understand, this is a long term contract. Everybody wants to make sure they understand their needs.
And so and in some cases, some of the parties who were part of ACP, that was kind of in some cases a shock to the system. So this is understanding what again, what their long term needs are. So I think it's multiple parties, multiple views and long term contract. And so it just takes some time. And then I think the last piece is we just want to make sure we understand from our standpoint, if we want to keep any.
And so it just all that plays into the timing.
Okay. And you still think though year end '20 is still a good time for them
to think of when you'll have some?
Yes. Okay. And my follow-up is just there's been a flurry of consolidation in the space and obviously you gave your high level comments on asset sales in the market. But Tobey,
maybe if
you can give us just a view of where you think like the Appalachian gas market goes from here in of consolidation? I mean, you've seen some from a lot of the oilier players. Do you think something similar like that is going to happen with the gas players? And how quickly could that evolve?
Sure. I think investors certainly have an appetite for companies that can operate at a larger scale, not just simply for the sake of scale, but because there's real value to be created. I think you look at what we've done at EQT, taken advantage of our scale, there's real value that we're creating, whether that means we get more reps on the wells that we execute, which gives us more opportunities to improve operational performance, being able to have access to really cutting edge technology like our electric frac fleets that
you can only put in if
you have a stable operation schedule, the benefits of scale you get from having a large operating footprint and a large gathering system that E Train provides us, which gives us access to a lot more markets. And then also from on the balance sheet side of things, having an investment credit rating is something that's going to be a differentiator as well. So I mean, I think investors are right in having the desire for larger scale companies and companies like EQT that can take advantage of that scale and create value for shareholders, I think, is going to be a theme that should be looked for. Your
next question comes from Holly Stewart of Scotia Howard Weil. Your line is open.
Thank you. Good morning, gentlemen. Maybe just a couple quick follow ups to some of the previous questions. To Josh's question on MVP, Dave, can you remind us what your letter of credit postings are for that project?
Yes, Holly, we don't break it out by pipeline. I just we have basically $800,000,000 of letters of credit in place. And again, we don't give it by project.
Would it come down materially if you optimize that hold?
It would come down, yes. I guess it depends on what you define as material. I think more importantly, as our credit ratings improve, it will come down. And I think that's probably the bigger I'd call the bigger driver between the 2.
Okay. Okay. That's helpful. And then maybe, Toby, a follow-up to some of the M and A type of questions. I mean, you highlighted in your prepared remarks how Appalachia stacks up on an ESG perspective.
Do you think that this ultimately starts moving through the mindset of producers as we kind of look at the oil M and A market here?
I mean, I think that ESG could just be another barrier to
some of
the smaller scale companies. Certainly on the private side, it's just another thing and feature that you need to bolt on to your business. Certainly, at AT and T, with the number of employees and specialists that we have to focus and improve the performance across all ESG metrics is a benefit you get from a large organization and scale. So I think larger companies are have the resources needed to dedicate to improving ESG performance and ESG performance we think is going to be a differentiator and something that investors care about and we certainly believe the benefits of strong ESG performance is going to be a key to long term value creation for shareholders.
Okay, great. And then maybe one final one for me. You've now come in, I think, below your well cost target 2 quarters in a row and obviously, now your full year average is well below that. Can you just talk about sort of your well cost trends and then any potential updates to those targets that you see coming?
Sure. I think just looking at Slides 9 through 12 sort of tell the story. Where we're at right now is we continue to produce results that actually drive value by lowering our well costs. We've certainly gotten past the fix the business phase at EQT in the large it's sort of towards the earlier when we got in. Now what you're starting to see is the innovative approach that we have at EQT.
So you see that that's driving the operational efficiencies. We've made some pretty big strides in still on the drilling side and in the completion side. And really what's driving that is really highlighted on Slide 12, which is just the continued application of new technology and leveraging that technology to drive operational efficiencies, which drive well costs. On top of that, I'd say we've been able to take to lock in some of the service pricing that we have. About 50% of our services are locked in, of our spend is locked in to provide some sustainability and the well cost performance that we've been able to demonstrate.
So we'll see how much more we can innovate and continue to drive the performance, and I'm encouraged to have an organization that has the ability to evolve and innovate.
Your next question comes from Mark Carlucci of Morgan Stanley.
Good morning. Just want
to build on Holly's question, thinking about sustaining capital in 2021. I think it was a year ago you gave a $1,150,000,000 kind of preliminary number. Just curious any early thoughts on spending or sort of how much of the savings that you realize were sort of built into that prior target?
So I would just say that we continue to walk down our 2020 CapEx and planning for 2021 CapEx numbers. We're going to continue a maintenance program, and we're going to we would say that probably start with what we're at with 2020 for our maintenance CapEx is going to be a good starting point for 2021.
Okay. And then just to follow-up on that, the so 80% of the cost savings are sustainable. Can you just comment on that remaining piece sort of what scenarios would that come back into the cost structure? I guess, how long do you have these service costs locked up for?
Once you start, there'll be an offer. Sure.
Yes. As far as the sustainability, I mean, the operation schedule that we have, the lateral lengths that we're putting out there, the percentage of combos, those things are all increasing. So that's going to that certainly is very sustainable. That's really what sets the operational teams up to really drive operational efficiencies, which drives cost. So that's a good well design.
We're going to continue with the evolved well designs that we've been putting in place here. So don't see any changes there. So we have a good idea of what these wells what it takes to actually execute these wells, the well design that we have. And the other thing I'd say is from the sustainability part, from a service price perspective, I mean, there's my comments on the fact that we've got over 50% of our spend is locked in with service costs. So, and those are the bigger needle moving items like frac fleets, things that are more sensitive to moving if you have a rise in activity levels, which again, we're pretty anemic levels from an activity level standpoint with under 300 rigs running in the country, we don't anticipate service pricing to rise materially because we don't expect activity to rise materially.
Materially. So we feel like we're in a really good position from a cost perspective to make these sustainable. Got it.
Your next question comes from Brian Singer of Goldman Sachs. Your line is open.
Thank you. Good morning.
Good morning, Brian.
I wanted to follow-up on the last question there, but really a bit more from a production activity perspective. You mentioned you want to see more long term price expectations at $3 or so versus $2.50 to increase activity or have more confidence in doing that. Is the implication then that we should assume you would be producing around 4th quarter type levels through 2021 at the maintenance capital? And if gas prices are in the longer dated futures go to 3, that's when we would expect more of a ramp up in activity?
Yes, I would say we look at for us, maintenance CapEx is the production levels we're looking is probably on a yearly Bcf level as opposed to what our quarterly production level would be. So I mean, just peg that at the 1480 to 1500 Bcf for the year.
Yes. With maybe some shut ins occasionally in there if we want to take advantage of arbitrage. Yes.
And as far as to answer your question on when we would think about growth, we're going to stay consistent with messaging with prior messaging, which is there's a couple of things we want to see first. Number 1 is we want to get our balance sheet and hit our leverage targets, which we're well on track to doing that by end of 'twenty one. I think the other thing we look at is you need to have a sustainable strip that's probably more than just the next 12 months out. And so we'll be surveying the landscape when we get to that point. And then maybe
the third part is, Brian, I think growth for us is probably 0% to 5%. So it's not going to be like the old 8 days of 20%, 30%. So it will be very modest growth if we do grow.
Great. Thank you. And then my follow-up goes back to the topic of M and A. And on the last call, you talked about that you would need to have confidence in M and A, free cash flow per share accretion, and you mentioned that again here today. You also mentioned that you would need any M and A to contribute to deleveraging the business.
And I realize that you can't talk specifically, but I wondered if you could characterize the market broadly on whether those opportunities are available to achieve both those goals as well as I think you also mentioned the NAV per share earlier in the call?
Yes, sure. So I mean, we've said historically it's a biased market. We think that that's still the market that we're in. So it all comes down to hitting those metrics that we talked about is getting assets at the right price. So I mean, that's I think is going to be an ultimate determination on being able to achieve those type of metrics.
And I guess we get the question on that as to the use of equity. And I guess what it would seem like if the goal is to contribute to deleveraging that that would be a part, but can you comment or talk maybe philosophically about
Yes. So, this is Dave. So, one thing to just think about is, probably a few weeks ago when we were at a conference, we mentioned to everybody that our balance sheet back a few weeks ago when the curve was actually lower, we could see ourselves already at sort of 2x leverage or less. And so I think from a ability to need equity effectively to fund an acquisition to delever, I think just the fact that the strip has risen up a lot, has really put ourselves already in, I would call it, investor grade metrics. That's kind of why we talked about it.
So I think if we do ever do M and A, I think the need for equity has significantly dropped. And it doesn't mean we wouldn't do it. But I'd just say that I think there's views out there that were written that we'd have to do a lot more equity. But I think again to Toby's point, if we buy it right, number 1, that's the first point. And then the fact that we're already sitting in investment grade metrics puts us in another good spot where equity is really less needed.
Thank you.
You're welcome.
Your next question comes from Neetan Kumar of Wells Fargo.
I'll start with you've talked a little bit about the long term growth and I think Toby you mentioned 5%. Can you there's another leg to the investment case today, it's the cash return strategy. How are you thinking about it? What are the gating factors for you to start returning some of this extra free cash flow to shareholders?
Yes. So hitting our leverage targets by 'twenty one, I think, is going to give us the ability to make that decision so that we could be returning capital to shareholders as early as 2021. I think that, all things being equal, when it's when our balance sheet has gotten to the place where we'd like it, growth or return capital to shareholders, we're most likely going to be returning capital to shareholders. The
industry
and even the Appalachia team, The industry and even the Appalachians seems to be under investing in supply. I want to particularly touch on what do you see around you right now because I think a comment there is that you're not incentivized and the industry is not incentivized to provide a supply response. Does that mean that I'm just kind of curious what are you seeing around board? Are people just being very, very reticent to bring back activity?
Yes. I think that you see you just look back at the history here and anytime we see a price signal, industry has increased rigs and grown production. Any production growth you get is offset by a decline in commodity price. So you're not really making any progress. I think industry gets that right now.
I think the fact that operators are looking to organically deleverage their balance sheet by reducing absolute debt as opposed to increasing EBITDA is one of the things that's sort of keeping people disciplined on the growth. And I think the other thing is, if you look at the strip and while 'twenty one certainly come up, which is great to see, you look further out and we I think you look at that strip in 'twenty two and 'twenty three and realize that there is still an opportunity for commodity prices to come up to a level that before anybody would think about adding more activity.
Great. Thank you.
Yes. And then I'll just jump in and say that if you want to use return on capital employed as a long term return metric for investors to want to come back and really invest in the space, The industry really needs 350 gas over the next 5 years to really generate that return on capital employed.
Great. That's what I was looking.
Your next question comes from Jeffrey Campbell of Tuohy Brothers. Your line is open.
Good morning. My first question is on M and A. Toby, since you've said that you think that much or at least a significant portion of Appalachian Tier 1 acreage is drilling up, What would really be the benefit of having more scale with a less attractive resource?
Sure. I think it comes down to just the points I made earlier about the benefits of upscale. So I mean being able to leverage technology at scale is certainly going to be something that would help. Being able to leverage lower well costs across a larger asset base is another one. Being able to leverage a larger, more robust gathering network access to more markets being the 3rd and then also being able to take advantage of an investment grade sheet would be the other as well.
And I'd say strategically just having a little bit more control over supply with a disciplined approach I think is another thing that helps stabilize the commodity. And like we said in our script scripted remarks, the thing that's going to increase the value of the biggest impact to the value for shareholders is going to be getting our assets valued at a price that's higher closer to $3.2.50 and more discipline in the industry is certainly going to be a key towards achieving that.
Okay. And following on your last point regarding forward net gas pricing, your desire to receive a higher commodity assumption. What sort of oil price do you think is required, I guess, over the next couple of years to keep sufficient volumes of associated natural gas out of the market, which in turn would allow producers like EQT to better control its state?
I would say $50
There are no further questions at this time. I will turn the call over to Toby Rice for closing remarks.
Thanks, everybody, for your time today. We spent a lot of time over the past year talking about the results that this organization has been able to produce. But I would urge everybody to take a minute and go to our CSR report at esg.ett.com. I think it's a great example of how we don't just care about the results we put up, but how we generate those results. And proud of the great work the team has done in putting that report and hope everybody can check it out.
So thanks, everybody. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.