Ladies and gentlemen, thank you for standing by, and welcome to the EQT Third Quarter 2020 Quarterly Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Andrew Breese, 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 Khani, Chief Financial Officer. The replay for today's call will be available on our website for a seven-day period beginning this evening. The telephone number for the replay is 1-800-585-8367 with a confirmation code of 8971226. In a moment, Toby and David will present the 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 for these forward-looking statements because of the factors described in today's earnings release and in the Risk Factors section of our Form 10-K for the year end December 31st, 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. With that, I'll turn it over to Toby.
Thanks, 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. First, I'd like to jump right into the positive results of the third quarter. The momentum that we experienced during the transformational first year of managing this company has continued in the third quarter, 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 Bcf that we strategically curtailed at the beginning of September and through the remainder of the quarter. On the well cost front, we continued to realize improvements in operational performance, delivering well cost of $660 / ft on our Pennsylvania Marcellus asset.
Third quarter well costs were $20 / ft lower than last quarter, 10% lower than target, and 22% lower than just one 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 third quarter CapEx spend of $248 million, which is $227 million below the same period last year and $55 million 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 frac fleets 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 siloed and fragmented and turning it into easily accessible and usable data to drive better decision-making and improved 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 million. This represents the fourth time we have reduced our 2020 capital guidance for a total of $275 million, or 20% 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 million 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 gas to the energy mix of the future. You will see on slide 24 of our investor presentation, EQT's operations have the second lowest emissions intensity of nearly 40 surveyed domestic and global E&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. 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 to the environment, investments made in our local communities, including over $29 million 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 multi-year 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. In the Haynesville, that number is about 15% more rigs. In the medium term, within the industry, there is approximately $115 billion of debt due from now until 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 this setup and outperform peers. The forward curve for 2021 has moved up into the $3 level, and the 2022 curve is now in the low $2.70s. 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. 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 David 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 1st 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 all 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 third quarter, while we were still able to deliver volumes near the midpoint of our guidance range. Going forward, we will continue to use curtailment strategically to capture incremental value when the opportunity presents itself. This segues nicely into the hedging activity that we recently completed. During the third quarter, the 2021 strips saw 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 two key goals in mind. First, the ability to pay off our remaining $900 million of 2021 and 2022 debt with free cash flow and our Equitrans equity stake. Secondly, lock in investment-grade metrics.
With this hedge position and a strong 2021 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 30th, we have added approximately 350 million dekatherms of 2021 swaps at $2.90 and 155 million of 2021 collars with a $2.75 dekatherm floor and a $3.15 dekatherm ceiling. We now have approximately 72% of our 2021 expected production hedged, 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 widening 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 TETCO M-2 at a spread of approximately negative $0.90 to Henry Hub. Differentials blew out to over -$1.55 and we were insulated from much of that exposure.
Although heavily protected, the significant basis widening during the period did push our third quarter differentials towards the weaker end of guidance, coming in at a - $0.48 / Mcf. This takes me to a quick overview of our third quarter financial results. As mentioned before, we're able to be within our guidance range for both sales volumes and average differentials at 366 Bcfe and a - $0.48 / Mcf respectively. Our adjusted operating revenues for the quarter were $853 million, and our total operating costs per unit were $1.44 / Mcfe. Operating costs per Mcfe were negatively impacted during the third quarter by the strategic volume curtailments.
In addition, for the third quarter of 2020, adjusted SG&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 million due to continued operational outperformance. Our adjusted operating cash flow for the quarter was $295 million, which led to a positive free cash flow of approximately $47 million. Shifting gears, I'd like to update everyone on the progress we have made on the debt front. In July, we received a $202 million tax refund, including interest, that we used to repurchase approximately $102 million of our 47/8% senior notes due in 2021.
As of September 30th, our net debt was $4.7 billion, which is roughly $100 million higher than the second quarter. This increase was driven by roughly $245 million 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 posting 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 one rating increase, which we are aggressively pursuing and naturally improve with rising natural gas prices. We view this as 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 million to approximately $4.47 billion, 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 million in tax refunds we expect to receive in the fourth quarter related to the successful appeal of certain prior year federal taxes paid. Additionally, we're forecasting $85 million-$135 million of free cash flow in the fourth quarter.
The new tax refund, fourth quarter free cash flow, remaining Equitrans stake, and a material level of 2021 free cash flow give us high confidence in our ability to achieve our $3.5 billion-$3.7 billion 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 two 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 this thesis, I'd like to point you to slide 19 in our investor presentation, which shows EQT's debt trading performance against various investment and non-investment grade indices. As you can see, our debt trades in line with investment-grade peers, signaling investors also think of EQT as an investment-grade company. I'd like to conclude on any 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 a 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 to 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, David. 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 in 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. With that, I'll turn the call over to the operator for Q&A.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. 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. 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 trying to get rid of it all at this point?
Yeah. Hi, this is David, Josh. I think just one thing to be careful about, I know basis really blew out a little bit wider than normal, let's remember that we had a warmer than normal winter, then we were sitting with COVID, I think we had a little bit unusual circumstances. I think we're studying that. We're trying to decide whether we want to keep some of that just also remind, we can probably also replicate that to some degree with a sales agreement as opposed to owning all the pipe too. There's multiple things we're thinking through here.
Got you. Thanks for that. On the M&A side, two things here. You guys still continue to reference asset sales as part of the debt reduction strategy. Just any thoughts there, and then obviously you guys have been rumored to be in discussions with the Chevron assets. While you 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 non-strategic asset sales, we've been pretty consistent on messaging there. The biggest gap for us was the bid-ask spread, largely driven by commodity price used to value the asset. 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. We'll continue to evaluate any potential offers on those as they come in. On the M&A front, yeah, we're not going to speak about specific deals, but continue to believe that anything we would ever look at would have to be a good strategic fit at the right value and accretive on a free cash flow per share and on that basis.
Great. Thanks, guys.
Your next question comes from Arun Jayaram of JP Morgan. Your line is open.
Yeah. Toby, David, 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 Equitrans on this dispute.
One, 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. I think we're going to be more silent on this, and just know that our goal is always to work with our partner at Equitrans. I think we've had disputes in the past and we'll come to some sort of resolution in the future. I'd just say stay tuned.
Yeah. Fair enough. Just my follow-up would be, I was wondering if you could maybe help us unpack the free cash flow guide a little bit. I know there's some moving pieces between called organic free cash flow generation and the notable tax proceeds, can you help us unpack how much of that $325 million free cash flow is from the organic base business versus taxes?
Sure. If you use $325 million as the midpoint here, there's about roughly $100 million of tax refund baked in there. Take it down to $225 million of organic, and just remind everybody, we shut in about 65 Bcf for this year, roughly. That would have been another $65 million probably or more of free cash flow. We're going to get about, we'll call it, $450 million of tax refunds on top of that. 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 one-notch upgrade, could you just maybe help us think about the magnitude or the improvement in liquidity you'd get from that?
Yeah. I would say it's probably about two-thirds of improvement off that number. There's some moving parts in there. We post-collateral with the different banks. Different banks have different credit levels, and some of the banks have unlimited credit levels. We move things around a little bit, and then we also use the exchanges. The rough number you should think about is about two-thirds.
That's helpful. Thanks a lot, gents.
You're welcome.
Your next question comes from Scott Hanold of RBC Capital Markets. Your line is open.
Yeah, thanks. I appreciate also your comments on MVP and the status of those negotiations. 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? 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.
Yeah. I'll just say. We won't get into a lot of things because we are in the negotiations. I'll just say we're negotiating with four or five parties right now. Just to understand, this is a long-term contract, so everybody wants to make sure they understand their needs. In some cases, some of the parties who are part of ACP, that was kind of, in some cases, a shock to the system. It's just understanding, again, what their long-term needs are. I think it's multiple parties, multiple views, and long-term contract, and so it just takes some time. Then I think the last piece is we just want to make sure we understand from our standpoint if we want to keep any. All that plays into the timing.
Okay. You still think, though, year-end 2020 is still a good time for him to think of where you'll have some?
Yes.
Okay. 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 markets. Toby, maybe if you can give us just a view of where you think the Appalachian gas market goes from here in terms of consolidation. 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, taking 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 Equitrans provides us, which gives us access to a lot more markets.
Then also from-- on the balance sheet side of things, having an investment-grade credit rating is something that's going to be a differentiator as well. 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.
Thank you.
Your next question comes from Holly Stewart of Scotiabank. 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, David, can you remind us what your letter of credit postings are for that project?
Yeah. Holly, we don't break it out by pipeline. We have basically $800 million of letters of credit in place. Again, we don't give it by project.
Would it come down materially if you optimized that hold?
It would come down, yes. I guess it depends on what you define as material.
Okay.
I think more importantly, as our credit ratings improve it'll come down, and I think that's probably the bigger, I'd call the bigger driver between the two.
Okay. That's helpful. Maybe, Toby, a follow-up to some of the M&A type of questions. 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&A market here?
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 onto your business. Certainly at EQT 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. I think larger companies have the resources needed to dedicate to improving ESG performance. ESG performance, we think, is going to be a differentiator and something that investors care about. We certainly believe the benefits of a strong ESG performance is going to be a key to long-term value creation for shareholders.
Okay, great. Maybe one final one for me. You've now come in, I think, below your well cost target two 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 nine 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 sort of gotten past the fix the business phase at EQT. What you're starting to see is the innovative approach that we have at EQT. You see that's driving the operational efficiencies. We've made some pretty big strides 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 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 in the well cost performance that we've been able to demonstrate. We'll see how much more we can innovate and continue to drive the performance. I'm encouraged to have an organization that has the ability to evolve and innovate.
Great. Thanks, guys.
Thank you.
Your next question comes from Mark Carlucci of Morgan Stanley. Your line is open.
Hey, guys. Thanks for taking the question.
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 $1.15 billion kind of preliminary number. Just curious, any early thoughts on spending or sort of how much of the savings that you realized were sort of built into that prior target?
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 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. Just to follow up on that, 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?
Why don't you start, Phil?
Sure. 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. That certainly is very sustainable. That's really what sets the operational teams up to really drive operational efficiencies, which drives costs. That's on 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. We have a good idea of what it takes to actually execute these wells, the well design that we have. 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.
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 at 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. We feel like we're in a really good position from a cost perspective to make these sustainable.
Great. Thanks so much, guys.
Got it.
Your next question comes from Brian Singer of Goldman Sachs. Your line is open.
Thank you. Good morning.
Morning, Brian.
Wanted to follow up on the last question there, really a bit more from a production activity perspective. You mentioned you want to see more long-term price expectations of $3 or so versus $2.50 to increase activity or to have more confidence in doing that. Is the implication that we should assume you would be producing around fourth quarter type levels through 2021 at the maintenance capital? 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?
I would say for us, maintenance CapEx is the production levels that we're looking is probably on a yearly Bcf level as opposed to what our quarterly production level would be. I mean, just peg that at the 1,480-1,500 Bcf for the year.
With maybe some shut-ins occasionally in there if we want to take advantage of arbitrage.
Yeah. As far as to answer your question on when we would think about growth, we're going to stay consistent with prior messaging, which is there's a couple things we want to see first. Number one 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 2021. 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. We'll be surveying the landscape when we get to that point.
Maybe the third part is, Brian, I think growth for us is probably 0%-5%. It's not going to be like the old heydays of 20%-30%. It'll be very modest growth if we do grow.
Great, thank you. Then my follow-up goes back to the topic of M&A. On the last call you talked about that you would need to have confidence in M&A, free cash flow per share creation, and you mentioned that again here today. You also mentioned that you would need any M&A to contribute to deleveraging the business. 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.
Yeah, sure. We'd said historically it's a buyer's market. We think that that's still the market that we're in. It all comes down to hitting those metrics that we talked about, is getting assets at the right price. That I think is going to be an ultimate determination on being able to achieve those type of metrics.
I guess we get the question on that as to the use of equity, and I guess it would seem like if the goal is to contribute to deleveraging that that would be a part. Can you comment or talk maybe philosophically about that?
This is Dave. 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 two times leverage or less. 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, investment-grade metrics. That's kind of why we talked about it. I think if we do ever do M&A, I think the need for equity has significantly dropped. It doesn't mean we wouldn't do it.
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. I think, again, to Toby's point, if we buy it right, number one, that's the first point. 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 Nitin Kumar of Wells Fargo. Your line is open.
Morning, gentlemen. Thanks for taking my question. I'll start with, you've talked a little bit about the long-term growth, and I think, Toby, you mentioned 0%-5%. 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?
Yeah. Hitting our leverage targets by 2021, 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 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.
Got it. My follow-up is actually on slide 15, and you've kind of alluded to this. The industry and even the Appalachian seems to be under-investing in supply. I want to particularly touch on sort of what do you see around you right now? I think a common there is that you're not incentivized, and the industries are incentivized to provide a supply response. Does that mean that? I'm just kind of curious, what are you seeing around the board? Are people just being very reticent to bring back activity?
Yeah, I think that you see, you just look back at the history here and anytime we see a price signal industry has increased rates and grown production. Any production growth you get is offset by a decline in commodity price. 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. I think the other thing is you look at the strip and while 2021 has certainly come up, which is great to see.
You look further out, and I think you look at that strip in 2022 and 2023 and realize that there's still an opportunity for commodity prices to come up to a level that before anybody would think about adding more activity.
Great. Thank you.
Yeah, I'd 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 $3.50 gas over the next five 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's on M&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. 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 third. Being able to take advantage of an investment-grade balance sheet would be the other as well. 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.
Like we said in our scripted remarks, the biggest impact to the value for our shareholders is going to be getting our assets valued at a price that's higher, closer to $3 than $2.50. More discipline in the industry is certainly going to be a key towards achieving that.
Okay. Thanks for that. Following on your last point regarding lower 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 a producer like EQT to better control its fate?
I would say $50.
Okay, perfect. Thank you.
Welcome.
There are no further questions at this time. I return 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. I would urge everybody to take a minute and go to our CSR report at esg.eqt.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. Thanks, everybody. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.