Ladies and gentlemen, thank you for standing by, and welcome to today's EQT Q1 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 I would like to hand the conference call over to Andrew Breeze, Director of Investor Relations. Please go ahead.
Good morning and thank you for joining today's conference call. With me today are Toby Rice, President and Chief Executive Officer and David Conny, 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-five eighty five-eight thousand three hundred and sixty seven with a confirmation code of 2066,546. In a moment, Toby and David will provide the prepared remarks with a question and answer session to follow.
During these prepared remarks, Toby and David will reference certain slides that have been published in a new investor presentation, which is available on the Investor Relations portion of our website. I'd like to remind you that today's call may contain forward looking statements. Actual results and future events could materially differ from these forward looking statements because of factors described in today's earnings release and in the Risk Factors section of our Form 10 ks for the year ended 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 for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn it over to Toby.
Thanks, Andrew, and good morning, everyone. Today, I will give a brief review of the quarter and provide an update on the business. I will then pass it to Dave to review the details of the quarter and talk about the recent actions we have taken to improve the financial standing of this business. Afterwards, we will open up the call for Q and A. This management team since being elected has been unrelenting in our quest to deliver on campaign promises.
Our operational results validate the promises that we made to our shareholders and prove our thesis that a well planned business combined with leading technology creates a differentiated durable and sustainable business. The equity and debt markets have taken notice. Since the beginning of the year, we have accessed the capital markets twice, once in January with our $1,750,000,000 senior note offering and again in April with our $500,000,000 convertible debt deal. Both offerings strengthen our strategic flexibility, de risked our near term maturities and were met with overwhelming market participation. Additionally, we have seen significant strengthening in both our equity and debt performance supporting these strategic actions.
EQT is in a unique position to capitalize on the improving natural gas macro as the vast majority of our production is natural gas and less than 5% of our production is tied to deteriorating liquids and oil prices. Even more so, our acreage sits in the southwestern core of the Marcellus and has over 15 years of inventory. Our financial and operational results over the last several quarters have proven that our approach to developing this world class asset is working and this company is well on its way to becoming the clear operator of choice. Moving forward, we will continue to push our technological boundaries and be at the forefront of innovation to drive incremental efficiencies and create value for our shareholders. This commitment is reflected in our Q1 results.
Our acute focus on cost reduction, schedule optimization well designed and operational uptime drove our strong performance during the period. We were able to deliver volumes well above the high end of our guidance range for less capital and developed our Pennsylvania Marcellus asset at a well cost of $7.45 per lateral foot, an accomplishment that is approaching our target of $7.30 per lateral foot faster than anticipated. Our operational costs are trending down and we will continue to focus on driving these down throughout the year. EQT and its employees continue to work hard safely generate value during the COVID-nineteen pandemic. As exhibited by this quarter's results, our business has been able to thrive as we seamlessly transitioned all of our office personnel to a remote work environment.
This success is principally a result of our digital work environment that we implemented during our 100 day plan, coupled with the heart, dedication and teamwork of our employees. EQT remains committed to our safety culture. We have had regular conversations with officials and the safety of all of our employees and contractors have been our primary focus. We have gone beyond the minimum safety standards in our response and have intensified our focus on data collection and technology to create an insight that allows us to contact Trace employees and contractor partners that enter our active sites. This insight has allowed us to contact hundreds of contractors' employees shortly after learning of potential exposure cases and provide them with the names of all individuals to be monitored.
The greatest risk to operators like EQT is the potential for increased exposure as a result of missed contacts and response delays and our contact tracing technology is just one example of how we are looking at managing the impact of this pandemic differently. To our employees in the field, our contracted partners, our peers and the health care and frontline responders, we thank you for your continued dedication during these times. We are working passionately to support the communities in which we operate, including recently donating $360,000 to local community funds. We will keep doing our part to make EQT and its community as safe as possible. The energy industry has also been impacted by deteriorating oil prices as a result of unprecedented demand destruction due to the COVID-nineteen pandemic.
While oil prices sit at historic lows and have forced reductions to rig counts and frac crews, well shut ins, slashing of capital budgets and production and bankruptcies, EQT has not only been resilient, but has been effectuating positive change while other E and Ps are challenged. While we are just 1 quarter into the year, we are trending at the high end of our production guidance and the low end of our capital and operating expense guidance, a standing that presents us with the ability to make decisions on the remainder of our 2020 program as we continue to monitor the improving macro setup in 2021. While we believe there is upside to our plan, we have maintained our previous 2020 guidance and intend to update that guidance as well as provide more commentary on our 2021 program as we move throughout the year. On the macro front, we continue to see weakness in demand impacting 2020 prices and expect prices to strengthen in 2021 and beyond. For 2020, demand has declined between 4 to 6 Bcf per day with weakened power, industrial and rescomp consumption.
Furthermore, LNG exports are facing more and more cancellations as the arp to export gas has gone negative for the next 3 months. On the supply side, we are now beginning to see the impact of declining oil and liquids prices, reducing associated gas output and building condensate in liquids inventory, resulting in associated gas supply being shut in. The estimates for the supply impact range from 3 to 8 Bcf a day and this can balance the market fairly quickly and sets up for a strong Q4 2020 calendar year 2021 and beyond. In addition, the last several years of declining natural gas prices have caused natural gas rates to decline over 50% from 200 back in January to currently under 90 today. As a result, near term natural gas supply response will be very delayed until balance sheets are repaired.
The challenge will be trying to balance the timing of demand recovery and to anticipate the new normal for demand. Can see prices having the potential to spike in certain peak demand periods that could result in some demand destruction or fuel switching. The 2014 2018 winter periods are somewhat test cases for our gas to be rationed for the highest and best use. We believe the forward curve is underestimating the move in prices and this is especially noticeable in the 2022 2023 curve. As the largest natural gas producer in the country, EQT is doing its part with a disciplined approach to capital allocation, focusing on maximizing free cash flow versus production growth despite a rising natural gas price environment.
Now I'll turn it over to David County to discuss some of our financial accomplishments, dig into the Q1 results a little more closely and then discuss our balance sheet management strategy.
Thanks, Toby. Before we get into the detailed quarterly results, I'd like to quickly review the financing accomplishments that we have made through the 1st 4 months of the year. Coming into 2020, we faced approximately $3,800,000,000 of debt maturities coming due through 2022. Subsequently, we have refinanced or paid down approximately $2,400,000,000 and plan to retire the remaining $1,400,000,000 over the next 19 months. We've thoughtfully managed our liquidity and although our current position is more than adequate, we fully expect to improve it going forward.
We have developed a more robust hedge process to be able to capture rising prices over time, while at the same time derisking the volatility in our revenues. We've accelerated the timing of our tax refunds, which increased our Q1 free cash flow and helped us better rationalize our asset sale program. We've lowered our CapEx forecast for 2023x and squeezed out more out of our G and A expenses. And last, we are reiterating our 2020 guidance while many in the S and P 500 have pulled their guidance. In addition to these accomplishments, we've also had a great Q1 from an operational and financial performance perspective.
The earnings release published today and the 10 Q that will be filed later this afternoon contain all the details, but I will review some of the highlights. Overall, we outperformed in many areas. First, we achieved sales volumes of 385 Bcf for the quarter, which exceeded the midpoint of our guidance range by 20 BcfE. This outperformance was really a combination of various efficiencies realized across the organization, the largest of which was improved base production uptime. Adjusted operating revenues were $957,000,000 down 21% compared to the Q1 of 2019 as the average realized price was $2.49 or $0.67 below last year, while sales volumes remained relatively flat year over year.
Our Q1 2020 production related operating costs reflected a per unit basis were $1.33 per Mcfe, dollars 0.05 lower than the Q1 of 2019 and below the low end of our full year 2020 guidance range of $1.34 to $1.46 per Mcfe. Capital expenditures were $262,000,000 or $214,000,000 lower than the Q1 of last year and lower than our expectations. As Toby mentioned, our Pennsylvania Marcellus well cost averaged $7.45 per foot, accelerating our path towards achieving our target well cost and driving our outperformance for the period. Our adjusted operating cash flow for the quarter was $513,000,000 as compared to 647
dollars in the Q1 of 2019,
while free cash flow was $251,000,000 as compared to $171,000,000 in the year ago period. Free cash flow was positively impacted by reduced capital expenditures as well as $95,000,000 in accrued cash income taxes from the CARES Act, which accelerate our ability to claim federal refunds of alternative minimum tax credits. For the Q1, there were also a few other items I want to point out which impacted our competitive results versus last year. First, as previously disclosed, we completed the exchange of 50 percent of our equity stake in E Train for gathering rate relief in conjunction with the execution of a new gas gathering agreement with EQM and $52,000,000 of cash proceeds. As a result of this transaction, we recorded a contract asset of $410,000,000 representing the present value of the expected rate relief and a gain of $187,000,000 We will amortize the contract asset over a period of approximately 4 years beginning at MVP in service date.
This non cash amortization expense will be recorded as a part of the gathering expenses in our GAAP reporting, but will be separately identified and excluded from our adjusted EBITDA and free cash flow non GAAP metrics. 2nd, during the Q1, we reclassified certain in basin transportation expenses to gathering expense in our financial statement and disclosures and guidance. This aims to provide additional clarity into costs associated with transporting our gas outside the Appalachian Basin. There is no net change to our 2020 guidance, but approximately $0.14 has been moved from the transmission to the gathering bucket. Overall, the Q1 was another successful quarter under the new leadership.
During the Q2 2020, we expect sales volumes of between 360 to 380 Bcfe, average differentials of negative $0.45 to negative $0.25 per Mcf. We're also expecting an uptick in capital expenditures of approximately $300,000,000 driven by increased activity, better weather and more daylight, all of which we expect to drive roughly breakeven free cash flow during the period. I started off my prepared remarks by discussing the financial accomplishments we've achieved thus far in 2020, and now I'd like to spend a little time talking about the details related to our maturity management strategy. I'd like to refer you to Slide 15 in our analyst presentation, which clearly lays out our plan. After applying all the proceeds from the recent convertible debt offering to the 2021 term loan, we now sit with about $620,000,000 of debt maturing in 2021.
When you take in consideration the 2020 expected free cash flow of $275,000,000 at the midpoint, over $300,000,000 of additional tax refunds and other small receivables, approximately $125,000,000 in proceeds expected from E and P sales in advanced stages and the remaining E Train stake, which has a current market value of approximately $200,000,000 you can see we have clear line of sight in handling the 2021 maturities and adequate carryover funds to be applied against the 2022 maturities. Then we turn to 2022 maturity of 750,000,000 dollars which I remind you isn't due until the end of 2022. As I just mentioned, we plan to have several $100,000,000 of that paid off by the end of 2020, leaving us with significant flexibility in our approach to managing that debt stack. Improving natural gas macro and commodity setup could support our ability to pay down this debt with cash flow generation if we choose. We also have several selective asset divestiture opportunities we can pursue to accelerate, supplement and or enhance debt retirement.
Touching on the selective asset divestitures quickly. We are taking a measured approach to selling assets. The market is still there, particularly the minerals market, but we're being very selective and deliberate on our decision on whether to continue pursuing this at this time. We expect that by the end of 2021, we will have reduced debt by more than the original contemplated $1,500,000,000 but in a more methodical way that should improve our cost of capital. This substantial debt reduction in conjunction with the improving natural gas macro should expedite our pursuit back to investment grade metrics, creating a more strategic differentiation for EQT.
As the fundamental drivers of natural gas macro continue to play out, we are carefully studying the commodity market to assure we are making highly informed strategic hedging decisions. When we created our updated hedge program in February, winter weather disappointed, sending the strip down about $0.30 to the $2.20 to $2.30 level. We added about 300 Bcf to our 2021 hedges during the February March time period, the latest capturing pricing between $2.50 to $2.70 At the heart of our strategic approach is appropriately balancing the ability to capture 2021 pricing upside, while protecting the downside risk. As we move through the year, we will look to opportunistically layer on hedges at favorable prices. We will expect to enter 2021 with a substantial percentage of our production hedge with additional hedges over the next several years.
The pace of our hedging activity has slowed post the full emergence of COVID-nineteen and the OPEC price war for a couple of reasons. First, as the supply demand impact of the current environment become clear, we're becoming more and more bullish on the natural gas pricing set up for 2021 and beyond. Secondly, the broader E and P group has been forced to layer on hedges to protect borrowing bases that are subject to redeterminations, creating pricing pressure in the market and we want to wait for this dynamic to abate. I'd like to also remind that we have roughly 90% of our 2020 gas production hedge at a weighted average floor price of above $2.70 per dekatherm, which has and will insulate us from commodity price volatility as we move through 2020. Our current liquidity sits at $1,600,000,000 which consists of $2,500,000,000 unsecured revolver, which is essentially undrawn, offset by approximately $900,000,000 of letters of credit posted, stemming from the ratings downgrades that occurred earlier this year.
Based on discussions with counterparties and maximum collateral exposure levels, we believe we are largely through the collateral cycle. I want to reiterate that unlike many E and Ps and Appalachian peers, our revolver is unsecured and not subject to borrowing based redeterminations. This is a strategic differentiator as it removes one of the biggest variables of the liquidity equation. Although our current liquidity is nicely above our minimum liquidity needs, we continue to pursue SEPs to add back liquidity. I'm encouraged by the progress we have made in removing risk, improving the balance sheet, setting this business up to prosper.
We have received positive feedback from the steps that we've taken and look forward to continuing to create value for all our stakeholders. I now pass the call back to Toby.
Thanks, Dave. The setup for EQT is compelling. This team has established both the track record of execution and keeping promises made to its shareholders. We will continue to find ways to lower our costs, become more efficient and extract maximum value from our premier asset base. We have made improvements from top to bottom across the organization and have created a durable and scalable business that is able to withstand external pressures.
Our heavy exposure to natural gas will allow us to capture the bullish macro setup on the horizon and will drive strong free cash flow yield and will create ample strategic flexibility. Our debt and maturity management plan will create a viable path back to an investment grade balance sheet, which will create clear differentiation for all our stakeholders. And lastly, EQT is committed to operating the right way with an intensifying focus on our ESG program. Before I turn the call over for Q and A, I'd like thank all of our EQT employees who have displayed the heart, trust and teamwork, which are driving the evolution of this business. With that, I'll turn it over to the operator for Q and A.
Your first question comes from Josh Silverstein. Your line is open.
Hey, thanks. Good morning, guys. You've made a lot of headway in getting towards the $1,500,000,000 debt target. Any reason why you would stop there, given the growing free cash flow position? And if you did hit the $1,500,000,000 target, what would be prioritized after that?
Additional debt reduction, return of capital to shareholders or even starting that by a little bit of growth spending?
Yes. So I think our goal is I think you'll see by the time we're all done, we'll be probably between my guess is between $1,600,000,000 $1,800,000,000 of debt retirement. Our goal is to get our leverage down below 2x. So those I think those are really key thresholds for us. The convert that we did be converted into equity as well.
That could be a further deleveraging event. But I think once we get below them, then that gives us the flexibility to do other, I call it, shareholder friendly things such as dividends, buybacks and other things.
That's helpful. And then could you just get an update on the asset sale thoughts? It seemed like you guys were pushing those out a little bit just to help get some better valuations into a rising price environment. But has your thought changed in terms of the priorities and what you wanted to sell relative to before? Is there less of a pressing need to do the royalty transaction versus just straight up production?
So any thoughts there would be great.
Yes, Josh. Good morning. This is Toby. Yes, on our asset sales program, I think we're going to stay we're going to continue to sort of trim the rose bush and be willing to divest of properties that are non core to our operating footprint. I think the progress we've made on a non core asset sale that we've mentioned here, the $125,000,000 is sort of representative of that.
We have some more of those, call it, non core fields that would be on the table. I think some of the larger assets that we're holding on to, keep in mind these assets are largely PDP weighted and we think the value of these assets will just continue to appreciate in a rising commodity price environment. So part of this is making sure that we maximize value creation and waiting for the macro to catch up to sort of where our fundamental view is before we continue to sell those larger assets. But like I said, these are this is a continued focus for us. We have our core plan.
We know where we want to develop. And we've got a goal of deleveraging this business and generating free cash flow for shareholders. So asset sales will continue to play a part of that.
Yes. Just that bucket, just to remind everybody, is well over $1,000,000,000 So there's a lot of firepower in there. It's just finding the right timing.
Great. Thanks, guys.
Your next question will come from Welles Fitzpatrick from SunTrust. Your line is open.
Hey, good morning.
Good morning. Good morning.
So
it looks like the $390,000,000 of tax refunds really gives you the ability to be more selective in the divestitures. And so maybe you're focusing more on the overrides, if I'm hearing it correctly. But on the other side of that equation, can we get an update on the strategy visavis mineral buys either to offset those overrides or for your own book that you guys have talked about in the past?
Sure. I think there's an opportunity set in front of us to purchase minerals and that was something that we were looking at doing to offset any mineral sales that we did. Even if we've maybe pushed pause on selling minerals, I think that opportunity set still remains. And we have a land budget that was set that we would be able to capture those opportunities without having to increase our CapEx budget in 2020. So purchasing minerals ahead of the drill bit is part of our strategy and it's budgeted for and we're looking forward to executing that.
Okay. Makes sense. And then can you talk to the GOR moving forward? Obviously, you guys are pretty gassy relative to your peers, which is great right now. Do you see gas as a percent of production to increase?
I mean, are you planning on, I guess, shifting those rigs a little bit further east to maybe take advantage of the positive gas curve?
Yes. I mean, sitting at 95% production of gas is probably going to stay consistent. So yes, for us, I mean we've been consistently allocating capital to dry gas. So there wasn't really a big amount of wet development to shift from. So we anticipate continuing to have a 95% production mix of dry gas.
Okay, perfect. And then just one last one for me. It looks like on Page 20 3, the gathering rates for 20.24 plus went from a little bit under $0.50 to a little bit over. Is that the price escalators or is that part of the reclassification you guys have talked about?
You're talking about in 2023 you said, 2024? Yes. Yes,
that was part of the reclassification.
Okay, makes sense. Thank you guys.
You're welcome.
Your next question will come from Chris Dandrinos from RBC Capital Markets. Your line is open.
Thank you. Good morning. Just going back to the February commentary around the Equitrans sale targeted for mid year, has that timing changed all in light of the recent kind of share price performance there or kind of any impacts to your projected free cash flows?
Yes. For us, we were always looking at trying to make sure that the value of E Train was more fairly valued and it's been very volatile. And I think now that I think there's the merger between E Train and EQM coming, MVP in service state was kind of another key catalyst. And I think now that you're seeing an improvement in natural gas fundamentals, all those things, I think, play very well into why E Train stock has kind of moved back up. And so I think for us, we're not going to hold on to it by the end of the year.
At some point, we'll sell before then, and we're just going to make sure that we maximize value for us.
Great. Okay. And then just on the guidance. You mentioned this non core asset sale in the press release. Does the current guidance include the impact of that asset sale?
And if not, kind of what's maybe the production associated with that? Thanks.
Yes. It's very small amount of production. And so right now we're running ahead of expectations. So when we strip it out, it will have very minimal impact to our guidance, if anything at all.
All right.
Thank you.
Your next question comes from Holly Stewart from Scotia Howard. Your line is open.
Good morning, gentlemen.
Good morning, Polly. Good morning.
Maybe just a couple First, recognizing that NGLs and condensate are not a huge part of your business, but the guidance does move down for volume for the year. So I guess the first question would be, what are you doing with your own portfolio right now just given pricing and then what are you seeing in the basin in terms of curtailments? Sure.
So, yes. So, just given our exposure liquids, we're not seeing any material differences in the way that we operate. But I think what you mentioned is a dynamic that's very important to understand is what's happening to other operators in the basin. We have seen people having to shut in wells because of not being able to get rid of their condensate. If I had to quantify what we've seen from the amount of dry gas that will be shut in as a result of these shut ins, it'd be probably in the order of 500,000,000 to 800,000,000 cubic feet of gas a day.
And so that's a pretty important dynamic that we're continuing to track. And again, these things would be favorable to the natural gas outlook that we see.
Okay. That's interesting. That's a big number. And then Dave, maybe just some perspective on the longer term goal for sub two times leverage, I guess, just thinking about the timing there according to your plan, do you see that being feasible by the end of 2022?
Well, I think from an absolute debt perspective, we'll get our absolute debt down to where we want to or better by the end of 2021. So that'll be things I'd say probably in our control. And then the next thing will really be the commodity price environment. And so if the commodity gets up closer to that 3 times level, dollars 3 level, that's where that'll be a nice trigger for us to get our leverage right into that zone. And so I think those are really to be the 2 variables to think about.
Okay. And then maybe just a housekeeping item. Any impact from this Texas Eastern explosion?
Yes. So that was an event that occurred a couple of days ago. We have no major impacts as a result of that. Just to give some background on that incident, about 10 p. M, we were notified by 2 pm and we had to shut back some gas.
But working with our partners, E Train was very helpful in allowing us to get our gas back to flowing. But by 2 pm the next day, we had all of our gas schedule and the commercial team had found markets for that gas and we're able to put it to sale. So there will be some differences on the pricing that we'll get for that selling in basin versus on the TECO line. But we expect that to be rather insignificant. We're we'll be able to quantify that now.
Okay, great. Thanks guys.
You're welcome.
The next question will come from Jane Chotzenko from Stifel. Your line is open.
Good morning and thanks for taking my questions. The first question is on $500,000,000 in convertible debt that you guys issued in April. Maybe you guys can talk about the rationale for doing this type of debt instead of plain vanilla senior notes?
Sure. This is Dave Kani. So if you look at the setup that heading into doing a convert, our debt traded up very close to par. So that created a really good dynamic from a fixed income perspective. And then the volatility of as our stock rallied very sharply, great good volatility really creates a second component of a convert, which is really a combination of debt and an equity option.
And so when you put those 2 together, it created a very, very good dynamic to do a convert. And so we hired a consultant who is very skilled in that. And if you notice how we executed that, we were able to get a very low coupon at 1.7 5%, and we were able to get a call spread that was very differential versus our peers that did convert. So it helped us actually save about $20,000,000 when you looked at kind of the cost differential between other converts and what we did. So it's just a really good setup for convert.
Okay. Okay, got it. And then I wanted to ask you something on the high Utica. So when you guys announced the CapEx cut back in March, it seems like it should have impacted the capital allocation to high Utica. Maybe you guys can talk about how you think about this asset and obviously it's for sale.
How we be kind of thinking about production outlook and maybe well costs where they stand currently?
Sure. So I'll take this sort of just at a higher level. Just looking at the capital efficiency of our program and how the Utica fits into that. I think looking at the capital efficiency at EQT, I break it down into sort of 2 categories, the capital efficiency of our entire program and the efficiency of our execution of specific well costs. When we look at the capital efficiency of our entire program, it's a couple of things that are happening that are allowed us to lower costs.
I mean, first, starting with capital allocation decision activity levels. We have a mentality that we're going to continue to stay in maintenance mode. And so not adding any new activity or production. Think the other aspect of capital allocation comes to the types of wells that we're actually developing. You'll see us start to shift more activity in to our Marcellus first and shift away from Ohio Utica development.
That will give us the ability to execute wells, Pennsylvania Marcellus wells that call it 730 a foot versus our Ohio Utica that's north of $1,000 a foot. So it will be more efficient application of our dollars there. And so I think you may see Ohio start maintain production, but in the future that asset may decline a little bit as we shift activity into the Pennsylvania Marcellus.
That's very helpful. The last question, if I may, on cash cost. So obviously, strong outperformance on cash cost in 1Q 2020. And just curious if there were like some one off items or if this is something that you guys can sustain through the remainder of the year?
Yes. We maintain our guidance, but I think with the I'd say we have a bias that if you sit and wait and stay tuned, we're going to think about what we do with the upside that we've created in our plan.
Got it. Thanks a lot.
Thank you.
And your next question will come from Sameer Badwani from Tudor, Pickering, Holt. Your line is open.
Hey, guys. Good morning. You've done a great job of getting the well cost down and it would seem service costs have provided somewhat of an unexpected benefit in the current environment. As you think about heading into 2021, do you see potential line of sight to get that $730 per foot target even lower maybe with a 6 handle?
Yes, sure. So this is Toby. I would say, 7.30 a foot was always our target, but it was not our floor. And so when we look at some of the things that we're doing now in present day and the sustainability of that into the future, we look at the quality of our well execution. I think there's really 4 parts.
One is operation schedule. That's largely driven by what percentage of our development is going to be set for Comba development. And in the future, we have a rising percentage of activity that's going to be part of Comba development. So that's to strengthen and allow us to lower costs. From a well design perspective, another key aspect of it with our standardized well designs, we know that we're going to be generating putting the same design in the ground with some simple tweaks.
But expect us that will really set us up to make sure that from the oilfield service side, which is another cost driver that our teams are able to procure the services they need for a stable schedule, activity schedule. And while it is true, I think services service costs have come down. And I think that largely has allowed us to accelerate hitting our well cost targets. The teams have been really focused on making these costs that we're benefiting from right now sustainable into the future. And so we've been able to sign into long term contracts.
I mean, specifically just looking at some of the biggest spend services on our frac equipment, we've been able to execute 2 long term pricing agreements, 1 with U. S. Well Services and another one with Evolution, both some really great technology that allows us to really take another take our operational efficiencies to the next level. And that's really leads us into the 4th aspect of cost sustainability, talking about our operational efficiencies, and with good combos with the right well design, good service contracts, we're really getting high quality crews and equipment. Our operational efficiencies will continue to improve.
We showed in our slides the fact that we've continued to show gains in our drilling performance. That will continue to improve as we get through our legacy wellbores that we inherited. We had a lot of wells that were drilled with short top holes. So we've had to spend a little bit more time drilling vertical section with our horizontal rigs. Those will be sort of flushed through the system towards the back half of this year.
So we see performance improvements on the horizontal section on the completion side of things, getting access to this new technology and the teams at continued execution. We see an opportunity for us to increase the operational efficiency from a stages per day perspective there as well. So I mean, all these things to say, they all come together and lead us to have great confidence in hitting our 7:30 a foot, extending that performance into the future and setting the table for lower costs going forward.
Yes, that's great color. Really appreciate that. And then just wanted to clarify some of your earlier comments. I think you mentioned there's some optionality heading into 21, but also focus on free cash flow towards addressing debt. Now those could be somewhat mutually exclusive.
So just looking for some clarity there.
Yes. So you've seen some other peers talk about the opportunity that's in front of Appalachian Producers and all natural producers, frankly, to defer some production in 2020 and push that production into 2021, and it pushes a much higher gas price environment. That opportunity is something that we're looking at EQT. Our operational uptime that we've had has allowed us to be ahead of schedule from a production standpoint. And that efficiency is going to give us the flexibility to be able to capture that opportunity.
So you may see us shift a little bit of production into 2021, but the decisions that we would make would not cause us to change our guidance.
Okay. Okay. So even if you were to curtail, it would still be within the guidance range, maybe just towards the lower end or something?
Yes, probably more towards midpoint to high.
Okay. Got it. Thank you.
And your next question will come from Jeffrey Campbell from Tuohy Brothers. Your line is open.
Good morning. Thinking about your Ohio Utica remarks at a high level over time, is acreage that costs more than $730 per foot to produce an eventual candidate for asset sale?
Yes. I mean, I think we think about we want to make sure we're spending our dollars in the highest return assets. And right now, Combo Development, Pennsylvania Marcellus is the most efficient use of development right now. And so we've shifted our operation schedule to prioritize the best rate of return type of projects. And when we look at that, the I Utica sort of falls behind our Pennsylvania Marcellus and our West Virginia Marcellus assets.
Okay, great. Thank you.
You add any color on the 2020 land budget? I was just wondering if there's anything unique happening now because of the conditions this year versus a better macro year like we're hoping for in 2021?
Yes. Our land budget was largely driven by a maintenance leasehold maintenance about 2 thirds of our $150,000,000 budget was set towards renewing leases and another $50,000,000 was for filling in the holes. So we've done some things working with our landowner partners to sort of spread some of those costs over time. So there is an opportunity for us to come in a little bit lighter on the land budget side of things. And then then looking forward, in future years 2021 going forward, there's an opportunity for us to take the amount of dollars that we have budgeted for land and walk that down from the $150,000,000 to something that is lower.
I think one of your points you referenced with a stronger 2021 outlook for gas, has that impacted land? I'm reading through into thinking about competition. And I would just say that, with such a dominant foothold and that EQT has along with just the mature aspect of this basin, really haven't seen a lot of competition here. And really in any part of the play, there's only one operator that can give landowners the confidence to get a wellbore drilled and get royalties, which is the big prize. And landowners are definitely educated and understand that and willing to work with EQT.
So that's sort of the dynamics of land right now.
That was a great answer. I appreciate that. And if I could ask one last one, just kind of getting off script of a lot of the questions here. I was just wondering what features of the hybrid drilling rig that you show on Slide 8 do you find superior to what's become kind of the standard high spec rig that most operators are using?
Thanks. Yes, sure. I mean, I think it really just I mean, keep in mind, a lot of these rigs, we burn diesel to generate power. I mean, we're burning diesel to generate electricity and that electricity powers the rigs. These battery packs really just sort of normalize the power loads that the rig is using and doing it in a more efficient manner.
So that's really what's taking place there. It's just a more efficient use of energy.
Thank you.
Yes.
Thank you.
I have no further questions in queue. I turn the call back over to Toby Rice for closing remarks.
Sure. On behalf of EQT's directors, the management team and our workforce, thank you for your support and interest in EQT. And all of us look forward to continuing on this momentum and working hard to deliver the results that our shareholders deserve. Thank you.
Thank you everyone for joining. This will conclude today's conference call. You may now disconnect.