Greetings, and welcome to EQT Corporation's 2nd Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Kane, Chief Investor Relations Officer for EQT Corporation.
Thank you, Mr. Kane. You may begin.
Thanks, Doug. Good morning, everyone, and thank you for participating in EQT Corporation's conference call. With me today are Rob McDonough, Senior Vice President and Chief Financial Officer David Schlosser, Senior Vice President and President of Exploration and Production Jerry Ashcroft, Senior Vice President and President of Midstream and Balu Jenkins, Chief Commercial Officer. Dave Porges is not participating as he had a previously scheduled conflict. The replay for today's call will be available for a 7 day period beginning this evening.
The telephone number for the replay is 201-612 7415 with a confirmation code of 13674485. The call will also be replayed for 7 days on our website. To remind you, the results of EQT Midstream Partners, ticker EQM and EQT GP, ticker EQGP are consolidated in EQT's results. Earlier this morning, there was a separate joint press release issued by EQM and EQGP. EQM and EQGP will have a joint earnings conference call today at 11:30 am, which requires that we take the last question of this call at 11:20.
The dial number for that call is 201-689 7817. In a moment, Rob and David will present their prepared remarks. Following these remarks, Rob, Dave, Jerry and Blue will be available to answer your questions. I'd also like to remind you that today's call may contain forward looking statements. You can find factors that could cause the company's actual results to differ materially from these forward looking statements listed in today's press release under Risk Factors and under Risk Factors in EQT's Form 10 ks for the year ended December 31, 2017, filed with the SEC as updated by any subsequent Form 10 Qs, which are on file at the SEC and available on our website.
Today's call may also contain certain non GAAP financial measures. Please refer to this morning's press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. I'd now like to turn the call over to Rob McNally.
Thanks, Pat, and good morning, everyone. I'd like to start by discussing several of our key achievements during the quarter before moving on to our standard quarterly update. We've made tremendous progress towards the separation of our midstream and upstream businesses. We've completed all of the midstream streamlining transactions that we previously announced in April. On May 22, we closed 2 transactions, the sale of EQT's Ohio Gathering assets to EQM for $1,150,000,000 in cash and $5,900,000 EQM units and the sale of RMP's IDRs to EQGP for 36,300,000 EQGP units.
On July 23, EQM completed the acquisition of Rice Midstream Partners in a unit for unit transaction at an exchange ratio of 0.3319. To support these transactions, EQM successfully issued $2,500,000,000 of senior notes. Proceeds from the offering were used to repay the amounts outstanding under EQM's 3 64 day term loan to pay off RMP's revolver and for general business purposes. The two remaining important items in our separation plan are the appointment of a new CEO and the filing of the Form 10. The CEO search is well underway, and we expect to have a CEO named prior to the separation.
We plan to file the Form 10 by mid August, which means the separation will likely occur in the Q4. While the ultimate timing depends on the SEC and IRS, we cannot be certain as to how quickly they will act. Our goal is to close the separation as soon as possible. We are committed to ensuring that both the production and midstream businesses emerge from separation with strong investment grade balance sheets. To achieve this objective, EQT will retain 19.9% of SpinCo's stock, which will be used to reduce debt at EQT Corp.
And to fund the stock buyback program. As a result of this share retention, we do not expect SpinCo itself to have any outstanding indebtedness at the time of the separation. Our Board has authorized a $500,000,000 share repurchase program effective immediately. Given our view that EQT stock is not reflecting the full value of our E and P and midstream businesses, we expect to begin using this buyback authority as soon as possible. We are pleased with this approval as it is one way for EQT to return value to its shareholders.
In the same light, we did repurchase 700,000 EQT shares in the 2nd quarter, taking advantage of the previously approved share repurchase authorization. Buying back EQT shares ahead of the split will benefit the shareholders of both companies. In June, we completed the sale of our Permian Basin assets for $64,000,000 in cash, which also relieved EQT of $40,000,000 of liabilities associated with the assets. Earlier this month, we completed the sale of our non core Huron assets for $575,000,000 in cash and relieved EQT of approximately $200,000,000 of assumed liabilities. Now focusing on the midstream side.
As you may have read in EQM and EQGP's 2nd quarter press release, the MVP JV announced a modification to its construction schedule and now anticipates a Q1 2019 in service date. More information on MVP can be found in EQM and EQGP's press release issued earlier this morning. Now on to results for the quarter. EQT announced 2nd quarter adjusted earnings per diluted share of $0.44 compared to $0.07 in the Q2 of last year. Adjusted operating cash flow attributable to EQT was $526,000,000 for the Q2, a $296,000,000 increase year over year.
SEC rules prevent us from adding expenses related to the separation back to adjusted operating cash flow. As a reminder, the results of EQGP, EQM, RMP and Strike Force Midstream are consolidated in EQT's results. Net income attributable to non controlling interest was $118,500,000 for the quarter compared to $81,500,000 in the Q2 of last year. Now moving on to the segment results. Starting with EQT production.
2nd quarter sales volumes were 363 Bcfe and fell within the stated guidance range of 360 Bcfe to 370 Bcfe. Volumes were 83% higher than the Q2 of 2017, primarily as a result of the Rice acquisition. Average differentials of negative $0.43 for the quarter came in 33% better than the negative $0.64 in the Q2 of 2017. Differential improvements were offset by lower NYMEX price of $2.80 compared to $3.18 last year. The average realized price, including cash settled derivatives, was $2.81 per Mcfe, a 2% decrease compared to the Q2 of last year.
Operating revenues totaled $951,000,000 for the Q2 of 2018, $320,000,000 higher than the Q2 of 2017 due to increased production associated with the acquisition. Approximately $13,000,000 of EQT production's operating revenue is considered pipeline and net marketing services revenue. We recast the segment to reflect the midstream asset drop, which resulted in 3rd party gathering revenue generated from the dropped assets being moved from the EQT production segment to EQM gathering segment. Thus, the $13,000,000 in EQT production as a result cannot be directly compared to our stated guidance in April of $15,000,000 to $20,000,000 Adjusting for the recast, the pipeline and net marketing services revenue would have been $24,000,000 Total operating expenses, excluding $118,000,000 of asset impairments, were $912,000,000 or 58% higher year over year and cash operating costs per Mcfe were 20% lower than last year. Now moving on to the midstream results.
As mentioned, EQM's results have been recast to include the pre acquisition results of midstream assets acquired by EQM from EQT. EQM gathering operating income for the Q2 was $122,000,000 $38,000,000 higher than the Q2 of 2017. Operating revenues were $68,000,000 higher than the Q2 of 2017, primarily due to the acquired Ohio Gathering assets. Operating expenses for EQM Gathering were $59,000,000 $30,000,000 higher than the Q2 of 2017. Again, this variance was primarily from the acquired assets.
ECRAM's transmission operating income for the Q2 was $61,000,000 dollars 3,000,000 higher than the Q2 of 2017. Operating revenues were $4,000,000 higher than the Q2 of 2017. Expenses for EQM Transmission were $29,000,000 which is $2,000,000 higher than the Q2 of 2017. Now moving to RMP Gathering and RMP Water. RMP Gathering reported an operating income of $40,000,000 while RMP Water reported an operating income of $24,000,000 Now on to our cash flow and liquidity position.
As of June 30, EQT had $200,000,000 of borrowings and no letters of credit outstanding under the $2,500,000,000 credit facility. EQT's current cash balance, excluding EQM and EQDT, is approximately $200,000,000 and there is full availability on our $2,500,000,000 revolver. We currently forecast between $2,700,000,000 $2,800,000,000 of adjusted operating cash flow for 2018 at EQT, which includes approximately $350,000,000 to $400,000,000 from EQT's interest in EQM, EQGP and RMP. Please note that the adjusted operating cash flow guidance for the year has been adjusted for the Huron asset sale and does not include taxes or costs related to the separation. With our forecasted adjusted operating cash flow and cash on hand, we expect to fully fund our forecasted 2018 capital expenditure plan of 2,400,000,000 dollars Lastly, I want to thank our employees and advisors for their hard work and dedication and our shareholders for their continued support.
With that, I will turn the call over to David to make some comments on operations. Thanks,
Rob, and good morning, everyone. Let me start by providing an update on 2018 sales volume. As Rob mentioned, Q2 volume was within guidance at 363 Bcfe and represents a slight increase over Q1 volume of 3.57 Bcfe. We still expect sequential quarterly growth for the remainder of the year and are guiding Q3 at 370 Bcfe to 380 Bcfe, an 8% quarter over quarter growth increase adjusting for the Huron. Huron adjusted full year guidance is now 1490 Bcfe to 1510 Bcfe and is consistent with prior guidance.
Moving on to operations. We continue to realize capital synergies from the Rice acquisition as we develop our large contiguous acreage position. In our Southwestern Pennsylvania core, our 2018 drilling program is now expected to deliver an average lateral length of 14,200 feet, which is 55% higher than our 2017 Southwestern Pennsylvania average prior to the Rice acquisition. In addition, our land group's efforts have also allowed us to lengthen approximately 70 prior year DUCs by an average of 3,000 feet each. As a reminder, we typically use top hole rigs to drill the vertical section and curve of a well and then bring in a more extensive horizontal rig to drill the lateral.
The timing gap created by swapping out the rigs, which is typically 4 to 6 months, creates an additional opportunity for land to extend laterals even after we spud a well. This was of particular importance following the Rice acquisition as we have the opportunity to significantly lengthen many wells even though those wells had already been spud by EQT or RICE. As a result of these efforts and in conjunction with our 2018 drilling program realizing longer than planned lateral lengths, we will reach our targets for feet of pay completed and feet of pay drilled, 2 important productivity targets, while spudding 34 fewer wells than we planned in 2018. On an activity level, the 2nd quarter was the highest in EQT history, with the company operating as many as 15 rigs and 12 frac crews. This resulted in nearly 680,000 feet of pay being fracked, which is 55% higher than our previous record.
On the drilling side, we have already drilled as much footage in the first half of twenty eighteen as we did in the full year 2017. This activity was completed while making significant efficiency gains with stacked footings per day and drilled footings per day up 20% 25 percent respectively over 2017 numbers. These results illustrate the benefits of EQT's manufacturing model and specifically our real time operating centers. Finally, the increased activity in Q2 will result in higher sales volumes in Q3 and Q4 with us turning in line approximately 50% more feet of pay in the second half of twenty eighteen as we did in the first half. We expect Q2 to be the high point for CapEx this year and reiterate our full year guidance of $2,200,000,000 for well development.
In the second half of twenty eighteen, we will return to a more moderate activity level, ramping down to 6 to 7 frac crews running at the end of the year and 13 to 14 rigs. I will now turn the call over to Pat.
Thank you, David. This concludes the comments portion of the call. Doug, will you please open the call for questions?
Thank you. We will now be conducting a question and answer Our first question comes from the line of Brian Singer with Goldman Sachs. Please proceed with your question.
Thank you. Good morning.
Hi, Brian.
You talked a lot about the buyback here. It seems like there are 3 avenues you have to fund the buyback asset sales, which you've done with the Huron sale here the midstream spinco proceeds, which you're highlighting might be an option to use for share repurchase. And the 3rd level might be activity levels and growth. Can you talk about the key constraints that you're looking for particularly on the latter 2, I. E, what your target balance sheet would be as you think about how much proceeds could be used from the midstream spinco towards share repurchase?
And then also whether you would consider slowing your growth rate and using the excess free cash flow
for share repurchase?
Yes. So there's several things in that question, Brian. So let me try to deal with them 1 at a time. As we think about the appropriate growth rate for the company, we certainly see the need to balance generating free cash with a moderate growth rate. We're currently working through that with the Board and we'll get we'll have a better guidance for you later in the year on what we think the forward growth rate will be, but we certainly do think there has to be a balance between returning cash to shareholders with growth.
In terms of the share repurchase, we have a $500,000,000 authorization from our Board. And once we have used that up, depending on what the balance sheet looks like and what the environment is like, we can certainly consider going back to the Board for further authorization. In previous calls and commentary, we have said that we want to see our leverage levels less than 2 times debt to EBITDA and preferably more like 1.5 times debt to EBITDA. And so that's the target range that we still believe is right for EQT going forward.
Great. Thank you. And then my follow-up is maybe a little bit of the reverse, which has to do with the better environment here for natural gas prices locally and as well the storage situation nationally. Given the deficit we have in storage and some improvement that we've seen in local Appalachian prices combined with some of the efficiency gains you've highlighted, how do you think about potentially increasing activity or what would you need to see to increase activity?
Yes. I think clearly, Brian, in a higher gas price environment, higher realizations, the math on returns will tell us that we're better off to increase growth rates and production. But we haven't seen a significant move in realized prices. While there have been some modest improvements locally in basis, that's been partially offset by lower NYMEX pricing. So I would say that, that dynamic isn't pushing us to increase production at this point.
Our next question comes from the line of Scott Hanold with RBC Capital Markets. Please proceed with your question.
Yes. Thanks. Good morning.
Hi, Tom.
Hi. On retaining those SpinCo shares, can you give us some sense of what is your plan to like how do you look to monetize that? Is it something we should expect pretty quickly? Is it going to be systematic, opportunistic? And with that, what was really the driving force behind making that decision to retain that those SpinCo shares?
Was it specifically to have the access to extra liquidity? Or was it for more during the spin process to make it a little, I guess, cleaner for investors that would have been spun a little bit more shares?
Yes. I mean, the real driver here was this was an avenue for us to right size EQT balance sheet and get to the liquidity levels that we want and be able to fund the share buyback prior to the spin because we were retaining that value and it gives us confidence that we have the available capital to fund the buyback without putting undue leverage at the spinco level. So we want our goal all along was that we would have 2 independent companies with strong healthy balance sheets, And this was the most elegant way to accomplish that goal as well as fund the share buyback.
Okay. And how do you want to execute that?
The share buyback?
No, no, no, the sale of the retained shares.
Yes, sorry. So we're required by the IRS in the spin that we would have to dispose of those shares within 5 years. My expectation is though that we will do it significantly quicker than that. And it's not something that likely happens right out of the gate. So I think that there will be some churn in the SpinCo shares as they trade to more natural shareholders.
But within the 1st couple of years, I would expect that we would exit that position. Okay. The requirement is just that we do it within the 1st 5 years.
Got it. And as a follow-up to a question Brian had there, just on looking at growth rates versus capital returns to shareholder. You had previously, obviously, when you've gone down this path with the separation, talked about 15% kind of growth rates and now there's a little bit more moderation. Can you give a little background again what's really driven sort of that thought process change and how meaningful of a change in that growth rate are you guys evaluating?
Well, I think that the driver really is feedback from the market. It appears to us that there's not really an appetite by shareholders and capital markets in general to fund growth outside of cash flow. So we think that you're getting to a position where our growth is within we can fund it within cash flow and then also return some cash to shareholders is the right way to go. And I think that we've been as an industry and as a
company, we've been moving in that direction
for at least the last year.
Historically. And are going to be, I would say it's less than what it has been historically. And I don't think that 15% plus growth rates are the right thing to do for the company and for shareholders. As we work through the budgeting process with our Board this fall, we'll give you more concrete guidance on what that growth rate looks like, but it's also going to be dependent on what the commodity price environment is as well. Where I think in a higher commodity price environment, we'll be biased towards a bit higher growth and in lower commodity price environments, I suspect it's going to be lower.
Yes. And so, and this is something you guys are looking to initiate pretty quickly, this potential shift. Is that right? So, it's going to would it have an impact on 2019? Or is 2019 pretty much locked and loaded with the drilling activity in 2018?
It could have a modest impact on 2019. But as you point out, the drilling activity that we have undertaken in 2018 largely sets the 2019
growth
profile.
Our next question comes from the line of Arun Jayaram with JPMorgan. Please proceed with your question.
Yes. Rob, I was wondering if you could kind of walk us through the steps in terms of the separation. You mentioned that the Form 10 would be filed in mid August. But walk us through kind of the timing and what kind of happens from here. And at what time would you be prepared to provide kind of standalone kind of guidance for EQT production?
Yes. So from here, we've essentially completed all of the cleanup transactions that we announced in April and the related financing transactions. So I would like to say that I'm extremely happy with the progress that we've made and the hard work that our teams have done. I'm really impressed with what we've gotten done. So what's left now is to file the Form 10, which we expect to do by mid August.
And then that starts the process with the SEC, which that timing then is a bit out of our control. It depends on how many rounds of questions the SEC has. And then we're also waiting on the PLR from the IRS. And we think that, that likely pushes us into the Q4 now between those two gating items. And I suspect that as we get closer to separation, we will likely want to get out and meet with investors.
And at that point, I think you'll get standalone guidance from both EQT and SpinCo. So I don't know what the dates of that will be, but I think in the month leading up to the spin being finalized, you would expect to hear from us with more concrete guidance for both SpinCo and EQT.
Okay. And just my follow-up, slight delay here in MVPs. Just wondering, Rob, if you could walk through some of the implications to EQT production. And obviously, that will delay the timing of where you'll incur kind of the transportation costs. But just maybe walk through maybe the impact to EQT from the delay?
Yes. There's really not much of an impact for EQT. EPT. It will delay the time at which we can sell volumes at Sandisko 165. And so it just means that we'll have more volumes being sold at M2 prior to that, but the financial impact is fairly limited to EQT.
All right, great. Thanks a lot.
Our next question comes from the line of Welles Fitzpatrick with SunTrust.
To follow-up on the MD2 comment from the last caller. There was it seemed like there was a little bit of a bump up on the top end of the guidance range as far as CapEx is concerned. Is that just conservatism because of the modest delays? Is that all we should read into that?
Yes. Just with delays and inefficiency as costs go up. So for instance, with the stay that the 4th Circuit Court put in place, it's caused us to have to jump around a bit and hop over water crossings and Okay. That
makes sense. And then just one follow-up. Obviously, you guys have talked about slowing the growth rate a little bit. So if your compatriots in the basin and Halliburton, Have you guys seen any of that effect flowing through to well costs? Do you think that that could provide some downward pressure on completion costs as we move through the year?
Yes. This is David. I'll tackle that one. I would say, yes, we have. Certainly, the pricing environment is different than it was in the first half of 'eighteen, especially on the pressure pumping side, which I think we've seen the most movement.
So I don't know if I have an exact number for you, but it's definitely downward pressure on pricing.
Our next question comes from the line of Sameer Panjwani with Tudor, Pickering, Holt and Company. Please proceed with your question.
Hey, guys. Good morning.
Good morning.
Sticking with the service theme, obviously, you guys are saying that you're seeing downward pressure on costs, but I did notice that your updated development costs came down a couple of percent. So I'm wondering if there's anything besides the cost that there is to provide an update on in terms of capital efficiency improvements.
Yes. I think the driver of that was the lengthening of the laterals that we talked about in my script. So that's lowering that I think by a penny. I believe it was the development cost.
Okay. And then any changes to your estimated maintenance CapEx? I think it was $1,200,000,000 that you provided previously
Our next question comes from the line of Drew Venker with Morgan Stanley. Please proceed with your question.
Good morning, guys. Rob, I guess this one for you on the leverage target and it's related to the proceeds from the SpinCo shares as you monetize those down the road. Is there some thought in your mind to target that leverage, previous leverage target you had mentioned 1.5x or to push that lower? And how are you thinking about using the proceeds between share buybacks or return of cash to shareholders and debt reduction?
Well, I mean, I think that the $500,000,000 share repurchase we have authorized, that's all that we have authorized at this point. And the majority of the rest of the value will likely go for debt reduction. And we do think that getting down to that 1.5 times debt to EBITDA is the right place for EQT to be. It puts us in a strong liquidity position. We don't feel the need to get to move it a lot lower than that, but if it were a little lower, that's fine
too. Our next question comes from the line of Holly Stewart with Scotia Howard Weil. Please proceed with your question.
Good morning, gentlemen.
Hi, Holly. Good morning.
Maybe the first for David, just kind of thinking about the TIL schedule for 3Q and 4Q, obviously a big jump up in 3Q, but then you got 4Q down, which actually looks a lot lower than 4Q 'seventeen. So is this just timing or should we think about a different pace as we move into 'nineteen just on this TIL schedule?
Yes. I think you should think about it in terms of it is just timing. I mean, that has such an impact. And we have a really active fracking in the Q2, so that's going to probably lead to most of those tills happening in the Q3. And that's really all you should read into it.
Okay. And then maybe, I guess, also for David on just the NGLs, the C3 plus production, looks like it's come in a bit, the guidance also a little lighter. Is there something we should think about on the NGL side and maybe adding to that ethane pricing moving up here a bit on the ethane side. Is there more you can do in terms of pulling out more ethane out of the stream?
Well, on the first part of the question, I think when you're talking about is the C3 plus was due to the Huron, the impact of the Huron being gone. Maybe Blue will answer the second part of that.
Yes. So in terms of incremental ethane, so we do have some flexibility at the plants in which we process our gas to pull out some incremental ethane. As you would expect, we do that. We've got term contracts in the portfolio and then we obviously look to optimize the spot opportunities and we will continue to do that. So, some flexibility around that, Holly.
Okay, great. And then maybe one last one for me, just maybe a little housekeeping. LOE seemed to come in a good bit during the Q2. Anything to highlight there?
Coming lower than you expected? Is that
what you're saying?
Yes.
Nothing other than the Q1 maybe was a little on the high side because of weather and the second quarter didn't have those kind of impacts.
Our next question comes from the line of Jane Trotsenko with Stifel. Please proceed with your question.
Thank you. Good morning. My first question, what are the key milestones that we need to watch in regards to Mountain Valley Pipeline?
Yes, sure. This is Jerry Ashcroft. Good question. I mean, the key milestones for us is continues to be both weather and us waiting on the 4th Circuit. We believe in the merits of the motion by the core and are pretty hopeful that, that stay will be lifted soon.
I see. I see. And then on the oilfield service side, do you know what exactly is causing the softening in the oilfield service environment? Is it like other public companies decelerating? Or is it like private mostly?
Yes. I'd say just broadly, it's just a deceleration of activity by us and some of our peers, where we're just we've laid down a few frac crews, a few rigs, and it doesn't take much slack in that market for it to really impact pricing. So I think it's just a general slowing and then there's a bit of excess capacity, particularly on the pressure pumping side.
So do you think is it short term or is it something like a trend that's pointing to the overall deceleration in the sub basin?
Well, I'd go back to some earlier comments where I think that there's not much appetite for companies to grow outside of cash flow. And so if you think that the industry as a whole is moving towards a model where growth is constrained by cash flow, then I think that that does put some downward pressure on growth rate, which then presumably creates some excess capacity in terms of services and might continue to
Do you Do you guys think that this will help you to reduce the well cost sometime in the future or at least review the well cost assumptions?
Certainly, if we see a meaningful move down in service cost, then that does impact our well costs, and we would update you on that as that progresses.
Okay. Sounds good. Thank you so much.
Thank you.
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
Thank you, David. This concludes the comment or this concludes today's call. Thank you all for participating.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.