Greetings and welcome to the EQT Corporation First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief 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, Patrick Kane, Chief Investor Relations Officer.
Thank you. You may begin.
Thanks, Christine. Good morning, everyone, and thank you for participating in EQT Corporation's conference call. With me today are Dave Porges, Interim President and Chief Executive Officer Rob McNally, Senior VP and Chief Financial Officer David Schlosser, Senior VP and President of Exploration and Production Jerry Ashcroft, Senior VP and President of Midstream Luke Jenkins, Chief Commercial Officer and Nate Tetla, Director of Investor Relations. 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 1,367,444.
The call will also be replayed for 7 days on our website. To remind you, the results of EQT Midstream Partners, Picker EQM, EQGP and Rice Midstream Partners 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 call at 11:30 today, which requires us to take the last question at 11:20. The dial in number for that call is 201-689-7817.
In a moment, Dave, Rob and David will present their prepared remarks. Following these remarks, Dave, Rob, David, Jerry, Blue and Nate will all be available to answer your questions. First, a few logistical comments. This communication does not constitute an offer to sell or a solicitation of an offer to buy any securities or a solicitation of any vote or approval. In connection with the proposed EQM R and P merger, EQM will file a registration statement on Form S-four with the SEC that will include a preliminary proxy statementperspectus regarding the proposed transaction.
The proxy statement prospectus when filed and other documents filed by EQT, EQGP, EQM and RMP with the SEC may be attained free of charge at the SEC's website, www.sec.gov. You should review materials filed with the SEC carefully as they will include important information regarding the proposed transaction, including information about the parties and their respective directors, executive officers and employees who may be deemed to be participants in the solicitation of proxies in respect to the proposed transaction and a description of the direct and indirect interest by security holdings or otherwise. 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 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 also on file with the SEC and available on our Web site. 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 of the most comparable GAAP financial measures. I'd now like to turn the call over to Dave Porteous.
Thank you, Pat. I'm certainly happy that you're able to get through all those required disclosures before we have to end the call. The only topic that I would like to discuss today pertains to my new role as Interim CEO. Approximately 1 year ago, I retired as CEO and transitioned to the role of Executive Chairman. As you know, my replacement resigned in mid March and I assumed the role of CEO to give the Board a chance to decide upon a replacement.
That search has begun and we expect to have a new CEO in place by the time of separation, which is still scheduled for the Q3. If you have any input you would like to provide, please let Pat Kane or me know. Just as I have committed to relay investor input about Board composition and other governance matters to the full Board, I also commit to you that I'll ensure that the whole Board receives any input on this topic that you wish to provide. Until our next CEO is hired, I will be spending most of my time overseeing the separation. We are fortunate that the upstream and midstream businesses have strong leaders.
And as you can see in the Q1 results, the operations of both units are solid. The separation process is well underway. At the Board level, we are determining which Board members will go with each company. As the Board works towards completing that task, we are also evaluating each company's Board composition to determine if we need to add numbers and if so, what expertise those new people should have. On the management side, we are identifying who would fill the various key roles at each company and in a couple of cases external searches have begun.
We have also identified the nature of transition service agreements that might be needed to assure a smooth operational transition for both companies. As you can imagine, while we would prefer to not have any transition service agreements, we cannot allow the lack of certain personnel or fully functioning systems at 1 or the other entity to get in the way of separation timing, hence the preparation of TSAs. On the finance side, we announced the terms of the midstream streamlining transactions and have started to prepare the required SEC filings, which Rob will speak to in a minute. I am pleased that Rob and his team were able to craft agreements that appear to be value accretive for all 4 entities. In my view, that was a noteworthy accomplishment.
In short, we are on schedule with all aspects of the separation. I thank you for your continued support to shareholders. And with that, I will turn the call over to Rob.
Thanks, Dave, and good morning, everyone. Before reviewing the Q1 results, I would like to give a brief update on several items that appeared in this morning's press releases. This morning EQM, EQGP and RMP announced in a separate news release a streamlining transaction. This transaction includes the sale of EQT's Ohio Gathering assets acquired in the Rice Energy transaction to EQM for approximately $1,500,000,000 in cash and EQM common units. EQM will also purchase Gulfport Energy's 25 percent ownership in the Strike Force gathering system for $175,000,000 in cash.
2nd, the merger of EQM and RMP in a unit per unit transaction at an exchange ratio of 0.3319, which implies a transaction value of about $2,400,000,000 including approximately $325,000,000 of assumed RMP debt. And third, the sale of RMP's IDRs to EQGP for approximately $940,000,000 in EQGP common units. The transactions are immediately accretive to both EQM and EQGP's distributable cash flow per unit. Relative to EQT, the cash proceeds from the sale of the higher gathering assets bring the E and P company's leverage closer to the target of 1.5x net debt to EBITDA. EQM and EQTP have provided a forecast through 2020 And based on this forecast, we expect Neuco cash flows of approximately $540,000,000 in 20.19 and approximately $670,000,000 in 2020.
During the same period, we expect cash taxes to be between 0% and 3% of these cash flows. Regarding the announced separation, we're pleased with the progress we've made and remain on track with our timeline of a separation by September 30. EQM intends to file the S-four related to the EQM R and P merger in mid May and we anticipate that the Form 10 for the separation will be filed in July. Now moving on to the quarterly results. During the quarter, we ran a process to sell our non core Permian asset and this morning announced the sale of those assets for $64,000,000 Because of this divestiture, we are adjusting our full year production guidance to 1.52 Tcfe to 1.55 Tcfe.
Additionally, we recorded an impairment charge of approximately $2,300,000,000 associated with non core proved and unproved properties and related pipeline assets in the Huron and Permian plays in the Q1. Adjusting for this impairment and other items, EQT announced adjusted earnings per diluted share of $1.01 compared to $0.44 in the Q1 of 2017. Adjusted operating cash flow attributable to EQT was $718,400,000 for the quarter compared to $332,400,000 for the Q1 of 2017. As a reminder, EQT Midstream Partners, EQT GP Holdings and Rice Midstream Partners are consolidated into EQT Corporation's results. EQT recorded $141,000,000 of net income attributable to non controlling interest in the Q1 of 2018 compared to $86,700,000 in the Q1 of 2017.
The $54,300,000 increase was primarily a result of increased income at EQM and the inclusion of RMP and Strike Force Midstream LLC. Now we'll move on to the segment results. Starting with EQC production. 1st quarter production sales volumes of 3.57 Bcfe were 88% higher than the Q1 of 2017, primarily due to the Rice merger and fell within the stated guidance range of 3.50 Bcfe to 3.60 Bcfe. The average realized price including cash settled derivatives was $3.33 per Mcfe, a 5% decrease compared to the first quarter of last year.
Average differential for the quarter came in 85% better than the Q1 of 2017, but was below our guidance range of positive $0.15 to 0 point 2 $5 When we gave differential guidance for the Q1, it was the coldest point in the winter and the forward curve was at its highest. The actual price settlements were lower resulting in a lower than forecasted average differential. Operating revenues totaled $1,300,000,000 for the Q1 of 2018, dollars 520,000,000 higher than the Q1 of 2017, primarily due to increased production associated with the Rice merger. Total operating expenses, excluding the $2,300,000,000 of asset impairments and $10,400,000 of amortization were $903,000,000 or 58% higher year over year. DD and A, gathering, transmission, processing and lease operating expenses were all higher year over year consistent with increases in production volumes due to the Rice merger.
Importantly, cash operating costs per Mcfe were 26% lower than last year. And moving on to midstream results. EQM gathering income for the Q1 was $99,000,000 $25,000,000 higher than the Q1 of 2017. Operating revenues were $24,000,000 higher than the Q1 of 2017, primarily due to higher contracted capacity and increased gathered volumes. Operating expenses for EQM gathering were $27,000,000 $1,600,000 lower than the Q1 of 2017, primarily due to lower SG and A costs.
EQM transmission income for the Q1 was $79,000,000 $8,000,000 higher than the Q1 of 2017. Operating revenues were $9,000,000 higher than the Q1 of 2017. Operating expenses for EQM gathering were 27,000,000 dollars 1,300,000 higher than the Q1 of 2017. Now briefly moving on to RMP Gathering and RMP Water. RMP Gathering reported an operating income of $44,100,000 while RMP Water reported an operating income of 11,400,000 dollars To conclude, I'd like to discuss our cash flow and liquidity position.
As of March 31, 2018 EQT had $1,300,000,000 of borrowings and no letters of credit outstanding under the $2,500,000,000 credit facility. We closed the quarter with approximately 100 and $55,000,000 of cash on the balance sheet, excluding EQM, EQGP and RMP. We anticipate the drop will add approximately $1,200,000,000 of cash to EQT's balance sheet, further improving our liquidity position. We currently forecast $2,750,000,000 to $2,850,000,000 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. 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 With that, I'll turn the call over to David.
Thanks, Rob, and good morning, everyone. Let me start by providing a quick update on 2018 sales volume. As Rob mentioned, Q1 volume was at the high end of
guidance at
3.57 Bcfe. We still expect sequential quarterly growth for the remainder of the year and are guiding a moderate increase for Q2 at 3.60 Bcfe to 3.70 Bcfe, followed by a larger increase in Q3 as new niche beam infrastructure comes online in Pennsylvania this summer. Moving on to operations. During the last year, our drilling engineering group has been developing an idea to manage our horizontal drilling operations in real time from our offices at EQT Plaza located in Downtown Pittsburgh. The thought behind this project was to improve collaboration amongst our technical teams, provide more consistent well results and improve our drilling efficiency.
The team tested this idea in the second half of twenty seventeen and we have now fully implemented the process. All of our directional drilling, geosteering and drilling engineering is now done at our real time operations center or RTOC in Pittsburgh. Although in its early stages of implementation, this concept is already showing significant returns. Since implementing the RTOC, we have seen a 14% increase in lateral feet drilled per day and we have increased our percent up formation drilled in target from 93% to 97%. We have also set EQT records for 48 hour footies drilled and a world record bottom hole assembly run.
In addition, on April 12, we set a new record for the longest lateral drilled to date in the Marcellus on our Harveston H-ten well in Washington County, PA. This lateral will have a completed length of 18,000 670 feet and is scheduled for completion in May. Based on the success of the RTLC for drilling, we have also implemented real time centers for gas operations and water hauling and will pilot real time centers for completions, construction and field logistics later this year. These real
time control centers are a
great example of EQT's manufacturing operating model that we believe will result in efficiency gains and cost reductions by streamlining our processes. And lastly, I want to provide a little color on well performance as it relates to these ultra long laterals. Currently, our longest producing lateral is the Haywood H-nineteen well located in Washington County, PA. This well has a completed lateral length of 17,400 feet and was packed with 97 stages. The well has been aligned for 120 days, has produced over 4.6 Bcfe and is currently producing our standard type curve of 2.4 Bcfe per 1,000 feet of lateral.
Our expectation for this well is an ultimate recovery of close to 42 Bcfe. Based on drilling, completion and production results to date, our current estimate of the lateral length technical limit in the Marcellus is approximately 20,000 feet. I will now turn the call over
to Pat. Thank you, David. This completes the comments portion of the call. Christine, can you please open the call for questions? Thank
you. We will now be conducting a question and answer Thank you. Our first question comes from the line of Brian Singer with Goldman Sachs. Please proceed with your question.
Thank you. Good
morning. Good morning,
Brian. Maybe I'll start with regards to the synergies that you'd announced with regards to the Rice transaction that's definitely noted on the G and A side, but maybe you could just run us through how that is progressing and the key milestones that you're looking for and we should be looking for over the next year?
Yes, sure, Brian. This is Rob. So on the G and A side, it's pretty straightforward. You can look at the G and A numbers that are reported. And what we had estimated prior to the merger was that the present value of the next 10 years' worth of G and A savings would be worth 600,000,000 dollars We now think we're going to exceed that number by maybe as much as $100,000,000 So that's going well.
And as a proxy for the capital savings on drilling and completion, probably the best proxy is lateral lengths. And what we thought when we announced the transaction was that we would see lateral lengths improve from approximately 8,000 foot in Green and Washington Counties to 12,000. And now our current estimates are that we will be at 13,600 feet for 2018 and it will improve beyond that. And so we expect that we're going to exceed the $1,900,000,000 of capital PV synergies by a reasonable amount several $100,000,000 So I'd say that we're well on track to deliver and exceed those synergies.
Great. Thank you. And then my follow-up is actually just 2 small questions. One relates to the restructuring, which is the EQM shares that EQT would be taking on, what is the long term view on the sustainability of keeping EQM as part of the EQT structure? And then if I could just follow-up on a comment you made with regards to the 20,000 but technical limit on lateral length in the Marcellus.
Can you just refresh us on any ongoing acreage acquisition spending that you think you would need to be able to increase the number of those types of wells in the portfolio?
Yes. So as to your first question on the EQM shares, our plan is that we will take all of our midstream assets EQM and ETGP units and that will be under NewCo or SpinCo and that's what will be spun out by September 30 and then at that point EQT would no longer own any of the midstream interest. In terms of the spending on acreage, the guidance that we've previously given still stands. We think that we're going to spend somewhere between $100,000,000 $200,000,000 a year for fill ins and blocking up acreage and protecting leases.
Thank you.
Sure. Our next question comes from the line of Arun Jayaram with JPMorgan. Please proceed with your question.
Yes. Just wondering if you could maybe just elaborate a little bit on the streamlining transactions that you've articulated this morning. Why did you choose this structure? And could this be step 1 of 2? And I guess my follow-up is just thinking about at some point, are you contemplating a GPLP simplification down the road?
Yes. So the I mean, the next step is going to be the spin of NewCo. And when we spin NewCo, it will still have this structure, it will have EQGP with EQM underneath and the IDR still in place. So the ultimate decision on what happens with the IDR simplification, it will be up to the NewCo Board of Directors and management team. I would give you my opinion that that structure is probably not viable long term in this market.
And so I think it's something that we'll start putting our minds to. But again, I would emphasize that that is going to be a NewCo Board and management decision on the timing of any potential simplification.
This is Gary. Just to add to what Rob had to say, I completely agree. I think in Rob's earlier comments, he's talked about a shelf life of IDRs and that's going to be one of our first priorities with Neuco and the management team and Board to see what that timing is. Great, great.
And just a follow-up, just as you guys continue to push the technical limits of these lateral lengths, I was just wondering about as you think about the types of completions that you're using and how are you thinking about spacing between laterals, especially as you push on beyond 18,000 foot? Does it change your spacing assumptions between wells?
This is David. I don't think going longer changes our spacing assumptions, but I just think in general, we're leaning towards increasing spacing over time because that's where the technology is pointing at. I think we're becoming more efficient with our fracturing technique and we sort of know the boundaries of them. And I think over time, you'll see our spacing probably increasing, which we think will ultimately result in lower development costs. So that's why we would do it or development cost per Mcf.
So that will be driving that will be forefront in our thinking on that.
And can you just give us
a little bit more color around that? Are you going from 5 wells per section to 4 or just a little bit of color around how that thinking is progressing?
I wish we had sessions here, but we don't unfortunately. But I would say that we're in the we are in the 750 to 800 foot spacing range right now. I think you'll see the industry and us going more in the 1,000 foot range over time.
Great. That's helpful. Thanks a lot.
Our next question comes from the line of Drew Venker with Morgan Stanley. Please proceed with your question.
Good morning, guys. Just hoping you can maybe just talk through any potential changes to the timing of that pretty material free cash flow inflection and priorities of use of free cash flow post the spin? Yes. So I think that our prior guidance still stands. We expect that we'll have with a low teens growth rate, we can generate $2,300,000,000 to $2,800,000,000 of free cash flow over the next 5 years.
But just to maybe add a little clarity to that, if you think about our 2018 production level, the maintenance CapEx to keep production flat at this level on average over the next 5 years would cost about 1,200,000,000 dollars And so that leaves significant cash flow. When you think about EBITDA being in the $2,500,000,000 to $3,000,000,000 range, that leaves significant cash flow to grow production and to return cash to shareholders or reduce debt. So just to give you a little bit of color on that. Thanks, Robin. And does that include the ongoing acreage spend you would have?
Yes. Okay. Yes, that is actually a pretty low number. And then could you just refresh us on priorities for use of free cash flow? Well, I mean, so in the immediate future with the separation, we're going to realign the balance sheets of both EQT and EQM.
We have moderated growth projections, but in the projections that you guys have seen over the past 6 months from upper teens and low 20s now to low teens And but that I think that is subject to move based on what the market does, what gas pricing does, what transportation does out of the industry. And then clearly, returning cash to shareholders is a priority. So I think it's going to be a mix of moderate growth and returning cash to shareholders once we have used some of the proceeds from these streamlining transactions to realign the balance sheets.
Just one follow-up on that Rob.
Drew, the bias is always to return money to shareholders. Everything else is going to be viewed against that standard. Any type of the growth, etcetera, it's always going to be viewed against the possibility of giving returning capital to shareholders.
Okay. That's very clear. Jay, thanks. One last one just to follow-up on the comment about aligning the balance sheet. Do we do you think there's a potential for any debt that's currently recourse to the parent to go to EQM?
You guys talked about, I think, the R and P debt will be transferred over and be recourse now to EQM. There any potential additional debt that would go to the midstream? Well, no. And the R and P debt is the revolver that we will take out. So it won't become recourse to EQM, but EQM will just take that out.
We are taking about $1,200,000,000 up to EQT in the drop transaction and that cash will be used to pay down the EQT revolver. There are not bonds at EQT that will become recourse at EQM, but we do have some relatively near term maturities, some in 2019. And so we will use additional funds to pay down some of that debt. But effectively, we will move well over $1,000,000,000 of debt that was at the EQT level to EQM, which will put us more in line with both EQT and EQM's leverage targets. So somewhere below 2x at EQT and moving towards 1.5x and for EQM in that 3x to 4x range, which will leave both businesses comfortably investment grade and I think fits their cash flow profile very well.
Okay. It's all very clear, guys. Thank you. Okay. Thanks, Drew.
Our next question comes from the line of Sameer Panjwani with Tudor, Pickering, Holt. Please proceed with your question.
Hey, guys. Good morning.
Good morning. A quick question on the dropdown. I think you guys have previously talked about $130,000,000 of EBITDA. It looks like quickly going through the numbers that the EBITDA near term kind of implied is closer to $150,000,000 So just can you provide some color on what's driving the difference there?
Yes. So I think that that $130,000,000 number was that was guidance that we gave about a year ago or about at the time of the Rice merger. And so the 'eighteen number is bigger. I can't remember if the $130,000,000 was a next 12 months or if it was a 'seventeen number, but it was one of the 2. The $150,000,000 or 160,000,000 or 160 is a good number for 'eighteen and then you're pushing on towards 250 to 260 in 2019.
So the growth profile is pretty steep And but that's what allowed the valuation that we're able to negotiate for that asset.
Okay, perfect. And then looks like you guys sold your Permian asset and I think the Huron is really the only remaining non core asset left at the upstream level. So any thoughts on monetizing that and any other non core assets we should be aware of?
Sameer, we're not going to comment on any M and A or divestitures or acquisitions. It just doesn't matter of course, don't do it.
Okay. Thank you.
Our next question comes from the line of Holly Stewart with Scotia Howard Weil. Please proceed with your question.
Thank you. Welcome back, Dave. Maybe just a micro and a macro. I mean, first on the hedges, it looks like you added a fair amount of swaps in 2019. Is there anything maybe structurally or how we should think about the hedge book here kind of on a go forward basis?
No, I think we were just really fairly light on our 2019 hedge book compared to where we historically would be given the proximity of 2019 to where we are. So it's just normal course. There's we don't read anything more than that into it.
Okay. Okay, great. And then maybe just kind of thinking through that, the lower strip, I mean, we're in backwardation, it seems like forever. Is there you talk about sort of a moderate growth rate and then returning cash to shareholders. Is there any thought with kind of the lower strip in the out years moderating that growth rate even further, which I think you guys have outlined as sort of lower teen level?
It's certainly a consideration. It's something that we think about here internally and talk to the Board about and will obviously be ongoing.
Okay. That's
clear. Thank you, guys.
Okay. Thanks, Holly.
Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Thank you, Christine, and thank you all for participating.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.