Good morning. Thank you for attending today's EQT Quarter 1 2022 Quarterly Results Conference Call. My name is Amber, and I will be your moderator for today's call. All lines will be muted until the question and answer portion of today's presentation. If you would like to ask a question, please press star one on your telephone keypad at any time. I now have the pleasure of handing the conference over to our host, Cameron Horwitz with EQT. Cameron, please proceed.
Good morning, and thank you for joining our first quarter 2022 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer, and David Khani, Chief Financial Officer. The replay for today's call will be available on our website for a seven-day period beginning this evening. In a moment, Toby and Dave will present their prepared remarks with a question and answer session to follow. An updated investor presentation has been posted to the investor relations portion of our website, and we will reference certain slides during today's discussion. I'd like to remind you that today's call may contain forward-looking statements. Actual results in future events could materially differ from these forward-looking statements because of the factors described in yesterday's earnings release, in our investor presentation, in the Risk Factors section of our Form 10-K, 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 our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby.
Thanks, Cam, and good morning, everyone. Since our fourth quarter conference call, the dialogue around energy has been fundamentally altered. The invasion of Ukraine has accelerated an already emerging global energy crisis while also reasserting security as a foundational pillar of energy and climate policy. Even before the invasion, we were seeing the impacts of global undersupply of traditional energy sources. This manifested in high energy prices, economic rationing, and rampant inflation. Now we have crossed an even dire threshold with military conflict occurring in Europe and signs of energy insecurity emerging in the United States as well. At the same time, the world is falling behind on its emissions reduction goals. With this as a backdrop, a fundamental shift is clearly needed. One offering bold yet practical solutions that can provide energy security to the world while getting us back on track to meeting global emissions targets.
Last month, we unveiled our Unleash U.S. LNG plan to do just that. Our plan contemplates quadrupling U.S. LNG capacity by 2030, which we estimate would reduce international CO₂ emissions by an incremental 1.1 billion tons per year. To put that in context, this is the emissions reduction equivalent to electrifying every U.S. passenger vehicle, putting solar panels on every home in America, and doubling the installed capacity of U.S. wind power generation, all combined. Unleashing U.S. LNG is by far the largest green initiative on the planet, is ready to deploy today, and would meaningfully bolster energy security for our allies. Without incremental U.S. natural gas, the world is reverting to coal.
In just the last 12 months, emissions associated with international coal consumption increased at a level that effectively wipes out all of the progress made by the United States in deploying wind and solar over the last 15 years. We will not be successful in addressing climate change without providing a scalable solution to international coal. That scalable solution is natural gas, and we're the ones that have it. To achieve the largest green initiative in the world, one that will help blunt the humanitarian and inflationary impacts of our global energy insecurity, all we need to do is build pipelines and more LNG infrastructure. No technology breakthroughs, no subsidies, nothing but building what we've built for decades. The reaction to our plan has been extremely positive as it is targeted, impactful and feasible.
We are seeing encouraging political signals with the Biden administration approving incremental LNG exports to Europe, supportive actions from the FERC, and recognition from the likes of John Kerry on the decarbonization benefits of natural gas. The influx of support from the broader public has also been tremendous and will ultimately empower our industry to meet the energy demands of Americans while providing energy security to the world. At EQT, we are uniquely positioned to be the linchpin in putting this game plan into action. As the largest natural gas producer in the U.S., our scale provides a material supply base with multiple decades of core high return inventory. The depth and quality of our resource gives us tremendous confidence in being able to meet growing long-term natural gas demand. Our recent investment-grade credit rating upgrade highlights the differentiated strength of our balance sheet.
As the largest producer of responsibly sourced gas with line of sight to being net zero by or before 2025, we believe EQT's natural gas production is among the most coveted energy molecules in the world. We are currently in discussions with LNG end users across various geographies and are contemplating equity investment opportunities in LNG export facilities. Our firm transportation portfolio delivers over 1 Bcf a day of production to the Gulf Coast, which will underpin the initial leg of our LNG strategy. We are pursuing a portfolio approach from the perspective of liquefaction at end markets. Our goal is to have our first LNG contract signed by the end of the year and believe we could see meaningful accretion associated with our LNG strategy by the middle part of the decade.
Turning to first quarter results, we executed upon our guidance and got off to a fast start in returning capital to shareholders since announcing our capital allocation framework in December. On the operations front, we began to realize the returns from our investment in our mixed-use water system and execution of large-scale combo development in West Virginia. Our first two pads utilizing our modern development runs came in with D&C costs nearly 20% below legacy West Virginia development. Furthermore, after nearly a decade of advocacy, West Virginia Governor Jim Justice recently signed into law modern pooling and unitization legislation, marking a huge win for both industry and landowners in the state. The unique property laws in West Virginia have made it a challenging place to operate, oftentimes resulting in delays and planning risks.
This new legislation will streamline our operations and allow for more efficient long lateral development of our nearly 300,000 core net acres, and when combined with the synergies we are realizing on the water and operational front, should drive additional value creation for our shareholders over the coming years. Since announcing our shareholder return framework in December, we have repurchased $230 million of our common stock at an average price of approximately $23 per share, reducing our share count by approximately 2.5%. We made our first $47 million quarterly fixed dividend payment. We also repaid $570 million of 2022 senior notes during the quarter, marking substantial progress towards our goal of reducing debt by $1.5 billion by year-end 2023.
In total, we returned $816 million during the quarter via share repurchases, dividends, and debt retirement. With the robust backdrop for natural gas prices, we are increasing our 2022 free cash flow outlook by 50% to roughly $2.35 billion at the midpoint. We believe the recent rise in natural gas forward curve is structural in nature and have positioned EQT stakeholders to meaningfully benefit. In the past quarter, we have not added any hedges, but early in this pricing run-up, we restructured our existing Q1 2023 swaps into callers with a ceiling of $10 per MMBtu, providing shareholders direct exposure to the recent rally in both near and long-dated natural gas prices.
Looking to 2023, despite the recent appreciation in our share price, our 2023 free cash flow yield is approximately 25% at strip pricing as natural gas prices have rallied alongside our stock. We now expect to generate roughly $17 billion of cumulative free cash flow from 2022 through 2027, representing approximately 115% of our current equity market capitalization. Beyond 2027, our 15+ years of core long lateral inventory has also substantially increased in value due to the rally in prices and the realization by investors and policymakers of the key role that natural gas will play in providing cheap, reliable, and low carbon energy to the world for decades to come.
We believe that while many operators' core inventory is being depleted, EQT will remain uniquely positioned among peers to continue delivering predictable, robust returns from our deep core inventory. This outlook underscores the compelling value opportunity at EQT and affords us tremendous flexibility to build upon our capital returns framework moving forward. I'll now turn the call over to Dave.
Thanks, Toby, and good morning, everyone. I'll briefly summarize our first quarter results before moving to the balance sheet, hedging, RSG, and end with some guidance updates. Sales volumes in the first quarter were 492 BCFE, roughly in line with the midpoint of guidance. We experienced some weather-related and trucking service impacts that put modest downward pressure on first quarter production. To address tightness in the trucking market, we began to implement new technologies with positive results and believe we can substantially mitigate any sustained impact moving forward. Our adjusted operating revenues for the quarter were $1.57 billion or $3.19 per MCFE, and our total per unit operating costs were $1.33 per MCFE. As a result, our operating margins were $1.86 per MCFE, about $0.60 higher than last year and on higher volumes.
Capital expenditures were $310 million, which was 5% below the midpoint of guidance and benefited from drilling costs coming in below budget. Adjusted operating cash flow was $889 million, and free cash flow was $580 million, inclusive of about $15 million of non-recurring expenses for changes in litigation reserves and settlements. Our capital efficiency for the quarter came in at $0.63 per MCFE, or 3% better than what was implied by the midpoint of our capital and production guidance ranges. During the first quarter, we achieved investment-grade credit ratings from Fitch and S&P, marking yet another vast milestone in our efforts to become a more sustainable company for our stakeholders.
Investment grade ratings provide us an expected approximately $20 million per year in interest savings, improved liquidity, strong ability to maintain our $2.5 billion undersecured revolver, and potentially for higher revenue tied to our LNG strategy. During the quarter, we retired all our 2022 notes, which leaves us about $900 million left of our 2023 goal of reducing absolute debt by $1.5 billion. Also worth noting, with rising interest rates, we may be able to retire an even greater amount of principal with these dedicated dollars. Our trailing twelve-month first quarter 2021 net leverage stood at 1.9x. At recent strip pricing, we forecast our year-end 2022 and 2023 net leverage to be approximately 0.8x and 0.1x respectively.
Our forecast assumes we use the full $1.4 billion of dividends and share buybacks. We continue to target a long-term net leverage goal of 1-1.5x, assuming a conservative $2.75 per MCF natural gas price, which should bulletproof our balance sheet through all parts of the commodity cycle. We ended the quarter with $2.1 billion of liquidity and expect the benefit of investment-grade credit ratings to add an additional $200+ million to our liquidity position over the near term as letters of credit are eliminated. We also recently completed the sale of the remaining balance of the shares of Equitrans Midstream common stock for proceeds of $189 million.
As highlighted last quarter, we transitioned from a defensive hedging strategy to a more balanced approach that utilizes wide collars and puts, providing prudent downside protection while allowing us to benefit from rising natural gas prices. Our percentage of production hedged for 2022 and 2023 remains unchanged from our prior outlook, with 65% and 45% of volumes hedged, respectively. However, we opportunistically restructured approximately 450 million a day of first quarter 2023 swaps, replacing them with costless collars with a floor price of approximately $5 and a ceiling of approximately $10. We are even better positioned to capture more upside from the bullish fundamental setup for the upcoming winter, as storage refill will likely continue to underperform.
Recall, last September, we spent approximately $75 million to restructure approximately 15% of our fourth quarter 2021 and 2022 hedge book to gain greater upside exposure to natural gas prices. At recent strip pricing, the mark-to-market value of these positions is approximately $600 million. We also added to the basis hedge positions, with 90% of our in-basin production now covered for the balance of 2022. The fundamentals within Appalachia remain solid. In-basin production has been trending below forecast this year, with volumes running approximately 2 Bcf or lower than year-end exit 2020 rates. We believe the capital discipline, due to lack of pipelines as well as general oil field service tightness, are the key contributing factors.
At the same time, gas-fired power generation is surprising to the upside as overall growth in power demand is occurring as coal supply has become even more increasingly tight. Europe's recent decision to ban Russia's coal imports could lead to further increases in natural gas demand as more North Appalachian coal is likely to be exported to Europe next year. These dynamics are leading to significant impressive gas price strength, with TETCO M2 and Dom South cash prices trading around $6.40 per MMBtu. As shown on slide 20 of our investor deck, local prices are highly correlated to Henry Hub, with the average M2 forward curve trading at 75%-80% of NYMEX. As Appalachian production growth slows while demand continues to rise, we believe the fundamental backdrop for local pricing remains healthy.
On the RSG front, we've now signed a total of 13 deals to sell responsibly sourced gas to various counterparties, totaling more than 3 Bcf per day. This includes our recently announced deal with Bloom Energy, which purchased certificates from us to cover all of its U.S. fleet's natural gas consumption for the next 2 years. Given the low methane intensity of our production, this represents the equivalent of taking more than 38,000 passenger vehicles off the road annually. This deal highlights the expanding opportunities we have to monetize RSG into the industrial complex and further validates the market's recognition of value associated with our low emissions natural gas. As the largest producer of RSG in the U.S., we are uniquely positioned to capitalize on these opportunities and directly facilitate emissions reductions goals across multiple industries.
Turning to guidance, we are raising the midpoint of our 2022 outlook for adjusted EBITDA by roughly 25% to $4 billion and free cash flow by 50% to $2.35 billion, respectively, which reflects the material rally in the forward gas curve since issuing our 2022 guidance. As our hedges roll off next year, our 2023 free cash flow should expand by 50% year-over-year, providing differentiated free cash flow per share growth even as we maintain flat production volumes. As Toby mentioned, we see $17 billion of cumulative free cash flow from 2022 to 2027 at recent strip pricing. We assume all cash taxes and modest well cost inflation in these projections, but do not assume any benefit from the broader success of our next generation well completion design.
As it relates to capital, oil field service inflation has accelerated of late, pricing pressures broadening out across all service lines. That said, we are relatively well-positioned with more than 50% of our 2022 capital locked in and remain comfortable with our capital guidance range at this time. Our long-term sand supply agreement is also a key differentiator for EQT, and market tightness has driven increased industry focus on security of sand supply. I'll now turn it back to Toby for some concluding remarks.
Thanks, Dave. To conclude today's prepared remarks, I want to reiterate a few key points. One, we believe the U.S. has a tremendous opportunity and responsibility to provide energy security to our allies while concurrently addressing global emissions associated with foreign coal, and this can only be done by unleashing U.S. LNG. Two, as the largest natural gas producer in the U.S. with a multi-decade core inventory, investment-grade balance sheet, and the largest base of responsibly sourced gas, EQT will play a key role in meeting both domestic and global natural gas demand growth for the foreseeable future. Three, the recent rise in the natural gas curve is likely structural in nature, and EQT shareholders are well-positioned to benefit on the back of the cost structure and balance sheet improvements we've achieved over the past several years.
The shallowing of our base decline and future gathering rate improvements should drive an additional 10% reduction in our breakeven NYMEX price through 2027. Four, lastly, we are aggressively executing upon our capital allocation framework, and our updated free cash flow outlook underscores the material flexibility we have to expand shareholder returns over time. I'd now like to open the call up for questions.
Of course. Thank you. If you would like to ask a question, please press Star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press Star followed by two. Again, to ask a question, that's Star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. Our first question comes from Arun Jayaram with J.P. Morgan. Arun, your line is now open.
Yeah. Good morning. Toby, my first question is just on LNG. You know, on the Baker Hughes call, that management team highlighted the potential for 100-150 million tons per annum of new global LNG capacity over the next couple of years, most of that concentrated in the U.S., North America. You know, thus far in my coverage, we've seen EOG and Apache sign agreements linked to global gas pricing. I was wondering if you could discuss what you're seeing today. Obviously, the market has changed a little bit over the last couple of years, and I wondered if maybe if you could give us some more details on the first LNG contract that you think could be signed by the end of the year.
Yeah. Hey, Arun Jayaram. Good morning. There's been a tremendous amount of demand that we've fielded here at EQT over the past, you know, few months. I'd say what EQT can offer with some of the contracts that we're looking at right now is to reduce the exposure for these international buyers to the volatility that they're experiencing right now. I think some of the contract structures that we're looking at is to provide a collar-type structure for these international buyers.
Obviously it's gonna be something that respects where TTF is right now, but I think going longer term, I think just gives us exposure to rising prices, but you know, provides the international buyers, allows them to avoid the blowout, because that's really the part that really hurts their countries and their economies is these really significant pricing swings that they're experiencing right now.
Great. My follow-up, Toby, in the deck you guys have highlighted over the next couple of years, you know, after debt retirement, you know, the buybacks, the dividend, you'd have, call it, $3 billion of excess free cash flow over the next couple of years. You know, as you look at your opportunity set today, you know, how would you rank the priorities for that excess free cash flow between additional returns to shareholders, you know, M&A, dividends? I'd love to see if we could see where your head's at, you know, particularly with the stock now, you know, moving a lot higher than when you're buying back stock, you know, on a year-to-date basis.
Yeah. While the current environment has sort of certainly given us even more ability to return more capital to shareholders, that's very exciting. I think one thing that will be consistent is our approach towards making the best risk-adjusted allocation of this capital. So listen, I mean, the environment's constantly changing, but, you know, we still see a tremendous opportunity in our stock, and that looks to be like continues to be a priority, in addition to, you know, accelerating the pay down of our debt. I'd say, you know, we're gonna continue to assess the landscapes, but that will be our guiding principle, is just making the best risk-adjusted return for our shareholders.
Great. Thank you.
Got it.
Thank you, Arun. Our next question comes from Holly Stewart with Scotia Howard Weil. Holly, your line is now open.
Good morning. Good morning, gentlemen. Maybe Toby, just to continue on this LNG theme, I'm sure we'll beat a dead horse today. Just, you know, EQT's really spearheaded this whole LNG push, and now we have a few potential policy changes that are coming out of the EU and the US. Maybe my question would be, you know, as you're looking at the landscape, what signals are you looking for to see that we're on the right track? Maybe what do you expect to see first?
Yeah. Holly, I think, you know, calling out sort of the biggest opposition against natural gas and really hydrocarbons in general is really we need to see a shift in the general sentiment, and a differentiation that, you know, natural gas should not be lumped in as with coal and just be called a fossil fuel. I think that there's a couple of things going on that people need to be aware of. One, emissions around the world are rising. Two, emissions in the United States are dropping. Three, the conclusion people need to take is people need to understand that it doesn't really matter what we do in the United States, because we've dropped emissions here, but emissions around the world are still rising.
This zero carbon solution only mentality needs to shift towards any decarbonization opportunity needs to be considered and put on the playing field. We are starting to hear those signals, specifically from John Kerry to say that natural gas is a decarbonizing tool. That's incredibly encouraging to hear. I think that message is gonna start you know bleeding out into to be a more common practical mentality. When you see that, I think we'll be able to start seeing the doors open on policies that will encourage and fast-track the pipelines and LNG facilities that we need to build. You know, we are fortunate that there is a tremendous amount of demand for this for international LNG.
It's just really about having a framework that allows us to build these pipelines, LNG facilities faster than ever before. I think the mentality shift towards decarbonizing projects like Unleash U.S LNG is the key to really putting these plans in motion.
Don't really think about it as, you know, one regulatory item or something that we need to see come across. It's just the broader, you know, push on, you know, decarbonization and sort of not including natural gas in that mix. Is that safe to say?
Holly, listen, I mean, I think you're gonna start seeing. I mean, what we're doing right now is really just putting an environmentally centric approach justification on why natural gas should be utilized in the energy transition to decarbonize the world. You know, this will change. There'll be specific policy requests, there'll be specific projects to fast track. When those projects get put on the table, you know, then we'll have things specifically that we talk about and, you know, both the political support and financial support to make those projects a reality. Right now we really just wanna make the case that natural gas and unleashing US LNG is the biggest green initiative on the planet.
It's the key toward providing energy security for the world, and getting people behind that idea and knowing that the projects will follow and we'll be able to have request specific support on those as they come up.
Yep. Okay, perfect. Dave, maybe one for you. Just, you know, you're forecasting sort of that sub-1x leverage by year-end. I know the target is 1-1.5, but assuming $2.75 gas, you got the IG nod, buybacks just started in a material way. I guess my question for you would just be, what are you focusing on now? It seems like you've checked a lot of those financial boxes that you guys were certainly targeting.
Yeah. You know, if you think about it, a year ago, what we were focusing on our capital allocation plan was all about debt reduction. And now we have a much broader array of opportunity sets to think about in how we invest our capital. I guess the positives and the challenges are we need to make sure we have the broadest opportunity set that generates the greatest rate of return for the investors, whether it's buybacks, dividends, investing LNG and other infrastructure that generates, we'll call real sustainable uplifted rate of return.
Awesome. That's great. Thank you guys.
Thanks, Holly.
Thanks Holly.
Thank you, Holly. Our next question comes from Neal Dingmann with Truist. Neal, your line is now open.
I just wanted to talk about cadence a bit.
Morning, Toby.
Hey Neal.
Toby, can you talk?
Morning
Can you talk about, again, first just on, at really kind of a twofold question, just on any thoughts on stepping up activity, and secondly, will all the activity be on your EQT combo development?
Yeah, Neal, I mean, we're sticking to maintenance mode. You know, we've been pretty vocal about this. You know, without more pipelines, you know, the prudent thing for us to do is to continue to stay in a maintenance mode. That's been our mentality in the past. It's our mentality until we start getting some more pipelines put in. Everybody knows, you know, MVP is a pipeline project that is still currently being opposed. In this pricing environment with these conflicts going on around the world, we've gotta be asking our questions, what can we do as leaders in this country to facilitate this project and get this project built because America needs it, the world needs it.
You know, we hope that people will look at this as one clear thing that people can do to address some of the issues that Americans are facing today with their high prices and people around the world are looking at the United States to get more access to more natural gas.
No. Follow up just on the combo development. Can you just talk about cost around there? It seems like that's actually improving efficiencies and helping overall, I guess unit cost. Is that fair to say?
Yeah, that's very accurate to say, Neal. I think when you think about, I mean the biggest factor I think people are looking at in industry in general is just service cost inflation. That's something that we factor into our forecast. One thing I would like to highlight is the innovation that's taking place here at EQT, our evolved well design concept that we're putting out right now. This will have the potential impact to mitigate service cost inflation. That's not baked into our forecast now, but that's an upside that would address, I think what people's large concerns are on well costs going forward.
Yeah. I think if we added to rigs.
Rate of rig
Yeah, we would probably see more inflation and maybe some initial productivity issues as well.
Great point, Dave. Thanks, guys.
Thanks, Neal.
Thank you, Neal. Our next question comes from Umang Choudhary with Goldman Sachs. Umang, your line is now open.
Hi, good morning, and thank you for taking my questions. Wanted to follow up on your last comment around cost inflation. As you look to not just your this year plan, but also to your next year plan, what are the areas where you're seeing some tightness in the market, and are there any opportunities to kind of proactively manage cost going forward beyond the combo development, which I'm excited to hear more about later this year?
Yeah. Consistent with what others are saying, you know, we're seeing impacts on steel and labor. Sand is a big factor across industry, especially in the Permian. You've seen sand getting access to sand supply costs have gone up, but for EQT, with our sand supply agreements, we're not seeing much inflation on that front. You know, our challenge is more on the labor side and getting that sand to location. Things like drivers is an area that we're looking to get some more horsepower into the system that way. That's where we see the inflation, really.
Great. Thank you. To follow up, would love your thoughts around gas macro, acknowledging that there's a very emerging potential for LNG longer term. How do you frame the gas macro in the near term? Also your thoughts around local Appalachian basis. I mean, following some recent M&A and some of the coal to gas plant retirement which we're seeing, do you see outlook for Appalachian basis improving in the near term?
I would say, you know, the one, as NYMEX goes up, I think you'll see that Appalachia will continue to correlate fairly well. Again, we call it around, you know, roughly around 80% correlation. Some of the things that will change the correlation and maybe even tighten up the correlation in times will be there's multiple Bcf per day of either pipeline or end market demand, such as coal retirements, the Shell cracker that's coming online in July here. So you could see it. I think, you know, the basin is not really growing like it did before. It's really moderated, and you could see producers are looking at the end market, and they want to participate like with NYMEX.
There's the discipline with that lack of pipeline is keeping it tighter. On a broader base, you know, the LNG market's gonna continue to be pinned up as Europe needs to be refilled. You have the exports to Mexico, you know, industrial demand. There's a big arb between U.S. and Europe on gas price, so that's putting, we'll call, upward pressure on demand as well. Then, you know, we talked about Northern App coal supply, but you know, the global market has really seen about 60% capital drop since the last, you know, well, five years. Supply will be very tight in coal supply while demand is still growing, unfortunately from a carbon perspective.
That's gonna keep tightness in the power market for the next several years.
Great. Appreciate your response. Thank you.
You're welcome.
Thank you, Umang. Our next question comes from Josh Silverstein with Wolfe Research. Josh, your line is now open.
Yeah, thanks. Good morning, guys. Just on the LNG contract and thinking about how this can come together, is it just a supply agreement in place? Do you guys think maybe you take an equity stake in one of these facilities? Just trying to get a better sense as to what you guys think is the central strategy here.
Yeah. You know, I would say it's all the above right now. We have a right now we're assessing multiple different things out there to see whether investment to contract only. You know, obviously, we have a large amount of free cash flow in front of us to think about how do we generate the right rate of return, but we wanna make everything we do very sustainable. The contracts will be a very easy thing to do. Investing in a facility comes with really some great opportunities there, but also big projects, and you have to think through that. There's a lot of things we're looking at right now.
Got it. Thanks for that. It sounded like you guys were debating potentially what you could be doing with the free cash flow depending on what the stock price is. You know, as you look out a few years given the buildup and sustainability and the free cash flow profile, there's a pretty big opportunity to shrink the share count meaningfully, maybe in half. I'm just curious how aggressive you guys may wanna get on that now and maybe lock in some additional collars for 2024, because it just seems like this, you know, free cash flow yield is not coming down based on where the free cash flow is going towards.
Yeah. Josh, I mean, that's a great question. It's a question that we ask ourselves every day as we look at the strip. I mean, going out past 2023 into 2024 through 2026, you know, gas price is around $4, which, if you looked at us two years ago and said, would you guys like that? You know, we'd be hedging that all day long. You know, I think just looking at the macro today and the fact that we've just got a significant underinvestment in energy, you know, the world is energy short. I think we're a little bit more patient from being a little aggressive on locking in these prices.
I mean, unless something changes, there's a lot more reason to think that these prices will be sustained higher to sort of where they're at today, and there's room. Now that being said, there's always weather risk. I mean, we have to balance all these things as we're looking. Yeah, certainly it's a really exciting setup for natural gas and the value creation potential for EQT.
Yeah. The other thing, Josh, is, you know, we might be hedging effectively by some of the LNG contracts that we do.
Yeah. That makes sense. Thanks, guys.
Thank you, Josh. Our next question comes from Scott Hanold with RBC. Scott, your line is now open.
Thanks. You know, hey, Toby, you've obviously been one of the, you know, leading proponents on trying to build out LNG globally. Can you give a sense? I know you provided some color on some of the, you know, the factors that are, you know, out there that you know should push the market that way.
As you start thinking about your desire to get a contract by the end of this year, from an investor and analyst standpoint, like what are some of the key initiatives that are out there that you think is important for us to watch for that's really going to sort of highlight the fact that there is gonna be this push to get these additional facilities up and running, and there's the ability to kind of link pricing in the US to something more like the global market right now?
Yeah. I think a couple of things for everybody to look at. Number one, net back pricing that we're able to get with these types of contracts. Then the second part is if we do make investment, what are the returns on those investments in LNG? You know, we've got a lot of value to bring to the table, you know, looking at doing more on the LNG side, both in the robust supply that we can bring to the table to help support getting these projects to FID. Then also on the demand side, you know, being America's largest natural gas producer, naturally, international buyers are calling EQT directly, so we can help on that front as well.
You throw in the fact that we're an investment-grade balance sheet, throw in the fact that we've got the cleanest energy on the planet, I'd say, from a methane intensity perspective. You know, there's an opportunity for us to leverage those tools to get some pretty differentiated terms and create more value for our shareholders with this LNG strategy.
Yeah, look, I guess you know, maybe my question is more pointed to you know the. Obviously, there's a lot of talk about trying to get U.S. being a part of the global market, but you know. What are the key things you think needs to happen? I mean, you obviously talked about political support, but but is there, you know, one or two things you think could happen in the time frames? You know, I'm just kind of curious, are there time frames, you know, which those could happen, which would, you know, be a very good indication that it's sort of a green light for you guys to sign up, you know, for an LNG contract because this is coming to a reality versus a conversation?
Yeah. If you're asking for, like, what are some specific things that would symbolize that, you know, we are green light on unleashing US LNG and moving towards that, realizing the potential-
Yes
Of American energy, the 50 Bcf a day? I mean, I think we're starting to see the signs of it right now with people that have been very strict on only promoting zero carbon solutions. I think to see that people are now admitting that natural gas is decarbonizing is the first sign. You know, we're gonna be coming up with some more projects here at EQT, working with the players on the downstream side of things on the LNG. But I think that's where you'll see a little bit more tangible steps being made there. Really, the political signal right now is just incredibly important, not just for the regulators and to help facilitate the. Get to a place where it takes us longer to get.
I mean, the ultimate goal here is to get to a place where it takes us longer to build something than it does to permit. You know, and also influencing the public sentiment so that Americans understand that more natural gas flowing, more energy flowing through the pipelines of America, underwritten by unleashing U.S. LNG is gonna provide a tremendous amount of energy security here in the United States. Having that amount of natural gas on standby is what's gonna keep, you know, energy prices the lowest in the world for Americans.
Okay. Appreciate that. You know, maybe quickly for David, you know, can you give us some color, like, on your free cash flow outlook? Like, how do you think cash taxes could progress in that, you know, outlook over the next, say, 12-18 months?
Yeah, first of all, every free cash flow number we give you, whether it's the near term or the long term, has the impacts of cash taxes. Just so you know, when you see, call it the 2023 numbers in our deck, you can know that we had that in there.
This year we have virtually none, but we're gonna probably burn through our NOLs this year. We'll start to become more of a cash taxpayer in 2023. We'll give you more guidance on that as we get through this year. It's obviously very sensitive to the commodity price. As you've seen, natural gas has been really volatile. Instead of giving you a number that we know will change probably 20 times between now and then, we'll give you probably more guidance on how to think about the framework of modeling it.
Fair enough. Thank you.
You're welcome.
Thank you, Scott. Our next question comes from John Abbott with Bank of America. John, your line is now open.
Good morning.
Good morning.
Morning, John.
Good morning.
Thank you.
Morning.
Yeah. First question here is, Toby, it's for you. The quarter did have. You did have less turn-on lines during the quarter. It sounds like that was due to some tightness with trucking and hauling. Now looking forward, are those issues resolved? What have you done in order to make sure those issues have been resolved? Let's just sort of start with that.
John, I think just at a very high level, just recognizing that, you know, our production guidance hasn't changed and CapEx is sort of still hasn't changed as well. You know, you're gonna see normal fluctuations quarter to quarter, but would point you to the high level as staying consistent. Some of the things that we've seen, you know, one on the sand hauling has been some tightness. We've added some new technology that gives a little bit more flexibility to the driver pool. You know, so there's.
In addition to just using pneumatic trucks, we are using some other technology that will give us access to a greater supply of trucks and easier for the drivers to go out there and bring sand to locations. That's one thing that is consistent. We've raised prices a little bit on the sand hauling front. That's attracted more labor. The sand issues that we were dealing with have largely been mitigated going forward. That really logistically has probably been one of the biggest constraints holding back our completions team from being wide open. That was a focus in first quarter. I feel like what we've done has given us a lot of confidence that that's been relieved. It's a bottleneck that's been relieved.
Appreciate it. For the second question, on the new completion design, could you just sort of remind us how that kind of sort of feeds in throughout the year, sort of the pace of that?
Yeah. It's gonna be picking up, you know, second quarter in the back half of the year. Just as a reminder, I mean, what we're doing is making some changes to the completion design. I mean, what we're looking to improve is just the completion efficiency across the lateral. You know, we look at data. We think that we're stimulating about 60% of the wellbore effectively. If we can change the completion design and get an extra 10% completion effectiveness, while that could have the benefit of increasing our productivity, you know, almost 15%. That's what we're targeting.
You know, we're on track to get, you know, early indications by end of 2022 and, you know, more firm indications on the total effectiveness by 2023.
Thank you very much, Toby.
Yeah.
Thank you, John. Our next question comes from David Deckelbaum with Cowen. David, your line is now open.
Thank you. Thanks, Toby and David, for the time this morning.
Yeah. You're welcome.
Thank you. I just wanted to ask Toby just for a little bit more clarification. I think you alluded to it, I'm not sure intentionally or not before with one of the other questions. Will EQT are you envisioning a broader role within sort of like the vertically integrated LNG food chain outside of just being an anchor shipper or an anchor tenant? You know, what sort of role do you envision EQT playing? Would there be potential partnerships with LNG companies? You know, would there be capital available on your end? Just thinking about how you envision taking on this pretty sizable goal out there.
Yeah. I think understanding, you know, our ultimate prize that we're looking for here at EQT is to get exposure to international markets. We wanna make sure we have the flexibility to enter into the contracts that really meet that will give us exposure to better realize pricing. One of the ways that we get more flexibility towards accessing those contracts is to take an investment in the LNG facility itself.
I think that the other thing we look at, I mean, our company mission here is realize the full potential of EQT, and that's where I think our supply and, you know, the demand that we could potentially bring to the table, with the balance sheet, with the, you know, environmentally, you know, great scores on the environmental front, coupled with our long inventory, are ways that we can hopefully translate those into some, what I consider to be differentiated, equity investments in these LNG facilities.
I appreciate that clarity because I think it answers the big question around the benefits of being investment grade now and having that opportunity to touch more of that premium pricing. So I appreciate that. Then just the last one for me, I guess, is you know, the thought process now, you talked about being in maintenance mode. As we build out LNG capacity, do you consider those opportunities for growth molecules or just taking a maintenance product and just pricing it at a more premium market?
No, I mean, Unleash US LNG is going to be the long-term demand signal that this industry needs to see before they think about growth. You know, these would be sustainable growth opportunities for us. But the difference now versus in the past is, you know, we're gonna need to see the pipelines, the LNG facilities, long-term contracts all lined up so we've really de-risked the returns that we're looking to generate in addition to making sure that we're not throwing the supply-demand fundamentals out of whack. Unleash US LNG is a really great opportunity to bring sustainable growth back to this industry.
Listen, I mean, we're not talking about a significant amount of growth for this industry to meet the targets that we've laid out. It's less than 10% growth a year. We can get to 50 Bcf a day as an industry. I think we can do that very sustainably backed by long-term contracts to make sure we can preserve the type of returns that our shareholders are expecting and quite frankly deserve.
Thanks, Toby. Good luck unleashing everything.
Okay, thanks.
Thank you, David. Our next question comes from Harry Mateer with Barclays. Harry, your line is now open.
Hi, good morning. First question, I know the base case on debt reduction's been your $1.5 target through 2023. You know, I guess after restriking your hedges, given the structural move in gas prices, do you think there are some opportunities to accelerate that relative to the existing plan and just get it done sooner? Especially with the rates move, does that open up some additional options, or is the preference to still just focus on what you can pay down through call schedules next year?
Yeah. Good question. I think I'll break it up into two pieces. The first part is, with some more debt trading below par, if we just apply the $1.5 billion, we'll get more than $1.5 billion just from that discount. But I think the second part is, yes, we do see opportunities if we wanted to accelerate over and above the $1.5 billion. We do see that is clearly an option. You know, being able to buy back our stock, being able to do, you know, maybe raising our dividend and accelerating the debt repayment, all three things look interesting to us as options, along with maybe investing in LNG and other things like that, for sure.
Great. Thanks. On the liquidity side, I know the company's working on its 2023 revolver. I'm curious how to think about a potential eventual Moody's upgrade. They're, you know, lagging the other two, and whether that would drive an additional improvement in your liquidity and LC needs, or is that benefit pretty much done now that you have S&P and Fitch at IG?
Yeah. I would say probably 80%-85% of the benefits really are coming from S&P and Fitch. There's a little bit of a small leftover piece that if Moody's were to upgrade us, we'll get a little bit extra improvement. But as you can see, we're sitting with $2.1 billion of liquidity already. Our letters of credit are gonna drop down pretty meaningfully already. And all our rate triggers that we had on our debt have all been reset down to zero effectively. We've gotten, I'll call it, the majority of it, in place. But it would be nice to see Moody's give us an upgrade and recognize where the balance sheet is.
Great. Thanks, guys.
You're welcome.
Thank you, Harry. Our next question comes from Noel Parks with Tuohy Brothers. Noel, your line is now open.
Hi, good morning.
Morning.
Morning.
I was really interested in hearing you drill down a bit on the Bloom Energy deal. As essentially sort of a milestone of the deal, I'm not aware of any other E&P having made a similar supply arrangement with a fuel cell company. I was just curious about how long has it been in the works, you know, maybe who approached who, and what we might look for as far as, you know, similar deals down the road. Also if you could comment on, you know, if there are any restrictions after the two-year timeframe as far as what you can do with them or other similar companies.
Yeah, great question. The RSG deal we did with Bloom Energy was something I think they approached us, which is great to see. I mean, being out there as you know in front of the environmental benefits of natural gas has led to a lot of calls like this. There's been a lot of interest in EQT molecules specifically.
You know, listen, I think what's really exciting about the future of this is, you know, people. Bloom Energy is a company leveraging fuel cells to promote the responsible consumption of natural gas. Fuel cells naturally will lower the emissions of using and provide, you know, reliable energy at attractive cost. There's a lot of people, and this is what we're really excited about, thinking about the fact that natural gas is the cheapest form of energy, and reliability as well. You know, what else can we do with natural gas? So I think you're gonna see a lot more demand for natural gas as people really use natural gas as the feedstock for innovation in a lower carbon future.
You know, you see other applications on the hydrogen side. There's a lot of innovation taking place on hydrogen. Again, that's gonna be another follow-on opportunity for natural gas as a feedstock in EQT. I think it's just really exciting to see that, you know, people are looking for new creative ways to create demand for low carbon natural gas.
This market is broadening because I think.
Sorry.
No, that's it. Keep going. I'm sorry.
Oh, okay. I was just going to ask about the terms. Is there any exclusivity in it? Are you free to do similar deals with other folks looking for a supply arrangement?
Yes, we have the capacity to do other deals. Yeah.
Great. I was curious about how will the transaction be accounted for? Is this essentially an asset sale or capital gains or something that's gonna be, you know, accrued through income over the life of the agreement?
Yeah. It'll be accrued as income over the agreement. Yeah. This would be considered as ordinary income items. Yeah. It would just effectively improve our net realizations if you wanna think about it that way.
Oh, it would show up in realizations? Okay.
Yeah. Yes.
Okay, great. Thanks a lot.
Welcome.
Thank you, Noel. There are currently no further questions in queue. As a reminder, that's star one on your telephone keypad to register a question.
Operator-
There are currently.
Oh.
Yes. I was just going to say there's currently no further questions in queue, so I'll pass the conference back over to management team for any closing remarks.
Thank you. You know, it certainly is an exciting time in natural gas, but I think, you know, one thing that's really driving EQT is knowing that there's a lot of issues that the world is dealing with, and we wanna be a solution provider. Every day, you know, we're working hard to make sure that we address these issues and help provide energy security to the world while also helping arrest climate change. It's gonna be a big driving factor for us going forward as continued commitment to making the world a better place. Thank you everybody for your support.
That concludes today's EQT Quarter One 2022 quarterly results conference call. Thank you for your participation. You may now disconnect your line.