Good afternoon, and thank you for attending today's bolt-on acquisition of Tug Hill and XcL Midstream. My name is Amber, and I will be the moderator for today's call. All lines will be on mute during the presentation portion of the call, with an opportunity for questions and answers at the end. 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, Managing Director of Investor Relations and Strategy. Cameron, please proceed.
Good afternoon, and thank you for joining today's call to discuss our bolt-on acquisition of Tug Hill and XcL Midstream. 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 own website beginning this evening. In a moment, Toby and Dave will present some prepared remarks with a question-and-answer session to follow. An investor presentation outlining the acquisition 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 and future events can materially differ from these forward-looking statements because of the factors described in today's press 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 forward-looking statements. Today's call may also contain certain Non-GAAP financial measures. Please refer to today's press release and our investor presentation for important disclosures regarding such measures. With that, I'll turn the call over to Toby.
Thanks, Cam. Thank you all for joining our call this afternoon. Today, we announced the bolt-on acquisition of Tug Hill and XcL Midstream, which comprise extremely high-quality upstream and midstream assets in the core of Southwest Appalachia, adjacent to existing EQT operations. This deal checked all the boxes of our guiding principles around M&A, including accretion on free cash flow per share, NAV per share, lowering our cost structure, and de-risking our business while maintaining our investment-grade credit metrics. Tug Hill represents the largest private operator remaining in Southwest Appalachia, with upstream assets comprising approximately 800 million cb ft per day of production, 90,000 net acres, and 11 years of remaining inventory. Tug Hill's acreage offsets EQT's leasehold in Marshall and Wetzel Counties in West Virginia, providing solid industrial logic and allowing for low integration risk given the complementary positioning of the assets.
Along with the attractive upstream acreage, we are also acquiring XcL, a full-service midstream franchise that connects to every major long-haul interstate pipeline in Southwest Appalachia. XcL's midstream assets comprise 4.5 BCF per day of gathering lines, 225 million cb ft per day of processing capacity, 20,000 barrels per day of condensate stabilization, and 600 million cb ft per day of compression. The integrated nature of Tug Hill and XcL's assets provide EQT with superior economics, enhanced margin capture, and increased free cash flow durability. Additionally, we plan to use XcL's platform to drive greater pipeline connectivity across EQT's existing acreage footprint and intend to fully integrate Tug Hill and XcL's water assets into our existing West Virginia water infrastructure.
In turn, this should drive down completion and LOE costs while also providing obvious environmental benefits by removing trucks from the road and increasing water recycling. Consideration for the deal is $2.6 billion of cash and 55 million shares of EQT common stock, implying a total purchase price of $5.2 billion based on the 15-day VWAP. We ascribe $4.1 billion of value to Tug Hill's upstream assets and $1.1 billion to XcL's midstream assets. We are buying the combined assets at a next twelve-month free cash flow yield of 27% and a next 12-month EBITDA multiple of 2.7x. Netting out the value associated with the midstream assets, the transaction implies we are acquiring the upstream business at a 33% next 12-month free cash flow yield and a 2.3x EBITDA multiple.
We note these valuation metrics conservatively assume no synergies, but our diligence suggests the potential for over $80 million per annum, largely from water systems integration, firm transportation optimization, and land spend efficiencies. Along with attractive valuations, Tug Hill's assets have among the lowest NYMEX free cash flow breakeven prices in Appalachia, generating free cash flow above $1.35 per million BTU Henry Hub prices on average over the next five years due to midstream integration and NGL exposure. On a pro forma basis, this acquisition is projected to lower EQT's corporate free cash flow breakeven price by $0.15 per million BTU on average over the next five years, which increases the resiliency of our business and de-risks our ability to execute shareholder returns through all parts of the commodity cycle.
We estimate this deal will drive 5%-10% free cash flow per share accretion over the next five years at natural gas prices ranging from strip down to $2.75 per MMBtu. Importantly, the ultra-low-cost nature of the asset base and financing structure provides a hedge for equity holders from downside price risk as free cash flow per share accretion expands in lower gas price environments due to the high-margin nature of the acquired assets. On a preliminary basis, we expect pro forma 2023 free cash flow to exceed $6 billion, with long-term annual free cash flow to average north of $5 billion at current strip pricing.
Looking through the lens of net asset value, this deal implies we are paying a sub-$3 per million BTU long-term natural gas price, providing substantial margin of safety given this is a 40% discount to where the long-term strip is currently trading. Subject to the transaction close and customary approval process, Wil VanLoh, Founder and CEO of Quantum Energy Partners, Tug Hill and XcL's capital provider, will be joining our board of directors. Wil's extensive knowledge of all facets of the energy market, including upstream, midstream, oil field technology, energy sustainability, and LNG, will bring significant strategic value to the boardroom. We are pleased to welcome Quantum as a long-term partner and shareholder of EQT's stock. As it relates to inventory quality, Tug Hill's assets will immediately compete for capital inside EQT's portfolio.
The combination of premier geology and ultra-low cost structure from integrated midstream ownership provide EQT additional drilling locations that rank in the top quartile of our existing core inventory and further bolster EQT's already peer-leading core inventory depth. We note the purchase price we are paying for these assets equates to a 20% discount to strip PDP value, midstream value, and wells in progress. The economic upside associated with this inventory provides substantial value creation potential for EQT shareholders. Turning to ESG, Tug Hill's strong environmental performance is fully aligned with EQT's net zero and other emissions targets. Tug Hill's methane intensity in 2021 was just 0.004%, which is below EQT at 0.039% and brings our pro forma business even closer to our 2025 methane intensity target of 0.002%.
Tug Hill's solid performance is largely driven by the elimination of pneumatic devices and using electric grid power for more than 70% of its pad sites. Nearly 100% of Tug Hill's volumes are RSG certified, with the vast majority of pads TrustWell Platinum certified, ranking them in the top 10% of peers. Additionally, XcL expects to receive RSG certification by year-end. Note that we have not assumed any benefit from potential higher realizations on future RSG sales in our outlook. In terms of operational pace, we plan to align Tug Hill's upstream assets with our maintenance capital program, stabilizing production between 800 and 900 million cb ft per day for the foreseeable future.
We've paired this acquisition with the recent addition of approximately 300 million cb ft per day to our firm transportation portfolio, comprising of 200 million cb ft of gas per day to the Gulf Coast and 100 million a day to the Midwest. We are also receiving 250 million a day of firm transportation from Tug Hill, which accesses the TCO market. Along with increasing confidence around the startup of MVP, local basis risk has been significantly reduced on the acquired assets and on legacy in-basin ECP production. Turning to our capital allocation framework, recall we recently raised our base dividend by 20% to $0.60 per share on an annualized basis and increased our year-end 2023 debt reduction goal by $1 billion to $2.5 billion.
Given greater free cash flow durability captured with this acquisition, we are doubling our stock buyback authorization to $2 billion. Thus, not only do shareholders get immediate free cash flow per share accretion on this deal, but we are materially increasing per share accretion to equity holders by redeploying free cash flow from Tug Hill into our stock buyback program. Paired with the $770 million outstanding on our initial authorization, we now sit with almost $1.8 billion of authorization to buy back EQT stock at an extremely attractive valuation.
We are also raising our year-end 2023 debt reduction target by $1.5 billion-$4 billion, which will keep leverage in line with our 1-1.5x target, assuming $2.75 gas prices, and ensures we maintain our bulletproof balance sheet with investment-grade credit ratings. As we retire additional debt, buy back our stock, and potentially realize synergies from the Tug Hill acquisition, we will look to redeploy cash savings into further dividend growth, highlighting the potential for even greater accretion to shareholder returns over time. With that, I'll turn the call over to Dave.
Thanks, Toby. We are excited to announce the acquisition of Tug Hill and XcL Midstream, which we strategically financed at approximately 50/50 debt and equity to maximize equity accretion while minimizing balance sheet impact. We expect to partially fund the cash component of the transaction through one or more opportunistic debt capital market transactions. In the interim, we've obtained $2.5 billion of committed financing from our banks. We also have access to $2.2 billion of liquidity on our unsecured revolving credit facility and expect to generate a significant amount of free cash flow. This will enable us to retire approximately 75% of the debt and equity issued from the transaction before year-end 2023 and still have a nice excess free cash flow buffer to handle material changes in commodity prices or accelerate our capital returns.
The transaction has been unanimously approved by our board of directors and is subject to customary closing conditions. The effective date of the transaction is July 1st, 2022, and we expect to close in the fourth quarter. Post-effective date purchase price adjustments will be netted against the cash and equity components of the consideration. Our current estimate is that total shares issued at close will be approximately 51 million, while cash consideration will be adjusted downwards by approximately $175 million, implying an adjusted closing price of approximately $4.9 billion. As Toby mentioned, our guiding principles state M&A must maintain our investment-grade credit metrics.
This acquisition checks that box as the transaction is leverage neutral across all reasonable commodity price scenarios while also improving the durability of our cash flow in downside price environments. On a pro forma basis, EQT's year-end 2023 pro forma net debt to adjusted EBITDA is forecasted at 0x at recent strip, which is essentially in line with EQT standalone metrics and contemplates execution of our increased buyback authorization. As Toby mentioned, we are raising our year-end 2023 debt reduction target from $2.5 billion to $4 billion, which will take gross pro forma debt down to approximately $3.5 billion. This allows us to maintain our leverage target of 1x-1.5x at $2.75 gas prices, ensuring that we have a bulletproof balance sheet across all commodity price cycles. Turning to hedging.
We are acquiring the upstream production from Tug Hill on an unhedged basis, so cash flows are fully exposed to the current favorable natural gas price backdrop. That said, we think it is prudent to add some hedges covering a portion of Tug Hill's production as we look towards 2023 and beyond. We preliminarily expect to hedge approximately 60% of Tug Hill's 2023 gas volumes using wide collars and puts consistent with our existing hedging philosophy, which aims to provide investors with the best risk-adjusted exposure to natural gas prices. Separately, we have recently added to our legacy hedge book, taking our hedge book from approximately 50% to approximately 60% next year through the purchase of deferred premium puts with an average strike price of approximately $4.65 per MMBtu.
We have also begun recouping some of the 2023 put premiums by selling calls to create costless collars with approximately $18 million in premiums received by selling $17.50 calls in the first quarter of 2023. With these collars, we've created approximately $4 of upside exposure for every $1 of downside risk, highlighting the attractive risk-adjusted nature of our hedging strategy. With that, I'll turn the call back over to Toby for some concluding remarks.
Thanks, Dave. I want to wrap up by reiterating a few key points. First, we have remained steadfast and disciplined in our guiding M&A principles and are highly confident in the value accretion associated with this acquisition even before accounting for potential synergies. Second, we are purchasing these assets at a compelling valuation, with the upstream business acquired at an attractive 33% free cash flow yield and a sub-$3 per MMBtu implied long-term gas price. Third, this deal has clear industrial logic, allowing us to capture core high margin, low-risk inventory adjacent to our existing operations in Southwest Appalachia. Fourth, Tug Hill and XcL have among the lowest cost structures in Appalachia, and this deal reduces our pro forma free cash flow breakeven by $0.15 per MMBtu, adding greater resiliency to our free cash generation moving forward.
Finally, given the accretion and greater resiliency of free cash flow this deal provides, we are showing an even stronger commitment to shareholder returns by doubling our share buyback authorization to $2 billion while maintaining our long-term leverage goals. With that, operator, please open up the call for Q&A.
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, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will 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 afternoon, gentlemen. Toby, wanted to get your thoughts. You raised your debt reduction target by $1.5 billion and you increased your buyback by $1 billion. You are allocating a little bit more free cash flow to debt reduction. I want to get your thoughts on that, 'cause effectively through this transaction, you're issuing $2.6 billion of equity, of which you'll return $1 billion back to shareholder by the end of 2023. I want to get your thoughts on that and maybe as well on thoughts on the lockup expiration on the equity you're issuing as part of this transaction.
Yeah. Hey, Arun. As the thoughts on increasing the debt targets, really, the goal there was to continue on our pace to accelerate our debt reduction targets. That's how we got to the 1.5 increase there. Then the $1 billion buyback just shows the commitment to return capital to shareholders and our excitement about this deal and the enhanced ability that this deal gives us to return capital to shareholders. You know, that being said, you know, when you look at the short-term free cash flow generation of this business, even with those increased amounts, we still have some flexibility. As we move forward here, you'll see us continue to adjust those numbers over time.
As far as the lockup is concerned, we did not put a lockup in place on this one. Couple things I think you can see the support that the Quantum team has in this deal and in EQT in the press release that we put out. I think their track record sort of speaks for themselves as their ability to hold stock long- term. You know, we thought that was more prudent than putting an artificial date that could potentially create some overhang on the stock. We feel good about the transaction and how we're moving forward with our partners on this front.
Right. Wil's joining the board, right?
Yeah, we're really excited about adding Wil VanLoh to our board. Really excited about what he brings to the table. Tremendous experience.
Okay. Great. My follow-up, maybe for David, you mentioned that the leverage ratio would be zero times, you know, if the strip holds. Could you give us a sense, Dave, what your model would show for your gross debt? I mean, are you planning to go to, you know, zero levered balance sheet, or would you know, plan to have some cash in the balance sheet? Wanted to know what your thoughts on year-end pro forma gross debt, and perhaps what would be remaining in your retained flexibility category, at year-end 2023.
Yeah. If you look at all of what we said we're gonna spend on. In there, by the way, we've already retired, just to remind, we retired $830 million of debt to date. You'd wanna strip that out from the roughly $4 billion. When you look at what we're gonna spend, and then you look at what's left over, we'll call it north of $2.5 billion of unallocated free cash flow. That's number one. I think if you look at our long-term debt or gross debt is gonna go from what we did expect it pre this acquisition at $3 billion, it's gonna grow to about $3.5 billion.
That gives you a sense that at roughly $2.75 natural gas prices, this combined business will generate roughly about, you know, we'll call it, $3.5 billion of EBITDA. That gives you roughly that 1 time.
Got it. That's super helpful. Thanks a lot.
Thank you. Our next question comes from Neal Dingmann with Truist. Neal, your line is now open.
Hi. Afternoon, guys. Congrats on the deal. Toby, can you talk a bit about just kind of it stuck out that breakeven THQ at $1.35, y'all at $2.30. Maybe just talk about that and the 300 locations you obviously that type of breakeven certainly would compete favorably. Then, you know, maybe within that same vein, I know y'all have gone to the next generation completions. Well, is that something you'll do? Could you even take their breakeven even further down by using that?
Yeah, Neal. The low-cost structure from Tug Hill is pretty easy to understand. Number one, they've got really attractive gathering rates, and it's an integrated business. That certainly is helpful. Then also the liquids uplift you get reduces your breakeven cost, and that's pretty significant. You know, it's pretty remarkable to think about an asset that has a breakeven at around $1.35 per million BTU. For us to be able to show that we have an asset that has an impact to lower our breakeven cost of this business by over $0.15 shows you how potent these assets are. We're really excited about bringing those in.
As far as the execution and the well designs, there will be a translation from the learnings that we have on our assets, which are literally right next door to where the Tug assets sit. As we continue to evaluate the impacts of our science program, we'll be positioned to translate those learnings, you know, right next door in Marshall. You know, as we mentioned in the last call, we're still in evaluation period on our Mark III well design.
Okay. One more if I could just for you or Dave. The free cash flow guide looks like about $6 billion now versus $5 billion prior, and looks like the new strip you're using is about $0.40 higher than what your previous guide. I'm just wondering, when you look at the guide, is most of that because of the higher strip prices? Or I don't know if you're able to talk about, you know, is there gonna be a higher production assumption guide in that? Maybe just talk about that pro forma guide of $6 billion versus the prior guide.
Yeah. I would just say, you know, Tug will add approximately 20% or somewhere around 20% to our free cash flow picture going out over time. We gave you a rough approximation. We didn't give you the exact number, but just know that Tug Hill and XcL combined give us a nice uplift in free cash flow.
Very good. Thanks, y'all.
Yeah. You're welcome.
Thank you. Our next question comes from Umang Choudhary with Goldman Sachs. Umang, your line is now open.
Hi. Thank you, and thank you for taking my questions. My first question was on the strategic rationales for the deal. You talked about the industrial logic, and pretty robust case for it. Can you talk to how the XcL Midstream can actually benefit your LNG strategy longer- term?
Yeah. The industrial logic really is gonna set the table for what I think are gonna be some low-risk execution, certainly on the integration side of things. Just gives us more confidence in that the execution of the accretion that we outlined is gonna take place. In addition to that, sets the table for potential synergies, which we've outlined at north of $80 million. Of that, you know, the XcL assets integrating the water and is gonna be a big part of those synergies in addition to the connectivity. We're relieving some bottlenecks in basin and getting us access. We're really gonna be leveraging all of the interconnects that XcL has already established. So that will certainly help. You know, how does this play with our LNG strategy?
Well, we now have access to more pipelines and to relieve bottlenecks to get into these FT contracts that we've established. That will certainly be helpful in allowing us to access, you know, end markets, including LNG markets.
Yeah. Let me just add that, you know, we have been building up our Midwest pipe capacity, and we have the ability to ship, I'll call it, somewhere between 250 and 300 million a day of gas down to the Gulf through that Midwest. That connectivity with the XcL pipeline capacity midstream will help us with that interconnect even more and allow us to take our Pennsylvania gas into that pipe and then down to the Gulf.
Got you. That's really helpful. Just one quickly housekeeping question from me. When it comes to curve decline rates, how does this transaction change your curve decline rate? I believe it was around 30% at the end of last year.
Yeah. It'll tick up a little bit. You know, the Tug Hill assets, they have a decline that's closer to 40%, and that's just as a byproduct of the fact that they were in growth mode up until this point. I think naturally you'll see that tick down up over time. You know, net-net, you could see a few points increase in our decline.
Thank you. That's helpful.
Thank you. Our next question comes from John Abbott with Bank of America. John, your line is now open.
Good afternoon. Toby, just sort of going on with, like, the previous question about the decline rate, and you just mentioned that Tug Hill had been in growth mode. The maintenance CapEx number here is, like, 800-900 million cb ft of gas equivalent per day. Should we be assuming that there's still momentum into the rest of the year and that we're probably closer to 900 million cb ft per day next year?
We've got, you know, wells in progress that I think will allow us to keep that production in that 800-900 range. Just for your perspective, to think about this asset, this is gonna require maintenance CapEx of between $300 million and $400 million, you know, tapering down to $300 million over the next couple years. For perspective, you know, the Alta asset, when we did that one, was about a BCF a day, and it was around $a few hundred million from a maintenance CapEx perspective. You know, Alta was a high quality asset. Tug Hill is no different.
Just one quick question on that maintenance CapEx toggling down to $300 million over the next several years. Is that the midstream? Just could you provide a little bit of context on the decline of midstream over time?
The midstream will decline about $50 million or $60 million. That's, you know, that along with, I'd call the underlying decline rate, will take that, you know, we'll call that upper 300 million of CapEx down into the low to mid 200s.
Very much appreciated. Just one other very quick question, this one here for you, David, is on cash taxes. Tug Hill, I mean, how does that change your cash taxes heading into 2023 on these assets?
Yeah. The free cash flow that we provided to you guys includes the cash tax impact of adding these assets to our mix. You know, this is. It's you know we've been trending up with the cash taxes as our NOLs have come down. As prices have gone up, we're moving closer to what we'll call that full cash tax payer position. Adding this to the asset as well will just you know make us be even closer to that, what I'll call that peak percentage of cash taxes. That's all included in our free cash flow numbers that we gave.
Thank you very much.
You're welcome.
Thank you. Our next question comes from Kevin MacCurdy with Pickering Energy Partners. Kevin, your line is now open.
Hey, good afternoon, and I apologize if you mentioned this already, but what is the current activity level in terms of rigs and turning in line on the Tug Hill asset? Directionally, where will you take that next year?
Yeah. They're running around three rigs right now. It's between 30-40 wells turn in line.
That's in, bro.
Yeah. That maintenance level will probably settle in around the 35 range.
Great. As a follow-up, you guys in the press release are quoting the next 12 months EBITDA. Just wanted to know exactly when does the next 12 months start?
The next 12 months, I believe starts in the fourth quarter of this year.
Great. October?
Yeah, it would be October, going forward.
All right. Thank you.
Thank you. Our next question comes from Noel Parks with Tuohy Brothers. Noel, your line is now open.
Hi. Good afternoon.
Hello.
I just had a couple questions. One, and I apologize if you mentioned this, is there a collar on the deal as far as the stock portion of the consideration?
You're talking about will we issue more or less stock tied to the movement of our stock? Is that what you're asking?
Yes.
No, we have a fixed share count.
Okay, great. Just to give a sense of the Tug Hill assets, can you give us a sense of sort of what vintage of leasing, you know, they acquired their assets during, and whether, you know, they bought them from another operator or whether it was original leasing of their own?
Yeah. I will say it's been over a period of time. Keep in mind, you know, Marshall County was one of the original counties that people started leasing in. This area has been leased for a long time. That's translated to a lot of leaseholds in the Tug Hill package that's HBP. I'd say there's been a recent wave recently on the Utica front getting those rights because of the success of the Utica. There's been some work there. This asset is largely HBP, and it gives us a lot of flexibility on the development pace.
Great. Just, does that imply that there might be more sort of recompletion opportunity there, compared to some of the rest of your holdings?
Well, I think recompletions will get stacked up against putting dollars, the returns we can generate from fresh development. You know, we have plenty of really high quality inventory to develop. If those recompletion opportunities present themselves, then we'd consider it. That's no different than what EQT's asset base offers. We've got a lot of legacy development that wells have been pretty mature. Right now, we've sort of just been focused on executing large scale combo development, and that is presenting some pretty attractive drilling returns, and that's where our focus has been. Listen, those opportunities should present themselves in the future.
Great. Thanks a lot.
You got it.
Thank you. That concludes today's Q&A session, so I will turn the conference back over to Toby Rice for any additional or closing remarks.
Well, thank you, everybody, for your time today. We really are looking forward to executing on this deal and continuing the track record of realizing the full potential of these assets that are under our management. Thank you very much.
That concludes today's bolt-on acquisition of Tug Hill and XcL Midstream. Thank you for your participation. You may now disconnect your line.