EQT Corp (EQT) 2017 Q2 法說會逐字稿

Greetings, and welcome to the EQT Corporation Second Quarter Earnings Conference Call.

(Operator Instructions) 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, Mr. Kane.

You may begin.

Thanks, Doug.

Good morning, everyone, and thank you for participating in EQT Corporation's conference call.

With me today are Steve Schlotterbeck, President and Chief Executive Officer; Rob MacNally, Senior Vice President and Chief Financial Officer; David Schlosser, Senior Vice President and President of Exploration and Production; and Lisa Hyland, Senior Vice President and President of Midstream.

The replay for this call will be available this evening for 7 days.

The telephone number for the replay is (201) 612-7415.

The confirmation code is 13650782.

The call will also be replayed for 7 days on our website.

First, a few logistical comments.

Earlier this morning, we issued our second quarter earnings release and posted a slide presentation.

Both are available on our website at www.eqt.com and included, among other things, comments about EQT's pending acquisition of Rice Energy.

This communication does not constitute an offer to sell or a solicitation or an offer to buy any securities or solicitation of any vote or approval.

In connection with the proposed transaction, EQT expects to file with the SEC a registration statement on Form S-4 and joint proxy statement later today.

These and other documents filed by EQT and Rice with the SEC may be obtained free of charge at EQT's website, www.eqt.com, or Rice's website, www.riceenergy.com, as applicable, or at the SEC's website, www.sec.gov.

You should review such materials filed with the SEC carefully as they will include important information regarding the proposed transaction.

To remind you, the results of EQT Midstream Partners, ticker EQM; and EQT GP Holdings, ticker EQGP; are consolidated in EQT's results.

Earlier this morning, there was a separate joint press release issued by EQM and EQGP.

The partnerships will have a joint earnings conference call at 11:30 today, which requires that we take the last question at 11:20.

The dial-in number for that call is (201) 689-7817.

In a moment, Rob and Dave will summarize EQT's second quarter results, and Steve will give a brief update on the Rice acquisition.

Following the prepared remarks, Steve, Rob, Dave and Lisa will be available to answer your questions.

I'd 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 those forward-looking statements listed in today's press release and on the risk factors in EQT's Form 10-K for the year ended December 31, 2016, as updated by any subsequent Form 10-Qs, which are on file at the SEC and available on our website.

Today's call may also contain certain non-GAAP financial measures.

Please refer to this morning's press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.

With that, I'll turn the call over to Rob McNally.

Thanks, Pat, and good morning, everyone.

Before reviewing the second quarter results, I do want to briefly give you an update on the Rice Energy acquisition.

As a reminder, on June 19, we announced our intent to acquire Rice for 0.37 EQT shares plus $5.30 per Rice share.

As Pat mentioned, the proxy statement will be filed later today and will be available on our website, Rice's website or the SEC website.

Steve is going to have further comments on the transaction in a few minutes.

We'll now provide an overview of the second quarter results.

As you read in the press release this morning, EQT announced second quarter 2017 adjusted earnings per diluted share of $0.06 compared to a $0.38 loss in the second quarter of 2016.

Adjusted operating cash flow attributable to EQT increased to $223 million as compared to $105 million for the second quarter of 2016, reflecting an increase of $118 million.

As a reminder, EQT Midstream Partners and EQT GP Holdings results are consolidated in EQT Corporation's results.

Moving to production.

Production sales volume of 198 Bcfe for the second quarter was 7% higher than the second quarter of 2016 and was slightly ahead of the high end of our guidance range.

The realized price, including cash settled derivatives, was $2.86 per Mcfe, a 36% increase compared to $2.11 per Mcfe in the second quarter of last year.

Operating revenue for the production company totaled $631 million for the second quarter of 2017, which was $554 million higher than the second quarter of 2016.

Total operating expenses at EQT production were $578 million or 10% higher quarter-over-quarter, consistent with volume growth.

Transmission expenses were almost $38 million higher due to volumes transported on the Rockies Express pipeline and the Ohio Valley Connector.

As mentioned on our first quarter call, we are paying for some REX capacity last year.

But since we are unable to physically move or produce gas to REX in the second quarter of 2016, we used that capacity for marketing.

When we use pipeline capacity for marketing, we net the cost of the transportation against the recoveries realized.

The cost of pipeline capacity used to move our produced gas is recognized as an operating expense.

Processing expenses were $17.7 million higher, consistent with higher wet gas volumes, primarily related to our recent acreage acquisitions.

Gathering expenses and DD&A were all higher, consistent with production growth.

Production taxes were $1.8 million higher as a result of higher impact fees due to increased drilling activity in Pennsylvania and better pricing.

Lease operating expenses, excluding production taxes, were $3.3 million lower.

Excluding the impact of prior year pension settlement and legal expenses, SG&A was slightly favorable for the quarter as we reduced our Kentucky cost structure when we integrated the Kentucky gathering operations into production in 2016.

During the quarter, our liquid story was strong, reflected by an increase in volumes and a higher pricing environment.

NGLs sales volume and realized price were significantly higher.

Regarding pricing, the average realized price, including cash settled derivatives, was $2.86 per Mcfe, a 36% increase compared to the $2.11 per Mcfe in the second quarter of last year.

The average differential for the quarter, which was a negative $0.64 per Mcfe was within the stated guidance range for the quarter.

This is a $0.51 decrease from the first quarter of 2017, but a $0.15 improvement from the second quarter of 2016.

Approximately 80% of our local basis exposure for the balance of 2017 is locked in and is reflected in our differential guidance.

The minimal effects of decline in local pricing highlight the value of our diversified firm capacity portfolio, which provides significant takeaway capacity to premium markets.

We continue to expect improvement in our realized price as incremental pipeline projects come online, including the Mountain Valley Pipeline project, which will provide access to the premium Southeast and Mid-Atlantic markets.

Now moving to Midstream results.

EQT gathering operating income was $83.3 million, $10.1 million higher than the second quarter of 2016.

Operating revenue was $112.1 million, a $12 million increase over the second quarter of 2016, driven by production development in the Marcellus shale.

This was slightly offset by increased operating expenses, which totaled $28.8 million for the quarter, a $1.9 million increase over the same period last year.

Looking at EQT transmission.

Second quarter operating income was $57.8 million, $1.9 million higher than the second quarter of 2016.

Firm reservation fee revenue was $79.5 million, $19.2 million higher than the second quarter of 2016, primarily as a result of EQT contracting for additional firm capacity on the OVC.

Operating revenues were $86.8 million, an $8.9 million increase over the second quarter of 2016.

While operating expenses were $29 million, a $7 million increase over the second quarter of 2016, with approximately $5 million of the $7 million increase being DD&A.

I will close my remarks by providing you with our liquidity update.

We closed the quarter in a great liquidity position with 0 net short-term debt outstanding under EQT's $1.5 billion unsecured revolver and about $561 million of cash on the balance sheet, which excludes EQM.

We are forecasting $1.2 billion of operating cash flow for 2017 at EQT, which includes approximately $200 million of distributions to EQT from EQGP.

We are fully capable of funding our roughly $1.5 billion 2017 CapEx forecast, which excludes EQM and land acquisitions with the expected operating cash flow and the current cash that we have on hand.

So with that, I'll turn the call over to David.

Thanks, Rob, and good morning, everyone.

As Rob mentioned, our sales volume for the second quarter was 198 Bcfe, which exceeded the high end of guidance by 3 Bcfe.

Operationally, we now have 7 frack crews secured and expect to operate at this pace for the remainder of the year.

With these crews in place, we anticipate approximately 55 Marcellus and Upper Devonian wells to be turned online in the third quarter and 58 in the fourth quarter.

This is approximately 3x the pace of the first 6 months of this year, during which we had 19 wells turned in line in the first quarter and 17 wells in the second quarter.

As you would expect, the production impact of this increased completion activity will be weighted to the fourth quarter and is reflected in our current guidance.

Additionally, with the success of our ongoing consolidation efforts, we now expect our 2017 drilling program to have an average lateral length of 8,400 feet, which is 11% higher than our 2016 average.

Now let's move on to our deep Utica test program.

As we've mentioned during previous calls, our capital is allocated to projects that we expect will deliver the best returns.

And as we continue to lengthen laterals and improve efficiency in the Marcellus, the hurdle rate for other investments continues to increase.

As an example, given our contiguous acreage position of the pending Rice transaction, we expect Marcellus wells in Greene and Washington counties to average at least 12,000 feet.

Based on recent Utica results and current development costs, we estimate a Utica well would need to achieve at least 4 Bcf per 1,000 feet to be competitive with a 12,000-foot Marcellus well.

And so far, we believe there are only 2 deep Utica wells that meet or exceed that threshold.

In short, we have multiple years of long lateral inventory in the Marcellus.

And when comparing the 2 plays, it is difficult for the Utica to compete.

For these reasons, we have made the decision to suspend our Utica test program and focus our efforts on Marcellus development as we integrate the assets we've acquired over the past 1.5 years.

This year's Utica program was planned to contribute 18 Bcfe to our annual volume.

Therefore, the suspension will impact our production guidance, which is now adjusted to be 205 to 210 Bcfe for the third quarter and 825 to 840 Bcfe for the full year.

I will now turn the call over to Steve.

Thank you, Dave.

Good morning, everybody.

As you're aware, the big news of the quarter was the June 19 announcement that we entered into an agreement to acquire Rice Energy.

Rice is an outstanding, strategic and operational fit for us, and we anticipate the combined entities will capture significant operating efficiencies, improve overall well economics and deliver stronger returns to our shareholders.

We also believe this transaction will enhance our options to address EQT sum-of-the-parts discount, which we have previously discussed.

We have spoken with many of our shareholders and other industry experts since the announcement, and we are pleased with the positive and enthusiastic feedback received.

In discussing this compelling transaction, we received questions in our ability to address the sum-of-the-parts discount and around our synergies estimates for the merger.

I will address both of these topics today.

First, on addressing the sum of the parts.

The Rice acquisition does not impact the timing of addressing our sum-of-the-parts discount.

In fact, we believe these transactions will enhance our options to address the sum-of-the-parts discount, which we have previously discussed.

Addressing the sum-of-the-parts discount is a priority for the board, and we will develop a plan by the end of 2018 that we believe is in the best interest of EQT and all shareholders.

These options could include splitting the companies, selling one of the businesses, collapsing EQM and EQGP to support a buyback program as well as several other scenarios.

Our analysis will be a comprehensive one, which not only evaluates all feasible alternatives for addressing the discount.

We will also include a full analysis of the potential tax implications of the current tax reform effort in Washington.

As you can appreciate, this is a longer-term development, and we do not have additional details to share.

The second most common question has been around synergies.

We are confident that the PV of the synergies are in excess of the $2.5 billion laid out in the deal announcement.

As you will see in our updated slide deck, which was posted to our website and filed with the SEC this morning, the $2.5 billion only covers categories of synergies, $1.9 billion of which are efficiencies driven by longer laterals, high-grading the drilling program to drill longer laterals first and lower surface costs, including fewer roads, pads, water pits and well lines.

Those savings are in our control, and we are forecasting $200 million in 2018 and $350 million per year for the following 9 years.

The other $600 million is from a reduction of a $100 million of G&A per year discounted for 10 years.

Given the overlap of the businesses and after careful evaluation, we believe that $2.5 billion is a conservative estimate and are confident in our ability to achieve these targets.

In addition to the quantified synergies, there are significant synergies that are harder to quantify.

We listed them in our presentation this morning, along with ranges of potential value.

If you took the high end of the ranges of each category, the additional synergies are well in excess of the $2.5 billion that we've already quantified.

A few examples are: increasing well recoveries by combining EQT and Rice's best drilling and completion techniques is worth $500 million for every 1% increase in EUR per foot; increased leverage in acquiring drilling and fracking services is worth $300 million for every 1% improvement in service cost; and G&A savings beyond the 10 years is worth approximately $500 million.

There are several other additional synergies discussed in our updated IR deck, and I would encourage you to review our new deck for the full slate of additional synergies.

I think you will also conclude that our original estimate of $2.5 billion in synergies is very conservative, and we expect to be able to exceed that amount by a fair margin.

We continue to make strong progress towards completing the transaction and recently received antitrust clearance from the Federal Trade Commission, one of the customary closing conditions of the transaction.

Rice is an outstanding strategic and operational fit for us, and we are excited to complete the transaction in the fourth quarter.

With that, I'll turn it over to Pat for Q&A.

Thanks, Steve.

That concludes the comments portion of the call.

Doug, can we please open the call for questions?

(Operator Instructions) Our first question comes from the line of Scott Hanold from RBC Capital Markets.

So a question on -- with the reduced activity in the Utica shale, this -- is some of that being reallocated to the Marcellus and with the capital that was spent there...

Yes, Scott, we -- some of that capital is being reallocated to completion of some DUCs that we acquired in West Virginia acquisitions from the -- over the past year.

So not to new grassroots wells, but to the completion of a suite of DUCs.

Okay, okay, understood.

And then, yes, because that, I guess, the completion pace you all have in the second half of the year, I mean, is significantly higher than obviously what you experienced in the front half of the year and I was kind of curious on why.

And I don't know the best way to look at this thing, but even relative to the frack crews you had, it seems a lot faster.

So just wondering with some color on that.

Yes, I think it's -- we now have the frack crews in place, and they're getting to work.

And so the pace of completed wells is going to be higher.

But the DUCs as well will also -- since we don't have to drill those wells, they're already drilled, will helps us increase that pace quite a bit in the second half of the year.

Yes, so the implied obviously growth in the fourth quarter that you all have is in excess of a sequential 10%.

And I would expect the exit rate should be pretty robust.

I mean, have you -- do you have a sense of what that might look like?

I don't think we've quoted that, but definitely, the fourth quarter and heading into 2018, we'll -- the growth rate will be significantly higher than it has been the last couple of quarters.

And one last quick one.

It looks like there's some reports that Rice acquired this Lola Energy.

Do you all have any comments on that?

And why would that be taking place during this process?

Well, we don't have comments on that.

I would defer you to Rice and/or Lola for questions on that.

I guess my only comment would be, we're very familiar with Lola and the assets that they have.

And they fit very nicely in our -- in the core backyard of Greene and Washington County.

So they're definitely high-quality assets, but questions regarding any potential transaction should be directed to those companies.

Our next question comes from the line of Drew Venker with Morgan Stanley.

Steve, I was hoping you can talk about the steps you might need to take to realize some of these -- the upside to synergies that you identified, like the marketing optimization or the longer laterals in West Virginia or any of the other ones that you think are relevant to speak to.

Yes, so maybe I should describe a few of those that probably aren't obvious.

So the West Virginia lateral is one.

That's a -- if you assume that we could increase the average lateral in West Virginia by 2,000 feet, at the same time delaying a significant amount of the West Virginia development because we'll be more focused on Pennsylvania, so all that's incorporated into this number.

The reason that we think that might be possible or at least a portion of that is possible is we've clearly found that time equals more length, especially in West Virginia because of the, frankly, antiquated oil and gas regulations they have, it takes a lot of time to piece together longer laterals.

And as a result of the Rice acquisition and shifting our focus to Pennsylvania, that will buy us a lot more time to work the existing locations in West Virginia.

And ultimately, they will be longer when we drill than they otherwise would have been.

So that's what's behind that.

And I would stress on that -- on the sheet in our IR presentation, those are ranges of values.

We're not necessarily saying that we expect to achieve 100% of all of those, but I would expect that we will achieve some amount of probably all of them or nearly all of them.

And that's one.

So we picked 2,000 feet because we think that's plausible, but it will be hard to quantify and hard to measure and will occur somewhat down the road.

On the -- I think the buying power is self-explanatory.

That's just having more leverage because of our scale in negotiating service contracts.

And/or, if that's not possible, having enough scale and enough certainty with our drilling programs that, if it made sense, we could ourselves get into the service business, if that made more sense to make sure we got some synergies there, although I think more likely would be that we're just able to negotiate better contracts.

The marketing optimization is again, because of the scale and the amount of gas that we will have available to sell, the thought in our commercial group that they will be able to negotiate better sales contracts, that one is a $0.05 improvement in realized price.

It would yield $1.4 billion in value.

I can't guarantee we'll get $0.05, but we should be able to negotiate better sales contracts.

So there should be some value there for sure.

LOE optimization is, again, we haven't built that into our synergies.

But clearly, because of the operational overlap of the 2 companies, we would fully expect to realize some unit LOE improvements.

And we've quoted a $0.03 improvement yields, $800 million in additional value.

We talked about the G&A.

We've only discounted that for 10 years.

If you assume that, that continues in perpetuity, it's another $0.5 billion.

But we tended to be more conservative on our estimate.

And finally, MVP expansion.

Because of the extra or the increased production that we'll have, it's possible that, that expansion opportunity could be accelerated by up to 3 years, which pulls forward that value and has a PV of about $200 million.

And the biggest one is the thought that between the 2 companies, we've got a lot of data on completion practices in this core area of the Marcellus.

And both companies have independently done a lot of science and analysis and gathered tremendous amounts of data, and we put those 2 databases together and can explore the best techniques in various areas.

Almost certainly, we will be able to come up with best practices going both ways that improve the returns of our wells.

Hard to predict how much that will be.

But for example, if we increased the EURs by 5%, that's an additional $2.5 billion of synergies.

So that's a particularly powerful one and one that I fully expect to capture some if not all of that amount of synergy.

That maybe a little long-winded than you wanted.

No, that's great.

All the color really helps actually.

So just to follow the West Virginia piece.

Would that existing laterals involve swaps or some unitization or something?

Is that partly what would factor into how successful that upside is?

Yes, it would be -- frankly, we'd be doing more of what we're already doing, but having more time to do it.

So swaps, for sure.

We have a lot of acreage that overlaps with one of our big competitors down there, but swaps are particularly difficult to work out.

You have different acreage dedications to different midstream companies.

You have different net revenue interest, different terms in the leases.

So it takes a lot of effort to get the swaps done.

It also gives us more time to work on the joint development and cotenancy legislation in West Virginia that we still feel needs to happen in West Virginia, and we still remain cautiously optimistic that with more time, we will get that legislation through.

That would be a big improvement for West Virginia lateral lengths and economics and make West Virginia more competitive in certain areas with our Pennsylvania opportunities.

So having more time to work on that before we drill the wells is certainly a big advantage.

And just one follow-up just on kind of the macro within Appalachia.

It seems like there's still a number of these smaller operators or even, let's just say, assets, that are in the market that might make sense to consolidate, whether by you or someone else.

Do you see a lot of those still out there?

Are there areas where there's a lot of disparate acreage that could be consolidated by someone?

Or if you see other willing sellers out there in addition to Rice?

;

Drew, I think with the acquisitions we've done in West Virginia and now with the Rice transaction, our appetite for additional significant acquisitions is satisfied, I think.

I think with the Rice transaction, our position is extremely well consolidated.

There will still be holes.

And I think we have estimated and told you all that we would expect you should be modeling about $200 million a year for fill-in opportunities to fill in those holes.

But in terms of anything -- any more significant transactions to consolidate, I think the Rice transaction accomplishes what we set out to achieve, and we're going to be focused on delivering on the results that we've been talking about.

So -- but that said, I think there are still lots of operators out there, lots of companies still trying to rationalize their positions and I think ultimately trying to do what we have just done and build contiguous acreage positions, too, so they can improve their capital returns and their margins.

So I would expect you'll see continued activity.

But I think, except for the small, little pieces and parts that we'll need to pick up to fill in some holes, I think we're good for now.

Our next question comes from the line of Michael Hall from Heikkinen Energy Advisors.

Just wanted to get into one of those synergies maybe in a little more detail.

The completion designs between the 2 organizations, can you kind of maybe compare and contrast what you know about the 2 different completion designs and where you think there might be some room for some beneficial improvement from combination?

Yes, Michael.

This is David.

First of all, I'll say that I congratulate Rice.

They've done a lot of good testing and they've documented it very well and so have we.

So I'm just really confident that when we marry the 2 organizations together, there's going to be things that offset each other and I think improve EURs.

Some areas that we're looking at now, they do some interesting things in targeting the wells that we haven't experimented with and even what they're calling engineered completions of by trying to pick better parts of the rock based on law of properties instead of just perforating every 40 feet like most companies do.

So -- but I think there's a couple of things that jumped out when they've tested those concepts and we haven't tested them as much.

And so when we get the data in and absorb it, we're confident we can make some tweaks.

Okay, makes sense.

And then on the completion space that you guys detailed for the second half, it's helpful.

I'm just curious.

Would the expectation be that you maintain those 7 crews through the first half of '18 and that sort of quarterly pace in completions is sustainable?

How should we think about that?

(inaudible) second half.

This is David again, yes.

That's what I would -- I think that's a good assumption that we'd be somewhere in that range for the first half of '18.

Okay, great.

And then the last one on my end is just on the...

Sorry, one clarification on that piece.

That would just be for the EQT run rate.

There would be additional crews because of the Rice acquisition.

So we would bid a higher number than 7 in '18.

No, understood.

That's what I was getting at.

Appreciate the clarification.

Yes, and then I guess the last one on my end is just I was just curious on the tax side of things in the context with the sum-of-the-parts path that you laid out.

I understand there's some uncertainty on tax treatment and perhaps a little limited on what you can disclose.

But maybe can you just provide a little bit of color on each of those paths?

Like how the different tax treatments might vary?

And just how important you view the tax impacts relative to the path of addressing the sum of the parts?

We -- as Steve said, we are -- we're committed to addressing the sum-of-the-parts issues in 2018.

And I'm not going to comment on any particular path forward, but we don't believe that taxes will be the deciding factor in whatever it is that we decide to do or importantly with regard to the timing of when we're able to do it.

Our next question comes from the line of Neal Dingmann from SunTrust.

Steve, I don't belabor the synergies, but it's such a positive important part.

I just want to make sure I'm clear on that Slide 14.

Generally, timing on -- you walk pretty detailed through the $2.5 billion.

Just wondering that additional $5 billion, I mean, is that a year after the -- or so after Rice closed, too?

I'm just trying to get a very general sense of how you kind of envision the timing of those other $5 billion?

Yes.

Well, if you look at Slide 14, it's actually an additional $7.5 billion of potential.

So I do want to be clear, the numbers that are shown on that page are all the numbers at the high end of the ranges.

And I think it's probably a bit optimistic to assume that we could capture all of that.

So I don't want anyone to take away from this that we're saying we're going to get another $7.5 billion on top of the $2.5 billion.

I do fully expect we will get some amount probably from each of those categories.

And I will -- it's probably a good time to mention this, but one of the reasons that we didn't provide these upfront is these -- to your question, Neal, these are far more difficult to prove and to do a look back on and demonstrate that we captured it and to quantify how much we got and when we got it because of the nature of them versus the 2 categories of synergies that we talked about initially, which, a, we have extremely high confidence we will get at least get that much; and two, we will easily be able to demonstrate how we performed versus those estimates.

These will be much more difficult to demonstrate how much we were able to get.

So with that caveat, these were all -- so the ones that are related to a development program so like incremental EUR improvements.

That was -- to get to the $2.5 billion, that assumed 5% every well pulling forward.

So that assumes starting day 1. So that's probably, frankly, a bit aggressive.

It will take a little time to study to get the data in and have engineers look at it, implement new practices, but that applies to several thousand wells.

So if we missed the first few dozen, it probably doesn't change the value that much.

And most of them are similar.

It assumes applying that improvement on the pro forma development plan.

Great detail, Steve.

And just one follow-up.

Looking at Slide 11, maybe for you or David.

You've always talked about and been pretty clear about that rectangle and I get the Rice piece and the Utica to the west of that.

But you have a bit of a piece, kind of call it, to the northeast of your acreage, up in Armstrong and you have a pretty good-sized piece down in West Virginia as well.

I'd call it that southern acreage just outside of that.

How do you view that acreage that is just outside of that block?

Is that something you would let expire?

Or because it's so close to the block, you still view it still pretty positively?

Well, in terms of expiring, most of that acreage is held by production.

So it won't expire.

We don't view it as favorably as the Greene-Washington County core for 2 reasons.

One, the geology is not quite as good.

The rock is just not as good.

It's not bad, but it's not as good.

And because of the consolidation efforts we've done in Greene, Washington and Northern West Virginia, that's where we're going to be able to drill the long laterals.

And that's where the capital efficiency is going to be dramatically improved.

So from a competition for capital standpoint, those corners of the box just won't compete for our capital but might be attractive to someone else.

But you won't see a lot of activity from EQT in the corners of the box.

Our next question comes from the line of Arun Jayaram with JPMorgan.

Steve, Slide 16 suggests that you're not just kind of playing lip service to addressing the sum-of-the-parts discount with plans to have something by the end of '18.

I did want to see if you could give us your thoughts on the activist letter that you did receive in the early part of July and thoughts on that.

Yes.

Well, I will certainly say it's not lip service.

And I'm trying to be as clear as I can that you have my personal commitment that we are going to address the sum of the parts.

And we're going to do it in a way that we think is most beneficial to our shareholders.

So that's about as clear as I know how to be, but I mean what I say.

So there is a strong commitment there.

Yes, regarding the JANA letter, I think we met with them shortly after the letter came out.

They're a significant shareholder.

We're trying to reach out to all of them, and we discussed the merits of the transaction and we discussed the merits and the opportunities to address the sum of the parts.

And I think I'll leave it at that.

Just like all of our shareholders, we communicate with them.

We don't always agree on everything.

But we made our case, and we still continue to feel very strongly that this Rice transaction creates significant value for our shareholders and is the best and most appropriate next step in EQT's strategy.

Great, that's very helpful.

I had 2 quick others.

One, as you talk about closing the transaction in the fourth quarter, just given the lag between permits and drilling and completing kind of the 12,000-foot wells, when, Steve, do you anticipate that you could start drilling or producing, I guess, the 12,000-foot laterals in the core of the Marcellus?

What is it -- what is the approximate timing of that as we think about '18, '19?

That's a good question because you're right.

The -- we will have to re-permit, and we can't begin that process until closing.

So there will be a time period where we're re-permitting wells.

Hopefully, that moves fairly quickly.

But as you may be aware, Pennsylvania, in particular right now is the DEP's a little bit slow on permits.

So there will be a few months to get that done.

And then because of the timing on these large pads with long laterals, that's typically about a year from spud to on average TIL.

So I would say it will be late '19 at the earliest and early 2020 before you really see the production from the longer laterals hitting our income statement.

Okay.

I mean, are you going to get some before everything -- before the whole program gets into that 12,000 foot mode, it would be later in '19?

Yes, but that's where you really start to see it in full development mode.

Some will certainly come sooner.

And even absent the Rice transaction on the EQT side, we currently have plans to drill quite a few wells that are north of 12,000 feet where our own acreage allows it.

So you will see some longer laterals coming even before the Rice transaction closes or before we start to get the benefits from it.

But by the end of -- early 2019 is when you'll see the full force in effect of the combined company.

Okay.

And just my final question.

Steve, on the Rice merger call, you made some interesting comments about Phase 2 of shale and talking about better balancing growth with buybacks and dividends.

And I guess your expectations pro forma to reach a free cash flow surplus in '19, I believe, under $3 gas.

Just wondering how shareholders have responded to that and how -- is this something that you're committed to as well as you think about on a go-forward basis?

Yes, that's another great question.

First of all, the shareholder response, I think, has been -- been extremely well received.

And I've been very pleased at that because I wasn't quite sure how it would be received, even though I think it is clearly the most prudent strategy for companies in the natural gas business.

And you're hearing more companies start to talk about that, which I think is also very positive development.

I will say that's another -- so I'm going to go back to the Rice transaction.

Another reason I think this transaction is so transformative for our shareholders is not only is it accretive immediately to EQT shareholders, not only does it give us an industry-leading cost structure and capital efficiencies in a very competitive commodity market.

It will allow this strategy of prudent and profitable growth with return of cash to shareholders to really happen.

Absent the -- those cost improvements and the capital efficiencies, it's much harder to adopt that strategy and be able to sustain it and do it in a way that really moves the needle.

With our ability to drill these long laterals and lower cost structure, I think it really makes that strategy extremely compelling.

So yes, that is what we are headed toward, and I think you really start to see the benefits of it probably in 2020 when we are growing, we think, in the mid-teens and substantially less than our cash flow.

Our next question comes from the line of Holly Stewart with Scotia Howard Weil.

Maybe first, for Steve or David, just kind of thinking through that 2018 development plan.

You note the codevelopment this year and the average well pad of 14 wells.

I guess any thought on this in kind of 2018 and beyond, I guess, meaning both the size of the well pads as well as the codevelopment?

By codevelopment, you mean Upper Devonian?

Or...

Yes.

Well, first in the well pads, yes, 14 is our 2017 average.

I expect that number to be increasing every year until it reaches, hopefully, we get through our -- in the range of 20 or so, which we think is the maximum size for a pad now.

So you should see that continue to increase over the next few years.

As far as codevelopment, I think we're going to continue to do the Upper Devonian where it makes sense.

We understand it.

We know the performance of it now.

We know where it works.

And so where it works, we intend to still develop it.

And I would add, on the Upper Devonian, it's really about the use-it-or-lose-it proposition, which makes it different than the Utica in terms of the Utica now can't compete with the longer laterals.

The Upper Devonian laterals can also get longer.

And for the Utica, it isn't going away.

So if that opportunity gets proved up by someone else anytime soon, we have that opportunity and can restart activity there quickly without losing anything.

In certain areas of the Upper Devonian, we do strongly believe that you lose that opportunity.

But I think what you will see, Holly, is going forward, a diminishing share of Upper Devonian relative to Marcellus.

So we have even more compelling Marcellus opportunities now that Upper Devonian will have to compete with and you may see us avoid those areas of Upper Devonian for now.

So we don't lose it, but we will be drilling long Marcellus wells outside of that Upper Devonian codevelopment area.

So I do think you will continue to see some Upper Devonian capital deployed.

But as a proportion of our total capital, I think you'll see it -- a steady decline and probably a fairly dramatic decline.

Okay.

Great.

And then maybe one just on the midstream side.

You highlight the MVP expansion and kind of your upside to synergies.

I would imagine there's some thought around OVC as well.

But also within the presentation, you kind of note higher returns to EQM and lower cost to EQT.

So I'm just curious if you could provide a little bit of color just around maybe the cost structure on midstream and how the synergies create sort of a lower-cost midstream business?

Holly, it's Rob.

I think when you look around at where we overlap with Rice, we overlap both on the upstream and the midstream side.

And so it's going to require less capital to deploy the midstream solution for whatever drilling that we do.

And so -- and some of that may accrue to the midstream business and some of that may accrue to the upstream business.

But there clearly will be less capital required to gather the volumes that get drilled.

Okay.

Great.

And then maybe just one final quick one on -- is there an update to the Permian sale?

Nothing at this point.

Our next question comes from the line of Brian Singer from Goldman Sachs.

A little bit of a theoretical question on the Utica.

To what degree is the decision to reduce activity in the Utica a function of the Utica no longer meeting return thresholds versus that potential for the synergies that are driving opportunities if Rice closes, i.e., would you have made the same decision on reducing activity in the Utica had the Rice transaction not been on the horizon?

Yes.

Brian, I think the truthful answer is I don't know.

The Rice transaction made it an easy decision given that the hurdle for the Utica to be better than our Marcellus opportunities went up significantly.

So it was a pretty obvious decision because of the Rice transaction.

Absent the Rice transaction, I think we were probably still in test mode with the thought that we could get there.

One thing we have learned over the past 6 months is while, in a lot of cases, we can drill wells in that $12 million to $14 million range, still, occasionally, you have a troublesome well, and the costs go well above that.

And when you average that in, the learning curve was going to be probably a little longer than we thought.

So we would have -- absent the Rice transaction, we would have been incorporating that and trying to figure out, well, how confident are we that the average will be in that range and what we probably need to get the results of a few more wells.

So my guess would be, we'll probably drill a few more wells to get the data and then make a decision.

And it could have gone either way.

But with the Rice transaction, it's a no-brainer.

We just don't think our Utica opportunities are likely to be able to compete with our new Marcellus opportunities.

So just one clarification on that, Brian, that I don't think we've said today.

When we're talking about the Utica, we're really -- we're only talking about the deep Utica in Pennsylvania.

We're not referring to the Ohio Utica that comes with the Rice transaction.

I mean, that's -- economically, that competes much better with the Marcellus.

Understood, great.

And my follow-up is actually a follow-up to Holly's question earlier on the Upper Devonian.

My take, and maybe I misunderstood it, is that you may have developed the core Upper Devonian a little bit more slowly because of better rate of return opportunities elsewhere post the transaction.

But looking on the map on Page 20, it would seem that the core Upper Devonian does overlap with a lot of the Rice -- some of the Rice acres in the Marcellus.

Can you just comment on -- or maybe clarify?

Well, it does overlap with some of it.

And that's why I said you shouldn't expect Upper Devonian to go to 0. But a lot of the Rice opportunity lies outside of that and on the fringes of that.

We may make the decision that the cost benefit is more marginal.

But certainly, within the -- in the heart of that block, if we were going to drill, I think we still feel strongly that we create value for our shareholders by taking the Upper Devonian versus foregoing that opportunity forever.

But it's not all of the Rice bridges.

These maps are kind of cartoonish, so you have to be careful about it.

And is there some quick...

There's more Rice -- go ahead.

Is there some quick and easy way of thinking based on your economics or your views on how much of a higher gas price you feel you need for the Upper Devonian economics to be equal to the Marcellus economics?

Never, because if gas prices go up, the Marcellus economics go up.

The -- I don't think the Upper -- the one thing that can equalize Upper Devonian with Marcellus in certain areas, in certain circumstances, probably not even areas, circumstances, is if the Upper Devonian has not been drilled, but the Marcellus has, and we have the opportunity to drill, say -- I won't get the numbers quite right, but a 16,000-foot Upper Devonian is probably economically equivalent to a 12,000-foot Marcellus.

And again, we'd have to check the numbers, but it's something like that.

And if the Marcellus is drilled, because the 2 companies have drilled wells, say, toe to toe, but the Upper Devonian hasn't been drilled, so the combined acreage allows a 16,000-foot Upper Devonian, the return on that investment is probably identical to a 12,000-foot Marcellus well that we would drill.

So there will be certain circumstances where extra-long Upper Devonians are just as good as your average Marcellus.

That is all the time we have for questions.

I'd like to hand the call back over to management for closing comments.

Thank you, Doug, and thank you all for participating.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time, and have a wonderful day.