EQT Corp (EQT) 2018 Q2 法說會逐字稿

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

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Pat Kane, Chief Investor Relations Officer for EQT Corporation.

Thank you, Mr. Kane.

You may begin.

Thanks, Doug.

Good morning, everyone, and thank you for participating in EQT Corporation's Conference Call.

With me today are: Rob McNally, Senior Vice President and Chief Financial Officer; Dave Schlosser, Senior Vice President and President of Exploration and Production; Jerry Ashcroft, Senior Vice President and President of Midstream; and Blue Jenkins, Chief Commercial Officer.

Dave Porges is not participating as he had a previously scheduled conflict.

The replay for today's call will be available for a 7-day period beginning this evening.

The telephone number for the replay is (201) 612-7415 with a confirmation code of 13674485.

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

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

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

EQM and EQGP will have a joint earnings conference call today at 11:30 a.m., which requires that we take the last question of this call at 11:20.

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

In a moment, Rob and David will present their prepared remarks.

Following these remarks, Rob, Dave, Jerry and Blue will be available to answer your questions.

I'd also like to remind you that today's call may contain forward-looking statements.

You can find factors that could cause the company's actual results to differ materially from these forward-looking statements, listed in today's press release under risk factors are under risk factors in EQT's Form 10-K for the year-ended December 31, 2017, filed with the SEC as updated by any subsequent Form 10-Qs, which are on file at the SEC and available on our website.

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

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

I'd now like to turn the call over to Rob McNally.

Thanks, Pat, and good morning, everyone.

I'd like to start by discussing several of our key achievements during the quarter before moving on to our standard quarterly update.

We've made tremendous progress towards the separation of our midstream and upstream businesses.

We've completed all of the midstream streamlining transactions that we previously announced in April.

On May 22, we closed 2 transactions.

The sale of EQT's Ohio gathering assets to EQM for $1.15 billion in cash and 5.9 million EQM units and the sale of RMP's IDRs to EQGP for 36.3 million EQGP units.

On July 23, EQM completed the acquisition of Rice Midstream Partners in a unit-per-unit transaction at an exchange ratio of 0.3319.

To support these transactions, EQM successfully issued $2.5 billion of senior notes.

Proceeds from the offering were used to repay the amounts outstanding under EQM's 364-day term loan to pay off RMP's revolver and for general business purposes.

The 2 remaining important items in our separation plan are the appointment of a new CEO and the filing of the Form 10.

The CEO search is well underway and we expect to have a CEO named prior to the separation.

We plan to file the Form 10 by mid-August, which means the separation will likely occur in the fourth quarter.

While the ultimate timing depends on the SEC and IRS, we cannot be certain as to how quickly they will act.

Our goal is to close the separation as soon as possible.

We are committed to ensuring that both the production and midstream businesses emerge from the separation with strong investment-grade balance sheets.

To achieve this objective, EQT will retain 19.9% of SpinCo's stock, which will be used to reduce debt at EQT Corp and to fund the stock buyback program.

As a result of this share retention, we do not expect SpinCo itself to have any outstanding indebtedness at the time of the separation.

Our board has authorized a $500 million share repurchase program, effective immediately.

Given our view that EQT stock is not reflecting the full value of our EMP and Midstream businesses, we expect to begin using this buyback authority as soon as possible.

We are pleased with this approval as it a one way for EQT to return value to its shareholders.

In the same light, we did repurchase 700,000 EQT shares in the second quarter, taking advantage of the previously approved share repurchase authorization.

Buying back EQT shares ahead of the split will benefit the shareholders of both companies.

In June, we completed the sale of our Permian basin assets for $64 million in cash, which also relieved EQT of approximately $40 million of liabilities associated with the assets.

Earlier this month, we completed the sale of our noncore Huron assets for $575 million in cash and relieved EQT of approximately $200 million of assumed liabilities.

Now focusing on the Midstream side.

As you may have read in EQM and EQGP's second quarter press release, the MVP JV announced a modification to its construction schedule, and now anticipates a first quarter 2019 in-service date.

More information on MVP can be found on EQM and EQGP's press release issued earlier this morning.

Now onto results for the quarter.

EQT announced second quarter adjusted earnings per diluted share of $0.44 compared to $0.07 in the second quarter of last year.

Adjusted operating cash flow attributable to EQT was $526 million for the second quarter, a $296 million increase year-over-year.

SEC rules prevent us from adding expenses related to the separation back to adjusted operating cash flow.

As a reminder, the results of EQGP, EQM, RMP and Strike Force Midstream are consolidated in EQGP's results.

Net income attributable to noncontrolling interest was $118.5 million for the quarter compared to $81.5 million in the second quarter of last year.

Now moving onto the segment results.

Starting with EQT production.

Second quarter sales volumes were 363 Bcfe and fell within the stated guidance range of 360 to 370 Bcfe.

Volumes were 83% higher than the second quarter of 2017, primarily as a result of the Rice acquisition.

Average differentials of negative $0.43 for the quarter came in 33% better than the negative $0.64 in the second quarter of 2017.

Differential improvements were offset by lower NYMEX price of $2.80 compared to $3.18 last year.

The average realized price, including cash-settled derivatives, was $2.81 per Mcfe, a 2% decrease compared to the second quarter of last year.

Operating revenues totaled $951 million for the second quarter of 2018, $320 million higher than the second quarter of 2017 due to increased production associated with the acquisition.

Approximately $13 million of EQT production's operating revenue is considered pipeline and net marketing services revenue.

We recast the segment to reflect the midstream asset drop, which resulted in third party gathering revenue generated from the dropped assets being moved from the EQT Production segment to EQM Gathering segment.

Thus, the $13 million in EQT production's result cannot be directly compared to our stated guidance in April of $15 million to $20 million.

Adjusting for the recast, the pipeline and net marketing services revenue would have been $24 million.

Total operating expenses, excluding $118 million of asset impairments, were $912 million or 58% higher year-over-year and cash operating cost per Mcfe were 20% lower than last year.

Now moving onto the midstream results.

As mentioned, EQM's results have been recast to include the pre-acquisition results of the midstream assets acquired by EQM from EQT.

EQM Gathering operating income for the second quarter was $122 million, $38 million higher than the second quarter of 2017.

Operating revenues were $68 million higher than the second quarter of 2017, primarily due to the acquired Ohio gathering assets.

Operating expenses for EQM Gathering were $59 million, $30 million higher than the second quarter of 2017.

Again, this variance was primarily from the acquired assets.

EQM's transmission operating income for the second quarter was $61 million, $3 million higher than the second quarter of 2017.

Operating revenues were $4 million higher than the second quarter of 2017.

Expenses for EQM transmission were $29 million, which is $2 million higher than the second quarter of 2017.

Now moving to RMP Gathering and RMP Water.

RMP Gathering reported an operating income of $40 million while RMP Water reported an operating income of $24 million.

Now onto our cash flow and liquidity position.

As of June 30, EQT had $200 million of borrowings and no letters of credit outstanding under the $2.5 billion credit facility.

EQT's current cash balance, excluding EQM and EQGP is approximately $200 million and there is full availability on our $2.5 billion revolver.

We currently forecast between $2.7 billion and $2.8 billion of adjusted operating cash flow for 2018 at EQT, which includes approximately $350 million to $400 million from EQT's interest in EQM, EQGP and RMP.

Please note that the adjusted operating cash flow guidance for the year has been adjusted for the Huron asset sale and does not include taxes or costs related to the separation.

With our forecasted adjusted operating cash flow and cash on hand, we expect to fully fund our forecasted 2018 capital expenditure plan of $2.4 billion.

Lastly, I want to thank our employees and advisors for their hard work and dedication, and our shareholders for their continued support.

With that, I will turn the call over to David to make some comments on operations.

Thanks, Rob, and good morning, everyone.

Let me start by providing an update on 2018 sales volume.

As Rob mentioned, Q2 volume was within guidance at 363 Bcfe and represents a slight increase over Q1 volume of 357 Bcfe.

We still expect sequential quarterly growth for the remainder of the year and are guiding Q3 at 370 to 380 Bcfe, an 8% quarter-over-quarter growth increase adjusting for the Huron.

Huron adjusted full year guidance is now 1,490 to 1,510 Bcfe and is consistent with prior guidance.

Moving on to operations.

We continue to realize capital synergies from the Rice acquisition as we develop our large contiguous acreage position.

In our Southwestern Pennsylvania Corp, our 2018 drilling program is now expected to deliver an average lateral length of 14,200 feet, which is 55% higher than our 2017 Southwestern Pennsylvania average prior to the Rice acquisition.

In addition, our land group's efforts have also allowed us to lengthen approximately 70 prior-year DUCs by an average of 3,000 feet each.

As a reminder, we typically use top hole rigs to drill a vertical section and curve of a well and then bring in a more expensive horizontal rig to drill the lateral.

The timing gaps created by swapping out the rigs was at typically 4 to 6 months, creates an additional opportunity for land to extend laterals, even after we spud a well.

This was of particular importance following the Rice acquisition as we have the opportunity to significantly lengthen many wells, even though those wells had already been spud by EQT or Rice.

As a result of these efforts and in conjunction with our 2018 drilling program realizing longer than planned lateral lengths, we will reach our targets for feet-of-pay completed and feet-of-pay drilled, 2 important productivity targets, while spudding 34 hero wells than we planned in 2018.

On an activity level, the second quarter was the highest in EQT history, with the company operating as many as 15 rigs and 12 frac crews.

This resulted in nearly 680,000 feet-of-pay being fracked, which is 55% higher than our previous record.

On the drilling side, we have already drilled as much footage in the first half of 2018 as we did in the full year 2017.

This activity was completed while making significant efficiency gains with fracked footage per day and drilled footage per day up 20% and 25%, respectively, over 2017 numbers.

These results illustrate the benefits of EQT's manufacturing model and specifically, our real time operating centers.

Finally, the increased activity in Q2 will result in higher sales volumes in Q3 and Q4 with us turning in line approximately 50% more feet-of-pay in the second half of 2018 as we did in the first half.

We expect Q2 to be the high point for CapEx this year and reiterate our full year guidance of $2.2 billion for well development.

In the second half of '18, we will return to a more moderate activity level, ramping down to 6 to 7 frac crews, running at the end of the year and 13 to 14 rigs.

I will now turn the call over to Pat.

Thank you, David.

This concludes the comments portion of the call.

Doug, will you please open the call for questions?

(Operator Instructions) Our first question comes from the line of Brian Singer with Goldman Sachs.

You talked a lot about the buyback here and it seems like there are 3 avenues you have to fund the buyback: Asset sales, which you've done with the Huron sale here; the midstream SpinCo proceeds, which you're highlighting might be an option to use for share repurchase; and the third level might be activity levels and growth.

Can you talk about the key constraints that you're looking for, particularly on the latter 2, i.e.

what your target balance sheet would be as you think about how much proceeds could be used from the midstream SpinCo towards share repurchase?

And then also whether you would consider slowing your growth rate and using the excess free cash flow for share repurchase?

Yes.

So there's several things in that question, Brian.

So let me start to deal with them one at a time.

Yes, as we think about the appropriate growth rate for the company, we certainly see the need to balance generating free cash with a moderate growth rate.

We are currently working through that with the board and we'll get -- we'll have a better guidance for your later in the year on what we think the forward growth rate will be, but we certainly do think there has to be a balance between returning cash to shareholders with growth.

In terms of the share repurchase, we have a $500 million authorization from our board, and once we have used that up, depending on what the balance sheet looks like and what the environment is like, we can certainly consider going back to the board for further authorization.

In previous calls and in commentary, we have said that we want to see our leverage levels at less than 2x debt-to-EBITDA and preferably, more like 1.5x debt-to-EBITDA.

And so that's the target range that we still believe is right for EQT going forward.

And then my follow up is, maybe a little bit of the reverse, which has to do with the better environment here for natural gas prices locally, and as well, the storage situation nationally.

Given the deficit we have in storage and some improvement that we've seen in local Appalachia prices, combined with some of the efficiency gains you've highlighted, how do think about potentially increasing activity or what would you need to see to increase activity?

Yes, I think -- clearly, Brian, in a higher gas price environment, higher realizations, the math on returns will tell us that we're better off to increase growth rates and production, and -- but we haven't seen a significant move in realized prices.

While there have been some modest improvements locally in bases, that's been partially offset by lower NYMEX pricing.

So I would say that, that dynamic isn't pushing us to increase production at this point.

Our next question comes from the line of Scott Hanold with RBC Capital Markets.

On retaining those SpinCo shares, can you give us some sense of -- what is your plan to, like -- how do you look to monetize that?

Is it something we should expect pretty quickly?

Is it -- can it be systematic, opportunistic?

And with that, what was really the driving force behind making that decision to, to retain that, those SpinCo shares, was it specifically to have the access to extra liquidity or was it sort -- was it for more during the spin process, to make it a little, I guess, cleaner for investors that would have been spun a little bit more shares?

Yes, I mean, the real driver right here was this was an avenue for us to right size the EQT balance sheet and get to the liquidity levels that we want, and be able to fund the share buyback prior to the spin, because we were retaining that value and it gives us confidence that we have, we would have the available capital to fund the buyback, without putting undue leverage at the SpinCo level, right?

So we want -- our goal all along was that we would have 2 independent companies with strong, healthy balance sheets and this was the most elegant way to accomplish that goal as well as fund the share buyback.

Good.

Then -- and how do you want to execute that?

The share buyback?

No, no, no.

The sale of the retained shares.

Oh, yes.

Sorry.

So we're required by the IRS in the spin, that we would have to dispose of those shares within 5 years.

My expectation is though, that we will do it significantly quicker than that, and it is not something that likely happens right out of the gate, so I think that there will be some churn in the SpinCo shares as they trade to more natural shareholders.

So within the first couple of years, I would expect that we would exit that position.

But the requirement is just that we do it within the first 5 years.

Got it.

And into follow-up, so it's a question Brian had there, just on looking at growth rates versus capital returns this year -- or share -- returns to shareholder.

You had previously -- obviously, when you'd gone down this path with the separation, talked about 15% kind of growth rates, and now, there's a little bit more moderation.

Can you give a little background again?

What's really driven, sort of that thought process change?

And how meaningful the change in that growth rate are you, guys, evaluating?

Well, I think that the driver, really, is feedback from the market.

It appears to us that there's not really an appetite by shareholders and capital markets in general, to fund growth outside of cash flow.

So we think that getting to a position where our growth is within -- we can fund it within cash flow and then also return some cash to shareholders is the right way to go.

I think that we've been, as an industry and as a company, we've been moving in that direction for at least the last year.

And -- so in terms of what the particular growth rates are going to be, I would say it's less than what it has been historically.

I don't think that 15% plus growth rates are the right thing to do for the company and for shareholders.

As we work through the budgeting process with our board this fall, we'll give you more concrete guidance on what that growth rate looks like.

But it's -- it's also going to be dependent on what the commodity price environment is as well, where I think in a higher commodity price environment, we'll be biased towards a bit higher growth and in lower commodity price environments, I suspect it's going to be lower.

Yes, and so -- and this is something you guys are looking to initiate pretty quickly, this potential shift.

Is that, right?

So it's going to ---- would it have an impact in '19?

Or is '19 pretty much locked and loaded with the drilling activity in '18?

It could have a modest impact on 2019, but as you point out, the drilling activities that we have undertaken in '18 largely sets the '19 growth profile.

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

Yes, Rob.

I was wondering if you can kind of walk us through the steps in terms of the separation you mentioned, that the Form 10 would be filed in mid-August, but walk us through, kind of the timing and what kind of happens from here?

And at what time would you be prepared to provide kind of stand-alone, kind of guidance for EQT production?

Yes.

So from here, we've essentially completed all of the cleanup transactions that we announced in April and the related financing transactions.

So I would like to say that I'm extremely happy with the progress that we've made and the hard work that our teams have done.

I'm really impressed with what we've gotten done.

So what's left now is to file the Form 10, which we expect to do by mid-August.

And then with that, starts the process with the SEC, which the timing then is a bit out of our control.

It depends on how many rounds of questions the SEC has, and then we're also waiting on the PLR from the IRS.

And we think that, that likely pushes us into the fourth quarter now, between those 2 gating items.

And I suspect that as we get closer to -- as we get closer to separation, we will likely want to get out and meet with investors and at that point, I think you'll get stand-alone guidance from both EQT and SpinCo.

So I don't know what the dates of that will be, but I think in the month leading up to the spin being finalized, you would expect to hear from us with more concrete guidance for both SpinCo and EQT.

Okay.

And just my follow-up, slight delay here in MVP.

I was just wondering, Rob, if you can walk through some of the implications to EQT production?

And obviously, that will delay the timing of where you'll incur kind of a transportation cost.

But just maybe walk through -- maybe the impact to EQT from the delay?

Yes, there's really not much of an impact for EQT.

It will delay the time at which we can sell volumes at essentially 165.

So it just means we'll have more volumes being sold at M2 prior to that, but the financial impact is fairly limited to EQT.

Our next question comes from the line of Welles Fitzpatrick with SunTrust.

To start on the -- the MVP comment from the last caller, there was -- it seemed like there was a little bit of a bump up on the top end of the guidance range, as far as CapEx is concerned.

Is that just conservatism because of the modest delays?

Is that all we should read into that?

Yes, just -- with delays and inefficiencies, costs go up.

So for instance, with the stay that the fourth Circuit Court put in place, this caused us to have to jump around a bit and to hop over water crossings and so it's just become less efficient, and that does drive cost up a bit.

Okay.

That makes sense.

And then just one follow-up.

Obviously, you guys have talked about slowing the growth rate a little bit, so have your compatriots in the basin and Halliburton.

Have you guys seen any of that effect flowing through, to well cost?

Do you think that, that could provide some downward pressure on completion costs as we move through the year?

Yes.

This is David, I'll tackle that one.

I would say yes, we have.

Certainly, the pricing environment is different than it was in the first half of '18, especially on the pressure pumping side, which I think we've seen the most movement.

So I don't have an exact number for you, but it's definitely downward pressure on pricing.

Our next question comes from the line of Sameer Panjwani with Tudor, Pickering, Holt & Co.

Sticking with the service theme, I -- obviously, you guys are saying that you're seeing downward pressure on cost, but I did notice that your updated development cost came down a couple of percent.

So I'm wondering if there's anything beside the cost that there is to provide an update on it, in terms of capital efficiency improvements?

Yes, I think the driver of that was lengthening of the laterals that we talked about in my script.

So that's lowering that, I think, by $0.01, I believe it was the development cost.

Okay, and then any changes to your estimated maintenance CapEx?

I think it was $1.2 billion that you provided previously in light of the service cost gains.

And then, also in light of the Huron sale?

No.

It's essentially unchanged.

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

Rob, I guess this one's for you on the leverage target and then it's related to the proceeds from the SpinCo shares as you monetize those down the road.

Is there some thought in your mind to target that leverage, previous leverage.

So I think you had mentioned 1.5x or to push that lower, and how you're thinking about using the proceeds between share buybacks or return of cash to shareholders and debt reduction.

Well, I mean, I think that the $500 million share repurchase that we have authorized, that's all that we have authorized at this point, and the majority of the rest of the value will likely go for, go toward debt reduction.

And we do think that getting down to that 1.5x debt-to-EBITDA is the right place for EQT to be.

It puts us in a strong liquidity position.

And we don't feel the need to get -- to move it a lot lower than that, but if it were a little lower, that's fine, too.

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

Maybe the first for David.

Just kind of thinking about the TIL schedule for 3Q and 4Q.

Obviously, a big jump up in 3Q, but then you got 4Q down, which actually looks a lot lower than 4Q '17.

So is this just timing?

Or should we think about a different pace as we move into '19, just on this TIL schedule?

Yes, I think you should think about in terms of -- it is just timing.

I mean, that has such an impact, and we are really active fracking in the second quarter, so that's going to probably leave most of those TILs happening in the third quarter, and that's really all you should read into it.

Okay.

And then maybe -- I guess, also for David, on just the NGLs, the C3 plus production.

It looks like it's come in a bit.

The guidance also, a little lighter.

Is there something we should think about on the NGL side?

And maybe adding to that, ethane.

Pricing moving up here a bit on the ethane side.

Is there more you can do, in terms of pulling out more ethane out of the stream?

Well, on the first part of your question, I think, what you're talking about is C3 plus is due to the Huron, the impact of the Huron being gone.

Maybe Blue will answer the second part of that.

Yes, so in terms of incremental ethane, so we do have some flexibility at the plants in which we process our gas, to pull out some incremental ethane.

As you would expect, we do that, we've got term contract in the portfolio and then we, obviously, look to optimize the spot opportunities and we will continue to do that.

So some flexibility around that, Holly.

Okay, great.

And then maybe one last one for me, just maybe a little housekeeping.

LOE seemed to come in a good bit during the second quarter.

Anything to highlight there?

What -- I mean -- come in lower than you expected?

Is that what you're saying?

Yes.

Nothing to say other than the first quarter, maybe was a little on the high side because of weather and in the second quarter, it didn't have those kind of impacts.

Our next question comes from the line of Jane Trotsenko with Stifel.

My first question, what are the key milestones that we need to watch in regards to Mountain Valley Pipeline?

Yes, sure.

This is Jerry Ashcroft.

A good question.

I mean, the key milestones for us is, continues to be both weather and us waiting on the Fourth Circuit.

We believe in the merits of the motion by the court and are pretty hopeful that, that stay will be lifted soon.

I see, I see.

And then on oil field service side, do you know what exactly is causing the softening in the oil field service environment?

Is it like other public companies decelerating, or is it like privates, mostly?

I'd say just broadly, it's just a deceleration of activity by us and some of our peers, where we're just -- we've laid down a few frac crews, a few rigs and it doesn't take much slack in that market for it to really impact pricing.

So I think it's just a general slowing, and then there's a bit of excess capacity, particularly on the pressure pumping side.

So do you think is it short term or is it something like a trend that's pointing to the overall deceleration in the sub-basin?

Well, I go back to some earlier comments, where I think that there's not much appetite to companies to grow outside of cash flow, and so if you think that the industry, as a whole, is moving towards a model where growth is constrained by cash flow, then I think that, that does put some downward pressure on growth rate, which then presumably creates some excess capacity in terms of services and might continue to put pressure on pricing.

Okay.

Do you guys think that it'll help you to use the well cost sometime in future, or at least review the well cost assumptions?

Certainly, if we see a meaningful move down in service cost, then that does impact our well cost and we would update you on that as that progresses.

There are no further questions in the queue.

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

Thank you, David.

This includes the comments -- this concludes today's call.

Thank you all for participating.

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

Thank you for your participation.

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