EQT Corp (EQT) 2021 Q1 法說會逐字稿

Ladies and gentlemen, hello, and welcome to the EQT First Quarter 2021 Results and Transformative Transaction with Alta Resources Call. My name is Maxine, and I'll be coordinating the call today. (Operator Instructions) I will now hand you over to your host, Andrew Breese, Director, Investor Relations, to begin. Andrew, please go ahead when you're ready.

Good morning, and thank you for joining today's call. With me today are Toby Rice, President and Chief Executive Officer; and David Khani, Chief Financial Officer. A replay for today's call will be available on our website for a 7-day period beginning this evening. In a moment, Toby and David will present the prepared remarks, and then we'll open up the line for the question-and-answer session. On our website, we posted an updated investor presentation, along with a separate presentation further detailing the transaction we announced this morning. We'll refer to certain slides from both presentations during today's call.

I'd like to remind you that today's call may also contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of the factors described in our first quarter 2021 earnings release, our investor presentation, transaction press release and presentation released this morning in the Risk Factors section of our 2020 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 our first quarter 2021 earnings release and our most recent investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.

And with that, I'll turn the call over to Toby.

Thanks, Andrew, and good morning, everyone. Today marks another major milestone for EQT as this morning, we announced the acquisition of Alta Resources' premium Northeast Pennsylvania Marcellus assets. But before I get into the transformational elements of the transaction, I wanted to provide a road map for today's call. First, we will start by reviewing the key highlights and why we are so excited about this transaction. Then I will pass the call to Dave to go over our first quarter results, positive guidance revisions and provide color on the other business and strategic matters. And then we'll finish up with some closing remarks and take your questions.

As announced last night, EQT's base business continued to deliver value to shareholders. During the quarter, we operated our Pennsylvania Marcellus at $635 per foot, delivered free cash flow of nearly $260 million, announced a decrease to our full year capital expenditure guidance of $75 million, and we are increasing our 2021 free cash flow guidance by 14%, now planning to generate $575 million to $675 million in free cash flow during 2021. The Alta transaction will only improve this.

Now jumping right into the deal. A reminder, our mission is to realize the full potential of EQT and become the operator of choice for all stakeholders. We have implemented our digitally enabled modern operating model, which allows us to maximize value creation from our existing assets and also unlock the ability to seamlessly scale our platform and accelerate value capture through consolidation. We have been vocal throughout our transformational journey over the past 18 months about our outlook on consolidation, and today's announcement is another step in our pursuit of maximizing value creation for all stakeholders.

The financial accretion to our shareholders, immediate strengthening of our credit profile and the strategic rationale for the Alta transaction are very compelling. This acquisition accelerates all of our financial and strategic objectives by adding high-margin core Northeastern Marcellus assets to the portfolio, which are highlighted on Slide 2 of the Alta acquisition presentation we posted earlier this morning. This asset offers a substantial PDP base of 1 Bcf per day of high-margin net production, generating a robust annual free cash flow profile of $300 million to $400 million at strip.

We captured the asset at a highly attractive valuation and 18% leverage free cash flow yield will drive 15% accretion to free cash flow per share, all while resetting our leverage profile at a level meaningfully below our 2x target with year-end 2020 leverage projected to be 1.7x net debt to EBITDA. Importantly, this deal accelerates both our time line to reach investment-grade metrics and our time line to deliver our shareholder return initiatives, which we will formally communicate in the coming months.

Lastly, the embedded low-cost structure on these assets driven by prolific well productivity and integrated midstream ownership structure and impact of favorable mineral ownership are projected to decrease EQT's pro forma free cash flow breakeven price by approximately $0.10 and reduce our maintenance capital intensity by 10%.

Slide 3 shows a great visual and put things into perspective just how impactful this acquisition will be on our corporate free cash flow breakevens and nominal free cash flow generation. On a pro forma basis, we expect to generate approximately $1 billion in free cash flow in 2022, with cumulative free cash flow of $5.5 billion through 2026, while our corporate breakevens approach $2 by 2026. When adding this core Northeast asset to our existing Southwest assets, the pro forma company is clearly positioned as the premier Appalachia operator of choice.

To further highlight how this asset strengthens EQT's position, let's turn to Slide 4 to look at some preliminary full year 2022 pro forma impacts. At closing, we expect EQT's pro forma net production to be approximately 5.6 Bcfe per day, adding the benefits of scale to our business. The Alta assets carry a basin-leading total operating cost structure of $0.45 per Mcfe and will reduce EQT's total operating cost structure by $0.20 to a level of approximately $1.25 per Mcfe, which drives pro forma adjusted EBITDA of approximately $2.5 billion. Maintenance capital intensity will improve by 10%, with the pro forma entity only requiring reinvestment of approximately 55% of our operating cash flow to run a highly efficient maintenance program. And lastly, the pro forma company is projected to deliver $1 billion of free cash flow in 2022. These metrics are compelling and exhibit the accretive nature of this transaction to our stakeholders.

It's also good to mention that we underwrote this transaction using very conservative assumptions, providing meaningful upside potential as these assets are fully integrated into our modern operating model. Operationally, we risked the PDP volumes, type curve and inventory, only ascribing value to roughly 30% of the total potential lateral footage. All child wells were removed from the future development plans, and we did not attribute any value to Upper Marcellus locations.

Financially, we expect this transaction to accelerate our return to investment-grade ratings, which will result in significant interest savings, improved cost of capital and better access to capital. And on the ESG front, we believe that integrating these assets into our ESG platform will unlock incremental value as end-user demand grows for responsibly produced low-emission natural gas.

Turning to Slide 5, I'll now briefly review the key components of the transaction and asset highlights. The total purchase price for these assets is $2.925 billion, consisting of $1 billion in cash and $1.925 billion in EQT common stock. We expect to fund the cash components of the transaction for one or more opportunistic debt capital market transactions. But in the interim, we have obtained $1 billion in committed financing. We also have access to over $1.4 billion in liquidity on our unsecured revolver. Stock consideration includes 105.3 million shares, representing approximately $1.925 billion in value based on the 30-day VWAP as of market close on May 4.

The effective date of the transaction is January 1, 2021, and all posteffective date purchase price adjustments and other closing adjustments will be netted against the equity component of the consideration, resulting in a reduced number of shares issued at closing. Our current estimate is that the total stock consideration will be reduced by approximately 11 million shares at closing. The transaction has been unanimously approved by our Board of Directors and is subject to an approval by our shareholders as well as customary closing conditions. We expect to close the transaction during the third quarter, at which time, EQT shares will be issued to Alta's diversified ownership group. No single Alta shareholder will receive more than 5% of EQT's pro forma outstanding stock at closing.

The Alta assets combines core rock, low royalty burden, beneficial mineral ownership and an integrated gathering system to provide superior returns and free cash flow generation. Upstream assets include approximately 1 Bcf per day of net production with roughly 50% in the majority of the nonoperated production being operated by Chesapeake; a solid hedge book covers approximately 35% of expected production through 2022 and will be novated to EQT at closing. Additionally, the asset comes with an in-the-money firm transportation book currently valued at $235 million, providing access to premium Northeast markets. In terms of acreage, this asset is comprised of 300,000 net Marcellus acres with over 97% held by production and a carry -- a very attractive 14% average royalty burden.

As further highlighted on Slide 7, the Alta assets provide exposure to most of the remaining Lower Marcellus inventory in the Northeast Marcellus core. The nonoperated assets operated by Chesapeake are squarely in the most productive rock in the region, while the integrated business model of the operated assets deliver superior returns. Midstream assets include an integrated 300-mile owned and operated midstream system with interstate pipeline connectivity, driving basin-leading total operating costs and providing operational flexibility. Also included is a -- 100 miles of an integrated freshwater pipeline, including 14 water storage impoundments with over 255 million gallons of storage capacity to support optimal asset development. Additional details on this attractive consolidation opportunity can be found on Slides 6 through 10.

We are poised to execute on this transaction and apply our operational successes in the Northeast core. On Slide 11, we lay out our high-level execution plan. We plan to execute a one-rig maintenance program on the operated Alta assets along with our non-op participation, which in total will require approximately 225,000 horizontal feet of development per year and can be seamlessly integrated into our master operations schedule. Like we do in the Southwestern part of the play, we will deploy our differentiated combo development strategy and apply our leading-edge drilling and completion techniques. We believe approximately 80% of future operations are set for combo development.

On the nonoperated assets, the collaborative governance structure will allow us to work alongside our non-op partners to apply best practices. In addition to the substantial due diligence performed on the asset and our intended retention of Alta's key personnel, EQT's current Head of Drilling and Head of Production have historical operating experience with these assets, which all provide incremental asset intelligence and execution confidence.

Having just completed the full integration of the acquired Chevron assets, we are primed to apply that proven framework on the Alta assets, which we described further on Slide 12. Our integration playbook contains more than 800 clearly defined tasks that provide a comprehensive and transparent road map for all operational system and administrative integration initiatives. We expect the deal to close during the third quarter and to have full operational system assimilation and streamlining completed by the end of the year.

To wrap things up, on Slide 15, we reiterate the compelling attributes of this transformative transaction. Our approach to conservatively underwrite the deal provides significant upside to this attractive valuation for core assets. The optimized financing structure and robust free cash flow profile are expected to accelerate deleveraging and shareholder return initiatives, and the integrated midstream ownership provides superior economics and accretive inventory. We're excited about the trajectory of our business and incremental benefits the Alta assets will have on our portfolio, and we look forward to discussing this transaction in more detail during the question-and-answer session.

I'll now turn the call over to Dave.

Thanks, Toby, and good morning. I'd like to briefly touch on our first quarter results before moving into some strategic topics. Sales volumes for the first quarter were 415 Bcfe, in line with our guidance range. Our adjusted operating revenues in the quarter were $1.1 billion, and our total per-unit operating costs were $1.31 per Mcfe, which is $0.04 below the midpoint of our annual guidance range. Our first quarter '21 capital expenditures came in at $238 million or well below the bottom end of our $280 million to $305 million guidance. Approximately half of the improvement was driven by the operational efficiencies as we hit $635 per foot, about $40 per foot below our forecast. Our adjusted operating cash flow was $495 million, resulting in positive free cash flow of $259 million.

I'd now like to discuss some favorable adjustments to our 2021 guidance but want to make clear that these projections do not include any of the accretive financial impacts expected from the pending Alta transaction. We expect to provide updated guidance postclosing in the third quarter. As a result of the first quarter 2021 capital expenditure outperformance, in addition to other favorable operational impacts expected to be realized through the remainder of the year, we have reduced our full year '21 capital expenditure guidance by $75 million. We now expect total 2021 capital expenditures of $1.025 billion to $1.125 billion. In addition, we have increased our full year 2021 free cash flow guidance by $75 million to $575 million to $675 million. We are keeping our 6-year cumulative free cash flow estimate of $3.5 billion with an upward bias. Add on Alta and this number increases by approximately $2 billion. We expect to improve upon this with time.

Additionally, on April 1, we exercised a preferential purchase right to acquire the Marcellus assets from Reliance Marcellus, LLC for approximately $69 million, which was triggered by Reliance's sale to Northern Oil and Gas. This adds approximately 15 Bcfe to our full year 2021 production, which now tilts slightly north of our midpoint, within our guidance range of 1,620 to 1,700 Bcfe.

Now moving on to some thoughts on macro and regional gas fundamentals. We've provided a couple of new slides in our earnings deck. First, Slide 14 shows the net impact from storm Uri and why we saw the decline in natural gas prices that followed, and second, Slide 16, that shows the differential emissions intensity by basin. For storm Uri, Texas experienced an extreme cold weather event in February that disabled a significant portion of the state's energy infrastructure. While this may have seen the net positive for natural gas, the impact was actually a net negative by at least 20 Bcfe due to the 4 Bcf per day of lost petrochemical and other industrial demand that extended into April. We also lost natural gas demand from warmer-than-normal weather in March and, as a result of both of these events, was the main culprit to declining natural gas prices.

Now as both industrial demand and weather have recovered as well as strong exports, we can see why we are experiencing a sharp upward improvement in natural gas prices to the $3-per-Mcfe level. We took advantage of these moves to reposition some hedges. In addition, we expect to see material gas-fired power market gains this year from over 5 gigawatts of coal retirements in 2021 alone, shortages of coal supply domestically heading for stronger export markets and beginning to see meaningful nuclear retirements happening. As a result, we believe the forward curve is undervalued.

Last, Slide 16 displays emissions by basin. This slide highlights Appalachia's low emission profile, of which EQT sits near the low end due to our installed technology and electric equipment utilization. We provide a simple construct to compare the cost on an Mcfe basis between basins using a generic $30-per-ton equivalent carbon price. As you can see, the cost of Appalachia is very low at 1/4 of the Permian Basin. Over time, this will get factored into everyone's cost structure (inaudible) and why we get excited about our responsibly sourced gas. Over time, we believe this will add value to our purchase of Alta.

In April, we extended our $2.5 billion unsecured revolving credit facility by 1 year to July 31, 2023. The main commercial terms of the credit agreement remain essentially unchanged, which demonstrates the bank's strong comfort in our financial positioning and glide path back to an investment-grade rating as well as our strong ESG profile. In an environment where E&P access to capital is shrinking and is expected to continue to shrink as much as 25% over the next 2 to 3 years, our ability to execute this extension on these terms substantiates our differentiated access to capital. This is made possible by our continued business execution, focus on ESG and accretive strategic actions.

Shifting gears, our efforts to sell down our MVP capacity and rationalize our firm transportation portfolio continues to be productive. Discussions with counterparties are progressing nicely to offload incremental MVP capacity during 2021. In addition, our sophisticated commercial team is relentlessly scanning the regional landscape to identify opportunities that capitalize on our existing FT portfolio and adding diversity to our delivery points and enhance realizations. We believe margin-enhancing opportunities exist within our existing portfolio and only expand with the Alta portfolio.

Now during the first quarter, NGL prices rose sharply mainly due to an increase in U.S. exports. We took advantage of the sharp rise in NGL pricing to lock in significant number of hedges to our portfolio. We're now approximately 62% hedged for the balance of 2021 and have increased the floor price of our overall liquids portfolio hedges by $0.26 per gallon. We also took advantage to reposition some of our 2021 hedges, removing some of the $2.75 ceilings as prices came down and added approximately 4% back as prices rose to $3-per-Mcf level for the balance of 2021. We also took advantage of adding 7% to calendar year 2022 as prices rally and now sit at 42%.

Last thing I want to hit on is the key transaction points to provide some good context for everyone. If you look at our existing asset base and what we have done to lower our capital intensity, we will need approximately 65% of our operating cash flows to sustain production over the next 3 years. When you look at the Alta asset, it will only need 35% over the same period, which lowers our overall pro forma capital intensity to about 55%. Based on the backwardated price curve, which we believe is undervalued, we anticipate the pro forma asset base will generate enough cash flow to extinguish all of our debt by mid-2027. This asset base is very differential and truly beneficial for both debt and equity investors. As we achieve investment-grade metrics, we will look to provide insight into our fourth quarter release on how we plan on using free cash flow to effectuate shareholder-friendly actions.

I now turn it over back to Toby for closing.

Thanks, Dave. I'll wrap things up today with some brief ESG-related comments. I will keep the comments light as we intend to discuss our broader ESG initiatives in greater detail alongside the publication of our 2020 ESG report in the coming months. In the first quarter, I was honored to join the Bipartisan Policy Center's American Energy Innovation Council. I look forward to working with the BPC and other members of the council to advocate for the role of natural gas to achieve a clean energy economy through the reduction of greenhouse gas emissions.

On the same topic, during the quarter, we announced a partnership with Equitable Origin and MiQ to obtain certification on approximately 4 Bcf a day of gas produced from over 200 of our well pads. This certification project is in addition to the certification project we announced in January with Project Canary, further building upon our growing portfolio of certified gas. We've received multiple inquiries from customers and end users since making these announcements, which demonstrate that there is growing demand for certified gas, and we believe Appalachia is best-positioned to capitalize on this differentiated product.

Lastly, as the country's largest producer of natural gas and one of the lowest-emissions intensive operators, we are in support of sound policies around regulation of methane that support natural gas' role in a low-carbon future. Our public support of reinstating the federal methane rule drives home our dedication to developing natural gas to the highest environmental standards, and we are in alignment with the actions taken by the U.S. Senate last week to reverse the rollback of these methane regulations.

In closing, we are a values-driven organization that continues to perform for our stakeholders. Our modern operating model is solidifying our position as the operator of choice and a clear ESG leader. Over the last 18 months, this team has transformed EQT, establishing a clear path to realizing the full potential of our premier assets, which is a test case for the value we plan to realize from the Alta assets as we integrate them into our portfolio. We appreciate your continued support.

And with that, I would like to turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from Josh Silverstein from Wolfe Research.

Just wanted to highlight on -- into the transaction. The transaction feels like you guys are buying a lot of free cash flow here, but just wanted to know how you guys are able to extract any more synergies here from running a 1-rig program. And are you planning on deploying more capital to the Northeast asset to be able to get more out of this? So any thoughts on that would be helpful.

Yes, Josh, I think our core development philosophy is developing our highest-rate-of-return projects first. So I mean there could be a shift in more activity to some of these really compelling returns that we're getting with the Alta asset. But that's a synergy that would be -- that we didn't account for, and that would be upside to the story.

And then in addition to that, from an operational perspective, I think you've seen the track record of what this crew has done by continually driving costs down and increase production uptime. I do anticipate that to continue on this asset but again, that would be considered upside to our plan.

Got it. And then Toby, you mentioned in here that this is establishing a foothold in Northeast PA and you continue to want to be the operator of choice. Does that mean there's more consolidation opportunities up here? And then maybe just a follow on to that, like why Northeast PA versus the Haynesville or another gas basin that might diversify you away from some of the potential midstream bottlenecks?

Yes. From a consolidation perspective, I don't think anything really changes here. I mean we sort of take everything on a deal-by-deal basis. Certainly, the focus is going to be realizing the full value from the Alta assets, and that's going to be our focus. We've also said we've been pretty -- we felt the stand-alone story for EQT was compelling. That's even more true now with -- the pro forma organization is something we're really excited about.

When we think about where consolidation happens, I think you just look at the risk nature of it. Basis risk is something that is not a new risk. We have controls in place to manage basis. Getting more exposure within basin is something that we're going to be able to manage. And I think it's -- we look at the asset, and this Alta asset is really unique. It's derisked, there's thousands of wells drilled in the area, it's high-margin with the midstream asset and the mineral structure. So low-risk, high-margin business, spinning out a ton of free cash flows, driving really strong accretion on free cash flow per share and allowing us to deleverage the business. I think it's really compelling. And that's what will attract us, is the most attractive opportunities for our stakeholders.

Our next question comes from John Abbott from Bank of America.

Toby, just to the extent -- Toby, to the extent that you can, can you just provide a little bit more background on the history of the deal? Was there initially a direct negotiation? I mean how did it come about, to the extent that you can discuss?

Yes. This was a process. I'd say it probably started with the Chevron acquisition. I think that was sort of a signal to people that consolidation was an opportunity to create value. And so people saw that consolidation was happening. And so there's some that was a process that was probably started about 6 months ago that we've been engaged with.

Yes. I think this is a -- this was a marketed process played by a bank with others involved. And so this is a, I'll call it, a marketed transaction.

I appreciate that. And then the second question is just on inventory with Alta Resources. You've risked it 30%. You've given us the impact of free cash flow through 2026. How long do you think you can maintain production up there in Alta's assets, post-2026 and (inaudible) free cash flow? Are we sort of looking at a 10-year inventory, 15-year inventory? What are we sort of looking at within that region?

Yes. We think we have enough inventory for more than 10 years. I think when you look at the amount of horizontal footage it takes for us to hold production flat, we put that out as around 225,000 feet. So you're looking at about 2.5 -- 2.2 million horizontal feet is what you need to keep this production flat for a period of 10 years. When you do the math, that would translate to around 55,000 acres. So the 300,000 acres here, we feel very confident in the inventory that this asset provides.

Our next question comes from Arun Jayaram from JPMorgan.

Toby, some of the initial buy-side questions is just the potential risk in EQT's basis risk, particularly given some of the delays in MVP. I was wondering if you could maybe give us a little bit more details on what the company is doing to mitigate that risk. How much of the Bcf is sold locally versus to other markets? And what are you using in your acquisition economics around basis differentials for this 1 Bcf relative to NYMEX?

Arun, this is Dave. I'll take that question. So first and foremost, they have approximately 400 million a day of the Bcf per day of, we'll call it, FT capacity that gives us about a $0.28 uplift over in-basin pricing. So that's -- is your starting point. We will also use our FT portfolio to optimize that a little bit higher. Second, this has about, we'll call it, 35% to 40% hedges in place. We will supplement that as well. And so I think we'll have taken that -- I'll take a lot of that basis risk out of the equation.

Fair enough. And what type of basis differentials did you use, Dave, in the economics just relative to NYMEX?

Yes. So just -- this has, I'll call it, about an (inaudible) in-basin -- the in-basin pricing is about $0.05 to $0.07 wider than our initial look without that FT piece that we have. So I'd just say, it provides a little bit wider than what we have.

Yes. And Arun, and just to put some color, we talked about the breakevens being around $0.10 lower than where we're at today. And the operating cost is $0.20. I mean the difference there is largely going to be due to the treatment in basis, right?

Right, right. Lower operating costs, I got it. Got it. And just my follow-up would be, obviously a decent non-op position with Chesapeake. Could you give us a sense of how much of the production is op versus non-op?

It's about 50-50 between operating, nonoperating. Yes.

Yes. And just the other thing to note, we actually market the gas. So we control the gas that comes out of that non-op position.

And the next question comes from Holly Stewart from Scotia Howard Weil.

Maybe a quick follow-up to Arun's question on just the portfolio mix. I see the changes and the pro forma on Slide 10. Does this assume, Dave, that MVP goes into service midyear? And maybe asked another way -- midyear '22? And maybe asked another way, is MVP in that new pro forma assumption?

We have MVP in on -- as 1/1/22. We didn't move it yet because the news literally just came out, and so we didn't kind of -- really didn't pivot it yet. So that will shift a little bit of the pro forma.

Okay. Okay. But MVP is in those assumptions. Okay. Maybe, Toby, just I see on the -- I don't even remember what slide it is now, maybe Slide 7, kind of the economics of each of the areas. But at a high level, how are you thinking about the operated versus the nonoperating positions? I mean there are some clear players in that Northeast PA region that the operated stuff makes sense for and then obviously, some clear players at the non-op positions. So just trying to think about your pro forma portfolio and how you're seeing those 2 different areas.

Sure. So on Slide 8, we put a map that highlights the geology there. So you've got the core Northeastern Pennsylvania dry gas. That's the area that's largely non-op with Chesapeake. And so what's really great about this asset is a lot of people really weren't aware this is -- this asset is like the type of rock that Cabot's drilling. I mean it is the same -- it is very similar geology. What's different, though, is the undeveloped potential. And when you look at the amount of development that's taken place in that core, you will see that on our nonoperated assets (inaudible) running room for development potential.

And so that will translate to being able to deliver the rate of returns that we put on Slide 7. And then when you compare those, I'd have -- so those returns are really driven by really great geology. But I think when you look at the operated assets from Alta, the returns are even better than what you're seeing in that Northeastern core, and that's because the impact of having integrated midstream assets and really favorable mineral ownership that lowers our royalty burdens, and that really drives the economics.

Okay. That's helpful. And maybe my final just on the midstream acquired. I mean you acquired some midstream through the Chevron deal, if I remember right now, again, with this transaction. So how are you thinking about that midstream business as part of the EQT portfolio going forward?

So we think that it's all about the margins and midstream is a strategic element to improving our margins. So we feel like it's an asset that we're going to keep and hold on to.

Yes. It's 100%-owned, Holly, where the Chevron piece is really only 30%-owned. So it's, I'll call it, a little different strategic nature and driver.

Our next question comes from Neal Dingmann from Truist Securities.

My first question really just noticeable on how maintenance capital was -- at the present. So could you guys speak to how the maintenance capital, how you would view it has improved year-to-date? And maybe what you see is out there with -- how this could help improve it.

Neal, would you mind repeating that question?

Yes, it was a little muffled, Neal.

Sorry, sorry. My question is on maintenance capital. You continue -- if you could just speak to sort of legacy, how that continues to improve. And then secondly, obviously by adding more scale with Alta, I assume that overall, the metrics will continue to improve on that. Could you speak on both sides of that maintenance capital?

Sure. So on the EQT assets, our maintenance CapEx is going to come down (inaudible) by continued operational improvement and just the natural shallowing of our PDP base decline. That just requires us to drill less wells over time to fill volumes to maintain production.

On the Alta asset, the biggest driver, why their maintenance CapEx levels are -- it's so efficient is just largely due to the fact that their margins are so high. And so you'll have -- you'll still have the improvement in the -- maintenance CapEx will improve over time in the Alta asset sort of on par with where we're at with EQT but it's just going to have a much more -- a much bigger effect to make us more capital efficient because of the midstream and high mineral interest.

Great. And then as follow-up, just again for you or Dave, just can you talk about how progress is working towards investment grade and how the Alta deal might influence this?

Yes. This is Dave. So (inaudible) the agencies a lot. I mean I would just say the only one right now that has put out something, Fitch has upgraded us, and we anticipate the other 2 agencies coming out at some point with comments. So stay tuned and this, we believe, is very accretive from a credit standpoint.

Agree. I would think they would have to.

Yes. And we didn't put that -- any potential upgrades or improvements in interest rates or -- into our forecast, so that will be all, I'll call it, upside.

Our next question comes from Scott Hanold from RBC Capital Markets.

Just curious on this acquisition. Obviously, you talked a little bit about the history, but at a high level, I would assume that there was a bit of competition for this bid. Clearly, you've got Chesapeake as an operator of probably some of the more core stuff. And certain -- and Cabot obviously is the next-door neighbor. When you look at the process of looking at this and making bids, I mean, you've got Chevron, you guys were the obvious buyer of that given your operating presence, and you all paid probably, as I think you mentioned sub-PV-10 PDP. Can you give us some color on like what it took to get this one across the line? How much -- what do you value the PDP at? What do you value the midstream at? And how much was allocated to the upside inventory?

Yes. On the process, I think we're going to be focused on buying attractive assets, and we know that there's always going to be other bidders in that. And I think what's important for us is to always just maintain a sense of discipline. We want to do deals that are accretive to our program. And we're willing to pay a price that will still drive pretty healthy accretion. And I think even in a competitive process, you look at the results here, the valuation we ended up with, we're still buying an asset with an 18% free cash flow yield. That -- you could look at that and say that's a significant discount to the free cash flow yield that we trade at, which is around 12%.

So we feel -- and the accretion is very straightforward, increasing our short-term free cash flow by -- free cash flow per share by 20%, long-term free cash flow per share accretion of over 15%, and just the deleveraging aspect of this asset, taking our leverage down long term by 0.5 turn; short term, taking it down 0.3x. All of this stuff brings us closer to our strategy of -- with which we've been vocal about, accelerating the return of capital to shareholders. And that's, I think -- when you pair that up with a conservative underwriting approach, we feel really good about what's to come with this deal.

Yes. And I'd just say in the Chevron -- yes, just a little addition there. The Chevron, that was (inaudible) your 2 acres that we know and so we paid really PDP, and we -- and when we -- got the WIPs for free. And if they didn't come with WIPs, we really -- we wouldn't have paid much for the acreage because we want to put that and drill that with our existing acreage. This, we did pay for undeveloped acreage, but the quality [acreage] is much better and in comparison, in some cases, better than what we have. And so it's accretive, I'd say, to our inventory overall. So that's the difference between the 2.

And then I would just say, to Toby's point, we do -- we need 65% maintenance capital, let's talk it over the next 3 years to keep our production flat. (inaudible) we'll be 35%. So it's going to generate 65% free cash flow. That's, I'd say, just think about the relative difference between our portfolio and their portfolio.

Yes. Any color on sort of that PDP value and the midstream value that's associated with it?

Yes. So the midstream value is probably -- it's generating, we'll call it, about $50-ish million of EBITDA. So you can put a multiple on that of whatever, 8x, something like that. And we probably paid, I'll call it, probably close to PV-10 overall and then you got to strip out the midstream value.

Okay. Okay. And then my follow-up question is going back to obviously operator of a good portion is Chesapeake and it seems like there's agreements in place for that partnership to work. What is your understanding of their goal on that acreage? Because obviously, that's going to be, in part, dictating some of the ability to drive sort of maintenance and some of the cash flow out of this asset.

As far as pace, the 225,000 horizontal feet that we're looking to maintain production, whether that's 50% Chesapeake-operated or 50% Alta or a touch higher Chesapeake or a little bit lower Alta, we'll be able to work through the pace. I think the bigger issue is just going to be making sure that we get on point with development plans, well design. That, to me, is the most important thing. Now we have taken a super conservative stance on child wells. And one of the things that we're excited about is just seeing the changes that Chesapeake's done in their development style.

I think you look historically out here, there's been a lot of what I would consider shorter lateral sub-6,000-foot laterals. You look at some of the other projects that Chesapeake's doing now and the laterals are going to be 12,000, 10,000-plus-foot -- feet. So that's going to create a more efficient program. And again, that would be considered upside to what we underwrote. And certainly, the -- there's probably going to be some more inventory up there as well because we were pretty conservative on the child side of things.

Okay. Okay. And I guess the point I was getting to, you're running -- you mentioned it's 50-50 production, operated versus nonoperated. One rig kind of keeps relative, let's say, call it, your operated half flat. Should then we assume it takes 2 operated rigs by Chesapeake to keep the non-op flat? I mean is that sort of a good high-level way to look at it?

Yes. I'd say probably 2 to 4, at a high level. Our working interest in this non-op is around 30% working interest. So 3 rigs lumping inside to 1 rig.

Our next question comes from Neil Mehta from Goldman Sachs.

As you guys said, you're getting closer here to investment grade. You're not in a position to have a conversation about returning capital to shareholders. So Toby and Dave, can you -- maybe you could talk about when do you think you'll be in a position to provide an update around capital allocation. Any early thoughts on a favorite strategy, whether it's buying back stock or potentially even thinking about a variable dividend?

Yes. This is Toby. Per Dave's comments in the question, that's something that we'll provide color on the framework towards the end of this year. And as far as that framework, I don't think we're going to try and reinvent the wheel. I think looking at putting out something -- a dependable return of capital in the form of a base dividend and then leaving room for more opportunistic -- return of capital opportunities. Variable dividend or share buybacks, that's probably going to be what the plan looks like. And we've seen a lot of these plans that have been put out by peers and I don't think we're going to do anything too exotic. It's going to be pretty straightforward.

And we'll survey our shareholders. We'll get their opinions as well.

Great, guys. And then the follow-up is just more of a technical question, which is when the deal closes, it looks like the shares will be distributed to Alta's shareholders. And so is there any lockup associated with that? Just walk through the mechanics of that because it's not going to be distributed as one large block. It'll go to disparate individuals, right?

Yes. So there is a lockup. It's a 6-month period lockup. There's a couple of opportunities for -- within that 6-month period to be able to sell down. We will manage the process. So it will be a very managed process. So all the details will come out in the filing shortly.

Our next question comes from David Deckelbaum from Cowen.

Toby, I wanted to ask you, just with the success of this deal, you guys are pro forma, I guess, almost about 7% of the U.S. daily gas supply now. You talked about this deal, you think about the motivations lowering your free cash breakeven, you talked about just the assets. In many cases, I think when Dave was speaking about, in many cases, the assets being better than some of the legacy EQT stuff, should we think about going forward, are there going to be more opportunities for you? Does this kind of light a fire to optimize your portfolio a bit more (inaudible) down in some areas that would be otherwise raising that breakeven price? Or should we be thinking about that, that there's actually a lot more benefits to having a scale of this size that actually improves over time if you guys are able to fold in some more deals?

Yes. I think we're going to do transactions that are accretive on a -- from a leverage perspective and a free cash flow per share. But I mean selling assets for us, I think the bar is a little bit higher just because it's -- some of the assets that are -- we'd be looking to sell that we consider nonstrategic have a high PDP component. So the price to get paid for that and deleverage a transaction is a little bit higher.

From a scale perspective, we've got pretty big scale. So we have the ability to shape the portfolio and continue to optimize it and still benefit from the commercial opportunities that present themselves that I do believe are really starting to become apparent and unique to EQT that you get from managing such a large production base. I mean pro forma, this transaction, we're going to have over -- we're going to be marketing over 6 Bcf of gas a day. And I think one of the things I'm really excited about is leveraging the commercial team that we've built out here, giving them another -- giving them access to other regions so that we can do more optimization across -- on the commercial front.

I appreciate the clarity on that. And just my follow-up is just actually on Mountain Valley. You guys talked about before you haven't moved the time line in your assumptions. But I guess based on the July start-up, you guys are not incorporating sort of a -- that fee payment that would be due to you guys at your call option in the beginning of '22 next year and that $1 billion of pro forma free cash?

Yes. So I'd just say we didn't. If you look at actually the -- over the 6-year period, the movement of MVP out 6 months is actually a net positive. We didn't count that into our 6-year free cash flow. And so just know that when we do, do that, that 6-year free cash flow number will go up.

Should we expect one of these fee penalty payments to come in, in the beginning of the year? Is that something that you guys would be calling now?

No. I think the one thing that I think people talk about that we have as an option is if MVP doesn't come online by the end of 2022, we have the option to take cash and reverse of credits we have against our gathering rates. That's something we'll make a decision some point in 2022. And right now, our goal would be to keep it in as a credit relief. We get more value from a leverage standpoint than not. I think that's what you're pertaining to.

(Operator Instructions) Our next question comes from Noel Parks from Tuohy Brothers.

I was wondering, could you talk a little bit about on the Alta properties operated part, what the CapEx pace has been like recently? Have they been sort of underinvested in recent quarters and years? And can you also talk a little bit about what their completion methods have been like and what you think you might change, applying your own experience?

Yes. So the Alta team has been running about a rig out here. They've got about -- we have it marked here as about 6 DUCs. It's actually probably closer to a dozen. So we'll be able to pick up operations there. I'd say historically, I think what's really interesting when you look at the Alta asset is really what this team has done. They bought these assets from -- Anadarko was the original operator. And they pretty much did what we did here at EQT and that's apply really solid completion designs, really solid development well design standards and showed a pretty significant improvement in the EUR performance.

So I mean we think that the benefits that we're going to showcase is continuing on the success that they've laid down but then adding in the benefits of combo development, streamlining logistics, streamlining of the procurement. And I think that will be -- allow us to drive costs a little bit better than where they're at today. But they're a great team. I think it's just we have a benefit of having a little bit larger scale and we can do some things and leverage that. And they've been growing the production -- well (inaudible) flat, I guess, is the key thing to think about, too.

Right, right. And the other thing is among the many considerations that led you to go for the deal, can you talk a little bit about how the ESG expectations or opportunities weighed in your decision to expand the footprint to the East, separate from the stand-alone economics, if there is a difference in your thinking there?

Yes. Certainly, ESG is actually one of the things that we look at when we're looking at opportunities. I think one thing that's really great about the Alta asset, it's 100% dry gas, which is going to give us the benefits to position us to continue to put out a really low emissions intensity score. So that's really important. Some of the things that are underway, which we're really excited about talking about in our ESG report that's coming out in a couple of months has to do with some of the ESG initiatives, replacing pneumatics, doing that. We'll be looking to apply those opportunities on the Alta assets just like we're doing at EQT.

One of the great things about ESG is a lot of the stuff we're talking about is what we do at the surface. And what that means is that stuff translates, whether it's things that we do well in Southwestern Pennsylvania, you're going to translate to the surface in Northeastern Pennsylvania. So we're really excited about the opportunity to improve on the ESG front as well.

That was our final question, so I'll hand it back over to Toby Rice for closing remarks.

Thanks, everybody. We're certainly really excited about this opportunity, and we'll continue to work hard to deliver value for our stakeholders. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.