EQT Corp

NYSE:EQT

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. Thank you for attending today's EQT Quarter One 2022 Quarterly Results Conference Call. My name is Amber, and I will be your moderator for today's call. All lines will be muted until the question-and-answer portion of today’s presentation. [Operator Instructions]

I now have the pleasure of handing our conference over to our host, Cameron Horwitz with EQT. Cameron, please proceed.

[Cameron Horwitz, Managing Director, Investor Relations & Strategy]

Good morning, and thank you for joining our first quarter 2022 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer; and David Khani, Chief Financial Officer. The replay for today's call will be available on our website for a 7-day period beginning this evening.

In a moment, Toby and Dave will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our website, and we will reference certain slides during today's discussion.

I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of the factors described in yesterday's earnings release and our investor presentation and the Risk Factors section of our Form 10-K and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements.

Today's call may also contain certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.

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

[Toby Rice, President & Chief Executive Officer]

Thanks, Cam, and good morning, everyone. Since our fourth quarter conference call, the dialogue around energy has been fundamentally altered. The invasion of Ukraine has accelerated an already emerging global energy crisis while also reasserting security as a foundational pillar of energy and climate policy. Even before the invasion, we were seeing the impacts of global undersupply of traditional energy sources. This manifested in high energy prices, economic rationing and rampant inflation. Now we have crossed an even dire threshold with military conflict occurring in Europe and signs of energy insecurity emerging in the United States as well. At the same time, the world is falling behind on its emissions reduction goals. With this as a backdrop, a fundamental shift is clearly needed, one offering bold yet practical solutions that can provide energy security to the world while getting us back on track to meeting global emissions targets.

Last month, we unveiled our Unleash U.S. LNG plan to do just that. Our plan contemplates quadrupling U.S. LNG capacity by 2030 which we estimate would reduce international CO2 emissions by an incremental 1.1 billion tons per year. To put that in context, this is the emissions reduction equivalent to electrifying every U.S. passenger vehicle, putting solar panels on every home in America and doubling the installed capacity of U.S. wind power generation, all combined. Unleashing U.S. LNG is by far the largest green initiative on the planet, is ready to deploy today and would meaningfully bolster energy security for our allies.

And without incremental U.S. natural gas, the world is reverting to coal. In just the last 12 months, emissions associated with international coal consumption increased at a level that effectively wipes out all of the progress made by the United States in deploying wind and solar over the last 15 years. We will not be successful in addressing climate change without providing a scalable solution to international coal. That scalable solution is natural gas, and we are the ones that have it. And to achieve the largest green initiative in the world, one that will help blunt the humanitarian and inflationary impacts of our global energy insecurity, all we need to do is build pipelines and more LNG infrastructure. No technology breakthroughs, no subsidies, nothing but building what we've built for decades.

The reaction to our plan has been extremely positive as it is targeted, impactful and feasible. We are seeing encouraging political signals, with the Biden administration approving incremental LNG exports to Europe, supportive actions from the FERC and recognition from the likes of John Kerry on the decarbonization benefits of natural gas. The influx of support from the broader public has also been tremendous and will ultimately empower our industry to meet the energy demands of Americans while providing energy security to the world.

At EQT, we are uniquely positioned to be the linchpin in putting this game plan into action. As the largest natural gas producer in the U.S., our scale provides a material supply base with multiple decades of core, high-return inventory. The depth and quality of our resource gives us tremendous confidence in being able to meet growing long-term natural gas demand. Our recent investment grade credit rating upgrade highlights the differentiated strength of our balance sheet. And as the largest producer of responsibly sourced gas with line of sight to being net 0 by or before 2025, we believe EQT's natural gas production is among the most coveted energy molecules in the world.

We are currently in discussions with LNG end users across various geographies and are contemplating equity investment opportunities in LNG export facilities. Our firm transportation portfolio delivers over 1 Bcf a day of production to the Gulf Coast which will underpin the initial leg of our LNG strategy. We are pursuing a portfolio approach from the perspective of liquefication at end-to-end markets. Our goal is to have our first LNG contract signed by the end of the year, and believe we could see meaningful accretion associated with our LNG strategy by the middle part of the decade.

Turning to first quarter results. We executed upon our guidance and got off to a fast start in returning capital to shareholders since announcing our capital allocation framework in December.

On the operations front, we began to realize the returns from our investment in our mixed-use water system and execution of large-scale combo development in West Virginia. Our first 2 pads utilizing our modern development runs came in with D&C cost nearly 20% below legacy West Virginia development.

Furthermore, after nearly a decade of advocacy, West Virginia Governor Justice recently signed into law modern pooling and unitization legislation, marking a huge win for both industry and landowners in the state. The unique property laws in West Virginia have made it a challenging place to operate, oftentimes resulting in delays and planning risks. This new legislation will streamline our operations and allow for more efficient, long lateral development of our nearly 300,000 core net acres. And when combined with the synergies we are realizing on the water and operational front, should drive additional value creation for our shareholders over the coming years.

Since announcing our shareholder return framework in December, we have repurchased $230 million of our common stock at an average price of approximately $23 per share, reducing our share count by approximately 2.5%. And we made our first $47 million quarterly fixed dividend payment. We also repaid $570 million of 2022 senior notes during the quarter, marking substantial progress towards our goal of reducing debt by $1.5 billion by year-end '23. In total, we returned $816 million during the quarter via share repurchases, dividends and debt retirement.

With the robust backdrop for natural gas prices, we are increasing our 2022 free cash flow outlook by 50% to roughly $2.35 billion at the midpoint. We believe the recent rise in natural gas forward curve is structural in nature and have positioned EQT stakeholders to meaningfully benefit.

In the past quarter, we have not added any hedges, but early in this pricing run-up, we restructured our existing Q1 2023 swaps into collars with a ceiling of $10 per million Btu, providing shareholders direct exposure to the recent rally in both near- and long-dated natural gas prices.

Looking to 2023, despite the recent appreciation in our share price, our 2023 free cash flow yield is approximately 25% at strip pricing as natural gas prices have rallied alongside our stock. We now expect to generate roughly $17 billion of cumulative free cash flow from 2022 through 2027, representing approximately 115% of our current equity market capitalization.

Beyond 2027, our 15-plus years of core long lateral inventory has also substantially increased in value due to the rally in prices and the realization by investors and policymakers of the key role that natural gas will play in providing cheap, reliable and low carbon energy to the world for decades to come. We believe that while many operators' core inventory is being depleted, EQT will remain uniquely positioned amongst peers to continue delivering predictable, robust returns from our deep core inventory. This outlook underscores the compelling value opportunity at EQT and affords us tremendous flexibility to build upon our capital return framework moving forward.

I'll now turn the call over to Dave.

[David Khani, Chief Financial Officer]

Thanks, Toby, and good morning, everyone. I'll briefly summarize our first quarter results before moving to the balance sheet, hedging, RSG and with some guidance updates.

Sales volumes in the first quarter were 492 Bcfe, roughly in line with the midpoint of guidance. We experienced some weather-related and trucking service impacts that put modest downward pressure in the first quarter production. To address tightness in the trucking market, we began to implement new technologies with positive results and believe we can substantially mitigate any sustained impact moving forward.

Our adjusted operating revenues for the quarter were $1.57 billion or $3.19 per Mcfe and our total per unit operating costs were $1.33 per Mcfe. As a result, our operating margins were $1.86 per Mcfe, about $0.60 higher than last year and on higher volumes.

Capital expenditures were $310 million, which was 5% below the midpoint of guidance and benefit from drilling costs coming in below budget.

Adjusted operating cash flow was $889 million, and free cash flow was $580 million, inclusive of about $15 million of nonrecurring expenses for changes in litigation reserves and settlements.

Our capital efficiency for the quarter came in at $0.63 per Mcfe or 3% better than what was implied by the midpoint of our capital and production guidance ranges.

During the first quarter, we achieved investment-grade credit ratings from Fitch and S&P, marking yet another fast milestone in our efforts to become a more sustainable company for our stakeholders. Investment-grade ratings provide us an expected approximately $20 million per year in interest savings, improved liquidity, strong ability to maintain our $2.5 billion under secured revolver and potentially for higher revenue tied to our LNG strategy.

During the quarter, we retired all our 2022 notes, which leaves us about $900 million left of our 2023 goal of reducing absolute debt by $1.5 billion. Also worth noting, with rising interest rates, we may be able to retire an even greater amount of principal with these dedicated dollars.

Our trailing 12 month first quarter '21 net leverage stood at 1.9x. At recent strip pricing, we forecast our year-end 2022 and 2023 net leverage to be approximately 0.8x and 0.1x, respectively. Our forecast assumes we use the full $1.4 billion of dividends and share buybacks. We continue to target a long-term net leverage goal of 1x to 1.5x assuming a conservative $2.75 per Mcf natural gas price which should bulletproof our balance sheet through all parts of the commodity cycle.

We ended the quarter with $2.1 billion of liquidity and expect the benefit of investment-grade credit ratings to add an additional $200-plus million to our liquidity position over the near term as letters of credits are eliminated.

We also recently completed the sale of the remaining balance of the shares of Equitrans Midstream common stock for proceeds of $189 million.

As highlighted last quarter, we transitioned from a defensive hedging strategy to a more balanced approach that utilizes wide collars and puts, providing prudent downside protection while allowing us to benefit from rising natural gas prices.

Our percentage of production hedged for 2022 and 2023 remains unchanged from our prior outlook, with 65% and 45% of volumes hedged, respectively.

However, we opportunistically restructured approximately 450 million a day of first quarter 2023 swaps, replacing them with costless collars with a floor price of approximately $5 and a ceiling of approximately $10.

We are even better positioned to capture more upside from the bullish fundamental setup for the upcoming winter as storage refill will likely continue to underperform.

Recall, last September, we spent approximately $75 million to restructure approximately 15% of our fourth quarter '21 and 2022 hedge book to gain greater upside exposure to natural gas prices. At recent strip pricing, the mark-to-market value of these positions is approximately $600 million.

We also added to the basis hedge positions with 90% of our in-basin production now covered for the balance of 2022.

The fundamentals within Appalachia remain solid. In-basin production has been trading below forecast this year, with volumes running approximately 2 Bcf or lower than year-end exit '20 rate. We believe the capital discipline due to lack of pipelines as well as general oilfield service segments are the key contributing factors. At the same time, gas-fired power generation is surprising to the upside as overall growth in power demand is occurring as coal supply has become even more increasingly tight.

Europe's recent decision to ban Russia's coal imports could lead to further increases in natural gas demand as more Northern Appalachian coal is likely to be exported to Europe next year. These dynamics are leading to significant invasive gas price strength, with TETCO M2 and Dom South cash prices trading around $6.40 per MMBtu.

As shown on Slide 20 of our investor deck, local prices are highly correlated to Henry Hub, with the average M2 forward curve trading at 75% to 80% of NYMEX. As Appalachian production growth slows, while demand continues to rise, we believe the fundamental backdrop for local pricing remains healthy.

On the RSG front, we've now signed a total of 13 deals to sell responsibly sourced gas to various counterparties, totaling more than 3 Bcf per day. This includes our recently announced deal with Bloom Energy, which purchased certificates from us to cover all of its U.S. fleet's natural gas consumption for the next 2 years. Given the low methane intensity of our production, this represents the equivalent of taking more than 38,000 passenger vehicles off the road annually. This deal highlights the expanding opportunities we have to monetize RSG into the industrial complex and further validates the market's recognition of value associated with our low emissions natural gas. As the largest producer of RSG in the U.S., we are uniquely positioned to capitalize on these opportunities and directly facilitate emissions reductions goals across multiple industries.

Turning to guidance. We are raising the midpoint of our '22 outlook for adjusted EBITDA by roughly 25% to $4 billion and free cash flow by 50% to $2.35 billion, respectively, which reflects the material rally in the forward gas curve since issuing our '22 guidance.

As our hedges roll off next year, our '23 free cash flow should expand by 50% year-over-year, providing differentiated free cash flow per share growth even as we maintain flat production volumes.

As Toby mentioned, we see $17 billion of cumulative free cash flow from 2022 to 2027 at recent strip pricing.

We assume all cash taxes and modest well cost inflation in these projections, but do not assume any benefit from the broader success of our next-generation well completion design.

As it relates to capital, oilfield service inflation has accelerated of late. Pricing pressure is broadening out across all service lines. That said, we are relatively well positioned with more than 50% of our 2022 capital locked in, and we remain comfortable with our capital guidance range at this time.

Our long-term sand supply agreement is also a key differentiator for EQT and market tightness has driven increased industry focus on security of sand supply.

I'll now turn it back to Toby for some concluding remarks.

[Toby Rice, President & Chief Executive Officer]

Thanks, Dave. To conclude today's prepared remarks, I want to reiterate a few key points.

One, we believe the U.S. has a tremendous opportunity and responsibility to provide energy security to our allies while concurrently addressing global emissions associated with foreign coal, and this can only be done by unleashing U.S. LNG.

Two, as the largest natural gas producer in the U.S. with a multi-decade core inventory, investment-grade balance sheet and the largest base of responsibly sourced gas, EQT will play a key role in meeting both domestic and global natural gas demand growth for the foreseeable future.

And three, the recent rise in the natural gas curve is likely structural in nature, and EQT’s shareholders are well positioned to benefit on the back of the cost structure and balance sheet improvements we've achieved over the past several years. The shallowing of our base decline and future gathering rate improvements should drive an additional 10% reduction in our breakeven NYMEX price through 2027.

And then four, lastly, we are aggressively executing upon our capital allocation framework and our updated free cash flow outlook underscores the material flexibility we have to expand shareholder returns over time.

I'd now like to open the call up for questions.

[Operator]

[Operator Instructions]. Our first question comes from Arun Jayaram with JPMorgan.

[Arun Jayaram, JPMorgan]

Toby, my first question is just on LNG. On the Baker Hughes call, that management team highlighted the potential for 100 million to 150 million tons per annum of new global LNG capacity over the next couple of years, most of that concentrated in the U.S., North America. Thus far, in my coverage, we've seen EOG and Apache sign agreements linked to global gas pricing. I was wondering if you could discuss what you're seeing today. Obviously, the market has changed a little bit over the last couple of years. And I wanted to maybe if you could give us some more details on the first LNG contract that you think could be signed by the end of the year.

[Toby Rice, President & Chief Executive Officer]

Yes, Arun. So there's been a tremendous amount of demand that we've fielded here at EQT over the past few months. I'd say what EQT can offer with some of the contracts that we're looking at right now is to reduce the exposure for these international buyers to -- with the volatility that they're experiencing right now. I think some of the contract structures that we're looking at is to provide a collar type structure for these international buyers. And obviously, it's going to be something that respects where [TTF] is right now, but I think going longer term, I think, just gives us exposure to rising prices but provides the international buyers -- allows them to avoid the blowout. Because that's really the part that really hurts their countries and their economies, is these really significant pricing swings that they're experiencing right now.

[Arun Jayaram, JPMorgan]

Great. Great. And my follow-up, Toby, in the deck you guys have highlighted over the next couple of years, after debt retirement, the buybacks, the dividend, you'd have, call it, $3 billion of excess free cash flow over the next couple of years. As you look at your opportunity set today, what -- how would you rank the priorities for that excess free cash flow between additional returns to shareholders, M&A, dividend? I’d love to see if we could see where your head's at, particularly with the stock now moving a lot higher than when you're buying back stock on a year-to-date basis.

[Toby Rice, President & Chief Executive Officer]

Yes. While the current environment has certainly given us even more ability to return more capital to shareholders, that's very exciting, I think one thing that will be consistent is our approach towards making the best risk-adjusted allocation of this capital.

So listen, I mean, this is -- the environment is constantly changing, but we still see a tremendous opportunity in our stock and that looks to be like a -- continues to be a priority in addition to accelerating the paydown of our debt.

So I'd say we're going to continue to assess the landscape, but that will be our guiding principle. It's just making the best risk-adjusted return for our shareholders.

[Operator]

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

[Holly Stewart, Scotia Howard Weil]

Maybe, Toby, just to continue on this LNG theme. I'm sure we'll beat a dead horse today. Just EQT has really spearheaded this whole LNG push. And now we have a few potential policy changes that are coming out of the EU and the U.S. So maybe my question would be, as you're looking at the landscape, what signals are you looking forward to see that we're on the right track? And maybe what do you expect to see first?

[Toby Rice, President & Chief Executive Officer]

Yes, Holly, I think calling out sort of the biggest opposition against natural gas and really hydrocarbons in general is really we need to see a shift in the general sentiment and a differentiation that natural gas is -- should not be lumped in as -- with coal and just be called a fossil fuel.

I think that there's a couple of things going on that people need to be aware of. One, emissions around the world are rising. Two, emissions in the United States are dropping. And three, the conclusion people need to take is, it's not really -- people need to understand that it doesn't really matter what we do in the United States because we've dropped the emissions here, but emissions around the world are still rising. And so this zero-carbon solution-only mentality needs to shift towards a any decarbonization opportunity needs to be considered and put on the playing field. And we are starting to hear those signals, specifically from John Kerry, to say that natural gas has -- is a decarbonizing tool. That's incredibly encouraging to hear. I think that message is going to start bleeding out into the -- to be a more common, practical mentality. And when you see that, then you'll -- I think we'll be able to start seeing the doors open on policies that will encourage and fast track the pipelines and LNG facilities that we need to build.

We are fortunate that there is a tremendous amount of demand for this for international LNG. It's just really about having a framework that allows us to build these pipelines and LNG facilities faster than ever before. And I think the mentality shift towards decarbonizing projects like Unleash U.S. LNG is the key to really putting these plans in motion.

[Holly Stewart, Scotia Howard Weil]

Okay. So I don't really think about it as one regulatory item or something that we need to see come across, it's just the broader push on decarbonization and sort of not including natural gas in that mix. Is that safe to say?

[Toby Rice, President & Chief Executive Officer]

Yes. Yes. And Holly, listen, I mean, I think you're going to start seeing -- I mean what we're doing right now is really just changing the -- is putting an environmental-centric approach justification on why natural gas should be utilized in the energy transition to decarbonize the world. This will change. There'll be specific policy requests. There will be specific projects to fast track. And when those projects get put on the table, then we'll have things specifically that we talk about and both the political support and financial support to make those projects a reality.

But right now, we really just want to make the case of natural gas and unleashing U.S. LNG's biggest green initiative on the planet. It's the key towards providing energy security for the world. And getting people behind that idea and knowing that the projects will fall and we'll be able to have request-specific support on those as they come up.

[Holly Stewart, Scotia Howard Weil]

Yes. Okay. Perfect. And then, Dave, maybe one for you. Just you're forecasting sort of that sub 1x leverage by year-end. I know the target is 1 to 1.5, but assuming $2.75 gas. You got the IG nod. Buybacks just started in a material way. So I guess my question for you would just be what are you focusing on now? It seems like you've checked a lot of those financial boxes that you guys were certainly targeting.

[David Khani, Chief Financial Officer]

Yes. So if you think about it a year ago, what we were focusing on our capital allocation plan was all about debt reduction. And now we have a much broader array of opportunity sets to think about and how we invest our capital.

So I guess the positives and the challenges are, we need to make sure we have the broadest opportunity set that generates the greatest rate of return for the investors, whether it's buybacks, dividends, investing LNG and other infrastructure that generates, we'll call real sustainable on a listed rate of return.

[Operator]

Our next question comes from Neal Dingmann with Truist.

[Neal Dingmann, Truist Securities]

I just want to talk about cadence a bit. Toby, could you talk about, again, first, just on -- really kind of a twofold question. Just on any thoughts on stepping up activity. And secondly, all the activity be on your EQ combo development.

[Toby Rice, President & Chief Executive Officer]

Yes, Neal, I mean we're sticking to maintenance mode. We've been pretty vocal about this. Without more pipelines, the prudent thing for us to do is to continue to stay in a maintenance mode. So that's been our mentality in the past, it's our mentality until we start getting some more pipelines put in.

And everybody knows, MVP is a pipeline project that is still currently being imposed. And in this pricing environment, with these conflicts going on around the world, we've got to be asking our questions, what can we do as leaders in this country to facilitate this project and get this project built because America needs it, the world needs it. And we hope that people will look at this as one clear thing that people can do to address some of the issues that Americans are facing today with high prices. And people around the world are looking at the United States to get more access to more natural gas.

[Neal Dingmann, Truist Securities]

And a follow-up, just on the combo development. Can you just talk about cost around there? It seems like that's actually improving efficiencies and helping overall, I guess, unit costs. Is that fair to say?

[Toby Rice, President & Chief Executive Officer]

Yes, that's very accurate to say, Neal. I think when you think about -- I mean, the biggest factor I think people are looking at in industry in general is just service cost inflation, and that's something that we factor into our forecast.

But one thing I would like to highlight is the innovation that's taking place here at EQT are evolve the well design concept that we're putting out right now. This will have the potential impact to mitigate service cost inflation. So that's not baked into our forecast now, but that's an upside that would address, I think, what people's large concerns are on well costs going forward.

[David Khani, Chief Financial Officer]

Yes, we would probably see more inflation and maybe some initial productivity issues as well.

[Operator]

Our next question comes from Umang Choudhary with Goldman Sachs.

[Umang Choudhary, Goldman Sachs]

I wanted to follow up on your last comment around cost inflation. As you look to not just this year plan, but also to your next year plan, what are the areas where you're seeing some tightness in the market? And are there any opportunities to kind of proactively manage costs going forward beyond the combo development, which I'm excited to hear more about later this year.

[Toby Rice, President & Chief Executive Officer]

Yes. Consistent with what others are saying, we're seeing impacts on steel and labor. Sand is a big factor across industry, especially in the Permian. You've seen -- getting access to sand supply, the costs have gone up. But for EQT, with our sand supply agreements, we're not seeing much inflation on that front. Our challenge is more on the labor side and getting that sand to location. So things like drivers is an area that we're looking to get some more horsepower into the system that way. So that's where we see the inflation really.

[Umang Choudhary, Goldman Sachs]

Great. And to follow up, would love your thoughts around gas macro, acknowledging that there's a very emerging potential for LNG longer term. But how do you frame the gas macro in the near term? And then also your thoughts around local Appalachia basis. I mean following some recent M&A and some of the gas plant retirement which you're seeing, do you see outlook for Appalachia basis improving in the near term?

[David Khani, Chief Financial Officer]

Yes. So yes, so I would say, one, as NYMEX goes up, I think you'll see that Appalachia will continue to correlate fairly well. And again, we call it around -- roughly around 80% correlation. Some of the things that will change the correlation and maybe even tighten up the correlation in times will be there's multiple Bcf per day of either pipeline or end market demand, such as coal retirements, the Shell cracker that's coming online in July here. And so you could see -- and I think the basin is not really growing like it did before, it's really moderated. And you could see producers are looking at the end market and they want to participate like with NYMEX. So the discipline with that lack of pipeline is keeping it tighter.

So on a broader base, the LNG market is going to continue to be pinned up as Europe needs to be refilled. You have the exports of Mexico. Industrial demand, there's a big arb between U.S. and Europe on gas price. So that's putting, we'll call, upward pressure on demand as well. And then we talked about Northern App coal supply, but the global market has really spent about 60% capital drops in the last 4 or 5 years. So supply will be very, very tight in coal supply, while demand is still growing, unfortunately, from a carbon perspective. So that's going to keep tightness in the power market for the next several years.

[Operator]

Our next question comes from Josh Silverstein with Wolfe Research.

[Josh Silverstein, Wolfe Research]

Just on the LNG contract and thinking about how this comes together, is it just a supply agreement in place? Do you guys think maybe you've take an equity stake in one of these facilities? Just trying to get a better sense as to what you guys think is the potential strategy here.

[David Khani, Chief Financial Officer]

Yes. I would say it's all of the above right now. We have -- now we're assessing multiple different things out there to see whether investment to contract only. And so we have -- obviously, we have a large amount of free cash flow in front of us to think about how do we generate the right rate of return. But we want to make everything we do very sustainable. And so the contracts will be very easy thing to do. Investing in a facility comes with really some great opportunities there but also big projects and you have to think through that. So there's a lot of things we're looking at right now.

[Josh Silverstein, Wolfe Research]

And it sounded like you guys were debating potentially what you could be doing with the free cash flow, depending on what the stock price is. But as you look out a few years, given the build-up and sustainability and the free cash flow profile, there's a pretty big opportunity to shrink the share count meaningfully maybe in half. I'm just curious how aggressive you guys may want to get on that now and maybe lock in some additional collars for 2024 because it just seems like the free cash flow yield is not coming down based on where the free cash flow is going towards.

[Toby Rice, President & Chief Executive Officer]

Yes, Josh, I mean, that's a great question. It's something that -- the question that we ask ourselves every day as we look at the strip, I mean, going out past '23 into '24 through '26. Gas price is around $4, which if you looked at us 2 years ago and said, guys like that, we'd be hedging that all day long.

But I think just looking at the macro today and the fact that we've just got a significant underinvestment in energy, the world is energy short. I think we're a little bit more patient from being -- being aggressive on locking in these prices. I mean if these -- unless something changes, there's a lot more reason to think that these prices will be sustained higher than sort of where they're at today, and there's room.

Now that being said, there's always weather risk. So I mean, we have to balance all these things as we're looking. But yes, certainly, it's a really exciting setup for natural gas and the value creation potential from EQT.

[David Khani, Chief Financial Officer]

Yes. And the other thing, Josh, is we might be hedging effectively by some of the LNG contracts that we do.

[Operator]

Our next question comes from Scott Hanold with RBC.

[Scott Hanold, RBC Capital Markets]

Toby, you've obviously been one of the leading proponents on trying to build out LNG globally. But can you give a sense, I know you provided some color on some of the factors that are out there that should push the market that way. But is there -- as you start thinking about your desire to get a contract by the end of this year, from an investor or an analyst standpoint, like what are some of the key initiatives that are out there that you think is important for us to watch for that's really going to sort of highlight the fact that there's going to be this push to get these additional facilities up and running and there's the ability to kind of link pricing in the U.S. to something more like the global market right now?

[Toby Rice, President & Chief Executive Officer]

Yes, I think a couple of things for everybody to look at. Number one, netback pricing that we're able to get with these types of contracts. And then the second part is if we do make investment, what are the returns on those investments in LNG.

We've got a lot of value to bring to the table, looking at doing more on the LNG side, both in the robust supply that we can bring to the table to help support getting these projects to FID. And then also on the demand side, being America's largest natural gas producer, naturally international buyers are calling EQT directly, so we can help on that front as well.

You throw in the fact that we're investment grade balance sheet, throw in the fact that we've got the cleanest energy on the -- I'd say, on the planet from a methane intensity perspective, there is an opportunity for us to leverage those tools to get some pretty differentiated terms and create more value for our shareholders with this LNG strategy.

[Scott Hanold, RBC Capital Markets]

Yes. Yes. And look, I guess, maybe my question is more pointed to -- obviously, there's a lot of talk about trying to get U.S. being a part of the global market. But what are the key things you think needs to happen? I mean you obviously talked about political support. But is there 1 or 2 things you think could happen in the time frames? I'm just kind of curious, are there time frames, which those could happen which would -- will be a very good indication that it's sort of a green light for you guys to sign up for an LNG contract, this is coming to a reality versus a conversation.

[Toby Rice, President & Chief Executive Officer]

Yes. So if you're asking for like what are some specific things that would symbolize that we are green light on unleashing U.S. LNG and moving towards that -- realizing the potential of American LNG for 50 Bcf a day, I mean I think we're starting to see the signs of it right now with people that have been very, very strict on only promoting zero-carbon solutions. I think to see that people are now admitting that natural gas is decarbonizing is the first sign.

We're going to be coming up with some more projects here at EQT, working with the players on the downstream side of things in the LNG. But I think that's where you'll see some -- a little bit more tangible steps being made there.

But really, the political signal right now is just incredibly important, not just for the regulators to help facilitate the -- and get to a place where it takes us longer to -- I mean the ultimate goal here is to get to a place where it takes us longer to build something than it does to permit but -- and also influencing the public sentiment so that Americans understand that more natural gas flowing, more energy flowing through the pipelines of America, underwritten by unleashing U.S. LNG, is going to provide a tremendous amount of energy security here in the United States and having that amount of natural gas on standby is what's going to keep energy prices the lowest in the world for Americans.

[Scott Hanold, RBC Capital Markets]

Okay. Appreciate that. And maybe quickly for David. Could you give us some color like on your free cash flow outlook? Like how do you think cash taxes could progress in that outlook over the next, say, 12 to 18 months?

[David Khani, Chief Financial Officer]

Yes. So, first of all, every free cash flow number we give you, whether it's the near term or the long term, has the impacts of cash taxes. So just so you know. And so when you see the, call it, the '23 numbers in our deck, you can know that we had that in there.

So this year, we have really virtually none. But we're going to probably burn through our NOLs this year, and so we'll start to become more of a cash taxpayer in 2023. We'll give you more guidance on that as we get through this year. It's obviously very sensitive to the commodity price. And as you've seen, natural gas has been really, really volatile. So instead of giving you a number that we know will change probably 20 times between now and then, we'll give you probably more guidance on how to think about the framework of modeling it.

[Operator]

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

[John Abbott, Bank of America]

Yes, first question here, Toby, it's for you. The quarter did have -- you did have less turn-on lines during the quarter. It sounds like that was due to some tightness with trucking and hauling. Now looking forward, are those issues resolved? And what have you done in order to make sure those issues have been resolved? And let's just sort of start there.

[Toby Rice, President & Chief Executive Officer]

Yes, John, I think just at a very high level, just recognizing that our production guidance is -- hasn't changed and CapEx is sort of still hasn't changed as well, you're going to see normal fluctuations quarter-to-quarter, but would point you to the high level, staying consistent.

Some of the things that we've seen. One, on the sand hauling, has been some tightness. We've added some new technology that gives a little bit more flexibility to the driver pool. So there's -- in addition to just using pneumatic trucks, we are using some other technology that will give us access to a greater supply of trucks and easier for the drivers to go out there and bring sand to location. So that's one thing that is consistent.

We've raised prices a little bit on the sand hauling front, that's attracted more labor. So the sand issues that we were dealing with have largely been mitigated going forward. And that really logistically has probably been one of the biggest constraints, holding back our completions team from being wide open. But that was a focus in the first quarter, I feel like what we've done is -- has given us a lot of confidence that that's been -- that's an issue that -- the debottleneck has been relieved.

[John Abbott, Bank of America]

Appreciate it. And then for the second question, on the new completion design, could you just sort of remind us how that kind of sort of feeds in throughout the year, sort of the pace of that?

[Toby Rice, President & Chief Executive Officer]

Yes. So it's going to be picking up second quarter and the back half of the year. And just as a reminder, I mean, what we're doing is making some changes to the completion design. I mean, what we're looking to improve is just the completion efficiency across the lateral. So we look at data. We think that we're stimulating about 60% of the wellbore effectively. And if we can change the completion design and get an extra 10% completion effectiveness, well, that could have the benefit of increasing our productivity almost 15%. So that's what we're looking at, we're targeting. And we're on track to get early indications by end of '22 and more firm indications on the total effectiveness by '23.

[Operator]

Our next question comes from David Deckelbaum with Cowen.

[David Deckelbaum, Cowen and Company]

I just wanted to ask, Toby, just for a little bit more clarification. I think you alluded to, I'm not sure intentionally or not before with one of the other questions. But will EQT -- are you envisioning a broader role within sort of like the vertically integrated LNG food chain outside of just being an anchor shipper or an anchor tenant? What sort of role do you envision EQT playing? Either would there be potential partnerships with LNG companies? Would there be capital available on your end? Just thinking about how you envision taking on this pretty sizable goal out there.

[Toby Rice, President & Chief Executive Officer]

Yes. I think understanding our ultimate prize that we're looking for here at EQT is to get exposure to international markets. And we want to make sure we have the flexibility to enter into the contracts that really meet -- that will give us exposure to better realized pricing.

One of the ways that we get more flexibility towards accessing those contracts is to take an investment in the LNG facility itself. I think that the other thing we look at, I mean, our company mission here is realize the full potential of EQT. And that's where I think our supply and the demand that we can potentially bring to the table, with the balance sheet, with the environmentally great -- great scores on the environmental front, coupled with our long inventory, are ways that we can hopefully translate those into some what I consider to be differentiated equity investments in these LNG facilities.

[David Deckelbaum, Cowen and Company]

I appreciate that clarity because I think it answers the big question around the benefits of being investment grade now and having that opportunity to touch more of the premium pricing. So I appreciate that.

And then just the last one for me, I guess, is the thought process now. You talked about being in maintenance mode, as we build out LNG capacity, do you consider those opportunities for growth molecules or just taking a maintenance product and just pricing it at a more premium market?

[Toby Rice, President & Chief Executive Officer]

No. I mean Unleash U.S. LNG is going to be the long-term demand signal that this industry needs to see before they think about growth. So these would be sustainable growth opportunities for us. But the difference now versus in the past is we're going to need to see the pipelines, LNG facilities, long-term contracts all lined up. So we've really derisked the -- really derisk sort of the returns that we're looking to generate in addition to making sure that we're not throwing the supply-demand fundamentals out of whack. And Unleash U.S. LNG is a really great opportunity to bring sustainable growth back to this industry.

And listen, I mean, it's -- we're not talking about a significant amount of growth for this industry to meet the targets that we've laid out. It's less than 10% growth a year, we can get to 50 Bcf a day as an industry. And I think we can do that very sustainably backed by long-term contracts to make sure we can preserve the type of returns that our shareholders are expecting and, quite frankly, deserve.

[David Deckelbaum, Cowen and Company]

Thanks, Toby. Good luck unleashing everything.

[Operator]

Our next question comes from Harry Mateer with Barclays.

[Harry Mateer, Barclays]

So I know -- first question, I know the base case on debt reduction has been 1.5 target through 2023. I guess, after restriking your hedges, given the structure of moving gas prices, do you think there's some opportunities to accelerate that relative to the existing plan and just get it done sooner. Especially with the rates moved, does that open up some additional options? Or is the preference to still just focused on what you can pay down through call schedules next year?

[David Khani, Chief Financial Officer]

Yes. So good question. So I think I'll break it up into 2 pieces. The first part is, with some of our debt trading below par, if we just apply the $1.5 billion, we'll get more than $1.5 billion just from that discount. But I think the second part is, yes, we do see opportunities if we wanted to accelerate over and above the $1.5 billion. We see that, that is clearly an option. So being able to buy back our stock, being able to do -- maybe raising our dividend and accelerating the debt repayment, all 3 things look interesting to us as options along with maybe investing in LNG and other things like that, for sure.

[Harry Mateer, Barclays]

And then on the liquidity side, I know the company is working on its 2023 revolver. I'm curious how to think about a potential eventual Moody's upgrade there, lagging the other two? And whether that would drive an additional improvement in your liquidity and LC needs? Or is that benefit pretty much done now that you have S&P and Fitch at IG?

[David Khani, Chief Financial Officer]

Yes. I would say probably 80% to 85% of the benefits really are coming from S&P and Fitch. There's a little bit of a, I’ll call, leftover piece that if Moody's were to upgrade us, we'll get a little bit extra improvement. So -- but as you can see, we're sitting with $2.1 billion of liquidity already. Our letters of credit are going to drop down pretty meaningfully already. And our all rate triggers that we had on our debt have all been reset down to zero effectively. So we've got, I'll call it, the majority of it in place. But it would be nice to see Moody's give us an upgrade and recognize where the balance sheet is.

[Operator]

Our next question comes from Noel Parks with Touhy Brothers.

[Noel Parks, Tuohy Brothers]

I was really interested in hearing you drill down a bit on the Bloom Energy deal. That's essentially sort of a milestone of the deal, I'm not aware of any other E&P having made a similar supply arrangement with a fuel cell company. So I was just curious about how long has it been in the works? Maybe who approached who? And what we might look for as far similar deals down the road? And also if you could comment on if there are any restrictions after the 2-year time frame as far as what you can do with them or other similar companies.

[Toby Rice, President & Chief Executive Officer]

Yes, great question. So the RSG deal we did with Bloom Energy was something -- I think they approached us, which is great to see. I mean being out there in front of the environmental benefits of natural gas has led to a lot of calls like this. There's been a lot of interest in EQT molecules specifically.

But listen, I think what's really exciting about the future of this is, people -- Bloom Energy is a company leveraging fuel cells to promote the responsible consumption of natural gas. Fuel cells naturally will lower the emissions of user and provide reliable energy at attractive cost. So there's a lot of people, and this is what we're really excited about, thinking about the fact that natural gas is the cheapest form of energy and reliability as well. What else can we do with natural gas?

And so I think you're going to see a lot more demand for natural gas as people really use natural gas as the feedstock for innovation in a lower carbon future. You see other applications on the hydrogen side. There's a lot of -- there's a lot of innovation taking place on hydrogen. Again, that's going to be another follow-on opportunity for natural gas as feedstock in EQT. And I think it's just really exciting to see that people are looking for new creative ways to create demand for low-carbon natural gas.

[David Khani, Chief Financial Officer]

This market is broadening...

[Noel Parks, Tuohy Brothers]

Sorry.

[David Khani, Chief Financial Officer]

No, that's it. Keep going. I'm sorry.

[Noel Parks, Tuohy Brothers]

Okay. I was just going to ask about the terms, is there any exclusivity in it? Are you free to do similar deals with other folks looking for a supply arrangement?

[David Khani, Chief Financial Officer]

Yes. We have the capacity to do other deals, yes.

[Noel Parks, Tuohy Brothers]

Great. And then I was curious about how will the transaction be accounted for? Is this essentially an asset gain or capital gain? Is it something that's going to be accrued through income over the life of the agreement?

[David Khani, Chief Financial Officer]

Yes. It will be accrued as income over the agreement, yes. It is -- this would be considered as ordinary income item, yes. And it would just improve -- effectively improve our net realizations is I want to think about it that way.

[Noel Parks, Tuohy Brothers]

It will show up in realizations? Okay.

[David Khani, Chief Financial Officer]

Yes.

[Operator]

There are currently no further questions in queue. [Operator Instructions]. There are currently no further questions in queue, so I'll pass the conference back over to management team for any closing remarks.

[Toby Rice, President & Chief Executive Officer]

Thank you. It certainly is an exciting time in natural gas. But I think one thing that's really driving EQT is knowing that there's a lot of issues that the world is dealing with, and we want to be a solution provider. And every day we're working hard to make sure that we address these issues and help provide energy security to the world while also helping arresting climate change. So it's going to be a big driving factor for us going forward, this continued commitment to making the world a better place. So thank you, everybody, for your support.

[Operator]

That concludes today's EQT Quarter 1 2022 Quarterly Results Conference Call. Thank you for your participation. You may now disconnect your lines.