EQT Corp Q1 FY2021 Earnings Call

Ladies and gentlemen, hello, and welcome to the EQT first 2021 results and transformative transaction with Alta Resources conference call. My name is Maxine, and I'll be coordinating the call today. 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 seven-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 a 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 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, and the 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, premier 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 one 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, which will drive 15% accretion to free cash flow per share, all while resetting our leverage profile at a level meaningfully below our two times target with year-end 2020 average projected to be 1.7 times net debt to EBITDA. Importantly, this deal accelerates both our timeline to reach investment-grade metrics and our timeline 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 puts 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 important 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 in inventory, only ascribing value to roughly 30% of the total potential lateral footage. All trialed wells were removed for the future development plans, and we did not contribute 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 post effective 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 combine 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 non-operated 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 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 non-operated assets operated by Chesapeake are squarely in the most productive rock in the region, while the integrated business model of the operated assets delivers 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 100 miles of an integrated freshwater pipeline, including 14 water storage facilities in common 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 non-operated assets, a 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 tests that provide a comprehensive and transparent roadmap 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 completing 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 for 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 2021 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 post-closing 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 2021 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 six-year cumulative free cash flow estimate of $3.5 billion with an upward bias. Add-on Alta and this expect to improve upon this with time. Additionally, on April 1st, 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 been seen as a 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 for 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 Mcf 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 retirements in 2020 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 one-quarter of the Permian Basin. Over time, this will get factored into everyone's cost structure 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 one year to July 31, 2023. The main commercial terms of the credit agreement remain essentially unchanged, which demonstrates the banks' strong comfort in our financial positioning and glide path back to an investment grade credit 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 two to three 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 enhanced 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 a 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 rallied and now sit at 42%. The 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 three 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 backdated 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 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 and helping 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's 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.

Our first question comes from Josh Silverstein from Wolfe Research. Your line is now open.

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

Yes, Josh, our core development philosophy is developing our highest rate of return projects first. There could be a shift in more activity to some of these compelling returns that we're getting with the Alta asset. But that's a synergy that we didn't account for and that would be upside to the story. In addition to that, from an operational perspective, you have seen the track record of what this crew has done by continually grinding costs down and increasing production uptime. I do anticipate that to continue on this asset, but again, that would be considered outside 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 that appear? And then maybe just a follow-up to that, why Northeast PA versus the Haynesville or another gas basin that might diversify you away from some of the potential midstream bottlenecks?

From a consolidation perspective, nothing really changes here. We 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 felt the standalone story for EQT was compelling. That's even more true now with the pro forma organization we are really excited about. When we think about where consolidation happens, you look at the risk nature of it; basis risk is not a new risk. We have controls in place to manage basis. Getting more exposure within a basin is something that we're going to be able to manage. This Alta asset is unique. It's derisked, there are 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 flow is driving strong accretion on free cash flow per share and allowing us to deleverage the business. I think it's compelling. That's what will attract us to the most attractive opportunities for our stakeholders.

Great. Thanks guys.

Our next question comes from John Abbott from Bank of America. Your line is now open.

Hey, good morning. Toby, to the extent that you can, can you provide a little bit more background on the history of the deal? Was there initially a direct negotiation? How did it come about to the extent that you can discuss?

This was a process that probably started with the Chevron acquisition. That was a signal to people that consolidation was an opportunity to create value. People saw consolidation happening. So it's a process that probably started about six months ago where we've been engaged.

Yes. This was a marketed process by a bank with others involved. So this was 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, post 2026 and free cash flow? Are we looking at a 10-year inventory, 15-year inventory? What are we looking at in that region?

We think we have enough inventory for more than 10 years. When you look at the amount of horizontal footage it takes to hold production flat, we put that out as around 225,000 feet per year. Over a 10-year period you're looking at about 2.2 million horizontal feet to keep production flat, which would translate to around 55,000 acres. So, given 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. Your line is now open.

Good morning. Toby, some of the initial buy-side questions are around potential basis risk, particularly given some of the delays in MVP. Could you give us more detail 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 one Bcf relative to NYMEX?

Hi Arun. They have approximately 400 million a day of firm transportation capacity that gives us about a $0.28 uplift over in-basin pricing. That is the starting point. We will also use our firm transportation portfolio to optimize realizations a little higher. Second, this asset has about 35% to 40% hedges in place. We will supplement that as well. So we will 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 relative to NYMEX?

The in-basin pricing is about $0.05 to $0.07 wider than our initial reference without that firm transportation piece. So it provides a little bit wider spread than our current portfolio.

Arun, to add color, we talked about the breakevens being around $0.10 lower than where we're at today and the operating cost being $0.20 lower. The difference is largely due to the treatment of basis.

Right, right. Lower operating costs, got it. And a follow-up: there is a decent non-op position with Chesapeake. Could you give a sense of how much production is op versus non-op?

It's about 50/50, operated versus non-operated. Also note we actually market the gas, so we control the gas that comes out of that non-op position.

The next question comes from Holly Stewart from Scotia Howard Weil. Your line is now open.

Good morning, gentlemen. Maybe a quick follow-up to Arun's question on the portfolio mix. I see the changes on the pro forma slides. Does this assume, Dave, that MVP goes into service midyear? In other words, is MVP in that new pro forma assumption?

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

Okay. Maybe, Toby, on the operated versus the non-operating positions. There are clear players in the Northeast PA region where the operated stuff makes sense and some clear players at the non-op positions. How are you thinking about the pro forma portfolio and those two different areas?

On Slide 8, we put a map that highlights the geology. You have the core Northeastern Pennsylvania dry gas. That's the area that's largely not operated by Chesapeake. What's great about this asset is the rock is similar to what other core operators are drilling; it's high quality. What's different is the undeveloped potential. On the non-operated assets, there's a lot more running room for development potential, which translates to the rates of return we put on Slide 7. For the operated Alta assets, the returns are even better because of integrated midstream assets and favorable mineral ownership that lowers royalty burdens and drives the economics.

Okay. That's helpful. And maybe my final on the midstream acquired: you acquired some midstream through the Chevron deal and now with this transaction. How are you thinking about the midstream business as part of the EQT portfolio going forward?

We think it's all about the margins and midstream is a strategic element to improving our margins. We view it as an asset we're going to keep. The Alta midstream is 100% owned, whereas the Chevron piece is only 30% owned, so the strategic nature is somewhat different.

Our next question comes from Neal Dingmann from Truist Securities. Your line is now open.

Hey, guys. My first question is on maintenance capital. Could you speak to how maintenance capital has improved year-to-date and what you see post transaction with Alta improving it further?

Neal, our maintenance CapEx on EQT assets will come down driven by continued operational improvement and the natural sharing of our PDP base decline. That requires us to drill fewer wells over time to maintain production. On the Alta asset, maintenance CapEx is very efficient largely due to higher margins. Maintenance CapEx will improve over time on Alta roughly on par with EQT but will have a bigger effect on our overall capital efficiency because of the midstream and high mineral interest.

Great. And then can you talk about progress toward investment grade and how the Alta deal might influence this?

We've spoken to the rating agencies a lot. Fitch has upgraded us, and we anticipate the other two agencies will comment at some point. We believe this is very accretive from a credit standpoint. We didn't put any potential upgrades or interest rate improvements into our forecast, so that would be upside.

Our next question comes from Scott Hanold from RBC Capital Markets. Your line is now open.

Thanks. Curious on the acquisition: I assume there was competition for this bid. Can you give color on what it took to get this across the line? How do you value the PDP, the midstream, and how much was allocated to upside inventory?

We focus on buying attractive assets and maintain discipline. We're willing to pay a price that drives healthy accretion. Even in a competitive process, the valuation we achieved still results in an 18% free cash flow yield. You can see significant accretion: increasing short-term free cash flow per share by 20% and long-term free cash flow per share accretion over 15%, and deleveraging by half a turn long-term and 0.3x short-term. Paired with conservative underwriting, we feel good about the deal.

With the Chevron acquisition, that was more Tier 2 acres where we paid really PDP-like value and got the whips for free. For Alta, we did pay for undeveloped acreage, but the quality is much better and in some cases better than what we have, so it's accretive to our inventory. Remember, our existing portfolio needs about 65% maintenance capital to keep production flat; Alta needs about 35%. That generates more free cash flow for the pro forma company.

Any color on the PDP value and the midstream value associated with it?

The midstream generates about $50 million of EBITDA. You can put a multiple on that, say eight times. Overall, we probably paid close to a PD10 metric, then you strip out the midstream value.

And regarding Chesapeake as operator of a portion, what's your understanding of their goals on that acreage since that will affect ability to drive maintenance and cash flow out of the asset?

The pace to maintain production—225,000 horizontal feet—applies regardless of operator mix. Whether it's 50% Chesapeake-operated or 50% Alta-operated, we'll be able to work through the pace. The key is alignment on development plans and well design. We've taken a conservative stance on trialed wells. Chesapeake has been shifting to longer laterals—10,000 to 12,000-foot laterals—creating more efficient programs, which would be upside to what we underwrote. There may also be additional inventory because we were conservative on trialed wells.

So with 50-50 production, operated versus non-operated, one rig keeps your operated half flat. Should we assume it takes two rigs by Chesapeake to keep the non-op flat?

Approximately two to four rigs, at a high level. Our working interest on the non-op is around 30%. So expect roughly a three-to-one rig ratio.

Our next question comes from Neil Mehta from Goldman Sachs. Your line is now open.

Thanks, team. As you get closer to investment grade, 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 buybacks or a variable dividend?

We'll provide color on the framework toward the end of this year. We don't intend to reinvent the wheel. Likely we'll put in place a dependable return of capital in the form of a base dividend and leave room for opportunistic return of capital—variable dividend or share buybacks. It will be straightforward and familiar to shareholders.

We'll also survey our shareholders and get their opinions.

Great. And on the mechanics: when the deal closes, shares will be distributed to Alta's shareholders. Is there any lockup associated with that? It won't be distributed as one large block, correct?

There is a six-month lockup period with a couple of opportunities within that period to sell down. We will manage the process, and details will come out in the filing shortly.

Our next question comes from David Deckelbaum from Cowen. Your line is now open.

Good morning, guys. With the success of this deal, pro forma you're almost about 7% of U.S. daily gas supply. You mentioned lowering free cash breakeven and that these assets in many cases are better than legacy EQT assets. Should we think about more opportunities to optimize your portfolio, sell down areas that raise breakeven, or does more scale improve metrics if you fold in more deals?

We'll do transactions that are accretive from a leverage and free cash flow per share perspective. Selling assets for us has a higher bar because many non-core assets have high PDP components and you'd need a strong price to make it accretive. From a scale perspective, we have the ability to shape the portfolio and still benefit from commercial opportunities unique to EQT. Pro forma, we'll be marketing over six Bcf per day, and I'm excited about leveraging our commercial team to optimize across regions.

Appreciate the clarity. Follow-up on Mountain Valley: you haven't moved the timeline in your assumptions. Should we expect the fee payment from the MVP start-up reflected in the pro forma free cash? Does the pro forma one billion free cash include MVP?

We didn't include any MVP shift in our six-year free cash flow number. If MVP moves out six months, that movement is actually a net positive over the six-year period. We didn't count that; when we do, the six-year free cash flow will go up. Regarding fee payments, if MVP doesn't come online by the end of 2022, we have the option to take cash and reverse a credit we have against our gathering rates. We'll make that decision in 2022. Right now, our goal would be to keep it as a credit relief if that gives more value from a leverage standpoint.

Our next question comes from Noel Parks from Tuohy Brothers. Your line is now open.

Good morning. On the Alta properties' operated portion, what has the CapEx pace been like recently? Have they been underinvested in recent quarters and years? Also, what have their completion methods been like and what do you think you might change applying your own experience?

The Alta team has been running about a rig. They have about six to a dozen drilling locations available, so we'll be able to pick up operations. Historically, Alta showed improvement in EUR performance after acquiring assets from Anadarko by applying solid completion design and development standards. We expect to continue their success and then add benefits of combo development, streamlined logistics and procurement to grind costs further. It's a great team, and we'll leverage our larger scale.

Thanks. And on ESG: how did ESG considerations factor into the decision to expand footprint to the East, separate from standalone economics?

ESG was an important consideration. Alta is 100% dry gas, which helps maintain a low emissions intensity score. We'll apply our ESG initiatives—replacing pneumatics, etc.—on Alta assets just as we do at EQT. A lot of our ESG efforts are surface-level actions that translate across regions, so we're excited about improving the ESG profile as we integrate Alta.

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.