With a new management team in place for only about two months, EQT Corp. (NYSE: EQT) is making fundamental changes, the company’s CEO told analysts Jan. 22.
Instead of being driven by volume targets, capital efficiency will take the lead. Correcting 2018 missteps, which led to operational issues, involves running wells in more of a manufacturing mode, according to Rob McNally, who joined EQT as CEO in October. The company—one of the biggest natural gas producers in the U.S. with a large footprint in the Appalachian region—plans to run six frack crews and seven rigs this year.
EQT’s focus in 2019 will include “not trying to jump through hoops to get to volume targets and importantly also being realistic about lateral lengths,” McNally said.
The Pittsburgh-headquartered company has been known to drill super laterals and plans to drill the majority of its wells in the Pennsylvania Marcellus with 13,200-ft average laterals.
“This is the region where our D&C costs per lateral foot is lowest and where we are delivering our lowest cost highest return wells,” McNally said. “No doubt over the last two years we’ve increased our average lateral length by roughly 50%. Going forward we expect to consistently deliver spud laterals averaging 13,000 to 15,000 feet, which we are confident will create real value for our shareholders.”
The details were delivered Jan. 22 as the company shared insight on its 2019 spending plans amid a potential activist campaign from shareholders that include founders of Rice Energy, which EQT merged with roughly a year ago.
EQT shares traded down 5.41% just after 2 p.m. Jan. 22.
Capex was forecast at $1.9 billion to $2 billion for 2019, down from the $2.4 billion forecast in 2018, with most of the reduction coming from reserve development as the company corrects its so-called “operational missteps.” EQT expects total reserve development capex to fall 30% to $1.6 billion.
The company also anticipates generating about $350 million of adjusted free cash flow in 2019 and at least $2.7 billion through 2023—with an initiative underway to further reduce annual capital costs by 10% by 2020. EQT has already seen annual cost savings of about $100 million—the result of restructuring and development efficiency initiatives.
EQT plans to increase its spud and turned-in-line average lateral lengths for all well phases and development areas to 12,100 ft and 10,600 ft, respectively, up from last year’s estimated 11,600 ft and 8,400 ft, as it works to reduce spending and increase free cash flow. The company said increasing lateral lengths and optimizing spacing will lead to higher single-well returns.
About 75% of the Pennsylvania Marcellus well spuds in 2019 will have between 850- and 950-ft spacing, averaging about 880 ft altogether compared to about 840-ft historical average spacing in 2018. The company said it is targeting optimal well spacing of 1,000 ft and plans to pump slightly larger frack jobs—2,625 pounds per foot at 850-ft spacing and 3,000 pounds per foot at 1,000-ft spacing.
“As we go to wider spacing and larger frack jobs, our dollar per foot metric will go up but the dollar per Mcfe goes down and I think that’s actually a better measure to measure capital efficiency,” McNally said.
Speaking on lateral length, he later added that “There is value in lengthening laterals because your cheapest foot of pay is the last one that you drill. So being more methodical about how we move out the learning curve on the longer laterals, I think, is important.”
That’s something McNally is confident the EQT team is capable of doing.
Erin Centofanti, executive vice president of production for EQT, said that in 2019 the company plans to have 20 wells with lateral lengths of at least 15,000 ft, enough work for about one rig. “We’re trying to get to only one rig at a time,” she said. “The biggest problem in 2018 was we had so many of them going simultaneously.”
Most of the laterals will be cut off at 15,000 ft, McNally said, noting EQT has successfully drilled more than 100 wells in the 10,000- to 15,000-ft range. “So we think that the operational issues and delays that were caused by that in 2018 are now behind us.”
EQT plans to spud 106 net Marcellus wells with an average lateral length of 12,250 ft, while spudding 20 net Ohio Utica wells with an average lateral length of 11,200 ft, the company said in a news release
Hopes are the “kind of cookie cutter” manufacturing mode, as McNally described it, will help drive capital efficiency.
As for production, EQT forecasts 2019 sales volume of 1,470 to 1,510 billion cubic feet equivalent (Bcfe). The 2019 drilling program anticipates a 5% increase in production sales volume in 2020.
Although fourth-quarter 2018 results are still to come, preliminary figures show the company produced 394 Bcfe in the fourth quarter, up 5% from the third quarter. Production for the year exceeded the company’s latest guidance, coming in at about 1,488 Bcfe, or 1,447 Bcfe adjusted for assets divested in 2018.
“Most importantly we forecast approximately $100 million of free cash flow in the fourth quarter,” McNally said. “We’re starting to see some of the benefits of our shift in strategy and this fourth quarter performance demonstrates our ability to achieve our plan and generate significant value for shareholders.”
EQT is scheduled to release its fourth-quarter 2018 earnings results in February.
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