Operator: Thank you. Your next question comes from the line of Noel Parks with Tuohy Brothers. Please go ahead.
Noel Parks: Hi. Good morning.
Toby Rice: Good morning.
Noel Parks: One question I had was as you have put together some of these longer-term forecasts and projections, and when you make the infrastructure piece, some of the trends look really compelling. As you look at different pricing scenarios, do you picture, and this, of course, would be a high class problem. Do you picture a gas price high enough where a plausible feeder kind of gets reintroduced of the industry overdrilling again? I mean, I know is that sustained $6, $7 or something like that?
Toby Rice: Yes. I mean, I think our biggest thing that is going to be the biggest driving force maybe on how people think about the dollars they spend towards drilling is really getting away from the half-cycle wellhead returns and looking more at a holistic cost of returns and gas price needed to actually not just generate free cash flow and cover your cost of supply, but actually create, deliver value back towards shareholders. And that right-now scenario is showing us that even with current strip is below the price level needed to generate the cost of returns that investors are demanding right now. So if you look at it from that perspective, I think you’d be a little bit more cautious over activity levels. But we think the – what’s happened in this industry over the past few years in this sustainable shale era is operators, I think, are being much more holistic when they’re making their investment decisions, and that’s going to lead to better – a more durable industry that’s better to serve customers over the long-term and also keep investors happy and satisfied with the returns that they’re making.
Jeremy Knop: I’d say another interesting caveat to that, that’s really important to remember. I think a lot of people like to talk in terms of averages when talking about future gas prices or commodity prices. In our view, I think what’s going to change a bit in the character of the gas market going forward is in a world where there’s less coal to switch to, you have renewable intermittency, you have your days of demand covered dwindling for gas. You’re going to see a lot more volatility. And so instead of a clear price signal, so to speak, of $5 or $6, as you suggested, which would give you confidence to drill and grow, I think you might see a year where gas is really high and another year where gas is really low. That will average out to an attractive price to the middle, but it does create a lot of volatility.
And I think from a planning perspective for companies that are just pure upstream producers, it creates a lot more pause before saying we want to go invest an extra $1 billion in drilling in a given year. And I think that if you want to look at a case study of that, you can see what happened in the past 12 months where that really seemed to be all the rage in 2022 of prices were high single digits. And all it took were a couple of events and prices fell as low as $2. Now you’re seeing the Haynesville start to really decline. So I think when you look ahead, I think that’s an important differentiation. But I think the net effect is you’re going to see some air gaps emerge of oversupply and undersupply. And that really underpins our focus on cost structure because we don’t want to be one of those producers that has to decline and has to ramp back up.
We’d love to be able to really produce durable cash flow and return for investors through the cycle. And again, if you’re worried about prices one year falling to $2 like we just saw this year and you have to hedge that but then you missed prices going back up materially higher, over the long run, you’re not going to generate nearly as much value. So again, that outlook is really informing how we scope the business, whether it’s through just organic cost cutting, it’s our hedging strategy, our balance sheet, how we think about future M&A. But that characteristic, I think, is an important caveat and it will be a lot different in the next five years compared to the prior five years.
Noel Parks: Great. Thanks a lot for bringing the volatility angle into it. And I also want to touch on the issue of coal replacement. And I was just wondering, are you – as you see utilities doing their longer-term planning, do you see any signs of the impact from some of the advanced technology out there, for example, for gas turbines, greater efficiency, lower emissions and so forth? Is that in the equation as you see some of these coal replacements on the horizon?
Toby Rice: Well, I think what you are seeing is energy security coming back into the headlines in the American grid. And when you look at a lot of the power generation capacity that’s been added, over the last five years, a lot of it has come from intermittent, albeit lower carbon energy solutions like wind and solar. And people are now stepping back and saying, do we have the reliability that we need? And you see this across all ISOs across the country where your peak demand number is coming very close to your reliable electricity generation. While you may have coverage from intermittent sources above that, you realize that when that peak demand hits and you’re pushing them, your red lining, your reliable electricity power generation, you’re on your knees praying for the wind to blow and the sun to shine.
And I think people are looking at this now and looking for more energy security and realizing that low carbon energy solutions like natural gas are going to be the solution that the world needs.
Noel Parks: Great. Thanks a lot.
Operator: Thank you. Your final question comes from the line of Bert Donnes with Truist. Please go ahead.
Bertrand Donnes: Hey, thanks guys. Toby, I think you brought this up a few times, the idea of downside protection when it comes to hedging and even your LNG strategy that I think provides a floor. It seems like you’re more careful in protecting the downside risk versus some of your peers. So maybe that backs off a little bit once you hit your leverage target. But do you think this is just the nature of you guys being the biggest guy in the room or are you looking longer term? Or maybe you just currently have a different investor base that are asking different things of you. But just any thoughts there?
Toby Rice: Well, I think it’s just prudent as an investor to think about protecting against the downside while also providing exposure to what we think is going to be a really exciting natural gas market. So I think one thing that’s going to be the alternative is, and we can play that with – by hedging and caring about the floors and also caring about the ceilings we’re putting in our business, we can do that with some of the supply deals, we structure delivering floors that cover our cost of capital, allow us to generate the returns that our investors are demanding while also providing ceilings that prevent customers from experiencing price blowouts. And at the end of the day, the integrated energy producer like EQT that has control over the cost to pull the gas out of the ground, the contracts to move it through the pipeline and get it through the tailpipe of LNG facility, we can offer pricing that ensures us to be able to generate returns but also gives the world what it really needs, which is guardrails on pricing.
