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EQT Corporation (NYSE:EQT)

Q4 2011 Earnings Call

January 26, 2012, 10:30 a.m. ET

Executives

Patrick Kane - Chief IR Officer

Philip Conti - SVP and CFO

David Porges - Chairman, President and CEO

Randall Crawford - SVP and President, Midstream, Distribution & Commercial

Steven Schlotterbeck - SVP and President, Exploration & Production

Analysts

Neal Dingmann – Suntrust Robinson Humphrey

Anne Cameron – BNP Paribas

Scott Hanold – RBC Capital Markets

Gil Yang – Bank of America/Merrill Lynch

Joseph Allman – JP Morgan

Craig Shere – Tuohy Brothers

Ray Deacon – Brean Murray, Carret & Co.

Steven Richardson - Deutsche Bank

Operator

Good morning, and welcome to the EQT Corporation year-end, 2011 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Patrick Kane, Chief Investor Relations Officer. Please go ahead, sir.

Patrick Kane

Thank you Laura. Good morning, everyone, and thank you for participating in EQT Corp’s year-end 2011 conference call. With me today are Dave Porges, President and Chief Financial Officer; Phil Conti, Senior Vice President and Chief Financial Officer; Randy Crawford, Senior Vice President and President of Midstream, Distribution and Commercial, and Steve Schlotterbeck, Senior Vice President and President of Exploration and Production.

In just a moment, Phil will summarize our 2011 operational and financial results, which were released this morning. Then Dave will provide an update on our development programs, reserve reports, and strategic operational matters. Following Dave’s remarks, Dave, Phil, Randy and Steve will all be available to answer your questions.

This call will be replayed for a seven-day period beginning at 1:30 p.m Eastern Time today, the phone number for the replay is 412-317-0088. The confirmation code for the replay is 447033. The call will also be replayed for seven days on our website.

But, first, I’d like to remind you that today’s call may contain forward-looking statements relating to the future events and expectations. You can find factors that could cause the company’s actual results to differ materially from these forward-looking statements listed in today’s press release and under risk factors in the company’s Form 10-K for the year ended December 31st, 2010, which was filed with the SEC and is updated by any subsequent Form 10-Qs, which are also on file with the SEC, and available on our website. And in the company’s upcoming 10-K for year ended December 31, 2011, which will be filed with the SEC.

Today’s call may also contain certain non-GAAP financial measures. Please refer to the morning’s press release for information on these non-GAAP financial measures.

I’d now like to turn the call over to Phil Conti.

Philip Conti

Thanks, Pat, and good morning everyone. As you saw in the press release this morning, EQT announced 2011 earnings of $3.19 per diluted share, compared to $1.57 per diluted share in 2010. After adjusting for several items which accumulatively added $148.4 million to our net income, our adjusted EPS was $2.21 in 2011.

The adjustments to net income include the impacts of the sale of Big Sandy Pipeline in the third quarter, the purchase of the outstanding interest in ANPI in the second quarter, the sale of the Langley Natural Gas Processing Complex, and an adjustment for non-income tax matters in the first quarter, and a gain on the sale of some available for-sale securities in the first half of the year.

Operating cash flow, which was not significantly impacted by these items in 2011 also increased by $236 million or by about 36%. These results were driven by another outstanding operational year at each of EQT’s business units.

Leading the way on the annual operating performance was a 44% increase in sales of produced natural gas and liquids at EQT production, which represented our highest annual sales growth rate ever. The other volumes at EQT Midstream also increased by 32%, trending up with the higher volumes at EQT Production.

The EQT average wellhead sales price was $5.37 per Mcf in 2011, or about $0.25 lower than in 2010. The realized price drop resulted from lower NYMEX natural gas prices in ’11 as compared to ’10, partially offset by higher natural gas liquids prices. Approximately 7% of EQT’s total production in 2011 was in the form of liquids.

For segment reporting purposes, of that $5.37 per Mcf of revenue, realized by EQT Corporation, $4.04 per Mcf was allocated to EQT Production, and the remaining $1.33 per Mcf to EQT Midstream.

Overall, absolute cost increase is expected given our outstanding growth rate, but on a unit basis, the total cost to produce, gather, process and transport EQT’s produced natural gas and NGLs was down about 22%.

The fourth quarter results basically mirrored the full year, so I do not intend to discuss them in detail. However, I will point out that the revenue deduction for third-party gathering, processing, and transportation was $0.43 for the full year of 2011 and $0.29 in the fourth quarter, as shown in the table, in this morning’s press release.

The fourth quarter number was positively impacted by the company’s ability to resell it’s unused contractive capacity on the recently completed El Paso 300 line, at unit rates above what we currently pay under the existing agreement with El Paso. The margin from capacity that was sold under short-term contracts, that is contracts with a duration of less than a year, reduced the revenue deduction by about $0.12 per Mcf on gas sold by EQT in the quarter.

Put another way, by adding the $0.12 to the $0.29 reported in the fourth quarter, a reasonable per-unit rate – run rate for the deduction for third-party gathering, processing, and transportation in models, would be approximately $0.41 for Mcf.

This number will be impacted positively or negatively going forward, depending on market rates we will receive for the resell of our 300 line capacity that is not currently reserved for EQT Production, or under long-term resell contracts with third-parties.

Moving on to a brief discussion of results by business segments, starting with EQT Production, and there, as has been the case for several years now, the big story in the quarter at EQT Production was the growth rate in sales of produced natural gas. As I mentioned, the growth rate was a little bit north of 44% for the year, and was slightly north of 37% for the quarter. By the way, the sixth straight consecutive quarter of more than 35% rolling year-over-year growth. Those growth rates were driven by sales from our Marcellus wells, which contributed 42% of the volumes in 2011.

In the fourth quarter, Marcellus sales volumes accounted for 47% of the total volumes. Total sales volume would have been about 300 Mcf equivalent higher for the year and the quarter but for a dehydration equipment malfunction in December.

Unit realized price at EQT Production was slightly, or about 3% higher than last year, even as the corporations realized price declined a bit as I already mentioned. This is one of the benefits of an increase in the Marcellus sales percentage, as the Marcellus gathering rate is $0.60 per Mcf, compared to $1.25 per Mcf for the majority of our other production.

Moving on to expenses in the production unit. Total operating expenses were $90 million higher, year-over-year. Absolute DD&A, SG&A, LOE and production taxes were all higher, consistent with the significant production growth.

DD&A represented about $73 million of the $90 million increase. Absolute LOE was a bit higher year-over-year, however volume increases have been outpacing the general trend of higher absolute expenses. And as you would expect, per unit LOE was lower in 2011 by about $0.04, or 17% to $0.20 per Mcfe for the full-year 2011.

Moving on to the Midstream business, excluding the gains of the Big Sandy and Langley sales, operating income here was up about 19%, consistent with the 32% growth in gathered volumes, mainly from EQT Productions growing sales volume, and that resulted in a 18% increase in gathering, net operating revenues.

Transmission net revenues also increased by almost 7% year-over-year as a result of added equitrans capacity from the Equitrans-Marcellus expansion project, an increased throughput, more than offsetting revenues no longer received by – received from the Big Sandy pipeline.

On the other hand, the line item titled storage, marketing, and other net operating income was down, up $7 million in the fourth quarter, and $35 million for the full year. This part of the Midstream business, as we talked repeatedly about it, it relies on seasonal volatility and spreads and the forward curve, and those continue to trend down in 2011 versus prior years.

Also, the loss of processing fees from Langley third-party liquids, resulted in lower marketing revenues. For 2012, we expect revenues from storage, marketing and other to be approximately $45 million.

Net operating expenses at Midstream were about $27 million lower year-over-year, lower O&M and DD&A expenses which collectively were $28 million lower year-over-year, represent basically the entire absolute decrease in Midstream expenses. The absence of expenses associated with the sole Big Sandy and Langley assets and reductions in non-income tax reserves, resulted in those decreases.

Then in conclusion with finally, with our standard liquidity update. We did close the year in a great liquidity position with $0 in net short-term debt outstanding under our $1.5 billion revolver, and about $830 million of cash on the balance sheet.

As detailed in the press release, due to the current low natural gas price environment, we have lowered our cash flow forecast for 2012 by about $100 million, and therefore consistent with our intent to live within our means, the company has decided to discontinue drilling Huron wells. As a result, our 2012 CapEx forecast decreased by about $135 million to $1.465 billion for 2012.

And with that, I’ll turn the call over to David Porges.

David Porges

Thank you, Phil. 2011 was another record year for EQT. Earnings per share, operating cash flow, sales volumes, Midstream throughput and natural gas reserves were all higher than ever before. Though the primary purpose of this call is to communicate with investors, I first wish to convey my congratulations for these accomplishments to the 1,800-plus employees of EQT Corporation. Having such a strong group managing our assets gives me confidence that we will continue to earn premium returns for our shareholders.

Sales of produced natural gas and liquids were 44% higher than in 2010. This is on top of 30% growth in 2010 over 2009. Put another way, our daily sales volumes, when we exited 2009 totalled 300 million cubic feet. We exited 2011 at 580 million cubic feet per day, 93% higher in just two years. The Marcellus continues to drive our growth. Marcellus Production accounted for 47% of our sales of produced natural gas in the fourth quarter.

EQT has tremendous assets. While our objective is to maximize value creation rather than volume creation from these assets, the only practical way to do so is by economically monetizing our extensive reserve base, be it production and other means, and by extracting value from our Midstream assets and Midstream opportunities. However, we believe it is also necessary that we live within our means financially, without issuing equity.

In 2011, I believe we made great strides towards doing so, but the work continues. I’d like to review a little of how we did this in 2011, and also how we intend to do so in 2012. In 2011 we invested $1.4 billion in to our business. We funded this investment with $900 million of operating cash flow, plus $620 million of Midstream asset sales. The proceeds from the asset sales came from the outright sale of two assets. We examined other structures and assets, but determined that selling these two assets outright was the best approach. For 2012, we have decided that the best approach to create value is again investing our operating cash flow, plus also utilizing other available capital. This other capital includes utilizing our investment grade debt capacity, which we did in late 2011, and further monetizing Midstream assets by forming a MLP.

As we announced last month, we plan to file the S1 this quarter, though we recognize that this merely starts the process with the SEC. The advantages to EQT shareholders of forming a MLP include maintaining operational control of where, when, ad to what speck gathering is built, access to a on-going source of low cost capital, and participation in any MLP distribution growth. Of course, a publically traded currency would also provide a market view of the value of the MLPs assets.

Our objective, maximizing shareholder value is unchanged by changes in the environment in which we operate. The strategy accomplishing this, the ammonization of our asset base and prudent pursuit of investment opportunities, while living within our means, is also largely unaffected by the changes we have experienced lately.

Tactics, however can and should change. Despite of a bit of a rebound this week, natural gas prices are down sharply since we established our capital budget in December. Lower prices impact us in two ways. First they reduce cash flow from operations and less cash available for investments.

We have over 50% of our dry gas hedged in a average price of $5.43 and about 7% of our production in the form of NGLs and oil. And incidentally, recall we include ethane in our dry gas numbers since the [inaudible] for ethane are essentially equivalent to methane on a per Btu basis.

Even so, based on cases we ran, using last week’s lows for the 2012 strip, our 2012 cash flow estimates were almost $100 million lower than when we established our capital budget. Lower prices also reduced the projected returns of our drilling program. Marcellus returns are still strong at the current five year strip, about $3.90. We also stress test our investments and the projected are still adequate at [inaudible] strip. Please do keep in mind that the lags between spending capital on Marcellus wells and selling natural gas produced from those wells is several months, meaning the relevant five year strip when looking at 2012 investments is actually the 2013 to 2017 strip, which is currently somewhat north of $4. Therefore, it is clear to us that investments in developing our Marcellus play, are attractive though they would obviously be even more attractive at higher prices.

Regarding our Huron wells, even though they are liquids rich, the returns are still below the Marcellus wells. But since lower prices mean a reduction in operating cash flow and we are commitment to living within our means, something has to give. That something is the Huron, and this is why we have suspended drilling in that play effective immediately. We will complete the wells that we have already – that have already been spud, and continue to produce from existing wells.

This decision will reduce our 2012 CapEx by about $135 million, and reduce our forecast of sales of produced natural gas by approximately 5 Bcfe. The effect of this decision of volumes in the out years is the decline of 6 Bcfe in 2013, and a little over 3 Bcfe in 2014. The fact that the lag between drilling and sales in the Huron is much less than in the Marcellus, is why the 2012 impact is as large as this, and the 2013/2014 impacts are as small as they are.

Normally, one might lean away from cutting spending in a area in which we experience a shorter lag, but 2012 is not shaping up as a normal year.

I’d now like to comment on our reserve report, which was released today. Our continued success in the Marcellus resulted in a 535 Bcfe or 18.5% increase in prude reserves. This increase was partially offset by a 413 Bcfe decrease in Huron prude reserves, and we eliminated all of the prude undeveloped reserves, consistent with our decision to suspend drilling of Huron wells.

I remain confident that this play has value for our shareholders, but we are not going to be pursuing that value in the near future, so we’re moving these PUDs now, seemed appropriate. Further regarding reserves, we continued to have success with our experiment with tighter frac clusters. As we previously noted, this design works best in the more brittle areas of our play. Brittleness is also positively correlated with higher EURs using the standard frac design.

With the year of well [inaudible] in Rogersville, Green County, we estimate an IP 40% higher than a standard frac well, with EURs trending, 20 to 25% higher. Our 2012 plan includes 49 wells using this design, with about half applied where we have well control, and half to these risk areas where predict success. We still do not have enough data to book many reserves, or extrapolate these results across our acreage, but are excited about the results so far.

In summary, EQT is committed to increasing the value of our vast resource by accelerating the monetization of our reserves and other opportunities. We continue to be focused on earning the highest possible returns from our investment, and doing what we should to increase the value of your shares.

We will stay disciplined and live within our means, investing our available cash from operations and from future monetization. We look forward to continuing to execute on our commitment to our shareholders, and appreciate your continued support. Pat?

Patrick Kane

Thanks, Dave. This concludes the comments portion of the call. Laura, could you please open the call for questions?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator instructions). Our first question is from Neal Dingmann of Suntrust. Go head please.

Neal Dingmann – Suntrust Robinson Humphrey

Good morning, guys. Dave, I just wanted to – if you could quick comment, obviously, on the new frac design that you’ve talked a lot about and have seen quite incremental results. You know, again, with what’s going on with gas prices, you know, does that cause you to give pause to that or does it actually cause you to increase? I just wanted sort of comments around that and if you’re going to continue to ramp that up.

Dave Porges

I’ll let Steve comment mainly on it, but we do focus, and we have focused all along on the extent to which we’re getting increases in EURs versus just the rest of acceleration. So you can see form the numbers, a lot of it is – our results that we’re getting from increased EUR, so it’s really just a more efficient way to spend. I mean, in theory, if you could spend the same amount of money, but have the – come from and have the same volume come from fewer wells, you would have a lot of efficiencies in other aspects of the business. A lot of that is what we’re seeing.

We certainly understand that this is not a timeframe in which you would seek acceleration for its own sake, but we do take that into account when we’re looking at the projected return. Steve, I’ll let you – would you like to add anything?

Steven Schlotterbeck

I think the only thing I would add is, you’ll notice that 50% of the wells we intend to use that technique on in 2012 are in our – what we call our Rogersville area in Green County where as we get more data, our confidence level continues to rise that we are actually seeing quite a – a fairly significant increase in ultimate recovery.

Our number, even at the current stripe prices, show the returns on that incremental capital to be in excess of the base return on our Marcellus drilling. So I think even exceptionally low prices on half of those wells, it makes excellent sense.

The other half, or still, I guess I would call them experiments, but based on what we’ve seen in Rogersville where we have the most data, we feel like those experiments are worthwhile and they’re targeted in areas that, based on the geology, we expect good economic returns, but we need to gather more data to be sure.

Neal Dingmann – Suntrust Robinson Humphrey

And Steve, your focus on the Rogersville area, is it more because of the continuity of the play or is it because of the particular formations of this? I mean, what kind of has you focused on this area?

Steven Schlotterbeck

Well, one, the initial results we got were very encouraging, so that obviously attracted our attention. But I think the reason that it’s a clear winner is the brittleness of the rock is pretty high there. So higher silica content in the rock there than we have other places and that seems to be a key factor in having this technique increase recovery.

Neal Dingmann – Suntrust Robinson Humphrey

Okay. And David, for you – Dave or Steve as far as just a quick comment on services out there, we continue to see more kind of an exodus from some of the gas plays, the oil plays in this one and how that factors into kind of what your service forecasts are for the remainder of year?

Dave Porges

Well, on the fracturing side, which is the, you know the build of the spend on a well, our prices are pretty fixed for 2012, so I can’t tell you we’re going to benefit in the short term from any softening in the market.

On the rig side, we do have a couple new rigs coming into the fleet in the next couple of months that have lower average day rates than what we’re currently spending, so we’ll see a little bit of an improvement there.

Steven Schlotterbeck

And generally speaking, we are very aware that they’re finally, finally the leverage is shifting back to the producer community from the service community. You know, this decline has been really [inaudible], but the steep decline has only occurred over the course of the last six to eight weeks. So we are very focused on getting more efficiencies and lower cost on that front.

Neal Dingmann – Suntrust Robinson Humphrey

Sure.

Steven Schlotterbeck

I can’t give you specific numbers on it right now.

Neal Dingmann – Suntrust Robinson Humphrey

Okay. Very good. And then the last one, if I could, it looked like, you know, the reallocation of the capital and the CapEx, you know, you did mentioned, you know, pulling back a little bit on the upstream side, but it looks like kind of going forward on the midstream. Do you still see, you know, around MLP and just, I guess I would say the midstream in general, the same opportunities as far as besides [inaudible], just continue to build out the midstream enabled to have the benefits around controlling your midstream and that’s kind of why we didn’t see any pullback on that side per se?

Dave Porges

Absolutely. Even though there’s been a lot of talk about pulling back, even with some of the discussions from a variety of others about the Marcellus, and you know, and moving some of their activities away from Marcellus, et cetera, all we’re talking about for the Marcellus at this point seems to be the rate of growth. It is clearly, I'm mean, what we see and what others who participate here see, is it is the most economic natural gas play in the country and continues to be economic at these prices, therefore it continues to need midstream.

So even though there are cash flow issues when prices drop that we all have to be focused on, the economic attractiveness of the midstream continues to be there.

Neal Dingmann – Suntrust Robinson Humphrey

I absolutely agree with you, Dave. Thanks.

Operator

The next question is from Anne Cameron of BNP Paribas.

Anne Cameron – BNP Paribas

Hi, good morning. Just a question on your midstream. Is there anything like, now that you’re playing [inaudible] this quarter, is there anything before or after that point until you do an IPO that prevents you from receiving bids on that from a third party?

David Porges

No, there is nothing about that that prevents us from receiving bids, having conversations, et cetera.

Anne Cameron – BNP Paribas

Okay, and are you still talking to any potential bidders or partners?

David Porges

I'm not sure that I want to comment on that, if you don’t mind. We’re certainly – we remain open-minded. Maybe I can leave it like that. We remain open-minded and – just so you know, the only time a company gets committed on an MLP is – it’s not with the first filing of S1, right, it’s when you ultimately finalize the entity. So even a filing of an S1 would not change the things that I’ve just said about the corporation business, et cetera.

Anne Cameron – BNP Paribas

Okay, thank you. That’s helpful. And then just a question around your West Virginia liquids production. The plant that Mark West is building in Logansport, like that is going to increase your liquids yield on your Marcellus production. So how much of your current NGL volumes are actually coming from West Virgina and what’s that’s going to do to them?

David Porges

Randy?

Randall Crawford

Yeah, most of our liquids production that comes out of the heron play that we’re currently – as we mentioned, we have a JT skid that we process in Dodgeridge County that provides a 0.5 gallons per Mcf that is produced. And when our plant comes on, that will increase to 2 ½ gallons per volume produced in the wet area.

Anne Cameron – BNP Paribas

Okay, thanks. That’s July, correct?

David Porges

Yes, that’s more of the – right, that is a mid-year thing, so you will see a – we would expect you would see a big jump up in our liquids numbers once that plant comes on line.

Anne Cameron – BNP Paribas

Okay, super. Thank you very much.

Operator

And the next question is from Scott Hanold of RBC.

Scott Hanold – RBC Capital Markets

Yeah, thanks, good morning.

David Porges

Good morning.

Scott Hanold – RBC Capital Markets

I guess, you know, Dave, can I ask you, you know, what would it take for you guys to drop a rig in the Marcellus? How I guess, bad does gas have to be for you guys to make that decision?

Dave Porges

I don’t know. That’s – you know, we tested it against the current prices and by current, I actually mean what we decided was the prudent thing to do was to test it against the lows that we hit last week. And of course, it could – clearly, it could test those lows again. It still makes a fair amount of sense to continue with our approach in the Marcellus.

We keep challenging ourselves on all of this stuff when the environment changes and I guess it’s maybe – maybe the safest thing I could say, and most accurate thing I could say, Scott, is that so far what we’ve seen wouldn’t cause us to make those alterations and drop a rig.

So that’s – I mean, certainly, you can imagine probably, you know, at this point, who wouldn’t be able to pick out a number and say here, what if gas prices went to, I don’t know, what if gas prices went to zero and stayed that way forever. How much would you like to drill? Obviously, then you wouldn’t. But within reason, we don’t see that being something that we’re concerned about. We will look at the cash flows, obviously. I guess that would be the thing that would cause us to change something if we thought because of prices that cash flows were drying up enough that we had to make some other form of move and then we’d take a look at the rest of the operations to see what other forms of move was required.

But as it is, I think we described with the heron, that saves us enough so that it more than makes up for the cash flow reduction that we saw even at last weeks’ lows.

So it would certainly have to go below last week’s lows for us to be worried about the cash flow.

Scott Hanold – RBC Capital Markets

Okay, so the way – so you know, if I, you know, obviously things are moving quick and fast and some operators have made some deeper cuts. At this point, you’ve obviously made a decision in the heron, but throwing numbers out there, if gas was at $3, $3.50 on average through the end of 2013, it comes down to not necessarily a Marcellus economic question but it’s more of, you know, what your cash flow capabilities are and funding for that. Is that a far way to view it?

David Porges

Right. That’s exactly right, which means these other things we’re talking about with regard to midstream monetization then factor into this heavily as well.

Scott Hanold – RBC Capital Markets

Okay, understood. A question on the production during the quarter. I think you mentioned the exit rate was like 580 and I think your average during the quarter was 576. It looks like you may have had a little bit of a backlog of wells to be brought on. Is there a bit of a backlog there right now that – to be working through in the first part of this year?

David Porges

There is a bit of a backlog. If you look at our earnings release, you’ll see we have a larger number of frac stages complete but not online than we typically have. The bulk of that increase is in our we area of the Marcellus where we’re waiting for the Mark West plant to be operational.

Normally, we probably would not have fracked those wells yet given that that won’t be online for a few more months, but because of the West Virginia regulations regarding reclamation of pits, we needed to go ahead and frac those so we could reclaim the pits at the proper times. That’s a temporary influence and it means we’ll have a lot of liquid-rich gas ready to go when the plant’s online.

Scott Hanold – RBC Capital Markets

Okay, got it. Lastly, looking at your reserves, you know, obviously the adjustment, the heron and CMB adjusted that number downward, but you know, just kind of stepping back and looking at it, it seems like your reserve additions, you were a bit light relative to prior years considering that your CapEx spend is, you know, was at at least those levels. Can you give a little color on that?

Steven Schlotterbeck

That’s mostly a function of where we decided to drill. The bulk of our drilling was focused in areas where we already had lot of proved reserves on the books, so there wasn’t a lot of – we weren’t really out in to new areas where there’s a lot of room to add new crude reserves. Combined with the fact, if you look at the prior couple years, we had added large amounts of crude reserves. I think it was just sort of the nature of the beast given where we decided to drill because when we decide to drill, we focus on where we can get the best returns and really don’t factor in what the reserve addition impact is going to be. This year, as result, it – we had lower additions.

David Porges

We never manager, at least as long as I’ve been here, we have not managed to a reserve number. We haven’t tried to adopt wells. One reason – coming up with a development plan, we have not tailored it to try to – with offsets in mind, et cetera, to create a particular growth pattern to the reserves. We come up with the most economic development plan and then we let the reserves fall out the way they do.

Scott Hanold – RBC Capital Markets

Okay, understood.

David Porges

Obviously then, when you’re focusing on drilling in more concentrated area, you’re going to tend to get less reserve ads. When you’re having more step outs, you’re going to tend to get more reserve ads.

Scott Hanold – RBC Capital Markets

Okay. Understood. I appreciate that. Thanks.

Operator

Our next question is from Gil Yang of Bank of America/Merrill Lynch.

Gil Yang – Bank of America/Merrill Lynch

Good morning, everyone. I just wanted to follow up on this issue of the well backlog and talk about implications. Are there any risk, or what do you think is the risk of having these wells fracked and – because normally they’re just sitting there from the frac load in the well, or what’s going on with those well?

David Porges

A lot of times we’ll flow them back to clean up the bulk of the water and then shut them in. Sometimes we’ll leave the full load in. If your questions about a concern of reservoir damage, I guess I’d refer back – I think we talked about this a few years ago. For a time there, we actually were thinking that it might be beneficial to leave that load in based on some results we had seen. We’ve backed off on that, but what I can say is, we have never seen any negative impact of keeping the frac load in the well for extended periods of time.

Gil Yang – Bank of America/Merrill Lynch

Okay.

David Porges

It just doesn’t seem to damage as the Marcellus wells.

Gil Yang – Bank of America/Merrill Lynch

Okay. Do you have any rules for how much volume you expect to get out of each stage?

David Porges

Well, that varies by area. I’d probably refer you to our type-curve information in the – on our website and you’ll be able to calculate by area what that is.

Steven Schlotterbeck

The tight curves are based on a 5,300 foot well, so you can ratio that for different lengths.

Gil Yang – Bank of America/Merrill Lynch

Now, was the buildup in the backlog in any way related to your willingness to sell the excess pipeline capacity?

David Porges

No. Not at all. It’s just that when you enter into those kinds of agreements, you’re entering into long-term agreements and you’re kind of forecasting what you’re going to need several years out. As you kind of grow into it, the odds are you’re going to have excess capacity in the early years. So we knew that going in.

Frankly, when we looked at that particular line, the one that we’ve been talking about having made some money on at the very tail end of 2011, the Elpaso 300 line, we also felt more comfortable making that commitment because we have a sense that in the early days there was probably going to be a little bit of money to be made on that anyway.

Gil Yang – Bank of America/Merrill Lynch

Okay, so given that you were…

David Porges

We do plan on growing into that capacity though, just so you know.

Gil Yang – Bank of America/Merrill Lynch

Okay. Can you give us an idea when you’ll grow into the capacity?

David Porges

Over the next – well, actually, I’m not sure if we have released this before, but how far out do some of the contracts – what’s the longest term of the contracts where we – that we sold down to other people? We didn’t go – we did no more than two years and one for three years, small levels. So no, we intent to grow into that over that period of time.

Gil Yang – Bank of America/Merrill Lynch

Okay, so the – in effect, the transportation subsidy if you will, from selling the – at a higher price than you paid for it will last – will last over the next two or three years and will…

David Porges

No, the potential is there. Obviously, just following the basis markets, you would assume it will tend to be higher in the winter than it will be in the summer and the – we’ve kind of layered those contracts in so that, as Randy said, there’s one that goes out for three years and then there’s another at – that goes to two. So – and then there’s others that are shorter term than that to the point of monthly and even daily.

So it gradually goes away over the course of the next two to three years.

Philip Conti

This is Phil Conti. That’s why I tried to guide you to the – the $0.12 that I said add back to the run rate for the fourth quarter is the part that’s not subject to long-term deals. That we’ll either do better than that or worse depending on what the market is like, call it next winter.

Gil Yang – Bank of America/Merrill Lynch

Right, so in a sense, it should go from the current number, $0.29 up to $0.41 over the next two or three years, right?

Philip Conti

You should use $0.41 right now. We have, as I said, some of it is under contract. We bake that into that calculation and we’re just telling you that depending on what the market’s like when we go to sell that capacity next winter; it could be more or less than that $0.12 impact. We think $0.12 is a good number for you to run with so add $0.12 to the $0.29.

Gil Yang – Bank of America/Merrill Lynch

Right, okay.

Philip Conti

We’ll continue to quantify how much was from the resale each quarter.

David Porges

And we’ll try to come up with a way to be transparent on this stuff as we can because the reality is, as we continue to layer in other transport contracts, they’re going to have the same feature where you layer something into the long-term, you’re not going to be using all of it in the early years because obviously, the – unless you can guess perfectly correctly, which I think everyone in our industry has demonstrated that we cannot do, I think we join other industries in that inability. But you have to choose on the two little capacity or probably error a little bit on the side of having more capacity. And you’ll wind up with a little bit more, so it means we’re probably going to have more of this excess as we enter into other contracts, but that’s not to say that it’s going to be worth more than what we’re paying. When we enter into it, assuming that we’ll be able to cover the cost, but not profit from it. It just happens that there’s a lack of capacity going into some of the Northeastern cities right now.

Gil Yang – Bank of America/Merrill Lynch

Right. And just a last question. I missed the number, how much liquid volume do you expect to come on when the JT skid comes online?

David Porges

Well, I mentioned the 2 ½ gallons. We hauld 120 million a day of capacity into that plant going into the summer. And so again, that number also does not include methane, so that’s…

Steven Schlotterbeck

And that’s not the JT. You asked from the JT skids. We use the JT skids to get the wet gas down to pipeline specs routinely. So the increase that Randy’s talking about is actually when we don’t have to use those JT skids there anymore because we’re going to through that Mark West plant.

Gil Yang – Bank of America/Merrill Lynch

Okay. Great, thank you.

Operator

The next question is from Joseph Allman of JP Morgan.

Joseph Allman – JP Morgan

Thank you. Good morning, everybody. Just a couple questions. One, the base decline for our heron production, what would you estimate your base decline is?

David Porges

Well, we gave the 6 Bcf decline next year from this year’s run rate and then another little bit over 3 for the year after that.

Joseph Allman – JP Morgan

Got you. And then on the drop in the CBM possibles, what’s the reason for that drop?

David Porges

I think some of that was economics driven. Some of our CMB drilling at these really low gas prices, it was hard to even keep those in the possible category.

Joseph Allman – JP Morgan

Okay, anything performance related or…

David Porges

No, I mean, we haven’t drilled in that field for a while, so there is no new production information. And in our PDPs, there was no revision to those.

Steven Schlotterbeck

The performance there is, at these prices, is mediocre. It’s just not any worse than it was a year ago, or two years ago, or five years ago. It’s not that, it’s that in this price environment, it’s a hard time competing against Marcellus gas and associated gas.

Joseph Allman – JP Morgan

Got you. And then in terms of your booking per well in the Marcellus, you know, in your release, you indicated that you’re PUD you booked at 6.3 B’s and that appears higher than year-end 2010 because I think in Pennsylvania you booked 6.3 B’s but in West Virginia you 4.7. So it appears that you increased the per-well URs assuming shorter laterals actually. So could you just clarify that and then this year you’ve booked the crude developed at 5.7 and how does that number compared to the year before?

David Porges

Well, I think to your first question, two factors came into play. One was improving well performance and the other is mix. We had higher percentage of PUDs in our very best area this year than we had last year. Those two factors came into play.

Could you repeat the second part of your question?

Joseph Allman – JP Morgan

Just for the PRU developed, you booked your PRU developed at 5.7 Bcfe per well. What’s the comparable number in 2010?

David Porges

4 ½ feet per well last year.

Joseph Allman – JP Morgan

That’s helpful. So in terms of the new frac design, how many wells have you drilled so far using that new frac design?

David Porges

I believe it’s 27, plus or minus a couple.

Joseph Allman – JP Morgan

Okay. And then in terms of someone asked the services question, are you having any issues or any concerns about just the logistics, you know, getting sand or any other materials?

David Porges

No. No problems at all.

Joseph Allman – JP Morgan

And then just on the comment on the Midstream, you know, you guys made a conscious decision to not sell it out right. I’m assuming just the openness that you expressed is really just, if you just get a really, really great deal, right?

David Porges

I have a feeling actually that that had to with the other alternative that’s long been on the table, which is a joint venture. But you’re right, we’re open – look, we’re in business to create value and so across the board, anything that will create value to the shareholders is something we’re open to. But the nature of the discussions that are going on in the past about the MLP were really more along the lines of various forms of joint ventures.

Joseph Allman – JP Morgan

Right, but I guess the other question I think was, you know, if I’m not mistaken, was are you open to just selling it out right? You said, you’re open.

David Porges

We’re open to anything.

Joseph Allman – JP Morgan

Right, okay.

David Porges

The question for us is where do we get the most value for the shareholder.

Joseph Allman – JP Morgan

Right, but you’ve already gone through that who thinking process right, so …

David Porges

We have, but if you’re trying to give a hypothetical of somebody coming in with whatever number we think if a value and they’re adding a zero, well, then that changes our view. I mean, you can answer yes, no when it’s value because that’s all in the eye of the beholder and we can’t predict whether us saying we’ll file an S1 or actually filing an S1 will alter the way other folks will view it. I mean, we’re very aware, you look out in the market – you don’t have to look very far to find folks who announce the transaction and then that focuses the mind of somebody else and they react to it by putting a different – kind of sharpening their pencil. That stuff happens and we don’t want to – we don’t want to stick our head in the sand and pretend it couldn’t happen here.

Joseph Allman – JP Morgan

Sure, but there’s no change in your thinking versus your last, you know, disclosure about – okay.

David Porges

That’s exactly correct.

Joseph Allman – JP Morgan

And you know, and control of the assets, I mean, the ability for you to be able to grow your Marcellus at the pace that you want hinges on having some control of this?

David Porges

It has value to us. I don’t know if I want to say hinges on because that kind of turns it into a black or white. It has value to us.

Joseph Allman – JP Morgan

Got you. Okay. And then lastly, just what prices are you using for your CapEx budget for 2012?

David Porges

Well, what we tested it at, all the numbers that we gave you were based on a $3 or a little below $3 stripe for ‘12.

Philip Conti

For the cash flow. The budget was based on the cost per well and the number of wells.

Joseph Allman – JP Morgan

Got you. That’s what I mean. Okay. Very helpful. Thanks guys.

Operator

The next question is from Craig Shere of Tuohy Brothers

Craig Shere – Tuohy Brothers

Hi. Can you discuss the percent of your gas stream that is made up by methane and the potential upside from eventual industry ethane solution in light of Range’s announcement this morning that they secured a $0.145 per gallon transport cost on EPD’s [inaudible] Express Line to [inaudible] connections?

David Porges

Yes. We announced what the percentage is of liquids that would double essentially with the take of ethane. As we mentioned before, the plant that will be coming online in Northern West Virginia will provide EQT the opportunity to extract ethane, which would increase the amount of gallons from 2 ½ to 5.

We have the flexibility to make that decision economically and as we look out and make that decision, if it is in EQT’s best interest to extra ethane from the price that we will receive, then we’ll have the ability to do that. And if we are in a position to sell it as methane as we today and blend it, if that’s in the economic best interest, then we’ll do that as well.

And we’re glad that pipelines are being built to move ethane. That’s good, but realistically, if you look at the macro situation for ethane supply demand in the Marcellus, and you read through the specifics of any kind of the agreements that people enter into, you come up with ways to, you extract methane – I’m sorry, you extract ethane from the methane stream mainly because you have to to get down to pipelines. It doesn’t really create a lot of value the way propane and butane, et cetera do. It’s, you know, if you can, as Randy said, if the pipelines are there and you can enter into transactions where you can have a little bit of money, that’s great, but the mindset we still thing – we still think the prudent mindset with ethane is to assume that you extract it when you have to to meet pipeline specs. And if you can make a few bucks on top of that, well, then that’s obviously great.

Craig Shere – Tuohy Brothers

But isn’t that, given today’s pricing with $0.14, $0.15 per gallon transport costs, isn’t that a premium to methane gas?

David Porges

Well, first of all, those things, those pipes will be – start netting back that and fuel and loss, it’s a pretty close call.

Craig Shere – Tuohy Brothers

Okay, so you think that at this point, there’s marginal uplift potential from finding end markets for the ethane?

David Porges

Yes, you have to enter into long-term term commitments. The only thing firm about that kind of pipeline deal – and it’s the same with our gas price, you know, with the EL Paso expansion that we signed up, it’s the same thing. The only thing that’s certain is that you’ve got to write them checks.

Craig Shere – Tuohy Brothers

Right.

David Porges

And if you’re in a position where that you need to extract ethane to meet the pipeline specs, then economics may not drive that decision. EQT’s in a position right now to make that decision based on the economics.

Randall Crawford

Look, wetter gas, in this market, is better than dryer gas, but for the most part, for all of us here, half of the C2 and above, roughly speaking is C2. So if you want to be able to extract the value form the C3 and above, you have to be able to do something with the C2. So you know, so I think net-net, it’s attractive if you have wet enough gas to make – you just want to make sure you can let the gas flow. And to let the gas flow, it has to – you have to have little enough ethane in it that you can meet pipeline specs. So in that context, the all-in economics can work very well, but the all-in economics don’t work because of the specifics of the ethane deal, that’s just a means to an end.

Craig Shere – Tuohy Brothers

Range has talked about the possibility of actually exporting from the East Coast within two to three years to Europe. If there was a closer export opportunity to global markets, would that change your outlook on the incremental value of ethane?

Randall Crawford

Absolutely. If the value is there, we’re prepared to pursue it. It’s just that that’s still not the driving force behind even the wet gas development. It’s the C3s and above that’s the driving force. But yeah, absolutely. If there’s the opportunity to make material uplift, then we certainly would pursue that.

Craig Shere – Tuohy Brothers

Okay. Thank you very much for the discussion.

Operator

Our next question is from Ray Deacon from Brean Murray, Carret & Co.

Ray Deacon – Brean Murray, Carret & Co.

Yes, hi. I had a question for Phil. I was wondering, could you just talk about your borrowing base in light of the fact that a number of companies have talked about downward revisions to their borrowing lines. My understanding is you have a corporate based facility, right, so there’s probably…

Philip Conti

Yes, there’s not borrowing base at all. It’s $1.5 billion without a borrowing base calculation ever done during the life of that facility. It matures in 2014, so I think November 2014.

Ray Deacon – Brean Murray, Carret & Co.

Got it. And what’s likely to happen with the IPO in the Midstream business? Does part of that go with the Midstream or what’s…

Philip Conti

You’re just trying to get us in trouble with the SEC, Ray. I know you.

Ray Deacon – Brean Murray, Carret & Co.

Okay, you can’t – and just in terms of the – to clarify the economics on the program in 2012, when you say you stress tested down to $3 strip, do you include the impact of the 50% that’s hedged in that or no?

Philip Conti

Actually, I’m happy to make a philosophical point. When we look at the going economics of the program, obviously we take the hedges into account. But when we’re making marginal decisions, on the margin, every MMBTU of every incremental or detrimental MMBTU of natural gas should be priced at the market. And I think that extends even if you were fully hedged and you dropped, you can always tear up the contract. You can cancel the contract. Nobody has to know that the production’s there. The accountants might have an issue with it. But you can still collect the money on a hedge even if you were fully hedged and decided to cut production.

So the right way to make marginal decisions is based on the strip. No matter how – what your hedge percentage is or isn’t, it happens, of course that the Huron decision on a piece of paper increases the percent hedge that we’ve got just because it takes the denominator down. But we make these decisions on what we should do on the margin by looking at the market.

Ray Deacon – Brean Murray, Carret & Co.

Okay. Got it, makes sense. And two quick questions for Randy. I was wondering, there’s been a lot of discussion that a lot of the major trunk lines that run through the Marcellus are going to fill up this year and given the cutbacks that people are announced, could you just talk about kind of your – some of your long-term plans and how the backhaul might play in to that as an asset I guess?

Randall Crawford

As you know, EQT has always been proactive to be to procure capacity and one, ensure flow assurance and number two, to access markets downstream and have liquidity and I think we’ve demonstrated that with our capacity on Tennessee. Going forward, I mean, as the development continues, it will continue that strategy. We still continue to see significant drilling and the need for capacity and that’s been our strategy going forward.

Ray Deacon – Brean Murray, Carret & Co.

Got it. Okay. I mean, you don’t see [inaudible]?

Randall Crawford

There will always be certain bottlenecks. Now with respect to the backhaul, again, we look at accessing a variety of markets. Obviously, the most attractive markets in the Northeast, but the backhaul, again, with the possibility of exporting LNG and accessing more meters, we continue to look at utilizing our portfolio to access a variety of markets and that does include the backhauls into the Gulf Coast and forward hauls into the Northeast. So we look at a variety of options that could give EQT one flow assurance into realize the best price for our product.

Initially, our approach for the LNG export is the same as it is on an earlier participant that asked about ethane export. We’re not prepared to enter into that type of arrangement right now, but we like the fact that the backhaul gives us the opportunity to do so if we wind up deciding in the future that it is, in fact an attractive thing to do.

Ray Deacon – Brean Murray, Carret & Co.

Got it. Great. Thanks. And I was just curious with that JT skid, I mean, is there – would you be able to sell the two of those or is there much value there? Would you continue to use them somewhere else?

Randall Crawford

Well, we would use those somewhere else. As we continue to grow into our – in order to meet pipeline specs, we’ll have the flexibility omove those.

Ray Deacon – Brean Murray, Carret & Co.

Thank you.

Operator

Next we have a question from Steven Richardson of Deutsche Bank.

Steven Richardson - Deutsche Bank

Hi, good morning. A quick question on just a clarification. Following up on the discussion of marking the strip to where it was last week and thinking about cash flow for this year, as you think about 13, can you just clarify what, you know how you think about this term living within our means and what that could mean? Is the program here – is the plan here to try to keep this program flat year over year or how do you think about that in the light of a $3 thereabouts strip next year?

Dave Porges

Well, practically, it means cash flows from operations plus monetization of probably Midstream assets, though really, anything is open to – I don’t mean to sound – make it trite, but everything if for sale at a price and to the extent that these other two find some of our assets more interesting to them then they are to right now, you know, that becomes a monetization opportunity. But I think practically, we’d look at 2013 and say it’s operating cash flow plus those sorts of monetization. And the stuff that’s nearer term, of course, is a continuation of some form of Midstream optimization. Of course, we chatted about what some of the ways that that would happen would be.

Steven Richardson - Deutsche Bank

Right, okay. Thank you. And so as you think about – I guess the other question was a clarification on the reduction of activity in the Huron. You mentioned that there’s – well completions are going on this year. Is there any other penalties or anything else in terms of shutting down that business that’s included in that capital number for 2012?

Philip Conti

No. Actually, the only missing – you know, we’re chatting about – before the cal began, so we’ll share it with the rest of you, if you’re doing the math on the number of wells that we’re not doing – we’re not going to drill that were originally in the plan, you would have to factor in that some of the wells that gets spud would have, but no longer will. But in the plan we’ve gotten spud late in 2012, they would have had a fair amount of their CapEx occurring in 2013. So you’ve got the 130 – just one decision causes a reduction in CapEx in 2012 of $135 million, which we stated and roughly, let’s say $25 million in 2013 from those 2012 wells. I mean, you spud the well but you would have still had more work to do fracking at such that would have bleed into 2013.

Steven Richardson - Deutsche Bank

Got it. But you were – the previous plan, were you already tending down in terms of activity so you would have held fewer wells waiting on completion at year end ’12 versus what you held in ’11?

Randall Crawford

No, because actually the ’12 plan, the beginning ’12 plan was pretty similar to the ’11 plan. We had – there’s no doubt that we trended down, but the ’12 plan actually reflected a plateauing versus ’11.

Steven Richardson - Deutsche Bank

Got it.

Randall Crawford

And the Huron program has a very short lag for SPUD to TIL, so we don’t generate a large backlog in the Huron play.

Steven Richardson - Deutsche Bank

Great. Thank you very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Kane for any closing remarks.

Patrick Kane

Yes, thank you, everybody for participating and as I mentioned earlier, the call will be available for seven days for replay. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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