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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Thank you for attending today's EQT Q2 2022 Quarterly Results Conference Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions]
I would now like to pass the conference over to your host, Cameron Horwitz, you may proceed.
Good morning, and thank you for joining our second quarter 2022 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer; and David Khani, Chief Financial Officer.
The replay for today's call will be available on our website beginning this evening. In a moment, Toby and Dave will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our website, and we will reference certain slides during today's discussion.
I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements, because of the factors described in yesterday's earnings release, in our investor presentation and the Risk Factors section of our Form 10-K and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements.
Today's call may also contain certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.
With that, I'll turn the call over to Toby.
Thanks, Cam, and good morning, everyone. Since our first quarter call, we have seen significant commodity price and equity market volatility. However, one thing that has not changed is the growing recognition that the world needs more clean, low-cost US natural gas supply in order to achieve its climate goals, drive down inflation and provide energy security, both domestically and to our allies abroad.
We're seeing this recognition play out on a global stage with positive signposts and support for natural gas as a key fuel source for decades to come. One such example is the recent vote from the EU Parliament to include natural gas investment as climate-friendly under the European taxonomy starting in 2023. The systems like this highlight the global shift toward embracing pragmatic energy solutions that can address climate change by attacking the largest source of global emissions, which is foreign coal.
In short, at a time when the world is being forced to determine what the best option is for affordable, clean and reliable energy, it is overwhelmingly turning to natural gas as the solution.
Here at home, recent nationwide polling data shows the US public is speaking loud and clear in support of more domestic natural gas development. Specifically, the polling data shows nearly two-thirds of voters rank strengthening US energy independence and reducing energy costs as their top priority today. Nearly 70% of voters support increasing US natural gas production and a similar amount to support building new natural gas pipelines with majority support running across all party lines, and voters are more likely to support a candidate that supports natural gas development by a 33-point margin.
Put simply, the American public is demanding that US natural gas play a leading role in providing affordable and reliable energy to the world, while also addressing climate change by replacing foreign call.
And in a world that recognizes and acts on the need to unleash US natural gas, EQT will thrive for several key reasons. First, we are the largest producer of natural gas in the US with a multi-decade high return inventory. As shown on slide 12 of our investor deck, we highlight breakeven pricing of our entire 1,800 core Marcellus inventory with every location generating a 10% or higher return at a natural gas price below $3 per Mcf. We note this core inventory has very rigid inclusion criteria, and a derisked view of our portfolio shows more than two times upside to this location count across our broader acreage position. We believe this combination of depth and quality of our inventory is unrivaled among peers and gives us significant confidence in our ability to generate strong shareholder returns for as far as the eye can see.
Second, our investment-grade credit ratings underscore the strength of our balance sheet, which we see as a key tenet for the long-term sustainability of our business and allows us to opportunistically lean into value-creating investments across commodity cycles. Year-to-date, we have repurchased approximately $830 million of debt principal, and we plan to further fortify our balance as we are rating our year-end 2023 debt reduction goal by $1 billion to $2.5 billion to tactically capture the market discount currently available.
Third, we have among the best ESG credentials across the entire energy sector, which is backed up by the progress highlighted in our recently released 2021 ESG report. As shown on slide 14 of our deck, we have lowered our Scope 1 and Scope 2 GHG emissions by 36% on an absolute basis and reduced our methane intensity by a similar amount in just three years. Our track record gives us tremendous confidence in achieving our net zero goal by or before 2025, and we highlight the credible path we will take to get there on slide 15 of our deck.
In summary, we have what the world needs; a leading inventory of low-cost, low emissions natural gas with the balance sheet and scale to support long-term development. These characteristics position EQT at the tip of the spear to meet the growing natural gas needs of both domestic and international end users via LNG. As highlighted in our last call, we continue to have discussions with LNG end users across various geographies.
As a reminder, our firm transportation portfolio delivers approximately one Bcf per day of production to the Gulf Coast, and we are looking at various paths to unlock LNG opportunities along the East Coast.
Turning to second quarter results. We executed on the midpoint of our production guidance as we were able to ameliorate the logistical issues that slowed down frac times in Q1. As shown on slide 13 of our deck, pumping hours per frac crew during the quarter increased by 25% sequentially and were up 7% year-over-year despite a significantly tighter oilfield service backdrop. We tip our hats to wear operations teams here as they have enabled continued efficient execution of our combo-development strategy even in the face of a challenging operating environment.
We continue to make progress on the evolution of our new completion design with several key projects successfully executed in Q2 and several more planned for Q3 and Q4. While we are still in various phases of assessing our science work, recent indications give us incremental confidence in the productivity uplift associated with our new design, and we plan to make a decision in 2023 as to broader implementation across our asset base. As a reminder, full implementation of this new design would be expected to both reduce annual long-term well count and capital needed to produce the same level of volumes.
Turning to capital returns. As shown on slide 9 of our investor deck, we are augmenting the framework we originally laid out to the market last December. First, we recently raised our base annualized dividend by 20% from $0.50 to $0.60 per share, which is a sign of the growing confidence we have in the sustainability of our business and longer term natural gas prices.
We believe a strong and growing base dividend is one of the best read-throughs to the long-term value proposition of an organization, and this adjustment reflects exactly that. We plan to continue reassessing our base dividend at least annually and see material room for long-term sustainable growth.
Second, we are increasing our debt reduction target by $1 billion to $2.5 billion by year-end 2023. While we had planned incremental debt retirement beyond 2023, given our long-term leverage goal of one to 1.5 times, we are taking the opportunity amid robust commodity prices to accelerate delevering and unequivocally fortifying our balance sheet.
The recent rise of broader interest rates has created a unique opportunity as our bond prices have declined despite our strengthening underlying credit quality. Taking this action ensures long-term business sustainability, drives asset value to our equity holders and gives us significant flexibility to invest through our cycles. We are keenly focused on deploying capital to the best risk-adjusted return opportunities available to us and a pristine balance sheet is a key enabler for us to compound value for our shareholders over time.
On share repurchases, recall, we rolled out our $1 billion authorization last December, noting we would be opportunistic with deployment. After aggressively repurchasing $230 million of stock in Q1 at an average cost of $23 per share, our stock more than doubled in value at certain points during the quarter. At the same time, we saw some early warning signs of recessionary risk, and as such, we temporarily tapped the brakes on our buyback, highlighting that we will remain disciplined on all forms of capital deployment and firmly focused on earning the best risk-adjusted return for our shareholders.
As the stock pulled back toward the end of Q2, we started opportunistically retiring our convertible notes, which are trading virtually in parity with our common shares. With the $213 million we spent repurchasing convertible notes during and subsequent to the end of Q2, we lowered our fully diluted share count by almost six million shares at an effective equity price of approximately $37 per share, while simultaneously eliminating a debt obligation and simplifying our balance sheet.
In total, our updated framework allocates roughly $4 billion towards shareholder returns by year-end 2023 and leaves approximately $3.5 billion of retained free cash flow flexibility on recent strip. With the continued resiliency of longer dated natural gas prices, we now see approximately $22 billion of cumulative after tax free cash flow from 2022 through 2027 at current strip. This is up from the prior $17 billion we highlighted last quarter and equates to approximately 140% of our current equity market cap, underscoring the tremendous value opportunity embedded in EQT shares.
I'll now turn the call over to Dave.
Thanks, Toby, and good morning, everyone. I'll briefly summarize our second quarter results before discussing our balance sheet, hedging, basis and guidance updates. Sales volumes for the second quarter were 502 Bcfe, in line with the midpoint of our guidance. As Toby mentioned, we implemented new technologies during the quarter to address the tight trucking market we experienced in the first quarter. This is paying off as we saw a material improvement in completion efficiency on a sequential basis.
Our adjusted operating revenues for the quarter were $1.6 billion or $3.21 per Mcfe, and our total per unit operating costs were $1.37. As a result, our operating margin was $1.84 per Mcfe, about $0.80 or 75% higher than last year on higher volumes and price realizations.
Capital expenditures were $376 million, in line with the high end of our guidance range. Adjusted operating cash flow was $915 million and free cash flow was $543 million, bringing our total year-to-date free cash flow to more than $1.1 billion. Our capital efficiency for the quarter came in at $0.75 per Mcfe, which was up sequentially due to greater spending on science associated with our new completion design and continued inflationary pressure.
Turning to the balance sheet. Recall, we achieved investment-grade credit ratings from Fitch and S&P earlier this year, underscoring the material progress we made in creating a more sustainable company for our stakeholders. As Toby mentioned, we are taking even more action to bull-proof our balance sheet through all parts of the commodity cycle by raising our year-end 2023 debt reduction target by $1 billion to $2.5 billion. This will reduce our gross debt to approximately $3 billion and accelerate achieving our long-term leverage target of one to 1.5x using a $2.75 gas price.
We are not wasting any time executing our goals as we deployed approximately $390 million over the past several weeks, including repurchasing approximately $175 million of senior notes and $213 million of convertible note principal and premiums. We note that the retirement of convertible notes executed to date has lowered our fully diluted share count by approximately six million shares while also simplifying our balance sheet.
At the end of the second quarter, our trailing 12-month net leverage stood at 1.6 times, down 0.3 turns from the prior quarter. Note, our net debt at quarter end reflects the impact of approximately $690 million of working capital usage during the quarter, the bulk of which should reverse in the second half of the year. At recent strip pricing, we forecast our year-end 2022 and 2023 net leverage to be approximately one time and 0.1 negative times, respectively, which contemplates executing the remainder of our buyback authorization and accounts for a 20% dividend increase.
We ended the quarter with approximately $2.2 billion of liquidity, and we recently renewed our $2.5 billion unsecured revolving credit facility with a five-year maturity. Two key points to note here. First, we added two new banks to our bank syndicate. Second, we were easily able to maintain our credit size while most revolvers have shrunk by approximately 15%, both of which showcase the underlying credit of our business and the strength in our bank relationships.
As noted in the SEC filing earlier this month, we exercised our option to receive a cash payment of $196 million from Equitrans Midstream in lieu of a portion of near-term fee relief. We expect to receive proceeds by late 3Q or early 4Q.
As shown in slide 18 of our investor deck, this cash election does not impact the $0.15 per Mcfe long-term gathering rate reduction from today's levels. Also, we still model an MVP start-up in fourth quarter 2023.
Moving over to hedging. During the quarter, we opportunistically restructured our hedge book for 2023. Specifically, we converted the bulk of our remaining 2Q through 4Q 2024 swap positions into costless collars. For the summer, we placed approximately $4 floors and $6.25 ceilings; and in the winter, $7.30 floors with $11 ceilings. The positive market skew at the time enabled us to set $3 of upside with only $1 downside, tying to our plan to provide stakeholders with strong risk-adjusted upside.
Separately, as we've seen signposts of global economic slowdown, we thought it would be prudent to add floors to our 2023 hedge book, buying approximately $4.55 puts with premiums that we were able to defer into 2023.
With these actions, we are now approximately 50% hedged on our 2023 volumes, predominantly with wide collars and puts. As an illustration of the resiliency of our forward outlook, if NYMEX retraced to approximately $3 per MMBtu in 2023, we would still expect to generate approximately $1.6 billion of free cash flow next year or a 10% free cash flow yield. Conversely, if natural gas averaged $7 per MMBtu level, we would expect to generate almost $6 billion of free cash flow in 2023 or nearly a 40% free cash flow yield.
Now turning to LNG. As Toby mentioned, we are making progress on our strategy and see an increasingly bullish setup for global natural gas fundamentals on a multi-decade basis. We expect global natural gas demand outside of North America to grow from approximately 285 Bcf per day today to 375 Bcf per day by 2050. This means supply growth equivalent to doubling the entire US natural gas production base is necessary to balance the global market in less than 30 years.
There is a growing recognition both domestically and abroad that we are unlikely to meet this demand without significant incremental production from Appalachia, which is home to the longest runway of low breakeven, low carbon intensive natural gas inventory in the world.
As noted in our unleash US LNG deck, resource quality and longevity dictate that 70% of incremental US LNG export growth will ultimately need to come from Appalachia. Equity is currently in various stages of discussion for supply agreements covering approximately one Bcf per day of FT capacity to the Gulf Coast. We are looking at ways to catalyze East Coast LNG, which could have meaningful ramifications to our Appalachian production long-term.
Turning over to guidance. As we noted last quarter, we saw pricing pressures broaden across all service lines. We experienced some further inflationary impact since our first quarter call, and as such, we are raising our 2022 CapEx guidance range to $1.4 billion to $1.5 billion, the midpoint of which is in line with the high end of our prior guidance.
As highlighted in slide 13 of our slide deck, our contracting strategy provides significant risk mitigation on a go-forward basis. The most notable is our long-term sand supply agreement and frac crew contracts we extended to 2024 and 2025. We are reiterating our 2022 EBITDA and free cash flow guidance ranges, but see bias towards the upper end. Note that our guidance reflects strip pricing as of July 2022. Given a structurally superior hedge position next year, our 2023 free cash flow should expand by approximately 100% year-over-year, providing differentiated free cash flow per share growth even with flat production volumes. Again, using strip pricing, we see approximately $22 billion of cumulative free cash flow through 2027, which is net of all expected cash taxes and hedge premiums.
I'll now turn it back over to Toby for some concluding remarks.
Thanks, Dave. To conclude today's prepared remarks, I want to reiterate a few key points. One, Americans are voicing clear support for more domestic natural gas, which is critical to reducing extreme energy costs, increasing America's energy independence and tackling global climate change by replacing international coal.
Two, our depth and quality of inventory, investment grade balance sheet in our peer-leading ESG credentials differentiate EQT as a leading producer on a global scale, and we stand ready to meet the long-term call on natural gas demand.
Three, we are outperforming our emissions reduction targets and have a clear and credible path to net-zero by 2025, which can be achieved with current technologies and at a very affordable price tag.
And finally, our updated capital returns framework shows a resounding commitment to our shareholders. With $4 billion earmarked for year-end 2023 for debt reduction, share buyback and our increased base dividend, with plenty of room for upside given we expect to generate $22 billion of cumulative free cash flow through 2027.
I'd now like to open the call to questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Arun Jayaram with JPMorgan. You may proceed.
Yeah, good morning. Toby, you've announced some incremental action on shareholder return, the $1 billion in incremental debt reduction, plus the dividend increase. My question is regarding when do you think the company would provide more clarity around the retained flexibility category? On your updated guide, $6.4 billion of free cash flow if the strip holds over the next quarters. If you back out debt reduction and the dividend, you have just under $4.4 billion of unaccounted for free cash flow. So just some thoughts on that and perhaps the pace of buyback activity given -- under your current authorization?
Sure, Arun good morning. So as it relates to our capital allocation framework, I think what we've done is set out authorizations that we know we can execute, but as you mentioned, we do have flexibility to go above there.
I think the flexibility is important because we want to make sure that we are matching the allocation decisions with the environment that we're in. I think there's a lot of clarity on the debt retirement goals that we've stated. But to put a little bit more color on our buyback approach, our buyback approach is opportunistic, and we believe that's appropriate given the current volatility that we see in this world. But understand that that's tough to model, the buyback pace that we have.
So I'd ask you to look at what we've done in the past. In Q1, we've taken advantage of our buyback authorization and bought back over $240 million worth of stock, retiring about 9.9 million shares. In Q2, we repurchased about $213 million of convertible notes, and that has the impact of retiring around 5.7 million shares.
So over the past two quarters, we've retired over $400 million of shares, retiring about 15 million shares at an average price of around $31 per share. I think the approach is providing some pretty good results. But look at what we can do in the future, and we have the opportunity to continue that pace. We're, obviously, stepping into a more robust free cash flow generation phase of this business, and I think the opportunity for us to do more is appropriate.
Fair enough. Perhaps for David. David, EQT repositioned your hedge portfolio. Getting some question on the impact to your free cash flow outlook. I know the repositioning started in the fourth quarter of this year. Can you give us a sense, if we kind of put in strip in the model, what kind of impact that had to cash flows from those moves? And was there any cost associated with this repositioning activity?
Yeah. So I'll answer that question. Yeah, no cost. Everything was done at market, and so no cost to us. So if you step back and just give you high levels, right now, with our hedges in place, we basically have a $2.92 floor and we have approximately $4.95 ceiling. And so that's the bounds of -- and we're about 45% -- I'm sorry, about 50% floors, and we're about 45% ceiling. So that provides the risk adjusted benefit. If the floors were reached, we'd be about $1.5 billion. If the ceiling would be reached or breached, it would be about almost $4 billion. So that just gives you a sense of range of outcome there.
With the repositioning, okay, we basically converted our swaps, which we'll call it about 10% of our hedge position was converted into costless collars. And as I said earlier on the prepared comments, the SKU was about $3 up and $1 down. And if you look at the value today, that position that we did is about $110 million into the money. And if we hit the ceilings of that -- of what we just did, we would create about $450 million of upside on free cash flow. So that gives you a sense of magnitude of what we did and it allows investors to understand how we have -- we think about the risk-adjusted upside.
Thanks for that color. Appreciate it.
Welcome.
Thank you. The next question is from the line of Umang Choudhary with Goldman Sachs. You may proceed.
Hi, good morning, and thank you for taking my question. My first question was on the well performance. Any -- from the next-generation completions, any early read through there? And then if it is successful, how would that change slide number 12? How much of that inventory would you be able to add with the sub-250 breakeven?
Umang, good morning. So it's early on our science. We are encouraged, but I will say that the wells are still in flat time in our choke management program. So we'll get a better read once these wells enter closer towards the decline periods of their lives. And so that's why we're refraining from being -- but we are leaning positive right now.
For slide 12, the couple of impacts on the enhanced well design. One, it's obviously going to improve the economics of the inventory that we put there. So, you'll see those sticks shift down the cost curve, which would be good. That will also pull some more what we consider non-core and give that a shot of lowering their breakevens.
But two, this will also have the impact of extending our inventory life because if this hit, this will allow us to reduce the number of wells that we need to drill each year to maintain volumes. So that will extend our inventory life past the 18 years of core inventory. So those are really the two dynamics that are at play right now.
That's helpful. And maybe next question is on the LNG strategy. You mentioned that you are in discussion with a lot of LNG customers. How are the discussions progressing? And what are the key points which the customers are looking for more clarity on?
Yes. So, I would just say, right now, we probably have an opportunity to lock in contracts for -- with probably about three or four different facilities. And so the question for us is duration and which we want to do. If we want international markets, do we -- what toll rates are we willing to accept.
And then we're trying to work on with the end markets specifically, a collar structure where we give ourselves some protection on the downside but allow us to get that risk-adjusted upside. So, those are the things that we're looking at right now.
And I'd just say there's a great demand from a producer standpoint. These facilities need gas supply. And so it gives us the option right now to figure out who we want to use and who we want to go through.
All right. That’s helpful. Thank you.
You're welcome.
Thank you. The next question is from the line of Neal Dingmann with Truist. You may proceed.
Morning. Toby, could you talk a little bit about just the availability of capacity going forward? And if there's -- it seems like you'll have some availability going forward. Your thoughts on if there is -- your thoughts on wanting to grow?
Production capacity, yes, Neil. Pipeline capacity in Appalachia, we've finally reached the limit of the midstream takeaway capacity in Appalachia. And as long as that's the case, we are going to remain disciplined in maintenance production mode.
We put a slide in our deck that sort of shows the dynamics of what's taking place on slide 29. One of the questions we get a lot is people have said, we say, well, why aren't we able to add more supply. We've got the biggest natural gas field in the world, and we cannot use that to help lower energy prices for Americans. Why is that? And we say, well, because we don't have pipelines. They've been blocked, canceled and opposed over the last 10 years.
And people say, well, we've been blocking pipelines for the last 10 years and we've been able to experience low energy prices. Well, the reality is we've always had excess pipeline takeaway capacity out of this basin during those times when those pipelines were canceled. Those would have added to that capacity. We've hit the wall now.
And that's why EQT is going to continue to remain disciplined. And it's an opportunity for this country to recognize this and say that -- and get more pipeline LNG infrastructure built in this country so we can address the growing demand for natural gas.
Yeah. It's great to hear. And then, not in the tight capacity, but the other. Then my thought is, again, given where gas prices are, obviously, returns are fantastic. Are you -- do you weigh like when you and Dave were looking at it, weigh -- is there -- I guess, sort of a two-part question, are there opportunities to roll in, I don't know, either bolt-ons or some bigger deals? And if so, is it just simply comparing that to -- you have ample acreage, no question, being the largest gas player. Is it just simply a comparison of what the deal price looks like maybe on PDPs or however you want to value them versus what's your organic growth to be?
Yeah, Neal. So I think, anything -- any asset you look at, I think you want to make sure you're getting quality. So we definitely compare asset quality versus ours. I think you look at Alta the cost structure that that asset base did, it lowered our cost structure of this company, lowered our breakevens by over $0.05.
So that's one consideration. But I mean, at the end of the day, everything we do on M&A is going to be. It's got to be more accretive than buying back our stock, and that's the ultimate decision.
Yes. You all have been very disciplined and it's great to see that. Great quarter. Thanks, Toby.
Thanks, Neal.
Thanks, Neal.
Thank you. The next question is from the line of Scott Hanold with RBC Capital Markets. You may proceed.
Thanks a lot. Good morning. I have a question just to delve into a little bit more into the LNG discussions as well as that potential free cash flow use that's not allocated at this point. But when you step back and look at it, obviously, there's been some larger peers that have gone out and made a announcement of a potential agreement to invest in a Gulf Coast LNG facility.
Where do you stand on using some of that free cash flow, potentially, to invest in the facility? And are you really looking at -- if so, is that more of an East Coast initiative that you think would make more sense for you all?
Yeah. So I sort of segregate the LNG into two categories, the Gulf Coast and the East Coast. From a Gulf Coast perspective, it's really more about looking at the best ways we can commit our supply to projects. I don't think that the capital is needed down there to get projects off the ground.
On East Coast, for us, I think there's an opportunity for us to help identify projects and work with developers to get these projects off the ground. So, I mean, we're doing some feasibility work and some high-level assessments of what some of those projects would look like, but not a significant amount of dollars being thought up to apply to East Coast LNG.
Obviously, for us, why spend dollars. Even on the feasibility side, I think East Coast LNG just could be so incredibly impactful to EQT and Appalachia, creating a demand source next to where we operate should help strengthen basis that would have an impact, not just on the volumes that we're able to supply to those facilities, but would also impact the amount of gas that we sell in basin. So there's just a lot of reasons why there's reasons for us to really want to push to get East Coast LNG and make that great idea a reality.
That's great, good to hear. And then, my follow-up question is, you all talked about going after the converts versus directly targeting, I guess, the outstanding equity on your buyback program. Could you give us a little high-level view on – is that – I think there are a lot of benefits to that, but can you just walk us through of like – is there – at what point does it make sense to target the equity versus the converts, or do you feel all – is there somewhat of an indifference to doing that?
Yeah. So it really depends upon where the stock is and where the convert is. So right now, the convert is way in the money, and so it trades very much like the equity. There is a little bit of premium for – we'll call it, for future dividends and things like that that you have to account for. But effectively, it now, it's very much akin to equity. But there is a percentage that you would strive to the debt side as principle.
So I think just know we have basically two tools in place, right? So we have the – we'll call it the direct way where we have our $1 billion buyback, and then we have the indirect way, which gets captured really in the $2.5 billion of debt principal that we have authorized to retire. So we have really two ways that gives us the flexibility to attack the equity. And where there's disconnects or things, we can try to play that arbitrage.
Understood. Thanks.
You’re welcome.
Thank you. The next question is from the man John Abbott with Bank of America. You may proceed.
Good morning, and thank you for taking my questions. Toby, the first question is for you. It's on inventory in West Virginia. During the first quarter call, you had mentioned the potential benefits of West Virginia signing in the pooling and utilization law. When you look at those 1,800 locations, the distribution, does that take into account those potential benefits? And have you had the time to assess what the benefits are to your inventory?
Yeah. Great question. So there was some legislation that was passed recently in West Virginia that basically allows modern unitization to take place. This is a tool that is available to operators now that really helps address, if there's unknown heirs, which is something that happens in West Virginia a lot. But if – the majority of landowners have signed up an ability to unitize as far as the way we view this is really – this is more of a backup plan in case we run to some of those roadblocks.
We have not had to use this legislation and – but it's nice to know it has there – it's there. So ultimately, the way this reflects in our inventory is just a higher level of confidence that the sticks that we put on the map we're going to be able to develop, because we've got modern legislation in place that will facilitate that.
For us, another read-through, we're out advocating for more pipeline infrastructure and the permitting policy reform. I think you look at what we've done in West Virginia, help leading to get that legislation put in place. I'm optimistic, I'm hopeful that we can continue to influence on a national level and help bring common sense, pragmatic permit reform so that we can get these pipelines and LNG facilities built, so we can address the energy crisis that's currently going on in the world.
Appreciate it. And the next question is for you there, David. It's going to be on your cumulative free cash flow outlook and on cash tax. For that six-year outlook, just curious, does that assume – does it have an inflation assumption baked in for 2023 already? And then second, on the cash tax, I recognize you would provide more color at some point later during the year. But as you sort of look out to 2027 or this is more of a calibration cash tax question, are you more of a 15% cash taxpayer or more of a 20% cash tax payer long term?
Yes. So as far as inflation in our 2023 numbers, yes, they're in there. And as far as cash taxes, whether 15% or 20%, I think longer term, it's towards the 20%. But obviously, as we as we consume our NOLs and -- it will trend up over time. I would just say one other factor just that you should be aware of, Pennsylvania just announced a corporate reduction in cash taxes by about 3%. And so that should help on the margin with some cash taxes in the future.
Thank you very much. Thank you very much for the color and for taking our questions.
Welcome.
Thanks.
Thank you. The next question is from the line of Vin Lovaglio with Mizuho. You may proceed.
Yes, thanks for getting me on guys. So I really appreciate the vision on LNG projects tend to be longer lead and Appalachia, as you said, is off-take in stream. I'm wondering if you see yourselves as having a role to play in stimulating regional demand growth, and if there's anything that you could say around opportunities on that end, especially on the industrial side. Thanks.
Yes. There's an opportunity to increase gas demand locally. I don't think anything has the type of scale that we're talking about with LNG, but there's new technology. I mean natural gas, I think, can be transformed in a low-carbon energy solution like blue hydrogen. So a lot of the new ventures work that we're doing is focused on what is the sustainability of hydrogen and what can we do to help mature that, the confidence in the sustainability of hydrogen.
There's also technology that's out there right now that instead of decarbonizing the product before it gets consumed, which is what happened with blue hydrogen, there's also technologies out there that will set the table for carbon capture while the energy is converted into electricity. So there's a lot of new technologies out there, a lot of low-carbon solutions that we're looking at.
And right now, though, the key thing for us to do is energy providers is understand the true sustainability of these options. What is the actual cost? What's the profitability? What is the actual emissions, full cycle emissions associated with it? And then what -- how big could this be from a scale perspective? So those are sort of the things that we're thinking about as we're understanding these solutions.
Yes. And I'd just add, as we've gone back to investment grade, we're now being approached for, I'll call, longer-term firm sales contracts to some of the industrial space. So I'd just say stay tuned on that progress.
Got it. Great. And I guess flipping over to the cost side. One thing that's really stuck out for us has been tubular pricing. Seems like a supply chain bottleneck, low inventories type of issue. Wondering how that -- if it has affected your planning, if at all, for 2023, compared to a more 'normal year'. Thanks.
Yeah. So when we set our budget for 2022, we did account for inflation, but you see we did take that up a little bit here this quarter. What's changed between the planning exercise at the end of the year and where we're at today, I think the assumption was that steel was going to be able to rebound in pricing and we get some steel relief in the back half of this year. Unfortunately, the war in Ukraine has just put more strain on supply chains when it comes to steel. And so we're seeing those -- we're not seeing the lower prices that we anticipated towards end of the year. And that's what's baked into our plan today and also into 2023 as well.
Yeah. And I'd just add. So there's, obviously, the intricacies of tubulars, but then if you look at the steel sector in general, steel prices have come down pretty materially, metallurgical coal, which is the feedstock into steel, has dropped from $600 a ton down into the $200 and change and then iron ore has come down pretty hard. So you have the makings of steel and tubulars to come down in price. It's just going to have to work its way through the processing side.
Makes sense. Thanks guys.
Thank you. The next question is from the line of Noel Parks with Tuohy Brothers. You may proceed.
Hi, good morning.
Good morning.
Just wanted to pick up on the comment you just about blue hydrogen and your research there. I'm just curious if you have any general thoughts on time frame of when you think some technologies might mature and also might be able to achieve scale. And just to give a sense of whether you're looking at, sort of, like a wide set of players or technologies or more of a short list?
Yeah. My view of hydrogen right now, blue hydrogen specifically, we think we can make blue hydrogen for cost of $20 per million BTU. That would include the carbon capture of that as well. And I remember a year ago looking at that and saying, wow, if it's too expensive, why would anybody pay $20 for hydrogen when you can buy natural gas for lower in that?
Well, $20 per million BTU doesn't seem that high compared to what Europe is paying today. But when you look at the majority of the cost of blue hydro, how do we get that to a sustainable pricing level? The majority of the cost to make blue hydrogen isn't in the actual transformation of natural gas to the hydrogen and capturing carbon. The majority of the costs come in the infrastructure it takes to move the hydrogen.
Now what's really interesting and what we're highlighting here is how can we bring the infrastructure cost down. Our unleash US LNG campaign initiative, one of the by-products of that is we have the ability to execute this plan and increase production in the United States by an incremental 50 Bcf a day slated for exports to replace foreign coal. We would have the opportunity to rebuild approximately 50 Bcf a day of pipeline infrastructure. And when we do that, we're looking at ways to make sure that when we build that pipeline, we build it so that they are hydrogen ready. And if we can do that, then we've just set the table for the hydrogen economy here in the United States. And it will basically secure natural gas' future, but the role of natural gas may transform from being an end-use product to being a feedstock for blue hydrogen. So we're looking at that.
The other technology I'd say that's out there in hydrogen is -- the technology to keep an eye on is that natural gas goes in, hydrogen comes out and solid carbon comes out as opposed to gaseous CO2. That's obviously going to really lower the logistics for actually what we do to actually capture that hydrogen. So, that's some new technology that's out. That is probably three to five years out, but well within a time frame as we're figuring out these different options.
Great. That was really, really nice view of the -- or explanation of the waterfront out there. And I guess in general, when you're talking about how it does seem all roads or many roads lead to greater reliance on Appalachian gas. And that to get there, of course, the pipeline situation has to be addressed.
What do you sort of see as maybe the catalyst or what party -- or piece of the puzzle do you think might be the first to budge, whether you think it's on the financing side on sort of like the state initiative side? Any ideas of kind of what might start to unlock greater access to new pipeline projects?
Yes, I think it starts by a shift in sentiment and a shift in understanding how important natural gas plays in this world. We are seeing the reality of a world that is undersupplied with hydrocarbons. And the result is this energy crisis we're facing today, unnecessarily high energy prices, ramped inflation, war in Ukraine and, by the way, emissions around the world are still rising because without natural gas, people are using more coal than they've ever used before.
That, I think, is being recognized. And I think you're starting to see a shift in that sentiment shift translated to policies. The EU declaring natural gas as green. We're seeing that with the customers around the world. You're seeing that here domestically, the Anti-Inflation Act that Mancin has put together to talk about -- to include in that pipeline reform -- permitting reform that's necessary so that we could get the pipeline infrastructure and LNG infrastructure built on an accelerated time line in a more pragmatic way. That is another precursor that you're starting to see here.
So, -- and then on top of all that, you just look at the polling of Americans, Americans get it. Over 70% saying we need more natural gas. So, the Americans support this The world is showing there's clearly a need for it. And now you're seeing governments adjust their policies to make this -- to make it easier for us to bring this energy into the world. But we're seeing the signs right now.
And then to sort of follow through, then the financing then follows or will follow, you anticipate sort of a financial consequence.
Yes. Yes. So, this is Dave. Yes, absolutely. Yes, the banks will be there. I think everything has got to be done obviously with a really with a low to no emissions kind of profile. And so people are not -- financing is not going to open up the kitty here unless missions and things are being done on a very, we'll call it responsible manner. So, -- and if it's done, I think that's -- then you'll see the financing absolutely be there.
Terrific. Thanks a lot.
Thanks. Thank you.
Thank you.
Thank you. There are no additional questions at this time. I will pass it back to Toby for any closing remarks.
All right, everybody. Thanks for your time this morning, and we look forward to continue to working hard to create value for our stakeholders. Thank you.
That concludes today's conference call. Thank you. You may now disconnect your lines.