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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the EQT Third Quarter 2020 Quarterly Results Conference Call. At this time, all participants are in listen-only mode. After speakers presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your speaker today Andrew Breese, Director of Investor Relations. Thank you. Please go ahead, sir.
Good morning and thank you for joining today's 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 for a seven day period beginning this evening. The telephone number for the replay is 1-800-585-8367 with a confirmation code of 8971226. In a moment Toby and David will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation is available on the Investor Relations portion of our website, which we may reference certain slides during this discussion, I'd like to remind you that today's call may also contain forward-looking statements, actual results, future events could materially different for these forward-looking statements because of the factors described in today's earnings release and the Risk Factors section of our Form 10-K for the year-end December 31, 2019 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 this morning's earnings release and our most recent investor presentation for important disclosures regarding such measures, including reconciliations of the most comparable GAAP financial measures, and with that, I'll turn it over to Toby.
Thanks, Andrew, and good morning everyone. Today I look forward to providing an update on the business and how we've progressed with our strategic initiatives. But first I'd like to jump right into the positive results of the third quarter. The momentum that we experienced during the transformation of first year of managing this company has continued in the third quarter, which was another impressive quarter both operationally and financially. We delivered sales volumes of 366 Bcfe, which was in line with our original guidance range, despite 15 Bcf that we strategically curtailed at the beginning of September and through the remainder of the quarter.
On the well cost front, we continue to realize improvements in operational performance delivering well cost of $660 per foot on our Pennsylvania Marcellus asset. Third quarter well costs were $20 per foot lower than last quarter, 10% lower than target and 22% lower than just one year ago. This continued progression gives us increasing confidence and makes our future development plan that much more compelling, as we continue to find ways to increase performance and enhance results.
We continue to do more with less, and that is apparent in our third quarter CapEx spend of $248 million, which is $227 million below the same period last year and $55 million below last quarter. The efficiencies that we continue to see in both drilling and completions substantiate the CapEx improvements. With less than 20% of the year-to-date cost improvements being attributable to service cost inflation, these are truly sustainable cost reductions. On the drilling side, we've seen roughly 20% improvement in Horizontal drilling speeds quarter-over-quarter and roughly 60% year-over-year, which was accomplished through the continued application of best practices executed by the same crews guided by a stable operation schedule.
On the completion side, our electric frac fleet really hitting their stride improving pumping hours and stages per month by approximately 15% respectively quarter-over-quarter. In addition to our electric frac fleet accomplishments, our teams have continued to find ways to streamline our operations. These efforts include automating processes that were previously manual employing new technologies to increase the reliability, efficiency and safety of our operations utilizing centralized operating systems, taking data that was one siloed and fragmented and turning into easily accessible and usable data to drive better decision making and improved performance. Put simply, we are leaving no stone unturned to find ways to improve the performance of this business.
The continued outperformance has resulted in positive revisions to certain full-year 2020 guidance at the midpoint, including an increased production of 15 Bcfe and a decrease in capital expenditures of $50 million. This represents for fourth time, we have reduced our 2020 capital guidance for a total of $275 million or 20% of the original budget, all while delivering more volumes, even considering strategic curtailments.
After accounting for a slight widening in-expected differentials, this will drive an expected improvement of $25 million in free cash flow. As we continue our financial and operational transformation, we do so with a heightened focus on our commitment to corporate responsibility and transparency. We recently launched our revamped ESG report focused on our evolution as a company, enhanced leadership directives our operational strategy and the implementation of our mission, vision and values, all aimed at becoming the operator of choice for all stakeholders and the clear ESG leader in the natural gas industry.
Before I get into highlights of the report, it's important to spend a little time on the criticality of natural gas of the energy mix of the future. You will see on Slide 24 of our investor presentation EQTs operations have the second-lowest emissions intensity of nearly 40 surveyed domestic and global E&P companies during the period. Our peers in Appalachia perform at similar levels. Looking specifically at gas producers, you'll see on slide 25, that of the top 10 US natural gas producers Appalachian players produce approximately 60% more gas with 70% lower emissions intensity. What excites me about this data is the differentiation of natural gas, and in particular Appalachian Natural Gas. The reliability, availability and cost benefits of natural gas are unquestionable, and we think as people start to look at the data, there will be a decoupling of natural gas from other fossil fuels as it pertains to environmental and socioeconomic benefits.
Turning to our ESG report, you will see that we have provided a detailed framework on how we think about our business and how all the pieces are aligned to execute on a cohesive operational corporate in ESG strategy. Our impacts on the ESG side of things are principally an output of operating in an informed, supported and purpose driven manner. In our report, we highlight among other things, the significant environmental benefits of our combo development strategy, how integrating ESG into our digital work environment improves data collection analysis and reporting, our commitment to operating safely while utilizing the highest standards to protect and mitigate impacts of the environment, investments made in our local communities including over $29 million in contributions in the form of infrastructure improvements, grants, scholarships and sponsorships, and steps we are taking to reduce greenhouse gas emissions, which have decreased 23% compared to 2018.
I encourage you to review our report, which can be found on our Investor Relations website. Shifting gears, I would like to talk about the compelling macro and natural gas set up. There are several main point that drive our multiyear bullish thesis. In the near-term supply and demand, we will continue to tighten as weather demand overcomes the storage overhang. Core acreage within the gassy regions are continuing to be drilled up, leaving Tier 2 and Tier 3 inventory that can only be economically drilled at materially higher strip, and lastly, total US rig counts and completion crews have fallen by approximately 65% since the beginning of the year.
In Appalachia, there need to be about 30% more rigs to keep production flat and in the Haynesville that numbers are about 15% more rigs. In the medium term within the industry, there was approximately $115 billion of debt due from now until 2023, which has forced producers to focus on corporate returns in fixing their balance sheets rather than growing production. In the long term, we believe there will be a sustainable and long-term global call on US Natural Gas. We anticipate that long-term US demand will increase driven by coal and nuclear retirements, partially offset by renewable builds and long-term global demand will increase driven by economic development in the developing countries.
The favorable macrodynamics as well as continued execution of our operational and financial strategies optimally positions EQT to capitalize on the setup and outperform peers. The forward curve for '21 has moved up into the $3 level and the '22 curve is now in the low 270s. Although important indicators, this will not cause EQT to add growth in 2021, as the curve is still too low and backwardated. We are focused on running an efficient business plan aimed at increasing NAV per share driven by efficiency gains and not growth. We believe that one of the most important drivers of value creation for our shareholders is getting our asset valued at a long-term price deck that is closer to $3 as opposed to 250, and looking at the strip, there is clearly a need for more discipline from EQT and all other operators to achieve this.
I'd now like to pass the call over to Dave to further discuss some of our financial and strategic highlights.
Thanks, Toby. First I'd like to start by briefly providing some color on the production curtailment that we implemented during the quarter. The curtailment was initiated on September 1st, and remained shut-ins for the entire month. We began a phased approach to bringing these volumes back online at the beginning of October and all production has returned to sales. The driver for the curtailment program was a material price arbitrage between September and Winter 2020 pricing and beyond. As we continue to outperform operationally, we're able to defer those extra volumes to be monetized in a much more attractive future price environment. Additionally, we hedge this production to lock in favorable pricing and the attractive economics, which provides a triple-digit IRR. In all, the impact of the curtailment was 15 Bcf that came out of our third quarter, while we were still able to deliver volumes near the midpoint of our guidance range.
Going forward, we will continue to use curtailment strategically to capture incremental value when the opportunity presents itself. This segues nicely into the hedging activity that we recently completed. During the third quarter, the 2021 strip store increased volatility, but ultimately moved higher currently sitting just above $3. As prices were rising, we were opportunistically adding 2021 hedges during the period to lock in value and protect downside risk; with two key goals in mind. First, the ability to pay off our remaining $900 million of 2021 and 2022 debt with free cash flow and our ETRN equity stake, and secondly lock in investment grade metrics. With this hedge position and a strong 2021 and rising 2022 strip we believe we've achieved these key milestone goals.
As a largest producer of natural gas, our hedge program in a broad sense is set to provide downside protection while capturing the upside. While it would be better to capture 100% upside from rising prices, it is prudent for us to take the risk away from associated with a warmer than normal winter, longer lasting impact from COVID, and higher than expected oil prices. While initiating forward hedges, we take a surgical approach aimed at targeting the higher risk seasonal periods, resulting in more risk protection in the volatile summer months, while leaving more upside in the winter months to be hedged over time. Since June 30, we have added approximately $350 million dekatherms of 2021 swaps at $2.90 and $155 million of 2021 collars with a $2.75 dekatherms floor and a $3.15 dekatherms healing.
As a result, we now have approximately 72% of our 2021 expected production hedge assuming maintenance level production up from the 40% at the end of the second quarter. During the quarter, we also experienced some regional price volatility and widening of local bases. Our strong fundamental team saw this coming back in May and as a result, we put on a robust basis hedge position for the fall of 2020 for Dominion South and TETCO M2 at a spread of approximately negative $0.90 to Henry Hub. Ultimately differentials blew out to over negative dollar 55 and we were insulated for much of that exposure. Although heavily protected, the significant basis warning during the period did push our third quarter differentials towards a weaker end of guidance coming in at a negative $0.48 per Mcf.
This takes me to a quick overview of our third quarter financial results. As mentioned before, we are able to be within our guidance range for both sales volumes and average differentials at 366 Bcfe and a negative $0.48 per Mcf respectively. Our adjusted operating revenues for the quarter were $853 million and our total operating cost per unit were $1.44 per Mcfe. Operating cost per Mcfe were negatively impacted during the third quarter by the strategic volume curtailments. In addition, for the third quarter of 2020 adjusting SG&A per Mcfe increased as compared to the same period in 2019 due to the higher incentive compensation expense resulting from changes in the value of [indiscernible] which exceeded the favorable impact of our personnel costs from reduction in workforce.
As Toby mentioned earlier, we came in below our internal expectations on the tax rate on capital expenditures at $248 million due to continued operational outperformance. Our adjusted operating cash flow for the quarter was $295 million, which led to a positive free cash flow of approximately $47 million. Shifting gears, I'd like to update everyone on the progress we have made on the debt front. In July, we received a $202 million tax refund, including interest that we used to repurchase approximately $102 million of our 4 and 7-eights senior notes due in 2021. As of September 30, our net debt was $4.7 billion, which is roughly $100 million higher than the second quarter. This increase was driven by roughly $245 million of borrowings on our revolver for margin deposits associated with the over-the-counter derivatives and exchange-traded gas contracts.
These deposits are reported as a current asset in our balance sheet. Importantly, these margin posting requirements change with commodity price movements and with respect to the over-the-counter derivatives, our credit ratings. Accordingly, our margin deposits will significantly decrease with just a one rating increase, which we are aggressively pursuing and naturally improve with rising natural gas prices. We do this as a more of a temporary liquidity item rather than a matter of truly impacting our leverage. When adjusting for these margin postings, our net debt decreased quarter-over-quarter by approximately $145 million to approximately $4.47 billion, implying a 2.81 net debt to adjusting last 12 months EBITDA leverage ratio. To add one more, aside to our liquidity position, we have seen increased bank competition to participate in our credit facility, which we view as a testament to our financial strength and its commitment to our responsible capital allocation. Further enhancing our debt reduction plan is another $48 million in tax refunds we expect to receive in the fourth quarter related to the successful appeal of a certain prior year federal taxes paid.
Additionally, we are forecasting $85 million to $135 million of free cash flow in the fourth quarter. The new tax refunds. Fourth quarter free cash flow remaining ETRN stake and a material level of 2021 free cash flow, give us high confidence in our ability to achieve our $3.5 billion to $3.7 billion total debt goal by year-end 2021. This plus an improving strip all begs the question about our current credit ratings. Our recent discussions with the rating agencies were positive. We believe we currently sit with investment grade metrics using the forward curve, which provides us incentive to lock those prices and through hedging. We will continue to pay down debt and hedge more over time, as those are two important things we need to do to reach investment grade. We firmly believe the macro factors that Toby discussed along with our continued execution lay the groundwork for positive rating actions over the next 12 to 18 months. To further support this thesis. I'd like to point you to Slide 19 in our investor presentation, which shows EQT's debt trading performance against various investment and non-investment grade indices.
As you can see our debt trades in line with investment grade peers signaling investors also think of EQT as an investment grade company. I'd like to conclude our any remarks by today by touching on a plan to rationalize our firm transportation portfolio. Constructive conversations continue to take place regarding offloading some or all of our MVP capacity. We do not believe that striking deal is dependent upon MVP being in service and feel that the viability of executing a transaction continues to improve. This is a very important financial catalyst for the company, one of which will drive material improvements in margins and free cash flow. Our team is very focused on this opportunity, and we continue to strive to have something in place at the end of the year.
Now, I will turn it over to Toby to wrap things up.
Thanks, Dave. EQT is uniquely positioned to demonstrate the true value the natural gas can and will bring to the future energy mix of this country. As we continue this transformational journey to realize the full potential of EQT's premier shale assets, our focus will not only be on the financial and operational results we deliver, but on how we achieve those results. Our strategic approach is centered around the culture we create, the technology we utilize, the people executing the plan and the ultimate impact we have on the environment and communities in which we operate. All of these elements create a cohesive operational corporate and ESG focus strategy being executed with vision and purpose.
These foundational elements that we have put in place guide our daily processes and will be what separates EQT from our peers, creating a clear natural gas leader in operator of choice to all stakeholders and ensuring sustainable long-term value creation. I'd like to thank all our employees for their continued hard work and dedication and every one of the attendance today for their continued interest and support of EQT, and with that, I'll turn the call over to the operator for Q&A.
[Operator Instructions] Your first question comes from Josh Silverstein of Wolfe Research. Your line is open.
Hi, thanks, good morning guys. Just continuing the thought that David had there on MVP. Right now, it's certainly makes sense for you guys to get rid of the whole position given the current basis differentials, but would that potentially be in that the last types out of the basin in the Marcellus, like we have the supply pull on it. Is there any thought as the keeping some of the capacity there or is it still try to get rid of it all at this point?
Yes. Hi, this is Dave, Josh. Yes, we're studying that and I think just one thing to be careful about I know basis really blew out a little bit wider than normal, but let's remember that we had a warmer than normal winter, and then we were sitting with COVID, and so I think we had a little bit unusual circumstances, but I think we're studying that, we're trying to decide whether we want to keep some of that, and just also remind, we can probably also replicate that to some degree with the sales agreement as opposed to owning all the pipe to. So there is multiple things we're thinking through here.
That's it thanks for that. And then on the M&A side two things here. You guys built continue to reference asset sales as part of the debt reduction strategies and then is there any thought there and then obviously you guys have been rumored to be in discussions with the Chevron asset or you might not be able to share much there. If there is any detail you can provide around the production base of the acreage footprint that would be helpful.
Sure, Josh. On the non-strategic asset sales, we've been pretty consistent on messaging there. I mean, the biggest gap for us was the bid-ask spread, largely driven by commodity prices used to value the assets. So, we've said it is the strip materialized -- materializes to our view, which is a sort of closer to where we're at today, that bid-ask spread close on those non-strategic assets. So we'll continue to evaluate any potential offers on those as they come in. Then on the M&A front. yes, we're not going to speak about specific deals, but continue to believe that anything we would ever look at would have to be a good strategic fit at the right value and accretive on a free cash flow per share and that basis.
Great, thank you.
Next question comes from Arun Jayaram of JPMorgan Chase. Your line is open.
Yes Toby and Dave. I was wondering if we could start maybe with an update on the Hammerhead system and if you've exercised your option to purchase the system, I think the agreement call for a 12% discount, and maybe just give us some thoughts on where you stand with ETRN on this dispute?
Yes one, I think we're not going to comment much on. I think we might put some comment out in our 10-Q at the end of the day today. So you can take a look at it, but I think we're going to be very more silent on this and just know that our goal is always to work with our partner ETRN and I think we've had disputes in the past and we'll come to some sort of resolution in the future. So I just say sort of stay tuned.
Yes, fair enough. Just my follow up would be, I was wondering if you could maybe help us unpack the free cash flow guide a little bit. I know there's some moving pieces between called organic free cash flow generation and the notable tax proceeds, but can you help us unpack, how much of that 325 free cash flow, it's kind of from the organic base business versus taxes?
Sure. So if you use 325 is the midpoint here there is about roughly $100 million of tax refund baked in there, so take it down to 225 of organic and just remind everybody, we've shut in about $65 million [ph] for this year, roughly, and so that would have been another $65 million or probably more of free cash flow, and then we are going to get about, we'll call it $450 million of tax refunds on top of that. So that give you a sense of the total free cash flow plus tax refunds, that were able to use to pay down debt.
Okay. If I could sneak one more in, David, you mentioned the collateral postings, this quarter, if you did get a one-notch upgrade, could you just maybe help us think about the magnitude or the improvement in liquidity you get from that.
Yes, I would say it's probably about two-thirds of improvement of that number, and so there is some moving parts in there. We post collateral with the different banks, different banks have different credit levels and some of the banks have unlimited credit level, so we move things around a little bit and then we also use the exchanges, and so, the rough number you should think about it about two-thirds.
That's helpful, thanks a lot guys.
You're welcome.
Your next question comes from Scott Hanold of RBC Capital Markets. Your line is open.
Yes, thanks. Appreciate also your comments on MVP and the status of those negotiations, but can you just -- for me, I guess, does it down a little bit what are the key discussion points between new and the counterparties right now and what really is I guess holding it up from getting some kind of a decision end of these are very complex negotiations. But if you can help me out and understand what are some of the kind of back and forth points?
Yes. I'd just say it's hard to, we want to get -- we won't get into a lot of things, because we are in negotiations, but I'll just say we have -- we're negotiating with like four or five parties right now. And just understand this is a long-term contract, so everybody wants to make sure they understand their needs. And so, and in some cases some of the parties who were part of ACP that was kind of a -- in some cases a shock to the system. So, they're just understanding again what their long-term needs are. So, I think it's multiple parties multiple views and long-term contract in, and so it just takes some time, and then I think the last piece is we just want to make sure we understand from our standpoint, how much that we want to keep winning and so it just all that plays into the timing.
Okay. And you still think the year end '20 is still a good time for, but think [indiscernible] of where you have some?
Yes.
Okay. And my follow-up is just, there has been a flurry of consolidation in this space, and obviously you give your high-level comments on asset sales in the market, but you Toby maybe if you can give us just a view of where you think like the Appalachian gas market goes from here, in terms of consolidation. I mean, you've seen some from a lot of the oilier players, do you think something similar like that is going to happen with the gas players and how quickly could that evolves?
Sure. I think investors certainly have an appetite for companies that can operate at a larger scale, not just simply for the sake of scale, but because there is real value to be created, I think, you look at what we've done at EQT, taking advantage of our scale, there is real value that we're creating whether that means we get more reps and the wells that we execute, which gives us more opportunities to improve operational performance being able to have access to really cutting-edge technology like our electric frac fleets that you can only put in, if you have a stable operation schedule. The benefits of scale you get from having a large operating footprint and a large gathering system that ETRN provides us, which gives us access to a lot more markets and then also from on the balance sheet side of things having an investment grade credit rating is something that's going to be a differentiator as well.
So I think investors are right and having the desire for larger scale companies and companies like EQT that can take advantage of that scale and create value for shareholders, I think it's going to be a theme that should be look forward.
Thank you.
Your next question comes from Holly Stewart of Scotia Howard Weil. Your line is open.
Thank you. Good morning, gentlemen. Maybe just a couple of quick follow-ups on some of the previous questions -- to Josh's question on MVP, Dave, can you remind us what your letter of credit postings are for that project?
Yes Holly, we don't break it out by pipeline. I just. we have basically $800 million of -- of credit in place, and again, we don't, we don't give it by project.
Would it come down materially if you optimize that whole?
It would come down. Yes, I guess it depends on what you define as material. I think more importantly as our credit ratings improve it will come down and I think that's probably the bigger -- I'd call the bigger driver between the two.
Okay. Okay, that's helpful. And then maybe Toby a follow-up to some of the M&A type of questions. I mean, you highlighted in your prepared remark how Appalachia stacks up on an ESG perspective. Do you think that this ultimately starts moving through the mindset of producers, as we kind of look at the oil M&A market here?
I mean I think that ESG could just be another barrier to some of the smaller steel companies certainly on the private status, then it's just another thing in future that you need to bolt on to your business certainly at EQT, with the number of employees and specialists that we have to focus and improve the performance across all these metrics is a benefit you get from a large organization and scale. So I think larger companies are, have the resources needed to dedicate the improving ESG performance, and ESG performance we think is going to be a differentiator and something that investors care about and we certainly believe the benefits of a strong ESG performance is going to be a key to long-term value creation for shareholders.
Okay, great. and then maybe one final one for me. You've now come in, I think below your well cost target two quarters in a row and obviously now your full year average is well below that. Can you just talk about sort of your well cost trends and then any potential update to those targets that you see coming?
Sure. I think just looking at Slides 9 through 12 sort to tell the story. Where we're at right now is we continue to produce results that actually drive value by lowering our well cost. We are starting got to fix the business phase at EQT in the large sledge, but it's sort of towards the earlier when we got in and now what you're starting to see is the innovative approach that we have at EQT. So you see that that's driving the operational efficiencies and we've made some pretty big strides and still on the drilling side and on the completion side, and really what's driving that is really highlighted on Slide 12, which is just the continued application of new technology and leveraging our technology to drive operational efficiencies, which drive well costs. On top of that. I'd say we've been able to take it to lock in some of the service pricing that we have about 50% of our services are locked-in, our spend is locked in to provide some sustainability in the well cost performance that we've been able to demonstrate. So we'll see how much more we can innovate and continue to drive the performance and I'm encouraged to have an organization that has the ability to evolve and innovate.
Great, thanks guys.
Thank you.
Your next question comes from Mark [ph] of Morgan Stanley. Your line is open.
Hi guys, thanks for taking the question. I just wanted to build on Holly's question thinking about sustaining capital on 2021. So I think it was a year ago you gave a $1.5 billion kind of preliminary number. Just curious, any early thoughts on spending or sort of how much of the savings that you realize or sort of built into that prior target?
So, I would just say that we continue to walk down our 2020 CapEx and planning for 2021 CapEx numbers and we're going to continue our maintenance program and we're going to -- we would say that probably start with what we're at with 2020 for our maintenance CapEx is going to be a good starting point for 2021.
Okay. And then just a follow-up on that the -- it's 80% of the cost savings are sustainable. Can you just comment on that, the remaining piece, sort of what scenarios would that come back into the cost structure. I guess, how long do you have these service costs locked up for
Once you start will be. Yes. As far as the sustainability, I mean the operation schedule that we have the lateral length that we're putting out there, the percentage of combo, those things are all increasing. So that's going to that certainly is very sustainable. That's really what sets the operational teams up to really drive operational efficiencies, which drives cost. So that's is well designed. We're going to continue with the well designs that we've been putting in place here. So I don't see any changes there. So we have a good idea of what these wells what it takes to actually execute these wells. The well design that we have and the other thing I'd say is, from the sustainability part from a service price perspective, I mean there is my comments on the fact that we've got over 50% of our spend is locked in with service costs. So, those are the bigger needle moving items like for frac fleet things that are more sensitive to moving. If you have a rise in activity levels, which again it will work pretty anemic levels from an activity level standpoint with under 300 rigs running in the country.
We don't anticipate service pricing to bit to rise materially because we don't expect activity rise materially. So we feel like we're in a really good position from a cost perspective to make these sustainable.
Great, thanks so much guys.
Your next question comes from Brian Singer of Goldman Sachs. Your line is open.
Thank you and good morning.
Good morning Brian.
Want to follow up on the last question there, but really a bit more from a production activity perspective. You mentioned you want to see more long-term price expectations at $3 or so versus 25 to increased activity or have more confidence in doing that. Is the implication then we should assume you would be producing around fourth quarter type level 3 [ph] at the maintenance capital and if the gas prices are longer dated futures going to three, that's when we would expect more of a ramp up in activity.
Yes, I would say, we look at for us maintenance CapEx is the production levels that we're looking at is probably on a yearly Bcfe level as opposed to what our quarterly production level would be. So we can just take that at 1480 Bcfe to 1500 Bcfe for the year. With maybe some shut-ins occasionally in there if we want to take advantage of arbitrage. And as far as, to answer your question on when we would think about growth. we're going to stay consistent with prior messaging, which is, there is a couple of things we want to see first. Number one is we want to get our balance sheet in our leverage targets, which we're well on track to doing that by buying at '21. I think the other thing we look at as you need to have a sustainable strip that's probably more than just the next 12 months out, and so we'll be surveying the landscape when we get to that point. And then maybe the third part is Brian, I think growth for us is probably 0% to 5%, but it's not going to be like the old days of 20%, 30% so it will be very modest growth if we do grow.
Great, thank you. And then my follow-up goes back to the topic of M&A and the last call you talked about that you would need to have confidence in M&A free cash flow per share accretion and you mentioned that again here today. You also mentioned that you would need any M&A to contribute to deleveraging the business, and I realize that you can't talk specifically, but I wonder if you could characterize the market broadly on whether those opportunities are a bit are available to achieve for both those goals as well as I think you also mentioned the NAV per share earlier in the call?
Yes, sure. So I mean, we said historically it's a buyer's market, we think that that's still the market that we're in, so it all comes down to those metrics that we talked about is getting assets at the right price. So, I mean that's I think is going to be an ultimate determination on being able to achieve those type of metrics.
And I guess we get the question on that as to the use of equity, and I guess when it would seem like if the goal is to contribute to deleveraging that would be apart, but can you comment or talk maybe philosophically about that.
Yes. So, this is Dave. So one thing to just think about is of probably a few weeks ago when we were at a conference we mentioned everybody that our balance sheet back in a few weeks ago when the curve is actually lower, we could see ourselves already get kind of two times leverage or less and so I think from an ability to need equity effectively to fund an acquisition to delever. I think just the fact that the strip has risen up a lot has really put ourselves already in our call investor grade metrics that's kind of why we talked about. So I think if we ever do M&A, I think the need for equity has significantly dropped and it doesn't mean we wouldn't do it, but I'd just say that I think their views out there that were written that we'd have to do a lot more equity, but I think again to talk these point if we buy it right, number one, that's the first point and then the fact that we're already sitting and investment grade metrics puts us in another good spot where equity is really less needed.
Thank you.
You're welcome.
Your next question comes from Nitin Kumar of Wells Fargo. Your line is open.
Thanks for taking my question. I'll start with, you've talked a little bit about the long-term growth and I think you mentioned 0% to 5%. [Indiscernible] legs to the investment case today, it's the cash return strategy. How are you thinking about it? What are the gating factors for you to start returning some of this extra free cash flow to shareholders?
Yes, so hitting our leverage targets is by '21. I think is going to give us the ability to make that decision. So that we could be returning capital to shareholders as early as 2021. I think that all things being equal, when it's when our balance sheet is going to the place where we'd like it, growth or return capital to shareholders where we're most likely going to be returning capital to shareholders.
Got it. My follow-up is actually on Slide 15, and you've kind of alluded to this the end of [ph] and moving the Appalachian seems to be under investing in supply. I want to particularly touch bonds what do you see around you right now, because I think your comment there is that you're not incentivized and industry were incentivized to provide a supply response. Does that mean I'm just kind of curious what are you seeing around Board of people just being very, very reticent to bring back activity?
Yes, I think -- I think that you see, you just look back at the history here and any time we see a price signal industry has increased rates and grown production, any production growth, you get is offset by a decline in commodity price. So you're not really making any progress I think industry gets that right now I think the fact that operators are looking to organically deleverage their balance sheet by reducing absolute debt as opposed to increase in EBITDA, is one of the things that sort of keeping people disciplined on the growth, and I think the other thing is you look at the strip and while '21 is certainly come up, which is great to see, you look further out, and I think you look at that strip in '22 and '23 and realize that there is still an opportunity for commodity prices to come up to a level that before anybody would think about adding more activity.
Great, thank you.
And then, I just jump in and you can say that if you want to use return on capital employed is a long-term return metric for investors that want to come back and really invest in this space. You know the industry really needs 350 gas over the next 5 years to really generate that return on capital employed.
That's what I was looking.
Your next question comes from Jeffrey Campbell of Tuohy Brothers. Your line is open.
Good morning. My first question is on M&A. Toby since you've said that you think that much up like a significant portion of Appalachian Tier 1 acreage is drilling up, what would really be the benefit of having more scale with a lots of attractive resource?
Sure. I think it comes down to just the points I made earlier about the benefits of upscale. So I mean being able to leverage technology at scale is certainly going to be something that would help being able to leverage lower well costs across a larger asset base is another one, being able to leverage the larger, more robust gathering network access to more markets being the third, and then also being able to take advantage of investment grade balance sheet would be the other as well, and I'd say strategically just having a little bit more control over supply. With a disciplined approach, I think is another thing that helps stabilize the commodity and like we said in our scripted remarks the thing that is going to increase the value of the biggest impact to the value for our shareholders is going to begin our asset value at a price as higher of closer to $3 and 250 and a more discipline in the industry is certainly going to be a key towards achieving that.
Okay. Thanks for that. and following on your last point regarding debt pricing your desire to [indiscernible] the higher commodity assumption. What sort of oil price do you think is required I guess over the next couple of years, to keep sufficient volumes of associated natural gas out of the market, which in turn would allow to do so like EQT's and better control to say?
I would say $50.
Okay, perfect. Thank you.
There are no further questions at this time. I will turn the call over to Toby Rice for closing remarks.
Thanks everybody for your time today. We spent a lot of time over the past year, talking about the results that this organization has been able to produce, but I would urge everybody to take a minute and go to our CSR report at esg.eqt.com. I think it's a great example of how we don't just care about the results we put up on how we generate those results, and proud of the great work the team has done on putting that report and hope everybody can check it out. So thanks everybody, thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.