EXPAND ENERGY Corp Q4 FY2023 earnings call

• Executed on strategic pillars in 2023, aiming to deliver sustainable value to shareholders through cycles.
• Marcellus team saw well cost improvement and increased footage drilled per day; Haynesville had strong production and outpaced peers in drilling.
• Returned approximately $840 million to shareholders via dividends and buybacks.
• Advanced LNG readiness by securing HOAs and signing LNG sales and purchase agreement.
• Completed Eagle Ford exit for over $3.5 billion and received credit upgrades.
• In 2024, reduced capital by nearly 20% and production by 15% from previous outlook, adjusting rigs and frac crews, focusing on capital discipline, operational efficiency, and free cash flow generation.

In the Marcellus, the team had a strong year with well costs improving 17% since Q1, footage drilled per day increased by 40%, and nine of the 10 longest laterals in history were drilled. In the Haynesville, strong production performance was achieved throughout the year, benefiting from improved gathering system hydraulics and outpacing peers in drilling. No specific revenue contribution percentages were mentioned.

• Reduced capital by nearly 20% and production by approximately 15% from the preliminary outlook.
• Plan to limit turn-in-line count to 30 to 40 wells, with most occurring in Jan and Feb.
• Drop two frac crews and two rigs, resulting in 4 rigs in Haynesville from March and 3 rigs in Marcellus midyear.
• Aim for incremental capacity of up to 1 Bcf per day by Q4 2024 to meet market demand when it recovers.

• Market is currently oversupplied.
• Capital supply cycles take 12 to 18 months to evolve while demand fluctuates quarterly.
• Impact of capital decisions has a long lag time, so stopping turn-in-line wells has an immediate impact on economics.

Q: So I wanted to start just on the game plan that you guys have outlined here. The 1 Bcf a day reduction in this plan, was this a function of the base declines that you have with the lower rig count or asked another way, what are the other kind of iterations that you guys came up with for the outlook?

A: So I want you to think about the production decline that we're seeing today as a function of the base decline, because what we're really doing is we're just stopping turn-in-line wells that we have had in progress. And the reason we're doing that is that we see that the market is oversupplied right now. CapEx reductions that we and anybody else in the industry take on have an impact to production several months out as long as 12 months out. And we need to -- for our business, we believe the right answer is to reduce production today. The market is oversupplied today, the value that you would receive for turn-in-line wells today reflects the fact that the market is oversupplied. And so we think we should hold on to that productive capacity and then turn it in line when there is greater demand and when the market is not oversupplied. This allows us to be responsive quickly. And so that that amount of production that we've quoted is really just to give you a sense of how much productive capacity we would build up to be responsive to the market as the demand is there by the end of this year. We quoted it as a Bcf a day if all of those wells were turned in line in one quarter. Now that's probably not a very realistic answer. We would probably layer those in. We would assume that demand would come back in some measured fashion and therefore, we could return production in a measured fashion. But that would be the aggregate volume that would be sitting and ready to respond.

Q: I want to actually continue along that kind of line of questioning. And you've already given us a lot of insight here, but this -- what you're laying out here is a new approach from what we've seen or at least from what I've seen over the last several years in the industry, not just building DUCs but also building TILs. And I'm wondering if you can elaborate a bit on -- recognize that this is a little bit terra incognita, but elaborate a bit on how you're thinking of the sequence of spending money on DUCs versus bringing TILs online. And I can think of at least a couple of different ways it might go. I don't expect you'll give us a price at which you act, but maybe you'll surprise me on that. But I could imagine one scenario where you would just -- when you got to the price you wanted you would just bring your TILs online and then you backfill with the DUCs. But I could also imagine the scenario where you guys are still running a completion crew and you don't want to bring wells online, and so you actually work down that DUC inventory ahead of time. So can you just elaborate a bit on how you're dealing with these kind of novel pieces that you now have on the board?

A: I'll start and Josh may have something to add here. But the way we're thinking about this, Charles, is we will be paying very close attention to the underlying fundamentals, the underlying supply and demand situation in the market. And we'll try to bring gas online when we see that there is demand that needs the gas. Today, we are filling storage or not drawing from storage at the levels consistent with the past, which is setting us up to have pretty full storage going into the next storage season next fall. And so we can see very clearly that the market has more supply today than there is demand on an annualized basis. And so we think we should hold back our supply to better meet that demand in the future. We know that demand will grow in the future. We have confidence in that and we believe we should be more efficient with the capital we have spent, the wells that we have in cycle and the wells that we will continue to have in cycle. And so this really is about making sure that we are continuing a business from a capital perspective that is efficient at drilling wells, is efficient at delivering productive capacity, but that we can then have the flexibility to hold that production for the times that it's better needed. I want to reiterate that we are pretty optimistic about the future for gas markets and this allows us to better deliver production when it's needed, where it's needed into those markets as demand is present and ready for it.

Q: I guess I want to start off, Nick, and just as you came up with this framework, to us, it looks like you're maintaining the balance between the Appalachia and the Haynesville, both of them are declining roughly about the same percentages and the mix stays the same. Would it not have -- why that sort of allocation across the two assets, would it have been maybe better to reduce the Haynesville a little bit faster? Just any color around that.

A: Well, just keep in mind that pricing is different in both of the assets. And so certainly today when the market is oversupplied, you're receiving quite a low value for gas and the Marcellus storage is quite full in the Northeast. And so we do see it prudent to reduce turn-in-lines in both basins to what is something pretty close to zero for the rest of the year. Good news is we can change that quickly if the market changes and shows us that the gas is needed and we can change that separate and apart from the Haynesville. So we maintain full flexibility but we just see pretty similar market conditions in both places right now.