Expand Energy Corporation (EXE) Earnings Call Transcript & Summary

Next presenting company, we're going to do this in kind of a fireside chat sort of format. We have Expand Energy, which is the largest U.S. natural gas producer. And with us today on behalf of Expand is the Chief Operating Officer, Josh Viets. So Josh and I are just going to have a fireside chat here. And if there's any questions, we can field those as well. So maybe, Josh, just for those that aren't as familiar with Expand, maybe just give a brief overview of the company, the assets.

Yes. So Expand Energy came to existence through the combination of Chesapeake Energy and Southwestern Energy merged in 2024. So we've been in existence now for approaching 18 months. Both companies have a long history within the U.S. shale, both being pioneers in the case of developing unconventional gas reservoir. Today, we are the largest producer of natural gas in the country. We produce about 7.5 Bcf a day of natural gas on a net basis. On a gross basis, we produce roughly 10% of the country's natural gas supply. One of the unique advantages of the company is we do own assets across the 2 most prominent natural gas basins in the Lower 48. That's the Haynesville Shale and the Appalachia Basin that spans from Eastern Ohio up to Northeastern Pennsylvania. We think that's a unique advantage for the company. And that's really just because there's different demand dynamics that are existing in both places. We also have an investment-grade balance sheet, and we're currently in the S&P 500. We think that investment-grade balance sheet is incredibly important. And combined with low leverage, that's less than 1x. We think those attributes are going to be incredibly important for us to capture opportunities going forward as we look for opportunities to further integrate our production, our wellhead volumes down into the downstream market.

So I know the Raymond James view, we're obviously quite constructive on natural gas. Our view is that as you get the kind of AI-driven load growth, the big ramp in LNG exports, the Haynesville is basically kind of the swing basin on the supply side to meet that, the load growth and the export ramp. And with you all being the largest producer in the Haynesville, sort of the de facto kind of swing producer, if you will. You have got a slide that I think is quite helpful that, yes, we could probably pull up. I kind of call like your heat map kind of strategy on sort of kind of the -- when it makes sense for you all based on the gas strip to either hit the accelerator or the brakes. Just maybe kind of walk investors through how you all think about sort of your role as that swing producer.

Yes. I mean, first of all, I think we think it's incredibly important that we can create clarity to the markets on how we're going to choose to allocate capital back into our business. One of the unique advantages that Expand Energy has is our ability to grow production. But of course, we want the production to be grown in times where there's been structural changes in the supply-demand fundamentals. And so John was alluding to the fact that we are living in this era of demand increases. And it's coming through 3 places: it's LNG growth; it's power demand, which is largely being generated through the expansion of computing; and then there's industrial demand that's also growing. Probably gets less talked about, but it's a real factor. And so when we think about capital allocation with the business, it has to be grounded in fundamentals. And ultimately, when you work your fundamentals, you're trying to arrive at a price. And so one of the things that we talk a lot about is our view on a mid-cycle price. And that's really where this heat map starts. Our view on mid-cycle price, which is bolded there in the center of the chart, is $3.50 to $4. And we think that is not necessarily -- shouldn't be skewed as this is what we think the next 2- or 3-year strip will play out. But you should think about that as that's the price that we're willing to underwrite our capital program on. And so that's really the first key input to how we think about it. So to John's question, well, you guys are the swing producer. Demand is increasing. Therefore, you should consider adding production. What we would say is, well, let's first take a step back and take that renewed view. Is the price signals that we're seeing today, are they transitory or do we expect them to be durable? And for those durable changes, we would expect that, yes, in those scenarios, we would have the potential to produce more. Today, and as we look out over the next, call it, 3 to 5 years, we think that band of $3.50 to $4 is the right view to underwrite the capital program. And so the output of that ultimately then becomes the amount of production that we think is appropriate to introduce into the market. So for us in 2026, that's 7.5 Bcf a day. And then we know what the sustaining CapEx is in order to support that production profile. So that for us on a maintenance basis is just under $2.8 billion. So this is something that we look at regularly, but we're very careful not to allow some transitory effect. So think about Winter Storm Fern, prices ran on the prompt basis to $7 for the month of February. Those aren't going to be the types of signals that we're thinking about resetting a price because it's really about what's happening 1, 2 and 3 years out that we need to understand to see how those supply-demand balances shift to ultimately repeg our view on mid-cycle price.

Over the past year, you've been able to lower the breakeven gas price in the Haynesville by about 15%. Some of that through like vertical integration efforts. Just maybe speak to that and any other levers you see to be able to keep moving that lower.

Yes. It's been a phenomenal year for the company. I've been in the industry for 25 years, and I've never seen an individual business unit or entity move by as much as we've seen in terms of the breakeven improvements within the asset. Really, it was -- at the forefront of this was, of course, the merger. We had both companies operating in the Haynesville at the time, both running relatively healthy programs. But one of the opportunities that we saw very early on was an ability to normalize the drilling performance between the 2 companies. And one of the things we probably underestimated is oftentimes you put 2 companies together, you see one has a higher cost and you say, "Well, I'm just going to take that higher cost company and bring it in line with where the other company is." Well, we did that, and then we did a little bit more because what you don't recognize is when you take best practices from both companies, 1 plus 1 doesn't equal 2, it's going to equal something like 2.5. And that's what we realized in that time. So one of the biggest movements that we saw within our capital improvements, where we've reduced our well cost by 13%. In a single year, we increased our drilling efficiency by over 30%. It's just a phenomenal outcome, again, to put 2 big companies together and be able to generate those types of outcomes so quickly. And so I think the obvious question is, well, how did that happen? It's really easy to go change the well design, so a casing program or your bit selection. It's another thing to go change how you drill. And that's what I would tell you, is those savings came how we drill wells. It's about the integration of our engineering, our analysts, our drilling contractors, the company men on site working together to go drive a faster optimization of drilling parameters. So really a credit to the organization for that. So again, a 30% reduction in our drilling times in the most complex basin in the U.S. The other factor was, and John alluded to this, so we made an investment back in 2024 to go develop our own sand source. And that had 2 real key benefits. One is the sand source was more proximal to our operations. So we're able to shorten the trucking time to get the sand from the mine to our well sites. And then also, it's just simply a lower input cost. We can extract it at a lower cost than what somebody else could because you're clipping the margin away from the supplier. So what that ultimately translated to is the input cost for our sand was reduced by 40%. And the proppant we buy to put down in the wells with the hydraulic fracturing process is one of the larger input costs into the completion. So it's great that I can lower my input cost. But actually, what's really exciting is when I lower my input cost, I can actually pump more of that product, so I can increase my proppant intensity, which then translates to higher production. So during this time, we also increased our proppant intensity by roughly 20%. And so this trend that you see on the chart on the left is showing well productivity, and it's looking at a 12-month cumulative production per lateral foot of horizontal well. And this trend that you see there with a roughly 11% improvement over the last 5 years, this is a trend that definitely bucks the trends that we're seeing across the broader shale plays. So much of the narrative is really centered around the degradation of inventory that's occurring. And so by reconfiguring our economics through smart vertical integration, we've been able to reset the narrative around production. So this isn't just about cost reduction. This is also about production improvements, which is enhancing, of course, our well returns and our overall capital efficiency for the business. And the last piece I would mention is we also saw year-over-year an 8% reduction in our production expense in the field. And again, when you take 2 companies together, both of us have large development programs, both have a lot of water to manage, be able to go and invest in water infrastructure, reconfigure how we go and haul water from a location to a disposal site also turned up in a really big way. And those 2 things combined the 13% reduction in capital cost, the increase in production from the new wells, combined with the lower production expense is ultimately what contributed to this 15% improvement in our breakeven.

You've got, by far, the deepest inventory in the Haynesville, a couple of decades plus. But you all have recently put together a pretty big acreage position in the Western Haynesville, set aside some of your capital to try to delineate that field. Maybe just speak to that decision and what kind of makes you excited about the Western Haynesville.

Yes. We think organically building acreage positions is incredibly valuable for the company. When you look at over the last year, some of the transactions in the Haynesville specifically, you'll see that on a per location basis, transactions are occurring at $3 million to $4 million per location. That's pretty high if you look back over the cycles of natural gas plays. And so those are things that we would look at, but simply, they just don't make sense. We prefer to be countercyclical when we think about acquiring existing assets. But in the case of the Western Haynesville, that was a play that we actually started evaluating back in the 2023 time frame. And when we started building our acreage position late in '23 and into 2024, we were 40 miles away from the closest producing well. We had seismic data that covered the area. We noticed that was less structurally complex than what we see as you go further west into the far western parts of the Haynesville where most of the activity has been concentrated. And so very quietly, we were able to aggregate a relatively modest acreage position, drill a vertical well, prove the presence of the reservoir and the prospectivity of it. And then with that vertical well result, we were able to go then build very quietly a 75,000-acre position. So now here we are with roughly 200 wells of inventory that we've now acquired at less than $1 million a location. So again, $1 million -- less than $1 million location versus $3 million to $4 million. And so we just absolutely love the upside that comes with that, and we like the ability to go generate a full cycle return through that organic leasing and exploration effort. So the other great thing for us, again, this highly prospective area. A company like ours that has 20 years of inventory in the Haynesville, we don't have to have this play contribute right off the bat. So in other words, we can be very methodical about how we appraise the asset, how we think about infrastructure being built into the play. And then as costs come down in the play, we will look to integrate that into our existing program or kind of back to the discussion on how we think about mid-cycle price, if mid-cycle price moved up with higher demand and that was calling for more production, that now serves as another growth engine for the company. So we really like the way that we've been able to position ourselves in that part of the play.

We've seen the Haynesville rig count has gone from 30 rigs to roughly 50 rigs over the last 12 months. Given -- in our estimation, we probably need to add another 25 rigs or so from here in the Haynesville to get what we think is the supply growth needed to meet that AI-driven load growth, the export ramp. Given that only you all and maybe one other company have any meaningful inventory in the Haynesville, at least of higher-quality rock, the core Tier 1 stuff that works in a $3-ish environment, like how do you see that playing out? As the rig count goes up and a lot of these operators are already running out of their best rock, just kind of how do you see that playing out?

Yes. I mean I think what it's pointing to is there's going to have to be a higher price in order to get enough gas into the markets to support the longer-term demand. And I think that just puts us at more of an advantage. We control roughly 40% of the inventory within the Haynesville. We, by far, have the lowest breakeven. We have over 20 years of inventory remaining. And if we kind of go back to the conversation earlier about the breakeven improvements, just in the last year, we've added 5 years of inventory that breakeven below -- has a breakeven below $3.50. And the other thing to just keep in mind, we included a slide in our investor deck at the end, and hope we can flip ahead to that slide, but not all rigs in the Haynesville are created equal. So one of the things that's really interesting, when we combine the increased drilling efficiency within our business, combined with the premier acreage position that we command, when you compare our rigs to the average industry rig over a 2-year time period, our rigs will generate 50% more production than the average industry rig. So in other words, what you should be paying attention to is when Expand starts adding rigs because that's really where you would start to see, I think, some acceleration of supply in the region and less so when you see some of the smaller operators, who are developing less quality acreage with a very limited inventory life. And so I think what we see right now is going to be a pretty modest supply impact. And again, I think our belief is in order to meet the demand growth, -- so think about this, 10 Bcf a day is going to be needed just to support the anticipated under construction LNG facilities in the U.S. Gulf Coast over the next 3 to 4 years. So there is a call on gas, and we think ultimately, a higher price is going to be needed to support it given where inventory sits today.

Given the fact that you've got peers that are pretty inventory constrained, you've got inventory that at least some of it you may not get to for 15, 20 years. I mean, is there some calculus you're walking through that says, "Well, if that acreage is more valuable to some of my peers and I'm not going to get around and drilling it for a while, that maybe some of that might be a divestiture."

Yes. We really take great pride on being good active portfolio managers. I mean just over the last 4 years, we've divested out of the Powder River position. That was inventory that wasn't competing for capital. We sold out of our Eagle Ford position. That capital wasn't competing there. It was simply higher on the cost curve than what we had in the rest of the portfolio. And so we're constantly looking at our inventory and assessing what's going to compete and what's not over some time period. And if we find ourselves in a market that's constructive, I think those are the things that we have to always consider.

Recently, you all had -- you made the decision to move the executive suite to Houston from Oklahoma City. There's been some management changes. There's been a lot bigger focus on sort of I think the way you all talk about just this price that you want to get, of like this $0.20 uplift for the gas price that you're selling, more deals like what you did, the long-term supply agreement with Lake Charles on the methanol side. Just speak to that, like this price that you all are trying to get and this push to do more and more of these long-term agreements.

Yes, sure. I mean I think you have to kind of think about the evolution of the company, going back to the start of when Chesapeake and Southwestern merged. I mean, for me, with the rest of the executive team, at that point in time, the catalyst for growth was really centered around the delivery of synergies. We've achieved that. That's gone. So what's next? And that's really what John is alluding to, is we do believe the next catalyst for earnings growth is going to come from our marketing and commercial bussiness. And I think the way I like to think about the opportunity in front of us and how value gets created, for one, we need to be able to move our gas into premium markets. We need access to the infrastructure. We need the commercial agreements to access premium markets to get a better price than we do today. Second, we need to be able to facilitate and capture new demand. And I think the Lake Charles Methanol agreement is just a fantastic example of how that can be done. So there, we had existing relationships. It was going to be along the U.S. Gulf Coast, so proximal to our operations. We had taken out capacity on a pipe called NG3. So we had 2.5 Bcf a day of gas moving south into the Gillis area. We have 20 years of inventory, so we can backstop any commercial agreement that was in place. And we have a counterparty with committed offtake to take blue methanol from the U.S. Gulf Coast into the international domain. And so that was the type of marriage that we saw. And our goal is to be able to emulate that time and time and again. So again, facilitating and capturing new demand. And then the third thing is about monetizing volatility. And so we have a 5 Bcf storage assets in play. We have an active hedging program. And so I think being able to use the information that we have. We market 10 Bcf a day of natural gas. So we should always have some of the best information on natural gas flows than anybody. And so using that information to our advantage to actively hedge and to be able to generate value from that, we think, is incredibly important. So again, accessing premium markets, facilitating capturing new demand and monetizing volatility is really what our M&C strategy is focused on. And for us, some of the changes that we've seen is really about us doubling down. It's really being more -- not necessarily more aggressive but a higher sense of urgency to increase the deal flow. This is an incredibly competitive environment. We expect natural gas demand to increase over 25% over the next 5 years. And so the market is moving very quickly. And so being closer to the customer, closer to counterparties, which we believe those counterparties exist in Houston. Our marketing and commercial, our internal team is already in Houston. So having the executive team close to this group only increases the chance. And again, it's a sign of urgency that we have about capturing this opportunity and the aspirational goal of a $0.20 improvement to our free cash flow margin, we think, is what's going to be the next catalyst for earnings growth for the company.

You talked about like not all rig adds in the Haynesville are created equal. That probably speaks to why Haynesville is a basin, we've seen kind of production kind of flatten out here in the last several months despite the rigs getting added. The other interesting dynamic is that where a lot of the rigs have been getting added recently is on the Texas side of the play, and there may be a lot of people aren't aware that we have a lot of interesting pipeline dynamics we're trying to get gas from Texas side and Louisiana side. And when you marry that up with where a lot of these LNG plants are coming online, a lot of this gas, we need to try to move it east across the Texas-Louisiana border. So maybe just talk about the dynamics there and how you all are situated to deal with it.

Yes. And I guess for that question, I'd even go further west, and it's into the Permian because I think the Permian is also going to be a key component to solving the supply-demand balance longer term. And so I think you would expect that each year, you'll have 2 to 3 Bcf a day of new Permian pipe capacity coming on. And it's going to be chunky at times. But one of the issues with the Permian takeaway is where that gas is landing. And so you really have 3 primary centers. It's going to be the Dallas-Fort Worth area. We have a new pipe coming on later in the year that's taking gas to an area south of the Dallas-Fort Worth Metroplex. We have going it down -- further down south to Aquadose. And then lastly, you have Katy, so on the west side of Houston. So that is probably one of the single biggest sources of natural gas growth, and John talked about East Texas. But there are infrastructure constraints that will limit the ability of that gas egressing out west of Houston, south of Dallas and getting that into the LNG corridor. If you think about like the Sabine Pass area. And so that infrastructure problem will eventually get solved in our minds, but it's absolutely going to take some time. And that just creates a unique advantage for a company like ours that's producing the 3.5 to 4 Bcf a day in the Haynesville region today to be able to access these premium markets as basis tightens, and we think that's a great answer for our shareholders.

There's recently been some pretty big M&A transactions in both of your operating bases, with the Haynesville and Appalachia. Just maybe speak to kind of how you all evaluate M&A, just anything on that topic.

Yes. I think we have a good track record that we've built up over the last 4 years. And one of the guiding principles that we have is we refer to it as our M&A nonnegotiables. And so we're absolutely going to look at every deal that's in our backyard. We think that's just simply prudent to do that, to understand the markets and how things are trading. But these M&A nonnegotiables will continue to underpin our decision-making. And so we're simply -- we're not going to overpay for assets. So earlier in the conversation, I referenced $3 million to $4 million a location as we saw Asian buyers coming into the Haynesville. We think that's overpaying. So we need to avoid doing that. Instead, we're focusing on organic addition. We're not going to stress our balance sheet. So we think we've learned those lessons, painful lessons, over time. So today, we run the company at well under 1x leverage, and we're not going to go do a transaction that stresses that. The deal needs to be accretive on all financial metrics. We think that's the obligation that we have to the shareholder to avoid any form of material dilution. And so these are the things that are going to continue to underpin us and I think maintain the discipline and the reputation that we've earned as a management team to be active stewards of our portfolio and timing transactions that create value for shareholders. And you look at the Southwestern transaction, you had 2 acreage positions that were juxtaposed one another, and we can go create $600 million a year on a run rate basis of incremental free cash flow. That's the type of transactions that shareholders should look for us to continue to look for.

Do we have any questions from the audience? Yes, go ahead. Repeat the question, too, just...

Yes. So the question was, as we're contemplating power deals that may be tied to AI, what are some of the considerations that counterparties might have as they're having conversations? So I think, one is, it's around the proximity to supply, and it's the durability of supply. And I think those are boxes that we check. Being in multi-basins gives us more flexibility on the number of counterparties that we can interact with and having 20 years of inventory, given the scale of production that we maintain, provides that question of durability. The other thing that as a power producer and if you're a hyperscaler, you need is land. One of the things that we've gotten really good at over time, is we have lots of relationships with landowners because we've been drilling wells for 2 decades -- 2-plus decades now. And so we hope the combination of those types of skill sets can marry up with the power producer and the hyperscaler over time. Yes. So the question was, is this something that we would expect to see over the next 12 months? We have active dialogues going on. And so our expectation is as we're really doubling down within our marketing and commercial business, accessing power, accessing industrial, accessing the LNG infrastructure are all the types of transactions that we're going to maintain a high level of focus on.

Any other questions? Yes, go ahead.

Yes. So the question was just to share a little bit more information on Nick Dell'Osso leaving, the timing of the new executives coming in, which includes CFO, CEO. And then I think the specific to me. So maybe I'll -- yes, I'll work my way backwards. So as part of the change, one of the things that we decided to do is we want to avoid the disruption to our operating teams. And so 80% of the company's corporate staff that supports the traditional E&P business is located in Oklahoma City. I believe, the Board believes that, that's going incredibly well. We've made a ton of progress over the last year, and so we don't want to disrupt that. So my role, the team will stay in Oklahoma City. As far as the timing goes, we expect this process for the CEO specifically to take 6 to 9 months. And so Mike Wistrich, who's our Chairman, is coming in -- has come in as the interim CEO, and he'll help lead the search process while leading the day-to-day dealing of the company. The CFO's search has been going on, obviously, for a little bit longer. And so we hope that, that announcement would come sooner rather than later. So we expect that announcement to be ahead of the announcement of a new CEO. And then just on your question with Nick, I mean, this was really about not necessarily a disagreement of strategy. It was really about the tactics of how that strategy is executed upon. And that was included the need to be in Houston, closer to counterparties, supporting directly the M&C organization. And that was a situation where, unfortunately, Nick wasn't in a position to be able to support that relocation. And so that's where we find ourselves today. I think that's to be decided. The Board is running the search process. And so we want to make sure we understand what that market looks like. We want high-quality candidates that can come in and lead the strategy that we've laid out.

I think we're out of time. Josh will be available in the breakout room. Please join me in thanking him for presenting.