Expand Energy Corporation (EXE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, thank you for attending and welcome to the end Expand Energy Corporation conference call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Brittany Raiford. Ma'am, please begin.

Thank you, Howard. Good morning, everyone, and thank you for joining our call today to discuss Expand Energy's 2026 2nd quarter financial and operating results. Hopefully, you've had a chance to review our press release and updated investor presentation that we posted to our website yesterday. During this morning's call, we will make forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our press release yesterday and in other SEC filings. Please recognize that except as required by law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measure we use a reconciliation to the nearest corresponding GAAP measure that can be found on our website. With me on the call today are Mike Wichterich, Josh Viets, Marcel Teunissen, and Dan Turco. Mike will give a brief overview of our results and then we will open up the line for Q&A. So with that, thank you again. I'll now turn over the conference to Mike.

Thanks, Brittany. Good morning, and thank you for joining our call. It's now been 6 months since taking the role of interim CEO. And I told you last quarter that I couldn't be more optimistic about the future of expand. Today's quarterly results are a testament to why I was optimistic then and why my optimism today continues to grow. Let's talk about why. First, the expand team has earned a well-deserved reputation for operational excellence and execution. This quarter was no exception. Our Southwest App team had a particularly good quarter the team has consistently delivered tremendous operating results conducted with a safety-first mindset. Our employee and contractor safety is job #1. Second, we embrace that to be a great company we need to be a disciplined allocator of capital. This year has been a clear reflection of that commitment. In the first quarter, our free cash flow surged as a result of high natural gas prices. We were able to capture this volatility and prudently chose to pay down $1.3 billion in gross debt. This was intentionally done to put us in a position to capitalize on times when commodity prices are soft. Pop month natural gas prices dipped after the first quarter, and we were prepared to act decisively when our stock price dislocated from our mid-cycle price view of $3.50 to $4. As our peer companies focused on paying off low interest debt, we repurchased $850 million. or 4% of our outstanding shares. This is a great example of how we allocate capital to generate superior returns through the cycle. Our Board also sees the value of this type of thinking has authorized an additional $1 billion for future buybacks so that we can continue to act decisively when market conditions dictate. Third, we believe an upstream company must replace and build its drilling inventory to be successful over the long term. Organic leasing, when done well, is the most accretive and effective way to extend inventory. This year, we have been active in each of our operating areas, adding high-quality locations that are either accretive to our near-term drilling plans or give us the ability to grow production when natural gas prices rise. We also believe in inorganic transactions. However, I will remind you, our bar is high. Any transaction must do more than add scale. It must create long-term strategic value and position the company to become something stronger and more impactful over time. These opportunities are rare and must meet our nonnegotiables. Fourth, we are positioned to expand for the long term as North American's leading integrated natural gas company. In February, I mentioned on our earnings call that we had a renewed focus on our marketing commercial efforts. We laid out a 3-part framework: one, facilitating and capturing new demand; two, reaching premium markets; and three, monetizing volatility. We -- in the first quarter, we announced the LNG transaction with Delfin, extending our reach globally and advancing our goals on both capturing new demand and reaching premium markets. The team is hard at work on additional transactions. We look forward to sharing details as they're finalized. On Monday, we announced the purchase of Twin Eagle, which immediately accelerates our marketing commercial strategy and puts us in the driver seat to reach premium markets and monetize volatility. We -- before I talk how Twin Eagle is a game changer for expand, I would like to welcome the Twin Eagle employees to the Expand team. Jeremy Davis, CEO of Twin Eagle and his team have built an incredible business and brand over the past 15 years plus. We believe this acquisition is a transformational opportunity to unite expands industry-leading diverse supply and financial strength with Twin Eagle's premier physical marketing platform, creating leading integrated natural gas company. We will soon be the undisputed largest independent natural gas producer and leading gas marketer, scaling our business from a regional player to a coast-to-coast heavyweight across the United States and Canada, reaching customers that none of our domestic peers can touch. Rather than relying on directional commodity price exposure, Twin Eagle's business is built around linking customers to physical supply by using transportation and storage assets to create value. The model is unique, repeatable and scalable. It is an origination and optimization company, benefiting from customer relationships with an average retention rate of 90%. This provides Twin Eagle with lower earnings volatility on their base business, while preserving the upside during supply disruption events. Simply put, this repeatability, which starts with deep customer relationships is why they have been profitable every year since inception. Together, we are strategically positioned to benefit from a new era of demand pulled from power, industrial and LNG consumers across North America. We will more effectively monetize regional volatility and reach high-value markets, providing us with a unique value creation opportunity that will differentiate us from our peers. We expect Twin Eagle will contribute more than $200 million of EBITDA in year 1 and grow to $350 million per year as we capture synergies over the next 2 years. Important to note our estimates assume normal market conditions and do not reflect the potential upside associated with periods of elevated volatility. With our confidence in this deal, we are raising our incremental marketing commercial free cash flow target to $750 million. We look forward to working with Jeremy and the entire Twin Eagle team to maximize the value of every molecule. Finally, before taking your questions, a quick update on the CEO search. We originally said that we expect the process to take 6 to 9 months. We're at the 6-month mark, and we will meet our goal. With that said, in the last earnings call, we told you that Expand team would not stop focusing on creating long-term value for our shareholders during the CEO transition I hope today, you will see that we were serious. If there is one thing I have learned about the expand team, it's that it plays to win. We attack our business with urgency, maintain our disciplined approach to value creation and keep our promises. I could not be more impressed with the enthusiasm and professionalism of this team nor optimistic for the company's future. With that, we welcome your questions. Operator, please open the line.

Yes, sir. [Operator Instructions] Our first question or comment comes from the line of Arun Jayaram from JPMorgan.

Yes. Good morning, Mike and team. Mike, I wanted to get your thoughts on how you think the Twin Eagle acquisition aligns with expands overall strategy?

I think -- thank you for the question, Arun. Overall, we said in our first my first call here in February that we're going to focus on our M&C business. And that focus has turned into integrated gas company, and that is the bigger vision on how to go customer back because we think this is a demand pull future as opposed to the supply future. So if you think that's the #1 goal is the gig customers Twin Eagle has that. It has over 1,000 customers, that business is based on those relationships -- they've had them for 8 years, and so we know it's repeatable. So if you think about integrated gas supply, we believe having a national footprint, 1,000 customers, Twin Eagle is a perfect fit for us.

Great. Great. And just my follow-up, Mike, just in terms of the broader landscape, one of your peers in the Appalachia Basin, which also has an integrated model, similar scale has been able to ink several natural gas supply deals with utilities, power projects for data centers, et cetera. I want to get your thoughts on whether you view the Twin Eagle acquisition with your expanded transportation portfolio, customer intimacy, do you view this as an enabler to get supply deals for expand called over the line?

I absolutely do think that. Of course, we have a large position in Appalachia. We will absolutely look for deals there as well. But between Eagle gives us, it gives us the whole United States as our program their utilities all over the country, near population centers who are building data centers. We don't think data centers will only be in the East. -- think they'll be all over. Twin Eagle already has long relationships with utility companies. They will ultimately be the big winner here, in my opinion. And so the footprint is what will make us special.

Our next question or comment comes from the line of Josh Silverstein from UBS.

Just a question on capital allocation between the balance sheet and shareholder returns. You clearly bought back a significant amount of stock and just authorized another $1 billion buyback. But now you're buying 20 with the balance sheet and cash on hand. So how do you flex between the 2 going forward?

Marcel here. Taking your question there. So when you think of the overall capital allocation framework, right, our #1 priority is to reinvest in our ongoing business, keep that engine going. So that's our D&C capital. Our second priority is dividends. We have a good and healthy dividend. So we continue to pay that -- the third priority is our balance sheet, and we've made great strides in that in Q1, and that kind of allowed us to have some flexibility as we went into the second quarter, as Mike talked about. And then the remaining cash flow allocated to the highest kind of returning kind of opportunity that we have and that could include buying back our own stock that is competing with other opportunities that we have. Specifically to the money spent on Twin Eagle, -- it is a big amount. But for our company, we can absorb this within the facilities we have. We have ample liquidity -- so I expect that over the next quarter, we can do both balance sheet and looking at other opportunities to that return -- that make good returns for shareholders as well.

Got it. And then maybe sticking on the cash flow statement, the CapEx trajectory was -- obviously, you've been elevated this quarter, the 3Q guide was higher versus expectations. Can you just talk about the trajectory of this maybe into what's implied for the fourth quarter? And how much of it was service inflation versus just a good opportunity to step up the leasing efforts because it looks like you added a lot in the Haynesville and Appalachia.

Yes, we would expect that the capital will tail off as we go through the second half of the year. The first thing I would just note is that we do have a little bit less D&C activity in the second half of the year, primarily across our Appalachia business. On the second quarter specifically, we continue to find great opportunities to go out and add organic leases. This is, of course, we're able to leverage our operational and subsurface expertise identify opportunities to get in early at a lower cost, which simply preserves our ability to generate premium returns off of that acreage in the long run. In addition, we like the acreage that we're getting because it's also providing real growth optionality for us. as a company as we are looking at a pretty significant demand growth as we exit the decade there has been an element of realized inflation in the second quarter. And so just depending on where we see crude prices go, that will impact what we pay for fuel. That's all accounted for within our full year guide. The fourth quarter as a whole, also, I would just note that you do tend to see leasing activity ramp down in the fourth quarter. And that's really just -- you just simply lose working days with the holidays. And so that does tend to lend itself to a lower overall spend. But I would just note that we want to continue to be opportunistic financially, we're strong enough to be active out acquiring organic leases. We think it's a fantastic investment for the company. And if we continue to find these new opportunities, that would end up pushing us towards the higher end of our capital range for the full year.

Our next question comment comes from the line of Charles Meade from Johnson Rice.

To you and your team there. I want to ask another question on Twin Eagle, maybe there's two parts to this. Can you describe for us the -- what relationships you may have had with Twin Eagle in the past? Like, for example, whether they were marketing some of your volumes or if there's any history between expand in Twin Eagle. And also, when you look at the assets you acquired, of course, the people are a big part of it, but 1 of the biggest tangible pieces, it seems to me is this of storage. And I wonder if you could talk about how you value that, whether it was evaluated separately or whether that's just it's -- the it was just part of the whole in the overall evaluation.

Sure. Thank you, Charles, for the question. Of course, Twin Eagle has actually been around a long time. I mean this is the original Dynegy team that's spun out. And they've been doing this exact business for 30 years. The Twin Eagle team today, of course, is 15% in the latest iteration. Fun at 1 point in time, Chesapeake was 1 of the equity owners of Twin Eagle which got sold in the past. So we've had a long relationship with them just in general. We don't sell a lot of gas to them. Historically, so there's not a lot of overlap. They focus a little bit more downstream from where most of our sales have been. And so -- which is what we like. We want to extend our reach and they provide that reach. So known them for a long time. We have a perfect culture fit in that, of course, they're here in our spring complex. They're actually in our complex. And so they'll be moving to our building ultimately, but same type of people that kids go to the same schools that our employees go to. And so it's a great cultural fit. -- as well. Storage specifically, we thought about storage is how do they achieve their returns, not specifically the storage assets themselves. -- how that translates into earnings and their ability to have repeat earnings. And that's the same way we looked at their FT and the AMA. It's like what do they do with it more than exactly that specific asset?

That is great detail. And then my follow-up is perhaps for Josh, the 33,000 acres that you guys picked up I think it was in Sabine in Natus Paris in Louisiana and the Natal zone. Can you talk about what you're seeing differently or what you're doing differently that now makes that acreage perspective for you where presumably, since it was sitting there on lease and open, it wasn't prospective for you or other Haynesville players so far.

Yes. Charles, thanks for the question. I think this really just comes down to if you think about the Southwestern merger us being in a position to deliver a tremendous amount of synergies through this continued operational excellence. I think we continue to establish ourselves in the Haynesville as the best operator in these deep, high-pressure gas wells. And that's exactly what we find in this what we refer to as the NFZ extension. We are stepping down deeper into the Haynesville and Bossier, you end up moving down another 2,000 feet and true vertical depth. But we are made to go operate and develop these deep, complex, high-pressure reservoirs. We also just have a ton of subsurface information that we've built up over the last 1.5 decades of operating in the basin. And so that just puts us in a technical and operational advantage to get into these plays early before others are fully valued in it and go in, in this case, acquiring over 100 locations at less than $0.5 million. location. And so we feel really great about this position that we're building. Our goal is to always look at rock in a way that maybe today, it looks like Tier 2 and we're going to go make it Tier 1, and we see that same type of upside with this opportunity here.

Next question come comes from the line of Matthew Portillo from TPH.

Good morning, all. I just wanted to start out on the Gulf Coast, specifically hearing more from the industry around Southeast demand from utilities and the interplay between that demand pull and the start-up of LNG facilities that's really starting to create an interesting dynamic. So I'm curious if you might be able to comment on how you all are seeing the marketing opportunities that evolve as it relates to utilities? Does this potentially down the road between utilities and LNG create a premium market strategy for you all in terms of pricing or the ability to lay off FT? Just hoping you could give us an update on how the market is evolving around the Haynesville, given that you are the largest producer.

Matt, this is Dan. We remain very constructive around demand. We put a page together. I believe it's on Page 15 of our deck, looking at demand. And this is really a historic wave of structural demand that's coming at us. You hit many aspects there. power industrial LNG. On the power side, we tend to be more conservative than others, but still significant demand and really electrification is growing. Data centers is a big story, but there's also microgrid solutions and just balancing of markets. This is evidenced in the last few weeks, we've seen record demand prints for the U.S. We hit an all-time high a couple of weeks ago about 101 terawatts. So this is growing and real. Again, we are tied on the conservative side. Industrial, same thing. This is an often part of the market that's missed, and it's really in our backyard down in the Haynesville area, the amount of expansions happening at manufacturing sites and then we're under some confidential conversations with new sites being contemplated for the back half of the decade. So we're excited about that. And then LNG, this is real and it's real structural we actually updated our demand. So we're a bit more bullish on LNG. We've seen some accelerated projects happen. We've seen more FIDs taking place. So really, the confluence of all these demands coming together right in our backyard in Haynesville and Appalachia really sets up nice for our business. And again, Mike said it earlier, this is a demand pull. So we have a lot of customers coming to see us being able to offer them different products. structural products, long-term products. That's something the expand footprint allows. And then adding Twin Eagle just makes us even integrated and more strong and enhanced. Having that coast-to-coast footprint and being able to offer different types of products is going to be real beneficial for us as a differentiator.

Great. And then the second question, just on broader capital allocation trends. Obviously, the 2027 strip has come under pressure and maybe some of the smaller privates and smaller publics have been a bit more growth focused in the near term. Just curious, given how large your footprint is across the U.S. being the largest gas producer kind of across the U.S. And as you guys think about capital allocation, if the market does require growth from Expand down the road, is it still fair to think about with the slide you guys lay out on Slide 6. I probably need to see something in the $3.75 to $4 mid-cycle case for growth to return from a larger producer like yourself?

Yes. The view on mid-cycle price is absolutely driving how we think about capital allocation back into our business. We think that $3.50 to $4 range still fits. We think that's the prices that will be required to balance the market ultimately. And so as we think about heading in towards the end of the decade where you start to see larger demand growth, Dan just referenced, specifically the LNG, power and industrial demand growth that we see. And so if we start to adjust up that view on mid-cycle price, this business is positioned to grow. And it's not just in the depth of our inventory, but it's also the access to infrastructure that the company maintains specifically across the Haynesville asset. We've talked about the NFC extension earlier. That's adding locations that creates a real growth option with unconstrained infrastructure. We have our East Texas position that we're building. We are well positioned, especially where we sit on the cost curve to be out in front. And it's -- again, the supply-demand fundamentals support it. We are in a position to go grow.

Our next question or comment comes from the line of Doug Leggett from Wolf Research.

Thank you. Good morning, everybody. Thanks for having me on. Guys, I've got two questions, if I may. I'm looking at, I think it's -- I'm looking at Slide #7, which is the drilling efficiency, the improvement, obviously pretty impressive. But my question is, at some point, should we expect the improved capital efficiency, if you like, to translate to a lower CapEx number because it seems that you're doing you've got the capacity to do more with less, if you like, given that you haven't changed your production guidance. That's my first. My second 1 is a follow-up, if you don't mind, on Twin Eagle. The $200 million, obviously, and the synergies, you guys have got a track record forgive me for this, have been somewhat conservative on your synergies. So I'm curious how you would frame the risk of delivering the $250 million -- and I'm excluding the extra $100 million because you already had 500 million in your own numbers. And I guess my point is where -- what's the trajectory and what's the impact on your breakeven?

This is Josh. I'll take the first part of your question. And I think really what you're getting at is, is there an expectation that our maintenance CapEx adjust, given some of the deficiencies that we're seeing. I think at a corporate level, we still see our maintenance CapEx kind of ex growth leasehold and growth D&C spend in the East Texas position, still sitting around that 2.8 level. there has been some headwinds on the CapEx front, just primarily through higher fuel costs in the year. So that will serve as a bit of an offset to the efficiency gains. But I think we continue to unlock ways at which we improve our capital efficiency -- of course, the great execution results that we've seen in Southwest Appalachia is 1 example -- we also highlight in the slide deck on Page 8, what we're achieving with our enhanced completions in the Haynesville which has the ability to increase our per well production to the tune of about 5% to 10%. And most importantly there, that's really about flattening that year 2 and year 3 decline rate. So those things will ultimately translate into our 2027 maintenance capital level. So I do expect, as we head into next year on a maintenance CapEx level that we do see some modest improvements year-over-year.

Good. Doug, and let me pick up on your second question. So the first bit was on the EUR 200 million of acquired EBITDA of Twin Eagle, right? So that's kind of what we called our base EBITDA or their base EBITDA and they've been consistently delivering that over the last couple of years in a low volatility kind of part of the market. When there's volatility, that number could be 1.5 to 2x of that particular number. So -- but we have kind of guided to the normal volatility type of range. 250 million of synergies. I think you're right. We have a track record of over-delivering and being conservative of that. I will do everything that we can to squeeze that out and to accelerate delivery of that. We're pretty excited about what bringing together kind of our supply and financial strength can do with the capabilities and relationships and the infrastructure that Twin Eagle team have and when we bring that together what it can unlock. Just then to the breakeven question, right? So on an excluding dividend basis, which is probably most comparable to others. We are around 270 million today. The acquisition itself will reduce that breakeven by about $0.05 to $0.10. And with the synergies, that's about $0.10 to $0.15. And if you include the full EUR 750 million of M&C delivery, which we shared in our deck, that's around a EUR 0.30 breakeven improvement overall. So here, you got all the stats.

Our next question or comment comes from the line of Scott Hanold from RBC Capital Markets. Your line is now open.

My first question is also on Twin Eagle. And I'd be interesting to see if you all could compare and contrast the advantages of this more commercial strategy for integration versus owning midstream assets, so more of the asset-heavy kind of opportunities. So can pair and contrast it to kind of advantages and disadvantages of those strategies.

Maybe I'll start and I'll let Marcel jump in. Generally, we consider this a capital-light opportunity. So we are reaching premium markets in a bigger footprint for a lot less money upfront that generally goes to superior returns. That was part of our -- part of the thesis of why we wanted to do this particular transaction. After that, it doesn't mean we won't do things like NGI, which is, hey, if we can do midstream deals and partnerships that help us get our gas to better markets, and we'll use Twin Eagle to go and market around that. We would do those types of things. Being a midstream company is not what we are. We're not a midstream company. We're not trying to be a midstream company. We think there are a lot of great ones out there. Williams does a great job. [ Canada Morgan ] does a great job. And so that's a hard place for us to compete. -- we prefer to compete on a customer basis on an upstream basis. But if we have opportunities to unlock our gas to go further and increase our prices, we're going to do that. Anything to add?

And my follow-up is just on the Western Haynesville, can you give us a sense of what you've seen from the first well so far and on the cost side. And at some point in time, do you think this can compete with the greater portfolio?

Scott, Josh here. We've been really pleased with what we've seen both from an execution and early productivity in the Western Haynesville. -- it's incredibly complex. Deep, you're over 17,000 feet deep there, and so costs are high. We absolutely see line of sight through improved drilling techniques, better completion designs, not just to drive down cost over time. but also to further enhance well productivity. That play for us, I would just note, is truly considered exploratory in nature. There are still a lot of things that we have to learn. But what we love about it is the upside of growth that it provides for the company. We do have a ways to go, I would say, to further appraise it. We just finished drilling our second well in the play in the second quarter. That was just a vertical test well to further delineate the reservoir pleased with what we've seen there. and we'll drill a third well later in the year. The first well is on production. That data is now in the public domain. I've been pretty pleased with the productivity, high pressures -- and so it does have the making. But again, this is something for us that we put in the appraisal stage. And we really have that luxury simply because of the depth of inventory that we have across our Louisiana position. over 2,000 locations, roughly 20 years of inventory. And the fact that we own 75% of all Tier 1 inventory really puts us in a position of strength and simply not as dependent upon the Western Haynesville, but Again, I would just note this creates a great growth option for the company as we head into the back end of the decade.

Thank you. Our next question comment comes from the line of John Freeman from Raymond James.

I wanted to follow up, Josh, on some of your comments on the Haynesville, where you talked about the success that you all had on the enhanced completions, which all slow show in the slide deck. And if maybe you can just sort of elaborate a little bit as I believe those -- the 1 trade-off as you do have a little bit longer cycle times, which I think pushed some of those Haynesville pills into next year, but if you can just sort of elaborate on that dynamic.

Yes, sure. We've really put ourselves in a competitive advantage in the Haynesville for one, just the scale additional opportunities to go out and how we source certain components of the supply chain -- as an example, our procurement of sand comes at roughly 1/3 of the cost of where our competitors are. And that's really 1 of the items that's unlocking this greater well performance. We can simply pump larger, more complex completions, and that's what's ultimately delivering the increased production, but most importantly, improvement in returns and lower breakeven Specifically, on your point on the cycle times, with the bigger fracs that leads to large longer pump times, longer drill out periods. And so the knock on impact as it does start pushing out some of our tills. We'll end up with roughly 10 fewer tills in the year than what we anticipated. There's opportunities to go accelerate those, but the current environment really isn't necessarily needing that incremental gas, so we're happy to allow these turn-in lines to float into 2027.

Great. And then just my follow-up question, just sticking with the Haynesville, can you discuss what's kind of being evaluated with the Gen X testing that's underway, what your -- it looks like the initial results are promising, but just remind us kind of what you're testing there?

Yes, sure. One of the things about the Haynesville is you end up producing 70% of the EUR in the first couple of years of production. And so what we're trying to unlock is to create a structural change in how we drain the reservoir and therefore, how those longer-term decline rates show up. we simply want to access more of the reservoir from a carbon wellbore. And so we are experimenting with some various completion techniques that allows us to enhance that stimulated rock volume. -- with the goal of increasing EURs, which we believe ultimately will lead to better returns in the asset, lower reinvestment rates and lower breakeven -- and so we've been pleased with what we've seen to date. It's a little bit too early for us to talk about it. We think there's a real competitive advantage with what we're doing. And so we'll hopefully be in a position to talk about that in the year to come.

Our next question or comment comes from the line of Neil Mehta from Goldman Sachs.