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EQT president on weathering the bust, learning Utica's potential for boom

While otherAppalachian drillers dropped their rigs to conserve cash with local pricesstuck below $2/Mcf, EQT Corp.used its strong balance sheetto buy bolt-on acreage from StatoilASA to drill longer laterals. S&P Global Market Intelligenceinterviewed EQT President Steven Schlotterbeck about EQT's strategy and thepuzzle of the Utica Shale at the company's Pittsburgh headquarters. Thefollowing is an edited transcript of the conversation.

S&P GlobalMarket Intelligence: I was just at the DUG East conference. It is that it used to be. This industry in this area is successful yet verychallenged. What do you see as the biggest challenge for the rest of the year? 

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Steven Schlotterbeck

President, EQT Corp.

Source: EQT Corp.

Steve Schlotterbeck:I think for us, frankly, it's going to come down to keeping the employeesmotivated during the downturn, keeping them engaged. We're fortunate to have avery strong balance sheet, so a lot of the distress that others are in hasn'taffected us.

We have had to respond to the lower-price environment bycutting our drilling capital basically in half for the last year. We made thedecision not to lay anybody off so we could maintain our capabilities for whenthe recovery happens. We've been anxiously awaiting that. We are also hopefulthat it will come later this year or early 2017, but you never know.

One of the big topicsaround the DUG East lunch table was: As soon as prices go higher, youAppalachian guys are just going to drill it all away. Do you see that as a realprobability, or is there enough restraint, if that's what you want to call it,in the industry?

That's probably exactly what's going to happen. I think Ihave history on my side. It's been that way in the industry since the veryfirst day. It's been boom and bust. I think it's part of the DNA of theindustry. Not that that's a good thing. I wish it weren't that way. But whatyou will see is that when prices recover and returns for investments go prettyhigh, as they will appear to, money will come rushing into this industry likeit always does. Billions and billions just sitting on the sidelines waiting tocome in.

Can your per-Mcf costget any lower?[According to its first-quarter report, EQT's operating costs were $1.44/Mcfein the most recent quarter. With depletion, total costs were $2.51 against anaverage realized price, with hedging, of $2.63/Mcfe.]

Actually, it can get lower. … There will always beincremental improvements to be gained. We're certainly not perfect. The biglever that's left, and I think it has a lot of leverage left, is longerlaterals. There is tremendous economic leverage in that.

Historically, we've been able to drill about 5,500-footaverage laterals. This year, we're going to get close to 7,000 feet.Unfortunately, the reason we're getting to 7,000 feet isn't something we'vebeen able to do on the land side; it was because we cut our program in half andwe eliminated the short laterals. It's just an averaging thing. It's just themath. The future opportunity is to be able to be able to consolidate biggerblocks of acreage to allow for longer laterals. We would love to drill everywell at 10,000 to 12,000 feet.

And that was therationale behind the Statoil purchase?


Longer laterals whilestaying under the umbrella of your midstream []?

Yes. We want to stay in our core. Fortunately, almost all ofour core acreage fits with our midstream system, so anything that's going tolengthen laterals is probably going to be within their operating area.

EQT has anembarrassment of riches between the Utica Shale and the Marcellus. Everyquarterly conference call, I hear you explain your decision tree: Do I drillthe Utica? Do I drill the Marcellus? Now I'm going to ask you to do it again.What's that tree look like? How do you make that decision?

We don't really view it yet as a competition between theUtica and the Marcellus. The Utica is an experiment; it's still exploratory innature for us. The Marcellus is our core development program. The vast majorityof our dollars go there. What we're trying to learn with the experiment is ifthe Utica can outcompete the Marcellus.

At the beginning of the year, we had two objectives in theexperiment. One was to see if we can get our costs down, and we had a targetrange of $12.5 [million] to $14 million [per well]. I think we've just gotteninto that range with our latest well, and I think we think there's significantimprovements yet to be done, so we're probably now focused toward the bottomend of that range over time.

The second objective was to understand the productivity ofthe reservoir and how widespread and repeatable it was, and we're in the middleof that. We've seen a good bit of variability amongst wells, so we don't haveall the answers there.

So right now, it's still uncertain as to whether we thinkthe Utica will be able to outcompete the Marcellus economically. But for us,once we have better understanding of the economics of the Utica, the decisiontree will be pretty straight-forward: It'll be driven on where we can get thebest returns on our investment.

The Utica could potentially have a few advantages that are alittle different than the Marcellus. In the Utica, we can go back on existingMarcellus pads, so we might be able to leverage the investment we've alreadymade in the roads, the pads, the pipelines for the Utica, where futureMarcellus development is probably going to require brand new pads, new roads,new pipelines. We'll factor all that in.