EQT Corporation 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. EQT is a natural gas producer focused on the Appalachian Basin; it reported one operating segment. The filing was signed February 27, 2020.
Business context and strategy
EQT reported 17.5 Tcfe of proved reserves and approximately 1.1 million net acres at year-end. Following a substantial board and leadership change in July 2019, management shifted toward “combo-development” projects—developing multiple wells and pads together—with the stated aim of reducing costs, improving capital efficiency and generating free cash flow. In the fourth quarter, EQT announced a plan to reduce debt using cash flow and proceeds from selected asset and investment sales.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total operating revenues | $4.42 billion | $4.56 billion |
| Operating loss | $1.15 billion | $2.78 billion |
| Net loss attributable to EQT | $1.22 billion | $2.24 billion |
| Diluted loss per share | $4.79 | $8.60 |
| Cash from operating activities | $1.85 billion | $2.98 billion |
| Cash capital expenditures | $1.60 billion | $3.73 billion |
| Year-end total debt, including current portion | $5.29 billion | $5.50 billion |
- Sales volumes were 1,508 Bcfe, up 1.4%; average daily sales volumes were 4,131 MMcfe per day. Excluding volumes from 2018 asset divestitures, sales volumes rose 4.2%.
- Average realized price, including cash-settled derivatives, declined to $2.69/Mcfe from $3.01/Mcfe. Natural gas sales prices excluding cash-settled derivatives were $2.48/Mcf versus $3.04/Mcf.
- Product sales revenue fell 19.3% to $3.79 billion, while a $616.6 million gain on derivatives not designated as hedges contributed to reported revenue. The comparable 2018 period had a $178.6 million derivative loss.
- Simple operating cash flow less cash capital expenditures was approximately $249 million. This is a calculated measure, not a company-reported free-cash-flow figure.
- Year-end cash was $4.6 million; EQT had $2.2 billion available under its $2.5 billion revolving credit facility. Current assets were $1.75 billion and current liabilities $1.35 billion.
- The board declared dividends of $0.12 per share for 2019. The filing states the board may change the dividend at its discretion.
Material changes and unusual items
- Proved reserves fell 19.7% to 17.469 Tcfe. Negative revisions of 4.907 Tcfe, primarily tied to the revised development strategy and five-year capital plan, outweighed additions of 2.068 Tcfe and production of 1.508 Tcfe. Proved undeveloped reserves declined to 5.025 Tcfe from 10.267 Tcfe.
- EQT recorded $1.124 billion of long-lived asset impairments in 2019, including $1.036 billion for non-strategic Ohio Utica assets. The filing cites depressed gas prices, strategy changes and potential asset monetization. It also recorded $556.4 million of lease impairments and expirations, versus $279.7 million in 2018.
- 2019 capital expenditures fell 35.3% from 2018. The company attributed lower operating cash flow year over year partly to discontinued-operation cash flows included in 2018 and lower cash operating revenues.
- Proxy, transaction and reorganization costs were $117.0 million, including $74.1 million of severance and termination benefits, $22.1 million of contract termination fees and $19.3 million of proxy costs.
- EQT settled royalty and trespass claims for $54 million plus lease modifications; $51 million was paid in 2019 and $3 million in January 2020.
Outlook, risks and contingencies
- 2020 plan: Capital expenditures of $1.15–$1.25 billion, expected to be funded from operating cash flow, with expected sales volumes of 1,450–1,500 Bcfe—approximately in line with 2019 using about $500 million less capital than the 2019 program.
- Management targeted Pennsylvania Marcellus well costs of $730 per lateral foot in the second half of 2020. Planned combo-development projects are expected to include approximately 13–25 wells, with average lateral lengths of 12,000–14,000 feet. These are forward-looking targets, not achieved results.
- Management said operating cash flow and revolving-credit availability should cover expected needs for at least the next 12 months, while noting that this expectation is not assured. Commodity prices, Appalachian basis differentials, takeaway capacity, production performance and execution of cost reductions are important uncertainties.
- Credit ratings deteriorated after year-end: Moody’s downgraded EQT to Ba1 in January 2020, and S&P and Fitch downgraded it to BB+ and BB in February, all with negative outlooks. EQT reported $0.6 billion of letters of credit posted for midstream assurances as of February 26, 2020, reducing available revolver capacity. Further downgrades could raise borrowing and collateral costs.
- In January 2020, EQT issued $1.75 billion of senior notes with stated coupons of 6.125% and 7.000%; following ratings downgrades, the rates increased to 6.875% and 7.750%. The company redeemed $1 billion of 2020 notes in February and announced a tender offer for up to $400 million of 2021 notes.
- EQT depends substantially on third-party midstream services, particularly EQM, and has significant long-term capacity and demand-charge commitments. A February 2020 gathering agreement consolidated contracts, increased minimum volume commitments and extended obligations through 2035; anticipated fee reductions depend on Mountain Valley Pipeline entering service, then expected January 1, 2021, and could be delayed.
- Other key risks include environmental and hydraulic-fracturing regulation, water sourcing and disposal, pipeline and permitting delays, concentrated Appalachian operations, lease expirations, litigation, and possible further impairments. EQT had $22.5 billion of future pipeline demand-charge and processing commitments as of year-end.
- Management reported no material expected effect from pending legal matters overall. A West Virginia produced-water release remained subject to a regulatory notice; EQT expected penalties above $100,000 but did not expect a material financial impact. The independent auditor issued an unqualified opinion and found internal control over financial reporting effective.
Important facts for investors to verify
- Whether the 2020 volume and capital-spending plan, combo-development cost savings and $730-per-foot well-cost target were achieved.
- How much debt was actually reduced through operating cash flow and asset monetizations, and the resulting interest, collateral and credit-rating effects.
- Whether Mountain Valley Pipeline entered service on schedule and when the gathering-fee reductions under the EQM agreement took effect.
- Whether reserve revisions, lease impairments or asset impairments continued as the development plan and commodity-price assumptions changed.
- The final proceeds and use of proceeds from the Equitrans Midstream share exchange and any other planned asset sales.