EQT Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. EQT reported as a natural-gas-focused Appalachian Basin producer. Its November 2018 separation of the midstream business means year-over-year comparisons and cash-flow figures require care: cash flows include discontinued operations, while the income statement presents them separately.
Financial performance and key metrics
- Revenue: GAAP operating revenue was $4.56 billion, up 47.5% from $3.09 billion. Natural gas, oil and NGL sales were $4.70 billion. Revenue included a $178.6 million derivative mark-to-market loss, versus a $390.0 million gain in 2017.
- Volumes and realized pricing: Sales volumes rose 67.6% to 1,488 Bcfe (4,076 MMcfe/day), largely reflecting the Rice acquisition and drilling growth. Adjusted for the 2018 divestitures, sales were 1,447 Bcfe. Average realized price, including settled derivatives, was $3.01/Mcfe versus $3.04/Mcfe.
- Profitability: Continuing-operations loss attributable to EQT was $2.38 billion, or $9.12 per diluted share, compared with income of $1.39 billion, or $7.39 per diluted share, in 2017. Net loss attributable to EQT, including discontinued operations, was $2.24 billion. Operating loss was $2.78 billion.
- Unusual charges: Operating expenses included $2.71 billion of impairment/loss on sale of long-lived assets, $530.8 million of goodwill impairment, and $279.7 million of lease impairments and expirations. The divestiture-related charges included a $260.5 million loss on capacity contracts no longer expected to be used.
- Fourth quarter: Q4 operating revenue was $1.25 billion; continuing-operations loss attributable to EQT was $598.1 million and net loss attributable to EQT was $636.7 million.
- Cash flow and capital spending: Consolidated cash from operations was $2.98 billion. Total cash capital expenditures were $3.73 billion, including midstream spending reported in discontinued operations; cash flow less those expenditures was approximately negative $756 million. Reserve-development spending was $2.26 billion.
- Liquidity and debt: Cash was $3.5 million at year-end. Reported debt was approximately $5.5 billion; this includes $800 million drawn on the $2.5 billion revolving credit facility. EQT said it was compliant with debt covenants, including a maximum 65% debt-to-total-capitalization ratio. Senior notes were rated investment grade with stable outlooks by Moody’s, S&P and Fitch.
- Reserves: Proved reserves totaled 21.8 Tcfe, up 2% reported and 11% excluding the 2018 divestitures. The filing estimated about 15 years of reserve life using 2019 production guidance.
- Dividend: The annual dividend declared was $0.12 per share. The Board declared a $0.03-per-share quarterly dividend payable in March 2019.
Material changes versus the prior comparable period
- Sales volumes increased substantially, driven mainly by the November 2017 Rice acquisition and production from prior drilling programs; 2018 divestitures partly offset the growth.
- Revenue increased, but realized price per Mcfe was slightly lower and derivative results swung from a large gain in 2017 to a loss in 2018.
- Continuing operations moved from substantial profit to a large loss, principally due to impairments and divestiture-related losses. Excluding those items, higher revenue was offset by increased depreciation and depletion, transportation and processing costs, interest expense and a lower tax benefit.
- The midstream separation was completed on November 12, 2018. EQT distributed 80.1% of Equitrans Midstream to shareholders and retained 19.9%, which it planned to dispose of and use the proceeds to reduce debt.
- The Permian and Huron divestitures generated net proceeds of $56.9 million and $523.6 million, respectively. EQT retained deep drilling rights across the Huron acreage.
Outlook, risks and contingencies
- 2019 outlook: EQT expected sales volumes of 1,470–1,510 Bcfe and capital spending of approximately $1.9 billion: $1.5 billion for reserve development, $0.2 billion for land and leases, $0.1 billion for capitalized overhead and $0.1 billion for other production infrastructure. Management expected the plan to be funded from operating cash flow and said the program was expected to support 5% sales-volume growth in 2020 over 2019 expected volumes.
- Strategy and commentary: Management emphasized cost reduction, capital and operating efficiency, capital discipline, balance-sheet strengthening, shareholder returns, mid-single-digit annual production growth and sustainable free cash flow.
- Commodity and market risks: Earnings, liquidity and development plans are highly sensitive to gas prices and Appalachian basis differentials. Lower prices may reduce cash flow, reserves and borrowing capacity or trigger further impairments. Takeaway constraints and regional concentration may pressure realized prices.
- Midstream and commitments: Following the separation, EQT depends on Equitrans Midstream and other providers for gathering, processing and transportation. Long-term pipeline and processing purchase obligations totaled approximately $23.5 billion, with payments potentially due even if reserved capacity is underused.
- Legal and environmental matters: A proposed royalty class-action settlement announced in February 2019 called for a $53.5 million payment, was subject to court approval and class participation, and had been recorded as a year-end reserve. The filing also describes environmental notices and settlements, generally assessed by management as not expected to materially affect the company.
- Other uncertainty: Key risks include regulation of hydraulic fracturing and emissions, water availability and disposal, operational and cyber incidents, reserve-estimate uncertainty, lease expirations, credit-counterparty performance, and execution/integration risks following the Rice acquisition and midstream separation. The separation also carries potential tax and indemnification risks.
Most important facts for investors to verify
- Reconcile the $2.24 billion net loss with the major impairment, divestiture and derivative items, and distinguish continuing from discontinued operations.
- Assess whether 2019 volume and capital-spending plans were achieved and whether operating cash flow funded the program as expected.
- Review debt maturities, revolver availability, covenant headroom and the intended timing and proceeds of EQT’s retained Equitrans Midstream stake disposition.
- Evaluate the economics and utilization of the $23.5 billion of long-term purchase obligations and the availability of takeaway capacity, including the Mountain Valley Pipeline timetable.
- Track court approval and final terms of the royalty settlement, along with any material updates to environmental, tax or separation-related contingencies.
- Consider the sensitivity of reserves, cash flow and impairment exposure to commodity prices, Appalachian basis and development assumptions.