EQT Corporation — Q3 2018 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2018. EQT operated upstream production and consolidated midstream businesses. Comparisons with 2017 are affected by the November 2017 Rice Energy acquisition and 2018 midstream transactions and asset sales.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $1.159 billion | $659.4 million | $3.647 billion | $2.242 billion |
| Operating income (loss) | $71.8 million | $138.0 million | $(1.552) billion | $719.1 million |
| Net income (loss) attributable to EQT | $(39.7) million | $23.3 million | $(1.608) billion | $228.5 million |
| Diluted EPS | $(0.15) | $0.13 | $(6.12) | $1.32 |
| Operating cash flow | Not separately provided | Not separately provided | $2.445 billion | $1.211 billion |
- Q3 revenue increased about 76%, driven mainly by higher production volumes; production sales volumes rose 82.5%. Nine-month revenue increased about 63%, with production volumes up 84.4%.
- Q3 operating margin was about 6.2%, versus 20.9% a year earlier. The nine-month operating loss chiefly reflects $2.706 billion of impairment and loss-on-sale charges.
- Q3 consolidated net income was $63.4 million, but $103.1 million was attributable to noncontrolling interests, leaving a loss attributable to EQT.
- Nine-month cash used in investing was $2.719 billion, including $2.855 billion of capital expenditures and $446.0 million of MVP contributions, partly offset by divestiture proceeds. Financing provided $131.6 million. Cash declined $142.5 million to $4.9 million.
- At September 30, total liabilities were $12.444 billion. Senior Notes and credit-facility borrowings totaled approximately $8.508 billion, including $699.5 million current. EQT had $472 million outstanding under its $2.5 billion revolver; EQM had $22 million outstanding and $1 million of letters of credit under its $1 billion revolver. EQT reported compliance with debt covenants.
- Common dividends were $0.03 per share for Q3. The company completed its $500 million share-repurchase authorization during the quarter.
Material changes and unusual items
- Rice acquisition assets contributed to higher production and midstream activity; reported growth is therefore not fully organic or directly comparable with 2017.
- Q3 included a $259.3 million charge for capacity contracts no longer expected to be used following the Huron asset sale. The nine-month impairment/loss-on-sale total was $2.706 billion, including impairments on Huron and Permian assets.
- EQT sold Permian assets for net proceeds of $57.7 million and Huron assets for $523.6 million. It retained deep drilling rights across the Huron acreage.
- Interest expense rose to $93.0 million in Q3 and $240.1 million for nine months, reflecting new EQT and EQM notes and borrowings. EQM issued $2.5 billion of senior notes in 2018.
- Q3 transaction costs were $31.5 million; nine-month costs were $93.2 million, related principally to the separation review, midstream transactions and Rice acquisition.
Outlook, risks and contingencies
- The board approved a pro-rata distribution of 80.1% of Equitrans Midstream to EQT shareholders, expected effective November 12, 2018; EQT planned to retain 19.9% initially and later dispose of that stake to reduce post-separation debt. Management cautioned that reported results include the midstream businesses and are not indicative of EQT’s future standalone results.
- Management targeted mid-single-digit annual production growth over the following five years, emphasizing capital efficiency and free cash flow. 2018 production capital expenditure guidance increased by $300 million to $2.5 billion; expected 2018 sales volumes were 1,460–1,480 Bcfe.
- Management planned approximately $1.8 billion of 2018 midstream investment, including about $0.9 billion of MVP contributions. The MVP’s targeted in-service date was Q4 2019, but permit and legal challenges—including a court decision vacating use of a federal permit in West Virginia—could delay or affect completion and returns. EQM disclosed maximum financial-statement exposure related to the MVP of about $1.391 billion at quarter-end, including its investment and guarantee exposure.
- EQT expected to address $700 million of 2019 debt maturities using retained Equitrans shares, revolver borrowings, operating cash flow or a combination. Commodity prices, basis differentials, development costs, regulatory approvals and separation execution are significant uncertainties.
- A royalty class action seeks more than $100 million; EQT reserved about $1.5 million and reported a trial scheduled for November 27, 2018. The company also disclosed environmental matters and stated that expected resolutions were not expected to be material.
Most important facts for investors to verify
- Whether the Equitrans Midstream separation and distribution closed on the expected terms and date, and the resulting standalone debt, cash flows and allocation of obligations.
- Progress, permitting, cost and timing of the MVP and related projects, including the effect of court and agency actions.
- Whether production growth, 2018 capital spending and sales-volume expectations were achieved, and the effect of commodity prices and basis differentials.
- The cash and debt impact of 2019 maturities and any disposition of EQT’s retained Equitrans Midstream shares.
- Any changes in impairment estimates, remaining capacity-contract obligations, or outcomes of the royalty and environmental proceedings.