EQT Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results include EQT’s upstream and midstream operations, including Rice assets acquired in November 2017; comparisons with Q1 2017 are therefore not fully like-for-like.
Financial results and liquidity
Unless stated otherwise, amounts are in U.S. dollars and millions.
- Revenue: $1,433.6, up 60% from $894.2. Natural gas, oil and NGL sales were $1,226.4; pipeline, water and net marketing services were $144.6; derivative gains were $62.6, down from $140.7.
- Profit: Operating loss was $1,723.5, versus operating income of $391.0. Net loss attributable to EQT was $1,586.0, or $5.99 per diluted share, compared with net income of $164.0, or $0.95 per share. Results include a $2,329.0 impairment charge. Income tax benefit was $339.0.
- Cash flow: Operating activities provided $904.4, versus $514.8. Investing activities used $849.4, including $732.4 of capital expenditures and $117.0 contributed to the Mountain Valley Pipeline joint venture. Financing activities provided $8.1. Cash and cash equivalents ended at $210.4, up from $147.3 at year-end.
- Margins and operating performance: Consolidated operating margin was approximately negative 120% of revenue, heavily affected by the impairment. Production sales volume rose 88% to 357.0 Bcfe; average realized price fell 4.9% to $3.33/Mcfe.
- Debt and liquidity: Credit-facility borrowings were $1,892.0 and Senior Notes were $5,564.8 at quarter-end. EQT reported compliance with debt covenants. Its senior debt ratings were BBB (S&P, negative outlook), Baa3 (Moody’s, stable) and BBB- (Fitch, stable). The filing does not state a consolidated current ratio.
- Dividend: EQT declared a quarterly dividend of $0.03 per share, payable June 1, 2018.
Material changes versus the prior period
- The Rice acquisition materially expanded production volumes and added RMP Gathering and RMP Water to the reported segments. Those businesses were not included in EQT’s Q1 2017 segment results.
- The $2.3 billion impairment of non-core Huron and Permian production and related pipeline assets drove the swing to a substantial quarterly loss. The assets were reduced to estimated fair value of approximately $1.0 billion; valuation relied on significant unobservable inputs.
- Interest expense increased to $70.0 from $42.7, primarily reflecting debt issued in 2017 and credit-facility borrowings. Transaction costs were $35.7, including costs for the strategic review, midstream transactions and Rice acquisition.
- Cash from operations increased with higher production volumes and midstream revenue, partly offset by lower prices and higher cash operating costs.
Outlook, transactions and risks
- 2018 plans: EQT expected production sales volumes of 1,520–1,550 Bcfe and approximately $2.2 billion of production well-development spending. Planned midstream investment was approximately $1.5 billion through EQM, including $1.1 billion of MVP contributions; RMP expected approximately $260 million of organic investment.
- Separation: EQT planned to separate upstream and midstream operations into two publicly traded companies, intended to be tax-free to shareholders, by the end of Q3 2018. Completion, timing, tax treatment and expected benefits were uncertain.
- Midstream transactions: Announced agreements contemplated EQM’s merger with RMP, transfer of Rice retained midstream assets to EQM, and sale of RMP incentive distribution rights to EQGP. The transactions remained subject to conditions, including RMP unitholder approval. EQM also entered a $2.5 billion, 364-day term loan facility to support related funding needs.
- Permian sale: EQT agreed to sell its Permian assets for $64 million, expected by the end of June 2018. The sale was expected to reduce 2018 production-volume guidance by 5 Bcfe.
- Commodity and project exposure: Results and liquidity are sensitive to natural gas and NGL prices, regional basis differentials, production and hedging outcomes. MVP construction had begun, with in-service targeted for Q4 2018; EQM’s maximum financial-statement exposure to the venture was approximately $637 million, including its investment and potential guarantee exposure.
- Other risks and contingencies: The filing warns of separation and merger execution, regulatory, tax, financing and business-disruption risks. EQT reported ordinary-course legal matters and said it did not expect their resolution to materially affect financial position, results or liquidity. In the Phoenix S Impoundment matter, the Pennsylvania Supreme Court upheld a ruling rejecting the regulator’s penalty interpretation; EQT expected a penalty above $100,000 but no material impact.
Key facts for investors to verify
- How the $2.3 billion impairment, asset valuations and any further impairment indicators affect reported results and asset values.
- Whether production-volume and capital-spending guidance remains achievable after the Permian sale and amid commodity-price and basis volatility.
- Closing conditions, timing, financing and tax treatment of the planned separation and midstream transactions.
- MVP construction progress, total funding requirements and EQT/EQM’s potential exposure under project commitments and guarantees.
- Debt levels, facility availability, credit ratings and covenant compliance as transaction funding and investment needs evolve.