EQT Corporation — Q3 2017 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. EQT reports three segments: production of natural gas, NGLs and oil; gas gathering; and gas transmission and storage. EQT consolidates EQT GP Holdings and EQT Midstream Partners, so reported net income includes substantial income attributable to noncontrolling interests.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $660.3 million | $556.7 million | $2,248.7 million | $1,229.3 million |
| Operating income (loss) | $137.7 million | $108.5 million | $718.1 million | $(88.8) million |
| Net income (loss) attributable to EQT | $23.3 million | $(8.0) million | $228.5 million | $(261.0) million |
| Diluted EPS attributable to EQT | $0.13 | $(0.05) | $1.32 | $(1.58) |
| Operating margin, approximate | 20.9% | 19.5% | 31.9% | Negative |
Revenue and income are affected by unrealized derivative fair-value changes recorded in operating revenue. Q3 2017 included a $35.6 million derivative gain, versus $93.4 million in Q3 2016; nine-month 2017 included a $222.7 million gain, versus a $32.3 million loss in 2016. Consolidated net income was $105.5 million for Q3 and $478.8 million for the nine months; $82.1 million and $250.3 million, respectively, were attributable to noncontrolling interests.
- Production: Sales volumes rose 4.6% to 2,229 MMcfe/day in Q3 and 6.2% to 2,172 MMcfe/day for the nine months. Average realized price increased 25.5% to $2.76/Mcfe in Q3 and 31.2% to $3.03/Mcfe for the nine months. Production operating income was $12.1 million in Q3, versus a $15.5 million loss, and $322.3 million for the nine months, versus a $468.7 million loss.
- Gathering and transmission: Nine-month operating income increased 11.2% to $242.7 million for Gathering and 8.6% to $189.0 million for Transmission. Growth reflected higher firm reservation revenues and capacity; higher depreciation and operating costs partly offset those increases.
- Cash flow: Nine-month operating cash flow was $1,211.4 million, up from $767.7 million. Investing used $1,716.5 million, including $1,152.9 million of capital expenditures and $819.0 million for acquisitions; financing used $114.8 million. Cash declined by $620.0 million to $483.6 million.
- Debt and liquidity: September 30 cash was $483.6 million. Balance-sheet debt and credit-facility borrowings totaled approximately $3.40 billion, including $707.5 million current debt and $105.0 million of EQM credit-facility borrowings. EQT had no borrowings on its own $1.5 billion revolver; EQM’s amended $1.0 billion facility had $105 million drawn. Both facilities were extended to July 2022. EQT reported compliance with debt covenants.
- Dividends: EQT declared $0.03 per share for Q3, unchanged from 2016; $0.09 per share was declared for the first nine months.
Material changes and notable items
- Higher realized commodity prices and production volumes drove much of the improvement in production results. Management also cited improved Appalachian basis, including the benefit of new transportation routes. Operating costs increased, notably transportation, gathering and processing.
- EQT acquired Marcellus acreage in three 2017 transactions for stated purchase prices totaling approximately $740 million. The filing reports $740.1 million net cash paid for 2017 acquisitions through September; purchase-price allocations were preliminary.
- On June 19, 2017, EQT agreed to acquire Rice Energy in a transaction valued at approximately $6.7 billion for Rice shareholders, based on the announcement-date share price, and expected to assume or refinance about $2.2 billion of Rice net debt and preferred equity. At filing, closing was expected in mid-November, subject to shareholder approvals and other conditions. EQT expected existing EQT shareholders and former Rice shareholders to own approximately 65% and 35%, respectively, after closing.
- On October 4, after quarter-end, EQT issued $3.0 billion principal amount of notes and received approximately $2.974 billion net proceeds. Proceeds were intended to fund the merger cash consideration and related transactions, refinance or redeem debt, and for general corporate purposes. EQT expected to redeem $700 million of 2018 notes in November, with make-whole premiums.
Outlook, risks and contingencies
- Management expected 2017 capital investment of approximately $2.0 billion, excluding the Rice merger and other acquisitions, including about $1.3 billion for well development and $0.5 billion for EQM midstream infrastructure. The well-development plan contemplated approximately 178 gross wells. EQT said Production investment was expected to be funded by operating cash flow and cash on hand; plans could be adjusted to market conditions.
- EQT identified commodity prices and Appalachian basis as major uncertainties affecting revenue, profitability, liquidity and development plans. Its hedging program aims to protect a portion of cash flows; hedge positions and results remain exposed to price movements and counterparties.
- No proved-property impairment was recorded in Q3. Management warned that further declines in five-year forward realized prices could cause a significant impairment in Huron play assets, with a carrying value of approximately $3 billion at September 30.
- The Rice merger could fail to close or integration may not deliver expected benefits. The merger agreement included potential termination fees of $255 million in specified circumstances and expense reimbursement of $67 million if termination resulted from failure to obtain a party’s shareholder approval. Certain 2017 notes require redemption at 101% plus accrued interest if the merger is not completed by May 19, 2018, or EQT abandons it.
- EQM’s 45.5% Mountain Valley Pipeline joint-venture interest had an estimated maximum financial-statement exposure of approximately $431 million, including its investment and potential guarantee obligations. EQM had issued a $91 million performance guarantee. FERC issued the project certificate on October 13, 2017; the pipeline was targeted for service in Q4 2018.
- Ordinary-course legal and regulatory matters were pending or threatened. Management said it did not expect their ultimate outcomes to materially affect financial position, results or liquidity. Disclosure controls were assessed as effective, with no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Rice merger closed on the anticipated terms and timing, and the resulting debt, dilution, integration costs and midstream asset transactions.
- How much reported earnings reflected derivative fair-value movements versus realized commodity prices, and how hedges affect future cash flows.
- Whether production growth, realized pricing and transportation costs support the stated capital plan and operating returns.
- Cash and debt levels after the October note issuance, merger funding, 2018 note redemptions and any additional revolver borrowing.
- Mountain Valley Pipeline construction, permitting, cost exposure and schedule, and any change in Huron impairment risk if forward gas prices weaken.