EQT Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparative periods ended June 30, 2014. Unaudited consolidated results cover EQT’s Production and Midstream businesses. Unless noted, dollar amounts below are in millions.
Key financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Operating revenue | $433.2 | $526.2 | $1,141.9 | $1,187.8 |
| Operating income | $33.0 | $224.8 | $347.8 | $581.6 |
| Net income | $63.7 | $138.3 | $284.9 | $349.2 |
| Net income attributable to EQT | $5.5 | $110.9 | $179.0 | $303.1 |
| Diluted EPS attributable to EQT | $0.04 | $0.73 | $1.17 | $1.99 |
| Operating cash flow | Not presented separately | Not presented separately | $656.0 | $765.4 |
- Q2 revenue declined 17.7%; first-half revenue declined 3.9%. Q2 operating income fell sharply, while first-half operating income declined 40.2%.
- Q2 income attributable to EQT fell to $5.5 million, principally reflecting lower realized production prices, higher operating costs, and greater income allocated to noncontrolling interests. A $64.9 million income tax benefit helped offset the Q2 pre-tax loss.
- First-half capital expenditures were $1,321.0 million; operating cash flow less capital expenditures was negative $665.0 million. EQT also contributed $45.9 million to the Mountain Valley Pipeline joint venture.
- Cash and cash equivalents were $1,958.2 million at June 30, versus $1,077.4 million at year-end. Total debt, including short-term loans and current debt, was approximately $3,290.2 million, versus approximately $2,988.9 million at year-end. EQM had $312.0 million drawn on its revolver; EQT Corporation had no borrowings on its $1.5 billion facility.
- Current assets were $2,490.3 million and current liabilities $1,031.3 million at June 30. Dividends declared were $0.03 per share for the quarter.
Operating trends and changes
- Production sales volume grew 33.5% in Q2 and 35.1% in the first half, reaching 1,616 MMcfe per day and 1,615 MMcfe per day, respectively. Marcellus production was the main growth contributor.
- Despite volume growth, realized price to EQT Corporation fell 39.9% in Q2 to $2.36/Mcfe and 35.9% in the first half to $3.02/Mcfe. Lower NYMEX gas and NGL prices were major factors.
- EQT Production reported a Q2 operating loss of $66.9 million, compared with income of $144.7 million a year earlier; first-half operating income declined to $119.0 million from $421.9 million. Higher DD&A, transportation and processing, exploration, and other costs also weighed on results.
- EQT Midstream operating income rose 22.2% in Q2 to $108.2 million and 38.7% in the first half to $237.9 million. Higher gathering and transmission firm-reservation revenue drove growth; lower usage-based fees and marketing revenue partly offset it.
- Net income attributable to noncontrolling interests rose to $58.2 million in Q2 and $106.0 million in the first half, reflecting EQM earnings and expanded public ownership following EQM’s March offering and EQGP’s May IPO.
Outlook, risks, and unusual items
- Management reduced 2015 capital investment guidance, excluding acquisitions, from $2.55 billion to approximately $2.4 billion, including EQM. Planned Production investment was approximately $1.7 billion, including about $1.5 billion for well development and a program of approximately 185 gross wells. Midstream infrastructure investment was expected to be about $0.7 billion.
- Management forecast 2015 sales volumes of 595–605 Bcfe, approximately 25% growth, and NGL volumes of 9,000–10,000 Mbbls. It cited a favorable long-term business outlook but warned that prolonged low commodity prices could slow reserve development.
- The company suspended Permian drilling in Q1 amid weak prices. It was evaluating initial production results from its first Deep Utica well; management said initial rates were expected to be significant, but results were not yet fully analyzed.
- In July, EQM agreed to build a roughly $250 million southwestern Pennsylvania header pipeline for Range Resources, supported by a 10-year, 550 MDth/day firm-capacity commitment. Phased service was planned for Q3 2016 and mid-2017.
- The $35.7 million tax benefit from IRS guidance related to the 2013 Equitable Gas transaction improved current-period earnings; the related regulatory asset and deferred taxes are expected to increase tax expense when disposed of in a taxable transaction or amortized over the remaining 32-year asset life.
- Effective December 31, 2014, EQT discontinued cash-flow hedge accounting. Derivative fair-value changes now affect earnings; approximately $98.3 million of net gains in accumulated OCI were expected to be recognized in earnings over the next 12 months as hedged transactions settled.
- Commodity prices, basis differentials, derivative valuation and counterparty credit, and access to financing are material risks. EQT’s senior debt ratings were investment grade but near the lower end of that range; a downgrade could increase borrowing costs and collateral needs. EQT and EQM reported covenant compliance.
- Pending environmental proceedings include a PADEP claim seeking $4.53 million in civil penalties related to a 2012 release. The company disputed the assessment and said it did not expect a material financial impact. A separate PFBC matter was resolved in March 2015 with a no-contest plea and $30,000 penalty.
Important facts for investors to verify
- Whether production growth and the expected 595–605 Bcfe volume range can offset continued weak realized prices and the resulting pressure on earnings and operating cash flow.
- Whether the $2.4 billion capital plan, negative first-half operating-cash-flow-to-capex gap, and planned funding sources remain achievable without materially increasing leverage.
- How much reported income depends on derivative gains, tax benefits, and earnings allocated to noncontrolling interests; these factors materially affect the difference between consolidated net income and income attributable to EQT.
- Progress, cost, timing, contractual commitments, and funding for the Range header pipeline, Mountain Valley Pipeline, and other infrastructure projects.
- Developments in the PADEP litigation, credit ratings and collateral requirements, and future recognition of deferred tax amounts and accumulated hedge gains.