EQT Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. EQT operates in production, midstream, and natural gas distribution. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $520.1 | $337.8 | $1,078.8 | $787.8 |
| Operating income | $171.3 | $81.4 | $369.9 | $233.6 |
| Net income attributable to EQT | $86.9 | $31.4 | $187.1 | $103.5 |
| Diluted EPS | $0.57 | $0.21 | $1.24 | $0.69 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $608.8 | $418.4 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $805.0 | $662.3 |
- Q2 operating margin was approximately 32.9%, versus 24.1% a year earlier. For the first half, it was approximately 34.3%, versus 29.6%.
- First-half operating cash flow less capital expenditures was negative $196.2 million, compared with negative $243.9 million in 2012.
- At June 30, cash was $16.7 million, down from $182.1 million at year-end 2012. Current assets were $577.4 million and current liabilities $495.4 million; the current ratio was approximately 1.17.
- Long-term debt was $2.499 billion, plus $55.0 million of short-term loans; total debt was approximately $2.554 billion. The $1.5 billion corporate revolver had $55.0 million drawn. EQT reported compliance with debt covenants; its maximum permitted debt-to-capitalization ratio was 65%.
- Common dividends declared were $0.03 per share in Q2 and $0.06 for the first half, versus $0.22 and $0.44, respectively, in 2012.
Material changes and operating drivers
- Q2 net income attributable to EQT increased to $86.9 million from $31.4 million; first-half income rose to $187.1 million from $103.5 million. The principal drivers were higher production volumes, stronger natural gas prices in Q2, and increased gathering and transmission activity. Costs also rose, notably DD&A, incentive compensation, and other operating expenses.
- Production sales volumes increased 54% in Q2 and 51% in the first half. Marcellus volumes more than doubled in both periods. Average effective sales price to EQT Corporation was $4.37/Mcfe in Q2, up 14%, but $4.32/Mcfe for the first half, essentially unchanged from 2012. Hedge gains were substantially lower than in 2012.
- Production segment operating income was $105.1 million in Q2 versus $17.7 million, and $179.2 million for the first half versus $76.7 million.
- Midstream operating income increased to $72.2 million in Q2 from $59.8 million and to $146.5 million for the first half from $115.9 million. Higher gathering volumes and Sunrise Pipeline-related transmission revenue were partly offset by lower storage, marketing, and other revenue.
- Distribution operating income was $6.2 million in Q2 versus $6.4 million, but $58.4 million for the first half versus $43.1 million. Colder winter weather and a favorable regulatory gas-cost audit supported the first-half increase.
Outlook, risks, contingencies, and unusual items
- Management expected 2013 capital investment, excluding acquisitions, of approximately $1.6 billion, including about $1.1 billion for well development and $400 million for midstream infrastructure. Projected 2013 sales volumes were 360–365 Bcfe, approximately 40% above 2012; projected NGL volumes were 4.8–5.0 million barrels.
- Planned 2013 drilling included approximately 176 gross wells. Management expected added midstream capacity of about 400 MMcf/day of gathering and 450 MMcf/day of transmission. Funding was expected from cash on hand, operating cash flow, and midstream dropdown proceeds.
- On June 3, EQT closed a $112.5 million acquisition from Chesapeake of approximately 99,000 net acres and ten Marcellus wells. The acquired wells were expected to add about 1.0 Bcfe of 2013 production sales and represented approximately 54 Bcfe of proved developed reserves. A planned reverse like-kind exchange had to be completed by November 30, 2013 or lapse.
- After quarter-end, Sunrise merged into EQT Midstream Partners on July 22. EQT received $507.5 million cash and partnership units valued at $32.5 million. EQT could receive a further $110 million if a specified 20-year transportation agreement becomes effective on its current terms by December 31, 2014; regulatory review was pending. EQT retained a 44.6% partnership interest after the related unit offering and merger and continued to consolidate the partnership.
- The proposed sale of Equitable Gas and Homeworks remained subject to state and federal regulatory approvals. Management expected approvals by year-end 2013; the businesses had not been classified as held for sale at June 30. Sale-related costs were $2.9 million in the first half.
- Commodity prices are a key risk. The filing reports 402 Bcf of natural gas hedged across production, purchases, sales, and inventory at June 30. A hypothetical 10% gas-price decline would increase the fair value of non-trading derivatives by about $149.5 million; a 10% increase would reduce it by about $148.9 million. These estimates exclude offsetting effects on physical transactions.
- Senior debt ratings were BBB at S&P, Baa3 at Moody’s, and BBB- at Fitch, all with stable outlooks. A downgrade could raise borrowing, collateral, and financing costs. Derivative counterparties could require additional collateral following a below-investment-grade downgrade.
- The filing cites ordinary-course legal and regulatory matters, but management did not expect pending matters to materially affect financial position, results, or liquidity. No material risk-factor changes from the 2012 Form 10-K were reported. Management cautioned that commodity-price volatility and seasonal distribution activity make interim results not necessarily indicative of full-year results.
- Unusual items include a $7.6 million Q2 2013 loss from hedge ineffectiveness and an $8.2 million unfavorable 2012 adjustment for previously mis-timed derivative put-premium accounting. The company stated the 2012 error was not material to prior periods and had no cash-flow or covenant effect.
Most important facts to verify
- Whether EQT achieved its 2013 production, drilling, capital-spending, and midstream-capacity targets, and how the capital program was funded.
- Regulatory completion and final economics of the Equitable Gas and Homeworks sale.
- Whether the Sunrise transportation agreement triggered the potential additional $110 million payment, and any other contingent Sunrise consideration.
- Completion and tax treatment of the reverse like-kind exchange for the Chesapeake acquisition.
- Cash generation relative to capital spending, liquidity after the post-quarter Sunrise transaction, and any material changes in debt, ratings, or hedge positions.