EQT Corporation — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. EQT operates in Production (natural gas, NGLs and oil), Midstream (gathering, transportation, storage and marketing) and regulated Distribution. The company cautions that seasonal distribution and storage activity and commodity-price volatility mean quarterly results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Operating revenue | $455.7 million | $436.6 million; up 4.4% |
| Operating income | $197.6 million | $169.1 million; up 16.9% |
| Net income | $122.3 million | $88.1 million; up 38.8% |
| Diluted EPS | $0.82 | $0.65 |
| Operating margin | 43.4% | 38.7%; calculated as operating income divided by revenue |
| Operating cash flow | $227.5 million | $275.4 million |
| Capital expenditures | $263.4 million | $217.5 million |
| Operating cash flow less capital expenditures | $(35.9) million | $(?) million; comparable-period amount not calculated here |
| Cash and cash equivalents | $138.6 million | $0 at December 31, 2010 |
| Long-term debt, including current portion | $1.949 billion | Unchanged from December 31, 2010 |
Current assets were $615.4 million and current liabilities were $405.3 million at March 31, 2011 (current ratio approximately 1.52). EQT had no short-term loans outstanding, versus $53.7 million at year-end; it also had $23.1 million in standby letters of credit under its revolving facility. The $1.5 billion facility matures in December 2014. The company reported compliance with debt covenants.
Material changes and operating drivers
- Net income increased by $34.2 million. Management cited the $22.8 million pre-tax gain on the Langley processing-complex sale, higher production volumes and reduced reserves for certain non-income taxes. Lower realized wellhead prices, higher DD&A and weaker seasonal price spreads partly offset these items.
- Production sales volumes rose 43.5% to 43.0 Bcfe; production operating income increased 12.6% to $82.3 million. Average realized price including hedges fell 15.8% to $5.43/Mcfe.
- Midstream operating income increased 26.5% to $66.6 million, supported by higher gathering volumes and transmission throughput and lower expenses. Distribution operating income rose 12.5% to $53.4 million, helped by colder weather, a West Virginia rate increase and lower expenses.
- Operating cash flow fell $47.9 million, principally because Q1 2010 included a $124.1 million tax refund and Q1 2011 had lower commodity prices; increased production and gathered volumes partly offset the decline.
- Investing cash use was only $3.9 million, versus $218.3 million in Q1 2010, reflecting $230.5 million in Langley sale proceeds, a $15.0 million dividend from Nora Gathering LLC and securities-sale proceeds. These inflows more than offset higher capital spending.
Outlook, risks and unusual items
- Management expected 2011 natural-gas sales-volume growth of approximately 34%, with drilling focused on horizontal wells in shale formations in Pennsylvania, West Virginia and Kentucky. No full-year earnings or cash-flow guidance is provided in the supplied filing text.
- Management anticipated increased competition and higher costs for drilling and frac services as Appalachian Basin activity grows. Q1 2011 capital expenditures were $263.4 million; the company began drilling 52 gross wells, 51 of them horizontal.
- As of April 17, 2011, disclosed production hedges included 56 Bcf of 2011 swaps at an average NYMEX price of $4.86/Mcf, 42 Bcf of 2012 swaps at $5.28/Mcf and 3 Bcf of 2013 swaps at $5.62/Mcf, plus collars and other positions. Hedge results remain exposed to commodity prices, basis differences, settlement and counterparty risks.
- On February 1, 2011, EQT sold its Langley, Kentucky processing complex and associated NGL pipeline for $230.5 million, recognizing a $22.8 million pre-tax gain. It also sold available-for-sale securities for $14.0 million, recognizing a $4.0 million gain.
- Credit ratings at March 31 included BBB from S&P and Fitch and Baa1 from Moody’s. Fitch downgraded EQT to BBB in March, citing increased upstream business risk; S&P and Moody’s had negative outlooks. A downgrade below investment grade could raise borrowing costs and collateral requirements. EQT said it was in covenant compliance.
- Ordinary-course legal and regulatory claims are pending or threatened. Management considers litigation reserves adequate and does not expect current matters to materially affect financial position, results or liquidity, while acknowledging outcomes cannot be predicted with certainty. The filing reports no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of the earnings increase is repeatable after excluding the Langley and securities-sale gains and the tax-reserve reductions.
- Whether production growth and the approximately 34% full-year sales-volume outlook are achieved, and how lower realized prices and rising drilling and completion costs affect returns.
- Whether operating cash flow can fund the capital program and dividends without increased borrowing or further asset sales.
- Hedge volumes, realized hedge effects, price differentials, and collateral exposure; the filing estimates $22.9 million of deferred hedge gains would enter earnings over the next 12 months assuming no price or transaction changes.
- Credit-rating developments, liquidity availability, covenant headroom and any material developments in legal, tax or regulatory matters.