EQT Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Unless stated otherwise, financial amounts below are in millions of dollars; the filing presents financial statements in thousands. EQT operates in Production, Midstream, and regulated Distribution.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $257.3 | $218.4 | $951.5 | $925.8 |
| Operating income | $88.2 | $39.9 | $335.8 | $243.6 |
| Net income | $36.5 | $2.9 | $154.6 | $101.5 |
| Diluted EPS | $0.24 | $0.02 | $1.07 | $0.77 |
- Margins: Calculated operating margin was 34.3% in Q3 2010 versus 18.3% a year earlier; nine-month margin was 35.3% versus 26.3%. Calculated net margin was 14.2% versus 1.3% in Q3 and 16.2% versus 11.0% for nine months.
- Cash flow: Nine-month operating cash flow was $621.0 million, up from $553.0 million. Investing outflow was $863.8 million, including $863.0 million of capital expenditures. Financing provided $440.1 million. Cash ended at $197.4 million, versus none reported at year-end 2009. Operating cash flow less capital expenditures was negative $242.0 million, compared with negative $83.1 million in 2009.
- Liquidity: Current assets were $768.1 million and current liabilities $518.2 million at September 30; calculated current ratio was 1.48. The $1.5 billion revolving facility had no borrowings outstanding, with a $23.5 million standby letter of credit outstanding. The facility was due to mature October 26, 2011.
- Debt and equity: Long-term debt was unchanged at $1.949 billion; no short-term loans were outstanding. The company issued shares for net proceeds of $537.2 million. Stockholders’ equity rose to $3.059 billion from $2.151 billion at year-end 2009.
- Dividends: $0.22 per share was declared for each quarter shown. A further $0.22 quarterly dividend was declared October 20, payable December 1, 2010.
Material changes and operating drivers
- Q3 net income increased substantially from the prior-year quarter, partly because 2009 included $24.3 million of long-term compensation expense under the 2009 Shareholder Value Plan. Higher production volumes, gathering revenues, and NGL revenues also helped; higher DD&A and lower wellhead prices partly offset gains.
- For nine months, revenue increased modestly, while net income rose 52%. Higher production volumes, NGL prices, and gathering activity supported results; higher DD&A, interest expense, and operating and SG&A costs were offsets. Interest expense rose to $102.1 million from $78.1 million.
- Production: Nine-month sales volumes rose 32.3% to 95,903 MMcfe, while average wellhead price fell 6.1% to $3.53/Mcfe. Production operating income increased 11.4% to $122.1 million. The company drilled 79 horizontal Marcellus wells versus 27 and 191 Huron/Berea wells versus 243.
- Midstream: Nine-month operating income increased 48.7% to $178.0 million. Higher gathered volumes and fees, NGL prices and sales, and processing revenues contributed. Midstream operating expenses also increased, including a $2.6 million compressor decommissioning loss in Kentucky.
- Distribution: Nine-month operating income declined 7.2% to $52.4 million. Warmer weather, higher bad-debt expense, and operating costs weighed on results. Q3 operating income fell to $0.6 million from $3.2 million, with lower throughput and asset-optimization revenues and higher expenses.
- Capital expenditures increased to $863.0 million from $636.1 million. The company acquired approximately 48,000 Marcellus net acres for $260.2 million, funded about 90% with EQT stock and 10% with cash; it reported approximately 500,000 net acres in the high-pressure Marcellus fairway afterward.
Outlook, risks, and notable items
- Management forecast approximately $1.2 billion of 2010 capital expenditures, excluding acquisitions, with investment focused on shale development and supporting infrastructure. No full-year earnings guidance is provided in the supplied filing text.
- Management identified the Marcellus as its fastest-growing and most profitable play and described plans for continued horizontal drilling. It expected production and Midstream volumes to grow as infrastructure expands.
- Equitrans Marcellus Expansion Phase 1 entered service October 1, 2010, adding approximately 100,000 Dth/day of delivery capacity. Phase 2 was expected to be filed with FERC in early 2011, with service targeted by end-2012, subject to approvals and execution.
- Management expected Q4 2010 Midstream storage, marketing, and other net operating revenues to be about $15 million below Q4 2009, citing less seasonal volatility and lower third-party marketing margins. The filing also describes discussions with DCP about alternative processing and NGL infrastructure arrangements; no final transaction is disclosed.
- Natural gas and NGL prices, drilling results and costs, weather, regulatory decisions, and execution of capital projects are key risks. A 10% natural-gas price decline would increase the fair value of non-trading derivatives by an estimated $53.7 million; a 10% increase would reduce it by $51.5 million. The filing notes that corresponding physical exposure is expected to offset hedge-value changes if transactions occur as anticipated.
- At September 30, 2010, credit ratings were investment grade, but Moody’s and S&P outlooks were negative. A downgrade below investment grade could raise borrowing costs and collateral requirements. The company reported compliance with debt covenants.
- Derivative assets were $280.3 million and derivative liabilities $119.4 million. A credit downgrade below investment grade could require up to $9.9 million of additional collateral for specified derivative liabilities. The company reported no such collateral posted.
- Pending legal and regulatory matters arise in the ordinary course; management said reserves were adequate and did not expect current matters to materially affect financial position, results, or liquidity. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether production growth, realized pricing, and drilling economics sustain returns as DD&A and capital spending rise.
- Funding for the planned capital program after nine-month capital expenditures exceeded operating cash flow and the company relied partly on equity issuance.
- Progress, costs, approvals, and timing for Marcellus gathering and Equitrans expansion projects, plus the status of any DCP or asset-sale arrangements.
- Hedge volumes, realized hedge results, and derivative collateral exposure under changing commodity prices or credit ratings.
- Distribution performance under warmer weather, customer bad debt, and regulatory rate outcomes; the filing says interim results may not indicate full-year performance because of seasonality and commodity-price volatility.