EQT Corporation — Q1 2021 Form 10-Q
Business context and period: EQT is a natural gas, natural gas liquids (NGLs) and oil producer operating primarily in the Appalachian Basin. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020. Unless stated otherwise, financial amounts are in millions.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Commodity sales | $1,131 | $715 |
| Total operating revenues | $950 | $1,107 |
| Operating income | $8.8 | $123.4 |
| Net loss attributable to EQT | $40.5 ($0.15 per share) | $167.1 ($0.65 per share) |
| Cash from operating activities | $399.9 | $500.3 |
| Cash capital expenditures | $251.3 | $256.2 |
Operating revenue fell 14% despite a 58% increase in commodity sales: Q1 2021 included a $188.8 million loss on non-hedge derivatives, versus a $389.4 million gain in Q1 2020. Adjusted operating revenues, a company-defined non-GAAP measure excluding unsettled derivative fair-value changes and marketing services, rose to $1,083 million from $957 million. Sales volume increased 7.8% to 415.2 Bcfe; average realized price including cash-settled derivatives was $2.61/Mcfe versus $2.49/Mcfe.
Operating expenses were $941.1 million versus $983.7 million. Depreciation and depletion rose to $377.1 million from $357.5 million, while lease impairment and expiration costs declined to $16.8 million from $53.8 million. Interest expense increased to $75.1 million from $62.4 million. The effective income tax rate was 26.1%; EQT recorded a $14.5 million tax benefit.
At March 31, 2021, cash was $40.7 million and total assets were $18.0 billion. Reported debt included $29.3 million of current debt, $300 million of credit-facility borrowings, $4.38 billion of senior notes and a $98.5 million note payable to EQM. Net cash from operations less cash capital expenditures was approximately $148.6 million. EQT reported $1.31 billion of current assets and $1.75 billion of current liabilities. The $2.5 billion credit facility had approximately $770 million of letters of credit outstanding; the company said it had sufficient unused borrowing capacity, net of letters of credit, as of April 30.
Material changes and notable items
- Sales volume rose primarily due to 34 Bcfe from the 2020 Chevron acquisition, partly offset by 5 Bcfe associated with divested assets. Marcellus volume increased 12%; Ohio Utica volume decreased 20%.
- Q1 2020 results included a $187.2 million gain on the Equitrans Share Exchange and a $48.9 million loss on acreage exchanges; these did not recur in Q1 2021. The comparison also reflects investment gains in Q1 2021 versus a $390.6 million investment loss in Q1 2020.
- On February 1, 2021, EQT redeemed the remaining $125.1 million principal amount of its 4.875% senior notes, at a total cost of $130.7 million. It reported a $4.4 million extinguishment loss.
- On April 23, EQT extended its credit-facility maturity from July 2022 to July 2023. On May 5, after quarter-end, it agreed to acquire Alta Marcellus and ARD for $1.0 billion cash and 105.3 million EQT shares, subject to purchase-price adjustments.
- The company completed implementation of an ERP system during Q1 and updated related controls; management said disclosure controls were effective and expected the ERP changes to strengthen financial controls.
Outlook, risks and contingencies
Management expected 2021 capital expenditures of $1.025–$1.125 billion, excluding noncontrolling interests, and sales volume of 1,620–1,700 Bcfe. It expected operating cash flow and, if needed, credit-facility borrowings to fund planned spending. Management believed cash flows and facility availability would meet requirements for at least the next 12 months and, based on current expectations, longer term. It also planned to sell remaining Equitrans Midstream shares and use proceeds to reduce debt.
EQT’s senior-note ratings were below investment grade: Moody’s Ba2 (stable), S&P BB (stable) and Fitch BB (positive). The company was in compliance with debt covenants at quarter-end, including a maximum 65% debt-to-total-capitalization ratio. Its hedge portfolio limits exposure to commodity-price movements but can also constrain the benefit of rising prices; changes in derivative fair value caused substantial quarterly revenue volatility. A hypothetical 10% gas-price decline would have increased the fair value of gas derivatives by approximately $473 million, while a 10% increase would have decreased it by approximately $469 million; these figures exclude offsetting effects on physical sales.
Other risks include commodity-price volatility, counterparty and collateral requirements, operating and regulatory risks, and acquisition execution. EQT disclosed that nine Wetzel County well pads had not complied with certain air-permit requirements after condensate handling changed. The company self-reported and took corrective action; it said penalties might reasonably exceed $300,000 but expected no material financial impact. It also reported ordinary-course legal matters and said their outcomes were not expected to materially affect its financial condition, results or liquidity.
Key facts investors should verify
- How commodity prices, derivative settlements and hedge positions affect realized prices, reported revenue and future cash flows.
- Whether 2021 capital-spending and sales-volume guidance is maintained, and whether cash generation supports the plan and debt reduction.
- The funding, dilution, closing conditions and expected benefits of the Alta acquisition announced after quarter-end.
- Progress and timing of the Mountain Valley Pipeline, including the anticipated gathering-rate relief and related contract benefits.
- Potential collateral or liquidity needs given below-investment-grade ratings, derivative liabilities and other contractual obligations.
- The resolution of the Wetzel County permit matter and any material developments in legal or regulatory proceedings.