EQT Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited; monetary amounts below are in U.S. dollars.
Business context and financial performance
EQT is primarily a natural gas producer, with approximately 95% of production from natural gas. Sales volume was nearly flat year over year, while lower commodity prices weighed on reported sales.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total operating revenues | $1.107 billion | $1.143 billion |
| Natural gas, NGL and oil sales | $715.2 million | $1.272 billion |
| Operating income | $123.4 million | $175.5 million |
| Net income (loss) | $(167.1) million | $190.7 million |
| Diluted earnings (loss) per share | $(0.65) | $0.75 |
| Cash provided by operating activities | $500.3 million | $871.3 million |
| Cash capital expenditures | $256.2 million | $371.0 million |
| Cash and cash equivalents, period end | $18.7 million | $40.8 million |
Average realized price, including cash-settled derivatives, fell to $2.49/Mcfe from $3.16/Mcfe; total sales volume increased 0.4% to 385.1 Bcfe. Operating margin was approximately 11.1% of reported revenue, versus 15.3% a year earlier. Operating cash flow less cash capital expenditures was approximately $244 million; this simple calculation is not a company-reported free-cash-flow measure.
Balance sheet and liquidity
At March 31, total debt was approximately $5.04 billion, including current debt, term-loan borrowings, senior notes and the EQM note payable; no credit-facility borrowings were outstanding. Total liabilities were $9.00 billion and shareholders’ equity was $9.63 billion. Current assets of $1.95 billion exceeded current liabilities of $1.47 billion, although current assets included $1.05 billion of derivative assets and a $391.7 million tax receivable.
Q1 financing included $1.75 billion of senior-note issuance and substantial debt repayments. In April, EQT issued $500 million of 1.75% convertible notes due 2026 and used $450 million of proceeds to repay term-loan borrowings. The company said it had sufficient unused credit-facility capacity for potential collateral demands as of May 1, 2020. It was in compliance with debt covenants at quarter-end.
Material changes and unusual items
- Net loss reflected a $390.6 million loss on the Equitrans Midstream investment, a $48.9 million loss on acreage exchanges, $53.8 million of lease impairment and expiration costs, and a $16.6 million debt-extinguishment loss. These were partly offset by a $187.2 million gain on the Equitrans share exchange.
- Derivative fair-value accounting materially affected reported revenue: EQT recorded a $389.4 million derivative gain, compared with a $132.0 million loss in Q1 2019. Separately, cash settlements received on derivatives were $245.7 million, versus $63.6 million paid a year earlier.
- In the Equitrans share exchange, EQT sold half its retained Equitrans Midstream shares for approximately $52 million in cash and gathering-rate relief. It recorded a $410 million contract asset and a roughly $117 million derivative liability tied to future cash bonuses. EQT retained approximately 11% of Equitrans Midstream at quarter-end.
- April downgrades by Moody’s and S&P increased the interest rates on the January-issued 2025 and 2030 notes to 7.875% and 8.750%, respectively, beginning with the interest period starting August 1, 2020. The downgrades also increased borrowing margins and contributed to approximately $19 million of derivative margin deposits posted by May 1.
Outlook, management commentary and risks
- For 2020, EQT expected capital expenditures of $1.075–$1.175 billion and sales volumes of 1,450–1,500 Bcfe.
- The company’s deleveraging plan had targeted a roughly $1.5 billion, or 30%, debt reduction by mid-2020. In light of market conditions, EQT said it would pursue non-core asset sales more selectively and seek to repay or refinance debt maturing in 2021 by year-end. It cited anticipated asset-sale proceeds, tax refunds and improved free cash flow, but cautioned that execution was uncertain. All free cash flow and divestiture proceeds were expected to go toward debt reduction until the leverage target was achieved.
- EQT suspended its quarterly common-stock dividend on March 26 to accelerate debt reduction. It was in advanced sale discussions for certain central Pennsylvania assets at an anticipated price of approximately $125 million; completion and proceeds were not assured.
- Management reported limited direct operating effects from COVID-19 to date, but warned that weaker demand, service-provider or supply-chain disruption, financing constraints and difficulty monetizing assets could harm results and liquidity. The oil-price shock was expected to have limited direct operational impact because of EQT’s small oil and NGL exposure; the impact of changing natural-gas prices remained uncertain.
- Key exposures include commodity-price volatility, potential further asset impairments, credit-rating and collateral requirements, and substantial long-term pipeline and processing commitments. Purchase obligations totaled approximately $26.3 billion, primarily capacity-related commitments. Management said pending legal and regulatory matters were not expected to materially affect financial condition, results or liquidity.
Important facts for investors to verify
- Whether commodity prices, realized pricing and derivative settlements support the 2020 volume, capital-spending and cash-flow outlook.
- Progress and actual proceeds from planned asset monetizations, tax refunds and the debt-repayment or refinancing plan for 2021 maturities.
- Updated debt balances, borrowing costs, credit ratings and collateral requirements, including the effects of any further downgrades.
- How much gathering-rate relief EQT realizes under the Equitrans agreement, and the assumptions underlying its contract-asset valuation and future amortization.
- Whether COVID-19, midstream availability, long-term contractual commitments or commodity-price changes lead to production curtailments, additional impairments or revised guidance.