EQT Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Unaudited consolidated results include EQT Production, EQT Gathering and EQT Transmission. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total operating revenue | $690.9 | $127.5 | $1,588.4 | $672.6 |
| Operating income (loss) | $189.8 | $(324.5) | $580.4 | $(197.3) |
| Consolidated net income (loss) | $122.6 | $(180.8) | $373.4 | $(92.4) |
| Net income (loss) attributable to EQT | $41.1 | $(258.6) | $205.1 | $(253.0) |
| Diluted EPS attributable to EQT | $0.24 | $(1.55) | $1.18 | $(1.56) |
- Q2 revenue included a $46.3 gain on non-hedge derivatives, compared with a $234.7 loss a year earlier. First-half results included a $187.1 gain versus a $125.7 loss. These fair-value changes materially affect reported revenue and earnings.
- Natural gas, oil and NGL sales were $576.7 in Q2 and $1,250.2 for the first half, up 89% and 87%, respectively. Production sales volumes increased 7.3% in Q2 and 6.5% year to date; average realized price rose 35.5% and 33.8%, respectively.
- Q2 operating income improved by $514.3 from the prior-year loss; first-half operating income improved by $777.7. Management attributed the improvement mainly to derivative gains versus losses, higher realized prices and increased production, partly offset by higher operating costs, interest expense, taxes and noncontrolling-interest earnings.
- Reported results attributable to EQT were substantially below consolidated net income because $81.5 in Q2 and $168.2 for the first half was attributable to noncontrolling interests in EQGP and EQM.
- Segment operating income in Q2 was $52.8 for Production, $83.3 for Gathering and $57.8 for Transmission. First-half segment operating income was $310.2, $156.9 and $129.3, respectively.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $809.0, versus $493.4 in 2016. Investing cash outflow was $1,192.8, including $680.5 of capital expenditures and $811.2 of acquisition expenditures, partly offset by $283.8 from sales of trading securities. Financing cash outflow was $147.3.
- Cash fell by $531.2 during the first half, from $1,103.5 to $572.3. At June 30, total assets were $15,724.0 and total liabilities were $6,346.4.
- Debt was approximately $3.3 billion carrying value, including $707.2 classified as current and $2,585.0 long term. EQT reported no borrowings under its $1.5 billion revolving facility; EQM reported no borrowings under its $750 million facility. EQM had $40 million outstanding under a separate 364-day facility with EQT.
- EQT was in compliance with its debt covenants at quarter-end. Its senior debt ratings were Baa3 (Moody’s, stable), BBB (S&P, negative) and BBB- (Fitch, stable). Ratings and commodity prices can affect borrowing costs, collateral requirements and financing access.
Material changes, outlook and risks
- Rice Energy merger: Announced June 19, 2017, the proposed acquisition had estimated consideration of approximately $6.7 billion, plus assumption or refinancing of about $1.5 billion of Rice net debt and preferred equity. EQT expected to fund the cash portion using cash and debt financing, including a committed bridge facility of up to $1.4 billion. The merger was expected to close in Q4 2017, subject to shareholder approvals and other customary conditions; the HSR waiting period ended July 18. EQT estimated post-close ownership at approximately 65% existing EQT shareholders and 35% former Rice shareholders. The merger could fail, require financing on less favorable terms, or deliver less than expected integration benefits. Certain terminations could trigger a $255 million fee, or expense reimbursement of up to $67 million in specified circumstances.
- Capital and production guidance: 2017 capital investment was expected to be approximately $2.0 billion, excluding the Rice merger and other acquisitions, including about $1.3 billion for well development and $0.5 billion for EQM midstream infrastructure. EQT planned approximately 178 gross wells. Excluding Rice, 2017 sales-volume guidance was 825–840 Bcfe and NGL guidance was 19,050–19,650 Mbbls. Sales-volume guidance was reduced by 10–15 Bcfe following suspension of the deep Utica test program; most 2017 drilling-program volumes were expected in 2018.
- Management cited a favorable long-term outlook based on its resource base, midstream position, cost structure, hedging and capital discipline, while noting that results and development plans remain sensitive to natural gas, NGL and Appalachian basis prices. It may adjust capital spending as market conditions and liquidity needs change.
- The company reported no proved-property impairment in its second-quarter evaluation. It warned that further declines in five-year forward realized prices could cause a significant impairment in Huron-play assets, carried at approximately $3 billion at June 30.
- Mountain Valley Pipeline: The project had 2.0 Bcf/day of 20-year firm commitments, including 1.29 Bcf/day from EQT. EQM’s maximum financial-statement exposure related to the joint venture was approximately $352 million, including its investment and potential guarantee obligations. The project targeted service in Q4 2018; the filing said the FERC certificate was anticipated by Q4 2017.
- Other contingencies: The Phoenix S Impoundment matter remained under appeal; the environmental board had assessed $1.1 million in penalties, and EQT expected penalties above $100,000 but no material financial impact. Trans Energy restoration obligations were estimated at $10–$15 million; the remaining $1.75 million consent-decree penalty was paid in April 2017.
- EQT hedged portions of expected production and basis exposure. Derivative fair values and settlements can cause significant earnings volatility; physical prices, counterparties and credit-rating changes also present risks. Management said pending ordinary-course legal matters were not expected to materially affect financial position, results or liquidity.
- The board declared a quarterly dividend of $0.03 per share, payable September 1, 2017. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Separate realized operating performance from non-hedge derivative fair-value gains and losses; review hedge settlements and realized-price calculations.
- Track Rice merger approvals, closing conditions, integration plans, final consideration, assumed debt and permanent financing terms.
- Compare production, capital spending and well-delivery results with the revised 2017 volume and investment guidance.
- Assess cash generation and liquidity after acquisition spending, distributions, current debt maturities and planned merger financing.
- Monitor natural gas and NGL prices, Appalachian basis, hedge coverage, credit ratings and any resulting collateral or impairment exposure.
- Follow MVP certification, construction timing, capital calls and guarantee exposure, along with the Huron impairment sensitivity and outstanding environmental proceedings.