EQT Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context
EQT is primarily a natural gas producer, with approximately 95% of production consisting of natural gas. The company cited COVID-19, commodity-price volatility and its shift from production growth toward capital efficiency as important operating conditions. Sales volumes averaged 3.98 Bcfe per day in Q3, down 3.8% year over year.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales of gas, NGLs and oil | $599.0 million | $769.6 million | $1,813.0 million | $2,941.8 million |
| Total operating revenues | $172.1 million | $951.6 million | $1,806.3 million | $3,405.0 million |
| Operating income (loss) | ($760.2 million) | ($161.5 million) | ($1,023.7 million) | $310.0 million |
| Net income (loss) | ($600.6 million) | ($361.0 million) | ($1,030.9 million) | ($44.8 million) |
| Diluted loss per share | ($2.35) | ($1.41) | ($4.03) | ($0.18) |
| Cash from operating activities | Not presented for quarter | Not presented for quarter | $1,131.6 million | $1,633.9 million |
| Cash capital expenditures | $276 million | $491 million | $788 million | $1,257 million |
Q3 total operating revenues included a $427.2 million derivative mark-to-market loss, versus a $180.3 million gain in Q3 2019. For the first nine months, derivative results were a loss of $11.3 million, compared with a gain of $456.0 million in 2019. Management’s non-GAAP adjusted operating revenues, which include cash-settled derivatives and exclude these fair-value changes, were $853.2 million for Q3 and $2,626.8 million for the nine months. The company reported no conventional operating margin measure in the supplied filing text.
Nine-month operating cash flow declined by $502.3 million year over year, mainly due to lower cash operating revenues and working-capital timing, partly offset by higher derivative cash settlements and $391.4 million of tax refunds, including interest. Cash and cash equivalents were $13.7 million at September 30. Total liabilities were $8.73 billion and shareholders’ equity was $8.85 billion.
Balance-sheet debt, including current debt, credit-facility borrowings, senior notes and the EQM note payable, was approximately $4.73 billion at September 30. The $1.0 billion term loan was fully repaid in June. The $2.5 billion revolving credit facility matures in July 2022; borrowings were $244.5 million, with $0.8 billion of letters of credit outstanding. EQT said it was in compliance with debt covenants, including the 65% maximum debt-to-total-capitalization ratio. Management believed operating cash flows and credit-facility availability would cover requirements for at least the next 12 months, while noting this was not assured.
Material changes and notable items
- Product sales fell 22.2% in Q3 and 38.4% for the nine months, reflecting lower realized prices and lower volumes. Nine-month average realized price was $2.39/Mcfe, down from $2.74; volumes were down 3.3%.
- Q3 production curtailments included approximately 1.0 Bcf/day net beginning in May and ending in mid-July, and approximately 0.4 Bcf/day net beginning in September. The company attributed lower volumes principally to these strategic curtailments.
- Interest expense rose to $69.2 million in Q3 and $196.9 million for the nine months, partly reflecting new debt. Rating downgrades raised coupon rates on the January-issued senior notes, effective August 1, to 7.875% and 8.750% from 6.125% and 7.000%, respectively.
- Q3 SG&A declined 29% year over year, mainly due to lower litigation expense and personnel costs. Nine-month loss on asset sales/exchanges was $102.7 million, including losses on acreage exchanges and asset sales.
- The Equitrans share exchange generated a $187.2 million gain in Q1 and approximately $52 million cash, along with gathering-contract rate relief. EQT retained approximately 25.3 million Equitrans shares at quarter-end.
- The company issued $500 million of 1.75% convertible notes due 2026. GAAP accounting separates liability and equity components, resulting in an 8.4% effective interest rate and additional non-cash interest expense as the discount is amortized.
- The quarterly cash dividend was suspended in March 2020 to direct cash toward debt reduction. The filing reports $7.7 million of dividends paid during the first nine months.
Outlook, risks and contingencies
For full-year 2020, management expected capital expenditures of $1.05–$1.10 billion and sales volumes of 1,480–1,500 Bcfe. Its deleveraging plan called for using nearly all free cash flow and asset-sale proceeds to reduce debt until its leverage target is achieved. Management said it expected monetizations and improved free cash flow to support repayment or refinancing of remaining 2021 maturities by year-end 2020; execution and proceeds were uncertain.
Management expected fee relief and a lower gathering-rate structure under the Consolidated GGA beginning in 2021. That agreement runs through 2035, includes a 3.0 Bcf/day initial annual minimum volume commitment and acreage dedication, and may require contingent payments tied to Henry Hub prices and the Mountain Valley Pipeline in-service date.
Key risks include gas-price and basis volatility, COVID-19-related demand and operational disruption, access to financing, further credit downgrades, collateral requirements, and possible impairment of assets. At September 30, derivative liabilities exceeded derivative assets; EQT had deposited $142 million against rating-triggered derivative exposure and recorded $102.5 million of exchange-margin deposits as current assets. Contractual obligations totaled $31.9 billion, including $25.4 billion of purchase obligations, primarily pipeline demand and processing commitments.
EQT was pursuing arbitration with Equitrans Midstream over whether it could terminate the Hammerhead Gathering Agreement and purchase the related system. The termination-election deadline was tolled while arbitration was pending. The company said pending legal matters were not expected to materially affect its financial condition, results or liquidity, but outcomes could not be predicted with certainty.
Important facts for investors to verify
- Whether 2020 volume and capital-spending guidance was achieved, and the actual cash flow available for debt reduction.
- Debt maturities, credit-facility availability, rating-triggered note coupons, and collateral or surety requirements; the filing disclosed approximately $93 million of surety bonds issued during the nine months.
- How much of reported operating performance reflects realized commodity sales and cash hedge settlements versus volatile derivative fair-value changes.
- Progress and realized proceeds from planned asset monetizations, including any disposition of remaining Equitrans shares.
- The resolution and financial implications of the Hammerhead arbitration and the long-term gathering commitments under the Consolidated GGA.
- Potential effects of commodity prices, COVID-19, and the company’s $25.4 billion of purchase obligations on future liquidity and development plans.