EQT Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts originally reported in thousands are presented in millions unless noted.
Business context and performance
EQT is primarily a natural gas producer, with approximately 95% of production consisting of natural gas. The company temporarily curtailed about 1.0 Bcfe per day of net production beginning May 16, 2020, amid weak commodity markets and COVID-19-related uncertainty.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| GAAP operating revenue | $527.1 | $1,310.3 | $1,634.1 | $2,453.4 |
| Operating income (loss) | $(386.9) | $296.0 | $(263.6) | $471.5 |
| Net income (loss) | $(263.1) | $125.6 | $(430.2) | $316.3 |
| Diluted EPS | $(1.03) | $0.49 | $(1.68) | $1.24 |
| Adjusted operating revenues, non-GAAP | $816.2 | $958.4 | $1,773.6 | $2,168.9 |
| Sales volumes | 345.6 Bcfe | 370.1 Bcfe | 730.7 Bcfe | 753.6 Bcfe |
| Average realized price | $2.36/Mcfe | $2.59/Mcfe | $2.43/Mcfe | $2.88/Mcfe |
GAAP revenue includes gains or losses from derivatives before settlement, so it can be volatile. Adjusted operating revenues exclude those fair-value changes and net marketing services and other, and include cash settlements on derivatives; the company presents this non-GAAP measure as an indicator of production-related revenue trends. In Q2, cash derivative settlements received were $315.4 million, versus $53.1 million in Q2 2019.
Cash flow, capital spending and liquidity
- Six-month operating cash flow was $947.1 million, down from $1,314.8 million. The filing attributes the decline primarily to lower cash operating revenues and working-capital timing, partly offset by higher derivative settlements and $189.6 million of income tax refunds received.
- Six-month cash capital expenditures were $512.1 million, compared with $765.8 million; total capital expenditures before non-cash items were $565 million. Investing cash outflow was $349.0 million.
- Cash and equivalents were $3.0 million at June 30, 2020, versus $4.6 million at year-end. Current assets were $1,541.8 million and current liabilities $1,560.6 million.
- Balance-sheet debt included $4,463.5 million of senior notes, $38.0 million drawn on the credit facility, $16.3 million of current debt and a $102.5 million EQM note payable. The $1.0 billion term loan was fully repaid during Q2. The $2.5 billion credit facility expires in July 2022; $0.8 billion of letters of credit was outstanding at quarter-end.
- Management said operating cash flow and available credit were expected to cover cash requirements for at least the next 12 months, while noting this was not assured. The company was in compliance with debt covenants at June 30, including its 65% maximum debt-to-total-capitalization ratio.
Material changes and unusual items
- Q2 operating revenue fell 59.8% year over year; sales of gas, NGLs and oil declined 44.6%. Lower realized prices and 6.6% lower sales volumes contributed. Six-month sales volumes fell 3.0%, and adjusted operating revenues fell 18.2%.
- Q2 included a $49.2 million loss on sale/exchange of long-lived assets and $41.3 million of lease impairment and expiration expense. Six-month asset-sale/exchange losses were $98.1 million; lease impairment and expiration costs were $95.0 million.
- In Q1, the Equitrans Share Exchange generated a $187.2 million gain. EQT sold half its retained Equitrans Midstream shares for approximately $52 million cash and contract rate relief. It recorded a $410 million contract asset and a derivative liability for future Henry Hub cash bonuses; the contract asset is expected to be amortized beginning in 2021.
- The investment in Equitrans Midstream generated a Q2 gain of $83.0 million but a six-month loss of $307.6 million, reflecting movements in its share price. The investment’s reported value was $210.2 million at June 30, down from $676.0 million at year-end.
- EQT issued $1.75 billion of senior notes in January and $500 million of 1.75% convertible notes due 2026 in April. The convertible notes’ accounting discount produces non-cash interest expense; the reported effective interest rate is 8.4%. The company also purchased capped calls intended to limit potential dilution, subject to a cap.
Outlook, risks and contingencies
- 2020 guidance was $1.075–$1.175 billion of total capital expenditures and 1,450–1,500 Bcfe of sales volumes. The company expected to fund spending through operating cash flow and, if needed, credit-facility borrowings.
- The company suspended its quarterly cash dividend in March 2020. Its deleveraging plan calls for using free cash flow and asset-sale proceeds to reduce debt; EQT said it believed planned monetizations, remaining tax refunds and improved free cash flow could allow it to repay or refinance debt maturing in 2021 by year-end 2020. Execution, timing and proceeds are uncertain.
- As of July 22, credit ratings were Ba3/negative at Moody’s, BB−/negative at S&P and BB/positive at Fitch. Downgrades trigger higher rates on the January notes: 7.875% and 8.750% beginning with the interest period starting August 1, 2020. The filing reported potential collateral assurances of up to approximately $1.1 billion, including about $0.9 billion already posted or outstanding.
- COVID-19, commodity-price volatility, demand and supply changes, service-provider or supply-chain disruption, financing access, further ratings downgrades and the ability to complete asset monetizations could affect production, liquidity and the deleveraging plan. Commodity derivatives are marked to fair value through earnings; a hypothetical 10% natural gas price move would change derivative fair value by approximately $347 million, before considering the offset on physical sales.
- Contractual obligations totaled $32.2 billion, including $25.8 billion of purchase obligations, primarily pipeline demand charges and processing commitments. Ordinary-course legal matters were not expected by management to materially affect financial condition, results or liquidity. A Pennsylvania environmental draft order concerning secondary containment at 228 processing units remained under negotiation; penalties were expected to exceed $100,000 but were not expected to be material.
Key facts for investors to verify
- Whether production curtailments, commodity prices and cash derivative settlements support the stated 2020 sales-volume and capital-spending outlook.
- Progress, timing and net proceeds from planned asset monetizations, and whether debt maturing in 2021 can be repaid or refinanced as management expected.
- The effects of credit ratings, higher note coupons and collateral requirements on borrowing costs and available liquidity.
- The assumptions supporting the Equitrans contract asset, future Henry Hub cash-bonus liability and retained investment value.
- Potential cash and operating impacts from COVID-19, long-term transportation and processing commitments, and the pending Pennsylvania environmental matter.