EQT Corporation — 2016 Form 10-K Summary
Business context and reporting period
Filed February 9, 2017, this 10-K covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. EQT operates natural gas production, gathering, transmission and storage businesses, with its midstream businesses consolidated through EQT GP Holdings and EQT Midstream Partners. The company is concentrated in the Appalachian Basin. Segment disclosures were recast after a 2016 reporting-structure change.
For the fourth quarter, reported operating revenue was $379.0 million, operating loss was $189.5 million, net loss attributable to EQT was $192.0 million, and diluted loss per share was $1.11. In Q4 2015, the respective figures were $601.4 million, $45.3 million of operating income, $134.6 million of attributable net loss and $0.88 loss per share.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total operating revenue | $1.608 billion | $2.340 billion |
| Operating income (loss) | $(278.3) million | $563.1 million |
| Net income (loss) attributable to EQT | $(453.0) million | $85.2 million |
| Diluted earnings (loss) per share | $(2.71) | $0.56 |
| Cash from operating activities | $1.064 billion | $1.217 billion |
| Cash capital expenditures | $2.591 billion | $2.434 billion |
| Cash and cash equivalents at year-end | $1.104 billion | $1.601 billion |
| Long-term debt, carrying value | $3.289 billion | $2.793 billion |
- Production sales volumes reached a record 759.0 Bcfe, up 26%; Marcellus sales volumes rose 31% to 660.1 Bcfe. Average realized price, including settled derivatives, fell 20% to $2.47/Mcfe from $3.09/Mcfe.
- Production segment operating loss was $719.7 million, versus $132.0 million of income, reflecting lower realized prices and a swing from derivative gains to losses. The $249.0 million GAAP loss on non-designated derivatives contrasted with a $385.8 million gain in 2015; derivative fair-value changes can make reported revenue volatile.
- Gathering operating income increased 19% to $289.0 million on 19% revenue growth and 21% higher gathered volumes. Transmission operating income rose 15% to $237.9 million, with revenue up 13.5%, supported partly by new capacity and the Ohio Valley Connector.
- Reported consolidated net loss was $131.1 million; the larger $453.0 million loss attributable to EQT reflects $321.9 million of earnings allocated to noncontrolling interests. The income-tax benefit was $263.5 million.
- Investing cash use was $2.961 billion, including acquisitions and investments in trading securities; financing provided $1.399 billion, including $1.226 billion of net proceeds from EQT share offerings. Year-end current assets were $1.828 billion and current liabilities $804.6 million.
Material changes and unusual items
- EQT acquired approximately 145,500 net Marcellus acres during 2016, including 122,100 net acres through several transactions, for $1.051 billion net cash. Proved reserves increased 35% to 13.5 Tcfe, primarily from acquisitions.
- EQT issued 19.55 million shares in two public offerings, receiving about $1.226 billion net proceeds. EQM issued $500 million of 4.125% notes due 2026 and raised about $217 million through its at-the-market unit program.
- EQT sold gathering and related assets to EQM for $275 million and sold another gathering system for $75 million, recording an $8.0 million gain on the latter sale. It also recorded a $59.7 million impairment on gathering assets sold to EQM, and a $9.4 million pension settlement charge following termination of its defined-benefit pension plan.
- Operating cash flow declined $152.6 million year over year, mainly because of lower commodity prices and higher operating costs, partly offset by higher volumes and derivative cash settlements. Cash fell by $497.7 million during the year.
Outlook, risks and contingencies
- Management forecast approximately $2.0 billion of 2017 capital investment, excluding acquisitions, including $1.3 billion for well development and about $0.5 billion for EQM midstream infrastructure. Planned production sales volumes were 810–830 Bcfe, with approximately 8% growth in 2017; management forecast 15–20% annual production growth for several years beginning in 2018.
- The 2017 drilling plan called for about 207 gross wells: 119 Marcellus, 81 Upper Devonian and 7 Utica. EQT expected to continue Utica development and targeted fourth-quarter 2018 service for the Mountain Valley Pipeline (MVP), a 2.0 Bcf/day project estimated to cost $3.0–$3.5 billion. EQM held a 45.5% MVP interest and expected $200–$500 million in 2017 joint-venture contributions.
- Management expected natural gas and NGL prices, particularly in Appalachia, to remain depressed during 2017. Commodity prices, regional basis, infrastructure access, project execution, reserve estimates and potential impairments remain key uncertainties. Huron assets carried approximately $3 billion; management warned that further forward-price declines could trigger impairment.
- Long-term debt principal was $3.318 billion, with no EQT or EQM revolver borrowings at year-end. EQT had a $1.5 billion revolver and EQM a $750 million revolver, both expiring in February 2019; both companies reported covenant compliance. Ratings were investment grade for EQT, while EQM had a Ba1 Moody’s rating and BBB- ratings from S&P and Fitch.
- Contractual obligations totaled $16.138 billion, including $11.631 billion of purchase obligations. Separately, future payments under EQM gathering and transmission capacity commitments totaled $6.0 billion and were excluded from that purchase-obligation total; many commitments extend up to 20 years.
- Environmental matters include Trans Energy restoration work estimated at $10–$15 million and a remaining $1.75 million civil penalty due by April 2017. The company also disclosed a $91 million EQM performance guarantee for MVP obligations and legacy NORESCO guarantees with a maximum undiscounted amount of approximately $115 million. Management judged pending matters and guarantees not expected to materially affect the company, but outcomes remain uncertain.
- Leadership changes were scheduled for March 2017: Steven Schlotterbeck was to become CEO, with David Porges becoming Executive Chairman. The independent auditor gave an unqualified opinion, and management and the auditor reported effective internal controls over financial reporting.
Most important facts for investors to verify
- Whether production growth and the $2.47/Mcfe realized price can support 2017 cash generation and the planned capital program; distinguish settled hedge cash flows from GAAP derivative fair-value changes.
- Whether acquisition economics, purchase-price adjustments and integration support the added acreage and 35% reserve increase, including the quality and development schedule of proved undeveloped reserves.
- Whether MVP and other infrastructure projects meet permitting, cost, funding and in-service targets, and how the long-term capacity commitments affect cash obligations and downside exposure.
- How much liquidity remains after acquisitions and capital spending, and whether debt, credit ratings, covenant headroom and EQM distributions remain adequate.
- Potential impairment exposure, especially in the Huron play, and the status and final costs of environmental restoration, regulatory proceedings and other contingencies.