EQT Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. EQT operates in Production, Midstream, and regulated Distribution. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
- Revenue: $450.0, down 4.8% from $472.7.
- Operating income: $153.3, down 30.4% from $220.4. Operating margin was approximately 34.1%, versus 46.6% in Q1 2011.
- Net income and EPS: $72.0 and $0.48 per diluted share, versus $122.3 and $0.82. The filing attributes the decline mainly to the prior-year Langley asset-sale gain, lower realized production prices, higher DD&A, and warmer weather, partly offset by higher production volumes.
- Cash flow: Operating cash flow was $222.1, versus $242.5. Capital expenditures were $269.6, producing approximately $47.5 of negative operating cash flow less capital expenditures. Investing cash outflow was $267.2; financing cash outflow was $41.0. Cash ended the quarter at $745.2, down from $831.3 at year-end 2011.
- Debt and liquidity: Long-term debt, including current maturities, totaled approximately $2,737.0; cash less this debt was approximately $1,992.0. Current assets were $1,604.6 and current liabilities $715.9. No borrowings or letters of credit were outstanding under the $1.5 billion revolving facility, which matures in December 2014. EQT reported compliance with debt covenants.
- Dividend: $0.22 per share declared for Q1; the board declared another $0.22 quarterly dividend payable June 1, 2012.
Material changes and segment results
- Production: Sales volumes increased 25.6% to 54.1 Bcfe, with Marcellus volumes up 67.9%. Average realized price including hedges fell 10.6% to $4.32/Mcf for natural gas; total wellhead price was $4.84/Mcfe versus $5.43. Segment operating income fell 26.9% to $60.1, as lower prices and higher expenses more than offset volume growth.
- Midstream: Gathering volumes rose 21.4% and transmission throughput 18.3%. Net operating revenues were nearly flat at $107.1, while operating income fell 37.2% to $56.1, reflecting the prior-year $22.8 Langley sale gain, increased expenses, and weaker storage and marketing results. The July 2011 Big Sandy Pipeline sale also reduced transmission revenue.
- Distribution: Operating income fell 31.1% to $36.8. Net operating revenues declined 18.6% to $63.4 as throughput fell 20.5%; the quarter had record warm weather, with heating degree days 24% below Q1 2011.
- Notable costs and accounting effects: Production taxes included an $8.2 Pennsylvania natural-gas impact-fee accrual, including $6.2 retroactive to pre-2012 Marcellus wells. Consolidated DD&A rose to $107.5 from $78.4. The Q1 2011 comparison included a $22.8 gain on the Langley processing complex sale.
Outlook, risks, and contingencies
- 2012 operating plan: EQT expected approximately $955 million for well-development capital expenditures, drilling about 144 gross wells (132 Marcellus and 12 Huron). It projected sales volumes of 250–255 Bcfe and approximately 30% production-sales-volume growth. Planned midstream spending was $365 million, with incremental gathering capacity of 445 MMcfe/day and transmission capacity of 700 MMcfe/day, including the Sunrise Pipeline expected to enter service in 2012. Management expected the plan to be funded from operating cash flow and cash on hand.
- Commodity exposure and hedging: EQT suspended drilling new Huron wells in response to low gas prices; wells already in progress and wells needed to maintain lease rights were to be completed. As of April 25, the company reported 2012 production swaps covering 77 Bcf at an average NYMEX price of $5.17/Mcf, plus collars covering 16 Bcf with a $6.51 floor and $11.83 cap. Gas-price changes affect revenue, earnings, liquidity, and derivative values.
- Midstream partnership proposal: EQT Midstream Partners filed an IPO registration statement in February 2012; it was not yet effective. The proposed contribution would include Equitrans, subject to stated conditions and FERC approval. EQT expected to retain control and continue consolidating the partnership, and anticipated receiving part of the offering proceeds if completed.
- Credit and other risks: Moody’s rated senior notes Baa2 with a negative outlook; S&P rated them BBB with a stable outlook; Fitch rated them BBB with a negative outlook. A downgrade below investment grade could raise borrowing and collateral costs and limit market access. Legal and regulatory matters were described as ordinary-course matters; management believed their outcomes would not materially affect the company, but could not predict them with certainty. No material changes to previously disclosed risk factors were reported.
- Seasonality and uncertainty: Management cautioned that interim results are not necessarily indicative of full-year results because of seasonal distribution and storage activity and commodity-price volatility. The filing provides no specific full-year earnings guidance.
Most important facts for investors to verify
- Whether production growth and the 250–255 Bcfe full-year sales-volume projection were achieved, and whether lower gas prices affected realized prices or drilling plans.
- Whether planned well-development and midstream spending stayed within budget and was funded as management expected.
- The completion, terms, proceeds, and asset contribution associated with the proposed EQT Midstream Partners IPO.
- The impact of the Pennsylvania well fee, warmer-than-normal weather, and the prior-year asset-sale gains on comparisons and future segment results.
- Debt refinancing for 2012 maturities, credit-rating developments, and any resulting changes to borrowing costs or derivative collateral requirements.
- The sensitivity of reported results to hedge settlements and fair-value estimates; at March 31, $291.6 million of net commodity-hedge gains was deferred in accumulated other comprehensive income, with approximately $186.6 million estimated to enter earnings over the next 12 months, assuming no price changes or new transactions.