EQT Corporation — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2019. EQT is principally an Appalachian natural gas, oil and NGL producer. Its midstream business was separated in November 2018; prior-period results are recast to show that business as discontinued operations, limiting direct comparisons.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share and operating data.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total operating revenues | $951.6 | $1,050.0 | $3,405.0 | $3,312.7 |
| Operating income (loss) | $(161.5) | $(147.5) | $310.0 | $(2,212.4) |
| Loss from continuing operations | $(361.0) | $(127.3) | $(44.8) | $(1,782.9) |
| Net loss attributable to EQT | $(361.0) | $(39.7) | $(44.8) | $(1,607.9) |
| Diluted loss per share from continuing operations | $(1.41) | $(0.49) | $(0.18) | $(6.79) |
- Revenue and production: Q3 natural gas, oil and NGL sales revenue fell 26.5% to $769.6 million, while total operating revenue fell 9.4%. The quarter included a $180.3 million unrealized derivative gain, versus a $3.1 million loss a year earlier. Adjusted operating revenue, a company-defined non-GAAP measure that includes cash-settled derivatives, was $941.7 million, down from $1,032.7 million. Sales volumes rose 1.8% to 380.8 Bcfe, but average realized price declined to $2.47/Mcfe from $2.76. For nine months, volumes increased 3.7% to 1,134.4 Bcfe and average realized price fell to $2.74/Mcfe from $2.96.
- Key earnings drivers: Q3 continuing-operations loss included a $261.1 million unrealized loss on the Equitrans Midstream investment. Higher proxy, transaction and reorganization costs and SG&A also weighed on results. Nine-month 2019 operating income and the substantially smaller continuing-operations loss compare with 2018, which included $2.7 billion of impairments tied mainly to asset divestitures.
- Cash flow and capital spending: Nine-month operating cash flow was $1,633.9 million, versus $2,445.4 million. Cash capital expenditures were $1,257.3 million, versus $2,850.0 million; operating cash flow less cash capex was approximately $376.5 million. Investing cash outflow was $1,256.2 million and financing cash outflow was $373.6 million. Cash at September 30 was $7.5 million.
- Debt and liquidity: Reported debt obligations totaled approximately $5.16 billion at September 30, including $1.0 billion under the term loan, $3.89 billion of senior notes, $161 million of credit-facility borrowings and the EQM note payable. The $2.5 billion revolving credit facility had no letters of credit outstanding. Current assets of $1,495.2 million modestly exceeded current liabilities of $1,449.7 million. The $1.0 billion unsecured term loan, raised in May to refinance a $700 million note maturity and repay credit-facility borrowings, matures May 31, 2021. EQT reported compliance with debt covenants, including a maximum debt-to-total-capital ratio of 65%.
- Other metrics: Nine-month interest expense was $154.8 million, down from $171.2 million. The company paid $0.09 per share in dividends during the first nine months; the board declared a further $0.03 quarterly dividend payable December 1, 2019.
Material changes versus the prior comparable period
- Q3 operating revenue and reported sales revenue declined, chiefly as lower commodity and liquids prices more than offset higher production volumes. Q3 earnings were further affected by the Equitrans Midstream investment’s fair-value loss.
- Nine-month operating cash flow declined, partly because 2018 included cash flows from the now-separated midstream business. Capital spending was lower as EQT shifted emphasis from production growth toward capital efficiency and cash generation.
- Debt composition changed after the May 2019 term loan and repayment of the 8.125% senior notes due June 2019. EQT held 19.9% of Equitrans Midstream after the separation and recorded changes in that investment’s fair value in earnings.
Outlook, risks and unusual items
- Guidance: EQT expected 2019 capital expenditures of $1.735–$1.785 billion and sales volumes of 1,490–1,510 Bcfe, funded by operating cash flow and, if needed, credit-facility borrowings.
- Strategy and management commentary: Following a substantially reconstituted board and appointment of a new CEO, EQT began a transformation program targeting lower costs and greater free-cash-flow generation through operational efficiency, improved well performance and technology. Development spending and future production growth are to be guided by project economics and commodity prices. The company cautioned that execution may be difficult, may disrupt operations and may entail further costs.
- Unusual expenses and contingencies: Q3 proxy, transaction and reorganization expense was $76.8 million, including $62.2 million of severance and termination benefits and $12.6 million of contract termination fees. Some executive compensation expenses and accruals were not included in Q3 results because compensation packages had not yet been determined. SG&A reflected increases in royalty and litigation reserves, net of settlements, of $36.6 million in Q3 and $82.4 million year to date.
- A royalty-owner lawsuit was settled for $54 million plus lease modifications; EQT paid $51 million in October 2019, with the balance scheduled for January 2020. A West Virginia acreage and gathering-agreement exchange produced a $13.9 million loss and a $38.1 million liability for specified gathering-cost reimbursements through December 2022.
- Risk and hedging: Commodity-price volatility is a central exposure and could affect revenue, liquidity, development plans and asset values; lower prices could lead to further impairments or reserve reductions. EQT hedges a portion of expected production. Moody’s, S&P and Fitch each assigned investment-grade ratings with negative outlooks. A downgrade could raise borrowing costs or collateral needs; EQT stated that available credit capacity could cover permitted collateral requests following a one-notch downgrade. Legal and regulatory matters remain, although management said it did not expect pending matters, based on current information, to materially affect financial condition, results or liquidity.
Investor verification priorities
- Track realized prices, production volumes and hedge settlements; distinguish cash-settled results from unrealized derivative fair-value changes.
- Assess transformation-program execution, future severance and other implementation costs, and the effect of the compensation expenses excluded from Q3 results.
- Verify settlement payments and lease changes in the royalty litigation, and the timing and amount of the $38.1 million gathering-cost reimbursement liability.
- Monitor credit ratings, covenant headroom, collateral requirements and refinancing needs, particularly the term loan due in May 2021.
- Review the valuation and any planned disposition of EQT’s Equitrans Midstream stake, and whether proceeds are used to reduce debt as management intended.