EQT Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. EQT operates production, gathering and transmission businesses, principally in the Appalachian Basin.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $897.5 million | $545.1 million |
| Operating income | $390.6 million | $127.2 million |
| Net income | $250.7 million | $88.4 million |
| Net income attributable to EQT | $164.0 million; $0.95 diluted EPS | $5.6 million; $0.04 diluted EPS |
| Operating cash flow | $514.8 million | $284.9 million |
| Cash capital expenditures | $311.4 million | $397.8 million |
- Operating margin was approximately 43.5%, versus 23.3% in the prior-year quarter. The filing does not present this margin directly; it is calculated from reported operating income and revenue.
- Operating revenue included $140.7 million of gains on derivatives not designated as hedges, compared with $109.0 million in Q1 2016. EQT paid $9.0 million in net cash settlements on those derivatives in Q1 2017, versus receiving $109.1 million in Q1 2016. These items make reported revenue and earnings sensitive to derivative fair-value movements.
- At March 31, cash and cash equivalents were $899.4 million, down from $1.104 billion at year-end. Total current assets were $1.252 billion and current liabilities $894.7 million. Total debt was approximately $3.291 billion, including $207.9 million current and $3.083 billion long-term; it includes consolidated subsidiary debt.
- EQT reported no borrowings under its $1.5 billion revolving facility; EQM reported none under its $750 million facility. Both facilities expire in February 2019. EQT and EQM reported compliance with their debt covenants.
- Operating cash flow less cash capital expenditures was approximately $203.4 million. Investing cash outflow was $641.9 million, including $669.5 million for acquisitions; financing cash outflow was $77.1 million.
Changes versus Q1 2016
- Revenue rose 64.7%; net income attributable to EQT increased by $158.4 million. Management attributed the improvement mainly to a 33% increase in average realized price, higher derivative gains, 6% production-sales-volume growth and higher pipeline and marketing services revenue. Higher taxes, operating costs, interest expense and noncontrolling interests partly offset the gains.
- Production sales volumes increased 5.6% to 189.9 Bcfe, while average realized price rose 33.1% to $3.50/Mcfe. Liquids sales volumes increased 73.8% to 4.245 million barrels, including ethane sales that were not reported in the comparable quarter.
- Gathering operating income was $73.6 million, up from $72.6 million; transmission operating income was $71.5 million, up from $64.5 million. Firm reservation revenues grew in both businesses, while increased operating and depreciation costs partly offset growth.
- Income tax expense increased to $100.7 million from $7.4 million; the effective tax rate was 28.6% versus 7.8%.
Outlook, commentary and risks
- Management forecast 2017 capital investment of approximately $2.0 billion excluding acquisitions, including about $1.3 billion for well development and $0.5 billion for EQM midstream infrastructure. The plan included approximately 207 gross wells.
- Expected 2017 sales volumes were 835–855 Bcfe, including about 85 Bcfe of growth; expected NGL volumes were 18.060–18.660 million barrels. Management said most volume from the 2017 drilling program would be realized in 2018 and described potential annual volume growth of 15%–20% in subsequent years.
- Management cited a substantial resource base, low-cost structure, hedging and disciplined investment as support for its long-term outlook, while noting commodity-price volatility and Appalachian basis differentials. It said the production investment plan was expected to be funded from operating cash flow and cash on hand.
- Q1 acquisitions added approximately 99,000 net Marcellus acres, drilling rights on approximately 44,000 net Utica acres, production of about 110 MMcfe/day, wells and gathering assets. The company paid $652.5 million net cash; purchase-price adjustments and asset valuations remained preliminary.
- The Mountain Valley Pipeline joint venture had 2.0 Bcf/day of firm capacity commitments, including 1.29 Bcf/day for EQT. The filing anticipated a FERC certificate in Q4 2017 and service in Q4 2018, subject to regulatory timing. EQM’s maximum financial-statement exposure related to the venture was approximately $328.3 million, including a $91 million performance guarantee.
- EQT warned that sustained low commodity prices could slow development, reduce reserves, pressure liquidity and lead to impairments. No proved-property impairment was recorded in Q1, but management noted a further decline in five-year forward prices could trigger a significant impairment of Huron assets, carried at approximately $3 billion.
- The company reported ordinary-course legal and regulatory matters and stated that their outcomes were not expected to materially affect financial position, results or liquidity. It reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- How much reported earnings growth reflects realized commodity prices and production versus non-cash derivative fair-value gains; review derivative settlements and hedge positions.
- Whether the 2017 production, NGL-volume, drilling and capital-investment forecasts were achieved, and whether acquisition spending or funding needs changed.
- Progress, permitting, cost commitments and guarantee exposure for the Mountain Valley Pipeline, including the projected in-service date.
- Commodity prices, Appalachian basis differentials, and the potential for impairment of Huron and other properties.
- Debt maturities, available liquidity, covenant compliance and the impact of changes in credit ratings or derivative collateral requirements.