EQT Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited; amounts below are in U.S. dollars, generally millions unless noted.
Business context and financial performance
EQT operates in two segments: Production, which explores for and produces natural gas and liquids, and Midstream, which gathers, transports and stores natural gas. The results include consolidated EQT Midstream Partners (EQM) and EQT GP Holdings (EQGP), with substantial earnings attributable to noncontrolling interests.
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenue | $556.7 | $584.0 | $1,229.3 | $1,738.4 |
| Operating income (loss) | $108.5 | $170.1 | $(88.8) | $517.8 |
| Consolidated net income (loss) | $70.1 | $100.2 | $(22.3) | $385.1 |
| Net income (loss) attributable to EQT | $(8.0) | $40.8 | $(261.0) | $219.8 |
| Diluted EPS attributable to EQT | $(0.05) | $0.27 | $(1.58) | $1.44 |
| Operating cash flow | Not presented separately | Not presented separately | $767.7 | $900.2 |
Q3 operating margin was approximately 19.5%, versus 29.1% a year earlier; the nine-month operating result was a loss. Revenue includes non-cash fair-value movements on derivatives, which can materially affect reported results.
Key financial position and segment results
- At September 30, cash was $1,757.4; current assets were $2,146.1 and current liabilities $618.6. The resulting current ratio was approximately 3.5.
- Carrying debt was approximately $2,887.8, comprising $91.0 of EQM credit-facility borrowings and $2,796.8 of long-term debt. EQT had no borrowings under its $1.5 billion revolving facility; EQM had $659 million of availability under its $750 million facility, before other restrictions. Both facilities expire in February 2019.
- Cash increased $156.2 from year-end 2015. Investing used $1,669.4, including $1,193.3 of capital expenditures and $412.3 for the Statoil acquisition. Financing provided $1,057.9, including $1,226.0 net proceeds from EQT share offerings.
- Production sales volumes grew 25% in the first nine months to 560.6 Bcfe, while average realized price fell 26% to $2.31/Mcfe. Production segment operating loss was $22.0 in Q3 and $477.3 for nine months.
- Midstream operating income rose 17% in Q3 to $132.7 and 14% for nine months to $399.1. Nine-month midstream revenue increased 9% to $653.4, supported by gathering and transmission growth.
Changes versus prior periods
- Q3 loss attributable to EQT of $8.0 compared with income of $40.8 a year earlier; the nine-month result swung from $219.8 income to a $261.0 loss. Lower realized commodity prices, weaker derivative results, higher operating costs and a larger noncontrolling-interest allocation were key factors.
- Production volume growth, largely from Marcellus development, partly offset weaker prices. Nine-month derivative results shifted from a $209.9 gain in 2015 to a $32.3 loss in 2016; Q3 gains were $93.4 versus $161.3 a year earlier.
- Operating cash flow declined $132.5 year over year. Capital expenditures were lower, but the period included the Statoil acquisition. EQT issued shares in February and May, receiving total net proceeds of approximately $1,226.0; shares outstanding rose to 172.8 million from 152.6 million at year-end 2015.
Outlook, commentary and risks
- Management expected 2016 capital investment, excluding acquisitions, of approximately $1.8 billion, including about $1.0 billion for well development and $0.8 billion for midstream infrastructure. Guidance called for approximately 140 wells, production sales volumes of 750–755 Bcfe, about 25% annual volume growth, and liquids sales of 11,825–11,915 Mbbls.
- Management cited a favorable long-term outlook based on resource scale, cost structure, risk management and disciplined investment, while noting that depressed and volatile natural gas and NGL prices could reduce spending, reserves and liquidity or trigger impairments. A further decline in five-year forward realized prices could cause a significant impairment of Huron assets, carried at approximately $3 billion. No proved-property impairment was recorded in Q3; an impairment on certain gathering assets was anticipated following the October asset sale.
- After quarter-end, EQT sold gathering and storage assets to EQM for $275 million. It also agreed to acquire Republic acreage for $319.8 million, pursue Trans Energy at $3.58 per share, and buy Pennsylvania acreage for $170 million. These transactions were expected to close in Q4 2016 and were to be funded with cash on hand.
- The Mountain Valley Pipeline (MVP) remained subject to FERC approval. The venture anticipated a certificate in mid-2017 and targeted service in Q4 2018. EQM’s reported maximum financial-statement exposure was approximately $251 million, including its investment and guarantee-related exposure.
- Natural gas and NGL price exposure is partly hedged. The company reported 624 Bcf of hedged natural gas positions and 913 Mbbls of NGL positions at quarter-end. Senior debt ratings were BBB (S&P), Baa3 (Moody’s) and BBB- (Fitch), all with stable outlooks; EQT and EQM reported covenant compliance.
- The nine-month effective tax rate was 87.2%, influenced by noncontrolling interests and the consolidated pretax loss. Ordinary legal and regulatory matters were pending; management said their outcome was not expected to materially affect financial position, results or liquidity. No material risk-factor changes were reported.
Important facts for investors to verify
- How commodity prices, basis differentials and derivative settlements affect realized prices and future cash generation.
- Whether production growth and the 2016 volume and capital-spending outlook were achieved, and how unit costs and DD&A evolve.
- Funding, closing conditions and final purchase-price adjustments for the post-quarter acquisitions, and EQM’s financing of the $275 million asset purchase.
- MVP permitting, construction timing, funding obligations and guarantee exposure; also monitor potential Huron and gathering-asset impairments.
- The effect of equity issuance and noncontrolling interests on per-share earnings, and the unusually high 2016 effective tax rate and expected reversal of the prior tax benefit.