EQT Corp quarterly report, Q1 FY2016

Business context and reporting period

EQT Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the first quarter of 2015. EQT reports two segments: EQT Production, which explores for and produces natural gas, oil and NGLs, and EQT Midstream, which provides gathering, transmission, storage and marketing services. EQT consolidates EQT GP Holdings and EQT Midstream, so reported net income includes amounts attributable to outside investors.

Key financial metrics

Cash capital expenditures exceeded operating cash flow by approximately $112.9 million in the quarter. Financing cash flow included $430.4 million of net proceeds from an EQT common-stock offering. EQT declared a quarterly dividend of $0.03 per share.

Material changes versus the prior comparable period

• Revenue decreased 24%, while EQT-attributable net income fell from $173.4 million to $5.6 million. Management cited lower realized commodity prices, higher operating expenses and increased income attributable to noncontrolling interests; higher production volumes, derivative gains and lower taxes partly offset these factors.
• Average realized production price declined 35% to $2.63 per Mcfe. Production sales volume increased 24% to 179,935 MMcfe; natural gas volume rose 26%, while NGL prices fell 40% and oil prices fell 31%.
• EQT Production recorded an operating loss of $11.3 million, versus operating income of $185.8 million. EQT Midstream operating income rose 9% to $141.9 million, supported by higher gathering and transmission revenues.
• Operating cash flow declined by $168.2 million. Cash capital expenditures fell by $229.9 million, primarily due to reduced well-development and acreage-acquisition spending.
• Reported revenue included a $109.0 million gain on derivatives not designated as hedges, compared with $43.6 million in Q1 2015. These fair-value gains are distinct from cash settlements.

Outlook, management commentary, risks and unusual items

• For 2016, EQT expected total capital investment of approximately $1.8 billion, including EQM; approximately $820 million for well development and $800 million for midstream infrastructure. The plan called for about 77 gross wells and sales volumes of 710–730 Bcfe, with NGL volumes of 10,250–10,750 Mbbls.
• Management expected natural gas and NGL prices, particularly Appalachian prices, to remain depressed during 2016. Prolonged low prices could reduce cash flow, slow development, affect reserves and cause material non-cash impairments. No impairment was recorded in Q1; Huron assets had a carrying value of approximately $3 billion and could face impairment if forward prices declined further.
• As of April 26, 2016, disclosed natural-gas hedges included 220 Bcf of 2016 NYMEX swaps at an average $3.65/Mcf, plus 32 Bcf of fixed-price physical sales. EQT did not hedge NGL exposure. Hedge positions, basis differentials and settlement timing remain important sensitivities.
• EQT raised approximately $430.4 million net through an equity offering in February, intending to use proceeds for general corporate purposes, potentially including debt repayment. EQT and EQM were in compliance with debt covenants at quarter-end. EQT’s senior debt ratings were investment grade, with stable outlooks; EQM’s ratings included Moody’s Ba1.
• EQT consolidated Huron operations in Kentucky, Virginia and southern West Virginia amid declining volumes and depressed prices, recording $3.8 million of restructuring charges. The company also expected to liquidate its terminated retirement plan in 2016, with approximately $6 million of cash funding and an estimated $16 million pre-tax actuarial loss reclassified to earnings.
• The Mountain Valley Pipeline joint venture remained subject to FERC approval, then anticipated in Q4 2016; service was expected in Q4 2018 if approved. EQM had issued a $91 million performance guarantee, and reported maximum financial-statement exposure related to the venture was approximately $183 million.
• Ordinary-course legal and regulatory proceedings were not expected by management to materially affect the company. Pennsylvania environmental notices concerning inadvertent sediment and bentonite releases could result in penalties exceeding $100,000; EQT expected no material impact.

Important facts for investors to verify

• How much of reported revenue and earnings reflects derivative fair-value gains versus realized production prices and cash settlements.
• Whether the 2016 volume and capital-spending targets remain achievable under low commodity prices, and how production growth translates into cash flow.
• The composition and availability of cash, debt and credit facilities across EQT, EQGP and EQM, including the implications of noncontrolling interests.
• Potential Huron impairment exposure, pension-plan liquidation costs and the timing and final terms of Mountain Valley Pipeline approvals, guarantees and funding.
• Commodity hedge coverage, basis exposure and the effect of any credit-rating changes on borrowing costs or collateral requirements.