EQT Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results for the three and nine months ended September 30, 2015, compared with the same 2014 periods. EQT operates through EQT Production, focused on Appalachian and Permian oil and gas production, and EQT Midstream, which provides gathering, transmission, storage and marketing services. Amounts below are USD millions unless otherwise noted.
Financial performance and liquidity
- Third-quarter revenue and earnings: Total operating revenues were $577.0 million, down 0.3% from $578.7 million. Operating income was $170.1 million versus $231.5 million; net income attributable to EQT was $40.8 million, or $0.27 diluted EPS, versus $98.6 million, or $0.65. Reported operating income included a $161.3 million gain on non-hedge derivatives, compared with $1.8 million a year earlier.
- Nine-month results: Operating revenues were $1,719.0 million versus $1,766.5 million. Operating income was $517.8 million versus $813.1 million. Net income attributable to EQT was $219.8 million, or $1.44 diluted EPS, versus $401.7 million, or $2.62 from continuing operations. The 2014 comparison also included a $37.7 million gain on sale/exchange of assets.
- Production and pricing: Q3 production sales volumes rose 26.7% to 156.3 Bcfe; nine-month volumes increased 32.1% to 448.5 Bcfe. EQT’s average realized price fell 41.6% in Q3 to $2.12/Mcfe and 37.3% for nine months to $2.71/Mcfe. Q3 average NGL price fell to $8.10/barrel from $42.27.
- Segment performance: Q3 Production operating income declined to $56.4 million from $140.0 million, while Midstream operating income increased to $113.0 million from $93.6 million. For nine months, Production operating income was $175.3 million versus $561.9 million; Midstream was $350.9 million versus $265.2 million.
- Cash flow and investment: Nine-month operating cash flow was $900.2 million, down from $1,141.9 million. Continuing-operations capital expenditures were $1,899.3 million, resulting in operating cash flow less these expenditures of approximately negative $999 million, before financing and other investing items. Investing cash outflow was $1,975.2 million.
- Debt and liquidity at September 30: Cash and cash equivalents were $1,662.7 million; current assets were $2,262.8 million and current liabilities $991.1 million. Long-term debt, including current maturities, was approximately $2,978.2 million, plus $350.0 million of EQM short-term borrowings. EQT had no borrowings under its $1.5 billion revolver; EQM had $350 million drawn on its $750 million facility. Both entities reported covenant compliance.
- Margins and taxes: Calculated consolidated operating margin was approximately 29.5% in Q3 2015 versus 40.0% in Q3 2014. The nine-month effective tax rate was 6.9% versus 33.3%, including a $35.5 million tax benefit related to IRS guidance on the 2013 Equitable Gas transaction; the benefit is subject to reversal or amortization over time.
Material changes versus the prior comparable periods
- Lower commodity prices outweighed substantial production growth: Q3 realized production price fell 41.6%, and nine-month realized price fell 37.3%. This was a primary driver of lower EQT-attributable earnings and operating cash flow.
- Midstream results strengthened as firm reservation revenues and gathering/transmission activity grew. Q3 firm reservation fee revenue increased substantially, while volumetric usage revenues declined as customers shifted to firm capacity.
- Derivative fair-value gains materially supported reported revenue and earnings. Because EQT discontinued cash-flow hedge accounting for commodity derivatives effective December 31, 2014, subsequent fair-value changes are recognized in current earnings; these gains are not equivalent to cash settlements.
- Noncontrolling-interest income increased to $59.4 million in Q3 and $165.4 million for nine months, partly reflecting EQM unit issuances and EQGP’s May 2015 IPO. This reduced earnings attributable to EQT shareholders despite consolidation of the subsidiaries.
- Capital spending remained higher than operating cash generation. Financing included $758.8 million of net proceeds from EQM unit offerings and $674.0 million from EQGP units sold in its IPO.
Outlook, commentary and risks
- Management reduced its 2015 capital investment estimate, including EQM, from $2.55 billion to $2.4 billion and then to $2.3 billion, primarily due to lower expected drilling and completion costs. EQT Production investment was expected to be approximately $1.6 billion; midstream investment approximately $0.7 billion, including $0.5 billion at EQM.
- Management forecast 2015 sales volumes of 595–605 Bcfe, implying approximately 25% growth. The stated plan included approximately 166 gross wells. After strong initial results from its first dry-gas-focused Utica well, EQT planned two additional Utica wells in 2015 and suspended Upper Devonian and Central Pennsylvania Marcellus drilling programs. Permian drilling had been suspended in Q1 due to low prices.
- Management cited a favorable long-term outlook based on resource position, risk management and disciplined investment, while warning that prolonged low natural gas, NGL and oil prices could adversely affect development plans, revenues, earnings, liquidity and reserves.
- The Mountain Valley Pipeline joint venture had 2.0 Bcf/day of 20-year firm capacity commitments, including approximately 1.3 Bcf/day from EQT. The project remained subject to FERC approval and was expected to enter service in Q4 2018. EQM had issued a $110 million performance guarantee related to its share of project construction funding.
- EQT’s senior debt ratings were BBB (S&P), Baa3 (Moody’s) and BBB- (Fitch), all with stable outlooks; EQM’s ratings included Ba1 from Moody’s and BBB- from S&P and Fitch. A downgrade could raise borrowing costs, collateral requirements and limit capital-market access. Commodity prices, basis differentials, hedge settlement, counterparty performance and pipeline capacity are material risks.
- Various legal and regulatory matters were pending. In a Pennsylvania environmental proceeding, the agency sought $4.53 million in civil penalties; EQT expected penalties to exceed $100,000 but stated it did not expect a material financial impact. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- How much of future reported earnings and cash flow depends on derivative settlements versus noncash fair-value movements, and how much hedged production remains in each year.
- Whether the 595–605 Bcfe volume target and $2.3 billion capital plan remain achievable under commodity-price, service-cost and drilling-program changes.
- Funding needs for capital expenditures and the Mountain Valley Pipeline, including reliance on EQM/EQGP equity issuance, dropdowns, distributions and EQM borrowings.
- The effect of increased noncontrolling ownership on earnings and cash available to EQT shareholders, and the sustainability of Midstream reservation revenues.
- Potential tax-expense reversals related to the $35.5 million IRS-guidance benefit, and developments in the Pennsylvania environmental proceedings and FERC review of the pipeline.