EQT Corp annual report, FY2015

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EQT Corporation — 2015 Form 10-K Summary

Business context and reporting period

This is EQT Corporation’s annual report for the fiscal year ended December 31, 2015, not a stand-alone quarterly filing. EQT operates in two segments: natural gas, NGL and oil production, and midstream gathering, transmission, storage and marketing. Results consolidate EQT Midstream Partners (EQM) and EQT GP Holdings (EQGP), with substantial earnings allocated to outside investors.

Financial and operating performance

  • Revenue: $2.340 billion, down 5% from $2.470 billion in 2014. Product sales fell to $1.690 billion from $2.132 billion; operating revenue also included $385.8 million of gains on derivatives not designated as hedges.
  • Profit: Operating income was $563.1 million, down 34% from $853.4 million. Consolidated net income was $321.9 million, while net income attributable to EQT was $85.2 million, or $0.56 per diluted share, versus $387.0 million and $2.54 per diluted share in 2014. The difference reflects $236.7 million of income attributable to noncontrolling interests.
  • Cash flow: Operating cash flow was $1.217 billion, down from $1.415 billion. Investing cash outflow was $2.526 billion, including $2.434 billion of cash capital expenditures; financing provided $1.832 billion. Year-end cash was $1.601 billion.
  • Production and midstream: Production sales reached a record 603.1 Bcfe, up 27%; Marcellus sales rose 34% to 505.1 Bcfe. Gathered volumes increased 28% to 754.3 TBtu. EQT Midstream operating income grew 23% to $473.4 million, while EQT Production operating income declined 79% to $104.9 million.
  • Pricing and impairment: Realized production price to EQT fell 36%, to $2.67/Mcfe from $4.16/Mcfe. EQT recorded $122.5 million of noncash long-lived asset impairments, compared with $267.3 million in 2014. Proved reserves declined 7% to 9.98 Tcfe, mainly reflecting price-driven revisions and reduced planned development.
  • Debt and liquidity: Balance-sheet long-term debt was $2.793 billion; EQM also had $299 million outstanding on its revolver at year-end, repaid in February 2016. EQT had no borrowings on its $1.5 billion revolving facility. EQT and EQM were in compliance with their debt covenants. EQT’s total assets were $13.976 billion.

Material changes versus 2014

  • Lower commodity prices sharply reduced realized prices and production-segment earnings, despite strong volume growth. Natural gas and NGL prices, particularly in Appalachia, remained weak.
  • Midstream earnings increased on higher gathering and firm transmission revenues, largely tied to affiliate production and expanded contracted capacity.
  • Operating cash flow fell by $197.8 million. EQT reduced well-development capital spending modestly, while total continuing-operations cash capital expenditures were $2.434 billion.
  • Noncontrolling-interest earnings rose to $236.7 million from $124.0 million, following EQM equity offerings and EQGP’s 2015 IPO. EQT received approximately $674 million of net proceeds from the EQGP IPO; EQM raised additional equity through public offerings and its ATM program.
  • The standardized measure of discounted future net cash flows from proved reserves fell to $977.6 million from $4.810 billion, reflecting lower SEC benchmark prices and other reserve and cost changes. The measure is not a fair-value estimate.

Outlook, risks and contingencies

  • Management expected Appalachian natural gas and NGL prices to remain depressed during 2016 and cautioned that further price weakness could reduce cash flow, slow development, lower reserves and cause additional impairments. Huron assets, with a stated carrying value of approximately $3 billion, were identified as potentially exposed to further price declines.
  • For 2016, EQT forecast approximately $1.8 billion of capital investment excluding acquisitions, including about $820 million for production development and approximately $800 million for midstream infrastructure. It expected sales volumes of 700–720 Bcfe, or approximately 18% growth, and NGL volumes of 10.0–10.5 million barrels. Plans included about 77 gross wells, with potential for five additional deep Utica wells depending on initial results. Funding sources were expected to include cash, operating cash flow, midstream dropdown proceeds and EQM capital raises.
  • The Ohio Valley Connector received FERC approval in December 2015; construction began in January 2016, with service expected by year-end 2016. The Mountain Valley Pipeline was proposed for service in late 2018, subject to regulatory approval; EQM held a 45.5% interest as of February 2016.
  • Commodity-price, Appalachian basis, infrastructure access and execution, regulatory and environmental requirements, reserve-estimation uncertainty, and access to capital are significant risks. Moody’s had placed EQT and EQM under review for downgrade; EQT’s ratings remained investment grade as of the filing, while EQM’s Moody’s rating was below investment grade.
  • Long-term contractual capacity commitments to EQM totaled $5.7 billion; total disclosed purchase obligations were $11.7 billion. EQM’s MVP performance guarantee was $91 million as of February 11, 2016. Legacy NORESCO savings guarantees had an undiscounted maximum of approximately $134 million. Management considered performance under these guarantees remote and expected potential payments to be immaterial.
  • A Pennsylvania environmental matter sought $4.53 million in civil penalties relating to a 2012 release. EQT disputed the penalty assessment and expected the matter to be immaterial; it also disclosed other environmental notices and ordinary-course legal claims.
  • The fourth quarter of 2015 included $601.4 million of revenue, $45.3 million of operating income and a $134.6 million net loss attributable to EQT, or a loss of $0.88 per share. Full-year comparisons are more representative of the annual filing period.

Most important facts for investors to verify

  • Whether 2016 production-volume and capital-spending forecasts were achieved, and how deep Utica well results affected the drilling plan.
  • Current realized prices, Appalachian basis differentials, hedge settlements and derivative fair-value effects; 2015 reported derivative gains included substantial noncash mark-to-market gains.
  • Updated proved reserves, reserve revisions and impairment sensitivity, especially for Huron and other non-core properties.
  • Liquidity, EQM debt and equity financing needs, credit ratings, covenant headroom, and the ability to fund the large capital program alongside long-term capacity commitments.
  • FERC approvals, construction costs and timing for OVC and MVP, including any changes to ownership, commitments or guarantees.
  • Resolution and financial impact of the Pennsylvania penalty proceeding, other environmental notices, and tax uncertainties, including the $259.3 million reserve for unrecognized tax benefits.