EQT Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. EQT operates in natural gas production, midstream gathering and transmission, and regulated distribution. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Operating revenues | $364.1 | $362.6 | $1,151.8 | $1,203.1 |
| Operating income | $85.8 | $315.0 | $320.5 | $688.6 |
| Net income attributable to EQT | $31.9 | $178.9 | $135.4 | $388.9 |
| Diluted EPS | $0.21 | $1.19 | $0.90 | $2.59 |
| Operating margin, reported | 23.6% | 86.9% | 27.8% | 57.3% |
Reported operating margins and earnings comparisons are heavily affected by 2011 asset-sale gains: $180.1 million from the Big Sandy Pipeline in Q3 2011 and $202.9 million from Big Sandy and the Langley complex in the first nine months of 2011. In 2012, production volumes rose, but lower realized prices, higher depreciation and depletion, and higher interest expense weighed on results. Production sales price averaged $4.04/Mcfe in Q3 and $4.21/Mcfe year to date, down 23% and 22%, respectively, from 2011.
Cash flow: Nine-month operating cash flow was $670.0 million, versus $736.8 million. Capital expenditures were $1,023.5 million, compared with $892.6 million; investing cash flow was negative $1,018.7 million. Financing cash flow was positive $156.4 million, including $276.8 million of net proceeds from the EQT Midstream Partners IPO. Cash declined to $639.0 million from $831.3 million at year-end 2011.
Balance sheet and debt: At September 30, total debt was approximately $2.727 billion, including $223.2 million current; cash was $639.0 million. Current assets were $1.228 billion and current liabilities $818.9 million. The filing reports long-term debt fair value of approximately $3.1 billion. A $200 million note matured November 15, 2012; management said it was evaluating financing alternatives for debt maturities. Neither EQT nor the Partnership had borrowings or letters of credit outstanding under their revolving facilities. EQT reported compliance with debt covenants.
Quarterly dividends declared were $0.22 per share, unchanged from 2011; nine-month dividends were $0.66 per share. Total equity was $3.848 billion, including $281.8 million of noncontrolling interests associated with the Partnership IPO.
Segments and material changes
- EQT Production: Operating income was $38.3 million in Q3 and $116.2 million for nine months, down 61% and 59%. Production sales volumes rose 33% and 29%, respectively, led by Marcellus growth, but lower gas and NGL prices and higher DD&A and SG&A more than offset volume gains.
- EQT Midstream: Operating income was $51.0 million in Q3 and $166.9 million for nine months, down 77% and 54%, largely because 2011 included asset-sale gains. Gathering volumes rose 30% in Q3 and 25% year to date; net operating revenues increased 16% and 9%. Sunrise Pipeline entered service in Q3 2012.
- Distribution: Operating income was $0.7 million in Q3 and $43.8 million year to date, down 72% and 32%. Nine-month performance was affected by unusually warm weather: throughput fell 12%, and the filing says the first nine months were 19% warmer than 2011.
- Partnership IPO: On July 2, EQT Midstream Partners sold 40.6% of its equity in an IPO; EQT retained 59.4% and continued consolidating the Partnership. The transaction created noncontrolling interests and changed EQT’s tax accounting for the Partnership’s income.
Outlook, risks and contingencies
Management forecast approximately $1.3 billion of 2012 well-development spending and drilling about 143 gross wells, including 132 Marcellus wells. It increased forecast 2012 production sales volumes to 257 Bcfe, implying approximately 32% growth, and preliminary 2013 volumes to at least 335 Bcfe, approximately 30% above the 2012 forecast. The filing says the 2012 capital plan would be funded by operating cash flow, IPO proceeds and cash on hand. EQT had suspended new Huron drilling in response to low gas prices, except for wells needed to maintain lease rights or already in progress.
Key risks include volatile natural gas and NGL prices, production and project execution, regulation and taxes, weather-sensitive distribution demand, counterparty credit, and access to capital. EQT’s ratings were Baa2/BBB/BBB, with negative outlooks from Moody’s and Fitch and stable outlook from S&P. A 10% natural-gas price decline was estimated to increase the fair value of non-trading gas derivatives by $136.3 million; a 10% increase would reduce it by $135.8 million. The filing cautions that this sensitivity excludes offsetting changes in physical transactions. Ordinary-course legal and regulatory matters were not expected by management to materially affect financial position, results or liquidity; the filing states there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the earnings decline reflects the absence of 2011 asset-sale gains versus current operating performance and commodity prices.
- Whether production growth and the 2013 volume outlook can be achieved while gas prices remain volatile and drilling costs and depletion rates rise.
- How EQT plans to refinance or repay the $200 million note that matured in November 2012 and other scheduled maturities.
- Whether operating cash flow and available cash adequately support the substantial capital program and dividend.
- How the Partnership’s IPO, retained ownership, related-party service arrangements and distribution obligations affect EQT’s future cash flows and reported results.