EQT Corporation — Q2 2012 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2012, compared with the same 2011 periods. EQT operates natural gas production, midstream gathering and transmission, and regulated distribution businesses. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $337.8 | $367.8 | $787.8 | $840.5 |
| Operating income | $81.4 | $153.2 | $234.7 | $373.6 |
| Net income | $31.4 | $87.8 | $103.5 | $210.0 |
| Diluted EPS | $0.21 | $0.58 | $0.69 | $1.40 |
| Operating margin | 24.1% | 41.6% | 29.8% | 44.4% |
Cash flow and investment: First-half cash from operations was $418.4 million, versus $481.1 million. Capital expenditures were $662.3 million, versus $544.9 million; investing cash outflow was $658.6 million. Dividends paid were $65.9 million. Cash declined by $316.2 million during the half to $515.0 million.
Debt and liquidity: June 30 cash was $515.0 million; current assets were $1.214 billion and current liabilities $696.6 million (current ratio approximately 1.74). Total debt, including current maturities, was approximately $2.737 billion, compared with $2.747 billion at year-end 2011. No borrowings or letters of credit were outstanding under EQT’s $1.5 billion revolving facility. EQT reported compliance with debt covenants.
Changes versus prior comparable periods
- Q2 revenue fell 8% and net income fell 64%; first-half revenue fell 6% and net income fell 51%. Lower realized natural gas and NGL prices, higher depreciation and operating costs, higher interest expense, and prior-year gains were key factors.
- Q2 production sales volumes rose 28% to 60.0 Bcfe, but the average realized price fell 32% to $3.83/Mcfe. First-half volumes increased 27% to 114.1 Bcfe, while the average realized price fell 22% to $4.31/Mcfe. Marcellus volumes were the principal growth driver.
- Production segment operating income declined to $17.7 million in Q2 from $99.8 million and to $77.9 million in the first half from $182.1 million. Higher production volumes did not offset price declines, higher costs, and increased DD&A.
- Midstream operating income increased 14% in Q2 to $59.8 million, supported by gathering growth, but declined 18% in the first half to $115.9 million, partly because 2011 included a $22.8 million disposition gain. Distribution operating income fell 29% in Q2 and 31% in the first half, chiefly due to warmer weather.
Outlook, significant events, and risks
- Management expected 2012 production sales of 250–255 Bcfe, approximately 30% growth, and planned about $900 million of well-development capital spending for roughly 141 gross wells, including 132 Marcellus wells and 9 Huron wells. EQT had suspended new Huron drilling in response to low gas prices.
- Management planned $365 million of 2012 midstream investment, targeting 445 MMcfe/day of additional gathering capacity and 700 MMcfe/day of additional transmission capacity. The Sunrise Pipeline, expected in service in Q3 2012, was to contribute 300 MMcfe/day of transmission capacity. The 2012 capital plan was expected to be funded by operating cash flow, cash on hand, and Partnership IPO proceeds.
- On July 2, 2012, after quarter-end, EQT Midstream Partners completed an IPO, issuing 40.6% of its equity. EQT retained 59.4% and continued to consolidate the Partnership; approximately $232 million of the Partnership’s $278 million net IPO proceeds was distributed to EQT. EQT expected to record public-partner noncontrolling interest beginning in Q3.
- Commodity prices remain a major exposure. EQT reported approximately 344 Bcf of natural gas hedges as of June 30; a hypothetical 10% gas-price decline would increase the fair value of non-trading derivatives by about $116 million, before the offsetting impact on physical sales. As of July 25, disclosed 2012–2014 swaps totaled 66, 84, and 45 Bcf, respectively.
- Pennsylvania’s 2012 natural gas impact fee contributed $11.3 million of first-half production taxes, including $6.7 million accrued for pre-2012 Marcellus wells. The filing also cites commodity-price volatility, weather, drilling and infrastructure execution, credit ratings and counterparty exposure, regulatory matters, and ordinary-course legal proceedings as risks. Management said pending legal matters were not expected to materially affect the company.
- An $8.2 million derivative put-premium accounting error was corrected in Q2, reducing Production revenue and increasing accumulated other comprehensive income by $5.1 million, with a $3.1 million reduction in deferred tax expense. Management concluded it was not material to prior periods or expected 2012 results and said it had no cash-flow or covenant effect.
- The board declared a quarterly dividend of $0.22 per share, payable September 1, 2012. The filing cautions that interim results may not indicate full-year results because of seasonality and commodity-price volatility.
Most important facts for investors to verify
- Whether production growth and the planned Marcellus program deliver the 250–255 Bcfe sales-volume outlook at realized prices sufficient to support returns.
- Progress, spending, and in-service timing for Sunrise and other gathering and transmission projects, and whether planned capacity is utilized.
- The effect of the July IPO distribution and the public partners’ noncontrolling interest on EQT-attributable earnings, cash flows, and equity in subsequent quarters.
- Hedge volumes, prices, settlements, and derivative counterparty and collateral exposure as gas prices and credit ratings change.
- Funding needs for the $229.9 million current debt portion, capital spending, and dividends, alongside operating cash flow and available liquidity.
- The impact-fee accrual, tax audits, and any changes in legal contingencies or other disclosed risks.