Business Context and Reporting Period
This summary covers the Form 10-Q filed by Equitable Resources, Inc. (formerly EQT Corp) for the quarterly period ended September 30, 2008. The company operates in three primary segments: Equitable Production (exploration and production of natural gas and crude oil), Equitable Midstream (gathering, processing, transportation, and storage), and Equitable Distribution (state-regulated natural gas distribution). In June 2008, the company completed a reorganization into a holding company structure to better segregate regulated and unregulated businesses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Operating Revenues | $297.8 million | $1,167.6 million |
| Net Operating Revenues | $215.7 million | $696.0 million |
| Operating Income | $162.7 million | $383.3 million |
| Net Income | $96.2 million | $222.1 million |
| Diluted EPS | $0.73 | $1.74 |
| Cash from Operating Activities | N/A | $326.9 million |
| Capital Expenditures | N/A | $959.9 million |
| Long-Term Debt | $1,253.5 million | $1,253.5 million |
| Cash and Equivalents | $10.6 million | $10.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 31% year-over-year for the nine months ended September 30, 2008, driven by a 25% increase in average well-head sales prices and a 6% increase in gas sales volumes.
- Profitability: Net income rose 13% to $222.1 million for the nine-month period, despite the absence of the $119.4 million gain on asset sales recorded in the same period of 2007. This was largely due to reduced Selling, General, and Administrative (SG&A) expenses from revised executive incentive assumptions.
- Capital Spending: Capital expenditures surged 80% to $960 million for the nine months, reflecting an aggressive drilling program (521 gross wells drilled) and midstream infrastructure expansion (Big Sandy pipeline, Langley processing plant).
- Segment Performance:
- Production: Operating income increased 39% due to higher prices and volumes.
- Midstream: Operating income increased 19% driven by higher NGL prices and gathering fees.
- Distribution: Operating income improved 20% primarily due to lower SG&A and transition planning costs compared to 2007.
Guidance, Outlook, and Risks
- Capital Spending Outlook: Due to current market conditions, the company revised its 2008 total capital and exploratory expenditure forecast down to approximately $1.4 billion. For 2009, the company plans to reduce spending significantly to between $900 million and $1 billion.
- Production Growth: The company anticipates annual gas sales volume growth of greater than 12% by focusing spending on drilling where midstream capacity exists. Long-term potential remains above 20% if capital markets are unconstrained.
- Commodity Hedging: As of September 30, 2008, the company has hedged greater than 50% of expected production through 2010 using swaps and collars. The net fair value of derivative instruments was a liability of $251 million.
- Credit and Liquidity Risks:
- Lehman Brothers: Lehman Brothers Bank, a lender in the company's $1.5 billion credit facility, failed to fund a portion of a recent borrowing and declared bankruptcy. The company recorded a $5.2 million reserve against receivables from Lehman but states there is no additional income statement exposure.
- Rating Watch: On October 15, 2008, S&P placed the company's ratings on CreditWatch with negative implications due to the increasing percentage of income and spending related to exploration and production.
- Legal Contingencies: The company is involved in royalty litigation in West Virginia. A tentative settlement has been reached within the established reserve, but no formal agreement has been executed.
Investor Verification Checklist
- Capital Market Access: Verify the company's ability to fund its $1.4 billion 2008 capex plan given the Lehman Brothers default and the S&P CreditWatch negative listing.
- Debt Covenants: Confirm continued compliance with the 65% total debt-to-total capitalization ratio covenant, especially as capital spending accelerates.
- Hedge Realization: Monitor the impact of the $251 million net derivative liability on future earnings as hedges settle, particularly given the volatility in natural gas prices.
- Legal Settlements: Track the finalization of the West Virginia royalty settlement to ensure the reserve remains adequate.
- 2009 Capex Execution: Assess the feasibility of the planned reduction in 2009 capital spending to $900M-$1B and its impact on long-term production growth targets.