EQT Corporation — Q2 2011 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2011, compared with the same 2010 periods. EQT operates in Production, Midstream, and regulated Distribution. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $349.0 | $257.5 | $804.7 | $694.2 |
| Operating income | $153.2 | $78.5 | $350.8 | $247.6 |
| Net income | $87.8 | $30.0 | $210.0 | $118.1 |
| Diluted EPS | $0.58 | $0.20 | $1.40 | $0.84 |
| Operating margin | 43.9% | 30.5% | 43.6% | 35.7% |
| Net margin | 25.1% | 11.7% | 26.1% | 17.0% |
For the first six months, cash provided by operating activities was $462.6 million, versus $476.6 million. Investing used $265.9 million, including $544.9 million in property, plant and equipment additions; financing used $117.4 million. Cash at June 30 was $79.2 million.
At June 30, total assets were $7.29 billion and total liabilities were $4.06 billion. Current assets of $799.4 million exceeded current liabilities of $472.0 million. Long-term debt was $1.99 billion, with $25.0 million current; there were no revolving-credit borrowings outstanding. EQT had a $1.5 billion revolving facility maturing in December 2014.
Material changes and drivers
- Q2 revenue rose 35.5% and net income nearly tripled year over year; first-half revenue rose 15.9% and net income rose 77.9%. Production sales volumes increased 47.4% in Q2 and 45.5% for the half, led by Marcellus growth. Higher Q2 wellhead prices also helped; first-half average wellhead price was lower year over year.
- Production segment operating income increased to $99.8 million in Q2 and $182.1 million for the half. Midstream operating income rose to $52.2 million and $118.9 million, respectively, on gathering and transmission growth and lower expenses; reduced storage, marketing and other revenue partly offset gains. Distribution operating income was $8.9 million and $62.3 million, aided by colder weather, lower expenses and, for the half, West Virginia rate increases.
- First-half net income included a $22.8 million pre-tax gain on the Langley processing complex sale, a $10.1 million pre-tax gain from revaluing the prior ANPI trust interest, and $8.5 million of pre-tax gains on securities sales. The ANPI acquisition also added producing properties and assumed notes with a fair value of $64.2 million.
- First-half operating cash flow was lower mainly because the prior-year period included a $121.5 million federal tax refund. Investing cash use declined from $523.6 million in 2010, helped by Langley sale proceeds, securities proceeds and a Nora Gathering dividend.
Outlook, risks and unusual items
- Management forecast 2011 natural gas sales volumes of 190–195 Bcfe, approximately 43% above 2010, and approximately $1.35 billion of capital expenditures excluding the ANPI transaction. It planned about 300 MMcfe/day of incremental Marcellus gathering capacity by year-end.
- The Big Sandy Pipeline sale for $390 million closed July 1, 2011, after quarter-end. EQT expected a pre-tax gain of approximately $170–$180 million, subject to customary adjustments, and planned to invest most proceeds in Marcellus and Huron development.
- Management cited potential competition for drilling and completion services and higher service costs as drilling activity grows. Commodity-price volatility is a central risk; hedges cover portions of expected production and other exposures, with positions extending through 2015. The filing’s sensitivity analysis estimates a 10% gas-price decline would increase non-trading derivative fair value by about $104.7 million, while a 10% increase would reduce it by about $102.5 million; these figures exclude the offsetting effect on physical transactions.
- Credit ratings were Moody’s Baa1, S&P BBB and Fitch BBB; S&P and Moody’s outlooks were negative, while Fitch’s was stable. EQT reported compliance with debt covenants. It disclosed ordinary-course legal and regulatory matters, for which it believes reserves are adequate and outcomes will not materially affect the company. No material risk-factor changes from the 2010 Form 10-K were reported.
- The company declared a regular $0.22-per-share dividend payable September 1, 2011. Management cautioned that interim results may not indicate full-year results, given seasonality and commodity-price volatility.
Important facts for investors to verify
- Whether production growth and the 190–195 Bcfe full-year volume forecast were achieved, and how realized prices and hedges affected results.
- Actual 2011 capital spending, drilling and completion costs, and delivery of planned Marcellus gathering capacity.
- Final Big Sandy sale proceeds and gain, and deployment of proceeds to development projects.
- Recurring earnings and cash generation excluding transaction-related gains and other unusual items; also the sustainability of segment margins and operating cash flow.
- Debt ratings, liquidity and covenant compliance, including any effects of commodity prices or rating changes on collateral requirements and financing costs.