EQT Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. EQT’s midstream business was separated in November 2018; prior-period operating results are presented as discontinued operations, while prior-period cash flows still include midstream amounts. Comparisons therefore are not fully like-for-like.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total operating revenues | $1.143 billion | $1.312 billion |
| Sales of natural gas, oil and NGLs | $1.272 billion | $1.226 billion |
| Operating income (loss) | $175.5 million | $(1.950) billion |
| Net income (loss) attributable to EQT | $190.7 million; $0.75 diluted EPS | $(1.586) billion; $(5.99) diluted EPS |
| Operating cash flow | $871.3 million | $904.4 million |
| Cash capital expenditures | $371.0 million | $729.3 million |
| Cash and cash equivalents | $40.8 million | $3.5 million at Dec. 31, 2018 |
| Total debt, approximate | $5.05 billion | $5.50 billion at Dec. 31, 2018 |
| Total current assets / liabilities | $1.380 billion / $2.185 billion | $1.970 billion / $2.355 billion at Dec. 31, 2018 |
Total operating revenue fell 12.9%, mainly reflecting a $132.0 million unrealized derivative loss in 2019 versus a $62.6 million gain in 2018, and lower marketing revenue. Management’s non-GAAP adjusted operating revenue, which excludes pre-settlement derivative fair-value changes and marketing revenue, was $1.210 billion versus $1.188 billion. Sales volume rose 7.4% to 383.5 Bcfe, while average realized price declined 5.1% to $3.16/Mcfe.
Net income improvement chiefly reflects the $2.3 billion impairment recorded in Q1 2018 on non-core Huron and Permian assets. Q1 2018 also included discontinued midstream operations and a $429.8 million income tax benefit; Q1 2019 included an $89.1 million unrealized gain on EQT’s retained Equitrans Midstream investment. Operating margin was approximately 15.3% of revenue, calculated from reported operating income and total operating revenue.
Operating cash flow decreased $33.1 million year over year. Cash capital expenditures were $371.0 million; the difference between operating cash flow and cash capital expenditures was approximately $500.3 million, not a company-reported free-cash-flow measure. Interest expense was $56.6 million. The quarterly dividend was $0.03 per share.
Operating developments and outlook
- Natural gas sales volume increased 10.4%; total liquids sales volume declined 28.4%. Lower liquids volumes and prices contributed to reduced liquids sales.
- Transportation and processing expense was $439.2 million, up from $416.7 million. SG&A rose to $49.0 million, including an $8.0 million litigation reserve; labor and personnel costs fell with efficiency efforts.
- Management’s 2019 plan calls for approximately $1.5 billion of reserve development, $0.2 billion of land and lease acquisitions, $0.1 billion of capitalized overhead, and $0.1 billion of other production infrastructure. Estimated total is approximately $1.9 billion, expected to be funded from operating cash flow.
- 2019 sales volumes are forecast at 1,480–1,520 Bcfe; the drilling program is expected to support 5% sales-volume growth in 2020 over 2019 expected volumes. Management targets mid-single-digit year-over-year production growth and sustainable free cash flow.
- EQT planned to spud approximately 123 gross wells in 2019. Management emphasized cost reduction, capital and operational efficiency, and prioritizing shareholder returns while strengthening the balance sheet.
Liquidity, debt, risks and unusual items
- The $2.5 billion revolving credit facility expires in July 2022; $350 million was outstanding at quarter-end. EQT reported compliance with its debt covenants, including a maximum 65% debt-to-total-capitalization ratio. Senior debt ratings were investment grade but at the lowest investment-grade level: Moody’s Baa3 and S&P/Fitch BBB-, all with stable outlooks.
- Approximately $700 million of debt matures in 2019. EQT said maturities may be funded with revolver borrowings, new loans, operating cash or proceeds from planned sales of its retained Equitrans Midstream shares; proceeds were intended to reduce debt.
- Commodity prices are a material exposure. EQT uses derivatives to hedge a portion of forecast production; Q1 derivative cash settlements were net payments of $63.6 million. A hypothetical 10% natural-gas price move would change derivative fair value by roughly $453–$474 million, before considering the offset from physical sales.
- A proposed royalty-class settlement would require a $53.5 million payment, stop certain future post-production deductions, and use a defined index-pricing method. It remained subject to court approval and minimum class participation; the final approval hearing was scheduled for July 11, 2019. EQT had also paid $0.4 million in penalties relating to Pennsylvania erosion and sedimentation notices.
- Other risks include commodity-price volatility, potential asset impairments or reserve revisions, derivative collateral and counterparty exposure, and litigation. Management said pending matters were reserved as appropriate and did not expect them to materially affect financial condition, results or liquidity.
- Lease-accounting adoption added $89.0 million of operating lease right-of-use assets and liabilities at adoption; quarter-end operating lease liabilities were $76.2 million. An $8.0 million litigation reserve was recorded in SG&A. The 2018 impairment materially distorts the year-over-year earnings comparison.
Investor verification points
- Confirm the final outcome and accounting treatment of the proposed $53.5 million royalty settlement.
- Track progress on the planned Equitrans Midstream share disposition, debt reduction, and the $700 million 2019 maturity.
- Compare actual 2019 spending and sales volumes with the stated capital and volume outlook, including the expected 2020 growth.
- Assess realized commodity prices, derivative settlements and positions, and the effect of price changes on cash flow and collateral requirements.
- Reconcile reported GAAP revenue and earnings with management’s adjusted operating revenue measure, allowing for the midstream separation and prior-year impairment.