EQT Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. EQT is an Appalachian Basin natural gas producer with consolidated gathering, transmission, and water businesses. Comparisons with 2017 are affected by the November 2017 Rice Energy acquisition; 2018 includes Rice results, while 2017 generally does not.
Financial and operating results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1.055 billion | $688.7 million | $2.488 billion | $1.583 billion |
| Operating income (loss) | $100.0 million | $190.1 million | $(1.624) billion | $581.1 million |
| Net income (loss) attributable to EQT | $17.8 million | $41.1 million | $(1.568) billion | $205.1 million |
| Diluted earnings (loss) per share | $0.07 | $0.24 | $(5.92) | $1.18 |
| Operating cash flow | Not separately provided | Not separately provided | $1.541 billion | $809.0 million |
- Q2 revenue increased about 53%, while EQT-attributable net income declined. Higher production volumes and Rice-related activity lifted revenue, but higher costs, interest expense, noncontrolling interests, and a $118.1 million divestiture-related impairment weighed on EQT’s result. Q2 operating margin was approximately 9.5%, versus 27.6% a year earlier.
- First-half results included approximately $2.4 billion of impairments associated with Huron and Permian assets. The impairment drove the reported operating and net losses; operating cash flow nevertheless rose year over year, partly reflecting noncash impairment and depreciation adjustments.
- Production sales volumes rose 83% in Q2 and 85% for the first half, to 362.5 Bcfe and 719.5 Bcfe, respectively. Average realized prices declined 1.7% in Q2 to $2.81/Mcfe and 3.5% for the first half to $3.06/Mcfe.
- First-half capital expenditures were $1.697 billion. Investing cash outflow was $1.762 billion, exceeding operating cash flow; financing cash inflow was $771.8 million. Cash and cash equivalents ended June at $698.0 million.
- At June 30, total liabilities were $12.261 billion and total equity was $16.703 billion. Senior Notes were $8.033 billion and credit-facility borrowings were $500 million; $699.3 million of Senior Notes was classified as current. Current assets were $1.781 billion versus current liabilities of $2.356 billion.
Material changes and transactions
- The Rice acquisition substantially expanded production and added RMP gathering and water operations. EQT reported five business segments in 2018, compared with three before the acquisition; year-over-year comparisons are therefore not like-for-like.
- EQT’s midstream subsidiary completed a $1.15 billion cash-and-units drop-down of certain Rice-related assets to EQM in May. EQM also acquired the remaining 25% of Strike Force Midstream for $175 million.
- On July 23, 2018, after quarter-end, EQM and RMP completed their merger. EQT had announced plans to separate upstream and midstream businesses, distribute 80.1% of SpinCo to EQT shareholders, and retain 19.9% initially. The proposed separation remained subject to approvals and conditions.
- EQT sold its Permian assets in June for net proceeds of approximately $60.2 million. Its Huron asset sale for $575 million closed July 18, 2018. EQT recorded an additional $118.1 million impairment/loss on sale in Q2 and expected up to $275 million more in Q3 for certain related capacity contracts.
Outlook, risks, and contingencies
- Management reaffirmed 2018 production sales volume guidance of 1,490–1,510 Bcfe, adjusted for the Huron divestiture, and expected approximately $2.2 billion of upstream well-development spending.
- EQT expected approximately $2.0 billion of 2018 midstream investment through EQM, including $1.1 billion of contributions to the Mountain Valley Pipeline (MVP). MVP’s anticipated in-service date was moved to Q1 2019; estimated project cost was $3.5–$3.7 billion, excluding AFUDC. EQT disclosed approximately $1.094 billion of maximum financial-statement exposure related to its MVP investment and performance guarantee.
- Management was evaluating the upstream development pace and capital plan in preparation for the proposed separation. It said future investment could be adjusted to balance free cash flow and volume growth. The filing provides no specific earnings guidance.
- Commodity prices, Appalachian basis differentials, production execution, and access to financing are key risks. Lower prices could reduce development activity and cause further impairments. EQT uses derivatives to hedge a portion of production; a hypothetical 10% natural-gas price move would change derivative fair value by roughly $445–$448 million, before considering the offset from physical sales.
- EQT reported compliance with debt covenants at June 30. Its ratings included BBB/Negative from S&P and Baa3/Stable from Moody’s. Downgrades could raise borrowing costs and collateral requirements. The company also warned that the proposed separation could be delayed, fail to deliver expected benefits, or create material tax exposure.
- A West Virginia royalty-owner class action remained pending, with trial scheduled for November 28, 2018. EQT denied the allegations and said it was vigorously defending the case. The filing did not quantify a potential loss.
Most important facts for investors to verify
- Whether the proposed upstream/midstream separation proceeds, on what terms, and with what tax treatment and debt allocation.
- Actual production, realized pricing, capital spending, and cash generation against 2018 outlook, including the effects of the Huron sale.
- Q3 impairment and capacity-contract charges following the Huron divestiture, and whether additional asset impairments arise.
- MVP construction cost, funding calls, regulatory progress, and timing to service.
- Debt maturities, liquidity and covenant headroom, and any effects of ratings changes or commodity-driven collateral needs.
- Outcome and potential financial exposure from the royalty litigation.