EQT Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are shown in millions.
Business context and reporting period
EQT operates EQT Production, which explores for and produces natural gas, NGLs and a limited amount of oil, and EQT Midstream, which gathers, transports, stores and markets natural gas. EQT Midstream Partners, LP (EQM) is consolidated, with public unitholders’ share reported as noncontrolling interests. Equitable Gas and Homeworks were sold in December 2013; their results are presented as discontinued operations, and prior periods were recast.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $526.2m | $473.1m | $1,187.8m | $889.0m |
| Operating income | $224.8m | $162.0m | $581.6m | $306.5m |
| Income from continuing operations attributable to EQT | $109.0m | $81.3m | $301.3m | $146.5m |
| Net income attributable to EQT | $110.9m | $86.9m | $303.1m | $187.1m |
| Diluted EPS from continuing operations | $0.72 | $0.54 | $1.98 | $0.97 |
| Diluted EPS | $0.73 | $0.57 | $1.99 | $1.24 |
Q2 revenue rose 11% and six-month revenue rose 34% year over year. Operating income included a $37.7m gain on the Range asset exchange in 2014, with $28.0m of that gain associated with de-designating certain cash flow hedges. Q2 2014 continuing income attributable to EQT increased by $27.7m; the six-month increase was $154.8m. The six-month effective tax rate increased to 33.6% from 30.9%.
Cash flow and investment: First-half operating cash flow was $794.6m, compared with $597.0m a year earlier. Investing cash outflow was $1,516.3m, including $1,023.7m of continuing-operations capital expenditures and $342.7m placed in restricted cash. Financing cash inflow was $1,150.3m, including $902.5m net proceeds from EQM’s unit offering. Cash and cash equivalents ended the period at $1,274.3m; restricted cash was separately reported at $342.7m. Capital expenditures were substantial: $1,338.6m in Production and $194.1m in Midstream for the first half.
Debt and liquidity: At June 30, long-term debt was $2,486.5m, current long-term debt was $11.1m, and short-term loans were $330.0m, all reported on the consolidated balance sheet. EQM had the $330m short-term borrowing under its revolving credit facility; EQT itself had no borrowings or letters of credit outstanding under its $1.5bn revolving facility. EQM had a $750m facility. Both companies reported covenant compliance. EQT’s senior debt ratings were Moody’s Baa3, S&P BBB and Fitch BBB-, each with a stable outlook.
Material changes and operating performance
- Production sales volumes increased 17% in Q2 and 23% in the first half, driven primarily by Marcellus development. The average effective sales price to EQT Corporation decreased 10% in Q2 to $3.85/Mcfe, but increased 9% for the first half to $4.59/Mcfe. Management cited lower Appalachian basis in Q2 and higher NYMEX prices and third-party transportation recoveries in the first half.
- Q2 Production operating income was $144.7m versus $105.1m; first-half operating income was $421.9m versus $179.2m. Q2 Midstream operating income was $88.5m versus $72.2m; first-half was $171.6m versus $146.5m. Midstream benefited from greater gathering volumes and transmission revenues, while expenses, including SG&A, increased.
- On June 16, EQT completed an exchange with Range Resources: EQT received approximately 73,000 net Permian Basin acres and approximately 900 producing wells; Range received approximately 138,000 Nora acres, about 2,000 producing wells, EQT’s remaining 50% interest in Nora Gathering, and $157.3m cash. The acquired assets’ fair value was approximately $510.3m; allocation was still being finalized.
- EQM’s May public offering generated approximately $902.5m net proceeds. At June 30, EQT held a 2% general partner interest, all incentive distribution rights and a 34.4% limited partner interest in EQM.
- EQT repurchased and retired 300,000 shares for $32.4m under a new authorization for up to 1 million shares. The quarterly dividend remained $0.03 per share.
Outlook, risks and contingencies
- 2014 capital investment, excluding acquisitions, was projected at approximately $2.4bn, including about $1.8bn for well development. Management forecast 2014 sales volumes of 465–480 Bcfe, approximately 25% production-volume growth, and NGL volumes of 6.5–6.6 million barrels.
- Management expected Appalachian basis differentials to remain negative relative to Henry Hub. The company’s commodity hedges and basis positions expose results to natural gas prices and basis changes; hedge ineffectiveness and non-designated derivative losses affected 2014 results.
- EQM announced plans for the 36-mile Ohio Valley Connector, with estimated cost of $300m, capacity of about 1.0 Bcf/day and expected in-service timing in mid-2016, subject to FERC approval. EQT had contracted for 650 MMcf/day. The proposed Mountain Valley Pipeline was expected to provide about 2 Bcf/day and enter service by the end of 2018; binding shipper agreements, approvals and the proposed joint venture remained outstanding.
- EQT had placed $500m of proceeds in a qualified trust for a potential like-kind exchange. After using $157.3m for the Range transaction, it was evaluating eligible replacement properties before the statutory deadline of November 3, 2014.
- Ordinary-course legal and regulatory matters were pending. EQT expected a Pennsylvania proposed penalty related to a 2012 water release to exceed $100,000, but did not expect the matter to materially affect its financial position, results or liquidity. The filing also added cyber incidents as a standalone risk, citing potential operational, data, environmental and financial impacts.
- Other key risks include commodity-price volatility, access to pipeline capacity and markets, project permitting and customer commitments, financing and credit-rating changes, and the possibility that actual results differ from forward-looking statements.
Most important facts for investors to verify
- How much of earnings growth was recurring versus attributable to the $37.7m Range-related gain and other unusual items.
- Whether production growth and realized pricing can be sustained given negative Appalachian basis and the hedge portfolio’s exposure to basis changes.
- Capital spending, cash generation and funding needs against the $2.4bn 2014 investment plan, including EQM borrowings and distributions to noncontrolling holders.
- Completion, cost, approvals, shipper commitments and timing for the OVC and Mountain Valley Pipeline projects.
- Use of restricted cash and completion of any qualifying like-kind exchange by the stated deadline.
- Final purchase-price and asset-value allocations for the Range exchange, and developments in legal, environmental and cyber risks.