EQT Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results include EQT Production, EQT Midstream and Distribution. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $506.6 million | $364.1 million | $1,585.4 million | $1,151.8 million |
| Operating income | $170.5 million | $85.9 million | $540.5 million | $319.5 million |
| Net income | $102.6 million | $36.7 million | $306.0 million | $140.2 million |
| Net income attributable to EQT | $88.3 million | $31.9 million | $275.4 million | $135.4 million |
| Diluted EPS attributable to EQT | $0.58 | $0.21 | $1.82 | $0.90 |
- Operating margin was approximately 33.7% in Q3 versus 23.6% a year earlier; nine-month operating margin was approximately 34.1% versus 27.7%. EQT-attributable net margin was approximately 17.4% in Q3 versus 8.8%, and 17.4% for nine months versus 11.8%.
- Q3 revenue rose about 39% year over year; EQT-attributable net income rose about 177%. For nine months, revenue increased about 38% and EQT-attributable net income about 103%.
- Nine-month operating cash flow was $1,007.1 million, compared with $670.0 million. Capital expenditures were $1,259.6 million, leaving operating cash flow less capital expenditures of negative $252.5 million, versus negative $353.5 million in 2012.
- Cash and cash equivalents were $423.9 million at September 30, 2013, up from $182.1 million at year-end 2012. Current assets were $933.3 million and current liabilities $540.7 million.
- Total debt was approximately $2.502 billion, broadly level with $2.526 billion at year-end 2012. The company had no loans or letters of credit outstanding under its $1.5 billion revolver; the Partnership also had none outstanding under its $350 million facility. EQT reported compliance with debt covenants.
- Q3 and nine-month dividends declared were $0.03 and $0.09 per share, respectively, compared with $0.22 and $0.66 in the comparable 2012 periods.
Drivers and changes versus prior periods
- Production sales volumes increased 42% in Q3 and 47% for nine months, driven mainly by Marcellus production. Average effective sales price to EQT Corporation rose 4% in Q3 and 2% for nine months. Management attributed earnings growth primarily to higher volumes and increased midstream throughput, partly offset by higher depreciation, depletion and amortization (DD&A) and taxes.
- Q3 EQT Production operating income was $97.6 million, up from $38.5 million; nine-month operating income was $276.8 million, up from $115.3 million. Production DD&A rose 39% in Q3 and 45% for nine months, while exploration expense increased, including impairments of unproved acreage following lease expirations.
- Q3 EQT Midstream operating income was $78.5 million, up from $51.0 million; nine-month operating income was $225.0 million, up from $166.9 million. Higher gathering volumes and transmission revenues were important contributors. Nine-month storage, marketing and other revenue declined, mainly due to lower realized margins and reduced activity.
- Nine-month Distribution operating income increased to $58.4 million from $43.8 million, helped by colder winter weather and a favorable adjustment following completion of a regulatory gas-cost audit. Q3 Distribution recorded an operating loss of $0.1 million.
- Interest expense declined to $35.6 million in Q3 from $40.5 million, and to $110.7 million for nine months from $122.3 million, mainly following debt repayments and higher capitalized interest. The nine-month effective tax rate was 29.9%, down from 33.6%.
Outlook, transactions and risks
- Management expected 2013 total capital investment, excluding acquisitions, of approximately $1.6 billion: about $1.1 billion for well development and $400 million for midstream infrastructure. The plan included approximately 176 gross wells. 2013 production sales volumes were estimated at 366 Bcfe, about 42% above 2012, with NGL volumes of 4,875 Mbbls.
- Management expected Northeast natural-gas basis pricing to remain negative because of regional supply. It planned to fund the balance of 2013 capital spending with cash on hand and operating cash flow.
- The proposed sale of Equitable Gas and Homeworks to PNG Companies remained subject to Pennsylvania, West Virginia and certain FERC approvals. The company expected regulatory review to conclude by year-end 2013; the businesses had not been classified as held for sale at September 30.
- In July, Sunrise merged into Partnership subsidiary Equitrans. EQT received $507.5 million in cash plus Partnership units. EQT recognized no book gain but reported a taxable gain of approximately $475 million and estimated an approximately $57 million increase in 2013 cash taxes. A further approximately $110 million payment to EQT was contingent on a related transportation agreement becoming effective by December 31, 2014, subject to regulatory review.
- The Partnership’s July unit offering generated $529.4 million of net proceeds for the Partnership. Following the offering and Sunrise transaction, EQT retained a 44.6% Partnership interest; the larger public noncontrolling interest increased income attributable to noncontrolling holders.
- Commodity prices, negative regional basis, production and execution risks, regulatory approvals, derivative-counterparty credit, and potential collateral requirements were identified as relevant uncertainties. A downgrade below investment grade could increase collateral needs and borrowing costs. Management said ordinary-course legal and regulatory matters were not expected to materially affect financial position, results or liquidity; no material change to previously reported risk factors was disclosed.
- Hedges covered substantial expected production, with disclosed fixed-price and collar positions extending through 2015; derivative positions and fair values remain exposed to market movements. The filing cautions that interim results may not indicate full-year performance because of seasonality and commodity-price volatility.
Most important facts for investors to verify
- Whether production growth, pricing and realized hedge benefits support the earnings increase, and how higher DD&A and acreage impairments affect returns.
- Whether operating cash flow can sustainably fund the announced capital program, given nine-month capital expenditures exceeded operating cash flow.
- Timing and final terms of regulatory approvals for the Equitable Gas and Homeworks sale, and whether the contingent Sunrise consideration is earned.
- How the lower declared dividend compares with the prior-year amounts and the company’s current capital-allocation priorities.
- Debt covenant headroom, credit ratings and potential derivative collateral exposure; verify the filing’s debt and liquidity figures against the full statements and notes.