EQT Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars. EQT’s midstream business was spun off in November 2018, so prior-period operating results are presented as discontinued operations; 2018 cash flows still include cash flows related to that business.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total operating revenue | $1.310 billion | $950.6 million | $2.453 billion | $2.263 billion |
| Income (loss) from continuing operations | $125.6 million | $(77.0) million | $316.3 million | $(1.656) billion |
| Net income (loss) attributable to EQT | $125.6 million | $17.8 million | $316.3 million | $(1.568) billion |
| Diluted EPS | $0.49 | $0.07 | $1.24 | $(5.92) |
| Cash from operating activities | Not reported separately for the quarter | Not reported separately for the quarter | $1.315 billion | $1.541 billion |
- Q2 operating income was $296.0 million, versus an operating loss of $114.7 million; reported operating margin was approximately 22.6% of revenue. The comparison is heavily affected by derivative fair-value changes and a 2018 impairment.
- Q2 revenue included a $407.6 million unrealized derivative gain, compared with a $53.9 million loss in Q2 2018. Six-month derivative gains were $275.6 million versus $8.7 million. These mark-to-market amounts can make reported revenue and earnings volatile and are not the same as cash settlements.
- Sales of natural gas, oil and NGLs fell 9.2% in Q2 to $900.5 million and 2.1% for the first half to $2.172 billion. Average realized price, including cash-settled derivatives, was $2.59/Mcfe in Q2 versus $2.81, and $2.88/Mcfe for the first half versus $3.06. Sales volumes increased 2.1% in Q2 and 4.7% in the first half; excluding divested assets, management reported increases of 8% and 10%, respectively.
- Q2 SG&A increased 36.9% to $86.2 million, primarily reflecting a $37.8 million increase in royalty and litigation reserves, net of settlements. For the first half, SG&A rose 31.5% to $135.2 million.
- First-half operating cash flow was $1.315 billion. Cash capital expenditures were $765.8 million, implying approximately $549 million of operating cash flow less cash capex. This is a simple derived measure, not a company-reported free-cash-flow measure. Cash used in investing was $764.6 million.
Balance sheet, debt and liquidity
- At June 30, 2019, cash was $30.2 million; current assets were $1.598 billion and current liabilities $1.533 billion, for working capital of approximately $64.8 million.
- Reported debt comprised $4.8 million current debt, $999.1 million term-loan borrowings, $3.886 billion of senior notes and $107.6 million payable to EQM; credit-facility borrowings were zero. These balances total approximately $5.0 billion. The $2.5 billion revolving credit facility expires in July 2022.
- On May 31, EQT borrowed $1.0 billion under a new unsecured term loan due May 31, 2021, using proceeds partly to repay $700 million of 8.125% notes that matured June 1 and to repay credit-facility borrowings. The term loan carried a 3.4% weighted-average rate at June 30.
- EQT reported compliance with its debt covenants, including a maximum debt-to-total-capitalization ratio of 65%. Ratings at July 25 were Moody’s Baa3, negative outlook; S&P BBB-, stable; and Fitch BBB-, stable. A downgrade could raise borrowing costs or collateral requirements.
- The company retained a 19.9% interest in Equitrans Midstream, valued at $997.3 million at June 30. It reported a $104.7 million Q2 unrealized loss on that investment and said it planned to dispose of the retained shares and use proceeds to reduce debt.
Changes, outlook and significant items
- The first-half 2019 profit contrasts with the large 2018 loss, which included a $2.3 billion first-quarter impairment and $118.1 million second-quarter impairment/loss on sale related to non-core Huron and Permian assets. Six-month comparisons also reflect the prior-year midstream business and other discontinued operations.
- Management reaffirmed 2019 capital expenditure guidance of $1.825–$1.925 billion and sales-volume guidance of 1,480–1,520 Bcfe. It said spending could be reduced depending on commodity prices and the development plan.
- Following the July 10 annual meeting and change in control, a substantially reconstituted board appointed Toby Z. Rice CEO. Management described a transformation plan focused on efficiency, well performance, technology, large-scale development projects and disciplined capital allocation. The company suspended its 2020-and-beyond outlook pending a revised plan expected within 60–90 days.
- EQT expected possible third-quarter severance and other compensation costs from leadership and organizational changes, and noted potential impairment of certain non-compete intangible assets. Future production growth will depend on project economics and commodity prices.
- Commodity-price volatility is a central risk: lower prices may reduce cash flow and development, and could lead to impairments or reserve revisions. EQT hedges production, but hedge fair values and collateral needs can change with prices and credit conditions.
- Legal matters include a $53.5 million royalty-class settlement paid into a settlement fund on July 8, 2019, with final court approval issued July 22. A separate West Virginia royalty and trespass case had a trial scheduled for September 2019. A Pennsylvania well-control penalty was still being negotiated; EQT expected a payment above $100,000 but did not expect a material financial effect.
- The board declared a regular $0.03-per-share dividend payable September 1, 2019. EQT adopted the new lease standard in 2019; operating lease liabilities were $60.2 million at June 30.
Key facts for investors to verify
- How much of reported earnings and revenue came from unrealized derivative gains, and how do realized prices and cash settlements compare?
- Whether 2019 capital spending and sales volumes remained within guidance, and what revised development plan and outlook management subsequently issued.
- Debt reduction progress, refinancing needs, credit ratings and any changes in covenant or derivative-collateral exposure.
- The costs and operational effects of the transformation, including severance, incentive-plan changes and any intangible-asset impairments.
- Final costs and outcomes of the royalty, trespass and well-control matters, and the timing and proceeds of any Equitrans Midstream share sale.