EQT Corporation — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. EQT operates natural gas, oil and NGL production, alongside gathering, transmission and storage businesses; EQT consolidates EQT Midstream Partners (EQM) and EQT GP Holdings (EQGP), including income attributable to their public investors.
Key financial results
- Revenue: Q2 operating revenue was $127.5 million, down from $439.6 million; first-half revenue was $672.6 million, down from $1.154 billion. The comparisons were heavily affected by derivative fair-value losses: $234.7 million in Q2 and $125.7 million in the first half, versus gains of $4.3 million and $47.9 million, respectively, in 2015.
- Earnings: Q2 net loss attributable to EQT was $258.6 million ($1.55 per diluted share), versus net income of $5.5 million ($0.04 per share). First-half attributable net loss was $253.0 million ($1.56 per diluted share), versus income of $179.0 million ($1.17 per diluted share). Consolidated operating loss was $324.5 million for Q2 and $197.3 million for the first half.
- Production and realized prices: First-half production sales volume rose 24.7% to 364.5 Bcfe, while average realized price fell 30.3% to $2.37/Mcfe. Q2 volume rose 25.5% to 184.5 Bcfe, while realized price fell 23.3% to $2.11/Mcfe. Management attributed the price decline principally to lower natural gas and NGL prices.
- Segments: First-half EQT Production recorded a $455.3 million operating loss, compared with $119.0 million operating income in 2015. EQT Midstream operating income increased 12.0% to $266.4 million, supported by higher gathering and transmission revenues.
- Cash flow and investment: First-half operating cash flow was $493.4 million, down from $656.0 million. Investing cash outflow was $859.9 million, including $821.7 million of capital expenditures; financing cash inflow was $1.022 billion. Cash and equivalents ended at $2.257 billion, versus $1.601 billion at year-end 2015.
- Debt and liquidity: Long-term debt was $2.796 billion and EQT had no borrowings under its $1.5 billion revolving facility. EQM also had no borrowings under its $750 million facility at quarter-end. Current assets were $2.614 billion and current liabilities $527.3 million. EQT reported compliance with debt covenants.
- Shareholder capital: EQT raised $1.226 billion net from common-stock offerings in the first half, issuing 19.55 million shares. Quarterly dividends declared were $0.03 per share.
Material changes and unusual items
- Operating results deteriorated sharply year over year, driven by weaker realized commodity prices, derivative mark-to-market losses, and higher operating expenses; production volumes nevertheless grew.
- The first-half tax benefit was $164.9 million, with a 64.1% effective tax rate. The filing attributes the rate in part to income allocated to EQGP and EQM public limited partners, for which EQT does not record tax expense. The 2015 comparison included a $35.7 million tax benefit related to IRS guidance on the 2013 sale of Equitable Gas.
- EQT completed termination of its employee retirement plan in June, recording a $9.4 million pension settlement charge and making a $5.4 million cash contribution to fully fund the plan.
- In July, after quarter-end, EQT acquired approximately 62,500 net acres from Statoil for about $407 million, subject to purchase-price adjustments. The acreage included approximately 50 MMcfe/day of current production and drilling rights on an estimated 53,000 undeveloped acres prospective for the deep Utica. Purchase-price allocation was not yet available.
Outlook, risks and contingencies
- Management forecast 2016 capital investment of approximately $1.8 billion, excluding acquisitions, including approximately $800 million for midstream infrastructure. The production capital-expenditure forecast, excluding acquisitions and EQM investment, remained $1.0 billion.
- Management expected 2016 sales volumes of 730–740 Bcfe, approximately 22% production-volume growth, and NGL volumes of 11,000–11,500 Mbbls. It planned 140 gross wells for the year and an accelerated second-half drilling program.
- Management said prolonged low gas and NGL prices could weaken cash flow, slow development, reduce reserves, or cause material non-cash impairments. Huron assets had a carrying value of approximately $3 billion; management warned that lower five-year forward prices could trigger a significant impairment.
- The Mountain Valley Pipeline remained subject to FERC approval. The joint venture anticipated certification and construction commencement in mid-2017, with service expected in Q4 2018. EQM had issued a $91 million performance guarantee; its maximum financial-statement exposure related to the venture was approximately $227 million.
- EQT reported investment-grade ratings of BBB (S&P), Baa3 (Moody’s) and BBB- (Fitch), each with a stable outlook. EQM’s Moody’s rating was Ba1, below investment grade; rating changes could affect borrowing costs, market access and collateral requirements.
- Legal and regulatory matters were pending or threatened. Management believed their ultimate outcome would not materially affect financial position, results or liquidity, while noting that outcomes could not be predicted with certainty.
Investor verification priorities
- Assess how much of reported earnings volatility reflects derivative fair-value accounting versus realized cash settlements and underlying production economics.
- Check whether production growth and the stated 2016 volume targets are achieved, and how commodity prices and Appalachian basis affect realized pricing and operating cash flow.
- Monitor capital spending, cash usage, equity dilution and funding of the Statoil acquisition and midstream program.
- Track Huron asset impairment indicators and the status, cost, permitting, guarantees and timing of the Mountain Valley Pipeline.
- Review the acquisition’s final purchase-price allocation and subsequent financial contribution when disclosed.