EQT Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. EQT operates through EQT Production and EQT Midstream, with the latter including consolidated EQT Midstream Partners, LP (the Partnership). Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total operating revenues, including derivative gains/losses | $708.8 million | $661.6 million |
| Operating income | $314.8 million | $356.8 million |
| Income from continuing operations attributable to EQT | $173.4 million; diluted EPS $1.14 | $192.3 million; diluted EPS $1.26 |
| Consolidated net income | $221.2 million | $210.9 million |
| Cash provided by operating activities | $453.1 million | $475.9 million |
| Capital expenditures from continuing operations | $627.7 million | $480.0 million |
| Cash and cash equivalents, March 31 | $1.784 billion | $1.077 billion at December 31, 2014 |
| Debt and short-term loans, March 31 | $3.284 billion | $2.989 billion at December 31, 2014 |
- Operating cash flow less capital expenditures was approximately negative $174.6 million; including the $54.2 million Mountain Valley Pipeline contribution, net cash used in investing was $681.9 million.
- Interest expense was $37.2 million, up from $32.0 million. The effective income tax rate fell to 20.6% from 35.5%, largely because a greater share of Partnership earnings was allocated to public limited partners and state tax expense was lower.
- EQT had no borrowings under its $1.5 billion revolving facility. The Partnership had $299 million drawn on its $750 million facility. Both were in compliance with debt covenants. EQT’s senior debt ratings were investment grade; the Partnership’s Moody’s rating was Ba1, below investment grade.
Material changes and operating trends
- Net income attributable to EQT declined $18.9 million. Management attributed the decrease mainly to a 33% lower realized price, higher expenses, and increased income attributable to noncontrolling interests, partly offset by production growth, derivative gains, higher midstream reservation revenue, and lower taxes.
- Production sales volume rose 36.8% to 145.2 Bcfe, while the realized price to EQT Corporation fell 32.8% to $3.70/Mcfe. EQT Production operating income decreased 33.0% to $185.8 million; segment expenses rose 34.5%, including higher DD&A, transportation and processing, exploration, and SG&A.
- EQT Midstream operating income increased 56.2% to $129.7 million. Gathering and transmission reservation revenues and volumes increased; gathering and transmission net revenues rose 44% and 38%, respectively.
- Unhedged commodity exposure remained material: EQT does not currently hedge oil or NGL exposure. Natural gas derivative gains not designated as hedges were $43.6 million, versus a $9.4 million loss in Q1 2014. These fair-value changes affect reported earnings and are not equivalent to cash settlements.
Outlook, risks, and unusual items
- Management reduced 2015 capital investment guidance, excluding acquisitions, to approximately $2.4 billion from $2.55 billion, citing lower expected drilling and completion costs and a low commodity-price environment. The plan includes approximately $1.7 billion for Production and $0.7 billion for midstream infrastructure.
- Production guidance was 585–600 Bcfe of sales volume, approximately 24% growth, and 9–10 million barrels of NGLs. The company planned about 188 gross wells and suspended Permian Basin drilling in Q1. Planned funding sources included cash, operating cash flow, midstream asset sales to the Partnership, Partnership capital raises, and a proposed EQT GP Holdings IPO.
- At April 22, 2015, disclosed natural gas hedges and fixed-price sales included 234 Bcf for the remainder of 2015 at an average $4.00/Mcf, 167 Bcf for 2016 at $4.14/Mcf, and 31 Bcf for 2017 at $4.27/Mcf, plus 30 Bcf of 2015 collars. These are not protection for all production.
- In March, EQT contributed its Northern West Virginia Marcellus gathering system to the Partnership for $925.7 million in total consideration, including approximately $873.2 million cash and Partnership units. The Partnership also raised $696.7 million net through a public unit offering. EQT assigned its Mountain Valley Pipeline interest to the Partnership for reimbursement of approximately $54.2 million in contributions; the venture is accounted for as an equity-method investment.
- Effective December 31, 2014, EQT discontinued cash-flow hedge accounting for commodity derivatives. Q1 fair-value changes therefore flowed through earnings; accumulated hedge gains remain in other comprehensive income and are reclassified as forecast transactions occur. The company estimated $124.9 million of net gains would be recognized in earnings over the following 12 months.
- Exploration expense included increased impairment of unproved acreage from lease expirations; SG&A included drilling-program reduction charges, a Utica proved-property impairment, and higher personnel costs. Ordinary legal and regulatory matters were not expected by management to materially affect the company. EQT paid a $30,000 penalty after pleading no contest to six strict-liability misdemeanors related to a 2012 water release; a separate Pennsylvania DEP penalty action remained pending, with EQT disputing the assessment.
- Commodity prices and basis, drilling and completion costs, project execution, access to capital, counterparty performance, and credit ratings remain key risks. A downgrade below investment grade could increase borrowing costs and derivative collateral requirements. Management reported no material change in previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings and future cash flow depends on derivative fair-value movements, hedge settlements, and the timing of reclassification from accumulated OCI.
- Whether realized gas prices, Appalachian basis differentials, and NGL prices support the production and capital-spending outlook.
- Execution and funding of the 2015 drilling and infrastructure plan, including the proposed EQT GP Holdings IPO and further Partnership asset transactions or capital raises.
- Partnership borrowing, covenant and credit-rating status, and the effect of public ownership on income attributable to EQT and noncontrolling interests.
- Resolution and potential penalties in the remaining Pennsylvania DEP matter, and the eventual impact of the water-release proceedings.
- The filing notes that Q1 2014 operating cash flow and investing cash flow were revised by approximately $12.2 million each to correct the presentation of accrued capital expenditures; the correction did not affect income.