EQT Corporation — Q3 2022 Form 10-Q
Business context and reporting period. EQT is an Appalachian natural gas producer. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Unless otherwise stated, amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales of natural gas, NGLs and oil | $3.694 billion | $1.784 billion | $9.546 billion | $3.993 billion |
| GAAP total operating revenues | $2.069 billion | $(1.465) billion | $4.018 billion | $(775) million |
| Operating income (loss) | $925 million | $(2.610) billion | $398 million | $(3.818) billion |
| Net income (loss) attributable to EQT | $684 million | $(1.977) billion | $59 million | $(2.947) billion |
| Diluted EPS | $1.69 | $(5.54) | $0.16 | $(9.67) |
| Net cash provided by operating activities | Not presented by quarter | $2.402 billion | $492 million |
Revenue and margins. GAAP operating revenue includes large mark-to-market derivative losses, so it does not track commodity sales alone. Q3 derivative loss was $1.627 billion; nine-month loss was $5.550 billion. EQT’s non-GAAP adjusted operating revenues, which include cash-settled derivative effects but exclude pre-settlement fair-value changes and marketing revenue, were $1.661 billion in Q3 and $4.842 billion for nine months. Average realized price including cash-settled derivatives was $3.41/Mcfe in Q3 and $3.27/Mcfe for nine months. The filing does not provide a single unadjusted operating-margin measure that captures the effects of these derivatives.
Production and costs. Q3 sales volume was 487.7 Bcfe, down 1.5% year over year; nine-month volume was 1,481.5 Bcfe, up 11.3%. Q3 transportation and processing expense was $541 million, production expense $82 million, and depreciation and depletion $419 million. Nine-month transportation and processing expense was $1.597 billion, production expense $235 million, and depreciation and depletion $1.270 billion. Higher gathering and transmission costs, lease operating costs, production taxes and SG&A were noted; inflation and lower Q3 volume affected per-unit costs.
Cash flow, capital spending and liquidity. Nine-month operating cash flow was $2.402 billion, versus $492 million a year earlier. Cash capital expenditures were $1.047 billion, versus $707 million. Investing cash use was $1.017 billion; financing cash use was $1.411 billion, including debt repayments, $149 million of dividends and $270 million of share repurchases. Cash and equivalents were $88 million at September 30, 2022, compared with $114 million at year-end 2021. Current assets were $3.902 billion and current liabilities $6.638 billion; derivative balances materially affect both totals.
Total debt carrying value was $4.769 billion, including $422 million current and $4.347 billion long-term, versus $5.591 billion at year-end 2021. The $2.5 billion credit facility was extended to June 2027, with two optional one-year extensions subject to lender approval. EQT said operating cash flow and credit-facility availability should meet expected cash needs for at least 12 months; it was in compliance with debt covenants at quarter-end.
Material changes versus prior comparable periods
- Q3 returned to GAAP profitability from a substantial year-earlier loss, mainly reflecting higher commodity sales and a smaller derivative loss. Sales volumes were slightly lower.
- For the first nine months, higher commodity sales and volume supported the swing to modest net income, but derivative losses, the contract-asset impairment, debt-extinguishment losses and reduced tax benefits limited earnings.
- Nine-month operating cash flow increased substantially, while capital expenditures also rose. EQT used cash for debt reduction, dividends and share repurchases.
- Q3 2022 included $1.69 diluted EPS versus a loss per share in the prior-year quarter. The year-to-date result was only $0.16 diluted EPS.
Outlook, transactions and risks
- 2022 outlook: EQT expected total capital expenditures of $1.400–$1.475 billion and sales volume of 1,925–1,975 Bcfe, excluding the pending Tug Hill and XcL Midstream assets. Both are management expectations, not guarantees.
- Acquisition: The company agreed to acquire Tug Hill upstream assets and XcL Midstream gathering and processing assets for approximately $2.6 billion cash plus 55 million EQT shares, subject to customary adjustments and regulatory approvals. The expected close was Q4 2022. EQT had placed $150 million in escrow. On October 4, after quarter-end, it issued $1 billion of senior notes intended to help fund the transaction; failure to complete could require redemption of those notes at 101% of principal under specified terms.
- Hedging and commodity exposure: Derivatives are not designated as cash-flow hedges, so fair-value changes flow through operating revenue. Nine-month cash settlements paid were $4.673 billion. Hedging protects cash flows but can limit participation in higher prices; price changes can also affect margin requirements and liquidity. At September 30, derivative liabilities were $4.215 billion gross, and EQT had deposited $143 million against credit-related collateral requirements.
- Unusual item: EQT recorded a $184.9 million impairment of the Equitrans gathering-contract asset in the first quarter, citing uncertainty about Mountain Valley Pipeline timing. It exercised a cash-payment option in Q3 and received approximately $196 million on October 4, 2022; the remaining contract asset was $29 million at September 30.
- Other risks and contingencies: Management cited commodity-price volatility, supply-chain constraints, inflation, operational and permitting risks, reliance on midstream services, acquisition integration and regulatory approval risks. Pending legal and regulatory matters were not expected by management to materially affect financial condition, results or liquidity; outcomes remain uncertain. EQT reported no material changes to previously disclosed risks apart from acquisition-related risks.
- Taxes: The nine-month effective tax rate was a benefit of 8.5%, affected principally by a Pennsylvania tax-rate change and partly offset by nondeductible debt-repurchase premiums. EQT was evaluating the Inflation Reduction Act’s tax and share-repurchase provisions.
Important facts for investors to verify
- Whether the Tug Hill and XcL Midstream acquisition closed on the expected terms and how its cash and share consideration was funded.
- How actual production, capital spending and operating costs compared with the 2022 outlook, particularly given reported supply-chain and inflationary pressures.
- The cash-flow and earnings effects of hedge settlements and open derivative positions, including potential collateral calls and the company’s exposure to commodity prices.
- Debt, liquidity and covenant headroom after the acquisition financing and subsequent debt issuances.
- Progress on Mountain Valley Pipeline timing and any further changes to the impaired gathering-contract asset or related cash flows.
- The effect of state tax changes and the Inflation Reduction Act on future tax expense and share repurchases.