EQT Lags Consensus on Lower Prices

Zacks

EQT Corporation’s (EQT) second quarter 2012 adjusted earnings decreased 45.1% year over year to 28 cents and missed the Zacks Consensus Estimate of 30 cents. The underperformance was primarily due to a 32% reduction in the average wellhead sales price to EQT Corporation.

Net operating revenue in the quarter was $298.1 million, representing an almost 9.0% year-over-year decline. Moreover, reported revenue fell short of the Zacks Consensus Estimate $339.0 million.

Net operating expense in the quarter crept up 24.3% year over year to $216.7 million.

Segment Details

EQT Production's second quarter operating revenue decreased 19.4% year over year to $158.6 million as realized price fell 37%.

Operating income dropped 82.3% year over year to $17.7 million.

Under the EQT Midstream segment, net gathering revenue surged 18% year over year to $72.1 million, owing to a 24% growth in gathered volumes. Net transmission revenues increased 31%. Net storage, marketing and other operating revenues averaged $14.7 million, representing a $2.7 million boost.

Operating income increased 14.4% year over year to $59.8 million in the reported quarter.

EQT Distribution’s net operating revenue dropped 5.2% year over year to $31.2 million.

The segment generated an operating income of $6.4 million, down from the year-ago level of $8.9 million.

Financials

The company’s operating cash flow was $160.1 million during the quarter, reflecting a decrease of 14.4% year over year.

EQT’s capital expenditure totaled $392.7 million in the quarter, with $264.9 million spent on EQT Production, $119.9 million on EQT Midstream and $7.4 million on EQT Distribution.

Guidance

The company reaffirmed its full-year 2012 volume guidance of 250 and 255 Bcfe, which is 30% higher than 2011. In addition, it expects third quarter volume of 66 Bcfe.

The company now expects its overall capex to remain $1,300 million for the year as compared with the previous expectation of $1,365 million. Moreover, EQT Production decreased its 2012 capex budget by $65 million to $900 million.

Our Recommendation

We reiterate our long-term Neutral recommendation for EQT.

EQT Corporation is an integrated energy company with an emphasis on natural gas supply activities in the Appalachian area, including production and gathering, natural gas distribution and transmission and energy efficiency solutions, primarily in the eastern and western coastal regions of the United States.

With an increasing reserve structure and stellar Marcellus results (Marcellus sales volumes were up 74.4% year over year in the second quarter), we believe that the company exhibits industry-leading organic growth momentum.

Moreover, management’s continuous efforts to derive value by monetizing midstream assets will likely accelerate exploration and production growth. The company also maintained its goal to drill 132 Marcellus wells this year.

Recently, EQT also formed a master limited partnership (MLP) − EQT Midstream Partners, L.P. (EQM) − that would own selective interstate pipeline assets. EQT Midstream Partners completed its IPO of 14,375,000 common units at $21.00 per common unit.

Following the IPO, EQT obtained $232 million cash, and holds a 57.4% limited partner interest in the partnership and a 2% general partner interest.

Proceeds of the IPO will likely to be used to finance further acceleration of EQT’s Marcellus development. The MLP is anticipated to focus on providing transmission and gathering services to producers in the Marcellus Shale, including EQT Production Company. This will help the company to focus on other areas of the business.

Again, recently, the company sold its limited partner interest in the MLP to own portions of the assets of Equitrans, L.P., EQT’s interstate pipeline subsidiary. Hence, EQT now owns the general partner of the MLP that will in turn provide the company with incentive distribution rights and a substantial portion of the MLP's common units.

However, EQT lacks a geographically diversified asset base, as its resources are concentrated in the Appalachian Basin. Any potential disruption in the region will adversely affect the company’s results.

The company holds a Zacks #3 Rank, which translates to a short-term Hold rating.

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