EQT Beats as Volume Grows

EQT Corporation (EQT - Analyst Report) has reported third quarter 2011 adjusted earnings of 45 cents, surpassing the Zacks Consensus Estimate of 43 cents. Results also compare favorably with 24 cents earned in the prior-year quarter. 

Operating revenue in the quarter grossed $336.7 million, showing a 30.8% year-over-year improvement. The revenue was also comfortably ahead of the Zacks Consensus Estimate $325 million.

The outperformances were driven by higher production (thanks to 243 million cubic feet equivalent/MMcfe per day average daily sales from Marcellus wells), midstream volumes and commodity prices.

Operating expense in the quarter crept up 19.3% year over year to $201.9 million. Nevertheless, operating income soared 53% year over year to $134.8 million.

Segment Details

EQT Production's third quarter operating revenue increased 57% year over year to $207.5 million, reflecting volume expansion, higher natural gas liquid prices and lower per unit midstream costs.

Total sales volume swelled 51% year over year to 558 million cubic feet equivalent per day (MMcfe/d) in the quarter, mainly on a substantial 252% increase in Marcellus Shale volume. The average wellhead sales price was $4.02 per thousand cubic feet equivalent (Mcfe); 5.5% above the year-ago level of $3.81 Mcfe.

Operating income improved 77.8% year over year to $98.9 million.

Under the EQT Midstream segment, net gathering revenues shot up 17% year over year to $63.3 million, owing to a significant growth in gathered volumes. Net transmission revenues dropped by $1.2 million to $18.3 million, mainly due to increased sale of capacity related to the Equitrans Marcellus expansion project.

Operating income increased 16.2% year over year to $41.7 million in the quarter.

EQT Distribution’s net operating revenue grew 11.6% year over year to $27 million in the quarter.

EQT generated an operating income of $2.5 million, up significantly from the year-ago level of $0.6 million.

Financials

The company’s operating cash flow was $189.9 million during the quarter, reflecting an improvement of 44% year over year.

EQT’s capital expenditure totaled 347.6 million in the quarter, with $255.2 million spent on EQT Production, $81.2 million on EQT Midstream and $10.1 million on EQT Distribution.

Guidance

The company expects the sales of produced natural gas to be 195 Bcfe for the year, which is the higher end of its previous expectation of 190-195 Bcfe. EQT reaffirmed 2012 sales of produced natural gas at more than 250 Bcfe.

Our Recommendation

We reiterate our long-term Outperform 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 a stellar Marcellus results, 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. Recently, EQT completed the sale of its Big Sandy Pipeline to Spectra Energy Partners, LP (SEP - Snapshot Report), a master limited partnership of Spectra Energy Corp. (SE - Analyst Report), for $390 million.

However, EQT lacks a geographically diversified asset base, as its resources are concentrated in the Appalachian Basin. Any potential disruptions 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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