EQT Corp. Lowered to Neutral

We have downgraded our recommendation for  EQT Corporation (EQT - Analyst Report) to Neutral from Outperform, reflecting the company’s susceptibility to the erratic energy sector fundamentals, lack of a well diversified asset portfolio and a dull dividend yield.

Based in Pittsburgh, Pennsylvania, 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 most of its resources concentrated in the Appalachian Basin, we believe that EQT has a weak geographically spread asset base. Hence, any disruption in the region will adversely affect the company’s results.

Additionally, EQT’s various multilateral drilling programs across its oil and gas fields face operational headwinds, such as rising service costs, completion delays and equipment failures.

However, negating these negative aspects, EQT performed well in the third quarter of 2011. The company’s adjusted earnings of 45 cents surpassed the Zacks Consensus Estimate of 43 cents and were significantly ahead of the prior-year quarter figure of 24 cents.

Operating revenue in the quarter stood at $336.7 million, exhibiting a 30.8% year-over-year improvement. The revenue also surpassed the Zacks Consensus Estimate of $325 million, driven by higher production (243 million cubic feet equivalent/MMcfe per day average daily sales from Marcellus wells), midstream volumes and commodity prices.

Apart from the Appalachian basin, EQT remains well positioned in the Marcellus Shale given its high quality large acreage position as well as its low royalty burden. With an increasing reserve structure and a projected higher number of wells to be drilled in the coming five years, we believe that the company exhibits industry-leading organic growth momentum.                   

Reflecting EQT’s long-term growth prospects, management raised its projection for 2011 natural gas production sales volume to 195 billion cubic feet equivalents (Bcfe), which is at the higher end of its previous expectation of 190–195 Bcfe.

The company also expects volume to be more than 250 Bcfe in 2012. We expect EQT to exceed its guidance, aided by the low-risk and high-growth rate drilling locations in the fertile fields.

We also support EQT’s strategy of divesting the expensive yet less profitable assets and concentrate on more cost-effective and lucrative investment opportunities. 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, despite these positives, we prefer to remain on the sidelines at this point as we do not see any significant price upside for EQT stock in the near-to-medium term. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

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