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EQT Corporation’s ( EQT - Analyst Report ) first quarter 2012 earnings declined 24.2% year over year to 50 cents and missed the Zacks Consensus Estimate of 61 cents. The earnings decline was primarily due to an 11% reduction in the average wellhead sales price to EQT Corporation as well as unseasonal warm weather in the Distribution segment’s service area.
Net operating revenue in the quarter was $365.9 million, exhibiting a 2.4% year-over-year improvement. However, reported revenue fell short of the Zacks Consensus Estimate $418 million.
Net operating expense in the quarter crept up 33.7% year over year to $213.7 million. Adjusted operating income dropped 10.8% year over year to $159.5 million.
EQT Production's first quarter operating revenue increased 13% year over year to $195.4 million, reflecting 26% year-over-year volume expansion, partially offset by lower average wellhead sales price.
Operating income dropped 27% year over year to $60.1 million.
Under the EQT Midstream segment, net gathering revenues surged 17% year over year to $69.3 million, owing to a significant 21% growth in gathered volumes. Net transmission revenues dropped 13% to $22.9 million, mainly due to the sale of Big Sandy. This was somewhat mitigated by improved sales related to the Equitrans Marcellus expansion project.
Operating income increased 10.4% year over year to $56.1 million in the reported quarter.
EQT Distribution’s net operating revenue dropped 19% year over year to $63.4 million.
The segment generated an operating income of $36.8 million, down from the year-ago level of $53.4 million.
The company’s operating cash flow was $227.1 million during the quarter, reflecting a decrease of 9% year over year.
EQT’s capital expenditure totaled $269.6 million in the quarter, with $183.7 million spent on EQT Production, $79.6 million on EQT Midstream and $5.5 million on EQT Distribution.
The company expects produced natural gas sales between 250 Bcfe and 255 Bcfe for the year, which is 30% higher than 2011. The expectation was reduced by 5 Bcfe from the previous forecast mainly to reflect the company’s decision to suspend drilling in the Huron play, in the current price environment.
The company also lowered its 2012 capex guidance by $100 million to $1,365 million, as its service costs to complete wells declined by 9% per well due to the lower natural gas prices.
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, 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. During 2012, the Equitrans expansion project is likely to augment transmission capacity by 450 MMcf per day.
Again, the company plans to sell a limited partner interest in the master limited partnership (MLP) that would own portions of the assets of Equitrans, L.P., EQT’s interstate pipeline subsidiary. After the completion of the IPO, EQT would own 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.
Proceeds of the IPO would 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.
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.
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