EQT Misses on Both Lines

EQT Corporation’s ( EQT - Analyst Report ) third quarter 2012 adjusted earnings decreased 46.7% year over year to 24 cents and missed the Zacks Consensus Estimate of 30 cents. The underperformance was primarily due to a 29% reduction in the average wellhead sales price.

Net operating revenue in the quarter was up almost 0.35% year over year to $329.7 million. However, reported revenue fell short of the Zacks Consensus Estimate $349.0 million.

Net operating expense in the quarter surged 25.8% year over year to $243.7 million.

Segment Details

EQT Production's third quarter operating revenue decreased 5.9% year over year to $195.3 million as realized price fell 29%.

Operating income dropped 61.2% year over year to $38.3 million.

Under the EQT Midstream segment, net gathering revenue surged 22% year over year to $77.0 million, owing to a 30% growth in gathered volumes. Net transmission revenues increased 45%. Net storage, marketing and other operating revenues averaged $5.4 million, representing a $7.0 million decline.

Operating income plunged 77% year over year to $51.0 million in the reported quarter.

EQT Distribution’s net operating revenue dropped 5.9% year over year to $25.4 million.
The segment generated an operating income of $0.7 million versus the year-ago level of $2.5 million.

Financials

The company’s operating cash flow was $176.2 million during the quarter, reflecting a decrease of 7.8% year over year.

EQT’s capital expenditure totaled $361.2 million in the quarter, with $255.2 million spent on EQT Production, $97.1 million on EQT Midstream and $8.2 million on EQT Distribution.


Guidance

The company has increased its full-year 2012 volume guidance to 257 Bcfe from its previous forecast of 250 to 255 Bcfe. The new full-year guidance is 32% higher than 2011. In addition, it expects 2013 volume of 335 Bcfe, which is 30% higher than the 2012 forecasted volumes.

Earlier, the company had estimated its overall capex to remain at $1,300 million for the year.

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 85% year over year in the third 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 - Snapshot Report ) − 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.