A prudent investment decision involves picking of stocks with solid prospects and selling those that carry risks. At times, it is rational to retain certain stocks that have enough potential but are weighed down by tough market conditions.
Here we focus on EQT Corporation (EQT - Free Report) , which is expected to register solid growth in the near future. Notably, the natural gas production company did not miss the Zacks Consensus Estimate for earnings in the trailing four quarters, with the average positive surprise being 88.3%. Moreover, it has an expected earnings growth rate of 10% for the next five years.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining in your portfolio at the moment.
EQT Corp is a pure-play Appalachian explorer that produces the largest volume of natural gas in the United States. The company employs advanced technologies like horizontal drilling for operating in the prolific gas basin. With huge production volumes of natural gas, it is well placed to capitalize on the mounting demand for clean energy in the United States.
The company has a huge inventory of drilling locations in the core Appalachian Basin that could provide output to the explorer for the next 15-20 years. Notably, the company expects its premium asset base to contribute nearly $3 billion to adjusted free cash flow over the next five years.
The company projects total 2019 production in the range of 1,480-1,520 billion cubic feet equivalent (Bcfe). The upper limit of the band is much higher than the 2018 level of 1,488 Bcfe. This will be supported by its humongous proved developed reserves of 11.6 trillion cubic feet equivalent.
EQT Corp, which has strong financials, successfully lowered net debt by $539 million through first-half 2019. Notably, the company’s balance sheet is significantly less levered than the industry it belongs to.
Moreover, in terms of the EV/EBITDA ratio — one of the best multiples for valuing oil and gas companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing company or industry — EQT Corp seems undervalued. The company currently has a trailing 12-month EV/EBITDA ratio of 3.1, below the broader industry average of 6.2.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
The pricing scenario of natural gas has worsened since the beginning of 2019. Being a leading natural gas producer, the weak commodity price is hurting the company’s business.
EQT Corp’s total operating expenses are on the rise. Through 2018, the company’s total operating expenses had skyrocketed 171%, in turn hurting the bottom line. Moreover, for 2019, gathering expenses per thousand cubic feet equivalent are expected in the range of 54-56 cents, whose midpoint is higher than 54 cents in 2018. If this trend continues, its profits might get eroded.
The pipeline bottleneck problem in the Appalachian basin has created a barrier for the upstream energy player, preventing it from transporting more of its produced natural gas to the key markets.
Moreover, the company’s lack of geographic diversification is concerning, since its entire asset base is located in the Appalachian Basin. As such, it is more vulnerable to basin-specific delays and interruptions in production from wells, which can potentially hamper growth.
To Sum Up
Despite significant prospects, low gas prices and rising costs are affecting the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are Matrix Service Company (MTRX - Free Report) , Dril-Quip, Inc. (DRQ - Free Report) and Pembina Pipeline Corp. (PBA - Free Report) . While Matrix Service sports a Zacks Rank #1 (Strong Buy), Dril-Quip and Pembina hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Matrix Service’s 2019 earnings per share are expected to rise 58.4% year over year.
Dril-Quip’s 2019 earnings per share are expected to rise 136.5% year over year.
Pembina’s 2019 earnings per share are expected to rise 21.5% year over year.
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