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Mixed 4Q for EQT, Lowers Forecast

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EQT Corporation’s (EQT - Free Report) fourth quarter 2011 earnings rose 22.4% year over year to 60 cents, surpassing the Zacks Consensus Estimate of 55 cents. The outperformance was driven by higher production volume, which averaged 53 billion cubic feet equivalent/Bcfe in the quarter.

Net operating revenue in the quarter stood at $369.9 million, exhibiting a 20% year-over-year improvement, mainly attributable to higher production and gathering and transmission volumes. However, reported revenue fell short of the Zacks Consensus Estimate $384 million due to lower marketing and other net revenues and higher costs allied with increased volumes.

Net operating expense in the quarter crept up 13.2% year over year to $197.2 million. Nevertheless, operating income soared 28.3% year over year to $172.6 million.

Segment Details

EQT Production's fourth quarter operating revenue increased a significant 50% year over year to $213.9 million, reflecting 37% year-over-year volume expansion and higher average wellhead sales price.

Operating income shot up 97.6% year over year to $106.1 million.

Under the EQT Midstream segment, net gathering revenues surged 13% year over year to $66.1 million, owing to a significant 30% growth in gathered volumes. Net transmission revenues dropped 16% to $21.1 million, mainly due to the sale of Big Sandy. This positive was partly negated by increased sales associated with the Equitrans Marcellus expansion project.

Operating income increased 9% year over year to $53.1 million in the reported quarter.

EQT Distribution’s net operating revenue dropped 13% year over year to $49.8 million in the quarter.

The segment generated an operating income of $22.1 million, down from the year-ago level of $30.8 million.


The company’s operating cash flow was $242.6 million during the quarter, reflecting a 24.9% year-over-year improvement.

EQT’s capital expenditure totaled 381.7 million in the quarter, with $287.8 million spent on EQT Production, $86.1 million on EQT Midstream and $6.1 million on EQT Distribution.


The company expects produced natural gas sales between 250 and 255 Bcfe for the year, which is 30% higher than in 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 $135 million to $1,465 million.

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. EQT’s year-end 2011 proved natural gas reserves increased 2.8% year over year to 5.365 trillion cubic feet equivalent.

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 the year, EQT completed the sale of its Big Sandy Pipeline to Spectra Energy Partners, LP (SEP - Free Report) , a master limited partnership of Spectra Energy Corp. (SE - Free Report) , for $390 million.

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 in turn will 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 the 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 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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