Board authorizes $500 million share repurchase program
PITTSBURGH–(BUSINESS WIRE)–EQT Corporation (NYSE: EQT) today announced financial and operational performance results for the second quarter 2018.
- Increase of 116% in net cash provided by operating activities
- Increase of 128% in adjusted operating cash flow
- Decrease of 20% in Production’s per unit cash operating costs
- Approved a 19.9% retention of SpinCo stock
- Authorized a $500 million stock buyback program
- Completed midstream streamlining transactions
- Announced and completed the sale of Huron assets
- Completed sale of Permian assets
|Financial Results||Three Months Ended|
|($ millions, except EPS)||2018||2017||Difference|
|Net income attributable to EQT||$||17.8||$||41.1||$||(23.3||)|
|Adjusted net income attributable to EQT (a non-GAAP measure)||$||116.3||$||11.4||$||104.9|
|Diluted earnings per share (EPS)||$||0.07||$||0.24||$||(0.17||)|
|Adjusted EPS (a non-GAAP measure)||$||0.44||$||0.07||$||0.37|
|Net cash provided by operating activities||$||636.7||$||294.2||$||342.5|
|Adjusted operating cash flow attributable to EQT (a non-GAAP measure)||$||526.1||$||230.5||$||295.6|
Net income attributable to EQT for the second quarter 2018 decreased due to higher operating costs, including impairments of long-lived assets and leases, transaction-related expenses, higher interest expense, and losses on derivatives not designated as hedges – all of which more-than-offset higher revenue that resulted from an 83% sales volume increase, lower corporate income taxes, and higher pipeline, water, and net marketing services revenue. Net cash provided by operating activities was higher as a result of an increase in revenues, partly offset by an increase in cash operating costs.
Adjusted net income attributable to EQT, which excludes non-cash derivatives, asset and lease impairments, and transaction-related expenses, increased $104.9 million for the second quarter 2018. Adjusted operating cash flow attributable to EQT, which includes transaction-related expenses and excludes the non-controlling interests in EQT Midstream Partners, LP (EQM) and Rice Midstream Partners LP (RMP), increased 128%.
The Non-GAAP Disclosures section of this news release provides reconciliations of non-GAAP financial measures to the most comparable GAAP financial measure, as well as important disclosures regarding certain projected non-GAAP financial measures.
RESULTS BY BUSINESS
|Financial Results||Three Months Ended|
|($ millions, except average realized price)||2018||2017||Difference|
|Sales volume (Bcfe)||362.5||198.1||164.4|
|Pipeline and net marketing services||$||13.2||$||8.1||$||5.1|
|Adjusted operating revenue (a non-GAAP measure)||$||1,017.1||$||566.1||$||451.0|
|Operating (loss) income||$||(79.8||)||$||52.9||$||(132.7||)|
|Adjusted operating income (loss) (a non-GAAP measure)||$||137.4||$||(1.8||)||$||139.2|
|Average realized price ($/Mcfe)||$||2.81||$||2.86||$||(0.05||)|
The $132.7 million decrease in operating income in the quarter was primarily due to higher operating expenses, which included an impairment charge of $118.1 million associated with non-core production assets and retained pipeline assets in the Huron and Permian plays; a loss on derivatives not designated as hedges in the current quarter; and a lower average realized price, partially offset by revenue from increased sales volume of produced natural gas. The increase in sales of natural gas, oil, and NGLs was primarily a result of the acquisition of Rice Energy Inc. (Rice).
The decrease in the average realized price for the quarter was primarily due to a decrease in the average NYMEX natural gas price, partly offset by an improvement in the average natural gas differential and higher liquids prices.
Operating expenses for the quarter were $452.3 million higher than the same period last year. In addition to the impairment, depreciation and depletion expense increased $155.6 million; gathering expense increased $83.8 million; and transmission expense increased $70.9 million; primarily due to increased produced volumes. Exploration expense increased $17.7 million, primarily due to an increase in the number of leases expiring in the second quarter of 2018. Per unit cash operating expenses decreased 20%.
Adjusted operating income for the quarter, which excludes impairment charges and non-cash derivatives, was $139.2 million higher, primarily due to higher revenue, partially offset by higher expenses.
EQT MIDSTREAM PARTNERS, LP (EQM)
The second quarter 2018 financial results for EQM were released today and provide operational results, as well as updates on significant midstream projects under development by EQM. EQM’s news release is available at www.eqtmidstreampartners.com. The summary results are:
EQM Gathering Financial Results
|Three Months Ended|
Operating income increased 46% in the second quarter 2018 compared to second quarter 2017, primarily driven by higher revenue from the acquisition of EQT’s retained midstream assets and production development in the Marcellus Shale partly offset by higher operating costs. Revenue from firm reservation fees represented 62% of total revenue during the quarter.
Operating expenses were $30.3 million higher due to additional assets acquired and placed in-service.
EQM Transmission Financial Results
|Three Months Ended|
The increase in operating income in the second quarter 2018 compared to second quarter 2017 was primarily due to higher contractual rates on existing contracts with third parties and affiliates. Revenue from firm reservation fees represented 92% of total revenue during the quarter.
Operating expenses were $1.7 million higher, primarily as a result of increased SG&A expense.
Mountain Valley Pipeline Update
Mountain Valley Pipeline, LLC (MVP JV) has modified its construction schedule for the Mountain Valley Pipeline (MVP) and now anticipates a first quarter 2019 in-service date. The 303-mile pipeline is estimated to cost $3.5 – $3.7 billion, with EQM funding its 45.5% proportional share.
SpinCo Share Retention
EQT plans to retain 19.9% of the shares of the new midstream company (SpinCo) that will be spun-off to EQT shareholders. EQT currently plans to dispose its retained SpinCo shares after the spin-off. The proceeds from the sale of SpinCo shares will be used to reduce EQT’s post-spin debt and to fund the stock buyback program.
EQT Stock Buyback
During the second quarter 2018, EQT repurchased 700,000 shares of EQT common stock at an average price of $55.25. The Board authorized an additional $500 million EQT stock buyback program, effective immediately.
The Company completed its previously announced plan to streamline its midstream structure, including:
- On July 23, 2018, EQM acquired Rice Midstream Partners LP (RMP) in a unit-for-unit merger at an exchange ratio of 0.3319x. EQM also repaid $260 million of RMP debt.
- On June 25, 2018, EQM completed its offering of $2.5 billion in aggregate principal of three tranches of senior notes.
- On May 22, 2018, EQT sold all of its RMP incentive distribution rights to EQT GP Holdings, LP (EQGP) for 36.3 million EQGP common units.
- On May 22, 2018, EQM acquired EQT’s retained midstream assets for $1.15 billion in cash and 5.9 million EQM common units (May 2018 Acquisition).
- On May 1, 2018, EQM acquired Gulfport Energy Corporation’s 25% ownership interest in the Strike Force Gathering System for $175 million in cash.
As a result of the drop down of retained midstream assets to EQM, EQT recast its segment information to retrospectively reflect the pre-acquisition results as if the entities were owned by EQM as of November 13, 2017, the date they were acquired from Rice.
On July 18, 2018, EQT completed the sale of its non-core Huron assets located in Southern Appalachia to Diversified Gas and Oil PLC, for $575 million cash. The transaction also relieved EQT of approximately $200 million of plugging and other liabilities associated with the assets. EQT retained the deep drilling rights across the acreage. EQT is reiterating 2018 production sales volume guidance after adjusting for the approximately 35 Bcfe reduction related to this sale.
As a result of the Huron Sale, the Company expects to record an additional impairment/loss on sale of long-lived assets of up to $275 million during the second half of 2018, associated with certain capacity contracts that the Company will no longer have existing production to satisfy and does not plan to utilize in the future.
On June 19, 2018, EQT completed the sale of its Permian Basin assets located in Texas for $64 million cash. The transaction also relieved EQT of approximately $40 million of related plugging and other liabilities.
EQM and EQGP Distributions
On July 24, 2018, EQM approved a cash distribution to its unitholders of $1.09 per unit for the second quarter 2018. The quarterly distribution is 2% higher than the first quarter 2018 and 17% higher than the second quarter 2017.
EQGP approved a cash distribution to its unitholders of $0.306 per unit for the second quarter 2018. The quarterly distribution is 19% higher than the first quarter 2018 and 46% higher than the second quarter 2017.
Due to the timing of the RMP merger, RMP will not declare a cash distribution for the second quarter 2018.
Calculation of Net Income Attributable to Non-controlling Interest (NCI)
The results of EQGP, EQM, RMP and Strike Force Midstream LLC (Strike Force) are consolidated in EQT’s results. For the second quarter 2018, EQT’s results reflected earnings of $118.5 million, or $0.45 per diluted share, attributable to the publicly held partnership interests and the minority interest in Strike Force.
|Three Months Ended June 30, 2018|
|Unitholder interest in net||Non-controlling||NCI interest in|
|Strike Force (c)||$||3.5||25.0||%||$||0.9|
|a)||Excludes pre-acquisition net income allocated to EQT and incentive distribution rights.|
|b)||Weighted average calculation for the three months ended June 30, 2018.|
|c)||On May 1, 2018, EQM acquired the remaining 25% limited liability company interest in Strike Force Gathering System. As a result, EQM owned 100% of Strike Force Gathering System effective as of May 1, 2018. Therefore, Strike Force includes April activity only.|
As of July 23, 2018, the approximate volumes and prices of the Company’s derivative commodity instruments hedging sales of produced gas for 2018 through 2020 were:
|Total Volume (Bcf)||368||471||365|
|Average Price per Mcf (NYMEX)||$||3.08||$||2.99||$||2.99|
|Total Volume (Bcf)||62||73||−|
|Average Floor Price per Mcf (NYMEX)||$||3.28||$||3.12||$||−|
|Average Cap Price per Mcf (NYMEX)||$||3.79||$||3.60||$||−|
|Total Volume (Bcf)||4||3||−|
|Average Floor Price per Mcf (NYMEX)||$||2.97||$||3.15||$||−|
|The Company sold calendar year 2018, 2019, and 2020 calls for approximately 53, 102, and 127 Bcf, at strike prices of $3.46, $3.53, and $3.46 per Mcf, respectively. The Company purchased calendar year 2018, 2019, and 2020 calls for approximately 29, 48, and 35 Bcf at strike prices of $3.30, $3.37, and $3.36 per Mcf, respectively.|
|The Company sold calendar year 2018 and 2019 puts for approximately 6 and 3 Bcf at strike prices of $2.92 and $3.15 per Mcf, respectively.|
|The average price is based on a conversion rate of 1.05 MMBtu/Mcf.|
Wells Drilled (spud)
|Marcellus||Upper Devonian||Ohio Utica (net)|
|2018 Forecast||115 – 120||5||20 – 25|
|Q3 2018 Forecast||30 – 35||0||2 – 4|
|Q2 2018 average lateral lengths: Marcellus 16,200; Upper Devonian 13,300; Ohio Utica 12,200|
|The 2018 forecast average lateral lengths: Marcellus 13,600; Upper Devonian 14,400; Ohio Utica 11,700|
Wells Turned-in-line (TIL)
|Marcellus||Upper Devonian||Ohio Utica (net)|
|2018 Forecast||160 – 170||20 – 25||20 – 25|
|Q3 2018 Forecast||63 – 68||3 – 5||7 – 12|
|Q2 2018 average lateral lengths: Marcellus 8,100; Upper Devonian 11,500; Ohio Utica 10,500|
|The 2018 forecast average lateral lengths: Marcellus 8,700; Upper Devonian 11,300; Ohio Utica 11,500|
Marcellus Horizontal Well Status (cumulative since inception)*
|As of||As of||As of||As of||As of|
|Wells drilled (spud)||1,791||1,763||1,743||1,288||1,259|
|Wells complete, not online||40||35||21||21||15|
|Wells drilled, uncompleted||269||284||298||207||216|
|*||Totals may differ from previous presentations to account for acquisitions, dispositions, wells plugged, or changes in target formation to / from Marcellus.|
Ohio Utica Horizontal Well Status*
|As of||As of||As of|
|Wells drilled (spud)||253||243||227|
|Wells complete, not online||14||2||5|
|Wells drilled, uncompleted||34||38||33|
Totals may differ from previous presentations to account for acquisitions, dispositions, or wells plugged.
Operating Income (Loss)
The Company reports operating income (loss) by segment in this news release. Other income, interest, income taxes, and unallocated expense are controlled on a consolidated, corporate-wide basis and are not allocated to the segments.
The following table reconciles operating income (loss) by segment, as reported in this news release, to the consolidated operating income (loss) reported in the Company’s financial statements:
|Three Months Ended||Six Months Ended|
|June 30,||June 30,|
|Operating income (loss):|
|EQT Production (a)||$||(79,846||)||$||52,884||$||(2,005,645||)||$||310,433|
|Unallocated expense and intersegment eliminations (b)||(66,053||)||(4,045||)||(129,568||)||(15,926||)|
|Operating (loss) income||$||99,969||$||190,127||$||(1,623,547||)||$||581,103|
|(a)||Impairment of long-lived assets of $0.1 billion and $2.4 billion for the three and six months ended June 30, 2018, respectively, is included in EQT Production operating income.|
|(b)||Unallocated expenses consist of compensation expense and administrative costs, including transaction costs of $19.7 million for the three months ended June 30, 2018, and $54.5 million for the six months ended June 30, 2018. Intersegment eliminations include the profit on water services that are provided to EQT Production and capitalized as part of development costs of $24.9 million for the three months ended June 30, 2018, and $47.5 million for the six months ended June 30, 2018.|
Adjusted Net Income Attributable to EQT and Adjusted Earnings per Diluted Share (adjusted EPS)
Adjusted net income (loss) attributable to EQT and adjusted EPS are non-GAAP supplemental financial measures that are presented because they are important measures used by management to evaluate period-to-period comparisons of earnings trends. Adjusted net income (loss) attributable to EQT and adjusted EPS should not be considered as alternatives to net income attributable to EQT or earnings per diluted share (EPS) presented in accordance with GAAP. Adjusted net income (loss) attributable to EQT as presented excludes the revenue impact of changes in the fair value of derivative instruments prior to settlement, asset and lease impairments, transaction costs and certain other items that impact comparability between periods. Management utilizes adjusted net income (loss) attributable to EQT to evaluate earnings trends because the measure reflects only the impact of settled derivative contracts; thus, the income from natural gas sales is not impacted by the often-volatile fluctuations in the fair value of derivatives prior to settlement. The measure also excludes other items that affect the comparability of results or that are not indicative of trends in the ongoing business. Management believes that adjusted net income (loss) attributable to EQT as presented provides useful information for investors for evaluating period-over-period earnings.
The table below reconciles adjusted net income (loss) attributable to EQT and adjusted EPS with net income attributable to EQT and EPS as derived from the statements of consolidated operations.
|Three Months Ended|
|(thousands, except per share information)||2018||2017|
|Net (loss) income attributable to EQT, as reported||$||17,806||$||41,126|
|Add back / (deduct):|
|Asset and lease impairments||137,643||2,264|
|Loss (gain) on derivatives not designated as hedges||53,897||(46,326||)|
|Net cash settlements received (paid) on derivatives not designated as hedges||25,513||(11,191||)|
|Premiums received for derivatives that settled during the period||237||532|
|Tax impact of non-GAAP items*||(54,050||)||19,966|
|Loss limitation impact on effective tax rate**||(90,708||)||−|
|Adjusted net income attributable to EQT||$||116,297||$||11,425|
|Diluted weighted average common shares outstanding||265,154||173,582|
|Diluted EPS, as adjusted||$||0.44||$||0.07|
|*||Blended tax rates of 22.2% and 40.2% were applied to the items under the caption “Add back (deduct)” for the three months ended June 30, 2018 and 2017, respectively. This represents the incremental tax (expense) benefit that would have been incurred had these items been excluded from net income attributable to EQT.|
|**||The tax benefit that may be recorded in any quarter is limited to the amount of benefit expected for the entire year. As a result, the tax benefit recorded in the first quarter 2018 was the entire benefit forecast for the year at March 31, 2018. At June 30, 2018 the forecast tax benefit for year was higher than at March 31, 2018, primarily as a result of lower commodity price forecasts for the second half of the year. As a result, the Company recorded an additional tax benefit in the second quarter.|
Operating Cash Flow, Adjusted Operating Cash Flow Attributable to EQT and Adjusted Operating Cash Flow Attributable to EQT Production
Operating cash flow, adjusted operating cash flow attributable to EQT and adjusted operating cash flow attributable to EQT Production are non-GAAP supplemental financial measures that are presented as indicators of an oil and gas exploration and production company’s ability to internally fund exploration and development activities and to service or incur additional debt. EQT includes this information because management believes that changes in operating assets and liabilities relate to the timing of cash receipts and disbursements and therefore may not relate to the period in which the operating activities occurred. Adjusted operating cash flow attributable to EQT is EQT’s net cash provided by operating activities, less changes in other assets and liabilities, adjusted to exclude EQM and RMP adjusted EBITDA, plus EQM and RMP interest expense plus the EQGP, RMP and EQM cash distributions payable to EQT. Prior to EQT’s 2018 operational forecast announcement in December 2017, the Company’s calculation of adjusted operating cash flow attributable to EQT did not include the addition of EQM’s and RMP’s interest expense. The Company believes it is preferable to present this non-GAAP supplemental financial measure with this adjustment as it better reflects EQT’s cash flows by excluding the cost of debt for EQM and RMP. EQT has recast all periods presented to be consistent with this change in the definition of adjusted operating cash flow attributable to EQT. Management believes that removing the impact on operating cash flows of the public unitholders of EQGP, EQM and RMP that is otherwise required to be consolidated in EQT’s results provides useful information to an EQT investor. As used in this news release, adjusted operating cash flow attributable to EQT Production means the EQT Production segment’s total operating revenues less the EQT Production segment’s cash operating expense, less gains (losses) on derivatives not designated as hedges, plus net cash settlements received (paid) on derivatives not designated as hedges, plus premiums received (paid) for derivatives that settled during the period, plus EQT Production asset impairments (if applicable). Operating cash flow, adjusted operating cash flow attributable to EQT, and adjusted operating cash flow attributable to EQT Production should not be considered as alternatives to net cash provided by operating activities presented in accordance with GAAP. The table below reconciles operating cash flow and adjusted operating cash flow attributable to EQT with net cash provided by operating activities, as derived from the statements of consolidated cash flows to be included in EQT’s report on Form 10-Q for the three and six months ended June 30, 2018.
|Three Months Ended||Six Months Ended|
|June 30,||June 30,|
|Net cash provided by operating activities||$||636,712||$||294,177||$||1,541,124||$||808,994|
|Add back / (deduct)|
|Changes in other assets and liabilities||54,264||42,520||54,504||(24,965||)|
|Operating cash flow (a non-GAAP measure)||$||690,976||$||336,697||$||1,595,628||$||784,029|
|(Deduct) / add back:|
|EQM adjusted EBITDA(1)||(209,508||)||(165,238||)||(413,939||)||(333,902||)|
|RMP adjusted EBITDA(1)||(79,693||)||−||(149,227||)||−|
|EQM net interest expense||20,683||8,662||31,399||16,588|
|RMP net interest expense||2,380||−||4,334||−|
|Cash distribution payable to EQT from EQGP(2)||84,459||50,340||146,305||96,126|
|Cash distribution payable to EQT from RMP(3)||−||−||13,121||−|
|Cash distribution payable to EQT from EQM(4)||16,823||−||16,823||−|
|Adjusted operating cash flow attributable to EQT||$||526,120||$||230,461||$||1,244,444||$||562,841|
|(1)||EQM adjusted EBITDA and RMP adjusted EBITDA are non-GAAP supplemental financial measures reconciled in this section.|
|(2)||Cash distribution payable to EQT for the three and six months ended June 30, 2018 and 2017, represents the distribution payable from EQGP to EQT related to the respective period.|
|(3)||Due to the timing of the RMP merger, RMP will not declare a cash dividend for the second quarter 2018.|
|(4)||Cash distribution payable to EQT for the three and six months ended June 30, 2018, represents the distribution payable from EQM to EQT after the drop down of retained midstream assets in the second quarter 2018.|
EQT has not provided projected net cash provided by operating activities or reconciliations of projected adjusted operating cash flow attributable to EQT or EQT Production to projected net cash provided by operating activities, the most comparable financial measure calculated in accordance with GAAP. EQT is unable to project net cash provided by operating activities because this metric includes the impact of changes in operating assets and liabilities related to the timing of cash receipts and disbursements that may not relate to the period in which the operating activities occurred. EQT is unable to project these timing differences with any reasonable degree of accuracy without unreasonable efforts such as predicting the timing of its and customers’ payments, with accuracy to a specific day, three or more months in advance. Furthermore, EQT does not provide guidance with respect to its average realized price, among other items, that impact reconciling items between net cash provided by operating activities and adjusted operating cash flow attributable to EQT and EQT Production, as applicable.
EQT analyst inquiries please contact:
Patrick Kane – Chief Investor Relations Officer, 412-553-7833
EQT Midstream Partners / EQT GP Holdings analyst inquiries please contact:
Nate Tetlow – Investor Relations Director, 412-553-5834
Media inquiries please contact:
Natalie Cox – Corporate Director, Communications, 412-395-3941