EQT Corp.’s free cash flow fell into negative territory in the third quarter—$2 million in the red—in part because of one-time charges associated with its completion of the company’s Tug Hill acquisition. Analysts saw it as a small drop compared to estimates that the EQT would see a much heavier financial toll.

One analyst said he had expected cash flow to plummet to negative $75 million. Another was expecting it to drop to negative $66 million.

“It’s actually commendable that they only generated $2 million negative free cash flow, given that the average Henry Hub price, which is the commodity that they sell, [was] at $2.50,” Mizuho Securities analyst Nitin Kumar told Hart Energy.

Other analysts agreed, saying they see evidence the Pittsburgh-based natural gas giant is gaining mastery in drilling and consolidating.

“They had a good financial quarter,” Pickering Energy Partners analyst Kevin MacCurdy told Hart Energy. “They produced more gas in the quarter, and their realizations were better for the gas, and their opex was lower. … Their capex spending was inline [and] led to better free cash flow than forecast.”

And EQT plans to rebound in the next four years with robust rewards for shareholders. CEO Toby Rice said on the earnings call that the company expects to produce a $14 billion in cumulative FCF from 2024 to 2028.

“We believe this outlook underscores the tremendous absolute and relative value proposition of EQT shares even after strong relative stock performance over the past several years,” Rice said on the call.

Rice told analysts EQT has completed 74% percent of a 1,000-item check list the company assigned itself for the $5.2 billion Tug Hill acquisition.

EQT has presumably had a long time to work out its integration plans after the deal was delayed for more than a year as it was reviewed by the Federal Trade Commission (FTC). The Tug Hill and related XcL Midstream assets the company acquired significantly bolster EQT’s infrastructure.

The midstream assets include 95 miles of owned and operated gathering system connected to every major long-haul interstate pipeline in southwest Appalachia.

MacCurdy said the infrastructure will be augmented by the increased takeaway capacity based on Rice’s earnings call commentary..

EQT said it secured to two 10-year firm sales agreements with investment-grade utilities covering 1.2 Bcf/d of EQT’s Mountain Valley Pipeline capacity.

“It could allow EQT and the basin as a whole to grow in later years,” MacCurdy said.

Rice told investors and analysts on the call that EQT would continue pursing M&A.

“We think consolidation is a tool when used correctly to create a lot of value for shareholders. I think if you look at the track record we’ve established over the past few years, we’ve done really smart deals and we’ve created a lot of value,” Rice said.

Tug Hill synergies

Stephens analyst Michael Scialla said the Tug Hill deal is already producing results for EQT just two months after clearing the FTC’s hurdles.

“They’ve already shown significant cost improvements on the wells that they’ve drilled on those Tug Hill assets verses where the Tug Hill well costs were, and they’re benefitting from the synergies on the infrastructure and the land overlaps,” he told Hart Energy. “They’re integrating the Tug Hill much more quickly than they did their prior big acquisitions.

“I think they feel like they’ve got a machine here that can continue to consolidate the basin.”

Kumar said he sees three encouraging signs from the EQT operating efficiency, restricting of contracts and aggressive debt reduction.

“To then quickly be able to direct free cash flow or reducing leverage so that you can get back to cash returns to shareholders, I think it’s a good strategy,” Kumar said.

He said he was impressed by Rice’s update that EQT had two crews pumping more than 500 hours a month.

“That’s a very, very high efficiency rate,” Kumar said. “I give Toby credit for putting things in place over the last four or five years. He’s transformed an analog old school mentality.”

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